Fewer than half of global financial institutions account sufficiently for complex financial and commodity exposures in assessing the riskiness of their holdings, according to a survey by Deloitte.
Saturday, March 31, 2007
Okay, why not. I'll post my portfolio just for the heck of it. I have everything in ANPI which has taken a lickin'--I figure it cannot go down any lower, but I could have had that conversation with myself at any point within the last year.
Friday, March 30, 2007
If you read no other book this year, read this one:
The Only Three Questions that Count (Investing by Knowing What Others Don't), by Ken Fisher.
I've not finished the book (I'm on page 73), but I'm comfortable recommending your buying it. Why? Because this book will help you turn your perspective inside out as well as amplify it. It will help you CHALLENGE your thoughts, uncover your biases. That challenge alone is more than worth the price of the book. It takes a whack of some of the much-vaunted mythologies and suggests a different tilt. You will find it both refreshing and informative. I say this having a bias AGAINST all things ubiquitous (Oprah, American Idol, stock news regarding KRY, Jim Cramer....). Few are more ubiquitous than Ken Fisher...but listen to him; I think that he has something worthwhile to say and well worth your time to hear.
04.01.07: Here is Steve's review
I wasn't able to get to the link in the comments. Thanks Steve!
that speaks to some of the things that I've been concerned about. (Remember, you can always find learned opinions to support your point of view. It doesn't mean that you are right, merely that you have good company).
There were a few things that I wanted to share with you:
First, let's look at the increase in homeownership and housing prices:
I will profess a little surprise that the housing stock (which I take to mean available homes=existing plus newly build) % to be as low as it was. I conclude, perhaps erroneously, that the percentage of new housing to existing housing--though great in absolute numbers--is small in relative percentage. Nevertheless, the increase in homeownership is impressive.
Second, and a bit unrelated to my overall purpose, but a statistic that I think deserves some airtime is the amount of employment in the mortgage banking sector.
You might expect that the slope of the employment line would be steeper, but one of the points in the paper was the amount of productivity increases:
"Most recently (mid 1990s to mid-2000s), technology has played an important role in stimulating these changes in the mortgage market by improving the ability of lenders to gather and process information. Consumers now appear to face lower costs for obtaining mortgages, refinancing existing mortgages, and extracting home equity; a better ability of mortgage issuers to measure and price the risk of mortgage applicants; and a greater array of mortgageinstruments from which consumers can choose."
The third schedule shows the the the increase of MBS's in private conduits. You know why I'm interested in that !!!!
The slope of this curve is astounding.
But also consider this little ditty (I've added the underlines):
"As the down payment constraint is eased, housing consumption increases monotonically. Moving from a down payment rate of 20 percent to 10 percent results in a 24 percent increase in the quantity of housing purchased. As can be observed on the left-hand scale of Figure 5a, this increase in housing consumption also accompanies an increase in total lifetime utility. Not surprisingly, the easing of constraints makes households happier. However, the increase in housing consumption comes at the expense of non-housing consumption."Finally, here's the table that reflects the relationship of housing expenditures on consumption.
As you know, there has been much discussion about the resiliency of the consumer. My sense of it is that the consumer is reaching the saturation of point of consumption. The salient points in this paper (to the extent that I understand them correctly) are
- Mortgage innovations have allowed people to buy more house than they would otherwise (though I will concede that "more" house may solely be to buy the inflated cost of a house they would have purchased more cheaply otherwise).
- Housing expenditures increase at the expense of other consumption
- The percent of homeowners has increase dramatically over the last few years
Thursday, March 29, 2007
I found this clause in the GS S-3 registration
What is says to me (and I'm not lawyer nor do I play one on TV) is that in
the event of a bankruptcy (think New Century), that the
loans might end up the property of the issuing entity. What does this mean?
I think that it means that these loans could be grabbed by the creditors
of the sponsor (such as New Century)and the certificate holders will be left
high and dry.
Let's watch the news for these items. I cannot stress how critical this clause
is--and I'm not sure how remote a probability such action could/would be.
Here's an interesting conflict of interest. You have Morgan Stanley (or any
other mortgage banker) who has securitized these notes and they are
left holding the bag for warehouse loans. How do you think THEY would want
a bankruptcy judge to rule? I think that they would want the judge to rule
these loans as assets of the depositor (e. g. New Century) so they can get their
loans paid from the proceeds of the loans. Very strange circumstances, you think?
Bankruptcy of the Depositor or the The depositor and the sponsor may be
Sponsor May Delay or Reduce eligible to become a debtor under the
Collections on Loans United States Bankruptcy Code. If the
depositor or the sponsor for the
certificates were to become a debtor
under the United States Bankruptcy Code,
the bankruptcy court could be asked to
determine whether the mortgage loans
constitute property of the debtor, or
whether they constitute property of the
issuing entity. If the bankruptcy court
were to determine that the mortgage
loans constitute property of the estate
of the debtor, there could be delays in
payments to certificateholders of
collections on the mortgage loans and/or
reductions in the amount of the payments
paid to certificateholders. The mortgage
loans would not constitute property of
the estate of the depositor or of the
sponsor if the transfer of the mortgage
loans from the sponsor to the depositor
and from the depositor to the issuing
entity are treated as true sales, rather
than pledges, of the mortgage loans.
The transactions contemplated by this
prospectus supplement and the related
prospectus will be structured so that,
if there were to be a bankruptcy
proceeding with respect to the sponsor
or the depositor, the transfers
described above should be treated as
true sales, and not as pledges. The
mortgage loans should accordingly be
property of the related issuing entity
The Economist Magazine had this on it's front cover on 02.10.07:
"Next Stop Iran"
"There is a real possibility that George Bush will order a military strike on Iran sometime before he leaves the White House Two years from now."
