Thank Goodness For $20+ Billion In Losses?

This week Bank of America - make that *Ken Lewis' Bank of America* - announced some $20 billion in losses due to its savvy investment in Countrywide Financial.

Hmmm...

Is this the same Countrywide that Ken Lewis' bank was raving about merely 2 years ago?

I'll enlarge the last line:

"THANK GOODNESS WE HAVE IT", i.e. Countywide!!!

And they said that, not only after OVER-PAYING for the subprime lender, but AFTER having many months to scrutinize the books.

Here's what I wrote/predicted 3.5 years earlier, in January 2008:

Ken is not simply paying $4 billion (on top of the $2 billion that already vanished); he is assuming the debt of a company whose liabilities exceed $120 billion. Even with a light recession and slightly higher Treasury rates, his gamble could easily cost BoA $20 billion!

How prescient am I!

And guess what....I'll predict ANOTHER $20 billion in Countywide Losses from here. Look, they lost all that money already and interest rates actually WENT DOWN. What's going to happen to these toxic loans when borrowing rates inevitably uptick???

Revisit my on-target prediction and enjoy one of my all-time most popular posts here:

Bank of America's Ken Lewis - Socialist Hero, Shareholder Villian

IndyMac Offering 3.125% Fixed Rate Mortgages!

I know someone who, like millions of others, had the misfortune to borrow too much against *their* home during the recent housing bubble.

Owing over $500,000 on what's now worth, supposedly, $350,000 he did the rational, best-interests-of-his-family thing and strategically defaulted on the mortgage (400k) and HELOC(150k).

His first mortgage, 395k, was issued by the long-since-bankrupted IndyMac bank. So now the note is held by Goldman Sachs cronies....er, I mean it's owned by us taxpayers and it's being *managed* by and to the financial benefit of Goldman Sachs cronies!

Seven months after deliberately missing his first mortgage payment, *IndyMac Federal Bank* - as it's been reincarnated as - offered him one of those so-called loan mods.

They, speaking for taxpayers and future generations, are offering him a deal:

They will transform his 395k adjustable (to LIBOR + 2.25%) loan to a fixed rate loan of 426k (includes late fees, taxes, etc.) at 3 1/8%.

3 1/8% for 30 years? Are you freakin' kidding me???!!!

The way he figured it, it came to $1,950 per month ("1556+395 for taxes and insurance").

BUT that wasn't precisely the loan *IndyMac Federal Bank* offered him via FedEx today. The numbers seemed off, too low.

Closer inspection revealed that IndyMac was actually offering him a fixed 3.125% mortgage for FORTY YEARS!!!

I have a question - can any of you Morons out there land such generous mortgage terms today?

Can any of y'all get a 426k, 3.125% 40-year loan on a house that, at the fleeting moment anyway, has manifest market value of $350,000???!!!

Realize that money, cheap as it is these days for those with access to the printing press, still isn't that cheap. So the government/taxpayers/IndyMac Federal Bank is offering a deal that's a guaranteed loser for itself.

Sure they can presently borrow short-term at less than 1% to fund these *mods* but that won't last forever - at least not for forty years. Once interest rates spike, not only will IndyMac become insolvent yet again, it will unleash another whole round of strategic mortgage defaults.

This guy asked me to calculate for him his net savings over the next ten years should he accept the loan mod versus, I guess, buying another place at today's market mortgage rate of 5.125%. I'll need some more clarity on the question/scenario to calculate anything at all.

But my hunch is that these hypotheticals are all quite beside the point. Since he'll always retain the capacity to simply re-default, I think he needs only to compare the $1,950 monthly number with what he'd be able to rent for that same monthly nut.

I told him that my hunch is still that the 40 year loan reset is a sucker's play. It's better to default now, and get one's good credit restored within 5 years than to prolong the agony. A loan mod, IMO, would merely delay the inevitable foreclosure as interest rates are all but guaranteed to rise significantly within the next 40 years. In other words, another leg down in the housing market will just, as I mentioned above, force him into another strategic default down the road.

Long-time readers well know my I'm probably not the person to ask about 40 year debt slavery sentences. I'm the one who thinks people should only buy/mortgage what they can afford on a 15 year term.

I'll have more on this one later on, for sure.

See also:

More On Goldman's IndyMac Thievery

The Cheapest Rent

Fannie & Freddie....Rearranging Deck Chairs

Here's an article that broached the subject of buying a foreclosed home from a *bank*:

Foreclosures Can Offer Deals, but Buyer Beware

Fannie Mae does give prospective homebuyers a leg up. Last month, it introduced a program that shuts out investor buyers for the first 15 days a home is on the market. Moreover, Fannie also has a financing program, which allows buyers to put down as little as 3 percent and doesn’t require them to carry mortgage insurance. It also provides loans that allow borrowers to wrap in costs for home renovations.

Freddie is testing a program that also initially shuts out investor buyers, and it is currently offering consumers who buy one of its properties up to 3.5 percent of a home’s purchase price, which can be used for closing costs, moving or even furnishings. The program was recently extended to buyers who submit a purchase offer by Jan. 31 and close by March 26. Primary homebuyers are also eligible for a two-year warranty on certain home repairs.

The title - Buyer Beware - is obviously ridiculous.

It's more like - Buyer Rejoice!

