The status of the meltdown

Implications: Banks report increased delinquencies and overall lower earnings as the economy slows and housing drags. The reporting style here is yet corporate positive as CFO’s mirror the earlier performances of the major home builders, the Realtors and the Mortgage Bankers Association in denying housing issues. It’s hard to believe that performance in the owner-occupied loan portfolio will be substantially any better overall than the non-banks when the final results are in, but the question of performance in the Land Acquisition and Development category may still up in the air. This time around, Wall Street and the non-bank lenders/investors may have borne the brunt of the risk here and the major defaults coming may accrue to those entities. We’ll see in the coming months as the credit quality of the home builders and land developers is further strained. Remember that last time in the nineties we had major failures across the ranks of the Banks, Thrifts, Insurers and non-Banks.

Analysis:

Separately, Conley Wolfswinkel, the Arizona land investor now in his second go around at major fortune building, says that he has amassed 80,000 acres and one out of six lots that Arizona home builders will be building out in coming markets. This time he will also have built created some measure of cash flow by joint venturing power shopping center developments which appear to be successful unless consumer spending slowdowns and interest rate risk combine to blow him away in these endeavors. Remember last time Mr. Wolfswinkel lost $ 2 billion and wound up with a felony record and tax issues. The inventory is on the far perimeter for the most part and no doubt is heavily leveraged. We’ll see if he can sell into the coming markets at a profit before running out of cash. This man is now just 58, but he seems to have been around forever. We wish him well since he may be the indicator of good news we need in Arizona if he begins to sell off at a profit. Problem is it’s always easier to buy than sell and as yet he has no record of a successful sales program.

You can find some official recognition of the housing pricing downturn possibilities at Drop Foreseen in Median Price of U_S_ Homes - New York Times 08-25-2007.htm. Here are testimonials and confessions and adjustments regarding anticipated results and past predictions in error and trend joining. It may be that we are just waiting here for the next admissions which will come when the defaults in greater amounts come to bear.

Countrywide’s issues are revealing too. This company had been able to make money on conforming product and built up a revenue stream from this quality paper and its servicing. When volume fell and profitability was threatened, the company turned to Alt-A and Sub-Prime as a new entrant in the field. The old operations have been carrying the new field in this cut-throat competition operation, but the realities have caught up and profits are hard to come by. B of A waited the game out and appears to have won the negotiation. The greater question here is whether the core is rotten and whether any current price is too much for a dead concept operation of this volume. If it turns out that Countrywide’s business model is a winner, then maybe B of A has a winner. If not, maybe a shutdown here like Money Store, New Century and the hundred or more closed-door concepts will stimulate a change in management at B of A too.

You can find a historical of the Phoenix Metro area travails of the 90’s at Housing bust recalls S&L collapse Today's lending crisis pales in comparison with 1980s meltdown, experts say in Sunday’s ArizonaRepublic. The article mentions sales at 25% of value and the closing of local institutions in favor of national competitors. The nature of the speculative fervor in this market is yet true and the judgment required is whether we’re just repeating history all over again without changed fundamentals. If your perspective is to look for greater sources of high wage employment, you’re probably going to come to the opinion that the outcome will mirror yesterday’s results.

Finally, repeating last week’s observations that liquidity is being bolstered by the Federal Government is worth repeating. If you believe there is a hint of last chance here, the conclusions are ominous. You may want to warm up your opportunity funds in anticipation of the coming period.