patrick.net

”Now we’re seeing the Alt-A and Prime spillover starting to occur.”

A common theme in articles lately. But is it because:

1. Bundles of Mortgages that were ALL of the sub-prime flavor, were sliced into different grade tranches, so some of them appeared to be of better grade than the rest, and sold accordingly, despite the underlying rot?

or

2. Alt-A and Prime folks with good credit who qualified for better loans, were offered and accepted the various ninja loans, that are now proving unserviceable?

There has probably been a good mix of both senarios.

EBGuy says:

"Headset,
Are you sure you can avoid the depreciation recoup?"

You are correct. The 2 out of 5 will only spare the tax on cap gains.

One thing about this blog - it has enough experts that any error in facts will be noticed, fast. A good thing, even if embarrasing at times.

Trading re-opened on AHM this afternoon, but I'll bet they wish they hadn't. Looks to close around 1.20, down about 90% for the day.

EBGuy,

Funny quote! Alt A IS basically subprime (by another name) and subprime IS basically flat-out fraud! That's what I've been seeing (and saying) for some time! I share Cramer's frustration as people try to bend your ear explaining the "distinction" between different mortgage qualities. (Kind of like when skibum gets torqued when MSM writers drag you through "median price" for the umpteenth time)

It's like grading turds! C'mon, a turd is a turd.

It’s like grading turds! C’mon, a turd is a turd.

Now THAT's funny!

"Median Price" should be nominated to the Lake Superior State University Banished Words List, this year.

http://www.lssu.edu/banished/

It’s like grading turds! C’mon, a turd is a turd.

Where, O where is Surfer-X when we need him? :twisted:

“Any 2 Will Do”...
“musical primary residences”

I can get the financial news anywhere, but I come to Patrick.net for the superior bullshit filtration and snappy one-liners. :-)

@Headset,

RE: fiat currency. Well, as Randy has often pointed out (in his many one-on-ones with goldbugs), metal coinage can be debased, inflated and manipulated almost as easily as pure fiat currency (witness South Seas, Mississippi Co. bubbles, Roman debasement, etc.). So, I guess it all comes down to a matter of fiscal restraint, not the medium of exchange.

If you consistently increase your money supply beyond the actual real growth in productive capacity and population (like the Fed is doing), you end up with inflation, regardless of whether you use gold, fiat money, coconuts or sand dollars. That said, you have to park your money 'somewhere' to avoid losing purchasing power, and metals right now is about as good a place as any.

The May Case-Shiller Index numbers are out. The SF Bay Area (does NOT include SiliValley) gave up the incremental gains of the previous two months, and now sits around where it was in February (so much for the post Superbowl selling season). Looks like prime areas can now no longer compensate for the declining regions. Miami (with the highest index) turned negative a couple of months ago, and is experiencing increasing rates of depreciation. Shiller is as cheerful as ever.
“At a national level, declines in annual home price returns are showing no signs of a slowdown or turnaround,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC.
The Composite-20 is about 200, so that is still around 10% appreciation since 2000.

I nominate REO Speedwagon's "Keep the Fire Burning" as the official RE bubble song for the rest of 2007.

EBGuy,

Add to that stocks have given up all of yesterday's modest "bounce" and then some thanks to Alt-A CDO & hedge fund "repricing". So much for Wall Street just "shrugging off" mortgage credit concerns.

"I nominate REO Speedwagon’s “Keep the Fire Burning” as the official RE bubble song for the rest of 2007."

...and follow that with a Prince hit rewrite: "Gonna party lilke it's 1928!"

HARM,
To add to your point, let's not forget that most hedge funds and other holders of these CDO's and such have yet to revalue their holdings, ala Bear Stearns now infamous duo. It seems every time someone takes a peek at their collection of "turds" as DiNOR eloquently puts it, they end up with phrases like "nearly worthless" or "junk" or the like.

Does MSM look at funds or MBs only after they've 'outed' themselves? It seems AHM or BS first have to 'out' themselves and then - maybe - the ratings get looked at.

