Walk Away From Your House by Jim Cramer
 

Video Link

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is now telling people who "made a bet and lost" to not compound the error, and to simply walk away from the mortgage and default.

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Re: Walk Away From Your House by Jim Cramer
 

Is this why my favorite subprime mortgage company was down 35% today? And down 50% over the last 3 weeks? I don't listen to Cramer so I bought more today and buying more tomorrow....

Re: Walk Away From Your House by Jim Cramer
 

Do you not listen to him, or do you listen and do opposite? [img]/images/graemlins/grin.gif[/img]

Re: Walk Away From Your House by Jim Cramer
 

DesertCat, do you invest in subprime lenders and/or homebuilders? I think this is def. a good time to be buying with all the people predicting the apocalipse and all, everything is on 52week lows etc.

Where do you see the most value on these markets? I really trust your analysis

Re: Walk Away From Your House by Jim Cramer
 

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Do you not listen to him, or do you listen and do opposite? [img]/images/graemlins/grin.gif[/img]

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I totally ignore him.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
DesertCat, do you invest in subprime lenders and/or homebuilders? I think this is def. a good time to be buying with all the people predicting the apocalipse and all, everything is on 52week lows etc.

Where do you see the most value on these markets? I really trust your analysis

[/ QUOTE ]

I think there is some value in subprime, the problem is it's a lot of work to figure out where. I bought some DFC and made some nice profits and sold most of it before it replunged. I'm not going to buy it back until I do my homework on it in more detail now that I better understand these businesses.

The company I'm referring to in my first post is out of business and the market apparently thinks it's bloated corpse is worthless. It's been a great learning experience, I bought early before I really understood it and as it declined I've been constantly reresearching it and learning more.

Effectively what you need to understand is that most mortage/lending companies carry huge assets (securitizations) on their balance sheets that they don't own and huge liabilities are are totally non-recourse to them.

So you have to carve out a "pro forma" balance sheet of what they really own/owe. Then you look at the "stub value" of what cash they can reasonably get out of their securitizations. The securitizations are separate companies and you need to get their prospectuses and monthly reports to tease out how much cash flow they can generate and what collateral will be left over when it's closed. In some cases it's clearly nil, in some cases it's murky, and sometimes it's obvious that the parent company is going to get some cash.

Lots of work. But I think it's rewarding. I'm down $70,000 so far, but if I'm right I'll end up with a substantial profit by next year.

Re: Walk Away From Your House by Jim Cramer
 

BTW, Wall Street has coined a term for this type of "value" investing.

Catching a falling knife.

Re: Walk Away From Your House by Jim Cramer
 

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[ QUOTE ]
Do you not listen to him, or do you listen and do opposite? [img]/images/graemlins/grin.gif[/img]

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I totally ignore him.

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I totally ignore him too, but wading into a sector in a clear downtrend isn't prudent IMO.

Why would you be buying into a falling market? If valuations look good by your analysis then wouldn't it be more sensible to wait for some confirmation from price action that an upward move is more likely?

Bottom fishing can prove profitable if you make the right calls at the right time, but I doubt it provides a good risk:reward

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
Video Link

[ QUOTE ]
is now telling people who "made a bet and lost" to not compound the error, and to simply walk away from the mortgage and default.

[/ QUOTE ]

[/ QUOTE ]

Sensational reporting by this guy is good for his ratings but I doubt many people will be able to walk away from their houses even if the valuations continue to fall.

People still need a roof over their heads and need to weight up the costs and benefits of defaulting and paying rent as opposed to remaining with their home and mortgage.

Walking away will cause people to 'lose their deposits'. Even though the market has already taken many people's deposits, it a near psychologically impossible thing to do - albeit prudent for certiain individuals in specific situations....a point Cramer fails to expand upon.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
[ QUOTE ]
Video Link

[ QUOTE ]
is now telling people who "made a bet and lost" to not compound the error, and to simply walk away from the mortgage and default.

