Same Coin, Different Sides

Two great headlines appeared on my Bloomberg in the last 24 hours.

The first came yesterday—Spain’s Property Stocks Drop on Concern Bubble Burst—above a story carrying a rather stark reminder that all Bubbles end badly:

Spanish real-estate and bank stocks tumbled on concern the country’s property boom is imploding. Inmobiliaria Colonial SA dropped as much as 22 percent and Grupo Inmocaral SA fell as much as 19 percent in Madrid, leading the slump by developers of homes and offices. Banco Bilbao Vizcaya Argentaria SA, the country’s second-biggest bank, declined as much as 3.2 percent on speculation bad loans will rise. Inmobiliaria Colonial, S.A. “purchases, constructs, sells, and leases all types of real estate properties. The Company operates primarily in Barcelona and Madrid. Inmobiliaria Colonial owns 40 buildings, of which 38 are office buildings.“ Grupo Inmocaral SA does basically the same thing. And, as in the manner of all good Bubbles, the fates of Grupo Inmocaral SA and Inmobiliaria Colonial, SA are inextricably linked, because the former bought most of the latter just about a year ago. Now, we all know that the Spanish Property Bubble is a unique situation entirely based on strong fundamentals that will never change.

Nevertheless, investors in both Grupo Inmocaral and Inmobiliaria, as well as the banks which have loaned them money to buy all those wonderful buildings, might want to read carefully the second great Bloomberg headline of the last twenty four hours, as well as the story beneath it, for a sense of things to come. Subprime ‘Liar Loans’ Fuel Housing Bust With $1 Billion Fraud

April 25 (Bloomberg) — Cheating on mortgage applications is so widespread and so seldom punished that it’s fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the Office of Thrift Supervision, which oversees savings and loans. Borrowers and brokers commit fraud when they exaggerate the applicant’s income, qualifying the borrower for a home he otherwise couldn’t afford. Such fraud robbed lenders of an estimated $1 billion last year, according to data collected by the Washington-based Mortgage Bankers Association and the Federal Bureau of Investigation.

“Misstatements about employment and income are being made every day,” Russell said. “The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.” What do the excesses of one property bubble have to do with the other?

Everything, I think.

Google “Spain property bubble” and you get 1.75 million search results. Google “Spain property collapse” and you get 1 million search results.

My bet is that ratio is about to flip.

Jeff Matthews I Am Not Making This Up © 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.