Category: Real Estate

Fannie and Freddie at Risk?

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Standard and Poors is warning that the GSEs are facing increasing risks as the housing crisis deepens, and so they might at some future time have to downgrade them.

Being the 2nd and 3rd largest borrowers in the world, they are firmly in the “too big to fail” camp, the regulators have reduced the reserve capital requirements for the GSEs (also here), and Congress making noise about increasing their lending limits*, I’m not particularly confident in Fannie Mae and Freddie Mac remaining particularly solvent.

*Shoot me now, I’m agreeing with some puke economist from the Heritage Foundation.

Economics Update

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Real estate is still trending worse. We have the New York Times writing about how the troubles have gone global.*

We also are now seeing discounts up to 60% on the last sale price in bank auctions on properties in South Florida.

And it won’t get better soon, because when pollsters ask about buying a home, respondents reply, “What??? buy a house now??? Are you out of your bloody mind???“.

Energy prices are surging, with oil closing at a new all time high, $111.76/bbl.

Also, it looks like Wachovia is hemorrhaging, and so is cutting dividends and planning to offer stock for much needed capital.

*As an aside, I’m not surprised that Ireland is in this select group. The “Celtic Tiger” has always seemed to me to be closer to Thailand and Indonesia than the rest of the EU with its prosperity being almost completely driven by low wages and real estate, and Spain is a close second on this. This is not to say that they will become 3rd world countries, but that they both may end up far closer to EU members like Poland, Slovakia, Hungary, and Croatia than they had previously imagined.†
†Mass flows of speculative capital always produce a nasty hangover.

Economics Update

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The average consumer is smarter than Alan Greenspan and the rest of the economic glitterati, because consumer sentiment dropped to a long time low (also here).

In energy, gasoline prices have hit another all time high, and oil prices seemed to have settled comfortably about $110/bbl.

That being said, it’s not just oil imports, inflation in non-energy imports in March surged 1.1%, with a year over year increase of 5.4%.

That 1.1% number is the largest jump ever recorded.

There is a smidgen of bright news, the Fed’s excrement for cash exchange program did not sell out this time, with only $33.95 billion of the $50 billion offered being taken.

In real estate, we have US banks killing the no down payment loan, which is long overdue. Even with a small amount of skin in the game, home borrowers tend to be much better risks.

Housing is tanking overseas too, with UK mortgage rates going up, despite BoE rate cuts, so they are pushing on a string there too.

But’s it’s not just us Anglo-Saxons, because Dutch home sales are tanking too, and let’s not talk about Spain.

Also, GE released earnings, and they sucked, which surprised the experts, but not me.

People are scared and not buying stuff. GE makes stuff. Any questions.

Delong is Wrong and Krugman is Right

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Brad Delong belives that a significant part of the housing bubble appreciation was due to a real lack of space, and thus he guesses that only about ½ of the appreciation will be lost, thinking that some of the appreciation is being driven by the , “location, location, location” factor.

Paul Krugman looks at the trajectories of rental and buying, and sees appreciating in housing but basically none in rentals, which would not be the case if there were actually a shortage of land in desirable locations.

Krugman is clearly right.

Economics Update

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Busy day in real estate, we have:

Of course with any of these situations, you will inevitably find the highly placed moron, and today’s is Morgan Stanley CEO John Mack, who is saying that he thinks that the credit crunch is, “in the final innings”. If you have money in Morgan, get it out now.

Why am I so certain about this? Because the Fed auctioned another $50 billion banks in their “crap for cash” program, which has now “auctioned” $310 billion to banks for their worthless mortgage paper.

If that doesn’t convince you, how about GMAC looking down the barrel of a ratings cut, which means that people who might want to buy a car will find it even more difficult to get a loan to do so.

Of course, Mack thinks that things are looking up because private equity firm TPG just put $7 billion into WaMu, which implies to him that private equity is on its way to a comeback.

Nope….Dead cat bounce. WaMu’s only virtue is that it’s better, and only a bit better, than Countrywide.

For an idea of how badly things are going, note that First Marblehead is at risk of imploding. Note that FM is a student-loan services provider. It should basically be impossible for them to lose money.

This is federally guaranteed, and cannot be discharged through bankruptcy, but given that their insurer, The Education Resources Institute Inc., just filed for bankruptcy, all bets are off.

Signs of the Apocalypse: The WaPo Editorial Board Gets One Right

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They label the Senate foreclosure bill a, “A Pro-Foreclosure Bill“:

We refer to a $7,000 tax credit (payable over two years) to anyone who purchases a foreclosed home within a year of the proposal’s enactment. Supposedly, this would help clear the nation’s swollen inventory of repossessed properties, thus propping up home prices more generally. Here’s the catch. For lenders as well as borrowers, foreclosure is an expensive hassle. If at all possible, most banks would rather avoid repossessing a house, which they must then try to resell. But, by making it cheaper to buy a foreclosed house than a comparable unforeclosed property, the tax credit makes it more feasible to sell one. The cost and hassle — for the lender — of foreclosure go down, and the benefits go up. Other things being equal, lenders would be that much more likely to foreclose — rather than to help homeowners stay in their houses on modified terms.

