Reggie Middleton

Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at Veritaseum.com, where we're ushering the P2P Economy.

 

One of the major aspects of my blog series was that land was worthless... I copied and pasted the Lennar CEO quote from big builder magazine and a link if you want to read the whole article...

Lennar CEO quote below

For the quarter ending Aug. 31, Lennar wrote off deposits and pre-acquisition costs on 15,000 home sites it no longer plans to buy. That adds up to a total of 24,000 home sites the company has abandoned in the first nine months of this year.

"We look at costs to develop a parcel of land and actually develop home sites and include in that the cost of building a home, and you get to the point where the residual value of the land itself-even in well located areas-is close to zero," says Lennar CEO Stuart Miller.

"Lennar has mothballed some large projects because the effective result of selling currently implies the land has zero value," says Stephen East, an analyst with Pali Research. "It also provides the company some accounting breathing room. By mothballing the projects, LEN is able to avoid taking impairment charges on the land that would reduce the value effectively to zero."

So the next time some clown laughs at you and says "oh yea, right that land is worthless... grunt... it has no value... grunt".... just attach the link

Key points on raw land

- time value of money has a cost and it is steep

- interest expense (leverage) has a cost and it is steep

- property taxes and insurance have a cost

- your original feasibility determines what you will pay for land... so if you run the feasibility at a high price and pace and it is much lower price and pace, then the 3 points above will bury you

My example - A real deal in Florida

The deal is 600 raw lots at multiple sites. We start with 6 months of entitlement, followed by 6 months of development, then we would sell finished lots at 36 a quarter from the different sites. It takes around 4 years to get out of all the positions (sell all the finished lots). I ran the numbers and we could only pay 34,000 per raw lot to make this deal work (meet our profit threshold)............ but guess what..... if you ran the same deal and you entitled land for 6 months, followed by 6 months of development..... however, KEY POINT... found one or multiple builders to take down all 600 lots at the end of development instead of over 4 years... we could pay up to 67,000 per raw lot (twice as much)... this is why so many people lose their a$$ in the land game... if you make the wrong assumptions and you paid the 67,000 and couldn't unload... you are dead... this is no different from a builder who paid for land based on the wrong sales price and pace assumptions and now finds he can't meet those expectations

Quick note: The "CFO" series are postings of a guest, anonymous author whose opinions I value. It is not me (Reggie) and I do not necessarily agree with everything posted, but his input is considered valuable. I think the diversity of opinion adds to the value of this blog.

"CFO" post starts here:

A few of the homebuilders are actually getting their $hit together and can weather the worst of storms.  I will present my builder stock ratings last.  When it comes to investing and even how I play caps, I am a top down investor.  I want to be 80-100% certain that everything in an industry is going one way... either up or down...  I hate divergence.  Why?  because now you have to figure out who the good companies are from the bad... In the case of builders, you already have knowledgeable people bidding up the strongest 2-4 stocks and lemmings bidding up all the crap or shorts covering...  I don't like it when bulls and bears are in mass battle... why?  it means that no one knows which way the effing industry is about to fall.  You may be thinking "Bill, are you saying its time to buy?".... not yet, but soon if you are going after a top 5 builder stock and only if we don't go into a recession

If we go into a recession then of course, you can red thumb all the builders again along with 70% of the stocks in the market... but we aren't there, and I am not in the predictions business.  If some bad "new" macro event occurs to builders then yes, I would red thumb all of them again... but the macro event I am waiting for hasn't happened 

I have to call it what it is... a technical bottom, divergence, no recession.  However, I see oil at $93 a barrel, I see housing in the crapper through 2009, and I bought a meal for myself and my 5 year old at McDonalds that cost $12 bucks.............. are you kidding me? all this macro news sucks, however, with all of this crap going on, guess what... the DIA, the SPY and the QQQQ are all full steam ahead moving up...  not me brother, I'm almost all in cash with some gold... The builder stocks have one more $hit sandwich to eat in the next 3 months... it is either going to be a market correction or a major bankruptcy/reorg...  so at that point I might plop a few long coins on a select builder...  however, this is only a good move if you believe we are not going into a recession...  If you think the economy is going to tank then ignore some of what I say in hear from an investment standpoint... again, I don't predict recessions.... I look at any oversold builder stock in a non-recessionary enviroment as a buy if it is a good company... why? volatility pops

Bankruptcies in process and done deals

On my Sept 25, 2007 blog post I stated that a top 30 builder would go under within 60 days (I have just under 30 days left)... quite a prediction given that we were 26 months into the downturn that began in July 2005 (the peak).  Additionally, up until Sept 25, 2007 only one top 200 builder had filed for bankruptcy.  Kara homes.  Kara was ranked #127 during 2005

This past week 2 private builders and 1 public threw in the towel

LEV... oh I know this linked article doesn't say chapter 11.. but the eyes and ears around Florida are telling me the homebuilding operation is finished... i would expect an announcement soon... they will then have to sell land assets and battle their creditors... LEV has a very complex legal structure, however, the courts might decide that the legal structure is not valid and that LEV corporation will have to pay back the creditors of LEV homebuilders.  I'm not sure how the market will react to a chp 11 filing on LEV stock or builder stocks.. why? because a lot of people in the know saw this coming anyways... 

LEV's equity placement bought them time, but they still need to battle the banks over whether or not they are liable for the homebuilding operations.. by the way, LEV was the #51 largest builder in 2005

Neumann Homes.... Neumann, Neumann, Neumann... what were you thinking!!!! expanding in Detroit in 2005...  Gee and you wonder how you made it into chapter 11 so quickly...  Neumann was the #46th largest builder in 2005... still not a top 30!

Hacienda.....the #97 largest builder in 2005... was rolled by their bank... the bank wants their money back and wants this recapitalized via sale.... pressure from banks?  yea, how about... your done, your cutoff, no more construction (vertical) loans

I told you bankruptcies were coming when I saw that Lennar report in Sept...  one top 200 builder in the first 26 months... and within 60 days of that Lennar report we have 3 builders rolling over...  this goes back to what I stated early on.... its all about the cash, the debt to capital ratio, and that land is illiquid and not worth book (can't sell and raise cash)....  Will the market take notice when LEV makes it official?  Neumann is bigger than LEV and the market didn't take notice...  Neumann is also bigger than DHOM, AVTR, and CHCI from a homebuilding standpoint

 

Worst in show - These Builder Stocks are red thumbs no matter what

This grouping of builder stocks blows even if we don't go into a recession...  however, I think the harvesting game is over on builder stocks... draw a line in the sand and stick with it... Go red and wait... you can also play the technicals (e.g. red thumb at the 50 and wait until it is over sold)...

WCI -  in their prior quarter they had gross margins prior to impairments of 11% and SG&A expenses of 21%... 50 net orders!!!!! and they own and control 31,000 lots....  their debt to capital ratio is 67%... banks and bondholders get nervous when you are  cruising over 45%....  the average price of their bonds is trading at 80% of par...  Think Miami condo towers... what does WCI do... condo towers in Florida and single family homes around 750k more or less....  It will be interesting to see what Icahn does... in the meantime this is a total dog

DHOM - Kentucky and Ohio... do you really need more information?  If so, I would suggest a mutual fund

CHCI - didn't do any research on this one... but its a penny stock now after being as high as 30 a share.. you can't red thumb it in caps anyways, so who cares

LEV - again, the complexity of their legal structure will beat those banks off for a little bit... but they still will have cash burn and they still have to actually beat the banks in court... throw on top of that going from 15 million to 90 million shares outstanding... well lets say, they aint making any big EPS money any time soon

TOA - these clowns are still alive!!!!  I really need them to go under because they are a top 30 builder... fyi.... their portfolio is out on the street now... guess they are interested in getting some major cash fast.  with a debt to capital ratio of 70%... they are in major effing trouble... having a lot of land in Florida is not a bonus

OHB - I think they recently had approved their 100th amendment to their covenants... this is another reason why i am done red thumbing all builders... if banks are going to look the other way for a crap builder like OHB, then there is no way a good builder will ever get pushed under....  the debt to capital on OHB is 72%... puts them in good company with the other misfit toys here

Special Situation Crap....  Red thumb these dogs on bounces

This grouping of builders sucks too... however, they have special situations which might allow them to live a little longer... of course if there is a recession... lights out...