[/ QUOTE ]

[/ QUOTE ]

Sensational reporting by this guy is good for his ratings but I doubt many people will be able to walk away from their houses even if the valuations continue to fall.

People still need a roof over their heads and need to weight up the costs and benefits of defaulting and paying rent as opposed to remaining with their home and mortgage.

Walking away will cause people to 'lose their deposits'. Even though the market has already taken many people's deposits, it a near psychologically impossible thing to do - albeit prudent for certiain individuals in specific situations....a point Cramer fails to expand upon.

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What deposit? His advice is aimed at the 100% LTV and neg am borrowers.

J

Post deleted by Mat Sklansky
 

Re: Walk Away From Your House by Jim Cramer
 

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Walking away will cause people to 'lose their deposits'. Even though the market has already taken many people's deposits

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Well? This is exactly what happened in the early 90's. The house was worth less than they paid for it. They owe more than the current worth. With a small down payment coupled with teaser rate/exploding mortgage waalking away is often a prudent strategy. Of course this just puts more pressure on the loaners.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
Investing in sub prime mortgage lenders right now would be beyond retarded.

Real Estate market is going to crash, hard. Take that money and buy forclosure properties.

[/ QUOTE ]

Are you shorting them since it's beyond retarded? In other words, is your money where your mouth is?

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
[ QUOTE ]
DesertCat, do you invest in subprime lenders and/or homebuilders? I think this is def. a good time to be buying with all the people predicting the apocalipse and all, everything is on 52week lows etc.

Where do you see the most value on these markets? I really trust your analysis

[/ QUOTE ]

I think there is some value in subprime, the problem is it's a lot of work to figure out where. I bought some DFC and made some nice profits and sold most of it before it replunged. I'm not going to buy it back until I do my homework on it in more detail now that I better understand these businesses.

The company I'm referring to in my first post is out of business and the market apparently thinks it's bloated corpse is worthless. It's been a great learning experience, I bought early before I really understood it and as it declined I've been constantly reresearching it and learning more.

Effectively what you need to understand is that most mortage/lending companies carry huge assets (securitizations) on their balance sheets that they don't own and huge liabilities are are totally non-recourse to them.

So you have to carve out a "pro forma" balance sheet of what they really own/owe. Then you look at the "stub value" of what cash they can reasonably get out of their securitizations. The securitizations are separate companies and you need to get their prospectuses and monthly reports to tease out how much cash flow they can generate and what collateral will be left over when it's closed. In some cases it's clearly nil, in some cases it's murky, and sometimes it's obvious that the parent company is going to get some cash.

Lots of work. But I think it's rewarding. I'm down $70,000 so far, but if I'm right I'll end up with a substantial profit by next year.

[/ QUOTE ]

I'm not sure what you mean by huge assets they don't own and liabilities that are non-recourse. If you mean term securitizations (as in most MBS/ABS transactions) that's not part of their book in any sense, except for three aspects - 1) They may or may not own residuals (equity tranche/first-loss position) and this may be what you're talking about in terms of the cash they can get. For most recent deals, the value of this will be close to zero. 2) The loans they sold into the securitization will have warranty for EPD (early payment default), fraud or other types of misrepresentation. This is a clear liability in this market. 3) They may or may not have retained servicing rights to the loans in the securitization (a fee for continuing to service the loans). This is another source of residual cashflow, though becoming less common for smaller shops.

All this is probably less of a concern (and easier to evaluate with reasonable amounts of disclosure) than loans in the pipeline that are held in a warehousing facility (which will generally be part of their book). Any serious mortgage market disruption can put the lender out of business because most of those credit facilities can be pulled on a moment's notice, in which case the lender won't have the luxury to wait to sell the loans into an appropriate securitization. In a liquidation scenario, you'll find that most lenders have very little value.

Post deleted by Mat Sklansky
 

Re: Walk Away From Your House by Jim Cramer
 

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Investing in sub prime mortgage lenders right now would be beyond retarded.

