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.