Stoneleigh: Sorry the Debt Rattle is very late today. I have had very limited internet access this morning due to technical problems. I will be adding material through the day.
Credit crisis expands, hitting all kinds of consumer loans
The credit crisis triggered by bad home loans is spreading to other areas, forcing banks to tighten credit and probably extending the credit crisis that's dragging down the economy well into next year, and perhaps beyond.
That means consumers are going to have an increasingly difficult time getting bank loans for car purchases, credit cards, home equity credit lines, student loans and even commercial real estate, experts say.
When financial analyst Meredith Whitney wrote in a report last October that the nation's largest bank, Citigroup, lacked sufficient capital for the risks it had assumed, she was considered a heretic.
However, Whitney was proved correct: Citigroup pushed out its CEO, sought foreign investors and slashed its dividend. Her comments now carry added weight on Wall Street, and she has a new warning for ordinary Americans: The crisis in credit markets is far from over, and it increasingly will affect consumers.
"In fact, we believe that what lies ahead will be worse than what is behind us," Whitney and colleagues at Oppenheimer & Co. wrote in a lengthy report last month about threats faced by big national banks, including Bank of America, Wachovia and others.
The warning is scary considering what's already behind us in the credit crisis — the resignation or firing since last August of CEOs at almost every large commercial or investment bank; the Federal Reserve lowering its benchmark lending rate by 3.25 percentage points; a Fed-brokered deal to sell investment bank Bear Stearns; and weekly auctions of short-term loans from the Fed worth billions of dollars to keep credit markets functioning.
Whitney argues that the worst is still ahead because the financial tools that enabled credit to flow so freely to homeowners and consumers for most of this decade are likely to remain in a prolonged shutdown indefinitely.
"After years of inherently flawed underwriting, banks face the worst yet of the credit crisis — over $170 billion in write-downs and charge-offs from consumer loans," Whitney told McClatchy. The same kind of losses from housing may be ahead for credit extended to consumers, she said.
Lenders Facing Another Wave of Write-Offs
Federal regulators are warning the world to get ready for the next wave of problems in the banking world.
Up to now banks have been struggling to deal with the piles of delinquent debt from earlier subprime lending to homeowners and the dozens of federal, state, and lender originated programs being proposed are all designed to address this crisis.
That situation is only getting worse according to information released last week by the Mortgage Bankers Association (MBA) which reported that 6.35 percent of all one-to-four family home loans outstanding at the end of the fourth quarter were delinquent, an increase of 53 basis points from the previous quarter and 151 basis points from the first quarter of 2007. These figures do not include loans that have already entered the foreclosure process. Once again this quarter, the rate of foreclosure starts and the percent of loans in the process of foreclosure are the highest recorded since 1979.
But, while lenders and investors have been working to raise the necessary capital reserves to withstand looming write-offs and losses from this consumer-based mess, a new group of bank customers have been watching their own situation get worse.
Home builders, condominium developers, and land speculators are facing growing problems making payments on their loans and, with home sales finishing up a disappointing spring sales season, these construction related loans look even shakier. Both borrowers and lenders are being hit for a double whammy as sale prices of homes and condos and the value of raw land continue to fall. This erosion of loan collateral makes it difficult if not impossible to get out of loans in one piece even where there are buyers available.
According to an article in the Wall Street Journal, those banks which are heavily tied to home construction loans have begun to dump them, many at steep discounts, a precursor to billions of dollars in new losses.
Citi, Merrill, UBS Face Monoline Losses, Whitney Says
Citigroup Inc., Merrill Lynch & Co. and UBS AG may post losses of $10 billion on bond insurance after MBIA Inc. and Ambac Financial Group Inc. lost their top credit ratings, Oppenheimer & Co. analyst Meredith Whitney said.
MBIA and Ambac, the world's largest bond insurers, had their AAA ratings cut two levels by Standard & Poor's June 5, which trimmed ratings on more than $1 trillion of securities they guaranteed. The downgrades may limit the so-called monoline insurers' ability to write new policies, putting further pressure on earnings, she wrote today in a note to investors.
``The limited earnings potential of monolines poses a risk to the value of the insurance and hedges on the subprime-related securities provided to the banks and brokers,'' Whitney wrote. ``The collateral damage could be in excess of an additional $10 billion.''
Whitney, one of the first bank analysts last year to gauge the depth of the U.S. credit crisis, said in January that losses tied to the bond insurers for all banks might top $40 billion. She didn't update her estimate. Citigroup, Merrill and UBS have taken more than $10 billion of writedowns related to the insurers, she wrote.
