Tag Archives: Home sales

Economic Collapse, Overvalued Stocks And The Stealth Bull Market In Gold

The narrative that the economy continues to improve is a myth, if not intentional mendacious propaganda. The economy can’t possibly improve with the average household living from paycheck to paycheck while trying to service hopeless levels of debt. In fact, the economy will continue to deteriorate from the perspective of every household below the top 1% in terms of income and wealth. The average price of gasoline has risen close to 50% over the last year (it cost me $48 to fill my tank today vs about $32 a year ago). For most households, the tax cut “windfall” will be largely absorbed by the increasing cost to fill the gas tank, which is going to continue rising. The highly promoted economic boost from the tax cuts will, instead, end up as a transfer payment to oil companies.

The rising cost of gasoline will offset, if not more than offset, the tax benefit for the average household from the Trump tax cut. But rising fuel costs will affect the cost structure of the entire economy. Furthermore, unless businesses can successfully pass-thru higher costs connected to high the er fuel costs, corporate earnings will take an unexpected hit. Rising energy costs will hit AMZN especially hard, as 25% of its cost structure is the cost of fulfillment (it’s probably higher because GAAP accounting enables AMZN to bury some of the cost in the inventory account, which then becomes part of “cost of sales”).

Gold is holding up well vs. the dollar. The dollar is at its highest since mid-November and the price of gold is trading 2% higher than it was at in November. Also, don’t overlook that the Fed began its snail-paced interest rate hike cycle at the end of 2015. Gold hit $1030 when the Fed began to tighten monetary policy. I thought gold was supposed to trade inversely with interest rates (note sarcasm). Gold is up nearly 30% since the Fed began nudging rates higher. Despite that it might currently “feel” like the price of gold is going nowhere, beneath the surface gold (and silver) have been staging a very powerful bull market pattern.

Kerry Lutz invited me onto his Financial Survival Network Podcast to discuss these issues and more. We have a good time catching up on a diverse number of topics – Click on the link below to listen or download:

Visit these links to learn more about the Investment Research Dynamic’s Mining Stock Journal and Short Seller’s Journal.

No Virginia: The Falling Housing Market Isn’t About Tight Inventory

The National Association of Realtors released its monthly  “Pending” home sale report for April this morning.  It fell 1.3% from March.  The Wall Street analytic “brain trust” was looking for a 0.4% gain.  The housing data is repetitively coming in well below Wall Street forecasts. This is emblematic of the unrealistic amount of “hope” built into the psychology of the American investor, who wants badly to believe anything he is told by “experts.”  A cynic might say it’s adverse denial of reality…

The NAR’s chief pimp, Larry Yun, once again is blaming the bad numbers on shortages of homes across the country.  This narrative is the pinnacle of mendacity.  Too be sure, in certain “hot” areas, there is a shortage of sub-$500k homes.  Blame the Government, which has made available Taxpayer-backed mortgages to anyone who can fog a mirror – see this article, for instance.  And blame the flippers, who are snapping up low-priced homes on the hope that they can turn it around and sell it to one of the fog-the-mirror buyers using a Government subsidized mortgage.

In truth, a recent survey showed that more than 50% of the inventory nationwide is in the high-priced (over $750k) price segment.  And prices are falling in most markets in this category, led by New York City (all five boroughs), which is starting to get decimated.

XHB is an ETF that tracks the S&P Homebuilders Select Industry Index. Lowes and Home Depot are the largest holdings. Pulte (PHM), NVR Inc (NVR) and DR Horton (DHI) are the next three largest holdings. Like the DJUSBH, it’s a mix of homebuilders and housing market-related stocks (building construction suppliers, etc).