Rejoice because they don't have to compete with *investors*, Fannie will *finance* the purchase (i.e. merely change the name on the house!), no mortgage insurance is needed, AND Freddie will even donate what amounts to a taxpayer-backed HELOC on top of the taxpayer-backed no-money-down mortgage!

This country is doomed.

GMAC Management - Bilking Taxpayers

One wouldn't know that GMAC was *bankrupt* reading stories like this:

March 1 (Bloomberg) -- GMAC Inc., the lender majority owned by the U.S. government, paid Chief Executive Officer Michael Carpenter $1.2 million for the month-and-a-half he was employed by the company last year. The next four top executives got 2009 pay packages valued at $4 million or more.

Carpenter, whose full-year package would have been valued at $9.5 million, got a salary of $119,726 and about $1.1 million in restricted stock, according to a regulatory filing today. The firm paid Chief Risk Officer Sam Ramsey $7.7 million and handed $5.7 million to Tom Marano, CEO of mortgage unit Residential Capital LLC. Finance chief Robert Hull got $4.9 million and Chief Marketing Officer Sanjay Gupta received about $4 million.

GMAC, the recipient of $17.3 billion in bailout funds, is subject to rules of the Obama administration’s special master on pay, Kenneth Feinberg. GMAC, based in Detroit, said Feinberg granted permission to pay Carpenter, who replaced former CEO Alvaro de Molina in November, as much as $9.5 million last year.

Marano’s 2009 base pay of $2.6 million was determined by GMAC’s board prior to the company’s restructuring last May, and wasn’t subject to Feinberg’s oversight. His 2010 pay package was modified to comply with Feinberg’s ruling, the company said.

How'd they get that $17 billion *bailout*?

Simple - the same way Big Military, Big Education, Big Banks, and Big Medicine do....rank *alarmism*. It'll be sooooo much worse if you (pols) don't take preventative action (read: fork over over money). Blah, blah, blah:

Feb. 25 (Bloomberg) -- Bankruptcy for GMAC Inc., the auto and home lender majority owned by the U.S. government, would have cost the government as much as $50 billion, the Treasury Department’s lead auto industry adviser said.

Sending GMAC into bankruptcy would have required the government to inject $40 billion to $50 billion into a newly formed company that would then lend to General Motors Co. and Chrysler Group LLC dealers, said Ron Bloom, chief adviser for the Treasury’s auto task force. Bloom spoke today at a hearing of the Congressional Oversight Panel in Washington.

At the end of December, GMAC received $3.8 billion in a third installment of government money. GMAC got $12.5 billion in two previous bailouts and almost $1 billion that was funneled through GM, which used it to invest in GMAC.

GMAC Chief Executive Officer Michael Carpenter told the panel the lender is "unlikely to require additional capital." Chief Financial Officer Robert Hull also testified today, saying the $20 billion in equity the company has on its balance sheet shows it’s solvent.

GMAC posted a $10.3 billion loss last year, driven in part by defaults on home mortgages. Analysts testified today that the best solution for GMAC and General Motors would be to place the lender into bankruptcy and sell the auto-financing business back to GM, which may suffer without its own in-house lender.

Going back to that first article for a second...

Someone tell me why *risk* and *financial* officers should be paid $5 million in annual salary when all they really did was procure billions from Uncle Sam?

I guess I'd feel more comfortable with their compensation if at least they were more aptly called *lobbyists* or something.

And recall that Thomas Marano who reaped $5.7 million last year - he has quite a blemish on his resume.

Marano was the face of Bear Stearns' mortgage division; he spent 25 years there before his division sent the century-old investment bank into bankruptcy. So it's not just that he shouldn't have been paid $5 million last year to rob taxpayers, it's that he shouldn't have even been hired in the first place!

I don't care, in my book, if you take down an entire investment bank you should be *out of the game*.

Recall also that Marano brought along that meathead Josh Weintraub whom I ripped nicely on this blog - so nicely that his relatives took to the comment section to defend him.

See:

Bear Stearns Run By Meatheads

Josh Weintraub - Round 2 With The Meathead

I Am A Lamb At The Teat

Josh Weintraub Hasn't Helped GMAC - So They Promoted Him

Undaunted Bull-Headed Morons

So I know somebody locally...

They overpaid for too much house, too soon (before the market dropped and before they procreated) - plus the place needs a whole lot of finishing to boot (sod, basement, driveway, etc.).

Three months after they buy borrow the place, the guy loses his job. And it takes him a full torturous year to find gainful employment. During that time the spouse admitted to many rivers of tears ("everytime I pulled into the driveway") and that they had to withdraw from retirement accounts just to pay the 30 year(!) mortgage.

So, fortunately for him he did secure a rare open position in this ultra-$hitty labor market - although it seems to be substantially *commission-based*.

Now, what does he do not even two months in?

He goes out and buys leases a *Rover*!

That has to be nearly $500 a month, right?

Earthlings simply do not learn - not unless the lesson is jammed down their throat, or fired up their posterior cavity.

Mortgage Fraud - All The Way Up, And All The Way Down

Just a quick note on *short sales* which are picking up steam in the wake of this housing market implosion.

My real estate buddy in Naples informs me...

Here's what's going on. People who are underwater are getting contacted by *investors* who tell the homeowners that they can get a bid on their home for them within a month. What homeowner wouldn't be interested in that? A month later, they come up with a bid that's *significantly below market value*.

