More Mortgage Messes Means More Panic

Elaine Meinel Supkis

Even though global trade is still unbalanced and is getting more unbalanced, the liquidity in the financial markets is drying up rapidly. But I would suggest, this 'liquidity' is still very much fluid and we will see its fluidity in the future as it massively flows out of certain countries and towards other goals. The destination of this money constantly shifts and the US has very little control over this because we are a deep debtor nation, not an excess-financing nation. Meanwhile, more funds based on real estate loans go under and not only in America but in Europe. The collapse is expanding, not contracting. Home Mortgage is the latest to go down the tubes into bankruptcy.

From Bloomberg:

Union Investment Asset Management Holding AG, Germany's third-largest mutual fund manager, halted redemptions from its ABS-Invest Fund after clients pulled 100 million euros ($137 million) in the past month.

The Frankfurt-based company also closed the 950 million-euro fund to new investments, spokesman Markus Temme said today. The fund, sold to institutional investors across Europe, has about 6 percent of its assets in securities related to subprime mortgage loans, Temme said.

The fund has taken the steps ``because of illiquidity in the market,'' Temme said in a telephone interview today.

6% of poisonous little tranches isn't so big a deal, right? The entire philosophy of 'spreading risk' by soliciting really bad loans to really bad credit risk people was supposed to not backfire and destroy all the entities where these stupid schemes are parked! They were supposed to enrich everyone while sitting quietly in various crooks and crannies and if they died and their corpses began to stink, the theory said, the sweet smell of the flowers of the surviving funds would cover up the stench.

But as person who deals with the dead bodies of animals a lot, leave a tiny skunk out in the sun for 24 hrs and then try ignoring the stink! The nature of investing is, one must have 'trust'. This is why our fiat dollars hopefully chime, 'In God We Trust!' even as the guys running the Federal Reserve and the Treasury are very untrust worthy! Once a fund loses investor trust, it dies. So attaching bad credit schemes to healthy credit schemes means both die as investors lose trust and run to other schemes.

All funds and systems are in competition with each other and so long as there is some place to park one's savings, money will flow there. One place, the last resort destination, is gold. The price of gold has been steadily climbing as the other systems fail to bring in good returns. The other place money is flowing is into government bonds. The danger there is national bankruptcy or national inflation like in Zimbabwe where it is raging at 10,000% which is Weimar Germany levels. When this happens, people simply pick up themselves and move to other lands, seeking safety or if they are powerful enough like Germany, they start a massive looting expedition which can be called 'World Wars'.

From Bloomberg:

The number of Britons having their homes repossessed rose to the highest since 1999 as interest-rate increases hobbled subprime borrowers.

Lenders foreclosed on a total of 14,000 properties in the first six months of the year, 30 percent higher than a year earlier, the Council of Mortgage Lenders said in London. The lobby group for U.K. home-loan providers said it couldn't give a subprime breakdown.

So it isn't just the US having a big,bouncy bubble bust. It isn't just the US that is seeing a big, black darkening of the futures of various funds, this is turning global. The happy news that Europe might escape the contagious panic in the US proved to be a false hope. And how could they? The US isn't Argentina and when Argentina went down the tubes to bankruptcy, this caused global repercussions! So of course, our present panic will certainly have huge side effects all over the planet!

From the Independent:

The pubs giant Mitchells & Butlers has called off a £4.5bn joint property venture with the Iranian tycoon Robert Tchenguiz, becoming the latest victim of the crisis in the debt markets.

The owner of the All Bar One and O'Neill's chains yanked the deal after more than two months of preparation that would have seen it sell a 50 per cent stake in its portfolio of 1,300 pubs into a highly leveraged venture with Mr Tchenguiz's R20 vehicle.

Its chief executive, Tim Clarke, said the plan was torpedoed by a sudden rise in credit spreads, which determine the premiums borrowers pay for their loans on top of the basic interest rate. He said: "To all intents and purposes we were ready to go on this transaction but terms moved against us in the debt markets at the last moment." Mitchells & Butlers was also forced to eat a £60m charge related to hedging positions it had put in place to lock in favourable rates.

This is a classic sign of global financial collapse. When just two or three top financial national systems flounder and begin to go negative, this can cause a classic cascade event. Seeing how England's hot real estate market is now acting exactly like the American market bodes ill for the future. The US news still tries to see the bright side of a big thunderstorm of destruction. Every little tat of 'this is going UP!' is hammered on while the grinding news of the collapse of the biggest segment of our economy, housing, continues. The entire boom caused by Greenspan dropping interest rates to 1% was focused on bidding up the value of real estate assets. This was a tragic historic mistake but the US/UK empires wanted to celebrate our 'wealth' in the twilight of our collapsing industrial bases.

Watching all these little schemes go belly up is amusing but it isn't a joke. Because the elemental force of emotional panic will soon set in as everyone realizes the party is over.

From Market Watch:

Troubled lender American Home Mortgage Investment late Thursday said it's going to lay off over 6,000 workers and stop taking mortgage applications as it struggles to avoid bankruptcy.
American Home (AHM :1.45, -0.03, -2.0% ) , which was the country's tenth largest mortgage lender, said it's cutting its employee base from over 7,000 to approximately 750, but will maintain its thrift and servicing businesses.

So, they are firing 90% of their workforce. The employment numbers are shouted from tower to fen but the reality is, the higher-paying jobs are vanishing or the pay of wealthy unions is dropping like a rock. Real estate sales makes a lot of money for people. Since agents are paid via a percentage, the higher prices climb, the bigger the paybacks for everyone involved in sales! So when prices drop and sales fall, they all get hammered very badly which is why housing collapses cause tremendous mayhem in the entire economy and in the case of America, the world's biggest export destination point, causes a collapse of world trade. So this news is another nail in the coffin of the world's biggest liquidity swim fest.

From World News:

Market plunges in $50b wipeout

Canberra Times

The Australian stockmarket crashed yesterday, suffering its largest one-day fall since September 2001 and giving the Reserve Bank Board another key issue to consider in its interest rate deliberations next week. In the wake of the sharp drop on Wall Street and news that Australia's most successful investment bank Macquarie Bank faced big losses on two of its investment funds,

This sort of mirrors the bridge collapse: one girder (the US subprime market) collapses and then whoosh, the entire edifice falls. The US has been the only entity that can cause global recessions or depressions for the last 100 years. This is because we are the biggest empire and the biggest market. This unfolding mess is 100% made in the USA thanks to our reckless spending habits.

From Bloomberg:

The perceived risk of owning bonds of mortgage lenders Countrywide Financial Corp. and Washington Mutual Inc. rose on concerns about deepening losses from risky home loans, according to credit-default swap traders who bet on creditworthiness.

Credit-default swaps based on $10 million of Countrywide's bonds jumped as much as $75,000 to $260,000, according to broker Phoenix Partners Group. The contracts are trading at the highest levels since at least July 2003, the earliest prices available, according to Credit Suisse Group. They rebounded to $213,000 as of 5:05 p.m. Credit swaps of Seattle-based Washington Mutual, the biggest U.S. savings and loan, rose as much as $25,000 to $115,000 and later was quoted at $110,000.

All the pretty little risk-defying mechanisms built up like a giant trapeze are proving to be pretty poor nets as various trapeze acrobats miss their swings and go plummeting to earth. The frantic attempts at preventing risk from hammering investors are going to continue but investors don't like crashing to earth and losing everything so they are running from this particular circus tent and this is why 'liquidity' has vanished from the Big Top Tranche markets.

Anyway, I am always filled with curiosity about failing corporations and it is time to take a gander at this dead duck, American Home Mortgage, here is their introduction to their web page:

In September 1990, former Security Pacific Financial Services CEO Jim Konrath and former venture capitalist Ray McKewon launched Accredited Home Lenders, with the goal of becoming the bestmanaged non-prime lender in the United States. Starting Accredited above a San Diego automobile repair garage, the two entrepreneurs had a business plan, financial acumen, and a vision of how to build a premier, non-prime mortgage company.

Accredited originated both retail and wholesale loans using the personal funds of its founders. By obtaining its first warehouse line in 1994, and shortly thereafter receiving a capital infusion by two venture-capital concerns—Crosspoint Venture Partners and Enterprise Partners Venture Capital— Accredited acquired greater access to capital and the ability to double its loan production at the time.

Joseph Lydon, President and COO, a former Ford Consumer Finance executive, joined Accredited in 1997. Adding depth to the seasoned management team, Accredited has experienced steadily increasing profitability under his leadership. Accredited completed its IPO in February 2003.

Right off the bat, the 'company history' left out a lot of information. A peek into their financial reports show that the company has not made increasing profits but has been floundering for over a year. Indeed, it amused me to see their regular reports ceased in early 2006!

Their history at their web page is rather amusing. They evidently stopped the clock a year and a half ago! There was no further news, no new timelines, the IPO information is old. Very obvious, they wanted to keep people in the dark.

Here is their last report which is over a year old. Their adjustable rate mortgages were running at a hysterically high 70+%. All secure buyers who are sane avoid this like a plague. Especially when mortgage rates were at a record low. The adjustable rates offered really low rates but everyone knew this wouldn't last and that they wouldn't drop lower and when the Fed began hiking interest rates, the only people stupid enough to get these adjustable loans were desperate buyers who didn't qualify to buy grossly overpriced huts in Stockton, California or in Miami Beach.

