Why We're Still in the Early Innings of the Bursting of the Housing and Credit Bubbles - And Implications for MBIA and Ambac 25 comments
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We’ve been working on nonstop for the past two weeks on a presentation entitled: “Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles – And the Implications for MBIA and Ambac.” Amherst Securities provided us with some incredible – and very sobering – data that leads us to the following conclusion (see page 19):
In summary, today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We believe it will get so bad that large-scale federal government intervention is likely.
Another implication, covered starting on page 57, is that MBIA and Ambac (which remain among our biggest short positions) are in big trouble.
To see the presentation, click here and, once on the web page, click the box on the right that says “Read Whitney Tilson’s Presentation on the Mortgage Crisis & the Implications for Bond Insurers”.
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Yikes! It's easy to become inured to the steady drone of bad news in the financials, until one is presented with such a salient example quantifying how much force is left in this storm.
Interesting would be your thoughts on the potential form and consequence of the massive Federal intervention you portend.
Ditto on Citibank as GreenInvestor above. It's missing from page 50 - it probably belongs in the top spot.
This would be a great cycle of wealth destruction, followed by a supercycle of wealth creation.
It is clear MBIA and Ambac will take losses. However, it is unfair to not calculate the NPV of the losses. MBIA and Ambac will only have to pay out losses over time (in the case of these mortgages, 30 years or less), not all at once. In the meantime, they will be able to use their "losses incurred but not paid" as float for investment just like any other P&C company. Not to mention, they still are due defferred premium revenue. This again will reduce their "net-net losses." Only by calculating the NPV of the return on float, the actual payment of losses, and deferred premium revenue will you come up with an accurate representation. This value is markedly LESS than your and Ackman's gross and net losses in your presentations.
A $500K home purchase price with 10% down on a 30 yr 6.5% fixed rate with debt to income at 45% requires $69,500 at closing financing a balance of $450K with a monthly income of $11,389 or $137,000 annually. The P3 chart shows 1/1/06- 6/1/07 $40 K annual income and pushing debt to income to 55% + provided borrowing power for a $340K + home. Without all of the detail in the P3 calculation that says $60K annual income could push the borrowing power to $500K.
Does anyone else see the disconnect? Where would a $60K earner get $69,500 for closing? and how long could the charade last when pretax income needs to be over $137K. Let's just forget about the incremental escalating cost of taxes, insurance and utilities that are paid with after tax dollars and become additional burdens within 2-3 years after move-in.
Fast forward to today's market the number is 5 times the starting wage.
Therefore, a house is only worth about 150k. Smart people should rent.