by Calculated Risk on 6/09/2008 01:58:00 PM

There are a number of stories this morning on the LandSource bankruptcy (hat tip El Pato, Ed, Bob, Brian and many others). It was pretty clear in April that LandSource would file bankruptcy, it was just a matter of when.

LandSource owns 15,000 acres of land in the Santa Clarita Valley approximately 30 miles north of downtown Los Angeles. (top of map)


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An interesting part of the story is that the California Public Employees' Retirement System (CalPers) invested at the top, and might lose most of their investment. They really should have known better in 2007!

From the WSJ: LandSource Chapter 11 May Hit Calpers

The bankruptcy filing in federal court in Delaware means Calpers could lose much of its $970 million investment in the venture, which it made through an investment vehicle in February 2007, only months before land values plunged.

Calpers has approximately $255 billion in assets, so this loss - almost $1 billion - is actually pretty minor.

Another interesting point: this is the kind of area that is being hit hard with gasoline prices over $4 per gallon. Imagine working in downtown LA with a 60 mile round trip commute each day. At 15 miles per gallon that is over $16 per day - a significant amount for lower paid workers. To say nothing about spending 1 1/2 to 2 hours per day stuck in LA traffic.

by Calculated Risk on 6/09/2008 10:42:00 AM

From the WSJ: Home Gauge Climbs Amid Bargains

The National Association of Realtors' index for pending sales of previously owned homes rose 6.3% to 88.2 from March, the industry group said Monday.
...
Lawrence Yun, NAR chief economist, said pending sales contracts picked up in areas where housing prices have dropped significantly.

"Bargain hunters have entered the market en masse, especially in areas that have experienced double-digit price declines, but it's unclear if they are investors or owner-occupants," he said.

DataQuick recently reported a similar pickup in low end areas of California - mostly from the sale of REOs (Lender Real Estate Owned):

[T]he swell in transactions mainly reflects more sales of homes under $500,000 in inland areas where depreciation and foreclosures have been greatest ...

Post-foreclosure homes continued to play a major role in the Southland market. Of all the homes that resold in April, 37.5 percent had been foreclosed on at some point in the prior 12 months, compared with a revised 35.8 percent in March and 4.6 percent a year ago. Across the six-county area, "foreclosure resales" ranged from 26.9 percent of resale activity in Orange County to 52.7 percent in Riverside County.

This minor increase in pending sales is due to the flood of foreclosures.

by Calculated Risk on 6/09/2008 09:43:00 AM

From Bloomberg: Citigroup, Merrill, UBS Face Further Writedowns, Whitney Says

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post further writedowns of $10 billion on their debt holdings after the two biggest bond insurers were stripped of their AAA rankings, according to Oppenheimer & Co. analyst Meredith Whitney.

More visits to the confessional coming ...

by Calculated Risk on 6/09/2008 09:04:00 AM

Last week I mentioned that 15% of the homes in Temecula, CA were REO or in foreclosure. Temecula is a fairly isolated town (see map), and the city is very dependent on construction and/or long commutes. The combination of the housing bust, plus high oil prices, is hitting exurban towns like Temecula very hard.

From Bloomberg: Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers

``At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical,'' says Mark Zandi, chief economist at Moody's Economy.com ...

The lifestyle of the exurban commuter may be one casualty.

Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.

``It was drive until you qualify'' for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. ``You can't do that anymore. Your cost of transportation will spike too much.''

Of course rural areas are getting hit hard too, from the NY Times: Rural U.S. Takes Worst Hit as Gas Tops $4 Average

[T]he pain [of $4 gasoline] is not being felt uniformly. Across broad swaths of the South, Southwest and the upper Great Plains, the combination of low incomes, high gas prices and heavy dependence on pickup trucks and vans is putting an even tighter squeeze on family budgets.
...
Here in the Mississippi Delta, some farm workers are borrowing money from their bosses so they can fill their tanks and get to work. Some are switching jobs for shorter commutes.

Any lifestyle dependent on low gas prices - and low gas mileage vehicles - is becoming uneconomical. For those that own a home in a remote location, work in construction, and drive a low gas mileage vehicle, this must feel like a depression.

by Calculated Risk on 6/09/2008 08:49:00 AM

"I am very disappointed in this quarter's results."
Chairman and Chief Executive Richard Fuld Jr.

From the WSJ: Lehman Plans Higher Capital Raising, Expects to Post $2.8 Billion Net Loss

Lehman Brothers Holdings Inc. unveiled plans Monday to raise $6 billion of fresh capital from an array of investors ...

The move comes as the firm said it expects a second-quarter loss of about $2.8 billion.

Lehman makes another visit to the confessional.

by Calculated Risk on 6/08/2008 07:18:00 PM

The previous post excerpted from a Business Week article suggesting Option ARMs are "The Next Real Estate Crisis".

Now, from the Financial Times: Crisis shifts to regional lenders

Home equity loans are rapidly emerging as the next front of the credit crunch, as falling house prices and lax underwriting lead to growing losses for US regional banks that have huge portfolios of such loans on their balance sheets.

