Housing Market Tracker - Subprime Review

 |  Includes: ACAH, BAC, BLK, C, JPM, MS, RDN
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.

Quotes of the Day

“We need a government loan. This country is falling apart. We need customers. We need some help. So many ‘For Sale’ signs in this neighborhood. People just have to leave their homes and run.” - Marcus St. Marie, owner of the Boston Road Furniture store in the Bronx, on the effects of the subprime crisis in his neighborhood. (NY Times, Dec. 17th)

“Financial innovation is great, but you have to have some basic rules. One of the most basic rules is that a borrower should have the ability to repay.” – Sheila Bair, chairman of the Federal Deposit Insurance Corporation. (NY Times, Dec. 18th)

Subprime Fallout

  • Banks Study Bailing Out Struggling Bond Insurer (NY Times, Dec. 19th): "Officials from Merrill Lynch, Bear Stearns and other major banks are in talks to bail out struggling bond insur[er] ACA Capital Holdings, that has guaranteed $26 billion in mortgage securities... ACA lost $1B [last] quarter, [and] has been warned by S&P that its ACA Financial Guaranty subsidiary may soon lose its crucial A rating. If it did, the banks that insured securities with ACA would have to take back billions in losses from the insurer under the credit protection terms they bought from ACA. The [situation] could serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds."

  • Morgan Stanley Post Loss on 4Q Writedown (Yahoo! Finance, Dec. 19th): "Morgan Stanley (NYSE:MS) on Wednesday reported a larger-than-expected FQ4 loss due to a $9.4 billion writedown from its exposure to subprime and other mortgage-related investments. The company also said China's government-controlled investment vehicle has invested $5B to help replenish its capital. China Investment Corp.'s... equity units... purchased from Morgan Stanley will yield 9%/year before they are converted into common shares in 2010... Morgan Stanley said it lost $5.8B, or $3.61/share in Q4, compared to a profit of $2.27B, or $1.44/share, a year earlier. The investment house reported negative net revenue of $450 million... compared to revenue of $7.75B a year ago."

  • 'SuperSIV' Fund to Start Buying in Weeks, Banks Say (Bloomberg, Dec. 18th): "The "SuperSIV'' fund, set up to provide cash to structured investment vehicles hurt by the collapse of the subprime-mortgage market, plans to start buying assets "within weeks,'' sponsors Citigroup Inc. (NYSE:C), Bank of America Corp. (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and BlackRock Inc. (NYSE:BLK) said Wednesday. The fund's size, originally envisioned at about $80 billion, will be based on... "SIVs needs and evolving market circumstances..." The urgency that led to the SuperSIV's creation eased after separate SIV bailouts by banks like HSBC and Citigroup... The Master Liquidity Enhancement Conduit fund, can still provide "an optional source of liquidity for eligible high-quality assets, [the banks said.]"

  • Fed Shrugged as Subprime Crisis Spread (NY Times, Dec. 18th): "An examination of regulatory decisions shows that... both the Fed and the Bush administration placed a higher priority on promoting “financial innovation” and [home ownership] than taming industry excesses... The Federal Reserve will [now] try to make up for lost ground by proposing new subprime loan restrictions... Lenders [will have to] document a person’s income and ability to repay the loan, and they may well restrict practices that make it hard for borrowers to see hidden fees or refinance with cheaper mortgages... Most [subprime lenders] have either gone out of business or stopped making subprime loans months ago."

  • Fed Will Limit Penalties on Prepayment of Subprime Mortgages (Bloomberg, Dec. 18th): "The Federal Reserve will make it tougher for lenders to impose fees for early repayment of subprime home loans... while giving lenders some flexibility through several exceptions... The staff memorandum will also probably recommend lenders be forced to include property taxes and insurance in monthly payments. They are already included in payments on most prime home loans, which banks make to their best customers."

  • Mortgage-Relief Plan Divides Neighbors (Wall St. Journal, Dec. 17th): "Congress joined the [subprime] rescue effort last week, passing legislation to help borrowers with mortgages up to $417,000 to secure refinancing. Yet Southern California, an epicenter of foreclosures, poses a particularly tough challenge because of the mix of adjustable-rate loans and high home prices that put many mortgages above the ceiling for government guarantees. The relief efforts so far have been met with skepticism. The prospect of aid for some borrowers, but not others, brings another layer of discord to neighborhoods already racked by plummeting home values, rising bank repossessions and vacant houses whose owners simply up and left."

  • Ratings Recap (Insurance Journal, Dec. 17th): "Fitch Ratings has withdrawn the 'AA-' insurer financial strength [IFS] rating of Radian Europe Ltd. (Radian Europe) due to its parent company's (Radian Group Inc.) (NYSE:RDN) decision not to pursue European mortgage insurance business at this time. Radian Europe has not underwritten any insurance or reinsurance transactions nor has it assumed any liabilities from any other company existing policies or treaties."

  • Holidays Find Loan Crisis Spreading to Businesses and Neighbors (NY Times, Dec. 17th) Bronx, NY: "The binge of subprime loans that flooded Williamsbridge a few years ago has now given way to foreclosures and forced sales by homeowners saddled with onerous mortgages they could never repay. The effects... are increasingly felt even among those who did not take on risky loans. Longtime neighborhood residents worry that their property values will be sunk by the double whammy of poorly maintained homes and revolving-door neighbors, while shopkeepers on the nearby commercial strip on Boston Road — especially those who sell hardware or home furnishings — say business has plummeted by 50% or more, as strapped homeowners cut costs."

  • What Happens if Guarantors Go Bust? (Michael Shedlock in Seeking Alpha, Dec. 17th): "The Fed: "The Term Auction Facility... and other measures we have taken to address market liquidity problems do not directly address the balance sheet or capital constraints facing financial institutions. Nor can they be expected directly to reduce the perceived risk in exposure to other financial counterparties." Note the Fed's admission that they can "not directly address the balance sheet or capital constraints facing financial institutions" nor can they "directly reduce the perceived risk in exposure to other financial counterparties". Those are arguably the only candid statements of fact the Fed has made in years, but ironically enough, they are the only Fed statements that everyone refuses to believe."

  • Subprime Crisis Claims California: Arnold to Declare Fiscal Emergency (Paul Kedrosky in Seeking Alpha, Dec. 16th): "California governor Schwarzenegger has conceded that the state budget deficit is ballooning... from forecasting breakeven, as of last August [to a projected] whopping $14-billion shortfall in 2008, up from the $10-billion forecast of a scant few months ago. How big is that deficit? It is the size of the California prison system budget plus the cost of running the sprawling University of California schools... Arnold says he will declare a fiscal emergency in the state, which requires the state to drop all other business and find an immediate solution. The options, however, are both simple and not-so-simple: cut spending, or increase taxes."

Website of the Day

A cautionary tale for these troubled times...

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