Housing Market Tracker - Sell Your Yacht to Buy Subprime

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Includes: C, GM, LNC, PMIR, THMR
by: Judy Weil

Quote of the Day

"One of the reasons I sold my yacht was to take all of my money to go and buy second liens at 30 cents on the dollar." - John Devaney, the bond broker and hedge-fund manager of United Capital Markets Holdings who had to freeze his fund to prevent a run of withdrawals and was forced to sell his yacht and private plane after losses on mortgage securities. Devaney now says that some AAA-rated mortgage bonds are a good investment. (Bloomberg, Feb. 4th)

Subprime Fallout

Lender GMAC Reports Big Loss. "GMAC LLC said Tuesday it lost $724 million in Q4'07 as the housing slump and disruptions in the credit and capital markets battered the lender's home mortgage division... General Motors (NYSE:GM) owns 49%of GMAC after selling the remainder of the business in that year to a Cerberus Capital Management LP for $14 billion. The company said its mortgage business Residential Capital, or ResCap, lost $921M during Q4, marking its fifth straight quarterly loss. Losses skyrocketed from write-downs on credit residuals and mortgage-backed securities, restructuring charges and higher funding costs." (Knox News, Feb. 6th)

CIFG's 'AAA' Insurer Financial Strength Ratings Placed On Negative Watch – Fitch. "Fitch Ratings has placed the 'AAA' insurer financial strength ratings of CIFG Guaranty, CIFG Assurance North America Inc and CIFG Europe -- subsidiaries of CIFG Holding -- on negative watch... Fitch's [says it's] updating certain modelling assumptions in its ongoing analysis of the financial guaranty industry [and] that modelled losses for structured finance collateralized debt obligations (SF CDOs) could increase materially due to these updated projections... Fitch expects that both simulated capital model losses and expected losses will increase materially for CIFG because of the company's significant SF CDO exposure within its insured portfolio, which was $9.2 billion as of Sept 30, 2007." (Forbes, Feb. 6th)

U.S. Central Federal Credit Union Of Lenexa Takes $760 Million Markdown. "U.S. Central Federal Credit Union of Lenexa, which invests funds on behalf of the nation’s regional credit unions, [announced] a $760 million markdown on the $40 billion in investment securities it holds for sale... Although the markdown represents only a fraction of U.S. Central’s investment portfolio, it prompted Standard & Poor’s to lower the institution’s long-term debt rating by one notch, to AA+ from AAA... Though little-known outside credit union circles, U.S. Central serves much the same role for [the nation's] credit unions that the Federal Reserve serves for banks... providing investment, liquidity, lending, payment and cash management services." (Kansas City Star, Feb. 5th)

Thornburg Returns to Profitability in 4Q. "[After bankruptcy fears in Q3,] Thornburg Mortgage Inc. has reported a profitable Q4'07... Net income was $64.8 million, or $0.33/share... compared with $80.3M, or $0.68/share, for Q4'06. [For 2007,] a net loss... of $874.9M, compared with net income of $297.7M for 2006. President/CEO Larry Goldstone: "There are a lot of positive trends... in Q4... Our declaration and subsequent payment of the common dividend... Our Q4 earnings were clearly above the current dividend level and above the consensus estimates, a decline in our cost of funds versus Q3 and our ability to successfully finance our mortgage loans through securitization at an attractive cost of funds and spread." (New Mexico Business Weekly, Feb. 5th)

Recovery For Sivs Unlikely Given Basel II Rules-Panel. "Bond industry American Securitization Forum conference in Las Vegas: The troubled market for so-called structured investment vehicles [SIVs] is effectively dead and likely to stay that way given new international rules for matching banks' reserves to their risks, panelists said... The new Basel II international accord, to be applied to U.S. banks with total assets of $250 billion or more, is likely to make investing through off-balance sheet SIVs less attractive for banks, which are the main sponsors of such vehicles... Implementation begins in April." (KPLC TV, Feb. 5th)

