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Quote of the Day

"Millions of homes have been built around the country during the past few years using a financing option that no longer exists. There may never be enough capacity to absorb all of these homes and other existing homes using 30-year mortgages, because there simply aren't enough people with the incomes to meet the requirements. Prices could not roll back far enough without damaging the economy irreparably." – Michael Hill, CEO of luxury homebuilder Emerge Homes. (Washington Post, Feb. 11th)

Subprime Fallout

Mortgage Crisis Spreads Past Subprime Loans. "People with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists. The rise in prime delinquencies... poses a threat to the battered housing market and weakening economy... Mortgage Bankers Association: At the end of September, nearly 4% of prime mortgages were past due or in foreclosure... The highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency/foreclosure rate for all mortgages, 7.3%, is higher than at any time since the group started tracking that data in 1979." (NY Times, Feb. 12th)

Countrywide, ACORN Partner For Foreclosure Prevention. "Countrywide Financial Corp. announced today it's partnering with the community group ACORN to engage in workouts with subprime borrowers -- even if they are already in default, and regardless of whether they have fixed- or adjustable-rate mortgages. ACORN, or the Association of Community Organizations for Reform Now, held demonstrations outside of Countrywide offices last fall, complaining that its foreclosure prevention initiatives were inadequate. The collaborative agreement announced today goes beyond Countrywide's previous efforts, which were primarily targeted at borrowers with ARM's who were still current on their loans and faced potential payment shock with an interest-rate reset." (Inman News, Feb. 11th)

More Signs of Credit Market Stress. "WSJ: Investment banks are sitting on sizable unsold inventories... of leveraged loans (the paper used to fund LBO deals) that are declining in value, thus sure to lead to further writedowns. And ironically, the Fed's interest rate cuts are only making matters worse. These instruments are floating-rate, priced off the short end of the yield curve, so rate cuts lower their interest payments, making them less attractive to investors... UBS and Wachovia are set to auction $700 million of loans believed to underlie some collateralized loan obligations... adding to further pressure to the market... The CDO market has ground to a near-halt." (Naked Capitalism, Feb. 11th)

Wisconsin Mortgage Insurer Pulling Back On Risky Loans. "Starting March 3, MGIC Investment Corp. (NYSE:MTG) will require at least 5% down on homes in "restricted markets" [including] Arizona, California, Florida and Nevada and major metro areas such as Washington, D.C., Detroit, Chicago, Boston and Atlanta... Condo-buyers will have to put 10% down... SEC filing: MGIC will not insure mortgages requiring little or no documentation or investment property loans in the restricted areas... Homeowners in the restricted markets who put at least 10% down will have to have FICO scores of at least 620 out of a possible 850. If they put less down, their scores will have to be at least 680." (Post Crescent, Feb. 11th)

S&P Cuts Ratings on $7.65B Worth of CDOs. "Standard & Poor's Ratings Services on Monday downgraded ratings on $7.65 billion worth of collateralized debt obligations [CDOs] mostly made up of mortgage-backed securities... The downgrades consisted of 67 portions of 10 different CDOs... To date, S&P has downgraded portions of 430 CDOs because of deterioration in the mortgage market. In addition, portions of 608 CDOs are currently on negative credit watch, which means there is a 50% chance they will be downgraded within three months. In total, S&P has downgraded or warned of possible rating cuts on $343.89 billion of CDOs." (Chron.com, Feb. 11th)

Raising Conforming Loan Limit Not A Simple Task. "Congress [has] agreed to raise the $417,000 conforming loan limit... allow[ing] Fannie, Freddie and FHA to guarantee loans of up to 125% of the median home price of an area... Fannie and Freddie will be able to tiptoe into the jumbo loan business in only 19 metropolitan statistical areas... HUD [has] to come up with median-home-price numbers for every housing market in America, [and] Fannie and Freddie will have to come up with credit guidelines and standards for purchasing, securitizing and guaranteeing [the new loans]... There's [also] no guarantee investors will accept the jumbo loans backed by Fannie and Freddie... as safe investments." (Inman News, Feb. 11th)

AIG Discloses Hole In Derivatives Valuation. "American International Group (NYSE:AIG) disclosed potential losses in its derivatives portfolio... The latest sign that credit worries sparked by the subprime mortgage crisis are feeding through to insurers... Morgan Stanley analyst Nigel Dally: AIG's mark-to-market unrealized loss on its credit default swap portfolio is expected to result in a charge of roughly $4.88 billion based on October and November pricing. That is more than triple the decline in the value of the portfolio estimated by AIG in early December -- a figure that benefited from a spread differential offset that AIG said it will no longer factor into its calculations." (Conde Nast's Portfolio, Feb. 11th)

Law Firms Follow Money In Credit Mess. "In the past four months, nearly 20 law firms have set up subprime practices comprising more than 500 attorneys, many of them in New York... Among the first was powerhouse Greenberg Traurig, which has 1,750 lawyers. It began building what is now a 48-member group in August. Mintz Levin Cohn Ferris Glovsky and Popeo launched its 25-lawyer practice in December; Pepper Hamilton followed in February with its 70-member credit crisis response team... At Bingham McCutchen, 65 partners make up a subprime practice that didn't exist two months ago." (Crain's NY Business, Feb. 9th)

Funds Caught in the Bond-Insurer Storm. "There's still plenty of uncertainty surrounding the major bond insurers... However, some smart investors think that they'll make it through this crisis just fine... Legendary value manager Marty Whitman holds MBIA and Radian Group in his Third Avenue Value Fund (TAVFX). In his fourth-quarter shareholder letter... he explains why he still likes these stocks--they're cheap, financially strong, well-managed, and unlikely to be liquidated despite the doomsday scenarios. Investors like Whitman are betting that the market's reaction has been overblown, and the next few months should tell us whether that's the case." (Morningstar, Feb. 8th)

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Source: Housing Market Tracker - Subprime Affects Prime