Saturday, May 31, 2008

Fitch Modifies Alt-A Rating Method

Voltron says: Bond rating agency, Fitch, breaks from the pack and begins saying what everyone already knows.  These mortgage bonds are crap.  This will put pressure on MBIA and Moody’s


"I don't know if it's going to be a majority or not but I think a large number of the [Alt-A] senior classes are facing downgrade pressure."

Grant Bailey, a senior director at Fitch, May 30, 2008


From Bloomberg: Fitch Changes Method of Rating Alt-A Mortgage Bond


Fitch Ratings modified how it assesses outstanding securities backed by Alt-A U.S. mortgages by starting to update projections for losses from non-delinquent loans instead of keeping estimates static from the time of issuance.


A record jump in delinquencies and defaults prompted the change ... Borrowers are at least 60 days late on 11 percent of adjustable-rate Alt-A loans backing bonds created in 2006 and rated by the firm, compared with a historical average of 1 percent to 2 percent.


The firm hasn't yet decided whether to use its new surveillance approach on prime-jumbo mortgage securities, Barberio said....


The Fitch analysts weren't able to immediately say how many Alt-A securities from the past three years have been downgraded. Most of the non-AAA bonds were lowered and others remain under review, they said.


Top-rated securities accounted for about 90 percent of the debt created in Alt-A deals. The company will downgrade many over the next few months, [Grant Bailey, a senior director at Fitch] said.


``I don't know if it's going to be a majority or not but I think a large number of the senior classes are facing downgrade pressure,'' he said.


More downgrades coming ...

LIBOR 'lie' remains for now

Adjustable Rate Mortgage-holders rejoice, LIBOR not being redefined … for now.  Housing Wire covered earlier how changes to the LIBOR could radically impact home mortgage payments for folks with loans whose interest rates are tied to the index.  You can all breathe a sigh of relief for the meantime, until the BBA  gets around to overhauling the biggest sham of an index that side of the Atlantic.


From Bloomberg on the no news is good news for homeowners:


The British Bankers’ Association failed to change the way the London interbank offered rate is set after investors and strategists said the measure has become unreliable as a gauge of borrowing costs.


The BBA, an unregulated trade group, has been under pressure to overhaul the 24-year-old system after the Bank for International Settlements said in a March report some members understated their rates to avoid being perceived as having difficulty raising financing.


“The committee will be strengthening the oversight of BBA Libor,” the London-based organization said in an e-mailed statement today. “The details will be published in due course.” The composition of the bank panels that contribute rates were left unchanged, it said.


The BBA’s statement fell short of expectations for changes to Libor that ranged from altering the member banks from which rates are gathered to adding an extra rate survey each day to reflect trading in U.S. hours.


“The BBA didn’t do anything; they don’t want to shake the boat,” said Stan Jonas, who trades interest-rate derivatives at Axiom Management Partners LLC in New York. “Any change that they make will damage the interest of their members, and the banks are the members.”


Banks routinely misstated borrowing costs to the BBA to avoid the perception they faced difficulty raising funds as credit markets seized up, turning Libor into “a lie,” according to Tim Bond, head of asset allocation at Barclays Capital, a unit of Barclays Plc


Wednesday, May 28, 2008

Lehman Remains `Undercapitalized,' Einhorn Says

By Josh Fineman and Rhonda Schaffler

May 28 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, needs more capital even after raising $6 billion to recover from credit-market losses, said David Einhorn, a hedge fund manager who's betting that Lehman shares will fall.

``We are nowhere near'' the end of the contraction that left Lehman with about $3 billion of writedowns and losses in the past year, Einhorn said today in a Bloomberg Television interview. ``Lehman is undercapitalized. They continued doubling down as the credit crisis evolved.''

Einhorn, who runs Greenlight Capital LLC, has been criticizing Lehman's accounting in recent months, including comments he made last week at a conference in New York. He said the bank hadn't disclosed its holdings of collateralized debt obligations before the first quarter and wasn't valuing its commercial mortgage-related assets based on market prices.

Lehman fell 36 cents, or 1 percent, to $36.84 at 4:03 p.m. in New York Stock Exchange composite trading. The stock is down 44 percent this year.

``Mr. Einhorn cherry-picks certain specific items from our 10-Q and takes them out of context and distorts them to relay a false impression of the firm's financial condition, which suits him because of his short position in our stock,'' Lehman said today in an e-mailed statement. ``He also makes allegations that have no basis in fact with the same hope of achieving personal gain.''

Fixing Mistakes

Einhorn said he would be ``happy to correct'' any errors should Lehman show him mistakes in his calculations.

Einhorn has claimed that Lehman failed to disclose $6.5 billion of CDOS on its balance sheet until a regulatory filing at the end of the first quarter. Lehman spokeswoman Kerrie Cohen referred to the company's 10-Q filing, which says the $6.5 billion is ``Other Asset-Backed Securities.'' She said CDOs represent a small proportion of the total.

The filing said that those securities are mostly tied to consumer and business lending. The portfolio of CDOs backed by mortgage-related assets, which have declined during the subprime crisis, was smaller than $1 billion, according to the firm. That part of the portfolio has been disclosed in recent quarters.

