patrick.net

Subprime-rib Dinner! $4.99 + Tax!

Randy H,

Good timing on the new thread! The good news is that.... the market is closed!

This won't be the end of subprime by any means. The REIC can no longer function without it. They'll clean up their act but no more than they absolutely have to and still attract some form funding.

Looks like the action has just begun. Who is next to crash?

Soros will call it reflexivity, but the negative feedback loop is now in place.

It's a *positive* feedback loop, as our engineers here have taught is. Positive meaning it just keeps feeding energy into itself.

I just turned on cnbc, and it's ironically humorous to watch the Countrywide CEO wringing his hands and then cut-to-commercial where we see a no-money-down, cash back home financing commercial from a guy in a grey polyester suit.

It’s a *positive* feedback loop, as our engineers here have taught is.

Fine. I have disgrace myself as an engineer.

My blog is a *negative* feedback loop. Well, it's a negative something.

If someone writes a fiction about such voodoo loans in a rational society the author would be accused of introducing a major plot hole.

But truth is stranger than fiction.

My blog is a *negative* feedback loop. Well, it’s a negative something.

Only after you challenged the wisdom of Second Life.

You are a brave man. And a wise man. But you picked the wrong fight. :)

As far as positive feedback is concerned:

1) As more FB's default, the less subprime lending.
2) The less subprime lending, the fewer buyers.
3) The fewer buyers, the more sellers have to lower their price.
4) The lower the prices, the less remaining equity FB's have.
5) The less equity FB's have, the less of a chance to sell or refinance.
6) This takes you back to 1 (repeat until equalibrium is reached).

There you have the positive feedback loop.

When will the problem spread to Alt-A mortgages?

Last night I spoke to a man developing residential real estate in SF (Condo lofts south of Market Street). I asked him if he wasn't worried because of the softening of the market. He was very sure that the market was still going 'gangbusters' in SF. I didn't even bother to point out the obvious signs of softening. Why would I at this point? It would be like pointing out the flaws and contradictions in someone's religion.

I then realized that real estate had become a religion, something that people worshipped and had faith, even with evidence to the contrary, in. The 'Manifestation' stuff, and prosperity Christianity are just attempts to blend this new Prosperity/Real Estate religion into established belief systems.
"Just believe strongly enough and you'll get lots of good stuff'. All the greed but none of the guilt. Why would you feel guilty, you're not getting this stuff because you are greedy or living beyond your means. This stuff is yours (on easy monthly payments) because you believed strongly enough.

Will the sub-prime meltdown take down this new religion with it? We'll see.

Wow - Dow closed --242.66 points. That's gonna leave a mark.

Randy H,

I caught a little of that interview w/Uncle Angelo too. He claimed he didn't "like" Warren Buffet, he LOVES WB!

Gosh, Uncle Angelo I'm just not sure Warren feels the same about you? :( That aside I'm sure subprime will continue to find new sources of funding and invent even more creative financing b/c these guys are survivors! I happen to think Mozilo was almost glowing. He get's some healthy distance between him and his former competitors as they fall by the wayside.

For those that saw he and Maria it was almost like he had all he could do to keep that ear to ear smile in check. Kind of like this, :)

I then realized that real estate had become a religion, something that people worshipped and had faith, even with evidence to the contrary, in.

It sure is.

The ‘Manifestation’ stuff, and prosperity Christianity are just attempts to blend this new Prosperity/Real Estate religion into established belief systems.

Manifestation is more than that. Merely believing in something strongly may not get you what you want.

SFWoman,

It's fine for a hot dog vendor to believe he has the best corner in the city (and the best dogs). It's when he tells other people that anyone can be "rich like him" if only they too believe is where I have problems.

@SFWoman,

I'm pretty sure RE is Kalifornia's official state religion. Recall this thread? I think there are historical precedents for this type of religion, such as Cargoism.

A few choice excerpts (see any parallels to today?):

"Cargoism" was, and is, a widespread religious movement among natives of the islands of Melanesia in the South Pacific. The theology and practice of the cult centers on the worship of cargo.

In simplest terms, followers of cargoism believe in the imminence of a new age of blessing which, they believe, will be heralded and fulfilled by the arrival of special cargo sent to them by supernatural powers. This belief existed long before the appearance in the Pacific of Western troops.

