I seem to be living in co-op HELL these days. See my post on the nightmare of the proprietary lease renewal here.
My latest adventure was working with a customer who was going through a divorce. I didn't think it was a big deal that he didn't list alimony or child support payments on his financial statement because none had been determined yet. Word to the wise: Going through a divorce? Don't buy a co-op.
Co-ops are generally looking for:
- 20 - 25% down payment (sometimes more, rarely less)
- 18 months at a minimum and most likely 2 years of mortgage and maintenance payments left over in reserve in liquid assets (401Ks and IRAs do not count!) after the down payment (Sutton Place and Park/5th Ave buildings frequently look for much higher reserves - this at least gives you a ballpark requirement for most co-op buildings)
- A 25 - 28% debt to income ratio (if your payments are $3,000/month, you need to gross about $12,000/month)
So if you are going through a divorce where you may be required to pay alimony or child support in the future, a board is going to be very concerned about your future debt to income ratio, even if your current numbers are great.
In this case, my customer had 2 years of payments in reserve, he was putting more than 20% down on the apartment, he had a great job history, a credit score of 770 and had a 26% debt to income ratio.
After submitting the board package, the board's managing agent asked for my customers divorce settlement paperwork. I explained that the divorce wasn't final and no paperwork had been drawn up yet. We ended up having to get a letter from the wife stating that her husband wasn't going to have to pay alimony or child support. I felt terrible for my customer and can not imagine how awkward it must have been for him to ask his wife to do this for him.
But even the letter from the wife wasn't enough for this building. The board then asked my buyer to put a year's worth of maintenance payments ($11,000) into an escrow account for an indefinite period of time. Although the broker rumor mill is that other people in the building have asked for and received their escrow $ back after one year, there is really no absolute guarantee that the building will give it back until my buyer sells his apartment. Different buildings work their escrow agreements differently.
If you are going through a divorce, buy a condo!
If you can't buy a condo, be prepared to furnish any paperwork that has been drawn up, or be prepared to have an attorney or your soon to be ex draft a letter to the board about estimated (or better yet, maximum) alimony or child support payments.
If you are going through a divorce be prepared to offer a year or two of maintenance to be kept in an escrow account to make a co-op board feel comfortable with your future debt to income ratio and reserves.
If you buy a co-op when you are going through a divorce, you'd better be be overly qualified to buy the apartment! Don't submit joint bank statements because naturally the board will assume that only half of the funds in that account will end up being yours. As my mother always said, "a woman should always have her OWN MONEY!"
When buying a co-op, plan to bear your heart and soul to the co-op board. Nothing is sacred! NOTHING.
A: The harsh reality of incoming weak economic data, a confused fed chairman who admittedly doesn't have the answers to our problems, and spent fiscal & monetary policy thus limiting future bullets in the fight against a severe recession is starting to set in. There is so much going on in creditville, a not so good place to call home, that this post is going to be more of an overview of recent events rather than a focus on one topic. With future rate cuts likely resulting in further commodity inflation, I'm concerned that we are going to be running out of bullets soon and will have to deal with a period of financial stress without the fed's strongest weapon available to us.
According to MARKIT indices for a glimpse into investor sentiment in the credit markets, things actually got noticeably worse since the end of January with one exception; corporate spreads narrowed a bit. Nothing to get excited about though as it didn't last long, but then again, anything other than straight deterioration is good in my mind. First I'll describe what I am seeing in the ABX, CMBX, & CDX indices and then you can see the chart below showing you a visual of the ABX & CMBX:
ABX Inidices Continue To Dive - investor sentiment weakens as expectations for rising defaults on subprime loans continue.
CMBX Spreads Narrow Then Widen Again - a fakeout. For a few days I was getting a bit hopeful that this commercial mortgage backed securities index would show some stabilization. But then spreads widened again with a big uptick showing continued distress in the commercial MBS markets. Investors seem to be waiting for commercial real estate to be the next shoe to drop, resulting in a new wave of losses for financials holding toxic CMBS bonds.
CDX Spreads Narrow Then Widen Again - another fakeout probably in reaction from the affirmation of AAA ratings at MBIA, and talk of an Ambac rescue plan; of course now it looks like the Ambac deal hit a snag according to Charlie Gasparino this morning. Credit still appears to be tight and spreads wide as risk aversion remains in place.
Add to these credit market indicators weak economic data, a HUGE loss over at AIG, Thornburg mortgage selling assets to meet margin calls, MBIA calling for more losses, UBS predicting $600 billion in credit market related losses throughout financial sector, Peloton Partners forced liquidation of $1.8 billion asset backed hedge fund, and the list goes on and on. To me, two of the above listed pieces of news sticks out: Thornburg forced sales to meet margin calls & Peloton forced liquidations. The UBS prediction of massive losses is not news, its a somber reality check.
The Thornburg news reminds us that all is NOT well in default land and that the trend for future defaults is rising; which is what the ABX indices are telling us as well. It seems we have forgotten about this recently as the bond insurer saga, Fannie & Freddie cap lifts took center stage this past week. Housing is the runaway train that is fueling all these problems, and the data is showing no end in sight yet. While subprime sparked the fire, it is the threat of spreading to higher quality debt classes that is scary. News on rising Alt-a defaults, or near prime, is starting to come in.
According to Bloomberg's article "Alt-A Mortgage Securities Tumble, Signaling Losses":
Securities backed by Alt-A mortgages and other home loans to borrowers with better-than-subprime credit tumbled this month, causing investment funds to unwind or meet margin calls and signaling larger losses for Wall Street.So what happened on February 14th? UBS announced a $2 billion write down and disclosed some $26.6 billion in Alt-A exposure! The Alt-A mortgage securities market totals just under $1 trillion; so the risk is validated. I guess it's all a matter of what you believe. You all know my concerns and I think it is just a matter of time for the problem to spread to other debt classes; you are starting to see it already. The problem now is that nobody wants to throw good money into bad, options for struggling institutions are very limited, and you are likely to see more forced liquidations of assets to meet margin calls in the near term. The fed is running out of bullets as commodity inflation runs wild, but we will certainly see more rate cuts soon in an attempt to limit the destructiveness of the coming slowdown. Just listening to Bernanke yesterday sent chills down my spine as we all learned even the fed chief is not sure how bad this problem is; only that it is "worse than 2001's environment" that caused a minor recession.
London-based Peloton Partners LLP, which owns debt tied to home loans considered safer as well as bets against subprime, is liquidating a $1.8 billion hedge fund.
Valuations for AAA rated securities backed by Alt-A loans, deemed between prime and subprime in terms of expected defaults, slumped 10 percent to 15 percent this month, partly because it's so difficult to trade or find prices for them, Thornburg Mortgage Inc., the Santa Fe, New Mexico-based lender and investor, said in a securities filing today.
Alt-A securities began tumbling on Feb. 14, when UBS disclosed its holdings and speculation began spreading that the Zurich-based company would sell a large amount, Thornburg President Larry Goldstone said in a Bloomberg Radio interview today.
The economic data & stock markets are lagging the credit markets, so I'm keeping tabs on how fiscal & monetary policy is being absorbed by the credit markets. We need to see:
a) confidence return to secondary mortgage markets
b) corporate spreads narrow
c) housing fundamentals reverse negative trend
d) financial write-downs coming to an end; clean balance sheets
...before we will see risk aversion dissipate and the credit markets start to normalize again where access to credit returns. When this happens, it is just a matter of how much bad lagging economic data resulting from this whole mess & seizing up of the credit markets is yet to come.
I'm sick of the macro-economic pall overshadowing everything! No, I don't think we are out of the woods...I just don't feel like talking about it anymore. So this is the first in a series of pieces I'm going to do on the emerging markets of New York City, where I will check in with local brokers who are active in the market and get some feedback on what they see on the ground today. I have already written on this site that I am bearish on the boroughs and Harlem in the intermediate term, due to new supply trends and my feeling that improving Manhattan values will keep more people in midtown and downtown. I also feel that certain markets like Harlem and Long Island City will offer great long-term appreciation potential to those who take advantage of the expected price correction. But I will not be blind to reality and would be happy to have my forecast proved wrong. So I promise to deliver to you, Mr./Ms. Reader, the unvarnished feedback I am getting from the people on the street doing deals. Remember I myself am not a broker, I currently have no development projects to tout, but yes, I would love to buy income-producing properties at extraordinary values, would that they existed. With that preface taken care of:
A check in with Willie Kathryn Suggs, principal broker at the eponymous Harlem real estate firm, told me this:
The last 2 weeks things have picked up. We had 10,000 hits to our web site in December, but our telephone call volume fell from 300 to 50. But we are busy now with real buyers who are willing to go out in the 20 degree weather to see properties. Prices for townhomes have flattened but they are not going down. We just saw an SRO conversion that was done without permits and sold in a foreclosure proceeding sell above the asking price. A couple of months ago people were coming in with lowball bids trying to take advantage of the news headlines, we aren't seeing that anymore. Some bids may be below asking prices but they aren't insulting.Edward Myers whose Myers, Smith & Grandy has been in business in Harlem for 38 years, commented on the strength he sees in the face of awful real estate conditions in the rest of the country, that has buyers concerned:
I have never seen the outlook so positive. The condo market is still rolling, they are still building and they are still selling, it's not at the same rate as 3 - 5 years ago, but pricing has not changed. The brownstone market is a little slow, but hasn't ceased. Where it used to take 30 to 45 days for a building to sell, now it may take 60 - 90 days or longerOn the commercial side, I checked in with Shimon Shkury. He's the partner on the ground in Harlem for income-producing property and real estate development site mavens Massey Knakal Realty Services. According to my call with Shimon:
The market is still strong in terms of investment sales. Pricing in multi-family is flat to up. Pricing on development sites is flattish.Shkury did comment that inventory is moving slower as buyers are taking longer to review deals. However, investor interest remains high with lots of newcomers including some foreign money and investors who have shifted focus from other boroughs. While banks are being tighter in their underwriting practices, there is still, reportedly, money to borrow. According to Shkury, banks had previously given borrowers some credit for future upside in rents on apartment buildings, but they are no longer doing so. They are focused only on debt service coverage ratios, which are required to be 1.15 to 1.25x. In order to reach these levels at current prices, some buyers are having to put in more equity than they normally would, which is lowering the loan-to-value ratios of the loans they can take out. On construction loans for condos, banks are insisting that the deals pencil out as rentals, which would be the alternative plan, if the builder ran into trouble or could not sell off the units fast enough.
According to Barry Hersh, the Associate Director of Education at the Steven L. Newman Real Estate Institute at Baruch College:
A year ago Robert Shiller from Yale spoke at the Newman Institute and later at a Real Deal gathering at Lincoln Center and he asked "Why is New York Immune?" Thus far international buyers have been the wild card.However, Hersh noted, there are widespread stories of condo developments going rental. He attributed this to slow velocity of condo sell-outs as opposed to a decline in selling prices to date. Although his suspicion was that these would come, while noting "Nobody puts an ad in the paper to let everyone know prices are now falling."
My take on Harlem is that so far it is holding up better than I expected considering deliveries from the pipeline of 1,345 condo units from 2007 and some portion of the 1,506 units that were started in 2006. It speaks to Harlem's attractiveness as an up and coming neighborhood, which I featured in my piece "Why Harlem is Hot Hot Hot!," last summer. I still think that as the country gets deeper into recession and the Wall Street layoffs and related job losses hit New York, there will be a buying opportunity. But if you have a long-term outlook, know what you can afford to spend and feel secure in your job, I would be hard pressed to tell you to avoid buying in Harlem, because of an impending price collapse. There is just no word of that right now.
A: Any way you slice it, this is positive news and since the Ambac rumor came out on Friday, this chapter of the bond insurer saga was good for about 400 DOW points so far! What is more positive in my mind, is MBIA's announcement as that came as a bonus since the Ambac rumor was released to us on Friday and everyone I talk to was waiting on that resolution. Getting ratings affirmations for both these guys does two very important things: adds clarity/confidence to tradabale markets + saves a round of write-downs for financials that would have come if the downgrades hit. I caution you to interpret this as a solve all fix, as it is very possible we will revisit bond insurance ratings issues if credit markets and housing markets continue to be pressured causing more defaults; especially to higher quality debt classes.
We must understand WHY bond insurers were at risk of losing their 'AAA' ratings in the first place, and that is defaults on bad loans that would result in claims filed by holders of toxic securities! Right now according to MBIA's site, HELOC's & Closed End Second Lien loans are the underperforming bonds with defaulting first loss tranches. I'll do a post on this later in the week but for now, you can see this chart:
Now, between Warburg's capital injections to MBIA and a consortium of banks combining forces to secure Ambac's ratings, the following forces are handed to the tradable markets:
a) short term clarity; business can continue to be booked
b) a degree of confidence that claims paying abilities are strong
c) removal of threat of a financial shockwave if downgrades came; muni markets residual effects
d) removal of threat of downgrade related write-downs at banks/brokerages
...hence contributing to the 400 point rally since the news started to leak Friday; but it looks like its now priced in at these levels. These are positive and important elements to be given to the markets. However, it does NOT fix:
a) continuing fundamental housing weakness; continuing affordability problem
b) toxic holdings still on books; more write-downs coming
c) rising defaults / foreclosures (Foreclosures Soar 57% in January from year ago levels)
d) continuing credit markets dysfunction
e) spreading of problems to other debt classes
f) slowing economy
g) rising inflation (Wholesale Prices Soar in January)
While I truly want to get excited about this, and I am to a degree as I am no longer as scared as I was when the threat of downgrades for these guys was here, it's foolish to think the rescue of the bond insurers ratings fixes the root problems that caused the downgrade threat to begin with. So, it is very possible that we will have to revisit ratings rescue plans down the road IF credit markets continue to be dried up, housing continues to fall, defaults continue to rise, and the problems spread to other debt classes. But defaults are the key since this data point directly results in a first loss and up the chain of tranches that resulted from loans being packaged up and sold to investors as mortgage backed securities. Look at todays news on foreclosures, according to CNN Money:
Filings saw yet another big jump last month, compared to levels a year ago; 45,327 homes were lost to bank repossessions. Foreclosure filings nationwide soared 57% in January over the same month last year - another indication that the nation's housing woes are deepening.As long as defaults & foreclosures are coming in at these levels, how could we get too excited? The result is that there will be more losses to the bonds securitized by these loans, leading the insurers with more claims to pay out. We need to see this dataset not only stabilize but solidly reverse course before we can talk about being out of the woods. Hey, at least I'm asking the right questions as I painfully try to keep my head above the sand.
Subprime, hybrid adjustable rate mortgages, with interest rates that reset to much higher, often unaffordable levels after a two or three year period of low rates, caused many borrowers to default. Even more exotic products, such as interest-only loans, where balances don't shrink, or, worse yet, option ARMs, where balances grow, also contributed to foreclosure problems.
Professor Roubini weighs in:
This is a bond insurance firm that – as pointed out by Barry Ritholtz and others – has recently been forced to borrow at rates of 14%, i.e. a much higher rate than average junk bond yields, let alone investment grade ones. Still the pretense has been kept that this firm has an AAA rating, the same as the US government and top notch super-safe US corporations.It will be very interesting to see to what degree this news plays on normalizing the credit markets in coming days! Will the market get more liquid? Will bids for toxic bonds come back? If the credit markets start to normalize, that will be a positive leading indicator for helping housing to stabilize. I have my validated doubts and I still think we have more pain to come with rising defaults, pressure in housing markets, slowing economy, and rising inflation. The process still needs to play out and the markets still need to cleanse itself of 5 years of bad bets; its only been about 8 months so far. But its nice to get some closure, for now, to this bond insurer saga.
