View Full Version : Effect of subprime mortgage collapse / credit crunch / stockmarket decline

August 2nd, 2007, 10:22 AM
What do you think the effect of subprime mortgage collapse / credit crunch / stockmarket decline will be on NYC houseing market, especially new construction condos?

Assuming the latest financial tribulations are more than a blip, they could suck some of the steam out of the Wall Street bonus bonanza. If this happens, will we see a lot of cancelled deals, and buildings opening with lots of empty units?

August 2nd, 2007, 02:12 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].

August 3rd, 2007, 12:18 AM

Credit Chill Freezes Leveraged Deals
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

August 3rd, 2007, 12:36 AM
Subprime Detectives Search
In Dark for Next Victim
Wall Street Can Bury
Mistakes in Fine Print
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

August 3rd, 2007, 12:43 AM
August 3, 2007
Mortgage Lender Says It Will Close

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

August 3rd, 2007, 01:06 AM
August 3, 2007
Hedge Funds Are Not Profiting From Market’s Current Volatility

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

August 3rd, 2007, 08:20 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.

August 3rd, 2007, 11:28 AM

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:

August 3rd, 2007, 11:49 AM
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....

August 3rd, 2007, 12:34 PM

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.;)

August 3rd, 2007, 01:01 PM
Lenders Broaden Clampdown on Risky Mortgages
Tightening Standards
Could Worsen Slump
In the Housing Market
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

August 3rd, 2007, 01:13 PM
The Debt-Ometers
How to Read the Subprime and Other Consumer-Loan Dials
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.
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

August 4th, 2007, 01:35 PM

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.

August 4th, 2007, 06:37 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}

August 5th, 2007, 10:58 PM
'Great Unwind' May Be Here
As Problems Spread
To Broad Bond Market,
Top Brokers Could Suffer
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

August 5th, 2007, 11:07 PM
Braving the Subprime Storm
Tough to Avoid Trouble,
As More Parts of Market
Start to Move Together
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

August 5th, 2007, 11:20 PM
Insuring Against Credit Risk
Can Carry Risks of Its Own
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

August 6th, 2007, 12:36 AM
August 6, 2007
Mortgage Maze May Increase Foreclosures

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

August 6th, 2007, 01:23 AM
Subprime's Ultimate Time Bomb?

Monday, August 6, 2007


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

August 6th, 2007, 02:00 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

August 6th, 2007, 12:45 PM
Housing Market to Weaken Even Further
As Mortgage Industry Takes Cure
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

August 6th, 2007, 01:08 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}

August 6th, 2007, 01:27 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.

August 6th, 2007, 01:32 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?

August 6th, 2007, 01:33 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

August 6th, 2007, 01:47 PM
NY Times Readers' Comments


August 6th, 2007, 03:09 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}

August 6th, 2007, 03:56 PM
FP, you might find the Jim Cramer Market Meltdown rant more entertaining than the NYT readers' comments - or maybe not.


August 7th, 2007, 09:33 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}

August 7th, 2007, 09:39 AM
Mortgage Fears
Drive Up Rates
On Jumbo Loans

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

August 7th, 2007, 09:50 AM
The Loan Comes Due

August 5, 2007
Zero Down
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

August 7th, 2007, 10:02 AM

James Grant is quoted in the above NY Times article^. I gather he is implying a coming depression. However, I wonder if the reporter quoted or understood him correctly. I think he would have implied recession before depression. And his quote does not specifically attribute the credit crunch as a panic. I wish the reporter pinned him down. I'll have to get my hands on the Interest Rate Observer.

James Grant is quite a character. I once saw him playing catch, with glove in hand, on Broad Street (not on sidewalk and pre 9/11) in front of NYSE. I wish I had my glove too.

August 7th, 2007, 10:23 AM
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.
{downtown broker}


I thought the term was Houseowners, not Homeowners ;). Remember, I read your book.

So FP, is it your opinon those 7 million were mostly speculators, flippers/investors or were they Homeowners who were joining the ownership economy?

Given the deliquency rate, there may be fewer Homeowners in the group than in historical statistics would suggest.

I think the real answer to that question is critical, since now politicians are starting to weigh in on issues I frankly think they have not studied or given much thought. Knee-jerk policies (not talking about the FED) may lead to adverse results IMO.

August 7th, 2007, 10:28 AM
Democrats Raise Heat
On Mortgage Overhaul
August 7, 2007; Page A2

WASHINGTON -- As a wave of mortgage foreclosures buffets financial markets and feeds voter economic anxiety, Democratic presidential candidates are jockeying to get ahead of the emerging issue. The latest, Democratic front-runner Hillary Rodham Clinton, is scheduled to unveil today a plan to combat "mortgage lending abuse" -- another example of the Democratic Party's increasing willingness to explore new regulations on business and markets.

The U.S. senator from New York is proposing a package of measures that would impose new disclosure requirements on mortgage brokers and curb their ability to dictate lending terms. Specifically, Mrs. Clinton is planning to say today that she would force brokers to state their fees in plain language, require a full disclosure of monthly tax and insurance costs for subprime loans, and ban prepayment penalties on all home mortgages. This latter proposal could shake up the industry, one analyst said.

Thomas Lawler, a consultant who used to work for government-sponsored mortgage lender Fannie Mae, said the mortgage industry will resist the package, arguing that it will further dry up credit for many Americans. He said Mrs. Clinton's proposal could also make mortgages more expensive for conventional borrowers with good credit scores.

One rival, former Sen. John Edwards of North Carolina, has proposed setting up bailout pools to assist homeowners facing foreclosure and easing bankruptcy rules for people in danger of losing their houses. Another Democratic contender, Sen. Chris Dodd of Connecticut, chairman of the Senate Banking Committee, has held hearings about predatory lending. His May "housing summit" involving industry officials and consumer advocates suggested changes to current lending practices that lenders would eventually agree to voluntarily, in lieu of future legislation.

Housing isn't the only issue where candidates are moving away from the party's 1990s shift to the economic center. In Iowa yesterday, Mr. Edwards blasted free-trade agreements and proposed a ban on future pacts unless they include strong labor and environmental components. He also proposed giving the Treasury Department more tools to counter countries such as China that "manipulate" their currencies in order to give themselves a trade advantage.

So far, such economic topics remain largely the focus of Democrats in the presidential race. Few if any of the nine Republican candidates have mentioned housing. Perhaps the closest to acknowledging problems in the industry is Republican Mitt Romney, who signed an antipredatory lending law in 2004 as governor of Massachusetts.

What may be the most significant of Mrs. Clinton's mortgage proposals is her call for an end to prepayment penalty riders on all mortgage products. Advocates of such riders, which prevent borrowers from paying off mortgages early, say they make mortgages easier to resell on secondary markets by guaranteeing a fixed rate of return to an investor. The tradeoff, advocates say, is that consumers often get a lower rate of interest when they agree to a prepayment penalty. But overhaul advocates say the riders are often used by subprime lenders to prevent holders of subprime adjustable mortgages from refinancing their loans at a lower rate with a rival lender.

Mrs. Clinton's other proposals deal with transparency. One would require mortgage brokers to disclose to borrowers that they make bigger commissions if the loans they sell carry higher interest rates or are larded with upfront fees. This disclosure of the so-called yield-spread premium that brokers receive is technically disclosed already in loan documents -- but is so loaded with jargon that few understand what it says.

The third main plank in Mrs. Clinton's policy would require lenders to include in the monthly payment estimate taxes and insurance on all higher-risk mortgages.

--Deborah Solomon contributed to this article.

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

August 7th, 2007, 12:49 PM
It's so hard for me to wrap my arms around the subprime mortgage collapse, because a) it's not happening in my my market and b) I'm not reporting on it. You read my book, the last time I talked to Governor Bernanke was years ago; he's not likely to be taking my calls anytime soon.

But it looks like easier credit would do two things -- it would support the newer borrowers who have become "houseowners" over the past few years, and it would rescue the Wall Street guys who built pyramids on their backs.

Now whether we "need" to do that as a matter of policy is beyond the scope of my tiny, tiny brain. But it does seem, if you could remove the emotion of "wow, people are going to lose their houses" from the equation, that it isn't much different from the collapse of Web 1.0 in 2000. The people who came pouring into that market at the end of that boom (and yes, I was one of them) shouldn't have been there, and they were there because they were following the lead of the rich.

The Internet idiots, as I like to call us, didn't get rescued, and the U.S. economy did not collapse.

Similarly, I don't have lots of good national homeownership stats, but it does seem like those newer housebuyers should not have been in that market -- the fact that ownership rates were pushed to historic levels is one sign that maybe ownership was being pushed too hard -- and the amazing drop in the percentage of equity required for ownership to 3% down, or even 0% down, was another.

This was a real estate industry fault as much as a financial industry fault -- we made it look too easy.

But that still doesn't answer the question of whether these drowning people should be saved or not. The liberal in me says of course, you can't let people lose their homes.

But the reason I was curious to hear what Mr. Grant had to say is that I think his whole "Trouble with Prosperity" thesis was that amelioration is the worst course, and whenever you soften the social costs of a decline through easy credit, you forestall economic growth later.

ali r.
{downtown broker}

August 7th, 2007, 12:54 PM
and, Kips Bay, your point about who these 7 million people are really does cut to the crux of the problem.

My guess is we'll never know. We'll get different snapshots of those 7 million people from different parties each trying to advance their own agenda, but it will be like the blind men describing the elephant . . .

ali r.
{downtown broker}

August 10th, 2007, 01:43 PM
I did a bit about this for Inman News, free today (Friday)

Please forgive the ARM-ageddon joke.



August 10th, 2007, 05:27 PM
Hey Front_Porch,

I read your article, and I agree it is raining, not pouring, out there for those in Sub-Prime and now Alt-A mortgages (By the way, your analogy stung a little too much since I unfortunately got too much water in a basement property this week and a blown chimney in another - and I'm not in Kansas :eek:). And certainly as you said, rates are historically low and should be put into that perspective.

I suspect your personal rate is based on your prime mortgage. On the other hand I would really be interested in knowing what the average and median sub-prime mortgage holder faces when their Arm gets reset/ or broken for others (yes, another ARM/Arm pun). I think we can all agree, that mortgage brokers/bankers took advantage of sub-prime mortgage holders just as much as sub-prime mortgage holders took advantage of the brokers/bankers. Though I am not shedding any tears, I am concerned that too many disregard the risk associated with rising rates (frankly, a course that should be taught in High School). And when coupled with a credit crunch and systemic market impact, this rain storm can quickly turn from a few splashes, as you said, to a torrential down pour. (I won't get started on Dow Theory and more impact waves from this market storm:rolleyes:...)

And big bravo to the ECB and FED this week for restoring some liquidity - my last water analogy...

August 13th, 2007, 04:06 PM
Okay, I have so many WTF reactions to this piece, and its crazy hyperbole, and its illogical subpoints, it's hard to know where to start --

How does my facing rising rates on my beach house make me the equivalent of Tom Joad, a man who can't support his family? (Will we call the new Okies "Hamptonies?")

Why shouldn't people who can't document citizenship be able to buy homes?

How does the pain of a class of new homeowners who came in on the margin -- because those 14 million people piled into a market that already had one of the highest homeownership rates in U.S. history -- destroy the nation's already-established equity base?

Why is it suddenly the mission of Fannie Mae, an agency set up to support starter homes (mortgages under $417,000), to suddenly save richer homebuyers?

How are 8% rates, low by historical standards and great in the consciousness of those of us who remember the '70s, "nuclear winter?"

Isn't your UWS Classic Six value protected by the co-op board which forced you to prove that you had liquid assets just in case you lost your lucrative job at Bear Stearns?

I remember from EC 101 that when rates change wealth shifts between debtors and creditors, and I do believe that it's painful, and possibly to be lamented, but c'mon.

I wonder what Cramer would write if somebody told him there was a war on.

ali r.
{downtown broker}

August 13th, 2007, 05:13 PM
Pardon my ignorance on the subject but does

Isn't your UWS Classic Six value protected by the co-op board which forced you to prove that you had liquid assets just in case you lost your lucrative job at Bear Stearns?

Mean that you need to have those liquid assets for the entirety of ownership? I thought that the liquid asset requirement was a “snap shot” of you current financials. I assumed that some people would save up the necessary funds to prove they could, buy the co-op, and then spend that "liquid asset" money on something else e.g. 2nd home, school tuition, narcotics etc. Are you saying that they can’t? (aside from the obvious “they shouldn’t”)

August 13th, 2007, 06:39 PM
I come from the "no questions are ignorant" school of thought -- of course you are right, spesq, that the co-op board process takes place at a moment in time, and that buyers are free to spend those assets after their purchase takes place . .

however, most co-op boards also administer an income test, so that the purchaser's housing costs are typically restricted to 25%-33% of their gross income.

So the purchaser Mr. Cramer is worried about still has 67%-75% of their gross income to spend on second home, school tuition, narcotics etc.

That buyer would whatever liquid assets they had displayed at the point of buying their condo while they had all that extra income coming in.

Not to say that these buyers are completely insulated from financial misfortune, but the argument I'm making is that the co-op system doesn't allow in the kind of zero-down buyers that Vegas and Phoenix are famous for.

ali r.
{downtown broker}

August 14th, 2007, 06:58 AM
Part of what Cramer is saying is that a lot of what drives value is demand and that the impact on the financial services business in NYC will dampen demand. In some ways I agree but only for the short term.

