Here’s two more pieces on the monoliners.
NY regulator: fixing bond insurers will take time
Any plan to fix the bond insurers' difficulties will take "some time," because of the complexity of the issues and the number of parties involved, New York State Insurance Superintendent Eric Dinallo said in a statement on Thursday.
Dinallo also said that clearly it is important to resolve issues related to the bond insurers as soon as possible. Dinallo met with a group of banks on Wednesday to press them to put up capital to bail out the wobbly bond insurers.
Ilargi: I think it was CalculatedRisk who said earlier today that there is no time for the bond insurers. Me, I’m more fantasizing about the level of pressure put on the ratings agencies to NOT downgrade anything in the field. Problem with that is, Moody’s, Fitch and S&P have a huge credibility issue, that seriously threatens their vey survival. If they don’t start telling it like it is on the bond insurers, and very soon too, they may lose the last few torn shreds of confidence that are left.
Next we have the New York Times, seemingly trying to fool their readers into thinking this is a new issue: "the next thing to worry about". Where were they the past few months? Never mind.
Next on the Worry List: Shaky Insurers of Bonds
Even as stocks ended five days of losses with a surprising recovery on Wednesday, officials began moving to defuse another potential time bomb in the markets: the weakened condition of two large insurance companies that have guaranteed buyers against losses on more than $1 trillion of bonds. Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.
That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system. To avoid a possible crisis, insurance regulators met with representatives of about a dozen banks on Wednesday to discuss ways to shore up the insurers by injecting fresh capital, much as Wall Street firms have turned to outside investors recently after suffering steep losses related to subprime mortgages. While it is unclear what steps, if any, the banks and regulators may ultimately take, the talks focused on raising as much as $15 billion for the companies, according to several people briefed on the discussion who asked not to be identified because of the sensitive nature of the discussions.
Eric R. Dinallo, the New York insurance superintendent who regulates MBIA, called Wall Street executives on Tuesday to set up the meeting at his office in Lower Manhattan. He led the session on Wednesday and suggested that the group move in as little as 48 hours to get a deal done ahead of any downgrading of the bond guarantors by credit ratings firms. Mr. Dinallo could face resistance from banks that do not have significant exposure to the guarantors and thus have less incentive to put up money. It is also unclear how executives and shareholders of the companies would react to the plan and the prospect of ceding control.
Sean Dilweg, the commissioner of insurance in Wisconsin, which regulates Ambac, sat in on the meeting but said he would be working with Ambac directly. Mr. Dilweg said he met separately on Tuesday with executives at Ambac, which is based in New York but chartered in Wisconsin. “Eric is looking at the overall issue, but I am pretty confident that we will work through Ambac’s specific issues,” Mr. Dilweg said in a telephone interview. “They are a stable and well-capitalized company but they have some choices to make.”
Ilargi: A well-capitalized company? Their market cap is $1.1 billion, with $556 billion in insured bonds, they lost another 17.3% on the Street today, and 90% from the top, and they are what? Methinks the commisioner wouldn’t like to see Ambac fail. Well, too bad.
While $15 billion might seem like a large amount of money for banks to commit to bond guarantors at a time when many investors have lost faith in them, Mr. Haines said it would be smaller than the billions the banks might have to write down if the companies lost their top ratings or incurred major losses.
“It’s a calculated kind of risk,” he said.
Ilargi: That’s what I said earlier today. Looks like a great deal. Like an offer they can’t refuse. But boy oh boy!
Existing Home Sales Fall, First Annual Price Drop Since Great Depression
Sales of existing homes in the U.S. fell more than forecast in December, capping the biggest annual slump in 25 years and the first decline in prices since the Great Depression.
Purchases fell 2.2 percent to an annual rate of 4.89 million, the National Association of Realtors said today in Washington. For all of last year, sales of single-family homes declined 13 percent and prices dropped 1.8 percent, the first decrease since records began in 1968 and probably the first since the 1930's, the group said.
Falling property values and stricter borrowing terms will lead to more foreclosures and depress housing for most of this year, economists said. Investors anticipate the Fed will cut interest rates again next week in an effort to prevent the downturn from exacerbating weakness in the broader economy.
"There is likely to be little or no increase" in gross domestic product this quarter, Harvard University economist Martin Feldstein told the Senate Finance Committee in Washington today. "The probability of a recession in 2008 now exceeds 50 percent. If it occurs, it could be deeper and longer than the recessions of the recent past."