Recently there’s been some extraordinarily large put positions purchased on XHB (XHB closed at $39.11 on Friday). For instance, on Monday and Tuesday last week, someone bought 2,200 and 2,500 June 15th $40-strike puts. There’s 4,551 June 15th $38-strike put open interest as well. These numbers substantially outnumber the open call options for the June 15th expiry. There’s 15,033 of open interest in the September $35’s, with 4,400 of those purchased this past Thursday. The largest September call open interest is 1,393 $42’s.

The point here is that some entities – probably a few hedge funds – are making a rather large bearish bet on the housing sector. It’s hard to know if the puts are being used to speculate or as a hedge. Either way, the sheer volume of puts purchased reflects heavy bearish sentiment toward the sector.

Peak flipping? I also strongly suspect that the NAR skews its data-sample toward the lower-price market segment. In other words, if it included a higher percentage of over $750k homes in its data-collection and sales calculation, the existing home sales number for April would have been lower. It’s the magic of statistics. I would also suggest that there was probably some sales “pulled forward” out of fear of rising interest rates. Typically there’s a surge in homebuying when interest rates begin to rise. Certainly the mortgage brokers are pitching the “buy now before rates go higher” story.

On a seasonal basis, home sales should be rising from March to April, even on a seasonally adjusted annualized rate basis. Furthermore, the prospect for May – assuming the NAR does not pull any statistical chicanery – is not good. How do I know? Because mortgage purchase applications have been down 5 weeks in a row. Four of the past five weeks, purchase apps were down 2% each week and one week was down 0.2%. This is why the XHB is down 15.6% since peaking in late January. Some of the homebuilders I’ve been recommending as shorts are down north of 20%. They still have a long way to drop.

My Short Seller Subscribers and I are raking in easy money shorting and buying puts on individual homebuilders. I discuss timing and options strategies. I also disclose my trades.  I also present data and analysis that you won’t find in the mainstream or alternative media.  You can learn more about this newsletter here:  Short Seller’s Journal information.

SSJ provides outstanding practical advice for translating a company’s bottom line fundamentals into $$’s. Whether you’re a buy and hold long term investor or short term trader (or both), you’ll find all kinds of helpful advice on portfolio management, asset allocation and short term/long term options strategies. Really can’t recommend SSJ enough! Thanks Dave for your great service!   – John

Getting Rich On Taxpayer-Backed Subprime Mortgages

A branch manager gets home loans for borrowers with weak credit or low incomes—and taxpayers back him up.Bloomberg.com

Bloomberg News featured a story today that I find to be an outrage. It seems that some punk kid in Houston – Angelo Christian – has recreated the Jordan Belfort story (“The Wolf Wall Street”) using subprime quality, Government-backed mortgage.

The Government now guarantees mortgages which require no money from the buyer’s pocket for a down payment, a 50% DTI (monthly total debt payments = 50% of pre-tax personal income), no income restrictions and will finance down to a 580 credit score. Someone with a 580 score has a track record of debt default, serial delinquency and, quite likely, a recent bankruptcy:

This would-be homeowner has a 596 credit score, putting him in the subprime range. His car has been repossessed, something that would likely disqualify him at the Bank of America branch next door.

“Usually a repo that’s like three years old, we’re not really going to sweat that,” he assures the caller. “We’re pretty lenient here.” He steers his prospect to several $400,000 homes with swimming pools. “Have your wife check that out,” he says, referring to a remodeled kitchen with granite countertops. “She’s going to love it.”

Christian works for American Financial Network, which underwrites, funds and services the entire spectrum of Taxpayer-guaranteed mortgage programs:  Fannie Mae, Freddie Mac, FHA, VHA and USDA (yes, the USDA guarantees “rural area” zero-percent down mortgages).  AFN receives fees up to 5% – or $15,000 – a on $300,000 mortgage.  This in and of itself is an outrage because it takes zero skill to underwrite a Government-backed mortgage.

“Zero-skill,” that is, unless fraud is involved.  I’m not accusing AFN of fraudulent activity, however, as we witnessed during the Big Short housing bubble, fraud was oozing from every crevice in the U.S. mortgage underwriting industry.   And subprime mortgages pumped and dumped by a character like Angelo Christian are usually the standard breeding ground for unscrupulous behavior.