Right now most on Wall Street (even those that work in areas not at all related to the credit crunch) are a bit nervous over what is going to happen over the next 4 months (most believe it will take 4 months or so to sort out all of the "hung" transactions). For many, this nervous feeling will translate into a pause in major capital expenditures. However, the fundamentals of our economy are strong and more importantly, the fundamentals of the Manhattan real estate market are really strong. This nervous feeling will pass quickly (I think once people get to their year end bonuses and realize the sky isn't falling we will be okay).

We will have a major problem should this 4 month period extend into the beginning of a recession or should there be some sort of major "event" that sends the economy into a tailspin.

All of the stuff Cramer says about citizenship and homeowners is nonsense and hyperbole but that shouldn't surprise anyone.

August 14th, 2007, 12:36 PM
Okay, I have so many WTF reactions to this piece, and its crazy hyperbole, and its illogical subpoints, it's hard to know where to start --

Cramer tends to have a flair for the dramatic, but he does have some good points if you read between the lines. My theory is (if you read his books), I think he's really jockeying for a rate cut so his theories aren't invalidated. :)

August 14th, 2007, 02:18 PM
Does anybody remember if Cramer was screeching this loudly during the "17 straight interest-rate increases?" that he's now squawking about?

ali r.
{downtown broker}

August 15th, 2007, 11:09 AM
Wall Street bonuses safe from volatility
Increases still in line for private equity, investment banking pros

By David Weidner (http://www.marketwatch.com/news/mailto.asp?x=100+119+101+105+100+110+101+114&y=David+Weidner&z=marketwatch.com&guid=%7B1419e6e2-8a58-47be-a4f3-56a0709a0250%7D&siteid=mktw), MarketWatch

Last Update: 3:42 PM ET Aug 13, 2007

NEW YORK (MarketWatch) -- Wall Street bonuses will see a modest impact from recent woes in the market, according to a survey released Monday by Johnson Associates Inc.

Compensation will be hit by firm-wide financial losses from loan-related fees and write offs. Those losses will be offset by the seven- to eight-month build up of the bonus pool, the report said. Bankers also can expect to see more options in compensation packages.

Private equity professionals and investment bankers can still expect to see 20% gains in yearend compensation.

"Increases are expected across the board, varying in magnitude with mixed business results across sectors and products," Johnson said in its report.

"The growing divergence in incentive pool increases and compensation levels between major firms and broader comparators continues."

Prime brokerage, hedge fund, derivative workers can expect 15% increases. Senior executives can expect 5% to 10% increases.

Merrill Lynch & Co. (MER (http://www.marketwatch.com/quotes/mer)),Lehman Brothers Holdings Inc. (LEH (http://www.marketwatch.com/quotes/leh)) , Bear Stearns Cos. (BSC (http://www.marketwatch.com/quotes/bsc)) , Goldman Sachs Group Inc. (GS (http://www.marketwatch.com/quotes/gs)) and Morgan Stanley (<IMG class=pixelTracking height=1 width=1 border=0>MS (http://www.marketwatch.com/tools/quotes/quotes.asp?symb=MS)) have set aside more than 45% of revenue for compensation and benefits, the report said.

August 16th, 2007, 10:38 AM
Some points, both locally and nationally:

- Wall St is getting hammered. Even business lines that have no sub-prime expose are getting hit by the credit crunch. I read a blurb this moring about how a movie financing deal is being withdrawn for just that reason. All sorts of deals aren't happening that were before. Also, I think we're going to see some straight up and (mostly) down trading losses for the big firms. Given that this is starting over the summer, if there isn't a BIG recovery through the fall, I don't see how this isn't going to have a major negative affect on bonuses

- Housing drives several entire industries. For instance Home Depot is facing lower revenues due to the housing crunch. The entire real estate - industrial complex, brokers, mortgage bankers (for multiple reasons), title companies builders, home furnishing people, etc, etc., are getting hit. The housing market is a HUGE driver of the economy, and it's taken a big shrink.

August 16th, 2007, 11:35 AM
Remodeling expenses follow housing expenses period.

So when the housing market peaked (in terms of just about every stat you could think of -- home sales, housing starts, prices) in 2005, it was natural to assume that remodeling expenses would subsequently peak and then drop.

So now they are, and suddenly Home Depot is surprised? Casual watchers of Home Depot are surprised? (Sorry to be repetitive if you saw me make this point in response to the Andrew Leonard piece on Salon earlier in the week).

However, let's note that the drop in remodeling expenses is expected to be short-lived.

And this comes not from me, being a flag-waving Realtor, but from the Harvard Joint Center for Housing Studies . . .let me quote:

Thanks to increase in both the number of homeowners and in expenditures per household, remodeling expenditures are expected to grow at a real compound annual rate of about 3.7 percent through 2015.

That doesn't address your Wall Street point, but I'd argue nobody but the media is on the ledge just yet. Bonuses may well be down (my Street clients are certainly worried) but they're unlikely to be nonexistent. There are already two good quarters on the clock, for one thing.

ali r.
{downtown broker}

Full JCHS report -- State of the Nation's Housing 2007 -- here:


August 17th, 2007, 10:20 AM
From the Times

August 17, 2007

Mortgage Ills Start to Strain Homebuying in Manhattan

By CHRISTINE HAUGHNEY (http://topics.nytimes.com/top/reference/timestopics/people/h/christine_haughney/index.html?inline=nyt-per)
The turmoil in the international mortgage market is starting to make it harder for New Yorkers to get the large loans that are typical in a city where the average apartment in Manhattan (http://topics.nytimes.com/top/classifieds/realestate/locations/newyork/newyorkcity/manhattan/?inline=nyt-geo) costs $1.3 million. In the past two weeks, banks have been increasing rates on so-called jumbo mortgages, sometimes at the very last minute, according to mortgage brokers and lawyers.
So far, only a fraction of the pending real estate deals are being affected. Mortgage brokers say about 10 percent of Manhattan buyers are having to pay higher rates than they had expected or put more of their money into a purchase and take smaller mortgages.
“It’s the end of an era of highly leveraged lending on residential apartments in Manhattan,” said Keith Kantrowitz, the president of Power Express Mortgage Bankers in Lake Success, N.Y.
Less than two months ago, Mr. Kantrowitz said that the average mortgage request by Manhattan borrowers had nearly tripled, to $4 million from $1.45 million, in the previous two years. Now, he said, his company will not lend more than 90 percent of the value of apartments worth more than $2 million.
“Buyers are going to have to liquidate their assets and put more money in,” he said.
Mr. Kantrowitz said he had a client who was trying to buy a $3.6 million Upper East Side condominium with a $3.3 million mortgage. That would mean the buyer borrowed about 92 percent of the value of the home. The buyer had a strong credit score and had been pre-approved for the loan by a major bank. But last week that bank said it would lend only $3 million, or about 83 percent.
Lenders want clients to put down more money, Mr. Kantrowitz said, so they will not walk away from the property if the market drops, leaving the bank to hold the mortgage. The buyer is trying to get back his $300,000 down payment because he does not have an additional $300,000 to put toward the purchase.
The jumbo mortgage, usually defined as one greater than $417,000, has become problematic because lenders are having a harder time reselling them to banks that package them and resell them as bonds.
Jeffrey Appel, a senior vice president and the director of new development financing for the Preferred Empire Mortgage Company, said most banks still made loans for jumbo mortgages, but under stricter guidelines.
“I have had people call that, two weeks ago, I could have gotten 95 percent financing,” Mr. Appel said. Now, he added: “It’s just not available. Things have changed overnight.”
Buyers should not expect a drastic fall-off in Manhattan luxury real estate, however, because mortgage brokers say that they still find loans for borrowers with strong credit scores who have equity to put into their purchases.
Many buyers will be unaffected by the squeeze. Jonathan J. Miller, the president of Miller Samuel, an appraisal company that specializes in the New York City market, said that many of the wealthiest buyers did not even use mortgages. “At the upper 10 percent of the market, at least half of the deals are all cash,” he said.
Some buyers also can afford to weather the costs of these rising interest rates. Alan Fried, a real estate partner at the Braverman and Associates law firm, made sure that a client met his mortgage-rate deadline recently on a $2.2 million mortgage for a $3.25 million apartment in Chelsea. By closing before the rates changed, Mr. Fried said, his client saved $45,000 a year in interest for the first five years of the mortgage.
For other buyers, though, it is a tough call.
Yossi Notik, a broker for the Manhattan Mortgage Company, had a client who was trying to buy a $1 million Upper East Side co-op. His client, a professional who makes nearly $500,000 a year with a credit score in the 600s, wanted to take out a mortgage for about $850,000.
But four days before the scheduled closing last week, the bank changed its mind and said it would not do the loan at all. Mr. Notik found his client an $800,000 mortgage with another bank. But the change forced her to delay the closing, put down more money and pay the seller’s expenses incurred by the delay.
“She deliberated walking away from her $100,000 down payment due to the tremendous amount of stress,” Mr. Notik said.
Some buyers are giving up on buying in Manhattan, and renting instead. Robyn Sorid and her husband spent six months searching for a two-bedroom apartment in TriBeCa to buy for about $2 million. They nearly made an offer on one deal. But as Ms. Sorid, who partly runs a private equity fund that invests in real estate, watched her friends have problems with changing mortgage rates, she decided to rent. Last week, she signed a lease for a place in TriBeCa.
“Tons of friends are seeing their mortgage quotes being re-priced,” she said. “We will probably sit it out for the next six to eight months, watch what happens and see.”

August 22nd, 2007, 11:28 AM
Volatile Markets Spook Money Centers' Landlords

August 22, 2007; Page B1

For the past two years, financial institutions fueled the robust office markets of New York and London.

Rental rates soared to record highs as hedge funds and a few other financial institutions elbowed each other out of the way for offices with amenities that reflected their presumed power: grand views of parks or waterways, easy commuting access and world-class restaurants nearby for entertaining clients. The vacancy rate for top-quality space plunged below 6% in both lower Manhattan and the City of London, the British capital's financial district.

But now the two cities' heavy dependence on financial-sector jobs has real-estate brokers and analysts debating whether the gusher will shut off. Caveats abound, with experts saying the answer depends on how long the turmoil continues, how much bad debt financial firms end up swallowing, and how many hedge funds go under. One thing market experts agree on, though: Most finance firms will take a timeout on real-estate decisions until they see how everything shakes out.

"Our view at the moment is there is going to be an awful lot of sitting on the fence over the course of the next three months on the part of the major banks," says Joe Valente, London-based head of research for DTZ, a global real-estate adviser.

If so, those landlords who bought buildings based on very aggressive assumptions of future rent growth, hoping to duplicate last year's 25% in New York or 15% in London, may start to sweat.

No office markets in the world are as dependent on financial institutions -- banks, hedge funds and private-equity firms -- as New York and London. Though cities such as Hong Kong and Tokyo are home to major banks, the office tenant base is more diverse.

The numbers are striking: Financial firms hold nearly one-third of all office space in Manhattan and London. The breakdown is even more pronounced for submarkets. In the City of London business district, finance firms have a virtual stranglehold at 52%, compared with only 7% for the West End district, according to CB Richard Ellis, a Los Angeles-based real-estate services firm. In lower Manhattan, where Wall Street is located, the financial sector holds 42% of all space, according to Colliers ABR Inc., a real-estate brokerage. (Those tallies don't include law and accounting firms that often support the financial sector.)

If the problems in the credit markets turn out to be no more than a summer cold and the financial system recovers quickly, the office markets in the world's financial centers may see little change. But there is some fear that the sniffles could become a lingering malaise and banks will start to cut back.

UBS AG analysts last week downgraded to "hold" from "buy" SL Green Realty Corp. and Boston Properties, two office real-estate investment trusts with heavy exposure to New York, saying that earnings should remain strong but that the possibility of layoffs at banks and implosions at hedge funds could weigh on the stocks. "Dislocation in the credit markets in recent weeks appears to have begun a ripple effect through the employment levels at Wall Street firms," writes analyst James Feldman.

Mr. Feldman writes that one Wall Street firm has canceled contracts with some newly hired analysts, several hedge funds have closed their doors, and merger activity has clearly slowed.

SL Green Chief Executive Marc Holliday declined to comment on the downgrade, but said people may fear the financial-sector tenants would put space back on the market as subleases. However, he said, "the market is so tight right now, that we are not seeing any drop-off in demand as evidenced by the leases we are signing and the rates we are still getting right up to today." Boston Properties didn't return calls seeking comment.

Nobody is predicting catastrophe for these markets. Rents aren't expected to drop anytime soon -- it's just that the growth rate might slow. After all, space is very tight and tenants are having trouble finding any big blocks of space. "The good news is that this credit-market volatility is occurring during the best office fundamentals New York City has ever seen," says Sonny Kalsi, managing director and global co-head of real-estate investing for Morgan Stanley.

A more likely consequence is that the leases taken by hedge funds at the rates of nearly $200 per square foot in midtown Manhattan and $198 per square foot in London's West End are a thing of the past, says Mr. Valente. Those leases made for sensational headlines but tended to be small spaces of under 10,000 square feet.

If most financial firms are lying low on decisions, people close to the situation say Merrill Lynch & Co. continues to negotiate a lease for its New York headquarters. Merrill's lease in the World Financial Center in lower Manhattan runs out in 2013, and it must make a decision soon if it wants to construct a new tower. The company is in talks with its current landlord, Brookfield Properties Corp., but is also talking with developer Larry Silverstein about one of three towers he is building at the World Trade Center site, as well as Vornado Realty Trust about a possible new skyscraper near Pennsylvania Station in midtown.

