Tell me that Bloomberg.com: the bubble is bottoming out.
Morgan Stanley real estate bought a stake in 11,000 properties at a 60% discount.
Category: Housing Crash
Bank of America to Buy Countrywide
Their press release is here.
Bank of America Corporation today announced a definitive agreement to purchase Countrywide Financial Corp. in an all-stock transaction worth approximately $4 billion.
Basically, BoA just bought Countrywide for some magic beans. It’s all funny money, unless, of course, if you are a shareholder, in which case, your stake in BoA is diminished.
Still a losing proposition, I think, particularly since the insolvent Countrywide will place downward pressure on the BoA stock price.
Holy Crap!!! I Got a Prediction Right!!!!
On 17 November, I wrote about Bank of America buying $$2 billion worth of preferred Countrywide stock yielding 7.3%, and that can be converted into common stock at $18 per share (a 21% discount of the then price). It was supposed to be master stroke of vulture capitalism, giving away the gold the golden goose for some magic beans.
At the time, I said, “Honestly, I think that they will end up losing money on this.“
It appears that I was right (happy dance), and we are now seeing the articles wondering how Can Bank of America Can Salvage Its Countrywide Stake. They didn’t buy the golden goose, they bought the intestinal gas from the beans (It’s trading for $8.72), and now everyone is wondering how BoA will minimize its hurt.
These guys are paid millions of dollars to get stuff like this right, and they didn’t, and I did.
It doesn’t take a genius to figure this stuff out.
OH MY GOD
Rich Toscano has a post on December home prices in the San Diego Area, and if this does not scare you, are dead:
For the month of December, the size-adjusted median price was down 4.6% for single family homes, 5.8% for condos and 5.0% overall. That’s right, for the month. The graph below shows the declines from the peak.
FWIW, the housing market is collapsing from the bottom up, so the houses not selling are cheaper, and the already bad figures become even worse when corrected for square footage.
Economic Update
Merrill Lynch saying that a recession in the US “has arrived”, to which I say, “what took you so long”?
Countrywide Financialis hit by rumors of bankruptcy, and they have admitted that they fabricated documents in a foreclosure suit., so their stock is tanking.
Morgan Stanley has downgraded Ambac Financial and MBIA, two of the largest bond insurers because of concerns about mounting losses.
New home contracts fall, the National Association of Realtors’ has upped their estimate for year over year losses, and KB Home’s losses shoot skyward.
Baltimore City is Suing Wells Fargo Over Subprime Loans
The City of Baltimore is suing Wells Fargo, claiming that, “contending that its lending practices discriminated against black borrowers and led to a wave of foreclosures that has reduced city tax revenues and increased its costs.”
I expect this to be the first of many such suits from local governments taking it on the chin from foreclosures.
Bear Stearns CEO to Step Down
Jimmy Cayne is to resign.
Bear Stearns is circling the drain, and I stand by my prediction, buyout or closure by August 2008.
Forclosures Skyrocketing in Boston Suburbs
As the picture shows, it’s not just poor people in poor neighborhoods who are getting hammered, and this pattern is being repeated nation wide.
Home Prices Sliding
This Wall Street Journal article makes a slight increase in home salse its lead, but it misses the bigger picture:
The median price of a previously owned home fell 3.3% to $210,200 in November from $217,300 in November 2006.
Sales up slightly, but prices down…both an artifact of potential house sellers being willing to cut prices. There are a lot of people out there who are waiting to sell homes, and believe that this downturn will be short term, and as more and more people see the falling prices as a longer term trend, they will move to sell sooner.
I’ve never seen a real home price drop that (not month to month, but a real one) that lasted less than 4-5 years. This one has even farther to go.
Economic Update, Housing Crash, Exotic Financial Instruments
In real estate, we have new home sales at a 12 year low, and we have the phenomenon returning of people just walking out on their homes. The pertinent quote is, “Lewis’ comments came as a new expression – “jingle mail” – referring to the growing trend where Americans mail the keys to their homes to the lenders before vacating, entered the US lexicon.”
