Saturday, March 8, 2008

Banks face $325 billion dollar systemic margin call

ReutersBanks face "systemic margin call," $325 billion hit: JPMSaturday
March 8, 9:24 am ETBy Walden SiewNEW YORK (Reuters) - Wall Street banks are
facing a "systemic margin call" that may deplete banks of $325 billion of
capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co
(NYSE:JPM - News), said in a report late on Friday.JPMorgan, which sent a
default notice to Thornburg Mortgage Inc. (NYSE:TMA - News) after the lender
missed a $28 million margin call, said more default notices and margin calls
were likely. The Carlyle Group's mortgage fund also failed to meet $37 million
in margin calls this week."A systemic credit crunch is underway, driven
primarily by bank writedowns for subprime mortgages," according to the report
co-authored by analyst Christopher Flanagan. "We would characterize this
situation as a systemic margin call."

The JPMorgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, JPMorgan said.

My take:

The bad news just keeps on coming. JP Morgan is now predicting a 30% drop in home prices. The credit crisis keeps getting worse. Thornburg is pretty much BK now as they failed to meet a margin call.

What is happening is the banks are holding onto CDO's that keep dropping in value. This forces them to sell good bonds in order to cover margin calls. when they run out of good paper to sell they are forced to come up with cash in order to shore up the bad debt. The new accounting rules are forcing them to come up with the cash(aka margin calls).

Thornburgs CEO explains it here in Fortune magazine:

"The company’s CEO, Larry Goldstone, blamed a quirk of fair value accounting for Thornburg’s plight. “The turmoil in the mortgage financing market that began last summer continues to be exacerbated by the mark-to-market accounting rules which are forcing companies to take unrealized write-downs on assets they have no intention of selling,” he said Monday. “In this environment, the current market price of assets has become disconnected from their underlying recoverable value, resulting in increased volatility and imprecise quarter-to-quarter comparisons of asset valuations.”

Under these new accounting rules, banks are now forced to come up with cash to shore up the near worthless AAA CDO debt as well as good assets that are falling in value due to detiorating credit market thats scared to death and doesn't want top buy. These new accounting rules are making it costly for banks to hold onto this bad debt.

The reason the banks don't want to sell these CDO's is because they will either be forced to take the full loss on the CDO, or the CDO is worth more then what it can be sold for but because their is so much fear in the credit markets no one will offer fair value. As a result they would rather face margin calls then sell these bad or good assets because they might be worthless or they are worth more then what they are selling for in a frightened marketplace. My guess is if some of these banks had to write down all of their loans they would essentially be insolvent because they own so much bad debt.

The fact that these margin calls have risen to 325 BILLION dollars tells me we are getting close to the point where these CDO's will all be sold because the banks can't continue to face margin calls like this. There will be a point where the banks will be forced to sell all of this paper so we can start over with a healthy credit market and affordable homes. It will be a systemic reset of the whole housing system.

The problem is when this happens, you will see a systemic disaster that will be a financial event unlike anything any of has ever seen seen before. Banks will go under, lending will come to practically to a halt and housing is going to get crushed.

When this is all done my prediction is loans will only be done by banks and the lending will go back to the way it was. A 20% down payment with a good credit/job history. These homes are nowhere near priced where they need to be when these old lending standards are put in place.

Sit back and enjoy the trainwreck we are watching in the housing market. Watch your investemnts and check out the strength of your bank We are getting very close to the housing time bomb explosion and prices will be in a freefall soon. This 325 billion dollar writedown just takes us one step closer to the explosion.

How Housing has put the whole economy at risk

I will post a video below of Art Cashin who I believe is one of the smartest guys on the street. He has 30 plus years in the market and is the head of trading for UBS.

If you have watched CNBC over the last 5 years they love to call this economy the "goldilocks" economy, meaning everything is fine and dandy and people like Larry Kudlow have repeatedly said that the housing problem is "contained" and has not spread into other parts of the economy.

Well it is becoming increasingly obvious to Art Cashin that "goldilocks" has had a "heart attack" and needs a "parachute" and needs to go to "rehab" in order to be saved.

Another comment that's becoming increasingly popular with Art and others on the street is "we don't know what we don't know". I find this to be extremely important. The subprime problem has spread into everything. This is called contagion. Contagion is the thesis that one problem like suprime can spread into many parts of the economy and wreak havoc in areas you never thought would have problems.

