Housing Rolling Along 2

Here is roughly how securitization works in Canada, should be fairly similar in the US.

Let's hypothetically say that you go to Bob's Mortgage Co. to get a mortgage for your house. The mortgage co. initially lends you, say, $300,000.

The cashflows of a mortgage are similar in some senses to that of a bond, with the exception that both principal and interest are paid to the investor over time (whereas the principal of a bond is typically repaid at maturity). So an individual with $300,000 to invest could buy a bond, deposit their money in an interest-bearing bank account, invest in an MBS (mortgage backed security) pool, etc.

Bob's Mortgage Co. then packages up your mortgage, along with a number of others, and securitizes those cashflows as a mortgage backed security pool. Mortgage insurance providers are sometimes involved in these pools (depending on quality of lending). For example, my understanding is that CMHC (Canadian Mortgage and Housing Corporation) offers insurance on some MBS pools in Canada, whereby the principal (but not interest) of an MBS pool is guaranteed by CMHC. The US equivalents of CMHC would be Fannie Mae and Freddie Mac.

Regarding your question about foreclosures, it is typically the mortgage servicing company (and the courts) that determine when and how a foreclosure will take place. This is determined by the repayment (or lack thereof) by the mortgagor. So if you don't make your mortgage payments, the mortgage servicing company will need to foreclose on your property, at which point the recovered principal from the mortgage would flow through to the owners of securities in the MBS pool.

Hope this helps, I can try and answer any other questions that you might have.

Regarding your question about "who is holding the bag?" - in the case of an MBS pool, it would either be the investors in the pool, or the provider of insurance for the MBS pool. Keep in mind however that not all mortgages are necessarily part of MBS pools, so there are many traditional lenders that are involved in mortgages (though again the issue of whether or not the mortgage is insured is important).

 

DHI just puked up again...slashed earnings.....AGAIN! The homies may be in for an a$$ pounding tomorrow...OWP

NEW YORK, July 13 (Reuters) - D.R. Horton Inc. (DHI.N: Quote, Profile, Research), the largest U.S. home builder, said on Thursday that orders for new homes fell 4.4 percent in its fiscal third quarter, and the company slashed its yearly forecast due to the soft housing market.

The value of the new orders fell even more, down 7.4 percent in the quarter ended June 30 to $3.83 billion.

Horton recorded 14,316 new home orders in the third quarter, down from 14,980 a year earlier.

The company said it sees the third-quarter earnings of 93 cents per share, way below the $1.30 analysts had expected, according to Reuters Estimates. The new outlook includes write-offs totaling 11 cents per share.

Horton also cut its outlook for the fiscal year ending in September to at least $3.65 per share down from its prior forecast of $5.25 to $5.35. Analysts expected Horton to post earnings of $4.96 for the year, according to Reuters Estimates.

Horton, based in Fort Worth Texas, also reduced the forecast for the number of homes it expects to sell in the year to 50,000 down from 58,000.

 

My wife work for a major mortgage bank in accounting dept. ".. loan pipeline is down 3.9%.."

 

WSJ.com/marketbeat.

9:17 a.m.: Amid the steady drum beat of bad news from home builders, D.R. Horton’s report Thursday night that it was sharply slashing its earnings guidance for 2006 is especially worrisome to the battered sector. The Fort Worth, Texas, homebuilder has long been the golden child of many analysts who were convinced that D.R. Horton’s management style and its ability to dominate certain markets would allow it to keep profiting even when conditions slowed. Gregory Gieber, an analyst for A.G. Edwards & Sons, says that scenario might have come true if the housing market was coming in for a soft landing. But Mr. Gieber says Horton’s profit report on Thursday — which revised its guidance from a range of $5.25 to $5.35 of earnings per share down to $3.65 or greater — helps to confirm, that “this is not a soft landing.” The failure of Horton’s incentives to drive sales in certain markets — a hallmark of the company’s strategy — shows that the current slowdown in homes sales is more profound that many had first thought.

D.R. Horton’s stock was crushed in after-hours and pre-market trading, with shares down more than 11% to $20.30. Other builders may also take a beating, as they report earnings in the coming weeks. “No one is safe,” says Banc of America Securities analyst, Daniel Oppenheim. “Everyone will feel the impact.”

 

DR Horton Market Cap:

7/20/05 (1 year ago)
$13.4 Billion

7/14/06 (today)
$6.48 Billion

 

There has never been as much inventory on the market. I think the worst is ahead.

 

agreed.

 

Iventory was high when I moved to Denver and it is higher now. I am just glad I got a pretty good bargain, bottom fishing.

 

There is no question that this is going to be a rather painful housing market crunch. I think it lasts about 3 years unless there is something else happening fundamentally as reflected by declining long term interest rates. I'm not betting on that, by the way.

I think a 30% decline which is partially reflected by an actual housing decline and partially through inflation/stagflation's effects on currency value.

Might be a good chance to pick up a bargain, but I think that once you have it, you OWN it - you don't get to move that easily in the future, so do watch out!

This is all conjecture though...

 

I tend to agree. A very long and protracted flat period.