Seth Chalnick

How Bloomberg Fabricates U.S. Housing Numbers

To those who say that actual foreclosures have not increased by as much as the author says.

That's not the point.

The point is that loan defaults have been increasing. And the problem is that there is no answer for the defaults. So the banks aren't even foreclosing anymore.

How Bloomberg Fabricates U.S. Housing Numbers

To the folks who think the low LIBOR rates are going to help things for the time being, you are missing something subtle but huge, which most of America is also missing. 50% of all re-sets will also switch to p&i re-amortized over the remaining 25yrs.

This creates a substantial payment shock even with the rate being lower. When the rate gets back up there, fogettaboudit. If you are one of the "lucky" ones who still gets the i/o option for another 5 years... yes it's true, your monthly pmt goes down while the rates stay low... good luck though in another 5 years when the remaining balance re-amortizes to the remaining 20yrs.

It does not matter if you are "well insulated". It matters that even a small percentage of your neighbors (in real life a huge percentage) are not. They will go to refi. They will not be approved. They will try to short sell. They will not be able to. They will walk. Your property value will go down for real this time.

How Bloomberg Fabricates U.S. Housing Numbers

Bravo Mr. Nielson, for publishing the web's first coherent explanation for banks holding back inventory:

"Now, with the U.S. housing market collapsing, these credit default swaps are being triggered. Selling these foreclosed properties locks-in the banks' losses – causing these massive obligations to come due."

Are swaps and derivatives so confusing that the investor consensus assumes that all toxic assets have already been baked into the market outlook?

This is not a rhetorical question.

We witnessed subprime havoc and now it seems most asset manager types have this idea that the toxic assets were all bundled in with prime assets… since nobody knew what was what, and that everything as a whole has already been written down.

But I used to work on Wall Street, and I know that many asset managers are basically just sales guys who push what their analysts tell them to push, and that many analysts types are myopic materialistic ivy league model writers who are driven by peer pressure and perverse incentives to tow the company line.

I'm just a residential real estate guy... but it seems to scream out to me that the prime loans have not yet defaulted... so how could they already be discounted? The subprime assets weren't written down until people defaulted on making payments.

And I see now, with first hand experience, even while everyone is making the call that real estate has bottomed… that a major portion of non-performing loans that defaulted to date (I'd actually say the majority of them) have not yet been dealt with. The mark to market accounting change and the not so subtle short supply of inventory artificially created demand compared to same period last year results... but fundamentally nothing has even changed.

And now we are starting to see the 5yr i/o loans expiring and this bucket of loans is approximately 3 times LARGER than the subprime bucket… with average loan amounts that are LARGER than subprime... and even the same subprime neighborhoods are mostly comprised of hard working blue collar 5yr i/o holders who haven't even been tested yet... unless you count the test of still paying your mortgage on time even though you are earning about 30% less than before while debt payments that are higher than before… even though your deadbeat subprime neighbor walked AFTER getting a loan mod that you deserved but they received and then re-defaulted on because their credit was already shot, etc.

If the 5yr i/o pool is 3 times larger… and it’s not baked in yet… and the default rate is much greater than expected, though only by people who subjectively gauge and report the market’s expectations rather than looking at fundamental math and the recent blueprint that is called the subprime crisis… it seems that smoke and mirrors are perhaps the best chance we may have after all. It’s all starting to make sense now.

Why Is the Market Going Up When Jobs Are Going Down?

@ rennert, aka $8.50 guy... everybody's working on your street because your neighbor's 5yr i/o hasn't adjusted to 25yr p&i yet.

Good luck with that 1% interest rate hike, which while I agree we need it to bring this crazy pyramid scheme down... will not only wipe out your home equity... but really kill consumer spending as the small business owners and svp's on your block lay employees off, get displaced themselves, and start cutting back to the good ole' fashioned $2.50 per gallon staples.

Let's not get ahead of ourselves here... first deflation... then rampant inflation.