Real Estate market is going to crash, hard. Take that money and buy forclosure properties.

[/ QUOTE ]

Absolutes are beyond retarded. There are more sub prime mortage lenders that are going to fail. The survivors will profit from the shakeout. There are some that are hugely overvalued because they aren't trading at zero. There are some trading near zero that are clearly worth much more. Do your homework individually and find out.

I hate absolutes, but if I had to say one about this situation I would have to say that "subprime mortgages written before the second half of 2005 are solid" is more true than not. I'll leave it to you to figure out why.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]

Why would you be buying into a falling market? If valuations look good by your analysis then wouldn't it be more sensible to wait for some confirmation from price action that an upward move is more likely?

Bottom fishing can prove profitable if you make the right calls at the right time, but I doubt it provides a good risk:reward

[/ QUOTE ]

Are you suggesting I'll make a bigger profit if I wait until it goes up so I can pay more?

To answer your question, I think the current price is idiotic, the remaining excess cash flow is clearly going to be more than the current trading value. I don't know when the price will stop being idiotic, but when it does it will quickly move up by around 100%. I can't predict when that will happen, certainly by year end, or by early next week. So I buy when I can.

And in this case, the company is going to dividend those cash flows directly to shareholders. So I really don't have to care what the market price is once I've bought. I expect to have my basis returned to me by years end.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
BTW, Wall Street has coined a term for this type of "value" investing.

Catching a falling knife.

[/ QUOTE ]

We've had enough exchanges that you should know that I specialize in catching falling knifes. It's how I make my living and it's treated me very, very well. I understand why wall streeters who don't understand how to estimate value, or cannot commit to value investing, grow cold when their "picks" drop in price, and assume they made a mistake or that someone else knows something they don't and rush to sell.

I guess Eddie Lampert isn't one of them.

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The audacity of his Kmart investment put Lampert on the map. With Kmart in Chapter 11 in 2002, he scooped up its debt as creditors fled. But his investment swooned as the retailer got even sicker. So Lampert doubled down and bought yet more debt, enough to give him control of the bankruptcy process.

[/ QUOTE ]

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]

I hate absolutes, but if I had to say one about this situation I would have to say that "subprime mortgages written before the second half of 2005 are solid" is more true than not. I'll leave it to you to figure out why.

[/ QUOTE ]

I assume this has to do with home price appreciation and the fact that a lot of 2/28's from then have already reset. On the other hand, underwriting standards already became comical in late 2004 and early 2005. Add that to the locality effect (bad loans tend to be clustered in neighborhoods which can change RE fundamentals by making those areas less desirable) and that most of those subprime borrowers are simply not ready for the payment shock.

But this is all moot as small lenders shouldn't have a lot of exposure to performance of loans in the 2004-2005 vintages. Where they are going to make money going forward (and how creditors view their prospects) is a much bigger concern. What lenders are essentially engaged in is an arbitrage between the price of mortgages in the primary market (what borrowers are willing to pay) and in the secondary market (what investors are willing to pay). There is no real arbitrage at a volume that can keep very many lenders in business.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]


I'm not sure what you mean by huge assets they don't own and liabilities that are non-recourse. If you mean term securitizations (as in most MBS/ABS transactions) that's not part of their book in any sense, except for three aspects - 1) They may or may not own residuals (equity tranche/first-loss position) and this may be what you're talking about in terms of the cash they can get. For most recent deals, the value of this will be close to zero. 2) The loans they sold into the securitization will have warranty for EPD (early payment default), fraud or other types of misrepresentation. This is a clear liability in this market. 3) They may or may not have retained servicing rights to the loans in the securitization (a fee for continuing to service the loans). This is another source of residual cashflow, though becoming less common for smaller shops.


[/ QUOTE ]

Many securitizations are still held on balance sheets, even when totally non-recourse (i.e. well after any EPD liabilities have expired). I'm not an expert on the accounting reasons why, but I believe in the cases I've seen it's because the securitization is effectively owned/controlled by the parent company.