Florida at the Precipice of Depression
Banks cannot afford to take 50-75% hits on mortgages, and that is exactly what is happening. The precipice is here, and we are on it. Recent reports about home sales rebounding are insignificant, because no one is accurately describing the growing inventory build-up. Banks simply don't have the margins to deal with this crisis. And for that reason, we will see massive bank failures and this will snowball into a complete economic meltdown. If you have an argument against this scenario, I'd love to debate you on a live conference call. We deal with the banks. We know what is going on before the numbers show up at the Fed or any analysts desks. We deal with the public, so we hear the desperation at all levels. I listen to grown men cry about how to explain to their families that they are losing everything. I listen to people that I fear are on the verge of suicide. I read about people committing crimes simply to put food on the table. Spend a week with me, and you'll understand why there is no feasible way to avoid a Depression.
The banks will fail, just as they failed in 1929 . . . but worse because this time some of this leverage is as high as 40:1. Insurance? Where is that going to come from? There is no insurance that can cover the cost of the coming bank failure, unless we just print more money. We are two generations removed from 1929. I am talking about Biblical 40 year generations. And when you look at who we were in 1929 and who we are now, you'll realize just how ugly it is going to be. In 1929 there was a stronger base of family values. There was a work ethic that we don't see today. The generation from 1929 - 1969 grew up with a totally different set of values than the generation from 1969 - 2009. The first generation worked their way out of the Depression. Today's generation doesn't understand work. We only understand creative financing and how to live off the next generation. And sadly, that is where we are today. We are at the precipice, and we are going to push our children over the edge because we lived so far above our means and ignored all of the warning signs. We lived just like the Romans in their final days.
Harsh? Like I said, spend one week with me, and you will go home with a new outlook about life, people and the crisis that is unfolding. You will go home with a sick feeling in the pit of your stomach. Guaranteed.
Just Florida? No, but Florida is your crystal ball.
Next on Crunch's Hit Parade: Corporate Synthetic CDOs?
The investments were "synthetic" but the pain may be real.
Investors are already paying the price for buying billions of dollars of complex securities, known as synthetic collateralized debt obligations, tied to the fate of U.S. homeowners. Now, they may be in for some unpleasant surprises from the much larger market for similar investments linked to the credit-worthiness of companies.
All but nonexistent a decade ago, synthetic CDOs grew popular in recent years, especially in Europe, as a way for insurance firms, banks and hedge funds to invest in a diversified portfolio of companies without actually buying their bonds. While the investments have stabilized since suffering with the broader credit markets earlier this year, some analysts are warning of more trouble ahead.
The problem: Most corporate synthetic CDOs are linked to the debt of U.S. companies, some of which are looking a lot shakier amid an economic slowdown. To make matters worse, some credit-rating experts burned by the subprime-mortgage crisis are taking a closer look at the way they rated synthetic CDOs. That could trigger downgrades in the $6 trillion market, forcing some investors to sell their securities or at least post significant losses.
"We will start seeing investors getting increasingly nervous" as downgrades pick up, says Michael Hampden-Turner, credit strategist at Citigroup in London. "There is more...pain for synthetic CDO investors."
As opposed to regular CDOs, which contain actual bonds, synthetic CDOs provide investors with income by selling insurance against debt defaults, typically on a pool of 100 or more companies with relatively high "investment-grade" credit ratings.
To attract different types of investors, they issue securities with different levels of risk and return: Holders of the riskiest pieces reap the highest return but suffer the first of any losses. That makes it possible for other, more-senior pieces to win top-notch grades from ratings companies.
Banks and insurance companies, such as American International Group and French insurance giant Axa, snapped up highly rated pieces, which typically offered a better return than similarly rated corporate bonds. Hedge funds often bought the riskier pieces, attracted by even higher returns.
Now, though, the CDOs aren't looking as good as they once did. That is in part because the banks that created them, in order to achieve more attractive returns, often filled them with companies that had among the lowest of investment-grade ratings, meaning they were among the riskiest of high-quality borrowers.
As the financial crisis takes its toll on the broader economy, some of those companies are seeing their credit ratings downgraded to "junk" -- moves that have a negative impact on the ratings and value of CDOs that contain them. In May, ratings firm Standard & Poor's downgraded to junk status Countrywide Financial Corp., one of the more widely referenced companies in synthetic CDOs. Another investment-grade company popular in CDOs was Sprint Nextel Corp., which S&P downgraded to junk last month.
CDOs' problems could also be magnified in coming months by a new policy at Fimalac SA's Fitch Ratings, the third-largest bond-rating service after Moody's Corp.'s Moody's Investors Service and McGraw-Hill Cos.' S&P. Fitch plans to apply a much more severe methodology when it reviews the ratings on hundreds of synthetic CDOs over the next few months.