SPF.. 5 million in cash??? are you kidding me  if you take their cash plus what they have available on their revolver line of credit, they can pay down only 0.14 of their debt... fyi... that is a bad thing... only 23% of their revolver is available.  Their bonds are trading at 77% to par...  I wonder who bought at par?  debt to capital ratio of 60%... this blows, but there are a lot of crappy private builders below these guys... fyi.... most privates are probably 80% or worse... yikes!!!!!

BZH... SEC investigation... also, 15% gross margin on quarter ending June 07 before impairments!!!! P.U..... they had $123 million in cash then too... oh you are wondering why I am looking at June's 10Q.... that is because they still haven't provided their latest financials or any visibility... their public debt is trading at the worst level 74% to par... their debt to capital ratio was 58% in June... I'm sure it is worse now

HOV... their latest quarter had 13% gross margins before impairments and 12% SG&A expenses... lmao... you are not generating any cash with this awful spread... only 9% of their revolving credit line is available.. worst in the industry... something to be proud of.... they are also worst in the industry in land expenditures (money still being spent on land related items like development, etc...) another cash drain.... their debt is trading at 80% to par...  debt to capital ratio of 59%... blows.....

BHS...  if you take the half life of uranium and divide it by 10 that is how many years of land BHS has... 130 net orders....and I have information that shows they own 13k lots and control another 15k????  WTF...  hint... why did GM sell Delphi.... answer... because they were the last effing manufacturing company to realize vertical integration doesn't work.... land is an input!!!!!!!!!!!!!!!!!!!!!!  you are a builder for pete's sake...

Fat, Dumb and Happy... or How to lose Billions of market cap for investors and still keep your job

This groping of builders consists of our large, lazy and stupid friends... why groping?  because after investing in these stocks you feel like you were sexually violated...

DHI - oink... oink... A lot of you have asked me who is Donald Horton?  click the link he is laying there next to the boy with the gun....  If there was ever a reason for the 2nd amendment it is to shoot a pig like this....  DR Horton had 48% cancellation rate this latest quarter.... net orders were 6,374.... so does that mean that there could possibly be 6,300 spec homes in various stages dumped out onto the market? lmao... of course that is what makes following builder stocks so much fun....  We still don't have their new cash number, but it has to be higher than $4 million (end of June).... congratulations $10.5 billion in inventory... more than any other pig... and how did you get such a big appetite?  with debt... $4.9 billion in debt, more than any other pig...  the debt to cap was 46% at the end of june.. I can't wait for the 10Q...

LEN - oink... oink...  Now Lennar was the reason why I declared bankruptcies were upon us soon.. and maybe no one will give me props for this call, but I am going to say nothing bad about LEN here for showing me how to look so bad as to be my indicator that the builders are going to $hit...

PHM - oink... oink... Oh Mr Dugas... please tell me... they aren't making land any more are they.... lmao....  think of DHI except 2 pounds thinner... yep, that is PHM

I don't know what to think about these builders list?

In this grouping we have builders that aren't big fat pigs, but then again, aren't lean mean fighting machines...  So I am going to say one nice thing and one jerky thing for each of these builders.. would I play them long on oversold conditions or short on overbought conditions?  I don't know, that is why they are in this box

CTX - absorption pace of 3/month per community... wow... every other builder is between 1.1 and 2.3... just sucking wind... and lets be clear, you really want to be around 6 or more to be considered doing good... so 3 means you have a heartbeat.. interesting, a CTX contact said mgt is adamant about getting 3/month...  On the bad side 3.9 months of backlog is 2nd worst to Lennar!!!!!

MTH - only 7,500 owned lots and 22,500 controlled lots... not quite NVR, but hey I love how they aren't land pigs...  the negative? 50% debt to capital at 6/07...  I'm sure its worse now

MHO - $2 million in cash on 6/07 and SG& of 20%!!!!!!!!!!!!!!!!!!!!!!!!!!!!!  the good?  they recently said orders were only down 2% YOY

Stocks I would buy after a large sell off and we don't go in recession

#5 KBH - $645 million in cash (if your not impressed add up all the cash of the above builders... and its pretty close to $645 million)... they have been unloading land like crazy down to a 4 year supply, 2nd lowest in the industry.  They can borrow up to 79% on their revolver and their public debt is trading at 89% of par.

#4 MDC - $731 million in cash...  they can borrow up to 97% on their revolver and their public debt is trading at 90% to par... they only control 3.6 years of land!!!!  So these guys can take advantage of the downturn...

#3 RYL - Why Ryland?  I think they are first to be bought out in consoldiation.. don't want to any further there....  Ryland is known in the industry as being conservative... and they are... they use higher hurdle rates to feasy deals and they will hold gross margins rather than fire sale... there cash is only $81 million... however there debt is only 983 million which is low... debt to capital of 40% is also very low...  nothing pops out as to why RYL should be #3, however, I feel I understand the industry pretty well and I think Ryland is going to pay out

#2 TOL - A lot of people either hate or love TOL...  I like that they had 23% gross margins prior to impairment and SG&A at 11%. both close to best in industry right now..  TOL buys premium positions (except for their crappy acquisition of landstar homes) and Bob Toll reviews all acquisition deals....  they have an 8.1 month backlog, biggest in the industry right now.  Their cancellation rate was only 24% best in the industry right now....  they have $771 million in cash... best in the industry... their debt to capital is 39%, top 4 in the industry....

#1 NVR - 22% gross margin before impairments 2nd to TOL.  4% SG&A.. not a misprint... next closest is 10%.... can rate 27% 2nd only to TOL...  Net Orders YOY increased 12%, 2nd to SPF... $314 million in cash plus 97% of their revolver is available... their cash and revolver availability can pay off their debt 5.69 times... the next closest is MDC at 1.89 times...  debt to capital ratio of 16% best in industry... they own zero lots and control 84,600 lots...  NVR has huge market expansion abilities, because they are so much smaller geographically... the finished lot strategy works... just go back to my blog where I showed NVR as being up 2,000 percent in 5 years, 3rd best in the industry... MTH was #1 and they also do a hybrid off the MTH strategy

Well fools from time to time I will throw out a graba$$ blog post, but the information series is done... it will mainly be some very relevant quick information on the industry...

good luck to all...  sorry if you wanted me to post that all the builders were going under, but again I am not in the recession prediction business and a few key builders are getting it

For those of you who go to dog shows, they have the term best in show for the best dog overall... since all builder stocks are dogs, my lowest rating is worst in show and I award it to more than one dog... because i'm nice

Losing the worst in show rating is very very hard......  it means you suck so bad I question your viability... perma red thumb

thoughts on macro bankruptcy count

The editor of big builder magazine appears to agree with the consensus that 1 of every 3 large builders (both private and public) is going to go under... unofficially we are at 4 of the top 200 so we have another 46 to go...

