Tag Archives: Home sales

Home Sales Data Show The Bubble Is Bursting

There’s no question in my mind now that the housing “snowball” has started downhill and it won’t take long to develop into an avalanche. In addition to all of the “for sale” and “for rent” signs I’m seeing with my own eyes popping up around Denver, I’ve been receiving emails from subscribers describing the same thing in their area.Short Seller’s Journal, July 22nd issue

The existing and new home sales reports this week were worse than even I expected.  Given the statistical manipulation tools used by the National Association of Realtors (existing home sales) and the Census Bureau (new home sales) – both entities use the same regression software – one can only wonder about the true rate of home sales decline.

Yesterday, CNBC.com featured a report titled, Southern California home sales crash, a warning sign to the nation.  I was surprised to see CNBC issue a bearish report on anything.  This report is similar to what’s occurring in New York City – rising inventory and falling sales.  Apartment rents in NYC are also dropping.  It’s similar in nearly all “bellwether” markets.

The Housing Bubble Blog (thehousingbubble.com), which was around during the mid-2000’s housing bubble, posted an article on Friday titled, “Discount sales can create a snowball effect.” The article featured articles from different cities, Portland, Dallas, Ft Collins (Colorado) and Minnapolis/St Paul which described rising inventory and falling prices.

This explains why the homebuilder stocks are in an official “bear market,” with some homebuilder stocks down over 30% since late January. I have yet to hear or read about this fact from the mainstream financial media or Wall Street.

Today’s new home sales report, along with the serial decline in the housing starts  data, disproves the “low inventory” narrative.  Affordability, rising rates and a shrinking pool of potential homebuyers who can qualify for a conforming mortgage has torpedoed demand.  The latest U of Michigan Consumer Sentiment report featured this chart on homebuying sentiment:


As you can see, the consumer “sentiment” toward buying a home is at its lowest reading since 2008. This is not a fact that would ever show up in the mainstream financial reporting on the housing market.

As for the low inventory narrative. The California Association of Realtors reported that June existing home sales plunged 7.3% from June 2017 and inventory is up 8.1%. A subscriber of the Short Seller’s Journal showed me an email in which Pulte Homes (PHM) was offering up to an unprecedented $20,000 bonus to realtors who sold Pulte homes in new developments in northern Florida.

Housing starts for June reported last Wednesday came in at 1.17 million (SAAR). The Wall Street brain trust was looking for 1.32 million. This was a 12.3% plunge from May.  May’s original report was revised lower. Starts for both single-family and multi-family homes were down sharply across the entire country. If inventory were “low,” housing starts would be soaring, not falling.

I’m sure northern Florida is not the only market in which Pulte is offering large selling bonuses and I’m sure Pulte is not the only homebuilder offering large broker incentives. I look at the inventory numbers across homebuilders every quarter. A lot of the inventory is “work-in-process.” But finished a new home does not necessarily show up in the MLS system unless the builder lists it. This is why, on the surface, new home inventory might look relatively low but the builders are showing huge inventory levels in their SEC-filed financials.

Because of the nature of the asset, and the relative illiquidity of the market relative to actively traded financial assets, change in the direction of the momentum in the housing market is like turning a large ocean-freighter around. The manic phase of the housing bubble is over. The momentum has been turning in the opposite direction since late 2017. Flippers who bought homes in the last 3-6 months will soon become desperate to sell. Some will look to rent and “wait for the market move through this valley and head up again” only find that rental prices in many areas are now below the cost of carry.  They forget to tell you that part in flipper seminars advertised on local radio stations.

Soon the “discount effect” of falling prices will snowball into an avalanche.  If you think this is wrong, take another look at homebuilder stock charts.  The commentary above is partially excerpted from the latest issue of the Short Seller’s Journal.  In this issue I discuss various strategies for building and managing short  positions in the homebuilder stocks in the context of the homebuilder earnings reports due out tomorrow (Thursday, July 26th).  New subscribers get a handful of back-issues, an option trading primer and a copy of my Amazon Dot Con report.

Trump’s Fed Comments Sends Gold Soaring

Last week Donald Trump broke the theoretical “Chinese Wall” that is supposed to exist between the Government and the Fed when he offered a stunning rebuke of the Fed’s current policy to continue raising interest rates. Though, it’s really more like “nudging” rates up at a snail’s pace.

Gold shot-up in price immediately after Trump’s ill-advised comments recorded on CNBC it the tape, more than offsetting a vicious sell-off in the gold price that occurred in the paper derivative gold markets in London and New York.

The Office of Management and Budget further revised higher its Federal spending deficit forecast for FY 2018.  The original forecast was under $500 billion.  The latest forecast is nearly $900 billion.  Without a doubt, we believe the spending deficit will top $1 trillion this year.

