Housing Market Tracker - U.S./Global 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

"If I am sick and you have the same disease, it may not be prudent for me to give you a blood transfusion!" – Reggie Middleton on insurer Ambac's purchase of reinsurance from Assured Guarantee (NYSE:AGO), another insurer that's also losing money in the subprime fallout. Ambac bought the insurance as part of an effort to maintain its 'AAA' status. (Reggie Middleton in Seeking Alpha, Dec. 31st)

Subprime Fallout

  • Lender Lobbying Blitz Abetted Mortgage Mess (Wall St. Journal, Dec. 31st): "During the housing boom, the subprime industry... shot down efforts by some states to curtail risky lending to borrowers with spotty credit. Ameriquest Mortgage Co., until recently one of the nation's largest subprime lenders... handed out more than $20 million in political donations [through lobbyists] and played a big role in persuading legislators in New Jersey and Georgia to relax tough new laws. Those victories, in turn, helped blunt efforts by other states to crack down on reckless lending, critics contend... A host of subprime lenders and banking trade groups, including Citigroup Inc., Wells Fargo & Co., Countrywide Financial Corp. (CFC) and the Mortgage Bankers Association, spent heavily on lobbying and political giving."

  • Corporate Bond Yields Fall as Companies Refinance (Bloomberg, Dec. 31st): "Bank of America Corp.: Borrowing costs for Citigroup Inc. (NYSE:C), AT&T Inc. and hundreds of U.S. investment-grade corporate bond issuers may fall next year as they refinance about $557 billion of bonds. Yields on $2.2 trillion of debt in Merrill Lynch & Co.'s benchmark U.S. Corporate Master index dropped to 5.96% from this year's high of 6.19% on June 12. While losses from subprime mortgages roiled credit markets, the rally in Treasuries more than made up for the widest risk premiums on corporate debt in five years."

  • Moody's Affirms Ambac, MBIA Ratings - Losing Any Last Shred of Credibilty (Reggie Middleton in Seeking Alpha, Dec. 31st): "MBIA (NYSE:MBI) takes nearly a billion dollars in value losses on its portfolio in one month, gets a $500 million dollar equity investment below current market price, and an offer for another $500M through a discounted right's offering, which brings it back to where it was before it lost the $1B last month (in trouble) and it gets its AAA rating confirmed??? Ambac buys reinsurance from Assured Guarantee (AGO), a company in the same business as Ambac taking very similar losses, and it gets to retain its AAA rating??? Doesn't anyone see concentration risk and an uncomfortable amount of correlation here, or is it just me?"

  • Pick Up Undervalued Financials - Barron's Interview (Eli Hoffmann in Seeking Alpha, Dec. 30th): "Barron's interviews Richard Pzena, founder of newly-public Pzena Investment Management (NYSE:PZN): Government-sponsored mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE) are selling for a mere 25-30% their worth; he sees 3-4 fold upside once the market recovers from its mortgage-lender jitters. He notes the relative ease with which the firms were able to raise capital when needed, and says they stand to earn 25-40% on equity they issued at 8-9%. While conceding consumer credit companies' earnings will drop on bigger loss provisions, he sees value in Capital One (NYSE:COF), which today trades at "as good as it gets" 4-6x normal (non-crisis) earnings."

  • Martin Whitman Buys (Guru Focus, Dec. 30th): "SEC filing: Martin Whitman's Third Avenue Value Fund buys.... during the 3-months ended 10/31/2007: Whitman added to his holdings in Insurance company Radian Group Inc. (NYSE:RDN) by 316.52%... Added to his holdings in Insurance company MBIA Inc. (MBI) by 29.22%... Added to his holdings in Real Estate/developer The St. Joe Company (NYSE:JOE) by 9.78%... Added to his holdings in Building Materials company USG Corp. (NYSE:USG) by 20%... Added to his holdings in Real Estate/developer Forest City Enterprises Inc. by 3.77%... Initiated holdings in Insurance company MGIC Investment Corp. (NYSE:MTG)... Sold out his holdings in Levitt Corp. (LEV)."

  • Buffett Move Boosts Guarantor Industry (Yahoo! Finance, Dec. 29th): "Buffett's formation of a bond insurance company provided some validation to an industry that has been battered by fears of collapse in recent weeks... Steve Stelmach, an analyst with Friedman, Billings, Ramsey & Co.: If Berkshire Hathaway leverages its strength and issues reinsurance to other bond insurers as part of its new business, it could help boost firms like MBIA and Ambac. Rating agencies said MBIA and Ambac could raise new capital through reinsurance plans to cover their outstanding books of business. But, if Berkshire provides no reinsurance options and instead just issues insurance on new municipal bonds, the new competition is likely to squeeze out some of the smaller insurers."

  • Are Subprime Losses Being Exaggerated? (Felix Salmon in Seeking Alpha, Dec. 28th): "Most subprime borrowers aren't going to default. Suppose even one in four does and lenders recover somewhat more than half the mortgage amount. A fourth of $1.3 trillion in subprime mortgages is $325 billion, and a 55% recovery would mean a loss of about $145B... [But] no one is going to have a real handle on mortgage losses unless and until someone manages to get a handle on the percentage of mortgage loans which are non-recourse... given the amount of refinancing going on during the last few years... I suspect that the vast majority of mortgages are not non-recourse. (Refis are never non-recourse.)"

Global Subprime Fallout

  • U.S. Subprime Problems Causing Woes In Europe, Too (Statesman.com, Dec. 30th): "Because the U.S. mortgages were packaged into securities and sold around the world, banks in Europe and elsewhere have suffered losses when Americans found themselves unable to pay... British consumers owe $2.7 trillion on credit cards, mortgages, and other consumer loans — more than the value of all the goods and services produced by the economy in a year... Hari Sothinathan, a senior analyst at the Knight Frank real estate agency in London: "The initial impact of the credit crunch has been greater restrictions placed on unsecured or secured credit availability, especially for consumers or companies with less than perfect credit histories. On the more positive side, policy makers are likely to keep the cost of borrowing lower than they would otherwise have done."

  • German Savings Bank Association Calls For Reduction Of IKB Capital (Forbes, Dec. 28th): "Germany's municipally owned Sparkasse savings banks called for a reduction of IKB Deutsche Industriebank AG's capital to spread the impact of the bank's financial problems among its owners, savings bank association DSGV's president Heinrich Haasis said... A German banking pool, including private, municipally owned and state-owned banks, threw a €3.5 bln lifeline to MDAX-listed IKB this summer, after the bank was hit hard by the US subprime crisis. So far, the owners of IKB, with the exception of 38% shareholder KfW Bankengruppe, 'have been spared the consequences,' Haasis said."

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