In a previous blog dated 9/25 I had stated that 8 publics of the 21 I track would be going bankrupt, delisted or bought by bondholders at a lower price than they were trading at....  I don't track AVTR (and they are a top 50 homebuilder), but my percentage was 36% if you include AVTR....  Going forward I will track their numbers too...

Beazer downgrade to worst in show

One of the homebuilders I had as a potential bankruptcy was BZH.  However, on my 20 of 20 blog post I had BZH as a special situation crap pick.  In other words, this stock is a piece of crap, but because of the lack of visibility it is hard to tell how bad their situation is...

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Well accidently, I missed some of their numbers on their 8k dated Oct 5...  in reading an analyst report this morning I grabbed these missing numbers and put them in my spreadsheet....  wow!!!!  they are bad!!!!!  after the 8k was issued the stock started trending down to the 8s, but shot up huge on the short covering rally...

Here are the numbers that concern me

68% cancellation rate (worst among the publics)  remember, a cancellation a lot of times can result in a future unsold spec depending upon the stage the house was in when cancelled... both a cash drain and will have to be sold at a deep discount to move..

YOY orders drop 52%... again the worst among the publics for the most recent quarter!!!!!  remember there are 21 I track and you are number 21 in these 2 important categories

Monthly sales absorption per community.. because I dont have an updated community count I used Junes... they are averaging 0.7 net sales per community... guess... that is right #21 of 21 builders...  my god I can't even believe this number.... 

There is a lack of visibility in backlog, but my estimate is 2.3 months.... worst in the industry...  remember how long it takes to build a home... call it 4 months... so if you drain your backlog where is the cash coming from during that 4 month period of cash out flow with few sales from backlog?

Now they did increase their cash position to 400 million, however, they had as of last quarter a debt to capital ratio of 58%....  not worst in the industry but in the bottom 1/3

Thus, I have no choice but to downgrade BZH from special situation crap to worst in show....  this thing will probably tank when they (if they ever) provide us financials

also, they spent 18 million towards the bondholders to get them to amend the bonds so that they didn't have to report their financials within the time period allocated... another total waste of 18 million

One of the major aspects of my blog series was that land was worthless... I copied and pasted the Lennar CEO quote from big builder magazine and a link if you want to read the whole article...

Lennar CEO quote below

For the quarter ending Aug. 31, Lennar wrote off deposits and pre-acquisition costs on 15,000 home sites it no longer plans to buy. That adds up to a total of 24,000 home sites the company has abandoned in the first nine months of this year.

"We look at costs to develop a parcel of land and actually develop home sites and include in that the cost of building a home, and you get to the point where the residual value of the land itself-even in well located areas-is close to zero," says Lennar CEO Stuart Miller.

"Lennar has mothballed some large projects because the effective result of selling currently implies the land has zero value," says Stephen East, an analyst with Pali Research. "It also provides the company some accounting breathing room. By mothballing the projects, LEN is able to avoid taking impairment charges on the land that would reduce the value effectively to zero."

So the next time some clown laughs at you and says "oh yea, right that land is worthless... grunt... it has no value... grunt".... just attach the link

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Key points on raw land

- time value of money has a cost and it is steep

- interest expense (leverage) has a cost and it is steep

- property taxes and insurance have a cost

- your original feasibility determines what you will pay for land... so if you run the feasibility at a high price and pace and it is much lower price and pace, then the 3 points above will bury you

My example - A real deal in Florida

The deal is 600 raw lots at multiple sites. We start with 6 months of entitlement, followed by 6 months of development, then we would sell finished lots at 36 a quarter from the different sites. It takes around 4 years to get out of all the positions (sell all the finished lots). I ran the numbers and we could only pay 34,000 per raw lot to make this deal work (meet our profit threshold)............ but guess what..... if you ran the same deal and you entitled land for 6 months, followed by 6 months of development..... however, KEY POINT... found one or multiple builders to take down all 600 lots at the end of development instead of over 4 years... we could pay up to 67,000 per raw lot (twice as much)... this is why so many people lose their a$$ in the land game... if you make the wrong assumptions and you paid the 67,000 and couldn't unload... you are dead... this is no different from a builder who paid for land based on the wrong sales price and pace assumptions and now finds he can't meet those expectations

This is an update of my analysis of Ryland and the US residential real estate market. If you recall, we have updated my land value forecasts to be more realistic and aligned with the aggressive fall in all residential housing classes (not just previously owned, detached single family housing as is found in the Case-Shiller index). The original posts were "What does Reggie Middleton and Ryland's upper management have in common? They are both selling shares faster than no doc loans get approved!" and "Okay, I have just recharged the batteries in my crystal ball: Back tested Home Price Trends - Historical and Forecasted". To get the full picture of my research on Ryland, you should read the two previous posts, for there is pertinent info that I did not include in this piece to avoid redundancy.

For those that are new to the blog, I have covered the effects of the real estate bust in detail, and its effects on banking, building and the macro scene. Please choose a category that interests you and browse through the archives. If you are unfamiliar with the homebuilding industry (which I feel is THE barometer for residential housing in the US), then see "Thoughts on the US Publicly Traded Homebuilders" as a primer and the informative "CFO" series as a more advanced course (you can start with "A fly on the wall - straight talk from the homebuilder CFO"). The "Bubbles, Banks and Builders" series is a more analytical take on individual companies and their macro situations.

 

Now, let me start off by clearing the air so there is no misunderstanding. I am short the real estate industry, in general. That is builders, insurers, financiers and thrifts, ancillary services, etc. Now, you know where I am coming from. I invested in residential real estate and studied the trends and macro/microeconomics of the asset class fastidiously. That does not make me an expert, but it does make me an eager student. There are many who offer advice and/or invest in this asset class and its derivatives, not as a student, but purely as a speculator or equity/debt analyst. Well, that is all well and good, except for the serious mistakes that can ensue from not knowing residential real estate trends and valuation. Let me be clear - We are in the BEGINNING throes of a very, very serious real asset and land recession (read land recession pt II as well) - one of the most serious in recent history, if not ever.

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It has already started manifesting itself in residential real estate with fury caused by the "The Great Global Macro Experiment" and is producing prodigious amounts of REOs and foreclosures, but will move forward to commercial and retail real assets. It has already manifested itself in the debt markets, spread geographically on a global basis - but this is just the start. It has also manifested itself in the insurance markets as well (reference MBI, ABK, RDN, MTG - down by up to 50% in mere weeks), but this is just the start. Be sure to read the links that are dispersed throughout this missive - they should be educational and definitely worth your time.

Why state what should be the obvious to many? Because, many don't get it. I hear advice such as, "Is now the time to dabble in the home builders?" or the home builders have hit a bottom. These people just don't seem to understand, or at least see things from my perspective. The homebuilders, the lenders and the insurers are the industries at ground zero of one of the worst burst bubbles that we have seen in some time. The home building industry is a staid cyclical industry that garnered practically no sell side analyst coverage until we had a residential real estate bubble. Now, it appears as if many actually believe the industry to be a growth industry, in lieu of a cyclical industry and are advising accordingly. What we have experienced over the last 8 years was a bubble, not a normal business cycle. We will probably never see performance numbers like that again in this lifetime. It's gone, outta here, vamoosed, vanished...  Let me state it again different terms. The real estate boom has nearly doubled gross margins for the builders. Net margins are now negative in the bust. For those builders who survive the bust there will be a prolonged lull in building then a return to the mean, which will  be a staid, cyclical 12% to 16% GROSS margin and low single digit net margins - no more multi-billion+ dollar quarters. It appears that many investors fail to study their history and believe that the housing  bubble performance of the builders makes them a growth industry. As you will easily see, they are not. They are a average yielding slow growth cyclical industry - very similar to the utilities, albeit a bit more risky. Even if the homebuilders were to somehow make all of their current problems vanish into thin air (nigh impossible, but let's just imagine), they would still take 2 to 10 years to return to single digit net margins, not the 30+% returns that we have seen during the boom.