Give the Banks Some Credit. "Op-Ed, NY banker Howard Milstein: "The federal government could help... banks of all sizes could regain their capital immediately... by guaranteeing the principal of [subprime] mortgages for 15 years... [while] banks would... leave their “teaser” interest rates on those loans in effect for the entire 15 years. This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value — and a significant amount of the banks’ lost capital would be restored. Plus, the banks would receive, from most of the homeowners with subprime mortgages, up to 15 years of teaser-rate payments." (NY Times, Feb. 5th)

Subprime Lender Accredited Plans Comeback. "Founder Jim Konrath: Accredited Home Lenders, a top subprime mortgage loan company in 2007 whose risky practices forced it to stop lending and slash its staff... has originated about $86 million in non-prime loans since November, with $50M of that in January... The company, which produced as much as $2 billion a month during the housing boom, is also eyeing a return to the asset-backed securities market that remains frozen in the aftermath of soaring defaults on risky U.S. loans. "We want to build a portfolio to test the market," Konrath told investors at the American Securitization Forum's meeting in Las Vegas." (Reuters, Feb. 5th)

Banks Said To Be Working On Bailout Of Bond Insurer FGIC. "WSJ: A group of banks are considering a bailout of bond insurer Financial Guaranty Insurance Co., which is 42%-owned by mortgage insurer PMI Group Inc. (PMI). The move is the latest initiative to shore up the nation's largest bond insurers to ensure they maintain their "AAA" ratings... WSJ [says] the potential financial bailout... is being led by Calyon, the investment-banking unit of French bank Credit Agricole SA, [and] includes UBS AG, France's Societe Generale, Citigroup Inc. (NYSE:C) and Barclays PLC. France's BNP Paribas, parent company of Bank of the West, may join the group." (San Francisco Business Times, Feb. 5th)

Subprime Investments Have Effect On Life Insurer Earnings. "For Lincoln National Corp. (NYSE:LNC), which sells life insurance, annuities, pensions and investment management services... Q4 earnings were dragged down by $71 million in writedowns... on its $9.1 billion residential loan-backed securities and holdings in financial companies including Northern Rock and Residential Capital Corp., a unit of GMAC Financial Services (GM)... UBS: Other life insurers with big investments in residential mortgage-backed securities, asset-backed securities and collateralized debt obligations include MetLife (NYSE:MET), with around 21% of its invested assets in such securities; Nationwide Financial Services (NFS) with 25%; Protective Life (NYSE:PL) with 30%, and Genworth Financial (NYSE:GNW) with 15%." (CNN Money, Feb. 5th)

States Could Unite In Subprime Lending Probe. "State attorneys general are talking to each other and could join their separate investigations over the subprime mortgage meltdown, Iowa Attorney General Tom Miller said: "There's been no movement to consolidate any of the cases, but nothing's been ruled out either..." Miller, who took a lead role on previous nationwide settlements over questionable lending practices that netted hundreds of millions of dollars from Ameriquest Mortgage Co. and Household Financial, said attorneys general are talking to each other about subprime mortgages... He added that multistate legal efforts demand enormous resources for investigations, negotiations and litigation." (Reuters, Feb. 5th)

United Capital's Devaney Says a Major Bank May Fail. "CEO of United Capital Markets Holdings John Devaney, the bond broker and hedge-fund manager who sold his yacht after wrong-way bets on mortgage securities, said there's... a one in five chance that a "major international investment bank'' will fail. Mortgage bonds that lack guarantees from government-linked entities such as Fannie Mae and aren't backed by subprime mortgages may lead to more losses for banks... The price drops "may be more of a problem than the subprime crisis,'' he said. Price declines in the market for "non-agency'' mortgage securities accelerated in the past two months... Some AA rated bonds can be bought for 20 cents on the dollar, Devaney said." (Bloomberg, Feb. 4th)

Housing to Hurt Economic Growth. "[Government] udget documents also suggest that the fallout from housing market issues could hit the banking industry particularly hard because of the consolidation among major banks. "This consolidation, combined with the fact that many of the larger institutions with significant market and trading presence are those most affected by the current market conditions, has increased the potential risks of a major failure that could put a significant strain on the resources of the Federal deposit insurance funds," the documents say." (Wall St. Journal, Feb. 4th)

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