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After years of radio silence, Dr. Michael Burry – the small-time stockpicker who rose to fame for his bets against subprime mortgage bonds featured in the book (and later film) “the Big Short” – is once again doing the media rounds, talking about his latest equity plays and sharing his thoughts about the next big market blowups.

And in an interview with Bloomberg, Burry doesn’t disappoint. At one point, he shares his skepticism about passive investing, and the flood of money that has poured into index funds since the financial crisis. Burry sees similarities between these funds and the CDOs that nearly brought down the financial system in the run-up to the crisis.

Burry, who made a fortune betting against the CDOs, argued that these passive flows are distorting prices for stocks and bonds in much the same way that CDOs did for subprime mortgages. Eventually, the flows will reverse at some point, and when they do, “it will be ugly.”

“Like most bubbles, the longer it goes on, the worse the crash will be,” Burry, who oversees about $340 million AUM at Scion Asset Management in Cupertino, said.

That’s one reason he likes small-cap value stocks: they tend to be underrepresented in index funds, or left out entirely.

Here’s what Burry had to say on a number of topics:

Index funds and price discovery:

Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets.
The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies – these do not require the security- level analysis that is required for true price discovery.

…click on the above link to read the rest of the article…

Subprime 2.0: Mortgages Now Available For Borrowers Without Credit Scores

July 26, 2019

Subprime 2.0: Mortgages Now Available For Borrowers Without Credit Scores

Waterstone Mortgage Corporation, a national lender, based in Wisconsin with licenses in 48 states, announced Tuesday that it’s now lending to people with aboustely no credit history, reported HousingWire.

Waterstone calls it the “Non-Traditional Credit Program” will use other forms of financial history, such as cell phone bills, rent, utilities, and insurance premiums when underwriting a borrower.

The Consumer Financial Protection Bureau (CFPB) estimates that about 26 million Americans have no credit score. The CFPB also states that an additional 19 million Americans have a limited or outdated credit history. This means that 18% of adults are “credit invisible,” said Waterstone in a statement.

“While a credit score is certainly very useful for determining a homebuyer’s ability to pay their mortgage payment, other payment indicators–such as bills that are consistently paid in full and on time–can be extremely telling,” said Waterstone Mortgage SVP–Investor Relations & Product Development Kim Newby.

The new program is available with conventional, FHA, USDA, or VA loan options, with the goal of helping those with no credit history into homes.

“Of course, the Non-Traditional Credit Program is ideal for borrowers who only use cash, debit or personal checks on a regular basis. But it’s also designed for those who have had credit cards or loans in the past, but who haven’t utilized credit in more than two years,” Newby said.
“Also, recent immigrants who haven’t yet established a credit score in the United States could benefit from this program, as well as young adults and recent college graduates who are just beginning to build their credit.”

Waterstone has debuted the new loan program at a time when a collapse in mortgage rates is failing to bring buyers back.

…click on the above link to read the rest of the article…

Zero-Down Subprime Mortgages Are Back, What Could Possibly Go Wrong?

October 16, 2018

Zero-Down Subprime Mortgages Are Back, What Could Possibly Go Wrong?

Ten years after the collapse of Lehman Brothers, banks are once again taking bets on the same type of loans that nearly collapsed the economy amid a flurry of emergency bailouts and unprecedented consolidations.

Bank of America has backed a $10 billion program from Boston-based brokerage Neighborhood Assistance Corporation of America (NACA), to offer zero-down mortgages to low-income borrowers with poor credit scores, according to CNBC. NACA has been conducting four-day events in cities across America to educate subprime borrowers and then lend them money – with a 90% approval rate and interest rates around 4.5%.

“It’s total upside,” said AJ Barkley, senior vice president of consumer lending at BofA. “We have seen significant wins in this partnership. Just to be clear, when we get those loans with all the heavy lifting here, we’re over a 90 percent approval, meaning 90 percent of the people who go through this program that we actually underwrite the loans.”

