by Tanta on 9/24/2007 02:34:00 PM

Ye Gods. That's almost as bad as laundry in the backyard.

The Wall Street Journal treats us to "The Invasion of Renters." I for one am unable to determine how far my leg is being pulled here, or how seriously this reporter is taking his own story. We begin with the familiar narrative build-up:

Mark Spector was happy with his new neighborhood. Then the renters started moving in.

In 2004, Mr. Spector and his wife, Deanna, paid $350,000 for a six-bedroom house in Bridgewater, a new development in Wesley Chapel, Fla., about 25 miles north of Tampa. They moved into their home and looked forward to meeting their neighbors.

Then Florida's once-feverish housing market started to cool. Investors who'd bought a large percentage of the properties in Bridgewater found they couldn't flip them for a quick profit, and brought in tenants, instead. By last year, Mr. Spector estimates, close to half of the residents in the subdivision of 750-plus homes were renters.

I have no idea how Mr. Spector can keep tabs on the occupancy status of 750 homes; I'm just glad he isn't my neighbor. Anyway, you're wondering what happened next, right?

The result, Mr. Spector says: overgrown lawns, drug deals in the park and loud parties in the "frat houses" down the street. "You'll see some driveways with a dozen cars parked in the driveway and on the grass," he says.

So, basically, we don't like abandoned homes, we don't like unsold homes, and we don't like renters. We also don't want to drop our sales prices so that those homes can be sold to owner-occupants. I am torn between wondering how bad those parties really are--as if owner-occupants never have parties that involve more than 12 parked cars--and wondering what people expected in the no-doc mortgage frenzy. Anecdotal evidence suggests that at least some of those no-doc loans involved drug money laundering to start with. How renters could be worse news than the owners is hard to fathom.

The extent of the problem is also hard to get a grasp on:

In another manifestation of the housing slump, thousands of property owners across the country are now renting out homes they cannot sell. As a result, developments and condos that once were largely owner-occupied are filling up with renters who some neighbors say are less engaged in their communities and less concerned about maintenance.

"Thousands"? Across the whole country? How many thousands?

I don't know, but I do know that mixing horror stories of drug deals and criminal complaints with stuff like this is not winning sufficient sympathy from me:

Denver, Colo., resident Neval Gupta says that when his 63-unit condo complex began running into problems as the number of renters grew, the board stepped up enforcement of its rules, including bans on storing bicycles on balconies and doing auto repairs in the parking garage. "We really crack down on the owners now to be accountable for their renters," says Mr. Gupta, the president of the condo board. "We do have a problem with some owners who put any renter they can find in there."

Mr. Gupta and other residents say such vigilance has helped cut down on some problems. But it has also created new ones. Craig White, who bought his unit as an investment and rents it out, says his last tenants left when they got tired of being "harassed" by over-zealous owner-occupants. "If you put your bike out [on the balcony] for a day or two, you're going to get a phone call," Mr. White says.

Just exactly when did "auto repairs" become a problematic thing to do in a garage? Are we really talking about someone blocking access with a major engine rebuild, or just some poor sap topping off the washer fluid? Do you trust anyone who has convulsions over a bike on a balcony to tell the difference?

Of course, plenty of renters cut their grass, take in the garbage cans and turn down the music at 9 p.m. And not all homeowners are model neighbors. Denise Bower, of Community Management, Inc., which manages 122 developments around Portland, Ore., says renters are often more responsive to complaints because they know they run the risk of losing their leases if they don't. "I have more problems with owners, by far," Ms. Bower says. "They get stubborn."

No, really? Might that stubborness be why some of these owners "have to" rent the place? Can't get more than what you paid in 2005?

by Tanta on 9/19/2007 11:30:00 AM

To supplement our regular reporting on MMI (Muddled Metaphor Index), we present our inaugural post on Mountain-Molehill Befuddlement Syndrome. MMBS is characterized by an inability to resist making a front-page story out of anything with 1) "mortgage-backed security" in it plus 2) one quote from some hedge fund guy (whose position is disclosed only in dollars, not in, like, who's getting shorted in the swap market). It's probably incurable, but we fight the good fight here anyway. Call us Quixotic.

Karen Johnson of the Wall Street Journal has a bad case of MMBS:

When fruit-spread purveyor J.M. Smucker Co. started buying mortgage-backed securities in 2004, they seemed like a safe way to diversify some of its investments.

Now, however, that asset class is in a bit of a jam.
Shares of banks and brokerages have fallen sharply since the markets cooled for commercial paper and other securitized debt that might hold mortgage-backed loans. But they aren't the only players with home-loan-related holdings.

In recent years, Smucker joined the ranks of other nonfinancial companies such as Garmin Ltd., Microsoft Corp., Netflix Inc. and Sun Microsystems Inc. by investing in what had been viewed as relatively safe investments that produced slightly better returns than cash and government bonds -- and could be sold quickly if needed. Many of these companies are cash-rich, looking for a secure place to park their millions. And none are expected to cash out any time soon.

