Category: Real Estate

Economics Update

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First and most importantly, GDP increased at an annual rate of 0.6% in q4. Seeing as how prices are increasing at an annual rate of greater than 4%, I would call this a contraction in real dollar terms.

Also, Initial jobless claims rise 19,000 to 373,000.

Moody’s is looking at downgrading Fannie Mae. Right now, it’s B+, which may be fine for a grade, but not so good for a financial institution.

Moody’s is probably thinking that they at risk of having problems if there is something like a margin call, as Thornburg Mortgage Inc. currently is. It looks like they will take a $300 million hit.

We also have a q4 loss of $2.5 billionfor Freddie Mac This goes along with Fannie’s $3.6 billion loss that I reported a few days back.

And just to show you that it isn’t limited to real estate, the credit crunch is forcing the Pennsylvania student loan program will stop making loans, at least for now, because the credit crunch is making money too expensive.

Fannie and Freddie Near Deal to Clamp Down of Appraisal Fraud

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New York State Attorney General Andrew Cuomo and the GSEs (Fannie Mae and Freddie Mac) are near a deal on appraisal fraud and self dealing (see also here):

At its core, the deal would bar lending companies that sell loans to Fannie and Freddie from using preferred or internal appraisers who may be subject to pressure to overvalue properties. The deal would establish a “home valuation protection code” to set standards on compensation and independence issues, and it would create an institute with a separate board of directors to monitor complaints from consumers and appraisers, according to documents described to The Washington Post by a source not authorized to speak publicly about the issues.

If the agreement takes hold, Fannie and Freddie would no longer purchase mortgages from lenders who fail to abide by the standards, a powerful economic force that could influence the entire housing landscap

As Tanta of Caluclated Risk so eloquently puts it, “It appears that Fannie Mae has finished or nearly finished its review, and is about to ruin several very large aggregators’ and thousands of pissant brokers’ day with a new set of rules regarding how appraisals can be obtained and what affiliations between lender and appraiser are acceptable.”

Economics Update

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The dollar has flirted with crossing the $1.50:€1.00 for months, and not that it has crossed the barrier, it’s continuing to weaken to new lows, with it currently around $1.51:€1.00.

Of course, it doesn’t help that Alan Greenspan is suggesting that the Gulf states drop their pegs to the dollar. I guess that he’s shorting the dollar or something now that he is “retired”.

On the bright side, the falling dollars is attracting overseas investors to US real estate, as it is now cheaper to buy.

In California, we have the California association of realtors reporting that new home sales are down 29.8%, and median price is down 21.9%.

Make no mistake this is a blood bath, and the numbers would be worse if they corrected for home size. The housing market is collapsing from the bottom up.

It will get worse, Fannie Mae has posted a $3.6 billion q4 loss, and I would expect something similar from Freddie, and we are still very early in the collapse of the housing bubble.

We may very see the collapse of Fannie and Freddie in the next 3 or so years.

This may explain why new home sales nation wide are at a 13 year low and why Mortgage application volume is falling off a cliff.

It doesn’t help that mortgage rates are no longer following the Fed rates because of inflation fears.

As the big sh^%pile continues to collapse, we are starting to see the inevitable lawsuits, with HSH Nordbank deciding to file suit against UBS, alleging that, “UBS’s management of the portfolio has been in breach of its contractual obligations and fiduciary duties and that substitutions were made solely for the benefit of UBS”.

We’ll be seeing a lot more of this.

Testifying before Congress, Ben Bernanke is expressing concern about both inflation and recession, aka “stagflation”, though the Fed is still shoveling money out the door, with another $30 billion auction of cash for garbage.

In the world of more real world finance, where people make money by making things, durable goods orders fall 5.3% last month, but oil is down a bit after getting above $102 a barrel.

It’s under $100, for now, on expectation of a recession.

Bush and His Evil Minions™ Choose Fat Cat Bankers Over Home Owners

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The ‘Phants in the Senate are threatening a filibuster, and the white house is threatening a veto over the Senate’s bill modifying bankruptcy laws to allow a judge to modify the terms of a loan on a primary residence.

Today, you can do this on your yacht, or your vacation home, or your rental property, but not on your loan.

Allowing so-called “cram downs” will not fix the problem, but it will make it better, and it will land squarely on the shoulders of the lenders who were the worst actors in this debacle.