Lehman is pushing forward with its plan to weather the credit-market contraction by shedding high-risk assets, such as mortgage-backed bonds, and decreasing reliance on borrowed money, or leverage. Since the end of last quarter, the New York- based company has raised $6 billion of capital, bringing its leverage ratio down to 27 percent from almost 32 percent, Chief Financial Officer Erin Callan said earlier this month.

CDO Values

All CDOs had declined in value and the $200 million gross writedown Lehman took on the portfolio didn't reflect market prices, regardless of the combination of assets, according to Einhorn.

``It's essential, from a public interest, that these investment banks de-lever in a very material way,'' Einhorn said in today's interview. ``That will require raising significant amounts of capital.''

Einhorn, 39, drew attention when he began questioning Allied Capital Corp.'s accounting methods in 2002 and sold its shares short, betting the stock would fall. The U.S. Securities and Exchange Commission later said Allied, based in Washington, lacked procedures to ensure that it correctly valued its holdings from June 2001 through March 2003. The company settled the regulator's probe last year without paying a fine.

Einhorn, who's promoting his book ``Fooling Some of the People All of the Time'' about Allied Capital, said ``we are slightly behind in the investment. It's not been one of the worst investments we've had. Certainly it's not what I expected it to be.'' Allied Capital shares have risen 19 percent in the last six years, outperforming the Russell 1000 Index by 5 percentage points.

Einhorn, whose Greenlight owns homebuilder M.D.C. Holdings Inc., the builder of Richmond American Homes, said that the housing market hasn't hit bottom yet.

``I don't think we are anywhere close to a bottom,'' Einhorn said. MDC ``is a very good company in a tough industry. You have a company that has pretty much no net debt at this point that always runs less levered than their peers. It's a very smart and savvy management that's in eventual growth markets.''

Oil bubble or dollar collapse?

NPR Marketplace

Ryssdal: It's a global market, Jeremy, for oil, right, so I have to ask about external factors other than supply and demand. What about, you know, the dollar for instance?

Hobson: Well that definitely plays into it. I mean, we've all heard about speculation in the oil markets and if the value of a dollar is weakening, why would you want to buy it? You'd go for something that's going up, like perhaps oil. The other part of it is oil is bought and sold in dollars and one analyst told me today if the dollar were even with the Euro right now, we wouldn't be looking at a $130 barrel of oil, we'd be looking at $80 a barrel of oil, so that weakening dollar is having an effect on the price that we see here in the United States.

Energy costs force Dow Chemical to raise prices 20%

Transcript of National Public Radio's Marketplace

Kai Ryssdal: Not to get all Ben Bernanke on you here, but have you ever wondered why inflation's been fairly tame for so long?

Part of the answer is Mr. Bernanke's interest rates, yes. The other part, though, is this thing called pricing power -- companies couldn't raise prices because consumers wouldn't pay 'em -- but today, the country's biggest chemical company said it's fed up and it's not gonna take it anymore.

The company in question is Dow Chemical and in all fairness, it's waited way longer than others to raise prices, but today Dow said effective this weekend, prices for all 3,200 of its products are going to go up by as much as 20 percent.

Even if you couldn't recognize many of those products, you'll recognize the culprit right away, as Marketplace's Dan Grech reports.

Dan Grech: Dow Chemical says this across-the-board price hike is unparalleled in its 111-year history.

Frank Mitsch is a senior chemical analyst at BB&T Capital Markets. He says chemical companies once gave wholesale customers 90-days notice before raising prices. Today's hike hits in just four days.

Frank Mitsch: This is an unprecedented move by them to announce it pretty much across the board really to signal to their customer base that it's no longer business as usual, they really need to get prices up ASAP.

Like everyone else, Dow has been hit by high energy and transportation prices and petroleum products are a key ingredient in much of what Dow makes -- things like Styrofoam, pesticides and plastics. Dow says its hydrocarbons spending has quadrupled in just six years to a projected $32 billion this year. Those costs now make up half of its total spending.

Mitsch: We have seen bits and pieces of these types of announcements from other companies, but obviously you're talking about the 800-pound gorilla here with Dow, so yes, I do expect to see other chemical producers announce price increases as well.

And you know what that means:

Peter Morici: It's inevitable that inflation will increase for a time when energy prices have jumped as much as they have.

That's economist Peter Morici with the University of Maryland.

To cut costs, Dow laid off 1,000 workers in December and is moving its commodity chemical production to Asia and the Middle East, where raw materials are cheaper.

I'm Dan Grech for Marketplace.

Alt-A Problems Grow, While Subprime Takes Turn for the Worse


Despite an absolute dearth of ARM resets, the number of severely delinquent Alt-A borrowers continues to grow, according to a report released late last week by Clayton Holdings, Inc. (CLAY: 5.90, +0.17%). The number of troubled Alt-A borrowers in the 2007 vintage rose an eye-popping 26.5 percent from March to April alone, nearly reaching 17 percent of loan volume.

The 2007 vintage isn’t the only Alt-A vintage facing problems, of course: 19.3 percent of borrowers with loans originated in 2006 were more than 60 days delinquent at the end of April, a jump of nearly 10 percent from March. Cumulative losses percentages for 2006 vintage Alt-A first liens continued what Clayton analysts called a “concerning upward trend,” with losses for 2006 issues running at more than three times the pace set by the 2004 and 2005 issues.