Then, they take that bid to the bank and the lender mysteriously approves the sale.

But there are a couple of issues/problems here:

1) The way some of these transactions are set up, the homeowners are not absolved of the mortgage debt. They are free of the house, but the lender is still owed money. Fine Print can be a bitch!

2) There's a serious conflict of interest inserting itself into these transactions. Supposedly, these *investors* have hired people directly from the loss mitigation units of the foreclosing banks. So these FNGs become liaisons between the investors and the lenders, though, mind you, employed by the *vulture* investors. What exactly does that mean?

Well, personal relationships between buyer and seller invite all sorts of payoffs and side deals. The example my buddy gave was a house being acquired by investors for 100k that had a clear market value today of 150k. Institutionalized bank stupidity is always a suspect, but I'd like to see the money/approval trail for that one.

As my buddy told me, it is near impossible for distressed homeborrowers to even get a phone call from the lender returned - never mind wresting a *loan mod* or executing a *short sale*. But these *insiders* - who are now ostensibly outsiders - already have all the connections and know-how to help make things happen.

Some people refer to this type of fraud/cronyism as the *revolving door between industry and government*.

The best example I have concerns lawyers and the SEC. All these young law school grads know the plan - work for the SEC for ten years at 80k....then after you've made all the important connections there, you're a shoe-in for a plush 400k job in the compliance department of some Wall Street concern.

End The 30 Year Mortgage

One can't buy stocks without putting 50% down, right?

The government put that margin law in place for our own good, to rein in reckless speculation and preserve the integrity of the stock market - I guess.

So why does Big Government not only permit, but ENCOURAGE the masses to commit years' worth of their unconfiscated wages to buying homes with next to ZERO downpayment?

Remember, since it generally costs 6% to sell a home, any property bought with less than that percentage put down is a *fully levered transaction*.

But today, the government, via FHA and the ghosts of Fannie and Freddie, is underwriting mortgages across the country with, maybe, nominally 3% down but it's essentially a smokescreen. Look at this typical *blog post* (ad!) I found in a split-second:

HUD (Housing and Urban Development) is offering home buyers who qualify for FHA loans to purchase a HUD foreclosure with only $100.00 down payment!

And look at the Google ads it's esconced in:



Now it's bad enough that 0% down home *buying* has been sanctioned by Big Government...

But even worse is the additional leverage from 30 year mortgages. Loans of this length, they not only preserve effective *zero equity* status for years, they introduce an even worse ill - *wage slavery*.

I'm 35 years old. Why the bleep do I want to buy a house, and have the same monthly nut at age 65, that I do today? Thirty years is a freakin' eternity. Actually, the monthly nut will be higher when I'm in my 60s - on account of the mortgage interest deduction being less! And that's not counting higher property taxes either.

It wasn't long ago that everyone did 10 and 15 year mortgages. Consider that at a rate of 5.75% today:

$100,000 of borrowed money over 30 years requires $584 in monthly payments.

But the same payment, at the same rate, for a 15 year mortgage will only amortize $70,000.

So there you have it. If homeowners or the government did away with 30 year loans....housing affordability, and hence prices would fall a steep 30%.

Today's $250,000 valued home would only cost $175,000.

And today's $500,000 valued home would drop to $350,000 overnight.

Mind you, these drastic declines would occur only with a change in consumer demand and bank/government supply of debt. They only consider a return to sanity on the debt slavery front. But if the bond market, too, were to regain its sanity....and rates normalized just a bit(!)....look out below.

Leverage is leverage. It doesn't well matter if it's sanctioned by the government or if *everybody else* is doing it.

Bank's Home = Your ATM

I just received the mortgage history on my Moronic landlord's house:

June 2003 - $370,000 Argent Mortgage Co. (original loan)

August 2003 - $35,000 Rockland Trust Co.

October 2003 - $75,000 Rockland Trust Co.

January 2004 - $194,000 Brockton Credit Union

February 2004 - $600,000 Ameriquest Mortgage Corp. (complete refi?)

August 2005 - $150,000 Southstar Funding LLC

August 2005 - $750,000 Wells Fargo Bank (complete refi?)

April 2006 - $240,000 Rockland Trust Co.

July 2006 - $190,000 Allied Mortgage Group

July 2006 - $1,000,000 Allied Mortgage Group

September 2006 - $190,000 Greenpoint Mortgage

September 2006 - $1,000,000 Greenpoint Mortgage

That may be incomprehensible at first, so I'll explain.

My understanding all along, straight from Moron's big mouth, was that he owed *$1.2 million* on the place.

Given that, I think it's safe to assume that only the last two entries constitute his debt at the moment.

Never heard of "Greenpoint Mortgage"? I never really did either. In terms of basic information, there's not much out there on the web. I know they were bought by North Fork Bank - which was swallowed up by Capital One - which ended up dissolved the entity because of an *inability to sell its mortgages on the secondary market*. Wikipedia also describes Greenpoint as *one of the first innovators of Alt-A mortgages*. Go figure.

So who owns Greenpoint and essentially the house I live in? I can't figure that out. Googling first suggested it was Countrywide/Bank of America, but then I read elsewhere that perhaps they might just be *servicing* the loan. But remember there was that photographing ninja caught outside my door from GMAC. So who knows which of these tax-payer supported banks actually holds the title.

