Although, Bear Stearns is no more, the NY times has some interesting observations on the now dead bank....
WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms
Stick around, because we’ll soon find out. And it’s not going to be pretty.
Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.
But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.
And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.
Bear’s default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4 percent.
Let’s not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.
Why does every growth rate in the housing market have to be massive. First, large price growth numbers, then large price falls, and now a 60 percent increase in foreclosures.
NEW YORK (CNNMoney.com) -- Foreclosure filings nationwide jumped 60% in February compared with the same month last year, but they decreased slightly versus January, according to a report released Thursday.
RealtyTrac, an online marketer of foreclosure properties, said 223,651 homes got hit with foreclosure filings last month, which include default notices, auction sale notices and bank repossessions. 46,508 of those were lost to bank repossessions, which more than doubled over last year. The report also indicated that foreclosure filings in February fell 4% compared with January, similar to a 6% decrease that occurred during the same time-span in 2007.
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More on the Case-Shiller numbers from the International Herald Tribune
Across much of the nation, home values are dropping — even those backed by solid mortgages — and banks are repossessing more every day. Most experts say the dive won't hit bottom for another year and only after excess inventory is sharply reduced and credit markets improve.
More government intervention may be needed, too, if the free market system doesn't work quick enough.
"The housing value crisis is spreading and deepening," said David Abromowitz, a senior fellow at the Center for American Progress. "It has gone way beyond subprime borrowers stretched too far with bad loans and now has clearly extended into the housing markets more broadly."
U.S. home prices dropped 8.9 percent in the final quarter of 2007 compared with a year ago, according to the Standard & Poor's/Case-Shiller home price index released Tuesday. That marked the steepest decline in the index's 20-year history.
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For US home builders, the current market is "challenging". In PR-speak, the word "challenging" means "total, unmitigated disaster".
Today, confidence among U.S. home builders crumbled this month to the lowest level in 16 years. The home builder sentiment index declined to 24 this month. We have to go back to January 1991 to find it at a lower reading.
Home builders certainly have plenty of problems out there to get them depressed. Inventories are high, sales are declining, prices are crashing, prospective buyer traffic is falling off and interest rates will stay at their current elevated level for months to come. Moreover, all those incentives, which have understated the true extent of the price crash,just aren't working anymore.
Things are so bad, it must be a challenge for US home builders to even get themselves out of bed in the morning.
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In the face of overwhelming evidence of a housing market meltdown, the NAR is slowly recognising the extent of the disaster. Today, it published their latest market assessment, and further reduced their 2007 housing price forecast. The group now believe that house prices will fall by about 1.4 percent this year.
The NAR also reduced their sales forecast, suggesting that existing home sales will reach just 6.11 million this year. That is a lot of lost 6 percent commissions. Furthermore, the group now believes that housing starts in 2008 will fall to their lowest level since 1998.
Although the NAR have woken up to the the fact that 2007 will be a bleak year for realtors, denial again sets in when it considers 2008. The group believe that existing home sales will increase, and prices will recover slightly. Yeah right, 2008 will be prime time for ARM resets. The year will be marked by an avalanche of defaults and foreclosures, which will provide the ideal background for an market recovery.
A pattern is now emerging. From here on out, the NAR will produce their monthly forecast, with each press release more pessimistic than the one issued before. It will be a case of hope fighting it out with reality. Of course, reality always wins.
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The housing market took another battering in May. The slump in activity, which started last year, is now accelerating.
Will it get worse? This is only the beginning.
US homebuilder confidence is at a 16 year low. The industry isn't short of misery; rising inventory, falling sales, rising defaults, falling profitability, rising interest rates, and falling prices. Who could hold a happy face after that litany of problems?
June 18 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest since February 1991 as interest rates climbed and delinquencies surged. The National Association of Home Builders/Wells Fargo index of sentiment declined to 28 this month from 30 in May, the Washington-based association said today. Readings below 50 mean most respondents view conditions as poor. Economists surveyed by Bloomberg News forecast the gauge to stay unchanged this month.
Homebuilders including Hovnanian Enterprises Inc. are losing money as they cut prices to stem a slide in sales amid stricter standards for getting mortgages. Builders have scaled back projects to work off bloated inventories, a sign housing construction will weigh on growth for the rest of the year, economists say.
The median forecast of 35 economists surveyed by Bloomberg was for the index to stay at 30. Predictions ranged from 28 to 32. The group's measure of single-family home sales fell to 29 from 31. The index of traffic of prospective buyers slipped to 21 from 22. A gauge of sales expectations for the next six months declined to 39 from 41.