Nearly half of the $50 billion of top-rated synthetic CDO paper Fitch rates could face a warning and possibly a downgrade, while about $8 billion of lower-rated deals could fall to "junk" status, according to a report by J.P. Morgan Chase analysts Jonny Goulden and Yasemin Saltuk.
Banks vs. Consumers (Guess Who Wins)
What if a judge solicited cases from big corporations by offering them a business-friendly venue in which to pursue consumers who are behind on their bills? What if the judge tried to make this pitch more appealing by teaming up with the corporations' outside lawyers? And what if the same corporations helped pay the judge's salary?
It would, of course, amount to a conflict of interest and cast doubt on the fairness of proceedings before the judge.
Yet that's essentially how one of the country's largest private arbitration firms operates. The National Arbitration Forum (NAF), a for-profit company based in Minneapolis, specializes in resolving claims by banks, credit-card companies, and major retailers that contend consumers owe them money. Often without knowing it, individuals agree in the fine print of their credit-card applications to arbitrate any disputes over bills rather than have the cases go to court. What consumers also don't know is that NAF, which dominates credit-card arbitration, operates a system in which it is exceedingly difficult for individuals to prevail.
Some current and former NAF arbitrators say they make decisions in haste—sometimes in just a few minutes—based on scant information and rarely with debtor participation. Consumers who have been through the process complain that NAF spews baffling paperwork and fails to provide the hearings that it promises. Corporations seldom lose. In California, the one state where arbitration results are made public, creditors win 99.8% of the time in NAF cases that are decided by arbitrators on the merits, according to a lawsuit filed by the San Francisco city attorney against NAF.
"NAF is nothing more than an arm of the collection industry hiding behind a veneer of impartiality," says Richard Neely, a former justice of the West Virginia supreme court who as part of his private practice arbitrated several cases for NAF in 2004 and 2005.
Credit crunch leaves a hangover
Business and personal borrowers will face a continuing battle with higher loan costs as the global credit crunch continues to put pressure on the needs of banks to raise money at affordable rates.
The latest attempts by banks and lenders to lock in their longer-term funding requirements indicate that while financing costs may have eased since the high point of the crisis just a couple of months ago, they are still significantly ahead of the pre-crunch levels last August.
In the corporate market, where lending is slowing because of the weakening economy, banking analysts at JP Morgan see no let-up in the immediate future.
"With banks now locking in expensive funding for considerable duration, we expect ongoing (higher) re-pricing of the business (loan) book as corporate customers' facilities fall due and the banks look to pass on the sustained higher funding costs," they said to clients last Thursday.
ANZ tested the five-year bond market last week as part of a $975 million financing move, and the bank paid 94 basis points - almost one full percentage point - above the short-term cash rate.
That was a big improvement on ANZ's previous effort in the same market on April 16 when a $1.35 billion funding round cost it 128 basis points.
However, the pricing of longer-term debt, which is used by all banks to help fund the demand for new loans from both companies and individuals, continues to run well ahead of what had been considered normal before the credit markets dried up 10 months ago.
Greenspan Conundrum In Reverse
Now we see that short term rates have fallen like a rock, but mortgage rates have not done likewise. I called for this mortgage to treasury disconnect to happen years ago, based on the idea of increasing default risk. Clearly that has happened in spades. Of course there really was no conundrum then, nor is there one now. It was all in Greenspan's head.
Conundrum or not, new home buyers are not seeing a penny of these rate cuts in spite of many misleading ads that I see about "low mortgage rates". The only people benefiting from the recent Fed rate cuts are those in existing mortgages, assuming their margin to the treasury or LIBOR index was reasonable.
The real story today is the Bond Market, although you won't hear that too loudly on Bubble TV.
The last few days have seen a rather nasty move in the yield curve - flattening. But last night Bernanke's speech, in which he noted that inflation expectations were at risk, hammered the curve at a time the pits were closed and the electronic reaction was instantaneous - and nasty.
One of the most common trades of late among the bond folks has been a "steepening" trade - that is, to be long 2 year bonds and short 10s or 30s. As the yield on the latter rises and the former falls, the price moves the other way - so the short end price goes up, and the long end price goes down.
Now gear this up at 20:1 and wow! Excellent!
Until it reverses, at which point you need to bend over and grab your ankles.
Treasury Curve Steepening Bet Blows Sky High
Treasury spreads between the 2 year treasury and the 30 year long bond exploded today....
....Minyanville Professor Jason Goepfert writes:
"How big is it? It's in the top 0.5% of all daily moves since 1975. Put another way, it's a four standard deviation event.
Are we going to now be hearing about funds going under that had put on leveraged curve steepeners?"
