As Mortgage Securities Disappear, What Will Replace Them? [Housing Tracker]

Quote Of The Day 

Mechanism For Credit Is Still Stuck. “The market for securitization, through which mortgages and other debts are packaged and sold as securities, has become sclerotic and almost totally dependent on government support. The problems, intensified by bond investors who have grown leery of these instruments, have been a drag on the economy and have persisted despite the exercise of extraordinary regulatory powers by policy makers… Bond investors first stopped buying private home mortgage deals, then shunned commercial mortgages. Now, they are becoming wary of credit card debts and auto loans. Thomson Reuters:  In H1’08, private securitizations reached just $131 billion, down sharply from $1 trillion in H1’07.” (NY Times, Aug. 13)

Bank Stocks Drop Anew Amid Worry Over Falling Home Prices. “Stuck with a growing glut of foreclosed houses, banks and investors are shedding them at increasingly steep losses, potentially adding to the banking industry's red ink this year. Banks are selling foreclosed homes in some cases for less than half the price they fetched two or three years ago. The cuts are coming as the U.S. banking sector, slogging through its worst crisis in decades, bites the bullet out of fear that prices will keep falling. JP Morgan announced a roughly $1.5 billion trading loss related to the largest U.S. bank's holdings of mortgage-backed securities.” (WSJ, Aug. 13)

SEC Short-Selling Ban On Fannie, Freddie To End. “A government order expires Tuesday that temporarily banned a certain kind of short-selling of the stocks of mortgage finance companies Fannie Mae (FNM) and Freddie Mac (FRE) and 17 large investment banks. The companies' shares have stabilized since the ban took effect July 21. The SEC says its order helped prevent stock manipulation, and that regulators will be able to analyze data to gauge its effectiveness. But some experts say that may be difficult to determine... The SEC on July 29 extended the ban until 11:59 p.m. ET Tuesday, saying it would not be extended further.” (USA Today, Aug. 13) 

Fannie, Freddie Common Stock Is Now A Call Option. “As of June 30, 2008, the fair value of Fannie Mae's common equity (that is, the book value available to common shareholders) was -$5.39 billion, compared with a March 31 fair value of -$2.07B… This deterioration (-$3.32B) was even larger than the -$2.30B loss that Fannie reported to investors, which was itself about four times higher than [analyst estimates]… Balance sheet losses are excluded from earnings. Financial stocks tend to be reasonably valued when they trade at tangible book value… Fannie Mae has no tangible book value. The common stock is now a call option… A slight 1.4% deterioration in the value of Fannie's book of assets will wipe out all of the remaining shareholder equity.” (Michael Shedlock in Seeking Alpha, Aug. 12)

Estimate: 1,300 Foreclosures Every Business Day In California. “ForeclosureRadar.com: Banks and lenders have now foreclosed on $100 billion worth of California homes over the past two years, and are foreclosing at the rate of 1,300 houses every business day… New mortgage defaults are declining, but foreclosures are continuing to rise sharply… The pace of foreclosures in California -- 1,300 every business day -- has more than tripled from the year-ago rate of 415 per day, ForeclosureRadar estimates.” (LA Times, Aug. 12)

Freddie Mac Will Stop Buying New York Subprime Mortgages. “In its latest effort to deal with the fallout of the subrprime credit crisis, government-sponsored mortgage buyer Freddie Mac said it will not purchase subprime mortgages secured by properties in NY state with note dates on or after Sept. 1. The move is Freddie's response to recent NY legislation that creates a new category of subprime mortgages. The state has said the legislation is intended to curb abusive lending practices. But Freddie said the pending law "creates the potential for heightened legal and business risk exposures for the purchasers or assignees of these loans," including secondary market participants such as Freddie and sister Fannie Mae that buy mortgages.” (WSJ, Aug. 12)

 

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Comments

[Chris White:]

I heard some computer whizz was working on packaging mortgage insecurities for resale. Naming the process "insecuritization" was found to be a problem in focus groups, it was said. Infinitely preferable were names using "relief" type words though de-stressing mortgages sounded too much like more distress.

2008 Aug 13 07:52 AM

[texalope:]

New mortgage defaults are declining, but foreclosures are continuing to rise sharply…

Seems to me foreclosures rising is a direct result of rising defaults a few months ago and should not come as some startling revelation.
Defaults declining indicates that foreclosures will be down in the near future. This is a forward looking indicator .
While all the headlines are gloom and doom and the financial and housing stocks have staged precipitous declines, the overall market is only down 15%. Could this mean things aren't as bad as headlines would have us believe? It's hard to remain optimistic but In Pennsylvania the stores and restaurants are still busy. Recent info on local housing sales show modest price decreases and modest increases depending on the town. Home sales take longer but the market isn't frozen.
The recent housing bill will help on some level. I for on do not expect the US to fail but we may muddle through for a while. I just keep looking for good businesses where the stock prices have fallen to a point that buying now represents value.

2008 Aug 13 08:30 AM

[neeb??:]

Above may be true in smaller centers but the more trendier districts nearer the big cities are the ones that everyone seems to be living in fear of... Oh, BTW do not be alarmed at some of the numbers Freddie Mac has for its own valuation. It seems to be essentially Zilch....

2008 Aug 13 08:43 AM

[urbanexus:]

Bank Stocks Drop Anew Amid Worry Over Falling Home Prices

The recent price cutting of foreclosed properties held by financial institutions is good news. If individuals and investors continue to acquire these homes -- as now appears to be happening in Southern California, Las Vegas and Phoenix -- the overhang of foreclosed properties may be liquidated more quickly than previously anticipated. Once that happens, the residential markets can move toward recovery -- at lower price levels.

The big question is when lot pricing will recover to levels where creating new improved lots makes economic sense. I don't have the answer to that but it may happen more quickly than many people think.

Production home builders are getting their direct costs down into the high forty dollar per square foot range -- for smaller product than typically built in recent years. The lower direct costs will, at least in part, offset the lower retail house prices, leaving room to pay for fees and lot improvement costs and ultimately generate some residual value to land.

2008 Aug 13 10:47 AM

[notsosmart:]

not to worry. new instruments(paper) with 3 alphabet letters will be created by the scammers with their hands in your pocket.maybe a lotto could be created to guess the 3 letters.

2008 Aug 13 11:40 AM