Mortgage Vultures. Good or bad?

[WB2YGF]

WOW.  These guys (ex-Countrywide) buy bad mortgages from the government for pennies-on-the dollar, lower the interest rate to 3% to make the mortgage affordable, then collect the loot.  Is this a good thing or a bad thing?

Ex-Leaders at Countrywide Start Firm to Buy Bad Loans
Published: March 3, 2009

CALABASAS, Calif. — Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering.

So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess.

Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

“It has been very successful — very strong,” John Lawrence, the company’s head of loan servicing, told Mr. Kurland one recent morning in a glass-walled boardroom here at PennyMac’s spacious headquarters, opened last year in the same Los Angeles suburb where Countrywide once flourished.

“In fact, it’s off-the-charts good,” he told Mr. Kurland, who was leaning back comfortably in his leather boardroom chair, even as the financial markets in New York were plunging.

http://www.nytimes.com/2009/03/04/business/04penny.html?

[Carl WA1KPD]

They were bankers before and they still udnerstand the market. And as the article goes on to say it is helping some homeowners......


"It is quite evident that their efforts are, in fact, helping many distressed homeowners.

“Literally, their assistance saved my family’s home,” said Robert Robinson, of Felton, Pa., whose interest rate was cut by more than half, making his mortgage affordable again.

The Laverdes, of Porter Ranch, Calif., had fallen three months behind on their mortgage after sales at a furniture store owned by the family dipped in the economic crisis. Margarita Laverde and her husband were fearful that they might need to move their four children, three dogs and giant saltwater aquarium into a cramped apartment, leaving behind their dream home — a five-bedroom ranch on a suburban street overlooking the San Fernando Valley.

But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, cutting their monthly payments nearly in half, Ms. Laverde said."


Bad loans were made, but no one held a gun to anyone's head and told them they had to take the mortgage out. At least someone is refinancing them.

[WA1GFZ]

Calabasas,
Ground is hard as rock and dry as a bone.

[Opcom]

There was some discussion on the entertainment talk radio on the various ways of trying to keep folks from being foreclosed on.

1. reduce the princial (by judge order) so the payments could be made.
2. reduce the interest so the payments could be made.

Looks like #2 is the way chosen for the bailouts. On the surface it seems better to me since the full principal will still be paid by the borrower as it should be.

[K1JJ]

As long as it's legal, those guys can take on the risk of any investment they want. Right now, there are few investers willing to put money into anything.  Takes some BA's to do.  So, they will certainly earn their money if they do well. If it were easy, everyone would be doing it and it would no longer be an opportunity as the market prices it too high.

It really comes down to a real estate market that ran away on the upside with lots of weak-handed leveraged buying at high prices towards the end. Now that the prices are falling under their own weight, the leverage is a double edged sword.  This is a natural occurance for any market where people are involved. (emotions)

Normally, in most other markets, liquidation would run its course as usual.  How can the government insist that real estate prices stay up artificially high?   Reducing the interest and principal is simply transferring the loss from the borrowers to the lenders. Maybe that's the what the govt wants to do it. But in the end, someone must pay for the loss in a declining market.

The pity is that the many conservative people who lived within their means are now in jeopardy in terms of their retirement accounts, home values and jobs.

The real mistake made was forgetting the lessons learned over the last 300 years. We have NOT learned how to control a bubble yet. We always think the good times will continue forever cuz it's different this time. Trying to stop the bubble this last 20 years would have gotten you fired or voted out of office. So, we do it all over again.   The govt needed the cash to continue its credit binge and the public needed the cash to continue pimping their rides...   We're all to blame, some more than others, really.

I'm still expecting a huge rally up in the stock mkt within a coupla of weeks. It will be breathtaking.  The market has almost run its course for this intermediate cycle decline and is due for a breather. But alas, later in the year it will most likely break down again to new lows. Don't get sucked into the rally.

T

[WB2YGF]

Don't get sucked into the rally.

