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Monday, August 18, 2008

Housing/Subprime/Credit Roundup — August 18, 2008

Items of Interest:

Fannie, Freddie Fall on Likely Need for a Bailout -- Fannie Mae and Freddie Mac tumbled in New York trading to their lowest levels in more than 17 years on concern the government will be forced to bail out the mortgage- finance companies, wiping out common stockholders.

Fannie slid 22 percent, while Freddie dropped 25 percent after Barron's reported that the Bush administration is anticipating the government-chartered companies will fail to raise the equity they need to offset credit losses, prompting the U.S. Treasury to act. The companies' stock market values are well below the minimum of $10 billion in capital that each would need to raise to ``have any credibility,'' Barron's said in its story.

``We agree with the call for Treasury intervention and think it is very, very likely to happen before the end of the third quarter,'' Ajay Rajadhyaksha, the head of fixed income strategy for Barclays Capital Inc., said in a telephone interview today. ``Without government help, we think there is very little chance of Freddie completing a significant capital raising.'' ...

Housing Wire:
Fannie, Freddie Take Another Beating -- A story appearing in Barron’s — which, it should be noted, didn’t exactly say anything really new — managed to ignite the latest round of selling by equity investors in shares of Fannie Mae and Freddie Mac...
2nd Quarter Real Estate Report & press release
  1. Nearly 24% of homes sold in the past year were sold at a loss;
  2. Of those who purchased a home in the past five years, 29% are “upside
  3. down” (negative net equity);
  4. Median home values are down a record 10% over the past year;
  5. Home values are now deflating in 85% of the country;
  6. Almost 15% of housing sales are now foreclosed transactions.
  7. Foreclosed homes account for 50% of all home sales in some markets
  8. The second quarter is the sixth consecutive quarter of home value declines and we see little promise of turnaround in the short-term as the rates of decline have yet to slow and, in fact, actually accelerated in many markets.
  9. Interestingly, homeowners seem to be oblivious to the reality of the housing market as it pertains to their individual home. As reported last week through the Q2 Zillow Homeowner Confidence Survey(6), 62 percent of homeowners think their home value increased or stayed the same in the past year and 75 percent expect their home value to increase or stay the same in the next six months...

Zillow Real Estate report 2nd Quarter 2008
The Big Picture:
Zillow Q2 RE Update -- Most homeowners [want to believe they] live in a town not unlike Lake Wobegon, where everybody is above average...

David Rosenberg / Merrill Lynch:
Daily Snapshot of Market Moving developments [pdf] -- The backdrop in housing remains decisively negative. The latest data from Zillow showed that …
Barry Ritholtz /The Big Picture:
Nonfeasance in Financial Oversight -- If I had to select a single word to describe the Greenspan era of the Federal Reserve (and to a lesser degree, the Bush White House) Nonfeasance is the word I would choose.

How bad was the Nonfeasance this last housing cycle? An Associated Press investigation, including "dozens of interviews" and the review of "thousands of state and federal documents" found that:
  • Since 2005, at the height of the housing boom, more than two dozen states and U.S. territories have violated federal rules by failing to investigate and resolve complaints about appraisers within a year. Some complaints sat uninvestigated for as long as four years. As a result, hundreds of appraisers accused of wrongdoing remained in business.

  • The only tool federal regulators have to force states into compliance is so draconian -- it would effectively halt all mortgage lending in a state -- that it has never been used.

  • Both state appraisal boards and the federal agency tasked with their oversight are chronically understaffed, many with only one full-time investigator to handle the hundreds of complaints that arrive each year. Some don't even have an investigator.
Weak rules cripple appraiser oversight -- As soaring home prices set the stage for America's great housing meltdown, a critical step in making sure those home sales were a fair deal -- the real estate appraisal -- was undermined from within. After the nation's last major banking disaster, Congress set up a system to catch rogue appraisers. Their game: inflating the value of homes at the direction of equally unscrupulous real estate agents and mortgage brokers, whose commissions are determined by the size of the deals.

