Why the Housing Sector Collapse Is Wonderful

[01WhiteCobra]

Got this from an e-mail newsletter I get from time to time.


Why the Housing Sector Collapse Is Wonderful

by
Porter Stansberry


Barrington is a subdivision in northwest Charlotte, North Carolina.

The houses in Barrington are "tract homes..."

To save money, homebuilders like to develop entire neighborhoods of identical houses. Every house uses the same architecture, so they only need to draw up one set of blueprints. Every house uses the same materials, so they can buy materials in bulk and reduce waste. Construction is easy, too. Once you've put up one, you can build 1,000. So the developers don't need to hire skilled craftsmen to build these houses. They employ the same unskilled worker you'd find on a production line in Detroit. (lol!)

You'll hear people call these houses "cookie-cutter homes."

Beazer Homes developed the Barrington subdivision. They jammed the houses close together on tiny lots and used the cheapest designs they could find. These tactics reduced the final sales prices and increased Beazer's profits. Houses in Barrington started at only $90,000.

Here's the thing, out of 107 homes in the Barrington, 41 are currently in default and will end up in foreclosure. Normally in North Carolina, fewer than 3% of home sales result in foreclosure. Something unusual happened here.

Beazer arranged the mortgage financing for 37 out of the 41 homeowners who ended up in default.

As the Charlotte Observer discovered, Beazer's mortgage employees were making loans to people who couldn't possibly afford the homes. Beazer completed the neighborhood in November 2002. The first foreclosure occurred two months later. Agina Anderson was the second person to default in Barrington. Anderson lost her home a year later, in November 2003. She was a 19-year-old single mother, working at a gas station for $8.05 an hour.

Everyone, individually, is responsible for whatever debts he incurs. I don't think it's right to blame Beazer for any individual default, and I certainly don't think borrowers should have recourse to sue lenders for making loans.

But look at the corporate culture Beazer established with these kinds of sales and mortgage policies. The company was essentially building a community it knew would fail. Putting so many very high-risk borrowers into one community meant, inevitably, the development would suffer a very high incidence of foreclosure. As a result, the value of the community would be destroyed.

By selling homes its buyers couldn't truly afford, the company was also inflating the sales and profit numbers it reported to shareholders. Worse, the company's culture of irresponsibility systematically destroyed the value of the company's brand and its reputation.

No one should have been surprised when the FBI began to investigate the company's mortgage practices, when the SEC followed with an accounting investigation, or when Beazer's chief accounting officer was fired in June.

Like so many of its customers, Beazer itself wound up in default. Unable to file regular SEC-required quarterly reports because of its ongoing investigations, it violated its bond covenants. Rather than admit its default and seek to compromise with its bondholders, as happens regularly in these situations, Beazer sued its own bondholders, calling them "vulture investors" in court papers. Astoundingly, Beazer denied it had defaulted on the terms of its debt – despite readily apparent facts to the contrary.

Beazer recently settled out of court with its bondholders, paying them $12 per $1,000 to delay action on the default until next May, by which time the company should be able to file reports again with the SEC. The company also admitted it had, in fact, been in default. But the company's culture of dishonesty and fraudulent dealing has already wiped out many shareholders the stock has fallen from $80 to $8.

I've spent a considerable amount of time in November researching shares of homebuilders, including Beazer. No, I'm not crazy.

If you want to be a great investor, you have to buy good companies when their prices are exceptionally attractive. You only get that chance with the best companies in the midst of a crisis. As an analyst, the collapse of the homebuilding sector is a wonderful challenge. Although I think many homebuilders will soon go bankrupt, at least a handful will survive.

And since all of these companies are now trading for more than 50% off their highs, it's probably not too soon to take a serious look.

Good investing,
Porter Stansberry

"Reprinted with permission from DailyWealth. Written by Dr. Steve Sjuggerud and Tom Dyson, DailyWealth is a free daily e-letter focusing on the world's best contrarian investment opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments. Click here for a free subscription."

[5.0_CJ]

Got this from an e-mail newsletter I get from time to time.


