Recent reports reveal a surprising amount of criminal activity in the mortgage business. This is particularly true in states whose names end in the letter A, such as Florida and Nevada. Two particular forms of illegal behavior are the licensing of mortgage brokers with criminal records and homebuilders' use of bribes -- or 'incentives' -- to encourage people to buy over-priced houses without disclosing them to lenders as required by law. Think I'm kidding?
DSNews reports that last week, Florida's mortgage commissioner resigned after it was revealed that he granted mortgage brokerage licenses to people with criminal records. Specifically, DSNews wrote that Don Saxon, who had been Chairman of the Office of Financial Regulation (OFR) had "allowed more than 10,000 people with criminal histories – including bank robbers, racketeers, defrauders, embezzlers, identity thieves, and tax evaders, among others – to work in Florida's mortgage lending industry between 2000 and 2007. These convicted felons had expropriated more than $85 million from lenders and homeowners during that time."
Meanwhile, things were not much more legal in Nevada. That's where the Wall Street Journal reports that the Las Vegas, NV branch of home builder Centex (NYSE: CTX) paid off the credit cards and mortgages of potential borrowers to entice people to buy homes priced from $350,000 to $550,000. The FBI is investigating allegations that Centex did not always disclose these 'incentives' to lenders as required by law.
Are you waiting for the malaise in the housing market to finally lift? Of course you are, who isn't? I can't wait for the day when headline news suddenly turns unambiguously positive. And I can't wait for the day when the market as a whole decides to anticipate it. For now, though, we've still got sour data to contend with. According to this article, famous luxury home-builder Toll Brothers (NYSE: TOL), whose competitors include Centex (NYSE: CTX) and Lennar (NYSE: LEN), reported preliminary results for the third quarter on Wednesday that showed a big decrease in home-building revenues. They decreased 34%, coming in at roughly $796 million. Seems par for the course, all things considered.
But there are more declines. Backlog orders decreased over 50%, and net signed contracts took a dive of 35% (both of these metrics are in dollar terms). The company is also issuing write-downs that will fall somewhere between $100 million and $200 million. Depressing stats, but according to the company press release, CEO Robert I. Toll believes that there is pent-up demand lurking out there in the marketplace for homes and he used the fact that total cancellations were down during the quarter as a tool for positive spin. Plus, the home-building revenue number did, in fact, beat estimates, according to Reuters. Does this make me want to run out and buy the stock?
No. Even though the stock has been strong in the last month, and even though it was up nearly 1% at the end of the trading session on Wednesday (a pretty nice showing on an otherwise overall downer of a day), I don't think I'm ready to initiate a position in Toll Brothers. I'd have to see a significant pullback in this one before my interest becomes piqued (some better economic news wouldn't hurt, either).
Disclosure: I don't own any company mentioned; positions can change at any time.
TheStreet.com's Jim Cramer says they should be punished for trying an end run on taxpayers.
Love Centex (NYSE: CTX) (Cramer's Take), sell Horton (NYSE: DHI) (Cramer's Take)? That's how I feel after reading Horton's pathetic plea to bring back down-payment assistance for this industry, which remains unpunished for all it did to foment the housing crisis.
Yesterday, in one of our "Wall Street Confidential" series, I opined that Centex was shaping up to be one of the better builders after making so many right moves in the last year to preserve capital. I didn't care for industry leader D.R. Horton, though.
And that was before I read the outrageous comments from Horton CEO Don Tomnitz in Market Watch yesterday, where he decried that the new housing law didn't include more down-payment assistance loans from the FHA. These seller assistance loans plied basically, by the homebuilders that allow homebuyers to use a back door to FHA loans, have been defaulting at very high rates. The Congress, in an actual dollop of wisdom, scrapped them and instead gave people a tax credit of $7,500 to buy a new house, not bad considering that houses have retreated in value to the point that even though you need to put down more money as a percentage basis, as an absolute basis there's some affordability. This kind of loan is precisely what got us in trouble, an affordable loan that people ultimately couldn't afford that just helped Horton dump properties.
Centex Corp. (NYSE: CTX) shares opened lower today, but have risen throughout the day, even after the company posted a fourth-quarter loss of $911 million, or $7.34 per share, well below analyst estimates of a $2.43 per-share loss. Revenue tumbled 37% for the quarter to $2.31 billion, as CTX cut its average selling price 15% to help build up sales. Investors must believe that the worst is over for CTX. If you think this stock won't be falling too far in the coming months, then it could be a good time to look at a bullish hedged play on CTX.
After hitting a one-year high of $49.85 last May, the stock hit a one-year low of $17.77 in November. This morning, CTX opened at $20.02. So far today the stock has hit a low of $19.79 and a high of $22.25. As of 12:15, CTX is trading at $21.92, down 1.10 (-5.3%). The chart for CTX looks bearish and steady, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bearish hedged play on this stock, I would consider a June bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in two months as long as CTX is above $17.50 at June expiration. Centex would have to fall by more than 20% before we would start to lose money. Learn more about this type of trade here.