The troubles in Alt-A are appearing despite the fact that very few borrowers in any vintage are yet to face a strong wave of rate-reset activity. The graph below shows that, if anything, lenders and policymakers should be concerned about a wave of pending Alt-A resets that are looming in the back half of 2009.

a smoking gun?
click for larger view (source: Clayton)

That looming wave of resets may be particularly troubling, given the current U.S. interest rate and LIBOR outlook held by most economists and bank officials; most see interest rates flat to increasing over that time frame, both within the U.S. and abroad, a pattern that could bode poorly for borrowers facing rate adjustments.

The good news is that one-month roll rates — which measure the transition of loans from one stage to the next (i.e., performing to delinquent, delinquent to severely delinquent, etc.) — for nearly every Alt-A vintage decreased for the month, with only the 2003 vintage showing an increase. That sort of respite may end up being short lived, however, given the sharp increase in deliqnuencies and continued downward trending of cure rates for troubled borrowers.

Subprime woes, renewed?
Subprime mortgages aren’t sexy to most financial media any more, and numerous reports lately have suggested that the problem in subprime mortgages has largely been mitigated by lower interest rates that have limited payment shock for the most vulnerable borrowers.

a smoking gun?
click for larger view (source: Clayton)

All of which is true; but that shouldn’t hide the fact that 60 day delinquencies in the 2006 subprime vintage rose 5.4 percent in April and now stand at 34.6 percent of remaining collateral; in the 2007 vintage, 23.1 percent of collateral is more than 60 days in arrears, as well.

While resets aren’t an immediate problem, there are yet a good number of resets that need to work their way out of the financial system (see graph above).

Perhaps more telling, toll rates increased in April on both subprime first and second liens after sharp declines in recent months, marking perhaps a renewed cycle for troubled subprime borrowers. Many media pundits have pointed to declining roll rates as evidence that the worst of the subprime crisis is behind us; the jump in rolls might suggest otherwise.

SEC could announce subprime cases soon

Voltron says: SEC is investigating Moody's and the other credit rating agencies
By John Poirier

WASHINGTON, May 28 (Reuters) - The U.S. Securities and Exchange Commission will make public as early as June several enforcement actions involving subprime mortgage-related investigations, two sources familiar with the probes told Reuters on Wednesday.

The SEC last year formed an internal task force to investigate areas of the subprime mortgage market, including sales practices, accounting, the role of credit rating firms and securitization of packaged mortgages.

Many market participants, including credit rating agencies, Wall Street firms and mortgage brokers and lenders have been criticized for failing to properly disclose certain risks to the public, contributing to the subprime mortgage crisis.

The SEC, which aims to maintain market confidence, is focused on ensuring proper disclosure and preventing fraud.

"I think we'll have a few subprime-related cases relatively soon ... within weeks," one source said.

Another source, who is also familiar with the agency's investigations, said the cases could range from "small to big" players.

The sources declined to identify the companies targeted in the investigations. SEC spokesman John Nester declined to comment on the pending enforcement cases.

He said the agency's examination of credit rating agencies will likely be completed in June and that the findings will be made public soon thereafter.

The collapse of the subprime mortgage market, which made loans to borrowers with spotty credit histories, has sent shock waves through financial markets and resulted in surging levels of foreclosures.

Earlier this year, SEC Chairman Christopher Cox told a Senate committee that the agency had more than three dozen subprime-related investigations under way but had not yet determined if any securities laws were violated.

Separately, an SEC official on Wednesday told a White House financial education panel that regulators are examining whether various players in the mortgage market might have run afoul of the federal laws.

"The SEC is actively investigating a number of cases involving possible securities fraud stemming from inappropriate subprime sales practices in after-markets," SEC Commissioner Paul Atkins told the group.

"Maintaining healthy and active markets for securities that fund mortgage and other credit markets remains a core concern for the commission," Atkins said.

The U.S. markets watchdog has said it is looking into possible computer glitches at credit rating agency Moody's Investors Service (MCO.N: Quote, Profile, Research), which the Financial Times said led to incorrect ratings of some complex European debt products.

Moody's has hired a law firm to conduct an investigation of the matter.

Moody's is one of three firms being examined in light of their handling of the subprime crisis, including aspects of their methodologies used to rate products and policies and procedures used to detect errors.

The SEC also has said it is tightening its oversight of the top five U.S. investment banks after the collapse of one of them, Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research).

Other regulators at the meeting urged the mortgage industry to simplify loans, improve disclosure and verify a borrower's income.

"We need to get back to basics," said John Dugan, who heads the Office of the Comptroller of the Currency, which regulates large national banks.

The meeting focused on how to increase financial literacy among borrowers, especially those who bought homes without realizing the full complexity of their mortgages.

Buying vs Renting

Voltron says: Even an MIT professor can get soft in the head when it comes to buying a house. (article here) An economist from the New York Times makes the correct analysis then decides to buy anyway (article here).

Houses back to 2003 prices

Published on Piggington's Econo-Almanac (

March Case-Shiller Index: Back to 2003 Pricing

Created May 27 2008 - 6:12pm

San Diego's home price decline continued in March, according to the Case-Shiller home price index:

For the month, the high tier was down 1.2%, the mid tier 2.3%, and the low tier 3.4%. Compared to earlier in the year, the month-to-month declines slowed somewhat for the high tier, even less for the middle tier, and imperceptibly for the low tier. That's what passes for a spring rally in this market.