The record of the Washington Post editorial board lately has been so bad that I’ve come to wonder if Richard Nixon was innocent.

H/T Dean Baker

Economics Update

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In the world of pipe dreams, we have the EU calling for a coordinated response to the credit squeeze.

The Euro-Wimps just don’t get it. This is America. We don’t do joint action based on a deliberate approach to everyone’s long term best interest. We shoot first, and ask questions later, and when the dead guy we shot doesn’t answer, we water board him, and then we bail out the bad actors, like Bear Stearns.

In the ever entertaining world of the monoliners, Fitch has cut MBIA’s rating to AA from AAA, because they are under capitalized (broke).

The disgrace here is that it took so long, though you knew that it was coming when MBIA asked Fitch to stop rating it about 3 weeks ago.

In the no surprise category, bankruptcies jumped 30% over in march 2007 year over year.

And for those of you who think that commercial real estate will be uneffected by the crash, vacancies at malls have skyrocketed.

Economics Update

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Well, it looks like 80,000 jobs were lost in March, and the unemployment rate went up to 5.1%, see here, here, and here.

There was good news, at least by the standards of the hacktacular financual press, the ISM’s report on non-manufacturing businesses rose, from 49.3 to 49.6, when it was expected to be 48.5.

Note that while the headline on the story speaks of a rebound, it’s not. Any number under 50 is a contraction, so the contraction was slower than expected, but it was still a contraction.

Given these numbers it’s no surprise that the Federal Reserve is signaling more rate cuts.

It won’t work. We need to go Nordic on this problem and nationalize the insolvent institutions, for a time at least.

Give all this information, it should come as no surprise that we are getting reports of skyrocketing vacancies in commercial space, the stuff that all the “experts” said was not going to be a problem.

This is typical. Commercial space lags residential space.

It won’t help that Oil is back above $105/bbl.

It also looks like Delphi auto parts may be going under, Appaloosa Management LP is pulling out of a deal to invest 2.55 billion in the manufacturer.

This will leave GM on the hook for a lot, and they may have no parts for their cars.

Fannie Mae Tightens Guidelines Again

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Fannie Mae is tightening lending standards (here and here).

This follows regulators allowing the borrow and lend more extensively, in an attempt to bolster the housing market.

Upper management at FNM gets it. That the market is completely fscked, and if they don’t tighten up, they will get swamped.

Changes to their standards for buying loans:

  • Minimum credit score of 580.
  • It won’t buy, “Delinquent loans that have fallen 60 or more days past due in the last year”.
  • It won’t buy loans to borrowers who have been foreclosed on in the past 5 years (used to be 4 years).

Calculated risk has some more details, and there are some additional standards which appear directed towards dissuading people from walking away from properties where they are under water (aka jingle mail).

Economics Update

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Let’s see, we have Bernanke, testifying before the Congress’s Joint Economic Committee, saying that there is just the slightest possibility that the US Economy might possibly be slipping into a recession, which is Fed speak for, we are totally boned.

Not surprisingly, the US dollar tumbles, because recession=further rate cuts.

Truth be told, given the current nature of the credit markets, the Fed could lower interest rates to zero and it wouldn’t lower short term rates. They are pushing on a string, and people are unsure about the amount of risk, so rates won’t go down.

On quick numbers, we have new mortgage applications falling 29% (refi is way down too), oil prices rising, up to about $101.20/bbl, and gas prices at a record high, $3.287/gal.

On the good news side, ADP’s private report is showing an increase in private sector payrolls, though I would rever the reader to this article on underemployment, which points to growing numbers of people working part time jobs, a sign of employment weakness, for some context:

Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure [underemployment report] stood at 8.9% in February, up from 8.1% a year ago.

“We’ve clearly had a broad weakening in the labor market,” Hall said.

My perspective, and I am an mechanical engineer, which means that I value tangible goods in my world view, is that the fact that factory orders are still declining, -2.5% in January, and -1.3% in February, is a better indicator, though I also consider the fact that car sales tanked last month, including Toyota, significant too.

Of course, economists, and other such folks, tend to look at consumer spending, so the fact that Discover Financial Services reported that its consumer spending confidence index is down might be a bigger deal for them.

In real estate, we have Manhattan condo and Co-op sales collapsing. It appears that the market is now crushing, “location, location, location”.

And on the more surreal side of real estate, we are finding an epidemic of copper pipe theft from abandoned homes. The hed is a real eye catcher, “ Some homes worth less than their copper pipes“.

This makes the USA sound like it’s suffering from Baghdad level looting.

Senate Dems Cave on Bankruptcy Reforms on Mortgages

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It’s being sold as an agreement on a relief plan, but the Republicans killed bankruptcy changes. You know the ones that would allow a primary home to be treated the same way as commercial property or vacation homes.

This is the single best part of any potential reform, for the following reasons:

  • It makes the holder of the loan willing to negotiate in good faith about restructuring.
  • It penalizes the bad actors more than others.
  • It would help more people keep their homes than any other step.
  • It does not involve taxpayers bailing the mortgage companies out.

Of course, it means that the fat cats experience some of the pain that they created, so it’s not acceptable to the Republicans.

Limits to Compensation for Mortgage Brokers at Countrywide

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Ailing (and corrupt) mortgage giant Countrywide Financial has just placed a cap of 4% on Mortgage brokers.

Note that 4% is way too high, but it’s a start.

Basically, it stops incentivizing the most extreme Yield Spread Premiums (basically a “load” on the loan which largely goes to the broker) to the detriment of the borrower, the lender, and the rest of the economy.

The incentives in the current home mortgage environment is a morass of forces pushing lenders toward unsafe, immoral, and destructive loan products, and this is something that should be changed.

Economics Update

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First, let me complain, yet again, about the nature of financial reporting. They are neck deep in dung, but they continue to look for a pony.

Cases in pointL

The the Institute for Supply Management’s (ISM) manufacturing index rose to 48.6 from 48.3 in February, which while higher than the 47.5 anticipated is still a contraction. Any number below 50 is a contraction. The index is a derivative (the calculus type, not the financial type), with 50 being zero. 48.6 is still a trend down, and this should be the lede.

Then we have construction spending “falling less than expected“. Again, construction spending fell, and while the “consensus” was 0.9%, and it fell 0.3%, this isn’t news, unless you tell us who, or why the consensus was that number.

Grrrrr.

On the “economic news for the rest of us” front, we have predictions that 200,000 jobs will be eliminated in the banking sector, and the number of food stamp recipients has gone through the roof.

BTW, if you are wondering if the real estate collapse is just a locak phemenon, the answer is no. We are now seeing the beginnings of a real estate collapse in china, and the housing crunch has now moved to the Hamptons.

Shanghai and the Hamptons. When you look at the range covered, there ain’t much left outside of this.

In the world of currency, it appears that the dollar has had the biggest quarterly loss since Q4 2004. The ECB is concerned with inflation, and quite honestly is not experiencing the same sort of meltdown that the US is, so it’s holding rates steady, which strengthens the Euro.

Finally, we have banks writing down billions of dollars (here, and here) in various bad investments. The markets rewarded them today, but I think that this will get much worse before it gets any better.

Economics Update

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South Korea’s National Pension Service will no longer invest in US Treasuries. They are saying that the rates of return are too low.

Note that this is the 5th largest pension fund in the world, so this is a decision with consequences.

I have noted on a number of occasions that the Fed would find itself torn between keeping the economy afloat, and keeping the dollar strong, and this is the first leak in the dam.

This does not necessarily mean that they won’t be investing in the US though. While the rates treasuries are low, other interest rates are rising, with the London interbank offered rate (LIBOR) up about 1%. Mortgage rates are also not responding to Fed Rate cuts.

Search for the term “pushing on a string” in my archives. It’s a quote from Keynes.

The weekly jobless claims numbers are less than were expected, which is good news, but there is a lot of noise week to week, so I’m more concerned about Commerce Department’s final GDP numbers, which show the inflation adjusted growth of the GDP being 0.6% annually.

Additionally, investors initial reaction was to flee long term treasuries following the unemployment numbers, which implies an expectation of increasing inflation.

In terms of the market recovering trust, not so much, with asset backed commercial paper, short term asset backed debt, falling. There are no buyers for it.

Finally, Merrill will write down $4.5 billion on CDOs (collateralized debt obligations), and post a loss in Q1.

Economics Update

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The first two bits are easy to understand, New home sales are the lowest since 1995, which matches with the horrid existing home sales data that I posted yeaterday, and Factory orders fell off a cliff in February.

First, things are simply getting even weirder in the never-dull world of monoliner insurers, with the Federal Home Loan Banking looking at offering bond insurance for municipal infrastructure project bonds.

It’s a dull, but very profitable racket, because there has been some sort of freaky deal between the monoliners and the rating agencies for years that has them offering artificially low ratings to muni bonds, which pretty much forces said governmental agencies to buy bond insurance.

If it works, it kills the monoliners, because this business is the only thing keeping them afloat on a sea of collateralized debt obligations (CDO).

Additionally, we have monoliner insurer FGIC notifying regulators that due to some “dodgy” dept that it is ensuring, that it is insolvent under New York State law, “FGIC in notes to its consolidated financial statements said it plans to submit a plan to the New York superintendent to reduce its risk. FGIC also said it has voluntarily ceased writing new business to preserve capital.”

This means that, theoretically at least, regulators could seize the FGIC, though they are in litigation with the borrower of the aforementioned debt, and they are filing a recovery plan.