Why the Housing Sector Collapse Is Wonderful

by
Porter Stansberry


Barrington is a subdivision in northwest Charlotte, North Carolina.

The houses in Barrington are "tract homes..."

To save money, homebuilders like to develop entire neighborhoods of identical houses. Every house uses the same architecture, so they only need to draw up one set of blueprints. Every house uses the same materials, so they can buy materials in bulk and reduce waste. Construction is easy, too. Once you've put up one, you can build 1,000. So the developers don't need to hire skilled craftsmen to build these houses. They employ the same unskilled worker you'd find on a production line in Detroit. (lol!)

You'll hear people call these houses "cookie-cutter homes."

Beazer Homes developed the Barrington subdivision. They jammed the houses close together on tiny lots and used the cheapest designs they could find. These tactics reduced the final sales prices and increased Beazer's profits. Houses in Barrington started at only $90,000.

Here's the thing, out of 107 homes in the Barrington, 41 are currently in default and will end up in foreclosure. Normally in North Carolina, fewer than 3% of home sales result in foreclosure. Something unusual happened here.

Beazer arranged the mortgage financing for 37 out of the 41 homeowners who ended up in default.

As the Charlotte Observer discovered, Beazer's mortgage employees were making loans to people who couldn't possibly afford the homes. Beazer completed the neighborhood in November 2002. The first foreclosure occurred two months later. Agina Anderson was the second person to default in Barrington. Anderson lost her home a year later, in November 2003. She was a 19-year-old single mother, working at a gas station for $8.05 an hour.

Everyone, individually, is responsible for whatever debts he incurs. I don't think it's right to blame Beazer for any individual default, and I certainly don't think borrowers should have recourse to sue lenders for making loans.

But look at the corporate culture Beazer established with these kinds of sales and mortgage policies. The company was essentially building a community it knew would fail. Putting so many very high-risk borrowers into one community meant, inevitably, the development would suffer a very high incidence of foreclosure. As a result, the value of the community would be destroyed.

By selling homes its buyers couldn't truly afford, the company was also inflating the sales and profit numbers it reported to shareholders. Worse, the company's culture of irresponsibility systematically destroyed the value of the company's brand and its reputation.

No one should have been surprised when the FBI began to investigate the company's mortgage practices, when the SEC followed with an accounting investigation, or when Beazer's chief accounting officer was fired in June.

Like so many of its customers, Beazer itself wound up in default. Unable to file regular SEC-required quarterly reports because of its ongoing investigations, it violated its bond covenants. Rather than admit its default and seek to compromise with its bondholders, as happens regularly in these situations, Beazer sued its own bondholders, calling them "vulture investors" in court papers. Astoundingly, Beazer denied it had defaulted on the terms of its debt – despite readily apparent facts to the contrary.

Beazer recently settled out of court with its bondholders, paying them $12 per $1,000 to delay action on the default until next May, by which time the company should be able to file reports again with the SEC. The company also admitted it had, in fact, been in default. But the company's culture of dishonesty and fraudulent dealing has already wiped out many shareholders the stock has fallen from $80 to $8.

I've spent a considerable amount of time in November researching shares of homebuilders, including Beazer. No, I'm not crazy.

If you want to be a great investor, you have to buy good companies when their prices are exceptionally attractive. You only get that chance with the best companies in the midst of a crisis. As an analyst, the collapse of the homebuilding sector is a wonderful challenge. Although I think many homebuilders will soon go bankrupt, at least a handful will survive.

And since all of these companies are now trading for more than 50% off their highs, it's probably not too soon to take a serious look.

Good investing,
Porter Stansberry

"Reprinted with permission from DailyWealth. Written by Dr. Steve Sjuggerud and Tom Dyson, DailyWealth is a free daily e-letter focusing on the world's best contrarian investment opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments. Click here for a free subscription."

I HIGHLY doubt they gave a loan to someone who makes 8.05 an hour. I'm CERTAIN there was some fraud on a paystub or something for that to go through, and either way - like the article states - it's entirely the guys fault and responsibility for what he signs, you don't ask to borrow 100k if you can't pay it back.