A little relief in rent growth could be good news for those tenants wincing at current rates -- now averaging above $91 per square foot for top-quality "Class A" space in midtown Manhattan and $129 for the City of London. "There might be some tenants dancing in the street, hoping the rates are going to come down," says James Kuhn, president of Newmark Knight Frank, a real-estate brokerage with headquarters in New York.

The party may be premature. The credit crunch will actually benefit some landlords, because developers will be less willing to start new buildings as people find it difficult to borrow money, says Stephen Hester, chief executive of British Land Co. PLC, one of the United Kingdom's largest real-estate investment trusts. Several towers are under way in London, including three being constructed by British Land, but most new space won't be completed until 2010.

Even if the London and New York markets remain robust overall, a few landlords could find themselves in a bind if leasing slows. Over the past year, sales prices for buildings soared. Just last month, investors smashed the office sales record in New York, for a building at 450 Park Ave., paying nearly $1,600 per square foot. In London, prices for prime office towers also remain strong.

Yet, rent assumptions for some commercial mortgages were aggressive. Some loan underwriters calculated office towers' cash flow based on prevailing market rates rather than what tenants are actually paying -- assuming, for example, that a tenant who is locked into a long-term contract at $50 a foot is actually paying $100 a foot, says Erin Stafford, senior vice president for the credit-rating firm DBRS.

Exacerbating their plight, landlords may not have the option of refinancing to avoid ballooning mortgage payments or selling the building at a higher price during this credit crunch. Says Jim Costello, senior economist for the real-estate research firm Torto Wheaton Research: "Depending on when loans get due, some folks may get left holding the bag."

--Michael Hudson contributed to this article

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

August 23rd, 2007, 11:17 AM
Lehman Closes Subprime Unit and Lays Off 1,200

August 23, 2007

Lehman Brothers, a leader in packaging subprime mortgages into securities, said yesterday that it would shut one of its home lending units and lay off 1,200 employees. The bank said it would take a $52 million charge to third-quarter earnings.

“Lehman Brothers announced today that market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space,” the firm said in a news release.

The announcement came on a day when Wall Street’s concerns about the credit markets seemed to ease, at least for now; the three major markets all rose more than 1 percent. The rush to the safety of short-term Treasury markets also slowed.

As part of the effort to calm the markets, several banks, at the prompting of the Federal Reserve, borrowed $2 billion from the discount window.

Lehman’s decision yesterday to close the lending unit, BNC Mortgage, made it the latest casualty in the subprime mortgage meltdown that started earlier this year and rippled into the broader credit markets starting in late July.

In recent weeks, several mortgage companies that specialized in risky home loans have stopped making loans, shut down or encountered other distress. Accredited Home Lenders, a subprime lender based in San Diego, stopped making loans through brokers and laid off 1,600 people, more than half of its staff.

The mortgage unit of HSBC Holdings announced yesterday that it would close an office in Carmel, Ind., and lay off about 600 workers; Delta Financial in Woodbury, N.Y., and Impac Mortgage Holdings, based in Irvine, Calif., both announced layoffs.

Amstar Financial Holdings said yesterday that its lending unit, Amstar Mortgage, had agreed to give up control of its branches to the Money Store.

In a deal reached earlier this year, Cerberus, which controls GMAC Financing, agreed to buy Option One, the mortgage subsidiary of H&R Block, the tax preparer. The widening problems in the mortgage market could jeopardize that acquisition.

Cerberus and H&R Block had no comment about the acquisition yesterday.

H&R Block said yesterday that it had tapped its bank credit lines twice for about $1 billion in the last week after its normal sources of cash began drying up.

In the last nine months, about 120 mortgage lenders have shut or declared bankruptcy, according to Lehman.

Yesterday, Quality Home Loans, a subprime lender in Agoura Hills, Calif., joined the list of those seeking bankruptcy protection.

Lehman Brothers is a major player in the mortgage market and a top player in underwriting securities backed by mortgages made to home buyers with weak, or subprime, credit histories. In 2006, the investment bank was the top underwriter for subprime mortgage-backed securities, with a roughly 11 percent market share, according to Inside Mortgage Finance, a trade publication.

Big Wall Street banks package subprime mortgages into securities and sell them to hedge funds and institutional investors looking for high-yielding assets. In the last 12 months, defaults on mortgages have surged as home prices have started falling. The worsening performance of the loans has squelched demand for mortgage-backed securities.

Executives at Lehman say that 85 percent to 90 percent of the loans written by BNC from 1999 until 2007 are either current or paid off, which is roughly in line with the industry average. Lehman has absorbed the losses of the remainder of the loans, these people say. The firm said earlier this year that 3 percent of its revenue in recent quarters derived from subprime-related businesses, or roughly $500 million in 2006.

Lehman took an ownership stake in BNC Mortgage in 2000 after helping to take the firm private. It fully acquired the business in 2004. Earlier this year, the bank announced that it would merge its Aurora Mortgage business and BNC, but that combination never came to pass.

Aurora, which focuses on so-called Alt-A loans, those made to borrowers with good credit, will continue to operate and may, over time, resume making subprime loans if the market for them revives, according to people briefed on the firm’s plans.

Copyright 2007 The New York Times Company

Lehman said that all approved loans by BNC would be honored.

August 23rd, 2007, 11:22 AM
The Manhattan Real Estate Slump That Wasn’t

August 19, 2007

IT wasn’t supposed to happen this way.

Just a year ago, as real estate brokers fretted through an ominously quiet third quarter, many Manhattanites waited for the housing market to reverse its madcap ascent and fall into line with the rest of the country.

But something happened on the way to the Great Manhattan Housing Slump. After what brokers optimistically termed a “pause” in the second half of 2006, buyers swarmed into the market. The torrent was so intense that by the end of this past June, it was clear that an astonishing gulf had opened up between Manhattan and nearly everywhere else.

On the national level, sales of existing homes slowed by 17 percent in the second quarter of 2007, compared with the second quarter of 2006, while inventory swelled by 16 percent, according to figures provided by the National Association of Realtors. New homes fared even worse: they fell by almost 19 percent, according to Commerce Department figures.

In Manhattan, by comparison, sales of new and existing apartments more than doubled. In a trend that could shift quickly in light of the recent problems in the credit and stock markets, inventory shed a third of its bulk. It dropped to 5,237 units, despite the influx of several thousand new condos, according to Miller Samuel Inc., the Manhattan appraisal company

Prices have been starkly different as well. By last month, the national picture was so dire that Angelo R. Mozilo, the chairman and chief executive of Countrywide Financial, the country’s largest mortgage lender, said things had not been so bleak since the Depression.

Cut to Manhattan. After a boom with annual price increases of 20 percent or more ended in mid-2005, prices have continued to rise over all, but not as sharply. In the second quarter of 2007, Miller Samuel said the average sale price of a Manhattan studio climbed 16.5 percent compared with the second quarter of 2005. The average for a one-bedroom climbed by 18.4 percent and a two-bedroom by 5.9 percent.

Apartments with three bedrooms, which make up about 6 percent of the market but appeal to an ever-more-moneyed class of buyers, rose by 17.9 percent in the same period.

Major brokerages, including Halstead Property, Bellmarc Realty, Brown Harris Stevens, Prudential Douglas Elliman and the Corcoran Group, say they are recording sales and profits that rival boom-time results. In fact, Douglas Elliman and Corcoran predict that this will be their most lucrative year by far.

Whether this momentum can be sustained remains to be seen, particularly in light of the recent gyrations in the debt market, which have led to a reduction in the availability of large mortgages and to an increase in their rates. A deepening credit-market crisis and national housing slump could squeeze the economy, the stock market and bonus pools.

“For the first time in over a year, there is some negative talk — about the credit markets and whether or not this will permeate the New York City real estate market,” said Pamela Liebman, president of Corcoran. “As of right now, it hasn’t. There has been no slowdown.” She said the biggest concern among her agents is finding enough inventory to satisfy demand.

But a buying binge alone does not a housing boom make. “I’m still not characterizing the market right now as a housing boom except in the upper echelon,” said Jonathan Miller, president of Miller Samuel.

So how has Manhattan (and, to a lesser extent, sought-after pockets of Brooklyn) managed to avoid a slump?

“Obviously, the market was helped first by the rumor and the reality of bonus money,” said Frederick W. Peters, president of Warburg Realty. He was referring to the fourth straight year of substantial bonus increases, particularly on Wall Street, that along with a rising stock market helped push buyers off the sidelines at the end of 2006 and caused some agents to cancel their winter vacations.

“But I also think we’re just in one of those demographic upswing periods,” Mr. Peters added. “More people are moving into the city, fewer people are moving out, and the rental market got much tighter over the course of 2006, which once again made buying a more attractive option. You put all those things together, and the market sort of entered the narrow part of the hourglass.”

There were other factors to consider, too. Tourism is at record highs, and the local economy is doing well in general. And it’s nearly as hard to find premium office space or a spot in private school as it is to find a family-size apartment.

But that’s exactly what more and more families have set their sights on.

It has been years since Samantha Kleier Forbes, a broker at Gumley Haft Kleier, lost a client to the suburbs. “My last casualty was in ’04,” she said. As two-career couples work longer hours and as the city grows safer and more family-friendly, there is a big demand for large apartments like Classic 6’s — a two-bedroom apartment with living room, dining room, kitchen and maid’s room (where children can be found bunking like sailors).

Families who want to stay, brokers say, are only one segment of the more stratified and well-heeled masses clamoring for a piece of Manhattan. While the dollar’s seemingly endless slide may have crimped the foreign vacation plans of many Americans, the purchasing power of Europeans has strengthened. They are increasingly matched, if not outmatched, by buyers from countries like China and India. And foreign buyers find Manhattan real estate very appealing when they compare prices in other large international cities like London.

“I’ve had 20 percent more business from international clients in the past couple of years,” said Sallie Stern, a senior vice president and managing director of Brown Harris Stevens. “They probably account for 30 to 35 percent. It’s a world market now.”

Shaun Osher, the chief executive of CORE Group Marketing, which is handling 11 condominium projects in Manhattan, said the number of foreign apartment-seekers had doubled since the end of 2005. Foreign buyers now constitute 5 to 10 percent of the sales in the buildings marketed by his firms.

“When you look at hotel rates and what it costs to come into Manhattan, it makes sense now to buy a pied-à-terre,” he said.

Besides foreign buyers, brokers say, more parents are snapping up apartments for their children, and some retirees are choosing Manhattan over the likes of Boca Raton.

“The baby boomer generation isn’t ready to give up and live in a swamp,” said Darren Sukenik, an executive vice president of Prudential Douglas Elliman. In fact, they are living the lives their nearby children would like to lead if only they weren’t working so hard, he said.

Meanwhile, renters have emerged as a force in the market, particularly for entry-level apartments. “Rents are rising again, and that pushes people back into the condo and co-op market if they have more than a one- or two-year time frame for living in Manhattan,” said Stephen G. Kliegerman, the executive director of marketing for new developments at Halstead Property.

Fanning the flames have been job and population growth, historically low interest rates and a trove of personal wealth minted by hedge funds, private equity firms and, to a lesser extent, the investment banks that serve them. Add to that the psychological comfort of knowing that Manhattan flourished after the Sept. 11 terrorist attacks, and further, that it appears to have shrugged off a national housing slump.

Even the condo glut that so many real estate executives feared has turned out instead to be a boon of sorts. “If we didn’t have new development coming on at the pace we did, we’d have a chronic shortage across all sectors, and we’d see 20 percent price growth,” said Mr. Miller, the appraiser.

Mr. Peters of Warburg Realty agreed. “You can’t even imagine how awful it would be,” he said. On the other hand, he added, things may feel pretty awful already for buyers who want a prewar apartment, since inventory in this sector continues to evaporate. In the last two years, co-ops, about half of which were built before World War II, have slipped from 63 percent of the market to 47 percent as new condos have been built, Miller Samuel said.

“There are so many new units coming on the market and being sold, but the real heart and soul of the co-op market is really depleted,” said Barbara Fox, the president of the Fox Residential Group, a Manhattan brokerage.

Consequently, brokers say, many prewar apartments in good condition, along with family-size apartments of any vintage, are being snatched up in bidding wars whose aggressiveness outrivals those of two years ago.

“The new rule is that there are no rules, and when you’re lying bleeding on your way to the emergency room, you’re still shouting, ‘Higher offer, higher offer!’ ” said Julie Friedman, a senior associate broker at Bellmarc.

She was among the many brokers who said that “best and final” offers have largely become neither, with buyers and sellers routinely negotiating after another bid has been accepted. “You remind sellers that there is a moral component, but my duty is to get the highest amount, and ‘moral’ and ‘the highest amount’ don’t necessarily overlap,” she said.

Some brokers complained that the demise of the sealed bid, which has been replaced over the last two or three years by e-mail offers to the seller’s agent, has further undermined fair play. “Buyers don’t trust them as much,” said Michele Kleier, president of Gumley Haft Kleier.

Whether Manhattan continues to be the land the slump forgot or is merely sunning itself before a hurricane is something of a guess. A strengthening dollar, a severe terrorist attack or a national economy hobbled by housing market woes could inflict blows of varying strengths.

More immediate is the worry about the availability of credit. “While I don’t think we were propped up to the extent other markets were by subprime and adjustable-rate mortgages, it does make credit hard to get for everyone to some degree,” said Gregory J. Heym, an economist for Brown Harris Stevens and Halstead Property. “Most people are probably expecting mortgages to be tougher to get.”

