by Calculated Risk on 10/21/2007 06:55:00 PM

WSJ: Europe Feels Housing Chill

The real-estate slowdown that hit the U.S. is spreading to Europe.

Home prices in some of Europe's hottest markets are falling after a decade of double-digit-percentage price increases. The reasons resemble those across the Atlantic: higher interest rates, faltering confidence and tighter lending standards.
...
Home prices in Spain more than doubled over the past 10 years, but the average price of an existing home has fallen slightly since July, according to real-estate agent facilisimo.com. France experienced its first quarterly home-price decline in nearly a decade in the third quarter, according to its federation of real-estate agents, while Irish house prices in August were 1.9% below the year-earlier level.

The weakening home market could hit European economies. An expanding construction industry has fueled growth in Europe. Now, construction in Spain and elsewhere is easing. ...

by Calculated Risk on 10/21/2007 06:23:00 PM

From the Financial Times: US loan default problems widen

Poor quarterly results from banks across the US over the past two weeks suggest credit problems once confined to high-risk mortgage borrowers are spreading across the consumer landscape, posing new risks to the economy and weighing heavily on the markets.
...
Banks are adding to reserves not just for defaults on mortgages, but also on home equity loans, car loans and credit cards.

“What started out merely as a subprime problem has expanded more broadly in the mortgage space and problems are getting worse at a faster pace than many had expected,” said Michael Mayo, Deutsche Bank analyst.
...
Dick Bove, analyst at Punk Ziegel, said bank earnings indicated “there are problems with consumer debt that extend beyond the well-known issues in the real estate markets. Auto loans are clearly a new area of concern”.

by Calculated Risk on 10/21/2007 11:45:00 AM

From MarketWatch: More firms expected to join SIV fund: officials (hat tip Bob)

More financial firms are expected to join the "Super SIV" special fund to help guarantee liquidity in the commercial paper market, officials said Saturday.

"Participation is expected to broaden in the weeks ahead," said Robert Steel, the U.S. Treasury undersecretary ...

Bank of Italy Governor Mario Draghi told reporters on Friday that Treasury Secretary Henry Paulson had informed his G7 colleagues that Pacific Investment Management Co., the world's largest bond fund, and Fidelity Investment, the Boston-based mutual fund giant, have decided to join the SIV fund.

But a spokesman for PIMCO said Draghi was incorrect.

"PIMCO is not participating," PIMCO spokesman Mark Porterfield said in an email on Saturday.

PIMCO is smart to stay away from this mess.

by Calculated Risk on 10/20/2007 03:42:00 PM

by Calculated Risk on 10/20/2007 02:40:00 PM

From the WSJ: SIVs Pose Risks for Money-Market Funds

Complex investments known as SIVs are roiling Wall Street and the world of high finance. But the investment vehicles also are threatening trouble in a seemingly unlikely place: money-market funds, the choice for many individual investors seeking safety.

In recent years, the short-term debt issued by such structured investment vehicles, or SIVs, had become a favorite for many money-market funds, thanks to their attractive yields, high credit ratings and added diversification.

As a result, many money-market mutual funds were holding 10% to 20% of their portfolios in debt issued by SIVs. Funds overseen by Bank of America Corp.'s Columbia Management Group, Credit Suisse Group's Credit Suisse Asset Management, and Federated Investors Inc. recently held big stakes in SIVs, including some of the most troubled names.
...
Most important for money-fund investors, fund companies would almost certainly take steps to prevent losses from reaching shareholders -- such as absorbing the losses themselves by purchasing the money-losing securities from the fund at their full price.

SIVs really aren't that complicated. They borrow short (via commercial paper less than 9 months duration so the don't have to file with the SEC) and lend long. Money market funds buy the commercial paper with deposits from their customers. Here is a good description:

... bankers hatched the idea of setting up a fund that would issue short-term commercial paper and medium-term notes to investors, then use the money to buy higher-yielding assets, typically longer-term ones. The bank would profit by collecting fees for operating the fund. The fund's assets would belong to its investors, so they would stay off the bank's balance sheet. SIVs had an advantage over conduits, a similar structure that was already gaining popularity: They didn't require banks to cover fully the fund's debts if the commercial-paper market dried up.

The funds can be off balance sheet because - at least theoretically - the investors (like the money market funds) will take the losses, not the banks. What is complicated (really opaque to the investors) is the quality of the SIVs investments.

Usually the main concern with borrowing short and lending long is interest rate risk. In this case, the problem is more credit risk with poor performing longer term investments.

by Calculated Risk on 10/19/2007 09:31:00 PM

From Reuters: Pimco, Fidelity to join SIV rescue fund - Draghi

Investment fund giants PIMCO and Fidelity have joined the so-called super SIV fund set up by three big U.S. banks, boosting confidence in the plan, Bank of Italy Governor Mario Draghi said on Friday.

