Category: Housing Crash

Economics Update: Real Estate Edition

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Swiss banking giant UBS is looking at a $26.6 billion exposure to toxic mortgates, in addition to whatever hit that they might take on subprime, so these are A and alt-A mortgages. It reported a loss of $11 billion in Q4.

In the Dallas-Ft. Worth Metroplex, foreclosure postings are up 27%, effecting 13,000+ residences, an all time record. The scary quote is, “Out of the homes posted, at least 20 percent are underwater and probably more” .

And everyone’s favorite subprime whipping boy, Countrywide Financial, has had delinquencies rise to 7.47%. That’s about one out of every 14 loans that is delinquent, which is clearly unsustainable.

If banks had to consider this rate of delinquencies as a normal cost of business, mortgage rates would probably be in excess of 12% just to break even.

It now looks like Royal Bank of Scotland is the latest institution in line to see significant losses from mortgage backed securities.

Economics Update

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Well, we have Bernanke and Paulson acknowledging that the economy is in trouble, but denying that there will be a recession in 2008.

The thing is, we are already in a recession. Let’s seem consumer spending is flat, with a false increase being driven by increasing food and fuel prices, and the growth rate is less than the real inflation rate.

In bond insurance, we have NY governor Elliot Spitzer saying that the Monolininers have 4-5 business days to recapitalize, or they will lose their AAA ratings, and regulators will have to, “have to step in and separate bond insurers’ municipal businesses from their more troubled structured finance units”.

Bet that offer from Warren Buffet does not look so awful now.

In mortgage loans, banks are lobbying hard to put off their bad investment choices on the US tax payers, which is not surprising, considering that house prices took their biggest quarterly drop ever, a national median price drop of 5.8% in Q4 of 2007.

Annually, that comes to about 23%/year.

The credit crisis is extending further, with delinqencies in assets backed by auto loans surging.

The Trade deficit fell in 2007, for the first time since the 2001 recession.

Economics Update

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The Michigan Higher Education Student Loan Authority will stop making loans under the Michigan Alternative Student Loan, because it cannot raise money in the capital markets to lend out. You can see their notice here

Student loans are about as safe as it gets. You cannot discharge them through bankruptcy, and they are very safe, but no one is willing to buy the paper, both because the bond insurers are basically belly up, and because no one trusts anything.

In a similar vein, though more directly related to the bursting housing bubble, Freddie Mac cut nearly in half the size of its REMIC (Real Estate Mortgage Investment Conduits) issue, because it cannot find buyers.

And in the useful congressional hearings area, i.e. not Roger Clemens and steroids, we have hearings on the collapse of the bond insurers.

In another sign of a slowing economy, media company Belo corporation is showing a loss.

Part of this may be the fact that, and I speak from experience having experienced their flagship Dallas Morning News, that Belo is to journalism what Osama bin Laden is to wet t-shirt contests. When you have a crappy product, you get hammered.

Economics Update

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Chancellor of the exchequer, Alistair Darling has stated at a G-7 forum that the credit crunch will be a “prolonged adjustment”.

Auditors for AIG, the world’s largest insurer is showing “material weakness” ovalues some of its complex financial instruments, specifically its, “credit-default swap portfolio”, see here and here.

Basically, it needs to write down more of its holdings in the big sh^%pile.

In related news, credit-default swaps are becoming more expensive across the markets, which reflects the standard risk/return equation. People find these riskier, so they are demanding higher yields.

In real estate, experts are saying that home prices will drop for 2 more years. I think that it will be 5+ years, at least adjusted for investment.

A Morgan Stanley analyst has stated the obvious, that Fannie Mae will be seeing a lot mroe defaults on its loans.

In personal finance, credit card companies are jacking up rates of credit worthy customers. It appears that they are looking for cash flow to offset losses in various financial derivatives and the mortgage market.

Rupert Murdoch Dow Jones is ajusting the Dow Jones Industrial Average, with Bank of America and Chevron replacing Honeywell and Altria.

This really does not mean much, after all the Dow is not really a good metric anyway, Honeywell has become too small, and with the spinoff of Kraft, Altria is pretty much just tobacco. Nothing to see here, move along.

Finally, I recommend that you check out this examination of the US financial position compared to meltdowns in 5 other counties. It’s kind of grim, as these charts show:
The Big Picture | 5 Historical Economic Crises and the U.S. look at pics”/>


Economics Update

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Economic schizophrenia, Consumer Confidence Falls, But Durable Orders Jump. Mr. Benanke is not sleeping well tonight.

Home ownership rate has biggest drop ever. A 1.1% drop in the percentage of occupied homes.

Everyone’s favorite not-so-whiz kid, Jerome Kerviel, is claiming that his superiors at French Bank Societe Generale knew of his activities, but took no action because it pumped up its profit numbers.

The First Bank Failure of 2008, the Douglass National Bank of Kansas City, Missouri.

The FBI has initiated investigations of 14 firms regarding subprime irregularities. Kind of makes the FBI sound like Metamucil.

They did not identify the companies. But the probes reached across the industry to include developers, subprime lenders, companies that securitized loans and investment banks that held them, said Neil Power, head of the FBI’s economic crimes unit.

Contrywide: $422 million Q4, and 1/3 of its sub-prime mortgages are delinquent. Well I got this prediction right.

Economics Update

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New home sales plummet. New home sales were down 26% from 2006, the biggest drop ever, surpassing the 23% decline posted of 1980.

Regulators opposes oppose increasing the GSE’s lending limit, with the director of OFHEO, James Lockhart saying, “We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform.”

I agree, the solution to too many people hanging themselves is not more rope.

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CBS News reporter Steve Croft has an interesting report on the mess on 60 minutes (click to view, but there is a 30 second ad at the beginning). Too narrow in scope, the big sh$%pile is about more than subprime.

European hedge funds are suspending redemptions.

WSJ Saying that this Recession Could Be Nasty

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Though, of course, the author, Justin Lahart, hedges about whether we will actually have a recession (My take is that we’ve been in one for some time, and that we have been experiencing a recession like living standards, based on percentage of population employed, since 2001)

His Article uses terms like, “on track to be at least as bad as the five most catastrophic financial crises to hit industrialized countries since World War II”, and makes reference to Japan’s “lost decade” in the mid 1990s.

The idea that this is going to be a bad one is hitting the mainstream.

Economics Update

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We’ve just had £2 billion ($4 b) fund in the UK suspend trading because of a panic, but “Aegon UK added that it believes the “underlying fundamentals of the asset class remain healthy”.

Nope, there is an increasing understanding that the last one leaving the room won’t only be without clothes, but that the price of exit will involve selling an organ.

Standard and Poors is now assessing the risk of bond insurer giants MBIA and Ambac in excess of 70% over the next 5 years. If they unwind, a lot more unwinds too.

Sprint is laying off 4000, and closing 125 stores.

Bond insurer ACA is asking for more time to unwind its contracts, basically because it’s out of case. If they go under, “Banks and brokers could suffer billions of dollars of losses from credit protection they bought from ACA.”

Accusations of Inappropriate Pressure by WaMu on Appraisers

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I am so not shocked that Jeniffer Wertz is claiming that claiming she was blacklisted last year for providing a housing market forecast that was too gloomy.

In the lawsuit, which was filed a week ago, Wertz says she completed appraisals on two houses in May and then quickly got a call from a WaMu sales manager demanding she change her outlook to “stable” so a loan could be approved.

The WaMu sales manager also demanded Wertz change her appraisal process to produce higher prices for the properties she was evaluating, according to Wertz’s lawyer Stephen Danz. The higher an appraisal comes out, the more likely it is a home loan will get approved.

When Wertz refused to comply, she claims the sales manager threatened to block her from doing future appraisal work for the bank. A month later, Wertz’s suit says, a third-party appraisal request assigner told her WaMu would no longer accept her work.

I have no doubt that this is true, and that this was endemic in the lending industry among most, if not all of the major players.

Andrew Cuomo is alleging that WaMu’s pressure on “title company First American and its appraisal unit, eAppraiseIT” is why they were basically falsifying appriasals, and The Securities and Exchange Commission and the Office of Thrift Supervision has opened an investigation.

I think that it will be more difficult to find a major lender who did not do this than to find one who did.

Economics Update

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Philadelphia-area manufacturing activity lowest just after 911.

Lehman Brothers is downsizing its mortgage arm. I believe that there is an expression, involving the words, “barn”, “door”, and “cow” that would be appropriate here.

It looks like the real estate crash is finally starting to effect rents, with rents increacing by only ½% in 2007 in a sampling of 10 metro areas. (In previous years, it was in the 3% range)

Housing starts and permits plunge to multi-decade lows. Housing starts are the lowest in 27 years, permits the lowest in 33 years. The market is still on the way down.

This analysis predicts 5 years to recover. It’s probably wrong.

Local housing crashes have all taken at around 5 years to recover, and the markets were far less inflated. Additionally, the underlying economic situation is very grim, and the home buyers were less leveraged, meaning that foreclosures will be higher this time.

The Dollar has recovered somewhat against the Euro in response to an inflation hawk on the ECB saying that right now recession is the problem, not inflation

Economics Update

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Consumer prices rise by the highest amount since 1990, though it should be noted that the inflation numbers have become far less reflective of reality due to “creative massaging” since then.

H/t to The Big Picture for finding the cartoon.

Bond Insurerer Ambac Cuts Dividend, and declares loss, they are bleeding to death.

[on edit, added the following]
Standard & Poors raises the assumed losses on 2006 subprime bonds from 14% to 19% when it makes ratings on financial instruments, such as CDOs. They are in the process of reviewing their models for all outstanding mortgage backed debt. (The end result won’t be pretty)

Then we have a report from JP Morgan saying that home equity delinquencies are high In fact, they are higher than they would have expected at the bottom of a recession, which implies that the way down is still pretty scary, and their profits fell 34%.

On the good news side, oil prices have fallen below $90/bbl, because traders expect to see a moderation in demand because of an economic slowdown.

Pigs Fly: William F. Buckley Jr. Calls for Regulation

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This is true, he is calling for regulation in the mortgage markets. Of course, his prescriptions are disastrously wrong, but he’s new at this regulation thing.

The short form for any solution: Do what FDR did. This problem has grown as we have rolled back depression era regulations.

His points, and my rebuttals:

  • He calls it, “terrible subprime-mortgage phenomenon”.
    • It’s not. It’s bigger than that. It’s not even a mortgage phenomenon, it’s bigger than that. There is a general rot at the core of our financial system.
  • The mortgage crisis came on because our free society did not think to intervene at a juncture where it could have limited the effects of cosmic thoughtlessness and insouciant greed.
    • Actually, I would argue that, given Alan “Bubbles” Greenspan’s close ties to Ayn Rand, it was because he supported, “cosmic thoughtlessness and insouciant greed”.
  • Mortgage brokers not caring about credit worthiness, because they immediately resell the loans.
    • Dead nuts right here.
  • The federal government being the only agent that can possibly intervene, it needs to do so, by forbidding the liquidation of mortgages until the disparity between true value and hypothetical value is pounded away by time and inflation — and a revitalization of the functions of the marketplace.
    • This is wrong. It is unbelievably and catestrophically wrong. He is proposing no foreclosures for the duration of the downturn. Local downturns, ones from much shallower peaks, have typically lasted 5 years. This one may last a lot longer. If you have no foreclosure, you have no incentive to pay the mortgage, and so you have NO LENDERS WILLING TO LEND. We would have a totalli illiquid market.

For what it’s worth, a good first step would be to allow bankruptcy judges to redefine the terms (not the principal) of the loans, as they can for vacation homes and rental properties.

If someone has that option, then a lender is likely to be more willing to deal with them responsibly about loan restructuring.

At this time, the people servicing the loans frequently do not own the loans, and as such, they are unable to renegotiate the terms. Allowing bankruptcy to do so would save a lot of homes, and save the market, and it would penalize the most egregiously abusive lenders.

Why It’s Good to Have Democrats Running Congress: Part 867-5309

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From Nancy Pelosi’s blog“

As part of its ongoing investigation into executive pay, the Oversight Committee has invited three CEOs implicated in the subprime mortgage crisis to testify on February 7, 2008, about their severance and compensation packages.

Read letters to Charles Prince, the former CEO of Citigroup (pdf) and E. Stanley O’Neal, the former CEO of Merrill Lynch (pdf).

Full letter to Angelo R. Mozilo, the CEO of Countrywide Financial (pdf):

January 14, 2008

Mr. Angelo R. Mozilo
Chairman and CEO
Countrywide Financial Corporation
4500 Park Granada
Calabasas, CA 91302

Dear Mr. Mozilo:

I am writing to request your testimony at a hearing on February 7, 2008, before the Committee on Oversight and Govemment Reform. The hearing will address executive compensation and severance arrangements for CEOs involved in the ongoing mortgage crisis.

According to recent press reports, if Bank of America completes its proposed purchase of Countrywide Financial, you stand to collect tens of millions of dollars in severance payments and other compensation. I request that you be prepared to provide your perspective on this reported pay package. You should plan to address how it aligns with the interests of Countrywide’s shareholders and whether this level of compensation is justified in light of your company’s recent performance and its role in the national mortgage crisis.

The Committee on Oversight and Govemment Reform is the principal oversight committee in the House of Representatives and has broad oversight jurisdiction as set forth in House Rule X. An attachment to this letter provides additional information about testifying before the Committee.

If you have any questions regarding this letter, please contact Roger Sherman or David Leviss of the Committee staff at (202) 225-5051.

Sincerely,

Henry A. Waxman
Chairman

Enclosure
cc: Tom Davis
Ranking Minority Member

Countrywide’s Mozilo To Leave In Luxury
Andrew Farrell, Forbes – January 14, 2007

Angelo Mozilo made nearly $150 million selling Countrywide shares before they tanked. The mortgage lender’s chief executive can nearly double that windfall and also earn some luxurious perks if he leaves his post following the struggling company’s acquisition by Back of America.

Mozilo will reportedly receive up to $115 million in severance in cash and stock if he resigns or is fired. Mozilo’s future at the company he founded is in doubt after its sale.

On Friday, Bank of America confirmed it will buy Countrywide Financial for $4.1 billion. Bank of America Chief Executive Ken Lewis has said only that he would like Mozilo to stay at Countrywide until the acquisition closes. Then, “I would guess that he’ll want to go have some fun.”

Mozilo, the son of a Bronx butcher, would be able to have some fun in style thanks to some perks in his severance package. In addition to the huge payout, Mozilo can take free rides on the company jet and have his country-club bills paid for, according to a Friday report in the Los Angeles Times.

Economic Update

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Wholesale inflation rose at the highest rate in 26 years, 26%, which would seem to indicate that the Fed won’t cut rates, but they have to, or the market will implode, leaving nothing but a greasy stain.

The Fed auctioned off $30 billion in loans, and this time the interest rates were lower, 3.95% as versus the previous 4.65% and 4.67%.

The banks borrow this money, so that they can lend it out at higher interest, and make money on the spread. The interest rate has dropped because another fed cut is expected, and because the lenders are still retrenching, so they have fewer loans to make.

And Merrill-Lynch is selling another piece of itself in a bit to hold onto solvency, this time to Kuwait Investment Authority, a sovereign wealth fund.

And in real estate, San Diego County house prices are down 13.1% year over year, and the recovery in UK house prices is over, it turned out to be a dead cat bounce, as the UK house price slowdown continues.

Economics Update

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First off, the Baltic Dry Shipping Index is falling off a cliff:

It’s the shipping rates on the 24 busiest routes. On January 10, it dropped 4.6%, and it’s dropped 28% from its November 13 peak. It’s basically an index of shipping rates of bulk items, which in turn is a pretty good indicator of where the world economy is going.

It’s going down, and it also indicates that the world economy has not “decoupled” from the US economy.

Then we have Citibank announcing a $24 billion write-down, (doubtless with more to come) , and announcing around 20,000 job cuts. What’s more, the it appears that the government of China has suggested that it will prevent a multi billion dollar investment in Citi by the state-owned China Development Bank.

This indicates that China is getting twitchy about making US investments, which does not bode well for the dollar, which is currently at $1.4877:€1.0000, within about a penny of its all time low.

And then there is the fact that banks are unable to sell Chrysler financing, amounting to about $7 billion. It had originally been $10 billion, but they could not “syndicate” (sell) that debt toward the end of last year.

Wolfgang Münchau has an interesting analysis of the Credit Default Swap (CDS) markets, which go much farther and deeper than subprime, and appear to be in at least as much trouble. (A primer on CDS, which are the most prevalent form of derivative, here).

Münchau makes a point, and I’m not even sure he notices, when he says, “A truly awful scenario would be a long recession. The US did experience some longish recessions in the past, for example from November 1973 until March 1975, but there was no CDS market around at the time.”

That’s the point. This brave new world of complex financial instruments has created a tsunami which is now looming over modern financial markets.

We also have Robert Shiller, co-creater of the S&P/Case-Shiller Home Price index saying that falling house prices have gutted the value of Countrywide Financial, which Bank of America just purchased.

When he says, “I might have a lower valuation of Countrywide than Bank of America does,” he means, “Those idiots just threw money after bad.”

I said the same thing 3 days ago, but obviously, I’m an engineer, I’m not an economist, dammit*!

*I love it when I get to go all Doctor McCoy!!!.

Cleveland Sues Banks as “Public Nuisances”

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I do not think that this lawsuit against 21 lenders will succeed, but we know what my prediction record is.

I think that the judges will throw it out of court in the early stages, but if they don’t, and it goes before a jury, I think that it will be far more likely that they will prevail.

That being said, the idea that major banks and Wall Street firms are being called public nuisances, “The Cleveland suit, filed Thursday in Cuyahoga County Common Pleas Court under the state’s public nuisance law, asserts that the financial institutions created nuisances across broad swaths of Cleveland because their loans led to widespread abandonment of homes,” does represent an interesting change in attitude.

For the past 25 years, the rule for municipalities and states was to please Wall Street, and now these institutions are being view, accurately IMNSHO, as parasites and near-criminal enterprises.