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SMOKE AND MIRRORS IN THE MORTGAGE AND REAL ESTATE INDUSTRIES

By
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

THE REAL ESTATE INDUSTRY WHERE TRUTH IS, INDEED,  STRANGER THAN FICTION MORTGAGE LENDING REPORTING - HEADLINE IN THE FINANCIAL NEWS THIS A.M. -

"Countrywide Financial Corp., the nation's largest mortgage lender, said Friday, it swung to a loss of more than $1 billion in the third quarter due to rising loan-loss provisions, writedowns and dwindling origination volume."

HOWEVER, the company insisted it will be profitable in this quarter and in 2008.  A bit of restructuring should do the trick, Countrywide claims.Further, Countrywide claims that the third quarter loss of $1.2 Billionwas due to the report of an "earnings trough".  For the curious, an earnings trough is when a public company saves all the bad news for one reporting period.  The theory is to get all of the bad news out of the way so thecompany can focus on good things to come. 

Third Quarter 2007 Loss - $1,200,000,000.
Third Quarter 2006 Earnings - $647,000,000.

WHAT COULD HAVE CAUSED THIS POOR EARNINGS REPORT?
  Countrywide increased it's loan-loss reserves due to expected rise in delinquencies and defaults, primarily among subprime mortgages to buyers with poor credit.  Reserved was $934,000,000, up $38,000,000from the same time last year.  Writedowns of $690,000,000due to the company's inability to sell subprime and other nontraditional loans due to rising delinquencies and defaults.

Countrywide is promoting their stock on projections for the 4th quarter.  Angelo Mozilo, Chairman of Countrywide, is under investigation by the SEC due to his large volume of shares sold recently while the stock was plummeting.  

Of course, the upward movement in the stock today could be due to short-sellers redeeming their stock.  Mmmmmm.
 

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REAL ESTATE MARKET REPORTING. " It's deja vu all over again."

NAR - Mortgage Availability Improving But Hampered September Existing-Home Sales
WASHINGTON, October 24, 2007 -
Temporary problems in the mortgage market are easing and are expected to free some pent-up demand, but
disrupted existing-home sales and distorted prices on sales closed in September, according to the National
Association of Realtors�.  Even so, prices rose in the Northeast and Midwest.

Temporary problems??  Can anyone recall when the "temporary problems" in the mortgage industry began?
The most interesting line?  "Even so, prices rose in the Northeast and Midwest." 

Prices on existing homes did, indeed, increase in my market.  A rise in prices is seen by the "experts" as a good thing.  The guys at NAR need to try to sell and average detached $700,000 homes in a market where the average income qualifies the average home buyer for $400,000.  That dang income thing!

THE GOOD NEWS AND THE BAD NEWS ABOUT ONE AREA IN MY MARKET PLACE, FAIRFAX COUNTY, VA.

The sold prices have held steady from 2005 through 2007:  $547,002 to $514,124 to $526,732Total units sold from 2005, 2006, to 2007 are: 

  • 2005 - 1,828 units
  • 2006 - 1,123 units
  • 2007 - 729 units

SMOKE AND MIRRORS!  SMOKE AND MIRRORS!

UPDATE:  3:30 p.m. on the way to and from visiting a builder today, I listened to a replay of the hearings held in Boston by Rep. Barney Frank, with testimony by regulators, consumer groups and later today, lending industry reps.  One of the Congressman questioning the "guests" didn't know what P.I.T.I. meant.  The question was about mortgage escrows. 

We're doomed.

 

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Comments (15)

Jason Romrell
Business Attorney and Success Advisor - Los Angeles, CA
Always love to read your thoughts!  Good info.
Oct 26, 2007 03:51 AM
Keith Stoller
Keith Stoller Tax & Business Solutions - Bakersfield, CA
I live in California...don't say smoke!  Just kidding.  Really though, with all the negative news in the industry right now is seems as though we'll all have a lot to write about for some time to come.  When things pick back up I hope everyone doesn't forget about Activerain.  It seems like right now we all have too much time to blog as it is. Happy Friday!
Oct 26, 2007 03:58 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Jason.  Thanks and drop by anytime.

Keith.  I'm on my way out to visit a builder.  So, as soon as the conference call with Countrywide is over, I'm on the road.  ActiveRain is part of my job.

