The Mortgage Lender Implode-O-Meter

Hey BDC63

Added to C and BAC at 50, Bidding 40 for more WM. Also bought MO PG JNJ CVX INTC PEP . I Will contine to buy into this correction. THIS IS PRECISELY THE TIME YOU BUY GREAT COMPANIES WHEN THEY THROW THE BABY OUT WITH THE BATH WATER. Each year there are 2 or 3 great opportunities to buy stocks. This is the first opportunity. C and BAC have an infintessimal exposure to subprime. Re-read the "message of the stock market" thread. Last August I said to buy housing stocks and everyone threw rocks. They are all up more than 30% since. ( I took my profits up 20%) All the above companies I mentioned raise their dividends EVERY YEAR and grow their earnings. JNJ PG MO CVX C BAC PEP are all the best of the best. This sell off is a gift if you are a serious investor. I have been investing for 30 years. I have experienced the oil embaro of the 70's the crash of 87 and the Asian Contasian of the late 90's. What is ocurring now with sub prime is a good thing in the longer run. The strong companies will get stronger. The excesses will be eliminated. I ALWAYS BUY THE PANIC SELL OFFS. I LOVE BLOOD IN THE STREETS. BRING IT ON, MR. MARKET !!!!!!

Funny, I got yet another flyer for Brokers on Friday in the mail, advertising all the funky loans they can do with a bright red intro:
The Subprime market is changing, but we're still going strong"

I don't do these loans, but I read the list of "niches" and couldn't believe they were still offering such high LTV on investment properties with low credit scores and lates on mortgages.

Then I heard the news. :funn:

I suspect these "strip mall lenders" are still blissfully unaware of the rapidly dwindling number of organizations and speculators willing to buy their garbage. They'll get the picture when they show up for work one morning to find their office supplies in a box on the curb and that the strip mall manager changed the locks on the door.


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So much for all the talking heads on CNBC claiming this subprime mess is "contained" and will affect a relatively small number of small lenders ... it doesn't get much bigger than Goldman, Merrill Lynch, and Morgan Stanley ...

This, from Bloomberg:

Goldman, Merrill Almost `Junk,' Their Own Traders SayGoldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.

Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.

Traders of credit derivatives are more alarmed than stock and bond investors that a slowdown in housing and the global equity market rout have hurt the firms. Merrill since 2005 has financed two mortgage lenders that subsequently failed and bought a third, First Franklin Financial Corp., for $1.3 billion.

``These guys have made a lot of money securitizing mortgages over the years in a mortgage boom time,'' said Richard Hofmann, an analyst at bond research firm CreditSights Inc. in New York. ``The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they're not able to keep that securitization machine humming along.''

Credit-default swaps on the debt of Goldman, the world's biggest securities firm, have risen to $32,775 per $10 million in bonds, up from $21,500 at the start of the year, according to prices compiled by London-based CMA Datavision. The price touched $35,000 on Feb. 28, the highest since June 2005.

Spokesmen and spokeswomen for Goldman, Lehman, Merrill and Morgan Stanley declined to comment. A spokeswoman for Bear Stearns didn't immediately return calls for comment.

For what it's worth I bought JOE on Friday. Time will tell.

Funny, I got yet another flyer for Brokers on Friday in the mail, advertising all the funky loans they can do with a bright red intro:
The Subprime market is changing, but we're still going strong"

I don't do these loans, but I read the list of "niches" and couldn't believe they were still offering such high LTV on investment properties with low credit scores and lates on mortgages.

Then I heard the news. :funn:

I suspect these "strip mall lenders" are still blissfully unaware of the rapidly dwindling number of organizations and speculators willing to buy their garbage. They'll get the picture when they show up for work one morning to find their office supplies in a box on the curb and that the strip mall manager changed the locks on the door.


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I forgot and didn't mention that it was Fremont Investment and Loan that I got the flyer from. That is the division of Fremont Bank. They were huge. They started subprime lending in California about 15 years ago. I recall them having difficulty geting licensed in New York, because the FDIC wanted them to open Banking branches here, but eventually they did get a license from the Banking Dept.

http://online.barrons.com/article/SB117288185598325465.html?mod=9_0002_b_this_weeks_magazine_home


Interesting cover story in this week's Barrons.

I forgot and didn't mention that it was Fremont Investment and Loan that I got the flyer from. That is the division of Fremont Bank. They were huge. They started subprime lending in California about 15 years ago. I recall them having difficulty geting licensed in New York, because the FDIC wanted them to open Banking branches here, but eventually they did get a license from the Banking Dept.