This meant that all buyers of houses using adjustable mortgage rates were lousy credit risks! Or grossly over-extended buyers who were egged into buying housing in a dangerously overheated market! And so nearly every mortgage written up by AHM since the end of 2005 when rates began their rapid climb, are nearly universally people who will probably default in a declining market value situation since they can't sell their overpriced homes to other fools wanting adjustable rates!

Note how never, even in the face of obvious looming bankruptcy, the analyst report recommended investors 'hold' rather than sell. This is constant. I doubt I have ever seen a bankruptcy here the recommendations were 'sell' in the month before closing doors.

Here is their list of awards and other nice landmarks in their climb upwards.

2006 Acquired Aames Investment Corporation (NYSE: AIC), a 52-year old non-prime mortgage originator based in Los Angeles in a merger completed October 1st. Accredited’s retail footprint grows from 43 branches to 115.
Distinctions

2002 Ranked by Inc. as one of America’s Fastest-Growing Privately Held Companies in 2000 and 2002.

2002 No. 11 on the San Diego Business Journal’s list of Fastest-Growing private Companies in 2002; and No. 13 in 2001.

2003 Top-performing IPO of 2003, on a percentage basis.

2004 San Diego City Council declared Tuesday, March 30, 2004, "Accredited Home Lenders Day" in recognition of the Company’s $275,000 donation of a brush rig to the Fire-Rescue Department. The gift was inspired by employee volunteers during the wildfires.

2004 Received San Diego Business Journal’s Starcom Award, March 24, 2004.

2005 Recognized with “Award for Workplace Excellence” by Peter Barron Stark & Associates. Accredited has received this award in each of the years the survey was conducted: 2000, 2001, 2003, and 2005.

2006 Award given by the Association for Corporate Growth for "Outstanding Corporate Growth", June 7, 2006.

Outstanding growth award in 2006? I looked at the actual data and it clearly shows a rapid deterioration in profits and a huge climb in costs. Here is their discussion about the downside of their little business:

The competition for bad credit risks went hog wild during 2005 and became hysterical at the beginning of 2006. At that point, prison gangs were contracting on houses while behind bars in Colorado, for example. Everyone who could con anyone were infesting the system as increasingly frantic mortgage operations sought out customers. This meant higher and higher interest rates but by mid-2006, the default rates were rapidly climbing, too. And I would suggest the defaults overtook loan growth about six months ago.

Also note how they whine about the core of capitalism. All organizations going bankrupt do this. It is rather funny. But what destroyed the profitablilty of AHM? Let's look at their overhead costs from a year ago:

Talk about out of control! As they struggled to say above the red ink waters, their staff costs soared. And not because of wage hikes even though that was well above inflation. Administrative costs rising by 14% in one year is a bad sign. Advertising (like all those silly ads with dancing characters we so enjoy at all the web news pages?) shot up and cost of operating overhead shot up nearly 25% and they had to hire 20% more staff. This is classic for mortgage companies. They wildly expand in the hopes of somehow making the books show a profit and then collapse which is why their collapses are so dangerous and has far reaching effects on the rest of the local or if big, national economies.

From Media Corparte News comes more bad news, another mortgage company going down the tubes:

Shares of San Diego's Accredited Home Lenders tumbled more than 38 percent in trading Thursday morning after the company raised concerns about its ability to stay in business in filings with federal securities regulators.
The troubled subprime mortgage lender filed its long-delayed annual report Thursday with several references to its ability to continue as a going concern. Most of the references expressed worry that banks which provide credit lines to Accredited – used by the company to originate mortgages – could require more collateral or stop providing the funding, which would squeeze the company's ability to say in business.
*snip*
The company has a buyout offer on the table. An affiliate of Lone Star Partners, a Texas private equity firm, has offered $15.10 a share for Accredited.

But Accredited's shares have traded well below the tender offer price since the deal was announced two months ago, highlighting investor fears that the the sale will fall through or will be renegotiated at a lower price because of deteriorating conditions in the subprime industry.

The deadline for shareholders to tender their shares is Aug. 14, although it could be extended.

They are going fast, aren't they? But if you look at their records, it is obvious this decline isn't new news, the trajectory was obvious last year. Those of us online who called the crest and the decline of this market last year (patting my own back) can now see it clearly in all the financial reports these guys have to file. AHM, for example, sought to avoid the bad news by simply refusing to file a report for its investors. This is because the report I cited here from over a year ago was filled with lots of bad news clearly showing a lot of trouble and this was before the housing market began to see huge rises in defaults.

From the NYT:

A bill introduced by Senator Levin would limit “penalty” interest rates to an additional 7 percent above the previous rate. It would also prohibit retroactive penalties and double cycle billing, and it would limit the amount of fees companies could charge customers who exceed their credit limit.

Passing the Levin bill would be a good start. But Congress needs a comprehensive approach to this problem. Lawmakers need to ban deceptive card offers outright, strengthen federal oversight and toughen truth-in-lending laws.