I don't post this to engage in a political conversations. Merely to post a former entry on a currently contemporary matter. While it is easy for us to be dismissive of other countries, I could imagine being part of a government of a country and bristling being told what I could or could not do. We don't really have a clear perspective of that in our country, for we seem to do whatever we want. Acting unilaterally, whether as a person or a nation doesn't win you many friends.
I generally try to not engage in political conversations. I have a neighbor who told my husband that "Leisa doesn't like George Bush because she's just jealous that she didn't go to an Ivy League school." This is why I don't like political and religious conversations, for there (shall I say oftentimes?) seems to be a decided break from discussing the point at hand to a diatribe against the person holding the opinion. Nearly one of the nuttiest things that I've heard said about me.
For the record, I've never had a conversation with this neighbor about George Bush or my like or dislike of him. Moreover, I've never given any consideration to the fact that I did not graduate from an Ivy League school. I've earned a terrific living without that credential. I think, though, that I earned some points when Mark indicated that I received the New Yorker (after my neighbor began to describe the magazine to my husband and Mark said, "Oh, Leisa subscribes to that."). He was dumfounded. Isn't that just stupid that he would be dumfounded? As you can probably guess, my neighbor is a little on the pompous side.
Anyway, at least I'm trying to put some "labels" to organize some of the content. It's hard to believe, but I started this blog on October 1 and it has almost been 6 months, now since I've been at it!
|"NEW YORK (Reuters) - Steelcase Inc. (SCS), the world's biggest office furniture maker, said on Thursday quarterly earnings tripled, helped by growth in its international business.|
|Fourth-quarter net income rose to $29.3 million, or 20 cents a share, from $9.3 million, or 6 cents a share, a year ago.|
|Revenue rose 5.4 percent to $779 million.|
|The Grand Rapids, Michigan-based company said it expects first-quarter earnings of 15 cents to 20 cents per share including special items.|
|The company sees first-quarter revenue up 6 percent to 10 percent."|
Net income includes 11.6M in "ex-items" or 40% of the net income item is "stuff". You don't see that in the release, nor do you see the anomalous income tax rate.
Now, it really doesn't matter what I think. The market often does something quite different than what I think. But never buy or sell a stock off of the headline number. Read the company's release, not the headline. One of the most profitable stock purchases I ever made was BUCY. The stock was trading down, but I could see that their backlog had increased tremendously. Well as soon as the conference call started, the stock went ballistic.
SC's operating income was quite strong, but (1)in a slowing economy, (2) the juice that they've already received from international income, and (3) a resorting back to normal income tax rates, I'm guessing that they will not see these types of results in the coming year.
We'll see if there is some realization that the DJ headlines vs the meat of the release has caused some cognitive dissonance. Perhaps I'm just missing something!
"United States Steel Corporation (X) is buying Lone Star Technologies (LSS) for $67.50 per share in cash or total consideration of $2.1 billion, a premium of approximately 39% to Lone Star's closing share price of $48.45 on March 28, 2007."
Lone Star is the last man standing with Maverick Tube, National Stainless, Hydril having already been purchased. These companies serve the oils services sector making tubing and other things needed to outfit drilling. I have owned them all.
Being so familiar with the industry and understanding the consolidation happening, I'm kicking myself a bit for not having a position in LSS. LSS was the weakest of all of the sisters, but one needn't be a rocket scientist to see the good probability of takeover. Simply put, they fell off my radar screen.
If I've come to learn anything is that your radar screen is your best friend--particularly when you have invested time in learning about companies as I had with this group. I made really good money off of them because they were a little known segment of the oil services. No one was talking about them, but I researched the segment and realized that they all gained through servicing all of the drillers. I also lost alot of money because I had call options that bit the dust, when the oil services sector tanked. Easy come. Easy go.
Companies fall in and out of favor. All of these tubers fell out of favor (to my dismay!). I remember Tim Knight having HYDL as a short and I warned on the consolidation in the industry and that I thought a short was risky. There is a place for fundamentals.
The second lesson, is that when stock become really really treat, they are in the bargain bin, not only for investors, but for potential purchasers. That happened to each of these suppliers over the past year. Cast in the bin--rummaged through and then proudly taken to the register.
The purchase price is just a hair off the all-time high.
North American sales are flat for the quarter over quarter, though YOY sales grew about 6%. Herman Miller's sales actually increased 15% over the same period. Clearly North American sales have stagnated
SCS's international operations are going gangbusters.
"As a result of the tax valuation and reserve adjustments made in the fourth quarter, the company's full year effective tax rate was 14.2%, significantly lower than the previous estimate of 34% to 35%. The company believes its fiscal 2008 effective tax rate will be between 34% and 35%." [A nice windfall I might add!]
"Consistent with past practices, the company is not providing full year guidance but does expect to continue its improvements in profitability towards the achievement of its long-term operating income margin of 10%."
Overall, I do not think that these are good results and confirms to me a slowing of cap expenditures in the US.
Wednesday, March 28, 2007
Unfortunately, the earlier formats were different, and these docs are a little cumbersome, but I plan to complete this for a few offerings. Here's something worth noting, in looking at the 2003-2 securitization, the % of baloons was only 5.46%. Also, the average loan size was 153.2K the overall pricnicpal was $416.8M--less than half of what you see here.
He expects that we'll test the previous low and will bounce. He's now bashing B. Bernanke which I don't like. Oh well...I'm married, so I know how to tune things out!
Above you will see my favorite flowering tree--a red bud. These trees sport tight--purple to fuschia like clusters close to the trunk as you see here. These buds have not yet opened. Aren't they beautiful? They bloom just before the dogwoods--my state's state flower. I'll share another picture when it blooms this year.
While I understand, too well, the need to have operations that are profitable, moves such as this only impairs quality. So these workers who make more are presumable experienced personnel who will now be canned for new hires.
