This post first appeared on Minyanville.
Reports are out this morning opining that Stockton, California represents a new hope for housing recovery. Hoping Stockton will lead the housing recovery is about like saying Alex Smith will lead the niners to the Super Bowl. It lacks a link to reality.
The recent rise in home sales transactions, especially in high foreclosure areas, is primarily attributable to the billions of dollars raised by hedge funds and other distressed investors. They're starting to get pressure to put the money to work. It's not evidence homebuyers are stepping back into the market.
Funds are trying to arbitrage the house, buy it at 60 cents on the dollar from a desparate bank and sell it for 80 on the open market.
The problem is, the marginal homebuyer in those areas does not have the 20% down payment it now takes to buy a home, even at 'discounted' prices.
Transactions may rise, but mortgage backed securities don't pay bond holders with realtor sales commissions.
If the bottom is called by the right media outlets, sellers still waiting on the sidelines will flood the market, trying to get out in a market that's not completely frozen.
Woosh, part deux, coming to a housing market near you in early 2009.
Thursday, July 31, 2008
Wednesday, July 30, 2008
To Bulldoze or Not to Bulldoze
The Wall Street Journal reports the idea of bulldozing vacant homes is starting to gain a bit of momentum ... below is a poetic take on the idea.
To bulldoze, or not to bulldoze, that is the question
Whether 'tis nobler for the financial system to suffer
The slings and arrows out outrageous building
Or to take tractors against a sea of unwanted McMansions,
And by destroying end them? To raze: to flatten;
No more, and by a bulldozer to say we end
The foreclosure and the thousand unnatural homes
That Stockton is heir to, 'tis a consummation
Devoutly to be wish'd. To raze, to flatten;
To raze, perchance to demolish: ay, there's the rub.
For in that shoddily constructed spec home what dreams may come
When we have siphoned off this mortal glut,
Must give us pause: there's the respect
That makes calamity of so long a bubble;
For who would bear the whips and scorns of oversupply,
The homies wrong, the proud homeowner's contumely,
The pangs of dilapidated roofing, the hot water's delay,
The insolence of reckless building and the spurns
That patient destruction of the unworthy takes,
When he himself might his demolition make
With a bare tract? who would writedowns bear,
To grunt and sweat under mounting debt,
But that the dread of Centex (CTX) after death,
The undiscover'd courtroom from whose bourn
No builder returns, puzzles the will
And makes us rather bear those abandoned homes we have
Than erect others that we know not how to sell?
Thus conscience does make housing experts of us all;
And thus the unnatural hue of vinyl siding
Is sicklied o'er with the pale cast of rows of twins,
And urban sprawl of great pith and moment
With this regard their profits turn awry,
And lose the name of action. - Soft you now demand for spec!
The fair Beazer (BZH)! Nymph, in thy orisons
Be all thy sins remember'd.
To bulldoze, or not to bulldoze, that is the question
Whether 'tis nobler for the financial system to suffer
The slings and arrows out outrageous building
Or to take tractors against a sea of unwanted McMansions,
And by destroying end them? To raze: to flatten;
No more, and by a bulldozer to say we end
The foreclosure and the thousand unnatural homes
That Stockton is heir to, 'tis a consummation
Devoutly to be wish'd. To raze, to flatten;
To raze, perchance to demolish: ay, there's the rub.
For in that shoddily constructed spec home what dreams may come
When we have siphoned off this mortal glut,
Must give us pause: there's the respect
That makes calamity of so long a bubble;
For who would bear the whips and scorns of oversupply,
The homies wrong, the proud homeowner's contumely,
The pangs of dilapidated roofing, the hot water's delay,
The insolence of reckless building and the spurns
That patient destruction of the unworthy takes,
When he himself might his demolition make
With a bare tract? who would writedowns bear,
To grunt and sweat under mounting debt,
But that the dread of Centex (CTX) after death,
The undiscover'd courtroom from whose bourn
No builder returns, puzzles the will
And makes us rather bear those abandoned homes we have
Than erect others that we know not how to sell?
Thus conscience does make housing experts of us all;
And thus the unnatural hue of vinyl siding
Is sicklied o'er with the pale cast of rows of twins,
And urban sprawl of great pith and moment
With this regard their profits turn awry,
And lose the name of action. - Soft you now demand for spec!
The fair Beazer (BZH)! Nymph, in thy orisons
Be all thy sins remember'd.
Tuesday, July 29, 2008
Housing Inventory Eases, But No Recovery In Sight
This post first appeared on Minyanville.
Another month, another attempt to use a single data point to foretell the bottom in the housing market.
On the same day the Case Shiller Home Price Index reported the fastest drop in home prices on record (again), the Wall Street Journal released analysis indicating beaten down markets are beginning to work through inventory overhangs.
Shrinking supply in the most troubled markets is likely a blip, however, as volatile trading in distressed assets is driving the real estate market in these areas.
According to the Journal, metro areas like Sacramento, California, Denver, San Diego and Las Vegas actually reported a decline in housing inventory from a year earlier. Supply is still well above historical averages but, the report argues, if this trend continues it could usher in the end to the real estate slump.
But in cities like Portland, Oregon, Seattle, Charlotte, North Carolina and New York, where home price declines are just beginning, the backlog of unsold homes is piling up. Supply in New York and Portland is up 31% and 28% respectively. Stagnant prices and swelling inventory are signs of a market that's about to crack.
Even in markets poised for a correction, real estate brokers desperate for sales commissions are frantically pounding the table, calling this the buying opportunity of a lifetime.
Meanwhile, back in a world still loosely based on reality, easing inventory is a result of changing market dynamics, not an imminent bottom.
First, in troubled areas like California’s Central Valley and Inland Empire, (east of Los Angeles) Phoenix and Las Vegas, foreclosure and other distressed sales account for almost half the total transactions. As vulture funds and other investors swoop in to purchase delinquent mortgages and abandoned houses, such opportunistic buying has reduced inventory.
Small boutique investment firms, big hedge funds and Investment banks like Lehman Brothers (LEH), Goldman Sachs (GS) and Merrill Lynch (MER) are driving these markets. Some are buying foreclosed homes en masse, while others are snapping up delinquent mortgage at a deep discount. As the new owner of the loan tries to sort things out with the borrower, homes previously for sale come off the market.
The majority of these properties, however, will just end up for sale again: Almost half the delinquent mortgages traded in this market ultimately end up in foreclosure. Investment banks and hedge funds aren’t in the business of owning portfolios of residential real estate, so in a few months they’ll start punting homes at further discounted prices.
Second, year-over-year comparisons for real estate and mortgage data are about to get a lot easier. Think back to the beginning of the credit crunch last summer - the mortgage market all but shut down. Real estate transactions ground to a halt, inventory spiked and price declines began to accelerate.
For as bad as the real estate market is today -- and while prices have certainly come down -- activity last year around this time was even worse.
In the next few months, new calls for a bottom will ring out. But given that so-called experts have been calling for a bottom since, well, the top, Minyans would be wise to continue to wait patiently for real signs this has occurred.
Another month, another attempt to use a single data point to foretell the bottom in the housing market.
On the same day the Case Shiller Home Price Index reported the fastest drop in home prices on record (again), the Wall Street Journal released analysis indicating beaten down markets are beginning to work through inventory overhangs.
Shrinking supply in the most troubled markets is likely a blip, however, as volatile trading in distressed assets is driving the real estate market in these areas.
According to the Journal, metro areas like Sacramento, California, Denver, San Diego and Las Vegas actually reported a decline in housing inventory from a year earlier. Supply is still well above historical averages but, the report argues, if this trend continues it could usher in the end to the real estate slump.
But in cities like Portland, Oregon, Seattle, Charlotte, North Carolina and New York, where home price declines are just beginning, the backlog of unsold homes is piling up. Supply in New York and Portland is up 31% and 28% respectively. Stagnant prices and swelling inventory are signs of a market that's about to crack.
Even in markets poised for a correction, real estate brokers desperate for sales commissions are frantically pounding the table, calling this the buying opportunity of a lifetime.
Meanwhile, back in a world still loosely based on reality, easing inventory is a result of changing market dynamics, not an imminent bottom.
First, in troubled areas like California’s Central Valley and Inland Empire, (east of Los Angeles) Phoenix and Las Vegas, foreclosure and other distressed sales account for almost half the total transactions. As vulture funds and other investors swoop in to purchase delinquent mortgages and abandoned houses, such opportunistic buying has reduced inventory.
Small boutique investment firms, big hedge funds and Investment banks like Lehman Brothers (LEH), Goldman Sachs (GS) and Merrill Lynch (MER) are driving these markets. Some are buying foreclosed homes en masse, while others are snapping up delinquent mortgage at a deep discount. As the new owner of the loan tries to sort things out with the borrower, homes previously for sale come off the market.
The majority of these properties, however, will just end up for sale again: Almost half the delinquent mortgages traded in this market ultimately end up in foreclosure. Investment banks and hedge funds aren’t in the business of owning portfolios of residential real estate, so in a few months they’ll start punting homes at further discounted prices.
Second, year-over-year comparisons for real estate and mortgage data are about to get a lot easier. Think back to the beginning of the credit crunch last summer - the mortgage market all but shut down. Real estate transactions ground to a halt, inventory spiked and price declines began to accelerate.
For as bad as the real estate market is today -- and while prices have certainly come down -- activity last year around this time was even worse.
In the next few months, new calls for a bottom will ring out. But given that so-called experts have been calling for a bottom since, well, the top, Minyans would be wise to continue to wait patiently for real signs this has occurred.
Monday, July 28, 2008
Two More Banks Go Belly Up
This post first appeared on Minyanville.
The Federal Deposit and Insurance Corporation's (FDIC) $53 billion war chest is under attack.
Already forced to use almost 10% of its stash to repay depositors at now-defunct IndyMac, the FDIC will cough up another $860 million from its deposit insurance fund after seizing two more banks over the weekend.
On Friday, regulators took control of First National Bank of Nevada and First Heritage Bank of Newport Beach, California. Both are units of First National Bank Holding Company, headquartered in Scottsdale, Arizona. The FDIC, however, was able to avoid an IndyMac-style bank run by selling the failed institutions to Mutual of Omaha, a Nebraska bank.
