Results 1 to 14 of 14

Thread: weekend commentary - the 'house of cards' begins to collapse ...

  1. #1
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default weekend commentary - the 'house of cards' begins to collapse ...

    (snip)"Lenard Schwartzer, an attorney for USA Capital, told bankruptcy Judge Linda Riegle on Monday that the company continued making distributions to all of its 3,600 investors even though many borrowers stopped paying interest on their loans."(snip)

    phase one marginal homebuyers default on their mortgage payments ...

    phase two subprime mortgage lenders go bankrupt and investors in their mortgage backed securities take big losses ...

    phase three ...

  2. #2
    Featured Member lunchbox's Avatar
    Joined
    Sep 2005
    Location
    falling from grace
    Posts
    1,943
    Thanks
    0
    Thanked 8 Times in 6 Posts

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    You don't even know the market segment that the company was lending in or seem to understand what the quote you posted is saying, so please forgo your doomsday analysis.

  3. #3
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    ^^ this was not an isolated incident ... from the same linked news story

    (snip)"[USA Capital's bankruptcy filing sic] It's the latest in a series of private lenders who have failed in Las Vegas, including Harley Harmon Mortgage, Interstate Mortgage Group and Global Express Capital."(snip)

    as to the nature of these failed mortgage brokers / private mortgage lenders, there obviously aren't many details available. Based on a previous failure which was fairly well documented, it would appear that they positioned themselves as go-between among private investors who put up front money, homebuilders who borrowed construction money, and subprime buyers of those homes who were short of down payment money.

    It's not too difficult to speculate on the following. The mortgage broker has a specific interest in financing both construction and sale of homes in particular developments. The mortgage broker seeks private investor money in exchange for a promised 12% rate of return. The mortgage broker then lends investor money to the homebuilder as seed money. The mortgage broker then works a deal with a subprime home buyer for a zero down mortgage at an interest rate which is say 2% above prime 20% down mortgages. On the impending sale of the house the mortgage broker recovers investor money loaned to the homebuilder and rolls it into covering 20% of the sale price. The mortgage broker then writes/sells mortgage backed paper for the 80% balance at prices reflecting a prime 20% down mortgage. The say 2% differential between the effective interest rate of the mortgage backed paper representing 80% of the amount, and the higher interest rate being paid by the subprime home buyer on 100% of the amount, is then used to pay the higher interest rate promised to the private investors who hold the remaining 20% of the amount ! This would be analogous in many ways to MGIC, but with the 'gap' being privately funded, and with the private investors taking the bulk of the default risk.


    as to the content of the original quote, it's pretty straightforward isn't it. When subprime mortgage borrowers stop making monthly (interest) payments on their mortgages, and when the mortgage holder continues to make interest payments to its investors, the mortgage broker goes bankrupt !
    Last edited by Melonie; 04-24-2006 at 10:22 AM.

  4. #4
    Featured Member lunchbox's Avatar
    Joined
    Sep 2005
    Location
    falling from grace
    Posts
    1,943
    Thanks
    0
    Thanked 8 Times in 6 Posts

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    Your phase two indicates significant loss = principle. The quote states they stopped paying the interest, not the principle.

    I don't know the other companies mentioned. USA Capital (USA Commercial Mortgage Company) was not in the business of giving loans for residences. They wrote commercial paper as a short term first mortgage on borrowers realestate, for quick cash 'infusions.' Short term meaning under 5 years. Instead of a cheap rates for such a short term, they charged exorbinant rates.

  5. #5
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    Your phase two indicates significant loss = principle. The quote states they stopped paying the interest, not the principle.
    probably semantics ... but even if precisely the case this would still mean that if borrowers were paying principal only on 100%, and if the mortgage broker was first paying principal plus interest on the 80% commercial mortgage paper to postpone default, that the 20% private investors would be taking losses on principal repayment in addition to receiving no interest.

  6. #6
    Featured Member Vamp's Avatar
    Joined
    Jul 2004
    Location
    Missouri
    Posts
    1,111
    Thanks
    271
    Thanked 757 Times in 289 Posts

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    Being in the banking world I see alot about the mortgage world.