Even Bloomberg expressed skepticism:  “This kind of lending echoes the subprime mortgage boom that preceded the credit crisis of 2008.”

In civil fraud complaints, the Department of Justice has accused many companies, including Quicken and Freedom Mortgage, of improperly underwriting FHA loans and then filing claims for government insurance after borrowers defaulted. In 2016, Freedom Mortgage settled for $113 million, without admitting liability.

Angelo Christian and American Financial Network use Taxpayer guarantees to underwrite mortgages with an elevated probability of default and yet, they bear zero risk.  They pocket a big fee-skim upfront and face no consequences when the 580 FICO score borrower declares bankruptcy – again.  Just for the record, after accounting for a 0-3% down payment plus all transactions costs – which approximate 10% of the cost of the home – these mortgages are upside-down vs. the value of the “net” value of the house at close.  Not a good business deal for the Taxpayers.  

FHA loans are now experiencing a 30-day or more delinquency rate with nearly 10% of its loans.  Fannie Mae and Freddie Mac combined wrote-down over $15 billion worth of loans in Q4 2017.  They required a $4 billion cash infusion from the Government (taxpayer) as a result of both accounting and cash losses.

This is going to get worse.   But until this collapses again – and it will – mortgage brokers like Angelo Christian are proliferating.  They employ a salesmanship resembling that of dirty boulevard used car salesmen (“we finance any credit / bankruptcy o.k.”) as a means of transferring a massive amount of money from the Taxpayer to their own pockets.

I would urge everyone to read this Bloomberg article so you can read about how Angelo uses taxpayer-funded fees to pay for his fancy sports cars in exchange for pushing subprime mortgages destined to blow-up onto people who have no hope of supporting the cost of home ownership on a sustainable basis.

 

Gold And Silver Are Extremely Undervalued

Patrick Vierra of Singapore Bullion invited me to discuss precious metals, the stock market and the fiat currency-fueled asset bubbles that will blow-up sooner or later.  I explain why investing in gold requires a long term perspective on investing and wealth preservation, why gold and mining stocks are extremely undervalued right now and why the world wants out of the U.S. dollar.

Singapore Bullion is Singapore-based bullion dealer and bullion storage facility with a wide-array of products and services – the podcast is ad-free:

01:37 Gold – A Long Term Perspective
08:14 Was 2015 the bottom for gold price?
13:14 Gold – One of the Best Performing Assets
14:45 Bullion vs Mining Stocks
17:10 Gold is very undervalued right now
19:20 The COMEX cycle that impacts the gold price
21:47 Silver will outperform gold
25:00 How overvalued are the stock markets
30:11 How every U.S pension funds will ‘blow up’
32:40 The ratio of paper to physical gold
35:01 Housing bubble rearing its head again
39:51 “Trump loves debt!”
41:09 Fed rate hike to prick the housing bubble?
45:25 The world wants out of the dollar

You can learn more about my research and stock idea newsletters here:

MINING STOCK JOURNAL                                     SHORT SELLER’S JOURNAL

The Mining Stock Journal is twice per month, every other Thursday evening. The Short Seller’s Journal is weekly, every Sunday evening. The last mining stock purchase recommendation (May 17th issue) is up 10.5% in the last five trading days. It’s going higher – a lot higher.  My Short Seller’s Journal subscribers have been raking in the profits in my homebuilder short ideas.

Subprime Mortgages: The Dog Returns To Its Vomit

Other people’s money is always more fun to play with recklessly than your own.  As such there’s been a quiet escalation in number of  private capital pools offering mortgage (and auto) financing to subprime quality borrowers.  “Special Circumstance Lending” is one such lender in Denver.  It constantly runs ads on Denver radio.