Circuit City will not be getting any of my business, and I will be writing them to tell them so. There is something more broken with their model if they cannot be profitable otherwise. In my opinion, of course. I recognize that there is room for other opinions and I could argue the opposite side. But firing people to make way for cheaper workers cheapens Circuit City's image. Would I want to go to work for them? I don't think so.
03.29.08 addendum: Mish has a more detailed post here
- From Bill Cara who is also quoting Colin Twiggs: "As I say, until the M&A deals are cleared from the HBB decks, and their prop trading gets a chance to off their dogs, I can see continued strength in US equities. Yesterday, the Nasdaq, Dow Utilities and S&P 500 were all up on the day. Equity futures are soft this morning, but Colin Twiggs is also looking for some strength to follow."
- Gary Kaltbaum two nights ago, though expressing some concern over the quickness of the follow through stated that: "We are back into a confirmed bull market."
- Gary K last night: The action today was just horrible. If you are a bull, you cannot be happy with today's market." (A reminder that Gary is almost purely a technician, but he is honest about his observations and I'm very glad to have his radio show).
- Jeffrey Saut at Raymond James is perpetually cautious as is John Hussman--read them for gravitas (see links under Info Mosaic).
- George Dagnino writes: "We are witnessing the unfolding of three major crises. I wrote several times here that the market is going to reflect these uncertainties. It looked like a top and walked like a top. It must be a top. I have been talking about it since December 2006 in my service." [if you are not reading George's blog regularly, then I urge you to put it on your regular reading list--see it to the right. Also, if you've not visited his website @ Peterdag.com and read about the business cycle--go there. Read ALL of the free stuff--better yet, print it out. It's like having a free book for the price of paper. But get his book, too, if you read not one other thing on the market: Profiting in Bull and Bear Markets.
My point, though, is simply this--you can find an opinion to suit your own bias. That is the single worst danger in managing your own money. You could be dead wrong, and you can easily find many well-qualified people who share your opinion. They'll be dead-wrong too, but such good company you will be keeping. You want to be with people that will tell you when THEY are wrong and a track record to show that they are able to realign their views.
One of the most telling things to read during financial storms is the steady press of good news all the way down to the gates of financial hell. You cannot trust the headlines. If you learn anything as your own personal money manager, it needs to be that. And if you are an amateur, like me, you want a stable of opinions so that you can soundly develop your thoughts and theses about the market and your investment strategy.
For my money (your money might be different), I see very little short term fundamentals that will lift this market much higher without great risk to my capital. So, I'm cautious, and I'm listening to the experts I've come to trust, and I'm making decisions that make sense for me. I might be wrong, as might they. But you have to weigh the risks--perhaps construct a probability table of returns based on your underlying investments. Here I've taken a principal balance of $100K and am setting out a 50% probability that the market will go up 10% (meaning I'm wrong) and a 50% probability that the market will correct by 25%. Now, I understand that the probabilities as well as the % earned or lost are subject to the gauntlet of criticism. Nevertheless, if you have worries and you want to quantify them, you could use a very simple model such as this. Naturally, you want the summation tells you important things about your overall decision.
So, for a 50/50 chance of being right/wrong over the above scenarios, my choice would be to protect capital and avoid the weighted probability of an 8% loss. Despite these lovely probabilities, in real life, the outcome is 100% one way or the other. It gives you a quantitative means of measuring your bias and the cost of your being wrong.
Tuesday, March 27, 2007
Borrowers are sorted in accordance to credit quality. Most of us have been through extensive credit screening gauntlets where information is gathered over a current period...perhaps the last year or two. So we have to produce most recent tax returns and supporting documentation, most recent paycheck(s) etc. In addition, our property was most likely appraised in order to provide an objective, third party valuation based on current market standards.
How well you are able to service your debt is based on your liquid assets and earnings. How well collateralized the debt is, also known as the loan to value ratio, depends on the appraisal quality and the relative market conditions.
Credit quality of borrower: I'm going to lift this straight out of a Goldman Sachs S-3
From S-48: The credit score tables appearing in Appendix B show the credit scores, if any, that the originators or underwriters of the Mortgage Loans collected for some mortgagors. Third-party credit reporting organizations provide credit (or FICO) scores as an aid to lenders in evaluating the creditworthiness of mortgagors. Although different credit reporting organizations use different methodologies, higher credit scores indicate greater creditworthiness. Credit scores do not necessarily correspond to the probability of default over the life of the related Mortgage Loan, because they reflect past credit history, rather than an assessment of future payment performance. In addition, the credit scores shown were collected from a variety of sources over a period of weeks or months, and the credit scores do not necessarily reflect the credit scores that would be reported as of the date of this prospectus supplement. Credit scores also only indicate general consumer creditworthiness, and credit scores are not intended to specifically apply to mortgage debt. Therefore, credit scores should not be considered as an accurate predictor of the likelihood of repayment of the related Mortgage Loans."----------------------------
Think about the above when you hear about how "good" the FICO scores are for borrowers.
You've seen this in another form, but seeing a different view cements the concept(s). I will be covering how certain aspects of this structure are covered in filings. I will post this chart in each entry for ease of use.
There are many reasons for mortgage originators to finance their activities by issuing mortgage-backed securities. Mortgage-backed securities
- transform relatively illiquid, individual financial assets into liquid and tradeable capital market instruments.
- allow mortgage originators to replenish their funds, which can then be used for additional origination activities.
- can be used by Wall Street banks to monetize the credit spread between the origination of an underlying mortgage (private market transaction) and the yield demanded by bond investors through bond issuance (typically, a public market transaction).
- are frequently a more efficient and lower cost source of financing in comparison with other bank and capital markets financing alternatives.
- allow issuers to diversify their financing sources, by offering alternatives to more traditional forms of debt and equity financing.
- allow issuers to remove assets from their balance sheet, which can help to improve various financial ratios, utilize capital more efficiently and achieve compliance with risk-based capital standards.