The issue for investors is how these companies determine the "fair" value of their mortgage-backed securities in the current environment, and whether they are telling the whole story about how easily these assets can be liquidated -- and for how much.

"It concerns me from the standpoint of transparency, whether the cash stated on the balance sheet is a true representation of the cash available to the company," said Jeffrey Diecidue, a hedge-fund manager at UCA LLC in Short Hills, N.J., who has less than $100 million in assets.

Oh, man, this is just not sounding good. Jelly makers hiding the sticky details of MBS holdings. According to some guy who runs a little bitty hedge fund in "Short Hills."

You might as well get off the edge of your seats here, folks.

The amount of mortgage-backed securities owned by nonfinancial companies as a proportion of their total assets is low, and some, like Smucker, say they invest in only highly rated loans. But in the current environment, just saying investments have high credit ratings gives investors little comfort. As the traditionally staid commercial-paper market has shown recently, even triple-A-rated debt can be backed by subprime loans, causing investors to balk, prices to fall and trading to seize up.

At the end of July, Smucker had $41.5 million in mortgage-backed debt classified as noncurrent marketable securities available for sale, which are assets the company intends to sell for cash if it is needed for future operations. While that debt is just 1.2% of Smucker's total assets, it makes up 22% of the company's total marketable securities and 100% of its noncurrent marketable securities.

Hoooo-eee. $41.5 million. 1.2% of assets. You get bonus points here if you know that "noncurrent" in this context has nothing to do with performance. And double-extra bonus points if you have any idea why the metric of percent of noncurrent marketable securities means anything important, useful, or sinister. If you enjoyed the slide from "investors in Smuckers, Inc." to "investors in MBS," vis-a-vis who is balking about what, you win the whole PBJ.

Other companies with mortgage-backed securities, including Biomet Inc., Microsoft, Novell Inc., Netflix and Sun Microsystems, declined to comment. Semiconductor maker LSI Corp. didn't respond to requests for comment.

John Olson, chief financial officer of memory-chip maker Xilinx Inc., said the company buys only diverse high-grade securities and no collateralized debt obligations, or CDOs, which are debt pools that can carry triple-A ratings while still being backed entirely by subprime debt. "Fortunately, our treasurer was smart enough to know that CDOs aren't always what they say they are," he said. Mortgage-backed securities make up $24.3 million, or 2.5%, of Xilinx's $963.8 million in short-term investments.

Still, complicated investments have hurt other companies in the past. In 1994, for instance, Procter & Gamble Co. sustained heavy losses from derivatives on its balance sheet and sued its financial adviser, Bankers Trust, for selling these complex contracts to the consumer-products company.

So, the CFO guy says, we aren't holding the complicated ones and we aren't holding derivatives of the complicated ones. Therefore the very next paragraph says . . . "still."

For the moment, investors will pretty much have to take companies at their word when they say such mortgage-backed financial instruments are liquid and their stated fair-value estimates are based on market prices. Most nonfinancial companies classify their mortgage-backed securities investments as available for sale, meaning they aren't required to record changes in fair value on the income statement, which is followed closely by investors and analysts.

Instead, changes in fair value of such securities are recorded on the balance sheet in "other comprehensive income," which affects shareholders' equity but is less of a focus for Wall Street. Those disclosures will begin to change next year, when a new accounting rule kicks in for U.S. companies. This rule, which will first be required of companies with financial years beginning after Nov. 15, calls for companies to provide more information about financial instruments for which they apply fair, or market, values.

For investors like Mr. Diecidue, the rule can't come soon enough.

"The current market volatility in connection with these asset-backed securities presents a conundrum to the investors, because it's harder to know the true book value of a company," he says, referring to the measure of a company's assets minus its liabilities.

Well, you know, if you're worried about it, you could get out the back of the envelope and write down 100% of Smuckers' MBS holdings, which would reduce assets by 1.2%. Then you could go back to worrying about somebody who has substantial enough MBS holdings to get your knickers in a twist over.

Or maybe you could ferret out some "news" about corporate balance sheets that is somewhat less mortgage-obsessed? Nah . . .

by Tanta on 9/09/2007 07:33:00 AM

Having complained rather bitterly lately about the quality of a lot this stuff that passes for "financial advice columns" recently, I'm happy to have the opportunity to draw your attention to Michelle Singletary's column, "The Color of Money," in my hometown rag the Washington Post. Singletary's stuff is almost always useful, informed, and no-nonsense in attitude.

The opportunity involves a follow-up to my great sprawling post the other day on mortgage "orgination channels." Singletary writes about the dreadful "net branching" practice:

In a relatively new arrangement, some skirt the law by paying to become part of a "net branch" operation. Net-branching is similar to franchising. It allows individuals to operate their own mortgage loan origination branch using the mortgage-lending or broker license of the branching company. Individuals get assistance in running their businesses and gain access to a network of lenders. . . .