The proprietor of Special Circumstance Lending was an aggressive participant in the junk mortgage underwriting business and dumped more than his fair share of subprime crap into the Wall Street mortgage securitization scheme that led to “The Big Short.” SCL doesn’t need to see your tax returns.  It will give you a mortgage based on bank account statements.

The big Wall Street banks appear to have retreated from risky mortgage lending.  But have they? Though new regulations are intended to limit the amount risk the big banks take underwriting mortgages , the banks instead extend large lines of credit to private “non-bank” mortgage lenders, like Exeter Finance.  The average credit score of Exeter underwritten paper is 570.   If Exeter doesn’t get repaid, the big banks extending the funds to underwrite that garbage won’t get repaid.

The Government, via Fannie Mae and  Freddie Mac, has been underwriting de-facto  subprime mortgages – though they are still labeled “prime” for securitization purposes – for a couple of years.  Let’s face it, a 3% down payment mortgage – where the 3% does not have to come from the pocket of the homebuyer – with a 50% DTI (50% of pre-tax monthly income is used to service debt) is not a prime-grade piece of paper. I don’t care what the credit score is attached to that underwriting.

But Freddie Mac is taking it one step further down the sewer. A Short Seller’s Journal subscriber who is involved with an investment fund that invests in difficult financings sent me the flyer he received for the new Freddie Mac dog vomit mortgage:  “I occasionally process residential mortgages, so I stay on top of the underwriting guidelines…As of July 29, you can buy a single family / condo (there has to be a first time homebuyer on the deed), with ZERO DOWN AND A 620 CREDIT SCORE, WITH NO INCOME RESTRICTIONS. I had a stroke when I read that!”

There is no minimum borrower contribution from borrower personal funds.  Furthermore, borrowers who put down 5% do not have to have a credit score.

The mortgages now offered by the Federal Government are beginning to look and smell like the same sub-prime sewage that was proliferated by Countrywide, Wash Mutual, etc in the mid-2000’s.  True, as of yet we have not seen a widespread issuance of the adjustable-rate ticking time bombs that triggered the financial crisis. But the U.S. Government, using your taxpayer dollars, has become the new subprime lender of first resort for first time homebuyers who have little financial capability of supporting the cost of home ownership for an extended period of time.

Like the dog returning to its vomit, the U.S. financial system has returned to the business of underwriting the next financial crisis.   Only this time around the Federal Government is providing a large share of the “rope” with which new homebuyers will eventually hang themselves.  The financial explosion that is going occur will be worse than 2008 because the average household has significantly more debt relative to income now, with more than 75% of all households living from paycheck to paycheck.  One small hiccup in the economy will trigger an avalanche of debt defaults.

Despite what seems like a strong housing market and buoyant stock market, the XHB homebuilder ETF is down 15.4% since mid-January. Many individual homebuilder stocks are down a lot more. My subscribers and I are making a small fortune shorting and trading puts on homebuilder stocks.  You can learn more about my subscription newsletter here:  Short Seller’s Journal information

 

Homebuilder Stocks Are In A “Bear Market”

I strongly believe that labeling the condition of the stock market based on arbitrary “percentage changes” up or down is absurd.  But then again most attributes of the current stock market are sublimely ridiculous, if not outright Orwellian.

But, what the heck. If down 20% is how you want to define a “bear market,” then a portfolio of Lennar (LEN, down 24%), Beazer (BZH, down 24%) and KB Homes (KBH, down 22%) are in definitive bear markets and heading lower, as are several other homebuilder stocks. This is a fact that intentionally goes unreported by Wall Street and Wall Street’s hand-puppet, the mainstream financial media (CNBC, Fox Biz, Bloomberg, Wall St Journal, Marketwatch, etc).

Homebuilders maliciously exploit a GAAP loophole that enables them to remove “interest expense” from the SEC-filed income statement. This artificially boosts reported GAAP and non-GAAP net income/earnings per share. I review this using Beazer as an example in the last issue of the Short Seller’s Journal.