It appears, then, that these securities go along way towards providing substance for derivative instruments such as cash flow swaps and interest rate swaps.
For those of you who read Bill Cara (that man is a saint!), you will know that frequent contributor MarkM infrequently self-imposes punishment of going to the woodshed.
Here's a wooshed that we can all hang out in for smokin' , drinkin' and cussin'--all of the things that promote civil discourse and social cohesion--
Here is one of Accredited Home Lenders (through their REIT) for the 2006-2 Trust
If you are interested in this securitization issue, then I urge you to look at this report. It's fascinating. Your eyes will not glaze over.
Essentially this distribution is a report card for discrete securitizations. It's everything you wanted to know about the loans: State, principal, interest rate, and LTV. Oh, DO look at some of those rates. What you will also find is whether or not they've been naughty or not about required overcollateralization. I'm not sure, but I think that the deficiency in the overcollaterization may result in a margin call.
In no particular order...hey, it's late. Here's the report that you can go to and see where the delinquencies are--you'll not find this on the company's balance sheet...it is in the real estate investment trust (REIT).
Remember my previous post? where there was credit support/enhancement through overcollateralization? Here's the summary that shows that:
I have to believe that overcollateralization deficiency is not a good thing--what I understand (I couldn't find any good information), is that this is part of credit support, and if it is not there, then, those folks at the bottom of the food chain have more risk than they gathered.
I did find something very interesting in a Goldman Sachs shelf filing. I'll add it to my Horizon Issues. I will not shoot my entire wad tonight--and it is late in my neck of the woods...speaking of which....my neck of the woods showed up in the top 100 fastest growing counties in America. Unbelievable (just goes to show you what you can get when the denominator is small to begin with!).
Monday, March 26, 2007
By Saskia Scholtes andRichard Beales in New York
Published: March 26 2007 03:00 | Last updated: March 26 2007 03:00
These instruments are beyond my abilities, but I'm sufficiently interested in them to pursue a bit of knowledge. I did a little nosing around and I found this article. Given the preponderance of hedging risks through derivatives instruments, and particularly if you invest in the financial sector, I would recommend your cultivating your knowledge regarding hedged risk. I found MOST of this article comprehensible, but my understanding is very limited. I'm in no position to educate you, but I'm in a position to make you aware.
I did note that LEND had $10M in hedging losses. I suspect that even if we do not suffer from some financial cataclysm, some dynamic shifts in the credit markets might provide some nasty surprises for folks hedged for one risk when the obverse materializes (causing the hedge position to be a loser--unless of course, the obverse situation is hedged). I wonder if company CFO's and/or Treasury heads know exactly what is in their banker's black box that calculates hedge settlements? I think that these are the stories that we are going to hear about more and more.
Saturday, March 24, 2007
I do have a few things to share with you. Note that I'm doing this only to raise your awareness about some of the underlying issues--issues that I really do not fully understand. Caveat...I may have this totally wrong.
I found Accredited Home Lender's (LEND) S-3 (Registration statement) for its very first issue of 2007 (2007-1). This is a whopping doc 390 pp.. I'm not able to devote the sort of time needed to review it.. But there are some gleanings that I wanted to share with you...... First, though, I want to make a couple of comments as to why any of this matters. Any there are smarter people reading this blog than the writer, so PLEASE FEEL FREE TO CORRECT MY ERRORS.
- We are hearing that subprime will not spill over. Well, I think it has spilled over in the worst sort of way because these loans have largely been part of a securitization machine led by government entities and the investment banks. So yes, this crap is in lots of porfolios--pension funds, insurance companies, fixed income portfolios.
- Due to the liberal lending policies, these loans can have LTV ratios as high as 100% (for the securitization that I'm commenting upon), but had appraisals been done, those ratios might change--for better or naught. So the quality of the underlying securities (and their commensurate ratings) might be materially different than expected. All manner of bad things can happen because of that as you will see if you read.
Let's look a moment at the structure of these collateralized instruments:
There are two things that are important.
- Each tranche represents a different risk (quality) level--greater risk = greater interest
- Each tranche represents a holder that gets lower in the food chain as you move down.
Here's another concept to be aware of and that is "credit support" or enhancement. You can read about it in greater detail here. IF you want your offering to be considered attractive, you need to offer some comfort--some cushion. There's a couple of ways to do that: (1) through structuring subordinated tranches (low on totem pole) as you see in the above diagram, and/or (2) through overcollateralization. Think about overcollateralizaton as a LTV ratio for the securitization (structured debt obligation).Per theLink: "Rating agencies rate the different ‘slices’ (from AAA tounrated) in order to provide market participants and investors with an assessment of the risk associated with each. Performance is largely driven by the collateral manager’s ability to avoid defaults and maintain creditworthiness of the investments." [I do not understand yet how the rating process is effectuated, but I imagine that it is due to FICO, LTV, level of loan documentation and other factors that would provide one with greater comfort of ultimate payback--that's another day. ]
The example above shows the tranches--think about it as a food chain or totem pole. It's not going to be a pretty place to be. An example, then, of support/enhance might be your issuing $100M of underlying assets (loans to borrowers) but only issuing $80M in securities. IN this example, the difference of $20M would be the equity portion retained. Now look at the diagram (above) again. The equity portion is unlikely to be the cream. So if you see issuers (such as Accredited) with these loans (equity) on their books, my understanding (I could be wrong) is that these would be drecht loans--and you would likely see higher default rates. Accordingly, loan loss reserves may need to be beefed up. Additionally, one could get an insurer (such as FGIC, Ambac, XL Capital, Radian et al) to take on risk in this area.
Let's follow the money. This is from LEND's S-3 registration Even if you click to make this larger, it will be a bit fuzzy, that is from the original. Do notice that everyone gets their fees first before anything gets disbursed to note holders.