Many people are thinking where should I safely invest in the economy as the housing market implodes? Well because of contagion some areas of the economy that people have always considered to be safe are now potential time bombs. My biggest area of concern here is the money markets. This is where many people go when the economy gets bad in order to protect themselves. Well subprime has no longer made money markets safe. Why? Because many of them bought CDO's!!

AAA rated CDO's were offering 10% returns. As a result many money market funds got greedy and bought many CDO's with that 10% return they would then payout the average MM return of around 5% thus making a 5% spread or profit on the difference.

So when these CDO's started blowing up due to foreclosures many were marked in value to zero. So now some money markets owe more to their customers then they can payout because they have been forced to write off many of the CDO's that they used to make a 5% profit spread on.

The contagion part of this thesis is CDO's were also bought by pension funds, college endowment funds, and banks based on their lucrative return because they were AAA rated by S&P and Moody's. This is turned out to be a joke because Wall St. was paying these agencies to give these bonds a AAA rating. This is where the biggest fraud is IMO. It may go down as one of the biggest frauds in history. How can a rating agency rate credit independantly when their customers are the Wall St. banks? These agencies obviously felt pressure to rate bonds AAA because Wall St. was paying them to do so. This is a total conflict of interest. One of the changes I expect going forward is these rating agencies will be paid in different ways for rating debt either through the buyers of credit or an independent agency.

So folks "we don't know what we don't know" meaning until all of these pension funds, banks,endowment funds admit how involved they got into CDO's or any other AAA rated debt that really isn't true AAA debt. FYI, AAA debt is supposed to never go bad. EVER. Well the crooked rating agencies destroyed this trust because they were being paid by the people who were structuring this debt and a lot of it should NEVER have been rated AAA rated because most of it is laced with small pieces of subprime mortgages which are garbage.

Until we know what we need to know and these institutions come clean I would avoid the stock market. "goldilocks has had a heart attack and needs a parachute" according to Art Cashin. If you watch CNBC/CNBS, pay attention to this guy. He can save you a lot of money and tells you whats really going on versus these "permabulls" who tell you day after day that "Now is the time to buy!!"

Art also comments on the psychologic aspect of this market which I think is extremely important. FEAR is dominating Wall St. and until these financial institutions come clean, WE DON"T KNOW WHAT WE DON'T KNOW. As a result I would buy fixed income investments like CD's, treasuries, and safe Money market funds like Vanguard who are very conservative and stayed away from CDO's and ride out this storm.

Cash will be king after this mess subsides and houses will dirt cheap and easy to buy if you have cash. The smart guys on the street are talking about "capital preservation" versus trying to make big returns in the stock market in 2008. Why do you think short term treasuries are returning only 1.5% instead of the normal 3-4%. This tells you what the smart money is doing. They are flying to cash in treasuries instead of buying stocks thus knocking down the returns down to 1.5% and riding this storm out.

So my advice is to preserve capital in a lot of fixed income and have money to invest when you feel this market is finding a bottom. IMO the bottom is still very far awy. We are only half of the way there because during the average recession stocks drop 28%. We have only corrected about 15% so far.

If you platy defense whats your worst case scenario with this playbook? you make 3% returns versus the average 8-10% return during the bull market. With all hell breaking loose in the markets I am more then willing to give up an extra 5% in returns when I think the downside risk is 30%. If stofcks turn and I miss the first leg up its ok. I will have saved 30% on the downside. This just gives me more money to invest when things turn around because I preserved capital.

My bottom line is similiar to Art's. Until we know what we need to know its stupid to buy into this market. We will know soon what all of these financials did and what their exposure is and when we do know the losses it will be time to throw some money back into selective names that are good companies.

This capital preservation will allow you to put a nice down payment on your cheap house after the bubble pops. The time bomb is about to explode and make sure you protect your assets so that you are ready to take advantage of buying a house at bargain basement prices.

