Effect of subprime mortgage collapse / credit crunch / stockmarket decline [Archive]

KipsBay

August 2nd, 2007, 03:12 PM

Subprime collapse is causing tighter liquidity across the board and is already having systemic impact. Tighter liquidity is now hurting private equity funds from raising debt to purchase public companies. With fewer public companies to go private in this new paradigm, the stock market rally has to slow unless foreigners buy stock on the benefit of weaker US$. The "Dow" rally from 10,000 to 14,000 has been helped by private equity funds buying public companies and removing the total supply of public equity shares (albeit a lot of companies were also buying back their own stock too).

So yes MikeW, I agree, the Wall Street Bonus Bonanza, could take a hit, especially since Wall Street has not diversified as much as London has, and cater as much to International Clients as it should. Still, tighter bonuses may likely impact 2nd home purchases in the Hamptons and elsewhere first before hitting NYC RE. More likely, a potential Wall Street Bonus impact may need another year to play out before impacting Wall Street bonuses significantly - 2007 bonus payments were a banner year so a setback to 2008 probably still means quite hefty bonus payments. Since so far the subprime impact has been limited to a handful of hedge funds (who are reporting positions monthly so maybe more HF), Californian Subprime players, and Bear Stearns (and arguably Merrill). For now, the others are surviving the gathering storm, like HSBC, by re-negotiating with individuals and giving them better terms in order to continue to make payments.

However, a caveat for Manhattan Real Estate, is that with the US Dollar so weak, I think condo marketing to International Buyers will continue at a brisk pace, but probably not enough to offset potentially continued liquidity crunch on Wall Street should the Subbrime problem not diminish in 2008. For now I don't think liquidity crunch will be a great factor on individuals specifically seeking RE in Manhattan, although there should be more paperwork and inspection of credit worthiness causing some closing delays.

By the way, Q3 2007 has proportiontely more than half of this year's subprime ARMs that have to be reset, thus the greatest potential for deliquencies this year. That said, we will know this October whether Subprime blowup has not yet been exhausted or whether it is in fact has the potential to accelerate. If the FED thinks there are greater systemic linkages from Hedge Fund derivative leveraging losses to Investment Bank instability, then I imagine the FED will cut rates before the end of the year as well, to soften the damage. On the other hand, with the liquidity crunch and higher oil inputs, our economic outlook for 2008/2009 is really worrisome. [Noting that Q2 GDP did look great, but not sure if it had more to do with inventories than actual growth].

KipsBay

August 3rd, 2007, 01:18 AM

CREDIT MARKETS

Credit Chill Freezes Leveraged Deals
By VICTORIA HOWLEY, KATE HAYWOOD and MARIETTA CAUCHI
August 3, 2007; Page C2
LONDON -- The big chill gripping global credit markets has caused 46 leveraged financing deals around the world to be pulled since June 22, representing more than $60 billion in funding that companies had planned for mergers and acquisitions.
The number of deals pulled last year: zero.
The credit squeeze has slowed to a trickle the flood of debt financing that has driven the buyout boom for the past couple of years. None of the 46 pulled financings have led to the cancellation of takeovers. But with banks saddled with billions of dollars of debt they can't sell to investors, it could make it harder for other deals to get initial financing from banks.
Already, some companies that had put themselves on the auction block are shelving sale plans.
"The gap between [financing] deals -- which were doable in June and those which are doable now -- has widened, and the only way right now the gap can be bridged is by valuations coming down, greater focus on operational improvements, or sponsors accepting lower returns," says Simon Parry-Wingfield, head of European leveraged-and-acquisition finance at Morgan Stanley in London.
Banks have been left holding debt for about $400 billion in uncompleted management buyouts and leveraged buyouts around the world that they had planned to sell to investors, according to data compiled by Baring Asset Management, which also tallied the total number of pulled deals.
In addition to the $60 billion of financings that have been postponed, this total includes those deals that banks have underwritten but haven't yet tried to sell as loans and bonds to investors.
By comparison, banks last year sold some $4 trillion of loans and more than $837 billion of bonds from high-grade and speculative-grade companies globally, according to data provider Dealogic.
For those bonds and loans to be sold, companies likely will have to accept higher borrowing costs. That is most likely to affect private-equity firms, which rely largely on leveraged finance. Corporate buyers are less affected because they can finance their acquisitions through cash or the sale of new shares, as well as debt.
Problems with U.S. subprime mortgages have pushed up yields on corporate debt in recent weeks. But bankers, ever the optimists, say the funding drought is unlikely to halt the five-year boom in mergers and acquisitions.
While more-difficult credit markets may affect the pace of deals and the average debt-to-equity ratio that lenders will accept, it won't completely put the kibosh on deal making, bankers say. But buyout firms must be willing to pay more to raise cash and accept lower leverage to stay in the game.

--Deborah Lynn Blumberg

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

KipsBay

August 3rd, 2007, 01:36 AM

Subprime Detectives Search
In Dark for Next Victim
Wall Street Can Bury
Mistakes in Fine Print
By DAVID REILLY and KAREN RICHARDSON
August 2, 2007; Page C1
Shoot first. That is what investors have been doing to financial stocks lately.
And they have some good reasons. The crisis in the subprime-mortgage market, for instance, has led to the collapse of several hedge funds, including some run by Bear Stearns Cos. At the same time, stalled corporate-bond deals and the collapse of hedge-fund Sowood Capital Management show cracks widening fast in the credit markets.
But investors in banks and brokerage houses also have been spooked by what they can't see. Namely, potential losses that many fear have been hidden in the books of financial firms, or stuffed in off-balance-sheet vehicles.
That has made it difficult for investors to gauge exactly who has lost money on subprime wagers and how much has gone up in smoke.
The uncertainty has hit stocks of financial houses that so far have said they don't have any major subprime problems. Deutsche Bank AG was one of yesterday's casualties. The German bank reported upbeat profit and said it wasn't exposed to the subprime crisis, but investors drove its stock down more than 2% on the Frankfurt stock exchange. Merrill Lynch & Co. has fallen about 22% since the start of the year, Citigroup Inc. is off 16% since January, and Lehman Brothers Holdings Inc. is down about 22%.
The mystery of "where are the losses?" has confounded hedge funds searching for opportunities to bet against banks whose day of reckoning has yet to come.
"We've been looking for financials that show losses from these securities on their books, and they've been very difficult to find,"' says Keith Long, president of Otter Creek Management, a hedge fund in Palm Beach, Fla., with $150 million in assets. "It's very opaque."
Investors have long complained about the lack of transparency when it comes to huge financial firms, whose balance sheets are so big that they can easily mask multimillion-dollar gains or losses. Analysts and investors currently cite several potential factors that could help hide subprime wounds.
Corporate executives and fund managers may still be relying on inflated values for mortgage-related securities. The widespread use of off-balance-sheet vehicles by banks and other financial institutions may also enable them to shift losses elsewhere. And a menu of choices offered to companies by accounting rules allows management to decide whether to recognize certain losses or push bad news into the future.
Some coming accounting-rule changes may help investors get a clearer picture. But those likely won't offer help for another year. In the meantime, markets are going to have to keep guessing about where losses are and how bad they could be.
While serious problems have yet to emerge for many larger financial players, it is "likely that institutions have large embedded losses" that are so far being hidden, says Josh Rosner, managing director of Graham Fisher & Co., an independent research firm.
Many securities that have taken a bath mightn't be showing up as a result of the use of "false marks," Mr. Rosner adds. In Wall Street parlance, a mark is the current market price of a security. Companies valuing their holdings say they are marking them to market. It is tough to get an accurate value, or mark, for some securities, such as those issued by investment vehicles known as collateralized debt obligations.
These vehicles pool various debt instruments, in many case mortgage-backed securities underpinned by subprime loans, and then sell slices that vary in terms of the risk of default.
There isn't an active market for many CDOs, and they don't have observable prices. Instead, to value such securities, companies and investment funds often rely on quotes from dealers, which may be unrealistic, out of date or based on their own internal investment models.
That often results in what is called "marking to model," a practice that can allow a firm to take an unrealistically optimistic view that overlooks potential losses. Some firms engage in "very aggressive marking," said Otter Creek's Mr. Long. "Until people are forced to liquidate because of redemptions, the marks will hold up."
A looming accounting-rule change might help, though it won't formally kick in until companies file financial results for 2008. The new rule requires companies and auditors to determine how much a security would be worth if it were sold to an unrelated third party in an arms-length transaction.
That would require a company to think about market risk, which could result in a discount being applied to a security's value when times are tough. It also may force companies to look beyond a dealer "quote" and consider what actually would be a market-clearing price for a security. During times of market stress, there can be a wide difference between a quote and a clearing price.
The new accounting rule won't radically change the way companies price hard-to-value securities, but it will "require a more realistic way of choosing value, and the auditors will have to enforce that," says Edward Ketz, an accounting professor at Pennsylvania State University. A potentially bigger plus is that the rule will require beefed-up disclosures from companies as to how they are valuing different types of instruments, Prof. Ketz says.
Of course, this mightn't help if a bank has sold risky securities into off-balance-sheet vehicles. In theory, investors shouldn't have to worry once such a sale occurs. But in practice, banks can still bear some risk associated with them.
Another way companies and banks might hide losses on securities backed by risky mortgages is to classify them for accounting purposes as being "held to maturity." This effectively precludes a company or bank from selling the security, but also means that it doesn't have to mark the security to market on its books.
Instead, the security stays on the books at its historical cost. Investors won't know if companies tried this maneuver until they file annual results for 2007, in which case they would have to disclose the amount of securities classified this way during the year, Prof. Ketz says.

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

KipsBay

August 3rd, 2007, 01:43 AM

August 3, 2007
Mortgage Lender Says It Will Close

By ERIC DASH
American Home Mortgage Investment, the troubled mortgage lender based in Melville, N.Y., will close today, making it the latest company to fail this year as loans made to home buyers, some even with solid credit histories, go bad.
In a news release issued last night, American Home Mortgage said that that it would lay off all but 750 of its 7,000 employees “in light of liquidity issues resulting from disruptions” in the secondary mortgage market.
“Conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative,” Michael Strauss, the chief executive of American Home Mortgage said in a statement.
The company said it was shutting down all but its thrift and servicing businesses “to preserve the value of its remaining assets.”
On its Web site last night, the company said it was no longer taking any loan applications.
Calls to A.H.M. offices and e-mail messages were not returned last night.
While the problems facing A.H.M. were widely known, the speed of the company’s unraveling came as a surprise.
Last Friday, the company halted its quarterly dividend payment in a last-ditch effort to come up with capital. Several big investment banks issued margin calls on the debt that the company used to buy mortgage-backed securities, which included its loans and those made by other lenders, and it said it was unable to finance mortgages.
“The disruption in the credit markets in the past few weeks has been unprecedented in the company’s experience and has caused major write-downs of its loan and security portfolios,” A.H.M. said in securities filings. This “consequently has caused significant margin calls with respect to its credit facilities,” the filing said.
Reports of A.H.M.’s plans to shut down were first reported on the Web site for Newsday.
A.H.M. is the latest home lender to fall this year and comes as other companies in the mortgage business are sounding alarms.
Yesterday, Accredited Home Lenders Holding, a San Diego-based subprime mortgage company being acquired by Lone Star Funds, said that its own sale was in jeopardy and that bankruptcy was possible. Its shares lost more than a third of their value.
“Several of our competitors have recently stopped originating loans or sought protection under bankruptcy laws,” Accredited Home Lenders said in public filings. “We may suffer a similar fate.”
Meanwhile, Michael Perry, the chief executive of IndyMac Bancorp, another mortgage company, told employees it was making “very major changes” to its lending standards in what he suggested would be a prolonged disruption in the secondary mortgage markets. Unlike previous ones that lasted few weeks or so, IndyMac has “to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct,” he wrote.
But the end of American Home came abruptly. Until recently, it was one of the fastest-growing and largest mortgage companies in the country. It specialized in adjustable-rate mortgages that in the first few years required borrowers to pay the interest or a minimum payment that was even smaller than that. It catered to homeowners with high credit scores and had an extensive network of retail branches, mortgage brokers and correspondent banks.
California, Florida, Illinois, Virginia and New York accounted for 46 percent of the loans American Home Mortgage held for investment at the end of March. A third of the mortgages were pay-option loans that allowed borrowers to make less than the interest payment on the loan by adding the deferred payments to the principal amount of the loan.
At the start of the year, A.H.M. seemed to defy the problems that were plaguing its industry. In the first three months, the company made $16.7 billion in home loans, up 27.2 percent from the same period in 2006.
And as recently as late June, the company said it expected to pay a dividend even though it would lose money in the second quarter because of rising delinquencies on its home loans and demands by investors that it buy back defaulted mortgages.
Those loans were popular with affluent borrowers and speculators during the housing boom, when rising home prices made them seem safe. Now, however, as home prices fall, defaults are rising.
Copyright 2007 The New York Times Company