All retail branches opened for normal business this morning, under the Mutual of Omaha name, avoiding check-cashing problems that still plague some IndyMac customers. Last week, after news leaked the FDIC wouldn’t cover a portion of uninsured IndyMac deposits, Washington Mutual (WM) and Wells Fargo (WFC) balked at IndyMac checks, placing a hold on deposits until their value could be verified.
While small in comparison to IndyMac’s $32 billion in assets, the two banks had almost $4 billion in combined assets, making the failures large by historical standards.
Working with the FDIC, the Office of Comptroller of the Currency issued a statement saying First National Bank of Nevada "was undercapitalized and had experienced substantial dissipation of assets and earnings due to unsafe and unsound practices." First Heritage was simply called “undercapitalized.”
Both banks were active issuers of subprime mortgages. Now, with losses that outweigh capital reserves, regulators have taken preemptive action and seized the banks to prevent panic.
While the FDIC is aggressively staffing up in advance of more failures, its Chairman, Sheila Bair, is moving to assuage concerns it won’t be able to live up to its obligations. In a press release last week, Bair reiterated the rights of American depositors and sought to inject confidence into the country’s banking system:
“The banking system in this country remains on a solid footing through the guarantees provided by FDIC insurance. The overwhelming majority of banks in this country are safe and sound and the chances that your own bank could fail are remote. However, if that does happen, the FDIC will be there -- as always -- to protect your insured deposits.”
The FDIC expects hundreds of banks to fail as a result of the current credit crisis, straining the cash its saved up to protect depositors. The seven failures so far this year tops the number of banks than went bust from 2004 through 2007, but is nowhere near the thousands that failed during the Savings and Loan crisis of the 1980s and 90s.
Today’s financial system, however, bears little resemblance to 20 years ago. The shadow banking system and the vast interconnectedness of the world’s financial institutions means no one bank can fail without potentially infecting its neighbors.
The FDIC has a tough road ahead.
The Federal Deposit and Insurance Corporation's (FDIC) $53 billion war chest is under attack.
Already forced to use almost 10% of its stash to repay depositors at now-defunct IndyMac, the FDIC will cough up another $860 million from its deposit insurance fund after seizing two more banks over the weekend.
On Friday, regulators took control of First National Bank of Nevada and First Heritage Bank of Newport Beach, California. Both are units of First National Bank Holding Company, headquartered in Scottsdale, Arizona. The FDIC, however, was able to avoid an IndyMac-style bank run by selling the failed institutions to Mutual of Omaha, a Nebraska bank.
All retail branches opened for normal business this morning, under the Mutual of Omaha name, avoiding check-cashing problems that still plague some IndyMac customers. Last week, after news leaked the FDIC wouldn’t cover a portion of uninsured IndyMac deposits, Washington Mutual (WM) and Wells Fargo (WFC) balked at IndyMac checks, placing a hold on deposits until their value could be verified.
While small in comparison to IndyMac’s $32 billion in assets, the two banks had almost $4 billion in combined assets, making the failures large by historical standards.
Working with the FDIC, the Office of Comptroller of the Currency issued a statement saying First National Bank of Nevada "was undercapitalized and had experienced substantial dissipation of assets and earnings due to unsafe and unsound practices." First Heritage was simply called “undercapitalized.”
Both banks were active issuers of subprime mortgages. Now, with losses that outweigh capital reserves, regulators have taken preemptive action and seized the banks to prevent panic.
While the FDIC is aggressively staffing up in advance of more failures, its Chairman, Sheila Bair, is moving to assuage concerns it won’t be able to live up to its obligations. In a press release last week, Bair reiterated the rights of American depositors and sought to inject confidence into the country’s banking system:
“The banking system in this country remains on a solid footing through the guarantees provided by FDIC insurance. The overwhelming majority of banks in this country are safe and sound and the chances that your own bank could fail are remote. However, if that does happen, the FDIC will be there -- as always -- to protect your insured deposits.”
The FDIC expects hundreds of banks to fail as a result of the current credit crisis, straining the cash its saved up to protect depositors. The seven failures so far this year tops the number of banks than went bust from 2004 through 2007, but is nowhere near the thousands that failed during the Savings and Loan crisis of the 1980s and 90s.
Today’s financial system, however, bears little resemblance to 20 years ago. The shadow banking system and the vast interconnectedness of the world’s financial institutions means no one bank can fail without potentially infecting its neighbors.
The FDIC has a tough road ahead.
Thursday, July 24, 2008
China: The Happiest Country on Earth
This post first appeared on Minyanville.
Optimism is decidedly out of favor in the United States. The slumping housing market, the credit crunch, high oil prices and a weak stock market are all making most Americans very bleak indeed about their economic future.
Meanwhile, halfway around the world, citizens of a certain very large country are all smiles. With the Olympics just a few weeks away, Chinese attitudes toward their nation’s future and its economic prospects have literally never been better.
According to the Pew Global Attitudes poll, 82% of China’s urban population considers the country’s economic situation good. A mere 20% of Americans, on the other hand, have a positive economic outlook.
And while the study is biased in favor of urban-dwellers rather than the rural population -- who are prone to rioting over high food and fuel prices -- it's evidence of general satisfaction with China’s progress since it began the transition to a more open economy 30 years ago.
The Wall Street Journal reports that most Americans have a false impression of the Chinese as toiling miserably under the heavy hand of Communist oppression. The surprisingly high level of optimism belies that view.
“Many Chinese view their country as more prosperous and freer than at any time in their lives. Many Westerners focus instead on continuing human-rights abuses and social injustice, comparing China to the yardsticks of their own societies.”
Yesterday on the Buzz, Professor Krueger -- whose contrarian ideas are usually just crazy enough to work -- commented on the possibility of a post-Olympics bounce in Chinese equities. 12 months ago, conventional wisdom said China would crumble after the Summer Games, and investors took profits accordingly. Now, with the global economy staring down mounting inflation and slowing growth, such an optimistic viewpoint seems distinctly counterintuitive.
But the Chinese don’t seem to care one iota what the rest of the world thinks, and scoff at the idea that the faltering developing world will drag China down with them. They expect prosperity to continue, a belief that may well become self-fulfilling.
Economic activity is made up of billions of individual transactions, the characteristics of each determined by the preferences of the actors involved. Whether it’s the purchase of a light bulb, buying a Prius (TM) or making a late-night Taco Bell (YUM) run, economic decision-making is driven by the attitudes of the individual. Those attitudes coalesce into what Professor Depew calls “social mood.”
If a country’s people are collectively optimistic, they’re more apt to spend, take risks and invest, which feeds back into optimism as new construction sprouts up around them and retailers do brisk business. On the other hand, if fear about keeping the lights on or losing one’s job takes root, attitudes towards consumption and what’s really necessary begin to shift.
Escalades (GM) lose their splendor, million-dollar McMansions (TOL) become $500,000 McMansions and American Express (AXP) gold cards are chopped up by borrower and lender alike. These are not attitudes that change overnight; they're cumulative, the amalgamation of millions of unique viewpoints into a single national conscience.
Challenges, such as inflation and pollution, certainly loom on China's horizon. But the collective will of many happy people may supercede the pessimism and negativity of the rest.
Optimism is decidedly out of favor in the United States. The slumping housing market, the credit crunch, high oil prices and a weak stock market are all making most Americans very bleak indeed about their economic future.
Meanwhile, halfway around the world, citizens of a certain very large country are all smiles. With the Olympics just a few weeks away, Chinese attitudes toward their nation’s future and its economic prospects have literally never been better.
According to the Pew Global Attitudes poll, 82% of China’s urban population considers the country’s economic situation good. A mere 20% of Americans, on the other hand, have a positive economic outlook.
And while the study is biased in favor of urban-dwellers rather than the rural population -- who are prone to rioting over high food and fuel prices -- it's evidence of general satisfaction with China’s progress since it began the transition to a more open economy 30 years ago.
The Wall Street Journal reports that most Americans have a false impression of the Chinese as toiling miserably under the heavy hand of Communist oppression. The surprisingly high level of optimism belies that view.
“Many Chinese view their country as more prosperous and freer than at any time in their lives. Many Westerners focus instead on continuing human-rights abuses and social injustice, comparing China to the yardsticks of their own societies.”
Yesterday on the Buzz, Professor Krueger -- whose contrarian ideas are usually just crazy enough to work -- commented on the possibility of a post-Olympics bounce in Chinese equities. 12 months ago, conventional wisdom said China would crumble after the Summer Games, and investors took profits accordingly. Now, with the global economy staring down mounting inflation and slowing growth, such an optimistic viewpoint seems distinctly counterintuitive.
But the Chinese don’t seem to care one iota what the rest of the world thinks, and scoff at the idea that the faltering developing world will drag China down with them. They expect prosperity to continue, a belief that may well become self-fulfilling.
Economic activity is made up of billions of individual transactions, the characteristics of each determined by the preferences of the actors involved. Whether it’s the purchase of a light bulb, buying a Prius (TM) or making a late-night Taco Bell (YUM) run, economic decision-making is driven by the attitudes of the individual. Those attitudes coalesce into what Professor Depew calls “social mood.”
If a country’s people are collectively optimistic, they’re more apt to spend, take risks and invest, which feeds back into optimism as new construction sprouts up around them and retailers do brisk business. On the other hand, if fear about keeping the lights on or losing one’s job takes root, attitudes towards consumption and what’s really necessary begin to shift.
Escalades (GM) lose their splendor, million-dollar McMansions (TOL) become $500,000 McMansions and American Express (AXP) gold cards are chopped up by borrower and lender alike. These are not attitudes that change overnight; they're cumulative, the amalgamation of millions of unique viewpoints into a single national conscience.
Challenges, such as inflation and pollution, certainly loom on China's horizon. But the collective will of many happy people may supercede the pessimism and negativity of the rest.
New Countrywide Suit Tries To Foreclose Foreclosures
This post first appeared on Minyanville.
When Bank of America (BAC) agreed to buy Countrywide, it didn’t just take on a mountain of questionably valued mortgage-related assets. It also took on huge legal liability.
San Diego City Attorney Mike Aguirre, who has a penchant for punitive lawsuits that rarely result in much more than a media frenzy, is accusing Countrywide of defrauding thousands of San Diego homeowners. A lawsuit has already been brought at the state level by California Attorney General Jerry Brown, as well as in several other states, including Washington and Illinois.
San Diego's suit takes aim at Countrywide’s alleged practice of coercing borrowers into risky adjustable rate mortgages (ARMs). Aguirre hopes to make San Diego a “foreclosure sanctuary” by preventing foreclosure proceedings on any property secured by a subprime ARM where the borrower owes more than the home is worth. (For more on what the glut of upside-down homeowners means for the future of the housing market, please read Finding the Bottom in Housing.)
The litigious City Attorney isn’t satisfied with just taking aim at Countrywide (and, by extension, Bank of America). Aguirre said he’s planning similar suits against Washington Mutual (WM), Wells Fargo (WFC) and Wachovia (WB).
While Aguirre’s heart may be in the right place, foreclosure moratoriums aren’t part of the road to recovery for the housing market. Opportunistic mortgage market participants are buying delinquent mortgages on the cheap, forgiving some part of the debt and giving borrowers a fresh start. Government intervention in this process will simply scare off lenders, since they'll have limited recourse if the loan goes sour.
At best, such suits will simply drive up the cost of new mortgages. At worst, they'll bring the recovery process to a standstill.
Foreclosures are nasty, painful and tragic. They are, however, a necessary part of the mortgage process, enabling lenders to recoup losses on bad loans.
Mandating an end to foreclosures is like telling the IRS it can’t go after tax evaders or preventing cops from chasing down burglars. This is not to say victims of foreclosures are criminals or necessarily deserve to be thrown out on the street, but living in a law-abiding society means that contracts must be enforced.
The moment we waive one group’s obligation to honor their collective word, the floodgates are open.
This certainly isn't the last lawsuit we’ll see following the collapse of the mortgage market. In fact, it’s just the tip of the iceberg. A couple years from now, when Option ARMs begin to reset, class action lawsuits will bear down on lenders like a rumbling avalanche rolling down a steep slope.
Banks would be wise to get long on lawyers.
When Bank of America (BAC) agreed to buy Countrywide, it didn’t just take on a mountain of questionably valued mortgage-related assets. It also took on huge legal liability.
San Diego City Attorney Mike Aguirre, who has a penchant for punitive lawsuits that rarely result in much more than a media frenzy, is accusing Countrywide of defrauding thousands of San Diego homeowners. A lawsuit has already been brought at the state level by California Attorney General Jerry Brown, as well as in several other states, including Washington and Illinois.
San Diego's suit takes aim at Countrywide’s alleged practice of coercing borrowers into risky adjustable rate mortgages (ARMs). Aguirre hopes to make San Diego a “foreclosure sanctuary” by preventing foreclosure proceedings on any property secured by a subprime ARM where the borrower owes more than the home is worth. (For more on what the glut of upside-down homeowners means for the future of the housing market, please read Finding the Bottom in Housing.)
The litigious City Attorney isn’t satisfied with just taking aim at Countrywide (and, by extension, Bank of America). Aguirre said he’s planning similar suits against Washington Mutual (WM), Wells Fargo (WFC) and Wachovia (WB).
While Aguirre’s heart may be in the right place, foreclosure moratoriums aren’t part of the road to recovery for the housing market. Opportunistic mortgage market participants are buying delinquent mortgages on the cheap, forgiving some part of the debt and giving borrowers a fresh start. Government intervention in this process will simply scare off lenders, since they'll have limited recourse if the loan goes sour.
At best, such suits will simply drive up the cost of new mortgages. At worst, they'll bring the recovery process to a standstill.
Foreclosures are nasty, painful and tragic. They are, however, a necessary part of the mortgage process, enabling lenders to recoup losses on bad loans.
Mandating an end to foreclosures is like telling the IRS it can’t go after tax evaders or preventing cops from chasing down burglars. This is not to say victims of foreclosures are criminals or necessarily deserve to be thrown out on the street, but living in a law-abiding society means that contracts must be enforced.
The moment we waive one group’s obligation to honor their collective word, the floodgates are open.
This certainly isn't the last lawsuit we’ll see following the collapse of the mortgage market. In fact, it’s just the tip of the iceberg. A couple years from now, when Option ARMs begin to reset, class action lawsuits will bear down on lenders like a rumbling avalanche rolling down a steep slope.
Banks would be wise to get long on lawyers.
Wednesday, July 23, 2008
Builders Dislike Taste Of Own Medicine
This post first appeared on Minyanville.
Turnabout, apparently, isn’t fair play.
After years of graft, deceptive lending and millions in profits on shoddily built houses, homebuilders are getting their just desserts.
The Wall Street Journal reports that banks, under pressure from regulators and shareholders to reduce their exposure to the housing market, are backing out of construction loans en masse. Builders, for their part, are crying foul.
Construction loans are like credit cards for big development projects: As the building goes up, developers draw on the loan to buy materials, pay employees and settle up with contractors. Banks like KeyCorp (KEY), Bank of America (BAC) and now-defunct IndyMac were active in the space, particularly in boom areas like southern California.
Recently, however, plummeting home prices have called the value of such projects into question. Banks are now refusing to honor their end of the bargain. If ground hasn’t been broken or the project is only partially complete, developers are left in the lurch: They're forced to repay the loan, post cash or sell the property. If they refuse, banks can push the project into foreclosure - and developers into bankruptcy.
Construction loans often carry personal guarantees, obligating builders to pony up their own assets if a deal goes sideways. In turn, builders are taking lenders to court, arguing that they have no cause to renege on their commitments. Banks, on the other hand, argue that property values have fallen to such an extent as to make many projects uneconomical.
As long as it can find an appraiser willing to value the property at a level that supports this claim, the bank has the upper hand. Finding an appraiser willing to do their bidding isn’t hard to do, since they value properties based on what their clients (i.e. banks) want.
The fact that builders are being forced into financial shackles by questionable appraisals does have a touch of morbid irony. During the boom, big developers like Centex (CTX), KB Home (KBH) and Lennar (LEN) built homes, then lent borrowers money to buy them. Since they controlled the loan origination process, they ordered appraisals from cronies who inflated the prices. Builders reaped the benefits, while homeowners got stuck with a home they paid far too much for.
Now that they’re on the other side of the fence, developers don’t find the game quite as fun. "If banks want to get out of residential lending, that's fine; let's sit down and figure it out," said one builder. "But that isn't being done. The rug is literally being pulled from under us and games are being played."
While banks may be acting in bad faith, minimizing their exposure to risky loans by any means necessary, it's doubtful that courts will find against them. Judges are already buried under foreclosure filings stemming from the irresponsible actions of builders gone wild.
So builders shouldn't expect much by way of sympathy.
Turnabout, apparently, isn’t fair play.
After years of graft, deceptive lending and millions in profits on shoddily built houses, homebuilders are getting their just desserts.
The Wall Street Journal reports that banks, under pressure from regulators and shareholders to reduce their exposure to the housing market, are backing out of construction loans en masse. Builders, for their part, are crying foul.
Construction loans are like credit cards for big development projects: As the building goes up, developers draw on the loan to buy materials, pay employees and settle up with contractors. Banks like KeyCorp (KEY), Bank of America (BAC) and now-defunct IndyMac were active in the space, particularly in boom areas like southern California.
Recently, however, plummeting home prices have called the value of such projects into question. Banks are now refusing to honor their end of the bargain. If ground hasn’t been broken or the project is only partially complete, developers are left in the lurch: They're forced to repay the loan, post cash or sell the property. If they refuse, banks can push the project into foreclosure - and developers into bankruptcy.
Construction loans often carry personal guarantees, obligating builders to pony up their own assets if a deal goes sideways. In turn, builders are taking lenders to court, arguing that they have no cause to renege on their commitments. Banks, on the other hand, argue that property values have fallen to such an extent as to make many projects uneconomical.
As long as it can find an appraiser willing to value the property at a level that supports this claim, the bank has the upper hand. Finding an appraiser willing to do their bidding isn’t hard to do, since they value properties based on what their clients (i.e. banks) want.
The fact that builders are being forced into financial shackles by questionable appraisals does have a touch of morbid irony. During the boom, big developers like Centex (CTX), KB Home (KBH) and Lennar (LEN) built homes, then lent borrowers money to buy them. Since they controlled the loan origination process, they ordered appraisals from cronies who inflated the prices. Builders reaped the benefits, while homeowners got stuck with a home they paid far too much for.
Now that they’re on the other side of the fence, developers don’t find the game quite as fun. "If banks want to get out of residential lending, that's fine; let's sit down and figure it out," said one builder. "But that isn't being done. The rug is literally being pulled from under us and games are being played."
While banks may be acting in bad faith, minimizing their exposure to risky loans by any means necessary, it's doubtful that courts will find against them. Judges are already buried under foreclosure filings stemming from the irresponsible actions of builders gone wild.
So builders shouldn't expect much by way of sympathy.
Tuesday, July 22, 2008
Wachovia Bleeding Cash
This post first appeared on Minyanville.
Robert Steel has his work cut out for him.
Steel, the new CEO of Wachovia (WB), took over last month after the company booted former head Ken Thompson. He's now facing the daunting task of righting a ship that has very much veered off course. The bank’s second-quarter results were nothing short of abysmal. According to The Wall Street Journal, Wachovia reported:
Robert Steel has his work cut out for him.
Steel, the new CEO of Wachovia (WB), took over last month after the company booted former head Ken Thompson. He's now facing the daunting task of righting a ship that has very much veered off course. The bank’s second-quarter results were nothing short of abysmal. According to The Wall Street Journal, Wachovia reported:
- Net losses of $8.7 billion or $4.20 per share, compared with net income of $2.3 billion last year.
- $6.1 billion in writedowns, largely on mortgage-related assets.
- Higher loan loss provision of $5.6 billion, up from $179 million a year ago.
- Charge-offs (loans the company has given up on) now 1.1% of total loans, compared to 0.14% last year.
- Lowered dividends from $0.375 to $0.05 per share.
- 6,350 job cuts - 5% of the company’s workforce.
Wachovia, like many of its banking peers, has been blindsided by credit losses. For Minyans with an abacus handy, the higher loan loss provision represents a 3100% increase over last year's, which shows just how unprepared management was for the current financial crisis.
The bank is now squirreling away cash to absorb further losses.
Steel, the former Undersecretary of the Treasury, appears to be taking aggressive measures to insulate the company from a mortgage portfolio that’s likely to deteriorate, along as the housing market continues to slide. Many analysts point to Wachovia’s ill-timed purchase of Golden West -- one of California's largest Option ARM issuers during the boom -- as the beginning of Wachovia's current crisis.
However, details of troubles throughout the bank’s business lines continue to emerge, and it’s becoming apparent that the Golden West debacle was only a symptom of a more systemic disease. In fact, Wachovia seems to have had little regard for prudent business practices, including:
- Charges stemming from rogue telemarketers ripping off clients total $150 million.
- A securities division under investigation for its role in the collapse of the auction-rate securities market.
- A $975 million charge related to a court ruling involving leasing transactions.
Hopeful shareholders may take solace from regarding this as a “kitchen sink” quarter in which the bank confronts its worst-case scenario and writes down assets accordingly. With Steel at the helm, management could plug enough holes to keep the ship afloat long enough to turn it around.
Unfortunately, with revenues falling in most of the bank’s businesses, persistent malaise in the mortgage and real estate markets, and speculation the company may have to sell itself to remain solvent, the future still looks rather bleak.
Friday, July 18, 2008
Death Of The Lifestyle Center
This post first appeared on Minyanville.
It was a nice idea, but it didn’t last.
During the boom, real estate developers raced to build what they call “Lifestyle Centers” - shopping areas that merge the thrill of purchasing a $700 Coach (COH) handbag with simpler pleasures like watching screaming children run through a towering water fountain.
The Wall Street Journal reports that construction of these trendy urban hamlets of consumerism replaced that of traditional enclosed shopping areas. Instead, developers rounded up small-time retailers like AnnTaylor (ANN), Talbots (TLB), Chicos (CHS) and Linens ‘n Things to fill up the storefronts in the hopes that their collective allure would seduce shoppers away from Big-Box rivals like Wal-Mart (WMT) and Costco (COST).
But alas, it was not to be. The dream of sipping a Starbucks (SBUX) double half-caff non-fat vente pumpkin spice latte while lugging sagging shopping bags around the duck pond is no more.
Together, the economic slowdown, real estate slump and credit crunch have thwarted this nascent craze, forcing developers to scrap plans for new centers. Shoppers are spending more at the pump and less on the frills that were the open air mall's stock-in-trade - which means tough times are ahead for peddlers of the non-essential.
Retailers like the aforementioned Talbots and Chicos are canceling expansion plans, while Linens ‘N Things and, more recently, Steve and Barry’s are just plain calling it quits.
But many analysts say the jig would have been up, in any event. Consumers’ financial woes are just the final nail in the coffin of Lifestyle-Center mania. One builder told the Journal most of the choice locations had already been snapped up, since the open-air malls are most popular in and around urban centers.
Plans for new construction were already stretching the limits of the model, expanding to such teeming metropolises as Brighton, Colorado and Boise, Idaho.
But many developers are being forced to limp through the completion of existing projects, though their creditors now fear that they may not be able to make good on their debts.
Developers, having taken out loans with “lease-up periods,” hoped to jam retailers into leases during the building phase. But many new developments are only partly occupied.
As consumers cut back and trade down, such swanky shopping opportunities are becoming less desirable. Costco may not be sexy, but it’s damn cheap.
The craze's slow demise is only one symptom of a broader trend: The rejection of reckless spending and conspicuous consumption. As strapped buyers turn away from the excesses of rampant consumerism, lavish malls -- and the luxuries they traffic in -- just aren't needed.
It was a nice idea, but it didn’t last.
During the boom, real estate developers raced to build what they call “Lifestyle Centers” - shopping areas that merge the thrill of purchasing a $700 Coach (COH) handbag with simpler pleasures like watching screaming children run through a towering water fountain.
The Wall Street Journal reports that construction of these trendy urban hamlets of consumerism replaced that of traditional enclosed shopping areas. Instead, developers rounded up small-time retailers like AnnTaylor (ANN), Talbots (TLB), Chicos (CHS) and Linens ‘n Things to fill up the storefronts in the hopes that their collective allure would seduce shoppers away from Big-Box rivals like Wal-Mart (WMT) and Costco (COST).
But alas, it was not to be. The dream of sipping a Starbucks (SBUX) double half-caff non-fat vente pumpkin spice latte while lugging sagging shopping bags around the duck pond is no more.
Together, the economic slowdown, real estate slump and credit crunch have thwarted this nascent craze, forcing developers to scrap plans for new centers. Shoppers are spending more at the pump and less on the frills that were the open air mall's stock-in-trade - which means tough times are ahead for peddlers of the non-essential.
Retailers like the aforementioned Talbots and Chicos are canceling expansion plans, while Linens ‘N Things and, more recently, Steve and Barry’s are just plain calling it quits.
But many analysts say the jig would have been up, in any event. Consumers’ financial woes are just the final nail in the coffin of Lifestyle-Center mania. One builder told the Journal most of the choice locations had already been snapped up, since the open-air malls are most popular in and around urban centers.
Plans for new construction were already stretching the limits of the model, expanding to such teeming metropolises as Brighton, Colorado and Boise, Idaho.
But many developers are being forced to limp through the completion of existing projects, though their creditors now fear that they may not be able to make good on their debts.
Developers, having taken out loans with “lease-up periods,” hoped to jam retailers into leases during the building phase. But many new developments are only partly occupied.
As consumers cut back and trade down, such swanky shopping opportunities are becoming less desirable. Costco may not be sexy, but it’s damn cheap.
The craze's slow demise is only one symptom of a broader trend: The rejection of reckless spending and conspicuous consumption. As strapped buyers turn away from the excesses of rampant consumerism, lavish malls -- and the luxuries they traffic in -- just aren't needed.
Tuesday, July 15, 2008
WaMu's Plea For Calm
This post first appeared on Minyanville.
After leading the banking sector to its largest ever one-day drop yesterday, Washington Mutual (WM), in an effort to assuage concerns that it's facing a cash crunch, released a statement claiming that the bank is "well-capitalized."
Though the stock bucked the trend this morning as the broader financial complex continued its unrelenting sell-off, shareholders aren’t likely to be comforted by the WaMu’s pleas for calm.
The largest savings-and-loan in the country has seen share prices fall below $4 following the seizure of IndyMac (IMB) by benevolent federal banking regulators; investors fear WaMu could be next.
IndyMac was reopened on Monday to handle endless lines of depositors hoping to recover their pennies from the bank’s coffers.
In a stark reminder of just how dicey bottom-picking can be, Bloomberg reminded us that private-equity firm TPG led a consortium of investors in providing the bank with $7 billion in much-needed cash in April, when the stock traded at $13. Those daring saviors have seen most of their investment wiped out.
TPG did, however, slip a protective clause into the deal: If the stock drops below $8.75 -- which it clearly has -- TPG is owed the difference, effectively putting the bank on the hook for its own equity losses. While protecting TPG's investment, this feature also makes it considerably more costly, if not impossible, for the bank to raise more capital, which would further dilute shares.
As more details emerge about these and other onerous terms with which banks have been forced to agree in their efforts to raise capital, it's becoming clear just how misguidedly optimistic investors were when such deals were first announced. Banking expert Minyan Peter wrote of the WaMu deal:
“I think the problem for most market participants right now is the assumption [that] what we're experiencing looks something like 'their prior experiences in banking crises.' And to me, that's why we have seen such a big rally over the past two weeks -- because, based on prior experience, a rally feels very right, right about now.
But for all the reasons I shared before, this one is different.”
We’re now seeing just how different this one is.
Professor Depew explained Friday how the Fannie Mae (FNM) and Freddie Mac (FRE) crisis is different from the Long-Term Capital Management failure in 1998: In this case, massive losses by financial institutions around the world are a symptom, not the cause.
A few misplaced bets aren’t to blame for the market turmoil; neither is rumor-mongering. The financial system’s problems, and by extension the economy’s, are rooted in years of mispriced risk and excessive leverage. Markets are now witnessing the destruction of that debt at a rate that’s stomach-churning to the traditional buy-and-hold investor.
The process, though painful, is necessary. The debt will be destroyed, firms will go out of business and the economy will slow, if not contract. All this is healthy. Agonizing, to be sure, but healthy.
As Toddo wrote yesterday on the Buzz and Banter, “The big picture blues will lead to an unfortunate destination, but that’s necessary to rebuild the foundation for sustainable economic growth. Once we get there, those with capital will be in a fantastic position to prosper.”
After leading the banking sector to its largest ever one-day drop yesterday, Washington Mutual (WM), in an effort to assuage concerns that it's facing a cash crunch, released a statement claiming that the bank is "well-capitalized."
Though the stock bucked the trend this morning as the broader financial complex continued its unrelenting sell-off, shareholders aren’t likely to be comforted by the WaMu’s pleas for calm.
The largest savings-and-loan in the country has seen share prices fall below $4 following the seizure of IndyMac (IMB) by benevolent federal banking regulators; investors fear WaMu could be next.
IndyMac was reopened on Monday to handle endless lines of depositors hoping to recover their pennies from the bank’s coffers.
In a stark reminder of just how dicey bottom-picking can be, Bloomberg reminded us that private-equity firm TPG led a consortium of investors in providing the bank with $7 billion in much-needed cash in April, when the stock traded at $13. Those daring saviors have seen most of their investment wiped out.
TPG did, however, slip a protective clause into the deal: If the stock drops below $8.75 -- which it clearly has -- TPG is owed the difference, effectively putting the bank on the hook for its own equity losses. While protecting TPG's investment, this feature also makes it considerably more costly, if not impossible, for the bank to raise more capital, which would further dilute shares.
As more details emerge about these and other onerous terms with which banks have been forced to agree in their efforts to raise capital, it's becoming clear just how misguidedly optimistic investors were when such deals were first announced. Banking expert Minyan Peter wrote of the WaMu deal:
“I think the problem for most market participants right now is the assumption [that] what we're experiencing looks something like 'their prior experiences in banking crises.' And to me, that's why we have seen such a big rally over the past two weeks -- because, based on prior experience, a rally feels very right, right about now.
But for all the reasons I shared before, this one is different.”
We’re now seeing just how different this one is.
Professor Depew explained Friday how the Fannie Mae (FNM) and Freddie Mac (FRE) crisis is different from the Long-Term Capital Management failure in 1998: In this case, massive losses by financial institutions around the world are a symptom, not the cause.
A few misplaced bets aren’t to blame for the market turmoil; neither is rumor-mongering. The financial system’s problems, and by extension the economy’s, are rooted in years of mispriced risk and excessive leverage. Markets are now witnessing the destruction of that debt at a rate that’s stomach-churning to the traditional buy-and-hold investor.
The process, though painful, is necessary. The debt will be destroyed, firms will go out of business and the economy will slow, if not contract. All this is healthy. Agonizing, to be sure, but healthy.
As Toddo wrote yesterday on the Buzz and Banter, “The big picture blues will lead to an unfortunate destination, but that’s necessary to rebuild the foundation for sustainable economic growth. Once we get there, those with capital will be in a fantastic position to prosper.”
Mortgage Reform: Why Government Intelligence is Oxymoron
This post first appeared on Minyanville.
There's only one truly safe bet in the entire financial arena: Mortgages will cost more in 2009 than they did in 2008.
The inevitable regulatory overreaction will meaningfully constrict lending for the next decade, if not longer, driving up costs for anyone buying a home in the foreseeable future.
But some things never change: Homeowners on the lower rungs of the economic ladder will ultimately bear the greatest burden for our collective transgressions.
Yesterday, the Federal Reserve outlined a regulatory overhaul effective October 2009. Lenders have one year to bring underwriting standards and internal procedures into alignment with the new rules. While many of the new laws take much-needed steps to protect borrowers from predatory lending practices, one particular change is evident of the Fed’s desire to placate consumer groups rather than implement good policy.
12 months ago, a scant minority of the investment public had heard of lenders insidiously penalizing borrowers for paying their loans off early. Such "prepayment penalties" allow borrowers to obtain a lower interest rate, for which they agree to pay fees if they repay the loan in a specific period of time (usually 1-3 years).
For homeowners getting back on their feet or savvy investors looking for low carrying costs, such provisions can make or break a deal. These transactions spur economic activity, while vanilla mortgages offered to middle managers in the suburban jungle simply advance the status quo.
Prepayment penalties have since incurred the wrath of populists everywhere, who condemn them as just another way to con unsuspecting borrowers into complex, burdensome and extortionate loans.
It would be ignorant to deny that prepayment penalties, levied without proper disclosure or explanation, are a common tactic of unscrupulous lenders. But banning them outright is just bad policy. The more choices a borrower has, the better able he is to negotiate with a lender. When used properly, these types of small modifications can save thousands of dollars over the life of a loan.
The Fed’s new plan outlaws prepayment penalties if a loan’s rate adjusts within the first four years of the mortgage. With tighter underwriting requirements, many borrowers on the cusp can only qualify for a loan if the rate adjusts. For some, a prepayment penalty is the only way to make a loan affordable.
Keeping lending channels open to traditionally under-banked groups should be a hallmark of our new regulatory environment. The one we're moving toward, however, will block mortgage availability to those on the economic fringe, making the gap between the upper- and lower-classes even wider, intensifying the disparity between the haves and the have-nots.
If this sounds like rhetoric reminiscent of the boom years, pause for a moment to consider.
Subprime lending is not evil. Though it’s caused more harm than good in the last decade -- Countrywide (BAC), National City (NCC), IndyMac (IMB) and even Fannie Mae (FNM) and Freddie Mac (FRE) are but a few cases in point -- healthy, responsible alternative lending spurs economic development in lower-income neighborhoods. Such activities should be monitored by government agencies, but performed by the private sector.
Instead of removing choice from the mortgage process, regulators should strive for education, transparency and real-time enforcement of laws. A massive sting operation 3 years too late is just a publicity stunt.
What if prospective homeowners were required to pass a simple test to qualify for an exotic, complicated mortgage? For sophisticated investors, the test would be a cinch; it could effectively serve as a “license” to use creative lending to their advantage.
Typical borrowers looking to stretch their mortgage dollars a bit, on the other hand, would be required to learn what they’re getting themselves into before digging a hole from which they’ll never be able to climb out.
A focus on education -- what we here at Minvanville call financial literacy -- isn’t just a path to get us to the next quarter, or through the next fiscal year. Understanding the most important financial decision an individual makes -- the purchase of his or her home -- is the only way to prevent another mortgage crisis.
No amount of government intervention can replace empowerment through the lost art of education.
There's only one truly safe bet in the entire financial arena: Mortgages will cost more in 2009 than they did in 2008.
The inevitable regulatory overreaction will meaningfully constrict lending for the next decade, if not longer, driving up costs for anyone buying a home in the foreseeable future.
But some things never change: Homeowners on the lower rungs of the economic ladder will ultimately bear the greatest burden for our collective transgressions.
Yesterday, the Federal Reserve outlined a regulatory overhaul effective October 2009. Lenders have one year to bring underwriting standards and internal procedures into alignment with the new rules. While many of the new laws take much-needed steps to protect borrowers from predatory lending practices, one particular change is evident of the Fed’s desire to placate consumer groups rather than implement good policy.
12 months ago, a scant minority of the investment public had heard of lenders insidiously penalizing borrowers for paying their loans off early. Such "prepayment penalties" allow borrowers to obtain a lower interest rate, for which they agree to pay fees if they repay the loan in a specific period of time (usually 1-3 years).
For homeowners getting back on their feet or savvy investors looking for low carrying costs, such provisions can make or break a deal. These transactions spur economic activity, while vanilla mortgages offered to middle managers in the suburban jungle simply advance the status quo.
Prepayment penalties have since incurred the wrath of populists everywhere, who condemn them as just another way to con unsuspecting borrowers into complex, burdensome and extortionate loans.
It would be ignorant to deny that prepayment penalties, levied without proper disclosure or explanation, are a common tactic of unscrupulous lenders. But banning them outright is just bad policy. The more choices a borrower has, the better able he is to negotiate with a lender. When used properly, these types of small modifications can save thousands of dollars over the life of a loan.
The Fed’s new plan outlaws prepayment penalties if a loan’s rate adjusts within the first four years of the mortgage. With tighter underwriting requirements, many borrowers on the cusp can only qualify for a loan if the rate adjusts. For some, a prepayment penalty is the only way to make a loan affordable.
Keeping lending channels open to traditionally under-banked groups should be a hallmark of our new regulatory environment. The one we're moving toward, however, will block mortgage availability to those on the economic fringe, making the gap between the upper- and lower-classes even wider, intensifying the disparity between the haves and the have-nots.
If this sounds like rhetoric reminiscent of the boom years, pause for a moment to consider.
Subprime lending is not evil. Though it’s caused more harm than good in the last decade -- Countrywide (BAC), National City (NCC), IndyMac (IMB) and even Fannie Mae (FNM) and Freddie Mac (FRE) are but a few cases in point -- healthy, responsible alternative lending spurs economic development in lower-income neighborhoods. Such activities should be monitored by government agencies, but performed by the private sector.
Instead of removing choice from the mortgage process, regulators should strive for education, transparency and real-time enforcement of laws. A massive sting operation 3 years too late is just a publicity stunt.
What if prospective homeowners were required to pass a simple test to qualify for an exotic, complicated mortgage? For sophisticated investors, the test would be a cinch; it could effectively serve as a “license” to use creative lending to their advantage.
Typical borrowers looking to stretch their mortgage dollars a bit, on the other hand, would be required to learn what they’re getting themselves into before digging a hole from which they’ll never be able to climb out.
A focus on education -- what we here at Minvanville call financial literacy -- isn’t just a path to get us to the next quarter, or through the next fiscal year. Understanding the most important financial decision an individual makes -- the purchase of his or her home -- is the only way to prevent another mortgage crisis.
No amount of government intervention can replace empowerment through the lost art of education.
Friday, July 11, 2008
GE Meets Low-Watt Forecast
This post first appeared on Minyanville.
General Electric (GE) is often seen as a proxy for the global economy: Its massively diversified business spans nearly every realm - from consumer credit to plastics to airplane engines.
This year, as concerns over slowing growth and rising prices choke consumers worldwide, GE’s ability to deliver consistent, secure returns has come under fire.
After lowering guidance earlier this year, the massive industrial conglomerate released second-quarter earnings this morning that met or improved upon analysts' diminished expectations. According to The Wall Street Journal:
General Electric (GE) is often seen as a proxy for the global economy: Its massively diversified business spans nearly every realm - from consumer credit to plastics to airplane engines.
This year, as concerns over slowing growth and rising prices choke consumers worldwide, GE’s ability to deliver consistent, secure returns has come under fire.
After lowering guidance earlier this year, the massive industrial conglomerate released second-quarter earnings this morning that met or improved upon analysts' diminished expectations. According to The Wall Street Journal:
- Profit fell 3.9% from a year ago to $5.1 billion, or $0.51 per share
- Revenue rose 11% to $46.9 billion, topping analyst expectations
- CEO Jeffrey Immelt reiterated 2008 earnings per share of $2.20 to $2.30
The company said most of its divisions performed better than expected, with the exception of NBC Universal and the industrials - which it’s considering spinning off anyway.
Notably, the company said it won’t need to raise capital to stem losses from its financial services operations. GE shares have been under pressure as of late, amid swirling speculation it would be forced to raise money to strengthen its balance sheet.
Instead, the firm has announced plans to jettison various low-growth businesses, including its consumer appliances unit, a mainstay for the more than century-old firm. Just this morning, the company said it would sell its Japanese credit card business to Shinsei Bank for $5.4 billion.
While GE’s $30 billion domestic consumer credit division is also on the block, prospective buyers aren’t exactly stampeding to get to the front of the line. Though Target (TGT) sold a chunk of its credit card business to JP Morgan (JPM) back in May, the capital window is now closed for most financial firms. GE may therefore be hard pressed to find a bidder.
CEO Immelt and his team are working to slim down the company, focusing on growth and rewarding shareholders for their loyalty.
Investors used to view GE as an easy way to buoy the American economy and pick up a few bucks every quarter in the form of a healthy dividend. Now, with the company and its subsidiaries involved in business in every corner of the globe, that trade-off is no longer so simple.
Wednesday, July 9, 2008
Even Google Can't Squeeze Profit From YouTube
This post first appeared on Minyanville.
Google’s (GOOG) $1.7 billion purchase of YouTube isn’t panning out quite as they'd hoped.
Shockingly, advertisers aren’t interested in hawking their products alongside such cinematic masterpieces as “Project Peepway,” “Extreme Makeover the Homeless Edition,” and innumerable clips of dorm room rockers brutalizing Beatles classics.
The Wall Street Journal reports that the Internet giant is running into a host of other troubles squeezing profits from YouTube’s massive video library: Customer complaints, redundant legal contracts and delays in approving ad campaigns, to name just a few.