The following graph shows the three tiers' declines from their respective peaks.

The loss of value is even starker when adjusted for inflation as measured by the CPI:

Here are some longer-term looks, first nominal and then real. As I've often discussed, the comparative thrashing being endured by the low end is largely due to the bubble in risky mortgage credit, which had the effect of causing inordinate price rises in the low tier and then resulting in mass foreclosures among those same properties.

Note that in CPI-adjusted terms, valuations are still well above the 1990 bubble peak:

From the November 2005 peak through March, the aggregate HPI had fallen 25.9%. It notably fell to just below the January 2004 value, meaning that we are now at an aggregate price level that hasn't been seen since 2003.

My simplistic HPI proxy (based on the 3-month average of the change in median price per square foot) did a bang-up job this month, predicting a month-to-month decline of 2.3% versus an actual decline of 2.6%.

Updated for the actual March value, the HPI proxy projects a total decline of 28.2% in April.

Tuesday, May 27, 2008

San Diego house prices down almost 20% year over year

Almost 30% of cars in CA bought with home equity loans!

Foreclosures in Military Towns Surge at Four Times U.S. Rate

By Kathleen M. Howley

May 27 (Bloomberg) -- U.S. Air Force Technical Sergeant Jeffrey VerSteegh, who repairs F-16 jets for the 132nd Fighter Wing, departed Des Moines, Iowa, in April for his third tour in Iraq. The father of four may lose his home when he returns.

The four-bedroom farmhouse he and his wife, Kathleen, own near the Iowa State Fairgrounds went into default in December after their monthly mortgage costs doubled to $1,100. Kathleen missed work because of breast cancer and they struggled to keep up the house payment, falling behind on other bills. Their bankruptcy was approved by the court a week after VerSteegh left for Iraq.

In the midst of the worst surge in mortgage defaults in seven decades, foreclosures in U.S. towns where soldiers live are increasing at a pace almost four times the national average, according to data compiled by research firm RealtyTrac Inc. in Irvine, California. As military families like the VerSteeghs signed up for the initial lower rates and easier terms of subprime mortgages, the number of people taking out Veterans Administration loans fell to the lowest in at least 12 years.

``We've never faced a situation like this, not in the Vietnam War, World War II, or the Korean War, where so many military are in danger of losing their homes,'' said Paul Sullivan, executive director of Veterans for Common Sense, a Washington-based advocacy group started in 2002 by Iraq and Afghanistan War veterans. ``No one asked them for their credit score when we asked them to fight for us.''

Military Foreclosures

Foreclosure filings in 10 towns and cities within 10 miles of military facilities, including Norfolk, Virginia, home of the Navy's largest base, rose by an average 217 percent from January through April from a year earlier. Nationally, the rate was 59 percent in the same period, according to RealtyTrac, which tallies bank seizures, auctions and default notices.

The biggest surge was in Columbia, South Carolina, home to Fort Jackson, where the Army trains recruits for combat in Afghanistan and Iraq. Properties in some stage of foreclosure rose 492 percent from a year earlier, RealtyTrac said. The second-biggest increase was 414 percent in Woodbridge, Virginia, next to the Marine Corps Base Quantico.

Foreclosure filings tripled in the cities surrounding Norfolk Naval Base and the Camp Pendleton Marine Corps Base near Oceanside, California, RealtyTrac said. Havelock, North Carolina, site of Marine Corps Air Station Cherry Point, saw foreclosures more than double.

Weak Credit

Military families were targeted as customers during the boom in subprime lending because their frequent moves, overseas stints, and low pay meant they were more likely to have weak credit ratings, said Rudi Williams of the National Veterans Foundation in Los Angeles. In 2006, at the peak of U.S. subprime lending, the number of VA loans fell to barely a third the level of two years earlier, according to VA data.

VA loans totaled 135,000 last year, its fourth consecutive annual decline.

An Army or Marine Corps sergeant with four years of experience makes $27,000 a year, plus combat pay of $225 a month, according to the 2008 Military Authorization Act, which increased basic pay rates 3.5 percent from a year ago.

Soldiers authorized to live off-base also receive a housing allowance that this year starts at about $500 a month, 7.3 percent higher than in 2007, paid even when they are deployed. Counting the stipends, they still fall short of the 2007 median U.S. household income of $59,224 as measured by the National Association of Realtors in Chicago.

Legislative Effort

``Think about how much stress comes with a foreclosure, and then imagine you're walking the same tightrope while being employed in Baghdad,'' said Paul Rieckhoff, 33, the head of Iraq and Afghanistan Veterans of America and a former 1st lieutenant with the Army's 3rd Infantry Division.

The Servicemembers' Civil Relief Act protects soldiers and sailors from losing homes for nonpayment of mortgages only while on active duty and for 90 days after they return home. Members of Congress, including Senator Johnny Isakson, a Georgia Republican, and Representative Bob Filner, a Democrat from California, are trying to extend that to a year, saying three months isn't enough.

Another flaw in the current law is it puts the burden on the soldiers, sailors or the families they left behind to come up with the paperwork and notify the bank, said Sullivan of the Washington Veterans' group. Unlike in other wars, members of the military often are able to telephone home or receive e-mails, creating a ``morale problem'' as they try to deal with foreclosure notices, he said.