But a six-month Associated Press investigation found that the system is crippled by both the bumbling of its policemen and their inability to effectively punish those caught committing fraud. And despite ample evidence appraisers are pressured into inflating home values -- sometimes to prices in support of loans that are more than buyers can afford -- the federal regulators charged with protecting consumers have thus far made a conscious choice not to act...
Dr. Doom: Nouriel RoubiniNew York Times:
Dr. Doom -- On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason...
Vanity Fair:
The King of Central Park West -- The highest-priced new apartment building in the history of New York—indeed, at roughly $2 billion in sales, the most lucrative in the world—isn’t a sleek, one-of-a-kind glass tower. It’s architect Robert A. M. Stern’s 15 Central Park West, an ingenious homage to the classic Candela-designed apartment buildings on Park and Fifth Avenues...

The apartments were sold out before construction was completed this year, at the highest prices of any new building in the history of New York. The Zeckendorfs started selling them at roughly $2,500 a square foot, which was already at the top of the New York market, and they kept raising the prices as construction went on, until the last apartments were sold at something approaching $4,000 a square foot. The total sales were in the range of $2 billion, making 15 Central Park West the most successful apartment building in the world—the architectural equivalent, you might say, of the highest-grossing movie in history...
Arnold Kling / EconoLog:
Freddie Mac: My Chapter -- Richard Syron... became Freddie Mac's CEO in 2003. Syron wanted to do more for low-income housing, and he did not trust the people that he found at Freddie Mac. As we now know, there was a blow-up between Syron and Freddie Mac's Chief Risk Officer over loans with low down payments. The Chief Risk Officer argued that such loans were bad for borrowers, bad for Freddie Mac, and bad for the country. Syron fired him.

In theory, Syron might have been correct. It could have been the case that the Freddie Mac holdovers he inherited were too conservative in the types of loans they were willing to buy. It could be that the policy of minimizing low-income lending and maximizing financial health was the wrong way to deal with the trade-off.

In practice, Syron's timing was awful. He pushed Freddie Mac into high risk loans just as the real estate bubble was in its final few years. He then compounded this mistake by ignoring those at Freddie Mac who said that if the company was going to take these risks, then it had to raise more capital...
Robert Shiller book: The Subprime Solution - How Today's Global Financial Crisis Happened, and What to Do about ItReview: Robert Shiller’s Subprime Solution -- I’ve just finished Robert Shiller’s Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about it ...

First, he thinks the subprime meltdown had more to do with psychology and sociology than economics. People believed themselves into a bubble, to the point where even rational, conservative people like the heads of Fannie Mae and Freddie Mac couldn’t forsee price drops of more than 13.4% in the housing market.

There is a strong theme of irrational responses in the face of fundamental uncertainty in this book, something The Black Swan author Nassim Taleb (who wrote a blurb for Shiller’s book) has a lot to say about. Most of the leaders of the day couldn’t see the subprime crisis as it happened, simply because they didn’t think these issues could ever get that bad.

Shiller spend a lot of time comparing the housing bubble in the US from 2000-2007 to the housing bubble which existed in the 1920’s just before the stock market crash of 1929 and the ensuing Great Depression...
Economist View:
Robert Shiller interview: The Subprime Solution [video]
Daily Kos:
$4,748.62: Your part in the housing bailout so far -- You would think that if the government was to give $1.43 Trillion (that's trillion, with a 'T') of low-interest, taxpayer-backed loans to wealthy Wall Street investors that tax paying Americans in general would be outraged. But considering the lack of any sort of public protest, that assumption would be wrong.

Maybe the public simply doesn't understand what has happened. On the off-chance that this is true, here's a quick and dirty explanation of how 10% of the GDP of America is transferred from the public to the "have's and have more's".

"The U.S. dollar is a 'faith-based currency' dependent on the credibility of a central bank"
-- Dallas Federal Reserve Bank President Richard Fisher

Federal Reserve Assets decline in quality----

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia