Banks 'set to call in a swathe of loans'

Banks 'set to call in a swathe of loans'

By Ambrose Evans-Pritchard
Telegraph.co.uk
Last Updated: 1:22am BST 26/06/2007

The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.

"The banks were not prepared to bid over 85pc of face value for CDOs rated "A" or better," he said.

"God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.

"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn."

US property writer Paul Muolo described the Bearn Stearns crisis as the "subprime Chernobyl", saying the bank had created a "cone of silence". ..
Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.

This is the biggest bail-out since the Long-Term Capital Management crisis in 1998, which Bear Stearns refused to join at the time. Bear Stearns is now alone, a case of rough justice being served.

Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m. The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s.

The Mortgage Lender Implode-Meter that tracks the US housing markets claims that 86 major lenders have gone bankrupt or shut their doors since the crash began. The latest are Aegis Lending, Oak Street Mortgage and The Mortgage Warehouse.

"There isn’t a recovery about to happen," said Ara Hovanian, head of the building group Hovanian Enterprise.

Nouriel Roubini, economics professor at New York University, said there were now concerns about "systemic risk fall-out" from the Bear Stearns debacle as investors look more closely at the real value of CDOs.

"These highly illiquid securities have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit," he said. "They have not been rerated in a way that is consistent with rising subprime default rates. "That is why Wall Street is in a panic. "Losses will be massive once these assets are correctly priced to market." Lombard Street said the Bear Stearns fiasco was the tip of the iceberg. The greatest risk lies in the "toxic tranches" of lower grade securities held by the banks.

Much-trumpeted claims that banks had shifted off the riskiest credit exposure on to the asset markets was "largely a fiction", said Mr Dumas.

The worst of the US property crisis has yet to hit since there is an overhang of $2,000bn of mortgages with adjustable rates which have yet to be reset. Many borrowers could see payments jump by half, or even double. At the same time, a spike in 10-year US bond yields by 0.65 percentage points over the last six weeks has drastically repriced the cost of fixed mortgages, knocking away a key prop for the US housing market.

"With defaults at their highest in the 37 years that records have been kept, it could be a long hot summer," said Mr Dumas.

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http://www.marketwatch.com/news/story/us-home-prices-falling-fastest/story.aspx?guid=%7B4B508C7D%2D1395%2D482F%2D9DC7%2D7CA11FF6C8BE%7D
[From Charles Schwab website] :
Home prices fall at fastest rate in 16 years
9:23 AM EDT June 26, 2007
WASHINGTON (MarketWatch) -- Home prices in 10 major U.S. cities dropped at the fastest pace in 16 years in the 12 months ending in April, according to Standard & Poor's Case-Shiller home price index released Tuesday.

Home prices in 10 cities fell 2.7% year-over-year, the largest decline since September 1991. Meanwhile prices in 20 cities dropped a record 2.1% year-over-year. The 20 city index is more comprehensive, but its history only goes back to 2001.

Price appreciation has slowed for 17 consecutive months.

Fourteen of the 20 cities show falling prices in the past year, led by Detroit (down 9.3%), San Diego (down 6.7%) and Washington (down 5%). Seattle had the largest price gains over the past year at 9.6%. Prices in Charlotte, N.C., are up 7%, and prices in Portland, Ore., are up 6.4%.

Miami's appreciation turned negative in April for the first time in this cycle; prices in Miami, which had risen 25% in the year ending in April 2006, are now down 1% in the past year.

"No region is immune to weakening price returns," said Robert Shiller, chief economist for MacroMarkets LLC and the co-creator of the index. Even in regions such as the Pacific Northwest or the Southeast, where prices are still rising, the gains have been slowing.

Falling home prices have squeezed many borrowers who have been able to extract equity from their homes or refinance their loan to avoid a sudden increase in mortgage payments as the interest rate on their adjustable-rate loans reset.

As a result of falling prices, foreclosures are rising nationally, especially in regions with a weak economy, such as the Midwest, and in the bubble regions of Southern California, Florida, Nevada and Arizona.

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The Daily Herald reports from Illinois. “The highest number of existing homes in two years are sitting on the market in the suburbs, and they’re facing the lowest percentage of sales in recent times, according to figures released by local Realtors.

The Post Dispatch from Missouri. “The national market for existing homes remains mired in a slump, and the St. Louis market hasn’t bucked the trend. Indeed, compared with sales a year ago, the local region fared worse than the nation.”

The Associated Press. “U.S. home prices fell for the 17th month in a row with all regions showing the effect of the housing slowdown, according to a housing index released Tuesday by Standard & Poor’s. It was the steepest decline since 1991.”
“Boston, Detroit, Phoenix, San Diego and Washington, D.C., showed the greatest year-over-year declines in prices.”

The Street.com. “Homebuilder Lennar offered little comfort about the state of the U.S. housing market Tuesday, posting much-worse-than-expected results for the second quarter and warning of continued deterioration in selling conditions. For the quarter ended May 31, Lennar recorded a loss of $244.2 million.”

“‘The housing market has continued to deteriorate throughout the second quarter,’ said CEO Stuart Miller in a statement.

“The chief financial officer of No. 6 U.S. home builder Hovnanian Enterprises Inc. (said) that the market will not significantly recover even in 2008.

“Goldman Sachs Group Inc. subprime mortgage bonds issued last year are being downgraded by rating companies at the fastest rate of any issuer, according to Citigroup Inc. research dated June 22.”

“Holders of some investment-grade portions of collateralized debt obligations backed by subprime mortgages will lose all of their money, according to Bill Gross. With subprime loan defaults at 7 percent, buyers of the BBB pieces of CDOs stand to lose their entire investment, said Gross.”

The Miami Herald. “Home sales in South Florida were sluggish in May and are expected to lag into the summer. The number of single-family homes sold in May plunged 44 percent in Miami-Dade from a year ago, according to figures released Monday by the Florida Association of Realtors.

“J. Larry Sorsby, chief financial officer of Hovnanian Enterprises, said Monday at the Reuters Real Estate Summit in New York that Lee County[Florida] is ‘by far the worst housing market that we’re in and I wouldn’t be surprised if it’s the worst housing market in the country.’”

The New York Times. “The American housing market, as measured by home-building activity, is falling at the most rapid rate in decades, underscoring the pain felt by builders who were far too optimistic about the state of the market.”

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Mexico stocks drop on US mortgage market fears
Reuters - 8 hours ago
MEXICO CITY, June 26 (Reuters) - Mexican stocks closed sharply lower on Tuesday as concerns about the US mortgage market and signs of weakness in the US ...
Mexican stocks down on US mortage market fears Reuters

all 14 news articles »

The U.S. Departments of State and Homeland Security announced Friday, June 8, that U.S. citizens traveling to Canada, Mexico, Bermuda or countries in the Caribbean region, who have applied for, but not yet received passports, can re-enter the United States by air. This accommodation does not mean that Americans are exempt from meeting the entry requirements of Canada, Mexico, Bermuda or countries in the Caribbean region, some of which require a passport, certified birth certificate, or other evidence of citizenship for entry.
http://www.travel.state.gov/travel/cbpmc/cbpmc_2223.