Option ARMs Still a Gaping Hole

While negam loans did comprise less than 25% of the purchases during the boom time (let alone 50%) I not only agree with the author's take on them, but actually stopped executing them back when they were still in vogue because they were simply insane. And it's also why I shorted the hell out of wamu and wachovia when they started to sink because they were the biggest players in this space. It will also be interesting to see how WF and Chase and BOA handle their 2 dollar deal of the century acquisitions as the derivatives come home to roost.

These loans are like guns. For the right party, i.e. a sophisticated investor in a steady 2-3% rising market, who has enough cash down to stay ahead of the cashflow curve... negams can be a useful tool. For most dumbass, short-sighted, misinformed greedy people this loan is disastrous.

Meantime, while these loans were thankfully the minority behind subprime, alt-A, and prime... just like people are coming out of the woodworks now proclaiming how crazy negam loans were... give it a few more months... and then we'll start to see the negam and yes, "prime" loans follow suit, with the public shock and outrage to follow. But they won't blame it on the fundamentals... nope, instead, they'll blame it on the subprime fallout bleeding into the prime markets.

And while derivatives continue to confuse the heck out of me... I still can't help but shake the notion that Wall St. didn't bake the downside into the subprime exposure... and now that everyone's talking about a real estate L shaped bottom... nobody wants to see the writing on the wall... that the true real estate capitulation has not even started yet. So what does this mean for derivatives... and the big Wall St. banks like Chase who hold a preposterous amount of them... and, in turn, the world financial markets?

This is why my VIX calls are still way out of the money after today’s huge increase... because I'm expecting it to push 70 before cashing out.

Many objective SA observers have been calling for this implosion for about 18 months now. It looks like the fundamentals are finally starting to catch up with the "trend is your friend" camp.

Why Is the Market Going Up When Jobs Are Going Down?

Ricard, you write:

"What if our companies hire abroad, make profits abroad, and bring home the bacon to Uncle Sam?

That surely would be a 'Wall Street' recovery..."

You make a good point, but replacing 70% of our GDP via outsourcing in one or two quarters would be a pretty impressive trick.

U.S. Housing Market Has Likely Bottomed

You know, I was going to make some comment or other debating points the author makes, but see that pretty much, most of the counter arguments have been well said by other folks. And then I read Living4Dividends comments, which I disagree with, but give a whole hearted thumbs up to them, since at least his argument makes sense.

And while only time will tell which force will tip the scales (fundamentals or hype-confidence)... one thing I want to make clear... Mr. Ho attempted to present a fundamental argument for a housing rebound. The items he mentioned are definitively not fundamental in nature. For example, he writes, "But more fundamental is a revival in confidence"... umm... market confidence is about as whimsical as the wind.

This sort of unfounded optimism is somewhat irresponsible, and mostly just weird.

Will FHA Fall into the Sub-Prime Trap?

Hi BullnBear,

Re: “jobless recovery”… a paradox consists of two seemingly opposite terms that make sense when joined together… like “jumbo shrimp”.

The idea of a “jobless recovery” is just wishful thinking. Subprime crashed because people couldn’t afford their payments. When they couldn’t afford their payments, and they couldn’t get more cash out from refinances, this put the whammy on spending, not just for the subprim-ers, but for everybody trying to do refinances, because the re-sets reversed the trend of appreciation.

Then, consumer discretionary spending died because people had less money. Spending makes up 70% of our GDP. So our GDP decreased. But on paper the GDP, along with corporate earnings reports, continue to defy gravity because corporations are cutting back on payroll and marketing and every other expense they can to make their earnings reports attractive. The banks, with the help of the government, are just flat out ignoring their non-performing assets and the costs that go with them.

Meantime, everyone I talk too seems to be counting their blessing that they’re only earning 30% less than they did last year while nobody’s spending since 20% of folks are unemployed and the majority of the rest of the folks are either underemployed or afraid they’ll potentially become unemployed.

The real problem with housing didn’t even start yet in earnest and it will wreak havoc on the jobs market, especially when the real stimulators of the economy… the small business owners… start seeing their own home loans adjust to principal and interest over 25 year amortizations while the rest of their credit lines get cut out from under them, on personal credit cards, and business tradelines.

