Quotes of the Day
“Capitalism without failure is like Christianity without hell.” and “Lenders and investors who were dumb enough to deal in subprime mortgages should not receive any special help.”– Berkshire Hathaway Chairman and CEO Warren Buffett.
“I suppose Mack meant that after the ninth inning, it’s game over for at least some of his team.” - An MBS trader who asked not to be identified by name, referring to CEO John Mack’s earlier remarks that the credit crunch was nearing its end, and Tuesday’s subsequent announcement that Morgan Stanley will be laying off workers.
Blackrock To Buy $15B Subprime Debt From UBS. “FT: Asset management firm BlackRock Inc. (NYSE:BLK) is to purchase a portfolio of subprime mortgage debt from UBS AG for $15 billion… at a 25% discount from its face value of $20B… The debt will be placed in a new fund that will be marketed to investors… UBS will hold a minority interest in the new fund and will be able to participate in any gains. The deal represents a contrarian bet the worst may be over in the credit markets and comes [after] recent mortgage asset purchases by Goldman Sachs (NYSE:GS), private equity firm TPG and hedge funds.”
Fannie Mae to Raise $6 Billion in Capital After Loss. “Fannie Mae (FNM), the largest U.S. mortgage- finance company, reported a wider loss than analysts estimated, cut its dividend and said it will raise $6 billion in capital as the worst housing slump since the Great Depression deepens. The Washington-based company tumbled as much as 12% in early trading and said its credit-market losses will be worse next year. The first-quarter net loss was $2.19B, or $2.57/share, compared with a loss of $0.64/share anticipated by analysts.”
Doubts Raised on Big Backers of Mortgages. “Fannie Mae and Freddie Mac (FRE) now… handle more than 80% of all mortgages bought by investors in Q1’08… more than double their market share in 2006…Their combined [required capital] cushion of $83 billion… underpins $5 trillion in debt and other financial commitments. The companies… suffered more than $9B in mortgage-related losses last year, and analysts expect those losses to grow this year… The companies are sitting on as much as $19B in additional losses that they have not yet fully acknowledged, analysts say. If either company stumbled, the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely.”
Buffett Advice: Buy Smart...And Low. “In what may spell trouble for bond insurers MBIA (NYSE:MBI) and AMBAC (ABK), Warren Buffett said, "We see every day that people are coming to us and paying more than they paid the original bond insurer to see that they have an insurer." Berkshire wrote $400 million in municipal-bond insurance in Q1’08 and is already licensed to operate in 49 states. "This is entirely a secondary-market business where people are telling us, 'We'll pay you just to back them up.'” People who already have insurance on a very low-risk investment (municipal bonds) are coming to Buffett and asking him to ensure that their existing insurance will be adequate.”
Countrywide Off, As Analyst Sees Deal Woe. “Shares of Countrywide Financial Corp. (CFC) fell more than 10% on Monday after an analyst called on Bank of America Corp. (NYSE:BAC) to scuttle plans to buy the nation's largest mortgage lender because of the falling value of its loan portfolio… BAC is almost certain to cut its offer price for Countrywide to as low to $2/share, from the initial agreement to pay $7/share, said analyst Paul Miller Jr., of FBR Capital Markets… BAC could face $20 billion-$30B in write-downs of Countrywide's mortgage loans pending completion of a deal for the troubled mortgage lender according to Miller.”
Banks Tighten Lending Standards On Mortgages And Other Loans. “Federal Reserve: More banks are tightening standards on home mortgages, other types of consumer loans and business loans in response to a spreading credit crisis. The percentage of banks reporting tighter lending standards was near historic highs for nearly all loan categories. The April survey found that nearly two-thirds of banks surveyed had tightened lending standards on traditional home mortgages. Fifteen percent said the standards had been tightened considerably. [Also,] tougher lending standards extend far beyond home mortgages to other types of consumer debt such as credit cards and home equity lines of credit.”
More Layoffs Ahead for Morgan Stanley, Lehman: Report. “CNBC: Morgan Stanley (NYSE:MS) execs are planning another round of layoffs at the Wall Street firm, this time hitting 1,500 employees. Citing senior sources inside the company, CNBC said that the cuts will span all business units. Morgan Stanley delivered better-than-expected earnings during Q1 despite absorbing $2.3 billion in write-downs tied to mortgage and related assets; which makes the expected cuts somewhat of a surprise.”
Equifax's New Mortgage Risk Tool. “Equifax, Inc., a provider of credit and consumer data, officially launched a tool Monday that's designed to help investors assess the credit risks associated with mortgage loans originated in certain geographic areas. Equifax released the new tool—Mortgage Market Risk Insight—at the MBA Secondary Market Conference & Expo this week. The new analytical tool provides investors with the most up-to-date credit information on borrowers living in certain zip codes.”
FGIC Says Gets Multiple Proposals For Capital. “FGIC Corp, a bond insurer, said on Monday it had received proposals from a range of strategic partners, reinsurers and private equity firms to enhance its capital position… While they complete their due diligence… the company said it will work closely with the New York State insurance department throughout the process. FGIC's owners include PMI Group (PMI), Blackstone Group (NYSE:BX), Cypress Group and CIVC Partners LP.”
Originations of Privately Insured Mortgages Increased in March. “Mortgage Insurance Companies of America reported slightly higher originations of privately insured mortgages in March compared with February. During March, 139,610 borrowers used private mortgage insurance to buy or refinance a home, slightly more than the February total of 139,077… The dollar volume of primary insurance written on newly originated 1-to-4 family conventional mortgage loans totaled $20,495.1 million in March, a 6.8% increase from February’s $19,198.8M. Traditional primary new insurance totaled $20,309.2M, and bulk primary new insurance totaled $185.9M in March. Year-over-year, the March 2008 total of traditional primary new insurance written represented an increase of 27.7% from the March 2007 total of $15,909.7M.”
Cash-Out Refinance Share Smallest Since Q2 2004. “Freddie Mac quarterly finance review: In Q1’08, 56% of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5% higher than the original mortgage balances. This was the smallest cash-out refinance percentage since Q2’04. Further, the share for Q4’07 was revised down to 77%. Frank Nothaft, Freddie Mac VP and chief economist: "While equity conversion is down, regular refinance activity has stepped up… "During Q1 about $29 billion in home equity was cashed out through refinance of conventional loans made to prime borrowers, off from a downwardly revised $36 billion cashed out in Q4’07.”
Get Seeking Alpha's housing market coverage by email -- it's free and takes only seconds to sign up.