Using Veritas to Construct the "Per…

29-04-2017 Hits:84623 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:79090 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:78936 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:83423 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:79989 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:82296 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:53269 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:81300 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:81300 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:81108 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:86961 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:84979 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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Reprinted from 10/6/2007

Well, equity prices are rising to record levels, shorts are getting squeezed as companies that seem to be headed towards bankruptcy are gaining 10% per day, and the macro/micro environment for the housing and banking industry looks bleaker by the day. Well, you can't hide absolute failure for long in the real estate markets, for unlike mark to model bonds, these are bricks and dirts that everyone can touch and feel (and research). I have some VERY interesting analysis here, but first let's recap the weeks behind us.

Financial cos. earnings and announcements for the 2 weeks ending Friday, October 05, 2007

  • Sovereign Bancorp Sees Hefty Q3 Charges [SOV]: The Philadelphia, Pennsylvania-based company said it would boost its pretax provision for credit losses in the third quarter to $155 million to $165 million from $51 million in the prior quarter.
  • Merrill Lynch & Co. Inc. (MER), the world's largest brokerage, said it would write down nearly $5.5 billion in credit losses and post a net loss for the third quarter.
  • Washington Mutual Inc. (WM) said it expects third quarter earnings to drop by about 75% because of factors related to weakening conditions in the nation's housing market. This is WaMu's mortgage arm's 5th straight quarterly loss. This time it is big enough to bring the whole company to the red.
  • Citigroup Inc. (C) said earlier this week that it currently expects a year-over-year decline of about 60% in its third-quarter net income, lamed by dislocations in the mortgage-backed securities and credit markets and weakness in the consumer credit environment. The company expects to return to normal earnings in the fourth quarter.
  • Deutsche Bank, Germany's biggest lender, and UBS, Switzerland's largest bank, also came out with similar warnings earlier this week, saying they saw billions of dollars of charges as a result of the fallout from the recent credit crisis.
  • Lehman Brothers Holdings Inc. (LEH) last month reported a 3% slide in its third quarter earnings, reflecting weakness in capital markets, specifically in fixed income.
  • Morgan Stanley (MS) reported an 18% decline in its third quarter earnings, hurt by $940 million mark-to-market losses on loans, reflecting the illiquidity created by the current credit crunch.
  • Bear Stearns Companies Inc. (BSC) reported its biggest profit decline since at least 1998 due to rising defaults in the sub-prime category and reduced fixed income trading. The company's third quarter profit dropped 61% from a year ago.

In addition, Lennar, the largest US homebuilder by revenue announced the biggest loss ever in their 52 year history of half billion dollars. KB Homes, despite one time gains of nearly 3/4 billion dollars, still managed to deliver a loss for the quarter. The banks say that upcoming quarters look much better, and Citibank analysts state that the builders may be hitting a short term bottom. Okayyy.

Let's see how good the upcoming quarters look for the banks since they wrote down the value of their asset backed bonds instead of getting rid of them. Then we will examine the newfound competition between the banks and the builders.

 

Below is a list of bank REOs. A REO (Real Estate Owned) is property that a banking (or banking related) institution is forced to hold when a loan that they either issued, purchased, or became legally responsible for was foreclosed on and the property held for collateral was taken back . Generally speaking, an increasing REO inventory indicates increasing foreclosure activity. Foreclosures are very bad for bank balance sheets and performance. REOs are worst. If the bank cannot reclaim its full principle, back interest, and expenses from the sale of the REO, the amount not reclaimed is a complete loss. In order to move REOs quickly, banks are willing to take a loss by:

  • reducing the price of the REO below that of the P&I outstanding,
  • offer preferental (below market or flexible term) pricing on loans to the buyer of the REO, usually profesional investors or first time homebuyers,
  • and other such concessions.

If a significant amount of REOs hits the market, they will compete directly with other sources of housing supply, namely homebuilders and existing homeowners looking to sell. REO can very deeply discounted, which makes them difficult to compete with on a pricing basis, and since they come with the blessing of a bank, tend to have a "deal you can't refuse" financing arrangement as well. Banks are willing to get these blights off of their balance sheets by any means necessary!

The list of institutions here is far from complete and is meant to represent only the REO and foreclosure inventory trend for a metropolitan area, not the absolute REO or foreclosure inventory in a market. Graphs are used to infer trends*.