How can a firm that can only borrow at spreads closer to those of firms that are borderline bankrupt be given a AAA rating is anyone’s guess. It looks like rating agencies have learnt nothing after having systematically misrated for years RMBS, CDO and other structured finance products. Their reputation and credibility has sunk now even lower than before.
I have been waiting expectantly for the latest Federal Reserve Data on banks' bad debts for Q4 2007...haven't you? Ok, well even if you're not a data geek....it's gettin' kinda interesting to say the least. The Q3 2007 data had already been showing the ugliness in residential lending, where delinquent loans had reached levels as high as the early 1990s real estate debacle (when data first began to be collected). It is possible that these numbers were even higher in the late 1980s, when the S&L crisis was still new. But suffice it to say, as evident from the chart below, things are truly ugggly in residential loan land. Things continue to worsen, but that's not new news.
Courtesy of Guild Partners
Note that the delinquencies are being converted rapidly to charge-offs (write-downs) of the value of these loans, which impacts banks' capital levels and ability to make new loans. Due to the severe declines in the value of residential real estate collateral, I would expect delinquencies to convert to more severe charge-offs in the current crisis.
Courtesy of Guild Partners
I'm not sure what the spike in charge-offs was in late 2001, most likely 9/11 related (I double checked and it is valid data point). What can be said is that we are in an area not reached very often and distinctly "recessionary."
Here's the interesting part of this quarter's data. I commented in my last piece on bank bad debt that commercial real estate data was likely to get worse and wrote about why in my piece The Next Train Wreck?. It's showing up in the data pretty rapidly. While the absolute level is not nearly as high as the early 1990s wipeout, we have recently "broken out" to the upside hitting levels above the last recession and not seen since Q3 1998 and the "Asian contagion" period. I am still on the fence about how bad the commercial real estate downturn will be, but not about whether there will be one. In my mind it seems highly unlikely that the delinquency numbers will get better near term. So this is a data series I - and I'll wager a bunch of bank regulators - will be keeping an eye on.
Courtesy of Guild Partners
The media has also been rife with reports of pressure on the consumer and credit card troubles. As you can see from the chart below, credit card delinquencies have been ticking up, but at 4.67%, they have not exceeded the 5% level that appears to be the "recessionary" level hit in the dot com/9-11 period or the early 1990s.
Courtesy of Guild Partners
The most important numbers are to be found in the table below. This is an aggregation of all bad loans as a percent of loans outstanding. It speaks to how much capital is being burned up by the current bad loan trend and it talks to the ability of banks to make future loans, without raising new capital. Fortunately for banks and the economy, we are nowhere near the crisis levels of the early 1990s. Remember, however, these numbers do not include write-downs of the values of marketable securities. They only include loans banks are planning to hold to maturity (which were probably better underwritten). There are literally tens of billions of losses - a number that seems to rise everyday - that are not included here. Note that these "marked to market" losses are not recognized yet and could reverse if the bad debt trend ends. Clearly, from these numbers, we can tell it's still increasing and, dare I say, accelerating.
Courtesy of Guild Partners
The data presented here is from the Federal Reserve Bank of San Francisco. I have utilized the non-seasonally adjusted numbers, which I hope will give us an un-varnished sense of the very latest data. Note that of course, this being Q4 2007 data, it's stale. But it does give a reality check as to whether debts are going bad with the same rapidity as debt-backed securities are being written down in the marketplace. I would have to say that as far as the residential housing and the CMBS market trends go, they seem to be being borne out in actual bank loan delinquencies. The one area where the media seems to have over-blown the story may be in credit cards, according to this somewhat stale data. Individual reports from credit card securitization trusts, and fresher data collected by market research firms, may be showing more stress than the numbers here do. I have to plead ignorance on this point. As noted above, the total bad debt picture is likely worse than what is being seen in the total bank delinquency numbers due to the marketable securities write-offs, which don't show up in these numbers.
A: Market players call it stabilization. Lets just review and you can draw your own conclusions based on the data released today by the always trustworthy NAR.
Here are the datapoints for Existing Home Sales (Yahoo Finance):
* Existing Home Sales Hit 9-Year Low
* Sales of Existing Units Fall 0.4% From December & Down 23.4% From Year Ago; slowest sales pace on records going back to 1999
* Median Prices Drop 4.6% From Year Ago Level of $201,000
* Total Housing Inventory Rose 5.5%
* Supply Hits 10.3 Months Up From 9.7 Months in December
Rumor is stocks rallied on this news amidst signs of stabilization and a bottom forming in housing. Im a bit verklempt! Talk amongst yourselves. Ill give you a topic. The housing market is neither bottoming or stabilizing.
A: This is one f**ked up environment where conspiracy theorists may actually be right! The NY Times had a story yesterday discussing the moral hazard of a gov't bailout. While in past decades wall street banks & brokerages begged governments NOT to interrupt with its progress & innovations, it has come time where now they are asking for just the opposite to get them out of the hole they dug for themselves. Michael 'Mish' Shedlock, of Mish's Global Economic Trend Analysis & Investment Advisor at SitkaPacific Cap Management, offers up some great commentary covering this very interesting read. Which do you believe...Let the tradable markets correct themselves OR aggressive government/fed sponsored bailouts & policy to stop the pain?
According to yesterday's NY Times article, "A 'Moral Hazard' for a Housing Bailout: Sorting The Victims From Those Who Volunteered":
Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for “financial innovation.”In comes Mish & his very interesting commentary. After reading it, you almost can put together both how bad these problems are and how ridiculous this financial world we live in really is; will we EVER take responsibility for our actions? READ THE WHOLE POST or read some snippets here:
A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government - now that it is in trouble.
The proposal warns that up to $739 billion in mortgages are at "moderate to high risk" of defaulting over the next five years and that millions of families could lose their homes.
To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.
"We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market," the financial institution noted.
The government would buy the mortgages at their true current value, perhaps through an auction, at what would probably be a big discount from the original loan amount. The mortgage lenders, or the investors who bought mortgage-backed securities, would be free of the bad loans but would still have to book their losses.
My Comment: This just gets sillier and sillier. If the Government buys them at "True Value" then why don't the banks just hold them at "True Value", or sell them to someone else at "True Value"? Clearly the idea is to dump them on the government at a price far above "True Value".
"Every citizen has a dog in this hunt," said John Taylor, president of the National Community Reinvestment Coalition, a community advocacy group that has developed its own mortgage buyout plan. "The cost of spending our way out of a recession is something that everybody would have to bear for a very long time."
Mr. Taylor estimated the government might end up buying $80 billion to $100 billion in mortgages. But he said the government could recoup its money if it was able to buy the mortgages at a proper discount, repackage them and sell them on the open market.
My Comment: Mr.Taylor is clearly a complete buffoon. How the hell is the government supposed to be able to package this garbage and sell it on the free market if the banks can't?
But identifying innocent victims has already proved complicated. The Bush administration’s Hope Now program offers to freeze interest rates for certain borrowers whose subprime mortgages were about to jump to much higher rates. But the eligibility rules are so narrow that some analysts estimate only 3 percent of subprime borrowers will benefit.
My Comment: Innocent victims are easy to spot. Those who stayed out of the mess but saw property taxes soar to the moon anyway. The second set of innocent victims were those on fixed incomes who got paid a lousy 1% in their money market accounts while the Fed blew the biggest credit bubble the world has ever seen.
The House Financial Services Committee is working on various options, including a government buyout. The Bush administration may be softening its hostility to a rescue as well. Top officials at the Treasury Department are hoping to meet with industry executives next week to discuss options, according to two executives.
"There are a lot of ideas out there," said Scott Stanzel, a spokesman for President Bush, when asked at a White House press briefing on Friday about a possible buyout program. "There are many different ways in which we can address this problem and we continue to look at ways in which we can do that."
My Comment: There are indeed a lot of ideas out there and every one of them but one is a horrid idea. The only good idea is to let this play out naturally over time without the government making matters worse.
UrbanDigs Take: I've said this before months ago! The problems we face today are the result of ultra cheap money + lax lending standards + speculative investing in an illiquid asset using leverage + financial innovation to disperse risk using complex and often mis-understood vehicles + housing deflation. The ultra cheap money and aggressive fiscal stimulus is spurring commodity inflation as housing deflates; an awful combination. The financial innovations were rooted deep and controlled by people with a vested interest in the transaction (make my fee and pass the product down the line approach); it was only a matter of time for the market to seize up. And after years of lax lending standards and very easy money which sparked a 5 year unsustainable boom in an illiquid asset, housing, the very dynamic that powered the boom is now extinct (tightening lending standards, more expensive borrowing costs, illiquid secondary mortgage markets).
What we need is a good old fashioned slowdown to reverse the mistakes made, weed out those that made bad bets, deeply embed the pain of these mistakes in the minds of investors, self-cleansing of the financial markets that allowed this boom to occur, clean off the balance sheets of toxic waste, and prices to revert back to the mean so that we can return on a longer term path of sustainable economic growth with the lessons learned!
Government and fiscal policy needs to be very cautiously applied to these problems so as NOT to disrupt the tradable markets from fixing themselves, and punishing those that made bad bets. If policy and actions are applied too aggressively, a moral hazard will certainly set in, inflation will run rampant, and we will have to deal with potentially worse problems at a later time. What I see now, is the tradable markets working on their own in the following way to correct itself:
a) seizing up of secondary mortgage markets - the very market where banks offload mortgage backed securities is dead. This is causing lending standards to be tightened, available capital to be restricted, lending rates to rise, risk to be re-priced, and losses to be booked on the bad holdings.
b) housing deflation - the turnaround in housing is removing speculative players from the market who helped power the unsustainable boom. In addition, as housing prices fall banks are re-thinking to whom they will lend their capital to and at what rate. In short, the bullshit days of giving anybody a loan because housing goes up are gone!
These two forces are the markets way of correcting themselves. However, it seems government and the fed are doing everything possible to stop these natural forces at work. Yes, I think we need help here, but look at what we got over the past 6 months ---> 225 bps of fed cuts, fed term auction facility injections to provide liquidity to banks and ease LIBOR, gov't sponsored rate freeze plan, gov't sponsored HOPE now plan, $168 billion economic stimulus package, and a bond insurer rescue plan about to be announced! Geez, am I the only one that is seeing all this?
Do you think we need more aggressive measures or to let the markets take it from here for a while?
A: Ahhhh, nothing like a good bond insurer bailout rumor to save the day for wall street! Funny, how every rally these days is rooted either from a bailout rumor or a fed rate cut rumor; solid stuff! Anyway, I had a conversation with a family friend a week ago who recently LOST HER LINE OF CREDIT on a HELOC, but I didn't put much thought into it until CR's post today. All this stuff really means something and it begs a larger question: If the credit crunch is exactly that, a tightening of credit availability and access to credit, how is that going to allow people to buy buy buy?
First, lets discuss the Ambac rumor very quickly as its 20 hours old news right now. A consortium of banks are reportedly going to announce a cash injection of $2-$3 billion to help Ambac maintain its AAA rating! YAYYYYYY, all our problems are now solved and housing will go up again and all these CDO's and other structured credit products are going to go up in value now! Umm, no! This doesn't solve anything other than delay the inevitable losses from being booked, and will buy Ambac some time until the next round of capital injections becomes necessary to maintain credit ratings again. Its clear the banks have a choice:
1) either team up and cough up capital to hold off a ratings downgrade and book 'X' amount of losses...OR
2) don't do anything, let the insurers get downgraded, and book 'X + X' amount of losses and deal with the negative effect on their corporate stock prices and residual effects that this will bring to overall market sentiment/losses and investor appetite for future risk taking
It's clear #1, the option that has less negative results, is the preferred route and the likely route. In the end, the losses will still be booked and the toxic holdings are still toxic. I look forward to this tentacle of the credit beast being cut off though.
Credit cards! Hey America, you have a spending and credit card problem! No news here. Did we really think this game would go on forever, honestly? According to CardTrak.com, credit card delinquency rates are up 100 basis points in the past 12 months alone; the chart on the right shows this! Our fascination with spending using credit when income doesn't afford the same luxuries is a ticking time bomb when a credit crunch hits home.
Credit card debt WAS securitized on wall street just like subprime mortgage debts were! According to an article from The Center For American Progress:
As borrowing in the mortgage market slows, credit card borrowing is accelerating—a dangerous trend because borrowers still face weak income growth. That means the credit card market could eventually run into the same problems that now afflict the subprime mortgage market.Which brings me to what is really going on in today's world if your head is not in the sand; tightening of available credit! What is it this time? Banks are starting to YANK Home Equity Lines Of Credit! So, lets say you have a $50,000 HELOC, and used $25,000 for home renovations and wanted to use the remaining funds for something else. Well, that available $25,000 is now at risk of being YANKED! According to The Washington Post (via Calculated Risk):
The lending industry that no longer aggressively issues subprime mortgages continues to aggressively market credit cards, especially credit cards with subprime-like lending terms, such as a variety of higher fees that are poorly disclosed.
Increased defaults could unravel the $915 billion in securitized debt backed by credit card receivables, just as delinquencies in the housing market unraveled the $900 billion in mortgaged-backed securities. Just like mortgage-backed securities, credit card debt is packaged and sold to investors. An increase in defaults could lead to losses not just for the credit card lenders, but also for pension funds and investors who bought the debt.
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.So, in clear conscious thought, how in the world can anyone possibly start to discuss a recovery when access to credit is being restricted? How much tighter will access to credit get as more losses are booked by banks & brokerages; we know there is more to come? And as credit gets tighter, even tighter than where we are right now, how in the world are consumers supposed to continue leveraged/credit spending?
Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.
USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.
Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.
Its midnight and your lost in the woods with no backpack or flashlight. I can see a vision of bruised adventurers running around in circles, scratching their heads as they ask each where they are? The only consistent is the collective sigh of "how should I know"?
As the lost group attempts to charter previously unchartered paths, they stumble upon the larger rocks on the ground here and there. Sometimes they fall, sometimes they don't but they always get up and continue on their way; each time a bit more wary than before. The group sub consciously walks slower with each fall as they fear what may lie ahead. Hours go by as slow as months as you try to navigate the herd back home without having to sleep in the woods with no equipment. But you know what, sometimes you have to sleep in the woods with no equipment.
This scenario in my opinion accurately describes what we are all facing right now. Fact is, we are in unchartered territory on the following levels:
a) the use of leverage to support a 5 yr illiquid asset boom (housing)
b) period of time AFTER a financial innovation results in the dysfunction & seizing up of the actual marketplace where the products are traded
c) housing deflation + commodity inflation
d) balance sheet black hole
No matter what you hear about this current situation, we can't argue that we are in a period of de-leveraging. Risk is being repriced and the credit markets are in shut-down mode as the industry around it attempts to corrects itself. Games that worked before, do not work now. And since housing is illiquid and nobody knows how Americans will be impacted by any economic slowdown, which few deny is here, it is impossible to predict the short term bottom for prices.
The additional threats we face relate to the rocks/trees we can't see as we navigate ourselves blindly through an unfamiliar terrain. We don't know what will happen. We don't know the side effects of the events that will play out over the near term. We are completely lost. In the near term, we know we will find out:
1. who is holding toxic securities - we just found out that Bristol Meyers Squibb & the life insurance companies are the latest company's to announce exposure to subprime mortgage backed securities
2. resolution to bond insurers saga - private takeover, gov't bailout, cash injections, etc..In the end, its all about one thing: RATINGS! Will the ratings remain AAA, or get downgraded. A downgrade, in any way, shape or form, will result in its own wave of losses to anybody holding anything toxic insured
3. economic data - we know its coming and the fed said it too; higher inflation and rising unemployment. Unemployment, GDP, ISM, and jobless claims are all expected to be pressured over the next few months at the very least.