The point of this is that Trump’s remarks were likely directed at pushing the dollar lower as part of the escalating trade war.  That, combined with a Government budget that will soon spiral out of control – and thereby necessitate a flood of new Treasury issuance – will likely force the Fed to reverse course on its monetary policy which in turn will send gold soaring in price.  We explain why on the latest episode of, WTF Just Happened (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

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You can take advantage of undervalued junior mining stocks using the Mining Stock Journal. OR learn how my subscribers and I are making a small fortune shorting the housing market, as homebuilder stocks are already in bear market, with the information and analysis provided in the Short Seller’s Journal. This week’s Short Seller’s Journal also discusses the coming demise of Tesla and how to best play it from the short-side.

WTF Just Happened? Stock Market Ignores Escalating Trade War & Spent US Consumer

Every month Government, corporate and household debt hits a new all-time high. The entire financial system is heading down an unsustainable path of debt issuance. The delinquency rate for auto and credit card debt is already at levels last seen in late 2008. The only reason the banks are not on the ropes – yet – is because they are still sitting on most of the liquidity the Fed injected into the banking system from 2009 to 2015.

This “slush fund for a rainy day” has been declining. As this money flows into the economic system, it’s starting to ignite inflation. Even the monthly Government-generated CPI and PPI reports, which are highly manipulated to minimize the true inflation rate, are starting to show rising inflation. Of course, with wage growth stagnant, the average household disposable income level is dwindling rapidly, which is why the personal savings rate is at a historically low level and revolving credit use is at an all-time.

Consumer sentiment has been trending lower off a recent peak. While the media puppets explain that trade war headlines are weighting consumers expectation, in truth consumer sentiment is falling because the average household is suffocating from the crushing weight of debt and a diminished ability to service that debt because real disposable income is declining. In most areas, home prices are falling. In fact, the home buying sentiment component of the U of Michigan sentiment survey is at its lowest level since 2008.

In this episode of WTF Just Happened?, we discuss these issues plus whether or not gold is forming a tradable bottom here (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

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I recommended Arizona Mining in May 2016 at  $1.26 to my Mining Stock Journal subscribers.  It was acquired for $1.3 billion, or $4.65/share.  My subscribers and I are making a small fortune shorting homebuilders plus this week’s issue features an idea that is the ultimate contrarian play.

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

The Real Data Show The Real Economy Hit A Wall

The economy is melting down – the only support for the Propaganda Narrative of a “booming economy” is a rising stock market. Without a doubt Trump has ordered the Working Group on Financial Markets – AKA “the Plunge Protection Team” – to push stocks higher for now so insiders can unload.

The huge jump in credit card debt reported yesterday by the Fed was received as “good news” for consumer spending. However, this is typical  technical color vomit served up through the mainstream financial media by Establishment “economists” and Wall Street. The likely explanation is that the average consumer is now forced to use revolving credit in order to maintain the current lifestyle.  This assertion is reinforced by the fact that the latest data from Transunion show that personal loans hit a record high in Q1 2018.

The homebuilder sector is in trouble. A Colorado-based credit union is now offering 0-percent down payment mortgages. Credit Union of Colorado will underwrite the 3% down payment FNM/FRE mortgage product and it will cover the remaining 3% of a home’s cost by giving the “buyer” an interest-free loan that is repayable at a future date or through a refinancing. The bank is charging 0.375% more for the mortgage than the rate for a 3% down payment conforming mortgage. The bank is betting the value of these homes will rise enough to cover the 3% down payment loan through a refinancing.  This is a de facto zero-down payment mortgage sponsored by the Government. 

I am certain that this product reflects the fact that banks are getting desperate for mortgage fees because the pool of borrowers who can qualify for FNM/FRE/FHA loans has dried up. The economy hit a wall in the last month or two and it’s going to crush the housing market. By the end of the summer it will be impossible for the NAR and the media puppets to blame low sales on low inventory.

In fact, recent reports from around the country show that home listings are soaring. This includes Seattle, where King County reported a 43% jump in single-family home listings in June, and Orange County (SoCal), which saw a 218% jump in home listings YTD. A 10% drop in contracts in Orange Country was also reported (The Orange County Register). In Denver, new rate of new listings exceeds contract signings now by a considerable amount.

The June employment report continues to show a “tight labor market.” This is utter nonsense given that over 95 million working age people are no longer consider part of the “labor force” using the methodology devised to compute unemployment by the Government. Again, “however…”

…the “tight labor market” narrative is not confirmed by help-wanted advertising. Help-wanted advertising is considered an accurate indicator of broad economy. The Conference Board has been tracking help-wanted advertising going back to 1919.  Formal tracking of help-wanted advertising shifted from tracking ads in printed media to tracking help-wanted ads online in 2005.