KipsBay

August 3rd, 2007, 02:06 AM

August 3, 2007
Insider
Hedge Funds Are Not Profiting From Market’s Current Volatility

By JENNY ANDERSON
WARREN E. BUFFETT once said when the tide goes out, you find out who is naked. There is suddenly a lot of skin showing on Wall Street.
In recent years, assets have flooded into private equity funds and hedge funds, mostly from institutional players like pension funds, endowments and foundations, seeking good returns with as little risk as possible. Last year alone, more than $126 billion of new money went into hedge funds, the most in any year on record. Since January, Dealogic estimates that $719 billion in buyouts, many by private equity, have been announced globally, also a record.
But now that most markets have gone haywire, it is time to take stock of what hedge funds and private equity firms are wearing.
Hedge funds, arguably, should be on a tear. Volatility is back; the wild swings in the market mean more opportunities to make money. As markets have plummeted, hedge funds can short stock (make money on falling prices). These markets should be their playground.
And for some, it has been. Those who found ways to bet against the subprime mortgage sector have watched that bet mint money. The double leverage merger arbitrage fund of Paulson & Company, for example, is up 22.6 percent for July and 91 percent for the year. Paulson’s one-and-a-half-times leveraged event arbitrage fund is up 31.1 percent for July and 98.3 percent for the year. MKP Credit, another fund focused on the mortgage market, is up 7.3 percent for July and 22.3 percent for the year, according to an investor.
But in talking to a wide range of hedge fund investors, it is clear that a number of hedge funds had a bad month. The superstar trader James Pallota, who runs the Tudor Investment Raptor Funds, is down 9 percent for the month and 3 percent for the year. Caxton, run by Bruce Kovner, is down 3 percent for the month but remains up for the year (both Mr. Kovner and Mr. Pallota have extraordinary long-term records).
On Monday, Sowood Capital, a $3 billion fund with $15 billion worth of positions run by a pedigreed manager from Harvard’s endowment, announced it would shutter its funds seemingly overnight, leaving Harvard’s endowment with a $350 million loss. Many are expecting negative results to far outweigh positive ones as all hedge funds report July results in the next few weeks.
Private equity firms would seem to be in even worse shape. The problems in private equity are well known. The Blackstone Group, which went public at $35, is currently trading around $25. A rival, Kohlberg, Kravis & Roberts, filed to go public but many question whether that will happen any time soon.
The problem is that the debt market, which financed a parade of deals with cheap debt, has shut down. The funds have huge amounts of capital to spend but no money to borrow to do the deals. The deals they have done, and are doing, are hard to hedge.
So hedge fund titans can be glad they are not private equity moguls, right? Wrong.
Conversations with investors over the last few days suggest they are on pins and needles. Two Bear Stearns hedge funds invested in subprime blew up, a third Bear fund with very little subprime exposure had to halt redemptions and Sowood went so long almost overnight. Many stocks with significant hedge fund ownership — Sears, Wendy’s, WCI — were pummeled in July.
Nervous investors are awaiting monthly numbers, which most hedge funds provide. If the investors want out, and they have fulfilled any requirement to keep the money in the fund for a certain amount of time, they can pull their capital. Too many redemptions can force funds to sell into a bad market, resulting in worse losses. In other words, the investors can be as much the problem as the markets.
The benefit to being a private equity fund right now is that private equity investors are not clamoring for month-end numbers and demanding to know what the fund will do differently to turn around performance. The funds are not stuck selling into a falling market, or with weird illiquid credit instruments with no prices. They do not have to mark their positions the way hedge funds do, which allows them breathing room. The banks are the ones stuck with the loans and as the market falls, the private equity funds’ targets become cheaper.
The leverage they have put on companies will probably start to become a problem. But portfolios are designed to weather a few disasters.
All of which brings about the ultimate paradox, which is the very bizarre logic of both private equity funds and hedge funds racing to go public. Clearly, the markets can be difficult for everyone. But it is tougher on those who deliver monthly numbers and who manage investors with an every-month mentality. This is inevitably what you get with public markets: short-termism.
Certainly the folks going public like Blackstone and Kohlberg, Kravis are selling only small amounts of their company, giving investors little to no power and insisting that they will not run their businesses for the short-term.
Perhaps. But it may be worth checking in with the hedge fund guys fielding panicked calls from investors who want to know what happened in July. And what will happen in August and September. By then, fall will be upon us and the anniversary of many bad investing memories. A season, one might say, to cover up.
Copyright 2007 The New York Times Company

bigkdc

August 3rd, 2007, 09:20 AM

The current credit crunch is not fundamentally driven; its driven by some technical factors. Right now there are just too many deals to be financed and the terms on those transactions got too far from market. Investors who generally fund these deals (ie, the people the underwriters sell the debt to) have finally taken a stand and have said thats enough.

Therefore, the banks and private equity finds are running around trying to figure out how to fund these deals. In the end, many of the banks will take a one time hit as they may have to offload the paper at a discount. That being said, the underlying fundamentals of the economy are in a place where Wall St will be fine. Bonuses may not be as far up as people were thinking they would be after the 1st half (which has been a record for many firms) but they will still be very good. This is not 2002...

So you may see a slowdown in purchasing/price appreciation but I would be surprised if Manhattan real estate took a real hit.

So long as the following things are true, Manhattan real estate will hold its value:

- Manhattan continues to be an island
- Manhattan is perceived to be a safe place to live
- Dollar is weak
- Economy is solid
- Wall Street is not in freefall

In the past when Manhattan real estate has struggled it has been a perfect storm where 2 or 3 of these factors have ceased to be the case.

KipsBay

August 3rd, 2007, 12:28 PM

bigkdc,

For the most part I agree with your points regarding Wall Street Bonuses and Manhattan Real Estate*.

However, the credit crunch is fundamentally driven, unless you are using a different jargon for the accepted term - actual economic technical supply/demand factors fall under the fundamental purview albeit if it is only a few of the many inputs in a more comprehensive analysis.

The USA (excluding NYC) in the past year on average has had real estate prices depress to levels that some analysts are starting to compare to percentage decreases not seen since the 1930s (maybe some hyperbole with political agendas from these analysts, but still significant percentage decreases). And with subprime delinquencies, existing home sales has plummeted (ok, from previous record high levels so %age decrease look exaggerated) and that in turn is spilling over to new home sales/starts. The credit crunch linkage from subprime to Private Equity and Hedge Funds is systemic, but in terms of the marketplace, for now just a pricing correction. That said, I agree that banks are re-evaluating and providing some checks/balances to restore the system that favored cheap and quick liquidity to debt instruments for too long - it was a fun party. Unfortunately/Fortunately, Wall Street and London FD are now dominated by the derivatives markets and that is the worry. When hedge funds are nearly 10(+/-) times leveraged and do not have to be marked-to-market until the end of the month, the market lacks transparency. And if the transparency is tied to potentially more subprime blowups (in October/November we'll get another really good snapshot of both sub and prime), then credit crunch can potentially mushroom before the FED can effectively calm the waters. And an extended credit crunch obviously hurts private equity, which has contributed greatly to the stock rally.

The markets are concerned with all these waves, given the potential for a bad storm (not a perfect storm, since other fundamentals look good for now). Ok, this is not the Internet [Hot Potato] rally of the late 1990s when valuations were tied to good stories, but when highly levered RE assets have promise of income returns equal nearly to t-bonds and carry the risk of steep capital depreciation, this fear should not be so easily dismissed. Certainly Wall Street can withstand the turbulence for another year or two, but add another few more poor fundamental factors into the mix, and we'll be seeing a lot of windows opening in the Empire State Building.

*Sure Manhattan is an island (as you said^), but it's also vertical despite Nimbyism. MikeW is right to question the condo risk. Eventually, the supply/demand curves cross for the $1000/$2000 per square foot apartments too - I think.:confused:

bigkdc

August 3rd, 2007, 12:49 PM

Would you short the market on high end new construction? I would be careful there - there is A LOT of wealth out there. Yes there will be a some hedge fund blow ups but I don't get the sense anyone is jumping out the window. The guy who blew up Amaranth has already raised a new hedge fund even while being investigated for the blow-up!

There are still more than enough wealthy native new yorkers and rich international folk that want to be in Manhattan to support high-end (ie, new construction condos) real estate.

Now, as it relates to more fringe properties, I am not as bullish...

And if all of a sudden we have a crime epidemic or a catastrophic terrorist event then things may change....

KipsBay

August 3rd, 2007, 01:34 PM

KipsBay

August 3rd, 2007, 02:01 PM

Lenders Broaden Clampdown on Risky Mortgages
Tightening Standards
Could Worsen Slump
In the Housing Market
By JAMES R. HAGERTY and RUTH SIMON
August 3, 2007; Page A3
Jittery home-mortgage lenders are cutting off credit or raising interest rates for a growing portion of Americans, extending well beyond the market for subprime loans for people with the weakest credit records.
This worsening credit crunch threatens to put further pressure on the housing market, where prices are flat to declining in much of the country.
Lenders say they are being forced to raise interest rates and stop offering certain loans because mortgage-bond investors have lost their appetite for a broad range of mortgages considered risky. That includes those dubbed Alt-A, a category between prime and subprime that often involves borrowers who don't fully document their income or assets, or those buying investment properties. Notably, American Home Mortgage Investment Corp., which stopped making loans earlier this week, said late yesterday it would cease most operations, slashing its work force to about 750 from more than 7,000.
"It is with great sadness that American Home has had to take this action," Chief Executive Michael Strauss said in a statement. "Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative."
Lenders are tightening standards and "raising rates like crazy," said Melissa Cohn, chief executive of Manhattan Mortgage, a New York mortgage broker. She said Wells Fargo & Co. is charging 8% for a prime jumbo 30-year fixed-rate loan that carried a 6 7/8% rate late last week. (Jumbo loans are those too large to be sold to government-sponsored mortgage investors Fannie Mae and Freddie Mac.) A Wells spokesman said rates are lower on loans made directly by the bank than on those through brokers.
The market for mortgage-backed securities is "very panicked," Michael Perry, chief executive of IndyMac Bancorp Inc., another big lender, said in a message on the lender's Web site yesterday.
Seeking to soothe the market, Countrywide Financial Corp., the nation's largest home lender, said it had plenty of funds available to weather the industry's troubles.
The fright among investors is forcing lenders to go back to more-conservative practices that were the norm before the housing boom of the first half of this decade. Many now are focusing on loans to borrowers who are willing to document their income, can make a down payment of at least 5% and have a history of paying bills on time.
Alt-A loans accounted for about 13% of U.S. home loans granted last year, according to Inside Mortgage Finance, and subprime loans about 20%. Industry executives have said subprime lending is likely to shrink by more than 50% this year, and now much of the Alt-A market is vanishing too.
This credit squeeze "will further crimp the effective demand for housing, and will make the late summer home-sales season even worse than the dismal spring season," said Thomas Lawler, a housing economist in Vienna, Va.
Tom Lamalfa, managing director of Wholesale Access, a mortgage-research firm in Columbia, Md., expects that half or more of the market for no- and low-documentation loans will disappear.
Some people use so-called low-doc loans to avoid paper work or because they are self-employed and have trouble showing a steady stream of income. But low-doc mortgages also can be used by people exaggerating their incomes.
National City Corp., another large lender, said yesterday that it is suspending originations of stated-income loans, which don't require the borrower to verify income. Wachovia Corp. said it had stopped making Alt-A loans through brokers, joining a trend among big lenders to rely less on outsiders to arrange mortgages. Wells Fargo told brokers this week that it was making "day-to-day" decisions on the pricing and availability of Alt-A loans amid reduced investor demand.
Several dozen lenders have gone out of business in the past six months, and others are teetering. Shares of Accredited Home Lenders Holding Co. fell 35% yesterday on the Nasdaq Stock Market after auditors said its "financial and operational viability" is uncertain if a pending merger isn't completed.

