Property Grunt

Tuesday, February 27, 2007

From bad to oh we are so f**ked

The s**t didn't hit the fan. It was the whole f**king septic tank. As much as I would like to blame Rosie O'Donnell for pissing off the Chinese for the worst day in the stock market since 9/11. I think that would oversimplify the matter.

Barry Ritholtz of the Big Picture argues that it wasn't the Chinese that have led us to this point but this is entirely of our own doing. In a nut shell it is our economy.

He lists these points that have dominated the news:

Freddie Mac to Tighten Subprime Rules -- (2.27)
See also: Video: Freddie Mac chairman and CEO Richard Syron discusses new subprime mortgage standards, which will be implemented September 2007.

Orders for Durable Goods Tumble (2.27)A key barometer of business-equipment spending -- orders for nondefense capital goods excluding aircraft -- fell by 6.0%, after increasing 3.6% in December.

No Worries: Banks Keeping Less Money in Reserve (2.27)Every Dollar Set Aside Can Cut Into Profits

Subprime Game's Reckoning Day (2.27)Risky Lending Fallout Threatens to Spread;Uncertain ARM Strength• Home Lenders Cut the Flow of Risky Loans (2.26)Default Fears Drain Subprime Pool, Adding To Pressures on Prices

Mortgage Hot Potatoes (2.15)Banks Try to Return High-Risk Loans To the Originators

Default Jitters Batter Shares of Home Lenders (2.9)Risky Mortgages Spark Concerns, Uncertainty About Fallout on Bonds

Let's not forget our former Fed Chairman Alan Greenspan who alerted the world yesterday that the USA is at risk for a recession. Great timing as always Alan.

What is probabkly going to get our nuts in a sling are the sub prime loans.

The King of all Appraisers, Jonathan Miller, had this to say about the sub prime minefield.

As I lamented in yesterday’s post Banking On Profits, Not Risks,
the lending industry and investors have had short attention spans when it comes
to understanding risk. As the housing market continues to either cool or
stabilize, depending on what local market is being discussed, a new focal point
is arising…lending.

With the housing bubble as a media topic nearly worn out, or even with
a few kicks left in it, subprime has taken the torch as one of the next hot
(er…sorry) topic. Today alone, the Wall Street Journal had seven stories on
subprime lending. And here is an endless supply of other
sources on the topic
as well.

Lou Barnes over at Inman has another bleak perspective on sub prime loans.

The money world has since 2005 watched for a blowing bubble in housing
above all other economic possibilities, but it's been watching the wrong thing.
Close, but wrong. Housing is in a long-term correction, still looking for
bottom, but the correction is orderly. Foreclosure rates are likely to rise
clear through 2008, but there is no evidence of recession-inducing spillover
into the economy as a whole -- dampening growth but not drowning it.
The party most vulnerable to the retreat of housing exuberance is not housing, it's
the mortgage profiteers, at this moment the Wall Street co-dependents even more
so than their Main Street lender-accomplices.

Junk is very, very lucrative. However, as a kindly man explained to me near the end of my brief career as a junk-bond salesman, "Mr. Barnes, there is a difference between junk and trash."
Every financial reporter and news outlet has for a month been all
over the demise of the subprime mortgage, the accent on foreclosures. In the
mortgage market, everybody has been blaming everybody: it's only the 2006
originations, it's only the bad actors ... big guys stuffing faulty paper back
down the throats of little guys until they fold, giant guys taking big losses
(HSBC $10 billion so far), but not giant losses.

As of Friday there are not enough buyers of subprime risk to cover
loans recently closed or in process. In panicky conditions, no buyers at any
price. Subprime loans this week from time to time may be unobtainable until
their rates move high enough and credit standards tighten enough. Trash, like
other things, rolls downhill: Alt-A loans are closer to junk than trash, but
high loan-to-value-ratio Alt-A loans are still trash. By next week there will be
few buyers of Alt-A risk, and that market may lock up just like subprime.

And no. I did not forget about the latest housing report. According to Inman.

This Standard & Poor's/Case-Shiller U.S. Home Price Index declined steeply throughout 2006, falling to near-zero growth after peaking at about 16 percent year-over-year growth in 2005.

It appears the idea that when the real estate market goes up then the stock market goes down and vice versa has been thrown out the window.

Hey, when we crash and burn at least we do it in style.