Mortgage-Servicing Debacle
Yes another example of why you, the individual investor, should be cautious about following the ultra-rich into investments. Their investment goals are different than yours.
Bruce Sherman’s newspaper investments, Sam Zell’s real estate bottom call, Warren Buffett’s GE/GS buys, Michael Dell’s Dell stock purchase — were all terribly timed. But they have plenty of time to sit and wait. Being a year or 3 early will not impact their lifestyle.
The latest case in point: Billionaire Wilbur Ross’s way early purchase of mortgage-servicing business via his 2007 purchase of American Home Mortgage Investment. If you followed his lead in this sector, you are suffering mightily.
The WSJ provides the details:
Billionaire Wilbur Ross, who plunged into the mortgage-servicing business with a slew of acquisitions in the past year, is running into problems in a new sign of increasing stress in the business that is on the front line of the U.S. housing crisis…
Until the downturn in the U.S. housing market, mortgage-servicing firms had inhabited a relatively obscure pocket of the lending industry, handling back-office duties such as collecting mortgage-loan payments, assessing late fees and working with struggling borrowers.
Now, as delinquencies force widespread modifications to loan terms, mortgage servicers are finding themselves increasingly in the spotlight. The industry also includes big banks such as Bank of America Corp. and Wells Fargo & Co. as well as a business owned by Goldman Sachs Group Inc.
At the American Securitization Conference in Las Vegas Tuesday, panelists discussed the growing number of foreclosures. Mary Coffin, a Wells Fargo executive vice president, said that servicing arms had been inundated with borrower requests to change the terms of their loans. “We have a tsunami upon us,” Ms. Coffin told attendees of a servicing panel.
Foreclosures tied to subprime loans — or those mortgages made to borrowers with sketchy credit histories — are expected to increase sharply. More than 1.5 million homes have been foreclosed on and two million families are at risk of losing their homes, according to a report by the Center for Responsible Lending report last month.”
As always, investors need to recognize that Billionaires have little worry about retirement and future cash flow. Those people who are concerned with these financial concerns should be cautious about imitating the ultra-rich . . .
Source:
Foreclosure ‘Tsunami’ Hits Mortgage-Servicing Firms
CARRICK MOLLENKAMP
WSJ, FEBRUARY 11, 2009
http://online.wsj.com/article/SB123431311043370779.html
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February 12th, 2009 at 10:16 am
This is something that I have maintained for a very long time, a Truth that is (or should be) obvious to everyone — the rich do not need to be especially gifted at handling money, the mere presence of large amounts of capital cushions them from their mistakes and allows them to survive a series of blunders that would have bankrupted the average investor.
And on the opposite end of the scale, the poor can be exceedingly brilliant in their financial management, and still be wiped out by a bout of unpredictable adversity. In fact, it is likely that the poor are, as opposed to their stereotype of being incapable of managing money, probably much better at managing their money and living within a budget than are the inhabitants of any higher rung of the socioeconomic ladder — they have to be to survive and maintain their place on the ladder. Of course, one can always find examples of those who have given up, and rely completely on others, but those same examples also exist on every rung of the socioeconomic ladder.
There is no such thing as gutting it out, investing for the long haul, or even investing at all, when every dollar of your capital is likely to be called upon by the end of the month (or week).
The miracle is that there also exist those who have ruined fortunes, and moved down the ladder substantially, swimming against the stream and the buoyancy of wealth.
And in comparison to the likes of the ultra-rich, it is not unreasonable to think of ourselves as “poor” — not correct, but not unreasonable either.
February 12th, 2009 at 10:35 am
I remember when Wilbur Ross was on Squawk Box as a guest host and discussed his “looking to buy” and later buy into the mortgage business. The CNBC anchors rolled out the red carpet for those appearances. At the time I didn’t know what Ross was seeing that I wasn’t. Perhaps he wasn’t spending enough time on the internet and reading about things like the mortgage broker with a card table setup at a San Francisco flea market hustling would-be first-time homebuyers into $700k loans to get their slice of the American dream???
February 12th, 2009 at 10:59 am
“Early” = Wrong
February 12th, 2009 at 11:11 am
Barry,
Don’t forget that Buffet, Zell, Ross, and others can force management to change. Billionaire investors have access to the media, can easily get in touch with other large shareholders, and will almost always have their calls taken by management. Wealth also purchases access, which is critically important in these types of investments as well. Having called on management of many companies (large & small) I understand how frustrating it is to get in touch with these people. Small investors, no matter how right, will not be able to start the necessary changes in the firms they are investing in (if this is part of the investment thesis.)
