MBIA, S&P and What AAA Really Means

http://seekingalpha.com/article/66101-mbia-s-p-and-what-aaa-really-means

From Seeking Alpha: 

Observation: MBIA (MBI)
is forced to borrow at deep junk rates (14%) in a 7% environment
(surplus notes have a slight premium).

Ruthless Default

NPR.org, February 13, 2008 · The Web site for You Walk Away is cheery and reassuring. There's a photo of a happy family in a park, smiling. Another family, also smiling, is packing up boxes.

"Are you stressed out about mortgage payments?" asks the site rhetorically. "Is foreclosure right for you?" it queries, but doesn't wait for an answer. "You are not alone — over 2.9 million homes have foreclosed in the last three years," it says. The not-so-subtle message: Foreclosure need not be a shameful, life-ruining experience. In fact, the company will gladly hold your hand through the foreclosure process—for a fee, of course.

Foreclosure, we're told, is a last resort, an option that no responsible homeowner would ever choose. But some distressed homeowners — no one knows exactly how many — are doing just that. They're voluntarily walking away from their mortgages, engaging in a practice the mortgage industry calls "ruthless default."

But is it really ruthless — or just good businesses sense? Some economists argue it's definitely the latter.

Sometimes, they say, walking away from your mortgage makes economic sense, especially for homeowners who find themselves "upside down" — that is, they owe more on their mortgage than their house is worth. In those cases, "voluntary foreclosures are not by themselves evidence of a newfound irresponsibility on Americans' part," says Nicole Gelinas, writing in The Wall Street Journal .

Separating the economics of foreclosure from the morality (and the stigma) is not easy, though.

"We need a culture of responsible consumers and homeowners," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, echoing a deep-seated American belief that one should always honor financial obligations.

The current housing crisis is different, argue some economists: Since some financial institutions sold these loans in a deceptive manner — for example, by approving people for loans they couldn't really afford — then why should homeowners feel obliged to honor their commitments?

The Virtues of Self-Interest

Most homeowners avoid foreclosure for selfish, and not necessarily moral, reasons. Foreclosure leaves a large black mark on a homeowner's credit rating. It might be as long as 10 years before they can qualify for another mortgage.

But Gelinas — a financial analyst and contributing editor of City Journal — argues that if enough people walk away from their homes, then banks won't blacklist all of them.

"Many walkers are going to want to buy houses again some day; and when they do, lenders are going to want to make money lending them money to do so (hopefully requiring a good down payment)," she says.

One thing that is certain: Foreclosures are on the rise. The Mortgage Bankers Association estimates that roughly 900,000 Americans were in the foreclosure process as of Sept. 30, 2007 — the most recent data available. That's an increase of 72 percent from the same period a year ago. Cities in California, Ohio, Florida and Michigan posted the highest foreclosure rates in the U.S., according to RealtyTrac, a private firm.

Traditionally, most people who foreclose on their homes do so because they lost their jobs or were hit with unexpected medical expenses. But the subprime mortgage crisis is different. Seven out of 10 people foreclosing on their homes are healthy and gainfully employed, according to John Taylor, president of the National Community Reinvestment Coalition. They simply can't afford to make their monthly payments.

Helping Others Walk Away

The spurt in foreclosures has spawned a cottage industry of firms who smell a business opportunity amid the misery. You Walk Away is getting the most attention, with some 25,000 daily hits to its Web site. (The firm won't disclose how many customers it has.)

For a fee of $995, the company offers services such as a "protection kit." For instance, they'll send a letter that "stops lenders from harassing the homeowner." They'll also put distressed homeowners in touch with a lawyer and an accountant to discuss their options. They'll advise people in the midst of foreclosure how long they can legally live in their homes, tempting people with the prospect that, "You WILL be able to stay in your home for up to 8 months or more without having to pay anything to your lender!"

Chad Ruyle, the company's co-founder, says they are not encouraging people to pursue foreclosure but merely helping them through the process once they have made that decision.

"We're not causing the foreclosure problem," he says. "The problem was already there." Or, as his business partner Jon Maddux puts it, "You can't blame a divorce lawyer for a divorce."

Red Flags

Firms like You Walk Away, though, have raised red flags with credit counselor and consumer watchdogs. Ellen Schloemer, director of research at the Center for Responsible Lending, says borrowers would be better off hiring their own attorneys and accountants, rather than relying on those provided by You Walk Away.

"Just look at the picture [on the company's Web site]," Schloemer says. "It shows people enjoying a day in the park. But foreclosure is no day in the park."

It takes a decade to recover from a foreclosure, she says, and there's not much anyone can do about that. The company, she says, paints a misleading picture of the foreclosure process.

"The real solution is to help people before they're forced into foreclosure," she says.

John Taylor, of the National Community Reinvestment Coalition, says he's concerned that the company might not help customers explore all of their alternatives before going into foreclosure.

"I would rather see people who are facing foreclosure fighting to keep their home, and keep it as long as possible, because help is on the way," he says.

On Tuesday, in fact, the Bush administration announced a new initiative aimed at helping homeowners about to lose their homes. For qualified homeowners, it will freeze the foreclosure process for 30 days. Dubbed "Project Lifeline," the new program will be available to people who have taken out all types of mortgages, not just the high-cost subprime loans that have been the focus of previous relief efforts.

Those efforts, of course, are about avoiding foreclosures, not facilitating them.

"Walking away from one's home should be the absolute last resort," says Gail Cunningham of the National Foundation for Credit Counseling. "However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities."

But there is one category of homeowner, she says, where foreclosure does make sense: people who bought their homes "with their hearts and not their heads."

"For people who may never be able to afford their home, then walking away is a viable option," she says. "If long term, you're not going to be able to sustain the mortgage payment, then you're fooling yourself and should get out of that situation and move on to life after foreclosure."

MBIA "AAA" credit rating re-affirmed.

I'm staying short and staying away from options.  Any rally is a good opportunity to short more.

Funny but true

click here for a primer on the subprime market.

Lots of news this weekend

Voltron says:  There's a lot of news coming out, so I'll summarize:

MBIA is again on ratings downgrade death watch.  Moody's has been putting out all kinds of signals saying that a downgrade might not be so bad and that a downgrade of only one level might actually help.  Yeah riiiiiiight.  Competitor Ambac may get bailed out by some banks.

