Housing Market Tracker: Subprime Review

by: Judy Weil

Here's our summary of articles and data points on the housing market. It's part of Seeking Alpha's coverage of the real estate market and homebuilder stocks. Like all other topics and stock coverage from Seeking Alpha, you can have this sent to your Blackberry or desktop email by signing up for our no-spam free email subscription service.

Quote of the Day

"What we conclude is that people are saying, 'Honey, let the house go,' but keep the cards." – Richard Fairbank, CEO of Capital One Financial, the largest independent U.S. credit card issuer. Fairbank says that of customers who are behind on their mortgage payments, 70% are current on their credit cards. (Int'l Herald Tribune, Nov. 9th)

Subprime Fallout

  • HSBC, the Subprime Seer: Sanguine View Isn't Likely (Wall St. Journal, Nov. 12th): "Analysts Robert Law and Raul Sinha, Lehman Brothers: HSBC (HBC) might have to boost its reserves against souring subprime loans at HSBC Finance's mortgage-services division by $2.4 billion, to a total $4.5B... By the end of this year, losses to defaults over the life of the loans could wipe out about 14% of a $41.4B loan portfolio... In February, HSBC [raised loan loss provisions to] nearly $2 billion... for 2006. At the time, HSBC was alone among big commercial and Wall Street banks in signaling big problems... HSBC Finance also has a large portfolio of second mortgages, which tend to be among the first to go bad."

  • Goldman Held Bigger Share of Level 3 Assets Than Citi, Merrill (Bloomberg, Nov. 12th): "SEC filing: Goldman Sachs Group's hard-to-value Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9% of Goldman's (NYSE:GS) $1.05 trillion total at the end of August. Citigroup Inc. classified 5.7% of its assets as Level 3 on Sept. 30 and Merrill Lynch reported 2.5%... [Citigroup and Merrill are] two of the firms hardest hit by subprime mortgage losses. Goldman (GS) officials say the firm won't report an "extraordinary" drop in its subprime holdings, investors have remained skeptical, pushing its shares down 15% this month."

  • Subprime Losses May Reach $400 Billion, Analysts Say (Bloomberg, Nov. 12th): "Losses from the falling value of subprime mortgage assets may reach $300B-$400 billion worldwide, Deutsche Bank AG analysts said. Wall Street's largest banks and brokers will be forced to write down as much as $130B because of the slump in subprime-related debt, according to a report today by New York- based credit analyst Mike Mayo. The rest of the losses will come from smaller banks and investors in mortgage-related securities."

  • Citigroup, Banks Reach Agreement on `Super SIV,' Person Says (Bloomberg, Nov. 12th): "Sources: Citigroup Inc. (NYSE:C), Bank of America Corp. (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM), the three largest U.S. banks, reached an agreement on the structure of an $80 billion fund to help unfreeze the market for short-term debt. Bankers working on the deal... settled on a simpler plan than initially proposed last month. Under the original plan brokered by Treasury Security Henry Paulson, the fund would buy some of the $320B in assets held by so-called structured-investment vehicles [SIVs]. A term sheet may be ready in as few as two weeks, once ratings companies evaluate the super-SIV and the banks obtain tax and legal opinions... Graham Fisher & Co. managing director Josh Rosner: "As opposed to recognizing losses, we're trying to roll those losses into the future, regardless of the sanity or safety and soundness of doing that.''

  • E*Trade Falls Victim to Subprime Fallout (Yitzchak Fishel in Seeking Alpha, Nov. 11th): "E*TRADE Financial said Friday in a SEC filing that deterioration in the residential mortgage market will likely result in writedowns that exceed previous expectations included in the company’s Oct. 17 earnings report. E*Trade told investors it would write off approximately $450 million of its $3 billion asset-backed securities portfolio, consisting mainly of CDOs (collateralized debt obligations) and second-lien securities, but also including $50M in AAA-rated debt... One analyst went as far as to question the company's long-term viability. E*Trade tumbled $5.04, or 59%, to $3.55 on Monday. The stock has fallen 82% this year, wiping out about $7.9B in market value."

  • Hedge Fund Makes $3 Billion From Subprime Bet (CNN Money, Nov. 11th): "U.S. hedge fund manager Paulson & Co. (NASDAQ:PLCC) has turned an investment of almost $500 million at the start of the year into almost $3.6 billion by taking out a form of insurance [that pays out when] subprime mortgage securities lose value, investors said. Four other hedge fund managers - Harbinger Capital Partners, Balestra Capital, Scion Funds and Peloton Partners - have also made substantial gains from subprime... In the middle of last year, banks were offering credit default swaps, a kind of insurance contract, on the BBB-rated tranches of U.S. subprime mortgage securities... Banks undertook to pay out the value of any falls in the BBB tranches."

  • Countrywide’s Chief Salesman and Defender (NY Times, Nov. 11th): "Countrywide Financial CEO Angelo Mozilo says... borrowers forced lenders like Countrywide (CFC) to lower their mortgage standards. The industry faced special pressure from minority advocates to help people buy homes... Why did the company’s chief, who routinely warned of his rivals’ lax lending practices well before the mortgage market cracked, ultimately allow Countrywide to ardently embrace those practices? Mr. Mozilo remains unbowed. After reporting a third-quarter loss of $1.2 billion last month, he predicted that the company would return to profitability in the current period."

  • Ohio Subpoenas Subprime Lenders (CNN Money, Nov. 10th): "Ohio's attorney general issued more than a dozen subpoenas Friday to obtain records from subprime mortgage lenders... Two other states have issued subpoenas to try to determine if any wrongdoing has occurred as home foreclosures has multiplied. Massachusetts subpoenaed investment firms, and New York subpoenaed government-sponsored lenders Fannie Mae (FNM) and Freddie Mac (FRE) in an investigation of appraisal collusion. Ohio appears to be the first state to issue subpoenas directly to subprime lenders... [Possibly] in response to the failure of 20 subprime lenders doing business in Ohio to sign a compact proposed by Strickland... designed to keep Ohioans in their homes."

  • Tanta on WaMu vs. Cuomo (Michael Shedlock in Seeking Alpha, Nov. 9th): "If [NY Attorney General Andrew] Cuomo's suit [against EAppraiseIT for collusion on home price appraisal inflation] makes any headway at all, it will put eAppraiseIT out of business. That's because if appraisal management companies are no longer willing or able to write these liability swaps into their contracts, they won't be able to offer what the lenders really want from them. The advantage of doing business this way isn't really about saving a few dollars on outsourcing administrative work for the lenders, it's about getting out from under a huge expensive compliance and legal risk... Yes, WaMu (NYSE:WM) will collapse if it has to take back those loans, but the bigger picture is the entire "originate and sell" model might collapse along with it."

  • A Seasoned Pro Scoops Up Mortgage Stocks (CNN Money, Nov. 9th): "Old Republic International insurance company (NYSE:ORI), which has its own mortgage insurance business, purchased 15% of PMI Group (PMI) and 11% of MGIC Investment Corporation (NYSE:MTG), the nation's largest mortgage insurer, over the past 11 weeks, according to a Thursday SEC filing... Zucaro has a reputation in the insurance industry as a conservative, long-term investor... As a result, his decision to buy stakes in PMI and MGIC could be seen as a vote of confidence in both companies... CEO Aldo Zucaro: "These two companies are here to stay. We bought them on the basis that recent market prices underestimate their long-term value."

Global Subprime Fallout

  • Barclays, Royal Bank Lose Shareholders' Confidence (Bloomberg, Nov. 12th): "Investors drove Barclays and Royal Bank shares down almost 30% in the past month on concern potential losses linked to the U.S. subprime mortgage market will hurt profits. Royal Bank trades at 5.6 times estimated earnings, the lowest in at least six years, and London-based Barclays (NYSE:BCS)is at 6.7 times profit. That compares with the average multiple of 9.8 for the 63-member Bloomberg Europe Banks and Financial Services Index. The stocks got battered because CEOs John Varley and Fred Goodwin have provided little information to investors after record foreclosures on U.S. subprime home loans... roiled credit markets."

  • Asian Markets Tumble With Wall Street; Yen Spike Sends Nikkei To 16-Mth Low (Forbes, Nov. 11th): "Stock markets across Asia tumbled Monday, with the Nikkei falling to an almost 16-month low as the yen's rapid appreciation against the dollar weighed on exporters while fresh disclosures of subprime-related losses at US banks pressured financials... Many shares are at bargain levels after recent falls. Even so, uncertainty about the outlook for US problems and the yen's exchange levels against the dollar are overwhelming bargain-hunting interest,' said Hiroichi Nishi, general manger of equities at Nikko Cordial Securities."

  • Singapore's OCBC Says US Subprime Exposure Small; Further Losses Unlikely (Forbes, Nov. 11th): "Oversea-Chinese Banking Corp said its exposure to the US subprime market is small and the likelihood of any further losses in Q4 is low. OCBC, the smallest of Singapore's three existing banks... reported 270 million Singapore dollars in asset-backed securities exposed to the US subprime market, for which it has set aside $221M, representing an 82% loss cover. Soon Tit Koon, CFO at OCBC. 'We have already made a substantial allowance... despite there being no defaults currently on any of these CDOs.' The asset-backed CDOs represent 42% of the bank's CDO investments, totaling $641M."

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