Just When You Thought It Couldn’t Get Worse…
The Government steps in. HousingWire with the latest:
A new bill introduced today by Reps. Brad Miller (D-NC) and Linda Sánchez (D-CA) seeks to repeal the home mortgage exception in the current U.S. Bankruptcy code:
… the Miller-Sánchez bill will treat home mortgages the same as mortgages on investment properties and family farms. The bill repeals a provision that prohibits a bankruptcy court from modifying a home mortgage, but allows a bankruptcy court to modify any other secured debt, including mortgages on other properties.
Called the Emergency Home Ownership and Mortgage Equity Protection Act (H.R. 3608), the bill would make it possible for a bankruptcy court to restructure a home mortgage — meaning a bankruptcy judge could change interest rates or alter principal amounts as part of a Chapter 13 restructuring plan.
This bill must be even more terrifying for mortgage lenders, investors, and anyone involved in the lending industry. One might ask how a bill that would obviously make it even harder for sub prime borrowers to obtain first and second mortgage loans will in fact help them.
Clearly the government is blindly lashing out, hopeful in it’s desperate attempts that it can succeed in finding any solution to at least stem the coming economic disasters. Sadly, it would appear they have yet to find a workable solution.
When All Else Fails, Blame Investors
Using the ultimate fall back excuse of Western economies, owners of Northern Rock bank have finally found someone other than themselves to blame for their banks recent disintegration: Speculative owners aka ‘Short Sellers.
According to the Financial Times:
The biggest shareholder in Northern Rock warned on Friday that aggressive short-sellers would pick a new mortgage bank to target if the Bank of England did not maintain “indefinite” support for the Newcastle lender.
Philip Richards, chief executive of hedge fund manager RAB Capital, also called on institutional shareholders to stop lending out shares of the bank, a move that would force short-sellers to buy stock to cover their positions. Short selling involves borrowing shares to sell, betting the price will fall.
Mr Richards bought a 6.05 per cent stake on Wednesday and Thursday for his Special Situations fund, although he immediately lost money as the shares fell 28 per cent on Thursday. On Friday they rose 4.9 per cent to 194.3p.
“Everybody will suffer if Northern Rock is allowed to go to the wall, even if depositors are protected,” he said.
Everyone will suffer if Northern Rock isn’t allowed to get out of debt, and make us millions? Sounds a bit dire! It’s interesting that they don’t mention that they themselves will suffer most of all should Northern Rock recover, and gain the most should the Bank do better.
Germany to Suffer From British Banking Bust
Fallout from the UK banking disaster could soon affect the German economy as well. One must wonder how far it will spread. Is Utah next?
SpiegelOnline reports:
The crisis at the British mortgage financer Northern Rock could also affect German investors and banks, SPIEGEL has learned.
As a result of the US subprime mortgage crisis (more…), the fifth-largest British mortgage lender got into refinancing problems last week and had to be bailed out with a financial injection from the Bank of England.
Like financial institutions in the US, Northern Rock had been re-selling mortgage debt to investors for years, in the form of exotic financial instruments bearing confidence-inspiring names like Granite, Dolerite and Whinstone.
Among those investing in such securities were German investment funds, who were attracted by their generous interest rates. According to its half-year report, funds offered by the Deutsche Bank subsidiary DWS Investments have stakes in Granite, while Allianz Global Investors has funds with investments in Granite and Dolerite.
A banking bust here in the United States could cause depositors to lose any deposits beyond $100k. For that reason, it’s often wise to invest excess funds in your own home. This can be accomplished using a Utah home equity loan.
CIT to Sell $4.2 Billion in Mortgage Bonds to Freddie Mac
In a second mortgage sell off, CIT Group has announced plans to sell off a huge amount of it’s mortgage debt on the secondary market.
Reuters reports:
The deal is expected to close later this month. CIT Group has borrowed $2 billion from Morgan Stanley against its expected proceeds from the sale.
The move was seen as a positive by investors concerned about CIT Group’s access to short-term credit markets. The company’s shares rose as much as 9 percent before giving back most of their gains. The cost of protecting CIT Group’s debt against default dropped dramatically.
New York-based CIT Group is still borrowing in commercial paper markets, but financing with short-term debt has become more expensive for many companies in recent months, with some issuers finding themselves shut out entirely.
Good news perhaps for CIT, bad news for the American government that will be buying up those loans.
HSBC to close Sub Prime Lending Unit, Fire 750
Reuters has the latest on the HSBC close down:
HSBC Holdings Plc (HSBA.L: Quote, Profile , Research), Europe’s biggest bank, said on Friday that it would close its U.S. subprime mortgage unit, cutting 750 jobs and taking an $880 million writedown, because the business is no longer sustainable.
For HSBC, which is under pressure from activist investors to shake up its corporate governance, it was the latest blow from the meltdown in the U.S. market for loans to home buyers with poor credit histories.
Decision One has restructured operations in the past year as defaults on risky subprime loans to people with weak credit have escalated. The unit centralized loan processing and underwriting and reduced the number of operating centers to two from 17.
Decision One relies on a network of independent mortgage brokers to find borrowers and to submit loan applications, a model that has been curtailed or discontinued by other lenders burned by lax underwriting standards and outright fraud.
An $880 MILLION DOLLAR writedown? That is a huge amount of money for a lender. Imagine how they have to pay off mortgage debt from foreclosures in order to reach such a high number. The losses are amazing.
