by Calculated Risk on 2/08/2008 04:19:00 PM

A few weeks ago, I mentioned Sean Egans (of Egan-Jones) estimate that the monoline insurers need $200 billion in capital.

To balance Egans' view, here is a response from Thomas Brown at Bankstock.com: Sean Egan: Giving the Backs of Envelopes a Bad Name

I got a call last week from Sean Egan of bond rater Egan Jones after I expressed doubt here about his much-bandied-about estimate ...

... Egan told me that he looked at each guarantor’s subprime mortgage and second lien exposure, and simply assumed 30% loss across the board. He then added up his estimates for all the guarantors, and arrived at $80 billion. Then he multiplied that by three, on the assumption that the rating agencies require three times anticipated losses to maintain a AAA rating. Then he took the result, $240 billion, and rounded it down to “over $200 billion” because it was such a big number.

I kid you not. Sean Egan has done the impossible. He’s managed to make S&P and Moody’s look like models of analytical rigor by comparison.

If accurate, I'm very surprised Egans' analysis wasn't more rigorous.

Here is another bearish view from David Roche writing in the Financial Times: Insight: The fire threatens credit insurance

If the monoline guarantees on bonds and credit derivatives were to be removed, the rule of thumb is that every 1 per cent decline in the price of insured bonds would give rise to $10bn of losses on bond portfolios elsewhere in the system. We estimate bond portfolio losses of $150bn-200bn were this to happen – or equivalent to the impact of the subprime crisis on the US banks.

I'm not confident that anyone has a concrete estimate of the future losses. Part of the problem is the insurers only pay for actual realized losses, and it takes a long time for those losses to show up (even though we all know they are coming). This is a story that will unfold slowly, and the ultimate losses depend on how far house prices fall, and on how many homeowners default.

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.