by Calculated Risk on 12/19/2007 06:29:00 PM

From Bloomberg: S&P Cuts Alt-A Mortgage Bonds; Analysts Warn on Prime

Standard & Poor's reduced its ratings on about $7 billion of Alt-A mortgage securities, citing a sustained surge in delinquencies during the past five months on loans considered a step above subprime.
...
Since July, late payments on Alt-A loans in bonds issued in 2005 have increased 37.3 percent to 8.62 percent, while delinquencies for such mortgages in 2006 securities rose 62.1 percent to 11.64 percent, S&P said.

The article also has some analyst comments on prime loans:

Prime ``jumbo'' mortgages from recent years packaged into securities also have rising delinquencies that may create losses among some bonds with investment-grade ratings, according to reports yesterday by New York-based securities analysts at Credit Suisse Group and UBS AG. ...

``It's not just a subprime problem,'' Joshua Rosner, managing director at New York-based research firm Graham Fisher & Co., said ...

We are all subprime now.

by Calculated Risk on 12/19/2007 04:18:00 PM

From Bloomberg: D.R. Horton Credit Ratings Cut to Junk Status by Moody's (hat tip Matt)

D.R. Horton Inc., the fourth-largest U.S. homebuilder ... ratings were lowered to Ba1 on concern that a housing recovery won't begin before 2009 ...

The public builder BKs are coming. I'm not saying Horton will go BK, but more of the public builders probably will (like Levitt & Sons). There is simply too much capacity in the industry, plus too much debt, too much inventory, and poor demographics for housing in general. The next few years will be very difficult for the homebuilders, and I suspect 2008 will make 2007 look like a good year.

by Calculated Risk on 12/19/2007 01:44:00 PM

From Richmond Fed President Jeffrey Lacker: Economic Outlook

Since August ... the inflation picture has deteriorated. In September and October, the overall PCE price index rose at a 3.3 percent annual rate, and the core index rose at a 2.6 percent rate. Judging by the closely related consumer price index, the numbers for November will be even worse. Now these numbers do display transitory swings, so I wouldn't extrapolate them forward indefinitely. Still, I have to say that I am uncomfortable with the inflation picture, and disappointed that the improvement we saw earlier this year was not more lasting.

I am also troubled by the lengthy divergence we've seen between overall and core inflation. Some of you may recall that core inflation was devised in the 1970s to filter out some of the more volatile consumer prices to get a better read on inflation trends. For several decades, core inflation seemed to work well due to the fact that food and energy prices had no clear trend relative to the overall price level. In the last few years, though, overall inflation has been persistently above core inflation, and few observers expect oil prices to go back below $20 per barrel. Because the job of a central banker is to protect the purchasing power of currency, it is overall inflation that we need to keep down, not just core inflation. Going forward, markets expect oil prices to back off slightly from their current level, and I hope they are right. If energy prices fail to decline, monetary policy decisions will be that much more difficult in 2008.

Lacker isn't currently a voting member of the FOMC, and last year he voted against holding the Fed Funds rate steady several times:

Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

So we need to keep Lacker's comments in perspective; he is more hawkish on inflation than most of the FOMC members.

For fun, here is how you calculate the two month PCE and core PCE inflation rates that Lacker mentioned. Using monthly data from Table 2.3.4U. (link shows quarterly data), we see that the PCE price index (line 1) in August was 117.711 and 118.356 in October. For the annualized rate from a two month period, first divide 118.356/117.711 = 1.00548. Take that to the 6th power (2 months = 1/6 of a year) and subtract 1. That gives 3.33% (Lacker rounded to 3.3%).

For the Core PCE inflation rate (line 23), the August number was 114.591, October was 115.074. So the annualized rate for two months was (115.074/114.591)^6 - 1 = 2.56% (Lacker rounded to 2.6%).

Finally, this graph shows the "lengthy divergence" between the PCE and core PCE inflation rates.

Click on graph for larger image.

Note that this graph is of the year-over-year change, and Lacker was talking about the two month annualized rate of change. The annualized rate over the last two months is higher, so the picture has definitely deteriorated.

The "lengthy divergence" (blue above red) has been mostly due to the rapid increase in oil prices.

by Calculated Risk on 12/19/2007 12:06:00 PM

From the WSJ: Ratings Move Roil Bond Insurers

The first potential casualty that went public was Canadian Imperial Bank of Commerce, which said it is a hedge counterparty with ACA Financial on about $3.5 billion in U.S. subprime real estate. CIBC said it could report a large fiscal first-quarter charge related to ACA Financial's rating cut and its ability to remain as a viable counterparty.

The informed speculation was that CIBC's counterparty was ACA. That was confirmed by CIBC this morning. See: Counterparty Risk: CIBC and ACA. Others will be lining up at the confessional.

by Calculated Risk on 12/19/2007 11:55:00 AM

Here is the S&P Report: Detailed Results Of Subprime Stress Test Of Financial Guarantors Some excerpts from the company specific comments:

Ambac Assurance Corp.
We affirmed the 'AAA' financial strength and financial enhancement ratings of Ambac Assurance and the 'AA' debt ratings of Ambac Financial Group, Inc. but the outlooks have been changed to negative. ...

CIFG Financial Guaranty
We have affirmed the 'AAA' financial strength rating of CIFG and the outlook remains negative. ...

Financial Guaranty Insurance Co.
The ratings of FGIC and FGIC Corp. are placed on CreditWatch with negative implications. Our most recent analysis of the company's non-prime RMBS and CDO of ABS exposure indicates a level of losses which would result in its capital position falling below our 'AAA' requirements. ...

