S&P/Case-Shiller Home Prices Fell 15.3% in April

Highlights:

• Home Prices: "In 20 U.S. metropolitan areas fell in April by the most on record. The S&P/Case-Shiller home-price index dropped 15.3 percent from a year earlier "
  

• James O'Sullivan: "A senior economist at UBS Securities LLC said, "There's such an excess of inventories that we certainly expect to see more price declines."
  

• Rising Borrowing Costs: "Fannie Mae, the largest mortgage buyer, last week cut its forecast for new and existing home sales this year as 30-year fixed mortgage rates jumped to an eight-month high."

Comments:

Testing the Water: "Come on in the water is just fine", is something I would expect to hear from a real estate seller. But to all you buyers eager to get in - - beware.

Rising Home Interest Rates: Certainly are complicating the picture. The Federal Reserve is in a very delicate situation of strengthening the dollar and fighting inflation versus stimulating the economy. Stable rates and prices would be nice but doesn't appear to be in the near term cards.

Jim

Horrid Housing Starts

Highlights:

Last three months: "the average seasonally adjusted annual rate for single family home starts was 689,000. The last time the figure was that low, Ronald Reagan was president and Paul Volcker was the Federal Reserve chairman. "

Another way to measure the decline: "has been is to compare the current seasonally adjusted rate with the actual number of housing starts over the preceding 12 months, again using three-month moving averages. A figure above 100 percent means starts are rising, while one below 100 percent means they are falling. The latest figure is 77 percent."

Long View: "It was the seventh consecutive month when the figure was under 80 percent. Other than a six-month string in 1981 and 1982, that figure has not fallen below 80 percent at any time since the figures became available in 1959. This is the 26 th consecutive month in which the figure was under 100 percent, meaning a declining market for starts. That matches the longest such streak ever, set in the mid-1970’s, when a severe recession was caused by soaring oil prices."

Comments:

Hold Tight: Currently, there is no indication that the bear market in real estate has run it's course.

Implications: Since the underlining assets are tied to National and International Fix Income Funds and Bank Holdings we can not anticipate any near term resolution of portfolio values until the knife (asset values) has stopped falling.
To all potential investors, be careful, it is very difficult to catch a falling knife.


Jim

Foreclosures Rise 48% in May as Repossessions Double (Update2)

Westbury, New York during a bus tour of foreclosed homes
on May 10, 2008. Photographer: Jin Lee/Bloomberg News

Highlights
Banks Repossessed: "Twice as many homes in May and foreclosure filings rose 48 percent from a year ago as falling house prices trapped borrowers in mortgages they couldn't afford,realty Trac Inc. said in a report today."

Michelle Meyer and Ethan Harris, economists at Lehman Brothers: "Foreclosures will account for 30 percent of national home sales this year as 1.2 million foreclosed single-family homes will eventually enter the market, they said. They estimate foreclosed properties, which typically sell for about 20 percent less than other homes, will depress home prices nationally by 6 percent."

Feedback Loop: ""The risk is that an adverse feedback loop will develop, in which problems in the housing market undercut the economy, causing even more stress in the housing and mortgage markets,'' Meyer and Harris wrote."

Wrong Way: "Lenders are afraid to lend and buyers are afraid they'll be under water in a year, so unless something dramatic happens we're going to continue to see the trend go in the wrong direction,'' said Rick Sharga, RealtyTrac's vice president of marketing."

Comments:

Foreclosure Status: Based on the facts reported there is no near term bottom in sight.

Titanic: We are all passengers on the same economic ship which just hit a real estate iceberg. It doesn't matter if you are in 1st class, 2nd class, or steerage the economic ship is taking on water and sinking. We must look beyond all the mistakes, poorly underwritten loan and misguided leadership and focus on a solution that will repair the rip in the hull of this once magnificent economy.


Jim

Mortgage-backed securities are shaken to the foundations (CMBS Market)

Highlights:

• CMBS Market: "The amount issued in the first five months of this year fell 89 per cent to $10.8bn, the lowest level since the late 1990s, according to Commercial Mortgage Alert. Overall issuance last year was $253bn."

• Issuance in CMBS: "has dropped as banks suffering from subprime writedowns held off from new loans. Yields on the bonds soared to record highs in March this year amid frantic selling, and as hedge funds as well as owners went short on them in anticipation of a commercial real estate doomsday. Soaring yields made borrowing via the CMBS market prohibitively expensive."
  

• New Wave of CMBS: "Show lower loan-to-value ratios and subordination – the cushions protecting bond-holders from losses – is deeper at the top of the capital structure, adding protection to the safest tranches of debt and boosting investors’ confidence."