The nature of the “bull market” in housing is widely misunderstood. As such, the easiest area of the market to make money shorting stocks is the homebuilding sector. I can say with certainty that 80% of the money I’m making shorting stocks is with homebuilder puts. It’s a boring sector but the percentages moves in these stocks makes it easy to “scalp” profits and to set-up low risk, highly profitable long term short positions.

 

Right now homebuilders are behaving like an ATM machine for short-sellers.

The Short Seller’s Journal is a unique weekly newsletter that provides truth-seeking insight on the economy and presents ideas for making money shorting stocks (including put option and capital management strategies). Learn how to use the homebuilders as your own ATM here: Short Seller’s Journal.

The Fed Successfully Destroyed The U.S. Housing Market

What concerns me is when people put their hard-earned money into housing or any other supposed store of value thinking that the sky is the limit. We are living in an age of epic distortions, misinformation and outright fraud. – Aaron Layman, Dallas-based Realtor, member of the Dallas and Houston MLS boards and a housing market analyst

The propaganda about a hot economy, “overheated” housing market and tight labor market is just one of several Big Lies being promoted by politicians and business leaders. The article below references a comment made by a money manager about the housing market “overheating.” But the housing market isn’t overheating. What’s overheating is the amount of “conforming” mortgage debt underwritten by the Federal Government on behalf of taxpayer. I’ll have more to say about this tomorrow.

The transformation of Fannie Mae, Freddie Mac, the FHA and the VHA into the new subprime debt provider has caused a shortage of homes under $500k, or under $600k in “high price” zones. But there’s an oversupply of homes north of $700k in most areas (the Silicon Valley area notwithstanding). But more on this tomorrow.

A colleague and email acquaintance, Aaron Layman, is a realtor in Houston who has been uniquely outspoken about the degree to which the current housing market is unhealthy and dysfunctional. I say “uniquely” because 99.9% of all realtors would sell a roach motel trap to cockroaches if they knew that they could get the cockroach qualified for a Taxpayer-backed mortgage to make that particular purchase (“hey man, this is a good value and prices are only going higher”).

Aaron has written a blog post which details the manner in which the Fed has destroyed the housing market and economy:

If you are out shopping for a home during this summer selling season and you are having a difficult time finding a good property at a reasonable price, be sure to thank the folks at the Fed for their fine work. Destroying a market takes some effort, particularly if you account for all of the PR necessary to cover your tracks. The Federal Reserve and their army of economists have created another fine mess in the U.S. housing market, destroying real price discovery and distorting the real value of a home which is end-user shelter.

Please use this link to read the entire essay – it’s worth your time:  The Fed Has Destroyed The Housing Market

Homebuilder Stocks: Overvalued, Over-Leveraged And Going Lower

I continue to believe that the “lowest hanging fruit” in shorting this stock market is the homebuilders and related stocks. History appears to be repeating, or at least “rhyming” in the housing sector:

Most investors do not realize this, because the majority of traders and “professional” money managers were still in college or b-school during the 2007-early 2009 stock market collapse, but the homebuilding sector actually peaked and began a waterfall decline in mid-2005 (see the chart above).

The propaganda narrative is that this time around the subprime mortgage issuance has been contained by regulation.  This is patently false.  The subprime mortgage game shifted from largely private underwriters to the Federal Government, starting in 2008.  Because the Government is involved, it has been well disguised in a “conforming” mortgage costume based on Federal Housing Finance Agency “requirments.”  Well, more like “guidelines” than requirements.