Someone has a tongue-in-cheek suggestion for what to do with those worthless "Negative Equity Certificates"  . . . Pool them and sell the insure the senior tranches as AAA CDOs.  Sound familliar?  Using structured finance to solve the problems caused by structured finance.  Laugh now then wait a year and see it happen . . .

I don't know how this slipped by me but, the conforming loan limit for Fannie and Freddie as been increased 75% from $417,000 to $729,500.  This certainly doesn't help "affordable housing" but it IS EXACTLY WHAT COUNTRYWIDE HAS BEEN ASKING FOR.  This could re-inflate the housing bubble.

Bank of America has hired Countrywide's President and Chief Operating Officer, David Sambol, as head of it's mortgage division. (WSJ)

The CEO of Countrywide, Angelo Mozilo, is appear before congress on Thursday to explain, among other things, why he sold $360 million in Countrywide stock while he was publicly saying the company was strong. (WSJ)

The Wall Street Journal reports that the mortgage market is now so reliant on funds from government-related entities that it has been "effectively nationalized," according to Richard Iley, an economist at BNP Paribas.  These institutions have kept the credit spigots open for home mortgages, but "potentially there are very large liabilities for the taxpayer," Mr. Iley says.

So it seems that the government is caving in and giving the mortgage industry whatever it wants.  This has the potential to re-inflate the housing market for two years or so until the option arms resets and recasts kick in.  That's why I STAY AWAY FROM OPTIONS that expire in less than two years.

Sure, this'll work

Bank of America Asks Congress for a $739 Billion Bank Bailout

The New York Times is writing A ‘Moral Hazard’ for a Housing Bailout: Sorting the Victims From Those Who Volunteered.

Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for “financial innovation.”

But as losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

My Comment: The attempt to blame the free market for this mess is galling. The blame lies with Congress, the Fed, and the SEC. If the Fed had not reduced interest rates to 1% and held them there, the bubble would never has gotten as big.

Tax breaks by Congress and things like "the ownership society" helped drive up prices. GSEs were created to promote affordable housing and now the limit on "affordable" has been pushed to $730,000.

It was an act of the SEC that created the nightmare at the rating agencies. See Time To Break Up The Credit Rating Cartel for more on the rating agencies.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

My Comment: The reason they are at "high risk" is twofold. Prices are too high and Congress and this administration is spending too much money weakening the dollar. Home prices need to come down, the war in Iraq needs to be stopped cold turkey, and Congress needs to stop bailing out banks and homeowners when they do something stupid. While we are at it, we need to abolish the Fed.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted.

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government’s $200 billion bailout of the savings and loan industry in the 1990s.

My Comment: Everyone would view it as a bailout of banks and Wall Street for one simple reason: It would be a bailout of banks and Wall Street.

The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

A rescue would also create a “moral hazard,” many experts contend, by encouraging banks and home buyers to take outsize risks in the future, in the expectation of another government bailout if things go wrong again.

My Comment: Precisely

If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.

My Comment: Taxpayers could be stuck or would be stuck? I think the latter. No one entity or agency can value these things, certainly not Moody's Fitch, and the S&P. For recent evidence, please see Evidence of "Walking Away" In WaMu Mortgage Pool.

The only proper way of establishing the worth of these securities is by the free market, not guesstimates by bureaucrats who cannot find their asses with both hands at one time, nor by banks willing to sell the government a bill of goods at taxpayer expense.

But a growing number of policy makers and community advocacy activists argue that a government rescue may nonetheless be the most sensible way to avoid a broader disruption of the entire economy.

The House Financial Services Committee is working on various options, including a government buyout. The Bush administration may be softening its hostility to a rescue as well. Top officials at the Treasury Department are hoping to meet with industry executives next week to discuss options, according to two executives.

“There are a lot of ideas out there,” said Scott Stanzel, a spokesman for President Bush, when asked at a White House press briefing on Friday about a possible buyout program. “There are many different ways in which we can address this problem and we continue to look at ways in which we can do that.”

My Comment: There are indeed a lot of ideas out there and every one of them but one is a horrid idea. The only good idea is to let this play out naturally over time without the government making matters worse.

Supporters contend that a government rescue could be the fastest and cleanest way to force banks and investors to book their losses from bad mortgages — a painful but essential first step toward stabilizing the housing market.

My comment: Those supporters are socialist fools.

The government would buy the mortgages at their true current value, perhaps through an auction, at what would probably be a big discount from the original loan amount. The mortgage lenders, or the investors who bought mortgage-backed securities, would be free of the bad loans but would still have to book their losses.

My Comment: This just gets sillier and sillier. If the Government buys them at "True Value" then why don't the banks just hold them at "True Value", or sell them to someone else at "True Value"? Clearly the idea is to dump them on the government at a price far above "True Value".

If the government took control of the bad mortgages, supporters of a rescue contend, it could restructure the loans on terms that borrowers could meet, keep most of them from losing their homes and avoid an even more catastrophic plunge in housing prices.

My Comment: A plunge in home prices should not be catastrophic. It should be welcome. Property taxes would drop and housing prices would be more affordable. Where are all the affordable housing clowns hiding out now anyway?

“Every citizen has a dog in this hunt,” said John Taylor, president of the National Community Reinvestment Coalition, a community advocacy group that has developed its own mortgage buyout plan. “The cost of spending our way out of a recession is something that everybody would have to bear for a very long time.”

Mr. Taylor estimated the government might end up buying $80 billion to $100 billion in mortgages. But he said the government could recoup its money if it was able to buy the mortgages at a proper discount, repackage them and sell them on the open market.

My Comment: Mr.Taylor is clearly a complete buffoon. How the hell is the government supposed to be able to package this garbage and sell it on the free market is the banks can't?

Surprisingly, the normally free-market Bush administration has expressed interest. Treasury officials confirmed that several senior officials invited Mr. Taylor to present his ideas to them on Feb. 15. Mr. Taylor said he had also received calls from officials at the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which is part of the Treasury Department.

My Comment: Bush knows Republicans are going to get slaughtered in the upcoming election so he is vote pandering like everyone else.