Economics Update

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The Consumer confidence index has dropped to 75, the lowest number since 2003, the expectations Index, which is on hop people see the future declined to 57.9, the lowest number since 1991.

In real estate, January foreclosures are up 57% from one year ago, the fall in house prices is accelerating, with the Case-Shiller home price index falling 9.1% year over year.

It appears that home improvement is stalling, with Home Depot having its first drop in sales ever. People don’t want to improve a depreciating asset.

Inflation (stagflation) is rearing its ugly head too, with Wholesale prices rising 1% for the month of January, and 7.4% in 2007.

In insurance, MBIA will stop writing policies for asset based securities for at least the next 6 months. Additionally, it is looking at spinning off its municipal bond business, and announced that it had eliminate its quarterly dividend.

In general investment news it appears that yet another complex obscure financial instrument will give the world heartburn, something called a “variable interest entity” (VIE). It appears to be another asset structured to keep sh&^ty investments off the balance sheets.

Economics Update

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It looks like the US dollar is trending downward on the expectation of further weakness in the US economy.

And in the late to the game category, business economists are finally predicting a recession.

This is not surprising, as Fed rate cuts are no longer effecting longer term rates, because people are expecting inflation to pick up, and do not wish to be repaid in devalued dollars.

It won’t help that bond insurer Ambac may be downgraded even if it manages to raise $3 billion in new capital.

The problem is that people are increasingly unable to sell their homes, as shown by a 23.4% year-over-year drop in existing home sales. That’s a collapse in the market.

So now, investors are lawyering up to go after corporate boards, on the theory that the guys on the boards are supposed to be professionals and to show a modicum of competence.

Pass the popcorn on this last one.

Economics Update

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In local finance, we have King County, Washington potentially losing all of a $207 investment, the county claims that they will “only” lose 83 million, the state says all of it.

This will be repeated, and given that the auction rate bond market has collapsed, and localities are fleeing that instrument, their ability to issue bonds will be significantly diminished.

Don’t expect any new money to spent on roads, schools, water, sewer, fire, or police for the next 5-10 years.

In real estate we should note that 8.8 million homeowners, or 10.3% of all home owner are under water. They owe more than they can sell their houses for.

Gas prices hit are way up, which is an ill wind for consumer spending, which counts for 70% of the US economy.

Analysts are warning of risks to Fannie Mae and Freddie Mac, which makes the decision to allow them to finance even larger mortgages appear even stupider.

Fitch Ratings is saying that life insurance companies may take an $8 billion dollar hit on subprime and alt-A real estate investments.

It also looks like we will be seeing downgrades on the monoline insurers within a week or so.

And in hedge funds, we have D.B. Zwirn & Co. seemingly on the path to shutting down. It has shuttered its Special Opportunities Fund, a $4 billion hedge fund. Once it unwinds this, and it may take a while, they have less than $1 billion under management.

We also have Clifford Asness’ AQR Capital Management showing that mathematics based strategies are not working:

Asness’ AQR Capital Management has notified investors that its Absolute Return Fund, long one of Wall Street’s most stellar performing quantitative hedge funds, lost 15 percent of its value through mid-February. The slide follows an 11.9 percent drop through the end of November.

Bloomberg reported Friday that AQR flagship hedge fund now manages $2.9 billion, down from $4 billion.

I think that its clear, and should have been clear after LTCM went belly up nearly a decade ago, that these model based hedge funds don’t work.

The models break down when you get significant swings.

Lenders Oppose Mortgage Bankruptcy Reform

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If I own a rental property, or a vacation home, and I declare chapter 11 bankruptcy, the courts can modify the terms, though not the principal, or the loan, but for my primary home, they cannot.

It does not make sense to me either, so I support the bills Emergency Home Ownership and Mortgage Equity Protection Act of 2007 and the Foreclosure Prevention Act of 2008, which allow courts to modify mortgage terms in bankruptcy.

They don’t go far enough, they only apply to the more exotic mortgages, and they should apply to all, particularly in terms of prepayment penalties and other fees.

The mortgage industry says it’s bad for consumers, because it will drive up interest rates.

The truth is that it makes the more exotic mortgages less attractive, but the old style fixed rate mortgages should be about the same.

