Latest Chinese Product Hassle: Crummy Drywall

You might have thought that the issues surrounding sub par Chinese consumer goods had subsided in the wake of all the toy and food scares a year ago.

You would have been wrong.

Edmonton Journal: Sick houses blamed on 'toxic' drywall

Homeowners from several communities in B.C.'s Lower Mainland have joined the flood of callers to a U.S. consumer group investigating Chinese drywall that has allegedly begun to sicken North Americans.
Thomas Martin, president of America's Watchdog, says that in the past two weeks about a dozen Lower Mainland callers have all reported experiencing the same nose bleeds, breathing problems and allergy-type symptoms that have affected homeowners across the U.S.Continued exposure could result in severe health problems, the group says.
"This type of drywall was produced with materials that emit toxic hydrogen sulphide gas and other sulphide gases," says a copy of one home-inspection report obtained by Canwest News Service on an affected Florida home where Chinese drywall was installed.
"These sulphide gases are also alleged to cause serious health conditions and illnesses, such as shortness of breath, dizziness, headaches, fatigue, insomnia, eye irritations and respiratory difficulties."
"It's scary, it's a nightmare. We think we are looking at the worst case of sick houses in U.S. history," Martin said.

Chalk up another risk of buying a house cobbled together in a rush during the housing boom. There's a reason (hundreds, really) why savvy home buyers avoid any home around here built after 2002.

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This Week In Marketnews: Tough Times In Housing Market

Marketnews: Custom Corner: New Home Construction Slowdown Affects Installation Business

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At the heart of the Mortgage Crisis

Below is a dialogue that I had earlier with a friend. We had been discussing television, specifically late night infomercials, when the subject turned:

DH: What I find interesting are commercials for refinancing your house through Countrywide followed by commercials for credit counseling and debt management on the Cartoon Network in the middle of the day.

Me: Yeah, synergistic advertising. It half makes you believe in conspiracies, doesn't it?

DH: It has a certain logic to it, I suppose, and my four year old has a very good idea of how a mortgage works now. The other day she wanted to refinance the house so we could get cash to buy her toys.

Me: What's gotten so many people into the pickle that they're in is that they had the same outlook as your four year old.

DH: No doubt.

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Faith-based mortgage lender denied redemption

Sorry, but faith-based lending ranks right up there with faith-based civil engineering for the title of Most Unsustainable and Probably Dangerous Idea. Would you want to drive over a bridge built by engineers who trust that God will provide?

WSJ: Mortgage WoesTake Toll on Lender With Roots in Faith
While many mortgage brokers screamed through the real-estate boom with blaring television ads and exotic loan structures, HomeBanc Corp. positioned itself as the good guy.
Inside the company, executives opened companywide gatherings and internal meetings with Christian prayers. Every branch office kept a chaplain on call. The company's $365,000-a-year human-resources chief, Dwight "Ike" Reighard, was the founder of a mega-church in an Atlanta suburb. He says he encouraged employees to pray, put others first and become better workers -- and also performed weddings and funerals for employees. "People who never attended church would tell me, you're my pastor," Dr. Reighard said in an interview on Saturday.
But over the past few weeks, as investors fled securities tied to mortgages, HomeBanc's sources of loan funds dried up. Unable to continue originating loans, the company staggered under the burden of its expensive sales infrastructure.
On Thursday, HomeBanc filed for bankruptcy-court protection. It fired most of its 1,100 employees on Friday and is shuttering its 22 branches and 139 kiosks in real-estate and builders' offices, exiting the mortgage-loan origination business and processing no new loans, including ones in its pipeline. Countrywide Financial Corp., of Calabasas, Calif. -- struggling with troubles of its own -- said it was buying at least five HomeBanc branches.

Ah, faith. An amazing number of financial scams, from MLM's to Ponzi schemes (HYIP's, anybody?) proliferate through church groups like pinkeye at a daycare.

I'm not saying everyone who goes to church needs Richard Dawkins and electroshock therapy, but the gullibility quotient certainly acts like a magnet for people who need a steady supply of suckers.