Draghi said U.S. Treasury Secretary Henry Paulson had discussed the fund with officials attending the G7 meeting of central bankers and finance ministers.

"Paulson has done a short briefing on the SIV fund," Draghi told journalists at the close of the G7 meeting. "PIMCO and Fidelity have joined."

From the WSJ: Banks May Pony Up $60 Billion for SIVs

Banks and other financial firms have expressed interest in putting up more than $60 billion toward a super-size investment fund...

If the expressions of interest turn into firm commitments in the next few weeks or months, the three U.S. banks organizing the fund would come close to their goal of raising a fund of $80 billion to $100 billion.

The banks also are targeting several big institutions in Europe, such as HSBC Holdings PLC in London and Dresdner Bank AG in Germany. Both rank among the largest managers of the kind of structured investment vehicles, or SIVs, that the fund is intended to support. HSBC and Dresdner declined to comment.

by Calculated Risk on 10/19/2007 04:24:00 PM

More downgrades (on what I think will be busy afternoon and weekend):

S&P Lowers Ratings on 1,413 U.S. RMBS Classes Backed by Subprime Mortgage Loans from the 4Q 2005 - 4Q 2006 (hat tip rs)

Standard & Poor's Ratings Services announced today that it has downgraded 1,413 of U.S. residential mortgage-backed securities (RMBS) backed by first-lien subprime mortgage loans that were issued from the beginning of the fourth quarter of 2005 through the fourth quarter of 2006. These downgraded securities had an original par value of $22.02 billion, which represents 4% of the $554.4 billion of U.S. RMBS backed by first-lien subprime mortgage loans rated by S&P during this period. These actions, combined with downgrades previously announced by S&P, impact a total of 1,671 securities of U.S. RMBS backed by first-lien subprime mortgage loans issued during this period, representing $24.8 billion, or 4.5% of the $554.4 billion mentioned above. S&P also affirmed its ratings on securities representing $531.6 billion original par value of U.S. RMBS backed by first- lien subprime mortgage loans from this same period.

Of the 1,413 securities downgraded today, approximately 47% were rated in the 'BBB' category and below. Fifteen 'AAA' rated securities were downgraded, accounting for roughly 0.01% of all downgraded securities and 1.1% of the total dollar amount downgraded. No 'AAA' rating was lowered below 'AA'.

We took these rating actions at this time because, based on the most recent data, we expect further delinquencies and losses on the underlying mortgage loans; the consequent reduction of credit support from current and projected losses; and continued declines in home values.

While cumulative losses to date remain low, they have increased since our July 2007 review and we expect them to increase further. Based on the most recent data from September 2007, cumulative losses for the period have increased from 29 bps to 69 bps -- a 138% increase since our July 2007 review.

The September 2007 data shows increasing levels of overall delinquencies and serious delinquencies. Seriously delinquent loans include loans that are either: delinquent by more than 90 days, in foreclosure, or for which the real estate is possessed by the servicer. For all U.S. RMBS backed by first-lien subprime mortgage loans issued during this period, overall delinquencies averaged 21.43%, and serious delinquencies averaged 14.17%. This is in contrast with the downgraded transactions, for which overall delinquencies averaged 15.73% and serious delinquencies averaged
23.33%.

We expect that the downgraded securities will be particularly vulnerable to increased losses because, on average, 60%-70% of the loans backing them are subject to some type of payment adjustment in the near future. Most of these are 2/1 adjustable-rate mortgages already in their adjustable-rate stage and already past their first, and typically largest payment reset. Despite some industry claims of increased accommodations to subprime borrowers, we expect losses to increase for borrowers who have experienced (1) rising loan payments due to resetting terms of their adjustable-rate loans, and (2) principal amortization that occurs after the
interest-only period ends for adjustable- and fixed-rate loans.

Standard & Poor's expects that the U.S. housing market will continue to experience price decreases. We project that property values will decline 11% on average from peak to trough and will begin to recover in late 2008, with the peak having occurred in the spring of 2006. This continued decline in home prices will apply additional stress to these securities.

As part of this review, we assumed losses for defaulted loans that closed during the second half of 2005 at a level of 40%, and for those that closed during 2006 at a level of 45%. During our July 2007 review we assumed losses for defaulted loans that closed in 2006 of 40%. We have now increased this assumption based on the most recent data and projected declines in home values.

by Calculated Risk on 10/19/2007 04:04:00 PM

From Bloomberg: Cheyne, IKB SIVs Default on Commercial Paper as Assets Fall (hat tip FFDIC)

Cheyne Finance Plc and IKB Deutsche Industriebank AG's Rhinebridge Plc, two structured investment vehicles that bought securities backed by home loans, defaulted on more than $7 billion of debt as the value of their holdings fell.
...
``The fallout from the credit crisis is far from over,'' said Jim Reid, head of fundamental credit strategy at Deutsche Bank AG in London. ``There are probably more skeletons in the closet. The problem is knowing when and where they are going to emerge.''