New Age of blessing = New Paradigm

...When soldiers and airmen from the United States and other allied countries arrived in the islands with huge war cargoes, it was for the worshipers proof that those who followed the beliefs of a cargo cult were to be rewarded for their faith. Though the natives did not benefit directly from the appearance on their islands of those types of cargo, the cultists believed that their predictions were confirmed and that the cargo-millennium was at hand. A time of plenty had arrived. There was no longer a need to work. Money was unnecessary. Crops could be, and were, neglected. Pigs were randomly slaughtered for feasts. It was a time to celebrate, and the cultists lived it up.

Real work is "old school". Debt = wealth, saving is for suckers. We can all get rich selling each other houses.

Things didn't turn out as the cultists expected, but few lost the faith. When goods fail to appear, as in the postwar period, the followers usually assume it is because they have not yet performed the correct ritual, because foreigners have schemed against them, or because the cultists have neglected the gods.

Have I buried enough St. Joseph statues? Have I "staged" my house correctly? Did I install enough pergraniteel? Gee, it's still not selling. I think those scheming, hateful JBRs at Patrick.net and the media are behind this! They WANT me to fail and their negative energy is disrupting my Prosperity karma!

Welcome to the Church of Our Lady of Everlasting Appreciation.

They WANT me to fail and their negative energy is disrupting my Prosperity karma!

LOL! You should try to refrain from using black magick though. Let's keep good energy flowing.

Not karmic advice.

@Davs_renter
Some of those comments are classic:

Where can I purchase one of these statues? Also, do you bury entire statue or just the head?

I believe the head goes in the dirt, ostrich-style.

The positive feedback loop needs one more critical item.

There are several positive feedback loops; I have just shown one as an example. They are all working in parallel; thus intensifying the outcome.

Smells like desperation to me.

SP :

I have disagreed with many posters here. It will hit BA even before the employment situation gets terrible. This area needs cheap credit as much as any other, if not more. What if the rates go to 8% ? What if down payments become mandatory ?

I thought we will see -ve YOY before end of 2006. I was wrong. This year started with good activity in BA RE market. It seemed like a dead cat bounce to me, as people were too much convinced that good times have returned. (Due to strong 6 month rally in stock market.)

I would be shocked if this subprime turns out to be a temporary blip. Given the credit tightening that is happening, we will see increased risk premiums. So even if the Fed drops rates - the mortgage rates will remain high.

I think 2007 will be the year Bay Aryans wake up. And in summer we will see -ve YOY median. What happens thereafter is too hard to predict. This thing seems to be moving too fast.

There are several positive feedback loops; I have just shown one as an example. They are all working in parallel; thus intensifying the outcome.

I'll add another Bay Area specific (+)ive feedback loop. The true impending RE disaster areas in the West - CA central valley, Sacramento, Las Vegas, Phoenix, where do you think a big chunk of the speculators buying and currently holding the bag are from? The BA of course! And once the carrying costs of "investment properties" start to skyrocket as they can't unload them, there will be a lot of financial hand-wringing back home. This will be yet another downward push on Bay Area prices. So much for using the "equity" in your primary residence for investment properties!

"Have I "staged" my house correctly?"

Wow! Great examples of just how twisted we've become.

skibum,

Try as I might I just couldn't get folks here locally to connect those dots. Everyone was to fixated on the idea that no matter how speculative the investments (or markets) became that they were somehow all anchored by someone with equity and FICO score!

And we all know that people with equity never make mistakes, right?

Subprime will soon become passe. Alt-A will be the new discovery for the MSM. The chart at Calculated Risk showed it to be as big as subprime.

Today's report on mortgage delinquencies showed increased problems in ALL types of mortgages. Even prime.

And this is not subprime problems "spilling over" into other. That's not the right way to phrase this. The problems were ALWAYS there in ALL mortgage types.

CALPERS came out with a big soothing report saying they don't have no stinking subprime in their portfolio. But the hedgies have no hedge to hide behind.

Scary math: More homes, fewer buyers

More significant than defaults may be the impact of credit tightening.

"Banks have become much more cautious. Lenders are tightening, not just subprimes, but Alt-As (not quite prime) loans and primes as well," says Ellen Bitton, founder of the Park Avenue Mortgage Group.

I think 2007 will be the year Bay Aryans wake up. And in summer we will see -ve YOY median. What happens thereafter is too hard to predict. This thing seems to be moving too fast.