Fremont's Tampa staffers are in jeopardy of losing their jobs.
By SCOTT BARANCIK
Published March 6, 2007

As the stocks of subprime mortgage lenders melted down Monday on Wall Street, one struggling bank put several hundred of its Tampa employees on ice.

Fremont Investment & Loan, the country's eighth-biggest subprime lender, told most of its Tampa staff to stay home Monday on paid leave. The move followed news that Fremont General Corp., its California-based parent company, had decided to quit lending money to home buyers who have bad credit and to try to sell that business line. Tampa staff were told to expect an update on their status Wednesday. Their future will depend in part on whether the residential mortgage business is sold, and to whom.

"As far as how individual offices will be affected by this, it's really too early to say," said Dan Hilley, a company spokesman.

Fremont's stock, which began the year at $16.21 per share, dropped 32 percent Monday to close at $5.89. It had plenty of company. New Century Financial Corp., ranked No. 2 on National Mortgage News' list of the largest subprime mortgage lenders, saw its stock fall 69 percent to $4.56 amid fears it might file for bankruptcy protection. Higher-than-expected default rates are causing most of the hand-wringing.

I am still leery of buying these stocks yet. IMO we still haven't seen bottom, and I am not a day trader, but here's today's news..

BLOOMBERG:

Fremont, New Century Advance as Report Shows More Refinancing

By Rick Green
March 7 (Bloomberg) -- Fremont General Corp. and New Century Financial Corp. shares rose as mortgage-lending stocks rebounded for a second day, buoyed by a report showing an increase in home- loan refinancing and rising prospects for takeovers.
The Mortgage Bankers Association said loan applications rose last week to the highest level in almost three months, paced by a 15 percent surge in refinancings. The perceived risk of owning low-rated subprime mortgage bonds held steady after declining for four consecutive days.
Fremont, based in Santa Monica, California, told employees on a conference call that five or six prospective buyers are in talks to buy its residential mortgage business. The company's shares surged $1.83, or 27 percent, to $8.60 in 1:07 p.m. composite trading on the New York Stock Exchange. New Century gained 44 cents, or 8.8 percent. NovaStar Financial Inc. added 13 percent. Countrywide Financial Corp., the largest U.S. mortgage lender, rose 0.7 percent.
``The market has been chaotic, but we think it has been overdone,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``People kind of sell and ask questions later.''
The shares of home lenders to the riskiest borrowers, led by New Century, plummeted on March 5 as concerns mounted that rising default rates would push them into bankruptcy. More than two dozen mortgage companies have gone out of business, ceased operations or sought buyers since the start of 2006.
New Century shares remain about 60 percent below their March 2 close and almost 90 percent off their 52-week high last May.
Refinancing Index
Subprime borrowers, typically people with poor credit or heavy debt loads, pay 2 to 3 percentage points more for a mortgage than less-risky customers. Many such loans are made at adjustable rates, leaving them prone to default if borrowing costs rise or lenders tighten standards.
The Mortgage Bankers Association's index of refinancing applications jumped 15 percent last week. It's now up 38 percent from a year earlier and has risen in five of the past six weeks. Total loan applications, which include those for new mortgages, rose 7.3 percent, according to the Washington-based trade group.
``We'll see more refinancing because of problem loans,'' David Lereah, chief economist for the National Association of Realtors, said in an interview yesterday. ``Refinancing may go up artificially.''
Subprime lenders are backed by financing from larger banks and financial institutions. Some of those stocks are smart buys now because the concerns that they'll be hurt by subprime defaults are overblown, Fox-Pitt, Kelton analysts led by David Trone said in a report today. They recommended shares of securities firms including Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos., all based in New York.
`Fully Punished'
Trone's team raised U.S. investment banks and brokers to ``overweight'' from ``market-weight,'' and elevated Morgan Stanley, Merrill and Bear Stearns to ``outperform'' from ``in- line.''.
``The market has already fully punished the bulge names for their involvement in subprime,'' the Fox-Pitt analysts wrote.
New Century, based in Irvine, California, disclosed March 2 that it faces a criminal probe and may need waivers from its own lenders to stay in business. The same day, Fremont said it would stop making loans to people who can't pay and announced plans to get out of the subprime business.
HSBC Holdings Plc, the U.K.'s biggest bank, was the No. 1 subprime lender in the U.S. last year. New Century ranked second, according to Inside B&C Lending, a trade journal.
Shares of Impac Mortgage Holdings Inc., which specializes in less-risky mortgages known as ``Alt-A'' loans, added 11 percent today. IndyMac Bancorp, the second-largest independent U.S. mortgage lender after Countrywide, gained 6.2 percent. Accredited Home Lenders Holding Co. fell 4.3 percent.