I dunno, sounds like an opportunity to me.  Jump in, ride it up, and jump out.

[WA1GFZ]

Tom,
The last time around things started improving when the bottom feeders started snapping up property. I have a feeling the the stock market will lag the economy this time because the last bunch of suckers don't have the money to be fleeced again.

[WB2CAU]

I'm still expecting a huge rally up in the stock mkt within a coupla of weeks. It will be breathtaking.  The market has almost run its course for this intermediate cycle decline and is due for a breather. But alas, later in the year it will most likely break down again to new lows. Don't get sucked into the rally.
T

Is this your own theory or one of the many theories abounding?  I listen every day to all of the so-called experts on CNBC and Bloomberg spouting theories on what's in store.  They seem to be grasping at straws for air-time.  Fact is, nobody really knows for certain.  There are so many variables that change on a daily basis.  However, I do believe we've just about reached bottom in the stock market.  One of the first to point this out a few months ago (and the market has leveled somewhat since) was Warren Buffet.  He sees this as a buying opportunity.  I see P/E ratios incredibly low.  To me, many many stocks are incredible bargains.  If you can trade counter intuitive to emotion there is a potential for money to be made.

Is your theory on an upcoming rally "in a coupla weeks" based upon a gut feeling or a repeatable pattern?

[K1JJ]

Hola,

John:  Sure, if you're a trader, get in and get out.  Rock and roll with it. S&P 500 futures are a great way to go. But most folks here are buy and hold types, so it would be the time to dump the dogs they got stuck with on the way down, then sit in cash.


Frank:  I think NORMALLY (over the last 70 years)  this would be a buying opportunity and the beginning of a new bull market.  But this is a major-major correction - a major bear market)  that still has a long way to go down and do more damage first.  The rules have changed and the market is sliding down a slope of hope.


Eric:  I've traded the stock, commodity and option markets since 1978. I've held positions as a stock broker, (Dean Witter)  commodity broker, branch manager, principal owner and fund money manager over that time. I've taught hundreds of public, technical analysis trading seminars all over the state of CT back in the 80's. (Now retired and only trade my own account)  I've seen a lot and have also personally made every investing mistake one can make, believe me.

I use purely technical analysis - chart, cycles, patterns and software I've developed over many years for trading. I also watch social mood and contrarian indications when excess has occured one way or the other.

Since last summer, I've been steadfastly bearish. In June '08, I even took all our money out of Bank of America due to their reckless investing. We moved to a local, conservative bank. I don't trust FDIC for a second. The branch mgr laughed at me. Since then her personal holdings and bank stock (BOA stock) have declined from 50 down to 3.  They were out of control with client's money. Buying Countrywide - and Merrill Lynch for $50 billion in a bear mkt?   Fitting epitaph, I'd say.  (If I were a REAAAL man, I wuda had the BA's to SHORT BOA too, but I didn't)

My point is, of course, no one can accurately predict the future over the long term. But you will STILL hear the talking heads on TV telling you, "this is the bottom" almost every day. Guys like Cramer have been buying all the way down and probably have bankrupted more than a few of his viewers. Slope of hope. It still has a long way down to go over the next few years, but will have tremendous short covering rallies up in-between these long declines to fool us. The bottom will occur with HUGE liquidation volume (hasn't happened yet) OR a long period of extreme pessimism and slowly eroding prices.

Right now I see the potential for a cycle ending and a huge rally, but just one of many that occur in a major bear market that continues down. If you look back at the 1929-32 bear mkt, you will see the downtrend was not straight down - there were periods when the market rallied sharply for several months at a time, only to collapse again to new lows. I'm sure the investers at the time were celebrating a new bull mkt, only to be disappointed again over and over.  There's no reason to try to pick a bottom. Catching falling daggers. A new major bull mkt gives you plenty of time to get on board.. sometimes years. The fastest money was made NOT from 1982 to 1995, but from 1995 to 2000. It was especially fast up in the last few years after over a decade of advancing. There's no reason to be a hero.