    I do agree with Melonie about Subprime mortgage lenders. Most the mortgages for subprime lending is given to people who would never qualify in any other mortgage. They don't know how to manage money and generally speaking do not understand the dynamics of the type of "creative financing" they are dealing with. Subprime mortgage lenders tend to use variable rate mortgages. Even with a cap on the rate, a one to two percent increase on a $100,000 mortgage can devistate a monthly budget.

    They are told when the interest go up just to refinance. If and when they change the refinancing laws these folks will have no choice but to default.

    It is a mess in the making.

  7. #7
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    They are told when the interest go up just to refinance. If and when they change the refinancing laws these folks will have no choice but to default.
    and herein lies much of the problem with Nevada mortgage broker bankruptcies - soon to be followed in other areas where housing market prices have not only stopped rising but have started to backtrack. Nobody but NOBODY will write a new mortgage on any terms if the current assessed value of the property is now less than the outstanding balance of the previous mortgage and if the homeowner seeking the new/refi mortgage loan doesn't have sufficient cash to immediately pay off the 'gap'. Thus it doesn't take a change in mortgage/banking regs to lock the door on subprime borrower refis, only declining real estate market prices.

    When the builder of a housing development encounters difficulty selling the most recently built houses, and discounts their selling price to unload them to avoid getting stuck with tax bills and construction loan interest payments, this has a direct effect on owners of houses which were built 6 months or a year ago for which they paid (and financed) a higher selling price. Now their 6 month or one year old house is by definition worth less than the discounted price being offered on brand new houses by the builder, such that they're going to have great difficulty attempting to refi when they owe more on their existing mortgage than their house can currently be sold for.

    Bankruptcies of subprime mortgage brokers/lenders inflicts financial losses of some degree on the investors who backed the lender. It doesn't take a change in mortgage/banking regs to cause investors to avoid future investment in high return mortgage notes when the default risk begins to skyrocket. This will have the direct effect of liquidity drying up in the subprime mortgage market, resulting in the tightening of creditworthiness standards by subprime and mainstream lenders alike.

  8. #8
    Featured Member Vamp's Avatar
    Joined
    Jul 2004
    Location
    Missouri
    Posts
    1,111
    Thanks
    271
    Thanked 757 Times in 289 Posts

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    Excellant point.

    Housing developers here have, on average, marked down their new homes $25,000 less than last year.

  9. #9
    Veteran Member
    Joined
    Sep 2003
    Posts
    744
    Thanks
    0
    Thanked 0 Times in 0 Posts

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    Prediction: Problems will hit the over priced condo market first for those who have purchased a unit in the last thre or four years. I think these units have the most chance of falling from purchased price to true value now of about 10 to 15%. That is not alot of fall in value, but enough to tip the 98% loan to value mortgages with no docs into being "upside down." When those late 20 somethings lose their jobs, they should just walk away
    from the unit rather than post cash at the closing to the new buyer. In the midwest, the mortgage note security is limited to the property period, and a definciency generally does not have to be made up out of pocket. I was surprised to find in the south that a deficency
    on the note (where the value is less than morgage balance at resale) sometimes requires
    the old owner to make up the deficency in cash by state law. If it isn't made up it becomes
    a claim on the assets of the old owner and definetly a credit rating hit.

    I would be most interested in the laws in California on mortgage defincency when value falls.

    Next units would be over priced mini mc mansions and tract homes in go go suburbs without
    mass transit access. These are more resilient than condos on value, but I think the gasolie crisis will hit them hard this time. These units are also subject to the owners over paying in the last three to four years.

    The most resilent and probably immune residential real estate is the single family home on a lot purchased prior to 1996, and refinanced on a low rate FIXED long term mortgage.
    These are fine.

    While I do not claim that the New York area has a bubble housing market, I go one further. I think the New York area has a "bubble economy" dependent on deals and wall street.

    The New York bubble economy is impacted only by extraordinary events and a longer term
    unforseen economic event. What is the chance of economic extraordinary events and
    the every (non computer modeling event) of the unforseen economic event happening in the next 12 months nationally or internationally that impacts Nw York area hard?

    I remember the early 90's and New York was hit hard inclduing condos. It wasn't hit first, as it is more resilent and can take some economic hits.

  10. #10
    Veteran Member azcustomer's Avatar
    Joined
    Jan 2006
    Location
    Phoenix, AZ
    Posts
    676
    Thanks
    0
    Thanked 3 Times in 3 Posts

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    Nice post NiceGuy.