A bunch of nasty Democrats like someone named 'Clinton' joined the GOP when they passed the 'Enslave the Debtor' bill two years ago. The lenders could already see the writing on the wall so they paid our corrupt Congress to change the bankruptcy laws so they could get paid no matter what. Of course, you can't get blood from a stone but try telling them this! And of course, if more and more people are permanently removed from the loan pool, it shrinks. This means, one can't find customers anymore! And then the credit card companies see falling profits, etc, etc. They were too stupid to figure this out, of course.

From Bloomberg:

Accredited Home Lenders Holding Co., the subprime mortgage company being acquired by Lone Star Funds, cast doubt on the sale and said bankruptcy is possible. The shares lost more than a third of their value.

``Several of our competitors have recently stopped originating loans or sought protection under bankruptcy laws,'' Accredited said in a regulatory filing today. ``We may suffer a similar fate.''

They bid up the stocks of the other dying organization to $15 but then it collapsed yesterday to $3 a share then it rose again, barely. Stocks valued at a collective $1,256,200,000 @$50 a share a year ago has collapsed to $125,620,000 @$5 a share and dropping. A lot of investors are feeling a lot of pain. Will they buy more such stocks in the next 5 years? Are people nuts? Fannie Mae has been madly buying up these crappy mortgages but even they, a corrupt, quasi-governmental half-assed privatized entity, cannot stay afloat with a million holes in their hold.

And the hysteria grows, note this story from Yahoo:

Over the past several weeks, an unaffiliated investment firm and its investment fund whose names include the word "Highland," have experienced financial difficulties. We want to clarify that these situations are in no way, shape or form associated with Highland Capital Management, L.P. or the companies we manage, and in contrast, we believe that our firm, funds and the companies we manage are positioned to perform well in the current volatile markets.

So the lesson here is, be careful what you name yourself. Heh. Highland is such a non-toxic name but this is why someone running a crummy hedge fund decided to use it to disguise their true nature. 'Highland Trust' would be a really good name! And this reminds me that trust funds were one of the poorest performing entities in the 1929 stock market crash.

Culture of Life News Main Page

Comments

[Cato]

Great post Elaine. You really captured the hysterical essence of it all. And another dot connected. Given the U.S. prison population is busy lifting weights and doing real estate deals, now I understand why there are so many houses sitting vacant. Hardest part is finding a lawyer who handles both homicide defense and real estate closings.

[Elaine Meinel Supkis]

And the lawyer has to be a public defender, to boot! But again, look at the US attorney general. Maybe he can do real estate deals behind bars. Both kinds of bars.

[DeVaul]

This mortgage backed security scheme is one of the oldest scams known to humans. It originated in an entirely different area of human endeaver, however. Go to any butcher shop and explain the idea of tranches and repackaging and they will show no sign of surprise. This is old hat to them.

Sausage. No matter how you slice it, it's still bologna.

Once upon a time, someone got the idea of mixing meat scraps that no one wanted to buy in with premium ground beef to sell as sausage. At first, no one noticed. It still tasted like sausage, so the butchers started adding more and more "scraps" and "leftovers" to their sausage and sold it for the same price as real beef. They made a killing doing this.

But then they got careless. People started to notice something was not right with their sausage. Diners became sick and dropped dead. The sausage spoiled faster, smelled funny, and tasted really bad. People began to demand to know what was in the sausage. Once they discovered that the butchers had mixed in livers, stomachs, eyeballs, brains, endless fat, bonemeal, intestines (large and small), ears, noses, bowels, testicles, and anuses, they were outraged and no longer bought any sausage -- not even the good kind.

At the height of the scam, some sausages consisted of 100% meat scraps (i.e. no meat at all).

This is what they have done with mortgages. They mixed rank mortgages with good ones and sold the package for the same price as if the whole thing consisted of prime mortgages.

There really is nothing new under the sun.

[Al]

DeVaul,
now you tell me. been calling that stuff chorizo and eating it most of my life, now I find out I was eating the pork version of subprime mortgages.

[DeVaul]

Sorry Al!

In all truth, the correlation between this latest scam and the older one had just occurred to me.

However, that being said, due take note that not all sausages are... ahem... adulterated(?). The same goes for mortgages. Those that are prime taste mighty good (to bankers at least).

Some exotic ones become delicacies -- like "Blutwurst", for example, which I once had the obligation of eating in front of a German family beaming with pride. (This is where lots of German "Altbier" helps alot).

But woe to the butcher who adds pork brains or cow ears to the pure congealed blood and fat that make up a perfect Blutwurst.

Now that prime mortgages are all or mostly all contaminated, we are seeing the awful consequences of greed and dishonesty.

[Elaine Meinel Supkis]

Good one, DeVaul. Time to eat some hot dogs. (Blech)