The FHA began offering 3.5% down payment Federally guaranteed mortgages in 2008.  Its underwriting market share went from 2% to 20%.  Not to be outdone, Fannie and Freddie began to offer 3% down payment, reduced PMI mortgages a few years later.  Not to be outdone by themselves, and after Fannie reported a $6 billion Q4 loss and required  a $3.7 billion cash infusion from the Taxpayers, Fannie and Freddie raised the DTI limit on conforming mortgages to 50%.  If the housing market is healthy, why is Fannie Mae receiving cash infusions?  A 50% DTI means that the mortgage applicant requires 50% of its gross monthly income to service its monthly debt payments (mortgage, credit car, auto, etc).

A 3% down payment, 50% DTI mortgage is subprime garbage.  It also implies that the FICO score is a farce.  Some who requires a 3% (in many cases less) downpayment with a 50% DTI  does not have prime credit rating.   After the DTI ceiling was raised in December, new  mortgages with DTI’s in excess of 45% jumped from 5% to 20%  of all mortgage issuance in January and February.  This subprime mania in its essence – though not name – and will lead to another massive Fannie/Freddie/FHA/VHA bailout.

All of the signs of the top of the last bubble are re-emerging. Home equity “cash out” loans are soaring again at what is likely peak home prices. According to Freddie Mac, cash-out “refis” are at their highest level since 2008.

We saw how this movie ended the last time around. If you forgot, rent “The Big Short.”  A private investment management company in California, Carrington Holding Company, has a mortgage lending facility that will now underwrite and fund mortgages to borrowers with credit scores as low as 500. Carrington will do loans up $1.5 million on homes/condos and home equity cash outs up to $500k. Recent credit events like foreclosure, bankruptcy or a history of late payments are acceptable. This business plan will not end well.

I recently saw a “for sale” in an upper-middle class neighborhood in Denver which advertised, “no money down, lender on site.” If the market is “hot,” why is this house being marketed as “no money down” and why is a lender at the open house? Is this a Volkswagon “sign and drive” transaction or this is a several $100k  home “purchase”  at what is likely the market peak?

This is in an area in which the average home sells for over $600k, which means unless the buyer puts down at least $70k, it can’t be backed by one of the Government mortgage agencies (the max loan limit for a conventional mortgage in Denver County $530k – in most areas of the country, the maximum loan size for a conventional Govt mortgage is $453k – Denver County is considered a “high price” area and thus the Government will underwrite a larger mortgage – “guidelines,” not “rules”).

This is the type of home borrowing that occurred in the last couple years of the mid-2000’s housing bubble. That “open house” sign also tells me that the market for homes that can’t be funded without Government assistance is deteriorating.

This housing market is unfolding in an eerily similar manner as the mid-2000’s bubble. Sales volume, prices and rental rates are starting to literally crash in New York City, as I’ve detailed in the last couple of issues. I read an article that said, based on the current sales rate, Miami has a built up a 6-year supply of condominiums. Again, the last time around the bubble began to pop first in NYC and south Florida. Phoenix and Vegas followed those two cities. As I presented last week, the move by Zillow Group to get into house-flipping is the signal for me that those two cities have peaked.

The Short Seller’s Journal provides unique insight to the economic data and corporate earnings – insight you’ll never get from so-called financial “experts.”  SSJ then offers ideas every week for making money on this insight.   To learn more, click here:  Short Seller’s Journal subscription information

 

Auto Sales Forecast To Tank In April

JD Powers and LMC Automotive are projecting auto sales to drop 8% in April from a year-ago April:

For much of the past two years, the discounts offered by automakers have remained at levels that industry analysts say are unsustainable and unhealthy in the long term…Sales are expected to drop further in 2018 as interest rates rise and more late-model used cars return to dealer lots to compete with new ones. – April Auto Sales Forecast

General Motors reported lousy Q1 numbers this morning. Revenues dropped 3.2% year over year in Q1. Revenues would have been worse but GM joined the rest of the country and extended financing to future deadbeats who took out loans greater than their annual pre-tax income in order to buy a pick-up truck. In other words, GM’s financing unit generated 25% growth in revenues, which cushioned drop in GM’s automotive revenues. Operating income fell off a cliff, plunging nearly 80% vs. Q1. Because of GAAP manipulations, EBIT was down only 55% from Q1 2017.