    I worked as a consultant during the last downturn pouring over portfolios of loans gone bad. It has been interesting to watch the lending practices evolve and I'm impressed with a lot of controls which are in place.

    That being said - I agree in part with Melonie and more with Niceguy.

    There will be a national dip in residential real estate. Each region will be affected differently. I know nothing about the dynamics of the lEast Coast and a lot about the SouthWest.

    Residential R/E speculation drove the market almost as fast as the internet bubble. I knew there was going to be a problem last year when the gal who cuts my hair was telling me about how much money she was going to make by flipping houses. Nothing against haircut gals - but smart investors are quiet about their investments. Any good investor knows that about the time popular investments hit the media, that investment has definitely "jumped the shark".

    The LA and LV condo markets are hyped up on investors who will see a crash. Here in Phx, the condo inventory has lagged the overhyped demand so the coming lull in demand will be absorbed by a delay in the rollout of inventory.

    The investor market will be hardest hit in California's central valley and Las Vegas. Here in Phx, the homebuilders are very good at managing risk - the hardest hit will be the small land speculators.

    The mini mansion market is going to be hit very hard as inventories of homes on interest only loans which have been on the market for over a year are at an all time high. The $700k to $1.5 million market in the SW will present the most opportunities for opportunistic investors shopping for bargains.


    "Life is not about the number of breaths you take.
    It's about those moments which leave you breathless."

  11. #11
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    While I do not claim that the New York area has a bubble housing market, I go one further. I think the New York area has a "bubble economy" dependent on deals and wall street.
    yup, big banks, big law firms, NYMEX, NYSE/Nasdaq, traders/brokers, upscale retailers, plus recycled tax dollars towards public sector employee salaries and social welfare benefit recipients just about covers the entire downstate NY economy these days. It's all based on collecting a slice of someone else's money while failing to create any real 'wealth' or 'value'. As a good portion of the 'someone elses' are foreign investors, the downstate NY economy is potentially very sensitive to US dollar exchange rate and world events which affect the confidence of those foreign investors.

  12. #12
    Veteran Member StuartL's Avatar
    Joined
    Feb 2006
    Location
    European Man Of Mystery
    Posts
    648
    Thanks
    1
    Thanked 21 Times in 7 Posts

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    I've been reading about this elsewhere and thought I'd add.
    Re NiceGuy's post above ...
    In the IMF report on property prices (Sept 05 I think) their economists found something not generally noted in property bulletins etc. It seems that across the world, the higher the % of borrowers who use a long term fixed rate ( = 5 or more years ) the more stable the market is. Where few long term mortgages are used, the market is more volatile. They also found that where a very low % of borrowers use a 5+ year fixed rate mortgage, the housing market is much more prone to drop in price significantly. In other words, boom and bust is to be expected.

  13. #13
    Veteran Member StuartL's Avatar
    Joined
    Feb 2006
    Location
    European Man Of Mystery
    Posts
    648
    Thanks
    1
    Thanked 21 Times in 7 Posts

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    Oops - forgot to add ...
    From what I read, many, many Americans take Adjustable Rate Mortgages. Gulp.
    In the UK, it is mostly 2 year fixed rates and discounted rates.

  14. #14
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: weekend commentary - the 'house of cards' begins to collapse ...

    Stuart, it's even worse than you mention in regard to some 40% of recent mortgages being ARM's. Into the volatility mix you also have to add 'interest only' mortgages (mortgages which do not amortize principal during the first few years in order to minimize initial monthly payments), 'double stack' mortgages (i.e. one 'conventional' mortgage for say 80% of the purchase price, plus a second loan at a higher interest rate for the 20% balance, leaving essentially zero equity, in order to minimize 'front money'/down payment). Some 1.6 TRILLION dollars worth of ARM's are due to have their first interest rate adjustment in 2006 or 2007

Similar Threads

  1. Replies: 1
    Last Post: 07-25-2010, 05:52 PM
  2. Replies: 0
    Last Post: 12-14-2008, 07:01 AM
  3. Replies: 55
    Last Post: 04-29-2008, 03:55 AM
  4. Replies: 2
    Last Post: 08-26-2007, 02:16 PM
  5. Replies: 1
    Last Post: 11-19-2006, 07:35 AM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •