More bank bailouts ahead?

Something from 6-24-08 from Antony Currie at breakingviews.com: The Fed’s decision to take on $29B of Bear Stearns’ assets may soon look like chicken feed. If problems at US banks worsen, the government (taxpayers) is likely to be on the hook for sorting out much of the mess. It’s not that the collapse of any one, or even a few, of the thousands of mostly small and mid-sized retail and commercial banks across America would pose the same kind of threat to the financial system that the now-defunct investment bank did. And anyway, most have access to the Fed for emergency funding. The problem is that the other usual escape routes available to struggling Main Street banks are narrowing. It’s getting harder to tap either new or existing shareholders for new funds to replenish bank capital. (Look what just happened to IndyMac) That’s because virtually all the deals that have been struck in the last few months – whether common stock or convertible bonds – have performed poorly. Those who bought stakes in Citigroup, Merrill Lynch, Wachovia, Washington Mutual and Keycorp, for example, are all underwater. Investors have tired of trying to call a bottom on bank losses. That’s making them much less willing to take on more exposure.


Bankers reckon it would now be tough to complete the deals they squared away as recently as a couple of weeks ago. It’s a similar story across the Atlantic, where British lenders Bradford & Bingley and HBOS are both trying to get big rights issues away with their share prices sagging and investors already loaded up with paper sold by the likes of UBS and the Royal Bank of Scotland. The mere whiff of a capital shortage is now enough to send shareholders scampering for the exits. Citigroup’s stock, for example, fell more than 5% late last week after finance chief Gary Crittenden told investors the firm would probably take more write-downs on mortgage-related assets – hardly a surprise. At least Citigroup and other big banks have size and brand recognition in their favor, making them better placed to attract more cash than their smaller brethren. But access to capital isn’t the only issue for smaller banks. In the past, a troubled lender could always try to sell.


So far only residential mortgages have caused much pain beyond Wall Street. Other consumer loans like car and credit card debt are only beginning to suffer, as are commercial mortgages. Losses here could keep the credit crisis rolling for another year or more. What’s more, unlike investment banks, retail and commercial banks usually book loans and other assets at face value until actual defaults appear likely. But under purchase accounting rules introduced earlier this decade, a takeover target’s portfolio has to be marked to the current market value when it is acquired. That could crystallise substantial losses, a factor that is staying the hands of the few potential acquirers. Bankers say it’s the reason a rumored bid for National City failed to materialize. It’s no wonder bank M&A volume is already 80% down on last year, according to Goldman Sachs. There’s often only one option left for a capital-starved US bank that can’t attract a suitor – receivership under the auspices of the FDIC. While hardly ideal, that works fine as long as only a few banks stumble. But if the pressures of the credit crunch cause too many to fail, FDIC could be overwhelmed. True, the government could prop it up, but that simply passes on the risk to the taxpayer. Mike Bell's note: now you know why I read the WSJ and get news from other sources, the local rags don't report it like this.

Value websites miss the mark

from Daily Real Estate News 6-24-08. Home-Value Web Sites Miss the Mark: Online home-value sites are often wrong. The estimates will have huge errors in them. Zillow.com and Cyberhomes.com rely on computer-generated automated models to estimate values, and the models help compensate for the fact that many neighborhoods don’t have enough sales to generate accurate values based on experience. But these models don’t reflect home condition, improvements, and may not even accurately convey property descriptions. The data is best used as a way to form an overall impression of a neighborhood.

Recourse is returning in commercial (read this)

I asked my brother, a commercial specialist, what he thought of my blog. Said he thought it was too detailed, thinking there was too much macro information, didn't think it'd resonate with my residential clients. Hmmm, good point. But I think the macro is really affecting what's happening locally, the big issues trickle down to the day to day activities of selling a house, or a shopping center (coming in a few months). This article is about commercial lending, I think it's important that even a first-time homebuyer understands that today's credit crunch is felt all over. It's from yet another WSJ article published 6-18-08 from Lingling Wei titled: Developers Dread Return of Recourse.