But getting back my landlord and his serial mortgaging...

Mortgage rates were indeed falling over that period, so refinancing wasn't such an unpopular tactic.

EXCEPT, that that he wasn't just refinancing the same amount, he was obviously extracting every bit of rising equity the banks would allow. These were *cash-out* refinances; and the loans were as *exotic* as could be: interest only, adjustable, etc.

This guy also, clearly, shopped around for the most lax lenders at each turn. I see that loan up there from Wells Fargo and I start scratch my head because this house, maybe for a minute at the euphoric peak of the market, was at best worth 700k. So who at Wells approved a $750,000 loan on $700,000 worth of collateral from 2,800 miles away? Lucky for Wells, greater fools were found down the road to take this risk off their books.

In summary:

He started out with 370k of debt...

After three rapid-fire extractions, got the total nut up to 600k...

Then he refi-ed that with Ameriquest - another *gone* lender...

One more extraction got his total debt to 750k...

Then Wells Fargo refi-ed that for him (at the top of the market)...

And it looks like Rockland Trust was the principal Moron (no pun intended), because they let him extract a whopping 240k(+) above the already underwater home's value. AND, they did this in April 2006, after the market had started its retreat...

Then the crook found two fly-by-night entities in Allied and Greenpoint to cap off this lunacy, at even higher ($1.2 million) prices and even further into a sliding market.

I'm going to stop here because I have to run.

One thing that troubles me, is that this scumbag's name shows up on this report....SPELLED FOUR DIFFERENT WAYS!

Go ahead, tell me that wasn't some deliberate skulduggery!

I won't believe you for a second.

This house (as well as three others!) was indeed a veritable ATM for my landlord.

The guy stole a whole lot of money. By my count, he extracted about $4 million in total from four different properties. Unfortunately, for him, he wasn't smart enough to keep it. In fact, he squandered every single penny.

(Note - the rest of us would have to gross $8 million in ordinary income to enjoy such lifestyle. In other words, I'm reminding y'all that he didn't pay income taxes on his *income*.)

As the walls of reality (and the repossessors!) are closing in on him. As his credit cards get turned off, his subprime business evaporates, his bills pile up, and his tenants(!) fight back...

I think the following is an apt image of my landlord thinking about his ATMs of yore:

The Cheapest Rent

Remember this last year? It was when IndyMac went bankrupt and was taken over by Big Government. Now it's actually called IndyMac Federal Bank!

So what happens to any enterprise or industry when those most incompetent, unionized bureaucrats take over?

Yeah....things get even worse.

When I was down in Naples last week my buddy remarked that his brother was living in a condo for the past 18 months without paying his mortgage.

I asked who the lender was.

You guessed it, "IndyMac".

This is no anomaly. I've read some time ago that those other Big Government financiers, Fannie and Freddie Mac, didn't even list a loan as *delinquent* until it had been for a full two years - never mind initiate a foreclosure proceeding. We all know how *efficient* government is, right?

Meanwhile, there are going to be some clowns who really luck out. I'll bet scores of deadbeats will be able to stay in their taxpayers' homes rent-free for quite some time. My landlord seems to be such a candidate.

If only I had the foresight/balls to stop paying rent and the brains to figure out a way to forestall eviction...

A Fight Where No One Got Hurt

First, visit - Itching For A Fight.

After screaming far and wide that he'd put $100,000 of his money against anyone in a narrowly-defined, subjective debate Barry Ritholtz has gone silent on the issue of Big Government's role in the *housing mess* - via subprime lending mandates and whatnot.

First, I jabbed him in the comments of his own blog.

And then afterwards I swung again on Steve Sailor's blog. Steve whacked him good as well and enjoyed the bonus of a direct response from Barry. Click here for the entire post with comments. Below I'm just going to copy Barry's feckless response to Steve, along with my *helpful* rejoinder:

Ritholtz said...

I think we are approaching this from two entirely different universes.

I am looking for cause and effect; I want to see data that supports or detracts from the proposition at hand. PROVE TO ME that X caused Y (including actual statistics).

Your proposal of Diversity causing the housing crash reads to me as a soft philosophical argument that is by definition unprovable -- and undisprovable.

At the very least, I see no proof in your writings. They are cogent arguments that leap from A to B to C -- but they lack the rigorous statistical evidence to demonstrate something convincingly to people who insist on hard data.

In my belief system, I use as few assumptions as possible. I try to avoid things that are unquantifiable. Statistical back testing is just on[sic] way to do that.

But even softer analyses such as war-gaming and alternative scenarios have to have some reasonable basis for proceeding. It cant be all assumptions, beliefs guesses
and hunches.

7/02/2009

My trenchant, and still unanswered, reply:

CaptiousNut said...

Barry Ritholtz deprecates counterarguments as *soft* and *philosophical*. He wants comers to statistically:

PROVE that X caused Y.

But what precisely are X and Y? And how exactly could one PROVE causation?

Here’s his own wording:

"Is the CRA significantly to blame for the credit crisis?

Let’s go term by term:

CRA = narrow, but treatable in debate.

significantly = vague and hardly mathematically defined.

blame = loaded, subjective term.

credit crisis = also amorphous and thoroughly subjective.

