Foreclosures only going higher, these sub prime mortgage companies are going to hurt even more. Last year there were 1.2 Million foreclosures, this year: 1.4+++.
Subprime Debacle Analysts and investors say they are keen to hear what the firms say about their potential losses as defaults on subprime mortgages, home loans to borrowers with bad credit records, rose to seven-year highs. More than 20 subprime lenders have closed down or sought buyers since the start of 2006. So far this year, shares of New Century Financial Corp. and Fremont General Corp., two independent subprime lenders, dropped 90 percent and 50 percent respectively. The perceived risk of owning subprime mortgage bonds, backed by subprime mortgage loans, has risen about 30 percent since the start of February, according to the ABX-HE-BBB- 07-1 index of credit-default swaps on 20 securities rated BBB- and created in the second half of 2006. Together, Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns hold about $6.4 billion of the securities, according to estimates from Hintz at Sanford C. Bernstein. $1 Trillion ``They're all involved to a degree, whether it's trading or originating deals,'' said Benjamin Wallace, who helps manage $650 million at Grimes & Co. in Westborough, Massachusetts, and holds shares of Morgan Stanley. ``You just don't know who owns what. They may have securitized it or still hold stuff on their balance sheet.'' Goldman and Lehman would be hardest hit if the slump in subprime mortgages turns into a credit crisis like the one that followed Russia's debt default in 1998, Hintz told clients in a March 6 report. If the losses are contained to the mortgage market, Lehman and Bear Stearns will sustain the biggest drop in earnings, he said. Investment banks repackage mortgage loans into securities that they sell to investors. Demand for higher yields led them to the subprime market, where interest rates are 2 or 3 percentage points higher than prime loans. As that business flourished, firms financed subprime lenders and some bought them outright. `Internal Risks' The subprime market ``was virtually non-existent 10 years ago,'' said Karl Case, an economics professor at Wellesley College in Wellesley, Massachusetts, and co-creator of the Case- Shiller Home Price Index, which tracks residential real estate values. ``It's well over $1 trillion now, it's big stuff.'' Lehman, which last year securitized $146 billion of residential mortgages, held $2 billion of non-investment grade residual interests from residential mortgage securities as of Nov. 30, up from $500 million a year earlier. ``We're going to find out how good internal risk controls are today at these big shops versus five years ago,'' said Bruce Foerster, president of South Beach Capital Markets in Miami and a former capital markets executive at Lehman. If Lehman's holdings decline 20 percent in value, 2007 net income would be reduced by about $130 million, or 3.2 percent, Hintz estimates. That isn't likely, said David Trone, a New York- based analyst at Fox-Pitt, Kelton Inc. ``While Lehman has $2 billion in residual interest in subprime mortgages, we believe the company has hedged 100 percent of its credit risk,'' he wrote in a March 1 note to investors. ``This has created meaningful gains that should offset any future increased credit loss experience.''
The tragedy at New Century is a modern day ârun on the bankâ A couple of weeks ago everyone would agree the NC (NEW) balance sheet was fine. Their credit lines were substantial. Their thousands of employees were being paid and loans were being funded. Now because of the snowball effect of disclosed accounting problems an entire industry, not just New Century is crumbling. Jobs, homes and retirement savings are being destroyed all because of the run-on-the-bank effect. The problems at New Century could have been fixed through a few new & disclosed journal entries adjusting loan portfolio performance / value, none of which would have resulted in the crash of the stock and what seems to be probable BK. I believe the problems are brought about by these crazy S / O accounting regulations that create hysteria on par with imminent predictions of global warming, bird flu and SARS. This is all insane.
new century made stupid loans and sold them to hedge funds. The borrowers behind these couldn't afford the payments. The loans were very bad. New century was forced to buy them back. They didn't have the money to do so. Game over. Britney and Tori go back to working at Hooters.
I'd like to know if traderich is still averaging this one down. Not for gloating purposes, I'm just curious how far someone looking to buy on the cheap will follow it. I would think that being delisted from the NYSE has to make one think that maybe it's time to just cut the loss and move on. Or is there serious interest in buying this at a buck and waiting it out? If they have no cash and their notes are being called, what option other than bankruptcy do they have? Anyway traderich, if you're still reading this thread I'd be interested to know if and how your strategy changed with the delisting.
I agree the game is probably over. However, sub-prime loans are not stupid. Most of these loans are not made to negligent or bad people. They are made to people who have credit blemishes. The lower FICO scores are usually due to temporary job loss, divorce, illness and even some bad luck. But the vast majority of âsub-primeâ loans are to good people who can afford and intend to pay back their obligations. By the way, the reason the interest rates are higher, is because there is more risk. The banks providing warehouse lending to the sub-prime industry understood their higher reward came with higher risk.
I don' t think subprime is bad. What is bad is putting someone in a loan where they can't afford the payments. Easy credit ripoffs aren't a new thing. If your combined household income is $50,000 a year , you can't afford a $400,000 home, even with all of the wonderful "technological advances" in lending that Easy Alan Greenspan praised at the top of this bubble. case in point: http://money.cnn.com/2007/03/14/magazines/fortune/sanon.fortune/index.htm?section=money_topstories
TM, I sold off immediately when it got delisted. To me, that is game over. I was wrong on this one as I was on TWR too. TWRAQ now. Anyways, life goes on. Looks like LEND, NFI, IMH, and HMB will be just fine. DRL is a long shot but paying good odds if it recovers.
Thanks for responding, I think some will be ok long term, but figuring out which ones is obviously the tricky part. Have you looked at TMA? The CEO and COO bought 220k shares between them today.