The news on American Home was grim by Saturday morning. But seemed important enough to get coverage only this afternoon? Fine. OK.

"Gonna party like it's 1928!"

I was able to find the second edition of Jim Cramer's "give it up, default on your loan and send in the keys" youtube link through Housing Doom! His logic was that if you're 20-30% under water on your home it makes better sense to just walk away! Wow! Pretty shocking stuff.

He specifically mentions the Inland Empire, Las Vegas and Phoenix among others. Wouldn't that be great! Jim Cramer told me to walk away from my house! Good luck Mr. Banker!

"Where, O where is Surfer-X when we need him? "

I can usually get him to rise like a trout rising to a wooly bugger. All I have to do is brag about being a boomer retiring on his back!

I was able to find the second edition of Jim Cramer’s “give it up, default on your loan and send in the keys” youtube link through Housing Doom! His logic was that if you’re 20-30% under water on your home it makes better sense to just walk away!

One of the few prognostications I have made on this board (and there haven't been many), is that when nature of purchase money, non-recourse loans hits the MSM (and Cramer is pretty close), the tide has gone all the way out; better run for the high ground and prepare for the tsunami. So in my book, when the man on TV (non-recourse loan or not), says walk away -- its all over.

You folks should get a chuckle out of this. SF has a beleagured Supervisor, Ed Jew, who is facing criminal charges for "perjury, false statements and voter fraud" because he "allegedly" lives outside of the district he represents, in a totally different city, Burlingame. One of the pieces of evidence against him is the fact that "in January 2005, McCarthy testified, Jew applied for a real estate loan in Arizona saying he intended to live in a home he planned to buy in Phoenix. In that application, Jew said he had lived at a home at 2116 Roosevelt Ave., Burlingame, for the past six years, McCarthy said." Uhhhh, how about mortgage fraud too (wonder if he actually bought the place).... I guess I shouldn't be too judgemental, maybe he really was going to move to Phoenix (they have a lot less fog there, you know).

Morgan Hill is near 400 and Gilroy broke 550 in housing inventory. This doesn't include all the new houses the developers are trying to unload. 1/3-1/2 of the inventory in Morgan Hill and Gilroy have reduced at least once in asking price. Santa Teresa and Almaden are starting to pile up as well.

However, it seems that Cupertino, Mountain View and Palo Alto still have pretty low inventory plus a high clearing rate. This market is amazingly bifurcated.

2116 Roosevelt Ave, Burlingame was bought in 97 by Lorene Jew for $525K, and subsequently passed over entirely to Edmund Jew in 2001. I think Lorene Jew must be his mother, and the tax base was transferred along as well.

I know some families pass on their houses to kids just before the valuation hit $1M so as to avoid the death tax. The house is valued at around $1.3M by zillow today.

Incredible, but it appears that yet another Bear Stearns fund backed by mortgage securities is hitting the skids:

http://money.cnn.com/2007/07/31/news/companies/bear_stearns/index.htm?postversion=2007073118

The WSJ excerpt on Calculated Risk claims:
Unlike the two other Bear funds that are being closed, this fund is not leveraged. Yikes.

OO,
Does a day go by when you don't use propertyshark? I admit I am addicted as well (great for checking out "suspicious" Craigslist ads). Paint still drying slowly in the fortress. Any insights into Crapertino's median drop last month?

EBGuy,

I am sad to report that my usage of propertyshark has gone down considerably, I only check up whatever properties that I come by to verify data :-)

I haven't been keeping track of price in Crapertino. My simple way of tracking is to look at listings and pendings. However, if we continue to have a few more days like last Friday, the market sentiment is bound to turn in the fortress. It is pretty clear to me that Evergreen, Gilroy, Morgan Hill, aka the outlying BA are breaking down due to the lack of credit. The fortress cannot possibly live out of a vaccum, at some point these buyers will wake up as well.

HARM,

in the Depression gold was not liquid, because it was illegal to use as money. This could happen again I suppose, so even if you could hoard gold bullion, unless you are elite international who already has it out the country, you wouldn't be able to use it. So what good would it be?

