"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

19 January 2007


A very worthwhile read on the housing market.

Any serious analysis of the USEconomy must begin with an update on housing. In a nutshell, both housing starts and permits have fallen significantly, new home construction remains at high levels, inventories persist at near record levels, and consumer expenditures are overdue for a grand plunge. The banking distress has begun, let it be known. To call a housing bottom here is perilous, absurd, and probably highly inaccurate. Regard any such bottom proclamation as extremely biased, replete with vested interest, and probably intentionally falsified with a clear bias. Check the person’s employer. In my view, the housing bust has at least two and three more years of bleeding damage to go.

Nothing has changed on the imminent risk from the housing decline to the US banking system and USEconomy. Among the various corners of the banking system, losses have been finally felt with mortgage portfolios and their bonds. The big banks, which serve both as creditors and counter parties to hedge funds, have unloaded substantial amounts of mortgage bonds at a discount to their clients in secret deals to elude public detection, otherwise seen as the initial writedowns. They wish to avert a public panic. With 40% of banking system assets tied either to MBS bonds or to home loan portfolios, the regional banks will suffer huge losses. Home valuation at a national level cannot be reduced by a few trillion$ without corresponding asset loss in the mortgage bonds. Expect at least one regional bank to go bankrupt. Certain large bank subsidiaries might go bust, absorbed by the parent with huge losses incurred. Others will be gobbled up in convenient acquisition mergers to hide the effect. We are perhaps only several months away from banking systemic distress from the housing bust. Deep public concern is still at least one or two years away, which will reach a peak when their certificates of deposit are deemed at risk or seized. Gold will love that. Imagine millions of people in doubt, seeking real safety no longer perceived available in banks!

The most recent high profile mortgage distress signal came from HSBC, the world’s third largest bank in marketcap size behind Citigroup and Bank of America. What an unmitigated disaster their acquisition was in 2003 of Household International, a lender to subprime borrowers. HSBC increased their loan loss reserves to $1.38 billion in Q3 from $1.25 billion in Q2, and reported a 3.99% delinquent rate (over two months past due) for mortgages, car loans, and credit cards. They admit not to doing their homework before the acquisition of Household, a financial firm specializing in deadly adjustable mortgages. Concern over an infectious spread from the mortgage divisions of banks to the unsecured loan portfolio is acute. The word ‘implosion’ fits very appropriately to describe what has begun in the mortgage finance sector, worthy of the photo from a website ( which tracks the littered dead within the industry.

The KILLING FIELD list in the mortgage industry grows like a Who’s Not Who: OwnIt, Harbourton Mortgage Investment, Mortgage Lenders Network, Secured Funding, Origen Wholesale Lending, and more (see my report). Add several others like the subsidiary at H&R Block which has taken huge losses. Others will fall without any doubt whatsoever. The only question is the location, impact, and time required to spread the acidic damage. What is striking about the list is not the lack of recognition of their names, but rather the prominence of some of their creditor broker counter parties, big Wall Street names. Lenders relaxed standards in order to sustain business and their own jobs, not to mention bonuses and origination fees per loan. The inside word is that a credit crunch approaches quickly. The crisis will undoubtedly become a massive fraudulent enterprise where aggressive lenders will be accused of having pushing reckless home loans to people who were totally uncreditworthy. The issue was also fees for bond market underwriters, who rushed to convert loan packages into mortgage bonds, quickly offloaded to the unsuspecting public or foolish Wall Street firms. Watch more pushback by savvy Wall Street, and lawsuits like the one filed last summer by Bear Stearns to reject defective bonds.

The Center for Responsible Lending estimates that 2.2 million American homeowners will likely lose their homes via foreclosure. Default rates are terrible in many regions of the nation, not confined in any way since a systemic problem. One in five subprime mortgage customers who purchased homes in the last two years is likely to enter foreclosure, amounting to 1.1 million people. The most alarming conclusion made from the study, after analysis of more than six million mortgages since 1998, is that the risk of default is independent of the credit score of the borrower. The failures are occurring regardless of income and past credit history. In 1994, only 5% of mortgages underwritten were risky subprimes. Now the subprimes comprise over 25% of the mortgage industry, totaling over $600 billion in 2005. Abuses of negative amortization, piggyback loans to cover down payments, and other stretched deals are discussed in the January Hat Trick Letter report, as are the key specific factors tipping homeowners over the edge into foreclosure. The most dangerous bank system risk might not be the failures so much as the skewed internal underwriter risk controls, and policy for loan loss reserves. Piggyback loans are insane since they directly enabled loans which would not have been approved. They are called “silent seconds” since their loan-to-value lenders only report the first mortgage. Mortgage industry data is thus skewed and biased. Shocks are next.


Early damage has finally begun to grip the ABX index for “BBB” credit insurance. The credit default swaps (CDS) market concerns standard insurance for the vast collection of bonds, including many types of mortgages. Foreclosures mean deceased returns on investment within mortgage portfolios for banks. The BBB type refers to subprime mortgage loans, as measured from a broad basket of size and regional locations. The ABX index has fallen suddenly in the late autumn and continues to fall. Relative to its own market, a drop of over 5% is large indeed. As quasi-insurer having invested in CDS contracts, your risk premiums rose and you profited like with a stock held. The index indicates a sudden decline in high risk mortgage conditions. The mortgage industry is unraveling precisely as my forecasts indicated last year. The concept of the credit default swap contracts is exactly the same as those pertaining to the General Motors bonds collateralized to car loans in summer 2005. As the bonds are damaged, the CDS contracts rise in value. The BBB index below absolutely screams of a widening crack in the mortgage industry, certain to extend into the banking system balance sheets. The scale of the BBB index is inverted to reflect fallen value of the mortgage portfolios.
Most USEconomic growth in this hollow recovery is attributed to equity extractions by an estimated 75%. In fact, it is tied to the major bulk of growth. Since the early 1990 decade, quarterly cashout loans against home equity have jumped by a remarkable 10-fold rise over a 10-year period. To claim its removal will be insulated from the overall USEconomy makes no sense whatsoever. This is the stuff of recessions. Home mortgage equity withdrawal has been sliced by 71% in the most recent four quarters reported up to 3Q2006. The impact will be felt broadly and deeply, especially at a time when adjustable mortgages are reset to higher monthly payment requirements.

Let it be known that banks and brokerage houses are shifting risk to hedge funds en masse, whose managers are traditionally more insane and driven by steroids. Nowhere is the Weimar trait more evident than in global credit and their derivative growth, whose magnitude is permitted to grow unchecked by collusive if not corrupted government agencies without any regulation.

Uber-blogger immobilienblasen explains further that the US housing forecast by the biggest bond investor in the country, PIMCO, is insanely sanguine. "PIMCO believes the most likely scenario for the U.S. in 2007 is that growth will remain below trend at about 2%, owing to the influence of the ongoing housing market correction and its expected impact on the labor market and consumer spending. That should all add up to a soft landing for U.S. growth and the global economy after the strong growth of the past few years. But we see the risks as skewed to the downside in the U.S., owing to the potential for a sharper-than-expected slowdown in housing that spills over into other sectors of the U.S. economy and slows consumer spending ( While we believe the rest of the world can take in stride a U.S. soft landing, a harder landing in the U.S. creates the potential for greater spillover effects and a harder landing for the global economy."


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