We don't know what other obstruction may pop up. We don't know the level of certainty or uncertainty that this information will bring with it. So we look to the stars for some sense of direction. The stock market is the stars, and is the tool that most use to figure out where they are when confused, or lost. But in this unchartered world where we don't know what lies ahead, this widely used, widely publicized vehicle is not a very good navigator for one real reason. Stocks trade on information available and investor sentiment for the near term, lets say the next six months. If the world around us slows and earnings come down, then the entire valuation model of equities (p/e) will have to re-adjust to the weaker times that we know are about to come. Here is a great recent example:
APPLE (NASDAQ: aapl), was trading at a higher price/earnings ratio only 4 weeks ago when shares were hovering near $160 a share and off its high of $200; lets say 31 although I don't have the exact #. Then something happened. On JAN 23rd, the earnings forecast disappointed. The stock fell 11% as investors re-adjusted the share price to be more in line with the lowered earnings forecast. As with most earnings disappointments, the adjusting stock slowly slipped over the following few weeks to a current trading price of $118.This very dynamic, is why stocks CAN'T be used as an accurate gauge to our current situation; yet I am sure it will. Right now, we are lost in the dark and for me, there are clouds obscuring the stars! Oh how I wait for those clouds to clear or for the sun to rise! Shit. A cliff. Didn't see that coming.
I love trying to explain what a "condop" is to buyers. Do condops exist anywhere besides NYC? I somewhat doubt it - we do everything a little different here when it comes to real estate! There are several definitions of a condop, but in the case of Azure, a new building going up at 333 East 91st St, a "condop" is a co-op with condo rules.
"Why would someone build a new co-op instead of a condo," you might ask. Azure has a 75 year lease on the land under the building. The City of New York owns the land. You can't have a landlease building that is a condo, so the next best option is to build a co-op that has condo rules. The developers of Azure agreed to rebuild a school next door as part of their development. The public school will be a "gifted and talented" middle school. In working with the City of NY on the school and on building low income housing outside of Manhattan, Azure may well be one of the last new buildings in Manhattan to receive a 421(a) tax abatement.
Since the building is a co-op with condo rules, it is investor friendly. You can rent out your apartment right away and there is no board approval for buyers when you sell the apartment. So you avoid the frustrating headaches that can come with owning a co-op. The building also requires only 10% down and the rest at closing. Generally in a new development, buyers would need to put down another 5% sixty to ninety days later. They are also offering closing incentives and attractive financing rates through their preferred lenders.
I think this building might be a tough sell for some people. In 26 years the land rent will be renegotiated with the City of New York and will be based on the market value of the property at that time. In 26 years in Manhattan, the value of land dramatically increases. So in 26 years, the land rent will increase and hence, the maintenance will increase. Additionally, in 10 years, the 421(a) tax abatement will be over, so those low monthly payments will only increase (recall Noah's post on 421A abatement). You'll never be one of those lucky co-op buildings that pay off their underlying mortgage & the maintenance actually goes down.
You're also paying almost the equivalent of condo closing costs (about 4% of the sales price for apartments over $1M, about 3% for apartments under $1M) but you're getting a co-op (usually your closing costs would be about $2,500 for anything under $1M).
15% of the apartments are sold and the sales office has been opened since November (unfortunately for them, November is probably the worst time to open a sales office, so they weren't blessed with great timing). The apartments are not exactly flying off of the shelves especially with the current market conditions.
The building's finishes are nice, the developer is open to combinations and buyers even have 4 choices for their kitchen cabinets and 3 choices for their counter tops. Usually, you get whatever finishes the developer says you get & all apartments are delivered with the same kitchens and baths; so its nice to have some level of 'choice'. Some of the apartments are around $1,000 per square foot, which is probably the lowest price per square foot for a new building on the Upper East Side. The 2nd Ave Subway will one of these years have an entrance on 94th street. Maintenance is around $1/ft on the lower floors, increasing to about $1.50 for higher floors. Studios start at $650K & one through five bedrooms are available.
Sample pricing. Maintenance is 53% tax deductible.
4D, 724 sq ft studio, $780K, Maintenance with 421a is $720.
4F, 601 sq ft studio, $605K, $596/month maint.
4B, 1063 sq ft one bed, 1.5 baths, $1.098M, $1,054/month maint.
8C, 2 bed, 2 bath, $1.55M, $1,728 maint.
18D, 2 bed, 2.5 bath, 1487 sq ft, 100 sq ft balcony, $1.697M, $2,141
18A, 3 bed, 3 bath, 1810 sq ft, $2.407M, $2,206 maint
31A, 4 bed, 4 bath, 2496 sq ft, 67 sq ft balcony, $4,127M, $4,517 maint.
Valet, 24 hour doorman & concierge, Residents' Lounge with Private Dining Room, Children's Playroom, Game Room, Fitness Center, Roof Terrace.
Storage Bins are also for sale.
Estimated Completion: Spring 2009.
Note: Was asked by a few buyer clients about this topic so I figured to re-publish what I did with my JR4 when I sold. This post was originally published in Jan, 2006 so please put yourself back into time and place. I'll do quick add on at the end.
A: As I wrote about in a previous post, What To Do With Your JR4, I just started renovations on my JR4 in which I'm changing the alcove into a true 2nd bedroom. Marketing a 2BR property in Manhattan should allow me to greatly maximize the return on this $4,500 project!
In New York City, there is quite a disparity between the selling prices of a 1 bedroom and a 2 bedroom apartment. After all, a 2 bedroom apartment gives you enough room to grow into should you decide to have a new baby or a roomate. The price difference in the Upper East Side looks something like this:
AVERAGE SELLING PRICE 1BR / 1.5BTH CONDO IN UES
AVERAGE SELLING PRICE 2BR / 1.5BTH CONDO IN UES
AVERAGE SELLING PRICE 2BR / 2BTH CONDO IN UES
*Note: Add on some premium for prime location, luxury buildings and those apartments that have been fully renovated or have outdoor space!
To market your property as a true 2BR apartment that won't leave buyers frustrated when they come to see it, you will need the 2nd bedroom to be at least 100 sq. ft., have its own window (a must) and HVAC, and its own electrical switches and closet. Just putting a wall up will not cut it and will leave buyers unsatisfied when they come to preview.
Most JR4's have the window and HVAC in the dining/office alcove leaving you with the job of closing off the room, adding a closet, and doing some electrical work. All in all, expect to pay about $5,000 for this work to be done. A new paint job will seal the deal and put your apartment in the 'sell-o-sphere' of a 2 bedroom! You should be able to add on around $75K to your asking price, depending on the last 2BR that sold in your building; although, you will need to price yours lower to accomodate for the lesser total space.
Here is my alcove space before the transformation:
Here is how it looks after Day 1:
Here is how it looks when completed:
The 2nd BR measures 10'4" x 10'8" and has a closet with 2 shelves and a pole for suits/shirts/pants. For Manhattan, it is suitable for most buyers who require a 2nd bedroom.
Before I start advertising, I need to do some fine tuning to the floorplan using photoshop to reflect the changed layout. I also need to do some research on what 2BR condo's are going for in my building and my neighborhood. I'll be sure to price mine below these (which is still way above the most expensive 1BR condo listings) to spur activity and get traffic into my open house!! In the end, the goal is to have the most aggressively priced 2BR condo on the market.
ADD-ON (2/21/2008) - Careful with pricing as your target buyer to make this strategy work most profitably is young/mature, looking for a starter home that could be scalable if their family grows! It is not for those who need a true 2BR, an extra 200 sft, at least 2 full baths, and a separate dining room! So, make sure you discount your converted 2BR properly or it will get little traffic.
A: A hot CPI number wakes everybody up to the FACT that commodity inflation is hitting consumer prices! Even those that say inflation is under control won't be able to continue that argument with a straight face. This inflation trend will continue as long as commodity prices remain at these elevate levels; and that will last as long as our fed attempts to re-inflate our economy out of this credit mess. Meanwhile, this credit storm is now a full blown category 5 hurricane on so many levels and is hitting land at numerous points; analogy --> credit crisis is spreading! Put both these FACTS together and you will understand why lending rates are rising.
First, the inflation news. According to the WSJ.com:
U.S. consumer prices accelerated across the board last month, a worrisome sign for Federal Reserve officials who must balance a sharp slowdown in economic activity with stubbornly elevated price pressures. Still, the inflation data likely won't deter Fed officials from lowering official interest rates again next month, as guarding against recessionary risks remains their top priority.As far as the credit crisis, things are just bubbling under the surface; I feel like a big event is brewing. Here is what is going on as a result of the dysfunctional credit markets and the effect it is having on willingness to lend:
a) Corporate Bond Risk Soars To Record On CDO Losses Speculation
b) California City Nears Bankruptcy
c) Credit Suisse Write-Downs + Lehman Brothers Commerical MBS Exposure
d) Auction Yield Chaos For Bonds & Auction Rate Turmoil Hits Pittsburgh Medical Center
e) Capital Sparse In Some US Student Loan Markets
f) Massachusetts May Raise Road Tolls Amid Auction Rate Woes
g) Corporate Spreads: Credit Market Bottom Nowhere In Sight
h) Those With Money In Short-Term Securities Can't Get It Out (CNBC Video)
...and on and on. It is sickening, its nauseating, its real, and it trickles down to the consumer as banks tighten lending standards and raise rates for mortgage loans that are considered riskier in times like this! You guys MUST understand something. I don't want all of this to happen! It makes me sick to see this credit cycle unravel & spread the way it has, but I don't control that. I will continue to discuss this because it eventually hits the consumer and real estate investments. Trust me, I cant wait for the day when the credit markets return to normal and will publicly discuss this when it happens. But mark my words, even when the leading credit market indicators normalize, we will have to deal with the pain that was inflicted for a while longer. For now, credit markets are still in pain and this cycle is not close to done.
As a result of everything that was mention above, lenders are forced to raise interest rates even as the 10-YR bond yield falls and the fed cuts rates to counter the looming economic slowdown. I discussed the disconnect between the bond market and mortgages rates back in December in my post, "Bond Yields & Mortgage Rates No Longer Related", once I disclosed to you guys back in August 2007 that "Its A Risky New World: Credit Spreads". In this new world, credit quality means a lot and underwriting standards have tightened significantly as the environment that produced a 5 year housing boom is long gone! The chart to the right shows you 30-YR Jumbo Fixed + 5/1 Jumbo ARM rates for New York over the past 3 months; NOTE THE TREND OVER THE PAST 1-3 WEEKS! It should be clear that as bond yields fell (red line), both lending rates have risen! A sign of the riskier world we live in.
One thing is for sure, as the credit markets lead the equity markets, and we see how bad it really is to balance sheets and how far it spreads, the availability of capital will get tighter & tighter!! That means higher rates for you guys until this credit storm passes. And when it does, the fed will have to hike rates to curb inflation that they helped fuel as they focused on slowing growth due to falling housing prices and the credit turmoil that resulted.
Several China related items over the last few days struck me as worth some attention. One in particular, a very large stock offering by a Chinese Insurance company begged some better explanation.
Chinese Consumer Prices Rose 7.1% Year-to-Year in January: This according to Marketwatch, which pegged the number at the highest rate in 12 years. This was reportedly driven by rising food and energy prices, not new news. The fact that recently released figures show foreign direct investment doubled year-to-year was nothing new either. But that's the problem, the runaway growth train (which we all now know far too well fuels bad underwriting), has not slowed one iota and inflation is rearing its ugly head. This, despite the governments efforts to rein it in through rate hikes, (modest)currency appreciation, bank reserve requirement increases and moral suasion. China's blizzards didn't help matters, as the country's central bank injected funds into the economy to accommodate holiday driven demand, which was stifled, resulting in an 18.9% leap in money supply, to the highest level in 20 months, according to an article in The Standard. "The central bank will probably tighten again in the second quarter" according to Paul Tang Sai-on, chief economist at Bank of East Asia in Hong Kong. Remember interest rate hikes are not good for stock markets, particularly highly valued stock markets.
Stock Index Futures to Debut? According to the Economic Times the Shanghai stock index rose 2% on late buying last night on rumors that China will launch trading of stock index futures in the second quarter. The market was up 1.58%, Monday, on Friday's approval of two new equity funds. According to Rueters, The China Securities Regulatory Commission had halted the approval of new stock funds in an effort to quell the speculative fervor of the markets last spring. The new equity mutual funds are set to raise 14 billion Yuan to be invested in the markets, prompting Rueters to speculate that this is an apparent effort to prop up the sliding market. I would call recent trading a demonstration that despite a 26% drop from the peak and 15% hit year-to-date, some speculative juices still remian, as there was no fundamental news here, just news that more players could join in the game. Worse yet, if the government is pursuing policies meant to help the market, it implies China's government like ours also has a financial heroin addiction. On the one hand trying to kick the habit and on the other capitulating to the withdrawal effects. Note from the chart above that withdrawal pains have been evident in the Shanghai Composite recently.
Monster Stock Offering: On January 18th, Ping An Insurance, China's second largest insurer by premium volume, disclosed plans to raise $20 billion in an IPO, in addition to making a $5.75B bond offering. It never specified what its plans for the proceeds were, although in December the firm received government approval to invest 15% of its assets abroad. Note that several large Chinese companies have done IPOs in recent years and also received the green light to invest overseas. One significant example was the mammoth $19.1 billion IPO of the previously state-owned Industrial & Commercial Bank of China in 2006, which set a record at the time. According to China Knowledge, Ping An recently announced that its premiums grew 49.3% year-to-year in January to $2B. With money that needs to be invested for the long-term flowing in at such high rates, one wonders why the firm needs to do a massive capital raise. The Wall Street Journal reports today that on February 4th the People's Daily, the communist party newspaper carried an article that was highly critical of the large offering and quotes an analyst from a China-based securities firm saying that the announcement has terrified the stock market. The article questions why the government would have a negative article written, when they could easily just block the offering. It speculates that the government is trying to send a signal to Chinese individual investors that it is concerned for their well being. YIKES! The government should be concerned. Pin An has another booster in HSBC, it's largest shareholder with a 16.7% stake, who according to Rueters, backs the firm's capital raising plan. Rumors and speculation have swirled around the Chinese firm taking a stake or stakes in European insurance firms, as it already has a 4.2% stake in Fortis. At this point, there has not been much in the way of speculation regarding a Sovereign Fund-type bailout/investment in a troubled U.S. or European bank, although we might have a muni bond insurance company or two to sell them. In the meantime, the markets are waiting expectantly for details on how the capital might be used, ahead of a March 5 shareholder vote on the issuance. Others are wondering about the Chinese government's conviction in its unstated policy of encouraging large share offerings, to add so much supply to the market as to tamp down the market's speculative urges. If I were a shareholder, I would hope Pin An would raise cheap capital while the market can still digest the issuance. Call me jaded, but I would also be hoping none of the funds from the record size stock issuance (someone correct me if there has been a bigger one) were going to get used to clean-up any sub prime or related toxic waste that might have found its way onto the Chinese giant's balance sheet, or in the premature bailout of an undeserving lender.
A: Oil settles over $100/barrel & Gold trades up 2% & Platinum reaches new record. Nah, there is no inflation! Cut away Big Ben, stocks need another hit!
At some point, corporate profits will either take a serious hit on rising costs OR they will pass on the expense to their consumers. Yet, we keep being told inflation is moderating!
