Thursday, March 13, 2008

Foreclosures filings rise 60% in February/ Defaults double from a year ago

Good morning everyone. Well I have several topics to discuss today but I wanted to start with the Realty Trac data. Foreclosures rose 60% and defaults doubled versus 1 year ago. 223,000 houses are now in some stage of default. I guess HOPE NOW isn't working so well. Banks are instead saying pay or get out.

Some comments from the article:

``This is continuing to worsen,'' Susan Wachter,
professor of real estate at the University of Pennsylvania's Wharton School in
Philadelphia, said in an interview. ``It tells us that we are not at a bottom.''
About $460 billion of adjustable-rate mortgages are scheduled to reset this
year and another $420 billion will rise in 2011, according to New York-based
analysts at Citigroup Inc. Homeowners faced higher payments as fourth-quarter
home prices fell 8.9 percent, the biggest drop in 20 years as measured by the S&P/Case- Shiller
home price index.
``With declining prices, there is a pervasive problem of
not being able to refinance or sell,'' Wachter said in an interview. ``I'm very
Foreclosure filings are likely to be ``explosive'' in May and
June as more payments jump, after remaining at current levels this month and
next, Rick Sharga, executive vice president of RealtyTrac, said in an interview.
There may be between 750,000 and 1 million bank repossessions in 2008. Bank
seizures rose 110 percent in February from a year ago, he said.
``We're in a vicious cycle,'' Sharga said. ``We've got depreciating
home values and loans resetting at an outstanding volume just as banks are
retrenching. Even people who want to buy a home now are having trouble getting a

My take:

This is slowly becoming the perfect storm. You have an additional $460 billion resetting loans which are mostly subprime. The only way for these owners to save their house is to refinance and the banks have raised lending standards so most of these people cannot do so. Making the problem worse is the fact that the banks are fighting to stay solvent and raising interest rates. This is why this spring foreclosure rates are expected to be explosive in the spring. Remember, the subprime resets aren't done resetting until the end of 2008.

Another thing Susan brings up and is rarely talked about is there are another $420 billion resetting in 2011. These are the five year ARMS that people jumped into during the boom. This will be another huge hit to housing 3 years from now. Anyone thinking this market is going to recover anytime soon should reconsider their position. Remember housing recoveries take 8-10 years. I think this one will take longer and it might be more then a 15-20 years until you see houses back at these levels if ever.

Sharga sums up the problem in one quote:

`Vicious Cycle'
``We're in a vicious cycle,'' Sharga said. ``We've got depreciating home values and loans resetting at an outstanding volume just as banks are retrenching. Even people who want to buy a home now are having trouble getting a mortgage.''

Sharga hits the nail on the head. the banks are in deep trouble and don't have the resources to help distressed buyers.

Some Market notes:

Carlyle Capital's mortgage bond fund defaulted and failed to cover margin calls. This has shaken the markets this morning. Carlyle was leveraged 30-1 in this fund and when you are that leveraged and AAA bonds start dropping in value it doesn't take much for you to be way underwater and insolvent. The fund is trading down 95% today. Whats interesting is the lenders decided to take the money thats left in the fund rather then give Carlyle time to see if their bonds might come back in value. What does this say about mortgage backed bonds and the confidence in the credit markets that they will come back in value??

The fact that the lenders grabbed whats left rather then wait and give Carlyle a chance to come back tells you that they do not believe in these bonds anymore.

A Carlyle senior advisor describes the troubles below:

"The fund's losses were caused by ``excessive leverage,'' said Arthur Levitt, a senior Carlyle adviser, in a Bloomberg Radio interview today. ``This did not affect the overall Carlyle enterprise,'' said Levitt, former chairman of the Securities and Exchange Commission and a board member of Bloomberg LP, the parent of Bloomberg News.
`Single Fund'
``This was a single fund, and I suspect as this plays out, you are going to see a lot of other private-equity companies, a lot of banks, going down the same road,'' he said."

Not a very rosey picture.

Hank Paulson also was on CNBC today talking about regulating the mortgage industry and he pleaded with the banks to increase their capital and lower their dividends. I suspect they will let housing bottom out before the mortgage regulation happens but the result of this is we will never see the fraud that we saw in housing from 2000-2006. That is why buying now at even prices that are at a 10% discount is a bad idea. You are still buying at housing bubble levels. Once the government regulates the cost of a house will drop because the fraud of the lenders, appraisers, banks will all be gone.

Regarding his comments on the banks he doesn't sound too confident about their solvency. Banks hate to cut the divedend because it sends a bad confidence message to investors. IMO Paulson sees the perfect storm coming and at this point all he can do is try to control the damage as this housing bubble deflates.

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