by Calculated Risk on 10/22/2007 11:05:00 AM

From the IMF: Assessing Risks to Global Financial Stability

Click on graph for larger image. This chart from Credit Suisse via the IMF shows the heavy subprime resets in 2008, plus it shows the reset problems with Alt-A and Option ARM loans in later years. Although many of the homeowners in the 2009 to 2011 reset periods will refinance (if they can), this shows that the problems in housing will linger for several years. What is especially concerning is all these Option ARM resets in 2010 and 2011. Most of these homeowners are selecting the minimum payments (negatively amortizing) and many homeowners will be upside down when the ARM resets.

by Calculated Risk on 10/22/2007 10:44:00 AM

From MarketWatch: KKR, Goldman cancel Harman deal, to invest $400 mln

[KKR] and Goldman Sachs will cancel their $8 billion takeover for Harman International but invest $400 million in convertible notes ... KKR and Goldman won't be sued and won't have to pay a termination fee under the agreement struck.

A pretty clean exit for KKR and Goldman. No pier loans here.

by Calculated Risk on 10/22/2007 10:15:00 AM

From Bloomberg: U.S. Housing Decline Threatens to Last Into 2009: John F. Wasik. A few excerpts:

[Ivy] Zelman ... says it's unlikely the U.S. housing market will recover before 2009, adding there's a ``50 to 60 percent chance of a recession,'' as the housing slump curbs consumer spending.
...
When you consider the huge home inventories and tight-as-a- drum mortgage restrictions, it's easy to conclude that the housing slump could extend well past 2008. ...

``I've never seen the market as bad as this,'' Zelman said. ``And it could get worse. The home-price decline could range from 16 percent to 22 percent.''
...
``These are the worst inventories we've seen as a nation,'' she says.
...
``Some 74 percent of consumer expenditures are correlated to housing. I don't think the consumer will hold up. They will cut back on things like buying cars and vacations.''

While Zelman forecasts that sales will drop for the next two years, she isn't as optimistic on home prices, which she says may continue falling until 2010 or 2011.

``We'd be better off if prices corrected all at once. It will get worse before it gets better.''
...
Keep in mind that job growth and consumer spending bear close scrutiny. If Zelman is right about a recession coming, then prices may fall more, plunging the housing market into an even sorrier state.

It's nice to have Zelman back in the news. Her views are close to mine.

by Tanta on 10/22/2007 09:45:00 AM

Via the New York Times:

“The market’s really low right now, so you can get a good price,” said Lori Crook, a food server at Keys Cafe who said she was looking for a place she could fix up and sell. “Even if you can’t sell it right away, if you just sit on it and sit on it, it will go up.”

The auction involved a tiny fraction of foreclosures in the state. Julie Gugin, executive director of the nonprofit Minnesota Homeownership Center, projected statewide foreclosures at 20,000 this year, up from 11,000 last year, based on data from sheriffs’ sales. . . .

“This is such a stark and dramatic illustration of how serious the problem is,” said Ron Elwood, a lawyer at the Legal Services Advocacy Project, which lobbies in the interest of low-income residents. “The reality is, half the reason 300 homes are being auctioned off is that speculators tried to make a killing and failed to do so.” In Minneapolis, 55 percent of foreclosures this year involved houses not occupied by their owners, according to county records.

But instead of alarming buyers about the risks, the auction of so many foreclosures at once was an invitation to speculators, small and large. Some, including Bryan Kihle and Jim Casha, who bought a four-bedroom house for $145,000, bid without seeing the properties. “I just looked at the picture and thought if we got it cheap enough, we could rent it for a year, then sell it when the market goes back up,” said Mr. Kihle, a building contractor.

Some day this war's going to start.

by Tanta on 10/22/2007 09:30:00 AM

Or "words," as the case may be. Take "Subprime crisis forces McMansions to take McBreather," a sad story of the housing horrors of Hinsdale, in which marketing time for properties in the $2MM range is now six to nine months, if you can believe that. (Note to reporters: that's hardly historically unusual for jumbo properties.) What I found amusing is how "subprime," the crisis thing announced in the headline, suddenly gets a set of scare-quotes half-way through the article:

Real-estate businesses are hurting. Uncertainty about the U.S. economy and tighter mortgage financing in the fallout from the "subprime" credit crunch have reduced buyers. . . .

Hanna said one way to view the U.S. property market was to picture it as "a pyramid, where subprime forms the base."

A credit crunch has tightened all mortgage lending because of probes of bankers, lenders and brokers amid the subprime crisis, limiting mid-tier borrowers from buying up.

"Now people at the bottom can't sell to move up a level and that also hurts people at the top of the pyramid," Hanna said.

Lenders are more reluctant to lend to people at the bottom of the market. But wealthier Americans with less-than-perfect credit -- some, for instance, with a hefty mortgage or two already -- are finding themselves in the same boat.

