by Calculated Risk on 10/14/2007 07:16:00 PM

From Reuters: Global defaults to reach 4.5-5.5 pct by 08-Barclays

Tighter bank lending standards and slowing economic growth could push global speculative-grade default rates as high as 5.5 percent by mid-2008, up from 1.48 percent currently, Barclays Capital said on Friday.

"When you do get a tightening of lending standards, you do certainly get a slowdown in the economy and that in turn starts to put pressure on corporates (corporate bonds)," Robert McAdie, Barclays Capital's global head of credit strategy, said on a Barclay's conference call.

If tight bank lending conditions persist, the default rate in the United States will likely rise to 6.9 percent from 1.5 percent currently, and in Europe to 7.75 percent, up from 2.9 percent, McAdie said. The global rate will likely reach 4.5 to 5.5 percent, he said.

Click on graph for larger image.

To put these numbers into perspective, this graph shows the U.S. speculative grade default rates from 1990 through 2005. The rate fell even lower in 2006 and is currently around 1.3 percent.

Others see the default rate staying near record low levels:

"Barring an outright recession, we do not expect a material rise in the default rate over 2008," said Daniel Lamy, a credit strategist at JP Morgan, in a note to clients. "We could be looking at defaults in the region of 1.5 percent again next year."

For the housing market, defaults were very low for several years as homeowners in trouble could either sell their homes or refinance at a lower rate. The same has been true for companies in trouble. But now, with rising rates for speculative grade bonds, it will become more difficult for these companies to obtain additional financing, and the default rate will probably rise.

by Calculated Risk on 10/14/2007 12:54:00 PM

According to CNBC: Surprise! Americans Set to Open Wallets This Holiday

It’s going to be a joyful—and profitable—holiday season for retailers, according to the surprising findings of the latest CNBC Wealth in America survey.

Americans plan to spend an average $839 during the holiday season, up 17.6% from last year, the survey says.
...
As the Dow closed Friday above 14,000, it is noteworthy that more than half of Americans surveyed believe a recurrence of the 1987 stock market crash, the anniversary of which is this Friday, is unlikely and about half of Americans believe now is a good time to buy stocks.
...
Much of the economic news in the past few months has focused on the housing industry and, according to CNBC’s survey, an overwhelming 90% of American home owners expect their home process [prices?] to stay the same or increase over the next 12 months by an average of 3.9%. And, nearly 80% of Americans said they don’t increase their spending based on gains in the price of either their homes or stock portfolios.

Meanwhile, in other news, most Americans eat healthy, excercise regularly, 'all the women are strong, all the men are good looking, and all the children are above average'. (from Garrison Keillor) emphasis added

Sorry, this is just too funny.

by Calculated Risk on 10/13/2007 04:31:00 PM

From the NY Times: Banks May Pool Billions to Avert Securities Sell-off

... Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles. The meetings, which began three weeks ago, have been orchestrated by senior officials at the Treasury Department, and the discussions have intensified in the last few days.

A broad framework for an agreement could be reached as early as tomorrow ... but many important details still need to be hammered out. Another round of discussions is taking place this weekend, and it still possible that the parties will not reach agreement.

See the article for a few more details. Here is the Reuters take: Treasury officials seek to help battered SIVs

One plan that was discussed at the meeting involved setting up a "super fund" where "each SIV in the market could pledge up to one-third of its assets and get financing," the source said.

The WSJ reported on this last night: Big Banks Push $100 Billion Plan To Avert Crunch

If the banks agree, the plan could be announced as early as Monday, people familiar with the matter said. Citigroup announces third-quarter earnings Monday. The tentative name for the fund is Master-Liquidity Enhancement Conduit, or M-LEC.

by Anonymous on 10/13/2007 12:51:00 PM

In an attempt to keep my mind off of M-LEC, I decided to don a Hazmat suit and go see what those mortgage professionals over at Broker Universe are up to these days. I feel obligated to share this with you.

This is just a beaut:

Who can do Seller Carry Back Loans ?

In August 2005, husband and wife purchase a condo in San Mateo County, CA. for $400,000., and got 100% financing.

They did not occupy the condo, the wife’s brother moved in and he has been paying the mortgage, taxes, and HOA fees from the beginning.

The condo now has an appraised value of $460,000.

The total mortgage balance owed on the condo is $399,000.

The husband and wife would like to sell condo to the wife’s brother.

Can sellers do a 10% carry back, and let the buyer get a 90% purchase loan ?

Loan amount would be $414,000.

Who will do the 90% purchase loan ?

The good news is that, so far, no lender representative has responded to this offering to get screwed. The bad news is that, so far, no lender representative has asked for the broker's real name and state so that the lender can make sure this character is on all "debarred" lists.

The thing I really like about this scenario is that, while the odds are very good that parts of it are untrue, it's even worse if you assume it's all true. I mean, it's probably just some run-of-the-mill liar with a fake appraisal wanting to get out of a bad "investment." But imagine if it were true: there's a couple out there who "bought" a condo without risking any of their own money in down payment. They managed to sucker the brother into carrying the mortgage and all other ownership expenses. Now that they at least believe that the unit has appreciated by 15% in two years or so, they would like to extract that appreciation from their own relative by having him in essence assume their mortgage to get them out of any liability, plus pay them $15,000 out of loan proceeds, plus sign a note requiring him to pay them the balance of the "appreciation" over some period of years, with interest.

In Broker America, this is apparently considered a perfectly legitimate transaction.

by Calculated Risk on 10/13/2007 12:12:00 PM

From the WaPo: Reston Builder's Cancellations Reflect Industry

Comstock Homebuilding Cos. of Reston yesterday reported that even though it sold 81 houses in the third quarter, 78 sales were canceled, a net of just three sales in three months and a striking reminder of the building industry's deepening troubles.