VA Mortgages

``It's heartbreaking to see people struggling with a foreclosure while they or someone they love is in a war zone, or when they're trying to adjust after coming back from one,'' said Sullivan, a Cavalry Scout with the Army's 1st Armored Division during the 1991 Gulf War.

Lenders aren't required to keep records on the status of non-government loans to military members or veterans, said Mike Frueh, the VA's assistant director for loan management in Washington. Judging solely by data on VA mortgages, active military and veterans in the current housing slump are getting into trouble with their home loans at a pace only slightly above the civilian rate, he said.

The share of VA mortgages in foreclosure was 1.12 percent in the fourth quarter, compared with 0.96 percent for so-called prime borrowers with the highest credit scores, the Washington- based Mortgage Bankers Association said in a March 6 report.

`Stench of Death'

``My data comes from those that have VA loans, and we haven't seen, as I understand it, a big jump'' in foreclosures, said James Peake, the Secretary of Veterans Affairs in Washington, in a May 20 interview.

The increase may yet be coming: the share of VA loans with payments 30 days or more overdue was 6.49 percent in the fourth quarter, double the rate of 3.24 percent for prime borrowers. The share of VA mortgages more than 90 days overdue was 1.54 percent, also double the prime rate, according to the bankers' report.

Monique Kelly, a disabled Iraq War veteran, said she is on the verge of adding to those VA delinquency numbers. The former Army staff sergeant in the First Armored Division paid her May mortgage bill halfway through the month and said she won't be able to make June's payment for her house in Owings Mills, Maryland.

Kelly, designated disabled by the VA because of post- traumatic stress disorder, said she bought the property in January for $305,000 and had to spend $10,000 fixing structural problems that were not disclosed to her.

``We fought for our country, and now we have to fight to save our homes,'' said Kelly. ``After living with the stench of death in Iraq, it seems like we shouldn't have to face problems like this when we come back.''

Help for Veterans

The VA has nine regional loan centers in the U.S. that last year provided counseling for 85,000 veterans who had problems with government-backed mortgages, Frueh said. He said he contacted Kelly to see if he can help her.

Counselors also try to help veterans who fall behind on non- VA loans, he said, though they don't track the number of those cases.

``We will always try to intercede on a veteran's behalf,'' said Frueh. ``If they have a VA-guaranteed loan, we can do more for them.''

Military families or veterans refinancing a mortgage have limited resources for VA-backed loans, Frueh said. The government can only guarantee refinanced veteran loans up to $144,000, Frueh said. The median price of a U.S. home was $219,000 last year, according to the Chicago-based National Association of Realtors.

`No Hope'

The law gives military personnel the right to have interest rates temporarily lowered to 6 percent on loans incurred prior to entering active service. To apply for protection, they have to send copies of their military orders to their mortgage servicing companies, even if they are on the front lines. The VerSteeghs in Iowa didn't know about that option, said Kathleen.

Before leaving for Iraq, the 43-year-old VerSteegh called the Bush Administration's Hope Now program created to help people facing foreclosure, his wife said.

``We got no hope from Hope,'' and no information about the potential interest-rate deduction, according to Kathleen VerSteegh.

San Francisco-based Wells Fargo & Co., the servicer of the VerSteegh mortgage, removed the VerSteegh property from foreclosure in April after receiving a copy of the husband's active duty orders, said Debora Blume, a spokeswoman for the bank's mortgage unit, in an e-mailed statement. Kathleen VerSteegh, 42, said they weren't notified of the change. The mortgage had gone into foreclosure on Dec. 31, Wells Fargo said.

Refinancing Plans

Wells Fargo ``is working with Mrs. VerSteegh to reduce her monthly payment during this time of financial hardship,'' Blume said.

Like many U.S. borrowers who got adjustable mortgages, the VerSteeghs planned to refinance into a better loan before their initial rate of 6.45 percent, fixed for two years, reset in December 2006. U.S. home values began to decline about six months before their first adjustment.

The so-called margin, a fixed charge added to the loan's index to determine interest rate resets, is 5.25 percent, about double the typical margin for an adjustable mortgage. Their loan is indexed to Libor, the London Interbank Offer Rate.

``We refinanced so we could get new windows and do some work on the house,'' she said. ``We assumed we'd have no problem getting another loan, but then it blew up in our faces.''

Now they can't apply to refinance into a VA mortgage because they owe more on the house than it's worth and ``our credit is shot,'' said VerSteegh.

Bonus Army

The last time veterans lost homes to this extent was during the Great Depression, said Sullivan of Veterans for Common Sense. The so-called Bonus Army of almost 20,000 World War I ex-soldiers marched on Washington in June 1932 to demand early payment of certificates granted for service.

U.S. infantry and cavalry regiments under the command of General Douglas MacArthur attacked their encampment with bayonets and sabers to disburse them.

VerSteegh, who gets to speak to her husband by telephone for 15 minutes once a week, said she tries to reassure him that everything on the home front is going well, even as she struggles with the threat of foreclosure and her health problems. She's eight weeks into a course of chemotherapy treatments for breast cancer and had a double mastectomy on March 14.

VerSteegh said she doesn't know exactly where her husband is, just that he's somewhere near Baghdad.