So Barry has the gall(or gap?) to stand before us and demand *actual statistics* to address his own fuzzier-than-a-Sicilian-backside question!!!

Mr. Ritholtz,

Economics is a SOCIAL SCIENCE. Macroeconomics is a JUNK SCIENCE. And political science is a misnomer!

(BTW, what exactly is the statistical, scientific basis of the term *wingnuttery* in your analyses? Mentally trapped in *binary*, huh? It must be a real intellectually superior universe that you hail from.)

It’s bad enough that you frame a subjective question and then rule out *cogent*, subjective responses...

But what kills me is you stickling for *causation* when you are a freakin’ quantitative trader. You so-called quants traffic in CORRELATIONS all day long and bet gobs of, well, other people’s money thereupon. So not only is your universe an unfit perspective for this debate – it’s unclear whether or not you understand your own livelihood.

Now, if Barry Ritholtz insists that the massive subsidization of our nation’s least creditworthy homebuyers had an insignificant effect on the overall housing market...

Then I guess Barry believes the subsidization of underperformers (via quotas and race-based financial aid) hasn’t significantly affected national academic standards or costs.

And I guess he believes that the subsidization of our most unhealthy (i.e. the aged via Medicare) hasn’t significantly affected healthcare in this country in terms of cost, efficiency, research direction, etc,...either.

Alright I was just kidding. I know he probably doesn’t have well-developed positions on those subjects - nor should he.

He really ought to limit himself to his wheelhouse – stockpicking; which he seems quite good at. Listening to him on wider socio-economic issues is like bearing a 22 year old Hollywood starlet on geopolitics.

The empirical fact is that the CORRELATION between Big Government and severe economic distortion remains the same as it's been throughout history - 100%.

7/07/2009

Now this is an important debate, an important battle to be fought.

It's just too bad that the prospects for real dialogue on this were, like most things Ritholtz,....all bluster.

I would have really liked to see someone like the sharp-tongued Don Luskin, neither a friend of mine nor Barry's, step up for a slugfest.

Alas, Luskin has been a housing bull the whole way down. This subject has proven beyond his ken.

"What about Mr. Mortgage?", I thought. And I even emailed him to ask but was *underwhelmed* to say the least. He replied:

Ritholtz is right -- the investment banks made this...then the commercials followed the IBs because their earnings were suffering. The cra was a small part.

Say what?

I respectfully pointed out to Mr. M. that:

PS - by the way, barry doesn't heap blame upon the investment banks as you say. he has them ranked 13-17 as culprits. you might want to revisit what he wrote because it's clear to me that he doesn't see the connections between the low end, middle end, and high end of the housing markets.

and i forgot that you at one time were contributing to his blog....

Anyway, enough on this subject for the moment.

But I do want y'all to check out a very well-written and informative piece on *political lending* by Zombietime - that photo-journalist from California.

Seriously, take the minute to click on it. What's chilling beyond the blog post's substance is how easily a non-financial layman can grasp the reality on housing better than pros in the business and on Wall Street.

More Floridian Foolishness

I spoke with my real estate buddy down in Naples briefly the other day.

Apparently he's got 8 clients with *full offer* bids in on properties (foreclosed?) at the moment. And, get this, he says that he doubts even one of his clients' bids will be accepted because they aren't *high enough*.

Now, I don't care what's happening at the end of this *green shoots*, deranged-optimism rally down in one particular part of the country....This economy is heading to hell in a handbasket.

First of all, let's discuss what's transpired in the past 3 months.

INSANE, bankrupt banks were tripping over each other to offer fixed 30 year mortgage rates at levels never before seen. A friend of mine acquired one such loan on his house in Orlando - a brand new home, I assume he put 20% down,....he received a 4.5% fixed 30 year loan. Unbelievable.

Also, these bankrupt banks like Bank of America, Wells Fargo, and JP Morgan were offering refi's at levels below 4%!!! How brainless is that? They are taking assets off each other's books that are paying 6% and transforming them into ones that pay a whole lot less. And for what exactly?

Oh, so they can book fees today and burnish their current earnings? Real smart, Morons.

This all happened in the context of not only the *spring buying season* but also amidst a furious, all-aboard bear market stock rally. The S&P rallied some 45% off its early March lows based upon, well, nothing fundamental whatsoever.

So idiots down in Florida, mostly *speculators*, are going bonkers trying to knife-catch an endless stream of foreclosures, big freakin' deal. This is no cause for longer term optimism. Haven't we been in this same exact myopic place some 4-5 years ago?

I mean, rates can only rise from here. Stocks have PEs twice as high (20X earnings) as seen by most bear markets. State and local governments are on the cusp of bankruptcy. Commercial real estate is bidless, in total over-supply, and trading 50% lower than two years ago. And residential real estate, in the most high-priced, blue-chip neighborhoods like NYC, Boston, and Silicon Valley has just started to drop.

To think that the long run prices of condos in Florida, a state whose entire economy has always depended on *real estate*, won't be aggravated by the above catalog is short-sighted and Moronic.



