Subprime Is Back In Fashion [Housing Tracker]

by: Judy Weil

Quotes Of The Day 

“Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth.” - The IMF’s latest Global Financial Stability Report Market Update. The IMF said that despite capital raising by financials, balance sheets are still under stress and equity prices have falled sharply. (Housing Wire, July 28th)

“If you are here by the end of the day, you're okay.” – A Charlotte-based Wachovia supervisor wrote in an email to his staff. The supervisor was trying a bit of humor to calm his nervous staff amid rumors of firings. (NY Magazine, July 28th)

“You are being placed into the accelerated one-year analyst program – and it ends today.” An email sent to interns at Goldman Sachs after they had to eliminate 500 NY staffers in the wake of the subprime crisis. The young alums are being paid through August. (NY Magazine, July 28th) 

Subprime Fallout

Merrill's Subprime Woes Continue. “Singapore investment company Temasek will buy $3.4 billion worth of new Merrill Lynch (MER) shares, but on a net basis will pay only $900 million, with the rest being covered by a compensation payment from Merrill. Temasek invested $4.4B in Merrill in December 2007. At the time, it negotiated a price protection clause which stated that if Merrill sold stock within the next year at a price below $48/share, Merrill would compensate Temasek for the difference between the lower issue price and $48/share. Accordingly, Merrill has now paid Temasek $2.5B in compensation, which Temasek has agreed to reinvest in Merrill stock. Temasek does not have price protection on the new investment.” (Finance Asia, July 30th)

Lone Star's Splash. “Lone Star Funds' $6.7 billion dive into mortgage-backed assets dumped by Merrill Lynch & Co. shows how ready some investors are to move into this market... Last week, Lone Star closed its last wave of fundraising on two pools totaling $10B-- finishing with $7.5B in Lone Star Fund VI, the private-equity firm's biggest to date, and $2.5B in the Lone Star Real Estate Fund, which will co-invest with the other new fund. [This week,] the firm… agreed to pay 22 cents on the dollar for a portfolio of collateralized debt obligations, complex debt products that originally were valued at $30.6B. Lone Star's equity in the deal is $1.675B.” (Wall St. Journal, July 30th)

For Lehman, Surgery May Solve Problems With Mortgage Debt. “Lehman needs to [jettison] a $65 billion pile of residential and commercial mortgage-backed securities. Although… written down substantially, there is still a risk that their value could deteriorate further. To get rid of it… Lehman (LEH) would have to take another hit. [A] 15% [hit] would be about $10B, knocking a big hole in its book value of $24B... Lehman [could] raise more equity, but [only] at a big discount to the already depressed share price. [Or Lehman could] sell all or part of its asset-management and private-client business… Analysts estimate it could fetch as much as $10B, although as a distressed seller Lehman again might have to take a discount… That [would] take Lehman off the risk list.” (Wall St. Journal, July 29th)

Merrill Deal Seen As Template For Banks, Bond Insurers. “Merrill Lynch's renewed attempt Monday to unload beleaguered subprime securities at a steep discount could be the big splash into the pool that gets the party started for other banks in the same situation. Even though Merrill's move could lead to renewed write-downs of other banks follow its lead, investors reacted positively to the Merrill deal… Some traders, distrustful after earlier declarations by banks that the worst was over, say it's too early to tell if the disposal of these assets will result in a turnaround for battered financial stocks... The moves will result in a third-quarter write-down of $5.7 billion for Merrill.” (Dow Jones via CNN Money, July 29th)

For the FDIC, a Servicing Transfer of Historic Proportions.  “Inside Mortgage Finance: IndyMac (IMB) held the nation’s 8th largest residential mortgage servicing portfolio, at $200.7 billion by the end of Q1… The FDIC is tasked with managing the single largest servicing transfer tied to a failed bank in history… The next closest comparison would be Superior Bank, which failed in July 2001 and serviced a $3.7 billion portfolio of securitized subprime mortgages... This is more than 50 times larger… MBS investors have been on edge in recent weeks as the future of the servicing portfolio remains up in the air; $184B of the loans in the servicing portfolio were sold or securitized, with IndyMac retaining servicing rights.” (Housing Wire, July 29th)

Subprime Mess Sends Number Of Fraud Lawsuits Higher. “Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research study:  Investors sued 110 companies for alleged stock fraud in H1’08, up from 107 in H2’07. About half of the suits included claims related to subprime and other credit losses… Filings [were at] 53 in H2’06. Banks and other financial firms accounted for 63 of the 110 companies that were targeted this year. Suits filed in H1’08 targeted companies including MBIA Inc. (NYSE:MBI), SLM Corp. (NYSE:SLM), Morgan Stanley (NYSE:MS), Bear Stearns Cos… UBS AG (NYSE:UBS)… Goldman Sachs Group (NYSE:GS)… Market capitalization lost by companies in the time periods covered by stock-fraud suits [was] $587 billion.” (Int’l Herald Tribune, July 29th)

Blackstone Buys $2B Mortgage Fund. “Blackstone Capital Partners, an affiliate of the world's largest buyout firm (NYSE:BX), said Monday it has agreed to buy a $2 billion fund focused on acquiring whole mortgage loans and mortgage-backed securities from Bayview Asset Management LLC, the mortgage related asset management arm of mortgage finance company Bayview Financial LP.”  (Markets Media Online, July 28th)

CNA Buys More Subprime, Calls Mortgages `Attractive'.“CNA Financial Corp. (NYSE:CNA), the commercial insurer majority-owned by Loews Corp., is buying more securities backed by subprime debt and said it's made an 8% return on the riskiest home-loan holdings purchased this year… The company wrote down its subprime holdings by $64 million in the period.  Loews (LTR) CEO Jim Tisch affirmed in April the insurer's strategy of seeking mortgage assets after the collapse of the subprime market. “It's not for the faint of heart,” Tisch said after Chicago-based CNA added $550M in subprime and Alt-A investments in Q1’08 [and] $163M in subprime holdings in Q2.”  (Bloomberg, July 28th)

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