Talcott Franklin, co-author of the “Mortgage & Asset Backed Securities Litigation Handbook,” on when we can expect to see a rebound in housing:
“If you look at the housing bubble that was contributed to by the subprime lending environment, you see the Mount Everest of housing bubbles, as opposed to every housing bubble we have seen before,” Franklin said. “It is unlikely that we will see a significant recovery in housing prices, given the size of the housing bubble.”
Via MarketWatch, Franklin said he expects recovery could be more than 14 years out, citing the S&L crisis as a baseline. To steal a phrase from a famous rock star: You wanted the most bearish? You got the most bearish!
Our very own Richard Bitner — managing director here at HW Publishing, and now, a burgeoning author, too — saw his memoir, Confessions of a Subprime Lender, get some big-time ink today over at the Wall Street Journal.
For those who don’t know, Bitner was the president of Kellner Mortgage Investments, a small subprime lender that went belly-up in March of 2007 amid the start of the subprime credit crisis. By that time, he had long since sold off his interest in the firm (he exited in 2005 when he grew uncomfortable with slipping credit standards), but his book is a telling insider’s peek into what really went wrong in the subprime lending boom.
Yes, borrowers … made poor decisions and needed to learn their lesson. But so did the lenders, brokers, rating agencies, regulators and Wall Street financiers who all thought, or pretended, that Johnny was a good bet. To his credit, Mr. Bitner owns up to a fact that many lenders still haven’t admitted: Just because Wall Street was willing to supply endless funding for crazy mortgages didn’t mean that lenders were forced to make the loans. “We decided whether a borrower was a good credit risk and we funded the loans using our own money (before selling them to investors). No one else made that final decision,” he writes.
Not everyone in the business was corrupt, of course. But too many were. After giving a concise overview of how mortgage loans are made and sold, Mr. Bitner exposes some of the industry’s dirty little secrets for making borrowers look more creditworthy than they are …
Those dirty secrets that only an insider knows, and his ideas on how to go about fixing the mess we’re now in, are worth reading — and worth your $13.57 to buy and read.
The WSJ’s James Hagerty notes that many of Wall Street’s finest, including Bear Stearns, “would have been better off listening to Mr. Bitner … three years ago [rather] than relying on their computer models. They had plenty of brainpower but fell short on common sense.”
Knowing Richard personally both as a friend and colleague, I know the months of work that went into the book, and I know his desire to see the industry recover from its current state. When I say that HW is out to create the next generation of trade media for mortgage banking, it’s the unique expertise of people like Richard that really give that sentiment its true meaning and direction.
(As an utterly shameless plug, we’ll feature an exclusive story on Richard’s reasons for writing his book in HOUSINGWIRE Magazine’s inaugural print issue — if you haven’t already, you only have until June 30 to snag a $79 subscription through the end of next year, so subscribe today.)
Warren Buffett’s words tend to be ones to heed. So we’ve duly noted his comments on CNBC today, in an exclusive interview with the business news channel. Via MarketWatch:
The Fed should be concerned about both inflation and economic growth, a tough thing to do, [Buffett] explained. But inflation should be the Fed’s main concern right now, Buffett added. “Inflation is really picking up,” he said. “Whether it’s steel or oil… we see it every place. It’s exploding.”
Exploding inflation. Could that be the next buzz word in the financial markets?
Well, that didn’t take long. It’s not even been a month since the $60 billion bailout/refinancing effort was completed for Residential Capital LLC, the ailing mortgage lending arm tied to GMAC LLC, and already questions are being whispered over the company’s future.
Bloomberg gives those whispers some ink:
Whether [the $60 billion is] enough to ride out the worst housing slump since the Great Depression remains in doubt. Moody’s Investors Service cut GMAC’s credit rating one level to six rankings below investment-grade last week as ResCap burns through cash after losing $5.3 billion in the past six quarters.
“ResCap presents a very significant risk,” said Mark Wasden, the lead GMAC analyst at Moody’s. “There is no easy exit from their difficulties right now. We think the company will yet again find itself in need of additional cash.”