Borrowers can have low credit scores, but have to go through an education session about the program and submit all necessary documents, from income statements to phone bills. Then they go through counseling to understand their monthly budget and ensure they can afford the mortgage payment. The loans are 15- or 30-year fixed with interest rates below market, about 4.5 percent. –CNBC

“That’s what’s going to help people who’ve been locked out of homeownership to really become homeowners and to build wealth,” said Bruce Marks, CEO of NACA. “It’s a national disgrace about the low amount of homeownership, mortgages for low- and moderate-income people and for minority homebuyers.”

To participate in the NACA lending scheme, borrowers can have credit scores – but will need to go through the education course and submit all necessary documents, “from income statements to phone bills,” reports CNBC. Then they undergo budget counseling to ensure they can afford the mortgage.

…click on the above link to read the rest of the article…

Canada Has A Subprime Real Estate Problem, You Just Don’t Know It

June 16, 2018

Canada Has A Subprime Real Estate Problem, You Just Don’t Know It

A few weeks ago, a real estate agent told me about his client. Relatively wealthy older dude, closed on not one but two townhouses he plans on flipping. After some questions regarding who financed such a deal, he explains it was a private lender. Right before adding, “don’t worry, it’s not like in the US. This guy has good credit, he just couldn’t get enough money from his bank.”

I realized that people aren’t lying when they say Canadian real estate is nothing like the US in 2006. Canadians just don’t understand what happened during the US subprime crisis. They also don’t really understand subprime lending is alive and well in Canada, we just use different names.

Subprime Borrowers Vs. Subprime Loans

First, a quick lesson on subprime. The S-word is a dirty word in Canada, so there’s little discussion about what it means. Most people think “broke ass borrower” when they hear the term, but that’s not always the case. There’s subprime borrowers and subprime loans.

Subprime loans are any loans that are below prime, as in the typical lending criteria isn’t met. The part that’s poorly understood is a borrower, a loan, or any combination of those can be subprime. A borrower with excellent credit, might want a subprime loan. This happens more often than you think, and is usually because a bank won’t lend as much money as needed. No one thinks of a family in a nice neighborhood with a private loan to buy their fourth or fifth condo as subprime, but they are.

Don’t worry, it’s not just average people that don’t understand this. There’s still a lot of confusion about the issue in the finance community around the US subprime crisis. Most people knew subprime lenders blew up, and naturally blamed poor people and immigrants with low credit scores, as is the way.

…click on the above link to read the rest of the article…

Wave of Corporate Bankruptcies Coming: GE Warns About its Subprime Mortgage Unit

May 3, 2018

Wave of Corporate Bankruptcies Coming: GE Warns About its Subprime Mortgage Unit

Earlier today I commented to a friend about corporate bankruptcies. A few hours later, another friend Emailed about GE.

Earlier today a friend pinged me with this story: U.S.Personal Spending Outpaces Income Growth For 26th Straight Month.

He commented: “Hey, a lot of good bankruptcies are coming.”

I replied: “Yes – the killer will actually be corporate! Many Zombie firms are on life support – low interest rates.”

Roughly three hours later, a second friend pinged me with this headline: GE warns its subprime mortgage unit could file for bankruptcy.

GE shut down WMC, its mortgage business, in 2007 after the market for lending to risky borrowers collapsed. But the business still faces legal trouble, including lawsuits from investors and an investigation by the Justice Department.

GE warned in a filing on Tuesday evening that WMC could file for bankruptcy if it loses one of those lawsuits.

Investors lost billions of dollars when subprime loans went bust across the country during the foreclosure crisis. Federal bank regulators ranked WMC as one of the worst subprime mortgage lenders in major metro areas, with more than 10,000 foreclosures between 2005 and 2007.

The investors who are suing claim that WMC misrepresented the quality of the mortgages it sold. The investors are demanding that WMC buy the mortgages back.

Story Irony

The irony in this story is that I was not at all referring to legacy businesses, but rather more recent corporate actions. This Tweet explains.

View image on Twitter

✔

With Zero Interest Rates and Massive Liquidity, The Percentage of Zombie Companies Has Soared. Promoting Excess Debt, Malinvestment and Overcapacity.

(Source BIS)

12:17 PM – Apr 29, 2018

A “zombie” corporation is one that needs constant refinancing at low interest rates or repetitive debt offerings to survive. Zombies are unable to pay down debt.

With rising interest rates, it gets increasingly harder for zombies to survive.