With all the news, the financial press is finally noticing that maybe, just maybe, those predictions of a quick rebound are a bunch of bullsh@$.
All in all, this is not surprising. News gathering is paid for by ad revenue, sales and subscriptions really only pay for ink and paper, not the words and pictures made with the ink and paper. Given the huge role that real estate pays in ad revenues, it’s unavoidable that the news media, notwithstanding the “Chinese Walls” will be the biggest boosters of real estate this side of Remax.
And in the department of the blindingly obvious, the Journal has an article saying that thecomplex financial instruments have magnified the credit crunch.
Well, duh. As much as people want to talk about innovation and the free market, much of that innovation has a seamy side.
The first man to rob a train was an innovator, and in financial markets we have a long (over 200 years just in the US) tradition of both fraud, and complex activities to benefit one entities, and transfer the downside of these activities to another.
At some point, society has to say that certain activities, like dope dealing and unsafe financial practices, are simply too damaging to society and they must be regulated.
1000 Words on Economics
Economic update
Nouriel Roubini sees the following signs of an upcoming recession (I consider them to be signs of a current recession, but I’m not an economist):
- Initial unemployment claims at 2001 recession level.
- Durable and capital goods orders falling.
- Consumer confidence down.
- Oil prices closer to $100 than to $90/bbl.
- Retail sales falling after accounting for inflation.
- Residential real estate going down, and accellerating.
- Commercial real estate starting down (more below).
- Various leading indicators falling, as are corporate earnings.
- Credit markets not only staying seized up, but getting even more seized up. (Dr. Roubins bullet points this out into about 5-7 items)
- Unstable world environment.
In terms of more specific news, we have mortgage applications falling off a cliff, despite a rate cut, Fitch saying that it may downgrade residential mortgage backed securities (RMBS) because the insurers for these bonds are basically insolvent, Goldman-Sachs is predicting that Citigroup may be forced to cut its divident (implying that there is more bad news to come), the Chinese Director of the State Administration of Foreign Exchange saying that the US should not cut rates any more because it will “hammer” the dollar, there is increasing evidence that commercial real estate is starting to tank too (It typically lags residential real estate by about ½ year), and residential real estate prices have fall by 6.7% year over year (and at about an 11.7% rate for the past quarter).
Mainstraem Journalism Finally Recognizes that “Incentives” Distort Reported Home Price
The fact that “sales incentives” are really stealth price cuts has has finally been noticed by the Wall Street Journal.
Buyers, sellers and other market participants typically monitor fluctuating home values through sale records that legally have to be listed with county clerks. But incentives offered to buyers — ranging from free cars or furniture to cash rebates — are making those prices less reliable as a sign of what buyers actually paid, netting out the giveaways. And that may be misleading lenders and people shopping for homes, some real-estate lawyers and appraisers warn.
Well, duh.
That is the purpose of these incentives, along with artificially inflating realtor’s’ commissions. (If the price were cut instead, the realtors would typically take a hit on their commission of over $1000)
Banks Starting to Worry About “Jingle Mail”
Jingle Mail for those of you who don’t know is what banks get when mortgage holders send the keys back.
Calculated Risk has an interesting post on the subject. Basically, there are a lot of people who are underwater on their mortgages because of home price drops, and even though they can still pay, renting is cheaper, and people might start to walk away from their homes and mortgages.
The folks at CR are estimating that , “somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes are worth.”.
I think that the number will be greater, BTW.
It’s the Fault of Clinton’s Penis
Yep, that’s what the Wall Street Journal says (subscription required):
The joint housing and mortgage-market crisis once again reminds us that all financial implosions stem from the same cause: borrowing short and lending long without enough equity to weather periodic storms in the gap between.
But this bubble was different. Besides being fueled by housing purchases and repackaged loans, each with inadequate equity — doubling down with other people’s money — at the end of the capital-gains rainbow was the right to take up to $500,000 of profit, tax free.
Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search …
Fed Shrugged as Subprime Crisis Spread
The hed above is straight from The New York Times article about how the Federal Reserve under Alan “Bubbles” Greenspan ignored the warning signs of the real estate bubble.