"Market conditions have continued to deteriorate throughout the year," Christopher Clemente, the company's chief executive, said in a statement.

Now that is a cancellation rate!

This is a small builder in the D.C. area. Emphasis added.

by Calculated Risk on 10/12/2007 10:33:00 PM

Here is more on the Citi SIV bailout plan from the WSJ: Big Banks Push $100 Billion Plan To Avert Crunch

The plan could be announced on Monday:

If the banks agree, the plan could be announced as early as Monday, people familiar with the matter said. Citigroup announces third-quarter earnings Monday. The tentative name for the fund is Master-Liquidity Enhancement Conduit, or M-LEC.

Some banks aren't happy with the plan (does this mean Treasury is trying to strong arm other banks into participating?):

The plan is encountering resistance from some big banks. They argue that Citigroup is asking others to help bail out its affiliates and an industry-wide bailout isn't needed.

Some banks are just eyeing the fees:

Two banks in the discussions with Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co., would participate not because they have SIVs -- they don't -- but because they would earn fees for helping arrange the superconduit, according to people briefed on the discussions. The superconduit's debt would be fully backed by participating banks, they said.

The timing is interesting since Citi and JPMorgan are expected to sell some $5 billion of loans on Monday to help finance the TXU LBO.

by Calculated Risk on 10/12/2007 04:21:00 PM

From the WSJ: Banks Discuss Solution To Liquidity Problem

The largest U.S. banks along with financial regulators are in confidential discussions to find a solution for a lack of cash liquidity ... [for] bank-affiliated investment vehicles that issued tens of billions of dollars in short-term debt ... the plan would be to create a "super conduit" that would issue short-term debt and serve as a buyer of assets currently held by so-called SIVs. [Structured investment vehicles] ...

Citigroup Inc., the world's largest bank in terms of market value, is one leader of the proposed plan. Citigroup has some seven affiliated SIVs with nearly $100 billion in assets.

But who would fund the "super conduit"?

by Anonymous on 10/12/2007 01:42:00 PM

Hedge fund fat cats ride to the rescue of beleaguered mortgagors. I might throw up.

Some of you may remember the whoop-de-doo in June of this year, when Paulson got all over Bear Stearns, in the newspapers, for "manipulating" the market by buying delinquent loans out of securities, for the alleged sole purpose of getting out of having to pay out on credit default swaps.

Paulson, having made a fortune on its short subprime trades, is now funneling money to a non-profit which is advocating bankruptcy reform. Says BusinessWeek:

A $20 billion hedge fund may have hit on a unique investment strategy for playing the subprime mortgage bust: fund a consumer-protection group. Paulson & Co., which has seen its assets under management soar this year through fortuitous bets in the subprime market, has given $15 million to the Center for Responsible Lending, a Washington nonprofit that has been lobbying on Capitol Hill for passage of bankruptcy legislation.

Paulson, run by former Bear Stearns (BSC) investment banker John Paulson, stands to rake in a windfall if the measure passes. The key bill, introduced last month, would allow federal judges to restructure mortgage terms and lower payments on the primary homes of borrowers in bankruptcy, a significant legal change. The process, known as a "cram-down" in industry jargon, is opposed by investment banks that trade in mortgage-backed securities. . . .

I propose a moratorium on any Wall Street participant calling any other Wall Street participant a "manipulator."

(Thanks, Brian!)

by Anonymous on 10/12/2007 11:14:00 AM

Courtesy of Thomas Zimmerman of UBS, whose PowerPoint presentation is available here. There's quite a bit of interesting data for the nerds.

These charts are mini-vintages (quarterly rather than annual) of 2/28 subprime ARMs.

The first shows serious delinquency (60 or more days delinquent, FC, or REO) for first lien purchase money loans using 100% financing (CLTV greater than or equal to 100%) with less than full documentation in states with "stable" HPA. (I don't know exactly what universe of states that is.)

The second chart shows the same loan type for California properties only:

To put this into some context, the third chart shows what we might call the more "traditional" subprime loan: a 2/28 ARM cash out, with full doc and CLTV less than or equal to 80%. This third chart is California properties only.

I think I've said this before, but it bears repeating: I have never, in my hundreds* of years in this business, worked with any mortgage model--pricing, credit analysis, due diligence sampling--that did not consider cash-out an additional risk factor. That is, historically speaking, cash-out refinances always performed worse than purchase money or rate/term refinances, and the models therefore would give a worse risk-weighting to a pool with a majority of cash-outs than a purchase-heavy pool. There were two main reasons for this: cash-out does correlate with heavy debt use (obviously), and also, historically speaking, cash-out refi appraisals were the least reliable, most subject to "hit the number" pressures. This was true even when lenders allowed substantially lower LTVs on cash-outs than recently has been the case.

In my view, a whole lot of the failure of the rating models to adequately account for the risk of these recent pools is that they used "historical" assumptions about the risk of purchase transactions.

*Mortgage years are like dog years, only worse.

by Calculated Risk on 10/12/2007 10:05:00 AM

From Bloomberg: Centex to Take $1 Billion in Charges as Slump Worsens

Net sales slumped 13 percent to 5,953 units and the Dallas- based company said home closings were off 14 percent.

Centex will write down $850 million for land, have a $40 million write off for property held by joint ventures and record $65 million in impairment expenses. The total charges are more than four times higher than those taken in the first quarter and come a day after Centex's credit ratings were cut to junk status by Moody's Investors Service.

``The housing market continues to be extremely difficult,'' Chief Executive Officer Timothy Eller said today in a statement. ``These adjustments reflect the market's further deterioration over the quarter and the significant effects of the mortgage- market disruptions.''