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Quote of the Day- "From the House's Mouth"
"I'm certain there is at least one major hedge fund out there at least as rightly concerned about a collapse in Moody's as the other way around. To see Moody's make forward-looking negative statements about hedge funds, who may well be suffering in large part as a result of their reliance on Moody's now evidently worthless ratings, is to witness the height of chutzpah.'' - Colin Negrych, a principal at Barclay Investments Inc. a NY broker-dealer, on Moody's warning that a hedge fund collapse of the same magnitude of Long Term Capital Management in 1998 could occur. (Bloomberg, Aug. 16th)
Real Estate Sales and House Prices
- Developers Back Out Of $4 Billion Leander Project (Statesman.com, Aug. 16th) Texas: "Plans for a $4 billion, 3,500-acre development in Leander that would have clustered homes with parks and commercial developments, as well as more than doubled the city's population, have folded. Avalon Park Group Management Inc. terminated [its commitment] citing a weak national homebuilding market. Beat Kahli, Avalon CEO: the project would have depended on national homebuilders, most of which are struggling because of the jittery market… The $4 billion project would have been a record for Leander. Avalon officials originally requested between $240m-$300 million in incentives, but the city only offered $120m, which would have been another record."
- Home Prices Up In Dallas, Survey Says (Dallas Business Journal, Aug. 15th): "National Association of Realtors: The median home price in Dallas-Fort Worth-Arlington rose to $156,500 during April-June, an increase of 1.7% over the median price of $153,900 during Q2'06… The greatest single-family-home price increase during Q2 was in the Salt Lake City area, where the median price rose 21.9% to $233,100… During Q2'07, the area did see a double-digit increase in the median sales price of existing condos and co-op homes. The price for condos in Dallas rose 12.2% to $133,200 from $118,700 in Q2'06."
- Area Home Prices For 2Q Show Improvement (Cincinnati Business Courier, Aug. 15th): " National Association of Realtors: The median home price in the MSA, which includes Northern Kentucky and southeastern Indiana, rose to $146,200 in Q2 from $136,300 in the previous quarter. That was 1.5% below the $149,100 price a home was fetching in Q2'06… By comparison, median home prices in Columbus were off 1.2%, to $153,900 versus $155,700 in Q2'06. Prices in Dayton fell 0.2% to $120,300 from $120,600, and 1.1% in the Lexington-Fayette metro area, to $148,300 from $150,000."
Real Estate Investing and Sentiment
- Foreclosure.com to Giveaway Free House at First of Many Educational Conferences (Earthtimes.org, Aug. 15th): "Foreclosure.com will give away a house during the Foreclosure.com Exchange Conference: "Real Estate Investing Training 2007" at the Broward County Convention Center in downtown Ft. Lauderdale, Florida, from Friday, September 28 through Saturday, September 29, 2007… According to Linda Yates, Director of Education, Foreclosure.com, it is an actual investment property that the winner of the contest will own free and clear, with no strings attached, to live in, resell, flip - whatever he or she decides to do with it."
Mortgates and Real Estate Lending
- Fannie, Freddie and the Housing Bust (Wall St. Journal, Aug. 16th): "Fannie Mae and Freddie Mac… ultimately crowd[ed] out the poor S&L industry from their chartered business. [Their] unchecked growth into second mortgages, subprime loans and many other assets -- not to mention their continued creep into the upper echelons of the home-mortgage industry through their current lending limit of $417,000 -- has pushed other mortgage-market participants further out on the risk spectrum in search of a livelihood… Recent estimates are that 50% of all mortgages originated are now guaranteed or owned by Fannie or Freddie... As long as Fannie and Freddie can utilize their government-agency status to tap the debt markets, they ought to limit their business activities to those that serve a public need. If they want to compete with the private sector, they should not have this taxpayer-subsidized funding advantage.
- Counterintuitive News From Mortgage Bankers Association (Square Feet Blog, Aug. 15th): "The Mortgage Bankers Association's… weekly survey of loan application activity… index actually rose 3.4% last week compared to a week earlier… Seeing as lenders have been pulling out of the market and/or changing the loans they have available practically around the clock for the past two weeks, how could the index of applications rise under those conditions? Doug Duncan, MBA chief economist: “Recent upheavals in the mortgage industry may be temporarily increasing the level of retail application activity at the large lenders that participate in the MBA survey rather than representing a system-wide increase…" I think it means that when large lenders are getting an unusually large share of the mortgage business, it skews their index?"