With the credit crunch posing serious risks to economic growth, our federal reserve has chosen growth over inflation as its mandate and with every rate cut we will most likely see:
* higher oil prices
* higher gold and other precious metal prices
* higher commodity inflation in pipeline
* short term 'high' for stocks
* weakening US dollar
When this credit storm passes and economic growth stabilizes, expect the fed to quickly take back a bunch of these rate cuts in an effort to curb runaway inflation. Housing deflation + commodity inflation is not a good situation make!
A: Sounds so easy right! Well after a busy Presidents Day weekend full of appointments and open houses, I will tell you this: properties that are priced right compared to recent in-building trades are very active! Specifically, the two bedroom market where there seems to be two different types of sellers; 'realistic ones' & 'testing the market' ones. Meanwhile, I feel like the two bedroom market is starting to show some options for buyers. Overall, its refreshing to see bonus season behave like bonus season.
The good news is that even with all the macro concerns & credit crunch, buyers are still out there in full force looking at properties to sink their $$$ into. Readers of this site know my feelings about buyers and the important role they play in any local housing market. In my opinion, buyers are everything and their confidence is the only gauge we have to see where the herd may be heading! Right now, plenty of buyers are out there actively viewing properties with some degree of drop in confidence; confidence varies depending on unique situation & views on the markets.
What a fabulous thing for Manhattan sellers that other markets would love to have! Outside Manhattan, many markets are experiencing surging inventories, fierce seller competition, and a total lack of buyer demand. Here in Manhattan, I see inventory slowly rising the past few months, a lack of fierce seller competition, and plenty of buyers aware of the economic concerns that are going on.
What does it all mean? It means these buyers are willing to put their dollars to work IF the property is priced correctly! It also means that they are hesitant to pay a significant appreciation premium compared to similar deals closed in 2007! Knowing this important piece of market information about the buyers allows me to conclude this tip for sellers: price your property right, and you will get action!
I was mostly out looking at the two bedroom market in midtown east & the upper east side. What I saw validates what I discussed above. Two bedrooms, ranging from 1150 sft - 1300 sft, priced in the 1.15 - 1.3M range had strong open houses. Meanwhile, similar two bedrooms with nothing extra to offer buyers priced above this range, were slow. As I normally do after seeing a bunch of units over the course of a weekend, I called Toes to see how her showings went and to get a sense of her opinions on the market in general. When she confirmed exactly what I saw, I knew it was accurate enough of an update to post here:
According to Toes:
Open houses this weekend in the $375K - $800K range were packed, despite the holiday weekend. The first time buyer is out there in full effect. Instead of seeing 10 - 15 properties as they may have in the past two or three years, they are looking at 30+ apartments and really taking their time to find the best deal. There is no sense of urgency, but still, the best properties are selling right away and there are still multiple offers generating bidding wars. I think the best strategy in this market is to price at or below market value and sell the apartment within the first 2 - 3 open houses. If something is on the market longer than that, buyers will low-ball.The key takeaway from this update for serious sellers should be to avoid greed and use common sense when interviewing agents to possibly work with! Price your property accurately based on in-building trades, your unique apartment features, light/views and to a lesser extent, active comparables.
I've heard from two other agents that their 2 bed 2 bath listings are really slow, they only had three or four people at their listings (in the $1.4M - $1.6M range). In the first three open houses, one of my colleagues has had only 10 buyers. In the past there was a shortage of 2 bedroom, 2 baths, but it seems as if the pendulum may have swung the other way, and now there is an oversupply of inventory. Pricing is key. Look at the competition on the market and make sure you are one of the best priced properties out there or the apartment is going to sit on the market. The longer it sits, the more likely you are going to have to accept a low offer.
Its a well known trick in this business to promise a very high sales price to win the listing from fellow competition (the market dictates what your home is worth, NOT the agent!), try to get buyer clients in the meantime, and work on a price reduction 1-2 months later. Don't fall prey to one of the oldest tricks in the book!
A: Ambac is considering following in FGIC's footsteps to split itself up, effectively trying to distance itself from the toxic portion of their business. Ambac is the #2 biggest bond insurer. This would leave MBIA as the biggest and last company to reveal their plans to stave off credit downgrades. So, what does this mean? In short, it protects the muni book and potential ramifications to the muni market should a downgrade come. It does NOT solve the problem of financial losses due to the toxic insurance sold to banks, brokerages, & other institutions for their structured credit investments that went sour. A new wave of write-downs should be expected.
The news via WSJ.com:Ambac
Financial Group Inc. is in discussions to effectively split itself up in a move aimed at ensuring that municipal bonds backed by Ambac retain high credit ratings, according to a person familiar with the situation.This is an organizational thing that will speed up the credit cycle so that we go through the pain faster in order to see the light at the end of the tunnel sooner. Will it work? Well, it all depends on how deep the credit crunch really goes, whether housing stabilizes or continues to fall, how affected the consumer is and the lagging effect on the economy, and how effective stimulus will be as time goes on. Lots of unknowns.
Ambac is considering splitting itself into two entities: MUNI PORTION + STRUCTURED CREDIT PORTION. Needless to say, the muni book is a safe & profitable business that would have been an innocent victim if the combined company was downgraded by the ratings agency. This was a very big threat to wall street and one that we discussed here on UrbanDigs months ago. It's also one reason why Buffet vultured in and offered to buy the muni book from the insurers and re-insure about $800 Billion in muni bonds; because its a safe & profitable business.
Which brings us to the structured credit portion of Ambac's book; the chicken shit. This is the toxic portion of the bond insurer's balance sheet and is so complex that nobody really can quantify the potential liability associated with the insurance it wrote for investors of these products. All we know is that its a complete mess and a ticking time bomb. This is the root cause of ratings downgrades threats.
By separating the business into two entities, Ambac would distance it's good business from the bad. Any future lawsuits, future ratings downgrades, or future liabilities associated with the bad business would be unable to tap into the good business; as far as I understand this scenario (feel free to correct me with any details if you understand this better than I). Now that the muni business is protected, the new entity holding the toxic waste will be downgraded and likely enter into bankruptcy protection. So, with the split here is what will likely occur:
AMBAC SPLIT ---> NEW BAD ENTITY GETS DOWNGRADED ---> NEW BAD BUSINESS ENTERS BANKRUPTCY PROTECTION ---> MORE LOSSES FOR HOLDERS OF THESE INVESTMENTS AS INSURANCE IS WORTHLESS
Which brings us to the ultimate point of this post. If the new split up company that insured the structured credit investments gets downgraded and goes into bankruptcy protection, it will leave those who bought the insurance as protection against losses holding the bag. It means a new wave of write-downs for banks, brokerages, hedge funds, and any other institutions that insured their CDO's & other products with Ambac. Future government intervention either for the new bad entity or for banks.
Professor Nouriel Roubini touches on the potential fallout to the institutions that are left holding the bad with worthless insurance:
"...a massive writedown – about $150 billion – of the mortgage related securities (RMBS, CDOs, etc.) that had been “insured” by the monolines."As I wrote many times in the past few months, this is a credit tsunami with many waves as it spreads to areas that once were considered safe; i.e. student loans, auction rate securities, etc..
I must say that it is a very good thing if the muni markets do not directly get penalized for the bad bets made in the structured credit markets. If there was no solution to protect the muni book and these insurers got downgraded across the board, you will see a shockwave of instability and uncertainty hit the US & Global markets. Eliminating this fallout is a good thing. However, even with this solution, confidence may be rocked a bit in the muni markets if this credit crunch continues. So, while it is not a saving grace, the solution to split the insurance companies into two should expedite the credit cycle process leading to the inevitable: more losses, more regulation, tighter lending standards, and the continuing process of cleaning the mess that was made after years of lax lending & bad bets on securities derived from the unsustainable housing boom.
A: This is for spunky; some of you should know what I mean by this. Curbed had Jonathan Miller's inventory charts a few weeks ago that I would like to revisit. Looking at my real time Manhattan inventory tool, powered by Streeteasy, I see rising inventory but still not enough to change the supply/demand imbalance right now that favors sellers. Lets break it down a bit more as a mid month review.
UrbanDigs NYC real estate data & charts is in BETA for another few months. For now, charts will only show daily readings going back 2 weeks so please bear with us as we tweak this tool to be of the highest accuracy for your future analysis. Daily readings, whether small or large, should be taken with a grain of salt as we finish our BETA testing. Overall though, the data seems to be accurate enough to discuss in posts like this one.
Here is the trend over the past few weeks:
Now, lets go back to Miller Samuel's chart a few weeks ago that showed total inventory trends up to January 2008; click chart to enlarge:
JAN 2007 TOTAL INVENTORY - 6,000
JAN 2008 TOTAL INVENTORY - 5,500
YEAR-OVER-YEAR % CHANGE - down 7% or so
6-MONTH % CHANGE - up 22% or so
Ok, I'm not a fan of using year over year changes for analyzing inventory because it doesn't take into account the change of investor sentiment accurately, and is going back too far in time and to me that doesn't make much sense. I'm way more interested in more real time trends, say the last 3-6 months, and what inventory is doing here as an indication of more real-time investor sentiment and marketplace supply.
When I look back a year ago, inventory is LOWER! When I look back 6 months ago, inventory is HIGHER. The current trend seems to be up. Going back in time, the bonus season of 2007 (JAN-APRIL) was very active (yes, I wrote about that numerous times right here on urbandigs), in my opinion more active than today's environment, and as a result sales volume was very strong. When you have strong sales volume, you will see a decline in inventory in the months following as deals close and listings are sold off. Combine this with a seasonal slowdown during summer months, and Jonathan Miller's inventory chart for APRIL-JULY 2007 makes a lot of sense. During this time, we saw inventory decline sharply largely a result for deals closed during the active bonus months prior + lack of new product coming to market entering the summer.
Then came September, some 5-6 weeks AFTER the credit crisis began and surfaced to media headlines and stock markets. If we look at inventory since August 2007, we see a rise of about 22% (4,600 units to about 5,600 units today), but lets be fair and check out what happened during these months in past 3 years.
AUGUST through JANUARY MANHATTAN INVENTORY TRENDS
AUG 2004 - JAN 2005 ---> down 9% or so (5,400 to about 4,900 units)
AUG 2005 - JAN 2006 ---> up 18% or so (5,300 to about 6,300 units)
AUG 2006 - JAN 2007 ---> down 12% or so (7,100 to about 6,200 units)
AUG 2007 - JAN 2008 ---> up 22% or so (4,600 to about 5,600 units)
Certainly we can say it's a trend worth reviewing! What makes this time around different of course is the macro environment, the lending environment, credit markets, and investor confidence. I have stated before that I think 2008 will be the year Manhattan inventory reverses course and rises, breaking the declining trend since the top in mid 2006. The main reason: a drop in buyer confidence leading to slower sales volume.
By no means is current inventory favoring buyers, we are still tight and there still is not enough options out there for buyers; an environment that favors sellers. But we must follow these trends and see how they react to the changing environment if we are to be ahead of the curve should fundamentals change here in our great city!
A: WSJ blog Real Time Economics published a piece yesterday that was very timely with my post regarding the widening of corporate credit spreads. We both had the same idea as we look for any signs of normalcy or disruption in the credit markets. Most people look to stocks as a function of the economy's overall health. When stocks are up, things seem ok. When stocks are down, things seem to be slowing. It's quite amazing how the psychology of stock markets affect investors willingness to take risk. So who is right? The stock markets or the credit markets? Well, lets put that on the side burner now and discuss a more important point; stocks are lagging the credit markets!
According to Real Time Economics article, "Stocks Are Venus, Credit Is From Mars":
Who’s right: stocks or credit? Bianco thinks it’s credit: "The hallmark of the current environment is the equity market lags the credit markets. However, it is the equity market that sets the tone for everything else. So, no matter how bad the credit market gets, as long as the equity markets are holding together, no problems are perceived…. Last July we saw the same thing; the equity market was doing well but the credit markets were not. So as far as most people were concerned, there was no problem. In August when equities caught up to credit and turned sharply lower, it was called a crisis."This is such a powerful force that I truly agree with. It's the reason I got so interested in learning what is going on UNDER the surface in an effort to profit later from stock price reactions to fundamental changes in the macro economy; in other words, it takes some time to be reflected in stocks! It's also the reason I discuss macro here on urbandigs, in an effort to discuss events that may ultimately affect us. So, I was curious to take the MARKIT ABX 'AAA' Index (which measures investor sentiment in the subprime mortgage markets) and plot it against a chart of the DOW since early August for a verification of stocks lagging nature to the credit markets. Sure enough, it's validated:
What an interesting thing when you compare two market forces such as equities and credit markets. Recall that the ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments.
So, as you can see on the above chart, the ABX index (BLACK LINE) declined rather sharply indicating a souring sentiment in the mortgage markets BEFORE stocks (BLUE LINE) followed with their decline. Now, there is something very important to note when making a relationship conclusion such as this; the effect of stimulus, rumors, and bailout plans on confidence for stocks.
Trust me, without the last 125 basis points of fed easing, Buffet's offer to re-insure the muni book, and bond insurer bailout talk we would probably be about 1,000 points LOWER on the Dow. Maybe more. There has been so much stimulus and bailout talk lately that has helped stocks recover and ease the pain that could have been much much worse. Which brings me to the credit markets.
There is little change here other than a positive effect on LIBOR due to targeted fed injections. The ABX Indices are still plunging, the CMBX Indices are cliff diving, and the CDX Index is showing a widening of corporate credit spreads. Clear signs that the credit markets are still dysfunctional. Now, will stocks lag in their reactions to the credit markets again OR will economic stimulus/bailouts save the day?
In the end, stocks overpower the credit markets in the eyes of public perception and is the preferred gauge as to how good or bad things are considered to be.
A: This is the most direct way to explain to you that credit markets are still under distress. With all the stimulus we have had; 175 bps of rate cuts, $150 Billion of fed term auctions, project hope + lifeline, rate freeze plans, co-ordinated bail out talks for bond insurers, Buffet's security offer for muni market...corporate credit spreads are STILL widening. San Francisco Fed President Janet Yellen acknowledges this reality, and admitted that this problem was one of the targeted solutions hoped for by fed rate cuts. And is anyone else seeing these muni auction's failing? Umm, this is not so good.
Here is a very brief explanation of corporate bonds. Corporate bonds can offer a high yield compared to other investments. Investors of these bonds take on interest rate risk + credit risk, the risk that the issuer will default on its debt obligations (there is also event risk, but for sake of this discussion lets keep it simple and ignore this for now). The payoff to the investor for assuming these risks is a higher yield. The difference between the yield on a corporate bond & government bond, is known as the credit spread!
The credit spread, whether narrow or wide, reflects the premium that the investor gets for assuming higher credit risk! When credit spreads widen, it is a signal of the demanded premium by investors (via a higher yield) to take on an increased credit risk. This is exactly what is going on right now. The chart below will illustrate to you what is going on.
WIDENING CREDIT SPREAD BETWEEN WACHOVIA HIGH YIELD CORPORATE BOND INDEX vs iSHARES LEHMAN 7-10 YR TREASURY BOND FUND
CHART LINK VIA BLOOMBERG: Simply add "IEF:US" symbol to this chart to compare credit spreads.
