by Calculated Risk on 9/11/2007 09:35:00 PM

From Bill Fleckenstein: Leveraged Black Boxes (Fleck's Site):

Note: Excerpted with permission. SIV: Structured Investment Vehicles.

"... though London appears to be the epicenter of conduit angst these days, our homegrown Citicorp appears to have plenty of exposure. That, according to the Lord of the Dark Matter, who in an email to me rattled off the following list of its SIVs: Beta Finance, Centauri, Dorada, Five Finance, Sedna Finance, Vetra Finance, and Zela Finance. He was able to obtain a portfolio commentary for Beta Finance ...

First of all, for those folks who can't quite wrap their arms around what an SIV, SPIV, or conduit is, those names all stand for pretty much the same thing -- special-purpose entities that reside off balance sheet. Think of them as virtual S&Ls, which can be quite sizable. ... And, because they're off-balance-sheet, they operate with little regulation.

The better question is: why these entities exist in the first place, and in such size. I think we know the pat answer -- so that financial institutions can employ them and utilize even more leverage than they are legally allowed to. ... Citicorp notes that the leverage in this particular vehicle, Beta Finance, is "only 14.24 times." Thus, Citicorp, a leveraged entity, owns a gaggle of leveraged S&Ls. ...

Next, Citicorp says: "We highlight that all US CMBS exposure is super-senior." What I find interesting in that comment: They've taken pains to note that their commercial mortgage-backed paper is the highest rated -- implying that there might be a problem with lesser-rated tranches of commercial mortgaged-backed paper.

That echoes a data point provided by someone wishing to remain anonymous, who resides near the top of the lending food chain at one of the world's largest banks. The source indicated to me that commercial mortgage-backed securities will also see problems. Though I did not get the impression from her that the timing was imminent, the weakness in the commercial version of the ABX index indicates that some pain is already being dispensed, even if there has been little spilled on this subject."

Note: According to Goldman Sachs, the problem is more acute in Europe, because the European regulations allow SIVs that would be on balance sheet in the U.S., to stay off balance sheet in Europe.

Earlier this year from Fleck:
January 14, 2007:

... a former top executive at a subprime lender (whose chronicling of the unwind has been amazingly accurate and timely), told me that serious issues are developing, and that large companies like New Century Financial (NEW, news, msgs), Accredited Home Lenders (LEND, news, msgs) and NovaStar Financial (NFI, news, msgs) will, in his words, "hit the wall" very soon.

January 30, 2007:

Turning to the subprime industry, once again I heard from my friend who has been staggeringly accurate. He continues to feel that things are about to really get worse. In an email to me, he wrote: "Scratch and dent loans are killing everybody. Bids that were 92 or 93 are now low to mid-80s. It is a bloodbath, and is pressuring even strong companies to buckle. NO ONE is making any money in the market right now. We are at a point of no return for many. The next two weeks will be wild."

Note: A wild two weeks indeed as subprime blew up in early February.

March 14, 2007:

My friend in subprime updated me last night, as follows: "The Alt a space has deteriorated very quickly, but not yet public. $40 billion in subprime still waiting to find a home. No loans will be bought at attractive prices until May production as it will be underwritten to new guidelines. The triple bbb's are a mess. The hedge funds that bought it are all in trouble. ... warehouse guys and Alt a guys are now next. Alt a guys may be worse as less insurance on those loans to protect them. The loan sizes are bigger as well."

by Calculated Risk on 9/11/2007 08:54:00 PM

The comedians at the National Association of Realtors (NAR) presented another forecast today for existing home sales in 2007. Their current forecast is for sales to be 5.92 million in 2007. This is compared to their original forecast from Dec '06 of 6.4 million units in 2007. (My forecast was for existing home sales to be between 5.6 and 5.8 million units).

The NAR forecast is still way too high, even after seven straight months of negative revisions. Luckily for the NAR, they still have three more downward revisions to go.

With a sharp slowdown in 2007 sales, it is amusing to look at the headlines from the NAR. Enjoy!

