Real Estate Blog

Bloomberg is reporting that Lehman Brothers may take up to $4 billion in losses as a result of marking down $61 billion worth of mortgage-related assets. The losses would be announced in their 3rd quarter earnings. Lehman was the biggest underwriter of mortgage assets prior to the meltdown. They continue to be on the watch list as analysts wonder aloud if they can limit their exposure fast enough before suffering the fate of Bear Stearns.

I think we’re due to lose one more big I-Bank - and Lehman is as good a better as any.

From Bloomberg:

Lehman Brothers Holdings Inc. may write down about $4 billion in credit-related investments and other assets when it reports fiscal third-quarter earnings, JPMorgan Chase & Co. analysts said.

“The credit environment continues to be difficult,” New York-based analysts led by Kenneth Worthington wrote in a report yesterday. “It will be another difficult quarter for Lehman.”

Lehman may mark down some of its $61 billion of mortgage and other asset-backed securities after benchmark residential and commercial mortgage-related indexes declined by as much as 20 percent, the analysts wrote. The company may have already been selling some commercial mortgage assets, they added.

Lehman, the largest underwriter of mortgage bonds before the subprime market collapsed, has slumped 77 percent in New York trading as it struggles to pare its debt holdings. The bank has reported writedowns and credit losses of $8.2 billion in the past 12 months, according to data compiled by Bloomberg.

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Lehman may mark down $61 billion worth of mortgage assets

Fannie Mae and Freddie Mac are on the verge of government intervention, reports the Financial Times.  As credit worries continue to wreak havoc on the financial markets liquidity concerns at the two massive GSE’s sparked a stock sell-off that left both company’s stocks down nearly 25%.

Any government intervention or recapitalization would severely undercut the value of any current shareholder stock by diluting the living daylights out of it.  Many had hoped that the mere notion of the US Treasury backstopping the GSEs would put an end to the market unrest.  This drove Fannie and Freddie stock higher as investors gained confidence that the market would stabilize with the weight of a US government guarantee.  Now that it looks exceptionally likely that it will actually happen investors are once again spooked.

From FT.com:

Fears about the financial system grew on Monday as money market liquidity tightened and sharp falls in the share prices of mortgage financiers Fannie Mae and Freddie Mac led the US stock market lower.

Fannie’s and Freddie’s shares lost 22 per cent and 25 per cent, respectively, after an article in Barron’s suggested that the US government was considering recapitalising the companies on terms that would all but wipe out existing shareholders.

The concerns about Fannie and Freddie also spread to their debt, which fell in price. This threatened to push interest rates on mortgages backed by the two firms higher and put further pressure on the battered housing market.

The price of insurance against default on Fannie and Freddie subordinated debt hit record levels in the credit default swaps market, according to data from Markit. Risk spreads on their senior debt – which most analysts presume would be fully honoured by the government in any rescue – widened to levels last seen in the immediate run-up to the Treasury’s July 13 rescue plan, Credit Suisse said.

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Fannie and Freddie on Verge of Bailout

That can’t help matters. Wachovia has agreed to buy back $9 billion in auction rate securities as part of a wide-ranging SEC investigation of several Wall Street firms’ sales and marketing practices. UBS, Morgan Stanley and others are buying back ARS by the billions in order to avoid formal charges of securities fraud.

Will this be the death knell for Wachovia? The cash-strapped company has been raising capital through numerous debt and equity sales - where will the $9 billion come from, or what about next quarter’s losses? Spooky.

From Market Watch:

The Securities and Exchange Commission on Friday said Wachovia Corp. Wachovia Corp has agreed to a settlement related to sales of auction-rate securities, the market for which collapsed earlier this year. Under the settlement, Wachovia will offer to purchase roughly $5.7 billion of auction-rate securities held by individual investors, small businesses and charitable organizations, the SEC said. The bank will also offer to purchase the roughly $3.1 billion of securities held by all other Wachovia investors, according to an SEC press release.

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That’s gotta sting: Wachoiva to buy back $9 billion in auction rate securities

Existing home sales hit their lowest levels in a decade while price declines offered little to help stem the fall. Median home prices fell nearly 10%. Of course the biggest losses were seen in bubble areas such as inland California, Florida and Las Vegas.

From Bloomberg on the losses:

Existing U.S. home sales fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7.6 percent as the real estate recession deepened.

The median price tumbled to $206,500 from $223,500 a year earlier, the Chicago-based National Association of Realtors said today. Sales of single-family houses and condominiums fell 16 percent to 4.913 million at an annualized pace.