I've got to give props to the former CEO though for dressing up brazen moxie as turning the other cheek:

Mr. Flood, the former CEO whose January severance package was $5 million, plans to start another faith-based mortgage company. He says HomeBanc employees and customers will take what they learned and plant the seeds wherever they land. "When Jesus got on the cross, people at the time thought that he failed because he died and the ministry ended," he said. "But people around him have cascaded it into the greatest movement in history. The company being a financial failure doesn't mean that the work has ended."

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China's mortgage market: the Other Shoe?

From Paul Kedrosky's Infectious Greed comes this disturbing tidbit:

Paul Kedrosky: China Has a Worse Mortgage Problem Than the U.S.

Here's the some inverted reassurance: One Chinese academic told the South China Morning Post today's' that China's mortgage market is in even worse shape than the U.S. sub-prime market.
Yi Xianrong, a banking and finance expert at the Chinese Academy of Social Sciences, said Chinese banks had been lax as they built up 3 trillion yuan ($396.2 billion) of mortgage lending.Defaults in the U.S. subprime mortgage market now total about $200 billion, on some $1 trillion of loans, according to Credit Suisse."The quality of housing loans are much worse than the subprime loans in the United States," Yi was quoted as saying by the South China Morning Post."At least there has been a credit check system (in the United States) but in China anyone can borrow money to buy a house."

If the Chinese banking industry has the same kind of oversight and controls in place as their manufacturing sector, then they're completely screwed.

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The Epicurean Dealmaker does it again

And by "does it again" I mean that TED delivers a summation of the collective impact that the Collateralized Debt Obligation meltdown in the U.S. has had on financial markets around the world in a way that makes it virtually impossible to quote in brief summaries.

The Epicurean Dealmaker: Grains of Sand
This writer and many others have pointed to the principal sources of this contagion across sectors: cross-sector investment portfolios (which transmit selling pressure across nominally unrelated security classes and markets when price declines in one market encourage an investor to liquidate unrelated securities to meet margin or redemption requirements) and financial leverage applied to portfolios. This writer has further maintained that—notwithstanding the broad dispersion of risk across investors in recent years—market-making investment banks remain important if not critical transmitters of both of these forces in the market. Unfortunately, knowing the proximate causes of contagion in the markets does not provide much illumination as to when and whether the meltdown will stop, or indeed how further contagion might play out.

Just read the whole damn thing. You'll be smarter and better off for having done so.

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Cramer on the Colbert Report

Actually, the big question was why CNBC's wardrobe department dressed Cramer's sidekick up like a giraffe.

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Quote of the Day

WC Varones will doubtless get a kick out this:

"In a hot market, half the misfits and ne'er do wells you know go get their realtor licence. The other half become mortgage brokers. This time around it included like 2/3 of my wife's divorced women friends. I kept hearing how low my mortgage was and how I was wasting all that equity. Now I'm the one that looks smart." - one of my regular correspondents from California.

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WC Varones lays it down on the mortgage crisis

Quite possibly the two most succinct posts you will read on the double-whamy affecting the US housing market are on the ever-irascible WC Varones' blog.

First, why funds that were heavily leveraged in mortgage-backed securities are taking it on the chin:

Bear Stearns did a pretty stupid thing, going out and buying bad mortgages from bad lenders and then using lots of debt to leverage it up. The outcome was obviously foreseeable. The question is how badly the blowup will affect the broader asset-backed market and how many other funds will have to dramatically restate the value of their assets. Asset-backeds can be thinly traded and hard to price, so many funds may be pricing their holdings too optimistically.Say they're pricing an asset-backed at 70, but they have a cash crunch and need to sell. The best bid they can get is 65. No big deal, right? A 7% drop in value. Ah, but here's where leverage comes in. These dumbasses have leveraged up their portfolio 10-1 or 20-1. A 7% drop in asset value means a 70% or 140% drop in the fund. Game over! Thanks for playing!

And why the rules of the game encourage homeowners to default:

A new study from Experian finds what we told you months ago: that borrowers with no money down facing rising rates and sinking property values will not pay their mortgages.Well, duh. You've got no skin in the game. You're paying $1500/month as a teaser rate on a home you "bought" for $500,000. A year or two later, the rate resets so that your payments are $2200. Meanwhile, the property market is sinking and you'd have trouble selling for $450,000. The obvious thing to do is stop paying the mortgage and let the bank take the house. You've lived in a nice house for cheap rent for a year or two. You can keep living there for free for a few more months as they go through the foreclosure process. That's a better choice than continuing to pay and having negative equity of at least $50,000 and increasingly difficult monthly payments. And you had a free option to get rich if the bubble continued. That's why we call them put-option ARMs. You just exercised your put.

