Mortgage Subsidies??

Let's take a look at this mortgage subsidy plan.

Buyer A purchased a house for 200K. Buyer A purchased the house with a 0 money down mortgage in 2005. Buyer A received a first mortgage for 80% or 160K from Lender X, and a Second Mortgage for 20% or 40K from lender Y.

Let’s say Buyer A is currently paying 12% interest on the loan, around $2000/month mortgage, $1600 to Lender X and $400 to lender Y.

Let’s suppose this house has decreased in value 30% and is now worth 160K. (This is a typical scenario in South Florida, California & Nevada).

The reality is that Buyer A has a big problem. They are stuck paying 12% in today’s market where 6% mortgages are available to strong borrowers. However, Buyer A cannot refinance this loan because there is no equity in the house. Now let’s assume Buyer A doesn’t have the best credit and assume that Buyer A’s job is in jeopardy. Now the problem escalates. This is our current reality.

Lender X also has a big problem. Buyer A is unable to make the payments, and the house that used to be worth 200K is now only worth 160K. With mounting foreclosures in the neighborhood, this value of the house continues to decrease, and Lender A is faced with a difficult decision to reduce payments to allow Buyer A to stay in the house, or to foreclose on an asset (really a liability in this market), that has severely decreased in value.

Lender Y is really in big trouble. Their loan has effectively been wiped out as they lent on the last 20% of the house’s value in 2005, a value that is gone. This lender’s security has vanished into thin air!!! If you were Buyer A would you want to pay $400 a month for a piece of air??

Welcome to our housing crises…So, its rumored the government has come up with a plan to subsidize mortgages to make payments more affordable for Buyer A, so that they are able to stay in their house, avoid foreclosure, continue to pay their lenders, and in essence put an artificial floor in the housing market.

First, if I am not mistaking, there was talk of this plan during the Bush presidency too, and after some thought (instead of the knee jerk reaction in the market yesterday), while mortgage subsidies aim to slow and eventually halt the housing crises, the plan opens up MANY questions, and has many holes that I think will prove impossible to overcome.

Here are just a few:

• Is lender X willing to negotiate a reduced payment? Is lender Y?
• Is lender Y entitled to receive a payment on a worthless note?
• How will government determine which homeowners are entitled to such a program?
• Does buyer want to continue to pay for an asset that has lost its value and that may not regain its value for 7-10 years?
• Is the government willing to subsidize principal reductions on mortgages?? This opens up a whole new can of worms as far as contract law, and in my mind even threatens the essence of capitalism.
  

Above is the most basic of problems, I haven’t begun to address CDO’s and Credit default swaps which created an even larger mess. Therefore, the mortgage subsidy plan, while meant well, will fail, just like the various other plans and rumored plans. For my solution to this mess, please refer to my previous post titled TIME & PAIN.

Another rumor....

Here we go again, market heads south only to be turned around by another government bailout rumor. I want to go over this new foreclosure plan and update my positions, but I will likely do that in the morning.

I don't do that many day trades, but I want to quickly go over 2 day trades I made today.



First, I decided to try getting a little bullish this afternoon, as we were moving down toward S&P support in the low 800's. My first buy (in purple) was sold for a quick loss within minutes. I wasn't happy with the loss, but I was happy with the discipline to take the trade, and to sell it when the market turned against me.

My second day trade was much better and profitable. I purchased (in red) when the market started to bounce on the news of the new foreclosure plan. I had seen this many times before, I knew we were nearing support in the S&P so I decided to go long again. The position rocketed higher, and when it paused, I bought more. I sold the full position at the end of the day.

I want to read up on this foreclosure plan tonight, but I suspect it will be another letdown....

FNF and AZO update

FNF and AZO pulled back today, let's take a look at both.

FNF



FNF pulled back nicely today, down 4% for the day. At one point the stock was down over 9%. Notice, that stock pulled back to its 20 day ma, and also the trendline, which is now its support. I am going to need a move below this trendline to be profitable.

AZO



AZO pulled back slightly today ,but has pulled back the past 3 days after rising to an all time high on Feb. 6th. It will be interesting to see if this stock pulls back further in the coming days.

I also added to my IYR put position today, and it remains my largest position.

Back in Business

Today was a good day to own puts.



I want to take some time to review my current positions. (I do have other positions, but will start with the ones already disclosed since this blog is just getting started). On the right hand column is a list of my current positions. I will update them every so often.

SPY puts - This is currently my best position. See my post on Feb. 6th, where I said:

I just purchased SPY APRIL 85 PUTS as the S&P is reaching some overhead resistance at 880. In my experience in this bear market, the best time to purchase PUTS has been on days like this, when it hurts the most.....Let's see if this keeps working.

The answer is YES, it keeps working. This position is currently up over 40%.

SWN puts - These are looking pretty good, but I need a drop below 32 to become profitable. These expire in March, so I need to see a drop below 32 soon.

IYR puts - This one is profitable, but is driving me nuts. I have shown a complete lack of discipline with this position. I bought these puts at 2.10, watched them move quickly to 3.50, back to 2, and now back to 3. These "round trips" are frustrating and unacceptable at this point. These puts expire in March so its time to be more nimble and take profits!! This stock is back below 30, and i still think it will visit 27 in the next few days.

FNF - This stock ran up as soon as I bought my puts. I gave this one a longer leash than I probably should have, but I am letting it go for a little. It pulled back nicely today, but I need a drop below about 16 to become profitable. My puts expire in June, so time is on my side.

AZO - This stock shot higher after I purchased puts, but I think it may have been a failed breakout as the stock has pulled back nicely the past couple days. My puts expire in June, so time is on my side.

Tomorrow should be another interesting day. I expect to see some sort of bounce from the bulls. They better start buying soon, because that bottom is awfully close....

TIME & PAIN

This is what we’ve been waiting for???

As expected, Geithners speech was a lot of fluff. There is no easy fix for our economic issues and it’s apparent our government (about 1 year into this mess) still hasn’t found a way to value assets and heal our banking system. I suspect that’s because THERE IS NO EASY FIX. There is no master plan that will fix what has been created over the past 10 years. Only TIME & PAIN. If Geithner came out today and said that our plan consists of two steps: Time and pain, I don’t think that would’ve been well received.

There where four major points to the Geithner speech…

1. The government will commence a “stress test” for banks. Ok, well great the government is going to look at the banks balance sheets. To me this means that there is more pain ahead for the banks. We still don’t know what to do once we admit our entire banking system is severely “stressed”.

2. A public/private trust to invest in toxic assets. Geithner specifically said they are still exploring how to do this. Uh, ok, thanks….

3. All government agencies to support lending and credit flow. Ah, now this is a novel concept…Haven’t we heard this for the past year?? How, Tim? We want to know HOW????

4. Housing Program to reduce rates for struggling borrowers, reduce mortgage payments, etc. Please, we’ve been hearing this for months. Loan modifications still aren’t working and there are millions of homeowners that are underwater. Again, there is no clear plan.

Glad I held my PUTS….

The President Speaks

It's refreshing to have someone in the White House who can acknowledge our economic problems, has a plan to address them, and can clearly explain their stance.

However, even the best deployed plan will have difficulty fixing a downward spiraling deflationary economy.

I sure am glad these days are behind us.....