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

KipsBay

August 3rd, 2007, 02:13 PM

The Debt-Ometers
How to Read the Subprime and Other Consumer-Loan Dials
By SUDEEP REDDY and CONOR DOUGHERTY
August 3, 2007; Page C1
The downturn of the subprime-mortgage market is drawing attention to sometimes-overlooked gauges on the economy's dashboard: those that track consumers falling behind on loan payments.
The rise in delinquencies -- generally defined as loans 30 days or more past due -- so far appears mostly in mortgages granted to subprime, or less-creditworthy, borrowers.
SUBPRIME FALLOUT
But economic forecasters, investors and the Federal Reserve are watching closely to see whether delinquencies are spreading.
"If you see sharp deterioration in bank card or credit-card delinquency rates, it suggests that consumers are beginning to buckle under the pressure of high energy prices and weakening housing markets," says Ryan Sweet, an economist at Moody's Economy.com. That would cast a shadow over the economy, given the import of consumer spending.
Here's some of what delinquency measures compiled by the Federal Reserve Board, the Mortgage Bankers Association and American Bankers Association trade groups and by private number-crunchers show today:
Widely publicized delinquencies in subprime mortgages are concentrated in variable-rate mortgages, which account for about two-thirds of the subprime mortgages outstanding. Delinquencies on fixed-rate, subprime loans are relatively stable. But, delinquency rates on prime, variable-rate mortgages also are inching up, a particular worry as rates on cheap adjustable-rate mortgages climb.
In a switch from past behavior, some consumers are falling behind on mortgages while staying current on credit-card payments. It used to be the opposite.
The number of credit-card loans in delinquency has been running at about 4% of the total for the past six years; levels of 3% were common in the 1990s, according to the American Bankers Association. But the percentage has been moving lower recently.
Here are what the major gauges show and how they work:
Mortgages: Subprime, Prime
The Mortgage Bankers Association's quarterly readings on mortgage delinquencies are among the most closely followed, though some economists say that the association may miss some smaller subprime lenders, and that the picture could look better than it really is. Numbers typically are released more than two months after a quarter ends.
Mortgages matter because they represent about four-fifths of U.S. consumers' $12.8 trillion in total debt. About one in six subprime variable-rate mortgages were delinquent in the first quarter.
Delinquencies are also up among fixed-rate subprime mortgages, although the problem is less acute: One in 10 loans is delinquent.
Delinquencies are far less common among borrowers with better credit ratings, as about 3.7% of those with variable-rate loans were delinquent in the first quarter. But that is up from 2.3% a year ago, and there are concerns the trend might continue to deteriorate as some of those borrowers confront higher monthly payments when mortgage rates rise or teaser rates expire or when refinancing becomes unattractive because of home prices.
Among these prime borrowers, delinquencies remain a low 2.2%, by the Mortgage Bankers Association's measure.
More detailed, and current, data on mortgage delinquencies come from First American Loan Performance of San Francisco, which collects data from mortgage servicers. Released 30 to 45 days after month's end, the LoanPerformance data cover about 85% of prime mortgages and 50% of subprime loans. Bob Visini, the company's vice president of marketing, says the Mortgage Bankers Association and top private providers generally show similar trends.
Cards, Autos, Home Equity
The Fed, drawing from data supplied by banks, reports its own delinquency rates for residential loans, including mortgages and home-equity lines of credit, 60 days after a quarter ends. But Fed data don't distinguish between variable and fixed-rate mortgages, so the Fed used LoanPerformance data in its recent semiannual report to Congress to make the point that mortgage delinquency problems are, so far, concentrated in subprime, variable-rate mortgages.
Although consumer borrowing other than mortgages accounts for only about a fifth of consumer debt, this credit plays a significant role in the pace of consumer spending. The broadest readings on delinquencies are issued quarterly by the Fed 60 days after a quarter ends. The Fed's data on credit cards show the amount of delinquent debt has hovered around about 4% over the past few years with no obvious rise lately.
The American Bankers Association publishes more-detailed consumer data two months after the end of a quarter. Its latest figures show delinquency rates on direct auto loans -- those made by banks -- at 1.68%, a 12-year low, a contrast to the mortgage market.
But the delinquency rate on loans made through auto dealers is at 2.73%, a 10-year high. That suggests the people with poorer credit, who are more likely to get car loans from dealers than from banks, are facing more trouble making payments.
The share of delinquent home-equity loans was 2.15% in this year's first quarter, a bit lower than in 2004 but well above the 1% pace of 2000, ABA figures show. Hints of trouble ahead are appearing. Countrywide Financial Corp., for instance, recently said 4.6% of its prime home-equity loans were delinquent in the second quarter, up from 1.8% a year earlier. Individual lenders release company-specific data, often in Securities and Exchange Commission filings or earnings reports, which can offer early warnings of industry trends.
Some private firms also predict delinquency trends, including CreditForecast.com, a joint service of Equifax Inc. and Moody's Economy.com that relies on Equifax's consumer-credit data. It provides information on local markets to help lenders and investors pinpoint problems.
The latest data show delinquencies for mortgages and consumer borrowing outside of credit cards rising in the second quarter. Its measure of delinquencies for credit cards and cars have remained fairly steady over the past year.
Mortgages vs. Credit Cards
In the past, consumers tended to make mortgage payments a priority, falling behind on credit cards first. That may be changing. In the first quarter of 2007, 3.73% of mortgages, in dollar terms, were delinquent, and credit-card delinquencies were 3.82%, according to Equifax and Economy.com. In contrast, after the 2001 recession, delinquencies on mortgages were 2.52% nationally versus 5.39% for credit cards.
Economists offer several possible explanations. The shift "may be related to the fact that we've got people who have mortgages for the first time, or they have different kinds of mortgages," said Robert Hunt, a Federal Reserve Bank of Philadelphia economist. "So, the shock hit them before they understood what's going on."
Or it may be that homeowners who have very little equity in their homes have little to lose by letting the mortgage company take the house. Elizabeth Warren, a Harvard law professor who studies bankruptcy, says mortgages have gone from something anyone would pay, "to a debt that has soared out of sight, causing more families simply to give up."

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

bigkdc

August 4th, 2007, 02:35 PM

bigkdc,

Yes, surprising the Amaranth guy is back. I would hope its mostly his own money invested in his HF.

I would not short high-end NYC residential construction, especially if the construction had some key attributes (i.e. high ceilings, green development...). However, I would not be vested in Residential - not excited by risk/reward unless an insider. NYC office space is still a better play in the interim for a variety of reasons.

Also commodities offer better rewards in the post subprime blowup with weaker US$, stocks and bonds. And since I am an optimist, I actually think subprime is oddly looking attractive due to some very unstochastic pricing anomalies as a result of illiquid marked-to-market pricing - yep, technical factors. Sometimes it pays to be a contrarian, however there is a timing consideration for now since I like wearing my shirt.;)

Then we are on the same page. I am not saying it is the best investment out there but those that think you are going to lose your shirt (to take your phrase) buying high end real estate are fooling themselves. The days of the 6 month flip are probably gone but it is still a solid asset class.

Right now my main focus is trying to figure out how to buy some beachfront real estate in brazil in an efficient way.

Front_Porch

August 4th, 2007, 07:37 PM

The top of the market has shown a lot of strength recently.

All Manhattan, 4-bedroom per-square-foot prices up 7.1% in the second quarter over the previous quarter; that's up 27.1% year-over-year.

Compare that to Manhattan per-square-foot prices of all different-sized apartments, which are up 3.1% over the previous Q and up 2.3% year-over-year.

Numbers from Miller Samuel, of course.

