Housing Bubble Bursting?

[Randolph Kinney]

Are you ready for a Japan style 10 year recession?

Banks Fight to Postpone Day of Reckoning

As Merrill went public with its plan to auction off the collateral, others tried to rescue the fund. There was talk that Citigroup would inject $500 million; Bear Sterns might inject $1 billion. And the Blackstone Group was very interested in supplying much needed capital. Blackstone’s offer required the brokers to abstain from further margin calls for 12 months. Such restrictions may be common in the private equity world that Blackstone is active in, but was not acceptable to Merrill. As the rescue plan fell through, Merrill stated it would go ahead with its auction yet again. In the meantime, J.P. Morgan was front running Merrill by trying to unload collateral they held for the Bear Sterns fund. When all was said and done, it wasn’t clear how much which broker was able to sell; but the sales were halted once again, and the parties seem to have agreed on an ‘orderly unwinding’ of the positions.

In our assessment, this had the hallmarks of the biggest financial crisis since the bailout of Long Term Capital Management; in 1998, the Federal Reserve (Fed) coordinated a bailout that led to the orderly unwinding of a fund that threatened the stability of the financial system. But this time is different: the instruments involved are so complex that journalists have had difficulty relaying the issues to the public; but the multiple calling and canceling of auctions by Merrill highlight the behind the scene maneuvering to avoid a fallout to the rest of the industry and beyond.

The risk to the financial system was not merely that some large brokerage firms may have been forced to write down a couple of hundred million dollars – they may still have to do that. But had the fire sale gone through, market values would have been available to the securities sold. This in turn would have forced other lenders to revalue the collateral they hold; and as the collateral is worth less, the brokers will lend less money. That would have triggered further margin calls, further forced liquidations. When hedge funds implode, they tend to sell off more liquid assets first; at the end of the sale, the prices of the liquid assets are depressed, yet the fund may still be left holding illiquid securities. To illustrate this, take the example (this is not the Bear Sterns fund) of a hedge fund that may make bets on CDOs and, say, the price of oil. As such a fund needs to raise cash, it would close out the more liquid oil positions, causing a spike (or drop – depending on which way the unwinding works) in the price of oil. The resulting volatility in the markets would be most painful for leveraged investors in the oil market, although the crisis originated in the CDO market. Too many leveraged investors have become complacent because the low volatility we enjoyed in recent years. Aside from the short-term volatility, the high leverage employed by many hedge funds would need to be reduced permanently. As speculators pare down their leverage, they sell off assets to raise cash.

In our assessment, the well-intended attempts to unwind the Bear Sterns fund in an orderly fashion are highly problematic. The fund’s problems have clearly shown that the credit extended to the industry is too large. The bankers involved commit similar mistakes as bankers in Japan in the 1980s and 1990s, where clearly bad loans were kept afloat with artificial means; those involved had the best intentions, but caused over a decade of pain to Japanese banks, corporations and consumers.

 

[Randolph Kinney]

A good read of history and what is going to happen

Bear Stearns Rivals Reject Fund Bailout in LTCM Redux

June 25 (Bloomberg) -- Bear Stearns Cos. is getting a taste of its own medicine.

It was Bear Stearns, the biggest broker to hedge funds, that nine years ago declined to join 14 other investment banks in the bailout of Long-Term Capital Management LP. Then last week, as New York-based Bear Stearns pleaded for help to rescue two of its hedge funds teetering on the brink of collapse, many of the same firms refused to come to its aid.

Merrill Lynch & Co., which pumped $300 million into LTCM, said no and seized $850 million of bonds held as collateral for loans it had made to the funds. Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and Cantor Fitzgerald LP also pulled out, leaving Bear Stearns to sort through the wreckage of bad bets on subprime mortgage bonds and collateralized debt obligations.

``There is a good analogy to Long-Term Capital,'' said Anthony Sanders, a former director of mortgage-bond research at Deutsche Bank AG who starts next month as a professor of finance and real estate at Arizona State University's W.P. Carey School of Business in Tempe, Arizona. ``They were all friends with Bear Stearns when they thought the spreads were huge. Now that the market has turned, Bear's standing there like the lone grizzly.''

Without assistance from his Wall Street peers, Bear Stearns Chief Executive Officer James E. ``Jimmy'' Cayne, 73, was forced to salvage the healthier of the two funds, putting $3.2 billion of the firm's capital at risk in the biggest bailout since LTCM. Bear Stearns may dissolve the second fund after more than $600 million of investors' money dwindled to less than $200 million.