Here is Art:

Friday, March 7, 2008

1 Trillion dollars needed to stop the house price slide

March 7 (Bloomberg) -- The $11 trillion U.S. home-mortgage market
needs about $1 trillion in new investment to halt a slide in prices that began
last year, according to analysts at Friedman, Billings, Ramsey & Co.
``There is an imbalance between housing debt and the capital base and the
quick way to return to equilibrium is for asset prices to adjust downward,'' the
Arlington, Virginia-based analysts led by Paul J. Miller Jr.
wrote in a report today.

Mortgage-asset prices are tumbling partly because investors are borrowing
less, as banks rein in both how much they lend and how much they borrow for
their own investments, the analysts wrote. Carlyle Capital Corp.,
Carlyle Group's mortgage-bond fund, is among investors saying bond-secured
lending is tightening."

My take:

Well Paul pretty much describes why house prices are falling in one quote. Many people ask why are house prices falling? The only way they can keep rising is for more money or debt to be available. As you can see in order for the ponzi like housing game to stabilize, we need an additional ONE TRILLION dollars in order to stop the slide. If you want housing to go up another 20% this year then add twenty percent to that 1 Trillion dollar number.

So one of either two things happen. Either banks lend out an additional 1 trillion dollars in order for prices to stabilize(yeah right) or they stop lending as much and houses drop in value. So if you are a bank and you have just loss billions of dollars in subprime lending what choice do you make??

Citibank gave you the answer yesterday. they announced they are cutting their lending by $45 billion which is basically a 50% reduction from the 90 billion they allocated towards this business in the past. Expect most institutions to do the same. Citibank was one of the largest lenders in the country and is the 5th largest bank in the US.

Merrill Lynch(MER) announced yesterday they were closing their subprime business unit and getting completely out of subprime lending and layed off the 650 people in the business unit. This is another example of Wall St. redcuing their exposure to the housing bubble.

So you can't expect the trillion dollars to come from the banks. In fact, a more frightening conclusion is they might decide to lend out less money then they did before. What happens to prices if the banks decide to lend 1 trillion LESS then the trillion needed to only STABILIZE prices in order to stay solvent after getting hit with massive writedowns. This is what Citibank has decided to do. Others will follow, especially the banks in Florida and California who most likely did many subprime loans as housing because unaffordable in these areas.

So now this could be a 2 trillion dollar problem.

In a nutshell the money simply isn't available to lend from the banks to keep housing stabilized. If anything its decreasing by a significant amount. The ONLY solution to all of this is a massive drop in prices unless everyone starts paying for houses in cash. I'll say it again. NOW IS NOT THE TIME TO BUY.

Thursday, March 6, 2008

Average US equity in Homes falls below 50% for the first time since 1945

From CNBC:

"Americans' percentage of equity in their homes fell below 50 percent for
the first time on record since 1945, the Federal Reserve said Thursday.
Homeowners' portion of equity slipped to downwardly
revised 49.6 percent in the second quarter of 2007, the central bank reported in
its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent
in the fourth quarter -- the third straight quarter it was under 50
That marks the first time homeowners' debt on their houses exceeds
their equity since the Fed started tracking the data in 1945

My only reaction to this is wow. We are witnessing the greatest housing downturn since the great depression. This is how bad it is folks. I think this speaks for itself.

The Mortgage Bankers Association also came out with their foreclosure data for the 4th quarter:

"The news follows a report from the Mortgage Bankers Association on Thursday that home foreclosures skyrocketed to an all-time high in the final quarter of last year. The proportion of all mortgages nationwide that fell into foreclosure surged to a record of 0.83 percent, while the percentage of adjustable-rate mortgages to borrowers with risky credit that entered the foreclosure process soared to a record of 5.29 percent."

More bad news. Foreclosures are soaring. When you add in the number of people that are past 30 days due about 10% of all mortgages are either going into foreclosure or have people that are behind on their mortgage payments.

So after the bad news hits and the housing boat takes another hit the bow, Citibank drops a bomb:

"NEW YORK--(BUSINESS WIRE)--Citi today announced it intends to reduce residential mortgage assets in its U.S. mortgage business by approximately $45 billion over the next 12 months, a 20 percent decrease from December 2007 levels, and will cut the amount of new loans to be held in portfolio by more than 50 percent in the next year. In addition, the company will integrate middle office and support areas to serve both first and second mortgage operations, organize sales channels around customer segments, and strengthen ties with Citi Markets & Banking, which will be the primary provider of capital markets services to its U.S. mortgage business going forward. Citi expects these changes to reduce expenses by approximately $200 million on a run rate basis within 12 months."