Mortgage lenders everywhere are going back to pre-boom lending standards, so obtaining a mortgage is harder for buyers with pockmarked credit or sketchy employment. But there is no panic over rising mortgage rates on jumbo loans (those exceeding $417,000), at least not now.

Large lenders like Chase and HSBC that typically sell mortgages after they make them can no longer do so because the credit crisis has dried up the secondary market, said Jeffrey Appel, a senior vice president and the director of new development financing at the Preferred Empire Mortgage Company in New York. Many large institutional lenders have raised their rates as a hedge against uncertainty, but rates at smaller regional savings banks, the so-called portfolio lenders who hang on to their loans, have hardly budged.

Last Monday, Melissa L. Cohn, the president of the Manhattan Mortgage Company, the largest residential mortgage broker in the New York, New Jersey and Connecticut, said her best rate on a 30-year $1 million mortgage was 6 7/8 percent, offered by a portfolio lender. And her worst rate, offered by a lender that sells mortgages on the secondary market, was 8 3/8 percent.

“Despite this incredible hysteria,” Ms. Cohn said, “there’s plenty of money for qualified borrowers.”

The credit-market meltdown could yet cloud Manhattan’s real estate prospects because of stock-market jitters. And an end to the leveraged buyout boom, if that happens, could trigger layoffs on Wall Street and eat away at bonuses.

But the fiscal year is far enough along that financial services workers can expect gains of 10 to 15 percent when bonus season rolls around later this year, said Alan Johnson, the managing director of Johnson Associates, a Wall Street compensation consultant. The real pain, if there is any to be felt, would come in the 2008-09 bonus season, he said, and a year or two later for private equity firms, which typically make their profits several years after a takeover.

“Pay is going to probably drop, but if it’s dropping from a really, really high level, we’re probably not going to have any charity dinners for these people,” Mr. Johnson said.

By then, too, the flow of new development is expected to slow significantly, judging from the dwindling number of construction permits filed this year. To the extent Manhattan’s housing market is threatened by a weak national economy and by declining bonuses, said Mr. Miller of Miller Samuel, “then the fact that we have a lower level of supply coming on would help keep the market from correcting.”

Neil Binder, a principal in Bellmarc Realty and a 30-year industry veteran, typically views upturns with a jaundiced eye. But in a residential market with tight supply and intense demand, he doesn’t see Manhattan’s real estate karma changing anytime soon, even in the face of mortgage-market turmoil.

“My brokers are saying their biggest frustration is to have buyers when there’s no product and that there’s nothing out there but new construction,” Mr. Binder said. “We may have bumps, but I don’t feel the underpinnings are weakening. My biggest problem this month is that I have all my salespeople taking vacations because they made so much money. My East Side office is a ghost town.”

Copyright 2007 The New York Times Company

August 23rd, 2007, 11:26 AM
4 Major Banks Tap Fed for Financing

August 23, 2007

The country’s four biggest banks announced yesterday that they had each borrowed $500 million from the Federal Reserve, taking an unusual step to ease the credit squeeze that has been rattling the financial system for weeks.

The banks — Citigroup, Bank of America, JPMorgan and Wachovia — said that they had tapped the so-called discount window of the Federal Reserve Bank of New York, five days after the central bank lowered the rate and loosened its collateral standards in an effort to inject more money into the credit markets.

The coordinated moves were seen as largely symbolic, aimed at removing the stigma of borrowing from the discount window, which is regarded as a last resort for financial institutions. All four banks can borrow money more cheaply elsewhere, and all said they had “substantial liquidity.”

In a conference call on Friday, Fed officials prodded the banks to take the action, according to people briefed on the situation.

The Federal Reserve said at the time that using the discount window should be viewed as a sign of strength, not weakness.

“I think it is a show of solidarity with the Fed’s objective with removing any taint of borrowing from the discount window,” said Paul McCulley, a portfolio manager at Pimco, a big fixed-income money management firm. “There was no obvious need for any of those institutions to borrow.”

Nonetheless, the move puzzled longtime market watchers, some of whom are expecting bigger troubles.

“Going to the discount window is like someone on the Upper East Side being seen in a Wal-Mart,” said Charles R. Geisst, a financial historian at Manhattan College. “The T-shirts may be cheap, but why would you?”

He added: “The banks are circling the wagons. Somebody’s got a problem.”

Other big banks have also tapped central banks for financing. On Tuesday, Barclays, a British bank, borrowed £314 million ($622 million) from the Bank of England’s standing facility, which is used to square accounts between banks. Deutsche Bank confirmed that it had borrowed from the Federal Reserve’s discount window on Friday, though it did not formally publicize the action until yesterday.

Wells Fargo, the nation’s fifth-largest bank, declined to comment about whether it had borrowed from the discount window, but said it had “ample funds.”

It is unclear when any of the four big banks used the discount window, or if any other banks had borrowed money. The Federal Reserve does not report data until this evening, but those are aggregate weekly numbers and do not name the borrowers.

Banks have long been reluctant to borrow from the discount window, because the disclosure that capital was being sought there was akin to announcing a financial crisis, which could alarm investors and make the situation worse.

By encouraging the largest banks to use the discount window and promoting it as a sign of strength, the Federal Reserve was trying to change investors’ perceptions.

“If you have a pipe to get liquidity in the system but nobody will use it, that limits its effectiveness,” Mr. McCulley said.

He added, “It was effectively an act of statesmanship by the big four banks,” noting that $500 million is a small amount for those financial institutions.

He said those banks could borrow federal funds at rates that are typically less than the discount window borrowing rate, which was lowered half a percentage point, to 5.75 percent, on Friday.

The borrowing announcements helped bolster investor confidence and lift the stock market for the second consecutive day. But some analysts said the main purpose was to send a message to the market for commercial paper and the broader bond market, both of which have been rattled since at least mid-July because of difficulties in the subprime mortgage market.

“From the Fed’s point of view, the risk was that banks would stop lending. That immediately pushes the pressure of the credit markets right into the U.S. economy,” said Brad Hintz, a Sanford C. Bernstein & Company analyst who was once chief financial officer for Lehman Brothers.

“By opening up the window, the Fed is really saying: ‘You go out and lend because we will lend to you,’ ” he added. “This tells us that confidence is coming back to the fixed-income market.”

In a joint statement, JPMorgan, Bank of America and Wachovia said that they were using the discount window in an effort to “encourage its use by other financial institutions.” Citigroup said separately that it was “pleased to inject liquidity into the financial system” and would “stand ready to continue to access the discount window as clients and needs warrant.”

Announcing its action yesterday, Deutsche Bank said that its decision to borrow on Friday was taken in support of the Fed’s efforts and the overall market.

Copyright 2007 The New York Times Company

August 23rd, 2007, 11:33 AM
Assurances on Buybacks Cost a Lender

August 23, 2007

Expanding rapidly as the nation’s largest home mortgage company, Countrywide Home Loans quietly promised investors who bought its loans that it would repurchase some if homeowners got into financial difficulties.

But now that Countrywide itself is struggling, it may not be able to do so, making it even harder for troubled borrowers to reduce their interest rates or make other changes to their loans to avoid foreclosure.

The possibility that Countrywide may have to buy back mortgages that it sold comes on the heels of its announcement last week that the tightening credit markets had forced it to draw on its $11.5 billion line of credit from a consortium of banks, a move that sent the market plummeting.

But yesterday, Bank of America agreed to invest $2 billion in Countrywide, buying preferred shares that carry an interest rate of 7.25 percent and can be converted into common stock at $18 each.

“Bank of America’s investment in Countrywide represents a vote of confidence and strengthens our balance sheet, enabling us to position Countrywide for future growth and success,” Angelo R. Mozilo, chief executive of Countrywide, said in a statement.

Countrywide, with its stock depressed, had been seen as a prospect for a takeover. But any obligation the company has to buy back loans may complicate discussions with potential investors or buyers.

The repurchase obligations are discussed in Countrywide’s prospectuses and pooling and servicing agreements that cover about $122 billion worth of mortgages packaged and sold to investors from early 2004 to April 1 of this year.

The agreements said that Countrywide Home Loans, a unit of Countrywide Financial, would buy back mortgages in the pools if their terms were changed to help borrowers remain current. Such changes are known as loan modifications. In general, it is difficult for homeowners to get loans modified if they are in a securitization pool.

It is unclear how many modified loans are involved. But it would cost $1.2 billion for the company to repurchase 1 percent of the loans in the pools at issue. Repurchasing 5 percent would cost $6.1 billion. When such buybacks are made, the original amount of the loan is paid into the pool and divided among the investors.

Under the terms of the loan pools, the decision to modify a mortgage is left to the company that services it. Servicers deal directly with borrowers, taking in monthly mortgage payments and sending them out to the investors in the pools. Most of Countrywide’s loans are serviced by its Home Loan Servicing unit.

But Countrywide’s servicing unit may have less incentive to help troubled borrowers who are interested in working out their loans, analysts said, because doing so could put the parent company on the hook to buy back a loan.

“With the volume of adjustable-rate mortgages that Countrywide has originated, their liquidity crunch potentially eliminates a viable tool to keep mortgages affordable in the face of impending interest rate resets,” said Kevin Byers, a principal at Parkside Associates, a consulting firm in Atlanta and an authority on securitizations.

According to company figures, last year 45 percent of Countrywide’s loans had adjustable rates; many begin with low rates and adjust to much higher levels.

Agreeing to buy back loans that are modified is highly unusual and perhaps unique among pools issued by companies like Countrywide, Mr. Byers said. Pools backed by mortgages issued by Fannie Mae and other government-sponsored entities typically include such language.

It is likely that Countrywide put the language into its agreements as an incentive to make its mortgage pools more attractive to investors, in turn generating more money for Countrywide when it sold them.

A Countrywide spokesman, Rick Simon, said that the company’s servicing unit was interested only in keeping loans performing and that its modification decisions would be based on that goal.

“Investors rate servicers based on their ability to keep loans in a performing state and to turn nonperforming loans into performing loans,” he said. “The fees collected for servicing are based on the loans performing.”

Loans that reach foreclosure are expensive for both lenders and servicers, Mr. Simon added.

But servicers must also consider the interests of investors who bought the mortgage pools for the cash flow they generate. If the cash flow drops because of loan modifications, some investors will be unhappy.

Mr. Simon would not say how many loans Countrywide had modified and bought back as a result of the pooling agreements. But Countrywide’s financial statements from last year show that it bought fewer delinquent loans out of securitization entities than in previous years. Those purchases totaled $1.5 billion last year, down from $3.8 billion in 2005 and $3.4 billion in 2004.

Under most agreements, the amount of loans that can be modified in any pool is limited to 5 percent, unless the mortgage borrowers are defaulting or seem to be about to default. Mr. Simon said that the pooling agreements indicating that Countrywide was obligated to buy back modified loans applied only to mortgages that are not in danger of defaulting.

But the language in the pooling agreements from 2004 through much of 2007 does not state this clearly. Only as of April 1 do Countrywide’s pool terms begin stating that the company is not required to repurchase modified loans.

Mr. Simon said this change in language was made to clarify the original intent of the agreements.

Many subprime loans being serviced by Countrywide are in trouble. As of June 30, almost one in four subprime loans serviced by the company were delinquent, up from 15 percent in the period a year ago. Almost 10 percent were delinquent by 90 days or more versus last year’s rate of 5.35 percent.

Loans can be modified to try to keep homeowners from losing their property. Major changes like reducing the interest rate are considered a loan modification.

Lesser changes are not, strictly speaking, modifications. Getting a delinquent borrower current on a loan by adding the payments that are owed is considered a forbearance, not a loan modification.

Copyright 2007 The New York Times Company

August 28th, 2007, 07:15 AM
In Washington, Aid to Homeowners Debated

August 28, 2007

WASHINGTON, Aug. 24 — Faced with a possible tidal wave of home foreclosures beginning this fall, Democrats and Republicans are battling over a philosophical question with huge practical implications: should the government ride to the rescue?

Both the Bush administration and Democratic leaders in Congress agree that legions of homeowners could be overwhelmed in the next 18 months, as low teaser rates expire on more than two million adjustable-rate mortgages, causing monthly payments increase sharply.

More ominously, falling real estate prices and a pullback among mortgage lenders are expected to make it more difficult for overstretched homebuyers to either refinance their way out of trouble or simply sell their houses.

“This is really just the beginning,” said Karen Weaver, global director for securitization research at Deutsche Bank. “There’s a big wave of defaults coming over the next 12 to 18 months.”

From a political perspective, the wave would be crashing during the primary and general election campaigns next year.

But the Bush administration and Congressional Democrats are ideologically divided about what Washington should do. Administration officials are reluctant to bail out people who bought homes they could not afford or simply gambled that easy credit and rising real estate prices would lead to quick profits.

Democrats, though opposed to a broad bailout, are proposing an array of measures to help lower-income people renegotiate their loans and stay in their homes.

“You cannot simply decree that there will be no foreclosures,” Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said. “You can’t just give people a free ride.”

Mr. Frank and other Democrats are pushing for changes that they hope will free more money for lower-income families and shift the balance of power between borrowers and lenders.

The proposals would expand the program of insuring home loans under the Federal Housing Administration, part of the Department of Housing and Urban Development; create a national fund for “affordable housing”; expand the ability of Fannie Mae and Freddie Mac, the government-sponsored finance companies, to buy renegotiated subprime mortgages; and give bankruptcy judges more power to order easier terms for borrowers.

