Home Financing Stocks Have Taken A Hit
The Wall Street Journal has a report on the stock market that includes a look at some housing sector prices. "Look at the companies that make home loans to people with low credit scores. New Century Financial is off about 27 percent this year; Accredited Home Lenders has tumbled about 27 percent. Friedman Billings Ramsey, the investment bank to the housing boom, is off about 43 percent this year."
"Beneath the surface, the canaries have started to look peaked. General Motors and Ford Motor (which have big financing operations) both reported weak sales for April on Tuesday. Three triple-A rated financials, Fannie Mae, Freddie Mac and MBIA, not to mention erstwhile triple-A AIG, are all under various forms of regulatory scrutiny."
Fannie is down 28% from September, Freddie is off 14% since January, MBIA has lost 11% from December and AIG gave up 27% this quarter. GM, even with todays big rise, is 34% lower than year ago levels. One matter not discussed often is that there are only a handfull of triple A firms in the US, way down from the 1980's.
12 Comments:
Ben, this blog is awesome!
I like to track the general decline of the Housing Finance sector via the Fidelity Select Home Finance Fund.
Ticker is FSVLX
http://stockcharts.com/def/servlet/SC.web?c=FSVLX,uu%5bh,a%5ddaclyyay%5bdc%5d%5bp%5d%5bvc60%5d%5biUb14!La12,26,9%5d&pref=G
The (always forward looking) stock market clearly has predicted that the end is nigh in the bubble markets.
I think the non-bubble markets (Houston, Dallas, Atlanta, non-coastal Carolinas, etc) will be okay... but the bubble markets (no need to list them here is there?) will feel some pain...
Dateline San Diego. . .
Just had an interesting and somewhat disturbing e-mail exchange with an associate of mine who has labeled me "chicken-little" regarding my reluctance to pay $2,000,000 for a house I could rebuild for $300k.
He sent me information on "Option ARM" loans which are all the rage now. The buyer/refinancer picks the payment: from a neg amort all the way up to a principal & interest amortized over 30 years. The payments on a $420K loan could be as low as $1,350/mo up to $3,321/mo depending on what you could afford/how long you wanted to pay.
He's confident that a person could buy and pay the neg amort amount (less than to rent the property) FOREVER and never fall behind and never lose house. Now, the person will NEVER own the home but will be able to (theoretically) live there.
I personally think that all the king's horses and all the king's wacky-loan-product men can't put this market back together. However, I would appreciate input from both sides on whether new, innovative loans can put off the inevitable.
Here is a site that I like to watch as an economic indicator simply because it is so far reaching.
http://www.bullandbearwise.com/content.asp
This site takes 35 different economic indicators, (including housing) rates them with a value of importance and aligns them in either a Bull or Bear column. Then gives the aggregate a number. Click on the 5 year graph and check out the drop in the last couple of weeks.
BKlawyer,
From what I see after a brief google search, the minimum payment amount would be readjusted periodically (every year for instance) with a cap, and less frequently without a cap (recasting). Also like in other ARM loans, the buyer bears the interest risk.
So if a buyer really stretched his finance, he may not be able to make the payments forever, after the minimum payment is adjusted. Also, if the buyer puts zero down and always make minimum payments and the prices plateau, he would have negative equity, and could not sell the house without bringing cash of his own.
"I think the non-bubble markets (Houston, Dallas, Atlanta, non-coastal Carolinas, etc) will be okay... but the bubble markets (no need to list them here is there?) will feel some pain..."
I know we don't have a lot of 2/1 1300 sq ft shacks selling for over a million dollars in Dallas, but that doesn't mean we don't have a bubble. The shear number of condos, condo conversions and escalating home prices (doubling and tripling of prices over the last couple of years) is the same here as in many other parts of the country. That combined with the alternative financing and lax credit requirements have fueled the fires here in Dallas just like most everywhere else. I'd be really surprised if there is a "soft" landing in this part of the country. After all, Dallas is famous for the condo scandals of the late 1980's that brought a whole lot of the S&L's tumbling down.
A common paranoid theory I keep seeing on the web is that the OCC (http://www.occ.treas.gov) has implemented new rules for mortgages that will prevent mortgage companies from issuing interest-only loans. This supposedly goes into effect September 1st, and is retroactive such that all current interest-only loans will be converted to a different type. This was done as a way of protecting mortgage companies.
I've looked at the web page for the OCC and it's like most government pages - totally impossible to find anything so I can't validate this story. Has anybody heard of this and if it is true, this would be a major development.
The Dallas market doesn't look like it's been in a bubble to me...
http://www.realestateconsulting.com/metro.html#Dallas
http://recenter.tamu.edu/data/hs/trends4.html
http://www.dallasfed.org/research/swe/2004/swe0402b.html
"I noticed quite of few forclosures in Texas. Why so many? The real estate prices are low. Of course that is - compared to Orange County. I don't understand."
That one's easy. While houses appreciate significantly in value (something that doesn't happen a lot in Texas), foreclosure can be avoided by people simply re-financing their way out of trouble - using the equity in the home and re-amortizing all of the time.
This changes when houses remain flat of go down in price, though, as re-fi becomes impossible and foreclosures rise.
What You Get For The Money is on HGTV tonight:
http://www.hgtv.com/hgtv/shows_hgftm/0,2496,HGTV_21876,00.html
http://www.hgtv.com/hgtv/shows_hgftm/episode/0,2496,HGTV_21876_38115,00.html
The top must be at hand!
I understand the nature of a neg am loan is similar to paying a credit card minimum. But at least with CC's there is a credit limit. Once you hit that, you can still pay the minimum but you can't charge anything.
With a home, wouldn't people paying minimums soon find themselves with a mortgage higher than the home is worth? Would the mortgage owner let the total run past the value of the collateral?
Or is collateral an old school concept that no longer matters in the New Hedge Fund Economy?
anon 1:43
The best link I could find on the subject:
http://realtytimes.com/rtcpages/20050222_interest.htm
http://mortgage-x.com/library/option_arm.asp
It looks like the max neg equity is about 10 - 20%.
I've gotten flyers for these loans in the mail. They NEVER give even a hint of the full implications of the contract. It's fraud in my book.
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