Posted on 06/26/2007 10:02:06 PM PDT by djf
The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.
Bear Stearns headquarters: Banks 'set to call in a swathe of loans' Bear Stearns headquarters in New York
The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.
"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."
Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.
"The banks were not prepared to bid over 85pc of face value for CDOs rated "A" or better," he said.
"God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.
"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn."
US property writer Paul Muolo described the Bearn Stearns crisis as the “subprime Chernobyl”, saying the bank had created a “cone of silence”.
Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.
This is the biggest bail-out since the Long-Term Capital Management crisis in 1998, which Bear Stearns refused to join at the time. Bear Stearns is now alone, a case of rough justice being served.
Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.
The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s.
The Mortgage Lender Implode-Meter that tracks the US housing markets claims that 86 major lenders have gone bankrupt or shut their doors since the crash began.
The latest are Aegis Lending, Oak Street Mortgage and The Mortgage Warehouse.
“There isn’t a recovery about to happen,” said Ara Hovanian, head of the building group Hovanian Enterprise.
Nouriel Roubini, economics professor at New York University, said there were now concerns about “systemic risk fall-out” from the Bear Stearns debacle as investors look more closely at the real value of CDOs.
“These highly illiquid securities have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit,” he said.
“They have not been rerated in a way that is consistent with rising subprime default rates. “That is why Wall Street is in a panic. “Losses will be massive once these assets are correctly priced to market.”
Lombard Street said the Bear Stearns fiasco was the tip of the iceberg. The greatest risk lies in the “toxic tranches” of lower grade securities held by the banks.
Much-trumpeted claims that banks had shifted off the riskiest credit exposure on to the asset markets was “largely a fiction”, said Mr Dumas
. The worst of the US property crisis has yet to hit since there is an overhang of $2,000bn of mortgages with adjustable rates which have yet to be reset. Many borrowers could see payments jump by half, or even double.
At the same time, a spike in 10-year US bond yields by 0.65 percentage points over the last six weeks has drastically repriced the cost of fixed mortgages, knocking away a key prop for the US housing market.
“With defaults at their highest in the 37 years that records have been kept, it could be a long hot summer,” said Mr Dumas.
If this is correct, it would make the S&L crisis and the Great Depression look like a cash shortage at a lemonade stand.
There is no crisis. Simply lower the prices until you sell more homes.
Or don't, but stop complaining in any case. "The industry" seems to want one-sided capitalism for themselves. They act as if buyers have no right NOT to purchase a home.
Oh, we're in a hard landing right now, which is about to be aggravated?? Nonsense...
Well, the point (for the lender) is not so much earning a higher rate on his loan, which as you suggest is fine; but having a borrower default and for the lender to suddenly discover the collateral underlying the loan is impaired, eg; not of the value stated in the appraisal process.
Obviously, the higher rates charged for these flavor loans are to offset higher risks of defaults. But the rub here is that not only have those defaults occurred at higher-than-expected rates, but now the lender cannot make him/herself whole by foreclosing on the home.
I am working on a home right now that was sold for $571K early this year. (A solid $60K of that was mortgage fraud, and/but that’s another chapter to the story) This home was financed with a first mortgage of about $435K and a second loan (’piggyback”) of about $135K. In the six months this homeowner has taken to discover that her gross takehome pay of just under $3K couldn’t quite be stretched to cover a $4.5 monthly nut, the property has declined maybe $60K in value. Current home value $450-$460K and the market is very slow. The second mort holder in this case will be lucky getting a dime on the dollar and could well be entirely wiped.
Collateral aint what it used to be:)
there are now multiple layers of collateral that could come crashing down. From first, mortgages...then financial institutions (Bear Stearns)...the pension plans and the equity market as a whole.
That suggestion makes just too much sense. Heck even the first $10,000 would improve savings rates.
Does this mean we don’t have enough unsecured credit in the hands of illegals yet?
This is just the begining.
There is going to be a ton of defaults from the loans ranked between prime and subprime, the Alt-A loans as well.
Alt-A has been labeled lovingly by some in the industry as Liars loans because you could basically state whatever you wanted on the application, and the mortgage lenders wouldn’t do much work to confirm this.
It was like throwing 100 gallons of gasoline on a bbq (bbq being the fed lowering rates too low and for too long).