I do not fully understand this diagram with respect to the Overcollateralization Deficit. But there appears to be cross collateralization between A-1 and A-2 notes, and if there is some deficiency, then the note insurer must be increased to maintain the appropriate reserve. I apologize for not having this more fully researched, but I wanted to post some general things first. If I waited until I fully understood all of the ins and outs (which I'm not equipped to do), then this post would never happen. Again, full disclosure of underlying ignorance.
Now what can go wrong? When you buy bonds supported by indebtedness (or if you make loans), you have two types of risk:
- market (interest rate) risk. Rising rates lowers the value of the instrument. This risk is mitigated through interest rate derivatives;
- credit risk: the risk that the borrower will be unable to pay. This is mitigated through the collateral support, enhancement (to include having an underwriter to insure the risk, remember MGIC and Fidelity Guaranty).
- Ratings of tranches may prove misleading--the underlying notes are assigned to each tranche--these are specific notes, not a fungible pool of securities. So what? If ratings have to be changed, and former investment grade securities are now looking like something different (think pig's ear v. silk purse), holders who are required by their charter, etc to hold investment grade, must do some dumping of these securities. That is called a sell-off. and those are not pretty.
- Holders in the lower tranches run significant risk of not getting paid their principle--they will start dumping those securities (and calling their lawyers).
- The equity portion of these tranches (and I'm sure some hedge funds may be involved in these as well as the issuers) will need to be written down to reflect the net realizable value--these impairments could affect required capitalization of issuers (this happened to LEND) and cause their being in default of credit agency requirements and/or contracts with their underwriters. (Again, this happened to LEND).
- The insured portion of these securities may cause greater payouts from the insurers, so their earnings and their capital ratios could be affected. Those insurer's are dependent on their agency ratings, too. So I see Fitch, Moody's and Standard& Poor as being quite busy in their assessment of these exposures and what it means to the people they rate.
So...all of the above is how subprime potentially reaches into our financial system. Until these issues are addressed by trusted financial leadership, do not think for a minute that it is a "contained contagion". And I would urge you to look at any fixed income holdings you have to see if YOU have any portfolio exposure. I just do not understand why you have the financial leadership (economists, money managers) speaking about this issue. Maybe I have the whole thing wrong, and I would welcome that criticism.
I'm not going to even try to post a summary of what I'm reading, but I do plan to post a few tidbits.
These SEC regs are designed to "consolidate and codify existing interpretative positions."
Here's a tidbit: One can issue asset based securities where the underlying pool has as many as 50% delinquencies. To qualify, though, for S-3 registrations, as many as 20% of the underlying assets can be delinquent.
Friday, March 23, 2007
In posting the loan types for FED, I became overwhelmed with disgust at the types of loans that were being offered to people. The categorization of this "issue" is misleading, and some of the castigations of the borrowers has been unwarranted (in my opinion). I'm going to have to provide some context first.
I'm a reasonably intelligent person. I was 5th in my class in my major (Accounting), and I've had a rich and diverse career which has required my understanding new and complex things. (I don't say any of this to be arrogant, but to provide context). So when I'm having difficulty understanding these loan terms (from a 10-K perspective, I'm sure it's harder in a loan doc), you know a teacher, fireman, geologist (pick your job/profession), is going to have some difficulty.
Part of my responsibilities in my past life (as regular readers now) was to negotiate contracts. So I'm accustomed to reading and arguing about contract language for all sorts of things--both when my organization was providing services and when I was purchasing services. I will tell you a line that I've heard on more than one occasion, from people who are selling to me and sometimes from their counsel when I have expressed concern over a particular clause: "Oh, that is what it says, but we would never do that, or that has never happened before." In negotiating a loan for financing that my company was particularly desperate for I was presented with loan documents that were frightening in many aspects. I expressed concern. "Nobody has ever expressed concern over this. We have NEVER changed our loan documents."
A contract is just that, a contract. My expectation is that if there is something written in it that gives someone the right to do something potentially injurious, that regardless of whether or not that company has ever exercised that right before the clause gives them permission to do it. And that has been my retort. And the documents were changed or--and this is the hard part--you walk away.
I walked away from a home equity closing because the bank had a clause in there for an automatic loan default if one or the other of us were to die. That' s a pretty onerous clause. You might have enough assets to pay the loan for quite a while, but no current income; accordingly, you might not qualify for a loan with the same interest terms. I insisted that it be changed. The loan officer tried everything she could, but their underwriting department would not budge. My husband and I walked out. My advice to each of you is that you always get documents in hand first, read them, consult with your attorney and then sign. That is NOT how it is done in most placed. Later, I got a loan from E-loan because the rate was more competitive than what I could get locally. (No Alt-A loans there....I had to give them tax returns, stubs, W-2's; they had an appraiser come out.) Excellent, professional service. I have not one complaint.
Now, I was under no duress to get the home equity loan. But if I were buying a home, or otherwise had a time frame or circumstances that would make walking out difficult, I may have passed on that concern. I'm going to cast what would be my concerns (and the soothing responses) under these modern day loans:
- Interest rate increase--Oh, don't worry about interest rates; they are the lowest in years and it is unlikely that they will increase.
- Payment fluctuation--We've crafted this loan so that your payments are low now, but will increase as your income increases (no discussion on negative amortization). You may be able to qualify for a different loan later because of your income increasing and your home increasing in value. Did you know that last year home values increased more than 20% in your area?
- Loan to value--Yes, it is a high loan to value, but you have mortgage insurance and that will take care of your payment in the even that you cannot. (Do you think that some folks might believe that mortgage insurance is like AFLAC--it pays the bills if they are unable to? I bet they do.) And remember what I said about your payments--your home's value is appreciating rapidly which is why we can offer this loan to you now.