In the company I referenced, they have some residual interests in 2004 securitizations that are just held as assets at estimated fair value, but their 2005 securitizations are entirely on the balance sheet. I can't tell you why they are accounted for differently, just that they are.

[ QUOTE ]

All this is probably less of a concern (and easier to evaluate with reasonable amounts of disclosure) than loans in the pipeline that are held in a warehousing facility (which will generally be part of their book). Any serious mortgage market disruption can put the lender out of business because most of those credit facilities can be pulled on a moment's notice, in which case the lender won't have the luxury to wait to sell the loans into an appropriate securitization. In a liquidation scenario, you'll find that most lenders have very little value.

[/ QUOTE ]

I'm not talking about warehouse facilities. This company shut down theirs long ago.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]


I assume this has to do with home price appreciation and the fact that a lot of 2/28's from then have already reset. On the other hand, underwriting standards already became comical in late 2004 and early 2005. Add that to the locality effect (bad loans tend to be clustered in neighborhoods which can change RE fundamentals by making those areas less desirable) and that most of those subprime borrowers are simply not ready for the payment shock.

But this is all moot as small lenders shouldn't have a lot of exposure to performance of loans in the 2004-2005 vintages. Where they are going to make money going forward (and how creditors view their prospects) is a much bigger concern. What lenders are essentially engaged in is an arbitrage between the price of mortgages in the primary market (what borrowers are willing to pay) and in the secondary market (what investors are willing to pay). There is no real arbitrage at a volume that can keep very many lenders in business.

[/ QUOTE ]

You are pretty much right on. Home prices are still higher now than they were in 04 in most cases, and even over the first half of 05. Since most of these loans have reset, they are generating substantially more interest and have real world loss rates since the resets, so it's easier to see which securitizations are in bad shape and which are good. The company I'm examining has 4 2005 securitizations. Two are in great shape, one (the last one) in bad shape, and the other is marginal.

For companies still in business, in the long run this shakeout is good, less competition will eventually create higher profit margins. You just have to be able to find the companies that are going to survive the tough times. DFC, which I mentioned previously, was able to do a securitization around March, and I think they increased or reconfirmed their warehouse lines shortly thereafter, and have like 6 months or so remaining before they need to do another securitization. They are a conservatively managed business (mostly fixed loans) and if they survive, should prosper. Note: This isn't a recommendation. I haven't looked at them in a while so my facts might be stale. But I firmly believe there will be more than a few companies that end up benefiting from the shakeout, if you can find them.

Re: Walk Away From Your House by Jim Cramer
 

While I'm ok with people who want to ignore JC, but I'd be careful picking up sub-prime lenders here. Their business model is TOTALLY broken for the most part. They don't have any money to make the loans themselves, and depending on reselling them and there are no buyers for this junk right now. They can't sell the loans they have now (even discounted) and can't make any new loans right now, so where's the upside?? I'm referring to the pure play lenders (not the BAC and C and WM out there). (And yes my money is where my mouth is here). I don't think the overall real estate market will 'collapse' as some predictions, but alot of the pure play lender-resellers will.

Steve

Re: Walk Away From Your House by Jim Cramer
 

LEND is up 40% today
http://money.cnn.com/quote/quote.htm...D&time=5yr

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
LEND is up 40% today
http://money.cnn.com/quote/quote.htm...D&time=5yr

[/ QUOTE ]

short covering - half the float is short.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
[ QUOTE ]
BTW, Wall Street has coined a term for this type of "value" investing.

Catching a falling knife.

[/ QUOTE ]

We've had enough exchanges that you should know that I specialize in catching falling knifes. It's how I make my living and it's treated me very, very well. I understand why wall streeters who don't understand how to estimate value, or cannot commit to value investing, grow cold when their "picks" drop in price, and assume they made a mistake or that someone else knows something they don't and rush to sell.


