2007 is not going to be a good year for mortgages. The percent of seriously delinquent after 12 months is 0.97% for mortgages issued in the first half of 2007, as opposed to 0.33% for those issued in 2006. Freddie Mac reported 1.38% at 18 months as compared to 0.38% for 2007 and 2006 respectively.
The defaults in 2006 aren’t really hitting the banks yet, and we’ve still had 7 bank failures….What happens when 2007 really hits?
One consequence of the credit crunch is that even with a Fed Funds rate of 2%, interest rates for everyone are going up.
Nowhere is this more obvious than in municipal bonds, where you also have the collapse of the monoliner insurers making getting a good rating more difficult.
The article gives an example, where the Bay Area Toll Authority refinanced $700 million in bonds at 5.33%, when last year it was 4%.
That’s an additional $9.31 million that they have to carry, and we are seeing this across the country, so new roads and bridges, and needed maintenance on existing infrastructure, are all being deferred.
I don’t see it getting any better for a while.
The consultancy firm Johnson & Assoc. is predicting that bonuses on Wall Street will be lower this year because the firms have lost so much money.
Given the history of American business, and Wall Street in particular, in the past few decades, I wouldn’t bet on it.
Only the little people pay for senior executive’s mistakes.
Well, the jobless numbers came out, and they suck. The weekly numbers rose by 7,000 to 455,000, a 6 year high, when predictions were for a drop to 433K, and the 4 week moving average, which is less noisy, rose to 419,500, a 5 year high.
At least our misery has company, with the ECB holding rates steady, saying that “risks to economic growth were starting to materialize”, which is a signal that Euro zone rates will remain steady.
Of course, our relentlessly optimistic financial press has to try to make s%$# into Shinola in housing, where they are touting a 5.3% month to month gain, which as Barry Ritholtz so eloquently notes, this is unmitigated crap, and driven by seasonal differences more than anything else, and the numbers are down year over year.
Additionally, we do not know how many of these are short sales in lieu of foreclosure.
We also have retail experiencing major suckitude now that the rebate checks have run out. To the degree that people are spending any more, it’s on necessities, and they are running up their credit cards to do this, because the banks are cutting back on HELOCs.
Meanwhile, oil rose on supply concerns after Kurdish rebels blew up a Turkish pipeline, though gasoline is down for the 21st straight day.
In the world of insurance, the largest US insurer, American International Group wrote down more than $11 billion in holdings, and is making noises about selling more shares to raise capital.
By most definitions, this is insolvent.
If this is indeed the case, the federal government should take it over, and kick management and share holders to the curb.
A number of economists have suggested that the world economy has become “decoupled”, and that a recession in the US may not cause a recession elsewhere.
If the latest information coming out of Japan is any indication, these economists are wrong, as Japan seems to be heading into a recession too, though one could argue that the 1990s Japanese recession still hasn’t fully ended.
Not surprisingly, this driven the dollar up, and it hits a 7-month high vs the Yen, ¥109.56.
In the ongoing GSE soap opera, the Treasury Department has hired Morgan Stanley to look at at the financial structure of Fannie Mae and Freddie Mac.
There was a competitive bid process to select Morgan, though I still wonder if this is prudent oversight, or the fox guarding the hen house.
In either case, I think the fact that Freddie Mac has cut dividends after posting an $821 million loss, about 3 times what was expected, was a sensible move.
Dividends are for when you make a profit.
The monoliner insurers are not a soap opera though, they are farce, and the latest case is Ambac claiming a $823.1 million profit, which appears to be entirely due to an accounting change:
Ambac, once the second-largest bond insurer, reported a $1.7 billion net loss in the first quarter after a $3.3 billion loss in the fourth quarter of 2007. A rise in the risk premiums on Ambac’s own debt in the second quarter lowered the value of bond guarantees, which was allowed to be reflected as a gain under new accounting rules, resulting in the quarterly profit.
Ambac rose 35 cents, or 7.4 percent, to $5.08 at 10:08 a.m. in New York Stock Exchange composite trading.
Ambac and other financial companies are taking advantage of the accounting standard change — intended by rulemakers to expand so-called mark-to-market accounting — to report gains when market prices for their liabilities fall.
I’d appreciate a translation from accountant-speak, but it appears to me that they are profiting from the fact that no one is willing to pay face value on the debts that they owe.
In real estate, nirtgage applications rose last week, though only a little, and the week to week numbers are, as I always remind my reader(s) noisy. It’s still way down.
In energy, oil fell on reports of increased inventories to $118.58/bbl, and
retail gasoline fell again. It’s now $0.25 off of the record, so you save two bits a gallon.
Finally, we note that when the US gets a cold, Mexico catches pneumonia, particularly in rural villages, where the economy is even more dependent on remittances.
