More Investor Claims Issued Agains Bear Stearns
Hedge funds are continuing to suffer at the hands of the declining real estate market, with Bear Stearns taking a beating this week. Reuters is reporting on the latest troubles:
The first of a new round of investor claims was filed against Bear Stearns Cos. on Wednesday for its role in managing two mortgage hedge funds that collapsed earlier this year, securities lawyers said.
The claims, which will be submitted to the Financial Industry Regulatory Authority (FINRA) for arbitration, represent more legal challenges for Bear Stearns, which recorded losses this summer.
The first of at least 11 new claims involves an unidentified Cayman Islands fund-of-hedge funds manager that lost $1 million in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund.
While such claims are kept somewhat anonymous, it’s a troubling sight to see Bear Stearns, long considered one of the savviest bond traders on Wall St., suffering so much from the housing decline. You’d thing someone in the firm would have done some basic calculations and realized that the likelihood of homeowners proceeding to payoff mortgage loans issued by subprime lenders was low at best.
New Study Finds Americans Slow to Payoff Mortgage Debt
A few key points from this study:
• Americans tend to put most of their money into checking accounts that earn little to no interest.
• Americans make mortgage payments that statistically go almost entirely to interest. (In the early years of a traditional 30-year mortgage, more than 80% of the total mortgage payments go towards interest.)
• Americans rarely pay more than the minimum monthly mortgage payment required.
• Americans rely on high-interest credit cards in times of financial crisis, rather than taking out a home equity line of credit at a lower interest rate.
A mortgage payoff is something few Americans experience early in life due to the reasons listed above.
Home Prices Suffer Sharpest Drop in Over Two Decades
An article published by Yahoo! Finance looks at the third quarter drop in home prices and the effects that this could have on the economy. According to the article:
- U.S. home prices fell 4.5 percent in the third quarter from a year earlier, the sharpest drop since Standard & Poor’s began its nationwide housing index in 1987 and another sign that the housing slump is far from over.
- One of the index’s creators also predicted that there’s a significant chance of a recession as the economy contends with falling housing prices, spiking foreclosures and turmoil in the financial markets.
- “We’re in the aftermath of the biggest housing boom in history, so how do we use historical data to judge the outcome?” he said. “We’re out of the range of the normal variation in the data and I take that as very significant.”
- After 13 years of rising home values — with the greatest increases occurring in the first part of this decade — the housing market has started to unravel, spreading from Main Street to Wall Street.
- The Federal Reserve has stepped in, cutting interest rates two consecutive times to 4.5 percent to encourage economic expansion. The Fed said last week it expects the housing slump and credit crisis to slow economic growth and push unemployment up slightly next year.
Seeing as the recently-ended housing boom was the biggest in the history of our nation, it should be no surprise that people predict that we are in the largest housing slump in history. This housing slump could put us into a recession as many fail to payoff mortgage loans, but so far, analysts are not really predicting an economic collapse. The scary thing is that we can only speculate, and we’ll have to wait and see what actually happens.
The Government’s Shadow Mortgage Bailout
An article published by eFinance Directory talks about the government’s plans to sponsor a mortgage bailout for borrowers and lenders even though the majority of Americans are against it. According to the article:
- A recent survey found that 62 percent of Americans are against a mortgage bailout. Most people want to see borrowers and lenders work out their own problems.
- Unfortunately, our government has other ideas. Policymakers have very carefully orchestrated a shadow mortgage bailout.
- Securities were key sources of money during the housing boom. Now that investors have stopped buying, many institutions have been forced to seek out alternative sources of mortgage funding.
- A number of banks have turned to the Federal Home Loan Bank (FHLB) system. The 12 FHLBs are cooperatives first created during the Great Depression to boost mortgage lending and revive the struggling housing market.
- The concern is that the FHLBs are taking on too much debt in their attempt to bail out lenders. If investors lose confidence and begin to get rid of FHLB debt (in the same way they dumped mortgage securities), one or more banks could collapse and leave taxpayers with the financial burden.
On the surface it may seem that the government’s mortgage bailout is helping the situation, but all it is doing is moving the risk to the taxpayers. It is no wonder then that so many people are against the idea. What is frightening, I think, is that the government is going against the wishes of the majority. We may be in a credit crisis, but does that excuse deterring from the democracy that this nation was founded upon? This may even make things harder for the average borrower to payoff mortgage debts.
If the Buck Breaks
An editorial published on the Wall Street Examiner discusses the potential causes and consequences of breaking the buck. According to the article:
- The day may come to pass when the buck finally breaks on the first money market fund. If this happens, it will be an absolute disaster that shakes investor confidence to the core.
- People have been projecting that firms will use every ounce of equity to defend the dollar barrier of their money market mutual fund. What is absolutely frightening about Legg Mason is that their cash needs far outstripped their available equity, forcing them to borrow 2 times their equity injections.
- It just doesn’t take much thought to see the potential risks ahead. If the buck breaks, you can bet that banks will not lend to mutual fund companies moving forward. This will force mutual funds to rely entirely on their own equity base. Heck, you may even see the SEC blessing the suspension of money market redemptions to stabilize the market. But what would that do to confidence?
- I cannot begin to state how disastrous this would be. I suspect a lot of cash investors will re-route their funds to normal banks who pay nothing in interest simply because there is FDIC insurance.
The current credit crisis could end in so many different ways. But it all depends on what people do, and how they respond to what is going on. I think the most frightening thing of all at this time is the uncertainty of things to come. It will be interesting indeed to see how this crisis plays out. Hopefully consumers will manage to payoff mortgage debt.
Ohio Mortgage Lenders May Face Prosecution
An article published in the USA Today takes a look at the plans of Ohio’s government to get aggressive with subprime mortgage lenders. According to the article:
Ohio’s governor and attorney general said Thursday they would issue subpoenas and take other aggressive measures against subprime mortgage lenders.