Federal Reserve policy makers last month acknowledged that the housing recession will hold down growth longer than they had anticipated. At the same time, officials have kept their outlook for ``moderate'' growth in the overall economy as consumer spending gains and manufacturing accelerates.
Some reports in recent weeks pointed to reviving demand for homes. The Mortgage Bankers Association's index of applications for mortgages to purchase homes rose an average 5 percent in May from the prior month and was up 6 percent from a year ago. Purchases of new homes unexpectedly jumped in April by the most in 14 years from April, the government reported last month.
Still, a large stock of unsold homes means that builders are reducing their projects. Inventories in April equaled 6.5 months' worth of sales, down from a record high of 8.1 months' worth in March.
Building permits, which signal intentions of starting projects, fell in April to the lowest since June 1997. The Commerce Department may say tomorrow that housing starts fell last month to an annual rate of 1.473 million, from 1.528 million in April, according to the median forecast. The housing market also must deal with the burdens of rising mortgage rates and tighter lending standards.
Thirty-year mortgage rates at the end of May averaged 6.37 percent, rising further to an average 6.74 percent at the end of last week, according to Freddie Mac, the second-largest purchaser of U.S. mortgages.
The number of U.S. homeowners who face possible eviction because of late mortgage payments rose to an all-time high in the first quarter, led by subprime borrowers, the Mortgage Bankers Association said in a report last week. U.S. foreclosure filings surged 90 percent in May from a year ago, RealtyTrac Inc., which monitors foreclosures, said June 12. The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, raised concern homes will be thrown back on the market as foreclosures rise.
The US housing market is sliding into the abyss. In May, home foreclosures rocketed 90 percent compared to a year earlier. Default notices, auction sale notices and bank repossessions totaled 176,137. Furthermore, foreclosures were up 19 percent from April, suggesting that the foreclosure rate is accelerating.
Lets summarise; foreclosures up, interest rates up, inventory up, sales down, and prices tumbling. Can things get worse? Yes, they can get much worse.
April housing permits down; new home starts up. There is difficult choice here; which indicator more accurately reflects the true state of the housing market. The new home starts numbers are up only when compared to the previous months. Therefore, it is time to invoke the NAR excuse - the weather. Less rain in April relative to March artificially inflated the new home starts data. So don't worry folks, the housing crash continues.
NEW YORK (CNNMoney.com) -- The battered housing market got another vote of no-confidence from builders last month as applications for new projects tumbled to the lowest since 1997, even as housing starts themselves edged higher.The numbers confirm other recent reports from home builders and real estate groups of a housing market that is still searching for a bottom and that is likely to get weaker before it picks up.
Housing starts rose to an annual rate of 1.53 million in April, according to the Census Bureau report, from the revised 1.49 million pace in March. Economists surveyed by Briefing.com had forecast a slip to a 1.48 million pace in April.
But building permits, which are often seen as a measure of builder's confidence in the market, sank to an annual rate of 1.43 million in April from a revised 1.57 million in March. It was the lowest reading since June 1997. Economists had forecast a dip to 1.52 million
The NAR just published this quarter’s house price data. No surprises here; prices are falling; the bubble is definitively over. Here are the sorry details:
• During the first three months of this year, the nationwide median price for houses and condominiums slid 1.8 percent to $212,300.
• Prices are at a two year low.
• Over half the cities in the US experienced declines.
• Sales are down 6.6 percent compared to last year.
Just to complete the grim picture, here are a few additional numbers, which again confirm that the housing market is in the middle of a massive recession:
• The National Association of Home Builders/Wells Fargo index of sentiment fell to 30 this month from 33 in April, matching a 15-year low reached in September.
• In April, U.S. foreclosure filings jumped 62 percent compared to last year.
To summarize; prices are falling, sales are falling, and foreclosures are rising. In other words, the market is falling off a cliff.
It seems that you can speculate on just about everything - even graves. Recently, China has been afflicted by get-rich-quick graveyard scams. Firms offered investors the opportunity to buy up lots of graves in the hope that prices would increase.
However, the grave yard bubble may be about to burst. The authorities have decided to clamp down on the cemetery speculators. Nevertheless, the grim reaper remains unperturbed. He marches on as he always did....
(BBC News) Inch for inch in China, it often costs more to be buried in a piece of land, than it does to actually live on it. So, inevitably, China has its own get-rich-quick-with-a-grave scheme.