Ok, so now you have a general idea of what the widening corporate credit spreads means (higher risk) and a visual showing you that this is actually occurring right now. Now, lets see what fed president Janet Yellen said on February 7th. According to Bloomberg:
"The increase in credit spreads has sort of worked against our policy," San Francisco Fed President Janet Yellen told reporters at her bank yesterday. "The fact that the spreads went up so dramatically really resulted in an effective tightening of financial conditions that our cuts were partly meant to address."Lets take another angle and try to bear with me here. Check out this TheStreet.com article which discusses, "Soaring Default Spreads Sock A Swap Seller"; which goes into derivatives trader Tom Jasper's trades:
Primus Guaranty -- which reported a $404 million loss in the fourth quarter, its largest ever -- remains a relatively unknown company that is nonetheless a major player in the credit default swap market. Primus essentially does only one thing: sell credit default swaps on single-name corporate bonds.Below is the MARKIT CDX.NA.IG Series 9 Index which shows the widening of spreads referred to in the above article which is at a record right now:
From 2005 to the summer of 2007, the U.S. CDX investment grade index -- a basket of corporate credits -- generally traded at spreads of below 50 basis points...
During this timeframe of relatively low risk, Primus was a big seller of credit default protection. But in the summer of 2007, spreads on the CDX investment grade index widened to 100 basis points, as fears of the brewing credit crunch drove up the cost of protection. Spreads dipped in the fall, but rose to a record 143 basis points on Tuesday, according to Markit.
Left Axis = Index Spread
Right Axis = Index Price
Red Line = Index Spread Widening
Black Line = Index Price Falling
WHAT CDX.NA.IG SERIES 9 MEANS (as I understand it from contacts I know in these markets): NA stands for North American. IG stands for Investment Grade. Every 6 months dealers are polled. They vote names into the new index. We're now up to series 9. To be eligible for a vote you must have contributed end of day marks for X% of days in the last 6 months on the names in the old index; X being a lot. There are a bunch of indices, but the two big ones are HY - high yield, and IG - investment grade. 100 names are in each. You take the 100 names and average the credit spreads to get the CDS spread on the overall index. Bigger spreads = worse credit in the index as a whole. If HY (high yield index) goes from 500bps to 1500bps and IG (investment grade index) goes from 50 to 70bps you know the HY index is getting a lot worse a lot faster than IG in terms of credit quality. Those numbers are just arbitrary to demonstrate a point.
This chart shows us that investment grade credit spreads had risen about 63 basis points in the past 12 days alone! Did I lose anyone? Hopefully not, and maybe it makes a bit more sense now. Here are some quick takes on the failing muni auctions and related articles to these topics. The markets are ignoring these events or consider it priced in already:
Auction-Bond Failures Roil Munis, Pushing Rates Up (Bloomberg)
Bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding won't commit their own capital to the debt. The auction failures provide new indication of Wall Street's unwillingness to commit capital amid $133 billion in credit losses and asset writedowns.Multiple Muni Issuers See Notes Fail At Auction (Forbes)
"It's the beginning of the end for the auction-rate market," said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. "Banks have stopped supporting the market."
U.S. municipal bond issuers were hit with "multiple" failures of auctions of their paper on Tuesday, industry sources said, as investors fretted about the safety of the bond insurers backing the debt.Corporate Credit Dislocation Persists, May Worsen (Guardian.uk)
As a result, states, counties, cities and towns around the nation now are being forced to pay sharply higher short-term interest rates, in some cases as much as 15 percent.
Dislocation reigns supreme in the European corporate credit market, with conventional thinking turned on its head over and over again, threatening to delay the return of confidence. High-yield bond investors are worried about what is happening to triple-A borrowers. Secured debt is trading comparably with unsecured debt. And investment-grade credit indexes have performed worse than their riskier high-yield counterparts. And, despite credit spreads being at their widest level since early 2003, things may get worse before they get better, as sentiment remains extremely fragile.Commercial Real Estate Follow Up: REIT Indicator (UrbanDigs)
"There's complete dislocation," said Sean Dawson, executive director for structured finance at Lehman Brothers, at a Fitch Ratings conference on subprime securities late last week.
We knew spreads had widened, forcing banks to write down the values of some of these CMBSs, but what really worries me is that the widening has continued even as the fed has slashed rates. Fed cuts rates and borrowing cost goes up, not the math we want to see.
NEWS FLASH: The United States is not the only country suffering from significant financial imbalances. Neither is it the only country where underwriting standards were thrown overboard as a result of many years of rising collateral values. Even if these factors were not at play it would be debatable whether world economies could emerge unscathed from a U.S. consumer slowdown. With the attitude towards aggressive lending changing markedly, some of the heretofore benignly neglected bubbles could pop.
Now that I have your attention, let's go country by country (through both developed and emerging markets) and catalog some of the problem issues.....my bet is that there are many more cases than I have overturned in the rather cursory (yes, I'm admitting it myself folks) investigation I have done for this article. Why are there all these imbalances? Easy money. Those of you who have attended the asset cycle 101 class already know that money hates a vacuum and that investors will leverage up appreciating assets until the asset prices start to fall or someone raises the price of leverage. Usually both of these happen at the same time. The rest of the story ain't pretty. Here is the list of problematic issues worldwide, that could be made worse by a wholesale change in sentiment towards aggressive lending. I'm not predicting that they will, I'm just letting you know they are out there and you may hear more about them in the future.
British Consumer Debt Crisis & London Commercial Real Estate Debacle
With regard to how a worldwide slowdown would impact the country, The Observer notes: "Since Britons are some of the most indebted people in the world, that puts us in a particularly vulnerable position. Per capita, Britons borrow more than twice as much as other Europeans. The average family pays 18 per cent of disposable income servicing debt. If the world economy slumps, the bailiffs will knock at British doors first."
As we have chronicled here before, there has been a run on British REIT's by investors seeking to pull their money out of the investment partnerships. While it is reflective of somewhat indiscriminate risk aversion, according to The Guradian, "Commercial property has proved one of the most popular investments of recent years, with billions of pounds pouring into the sector. Investors, keen to enjoy double-digit returns, maintained their attachment to the sector last year despite many analysts arguing it was already hugely overvalued. Warnings that commercial property was an asset bubble ready to burst went unheeded."
With regard to London in particular, which has possibly benefited in a business sense even more than New York City from Wall Street's credit derivatives and related hedge fund trading, The Evening Standard notes, "The faltering economy has left the City of London office market braced for its worst crisis since the recession of the early 1990s. Demand for office space is falling as firms slash thousands of jobs and stop hiring new staff. But supply levels are rising dramatically - not just from space freed up by redundancies but also from a wave of new offices being built with completion dates this year and next. Around five million square feet of office space yet to be let is due to open in the City this year and next - room for some 40,000 people."
Spain - Residential Property Bubble Extraordinaire
According to a quote by David Owen of investment bank Dresdner Kleinwort, cited in the blog Seeking Alpha, "Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country. The size of the Spanish corporate sector's financial sector is truly really scary. It rose to 14.5% of GDP in the third quarter of 2007 from 10% in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding quickly and very painfully." The article goes on to note that Spanish direct investment in residential construction (ex mortgages and other related businesses) is 18% of the economy versus 6% in the U.S. Diana Choyleva, an economist at Lombard Street Research in London, is quoted as saying "Spain is like the U.S, on speed when it comes to the housing market. It is highly likely there will be falls in nominal prices." It also cites Moody's as saying that Spanish loan delinquencies may rise 15 fold by the end of 2008 due to increasing interest rates.
China Potential Stock Market Unwind + Corporate Bad Debt Bomb:
Zhong Wei, an economist with Beijing Normal University, was recently quoted regarding the U.S. sub prime crisis in the central bank's newspaper saying "The non-performing loan ratio in the banking industry and risks of volatility in the capital market are both rising". Why should the central bank be worried about this? It's not just the $7.9 billion of U.S. sub prime exposure the Bank of China has admitted to. According to aMay 2006 Ernst & Young report, the country had $911 billion of domestic bad debt. This is the $1 trillion of bad debt number you may recall hearing about now and again. At the time this was equal to nearly 40% of China's gross domestic product. Ernst & Young also believed there were $225 billion of additional pending low quality loans that would eventually go non-performing. However, Ernst & Young reportedly "corrected" their report a short while later to be more in keeping with the government's official tally of $133 Billion in non-performing loans for the four largest banks. When these figures were reported, worries about China being vulnerable to a liquidity shock were well publicized. While not much has been written since then, these bad debts didn't just disappear in 18 months. The Chinese government has reportedly been transferring bad loans to "special asset management companies" at least in part, with the use of $500B of government funds, over the past decade. Last Friday, China's banking regulator put out a report on its priorities for the country's banks; it didn't mention bad loans, but focused on improving innovation and strategic planning. The silence was somewhat deafening. In fact, the agency's chairman, Liu Mingkang, was quoted as saying: "Five years ago, the state banks were technically on the verge of bankruptcy, but now they are large commercial banks with international recognition." The economy was booming for 15 years and the banks were nearly bankrupt, it's still booming and now everything is fine? Somehow I am not sure that underwriting standards have done a 180 degree turn in the last 18 months. Interestingly, about 21% of loans are to exporters, who are reportedly already seeing their U.S. customers become slow in paying their bills. This may be why Yu Yongding, director of the Chinese Academy of Social Sciences and a former adviser to the central bank, was recently quoted as saying: ``If there is weakness in the world economy, the impact on the Chinese economy will be very serious.'' The Shanghai Composite Index was up over 125% last year and 132% in 2006, individuals; corporations and, yes, banks have all been making significant profits in the stock market, which has now fallen 30% or so from the peak.
India Potential Stock Market Structural Issues & Real Estate Valuation Problems
According to an article in the blog Seeking Alpha, 2 bedroom condos in New Delhi, are now selling for $200,000, or about $200 per square foot, this compares with $400 per square foot for a similar condo in Chicago. The only problem is, per capita income in Chicago is 50 times that of New Delhi. Additionally, New Delhi has room to grow geographically in 4 directions so there is no reason for a scarcity premium versus Chicago which can only grow in two directions. Additionally, while it is true that India's overall population density is much higher than the U.S., it is reportedly less densely populated than your run of the mill northeastern U.S. state like New Jersey.
In 2007, India's stock market rose a record 47.1%. Recently, sentiment has shifted markedly regarding the future market outlook. Much attention has been paid to the cooling of a smoking IPO market, particularly after Monday's 17% drop and flop of the biggest ever Indian IPO, Reliance Power.
According to Jigar Shah, head of research in India for Kim Eng Securities, as quoted in the Wall Street Journal, "As I see it, we are likely to go down further, primarily because investor sentiment has declined quite significantly." One analyst's opinion, but if it reflects public sentiment in this retail driven market; it may not be a good omen. Alok Vajpeyi, a VP and MD with Dawnay Day AV Financial, told the Economic Times of India, "The stock market reacted with great speed to redress the short-term valuation imbalances that had arisen as a result of exceptional liquidity — both domestic and overseas, by reversing perhaps 20% of the index gains from the peak. It hurt! It does not matter to most how much you made in the past. Even those, who earlier made a multiple of the money that they lost in recent weeks, have temporarily receded into their shells. For the time being investment sentiment is changed from the secularly bullish outlook on the market that shares will only go up, and that IPOs will list at massive premiums." Note that according to a recent Business Week article, due to an under-developed bond market - where new issues are less than 1% of GDP vs. 112% in the U.S. and 10% in China, the equity market is more critical to funding businesses' day-to-day funding needs. Another structural issue that has already been a problem during periods of frenetic trading is that, according to the Wall Street Journal, the stock exchange does not allow electronic funds transfer and relies on payments made by check. Retail investors have trouble acting quickly on changes in the stock market because they often mail checks to brokers and the checks then have to clear. This has reportedly caused some clients with margin accounts to be "bought in" before they could deliver funds against margin calls.
On the plus side. I am hopeful that this may be one of the last articles we have to write about risks in the financial system that people aren't talking enough about yet. I really hope so, because the sooner we can qualify and quantify all the things that could go wrong, the sooner the markets will discount these factors and governments and central banks can start working to offset their corrosive effects on money creation.
From the Blogosphere:
Is Europe's Housing Market Next
Will That Great Bubble Be Full of Hot Air
Spanish Economy Dominates Eelection
Decade of The Dragon
Timing the Chinese Bubble
PHOTO SOURCE: Answers.com
A: This is important and market futures are jumping a bit since this conference call with Warren Buffet. Buffet has offered the three major bond insurers to re-insure up to $800 Billion worth of municipal bonds. One major concern on wall street was that if the bond insurers get downgraded, the innocent victim will be the municipal bond market and that will rattle financial markets globally; hence the all-in effort to stave off credit downgrades. Now, Buffet gets in the mix and offers to re-insure these bonds and prevent any disruption of the muni market if downgrades come. The problem is, 1 of the 3 bond insurers already rejected the offer and the offer does NOT include any bailout for complex CDO's, where the problems are in the first place.
First the news. According to CNN Money:
The billionaire's Berkshire Hathaway (BRKA, Fortune 500) approached the three largest bond insurers last week, offering to insure about $800 billion in tax-exempt bonds, Buffett told CNBC in a televised interview.Thats the good part, as I noted yesterday in my post on failed student loan bond auctions that disruptions in the muni market is what is really scaring wall street. So, the street is taking comfort that there is one backup solution on the table to re-insure a helluva lot of muni bonds! Buffet said his deal is on the table for 30 days! So we have like 23 days left, since the offer was sent in last week.
"This would just eliminate one major cloud from the market," said Buffett.
Now the bad news. Buffet's offer does NOT cover the complex financial instruments that have lost so much value as the national housing slump caused rising delinquencies for subprime borrowers. That is where the real problem is. These bond insurers have offered insurance on billions of CDO's (collaterilized debt obligations), and other types of residential mortgage backed securities to the likes of Citigroup, Merrill, Morgan Stanley, Wachovia, Washington Mutual, etc.. These complicated structures basically took subprime loans, bundled them up into one big pool, made a bond out of it backed by the mortgages, and then sliced & diced the bond up into different tranches of risk (AAA, AA, A, BBB, BB, etc) and sold them off to investors; here is a breakdown of how mortgage backed securities work and why we are in such trouble. All was fine & dandy as long as housing appreciated, payments were made, and the secondary market where these instruments trade was functional. It was when housing turned down, defaults rose, and the secondary market for these trades dried up leaving holders of this toxic waste with no place to sell at a desirable price. Hence, the write-downs.
They turned chicken shit into chicken salad and sold it to investors who then took out insurance on these credit products should they go sour. Well they did. And now the bond insurers have tons of claims that will need to be paid out; and guess what, we're not sure if they have the capital!
So, the financial institutions will have to book more write-downs. Buffet won't even touch the CDO's that were insured by Ambac, MBIA, and other insurers. It's way too complicated for Buffet, he doesn't know how deep the losses could go, and he doesn't understand the complexity of the products themselves. That tells you something. Which leads me to the final point.
If Buffet will backup and re-insure the muni's on any downgrade, all we need to do is fix the problem with the CDO's, that Buffet won't touch. Easier said then done, but at least we have a bit more clarity right now, although without any concrete solution. This will add some degree of confidence to the markets.
A: I am by no means an expert on bond auctions and would love to hear/learn from anyone who reads urbandigs and knows about this market to elaborate on the situation! Is it big news, non event, a sign of the times, or just good gossip? There is also the coming auction for the Blackstone buyout of Hilton coming up and many are looking to that event as the most up to date gauge on the health of the commercial lending market. Now this is Hilton we are talking about. A footprint, earnings and a strong brand. This should work, so investors I talk to are more curious about the level of success in this fund raiser for any additional warning signs.
