Thursday, March 22, 2007

More Subprime Fallout

Most of the national press reports on the big picture but it was interesting to note the local spin placed on the subprime mortgage mess by the local paper, the Contra Costa Times. It seems one home seller had seen his home "in escrow five times in the past three months after lenders canceled the subprime loans of four would-be buyers. . . Most of the people, except the last buyer, had 100 percent financing . . . They had a pre-approved letter, but when they went back to the lender, they were told, 'We're not doing those anymore.' "

The article also mentions that California holds 22% of the national sub-prime debt. "In a study by First American CoreLogic, economist Christopher Cagan projected that about a third of all 'teaser rate' loans originating from 2004 to 2006 will default because of reset, and an estimated 1.1 million homeowners will lose their first homes to foreclosure." Ed Leamer of the UCLA Anderson Forecast says "What drove the California marketplace wasn't foreign borrowers but entry-level buyers helped into the market by exotic loans." He believes "it will take four years before there is significant appreciation in the housing market, and subprime loans won't be given sparingly." A loan consultant mentions that "subprime salespeople would come daily to their four-person office, bearing gifts and hoping to get [them] to put their clients in their subprime loans . . . they would ask what loan they were working on and say they could cut a better rate without any documentation or credit history." Around January, the traffic abruptly stopped. Amazing!

The article goes on to say that "some areas of the country, such as the Midwest, are considering foreclosure moratoriums." This is supposed to help? It would be like Nixon's price controls. The problems will leak out in other ways: if a bank can't foreclose, do you think they will be able to make other loans? Do you think a bank will loan money the next time around to lower income buyers if they don't think they'll be able foreclose if they need to? How could a moratorium possibly help? This problem is not near the end.

Strategy Update: The Dynamic Beta Strategy has shown solid out performance relative to the S&P 500 since the June 2006 bottom, rising 27.9% versus the S&P's 19.0% and has tacked on big returns this week rising 5.8% in the last 9 market days. Visit our website for more information.


Post a Comment

<< Home