Real Estate Blog

Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.

The market was up strong yesterday. Other than the shares of bank stocks, you have to wonder why. The worldwide central bank bailout is not intended for the equity investor, or general public, or business, or you, or me. It’s intended for banks, ostensibly to spur lending, but more likely to keep them afloat through next week’s Great Derivatives Unwind. This has got to be a big part of the motivation of the CBs to provide unlimited lending to banks.

Distracted by worldwide stock market crashes, attention shifted away from Lehman’s derivatives’ payouts scheduled for October 21. Recovery value has been set at 8.625 cents per $1.00, which means that sellers of credit protection must pay 91.375 cents to the buyers (according to Creditex, the company that holds auctions).

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. The list of participants in the auction includes Newport Beach, California-based Pacific Investment Management Co. PIMCO, manager of the world’s largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC and AIG, the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York.

According to JPMorgan, the largest foreign bank holders of Lehman’s derivatives are Deutsche Bank, Barclays, Societe Generale, UBS, Credit Suisse and Credit Agricole. Overall, as of June 30, 2008, the top ten US banks in terms of derivatives exposure were: JPMorgan Chase, Bank of America, Citibank, Wachovia, HSBC USA, Wells Fargo, Bank of New York, State Street Bank, SunTrust Bank, and PNC Bank, according to the Comptroller of the Currency Administrator of National Banks’ Quarterly Report on Bank Trading and Derivatives Activities for the second quarter of 2008. Lots of other good information too, if you like this sort of thing, as I do.

And this is just the beginning. Few losses are expected from the failed GSEs. Fannie Mae’s senior debt settled at 91.51 and subordinated debt at 99.9 cents on the dollar; Freddie Mac senior debt was 94.00 and subordinated debt was 98 cents on the dollar. Washington Mutual could be another story. It’s Credit Event Auction will settle, meaning prices will be determined, on October 23. Just last week there were credit events at the largest three Iceland banks, all of which have large quantities of derivatives outstanding. These are all financial institutions; industrials haven’t started yet.

Nonetheless, the market’s up. For technical types, Mish Shedlock has a good and almost-understandable-by-laymen explanation of where the market is in terms of Elliott Wave theory. He says, “In terms of price, given the magnitude of today’s move on top of the huge move up from Friday’s low, the rally may be 65% over already. In terms of time, the rally likely has several weeks to a couple of months to play out.” See S&P 500 Crash Count at www.globaleconomictrendanalysis.com

In my opinion, the markets are still very fragile. Charts or no charts, it wouldn’t take much to see another cliff dive. We’ll see what happens next.

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Derivatives: The Great Unwind

Fannie Mae posted a $2.3 billion loss for the quarter as the mortgage and housing bust keeps chipping away at the liquidity of the mortgage giant. At this rate, I can’t imagine it being too much longer before the treasury pumps its first infusion of capital in to the company.

At least the company cut the dividend to a nickel for investors (from 35 cents).  In my opinion as long as the government is explicitly guaranteeing the debt of this company, and using taxpayer funds to prop them up all dividends should be eliminated and corporate pay packages should be brought in line with other public officials.  How pissed are you that your tax dollars are going to pad the salary of Fannie’s CEO?

From Market Watch:

Fannie Mae reported Friday a wider-than-expected loss for the second quarter and cut its dividend as the biggest U.S. buyer of home mortgages said the struggling housing market and credit expenses again hurt its performance, sending the company’s shares lower.

Fannie Mae lost $2.3 billion, or $2.54 a share, a reversal from the $1.9 billion, or $1.86 a share, earned in the year-ago second quarter.

Daniel Mudd, Fannie’s chief executive, said that credit conditions are getting worse and that the company expects to have to resort to further increases in its loss reserves.

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Fannie posts $2.3 billion quarterly loss

Wow, this keeps getting more and more interesting by the minute.  The latest in the mortgage market meltdown is the news that Citigroup and now UBS will buy back a combined $32 billion worth of auction rate securities that were sold fraudulently.  This is just another blow for cash-strapped mega-banks that have gone to great lengths to raise and maintain capital in this credit crunch.

Billion-dollar buybacks sure don’t help.  Shareholders rejoice! Not really.

From Bloomberg:

UBS AG, Switzerland’s biggest bank, may pay more than Citigroup Inc. or Merrill Lynch & Co. to settle state and federal claims that it fraudulently sold auction-rate securities, a person briefed on the negotiations said.

UBS is close to resolving those claims and may make a promise to retail and institutional clients to buy back the securities, valued at $25 billion by regulators, the person said. Merrill Lynch offered yesterday to buy back about $10 billion in auction-rate securities from individual investors, claiming that was the amount its customers held.

Citigroup agreed yesterday to buy back $7.3 billion of the debt from individual investors to settle state and federal regulators’ claims and to pay $100 million in fines, setting a framework for talks with other banks including UBS. Citigroup also promised to help institutional customers unload another $12 billion in the securities.

“We reach settlements that are appropriate for the circumstance,” New York State Attorney General Andrew Cuomo said yesterday at a press conference announcing the deal with New York-based Citigroup, the largest U.S. bank by assets, that also requires it to help more than 2,600 institutional investors unload $12 billion of the securities. “UBS would be a different circumstance.”

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Auction Rate Securities = Bank Desperation

Tough times call for drastic measures. A friend of mine in Bothell, WA is trying something new to build interest in his house. He is having an auction… sort of. The “Bothell Countdown” is the brainchild of Justin Wilcox and is something like a reverse auction where instead of the price going up over time, it goes down. He is starting the price around market value and will work the price down in $10k - $5k increments each week, building publicity around the house’s Web site and sending out email updates to prospective buyers along the way. Ultimately he plans to sell the house the same way anyone would (solicit bids, accept or reject them, etc.), the only difference being prospective buyers can pick the price they think the house is worth and wait until the price falls within that range. I have to give him credit for his ingenuity and balls of steel.

When I talked to Justin about his idea, he said he used Zillow and his Zestimate to help him pick the starting price. In fact, he even built a spreadsheet using the Zillow comparables data to get a better feel for the price per sqare foot averages in his neighborhood. I took a look at his calculations and am impressed that he is going to start at such a reasonable price when the auction has nowhere to go but down!

I will definitely be keeping my eye on the house… 19833 95th Ave NE, Bothell, WA 98011.

Good luck Justin!

More here:

Short sales are a lot of work but, if you are like me, you get a lot of satisfaction from helping people who otherwise would end up in foreclosure. Even when you have a negotiator handle the bulk of the paperwork and phone calls, an unqualified or worse yet an unwilling seller can squash your work, your wallet and your closing.

Go here to read the rest:
How to Make a Success of Short Sales