After a decade of easy lending, the dreaded personal guarantee is making a comeback in the real-estate industry, bringing back the kind of tough terms that borrowers hoped not to see again: Recourse loans -- once a staple of commercial lending -- had largely fallen by the wayside during the past decade as banks found ways to minimize their risk. Now, with the securities market for commercial loans still anemic, recourse loans are popping up again. Those who can't wait out the credit crisis may have little choice but take a deep breath and sign a recourse loan.
Take, for example, Judah Hertz, chief executive of Hertz Investment Group in Santa Monica, Calif. About 3½ years ago, Mr. Hertz took out a $50 million mortgage from LaSalle Bank to buy an office building in New Orleans. That loan required no personal guarantee. As the loan is due next month, he is left with little choice but to accept a new $50 million loan from Wells Fargo that requires him to personally guarantee 25% of that amount.
During the recent sales frenzy for commercial properties, nonrecourse loans were the norm. Typically, this meant that the developers put up as collateral only the buildings they were purchasing. If they couldn't pay off the loans, they simply handed the building's keys to the lender and walked away. The borrowers' other holdings -- including personal assets such as homes and boats -- remained intact. The investment banks that originated many of these loans felt comfortable with the arrangement because they typically packaged those loans into commercial-mortgage-backed securities, or CMBS, and sold them as bonds, reducing their own risk if the borrowers couldn't pay. Now, with a 90% drop in CMBS sales, banks have all but stopped originating loans aimed at the bond markets. Instead, they're returning to the traditional model of holding on to -- as opposed to selling -- the loans. Even for banks, recourse lending can cause headaches. Borrowers are more likely to fight the banks if they face losing much of their net worth over one bad gamble. Plus, the banks make less money; the interest rates they can charge on recourse loans are about 1% lower than on nonrecourse loans.
Banks that have already suffered losses related to residential mortgages are increasingly viewing recourse loans as a necessary layer of protection. When prices were rising, the bank could take control of a building and sell it to pay off the loan. Now, with falling valuations, the building could be worth less than the debt on it. In that scenario, banks want a way to make up the difference.

Gauging Value In Real Estate

Gauging Value In Real Estate As Prices Slide. From another WSJ article, written by Jeff Opdyke 3-13-08.
In this battered housing market, choosing the right neighborhood is more important than ever.
Maybe you can't pick which region you move to, but you can pick where you live within it, and that could have a big effect on whether or not your home turns out to be a winning investment. Home-price declines can last for years. There are signs the current decline could be bad. NAR statistics indicate that housing prices in 2007 experienced their first year-over-year decline in at least 40 years. Prices are expected to fall further this year -- and possibly next year, as well -- as the housing crisis broadens.
But even in this brutal landscape, cities such as Seattle; Austin, Texas; and Wichita, Kan., are still seeing price increases. And even in hard-hit cities, certain neighborhoods are holding up better than others. One factor is well-known to home buyers: schools. Houses in high-ranked school districts generally retain their value better.
But don't overlook perhaps the most important variable of all: supply and demand. Prices were hit hardest in places like Phoenix, Miami or Las Vegas, which were smothered in recent years by new construction. If you're moving to one of these cities, be wary of areas where lots of new homes are soon to be built or scheduled to go on sale soon.
During the boom, builders plastered the Phoenix region with houses that were snapped up quickly, many times by speculators who were looking to score a quick profit. Today, the metro area has more than 18 months of supply, compared with a national average of 11 months. Yet it is apparent that some parts of Phoenix are substantially weaker than others.
Buckeye, a suburb west of Phoenix, sprawls across 600 square miles of desert. Town planners have approved roughly 400,000 houses. But already the supply of homes stretches to nearly 20 months, and that means buyers are "more at risk for [further] decreases in property values".
By contrast, Tempe, with no room to expand and a location closer to Phoenix's job centers, has an 11-month supply of houses.
In many cities during the housing boom, developers ventured far afield to buy cheaper land, expecting that if they built it, buyers would come. And buyers did. But now they aren't so eager for two reasons: Gas is topping $3 a gallon, increasing their commuting costs, and the necessary infrastructure such as schools and retail and medical facilities often haven't sprung up yet.
Though buyers generally get more house for their dollar in more-remote communities, many buyers today are forsaking size for the conveniences of being close to the city, often in areas that are redeveloping.
Don't forget that home buying is always a street-by-street exercise, and that is particularly true in a weak market. In a strong market, buyers scarf up homes on busy streets or less-than-desirable locations. But in a down market, things change. Just about anything sold in the hot market of 2004 and 2005, but now it's location, location, location -- more than ever.

