Tuesday, April 8, 2008

Housing losses expected to reach $1 Trillion/Washington Mutual cuts its dividend

Hello all! Today was a very bearish news day in the markets. Washington Mutual(WAMU) was able to raise $7 billion in new capital but had to cut its dividend and there seems to be new concerns around its alt-A loans. From Yahoo Biz:

"The $7 billion infusion is more than what many analysts have deemed adequate to cover losses this year, Hindman said -- even in the most pessimistic scenarios.

But some analysts think a rise in alt-A defaults may still be coming, since they became popular relatively late in the mortgage boom. Last month, Fitch Ratings put $160 billion of alt-a mortgage-backed securities on review.

"That's really sort of an enigma," Hindman said. While companies are disclosing more about what types of mortgages they hold, he said it's hard to predict when that boot might drop for WaMu -- if at all.

Victoria Wagner, a credit analyst at S&P, said the TPG-led investment should be enough to keep WaMu going into next year. But she noted that the company holds a high concentration of mortgages in California, one of the hardest-hit housing markets."

My take:

I have been discussing these alt-A "liar" loans for a few months now. This is the next shoe to drop and I predict the default rates of alt-A's will rival the default rates on subprime. These were the favorite loans of the speculators because most of them were done with zero money down and no documentation. The speculators were also able to do several of these at once. Expect these loans to start folding like tents as these homes don't sell and these speculators run out of cash and start defaulting.

Other alt-A's will fold because people simply bought a house that they cannot afford.

The fact that a lot of Washington Mutual's loan portfolio is in California is a very bad sign. We all know how bad that market is. Put WAMU on your potential "run on the bank" list. If this is your bank I might suggest moving your money elsewhere or at least keep the balance below 100k because the FDIC will only insure up to $100,000.


Well we are now up to $1 trillion dollars in expected losses from the housing crisis according to the International Monetary Fund. This number is rising faster then the number of times Paris Hilton changes boyfriends. We started at $200 billion and now we are at $1trillion. Unbelievable. Here is how the IMF got to this number:

"Falling U.S. house prices and rising delinquencies may lead to $565 billion in residential mortgage-market losses, the IMF said in its annual Global Financial Stability report, released today in Washington. Total losses, including those tied to commercial real estate, may reach $945 billion, the fund said. The fund also saw as much as $90 billion in further losses from potential downgrades of bond insurance companies.

The forecast signals the worst of the credit crunch may be yet to come, because banks and securities firms so far have posted $232 billion in asset writedowns and credit losses. Policy makers, concerned that lenders' deteriorating balance sheets will hobble economic growth, are pushing companies to raise capital.

``The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,'' the report said. The fund warned of the risk of ``a serious funding and confidence crisis that threatens to continue for a significant period.''

My Take:

Notice the IMF warned that the worst is yet to come and a serious funding crisis threatens to continue for a significant period. Remember those bottom callers on CNBC? This is why you need to ignore them.

The fragile balance sheets of banks like WAMU will end up effecting the mortgage market. There is simply very little money available for lending unless your credit is spectacular. This will continue to force housing prices down. Housing is now in a vicious spiral because the banks have no money to lend, the buyers then can't buy, inventories then continue to increase which kills pricing power. I didn't even include the foreclosure problem which exacerbates the spiral.

Get a bag of popcorn, and sit back and relax as your dream house keeps dropping in price as a result of this housing spiral. I wouldn't even be looking at houses right now let alone buying.

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