The authorities have stepped up their enforcement actions against operations that do business with unlicensed mortgage brokers, loan officers or loan originators. Most recently, 10 states took action against Apex Financial Group, also called Apex Mortgage. Apex was doing business with multiple unlicensed entities, leaving consumers unprotected, the states allege.

One person who worked with Apex was Frederick C. Lee Jr., founder of Financial Independence Group and other mortgage companies, whom I wrote about in an earlier column. Former insiders, with knowledge of the inner workings of Lee's multi-state mortgage operation, said he has assembled a network of people who arrange mortgages, sometimes through net-branching, even though the officers are not properly trained or in some cases licensed as required by the states.

In an interview, Lee denied that he or his company was involved in facilitating mortgage loans. "I'm not a mortgage guy," he said.

Yet loan documents I obtained suggest that Lee is acting as a mortgage broker. In one case, a $504,000 residential loan in Maryland lists North American Real Estate Services as the broker. Lee's cellphone number is listed as the originator's contact number. Lee is not licensed as a mortgage broker in Maryland.

by Tanta on 9/07/2007 08:23:00 AM

This, by Michael Lewis of Bloomberg, is hysterical. Hat tips for the dozens of you who sent me the link.

There's a reason the rich aren't getting richer as fast as they should: they keep getting tangled up with the poor. It's unrealistic to say that Wall Street should cut itself off entirely from poor -- or, if you will, ``mainstream'' -- culture. As I say, I'll still do business with the masses. But I'll only engage in their finances if they can clump themselves together into a semblance of a rich person. I'll still accept pension fund money, for example. (Nothing under $50 million, please.) And I'm willing to finance the purchase of entire companies staffed basically with poor people. I did deals with Milken, before they broke him. I own some Blackstone. (Hang tough, Steve!)

But never again will I go one-on-one again with poor people. They're sharks.

Do I need to dredge up the old posts from the days (a mere few months ago) when "Subprime Is About Helping The Poor" was baloney du jour? Or do you all still remember that as vividly as I do?

by Tanta on 9/07/2007 07:18:00 AM

I thought I knew the answer to that question, roughly, but twice in the last two days I've seen a number thrown around that surprised me. This morning it was The Morning Call, "Survey: 33 percent of home loans didn't close last month," the first paragraph of which sayeth:

A third of home loans originated by mortgage brokers failed to close in August as investors shied away from riskier borrowers, a new survey says.

Oh. So it's not 33% of home loans, it's 33% of brokered home loans. And how many is that?

Mortgage brokers account for about one-third of total mortgage originations, and have originated a larger share of loans to riskier borrowers, so the percentage of failed loans in the entire market may be smaller.

Oh. A third of a third failed to close. Or, roughly, 11% of "home loans." Which makes a less impressive headline, for sure.

But what's with that one-third of mortgages being brokered? I seem to recall that back in the glory days, when brokers wanted to take more credit for their part in the "economic miracle," the number was a bit higher. So I just started surfing.

McClatchy, July 5 2007:

Mortgage brokers, who originate up to two-thirds of home loans, have exploited their lack of federal regulation to loosen lending standards in ways that sparked today's high mortgage-default rates among borrowers with weak credit.

Baltimore Sun, August 30 2007:

Some states are looking to require that mortgage brokers act in the best interests of consumers. Roughly two-thirds of mortgages are originated through brokers, and consumer advocates say some steered borrowers to high-cost loans or deliberately excluded real estate taxes and insurance escrow to make mortgage payments look more affordable.

National Association of Mortgage Brokers, May 31 2007:

The National Association of Mortgage Brokers is the voice of the mortgage broker industry with more than 25,000 members in all 50 states and the District of Columbia. NAMB provides education, certification and government affairs representation for the mortgage broker industry, which originates over 50% of all residential loans in the United States.

National Mortgage News, undated:

In 2006 loan brokers using table-funding (the wholesale channel) accounted for 26% of the $3.267 trillion in residential loans originated in the U.S., or $849.4 billion. Brokers and correspondents (correspondents are depositories or mortgage bankers using warehouse lines) together accounted for 62% of all loans produced, or $2.02 trillion. In 2005 retail accounted for 43%, wholesale 27%, and correspondent 30%. These exclusive survey figures are courtesy of the The Mortgage Industry Directory and The Quarterly Data Report.

Mortgage Bankers Association, September 2006:

for the market as a whole in 2004 and 2005, 49-50 percent of loan originations were through a broker channel, 42-45 percent through retail originations, and the remainder through direct marketing channels.

A problem here seems to be difficulty in distinguishing between a "broker" (who has no money, basically) and a "correspondent" (who has enough money to close the loan and disburse funds). The problem is overlap: Correspondents originate brokered loans and then sell them to "wholesale lenders," who also themselves originate brokered loans. It's a big and complex food chain and double-counting as well as non-counting are chronic problems.

Why should we care? Well, besides wanting some reality check on that eye-popping statistic that started all this rumination, I'd like to know if broker market share is truly shrinking in the backlash. I'll keep you posted if I find, um, consistent information.