Yesterday was a good day for the bears, but there was such a blizzard of information it was hard to keep it all straight. The sidebar must have turned over at least once, so this post will mostly just try to capture links to a few of the stories covering some of the important themes. WireGuy P. Jackson was one of many writers  who posted  trying to make sense of number 16 (according to Implode-O-Meter) subprimer NovaStar Mortgage’s 4Q earnings reports released late Tuesday. After the company’s stock imploded on Wednesday, losing about a third of its value, NovaStar issued a press release  correcting the near-universal impression it had warned it would not have any profit to speak of until about 2011. The new story was they had been talking about not receiving taxable income profit, but still expected GAAP earnings. AP corrected  their own story in accordance with this clarification and given the massive stock-moves based on this nuance, litigation is certainly not out of the question. Be that as it may, there was certainly a stock event yesterday. My question: How many more subprimers will Go NovaStar when they lay their own new challenges on the table?
In other developments yesterday, elements of the first string MSM and high end business academia both woke up and smelled the subprimers for perhaps the first time. Regular columnist Robert J. Samuelson of Newsweek penned a piece  that will come through the mailboxes of hundreds of thousands of American homes later this week. The B-Schools haven’t engaged much with the issue so far, but perhaps this University of Pennsylvania effort  will break the ice. Of course the usual suspects are still keying furiously. Mr. Twist’s pick from yesterday is this Gary North effort.
Continuing another important theme, number one subprimer Wells Fargo tightened its lending standards and announced a 320-head downsizing. WireGuy posted  on that story too, and this MSM summary  also lays out the facts.
Generally speaking, Wednesday was a big day for the subprime story. Still subprimer # 16 from Kansas City, MO was the NovaStar of the show yesterday, flaring up in a most startling manner. I’ll round out this DoomWatch with a selection   … of links to some other sources. Don’t miss that bottom-line quote from The New York Times, it pretty well sums it all up.
Notes and References: This Google News Business’s NovaStar cluster (66 stories Wednesday evening) should live for a day or so. : "Falling Off a Cliff: NovaStar Q4 Earnings Drop 150 Percent", P. Jackson, HousingWire blog, February 21, 2007.
The company said it does not expect to report a profit for 2007 through 2011, and as a result, CFO Greg Metz said NovaStar is “evaluating” whether to retain its current REIT status.
: "NovaStar Financial, Inc. Corrects Media Statements: Company Expects to Report GAAP Profitability In Coming Years", BusinessWire – source: NovaStar, February 21, 2007.
Scott Hartman, Chief Executive Officer, commented: “Some news stories mistakenly assert that NovaStar does not expect to report profits the next several years. In our earnings release and conference call on Tuesday, we stated that we expect to recognize little, if any, taxable income during the period 2007 through 2011. Taxable income involves a calculation for tax returns filed under the IRS requirements for Real Estate Investment Trusts. This figure differs significantly from net income under General Accepted Accounting Principles, known as GAAP earnings. …" [emphasis in original]
: "CORRECTION: Subprime Lenders Sector Snap", Associated Press / Forbes, February 21, 2007.
An initial version of this story incorrectly implied that Novastar Financial Inc. expected to lose money under generally accepted accounting principles over the next five years. The company clarified in a statement Wednesday that it expects to be profitable on a GAAP basis over the next several years.
: "Storm Cloud at the Global Bazaar? Some suggest that excess liquidity could threaten the world’s economy", by Robert J. Samuelson, Newsweek, February 21, 2007.
… "Bubbles" can form. Losses may follow.
We now have evidence of that.
Just recently, HSBC—a major bank holding company—announced more than $10 billion in losses on so-called "subprime" home mortgages. Representing about 20 percent of new mortgages in 2006, subprime loans go to weaker borrowers with shakier credit histories. When borrowers are less creditworthy, their loans carry higher interest rates. Hence, the appeal to lenders. Now, losses are emerging.
What’s unclear is whether the subprime losses are an isolated event or a harbinger of wider investment blunders.
: "Could Tremors in the Subprime Mortgage Market Be the First Signs of an Earthquake?", Knowledge@Wharton, February 21, 2007.
For months, the steady drip of news about troubles in the subprime mortgage market looked no worse than one would expect: merely a comeuppance for lenders, borrowers and investors who should have known that high-interest loans to people with poor credit were risky.
During the same period, many economists started breathing again after concluding that the superheated home market of recent years had not become the bursting bubble many had feared. While home prices are leveling off, there has been no deep, widespread decline.
But now some experts wonder whether those sighs of relief came too soon, especially in light of the troubles recently experienced by one of the largest subprime players, HSBC Holdings. Some suggest that the growing number of borrower defaults in the "aggressive lending" market, which includes various types of risky mortgages besides subprime loans, could shock the broader housing market and economy after all. Many subprime borrowers are paying 10% to 12%, compared to 6% to 8% on standard, or "prime," loans, and delinquencies are rising.
;What Goes Up Must . . . Stay Up?", by Gary North, LewRockwell, February 21, 2007.
The biggest doubt on today’s horizon is the housing market. The cloud no larger than a man’s hand is the sub-prime lending market. High-risk home buyers who thought they could become owners are discovering that rising interest rates, rising property taxes, and standard maintenance expenses are squeezing their after-tax income. They are not careful budgeters. They are now trapped by loans made by a banking system that thought it had passed risk on to quasi-government agencies such as Fannie Mae and Freddy Mac.
There is a great website called The Mortgage Lender Implode-O-Meter. It tracks the number of bankruptcies of sub-prime lenders since December, 2006. The number keeps rising weekly. It is up to 23, as of February 14, but don’t expect this figure to peak at this level. This process is just getting started. …
: "Wells Tightens Subprime Loan Criteria; Layoffs to Hit 320", P. Jackson, HousingWire blog, February 21, 2007. : "Wells Fargo cuts 320 subprime mortgage jobs", Reuters, February 21, 2007. : Some bloggers faster than Doom:
- "NovaStar gets Trounced… Investors left bewildered", SoCalBubble
- "Loan Guidelines ‘No Longer Appropriate’ ", TheHousingBubbleBlog
- "Pricing Risk", MISH’s GlobalEconomicAnalysis
- "FLASH: Novastar blows up – the latest subprime casualty. So when does Countrywide pre-announce its disaster?", HousingPanic
- NovaStar Discussion, CalculatedRisk
: "Moody’s may cut NovaStar Mortgage servicer ratings", Reuters, February 21, 2007. : "Fears Reignite for Subprime Lenders: The group tumbles after NovaStar warns it expects to recognize little, if any, taxable income for the next five years", BusinessWeek, February 21, 2007. : "Subprime Mortgage Bond Derivatives Fall After NovaStar’s Loss", by Jody Shenn, Bloomberg, February 21, 2007. : "High-risk lenders take a hit from investors", by Saskia Scholtes and Michael Mackenzie, FT / MSNBC, February 21, 2007. : "Subprime Lenders Hit Hard", by Vikas Bajaj and Julie Creswell, New York Times, February 22, 2007.
Though each lender is suffering from a variety of individual ills, rising default rates among loans made to people with spotty, or subprime, credit appear to be the central problem for the industry.