Housing Crisis To Continue For Years To Come
Things are looking bleak, and even Christmas time will do little to change the housing market. With ever increasing numbers of foreclosures, it appears unlikely that anything will be able to stimulate the market. The New York Post recently published an article that supports this:
A barrage of grim reports yesterday raised fears of an unprecedented wipeout of home prices over the next three years, erasing as much as 30 percent of a home’s value in many areas.
That bleak assessment from Morgan Stanley and Moody’s Investors Service hit just as another report warned that even good credit risks are suddenly turning delinquent on their payments, dragging down mortgage banking’s healthiest chunk of business.
The Mortgage Bankers Association says it’s alarmed by the surprising jump in third-quarter delinquencies on prime loans held by the most credit-worthy owners.
Morgan Stanley said the ongoing collapse of junk mortgage paper, combined with a decline in available credit, has plunged the US real-estate industry into “a very different environment on the heels of market events that could force a housing recession like none ever imagined or experienced.”
“History has never seen such extended periods of house-price declines,” it added.
With the market locked down, and lenders hesitant to issue loans or 2nd mortgage notes, there is little that can stimulate a recovery short of a massive government bailout.
Lennar Sees Downgrade
The AP has the latest on the mortgage crisis:
A Deutsche Bank Securities Inc. analyst cut his rating on Lennar Corp. Friday, saying joint-venture agreements with real estate and investment entities may come back to haunt the homebuilder as a housing crisis widens.
Homebuilders are facing high cancellations amid a glut of unsold homes on the market, as potential purchasers are skittish about the market as home prices fall. Some are finding it difficult to find mortgage financing because credit markets have tightened.
Nishu Sood, in a client note, cut his rating on the stock to “Hold” from “Buy” and cut his target price to $17 from $36. Lennar owns about $1.1 billion in equity in various joint ventures, he wrote.
Obviously, most good investors are shying away from anything having to do with the housing market. What’s surprising is that investors didn’t do so sooner. Obviously this house of cards had to fall sooner or later, the only real surprise being that no one saw it coming.
Smart consumers are now investing in their own homes using 2nd mortgage loans, rather than trying to play the market during a downturn.
Scwab dumps SIVs
Schwab, a money manager has been making some interesting moves in the financial market.
These changes have are affecting the money market’s funds exposure to SIV debt.
Marketwatch has the latest:
By year’s end, Hintz said, Schwab’s exposure to SIVs should drop to around 3.5% of assets. That’s based on typical maturity structures of the firm’s underlying money market assets, he added.
Looking out to the end of February, Hintz wrote in the report that he expects such commercial paper to represent slightly more than 2% of the funds’ total assets. Hintz also says that in the second half of 2008 almost all of Schwab’s SIV exposure should be eliminated.
Bernstein maintained its outperform rating on the stock and $27.50 target price.
“Like other large mutual fund complexes, Schwab is unlikely to ever allow its funds to drop below a dollar and would, if necessary, step in to buy the SIV commercial paper at par,” Hintz said.
A recent article in The Wall Street Journal highlighted the exposures of several money market funds to SIV debt. One of those was Schwab’s Advisor Cash Reserves Fund.
These changes will doubtlessly affect the rates on loans such as 2nd mortgage loans, which will make it harder for Americans to afford their homes.
Mayors Meet to Discuss Foreclosure Woes
An article published by CNN gives details of the latest meeting of the United States Conference of Mayors. According to the article:
- The mortgage meltdown will take a heavy toll on home prices in 2008 with declines expected to average 7 percent across the nation and lost property value of $1.2 trillion, according to the United States Conference of Mayors.
- The organization has representatives from more than 1,100 cities and were meeting to address problems brought on by spikes in foreclosure rates.
- “Today the foreclosure crisis has the potential to break the back of our economy, as well as the backs of millions of American families, if we don’t do something soon,” said USCM President Douglas Palmer, Mayor of Trenton, N.J., in a written statement.
- Municipalities will start to feel the pinch with a decline in the property tax growth rate. Some places could even experience an outright decline in collections. The housing decline will also affect state coffers, as transfer taxes plummet along with home sales volumes.
I’m not sure how productive this meeting was. Sure it’s a good thing to discuss concerns about current issues, but it should lead to ideas for solutions. We don’t need our elected officials to sit around and share their complaints and woes. What they, and everybody else should be doing is working to find solutions. We may not be able to stop the credit crisis dead in its tracks, but we can try to curb its effects. We should be spending our time and energy figuring out how to do that, not just vocalizing our fears. One creative idea for solving a debt problem is to take out a 2nd mortgage.
Interbank Trading Suspended in Europe
An article published by Bloomberg takes a look at the recent agreement among European banks to suspend trading in the second mortgage debt market. According to the article:
- European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region’s main source of financing for home lenders.
- The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26.
- “In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads,” the committee of banks and borrowers “recommends that inter-bank market making be suspended,” the council said in an e-mailed press statement.
- “Conditions have really weakened over recent days,”said Andreas Denger, a covered bond analyst at Calyon SA in London. “Most investors are not willing to invest in the current volatile market.”
- “Without market making between banks, investors will shun the sales of new covered bonds.”
Is it any wonder that banks worldwide are scared? After seeing what has been happening in the United States, it would be foolish for other nations to not take serious precautions. But will it be enough? Right now, all they can hope to do is “avoid undue over-acceleration” of the problem. That doesn’t mean that they will be able to stop the credit crisis from seriously hurting their economy. All anyone can do now is wait and see if these decisions will help anything.