[/ QUOTE ]

DC,

i actually followed some of your more well discussed picks here. i'd like to submit a falling knife for your opinion.

IGT. the company is heavy with cash (19% ROE for 3 years in a row and a great balance sheet), buying back stock (smart as the price is falling), well-positioned for global growth in several old and new gaming technologies (server-based gaming), pretty easily beats rather gloom estimates with its high profitability (13 ROA), but is continually falling because analysts think it's overvalued compared to the industry.

this is puzzling because its P/E is 25 to the Gaming Industry average of 45. at the same time, its P/Book and P/Sales is twice as high as industry avg. but even that reason is suspect, since IGT is much bigger than the rest of its competitors put together.

there are a few suspect activities. all of insider actions in the past 6 months have been sells. the short position is low at 2.4%, and this is a positive, but it's not like it will triple via a squeeze or anything.

anyways, speaking of falling knives, i thought i'd ask you.

Re: Walk Away From Your House by Jim Cramer
 

AHM.... Nice one, and it's not even sub-prime.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
AHM.... Nice one, and it's not even sub-prime.

[/ QUOTE ]

Starting at the bottom of the pyramid and slowly going up. Sub-prime then ALT-A then prime. Going to be a snowball effect. Half the jobs in the past 5 yrs have been housing related, they will be wiped out. Wonder how they can afford to pay their mortgage.

I am more concerned about the illegal aliens working in construction in Southern California. I hope they go back to Mexico after losing their job instead of robbing people. Got my guns ready just in case [img]/images/graemlins/smile.gif[/img].

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
BTW, Wall Street has coined a term for this type of "value" investing.

Catching a falling knife.

[/ QUOTE ]

We've had enough exchanges that you should know that I specialize in catching falling knifes. It's how I make my living and it's treated me very, very well. I understand why wall streeters who don't understand how to estimate value, or cannot commit to value investing, grow cold when their "picks" drop in price, and assume they made a mistake or that someone else knows something they don't and rush to sell.


[/ QUOTE ]

DC,

i actually followed some of your more well discussed picks here. i'd like to submit a falling knife for your opinion.

IGT. the company is heavy with cash (19% ROE for 3 years in a row and a great balance sheet), buying back stock (smart as the price is falling), well-positioned for global growth in several old and new gaming technologies (server-based gaming), pretty easily beats rather gloom estimates with its high profitability (13 ROA), but is continually falling because analysts think it's overvalued compared to the industry.

this is puzzling because its P/E is 25 to the Gaming Industry average of 45. at the same time, its P/Book and P/Sales is twice as high as industry avg. but even that reason is suspect, since IGT is much bigger than the rest of its competitors put together.

there are a few suspect activities. all of insider actions in the past 6 months have been sells. the short position is low at 2.4%, and this is a positive, but it's not like it will triple via a squeeze or anything.

anyways, speaking of falling knives, i thought i'd ask you.

[/ QUOTE ]

Buried. Sorry. I'm devoting my time to reading securitization prospectuses right now.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
BTW, Wall Street has coined a term for this type of "value" investing.

Catching a falling knife.

[/ QUOTE ]

We've had enough exchanges that you should know that I specialize in catching falling knifes. It's how I make my living and it's treated me very, very well. I understand why wall streeters who don't understand how to estimate value, or cannot commit to value investing, grow cold when their "picks" drop in price, and assume they made a mistake or that someone else knows something they don't and rush to sell.


[/ QUOTE ]

DC,

i actually followed some of your more well discussed picks here. i'd like to submit a falling knife for your opinion.

IGT. the company is heavy with cash (19% ROE for 3 years in a row and a great balance sheet), buying back stock (smart as the price is falling), well-positioned for global growth in several old and new gaming technologies (server-based gaming), pretty easily beats rather gloom estimates with its high profitability (13 ROA), but is continually falling because analysts think it's overvalued compared to the industry.

this is puzzling because its P/E is 25 to the Gaming Industry average of 45. at the same time, its P/Book and P/Sales is twice as high as industry avg. but even that reason is suspect, since IGT is much bigger than the rest of its competitors put together.

there are a few suspect activities. all of insider actions in the past 6 months have been sells. the short position is low at 2.4%, and this is a positive, but it's not like it will triple via a squeeze or anything.

anyways, speaking of falling knives, i thought i'd ask you.