- Countrywide Taps $11.5 Billion Credit Line From Banks (Bloomberg, Aug. 16th): "Countrywide Financial Corp., the biggest U.S. mortgage lender, drew down an $11.5 billion bank credit line as the global credit crunch curbed access to short- term financing from debt markets. Countrywide: The loan was funded by a group of 40 banks and is part of an "assortment of financing alternatives'' to supplement cash in turbulent markets… Countrywide turned to backup financing amid a housing slump that's forced at least 70 other mortgage companies to close, go bankrupt or put themselves up for sale. The company also said that as of today, most of its new home loans will conform to Fannie Mae and Freddie Mac standards."
- Countrywide Shares Tank on Merrill Downgrade (Judith Levy in Seeking Alpha, Aug. 16th): "Shares of market-leading mortgage lender Countrywide Financial (CFC) fell Wednesday… after Merrill Lynch analyst Kenneth Bruce… wrote that "effective insolvency" would result if Countrywide is forced by creditors to liquidate its assets… Countrywide's shares have lost 50% this year. The [rising] price of Countrywide's five-year credit default swaps rose… suggested that doubts are rising about the company's solvency (CDS prices rise together with the perceived risk of owning a company's bonds)… Specialty finance company KKR Financial Holdings, which reported that it had lost $40 million on the sale of $5.1 billion of mortgage loans, plummeted 31% to $10.52 on Wednesday."
- Lender Reports Rising Defaults (LA Times, Aug. 15th): "Countrywide and other mortgage lenders [have] raised lending standards, making loans difficult or impossible to get for many would-be borrowers and cutting into loan volume. Countrywide said its sub-prime lending in July totaled $1.8 billion, down 46% from $3.35b in July 2006… Piper Jaffray analyst Robert Napoli: The secondary market for home loans "is just not working." By concentrating on loans that Fannie and Freddie will buy and by taking advantage of turmoil in the industry, Countrywide could significantly boost its market share. Countrywide "loses a competitor or two virtually every day" and "has the liquidity to work its way through the current environment."
- Scottish Re Slumps 23% On Mortgage Concerns (MarketWatch, Aug. 15th): "Scottish Re (SCT) reported net income available to ordinary shareholders of $99.5 million, or $0.63/share. That's an improvement from a net loss available to ordinary shareholders of $123.9m, or $2.31/share, a year earlier… Scottish Re [reported] $2.1 billion of asset-backed securities backed by subprime mortgages and $1b of Alt-A residential mortgage-backed securities… That compares to shareholders' equity of roughly $1.1b."
- Impac Mortgage Has No Intention Of Bankruptcy – CEO (Reuters, Aug. 15th): "Impac Mortgage Holdings (IMH) on Tuesday posted a $152.5 million loss in Q2 compared with earnings of $26.4m in Q2'06. Deteriorating market conditions and rising delinquencies led Impac to boost its provisions for loan losses by $163m… Impac earlier this week stopped making loans known as Alt-A, its primary product that is typically between prime and subprime in terms of quality. It has fired about 20% of staff across the country and is prepared to make "further adjustments" as needed based on market… The company could not guarantee that it would satisfy margin calls from its lenders, though it has met such demands as of Wednesday."
- Freddie Mac To Purchase More Alt-A Loans From Lenders (Sahul Sharma in Seeking Alpha, Aug. 15th): "Freddie Mac (FRE) says it will purchase more Alt-A loans from lenders that use well-defined credit standards to originate mortgages, reports American Banker. That liquidity jolt means more funding for the pipelines of lenders that have sold loans to Freddie in the past: Charles Coulter, Freddie's VP of strategy and offerings management, said that some large Alt-A customers had asked the government-sponsored entity for the commitments to get "greater certainty around their ability to execute." Freddie Mac VP: [the move] "will accommodate a majority of the fixed- and adjustable-rate Alt-A product, including many of the reduced-documentation mortgages" that the agency buys on a bulk basis."
