by Calculated Risk on 2/08/2008 02:29:00 PM

From Bloomberg: Loan Losses May Spur Writedowns, Bank of America Says

Banks sitting on $160 billion of unsold leveraged loans may have to write down more losses after a plunge in the value of the debt, according to Bank of America Corp. analysts.
...
``The substantial widening in loan spreads and the lengthening in expected maturities as refinancing options dim have now threatened an unwind in leverage,'' the report said. ``A replay of last year's third-quarter bank writedowns for hung bridge exposure may be on the horizon.''

In many LBO deals, the investment banks provides a bridge loan until they can syndicate the debt. Because of the credit crunch, the banks haven't be able to sell the debt, and the bridge loans are "hung" on the banks balance sheet. Many people refer to these hung bridge loans as "pier loans"; a bridge to nowhere.

The average price for the most actively traded U.S. loans fell to 88.37 cents on the dollar this week, from 91.14 cents last month, according to S&P's LCD. Prices have fallen from 100, or face value, last June.

Although the banks have already taken write-downs on these pier loans, they probably haven't accounted for half the losses. The good news is, at least so far, the various companies acquired with LBO debt are still making their interest payments. It will really get interesting if (and when) one of these companies defaults on their debt.

by Anonymous on 2/08/2008 01:23:00 PM

WASHINGTON, Feb 08, 2008 /PRNewswire-USNewswire via COMTEX/ -- The National Association of Realtors congratulated the U.S. Congress for quickly passing a national economic stimulus package and thanked President George W. Bush for his leadership and willingness to promptly enact legislation that will help thousands of families, the housing market, and the U.S. economy.

"We believe the economic stimulus bill that Congress sent to the president today is strong legislation that will quickly impact the nation's families and economy," said NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif. "We are pleased that both the Federal Housing Administration (FHA) and the Fannie Mae and Freddie Mac (GSE) loan limits have been increased, even if only temporarily. This will be a major stimulus for the housing industry and for people who want to own a home."

Increasing FHA loan limits will help an additional 138,000 Americans achieve the dream of homeownership and will allow nearly 200,000 homeowners to refinance and potentially keep their home, according to NAR research. . . .

An economic impact study conducted by NAR earlier this month estimated that increasing the GSEs' conforming loan limits would result in as many as 500,000 refinanced loans and could help reduce foreclosures by as much as 210,000. In addition, over 300,000 additional home sales could be generated, housing inventory would be reduced and home prices would be strengthened by two to three percentage points. "These are real results and will have an immediate and sustainable impact for families across our country," said Gaylord.

I'm posting the text of this only so that when we go back and do the numbers at the end of 2008 and see that NAR's estimates for GSE refis and purchases were off by about an order of magnitude, we don't have to worry about the link to the original PR having disappeared from the toobz.

I'm hesitating, by the way, to make my own estimates of potential additional refis and sales transactions under the new GSE conforming limits, since we don't yet know what guidelines the GSEs will use for the larger loans (especially but not limited to maximum LTV/CLTV and mortgage payment history); we don't know when the GSEs will announce these standards so that lenders may begin taking applications, and we don't know how the things will be pooled or guarantee fees set, which will definitely impact the rate offered and hence the motivation for existing jumbos to refinance. And until those announcements are made, we won't know how many months of 2008 will be left. That said, I will go on record as being stunned and surprised if we see more than half of NAR's dreams come true.

by Calculated Risk on 2/08/2008 12:22:00 PM

PR from Fitch: Fitch Places 87 RMBS Bonds Wrapped by MBIA on Rating Watch Negative

Fitch Ratings has placed 87 classes of residential mortgage-backed securities (RMBS) guaranteed by MBIA on Rating Watch Negative. Fitch placed MBIA's 'AAA' Insurer Financial Strength (IFS) on Rating Watch Negative following Fitch's announcement that it will be updating certain modeling assumptions in its ongoing analysis of the financial guaranty industry.

With the possibility that modeled losses for structured finance collateralized debt obligations (SF CDOs) may increase materially as a result of these updated projections, Fitch believes that loss projections will be most sensitive to loss given default assumptions used for SF CDOs that reference subprime RMBS collateral. Fitch will update the market upon conclusion of its analysis.

The ratings agencies are still tiptoeing towards the eventual downgrade.

by Calculated Risk on 2/08/2008 10:22:00 AM

From the WSJ: Wholesale Inventories Build Up

U.S. wholesalers' inventories piled up at the highest rate in more than a year during December as sales plunged, a worrisome sign that unsold goods were piling up on shelves as the economy braked.

Wholesale inventories increased 1.1% at a seasonally adjusted $411.60 billion, after rising a revised 0.8% during November ...

Mounting inventories can be a good sign for the economy, suggesting firms have confidence demand is rising and are, in turn, stocking up to satisfy customers. But it can also mean an unwanted buildup caused by receding demand .... A pileup in inventories does not bode well for future production of goods -- or for future economic growth.

For the current buildup in inventories, the likely explanation is "an unwanted buildup caused by receding demand".

by Calculated Risk on 2/08/2008 10:15:00 AM

From Reuters: OFHEO's DeMarco-Mortgage delinquencies on the rise (hat tip Housing Wire)

Edward DeMarco, deputy director of the Office of Federal Housing Enterprise Oversight, told an audience of securities analysts that his organization in March would begin publishing a monthly index of home prices in an effort to better track trends.
...
Another closely watched home price gauge is reported on a monthly basis: the Standard & Poor's Case-Shiller series. S&P/Case-Shiller also provides quarterly views.

"Both indices have fallen off a cliff recently," DeMarco told the analysts.

