by Calculated Risk on 7/25/2007 08:17:00 PM

NOTE: Haloscan comments are acting up again. Please try refreshing the page if the posts do not display completely. Please accept my apologies for the poor performance of Haloscan.

We've been joking about short term bridge loans turning into "pier loans", and it appears Citigroup is the proud owner of many of these shiny new piers.

From the WSJ: Chrysler Throws Salt in Citigroup’s Wounds (hat tip Brian)

Citigroup is one of the banks that will ... be left holding the bag after investors took a pass on the sale of $10 billion of loans at Chrysler’s auto unit for the company’s leveraged buyout. ... It isn’t good news for either the banks or the buyout firms. There will come a point, if we aren’t there already, when banks refuse to make new loan commitments.
...
Chatter among investment bankers lately has focused on Citigroup, which is said to be clamping down especially hard on making new loans. ... Citi has the misfortune of having been involved in a lot of the buyout loans that have soured lately, including Allison Transmission, U.S. Foodservice, Dollar General and ServiceMaster. It also has a role in three of the coming megadeals that still need to be financed: First Data, TXU and Clear Channel Communications.

That is a lot of piers.

by Calculated Risk on 7/25/2007 05:43:00 PM

John Spence as MarketWatch reports: Economist cuts housing forecasts

The chief economist for the National Association of Home Builders on Wednesday ... lowered his forecasts for new construction as the market has weakened further ...

"It's fair to say the performance of the housing market during the first half [of 2007] and the outlook for the second half and next year are a lot weaker than six months ago," said David Seiders ...

His outlook for 2007 single-family housing starts is now 9% lower than it was at the beginning of the year, while his 2008 forecast has been slashed by 15%, Seiders said on a conference call. His forecast is for housing starts of 1.42 million this year and 1.45 million in 2008.

This means Seiders expects starts to average about 1.38 million per month, at a seasonally adjusted annual rate, for the 2nd half of '07. That is too much production, and I expect starts to fall even further.

by Calculated Risk on 7/25/2007 01:33:00 PM

Existing home sales through June were 2.929 million units. In a typical year, sales through June are about half the sales for the year. So at the current pace, sales will be around 5.86 million.

Here are a few forecasts (made at the end of '06):
David Lereah (as NAR economist): 6.34 million
Fannie Mae Chief Economist David Berson: 5.925 million
Calculated Risk (me): 5.7 million (center of range, 5.6 to 5.8 million).

And a few more forecasts from the comments:
Banker: 5.5 million
Barely: 5.35 million
central_scrutinizer: 5.9 million

Please feel free to add your prediction to the comments section of this post. We will announce a winner in January - and the prize will be ... uh, your name announced as the winner and the admiration of others.

by Calculated Risk on 7/25/2007 12:05:00 PM

For more existing home sales graphs, please see the previous post: June Existing Home Sales

To put the NAR numbers into perspective, here are the year-end sales, inventory and months of supply numbers, since 1969.

Click on graph for larger image.

This graph shows the actual annual sales, year end inventory and months of supply, since 1982 (sales since 1969). For 2007, the June inventory and Seasonally Adjusted Annual Rate (SAAR) for sales were used.

The current inventory of 4.196 million is below the all time record 4.431 million units set last month. However, since sales have continued to fall, the "months of supply" metric remained at the same level: 8.8 months. The "months of supply" is now above the level of the previous housing slump in the early '90s, but still below the levels of the housing bust in the early '80s.

The "months of supply" is calculated by dividing the total inventory by the seasonally adjusted annual rate (SAAR) of sales, and multiplying by 12. Currently inventory is 4.196 million, SAAR sales are 5.75 million giving 8.8 months of supply.

Both the numerator and the denominator are generally moving in the wrong direction (although inventory declined in June). Not only is inventory near record levels, but sales - though falling - are still significantly above the normal range as a percent of owner occupied units.

Forecasts

The followings shows the actual cumulative existing home sales (through June) vs. three annual forecasts for 2007 (NAR's Lereah, Fannie Mae's Berson, and me). Note: Several people have asked me to add their forecasts to this graph, instead I think I'll have a contest to predict the total existing home sales for 2007.

My forecast was for sales to be between 5.6 and 5.8 million units (shown as 5.7 million).

NSA sales are 2.929 million units through June. In a typical year, sales through June are about half the sales for the year. So at the current pace, sales will be around 5.86 million. It appears that sales will slow, perhaps significantly, in the second half of 2007, so the risk to my forecast is most likely on the downside.

To reach the NAR forecast, revised downward on July 11 to 6.11 million units, sales would have to be above the 2006 levels for the remainder of the year. Given tighter lending standards, we can probably already say the July NAR forecast was too optimistic.

by Calculated Risk on 7/25/2007 11:36:00 AM

From Bloomberg: KKR's Banks Fail to Sell $10 Billion of Alliance Boots LBO Debt

Kohlberg Kravis Roberts & Co.'s banks, led by Deutsche Bank AG, failed to sell 5 billion pounds ($10 billion) of senior loans to fund the leveraged buyout of Alliance Boots Plc, two people with direct knowledge of the deal said.

And from the WSJ: Bankers Postpone Chrysler Debt Sale

Bankers raising $20 billion in loans for Chrysler Group have postponed a sale of $12 billion in debt for the auto company and are planning to fund the bulk of that debt from their own pockets for the time being, according to a person familiar with the matter.

by Calculated Risk on 7/25/2007 09:56:00 AM

The National Association of Realtors (NAR) reports Prices Rise, Existing-Home Sales Decline in June

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – declined 3.8 percent to a seasonally adjusted annual rate1 of 5.75 million units in June from a downwardly revised level of 5.98 million in May, and are 11.4 percent below the 6.49 million-unit pace in June 2006.
...
The national median existing-home price2 for all housing types was $230,100 in June, up 0.3 percent from June 2006 when the median was $229,300. The median is a typical market price where half of the homes sold for more and half sold for less.