Thursday, March 22, 2007
Here's another installment of 10-k peak into mortgage lenders.This peek is for FED
Interest Rates, Terms and Fees. We originate residential adjustable mortgage loans ("AMLs") with 30 and 40 year terms and interest rates which adjust monthly based upon various indices.. . .
Loans with 40-year terms were 80%, 77%, and 27% of loan originations during 2006, 2005, and 2004, respectively. The increase in loans with 40-year terms is attributable to increased marketing efforts for this product as a response to the decreased "affordability" of houses in our market areas.Payment Caps. There are varying periods for which our loan payments may be fixed, ranging from one year to five years. If the payment is fixed for one year, after the first year the payment may be increased by no more than 7.5% each year. If the payment is fixed for three years, after the third year the payments for the fourth and fifth years may be increased by no more than 7.5% for each year. If the payment is fixed for five years, after the fifth year, the payment will be adjusted to provide for full amortization, starting with the sixth year. An annual payment cap of 7.5% applies thereafter, subject to the lifetime balance cap described below. Most of our loans, including loans with fixed payment periods of less than or equal to five years, will have payments adjusted ("recast") every five years without regard to the 7.5% limitation to provide for full amortization over the balance of the loan term. The annual payment cap of 7.5% applies thereafter. The portfolio of single family loans with a one-year fixed payment was $4.6 billion at both December 31, 2006 and December 31, 2005 and was $2.9 billion at December 31, 2004. The portfolio of single family loans with three-to-five year fixed payments was $1.8 billion at December 31, 2006, compared to $2.7 billion at December 31, 2005, and $1.6 million at December 31, 2004.
(Click to make larger).
The following table shows the contractual maturities of our loan portfolio at December 31, 2006:
Interest rate variability: A monthly calculation and application has to be a nightmare.
Payment Caps: This is so special. The payment will cap at no more than 7.5% (so if you have a $1,000 payment it will now go up to $1075--whoop dee do), but the interest that accrues is variable every single month. Further, even though there are payment caps in place, for most loans in the 5th year the entire thing gets reset so that the payment is set so that it will re-amortize over the remaining life of the loan. If you have a 40 year mortgage, I guess that is 35 years, and you are likely to owe more than your home is worth. HOW CAN THE AVERAGE HOMEOWNER UNDERSTAND THIS CRAP?!
On the call they are talking about slowing sales 6-7% per year perhaps getting to 9% with the cultivation of international business. This is about 1/2 of previous growth rates.
Wednesday, March 21, 2007
Okay...back to scuttlebutt.......
From CNN's Eyeopener: "Julie Roehm and Sean Womack, the former Wal-Mart marketing executives currently in a brouhaha with the giant retailer, showed up at a marketing conference in Hollywood this week to pitch their new consulting firm.
If you haven't heard about the case, you can read about it here. The quickie version: Roehm was an edgy marketing executive who was fired by the retailer after less than a year of service. She sued for breach of contract. Wal-Mart countersued this week, claiming she had an affair with Womack (then her subordinate) and misused her position to drum up a possible job at an ad agency. And it trotted out some eye-brow raising emails to make its case -- emails that Roehm's lawyers say are being misconstrued.
No doubt we'll be hearing about this case, with all sorts of salacious details ... or at least allegedly salacious details ... for a while."
You can see the video here: Scandal! (my label!)
It's worth watching the video tape...watch the two when he says "caught"
I was in advertising and those two didn't make much sense in the interview. I guess they are trying to get their faces in the public to humanize--but their interview responses, to my mind, were beyond dopey.
Tuesday, March 20, 2007
empyrean \em-py-REE-uhn; -PEER-ee-\, noun:
1. The highest heaven, in ancient belief usually thought to be a realm of pure fire or light.
2. Heaven; paradise.
3. The heavens; the sky.
1. Of or pertaining to the empyrean of ancient belief.
My former colleagues used to tease me about the words that I use. I was always able to fend off the label of being an utter nerd in that I didn't know about 1/3 of dictionary.com's word of the day. So....here it is in tribute to a market top! It may reach empyrean levels!
Monday, March 19, 2007
- "NIW for bulk transactions decreased from $21.4 billion in 2005 to $18.9 billion in 2006 due primarily to narrow credit spreads and increased competition from both the marketplace (reflecting greater appetite for higher risk tranches by investors including hedge funds, and CDOs), and other mortgage insurers." [Everyone jumped into this pool!]
- "Our direct pool risk in force was $3.1 billion, $2.9 billion and $3.0 billion at December 31, 2006, 2005 and 2004, respectively. These risk amounts represent pools of loans with contractual aggregate loss limits and those without such limits. For pools of loans without such limits, risk is estimated based on the amount that would credit enhance the loans in the pool to a `AA' level based on a rating agency model. "[I don't know about you but when I read "credit enhance" in the same sentence stating "without such limits", red flags go off. But perhaps it is my ignorance]
- "Net premiums written and earned during 2006 decreased, compared to 2005, due to lower average premium rates, offset by a slight increase in the average insurance in force. Assuming no significant decline in interest rates from their level at the end of February 2007, we expect the average insurance in force during 2007 to be higher than in 2006 because insurance in force at December 31, 2006 was at the highest level of any quarter-end in 2006 and our expectation, discussed under "NIW" above, that private mortgage insurance will be used on a greater percentage of mortgage originations in 2007. [Due to competition we didn't charge enough premium for the risk taken on and given that things are so bad in the mortgage market, there will be a greater demand for mortgage insurance].
- "As discussed in "Critical Accounting Policies," consistent with industry practices, loss reserves for future claims are established only for loans that are currently delinquent." [Here's my problem with this...and I've seen this type of qualifying/hedging language in all of reports that I've read. . . I think that they are really saying, we think that these loan losses will be higher but we are going to do things the way we've done them in the past. I say...look out ahead for big loan losses as the 2006 tranche of loans start to turn ugly.]
- "Loss reserves are established by management's estimation of the number of loans in our inventory of delinquent loans that will not cure their delinquency and thus result in a claim (historically, a substantial majority of delinquent loans have cured)." [More hedging language--but to their credit, loss reserves is part art and part science. My guess is that the "art" that they refer to is "black" art (like black magic). I will read every report they issue this year. If I'm wrong, I'll be graceful about it. If I'm right I will bray like a donkey].
- "The increase in estimated severity is primarily the result of the default inventory containing higher loan exposures with expected higher average claim payments as well as a decrease in our ability to mitigate losses through the sale of properties in some geographical areas." [This is why the economic outlook is so critical.]
- "In the fourth quarter of 2006 California and Florida began to experience less favorable housing markets, which will likely increase the actual claim rates and severity in those areas." [We think something is looming, but we are not going to do anything about it for reasons that we told you about before.]
- Discussion of purchase of Fieldstone: "At September 30, 2006, Fieldstone owned and managed a portfolio of over $5.7 billion of non-conforming mortgage loans originated primarily by a Fieldstone subsidiary. These mortgage loans are financed through securitizations that are structured as debt with the result that both the mortgage loans and the related debt appear on Fieldstone's balance sheet. The closing of the acquisition will not change this balance sheet treatment. At September 30, 2006, according to information filed by Fieldstone with the Securities and Exchange Commission, Fieldstone's assets were $6.4 billion; its liabilities were $6.0 billion; and its shareholder's equity was $424 million. [Not a terribly robust spread given the amount of loan losses that are likely--MTG's loan losses on drecht debt is 14%--not much coverage which is why they are giving up the ghost.]
- "The transaction supports C-BASS's fundamental business premise of using servicing provided through Litton to increase the returns on mortgage assets owned by C-BASS. The acquisition of Fieldstone will also provide C-BASS with mortgage origination capability. Subprime Market: Significant dislocation occurred in the subprime mortgage market during February 2007. Spreads on non-investment grade and non-rated subprime mortgage securities, which are the bulk of C-BASS's mortgage securities portfolio, increased dramatically through February 23, 2007, when our Management's Discussion and Analysis was finalized. Unless spreads return to their level at the end of January 2007, C-BASS will experience expense from negative mark-to-market revaluations of these assets." [These credit spreads are what are going to hit in waves and cause mark to markets--NO ONE who is knowledgeable is really quantifying this! I'm not knowledgeable, please let me know if you see analysis.]
- "As noted under "Our income from joint ventures could be adversely affected by credit losses, insufficient liquidity or competition affecting those businesses--C-BASS" inItem 1A. of this Annual Report on Form 10-K, t he substantial majority of C-BASS's on-balance sheet financing for its mortgage and securities portfolio is dependent on the value of the collateral that secures this debt. When spreads increase, additional cash (margin) must be provided to the lenders to offset the related decline in collateral value. C-BASS has maintained substantial cash resources against the risk of spreads increasing by amounts that are substantially greater than have been experienced in February 2007 through February 23, 2007. Hence, we do not believe the spread increases experienced in February 2007 through February 23, 2007 have materially impaired C-BASS's liquidity. C-BASS also maintains substantial liquidity to cover additional margin that may be required when C-BASS's interest rate risk hedging instruments decline in value as a result of short-term interest rate declines. "[No matter which way interest rates go, somebody is going to suffer.]
Sunday, March 18, 2007
As I share this information with you, I will ascribe credit to the sources that I use, and as always, qualify my opinion on (as well as my ability to research) such matters as being woefully constrained by my general ignorance in how these sophisticated instruments work. What is becoming apparent to me, and I have no wish to disparage any party, is that this environment has been a very fee rich environment where the rewards are great and the risks (except to the ultimate purchasers of these obligations) are small. I'm willing to bet that the re-packaging of this risk and distributing it downstream eliminated the traditional safety valves that would have curtailed continued lending. In this fee rich/risk free environment, ordinary prudence was hit over the head and wrapped in a rug. Well, there are quite a few of these ordinary prudence corpses strewn about, and the air will begin to fill with the stench of them. I think we got our first whiff this past week. I'll also add...this stuff makes my head hurt.
Now, there are lots of people in the food chain of the structured debt obligations. My goal is not to provide an exhaustive detailing of that, but rather I'll provide you with links to resources along the way. My first recommendation is that you read Wikipedia's entry for collaterized debt obligations and mortgage backed securities. If you are balking at reading Wiki's entry, let me remind you that this knowledge is part of your continued erudition AND you will be the center of attention at your next cocktail party as you explain to others about the potential problems involved. Seriously folks, I believe that this will be as troublesome as the junk bond fiasco. So as a citizen, take 20 minutes to educate yourself. Yen carry trade--laugh at it. I don't think it is anything compared to the possible unwinding of these structured debt obligations. My greatest hope? That I'm wrong.
My first bit of research is to provide you with the following table. It is only slightly amended from the original table which you can find referenced within the table. While there are other types of asset back securities, I chose to limit the table to mortgage-related issues. This table shows the people who have insured the securities. in addition to sizing the total market for 2005 and 2006. As you can see (and presuming my understanding is correct) less than 5% of the total amount issued has been insured. You may also find it interesting to note that FGIC (Fidelity Guaranty Insurance Company is owned partially by Blackstone).
[click to make larger]
Friday, March 16, 2007
Bottom Line: To maintain the same median income to median home price in 2006 from 2000, the median household income would have to be ~40% higher. The household would have to be earning $67K v. $48K.
P. S: 4.49 p.m. The actual median price of a home discussed in the news is about ~230K. I'm not sure why there is a difference between how I calculated and/or applied the index. Suffice, to say, though, the point still sticks if not more conservatively stated here.
