Another bank sees a half trillion dollars going up in smoke
Banker expects half of all mortgages written in ’05-’06 to default
| As mortgage defaults and foreclosures rise to record levels, we condense six 2007 articles on the implosion of home loans: (1) The end of the engineers' ball: does financial engineering benefit anyone beyond Wall Street? by Martin Hutchinson, author of Great Conservatives and the Bear's Lair column, in the Financial Times (Nov 12); (2) “Wachovia takes $1.1B subprime hit; Capital One hurting" by Jonathan Stempel of Reuters (Nov 9); (3) “Morgan Stanley peers through the looking glass, darkly” by David Wighton in the Financial Times (Nov 9); (4) “Fannie Mae loses $1.4B in third quarter by the Associated Press (Nov 20); (5) “Freddie Posts Loss, May Cut Dividend; Shares Plunge” by James Tyson of Bloomberg; and (6) “Third-quarter home sales fall in 46 states; overall price dips” by the Associated Press (Nov 21). Note the British press is more forthright about the mess we’re in. |
by Jeffery J. Smith
November, 2007
Hutchinson: Financial engineering's benefit to the global economy is questionable at best, and the increases it has produced in the financial services sector's share of global output may merely have been successful rent-seeking. In the long run, less opulent compensation for financial engineers, more aggressive audit and supervision policies for financial institutions' engineered assets, and a healthy cynicism about financial engineering in general may put this genie at least half way back into its bottle.
Stempel: This is now worse than the debacle of Long-Term Capital Management, the hedge fund whose 1998 collapse threatened to unhinge global financial markets.
Wachovia, the fourth-largest US bank, lost $1.1 billion on subprime loans (mortgages given to borrowers with weak credit), from $1.8 to $676 million in October. In Q3 their other mortgages lost $347 million. Wachovia expects other mortgages to lose $500 million to $600 million this quarter.
The rate of net charge-off -- loans written off as having no chance of being recovered -- on credit cards rose from 4.13% in the third quarter to 5.11% in October. Card loans at least 30 days past due rose from 4.46% to 4.75%. Capital One, the largest independent Visa and Master credit card issuer, expects to lose between $4.9 billion and mid-$5 billion.
Wighton: Morgan Stanley has lost more than $3.7bn. They had bought "super senior" tranches of collateralised debt obligations. These paper promises are composed of mortgage-backed securities divided into slices with varying yields and risks.
The top AAA-rated tranches were seen as safe, because any losses on the underlying securities would be absorbed by investors in the lower tranches. To top it off, the senior tranches offered a good yield.
But these mortgage-backed securities fell so far it ate into the cushion under the super senior tranches and they started to fall, too.
The fall in the super senior tranches implies defaults in the range of 40 to 50% on mortgages written in 2005 and 2006, levels never seen before.
But even in this looking-glass world, money does not completely disappear. Someone was on the other side of the trades.
Associated Press: The collapse in high-risk mortgages and ensuing credit crisis of last summer rattled global markets, forced more than 50 lenders into bankruptcy, and battered Wall Street powerhouses such as Citigroup. Merrill Lynch, the world's largest brokerage, reported $8.4 billion of writedowns on mortgage-related investments and corporate loans.
Fannie Mae, the largest US buyer and backer of home loans, lost $1.4 billion in Q3, reducing profits for the first nine months of 2007 by more than half.
The company’s report was up-to-date for the first time since 2004 when its inaccurate reports swept top executives from office.
Tyson: Freddie Mac and the larger Fannie Mae, also created by Congress to cover low-end mortgages, have lost $41 billion in market value this year.
Freddie Mac, second to Fannie Mae, fell more than 25%, the biggest decline since it went public in 1988. The worst housing slump in 16 years caused a net loss of $2.02 billion, or $3.29 a share. The third-quarter loss was almost triple the $715 million a year earlier.
Their report marks Freddie Mac's third regular quarterly release in five years. The company stopped giving earnings in 2003 when its inaccurate reports came to light.
Freddie Mac reduced the value of assets by $3.6 billion and cut its portfolio by $29 billion in September and October. The sister companies, which own or guarantee 40% of the $11.5 trillion US home loan market, will have less money available for new mortgages.
These companies have lots of problems yet to come, said investor Jim Rogers, chairman of New York-based Beeland Interests, who also had a TV show on CNBC called “The Geonomics Report”.
Homebuilding permits fell 6.6% in October to the lowest level since 1993. Wells Fargo CEO John Stumpf said the housing market was the worst since the Great Depression.
Associated Press: Sales of existing homes fell in 46 states during the July-September quarter. Nevada had the biggest fall: 35.3%.
Existing home sales in North Dakota rose 2.9% from the same quarter a year ago. Vermont existing home sales rose 0.8%. No data were available for Idaho and New Hampshire.
The median existing single-family home price dropped 2% to $220,800 from a year ago. Where prices had been booming, they fell hard. Compared with last year’s Q3, median prices dropped more than 10% in parts of Florida and California.
The lowest median price was in the Youngstown area of Ohio: $81,600. Prices were more than 10 times higher in the San Jose CA area, which had the nation's most expensive median price of $852,500.
Tyson: Foreclosure filings doubled to 223,538 in September from a year earlier. Banks and securities firms worldwide have reported about $50 billion in losses. The total damage may reach $400 billion, Deutsche Bank said.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: The “Crash of 2007-8” is underway -- and the Fed is our pilot
Subprime Loans, Subsidized Land, and Manipulated Money
Corruption? Bribery? Capitalism? |
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