Now, after reading the many posts in this blog on the topic, you may realize that I don't think the builders problems are going to just vanish into thin air.  The homebuilders have a big, big problem. Those who may be attempting to bottom fish at the beginning of a severe real estate bust either don't understand RE cycles or are totally underestimating the severity of this current cycle. Graphing the trends makes it obvious, so let's take a look at some pretty pictures that illustrate the historical trends of Ryland and the US residential real estate market (click any graph to enlarge).

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1992 was the last significant down period for Ryland. It shows as a near imperceptible blip in the land value graph (primarily CA and the Mid-Atlantic states), yet dropped Ryland's margins by 50% and lasted about 5 years. Notice how small the blip is in the graph - seriously, the size of the blip is important - for if you compare it the latest boom in 2000 - 2006 you can see the severity of the current situation.

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Looking at this graph, one can see how minor blips in margins cause leveraged and extreme fluctuations in Ryland's share price. Looking at what we just went through in the last 7 years, starting around the half way mark of 1999 - BIG difference! Ryland's share price trend spiked towards the sky with the ever so slight but increasing trend in margins, and now that margins are negative the share price trend is dropping like a meteor from the sky.

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Image024

These charts give us a magnified view of the correlation between gross margins, net margins, housing price trends and Ryland's Z (bankruptcy) score. More pessimistic (and realistic) than my previous analysis, Ryland is well entrenched in the 72% probability range of going bankrupt within 8 quarters, with about 8 quarters of negative net margins - yet they are buying back company stock as management is selling their stock. Amazing!!! At least somebody is reading my blog, though. Moody's is considering downgrading Ryland to junk status.

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Revenue Timeline

Ryland has been in business for a long time, and has endured real estate booms and busts before - but not to the extent of what we are currently going through. They, like many other builders, banks, and monoline insurers drank from the cup of easy credit and euphoric price increases too heavily and for too long. Reference the following chart to see a comparison of the last few troughs compared to this one.

Looking at historical and projected revenues, you can see what I mean by a reversion to the mean (no pun intended). Ryland's revenues (if they survive) will stop tanking at just about the point where the boom began. Thus, all of that artificial profit and margin will be nearly erased, as it always is in a boom/bust scenario - and business will continue along at the inflation adjusted norm - again, that's if Ryland is still around to see this occurrence.

Builders

I have focused this historical analysis on Ryland, but it is applicable to nearly all of the public builders. Compare the graphs above to this one of the major builders and you can easily see where I am coming from. As a matter of fact, after scrubbing the books with a more realistic view of housing values and apply the average price to book valuation of the major builders to Ryland, one finds that Ryland is trading at about a 100% premium to its peers. Does this company really deserve such a valuation? Obviously, management doesn't think so, at least for thier personal holdings, and neither do I.

The Ryland Group Inc.          
           
RELATIVE VALUATION           
           
Company Bloomberg ticker P/B
    2006 2007E 2008E 2009E
           
Lennar Corporation LEN US Equity                      0.7                      0.8                      0.8                   0.7
D.R. Horton, Inc DHI US Equity                      0.7                      0.8                      0.7                   0.7
Pulte Homes PHM US Equity                      0.6                      0.7                      0.7                   0.6
KB Home KBH US Equity                      0.8                      0.8                      0.9                   0.8
M.D.C. Holdings, Inc. MDC US Equity                      0.9                      1.0                      1.0                   1.0
RYL Group RYL US Equity        
           
Industry Average   0.7 0.8 0.8 0.7
Source: Bloomberg          
           
Relative P/B Valuation          
Ryland Group 2008        
Book value per share 16.72        
Industry P/B 0.82        
Target Stock Price (US$) 13.66        

Ryland closed at $26.28 on Nov. 5th, down from nearly $30 the week before. Just do the math...

So where does Ryland stand now?

Not very well in my opinion. Then again, I am selling the stock short, while Ryland management is just selling the stock. Let's take a quick look at my researched opinion on the company.

Land Sales - In an attempt to shore up cash, the builders (and Ryland as well) have been trying to sell land as well as houses. The problem is they have paid so much for the land with so much debt that they cannot practically offer it at at price that anyone with a brain is willing to pay. The key word here is practically, not profitably. In a distressed sale, it all goes for pennies on the dollar and the true devaluation game begins (Tousa's pre-packaged bankruptcy affair). Thus far, Ryland has $8.3 million of land sales (Q307) vs. $37.4 million of land sales the year before (78% drop). The gains on land sales last year was 19.52% while the gains on land sales this year was 3.54% (an 82% drop in profitability). Since they probably used the FIFO method of accounting for the gains, it is safe to say that this will be the last quarter for some time that they can report a positive number for land sales gains due to the fact that the real overpriced property hasn't moved yet at least from an accounting perspective.

Cash Generation - Ryland has had a very hard time turning over inventory to generate cash. I illustrated this in detail last month, and it is now being publicized by Moody's. I modeled a big drop in cash this quarter, even though their latest press release states that they have generated positive cash for the quarter enabling them to pay down $36 million in debt. We will get the details when the 10Q is released. If the large shortfall doesn't occur this quarter, it will occur in the next quarter or two. The reason??? They have to start building more houses in order to attempt to monetize their raw land. As shown above, they aren't very successful at selling the land to generate cash, thus the only other way to generate anything (even losses) is to sell houses - which must be built in order to be sold. This takes money. Last quarter, according to their press release they generated $42.6 million of cash flow from operations which they used to pay down $36.9 million of debt (out of $1.5 billion - that's right, BILLION). That leaves $5.7 million of cash left over after debt service and paydown. That's a small amount of money for a multi-billion company. I also think it is misleading, due to management trying to rob Peter to pay Paul. To approach from a different perspective, RYL has generated $17,074 of cash per each closing they made, on average (and macro conditions are getting much worse, much faster). This is abysmal performance. Look at it from this point of view. The real estate broker makes $15,600 (gross) @ 6% on each $260,000 house sold - without the excessive debt, construction, time lag, and market risk. Now I am hopeful that this builder negotiates better commissions, but word on the street is that the builders are actually paying higher than average commissions to garner extra marketing interest. Some builders market exclusively in-house (requires additional upfront cash), some outsource, and some do both. Back to my point and extrapolating further, Ryland will need 53,974 closings to pay down their existing debt at their current pace or 24 quarters. I foresee them having 8 quarters to get their act together as a going concern before having to do the Tousa (no, it's not a new dance).

New orders (net) will not be positive until about 2nd quarter of 2008

Image004

Closings will not trend upward reliably until 2009.

Image005

Order cancellations will continue to trend upward until around 2009, with Texas leading the way to positive territory before the rest of the regions.

Image008_2

Average closing prices are geographically specific, but in general, don't look good until 209, again with the exception of Texas. California, Nevada and southern Florida are in for some pain, with Cally leading the way.

Image010_5

This is the formula that determines the cash in the builder's pipeline in terms of days of backlog to sell. The higher the number the better. Ryland will be in danger of running out of sales, for some time. This contributes heavily to a low Z score.

Image012_2

Mortgage origination will drop because of less houses being sold in addition to a tighter mortgage market. There is still risk that the builder could bet stuck with unsalable mortgages in its warehouse credit facility. Financing was a profit center for builders with a high margin, look for it to become a possible drag on earnings and source of unhedged risk.