- Smaller U.S. Banks Face Subprime Mortgage Strains (Reuters, Aug. 15th): "Marcia Bradshaw, senior VP of mortgage lending at Virginia Commerce Bancorp Inc. (VCBI), "We're only going to do very stable credit quality loans… with $2.1 billion of assets… we're not putting anything on the books that's risky in any way." Like many smaller banks, Virginia Commerce doesn't deal in "Alt-A" mortgages, the credit class just above subprime. But like most banks, it does extend mortgages it hopes to resell to investors. That's becoming difficult, however, as mortgage buyers steer clear… Smaller banks have been left with 30-year mortgages on their books, eating into profit margins and forcing them into short-term borrowing."
- Bay Finance Shuts Down (Yahoo! Finance, Aug. 15th): "Bay Finance Co., the mortgage lending subsidiary of The Commerce Group Inc. (CGI), will stop originating loans immediately, the company said Tuesday night. The Commerce Group intends to retain the existing loan portfolio, valued at about $20 million… "Over the last year, we have made a concerted effort to focus our energy and resources on our core property and casualty insurance business," said Gerald Fels, the president, CEO and chairman of Commerce Group."
- Genworth Says Subprime Exposure Limited (Forbes, Aug. 15th): "Genworth Financial Inc.(GNW) said Wednesday that its investment exposure to securities backed by subprime mortgages is limited and that its U.S. mortgage insurance business has experienced below-industry losses and is focused on fixed-rate prime loans. The insurance company said… that it held $2.1 billion in securities backed by subprime mortgages, or those granted to borrowers with weak credit histories, as of June 30.It had another $1.6b in securities backed by so-called Alt-A mortgages, which are loans made to higher-rated borrowers who can't fully document income or assets. Combined, these securities make up just 5% of Genworth's $72.6b in invested assets."
- Jim Cramer's Meltdown Spills Into His Writing (Felix Salmon in Seeking Alpha, Aug. 15th): "Jim Cramer said: "Hundreds of billions in [mortgage-backed] bonds… are worthless." Bonds aren't worthless… Mortgage-backed bonds… are backed by mortgages, which in turn are backed by houses. The minimum recovery value on a defaulted mortgage is about 50%... If Cramer really thinks that mortgage-backed bonds are worthless, he should be shorting them all… now. But I don't think he is. The AAA-rated tranche of the ABX subprime index has already started to rally – it's now back up to 92.5, from a low just below 90… Even the lowest, BBB- tranche of the ABX index is still trading in the high 30s: a long way from zero."
- Accredited Home Lenders' Shares Bounce (MarketWatch, Aug. 15th): "Lone Star Funds said [Tuesday] it was pushing back its tender offer until… Aug. 28 in accordance with its obligations under a merger agreement with Accredited Home Lenders (LEND). Accredited earlier said it [was suing] Lone Star to force it to go through with its previously announced $400 million acquisition of the mortgage lender... The company said more than 97% of Accredited's stock has been tendered in favor of the deal… Lone Star: "So long as one or more conditions to the closing of the tender offer remain unsatisfied, Lone Star is required, upon the request of the company, to extend the tender offer period for no more than 10 business days." Morningstar analyst Erin Swanson: "This deal has a good chance of closing."
- Foreclosures Shrinking In Select Cities (Realty Times, Aug. 16th): Stockton's foreclosure count has risen 256% from H1'06 to H1'07… Motown had the second highest foreclosure rate among the nation’s 100 largest metropolitan areas -- one foreclosure filing for every 29 households… a 26% increase from H2'06 and nearly double the number reported in H1'06… Sin City documented the third highest foreclosure rate among the nation’s 100 largest metropolitan areas, with one foreclosure filing for every 31 households during H1'07. The Las Vegas metro area… reported a 72% increase from H2'06 and more than twice the number reported in H1'06."
- Realtytrac: Tampa Bay Foreclosures On The Rise (Tampa Bay Business Journal, Aug. 15th): "RealtyTrac: Foreclosure filings in Tampa Bay have reached more than 10,000 in the first half of this year… The Tampa Bay posted 10,173 foreclosure filings, or one filing for every 79 households, between January-June. That represented a 90% jump from H1'06… The Tampa Bay ranked 24th in foreclosures among the nation's top 100 largest areas… Miami ranked seventh, while Sarasota ranked 31st in the report."
