by Calculated Risk on 12/17/2007 06:17:00 PM

Press Release: Fitch Places FGIC on Rating Watch Negative After CDO & RMBS Review

Fitch Ratings has placed the following ratings of FGIC Corporation (FGIC Corp.) and subsidiaries Financial Guaranty Insurance Co. (FGIC) and FGIC UK Ltd. on Rating Watch Negative:

FGIC Corp.

--Long-term 'AA';

--$325 million of 6% senior notes due Jan. 15, 2034 'AA'.

Financial Guaranty Insurance Company

FGIC UK Ltd.

--Insurer financial strength 'AAA'.


This action follows the completion of the updated assessment by Fitch into FGIC's current exposure to structured finance collateralized debt obligations (SF CDOs) backed by subprime mortgage collateral and one CDO-Squared deal, as well as FGIC's exposure to residential mortgage-backed securities (RMBS). This review indicates that FGIC's capital adequacy under Fitch's Matrix financial guaranty capital model currently falls below guidelines for an 'AAA' IFS rating by more than $1 billion, due to downgrades by Fitch in a number of FGIC's insured SF CDO's coupled with some deterioration in the company's RMBS portfolio, including second-lien mortgage securitizations.

If within the next four-to-six weeks, FGIC is able to obtain firm capital commitments, and/or put in place reinsurance or other risk mitigation measures in order to meet capital guidelines, Fitch would expect to affirm FGIC's ratings with a Stable Rating Outlook. If FGIC is unable to meet capital guidelines in the noted time frame, Fitch would expect to downgrade FGIC's ratings. In that event, Fitch anticipates downgrading FGIC's IFS rating no lower than one or two notches. FGIC and its investor group have presented plans to Fitch about bolstering FGIC's capital position to support an 'AAA' IFS rating. While the basics of the plan would appear to be sufficient to restore FGIC's 'AAA' rating and Stable Outlook, execution of the plan could be challenged by individual requirements at each of FGIC's primary investors.

by Calculated Risk on 12/17/2007 03:57:00 PM

From Bloomberg: Paulson Favors Fannie, Freddie Buying Jumbo Mortgages

Paulson said in an interview today that he favors allowing the two companies to purchase so-called jumbo loans, which exceed $417,000. ...

Paulson said he agreed with Federal Reserve Chairman Ben S. Bernanke, who suggested to lawmakers that they consider allowing Fannie Mae and Freddie Mac into the jumbo mortgage market. ``I think Ben Bernanke and I are on the same page,'' Paulson said.

Bernanke indicated in a Nov. 8 hearing that he favored letting Fannie Mae and Freddie Mac buy mortgages of up to $1 million.

by Calculated Risk on 12/17/2007 02:54:00 PM

From the Financial Times: ECB steps up liquidity fight

Emergency help for financial markets entered new territory on Monday night as the European Central Bank announced it would on Tuesday offer unlimited funds at below market interest rates in a special operation to head off a year-end liquidity crisis.

The surprise move, which follows last week's co-ordinated barrage of measures by the world's central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease market tensions.

by Calculated Risk on 12/17/2007 01:11:00 PM

Click on graph for larger image. The NAHB reports that builder confidence was unchanged at a record low 19 in December.

NAHB: Builder Confidence Remains Unchanged For Third Consecutive Month

Builder confidence in the market for new single-family homes remained unchanged for a third consecutive month in December as problems in the mortgage market and excess inventory issues continued, according to the latest NAHB/Wells Fargo Housing Market Index (HMI), released today. The HMI held even at 19 this month, its lowest reading since the series began in January 1985.

“Builders continue to look for signs of improvement in the ongoing mortgage market crisis that is weighing on housing and the overall economy,” said NAHB President Brian Catalde, a home builder from El Segundo, Calif. ...

“Today’s report shows that builders’ views of housing market conditions haven’t changed in the past several months, and there clearly are signs of stabilization in the HMI,” noted NAHB Chief Economist David Seiders. “At this point, many builders are bracing themselves for the winter months when home buying traditionally slows, scaling down their inventories and repositioning themselves for the time when market conditions can support an upswing in building activity – most likely by the second half of 2008.”
...
In December, the index gauging current sales conditions for single-family homes improved by a single point, to 19, and the index gauging sales expectations for the next six months rose two points to 26. Meanwhile, the index gauging traffic of prospective buyers declined three points to 14.

