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Friday, August 8, 2008

Housing/Subprime/Credit Roundup — August 8, 2008

Items of Interest:

Housing Wire:
Fannie Posts Large Loss; Rough Road Ahead -- Mortgage finance giant Fannie Mae (FNM: 9.11 -8.44%) posted a larger-than-expected second quarter loss on Friday morning, as credit costs tied to an increasing number of defaulted mortgages helped eat away at the GSE’s bottom line, and the company reserved aggressively for expected default activity 18 to 24 months out from now.

As a result, the company said it would cut its common stock dividend from $.35 per share to $.05 per share, a move that it said would preserve $1.9 billion in capital.

The company also said it will move to reduce operating costs by 10 percent by the end of next year, although executives did not provide further details on any staffing cuts that may be in the offing; the company has been beefing up its staff in default management and REO sales as of late, and said Friday that it will open local offices in both California and Florida to help it better manage swelling foreclosed property inventory in both states.

Fannie absorbed $5.3 billion in credit-related expenses during the second quarter, including $3.7 billion added to the company’s loss reserves; rising credit costs more than swamped an increase in revenue, which reached $4.0 billion for the quarter, up 5 percent from the first quarter and 46 percent from Q2.

Company executives said they expect credit costs to continue to rise — and sharply, too — throughout the balance of this year...

Colin Barr / CNNMoney:
Fannie: Sun will come out tomorrow - Fannie Mae is betting its bulging rainy-day fund will see it through the housing storm. But the mortgage giant's forecasting record doesn't inspire much confidence...

Fannie Mae: Q2 Ended in June, but July was Worse - Calculated Risk
As Defaults Climb, Fannie Mae Posts $2.3B Loss - D. Hilzenrath, WaPo
Fannie Slashes Dividend; CEO Mudd Sees Credit Losses Growing -
Barry Ritholtz / The Big Picture:
Who Doesn't Understand the Pending Home Sales Index? -- Only two groups: The Media and Wall Street economists.

I'll make this as simple as possible. (If you are a journalist that covers this area, please read and UNDERSTAND this).

The NAR release makes clear (in the footnotes) that the Pending Home Sales Index was a NEGATIVE REPORT. This was not a positive, despite what you may have read -- or wrote -- about this.

Here are 4 details you need to understand:
  1. The Pending Home Sales Index is down 12.3% Y/Y. As the NAR notes itself, it is the annual data, not the monthly number, that matters most.

  2. 30-40% of these pending sales were distressed/foreclosure sales. Many of the ‘pendings’ are short sales -- bought for much less than the amount owed on the mortgage. The majority of these will not get approved by either the seller (REO Bank) or the financer (mortgage originator).

  3. There is a growing gap between PHSI and actual closings (See NT chart below).

  4. The monthly rise is nothing more than regular seasonality.

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