So
the bad news continues to roll in regarding subprime lenders, many of whom
are publicly traded companies. As I mentioned in my previous postings,
NovaStar
Financial is the latest subprime lender to catch its investors off guard.
NovaStar investors would have been well advised to be reading this blog,
maybe they wouldn't have been caught off guard by the meltdown they're now
facing.
Shares
of NovaStar are now down 42%! I for one, am not shocked in the least.
I should have been shorting this pig. Recall,
ResMae
Mortgage,
Accredited Home Lenders
Holding,
New Century Financial are
also reporting massive losses. If you are in any of these equities, get out
now, you may be upside down, but it will only get
worse for you.
Some commentators believe that
subprime investors have fallen for only the good
bullish news that the subprime lenders keep pushing
out. Don't buy it, the borrowers using these
products are stretched beyond belief. When these mortgages reset at even
higher interest rates, more and more loans are going to go south
on these lenders.
ORIGINAL POST FOLLOWS:
I’ve written a lot lately about the
subprime
mortgage market
and its affect on working class America. Regular
folks reaching for the American dream of homeownership
are my favorite kind of people. Let’s
continue our update on the happenings in the
real
estate market and
think about the big business side of things.
I am willing to see the business side of this
issue; just maybe not as well as the little guy
side of the issue.
Oh, and by the way, there are
a couple of reserach papers that I thought would
be useful for this entry... here are the links:
Feb. 13, 2007 –
Goldman Sachs, "Subprime mortgage credit outlook is bleak, prime is fine" (
right
click "save as" here for a PDF)
Feb. 13, 2007 –
Bank of America, "Short Housing Risk in the Credit Market" (
right
click "save as" here for a PDF)
How
did the subprime market grow so quickly? The
advent of
mortgage-backed securities where
subprime mortgages were packaged into securities
so that lenders could spread their risk and issue
more loans that only a decade ago, they never
would have issued, allowed for this market extension.
Recently, many investors in these mortgage-backed
securities have been forcing lenders to buy back
the “dogs” or the
defaulting loans, which has created a crisis for several smaller subprime lenders.
Credit Suisse reported that one in four subprime mortgage deals issued in 2006, had a
delinquency rate of 8% in December. Another reason for the explosive growth of the subprime mortgage market was the recent accounting scandals faced by
Fannie Mae and
Freddie Mac. These scandals opened up windows of opportunity for thousands of
hedge funds,
pension funds and other money sources around the world to begin setting lending standards based upon their insatiable desire to chase higher returns and their appetite for greater risk than Fannie and Freddie have. So, according to
Lewis Ranieri, a
pioneer in mortgage-backed securities, before
you knew it, “Lenders were putting people
in houses without knowing how much the guy earned
or how much the house was really worth.”
The Associated Press recently reported that the mortgage industry
plunged into a deeper hole this past month.
HSBC
Holdings, PLC, a major player in the U.S. subprime mortgage markets
will reportedly put back $10.6B to cover loans it now believes are
problem loans and possibly uncollectible. Other reports suggest that
New
Century Financial Corp has been hit even harder. Indeed, many
Wall Street analysts downgraded the
New
Century stock and shortly thereafter, the stock fell 36% in market
cap.
Countrywide Financial Corp. and
IndyMac
Bancorp stock also fell in several percent these past few weeks.
Further
Novastar Financial,
Inc. stock fell more than 11% and
Fremont
General Corp. plummeted as well. All told, the combined market
value of seven U.S. based lenders who actively pursued the subprime
mortgage market dropped more than $3.7B in a single day.
During the
housing boom years earlier in the decade, many financial institutions
were chasing subprime borrowers because of the higher returns
those loans were able to generate. Maybe you’ve heard the old
cliché, "sell to the poor, live with the rich." Well
you can bet that these financial institutions
were simply following an old path to riches.
Could the next couple of years be their comeuppance?
Before I get accused of being anti-business, and God forbid, anti-banker (I love my bankers at
Compass Bank and
Advocate Capital,)
I’m not. Let’s look at the political side of the subprime mortgage market. If the housing boom is over, we will certainly see politicians and others start bashing the bankers. Heck, I’ve
accused the bankers of working a number on the
least sophisticated borrowers in the U.S., the
folks who need and/or use subprime loans to afford
a home. Back to our story. Banks are in the business
of loaning money to people who can pay back the
loans. The subprime loans that were given out
like candy these past couple of years have put
many companies in the red, or on the verge of
bankruptcy. Just have a look at the financial performance of the companies mentioned above.
So, here is where I come down on the subprime
mortgage market issue. For the most part, the
subprime market has performed as it should perform.
Risky loans are falling into default and home
foreclosure rates are sure to hit new highs in
the months to come. I believe that is not what
the market expected. Again, banks aren’t in the business of loaning to people who can’t
pay them back. What worries me is how the same
folks who are now calling for
tighter credit standards are
the same folks who have been screaming about “red-lining” by banks who refuse to lend in poor neighborhoods. Those poor neighborhoods are the same hoods the subprime mortgage lenders targeted. Strange? Not really; don’t forget, sell to the poor, live with the rich. The issue is thornier than the politicians or Wall Streeters suggest. Does anyone have a solution that can satisfy both the rapacious need to make money on Wall Street and the dignity of homeownership all Americans want? I’m
all ears.
©2007
Angel Reyes
Read more articles by Angel Reyes at AngelReyesBlog.com.