But even supporters acknowledge that a government rescue poses risks to taxpayers, who could be left holding a very expensive bag.

Ellen Seidman, a former director of the Office of Thrift Supervision and now a senior fellow at the moderate-to-liberal New America Foundation, said the government’s first challenge is to buy mortgages at their true current value. If the government overpaid or became caught by an even further decline in the market value of its mortgages, taxpayers would indeed be bailing out both the industry and imprudent home buyers.

My Comment: The first and only challenge is to do nothing.

“It’s not easy, but it’s not impossible,” Ms. Seidman said. “There are various auction mechanisms, both inside and outside government.”

My Comment: With that Ms. Seidman proved she is a complete buffoon too.

A second challenge would be to start a program quickly enough to prevent the housing and credit markets from spiraling further downward. Industry executives and policy analysts said it would take too long to create an entirely new agency, as Bank of America suggested. But they expressed hope that the government could begin a program from inside an existing agency.

My Comment: We are in deep trouble if we start addressing the second challenge. The first and only challenge should have been to do nothing.

But even if the government did buy up millions of mortgages and force mortgage holders to take losses, the biggest problem could still lie ahead: deciding which struggling homeowners should receive breaks on their mortgages.

My Comment: See how this has already morphed into a third challenge. And they did not even say so. There will be 88 challenges, all of them butchered, if we go beyond the first challenge of doing nothing.

Administration officials have long insisted that they do not want to rescue speculators who took out no-money-down loans to buy and flip condominiums in Miami or Phoenix. And even Democrats like Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, have said the government should not help those who borrowed more than they could ever hope to repay.

My Comment: Instead they want to rescue the banks who were equally stupid, if not more so.

But identifying innocent victims has already proved complicated. The Bush administration’s Hope Now program offers to freeze interest rates for certain borrowers whose subprime mortgages were about to jump to much higher rates. But the eligibility rules are so narrow that some analysts estimate only 3 percent of subprime borrowers will benefit.

My Comment: Innocent victims are easy to spot. Those who stayed out of the mess but saw property taxes soar to the moon anyway. The second set of innocent victims were those on fixed incomes who got paid a lousy 1% in their money market accounts while the Fed blew the biggest credit bubble the world has ever seen.

Bank executives, meanwhile, warn that the mortgage mess is much broader than people with subprime loans. Problems are mounting almost as rapidly in so-called Alt-A mortgages, made to people with good credit scores who did not document their incomes and borrowed far more than normal underwriting standards would allow.

My Comment: Finally a true statement. The mortgage mess is indeed very broad. But notice how the blame was shifted to those who did not document their incomes, from banks who knowingly looked the other way while it happened.

Borrowers who overstated their incomes are not likely to get much sympathy. But industry executives and consumer advocates warn that foreclosed homes push down prices in surrounding neighborhoods, and a wave of foreclosures could lead to another, deeper plunge in home prices.

My Comment: Most of those who overstated their incomes are not looking for sympathy. They are simply walking away. It is banks who are looking both for sympathy and handouts.

Right or wrong, the arguments for rescuing homeowners are likely to be blurred with arguments for rescuing home prices. At that point, industry executives are likely to argue that what is good for Bank of America is good for the rest of America.

My Comment: There is no blur here. The arguments for rescuing homeowners and rescuing home prices are both equally stupid.

What's good for Bank of America is to learn a very painful lesson.

Mike "Mish" Shedlock

Countrywide . . . the band played on

or squeezing the last drops from the lemon.

Wall Street Journal:

Countrywide Financial Corp., the nation's largest mortgage lender by loan volume, will host about 30 representatives of smaller mortgage banks for three nights next week at the Ritz-Carlton Bachelor Gulch ski resort in Avon, Colo. At one of the country's most-glamorous skiing spots, a regular room on a weekday starts at $750.

The first items on the agenda for guests arriving Monday evening: Cocktails and ski fittings. Next is dinner at the Spago restaurant, whose menu includes Kobe steak with wasabi potato puree for $105. (For the budget-minded, pan-roasted buffalo filet with Kabocha pumpkin flan is $54.)

The annual event is for bankers at correspondent lenders, which originate loans and then sell them to Countrywide. The Calabasas, Calif., lender is paying for hotel rooms, meals, skiing and tips, according to a program distributed to attendees.

The schedule calls for four-hour business meetings Tuesday and Wednesday mornings, followed by skiing and dinner. Those dinners are at Zach's Cabin, where diners arrive by sled, and at Larkspur in Vail, Colo., where the menu includes California farmed Alverta President caviar, listed at $140.50.

...

Sen. Charles Schumer, a New York Democrat who has been pushing Countrywide and others to do more for people facing foreclosure, called on Countrywide to cancel the trip and devote the money to refinancing distressed homeowners.

A Countrywide spokesman declined to comment. The company has argued in recent news releases that it is making efforts to keep distressed borrowers in their homes. Among those are agreements with nonprofit consumer-advocacy groups to negotiate loan workouts for borrowers. A Bank of America spokesman declined to discuss Countrywide's hospitality.

Treasury studying home refinance plan

Voltron says: This "negative equity certificate" is a kooky idea. It is basically sticking the lender with a lien on the house. It's worth the same as a bull call spread that never expires. It would theoretically be initially worth about half of the amount lost on the loan and the banks will have to realize the loss. Banks will probably try to sell these certificates on the open market. This will create some downward pressure on house prices because investors can buy the certificates instead of buying actual houses. It doesn't change the fact that it is in the best interest of the homeowner to default.

By John Poirier

WASHINGTON (Reuters) - The U.S. Treasury Department is studying a new regulatory proposal aimed at prodding servicers to help homeowners facing foreclosure to refinance their mortgages, the department's undersecretary, Bob Steel, said on Thursday.

The program would create "negative equity certificates" that would in the long term help servicers recoup losses from refinancing a mortgage when a home's value has dropped.

The proposal, being developed by the Office of Thrift Supervision (OTS), would operate along with other Bush administration programs to modify mortgages provided to borrowers with poor credit histories and who are about to lose their homes.

"We're just learning about it," Steel said at the Reuters Housing Summit. "I spoke to Mr. (OTS Director John) Reich last night. I think they're still working out the details too."