Regards,
TDL
February 12th, 2009 at 11:12 am
Yes, the rich really are different than you and me.
If they can manage to lose enough money, us poor folks will step in w/ our tax dollars to bail them out.
February 12th, 2009 at 11:13 am
This is grossly off-topic. But it appears the market is telling everyone today (in the words of Eddie Murphy) to “have a Coke & smile and shut the fuck up!” KO up 5% 11am
February 12th, 2009 at 11:22 am
I was still busily shorting mortgage lenders and home builders in the Spring of ’07 while reading commentary that argued it was time to re-enter the real estate market, in part, because people like Carl Icahn had started buying real estate and the smart money was coming back in (in Icahn’s case it was the regional developer WCI Communities and hundreds of Florida condos).
In June of ’07 I posted this (at http://tinyurl.com/crn7a5 if you must know)
“Still doing fairly well shorting mortgage lenders and home builders in my trading accounts, WCI most recently since it was pumped up beyond intrinsic value by a putative Carl Icahn takeover attempt (never can figure out what these guys are really up to so I never follow their play but sometimes that play can help you go a way you want to go).”
February 12th, 2009 at 11:46 am
This reminds me of one of the versions of the Gambler’s Ruin analyzed in introductory probability courses. Wikipedia has a nice writeup; Huygen’s result is the one of interest. In a fair game between two people, one will eventually be wiped out. The probability depends on the size of their starting stake relative to the total in play – the person who starts with less is, unsurprisingly, the one who is more likely to be wiped out. There are related results for the expected length of the game.
In the market situation, we can treat all the other participants as the single “other player” for Huygen’s analysis. Since this means that any individual investor, even Buffett, is facing an opponent with approximately infinite resources, every individual investor can expect to be wiped out if they say in the market long enough. However, people who start with more money can expect to last longer before this happens.
Of course this analysis depends on the game being fair. There are ways for individuals to have a positive expection in the markets – some of them are even legal. But the lesson is that, unless you are certain that you have such an advantage, you will eventually lose everything you have. So maybe the markets should be treated like casinos; decide ahead of time how much you want to lose, and only put that much on the table.
(Apologies if a variant of this appears twice – it doesn’t seem to have posted the first time. Is there spam filtering? I had a URL for the Wikipedia article on the Gambler’s Ruin.)
February 12th, 2009 at 11:50 am
Billionaires are only one of group to be wary of. Others are too numerous to mention.
I like the 5% above 200 day moving average rule.
February 12th, 2009 at 12:11 pm
Not that’s rocket science (or isn’t obvious) but I made this very point in your last post on the Oracle of Omaha. Those with seemingly unlimited capital have the luxury of being early or even outright wrong quite often because eventually they’ll be right and make a killing to make up for those mistakes.
The rest of us go broke doing this.
February 12th, 2009 at 12:28 pm
@ Andy Tabbo Says: February 12th, 2009 at 10:59 am. “Early” = Wrong
Exactly. But only if you have to sell. Think how early John Paulson was in shorting MBS.
February 12th, 2009 at 12:44 pm
Dennies Kneale giving his “Power Picks” on CNBC’s “Smart Money”. The irony of this show is too rich for words. If I start taking investing advice for these idiots, Kneale in particular, please put a bullet in my head immediately.
February 12th, 2009 at 1:29 pm
Ricketts will go down as the earliest of the earlies buying the Cubs in ’09.
They’ll be waiting over Buffett’s favorite holding period, forever.
February 12th, 2009 at 4:03 pm
I don’t actually quite see how the super rich invest differently unless the simply invest less a proportion of their nett worth. This option is available to us all isn’t it?
Being super rich means at some stage you have worked very hard and put a lot of thought into how you handle your money. Old habits die hard I would say.
The super rich may invest differently due to their notoriety. They are more likely to try to distract people from their real stratergy and their public appearances are going to be a lot about public relations and less about what they truely intend to do next or over the long term.
February 12th, 2009 at 6:36 pm
I’m not a billionaire, merely a financial mortal. I sold all my stock (I’m not a day trader) in August 2007, and I’m getting ready to sell all of my gold. I’m blessed with common sense and a graduate education in economics. Watch out people, hold your money in cash!