Lenders just got caught up in competition and belligerent underwriting... they fucked up too, but they pay by losing their lending status and inability to securitize - and possibly go under. The big problem the lenders ran into is they did not have much experience doing non-prime mortgages. The ARM loans allowed these mortgage companies to sign a bunch of non-prime business... and everyone was happy at their contract rate... problem is they (again) didnt have any experience on how non-prime borrowers react to expenses.. they don't pay. Also, since they got so competitive, they were really cutting their loans to razer thin budgets - just squeeking a borrower through on their debt to income / payment to income... basing their approvals solely on the signing rate, and not the adjusted rates. My company (non-prime auto) also fucked up, but we're a lot more elastic than housing, we felt this pinch 8 months ago. Banks are highly competitive with eachother... when one lender starts buying up a lot of business, the other banks lose theirs... so they in order to be competitive they similarly adjust their buying practices... and since loans are elastic (and in the housing market with ARM loans, it's an even worse situation) you don't know you fucked up until it's 6-20 months on the books and you're getting defaults, THEN you adjust your scorecard.. and you have to survive the other 6-20 months before your correction starts paying off... so these mortgage companies started seeing them fucked up about 8 months ago, but since people stop paying their cars before their houses, they are just now defaulting on mortgages... so I would expect they are probably 40% of the way through it - in another 12 months the worse should be over. What determines if the lender survives or not is how diversified their portfolio is, how deep they bought, and how their lending rating is. The companies hit big were the ones that were not diversified, bought deep, and probably didn't have a great lending rating beforehand... so they start defaulting on all their loans - their lending rating drops, they can't package and securitize their loans and sell them off to investors... they can't work their own loans themselves and hope to collect on them... because they probably don't have enough of a surplus to continue buying loans... that's the pinch that eats lenders.. is when they can't securitize... and a lot of that is based on previous reputation. Hopefully lenders realize ARM loans should be targeted towards the prime market, and the non-prime should have fixed rates.

[AdamLX]

Back in March, I believe, is wen there were lots of rumors floating around of Beazer being investigated for fraudulent applications etc. From what I read they were just as bad as the investors at "making loans work." Several people from the area submitted applications with grossed up income to qualify.

Beazer isn't alone. I still see original applications that state $80,000 and the person only makes $32,000 and is defaulting on their $400,000 "minimum 2% payment" type of loan.

[01WhiteCobra]

Back in March, I believe, is wen there were lots of rumors floating around of Beazer being investigated for fraudulent applications etc. From what I read they were just as bad as the investors at "making loans work." Several people from the area submitted applications with grossed up income to qualify.

Beazer isn't alone. I still see original applications that state $80,000 and the person only makes $32,000 and is defaulting on their $400,000 "minimum 2% payment" type of loan.

Oh, I don't believe Beazer was the only one either. But, Beazer is the only homebuilder with their mortgage business being investigated by HUD, the FBI and the IRS that I know of.

5.0_CJ, if you highly doubt they made a loan to someone based on lying, inflated income, I got some beachfront to sell you in Arizona.

Here is a nice map of South Chase in Charlotte. A subdivision developed by Beazer.

http://enterprise.star-telegram.com/ARCIms/Maps/clt/sc_2.asp?frmZoomStat=0&action=show&Map.x=77&Map.y=299

[AdamLX]

Oh, I don't believe Beazer was the only one either. But, Beazer is the only homebuilder with their mortgage business being investigated by HUD, the FBI and the IRS that I know of.

5.0_CJ, if you highly doubt they made a loan to someone based on lying, inflated income, I got some beachfront to sell you in Arizona.

Here is a nice map of South Chase in Charlotte. A subdivision developed by Beazer.

http://enterprise.star-telegram.com/ARCIms/Maps/clt/sc_2.asp?frmZoomStat=0&action=show&Map.x=77&Map.y=299

Yep, they were the first to have the FBI and HUD breathing down their neck as the sub prime market started crashing back in March of '06. From what I could see it was mainly because they were the first company to have mass amounts of defaults in neighborhoods which had almost everyone builder financed. They definitely aren't alone though, but were probably the one who abused it the most (so far).

http://ml-implode.com is a fun little website to check every once in a while.