MBIA Insurance Corporation
The outlook on MBIA and MBIA Inc.'s financial strength and debt ratings is changed to negative and their ratings affirmed. The outlook change is warranted because of the absolute size of stress scenario losses relative to the adjusted capital cushion of $2.75 billion. ...

XL Capital Assurance Inc./XL Financial Assurance Ltd.
We revised the outlook on XLCA, XLFA, and Security Capital Assurance Ltd.'s financial strength and debt ratings to negative, while affirming the respective ratings. ...

ACA Financial Guaranty Corp.
The financial strength and financial enhancement ratings on ACA are lowered to 'CCC' and placed on CreditWatch Developing. The lower rating reflects the substantial excess-of-modeled stress test losses of nearly $2.2 billion over the company's adjusted capital cushion at Dec. 31, 2007 of approximately $650 million. While ACA has been diligently working to address contingent liquidity concerns, it has not focused significantly on raising additional capital. Lower new business activity during this period of rating uncertainty is a positive from a capital adequacy standpoint but the incremental improvement is not sufficient to close the gap between stress losses and the capital cushion. The magnitude of the gap is large enough to create significant doubt that the company could possibly access sufficient hard capital resources to resolve the problem. CreditWatch Developing acknowledges the possibility that the company may be able to modify its obligations to its counterparties but reflects the real possibility that the counterparties will require the company to post significant collateral going forward.

by Calculated Risk on 12/19/2007 11:28:00 AM

Update: Only news story I could find so far from Reuters: S&P cuts ACA to "CCC" junk, acts on 6 bond insurers

Press Release: S&P Takes Rtg Actions On Six Bond Insurers (no link, hat tip Brian)

Standard & Poor's Ratings Services today announced various ratings actions on six financial guaranty insurance companies.

The rating actions were prompted by worsening expectations for the performance of insured nonprime residential mortgage backed securities and CDOs of asset backed securities. Based upon current stress test analysis, the details of which are being published simultaneously with this release, the affected companies may experience claims and/or capital consumptive negative rating transitions such that their capital resources may no longer be sufficient at their respective rating levels. Another consideration in the analysis, if there is a capital shortfall, is the magnitude of the shortfall and the extent to which the company has raised or is planning to raise new capital, and the viability of that capital plan.

Standard & Poor's will host a teleconference today at 3 p.m. EST.

... Our analysis of the impact of the ratings actions announced today is ongoing. We expect to post lists of affected structured finance issues later today. As we complete our analysis during the next few weeks, we may publish additional ratings changes.

ACA cut to CCC from A, AMBAC and MBIA outlooks revised to negative from stable. More to come ...

by Calculated Risk on 12/19/2007 10:11:00 AM

From MarketWatch: Morgan Stanley write-downs grow by $5.7 billion

Morgan Stanley said Wednesday it's writing down an additional $5.7 billion of mortgage-related assets, taking the total fourth-quarter loss to nearly $10 billion in the latest sign that the credit crunch is worsening.
...
New York-based Morgan Stanley booked the additional $5.7 billion of write-downs in November.
...
Morgan Stanley blamed the $9.4 billion total write-down on "the continued deterioration and lack of liquidity in the market for subprime and other mortgage-related securities since August."

MarketWatch has a chart of the Bankers' Writedowns ($70 Billion so far) and much more to come.

The confessional is very busy.

by Calculated Risk on 12/19/2007 01:01:00 AM

“It’s a zero-sum game. If you put trades on that worked so well that you bankrupt your counterparty, you will not collect on those trades.”
(edit, quoted wrong person) Jim Keegan, a senior vice president and portfolio manager at American Century Investments

I'm starting with Keegan's comment because that was my first reaction to a possible bailout by the banks. Since ACA currently has a negative net worth, wouldn't the bailout amount have to be equal to the amount that ACA lost (and the banks saved by buying insurance)? How does that help?

From the NY Times: Banks Study Bailing Out Struggling Bond Insurer

Officials from Merrill Lynch, Bear Stearns and other major banks are in talks to bail out a struggling bond insurance company that has guaranteed $26 billion in mortgage securities, according to two people briefed on the situation, because the insurer’s woes could force the banks to take on billions in losses they had insured against.

Worth reading.

by Calculated Risk on 12/19/2007 12:04:00 AM

Press Release: Hovnanian Enterprises Reports Fiscal 2007 Results

Sales:

... the Company delivered 13,564 homes with an aggregate sales value of $4.6 billion in fiscal 2007, down 24.4% from 17,940 home deliveries with an aggregate sales value of $5.9 billion in fiscal 2006. In the fourth quarter, the Company delivered 3,969 homes with an aggregate sales value of $1.3 billion in fiscal 2007, a decline of 22.0% in sales value from the fourth quarter in fiscal 2006.

Cancellation rate:

The Company's contract cancellation rate, excluding unconsolidated joint ventures, for the fourth quarter of fiscal 2007 was 40%, compared with the rate of 35% reported in both the fourth quarter of 2006 and the third quarter of fiscal 2007.

The headline number will be their losses and writedowns, but for the overall housing market, I think sales and cancellations are interesting. I use changes in the cancellation rate to adjust the New Home sales number from the Census Bureau (since the Census Bureau excludes cancellations). With rising industry wide cancellation rates, the Census Bureau understates the increase in inventory.

by Calculated Risk on 12/18/2007 08:11:00 PM

Krugman speaks at Google on Dec 14th. Krugman was on book tour, but he spoke about the current economic issues instead.

Paul Krugman is a professor of economics and international affairs at Princeton University, and the author or editor of 20 books and more than 200 professional journal articles. In recognition of his work, he has received the John Bates Clark Medal from the American Economic Association, an award given every two years to the top economist under the age of 40. The Economist said he is "the most celebrated economist of his generation."