Help me out here, am I right on this? Negative Amortization...

[dtw]

Your analogy fails - it IS booked as a receivable. If I sell you a widget on 30 day terms, I record revenue upon shipment and a receivable. So the bank is doing the same thing, but with interest. In other industries (I don't deal with banks frequently) adding the interest onto the principal is called accretion.

I am not sure why you would take exception to this unless the balance was not collectible - in which case you'd want to see some kind of reserve against the receivables.

[Paul T]

Wayne, I think you are right on the money and I'd keep that short! With 80% in no doc "liar loans" and all this neg am, soon these option arms will hit their neg am limit and then they begin to fully amortize - immediately! Typically it's when loan value hits 105 or 110%. Then sit back and watch the foreclosures begin...

[turbo6bar]

You're right, Wayne. It is a ticking timebomb. Thing I don't like about these Alt-A producers is the high short interest. However, it is hard to believe these companies will manage to hold value while the worst of the housing bust is still ahead (Alt-A resets are hitting big in the next 12-36 months).

I have seen a lot of data cross my screen the past few weeks, but one tidbit that stuck out was Indymac's recent reports. Their quarterly origination volume was actually up YOY, but they remarked that if new lending guidelines (in effect now) would have been in place last quarter, volume would actually have been cut by 1/3. Wow!

[Moses]

The mortgage industry has adopted the business model of the Rent-to-Own stores that feed on the poor.

They sell an overpriced but highly desirable product with nothing down and "affordable" payments that cannot sustain a long term commitment to buy. This whole thing is gonna get ugly. As the housing market get softer, I expect we'll see more and more folks walk away from "interest only" and "negative am" loans. The default rates will be extraordinary.

As for posting earnings that should remain on the books as recievables, it is at least intellectually dishonest unless they have calculated in an expected default rate.

[turbo6bar]

Fabulous graphic from an article at itulip.com:

As for posting earnings that should remain on the books as recievables, it is at least intellectually dishonest unless they have calculated in an expected default rate.

Well, you can put them down as intellectually dishonest, because several lenders are actually reducing reserves for defaults. They cite that a portion of their portfolio is refinancing into a new mortgage. Smaller portfolio means fewer defaults, right? Not quite. The ones who are refinancing are ones with the ability to refinance, leaving those who don't want to refi or those who CANNOT refi. Portfolio quality may actually be deteriorating.

[dtw]

Originally posted by Wayne at Pelican Parts
Read the article from Seeking Alpha - it explains why booking non-cash earnings is far different than regular earnings.

-Wayne

I did read it and I'm quite familiar with non-cash earnings (am a CPA by profession) - my points stand. There's nothing wrong with the accounting here - what is highly subjective and risky is management's judgment on the collectibility of the mortgages. The issue in the accounting profession for the last several years has been making financial statements (or really, the rule & guidance underlying them) more transparent to the reader. This is undermined by companies engaging in more and more complex transactions - it gets nearly impossible for the average (not professional) investor to make sense out of a set of statements.

I see the reference to Enron later in the thread. That was a huge wake up call. Their statements should have had a red, bold disclaimer all over them - "Hey Joe Investor - pay attention - if the following reasonably possible circumstances occur, a *****load of off-balance-sheet debt will be called and company will instantly go bankrupt. Buy this stock at your own risk". Again, I'm not in banking but I've been pretty edgy the last few years watching some of the products the banks have been offering. Definitely risky.

[Hugh R]

97.08% of mortgages are adjustable! I don't play the shorting game, but I might on that one.

[competentone]

Originally posted by Moses
The mortgage industry has adopted the business model of the Rent-to-Own stores that feed on the poor.

They sell an overpriced but highly desirable product with nothing down and "affordable" payments that cannot sustain a long term commitment to buy. This whole thing is gonna get ugly. As the housing market get softer, I expect we'll see more and more folks walk away from "interest only" and "negative am" loans. The default rates will be extraordinary.

Agreed, but the thing that would prevent me from taking any short position on the banks -- is the fiat money/Federal Reserve banking/monetary system we have.

I'm expecting, that before things get too bad, the government (through the Fed -- the Fed is really not a private entity as some would try to make you believe) will turn on the printing-press full blast and bail out the banks -- and voters holding mortgages they can't afford.

From the politician's perspective it is much better to have hyper-inflation -- which they can blame on "evil corporations raising prices on goods and services" -- rather than have large numbers of people being put out of their homes because they have defaulted on their poorly constructed loans.

There is probably going to be some severe implosions in the banking industry (I suspect there is a good chance Wayne will make money on his short positions), but I expect there will be a "government bailout" of the industry before things get too bad.

If I were holding a short position on the bankers, I wouldn't get too greedy expecting a complete collapse of the industry. The government will bail it out, which will trigger massive inflation, which is one of the reasons I'm so bullish on gold.

[competentone]

Originally posted by Wayne at Pelican Parts
....FED....

Note, this one of the stocks in my shorting portfolio.

Just looked at some of the numbers:

http://finance.yahoo.com/q/ks?s=FED

41% of the float is short!

It could be difficult to make money if the company's financials put pressure on the stock price to drop since there will be so many shorts trying buy to cover.

Any "good" news -- like an unexpected lowering of the Fed. funds rate -- and the resulting short-squeeze could be quite painful.

The premiums on the options look pretty steep too -- so hedging would be expensive, as would be trying to play an effective short position by purchasing naked puts.

Hope you got in with your short position during the recent highs:
http://finance.yahoo.com/q/bc?s=FED and are sitting on gains already.

Insider sales look OK for a short position:
http://www.form4oracle.com/company?cik=0000810536&ticker=fed

[daepp]

The neg am interest IS booked as a receivable. They should defer those earnings for the loans if it is not reasonable to expect interest and principal to be repaid as agreed. I would also think it prudent to segregate those credits and perhaps apply a higher loan loss reserve allocation. However, that being said, for those loans that pay as agreed, do you want them to earn only when paid in full?

[M.D. Holloway]

Originally posted by competentone
...which is one of the reasons I'm so bullish on gold.

$730/oz by the end of the year Baby! You heard it here!

[Porsche-O-Phile]

I think you're right Lube. I'm looking at getting a few ounces to hold in reserve. God knows I'm not going to be putting any $$$ into real estate anytime soon - might as well put it where I'm going to get a decent return.

That said, current stock picks are doing very well although I'm not sure how much of that was wise picks and how much of that was the generally bullish market at the present time. I'm seriously considering some shorts in financials and companies heavily tied to mortgage lending, but I do have real concerns about grandstanding politicians approaching an election year trying something stupid, like a bailout, which could render any gains from such shorts negligable or possibly even result in a loss.

Yes, sadly I really do think our government is that stupid and misguided. I doubt it will REALLY happen and will probably join you in similar short positions but it wouldn't really surprise me if something like a bailout did seriously start getting batted around.

[red-beard]

I've invested in concrete pool. It's a solid investment with liquid potential.