by Calculated Risk on 12/04/2007 02:16:00 PM

From Bloomberg: Citigroup SIV's Junior Sedna Debt Cut to CCC by Fitch (hat tip FFDIC)

Citigroup Inc.'s Sedna Finance Corp. had $867 million of junior-ranking debt downgraded 12 levels to CCC by Fitch Ratings after declines in the structured investment vehicle's assets.
...
Sedna's net asset value has fallen to 54 percent, eroding nearly all the protection the downgraded ``second priority senior'' notes gets from ranking above the lowest layer of debt, Fitch said in a statement today.

12 levels? Yikes!

by Calculated Risk on 12/04/2007 11:45:00 AM

Last week I posted a chart (see Goldman Sachs on Housing) from First American CoreLogic that showed the distribution of home equity among US mortgage holders at the end of 2006:

Click on graph for larger image.

Since the end of 2006, U.S. home prices had fallen about 3.6% (by the end of Q3 2007), according to the S&P/Case-Shiller® U.S. National Home Price, and will probably decline 5% for all of 2007.

The price decline in 2007 would move the dashed line one column to the right, putting another 4% of U.S. homeowners into the no / negative equity category.

But what do these percentages mean in actual numbers? According to the Census Bureau's 2006 American Community Survey (see table here) there were 51,234,170 household with mortgage in the U.S. in 2006.

The following graph shows the number of homeowners with no or negative equity, using the most recent First American data, with several different price declines.

At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages).

By the end of 2007, the number will have risen to about 5.6 million.

If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million.

The last two categories are based on a 20%, and 30%, peak to trough declines. The 20% decline was suggested by MarketWatch chief economist Irwin Kellner (See How low must housing prices go?) and 30% was suggested by Paul Krugman (see What it takes).

To put these price declines into perspective, this graph shows 15% and 30% nominal price declines for the S&P/Case-Shiller U.S. National Home Price Index and the OFHEO, Purchase Only, SA index.

A 15% nominal price decline would take prices back to late 2004 for both indices. A 30% price decline for Case-Shiller would take prices back to mid-2003; 30% for OFHEO would take prices back to late 2002.

Not all areas will see the same price declines, but this does provide a gross estimate of the number of homeowners with no equity based on various price decline assumptions. This number is important because homeowners with little or no equity are very vulnerable to negative events - they will have difficultly selling their home, and they can't borrow from their home to meet emergency needs.

This will also impact consumption, because for these homeowners, the Home ATM will be closed.

Finally, given the potential number of homeowners with negative equity, this raises the question if the HUD projections of "two million foreclosures by 2008 or 2009" are too low.

by Calculated Risk on 12/04/2007 10:20:00 AM

From MarketWatch: H&R Block, Cerberus call off Option One deal

... H&R Block Inc. said Tuesday it ... will close all remaining origination activities of Option One and has stopped accepting new loan applications.

H&R Block said the move will result in 620 staff cuts, the closure of three offices and a pretax restructuring charge of about $75 million. The company said it continues to pursue the sale of its loan-servicing activities.
...
H&R Block Inc. said ... it has agreed to terminate a previous agreement under which an affiliate of Cerberus Capital Management would have acquired ... Option One.

No surprise.

by Calculated Risk on 12/04/2007 12:01:00 AM

From the WSJ: SIV Exposure Seen at Some Money Funds

Funds recently holding some of the SIVs include some from Barclays PLC's Barclays Global Investors; UBS AG; Charles Schwab Corp.; Deutsche Bank AG; BNY Hamilton Funds and Morgan Stanley.
...
The funds range in asset size from $2 billion to $36 billion, and hold about 1% to 2% of their investments in some of the SIVs.
...
Among funds holding SIVs is the $29 billion Western Asset Money Market Fund, run by a unit of Legg Mason Inc. The fund holds a SIV called Orion Finance, which was on Friday downgraded by Moody's. Orion represents about 0.5% of the fund.

A Legg Mason spokeswoman said in an email that the company is confident in the stability of the fund's net asset value. "By and large, SIVs are paying on time, and Legg Mason's money funds' exposure to SIVs continues to come down as paper matures and pays."

It is extremely unlikely that any of these funds will "break the buck". However the last comment is important for the SIVs: everyone wants to reduce their exposure to SIVs as the paper matures.

by Calculated Risk on 12/03/2007 06:11:00 PM

A quick note: Blogger has an issue with graphs and images. When you click on the graph, instead of opening a larger image in the browser, blogger asks you if you want to download a file. This is a known issue with blogger, and they are currently working on the problem.

Meanwhile there is a somewhat tedious work around. I believe I've fixed the graphs in the following two posts:

Krugman: 15% House Price Decline "Implausible"

House Prices and Foreclosures, Massachusetts

Sorry about that ... Best to all.