Friday, December 08, 2006

Death of the subprime and easy credit

This has been a very interesting week. Multiple subprime lenders bit the dust. Ownit made the news and simply closed the doors at 5:05pm to 300 workers in Agoura Hills (Ventura County, CA) and another 500 elsewhere. Sebring Capitol also shut down as did Merritt. Option One is on the block by H&R block and in my opinion could eventually take H&R block down (or at least into BK court). Netbank closed their subprime unit a month ago. I'm also concerned about Ameriquest. They seem to be flailing.

Opednews noted something that I hadn't considered:
"Many people in the industry cannot claim unemployment because they were on commission only jobs. Many of them were treated as self employed or independent contractors thus they are not reflected in the real unemployment numbers. "

This is interesting... We're going to have unemployment without official unemployment! In other words, the statistics are already off, but by how much?

Its almost like the secondary market has lost its appetite for sub-prime mortgages. This bubble was fueled by easy liquidity; is it over? Most likely this is just a step down in the long road to rational credit markets. However, I am of the opinion that this won't be a smooth tightening of the "home ATM" spiket, but rather a time of sharp reductions.

This leaves me with a question, can banks reduce or cut off unused HELOCs to minimize their exposure? How long until too many people do not have enough credit to be credit worthy?

I still predict 2Q 2007 is the schwerpunkt of the housing crisis. As I posted in the comment's of Ben's blog, I am willing to entertain an earlier start. ;) These sub-prime loans removed affordability from many markets. I say good ridance to them.

For southern California, that will suddenly remove 1/3rd of the buyers. Do not expect the upgrade market to maintain prices when the 1st and 2nd time home buyers cannot upgrade. When you factor in the ever increasing foreclosure inventory, it tells me we're in for quite a price correction.

I'm keeping with my prediction of a 30% to 60% price drop for Southern California. For 2007 it seems almost impossible for us to have less than a 25% price drop in one year. Yikes! Will it all happen in 2007? Unlikely due to the way the ARMs reset and people's willingness to go into denial for a year. But this isn't the 1990's where people have nice nest eggs to ride out a downturn for years. Today's typical consumer's sustainable downtime is a few months; yes, some can only get by for a few weeks.

Considering that the bulk of the sub-prime jobs are in Orange County, LA Country, and Ventura Country... I'm not very optimistic for Southern California what so ever. (Yea, I skipped San Diego county. If you don't know what's happening there... I can't help you.)

Its only a question of when credit gets tough. Its only a question of how long until home prices really drop. Forget a spring bounce... that cannot happen with 1/3rd of the mortgages taken off the plate.

Neil



article from bloomberg on Ownit (sorry about the ad...):
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKO4CvD700gI&refer=home

The oped news article:
http://www.opednews.com/articles/genera_alex_gab_061207_mortgage_industry_cr.htm
article on mortgage catering due to fraud:
http://www.opednews.com/articles/genera_alex_gab_061207_mortgage_industry_cr.htm

10 comments:

buzz saw said...

Argent Mortgage Company LLC is a subsidiary of Ameriquest Mortgage, which is one of the United States's leading wholesale sub-prime lenders. It is owned by billionaire Roland Arnall. [link]

Other news (hopefully to be updated from time to time):

Ameriquest news (this site has a lot of subprime lender news):

More evidence that the Sub-Prime World is bleeding a slow death: Ameriquest is reportedly closing its 229 retail branches and firing 3,800 employees.

Interesting link
here
, here, and here.

Mergers, buyouts, sellouts, failures, and acquisitions are the order of the day. I can't keep up with them. Good luck w/ the blog.

buzz saw said...

This site might help you clean up your HTML links. If you use this technique your sidebar will come back to the top of the page. (Just trying to help)

4shzl said...

This is interesting... We're going to have unemployment without official unemployment! In other words, the statistics are already off, but by how much?

This is news? C'mon, Neil, you should know better. If U.S. unemployment were measured and reported according to EC standard, it would be about twice as high.

Generally I'm an equity optimist . . . I still predict 2Q 2007 is the schwerpunkt of the housing crisis.

I'm not sure whether this forecast qualifies as optimism or just impatience. Regardless, there's no way housing bottom's in 07. Read CR's analysis of the latest Freddie Mac spin-shot for an explanation of why:

http://calculatedrisk.blogspot.com/

wannabuy said...

4shzl,

Oh, the housing bottom isn't in 2007. I'm saying the market turns and all the factors come together in 2007. And yes, I'm well aware the current unemployment numbers don't add up... one reason I blog it.

Buzz saw,

I'll clean up the urls in future links. :)

Neil

TJ & The Bear said...

Hi Neil,

Greetings from the Hollywood Hills!

Your prediction of a 30% to 60% correction takes us back to pre-boom values. Not bad, but not nearly far enough.

Sure, affordability will dictate pre-boom prices once you remove exotic financing & subprime lending. However, doesn't that wrongly assume that California homeowners still have most of their pre-boom equity to use for trading up?

Homeowner's equity prior to the boom was somewhere around 65% of value; now it's down to 56%. The number of homeowners that own their home outright has stayed about even at 35%, so homeowner's equity on mortgaged properties has actually declined much greater than indicated. In fact, assuming that those 35% free and clear are distributed evenly, that leaves all mortgaged properties underwater (on average) at pre-boom valuations. As they say, debt is fact whereas equity is a matter of opinion.

The only thing that sustained California homes at 5x+ median income pre-boom valuations was equity rollover; what happens when there's no equity left to rollover?

Combine zero or negative equity with the return of standard qualifying (i.e., 20%+ down, 28% DTI, 700+ FICO, 30 year fixed, full doc) and prices have to go back to 3x because everyone's essentially a first-time buyer again (or worse).

Comments?

wannabuy said...

TJ,

I am trying to add to my "mental model" on California real estate how much of an inpact "roll over" equity has had on sustaining prices... (Obviously quite an impact, but how much?) This is also the first bubble in a long time that will pop nationally. Thus, we won't have any money moving in from out of state...

so maybe I'm being optimistic on future home prices... We'll see. I think we can all agree buyers in 2007 should come with a free labotomy.

Neil

TJ & The Bear said...

Neil,

I may be oversimplifying, but what else besides "rollover equity" could account for the difference between MHHI and median housing prices?

Second point of debate: Home prices declining to near pre-boom levels would occur regardless. This time, though, we have a huge new set of internal negatives -plus- a host of external disasters-in-waiting.

AnalysisGuy said...

I released today’s FREE report on Chicago. And it's a fairly normal market - that's strange for us CA natives... It joins prior FREE reports on Boston, Bakersfield, San Francisco, Seattle & Los Angeles.
thebubblebuster.com

wannabuy said...

I may be oversimplifying, but what else besides "rollover equity" could account for the difference between MHHI and median housing prices?


As much as I get tired of saying it, the nice weather. My parents and dozens of their neighbors haven't moved since the 1970's. While most people cannot afford to retire in LA, there is quite a population dug in for the long haul.

So, any prediction on when the first hedge fund fails in 2007?
Neil

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