Signup for our free newsletter:

Paulson: The Worst is just beginning for housing... What?

Written By Brian Hicks

Posted February 13, 2008

Paulson’s looking a bit nervous.

A year too late, Hank Paulson now tells us “the worst is just beginning [for housing].” You have to wonder what color the sky is in Paulson’s world.

We knew in February 2007 that a trillion dollars worth of ARMs would begin resetting in October 2007. In fact, here’s what my team and I knew a year ago. It’s just unfortunate that my opinion, and the opinions of smart traders like Peter Schiff, were ignored.

"Truth be told, when it comes to an “improving” housing market, do yourself a big favor. Ignore the mainstream press, and Wall Street hot shots that would have you believing in a housing bottom, or the illusion of priced in lending weakness.

We’re still not nearing a housing bottom, or an improving lending market.

Just ask companies like Lennar, KB Home, and DR Horton, who still don’t see this mythical housing bottom. Or, just ask Mortgage Lenders Network
USA, which just filed for Chapter 11 protection, becoming yet another casualty of the lending market in a slowing housing market.

As for the lending market, we were so bearish on the sector that we recommended that readers load up on New Century Financial (NEW) put options two days before the stock fell $14+. While readers already cashed out with 89% gains on the first half of the position, they’re still holding the second half, watching as the stock craters even more.

Truth… Sub-Prime is Doomed…

Among the worst hit lenders are the sub prime lenders, or those companies that make loans to borrowers with less than perfect or poor credit histories. While sub-prime lenders charged higher interest (two or three points higher than prime lenders) as insurance for the higher risk the borrower represented, rising foreclosures have left the sub-prime industry facing substantial fallout risks.

Sub-prime lenders could offer adjustable or teaser rates to those with bad credit. Loans like this made up 23% of the
U.S. mortgage market in 2006 as compared to the 8% in 2001, according to Yahoo News. And it’s now a big problem as one in five sub-prime mortgages are now ending in foreclosure, according to the Center for Responsible Lending as mentioned by Yahoo News.

The Lending Market has not bottomed… nor has it priced in all negativity.

I’d love to sit here and jump on the bullish housing bandwagon that dominates Wall Street. Really, I would. But I’m not a fan of flushing my money down the toilet.

In reality, the housing market has not bottomed. Sub-prime lenders are doomed. You can continue to listen to the delusional madness pouring from the mouths of Street analysts, and the mainstream press, or you can listen to the homebuilder CEOs and the sub-prime lenders that have gone belly up because of a weak housing market.

It’s your choice. But I’d go with the latter, though.

Even JP Morgan’s CEO, James Dimon, is bearish on the sector, saying, “’Mortgages are the one area of sub-prime lending where ‘we really see something taking place that looks like a recession….’”

That’s just an inkling of the tumultuous future for sub-prime lending. believes “The sub-prime sector still has another year of tough times ahead.” That’s supported by Countrywide Financial, which says, “We’ve got another eight, nine, 10, 12 months of headwinds. You’re seeing 40 or 50 (sub-prime companies) a day throughout the country going down in one form or another. I expect that to continue throughout the year.”

Yet, throughout 2007, Paulson assured us that we were at or near a housing bottom. Bernanke assured us that there were no economic spillovers. And to save us from their wrongful calls, they’re now forced to cut rates, increase our inflationary risk, and tell us not to worry about falling into a recession.