The housing speculators/flippers pounced on these loans and the mortgage lenders were only so happy to do this, figuring they could sell the loans off as soon as possible in these CLO and MBS packages to sell to other financial institutions, hedgefunds, pension funds, and foreign investors. THis way the risk could be spread out easily and everyone was praying for a soft landing. Now that the housing market has gone soft to bad to many areas, you now have these flippers sitting on multiple properties they bought that are now depreciating in value and don’t have the income or savings to keep paying the loans. All of them believed they could flip these properties for profit in a short period of time.
You now have something like a 9 month inventory of homes in the US and its going to get bigger every month as flippers walk away from these properties and buyers sit on the sidelines waiting for prices to bottom out.
Chinese only own about 10% to 15% of US debt.
The Japanese own the biggest amount by far. They are the ones we have to worry about.
Bingo! You got it. This is what the bruhaha was about with Bank of America and their credit cards to illegals. This has been going on for years. It's not the credit cards, it's the bank accounts they qualified for with no visible means of support. Easy credit meant they could buy a house with no money down with an adjustable rate, and no real job. Now they are headed back to Monterey if they can't pay and we have to take it in the kazzoo. Some have even sold for a profit and took off with the money. Do they pay income tax? I think not.
The problem with the banks giving credit cards was never the credit card. They were paid for by the illegal with up front money. What was bad was that gave them credit. to get a bank account, and other loans, and even launder dirty money. Now that rates have gone up, the day of reckoning is here, and they are gone. Many had houses with several families moved in. One house in Houston was raided with 67 people in it. With a new SS number and fake drivers license, they are ready to live the American dream again.
I know of half a dozen families who own three or more homes each, all of them mortgaged beyond value, who are attempting to ride out the rising rates and unoccupied properties. I listened in horror as they described buying homes across the country during the housing ‘boom’. Several participated in quartering - joining up with three other investors to purchase a home, each with quarter equity, to ‘reduce the risk.’
Alas, this backfired, big time. Each were responsible for a quarter of the payments on the homes. But what started happening is one person would get into trouble, extending their investments too far and lo and behold, a quarter of their payment isn’t being paid as one of the investors drops out. And it cascades from there - the higher rates and payments, as well as interest only loans, has a lot of people toppling over.
Interestingly, this also seems to be spilling over into the employment market as people who had left the job market to manage properties or enjoy being paper multi-millionaires are rushing back to take whatever they can get at whatever salary they can manage. A few headhunters I know are pushing people they hadn’t talked to for half a decade who are back and needing money yesterday, even if they’re only bringing home two-thirds of what they used to.
Most interesting are the number of people who are forgoing retirement plans, medical plans, etc in a bid to raise their immediate take home salary as much as possible.
I think the next decade will prove what the entitlement generation is made of.
I assume you are talking about the boomer's. My wife and I are of the early 30's late 20's age group, and I know what I think is going to happen. SS is going to be unsupportable, and higher taxes will be leveraged to pay for it. Boomer's will sit there and demand the workers be taxed more. How does that sit with me? I'm pissed.
As it is now you have to have two incomes to afford a house. Home school or private schooling is not an option. The mean income is not enough to afford the mean house.
All this while retiring boomer sit in the casino and demand I give them more of my pay check. It's not our fault they were lied to by Big Government. I'm sure I'm going to get flamed now. I don't care. The thought of having to pay for the boomer's free government ride, while saving for my own retirement, while trying to hold a family together.... I don't know...
I think its going to come down to the Gen X'ers to save the nation. We are the ones that will have to break the entitlement cycle. Boomer's are not willing to do it, and frankly, they don't have the time.
There's a heaping pile of stupid on both sides in story, or is it greed? Either way, the buyer and the lender both are at fault.
It should read “swath of loans”, not swathe.
That is what the Subprime market is essentially. People who have little credit history or not so good credit fall under subprime. Subprime being high/adjustable interest and fuddy dutty financing. Its primarily the fuddy dutty financing that is coming to fruition. I don’t have a problem with it. It is how capitalism works. The greedy, fearful and stupid get smacked down. Then markets are brought back into harmony until another pendulum swing.
I at least want what I paid in.....after that.....you can bitch all you want....
Margin calls are an ugly thing and there’s always a hard lesson to be learned therein.
MM (in TX)
i’ve heard that some funds have been marking cdo’s to market at or near par, rather than far below that.
Business is business, but it does seem there might be at least a tinge of payback for Bear's intransigence back during LTCM.
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