That’s the sort of assessment that we can pretty much assure readers that JPMorgan vice chairman James Lee, GM COO Fritz Henderson, and Cerberus Capital Management LP founder Stephen Feinberg had hoped to stave off for at least a few quarters, allowing ResCap to catch its battered breath.
After all, the deal was touted as “one of the largest global refinancings ever completed” at the time it was announced. Isn’t that supposed to buy more than two weeks?
In any other market, perhaps. But mortgage losses are mounting in the private-party market, and ResCap (along with Homecomings, GMAC, and other mortgage brands in the ResCap umbrella) was once among the rulers of the subprime roost. Which means there is plenty of bad debt still on the books.
Large companies like GMAC would love to unload their distressed mortgages — and we hear that they’re certainly among the more active participants in that still-emerging marketplace — but doing so creates additional sources of risk that some might not yet appreciate.
For one thing, it speeds up recognized losses; selling bad assets in bulk now, even if for a fixed loss percentage less than the severity of holding on until a property turns into REO and is eventually resold, means recognizing losses now. There’s only so much of that sort of immediate kind of hit that any one company can handle, especially a company that’s already been taken to the mat by its own credit quality.
Our sources tell us that firms like GMAC are selling assets, but in a controlled manner that makes it more palatable from the perspective of overall loss experience.
Which means that firms like GMAC are often stuck with a tough conundrum — the assets ResCap holds are sucking the life out of it, not so slowly, either; yet selling the assets off at once could actually mean a more certain and quicker end for the troubled lender.
No wonder all those analysts are wondering aloud if $60 billion will be enough.
We’ve noted indicators of pending softness in CRE from time to time in the past here at HW, but today a feature at Bloomberg underscores just how soft the commercial RE sector really is:
Workers building the $3.5 billion Cosmopolitan Resort & Casino on the Las Vegas strip are getting used to their financiers from Deutsche Bank AG …
Since January, when New York developer Ian Bruce Eichner defaulted on a $760 million loan, Frankfurt-based Deutsche Bank has been cutting Perini a monthly check for $70 million to continue construction, now in full swing with 2,800 workers on site and a dozen cranes towering overhead …
Not far down the strip is the Tropicana Resort & Casino, whose parent filed for bankruptcy protection in May. Tropicana Entertainment LLC defaulted in April on a $1.3 billion syndicated credit line arranged by Zurich-based Credit Suisse Group to help finance the purchase of the casino in 2006 …
The economic slump that began in the U.S. housing market has spread to commercial real estate, Wachovia Corp. senior economist Mark Vitner wrote in a June 4 note.
Which isn’t good for the economy, or for residential real estate, at that. I’m not sure we’ve seen an official pronouncement of a CRE slump but for a few analysts yet, but I’m sure they’re on the way.
We think it’s our job here in the BuzzPost to call it like we see it — and what we’re seeing this Monday morning from North Dakota Senator Kent Conrad is nothing less than either blind stupidity or record-setting hubris.
In an op-ed “defense” published Monday by the Wall Street Journal, Conrad says that he never asked for special treatment on a series of mortgages he obtained from Countrywide, and that while he did talk with Angelo Mozilo about his mortgage, he wasn’t aware of special treatment:
Here are the facts: In 2002 I was looking for a mortgage and went to several lending institutions. I also called a close friend of mine who knew a lot about mortgages for advice. My friend happened to be with the head of Countrywide Financial when I called and put him on the line. I spoke with a gentleman by the name of Angelo Mozilo for about 30 seconds …
In 2004, I also financed an eight-unit apartment building in Bismarck, North Dakota. It is true Countrywide did not typically finance buildings with more than four units. But …
Conrad says in his “defense” that Countrywide waived fees and points on a mortgage he received, but that he didn’t see it as special treatment — and he adds the obligatory “nothing is more important to me than the public’s trust” line.
