by Calculated Risk on 2/14/2008 09:59:00 PM

For a little evening reading, here is the 9 page Cerberus letter to investors (via the WSJ Deal Journal)

After sketching the grim state of affairs with references to the “liquidity crisis,” a “market panic” and a “widespread decline across all sectors,” Cerberus boss Steve Feinberg (pictured) and his co-founder William Richter addressed its highest-profile deals.

The bigger concern of the two: GMAC, the former lending arm of General Motors that finances billions of dollars worth of homes and cars. “We have significant concerns,” they write in this nine-page letter to their investors, which was first reported on by Bloomberg. “If the credit markets continue to decline and we find ourselves in a prolonged environment of capital market shutdown, GMAC could run into substantial difficulty.”

by Calculated Risk on 2/14/2008 05:57:00 PM

Patrick M. Parkinson, Deputy Director, Division of Research and Statistics testified today to Congress on Bond Insurance. Here are a few excerpts:

... downgrades [of bond insurers] might adversely affect financial stability through several channels. These include: (1) the potential for disruptions to municipal bond markets, (2) potential losses and liquidity pressures on banks and securities firms that have exposures to the guarantors, and (3) the potential for further erosion of investor confidence in financial markets generally.

Parkinson provides a discussion of what is happening in the muni bond market:

If guarantors are downgraded to below AA-, many money funds will be required to put tender option bonds and variable demand obligations back to the liquidity providers. Investors may also choose to put securities back in advance of potential downgrades. Indeed, some money market funds reportedly have already exercised this option with respect to securities insured by those guarantors with significant exposure to CDOs of subprime RMBS.

And on the banks:

Of greater concern is the potential for losses at banks that have hedged their holdings of super senior tranches of CDOs of ABS with credit protection purchased from the guarantors. These hedges lose value when the financial condition of the guarantors deteriorates. In fact, many banks already have written down the value of their hedges significantly to reflect the market view that some guarantors may not meet their obligations on the protection they sold to the banks. Thus, further downgrades of the guarantors may not necessarily require those banks to write down the value of their hedges significantly further. However, as long as the concerns about the ability of some guarantors to meet their obligations persist, any further declines in the value of the banks' holdings of CDOs of ABS will not be fully offset by increases in the value of their hedges.

Even if banks' losses from exposures to the guarantors are moderate relative to capital, banks could experience significant balance sheet and liquidity pressures if they take significant volumes of tender option bonds, variable-rate demand obligations, or ARS onto their balance sheets. The banks that have these exposures are currently well capitalized. However, if these banks take on significant-enough volumes of such securities, the resulting downward pressure on capital ratios might prompt some of them to raise additional capital or constrain somewhat the growth of their balance sheets to ensure that they remain well capitalized. Efforts to constrain the growth of their balance sheets could be reflected in somewhat tighter credit standards and terms for a variety of bank borrowers, including households and businesses. Many banks already have tightened lending standards and terms, likely in part because of balance sheet pressures associated with recent turmoil in financial markets. Further tightening would add to the financial headwinds that the economy already is encountering.

Part of the problem is no one knows how large the losses will be. As Parkinson notes, even moderate losses for the banks can result in further tightening and exacerbate the credit crunch.

by Calculated Risk on 2/14/2008 05:38:00 PM

From Jim Wasserman and Phillip Reese at the SacBee: Sacramento region foreclosures nearly equal home sales in January (hat tip Jesse)

In the most ominous indicator yet of the Sacramento region's struggling housing market, January saw nearly as many people lose their homes as buy them.

January's 1,815 closed escrows in Amador, El Dorado, Nevada, Placer, Sacramento, Yolo and Yuba counties was only 33 more than the 1,782 foreclosures recorded in the same counties that month, according to statistics from La Jolla-based DataQuick Information Systems of La Jolla and Foreclosures.com. of Fair Oaks.
...
The foreclosures -- more than 10,000 last year in the eight-county capital region -- are fast pushing down home sales prices.
...
Sacramento County's median sales prices for all new and existing homes are down a record 26.8 percent from January 2007, the firm reported. The county's $253,000 median sales price is down now 34.6 percent from an August 2005 high of $387,000.

We have to be a little careful using median home prices, since the mix of homes matters. But clearly foreclosures are impacting prices in the Sacramento region.

by Calculated Risk on 2/14/2008 03:15:00 PM

From Bloomberg: FGIC Insurance Credit Ratings Cut to A3 From Aaa By Moody's (hat tip John)

FGIC Corp.'s bond insurance units had their credit ratings cut six levels to A3 from Aaa by Moody's Investors Service.

``These rating actions reflect Moody's assessment of FGIC's meaningfully weakened capitalization and business profile resulting, in part, from its exposures to the U.S. residential mortgage market,'' Moody's said in a statement today.

by Calculated Risk on 2/14/2008 03:02:00 PM

From MarketWatch: Bond insurers have days to re-capitalize, Spitzer says

Bond insurers have four to five business days to re-capitalize themselves enough to keep their crucial AAA credit ratings, New York Governor Eliot Spitzer said during a Congressional hearing ... If that doesn't happen, regulators will have to step in and separate bond insurers' municipal businesses from their more troubled structured finance units.

The next few days should be interesting.

by Calculated Risk on 2/14/2008 01:59:00 PM

From DataQuick: Bay Area home sales lowest for any month in two decades

Bay Area home sales plunged below 4,000 transactions for the first time in over 20 years last month as the market remained hamstrung by the credit crunch and uncertainty among buyers, sellers and lenders. Price declines steepened, especially in inland markets hit hard by foreclosures, a real estate information service reported.

