Greg Weston

The Option Arm Triplets: Dead Banks Walking

Update on CA and FL Housing:

Please check out the entire article here about how foreclosures are not only getting worse, but getting worse quickly, especially in California and Florida, where DSL/FED and BKUNA have most of their OA lending.

Marketwatch:
Homes in foreclosure process set another record
California, Florida continue to drive national numbers in MBA survey

www.marketwatch.com/ne...={21015C68-EDCF-4E8B-B...

In particular, these portions:

---Increases in foreclosures seen in California and Florida overshadow improvements seen in states including Texas, Massachusetts and Maryland---

---California and Florida alone accounted for 39% of all of the foreclosures started nationally during the second quarter. Together, the two states made up 73% of the increase in foreclosures between the first and second quarters, according to the MBA.
"The worst states are getting worse,"---

--- Certain loan types also are driving rates, Brinkmann said.
"Subprime ARM loans accounted for 36% of all foreclosures started and prime ARMs, which include option ARMs, represented 23%," he said in a news release. "However, the increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans," he added.
In future quarters, foreclosure start numbers will probably be increasingly dominated by problems with prime ARMs, he said. That's due partly to the difficultly some borrowers are having with prime, option ARMs.---

My fact-driven opinion that DSL, BKUNA, and FED will all soon be shut down by the FDIC and see their stocks go to 0 is supported by even more new facts on the ground.

Maybe because I am here in San Diego, one of the ground-zeros for the mortgage/housing crises, while many analysts are ensconced in the very unique and still-inflated Manhattan market they refuse to recognize that these banks are on their death bed, and only being kept alive in the short term by the extraordinary degree incompetence banking regulators have shown in even letting them get this far.

The Option Arm Triplets: Dead Banks Walking

Yes Wez, I also took the crazy run-up last week as a chance to add to my position. I didn't manage to sell right at the peak, but my call writes (FEDIW) that I sold 8/28 for $1.15 are now worth about 20 cents.

Looks a few other people with even better timing managed to short FEDIW at 1.30 that same day. Congrats to them.

Pretty nice 78% gain in one week for me though.

If you have the nerves short like heck any of the triplets when they have these stupid speculative/short-cove... run-ups.

The Option Arm Triplets: Dead Banks Walking

E Nuff:

Having "most" loans perform will still bankrupt the company because of its leverage, which is not especially high for a bank, but is extremely high relative to the risk involved in its portfolio.

Also, where the heck are you getting "20-30% declines in home value."?

In much of FED's territory, prices are down by well over 50% from peak values, and still dropping as we speak.

FICO scores on very risky loans have proved to be a very poor indicator of risk, much better is CLTV. And CLTV is well above 100% of the average current value.

No, not everyone casually "walks away" form their home, but when you take out a $550,000 mortgage, and then it rises to $605,000 because of Neg-Am, and then your payments double, and the economy goes into the recession, and your house is only worth $400,000 if it were even possible to sell it.... well you get the picture.

As for the run up, I am a medium to long term value investor, not a day trader.

The Option Arm Triplets: Dead Banks Walking

GBGB:

I think 40% is a pretty good estimate of what has happened to California real estate. A change in the mix of home sellings can bias the figure to be sure, but here are some other things that can bias the figure:

(1) seller incentives that don't go to the purchase price (the recorded price is $500,000, but the seller gives the buyer $5,000 in cash for closing costs and another $10,000 for "repairs" or for "decorating")

(2) the seller pays for expensive upgrades and renovations. So X buys a house for $400,000 in 2006, spends $100,000 on extensive renovations, and then the bank forecloses and resells the place for $360,000. This gets counted as a 10% decline, when in fact the loss for the first buyer and/or the bank is 140,000 or 35%.

Certainly some parts of California, like Pacific Heights in SF, Mountain View in Santa Clara County, and the good parts of Santa Monica and West LA, are down only about 5-10% from the peak.

On the other hand, other areas are down 50-70%. Same for Florida. condos in South Beach are down about 20%, downtown Miami more like 40%, and Naples 60%.

When it comes to the banks I am writing about, the numbers in the bad areas are actually the more important figures, because that where all the foreclosures are.