Global Impact and Alternatives To The Housing Slump
- SA Examines Local Exposure To Subprime Crisis (Jerusalem Post, Aug. 16th): "In a letter sent out this week to about 100 public companies… the Israel Securities Authority [said it] will examine reports provided by the companies and should it determine that a company had a significant exposure to [subprime-related] high-risk assets, the Authority will request that the company disclose the exposure, including any hidden subprime-related losses, to the public. Dun & Bradstreet Israel: "Although there is no fear of a crisis in the local mortgage market similar to the US crisis, banks are expected be more severe in the financial examination of customers."
- Kaupthing Buys NIBC, Hit by Subprime, for EU3 Billion (Bloomberg, Aug. 15th): "Kaupthing Bank hf, Iceland's biggest bank, agreed to buy NIBC Holding NV for €3 billion ($4 billion)… NIBC's owners, a group led by J.C. Flowers & Co., will acquire the subprime holdings for $528 million, NIBC CEO Michael Enthoven said. NIBC said Aug. 9 it lost at least €137m on the asset- backed securities and said today it expects no further losses. NIBC canceled an IPO in March and pulled a bond sale last month… NIBC said last week it had €391m of investments related to U.S. subprime as of June 30, almost three-quarters of which are AAA rated."
- Asia Decoupled? Now There's a Subprime Concept: William Pesek (Bloomberg Opinion, Aug. 16th): "Asia is a different place than a decade ago. Banks, Japan's included, are healthier and carry significantly less debt… The region amassed some $3 trillion of currency reserves. Asia has so much cash available to fend off crises that government investment funds are being created to take more advantage of it. That's just one of the many ironies a decade after Asian's financial crisis. Another is how U.S. woes now threaten Asia, not the other way around. One more is that Asia may soon be gobbling up distressed U.S. assets, the way U.S. investors did in Asia in the late 1990s."
- Property Investors Move Cash To Europe (Financial Times, Aug. 14th): "The trickle of British money into European property has become a torrent as investors rush to find more promising opportunities outside their home market. Capital flows from the UK into commercial real estate on the Continent have hit €11.8bn (£8bn) since January and are on track to exceed €25bn this year, according to figures from Jones Lang LaSalle, the agents."
Macro Impact, And Will The Housing Slump Cause A Recession?
- Home Sales Continue Fall Across U.S. (Daytona Beach Journal Online, Aug. 16th): "National Association of Realtors: Sales of existing homes fell in 41 states during the April-June quarter while home prices were down in one-third of the metropolitan areas surveyed. [However,] existing home prices were up in 97 of the 149 metropolitan areas or 65% of the areas surveyed compared with [55%] a year ago… The states suffering the biggest drop in Q2 sales, [vs. Q2'06] were Florida, down 41.3%, Nevada, down 37.5%, and Arizona, down 23.4%... Wyoming rose 10.8%, Iowa and North Dakota rose 2.9%. Nationwide, existing homes sales totaled 5.91 million units annually in Q2, down 10.8% from... Q2'06. The national median sales price in Q2 was $223,800, down 1.5% from a median price in the spring of 2006."
- The Existing Home Sales Report Beats Expectations (Jordan Kahn in Seeking Alpha, Aug. 15th): "The NAR put out its quarterly Median Sales Price report for single-family homes as of Q2… I did not find as much weakness as I would have thought. Overall, the median sales price for the entire U.S. fell -1.5% from Q2 2006, but was higher than last quarter. For the major cities: Chicago (+1.7%), Los Angeles (+2.9%), Miami (+2.0%), New York (+1.7%), San Francisco (+7.6%). These are pretty surprising figures, and show no declines in these major cities… These figures continue to lend themselves to the notion of a soft-landing in housing."
