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

by: Judy Weil

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

Quotes of the Day

"It was a particularly bad day." - Michael McCauley, senior corporate governance officer for the State Board of Administration, which manages investment pools for municipal and state funds. McCauley was trying to explain why the State Board suddenly froze the pool and blocked withdrawals less than 24 hours after the fund's manager reassured the CFO of Port St. Lucie, Florida that there was no rush of withdrawals, no problems, and that she could (and did) put the county's $135 million there safely.(NY Times, Jan. 1st)

"If they have a house, if the owner has a pulse, we'll give them a loan." - Russell Jedinak, quoted from the OC Register in California, in 1991. Jedinak and his wife sold the first subprime mortgages as securities for Guardian Inc. in June 1988. Over the next three years, Guardian securitized 32 series of loans totaling $2.7 billion, mostly second mortgages on homes in low-income neighborhoods purchased by people with lots of equity but poor credit records." (O.C. Register, Dec. 30th)

Subprime Fallout

  • Sub-Prime Problem Not As Big As Made Out To Be (Business Standard, Jan. 2nd): "[Subprime] losses aren’t likely to be so large [because] mortgages are backed by collateral, a house or condominium. When [a foreclosed home is] sold, the lender often will get 50%-60% or more of the loan amount after foreclosure expenses. [Also,] lenders recover somewhat more than half the mortgage amount. A fourth of $1.3 trillion in subprime mortgages is $325 billion, and a 55% recovery would mean a loss of about $145B. To reach a $300B loss would require foreclosures on about half of all subprime mortgages with a 55% recovery upon sale of the property. And a $400B loss would take about a 60% foreclosure rate with recovery of about half the value from the sale."

  • PHH Acqusition Is Dead (The Street, Jan. 1st): "PHH press release: The two-part deal fell apart because Pearl Acquisition, a Blackstone affiliate that was to acquire PHH's mortgage business, failed to secure sufficient debt financing. Investors have been aware of the acquisitions' imperiled status for months, ever since doubts emerged about Pearl's ability to obtain financing. PHH agreed to the deal last March, before the summer's subprime-related credit crisis hit. Under terms of the deal, GE's General Electric Capital unit would have purchased PHH and then immediately [sold] its mortgage business to the Blackstone unit. GE would have kept PHH's vehicle fleet management business."

  • Countrywide's Call For Increased Mortgage Limits Must Be Ignored (Wall St. Diary in Seeking Alpha, Jan. 1st): "In 2000, the conventional loan limit stood at $252,700 and appreciated to $417,000 by 2007... Clearly the increase in conventional loan limits contributed to the excesses in the mortgage and housing markets. With higher conventional loan limits, sellers, buyers, and speculators were able to rely on securitization in order to generate liquidity for increasingly questionable mortgage backed debt (as well as other asset backed debt). Purveyors of innovative... mortgages like Countrywide accelerated the mortgage credit and housing bubbles by adding to the liquidity for anyone who wanted to “leverage-up” knowingly or unknowingly."

  • Housing Needs Some Shelter (Forbes, Dec. 31st): "Mortgage Insurance Companies of America reported some troubling data Monday. Defaults on privately insured U.S. mortgages rose 35% in November to 61,033, from 45,325 the previous year. This means that the number of insured borrowers falling more than 60 days late on payments is on the rise, a sign that the housing market is continuing to deteriorate since missed payments of more than 60 days often leads to foreclosure."

  • Homeowners With No Equity (Calculated Risk, Dec. 31st): "At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages). By the end of 2007, the number will have risen to about 5.6 million. If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million. The last two categories are based on a 20%, and 30%, peak to trough declines."

  • Dave Barry on Subprime and the Dollar (Paul Kedrosky in Seeking Alpha, Dec. 31st): "Humorist Dave Barry on subprime: There was a major collapse in the credit market, caused by the fact that for most of this decade, every other radio commercial has been some guy selling mortgages to people who clearly should not have mortgages. ("No credit? No job? On death row? No problem!") It got so bad that you couldn't let your dog run loose because it would come home with a mortgage. The subprime mortgage fiasco resulted in huge stock market losses, and the executives responsible, under the harsh rules of Wall Street justice, were forced to accept lucrative retirement packages."

  • "Banking System’s Problems At Heart Of The Bear Case" (Naked Capitalism, Dec. 31st): "[Is] the banking system’s problem one of liquidity or solvency... One can lead to the other. [Will] any big banks go bust next year? Some factors make it more likely... Defaults are set to rise. S&P: Speculative-grade defaults in the US are now at an all-time low, at less than 1%, [vs.] 10% in 2001 and 12% in 1990 – both recession years. But the proportion of bonds defined as distressed – that is, with spreads of more than 1000 basis points over Treasuries – is rising sharply and now stands at almost 5% compared with 2.1% a year ago. That is stage one. Stage two – actual defaults – will duly follow."

  • Is Subprime Just the Tip of the Iceberg? (Michael Panzner in Seeking Alpha, Dec. 30th): "The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets,” Ted Seides, the director of investments at Protégé Partners, a hedge fund of funds, wrote in Economics & Portfolio Strategy. “Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit,” he added. “Similar to the growth of subprime mortgages, the rapid rise of credit products required ideal economic conditions and disconnected the assessors of risk from those bearing it.”

  • How Subprime Lending All Started In O.C. (O.C. Register, Dec. 30th): "What became a global financial crisis had roots in Orange County... Until the 1990s, subprime lenders like Long Beach Savings could only resell their mortgages to private investors willing to take bigger risks for higher returns. Once Wall Street began issuing public securities, the lenders' capital grew exponentially. Former investment banker William Komperda: Executives from Long Beach approached Greenwich with the idea of securitizing their mortgages because Greenwich had already dealt in similar issues. To make the Long Beach deal acceptable, Komperda persuaded insurers to cover the issue and ratings agencies to give it an AAA rating."

  • Big Changes Lie On Wall Street's Horizon In '08 (Crains' NY Business, Dec. 28th): "In the past few months, Bear Stearns, Merrill Lynch, and Morgan Stanley have all sold pieces of themselves to investment funds controlled by governments in China or Singapore. With these firms still facing additional (and huge) losses in 2008 as the credit bubble continues to unravel and the economy tips into recession, look for one of them to... agree to sell themselves outright. Most like[ly] the acquirer will be a major U.S. bank, such as J.P. Morgan Chase (NYSE:JPM). As wealthy as Asian sovereign wealth funds may be, it’d be awfully unpopular in Washington for a major Wall Street firm to be totally in foreign hands."

Global Subprime Fallout

  • London Scottish Falls on $44 Million Consumer Charge (Bloomberg, Dec. 31st): "London Scottish Bank Plc, the U.K. lender to customers with poor credit histories, fell the most in a decade in London trading after saying it will take a charge of as much as £22 million ($44 million) to cover losses. A surge in unpaid consumer loans forced the bank to increase impairment provisions, it said in a statement today. The U.K. Financial Services Authority has also required the company to increase its capital base, leading to a £13M shortfall, London Scottish said."

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