No jobs = no recovery.

To me, the stock market seems manipulated beyond belief… sort of like fattening up the 401k chickens before the short sell slaughter.

Will FHA Fall into the Sub-Prime Trap?

As a real estate insider I whole-heartedly agree with this article, with the exception of the error the author makes in saying that people can “use the $8,000 first time homebuyer tax credit for that 3.5%” down payment. While the FHA allows for this in theory, no lender extends this feature in practice, because it is unclear how and when the semi-government institution will credit back the lender.

Meantime, to add key perspective to this article, the FHA loans cost consumers considerably more per month than conventional loans do, and they become downright cost prohibitive as the sale price approaches $400k… and yet buyers can borrow right up to “agency jumbo” loan limits, which for example in SD are $697,500.

Approximately half of the increased monthly payment stems from the borrowing of more money… the rest comes from the multiple whammies of higher rate, upfront mortgage insurance premium (added to the loan balance), and monthly mortgage insurance premium… all of which are applied to the whole balance enchilada, which is obviously really high… i.e. 96.5% loan to value.

I say key perspective, because the higher cost of all this directly impacts the ability of folks to repay.

For further perspective on this issue, and insight into the party line rhetoric most real estate agents regurgitate via groupthink… SA fans may be interested in checking out a very telling thread on Trulia.com, whereby industry insiders go at it, pitting party line sound bytes against fundamental analysis.

The Trulia question is posed by a Long Beach broker, named Ben Nicola, and it is entitled, “What’s Wrong with FHA financing?”

This link should take you there… www.trulia.com/voices/...

Jamie Dimon: The Man Who Could Save Wall Street

For all the hypocrisy one ever needs to swallow to draw any kind of conclusion about Jamie Dimon and his altruistic motives, check out his Op-Ed, published by the Wall Street Journal on June 29, 2009.

For easy reference, there is a link to it in a SA article I published, which is entitled, “A Letter to Jamie Dimon”, and which reproduces the response I logged in the comment section beneath the Op-Ed itself, along with a dozen or so equally outrageous comments filled with sarcasm and disbelief.

Falling Up: The New Business Model

Hi Reneeg,

In short, there are probably many reasons why banks are keeping properties off the market, though I’m not sure which is the most compelling. Actually I’m not sure anyone is… even the banks themselves.

Here are a few likely reasons:

-So they don’t flood the market with inventory thereby putting downward (spiraling) pressure on home prices.

-So they don’t publicly acknowledge the amount of non-performing assets, which would put downward pressure on their share prices (not to mention, call into question the stability of their very business model, and by extension, the world financial markets too).

-So that the public can "catch their breath" and confidence can be inspired to resume spending. (The government and banks are working together on this one.)

For more in-depth coverage of these questions and more importantly, the very importance of asking these types of questions… check out my SA article called, “Here’s a Statistic I Dare You to Challenge”.

Hope this helps,

sc

Banking Sector: Worst Is Yet to Come

dragonpaw, my friend, I am publishing a SA article dedicated to you :)

Banking Sector: Worst Is Yet to Come

I think Reggie does a good job of intertwining facts and informed opinion.

I rarely do this, but I'm going to cut and paste here a comment I made last night on another thread... which shows another whole perspective of why the worst is yet to come in the financial sector.

You can find the SA article posted by Zacks if you search for ("Mortgage Delinquencies Rising").

My comment addresses a two-fold question posted by another reader... paraphrased as follows: "what is there to worry about my 5yr rate re-set if the rates are lower these days?" and "are option arms really that bad if the rates are lower too?"

First, in your scenario, yes you are better off if rates stay low compared to what will happen when they inevitably climb, but there still exists a major problem for many folks who are making less income than they did at time of purchase or who took on additional debt since then.

When the rate switches to adjustable... about 50% of these loans also switch from i/o to p&i... the other 50% keep the i/o option for five more years. The ones that go p&i now, reset the amortization to 25 yrs... the ones that go p&i in five years will switch at that time to 20yr amortization.