Prices are declining with the U.S. on the brink of a recession, consumer prices rising and 30-year fixed mortgage rates at a six year high last month. A third of all sales in the quarter were foreclosures or “short sales,” in which lenders take a loss on a property, the Realtors said. Bank repossessions almost tripled in July from a year earlier, RealtyTrac Inc., a seller of foreclosure data, said in a separate report today.

“It’s getting worse,” Rick Sharga, RealtyTrac’s executive vice president for marketing, said in an interview. “The number of properties that have been foreclosed on by the banks and still haven’t sold is the highest we’ve ever seen.”

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Existing home sales hit decade low

Consumer prices rose by .8% last month, more than double analysts expectations. Of course, with artificially low interest rates one can’t really expect anything different; but it does make it damn clear that the Federal Reserve has nowhere to go but up with interest rates.

While the mainstream media is spinning the oil price drop means inflation has peaked the core inflation (excluding food and energy) still rose .3% which was also above analyst estimates.

So basically our dollar doesn’t go as far, our homes are heading in to the toilet, employment is up surprisingly and the government wants to raise taxes to bail out of our financial institutions for the greed and largesse. Sweet, happy Thursday. God bless America.

From Bloomberg:

U.S. consumer prices jumped to a 17- year high in July, reducing the scope of the Federal Reserve to lower interest rates as economic growth slows.

The consumer price index climbed 0.8 percent, twice as much as anticipated, the Labor Department said today in Washington. The cost of living was up 5.6 percent in the year ended in July, the biggest rise since January 1991. So-called core prices, which exclude food and energy, also advanced more than projected.

The surge last month reflected energy prices that have since declined, signaling July may represent the peak in inflation. Still, increases went beyond food and fuel, including gains in clothing, airline fares and education, likely intensifying discussions among Fed policy makers about how quickly to shift toward raising rates.

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Runaway prices stun market watchers

It’s nice to see the mainstream media cover more of the voices outside of the bottom callers who keep tripping over each other to be the first one to call bottom. Merrill Lynch’s Chief Investment Strategist Richard Bernstein said that investors are “significantly underestimating” the risks still associated with the credit crisis and suggested that we are not even close to the end of the problems.

I couldn’t agree more - the more that the mainstream media gets this message out the faster we’ll precipitate the changes that will get us to that bottom, where we can actually start a recovery.

From Bloomberg:

Financial stocks fell, led by Bank of America Corp. and Morgan Stanley, after a limit on short selling expired and Merrill Lynch & Co. said the credit crisis is “far from over.”

Finance company stocks also fell after Merrill Chief Investment Strategist Richard Bernstein said investors are “significantly underestimating” the extent of the credit crisis.

“The problems are not confined to large institutions that are overexposed to U.S. subprime loans,” Bernstein wrote in a note to clients. He said banks and brokerages need “massive” consolidation to recover.

Analysts including Oppenheimer & Co.’s Meredith Whitney and Deutsche Bank AG’s Mike Mayo this week cut profit estimates and forecast further writedowns on mortgage-related bonds.

“You are going to see stresses continue for financial institutions,” said Stephen Wood, who helps manage $213 billion at Russell Investments in New York. “You’re beginning to see that macroeconomic slowdown ripple through.”

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Banks have dialed up the lending requirements in the face of the nearly half-trillion dollars lost in the mortgage mess to-date. The Federal Reserve reported that banks and lending institutions have tightened credit standards across all loan-types as losses mount and liquidity remains a key issue.

This should be seen as good news of course. Common sense lending disappeared for a long time, and now it seems like we’re making our way back to some place of balance. Of course, we’re sure to over-correct in the process; but we’re certainly not there yet.

From Bloomberg:

Most “domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months,” the Fed said today in its quarterly Senior Loan Officer Survey.

Banks may be reluctant to lend against housing collateral that is falling in value. Home prices in 20 U.S. metropolitan areas dropped 15.8 percent in May, the biggest decline since record keeping began in 2001, according to the S&P Case-Shiller Home-Price Index.

The economy is also faltering. The unemployment rate has moved up 1 percentage point during the past 12 months to 5.7 percent, while delinquencies on home loans to borrowers with weak or limited credit histories rose to 18.8 percent in the first quarter from 13.8 percent a year earlier.

“Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months,” the Fed said.

Of the 32 banks that originate non-traditional mortgage loans, about 85 percent reported tighter lending standards, up from 75 percent in the prior survey, the Fed said.

