When will the subprime market collapse?

This article is for commentor EconE, unfortunately it is for NY Times subscribers only, Will Other Mortgage Dominoes Fall? (though someone re-published it online.) It looks at the subprime and Alt-A markets.

It’s amazing how long it can take ivnestors to see that the wheels are coming off a prized investment vehicle. Denail, after all, is a powerful thing.

But when an imperiled favorite happens to be a pol of asset-backed securities – especially those involving home mortgages – denial can be be compounded by outright blindness to the real risks of that investment. That may explain why, even as everyone concedes that the subprime or low-grade mortgage market has fallen into the sea, the vast pools of mortgage-backed securities built in part on those risky mortgage loans still appear to be on solid ground.

The article also mentions a recent study on this subject written by Joshua Rosner and Joseph R Mason. If you’re interested here it is, How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?

The Seattle Times had a related but more consumer oriented syndicated article this weekend, Tighter rules expected in subprime market:

Delinquencies in the $1.3 trillion impaired-credit mortgage market hit 12.6 percent in the latest quarter, up from 11.7 percent. Delinquencies exceeded 13 percent among borrowers with subprime adjustable-rate loans.

Growing numbers of the companies that make or invest in subprime mortgages are themselves facing financial distress, and some have shut their doors or filed for bankruptcy protection.

HSBC Holdings, Europe’s largest bank and a major subprime lender in this country, shocked Wall Street recently by announcing that home-loan delinquencies have gotten so bad that it has set aside $10.6 billion to cover potential losses.

The Seattle Times had another article with some stats in it, Homeowners brace for ARMs’ new rates:

Mortgage experts estimate that approximately $1.5 trillion worth of adjustable mortgages will reset by the end of 2007. Forecasts call for $600 billion to $700 billion of those loans to be refinanced into new loans, including fixed-rate mortgages.

Last year, ARMs represented 30 percent of all mortgages, according to the national Mortgage Brokers Association. By 2008, it estimates, the number will drop to 18 percent.

So which businesses involved in mortgages are you shorting?

About Matt

Matt , Urbnlivn's publisher, has a love for lofts with industrial features and new construction condos that is only eclipsed by his passion for outdoor sports and urban living. Phrases such as “polished concrete” and “exposed brick” are music to his ears. You can also find Matt on Twitter or skiing.

  • EconE

    What’s shakin’ Matt.

    Stopped by…not sure if you wanted me posting anymore…but anyhow. I don’t play the market…especially when we are in a “hyper” speculative asset market bubble. The guy on the housing panic website has talked about shorting for well over a year…both builders and mortgage companies. He’s been right on with most of predictions but right now…all the good cherries have been picked so you are a little late to the party. I have had my eye on this bubble since 2003 and have been discussing it quite a bit…so I have prepped my investments accordingly.

    I talked to my dad about a recent Economist Article that discusses who has been buying all of these sub-prime bonds. When he heard that some of the bigger banks (Chase/Deutschebank/Credit Suisse were into buying them…he said that there will be some banking system problems.

    One article that may be of interest to you is this one.

    http://english.people.com.cn/200702/18/eng20070218_351086.html

    I guess I have too much time on my hands…hahaha. This is just the third large move that the Chinese government has made in the last few weeks in order to control their “asset” bubbles.

    Sure…I could share what I know with people more…but honestly…I have sat back and watched out nation chase it’s tail into a speculative frenzy over real estate and it became nothing other than a bubble. Asset Market bubbles are nothing new…and the shiny condo’s are really just 21st century tulips. People saw a way to “get rich quick” by flipping condos and now…the game is up…There are going to be a TON of people that are going to get burned in this and it was the “easy money” loans where people were soooooo sure that 3,6, or 12 months later that all they had to do was sign their name a few times and they could get themselves a condo.

    In the good old days…not so long ago…people bought houses…they weren’t “sold” houses…and they certainly didn’t line up at some developers project begging to buy a condo (ummm…lotteries?…DUH!!!)…not only that…they bought them in order to sell them.

    Suuuuuuure….they say that only X% will be sold to investors but in the days of Stated Income no doc loans and crazy arms…not to mention “liar” loans…would it surprise you that many of these “purchase to live in people” were actually investors and just lied about it? Please…do not underestimate human greed.

    Because I lived in Seattle before and will sooner or later return I have followed the market like a HAWK…and I too…like you concentrate on the Downtown condo market primarily and other “secret spots”. I check the MLS daily…not just the new listings…but scroll through all the things that had caught my eye to see what is selling. Sometimes the dissappear…but usually…they come back. I can see which condo developers are playing games and what is and isn’t selling.

    40 units either for sale or rent at 2200 building currentlyand Paul just announced the groundbreaking on some new project..financing through…Countryside. Add to that all the other units that are coming on the market with people that may have financed on one of those ARMs and then end up taking it in the shorts when they can’t find a renter to cover their carrying costs and cant refi in a couple years when lending standards are EVEN TIGHTER.

    Bernanke in My opinion is buying time holding rates steady…but in all reality…it needs to end…the longer a bubble is perpetuated…especially when you consider where and how the money gets there…the worse the outfall is…it really hasn’t been much different throughout history. Bulls Make money Bears Make money…Hogs Get Slaughtered. And don’t forget to never reach for a falling knife. I like the condos up there as much as you do…maybe even more…but now is not the time to buy.

    And..One quick question…Where’s that condo on the MLS? The one above. I didn’t see it on Urban Living Seattle and when Realtor.com the Ohhhh so transparent MLS listing site of the National Association of realtors has about 60% of what the other sites have (no…Morford doesn’t have old inventory up that has already sold)…I’ll bet that it doesn’t go STI very fast unless it is one of those bogus STI’s that I have heard about from people in the industry…hell…even if it is…who cares…no faking will get anybody out of this market faster right now…I’m not even going to mention how low it will go but hang tight for a couple years…and you’ll see what I mean. This is gonna shake the economy more than you think…not just housing.

    People are going to hurt…but they brought it on themselves…no one NEEDED more than one domicile. There is going to be lots of personal financial ruin and the government won’t bail people out…they’ll bail the banking system out first because frankly…in their mind…anybody who lost in a condo investment deserved it…they should have kept their eyes open and had a better understanding of basic economics before they stepped up to the plate.

  • EconE

    Oh…yeah…and what are all those people going to do when they can’t refinance their ARM…can’t afford the upped payments…and have to sell when there are more and more resetting every day.

    He who is the proudest…he who holds out the longest…may end up being the one that gets hurt the most.

    And…one last little bit of food for thought…if a building is full of these types of ARM investors…it may start as a nice building…but the financials will be wobbly from the getgo if it doesn’t have enough owners that can afford the dues when their payments adjust up…or if it just doesn’t have enough owners. I have a feeling that there are more people than we know that are holding on to an “extra” condo that is showing up as an “occupied” unit in government stats.

  • EconE

    Oh…yeah…and what are all those people going to do when they can’t refinance their ARM…can’t afford the upped payments…and have to sell when there are more and more resetting every day.

    He who is the proudest…he who holds out the longest…may end up being the one that gets hurt the most.

    And…one last little bit of food for thought…if a building is full of these types of ARM investors…it may start as a nice building…but the financials will be wobbly from the getgo if it doesn’t have enough owners that can afford the dues when their payments adjust up…or if it just doesn’t have enough owners. I have a feeling that there are more people than we know that are holding on to an “extra” condo that is showing up as an “occupied” unit in government stats.

  • EconE

    Great essay…They should simplify it because most people would understand that less than all the freaky mortgages.

    interesting thing to point out however…this is something that made me go hmmmmm.

    from the essay Part 1A.

    A. Fundamental Changes in Origination and Servicing

    “Reductions in down-payment requirements, relaxed underwriting standards,
    the movement to automated valuation and underwriting systems, and the ability
    of lenders to move loans off of their balance sheet into the capital markets
    decoupled the traditional links between regional economics and housing market
    performance. Similarly, an industry effort to mitigate bad loans, rather than
    having them pre-pay or foreclose, has altered the historic relationship between
    default and foreclosure rates. Although these changes posed minimal increases in
    risk during a rapidly appreciating and low-interest-rate housing environment,
    their risks may materialize under an environment with stagnant valuations and
    increasing interest rates.”

    then…at the end of the essay…referring back to the above…

    “The structural changes noted in Part I.A largely went unnoticed by
    MBS investors until only recently.”

    WTF? Don’t these guys know math…are they saying that they had never heard of a neg-am product until JUST RECENTLY. These guys invest in these things and they don’t even read the label? I dunno…questionable in my opinion.

    “We explain that those changes went unnoticed
    largely because of the existing complexity and valuation difficulties underlying
    todays MBS markets.”

    C’mon you guys (answering to the essay authors)…that was a great essay but really…when are you economists just going to come out and tell people what’s up…real simply.

    Speculatory asset bubble that is going to pop and we…well…lots of us…are going to be F’d…even some that “think” they are secure.

    It’s about time for another depression…dont you think?

    It’ll be televised…and someone will make a ton of money off of it. It’s just the way things work.

    Money…it’s a strange and elusive thing…Economics…even moreso.

    Economically speaking…we are pretty much in uncharted waters…and not those that have nice lush tropical islands.

    I only wish I could have been at the recent G7 finance ministers meeting to see what China had to say…interesting that they were an invited guest…I’ll bet Putin was pissed though…lol.

    I also noticed you are from Canada…

    What else did you expect from us greedy Americans…economic prudence and financial responsibility? HA!

  • EconE

    Great essay…They should simplify it because most people would understand that less than all the freaky mortgages.

    interesting thing to point out however…this is something that made me go hmmmmm.

    from the essay Part 1A.

    A. Fundamental Changes in Origination and Servicing

    “Reductions in down-payment requirements, relaxed underwriting standards,
    the movement to automated valuation and underwriting systems, and the ability
    of lenders to move loans off of their balance sheet into the capital markets
    decoupled the traditional links between regional economics and housing market
    performance. Similarly, an industry effort to mitigate bad loans, rather than
    having them pre-pay or foreclose, has altered the historic relationship between
    default and foreclosure rates. Although these changes posed minimal increases in
    risk during a rapidly appreciating and low-interest-rate housing environment,
    their risks may materialize under an environment with stagnant valuations and
    increasing interest rates.”

    then…at the end of the essay…referring back to the above…

    “The structural changes noted in Part I.A largely went unnoticed by
    MBS investors until only recently.”

    WTF? Don’t these guys know math…are they saying that they had never heard of a neg-am product until JUST RECENTLY. These guys invest in these things and they don’t even read the label? I dunno…questionable in my opinion.

    “We explain that those changes went unnoticed
    largely because of the existing complexity and valuation difficulties underlying
    today’s MBS markets.”

    C’mon you guys (answering to the essay authors)…that was a great essay but really…when are you economists just going to come out and tell people what’s up…real simply.

    Speculatory asset bubble that is going to pop and we…well…lots of us…are going to be F’d…even some that “think” they are secure.

    It’s about time for another depression…dont you think?

    It’ll be televised…and someone will make a ton of money off of it. It’s just the way things work.

    Money…it’s a strange and elusive thing…Economics…even moreso.

    Economically speaking…we are pretty much in uncharted waters…and not those that have nice lush tropical islands.

    I only wish I could have been at the recent G7 finance ministers meeting to see what China had to say…interesting that they were an invited guest…I’ll bet Putin was pissed though…lol.

    I also noticed you are from Canada…

    What else did you expect from us greedy Americans…economic prudence and financial responsibility? HA!

  • jo

    someone have cliff notes on all that?

  • jo

    someone have cliff notes on all that?

  • EconE

    sorry jo…Cliff notes are only for people that want to “work the system” rather than actually learn something.

  • EconE

    sorry jo…Cliff notes are only for people that want to “work the system” rather than actually learn something.

  • EconE

    If you don’t mind Matt…I’d like to nominate this as kind of the economic information section…I’ll post articles that are of potential economic interest.

    This latest article dicusses the upcoming meeting of the OPEC ministers.

    Take note of the comment on the attutude of the head of the group.

    http://english.people.com.cn/200702/20/eng20070220_351354.html

  • EconE

    Another good one from Bloomberg Feb 15th…not todays news…but by no means stale.

    This article explains how subprime backed bonds are being downgraded…soon…they’ll just be junk bonds. One problem is if it hits the prime market where people did cash out refis because that is an economic no no and really isn’t financially prudent.

    so…for your reading pleasure…well…it might be displeasureful for some but it’s better to know what is happening out there.

    http://www.bloomberg.com/
    apps/news?pid=20601009&sid=
    aUlpv5Um_168&refer=bond

  • EconE

    sorry…the link from the above story didn’t work…lemme try again here…sorry…not a computer whiz.

    http://www.bloomberg.com/apps/news?pid=20601009&sid=aUlpv5Um_168&refer=bond

  • EconE

    I read this one the day it came out…but thought you would find it of interest.

    http://today.reuters.com/news/articlebusiness.aspx?type=ousiv&storyid=145091%2015-Feb-2007%20RTRS&from=business

    It basically summes the latest SEC filings with respect to what the Gates foundation is getting out of and into investmentwise.

    Funny…it doesn’t mention something Bill has been rumored to dabble in.

  • EconE

    I read this one the day it came out…but thought you would find it of interest.

    http://today.reuters.com/news/articlebusiness.aspx?type=ousiv&storyid=145091%2015-Feb-2007%20RTRS&from=business

    It basically summes the latest SEC filings with respect to what the Gates foundation is getting out of and into investmentwise.

    Funny…it doesn’t mention something Bill has been rumored to dabble in.

  • EconE

    KABOOOM!

    This is what happened whilst you all slept tonight.

    Novastar lost 33% in overnight trading tonight.