ali r.
{downtown broker}

KipsBay

August 5th, 2007, 11:58 PM

'Great Unwind' May Be Here
As Problems Spread
To Broad Bond Market,
Top Brokers Could Suffer
By RANDALL SMITH and SERENA NG
August 6, 2007
The problems have been gathering for months, beginning with subprime loans and spreading outward. Now Wall Street firms face the risk of a broad bond-market unwind, leaving vulnerable five years of record earnings and stock run-ups.
Investors are worrying about more than just reduced earnings growth. It's the overall uncertainty, they say: The unintended risks of "bridge" loans stuck on balance sheets or even how to value a new set of exotic securities that can't find buyers. This could weigh on Wall Street stocks -- be it Lehman Brothers Holdings Inc. or Goldman Sachs Group Inc. -- for months to come.
Analyst Brad Hintz of Sanford C. Bernstein & Co. predicts "performance will decline" at the top five U.S. brokers for the second half of the year. "The halcyon days," he adds, "may be over for now." Perhaps that's why chatter around some firms suggests job cuts could be coming if conditions don't improve by September.
The worries stretch across a number of areas. In the past few weeks, trading has fallen off to a trickle in some asset-backed bonds, issued at double-A or triple-A ratings. With no bidders lining up, valuations and ratings have been left uncertain. Investors are also finding it harder to trade some risky high-yield, or "junk," bonds and leveraged loans for borrowers with high debt levels.
The pullback in liquidity has been made worse by the usually slow summer-vacation season. That has hurt the chances Wall Street securities firms can offload their bridge-financing commitments for pending private-equity deals, which have soared this year.
For months, analysts and bankers had predicted that rising debt levels for hedge funds, buyouts and Wall Street dealers might eventually snap, leading to a "great unwind" of lower prices and forced selling. Now, some say, the process has begun.
For the Wall Street firms, analysts say the current crunch could mean cutbacks in lucrative fees for financing and advising on fewer private-equity buyouts, and the risk of losses on loans to finance hedge-fund positions and "hung" financing commitments. They also face reduced profits if they must trim their sails by cutting the size of their balance sheets.
"A lot of investors are realizing that the same very loose lending standards that were applied to homeowners have also been applied to corporate" bonds as well, says Albert Edwards, the global strategist at the Dresdner Kleinwort unit of Allianz SE who popularized the term "the great unwind" and believes such an unwind has been under way since early this year.
Others disagree. "I don't see it as a great unwind, but a correction to more reasonable levels. It's more like the great return to rationality," says Peter Andersen, a junk-bond manager at Dreman Value Management. "Overall, it's a healthy thing, but it's quite painful living through the adjustment."
So far, investors are skeptical that an unwind won't claim some victims. Bear Stearns Cos. shares are now off nearly a third year-to-date, and its co-president and co-chief operating officer, Warren Spector, resigned yesterday. Merrill Lynch & Co. shares are off by a quarter, and Lehman shares nearly 30%.
A Wall Street executive who markets hedge funds and other alternative investments said the valuation of some collateralized-debt-obligations pools backed by other securities such as mortgages -- which sport nominally top-notch credit ratings -- has become highly uncertain. "Someone says they're worth 50, and someone else says 90, and you can't sell at 30 because there aren't any bids," he said.
Such uncertainty creates a challenge for Wall Street firms that have made loans backed by such securities. Should they be marked down? And should investors who hold them with borrowed funds be forced to sell assets to give the lenders an extra cushion of safety?
By the fraught psychology of the bond market, this could trigger more problems than it is supposed to prevent.
"When you have something like this, there's a debate about where to mark these things," said Alex Ehrlich, global head of prime brokerage at UBS AG, which has extended credit to some clients that hold such securities. "Nothing's trading, so you have to exercise great care and caution in where you mark. We're trying to be pragmatic. When you're caught up in this situation, you know the market is dysfunctional; you have to come up with reasonableness standards. We try to come up with a theoretically fair value."
One symptom of the ailing market is fewer new issues. Friday, Thomson Financial said the 48 U.S. corporate-bond deals in July, which is ordinarily a slow month, constituted "the lowest monthly number since 1990."
In recent months, several firms have disclosed sharply higher levels of financing commitments. Lehman reported that its "contingent commitments" for noninvestment-grade acquisitions tripled to $43.9 billion in May from $12.8 billion just six months earlier. Lehman says that number is "significantly greater" than what it will actually have to commit to, because some bidders line up more commitments than they need or don't win the deal.
Other firms have also reported commitment increases. Goldman Sachs has $71.5 billion in noninvestment-grade financing commitments, up 25% from six months earlier. Morgan Stanley has $32.4 billion in such commitments, up 75% since November.
Such commitments can produce losses or eat heavily into fees. When J.P. Morgan Chase & Co., Merrill, Citigroup Inc. and Bank of America Corp. led a $7 billion financing for Tribune Co. in May, they had to sweeten terms for investors, eating into a third of their $120 million in fees.
Wall Street executives say some losses are offset by the fees they earned for making the commitments in the first place, typically in the range of 2%. A report by Buckingham Research Group estimated that even if $200 billion in unsold bonds for buyouts needed to be marked down on brokers' books by 5%, the "hit" would amount to only 3% of revenues.
Some analysts and Wall Street executives point to the strength of the global economy in their predicting the credit crunch will be short-lived. Buckingham analysts James Mitchell and John Grassano compare the current debt-market pullback to the brief two-month impact of credit-rating downgrades in 2005 of the two big U.S. auto makers.
Other Wall Street market participants say a recent $6 billion debt sale to help finance the buyout of DaimlerChrysler AG's Chrysler Group and a $2 billion bond issue by General Electric Co.'s General Electric Capital Corp. show the market is still open -- although the Chrysler loans were sold at a discount, and $10 billion of the debt remains on the underwriters' books.
--Michael Hudson contributed to his article.

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

KipsBay

August 6th, 2007, 12:07 AM

Braving the Subprime Storm
Tough to Avoid Trouble,
As More Parts of Market
Start to Move Together
By JUSTIN LAHART, ALISTAIR MACDONALD and JOANNA SLATER
August 6, 2007
Diversification -- not putting all one's eggs in the same basket -- has long been a mainstay of investing safely. But it works only so long as all the baskets don't tumble at once.
In recent weeks, assets around the world have fallen in lockstep. Stocks, corporate bonds, emerging-market debt and a host of derivatives backed by mortgages and other types of borrowing have been hit hard. Even commodities such as gold and other metals, which investors turn to precisely because their prices typically don't move in sync with other assets, dropped along with everything else in late July.
The result is that investors who spread their money across different assets are finding they were less protected than they thought.
"It is becoming more difficult to find assets that aren't highly correlated. Over short periods of time, property, commodities, equity and bonds are all moving together in similar directions," said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh which has about £140 billion, or $285 billion, under management.
Concerns about risky bonds sent U.S. stocks tumbling Friday. The Dow Jones Industrial Average fell 2.1% to 13181.91. Although still up 5.8% this year, the Dow is now nearly 6% below its record close of 14000.41 on July 19, little more than two weeks ago.
The Standard & Poor's 500-stock index is down 7.7% from its record, also hit July 19, raising the specter of a 10% decline that is considered a correction to shake off speculative excess in a bull market. The S&P is up just 1% this year.
Much of the boom that buoyed financial markets over the past few years was aided by a belief among portfolio managers that by spreading their cash across a myriad of investments they could take on substantially more risk. Wall Street firms helped meet that demand by creating investment vehicles that lump uncorrelated assets together.
Borrowing With Confidence
Because they believed they were safer with assets that don't move in sync, hedge funds and other investors felt more comfortable investing with borrowed money, amplifying the cash pouring into new investment vehicles. As money poured in, pushing prices higher, stocks around the world, corporate bonds, emerging-markets debt, mortgage-backed securities and commodities began to trade more similarly. And when they fell, and funds that had used borrowed money to invest needed to sell assets to cover debts, the correlation grew even stronger.
When the Dow tumbled 311 points on July 27, gold fell $10.80 per troy ounce to $662.50. Traditionally, investors have fled to gold in times of uncertainty as a scarce and tangible asset that keeps its value. Now, trading activity is so high that gold is being used as a source of cash to cover losses in other markets.
"When you can't sell your assets that are going bad, you sell assets that are good," says Kim Catechis, who manages $3.8 billion in emerging-market stocks at Scottish Widows Investment Partnership. "We've seen some evidence of that."
The drive toward uncorrelated assets picked up after the tech-stock meltdown that began in 2000. Investors who had loaded up on tech stocks suffered for it, but those that had spread their risk across different asset classes escaped relatively unscathed.
Studies show that commodities historically performed differently than stocks and bonds. This is partly because inflation usually hits returns on bonds and stocks, but commodities are a component of inflation, pushing it up when prices rise for oil and basic materials.
In 2005, Gary Gorton at the University of Pennsylvania's Wharton School and K. Geert Rouwenhorst at Yale looked at the correlation of commodities futures and the S&P 500 between 1959 and 2004. They found that during the very worst performing months for stocks, 5% of their sample, shares fell an average of 8.98% while commodity futures gained 1.03%. They also found a negative correlation between commodities and bonds.
Aoifinn Devitt at Clontarf Capital in London, who advises family firms and institutions on alternative investments, says most of the commodities funds she sees marketed hail the benefits of not being correlated to other markets. Many investors put money into commodities precisely because they offer diversification. At the end of last year, the California Public Employees' Retirement System, the nation's largest pension fund with $245 billion in assets, set aside $500 million for investment in commodities.
But over the past year commodities have increasingly moved in step with other markets. The price of copper and aluminum, two of the most widely traded metals, suffered near 5% declines in the week ended July 27, almost mirroring the 5.6% fall on the Dow Jones Stoxx 600, which tracks Europe's 600 largest listed companies, and the S&P 500's 4.9% decline.
Because many developing countries continue to show robust growth, many investors believe that emerging-market stocks and bonds should be able to weather the latest storm. But as the Dow Jones Industrial Average fell 4.2% the last week in July, the MSCI Emerging Markets Index lost 3.8% in dollar terms and Merrill Lynch's index of emerging-market sovereign and corporate debt fell 1.5%.
"On a fundamental basis, emerging markets are fine," says Uri Landesman, a senior portfolio manager at ING Investment Management in New York. But in the immediate future, he says, the question is what investors will do. "Are people spooked? Are people pulling in their risk reins?"
The increasing correlation of global markets is enough that regulators are beginning to take note. Britain's Financial Services Authority, which regulates the London markets, listed it as a potential risk for 2007 in its report Financial Risk Outlook.
Correlation "calls into question some of the benefits of geographic diversification, either in an investment portfolio or within a group," the FSA said. With markets so interlinked, financial crises are less likely to be contained in the area they originate in, spreading over geographic areas and markets, the report said.
Collateralized-debt obligations holding bonds backed by subprime mortgages illustrate how investments don't always perform as expected. CDOs, as they are known, are pooled debt instruments cut into slices, known as tranches. Higher-rated CDO tranches were considered relatively safe because they were structured so they wouldn't get hit until a large proportion of the debt held by the CDO suffers losses. But losses among subprime-backed bonds held by CDOs were far more correlated than expected, causing steep losses.
Dragging Down Quality, Too
In addition to subprime mortgages, loans to the riskiest borrowers, some troubled CDOs also held bonds backed by better-quality household mortgages, commercial mortgages and credit-card debt -- which had the effect of making those instruments more highly correlated with subprime mortgages.
"When you fund things with CDOs, they become correlated, because they're all funded from a single place," says Christopher Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School.
Losses in CDOs also prompted investors to question the valuations of other instruments that hold corporate debt -- among the reasons that the corporate debt market, too, has run into trouble. Leveraged loans -- bank loans to companies that have historically shown little correlation to other financial markets -- had their worst month on record in July, falling 3.35%, says S&P.