Further Trouble for Northern Rock
Ailing British lender Northern Rock has found its value plummet despite a promised bailout from the Bank of England. The Financial Times has further details:
Northern Rock’s market capitalisation has shrunk to less than 1 per cent of its assets. That means wild swings: within one hour the shares moved by 36 per cent. It has also attracted bottom-fishers, with a prominent hedge fund taking a stake and buy-out vehicles said to be circling. Clearly, if Northern Rock’s business recovered fully, it would be a steal on about two times 2006 earnings and half of adjusted book value. But there is a convincing case that the shares will fall further.
Critically, market borrowing rates – three-month Libor is 6.36 per cent – remain above the roughly 6 per cent yield on Northern Rock’s loan book. If this book was gradually run down and funding rolled over at market rates, net interest margins would turn negative. Citigroup takes adjusted book value of 380p per share and then deducts estimated running losses to get to a range of 200p to 324p. That is above yesterday’s close of 172p, but impairments must also be considered. After assuming write-offs of less than 1 per cent of assets, Citi’s standalone fair value range falls to 6p to 130p.
A market value of 1% of total assets is a sign that investors have next to no faith in the lender having much of a future. A similar situation to a lesser extent has plagued homeowners who find themselves owing more on their homes through mortgages and home equity line of credit loans than the property is worth.
Bad News for Standard Pacific Homebuilders
Some bad news for one of the larger homebuilders in the United States.
Fitch Ratings assigned a “junk” rating to homebuilder Standard Pacific Corp.’s proposed $100 million convertible debt offering.
The ratings agency assigned a “B” rating, which means the debt is speculative and subject to very high credit risk. The non-investment grade rating also means Standard Pacific will have less favorable borrowing terms than if the debt received an investment grade rating.
Fitch also noted its “Negative” outlook for the company, due to “a more challenging outlook for homebuilders during the balance of calendar 2007 … and probable future weakening in the housing market in 2008.”
In aftermarket trading shares of Standard Pacific shares fell 1 cent to $7.04, after falling $1.05, or 13 percent, during Monday’s trading session.
As homebuilders, lenders, and banks find themselves increasingly unable to get loans it seems likely that many of the major players in the lending industry will remain unable to get out of debt.
One thing is clear, investors consider companies involved in home building and lending to be risky investments.
Greenspan Supports Hedging One’s Bets
Alan Greenspan, appointee of Presidents Ford, Reagan, Bush I, Clinton, and Bush II has stated that he expects the interest rates in this country to skyrocket up past 10%. In an interesting editorial regarding his position Dean Baker writes:
But Greenspan’s greatest skill has been to carefully position himself on key issues so that he could cover his backside, regardless of what happened.
This ability has gotten a great deal of attention in the context of his qualified support of President Bush’s tax cut. He gave public testimony that was widely taken at the time as an endorsement of the tax cut. Of course he did include many qualifications, which were laid out in careful Greenspanspeak. Now that it is clear that the tax cuts lead to large deficits (which he doesn’t like), he has chosen to emphasize how he had qualified his support. Of course Greenspan could have emphasized his qualifications at the time – before the tax cut was approved – but he chose to let the public believe that he endorsed the plan.
Greenspan’s discussions in his book of the stock and housing bubble are similar. He sort of saw the bubbles, and sort of, kind of, tried to do something about them. But hey, what can the Fed do about financial bubbles? As Greenspan said, how could he think he knew more about financial markets than the collective judgment of millions of well-informed investors?
Considering this view, that the government can do little about bubbles, it would be wise for those looking to invest to find a way to hedge themselves against the housing market.
A simple method of doing such would be to purchase gold and use a 2nd mortgage to pay down your home. That way, should housing continue to fall, you’ll still be in your home with few worries, and should housing recover you’ll find yourself just as well off.
American Home Facing Investigation
Maryland has announced that it will be opening an inquiry on American Home Mortgage after it defaulted on its tax payments to the state. According to the AP:
The Maryland Commissioner of Financial Regulation filed an inquiry with American Home Mortgage on Friday. Melville, N.Y.-based American Home Mortgage has five days to respond to the letter, said Joseph Rooney, the deputy commissioner for Maryland’s financial regulator.
Officials in New York and Washington state are also looking into bounced checks there.
Mortgage servicers typically collect property tax payments each month with a borrower’s mortgage payment. The property taxes are then placed in an escrow account and held until property tax bills are due. Because they are placed in an escrow account, funds should always be available to make the payments.
The Maryland regulator asked American Home Mortgage to explain why the initial checks failed to clear and to clarify the scope of the incident, Rooney told The Associated Press.
Having a mortgage with an ailing lender should be a cause for concern for any homeowner. American Home’s failure to pay the property taxes for its borrowers could potentially result in borrowers losing their homes to tax auctions. This serves as an excellent motive to pay off mortgage loans early.
Online Advertising to Benefit From Housing Crunch
One of the few areas other than Utah that stands to actually benefit from the housing mess looks to be Online Advertising. Finfacts reports:
Online advertising spending in the US is forecast is continue its strong growth even if a US economic downturn squeezes the advertising sector as a whole.
It is claimed today that pressure on companies to cut costs if the economy softens could even accelerate the switch in spending from traditional media to more targeted and measurable digital forms.
The Financial Times says that some of the US mortgage lenders embroiled in the recent lending crisis have stepped up online spending, attracted by the ability to entice people to click on ads.
“If marketing budgets shrink, and they are often the first to be cut in a downturn, digital will still continue to grow,” Eric Bader, managing director of digital at MediaVest, told the FT. “The focus will be on advertising that can be measured for effectiveness, and online will gain share relative to television, newspapers or radio.”
Paying down a home early in Utah with a Utah home equity loan may leave one to having extra to invest, in which case an investment in Online Advertising may prove profitable.