The Bush administration, with the Treasury Department heading the efforts, is looking for more limited solutions. Administration officials are working on their own ideas to let the F.H.A. insure slightly more expensive homes, which could make it easier for people with low incomes or weak credit to switch out of subprime mortgages and into more traditional fixed-rate loans.

Robert K. Steel, under secretary of the Treasury for domestic finance, has been put in charge of developing other ideas, but administration officials have said little about what those might be.

“The president has asked Treasury to be clearly focused on actions that can be taken, things we can do, to help mortgage holders who are in danger of losing their homes,” a spokeswoman for the Treasury Department, Jennifer Zuccarelli, said. “We are looking at all other options to help stressed borrowers.”

For the last six years, administration officials have followed a laissez-faire approach, saying they did not want to restrict innovative mortgage products.

But it may be difficult to continue that hands-off policy much longer. The number of foreclosure filings in July was almost double that of a year ago, according to RealtyTrac, which provides real estate data. About 13 percent of adjustable subprime mortgages are past due, but most of the problems are on loans whose monthly payments have not yet been adjusted upward.

Deutsche Bank estimates that about $400 billion in subprime loans are scheduled for rate increases of 30 percent or more by the end of 2008.

Consequently, many Democratic lawmakers are pushing for measures that would make it easier for imperiled homeowners to replace their adjustable subprime mortgages with more traditional 30-year fixed-rate mortgages.

Democrats also want the administration to let Fannie Mae and Freddie Mac buy a larger volume of mortgages for their own portfolios. The two government-sponsored companies buy billions of dollars in mortgages each year, up to a loan limit of $417,000, and package them into securities that can be traded. They also hold some of the bundles of mortgages in their own portfolios to increase returns to shareholders.

Democrats, including Mr. Frank in the House and Senator Christopher J. Dodd of Connecticut, chairman of the Senate banking committee, contend that Fannie Mae and Freddie Mac could help thousands of people refinance their subprime mortgages if the two finance giants were allowed to hold those loans in their portfolios.

The Treasury Department has opposed that kind of expansion, arguing that the two companies crowd out commercial rivals because they exploit an implied government guarantee to borrow money at lower rates than their rivals.

Treasury officials have indicated a willingness to let Fannie and Freddie play a bigger role, but they argue that letting the two companies hold more mortgages — the current regulatory limit is about $700 billion for each — would pose a risk to taxpayers without helping homeowners.

Mr. Frank has argued that Congress should also increase the size of mortgages that Fannie and Freddie can buy, from $417,000 now to $500,000 or even $650,000 in markets like San Francisco and New York.

Some specialists warn that simply switching out of an adjustable loan will not keep all homeowners from losing their houses.

“The problem is that a lot of people have bought more house than they can afford and in many cases the price has dropped a great deal,” said Dean Baker, co-director of the Center for Economic Policy Research, a liberal research group in Washington. “If we do a workout that allows someone to pay off a $240,000 mortgage on a house that would only sell for $220,000, have we really done them a favor?”

Democratic lawmakers have proposed changes that would give borrowers more power to negotiate lower interest rates or even a lower loan amount.

Supporters say such a move might benefit lenders, because foreclosing and re-selling a property can be costly — especially if real estate prices are declining.

This year, lawmakers persuaded the Financial Accounting Standards Board to allow companies that service mortgages, as opposed to the investment funds that may actually own the mortgage, to negotiate changes.

Senator Charles E. Schumer of New York, chairman of the Joint Economic Committee, has proposed that the government distribute $300 million to nonprofit groups that could advise families on how to refinance or renegotiate their mortgages. The Senate recently included $100 million for such programs in a spending bill for HUD.

Another idea, being considered by Senator Richard J. Durbin, Democrat of Illinois, would give bankruptcy judges the ability to revise mortgage contracts, much as they already do when sorting out payments to other kinds of creditors.

“The most important thing in the mortgage market is not about money, but about the rules of the game,” said Eric Stein, senior vice president at the Center for Responsible Lending, a nonprofit organization based in Charlotte, N.C., that has long criticized subprime lending.

Mr. Stein and other industry critics would ban the steep penalties for prepaying mortgages. Such penalties, which are rare for prime borrowers, or those with good credit, often make it prohibitively expensive for people to refinance.

Mortgage lenders are expected to fight such a prohibition, arguing that prepayment penalties make it possible to offer very low initial interest rates to higher-risk borrowers.

Some advocates for low-income homeowners argue that the government may have to rescue people, at a cost of billions of dollars.

Democratic presidential candidates, including Senator Hillary Rodham Clinton and former Senator John Edwards, have called for a billion-dollar fund to help low-income homeowners.

“We have entered the arena of ‘too big to fail,’ ” said John Taylor, president of the National Community Reinvestment Coalition, a nonprofit group in Washington. “We need to pony up and prevent the market from deteriorating further.”

For the moment, neither Democratic leaders in Congress nor Mr. Bush have much appetite for a true bailout. But that could change as the elections draw nearer.

Copyright 2007 The New York Times Company

August 28th, 2007, 07:26 AM
Inventories of Homes Rise Sharply

August 28, 2007; Page A2

WASHINGTON -- U.S. sales of existing homes fell slightly in July, but a surge in inventories set the stage for a steeper slump and sharper price declines in the months ahead.

After the credit crisis that hit financial markets this month, U.S. home sales are expected to drop further as tighter lending standards and a pullback by mortgage firms keep potential buyers on the sidelines.

Sharply rising inventories are a sign of homeowners trying to sell their homes before prices tumble more, said Joseph Brusuelas, chief U.S. economist at consulting firm IDEAglobal.

"There are going to be no happy endings here," he added. "It's the last days of the old order."

Existing-home sales slipped 0.2% in July to a seasonally adjusted annual pace of 5.75 million homes, the lowest in five years, the National Association of Realtors said yesterday. The median sales price dropped to $228,900, down 0.6% from the July 2006 level, which was the highest on record.

Inventories of homes for sale jumped 5.1% to 4.59 million, or about 9.6 months of supply at the current sales pace. A supply of about six months generally indicates a balanced market.

The tightening of credit markets became most severe in mid-August. That means the full effect may not be seen until sales figures for September are released. The Realtor group's figures reflect transaction closings, which mark the end of the buying process.

The problems may be most acute in the markets for lower-end homes, which tend to go to less credit-worthy borrowers, and for higher-end homes that require buyers to take out so-called jumbo loans. Rates for such loans, which exceed $417,000, jumped sharply this month.

Even before the market turmoil, inventories were expected to rise sharply into early next year as homeowners increasingly default on loans.

Sellers could face price declines of as much as 10% in the next six months as the market settles, said Joshua Shapiro, chief economist at consultancy MFR Inc. in New York.

"To sell cheaper homes, prices need to be slashed even more because demand is falling off," Mr. Shapiro said. "If the bottom is falling out of the lower end of the market, it's going to have to affect the middle, which affects everything above it."

New-home sales increased 2.8% in July to a seasonally adjusted annual rate of 870,000, government data last week showed. Such sales also are expected to decline as a result of tightening credit and slower activity by builders.

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

August 28th, 2007, 08:07 AM
Drop Foreseen in Median Price of U.S. Homes

August 26, 2007

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.

The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.

“For most people, this is not a disaster,” said Nigel Gault, an economist with Global Insight, a research firm in Waltham, Mass. “But it’s enough to cause them to pull back.”

In recent years, many families used their homes as a kind of piggy bank, borrowing against their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing has soared since 2001.

Now, however, that financial cushion is disappearing for many families. “We are having to start from scratch and rebuild for a down payment,” said Kenneth Schauf, who expects to lose money on a condominium in Chicago he and his wife bought in 2004 and have been trying to sell since last summer. “We figured that a home is the place to build your wealth, and now it’s going on three years and we are back to square one.”

On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade, according to Moody’s Economy.com, a research firm.

Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for home buyers.

It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump. A 2004 report jointly written by the top economists at five organizations — the industry groups for real estate agents, home builders and community bankers, as well as Fannie Mae and Freddie Mac, the large government-sponsored backers of home mortgages — was typical. It said that “there is little possibility of a widespread national decline since there is no national housing market.”

Top government officials were more circumspect but still doubted that the prices would decline nationally. Alan Greenspan, the former Fed chairman, said the housing market was not susceptible to bubbles, in part because every local market is different.

In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said “strong fundamentals” were the main force behind the rise in prices. “We’ve never had a decline in housing prices on a nationwide basis,” he added.

But Global Insight, the research firm, estimates that the home-price index to be released Thursday by the Office of Federal Housing Enterprise Oversight, a regulatory agency, will show a decline of about 1 percent between the first and second quarter of this year. Other forecasters predict that the index will rise slightly in the second quarter before falling later this year.

In all, Global Insight expects a decline of 4 percent, or roughly 10 percent in inflation-adjusted terms, between the peak earlier this year and the projected low point in 2009. In California, prices are expected to decline 16 percent — or about 20 percent after taking inflation into account.

The government’s index, which compares the sales price of individual homes over time, is intended to describe the actual value of a typical house. Since the index began in 1975, it has slipped from one quarter to the next on a few occasions, but it has never fallen over a full year.

Another index dating back to 1950, calculated by Freddie Mac, has also never shown an annual decline. Price data published by the National Association of Realtors, based on the prices of houses sold in a given year, have also never declined. According to the association, the median home price is now about $220,000.

Mr. Schauf and his wife, Leslie Suarez, put their condo in the Sheridan Park neighborhood of Chicago up for sale shortly before moving to Texas last year so he could take a new job. They bought the two-bedroom unit in September 2004 for $255,000, with a 5 percent down payment. They redid the floors, installed new window treatments and repainted the walls.

They said they expected the condo to sell quickly. Instead, they have cut the price several times and have yet to receive an offer. The current list price is $279,000, though they expect to settle for less.

Without the money for a new down payment, they are renting an apartment in Austin. They also expect the monthly payment on their adjustable-rate mortgage to go up $200 in October.

Ms. Suarez, who grew up in the Dallas-Fort Worth area, says she is not as surprised because she remembers home prices falling after the oil bust in the late 1980s. “Growing up in Texas, real estate has never been a windfall,” she said. “For me, I always just wanted to break even.”

Housing prices have previously declined for long stretches in various regions. Most recently, prices fell in California and in the Northeast during the recession of the early 1990s.

The current slump is different from that one, though, in both depth and breadth. In fact, the national median price rose only slightly faster than inflation from 1950 to the mid-1990s.

But as interest rates fell and lending standards became looser, prices started rising rapidly in the late 1990s, even in places like Chicago, which had rarely seen a real estate boom. The result was a “euphoric popular delusion” that real estate was a can’t-miss investment, said Edward W. Gjertsen II, president of the Financial Planners Association of Illinois. “That’s just human nature.”

Many families are clearly richer because of the boom. In the Old Town neighborhood of Chicago, the town house that Ian R. Perschke, a technology consultant, and Jennifer Worstell, a lawyer, bought in late 2004 has appreciated more than 30 percent, they estimated. The gain was big enough to allow them to take out a larger mortgage and renovate two rental units in the house. But Mr. Perschke said he understood that he was “not going to see that appreciation over the next three years.”

Prices in Chicago peaked in September 2006 and have since dipped 1.7 percent, according to the Case-Shiller home-price index, which is tabulated by MacroMarkets, a research firm.

For all the attention that the uninterrupted growth in national house prices received, some economists argue that it was misplaced. The Case-Shiller index, which many experts consider more accurate than the government measure, did show a drop in prices in the early 1990s. (Unlike the government’s measure, it includes mortgages of more than $417,000, which are not held by Fannie Mae or Freddie Mac.)

After adjusting for inflation — the most meaningful way to look at any price, economists say — even the government’s index fell in the early 1990s.

Dean Baker, an economist in Washington who has been arguing for the last five years that houses were overvalued, said the idea that house prices could go only up had fed the bubble.

“It was very misleading,” said Mr. Baker, co-director of the Center for Economic and Policy Research, a liberal research group. There are a lot of people, he said, who bought “homes at hugely inflated prices who are going to take a hit. You also have a lot of people who borrowed against those inflated prices.”

Perhaps the most prominent housing booster was David Lereah, the chief economist at the National Association of Realtors until April. In 2005, he published a book titled, “Are You Missing the Real Estate Boom?” In 2006, it was updated and rereleased as “Why the Real Estate Boom Will Not Bust.” This year, Mr. Lereah published a new book, “All Real Estate Is Local.”

In an interview, Mr. Lereah, now an executive at Move Inc., which operates a real estate Web site, acknowledged he had gotten it wrong, saying he did not fully realize how loose lending standards had become and how quickly they would tighten up again this summer. But he argued that many of his critics have also been proved wrong, because they were bearish as early as 2002.

“The bears were bears way too early, and the bulls were bulls too late,” he said. “You need to know when you are straying from fundamentals. It’s hard, when you are in the middle of the storm, to know.”

Copyright 2007 The New York Times Company

August 28th, 2007, 08:20 AM
Debt Issues Top Economists' Fears

Terrorism Falls in Poll
On Short-Term Threats
Amid Market Turmoil

August 27, 2007; Page A2

WASHINGTON -- The combined risk of mortgage defaults and heavy debt loads has overtaken terrorism as the biggest short-term threat to the U.S. economy, according to a survey of economists being released today.

The National Association for Business Economics says almost a third of its survey respondents listed debt-related problems as their top worry: About 18% cited the effects of subprime-loan defaults and 14% listed excessive household or corporate debt.