Why is this so bad? Because the mortgage pool is shrinking and de-leveraging by billions of dollars everyday. The mortgage "pool" of lending dollars was reduced by $45 billion in one day!! Astounding....

What this means for the home buyer is banks are now less willing to lend and it will result tighter lending standards and higher mortgage rates. When this news hit the wire the already "spooked" lending mortgage markets sent rates higher.

Mortgage rates on the 30 year rose another 10 basis points just today. These moves we are seeing daily on interest rates usually happen over the course of a month or a quarter.

What Citibank is basically saying is we no longer think housing is the place to be and we want to pick up our toys and not play anymore and go home. The FED is pleading for the banks to continue to lend. Well I guess after you lose billions of dollars(Citi in one quarter alone wrote down 16 billion in bad loans) maybe you decide its better to survive then it is to continue to lend and lose money.

This news should rattle the stock markets tomorrow and if the jobs report is bad then you could see quite a big drop in stocks. All of the above news will continue to send housing lower. The Citibank news is a devastating blow to the already battered lending market.


Rates rise over .50 yesterday now over 6%!

A few quick points this morning on the rapidly changing housing market. CNBC reported today that rates moved to over 6% in the 30 year mortgage market representing a move in just one day of over 1/2 a point to about 6.03%. For the homebuyer this does not include the lenders profit so add another 1/4-1/2 point and you now have mortgage rates at close to 6.5% versus 5.5% about a month ago.

This .50 point one day move was the largest one day moves ever. I had warned yesterday morning that the unusual high spreads(which represents FEAR) in the credit markets yesterday and over the last few weeks would result in a higher moves in interest rates.

As a result, this will put further pressure on housing prices because people will qualify for less money as a result of the higher rates. Expect rates to keep rising until someone starts buying mortgage paper in the credit markets. Keep in mind that this paper in the credit markets is gov't insured and there are still NO buyers. This is the level of FEAR that the credit markets have right now. Even solid mortgage paper with zero defaults is considered to be garbage in the credit markets because no one believes this it is safe debt to purchase. Until this FEAR subsides and people believe that housing is stable things are only going to deteriorate.

Who are the casualties here? Companies like Thornburg Mortgage(TMA) that I discussed a few days ago. They announced last night that they were unable to meet a $28 million dollar margin call yesterday on debt that they cannot sell. If they cannot come up with the cash then they will go Bankrupt within days. Stock is down another 50% as we speak. They probably have some of the safest debt on Wall St. based on their tight lending standards but without a buyer for their securities they have no chance to survive.

This is getting reall really ugly folks. When companies like TMA are about to go under things are really bad. If the credit markets continue to not function and rates continue to rise then expect a time bomb explosion in the housing markets. We are on the verge of a violent stock market event IMO. A potential crash in the stock market is not out of the question here.

Wednesday, March 5, 2008

Why are prices not dropping? Buyers remorse

Some of you might be frustrated that prices have not dropped in your local market. Tonight I wanted to explain why some markets have had large price drops while others have had only slight drops or even increases.

If you live in an area where inventories have soared while prices have stayed flat and you are frustrated then there are a few things you need to look at. Many times the median price may stay the same or rise because no one is selling!!! If the volume of homes sold in your area went from 100 homes a month to 5 per month then the median price is a useless figure because this means the realtors found 5 suckers to pay bubble prices. Over time as inventories continue to rise, the sellers will eventually react and drop.

Please take note that some areas will not drop as far as others. Michigan/Ohio has already seen most of their price cuts due to the severe recession that has hit these areas due to the auto industry imploding and manufacturing moving overseas. Other areas simply never inflated in the first place. If prices have only risen 3-5% a year in your local area over the past decade then you cannot expect large drops. Also look at the average home price vs. average incomes in the area. Housing should cost 3-4 times income. I think its important that buyers realize that some parts of the US never saw this bubble and as a result will see fairly stable housing prices. The true bubble crashing areas are CA, AZ, FL, DC/Baltimore, NV, and Mass. according to Forbes. Other areas that will see large adjustments include IL, WA, GA,NY,NJ, R.I., CT, MN. The rest of the country may see smaller drops. Use the above criteria to check out your local market and decide where prices are.

Ok so why aren't prices dropping in some bubble areas. Many sellers are still in denial about overpaying by 30-40% if they bought in '05-'07. Coming to terms with the fact that you paid $500,000 for an asset that's worth $300,000 is a pretty big pill to swallow. Put yourself in their shoes. Would you be anxious to sell at a 40% discount?

This problem is exacerbated by the fact that people put only 0-5% down as a down payment because the lending was so loose. Anyone with a pulse qualified for a loan. As a result many cannot afford to sell much below what they paid without having to come to the closing with a check. How many buyers have checks that big to write when the average credit card debt is close to $10,000. This will force homes to be priced artificially high for a period of time. However, later on down the cycle this will actually speed up the price drops.

Here is why:

As the pressure mounts on these buyers to sell and they realize all they did was sign on their name on Countrywide's loan application there will be a point where they will just "walk away" because they have nothing invested. Most financial planners are advising clients that "walking away" is the best thing for them to do financially. Take your credit hit and move on with your life.

You are starting to see this in the news and expect to see it become more and more common. I am surprised that people are already walking away and I think th FED is too. The fact that you see Ben Bernanke and Hank Paulson on the news talking about the housing downturn is not a coincidence. They see whats coming and they are trying to act swiftly to stop it. First the FED tried to freeze ARM resets for 5 years. Since that didn't work and foreclosures continue to rise they are now pleading with the banks to drop the loan balances(see my BB bank post).

I think the fact that Ben is already discussing the banks taking a hit is very interesting. He realizes with the crashing dollar(at another all time low today) that his window of being able to drop rates is starting to close . Expect another 50 basis points in March but if the dollar continues to weaken it will be tough for the FED to drop again. However he also realizes this housing mess has to be fixed or the economy is going to crash. There are two ways to pay for this housing debt debacle. Its either a taxpayer bailout or Wall St. takes the hit.

My personal belief is that since cost of this is in the trillions I expect it will be a combination of both. Wall St. can't afford to take the hit by themselves without losing most of their banks to insolvency and Ben knows we need a healthy financial system so you know where the rest of the money will come from. TAXES! No one wants any type of bailout but this mess has had such a devestating effect on the whole economy that it will most likely happen in some form. Expect a lot of noise around a gov't bailout over the next few months. there is no way its a full gov't bailout because they can't afford it either. The US has $9 trillion dollars in debt. As a result expect both the taxpayers and Wall st. to get us out of this mess. There will hundreds of ideas thrown around in Washington on how to save us but expect the combo idea to be the solution.

Since this will take time lets get back to the seller and when they will move from "denial mode to "panic" mode.

IMO one more spring/summer bust should do the trick and the "full panic" mode will start. We are already getting out of denial mode as December prices dropped 8.9%. Remember Dr. Shiller says bubbles are mostly psychological going up and going back down. As sellers watch the news day in and day out and their house has no offers they will eventually run to the exits all at once. This is the time you will want to have your checkbook in hand and ready to pounce! Any frustrated buyers out there feel free to share your frustration in the comments section.

Expect interest rates to keep moving higher

There was a great piece on CNBC this morning on the trading in the mortgage markets. Traders bluntly said they had never seen anything like the trading that went on in yesterdays mortgage market. The spread between the 10 year treasuries and the 30 year mortgage rate widened to 200 basis points which is the largest spread EVER seen between the 10 year treasury and the mortgage rates on a 30 year. The average historical spread here is 120 basis points.

What does this mean to you? Higher mortgage rates going forward. Fear has reached an unprecedented level in these markets and banks are finding no buyers in the secondary market to buy the mortgages after they approve a mortgage from a home buyer. Because of this fear banks are lending at higher rates. Right now the 10 year treasury is at 3.5%. Mortgage rates are anywhere from 5.5%-5.9%. So if the banks were to use the average hostorical spread of 120 basis points rates should be around a shade under 4.9% with great credit. They refuse to use these historical spreads because they can't sell the mortgage.

Until the credit markets come back and start buying mortgage bonds from the banks and brokers then you can expect higher mortgage rates. Right now NO ONE is buying any mortgage related products because they are afraid if they buy at $80 this week that it might only be worth $70 next week. These are historic events in the mortgage market and shows you how bad things are.

