Category Archives: real estate market

Morgans Hotel: A Zombie Company Defaulting on Debt and Burning Through Cash

I wrote another cheery article on Seeking Alpha, this time about Morgans Hotel Group (ticker:MHGC).

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Proof banks are sitting on severely delinquent home loans

The housing market is not going to bounce back because there’s a huge pipeline of severely delinquent and underwater mortgages out there that still haven’t been absorbed by the market.

Courtesy of the NY Fed, here’s concrete proof banks are sitting on huge numbers of bad loans rather than foreclosing and letting them hit the market. (Ignore the data for 2006: there were few foreclosures back then. Focus on the early 2007 to early 2009 trend.)

This first set of graphs shows the probability that once a borrower goes 60 days late, he then fails to make his next payment and goes 90 days late:

Note the percentage of supposedly “near-prime” Alt-A loans where a 60-day-late borrower cures has plunged from 25% to 5%. The percentage of delinquent loans that get repaid in full because of a refinancing (in yellow) has also dropped from low to virtually zero.

So we see once borrowers miss a couple payments they have no ability or no intention to get current.

You’d expect, with this trend, for banks to then be more aggressive about foreclosing on seriously delinquent mortgagers. Yet we see the opposite: The next set shows what banks do for loans than are 90+ days delinquent.


So banks have gone from foreclosing on about 45% of their severely delinquent Alt-A loans each month to 20%.

So if you own a house that’s underwater, in practice you can probably keep living there (or collecting rent payments) for a year or so without making payments to the bank. You have 3 months before the loan is bad enough for the bank to foreclose, around 3 more months before the bank starts the foreclosure process and who knows how much longer before the bank actually moves to take possession of your home.

On that last point, the next graph shows the declining percentage of Alt-A loans in the foreclosure process that resolve out of foreclosure (i.e., short sale or refinance) and the likewise declining percentage of these loans banks are taking possession of:

Finally we see soaring losses on first mortgages:


This would be much worse if you included second mortgages, and worse still if banks weren’t propping up the market by sitting on bad loans. Worse still, banks are sitting on bad loans in the weakest markets the longest.

Bottom line, U.S. banks are still not owning up to their bad mortgage debt. Our government is turning a blind eye hoping the problem will go away. It won’t. This policy was tried and failed in Japan, where the economy never really recovered.

In fact, the Japanese stock market lower now than it was 24 years ago in 1985:

Nikkei Historical Graph

Unemployment in the Inland Empire set to reach Great Depression levels

David Pierson of the LA Times reports that unemployment is soaring the the Inland Empire (San Bernadino, Riverside and eastern LA counties), hitting 9.5% as of October. Given that we are now well into November, it is probably above 10% now. And these are the official statistics that economists agree understate the real number of unemployed by not counting those who are working part time while looking for full time jobs, and “discouraged workers” who want to work but have given up actively looking for a job.

Meanwhile next year tax shortfalls will mean more local government layoffs. Construction employment will continue to decline as financing dries up and the last buildings that were under construction when the economy turned are completed. Retail employment will also continue to decline as consumers are either pinched or under fear they soon will be.

California Foreclosures Soar To New Records In August

An article focusing on Riverside and San Bernardino’s problems is here:

The highlights are grim:

With 11,485 foreclosure-related filings last month, Riverside County ranked fourth nationally in foreclosure activity, with one filing for every 64 households. San Bernardino County ranked sixth with 9,651 filings, or one for every 69 households.

In Riverside County, total foreclosure-related filings were up 58 percent from a year ago and 39 percent from July, while in San Bernardino County, total filings increased 98 percent from August 2007 and 34 percent from the month before.

Most of the growth was in bank repossessions. There were 4,165 in Riverside County, up 248 percent from a year earlier, and 3,172 in San Bernardino County, up 348 percent.

A press release with national figures on the real estate decline is available here.

The figures are so bad it is hard to wrap your mind around them. In several California counties, 1 in 50 or 1 in 60 households were hit with foreclosure notices in just a single month.

Yet Another Seeking Alpha Article about Troubled Banks

We all have our own strange hobbies, one of mine is pouring through financial statements of troubled financial institutions, and writing about the chaos I see in their numbers.