BUT, GM was credited with a headline “beat” of the Street’s earnings estimates. Only in America can a company’s operating numbers go down the drain and yet still be credited with a headline GAAP-manipulated net income “beat.” I find much humor in this absurdity. Others might find it, upon close examination, to be pathetic or even tragic. Given the forecast for April automotive sales, at least now we know GM announced earlier this month why it will begin to report auto sales on a quarterly basis instead of monthly.

The economy is much weaker than the narrative promoted aggressively by Wall Street, DC and the financial media. This tweet from @RudyHavenstein captures perfectly the divergence between moronic mainstream financial media and Main Street reality. We’re bombarded daily with propaganda about the healthy economy. Yet plenty of statistics show that the average household in this country is struggling under a mountain of debt and is living paycheck to paycheck.

This mostly explains the why credit card debt hits a new record high every month now. The average household is using revolving credit to help make ends meet. The only problem is that, in aggregate, the credit debt is not getting paid down. Rather, it’s increasing by the day. To compound the problem, credit card issuers are aggressive about jacking-up rates when the Fed funds rate is rising. I have a friend who has a 670 FICO score and recently used a loan to buy a car. The interest rate on the loan is 8%. This means that credit cards in general are charging rates in the mid-to-high teens to users with a sub-720 credit score. The outstanding balance will double in 5 years for a card-user who only pays the minimum amount each month on a card with a 15% interest rate. The only problem: that user will likely default before the balance doubles.

But why listen to the Orwellian propagandists?  Just follow the money from corporate insiders: The graphic to the right shows the ratio of insider sells to buys. When the ratio is under 12:1, it’s considered “bullish.” When the ratio is over 20:1, it’s considered bearish. In the last couple of weeks, the ratio has spiked up over 35.

It would seem the Atlanta Fed agrees with the assessment that the economy is far weaker than is being promoted by politicians and Wall Street. Back in February, the Atlanta Fed was forecasting Q1 2018 GDP to be 5.4%. Since then the Atlanta Fed has cut lowering its forecast almost weekly. This past week it chopped its Q1 GDP forecast down to 1.9%.

How can you profit from this insight?   I’ve been presenting several “off the radar” short-sell ideas in my Short Seller’s Journal from which myself and several subscribers are making a quiet killing.  Right now the easiest money to be made in the market is shorting homebuilders.  I have have a subscriber who made 150% on DHI puts in the first 30 minutes of trading today. I have another subscriber who is short Lending Tree (TREE) from $340.  I got this email from him today, with the stock down $42 to $264:  “The TREE keeps on giving. Many thanks!”

Every time the market bounces now, or when individual “daytrader/algo” stocks pop on headline “beats,” it creates an opportunity to make easy money shorting stocks or buying puts.  The Short Seller’s Journal provides unique insight to the economic data and corporate earnings – insight you’ll never get from so-called financial “experts.”  SSJ then offers ideas every week for making money on this insight.   To learn more, click here:  Short Seller’s Journal subscription information. This week I’ll be presenting an oldie but goodie short that soared today on tepid numbers (no, it’s not Facebook).

Just wanted to give you kudos for for your Short Sellers Journal. i find myself waiting every Sunday to read your publication. Your research and conclusions ring true. One of the better newsletters I receive. – recent subscriber feedback

Subprime Mortgages Come Roaring Back…

…Only this time around they are sponsored by the U.S. Government and guaranteed explicitly  by the Taxpayers.  I say “explicitly” because Government agency-issued mortgages are directly guaranteed.  In 2008, the Government bailed out the banks who had issued subprime mortgages and related derivatives, but the Taxpayer never signed up for the multi-trillion dollar bailout, which largely transferred wealth from the middle class taxpayer to the Too Big To Fail bank executives.

