Losses from the falling value of subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank AG analysts said.
Wall Street’s largest banks and brokers will be forced to write down as much as $130 billion because of the slump in subprime-related debt, according to a report today by Mike Mayo, a New York-based analyst. The rest of the losses will come from smaller banks and investors in mortgage-related securities.
Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley led more than $40 billion of writedowns of assets as record U.S. foreclosures plundered asset prices. About $1.2 trillion of the $10 trillion of outstanding U.S. home loans are considered to be subprime, Mayo said in the note.
“We’re not out of the woods yet,” said Mondher Bettaieb- Loriot, who helps manage the equivalent of about $58 billion at Swisscanto Asset Management in Zurich. “There are more losses to be taken and there’s more negative news to come. At some point it will be a buying opportunity but we’re not there yet.”
What is that adage bout something seemingly too good to be true than it usually is too good to be true? Quick money on the leaner side, only pay a little interest on the debtor side, it seemed great at the time for both, each hoping to beat the system and extract money from the other … but in the end it looks like everyone looses, even those of us with boring 30 year conventional loans …
I fear their has been real villianary here. The Wall Street big boys are always hyping some new product and the allure of high returns sucked in a lot of the unwary investors. Further down the food chaing why did smart people thought giving homes to the renter class with no money down (they are only one layoff, divorce or illness from a foreclosure and/or bankruptcy) was a good idea? …… because they got their money up front. I think there has been huge collusion with the brokers (and the homebuilders) and the homebuyers about income reporting – the only bright spot is that interest rates did not go up any more than they did – had the traditional 30 year note hit 8 instead of 6 the fallout would have been truly massive. The hit middle and upper middle class neighborhoods will take becasue of the foreclosures which will become rental property will be considerable.
Nobody held a gun to the buyers’ heads and forced them to borrow for much too much house. Greed, envy, and a form of gluttony, pure and simple. Most of them borrowed for two reasons:
a) They were ‘sure’ that prices would continue to soar, thereby putting them on Easy Street.
b) They wanted a fancy house, for show.
It’s no accident that the average home has increased in [i]size[/i] by more than 50% even as [i]family[/i] size has continued to shrink.
The mortgage mess offers us the temptation blaming it on some easily identifiable “bad guy(s)” when the reality is more complex. Lots of actors had incentives to favor aggressive extension of credit: banks with cash to lend and risk to take; brokers compensated on deal-flow; developers dependent on new customers; would-be homebuyers. Other actors deserve some blame an enablers: semi-government agencies who buy or underwrite certain types of mortgages; appraisers. And some of those villains are driving the cleaning up process. The credit squeeze in the third quarter was driven by the banks themselves, among themselves. They weren’t willing to lend to each other with questionable assets as collateral (which is why the Fed kept pumping in billions in short-term financing, just to keep the wheels of cash flow turning). They also started pricing more risk into mortgages (which is why mortgage rates have not come down as Fed interest rates and bond yields have come down) and getting more selective in the underwriting process. Compounding this is what banks do to mortgages once they own them – bundle them, sell them, break up the cash flows into streams with a certain level of risk and sell them individually, etc. The banks have by-and-large stopped taking the big risks now, and what we’re seeing the markets is the process of banks uncovering and reporting the impact of sins of the past.
TWilson, that’s dead on.
My only fear is that the credit creation and speculation has been so large, in many areas, for such an extended period of time, that the correction will be relatively painful.
Rick,
I do think you are right, the correction will be painful. The credit creation piece is stabilizing (risk-pricing going up), but that’s putting brakes on the real estate market (fewer buyers). The speculative piece is also unwinding, which is painful because speculators who just want out are taking any price and driving down prices overall in a market already overloaded with inventory and foreclosures. Where this hits Main Street is (a) lower home values, (b) more expensive access to liquidity that depends on home equity, and (c) investment pain in the stock market. So far corporate hiring has remained robust and unemployment low, at least.
There’s some villainy here, but it’s just part of the picture.
Examples of villainy:
— Persuading unsophisticated homeowners (typically elderly, poor, or both) who had substantial equity in their homes to refinance their mortages in a way that racked up large fees for the lender or mortgage broker without any meaningful benefit for the homeowner. Loan-origination fees. Closing costs. Near-useless features like single-premium life insurance.
— Persuading unsophisticated homebuyers to take mortgages with teaser rates by telling that they could refinance cheaply at the end of the teaser period.
But villainy is only part of the picture:
— Homebuyers bought more home than they could afford and did so at inflated prices.