    Japan Raised their interest rates. (It’ll be interesting to see how the Fed reacts to this)

    and…here’s a little tidbit of information regarding Countrywide…

    http://finance.yahoo.com/q/it?s=CFC

    tell me…does it look like certain people are cashing in?

    mmmm…2:40 AM…maybe I should get some rest.

    I wonder what will happen while I’m sleeping? Maybe I will start shorting some companies soon…I’ve got my own personal timeline for which industries I’ll target.

  • EconE

    KABOOOM!

    This is what happened whilst you all slept tonight.

    Novastar lost 33% in overnight trading tonight.

    Japan Raised their interest rates. (It’ll be interesting to see how the Fed reacts to this)

    and…here’s a little tidbit of information regarding Countrywide…

    http://finance.yahoo.com/q/it?s=CFC

    tell me…does it look like certain people are cashing in?

    mmmm…2:40 AM…maybe I should get some rest.

    I wonder what will happen while I’m sleeping? Maybe I will start shorting some companies soon…I’ve got my own personal timeline for which industries I’ll target.

  • EconE

    Oh…here’s a goody.

    http://english.people.com.cn/200702/21/eng20070221_351530.html

    and they are doing it more efficiently also.

    Know what that means?

  • EconE

    It’s not the headline that caught my attention in this article…

    http://english.people.com.cn/200702/20/eng20070220_351354.html

    sorry for yesterdays news…I’ll bet that “Business” aka “FinanceGuru” already beat me to this one.

  • EconE

    I wonder if anybody will even understand why I feel this might be relevant.

    http://english.people.com.cn/200702/21/eng20070221_351532.html

  • EconE

    mmm…looks like I’m having a one sided conversation here.

    You there Matt?

    Was there a purpose to your original post?

    For some reason I thought you might have wanted to engage in some economic discussion.

    I guess I was wrong.

  • EconE

    mmm…looks like I’m having a one sided conversation here.

    You there Matt?

    Was there a purpose to your original post?

    For some reason I thought you might have wanted to engage in some economic discussion.

    I guess I was wrong.

  • http://twitter.com/mattgoyer mattgoyer

    I’m here, just busy! I haven’t had time to read through the links you posted yet.

  • http://blog.mattgoyer.com Matt

    I’m here, just busy! I haven’t had time to read through the links you posted yet.

  • EconE

    cool…wasn’t sure…I sent you an email also…check your spam box because I have an @aol or an @aim address it comes up differently.

    any way to contact you offline?

  • EconE

    cool…wasn’t sure…I sent you an email also…check your spam box because I have an @aol or an @aim address it comes up differently.

    any way to contact you offline?

  • EconE

    This one is pretty important Tim…you might want to “un-busy” yourself and look at this one…China is letting their people sell off more $’s…just read the last 3 paragraphs.

    It’s short.

    http://english.people.com.cn/200702/24/eng20070224_352182.html

  • Matthew

    The subprime collapse will be yet another reason why inventory is going to rise in 2007. Not only are more and more people priced out of the market, the people that shouldn’t have been in the market in the first place are also now priced out.

  • Matthew

    The subprime collapse will be yet another reason why inventory is going to rise in 2007. Not only are more and more people priced out of the market, the people that shouldn’t have been in the market in the first place are also now priced out.

  • EconE

    The subprime collapse is just one of many reason…and is just the beginning.

    who knows…in a few years…Matt may have actually appreciated some of the posts I have made here…or he may just be really pissed that he didn’t take the time to actually read and discuss…

    Or everything will just be fine and no one should have anything to worry about.

    1420 E. Pine St…Lowered to 449k recently. (don’t think I’m not watching daily)

    funny…the price was lowered? I thought it was just about the pictures.

    I guess I’m just going to sit back and watch from now on…no sense sharing useful information when it falls on deaf ears.

    being busy is not an excuse to let life pass you by.

  • EconE

    The subprime collapse is just one of many reason…and is just the beginning.

    who knows…in a few years…Matt may have actually appreciated some of the posts I have made here…or he may just be really pissed that he didn’t take the time to actually read and discuss…

    Or everything will just be fine and no one should have anything to worry about.

    1420 E. Pine St…Lowered to 449k recently. (don’t think I’m not watching daily)

    funny…the price was lowered? I thought it was just about the pictures.

    I guess I’m just going to sit back and watch from now on…no sense sharing useful information when it falls on deaf ears.

    being busy is not an excuse to let life pass you by.

  • http://twitter.com/mattgoyer mattgoyer
  • http://blog.mattgoyer.com Matt
  • http://www.slideshare.net/NYCRC/new-york-city-regional-center-eb-5-visa-nycrc New York City Regional Center

    Actually, when that article has been published in different newspapers, It seemed me so impressive. One of the better guidance I have found from that regard housing mortgage rates.