About 65 percent of domestic banks indicated they had tightened their lending standards on credit card loans over the previous three months, up “notably” from about 30 percent in the April survey, the Fed said.

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Note: I’m very excited to introduce a series of guest articles by Anthony M. Freed.  This is his first.  Anthony is an analyst, researcher and freelance writer, and can be reached at anthonymfreed@gmail.com.  Please welcome him - I’m excited to get his take on the market from the analyst perspective.

So once again wild swings in the markets have unleashed the bullish cries of “Bottom!” by the guestimating industry cheerleaders like Jim Cramer, the NAR, and similarly minded government ilk who believe we can all collectively wish our way out of this mess. But the proverbial writing has long been on the wall, and we have yet to measure the depth of the losses.

What are the monsters are lurking in the nearby shadows? Well I am not going to tell you anything you have not already figured out if you have been following news posts and blogs about the mortgage industry with even a passing interest. It’s that illegitimate offspring of Sub prime and Prime called ALT A that is taking over the national spotlight. Now everyone in charge can throw up their hands in surprise that the golden child of the short lived post-sub prime era was a bad idea too. This from Housingwire.com’s Paul Jackson on Fannie’ mounting ALT A problems:

“,,,any changes purchase/underwriting criteria still clearly came far too late to prevent GSE (Fannie) from taking a direct credit hit, now that the Alt-A mortgage class is the latest area of mortgages to go through a meltdown, and many borrowers are defaulting at a seemingly parabolic rate each month and each quarter.”

This should not be not be news to anyone, especially those who should be in the know. As late as the spring of 2007, major national lenders were still aggressively marketing ALT A products with with ridiculously vacuous underwriting criteria: A borrower could secure a no income/no asset documentation cash-out refinance loan, with a simultaneous second mortgage up to 95% CLTV, on a non-owner occupied investment property, with only a 620 FICO, two months PITI reserves and a debt to income ratio up to 60%. Whah?

So even as executives were in the midst of struggling to explain how they were blindsided by the rapid demise of their sub prime divisions, they were also racing to expand ALT A criteria to cover all but those borrowers with the very worst credit ratings. And they did not stop there, they pressed on with the development of other exotics Iike Near Prime and Expanded Approval, And it was all done to maintain market share and the record origination levels they had grown addicted to. But who will they blame in the media for their greed driven and fiscally irresponsible business practices? Why, all the lying cheating borrowers who did this to them, of course! Also from Jackson’s article:

“The strategy isn’t all that surprising, as nearly anyone in the mortgage business these days is looking for a reason to push the bad loans — and the losses associated with them — off of their books, and onto someone else’s. And in the case of Alt-A, there’s likely to be more than a just a fair amount of income misrepresentation, among other sorts of fraud.”

I am in love with this line of reasoning: The average American homebuyer- be they plumber or grocery clerk or postal worker – collectively conspired by the millions to defraud the financial industry out of 3 trillion dollars in about a five year period. And now, they are cleverly concealing their new found fortunes by going through the motions of being foreclosed upon and thrown out on the street just to cover their tracks. Truthfully, how much can you be lying about if you only need to get yourself to a 60% DTI?

I know if they look at enough liar loans, they will find some liars. But that is missing the fundamental issue at hand here, that it was lax underwriting and low down payments initiated by the lenders, not the borrowers, that are responsible for this mess, I can remember as a little boy, asking my dad why someone would bother putting up a chain link fence that was only four feet tall. “Little fences are only for keeping good people out of trouble,” he told me. And that is exactly what the lenders did not do when they developed and marketed these and other more complicated products like Pay Option Arms, they built them without the little fences that would have kept them and us out of trouble.

Let’s pretend for a moment that borrower overstatement of income on ALT A loans really was so greatly overstated on average as to be responsible for 50% of all defaults on the books. Imagine what the effect a simple underwriting requirement like a signed T4506 – the authorization to review tax returns – could have made. They do not inherently prevent default on stated income and asset loans, but they certainly would have made borrowers who might be tempted to stretch the truth think twice about the consequences. Instead, there was a culture were no one felt they had to be really honest with anyone else. The hunters set the traps, and now they want to blame the animals for getting snared, and the media just eats it up.

So don’t be fooled by those who need you to stick your money into those raucous markets. The time will come, but it’s not here yet. And it should not be this difficult for the big brains to figure it all out. The underwriting is on the wall, the deals are closed, and the resets are coming like clock work. Let’s all just accept that it is really no surprise to any of us.