``I don't tell him the whole story, because he has to focus on his job,'' she said. ``The guys in his unit are depending on him.''


     Foreclosure Filings Near Military Bases from January to April, Compared With a Year Earlier:
     Columbia, South Carolina: 492%
     Woodbridge, Virginia: 414%
     Triangle, Virginia: 363%
     Oceanside, California: 182%
     Norfolk, Virginia: 155%
     Havelock, North Carolina: 133%
     Carlsbad, California: 131%
     Barstow, California: 120%
     Columbus, Georgia: 102%
     Twentynine Palms, California: 73%
     U.S. Total: 59%


S&P: US home prices tumble a record 14.1 pct in 1Q

By J.W. ELPHINSTONE, AP Business Writer

U.S. home prices dropped at the sharpest rate in two decades during the first quarter, a closely watched index showed Tuesday, a somber indication that the housing slump continues to deepen.

Standard & Poor's/Case-Shiller said its national home price index fell 14.1 percent in the first quarter compared with a year earlier, the lowest since its inception in 1988. The quarterly index covers all nine U.S. Census divisions.

Prices nationwide are at levels not seen since the third quarter of 2004, according to Maureen Maitland, a S&P vice president. However, the index is still up 60 percent versus 2000.

Two narrower indices set record declines in March versus the previous year. The 20-city index tumbled 14.4 percent, the lowest since that index was started in 2001. The 10-city index plunged 15.3 percent, a record in its 20-year history.

"There are very few silver linings that one can see in the data. Most of the nation appears to remain on a downward path," said David Blitzer, chairman of S&P's index committee.

Nineteen of the 20 metro areas reported annual declines, with 15 of them posting record lows. Six metro areas lost more than 20 percent.

Las Vegas had the worst performance in March, falling 25.9 percent from a year earlier, followed by Miami and Phoenix. Only Charlotte, N.C., stayed above water, gaining less than 1 percent over the previous year.

Last week, the Office of Federal Housing Enterprise Oversight said home prices fell 3.1 percent in the first quarter, the largest drop in its 17-year history and only the second quarter of price declines recorded.

The OFHEO index is narrower in scope and is calculated using mortgages of $417,000 or less that are bought or backed by Fannie Mae or Freddie Mac. That excludes properties bought with some of the riskier types of home loans.


Monday, May 26, 2008


Voltron says: For those of you just tuning in . . . here's an NPR radio program that does a pretty good job of describing the mortgage crisis. Load it into your ipod and enjoy.

SEC probing main credit rating agencies

By Sudip Kar-Gupta

PARIS, May 26 (Reuters) - The U.S. Securities & Exchange Commission (SEC) is looking into the workings of the three main credit rating agencies, prompted by their handling of the subprime crisis and a report of computer errors at Moody's (MCO.N: Quote, Profile, Research).

"We sent letters to Moody's, Standard & Poor's and Fitch asking for them to get back to us on aspects of their methodology," said Erik Sirri, director of the SEC's trading and markets division.

"We asked them to explain the policies and procedures used to detect errors in ratings of structured finance products and to tell us about any errors that they found in structured finance products over the last four years, including steps that they followed to correct the problem," he added.

Rating agencies have come in for criticism for not giving early warning of a number of big corporate debt scandals, and also for their ratings of complex products that were hit hard by widespread defaults on U.S. subprime mortgages and the ensuing credit market crisis.

Supervisors have also drawn criticism for inadequate scrutiny of events.

SEC Chairman Christopher Cox had earlier told Reuters that his regulatory body had started an inquiry into Moody's, whose shares have plummeted over the last week on concerns that it may have made ratings errors.

"We have ample jurisdiction to look into this," said Cox.

"On June 11, the SEC will formally propose new rules concerning credit rating agencies," he added.

The Financial Times reported last week that Moody's had wrongly assigned triple-A ratings to complex European debt products called constant proportion debt obligations, or CPDOs.

Moody's said it rated 44 European CPDO tranches totalling about $4 billion. It said it had hired law firm Sullivan & Cromwell to conduct an investigation into why the coding error in a computer model caused the products to be given a rating four notches higher than they merited.


Cox, who was speaking on the sidelines of the 2008 International Organisation of Securities Commissions conference in Paris, said there were long-running problems concerning the rating agencies.

The agencies had already come under fire from 2001-2002 for not having spotted signs of problems at Enron and WorldCom, the U.S. utility and telecoms giants that went bankrupt after the publication of fraudulent accounts.

Cox said there were similarities between the rating agencies' decision to rate certain subprime assets with investment grade ratings and earlier decisions to give out similarly high ratings to assets that later proved worthless.

"In the largest municipal bankruptcy in American history, in Orange County (1994), we had the same problem of paper being rated very highly on the eve of collapse," said Cox.

"These problems are long-standing, and they need to be addressed."

Cox also reiterated that plans were under way for the SEC to tighten up its monitoring of the top five U.S. investment banks, following the collapse of Bear Stearns due to the subprime crisis.

The SEC currently monitors Morgan Stanley (MS.N: Quote, Profile, Research), Lehman Brothers (LEH.N: Quote, Profile, Research), Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research), Goldman Sachs Group (GS.N: Quote, Profile, Research) and Bear Stearns as part of its consolidated supervised entities program.

"We are discussing with each of the firms various stress scenarios that include not only impairment of unsecured funding but also of secured funding," Cox said.