The Conference Board’s Help-Wanted Online Advertising for June declined 3.7% from May. May was down 2.1% from April. April was down 1.4%. The May and April declines were revised lower in the latest report from the original reports. New ads were down 4.6% in June from June 2017. The total number of ads were down 5.7% year-over-year for June.

The fact that help-wanted ads as tracked by the Conference Board are declining sharply month-to-month and year-over-year reinforces my view (and I’m not alone in this view) that the real economy – as opposed to the “fake news” economy reported in the mainstream media – is contracting.

A portion of the above commentary is an excerpt from the latest Short Seller’s Journal. My subscribers and I are making easy money shorting the home construction sector as well as other select stocks. This includes specific ideas for using put options plus market timing. You can learn more about this newsletter here:   Short Seller’s Journal information

The Housing Market: A Bigger Bubble Than 2008 Is Popping

The XHB homebuilder ETF is decisively below three key moving averages after it knifed below its 50 dma last week.  KB Homes reported a big earnings and revenue “beat” on Thursday after the market closed.  The stock soared as much as 9% on Friday.  Per the advice I gave my subscribers about shorting the inevitable price-spike in the stock,  I shorted the stock Friday mid-day (July and August at-the-money puts).  The stock is down 6% from its high Friday and is back below all of its key moving averages (21, 50, 200).

Several subscribers have emailed me today to report big gains on put options purchased Friday.   When a stock sells off like this after “beating” Wall St estimates and raising guidance, it’s a very bearish signal.  I’ve identified the best homebuilders to short and I provide guidance on timing and the use of put options.

Housing is dropping and it’s demand-driven, not supply-driven – All three housing market reports released two weeks ago showed industry deterioration. The homebuilder “sentiment” index for May, now known as the “housing market” index for some reason, showed its 4th decline since the index peaked in December. The index level of 68 in May was 10 points below Wall Street’s expectation. The index is a “soft data” report, measuring primarily homebuilder assessment of “foot traffic” (showings) and builder sentiment.

While the housing starts report for May showed an increase over April’s report, the permits number plunged. Arguably the housing starts report is among the least reliable of the housing reports because of the way in which a “start” is defined (put a shovel in the ground, that’s a “start”). On the other hand, permits filed might reflect builder outlook. To further complicate the analysis, the report can be “lumpy” depending on the distribution between multi-family starts/permits and single family home starts/permits.

A good friend of mine in North Carolina was looking at the Denver apartment rental market earlier this week and was shocked at the high level of vacancies. I would suggest this is similar in most larger cities. It also means that multi-family building construction will likely drop off precipitously over the next 12 months.

Existing home sales for May reported Wednesday showed the second straight month-to- month drop and the third straight month of year-over-year declines. The headline SAAR (Seasonally Adjusted Annualized Rate) number – 5.43 million – missed Wall Street’s forecast for 5.5 million. April’s number was revised lower. Once again the NAR chief spin-meister blames the drop on low inventory. But this is outright nonsense. The month’s supply for May increased from April and, at 4.1 months, is above the average month’s supply for the trailing 12 months. It’s also above the average months supply number for all of 2017. If low inventory is holding back pent-up demand, then May sales should have soared, especially given that May is historically one of the best months seasonally for home sales. The not seasonally adjusted number for May was 3.4% below May 2017.

The primary reason for declining home sales, as I’ve postulated in several past issues, is the shrinking pool of buyers who can afford to support the monthly cost of home ownership. The Government lowered the bar for its taxpayer-backed mortgage programs every year since 2014. It lowered the down-payment requirement, broadened the definition of what constitutes a down-payment (as an example, seller concessions can be counted as part of a down-payment) thereby reducing even further the amount of cash required from a buyer’s bank account at closing, it cut mortgage insurance fees and it lowered income and credit score restrictions. After all this, the Government is running out of people into whom it can stuff 0-3% down payment, 50% DTI mortgages in order to keep the housing market propped up.

A lot of short term (buy and rent for 1-2 years and then flip) investors and flippers are holding homes that will come on the market as home prices fall. The majority of the MLS notices I receive for the zip codes in Denver I track are “price change” notices. All of them are price reductions. Whereas a year ago the price reductions were concentrated in the high-priced homes, now the price reductions are spread evenly across all price “buckets.” Denver was one of the first hot markets to crack in the mid-2000’s bubble and I’m certain what I’m seeing in Denver is occurring across the country in most mid to large metropolitan areas. Yes, I’m sure there’s a few exceptions but, in general, high prices, rising mortgage rates and stagnant wages are like poison darts being thrown at the housing bubble.

The analysis above is an excerpt from the June 24th Short Seller’s Journal.   My subscribers and I are making a small fortune shorting homebuilders and homebuilder-related stocks.  I will adding a couple other sectors in up-coming issues that are ready to shorted aggressively.  You can learn more about this service by following this link:  Short Seller’s Journal information.

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