A deflation's job is to destroy assets of every class. Almost everyone loses money in a deflation. Even Warren Buffet lost $12 billion in this decline. Deflations occur rarely - about once every 70 years or so. The idea is to survive it until good times return. The only "safe" haven is cash and cash equivalents. I've been harping on being into cash (T-Bills) since the summer, '08. The US dollar has made a 3 year high against major currencies. Domestically, it is in the biggest bull market in 70 years compared to real estate, stocks, oil, etc. There will be a time when cash (T-Bills) is a sucker hold again, but for the foreseeable future, it is king.  People who tell me they can't stand only 1% return in cash don't realize that they are really seeing 30%-80% against most assets since last summer.

Again, no one can predict the future accurately for long or they would have all the money in the world. We can only make decisions based on history and this means going back not just 10 or 20 years, but 400 years (including England's market) to see the complete history of the many bull and bear mkts this country has faced. And many of us think, "it's different this time" but it's not. Human nature doesn't change, just the actors.
We are doomed to repeat it again and again in each few generations.

T

[K1JJ]

BTW, a few words about the stock average indices...

Many of the stocks that got hammered in the last year will not make it. They will be erased from the Dow Jones and other indices.

If you look at the 1929 roster of leading stocks, there are many Studebakers in there... never saw the light of day again. What the exchange does is simply erase them when they fail and add new stocks. So, today's averages poorly reflect what a REAL buy and hold would look like today.

The lesson to be learned is, yes, some of these stocks today look like tremendous bargains priced at 1, 2 or 3... BUT will they even survive?   We find through history that the best stocks to buy after a bear market are the ones that held up the best. They generally take off like a rocket, while the beat up ones stagger with their problems a while longer..

Once the bear mkt is over, look and see what the strongest stocks are doing - the ones that remained firm. A few that come to mind are WalMart, United Tech... and more. But only after the bear is over, cuz they may have a ways down to go yet too.


But there's no free luches. Everything is priced fairly. If you buy the cheapies you get a bigger % gain, but the risk of complete loss is higher. The "Blue Ships" move more slowly, (percentage-wise)  but are usually a safer buy.

BTW, I trade only the S&P 500 futures contract for my own account. This is a 5% leveraged instrument and my trades last maybe 45 minutes to a few hours, max. I haven't traded stocks themselves in over 20 years.  I am no longer registered as a professional with the federal govt NFA/CFTC or SEC/NASD, (since May, '08) so have no desire to give specific advice or manage money for anyone. (Just wanted to make that clear... ) 

T

[KA1ZGC]

I am no longer registered with the NFA or SEC/NASD, (since May, '08) so have no desire to give specific advice or manage money for anyone. (Just wanted to make that clear... ) 

In lieu of harassing you for financial advice, I'll encourage more of these free Tom Vu seminars. Some of us are paying close attention. 

[W1UJR]

In lieu of harassing you for financial advice, I'll encourage more of these free Tom Vu seminars. Some of us are paying close attention. 

Actually, I think MANY of us are paying close attention.
A impartial voice of sanity and reason is what we greatly need at this time. 


Good to "see" you Tom and Thom.

[KA1ZGC]

"I do naht know ahnsah to difficut leal estate question, but come, we watch Tom Vu video and we learn ahnsah to difficut leal estate question... togethah!"

[W1UJR]

Yes, all that is lacking is the "bikini girls" from the classic Tom Vu infomercials -->>
http://www.youtube.com/watch?v=jYqDS9i8zJw
http://www.youtube.com/watch?v=iQNdi-fRExc&feature=related
http://www.youtube.com/watch?v=K853GykeGH0&feature=related

Interestingly enough, it would seem the very strategy taught by Tom Vu is exactly
that has gotten this country in such deep trouble. Take a view and you'll see.