Image014_2

In aggregate, revenues will not break positive territory until 2009, but will trend upward through negative territory in 2008. Unfortunately, negative revenue growth is bad, even though it may be trending towards the positive. The wait 'til '09 will bankrupt a few builders.

Image016

Margins look to be negative for some time, excluding Texas. This portends misery for equity investors of the builders. I've pasted the graph that illustrates the correlation between margins and share prices below the margin projection graph to give you an idea of what could happen even a couple of years out into a recovery.

Image017_2

It looks bad if history is any indication of the future...

Image055

In many regions, it even looks bad if you exclude impairments and writedowns...

Image020

Assumptions going into our Ryland model

Overall region-wise outlook

Among all the four regions of RYL, we expect the west to experience the most decline and Texas to experience the least decline. For both southeast and northern regions, we expect moderate declines in the new orders

 

West: We expect a significant decline in RYL's western region, led primarily by the the ongoing slump in its Californian and Las Vegas markets. Both these regions have bore the brunt of the overall nation-wide housing slump owing to their similar economic and demographic dynamics as that of the US nation. We expect RYL's Western region to witness the severest decline in housing market among all its four regions of operations

 

Southeast: We expect some decline in RYL's Southeast region, as all the areas of operations of RYL in southeast are witnessing a housing slump. However, we predict a relatively less downfall in RYL's SE region as compared to its Western region (with the exception of the Southern Florida area)

 

Texas: We expect the Texas region to be the strongest among all of RYL's operative regions. This is primarily owing to the region's high lack of correlation to the national housing sector. Historically, Texas gained relatively less in times of US housing boost and hence should loose relatively lesser in times of slump. There is always the risk of the abusive use of exotic financing instruments that may exacerbate a downtrend, but it should still be relatively less than most of the country. Further, the state's strong job market and export economy provides it savings against the nationally falling US industry

 

North: We expect RYL's north region to witness moderate decline since most of the states within those regions did not experience the boom as experienced by other states and hence, we believe the north region would witness a relatively lesser decline

   

 

 

Gross margin estimates

 

 

 

West

The previously red hot markets of California, Las Vegas and Phoenix are now cooling off. During boom times, these regions witnessed the highest growth, as also reflected in their high gross margins historically.

 

In line with the national housing growth, these regions are now facing the severest problems - in terms of highest price declines and sluggish home sales. We expect the trend to continue, especially in view of the industry leading growth in foreclosure rate in California and Nevada

 

Notably, around 42.5% of the inventory impairment written off in 2Q2007 was in California, 31.5% in Las Vegas, NV, and 15.0% in Phoenix, AZ - a sum of US$113 million, 89.0% of the total inventory impaired in 2Q2007. This is primarily owing to the steepest price decline in these markets

 

Though RYL has only 12% of its assets in California which should be a slight saving grace against the falling prices, we expect the region to be worst hit among RYL's other regions and estimate a dip of 1.5% in 2008, post which we assume slight recovery in the region's gross margin

 

On the other hand, had RYL already had bought a substantial amount of land in California, it would have returned to normal gross margins relatively earlier. However, since only 12% of its assets are in California, we have not assumed slight normalcy in the region's gross margin before 2010

 

Further, California ranked at the bottom in the NAHB's House Opportunity Index (HOI) released in August 2007 indicating lower housing affordability and thus lower prospective sales

As per Los Angeles County Economic Development Corporation (LAEDC), housing permits in California, which declined 1.9% and 21.5% in 2005 & 2006, respectively, will decline a furhter 27.2% in 2007 and 4.5% in 2008 before it will recover with a 7.0% growth in 2009

 

 

Southeast

We expect all states/ cities of RYL's Southeastern region to witness significant decline in the near term, albeit we expect it to be moderate than in the West

 

While Atlanta, GA has limited scope owing to the presence of a large number of small builders, both NC-SC are following the US national housing industry's trend, reflecting a downturn in the coming quarters

 

Consequently, we have estimated a decline in RYL's Southeast operations till 2009 when it reaches 4.2% and grows to 5.2% in 2010, the margin in 2009 (4.2%) is still higher than that of West in 2009 (3.7%)

 

While SC is witnessing an overall decline in the number of homes sold and their prices, the trend is uneven across cities. Despite the overall decline, only five of the 15 reporting regions showed significant declines in sales in 2Q2007. Though we expect South Carolina to recover early owing to the uneven housing trend in the whole state, we believe RYL would be affected by this decline for a relatively longer period and witness a substantial decline in new home sales in the near term, led primarily be huge declines in Charleston and Myrtle Beach areas

Interestingly, as per Charleston Metro Chamber of Commerce's Developers Council, the wages of people in Charleston are not rising as fast as the house prices leading to reduced affordability and hence, lower demand for new houses

 

 

Texas

Texas has never witnessed significant growth, even during the boom times in US housing industry and consequently, the state should not witness a steep decline in times of downfall

 

Further, among leading housing states in the US, Texas has relatively expensive land availability, limiting the state's ability to achieve high gross margins

Consequently, while we expect the region's gross margins to decline slightly in 2007 and 2008 assuming an adverse effect of the nation-wide decline, we expect faster recovery in the area

 

 

North

We expect RYL's Northern region to witness some decline, however, it should be more moderate than that in West and Southeast

 

The region had relatively more stability than other RYL regions indicating a relativly less decline in times of slump

 

   

Price expectations

For price building, we have used five key US home prices indices, blended together to create a proprietary, financially engineered indexing engine.

 

For each region, we have identified key representative states/ cities, whose price indices are available, as follows:

 

North: Chicago, IL and Washington, D.C. - since they are the bigger cities in that region and are large players among all the states/ cities

 

Southeast: Tampa, FL - since the city has been most hit in the RYL's southeastern region

 

Texas: Dallas and San Antanio - since their price trend has moved in line with Texas' state-wide trend

 

West: Sacramento and Los Angeles, CA - since their price trend has moved in line with Californian state-wide trend; and Las Vegas, NV - since it has been hit badly in RYL's Western region

 

Within sources, we have assigned weighs to the five indices to arrive at a weighted average predicted growth rate in average closing prices for each region.

 

At present, we have assigned a higher weight to particular price indices since their trend is forward looking to arrive at homes' average closing prices. Further, as is noted in the Boom Bust Blog, the S&P index covers only single-family attached and detached housing prices and excludes condos, which are a part of RYL's housing portfolio

   

Note -->

The break-up of RYL revenues for single-family and condos is not available, hence, we have applied the price expectation for the company's overall housing units, although we have financially engineered condo price drops into our real estate pricing data.

   

Volume estimates

For new orders' estimates, we have used three key US homes data -
- No. of building permits, State of the Cities Data Systems (SOCDS) (available state-wise)
- No. of housing starts, US Census Bureau (available US Census' region-wise)
- New home sales, US Census Bureau (available US Census' region-wise)

 

For each region, we have identified key representative states/ cities, whose price indices are available, as follows:

 

North: Midwest region of the US Census and MD, DE, OH, IL, IN, MN, WA states of SOCDS

 

Southeast: South region of the US Census and FL, NC, SC, GA states of SOCDS

 

Texas: South region of the US Census and TX state of SOCDS

 

West: West region of the US Census and CA, NV, AZ, CO states of SOCDS

 

Within sources, we have assigned weights to the three databases to arrive at a weighted average predicted growth rate in RYL's gross new orders for each region.

