Housing Market Tracker - Subprime Review

Includes: BAC, CFC, COOP, WFC
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

“These letters are a smoking gun that something is not right in Denmark.”- Judge Thomas P. Agresti said about Countrywide Financial Corp.'s business practices. Countrywide fabricated letters notifying a client of escrow charges to justify a foreclosure suit the company was pursuing. (NY Times, Jan. 8th)

"Credit-default swaps are perhaps the most egregious offenders [in today's banking system.] Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.'' – Bill Gross, manager of PIMCO, the largest bond fund in the world. (Bloomberg, Jan. 8th)

Subprime Fallout

  • Countrywide Loses Most Since 1987 on Bankruptcy Bets (Bloomberg, Jan. 8th) Countrywide Financial Corp. (CFC) dropped 23%, to $5.89 [midday], the most since October 1987... amid speculation the largest U.S. mortgage lender will file for bankruptcy... Broker Phoenix Partners Group: Credit-default swaps tied to Countrywide's debt soared to a record as investors demanded 30% upfront and 5% a year to protect from a Countrywide default for five years. Yesterday, investors were demanding 20% upfront and 5% a year. Contracts trade on upfront payments when the market sees a high risk of default."

  • Pending Sales of Existing U.S. Homes Fell in November (Bloomberg, Jan. 8th): "Treasury Secretary Henry Paulson said evidence shows the housing decline "has further to run.'' The Treasury chief indicated the outlook may prompt an expansion of the plan Bush administration officials brokered with mortgage lenders last month. The initiative was designed to make it easier to negotiate affordable loans and freeze some adjustable-rate mortgages at current rates. "One thing we will consider is maybe expanding this beyond subprime borrowers to other borrowers,'' Paulson said.

  • Baltimore Is Suing Bank Over Foreclosure Crisis (NY Times, Jan. 8th): "Baltimore’s mayor and City Council are suing Wells Fargo Bank, contending that... in 2006, Wells (NYSE:WFC) made high-cost loans, with an interest rate at least three percentage points above a federal benchmark, to 65% of its black customers in Baltimore and to only 15% of its white customers in the area... Similarly, refinancings to black borrowers were more likely to be higher cost than to white ones and to carry prepayment penalties... The complaint requests unspecified damages to cover the diminished property tax revenues and higher costs that the city said it had incurred. Additional costs include those for fire and police protection in hard-hit neighborhoods and expenditures to buy and rehabilitate vacant properties."

  • Lender Tells Judge It ‘Recreated’ Letters (NY Times, Jan. 8th): "The Countrywide Financial Corporation fabricated documents related to the bankruptcy case of a Pennsylvania homeowner... raising new questions about the business practices of the giant mortgage lender at the center of the subprime mess. The three letters from Countrywide addressed to the homeowner — claimed that the borrower owed the company $4,700 because of discrepancies in escrow deductions. [The borrower and her lawyer claim they never received the letters.] Countrywide’s local counsel described the letters to the court as “recreated..." The [case] is one of 300 bankruptcy cases in which Countrywide’s practices have come under scrutiny in western Pennsylvania.”

  • The Coming Credit-Card Crunch (Yahoo! Finance, Jan. 7th): "Market research firm TowerGroup: As of Q3'07... credit-card balances increased by 7% on an annualized basis, [vs.] average annual increases of 2% over the previous six years... Federal Reserve: In Q3'07, delinquency rates... at the country's 100 largest banks crept up to 4.47%, from 4.24% for Q3'06. During the real-estate boom years (2004-early 2006), when homeowners easily refinanced mortgages or took home equity loans to pay off mounting credit-card debt, delinquency rates rarely surpassed 4%. Charge-offs, or debt that has been removed from the banks' books and declared a loss, are also on the rise, at 4% at the end of Q3, compared with 3.84% a year earlier."

  • Mortgage Job Losses Topped 86,000 In 2007: Study (Conde Nast, Jan. 7th): "MortgageDaily.com: Mortgage lenders cut 86,071 jobs last year... California was hit hardest by the cuts, with a net loss of 15,933 mortgage jobs, or 18.5% of the nationwide total... Many mortgage experts expect further job losses in 2008 as hundreds of thousands of adjustable-rate mortgages reset higher, though MortgageDaily.com publisher Sam Garcia expects the pace of layoffs to slow. Countrywide made the most job cuts in 2007, eliminating 11,665 jobs... Other cuts totaled 6,628 at American Home Mortgage Investment Corp., 5,948 at First Magnus Financial Corp, 5,200 at New Century, 4,470 at GMAC LLC's Residential Capital LLC unit, and 3,580 at Washington Mutual (NYSE:WM)."

  • CIBC Ousts Shaw, Kilgour After Debt Writedowns (Bloomberg, Jan. 7th): "Canadian Imperial Bank of Commerce, the country's worst-performing bank stock last year, ousted its top investment banker and chief risk officer after announcing debt writedowns of as much as $3 billion, more than any other Canadian lender. CIBC World Markets CEO Brian Shaw will be replaced by TSX Group Inc. CEO Richard Nesbitt... CFO Tom Woods will replace Ken Kilgour as CRO. Canadian Imperial CEO Gerald McCaughey is shaking up his top executives after the bank announced pretax writedowns of almost C$1B ($1B) in 2007 on investments tied to U.S. subprime mortgage securities. CIBC said Dec. 19 it may take additional writedowns of about $2B.

  • Interview: Master of the Debt Universe (Smart Guy Stocks in Seeking Alpha, Jan. 4th): "Corporate credit analyst and [hedge fund] trader: Liquidity is extremely poor and credit spreads are near all-time wides. With spreads where they are, issuing debt is very expensive for companies. Many financial corporations,[once] able to fund themselves by paying as low as 50 basis points above Treasuries for issuing 10-year paper... are now forced to pay 3-5 times as much... In mid 2006 Wachovia (NASDAQ:WB) issued 10-year senior bonds at Treasuries plus 70 bps. Now they would have to pay Treasuries plus 170 bps or more... Bear Stearns (NYSE:BSC), Merrill Lynch (MER) and Countrywide (CFC)... have to issue much, much wider [i.e., more expensive debt]."

  • Short -Term Treasuries Prices Say Investors Are Pretty Spooked (Naked Capitalism, Jan. 6th): "Even though interbank rates have come down, in all likelihood due to the operation of the Fed's Term Auction Facility, Treasury prices indicate that investors are still worried about credit and counterparty risk. This may in part be a reaction to the losses suffered by enhanced cash funds and money market funds (although the latter and some of the former have been absorbed by fund sponsors)."

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