Stuck,

Possibly. What I've learned here (and elsewhere) is that the downward trajectory of RE markets moves like molasses. I subscribe to Randy's market stickiness credo. Even with the rapid implosion of subprimes, there will be some delay before the resultantly shrunken pool of entry-level buyers exerts downward price pressure on entry-level homes. It'll take some time for those sellers to react to this new market force, and you can extend that up the RE ladder/food chain.

I think the most immediate observation will be another significant drop off in transactions across the board. This will result in downward price pressure eventually for sure, but I'm not convinced it will be within a few months. On the other hand, Realtors (tm) will be hurtin' even more than they are now.

skibum :

I had mentioned it as well a few threads back. Many BA people HELOCed and bought in central valley, Sacramento even Florida and San Diego. There are no stats on this, but anecdotal evidence is convincing enough.

I realized the HELOC problem is going to bad, when my friends HELOCed and bought condos in Banglore. RE so easily became the new daytrading. The guy who coined the term "irrational exuberance" made sure that it never goes away.

StuckinBA,

Excellent observation! It's important to make that distinction up front. I don't wanna hear 3-6 months out or down the road on how it's was all the subprime dirtbags that derailed their well laid plan for early retirement.

Gosh, I'm sorry I didn't realize that some delinquent illegal in Chula Vista made you late on YOUR prime mort. payment in the BA?

Another parallel meltdown that will come of this subprime implosion is what will happen with hedge funds and brokerage houses. As all the MSM outlets are now breathlessly reporting, many old-line houses have been caught with their hands in the subprime cookie jar - HSBC, Bear Stearns, UBS, etc:

From today's WSJ:

"Massachusetts Subpoenas Bear, UBS Over Research of Subprime Lenders"
By JED HOROWITZ
March 13, 2007 4:21 p.m.

Bear Stearns analyst Scott Coren upgraded New Century's stock to "peer perform" from "underperform" on March 1 after the troubled mortgage lender said it was curtailing new loans and restating past results because of accounting errors.

There's also this WSJ article stating how several large hedge funds have also relied a bit to much on this asset class to boost returns:

"Hedge Funds'Risky Bets Come to Roost"
...Subprime InvestmentsAre Starting to Hurt, Highlighting Volatility

skibum,

What the problem is?

NEW (rather NEWC) is performing right in line with it's peer group!

SFWoman:
“Just believe strongly enough and you’ll get lots of good stuff’. All the greed but none of the guilt. Why would you feel guilty, you’re not getting this stuff because you are greedy or living beyond your means. This stuff is yours (on easy monthly payments) because you believed strongly enough."

I know! It's just like watching Deal Or No Deal. Often the supporters (friends and family) of the contestants would shout out to encourage "You know you can do it" or "I have faith in you". They seem to have no understanding that at every decision point (Deal or No Deal), the offer reflects exactly the amount given the probability, regardless how much he/she believe in him/herself.

Speaking of hedge funds (DinOR, you should love this), the SEC is trying to set the bar a bit higher for folks who want a piece of this pie. The masses, of course, are apopletic. So the question remains, does stupidity have an economic threshold?

Since 1982, to invest in these unregistered and largely unregulated vehicles, an individual or married couple has needed at least $1 million in net worth or a certain amount of annual income -- $200,000 in each of the past two years for individuals or $300,000 for couples. Had those amounts been indexed for inflation, they would have nearly doubled by now. The rule does not exclude home equity from net worth.

Under the proposed rule, individuals or married couples would have to meet the old standard plus a new one. They would also have to have at $2.5 million in "investment assets" -- excluding equity in a home or business property -- to qualify as an accredited investor eligible to participate in many private offerings.
....
In 1982, according to the SEC, 1.9 percent of the U.S. population could have qualified as accredited investors. By 2003, thanks largely to home-price appreciation, 8.5 percent would have qualified. The proposed rule would reduce the eligible universe to 1.3 percent.
http://sfgate.com/cgi-bin/article.cgi?f=/chronicle/a/2007/03/11/BUGC2OHQIU1.DTL

By the way, there is such a thing as a negative feedback loop.

Yes there is and we have experienced many negative loops. For instance, as prices have been rising, fewer people were able to buy, as fewer people are able to, it puts negative feedback on prices (subprime lenders have tried to attenuate this negative feedback by loosening their standards) until the negative feedback overcomes the output as it has.

I am against regulating hedge fund (or that 25K "daytrading" rule). Such regulations are all counter-productive.

The SEC should enforce integrity, not suitability. If an "unsuitable" investor comes along willingly after learning all facts, he should be allowed to lose his shirt and then some.

All I can say about today is WOW!