The Housing Bubble

Some housing bubble news from Wall Street and Washington. Associated Press, “The National Association of Realtors reported Monday that…over the last 12 months, however, existing home sales have plunged 20 percent, underscoring the troubles in the housing sector. Home prices continued to sink. The median price of a home sold last month was $210,200. That marked a 3.3 percent drop from a year ago. It was the fifth biggest annual decline on record.”

“The inventory of unsold homes in November was 4.27 million homes. At the current sales pace it would take 10.3 months to exhaust that overhang. ‘Inventory is still high and further reduction in prices may be required in some areas to induce buyers back into the market,’ said the association’s chief economist, Lawrence Yun.”

“Regionally, existing-home sales in the West are 25.0 percent below a year ago. In the Midwest, existing-home salesare 16.9 percent below November 2006. Existing-home sales in the South are 19.4 percent below a year ago. Existing-home sales in the Northeast are 19.4 percent below November 2006.”

From MarketWatch. “Sales of existing homes are down 31% from the peak of 7.21 million two years ago.”

“Homebuilder M/I Homes Inc. said it will take charges of about $80 million in the fourth quarter on the sale of 3,700 lots and expects further impairment charges related to its inventory during the quarter.”

“As part of the sales, M/I Homes also sold all its current lots in the West Palm Beach, Fla. area and is completely exiting development in the market.”

From Bloomberg. “London Scottish Bank Plc, the U.K. lender to customers with poor credit histories, fell the most in a decade in London trading after saying it will take a charge of as much as 22 million pounds ($44 million) to cover losses.”

“London Scottish said in a separate statement it had ’strengthened’ its lending criteria for new mortgage business.”

“Defaults on privately insured U.S. mortgages rose 35 percent in November to a record, an industry report today showed, adding to evidence the U.S. housing slump is deepening.”

“The number of insured borrowers falling more than 60 days late on payments jumped to 61,033 last month from 45,325 in November 2006, according to the Mortgage Insurance Companies of America. The missed payments, often a prelude to foreclosure, represented a 2.9 percent increase from October.”

“Australian mortgage-backed bond sales fell to the lowest in three years as the fallout from the U.S. housing recession cut demand for the assets in the second half of the year.”

“Sales of bonds backed by Australian home loans plunged 87 percent in the last six months to A$5.9 billion ($5.2 billion), from a record high of A$44.4 billion in the first half of the year, according to Deutsche Bank AG.”

“Yield premiums continued to increase, leading Sydney-based Bluestone Group Ltd., a non-bank lender, to pay a record high 108 basis points on A$400 million of top-rated debt Dec. 7, more than five times what it paid to raise funds in March.”

From BBC News. “After previous financial disasters caused by excessive bank lending, regulators developed rules to limit how many loans a bank could have on its balance sheet. But, across America, banks were lending far more than that 10 to 1 ratio.”

“How had they managed to do it? The first technique banks used to circumvent regulators’ rules is known as ’securitisation’ - a way of a bank getting loans it had already made off its balance sheet. They did this by selling their loans off to pension funds, insurance companies, even to other banks around the world.”

“The banks’ loans should have been hard to sell because they were low quality - since they were issued with no questions asked, there was little assurance they could be repaid.”

“But the banks had an answer to that. To make their risky loans appear attractive to buyers, banks used complex financial engineering to repackage them so they looked super-safe and paid returns well above what equivalent super-safe investments offered.”

“Even savvy Wall Street veteran and billionaire Wilbur Ross could not figure out what was happening.”

“‘What they were fundamentally doing was taking a $100 pile of low quality securities and creating something they could sell to investors for $103,’ he says. ‘So there was an alchemy - making more price than there was value.’”

The Orange County Register. “What became a global financial crisis had roots in Orange County. Securitization of mortgages wasn’t invented here. Fannie Mae had been doing that for decades with conventional mortgages. And subprime lending – previously known as ‘hard money’ or C and D lending to people with subprime credit – had a long history.”

“But until the 1990s, subprime lenders like Long Beach Savings could only resell their mortgages to private investors willing to take bigger risks for higher returns. Once Wall Street began issuing public securities, the lenders’ capital grew exponentially.”

“A clear plastic plaque on William Komperda’s desk memorializes a 1990 deal that helped launch the made-in-Orange County subprime lending bonanza. Dated June 28, 1990, the plaque commemorates $70,732,555 of bonds underwritten by Komperda’s Connecticut-based firm, Greenwich Capital.”

