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Monday, March 12, 2007

Tanta: Credit Suisse "Not drinking the Kool Aid"

by Calculated Risk on 3/12/2007 06:19:00 PM

CR Note: To put the title into context, last December during the Toll Brothers conference call, Ivy Zelman asked CEO Bob Toll:
"Which Kool-aid are you drinking?"
From Tanta:

Ivy Zelman and several colleagues at Credit Suisse have put together a very big and highly detailed equity research report called “Mortgage Liquidity du Jour: Underestimated No More,” which unfortunately is not available on the free internet. Although the title may suggest otherwise, the report is not really about mortgage credit issues; it is an attempt to look at the rapidly deteriorating conditions in the mortgage market for their impact on homebuilders, which are the equities Zelman covers. (Sure, CR basically has already done exactly this analysis, but Zelman has the advantage of access to databases and CSFB’s mortgage industry analysts.) The upshot is that Zelman is not drinking the kool aid that the problems are limited to subprime only, or entry-level housing only, or are going to be over any time soon.

First, the report looks at overall recent trends in the large categories of general credit quality (prime, Alt-A, and subprime):

See document here. Just the leads are in this post to let the reader find the text.

The overall share of prime conventional loans . . .

The report then summarizes the current situation of guideline tightening and regulatory changes that are contracting the mortgage market (a familiar list of items to CR readers). It concludes that

[T]ightening liquidity puts current builder backlogs at considerable risk ...
Moving beyond changes in the origination market, the report looks at issues of performance of the current mortgage book for its further impact on new home sales:
We estimate that there are approximately 565,000 homes in the foreclosure process...

Finally, the report turns consideration of this data into a set of projections of the effect on new and existing home sales:

In our base case, we assume that 50% of the subprime market is at risk, . . .