by Calculated Risk on 12/18/2007 07:19:00 PM

From the Financial Times: Second wave of SIV liquidity problems looms

January will bring the start of a second wave of liquidity problems for SIVs as the vast majority of medium-term funding starts to come due for repayment, according to a report from Dresdner Kleinwort analysts to be published on Wednesday.
...
SIVs rely on cheap, short-term debt ... [that] has come from both ...(CP) ... and from the slightly longer maturity medium-term note (MTN) markets. ... “So far SIVs have primarily felt the impact of collapsed CP issuance,” said Domenico Picone at DrK. “Outstanding MTN for the 30 SIVs currently stands at $181bn, which will be the next liquidity challenge they face.”

Luckily the SuperSIV will be ready to step in, from Bloomberg: `SuperSIV' Fund to Start Buying in Weeks, Banks Say.

by Calculated Risk on 12/18/2007 04:13:00 PM

From Bloomberg (no link yet): Macklowe Failed to Repay $500 Million Loan, Newsletter Says (hat tip Brian)

New York investor Harry Macklowe failed to pay a $495 million loan from Deutsche Bank AG to develop an office, hotel and condominium tower on the Park Avenue site of a former luxury hotel, Commercial Mortgage Alert said.
...
He also missed a payoff deadline for a $120 million loan on
510 Madison Ave. ...

In September, the WSJ reported: Macklowes On a Wire

Mr. Macklowe and his son Billy paid $6.8 billion to buy seven New York buildings from Equity Office Properties Trust. ... the sale was one the most expensive real-estate deals in U.S. history, symbolizing the skyrocketing prices paid for buildings at a time of cheap debt and demand for office buildings.

The transaction was emblematic of the lax underwriting standards of the real-estate boom. Macklowe Properties put in only $50 million of equity and borrowed $7.6 billion, according to the documents. (Mr. Macklowe borrowed more than the purchase price to cover closing costs and other fees.) The deal also had "negative debt service," meaning that the rents from the buildings weren't expected to cover the debt payments for five years ...

Talk about a high LTV: borrowing $7.6 Billion for a $6.8 Billion purchase on properties that have probably declined in value. Approximately $5.0 Billion of the debt must be paid off in February.

by Calculated Risk on 12/18/2007 03:42:00 PM

The Union Tribune has a graph of house prices in San Diego based on the DataQuick numbers released earlier today: Home prices tumble

Click on graph for larger image.

This graph from the Union Tribune article shows the median home price in San Diego has declined 15% from the peak in November 2005, and has now returned to early 2004 pricing.

From an earlier post, this graph shows the round trip for 15% and 30% nominal national price declines for the S&P/Case-Shiller U.S. National Home Price Index and the OFHEO, Purchase Only, SA index.

A 15% nominal price decline would take prices back to late 2004 for both indices. A 30% price decline for Case-Shiller would take prices back to mid-2003; 30% for OFHEO would take prices back to late 2002.

For San Diego, the Case-Shiller index through Sept 2007, shows prices have declined to below the July 2004 level (very similar to the DataQuick numbers). Not all areas will see the same price declines, but these round trip graphs will probably become common.

by Calculated Risk on 12/18/2007 01:40:00 PM

From DataQuick: Southland prices fall again; sales perk up

... Sales were the slowest for a November in at least 20 years and the median sale price posted a record 10.3 percent year-over-year decline ...

A total of 13,173 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in November. That was up 2 percent from 12,913 sales in October, and down 42.7 percent from 23,005 in November last year, according to DataQuick Information Systems.

Last month's sales were the lowest for any November in DataQuick's statistics, which go back to 1988. The previous low was in November 1992, when 15,446 homes sold. November has averaged 22,749 sales over the last 20 years.
...
The median price paid for a Southland home was $435,000 last month, down 2.2 percent from $445,000 in October, and down 10.3 percent from $485,000 in November last year. That year-over-year decline is the largest for any month in DataQuick's records. Last month's $435,000 median was the lowest since March 2005, when it was also $435,000.

Foreclosure activity is at record levels ...

Record low sales, record falling year-over-year decline in prices, record foreclosure activity - sounds like a broken record.

by Calculated Risk on 12/18/2007 12:27:00 PM

From MarketWatch: Goldman's 'horrible' Nov. points to more credit losses: CNBC

... Goldman Sachs ... suffered through a "horrible" November, in a signal that the credit crunch may continue, CNBC reported Tuesday ... the business channel reported that Goldman recently endured the worst two weeks in the company's history.

This follows this mornings news: Goldman Sachs again outpaces expectations

Goldman Sachs on Tuesday posted fourth quarter earnings that were well ahead of analyst estimate ... highlighting the firm's ability to manage risk and outride rivals in one of the toughest markets in memory.

Goldman's Q4 ended in November, so that included the "horrible" November.

by Tanta on 12/18/2007 10:04:00 AM

Only a mere fifteen months after the eagerly-awaited Nontraditional Mortgage Guidance began closing the barn door slowly enough that the entire wretched 2006 subprime and Alt-A loan vintage still managed to get out, the Fed has deemed the time right to take decisive action on mortgage regulation:

Dec. 17 (Bloomberg) -- The Federal Reserve will make it harder for lenders to charge fees for early repayment of subprime mortgages, according to consumer advocates and a regulator.

The change will probably be one of several recommendations from the Fed's Board of Governors when it gathers in Washington tomorrow to respond to the collapse in the market for subprime home loans. . . .

Fed staff, with input from policy makers, will propose as many as four new requirements for lenders tomorrow before a Board of Governors meeting scheduled for 10 a.m. They may also set two new standards for disclosure.

The proposal will suggest limiting prepayment penalties for most high-cost loans, while giving lenders some flexibility through several exceptions.

``The consensus seems to be that they are going to do something on no-documentation loans, and they are going to ban prepayment penalties,'' said Brenda Muniz, legislative director in Washington at Acorn, a community advocacy group. ``The devil is in the details,'' she said. There may be several loopholes for lenders, Muniz added.

The staff memorandum will also probably recommend lenders be forced to include property taxes and insurance in monthly payments. They are already included in payments on most prime home loans, which banks make to their best customers. The proposal will also address standards for measuring whether borrowers can afford a loan for the duration of the mortgage, instead of just for an initial period of lower interest rates. . . .

"It is a common practice for these payments to be escrowed in the prime markets, and I see no reason that escrows should not be standard practice in the subprime markets too," Kroszner said in a Nov. 5 address in Washington.

In the real world, it is common practice for tax and insurance escrows to be required on prime loans only when the LTV is greater than 80%; if there's still a lender around who won't waive escrows for lower-LTV loans (usually for an additional 0.25% in points), I haven't heard about it. I can tell you that nobody complains more bitterly than a prime borrower with a low LTV forced to escrow; these are responsible folks who quite rightly consider escrows on a par with excess tax withholding. It is particularly galling when servicer escrow processes, in this day and age of frequent loan servicing transfers and stripped-down operations, are such a mess in so many respects. Escrowing your tax and insurance payments should at least guarantee that you'll never have a policy cancelled or get a late notice from the county assessor, but too many people are finding that not to be the case.

Practically speaking, what changed in the world of the last several years was the explosion of the piggyback loan. Purchase mortgages, especially for first-time homebuyers, that would a few years ago have had high LTVs and mortgage insurance (which is always escrowed), became 80% first mortgages and therefore fell under the escrow waiver rules. So at some level this problem is going to solve itself, as second-lien lenders exit the game and low-down loans have to secure mortgage insurance, which then require escrow accounts. I will be quite interested to see what gets proposed here by the Fed, however, as a rule.

The interesting thing is that the industry never knows what to think about escrow rules. Servicers like them, since in addition to the obvious risk reduction, escrow balances are a profitable source of float. Originators, however, have two important reasons to resist giving up escrow waivers: you lose low-LTV refi business (it's hard to talk a low-LTV borrower into refinancing an existing loan that doesn't require escrows into a new loan that does, if the low-LTV borrower wants to manage her own T&I), and you just can't play qualifying games with stretched borrowers. A high-DTI loan without T&I included in the payment is more than usually likely to fail eventually, but often not until the first or second tax bill comes due. A high-DTI loan with T&I included in the payment is more than usually likely to fail early, while it's in that nasty early default warranty period. So I expect the usual schizoid response from the lobbyists.

One thing that has been a particular problem lately is estimated tax payments--escrowed or just calculated for qualifying purposes--on new construction. A perfectly common slimy origination practice is simply to use the last actual tax bill on the parcel to calculate next year's tax bill, even though a moderately alert cub scout could tell you that as the property was unimproved acreage last year and will be assessed next year with a 3,000 square foot home on it, last year's tax bill is going to be a tiny fraction of what the borrower will actually have to pay. Every underwriter knows this practice is creating loan failure; every loan officer knows this practice is shoe-horning in marginal borrowers who wouldn't meet DTI requirements using sane numbers and hence is a way of keeping the party going.

I certainly wouldn't expect Fed regulations on mortgage escrows to include drilled-down rules on how to calculate taxes on recently improved property. But that's kind of the point: the industry has behaved in such perverse, self-defeating ways lately that you probably do have to actually write legislation including the kind of blindingly obvious rules on tax calculation that underwriter trainees used to master by the end of their first week. If you don't, then these self-defeating practices will continue as long as the industry is structured so that someone profits from it.

There's also the chronic problem of "de minimus" HOA assessments and ground rents. Servicers hate having to manage escrow accounts for HOA assessments of $50 a year, not to mention those $1.00 ground rents. Those things never get escrowed. But that means that the increasing number of loans with quite significant assessments are also going un-escrowed, as servicers just decide not to handle HOA dues across the board. That wasn't a huge problem back when we didn't put first-time homebuyers with no savings into gated communities with an absurd DTI. Now that we do, we're seeing the first foreclosure notice coming from the HOA, not the lender or the tax assessor.

