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Reality kidnapped Goldilocks on Feb. 8, if only fleetingly. That's when folks took to heart negative announcements from mortgage lenders New Century Financial and HSBC.
From New Century (NEW, news, msgs) came word that (a) its financials were basically no good and that (b) it hadn't properly accounted for loans it had sold to other institutions and that might now be sent back..
Even more important was the news from HSBC (HBC, news, msgs), regarded as a good operator, which revealed that it was going to take its mortgage loan-loss reserves from $8.8 billion and change to $10.6 billion and change. The disconcerting conclusion reached by HSBC, as described recently in The Wall Street Journal:
"Its systems for screening subprime borrowers and for assessing the default risk they posed were flawed. Many of those loans have soured, sometimes quickly. The percentage of HSBC mortgages more than 60 days past due is climbing. Fraud by borrowers has been higher than expected."
Yes, there is a consequence
To which I would respond: No kidding. How clever, how smart, how awake did you have to be to know that that was going on and that this was going to be the outcome?It's almost impossible to look at the set of facts that have presented themselves in the past several years, coupled with today's problems, and not conclude we're headed for trouble. (Witness all the ink I have spilled on this subject recently.)
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However, that is the conclusion the bulls continue to avoid every single day. Oftentimes, obvious problems unfold in plain sight. Then, sometimes, they get ignored long enough that they're deemed not to matter, and that therefore, a nearly certain outcome will yield to the highly improbable one.
What the bulls have yet to grasp, even after the aforementioned data points from these two companies, is that problems in the housing ATM financing mechanism (which has let homeowners borrow vast sums against their homes' inflated values) are getting worse, and that the lending business is changing.
My guess is that if the accounting conventions weren't so flexible when it comes to financial institutions -- witness what New Century seems to have pulled off until now -- we would already have seen a lot of rot.
HSBC induces hives
In fact, just after writing in my daily column that "I suspect the HSBC news will induce shudders throughout many boardrooms," I received e-mail from several knowledgeable readers who reported that closed-door meetings were indeed taking place at financial institutions that fund subprime companies. I would imagine there has been a good deal of angst at many organizations, and I think it will be rather difficult to put the genie back in the bottle, as it were.My expectation is that problems in credit land ought to continue to spread, although, judging by the limited weakness in housing and housing finance since New Century's and HSBC's announcements, it hasn't happened just yet. And, if that's the case, we shouldn't need a magnifying glass to find these woes.
Even though stock market participants have been willing to suspend disbelief, we still face the problem of an unwinding real-estate market, its impact on the economy and its impact on the stock market. Of course, the latter would also reinforce the prior two problems.
As I said, all of these problems have been hiding in plain sight. But the fact that folks want to pretend the problems don't matter -- and push out the moment in time when they react -- doesn't change the reality that the risks are extraordinarily high these days. Pretending will only make the dislocation bigger.
The recent collapse in the shares of New Century demonstrates what I expect to happen literally any day now in technology and the tape at large, although predicting when is impossible. Folks should not underestimate the power of the trickle-up in the rot from the housing ATM finance mechanism.
At the time of publication, Bill Fleckenstein did not own or control shares of the equities mentioned in this column.
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