It’s a clever turn of phrase. Greenspan was an acolyte of Rand’s and what was likely his first publication in the Times was his defense of Atlas Shrugged against a brutal review of the work. He argued that it was actually a “celebration of life and happiness”.
While the authors of the article rarely write the headline, it is clearly an attempt to cast the failures of the Fed to deal with the problems in the credit markets generally, and the housing market specifically as a result of Greenspan’s Randroid ideas.
It clearly shows that Greenspan was never the genius that he was viewed as in, say, 2000.
To my mind, the high opinion that many people had of him was an artifact of low oil prices and the cooking of the books with regard to inflation figures.
Read the article. It’s a hoot.
Federal Reserve to Tighten Lending Regulations
This good, but I need to say three words: barn door cow.
The high points:
- Prohibit giving people unaffordable loans.
- Restrict use of “liar” loans.
- Prohibit or limit prepayment penalties.
- Curb or better disclose broker incentives.
- Require or encourage escrowing of taxes and insurance.
- Prohibit coercion of appraisers.
- Prohibit loan servicers from engaging in unfair practices.
- Require better disclosure overall.
Of course, half of these should be done already by anyone who wants to operate for more than a few years and then leave town ahead of the police.
Your Update on the Economy
Let’s see, the Fed cut rates by 25 basis points, but the market wanted 50, so the Dow dropped 294.26 points.
The WSJ is saying that the U.S. mortgage crisis rivals the S&L meltdown.
While it’s nice that they take it seriously, the US Credit/Insolvency crisis is already worse than the S&L meltdown. Still, it’s a good read.
Own to rent cost ratio, the real estate equivalent of P/E:
The discount for the mortgage packages:
And while we are at it, how about MBIA, the world’s largest bond insurer, getting $1B infusion from private equity firm?
This is not about someone finding a deal. It’s about a private equity firm keeping MBIA alive while they offload their piece of the big sh&%pile on some other idiot.
Also, Washington Mutual is closing offices and laying off more than 3000 employees, including a friend of mine, because of mortgage and credit problems.
Also, Freddie Mac is looking at $5.5-$12 billion in additional losses. That’s in addition to the $4.5 billion that it’s already lost this year.
At the rate this is going, it will be raining Katz and Hutton on Wall Street.
Watch out for jumping finance professionals.
Krugman on the Bush/Paulson Mortgage Rate Freeze
Once again, he nails it. The Bush/Paulson program isnot about fixing the problem, it’s about making sure that no one else does, or as Dr. Krugman puts it:
In particular, the Paulson plan is probably an attempt to take the wind out of Barney Frank’s sails. Mr. Frank, the Democratic chairman of the House Financial Services Committee, has sponsored legislation that would give judges in bankruptcy cases the ability to rewrite mortgage loan terms. But “Bankers Hope Bush Subprime Plan Will Scuttle House Bill,” as a headline in CongressDaily put it.
As it currently stands, a bankruptcy judge cannot rewrite the terms of a mortgage, but Frank’s legislation would allow that.
He makes a compelling case that this is about protectinb banks and bond holders, so go read his OP/ED
Construction Loans Heading the Way of Subprime Loans
This is not good:
Like Subprime Mortgages, Some Construction Loans Are Delinquent
Like Subprime Mortgages, Some Construction Loans Are Delinquent
By FLOYD NORRISBANKS across the United States, particularly the smaller ones, have become dependent on construction lending just as that area of the economy is weakening and the number of bad loans is growing.
Figures compiled by the Federal Deposit Insurance Corporation and released last week show that both midsize and small banks had construction loans outstanding that were greater than their total capital. A decade ago, such loans were equal to only a third of capital for those banks.
For most of this decade, that was a good strategy. Construction loans proved to be very profitable, particularly for smaller banks as competition from larger banks and securities markets eroded their position in areas like mortgage lending and credit card issuance.
Now, however, more than 3 percent of all construction loans are classified as being nonperforming, or have borrowers that are behind on their payments. That is the highest proportion in a decade.
…
The smaller banks have eschewed many of the riskier practices of the larger national operations, but it looks like they are going to get bitten by the turndown too.