At present, we have assigned a higher weight to the SOCDS building permits data since it tracks the trend state-wise and further, it reflects the expected new construction activity, in turn indicating the new orders received

   

Cancellation rate

We have assumed the high cancellation rate for RYL till 2009 owing to low consumer confidence and disrupting mortgage conditions. We have assumed some recovery in the cancellation trend beginning 2010

 

Region-wise, we have estimated cancellation rates based on our overall regional outlook on the US housing industry.

Consequently, we have assumed the highest cancellation percentages in RYL's Western region, followed by Southeast and some moderated increases in the company's North and Texas regions. This is primarily owing to the steep decline in RYL's western region's prices and new orders, low consumer confidence, and the expected decline in the region which witnessed significant growth during boom times

   

Cost of sales per closed unit

We assume that RYL's cost of sales to grow at lower growth rates q-o-q, albeit marginally and beginning in 2009. As the inventory keeps on building in housing industry, we expect a slight decline in the land prices till 2009-end post which we assume slight recovery in land prices. This is a very conservative assumption and it is quite likely that land prices will slide further into recession beyond 2009. Further, we assume that the y-o-y rate of growth of wages and material cost will decline in going forward

   

SG&A

We assume higher SG&A expenses as percentage of RYL revenues in the near term, reflecting the rising cost of inventories being held and interest expenses. However, in line with the company's objective to incur SG&A expenses at the rate of 10% of its revenues, we have assumed some efficiency 2010 onwards

   

Financial Services

In addition to the increasing interest liabilities on warehouse lines of credit increase, a growing disability to re-sell their mortgages in the secondary market is posing a challenge for most homebuilders in the US who offer mortgage financing to its buyers. This should have an adverse effect on RYL's financial services segment as well as on its gross new orders

 

Consequently, we have lowered the rate of growth in the number of mortgage origination units for RYL till 2009, post which we assume recovery to start off

 

Further, we have assumed that RYL's re-sold mortgages as percentage of total mortgage value will decline steadily before recovering by end-2008

 

Financial Services revenues: We have projected the Net gains on sales of mortgages and mortgage servicing rights, Title/escrow/insurance, and Net origination fees on per unit basis and have assumed a decline in the revenues per unit till 1H2008 post which the revenues should recover

 

Housing price change assumptions as of Oct. 23, 2007

 

 

 

 

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

4Q2008

 

West

-5.30%

-4.90%

-3.90%

-4.10%

-3.80%

-3.10%

 

North

-4.10%

-3.80%

-2.80%

-2.10%

-1.80%

-0.90%

 

Texas

-0.80%

-0.20%

0.20%

0.30%

0.70%

1.30%

 

Southeast

-6.00%

-6.20%

-3.90%

-2.60%

-1.40%

-1.20%

 

Average

-4.10%

-3.80%

-2.60%

-2.10%

-1.60%

-1.00%

 
               
 

1Q2009

2Q2009

3Q2009

4Q2009

2010

2011

2012

West

-2.70%

-2.30%

-2.30%

-2.00%

-2.50%

-3.10%

-2.20%

North

-0.80%

-0.70%

-0.30%

0.20%

0.40%

3.70%

4.10%

Texas

2.70%

5.40%

10.80%

21.50%

30.30%

24.20%

19.40%

Southeast

-0.40%

-0.50%

-0.60%

2.00%

-2.70%

-8.50%

-9.30%

Average

-0.30%

0.50%

1.90%

5.40%

6.40%

4.10%

3.00%

Tuesday, 06 November 2007 05:00

Credibiliy is still the key, Mr. Hovnanian

If you remember, I had a rather poignant critique of Hovnanian's Deal of the Century, and their financial results for the last quarter. As a quick recap, Hovnanian's CEO said that they have "gross" sold (whatever the hell that means) XXX so many houses and the price slashing event was so successful, blah, blah, blah. I was quite skeptical, to say the least. Don't get me wrong, I do not want to belittle a family business that is on the ropes. Far be it from that, I am proud of family businesses - BUT, credibility is the key here. You lose credibility if you reliably spout BS, especially the sort of BS that is easily discernible. That is the case we have here. This is contrasted by Toll's CEO, who is much more pessimistic, at least publicly, than HOV's CEO - despite the fact that his company is in a much better financial position. It appears as if TOL's CEO is a class act. I have nothing against any of these guys, but you really do need to be careful of the hype and hyperbole when you want serious financial types to take you, well,,, seriously! There is no need for me to comment further. Simply read the news piece that describes the press release below.

Upscale U.S. home builder Hovnanian Enterprises Inc (HOV)) said on Tuesday fourth-quarter net contracts and home deliveries fell, while cancellations rose amid the housing market's decline.

The company also said the sales pace in October in most of its markets "significantly deteriorated" when compared with recent months, but shares rose 1.8 percent as the company also moved to shore up its balance sheet.

Tighter credit standards brought on by defaults in the subprime mortgage market, a glut of homes for sale and buyer concern about economic weakness have home builders scrambling to strengthen their balance sheets to weather the market decline, which began more than 18 months ago.

Hovnanian said preliminary fourth-quarter results showed net contracts fell 10 percent to 2,781 homes, while deliveries slid 19 percent to 3,969 homes.

The figures for both exclude home deliveries from unconsolidated joint ventures.

The Red Bank, New Jersey-based company said cancellations for the quarter that ended Oct. 31, were 40 percent of gross contracts, up from 35 percent in the previous quarter as well as the year-ago quarter.

Hovnanian blamed the higher cancellation rate on the inability of some customers to obtain loans due to the tightening of mortgage underwriting standards.

Tuesday, 06 November 2007 05:00

Lennar comes clean

Lennar came clean this morning, detailing off balance sheet JVs and unconsolidated entities. We are running the model on Lennar and will have a detailed opinion by the end of the week. In the mean time, here is the 8k addendum. Below that you can find the Bankruptcy Score chart for Lennar, to keep things in perspective. The chart was created before gaining access to this new info (we were actually more conservative).

Lennar has declared aggressive management of assets and published off balance sheet debt

  Unconslidated Entities (Excluding LandSource, Heritage Fields & Kyle) LandSource, Heritage Fields & Kye Acquisition Total Unconsolidated Entities
Lennar net recourse exposure $            911,324   $          911,324
Reimbursement agreements w/partners $            256,250   $          256,250
Partner several recourse $            676,912   $          676,912
Non-recourse debt $        1,338,575 $  2,355,332 $      3,693,907
  $        3,183,061 $  2,355,332 $      5,538,393
       
Equity of the unconsolidated entities:      
Lennar $            964,362 $     112,858 $      1,077,220
Others $        1,229,306 $     770,024 $      1,999,330
  $        2,193,668 $     882,882 $      3,076,550

You know what they say, "A picture is worth a thousand words". Five and a half billion dollars is a lot of money to hide off of the balance sheet. Now that they have given us a taste, I want detailed performance numbers and asset values. Click the chart below if you need a larger view.

Image005

According to the bankruptcy score, Lennar is in real trouble. This is more pessimistic than the previous Lennar analysis due to greater clarity. I will post a detailed report this weekend.

Listening to CNBC this morning, I heard that residential construction spending has just increased, bucking the consensus and being lauded as good news. The home builders, who are the largest contributors to this index, are buried in debt and need to build in order to monetize the land they cannot sell for positive cash flow. This is their business, and they must build in order to try to make money.  I know it sounds counterintuitive to build houses when you currently have more houses than you can possibly sell, but from their perspective land is worth more with a finished house on it then it is in a raw condition. This is in their individual selfish interests. The problem is that adding more houses is negative for the homebuilding industry in general, negative for the economy since it adds supply to an oversupplied market that has slackening demand, and it steals wealth from homeowners by dropping the values of homes as supply increases further.