"But it's more ideas," Steel said. "Other ideas from other people is a good thing."

The OTS regulates the thrift industry, which is largely comprised of mortgage lenders ranging from small, locally-owned institutions to big companies such as Countrywide Financial Corp and Washington Mutual Inc.

The proposed program is in its early stages and comes at a time when officials fear an increasing number of people would rather just walk away from homes which have seen values fall during the U.S. housing and financial turmoil.

If implemented, the program, possibly with Federal Home Administration assistance, would apply to all mortgages but it appears it would mainly focus on subprime loans.

It would not necessarily guarantee a full repayment to the servicer because the value of the certificates could be publicly traded and fluctuate with home prices, OTS officials have said.

AA ratings for U.S. bond insurers may cut risks: report

Thu Feb 21, 2008 12:18pm EST

NEW YORK (Reuters) - Bond insurers would be better off targeting AA ratings than trying to protect their top "AAA" ratings by splitting their businesses, which could damage their bank policyholders, Bank of America said in a report on Thursday.

The ratings of bond insurers including MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Group (ABK.N: Quote, Profile, Research) may be cut because of expected claims from their guarantees on risky residential mortgage backed debt, including collateralized debt obligations.

A rating downgrade would dry up demand for their business of insuring municipal bonds and could make it more expensive for local governments to sell debt.

Regulators and some bond insurers have proposed splitting off the companies' risky structured finance operations into a separate company as a way to protect the ratings on more than a trillion dollars of municipal bonds.

However, this would likely prompt a credit ratings cut for the structured finance unit, Bank of America analyst Jeff Rosenberg said in a report sent on Thursday. That would force banks to write down the value of securities guaranteed by the structured finance units by as much as $30 billion.

"That plan, while limiting the damage to the municipal market comes at significant cost to the broader financial markets," Rosenberg said.

An alternative option would be for insurers to target an "AA" rating. The capital requirements to hold this rating would be significantly lower than those required for the top "AAA" ratings, Rosenberg said.

Bank write downs from insurance policies they have purchased on CDOs would likely fall to around $5 billion, he said.

"The AA level limits the spread of systemic risk while reducing the amount of new capital required," Rosenberg said. "Targeting the AA level would also reduce the risk of further capital requirements as loss expectations change," he added.

Damage to the municipal bond market would also likely be limited from this scenario, as triggers for tax-free money market funds to sell municipal debt is often below "AA."

However, Rosenberg noted that a downgrade below AA could limit the number of buyers and force banks to absorb $100 billion in short-term municipal bonds.

While a rating of AA will likely lead to some losses for municipal bond investors, Rosenberg notes that breaking up the insurers would likely face significant legal hurdles and may not offer any greater protection of their investment.

A 'Simple' Bond-Insurance Plan

The Complex Risks of Dividing

Businesses to Avert Downgrades

By KAREN RICHARDSON and LIAM PLEVEN
February 21, 2008; The Wall Street Journal, Page C2

Everyone seems to have a plan to fix the problems of Wall Street's struggling bond insurers.

From Warren Buffett to state insurance regulators to stock market short sellers, the many rescue plans being floated around for MBIA Inc., Ambac Financial Group Inc. and FGIC Corp. offer variations on a similar theme.

They want to separate the industry's safer business of insuring municipal bonds from the riskier business of covering securities backed by, among other things, subprime mortgages, in essence splitting the insurers in two, creating one good and one bad.

Each plan, in turn, is fraught with complications and contradictions.

The latest to offer up a plan yesterday was hedge-fund manager William Ackman, head of Pershing Square Capital Management LLC, who has long bet against bond insurers and their shareholders.

Here is a rundown of what is in play:

Q: Why are bond insurers in so much trouble?

A: They face big losses, and their top-notch credit ratings, critical to their ability to do business, are threatened. The housing slowdown means investments tied to mortgages they insured could default, leaving them on the hook to pay out billions. Credit-rating services threaten downgrades, which would raise their cost of funds and hurt the value of the bonds they insure.

Both Main Street investors, who have ordinary municipal bonds, and Wall Street banks, which hold the more-complex securities, could see their holdings plunge in value if the insurers behind them are downgraded.

Q: What is this idea of splitting bond insurers in two?

A: FGIC, one of the major bond insurers, has requested that regulators allow it to set up a new firm that would insure municipal bonds exclusively -- in essence, a "good bank." Ambac Financial Group, which owns a small bond insurer called Connie Lee Insurance Co., says it could use that unit's licenses in 47 states to quickly undertake its municipal-bond insurance business.

These steps would effectively force the struggling units -- which insured mortgage-linked investments -- to fend for themselves. These "bad banks" could be downgraded and even go into "run off" mode, waiting for existing policies to expire and paying claims, but not selling new insurance. These units could try to raise capital, or banks that own the debt securities insured by these units could cancel their policies and get cash or stakes in the "good bank."

Q: What is Mr. Ackman's plan?

A: The structured-finance business connected to struggling mortgage investments would own 100% of the low-risk municipal-bond insurance business, which would retain its triple-A rating. The municipal unit would have its own board and pay dividends to its parent, which, if anything is left after paying its claims, would pay dividends to the holding company.

Q: Is this good for shareholders?

A: Very few options are good for shareholders right now, this included. If mortgage losses are significant, investors in the holding companies and the firms' creditors would likely see their investments become nearly worthless under Mr. Ackman's plan.

Q: What impact would all this have on holders of bonds insured by the firms?

A: In a good bank/bad bank plan, municipal bondholders would be fine because their bonds would be backed by a triple-A insurer. The holders of other securities, including less-risky consumer debt, could see the value of their investments drop because they would likely be insured by weaker firms that might be unable to pay claims. Banks, which hold billions of dollars of these securities, might sue for "fraudulent conveyance," in which an entity uses a pool of assets to pay one obligation and not another.

Q: How will this all play out?

A: In the end, it depends on two factors -- the severity of losses on mortgage-related bonds, for which the outlook has deteriorated, and how easily the bond insurers can raise new capital, which has become tougher as their share prices have plummeted.