I have strong doubts the Fed is going to hike given that any hikes will add to the wreckage in housing. However, if the Fed does hike, it will be for one reason only: It was forced to by the markets. It sure won't be because of a strengthening economy.
One day does not necessarily prove much, but the fact that there was no selloff in the long bond today in spite of a massive move in the 2's may be telling.
Whatever inflation scare is happening, the long bond sure did not see it today.
F.H.A. Faces $4.6 Billion in Losses
The Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans, officials said Monday.
Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years.
Housing officials said the agency was also hurt by poor performance in its traditional mortgage portfolio. Deteriorating economic conditions led some of its core clients — first-time buyers, minorities and lower-income owners — to default, they said.
The projected loss is the highest in the home loan program since 2004, and officials said the F.H.A. had to withdraw $4.6 billion from its $21 billion capital reserve fund in May to cover the costs. They said the agency, which is self-sustaining, would not need appropriations from Congress to remain solvent.
But Mr. Montgomery warned that the F.H.A. would have to renew its efforts to end the seller-financed down payment program, which accounted for 35 percent of its loans in 2007.
He said the mortgages had foreclosure rates three times those of traditional loans and would push the F.H.A. to the brink of insolvency.
“Let me repeat: F.H.A. is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”
Homeowners Demand Tax Reassessments As Market Values Plummet
Property taxes have increased at twice the rate of inflation during the last decade. Between 2000 and 2007, the increase in per capita property taxes was 51.7 percent.
Nobody was complaining when home values were rising, but times have changed. The housing market has gone to the dogs and homeowners across the nation are seeing their equity disappear overnight.
The downturn has taken a toll on values. Unfortunately, it seems that nobody told the tax man. There are a number of homeowners who are still paying taxes based on assessments that were made at the peak of the real estate boom.
According to the National Taxpayers Union, an estimated 60 percent of U.S. properties are overvalued, leaving the majority of Americans paying more than they have to. As home prices fall across the nation, the figure is expected to move even higher.
Part of the problem lies with the time-frame in which many locales re-assess properties. The 'true market value'--the amount a property could sell for--is usually re-assessed every few years. In other words, it can take awhile for taxes to catch up with the market value.
4 great reasons to rent
Before the housing boom went bust this year, homeownership was considered a good investment. But now, with the rash of mortgage foreclosures, renting may be a more attractive option. Here’s why.
1. Renting can save money
2. Homeowners’ tax deductions are overstated
3. More options are available to renters
With fewer houses and condos selling, more owners are converting their properties into rentals or providing incentives to lure prospective tenants. In condo-heavy cities such as Palm Beach, Fla., for example — where the vacancy rate has jumped 2.5% — investors are undercutting apartment rates to generate interest. “A lot of people are offering three free months to attract renters,” says Robert Smith, a real-estate adviser in Orlando, Fla. “And modern apartments offer amenities that may be unaffordable in a new home.”
4. Renting gives you flexibility
Canada Unexpectedly Keeps Rate at 3%, Citing Prices
The Bank of Canada unexpectedly kept its benchmark interest rate unchanged, ending a series of rate cuts as higher energy costs threaten to stoke inflation.
Governor Mark Carney held the rate on overnight loans between banks at 3 percent, surprising all 30 economists surveyed by Bloomberg. Canada's dollar and bond yields jumped.
Energy costs threaten to push inflation above 3 percent, the upper limit of the bank's target range, policy makers said. The decision to pause to contain inflation as global food and energy prices surge brings Canadian policy into line with counterparts in the U.K. and U.S.
``In this environment where prices aren't correcting, the bank has to be prudent and by choosing to stay put it clearly showed that it's worried,'' said Martin Lefebvre, an economist with Mouvement Desjardins in Montreal.
The bank has lowered its rate from 4.5 percent in December, when it started interest rate cuts designed to shore up an economy battered by a high currency and weak U.S. demand for car and lumber exports.
U.S. Economy: Trade Gap Grew in April on Oil Imports
The U.S. trade deficit widened in April as the surge in oil prices propelled imports to a record, overshadowing the biggest gain in exports in four years.
The gap grew 7.8 percent to $60.9 billion, more than forecast and the most since March 2007, the Commerce Department said today in Washington. Excluding petroleum, the shortfall was little changed. March's deficit was revised lower.
The figures led some economists to estimate that first- quarter growth was greater than previously estimated by the government, even as fuel prices push imports higher. The dollar's two-year slide, coupled with stronger growth in Europe and Asia, is spurring demand for planes built by Boeing Co. and machinery made by Deere & Co.
``The hyper-competitiveness of the dollar, plus reasonable growth in our export markets, that combination has proven to be very powerful,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``Trade's been a buffer; it's kept GDP in positive territory. It's clearly a cushion.''