According to Bloomberg article , "Auction-Bond Failures Spread to Student Loan Debt":
College Loan Corp., a San Diego- based lender, said some bonds it issued with rates determined through periodic auctions failed to attract enough bids. Demand for bonds in the $360 billion auction-rate securities market is waning on investor concern that dealers who collect fees for managing the bidding on the bonds won't commit their own capital to prevent failures. Reduced appetite for auction-rate debt in the municipal market also reflects expectations that the credit strength of insurers backing the securities may deteriorate.This last part is the most interesting. Gasparino was talking today (CNBC: Watch Video Now) about the REAL ramifications of a major bond insurer downgrade, and that was a disruption of the muni bond market! Should the downgrades come, a "massive disruption" in the trillion dollar municipal bond market will begin spreading shock waves to financial institutions, hedge funds, state pension plans, and on and on. This is the real concern should Moodys, S&P, or Fitch downgrade an Ambac, or MBIA's credit rating. And according to Garsparino, this is the type of bailout structure that is trying to be reached, not a bailout for losses sustained on the market sales for holdings of residential mortgage backed securities. Those losses would come as a new wave of write downs should the bond insurer downgrades come. Nobody is denying this.
Auction bonds issued by Sallie Mae, the largest student loan lender, also failed to attract enough bidders last week, according to a report today by Keefe, Bruyette & Woods, a New York-based securities firm. "It seems that the dealers are no longer willing to bid in large amounts for these issues," said Lee Epstein, chief executive at Money Market One, San Francisco-based securities firm specializing in short-term securities.
In the municipal market, at least two auctions run by Lehman Brothers Holdings Inc. failed on Jan. 22, the first day the bond investors could react to a ratings downgrade of Ambac Financial Group Inc.'s main insurance units.
Jeff touched on this exact scenario months ago: Tentacles of the Credit Beast (November, 2007)
Now according to Business Week there has only ever been one money market fund that "went bust" and investors got back 96 cents on each dollar. So nobody panic. However, it is concerning that funds regular folks depend on as essentially riskless are having some problems - it makes you wonder just how tangled a web has been weaved here. So lets tackle just one more curve ball. Municipal Money Market Funds.Jeff hit the nail on the coffin three months ago..."Oh what a tangled web we weave!" Here is news. Manhattan real estate is still active during the generally active bonus season! Thank god I have something else to discuss daily.
Municipalities and public institutions like hospitals use bonds to finance themselves and over the years, even those with lower credit ratings have been able to access capital markets easily by using bond insurers to help them attain investment grade status. These same bond insurers also insured CDOs and sub prime CMBSes and as a result of the sub-prime credit debacle stocks of the insurers like Ambac have gotten creamed this year. People are worried about how much of a hit they will take on the insurance they have written. As a result, municipal bonds backed by these same insurers are getting roughed up, raising the cost of new bond issuance by municipalities. You see this credit crunch keeps branching out and side swiping otherwise innocent bystanders. Thus far the wounds have not been particularly bad, but it has created an environment of risk aversion, which makes sense, but also raises the cost of doing business for most participants in the economy....Oh what a tangled web we weave!
A: So much to talk about. Here are just some headlines working their way around the blogosphere and web today about the credit crisis. Apparently, subprime is contained....to planet earth! Concerns of a spread to Mars & Venus start to hit investors.
New Hitches In Markets May Widen Credit Woes (wsj.com)
A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100 billion in losses and helped push the U.S. economy toward recession.UrbanDigs Related: Here & Here
Problems are cropping up elsewhere in credit markets. Money-market investors in the past have been large buyers of short-term instruments backed by tax-free municipal bonds and student loans. But they have been shunning these instruments -- known by such names as auction-rate securities and tender-option bonds -- because they fear the debt used to back the instruments will default or get downgraded by rating services.
Commercial real estate is another segment of the market that is showing cracks. There were no new offerings of commercial mortgage-backed securities in January, and the cost of protection against default on such securities issued in 2005 and early 2006 has more than tripled, according to Market Group's CMBX index. Goldman Sachs estimates banks could write down $23 billion from CMBS losses this year.
MBA Survey on Delinquencies (via Minyanville)
As pressure mounts on rating agencies to proactively evaluate risky bonds, downgrades will continue to creep up the credit spectrum.Subprime Losses Could Rise To $400 Billion (ft.com)
Prime loans make up almost 80% of the massive mortgage market, and delinquencies are quickly deviating from historical averages. While subprime mortgages continue to make headlines, data from the latest MBA survey on delinquencies for 3Q '07 shows a disturbing trend:
* Prime serious delinquencies (+90 days) are up 14% from 2Q '07
* Subprime serious delinquencies (+90 days) are up 10% from 2Q '07
* Prime ARM foreclosure starts are up 65% from 2Q '07
* Subprime ARM foreclosure starts are up 23% from 2Q '07
Note this is a quarter-on-quarter comparison and a snapshot before the credit crunch began to materially impact the broader economy. Overall prime delinquencies measured 3.1% compared to historical levels of 2.4% and are increasing at a faster rate than subprime delinquencies.
Senior global policymakers have raised projections for the size of subprime-related credit losses in a move that implies financial institutions will have to increase write-offs.UrbanDigs Related: Level 3 Assets
Speaking after the meeting of Group of Seven finance leaders, Peer Steinbrück, German finance minister, said the G7 now feared that write-offs of losses on securities linked to US subprime mortgages could reach $400bn.
Over The Limit (businessweek)
The credit crisis that began rumbling through the mortgage market last summer is now spilling over to the nation's other great expanse of borrowing: credit cards. Banks have extended $740 billion to Americans like the Fitzgeralds, a 15% jump over the past five years. With the economy weakening, delinquencies are rising, particularly in states battered by the housing bust.UrbanDigs Related: Not A Subprime Problem
Banks and other card issuers are lowering credit limits, hiking interest rates, and refusing to approve applications as part of a broad clampdown to prevent more losses. That leaves strapped consumers with few options. Homeowners can no longer turn their equity into cash to pay their bills. The drop in home prices has wiped out billions in equity, and since families can no longer use their abodes as ATMs, debt loads are mounting and borrowers are falling behind on payments.
As with mortgages, banks bundle big chunks of so-called credit-card receivables, essentially consumers' outstanding loan balances. Then they issue bonds backed by the bundles, which are sold to big investors such as pensions and mutual funds. Credit-card securities are a different breed from those financing housing. For one thing, credit-card debt is unsecured. That means if a borrower defaults, there's no tangible asset, such as a house, that can be sold to recoup at least some of the money. And if delinquencies and defaults double or triple from current levels, investors will likely realize losses.
There is something positive I would like to mention. 3-Month LIBOR rates have dropped considerably as the fed, whether directly or indirectly, specifically targeted LIBOR through a series of TAF (term auction facilities) since early December. I wrote about it this when breaking news came out that the fed was in the process of co-ordinating a global effort to normalize the credit markets; read story here. This is one sign of normalization, HOWEVER, and its a big however, we are still adjusting to the fact that these credit problems go way beyond subprime and will ultimately affect securitizations of other debt classes: alt-a, prime, HELOC's, option arms, cosi/cofi, credit cards, auto loans, etc..That is the problem. This is not a subprime problem, but an overall mortgage/debt problem that has resulted from decades of habitual debt mounting and years of lax lending standards, lax underwriting, financial innovations that helped disperse risk, and speculative behavior in housing resulting in unsustainable price gains. This will take time to work out.
Its a TOES day!!
Out of the 50+ new development sales offices I have been to, three of the four best presentations have been at buildings marketed by Shvo: 20 Pine: The Collection, The Gramercy by Starck, and the latest, the W New York Downtown Hotel and Residences. Whether you like the guy or not, his ability to create a perfect customer experience is pure genius.
When you walk into the W sales office, you feel as if you are walking into a lounge. You are greeted by a well-dressed man or woman (I'd be hard-pressed to say "receptionist," it just doesn't seem like the right term) who offers to check your bag or coat. They ask if you would like something from the bar, which is stocked with a bevy of beverages. Dim lighting, candles, and couches with comfy pillows set the mood while you wait for the sales experience to start.
I can sign my customers in on a computer instead of by filling out paperwork (how primitive!) If I have brought them to a Shvo building before, their name & contact information appears, which makes them feel special. Why isn't everyone doing this?It saves the sales office the extra step of entering customer's contact info into a database. And in the age of trying to reduce one's carbon footprint, it saves trees.
You turn the corner through a white, curvy maze. Your sales person spins a globe that is mounted to the floor & stops it on the W over Europe. A video launches into a description of Europe's W hotels. Remote controls are sooo last year!
A few feet away, after watching a video about the W's developer, architect and designer, your salesperson points their finger towards a screen where they can select various floors of the building and demonstrate what you will find on each floor. You view renderings of the amenities and look at apartment floorplans while lounging on a sofa.
You saunter over to the model kitchen and bath. After your tour of the model, you're given a Graff inspired marketing package about the building and a separate packet of floorplans and availability.
Because Shvo is selling a lifestyle, and he does it so well, you feel as if you are really getting your money's worth, no matter how expensive the product is. The W is over $2,000/sq ft, quite possibly the most expensive price per sq ft for new construction in the Financial District at this time. But if I had oodles of money, loved being waited on hand and foot and having every convenience at my fingertips, I'd break out my checkbook in a heartbeat. And when someone asked where I lived, I'd say, "Oh, I live at the W." It has quite the nice ring to it.
Please note that this is Toes posting, not Noah!
I haven't written about any new developments in a while. In all honesty, they've kind of started to blend together. Once you've seen 50 new developments, you almost feel like you've seen them all. I finally made it to the Laurel Condominium yesterday and I was really impressed with the quality of the building and apartments. But (as is typical for Manhattan) you get what you pay for! The lower floors are $1,500/sq ft, higher floors closer to $2,100/sq ft. If you want a penthouse with a terrace, for $13 Million, you can get 4,073 sq ft with a 3,127 st ft private terrace.
I don't want to repeat what's already been said, so you may wish to visit the NY Condo Blog to get the full spectrum about the Laurel. But I will cover a few things they didn't touch upon...
400 E 67th Street, corner of 1st Ave
Design by Costys Kondylis; Developed by Alexico Group
~ 35% sold, sales office opened early December
Closings summer/fall 2008 (which probably means fall/winter 2008)
- 50 ft Lap Pool
- 2 Custom Designed Resistance Pools
- Fitness Center (more like a fitness center on steroids, this one has everything)
- Steam Room & Sauna
- Children's Playroom (They call it the "Toddler's Craft Clubhouse" - Barf!)
- Game Room (pool table, foosball, arcade)
- Conference Room/Dining Room/Catering Kitchen
- Screening Room
- Garage (for an extra charge, of course)
- LEED certified design (bike storage/bike racks, water-efficient landscaping, construction waste management, recycled content construction materials, low-emitting materials, local manufacturing, design maximizes exposure to daylight which promotes energy conservation)
- Bought the air/development rights over neighboring buildings so most views are protected
- Tasteful kitchens and baths: they are simple, classic and mostly white - it would be pretty hard for someone to hate them (good for resale)
- Stove/oven vents to the roof (usually air is recirculated)
- Wine fridge built in to all but the smallest apartments
- TV built into the bathroom vanity mirror!
- Heated bathroom floors
- White marble + white lacquer cabinets, Sub Zero + Gaggenau stainless steel appliances
- Convection and steam oven
- Electric induction cook-top
- Wine fridge
- Garbage disposal (in Manhattan, these are pretty much only found in new construction)
Question to Urban Digs readers: Will someone with radiant-heated floors please write in and tell us if you use this feature? Should developers bother? Or is a bath mat sufficient to keep your toesies warm in the winter?
Question for UrbanDigs Readers #2: If you love to cook, please explain what the benefits are of having a convection and steam oven and an electric induction cook-top and a natural gas cook-top. It seems like total overkill to me since (like many Manhattanites) I don't cook. I suppose if you love to have catered parties in your apartment or if you are a chef, it is wonderful. But if you are using the apartment as a pied a terre or you enjoy sampling the amazing cuisine we have in NYC and dine out every night... I suspect you could care less?
Question for UrbanDigs Readers #3: Do you have a screening room? Does anyone actually use it?
Not sure how many people will really buy into the Triathlon Training Center concept. I have done a few triathlons myself & I am training for one now, so I love the idea... But I wouldn't be willing to pay for it. A 496 sq ft studio is on the market for $750K. The living area is 12 by 20, the rest of the apartment is bathroom, kitchen, and hallway (marketed as the "gallery"). There are other new developments / conversions where you easily can get 600 sq ft for the same price. If you aren't big into triathlons, you probably care more about the size of your apartment than about the pool and fitness center. Still, for the athletically inclined, this is your dream building.
6A: 496 sq ft, $750,000 - Common Charges $398/month, Real Estate (RE) Taxes with 421a $45/month
9D: 1,100 sq ft, $1,620,000 - CCs $882/month, RE taxes w. 421a $99/month
2 Bed/2 Bath:
11B: 1,276 sq ft: $2,160,000 - CCs $1,023/month, RE taxes $115/month
3 bed/3 bath:
25A: 2,285 sq ft, $4.875,000 - CCs $1,833, RE taxes $206 (without the abatement you'd be paying a nice $3,505/month)
Buyers, please make note of:
- No shower door or rod in the 2nd bathroom (see my post about small details that sometimes go missing in new developments). This seems to be the trend in the 2nd baths in new developments.
- Ceiling heights are lower below the 15th floor than they are above the 15th floor
- To get a view of the river on the east side of the building, you need to be above the 15th floor
- Studios and most one beds are below the 15th floor
- Most apts with terraces are already sold (except some of the penthouses)
- The square footage is calculated from the midpoint of the wall to the window (as it should be for a condo). The square footage does NOT include your percentage ownership of the common areas (Noah wrote about double counting common elements), which is something a few developers are doing these days which I feel is very misleading to buyers.
The marketing package about the building is beautifully done (and must have been really expensive). However, I almost died laughing when I read about the "Duravit Starck 2 Series wall-mounted water closet with dual flushometer." Hello, people, it's a toilet. Ahhhh, real estate marketing at its finest!
The sales office was organized, and the salespeople were extremely knowledgeable about the building, which is better than I can say about a lot of new developments. I give the Laurel two very big thumbs up if you have an unlimited budget & you don't mind being on 1st Avenue in the 60s (not the most exciting place to live - trust me, I live nearby!).
A: I've been very busy lately and bids are being submitted. As I focus on product quality, resale potential, and valuation, my clients usually start a bidding strategy in their head right after they leave the property. I try to wait until after I do comps analysis to devise a strategy because in my opinion the most important past sales to review are the ones that occur in the same building, NOT nearby! The goal is always to try to get the best price possible for the product that we choose to go for. Sometimes it works, sometimes it doesn't. But at least we know we will not overpay for a property just because the seller is greedy and stubborn on counter-offers; and expects to get 10% more than a past sale 6 months ago.
First off, here are my past writings on bidding strategy for buyers and all should be must reads for any first time purchaser:
Bidding Strategy 101: Reverse Psychology
The Sellers First Response: The Probe Bid
Timing A Low-Ball Offer
Moving on. First off, you must take into account listing history (time/price) & seller psychology when devising a bidding strategy; at least I do. What I mean is, if a listing is less than 3 weeks on the market then the seller really hasn't reached the point of desperation & frustration yet. So, by submitting a low ball bid on a property that is only a few weeks on the market may not get the desired response. Why? Because the seller says to themselves, "...it's only been 2 weeks and I already got a bid 10% below ask. I have time. I'll wait for a better bid".
On the flip side, a seller who has been on the market for 4+ months already and is getting frustrated by the lack of action in terms of bids received, their response is likely to be very different to your low-ball!