On a loan size of $800k if the rate is the same now as it was at time of purchase, this creates a payment increase (or payment shock as the case may be) of approximately $1,000/mo.

This may be easily absorbed by many households, but the marginal ones will look for other options. They will try to refi, and they will get rejected. Then they will attempt to short sale and only 15% will succeed. The rest will ultimately walk away, thereby creating a downward spiral in home values for the next marginal household.

The option arms are worse because they pay (or accumulate) anywhere from 8% to 11% on their balance just for the option to pay less than interest only. Most of the folks who have these loans have not even been paying the i/o... they have been paying less than i/o. When the negative amortization reaches 115% or 125% (varies by lender) of the original balance, the loan implodes by becoming due. A recipe for disaster.

Meantime, the prime pool is three times larger than subprime and, as this article points out, the average loan size is also larger. The subprime problem loans have not been absorbed into the market yet. They have merely been put on hold. The bankerment has (successfully?) used smoke and mirrors until now… since at least the prime consumers have been paying their monthly payments, but when they start defaulting (and they already have started)... the banks will start to falter. This will create another credit crunch and it will accelerate the problem.

The imminent prime crash is going to make the subprime crash look like a little footnote in history.

Mortgage Delinquencies Rising

Mavericks, you ask good questions... let me try to answer.

First, in your scenario, yes you are better off if rates stay low compared to what will happen when they inevitably climb, but there still exists a major problem for many folks who are making less income than they did at time of purchase or who took on additional debt since then.

When the rate switches to adjustable... about 50% of these loans also switch from i/o to p&i... the other 50% keep the i/o option for five more years. The ones that go p&i now, reset the amortization to 25 yrs... the ones that go p&i in five years will switch at that time to 20yr amortization.

On a loan size of $800k if the rate is the same now as it was at time of purchase, this creates a payment increase (or payment shock as the case may be) of approximately $1,000/mo.

This may be easily absorbed by many households, but the marginal ones will look for other options. They will try to refi, and they will get rejected. Then they will attempt to short sale and only 15% will succeed. The rest will ultimately walk away, thereby creating a downward spiral in home values for the next marginal household.

The option arms are worse because they pay (or accumulate) anywhere from 8% to 11% on their balance just for the option to pay less than interest only. Most of the folks who have these loans have not even been paying the i/o... they have been paying less than i/o. When the negative amortization reaches 115% or 125% (varies by lender) of the original balance, the loan implodes by becoming due. A recipe for disaster.

Meantime, the prime pool is three times larger than subprime and, as this article points out, the average loan size is also larger. The subprime problem loans have not been absorbed into the market yet. They have merely been put on hold. The bankerment has (successfully?) used smoke and mirrors until now… since at least the prime consumers have been paying their monthly payments, but when they start defaulting (and they already have started)... the banks will start to falter. This will create another credit crunch and it will accelerate the problem.

The imminent prime crash is going to make the subprime crash look like a little footnote in history.

BTW, this Zacks article is a really good one that makes several excellent points and observations… but I couldn’t help but notice how weird it seems being posted so closely to the other article entitled “pending home sales pop”. Weird.

Shadow Inventory: Conspiracy Theory or Real?

I'm really surprised that this article didn't get more kudos from SA readers, and also that the first comment was actually taken seriously, which unfortunately diluted focus from the main point highlighted by the author.

This is a terrific piece... one of only ones I have seen that puts substance behind the excellent point that user 463618 makes, and which astute observers have been talking about for some time now.

Overlooking this “shadow inventory" or whatever the heck you want to call “that which should be on the MLS but is not”… and taking the banks and the government at face value about how they've been dealing with the situation, or even acknowledging it in the first place, is a mistake that I believe will catch both Main and Wall Streets by surprise... the consequences of which will be devastating.

How on Earth most people are willing to rationalize that the fundamental problems don't exist when technical data temporarily suggests otherwise is simply beyond me. Add to this that the prime re-sets have not even started yet, that interest rates are artificially being kept at bay, that there is no market for jumbo paper, and that unemployment is still a huge factor... and wtf are people thinking??