Housing Market Tracker - Subprime Review

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 |  Includes: AMBC, C, FMCC, FNMA
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

"The subprime upheaval pushes out by years the time it will take for the 10-year [Treasury] notes yield to rise above 5.5%." - Louise Yamada, who runs top-ranked technical analysis firm Louise Yamada Technical Research Advisors LLC in New York. (Bloomberg, Dec. 17th)

Subprime Fallout

  • Subprime Woes In US May Delay Citi's Sale Of Indian BPO (India Economic Times, Dec. 17th): "Vikram Pandit, the new Citigroup CEO, will have to add his home country India to the long list of problems he must resolve. The $630-million sale of Citi’s BPO operations in India to Genpact, concluded in-principle in September, has got deadlocked due to Citi’s financial worries related to the US subprime mortgage crisis... Industry sources said the US financial group Wachovia was ‘upset’ over Genpact’s decision to buy the 10,000-strong BPO unit from Citi... a major rival to Citi... Wachovia uses services of a dedicated unit in India, run jointly with Genpact under a seven-year agreement."

  • Centro Slumps 76% on Struggles to Refinance Debt (Bloomberg, Dec. 17th): "Centro Properties Group, the owner of 700 U.S. shopping malls, slumped 76% in Sydney trading after saying it's struggling to refinance debt because of the collapse in the subprime mortgage market. Centro suspended dividends and said it may have to sell assets, after lenders set a Feb. 15 deadline to negotiate maturing debt... The share slump wiped A$4.98 billion ($4.3B) from the market value of Centro and Centro Retail Group, the listed REIT it manages. A sale of assets threatens to undo CEO Andrew Scott's $9 billion expansion into the U.S., where Centro owns the Roosevelt Mall in Philadelphia and Clearwater Mall in Florida."

  • Hey Barron's, Warren is the Ultimate Anti-Volatility Asset (David Merkel in Seeking Alpha, Dec. 17th): "Suppose Buffett... decides to take Ambac (ABK) private. [He'd]... create a non-guaranteed downstream holding company, capitalize it to a level necessary for a AAA rating, and buy Ambac. Warren never guarantees the debt of subsidiaries that he buys. Why should he reward bondholders of his target companies? Warren has never sent a subsidiary into insolvency, but he clearly reserves the right to do that. Bondholders have given him that right... That said, Berky’s excess cash offers opportunities at present... to snap up distressed assets when [Buffett] chooses to do so, and at minimal risk to Berky if an acquisition fails."

  • Greenspan: Throw Cash At Mortgage Crisis (Tim Iacono in Seeking Alpha, Dec. 16th): "Is it possible there could be a bigger moral hazard than Alan Greenspan's proposed solution to the housing crisis? Greenspan said: "Cash from the government", presumably deposited directly into the bank accounts of homeowners who are about to lose their homes, is the former Fed Chairman's solution to the current foreclosure crisis. He added, "Cash is available and we should use that in as large amounts as is necessary to solve the problems".

  • Subprime: A Predictable Surprise (BusinessWeek, Dec. 17th): "That Goldman got it right when so many got it wrong [shows the] firms [ability] to manage risk... [and] demonstrates that the subprime collapse was a predictable surprise... One fund manager not employed by Goldman told me that a Goldman representative informed him that they were seeing unexplained anomalies in their models more than two years ago and began to prepare for the consequences... However, let's ask whether they continued to sell products based on subprime mortgages even after they began to limit their own exposure or shorted subprime CDO products they had recently sold to clients."

  • This Crisis Is No Longer A Simple Problem Of Liquidity (UK Times Online, Dec. 17th): "The Northern Rock crisis looked initially like a liquidity crisis. Nobody questioned the underlying value of the Rock’s mortgages and therefore its ability to repay depositors in the long term. The problem was simply one of timing – if too many depositors wanted to withdraw their money, the bank could not sell off or “liquidate” its mortgages and other long-term assets quickly enough to pay the depositors back. It is now apparent, however, that Northern Rock also faces a solvency problem. The collapse of confidence in the British housing market has reduced the market value of its mortgages."