We’re not buying any of it. Not after he scrambled to donate money to charity equaling the past value of a benefit he received from Mozilo. Not after he admits to getting a multi-family loan from Countrywide that the company didn’t offer other borrowers. The fact that he finds it to be non-sensational that he called Angelo Mozilo to get a mortgage, or that he blindly followed a friends “advice” on who to call to get a great mortgage, is disturbing. This is a U.S. Senator we’re talking about here, for crying out loud. How many HW readers have called and spoken to Ken Lewis when opening a savings account at Bank of America?
And if you had, would you have characterized the experience as nothing out of the ordinary?
In the end, we don’t know which is more troubling: Conrad lying through his teeth, or Conrad actually telling the truth (meaning that he was oblivious to his status).
Both Conrad and fellow Senator Chris Dodd would have us believe that being a VIP — being a Senator of the United States of America — didn’t lead them to believe they were getting VIP treatment from Countrywide. There’s either extreme hubris in that sort of defense, or extreme stupidity. Neither are what we should expect from our elected officials.
The WSJ takes on alleged improprieties at banks, which isn’t exactly a novel topic these days.
The story zeroes in on the games played with non-performing assets — a subject near and dear to HW’s own editorial heart these days, given that we’ve been suggesting that many banks are under-reserving relative to the level of reported NPAs on the books.
But when is an NPA not an NPA? Answer — when you get to pick the definition:
In January, Astoria Financial Corp. told investors that its pile of nonperforming loans had grown to about $106 million as of the end of last year. Three months later, the thrift holding company said the number was just $68 million.
How did Astoria do it? By changing its internal policy on when mortgages are classified on its books as troubled. The Lake Success, N.Y., company now counts home loans as nonperforming when the borrower misses at least three payments, instead of two.
Whether kosher or not, the only thing that firms like this really do when they move numbers around is buy time — in the end, losses will push through. A bad loan will eventually default regardless of the accounting treatment, and in the case of a bad mortgage, the bank will eventually take the house back and have to wait to resell it before a loss is recognized.
The only question is to what degree investors will be surprised when it eventually happens. Wells Fargo gives a perfect example of this conundrum, from the same WSJ story:
At Wells Fargo & Co., the fourth-largest U.S. bank by stock-market value, investors and analysts are jittery about its $83.6 billion portfolio of home-equity loans, which is showing signs of stress as real-estate values tumble throughout much of the country.
Until recently, the San Francisco bank had written off home-equity loans — essentially taking a charge to earnings in anticipation of borrowers’ defaulting — once borrowers fell 120 days behind on payments. But on April 1, the bank started waiting for up to 180 days.
There is a possibly a good reason for this — committing to longer workout horizons with troubled borrowers before charging off the loan and walking away as a lender would lead to such a change. Consumer advocates have been hounding lenders to do just that; and now that Wells is doing it, the WSJ jumps in with a story about how it’s playing a shell game with NPAs.
But the flip side of the coin is equally true. Past experience in distressed debt informs us that borrowers already 120 days in arrears are especially likely to remain in arrears when they hit the 180 day mark a few months later; which means that write-offs could possibly be pushed out further before hitting income.
Which side is right? I have a sneaking suspicion that both are, oddly enough.
We’d heard rumors about this, via MarketWatch:
Washington Mutual said Thursday that it is cutting 1,200 more jobs as part of the lender’s efforts to reduce costs and return to profitability. More than half of the job cuts — 775 positions — are in California and Florida, two formerly booming real estate markets that have been hit hard by the mortgage crisis. Another 270 positions were reduced in Washington state. The cuts are part of a plan WaMu announced in April to lower expenses by $500 million to $600 million, according to a spokesman at the lender. WaMu already cut 3,000 jobs earlier this year as it closed a series of home loan centers. The job losses announced on Thursday affect back-office and support workers.
Expect further cuts at other large banks shortly.
A secondary mortgage market expert I think extremely highly of emailed me last night with the following terse take on the state of the financial markets:
I think we’re on the cusp of another sewer break on the news front … get your waders on …
No kidding. While March may have represented the worst of the credit crunch thus far, May and June are looking to shape up as particularly troublesome for a side of the mortgage market that, so far, has seen relatively benign activity. Reuters’ Al Yoon knocks yet another story out the park Thurday morning:
Investors who thought they were safe owning guaranteed mortgage-backed securities in the wake of steep credit losses from other MBS are now grappling with a different kind of risk.
