Housing Market Tracker - Subprime Review

Includes: CFC, HCBK, JPM, WMIH
by: Judy Weil

Here's our summary of articles and data points on the housing market and the subprime crisis. 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

"The subprime problem has been contained. It's been contained on planet earth." – Jim Grant, financial author and editor of Grant's Interest Rate Observer. (Investor Insight.com, Nov. 26th)

Subprime Fallout

  • Schumer Demands Investigation of FHLB Loans to Countrywide (Naked Capitalism, Nov. 27th): "Countrywide Financial Corp. (CFC), Washington Mutual Inc (NYSE:WM)., Hudson City Bancorp Inc. (NASDAQ:HCBK) and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6%. The government-sponsored companies were able to make loans at about 4.9%, saving the private banks about $1B in annual interest. FHLBs' Office of Finance: To meet the sudden demand, the institutions sold $143B of short-term debt in August and September. The sales pushed outstanding debt up 21% to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009."

  • Senator Urges Countrywide Scrutiny (BusinessWeek, Nov. 26th): "Sen. Charles Schumer on Monday urged a federal regulator to examine whether loans to troubled Countrywide Financial Corp. put at risk a network of regional government-sponsored lenders. Countrywide, plagued by a surge of defaults among loans made to borrowers with weak credit, is the largest borrower from the Federal Home Loan Bank of Atlanta, with $51 billion, or 37% of the bank's total advances as of Sept. 30, according to a SEC filing. The Federal Home Loan Bank system, created by Congress during the Depression, has some 8,100 members around the country including banks, savings and loans and credit unions."

  • The Next Dominos: Junk Bond And Counterparty Risk (John Mauldin's Outside the Box, Nov. 26th): "The amount of outstanding corporate credit and leverage applied to it dwarfs the market for subprime mortgages. As such, the consequences of a problem in this arena may be far more severe than what happened in subprime... Given their subordination in the capital structure, junk bonds (or, euphemistically, high-yield bonds) are a logical place to look for the first signs of trouble. Statistics of high-yield issuance reveal relaxed lending standards... In each year since 2004, more than 40% of all new debt held ratings below investment grade. For perspective, the proportion of new paper of such poor quality issued in each of the last four years far exceeded the proportion of such issuances in any year since the late 1980s."

  • JPMorgan To Cut About 100 Subprime Jobs (Reuters, Nov. 26th): "JPMorgan Chase (NYSE:JPM) filing with the California Employment Development Department: JPMorgan plans to cut about 100 subprime mortgage jobs at its subprime retail operations in Ontario, California, effective December 15th... JPMorgan said it has reduced subprime originations and operations staff because of home price weakness and tighter credit standards. About 40% of JPMorgan's 2006 subprime originations would not be approved under today's standards, JPM said. The bank has discontinued, for example, all subprime home equity loans. JPMorgan has said that it expects to originate about $1 billion subprime loans per month."

  • Wall Street Carnage All About The Great Housing Slump (Paul Krugman in Seattle PI, Nov. 26th): "There's a pervasive loss of trust [from the unfolding of the subprime crisis], which is like sand thrown in the gears of the financial system. The crisis of confidence is plainly visible in the market data: There's an almost unprecedented spread between the very low interest rates investors are willing to accept on U.S. government debt -- which is still considered safe -- and the much higher interest rates at which banks are willing to lend to each other."

  • 1000% Hedge Fund Wins Subprime Bet (Financial Times, Nov. 25th): "A Californian hedge fund has made more than 1,000% return this year by betting against US subprime home loans, making it one of the world’s best-performing funds of all time. Lahde Capital... last week passed the 1,000% mark, after fees, following the latest leg of the credit market turmoil... However, Andrew Lahde has now begun to return money to investors, [saying]: “The risk/return characteristics are far less attractive than in the past.” Lahde expected the collapse in value of subprime mortgage-linked securities to be repeated for bonds backed by commercial property loans in a deep recession – which he also predicts."

Global Subprime Fallout

  • A Banker in Germany Says Trouble Is Not Over (NY Times, Nov. 27th): "Although European banks, as a whole, do not appear to have been as hard hit as American ones; the assumption among some in the United States is that Europeans ended up holding many of these investments. This was reinforced by the fact that the first banks to get into trouble were two midsize German banks: IKB Deutsche Industriebank and Sachsen LB. Commerzbank head Klaus-Peter Müller contends it is primarily an American malady... Commerzbank has not been invited to take part in the fund of at least $75 billion that is being cobbled together by leading American banks to stabilize the credit markets, Mr. Müller said. And given his bank’s relatively modest role in the credit crisis, he sees little reason that it should."

  • Royal Bank of Scotland Investors Suffer as Bigger Isn't Better (Bloomberg, Nov. 26th): "Royal Bank CEO Goodwin's bet that America's housing boom would supplement slower growth in the U.K. backfired this year as U.S. foreclosures rose to a record and the world's biggest financial institutions wrote down more than $65 billion for debt-related losses... Royal Bank dropped 37% in London trading this year, underperforming all but two of its 40 largest global competitors, Citigroup Inc. and Mitsubishi UFJ Financial Group Inc. Goodwin is grappling with slowing revenue growth and higher financing costs as RBS prepares to digest its latest $23.7B takeover... of ABN Amro Holding NV's securities and Asia units."

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