Another type of bid, a probe bid, is designed to be more aggressive than a low-ball bid with the hope to gain information about the seller's motivations on price. A probe bid is a very interesting negotiating tactic if applied correctly. The ultimate goal is to:
a) not insult the seller by bidding too low
b) retrieve information from the seller that may assist with the next move
c) see how motivated the seller is
Many brokers do not analyze bidding strategies and negotiating like I do, and encourage their clients to bid as aggressively as possible to get the deal done fast. Fine, I have no issues with that as long as buyers agree. But I don't think that's the best approach for buyers trying to get a good price on a deal; and lets be honest, many sellers do price high and try to test the market. If the product is such a deal, and has all the features that demand a strong bid, by all means do it. But more times than not, buyers don't get everything they hope for in the same package.
Which brings me to today's point: when good bids go bad! Say you find a great product, that is priced right, is fairly new to the market, and you want it. So, you put a bid about 7% below ask to start out the negotiation and get a very quick response that is not as aggressive as desired. This tells me:
1) seller is taking back control of negotiations by limited counter-offer
2) although a very fast response by the seller, its clear they are not too willing to stretch right now
3) is testing my clients seriousness to get a deal done
A fantastic response by the seller and one that tells us good information. The probe bet worked and after analyzing the building comps, it's clear the seller knows they priced correctly and shouldn't have to stretch too much from asking to get a deal done. While its not the result I had hoped for (seller is not as motivated to get a deal done quickly), it's a great deal of information that we can use for the next bid.
As I told my client after the seller's response to our probe bid, I think we should get aggressive, up the bid, and pay what I feel the property is worth on the open market without playing the ping-pong game any longer. This will give the seller the seriousness they are looking for, and give my client the best chance of getting the property at a price that I consider market value! If that doesn't work, at least it will get a final counter from the seller leaving my clients with a decision to make.
My client ultimately decided to bid less than my suggestion, put a 'best & final' tag on it, and give the seller until end of day Friday to accept. A bold move! This kind of move will work 50% of the time, and is a move I would be on board with IF the seller countered our original offer more aggressively, and showed some signs of motivation. But the seller didn't, and I think this move doomed us and had little effectiveness given the underlying scenario.
The Result: It didn't work and a higher all cash offer came in that was accepted; we are now backup. The combination of an un-aggressive re-counter + the strong arm tactic of it being our last bid, hurt us in the end. There was never a chance for us to up our bid, and the seller broker never got back to me that multiple bids are now in and for us to submit our highest bid by a certain deadline. While my clients bid was a good one, and the probe got us very useful information, we didn't respond the right way. It was a good bid that gone bad. Of course, the timing of another offer submitted didn't help either.
So what should we learn? When a property is priced right and early in its listing history, don't be shy to get a bit aggressive and pay what the property is worth on the open market! Many people have a fixed % in their head, regardless of asking price, that they must get the seller down from asking in order to do the deal. THAT IS A VERY BAD CHARACTER TRAIT and may prevent you from jumping on an opportunity when one presents itself. Instead, go into the bidding phase with a clear understanding of what the product SHOULD fetch on the open market based on comps, permanent features, location, light/views, condition, etc..If you do decide to play ping-pong, analyze the seller's response closely and don't hesitate to get aggressive and bid market value, even if its closer to the asking price than you might otherwise hope! In the end, it doesn't matter if the property is priced correctly!
A: Via the WSJ's Real Time Economics, Ben Bernanke outlined the risks to the financials if the monoline bond insurers get downgraded by the dis-respected, dis-credited ratings agency's. Trust me, when the head of the FOMC states this kind of concern you know its a ticking time bomb and that they are going to bring in anyone with bomb disarming experience or potential to help stop it from going off.
Via Real Time Economics (letter):
Federal Reserve Chairman Ben Bernanke said a downgrade of the monoline bond insurers could leave banks exposed to losses on insured securities and force them to take back onto their balance sheets insured securities held by others for which they have provided liquidity and credit guarantees. “Banks could be required to bring a sizable volume of assets, especially municipal securities, onto their books,” he said.Late yesterday, Warburg agreed to take on another $750 Million investment in MBIA as the company desperately tries to raise capital to avoid a downgrade of it's critical 'AAA' rating. Sounds like good money going into bad to me. Anyone else recall Bank of America's investment in Countrywide Financial at $18/share? The stock popped to $23, for a few days, before heading on its downward path down to $5/share where BAC decided to just buy the whole company out.
“Given the adverse effects that problems of financial guarantors can have on financial markets and the economy, we are closely monitoring developments.”
Only 1 week ago, MBIA did a very shady conference call to re-assure investors that they won't go insolvent, as they answered pre-selected written questions emailed from analysts the night before. The call on JAN 31st, the next day, could ONLY be positive spin as the company answered the questions they chose. TheStreet.com had the story where MBIA said a recently closed cash infusion by Warburg was sufficient to maintain their 'AAA" rating as the CFO called those who question their business 'fear mongerers':
The company, which has received a cash infusion by private equity firm Warburg Pincus, underscored that it has sufficient funds to meet or exceed rating agency's capital concerns and voiced its belief that it is well positioned to go forward.Now, only 7 days later, MBIA issues common stock to Warburg for another $750 Million. Does this sound like all is well to you? Why do we even believe the words that come from these CEO's mouths? After all we have been though with Enron, Worldcom, Global Crossing, Tyco, and recently Countrywide. Who recalls CFC's CEO claiming this quarter would be profitable late in 2007? Ha! What a farce as they reported $400 million in losses.
"It is virtually impossible to imagine a circumstance in which MBIA would become insolvent," said CFO Charles Chaplin, answering one of a litany of questions submitted by Ackman just prior to the start of MBIA's marathon call. What was not clear on the call, however, was what the future of the franchise might look like going forward as competition increases and further downgrades loom. Indeed, about an hour after the MBIA call wrapped up, Standard & Poor's placed MBIA on watch for a downgrade with negative implications and cut Financial Guaranty Insurance Co. to double-A from triple-A.
Folks, this is what happens when you try to sell chicken shit as chicken salad! If it smells like shit, looks like shit, then it's shit! With regard to today's problems, wall street wrapped up subprime chicken shit, gave it a makeover, and sold it to investors/banks/brokerages/hedge funds as 'AAA' chicken salad. Well, the financials ate too much chicken salad and now their breath smells like shit.
Just a quick newsflash on the tightening bank regulatory environment.
"Deterioration of the commercial real-estate market will lead to rising losses and bank failures in the near future".
"The crisis in the US housing market has had a knock on effect on commercial property".
“There will be more frequent interaction between supervisors and banks with concentrations in CRE loans that are declining in quality,” he said. “There will be more criticised assets; increases to loan loss reserves; and more problem banks. And yes, there will be an increase in bank failures.”
According to the Financial Times of London, these comments were made by John Dugan the U.S. Comptroller of the Currency at a recent conference in Florida. Importantly, Mr. Dugan was recently named chairman of the international Joint Forum an organization that deals with banking, securities and insurance issues and the regulation of multi-national financial conglomerates. Dugan also reportedly issued a warning last week that banks should use market prices, rather than "models ", to value securities even if trading volumes were far below normal.
Remember what I am saying here..... more regulatory scrutiny and tougher underwriting oversight will hurt real estate and the economy if not implemented very carefully.
Banks are already tightening credit on a wholesale basis. According to Inman News, the latest quarterly survey of commercial/multifamily mortgage bankers originations by the Mortgage Bankers Association showed "loan originations sank by double digits in Q4'07 when compared to a year earlier. Total fourth-quarter originations dropped 16% below the level recorded in Q4'06, with the decrease seen across most property types and investor groups... Decreases in total commercial/multifamily mortgage originations were led by a drop in commercial mortgage-backed security [CMBS] conduit loans, which have been impacted significantly by the recent credit crunch and other market disruptions."
Now it looks like the regulators have started turning the screws for real and credit tightening has moved beyond the CMBS market to smaller portfolio lender banks.
The Wall Street Journal has a quote from a small local banker regarding federal examiners currently looking at his bank's books, which really underscores this emerging situation. "They are scrutinizing and really drilling down into the loan portfolio like we've never seen them do in the past." according to Jim MacPhee, CEO of Kalamazoo County State Bank. Another quote from the same article demonstrates this isn't a one off circumstance "I'm hearing from my member bankers that the regulators from state and federal regulatory agencies are really coming in and cracking down," this was according to Camden Fine, president of the Independent Community Bankers of America, a small bank trade group.
From the Blogosphere
Banks Put Stranglehold on Credit
Tighter lending Standards "Hurt" those Needing Help
Lending Standards Tighten Video
A: I would like to talk about the bigger picture again, as I often do here, and discuss some of the problems that seem to be bubbling under the surface in the commercial sector. This is a wide angle lens discussion on this sector and not a spotlight on Manhattan commercial real estate. It's important to note that commercial real estate saw a similar boom that residential saw over the past 4-5 years, and that the debt used to finance many of these deals were securitized and dispersed just like subprime was. As the slowdown occurs, one has to wonder if this may be the next shoe to drop on the books of the financials holding commercial mortgage backed securities.
Yes, all this matters. First, lets take a look at what the CMBS indices have been doing over at Markit.com which shows us the continuing widening of credit spreads in the commercial sector. What does this mean? Well, even with the fed rate cuts, the lending environment for commercial real estate has dried up. Risk is being priced in and as a result, credit spreads are widening signaling unease in the credit markets for this type of paper. The chart on the right shows you the rising spreads: FOR CMBS INDICES, UP IS NEGATIVE.
This is not all. The MIT Center for Real Estate issues a quarterly report, TBI (transactions based index) of Institutional Commercial Property Investment Performance, to measure market movements and returns on investment based on transaction prices of properties sold from the NCREIF Index database.
"Results for the 4th quarter of 2007 show a negative 5% capital return for the properties sold in the NCREIF database. This is the second consecutive negative quarterly price change in the all-property TBI, a cumulative fall of more than 7% since the peak in the 2nd quarter of 2007. The investment total return for all properties in the 4th quarter also registered a decline of 4.3 percent.According to the BostonHerald.com's article, "Commercial Real Estate Prices Tank":
Please note that the TBI is a statistical methodology that produces estimates of price movements and total returns based on transactions of properties sold from the NCREIF Index database."
Commercial real estate prices are tumbling across the country in a decline not seen since the devastating recession of the early 1990s, a new MIT report finds. The value of commercial real estate owned by major U.S. pension funds fell 5 percent in the fourth quarter, according to a commercial market index produced by the MIT Center for Real Estate. The drop was nearly twice the 2.5 percent decline seen in the third quarter. The ongoing credit crunch in the capital markets, which has made it difficult for real estate firms to both buy buildings and develop projects, is a key factor in the price declines, the MIT report finds.Jeff spoke about this last week. In his piece on JAN 29th, Jeff stated:
...the spread (or premium in yield) investors are demanding from 'AAA' Commercial Mortgage Backed Securities has risen significantly. We knew spreads had widened, forcing banks to write down the values of some of these CMBSs, but what really worries me is that the widening has continued even as the fed has slashed rates. Fed cuts rates and borrowing cost goes up, not the math we want to see.There is a point here. We know that forces outside Manhattan can affect us. If subprime defaults rise as national housing prices fall, the entire secondary market for securitized subprime MBS will dry up. This wreaks havoc to the financials, causes billions in losses, tightens underwriting standards, and makes lending rates rise as risk is re-priced. Well, what about OTHER DEBT CLASSES; i.e. Commercial mortgage backed securities?
Since cap rates (mutiples of net operating income) at which properties trade are directly correlated with borrowing rates (increased interest cost = increased cap rate) and increased cap rates equate to lower prices versus net operating income, assuming net operating incomes from commercial properties just stay flat, prices will fall. So even in a market with great dynamics like Manhattan, if borrowing costs rise, net operating incomes need to rise just to keep cap rates stable and keep prices from falling. Again, this equation isn't new news, but you really want to see borrowing costs stop rising.
I did some searching and I saw that Fitch yesterday placed 51 U.S. CMBS deals under analysis with the report concluding within the next 30 days. Here is the story:
"Following its monthly surveillance review, Fitch Ratings has identified 51 of its U.S. CMBS deals as 'Under Analysis', indicating that Fitch will be issuing a rating action within 30 days."What is the potential damage to banks books? According to today's WallStreetJournal story, about $180 Billion. When discussing Blackstone's coming sale of debt for which it used to finance the Hilton deal, concerns are mounting:
"A less-than-successful offering could send the market into a longtime funk, exposing banks to more write-downs at a time when they have recorded more than $100 billion of losses on residential-mortgage-related securities over the past few months. In a report issued Friday, analysts at Goldman Sachs Group Inc. estimated that banks could book $23 billion of commercial-real-estate-related losses this year alone, consisting mainly of write-downs on CMBS's and related securities.So, although this doesn't necessarily relate directly to Manhattan, do you feel this is something worth keeping an eye on? I certainly do!
All told, Goldman Sachs predicts that U.S. commercial-real-estate prices could fall as much as 26% though 2009, driving the total of related loan losses to more than $180 billion over time, of which global banks and brokers might bear over $80 billion."
A: Okay, so the ISM # was awful, the economy is clearly contracting and stocks are hung over from all the drugs they did from their dealer, the federal reserve. Guess what. Stocks now want an inter-meeting rate cut and rumors are starting to spread. When will it end? For god's sake, someone give the markets an intervention!
How do I describe this other then "pathetically predictable". Stocks fall, market rumors swirl and traders beg for more rate cuts! Just one more hit Benny, pleassse, and I swear I'll get out of my positions!
I seriously hope the fed exercises some monetary discipline! After the last 50 basis point cut, and subsequent market drug induced rally, the talk was that the fed did what they needed to do! One week later, reality sets in that the economy is slowing and now the markets ask for more?
The economic reports should be expected to come in weak, I discussed this only 12 days ago in my post, "First Stock Shock; Second Economic Data":
We must be prepared for how this cycle will likely play out. Now that stocks adjusted, with the help of a very aggressive 3/4 point inter-meeting rate cut by the fed, the economic reports (jobs, gdp, inflation measures) are going to be coming out and the news is widely expected to be sobering!
...there is a lot coming that we will need to digest and trust me on this one, if these reports do come in on the disappointing side, the chatter in the media will change from whether we will go into a recession to how severe will the recession be!
Well it came today with a very weak ISM #. Here is what I was talking about in that post, as the recession talk now gets serious. According to today's CNN Money article titled, "Recession is here - economists":
A growing number of top economists believe that the U.S. economy has now toppled into recession. Alarm bells were set off Tuesday by a grim report on service businesses, which make up the majority of the U.S. economy. The Institute of Supply Management said that activity in the service sector declined for the first time in nearly five years. This report also indicated that employers are cutting staff.Anyone with a clear head and not phased by the powerful curtain of denial, can see that there are red flags waving. But to start with the cries for more rate cuts, and talk of an inter-meeting cut as stocks fall, is so damn played! Was I dreaming, or did we not just get 125 basis points of fed easing in the past 4 weeks? Now they want more and fast?
When will they learn that fed easing is only a week long fix for stocks, is the strongest ammo the fed has to stimulate growth, can only go 0% (hey Japan, how YOU doing?), and STILL won't fix the problems we face! Just bring on the damn recession, stop your whining, take the losses, consolidate & regulate, clean the books, take the medicine, and lets move past all this. Thats the only way.