Hats off to the (wo)man who came up with the idea of announcing the BoA takeover of CountryLied. It’s absolutely brilliant. No need to sign anything, or have any serious intention of closing the deal. Just the announcement was enough to stave off CFC’s certain bankruptcy, which would have been executed by now, and prop up its stock, as well as lift up the entire industry a few notches with the -false- hope of more deals to come. Will it ever be signed? Want to bet? Really, brilliant sleight of hand.
And take a long hard look at the numbers BoA has put on its CDO's and subprime loans: 30 cents on the dollar. Let's see the entire industry do that, now, today! And then let someone calculate the total losses. It's high time. Oh, and when they're done with that, let's see what they think their Pay-Option ARM's are worth. Come clean boys and girls, let's see what the emperor wears.
Bank of America sees Countrywide deal done in second half
Bank of America CEO Ken Lewis said Tuesday that the company expects to close its previously announced acquisition of mortgage giant Countrywide Financial in the second half of 2008.
CFO Joe Price also told listeners on a conference call Tuesday morning that the company marked down its value for CDOs and subprime loans to less than half their original value. "The combined subprime CDO sales and trading positions at 12/31 are carried at 600 million or about 30 cents on the dollar," Price said.
The executives said they expect the U.S. economy to slow, but they do not expect it to enter a recession.
Housing prices to free fall in 2008 - Merrill
The worst housing financial crisis in decades is only going to get worse, a Merrill Lynch report said Wednesday.
The investment bank forecasted a 15 percent drop in housing prices in 2008 and a further 10 percent drop in 2009, with even more depreciation likely in 2010.
By contrast, the National Association of Realtors (NAR) expects housing prices to remain flat in 2008. NAR did cut its home price estimate for the current quarter, however, to a 5.3 percent year-over-year decline, which represents the steepest drop in that price measure on record. But NAR sees an uptick in home prices in the last two quarters of 2008.
"Merrill Lynch's figures are way too pessimistic, and they are unprecedented," Lawrence Yun, the National Association of Realtors chief economist told CNNMoney.com. "There is so much variation in local housing markets, and we see stable price conditions for 2008."
The current housing crisis and the depreciation in home prices have pummeled the economy, with businesses and consumers cutting back on spending, raising the specter of a recession. "Lower sales and higher inventory for sales are lowering the velocity of transactions," said Fritz Siebel, Director of US Property Derivatives for Tradition Financial Services. "That cannot be a sign of good health for the economy."
But for those who think that the worst is over, Merrill Lynch said that housing prices still remain comparatively high. The brokerage believes that home prices are still far above historical norms when compared to other measures such as rent or GDP. "By our calculations, it will take about a 20 to 30 percent decline in home prices to correct this imbalance," said the report.
Merrill Lynch believes that housing starts will most likely slide another 30 percent by the end of 2008 - a historic low.
Equities rebound on insurance bailout hopes
Investors poured back into equities on Thursday, hoping a rescue plan for ailing bond issuers would stem credit losses, while allegations of a massive trade fraud at Societe Generale added to financial sector woes.
Demand for bonds fell as equities rebounded but currency traders remained cautious.
European and Asian stocks markets took their cue from overnight gains on Wall Street to rise sharply. The pan-European FTSEurofirst 300 was up 3.6 percent and Japan's benchmark Nikkei .N225 closed 2.1 percent higher.
The key driver was news that New York's insurance regulator had pressed major banks on Wednesday to put up billions of dollars to support wobbly bond insurers.
Faith In The Fed: The Last Bubble To Pop
A mad rush by Congress, Bush, the Treasury department and even foreign central banks to "Do Something" is now underway.
If the Fed, Congress, and Central Banks would just stop and think, they would realize they already "did" something. They created the biggest credit bubble in history and we are on the backside of the credit bubble bust right now. It's too late to do anything about that now.
Market action now suggests leveraged hedge funds are selling what they can (oil stocks like Exxon Mobil (XOM) and tech stocks), not what they want (junk mortgage backed securities). The latter simply has no bid. Recent action smacks of margin call selling or a derivative blowup somewhere.