Each time I sign the customs declaration I notice that along with the $10K worth of cash, you hafta report moving 10K of gold across the border, too.

What do you and Randy H think about something like this happening again if the dollar collapsed?

Another accidental landlord here in fortress Marin.

Probably 7 months ago I blogged about how our neighbors were trying to sell their house as a secretive pocket listing. After 2-3 months of that they put it up for sale. They paid just over $1mm exactly 2 years before moving in. They did a *ton* of inside work on the place. Blah blah, all top of the line appliances and such. They weren't flippers. They had a baby, and being a home smaller than large mobile-homes where I grew up, they probably thought they needed to move, trading-up.

They bought a new place, vacated, staged, etc. They listed about $400K over their purchase price. Not bad, $200K per year just for sitting there. In fairness, they probably did put about $80K-$100K into it.

Weekend after weekend it was held open. The price came down, and down and down. It's right back at exactly 2.5% over their original purchase price, and surprise of surprise, it's now got a big "lease option available" sign plastered on the garage and they're looking for renters.

Price stickiness in action. They won't sell below asking, hell or high water (luckily both seem to be coming soon). I peeked at their title a while back. They'll have to rent it out at about $6800K/mo to break even even ignoring all their expenses and such. LOL! We rent a house 3X larger a couple houses up for about half that. Good luck, FB accidental landlords.

sybrib

If you have gold during a crisis that bad you will either

a) not use it because you'll be smart enough not to try, or
b) not use it because someone else will take it from you after you do try

Gold is probably only good for a bribe to get you on a ship and out of the country type of thing. Trouble is, during such a meltdown, there probably aren't any other countries worth going to that would welcome your arrival.

I don't worry about another Great Depression. It always *could* happen. But it's not very likely. Other terrible things are much more likely, and more worthy of our worry.

AP
J&J to Cut Up to 4,820 Jobs on Drug Woes
Tuesday July 31, 8:48 pm ET
By Linda A. Johnson, AP Business Writer
J&J to Cut Up to 4,820 Jobs, or Up to 4 Percent of Its Work Force, As Key Drugs Flounder

http://biz.yahoo.com/ap/070731/johnson_johnson_restructures.html?.v=21

In a statement late Tuesday, Johnson & Johnson-owned Alza Corp. said it will close its Mountain View, Calif. office and eliminate about 600 jobs. About 200 employees working in Mountain View will be transferred to La Jolla, Calif. and other Johnson & Johnson offices.

"This is what you would expect, this type of retrenchment," given the safety questions, looming generic competition and other problems facing J&J and rival drugmakers, said analyst Steve Brozak of WBB Securities. "Woe be it to the company that doesn't realize it sooner rather than later."

......

hmm, speaking of drug cos, anyone seen 'sicko' yet?

Hey DS, did you see this:

http://preview.tinyurl.com/3cz4je

Looks like Australia is not immune to the fallout.

Randy H says:
They won’t sell below asking, hell or high water (luckily both seem to be coming soon).

Speaking of mental accounting, the thing is that a lot of money disappears in transfer costs on purchase, as well as interest to the bank on the mortgage every single month, which is what I think Randy was alluding to earlier -- people aren't really factoring in the 'dead money' of interest payments when they sell, or even calculating it, so it's really written off money also. So to take a loss or 'break even' at sale time on the last asking price doesn't take into account the further effect of inflation, closing costs including agents' fees and transfer taxes, ongoing property taxes and rates, or interest payments, except that all these factors seem to exercise a constant 'ratchet effect' in a booming market.

Only flippers and some landlords are trying to make huge profits on property resale as a business, the rest are basically paying a premium for the security of ownership, and perhaps 'hoping' for 20% appreciation every year to cover all sins (or expenses)...

Yes, I saw the indirect hits to Macquarie Bank. They don't have direct exposure to subprime markets, but they had a few margin calls on allied funds -- just goes to show how things are interconnected.

I will be interested to see if there is much of a carry trade effect from the US subprime fallout -- and any international credit squeeze or risk reassessment which might occur. The boast of analysts here is that 'relatively few' Oz loans are in the subprime category, so they feel shielded, which to me is a pity of sorts, as I kind of want the whole property market and maybe the sharemarket also to collapse as a lesson to everyone.