To prove the point, it would be an interesting study for a financial journalist (and in fact, I might just send this prompt to the WSJ) to take 5 states (e.g. CA, VA, FL, TX, MI) where there is a stated problem and pick perhaps 5 counties in various parts of the state that have different housing/population demographics---hot v. cold spots if you will. Then, they ought to look at the average home price in 2000 v 2005 compared to the average qualifying earnings to purchase a home in 2000 v 2005. In fact, a wonderful barometer would be to conduct a P/E ratio--price of the home divided by annual, qualifying earnings. (I've written about this on Barry Ritholtz's blog, but still have not seen anyone do it).
One doesn't have to be a genius to make a few guesses about what the data will show for this simple reason: Incomes have not gone up all that much from 2000 to 2005 BUT we know that housing prices have gone up (in some areas) quite a bit. Accordingly, I wince at the unfair characterization of these people whose lending status went from prime to subprime just because they could not qualify for a bloated housing price.
I may nose around to find out if I can find any comparative statistics. I did find some information here .
Thursday, March 15, 2007
I know that I've mentioned this before, but it bears repeating. Go get the book, The Tipping Point by Malcolm Gladwell. I have despaired over the market's seemingly slow cognition of what seems to be the obvious. But I realized today, that the market must reach a tipping point prior to it capitulating to what is seemingly the obvious.
I was surprised that the market was up today given today's numbers.
I'm doing a little pokin' around, and I must regrettably admit that I'm not knowledgeable enough to know all of the implications, but it seems to me that insurance companies jumped fully onto this band wagon.
Here's a link that will give you an interesting overview and will explain AXA's involvement. If you are interested, you may want to look. I'll try to have more later, but I'm woefully ill-equipped to research this in a meaningful way. Nevertheless, I'm confident that I can uncover a few tidbits. And I think the fact that these insurance companies are in this arena is an important tidbit. Also, if there is a re-grading (meaning de-grading) of some of these securities, then that will be problematic for some holders.
Do not think for a minute that this story goes away with the subprime lenders. They were merely the initial conduit. There is an entire food chain behind them, and I'm pretty confident some folks that are holding these in their portfolios are scrambling to ensure that valuations are appropriate.
Wednesday, March 14, 2007
While it is so that you
can eat a pig from nose
to asshole and beyond,
the cow is usefuller:
the beef, beefsteak, broth,
are healthy, and the milk,
the fine glue from the hooves,
the leather and the horns,
Oh you can take one horn
and blow it and call up
whole armies of believers!
Poems Seven. Alan Dugan. Seven Stories Press. New York. 2001.
This book was a National Book Award Winner. I don't typically read much poetry, but when Tower Books closed shop, I made some purchases in their "awards" section at attractive prices. The poetry in this book is hard-edged. I literally opened this book to this poem, and it seemed to coincidental to pass up. I hope that you enjoy it.
- Inculcation: We are taught that the market is safe, and it is the best vehicle for Americans to both invest and save for the future--witness the SEP IRA plans, 401(k) plans, 403(b) plans, IRA's.....We have accessible vehicles and they drive right to the market.
- Excitement: There are enough high fliers to tantalize one's imagination that quick and easy riches can be made.... eyes glaze over, daydreaming of your Maserati's color preoccupies your time, and you try to figure out if you should pay your mortgage off with your gains or buy an new home.
- Perception of Ease: Nothing could be easier than finding stocks! Buy technical analysis books, subscribe to a stock picking service, surf the web for clever sites with trade by trade suggestions. It's like printing money (until the press hangs up and eats your money.)
- Status: The stock market is emblematic of wealth and status for many Americans--there's a certain cachet about having money in the market.
- Social: There's a social aspect--this blog, other blogs (radio/TV shows), and however we choose to interact with those media. You connect with the message, the personality.
Your return on assets includes your return for your time. You are a big part of your portfolio. If you have $100K in the bank and no other assets and you make $50K a year ($44K after tax), then you've earned a gross return of 44%. Sure it's an oversimplification, but that's the gist of it. Whatever you save and put in your account would essentially be your net return.
I believe that there is no imperative to always be in stocks all the time or even in stocks at all. Investing in your business, in real estate, buying loans, putting your money in CD's or buying bonds...there are plenty of places to put your money. You can put it in my account if you want!
I really try to keep the J. Altucher's story very close in my psyche.
I think that there are a few guideposts to keep in mind post sub-prime blow up and whether or not it is a contained contagion. But here are a few of the granular issues that are really as important as (if not related to) this issue:
- Liquidity: Liquidity is bound to be impaired. We can do LOTS of speculation on what it will do to consumer spending, but I think that we can say with certitude it WILL EFFECT the number of new homes sold.
- Economy/Consumer: If the majority of jobs created in this last recovery is reliant on the burgeoning homebuilding industry (as I understand that it is), and we know that industry is impaired, then it is reasonable to deduce that unemployment claims will rise. Calculated Risk has done a remarkable job in detailing his thoughts on the effects on the employment numbers. Job losses will result in consumers tightening up their spending. Plus, for those with rate resets, even if they are PRIME borrowers, that payment increase will take a bite out of their pocketbooks.
- Other Markets: As you can tell by their reaction, there are not too many "safe-havens". As I understand it, there are two types of risk:
- market risk--we just saw that--that risk is endemic to all markets
- USD risk--it seems like there are other ways to hedge that bet rather than being in foreign stock ETF's. I don't pretend to know, but I think that there has been a bit of "safe-haven" pedaling regarding foreign markets.
- Commodities: These have been volatile. I think that the markets have spoken, and they are saying that THEY depend on the US consumer (such a burden the consumer bears!) to stay healthy and grow. Expect commodities to downturn if the consumer buckles. Many of the emerging markets are commodity centric. Yeah, yeah, I've heard the global infrastructure story, but the global markets are telling us something different for now. At least that is how I understand it.