Internally, Google is still wrangling with a mess of logistics never properly untangled after the acquisition. The company hopes to have the kinks ironed out by the end of the year.
The lawsuits can't haven’t helped: Viacom (VIA) sued Google last year for potential copyright infringement, alleging that Google was profiting from television clips illicitly uploaded by users.
Last Wednesday, Google was ordered to surrender all user data -- including search histories and IP addresses -- pertaining to YouTube to the copyright court, resulting in hysterical backlash from Youtube users. Already skeptical advertisers are unlikely to be swayed by videos with titles like F**k Viacom, VIACOM VS YOU = BOYCOTT and Screw You, Viacom.
In response to the lawsuit, Google has agreed not to run ads unless media companies and other partners sign off on the content. The result: Only 4% of all videos are available for advertising.
Finally, as the economy weakens, companies are cutting back on marketing and sticking to more established media outlets. Only this morning, Robert J. Coen, a leading advertising forecaster, told the New York Times that he had scaled back his 2008 ad spending estimates for the second time this year. Google itself admits that sponsors have been reticent to throw money at a largely untested strategy.
For Google, it’s not just about cracking the YouTube conundrum for the sake of secret handshakes and frozen margaritas in the corporate cafeteria. The company’s fantastic growth has been driven primarily by its dominance in the online search business, which is still expanding more than 50% each year.
Google has undoubtedly benefited from the prolonged takeover battle between Microsoft (MSFT) and Yahoo (YHOO), but the company can't maintain its breakneck growth (or meet Wall Street's demands) without expanding other business units. Google is also exploring older media venues, such as print, radio and television, in an attempt to grab some of the 90% of advertising dollars not spent on the Internet.
If Google can't successfully expand outside the world of online search, investors are apt to abandon it for the next Internet company with a convincing business model and an appealingly goofy name.
Google’s (GOOG) $1.7 billion purchase of YouTube isn’t panning out quite as they'd hoped.
Shockingly, advertisers aren’t interested in hawking their products alongside such cinematic masterpieces as “Project Peepway,” “Extreme Makeover the Homeless Edition,” and innumerable clips of dorm room rockers brutalizing Beatles classics.
The Wall Street Journal reports that the Internet giant is running into a host of other troubles squeezing profits from YouTube’s massive video library: Customer complaints, redundant legal contracts and delays in approving ad campaigns, to name just a few.
Internally, Google is still wrangling with a mess of logistics never properly untangled after the acquisition. The company hopes to have the kinks ironed out by the end of the year.
The lawsuits can't haven’t helped: Viacom (VIA) sued Google last year for potential copyright infringement, alleging that Google was profiting from television clips illicitly uploaded by users.
Last Wednesday, Google was ordered to surrender all user data -- including search histories and IP addresses -- pertaining to YouTube to the copyright court, resulting in hysterical backlash from Youtube users. Already skeptical advertisers are unlikely to be swayed by videos with titles like F**k Viacom, VIACOM VS YOU = BOYCOTT and Screw You, Viacom.
In response to the lawsuit, Google has agreed not to run ads unless media companies and other partners sign off on the content. The result: Only 4% of all videos are available for advertising.
Finally, as the economy weakens, companies are cutting back on marketing and sticking to more established media outlets. Only this morning, Robert J. Coen, a leading advertising forecaster, told the New York Times that he had scaled back his 2008 ad spending estimates for the second time this year. Google itself admits that sponsors have been reticent to throw money at a largely untested strategy.
For Google, it’s not just about cracking the YouTube conundrum for the sake of secret handshakes and frozen margaritas in the corporate cafeteria. The company’s fantastic growth has been driven primarily by its dominance in the online search business, which is still expanding more than 50% each year.
Google has undoubtedly benefited from the prolonged takeover battle between Microsoft (MSFT) and Yahoo (YHOO), but the company can't maintain its breakneck growth (or meet Wall Street's demands) without expanding other business units. Google is also exploring older media venues, such as print, radio and television, in an attempt to grab some of the 90% of advertising dollars not spent on the Internet.
If Google can't successfully expand outside the world of online search, investors are apt to abandon it for the next Internet company with a convincing business model and an appealingly goofy name.
Tuesday, July 8, 2008
Feast During Famine
This post first appeared on Minyanville.
Shoppers are trading in prosciutto and buffalo mozzarella for peanut butter and jelly.
Economic downturns generate at least one kind of plenty: A bountiful supply of news stories about consumers cutting back. Whether it's carpooling, staying in on Saturday nights or visiting Mount Rushmore instead of the Eiffel Tower, there are plenty of ways to stretch that discretionary dollar during hard times.
USA Today reports that Americans are even paring down the grocery bill by sacrificing their arterial integrity: Adam Drewnowski, director of the Center for Public Health Nutrition at the University of Washington, says that strapped shoppers often ditch fruits and vegetables in favor of calorie-packed junk.
By junk, I mean glorious Kraft (KFT) macaroni and cheese and uber-sweet Cap’n Crunch (PEP). It isn't clear if this is because healthier fare is dramatically more expensive, or because comfort foods like Twinkies (IBCIQ) become much more appealing when your dreams of early retirement are rapidly fading away.
With food costs rising 4% in 2007 -- the highest annual rate since 1990 -- and expected to rise 4.5% to 5.5% more in 2008, some shoppers are making like their 18th-century forebears and opting to grow food themselves. Vegetable gardens are back in vogue, and even chicken coops have suddenly reentered the mainstream lexicon.
During good times, few people even bother to make a grocery budget: Food seems so unquestionably essential. Now, all those buy-one-get-one-free specials are starting to seem like a good idea.
According to USA Today’s poll, most consumers are thinning out their monthly food bills by opting for smaller portions, using leftovers and cooking at home; restaurants are definitely feeling the pinch as diners opt for homemade meals rather than greasy fast food. This doesn’t bode well for gimmicky chains like Buffalo Wild Wings (BWLD), Sonic (SONC) and Steak 'n Shake (SNS), which serve up deep-fried cholesterol with a side of mayonnaise. And smaller portions can't bode well for Burger King (BKC): They're still hawking the Triple Whopper, which comes in at a mere 1100 calories.
The pressing question for the country’s economy is whether these trends will last. Consumers cut back during recessions; it’s just what they do. When the economy picks up again, however, the lean times are quickly forgotten, those backyard gardens go fallow and shoppers return to their gluttonous, free-spending ways.
Many argue that this time is different - always a dangerous proposition, to be sure. But with the bursting of the credit bubble, the American public may be turning on consumerism with the same ferocity with which it adopted strip-mall extravagance in the first place.
Without home equity to tap into and credit cards becoming increasingly tough to secure, we may have little choice but to revert back to simpler times - and live within our dwindling means.
Shoppers are trading in prosciutto and buffalo mozzarella for peanut butter and jelly.
Economic downturns generate at least one kind of plenty: A bountiful supply of news stories about consumers cutting back. Whether it's carpooling, staying in on Saturday nights or visiting Mount Rushmore instead of the Eiffel Tower, there are plenty of ways to stretch that discretionary dollar during hard times.
USA Today reports that Americans are even paring down the grocery bill by sacrificing their arterial integrity: Adam Drewnowski, director of the Center for Public Health Nutrition at the University of Washington, says that strapped shoppers often ditch fruits and vegetables in favor of calorie-packed junk.
By junk, I mean glorious Kraft (KFT) macaroni and cheese and uber-sweet Cap’n Crunch (PEP). It isn't clear if this is because healthier fare is dramatically more expensive, or because comfort foods like Twinkies (IBCIQ) become much more appealing when your dreams of early retirement are rapidly fading away.
With food costs rising 4% in 2007 -- the highest annual rate since 1990 -- and expected to rise 4.5% to 5.5% more in 2008, some shoppers are making like their 18th-century forebears and opting to grow food themselves. Vegetable gardens are back in vogue, and even chicken coops have suddenly reentered the mainstream lexicon.
During good times, few people even bother to make a grocery budget: Food seems so unquestionably essential. Now, all those buy-one-get-one-free specials are starting to seem like a good idea.
According to USA Today’s poll, most consumers are thinning out their monthly food bills by opting for smaller portions, using leftovers and cooking at home; restaurants are definitely feeling the pinch as diners opt for homemade meals rather than greasy fast food. This doesn’t bode well for gimmicky chains like Buffalo Wild Wings (BWLD), Sonic (SONC) and Steak 'n Shake (SNS), which serve up deep-fried cholesterol with a side of mayonnaise. And smaller portions can't bode well for Burger King (BKC): They're still hawking the Triple Whopper, which comes in at a mere 1100 calories.
The pressing question for the country’s economy is whether these trends will last. Consumers cut back during recessions; it’s just what they do. When the economy picks up again, however, the lean times are quickly forgotten, those backyard gardens go fallow and shoppers return to their gluttonous, free-spending ways.
Many argue that this time is different - always a dangerous proposition, to be sure. But with the bursting of the credit bubble, the American public may be turning on consumerism with the same ferocity with which it adopted strip-mall extravagance in the first place.
Without home equity to tap into and credit cards becoming increasingly tough to secure, we may have little choice but to revert back to simpler times - and live within our dwindling means.
Monday, July 7, 2008
Trading Tip: Ditch TIPS
This post first appeared on Minyanville.
Given the opportunity to bet on inflation 12 months ago, most investors would have fired up the Delorean without so much as a second thought.
Treasury Inflation Protected Securities, or TIPS, are designed to keep pace with inflation as measured by the Consumer Price Index, or CPI. The $500 billion market had once been considered a safe place to sock away funds as a hedge against higher prices. Amidst a barrage of screaming headlines about record oil and food prices, it may therefore seem strange that money managers are advising clients to bail on TIPS.
Bloomberg reports that Morgan Stanley (MS) and FTN Financial, a division of First Tennessee Bank, are suggesting clients move money invested in TIPS to securities that offer a better hedge against higher prices. Investors should bet on derivatives whose value is based on inflation expectations, rather than on the government’s shoddy data. They contend the methodology used to calculate the CPI doesn’t accurately reflect the true rate of inflation.
To Minyanville readers, this shouldn’t come as much of a surprise; Professors Mauldin and Depew have discussed the shortcomings of the CPI at length.
