Dave Kranzler explains why the mainstream narrative that subprime lending is contained is patently false. Here’s the details…
I continue to believe that the “lowest hanging fruit” in shorting this stock market is the homebuilders and related stocks. History appears to be repeating, or at least “rhyming” in the housing sector:
Most investors do not realize this, because the majority of traders and “professional” money managers were still in college or b-school during the 2007-early 2009 stock market collapse, but the homebuilding sector actually peaked and began a waterfall decline in mid-2005 (see the chart above).
The propaganda narrative is that this time around the subprime mortgage issuance has been contained by regulation. This is patently false. The subprime mortgage game shifted from largely private underwriters to the Federal Government, starting in 2008. Because the Government is involved, it has been well disguised in a “conforming” mortgage costume based on Federal Housing Finance Agency “requirments.” Well, more like “guidelines” than requirements.
The FHA began offering 3.5% down payment Federally guaranteed mortgages in 2008. Its underwriting market share went from 2% to 20%. Not to be outdone, Fannie and Freddie began to offer 3% down payment, reduced PMI mortgages a few years later. Not to be outdone by themselves, and after Fannie reported a $6 billion Q4 loss and required a $3.7 billion cash infusion from the Taxpayers, Fannie and Freddie raised the DTI limit on conforming mortgages to 50%. If the housing market is healthy, why is Fannie Mae receiving cash infusions? A 50% DTI means that the mortgage applicant requires 50% of its gross monthly income to service its monthly debt payments (mortgage, credit car, auto, etc).
A 3% down payment, 50% DTI mortgage is subprime garbage. It also implies that the FICO score is a farce. Some who requires a 3% (in many cases less) downpayment with a 50% DTI does not have prime credit rating. After the DTI ceiling was raised in December, new mortgages with DTI’s in excess of 45% jumped from 5% to 20% of all mortgage issuance in January and February. This subprime mania in its essence – though not name – and will lead to another massive Fannie/Freddie/FHA/VHA bailout.
All of the signs of the top of the last bubble are re-emerging. Home equity “cash out” loans are soaring again at what is likely peak home prices. According to Freddie Mac, cash-out “refis” are at their highest level since 2008.
We saw how this movie ended the last time around. If you forgot, rent “The Big Short.” A private investment management company in California, Carrington Holding Company, has a mortgage lending facility that will now underwrite and fund mortgages to borrowers with credit scores as low as 500. Carrington will do loans up $1.5 million on homes/condos and home equity cash outs up to $500k. Recent credit events like foreclosure, bankruptcy or a history of late payments are acceptable. This business plan will not end well.
I recently saw a “for sale” in an upper-middle class neighborhood in Denver which advertised, “no money down, lender on site.”
If the market is “hot,” why is this house being marketed as “no money down” and why is a lender at the open house? Is this a Volkswagon “sign and drive” transaction or this is a several $100k home “purchase” at what is likely the market peak?
This is in an area in which the average home sells for over $600k, which means unless the buyer puts down at least $70k, it can’t be backed by one of the Government mortgage agencies (the max loan limit for a conventional mortgage in Denver County $530k – in most areas of the country, the maximum loan size for a conventional Govt mortgage is $453k – Denver County is considered a “high price” area and thus the Government will underwrite a larger mortgage – “guidelines,” not “rules”).
This is the type of home borrowing that occurred in the last couple years of the mid-2000’s housing bubble. That “open house” sign also tells me that the market for homes that can’t be funded without Government assistance is deteriorating.
This housing market is unfolding in an eerily similar manner as the mid-2000’s bubble. Sales volume, prices and rental rates are starting to literally crash in New York City, as I’ve detailed in the last couple of issues. I read an article that said, based on the current sales rate, Miami has a built up a 6-year supply of condominiums. Again, the last time around the bubble began to pop first in NYC and south Florida. Phoenix and Vegas followed those two cities. As I presented last week, the move by Zillow Group to get into house-flipping is the signal for me that those two cities have peaked.
The Short Seller’s Journal provides unique insight to the economic data and corporate earnings – insight you’ll never get from so-called financial “experts.” SSJ then offers ideas every week for making money on this insight. To learn more, click here: Short Seller’s Journal subscription information