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Wednesday, August 22, 2007 12:59 AM


Foolish Concerns, Foolish Optimism, Foolish Logic


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RealtyTrac is reporting Home Foreclosures Almost Double in July as Rates Rise.

Aug. 21 - U.S. homes facing foreclosure almost doubled in July as property owners with adjustable-rate mortgages saw their payments rise and were unable to refinance because of the subprime crisis, RealtyTrac Inc. said.

Lenders sent 179,599 notices of default, scheduled auctions or bank repossessions last month, a 93 percent increase from a year earlier, Irvine, California-based RealtyTrac said today in a statement. California, Florida, Michigan, Ohio and Georgia accounted for more than half of the country's total filings.

An increase in foreclosures will add more homes to the market and further erode values. U.S. home sales dropped to a four-year low in the second quarter and prices fell in a third of U.S. cities, according to the National Association of Realtors. In June, a nearly nine-month supply of houses was on the market, double that of two years ago.

"Home equity has been a major factor in consumer spending, and the major concern is we'll go into a recession as that equity dries up," said Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School in Philadelphia. "Consumer spending drove us out of the last recession in 1991, and we might see a reversal of that now."

"We are estimating that we will see about 2 million foreclosure filings this year," said Rick Sharga, RealtyTrac's executive vice president for marketing. "We honestly don't see it getting much better before it gets a little bit worse."

California foreclosure filings totaled 39,013 in July, about triple the previous year. The state led the nation in foreclosure for the seventh consecutive month, RealtyTrac, a seller of foreclosure data, said.

Florida ranked second with a 78 percent increase to 19,179 filings. Michigan replaced Ohio as the state with the third highest number: 13,979.

Foreclosures in Michigan and Ohio are driven by the decline of manufacturing in the so-called Rust Belt states, while California, Florida and Georgia have high numbers of "exotic mortgages," such as those with balloon payments or teaser rates, Wachter said.

"Home prices rose so high in those states that homebuyers needed aggressive, exotic mortgages, such as subprime, to afford to buy," Wachter said. "Those are the mortgages that default first."
Foolish Concerns

This is a foolish concern: "Home equity has been a major factor in consumer spending, and the major concern is we'll go into a recession as that equity dries up".

The real concern should be that consumers keep on spending money they don't have on overpriced junk they do not need. Once again these analysts have things ass backwards. The longer such nonsense goes on the worse things get. And that is precisely what happens every time the Fed intervenes to protect banks and other lenders from poor decisions.

Foolish Optimism

"We honestly don't see it getting much better before it gets a little bit worse."

My take: Things are going to get worse, much worse, and for at least another 3-5 years, perhaps much longer. Twenty year bubbles do not correct in two years.

Take a good hard look at California. It's woes have just begun. If you want to understand how bad California is likely to get then take a look at Florida. Owning a home in California makes almost no economic sense. That how out of whack California is.

Foolish Logic

Check out this logic: "Home prices rose so high in those states that homebuyers needed aggressive, exotic mortgages, such as subprime, to afford to buy."

The flaw should of course be obvious. If someone could really could afford those houses, foreclosures would not be tripling, would they? Exotic mortgages do not make things "affordable". They are instead a recipe for disaster. What was presented as logic was really the Greater Fool's Game. What we are now witnessing is what happens when the supply of greater fools runs out.

Ground Zero

Florida continues to be "Ground Zero" in the nationwide housing bubble busting shakeout. California has a lot of catching up to do.

Those wishing to find out about "Ground Zero" opportunities in Florida can contact Mike Morgan at Morgan Florida. Those interested in the Southern California market may wish to contact Rich Toscano (aka Professor Piggington) or Robert Campbell and the Campbell Real Estate Timing Letter.

For general housing news I look to Patrick.Net. And for the latest in graphs and trends on housing stats as well as up to the minute current news it is impossible to beat Calculated Risk.

Finally I would sure be remiss if I did not point out the Mortgage Lender Implode-O-Meter. There are numerous other housing blogs so apologies offered if I can not list every one of them. But looking at the Implode-O-Meter tonight I see the count is now up to 130.

More Layoffs

The latest news (nearly impossible to keep up with now) shows Scottsdale-based 1st National Bank Holding Co. to lay off 541, shut mortgage unit.
Scottsdale-based 1st National Bank Holding Co. said it will discontinue its national wholesale-mortgage unit and close mortgage centers in Virginia, North Carolina and Nevada, keeping open just one operations facility, in Tempe.

"This was one of the most painful decisions of my 38-year career," owner and Chairman Raymond Lamb said in a statement. "I have never seen a market shift as drastically as has occurred in the mortgage business over the last four months, but even more precipitous in the last few weeks."
First Magnus Fires 5,900+-

In the latest breaking news I see that First Magnus Files for Bankruptcy.
First Magnus Financial Corp. filed for bankruptcy Tuesday, less than a week after the Tucson-based national mortgage lender suspended its operations.

