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Thursday, August 7, 2008

Housing/Subprime/Credit Roundup — August 7, 2008

Items of Interest:

Hank the Great? Paulson Copies Frederick With Covered-Bond Plan -- In 1769, short of funds to rebuild Prussia after attacks by Russia, Sweden and Austria, Frederick the Great let aristocrats, churches and monasteries raise money by pledging their estates as security to investors.

From those beginnings emerged what today is Europe's $3 trillion market for covered bonds -- securities backed by assets such as mortgages as well as the seller's promise to pay. Now U.S. Treasury Secretary Henry Paulson, faced with carnage in the housing market that led to $480 billion of losses and writedowns at the world's top financial institutions, is using a similar strategy to help America's banks turn assets into cash.

While the European market has grown for 250 years, Paulson's plan confronts obstacles Frederick never faced: Besides competition from the biggest U.S. housing-finance companies, the debt would be tied to mortgages and banks that are sliding in value with America's homes and economy...

Larry Summers / Financial Times:
Thoughts on US Economic recovery -- Macroeconomists, like medical scientists, use case studies to teach their students about the maladies to which the system is susceptible. For supply shocks and stagflation, the example is the 1970s. The financial dislocations that occur when bubbles burst are illustrated by the Great Depression and Japan’s problems in the 1990s. The importance of central bank credibility in resisting inflation emerges from discussion of the experience of the late 1960s and the 1970s...

Today, the end of the current financial crisis looks further away than it did in August 2007. Policy is not yet ahead of the curve. I used to remark in the context of the emerging market crises of the 1990s that I would date the moment of recovery from the first time an official pronouncement proved to be too pessimistic. By this standard, recovery is not at hand.

The best prospects for managing a very difficult situation involve a comprehensive effort to support the real economy through temporary fiscal stimulus and the financial system through a programme of measures directed at capital rather than liquidity problems. These steps offer no assurance of success but reactive drift raises the risks of costly failure...
Paul Kedrosky / Infectious Greed:
Required Reading: Larry Summers on Building a Recovery -- Larry Summers' FT column on building a U.S. financial recovery is must reading. It is lucid, crisply argued and practically-minded in its attempt to come up with a plan to get U.S. policy ahead of the curve with respect to the unfolding multiple crises in the U.S. economy.

David Pauly / Bloomberg
Financial Cowboys Need to Be Lassoed - Fannie Mae and Freddie Mac have clearly messed up their designated roles as keepers of a secondary market for mortgages, buying loans from banks, which can then lend again.

Their mission to promote home-ownership was forgotten as they cooked their books to make the earnings reports look good to stockholders and spent millions on lobbying to keep government reformers at bay...
Wall Street Journal:
Even the Rich Get Home-Equity Yanked -- Wall Street firm Morgan Stanley added some of its well-heeled clients to the long list of customers whose lenders have frozen or reduced their home-equity loans.

While federal laws do not allow lenders to force responsible borrowers to repay the loans immediately, those same federal statutes allow lenders to reduce or eliminate customers' home-equity lines of credit if the lender can reasonably determine that a borrower's home has fallen in value.

"A segment of clients was recently notified of a change in the status of their home-equity line of credit due to a change in the value of their property and/or their credit profile," a spokeswoman for Morgan Stanley said.

Many other lenders, including J.P. Morgan Chase & Co. and Washington Mutual Inc., have recently made similar statements, as they've moved to reduce the credit available to borrowers in declining housing markets...
Wall Street Journal:
Plying the Foreclosure Market -- Silver Portal to Buy Homes in San Diego, Preferably Near Starbucks

Burl East is looking for a good deal on a foreclosed house. Make that a good deal on 1,500 foreclosed houses.

Mr. East, a managing principal of Silver Portal Capital LLC, a small real-estate investment bank, is raising $150 million to purchase foreclosed houses in and around the firm's hometown of San Diego. He is scouring lender portfolios and real-estate listing services -- as well as spots to get a cup of coffee -- for houses that he can rent out and then resell in five years. That is when he bets that the local housing market will have recovered.

"It's like the infantry," says Mr. East, 48 years old, who plans to buy his first house later this month. "We've made a list, and we are going house to house."

Silver Portal is raising money from pension-fund advisers and opportunity funds and has completed about 75% of its fund-raising process, Mr. East says...
Michael Steinberg / Seeking Alpha:
Buying Up Foreclosed Single-Family Homes - Smart? -- Silver Portal is allocating $25K to maintain each house for five years. Most houses will need at least $5K in cosmetic repairs before they can be occupied. Ongoing maintenance, tenant acquisition and insurance will be expensive because of the discrete location of each unit. This is why institutional investors have long favored large apartment complexes.

Investors are targeting a five year wait to profit from appreciation. Silver Portal might learn a few things from mom and pop professional landlords. Professional landlords never count on appreciation to bail them out; properties must be cash flow positive from the start. It appears to me that Silver Portal will be running cash flow negative...

I don’t believe housing values will return to their peak within five years because lending standards have forever changed, and the cost of operating a single family home has increased sharply. If the value of the homes purchased does actually double in five years, it implies a 12% annual return before expenses. Not worth the risk.
One other small problem with renting hundreds of single family homes .... the "serial evictee" or ....

One small problem for Silver Portal Capital LLC
CBS News:
Foreclosures-West Nile Virus Link Possible -- Health officials in California say the foreclosures crisis may be adding a new wrinkle to the fight against the West Nile virus, as standing water in pools that are being left unattended in backyards of abandoned homes becomes a potent breeding ground for the mosquitoes that carry it.

Epidemiologists have also noticed that a more virulent strain has been making up a disproportionate percentage of this season's early cases...

this is may be a sign of the times. There has been, as more and more homes are passing into foreclosure and many of those homes have backyard pools, these are being neglected, they're not being maintained. This can become a ripe feeding ground and breeding ground for these mosquito populations." ...
Housing Doom:
The Housing Gods Must Be Crazy In California -- The San Francisco Chronicle reports from California. “Despite plummeting values across the nation, 62 percent of homeowners believe their property’s worth has actually climbed or stayed the same during the past year, according to a survey commissioned by Zillow. In reality, the market price on 77 percent of properties has dropped and only about 24 percent have risen or held firm, the company estimates.” ...
Orange County CA / Mortgage Insider :
Wachovia sees O.C. home prices dropping 20% - Wachovia, one of the largest financial firms in America, estimates some Orange County homes will drop 20% more in value, after already losing 12%.

Wachovia didn’t give an exact time line. The company, during its July 22 earnings presentation, estimated losses on loans that allow borrowers to choose their monthly payment, including one that means owing more to the bank. Having been burned, it no longer makes that loan...

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