About 20% of the 258 members responding put defense concerns and the possible economic disruption of a terror attack at the top of their list, down from 35% in the group's March survey. Energy prices were the top-cited risk among 13% of the group, which largely includes economists working at U.S. corporations or with think tanks and universities.

The poll results, collected from July 24 to Aug. 14, reflect early worries about the turmoil spreading through equity and debt markets in recent weeks. Defaults tied to riskier home loans soared this year, devaluing mortgage-backed securities and spurring a pullback from many lenders. The ensuing crisis has spurred worries of cutbacks in business and consumer spending.

Forecasters are starting to shave their growth forecasts for this year as a result of the market turmoil. They are discussing the odds of a recession, which they say is avoidable if the Federal Reserve cuts interest rates. The economy grew at a strong 3.4% annual rate in the second quarter after almost stalling in the first three months of the year with 0.6% growth.

Recent indicators also offered positive signs: Friday's report on July durable-goods orders, for instance, showed strength in manufacturing and business investment, although the figures reflected activity before this month's market unrest. (Clouding the outlook for the job market, however, employers are shedding temporary workers. See article1.)

Peter Hooper, chief economist at Deutsche Bank Securities, said growth in coming quarters would be trimmed "if we don't get some snapback [in markets] pretty soon. The odds of recession have gone up," he said. "We were thinking they were one out of four; maybe they're closer to one out of three."

The Fed lowered its discount rate, for its loans to banks, by half a percentage point on Aug. 17 in a bid to restore liquidity to the financial markets. Its policy committee kept the more closely followed federal-funds rate steady at 5.25%, where it has stood since June 2006, but changed its economic outlook, noting downside risks to growth had "increased appreciably" because of deteriorating market conditions.

Markets have stabilized somewhat over the last week with the Fed's actions. Macroeconomic Advisers, a forecasting firm based in St. Louis, said it expects the Fed to adopt a gradual approach by cutting rates by a quarter-point at its Sept. 18 meeting "and buying time to see the macro spillovers" before moving further.

Lehman Brothers economists said the Fed has "to worry that the recovery in the markets is predicated on [the central bank] cutting rates." Lehman has cut its economic-growth forecast to just 1.8% over the next three quarters, noting that "if financial markets continue to freeze up, a recession becomes a real risk."

The housing market has also restrained economic growth, with construction activity easing and household wealth declining because of falling prices in many areas. However, the business economists' survey says the five-year outlook for housing "remains largely positive." About 42% of those responding said they expect U.S. home prices over the next five years to be flat, on average, while 41% expect price increases. Just 16% expect price declines.

--Grep Ip contributed to this article.

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

August 28th, 2007, 10:48 AM
It would be a completely dumb idea to raise Fannie Mae conforming loan limits at this point . . . but students of history know the government has already been tinkering with them.

In November of last year (that's '06 folks) an AP story came over the wire that said new Fannie Mae conforming loan limits for mortgages came out.

The limits change based on housing prices; the historic pattern had been, every year housing prices went up, so every year Fannie Mae limits went up.

But in '06, the Fannie Mae limits didn't change.

That was the first time IN 12 YEARS they didn't change.

What's more, the underlying housing prices dropped . . . so by rights the limits should have been dropped too, but they weren't, which was indicative that the government was, even back then, monkeying around trying to prop sales a little.

This was a national business story, and the California papers caught this and ran with it . . .but to my knowledge, none of the NYC papers did.

And yes, I wrote at least one of them and pointed it out, because I'm a wiseacre.:p

Here's a nice story from Rex Nutting at Marketwatch that got it right at the time:


ali r.
{downtown broker}

August 31st, 2007, 10:41 AM
Investors Default On Outsize Share Of Home Loans

August 31, 2007; Page A1

Investors played a big role in pumping up home prices during the housing boom. Now, they account for an outsize proportion of loan defaults, mortgage bankers and builders say.

A survey by the Mortgage Bankers Association found that mortgages on properties that aren't occupied by the owner -- mostly investment homes -- account for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada, states where overdue payments are mounting fast.

Defaults were high on both prime and subprime loans, those made to borrowers with shaky credit histories.

The four states were among the favorites of speculators during the housing boom. When the market was hot, many speculators bought homes hoping to flip them for a quick profit. But now that home prices have turned lower, that strategy is backfiring.

As a result, some investors have "simply walked away from their mortgages," said Doug Duncan, chief economist of the MBA, echoing recent comments from executives of Countrywide Financial Corp., the nation's largest mortgage lender.

Investor defaults are likely to add to the spate of foreclosed homes hitting the market over the next year or two, even as much tighter lending standards cut many potential buyers out of the market.

The darkening outlook for the housing sector has prompted economists at Goldman Sachs Group to predict that home prices nationwide will fall an average of about 7% both this year and next. Alarmed by such prospects, a group of top executives from home-building and supply companies are scheduled to meet next Wednesday with Federal Reserve Chairman Ben Bernanke to argue for Fed actions to support the housing industry.

In Nevada, Arizona and Florida, loans for properties that weren't owner-occupied accounted for nearly a third of all home mortgages issued in 2005. The figure was 14% for California and 17% for the nation as a whole. The nationwide share for these primarily investor loans was in a range of about 5% to 7% in the 1990s, then jumped to 11% in 2002, 12% in 2003 and 15% in 2004.

In Nevada, homes that weren't occupied by the owner accounted for 32% of the prime-mortgage defaults recorded as of June 30, the MBA said. Such homes accounted for about a quarter of prime-loan defaults in Florida and Arizona and a fifth in California. For the nation as a whole, the figure was 16%.

The MBA defines defaults as loans that are 90 days or more past due or in the foreclosure process, but not those already taken over by lenders.

Sazzad Khandakar, 43 years old, an information-technology manager and father of three in Monroe Township, N.J., is among the nation's distressed home investors. In early 2005, he bought a $410,000 condominium and a $390,000 newly built single-family home, both in Orlando, Fla. "Everybody around me bought an investment home in Florida," Mr. Khandakar said. "Florida was all over the news; my friends were doing it....I didn't want to miss out."

He planned to keep the condo as a second home and sell the detached house for a quick profit. For the condo, Mr. Khandakar made a 10% down payment, but he borrowed 100% of the cost of the house, assuming that its rapid price appreciation would soon provide him with equity. Instead, prices began falling, and he has been unable to sell the home or find a tenant. Now, Mr. Khandakar said, he is behind on both loans.

"My credit is shot for the next six or seven years," he said, and he has run through $100,000 of retirement savings. "It will take me another five to 10 years to recover that," he added.

Many home builders say they tried to rein in sales to investors. Dom Cecere, chief financial officer of KB Home, a major national home builder based in Los Angeles, said his company used contractual clauses barring home owners from renting out their properties, but many investors bought anyway. "People do infiltrate whether you like it or not,'' he said.

Thanks to easy lending standards, many investors were able to get mortgages even though they put down deposits of as little as 2% to 3% on homes that weren't yet built. Some watched gleefully as a rising market boosted the value by 5% or 10% before the home was ready for occupancy. "For a while it went their way, they bought two or three homes and continued to roll the dice,'' said Mr. Cecere. "But that goes the other way when the prices go down.''

In the end, some investors may have made money by flipping a series of houses, and lost out only on their last investment, which they couldn't sell before the market collapsed, Mr. Cecere said.

Jerry Howard, chief executive of the National Association of Home Builders, said, "It's probably a pretty good bet" that the trade group will press the case for cutting interest rates when it and housing-industry executives meet with Mr. Bernanke on Wednesday.

On Aug. 17, in response to a credit crunch that grew out of problems in the markets for mortgage-linked securities, the Fed reduced its discount rate, the fee charged on direct Fed loans to banks, to 5.75% from 6.25%, in an effort to boost confidence amid near panic among investors over the surge in mortgage defaults and risks on other types of loans.

Markets are betting the Fed eventually will have to cut the more economically important federal-funds rate, charged on loans between banks, the benchmark for short-term borrowing costs. Lower rates tend to stimulate the economy by making it cheaper to borrow money.

Home prices are weak in most of the country largely because of a glut of houses and condos on the market. In July, the number of homes listed for sale nationwide was enough to last 9.6 months at the current sales rate, according to the National Association of Realtors. That's well above the five- to six-month supply that's considered balanced.

Meanwhile, lenders keep setting tougher terms, particularly for investors, who are viewed as higher-risk borrowers. Guidelines sent out to mortgage brokers last week by Countrywide specified that investors must make down payments of at least 20% on some types of loans and must document their income and assets. During the boom, many lenders provided 100% financing and often didn't insist on seeing the borrower's tax forms and pay stubs.

Underscoring the growing pessimism about housing, economists at Goldman Sachs in New York raised their forecast for the drop in U.S. home prices this year to 7% from a previous 5%. The forecast is based on the S&P/Case-Shiller national home-price index, considered the best such gauge by some housing economists. The Goldman economists expect a further 7% decline in house prices next year. In this year's second quarter, the index was down 3.2% from a year earlier.

Another house-price index, produced by the Office of Federal Housing Enterprise Oversight, or Ofheo, showed that prices in the second quarter were up 3.2% from a year earlier, the federal regulator announced yesterday. The Ofheo index, based on loans guaranteed by Fannie Mae and Freddie Mac, excludes homes financed with mortgages above the current $417,000 limit of the two federally sponsored mortgage giants. As a result, it misses much of the market in California and other high-price areas. The Ofheo index has lagged other gauges in tracing the housing slump of the past two years.

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

September 30th, 2007, 11:07 PM
Report: Countrywide CEO Cashed Out

LA Times: Angelo Mozilo Cashed In $138 Million In Options Before Crash

CBS News (http://www.cbsnews.com/stories/2007/09/29/business/main3311669.shtml)
LOS ANGELES, Sept. 29, 2007

(AP) Countrywide Financial Corp. Chairman and CEO Angelo Mozilo cashed in $138 million in stock options over the last year, switching his trading plans as the mortgage company went into a tailspin, it was reported Saturday.

Between November 2006 and August, Mozilo changed the plans outlining how many of his shares would be sold monthly, the Los Angeles Times reported.

Mozilo unloaded 4.9 million Countrywide shares, most of which he bought through exercising options.

Hundreds of executives use similar trading plans, approved by federal regulators in 2000 as a way to defend against insider trading allegations. While not illegal, it is highly unusual for the plans to be changed so often in a short period, experts said.

"If a guy is changing his plan around, I would think that would send up a red flag. I wouldn't allow my clients to do it," said Thom F. Carroll, a financial planner with the Baltimore wealth management firm Carroll, Frank & Plotkin.

Mozilo adopted a new trading plan, added a second one and then revised it while the housing and mortgage industry slumped, the Times reported, citing regulatory findings.

The changes allowed him to sell hundreds of thousands of additional shares before Countrywide stock plunged.

Sandy Samuels, Countrywide's chief legal officer, said Mozilo's stock sales were all "in accordance with company policy."

"The (trading) plans were put into place in consultation with Mr. Mozilo's financial adviser, without regard to any non-public or market information," Samuels said in a prepared statement to the Times.

Calabasas-based Countrywide, the nation's largest mortgage lender in terms of volume, faces a lawsuit claiming it failed to warn employees about the depth of its financial troubles, resulting in heavy stock losses in their 401k retirement accounts.

The company recently said it will eliminate as many as 12,000 jobs in the coming months. Its stock, meanwhile, is off more than 50 percent from its $45.03 high on Feb. 2.

© MMVII The Associated Press. All Rights Reserved.

October 1st, 2007, 09:46 AM
Citigroup Warns of 60 Pct. Earnings Drop

Citigroup Warns Its 3rd-Quarter Earnings Could Fall 60 Percent on Mortgage and Loan Losses

Yahoo.com (http://biz.yahoo.com/ap/071001/citigroup_outlook.html?.v=2)
October 1, 2007

NEW YORK (AP) -- Citigroup Inc., the nation's largest financial institution, warned Monday its third-quarter earnings are likely to decline 60 percent, as it takes more than $3 billion in writedowns for securities backed by underperforming mortgages and loans tied to corporate buyouts.

The announcement from Citigroup came as the Swiss bank UBS AG said it will post a loss of up to $690 million in the third quarter partly due to losses linked to U.S. subprime mortgages.

Subprime mortgages -- loans given to customers with poor credit history -- have gone delinquent or defaulted at rising rates in recent months, causing banks to lower the value of the loans as investors shy away from buying them.

Weakness in that business spread to other credit markets, leaving banks stuck with loans they promised during the merger and acquisition boom.

Citigroup will write down about $1.4 billion on funded and unfunded loan commitments when it announces its third-quarter results. It will record losses of about $1.3 billion on the value of securities backed by subprime loans. Citigroup will also record a loss of $600 million in fixed-income credit trading due to market volatility.

Third quarter global consumer credit costs also increased $2.6 billion from the same quarter a year ago, the company said. About 75 percent of that increase is due to rising loan-loss reserves -- money held to cover loans that default.

Citigroup shares fell 87 cents, or 1.9 percent, to $45.80 in premarket trading on Monday.

Citigroup moved its earnings release date to Oct. 15 from Oct. 19.

Copyright © 2007 Yahoo! Inc.

October 1st, 2007, 10:54 AM
As of nearly 11 am, Citigroup stock is up 34 pennies on the day's trading, against a background of S&P 500 (SPAL, for those of us who are old geezers) up 0.67%.

