Housing Bubble Bursting?

[hastalavista]

I read this article, and for kicks, I looked up the companies latest 10-K filing.

Here's the link to the article:
http://www.baltimoresun.com/business/bal-te.bz.hale07may07,0,7628608.story?page=1&track=rss

What caught my eye is this is a bank, under FDIC regulatory jurisdiction. Here's some exceprts from their 10-k filing:

A Significant Amount of Our Business is Concentrated in Real Estate Lending, and Most of this Lending Involves Maryland Real Estate
Approximately 27% of our loan portfolio is comprised of commercial and consumer real estate development and construction loans, which are secured by the real estate being developed in each case
We Have A High Percentage Of Commercial, Commercial Real Estate, And Real Estate Acquisition And Development Loans In Relation To Our Total Loans And Total Assets
Our loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in relation to our total loans and total assets. The Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, along with other federal banking regulators, issued final guidance on December 6, 2006 entitled, Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, directed at institutions that have particularly high concentrations of commercial real estate loans within their lending portfolios. These types of loans also typically are larger than residential real estate loans and other commercial loans. Because the loan portfolio contains a number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on financial results.
Based on our commercial real estate concentration as of December 31, 2006, we may be subject to further supervisory analysis during future examinations. [Denis bold] Although we continuously evaluate our concentration and risk management strategies, we cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our commercial real estate portfolio. Management cannot predict the extent to which this guidance will impact our operations or capital requirements.

I put the one part in bold. BTW, these guys made a loan on a failing condo development that apparently is the talk of Baltimore real estate circles.

Here's another item that caught my eye:

We Experience Interest Rate Risk On Our Loans Held For Sale Portfolio
We are exposed to interest rate risk in both our pipeline of mortgage originations (loans that have yet to close with the borrower) and in our warehouse loans (those loans that have closed with the borrower but have yet to be funded by investors). We now manage this interest rate risk primarily in two ways. On the majority of the loans we originate, we enter into agreements to sell our loans through the use of best efforts forward delivery contracts. Under this type of agreement we commit to sell a loan at an agreed price to an investor at the point in time the borrower commits to an interest rate on the loan, with the intent that the buyer assumes the interest rate risk on the loan. Beginning in January 2006, a portion of our mortgage loan pipeline and warehouse were hedged utilizing forward sales of mortgage-backed securities and Eurodollars for loans to be sold under mandatory delivery contracts on a pooled or bulk basis. We expect that these derivative financial instruments (forward sales of mortgage-backed securities and Eurodollars) will experience changes in fair value opposite to the change in fair value of the derivative loan commitments and our warehouse. However, the process of selling loans on a bulk basis and use of forward sales of mortgage-backed securities and Eurodollars to hedge interest rate risk associated with customer interest rate lock commitments involves greater risk than selling loans on an individual basis through best efforts forward delivery commitments. Hedging interest rate risk in bulk sales requires management to estimate the expected “fallout” (rate lock commitments with customers that do not complete the loan process). Additionally, the fair value of the hedge may not correlate precisely with the change in fair value of the rate lock commitments with the customer due to changes in market conditions, such as demand for loan products, or prices paid for differing types of loan products. Variances from management’s estimates for customer fallout or market changes making the forward sale of mortgage-backed securities and/or Eurodollars non-effective may result in higher volatility in our profits from selling mortgage loans originated for sale. We have engaged an experienced third party to assist us in managing our activities in hedging and marketing our bulk sales delivery strategy. [Denis bold]

It sounds to me like this bank was trying some fairly sophisticated hedging stragegies- that I certainly do not understand; and perhaps, they didn't either? - and now are engaging in outside expert help.

From what I read, this is a relatively small banks as banks go. But, there are a lot of small banks around. I said in an earlier post (100+ posts ago) that the bad news so far seemed to involve Financial Service Companies (non-regulated) and not Federally Regulated Institutions. One bad bank does not a whole industry tarnish, but one has to wonder how deep did some of these smaller institutions dive into risky lending practices?

 

[Randolph Kinney]

Denis, you have only the tip of the problem. There is a lot of non-GAAP accounting going on with banks and real estate entities like builders. They have accounting policies that under reserve asset losses. These assets are not marked to market, such as land, such as loans to developers that have unfinished houses, canceled contracts, such as ALT-A loans held in the banks portfolio, risky commercial loans, etc.

Just follow the earnings, loss reserves, etc. If the problem is getting worse, the next quarter earnings and loss reserves are not going to be favorable.

 

[Greg Bell]

LOOKOUT FOR 1929..SIGNED CHICKEN LITTLE...
The surging Dow Jones industrial average has rallied for 24 of its past 27 sessions - raising some alarm bells because that hasn’t happened since 1927.