--Devon Maylie contributed to this article

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

KipsBay

August 6th, 2007, 12:20 AM

Insuring Against Credit Risk
Can Carry Risks of Its Own
By HENNY SENDER
August 6, 2007
During the 1990s, international banks lent dollars to Indonesian companies. To hedge against the possibility that the borrowers could go belly up, the international banks bought credit insurance.
Unfortunately, the insurance was purchased from Indonesian banks, so when the Asian financial crisis hit and the rupiah went into free fall, the ability of local banks to compensate the international banks for their losses on those loans plummeted as well.
As U.S. banks grapple now with turmoil in the credit markets, there are some interesting parallels to the Indonesian crisis a decade ago.
Banks, insurers and others routinely assure investors that they are hedged against adverse moves in markets by purchasing different types of insurance in the form of derivative contracts. As a result, the market for these contracts has soared. In one of the most comprehensive surveys of the market, the British Bankers' Association estimated last fall that by the end of 2006, the market for all credit derivatives was $20 trillion and was expected to be $33 trillion by the end of 2008.
The problem: The sellers of this protection are often hedge funds. Indeed, Deutsche Bank estimates that hedge funds account for as much as 30% of such credit protection, with insurers providing much of the rest.
Some hedge funds are thriving in the market turmoil, but many others are under significant pressure as a result of sudden losses in the debt markets. If many buyers of such credit insurance -- which include banks, traditional money managers and hedge funds -- decide they want to take profits as companies are downgraded and come under pressure, it could be problematic. That is because hedge funds that are losing money but also selling credit insurance may not be able to honor their commitments, rendering the protection worthless.
It is like counting on a homeowner's insurance policy to pay for a new house after a fire, only to discover the company that sold the policy is so financially fragile it might not be able to pay the benefits.
The boom in credit insurance, often in the form of credit-default swaps, facilitated much of the frenzied buying of bonds and loans in recent months. Just as the presence of ropes and guides is leading more climbers to the peak of Mount Everest out of a sense of security that may not be justified, many players enthusiastically jumped into the mortgage market and the corporate-debt market, comfortable in their purchase of insurance against losses. In other words, lenders and bondholders were willing to make ever-riskier loans because these new financial instruments made it possible to lay off the risk of default on others.
The extent to which Wall Street relies on such hedges was apparent Friday during the conference call Bear Stearns Cos. held with investors to allay fears that it was in financial trouble following the collapse of two of its hedge funds. Bear executives repeatedly referred to their dependence on hedges, including credit derivatives, to offset their losses on subprime mortgages and loans to poorly rated companies, stating that such hedges offset losses.
Feeding worries about problems in the credit-derivatives market is the lack of transparency and precise data. Fearing that even the paperwork backing trades was a mess, the Federal Reserve Bank of New York used moral suasion on the financial community in 2005 to deal with technical issues of clearing and settlement.
Despite progress on eliminating backlogs in processing trades in the credit-derivatives market, the market remains opaque. It isn't just that entities that sold insurance might not be able or willing to pay off contracts, it is also unclear who is holding the risk because it is sold from one party to the other.
"If you don't know how the risk is spread, it is impossible to say how dangerous the likelihood of a systemic daisy chain is," says one Fed official.
That puts the investment banks that are on the other side of hedge funds in a delicate position. The prudent thing for any single bank to do when times are tough is to demand more collateral and margin from hedge-fund clients. But as the banks force hedge funds to put up more of their own capital, they could trigger additional losses, adding more volatility to financial markets.
For the worst case to materialize, a hedge fund would have to lose all its capital. But that isn't so hard to imagine. Consider the case of Sowood Capital Management. In a conference call with investors Friday, Jeffrey Larson, Sowood's managing partner, explained his decision to sell his portfolio to Citadel Investment Group at the end of July after huge losses.
"We were very concerned about our ability to continue to meet margin calls for very long, particularly since our losses in July were triggering events that could have required us to post hundreds of millions of dollars in additional margin on our original positions," he said.
If a hedge fund with losses of that magnitude was also selling credit insurance, the situation could become ugly. Hedge-fund losses in the junk-bond market can have an impact on a seemingly unrelated market as the funds are forced to sell what they can, a phenomenon known as correlation. Similarly, one kind of risk can quickly translate into another kind of risk. In this case, the risk of losses in the market can quickly lead to counterparty risk, or the risk that the party on the other side of a given trade may not be able to perform.
Wall Street doesn't always learn from its mistakes. A year after losses in Indonesia, many international banks bought Russian government bonds, hedging their positions with credit derivatives. Sadly, they bought that credit insurance from Russian banks. When the government defaulted on those bonds, the Russian banks -- which held even more of those bonds than the international banks -- were unable to honor their commitments.

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

KipsBay

August 6th, 2007, 01:36 AM

August 6, 2007
Mortgage Maze May Increase Foreclosures
By GRETCHEN MORGENSON

In 2003, Dianne Brimmage refinanced the mortgage on her home in Alton, Ill., to consolidate her car and medical bills. Now, struggling with a much higher interest rate and in foreclosure, she wants to modify the terms of the loan.

Lenders have often agreed to such steps in the past because it was in everyone’s interest to avoid foreclosure costs and possibly greater losses. But that was back when local banks held the loans and the bankers knew the homeowners, as well as the value of the properties.

Ms. Brimmage got her loan through a mortgage broker, just the first link in a financial merry-go-round. The mortgage itself was pooled with others and sold to investors — insurance companies, mutual funds and pension funds. A different company processes her loan payments. Yet another company represents the investors as the trustee.

She has gotten nowhere with any of the parties, despite her lawyer’s belief that fraud was involved in the mortgage. Like many other Americans, Ms. Brimmage is a homeowner stuck in foreclosure limbo, at risk of losing the home she has lived in since 1998.

As the housing market weakens and interest rates on adjustable mortgages rise, more and more borrowers are falling behind. Almost 14 percent of subprime borrowers were delinquent in the first quarter of 2007. Investors, fearful that these problems will hurt the overall economy, have retreated from the stock and bond markets, creating major sell-offs.

And the very innovation that made mortgages so easily available — an assembly line process known on Wall Street as securitization — is creating an obstacle for troubled borrowers. As they try to restructure their loans, they are often thwarted, lawyers say, by strict protections put in place for investors who bought the mortgage pools.

This impasse could exacerbate the housing slump, pushing more homeowners into foreclosure. That would lead to a bigger glut of properties for sale, depressing home prices further.

“Securitization led to this explosion of bad loans, and now it is harder to unwind and modify them even where it is in the best interests of both the borrower and the investors,” Kurt Eggert, an associate professor at the Chapman University School of Law in Orange, Calif., said in an interview. “The thing that caused the problem is making it harder to solve the problem.”

Creating difficulties is the complex design of mortgage securities.

Some homeowners have problems simply identifying who holds their mortgages. Others find the companies that handle their loan payments, known as servicers, are unresponsive, partly because modifying loans cuts into profits.

Even if circumstances suggest fraud when a loan was made, lawyers say, the various parties protect each other by refusing to produce documents.

Compounding the problem is a law stating that when a loan is passed to another party, that entity cannot be held liable for problems.

“I don’t think there is anything in the entire securitization process that is at all focused on the borrower’s interest,” said Kirsten Keefe, executive director of Americans for Fairness in Lending. “Everything they do is, ‘How are we going to make a profit, and how are we going to secure ourselves against risk?’ ”

The idea of pooling loans and selling them to investors dates back to 1970, but the practice has exploded in recent years. At the end of last year, $6.5 trillion of securitized mortgage debt was outstanding.

More than 60 percent of home mortgages made in the United States in 2006 went into securitization trusts. Some $450 billion worth of subprime mortgages, those made to borrowers with weak credit, went into securitizations last year.

Fifteen years ago, the last time the housing market ran into stiff trouble, government-sponsored enterprises like Fannie Mae did most of the work pooling and selling mortgage securities. These enterprises readily agree to loan modifications.

But not so in the private issues pooled and sold by Wall Street, which has fueled the extraordinary growth in the market.

The process begins with the entity that originates the loan, either a mortgage broker or lender. The loan is assigned to a company that will service it — collecting borrowers’ payments and distributing them to investors. Sometimes the servicer is affiliated with the lender, creating potential conflicts if a loan goes bad.

A Wall Street firm then pools thousands of loans to be sold to investors who want a steady stream of cash from loan payments. The underwriters separate them into segments based on risk.

Once a trust is sold, a trustee bank oversees its operations on behalf of investors. The trustee makes sure that the terms of the pooling and servicing agreement are met; this document determines what a servicer can do to help distressed borrowers.

The agreements require that any modifications to loans in or near default should be “in the best interests” of those who hold the securities.

But there is wide variation in how many loans can be modified. Some trusts have few curbs; others allow no more than 5 percent of mortgages to be changed.

Some trusts limit the frequency with which a loan can be modified or dictate a minimum interest rate. The variations help explain why borrowers are having difficulty.

Ira Rheingold, executive director of the National Association of Consumer Advocates, says companies in the chain should be held responsible. “Because Wall Street is responsible for the mess we are in, they need to bear some of that burden,” Mr. Rheingold said. “Why should people who have been funding these bad loans get a free pass?”

For now, the burden falls on people like Ms. Brimmage, a former forklift driver at an Owens-Brockway Glass Container plant in Godfrey, Ill., that closed last fall. A borrower in good standing since 1998, she said a local broker persuaded her to combine her debts in a fixed-rate loan of $65,000 in 2003.

But at the closing, she was presented with an adjustable-rate mortgage from the Argent Mortgage Company, carrying a low teaser rate for two years. When she objected, the broker assured her that rates would fall and she could get a better fixed-rate loan later. She said she believed him.

Rates did not fall. Still, Ms. Brimmage made her payments until illness struck in 2005. She then had difficulty paying the mortgage and liquidated part of her 401(k) retirement fund to keep current. Last September, she received a foreclosure notice from AMC Mortgage Services. Argent, which made the loan, and AMC are units of ACC Capital Holdings, a private company.

Clarissa P. Gaff, a lawyer for Ms. Brimmage at the Land of Lincoln Legal Assistance Foundation, hopes to cut her client’s loan and reduce the interest rate. The monthly payments have risen to $691 from $414, as the rate has jumped to 11.25 percent from the original 6.3 percent.

But the servicer has not agreed. Deutsche Bank, the trustee of the security holding the loan, says it is unable to help because it is neither the servicer nor the lender.

AMC Mortgage Services says Ms. Brimmage must pay the full amount. A spokesman for the company said that it had worked with her for two years and that it is in the interests of all involved in a mortgage to keep a loan current.

Ms. Gaff said some documents indicate that the mortgage broker who arranged the loan may have violated truth-in-lending requirements. The broker’s employer has been barred from doing business in Illinois and a handful of other states.

“We have run into this in any number of cases,” Ms. Gaff said. “The bank that holds the note as trustee claims to have no information relating to the servicer or the loan originator in spite of the fact that documents show all the parties have been working together for ages. It insulates them from liability.”

Imperiled homeowners are especially disadvantaged if they live in a state — like Georgia, California, Texas and 18 others — where foreclosures can take place without a judge’s oversight. A loan servicer in these places can push for quick foreclosure, sometimes in 40 days. Fast turnarounds are in a servicer’s interest because securitization pools do not cover the costs of modifying loans.

Lawyers trying to assist distressed homeowners sometimes find that these proceedings have been started without proof of ownership.

“There is some sort of confusion with regard to ownership in virtually each one of my subprime cases,” said Howard D. Rothbloom, a lawyer in Marietta, Ga., who represents low-income people battling foreclosure. “Securitization has made it so complicated that everyone in the process is able to say that they don’t know what’s going on. The effect is, no poor person can afford to litigate this type of matter to bring it to a resolution, and therefore they lose their home.”

Mamie Ruth Palmer, an elderly woman in Atlanta, filed for bankruptcy in 2002 to stop a quick foreclosure sale. On Ms. Palmer’s behalf, Mr. Rothbloom is suing the trustee, Bank of New York, as well as HomEq Servicing, which withdrew its registration to do business in Georgia last fall. Mr. Rothbloom argues that Ms. Palmer’s lender levied improper costs, including $11,500 in legal fees.

Ms. Palmer is still in her home and makes mortgage payments to a bankruptcy trustee, Mr. Rothbloom said, but he has been unable to reach a settlement. Her loan stands at $51,500.

Bank of New York, like Deutsche Bank, says that the trustee’s function is an administrative one and that it is not responsible for foreclosures. HomEq did not return a phone call seeking comment.

Mr. Rothbloom said he has had cases where homeowners received foreclosure notices from entities that could not prove ownership.

“I am sure there are a lot of people who are no longer living in their homes where there was a flawed foreclosure,” Mr. Rothbloom said.

Copyright 2007 The New York Times Company

KipsBay

August 6th, 2007, 02:23 AM

Subprime's Ultimate Time Bomb?

Monday, August 6, 2007
BARRON’S

By JONATHAN R. LAING

DESPITE A GLOSSY ROSTER OF OWNERS LIKE Bear Stearns Merchant Bank and New York investment company Third Avenue Trust, ACA Capital (ACA) has flown under Wall Street's radar for most of its 10-year history.

And perhaps that has been a good thing, given ACA's rather picaresque history. The firm's founder, H. Russell Fraser, often arrived at the New York headquarters in full Marlboro Man western regalia -- until he was sent packing to his ranch in Wyoming in 2001 as a result of lousy numbers in ACA's original business of insuring low-rated municipal-bond issues. Then in 2004, ACA suffered the indignity of having its stock's initial public offering aborted shortly before launch when its primary underwriter, JPMorgan, took a walk. It seems that, late in the process, Morgan became concerned about some personal-tax issues of Fraser's successor, who has since departed.

With new management in place, ACA was finally able to get its IPO off last fall. But investor disinterest forced the company to cut both the size and the projected offering price. ACA was able to raise just a paltry $79 million.