After hitting a one-year high of $49.85 in May, the stock hit a one-year low of $17.77 in November. This morning, CTX opened at $25.90. So far today the stock has hit a low of $25.00 and a high of $26.09. As of 1:00, CTX is trading at $25.01, down $1.31 (-5.0%). The chart for CTX looks bullish and steady, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $30 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 12.4% return in six weeks as long as CTX is below $30 at May expiration. Centex would have to rise by more than 20% before we would start to lose money. Learn more about this type of trade here.
TheStreet.com's Jim Cramer says until the public feels they won't lose money on a home, no problems will get solved.
Would you ever buy a house in this environment? That's really the ultimate question that has to be asked -- that the Fed should be asking -- if this junk is ever going to come back to life.
I know some of it is so short-term that the jury's back and the verdict is guilty, but most of it hinges on a simple issue: housing depreciation. If you think that your house is going to lose value, default on the second home lien. Which then, we know now, means defaulting on the ultimate mortgage.
The Fed can tinker with LIBOR (I still can't believe they wasted the banking system's time with the LIBOR/auction plan). It can issue statements that are a little more pro-growth than neutral.
Or it can try to change the psychology of the home buyer and homeowner.
TheStreet.com's Jim Cramer explains what could force the Fed to cut rates again.
The housing index just can't rally for a minute. The thing's amazing. The stress of the system is so clearly manifested by this that I have to wonder if the Fed wants this index lower.
Many of these firms lent money recklessly. Are the Fed heads thinking these companies need to pay like the New Centurys and the NovaStars (NYSE: NFI) (Cramer's Take) did? (Are the feds, by the way, thinking that this GMAC company has to go because that was a huge provider of crummy mortgages?)
Things keep getting worse and builders get more and more cautious. In fact, according to the Commerce Department's most recent survey, housing starts dropped 10% to an annual pace of 1.19 million in September from a 1.33 million rate in August. That's worse than economists expected. Briefing.com's survey showed economists estimated a more modest fall to 1.29 million.
We haven't seen a housing market this weak since 1993 and the future doesn't look any better. Housing permits were down 7% to an annual rate of 1.23 million in September from 1.32 in August. That's the lowest level for permits in 12 years.
Centex (NYSE: CTX) of Dallas joinsthe growing list of home builders that will be taking charges. The Wall Street Journal reported this morning that Centex plans to take $1 billion in charges [subscription required]because of the deteriorating housing market. Charges reported by the Journal include:
$850 million impairment on its neighborhood and land inventory plus $40 million more on land held by joint ventures.
$40 million write-off in pre-acquisition costs and option deposits
$60 million provision for future mortgages.
These loses are on top of the $193 million in write-offs for the first fiscal quarter.
Yesterday, Moody's downgraded Centex's credit rating to junk status and said it expects to see weak conditions in the housing industry until at least 2009. Moody's also told the Journal that Centex, "has had difficulty unloading excess inventory, is facing rapidly declining home deliveries and revenue generation, and has close to a seven-year lot supply."
Centex reports its results officially on October 23. Expect bad news and falling stock prices between now and then.
Alternative investment asset manager Fortress Investment Group's (NYSE: FIG) decision to shutter its subprime mortgage division, Nationstar Mortgage, generated only a mild reaction from traders and analysts alike. Nationstar, a leading U.S. subprime lender, has sustained substantial losses due to rising defaults and foreclosures.
Nationstar said any approved mortgage applications in its pipeline would be honored. Nationstar will also continue to service the $10 billion in subprime loans in its portfolio.
Wall Street took Fortress's subprime decision in stride: Wall Street appreciates all the candor and data it can get regarding the status of subprime loans and operations, and Fortress's announcement will help analysts compose a more-complete report on Fortress, one reason the Street did not punish FIG's shares this week. On Friday, FIG's shares closed down 26 cents to $21.32.
Moreover, Wall Street's clamor for "the more data, the better" regarding the subprime sector is not without justification. Late payments and defaults on subprime mortgages are already four times the historical U.S. average, and many analysts expect that percentage to rise in the quarters ahead: about $350 billion in subprime home loans will shift to higher interest rates, with initial rate increases boosting costs by 30% or more, according to research by Credit Suisse (NYSE: CS).
Nationstar, formerly Centex Home Equity, was bought in 2006 by Fortress, a manager of private-equity and hedge funds, for about $554 million. It had been owned by Dallas-based Centex (NYSE: CTX), the fourth-biggest U.S. homebuilder.
CNBC's Jim Cramer says he is dumbfounded that Centex Corporation (NYSE: CTX) still pays a dividend, and he is certain that the dividend will be cut or erased barring a miraculous turnaround in housing. Today's news that new home sales were up is at least partially negated by the fact that prices were down. If you are inclined to agree, then it could be a good time to get into a bearish hedged trade on Centex.