Regionally, the HMI results were mixed in December. The Midwest and South each posted two-point gains in their HMI readings, to 15 and 21, respectively. The West held even at 18, and the Northeast, which experienced wetter weather conditions than normal in the survey period, posted a seven-point decline to 19. All regions were down on a year-over-year basis.

by Calculated Risk on 12/17/2007 12:30:00 PM

From the WSJ: National City Warns of Loan Losses

National City Corp. expects to set aside about $700 million to cover loan losses in the fourth quarter and said it incurred mortgage-related charges of about $200 million in October and November.

"The mortgage business continues to be under stress," the financial-services company said in a Securities and Exchange Commission filing....

Here is the National City SEC filing.

Click on graph for larger image.

This graph shows the key nonperforming assets of National City Corp. Residential REO's are including in National City mortgage and First Franklin nonperforming assets.

According to the SEC filing:

Credit quality in the commercial and core consumer portfolios, including direct home equity lending, remains satisfactory. The areas of elevated risk continue to be in the run-off portfolios of First Franklin non-prime mortgages, especially seconds; broker-originated home equity loans and lines of credit associated with the former National Home Equity business; and certain sectors of investment real estate and residential construction. In particular, indirect home equity loans and lines that were transferred to portfolio in the third quarter have shown further deterioration beyond that which was anticipated at the time the September 30 loan loss allowance was established.
emphasis added

Look at the graph. Most of the problems are in residential, but the nonperforming CRE (green) and nonperforming CRE construction (red) are definitely climbing.

by Calculated Risk on 12/17/2007 10:05:00 AM

From Bloomberg: Moody's Warnings on FGIC, MBIA Cast Doubt on $1.2 Trillion Debt

Moody's Investors Service's warning that the top credit ratings of FGIC Corp. and three other bond insurers may be cut casts doubt on $1.2 trillion of municipal, corporate and asset-backed securities.
...
``Everyone understands the systemic risk if even one of these companies is downgraded,'' said Peter Plaut, an analyst at hedge fund manager Sanno Point Capital Management in New York.

Does everyone understand the systemic risk? I'm not so sure. This warning puts 89,709 public finance issues on negative watch and probably impacts most communities in the U.S..

by Calculated Risk on 12/17/2007 09:38:00 AM

From Bloomberg: Centro Slumps 76% on Struggles to Refinance Debt (hat tip CG and Brian)

Centro Properties Group, the owner of 700 U.S. shopping malls ... say[s] it's struggling to refinance debt ...

Melbourne-based Centro suspended dividends and said in a statement that it may have to sell assets, after lenders set a Feb. 15 deadline to negotiate maturing debt. Traditional sources of funding are ``shut for business,'' Chairman Brian Healey said in the statement.
...
``We never expected nor could reasonably anticipate that the sources of funding that have historically been available to us and many other companies would shut for business,'' Centro's Healey said in the statement.

No one could have known.

UPDATE: Last week I mentioned MBS (apartments) in Texas was delinquent on many loans. The WSJ had a story on Saturday: In Texas, MBS apartment Titan Battles Defaults

Massive Texas apartment-complex owner and operator MBS Cos. is in danger of defaulting on nearly $400 million in loans and has sought bankruptcy-law protection for many of its properties to stave off foreclosure.

by Calculated Risk on 12/16/2007 09:45:00 PM

Here are a couple of different stories about CDOs and lawsuits. The first story concerns Wall Street selling CDOs to municipalities who now are claiming they were unaware of the risks.

From the Finanical Times: Lehman faces legal threat over CDO deals (hat tip Viv)

Lehman Brothers faces the threat of legal action by municipal councils in Australia over the sale of high-risk collateralised debt obligations by the Wall Street bank's local subsidiary, Grange Securities.

At least two councils in New South Wales and a third in Western Australia are considering litigation against Grange ...