A total of 3,586 new and resale houses and condos sold in the Bay Area in January. That was down 29.2 percent from 5,065 in December, and down 41.9 percent from 6,168 in January 2007, DataQuick Information Systems reported.

Last month's sales were the lowest for any month in DataQuick's statistics, which go back to 1988. Sales have decreased on a year-over-year basis for 36 consecutive months. Prior to last month the slowest January was in 1995, when 4,326 homes sold. The strongest January, in 2005, posted 8,298 sales. The average for the month is 6,319 sales.

The median price paid for a Bay Area home was $550,000 last month, down 6.4 percent from $587,500 in December, and down 8.5 percent from $601,000 in January last year. Last month's median was 17.3 percent lower than the peak $665,000 median, last reached in July, and was the lowest since February 2005, when the median was $549,000.

... Foreclosure activity is at record levels, financing with adjustable-rate mortgages or with multiple mortgages has dropped sharply.
emphasis added

by Calculated Risk on 2/14/2008 01:07:00 PM

The National Association of Realtors reports that year-over-year sales declined in Q4 in 46 states (including D.C.). Sales increased in 1 state (South Dakota from 36K to 39K) and sales in North Dakota were unchanged.

Note: Data isn't available for Indiana, New Hampshire, and Idaho.

Seven states saw sales declines greater than 30%: Nevada (44.2%), Wyoming, New Mexico, Oregon, Arizona, Utah and Maryland.

Another seven saw sales declines greater than 20%: California, Florida, Georgia, Lousiana, Connecticut, Illinois, and Virginia.

This shows the breadth of the housing sales bust. The bust isn't confined to the "bubble" states, the bust is everywhere.

by Anonymous on 2/14/2008 11:38:00 AM

While we're on the subject of mortgage insurance:

WINSTON-SALEM, N.C., Feb 13, 2008 /PRNewswire-FirstCall via COMTEX/ -- Triad Guaranty Inc. today reported a net loss for the quarter ended December 31, 2007 of $75.0 million compared with net income of $8.1 million for the same quarter in 2006. . . .

Mark K. Tonnesen, President and Chief Executive Officer, said, "The trends we encountered in the third quarter accelerated in the fourth, especially the rise in defaults in locations where home prices are under pressure. While the total portfolio default counts increased 38% during the quarter, in California and Florida, default counts rose a combined 85%. The rapid and significant deterioration in the housing markets and its effect on our portfolio performance has prompted us to implement various measures reflected in our underwriting standards, capital management, loss mitigation and expense management."

Mr. Tonnesen continued, "During the fourth quarter, we took a leadership role in our industry by tightening underwriting guidelines. Our new guidelines, which address loan to value limitations, credit scores and loan documentation, and incorporate volume limitations in distressed markets, led to our reduced fourth quarter production and are expected to further limit production in 2008. The Company has developed and is actively pursuing a plan to manage and enhance its capital resources. Although, at this time, we can give no assurance that we will be able to successfully implement our plan, we realize these efforts are critically important to the future of Triad Guaranty. Thus, enhancing capital resources is a top priority. Capital management dictated our decision during the quarter to withdraw from Canada and contribute this capital to our U.S. insurance subsidiary." . . .

Net losses and loss adjustment expenses of $191.7 million for the fourth quarter of 2007, compared to $106.8 million for the third quarter of 2007 and $41.3 million for the fourth quarter of 2006, reflect the substantial changes that have occurred in the mortgage and housing markets during the second half of 2007 and especially during the fourth quarter. Net losses and loss adjustment expenses for the fourth quarter of 2007 include a reserve increase of $150.7 million compared to $76.6 million and $23.3 million for the third quarter of 2007 and the fourth quarter of 2006, respectively. Paid claims totaled $36.3 million in the fourth quarter of 2007, compared to $28.5 million for the third quarter of 2007 and $16.6 million for the fourth quarter of 2006.

Average severity on Primary paid claims was $41,600 in the fourth quarter of 2007, up from $36,900 in the third quarter of 2007 and $28,100 in the fourth quarter of 2006. The average severity on Modified Pool paid claims in the fourth quarter was $57,900, which also was up significantly compared to $41,300 in the third quarter of 2007 and $26,200 in the fourth quarter of 2006. The Primary delinquency rate was 3.81% at December 31, 2007 compared with 2.80% at September 30, 2007 and 2.47% at December 31, 2006. The Modified Pool delinquency rate rose to 6.09% at December 31, 2007 compared with 4.42% and 2.67% at September 30, 2007 and December 31, 2006, respectively.

by Calculated Risk on 2/14/2008 10:36:00 AM

From the WSJ: Bernanke Signals More Rate Cuts Amid Continued Downside Risks

"At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt," Mr. Bernanke said in prepared testimony to the Senate Banking Committee.

Mr. Bernanke was testifying along with Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox. Mr. Paulson Paulson told Senators that he expects the economy to stay in positive territory, while Mr. Cox talked about enforcement efforts underway.

But while he envisions "an improving picture" on the economy, Mr. Bernanke cautioned that "downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further."

The Federal Open Market Committee, he said, "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks." He also signaled that future policy moves will depend on the Fed's medium-term forecast for growth and inflation "as well as the risks to that forecast," since policy works with a lag.

Here is Bernanke's testimony.

by Anonymous on 2/14/2008 09:47:00 AM

From Mortgage Pig™.