The depressing thing is that on a per capita basis, Mexico is solidly in the middle of the world in terms of wealth, and if a bit more could be pried from the top 1-2%, everyone would do better…..But I forget…that’s socialism, so we deal with hoards of economic refugees in the US instead.
Read Mike Morgan’s essay The World’s Grandest Ponzi Scheme Unravels.
He makes Nouriel Roubini, and for that matter me, look like Panglossian optimists, though he does appear to be a short seller, which means that pessimism is his job.
I’ve shown this scare chart, but it’s time to show it again:
Pleasant Dreams.
Well, the Fed held rates steady, and it appears from their statement that they will hold rates steady.
Honestly, I don’t expect any rate change now before the election. Changing the rates in September or October would lead to complaints of a political agenda.
The Index of Supply Management’s index of non- manufacturing businesses showed continuing contraction in July.
It was up to 49.5, which was above forecast, but anything under 50 is contraction.
For what it’s worth, it looks like Noriel Roubin’s prediction that hundreds of banks will fail as a result of the credit crunch is finally getting some ink at a major news service (Reuters).
I would suggest his blog to get more detail, particularly on his estimate that the Taxpayer will be on the hook for $1-$2 trillion for all this.
Both he, and I, think that the credit crunch will get a lot worse, and stories like former Merrill Lynch superstar Dow Kim shutting down his hedge fund before it started, because investors got skittish and pulled out, would seem to confirm this.
I would also note that delinquent loans are rising for commercial real estate, which indicates that the commercial real estate market is following the residential market down the drain.
In the normal indices, we see the dollar up a bit, and oil and gasoline down for another day.
Thursday, when the Euro Central Bank sets its rates, should be interesting.
The economic reporters out there are finally noticing that the mortgage crisis is not just subprime, and that default and foreclosure rates for Alt-A and Prime mortgages are skyrocketing too.
Challenger, Gray & Christmas is reporting that planned job cuts were up 26% in July, and the Conference Board’s Employment Trends Index fell to 112.1 in July, leading the board to predict that unemployment could pass 6% in 2009.
Additionally, the board noted that U6 has now topped 10%, which is probably the best metric, and closer to the one used in EU nations, for the first time in 5 years. Quoth the Wiki:
In an article with a typically bad headline, we see that personal spending and income fell in July, the headline leads with non-inflation adjusted spending, and we also see that inflation has eaten up most of the tax rebate stimulus package.
So what the taxman giveth, the House of Saud taketh away.
Commodities are showing some moderation now, with copper and aluminum falling because of the economic slowdown, though there is a consensus that latter will rebound.
Energy is down too, both oil and retail gasoline, much for the same reasons.
The dollar is down slightly, but is likely to be a holding pattern until tommorow, when the Fed makes its decision on interest rates, and may not move much until Thursday, when the ECB does the same.
In banking, Citi is now losing money on credit card securitizations, where they take credit card debt and package it into securities (similar to mortgage backed securities).
When you lose money on this, the economy is not in good shape, or you are completely incompetent. In the case of Citi, probably both.
Finally, the finance unit of Chrysler was able to finance only $24 billion of the $30 billion it sought to renew, and it was at a higher cost than anticipated, which will likely make auto loans more expensive.
Tanta has noted that, “some of the bigger economic illiterates in Congress,” have sponsored a bill to restore the Downpayment Assistance Program (DAP). (previous posts here)
Basically, it allows a seller to supply the down payment to the buyer in exchange for a higher sales price, allowing people who won’t make a down payment to get an FHA approved loan, which require a down payment.
They funnel the money through a DAP company, and all is forgiven.
The default rate on DAP loans is at least three times those with down payments.
This is something that, “builders, real estate lobbies, and DAP companies,” are lobbying for, big time.
The Congresscritters in question also do not understand insurance apparently, details at link.
Specifically the news from the FDIC, which almost always chooses to act after the close of business on Friday.
Well, this Friday, they seized First Priority Bank. Sun Trust will be taking over the deposits.
Additionally, they warned four banks that they did not have enough liquidity. They were ordered to, “raise more capital, expand their loss allowances and better oversee and diversify their loan portfolios.”
The cost of the JSF for Australia has apparently $AUS75 million to $AUS131 Million* (the Australian dollar is about $0.95 US).
It’s still cheaper than the F-22, which law forbids them to get anyway, which clocks in at an eye-popping $355 million (US).*
I think that a number of nations will start considering alternatives, either US (F-15, F-16, F-18E/F) or foreign (Typhoon, Rafale, Gripen,Flanker Family), when the full cost is made known.
Additionally, I think that for non-US (and non-UK) forces the support costs may be higher because their own militaries will not be able to maintain some of the systems, as they will not be given sufficient information on the aircraft’s highly integrated avionics.