Now, recently I received this *prospectus* from another friend, who's also in real estate. It's selling:

....170 contiguous developed & platted lots, 100% complete (performance bond put up for final coat of asphalt) recently acquired by the sponsor of this deal as part of a larger discounted bulk purchase of the unsold portions (including raw paper lots) of ****** ******* an operational 18 hole golf and country club gated master planned residential community in Fort Meyers FL. The in place facilities are magnificent and 1,300 new homes out of the original 2,700 home subdivision sold for as high as $1,000,000. The new homes currently being sold start at under $200,000 by national builder, ***** ******, which means lot values to builders are in $40,000 range. The gross pro forma sell out to builders over a conservative time period of 30 months is $7,000,000 for the 170 lots which the sponsor is putting into the partnership at $3,000,000 ($17,600/lot). There are $1.4 of primarily soft cost to run the sales and marketing so the gross profit would be about $2.6mm.

The $1.4mm in sales costs can be capitalized into a $4.4mm project cost or the initial capital can be the purchase cost of $3mm and the other cost taken out of unit sales. The sponsor is open as to capital structure and structuring the returns but suggests a mid teen pref to the investors money and then a 50% split. The investor return should be over 20% IRR on the $3mm capital investment and less with the fully capitalized $4.4mm (which dollar amount is a projected 58% of retail value so could be looked at as a high yield loan with a kicker)

The sponsor has not shown any lot value price growth as might materialize if the market has bottomed out. We are in the process of bringing in one or two other builders for the 170 lots.

Some of y'all unfluent in these matters may have to re-read that for comprehension - I certainly did.

Basically someone is firesale-ing a couple of hundred lots in an existing community in Fort Meyers. This is hardly a rare event down there today.

But notices like these should be the fair warning to all these *speculators* bidding up foreclosures that the supply of homes in Florida, both today and tomorrow, will be continue to be immense.

And that while some of them may catch a *near bottom* in one particular little condo....their money is still going into a dead asset class for the foreseeable future.

Who's A Jumbo-Sized Moron?

If you live in a tony northeastern locale, as I do, you're surely aware that the high-end of the housing market is utterly falling apart. Inventory is piling up rapidly....and demand is absolutely *bid-less*. Homes in towns near me that would have sold for $1.6 million recently are now languishing at $1.2 million without any buyers in sight. And homes that would have sold for $1 million 18 months ago are now hitting the low 800s without moving.

To ask a stupid question:

Why are luxury homes in the process of falling off a cliff?

Well, look no further than this recent news item:

Bank of America Corp. was the largest jumbo lender in the first quarter, with almost $9 billion in new loans, followed by Citigroup, according to newsletter National Mortgage News. JPMorgan ranked sixth. San Francisco-based Wells Fargo & Co. was the top overall mortgage originator, followed by Bank of America, JPMorgan and Citigroup, the newsletter said.

So, just as jumbo borrowers were about to have their collateral walloped....

Ken Lewis decided to become the largest jumbo lender in the country!

Remember, this is the same guy who jumped head-first into subprime lending (er, legacy toxic debt) in July 2007 right when that market was starting to implode.

More:

Barbara Desoer, head of Bank of America’s mortgage unit, said in a March interview the bank was seeking to make more jumbo mortgages, offering "extremely competitive" rates to consumers. The Charlotte, North Carolina-based bank "has balance-sheet capacity and we’ve allocated it to jumbos given our presence in some of the states and regions where that’s important," she said. "We’re very much open for business."

Bank of America doesn’t now make jumbo mortgages through brokers or so-called correspondent lenders, only its "retail" channel, though that’s "under regular evaluation," said spokesman Rick Simon.

Let me ask y'all another question:

Is Bank of America in any position to be strutting *extremely competitive* on anything?

This Ken Lewis is an out-of-control lunatic....one whose ability to *read the cards* is non-existent. I'm sorry, you can't run a bank, no less one of the largest in the world, if you CAN'T GAUGE COLLATERAL.

This is the guy who declared 2007's fourth quarter the worst his company would ever see.

This is the guy who bought the less than worthless, aforementioned Countrywide.

This is the guy whose firm wrote over $110 billion in unsecured HELOCs in 2006 alone.

This is the Moron who paid a premium(!) for the disaster Merrill Lynch.

All one has to do is see his bets du jour to know where the next shoe's going to drop.

High end homes in *important areas*....see ya later!

See also - Refi'ing A Bubble.

And, for the master link on Kenny, my third favorite Moron - click here.

Banks - Sodomizing Themselves On The Way Down Too!

First, visit - The Cost Of Credit.

So the slightly underwater homeowner I profiled was wrestling with the question of whether or not to go into his pocket, make his mortgage lender whole, and preserve his credit.

Here's an excerpt from an email I received from that dude today. His wife will be referenced by "Judy":

So Judy and I met up with one of her friends for lunch today. Her mortgage (on a condo) was $198k, and she knew the value dropped by 33% in the last year (they are now listing even lower, around $110k)... upside down on this one by a mile. She wasn't happy making her monthly payments (although she could easily still make them) and asked the bank what her options were... could she refinance? will the bank drop the amount owed on the mortgage (essentially a short sale), etc? As you probably already know the answer the bank gave her... she decided to foreclose. A few months went by, she moved out, and was renting month to month in a nearby apartment. Then the auction begins on her old condo with a $69k sale price. Her friend then walks in with her mom and buys the place back, under her mom's name! So now her mortgage is $69k at the same place where she 'owed' $198k just three months ago! I thought about how stupid this was... 1) on her friends part for taking a mortgage on a condo in MI for $198k AND 2) by the bank. The bank (/Judy's friend) could have renegotiated the price of the condo to $130k and Judy's friend would have taken it! Instead, they sell the place for far less and take an even larger loss!