 

[Randolph Kinney]

More subprime fallout

Cheyne Capital's Queen's Walk Fund Loses $91 Million on Subprime Mortgages

June 25 (Bloomberg) -- Queen's Walk Investment Ltd., a fund investing in the riskiest portions of bonds backed by mortgages, reported a net loss caused by the slump in the U.S. subprime market and fewer U.K. borrowers paying penalty charges.

The fund, run by London-based Cheyne Capital Management Ltd., said it lost 67.7 million euros ($91 million) in the year ending March 31, or 1.67 euros per share, compared with a profit of 9.7 million euros last year after its inception in December 2005. Queen's Walk sold most of its holdings in the U.S. mortgage market in the first three months of the year, it said today in a statement.

Queen's Walk is the second U.K.-listed fund to report losses because of rising delinquencies in the U.S. mortgage market, after London-based Caliber Global Investment Ltd. last month said it lost $8.8 million. Bank of America Corp. last week said hedge fund losses at Bear Stearns Cos. may be the ``tipping point of a broader fallout'' from the subprime market.

UBS AG, the world's biggest asset manager, shut down its New York-based Dillon Read Capital Management LLC hedge fund unit last month because of losses attributed to U.S. mortgage investments.

As U.S. home-loan defaults rise, bondholders stand to lose as much as $75 billion on subprime mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts.

 

[Austin]

http://biz.yahoo.com/ap/070625/economy.html?.v=4

Home Sales Hit Slowest Pace in 4 Years
Monday June 25, 10:21 am ET
By Martin Crutsinger, AP Economics Writer
Sales of Existing Homes Fall in May to Lowest Level in Four Years WASHINGTON (AP) -- Reflecting further housing troubles, sales of existing homes fell in May to the lowest level in four years while the median home price dropped for a record 10th consecutive month.The National Association of Realtors reported Monday that sales of existing single-family homes and condominiums dropped by 0.3 percent to 5.99 million units in May, the slowest sales pace since June of 2003.

 

[Greg Bell]

All this bad news will make the stock market skyrocket tot new heights.The Enron syndrome is rampant on wall street.One Monday we will wake with a two thousand point drop and the talking heads leaping from their soft chairs
onto those pointy little heads..

 

[Mike Kennedy]

STAND AND BE COUNTED......SEND A CHECK TODAY !

http://appraisersforum.com/improving...a-crowley.html

 

[Austin]

Mortgage Fruad

http://realtytimes.com/rtcpages/20070625_fraudrising.htm

Mortgage Fraud Rising Fast; Florida and California Now the Hot Spots
by Kenneth R. Harney

Mortgage fraud -- from bogus appraisals to consumer lies about employment and income -- is booming, up by 30 percent in the last year, according to a comprehensive new study prepared for the Mortgage Bankers Association of America using FBI and private mortgage industry data.

The study predicts even higher fraud reports in the subprime arena in the coming year because the tightening of underwriting standards will mean "more (real estate and mortgage) professionals chasing a smaller pool of business" and "general pressure on all loan originators to generate volumes" and "get loans approved for borrowers with marginal credit" now locked out of the market.

My office is located in number 6 on the list. There are only about 12 local appraisers and I haven't done GSE appraisals for 17 years. I don't think they are using appraisers. I knew this was going on and about three years ago wrote the news editor whom I know well but he was not interested in the story because it might pee off his advertisers-Realtors/Mortgage Companies. So much for journalism.

 

[Steve Owen]

Wow! A mortgage fraud story that doesn't even mention Kansas City!

 

[Greg Bell]

Don't worry , K.C. Kansas will show up soon..

 

[moh malekpour]

U.S. New-Home Sales Decreased 1.6% to a 915,000 Pace

Here you have it. It is supposed to be the busiest time for housing market and look what is going on there

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKzf7L4di0tc&refer=home

Purchases of new homes in the U.S. dropped in May, signaling demand is still faltering in the second year of the housing slowdown.

Sales fell 1.6 percent to an annual pace of 915,000 last month from a revised 930,000 rate the prior month that was lower than previously estimated, the Commerce Department said today in Washington. The supply of unsold homes at the current sales pace rose.

A jump in mortgage rates this month and a glut of unsold properties on the market will continue to discourage home construction, economists said. The housing slump, already the worst since 1991, will restrain the economy for the rest of the year and potentially into next.

``The housing market should continue to be a drag to growth,'' said John Shin, an economist at Lehman Brothers Holdings Inc. in New York. ``Excess inventories and soft demand should keep homebuilders from increasing construction until after next year.''

Consumer confidence this month slumped to the lowest level since August as gasoline prices remained elevated and concern grew that the job market would weaken, a report today from the New York-based Conference Board also showed. The research group's gauge fell to 103.9 from 108.5 in May.

After the reports, the benchmark 10-year U.S. Treasury note was little changed, yielding 5.08 percent. Stocks were higher