- Downturn In US Housing Market Worsens (MSNBC, Aug. 15th): "The outlook for the US housing sector worsened Wednesday as an index of sentiment among housebuilders fell to its lowest level in more than 16 years... National Association of Realtors: The crisis in the subprime mortgage market contributed to an 11% fall in sales nationwide in Q2. The National Association of Home Builders has only once registered a worse mood than that recorded in its latest monthly survey yesterday. David Seiders, NAHB chief economist, said conditions were worsening because "problems in the subprime mortgage sector have spilled over to other components of housing finance, including [more mainstream loans]".
- Two-Year Treasury Yield Near 18-Month Low on Subprime Concern (NY Sun, Aug. 16th): "Two-year Treasury yields fell to an 18-month low as investors sought the safety of government debt amid signs that losses linked to American subprime mortgages are mounting. Two-year notes, more sensitive to interest-rate expectations, gained as traders stepped up bets the Federal Reserve will cut borrowing costs… As long as other markets remain dysfunctional the bid will remain in Treasuries no matter where inflation is," said William O'Donnell, American government bond strategist at UBS Securities in Stamford, Conn., one of 21 firms that trade with the Fed."
Homebuilders And Housing Stocks
- Why Sub-Prime Doesn't Worry Me (Jason Kelly in Seeking Alpha, Aug. 16th): "The housing market has slowed… from a breakneck amazing pace to a decent pace… To put this in perspective, home sales and housing starts are about where they were in 2002. Those levels were considered fine back then. They're still fine today… Even if housing slipped by 50%, the overall economy would suffer only a 2.5% loss… Besides, housing is nowhere near falling 50%, so we're actually looking at a hit to the overall economy of maybe 1%… Smart investors are watching for good entry prices on stocks they've wanted to own for years and hoping for a lower market in the near term… The Kelly Letter has already bought one stock in the downturn so far, and we're looking to buy more, including a home builder."
- BFC Financial-Levitt Merger Off (South Florida Business Journal, Aug. 15th): "Florida homebuilder Levitt Corp. said it received a notice from BFC Financial Corp. terminating the[ir] merger agreement… The cancellation comes less than a week after Levitt (LEV) announced its Q2 loss of $58.1 million, and as the real estate market shudders in South Florida and [nationally]. Levitt's board said that, in light of the termination, it will go ahead with a previously announced $200m Class A common stock rights offering. BFC said it plans to participate in the offering. BFC (BFF) is controlling shareholder of both Levitt and bank holding company BankAtlantic Bancorp (BBX). Levitt has a 31% stake in Bluegreen (BXG)… owner and operator of timeshare resorts."
- Losses Skyrocket In Dominion Homes 2Q (Columbus Business First, Aug. 15th): "Dominion Homes (DHOM) said [its] Q2 losses… deepened to $29.7 million, or $3.63/share, more than five times the Q2'06 loss of $5.9m, or $0.73/share [due to] a slump in closings, larger sales discounts and, chiefly, a $17.2m real estate inventory-related charge. Q2 sales were down 49% at $38.8m, vs. $75.8m in Q2'06. Dominion delivered 206 homes in Q2, down from 398 in Q2'06… Q2'06's contract backlog was valued at $109.5m with 548 homes… Dominion has downsized by more than 50% in the past 18 months… Year-to-date, Dominion has reduced its [lots owned] by 10%… Reduced profit margins and quarterly charges at the company have put it out of compliance with some of its lenders for H1'07, and it is in discussions with them to modify credit requirements for these and future quarters."
- Deere Profit Up On Overseas Sales (Yahoo! Finance, Aug. 15th): "Deere & Co. (DE) said on Wednesday net earnings in Q2 rose a better-than-expected 23%, driven by strong overseas sales of tractors and other equipment… But Deere, which competes with Caterpillar Inc. (CAT) in the construction machinery market, said the slump in the U.S. real estate market was taking a toll on that business: "U.S. markets for construction and forestry equipment are remaining under pressure. Although nonresidential spending is growing, housing construction has experienced a significant downturn." As a result, the company reported that U.S. sales of its equipment fell -- even though farmers spent more money on equipment, benefiting from the ethanol-fueled rise in corn and soybean prices."
- Macy’s Inc. F2Q07 (Qtr End 8/4/07) Earnings Call Transcript (Seeking Alpha, Aug. 15th): "Karen Hoguet – CFO, Macy's: "Trends in the later part of the quarter in home-related merchandise and the former May Company doors, give us reason to be optimistic that we can improve the sales trend in the back half of the year."