[5.0_CJ]

Back in March, I believe, is wen there were lots of rumors floating around of Beazer being investigated for fraudulent applications etc. From what I read they were just as bad as the investors at "making loans work." Several people from the area submitted applications with grossed up income to qualify.

Beazer isn't alone. I still see original applications that state $80,000 and the person only makes $32,000 and is defaulting on their $400,000 "minimum 2% payment" type of loan.

Yes, customers lie all the time. That income is suppose to be proven to the loan officers though. If the LO's were over zealous than they are responsible for their company tanking. As for gross income... that's a common practice for all lenders - if the income is submitted as net. It's discrimination to use net income.

as for the 8.05 - I highly doubt that's the whole story, he might have had a shitload of overtime, or bonuses, or other income - sounds like the press puffing something up to me.

[AdamLX]

as for the 8.05 - I highly doubt that's the whole story, he might have had a shitload of overtime, or bonuses, or other income - sounds like the press puffing something up to me.

Stated loans with Beazer were a breeze for broke asses. That's the problem. I wouldn't doubt it for one second from the bullshit I see on a day to day basis from brokers that someone had 2 years employment and stated they made enough to get the home, or the best one, the broker said "you need to make at least XXXXX.00 to get this loan... what's your yearly stated income?" When your calls aren't recorded and monitered you can get away with murder.

You're a fry cook, not a Food Machine Technician, stupid shit like that.

[01WhiteCobra]

Stated loans with Beazer were a breeze for broke asses. That's the problem. I wouldn't doubt it for one second from the bullshit I see on a day to day basis from brokers that someone had 2 years employment and stated they made enough to get the home, or the best one, the broker said "you need to make at least XXXXX.00 to get this loan... what's your yearly stated income?" When your calls aren't recorded and monitered you can get away with murder.

You're a fry cook, not a Food Machine Technician, stupid shit like that.

"you need to make at least XXXXX.00 to get this loan what's your yearly stated income."

"My income is XXXXX.00+yyyyy.00"

[Vertnut]

Stated loans with Beazer were a breeze for broke asses. That's the problem. I wouldn't doubt it for one second from the bullshit I see on a day to day basis from brokers that someone had 2 years employment and stated they made enough to get the home, or the best one, the broker said "you need to make at least XXXXX.00 to get this loan... what's your yearly stated income?" When your calls aren't recorded and monitered you can get away with murder.

You're a fry cook, not a Food Machine Technician, stupid shit like that.
I'm in the housing industry (not "production") and have seen a lot of shady mortgage lenders over the years. I've seen what they can do for someone buying a medium-priced custom ($225k) and can only imagine what they would do on the smaller homes. Choice and others, had the ability and the lure, to get folks to use "their" mortgage companies. They would bribe them with upgrades at no charge, but hit them in the long run with fees and rates. Younger couples in particular, never knew what hit them until it was too late.

[AdamLX]

I'm in the housing industry (not "production") and have seen a lot of shady mortgage lenders over the years. I've seen what they can do for someone buying a medium-priced custom ($225k) and can only imagine what they would do on the smaller homes. Choice and others, had the ability and the lure, to get folks to use "their" mortgage companies. They would bribe them with upgrades at no charge, but hit them in the long run with fees and rates. Younger couples in particular, never knew what hit them until it was too late.

I saw a GFE on a first time home buyer yesterday, utterly amazing. $138K loan with 358/month PMI (should be about 120). It was a total broker/lender special with a fake lender credit and a loan amount mysteriously $2000 higher than what she owed, only to be explained that "you owe $138000, you didnt pay down your mortgage the first year and this is your payoff". They owed 136,500. The only saving they were offering the brwr was taking the PMI down to what it SHOULD have been in the first place.

[slow99]

Alt A's seem like a brilliant idea.