Ackman's Plan for Bond Insurers Is the Best So Far

Voltron says: MBIA short seller Bill Ackman's plan for restructuring MBIA is in the best interests of the policy holders. It's apparent from MBIA's icy response that they did not even read the proposal. It is also apparent that the news media did not read the proposal. That's why you read cfcsux!

From seeking alpha.com:

Pershing Square's Bill Ackman presented his plan(.pdf) for the bond insurers MBIA (MBI) and Ambac (ABK) yesterday. Unlike the Buffett that would essentially leave the SFV (structured financial vehicle) portion of the company's to shrivel away, Ackman's plan calls the company's bluff.

Rather than have the proceeds from the Municipal portfolio flow to the holding company, Ackman is saying "let them support the losses at the SFV portfolio". Assuming the losses in SFV are as small as management says they are, this ought to work. Now, the plan falls apart if the losses are as massive as Ackman claims they will be. In this case, the Muni proceeds will not cover the losses and the house of cards come tumbling down. This is what Ackman is banking on.

Either way he wins, because if the Muni portfolio is providing liquidity to the SFV side, there are no dividends to flow up to the holding companies. Without the dividends, there is no income or revenue for the insurers. Would you buy shares in a holding company with no revenues? Me neither....

MBIA restructuring

voltron says: MBIA's CEO was fired.  The old CEO was brought back.  They are in discussions to split into two parts, municipal bond insurance (bread and butter) and structured debt insurance (toxic waste).  If this happens, your broker may force you to cover your short position.  If not you will be short both companies.  I would not be so quick to cover the municipal bond side, because they are likely to get sued by the structured debt insurance holders and the need for municipal bond insurance is being questioned.  It is also a business that Warren Buffett is entering, and I could even envision the federal government taking over the role.

Stupidity Marches On . . .

Once Bitten, Twice Bittten?

Some Wall Street Banks Appear Willing to Give Subprime Another Try
Wall Street Journal, February 11, 2008; Page C6

The hard-rock band Mötley Crüe once sang of a toxic relationship, "Girl, don't go away mad; girl, just go away."

Wall Street might want to take the same approach to its failed relationship with subprime-mortgage-related lending. The investment banks have taken more than $100 billion in write-downs -- and half as much in capital infusions from foreign funds.

But Wall Street seems to believe there still is money in failed mortgages.

In fact, firms such as J.P. Morgan Chase and Bear Stearns are sidling back toward their subprime exes, looking to buy some assets on the cheap. Jamie Dimon wants to build J.P. Morgan's mortgage bank and start buying up jumbo mortgage loans and subprime assets, which he thinks now compare favorably to their previous prices.

Bear Stearns believes there are numerous opportunities in acquiring distressed mortgage assets; in fact finance chief Sam Molinaro told Banc of America Securities analyst Michael Hecht that there are too many buyers and not enough sellers of such assets.

At the end of 2007, Lehman Brothers Holdings, which was relatively unscathed by subprime, had more mortgage exposure than it did the year before: $37.3 billion compared with $27.5 billion in 2006.

Does the timing inspire confidence? The track record isn't so hot. Merrill Lynch, for one, bought subprime lender First Franklin even when analysts were already starting to fret about subprime exposures on earnings conference calls.

A slew of new risk-management executives have been installed to help the banks learn from their past lessons. Investors should be asking just how it is going to be different this time.

Massive Fraud

Things Not To Say When Your Bear Stearns Hedge Fund Is Imploding

Posted by Deal Journal

Kate Kelly, who covers Wall Street for the Wall Street Journal, provides this analysis of newly released transcripts surrounding the Bear Stearns hedge funds.

Snippets of an April 25, 2007 investor conference call held by Bear Stearns Cos. hedge-fund manager Ralph Cioffi, which we link to here, read like a handbook of Things Not To Say When Your Fund Is Imploding. At least, federal prosecutors from the U.S. Attorney’s office in Brooklyn might think so.

Brooklyn prosecutors have launched a criminal investigation into whether Mr. Cioffi and his colleague Matthew Tannin engaged in securities fraud by telling fund investors they were optimistic about the prospects for two hedge funds they managed when in fact they worried privately about the funds’ future, according to people familiar with the matter. The question they must grapple with: how much Messrs. Cioffi and Tannin really knew when they held that call. Were they truly aware of the deep declines to come? Or foolishly upbeat about their funds’ prospects, despite market indications of the pain that was to come?

During the April 25 call, Mr. Cioffi told investors that the two funds, called the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, were down just slightly for the month. But figures he released to investors about a month later revealed that the Enhanced Leverage fund, which was the riskier of the two, was in fact down 23% through late April, and its sister fund down about 5%.

Nor were investors informed at the time of Mr. Cioffi’s early March move of $2 million of his own money out of the Enhanced Leverage fund and into a third fund he managed, Structured Risk Partners, that ultimately proved less risky. (Mr. Cioffi has told associates that the money transfer, which was approved by compliance officers at Bear Stearns Asset Management, was intended to show confidence in the third fund.)

Five weeks after the conference call, around June 5, the Enhanced Leverage fund was gated, or barred from returning investor money. For much of May and June, Messrs. Cioffi and Tannin scrambled to sell billions worth of mortgage-backed securities in hopes of raising cash for lender margin calls. But when they came up short, Merrill Lynch & Co. on June 15 seized the collateral assets attached to its loan. Other lenders quickly followed suit, ultimately forcing the funds to file for bankruptcy in late July.

One loser in the process: Bear Stearns broker Shelley Bergman, who had placed a number of clients in the two High-Grade funds. Mr. Bergman, who questioned Mr. Cioffi sharply in the call (see questions from “Shelly” in the transcript), left Bear earlier this year for Morgan Stanley, where he now works. He referred a call for comment to his lawyer.

Here are some highlights from the April 25 call.

On how secure the funds’ loans were:

Mr. Cioffi: “…one of our main strategies over the last several years has been to put in place significant amounts of non-recourse term funding…the reason we did that is so that we would not be faced [with becoming] a forced seller due to margin calls, or, you know, having repo lines removed or terminated.”