So, based on today's approximate interest rates, that girl went from paying $1,200 to a mere $420 monthly mortgage!

I just can't wait until the market tanks some more and this sharp broad holds her *mom* up for a reduced payment!

I'll see if I can find out the name of the Moronic lending bank - though it really doesn't matter because they are all doing the same thing.

Though, in fairness to them, they can't make it too easy for borrowers to simply get outstanding debt forgiving/reduced. They want one to show *distress* by missing payments before they even consider approving a short sale or mitigating one's principal.

The problem is, with the internet and Google nowadays....scheming, and rational, homeborrowers can easily find out how to work the *system* by reading blogs and whatnot.

Hmmmmm....on that note, I wonder how much money I'VE cost the banks thus far???

Obviously, not enough to boost my decimated Ultrashort Financials ETFs!

The Cost Of Credit

Recently, someone I know got me on the phone and was picking my brain about their housing situation.

They want to move, far away, but they own mortgaged a house that has fallen to just below their debt load. I believe they owe around 200k and the house is worth that, if not a bit lower.

Of course, a real estate commission and other transaction costs quickly add up on an *exit*. So the dude will in all likelihood have to go in his pocket to leave the house with his credit intact.

So, say the total figure is $10,000. Would you tap your savings and ante it up?

What if it was $20,000?

In other words, at what point do you just keep your savings, walk away from the house, and imperil your precious *credit score*?

First of all, this is a multivariate imbroglio. How much savings does the potential walker have? Are they planning or hoping to tap the public mortgage market very soon, or not? What is their house really worth? Etc.

I thought about this question long and hard. I've concluded that about 10k is all that I'd put up, ever, to maintain my credit score.

Bad credit should be erased in 7 years time. Furthermore, I think that in the future banks won't be too harsh on borrowers with small black marks on their resumes from this recent period because....there'll simply be too many of them!

Plus, damaged credit has the positive side effect of returning people to reality, and renting.

As I wrote in Homeownership Sucks:

I know a guy who, unfortunately is amidst a divorce and has left his 3,700 square foot, 100 year-old Victorian house and moved into a 3 bedroom rental apartment. He insists that aside from all the other issues implicit in a divorce, he is loving renting now. He has nothing to worry about fixing or renovating. He no longer comes home to annoyances like leaky faucets; he no longer frets about peeling paint or creaky steps. Now he just comes home from work and can finally relax.

Getting back to the slightly underwater house....

I say, after negotiating a 4% real esate commission, put the house up for sale, keep dropping it till it sells. Then bring the sale to your lender - and when they decline, immediately stop making payments; and linger until law enforcement throws you out.

I do not think it immoral to walk away from a house even if you have the money to make the lender whole.

Check that. I don't think it's any more immoral than banks LENDING to people on terms that put them into abject, 30-year debt slavery.

Same Old Short Sale Story

A local broker forwarded me the above home to consider buying. It's a *short sale* with a current list price of $465,000. Driving by this afternoon, we noticed there wasn't even a sign out front. This one must be really close to *auction*.

At 2,300 square feet, it's a bit small for me to even consider. Remember, I work from home and will educate my kids there. This claustrophobe needs a tad more space than that. After all, I didn't rent this entire housing bubble only to settle!

The first thing I do when I get a new listing is Zillow.com it.



Okay. So it sold *at the top* for 366k....

Then how the bleep is it a *short sale* at 465k?

It would seem that, minimally, the homeowner homeborrower took out 100k in home equity lines. Here's the pricing history:



Okay, as I was typing this up, I had to change course for the post. Since in the pictures of the listing, I didn't see gleaming hardwood floors, a Trex deck, nor granite countertops I was wondering where the HELOC money went. Then I found a note in the description that said *1,300 square feet* were a recent addition. Aha! So it was a flipper who paid $366,000 - at the top - for a mere 1,000 square foot chicken shack. He added on, skipping the fashionable kitchen update, and unsuccessfully tried to flip it for 600-700k.

Whoever this guy is - and he could very well be a contractor - with this track record, I sure hope he LOVES stocks today. (note I am really short these days)

My wife wants to see the place this week so I'll humor her. So I'll find out some more details soon. Any guesses as to who the real homeowner is?

I'll bet between the two liens there are two of these culprits: Countrywide, Wamu, GMAC, Option One, and perhaps Greenpoint Mortgage.

By the way, they say that 90% of agreed-upon short sale transactions are rejected by the banks these days. The lenders are probably suspicious of friends trying to pull fast ones on them.

But man, were they late to adopt some healthy skepticism!

Refi'ing A Bubble

Right now, there over 70 homes in the tony town of Hingham, Massachusetts listed for sale at $1 million or higher.

But in the last six months, only 8 homes have sold over that price point.

I talked to a local broker and she confirmed that *the high end is dead*.

But she told me that the low end, the 400k stuff is going bananas. She said, "These homes are selling in like one day."

"But who wants to live in 1,600 square feet?" I asked.

"More like 1,400, if you're lucky," she corrected me.

My general rule of thumb is that if something is selling *like in one day*, it's the last thing in the world I want to be buying. Supposedly foreclosures under 100k are getting scooped up that fast as well in places like Cape Coral, FL.