Monthly Averages of REOs for Riverside, CA

Image005_2

What we have above is a 2 and 1/2 times increase in REOs in just five months. Still not convinced of a problem? To give you an even clearer picture, here are the numbers for the last 10 weeks.

 

Image010

Do you see how steep this incline is, and how much it is increasing week by week? REOs have nearly doubled in the past 10 weeks. This is not an anecdotal blurb, look at the longer trend captured above. Things are getting very bad, very fast. Yet, banks like Citi, Washington Mutual, et. al. say that the worst is behind them. Someone should email them a copy of this blog.

Now its Bank vs. Builder vs. Homeowners - Who will win the race to the bottom of the profit ladder?

 

Companies like KB Homes are fighting for thier existence to get rid of land and inventory by any means necessary, even at a loss. Thus, they are discounting heavily, by up to and over 50% in many cases. KB Homes offers houses in Riverside County, CA at the following highly discounted fire sale prices:

  • 2 stories, 5,187 sq ft, 4-5 bedrooms + family, 5.5 bathrooms, 4 car garage $736,990 - $142 per foot
  • 2 stories, 4,914 sq ft, 4-5 bedrooms + family, 4.5 bathrooms, 3 car garage $747,990 - $152 pr foot

 

Companies like IndyMac bank are approaching the same situation. They have all of this real estate on thier books, despite the fact they are a mortgage company. It is ironic, since the builders have all of these mortgages on thier books, despite the fact they are home builders (in '06, Lennar originated 41,800 mortgages worth $10.5 billion). The mortgages are going bad on the builders books, and the real estate is going bad on the bankers books.

This is what IndyMac is offering:

Property Address
Price Bed Bath
SqFt
3559 Cortez St$244,900 21832
11356 Rancho Loma Dri$334,900 321427
3124 Rainforest Dr$433,900 432125
7872 Northrop Dr$439,900 532676
8491 Lodgepole Ln$489,500 432900

Currently, the homebuilders are actually offering their new inventory at a cheaper basis per sq. foot than the bank REOs. That won't last for long however, as it become obvious to the banks that they need to slash prices even more aggresively to move the property. When that happens (in a period of months), then IMB is to be accompanied by many banks in a mad dash to slash, and they will be fiercely competing with homebuilders fighting for their existance. All of whom will be competing with the existing homeowner trying to sell. There can only be one absoute price winner, with the other two simply cycling back through the banks one way or the other - either through foreclosure, corporate loan default, REO on balance sheet as unsold dead weight, or a new loan to finance a vulture investor buying for pennies on the dollar. While it appears that the homebuilders are selling larger homes for less than the banks, the banks are very, very willing to discount further off the offering price and make deals. Further, the homebuilder McMansion model is failing, with buyers now looking for smaller, cheaper homes - exactly like the ones being thrown back onto the market by the banks with cheap financing.

Who else is involved in this mess?

The organizations below are either government agencies or institutions sponsored by the government. HUD and VA are government agencies that promote home ownership and fair housing and back loans issued under their respective charters. Freddie Mac and Fannie Mae are GSEs that were created by the government to increase home ownership through the purchase of loans meeting their standards. This is thier REO involvement in Riverside. That's right, the tax payer is going to have to directly foot the bill or a decent portion of this stuff. According to these numbers, Fannie and Freddie are going into the real estate management and sales business - and to think, they are actually lobbying to have thier inventory caps lifted. Imagine, if that were to happen (actually, it already did) what this will look like this time next year!

Image015_2

Bank Owned

The REO listed below are owned by banks, loosely define as diversified, non-governmental financial institutions providing services other than mortgage lending/origination. Bank REO is currently being tracked for Bank of America, Chase, Citi, HBSC, and IndyMac. Needless to say, IndyMac is going to have a rough next couple of quarters!

Image014

 

 

Here we have the major OPM (other people's money) houses, loosely defined to be organizations that generally find purchasers for loans that they originate or issue. Through various legal arrangements with the institutions that finance them, brokers/originators can (sometimes) end up owning the property they originated a loan for if that loan goes bad. The originator of the year is Countrywide. These guys are amazing. Just click here for more info on Countrywide and Washington Mutual, the banks that say the worst is behing them, ha!

Image019

Countrywide, as an ongoing concern, is a joke. Speaking of ongoing concern, I seriously have my doubts. They are about to be one of the largest owners of single family housing in the country.

 

Next, we will review the REO status in all of the homebuilders most profitable MSAs to see what banks they are competing against and what banks are in trouble.