Sic Semper Tyrannis - Post details: Its Not Just A Housing Collapse: Its a Housing-Finance Collapse

Its Not Just A Housing Collapse: Its a Housing-Finance Collapse

Posted on 08-22-2006 at 03:08:14 pm by Aaron

, 301 words, 4398 views

From Barron's ("The No-Money-Down-Disaster", by Lon Witter, Aug. 19, 2006):

"The following figures are from Washington Mutual's annual report: At the end of 2003, 1% of WaMu's option ARMS were in negative amortization ... At the end of 2004, the percentage jumped to 21%. At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.

Every month, these borrower's debt increases; most of them probably don't know it. There is no strict disclosure requirement for negative amortization.

This financial system cannot work; houses are not credit cards. But WaMu's situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million."

Hmmmm... take questionable receivables, mark them to market immediately as profits, and watch as your stock soars. Reminds me of Enron (just a tad).

The numbers here are truly staggering, and the fact that negative amortization (even when legitimate) represents extremely long-run receivables that need to be heavily discounted for risk is extremely unsettling (i.e. the probability that a given dollar of negative amortizations-receivable will actually be collected is not 1 and will vary with macroeconomic conditions).

It is truly disgusting how all the financial companies are running around claiming that there is no risk anymore, and securitizing things that don't really exist and calling them wealth, assets, and revenue. They will get burned. We will get burned.

Unfortunately as this little revelation shows, it is all worse than most bearish commentators have thought. This kind of dishonest and deceptive disregard for risk bodes very poorly for the finance system. It also bodes very poorly for the stocks of mortgage financiers... which sounds like an opportunity to me.

Categories: economics, finance, business, investment • 5 comments

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Comment from: halve [Member]

opportunities? i'm assuming you mean in commodities b/c it appears as though bankruptcies, etc. will be at ridiculous rates thus meaning the U.S will be in more debt which devalues the dollar even further due to the international sentiment. Is that what you're getting at?

I will say there is an article that came out recently talking about how many millionaires there were in the U.S. and it was around 9 million which is excluding the net wealth from the primary home. So somebody's got some coin out there and one has to wonder if they are the folks who are in the most debt or if it is another income category

Permalink 08-22-2006 @ 16:28

Comment from: Aaron [Member]

I meant in shorting housing financiers, actually.

I think a good chunk (at least 30%) of those millionaires will drop off that list when the bubble is done popping (it goes beyond real estate to the financial economy in general).

It is little mystery as to who is in debt: most of us. Regular folks. People living off credit cards and home equity.

Permalink 08-22-2006 @ 20:07

Comment from: Richard Nikoley [Visitor]

· http://www.uncsense.com

Of course, people are sold on neg-am loans because the payment is less (substantially) and because they believe the property will appreciate at a greater rate than their cost.

As an R/E investor, I'm always pitched neg-am loans, but have always passed on them for rental properties. You should never put yourself in a position on an investment where you will likely have to write a check to liquidate. I like to do rentals with 10-20% equity.

I did just purchase two side-by-side tri-plexes with neg-am loans, but these are short term--only 6 months to a year while we get the city's OK to tear down and rebuild six townhomes. In this case, it made financial sense, as the cash is better used to pay architects and engineers during the process of getting city approval. That, in itself will greatly increase the value of the property, i.e., I'll likely be able to see at a profit once the building permits are approved and the plan is appraised. At that point, we'll roll into a construction loan and proceed forth.

My point is that debt is probably the most powerful money-maker there is -- when used wisely and businesslike.

Permalink 08-28-2006 @ 12:34

Comment from: Aaron [Member]

No doubt debt can be used responsibly. I have nothing against debt, per se.

But due to various systemic biases, I think it is clear this is far from the average case.

The fact that neg-am "profits" have grown so fantastically suggests that there are a large number of folks who are suddenly employing neg-am out of desperation. Why else should the levels this year be 8 times last year? I doubt prudent business practice changed so quickly.

Debt can be useful, but I think it is probably going too far to elevate debt to "most powerful money-maker" status. This is the line being fed to us by the economic establishment, look where that is getting us. The obvious critique here is that debt itself doesn't make money, wise investment does. And wise investment is most safely done with capital reserves.

If one habitually needs debt, one should ask, "why don't I have any capital to grow profits?" If net debt is truly required on a continuing basis, and even worse, a growing quantity of debt, I think one's business practices are likely not sustainable, and are perhaps value-destroying.

Permalink 08-28-2006 @ 22:36

Comment from: Sarah Starkey [Visitor]

I hope WaMu collapses along with the Real Estate market - they truly deserve it. I'm a former California RE investor who got out just in time, no thanks to WaMu. The first loan I took on the property was an Option ARM. It had a pre-pay penalty that they "forgot" to disclose. When trying to re-fi into a new loan to buy out my partner (and waiting patiently for the penalty to expire), the broker involved tried desperately to force yet another time-bomb Option ARM down my throat. When I asked for complete loan disclosures, the servicing staff gave me the run-around for nearly a month, and I never DID get full disclosures on what the payments might escalate to. They tried every trick in the book -"The fax doesn't work"..."I'm not authorized to discuss terms", and, worst of all "the Broker (Ned Welsh), doesn't use e-mail!" PLEASE! Perhaps he doesn't like having anything in writing??? Finally I insisted on a fixed rate loan which they begrudgingly gave me. It was clear to me that Ned Welsh was disappointed - it seems that the incentives on WaMu's fixed rate loans aren't good for his bottom line. Since I was well qualified for a fixed rate loan, I eventually got it, but overall my simple re-fi transaction took FOUR MONTHS to close due to the run-around and the rank stupidity of the staff servicing the loan. Three months after closing, I saw the signs of the market going soft and I sold my property. I am glad I got out, but I will never forget the months of agony of me and my investment partner endured while dealing with WaMu and their crooked broker & incompetent servicing staff (what I've said above is only the tip of the iceberg). I could write a book about it, but who has the time?

Permalink 09-03-2006 @ 15:18