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ALT A is Broken? Really?

The New York Post is reporting that a large sovereign wealth fund is angling to buy up US property on the cheap.  With a weak dollar and REO piling up, these foreign funds are looking for 50-cents on the dollar discounts in American residential and multi-family property.

Sovereign wealth funds are well-known for their high-profile purchase of American assets like the Chrysler Building in NY, but now they’re expanding to pick-up foreclosed properties at a huge discount.

With large-scale property acquisition Americans will be saddled with the debt of their excess while the property asset resides in the portfolio of a foreign state.  We’ve outsourced everything - we might as well start outsourcing our property as well.

From the New York Post:

There’s a new land grab starting in America.

Foreign money, which up to now has focused its attention on investing in iconic commercial real estate - like Barneys New York and the Chrysler Building - is now moving to scoop up tens of thousands of discounted foreclosed homes across the country.

One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains, The Post has learned.

The search, which is being carried out, in part, by Field Check Group mortgage consultant Mark Hanson, who was retained by the broker, Steve Iversen, is concentrating on single- and multi-family REO (real estate owned) homes, or homes that have already been taken over by the mortgagee.

Neither Iversen nor Hanson would disclose the name of the client, but sources told The Post it’s a sovereign fund.

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American consumers, left with the debt and none of the assets

Portfolio.com asked it’s readers to vote on the least trustworthy Wall Street CEO. The results are not surprising and macabre in their own way. As we’ve thoroughly documented here, Wall Street CEOs have had a problem with drinking their own kool aid or lying throughout the housing, credit and mortgage bust.

Below are the results with their most choice quote about the strength of their company or the impact of the mortgage mess on their business.

The higher the percentage the less trustworthy. As Barry asks at The Big Picture, where’s Tangelo? And the answer

of course is, he’s no longer a CEO.

From Portfolio.com:

The Final Tally:

Alan Schwartz, Bear Stearns : “Capital … remains strong.” 26%

Martin Sullivan, AIG: Chance of a loss? “Zero.” 22%

Ken Lewis, BofA: There’s “value in Countrywide.” 12%

Ken Thompson, Wachovia: We’re in “a great market.” 11%

Dick Fuld, Lehman Bros.: “The worst is behind us.” 8%

John Thain, Merrill Lynch: “We have tackled the problem.” 8%

Vikram Pandit, Citi: We are “well-capitalized.” 7%

Kerry Killinger, Washington Mutual: “Profitability” in 2008. 4%

John Mack, Morgan Stanley: “Comfortable” with the risks. 3%

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The worst over?  Not so much.  AIG took a whopping $5.4 billion dollar loss last quarter related to, you guessed it, mortgage losses and write downs!  I’m one big broken record these days, but there’s not much else to say here.

AIG quickly took a nice chunk out of its recently-raised $20 billion as writedowns on mortgage hammered its business.

From Market Watch:

American International Group reported a $5.36 billion second-quarter net loss late Wednesday as the insurance giant was hit again by write-downs and impairments on mortgage-related exposures.

The quarterly net loss included $5.57 billion of unrealized market valuation losses on AIG’s super senior credit default swap portfolio. It also included $6.08 billion of net realized capital losses from its investment portfolio, the company disclosed.

“Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment,” AIG’s new Chief Executive Robert Willumstad said in a statement. “We have a lot of work to do to restore AIG’s profitability to where it should be.”

AIG reported a record quarterly loss earlier this year after suffering huge write-downs on credit exposures. The company quickly raised roughly $20 billion selling new shares and other securities.

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AIG takes $5.4 billion 2nd quarter loss

Thank goodness for that explicit guarantee!  Freddie Mac posted losses of $821 million and said that there is “no possible way” to predict the end of the housing bust.  The company also doubled it’s loan loss reserves to $2.8 billion - which sounds reassuring until you realize that $2.8 billion is only good for about 3 quarters of similar losses.  Freddie Mac is going to need lots of cash - my paycheck awaits!

From Bloomberg:

Freddie Mac, the U.S. mortgage-finance company hobbled by record foreclosures, slashed its dividend at least 80 percent after posting a quarterly loss that was three times wider than analysts’ estimates.

… Freddie doubled its reserves for future home-loan losses to $2.8 billion, signaling Chief Executive Officer Richard Syron sees no end in sight to the worst housing slump since the Great Depression.