A great example in the video below. there are some secondary bonds that are available to be bought that are very safe from a default perspective and offer an 8% return. A bank could borrow at 3%(Fed Funds Rate) and buy this safe bond at an 8% return for a profit apread of 5%. Sounds like a no brainer right? The problem is there is such a fear that these bonds will be worth less tomorrow or next week that the 5% spread doesn't look so appealing because you could potentially lose money if the bond drops in value.

My take on all of this for you home buyers out there is to wait this out before buying. Spreads will eventually return to normal and rates should come back down a bit. However, if the Wall St. continues to be unwilling to buy these mortgages from the banks then expect things to get worse and rates could go much higher. Something has to give here and if this problem persists then expect a blowup at some point in the near future.

Overall things are unravelling in the mortgage market and you need to stay away until a solution is found and the mortgage market stabilizes. This may take a FED bailout where they start buying the mortgages. This may be the only answer but its not a good one for the housing market. More on this later.

You can check out this CNBC video to learn more. The time bomb keeps ticking.

Tuesday, March 4, 2008

Bernanke pleads to the banks

Ben Bernanke(sounding more worried by the minute) came out today and pleaded for the banks to take drastic measures to restore health to the housing market.

Some of his excerpts:

``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''
Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments, indicating that he sees housing as a serious threat to the economy that can't be addressed by fiscal or monetary policy alone. The Fed's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments. "

My interpretation:

Ben realizes cutting FED rates will not do anything to help the housing markets. The FED rate cuts have done nothing to lower mortgage rates so far. The bond market sets these rates and during a normal financial business cycle FED cuts did lower mortgage rates because the banks were healthy and had cash and were willing to lend. Remember when Greenspan dropped the FED rates to 1%? The result was a housing bubble. Well this is not your average market.

Lowering rates back to 1% to reinflate the bubble will not work and cannot be done today. The reason is three fold. RISK, FEAR, and AFFORDABILITY are now in the marketplace.

A great comparison to this debt crisis is Japan. Japan tried to drop rates back down when their housing bubble burst in the late 80's. Japan actually took rates to ZERO and guess what happened. NOTHING. You can buy a house in Japan for about the same price today as you could in 1989. Zero appreciation over almost 20 years. People got so burned that they never came back. Expect the same thing here. how many people have had a realtor tell them their is only so much land and now is the time to buy. Next time ask them well why didn't prices go up in Japan for 20 years where there is no land!

OK now back to the three reasons why the FED rate cuts won't bring back housing:

RISK is back because of foreclosures. Banks have learned the hard way that when you lend people money there is a chance they might not be able to pay it back. As a result even if rates went to zero they would not offer the loan products like subprime again because they got burned.

The FEAR factor is mainly the lack of trust between banks. Wall St. sold banks bad loans all over the world. European banks did the same thing amongst each other. The result of this is none of them trust each other anymore. This fear has spooked the bond market and kept mortgage rates higher. Banks also don't know how much bad debt their fellow financial customers have which just enhances the fear factor. As a result the availability of money vanishes. this hits the home buyers in the form of tighter lending and higher rates. Until the FEAR is gone the FED rate simply doesn't matter.

AFFORDABILITY. Prices must come down people. Somewhere around 30% nationally on average IMO. Some areas need to come down by 50% (CA,NV,DC,FL, AZ). The bottom line is with tighter lending housing needs to be affordable so people are able to QUALIFY for the loans. Until this happens we will be in a standstil and the inventories will grow which will push prices down even further. Supply and demand people!

The ONLY way housing will recover is when housing prices drop back to affordability, the banks open their books and show TRANSPARENCY, and the system is regulated in a trustworthy manor. Appraisers need to be independent and regulated and not pressured by the banks. Fanny and Freddy are trying to get this started but we will see. The ratings agencies like S&P and Moody's can no longer be paid by their customers(Wall St.) to rate bonds.

What Ben was saying today is this problem cannot be solved by the FED and the banks need to take action. The financials did not like this idea and were beaten down badly in the stock market today. Ben also has something to worry about that wasn't around for the last 15 years. Inflation. Anyone buy a gallon of milk or an ounce of gold lately?