Wang Peng is among those who have lost their life savings The idea is this - you buy up loads of empty plots, their value increases, and then you sell them off at a profit. Companies have released promotional videos promising investors a quick return on their money.
One video shows a beautiful cemetery, lined with temples. All you have to do - the company promises - is buy some empty graves, wait a while, sell them off. And make a safe and easy profit. A solid-looking deputy mayor sitting behind an equally solid looking desk is shown in one video - reassuring ordinary people that buying up stacks of graves is a good idea. But for many investors it has all gone wrong.
At his apartment in Beijing, Wang Peng searches for the certificates he has locked in a cupboard - he does not want his four-year-old granddaughter to find them and scribble on them. The certificates show that he bought 24 empty plots in a cemetery called Spiritual Spring.
These pieces of paper are all that Mr Wang has to show for his family's entire life savings - more than £10,000. But the company has never delivered. And the certificates are worthless.
"I will never forgive them," he says, "because they cheated me badly". "They made me lose all my life-savings. I am having such a difficult time right now. Why should I forgive them? "They should return our money. You can't treat us ordinary people this way."
Could home builders be the next big bankruptcy growth industry? Some firms look vulnerable......
(yahoo news) When Kara Homes began building Horizons at Birch Hill, a community for active seniors, the plans were ambitious: 228 spacious residences that weren't typical cookie-cutter McMansions. But four years later, the project in Old Bridge, N.J., has been abandoned by Kara, which is now in Chapter 11. A dozen or so homes stand unfinished, the front doors swinging in the wind, and the half-built clubhouse bears a large "Unsafe for Human Occupancy" sign.
"It's not a great situation, but we're all hanging together," says Frank Ramson, one of the development's 70-odd homeowners. "What's killing us is the uncertainty of how long it might take another builder to step in."
Ramson isn't alone in his angst. The downturn in the housing market has caught the nation's homebuilders by surprise, leaving many overextended with costly land they can't develop and unfinished homes they can't sell. The financial strain is starting to show. From Arizona to Arkansas, dozens of small- and midsize builders have filed for bankruptcy over the past six months.
And in late April, credit analysts at Moody's Investors Service (NYSE:MCO - News) warned that a number of large homebuilders could fall out of compliance with their debt agreements later this year, leaving them at risk of default unless lenders come to their rescue by agreeing to rework their loans. Some builders are so desperate, in fact, that they're even running into the arms of hedge funds to bail them out with fresh loans at high rates and onerous terms.
More Bankruptcies?
Wall Street certainly has its concerns about the industry. This year the price of credit default swaps--in effect, a tool for bondholders to hedge their risks--has risen sharply for several large builders, including Pulte Homes (NYSE:PHM - News), Toll Brothers (NYSE:TOL - News), and D.R. Horton (NYSE:DHI - News). Toll Brothers Chief Financial Officer Joel Rassman says: "The people buying the swaps may think it's riskier, but the people actually buying our paper don't (because our spreads with Treasuries are shrinking)."
But for the industry as a whole, there may be even more problems waiting just below the surface since many builders entered into big land deals with partners, amassing billions in debt that doesn't show up on their balance sheets. "I think we're going to see a lot more (bankruptcy) filings in the next 6 to 12 months," says Tucson attorney Eric Slocum Sparks, who is representing one local builder, AmericaBuilt Construction, in Chapter 11. "I've got a couple of clients who want to see me next week, and I know these aren't social visits."
The extent of the industry's woes will depend on where housing heads from here. So far analysts and executives alike are unsure whether, or by how much, the slump will deepen. But the trends aren't pretty. The National Association of Realtors now predicts that new-home sales are likely to drop 18% this year, a bleaker scenario than the 9% decrease in the February forecast
Mortgage refinancing played a crucial role in sustaining the housing bubble. Maybe the lenders adopted some rather aggressive sales techniques. However, far too many people entered the housing market with a chain of unrealistic expectations.
The chain started with a belief that housing prices never drop. This expectation linked into the idea that interest rates would not go up significantly. These misplaced imaginings pushed borrowers into taking on too much debt to pay for overvalued houses. Interest only loans and teaser rate arms reconciled the borrower’s high levels of debt with stagnant incomes. People could only think of monthly payments, and not long term personal debt sustainability. Finally, refinancing was the last link in the chain. People stupidly thought that they could keep their monthly payments low by periodically refinancing.