Oct 26, 2007 04:05 AM
Eileen Landau
BAIRD & WARNER, NAPERVILLE - Naperville, IL
ABR, CRS, e-PRO

Lenn,

You know that Jim Cramer is predicting that CW will BK...along with several large lenders/banks. Not to mention private mortgage insurers and builders.

And, this is really just the start. As we've been in the business for many years and have seen recessions in housing before, this too shall pass.

But when it's over, the landscape will have changed!

Oct 26, 2007 04:28 AM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

"ActiveRain is part of my job."

And you do it very well. That is an interesting/refreshing way to look it Lenn and I think you are right! 

Oct 26, 2007 05:01 AM
John MacArthur
Century 21 Redwood - Washington, DC
Licensed Maryland/DC Realtor, Metro DC Homes
Lenn - I don't want to know what they are smoking and I have suspicions about what may be on their mirrors.
Oct 26, 2007 05:15 AM
Fran Gaspari
Patriot Land Transfer, Inc. - Limerick, PA
"The Title Man" - Title Insurance - PA & NJ

Lenn,

Any suggestions as to what I might do with my 'earnings trough'? Thanks,   Fran

Oct 26, 2007 06:07 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Eileen.  Could be.  They have a market cap of almost $10 Billion.  But, when you lose 1.2 Billion in a quarter, can anyone say shrinking???  WaMu has a market cap of almost $25 Billion. 

It wouldn't surprise me if they want under.  This uptick today is solely on pro forma.  I learned a long time ago to pay no attention to pro forma.

Jason.  Thanks.  I just get up in the morning and "go to work" at my computer.

John.  I agree.  I've gotten on belly laugh after another today.  First listing to the financial news this a.m. and then Congressional Hearings on the mortgage industry legislation.

Fran.  Isn't that one a riot.  Earnings trough is another word for "cooking the books".

Oct 26, 2007 08:15 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Good stuff Lenn. CW is in big time trouble no matter how they want to spin it. They are also only at the tip of the iceburg.

It is comforting to know that Congresman doesn't know what P.I.T.I. means though. My confidence has been restored:)

Oct 26, 2007 08:31 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Thanks Bryant.  It was fun listening to that bunch.  But, if I took them seriously, I'd be very afraid, very afraid. 

How do you believe it would affect home sales if every ARM borrower had to qualify at the highest rate?  How would it affect home sales if we eliminate the YSP and require mortgage brokers to be pain in an income stream like life insurance sales persons. 

The hearings were clearly stacked to favor the national and state chartered banks.   

They were almost in unison with eliminating the "pay option" loans.  I love the pay option loans, except that I like them with 40 and 50 year ams.

Oct 26, 2007 08:51 AM
Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO
I'm not surprised but a bit angry at the P I T I question..... it aggravates me that self policing was so bad that now legislators with not enough knowledge are in the picture. I hope however, we are not doomed lol
Oct 27, 2007 03:52 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

It appears that they would like to require that mortgage bankers be licensed like banks. 

I dread the mortgage industry going the way of the 1930s when banks controlled mortgages and the only folks who could get one were folks that didn't need to borrow the money or who could fully collaterlize the loan. 

Without being able to leverage mortgage financing, most folks would be tenants. 

Thanks Carole.

Oct 27, 2007 04:44 AM
John S.
RealtorRatingz.com - Canandaigua, NY

Lenn, this is a little off topic but I thought you might be interested.  Fortune just published an excellent examination of some junk mortgages that were highly rated by the rating agencies:

http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversion=2007101609 

The way these mortgages were structured, it was practically a no-lose situation for the borrowers.  It makes me think that the lenders were more at fault than previously realized.

Oct 27, 2007 08:01 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

John.  That was a priceless read.  I loved it.

In time, we may find that the securitization of these high risk loans was the biggest mistake.  The investors will dry up and mortgage brokers won't be able to sell loans.

We've gotten a long way to go in this mess.

Thanks for the link. 

Oct 27, 2007 09:00 AM
Kaye Thomas
Real Estate West - Manhattan Beach, CA
e-PRO, Manhattan Beach CA

One of the Congressman questioning the "guests" didn't know what P.I.T.I. meant.  The question was about mortgage escrows

 

Lenn.. Yes... Very scary but this shouldn't be a surprise.. most of these guys have no clue about what happens in the real world.  I  don't want to see mortgage lending wind up as the sole provence of banks.. that would be a disaster.. especially if the allow banks to also sell real estate

Oct 27, 2007 09:23 AM