“It was the first time his client, Long Beach Savings F.S.B., publicly placed securities backed by subprime mortgages. ‘We thought it was just a niche market,’ Komperda said of the initial securities offering. ‘It grew beyond what we imagined.’”

“By 2005, the peak year of subprime mortgage securities offerings, Wall Street sold $508 billion worth of the issues, according to Inside Mortgage Finance. Investors around the world purchased the securities, a boom that went bust this year.”

The Wall Street Journal. “During the housing boom, the subprime industry succeeded at more than just writing mortgages. It also shot down efforts by some states to curtail risky lending to borrowers with spotty credit.”

“Ameriquest Mortgage Co., until recently one of the nation’s largest subprime lenders, was at the center of those battles. Working with a husband-and-wife team of Washington lobbyists, it handed out more than $20 million in political donations and played a big role in persuading legislators in New Jersey and Georgia to relax tough new laws.”

“Those victories, in turn, helped blunt efforts by other states to crack down on reckless lending, critics of the industry contend.”

“Executives at Ameriquest, based in Orange, Calif., acknowledge that the company lobbied heavily against state lending restrictions, but say that other subprime lenders did so as well. In fact, a host of subprime lenders and banking trade groups, including Citigroup Inc., Wells Fargo & Co., Countrywide Financial Corp. and the Mortgage Bankers Association, spent heavily on lobbying and political giving.”

“Federal lawmakers didn’t pose much of a threat to the subprime industry in recent years. Members of Congress received at least $645,000 in donations from Ameriquest and large sums from other big subprime lenders, Federal Election Commission records indicate. They debated new oversight of the industry, but took no action.”

From Reuters. “Merrill Lynch & Co is in talks with Chinese and Middle Eastern sovereign wealth funds that could lead to the sale of another big stake in the U.S. bank, British newspaper The Observer reported, citing sources in London and New York.”

“New Chief Executive John Thain has been trying to bolster the company’s capital amid huge subprime mortgage losses. ”

“‘The multi-billion cash injection from Singapore’s Temasek TEM.UL was not enough and Thain is taking calls from a host of other potential saviors, which are understood to include sovereign fund investors from the Gulf and China,’ the newspaper quoted a US observer as saying.”

“A source told the Observer: ‘Thain is desperately seeking an additional infusion of foreign capital to bolster Merrill’s balance sheet. It could be done by selling shares or other assets to raise cash.’”

Dow Jones Newswires. “Some of the world’s biggest banks are increasingly turning to governments in Asia and the Middle East for cash to fill gaping holes left by mortgage-related write-downs.”

“The Observer quoted Sanford Bernstein analyst Brad Hintz saying Thain is seeking capital from foreign investors to offset a large fourth-quarter write- down. The newspaper reported Thain and other Merrill executives plan to work through the New Year holiday on strategies to save the bank if the credit crunch worsens further.”

“A possible merger with another banking group has not been ruled out but was seen as an ‘extreme scenario,’ according to the report.”

National Mortgage News. “One question some of you might be asking is this: if subprime volumes have screeched to a halt, what are all those traders on Wall Street doing? Good question. We’re told that come January there will be a wholesale shakeup at several firms.”

“Sources tell us that Deutsche Bank, Lehman Brothers and Merrill Lynch all are conducting reviews (or soon will) of their entire mortgage operations. As for where the most drastic changes might occur, Merrill Lynch might be a good bet.”

“An account executive there told us recently about conditions at Merrill’s First Franklin Financial Corp. He said many offices are not funding loans while awaiting training for Fannie Mae products.”

“‘So far, there’s been no training,’ he told us. The AE, requesting his name not be used, painted a bleak picture, saying business is so slow that employees pass the day playing Scrabble and PlayStation on the conference room projector screen.”

“He said FFFC AEs and executives keep asking Merrill why they can’t just originate loans and put them on the balance sheet of Merrill’s FDIC-insured bank. ‘We’re not getting any answers,’ he said.”

“The last word of the year: Mortgage executives, financial analysts, politicians, consumer advocates and journalists, to name but a few, are now analyzing just what went wrong in subprimeland. Readers of National Mortgage News and our affiliates already know the answer to the blame-game question of ‘Who did it?’”

“Mortgage bankers, brokers, Wall Street financiers, appraisers, underwriters, rating agencies, and yes, consumers, all played a starring role.”