On the possibility of big redemptions, or investor requests for their money back:

Mr. Cioffi: “Obviously the big question we’ve been getting from a number of investors are [sic] how do we look on a redemption subscription basis. The next big redemption date would be June 30th and, as of now, I believe we only have a couple of million of redemptions for the June 30th date.”

On the state of the structured credit market (which is home to complex mortgage-backed securities like CDOs):

Mr. Tannin: “…the structured credit market, and the subprime market in particular, has not systematically broken down…there is no concern among [analysts and mortgage servicers] that there is gonna be a performance that is not historically rational.”

On the state of the funds in general:

Mr. Tannin: “…from a structural point of view, from an asset point of view, from a surveillance point of view, we’re very comfortable with exactly, you know, where we are…it is frustrating to have had a negative month. It is frustrating to be in an industry where people are writing articles daily about how the world is coming to an end…”

On the near-term picture:

Mr. Cioffi: “We are cautiously optimistic that the CDO market has found its footing and will trade, on a going forward basis, based upon actual credit fundamentals…Where we have those risks in our portfolio, we feel comfortable that we have significantly hedged them…The market will stabilize…We have a plan in place that will get the funds back on track to generate positive returns.”

Hedge Fund Manager Bill Ackman on MBIA

MBIA MIA CULPA

Bond insurers admit mistakes

Companies plan retreat from structured finance, attack short sellers

By Alistair Barr, MarketWatch

Last update: 8:50 p.m. EST Feb. 14, 2008

SAN FRANCISCO (MarketWatch) --Executives of leading bond insurers Ambac Financial and MBIA Inc. admitted mistakes and took some responsibility for the current crisis in the municipal bond market during Congressional testimony on Thursday.

Ambac (ABK) Chief Executive Michael Callen also said that the company will no longer guarantee complex mortgage-related securities known as collateralized debt obligations (CDOs) and even more convoluted securities called CDO squareds.

MBIA (MBI) Chief Financial Officer Chuck Chaplin said the company has been talking with the New York State Insurance Department about restricting the type of risks bond insurers can take on in future, possibly limiting themselves to muni bonds.

However, the company also criticized short sellers, who bet against shares including those of MBIA, for spreading "false and misleading assertions" for their own benefit.

Bond insurers used to just guaranty muni bonds, becoming known as monoline insurers because they didn't take on any other types of risk. But during the 1990's, they branched out into structured finance, selling guarantees on mortgage-backed securities and CDOs. Since the mortgage crisis hit last year, concerns have grown that these companies will have to pay big claims, leaving them with less capital than they need to keep crucial AAA ratings.

That, in turn, has sparked turmoil in the muni bond market. That's because when a bond insurer is downgraded, all the securities it has guaranteed are, in theory, downgraded too.

MBIA's Chaplin admitted some responsibility for that turmoil, under tough questioning during Congressional testimony on Thursday.

"We are culpable," Chaplin said. "The fact that we have engaged in wrapping the bonds that we have, especially in the mortgage area, has resulted in the problems that we're experiencing right now."

If MBIA and other bond insurers had stuck to just guaranteeing muni bonds, "we certainly wouldn't have this problem," he added. "I'm afraid we have no one to blame but ourselves."

Ambac's Callen also said that the insurer had made mistakes.

"We guaranteed overly complicated structures known as CDO squareds," he said. "We're not happy about that. We will no longer guaranty CDOs and CDO squareds."

The biggest mistake Ambac made was assuming that the mortgages backing such securities wouldn't experience losses all at once, because they were from different parts of the U.S. But the downturn in house prices and accompanying foreclosures has unexpectedly become a nationwide problem.

In the wake of such mistakes, MBIA's CFO was asked if bond insurers should be limited to just muni bond risks in future.

"We have been having just those types of discussions with" the New York State Insurance Department, Chaplin said. "About changing the base of business that the bond insurers engage in."

Still, despite taking some responsibility for recent credit market turmoil, MBIA also criticized short sellers, such as Bill Ackman, head of hedge fund firm Pershing Square Capital Management LP, who has been betting against the company for several years.

Ackman often makes "false or misleading assertions and draws incorrect conclusions," MBIA said in a document that was submitted to lawmakers recently. MarketWatch obtained a copy.

"It's clear to us that Mr. Ackman's comments have undermined confidence in MBIA for both the fixed-income and equity markets," the company added. The "trading value of MBIA's stock and credit default swaps have weakened, providing potential financial benefit to Mr. Ackman."

The hedge fund manager, who was also testifying at the same hearing on Thursday, rebuffed the accusations, arguing that executives of bond insurers may also be acting in their own self interests.

"Management is also biased. They own stock and options. I am short stock and options," he said.

Ackman said Pershing's interests are aligned with bond insurer policyholders.

"We want the bond insurers to make good on their obligations," he said.

Alistair Barr is a reporter for MarketWatch in San Francisco.

Oh Puh-Leeease! Excuse me while I vomit.