Models that predict payments on bonds issued and protected by Fannie Mae, Freddie Mac and Ginnie Mae have been far off the mark in recent months, resulting in increased risk to investors in the $4.5 trillion “agency” MBS market.
Errors are happening for the same reason credit loss forecasters failed to prepare investors for the subprime mortgage meltdown: it has never happened before.
As HW grows (hint: subscribe to our coming magazine!), we’ll be tracking this more closely ourselves; we’ve been hearing about just how bloody May was for agency MBS for a few weeks now. In particular, prepayments didn’t just slow. They came to near standstill by Wall Street prepayment research standards.
When HW first started in late 2006, I spent alot of time writing about how prepayment modelers had failed to account for credit and collateral risk effectively in most of their models; what we’re seeing now is the flip side of that same coin. In pure prepayment terms, triggers are blowing up faster than most models have been set up to handle — and that’s hurting even the most staid of agency MBS investors.
More from Reuters and Yoon on the matter at hand:
Wall Street banks that spend countless hours trying to measure that risk for clients have seen data stray from their forecasts by unusually large amounts. A 20 percent drop in May prepayments sharply exceeded expectations, leading to a collective groan among analysts.
May data “was a shock to everybody,” said Arthur Frank, head of MBS research at Deutsche Bank in New York. Vagaries of falling prices and tight credit have “wreaked havoc” on models that were created during the heydey of refinancing, analysts at Merrill Lynch & Co. said in a recent research note …
“An unprecedented housing market will produce unprecedented prepayments and defaults,” said Dale Westhoff, a managing director at JPMorgan Chase & Co. in New York, who has been refining models for 18 years. “We’ve already seen that on the default side. On the prepayment side, the May numbers are starting to reflect this new environment.”
With due deference to Deutsche and JPMorgan, not everyone has been surprised by the prepayment shift. UBS immediately comes to mind, for one, having read their weekly MBS research for some time now.
There’s also Stamford, Conn.-based Structured Portfolio Management, which in mid-April said it was shifting its asset allocation strategy in the belief that prepayments would slow dramatically in subsequent months. (No word on how they’ve done with that approach, but I can safely bet the answer is “not badly.”)
And, of course, we should note that HW’s well-known contributor Linda Lowell noted in early May that prepayment-based strategies needed to move to the forefront for MBS traders — “the data underlying prepayment models reflects relaxation of credit standards and risk-based pricing, not the current tightening trend,” she wrote then.
No, no that Paulson. Instead, we’re talking about John Paulson, the hedge fund manager that moved to the top of the class by shorting subprime in 2007 — and the now-iconic investor thinks the crisis yet has legs.
At the GAIM International 2008 hedge fund conference in Monaco, Paulson said a recession was coming, and that a huge opportunity in distressed debt was on the horizon. Via Reuters:
“I believe we’re going to go into recession, I think the second half [of the year] will be worse than the first half, and I think the recession will last into 2009…. The primary factor leading to recession will be a decline in consumer spending, and I believe that will be more pronounced in the coming months.”
… He also said his funds had minimum exposure to equity markets because of a likely recession and that it was too early to start distressed debt investing, though a huge opportunity would eventually emerge.
“I do think long-term distressed presents an opportunity that is as much as $10 trillion. That is a reflection of how much the credit markets were overvalued on the upside.”
Paulson joins a growing chorus of financial market participants that see a bloody back half of 2008 coming. RBS chief credit strategist Bob Janjuah warned clients Wednesday to prepare for a “nasty” crunch in the back half of this year, while Morgan Stanley warned of a pending currency crisis and strong recession due to “transatlantic tensions” over monetary policy.
Paulson, of course, rose to the top of the hedge fund ranks during 2007 by pouring into short positions against subprime MBS. Trader Monthly estimated in April that his take was well over $3 billion last year alone.