After hitting a one year high of $58.42 in December, the stock slid to a one-year low of $28.84 earlier this month. This morning, CTX opened at $31.66. So far today the stock has hit a low of $31.52 and a high of $32.70. As of 11:10, CTX is trading at 32.26, up 0.40 (1.3%). The chart for CTX bearish and steady, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
If you agree with Cramer, then for a bearish hedged trade, I would consider an October bear-call credit spread above the $40 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just 2 months as long as CTX is below $40 at October expiration. Centex would have to rise by more than 24% before we would start to lose money. Learn more about this type of trade here.
CTX has not been above $40 since mid-July and has shown some resistance around $33.50 recently. This trade could be risky if the housing market responds well to a potential Fed rate cut, but even if that happens, CTX could have trouble getting above $39, where it topped earlier this month.
Although they spent most of the day in the green the indexes gave up ground through most of the session to close just in the red.
The NYSE had volume of 3.6 billion shares with 1,612 shares advancing while 1,706 declined for a loss of 6.18 points to close at 9,428.86. On the NASDAQ, 2.2 billion shares traded, 1,426 advanced and 1,685 declined for a loss of -2.65 to 2,542.24.
EMC Corporation (NYSE: EMC) rose $1.33 (8%) to $19.05; ahead of it's subsidiary VMware making its debut on the NYSE tomorrow in an IPO that analysts are predicting will be big. EMC will retain 90% of the shares. This is likely the reason for the active calls as EMC Corp. (NYSE: EMC) saw heavy volume on the August 19 calls (EMCHT) with over 56,000 options trading.
In options there were 5.4 million puts and 5.8 million calls traded for a put/call open interest ratio of 0.92. The CBOE Volatility Index has been high closing today at 26.57. This is the fear indicator of the market. Not only is the index up, but options on the index are high with the CBOE S&P 500 Volatility Index (NASDAQ: $VIX) moving volume on the August 25 calls (VIXHE) with over 35,000 contracts.
Other stocks with active options include State Street Boston (NYSE: STT) saw heavy volume on the November 75 calls (STTKO) with over 60,000 options trading. Most of the active puts were on the indexes and the iShares Russell 2000 ETF (NYSE: IWM) had volume on the August 78 puts (IOWTZ) with over 86,000 options trading.
Kevin Kersten is an Options Analyst with InvestorsObserver.com. Disclosure note: Mr. Kersten owns and or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.
To be sure, it was not an incrementally positive data point for the housing sector. New housing starts declined by 2.1% in May, to a seasonally-adjusted 1.47 million units -- the first decline in four months -- as builders pulled-back in the face of a rising inventory of residential homes, the U.S. Commerce Department announced Monday.
Starts of single-family homes declined 3.4%. However, overall building permits rose 3%, aided by a rise in multi-family permits.
The housing slump has been a two-edged sword for the U.S. Federal Reserve, business decision makers, and others who follow the economy. On the one hand, the slump has slowed economic growth and taken some pressure off core commodity / raw material prices - a condition that has moderated inflation. On the other hand, that same slump threatens to reduce economic activity by too great an amount -- with some Fed watchers arguing that the slump could cause a recession.
Specifically, Fed data indicated that the recession in the housing sector cut 0.9 percentage points from U.S. economic growth in Q1 1007, after cutting 1.2 percentage points in 2H 2006.
Fly Analysis: While inflation remains above the Fed's target range, Tuesday's housing data provides another data point for those who argue that U.S. economy should be moved to the front burner: U.S Q1 GDP growth came in at a scant 0.6%, according to preliminary U.S Bureau of Economic Analysis data. Further, while Tuesday's housing data does not guarantee further GDP slowing in Q2, the data does send a strong signal that those hoping for an economic boost from the housing sector are not likely to see that boost in Q2, and perhaps, for considerably longer.
Bill Miller, the famed Legg Mason fund manager, was on television last week. He said he is long on housing stocks.
In Barron's Up and Down Wall Street column (subscription required), Doug Kass of Seabreeze Partners said he was short housing stocks - no big surprise there. Kass referred to order cancellation as the reasoning for his bearishness.
Typically, publicly traded homebuilders have cancellation rates of 15% of orders. However, that number has jumped considerably. Cancellation rates of publicly traded homebuilders:
These numbers (from the Barron's article) are so bad that the worst might be unfolding right now.
TheFly's advice, Miller tends to be too early and Kass is often too negative when the worst is already priced in the stocks. I'd say, start following these stocks again, expecting a bottom in the spring and early summer.
The most recent rally is mostly from an oversold condition. I'd wait for another correction and see where the industry fundamentals stand.
Recent reports reveal a surprising amount of criminal activity in the mortgage business. This is particularly true in states whose names end in the letter A, such as Florida and Nevada. Two particular forms of illegal behavior are the licensing of mortgage brokers with criminal records and homebuilders' use of bribes -- or 'incentives' -- to encourage people to buy over-priced houses without disclosing them to lenders as required by law. Think I'm kidding?
Here are some highlights from this past week's 
Although they spent most of the day in the green the indexes gave up ground through most of the session to close just in the red. 
Before the bell: Wall Street headed higher; automakers, retailers in focus
Waiting for the other shoe to drop: The looming credit crisis
Bet on T&A with J&J (JNJ)