The subpoenas could lead to possible prosecution against lenders under antitrust and civil rights laws, as well as the Consumer Sales Practices Act.
The announcement came about a month after Gov. Ted Strickland asked the lenders to enter an agreement to help struggling homeowners stay in their homes through various measures, such as offering six months’ notice before an adjustable rate mortgage was to reset.
“Their refusal to sign the compact speaks volumes about their crass disregard for the people they have hurt and the communities they have destroyed house by house, street by street, block by block,” Ohio Attorney General Marc Dann said.
It’s good to see a government standing up for its people. Yes, the blame for getting in debt rests almost entirely on the shoulders of the borrower, but mortgage lenders could be doing more to help them payoff mortgage loans. It would have no large monetary toll on the companies, and in fact would help prevent some cases of foreclosure. Hopefully more states follow in the footsteps of Ohio to try to better the mortgage industry.
Commercial Paper Crisis Hits Canada
An article from the Canadian news source, Financial Post takes a look at the individuals who are being affected by the commercial paper freeze-up. According to the article:
The turmoil in asset-backed commercial paper knocked Bay Street on its ear in August and now, three months later, it has re-emerged on Main Street as pensioners and individual investors start to feel the pain.
According to analysts, the major banks who sold the paper are dealing with individuals on a “case by case basis,” while National Bank Financial said it would repurchase illiquid notes from all its retail clients up to a maximum of $2-million per client. Other clients have not been so fortunate.
The Financial Post has learned of a case involving a 52-year-old women in Victoria, B.C., who several months ago invested the proceeds of the sale of her condo in ABCP. On the advice of her broker she bought $250,000 of commercial paper only to find when she tried to make a down payment on a house she had bought that she couldn’t get here money back. The woman, who asked not to be named, is still in discussions with the broker regarding what should be done.
The commercial paper freeze-up in Canada is a disturbing reflection of the same crisis that has hit the U.S. Can we expect more financial systems to follow? Most likely. Has the world become so globalized that the problem of one nation will soon afflict the rest? And if this is the case, what can save us from the inevitable financial collapse? No doubt many propositions for solutions will surface in the days to come. Unless one comes up, it will be pretty hard for those with ARM loans to payoff mortgage debt.
Mortgage Reform Bill Passes
An article on Market Watch briefs the mortgage reform bill that was just passed. From the article:
Members of the House Financial Services Committee voted to approve a bill imposing sweeping changes on the mortgage industry, including minimum standards for approving loans and some new liabilities on those who securitize risky mortgages. Committee members OK’d the bill by a vote of 45 to 19. The bill would mandate licensing for mortgage brokers and bank loan officers and set a minimum standard for all mortgages stating that borrowers must have a reasonable ability to repay. The bill was introduced by Democrats Barney Frank, Mel Watt and Brad Miller. Frank, of Massachusetts, is the committee’s chairman.
Obviously not everyone was in favor of this bill. Sure, this bill will make it harder for lower-income workers to procure a mortgage for a home. But if the borrow cannot prove the ability to repay, and in fact do not have this ability, it is only saving them from loss and suffering down the road. If these minimum standards had been in place sooner, the rate of foreclosures would not be as high and the market crisis would not be so severe.
Sadly the legislation does relatively little for homeowners currently struggling to payoff mortgage loans incurred by predatory lenders.
Preparations for Market Volatility
An Australian based news site, The Daily Telegraph, published an article discussing the extreme volatility that can be expected in 2008 as global markets try to overcome the subprime mortgage crisis. The following is an excerpt from the article:
Trading began the week on a positive foot, but as the Citigroup news which forced its boss Charles Prince to step down filtered through, world markets slid, with Hong Kong’s Hang Seng the hardest hit, falling 3 per cent.
CommSec chief equities economist Craig James said the downturn was the first pothole in a potentially bumpy week on the local market.
The volatility will climax with the Reserve Bank’s decision on interest rates tomorrow morning, with all indicators pointing to another increase.
“It is by no means going to be smooth sailing this week and we have seen that today, the potential for significant volatility,” he said.
Colonial First State chief equities analyst Hans Kunnen believes there is a mountain of short-term risk for Australian investors, but greener pastures await just over the hill.”Given the pace of the market in the last two months, I keep telling people there are short term risks, but my take on the market in the medium term is that I’m not concerned,” he said.
“But at the moment we have to be prepared for volatility.”
It seems to be a widely accepted belief that the upcoming months will be a rollercoaster ride for global markets. But if everyone can just sit tight and not overreact at every dip in the market, we stand a greater chance of overcoming this crisis and finding a way to payoff mortgage debt..
Merrill Lynch Trying to Hide Problems?
According to the Wall Street Journal, Merrill Lunch has been off-loading some of its mortgage-relate assets, engaging in deals with hedge funds, in an effort to cap its exposure to risky mortgage-backed securities. Their efforts to payoff mortgage debt are attracting attention. An excerpt from the article explains why this maybe be an issue:
In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.
While the Merrill-related entity’s assets and liabilities weren’t on Merrill’s own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses, the person said. The deal delayed that risk for a year, the person said.
At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors. Some previous scandals, such as the collapse of Enron Corp. and the troubles of Japan’s financial system in the 1990s, involved efforts to hide problems through off-balance-sheet transactions.
In addition, Merrill Lynch recently suffered one of the largest known Wall Street losses in history: a $7.9 billion write-down, fueled by mortgage-related problems. If the company has suffered that much of a loss despite its dealings with hedge-funds to postpone other losses, can we really be sure about its stability? Is its final demise looming in the near future? Is Merrill Lynch really trying to hide problems, or is it all just a coincidence? It will be interesting to see.