Any questions?

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Minyanville fills me with an exultant sense of schadenfreude

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Some Harsh Words About Mortgage Bonds To Keep You Up At Night

From the excellent econ blog Wasatch Economics

GSEs and the housing market
The only thing holding this whole house of cards together is the fact that the Chinese need us to buy their stuff; so the Chinese central bank is piling up US Treasuries which is keeping a lid on long term interest rates. The carnage that would result if the yield curve reverts to a normal shape is pretty scary…

Wooooo!

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Best Summary of the Subprime Crunch Yet!

From the SF Chronicle, courtesy of WC Varones' ever-entertaining blog.

Some common sense from the San Francisco Chronic:
Dumb: Buying a house you can't afford with no down payment and a loan whose monthly payments will explode in a few years.

Dumber: Lending money to people who can't afford a traditional mortgage, especially when they have lousy credit ratings and don't substantiate their income.

Dumbest: Bailing out dumb and dumber, especially with taxpayer money.

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Need some US housing schadenfreude? Try getting it in bulk!

Patrick.net has all the gleeful bad news you can stomach.

And a tip of the hat to WC Varones for the link!

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More blogging about the housing market

From W C Varone's Blog:
It's 2004 or 2005. You want to get rich quick in the real estate boom. So you buy a house that would normally be out of your price range, except for the creative financing your mortgage broker found you. You get an ultra-low initial interest rate. Sure, it will adjust upward in a few years, but who cares? You can always refinance, right?
WRONG!!!

And from Marketing Matters:
It's about time, but real estate speculators, one by one, are being taken out back and shot.

And as a refresher, don't forget this delightful story from California.

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Another bellweather of stormy seas in the US housing business

You know that the sub-prime lending fiasco has reached a fever pitch when New York Times' correspondent Gretchen Morgenson takes time away from her favorite windmill of executive compensation to pen a wordy piece about the sub-prime market.

Her florid, rambling prose aside, it's worth reading just for this one bon-mot:

Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.
Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.

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The year in the US new home industry in a nutshell

Courtesy of Dealbreaker's Opening Bell:
D.R. Horton CEO: '2007 is going to suck' (Reuters)If you're investing in homebuilders, you might want to keep hitting the snooze button for the next several months. The CEO of DR Horton is making it pretty plain. 2007 is going to suck. No real mystery, it sounds like pretty much more of the same. Not too many homes are going to be sold, and the price they are sold for is going to be weak. And whatever profits the company is going to make will be canceled out by big writeoffs on all the land they've spent so much on in recent years.

Really, what is left to talk about?

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What’s really the root cause of the US mortgage crisis?

This story is too good not to share with all of you. I just got this in my email from my good friend Doug in California, and he agreed to let me post it.

Lee,

I don't remember if I told you this story or not; it's been a year or two since this happened.

I was at a gathering and talking to a couple that had bought a place with a 80\10\10 with all of the bells and whistles (interest only, introductory rates...). They were explaining to me how a) they could afford the house and b) it all worked, after I commented that I couldn't afford the house they bought.

Them: We paid $600,000, but we only have to make interest payments for the next three years, so we're only paying around $2,500 (that month, until their lines rates started moving up). Then in three years, when interest rates are lower than they are now (ha, ain't happening), we'll refinance into a 30 year fixed.

Me: What would the payment be on $600,000 for 30? Say at around 8%? Wouldn't that be close to $4,500 a month?

Them: First off, in three years, rates won't be 8%, they're going to be 3-4% (okay, whose ass was that pulled out of?). And we won't have a $600,000 loan due to the equity.

Me: Due to the equity? How does that work?

Them: It's from the appreciation. Our house will go up a minimum of 10% a year, so in three years it'll easily be worth $900,000 (okay, that's more than 10% a year). So we'll have $300,000 of equity. That means when we refinance, we just have to get a loan for $300,000; the difference between the $600,000 and the $300,000 equity.

Me: How do you get the $300,000 equity out in order to reduce the $600,000 down?