Rumors were flying during the last hour of trading of problems at Merrill and Bear. The Merrill rumor was of a special board meeting this weekend with possible additional writedowns - we will see.

by Calculated Risk on 10/19/2007 04:02:00 PM

From Fitch: Affirms $1.27B & Downgrades $265.5MM from 4 IndyMac Subprime Transactions (hat tip sr)

Fitch Ratings has taken the following rating actions on IndyMac Banks INABS certificates. Affirmations total $1.27 billion and downgrades total $265.5 million.

(see press release for details)

The rating actions are based on changes that Fitch has made to its subprime loss forecasting assumptions. The updated assumptions better capture the deteriorating performance of pools from 2006 and late 2005 with regard to continued poor loan performance and home price weakness.

by Calculated Risk on 10/19/2007 11:26:00 AM

Wachovia conference call comments (from Brian):

"Much of the increase in non-performing loans and the losses are on loans in certain California markets that have experienced fairly steep declines in prices. Our delinquency call centers report that the primary reasons for borrowers struggling to pay are three fold. First is reduction of income or underemployment. Second is the assumption of additional debt from lenders other than Wachovia and thereby changing the credit profile from the origination of the loan. And third unemployment. We have seen some uptick in unemployment in some of these markets. Let me also point out that while the average current estimate at the appraised value of non-performing loans is 77%, there is $380 million in balances out of the total $1.7 billion where the current estimate of value is over 90%. Actually on that pool, averages in the high 90s, again reflecting the dramatic decline of house prices in certain markets. These particular loans have a low loan to value of just under 80% at origination. It's interesting to note here that problems in these markets, really for all lenders seem to be across the board without originating FICO, the type of loan or the property. Given our outlook for continued weakness in the housing market and possibility for slow income consumer sector, we anticipate loans on consumer mortgage book continue to increase over the next few quarters and that losses will be up albeit fairly modest charge operates. To manage the increase in loans in foreclosure, we have significantly increased our staff responsible for handling Oreo properties and working with delinquent borrowers. Prepare the property to sell and sometimes choosing to maybe take a somewhat higher loss on that sale rather than risk holding out for a top dollar opportunity that may or may not come down the road.” emphasis added

Note that Wachovia is seeing rising unemployment - already - as a factor in delinquencies. But the most important comment is that the problem loans are: "across the board without originating FICO, the type of loan or the property".

Across the board!

On Commercial RE portfolio:

“The commercial real estate portfolio continues to perform very well overall. Loan secured with income producing property continues to enjoy solid underlying fundamentals with favorable vacancy rates and cash flows. As we have noted, probably on the last couple of calls, the portion of the commercial real estate portfolio connected to housing is experiencing an upward trend in criticized assets higher charge-offs and non-performs. While these loans have generally performed well overall and the charge-offs and total real estate financial services portfolio, we're only $3 million in the quarter, we do anticipate further softening and have recently undertaken a thorough review of commercial real estate loans. Nearly all of these loans are on a with-recourse basis. We are and will be moving aggressively to work with borrowers to shore up as best we can. We believe credit costs will be rising, we believe the deterioration will be manageable”

CRE sounds OK so far.

Here’s what they had to say about the marks in their CDO portfolio:

“Next line addresses other structured products [Total of $438MM]. Here we have the marks on warehouse positions and trading inventory, both of which we hold in trading portfolios. This includes the positioning Ken referred to in reference to sub prime mortgage exposure and AAA rated securities. $308 million is associated with sub prime securities [Their slides say $347 of the mark was related to subprime of which $308 was AAA subprime]. Basically there, we never would have expected that you see AAA securities trade so far so quickly from par.”emphasis added

They were later asked if they were happy with their risk management:

“And you know, we'll change the way we do some things. I would say that as we look at results, I think the biggest disappointment for me is that of those $1.3 billion end marks, we had about $300 million, in losses on AAA sub prime paper in trading desks and inventory. And the thing that disappoints me about that, we avoided it in our origination efforts and avoided it in, for the most part in our securitization efforts. So frankly, I think we had a little bit of a break down in having AAA sub prime in some of our portfolios we took losses on. I think it is amazing that we could take $300 million of losses on AAA paper. We didn't expect that that paper could degenerate that fast, with that kind of swiftness”emphasis added

Comments about the general credit environment:

Analyst:

As we talked to companies, September, I think you mentioned this too, was a particularly weak month for credit and is that trend, as you see it in October, about the same? Would you say it's slowed or accelerated?

Wachovia:

"Still kind of early in the month, but I would say that the trends we saw late August and September, you know, halfway through this month are about the same. I wouldn't say they've accelerated, but they haven't backed off either."