I am a contrarian along these lines, as in my viewpoints on share buybacks.

I am so convinced of the title, that I have compiled a list to illustrate. Of course, I didn't include the home builders in this list since they have obviously been hit, and I didn't include the banks earnings (since they have obviously not been doing well), and I didn't include the mortgage insurers results (since they have been hit hard), and I didn't include the foreclosure rates (since those are dismal), and I didn't include REOs (with CountryWide becoming the largest holder of single family housing in the country), and I didn't include... Well, you get the message. So let's see what I did include in my compilation to show how far away from recession we are...

My team's latest forecast of real estate price trends 4 years forward (the entire table may not fit in this post, width-wise):

3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 4Q2009 2010 2011 2012
West -5.30% -4.90% -3.90% -4.10% -3.80% -3.10% -2.70% -2.30% -2.30% -2.00% -2.50% -3.10% -2.20%
North -4.10% -3.80% -2.80% -2.10% -1.80% -0.90% -0.80% -0.70% -0.30% 0.20% 0.40% 3.70% 4.10%
Texas -0.80% -0.20% 0.20% 0.30% 0.70% 1.30% 2.70% 5.40% 10.80% 21.50% 30.30% 24.20% 19.40%
Southeast -6.00% -6.20% -3.90% -2.60% -1.40% -1.20% -0.40% -0.50% -0.60% 2.00% -2.70% -8.50% -9.30%
Average -4.10% -3.80% -2.60% -2.10% -1.60% -1.00% -0.30% 0.50% 1.90% 5.40% 6.40% 4.10% 3.00%

----- EXTENDED BODY:

Banking Jobs Lost - Challenger, Gray & Christmas Inc, the consulting firm, said in August the U.S. financial industry had announced 87,962 job cuts this year, 75 percent more than in all of 2006. It said 35,830, or 41 percent, relate to housing market problems.

  • Bank of America, the No. 2 U.S. bank, said it was cutting 3,000 jobs, a majority of them in corporate and investment banking, and the rest elsewhere. The cuts amount to 1.5 percent of the bank's 198,000-person work force.
  • Bear Stearns said on Oct. 3 it was cutting 310 jobs in its mortgage origination businesses as part of a reorganization of its mortgage operations. It had said in August that it cut 240 subprime lending jobs.
  • Credit Suisse on Sept. 26 cut 150 jobs in its mortgage-backed securities business.
  • Capital One, an independent credit card issuer, said on Aug. 20 it will eliminate 1,900 jobs. In June, it announced plans to cut 2,000 jobs.
  • Citigroup said on April 11 that it would eliminate 17,000 jobs and move an additional 9,500 jobs to lower-cost locations.
  • Countrywide Financial, the largest U.S. mortgage lender, plans to cut 10,000 to 12,000 jobs, or up to 20 percent of its work force. It said on Oct. 16 that it expected a $125 million to $150 million pretax restructuring charge from the move.
  • HSBC Holdings' U.S. mortgage unit said on Sept. 5 it would cut about 600 jobs.
  • JPMorgan Chase, the No. 3 U.S. bank, is cutting 100 jobs across its global credit markets unit, or about 10 percent of that group's head count, people familiar with the situation told Reuters on Oct. 11.
  • Lehman Brothers Holdings said it will fire another 850 workers, or about 3 percent of its work force. The cuts come after the investment bank said it was cutting 1,600 jobs.
  • Morgan Stanley said on Oct. 17 it was cutting about 300 jobs in its institutional securities division, mostly in mortgages. On Oct. 2, it said it would restructure its residential mortgage business and cut about 600 employees.
  • National City, the ninth-largest U.S. bank, said on Oct. 24 it is eliminating 2,500 jobs, 1,200 more than it disclosed the month before, after it merged its home equity and mortgage lending units.
  • SunTrust Banks, the seventh-largest U.S. bank, said on Aug. 20 that it plans to eliminate about 2,400 jobs by the end of 2008.
  • Wachovia, the fourth-largest U.S. bank, said on Aug. 28 it plans to eliminate about 2,000 of 2,600 jobs at the Richmond, Virginia headquarters of its Wachovia Securities brokerage unit as part of the company's acquisition of A.G. Edwards. The company also said recently it plans to eliminate about 200 investment banking jobs, or roughly 5 percent of its 3,900-strong investment banking operations.
  • Washington Mutual, the largest U.S. savings and loan, is laying off 1,000 employees as it copes with slumping housing demand.
  • Wells Fargo, the fifth-largest U.S. bank, said on July 26 it would cut 170 jobs
    "Imploded" Lenders:

