Tuesday, May 10, 2005

Out On A Golden Limb

Golden West Financial, which is most commonly know by the World Savings subsidiary, has first quarter numbers out. The mortgage firm couldn't be more leveraged. "Our loan portfolio increased to $107 billion, up 29% from $83 billion at March 31, 2004."

A staggering 99% of those loans are adjustable rate mortgages and the number of those that are refinacing is up to 78%, from 72% a year ago. Churn, baby, churn.

In addition to being vastly overweight in California, the spread between cost of funds and the rate it can charge is narrowing. From 2.92% a year ago to 2.4% now; that's almost an 18% decrease!

32 Comments:

At 9:27 AM, Anonymous Anonymous said...

Hmm.. I've got CDs with them. Under the FDIC limits though, so hopefully the risk there is minimal.

 
At 9:28 AM, Anonymous Anonymous said...

Doesn't Buffett own Golden West Financial?

 
At 9:34 AM, Anonymous Anonymous said...

I hope that FDIC is in a better position than mortgage insurers.

The bubble burst is no longer a question of if or when. It is happening already.

I start to worry that we will need 100% downpayment to buy a house in the coming years. But let's be optimistic for once and hope that 30% will suffice.

 
At 9:35 AM, Blogger John Law said...

U.K. Retail Sales Plunge Most in at Least 10 Years

http://www.bloomberg.com/apps/news?pid=10000087&sid=a.wISF1cWzGs&refer=top_world_news

 
At 9:37 AM, Blogger John Law said...

(A staggering 99% of those loans are adjustable rate mortgages and the number of those that are refinacing is up to 78%, from 72% a year ago. Churn, baby, churn.)

are you kidding? wow!

 
At 9:47 AM, Blogger Ben Jones said...

John,
They actually plan it that way. It is their goal to be in adjustables. That's why the spread issue is so huge. They hold these MBS's too.

The flat LT rate caps what they can charge as ST rates increases eat away at their margin. The only way they can hold up earnings is to expand. Classic setup for failure.

 
At 9:51 AM, Anonymous Anonymous said...

As far as I know, Golden West Financials is the best S&L in the US. Most of their mortgage loans are variable rate. They already do this for 30 years! For S&L, variable rate is easier to manage than fixed rate because when the interest rate goes up, your loan rate goes up too, so the bank can maintain a pretty stable margin. And those guys are very, very conservative, I think normally they only loan 60%-70% of the house price. Well, I think CA housing bubble is obvious, but GDW is the last bank I will worry.

 
At 9:53 AM, Anonymous Anonymous said...

Ben,

Where did you get that GDW has lots of MBS? I read all their annual reports, but I have never seen MBS.

 
At 10:07 AM, Blogger Ben Jones said...

9:53 Anon,

From the link.

Loans receivable including mortgage-backed
securities (MBS)(a) 107,493,824
Adjustable rate mortgages including MBS(b) 104,481,133

 
At 10:51 AM, Anonymous Anonymous said...

Off topic, but I just had to post it:

http://www.apartmenttherapy.com/main/archives/002753.html

Turnkey 655 & 590 sf studios in NYC for $885K & $797K. The website works it out to "roughly $1,350 a square foot." They're swanky and all, but couldn't someone just buy a studio and hire an interior decorator? (A studio in Manhattan that would've gone for $40K ten years ago is now about $300K, btw.)

Is it just me, or have things gone completely nuts?

 
At 11:03 AM, Anonymous Anonymous said...

I agree with anon 9:34

"The bubble burst is no longer a question of if or when. It is happening already."

 
At 11:39 AM, Anonymous Anonymous said...

"I start to worry that we will need 100% downpayment to buy a house in the coming years. But let's be optimistic for once and hope that 30% will suffice."

Of course, when the median price for a home is only 100K, I guess a 30% (or even 50%) down wouldn't be so bad. :-)

 
At 11:57 AM, Anonymous Anonymous said...

11:03 you stated "The bubble burst is no longer a question of if or when. It is happening already."

The bubble has burst? Why do you think that? What is your reasoning?

 
At 12:13 PM, Blogger John Law said...

what did marx say? a capitalist will sell you the rope you're going to hang him with!

 
At 12:17 PM, Anonymous Anonymous said...

People, althought I think that CA will take a huge it doing the coming crash, I don't think moderately priced desirable areas will see much of a downturn.

For example, I think Boston may do quite well. The median home price is only $450K, which many dual income professionals can easily afford. Heck, many people make $100K, so a dual income professional couple can rack in $200K per year. So $450K is quite afforable.

Seems like many are making mountains out of molehills.

 
At 12:41 PM, Blogger goleta said...

Boston might do OK, but what kind of SFH can you get in Boston with $450K? It all depends on the disparity between home prices and income.

If median home price is 15 to 20 times median individual income or 10 times median family income like it's in most coastal areas of California, then the market will collapse. If the median home price is close to 4 times of median family income, then you're right that the prices will not go down much.

 
At 12:58 PM, Anonymous boulderbo said...

ben,

i sell to world savings and they are very conservative. their primary product is an option arm, which allows a neg am, interest only or amortized product. all of their products are a much lower loan to values than the other competing lenders (countrywide, greenpoint and indy mac). they were one of the few saving and loan institutions to make it through the last mess.

 
At 1:00 PM, Anonymous Anonymous said...

anon 11:57

I think it is starting to unravel.

There are signs in many markets that indicate the tide is changing, from more inventory, days on market are longer, price reductions, lower median prices, fewer number of sales, increased defaults.

I am seeing more articles about the housing bubble. Surveys are showing an increase in the number of people who now believe we are in a housing bubble.

Even Fannie Mae, Freddie Mac and FDIC are now warning of a bubble in certain markets. It seems that the overheated markets of the west and east coasts have infected other central U.S. cities and they all appear to be merging into one big overheated market.

It has burst in Australian and U.K.; they are having major corrections. Our market had pretty much been in tandem with Australia and U.K. and it is said that we are about six months behind them.

Regulators are about to put a stop to the risky ARM products. PMI companies are pulling back. I talked to a mortgage broker friend of mine, he said underwritters are starting to tighten up.

We are seeing many classic end of bubble characteristics. Condo conversions usually show up at the end of the cycle.

The fundamentals make no sense. The amount of speculators and flippers. The shrinking affordability index.

I am a Realtor in L.A. and since January I have seen several of my friends get multiple REO listings. We haven't seen REO's in this area for a few years. (REO is a foreclosure property that the bank now owns).

There are more reasons why I think we have already tipped and are now on our way down. I think it will happen fairly quick, it will get worse from this point on and we should see it really intensify by the end of summer.

That is my opinion, for what it's worth.

 
At 1:04 PM, Anonymous Anonymous said...

A dual-income family making $200k/year will not want a median-priced single-family home. In the San Francisco Bay Area, a median-priced (~650k) detached house is 1500-sf in a bad school district (typically one with lots of Latinos). To get into a good school district, you need $1M for a 3 bedroom, 1500-sf house, or $1.3M for a 4-bedroom house approaching 2000 sf. Even a family with two working professionals can barely afford that.

 
At 1:11 PM, Blogger deb said...

"I talked to a mortgage broker friend of mine, he said underwritters are starting to tighten up."

I'd love to hear more from the lending side. I think when lenders begin to tighten standards, even a little, it will begin the dramatic transformation from seller's to buyer's market.

Any lenders out there who can tell us how quickly and to what degree standards might be raised?

Any realtors seeing deals fall apart because the buyer can't qualify or the property doesn't appraise?

 
At 1:24 PM, Anonymous boulderbo said...

deb,

the first signs of lender tightening would be a cut in loan to values for investor properties, as they present the most risk. greenpoint recently cut their max ltv for these loans to 90% from 95%, someone from hq found out that these loans made up better than half of their new originations. a few others are requiring pmi for higher ltv's, which makes approval of these loans less likely.

 
At 2:08 PM, Anonymous Anonymous said...

"If the median home price is close to 4 times of median family income, then you're right that the prices will not go down much."

Boston median household income is about $86K. The median home is about $450K.

4 times median household income is $344K. NEVER gonna happen in Boston.

You telling me people will sell for over a $100K loss! Not.

 
At 2:11 PM, Blogger Ben Jones said...

boulderbo,
I'm glad to hear that about GF. Are there mortgage firms that you think are overdoing it?

1:00 Anon,
Thanks for the inside LA info. Please keep us up on that market.

 
At 2:29 PM, Anonymous boulderbo said...

ben,

here in the denver market, we're not experiencing any bubble of the magnitude that you see on the coast. we had 12,000+ foreclosures last year, but the investors are stilling lending on the same terms as they do across the country. long beach used to be the kamakazi lender of last resort until wamu bought them (and found out what a gem they bought). many replaced them, option one, aurora loan services, indy mac, etc, all lending very aggressively. what i think we're seeing are those higher in the feeding chain (the investors that buy the end securities)are starting to question what they are truly buying. i have heard that they are to requiring tighter underwriting and/or credit enhancement (pmi), which is really the same thing. i firmly believe that tightening by the lenders (not necessarily by their choice) is going to precipitate the cooling of the market.

 
At 2:51 PM, Anonymous Anonymous said...

2:08 Anon,

Where are you getting the median household income for Boston? The figures I've seen from the last available ACS done by the U.S. Census Bureau show much lower incomes for Boston (42,567) (Suffolk 42,979, Middlesex 65,529, Norfolk 67,689).

I don't necessarily disagree with you about people not wanting to take a 100K loss on a 450K home (of course according to the ACS numbers, the 4X median household income results in a much lower priced home and a concomitant loss). People will try to sit on a property and hope that the market returns. What may push them to sell (or rather be foreclosed upon) is when the financial stress is too much, e.g., unemployment. So I think initially there will be flattening of the market and then as additional negative economic factors come into play such as a recession, which may occur in the next 2 years (and the deflation of the psychological speculative bubble), some sizable depreciation may follow in the housing market. I don't think 20-30% depreciation in many of the hot markets is unreasonable under the right circumstances.

The amount of depreciation, though, may be tempered by the historical affordability factor. For example, I think for the past 20 or so years, California has had an affordability ratio greater than 3, which is the neutral baseline. I want to say it's been around 4 to 5 in many of the markets, though now places like San Diego are beyond 6. I would think that depreciation in those markets will be unlikely to go down to create an affordability index of 3.

 
At 3:17 PM, Anonymous Anonymous said...

2:08 PM Anon,

"Homeowners" do not choose to sell at a $100,000 loss. For example, my family sold a home (in Deb's area) of L.A. in 1989 for $375,000. The buyers were dual-income, no kids. Both were bank executives (with different banks). In just over a year, both had lost their jobs and were forced to sell (couldn't pay the mortgage). They even had put over $100,000 down, which is not as common today. They lost all of their down payment, and then some. Near the bottom of the market, our next-door neighbors sold their home (same model & quality) for $228,000. That's a drop of over 39%. The neighbors still had equity because they purchased in the early 70's, but downsized into a much smaller home and less desirable area.

My own father (college professor) ended up walking away from a condo, many of my friends' parents ended up walking away, also. These are college-educated, intelligent people who put the standard 20% (or more) down. Imagine what will happen this time! Lending standards have never been so sloppy. This will end very, very badly.

 
At 3:24 PM, Blogger Thomas said...

If a person buys a house for $200,000, watches the market price go to $400,000 and then dial back to $300,000, and then sells at that price, he hasn't "sold at a $100,000 loss." He's sold at a 50% profit.

Remember, not every house was bought and sold this year. In my Orange County, California neighborhood, prices could decline by more than 30%, and a person who bought as recently as 2002 would still have realized a significant profit.

Nobody will willingly sell at a $100,000 loss, but in a declining market, a person who bought his house when it was dirt cheap will happily sell it for more than he bought it for, even if theoretically he could have sold it the year before for even more. The more recent purchasers will try and hold on until the market comes back and erases their loss before it's realized -- unless they are forced to sell by unemployment, relocation rising interest rates, death, divorce, overextension, etc. and have no choice but to list at something near the market price, no matter how much of a bath he takes. (Alternatively, in California, he just walks away, takes the hit to his credit, and leaves the lender stuck with the non-recourse deficiency.)

 
At 3:36 PM, Anonymous Anonymous said...

Boston median HOUSEHOLD income in $86K (link below). The $46K number you stated is likely per capita income. Since most households are dual-income, the number make sense: 2x$46K~$86K.

http://realestate.yahoo.com/re/neighborhood/search.html?sa=boston%2C+ma&csz=02110&submit=Submit

 
At 3:55 PM, Blogger desi dude said...

THomas

---
The more recent purchasers will try and hold on until the market comes back and erases their loss before it's realized -- unless they are forced to sell by unemployment, relocation rising interest rates, death, divorce, overextension, etc.
---

This is not necessarily the case. I talked to one gentleman who walked away from his residence in 1980s(?). He said his house had declined ~20% from his purchase price. He had more than 50K sitting in the bank and he didnot want to make payments on a depreciating asset.

eventually he bought back the same house(just plain lucky!) couple of years later.

 
At 6:38 PM, Anonymous Anonymous said...

My figures are from the U.S. Census Bureau's ACS, and they are for median household income. I believe the yahoo website does not reflect all of Boston, nor the Boston metro area. It's actually only for Boston area code 02297. The yahoo website is fairly misleading because it makes it seem like the entirety of Boston is covered by that one zip code.

 
At 7:36 PM, Anonymous John Vosilla said...

"i sell to world savings and they are very conservative. their primary product is an option arm, which allows a neg am, interest only or amortized product. all of their products are a much lower loan to values than the other competing lenders (countrywide, greenpoint and indy mac). they were one of the few saving and loan institutions to make it through the last mess."

Seems like Countrywide is also the most leveraged of the group and probably the most at risk next downturn.

 
At 8:46 PM, Blogger goleta said...


Seems like Countrywide is also the most leveraged of the group and probably the most at risk next downturn.



Ironically, Countrywide has out paced other companies in Ventura county to become the largest employer.

 

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