Alt-A Mortgages: The next Time Bomb

Housing dominated the financial headlines once again today. There is more proof that the mortgage crisis has spread into all types of mortgages. I caught a piece today on CBS market watch which provided some troubling information on alt-A loan performance.

Here is a quote from Alan Fournier that about says it all:
"Generally speaking, I do not believe Alt-A credit is any better
than subprime,
" said Alan Fournier, the managing member of Pennant Capital
Management LLC in Chatham, N.J. "The performance of this market doesn't surprise
me, given what's happening to home prices and credit availability today."
When you look at the performance of all loans you can see why Alan feels this way.
As late as last November the delinquency rates for
borrowers behind on their loans by 30 days on alt-A loans was ZERO. In February this rate had risen to 3.89%!!
This is what happens when prices start to drop and people bought homes that they cannot afford. What we are starting to learn based this data is that people from all income brackets made the same mistakes. A lot of these alt-A loans were done with no documentation. Many speculators loved these loans because it allowed them to buy several homes that they could then "flip" for a big profit. Well when prices drop the mortgage payment doesn't and that that
flipper then turns into a flopper. Many of these Alt-A loans will end up in
foreclosure IMO.
There were $612 billion dollars of these loans in 2006 and
another 400 billion in 2007. These loans were then securitized into bonds. A year ago these bonds were trading at 100% of their value. Today they are trading on average at 10 cents on the dollar lower and some are trading as low as 30 cents lower on the dollar. That's a 10-30% loss of value on ONE TRILLION dollars of mortgage bonds at current prices. What will these bonds be worth as the delinquencies get higher and higher as prices fall and the speculators and the "in over their head" homeowners can't sell? Time will tell but its not gonna be pretty.
The bottom line to this is it will mean further bank write downs and further pressure on the housing markets. These numbers are starting to boggle the mind. The time bomb keeps ticking and the numbers keep getting worse. The explosion and unwind of this debt debacle is coming sooner rather then later. The speed at which it is unraveling is breathtaking. Now is NOT the time to buy.

Monday, March 3, 2008

Thornburg Mortgage hanging on by a thread

I needed to comment on this tonight because its just another nail in the coffin for housing as the time bomb is about to explode. TMA fell 51% today down to $4.32/share as they announced they may not be able to meet margin requirements required by their lenders.

As you can see by this article Citi thinks that they might not find the capital to cover the margin calls and go BK. I find this ironic because I am not even sure Citi can avoid Bankruptcy but that's beside the point.

This is an important development because Thornburg was supposed to be the BEST run mortgage outfit in the country. They avoided all subprime loans. They focused almost solely on "jumbo" loans(over $417,000). If you were a Kennedy or a Bill Gates or a hedge fund billionaire then this is where you went to get your loan. It was the Rolls Royce of mortgage companies. To fighting for their lives shows you how bad things are out there.

The reason Thornburg is having so many problems is they got involved in some no doc Alt-A CMO's. The credit markets are so scared of anything involved with housing they don't want to touch any CDO or CMO because FEAR and as a result Thornburg is stuck with these CMO's and can't sell them. These CMO's are most likely decent securitizations because Thornburg had such tight lending standards and dealt with such an affluent customer base. The credit market must think otherwise. This is consistent with my worst case scenario thesis that we will now see prime and Alt-A loans start to fail at a much higher rate.

Everyone knows the credit markets are frozen and not moving any paper but the fact that Thornburg is being hung out there to die is something to take notice of. If their CMO's can't sell then what about WAMU's or Countrywides paper? If Thornburg goes under then get ready to see the others follow or be forced to merge.

Bank of America's(BAC) purchase of Countrywide is not a move BAC wants to make IMO. Its a move they have to make. Expect some other larger outfits like WAMU to be merged in as well. Why? Because its in both parties best interest. A bank run on Countrywide could result in a full panic and force bank runs everywhere else. Its in the banks own interests to buy the weak and work with the gov't on absorbing the debt without going under themselves. These mergers were done many times in 1990/91. Citibank was insolvent themselves before being merged with other banks which allowed them to avoid bankruptcy.

The difference here is the lending was 10 times worse in the last 5 years then it ever was in 1990/91. There were no subprime, no doc, or 100% financing loans in 1990 which were common in the past two years.