Yet ACA's days of relative anonymity are fast coming to an end. For in recent weeks, the insurer has been drawn into middle of the mushrooming subprime-mortgage crisis, by virtue of having quietly over the past two years insured $15.7 billion of predominantly subprime securities. And the bulk of these guarantees ($9.3 billion worth) have been placed on some of the most speculative paper in this free-wheeling market -- so-called mezzanine, subprime collateralized debt obligations, or CDOs.

In all, the firm's CDO exposure, including subprime and instruments backed by various corporate and commercial mortgage debt, totals an imposing $61 billion of value -- on a capital base, or shareholder net worth, of just $326 million. A leverage ratio, in other words, of over 180-to-1.

Not surprisingly, the stock ACA Capital (ticker: ACA) has been clobbered in the last month and a half, falling from over 15 on June 19 to a low of 5.17 on July 24. It rallied to back over 7 last week, after management worked to calm market jitters over the company's liquidity and asset quality during the second-quarter analyst call. "ACA's stock has become the ultimate derivative for the subprime-mortgage market, allowing those with bearish views to pound it on the short side," says Standard & Poor's analyst Dick P. Smith, who recently reaffirmed his single-A rating on the company.

Various doomsday scenarios are revolving around ACA, which has a market value of about $260 million. Some critics depict the insurer as a giant warehouse in which various Wall Street securitizers such as Bear Stearns (BSC), which holds 27.7% of the company's stock, Merrill Lynch (MER), Lehman Brothers (LEH), Citigroup (C) and RBS Greenwich Capital have parked billions of dollars of risky obligations in order to obtain capital relief, avoid earnings volatility and gussy up their balance sheets. Bear Stearns, for its part, has said it has confidence in ACA's management.

Yet, should ACA buckle under this outsized burden, all $61 billion of the exposure it has insured would come cascading back on the balance sheets of the aforementioned firms and some 25 other Wall Street counterparties with which ACA deals. The possibility of hefty losses likewise looms, particularly in the subprime CDOs.

ACA MANAGEMENT, BOTH DURING last week's earnings call and a private discussion with Barron's, was quick to dismiss the possibility of the company having major problems. Including its shareholder net worth of $326 million, the company says it has claims-paying resources of more than $1 billion, which should be more than enough to satisfy any future liquidity needs.

Moreover, 99% of its $61 billion in CDO risk exposure is still rated not just triple-A but "super" senior triple-A, with ample collateral protection, even in the now-troubled subprime area, to endure any financial direct hit. Finally, as a long-term guarantor, ACA claims that it isn't subject to the same capital-depleting hits from mark-to-market reductions as many other players -- that is, as long as its CDO risks aren't downgraded or start actually generating claims losses.

Yet one wonders whether ACA is living in a Prague Spring, ignoring menaces that lie ahead. Subprime delinquencies and loan defaults are surging, of course, but not yet at a pace to trigger claims losses for ACA. But the crisis is still young. Over the next year and a half, monthly mortgage payments on some $600 billion of subprime mortgages will be rising sharply for already financially-strapped borrowers, as the loans reach the dreaded two-year reset date. Meantime, foreclosure losses for lenders figure to surge, as properties are dumped into an increasingly-glutted market.

Of particular concern are the $9.3 billion in mezzanine CDOs, mostly backed by subprime mortgages that ACA has insured. These are comprised of triple-B minus and some triple-B slices of different subprime-mortgage-backed securities that have been bundled together by dealers into CDOs that are then tiered in the exact same fashion as the underlying securities. Returns generated from mortgage interest and principal payments in the pools underlying the securities flow down the capital structure, slaking the thirst of the higher-rated slices or tranches first before trickling down to the lower levels. Thus any losses in the collateral pool are absorbed or felt first at the lower portions of the securitizations.

ACA makes much of the idea that as a guarantor of only super senior triple-A paper, it would seem to be well-protected. Claims losses in its mezzanine CDOs would have to immolate all the tranches below ACA's, or 40% of the CDO's capital structure, before ACA would lose a dime as insurer of only the top 60% of the structure.

For Love of Leverage: ACA's portfolio of guaranteed commercial debt obligations, or CDOs, had been growing rapidly. It is now more than 180 times larger than the company's capital base.
But remember, the tranches comprising its mezzanine CDOs consist of only triple-B slices of the mortgage-backed securities pools, which are far less protected from loss. In fact, all it takes to completely snuff out the triple-B slices are cumulative losses in its underlying mortgage pool of just 7%. Hence, modest collateral impairment of 7% spread across the pools underlying the mezzanine CDOs would be enough to pancake the entire structure, from the lower-rated piece all the way to the rarified, top 60% super triple-A part of the CDO guaranteed by ACA. If this were to happen, ACA would be on the hook for virtually its entire $9.3 billion mezzanine risk exposure.

An unimaginable occurrence? Not really. The very S&P that last Friday claimed that problems in the subprime market constituted no threat to ACA's single-A rating shocked Wall Street last month by forecasting cumulative losses on 2006 vintage subprime mortgages of 11% to 14%. This is a jump from the loan-loss projection earlier made by Moody's of 6% to 8% impairments on 2006 loans backing different subprime securitizations. Of ACA's $9.3 billion in mezzanine guarantees, nearly half consist of this 2006 paper. And its remaining vintages, 2005 and 2007, are scarcely performing better either in their relatively short lives.

Equally unsettling has been the price action in the TABX-40-100 index, which reflects current expectations of the value of the kind of senior tranches of 2006 vintage CDOs that ACA has insured in abundance. The TABX is currently trading at around 43 cents on the dollar. This means that if ACA were to mark its $4.4 billion in 2006 CDO guarantees to this index, its GAAP net worth would fall from a positive $326 million to a negative $2 billion or so.

ACA officials insist that the TABX reflects current subprime-market fear and hysteria rather than any sober appraisal of true market fundamentals. Moreover, the company claims that the mortgage pools that the TABX references are far less diversified than those pools standing behind ACA's guarantees. Finally, the TABX reflects the frenzied hedging of subprime-market participants who are subject to the liquidity risk of having their credit lines pulled. ACA, as long as it maintains its A-rating, has no such risk.

There's some truth to these claims, but only some. GAAP accounting, but not insurance accounting, required ACA to make some mark-to-the-market adjustment to its CDO exposures, although the company has wide discretion on the measures it uses. Thus in the second quarter, ACA took a minimal after-tax charge of just $43.9 million, which is a far cry from the $2.4 billion adjustment that the TABX is indicating just on the firm's subprime CDO book of 2006 paper.

The Bottom Line

The company's stock, already pounded, could fall still further as the subprime debacle plays out over the coming year. Wall Street firms working with ACA also could be hurt.BUT THE MEZZANINE EXPOSURE isn't the only peril in ACA's $15.7 billion subprime-guaranty portfolio. The company has also insured some $5 billion of so-called "high grade" subprime CDOs. Single-A tranches of underlying mortgage pools comprise about two-thirds of these instruments. And although the single-A tranches are situated somewhat higher in the mortgage-backed securities' pecking order than the mezzanine triple-B slices, they aren't all that protected from big hits. Collateral losses of 10% on the underlying pools completely wipe out these tranches and two-thirds of any high-grade CDO of which they are part. Given ACA's exposure in its high grade CDO guaranty portfolio, it could suffer losses there of nearly $3 billion on its $5 billion of exposure.

Finally, ACA has insured a $444 million "CDO-squared," or a CDO comprised of other CDO tranches and thus separated from underlying mortgage-backed securities twice over. So any collateral losses in the pools of underlying mortgage-backeds hit CDO-squareds harder and more quickly than their CDO sires. A 4.5% loss in the underlying collateral is enough to snuff most CDO-squareds.

Ultimately, ACA's fate will be decided in the court of market opinion -- by the performance of literally thousands of subprime mortgages embedded in various mortgage-backed pools. The S&P prediction of low-teen collateral losses is probably as good as any. But it all depends upon how these losses are distributed. If the average consists of a minority of pools with huge losses and most get minimal hits, ACA could live to fight another day. Yet should U.S. subprime woes prove to be systemic across different geographies, then ACA could be toast. We should know the answer within the next year.

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

KipsBay

August 6th, 2007, 03:00 AM

The Fed and markets
Published: August 5 2007 17:42 | Last updated: August 5 2007 17:42

Those hoping that the “Greenspan put” lives on in his successor are likely to be disappointed. Ben Bernanke, chairman of the Federal Reserve, has made pretty clear in the past that he does not plan to ride in with interest rate cuts to save the markets from themselves. Instead the Fed will take its decisions based on the economic data.

Recent turmoil in the credit markets, which stemmed from problems with subprime mortgages and has caused serious stock market jitters, is therefore unlikely to get Mr Bernanke pulling the trigger. But he will be watching very closely to see if there is a real economic spillover. That is a particular risk, given that most of the pain so far has been in credit. There is a possibility that much tighter lending standards to high-risk consumers and companies will also sustainably raise the cost of regular borrowing, helping to slow an economy that is already expected to grow at a disappointing pace in the second half of the year.

No wonder the futures markets are suddenly pricing in at least one interest rate cut by the end of the year. Recent data have given the Fed slightly more room for manoeuvre. The labour market has softened a little, with the unemployment rate ticking up to 4.6 per cent and weak job creation figures. Meanwhile, the rise in the core personal consumption expenditures index, the Fed’s preferred measure of inflation, has finally fallen back below 2 per cent, the top of its target range.

On top of that, news from the housing market has continued to worsen rather than stabilise, as many hoped. That could continue as mortgage rates for less credit worthy borrowers have risen. Even for prime borrowers rates have not fallen in line with Treasury yields in recent weeks.

A cut in short-term interest rates this year is not yet a foregone conclusion. But the Fed can expect to be back centre-stage, starting from this week when all eyes will be focused on any comments it makes about the impact of rollercoaster markets on the economy.

Copyright The Financial Times Limited 2007

KipsBay

August 6th, 2007, 01:45 PM

Housing Market to Weaken Even Further
As Mortgage Industry Takes Cure
By JAMES R. HAGERTY
August 6, 2007; Page A2

After a binge of lax lending in recent years, the U.S. home-mortgage industry is finally taking the cure, swearing off high-risk loans to people with lousy credit records. The bad news is that this medicine is creating a vicious circle that will make the housing market even weaker, at least in the near term.

As regulators and jittery investors force them to adopt more and more conservative lending standards, lenders are cutting more people out of the housing market. In what would strike most people outside the industry as a return to common sense, lenders now are shunning would-be borrowers who can't make a down payment, prove that they have a reliable income and show a record of reasonably regular bill-paying. They also are turning down refinancing requests from many people trapped by adjustable-rate loans that are proving too expensive after the initial feel-good period of low payments.

Question of the Day:2 Which makes more financial sense now, buying or renting a home?"This week is going to be a nightmare," says Melissa Cohn, chief executive of Manhattan Mortgage in New York. Lenders are scaling back so fast that it isn't clear which loans are available or on what terms, and rates are jumping even on large loans, known as jumbos, for prime borrowers.

These stricter lending standards reduce demand for homes and nudge some people who can't refinance toward foreclosure. Higher foreclosures add to a glut of homes on the market in most of the country. And, completing the vicious circle, a weaker housing market comes back to bite the lenders by wiping out owners' equity in their homes and increasing the risk of even more foreclosures down the road.

"The market is in a panic," says Larry Goldstone, president of Thornburg Mortgage Inc., a lender in Santa Fe, N.M. He says he thinks the mortgage-bond market, which supplies most of the money for home mortgages, will calm down within a few months, but the housing market may need at least another year or two to heal.

Earlier this year, lenders had to cut back on subprime mortgages, those for people with the weakest credit records, because a surge in defaults made investors unwilling to buy so many of those loans. In the past few weeks, stung by losses on mortgage securities at some big funds and clampdowns by rating agencies, investors have grown much more nervous. For good reason: A recent Merrill Lynch report estimates that they face $120 billion to $170 billion of default-related losses on U.S. home mortgages currently outstanding. So investors now are shying away from many more types of mortgages, including those known as Alt-A, a category between prime and subprime.

By late last week, panic among mortgage lenders and investors was starting to feed on itself. One midsize lender, American Home Mortgage Investment Corp., shut down its lending operations after creditors cut off funding; the chief executive of another big lender declared that the mortgage-securities market was "not functioning;" and Countrywide Financial Corp., the nation's biggest home lender by loan volume, felt compelled to issue a statement Thursday saying it had plenty of cash on hand. Despite that reassurance, Countrywide's share price dropped 6.6% Friday. Some lenders temporarily stopped taking loan applications Friday because they were unsure about their ability to sell mortgages to investors.

This retreat by investors, who until six months ago seemed to have a boundless appetite for risky mortgages, is forcing lenders to concentrate on more traditional types of loans that they can keep as investments or sell to Fannie Mae and Freddie Mac, the government-sponsored providers of mortgage funding. Fannie and Freddie's share of mortgages packaged into securities rebounded to 49% in the second quarter from a low of 37% a year earlier, according to Inside the GSEs, a trade publication.

Because loan standards are now much tougher, at least 10% to 15% of the people who could have qualified for a home-purchase loan last year can't do so now, says Jan Hatzius, chief U.S. economist at Goldman Sachs. Meanwhile, many of the people who would still qualify for a loan don't want to buy a house now because they think prices will fall further. So the housing market is likely to remain weak for at least another couple of years, Mr. Hatzius figures.

One reason is that it takes time to absorb all the houses and condos waiting for buyers. The National Association of Realtors counts about 4.2 million resale homes for sale, along with more than 500,000 new homes on the market. That is enough to last about 8½ months at the recent sales rate; a supply of five to six months generally is considered balanced.

Foreclosures will add to the supply. Moody's Economy.com has estimated that 2.5 million homeowners will default on their mortgage loans this year and next. Some will be able to keep their homes, through "loan modification" agreements that reduce payments or through various refinance packages offered by lenders and state rescue programs. But about 1.7 million of them will lose their homes to foreclosure, the research firm projects.

The U.S. housing boom over the past decade turned about five million renters into homeowners, says William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology. But many of the loans that made that possible have proved unsustainable. Dr. Wheaton expects about two-thirds of those people to go back to renting. Eventually, he says, rents will rise, and more people will see owning as a better alternative, helping to revive the housing market, perhaps in 2009 or 2010.

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

Front_Porch

August 6th, 2007, 02:08 PM

Scary stuff from Mr. Hagerty, who was kind enough to blurb my book . . .

all I can say is that I'm not seeing these effects in Manhattan. I should note that my clients aren't borderline qualifiers, so the introduction of "stricter standards" by lenders doesn't mean anything to them.

But I'm still seeing business as usual. Still seeing mortgage rates float in a band around 6.5-6.75%, still seeing new construction condos charging ahead with pricing amendments.

The one glimmer of hope is that I went shopping downtown with clients yesterday, and we did have one building offer to pick up RETT if we signed quickly, which is an offer I hadn't had in six months.

ali r.
{downtown broker}

KipsBay

August 6th, 2007, 02:27 PM

How Speculators Exploit Market Fears
by Ben Stein

Posted on Thursday, August 2, 2007, 12:00AM

Here's a fact: The speculators and hedge fund managers who run today's stock market need market volatility in order to make money.
They can't make enough money if the market stays flat or moves only a bit, so they like extreme and unexpected price movements. They especially like sudden, surprise movements down, when they can make money off stocks they borrow and sell -- or, as they say, "sell short."

Money Lust Satisfied

That's what's been happening the past couple of weeks. But it's not interesting to say that the speculators are whipping the market around to satisfy their money lust. So the speculators themselves make up reasons for why the market is fluctuating, flog those reasons to the media, and then profit if some other speculators believe the jive reasons and jump in the way the manipulators want them to.
Supposedly, the market is "correcting" because of worries about the housing slowdown, and also because of fears that the debt markets that support mergers and acquisitions is drying up.
These are interesting theories, and people who don't know a lot about the stock market or the economy might find them beguiling. What follows are a few truths that show how shallow these "reasons" for the stock market moves are.

Housing a Theory

Yes, the housing market has slowed from a spectacular bubble level to a simply pretty good level. Housing sales and starts are now about what they were in 2002, and no one thought we were in a housing depression then.
In any event, housing is only about 5 percent of the economy. If it falls by 15 percent, that would represent a fall-off of about .75 percent. That's not trivial, but it's also not the stuff of which recessions are made.
The fact is that there is no recession. The economy is suffering from a labor shortage, not a surplus of unemployment. The Fed is worried about excess demand, not slack demand.
Corporate profits set new records every day. Whatever's happening in residential sales and building is simply not slowing down the economy. Why should a Boeing or a Merck or a Pfizer have any reaction to housing at all? Because the speculators sell everything they can when nervousness sets in -- and for no other reason.

A Minor Major Mess

Subprime is a mess. But it's a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That's 4 percent of mortgages.
Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market -- a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it's nothing.
And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything.
There's simply no connection between subprime and developed or developing nations' stocks. This by itself shows the thin context of the selling wave late last month.
Money's Still Cheap
What about the supposed drying up of loans for mergers and acquisitions by private equity firms? Well, here's a good, simple test of just how valid that explanation is for stock market moves: The majority of private equity takeovers are financed with junk debt.
If there really were a major shortage of funds for these deals, the interest rate on the junk would skyrocket. Instead, while the rate has risen by about 150 basis points in the past month, the spread between junk and investment grade is now about 290 basis points, according to leading junk analyst Martin Fridson.
This is a lot lower than the year-end average of the spread from 2002 to 2006, and far below the almost 800 basis point spread during a true interest-rate crunch like the one after the tech meltdown in 2000-2002.
So that's phony, too. Interest rates have risen, but not anything like what they've done in real crises. And besides, the Dow fell by about 550 points the week before last, yet not one of the Dow stocks is involved as either acquiror or acquiree in a private equity deal.
In short, money is no longer virtually free the way it was for private equity deals in the past year. But it's not expensive by historical standards, either.

Spreading the Fear

In other words, it's all the speculators trying to panic us so their sell programs will make money. And they'll make money as long as they can spread their panic. When they can't do that any longer, they'll work the long side -- and make up reasons for that, too.
In the meantime, the economy is strong. Profits are great, and interest rates are low and will stay that way. Don't sell. With all the shrieking about the market, it only fell to what it was about five weeks ago -- and we didn't think we were poor then.
So let the speculators shout "fire." As of right now, they're not blowing anything but smoke.

Copyright © 2007 Yahoo! Inc. All rights reserved.

bigkdc

August 6th, 2007, 02:32 PM

The one glimmer of hope is that I went shopping downtown with clients yesterday, and we did have one building offer to pick up RETT if we signed quickly, which is an offer I hadn't had in six months.

Do you think that was a market thing or something to do with the individual development?

Do you know if you can still get a price amendment if you have sold at asking price but have given concessions like the one you mentioned?

KipsBay

August 6th, 2007, 02:33 PM

Countrywide, broker debt-protection costs rise
Monday August 6, 12:55 pm ET

NEW YORK (Reuters) - The cost to insure the debt of mortgage lender Countrywide Financial Corp. (NYSE:CFC - News) and U.S. brokers with exposure to mortgages, including Bear Stearns Cos. (NYSE:BSC - News), surged on Monday.
Credit default swaps on Countrywide's home loan unit Countrywide Home Loans, its most actively traded swap, rose by around 100 basis points to 445 basis points, or $445,000 per year for five years to insure $10 million in debt, according to data from CMA DataVision.

Debt-protection costs of Countrywide, the largest U.S. mortgage lender, have doubled from 210 basis points on Thursday on accelerating concerns about profits as mortgage borrowers struggle with payments.

Last week, Countrywide posted a 33 percent decline in quarterly profit and slashed its 2007 forecast as more homeowners fell behind on payments. For details, see (ID:nN24376451).

Credit default swaps on mortgage insurer Radian Group Inc. (NYSE:RDN - News) also leaped 100 basis points on Monday to around 500 basis points.

Radian's credit default swap spreads have more than doubled from around 182 basis points last Monday as concerns about home loans grew and on increasing speculation that Radian's planned merger with MGIC Investment Corp. (NYSE:MTG - News) may fall through.

Bear Stearns Cos.' credit default swap spreads also widened around 40 basis points to 200 basis points.

Warren Spector, Bear Stearns' co-president and co-chief operating officer, resigned on Sunday, two days after the bank said in a conference call that it was weathering the worst storm in the financial markets in more than 20 years. (ID:nN05330619)

Lehman Brothers' (NYSE:LEH - News) swaps were around 25 basis points wider at 155 basis points, and Goldman Sachs' (NYSE:GS - News) swaps were around 15 basis points wider at 106 basis points, according to data provided by CMA DataVision.

Credit default swaps on U.S. home builders were also pushed wider in line with weakness in mortgage-related debt.

The cost to insure the debt of D.R. Horton, Inc. (NYSEHI - News), Lennar Corp. (NYSE:LEN - News) and Toll Brothers Inc.(NYSE:TOL - News) all rose by around 30 basis points, to 410 basis points, 261 basis points and 265 basis points respectively, CMA data showed.

Swap spreads on KB Homes (NYSE:KBH - News) and Meritage Homes Corp. (NYSE:MTH - News) also were around 40 basis points wider at 545 basis points and 725 basis points, respectively.

Copyright © 2007 Reuters Limited

KipsBay

August 6th, 2007, 02:47 PM

NY Times Readers' Comments

http://news.blogs.nytimes.com/2007/08/06/mortgage-woes/

Front_Porch

August 6th, 2007, 04:09 PM

wow, those New York Times posters are offering up some craigslist-quality comments.

as far as bigkdc's question, I think you can still get a pricing amendment if you sell at list but offer to pick up closing costs, but I'm no lawyer so don't quote me on that.

ali r.
{downtown broker}

KipsBay

August 6th, 2007, 04:56 PM

FP, you might find the Jim Cramer Market Meltdown rant more entertaining than the NYT readers' comments - or maybe not.

http://www.youtube.com/watch?v=SWksEJQEYVU

Front_Porch

August 7th, 2007, 10:33 AM

Omigod, I love Jim Cramer so much!! Why do we not have a little heart gif?

Let's settle for

I :D Jim Cramer.

But I love him because of his passion for his convictions, not necessarily because I am persuaded that his convictions are right.

Those 7 million people who took teaser rates, they were marginal additions to the homeownership rate that was already pushing historic levels -- maybe the economy can't sustain them as homeowners.

I'd be more curious to see what a long-term pundit about market speculation thinks -- in other words, what does Jim Grant have to say?

ali r.
{downtown broker}

KipsBay

August 7th, 2007, 10:39 AM

Mortgage Fears
Drive Up Rates
On Jumbo Loans

By JAMES R. HAGERTY
August 7, 2007; Page A1

Turmoil in the U.S. home-mortgage market is starting to pinch even buyers of high-end homes with good credit records, in the latest sign of rising anxiety among lenders and investors.

This surge in rates on so-called jumbo loans is particularly notable because rates on 10-year Treasury bonds have been falling. Normally, mortgage rates move in tandem with Treasurys, but market jitters have caused investors to ditch mortgage securities.