The rising defaults on home equity loans, used by people to raise funds by taking out a second mortgage on their houses, underscore how the financial crisis is shifting from big banks’ writedowns on complex derivatives to consumer-related problems for smaller banks.

So is the next crisis Option ARM recasts or HELOCs hitting the regional banks?

The answer is probably both, but in different ways. The Option ARM recasts will lead to more foreclosures, especially in move up areas where the product was very popular, and put more pressure on house prices. HELOC lenders tend to avoid foreclosure, since HELOC lenders frequently experience 100% losses in foreclosure - so the lenders don't bother with the added expense. Instead the HELOC losses will hit the lenders' balance sheets, and will lead to more write-downs and potentially more bank failures.

by Calculated Risk on 6/08/2008 10:00:00 AM

From BusinessWeek: The Next Real Estate Crisis

[T]he next wave of foreclosures will begin accelerating in April, 2009. ... hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset.
...
According to Credit Suisse, monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010.
...
The loans automatically recast after five years, but many will recast sooner as loan balances hit specific principal caps—typically between 110% and 125% of the initial loan amount.

Click on image for Business Week graph in new window.

This graph from Credit Suisse (via Business Week) makes a key point. Many of the Option ARMs will recast sooner than originally scheduled, because the loan amount will have hit the principal ceiling (usually 110% of the original loan amount).

Tanta explained this in Negative Amortization for UberNerds:

[Once the loan hits the principal ceiling], the loan must become a fully amortizing loan—no more minimum payment allowed, all payments must be sufficient to pay all interest due and sufficient principal to amortize the loan over the remaining term.

The percent of original balance limitation, in other words, marks the day that neg am is no longer an option for the borrower, and the loan has to start paying down principal from here on out—the borrower is “caught up,” and never again allowed to “get behind.”
...
Note that the loan remains an ARM, even though it is now no longer a neg am ARM. That means that the borrower’s payment can still increase or decrease at future rate change dates. It will simply be, from here on out, an increase or decrease from one fully-amortizing payment to a new fully-amortizing payment.
emphasis added

What matters for the housing market is the gray bars - and we are just starting to see the impact on delinquencies of homeowners moving from NegAm payments to fully amortizing payments on their Option ARMs.

And, finally, the blue bars tell us when these homeowners obtained their loans - usually 5 years before the scheduled recast. Since the peak is in 2011, we know that most of these homeowners bought or refinanced from 2005 through early 2007. Therefore, with falling house prices, most of these homeowners are underwater (owe more than their homes are worth), and selling or refinancing will not be a viable alternatives.

by Calculated Risk on 6/07/2008 09:23:00 PM

From Bloomberg: U.S., Asia Express `Serious Concern' Over Oil Prices

The U.S. and Asia expressed ``serious concern'' over record oil prices, ... in a joint statement issued [by officials from Japan, China, India, South Korea and the U.S.] after a meeting in Aomori in northern Japan today.
...
The governments of China and India, which sell fuels to domestic users below cost, were in agreement with the U.S., Japan and South Korea that ``a gradual withdrawal of fuel subsidies is desirable,'' the statement said.

India, Malaysia, Indonesia and Taiwan over the past month raised fuel prices and cut subsidies, in a move that may reduce Asian demand and slow global oil-consumption growth.

``This is the first time that we can agree on the necessity of abolishing fuel subsidies by steps,'' Japan's Trade Minister Akira Amari told reporters today. ``Each country has different reasons and contexts, so they cannot do that immediately.''

Reducing subsidies is an important step for the Asian countries. With market prices, Asian fuel demand will probably slow or even decline.

by Calculated Risk on 6/07/2008 10:44:00 AM

NY Times: Job Losses and Surge in Oil Spread Gloom on Economy

Many people turn negative again ...

by Calculated Risk on 6/06/2008 10:56:00 PM

From Bloomberg: Australian House Prices Fall Most in Five Years on Higher Rates

The median price for houses fell to A$458,488 ($439,644) in the March quarter, down 2.7 percent from the previous three months, the Real Estate Institute of Australia and Mortgage Choice Ltd. said. ...

Falling residential prices support the central bank's view that Australia's $1 trillion economy will slow this year, helping ease the fastest inflation in 17 years.

From ABC News in Australia: Construction slump points to economic downturn

The Australian Industry Group (AiG) - Housing Industry Association (HIA) Performance of Construction Index (PCI) reveals that building activity fell sharply in May, after also falling heavily in April.

The index now stands at a paltry 36.9 - well below the benchmark number of 50 that separates an expanding industry from a contracting one.

This is the lowest result and the sharpest monthly fall in the index's two and a half year history.

The previous sharpest fall was the month before.

And from Australian TV: Their view is the credit crisis is back - well, it never really went away (hat tip RemiG, 2 min 56 sec). This appears to be from yesterday - before the U.S. market tanked today.



I laugh every time I hear the phrase "dodgy debt".