In an attempt to off-set the falling velocity in the housing market, taxpayer-backed Fannie Mae and Freddie Mac have reduced their credit standards on guaranteed conventional mortgages several times over the last 3 years. In 2015 they reduced the down payment requirement to 3% from 5%. In addition, they reduced the amount mortgage insurance required on mortgages with less than 10% down. Then they allowed “soft dollar” contributions to count as part of the 3% down payment, like seller concessions or realtor commission concessions. They also allowed homebuyers to use loans from other sources to fund the down payment. In this manner, a homebuyer could prospectively buy a home with a taxpayer-guaranteed mortgage using no cash out pocket.

Then last June (2017) Fannie and Freddie raised the Debt To Income (DTI) ratio from 45% to 50%. DTI is the ratio of monthly debt payments (all forms of household debt payments) to the borrower’s monthly gross income. A borrower with a DTI of 50%, including the new mortgage, is using 50% of monthly net income to make debt payments (mortgage, credit cart, auto, student loans, personal loans).

The chart on the right shows the spike-up in the number of conventional mortgages issued by Fannie and Freddie once the DTI was raised (source: Corelogic w/my edits). As you can see, before the DTI was raised the number of mortgages issued with a DTI over 45% was one in twenty. After the change, the one in five new mortgages backed by the taxpayer were issued to homebuyers with a DTI over 45%. This is, by far, the highest level of high-DTI mortgages since the financial crisis.

But the story gets worse. The Urban Institute conducted a study of high DTI mortgages and discovered that 25% of all Fannie Mae mortgages issued to borrowers with a credit score below 700 had a DTI over 45% in just the first two months of 2018. This is up from 19% a year earlier. This is after Fannie Mae reported a $6.5 billion loss in Q4 2017 that the taxpayers will cover. The Government raised the DTI in order to stimulate home sales by inducing households, who could otherwise not afford the monthly cost of home ownership, into taking on even more debt to purchase a home. The majority of these home “buyers” will ultimately default and the taxpayer will get the privilege of eating the loss.

Zillow Group Is Now Flipping Homes? – Zillow Group stock plunged as much as 11% on Friday after it announced that it would be adding home flipping to its home-listing services. Clearly the market was spooked by this announcement – and for good reason. The plan will significantly raise ZG’s risk profile and will require the assumption of $10’s of millions in debt, depending on the number of homes ZG holds on its balance sheet any given time. It’s plan now forecasts holding up to 1,000 homes by year-end.

ZG stock is extraordinarily overvalued.   The Company released its Q4 and full-year 2017 earnings on February 8th and the numbers had little affect on ZG’s stock. ZG continues to generate operating and net losses. It incurred a $174 million intangibles write-down in Q4 2017 that was related to its 2015 acquisition of Trulia. While the Company and Wall St. analysts will remove this write-down as “non-recurring, non-cash,” it is indeed a write-down that occurred to an asset for which Zillow overpaid by at least $174 million. As the housing market fades, ZG will likely incur bigger write-downs of its “intangibles and goodwill,” which represents 85% of ZG’s book value.

The move into home-flipping signals, at least in my view, that ZG has determined that its current business model will never be profitable. The decision to test  home flipping in Phoenix and Vegas can be seen as desperate attempt to generate income. Ironically, in the last housing bubble, flippers in those two markets were decimated. I don’t see how this will end well for ZG, especially now that Congress is exploring rules changes to Fannie and Freddie that will raise the cost of conventional mortgages. The conventional mortgage user is the prime market for home flippers and now the average conventional mortgage applicant has de facto sub-prime credit.

By the way, just for the record, on average and in general, home prices are coming down quickly in most markets.  Case Shiller is severely lagged data and it emphasizes price gains from flips.  Robert Shiller used to admit to these facts publicly. Now he’s a bubble cheerleader like everyone else who sold out.

Taxpayer:  Get ready to eat more losses on the housing and mortgage market.

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