Here is another interesting Tweet:

…click on the above link to read the rest of the article…

NY Fed Warns about Booming Subprime Mortgages, now Insured by the Government

June 21, 2016

NY Fed Warns about Booming Subprime Mortgages, now Insured by the Government

“Astronomical” default rates and losses.

The New York Fed just warned about the ticking mortgage subprime time bombs once again being amassed, and what happens to them when home prices decline. But unlike during the last housing bust, a large portion of these time bombs are now guaranteed by the government.

Subprime mortgages are what everyone still remembers about the Financial Crisis. They blew up has home prices fell. Folks who thought they were “owners with equity” found out that they were just “renters with debt.”

And they dealt with it the best they could: forget the debt and the rent and stay until kicked out. Cumulative default rates on subprime mortgages spiked to 25% in 2007, according to the report. Banks ended up with the properties and collapsed. Mortgage backed securities based on these subprime mortgages imploded. Bond funds that held them imploded. All kinds of fireworks began. While subprime mortgages didn’t cause the Financial Crisis by themselves, they were an essential cog in a crazy machinery.

Now, the machinery is even crazier, subprime mortgages are even bigger, and mortgage-backed securities, chock-full with subprime, are hotter than ever. Only this time, the taxpayer is on the hook.

During the prior housing boom, from 2000 through 2005, government mortgage insurance programs covered less than 3% of all subprime mortgage originations, while private mortgage insurers covered over 20%.

But during the housing bust, private insurance of subprime mortgages dropped to essentially zero. And the government – through various programs by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the USDA’s Rural Housing Service (RHS) – stepped in to pick up the baton, plus some, insuring subprime mortgages with a vengeance. By 2009, the government insured nearly 35% of new subprime mortgages. More recently, it still insured about 22% of new subprime mortgages.

…click on the above link to read the rest of the article…

The Subprime Auto Loan Meltdown Is Here

February 25, 2016

The Subprime Auto Loan Meltdown Is Here

Uh oh – here we go again. Do you remember the subprime mortgage meltdown during the last financial crisis? Well, now a similar thing is happening with auto loans. The auto industry has been doing better than many other areas of the economy in recent years, but this “mini-boom” was fueled in large part by customers with subprime credit. According to Equifax, an astounding 23.5 percent of all new auto loans were made to subprime borrowers in 2015. At this point, there is a total of somewhere around $200 billion in subprime auto loans floating around out there, and many of these loans have been “repackaged” and sold to investors. I know – all of this sounds a little too close for comfort to what happened with subprime mortgages the last time around. We never seem to learn from our mistakes, and a lot of investors are going to end up paying the price.

Everything would be fine if the number of subprime borrowers not making their payments was extremely low. And that was true for a while, but now delinquency rates and default rates are rising to levels that we haven’t seen since the last recession. The following comes from Time Magazine…

People, especially those with shaky credit, are having a tougher time than usual making their car payments.

According to Bloomberg, almost 5% of subprime car loans that were bundled into securities and sold to investors are delinquent, and the default rate is even higher than that. (Depending on who’s counting, delinquency is up to three or four months behind in payments; default is what happens after that). At just over 12% in January, the default rate jumped one entire percentage point in just a month. Both delinquency and default rates are now the highest they’ve been since 2010, when the ripple effects of the recession still weighed heavily on many Americans’ finances.

…click on the above link to read the rest of the article…

The Oil Crash Of 2016 Has The Big Banks Running Scared

January 19, 2016

The Oil Crash Of 2016 Has The Big Banks Running Scared

Last time around it was subprime mortgages, but this time it is oil that is playing a starring role in a global financial crisis. Since the start of 2015, 42 North American oil companies have filed for bankruptcy, 130,000 good paying energy jobs have been lost in the United States, and at this point 50 percent of all energy junk bonds are “distressed” according to Standard & Poor’s. As you will see below, some of the big banks have a tremendous amount of loan exposure to the energy industry, and now they are bracing for big losses. And the longer the price of oil stays this low, the worse the carnage is going to get.

Today, the price of oil has been hovering around 29 dollars a barrel, and over the past 18 months the price of oil has fallen by more than 70 percent. This is something that has many U.S. consumers very excited. The average price of a gallon of gasoline nationally is just $1.89 at the moment, and on Monday it was selling for as low as 46 cents a gallon at one station in Michigan.