It is not hard to see how many borrowers, desperate to refinance, could fall prey to unscrupolous sales pitches. “Oh yes, we can keep your interest rate at just 7 percent, so long as you sign here”. However, refinancing only makes sense as long as rates remain low. Once they rise, the chain breaks, and over-leveraged borrowers begin to understand that the level of debt and not just the monthly payments are important.
Here is a story of one lawsuit from St.Louis. The accusation has a ring of plausibility.
(STL Today, May 10th 2007) Twenty-nine families in St. Louis and four Missouri counties have filed lawsuits accusing Ameriquest Mortgage Co., a California-based mortgage lender, of engaging in abusive practices related to refinancing home loans.
The suits say that Ameriquest encouraged borrowers to refinance their loans by saying they could get better rates. When the loans were refinanced, the borrowers owed more than previously because of prepayment penalties and other fees, and their interest rates went up, not down.
The lawsuits were filed on behalf of families in the St. Louis and Kansas City areas. Four were filed Wednesday in circuit court in St. Louis, St. Louis County, St. Charles County and Jackson County, Campbell said. Another suit was filed March 30 in Jefferson County Circuit Court.
One plaintiff, Harold Bowyer of Festus, refinanced a $107,100 mortgage with a 7.7 percent interest floor and a 13.7 percent ceiling. He was told the new loan would have an interest rate of 6 or 7 percent. But after the new loan was closed, Bowyer learned that the amount he owed had risen to $122,550, including $6,519 in fees. The interest rate floor was 10.15 percent, and the ceiling was 16.15 percent, according to the lawsuit.
Every chart tells a story, and this one for the Toll brothers share price, tells a tale of misery. If you held the stock between June 2005 and June 2006, you would have lost around two thirds of your investment. If you had bought the share in June 2006, you would have looked good for another six months, but then TOL would have taken you for a ride down to the cleaners. Since Christmas, this stock has suffered.
This blog doesn't give investment advice, it merely comments on the misery and despair that comes with holding stocks like Toll brothers. The company's recent financial statements have been high on misery index. Luxury homes are just not selling like they did back in 2005. Toll's revenues for the second quarter are down 19 percent. Furthermore, Toll now expects to take a second-quarter charge of $90 million to $130 million to cover falling home values across the country.
Here is how chief executive Bob Toll tells it: "Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets," He even got a little poetic; the "lack of buyer confidence may have served to impede the glimmers of a rebound we had started to see in early February".
"Lack of buyer confidence" is an interesting statement from Bob Toll. In what exactly have the buyers lost confidence? House price inflation - that is what the buyer misses. No one believes in house price appreciation. Instead, everyone expects house prices to be lower next year. In fact, buyers are fairly confident about it.
At least Bob is not blaming the subprime debacle for Toll's miserable share performance.
Today, RealtyTrac published the latest data on nationwide foreclosures. The numbers are bad:
Foreclosure activity in some states has reached epidemic levels.
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In the run-up to this week's FOMC meeting, several commentators have suggested that the Fed may be delaying a necessary cut in interest rates. The story goes something like this; recent data tells us that economy is slowing rapidly, whilst inflationary pressure is subsiding, and if the Fed doesn't do something soon, then the economy will slip into a nasty recession by the end of the year.
The problem at the story is that it's only half true. Certainly, the economy is slowing, but inflationary pressures remain rather strong. Just take a look at gas prices if you own any doubt about that. The consumer still keeps on consuming, as the chart above suggests. There is a slight post-holiday dip consumption,but by March everything is back to normal. Certainly, the housing market is looking into the abyss, but the stock market is doing fine, so the overall effect on wealth is redistributive, rather than a growth reducing.
However, if you think about a little further, you will realise that it is consumer spending that is the problem, not inflation. There is a nasty story behind that retail sales chart. It is a story of declining personal savings. Low interest rates have discouraged savings, and encouraged consumption, which in turn has been fuelled by an accumulation of private-sector debt. The counterpart of this declining savings rate is found in the US current account. The federal government has also done its part to accumulate a large stock of debt. For several years, the government has run large fiscal deficits, financed by treasury bills, largely bought by foreigners.
Private and public sector balance sheets need to recover, which is just a fancy way of saying that people need to save more and the government should reduce spending. The only thing that will make people save more is a higher return on their savings. This is why the Fed needs to raise rates, and at a minimum, keep them at the current level for the foreseeable future.