Freddie has 22,000 properties in foreclosure, more than ever before, and it now anticipates losing 26 percent on each loan, up from 22 percent. McLean, Virginia-based Freddie has plunged 76 percent this year on concern the company may not have enough capital to overcome delinquencies on the $2.2 trillion of mortgages it owns and guarantees, prompting Treasury Secretary Henry Paulson to step in with a rescue plan.

“Neither we nor anyone else can predict when the housing market will recover and it will be folly for anyone” to try, Syron said on a conference call with analysts today. “There’s still a large amount of inventory to work through the system and record foreclosures.”

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Freddie Mac loses $821 million for the quarter

HSBC reported $10 billion worth of bad debt charges, including $3.9 billion in mortgage-related write downs today in its earnings call.  The company bet big on the US subprime market during the bubble including the purchase of Decision One and Homecomings and the extension of large lines of credit to subprime mortgage originators.  We should expect to see HSBC take more writedowns on those bad bets in future quarters.

From Market Watch:

HSBC Holdings on Monday reported a 29% drop in first-half net income as bad-debt charges surged to more than $10 billion and write-downs continued to mount, though the banking giant increased its payout as profits in Europe and Latin America grew.

Europe’s largest bank said it wrote down $3.9 billion in its global banking and markets division on mortgage assets, leveraged loans and exposure to bond insurers. The write-downs led to a 35% drop in pretax profit generated by the division, to $2.7 billion.

Loan-impairment charges and other provisions jumped 58% to $10 billion, with the majority of those bad-debt charges stemming from its U.S. business in personal financial services.

Overall, its North American operations reported a $2.89 billion pretax loss, compared to a profit of $2.4 billion in the first six months of 2007.

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Nouriel Roubini, former White House economic advisor and most recently foreseer of the housing and credit bust has a great article in Barron’s where they dig in to his all-to-prescient forecasts of the economy.

Here is just a brief excerpt, but it’s more than worth the entire read.

From Barron’s (via Roubini’s blog RGE Monitor):

LIKE THE EXHORTATIONS OF JEREMIAH TO THE NATION OF Israel before the first temple’s destruction, the warnings of economist Nouriel Roubini fell on deaf ears. For the past two years Roubini, a professor at New York University, has cautioned about a huge housing bubble whose bursting would lead to a 20% drop in home prices; a collapse in subprime mortgages; a severe banking crisis and credit crunch; the near-failure of Fannie Mae and Freddie Mac , and a U.S. recession of a magnitude not seen since the Great Depression. So far, this latter-day prophet of doom has been on the mark, though time will tell about the recession part.

What recourse will the taxpayer have?

The taxpayer’s bill is going to be huge. I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion. When I made this analysis in February everybody thought I was a lunatic. But a few weeks later the International Monetary Fund came out with an estimate of $945 billion, Goldman Sachs (GS) estimated $1.1 trillion and UBS (UBS) $1 trillion. Hedge-fund manager John Paulson recently estimated the losses would be $1.3 trillion, and late last month Bridgewater Associates came up with an estimate of $1.6 trillion. So, at this point $1 trillion isn’t a ceiling, it’s a floor. And the banks, as I’ve said, have written down only about $300 billion of subprime debt.

How long will it take for the collapse in the banking sector to play out?

It is happening in real time. Many smaller banks are going bust already. More than 200 subprime-mortgage lenders have gone bust in the past year alone. And many community banks will go bankrupt. Community banks usually finance everything: the homes, the stores, the downtown, the commercial real estate, the shopping center. If you are in a town or a municipality where there is a housing bust, the bank is gone. Of three dozen or so medium-sized regional banks, a good third are in distress. That includes the Wachovias and Washington Mutuals of the world. Half of this group might go bankrupt. Even some of the majors could end up technically insolvent, though they might be deemed too big to fail.

Take Citigroup. In 1991 there was a small real-estate bust, though the quarterly fall in home prices was only 4%, based on the S&P/Case-Shiller indices. Citi was effectively bankrupt and signed a memorandum of understanding with the Fed that allowed the government to give the bank regulatory forbearance. Citi was allowed to ride it out and try to recapitalize in a few years, and thereby avoid bankruptcy protection. This time around the S&P/Case-Shiller indices indicate home prices already have fallen 18%. The decline could be as much as 30%, because the excess supply is huge.

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You just have to watch this. Classic. Amazing how the leading trade organization for real estate sales professionals can get away with blatant lying. Hat tip hp

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What will it take for reputable real estate agents to abandon the NAR?