• Analysts Expect Volume to Pick Up: "this year partly because it takes three to four months to complete the securitisation process – but not to return properly until next year. In the end, the drastic contraction in the CMBS market is not seen as disastrous, with property markets expected to return to their level in 2003-4."
  

Comments:

CMBS Packages: Appears to be forging a more transparent product with along with wider cushions protecting the bond holders. This is a trend I believe we will soon see across the board in all the Fix Income Market Security packages.

CMBS Pricing: Higher interest rates, De-Leveraging of balance sheets, and slower economic activity on a world wide basis don't indicate a near term stabilization in pricing or increase in new CMBS production.


Jim

Housing Slump Helps the Draw of Fixer-Upper TV

Above, Jay Goldman/HGTV; Top right and bottom right, TLCStill popular are programs like HGTV’s “Designed to Sell,” left, and TLC’s “Flip That House,” top right, and “Date My House,” right.

Highlights:

• Shows hallmarks of the bubble: "“Flip That House” (on TLC) and “Flip This House” (on A&E) — are still around, but have been retooled with less-than-happy endings. The TLC episodes are repeated several times each week and still draw an average of 700,000 viewers a showing."
  

• Last year HGTV doubled their orders: "“House Hunters” and “Designed to Sell,” two shows offering advice on buying and selling decisions."

• "Ashton Crew tuned into HGTV: about a year ago as she tried to sell her home in Ankeny, Iowa. “I thought, in this market, any suggestion could help,” she said. But she was disappointed. “I found myself starting to resent the shows a little, thinking their advice a bit too simplistic,” Ms. Crew said. She recently decided to take her home off the market.""

• Senior Vice President for A&E: "Robert Sharenow, called them the type of shows “that keep on giving.” The ratings for “Flip This House” have remained steady for the last two years, even as house-flipping has grown less reliable, as they tap into a home-improvement vein that the cable networks believe will always exist, no matter how gloomy the market may be."

Comments:

Flip that House "not": The velocity of home sales are slowing down on a year or year basis and the trend is continuing to move in the direction of working with the property you own.

General Population: is experiencing another cyclical understanding that you can lose money in the real estate market. The results are making everyone more cautious going forward as the economic realities of their own situations become apparent.


Jim

No down payment? No problem. Loophole still allowing risky mortgages by disguising money as a gift.

Photo - Marcio Jose Sanchez / AP

Highlights:

• FHA Traditionally: "Allowed family and friends to gift a downpayment to homebuyers. In the last 10 years, homebuilders and sellers have gotten into the act by funneling their upfront consideration through down-payment assistance not-for-profits".
  

• 2005 U.S. Government Accountability Office report: "Agency found that homes sold with nonprofit assistance were appraised and sold for prices about 2 to 3 percentage points higher than comparable homes without such assistance."
  

• Seller-Financed: "This practice burden FHA borrowers with pricier homes, it also increases the odds that the new homeowners can't afford their monthly mortgage payments. No-downpayment loans have default rates that are three times the FHA average."
  

Comments:

Desperation: Mix anxious homebuyers with homebuilders who have high inventory together and watch the creative solutions fly. The problem is most homebuyer have a cup of money versus a homebuilder or seller who has a bucket of cost.

Non-Profits: Don't paint the entire group with the same brush. The majority do a stellar job in educating their target group and helping them become responsible homeowners.

FHA: Is under the gun to perform, especially during this subprime crisis. I continue to look for agency improvement but understand that the economic landscape makes it difficult for everyone to perform as they would prefer.


Jim

CDO Boom Masks Subprime Losses, Abetted by S&P, Moody's, Fitch

LINKS:
http://www.bloomberg.com/apps/news?pid=20601010&sid=ajs7BqG4_X8I&refer=news
http://www.bloomberg.com/apps/news?pid=20601109&sid=aTlvTOj5XpTE&refer=exclusive

Highlights:

• Investment-grade ratings: "On 95 percent of the securities in the CDO gave no hint of what was in the debt package -- or that it might collapse."
  

• Lehman Brothers Holdings Inc.: " CDO holdings have already declined in value between $18 billion and $25 billion because of falling repayment rates by subprime U.S. mortgage holders."
  

• "Scarlet Letter: "Regulators' plans to add a letter to credit ratings of asset-backed debt may constrict the $4.6 trillion market."

• CDO Failures: "The number of collateralized debt obligations failing since October has reached 186, with $202 billion of assets, data compiled by S&P and Bloomberg show. That's 40 times the total for the previous four years, according to the rating company."

Comments:

Two well written articles by a Bloomberg team of writers about the CDO market :

First: Gives you some historical information regarding how we got to this deteriorated state regarding CDO market.