The lender's total assets were estimated at more than $942 million and its total liabilities at nearly $813 million in the company's bankruptcy petition, which was filed in U.S. Bankruptcy Court in Tucson.

"After carefully considering our options, a Chapter 11 filing provides First Magnus with the ability to realize the highest value of our assets for our creditors," First Magnus President and Chief Executive G.S. Jaggi said in a news release.

First Magnus, which originated home loans and then sold bundled loans into the secondary loan market, stopped taking mortgage loan applications and fired 99 percent of its 6,000 employees Thursday.

First Magnus also still owes employees about $13 million from the last pay period, company spokesman Gary Baraff said. That's why, he said, the company made that amount its No. 1 request in the bankruptcy filing. "Nobody in the company has been paid, including the CEO," he said.

He said everyone at First Magnus is still reeling from the shock of the company's downfall.

"The company went out of business overnight," Baraff said. "Three weeks ago we were at the apex of the company's history. Everything was falling into place for us, and we had remarkable momentum across the country. It was shocking to everyone that essentially the secondary market collapsed."
First Magnus went from "Remarkable Momentum" to "No Pay" to "Bankruptcy" in three weeks flat.

Nearly 88,000 Financial Services Jobs Lost this Year

Reuters is reporting Financial job cuts soar on housing woes.
A deepening U.S. housing slump has caused an alarming surge in job losses at U.S. financial services companies, and the end is nowhere in sight, consulting firm Challenger, Gray & Christmas Inc. said on Tuesday.

The industry has announced 87,962 job cuts so far this year, 75 percent more than the 50,327 recorded for all of 2006, Challenger said. Nearly one-fourth of this year's cuts have been announced in August alone.

Of this year's cuts, 35,830, or 41 percent, were tied to housing market troubles, including riskier subprime mortgages. Job cuts by real estate and construction firms totaled 21,620, more than twice the number for all of 2006, Challenger said.

"Companies are not surprised by what's happening, but the reality of the situation and the speed with which it occurred is shocking," Challenger added. He said it could be months before housing-related job cuts peak.

In the last week, investment bank Bear Stearns Cos (BSC), credit card issuer Capital One Financial Corp (COF) and mortgage lenders Countrywide Financial Corp (CFC) and First Magnus Financial Corp announced 8,640 mortgage-related job cuts, Challenger said.

Another 2,400 cuts were announced by SunTrust Banks Inc as part of the bank's existing cost-cutting program.

April has been the year's busiest month for financial job cuts, Challenger said. That month, companies announced 33,789 cuts, including 17,000 by Citigroup Inc (C) and 3,200 by bankrupt mortgage lender New Century Financial Corp.

Job cuts are mounting as credit losses widen.

On Tuesday, the government's Office of Thrift Supervision said troubled assets, or loans at least 90 days past due, rose at savings and loans it regulates to $14.2 billion in the second quarter from $9.5 billion a year earlier.

John Challenger said it's understandable for mortgage workers to feel whipsawed. Countrywide, for example, cut 500 jobs last week after having added 6,931 jobs from January to July, with increases in every calendar month.

"It's devastating (for morale)," he said. "It's hard to keep morale up, given the boom-bust nature of the mortgage sector."
Poof - Just Like That

88,000+- people in financial services lost their jobs this year (nearly 22,000 of them in August alone). And that does not count 6,000 from Magnus so make it 28,000 for August. Given the dismal savings rate I suspect most of them risk foreclosure. If so, add another 20,000 or so houses to inventory just for August and just for financial services.

How many people out of a job now wish they had a cash cushion? I will bet 99% of them. Yet I have been told for months (years actually) how "foolish" it is to have cash. Go figure.

Containment went from subprime to Alt-A to prime. But containment's not stopping there. How can it?

Every day people are losing their jobs because of the disaster in housing. And every day more jobs are outsourced to India and China. Yet every day Walmart or Pizza Hut or Target, etc, builds a new store. But how many more Walmarts or Pizza Huts or nail salons do we need when jobs are being lost left and right?

Far from being the savior that many think, commercial real estate is soon going to get crushed. It is overbuilt, overloved, and due for a collapse. If Bernanke thinks he has a problem now, watch what happens when commercial real estate blows up. Fannie Mae (FNM) and Freddie Mac (FRE) might be able to keep people in their houses in lieu of foreclosure by renegotiating terms down and down again (for a while anyway but certainly not forever), but bank funding of unneeded strip malls is another thing indeed.

Bernanke, It's Your Move.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

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