[/ QUOTE ]

Everything you said is correct and it could potentially be a good play. It's been losing market share to major competitors over the past two quarters, though. It's also currently in the middle of a a patent litigation. Keep an eye on it for the time being.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Investing in sub prime mortgage lenders right now would be beyond retarded.

Real Estate market is going to crash, hard. Take that money and buy forclosure properties.

[/ QUOTE ]

Are you shorting them since it's beyond retarded? In other words, is your money where your mouth is?

[/ QUOTE ]

until this thread i never put 2 and 2 together on it. shorting them doesn't seem like a bad idea actually. i'll look into it. my efforts on this have been concentrated on foclosure property.

[/ QUOTE ]

You might be a touch too late to the dance and if the possibility of going short never occurred to you, perhaps now is not the time to do so.

I love the symmetry; during the bubble every grocery bagger was an amateur flipper, now maybe they'll become foreclosure buyers and stock shorters.

J

Re: Walk Away From Your House by Jim Cramer
 

Cramer on cnbc money

(bonus: he goes ballistic in the middle)

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
Cramer on cnbc money

(bonus: he goes ballistic in the middle)

[/ QUOTE ]

Wow, if only this were more widely posted and discussed. Is LoL more your speed?

J

Re: Walk Away From Your House by Jim Cramer
 

I'm not in the mood for trolling. If you dont like my posts, put me on ignore.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
I'm not in the mood for trolling. If you dont like my posts, put me on ignore.

[/ QUOTE ]

And I'm not in the mood for a quick login and spam of already discussed links with little commentary, this was one of many. It seems we are in an intractable state. Either you suck less or I STFU.

J

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
BTW, Wall Street has coined a term for this type of "value" investing.

Catching a falling knife.

[/ QUOTE ]

Oh, so people with poor credit will never need houses again, right? Gotcha.

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]
[ QUOTE ]
BTW, Wall Street has coined a term for this type of "value" investing.

Catching a falling knife.

[/ QUOTE ]

Oh, so people with poor credit will never need houses again, right? Gotcha.

[/ QUOTE ]

There are poor people?

Re: Walk Away From Your House by Jim Cramer
 

[ QUOTE ]

I think there is some value in subprime, the problem is it's a lot of work to figure out where. I bought some DFC and made some nice profits and sold most of it before it replunged. I'm not going to buy it back until I do my homework on it in more detail now that I better understand these businesses.

The company I'm referring to in my first post is out of business and the market apparently thinks it's bloated corpse is worthless. It's been a great learning experience, I bought early before I really understood it and as it declined I've been constantly reresearching it and learning more.

Effectively what you need to understand is that most mortage/lending companies carry huge assets (securitizations) on their balance sheets that they don't own and huge liabilities are are totally non-recourse to them.

So you have to carve out a "pro forma" balance sheet of what they really own/owe. Then you look at the "stub value" of what cash they can reasonably get out of their securitizations. The securitizations are separate companies and you need to get their prospectuses and monthly reports to tease out how much cash flow they can generate and what collateral will be left over when it's closed. In some cases it's clearly nil, in some cases it's murky, and sometimes it's obvious that the parent company is going to get some cash.

Lots of work. But I think it's rewarding. I'm down $70,000 so far, but if I'm right I'll end up with a substantial profit by next year.

[/ QUOTE ]

And what if you're wrong? I personally have probably not done anywhere near the amount of research on the sub prime market as you have, but to paraphrase Keynes- the market can be irrational longer than you can remain solvent. You expect to make back your basis on dividends, but isn't it possible (and imo, likely) that this "crisis" will force your company to cut dividends? You've already said that one went out of business.