	February 14, 2008

Worried Bankers Seek to Shift Risk to Uncle Sam By DAMIAN PALETTA February 14, 2008; Page A2 WASHINGTON -- The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government. One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers. Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal. The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss. The fact that the plan is receiving serious consideration suggests the level of concern in Washington as housing problems worsen and early efforts by the Bush administration fall short. Last fall, the government backed a plan by banks to rescue bank-affiliated funds that had invested in mortgage-backed securities, but it fell through. More recently, a hotline set up with Washington's support for troubled borrowers has helped only a small fraction of those in need. Politicians and bankers are now abuzz with talk about broader ideas to prevent the housing market from deteriorating. Another plan gathering support seeks to make it easier for banks to write off part of the unpaid balance on loans that exceed a property's value, people familiar with the matter said. If that happens, homeowners would owe less, and they might be able to refinance their loans and avoid foreclosure. Several lenders are already considering the move, known as a "principal charge off," but are hesitant to move forward. Loan servicers -- the companies that collect monthly mortgage payments -- worry that if they take big write-offs, they might be sued by investors who hold mortgage-backed securities. However, if the industry came forward with a standard backed by the Treasury Department, the legal concerns would likely fade. "Everybody is looking at everything," Federal Deposit Insurance Corp. Chairman Sheila Bair said yesterday after a speech in Washington. "The door is not closed on anything." The Credit Suisse plan would open the way for nearly 600,000 subprime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA. Some 1.3 million borrowers were either seriously delinquent or in foreclosure at the end of the third quarter, the most recent numbers available from the Mortgage Bankers Association. The FHA was created during the Great Depression and provides mortgage insurance for qualified borrowers. The agency grew less popular during the recent housing boom because credit was widely available, but it has recently rebounded as some credit markets have dried up. Homeowners with FHA insurance pay premiums into an insurance fund. In a 20-page summary handed out to lawmakers, policy makers and regulators, Credit Suisse said the plan would make $89 billion in subprime loans eligible for refinancing. Credit Suisse spokeswoman Victoria Harmon said bank officials have "shared our ideas and technical advice on FHA" and received "constructive" responses from the government. Officials from J.P. Morgan Chase & Co. are pulling together their own proposal to expand the number of homeowners who could refinance into FHA-backed loans. Just a few months ago, such proposals would have been considered far-fetched, but these and other unorthodox ideas are gaining credibility. This week, the government announced the latest idea, a mortgage-industry plan that would give seriously delinquent borrowers extra time to avoid foreclosure. So far the government's moves haven't propped up the sagging housing market or thawed frozen credit markets. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are expected to face questions on these issues today from lawmakers at a Senate Banking Committee hearing. The panel's chairman, Sen. Christopher Dodd (D., Conn.), is working on a plan that would resurrect a federal agency created during the 1930s to buy up distressed mortgages at steep discounts and help borrowers refinance into more-affordable loans. Senior Treasury Department officials have been wary of proposals that could expose taxpayers to losses and bail out lenders, but they have been willing to entertain most ideas. Some congressional Republicans are becoming worried that as more bad news and data are released about the housing market, some proposals could expose taxpayers to severe losses. "I would share the concern and nervousness about going in that direction," said Rep. Scott Garrett (R., N.J.), a member of the House Financial Services Committee. Sen. Charles Schumer (D., N.Y.) earlier this week urged the lending industry to move toward a standard of partially writing down the principal of "under water" loans, where the borrower owes more than his or her home is worth. Separately, Sen. Schumer called the Credit Suisse plan "an interesting idea, which we are looking at pretty seriously." However, Credit Suisse hasn't won the endorsement of the American Securitization Forum, an influential group of investors.

Close

Ackman criticizes bank bailouts for bond insurers

Hedge-fund manager offers ways to fix muni-bond woes in testimony

By Alistair Barr, MarketWatch

SAN FRANCISCO (MarketWatch) -- Banks' efforts to bail out troubled bond insurers won't change the ultimate losses from the industry's foray into the riskier structured-finance business, but will just transfer the pain to another sector, according to hedge-fund manager Bill Ackman.

In testimony due to be delivered to a congressional committee Thursday, Ackman also proposed ways that a crisis in the municipal-bond market may be averted. MarketWatch obtained an advance copy of his prepared remarks.

Ackman, who runs Pershing Square Capital Management LP, has been shorting or betting against the holding companies of leading bond insurers MBIA Inc. (MBI) and Ambac Financial Group (ABK) .

New York Gov. Eliot Spitzer, New York State Insurance Superintendent Eric Dinallo and executives from Fitch Ratings, Ambac and MBIA are also due to testify during Thursday's House Financial Services subcommittee hearing on the state of the bond-insurance industry.

MBIA plans to ask regulators to prevent what it calls market manipulation by short sellers, specifically targeting Ackman, CNBC reported Wednesday. The two have sparred many times in recent years.

MBIA also plans to say that some bond insurers may not survive the current crisis. In addition, the company will say that the way agencies rate bond insurers may need to be changed, CNBC said. Elizabeth James, a spokeswoman for MBIA, declined to comment.

Ambac Chief Executive Michael Callen will tell lawmakers that the bond insurer isn't struggling to meet current obligations, but needs to stabilize its ratings so that it can pursue new business, the company said in a statement late Wednesday.

Callen will also "discuss some of the factors that have heightened speculation and created undue fear in light of the exaggerated and inflated estimates related to losses," Ambac added.

Bond insurers guarantee more than $1 trillion of muni bonds, providing AAA backing to help cities, school districts and other municipalities borrow more cheaply. But losses on more complex securities known as collateralized debt obligations, or CDOs, have imperiled the bond insurers' top ratings, throwing some parts of the muni market into turmoil.

'The problem is that the math doesn't work. The amount of losses doesn't change whether the losses are borne by the banks or the insurers.' — Bill Ackman

Regulators have now stepped in to try to avert a wider crisis. The New York State Insurance Department, headed by Dinallo, is currently focusing on banks and brokerage firms that are big counterparties to the bond insurers. The regulator is trying to encourage these companies to inject new capital into specific bond insurers to prevent them from losing their AAA ratings.

Ackman said that such a plan is "simply an artificial loss-deferral exercise," according to his prepared testimony. "The problem is that the math doesn't work. The amount of losses doesn't change whether the losses are borne by the banks or the insurers."

Banks are considering such bailouts because they bought guarantees from bond insurers to hedge their own CDO exposures. If their counterparties are downgraded or if a major bond insurer runs out of money to pay claims, banks may suffer another round of painful write-downs.

To avoid this, banks are trying to take advantage of lower regulatory capital and rating-agency standards for the bond insurers. The current system gives roughly eight times more credit to one dollar of capital held by a bond insurer vs. one dollar held by a bank, according to Ackman.

"If offered the choice, what bank wouldn't invest $1 billion to avoid $8 billion of write-downs?" he asked.

A more efficient solution would involve the banks taking the extra write-downs and being more transparent about their exposures. These firms could then raise more capital or be bailed out themselves, which would be a better option than "the indirect method of propping up ailing bond insurers," Ackman said.

Still, given his short positions in Ambac and MBIA, Ackman could lose money if these bond insurers are salvaged by their bank counterparties.

But he also noted that Pershing is a big investor in U.S. companies like Target Corp. (TGT) , Sears Holdings Corp. (SHLD) and Barnes & Noble Inc. (BKS) , which are vulnerable to a slowdown in the economy and consumer spending.

The consumer slowdown is partly driven by the credit crisis, and fixing the bond-insurer problem may help alleviate that, Ackman said.