“You don’t find those sorts of streaks near what have historically been tremendous buying opportunities,” hedge-fund manager Bill Fleckenstein yesterday said after the Dow rose 48.35 points to close at a record 13,312.97.

The Dow has rallied in all but three sessions since March 29 - a run not seen since July 1 to Aug. 2, 1927, just 26 months before 1929’s stock-market crash.

 

[Greg Bell]

The rest of the story...hurry and hide...

Home > Business Today > Business


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Historically bull may be in china shop: Dow surge parallels ’27
By Jerry Kronenberg
Tuesday, May 8, 2007

The surging Dow Jones industrial average has rallied for 24 of its past 27 sessions - raising some alarm bells because that hasn’t happened since 1927.

“You don’t find those sorts of streaks near what have historically been tremendous buying opportunities,” hedge-fund manager Bill Fleckenstein yesterday said after the Dow rose 48.35 points to close at a record 13,312.97.

The Dow has rallied in all but three sessions since March 29 - a run not seen since July 1 to Aug. 2, 1927, just 26 months before 1929’s stock-market crash.

Although experts don’t see a 1929-style collapse coming, some think the Dow is setting up for at least a short-term correction.



“This rally could go on for two more hours or six more months, I don’t know which. I do know that periods where things get really crazy end badly,” said Fleckenstein, who admits his RTM Fund “shorts” the market (bets prices will fall).

Fleckenstein said today’s Dow streak parallels not just 1927, but also the June/July 1929 period, when the index rose in 19 of 21 sessions three months before the crash.

The fund manager also noted that Tokyo’s Nikkei-225 index rallied in 32 of 38 November/December 1989 sessions right before that market lost 40 percent.

“I think this big bull market we’re having is coming to an end,” he said. “I think we’re going to have a recession and a bear market.”

Natick economist Timothy Rogers of Briefing.com is less downbeat, but agrees economic woes will soon hit the Dow.

“We have the lowest gross domestic product growth in years, there’s a risk manufacturing will fall and the housing sector is already in recession,” he said. “Those aren’t the makings of a strong economy.”

 

[moh malekpour]

U.S. Home Prices to Drop in 2007, First Since 1930s

U.S. home price declines this year are going to be steeper than earlier forecast because of the drop in subprime mortgage lending and the adoption of stricter lending standards, the National Association of Realtors said.

The group today revised its forecast for home prices and sales. The 2007 median price for an existing home likely will drop 1 percent to $219,800 from 2006, the Chicago-based association said in a report. The median price for new homes is projected to be fall $100 to $246,400, the first decline since 1991.

Record-high defaults by subprime borrowers, those with flawed or insufficient credit histories, have prompted mortgage lenders to limit the number of people who qualify for a home loan, according to the realtors' report. At the same time, unemployment is down and household incomes are up, which should help bring a housing recovery in 2007's third and fourth quarters, the group said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoMSaUJr0qD4&refer=worldwide

 

[Randolph Kinney]

Standard & Poor's to Require More Protection on Second-Mortgage Securities

http://www.bloomberg.com/apps/news?pid=20601009&sid=a1wOaVLjZssk&refer=bond

May 8 (Bloomberg) -- Standard & Poor's joined Moody's Investors Service in requiring more protection for investors in bonds backed by second mortgages, as late payments and defaults exceed expectations on such debt to borrowers with poor credit.


Second-lien mortgages often have been obtained by homeowners in lieu of down payments. Subprime versions of such ``piggyback'' loans have performed worse than subprime housing- debt overall, putting some AAA rated securities sold by Goldman Sachs Group Inc. at risk of downgrades and leading HSBC Holdings Plc to set aside more reserves for losses.


``People are taking out these loans and then realize they can't make payments on them,'' said Terry G. Osterweil, an analyst at New York-based S&P, one of the two largest credit- rating services. ``The first one they're going to default on is the second lien, not the first lien, because many times a servicer will write off the second lien and not foreclose.''


S&P's new views would have raised the required amount of ``over-collateralization,'' or investor protection created by having more underlying loans than bonds backed by them, to 8.10 percent, from 5.45 percent in an example the firm used in a report. The amount of debt created with AAA ratings in the issue would have been lowered to 68.30 percent, from 72.25 percent.

In November, ratings services broke from past practices on mortgage bonds to reassess their initial ratings within a year. Since then, securities of second mortgages have had the most ratings downgrades or warnings about downgrades among bonds from 2006, including on the only AAA bonds.