And all kidding aside Tom, the real Tom, I, and I am sure others, really do appreciate
what you have shared on this board. Seems every media outlet has an agenda these
days, too many talking heads, too little straight talk.

So thanks for sharing your wisdom here Sonny.

-Bruce

[WB2YGF]

I've been harping on being into cash (T-Bills) since the summer, '08. The US dollar has made a 3 year high against major currencies. Domestically, it is in the biggest bull market in 70 years compared to real estate, stocks, oil, etc. There will be a time when cash (T-Bills) is a sucker hold again, but for the foreseeable future, it is king.  People who tell me they can't stand only 1% return in cash don't realize that they are really seeing 30%-80% against most assets since last summer.

I am currently getting 2.25% on my FDIC insured savings account. Seems like T-Bills would earn less than that.

(Then there is the my junk bond ETF paying 13%, but that's just for sport.  )

[WB2CAU]

Tom (K1JJ), I appreciate you taking the time to reply with an intelligent, articulate response.  I have the utmost respect for your opinion based upon your education and experience. 

[K1JJ]

I am currently getting 2.25% on my FDIC insured savings account. Seems like T-Bills would earn less than that.
(Then there is the my junk bond ETF paying 13%, but that's just for sport.  )

Thanks for the comments, guys!  It makes writing this all worth while. BTW, I have a series of articles that I wrote two years ago about my own trading rules, trading techniques and investing. Would anyone like to read them? I have a link available. It's flee!


John:

Yep, this is true.  It's all  matter of perceived risk.  Sometimes it's not logical. It's just what the market tells us by its buying and selling pressures.

For example, what the market is telling us now is they are willing to receive close to zero % interest in T-Bills cuz they are scared of default.  Safety is #1, GI.  The FDIC can handle one or two major banks failing, but what if 500 go under at once? The FDIC has maybe 1% in reserves, just like the Social Security or Medicare situations. The best case is our bank accounts would become inaccessible for a period of time.

The ultimate security is US govt securities - backed directly by the full faith and credit of the US Govt. They survived the last depression without a single problem.  FDIC insured bank deposits are not the same thing - well, at least the market is telling you that by giving a higher return for bank CDs.  The note is only as good as the creditor, as you've found with the 13% notes....


Personally, I don't care about an extra 2% on my "safe" money. FDIC scares me cuz the vast majority of the public trust it like the holy grail. If ya think about it, the only thing that hasn't gotten beaten up has been bank savings, checking and CD accounts. Thank the Lord.

My worst scenario - fantasy, but I always prepare for the worst:  Obama: "My fellow Americans - due to the recent banking disaster yesterday, we need to spread the wealth to take care of the poor. All bank accounts have been temporaily frozen. Your funds are safe and guaranteed by the FDIC. However, as a TEMPORARY measure we will need to devalue all accounts over $10,000 by 66% to reduce the debt load to the govt in this crisis so we can help those who really need the money. You WILL be paid back every penny".  Or somethin like that. This will probably never happen.  But, it is less likely to happen to T-Bills and US Bonds or else foreign countries wud hurt the US more than the benefits.  

Proabably the worst thing would be our bank-held money being frozen until the govt sorts things out. This has happened in 1933 and has happened countless times in other countries.

If the market rallies soon, we will have a welcomed breather and can relax for a while.

By thinking things out like this, we can make a plan A and B or C, just in case.  The best case is nothing happens and we've just taken a conservative posture (treaded water) for a period of time.

T

[WA1GFZ]

I think the banks and government could do much better if they just extended the time of these loans in trouble. Maybe with an agreed upon interest penelty that people could manage. Then fix the real problem in this country the lack of jobs where people can make enough money to live on.
Eliminate HR1 B, Nafta and all these other bogus trade deals. You want to outsource your company then pack up and leave. And don't let the door hit your ass on the way out.
Handing money to banks seems as effective as burning dollars to keep warm.
Then it is time to tell these local tax and waste dirt bags we are done bonding useless projects that just drive up local taxes. They tried that crap in East Lyme and 90% of the town voted against it. Here in Enfield laws were changed so we have no say.

