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.