But this oil crash is nothing to cheer about as far as the big banks are concerned. During the boom years, those banks gave out billions upon billions of dollars in loans to fund exceedingly expensive drilling projects all over the world.

Now those firms are dropping like flies, and the big banks could potentially be facing absolutely catastrophic losses. The following examples come from CNN…

For instance, Wells Fargo (WFC) is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”

…click on the above link to read the rest of the article…

The Big Short

January 6, 2016

The Big Short

QUESTION: Marty; I am curious what you thought of the Big Short especially since you are the one who got the timing right to the day. In markets, I do not have to tell you that being too early is more dangerous than being too late. Since that fateful day on the floor when the Case-Shiller real estate index peaked and the stock market began to crash, everyone was calling it Armstrong’s Revenge for it began on the day of your ECM. They lucked out on their trades since they were all too early and played a game where the bankers fixed the price rigging the game. So any comment?

ANSWER: The BIG SHORT was financed by Plan B Entertainment Inc., which is owned by Brad Pitt. I thought the film was very accurate in describing what took place. It is questionable to what extent the bankers knew the full implications of what they had done. They knew they will filling the CDOs with garbage. They knew what they sold would collapse in price. I think what they did not comprehend was the extent to which the leverage would implode.

The movie did a fair job of trying to explain complex issues for the average person. But I think it still was over the heads of most. The casino explanation was clever, but short of the mark. Perhaps they should have used the analogy of life insurance. You can take a policy out on yourself. However, anyone else can as well. Your boss may take an insurance policy on you because you have a key role. There can be multiple policies on you but there is only one you.

…click on the above link to read the rest of the article…

The Big Short is a Great Movie, But…

January 5, 2016

The Big Short is a Great Movie, But…

Paris — Michael Lewis is the chronicler of Wall Street. He takes the complexity behind which the inhabitants of the financial world hide and weaves a tale that is both understandable and compelling. Starting with the classic “Liars Poker” (1989), Lewis has produced a number of books about the financial markets including “Flash Boys: A Wall Street Revolt” (2014) and “The Big Short: Inside the Doomsday Machine” (2010). Working with director Adam McKay and some great actors and screen writers, Lewis has managed to produce what is perhaps the most accessible and relevant treatment of the mortgage boom and financial bust of the 2000s, and the subsequent 2008 financial crisis.

The beauty of “The Big Short,” both as a movie and a book, is that it provides sufficient detail to inform the general audience about events and issues that are not part of everyday life. Wall Street is a secretive place, but “The Big Short” manages to convey enough of the details to make the story credible as a journalistic effort, yet also enormously entertaining. Lewis does this with two essential ingredients of any film: a simple story and compelling characters.

Images of greed and stupidity are presented like Italian frescos in “The Big Short,” pictures that are memorable and thought provoking. Indeed, what many people know and remember years from now about the 2008 financial crisis will be shaped by creative efforts such as “The Big Short” for the simple reason that Lewis has simplified the description into a manageable portion. Unlike hedge fund manager Michael Burry (played by Christian Bale), most people lack the patience and expertise to sift through and understand reams of financial data.

…click on the above link to read the rest of the article…

Seek and Ye Shall Find

November 25, 2015

Seek and Ye Shall Find

A man who wants to lead the orchestra must turn his back on the crowd.”
– Max Lucado.

So. Farewell then Jim Slater, who died earlier this month. We met Mr. Slater only once, at an investment conference at the height of the financial crisis in 2008. Just before going on stage we asked him what he was doing with his own money. He replied,

“I own index-linked Gilts in bearer form and I am holding them in a fire-proof safety deposit box.”

We doubt if he was joking.

Seven years on from the collapse of Lehman Brothers, everything has changed, and yet nothing has changed. There is no longer a perception of panic. $14 trillion of central bank stimulus has seen to that. But at the same time, a predicament brought to crisis by too much borrowed money has been exacerbated by much more borrowed money: $57 trillion of it, according to the McKinsey Global Institute. Perhaps the most prescient commentator before the fall of Lehman Brothers was Tim Lee of pi Economics, who wrote the following back in November 2007, fully 10 months before the failure of a second-rate investment bank triggered a global credit crisis:

“There is little doubt, to my mind, that we are now at a defining moment in financial history, a time that, once it has passed will be referred by economic and market historians in much the same way as the Wall Street Crash of 1929 or the credit and banking crisis of 1973-4 are now.

