Housing Market Tracker - Killer Leverage

by: Judy Weil

Quotes of the Day

"If you have leverage, you're stuffed." - Alex Allen, CEO of Eddington Capital Management Ltd. In London. Banks are now demanding more collateral and stiffer terms to loans, and making unprecedented margin calls in the credit crisis. Allen likens the crisis to an upside down bank panic, with bankers, not depositors, concerned they won't get their money back. (Bloomberg, Mar. 10th)

"I do not have any information on the GSEs that the market does not have. Nevertheless, in assessing the risk of further credit disruptions this year, I would put the GSEs at the top of my list of sources of potentially serious trouble." - William Poole, president of the St. Louis Federal Reserve Bank, about Fannie Mae and Freddie Mac (Government-Sponsored Entities). (Barron's, Mar. 10th)

"It seems like everyone is hurting except for you.”- Representative Henry A. Waxman, Democrat of California, the chairman of the House Committee on Oversight and Investigations, said to a panel of executives including former Citigroup CEO Charles Prince, former Merrill Lynch CEO Stan O’Neal and Countrywide Financial CEO Angelo Mozilo. Waxman presided over a congressional hearing on excessive executive pay at U.S. corporations, particularly those hurt by the subprime crisis. (NY Times, Mar. 8th)

Subprime Fallout

Bonds Explode As Loans Implode. “Palm Beach County taxpayers are paying higher interest rates on bonds for some public projects. [For example:] Rates on a $6.5 million water and sewer bond shot from a range of 3.5%-4% to as much as 9%. The bond issue was insured by Ambac Financial Group Inc. (ABK), one of the bond insurers hobbled by write-downs on subprime mortgages. P.B. County debt manager John Long: "The way the market perceives any bond issue that has an insurer's name on it is what's causing the problem." At $6.5M, the variable-rate issue is a small piece of the county's $1 billion-plus in debt." (Palm Beach Post, Mar. 11th)

Car Dealers Give Credit Where Due. “Credit industry tracker Bankrate.co: Shoppers with FICO credit scores of 750 or higher on the 850-point Fair Isaac Corp. (FIC) scale… may qualify for interest rates in the 5%-6% range. But those with tarnished credit trying to buy an old car probably will face rates at least twice as high. The subprime mortgage crisis is partly to blame for the growing spread in rates, some credit experts suggest. Although banks say they are not experiencing a significant jump in vehicle repossessions, they acknowledge they are scrutinizing car loans more closely than they did a few years ago… A Florida used car dealer said repossessions are way up.” (Daytona Beach News Journal, Mar. 11th)

Fannie May Fail. “Barron's: Fannie Mae reports a net worth of $45.4B, $3.9B more than its minimum capital requirement of $41.5B. BUT, $13B of that are deferred tax credits that only have value if the company earns enough money to trigger them -- an unlikely scenario… Fannie tells regulators it will have to pay out $15.4B in guarantees on its $2.4T guaranty book. Yet its "fair value" balance sheet estimates guarantees at $20.4B... Fannie could be hit by cumulative credit losses of over $50B… There's no doubt the government will be forced to back Fannie's debt and guarantee obligations, much of which are owned by major U.S. creditors like China and Japan.” (Barron's, Mar. 10th)

Countrywide Is Probed by FBI for Possible Fraud, Person Says. “WSJ: Countrywide Financial Corp. (CFC), the largest U.S. mortgage lender, is under investigation by the FBI for possible securities fraud. Investigators are focusing on whether Countrywide officials misrepresented the company's financial position and the quality of its mortgage loans in securities filings… Countrywide is among at least 14 companies that the FBI is checking for possible accounting violations related to the subprime lending crisis, including mortgage lenders, housing developers and Wall Street firms that package loans as securities.” (Bloomberg, Mar. 9th)

ALL BUSINESS: CEO Pay Rise Shenanigans. “SEC filingMonday: WaMu’s board changed the executive pay structure to exclude certain credit costs when calculating cash bonuses. Now, 30% of the bonuses will be tied to operating profits excluding expected mortgage defaults or the costs of real estate foreclosures. Another 25% of the calculation will exclude some restructuring and business resizing costs as well as foreclosures. The board will "subjectively" evaluate the company's performance in credit-risk management. Washington Mutual’s… revised pay structure gives [executives] little incentive to minimize credit costs, said analyst Frederick Cannon of the investment firm Keefe, Bruyette & Woods.” (AP, Mar. 8th)

Tight Credit, Tough Times for Buyout Lords. “On Friday, Carlyle Capital, a highly leveraged investment fund… teetered on the brink of insolvency as banks began calling in its loans... Carlyle Capital said Friday that it was “considering all available options” after it received additional margin calls, prompting some analysts to warn that more funds could struggle to meet increasingly tighter financial requirements. The shares were suspended from trading on the Amsterdam stock exchange after plunging 58% the day before. Carlyle Capital employed enormous leverage, borrowing 30 times the value of its assets to invest in mortgage securities issued by Fannie Mae and Freddie Mac.” (NY Times, Mar. 8th)

Fannie Mae Datapoint of the Day. "Fannie Mae's credit default swaps are trading over 200bp, despite their implicit government guarantee. Writing protection at these levels seems like a no-brainer to me: even if there is an event of default, recovery is going to be very close to par, and you get all the insurance premiums in the mean time." (Felix Salmon in Seeking Alpha, Mar. 7th)

Radian Group Inc. Appoints Catherine M. Jackson as Senior Vice President, Controller. “Radian Group Inc. (NYSE:RDN) today announced that it has appointed Catherine M. Jackson as SVP, Controller. Ms. Jackson will report to C. Robert Quint, CFO. Mr. Quint said, "Cathy's considerable financial services experience makes her an important addition to our senior leadership team and we welcome her to Radian. Cathy will add strength to our finance and accounting teams as Radian navigates the current challenging market conditions." Ms. Jackson has over 20 years of experience in accounting and corporate financial management responsibilities as well as significant experience in the real estate and the financial services industries.” (Press Release, Mar. 7th)

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