Second: Discusses a possible course of action to begin solving a major problem. It is apparent that CDO's are going to be around for a while and the costs will continue to rise.

Jim

Pending Sales No Longer Good Indicator Of Future Sales

Link:
http://housingdoom.com/2008/06/09/pending-sales-no-longer-good-indicator/

Highlights:

• Year over Year: National home sales were down 13.1%
• Pending sales in 2005: implied a 30 day close. In 2008, it can take much longer than 30 days regarding when the house will close or experience fallout.
  
• Foreclosure and Short sales: are mixed with regular home sales and pending data. It would be helpful to understand what percentage of this month to month improvement was due to forced sales.

Comment:

Referring to the graph above: you can see the correlation between pending sales and actual home sales are diverging. The chart is illustrating a slight pick up in pending sales along with a continued downward drift of actual home sales.

Jim

Your comments are welcome.

Lehman Plans Higher Capital Raising, Expects to Post $2.8 Billion Net Loss

Link:
http://docs.google.com/Edit?docID=dcbc2vhk_2hcv5hwgv

Comments:

Lehman is another well organize Wallstreet firm who is trying to prevent a tipping point in the firm's ability to stay solvent.

• Hedge Effectiveness: Was negatively impacted due to problematic assets that were difficult to correlate and experienced basis drift during the process.
• Realizing Losses: Chief Financial Officer Erin Callan found the bid side to many of the less liquid assets they sold, a good move, even though it may have been painful.
  
• Illiquid Assets: (BYOF) Bring Your Own Financing is the mantra, Unfortunately not always possible with some of the more radioactive structured assets.
• De-Leveraging: Lowering the leveraged risk profile makes me think of a team of experts in a large plane going down. "Throw everything out that isn't welded down, we got to get more lift so we can suck in more financing."

Food for thought:

Another Wallstreet Firm in Trouble: This isn't Beat Stearns but the continued decline of the various underlining assets being held by both Wallstreet and Investors is toxic.

Best Practices: Hedging is an art form with science mixed in to make it more respectable. It is easy to miscalculate a variable or not refresh the data frequently enough and later find yourself upside down on the hedge.

Chicken Salad: As we all have heard before, "You can't make chicken salad out of chicken poop." There is still alot of poop out there.


Jim

Note: Your comments are welcome.

Frank-Dodd Rescue Prolongs Housing Crisis by Deferring Defaults

By Bob Ivry

June 5 (Bloomberg) -- Dan Castro

Barney Frank, U.S. representative from Massachusetts, chairs a hearing of the House Financial Services Committee in Washington, April 9, 2008. Photographer: Dennis Brack/Bloomberg News





Link:
http://www.bloomberg.com/apps/news?pid=20601103&sid=aKlXIcX4YHzk&refer=news

Comments: We must recognize there is a group of people who are beyond help right now and that a certain percentage of homeowners and speculators were reckless regarding their home purchase.

What can we do?

• Understand: solutions need to be formulated at the Federal, State, and Local levels that will motivate free market participates to embrace the new programs.
• Cooperation: and linkages to solutions at the Federal, State, and Local level will greatly enhance success.
• Market Solution: involves a refinanced loan not a rewritten old loan.
• Many Second Liens: stakeholders offered Piggyback Loans which were highly speculative an very lucrative. This loan helped the homeowner avoid Mortgage Insurance (MI).
• Better Definition: of whom do you assist, for how much, and for how long.

Food for thought: Many of the recommendations are trying to use mortgage tools that don't have the capacity to solve the problem. A vertically and horizontally integrated program using newly created MBS instruments could go a long way in discouraging the fast buck speculators and encouraging market investors to continue to support MBS and Structured Market Environment. It can be done in a timely manner with available resources.

Best Regards,
Jim

New York sets rating agency fee reforms and SEC weigh in

Thu Jun 5, 2008 4:27pm EDT - - - Reuters --- By Martha Graybow and Walden Siew

Links:
http://www.reuters.com/article/ousiv/idUSN0528456020080605

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080605/REG/656329280

Comments: A move in the right direction regarding potential conflict of interest between the Rating Agencies and the Broker/Dealer Community. Cuomo is certainly asking the right questions and kudos to him for attempting to take action. However, I don't view the solution robust enough to solve the problem.

Food for Thought: As a follow up, look for the
6/11/08 proposal by the Securities and Exchange Commission.
I believe they need to bifurcate the Structured Finance Securities ratings to:

• Raise Investor awareness regarding the risks inherent to these type of investments.
• Highlight the unique performance qualities of these Structured Finance Securities.

Your thoughts and comments are always welcome.

Jim