“Unfortunately, as is becoming increasingly clear, this crisis is not really just about subprime mortgages. It is much more serious than that. It is the beginning of an inevitable realignment of credit and wealth with incomes and accumulated savings… subprime is merely the first part of the credit edifice to give way, rather than the whole story…”

…click on the above link to read the rest of the article…

The Most Devious Liars in the Room

November 5, 2015

The Most Devious Liars in the Room

There were a few different stories coming out over the last few days that reveal the true nature of government and the apparatchiks who use disinformation, devious machinations, fraudulent accounting, and taxpayer money to cover up their criminality, lies, and the true state of the American economy. The use of government accounting tricks to obscure the truth about our dire financial straits is designed to keep the masses sedated and confused.

A few weeks ago, to great fanfare from the fawning faux journalists who never question any Washington D.C. propaganda, they announced the lowest annual deficit of Obama’s reign of error.

For the fiscal year that ended Sept. 30 the shortfall was $439 billion, a decrease of 9%, or $44 billion, from last year. The deficit is the smallest of Barack Obama’s presidency and the lowest since 2007 in both dollar terms and as a percentage of gross domestic product.

Jack Lew, the Treasury Secretary, and Obama were ecstatic as they boasted about this tremendous accomplishment. I find it disgusting that our leaders hail a $439 billion deficit as a feather in their cap, when until the mid-2000’s the country had never had an annual deficit above $300 billion. After 183 years as a country, the entire national debt was only $427 billion in 1972. Now our beloved leaders cheer annual deficits above that figure. What a warped, deformed, dysfunctional nation we’ve become.

When the government reported this tremendous accomplishment, there was no way to verify the number against the national debt figures, as the government stopped reporting the daily national debt figure because of the debt ceiling impasse with Congress. The farce of these Kabuki Theater exercises in government incompetence is almost beyond comprehension.

…click on the above link to read the rest of the article…

Largest “Alternative” Mortgage Lender in Canada Plunges, Denies “Systemic Problem” in Housing Market

July 15, 2015

Largest “Alternative” Mortgage Lender in Canada Plunges, Denies “Systemic Problem” in Housing Market

Home Capital Group, Canada’s largest non-bank mortgage lender, focuses on “alternative” mortgages, as they’re called euphemistically, that is high-profit mortgages to risky borrowers with dented credit or unreliable incomes, such as self-employed folks or new immigrants, who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime.

Its stock plunged almost 20% on Monday in Toronto. On Tuesday, it dropped another 4% to close at C$32.74, the lowest since September 2013, and down 41% from the halcyon days last November.

Analysts went into a wild and belated scramble to lower their ratings on the stock. It has been the fourth most shorted stock in Canada, with 20% of its free float shorted, according to Bloomberg. Those folks made a bundle over the last two days.

Friday after hours, when no one was supposed to pay attention, the company issued astatement ahead of its second quarter earnings report on July 29 that shocked analysts:

In the second quarter, originations of high-margin uninsured mortgages had plunged 16% from a year ago, to C$1.29 billion. And originations of lower-margin insured single-family mortgages had plummeted 55% to C$280 million.

A warning sign flaring up in Canada’s majestic housing market where prices have soared for years, in an economy rattled by the oil price crash and other issues, and now likely in a technical recession?

No way.

“We think this is an HCG-specific growth issue,” Royal Bank of Canada analyst Geoffrey Kwan wrote to clients, “not an early signal of rising losses or broader housing stress.” However, he did expect industry mortgage loan growth to “slow in the next 2-3 years.”

Just not yet.

The company blamed some changes it had made: It had terminated some of its 4,000 or so mortgage brokers, “which caused an immediate drop in originations,” according to the statement.

It suddenly decided to use a “conservative approach to growing its residential mortgage business.” What had spooked it? What does Home Capital know that we don’t? It didn’t say.

…click on the above link to read the rest of the article…

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