The somewhat comparable series from S&P/Case-Shiller is the quarterly series.

by Calculated Risk on 2/08/2008 12:12:00 AM

From the WSJ: MBIA Share Offering Boosted to $1 Billion

Bond-insurer MBIA Inc. said it boosted the size of a share offering to $1 billion from $750 million after it was oversubscribed by investors.

The Armonk, N.Y.-based company said it priced 82,304,527 shares of common stock at $12.15 a share to raise $1 billion.

MBI closed at $14.20 yesterday, so this offering is priced $2 under the current price.

by Calculated Risk on 2/07/2008 06:50:00 PM

Maybe the Goldman guys still have Tom Petty's Superbowl performance on their minds since they titled their research report today Free Fallin'.



The title says it all. The report reviews recent economic data and then concludes that the U.S. economy is probably now in recession.

by Calculated Risk on 2/07/2008 04:44:00 PM

From Bloomberg: Security Capital's Bond Insurer Loses Aaa at Moody's (hat tip jg)

Security Capital Assurance Ltd.'s bond insurance units, hobbled by a decline in subprime mortgage securities, lost their Aaa credit rating at Moody's Investors Service.

XL Capital Assurance Inc. and XL Financial Assurance Ltd. were cut six levels to A3, New York-based Moody's said today in a statement. The outlook for both is negative, Moody's said.

SCA, based in Hamilton, Bermuda, was stripped of its top ranking at Fitch Ratings last month ...

Also see Deutsche Bank AG Chief Executive Officer Josef Ackermann Says Bond Insurers Threaten Debt `Tsunami' comments today:

Deutsche Bank AG Chief Executive Officer Josef Ackermann said rating downgrades for bond insurers pose risks that could match the U.S. subprime market collapse.

``It could be a tsunami-like event comparable to subprime,'' Ackermann said in a Bloomberg Television interview in Frankfurt today.

by Calculated Risk on 2/07/2008 01:42:00 PM

A few headlines from D.R. Horton (largest U.S. homebuilder):

Cancellation rate 44%.

Housing environment is "Challenging"

Average ordered home price fell 17%.

Inventory of homes is "too high".

Cancellations high in California, Arizona, Florida, Las Vegas.

California housing market won't recover in next 12 months.

Pricing weaker than expected.

by Calculated Risk on 2/07/2008 01:06:00 PM

Dallas Fed President Richard W. Fisher spoke in Mexico today: Defending Central Bank Independence. Here are his comments on why he voted against the rate cut last meeting:

At the last meeting of the FOMC, I voted against lowering the federal funds rate—the target rate we set for banks to loan overnight money to each other—from 3.5 percent to 3 percent. The minutes of that meeting will be released on Feb. 20, 2008. It would be inappropriate for me to discuss the deliberations; however, I can give you a perspective.

I spoke earlier of [former Fed Chairman] William McChesney Martin. He famously said that the job of a good central banker is to take away the punchbowl just as the party gets going. For the past few years, we have had a raucous party of economic growth fueled by an intoxicating brew of credit market practices that financed a housing boom of historic, and late in the cycle, hysteric, proportions. With the benefit of perfect hindsight, some have argued that the Fed failed to take away the punchbowl as the subprime party spun out of control, leaving rates too low for too long and not using our regulatory powers to restrain excessive complacency in the pricing and monitoring of risk. But that is beside the point.

Now we are faced with the consequences of a process that lawyers would call the “discovery phase”: As big banks and other financial agents confess their acts of fiduciary omission and excesses of commission, credit markets have effectively de-leveraged important segments of the economy, slowing growth suddenly and precipitously. Instead of taking the punchbowl away, the Federal Reserve is now faced with the task of replenishing the punch.

Yet at the same time, we are faced with the unprecedented consequence of demand-pull inflationary forces fueled by the voracious consumption of oil, wheat, corn, iron ore, steel and copper, and all other kinds of commodities and inputs, including labor, among the 3 billion new participants in the global economy. When it comes to these precious inputs, we have no control over the surging demand from China, India, Brazil, the countries of the former Soviet Union and other new growth centers, but we know that it is putting upward pressure on prices in our economy. Economists note that the “income elasticity of demand” for food is higher in China and other emerging economies than in the United States. Many of these countries’ income elasticity of demand for oil and certain other vital commodities is greater than 1, meaning that their demand for these items will increase faster than their income. Even if growth slows somewhat in some of these important emerging economies—the World Bank, for example, projects China’s growth will be 9.6 percent in 2008, down from 11 percent last year—demand for inputs relative to the world’s ability to supply them will likely continue to exert upward pressure on key commodity prices.

We also know that the inflationary expectations of consumers and business leaders are impacted by what they pay for gasoline at the pump and food at the grocery store.

Monetary policy acts with a lag. I liken it to a good single malt whiskey or perhaps truly great tequila: It takes time before you feel its full effect. The Fed has to be very careful now to add just the right amount of stimulus to the punchbowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.

We have been hard at work trying to find the right mixture. Before the meeting last week, we had reduced the fed funds rate by 175 basis points in 18 weeks—cuts that I supported even though I did not have a formal vote. During that time, we also initiated a new system for term money that has auctioned $100 billion at rates below the official discount rate.

My dissenting vote last week was simply a difference of opinion about how far and how fast we might re-spike the monetary punchbowl. Given that I had yet to see a mitigation in inflation and inflationary expectations from their current high levels, and that I believed the steps we had already taken would be helpful in mitigating the downside risk to growth once they took full effect, I simply did not feel it was the proper time to support additional monetary accommodation.

That is two voting members expressing serious concerns about inflation.

However, it appears the market isn't listening to Fisher, or Plosser's "damn the torpedoes, full speed ahead" speech yesterday:

"Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help. ..."

Click on graph for larger image.

According to the Cleveland Fed, the market expectations are centered on an additional 50 bps cut in the Fed Funds rate in March to 2.5%.