Mighty Mouse Bernanke Fails To Save The Day
Unfortunately, there is no "fix" temporary or permanent on either side of the Atlantic. The harder the Fed and ECB fight this mess the longer it will last. Housing prices, asset prices, and leverage all have a lot of unwinding to do. The problem is not liquidity, the problem is solvency. Anyone expecting another miracle save is going to be disappointed.
Mortgage Rates And The Red Queen Race
All things considered, the odds of a huge number of people in 15 year fixed rate mortgages benefiting by this drop in the Fed Funds Rate is pretty slim, especially since the pool of possible beneficiaries is primarily for the last 18 months or so.
Thus, the only people really benefiting from this drop so far are those currently in interest only mortgages, pay option ARMs, or other ARMs specifically tied to short term LIBOR. For those in Pay Option ARMs, this benefit may do nothing but postpone the day of reckoning. This is especially true for Option ARM holders who are only able to afford the minimum payments and are going deeper in debt every passing month due to negative amortization. For the rest, the benefit is real. However, this just puts people back to where rates were a couple years ago.
Conclusion: 175 basis points of rate cuts at best amounts to nothing but treading water when it comes to helping the mortgage crisis.
California Foreclosure Activity Still Rising
"Foreclosure activity is closely tied to a decline in home values. With today's depreciation, an increasing number of homeowners find themselves owing more on a property than it's market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move," said Marshall Prentice, DataQuick's president.
The median price paid for a California home peaked at $484,000 last March and declined to $402,000 by the end of 2007, although much of that decline was caused by significant shifts in the types of homes that were sold.
Most of the loans that went into default last quarter were originated between August 2005 and October 2006. The median age was 22 months, up from 15 a year earlier, indicating that the pool of at-risk home loans is getting larger.
Dodd Seeks U.S. Program to Buy `Distressed' Mortgages
Senate Banking Committee Chairman Christopher Dodd proposed creating a federal program to buy ``very distressed'' mortgages at steep discounts as part of economic stimulus legislation being developed in Congress….
….Dodd's proposal, modeled on the Depression-era Home Owners' Loan Corp., came as Democrats unveiled several proposals reminiscent of 1930s-style economic-stimulus programs. Senate Majority Leader Harry Reid of Nevada said today Congress should work on a long-term plan that would pay to build roads, utilities, schools and housing.
Dodd outlined his proposal in a letter to Reid yesterday. The program would ensure lenders and investors ``take a haircut'' and are not being bailed out, Dodd said in the letter.
The proposed corporation would buy outstanding mortgages at ``steep discounts'' and convert them into loans insured by the Federal Housing Administration or backed by government-sponsored enterprises, he wrote to Reid. Dodd proposed $10 billion to $20 billion to fund the program.
Refinancing Drives Increase In Mortgage Applications In Latest MBA Weekly Survey
"Refinance applications are up 92% since the beginning of November and purchase applications are up 7%. With tighter credit conditions we do not know how many of these applications will become loans, but it is clear that borrowers are responding to the 40-80 basis point drop in rates we have seen since November 2 across products," said Jay Brinkmann, Vice President of Research and Economics at the Mortgage Bankers Association.
Builders, Banks Could Get Tax Break
U.S. homebuilders, lenders and other struggling companies could receive hefty one-time tax refunds this year and next under a provision of the economic stimulus plan percolating in Washington.
President Bush and lawmakers from both parties aim to quickly inject capital into the economy, which has been hit hard by turmoil in the housing and credit markets, by extending the timeframe under which companies are allowed to retroactively deduct net operating losses against earlier profits.
It would be the second time in recent history that the government has amended this accounting tool, known as a "tax loss carryback," to stimulate the economy in the face of a recession.
Under the proposal, one of several emergency tax breaks being considered for corporate America, companies would for two years be allowed to carry back losses incurred in 2007 and 2008 against profits accrued over the previous five years, instead of the usual two year timeframe.
Some of the biggest beneficiaries would be Wall Street banks such as Citigroup Inc., Merrill Lynch & Co., Morgan Stanley and Bear Stearns Cos. Homebuilders, which have been punched by the housing slump after years of go-go profits, also stand to benefit. In fact, any company that is now struggling following years of healthy profits (that pumped up their tax bills) could in theory benefit.
Homeowners just walking away
As I've noted before, one of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes. These are homeowners with the "capacity to pay, but have basically just decided not to".
Wachovia is seeing that happen now. Imagine what will happen as house prices fall this year and next.