In other words, sounds like the markets had already expected that kind of bad earnings news.

ali r.
{downtown broker}

October 6th, 2007, 01:20 PM
Until recently I was an underwriter for a sub-prime mortgage company that is about to close. It seems that most media outlets and government officials fain ignorance about the real underlying cause of the problem. There is either a tendency to blame the borrower or act as though no one in the industry {or outside of it} saw this coming. They fail to mention that those who gained the most financially got off scot free while leaving the mess behind for everyone else to clean up. In my former company, the sales managers and loan officers "held the keys to the safe" while deciding which guidelines to ignore sometimes going so far as to bribe fellow underwriters to "look the other way". Sales managers often overrode an underwriter's decision they did not agree with. Other times fellow underwriters would be threatened with their job for "impeding company growth and progress" just because they refused to go along with the flagrant disregard of guidelines . I complained to the sales managers about the bribing but all I got was a formal write-up for making "inappropriate comments".

There was absolutely no support from the owner of the company all the way to the human resource representative. This company is as corrupt as they come. I can't tell you the number of sexual affairs that occurred between married and unmarried people; primarily among the management staff {at the workplace itself}. Promotions were strictly political thus moving people "up the ladder" who never proved themselves worthy or were on a final written warning to be terminated {for poor performance}. As a result of the corrupt management of this company, I and several hundred others were laid off. I believe the federal government needs to investigate this company and bring to trial those corrupt individuals who broke the law. This would set an example for the rest of the mortgage industry that absolute corruption corrupts absolutely.

October 6th, 2007, 06:13 PM
More news (http://homebuying.about.com/od/findingalender/qt/0307subprime.htm) on the mortgage meltdown. Some additional news on "selling in a falling market (http://homebuying.about.com/od/marketfactstrends/qt/FallingMarket.htm)".

October 25th, 2007, 04:32 AM
The sub-prime mortgage crisis in the US has also affected the UK market - see link


Personally, I believe we've got our own sub-prime mortgage problems building up as repossessions rise significantly. Basically too much credit is out there, given by lenders without due consideration as to ability to repay.
Greed over financial prudence, egged on by a government that has built its so-called "economic success" on massive layers of debt.

October 29th, 2007, 05:22 PM
I like the thread and the topic. The only thing is that more of the posts are reprints of articles rather than the typically active discourse one typically sees on wired new york....

October 29th, 2007, 05:48 PM
That, and the fact that the stock market went up again, which put me (for one) back to work . . .

ali r.
{downtown broker}

October 30th, 2007, 12:31 PM
somebody can help me i've open a new 3d...

November 9th, 2007, 11:05 AM
With news like this (http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2839285.ece) it's a wonder that people aren't dragging this type of scum out into the streets and beating them to a bloody pulp ...

Ex-Citigroup chief to exit with almost $100m

Charles 'Chuck' Prince is expected to leave the bank with a $42m package on top of shares worth $53m

Times Online
November 9, 2007

Charles "Chuck" Prince, the deposed head of Citigroup, is in line to walk away from the Wall Street giant with a total pay, perks and shares payout worth just under $100 million, it has emerged.

The payout for Mr Prince, who stays on as a consultant until the end of the year, include a pro-rata cash "incentive award" currently estimated to be worth $12 million.

It also includes $10,716,469 in restricted share awards and $16,046,703 in stock options that will automatically vest at his departure.

Mr Prince, whose exit was sealed late last week, already owns 1.61 million shares in Citi, currently worth about $53 million.

Although Mr Prince's payday is a bonanza by most standards, it still falls far short of the $161 million collected by his investment banking rival Stan O'Neal at Merrill Lynch.

Both men were "retired" from their positions in the wake of multi-billion dollar losses against their exposure to the sub-prime mortgage markets and related turmoil in the credit markets.

Citi has already taken a $6 billion hit and estimated a further $8 billion to $11 billion could follow. Merrill wrote down $7.9 billion but said last night that its exposure had reached $27.2 billion.

Mr Prince received total compensation last year of around $25 million. Mr O'Neal, Wall Street's second-highest paid banker, collected a package worth about $48 million.

Under the terms of the severance deal negotiated with Mr Prince, Citi will provide him with an office, an administrative assistant, and a car and driver for the next five years, unless he finds a fresh job beforehand.

Mr Prince's pension entitlement, currently valued at about $1,427,648, remain intact, according to filings to the Securities and Exchange Commission, the US regulator, made by Citi last night.

Mr Prince's departure, unusually for a Wall Street exit, is not effective immediately. Instead, he will stay on until the end of the year to provide advice to the chairman of the board and the acting chief executive, Sir Win Bishoff.

Citi said it would match for his consultancy work the pay and perks he received before his resignation as chairman and chief executive.

© Copyright 2007 Times Newspapers Ltd.

August 25th, 2008, 12:32 PM
FBI saw threat of mortgage crisis

Linda Spillers / For The Times
EARLY WARNING: Chris Swecker in 2005. In charge of criminal probes for the FBI, he believed the agency would prevent upheaval in the mortgage industry.

A top official warned of widening loan fraud in 2004, but the agency focused its resources elsewhere.

By Richard B. Schmitt, Los Angeles Times Staff Writer
August 25, 2008 (http://www.latimes.com/business/la-fi-mortgagefraud25-2008aug25,0,6946937.story)

WASHINGTON -- Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.

"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.

Today, the damage from the global mortgage meltdown has more than matched that of the savings-and-loan bailouts of the 1980s and early 1990s. By some estimates, it has made that costly debacle look like chump change. But it's also clear that the FBI failed to avert a problem it had accurately forecast.

Banks and brokerages have written down more than $300 billion of mortgage-backed securities and other risky investments in the last year or so as homeowner defaults leaped and weakness in the real estate market spread.

In California alone, lenders have foreclosed on $100 billion worth of homes over the last two years and are foreclosing at a rate of 1,300 houses every business day, according to a recent report from ForeclosureRadar.com.

Most observers have declared the mess a gross failure of regulation. To be sure, in the run-up to the crisis, market-oriented federal regulators bragged about their hands-off treatment of banks and other savings institutions and their executives. But it wasn't just regulators who were looking the other way. The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities, and paid scant attention to white-collar crimes that may have contributed to the lending and securities debacle.

Now that the problems are out in the open, the government's response strikes some veteran regulators as too little, too late.

Swecker, who retired from the FBI in 2006, declined to comment for this article.

But sources familiar with the FBI budget process, who were not authorized to speak publicly about the growing fraud problem, say that he and other FBI criminal investigators sought additional assistance to take on the mortgage scoundrels.

They ended up with fewer resources, rather than more.

In 2007, the number of agents pursuing mortgage fraud shrank to around 100. By comparison, the FBI had about 1,000 agents deployed on banking fraud during the S&L bust of the 1980s and '90s, said Anthony Adamski, who oversaw financial crime investigations for the FBI at the time.

The FBI says it now has about 200 agents working on mortgage fraud, but critics say the agency might have averted much of the problem had it heeded its own warning.

"The FBI correctly diagnosed that mortgage fraud was epidemic, but it did not come close to meeting its announced goal," said William K. Black, who was a federal regulator during the S&L crisis and now teaches economics and law at the University of Missouri-Kansas City.

"It used everyday procedures and woefully inadequate resources to deal with an epidemic," he said. "The approach was certain to bring symbolic prosecutions and strategic defeat."

The mortgage debacle has laid bare a system marked by dubious practices at every stage of the process. Lenders often made loans to borrowers who had limited ability to repay them but little desire to pass up the dream of homeownership. Many loans lacked basic documentation, such as information about borrowers' incomes.

Still, mortgage companies could hardly sell them fast enough, packaging the loans as investment securities and peddling them to eager buyers on Wall Street.

The FBI defends its handling of the crisis, with officials contending that as home prices were rising several years ago, the trouble brewing in the mortgage market -- and the potential crimes behind it -- was not immediately apparent.

Officials said they began approaching mortgage companies and others in an attempt to raise awareness about the growing fraud problem. But the lenders had little incentive to cooperate because they were continuing to make money. Black says that in many cases, they were part of the fraud.

"Nobody wanted to listen," Sharon Ormsby, the chief of the FBI's financial crimes section, said in an interview. "We were dealing with the issue as best we could back then."

Over the last three years, the FBI and other agencies have brought dozens of mortgage-fraud cases. The bureau has rooted out foreclosure rescue schemes in which homeowners are tricked into signing over the deeds to their homes to operators who buried the properties even deeper in debt. Agents have disrupted cases of identity theft in which criminals open -- and exhaust -- home equity lines of credit and leave homeowners stuck with the bill.

Many of the cases have been relatively small, however, with about half the investigations involving losses of less than $1 million -- the size of two or three loans.

But the tepid response also reflects a broad realignment of law-enforcement priorities at the Justice Department in which mortgage fraud and other white-collar crimes have been subordinated to other Bush administration priorities.

That has reflected, in part, the ramp-up in national security and terrorism investigations after the Sept. 11 attacks. But the administration has also put more support behind efforts against illegal immigration and child pornography.

In a way, the mortgage debacle could not have come onto the FBI radar screen at a worse time. Just as Swecker was making his doomsday forecast, the FBI, under pressure from Congress and the White House, was creating a crime-fighting brain drain, transferring hundreds of agents from its criminal investigations unit into its anti-terrorism program. About 2,500 agents doing criminal work -- 20% or so of the entire force -- were affected.

Even as the number of new white-collar cases started declining, the Justice Department did pursue some high-profile corporate prosecutions, such as those arising from the collapse of Enron Corp. But some former prosecutors question the administration's current commitment to pursuing complex, high-stakes cases.

"I think most sitting U.S. attorneys now staring at the subprime crisis find scant resources available to pursue sophisticated financial crimes," said John C. Hueston, a Los Angeles lawyer who was a lead federal prosecutor in the trials of Enron executives Kenneth L. Lay and Jeffrey K. Skilling.

Absent a major shift in priorities and resources, he said, it is likely that the Justice Department and the FBI will continue on their current path of focusing on simple cases "that don't go to the heart of the problem."

The FBI says it has 21 open investigations into possible large-scale fraud related to the subprime meltdown. The Times reported last month (http://www.latimes.com/news/nationworld/nation/la-fi-probe24-2008jul24%2C0%2C6703300%2Cfull.story) that a federal grand jury in Los Angeles had subpoenaed records from three large California lenders: Countrywide Financial Corp. (now part of Bank of America Corp.), New Century Financial Corp. and IndyMac Federal Bank.

Among other possible targets, the FBI has said, are investment firms that sold billions in securities backed by shaky subprime mortgages and credit rating agencies that gave high marks to the now-worthless securities and failed to protect investors.

But it may be hard to jump-start such probes. Trying to prove that a major mortgage company intended to defraud buyers of its securities, for example, could take years of digging into records and testimony.

Moreover, some of those involved may have special legal protection: Credit rating firms have in other cases successfully asserted that their opinions about the values of securities are protected by the 1st Amendment.

"I am happy to have investigations going on, but these investigations should have taken place years ago," said Blair A. Nicholas, a San Diego lawyer representing investors who lost money in the collapse of several subprime mortgage lenders. "They seem to always get involved after the horse has left the barn. It is always cleaning up the mess rather than being proactive."

Could the crisis have been averted, or at least mitigated, if the FBI had intervened more forcefully?

"Until there is a catastrophic loss, there is no incentive to investigate criminal conduct," said Cynthia Monaco, a former federal prosecutor in New York. "Nor are there people coming forward with evidence" such as angry investors or whistle-blowing corporate employees, she said.

Even now, Monaco added, it is far from clear whether the damage -- suffered by investors and homeowners alike -- was the product of clear-cut fraud.

Ormsby says the FBI is more actively working with other federal investigative agencies in the hope they will pick up the slack. The Secret Service, for example, in a departure from its traditional missions of protecting presidents and heads of state and investigating counterfeiting, has assigned more than 100 agents to examine mortgage fraud, said spokesman Edwin Donovan.

The Justice Department is also starting to mobilize. The department offered what it described as a "basic seminar" on mortgage fraud cases to about 100 prosecutors last week at its national training academy in South Carolina.


Tamara Holmes
October 28th, 2009, 03:47 AM
The credit crunch will have little effect on it other than the growth of the endowment could be stunted due to the drop in the stock market. Most endowments are stock-market linked I would guess so you may end up with a short-fall depending on how your endowment has been doing up to now...
The main effects of the credit crunch are going to be on new mortgages and in particular how difficult it is going to be to actually get one. If you are close to paying off your mortgage and your endowment is going to more or less cover the mortgage then you have no problems. However many endowments actually fail to reach their target and in that case you may be forced to re-mortgage if you cannot cover the short-fall yourself.
No doubt you won't have to worry about negative equity if you are that close to the end of your mortgage.

August 20th, 2011, 03:27 PM
In New York, a Sprinkling of Higher Prices

http://graphics8.nytimes.com/images/2011/08/21/realestate/21COVER-SPAN/21COVER-SPAN-articleLarge.jpg Hiroko Masuike/The New York Times
Prices are at a high point in some buildings, including, clockwise from top left, City Spire, at 150 West 56th Street; the Lion's Head condos, at 121 West 19th Street; the Chelsea Stratus, at 101 West 24th Street; and 520 West Chelsea, at 520 West 19th Street.