The safe prediction is that as soon as the draft rules are announced, we'll get a press release from the MBA decrying the additional cost of mortgage financing that will result. What with the add-ons from cram-down legislation and prepayment penalty restrictions and eliminating no-docs and ending appraiser-shopping and everything else they've warned us about in dire tones, we can (should we choose to believe them) prepare for 12.00% mortgage rates by about March. Of course, by then your tax bills might actually start dropping a bit, once the assessor gets the new comps . . .

by Calculated Risk on 12/18/2007 08:30:00 AM

The Census Bureau reports on housing Permits, Starts and Completions.

Seasonally adjusted permits fell; permits for single family units fell sharply:

Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 1,152,000. This is 1.5 percent below the revised October rate of 1,170,000 and is 24.6 percent below the revised November 2006 estimate of 1,527,000.

Single-family authorizations in November were at a rate of 764,000; this is 5.6 percent below the October figure of 809,000.

Starts fell sharply, with starts for single family units at the lowest level since April 1991:

Privately-owned housing starts in November were at a seasonally adjusted annual rate of 1,187,000. This is 3.7 percent below the revised October estimate of 1,232,000, and is 24.2 percent below the revised November 2006 rate of 1,565,000.

Single-family housing starts in November were at a rate of 829,000; this is 5.4 percent below the October figure of 876,000.

And Completions declined sharply:

Privately-owned housing completions in November were at a seasonally adjusted annual rate of 1,344,000. This is 4.1 percent below the revised October estimate of 1,402,000 and is 28.7 percent below the revised November 2006 rate of 1,885,000.

Single-family housing completions in November were at a rate of 1,088,000; this is 4.1 percent below the October figure of 1,135,000.

Click on graph for larger image.

Here is a long term graph of starts and completions. Completions follow starts by about 6 to 7 months.

Look at what is about to happen to completions: Completions were at a 1,344 million rate in November, but are about to follow starts to below the 1.2 million level. I'd expect completions to fall rapidly over the next few months, impacting residential construction employment.

Even with single family starts at the lowest level since the '91 recession, when you look at inventories and new home sales, the builders are still starting too many homes. I expect starts to continue to decline over the next several months.

by Calculated Risk on 12/18/2007 12:00:00 AM

From the NY Times: Fed and Regulators Shrugged as the Subprime Crisis Spread. This story offers an opposing perspective to Greenspan's personal exoneration.

Greenspan is no Atlas.

by Calculated Risk on 12/17/2007 06:17:00 PM

Press Release: Fitch Places FGIC on Rating Watch Negative After CDO & RMBS Review

Fitch Ratings has placed the following ratings of FGIC Corporation (FGIC Corp.) and subsidiaries Financial Guaranty Insurance Co. (FGIC) and FGIC UK Ltd. on Rating Watch Negative:

FGIC Corp.

--Long-term 'AA';

--$325 million of 6% senior notes due Jan. 15, 2034 'AA'.

Financial Guaranty Insurance Company

FGIC UK Ltd.

--Insurer financial strength 'AAA'.


This action follows the completion of the updated assessment by Fitch into FGIC's current exposure to structured finance collateralized debt obligations (SF CDOs) backed by subprime mortgage collateral and one CDO-Squared deal, as well as FGIC's exposure to residential mortgage-backed securities (RMBS). This review indicates that FGIC's capital adequacy under Fitch's Matrix financial guaranty capital model currently falls below guidelines for an 'AAA' IFS rating by more than $1 billion, due to downgrades by Fitch in a number of FGIC's insured SF CDO's coupled with some deterioration in the company's RMBS portfolio, including second-lien mortgage securitizations.

If within the next four-to-six weeks, FGIC is able to obtain firm capital commitments, and/or put in place reinsurance or other risk mitigation measures in order to meet capital guidelines, Fitch would expect to affirm FGIC's ratings with a Stable Rating Outlook. If FGIC is unable to meet capital guidelines in the noted time frame, Fitch would expect to downgrade FGIC's ratings. In that event, Fitch anticipates downgrading FGIC's IFS rating no lower than one or two notches. FGIC and its investor group have presented plans to Fitch about bolstering FGIC's capital position to support an 'AAA' IFS rating. While the basics of the plan would appear to be sufficient to restore FGIC's 'AAA' rating and Stable Outlook, execution of the plan could be challenged by individual requirements at each of FGIC's primary investors.

by Calculated Risk on 12/17/2007 03:57:00 PM

From Bloomberg: Paulson Favors Fannie, Freddie Buying Jumbo Mortgages

Paulson said in an interview today that he favors allowing the two companies to purchase so-called jumbo loans, which exceed $417,000. ...

Paulson said he agreed with Federal Reserve Chairman Ben S. Bernanke, who suggested to lawmakers that they consider allowing Fannie Mae and Freddie Mac into the jumbo mortgage market. ``I think Ben Bernanke and I are on the same page,'' Paulson said.

Bernanke indicated in a Nov. 8 hearing that he favored letting Fannie Mae and Freddie Mac buy mortgages of up to $1 million.