So the big question that remains is did the reckless/ponzi like lending take the banks to the point of where they get time bombed and go under?? Time will tell and I am afraid of what the answer is.

There was another big development in the market today around freddy/fanny and appraisers that I will discuss tomorrow.

Countrywide reports 2007 option ARM 90 day delinquencies rise 900% verus 2006

What a way to end the year for the countries largest mortgage lender! Countrywide reported some horrific news in the WSJ today about the rise in borrowers that are 90 days past due on their loan payments. in 2006 only .6% of of borrowers were 90 days behind on payments. By the end of 2007 that number has risen to 5.4% which is about a 900% increase in people past due 90 days!

As I have explained before there are still about another year of resets so expect these numbers only get worse. I apologize if you cannot read the graph above but Countrywide also looked at how many borrowers are at least 30 days past due and broke it down by prime loans, HELOCS which I discussed yesterday, and subprime.

The numbers here are also staggering. The number of borrowers with subprime mortgages that are 30 days or more past due went from 19% in 2006 all the way up to 27% in 2007. Yes folks that means almost 1/3 of subprime borrowers are past due. There was also a large increase in HELOCS going from 2.9% being 30 days or more past due in 2006 up to 5.9% in '07 which is a more then 200% increase.

Now lets take a look at the stats on the prime borrower. Of all the bad news discussed above this number scared me the most. The prime borrower is supposed to be the best buyer with the highest credit rating and will get the lowest rates. These are the cream of the crop buyers! The number of PRIME borrowers that are at least 30 days or more past due went from 2.8% in 2006 up to 4.2% in 2007 which comes out to a 50% increase.

This number is most frightening to me because subprime has already been pretty much expected to implode. Wall St. is not expecting the PRIME borrowers to cave. If this happens then it will be a massive shoe drop that is not expected by the street and will lead to more write downs.

If the real estate market starts to lose the prime borrower then the whole real estate market could implode. When your best borrowers can't afford their loans then who can??? Bank of America is supposed to be acquiring Countrywide. I wonder after seeing numbers like these if they will end up trying to back out of the deal. With Countrywide owning $28 billion dollars of ARM loans like these they would be crazy not to run away from this deal as fast as they can!

More pain to come. Stay tuned and any comments regarding the real estate market are always welcome here so feel free to share your thoughts!

Sunday, March 2, 2008

Tougher Refinancing requirements are making things worse

Well I guess the banks have decided to ignore the "Hope Now" mantra coming out of Washington DC. I ran across a great article below which really surprised me in the Baltimore Sun today.,0,2083684.story

Many homeowners have two mortgages on their homes. This became very common over the last 4 years because people were getting 20% loans in addition to their core loan in order to avoid having to pay PMI which is insurance that is required if you put less then 20% down on your house. Many other homeowners got HELOCS which allowed them to take equity out of their homes which they then used on everything from buying a new boat to upgrading their home. Some have called these HELOCS "The housing ATM".

Since the banks required No Documentation loans I would guess that a high percentage of recent buyers have two loans on their homes since the appreciation made them so unaffordable. Many HELOCS were done to keep up with the Jones.

When homebuyers bought over last 5 years this wasn't a problem because as your house appreciated in value you could just refinance into one loan at a fixed rate. Well this is just fina and dandy as long as houses keep rising in value. No one could ever believe they would fall in value.

So as people see their 2 loans about to reset they start to panic and when rates dropped a month ago many were ready to refinance at a lower rate because they could afford both mortgages at a fixed rate. You would think that with so many people having trouble the Wall Street Pigmen would be very accommodating towards working with distressed owners and allowing them to refinance both loans into one.

Well National City then decided to drop a bomb on Feb. 18th and decide that they would no longer approve any loans that had a second mortgage with another bank.

So as Washington DC pleads with the banks to work with their distressed buyers banks like National City Bank decide to tighten the noose. What this tells me is the banks are in such bad shape that they are doing anything to avoid taking on any risky debt. This poor guy wasn't looking for more money. He was just looking to save his house.

Each say I read something in the paper or watch somthing on CNBS that shows further evidence that the housing market is continuing to freefall and things are getting worse. All of yoo potential homebuyers should pop some popcorn, be patient and watch the oncoming housing train wreck.