Again, I say wait. For a long term investment/gamble you want to buy junk that's bidless, not bidfull.

There's plenty of supply on the way. Just wait.

Recently there's been this ridiculous run to bid up stocks, *cheap foreclosures*, and chicken-shack homes in places like Hingham. I guess the bear market stock rally, the warm weather, lower interest rates (for the creditworthy), and hopeful delusion are ruling the day.

People are getting complacent again - especially the big banks. Look at this chart that Calculated Risk put up today:



Now it's great that banks can essentially borrow at 0% in the short-term and lend at 5% to mortgagers. I mean it's great that they can generate some sorely-needed profits that way. But do they really have to squander the windfall of cheap money by selling 4.5% mortgages as they've been doing this past month?

In other words, look at the chart, they've reduced the *spread* on their mortgage lending back to normal levels. I submit they should not be dropping mortgage rates; what they're doing is arrogant; and it's what got them in trouble in the first place.



Can y'all believe they said that ???!!! link

Drudge also had, which I can't find now, a pic of Ben Bernanke giggling on his site the other day.

So everyone is giddy about *refi's* - the banks, some real estate lawyers I know, probably appraisers,....

They need to bear in mind, that once the US Treasury market starts to fall apart - and that could be very soon as I'm now out of my short - there might not be any more refi's for a decade.

My Own Stress Test

Right now there's some sham propagated by our government where it's ostensibly *stress testing* the nation's banks - particularly the large ones - for financial integrity.

Let's put aside the silly notion that as highly regulated entities, this kind of auditing should have been going on all along by our elected officials.

Without even researching what these so-called stress tests are examining, I presume they are ignoring the most significant variable of them all - low interest rates which derive from sky-high Treasury prices. This, long-time readers know, I've been saying for a while now. And note that EVEN WITH nominally low mortgage rates, housing is still spiraling down the toilet!

I submit that if the Treasury market dumps, and mortgage rates scream past 7% and 8%, that all these banks will be roasted by their mortgage books - no matter what the *employment rate* - no matter what the level of *reserves* - no matter what the current *spread margin*.

So I just don't get the mad rush today for banks like Wells Fargo and Bank of America to go hog-wild selling *refi's* and effectively expanding their mortgage books. It doesn't well matter what home prices are - whatever home A is with 5% rates, its marginal cost of ownership and therefore its market price, can arguably go down another 19% with an uptick from 5% to 7% in mortgage rates.

You see, it's been proven that the number one cause of mortgage default is actually *negative equity*. Loan type, geography, demographics,....that's almost all irrelevant. This is a point that Mr. Mortgage, Mark Hanson, has been trying for a while to drive home.

These banks think that since their current borrowing costs are near zero, that they can write 5% loans with abandon to *those with good credit*. I think they are completely out of their minds.

The fact is, if the US Government could borrow money at 3% for 10 years - as it can today - then why hasn't it been doing so all along?

Because it can't. All the clowns are mistaking an anomaly for the new and permanent baseline.

Prepare yourselves for interest rate mean-reversion, even if your banks and Big Government aren't doing so.

Armando Rodriguez - A Crook

This guy down in Naples refinanced *his house* five times over the 2002-2007 period.

It looks like the home is currently *bank owned* and going to sell for a mere 80k or so (down from a peak of approximately 250k).

Note all five of the lenders: Indymac, Oak Street Mortgage (twice), People's Choice Home Loan, and Option One are all now bankrupt.

Just for kicks I did a People Search on Armando. I figured I'd wield my Spanish cuss words and mess with him a bit. I believe the word for thief is ladrón. ¿No?

But alas, Armando has now moved to 2520 Tropicana Blvd, Apt A where he's no doubt delinquent on his rent; is commiting credit card fraud; and probably urinates without lifting the toilet seat!

More Establishment Attacks On Blogs

Click that graphic to enlarge or click here for full article.

The gist is that some judge in Kfell's libertarian paradise - New Hampshire - ordered a website to out its anonymous sources even though:

1) The plaintiff didn't prove *defamation*.
2) The plaintiff didn't prove the leaked info was *confidential*.
3) The plaintiff is a scumbag mortgage company.
4) Big Media newspapers and magazines are almost never molested by judges despite their copious use of anonymous sources.

Here's all you need to know about the litigant - The Mortgage Specialists:

From their website:

The Mortgage Specialists has been a leader in mortgage lending in New England for the last twenty years. We have been recognized by Fannie Mae nationally and have won their most prestigious award "The Platinum Award."

Recognized by Fannie Mae???

Hah!

That means their entire business model is most likely based upon STEALING MONEY from us taxpayers. (Sue me for that statement, please!)

For just one example of this institutionalized fraud, check out that post I wrote the other day, if you haven't already - Fannie Mae & Freddie Mac....Killing US!.

I can't wait to see Kfell spin this one! How about "that judge is originally from Massachusetts"???

Or "he was educated in Boston"???

Mr. Mortgage, Found

He left ml-implode.com and jawboned going over to Barry Ritholtz's blog....but he somehow got lost.

It must have taken me a full 10 minutes to find his new launching pad - Field Check Group.

Here's his latest blog entry - California Foreclosures About To Soar.

Y'all ought to bookmark his blog!