But wait, there’s more!!!!
Lockheed is looking to change the accounting structure in order to generate a sh$#load more costs:
The JPO currently bills each of the three major F-35 contractors separately. This unique arrangement is designed partly to limit the amount of overhead feeds charged by each of the contractors, which can amount to hundreds of millions of dollars over time.
Lockheed’s proposal, however, would bundle all of the industry team’s charges into a single billing process for submitting to the JPO for payment.
Each charge submitted by BAE and Northrop would include a discrete fee to cover their own overhead costs. Lockheed would then add its own overhead for the aggregated bill. Since Lockheed would be charging an overhead fee on top of fees already charged by BAE and Northrop, the JPO would be paying a “fee on a fee”, Wood says.
She adds that the JPO estimates the current structure has saved $850 million already, so making a change for the full-rate production phase could dramatically increase the programme’s overall costs.
So if you read anyone who says they have a handle of the actual cost of the F-35, don’t believe them.
*There are a number of ways to price aircraft, and I believe that both are total program cost divided by number of aircraft. I’ve heard quotes at about 1/2 as much for the F-22.
They are buying delinquent mortgages at pennies on the dollars, and if they can modify the mortgages to make a profit, good. If not, foreclose, and sell at a discount, but you still make a profit on it.
This time, it’s commercial mortgage back securities, and the default rate is about 4%, but this number is expected to quadruple if the economy slows down significantly.
Let’s note that this is commercial property, the stuff that’s supposed to be largely recession proof that we are talking about here:
Such a scenario corresponds “to the negative predictions currently offered by commercial real estate experts”, analysts at Fitch wrote. This would happen if the economy suffered a similar downturn to 1991, and assumes that the value of properties covered by the deals falls by 25 per cent, and cash flow from rents by 15 per cent.
The higher defaults under such a slowdown compares with a historical default rate of 7.9 per cent, and with the milder scenario that Fitch thinks is more possible of 0.8 per cent economic growth and a 13.7 per cent rate of default.
It would cause non-investment grade bonds – B and BB rated CMBS – to suffer loss rates of 100 per cent and 95.9 per cent, respectively. Meanwhile, 30.6 per cent of the lowest-rated investment grade bonds – BBB rated – would experience losses, while loss severities would rise to 37.9 per cent from an historical average of 33.5 per cent.
The data suggest that recently issued CMBS may fall victim to inflated property values and weaker underwriting standards experienced at the height of the US property boom in 2006 and 2007, as well as the weaker economy. Those bonds make up about 49 per cent of the outstanding CMBS market of more than $800bn. The survey covers all Fitch-rated bonds issued during those two years, making up 74 deals worth $217.3bn. That was about 60 per cent of all CMBS issued during the period.
These numbers are apocalyptic.
This is why no one in their right mind is building anything. Construction spending is down for the 11th time in 13 months.
Freddie Mac seems to have realized the gravity of the situation though. Yesterday, I wrote about their doubling the payments to servicers for loan workouts, and today we discover that they are ending bonuses for servicers who foreclose quickly.
It makes sense. When times are good, you just want the stuff off your books and resold quickly, but when times are bad, you go broke doing that.
The SEC has subpoenaed them, and the state of New York has filed fraud charges against them.
Someone has been a very bad boy.
I’m just not sure what.
I’m checking the Bloomberg financial news, and I come across this story, all of two paragraphs, about conducting all the trades for credit default swaps through a clearinghouse of some kind.
Some of the names that planning to do this are, “JPMorgan Chase & Co., Deutsche Bank AG and Morgan Stanley,” and the article further goes on to state that, “The clearinghouse would be designed to absorb losses in the event a major market-maker fails.”
Considering the value of the CDS market, which is roughly equal to that of world GDP, I gotta figure that something bad is heading down the pipeline, and that the big players are looking to offload it onto either stupid investors and/or the taxpayers.
Can anyone translate this into meaningful English?
The Financial Accounting Standards Board (FASB) just postponed a rule that would require that off balance sheet entities* onto their books for one year.
They were getting a lot of pressure from banks and their allies on Congress about this.
The question is: what are they hiding, and at least part of the answer is:
Many lenders made profits in the run-up to the subprime- mortgage crisis by selling pools of loans to off-balance-sheet trusts known as qualified special purpose entities, or QSPEs, which repackaged the pools into mortgage-backed securities. Some banks then sold those securities to other off-balance-sheet vehicles they sponsored, such as so-called asset-backed commercial paper conduits.
*Things like “mortgages and credit-card receivables.”
They are suing over their giving lower ratings to government bonds than equivalent corporate bonds, which they actually call, “a secret Wall Street tax on Main Street”.
The disparities in ratings means either higher interest rates, or carrying monoliner insurance, both of which accrue to the benefit of Wall Street.