The Lehman-originated Federation CDO, exposed to the US subprime mortgage market, was last month marked down to just 16 cents in the dollar by the bank, leaving councils nursing paper losses of 84 per cent.

The sale by Grange and others of many hundreds of millions of dollars worth of CDOs to Australian councils, some of which had 70 per cent or more of their total investment devoted entirely to CDOs, has sparked an investigation by the state government of New South Wales.

The second story concerns sophisticated investors wrestling over the scraps, from the WSJ: CDO Battles: Royal Pain Over Who Gets What

A recent filing in New York state court provides a window into the legal battles likely to ensue from battered investments. Big players, including Deutsche Bank AG, bond insurer MBIA Inc., Wachovia Corp. and UBS AG are tangled together over a mortgage investment vehicle named Sagittarius.
...
On Nov. 6, Sagittarius triggered "an event of default." This prompted MBIA to claim it should get all the remaining payments. That put it into potential conflict with Deutsche, the CDO's trustee, and UBS, an investor with fewer rights in the event of default.

Sorting out how to value the assets, who gets paid and whether to pull the plug on struggling CDOs is complicated business. Often little is known about who holds what. "If there's one safe prediction for 2008, it is that legal teams will be busy," wrote J.P. Morgan Chase in a recent report led by analyst Chris Flanagan.

The lawyers will definitely be busy.

by Calculated Risk on 12/16/2007 12:02:00 PM

It is always difficult to tell - in real time - if the economy has slipped into a recession. Dr. Jim Hamilton at Econbrowser (and extended by Chauvet - see below) has developed a model that seems to do a pretty good job. From Chauvet:

"According to the model, the probability that the American economy was in a recession in October, the last month for which we have data, was only 16.5 percent. This is high enough to make us nervous about the future, but it is low enough that we can be fairly sure that if a recession is going to be visible in the data, it did not begin until November at the earliest."

The next few months will be an interesting test of the Hamilton / Chauvet models.

Here are six views on the recession question from the NY Times:

You Can Almost Hear It Pop, by Stephen S. Roach

The Facts Say No, by Marcelle Chauvet and Kevin Hassett

Bet the House on It, by Laura Tyson

Not if Exports Save Us, by Jason Furman

Nobody Knows, by James Grant

Wait Till Next Year, by Martin Feldstein

"My judgment is that when we look back at December with the data released in 2008 we will conclude that the economy is not in recession now.

There is no doubt, however, that the economy is slowing. There is a substantial risk of a recession in 2008."

Feldstein's view is especially important since he is the current President of the National Bureau of Economic Research (NBER) the organization that calls recession in the U.S..

And for fun, here are some Greenspan quotes from the '90/'91 recession: (bear in mind that the recession started in July, 1990):

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.” Greenspan, August 1990

“... the economy has not yet slipped into recession.” Greenspan, October 1990

Source (pdf): "Booms, Busts, and the Role of the Federal Reserve" by Dr. David Altig.

by Calculated Risk on 12/15/2007 04:56:00 PM

From the Chicago Tribune: Commercial sales outlook turns darker

... since the summer, sales in the commercial real estate market have slowed radically as financial institutions and debt markets reel from the fallout of years of ill-advised financing.

... as the economy slows, real estate fundamentals such as rents and vacancies seem destined to weaken, and some wonder if the frenzied commercial property deals of the recent past were wise.

Lenders competing for ever-larger shares of commercial property loans offered low- or no-interest financing for 90 percent or more of the asset value to buyers who might have rushed through their due diligence and bid up prices extravagantly, said Arthur Oduma, a senior analyst for Morningstar Inc.

"Lenders were almost reckless," he said.

Mark "Sam" Davis, senior managing director of real estate for Allstate Insurance, a commercial property lender and a unit of Northbrook-based Allstate Corp., agrees.

"In hindsight, some of these deals don't look so good and are unlikely to perform as the economy weakens," Davis said.
...
The Chicago office market could be further weakened because 6 million square feet of new office space is in development, with 3.6 million square feet of that scheduled for completion in 2009.
...
"With so much space rolling over, and tenants having more options, that makes investors back away," said Oduma.

"Reckless" lenders, slowing demand and more supply coming; those are key CRE fundamentals.