— Investors who’d gotten their hands burned in the stock market rushed into real estate. They’d bought high and sold low in one bubble and were about to do the same in another.
— Most importantly of all, investors became insouciant about credit risk, the risk that borrowers would default. This insouciance, which pervaded capital markets, assured a steady flow of money to finance additional speculative lending.
#5 & #6 — This is the market balance of things done three and four years ago. I’m in a related industry to new construction and seen these before, the foreclosure wave is actually the last wave to hit. At the moment and for a few months more creditors will suddenly withhold credit from many deserving people however the rule loosen up quickly because no new business hurts the creditors. There will be a temporary deflation of prices across the board, mostly the luxury home market will be hit.
Since the market crash of 1988, there is very few speculative building going on, in already developed area there was a lot of subdividing and speculative building of luxury homes but that actually a small sector of the market. Major builders like Toll Brothers or Brookfield do not build until a contract is signed (there can be walk outs, but those hit mostly last spring, so the market in my area is somewhat recovered from that issue).
Ironically you will see some investors hop back in the home market soon. These are the one who do not follow the herd and realize they can snatch up foreclosed houses dirt cheap and hold on as rental for a few years to sell at a profit. I’m seeing that in the listings already, for a zip code I’ve watch it was 208 foreclosures (from notice to property owned by creditor) in August, 268 in October and 167 this morning. The will not effect is the top end homes, those will be allowed to fall way below purchase price and the people who owed them will have to hold onto them or take the hit (mirroring the ’92 crash which I knew a couple that had the house deflate by $100K the year after they purchased and they did sell it for a $100K gain but only after six or so years later).
Also you’ll see realtors go into financing in order to move a house. I remember in the mid-nineties Weichert Reality had several programs that allowed co-workers with poor credit to get a home (30 year conventional loans a point a half above a loan I took out near the same time).
If you use the measure of 2003, then I think what folks written is correct. I don’t think 2003 is a good base year, it was extremely overheated from my work in a related industry. I do think we’re in the last of it and there will begin a SLOW climb out, 1st quarter of next year will be better than 4th quarter this year and 2nd better than first but I don’t think it’ll be noticeable until the numbers come in. 2008 will probably be more like 1996 and several years along those lines.
Also the current credit crunch seems mostly only on this one market, creditors are allowing my company to make stupid decisions on loans.
KAR, I hope you are correct, but I am less optimistic for next 12-24 mos. The corporate credit crunch may be easing (still not seeing as many large LBO’s and acquisitions as pre-squeeze), the secondary and tertiary impacts of the real estate slowdown have a way to go. Consumers have been using home equity as a source of liquidity and as a cushion – but large numbers of people are going to see home values drop for the first time in a long time, which is likely to curb spending. Retail sales are already missing forecasts this year. On the corporate side, while earnings have been holding up, there are signs of capital spending being curbed (projects delayed, deferred, scaled down), at least if you believe Cisco – that’s why Nasdaq is outpacing the SP500 to the downside, and B2B IT players are sagging, too. Not that all of this is driven by the subprime implosion, but it all putting pressure on consumers who have been the workhorses of the US economy.
TWilson – I think your dead on with consumer confidence in there is a lag between events of when those saw the down turn come and when it occurred to John and Jane Doe, so there logically will be a lag of when prices stabilizing and market turns around to when consumers believe it.
We have a HUGE problem with incomplete, misleading and even outright false reporting by the media on this crisis. The first problem is that the media is conflating all the different mortgage problems into “the subprime crisis”. In reality there is a much greater problem with the (negative amortization) Option ARMs. With subprime loans borrowers at least paid the interest (if not p & i). But the OA’s often had payments that were only 50% or less of the interest. So combine a rising balance with falling property values, and you have a real, compound problem (to say nothing of the fact that OA’s will blow up in 3-5 years).
The estimate of 30-40% of subprime loans going to foreclosure seems wildly sensational. (I read one analysis today that estimates 10%.) Moreover, most commentators seem unaware that subprime lenders also made 30-year fixed loans. In fact I know many folks who got 30-year fixed loans from subprime lenders at rates as low as 4.5%, rates that were often lower than “A” loans.
These are just a couple examples of how the media has rushed to sensationalize and make a serious problem worse. Yes, there were plenty of bad actors at all levels. But in the rush to point fingers, the concern for truth seems to be a low priority. And the tragedy is that the media-induced stampede is currently leading (and has already led) to legislation that will make the situation even worse.