December 11, 2006: Existing-Home Sales In 2007 Expected To Recover From Cyclical Low

January 10, 2007: Gradual Rise Projected for Home Sales

February 07, 2007: Existing-Home Sales To Improve, With Later Recovery For New Homes

March 13, 2007: Housing Recovery Likely This Year, But Timing Isn't Clear

April 11, 2007: Tighter Lending Standards Good For Housing, But Will Dampen Sales

May 09, 2007: Housing Forecast Changed Slightly Due to Impact From Tighter Lending

June 06, 2007: Home Sales Projected to Fluctuate Narrowly With a Gradual Upturn

July 11, 2007: Home Prices Expected to Recover in 2008 As Inventories Decline

August 08, 2007: Near-Term Home Sales to Hold in Modest Range

September 11, 2007: Mortgage Problems to Dampen Home Sales in The Short Term

by Calculated Risk on 9/11/2007 02:17:00 PM

From the Chicago Tribune: Empty offices leave landlords high and dry (hat tip Vader)

... Chicago-area office landlords are now feeling the pain as the problems spread into various channels of the commercial property industry.
...
Now, rather than anticipate big sales, commercial landlords are worrying about how to pay the debt on buildings that are generating less income than just a few months ago.

... As rents diminish and credit rating agencies lower the extravagant asset value assessments of recent years, an owner could be holding a building that is worth less than the amount owed on it.
...
"All across the country there are huge spaces where tenants aren't paying rent," [Joseph Cosenza, vice chairman of the Inland Real Estate Group] said. "In May, I was to sign a contract to buy a brand new office on the East Coast," he said. When the developer declined to give Cosenza the anchor tenant's financial statements, he walked away from the deal. "Thank God because today the tenant is gone."
...
Chicago, especially in the suburbs, has higher vacancies and lower rents than other U.S. office markets. As of midyear, the metropolitan area had an 18.5 percent vacancy rate, 532,678 square feet more put back on the market than was taken off by leasing and an overall asking rent of $22.16, still off from the high of $22.30 in 2000, according to Cushman & Wakefield of Illinois Inc.

Downtown Chicago, meanwhile, has 6 million square feet of new offices in development.

The commercial real estate (CRE) downturn will be worse in Chicago than many other areas - because of the already high vacancy rate - but it appears the expected slowdown in CRE has started.

As a reminder, in a typical business cycle, investment in non-residential structures follows investment in residential structures with a lag of about 5 quarters.

Click on graph for larger image.

This graph shows the YoY change in Residential Investment (shifted 5 quarters into the future) and investment in Non-residential Structures. In a typical cycle, non-residential investment follows residential investment, with a lag of about 5 quarters. Residential investment has fallen significantly for five straight quarters. So, if this cycle follows the typical pattern, non-residential investment will start declining later this year.

by Anonymous on 9/11/2007 12:39:00 PM

The good news? The Federal Trade Commission is talking about deceptive mortgage advertising:

“Many mortgage advertisers are making potentially deceptive claims about incredibly low rates and payments, without telling consumers the whole story – for example, that these low rates and payments apply for a short period only and can go up substantially after the loan’s introductory period,” said Lydia Parnes, Director of the FTC’s Bureau of Consumer Protection. “Home ownership is the American dream, but it can become a nightmare for consumers who don’t have the information they need to understand the terms of their mortgage.”

In warning letters, the agency is advising more than 200 advertisers and media outlets that some mortgage ads are potentially deceptive or in violation of the Truth in Lending Act. The ads, including some in Spanish, were identified in June during a nationwide review focused on claims for very low monthly payment amounts or interest rates, without adequate disclosure of other important loan terms.

The bad news?

During the past decade, the FTC has brought 21 actions against companies in the mortgage lending industry, focusing in particular on the subprime market. Several of these cases have resulted in large monetary judgments, with courts collectively ordering that more than $320 million be returned to consumers.

That's the kind of enforcement record that really scares these scumballs off, isn't it? Does anyone know what percent of the entire industry's ad budget over the last ten years $320 million is? According to Mortgagedaily.com, projected mortgage [Ed. note: Duh!] advertising expenditures just for 2007 is $152 billion. The FTC isn't putting a very heavy "inaccuracy tax" on that.

by Calculated Risk on 9/11/2007 11:37:00 AM

This Reuters commentary has some interesting statistics: Fed hazard is recession, not an immoral bailout: James Saft

Lehman Brothers figures show non-agency mortgage security issuance falling to $15 billion in August, down from $41 billion in July and $70 billion a year ago. And rates are much higher, up by 0.85 percentage points since June for prime loans larger than Fannie and Freddie's $417,000 limit.

And on mortgage applications:

Washington-based Campbell Communications carried out a survey of 1,744 mortgage brokers between August 23-31, according to Realty Times. The survey found about 33 percent of purchase loans did not come through, against 4 percent in 2004.

Even so-called prime borrowers had their closings cancelled 21 percent of the time.

This is another indicator that home sales declined sharply in August (see here and here), and probably means Mortgage Equity Withdrawal (MEW) also declined significantly (probably impacting consumption later this year).