Walk Away From Your House by Jim Cramer

[DesertCat]

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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.

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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.

[SteveOMS]

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

[r3vbr]

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

[gonebroke2]

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

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short covering - half the float is short.

[sylar]

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

Catching a falling knife.

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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.


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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.

[quant_trader]

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

[gonebroke2]

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

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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].

[DesertCat]

[ 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.


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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.

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

[PRE]

[ 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.

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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.

[jaydub]

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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.

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

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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.

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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