[WB2YGF]

The FDIC can handle one or two major banks failing, but what if 500 go under at once? The FDIC has maybe 1% in reserves, just like the Social Security or Medicare situations. The best case is our bank accounts would become inaccessible for a period of time.

Clearly, they are already preparing for the depletion of their reserves.  FDIC wants to increase their credit line with the Treasury from 30 Bn to 100 Bn, and possibly even 500 Bn. 

http://www.foxnews.com/politics/2009/03/05/senate-moves-loan-fdic-billion/

If there was a run on ALL banks, the government would have no choice but to limit withdrawls.

[K1JJ]

FDIC wants to increase their credit line with the Treasury from 30 Bn to 100 Bn, and possibly even 500 Bn. 

That's good. Bank deposits are in the trillions, so any bit counts...

Guess my point is we could side-step that extra worry and risk by accepting $20 less per year for every $1000 (2%)  by being in US T-Bills. 

Hey I still have some $ in CD's, so welcome me to the club too... 


What a nice day for outside work - been working on the telescope out there in 60 degree wx. Getting ready for spring, cuz spring is galaxy time.

T

[Steve - WB3HUZ]

Eliminate HR1 B, Nafta and all these other bogus trade deals. You want to outsource your company then pack up and leave. And don't let the door hit your ass on the way out.

LOL. Already been happening for decades. NAFTA has nothing to do with it. It's call labor prices too high, taxes too high, insurance too high, too many regulations. Why wouldn't companies leave. We're forcing them out.

[ka3zlr]

Hear Hear....agreed.

[Opcom]

Don't get sucked into the rally.

I dunno, sounds like an opportunity to me.  Jump in, ride it up, and jump out.

done that before, but it is very risky to try to time the market. As long as you pay alot of attention, it can work.

I have done better however, by generally staying in, and only getting out at the beginning of a downturn signaled by decrease value of high-risk items in which I do not participate. That signal happened 2 years ago. I would not be a good money advisor because people wouldbe unsatisfied at low returns. At least I still have most of my $, whatever that is presently worth. One thing to be said about it, my debts are all fixed in $'s, just as my money is.

That's one thing people overlook. If I owed $10,000 on my mortgagae, it does not matter how worthless the dollar is because it is still the same numerical amount. If I owed "250 pieces of silver" or "5 tons of aluminum" on it, it could make or break me at the whim of things that have actual value. There is about 1/2 ton of aluminum and 200LBs of copper wire in my back yard. I'm waiting..

[WA1GFZ]

I prefer my government protect my standard of living not drop it to match the rest of the third world. Our government costs too much how about we force them to take a 50% cut and pay for health care. That is what they want the people building cars to do. If the royal clas has free health care why not the rest of us. If the royal class retires with a sweet deal how about the tax payers or are we just useless serfs.

[WB2YGF]

That's one thing people overlook. If I owed $10,000 on my mortgage, it does not matter how worthless the dollar is because it is still the same numerical amount. If I owed "250 pieces of silver" or "5 tons of aluminum" on it, it could make or break me at the whim of things that have actual value. There is about 1/2 ton of aluminum and 200LBs of copper wire in my back yard. I'm waiting..

I have been meaning to bring this point up too.  For some, high inflation can be a bonanza.  

If you have a big mortgage, little savings, a job with cost of living increases, and a low interest rate fixed mortgage, your house will go up in value, while your mortgage payments and principal owed go down, down, down, in relative terms.  Pretty soon, your mortgage payment is no more than an auto loan payment.  (Unfortunately, the property tax part of the payment still goes up.)  

I saw this happen when my dad paid off his mortgage early because the loan depreciated down to something trivial.  It helped that he had a government pension too, so he didn't have to worry about a 401K depreciating.  I'm not so lucky.

If course, what we have NOW is DEflation, which is disastrous for many.