"We now live in a post Bear Stearns reality." (Editing by Will Waterman)


Rethinking Shorting Stocks

Peter Schiff argues in his book crash proof that when you short sell a stock, you are exchanging shares that probably have some value for dollars which have no value. Instead, he recommends borrowing dollars, which are decreasing in value, and investing them in assets such a foreign stocks that pay dividends to cover the interest and which may increase in value.

Voltron says: Many financial stocks probably have negative value. While I don't agree that dollars have no value, they certainly can go down in value very quickly, so I generally agree with Peter Schiff that you don't want to be caught holding dollars in a margin account. I'm going to switch gears and start buying DKA, DBU and DBN on margin (borrowed money).

Saturday, May 24, 2008

It's Not an Oil Crisis, It's a Dollar Crisis.

Voltron says: Peter Schiff is a straight shooter. I highly recommend his book crash proof and investing with his company, Europacific Capital.

By Peter Schiff

It is unfortunate that the Supreme Court, in its ruling this week that U.S. currency is unfair to the blind, did not make the next logical step and declare it unfair to everyone who buys gasoline.

In their search for explanations as to why oil has surged past $130 per barrel, Washington, Wall Street, and the financial media are as clueless as cavemen after a freak summer snow storm. Despite the head scratching, the blame game is nevertheless in full force. Speculators and big oil companies are being trotted out as scapegoats, and increased margin requirements and taxes on windfall profits and futures trading have been mentioned as appropriate sanctions. In fact, this week the House of Representatives overwhelming approved a bill to sue OPEC for violating U.S. anti trust laws. It should be clear that all of this is pure farce, and that no one understands what is actually happening.

The reality is that after years of reckless consumption and dollar debasement, Americans are now being priced out of markets over which they formerly held unchallenged title. As more affluent foreigners consume more of the resources and products they previously supplied to us, Americans are being forced to cut back. The rising dollar-based price of gasoline is simply an illustration of this global trend.

Poorly concealed behind contrived government statistics, the signs of America’s falling standard of living are everywhere; all one has to do is look. We are unloading SUVs for less desirable compacts, and are paying more to fly on crowded planes (where we pay to check luggage and dine only on what we bring onboard). We drink our lattes at McDonalds or not at all, and we increasingly forego dining out, trips to the mall, and vacations, just so we can scrape together enough to fill our gas tanks and kitchen pantries, pay taxes and insurance, or make credit card, mortgage or car payments.

The collective belt tightening is simply the down payment on the Government’s massive bailout of Wall Street investment banks and mortgage lenders. As the Fed creates money to buy bad mortgages and other shaky securities held by banks and brokerage firms, the value of the savings and wages of everyone on Main Street will continue to fall. As a result, the costs of products previously taken for granted have begun to bite.

The various housing bills and stimulus packages now passing through Congress will add significantly to the staggering final price tag. In the end, the “free lunch” currently being dished out by Washington will be the most expensive meal ever served. The cost will be borne by ordinary Americans citizens every time they open their wallets. Four dollar gasoline is just the beginning.

For all the talk of increased global demand, few seem to understand from where it actually comes. The surge in global demand is both a function of the increased purchasing power of foreign currencies and the fact that foreigners are choosing to spend more of their incomes themselves. In other words Greenspan’s famous “global savings glut” is turning into a global consumption binge, with Americans unable to crash the party. This trend will only get worse as the dollar-denominated price of just about everything that is either imported, or capable of being exported, goes through the roof.

We can look for scapegoats all we want but the simply fact is Americans are going to have to get used to a much lower standard of living. Those who have been putting all the food on our tables are finally pulling up chairs themselves.

Buffett sees "long, deep" U.S. recession

by Erik Kirschbaum

The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investor Warren Buffett said in an interview published in German magazine Der Spiegel on Saturday.

He said the United States was "already in recession" and added: "Perhaps not in the sense that economists would define it" with two consecutive quarters of negative growth.

"But the people are already feeling the effects," said Buffett, the world's richest man. "It will be deeper and last longer than many think."

But he said that won't stop him from investing in selected companies and said he remained interested in well-managed German family-owned companies.

"If the world were falling apart I'd still invest in companies," he said.

Buffett also renewed his criticism of derivatives trading.

"It's not right that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets even though the sectors are actually in good health."

Buffett complained about the lack of effective controls.

"That's the problem," he said. "You can't steer it, you can't regulate it anymore. You can't get the genie back in the bottle."


Where the Financial Crisis Is Headed Next

Barron's Online






Interview With Sy Jacobs, Founder, JAM Asset Management


THREE YEARS AGO, HEDGE-FUND MANAGER SY JACOBS TOLD Barron's that serious trouble was brewing in the housing market, predicting that "the bursting of the housing bubble [would] be a dominant theme for investing in financial stocks in the next decade." He was right. Jacobs, 47, is the founder of New York's JAM Asset Management, which runs two funds, both focused on financial stocks and closed to new investors. The larger entity, JAM Partners, follows a market-neutral, long-short strategy and has close to $300 million in assets. As of May 21, the fund's year-to-date total return, net of fees, was 9.6%, versus a 4.5% loss for the S&P 500. Its annualized return since inception in 1995 (through April 30) was 16.6%, compared with 9.9% for the S&P. The $45 million JAM Special Opportunities Fund invests in illiquid private-equity holdings. Jacobs' familiarity with financial stocks dates to the 1980s, when he worked as an analyst at firms like Salomon Brothers and Alex. Brown & Sons. To find out where Jacobs sees new problems emerging in the financials -- surprisingly, they're not in the subprime arena -- read on.