Meanwhile, American Home Mortgage Investment Corp. finally succumbed yesterday to the mortgage-sector chaos that had crippled it in recent weeks and filed for protection from creditors under Chapter 11 of U.S. bankruptcy law. And executives at Fannie Mae, the government-sponsored entity that along with Freddie Mac provides funding for home loans, asked the companies' government overseer to raise the maximum amount of home mortgages and related securities Fannie can hold in its investment portfolio. The goal would be to boost demand for mortgages in general, proponents of the idea said.

Among other signs of distress, Aegis Mortgage Corp., Houston, notified mortgage brokers that it is unable to provide funds for loans already in the pipeline, a spokeswoman said. And Luminent Mortgage Capital Inc. of San Francisco said it faced calls for repayments from creditors and is suspending its dividend.

Lenders -- having already slashed lending to subprime borrowers, as those with weak credit records are known -- now are jacking up rates on jumbo mortgages for prime borrowers. These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie and Freddie. They account for about 16% of the total mortgage market, according to Inside Mortgage Finance, a trade publication, and are especially prevalent in California, New Jersey, New York City, Washington, D.C., and other locales with high home costs.

Lenders were charging an average 7.34% for prime 30-year fixed-rate jumbo loans yesterday, according to a survey by financial publisher HSH Associates. That is up from an average of about 7.1% last week and 6.5% in mid-May.

The higher costs for such loans will put further downward pressure on home prices in areas where homes typically bought by middle-class people can easily cost $500,000 to $700,000.

Mortgages are typically packaged into securities and sold to investors. But as subprime weakness has made investors skittish, lenders are becoming more cautious in issuing mortgages. Though defaults have soared on subprime loans and are rising on Alt-A mortgages, a category between prime and subprime, losses on most types of prime mortgages have remained very low. Even so, lenders have raised rates on prime jumbo loans defensively because they are unsure what rattled investors may be willing to pay for them, said Doug Duncan, chief economist of the Mortgage Bankers Association.

The jump in jumbo-mortgage rates is the latest gust in a subprime storm that has sunk two hedge funds run by Bear Stearns Cos., knocked American Home and dozens of other lenders out of business, battered an already weak housing market and fueled weeks of stock-market turmoil. Yesterday, the Dow Jones Industrial Average rebounded 286.87 points, or 2.2%, to 13468.78.

Alarmed by weakness in the housing market and rising foreclosures, investors who buy loans and securities backed by mortgages have fled the market for almost any loan that isn't guaranteed by Fannie Mae or Freddie Mac, Mr. Duncan and others said. That means lenders must either hold loans, at least temporarily, and face the risk of falling values for them, or seek out borrowers who qualify for loans that can be purchased by Fannie and Freddie.

For other types of loans, Mr. Duncan said, "there is no market." He said it isn't clear how long the market will remain disrupted, but said some mortgage bankers fear the current paralysis could last weeks. "We're getting calls from members [of the lenders' association] who are quite desperate about their circumstances," Mr. Duncan said. Large banks have the capacity to retain loans on their books, but many other lenders can only make loans that can be sold quickly.

Since defaults on lower-grade mortgages began hitting worrisome levels late last year, several dozen lenders have closed. American Home, until recently the 10th-largest U.S. home-mortgage lender in terms of loan volume, was forced to stop lending and lay off most employees last week after the Melville, N.Y., firm's creditors cut off further funding and demanded repayments.

The latest mortgage ripples come as Federal Reserve policy makers prepare to meet today to discuss the economy and interest-rate policies. They are expected to keep the target for short-term interest rates at 5.25% and maintain their focus on holding down inflation, but acknowledge increased risk to economic growth from jitters in the credit market and the weak housing sector.

Pressure is likely to grow for the Fed and other regulators to take steps to reassure mortgage lenders and home buyers.

The Office of Federal Housing Enterprise Oversight, or Ofheo, which oversees Fannie and Freddie, last year ordered both mortgage issuers not to make any substantial increases in their holdings because of problems with accounting and financial controls at the two companies.

But Fannie officials have argued that raising the ceiling on their mortgage purchases could help calm turmoil in the mortgage market and avoid disruptions in the flow of credit, people familiar with the situation said.

A Fannie spokesman declined to comment, as did a spokeswoman for Ofheo. David Palombi, chief spokesman for Freddie, said one other possible response to the market turmoil would be to allow the two companies to buy larger mortgages, those above the current $417,000 cap.

Ofheo's director, James Lockhart, has said the two companies have made progress in redressing their accounting and financial-control problems but need further improvement. That view could be an impediment to raising the cap.

The market disruption came as crushing news for Gary Cecere, a mechanic who lives in Croton-on-Hudson, N.Y. Mr. Cecere said he learned yesterday that Wells Fargo & Co. was no longer willing to complete a planned package of two mortgage loans that would allow him to buy a $410,000 four-bedroom home in Mahopac, N.Y. Hugo Iodice, a branch manager at Manhattan Mortgage Co. who is acting as a loan broker for Mr. Cecere, blamed tighter standards imposed by Wells Fargo on Alt-A loans. A Wells Fargo spokesman had no immediate comment.

"I was getting ready to close [on the home purchase] this week, and they basically pulled the carpet out from under my feet," said Mr. Cecere. For now, he said, his wife, five children, two cats and a dog are cramped into a two-bedroom temporary apartment, awaiting a move. Mr. Iodice said he is trying to find an alternative loan for the family.

Even borrowers with good credit records who can afford a large down payment are finding rates surprisingly steep if they can't qualify for a loan that can be sold to Fannie or Freddie. Rates on prime jumbo loans have risen so fast that "nobody in their right mind would pull the trigger" and accept one now, unless they couldn't delay a home purchase, said Darren Weisberg, president of PFG Mortgage Services Inc., a mortgage broker in Lake Forest, Ill.

Some lenders are pulling the plug on whole categories of loans. Yesterday, National City Corp., a Cleveland banking company, said it has suspended its offerings of home-equity loans or lines of credit made through brokers rather than the bank's branches. The company cited market conditions.

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

KipsBay

August 7th, 2007, 10:50 AM

The Loan Comes Due

August 5, 2007
Zero Down
By FLOYD NORRIS
SUDDENLY it’s not so easy to borrow.

That is true for homeowners, and it is true for companies.

Only two months ago, it seemed as if almost any company could borrow money at low interest rates. Now loans seem to be drying up everywhere.

What had seemed like a contained problem, involving home loans to people with poor credit, has suddenly mushroomed into a rout that threatens to make life difficult for everyone who needs to borrow money.

Home buyers are likely to pay more for mortgages, and some with less-than-pristine credit or an inability to come up with a down payment may find they no longer can borrow at all.

A German bank had to be rescued by other banks last week, because it had speculated in securities backed by American mortgages. One of the biggest mortgage lenders in the United States collapsed, and another said it would drastically scale back its lending because it cannot find investors willing to finance the loans it makes.

The volume of new high-yield bonds — also known as junk bonds — fell by 89 percent in July. The market for loans to highly leveraged companies has almost dried up. Standard & Poor’s counts $35 billion in corporate loans that have been delayed or canceled, including loans to finance the leveraged buyout of Chrysler.

The Chrysler deal will go through, because banks had promised to lend the money if others would not take the loans. But from now on there are likely to be fewer corporate takeovers, and those that do take place are likely to be at lower prices. “This is a classic credit correction,” said Jack Malvey, the chief global fixed income strategist for Lehman Brothers. “The magnitude of risk was significantly underappreciated.”

Mutual fund investors have been pulling back rapidly, with more than $1.3 billion coming out of funds that invest in leveraged loans during recent weeks, and $2.7 billion leaving funds that buy high-yield bonds, according to AMG Data Services.

Hedge funds, which had been major buyers of complicated securities that financed leveraged loans and mortgages, have also pulled back. Some investors have tried to pull money out of such hedge funds, leading Bear Stearns to stop investors from making withdrawals from three of its funds.

“That is the core of a financial crisis, when too many people head to the exits simultaneously,” said Robert Bruner, the dean of the business school at the University of Virginia.

Mr. Bruner is the co-author of a book on the Panic of 1907, to be published next month, and he sees similarities between then and now. “It was a time marked by the rise of new financial institutions and new financial instruments,” he said. “It marked the end of a period of extraordinary growth, from 1895 to 1907.”

The credit market has changed drastically in recent years, as banks grew far less important and credit rating agencies like Standard & Poor’s and Moody’s became the essential players in the new financial architecture.

Many loans, whether mortgages or loans to corporations, were financed by selling securities. It was the credit agency ratings that determined if those securities could be sold, and deals were structured to meet the criteria set by the agencies.

Those criteria turned out to be very generous. The agencies figured that even very risky loans were unlikely to cause big losses, and so most of the securities backed by loans to poor credit risks could get AAA ratings — the highest available — as long as those securities had first claim on loan payments. Investors bought the securities thinking they were completely safe, and some did so with borrowed money.

Now, however, there is fear even about those securities. The rating agencies are changing their criteria for the loans, and many investors no longer trust the ratings.

The markets are “very panicked and illiquid,” said Mike Perry, the chief executive of IndyMac Bank, the ninth largest mortgage lender in the first half of this year, as he announced plans last week to curtail lending sharply. It is very difficult, he said, to find buyers even for the AAA securities.

All this has happened with few defaults. Mortgage delinquencies are up, particularly on loans made in 2006 when credit standards were very low, but the real problem is that lenders and investors fear things will get much worse.“This is what we would characterize as the first correction of the modern neo-credit market,” said Mr. Malvey of Lehman Brothers. “We’ve never had a correction with these types of institutions and these types of instruments.”

It now seems likely that the rating agencies, and investors, were lured into a false sense of security by the lack of defaults. With the value of homes, and companies, rising, it was usually possible for a borrower in trouble to refinance the debt or, at worst, sell the home or business. Either way, lenders got paid.

Now, there is less confidence that rising prices will bail out lenders, and there is doubt not only about the quality of old loans but also about important parts of the new financial system.

“The markets seem to be expressing concern about the performance and the stability of hedge funds and, to a lesser extent, private equity funds,” said Mr. Bruner.

The credit squeeze is coming at a time when the American economy seems to be growing, despite problems in the housing market, and the world economy is strong. “The underlying economy is very healthy,” said Henry Paulson, the Treasury secretary, as he visited China last week. But a good economy in no way precludes credit problems. In fact, it is during good economic times that credit standards are most likely to be so lax that bad loans are made.

“Financial panics don’t happen during depressions,” said James Grant, the editor of Grant’s Interest Rate Observer. “They happen on the brink of depressions. The claim the world is prosperous is beside the point.”

Not all panics lead to economic downturns, of course, and if this one continues pressure will grow on the Fed and other central banks to lower the short-term interest rates they control and thus stimulate the economy.

But central banks do not always determine what happens in credit markets.

“The Fed tightened in 2005 and 2006, but creative financing on Wall Street blunted the impact,” said Robert Barbera, the chief economist of ITG, a research firm. “The collapse of that option in the last 90 days means the entirety of that tightening is arriving now, and there is a violent tightening going on.”

Of course, this phase will pass. The insurance companies and pension funds that are the traditional buyers of bonds always have money coming in, from interest payments and bond maturities, as well as from new business, and they will have to put it to work.

“The history is that lenders move in great caravans between two extreme points, which we can call stringency and accommodation,” said Mr. Grant, recalling how hard it was for companies to get loans as recently as 2002.

Lenders will move back to accommodation one day, he said, but for now it appears that risky borrowers,whether of the corporate or individual variety, will discover that it’s much more difficult to find someone to lend money to them.

Copyright 2007 The New York Times Company