Housing Market Tracker - Global/U.S. Subprime Outlook

Includes: C, CFC, IDMCQ, MER, STT
by: Judy Weil

Quote of the Day

"They [the Fed] need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence... There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for." Anna Schwartz, 92, the renowned economist who co-write a book with Nobel Laureate Milton Friedman on the role of the Fed in enabling the great depression. (Markham Lee in Seeking Alpha, Jan. 15th)

Subprime Fallout

Study: Minorities’ ’Dream’ Foreclosed "United for a Fair Economy study: The subprime-mortgage crisis will cost black and Hispanic homeowners up to $256 billion - the worst financial hit for minorities in modern U.S. history... The report projected blacks will lose $71.5B-$121.6B on high-cost mortgages taken out in the past eight years. Hispanics will forfeit another $75.8B-$128.9B... Blacks got 54.7% of all high-cost mortgages issued nationwide, even though African-Americans represent just 13.4% of U.S. population. Even among upper-income buyers, 54.4% of blacks and 48.9% of Hispanics used high-cost loans. By contrast, just 16.4% of higher-income white buyers received such loans." (Boston Herald, Jan. 16th)

IndyMac Laying Off 2,403 Employees "Mortgage lender IndyMac Bancorp Inc. (IMB) said Tuesday it will slash its work force by 24%, laying off 2,403 employees in a bid to cut costs... IndyMac [is] closing wholesale mortgage lending centers in cities including Tampa, Fla., Philadelphia, Boston, and Columbia, S.C., with the aim of consolidating the operations in other locations. The latest round of layoffs follows a reduction of about 1,600 workers last year through voluntary resignation. The company ended 2007 with a work force of 9,938. Mike Perry, CEO, anticipates further cutbacks of between 500-1,000 other employees worldwide, primarily in H1'08." (Yahoo! Finance, Jan. 15th)

Baltimore Finds Subprime Crisis Snags Women "National Association of Realtors: Single women have been among the fastest-growing groups of homeowners in recent years, and in Baltimore they accounted for 40% of home sales in 2006, twice the national average. Nearly half of these mortgages were subprime, National Community Reinvestment Coalition [NCRC] found... Though women and men have roughly the same credit scores, the Consumer Federation of America found that women were 32% more likely to receive subprime loans than men. The disparity existed within every income and ethnic group. The NCRC [also] found that women received 37% of high-cost home loans in 2005, compared with just 28% of prime loans." (NY Times, Jan. 15th)

Greenspan Goes Over the Hedge "The former Federal Reserve chairman—the very man whom many blame for ushering in the housing collapse with his bargain-basement interest-rate policy—will be joining on as an adviser to one of the mortgage market's profiteers, Paulson & Company. Wall Street Journal: John Paulson earned some $3B-$4 billion [on subprime bets]... As early as 2005, Paulson was convinced that the troubles in the mortgage market were deeper than the experts were predicting. So he developed a strategy of scooping up cheap credit-default swaps, shorting C.D.O.'s, and taking a hefty short position in the A.B.X. index when it debuted in 2006." (Portfolio.com, Jan. 15th)

Citigroup Posts Staggering Loss, Cuts Dividend "On Tuesday, investment firm Citigroup announced $18.1 billion in Q4 write-downs and a net loss of $9.8 billion. In a bid to shore up its capital, the firm secured $12.5B in cash from a collection of investors and slashed its dividend by 41%. While the losses were expected, many investors seemed uncertain about the future health of Citigroup (NYSE:C). The stock was initially trading higher premarket but eventually edged down 2.6%, or $0.74, to $28.32, shortly prior to the opening bell." (Forbes, Jan. 15th)

Hedge-Fund Deposits Declined 33% in Fourth Quarter "Hedge Fund Research Inc.: Hedge-fund inflows declined by 33% in Q4 as subprime-mortgage losses caused some investors to delay new deposits. Fund managers attracted $30.4 billion in Q4'07, compared with $45.2B in Q3'07. Investors put $15.8Bof new cash into hedge funds in the year-earlier quarter. Net deposits climbed 54% to a record $194.5B in the year as the average hedge fund returned 10.2%, almost double the gain by the Standard & Poor's 500 Index including dividends... The average fund return fell from 12.9% in 2006, giving some investors reason to reconsider where to put fresh money to work." (Bloomberg, Jan. 15th)

State Street Earnings Fall 28% on Legal Costs for Fund Losses "State Street Corp., the world's largest money manager for institutions, said fourth-quarter earnings fell 28% after setting aside $618 million to settle legal claims stemming from losses on subprime mortgages. Net income declined to $223M, or $0.57/share, from $309M, or $0.91, a year earlier... Sales rose 53% to $2.48B. State Street faces at least three class-action lawsuits from investors claiming its funds made inappropriate bets on subprime-backed securities. It disclosed the legal reserve Jan. 3 and said it replaced William Hunt, its CIO." (Bloomberg, Jan. 15th)

Mortgage Creation To Drop Below $2 Trln In 2008: MBA "Mortgage Bankers Association: Mortgage creation will slump 16% in 2008 to $1.96 trillion, breaching $2T for the first time since 2000. Economic growth will slow through H1'08, helping depress loan creation from $2.34T in 2007... Loan origination will slide by an additional 4% in 2009 to $1.88T, starkly below the $3.8T peak set in 2003. Average 30-year mortgage rates will rise slightly to 6.2% by Q4, "still quite low by historic standards," MBA economist Doug Duncan said." (Reuters, Jan. 14th)

Waxman Eyes CEO Pay During Subprime Mortgage Crisis "House Oversight and Government Reform Chairman Henry Waxman (D-Calif.), [scheduled] a hearing next month to question three current and former CEOs of companies involved in the subprime mortgage crisis about their own multi-million pay packages. Waxman has sent letters to Angelo Mozilo, CEO of Countrywide Financial (CFC), Charles Prince, former CEO of Citigroup (C), and E. Stanley O'Neal, former CEO of Merrill Lynch (MER), asking them whey they "stand to collect tens of millions of dollars in severance payments and other compensation," even as their current or former companies are losing billions of dollars in the subprime mortgage meltdown." (CBS News, Jan. 14th)

Global Subprime Fallout

Subprime Fallout Hits German Investment Bank "The fallout from the subprime mortgage crisis in the U.S. has hit German investment bank Hypo Real Estate... It is writing off US$580 million in American debt it had bought... The bank had previously repeatedly reassured investors that it would remain unscathed by the US credit crunch, which has swept world markets. Investors reacted to the US$580M writedown, which amounts to almost Hypo's entire 2006 net profit, with a massive sell off. The shares had plummeted 35% by the close of Tuesday trading, compounded by news that it was slashing its 2007 dividend by two-thirds." (National Business Review, Jan. 16th)

MUFJ Sees Near Half-Billion Dollar Subprime Loss: Report "Japan's Mitsubishi UFJ Financial Group Inc. (MUFJ) incurred some $468 million in losses related to the US subprime mortgage crisis as of the end of last year... MUFJ said in October the US subprime loan crisis had wiped ¥5.0 billion ($47M) off its first-half-to-September profits while the value of its securities backed by subprime loans in the US had dropped by ¥20B yen. The bank, formed in October 2005 through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings, said in October it still had about ¥260 billion in subprime related investments." (AFP, Jan. 16th)

East Europe Warned On Subprime Fallout "Varel Freeman, first vice-president of the European Bank for Reconstruction and Development, sought to temper expectations that the fast-growing region might ride out the upheavals caused by the US subprime crisis... Data showed that the spreads over international benchmark interest rates paid by borrowers in the region had risen markedly since last June. Freeman: "In June it would have been hard to find a spread of above 50 basis points. Today 50 basis points is probably average and the variation [between borrowers] is far wider." Freeman [cited] Russia, where the spread had risen from about 40 to about 100 basis points." (Financial Times, Jan. 16th)

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