Muni ratings

The hedge-fund manager also criticized the rating agencies for underrating muni bonds, arguing that this created the opportunity for bond insurers to charge premiums to bolster creditworthiness for municipal borrowers rated AA or lower.

The agencies currently use the same ratings for structured securities as they do for corporate debt and municipal bonds. However, recent studies have shown that muni bonds default much less than corporate bonds and structured securities like CDOs. The mortgage crisis has shed harsh light on such differences.

Ackman said that in future muni bonds should be rated on the same scale as corporate bonds. That would immediately improve muni-bond ratings, avoiding the possible forced sale of securities by investors who can't hold lower rated debt by law, he commented. It would also reduce the need for bond insurance, Ackman said.

The Securities and Exchange Commission currently requires that money-market funds sell securities that fall below AA. This rule should be clarified to state that the corporate-ratings method be used for this test in future, he added.

Median housing prices in county hit 4-year low

By Roger Showley UNION-TRIBUNE STAFF WRITER February 13, 2008 San Diego County median home prices fell last month to their lowest level in four years with nearly half of existing homes selling at a loss in the face of mounting foreclosures, DataQuick Information Systems reported yesterday. With most buyers and sellers sitting on the sidelines, distressed properties dominated the market in sales and prices. “Sales overall are ridiculously low,” said DataQuick analyst Andrew LePage. “A larger chunk of what's selling today is in the hardest-hit areas, with more foreclosure activity and depreciation.” LePage said a record 34 percent of resale homes last month were previously in foreclosure and 9 percent were in default. Nearly half of all resale houses and condominiums were sold at a loss from when they were last purchased. The median loss was about 25 percent. By comparison, 5.3 percent of resales in January 2007 had been in foreclosure. The December figure was 31.2 percent. Things could get worse, LePage said, if San Diego slips into recession and homeowners who lose their jobs are forced to sell because they can't make their mortgage payments. “There's an awful lot of uncertainty,” he said, and households are so financially strapped that many will have difficulty keeping above water. Robert Brown, an economist at Cal State San Marcos, called the latest figures “staggering” and said they might feed on buyers' and sellers' expectations of worse conditions to come. “I just don't think this has sorted itself out for sure,” Brown said. “So much of this is speculation, trying to predict what will happen in the future.” The overall median price slipped $1,000 from December and $43,000 from a year ago to $429,000, the lowest since February 2004. The median price for resale houses, making up about half of the market, fell faster, down $18,500 from December and $88,500 from January 2007 to $451,500. The median for resale condos dropped to $300,000, the lowest since November 2003, from $311,000 in December and $380,000 in January 2007. The only bright sign was in the category of new homes. Its $540,250 median was up from $445,000 in December and $395,000 a year ago, reflecting the absence of low-cost condo conversions and the continuing sales of new homes, albeit at low rates. The sale of 1,826 houses last month, the second lowest since DataQuick began tracking San Diego housing in 1988, was 34.1 percent lower than year-ago levels. It was the 43rd straight month that sales dropped on a year-over-year basis. Active listings yesterday stood at 18,443, up from 17,882 in December and 16,689 in February 2007, the San Diego Association of Realtors said. East County and South County neighborhoods have seen the most concentrations of foreclosures and defaults and their overall median price declines reflected that impact – down 20.3 percent and 15.8 percent, respectively. Central San Diego was up 6.4 percent, North County Inland was down 10.8 percent, and North County Coastal was down 9.4 percent. Countering the gloom, area real estate agents and mortgage brokers said they were encouraged by Congress' approval of an economic stimulus package last week. One of its provisions will temporarily raise the conforming loan limit from $417,000 to a projected $630,000 for the San Diego area. That means buyers and owners will be able to take advantage of lower interest rates and better terms not found in jumbo mortgage loans exceeding $417,000. Lori Staehling, president of the San Diego Association of Realtors, said agents and lenders are reporting increasing interest from prospective buyers, as measured by prequalification loan applications and traffic at open houses and new-home subdivisions. Gary West, 60, had applied to refinance his $450,000 loan on a 1,700-square-foot home he has owned in Scripps Ranch since 1972. But now West hopes to rewrite his application to take advantage of the higher loan limit. He also thinks he'll put his house on the market this summer, having failed to sell it in the past year. “You have to wait for the golden goose to come around,” West said. “OK, now we can do it.” Bruce Oberhand, 40, may just be the ideal buyer. Oberhand and his wife, Jenny, and two children live in Aliso Viejo in Orange County and want to relocate to Scripps Ranch, Poway or another San Diego community known for good schools and nice neighborhoods. They have been unable to sell their home, listed at $629,000 to $659,000. “Hopefully, we're buying at a dip and can enjoy the appreciation,” he said. Home builders, who have delayed or canceled new phases and projects, also plan to take advantage of the stimulus package. John Laing Homes, with six subdivisions in San Diego, is launching a buy-now program today. It includes an interest buy-down program as well as better mortgage terms in anticipation of the higher loan limits that won't become effective until early next month. “There's been very positive reaction,” said spokeswoman Linda Mamet. “Buyer traffic has increased 40 percent since the beginning of the year. A lot of that is because of discussions of the economic stimulus package and the anticipated loan limits.” But optimism is not universal. Ramsey Su, a veteran real estate agent who specialized in the foreclosure market starting in the early 1980s, said the market shows no sign of improving. Su said that in parts of Florida foreclosures are outnumbering regular sales. “I've never experienced that before,” Su said. “How does it end? The end is coming in the future.” Paul Leonard at the Center for Responsible Lending noted that the stimulus package may help owners worried about loans that will reset to higher rates but not those already in default or foreclosure. “I suspect it will help some of them but it certainly is not going to be a panacea,” Leonard said. Steve Blank, senior resident fellow in real estate finance at the Urban Land Institute, said 2008 promises to be a “tough year.” “Clearly, we all agree housing got ahead of itself,” Blank said, adding that housing is likely to fall back 5 percent to 10 percent, depending on the market. In San Diego County, the latest median is 17.1 percent off the peak of $517,500 set in November 2005. The single-family-resale median is 21.3 percent off the $574,000 peak set in May 2006.