Even if it did bump up rates, average mortgages payments would still stay the same, because people do not buy homes on price, but on monthly payments, and prices would adjust.

That’s what happens when one makes such a highly leveraged purchase.

Economics Update

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The European Commission is predicting higher inflation and slower growth for this year.

Because the European Central Bank has controlling inflation as its sole mission, as opposed to the Fed, which also has an obligation to maximize employment, I think that we will see no rate cuts from the ECB, and perhaps a rate hike, which means that the current, and any future rate cuts by the fed will increase downward pressure on the dollar.

In terms of the US economy, we have the index of leading indicators index falling for the 4th straight month, the Philadelphia Federal Reserve’s report on manufacturing activity fell sharply, to the lowest point in 6 years, and Philly Fed’s future general activity index, which looks forward about 6 months, fell to the lowest number since 1990.

On the brighter side, this has driven oil prices down, because a recession implies reduced demand for energy, to $97.31/bbl.

In real estate, we have Mark Zandi, chief economist and co-founder of Moody’s Economy.com, predicting that home prices will fall 20% from their peaks.

He’s an optomist. First, interest rates are going up, and second, you always get overshoot in a correction like this. I expect a 40%+ drop in real terms, though inflation will mask some of that.

We also have the spread between adjustable-rate and fixed-rate mortgages growing. This is an indication that lenders are expecting rates to go up in the relatively near future, and they don’t want to be locked into low return loans.

We are also seeing localities recognize that they are going to get hosed on bond issues because of the bond insurance crisis, paying higher rates on lower rated bonds.

Good Point on the Credit Collapse: Actions Taken are Bailing Out Banks, Not Helping Economy

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John Cassidy at Portfolio.com details what amounts to an ongoing and growing program of bailouts for the banking industry.

There is, of course, the Fed Auctions of cash where worthless and near worthless securities are being used as collateral for loans, but there is more.

The Federal Home Loan Bank system, which actually dates from the Herbert Hoover administration, has been shoveling cash out the door, with an implicit federal guarantee. It’s government chartered, like Fannie and Freddie, which have now had their lending limits increased.

Cassidy’s recommendation, that the Federal Government buy distressed security at steep discounts, would be a good one, except that any discount would likely still be too much. The assets are illiquid, which means that they have next to no value right now.

The only way that we are getting out of this is by inflating our way out of this.

A lot of 401(k) and IRA accounts are going to be a lot worse off, but the alternative will look like 1932.

Economics Update

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Well, let’s start off with real estate:

First, we have an article asking whether the Federal reserve is refilling the housing bubble. Normally this would not merit comment, but look at the link. Look at the author. Look at the title. It’s Lawrence Yun, chief economist for the National Association of Realtors, and it has the word “bubble” in the title.

When the NAR is calling it a bubble, it’s a bubble.

We also have reports that people are defaulting on subprime loans before they reset, which implies that these people so overbought their houses, that they can’t even afford the “teaser” rates.

We also have single family home starts dropping to a 17 year low, though there has been a pickup in condo and apartment construction (not sure how much is the former, and how much is the latter).

We also have Mortgage applications plummeting 22%, as rates rise in the face of the fed cuts, because no one trust to lend anymore.

The fed is “pushing on a string”.

Finally, we are starting to see Foreclosure tourism, with bus tours of foreclosed homes becoming a regular event in Florida.

It’s an attempt by some realtors and speculators to get the market moving again. Isn’t gonna happen.

In terms of more personal finance, we have an explosion of people tapping their 401(k) accounts for living expenses.

Yep, those private accounts to replace social security sound like such a good idea. As I’ve said before, it’s like eating your seed corn, which is what these folks are doing.

On a more general macroeconomic note, inflation is up, with the CPI rising 4.3% in 2007, and prices rising at a 5% annual rate in January.

On top of all this, the Federal Reserve has cut its forecast for economic growth.

Considering the fact that the official CPI understates inflation, we are probably closer to an 8% inflation rate (prices doubling every 9 years), so I’m calling stagflation, which seems a no brainer, even without oil hitting another record, with it peaking at trading at $101.32/bbl and closing at $100.74/bbl….No…wait….that’s two records.