  • Housing Industry Looks To Congress For Help (Orlando Business Journal, Dec. 17th): "Legislation pending in Congress would increase the size of mortgages that could be insured by the Federal Housing Administration and reduce down payment requirements. This would enable many homeowners to refinance subprime mortgages into FHA-backed loans with better terms. The House passed FHA reform legislation Sept. 18... but Sen. Tom Coburn, R-Okla., blocked Senate consideration of the bill Dec. 6... Coburn: "This bill... makes taxpayers liable for billions of dollars in loans that may default." ... [Other] pending legislation would strengthen federal regulation of Fannie Mae (FNM) and Freddie Mac (FRE), and also increase the size of mortgages they could purchase."

  • Cashing In On The Mortgage Mess (Newsday, Dec. 17th) New York: "Since the subprime collapse in August, some Long Islanders have been laying foundations to seize big-time opportunities in the mortgage market. With banks and Wall Street eager to write off billions of dollars in foreclosures and bad loans by the end of the year, mom-and-pop players have been networking to match sellers and buyers, an effort that will pay off in commissions if deals go through. Friends and friends of friends combine resources to see if they can purchase bank-owned houses, which they would then rent out or perhaps resell for profit."

  • UBS Expects Further Subprime Writedowns Of 4.5 Bln Sfr In Q1 - Report (Forbes, Dec. 16th): "Swiss Sunday paper Sonntag: UBS AG expects further subprime-related writedowns of 4.5 billion sfr in Q1'08, after announcing a writedown of $10B earlier this week... The Swiss bank book[ed] a 4.2B sfr subprime loss in Q3. Earlier this week, UBS also said that in order to strengthen its capital base, it will issue 13B sfr of new capital, 11B of which has been placed with GIC, and a further 2B sfr with an undisclosed strategic investor in the Middle East."

  • Goldman Profiting Big from Mortgage Mess - WSJ (Steven Towns in Seeking Alpha, Dec. 14th): "WSJ: Goldman Sachs (NYSE:GS) is raking in one of the industry's biggest profits in years thanks to a... group of 16 structured-products traders' bets against mortgage-backed securities... [for] a profit of nearly $4 billion, according to sources familiar with Goldman's financing. The profits... will offset mortgage-related losses of $1.5B to $2.0B at other divisions. The Journal explains the structured-products group's mission is to make markets for clients, but it also can invest company capital to exploit opportunities, even if the trades are in the opposite direction of clients', as in the case of subprime-mortgage securities... Goldman reports fiscal Q4 results on Tuesday."

  • Citi Bails Out SIVs; Moody's Cuts Rating (Judith Levy in Seeking Alpha, Dec. 14th): "Citigroup (NYSE:C), in a dramatic shift of course, will bail out seven affiliated SIVs and take $49 billion in assets onto its balance sheet to avoid fire sales of the SIVs' assets. Moody's responded Thursday by lowering Citigroup's credit rating to Aa3, the fourth-highest level. Moody's SVP Sean Jones: "Citigroup's weak earnings should prohibit the bank from rapidly restoring weak capital ratios," which could imply further downgrades... The Citi bailout slashes the amount of senior debt still owed by SIVs to $140B from $340B in August, [possibly mitigating the] need for the "superfund" set up by Citi, JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) to rescue SIVs."

  • Ambac, Assured Guaranty Strike $29 Billion Reinsurance Deal (Judith Levy in Seeking Alpha, Dec. 14th): "The monoline bond insurer Ambac Financial Group (ABK) announced Thursday that Assured Guaranty (NYSE:AGO) will reinsure $29 billion worth of its financial guaranty contracts, improving Ambac's capital position and easing the immediate threat of a rating downgrade. In exchange, Ambac will give the Assured Guaranty unit, AG Re, more reinsurance business over the next three years. The WSJ notes that Assured Guaranty has "the least exposure to subprime-mortgage-related loans in the form of collateralized debt obligations" of all financial guarantors, and its own AAA rating is not in question. On Wednesday, Fitch said it will cut its rating on Security Capital Assurance (SCA) to AA if it fails to come up with $2B in capital over the next 4-6 weeks."

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