OO Says:
[re: Crapertino] if we continue to have a few more days like last Friday, the market sentiment is bound to turn in the fortress.

Home prices in Mountain View, Los Altos, Crapertino are very sensitive to tech-stock prices (and tech jobs) since the current buyer demographic relies heavily on options and ESPP profits. So I would suggest watch for that.

Alza shutting down? Hmm... they have some nice buildings in Mountain View, right next to the Googleplex.

SP

this was the article in the tabloid daily telegraph, another murdoch paper -- check out the front page of their website, it looks like E! weekly...

MacBank shares hit by US crisis | The Daily Telegraph

I've been blogging all over the Tele now given that they allow reader 'feedback' on just about every story. Can't resist...

Why do so many smart people have so much faith in regulation? It's been the bane of our existence.

A little regulation may work out well, if it is local and preferably temporary. However, it most often produces a worse result than the free market over time. This is most true for national regulation that one can't easily escape.

The basic issue comes down to choice and adapting to change. Regulation by definition is designed to limit that.

Now I'm not saying never have regulation. Rather, it should be used most sparingly. The problem in these credit markets is not lack of regulation. It is the government support of the large speculators that allows this to grow out of proportion.

ADP Employment Report for July is out

Private Sector jobs up 48k vs last month 128k

Add another 25-30K government jobs. That should give the number for friday.

Randy H,

Absolutely hysterical "accidental landlord" story. Keep us posted on that situation. I'm sure the neighbors just love the "lease option available" sign hung out like so much dirty laundry as well.

Why do so many smart people have so much faith in regulation? It’s been the bane of our existence.

A little regulation may work out well, if it is local and preferably temporary. However, it most often produces a worse result than the free market over time. This is most true for national regulation that one can’t easily escape.

China is a great example of what can happen with less regulation.

Spectator Says:
August 1st, 2007 at 4:08 am
"Why do so many smart people have so much faith in regulation? It’s been the bane of our existence."

I don't understand comments like this. Just a blanket assertion with little to back it up other than an immediate eqivocation in the next paragraph. We enjoy an incredibly safe standard of living which gives us the luxury of dwelling on the notable failures, and mistakes.

With no regulation there is a good chance you or any one of us would be dead from anything from food contamination to medical concoctions. These deaths were very common in the 'golden age' of little state intervention in commerce. Our society has finally evolved to the point where the optimum balance is where government sets boundaries and standards, and the free market then allowed operates to everybody's betterment.

changed tense midstream, sorry, 'then operates to everybody's betterment."

The last 20 minutes surge of 180 pts going from negative territory to positive 150 was most definitely an act of PPT.

Why would anybody, with absolutely no news to cheer about and plenty to lose sleep over, plunge in when the whole day was clearly a zig-zag, tug-of-war territory?

Will the PPT buying fund count towards the M3 growth?

@Malcolm,

Agreed. I think the problem with discussing government "regulation" in general is that most people tend to mentally equate the term REGULATION with SUBSIDY.

Everyone,

Just to be completely clear, let's review our definitions here:

REGULATION:
Government setting ground rules and basic operating limits for "free markets", so they will operate in a socially beneficial way that (hopefully) discourages fraud, theft, coercion, cartels and information hiding, while encouraging "fair" competition that occasionally allows even small, non-politically connected players to succeed.

Examples: Sarbanes-Oxley, Glass-Steagall, OSHA, FDA food inspection, child labor laws, immigration enforcement (haven't seen too much of the latter lately).

SUBSIDIES:
Government picking market "winners" or "losers", either directly, by paying certain industries/companies large sums of taxpayer money, awarding no-compete federal contracts, or indirectly, by giving that industry preferential tax breaks/credits.

Examples: oil & gas and corn/ethanol/sugar subsidies, non-negotiable Medicare drug prices for big pharma, no-bid military contracts for Halliburton/Bechtel, tax breaks for RE flippers.