A primary criticism of the CPI is that it doesn’t properly account for fluctuations in food and energy prices. Historically, fuel and food have been more volatile than other consumer goods, so the Bureau of Labor Statistics (BLS) -- the government body tasked with tabulating the CPI each month -- strips out those costs to arrive at its “core” or headline CPI number.
The BLS also juggles the basket of goods used to calculate the CPI, which many contend allows it to distort the inflation rate. By swapping out expensive goods for cheap ones, it’s pretty easy to keep the most widely watched measure of inflation low - even while prices are obviously soaring.
A second factor that’s led investment advisers to steer clients away from TIPS is a divergence between the inflation expected by consumers and that reported by the government. Consumer sentiment readings indicate fear of higher prices, while traders betting on TIPS expect inflation to moderate over the next few years.
Some say this is just another sign of traders’ lack of faith in government data. Others, however, argue that inflationary pressures are actually decreasing as the credit crunch forces firms like Citibank (C), Merrill Lynch (MER) and General Motors (GM) to de-leverage.
Traders may be getting ahead of the curve: The debate highlights the importance of inflation expectations and their impact on consumer behavior.
If a rational consumer believes gas will be more expensive tomorrow than it is today, he'll make sure to swing by the Exxon-Mobil (XOM) station on his way home from work. If his view is the same tomorrow, he should fill up again - since prices will just be higher the following day.
This type of behavior leads to unnaturally high demand, as consumers shift purchases forward, pressuring supply. Increased demand coupled with dwindling supply means higher prices, which fuel more inflation expectations, pushing prices up even further.
Wash, rinse, repeat.
At some point, however, consumers are forced to give up; they simply run out of money.
The best cure for high prices may be high prices. As shoppers trade down, cut back and stash away their pennies for that inevitable rainy day, demand will diminish - and consumers will have no choice but to figure out how to get by on less.
Given the opportunity to bet on inflation 12 months ago, most investors would have fired up the Delorean without so much as a second thought.
Treasury Inflation Protected Securities, or TIPS, are designed to keep pace with inflation as measured by the Consumer Price Index, or CPI. The $500 billion market had once been considered a safe place to sock away funds as a hedge against higher prices. Amidst a barrage of screaming headlines about record oil and food prices, it may therefore seem strange that money managers are advising clients to bail on TIPS.
Bloomberg reports that Morgan Stanley (MS) and FTN Financial, a division of First Tennessee Bank, are suggesting clients move money invested in TIPS to securities that offer a better hedge against higher prices. Investors should bet on derivatives whose value is based on inflation expectations, rather than on the government’s shoddy data. They contend the methodology used to calculate the CPI doesn’t accurately reflect the true rate of inflation.
To Minyanville readers, this shouldn’t come as much of a surprise; Professors Mauldin and Depew have discussed the shortcomings of the CPI at length.
A primary criticism of the CPI is that it doesn’t properly account for fluctuations in food and energy prices. Historically, fuel and food have been more volatile than other consumer goods, so the Bureau of Labor Statistics (BLS) -- the government body tasked with tabulating the CPI each month -- strips out those costs to arrive at its “core” or headline CPI number.
The BLS also juggles the basket of goods used to calculate the CPI, which many contend allows it to distort the inflation rate. By swapping out expensive goods for cheap ones, it’s pretty easy to keep the most widely watched measure of inflation low - even while prices are obviously soaring.
A second factor that’s led investment advisers to steer clients away from TIPS is a divergence between the inflation expected by consumers and that reported by the government. Consumer sentiment readings indicate fear of higher prices, while traders betting on TIPS expect inflation to moderate over the next few years.
Some say this is just another sign of traders’ lack of faith in government data. Others, however, argue that inflationary pressures are actually decreasing as the credit crunch forces firms like Citibank (C), Merrill Lynch (MER) and General Motors (GM) to de-leverage.
Traders may be getting ahead of the curve: The debate highlights the importance of inflation expectations and their impact on consumer behavior.
If a rational consumer believes gas will be more expensive tomorrow than it is today, he'll make sure to swing by the Exxon-Mobil (XOM) station on his way home from work. If his view is the same tomorrow, he should fill up again - since prices will just be higher the following day.
This type of behavior leads to unnaturally high demand, as consumers shift purchases forward, pressuring supply. Increased demand coupled with dwindling supply means higher prices, which fuel more inflation expectations, pushing prices up even further.
Wash, rinse, repeat.
At some point, however, consumers are forced to give up; they simply run out of money.
The best cure for high prices may be high prices. As shoppers trade down, cut back and stash away their pennies for that inevitable rainy day, demand will diminish - and consumers will have no choice but to figure out how to get by on less.
Delta Reserves Right To Lose Luggage
This post first appeared on Minyanville.
There was a time when man yearned to fly. Now, he dreads it.
The quality of air travel has precipitously declined in the wake of skyrocketing fuel prices. Minyanville (along with every other media outlet in the known world) has covered the story in depth, including the sometimes absurd measures which struggling airlines have taken to stay afloat.
A recent anecdote epitomizes the industry's current attitude towards its customers: They appear to be pushing passengers away on purpose.
Last week, a friend -- whom we'll call Isabel -- flew Delta (DAL) home to New Jersey from a family gathering in Charlotte, North Carolina.
The airline, like struggling competitors American (AMR), Continental (CAL) and US Airways (LCC), has added a range of fees to keep up with rising jet-fuel prices. In late June, Delta tacked on a $50 surcharge for frequent flyers redeeming awards - a questionable strategy for dealing with loyal customers.
While taking $50 hits here and there definitely hurts, there's another side to cost-cutting and cash hoarding that most travelers are fortunate enough never to see.
Isabel arrived at the airport two hours early; plenty of time to check her bag and easily make her flight. Inclement weather hit both the New York and Charlotte area later in the day, but she was one of the lucky few who made it home before the cancellations began. Her bag, however, missed the flight.
No big deal, of course - this is scarcely the first time a bag destined for Newark took an inexplicable detour to Cincinnati.
Isabel returned home without the bag, though Delta assured her that it had been located would be delivered to her first thing Monday morning - or possibly afternoon: The delivery window was only 12 hours wide.
The bag didn't show up on Monday. Or Tuesday. By then, the novelty had worn off, and Isabel was well and truly furious. Delta promised her another delivery, even offered to compensate her a whopping $25 - standard company policy for bags not returned within three days.
Tuesday afternoon, the bag materialized at the delivery service. All would be well Wednesday morning.
Come Wednesday morning, Isabel was on the phone again with Delta, inquiring about the delivery of her bag (in an identical 12-hour window) and the $25 in blood money. The Delta representative informed her that the airline wasn't obligated to give her the money, since the airline got the bag to the delivery service within the stipulated three-day timeframe.
Oh, the bag isn't there yet? Not important: Rules are rules. If you really wanted your bags to arrive with you, you would've bought them a ticket.
The bag finally showed up at Isabel's office Wednesday afternoon.
Well, most of it did.
During its mysterious odyssey, two bottles of perfume and a ceramic hair straightener worth three times as much as any household appliance I've ever owned (I'm told its ability to straighten hair is nothing short of miraculous) went missing.
She got on the line with the helpful people at Delta again. Unfortunately, the perfume bottles (taken individually, of course) weren't valuable enough to replace, and she was also out of the luck on the straightener: Delta considers it a piece of electronic equipment, and therefore ineligible for a refund.
Now, I don't know a lot about hair straighteners, but I know this one was a far cry from an iPhone (AAPL) or Blackberry (RIMM).
But Delta wouldn't budge. The company held fast to its rules and lost at least one customer forever, maybe even two, or however many people are horrified by this article.
They didn't even send her one of those much coveted "The airline lost my bag, screwed me out of $25 and stole $300 in beautification products and all I got was this lousy t-shirt," t-shirts.
Saying "You're about to lose a customer forever" no longer means anything to the airline industry; it's just a quaint relic of happier times.
Before rising gas prices chewed through whatever remained of airlines' profits, they had room to waive fees, choose customer satisfaction over pusillanimous interpretations of a refund policy or even dole out a few extra cans of Coke (KO) on a long flight.
Now, for these struggling firms, every penny counts - even if it comes at the expense of their most frequent fliers.
There was a time when man yearned to fly. Now, he dreads it.
The quality of air travel has precipitously declined in the wake of skyrocketing fuel prices. Minyanville (along with every other media outlet in the known world) has covered the story in depth, including the sometimes absurd measures which struggling airlines have taken to stay afloat.
A recent anecdote epitomizes the industry's current attitude towards its customers: They appear to be pushing passengers away on purpose.
Last week, a friend -- whom we'll call Isabel -- flew Delta (DAL) home to New Jersey from a family gathering in Charlotte, North Carolina.
The airline, like struggling competitors American (AMR), Continental (CAL) and US Airways (LCC), has added a range of fees to keep up with rising jet-fuel prices. In late June, Delta tacked on a $50 surcharge for frequent flyers redeeming awards - a questionable strategy for dealing with loyal customers.
While taking $50 hits here and there definitely hurts, there's another side to cost-cutting and cash hoarding that most travelers are fortunate enough never to see.
Isabel arrived at the airport two hours early; plenty of time to check her bag and easily make her flight. Inclement weather hit both the New York and Charlotte area later in the day, but she was one of the lucky few who made it home before the cancellations began. Her bag, however, missed the flight.
No big deal, of course - this is scarcely the first time a bag destined for Newark took an inexplicable detour to Cincinnati.
Isabel returned home without the bag, though Delta assured her that it had been located would be delivered to her first thing Monday morning - or possibly afternoon: The delivery window was only 12 hours wide.
The bag didn't show up on Monday. Or Tuesday. By then, the novelty had worn off, and Isabel was well and truly furious. Delta promised her another delivery, even offered to compensate her a whopping $25 - standard company policy for bags not returned within three days.
Tuesday afternoon, the bag materialized at the delivery service. All would be well Wednesday morning.
Come Wednesday morning, Isabel was on the phone again with Delta, inquiring about the delivery of her bag (in an identical 12-hour window) and the $25 in blood money. The Delta representative informed her that the airline wasn't obligated to give her the money, since the airline got the bag to the delivery service within the stipulated three-day timeframe.
Oh, the bag isn't there yet? Not important: Rules are rules. If you really wanted your bags to arrive with you, you would've bought them a ticket.
The bag finally showed up at Isabel's office Wednesday afternoon.
Well, most of it did.
During its mysterious odyssey, two bottles of perfume and a ceramic hair straightener worth three times as much as any household appliance I've ever owned (I'm told its ability to straighten hair is nothing short of miraculous) went missing.
She got on the line with the helpful people at Delta again. Unfortunately, the perfume bottles (taken individually, of course) weren't valuable enough to replace, and she was also out of the luck on the straightener: Delta considers it a piece of electronic equipment, and therefore ineligible for a refund.
Now, I don't know a lot about hair straighteners, but I know this one was a far cry from an iPhone (AAPL) or Blackberry (RIMM).
But Delta wouldn't budge. The company held fast to its rules and lost at least one customer forever, maybe even two, or however many people are horrified by this article.
They didn't even send her one of those much coveted "The airline lost my bag, screwed me out of $25 and stole $300 in beautification products and all I got was this lousy t-shirt," t-shirts.
Saying "You're about to lose a customer forever" no longer means anything to the airline industry; it's just a quaint relic of happier times.
Before rising gas prices chewed through whatever remained of airlines' profits, they had room to waive fees, choose customer satisfaction over pusillanimous interpretations of a refund policy or even dole out a few extra cans of Coke (KO) on a long flight.
Now, for these struggling firms, every penny counts - even if it comes at the expense of their most frequent fliers.
No HOPE NOW For Mortgages
This post first appeared on Minyanville.
Washington’s war on foreclosures isn’t going very well.
Or is it? It depends on who you ask.
In the past few days, contradictory reports have emerged over the status of efforts to stem the rising tide of foreclosures.
HOPE NOW, the foreclosure prevention program started by Congress last July, reports that it’s successfully preventing thousands of repossessions a day - 170,000 in May alone, and almost 2 million overall. The group includes such mortgage behemoths as Wells Fargo (WFC), JP Morgan Chase (JPM) and Countrywide (CFC).
Consumer groups, on the other hand, aren’t so sure. The California Reinvestment Coalition (CRC), which advocates for low-income communities, says that servicers are failing to keep troubled borrowers in their homes, and that HOPE NOW's methodology in counting "prevented" foreclosures is deeply flawed.
The CRC also alleges that the loan servicing industry hasn't adequately met the demands of millions of homeowners who were victims of predatory lending during the boom.
On Housing Wire, Paul Jackson aptly points out that public perception about homeownership and lending practices is changing, despite the public-relations war being waged by both sides. During the boom, community development groups chided banks for shutting out low-income borrowers. Even President Bush got involved, pushing the Federal Housing Administration to offer “no down payment” loan options.
But public perception can send organizations headlong from one side of an issue to the other: Consumer advocacy organizations have now turned against lenders, in some cases incriminating them for following the very advice they themselves hawked just a few years ago.
Politicians, as they’re wont to do, are responding with cries for vast reams of legislation to protect borrowers. Consumer groups are now pitted against the formidable housing lobby, which has been very generous with its donations this election year.
Minyanville’s Professor Depew often writes about the concept of “social mood,” and how consumer preferences lead trends, rather than visa versa: "As social mood continues to darken and turn against symbols of excessive wealth and consumption, the former icons of bull market glee and prosperity begin to tarnish in the public eye."
If there’s one sure bet in housing, it's that writing a new mortgage will be a lot trickier in five years than it is today. Disclosure will increase, conflicts of interest will be regulated away and bureaucracies needed to police the new regime will be created out of whole cloth.
Regulators may succeed in preventing another bubble, but the cost of legislation that unduly constricts mortgage lending will be borne for years to come.
Washington’s war on foreclosures isn’t going very well.
Or is it? It depends on who you ask.
In the past few days, contradictory reports have emerged over the status of efforts to stem the rising tide of foreclosures.
HOPE NOW, the foreclosure prevention program started by Congress last July, reports that it’s successfully preventing thousands of repossessions a day - 170,000 in May alone, and almost 2 million overall. The group includes such mortgage behemoths as Wells Fargo (WFC), JP Morgan Chase (JPM) and Countrywide (CFC).
Consumer groups, on the other hand, aren’t so sure. The California Reinvestment Coalition (CRC), which advocates for low-income communities, says that servicers are failing to keep troubled borrowers in their homes, and that HOPE NOW's methodology in counting "prevented" foreclosures is deeply flawed.
The CRC also alleges that the loan servicing industry hasn't adequately met the demands of millions of homeowners who were victims of predatory lending during the boom.
On Housing Wire, Paul Jackson aptly points out that public perception about homeownership and lending practices is changing, despite the public-relations war being waged by both sides. During the boom, community development groups chided banks for shutting out low-income borrowers. Even President Bush got involved, pushing the Federal Housing Administration to offer “no down payment” loan options.
But public perception can send organizations headlong from one side of an issue to the other: Consumer advocacy organizations have now turned against lenders, in some cases incriminating them for following the very advice they themselves hawked just a few years ago.
Politicians, as they’re wont to do, are responding with cries for vast reams of legislation to protect borrowers. Consumer groups are now pitted against the formidable housing lobby, which has been very generous with its donations this election year.
Minyanville’s Professor Depew often writes about the concept of “social mood,” and how consumer preferences lead trends, rather than visa versa: "As social mood continues to darken and turn against symbols of excessive wealth and consumption, the former icons of bull market glee and prosperity begin to tarnish in the public eye."
If there’s one sure bet in housing, it's that writing a new mortgage will be a lot trickier in five years than it is today. Disclosure will increase, conflicts of interest will be regulated away and bureaucracies needed to police the new regime will be created out of whole cloth.
Regulators may succeed in preventing another bubble, but the cost of legislation that unduly constricts mortgage lending will be borne for years to come.
Wednesday, July 2, 2008
IndyMac: Too Big to Fail?
This post first appeared on Minyanville.
Federal regulators may soon be forced to decide if IndyMac Bank (IMB) is too big to fail.
IndyMac?
Spun out of Countrywide (CFC) in the late 1980s, IndyMac is a Southern California thrift and mortgage originator specializing in loans a couple of notches above subprime. Known as “Alt-A,” these mortgages thrived during the credit boom, when verifying a borrower's income was considered due-diligence overkill.
IndyMac aggressively issued these loans, along with billions in option adjustable rate mortgages, or option ARMs, to become the country’s second largest private mortgage lender. Countrywideis was number one.
Since the mortgage market stumbled last year, however, IndyMac's shares have plummeted. They now sit at just 70 cents per share, down from over $47 in December 2006.
Thanks to Senator Chuck Schumer, the Federal Reserve may need to decide whether IndyMac’s potential demise is too great a risk for the fragile financial system to bear. According to The Wall Street Journal, Schumer sent a letter to banking regulators last week suggesting that they look more closely into the bank’s financial strength - and the potential implications of its collapse.
The letter kicked off a small-scale bank run, with frightened customers yanking $100 million, or 0.5%, out of total deposits.
Yesterday, in a statement to the Securities and Exchange Commission, IndyMac said it hoped the stampede caused by Schumer’s letter would soon subside; branch traffic is already slowing. The bank claims to be working closely with the Federal Deposit and Insurance Corporation (FDIC) to strengthen its balance sheet.
At issue isn't whether another troubled mortgage company will go bust - IndyMac certainly wouldn’t be the first. But Schumer’s involvement is likely to force Chairman Bernanke’s hand, compelling him to determine which firms fall under the shadow of the Fed’s umbrella.
By orchestrating a bailout of Countrywide by Bank of America (BAC), as well as of Bear Stearns by JP Morgan (JPM), the Fed set a dangerous precedent. While there may have been sound arguments for saving these firms to prevent outright financial panic, can the same be said about IndyMac, a bank with a market capitalization of just $70 million?
And what about KeyCorp (KEY), Fifth Third (FITB) or Zions Bancorp (ZION), all of which have recently gone to the rapidly closing financing window?
These are questions regulators must answer, and soon.
Struggling companies -- especially banks -- need to go bust, in order to stimulate healthy new growth. The Fed's propping-up of doomed institutions only forestalls or hampers this process.
The financial system is bloated with firms that should go out of business - and it's time that it went on a diet.
Federal regulators may soon be forced to decide if IndyMac Bank (IMB) is too big to fail.
IndyMac?
Spun out of Countrywide (CFC) in the late 1980s, IndyMac is a Southern California thrift and mortgage originator specializing in loans a couple of notches above subprime. Known as “Alt-A,” these mortgages thrived during the credit boom, when verifying a borrower's income was considered due-diligence overkill.
IndyMac aggressively issued these loans, along with billions in option adjustable rate mortgages, or option ARMs, to become the country’s second largest private mortgage lender. Countrywide
Since the mortgage market stumbled last year, however, IndyMac's shares have plummeted. They now sit at just 70 cents per share, down from over $47 in December 2006.
Thanks to Senator Chuck Schumer, the Federal Reserve may need to decide whether IndyMac’s potential demise is too great a risk for the fragile financial system to bear. According to The Wall Street Journal, Schumer sent a letter to banking regulators last week suggesting that they look more closely into the bank’s financial strength - and the potential implications of its collapse.
The letter kicked off a small-scale bank run, with frightened customers yanking $100 million, or 0.5%, out of total deposits.
Yesterday, in a statement to the Securities and Exchange Commission, IndyMac said it hoped the stampede caused by Schumer’s letter would soon subside; branch traffic is already slowing. The bank claims to be working closely with the Federal Deposit and Insurance Corporation (FDIC) to strengthen its balance sheet.
At issue isn't whether another troubled mortgage company will go bust - IndyMac certainly wouldn’t be the first. But Schumer’s involvement is likely to force Chairman Bernanke’s hand, compelling him to determine which firms fall under the shadow of the Fed’s umbrella.
By orchestrating a bailout of Countrywide by Bank of America (BAC), as well as of Bear Stearns by JP Morgan (JPM), the Fed set a dangerous precedent. While there may have been sound arguments for saving these firms to prevent outright financial panic, can the same be said about IndyMac, a bank with a market capitalization of just $70 million?
And what about KeyCorp (KEY), Fifth Third (FITB) or Zions Bancorp (ZION), all of which have recently gone to the rapidly closing financing window?
These are questions regulators must answer, and soon.
Struggling companies -- especially banks -- need to go bust, in order to stimulate healthy new growth. The Fed's propping-up of doomed institutions only forestalls or hampers this process.
The financial system is bloated with firms that should go out of business - and it's time that it went on a diet.
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