    175. Bank of America (subsidiaries)
    174. Diablo Funding Group Inc.
    173. Honor State Bank
    172. Spectrum Financial Group
    171. National City - Home Equity, Correspondent
    170. Priority Funding Mortgage Bankers
    169. BrooksAmerica Mortgage Corp.
    168. Valley Vista Mortgage
    167. New State Mortgage Company
    166. Summit Mortgage Company
    165. WMC
    164. Paragon Home Lending
    163. First Mariner Wholesale
    162. The Lending Connection
    161. Foxtons, Inc.
    160. SCME Mortage Bankers (Wholesale)
    159. Aapex Mortgage (Apex Financial Group)
    158. Wells Fargo (various Correspondent and Non-prime divisions)
    157. Nationstar Mortgage
    156. Decision One (HSBC)
    155. Impac Lending Group (Wholesale)
    154. E-Trade Wholesale Lending
    153. Long Beach (WaMu Warehouse/Correspondent)
    152. Expanded Mortgage Credit Wholesale
    151. The Mortgage Store Financial
    150. C & G Financial
    149. CFIC Home Mortgage
    148. BrokerSource (BSM Financial - Wholesale)
    147. All Fund Mortgage
    146. LownHome Financial
    145. Sea Breeze Financial Services
    144. Castle Point Mortgage
    143. Premium Funding Corp
    142. Group One Lending
    141. Allstate Home Loans / Allstate Funding
    140. Home Loan Specialists (HLS)
    139. Transnational Finance Wholesale
    138. CIT Home Lending
    137. Capital Six Funding
    136. Mortgage Investors Group (MIG) - Wholesale
    135. Amstar Mortgage Corp
    134. Quality Home Loans
    133. BNC Mortgage (Lehman)
    132. Accredited Home Lenders, Home Funds Direct
    131. First National Bank of Arizona (FNBA) Wholesale, Correspondent
    130. Chevy Chase Bank Correspondent
    129. GreenPoint Mortgage - Capital One Wholesale
    128. NovaStar (Wholesale), Homeview Lending
    127. Quick Loan Funding
    126. Calusa Investments
    125. Mercantile Mortgage
    124. First Magnus
    123. First Indiana Wholesale
    122. GEM Loans / Pacific American Mortgage (PAMCO)
    121. Kirkwood Financial Corporation
    120. Lexington Lending
    119. Express Capital Lending
    118. Deutsche Bank Correspondent Lending Group (CLG)
    117. MLSG
    116. Trump Mortgage
    115. HomeBanc Mortgage Corporation
    114. Mylor Financial
    113. Aegis
    112. Alternative Financing Corp (AFC) Wholesale
    111. Winstar Mortgage
    110. American Home Mortgage / American Brokers Conduit
    109. Optima Funding
    108. Equity Funding Group
    107. Sunset Mortgage
    106. Fieldstone Mortgage Company
    105. Nations Home Lending
    104. Entrust Mortgage
    103. Alera Financial (Wholesale)
    102. Flick Mortgage/Mortgage Simple
    101. Dollar Mortgage Corporation
    100. Alliance Bancorp
    99. Choice Capital Funding
    98. Premier Mortgage Funding
    97. Stone Creek Funding
    96. FlexPoint Funding (Wholesale & Retail)
    95. Starpointe Mortgage
    94. Unlimited Loan Resources (ULR)
    93. Freestand Financial
    92. Steward Financial
    91. Bridge Capital Corporation
    90. Altivus Financial
    89. ACT Mortgage
    88. Alliance Mortgage Banking Corp (AMBC)
    87. Concord Mortgage Wholesale
    86. Heartwell Mortgage
    85. Oak Street Mortgage
    84. The Mortgage Warehouse
    83. First Street Financial
    82. Right-Away Mortgage
    81. Heritage Plaza Mortgage
    80. Horizon Bank Wholesale Lending Group
    79. Lancaster Mortgage Bank (LMB)
    78. Bryco (Wholesale)
    77. No Red Tape Mortgage
    76. The Lending Group (TLG)
    75. Pro 30 Funding
    74. NetBank Funding, Market Street Mortgage
    73. Columbia Home Loans, LLC
    72. Mortgage Tree Lending
    71. Homeland Capital Group
    70. Nation One Mortgage
    69. Dana Capital Group
    68. Millenium Funding Group
    67. MILA
    66. Home Equity of America
    65. Opteum (Wholesale, Conduit)
    64. Innovative Mortgage Capital
    63. Home Capital, Inc.
    62. Home 123 Mortgage
    61. Homefield Financial
    60. First Horizon Subprime, Equity Lending
    59. Platinum Capital Group (Wholesale)
    58. First Source Funding Group (FSFG)
    57. Alterna Mortgage
    56. Solutions Funding
    55. People's Mortgage
    54. LowerMyPayment.com
    53. Zone Funding
    52. First Consolidated (Subprime Wholesale)
    51. EquiFirst
    50. SouthStar Funding
    49. Warehouse USA
    48. H&R Block Mortgage
    47. Madison Equity Loans
    46. HSBC Mortgage Services (correspondent div.)
    45. Sunset Direct Lending
    44. Kellner Mortgage Investments
    43. LoanCity
    42. CoreStar Financial Group
    41. Ameriquest, ACC Wholesale
    40. Investaid Corp.
    39. People's Choice Financial Corp.
    38. Master Financial
    37. Maribella Mortgage
    36. FMF Capital LLC
    35. New Century Financial Corp.
    34. Wachovia Mortgage (Correspondent div.)
    33. Ameritrust Mortgage Company (Subprime Wholesale)
    32. Trojan Lending (Wholesale)
    31. Fremont General Corporation
    30. DomesticBank (Wholesale Lending Division)
    29. Ivanhoe Mortgage/Central Pacific Mortgage
    28. Eagle First Mortgage
    27. Coastal Capital
    26. Silver State Mortgage
    25. ResMAE Mortgage Corporation
    24. ECC Capital/Encore Credit
    23. Lender's Direct Capital Corporation (wholesale division)
    22. Concorde Acceptance
    21. DeepGreen Financial
    20. Millenium Bankshares (Mortgage Subsidiaries)
    19. Summit Mortgage
    18. Mandalay Mortgage
    17. Rose Mortgage
    16. EquiBanc
    15. FundingAmerica
    14. Popular Financial Holdings
    13. Clear Choice Financial/Bay Capital
    12. Origen Wholesale Lending
    11. SecuredFunding
    10. Preferred Advantage
    9. MLN
    8. Sovereign Bancorp (Wholesale Ops)
    7. Harbourton Mortgage Investment Corporation
    6. OwnIt Mortgage
    5. Sebring Capital Partners
    4. Axis Mortgage & Investments
    3. Meritage Mortgage
    2. Acoustic Home Loans
    1. Merit Financial

    Ailing/Watch List Lenders:
    11. Countrywide Financial
    10. ComUnity Lending
    9. Secured Bankers Mortgage Company (SBMC)
    8. Delta Financial Corp
    7. Meridias Capital
    6. Option One
    5. Ocwen Loan Servicing
    4. Doral Financial Corp.
    3. Evergreen Investment/Carnation Bank
    2. Coast Financial Holdings, Inc.
    1. Residential Capital, LLC*
    "Imploded*" Funds:

    21. Niederhoffer Matador Fund
    20. Absolute Capital Management Holdings
    19. Pirate Capital (Activist Funds)
    18. Synapse High Grade ABS Fund
    17. Cheyne Finance LLC (Cheyne Capital Management)
    16. Geronimo Multi-Strategy, Sector Opportunity, and Option & Income
    15. Basis Capital Fund Management, Ltd. - Basis Yield Alpha
    14. Solent Capital Partners LLP, Mainsail II
    13. Sentinel Mangement Group
    12. Sachsen LB: Ormond Quay conduit fund
    11. Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia (BNP Paribas)
    10. Union Investment Asset Management Holding AG
    9. Oddo: Cash Titrisation; Cash Arbitrages; and Court Terme Dynamique
    8. Sowood Capital Management
    7. Galena Street Fund
    6. United Capital Markets Holdings Inc.: Horizon Strategy
    5. Caliber Global Investment
    4. Lake Shore Asset Management
    3. Ritchie Capital Management
    2. Bear Stearns: High Grade Structured Credit Strategies Enhanced Leveraged Fund; High Grade Structured Credit Strategies Fund
    1. Dillon Reed Capital Management (UBS)

    Historical Implosions:

    1. Amaranth Advisors [2006-09]
    2. MotherRock [2006-08]
    3. International Management Associates LLC [2006-02]
    4. Wood River Capital Management [2005-10]
    5. Bayou Group [2005-07-27]
    6. GLT Venture Fund [2007-07]
    7. KL Group [2005-03]
    8. Eifuku Master Fund [2005-01]
    9. Long-Term Captial Management (LTCM) [1998-12-31]
    10. Askin Capital Management [1994]

    Ailing/Watch List*:

    16. Ellington Capital Mgmt. (certain funds)
    15. Golden Key Ltd.
    14. Queen's Walk Investment, Ltd. (Cheyne Capital Management)
    13. Carlyle Capital Corporation
    12. Capital Fund Management
    11. John W. Henry & Co.
    10. Campbell & Co.
    9. Tykhe Capital, LLC
    8. North American Equity Opportunities and Global Alpha (Goldman Sachs)
    7. Black Mesa fund
    6. Second Curve Capital (various funds)
    5. Axa IM
    4. Macquarie Fortress Investments Ltd.
    3. Frankfurt Trust
    2. Absolute Capital (Yield Strategies funds)
    1. Mariner Bridge
  • the lender expects to be profitable in the fourth quarter. I don't know about this. Countrywide is taking in more overvalued, underwater residential property in a the midst of a massive residential slowdown, than any other entity that I know of in America. In addition, they have significantly shrunk their business so it will be hard for them to earn their way out of this. Mortgages sales volume and size will decrease since home sales are decreasing amid shrinking housing values, and thier business model is going conforming.

    What is CFC going to do with all of those significantly devalued mortgages on their books? What are they going to do with all of the increasing foreclosures coming down the pike? They already wrote many billions of dollars of bad loans, and now they are taking loads of zero equity property in as well. What are they going to do with those? If you think the homebuilders have written down the value of their assets significantly, imagine the competition they will get from Countrywide. Hey, I am being pessimistic, let me take a close look at their numbers before I jump to conclusions.

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