Barron's: You were early in detecting the serious problems in subprime mortgages. That turned out to be a great call.

Jacobs: About three years ago, we were worried about subprime specifically. And that view very much paid off for us as we were short a host of such companies. More than a year ago, in another interview with Barron's, we said subprime was already in a full meltdown mode, but the idea that subprime was somehow isolated was still popular. Our message was that the mortgage-credit tail was going to wag the capital-market and economic dog. That's coming to pass now.

Looking ahead, what do you see for the financials?

We believe the recent rally in financial stocks -- and for the whole market -- is a bit of a head fake that will prove to be a bear-market rally.

What's your premise?

After first ignoring subprime, people now are too focused on it and they're missing the broader storm coming -- that's the head fake. While the bursting of the housing bubble produced all sorts of headline-making losses for some, it is just starting to drag down the rest of the economy. Separate from subprime, you are seeing diminished ability for consumers to spend their home equity. The securitization market, which banks and finance companies use to get funding, has slowed. So we see consumer and business spending slowing; the economy will falter.

In a recent letter to your investment partners, you noted that you were very concerned about the health of construction loans. Could you elaborate on that concern for us?

I spent a week recently in California, visiting some troubled, or soon-to-be-troubled, banks. With home sales down so much, construction lending is becoming a problem. You have a lot of developers and home builders stuck with homes that aren't moving. And they are sitting on lots that have loans against them. Subprime is such a small piece of the banking industry, but construction lending is a core product. If the housing market stays weak for much longer -- and it seems to be getting weaker -- construction-loan losses are going to be a big problem.

After the brutal real-estate recession that occurred in the early 1990s, there was a sense that banks had finally learned their lesson and would be much better fortified for the next downturn. I take it you don't think that's true.

I take a pretty cynical view of whether bankers have gotten smarter. We've had a real-estate bull market ever since the early 1990s. I think you are going to see the same thing again. The number of banks that get taken over by the FDIC and disappear may not be as high as it was in the late-1980s and early 1990s because there is strength in the energy patch now. But real-estate lending institutions are the bulk of the community-bank world, and I think you are going to see a lot of banks disappear.

What's your sense of the prevailing views of the financials right now?

People are trying so hard to believe that the Bear Stearns crisis in March was some sort of financial crescendo and represents the bell that gets rung at the bottom, as if that happens. But just because we got saved from what would have happened that Monday if Bear went down doesn't mean we are saved from all the forces that conspired to get Bear Stearns to the brink in the first place. Bear was not the sacrificial lamb to the market gods. It got knocked down by the same winds that are affecting everybody else. Credit destruction is a process -- not an incident. And avoiding that particular meltdown doesn't mean that things are getting better -- and yet that is how financial stocks in particular and the market in general have acted ever since.

You're a fundamental stockpicker, but are there any interesting trends you see in the financials?

One of our themes on the long side is that local plain-vanilla, over-capitalized community banks, especially thrifts, are in a position to gain back market share in the lending business. And they have real deposit franchises that they can fund themselves with. They have been losing market share to the Countrywide Financials [ticker: CFC] of the world for a generation. Now, though, they are going to gain a lot of that market share back, because they suddenly have a funding advantage, relative to the larger financial firms that have been securitizing their loans. That market has been discredited. We're long lots of micro-cap ways to play this, but they're too illiquid to mention here.

Fair enough. Let's discuss some of your holdings, starting on the short side.

The first one is Wells Fargo [WFC], trading at 12 times '08 estimates and 2.7 times tangible book; the group trades at less than two times book. The Wells Fargo name has a storied past and gets the Warren Buffett halo effect because he owns a lot of the shares. But if you look back at the last real-estate recession in the early 1990s, the Wells Fargo side, focused on California, had a lot of credit problems in the real-estate area, and the stock underperformed during that period. The Norwest side, which has more exposure to the Midwest, still has a lot of consumer-credit exposure. Of particular concern is the bank's portfolio of home-equity loans.

What's the big worry there?

Home-equity line of credit (HELOC] is 16% of their portfolio. More than a third of their HELOC exposure is in California, which is now developing very badly on the home-price and employment fronts. And delinquencies and losses are already rising pretty sharply. But they also have a big unfunded exposure to the undrawn lines of credit. Also, despite their reputation for being conservative, their loan-loss reserve at the end of March was lower than their annualized charge-off rate for the first quarter. Given the prospects for rising losses that we see, that's not conservative. We think they will disappoint this year and next and, as a result, their premium multiple will go down.

Wells Fargo, however, is known as a well-run bank. One example of that is the company's reputation for being very effective at cross-selling its products.

We're most concerned with their exposure to home-equity loans at the top of a real-estate bubble. Remember that home-equity lines of credit sit on top of first mortgages. So if home prices depreciate, which is what is happening now, and a home goes into foreclosure, the home-equity line often gets wiped out. The first mortgage holder can get most of their money back, but the home-equity line absorbs all of the loss.