In terms of the financial establishment recognizing that the problems are far deeper and broader than previously understood, we have Martin Wolf of the financial times saying that, “America’s economy risks mother of all meltdowns“, and we have Portfolio.com wondering if the basic model used to evaluate the complex instruments in the big sh$#pile, or more generally, the prices of options, the Black Scholes Pricing Model, is simply inaccurate, which would render their prices unknown. It’s literally look at the chicken entrails to figure out the prices time.

Basically, the model falls apart, and has always fallen apart:

Good theory. The glitch was discovered only after the fact: When a market is crashing and no one is willing to buy, it’s impossible to sell short. If too many investors are trying to unload stocks as a market falls, they create the very disaster they are seeking to avoid. Their desire to sell drives the market lower, triggering an even greater desire to sell and, ultimately, sending the market into a bottomless free fall. That’s what happened on October 19, 1987, when the sweet logic of Black-Scholes was shown to be irrelevant in the real world of crashes and panics. Even the biggest portfolio insurance firm, Leland O’Brien Rubinstein Associates (co-founded and run by the same finance professors who invented portfolio insurance), tried to sell as the market crashed and couldn’t.

This is what has happened with investment banks and leveraged loans, where they have been left holding the bag on $197 billion in loans to people like private equity buyout specialists that they cannot resell.

In the ever popular world of the bond insurers collapsing, we have Moody’s predicting a $7-$10 billion hit for banks as a result, though I would add at least one zero to that total.

As a result, a unit of private equity firm KKR cannot refinance, and has delayed repaying loans as a result.

Compounding this is the fact that the proposals to split the insurance companies into separate Municipal bond insurance and sh&^pile insurance is making it much more difficult for them to raise the capital they need to stay afloat.

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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First, it appears that the current credit crisis is now being recognized by some media outlets, such as the New York Times, as not being limited to subprime borrowers. Of course the story misses the fact that it’s not just mortgages, and the story that they use to illustrate the problem is a, “a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition”, who is the last person we should think of bailing out.

He understood the issue, and took the loan anyway.

As to the general, and ongoing, credit meltdown, we have yet another New York Times story, this leading off with Sailfish Capital Partners, a hedge fund that is being liquidated.

The pair, both fixed-income specialists, quickly raised $1 billion for their flagship multi-strategy fixed-income fund, according to investor documents. Assets grew steadily, reaching $1.2 billion by the end of 2005 and $1.5 billion by the end of 2006, when the fund returned more than 12 percent. In July, the fund sat atop almost $2 billion, and exhibited relatively low volatility — a key factor for institutional investors.

But July proved treacherous. As the credit markets seized up, Sailfish owned seemingly safe top-rated investments, including mortgage investments, that suddenly plummeted in value.

Illiquidity will get worse, and this is one of what will be many stories,

And then we have Warren Buffet offering to buy the good assets of the bond inurers and so give them a capital injection (see also Also here).

Basically, he wants to buy the good stuff for pennies, and leave the sh%$pile for the monoliners to deal for later. Buffet ain’t dumb, this is thinking vulture capitalism.

We are starting to see adulatory coverage of the (very boring, but generally safe)municipal bond market, though I wonder what happens to resale value of the bonds if the monoliners go belly up before Jimmy Warren Buffet gets his hands on those assets.

Finally, we have the federal budget deficit more than doubling, which means that we have to borrow even more foreign money and more downward pressure on the dollar.


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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Consumer confidence sinks lower the RBC Cash Index falls to its lowest level since it was created in 2002, and consumer borrowing tumbles, rising at an annual rate of 2.1%, the lowest rate since April.

On a “beat my own drum” note, it’s nice seeing a real economist warning that the stimulus package is going to damage Fannie Mae and Freddie Mack by increasing the loan limits, and hence exposure. I warned about this yesterday, and it’s nice to see a real economist agree.

In high finance, it looks like there will be significant writedowns on the $160 billion of “pier” loans out in finance land.

Basically, a “pier loan” is a bridge loan for things like a private equity transaction where the banks cannot sell the debt, and hence it’s a “bridge to nowhere”, or a “pier”.

The average price for the most actively traded U.S. loans fell to 88.37 cents on the dollar this week, from 91.14 cents last month, according to S&P’s LCD. Prices have fallen from 100, or face value, last June.

This means that no one is interested in buying the loans, so they have to discount.

Finally, look at these charts on The Financial Ninja, and be very, very afraid.