``The bonds have come out of the gates performing extremely poorly,'' said Jeremy A. Shor, a portfolio manager at Brown Brothers Harriman & Co. in New York, who oversees about $3 billion in asset-backed bonds. ``The market is trying to determine if this is due to idiosyncratic or systemic reasons.''


Defaults on second mortgages, also called home-equity loans, generally don't lead to foreclosures if borrowers stay current on their first mortgages, which get paid back first with money recovered in a sale of seized property. Subprime borrowers have bad or limited credit records or high debt burdens.


Of the 75 deals in which subprime second loans were packaged into bonds and rated by Moody's last year, 23 have had bonds downgraded by the firm or had warnings about potential downgrades issued. Moody's is reviewing AAA securities sold in four deals by Goldman Sachs, Washington Mutual Inc., Fremont General Corp. and New Century Financial Corp.

The performance stems from ``a combination of the home- price-appreciation effect hitting at the same time as the origination standards led risk-layering to be at its highest,'' which created more stretched borrowers and less ability for them to tap equity in a refinancing or sell, said Nicolas S. Weill, a senior vice president at Moody's.


Defaults by real-estate speculators, or ``flippers,'' probably also rose, Weill said. Moody's said April 2 that it had raised expected losses for the loans to 13 percent to 15 percent, from 10 percent to 12 percent for 2006 deals.

 

[Randolph Kinney]

U.S. Housing Agency Seeks Ban on Down Payment Aid Programs by Nonprofits

http://www.bloomberg.com/apps/news?pid=20601206&sid=am2nC9AjcJbU&refer=realestate

May 8 (Bloomberg) -- The U.S. Department of Housing and Urban Development plans to seek a ban on down payment assistance programs that have grown sevenfold this decade and contributed to a surge in foreclosures of government-backed mortgages.


Nonprofit groups including Nehemiah Corp. of America and AmeriDream Inc. provide the down payment help and are then reimbursed by the seller. The programs are ``a contributing factor of increased risk in our portfolio'' of loans, HUD spokesman Lemar Wooley said in an e-mail.


HUD plans to propose the ban this month for public comment, possibly as early as this week, Wooley said. More than 100,000 low- and moderate-income consumers bought homes using such programs last year. The percentage of foreclosures on these homes is more than double that on other loans sponsored by the Federal Housing Administration, according to agency audits.


``It's painted to be helping homeowners get into houses,'' HUD Inspector General Kenneth Donohue said in an interview. ``But it is circumventing good business practices, and you bet it has resulted in foreclosures.''

Once HUD issues its rule proposal, industry and consumer groups will have 60 days to submit comments.

``Clearly there have been some problems, but we'd hate to see the whole thing eliminated out-of-hand,'' said David Ledford, a vice president of the National Association of Homebuilders. ``It's been a key ingredient to helping people achieve home ownership.''

The Washington-based group's 235,000 members include U.S. homebuilders D.R. Horton Inc., Lennar Corp., and Pulte Homes Inc. The companies are the three largest builders by market value, respectively. In 1999, HUD proposed a similar ban and withdrew it in 2001 following industry opposition.
Some nonprofit aid is provided to buyers without reimbursement from sellers. This type of assistance will not be forbidden under the upcoming proposal, Wooley said.


Under the program that HUD will try to ban, groups including Sacramento, California-based Nehemiah and AmeriDream Inc. in Gaithersburg, Maryland, give buyers an average of about $3,400 in down payment money. Sellers who reimburse them also pay a service fee. The arrangement was designed to circumvent U.S. rules that bar sellers from giving direct assistance.

 

[Greg Bell]

can't wait to get my social security..



Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.

 

[Randolph Kinney]

can't wait to get my social security..



Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.

You just gotta have faith ... faith the government owns the printing press and print as much or more than what they owe or have committed to spend. :new_all_coholic:

 

[Randolph Kinney]

Tolls Brothers warns; second-quarter contracts down 25%

http://www.marketwatch.com/news/sto...x?guid={C471409F-29C5-4293-97A4-2646BBD606F3}

LONDON (MarketWatch) -- Luxury homebuilder Toll Brothers, Inc. said contracts fell 25% to $1.17 billion in the second quarter and warned it won't hit the quarterly and annual guidance it provided in February. Still, Toll Brothers said it expects to report a profit in the second quarter. It said it continues to face difficult conditions in most of its markets and that traffic was flat on a gross basis in the quarter. The company estimated writedowns before tax for the quarter between $90 million and $130 million. While it said it believes fewer than 2% of its buyers are use sub-prime loans, the impact of stricter lending standards arising from problems in the sub-prime market is "negatively affecting affordability at lower price points."