Click on graph for larger image.

The first graph shows the NSA sales per month for the last 3 years.

The pattern of YoY declines in sales is continuing. For New home sales, March is usually the strongest sales month of the year. For existing homes, the Summer months are more critical.


The second graph shows the months of supply. With the months of supply now over 8 months, we should expect falling prices nationwide.


However, the NAR reports that YoY prices were up slightly in June.


The third graph shows nationwide inventory for existing homes. According to NAR, inventory declined from the record in May to a 4.196 million units in June.

Total housing inventory fell 4.2 percent at the end of June to 4.20 million existing homes available for sale, which represents an 8.8-month supply at the current sales pace, the same as a downwardly revised 8.8-month supply in May

Other sources have reported that inventory levels have increased, and I expect inventories to continue to rise through the summer. More on existing home sales later today.

by Tanta on 7/25/2007 09:05:00 AM

I would have posted this yesterday, but I got caught up in reading the actual Citi report on which it is based (and that's 58 pages of hard-core Nerdalytics). I am going to try to have something more to say about this today. Until then, Bloomberg:

July 24 (Bloomberg) -- Defaults on some so-called Alt A mortgages packaged into bonds last year are now outpacing those from subprime loans, according to Citigroup Inc.

The three-month constant default rate for 2006 Alt A hybrid adjustable-rate mortgages is 2.3 percent, compared with 2.2 percent for subprime ARMs, New York-based Citigroup analysts led by Rahul Parulekar wrote in a July 20 report. The figures represent the percentage of balances in a mortgage-bond pool expected to default in the next year based on 90-day trends.

The speed at which Alt A hybrid ARMs are being paid off due to home sales or refinancing has also fallen to about the same level as for subprime ARMs, which typically prepay more slowly, the analysts said. Slower prepayments can make the same rates of defaults more damaging by leaving more of the initial balances outstanding to eat into bond-investor protections.

The combination of challenges mean 2006 bonds backed by Alt A mortgages, a credit grade above subprime loans, may need ``lower loss severities to still come out with lower cumulative losses than subprimes,'' the Citigroup analysts wrote.

by Tanta on 7/25/2007 08:01:00 AM

Some of you may have noticed that LEND took quite a beating yesterday. Apparently there is some question of the viability of the Lone Star deal:

On June 29, Jean Wan filed an amended stockholder class action lawsuit against Accredited, Lone Star and several executives and directors involved in the deal.

Wan claimed Accredited would be better off remaining independent because many of the company's subprime mortgage rivals had already gone bankrupt. Once the market recovers, Accredited could thrive as one of the few remaining subprime specialists and shareholders shouldn't miss out on this opportunity, the suit argued.

The complaint is being called the "Forrest Gump" suit because it compares Accredited's situation with that of the two main characters in the 1994 film.

Forrest and Lieutenant Dan buy a shrimp boat and start the Bubba Gump shrimp company. But they struggle early on because there are so many other boats catching all the shrimp. Then a hurricane hits, destroying many boats and leaving Bubba Gump owning the last shrimp boat in the area. From then on, Forrest and Dan become rich, the suit explained.

Accredited, like Forrest and Dan, was able to weather the subprime mortgage storm that destroyed rivals like New Century Financial.

"Effectively, Accredited is now the 'Bubba Gump' of the subprime lending market," the suit said. "Currently, Accredited stands in the enviable position of being able to grab up the market share left by New Century and the other subprime lenders that have declared bankruptcy or left the market."

"This position will allow the holders of Accredited's equity to reap the lion's share of profits available in the subprime lending market," the complaint added. "The Individual Defendants, however, wish to keep these profits for themselves and freeze out Accredited's current shareholders."

Stupid is as stupid does.

by Calculated Risk on 7/25/2007 01:50:00 AM

From the WSJ: Chrysler's Bankers May Take On Debt

Chrysler's attempt to tap debt markets for $20 billion hit a critical juncture as bankers began discussing the likelihood that they will have to step up with a large part of the money because investor demand hasn't been strong enough.
...
The struggle to raise money from investors was the latest sign of how inhospitable debt markets have become recently. ... Chrysler's bankers -- including J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bear Stearns Cos. and Morgan Stanley ... were yesterday discussing plans to take a half or more of a $10 billion piece of the Chrysler auto loan, people familiar with the matter said.

The debt to be held by the banks would bear the first losses if Chrysler has problems repaying. ... The $8 billion loan sale for Chrysler Financial, meanwhile, is still on track to be completed this week, though the company has had to increase the amount of interest it would pay on the debt.

It also needs to raise $42 billion, much of it to compensate Daimler for existing Chrysler debt it still holds. That sale isn't expected to be as difficult, because much of it will be backed by healthy Chrysler auto loans.

by Calculated Risk on 7/24/2007 07:41:00 PM

From the WSJ: Fed Official Sees No Signs Of Subprime Woes Spreading

A Fed policy maker said rising delinquencies on prime mortgages would be one reason to worry that problems in subprime mortgages are affecting the broader economy, but there's no sign of that yet.

"If I started to see some of the spillovers occur in some of the prime mortgages, I'd get more nervous," Federal Reserve Bank of Philadelphia president Charles Plosser said in an interview with The Wall Street Journal Tuesday. Worrisome signals, he said, would be "things like serious, substantial falls in consumer spending, or employment really begin to tail off" or signs that the negative impact on consumer wealth of falling housing prices is "showing up in consumption in one form or another, or employment. And we don't see that much."

I guess Plosser will be "more nervous" tonight when he reads the CFC press release and the summary of their conference call.