There are major downsides to fed easing:
a) pipeline commodity inflation
b) moral hazard; bailing out risky bets encourages future behavior
c) re-inflating an asset bubble that was inflated by fed easing in the first place; delaying and worsening the inevitable correction
Right now, the hope is that the slowdown will fix the inflation problem by itself and put a floor on how severe any recession may be. But to re-inflate an asset bubble with more hot air, without allowing it to correct itself, will likely push off and worsen the eventual pop! The markets need to realize that the short term jolt they really are wishing for via fed easing, is not the answer to our problems! To see this simply look at today after such aggressive easing in past 4 weeks! Amazing. We have become a society that fears slowdowns, instead of embracing them for what they truly are: short term disruptions in economic growth usually brought on by unsustainable asset bubbles. As the recession occurs, the risky bettors are punished, shareholders and corporations feel pain, there is consolidation in the industry, the books are cleaned out, pain is embedded deep in the minds of investors, and change occurs to protect the industry from future re-occurrences.
To stop this process is to not allow the markets to fix themselves! Let it happen!
I would like to end this post with what I thought was a great quote by a commenter on Barry Ritholtz's blog The Big Picture, which depicts a great image of what is holding up our economy:
"There is no business cycle. Don't you know that the price of housing and stocks only go up? Recession bad. Perception of strong economy good. Savers bad. Spenders good."
Obviously sarcastic, but for an economy with an obvious debt/spending problem, it seems we like to punish those who save (low savings rate & inflation) and reward those who were on the wrong side of extremely risky bets. Now I know its not that simple and this is a very general comment, but seriously, we need to let the recession cleanse these problems; NOT a fiscally irresponsible fed.
Since there really is no daily update for real estate, I want to discuss the equity markets today. So the stock market took a shellacking from its high in October 2007 to its recent lows, with the Dow losing 18.1%, the Nasdaq composite falling 23% and the S&P 500 falling 19.4%. Many are beginning to entertain the idea that this 20% or so decline constituted a "bear market" and that the climatic sell-off overseas and slashing of rates by the Fed constituted a capitulation, ending this nasty period and setting up the next bull market.
It should be so easy! In 1998 when Long-Term Capital almost brought the financial system to a grinding halt after more than a year of the "Asian contagion", the market got slammed for 2 months or so and the sell-off was replete with rumors of Wall Street firms about to go tapioca. The relentless bout of panic selling was met with a fed rate cut and boom, stocks were off to the races through 1999 and 2000. People would like to analogize today's market with that one....but I think they are dead wrong.
The reason for this is the action of one powerful indicator, which was flashing an all-clear sign in 1998.....but is not doing so today. As a portfolio manager I found this one simple indicator to be the most valuable in establishing a market mind set. Before I share this elementary concept with you, a couple of explanations. First why should you care? As Noah and I have been saying for at least 6 months, while the Manhattan real estate market is a special case versus the rest of the country, it is not immune to a recession, particularly one that is centered in Wall Street. We have cited lots of statistics and information to back up our belief that this is true and I think so far we have had a pretty good track record of being in front of financial market developments that have stunned and amazed many.
Whether we have just made it through a bear market in stocks or are beginning a period of lower stock market returns is likely to be very significant to the Manhattan real estate market. Second, Noah says "don't try to time the market", as you respond..."but isn't this just another example of you guys being closet market timers"? To this I would say that as a mutual fund portfolio manager, I never had the opportunity of trying to time the market, because my job was to be at least 90% invested in stocks at all times, and even when I was with a hedge fund, the risk of being wrong (fatal) prevented us from making significant directional bets on the market. Despite this, I always tried to pay attention to the technical side of the market and have a mindset regarding the overall direction of the market, which told me whether to be more aggressive or more conservative with my investments given the constraints I worked under. Noah has essentially been telling real estate investors the same thing. If you are raising a family and need more space, if you have a 4 year plus view, if you have ample funds, don't avoid buying because the real estate market looks like it may be dicey in the short-term. But have a mindset about what the future could be like and adjust your degree of aggressiveness if there looks to be significant signs of an acceleration or deceleration in the market.
Okay, lets get down to business. If you take a look at the chart above,which is from CBS Marketwatch, you will see a great example of a top in a stock or market. Charts work for both charts and markets, because they are just records of the trading patterns of the human market participants....who act the same over and over year to year, century to century, market to market. This chart shows how the market got creamed over the summer, made a nominal new high in October, got slammed back to the same level in late November, then tried to get back to its old high. The action over 6 months' time created a large overhead supply of stock people were holding at a loss, and would be tempted to sell on any rally that got them back to break-even. When this rally attempt "failed", in the same area where stocks spent most of their time going all the way back to May, people decided to dump their losers and the market got drilled to a new low. It has recently popped back up some, but even an optimistic article on CBS Marketwatch, which suggests that sector rotation is laying the groundwork for a new bull market notes: "Given the severe January breakdown, rallies to the S&P's neckline - the 1,400 area - will likely draw sellers." This selling probably started yesterday.
Now before I talk about my simple indicator, let me say that I don't like being bearish and it's been a drag cataloging all the negative complications of the residential real estate bubble popping lo these many weeks. I am looking forward to the day I will write a piece entitled "Buy Anything with a Symbol" or "Buy the Condo You are Standing Closest to..... NOW!!!!" But now isn't that time.
I have not really commented on the stock market since my "Black Monday 20 Years Later" piece back in June. I was amazed at the positive market action this summer, despite the very negative implications of the emerging credit mess.....and I have been waiting for the primary market trend indicator to turn negative, as it did recently, before uttering a negative word about this volatile and crazy market. I also decided to catch up with an old friend of mine for a sanity check before I wrote this piece.
My buddy Stan Weinstein runs a technical forecasting service for institutional investors called Global Trend Alert. His monthly and weekly pieces are found ubiquitously on hedge fund and Wall Street trading desks. Back in the day, Stan literally wrote the book on technical analysis, "Secrets for Profiting in Bull and Bear Markets," and had a widely followed newsletter called "The Professional Tape Reader", which he started back when there was still a ticker tape. I haven't talked to Stan in a long time, but as always he was generous with his time (between grabbing lines from the titans of Wall Street). He sent me his last monthly piece and allowed me to quote him here on UrbanDigs.com. What Stan said went something like this:
"Back in November we turned bearish on the markets primary trend, after the phony rally to new highs, which was not confirmed by the market's advance/decline line, Russell 2000 Index and our proprietary S&P Survey (of the chart patterns of all large cap stocks) among other negative factors. We are now entering a period of bear market rotation where retail, transports and financials, which led the market down, are being cushioned by value buyers and short covering, while new sectors like technology, industrials, cyclicals, machinery and oil related stocks are starting to roll over. The market is never a monolith and some sectors like coals and healthcare services still look like decent places to hide. At a minimum we expect the Dow to get down to 11,000 with a June/July bottom possible, but you could certainly overshoot on the downside."So how do I add to that? Stan is one of the greats, but it was actually Vince Boening, another graybeard technician who at the time was DLJ's technical guru, who taught me the importance of the key primary trend indicator....the 200 day moving average, when it came not just to individual stocks, but to the market overall. Any stock jockey can tell you that it's bearish when an individual stock falls decisively through the line representing the 200 day moving average of its price on higher than normal volume, and that it takes a lot of technical "work" to fix this damage, so stocks don't usually just turn back around and go straight up after busting the 200 day (although nothing is an "always" in financial markets). However, it wasn't until 1998, with all hell breaking loose in financial markets, and rumors of various Wall Street firms going bust, that I learned how important the direction and incline of the 200 day moving average was for the market overall. I had called Vince Boening to get his take on the market bloodshed, as he was one of the only people around not turning acutely bearish, and he said: "While its obvious that there has been a panic sell off, the 200 day moving average of the market is still moving up strongly, reflecting the robustness of the rally prior to the sudden onset of weakness. There is a natural tension for stocks to rebound when they have sold off so suddenly and traded through a strongly up trending 200 day moving average, because the inertia of the market is still up". Vince was more right than I think even he believed. As it turned out, with the Fed cutting rates to cushion the blow from Long-Term Capital's demise, and then its continued expansion of the money supply in preparation for any Y2K problems, the market rocketed out of the August 1998 lows, (interestingly the Dow itself never made a new high in that cycle), with the Nasdaq and other indices barreling higher until Q1 2001.
I believe that the reason the 200 day moving average is relevant at all for markets or stocks is deeply rooted in human psychology. It's very hard for human beings to suddenly believe that the world has fundamentally changed (excepting maybe a 9/11 type incident) due to an event, we need time to really become convinced that things won't go back to the way they were. As my partner likes to say, it's like sailing away from shore, you keep thinking you can turn around and go back....it takes a long time before you realize you will just have to keep on the same course until you find land again. Thus it really takes about 200 days of continued bad news to shake people's confidence. At the end of my chat with Stan I said "I think this rally looks like a gift to short sellers and those who want to cut back on stocks....the 200 day moving average has only just turned negative (see blue line on the chart)". I could hear Stan typing in the background and pulling up a chart in his system...."Ya know kid, you got a good point." If you look at the market's big plunge back in August it looks hauntingly similar to the late 1998 tape action....and in fact the market did rocket back to a nominal new high this fall as well, but the roll over and plunge to lower lows this fall has put the coup de grace on the bull market, by dispelling all the momentum that was left in the 200 day moving indicator. The market's inertia is now downward.
As far as my compass shows, there is still a long voyage ahead for the market on the downside, and the 200 day moving average says we will just have to ride it out. There's no going back to shore. My only caveat to this view, would be an explosive rally starting....about now, which wiped out a lot of technical damage before the 200 day moving average gets even more negative (as it inevitably will as it starts to factor in less and less of the positive market action of last Spring). Now fundamentally the market isn't historically expensive (if you believe the incredible shrinking earnings estimates), but without the low P/E oil stocks it doesn't look real cheap either. So maybe there isn't that much downside past Stan's 11,000 target, but I wouldn't hold my breath for strong returns from today's level for quite a while. If the market goes to sleep for a spell here, I don't see much in the way of positive events for brokerage firms, hedge funds or Manhattan's economy.
(Premature?) Positive Commentary on Stocks from the Blogosphere:
Positive Energy as Market Struggles
Market Bottom; Insider Buying Exceeds Insider Selling, Signaling Market Bottom
Bear Market May Produce Positive Results For Investors
In case you didn't notice, I reinstalled the live chat in the right side of urbandigs.com. I'll start doing the chat again daily from 10:00AM to about 11:00AM, or as time allows it. When I'm working, I'll leave the chat online in case anyone wants to talk briefly.
Also, I apologize for light postings past few business days, as I'm very busy right now. Once I get bids in for clients, searches done for new buyers, and appointments all set up I'll work on some new content and views on both the market here and macro updates. All in all, it seems the market here is active which leads me offer a few pieces of advice for both buyers & sellers:
Analyze your OWN, UNIQUE situation when deciding whether to buy or not. Try not to get caught up in headlines. If you can afford to buy, have the liquid assets waiting to be put to work, have a 4+ year timeline to own, and are happy with your job security and salary, then follow these easy steps so that the resale-ability of the product you will buy is maximized:
c) RAW SPACE
Visit at least 7-8 properties in your price point so that you become familiar with property size, layouts, property condition, what is considered good light/views, etc.. Become a mini expert on your price point; understand how monthly costs should affect affordability of the purchase price on the open market. When a product comes on the market or becomes priced right both for you & the open market, go for it. Analyze building and neighborhood comps, focusing on the building comps more heavily, and devise a bidding strategy to increase chances of 'hitting' your desired # in the end!
Depending on your motivation to sell, focus on these two things first:
Doug Heddings points out the importance of product quality, which is so important at resale, but in this case you already own your home so there is nothing you can do to change it. So, after pricing & marketing, you may want to dabble with low cost staging and/or renovations to get your property into tip top showing condition!
Psychology IS important to buyers! As they browse through your home, they try to envision if it will work for them. As they go into deep thought and envisioning, they start adding up what work will be needed to the property. More times than not buyers try to deduct these expenses from the purchase price. It's only in cases of aggressive pricing & packed open houses that this train of through becomes less of a factor.
Here are some quick tips:
1) remove your personal/family pictures wherever possible; remove the YOU element of the property so that you don't disrupt the buyers' train of thought as they envision their family in the apartment
2) floors? Refinishing your floors is a low cost and very high reaction type of renovation! For $2.25 - $2.50/sft, Marc at FloorworksNY can add life to your worn out floor; I'll vouch for his services and used him twice myself. As buyers walk into an apartment with a dull floor, they immediately think of replacing the floor and the high cost of that expense; aprox $15/sft! If the floor is sanded, stained, and poly'd and shines right into the buyers' faces as they enter the apartment, this expensive thought suddenly disappears!
3) try to show at sunniest times
4) staging; anti-clutter the apartment and re-arrange some furniture if need be to make the layout flow properly to maximize viewable usable space. Buyers like to see a large apartment, not a cluttered one that makes it appear smaller.
5) clean; such a simple thing yet I can't begin to tell you how many disgusting apartments I take buyers to. If the place was clean, the buyer wouldn't walk around the property with a grunt on their face the entire time.
6) quote accurate square footage; lying will get the buyers hopes up as they view the property online and disappoint them when they come to see it. A disappointed buyer is a buyer who doesn't submit a bid; and if they do, it's likely to be on the low side.
As to moving the property, obviously with a higher motivation to sell pricing becomes way more important. If you truly price right, you should get buyers into your open houses and hopefully a few bites within the first 3-4 weeks. If you aren't getting any traffic, re-analyze pricing and ask your broker how the property is being marketed weekly?
Good Luck to all!
In my piece yesterday on the upswell of regulation and litigation likely to begin impacting the residential real estate business, I neglected to mention a couple of news items from the Wall Street Journal this past week that had initially prompted me to look into the matter. The piece was just getting too long...my apologies. Very quickly here are the other items of note.
Federal Reserve Governor Randall Kroszner, who runs the Fed commitees that formulate policy on bank regulation and consumer protection, is said to be in danger of not being re-appointed, due to his de-regulatory bent. He has been criticized by Senate Banking Committee Chairman Chris Dodd for his role in new mortgage regulations. Kroszner will give two speeches on the Fed's proposed new mortgage regulations next week.
Last month Related Group of Florida filed 16 suits in Miami-Dade County seeking the forfeiture of commissions paid to brokers who sold luxury condominiums it built, after buyers defaulted. If condo sponsors can get away with this sort of thing, brokers are going to have very little incentive to pre-sell new developments, in my opinion.
A former Countrywide employee who worked as a regional VP in the Houston office of a JV between KB Homes and Countrywide alleges that he was fired for raising concerns about questionable lending practices. These included personnel helping borrowers submit loan applications with false income amounts and giving unconditional approval of 10% of the backlog of home loans so that KB Home could start building the homes with contracts in hand. The State of Florida's Attorney General Bill McCollumhas has already issued a subpoena to Countrywide Credit seeking information on sales practices, loan origination standards and fees charged in its foreclosure process. Expect much tougher lending standards and laws that demand that they are adhered to.
Governor Eliot Spitzer is looking to close a tax loophole that lets out-of-towners and foreigners who have owned limited partnership interests in New York property to avoid paying state income taxes on the profits earned when they sold those interests. As a result of the fiscal pressures that states face due to the decline in real estate related tax revenue, expect more initiatives of this nature. This instance in particular may not be helpful to the New York City real estate market.
Disagreement has emerged as to whether New York Attorney General Andrew Cuomo or the Office of Federal Housing Enterprise Oversight (the official regulator of Fannie Mae and Freddie Mac) should be investigating allegations of fraudulent appraisals and mortgage fraud.
You get the point. Expect many State Attorneys General to get into the act of investigating and then persecuting various members of the real estate food chain. Congressmen will be strong arming regulators to get tough. New rules and laws will be promulgated. Developers will sue brokers, buyers will sue developers and brokers. The whole business will get tougher and less profitable at the same time that consumer interest wanes.....same as it ever was.