New Century, based in Irvine, California, disclosed March 2 that it faces a criminal probe and may need waivers from its own lenders to stay in business. The same day, Fremont said it would stop making loans to people who can't pay and announced plans to get out of the subprime business.

So let me get this straight....going forward they're only going to make loans to people who can pay???

What kind of a zany business plan is that for a mortgage company?
<sarcasm off>.

So let me get this straight....going forward they're only going to make loans to people who can pay???

What kind of a zany business plan is that for a mortgage company?
<sarcasm off>.

I know. I was soooo tempted to e-mail the writer of the article and ask if that was a quote directly from Fremont. :funn:

New Century (the 3rd largest US subprime lender) bites the dust!

Bankruptcy rumors on all the blogs (even CNBC is talking about this one). The stock is down to $4 (was in the $40's a few weeks back).

Headline:
New Century Halts New Loans as Lenders Cut Off Credit
http://www.bloomberg.com/apps/news?pid=email_en&refer=home&sid=aItk2fsczSGI

"The refusal by several lenders to let New Century tap other credit lines has prevented the mortgage company from delivering all the loans it promised to customers, said a company statement. While New Century hopes to resume accepting applications as soon as possible, the statement said there's no assurance this will happen. "


Impode o meter update: 34

New Century (the 3rd largest US subprime lender) bites the dust!

And this excerpt from MarketWatch.....

Lenders specializing in such loans, like New Century, rely in part on big banks known as warehouse lenders to finance their operations. These backers require that subprime lenders meet certain minimum financial targets; otherwise, they have the right to end the business relationship.
On Friday, New Century said it had breached one of those requirements, or covenants, and also disclosed that it's the subject of a federal criminal investigation.

"Once you get hit with one of these crunches, warehouse lenders don't want to lend to you, so you're really done," said Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business and a visiting scholar at the Federal Deposit Insurance Corp.

New Century said late Thursday that one of its financial backers forced the company to repurchase some loans. It didn't identify the lender.

The company said it's talking with lenders and other third parties about getting more access to financing, but warned that its efforts might fail.

"These firms that rely on funding mechanisms like securitizations are like sharks -- if they stop moving they die," Mason added.

(A hat-tip to Mason's simile.)

And this excerpt from MarketWatch.....

Lenders specializing in such loans, like New Century, rely in part on big banks known as warehouse lenders to finance their operations. These backers require that subprime lenders meet certain minimum financial targets; otherwise, they have the right to end the business relationship.
On Friday, New Century said it had breached one of those requirements, or covenants, and also disclosed that it's the subject of a federal criminal investigation.

"Once you get hit with one of these crunches, warehouse lenders don't want to lend to you, so you're really done," said Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business and a visiting scholar at the Federal Deposit Insurance Corp.

New Century said late Thursday that one of its financial backers forced the company to repurchase some loans. It didn't identify the lender.

The company said it's talking with lenders and other third parties about getting more access to financing, but warned that its efforts might fail.

"These firms that rely on funding mechanisms like securitizations are like sharks -- if they stop moving they die," Mason added.

(A hat-tip to Mason's simile.)

Here is another one, Countrywide is pulling back on 100% financing!

Countrywide stops no-money-down lending
The mortgage lender tells brokers to end offering the option of no down payment as delinquencies increase.
March 9 2007: 5:28 PM EST


NEW YORK (Reuters) -- Countrywide Financial Corp., the largest U.S. mortgage lender, Friday told its brokers to stop offering borrowers the option of a no-money-down home loan, according to a document obtained by Reuters.

Loans financing 100 percent of a home's value are among those leading to a sharp rise in delinquencies at U.S. mortgage lenders. Such mortgages below "prime" quality have resulted in the closure, sale or losses at more than two dozen mortgage lenders, analysts said.

"Please get in any deals over 95 LTV [loan-to-value] today!" Countrywide said late Friday in an urgent e-mail. "Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12."

Countrywide (Charts), along with lenders ranging from HSBC Holdings Plc (Charts), Europe's biggest bank, to NovaStar Financial Inc. (Charts) to New Century Financial Corp. (Charts) have reported rising delinquencies lately.

Aaron Krowne, the guy that runs the impode-o-meter website, has a 30 minute podcast interview on Wall Street Examiner Radio with Lee Adler (March 11),

http://podcast.streetiq.com/streetiq?ChannelID=3135&GUID=1382931&Page=MediaViewer

It's definately worth listening to when you have a half hour to spare ... a great counterbalance to the "mainstream financial informercial media", as Lee Adler calls them.