In this article, I once again predict the demise of three medium-small banks that were completely reckless with their lending practices, and which stand out as particularly bad actors in an era when most banks were at least somewhat reckless.

If you have uninsured deposits in any of these three banks–Downey Savings (CA, AZ), FirstFed Financial (CA), or Bank United (FL)–by all means take them out as soon as possible. There is a substantial chance that you will face losses on the scale of IndyMac’s uninsured depositors.

Lest I seem to be a complete bear, at the same time I think now may be a good time to invest in conservative utility stocks like DPL, clean energy funds like PBW,  and clean energy stocks like TSL. I am still very impressed with the growth story of Starbucks (SBUX), Google (GOOG), and China Mobil (CHL), which are down substantially from their highs. More adventurous investors might consider investing in some GM bonds now yielding 17% (XGM).

New Seeking Alpha Articles

I have recently written two more articles for financial portal Seeking Alpha. First, I question the valuation of Maguire Properties‘ common stock given the problems with the Southern California commercial office market and the near-collapse of commercial real estate funding.

Second, I wrote a shorter article with updates on Redwood Trust, Crystal River Capital, FirstFed Financial, and Maguire Properties.

I am not the only one warning investors against putting money into bank and financial stocks. Money Manager and blogger Michael “Mish” Shedlock sounds warning about 10 Financial Entities On the Brink.

Overbuilding of Housing Keeps Downward Pressure on Prices

Calculated Risk has a post showing that single-family houses were greatly overbuilt for several years. Based on my research for and the experience of several of my clients, things are even worse for condo complexes than single family structures.

The percentage of buyers who are unable to complete their purchase agreements has gone through the roof in the past 6 months from already high levels.

To take a typical example, a 400 unit tower in San Diego or Miami would sell out in 2006, but as closing time approaches 20-60% are unable to complete the agreement, either because the decline in value greatly exceeds their deposit, or because financing is next to impossible for non-owner occupied condos.

Even in the city of San Francisco, the single strongest market in California (which is not saying much), banks that “pre-approved” people with steady jobs in 2005 and 2006 are now asking for 30% and 40% down payments on condos. Many people who can afford big down payments, if they previously prequalified with stated incomes and/or stated assets, are being rejected because those loans barely exist now.

This means (1) condo sales were overstated in 2004-2007 to the extent buyers who signed purchase agreements pre-construction are counted as sales (2) there is a huge inventory of new condos that the builders have not sold and have not listed.

Since building a condo high-rise normally takes 2-4 years, the next year is going to get worse as huge numbers of buildings are completed with half or more of committed buyers not closing, and few buyers able to obtain financing to replace them. The buildings sold in 2004 are only somewhat underwater and closing rates are generally fairly high. But the 05-07-started buildings are generally more cheaply made, were sold at higher prices, and not as well located. Builders are also trying to force closings on buildings before construction is completed on all floors and on amenities like pools and gyms, further encouraging people to default.

Why do I say condo buildings started in 2005, 2006, and 2007 are more cheaply made than older buildings?

(1) There was a “gold rush” mentality these years, and construction was rushed forward as everyone tried to cash in on the boom.

(2) Financing was so easy some fairly shady or completely inexperienced people were able to get bank loans to build condos.

(3) The market wasn’t so white hot in 2001-2004, so generally these complexes were built by experienced developers who knew what they were doing and were able to obtain prime locations in the weak real estate market of 1995-2002.

(4) The raw materials developers need for building: concrete, wood, metals, ceramic fixtures, glass, etc, all shot up in price from 2002 to 2007. This meant there was a lot more corner-cutting, and buildings built in this period were simply less “substantial” than older buildings.

(5) The market for construction labor was extremely tight during the boom years, often meaning shoddy construction by inexperienced illegal immigrants. With buildings going up everywhere, quality construction labor was stretched extremely thin.

(6) Perhaps worst of all, construction delays in some recently completed buildings could cause serious problems down the line, including toxic mold. I have heard some horrible anecdotes from contractors here in San Diego on how some new condo buildings here had drywall exposed to outdoors for months because of financing issues caused unplanned delays in construction.

Buyer beware!