"Many of the people at the high end are CEO's and entrepreneurs who are used to getting what they want," said Bill McNamee, president of Pinnacle Home Mortgage, a mortgage broker focused on Chicago area high-end homes. "They don't like being told 'no,' but some will be forced to get used to it."

Nervousness after the summer's stock market volatility and fear of a recession have also played a role.

"High-end owners are staying put and adding on to their houses because they're afraid of what's happening in the economy," said Sandy Heinlein of Baird & Warner Real Estate in Inverness, a wealthy Chicago suburb.

Many owners are unwilling to risk buying a home for fear they may not be able to sell their existing one, she said.

Pat Turley, owner of Koenig & Strey GMAC Real Estate in the Chicago suburb of Glen Ellyn, said unrealistic expectations from both buyers and sellers have added to the slowdown.

"Some sellers have yet to accept they won't get the price they could have a year or two ago," Turley said. "And while it's a buyer's market, there is a limit to how low buyers can expect sellers to go."

A pyramid. Really? How big do these people think the subprime "starter home" purchase-money market is (or was, even at its height)? Perhaps those sudden queasy quotes around "subprime" involve an implicit recognition that the real "anomaly" in the market is the McMansion owners who perceive themselves as the top of the pyramid, but still want to sell and move up? Um, where are they going to go? Evanston? How wide does the top of a pyramid get?

And we think the problem is that "subprime" borrowers cannot "sell to move up a level"? Odd. I'm hearing that they cannot "sell to avoid foreclosure."

Some day this war is going to end, but until then, we are all subprime now.

by Calculated Risk on 10/22/2007 12:44:00 AM

From the NY Times: Mortgage Security Bondholders Facing a Cutoff of Interest Payments

Collateralized debt obligations ... are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own ...

Cutting off the cash flow, which is governed by rules and mathematical formulas that vary by security, is expected to accelerate in the months ahead.
...
With such a re-evaluation, owners of collateralized debt obligations ... may be forced to write down mortgage investments beyond the billions they have already written off. Some bonds, for example, may go from being valued at, say, 70 cents on the dollar to becoming largely worthless overnight, bankers and analysts say.

There is more in the article by Vikas Bajaj. The article suggests there is more pain coming for investors in certain CDOs.

by Calculated Risk on 10/21/2007 06:55:00 PM

WSJ: Europe Feels Housing Chill

The real-estate slowdown that hit the U.S. is spreading to Europe.

Home prices in some of Europe's hottest markets are falling after a decade of double-digit-percentage price increases. The reasons resemble those across the Atlantic: higher interest rates, faltering confidence and tighter lending standards.
...
Home prices in Spain more than doubled over the past 10 years, but the average price of an existing home has fallen slightly since July, according to real-estate agent facilisimo.com. France experienced its first quarterly home-price decline in nearly a decade in the third quarter, according to its federation of real-estate agents, while Irish house prices in August were 1.9% below the year-earlier level.

The weakening home market could hit European economies. An expanding construction industry has fueled growth in Europe. Now, construction in Spain and elsewhere is easing. ...

by Calculated Risk on 10/21/2007 06:23:00 PM

From the Financial Times: US loan default problems widen

Poor quarterly results from banks across the US over the past two weeks suggest credit problems once confined to high-risk mortgage borrowers are spreading across the consumer landscape, posing new risks to the economy and weighing heavily on the markets.
...
Banks are adding to reserves not just for defaults on mortgages, but also on home equity loans, car loans and credit cards.

“What started out merely as a subprime problem has expanded more broadly in the mortgage space and problems are getting worse at a faster pace than many had expected,” said Michael Mayo, Deutsche Bank analyst.
...
Dick Bove, analyst at Punk Ziegel, said bank earnings indicated “there are problems with consumer debt that extend beyond the well-known issues in the real estate markets. Auto loans are clearly a new area of concern”.

by Calculated Risk on 10/21/2007 11:45:00 AM

From MarketWatch: More firms expected to join SIV fund: officials (hat tip Bob)

More financial firms are expected to join the "Super SIV" special fund to help guarantee liquidity in the commercial paper market, officials said Saturday.

"Participation is expected to broaden in the weeks ahead," said Robert Steel, the U.S. Treasury undersecretary ...

Bank of Italy Governor Mario Draghi told reporters on Friday that Treasury Secretary Henry Paulson had informed his G7 colleagues that Pacific Investment Management Co., the world's largest bond fund, and Fidelity Investment, the Boston-based mutual fund giant, have decided to join the SIV fund.

But a spokesman for PIMCO said Draghi was incorrect.

"PIMCO is not participating," PIMCO spokesman Mark Porterfield said in an email on Saturday.

PIMCO is smart to stay away from this mess.

by Calculated Risk on 10/20/2007 03:42:00 PM