The Rising Magnitude of the Subprime Crisis
An article published by Fortune Magazine takes a look at the worsening conditions and the long list of victims of the subprime 1st and 2nd mortgage crisis. Here is an excerpt from the article:
Two things stand out about the credit crisis cascading through Wall Street: It is both totally shocking and utterly predictable.
Shocking, because a pack of the highest-paid executives on the planet, lauded as the best minds in business and backed by cadres of math whizzes and computer geeks, managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages.
Predictable because… as the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.
In pure destructive power, the subprime mess has become Wall Street’s version of Hurricane Katrina. It has wreaked havoc on the nation’s iconic brokerage firm, Merrill Lynch and biggest bank, Citigroup, which have announced billions of dollars in losses and parted ways with their celebrated CEOs, E. Stanley O’Neal and Charles Prince.
The article goes on to give more details about the losses felt by Merrill Lynch and Citigroup, but I particularly liked this excerpt because it has a good grasp on the magnitude of the credit crisis and gives a basic explanation as to why it has gotten as bad as it has. I think it is important that everyone understand this so that nobody is caught off guard when the crisis only continues to worsen.
Swiss reinsurance firm loses over $1 billion
Lossses continue to pile as the Swiss company, Swiss Reinsurance Co., the world’s largest reinsurer announces having lost $1.07 billion due to US subprime mortgage problems.
Swiss Re fell the most in more than 4 1/2 years in Zurich trading on the loss, which amounts to 981 million francs after tax. Losses occurred on two credit-default swaps Swiss Re sold to protect clients against declines in investments backed mostly by mortgages, the Zurich-based company said today.
“We clearly made some poor choices,” Roger Ferguson, the former U.S. Federal Reserve governor who runs Swiss Re’s financial-services division, told analysts on a conference call. The loss comes less than two weeks after the company, headed by Chief Executive Officer Jacques Aigrain, reported third-quarter profit that surpassed analysts’ estimates.
The 144-year-old Swiss Re earns almost two-thirds of its premium income from helping shoulder property-and-casualty risks for insurers such as Allianz SE. The company’s financial-services unit, which provides risk and capital management, structured investments and investment-banking services, had a 113 million- franc loss in the third quarter, it said Nov. 6.
For a 144 year old firm, it seems fairly ridiculous that such a mistake could have been made investing in subprime 1st and 2nd mortgage loans.
The Expanding Market of Reverse Mortgages
An article published by the Wall Street Journal takes a look at a part of the 2nd mortgage market that has previously received a lot less attention: reverse mortgages. The article gives more details on reverse mortgages, saying:
- With a reverse mortgage, instead of the borrower making payments to the lender, the lender makes a payment or payments to the borrower. The borrower keeps control of the house and doesn’t have to pay back the money as long as he or she lives there. When the homeowner dies or moves out, the loan is typically paid off by selling the house, and any money left over goes to the homeowner or the homeowner’s estate.
- The product is evolving from meeting basic needs to fulfilling the desires of a new generation of retirees, from funding a vacation getaway or a recreational vehicle to renting a Paris pied-a-terre. The new options, though, mean more potential for confusion among consumers — and a bigger chance that they could miss out on getting the best loan for their situation.
This may seem like a great idea, but people considering this still need to be careful and read the fine print. If people fail to do this, it could mean more trouble when unexpected fees and interest rates lead to more financial difficulties.
Mortgage Brokers Oppose Attorney General’s Proposition
An article published in the Boston Herald takes a look at 1st and 2nd mortgage brokers’ reactions to proposed regulations for the industry. According to the article:
Mortgage brokers are in an uproar over Attorney General Martha Coakley’s proposed regulations for the industry, saying her plans would gut how they’re paid and potentially lead to thousands of job losses.
If the new rules take effect as currently written and explained by Coakley’s staff, Cuff said they’ll “dramatically affect” the entire mortgage-loan industry and “overnight” could lead to the closure of hundreds of mortgage-broker firms and the elimination of thousands of jobs.The result could make it more difficult for lower-income and first-time home buyers to get non-subprime mortgages, he said.
Coakley, who’s attempting to crack down on mortgage-loan abuses that were rampant before the recent collapse of the subprime-loan market, yesterday shot back that brokers and others never brought up the compensation issue during recent hearings on her regulations.
Obviously, changes need to be made. But should we accept the first propositions that come, even if they aren’t the best solutions? What’s the point in making changes that just lead to other problems? To what end are we benefited if we jump out of the fire and into the frying pan?
Dunmore Homes Files Bankruptcy
An article published by the Sacramento Business Journal gives the details of another housing company filing for bankruptcy. According to the article:
Dunmore Homes, which was recently acquired by a Sacramento investor, has filed for a bankruptcy reorganization in “continuing efforts to restructure the company’s obligations to its creditors,” Dunmore announced late Thursday.
Like other builders in Sacramento, the Granite Bay company that was founded 50 years ago has struggled through the worst housing slump in years; it halted all construction in August. The assets were purchased by investor Michael Kane a month later.
“We have engaged our lenders in a process to restructure our debts,” Kane said in a prepared statement. “And while certain creditors took positions requiring us to seek the protection of the bankruptcy court, we intend to continue focusing on our restructuring efforts while ensuring all creditors are treated fairly.” Kane said the company had hoped to avoid bankruptcy court.
Everyone seems to be affected negatively by the current credit crisis. Housing contractors and 2nd mortgage lenders, companies big and small; no one is immune to the contagion of the housing meltdown. It’s all a matter of time until every last one of us feels the negative effects of the crisis at hand.