You Gotta Know When to Hold'em...

...Know When to Fold'em.
Know When to Walk Away;
Know When to Run.

"You never count your money while you're sittin' at the table. There'll be time enough for countin' when the dealin's done." ~Kenny Rogers

Wall Street Journal via the Post Gazette

"Herb and Marion Sandler have been running one of the best home-lending franchises in America for decades. Now, they're getting out."

"Their decision to sell Golden West Financial to Wachovia for about $25 billion in mostly stock and some cash may turn out to be a harbinger of the end of the housing bubble."

"Mr. Sandler pooh-poohs the notion that the couple's exit foretells the top of the market."

'"If that had been the case, I would have wanted to get out in 1980, in 1986, in 1994," he said Tuesday in an interview. "All those other times were significantly more difficult. The situation is fantastic, the expectations are fantastic, and the prognosis is fantastic. ... If we had taken all cash, I think you would have had a much stronger point. We wanted as much stock as we could get."'

"That's a strong message for those who have worried about the California mortgage market. Several of my columns have addressed potential problems from the product that Golden West pioneered -- the option adjustable-rate mortgage."

"Since the early 1960s, Herb Sandler and his wife have built Golden West carefully, mortgage by mortgage. Option ARMs allow customers alternatives of how much to pay each month, including the choise of making a minimum payment, as one might make on a credit card. They have accounted for 99 percent of what their bank has offered for the past 25 years. Its profits, which have grown at just under 20 percent annually for four decades, are the stuff of legend."

"The problem for Golden West is that irrational behavior from competing lenders and borrowers can harm even the most prudent players. A full 29 percent of people who took out mortgages or refinanced in 2005 have no equity or negative equity in their homes, according to Christopher Cagan of First American Real Estate Solutions, a data provider."

"That's a shocking figure, compared with 10.6 percent of people who took out mortgages in 2004. "I would not want to be one of those people," says Mr. Cagan."

"Many investors and economists are deeply concerned, of course, about excessive home-price appreciation in California and slackening lending standards. The option ARM could be making things worse."

"The hitch is that, when customers opt to pay less than the interest due, the unpaid interest gets tacked on to the loan balance. While still low, that so-called negative amortization has been rising at banks that offer option ARMs, raising questions about their customers' ability to pay off their loans in full if their rates get adjusted upward rapidly or times get hard."

"Mr. Sandler says he's seen worse periods, he is thinking about times like 1994."

'"What you had was a deep, deep real-estate depression. I emphasize depression," says Mr. Sandler."

"Golden West had to write off the highest level of loans in its history. That figure? A paltry 0.18 percent of the total size of the portfolio. "Most financial institutions would give their eye-teeth" for such a low rate even in normal times, he says."

"That's not to say that Mr. Sandler is all happy talk these days. "I am worried about everything at all times," he says. "We run scared all the time."'

"This cycle, he began worrying about excesses in the California housing market back in 1998 and started to rein in some of the bank's lending practices, requiring bigger down-payments."

"But he doesn't think the problems lie with Golden West or the other banks that cater to customers with good credit: "I am particularly concerned in the subprime area, where I think people will be hurt."'

"As noted here early this year, we are entering the era of the Zombie Consumer, who has little savings and little prospect for an increase in salary but is kept alive and spending by companies willing to make borrowing easier at the expense of their own profit margins."

"The portion of profits that come from the deferred interest on option ARMs -- that negative amortization -- has been rising at major lenders. At Golden West, it was 34 percent of net income in the first quarter, compared with 27 percent in the fourth quarter, according to Creditsights estimates. Other major nationwide and regional lenders have similarly rising percentages."

"In addition, the first quarter held hints that Golden West's golden time was slowing down. Mortgage origination was ebbing, with the bank logging $11.6 billion worth, down from $13.1 billion in the fourth quarter."

"Before the takeover was announced, Wall Street's crack analysts were predicting that Golden West's earnings would continue to rise in a straight line, as if drawn with a ruler on a graph.
And then the Sandlers sold out."

"They got the highest price the bank's shares had ever fetched, about 15 percent over where the stock traded before the offer. It's a crowning moment for two of the biggest stars in banking."

"But when smart people cash in some of their chips, it's rarely a good time to bet."

"Even if they tell you not to worry."