Where does the time go… Does anybody really know?
I wonder this after spending the last five years poking at the letters on this grimy keyboard.
It all began with a wild story aptly entitled “An ‘Uh-Oh’ at the Top” roughly 1,825 days ago, only it doesn’t seem nearly that long ago.
In the days, months, and years that followed, I wrote hundreds of scary stories about the collapse of the housing market and the brewing debacle that would sink the nation’s banks.
Of course, not many readers believed these harrowing tales when I wrote them…
But eventually, even the most dire of those predictions came true. Looking back, my only regret is that I was right.
Still, I don’t consider myself a seer on this one — even given my track record. In truth, those were the easiest calls I ever made.
The Big Lie
That’s because one of the great canards in the fallout from the mortgage debacle is the idea that no one in charge could have known that this was going to happen.
Incidentally, canard is a French word meaning “duck”, used in English to refer to a story that is deliberately false or misleading. Its use originates from the old French idiom “Vendre un canard à moitié”, meaning “to half-sell a duck.” In other words, it’s a fancy way to say something is BS.
Of course, the real truth about who might have known is otherwise.
Lots of people saw this coming from a mile away — and most of them knew it long before “subprime” became the word of the day. But for the shark-infested waters of Wall Street, closing the beaches simply wasn’t an option.
The con game went on long after it should have ended — even though everyone knew what lurked beneath the waves. With so much money involved in the game, greed trumps common sense every time.
So when people used to ask me why I got out of the business at its height, I always told them the same thing: The mortgage business left me long before I ever decided to leave it.
And when it all came crashing down, all I could say was: “See, I told you so.”
When you crumple up and throw away 50 years of mortgage wisdom in the blink of an eye, it shouldn’t have surprised anyone that disaster would eventually ensue. In the end, it was only a matter of time…
Putting it Back Together Again
The good news today is the mortgage pendulum is swinging back to where it started.
According to a proposal by the Federal Reserve, lenders would be required to ensure borrowers actually have the ability to repay their mortgages before making a loan to them.
The rule — which is required by the Dodd-Frank financial reform law — is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.
The proposed requirements for what is being called a “qualified residential mortgage” (or QRM) include:
A minimum 20% down
An owner occupied property only
Mortgage debt service to income no greater than 28%
No prior defaults, judgments, or BKs
Only straight 30-year mortgages; no balloon payments, no interest only, no negative amortization
So the bottom line here is what was old is about to become new again.
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Keep in mind these proposed new guidelines won’t exclude loans that cannot meet these thresholds, but they will set the bar in terms of risk retention for all lenders. That ensures each lender has “skin in the game”, since loans failing to meet these requirements will force lenders to retain 5% of the risk in each mortgage they make.
As a result, loans with greater risk will become more costly, making purchasing a home as hard as it was before the train veered wildly off the tracks.
Ultimately, this means fewer borrowers and even lower prices.
This has a coalition of realtors, mortgage bankers, and advocacy groups screaming foul as the guidelines become even tighter. It’s as if they think they can put Humpty Dumpty back together again and just be on their merry way…
If only it were true.
You see, this is one double dip that cannot be stopped.
In fact Robert Shiller, the economist who co-founded the S&P/Case-Shiller index of U.S. home prices, said recently a further decline in property values of 10 percent to 25 percent in the next five years “wouldn’t surprise me at all.” He went on: “In real terms, there has never been a bust of this proportion.”
Where she stops, nobody knows…
More Room to Fall
What I do know is that even after writing this article on homebuilder stocks in 2007, the builders still have room to fall.
This is evidenced by the beating KB Home (NYSE: KBH) took yesterday after it fell by over 13% on very heavy volume when the company said it lost $68.5 million (or 89 cents per share) in the second quarter, compared with a loss of $30.7 million (or 40 cents per share) a year earlier. In all, the company reports building 1,265 homes during the quarter — down 29 percent from a year ago.
Do similar numbers for other home builders make the group attractive at current levels? Well, not hardly, if you take a realistic look at their future numbers…
In fact at this point, they still look like they’re nothing more than dead money value traps — and that’s without taking into consideration the fact that interest rates have nowhere to go but up, the shadow inventory that’s about to be dumped on the market, and persistently high unemployment…
So as Editor Adam Lass recommended back in April, now may still be the time to short housing stocks using put options.
After all, as our own “Options Coach” options can be a great tool in volatile markets as Ian Cooper explains in in this video. I recommend watching it.
As for housing, let’s just call it the gift that just keeps on giving. Five years later, I am still writing about it.
What a long, strange trip it has been…
Your bargain-hunting analyst,
Editor, Wealth Daily