What would happen if the Fed decided to cut rates prematurely as some would suggest? Simply, the consumer would keep on doing what she has done the last five or six years. She would keep on borrowing, keep on spending, and keep on building up debt. The US current account will continue to be high. In the short term, foreign central banks will keep financing that deficit, until one day they will have had enough, and suddenly start selling dollars. At this point, the current account will adjust very rapidly indeed, and the US economy could sink into a calamitous recession.
Currently, the economy is slowing, but that is a good thing. It is better to have a gradual slowdown in growth, coupled with an orderly repair of private balance sheets, rather an a disorderly financial crisis. Let's hope that the Fed ignores these shortsighted calls for a cut in interest rates.
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It was long speculated that California would be the epicentre of the housing crash. So far, it hasn't disappointed. California was the nation's leader in exotic, strange, and default prone mortgage products. Now, in one Californian city after another, the local press are reporting an explosion in defaults and foreclosures.
San Diego is one such city.......
In the fourth quarter of 2006, San Diego County experienced a 169 percent increase in homes receiving notices of loan default from a year ago. Default notices the first step in the foreclosure process - were up to 3,150 from 1,173 for the like quarter 2005, according to DataQuick Information Systems, which compiles home property data.
Throughout California, there were 37,273 default notices - notifying homeowners 90 days behind on payments sent from October to December 2006, marking the most foreclosure activity since the third quarter of 1998, when the number of default notices hit 38,053.
The study, released in January, states that foreclosures tend to occur a year or two after the loan is made. Most of the loans currently entering default originated between January 2005 and February 2006. After the first year or two, many home buyers who took out adjustable rate mortgages and other "inventive loans" experienced the "reset" of their payments; when a buyer's introductory interest rate shifts, and monthly payments increase.
In the city after city, the story is the same. The story starts back in 2002, with a massive cut in interest rates prompt an undeserved rise in house prices. With increased housing demand comes a construction boom, and speculators taking a bet on house prices rising further.
It is now spring 2007 and the story is reaching a sorry conclusion; interest rates are up , speculators have long ago disappeared, the construction boom is replaced with recession, and prices are crashing. Everywhere, there is oversupply in the housing market.
However, it is dangerous to think that it is safe to return to the housing market, as this story from Tucson Arizona warns:
(Arizona Daily Star) Tempted by a generous price cut, Cynthia Saenz couldn't resist buying a new house in Vail about eight months ago. But after reaping benefits on the buyers' side of the market, Saenz is languishing on the sellers' side. She put her Southeast Side house up for sale five months ago and has reduced the 1,800-square-foot home's price from $230,000 to $200,000. Still, it hasn't sold. Saenz's house is among a record number of properties on the market in the Tucson area.
An explosion of home-building and numerous condo conversions during the boom of a few years ago have led to an unprecedented glut of homes now that the market has cooled, according to real estate executives and industry analysts. Investors who helped propel the boom are dumping properties and going elsewhere, they said. Many homes are being sold only with the help of price reductions and incentives.
Several industry observers predict the market will pick up within a year. But their hopes all hinge on whether the overabundance of homes can be reduced.
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What do you have to do in order to become a Californian mortgage broker? According to this advertising, it takes just two things; attend a two-day course and write a cheque for $3,995. After that, it appears that you can sell mortgages to anyone dumb enough to listen to your sales pitch. I don't know about you, but I feel like a career change. If it is this easy, then I am signing up.
I just love this sales pitch:
"The First Loan Broker Training Program that Guarantees You Will Become a Professional Mortgage Broker Certified and Licensed by the State of California, or Your Money Back -- in Only 2 Intensive Days, with Absolutely No Tests, and No Experience or Degree Required all for one fee of only $3,995!"
I keep saying this, but there really isn't any mystery why the housing market is sliding into the abyss.
Congress did the numbers on a sub prime bailout and realized that the cost was too high. Barney Frank, chairman of the House Financial Services Committee , said today "Legislation going forward will not help this current group of people (i.e. subprime borrowers) who are entrapped". That is right, Barney, they are forsaken and doomed.
Instead Federal lawmakers will "focus on steps to protect consumers from bad mortgages in the future". However, predatory lending practices are as old as the hills. New legislation is not needed, but there is a need to enforce the law. These practices were tolerated by a financial regulator unwilling to restrain a profitable business built on exploiting the poor and vulnerable.
Congress should leave the law alone. Instead, it should seek accountability from the Fed. Firing Bernanke would make a good start. Hauling Greenspan before congress would be an effective follow up.
Hey! You've won a ride back to the top
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