Listened to the interview with Lee and AAron. If they both expect inflation or hyper inflation, it seems to me that real estate is a good hedge
It is always good to listen to the contra arguement. My conclusion is they are a bit too pessemistic. Sub prime is a big problem for the marginal consumer. I do not think it is cataclysmic as some are thinking. The free market economy is ALWAYS full of excesses in certain areas, but they always work themselves out to the detriment of the ones affected or participating in those excesses. This pales (sub prime) in comparison to the oil shock of the early 70's. The economy ALWAYS muddles through. I stick with my game plan of buying the solid banks ( C, BAC, JPM, WFC, WB ) and the great growth and predictable earners like jnj pg cvx xom pep gis on any market corrections.

Interesting day for New Century--all lenders cut off the money and are demanding New Century buy back $8 Billion (with a "B") in junk mortgages. Stock's price got down to pocket change before NYSE closed down trading.

Like the Soup Nazi might say...."No money for you.....NEXT!"

The subprime market is pretty much toast for now (there were over $600 Billion in subprime loans written last year).

Big day for lender implosions ... Accredited and BNC (Lehman Brothers) BOTH today.

The Implode-O-Meter is now up to 133.

They also started a HedgeFund-Imoplode-O-Meter, here:
http://hf-implode.com/

23 so far.

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Don't you just love these "flashback" threads?


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Don't you just love these "flashback" threads?


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I just read back over the whole thing ... I enjoyed it as well. Though, I suspect some others may not be so interested in seeing what they were thinking (and posting) a mere 5 months ago.

I find them very educational!

Quick question I have (as a caveat, I know VERY little about mortgages etc):

Is the higher percentage of interest only loans in this area because there are so many lot loans & construction loans for all the new construction as compared to more standard mortgages in an area that is selling/buying homes instead of building new?

Although I am not thrilled with site layout that bcd posted which puts the top 25 lenders, but right above it says 19 have imploded and put the closed or bk businesses below (implode o-meter)

I have a feeling the mortgage companies listed are just the tip of the iceberg. The 19 defunct cos. most likely did not sell those subprime loans directly on Wall Street, but most likely sold them in bulk transactions to the top 25. Those top 25 not only made subprime loans (BBB) but also Alt A, A- loans, as well as some of them the exotic ARM programs.

We still have yet to see how the impact of defaults to the top 25 is going to trickle down to hedge funds, pension funds, and mainly derivatives (an unregulated market :shock: (almost 400 trillion dollars) and when mortgages go bad, they may not have the financial assets to withstand such a influx of defaults.
I've been in the mortgage business 22 years and I can tell you Subprime lending has never been tested by a severe downturn in house prices and the economic cycle to this extent.

We still need to see how all this plays out IMO.

I just read back over the whole thing ... I enjoyed it as well. Though, I suspect some others may not be so interested in seeing what they were thinking (and posting) a mere 5 months ago.

Sounds like we almost had a crystal ball. ;-)

I find them very educational!

Quick question I have (as a caveat, I know VERY little about mortgages etc):

Is the higher percentage of interest only loans in this area because there are so many lot loans & construction loans for all the new construction as compared to more standard mortgages in an area that is selling/buying homes instead of building new?

I suspect it is mainly the following:

1). high concentration of speculators, who are notorious for using OPM and tying up as little cash as possible

2). high cost of the area made affordability for many only possible through interest only loans (and since everyone was told "real estate only goes up" & "they aren't making any more waterfront" & "you better get in now or you will be priced out forever" ... people didn't (or didn't want to) recognize those loans as toxic waste).

It looks like Country Wide has dodged a bullet. Bank of America is making a $2 billion investment in a convertible preferred issued to them by CFC. It will give BofA a 15% equity interest in CountryWide. Both stocks traded up on the news after the close. I would buy Washington Mutual ( WM ) on this development. Bigger and better company than CFC. Citicorp ( C ) has been runored in the past as interested in buying WAMU.

It looks like Country Wide has dodged a bullet. Bank of America is making a $2 billion investment in a convertible preferred issued to them by CFC. It will give BofA a 15% equity interest in CountryWide. Both stocks traded up on the news after the close. I would buy Washington Mutual ( WM ) on this development. Bigger and better company than CFC. Citicorp ( C ) has been runored in the past as interested in buying WAMU.

I bought WM and NLY on Tuesday. Both have since moved lower. I also bought C a few weeks ago ? that?s lower too. I?ll just sit on all of them, as I usually do.

Be patient ...you will be rewarded in C and WM. They both increase their dividends, Citicorp does it annually (each February) and WM each quarter, usually by a penny. I know nothing about NLY.