BANK REGULATORS PLAN to crack down on loose lending standards on subprime mortgages. New Century said it is the subject of a criminal inquiry.
The Journal story summarizes both the ultra-woes of New Century (NEW) and the exit stage left of Freemont (FMT) from subprime lending via FDIC cease and desist order. These are breathtaking corporate developments in and of themselves.
But the decision by banking regulators to stop the banking industry from making bad home loans (gee, what a concept) is going to have severe reprecussions. The effective overnight end of easy interest only 2/28, no-doc, 100% LTV, 3-2-1 and 1-0 buydowns, GPM's, etc will erase close to 20% of the potential buyers from the real estate market effective TODAY if the last few years of subprime and alt-a loan stats are good data to work from. Holy (insert your word of choice here)
! The regulatory shutdown doesn't even count that distress that showing up in higher FICO score customers who are starting to have trouble paying their second mortgages, according to Countrywide (CFC). The real estate market is crashing (he said with a monotone expression). Of course, crashing something that's spread out across the country and worth trillions doesn't happen overnight and will take months play out, but the subprime locomotives that have resulted in unsustainable excess are going off the cliff one by one.
By the way, with respect to New Century which will more than likely go out of business, the problems there have been known for years. Did you know that on a conference call in 2005 NEW management admitted that they borrowed $1 bln for a-single-day each quarter to beef up their balance sheet? Did you know that NEW management admitted that they sold mortgages back to themselves? Aaron Crowne over at http://www.mortgageimplode.com/ uncovered this and has linked up to it. It's worth going over there to check this stuff out. Aaron also draws attention to the absolute travesty of the Bear Stearns (BSC) buy recommendation on NEW shares earlier this week. In covering the analysts shenanigans for so many years, I've gotten so used to it that I haven't said much about it since it happens all too often, but the conflict of interest in the Bear Stearns call are unusually astounding. Aaron's count of subprime lenders that have gone kaput is up to 30! By the time it's over, I believe there will NO independent subprime company left standing.
All of this brings me back to my own deep thoughts: The regulators were asleep at the switch until late Friday. Surely if a blogger in 2005 can pick up on the shenanigans at a place like NEW, regulators had to know but let it go. Who gave the regulators (a variety of agencies) orders to OD on the Ambien until now?
These developments will surely have a dark impact on the market come Monday morning since the finger prints of the biggest names in banking and Wall Street are all over the subprime debacle and the implication of a crashing housing market is elimination of the 'wealth effect' which will stymie the consumer and send the outlook for earnings and the economy into a tailspin.
We found out this past week that the markets can actually become non-complacent (who woulda thunk it!). Will we see a selling climax next week that leads to a rebound? Or a selling climax that leads to an extended bear? It's all hard to say. With M2 and M3 through the roof via central banks around the globe it might be tempting to go with the easy, short lived correction theory. But in spite of all the liquidity creation by the "money changers", the early stages of a credit crunch are in the making here in the States. That's got to be bad for stocks. I will post more about that later this weekend.