Them: You don't need to, it's already there.

Me: Ah! Wow, you guys are really on top of this, that's pretty slick.

Them: Yeah, it's hard to believe that people are so stupid as not to take advantage of free money.

So what is the root cause of the US mortgage crisis?

It's because of people like them!

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Is the US housing market's house of cards starting to totter?

Wall Street Journal: Freddie Won't Buy Some Subprime Loans (reprinted in full for your benefit, since WSJ insists on hiding their prose behind a subscribers-only firewall)
Pressure is increasing on mortgage lenders to stop offering loans that subject borrowers to steep increases in payments after the first two or three years.
Freddie Mac, one of the biggest providers of funding for U.S. home mortgages, said yesterday that it plans to quit purchasing such loans granted to subprime borrowers, or those with weak credit records. Subprime lenders depend on their ability to sell loans -- often packaged into securities -- to investors such as Freddie and rival Fannie Mae.
In another sign of turmoil in the industry, subprime lender Fremont General Corp. said late yesterday that it will postpone the release of its fourth-quarter results, originally due today. The Santa Monica, Calif., company offered no explanation, but said it would explain the delay in a filing with the Securities and Exchange Commission. Company officials couldn't be reached for comment. Fremont was the seventh-largest subprime mortgage lender last year, with a market share of about 5%, according to Inside Mortgage Finance, a trade publication.
Freddie's move adds to pressure already applied by lawmakers -- notably Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, and Sen. Christopher Dodd (D., Conn.), head of the Senate Banking Committee -- who are urging bank regulators to crack down on these loans. Both lawmakers praised Freddie Mac's announcement. "It is responsible, and it demonstrates how [Freddie and Fannie] can be a force for good," Mr. Frank said.
A surge in subprime mortgage lending propelled the housing boom in the first half of this decade by making it possible for more Americans to buy homes. New subprime loans granted in 2006 totaled about $605 billion, or more than 20% of the total mortgage market, up from $120 billion, or about 5%, in 2001, according to Inside Mortgage Finance. But a surge in defaults on subprime loans in recent months has alarmed investors and politicians, who fear foreclosures will force large numbers of people from their homes. The Center for Responsible Lending, a nonprofit research and lobbying group, estimates that 2.2 million subprime loans, or about 15%, originated between 1998 and the third quarter of last year will end in foreclosure. That includes about 488,000 foreclosures already recorded.
Freddie said that effective Sept. 1, it will stop buying subprime loans that are likely to lead to a "payment shock" when rates are reset after two or three years. Freddie officials said a typical borrower who got a $150,000 loan with a starting interest rate of 5.5% two years ago might now face a reset to 12%, raising monthly payments 75% to nearly $1,500. The company said it is working with big lenders to develop subprime loans with longer fixed-rate terms -- perhaps the first five years -- and less scope for sudden jumps in payments. In granting the loans, Freddie said, lenders will have to determine that the borrower can cope with the higher payments likely to kick in after the initial "teaser" period. Fannie said it has bought subprime loans and securities "very carefully" and is working with lenders on mortgages that will help borrowers struggling with payment shock. The company also said it is awaiting guidance from regulators.
Richard Syron, chairman and chief executive of Freddie, said in an interview the company's stand could lead to a "substantial reduction" in subprime loans that allow for payment shocks. The Mortgage Bankers Association, a trade group in Washington, said Freddie's plan "will limit the product options and the access to credit for those individuals most in need, many of whom are first-time, underserved or minority home buyers." A spokeswoman for New Century Financial Corp., Irvine, Calif., one of the nation's biggest subprime lenders, said Freddie's plans seem "directionally consistent with some of the changes we have made and are making, although Freddie's approach appears to be more sweeping." Freddie and Fannie bought about a fifth of subprime mortgage securities issued last year, according to Inside Mortgage Finance.

And here's what my good friend who goes by the monniker Charles Farley had to say about this:

subject: Lee, the beginning of the perfect storm...

Start by taking the sub-prime borrowers out of the market. Add a huge new home inventory, mix in a bit of an increase in the foreclosure rate and toss in a dabbling of a stock market shock (which is code for an aversion to risky investments) -- we are going to bake us up a prime vulture oriented market for housing in the US.

Negative equity...here we come!

You heard it here first!

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