By VIVIAN S. TOY (http://topics.nytimes.com/top/reference/timestopics/people/t/vivian_s_toy/index.html?inline=nyt-per)
Published: August 19, 2011

BEFORE the financial markets’ most recent drubbing, New York City (http://topics.nytimes.com/top/classifieds/realestate/locations/newyork/newyorkcity/manhattan/?inline=nyt-geo)’s real estate prices had been flat for the better part of a year. But over the spring and summer, prices in certain pockets of property sprinkled around Manhattan (http://topics.nytimes.com/top/classifieds/realestate/locations/newyork/newyorkcity/manhattan/?inline=nyt-geo) and Brooklyn (http://topics.nytimes.com/top/classifieds/realestate/locations/newyork/newyorkcity/brooklyn/?inline=nyt-geo) had rebounded to or beyond pre-recession levels.
Enlarge This Image (http://javascript<strong></strong>:pop_me_up2('http://www.nytimes.com/imagepages/2011/08/21/realestate/21JUMP4.html','21JUMP4_html','width=720,height=563 ,scrollbars=yes,toolbars=no,resizable=yes'))
http://graphics8.nytimes.com/images/2011/08/21/realestate/21JUMP4/21JUMP4-articleInline.jpg (http://javascript<strong></strong>:pop_me_up2('http://www.nytimes.com/imagepages/2011/08/21/realestate/21JUMP4.html','21JUMP4_html','width=720,height=563 ,scrollbars=yes,toolbars=no,resizable=yes'))Hiroko Masuike/The New York Times

72 Mercer Street in SoHo has a doorman, rare in the neighborhood.
These micromarkets could turn up along a particular avenue or even in a specific building, and they tended to be in what brokers describe as prime locations, in neighborhoods like Greenwich Village and Chelsea in Manhattan, and Brooklyn Heights and Park Slope in Brooklyn.
They fell into a few general categories, namely: apartments in move-in condition; family-size apartments with three or more bedrooms; apartments with unusual features like helicopter-level views of Central Park; and almost-new condos in their first resale. Having one of these traits did not guarantee a record-setting price, but apartments achieving that milestone tended to have one or more of them. The apartments often also generated multiple offers, though not quite the frenetic bidding wars that were routine in 2007 and 2008.
The latest round of economic turmoil will no doubt give buyers pause and may portend a double dip for the real estate market.
“Consumers are going to look at all this economic uncertainty and they’re going to be more wary about buying,” said Jonathan J. Miller, the president of the appraisal firm Miller Samuel and a market analyst for Prudential Douglas Elliman. “It’s going to delay the recovery, which was already challenged, and it will probably take the edge off some of the areas that have already seen improvement.”
Despite this, brokers say, the types of apartments that had been getting 2007 and 2008 prices will probably continue to do so.
Shaun Osher, the chief executive of the agency CORE, said he had seen apartments in several developments that opened in 2008 and 2009 easily selling for more than the original owners paid. “The product is the product,” he said. “Even if the markets decline, the units that will continue to fare the best are the resales in new developments.” For some people, he added, “the only thing better than buying a shiny new condo is buying one that is still pretty new but has already had any problems vetted out.” He said the strong sales were helped by a lack of new inventory coming to market.
At 520 West 19th Street in Chelsea, which CORE helped sell out in 2008, a three-bedroom apartment that closed in September 2008 for $2.675 million sold this June for $3.15 million, an increase of nearly 18 percent. Similarly, Streeteasy.com shows that a two-bedroom there resold in April for $2.3 million, 10 percent more than the $2.09 million the original owner paid. The bounce clearly had not yet hit last summer, when another three-bedroom sold for $2.3 million, 13 percent below its original $2.64 million sale price.
The success of 520 West 19th Street, of course, cannot be generalized for all two- to three-year-old buildings.
Doug Perlson, the chief executive of the brokerage RealDirect, said strong resales were “not the rule for a lot of the developments that came on at the height of the market.” In Chelsea, he said, some buildings near Eighth Avenue are reselling at a loss, while buildings farther west or farther east are getting a premium.
“There are pockets of activity in West Chelsea near the High Line (http://topics.nytimes.com/top/reference/timestopics/subjects/h/high_line_nyc/index.html?inline=nyt-classifier) that are probably going to have success in whatever market we’re in,” Mr. Perlson said. Buildings along the Avenue of the Americas have also been selling well, he added, because “this neighborhood has become much hotter in the last two years,” with the opening of a Trader Joe’s and the Eataly food court not too far away. He said he had a buyer in contract for a two-bedroom at the Lion’s Head Condominium, at Avenue of the Americas and 19th Street, for $2.15 million. The apartment originally sold in 2007 for $2 million.
On the same avenue at the Chelsea Stratus, a 37-story tower at 24th Street that opened in mid-2007, at least eight apartments have resold this year with premiums of 2 to 21 percent, according to data from Streeteasy.com (http://streeteasy.com/).
Andrew Anderson, an executive vice president of Prudential Douglas Elliman who led the sales team for the developer and has since resold dozens of units at the Stratus, said that after Lehman Brothers collapsed in September 2008 , about 20 buyers pulled out of their contracts. Those units were resold at discounts of about 15 percent in 2009, he said, but prices started to bounce back in mid-2010.

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August 20th, 2011, 08:17 PM
Thanks for bumping this thread, mariab. I didn't know it was here!

I posted this in the One Housing Woe Gives Way to Another (http://wirednewyork.com/forum/showthread.php?t=4359) thread, too, but it's probably more topical here.


For god's sake :rolleyes:.

I hope common sense prevails.

Community Stands Strong to Block an Eviction


Mary Lee Ward, in hat, on Friday morning with her lawyer Karen Gargamelli, right;
Assemblywoman Annette Robinson, in red; and Edna Johnson, an aide to Representative Edolphus Towns.

From inside Mary Lee Ward’s small and sparsely furnished living room in Bedford-Stuyvesant, Brooklyn, it sounded Friday as if a block party was in full swing in the street below. Cars and trucks honked their horns as they passed and almost 200 voices could be heard cheering and chanting.

But this was no street party; it was not yet 9 a.m. and the crowd outside was there as a line of defense.

Ms. Ward — a tiny, soft-spoken 82-year-old — faced eviction by a city marshal on Friday morning, as the result of a subprime mortgage she took out in 1995. The lender, which filed for bankruptcy in 2007, had subsequently been investigated for predatory and discriminatory practices. And so neighbors, friends, housing advocates and supporters formed a thick human wall outside Ms. Ward’s small, gray house on Tompkins Avenue.

Shortly after 9:30, the local state assemblywoman, Annette Robinson, emerged from the house with news.

“The marshal will not be taking action today,” Ms. Robinson said over a bullhorn, as Ms. Ward stood by her side. Ms. Robinson vowed to negotiate with the deed holder to keep Ms. Ward in her home.
Friday’s protest followed three years of work on Ms. Ward’s behalf by the nonprofit legal group Common Law and Ms. Robinson, among others.

“If I’m evicted today, that’s it for anybody who’s a senior citizen,” Ms. Ward, who has lived in the house since 1967, said earlier in the morning, sitting in her living room next to a table covered with legal documents. “It would show they can break up the community and do anything to us.”

Fifteen years ago, Ms. Ward says, she needed money for a lawyer to help keep her great-granddaughter from being put up for adoption. Like many others in her neighborhood, she turned to a subprime lender.

She signed a contract with Delta Funding, a company she found advertised on a flier tucked in her mailbox. She borrowed $82,000 against her house, but claims she only ever received a payment of $1,000. Ms. Ward still displays a faded portrait of her great-granddaughter as a baby, even though she was unable to prevent the adoption and has long since lost contact with her.

In 1999 and 2000, several state and federal agencies sued Delta Funding, accusing the company of predatory lending practices directed at elderly members of minority groups throughout Queens and Brooklyn. Those suits were settled with Delta denying wrongdoing. Lawyers from Common Law say the lender sent a letter to Ms. Ward in 2001 informing her that they were canceling her loan, but the loan never was canceled. Instead, the mortgage passed from financial institution to financial institution over the last 10 years.

Unable to pay the growing debt, Ms. Ward was issued a judgment of foreclosure in 2008 and the property was put up for auction that July. The winning bidder, the real estate investment company 768 Dean Inc., has been trying to evict Ms. Ward ever since. It arranged, through a court order, for a city marshal to remove her from the residence on Friday, a move that galvanized support for Ms. Ward. By 7 a.m., demonstrators had gathered outside her doorstep, brandishing banners that read “We stand with Ms. Ward” and “Defend the block.”

“We have the people power to push the landlord to negotiate with us,” said Karen Gargamelli, a lawyer with Common Law. “Our demands are that the eviction be stopped and that the landlord give the deed back either directly to Ms. Ward or to the Bed-Stuy community in a land trust for affordable housing.”

Common Law has also asked the state attorney general to investigate why Ms. Ward’s purportedly canceled mortgage has continued to haunt her.

768 Dean Inc. does not have a listed phone number. Voice messages left at the workplace of its principal owner, Shammeem A. Chowdhury, and with Mr. Chowdhury’s lawyer were not immediately returned.

Ms. Ward is not the first to have received this brand of foreclosure defense. Take Back the Land, a housing activist group founded in Miami, has blockaded houses in Rochester, N.Y. in recent months to delay or prevent evictions. Many of the protesters outside Ms. Ward’s house came in response to a call put out by a coalition of housing advocacy groups, Organizing for Occupation.

A tearful Ms. Ward spoke briefly to those who had gathered on her behalf. “You have to stick with it when you know you’re right,” she said. “We’re not slaves anymore. My grandfather was a slave, but I’m not.”

Neighbors Neighbors and others gathered Friday morning to show their support for Ms. Ward.

http://cityroom.blogs.nytimes.com/20...a-foreclosure/ (http://cityroom.blogs.nytimes.com/2011/08/19/community-stands-strong-to-block-a-foreclosure/)

August 20th, 2011, 08:40 PM
It worked the first time, but from what I've seen on the news, the marshal will be back. This article is encouraging though. More & more people are hearing about it, including lawmakers, & I'm sure a few high-profile lawyers won't mind jumping into the fray pro-bono.

Actually that article is appropriate there too. Speaking of threads, I came across one you posted in 2010, I think in the real estate forum, about Columbia University's collection of NYC floor plans. I came across that website about a year later by accident, but there's some really neat things in there. Mostly postwar as far as I can see right now, but really informative & helped me a ton. I probably would have found yours sooner or later. Some good threads that go way back, you should start from the last page & work your way up.

August 20th, 2011, 08:59 PM
I've been here a while and have already done that :). Bound to miss the odd thread occasionally, though.

September 2nd, 2011, 10:29 PM
U.S. Is Set to Sue a Dozen Big Banks Over Mortgages


The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.

Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds, but this federal effort is a new chapter in a huge legal fight that has alarmed investors in bank shares. In this case, rather than demanding that the banks buy back the original loans, the finance agency is seeking reimbursement for losses on the securities held by Fannie and Freddie.

The impending litigation underscores how almost exactly three years after the collapse of Lehman Brothers and the beginning of a financial crisis caused in large part by subprime lending, the legal fallout is mounting.

Besides the angry investors, 50 state attorneys general are in the final stages of negotiating a settlement to address abuses by the largest mortgage servicers, including Bank of America, JPMorgan and Citigroup. The attorneys general, as well as federal officials, are pressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure.

And last month, the insurance giant American International Group filed a $10 billion suit against Bank of America, accusing the bank and its Countrywide Financial and Merrill Lynch units of misrepresenting the quality of mortgages that backed the securities A.I.G. bought.

Bank of America, Goldman Sachs and JPMorgan all declined to comment. Frank Kelly, a spokesman for Deutsche Bank, said, “We can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”

But privately, financial service industry executives argue that the losses on the mortgage-backed securities were caused by a broader downturn in the economy and the housing market, not by how the mortgages were originated or packaged into securities. In addition, they contend that investors like A.I.G. as well as Fannie and Freddie were sophisticated and knew the securities were not without risk.

Investors fear that if banks are forced to pay out billions of dollars for mortgages that later defaulted, it could sap earnings for years and contribute to further losses across the financial services industry, which has only recently regained its footing.

Bank officials also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy. Other experts warned that a series of adverse settlements costing the banks billions raises other risks, even if suits have legal merit.

The housing finance agency was created in 2008 and assigned to oversee the hemorrhaging government-backed mortgage companies, a process known as conservatorship.

“While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.

The suits are being filed now because regulators are concerned that it will be much harder to make claims after a three-year statute of limitations expires on Wednesday, the third anniversary of the federal takeover of Fannie Mae and Freddie Mac.

While the banks put together tens of billions of dollars in mortgage securities backed by risky loans, the Federal Housing Finance Agency is not seeking the total amount in compensation because some of the mortgages are still good and the investments still carry some value. In the UBS suit, the agency said it owned $4.5 billion worth of mortgages, with losses totaling $900 million. Negotiations between the agency and UBS have yielded little progress.

The two mortgage giants acquired the securities in the years before the housing market collapsed as they expanded rapidly and looked for new investments that were seemingly safe.

At issue in this case are so-called private-label securities that were backed by subprime and other risky loans but were rated as safe AAA investments by the ratings agencies.

In the years before 2007, “the market was so frothy then it was hard to find good quality loans to securitize and hold in your portfolio,” said David Felt, a lawyer who served as deputy general counsel of the finance agency until January 2010. “Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments."

Fannie and Freddie had other reasons to buy the securities, Mr. Rood added. For starters, they carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.

In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.

“Competitive pressures and onerous housing goals compelled them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.

In fact, Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.

As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion.