More On Mortgage Market Fallout [Housing Tracker]

Quotes of the Day

“This is the fourth attempt to revive the market and boost investor sentiment this year. Each time the stock market embarked on a rally averaging 6 weeks and seeing the S&P 500 advance 8% before sputtering and heading back to new lows.” -  Merrill Lynch & Co. economist David Rosenberg. (Housing Wire, Sept. 8)

“Some may worry that Treasury has taken on so much taxpayer burden they don’t have any remaining capacity more to take on the burdens of Lehman.” - Fox-Pitt Kelton analyst David Trone, on the prevailing market sentiment that Lehman, whose stock price more than halved since Tuesday, would not likely be bailed out by the government as Bear Stearns was. (NY Times, Sept. 9)

Subprime Fallout

Fed May Expand Funding Aid to Banks in a `Mother of Year-Ends'. “The Federal Reserve may have to increase the cash it provides to banks and brokers, already a record, to help them balance their books at the end of the year. Six bank failures in the past two months and rising concern about Lehman Brothers Holdings Inc.'s (LEH) capital levels pushed lenders' borrowing costs to near a four-month high yesterday. They may climb further as companies rush for cash to settle trades and buttress their balance sheets at year-end… One option is for banks and brokers to increase the loans they take out directly with the Fed.” (Bloomberg, Sept. 11)

Lehman Puts New Value on Subprime. “Lehman CFO says its alt-a mortgage assets marked down to $0.39 per $1 par. Lehman CFO says subprime mortgage assets marked down to $0.34 per $1 par vs $0.55 in Q2 [-39%]. Lehman CFO says asset backed CDOs marked down to $0.29 per $1 par vs $0.35 in Q2. What this means is that Lehman (LEH) has put a new, lower value on the assets everyone is worried about on its books…  If stock and bond investors feel that this is a fair value, we may see some stability in the shares. [But] remember that last year, hedge-fund giant Citadel bought E*Trade’s collateralized debt obligation portfolio for 27 cents on the dollar.” (Fox Business, Sept. 10)

Federal Mortgage Success Stories. “Smaller Maes and Macs — have come through the credit crisis largely unscathed. Some... are even prospering. The Federal Agricultural Mortgage Corporation, or Farmer Mac… shares have soared 153% this year, and its profit is up… Farmer Mac buys mortgages on farmland from agricultural lenders and then sells instruments backed by those loans. The company is thriving because the price of crops — and farmland — has been rising. The Government National Mortgage Association, or Ginnie Mae… provides guarantees on mortgage-backed securities backed by federally insured or guaranteed loans. Earlier this year, Ginnie Mae’s sales of new government-guaranteed debt soared to the highest point since 2003, as the market for other mortgage-linked debt collapsed.” (NY Times, Sept. 9) 

Federal Bailout Gives Hope To Those Facing Foreclosure. “With the government takeover of Fannie Mae and Freddie Mac, U.S. taxpayers now essentially own the bulk of the nation's mortgage market…  Mark Zandi, chief economist of Moody's Economy.com: "Instead of nationalizing an industry like the S&L industry, we've effectively nationalized the mortgage market." (Denver Channel, Sept. 8) 

Street Set to Fill Hole in Mortgage Market. “The federal takeover of two mortgage giants could eventually be a boon for Wall Street, by jump-starting a faster rebound in mortgage securities issues, and by gradually diminishing Wall Street's two largest competitors in the $6 trillion market for packaging and reselling mortgage-backed bonds… The two companies [must cut] mortgage assets on their books by 10% annually beginning in 2010. As the two agencies pull back from the market, that should open up an opportunity for Wall Street banks to securitize more home mortgages. Among the most-active players in this arena are Credit Suisse Group (CS), Deutsche Bank AG (DB) and Lehman Brothers Holdings Inc..” (WSJ, Sept. 8)

                          

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Comments

[billddrummer:]

Hi Judy,

Great compilation, thanks!

New statistics from the Reno/Sparks market. Sales in August were off 18% compared to last year, the median sales price dropped again, to $240,000, and it's now fully 30% below the peak median reportedi n July 2005.

Inventory is creeping upward even at the lower price ranges, with a 10 months' supply of inventory for homes under $300,000. For the first time since August 2005, the average selling price for these homes fell below $200,000. Inventory ranges from 12 months for homes between $300,000-$500,000, to 28 months up to $1 million, 4 years over $1 million, and an infinite supply over $2 million (67 listings--no sales).

Read more here:

realtytimes.com/rtmcrc...~Reno~dianecohn

Thanks again for this resource. I appreciate it!

2008 Sep 11 02:55 PM

[SA Editor J...:]

Hi Bill,
So from the above it seems as if the crisis is going strong, but your comment yesterday gave me the feeling that there was some stabilization in the Nevada market. What's your overall sense there?

2008 Sep 11 04:20 PM

[billddrummer:]

Hi Judy,

It's a bifurcated market, to be sure. In Las Vegas, the bubble was much larger, grew faster, and popped more suddenly. Values crashed as rapidly as they rose, which produced the strong YoY sales growth (my opinion). But in Northern NV, which was more impacted by the bubble in Sacramento and the SF Bay area, our price runup was more gradual. For example, in LV, median home prices leaped by 50% in one month, pushed by strong demand, low rates, exotic mortgages and lack of inventory. Northern NV never experienced that kind of explosive growth in home prices. What was more at work here was speculative fever that seduced people into thinking that prices would keep rising long enough for them to either cash out or bail out. As I noted earlier, median prices peaked here in 2005. What I didn't include was that prices stayed high through 2006, and most of 2007. By illustration, it took 18 months for the median sales price to fall 20% from the July 2005 peak. So here, it was more a tire with a slow leak that eventually goes flat than a bubble popping.

I'm still of the camp that believes the median household income (and the effect of prevailing mortgage rates) will drive median prices down until more families can afford to purchase homes. And to me, that median for this area is $175,000. But with every 1% rise in mortgage rates, the payment on a $180,000 loan rises $118/month. That will tend to weed out potential buyers, and push medians down even further.

I don't think mortgage rates can get much lower.

Hope that helps clarify some of the differences I'm seeing between Northern and Southern NV.

Thanks again for reading my comments. I appreciate your feedback!

2008 Sep 11 04:55 PM

[billddrummer:]

Hi Judy,

I don't think I fully answered your question. Las Vegas appears to be healing, and you might say the very worst is over. That doesn't mean that home prices will stop falling, but that the rate of decrease will slow. The sales growth in August is encouraging, although sales are still dominated by distressed transactions (short sales and REOs).

In Northern NV, I think there's more value to lose. I wouldn't be surprised if median sales prices fall another 10-20% before values stop decreasing. And I don't think anyone expects to see a rise in home values for at least another year, perhaps two.

Hope that helps.

Bill

2008 Sep 11 05:00 PM

[billddrummer:]

Hi Judy,

This is the correct link to the Northern NV statistics
renorealtyblog.com/

The article was posted 9/11/08, and has an imbedded link to the full report.

Sorry about the other one. It's wrong.

2008 Sep 11 06:12 PM