- The Home Depot Q2 2007 Earnings Call Transcript (Seeking Alpha, Aug. 14th): "Carol Tome – CFO Home Depot: "HD Supply['s] business is heavily focused on residential construction and you know what's going on in the residential construction market. For the quarter, sales for HD Supply were down almost 7%, organic growth was down about 10%. Their gross margin did suffer some contraction in the quarter."
Commercial Real Estate and REITs
- Fidelity, Franklin Hit as Real Estate Funds Lose $13 Billion (Bloomberg, Aug. 16th): "Fidelity Investments, Franklin Resources Inc. and Kensington Investment Group Inc. are the biggest losers in a decline by U.S. real estate funds that wiped out $13 billion in the past three months. Property funds, the best performers in 2006, slumped 16% since May 14... The $5.9b Fidelity Real Estate Investment Portfolio, the largest among the group, fell 19.7%. The $718 million Franklin Real Estate Securities Fund and the $500m Kensington Strategic Realty Fund each dropped 20.3%, the most among actively managed property funds with more than $100m in assets… Investors pulled $4.5b from real estate funds in [Q2] after a drop in commercial property shares slashed returns."
- Dollars for Donald Downtown (Slatin Report, Aug. 15th): "Where did Trump and his equity partners… find their $350 million in financing for this $420m, 45-story tower [Trump SoHo]? Commercial mortgage REIT iStar Financial (SFI)… provided a $275m senior loan… Hotel owner/developer/manager Lowe Enterprises, [provided] a $75m mezzanine loan. The Lowe piece, says VP John Lustgarten, is the first investment from Lowe's recently closed Resort Mezzanine Fund… The news about the financing comes as concerns grow around the retreating mortgage market nationwide… [Donald Trump] acknowledge[ed]: "There's no financing out there." In several conversations in recent days with residential and commercial real estate professionals, it seemed that all were… giv[ing] the Manhattan condo market six months to live."
- Mortgage REIT Woes are a Blast From the Past (Reuters, Aug. 15th): "The REIT structure requires companies to pass along a minimum of 90% of what would have been taxable income [as dividends]… With no retained earnings, [leverage-reliant] mortgage REITs such as New Century Financial Corp (NEWCQ.PK), American Home Mortgage (OTCPK:AHMIQ), and the former REIT HomeBanc Corp (HMBN.PK)... filed for bankruptcy protection… Today's mortgage REIT business is rooted in home mortgages and mortgages for office, industrial, hotel, shopping center or apartment properties. Mortgage REITs… tied to subprime residential mortgages [like] Deerfield Triarc Capital Corp (DFR), CBRE Realty Finance (CBF), RAIT Financial Trust (RAS) have come under pressure."
- U.S. REIT Bids $1.4 Billion U.S. for Toronto Firm (Toronto Star, Aug. 15th): "Behringer Harvard REIT has offered to buy IPC US REIT in an all-cash, $1.4 billion (U.S.) deal. Toronto-based IPC, which invests exclusively in U.S. commercial real estate, said Tuesday its board unanimously supports the takeover bid. If the transaction is approved, unitholders will receive $9.75/unit in cash and any declared and unpaid monthly distributions as well as $6.67/unit, pro rated based on when the closing happens. IPC REIT will then be wound up. As part of the deal, IPC will continue paying its monthly distributions of $6.67/unit. IPC, which put itself up for sale in January, owns 87% of IPC (US), Inc."
- iStar Financial Declares Preferred Stock Dividends (CNN Money, Aug. 15th): "iStar Financial Inc. , a commercial real estate financial company, announced [Wednesday] dividends [of about 0.50%] on the Company's Series D, Series E, Series F, Series G, and Series I Preferred Stock. For all five series of Preferred Stock, dividends are payable on September 14, 2007 to holders of record on August 31, 2007… iStar Financial Inc. [REIT] primarily provides… investment capital to high-end private and corporate owners of real estate, including senior and mezzanine real estate debt, senior and mezzanine corporate capital, as well as corporate net lease financing and equity."
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