Perhaps I'm wrong but my view of the value investing strategy is that you make purchases with very little downside. You say you've already lost $70k, which is apparently significant to your portfolio. Dollar amounts don't actually mean much- what percent of your portfolio have you lost in these investments? What percent of your portfolio is in these mortgage related companies? Going against popular view can be quite profitable, but the view is usually popular for a reason. I'm by no means an expert on mortgages, but the experts sure seem to believe that a crisis is on hand.

When the S&P500 was trading in the 700s in 1997(?) Greenspan said that the market was far too optimistic, yet we had a huge bull run for the next three years. The market as a whole has only been showing weakness about the "lending crisis" for a couple of weeks. Reports that I've read on the housing markets seem to indicate that barring some sort of intervention, the downturn will extend into 2009. Are you planning on adding more and more money into your positions (which could be black swans) while they keep going down?

Re: Walk Away From Your House by Jim Cramer
 

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And what if you're wrong?

[/ QUOTE ]

I size my positions carefully based on risk and my portfolio size. I can afford for this one to go to zero and still have profitable year.

[ QUOTE ]

I personally have probably not done anywhere near the amount of research on the sub prime market as you have, but to paraphrase Keynes- the market can be irrational longer than you can remain solvent.

[/ QUOTE ]

Not sure what Keyne's specific point was, I can stay solvent forever because I use very little margin debt.

[ QUOTE ]

You expect to make back your basis on dividends, but isn't it possible (and imo, likely) that this "crisis" will force your company to cut dividends? You've already said that one went out of business.

[/ QUOTE ]

Many have gone out of business, including the one I'm investing in. It currently has about $43M in cash & equivilents, is pretty much a lock to receive $16M in cash flows in the next 4-5 months and has $51M in liabilities (some non cash that won't cost anything), so a net cash value of about $7M vs. a market cap of $18M. It also has $78M in securitization assets, loans, and real estate & a lawsuit worth up to $25M. So the market is saying those loans/real estate/lawsuit are worth about 10% of stated value (which has already been written down substantially).

The market is wrong here, mainly because there is no "market" for $18M market cap companies, i.e. wall street isn't looking at them. I think it's most likely that the company will end up being worth between $40M and $80M. And it's already committed to dividending all excess cash. And I think I have very little downside in this one.

[ QUOTE ]

Going against popular view can be quite profitable, but the view is usually popular for a reason. I'm by no means an expert on mortgages, but the experts sure seem to believe that a crisis is on hand.

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I'm not going against the popular view, I actually agree with it. Subprime underwriting standards did go loopy, real estate values were in a bubble, and the fallout is far from over. But clearly subprime loans will be made in the future, just on financially prudent terms. And every subprime loan written in the last 5 years isn't going bad, not even most of them. In the worst securitization this company has in 2005 has a loss rate of 2.9% in total.

Think about it this way. If 10% of loans go all the way to foreclosure and the company takes a 35% loss on each foreclosed loan, that's a 3.5% loss rate. It's a little more complex than that, but at that loss rate even if every loan went bad a basket of subprime loans would still be worth something like 65% of face value. The loss rate is of course depending of course on the value of the properties at auction and costs of the foreclosure process.

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When the S&P500 was trading in the 700s in 1997(?) Greenspan said that the market was far too optimistic, yet we had a huge bull run for the next three years. The market as a whole has only been showing weakness about the "lending crisis" for a couple of weeks. Reports that I've read on the housing markets seem to indicate that barring some sort of intervention, the downturn will extend into 2009. Are you planning on adding more and more money into your positions (which could be black swans) while they keep going down?

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You seem to be macro focused. The housing market will have some impact on my positions value, but much of the value is already in cash, and even in worse downturn the remaining mortgage/reo assets will be worth a lot more than zero. Enough to pretty much guarantee a profit here. Every position stands on it's own.