Fannie and Freddie, what's up these days?

A good article from David Wessel in the 6-12-08 WSJ: Mortgagers' Dual Roles Clash. Freddie and Fannie are ungainly hybrids. They're part shareholder-owned profit-making companies, part government agencies with a mission to make mortgages cheaper and more widely available. And they're huge, much bigger than Bear Stearns, the investment bank whose collapse, we were told, threatened the entire financial system. The housing bust is heightening the tension between the two parts of the hybrid. Falling house prices and rising delinquencies weaken the companies financially, raising concerns about their stability and the risks they pose to taxpayers. Their entire business is housing. But the past year also underscores the societal importance of their mission: making home ownership more affordable and rescuing the economy when housing goes bust.
Fannie and Freddie make big profits for shareholders and pay high salaries. Shareholders benefit because Fannie and Freddie borrow more heavily than other financial companies and more cheaply, because everyone who lends them money assumes -- correctly -- that the U.S. government stands behind their debt, and that they agree to be regulated. (Based on recent public filings, Freddie and Fannie have a debt-to-equity ratio -- a measure of how leveraged they are -- of 27.6 & 19.6, respectively. By contrast, the ratio at B of A and J.P. Morgan Chase is about 3.9, and their stocks are getting hammered.)
Today the government essentially is telling Fannie and Freddie to lend more, tolerate delinquencies, and raise capital at unfavorable prices for the good of the economy, even if you don't believe it's in shareholders best interests.
Fannie and Freddie -- and thus taxpayers -- take the risk that interest rates will turn against them, creating a devastating mismatch between the rates they pay to borrow and the rates they receive on their huge portfolios of mortgages. That was before the previously unimaginable happened: a widespread decline in house prices.
Fannie and Freddie already have absorbed huge losses, not only on the mortgage-linked securities they hold but also on the $4 trillion in guarantees they have made on principal and interest on mortgages turned into securities held by others. They face bigger losses if house prices fall an additional 10% or 15%, as is widely predicted.
Privatization and nationalization are conceptually pure and politically improbable. Today, half of Congress wants Fannie and Freddie to pick up the pieces from the subprime debacle and lend more; the other half wants to block them from exposing taxpayers to additional risks.

FAST Facts from C.A.R. 6-19-08

Fast Facts
Calif. median home price - April 08: $403,870(Source: C.A.R.)
Calif. highest median home price by C.A.R. region April 08: Santa Barbara So. Coast $1,170.000(Source: C.A.R.)
Calif. lowest median home price by C.A.R. region April 08: High Desert $210,860(Source: C.A.R.)
Calif. First-time Buyer Affordability Index - First Quarter 08: 44 percent (Source: C.A.R.)
Mortgage rates - week ending 06/12/08 30-yr. fixed: 6.32% Fees/points: 0.7% 15-yr. fixed: 5.93% Fees/points: 0.6% 1-yr. adjustable: 5.09 % Fees/points: 0.6% (Source: Freddie Mac)

Tax Assessor Press Release

MAY 27, 2008, DECLINE IN VALUE REVIEW PRODUCES PROPERTY TAX SAVINGS. Los Angeles County Assessor Rick Auerbach today announced completion of a decline in value review of homes in Los Angeles County. "We looked at homes and condominiums that were purchased between July 1, 2004 and June 30, 2007, based on our analysis of market trends in Los Angeles County," Auerbach said. "The review included 318,000 homes and condos. Our analysis will result in lower assessments on 128,000 homes and condos and will be reflected on the tax bills to be issued in October." The average reduction in assessed value is about $73,000, he added, amounting to an average property tax savings of approximately $750. "In addition, this review will eliminate the need for many taxpayers to go through the formal appeal process". The 128,000 homeowners who will be receiving a value reduction will be notified in writing by June 30 of this year. If they disagree with the amount of the reduction they should contact the nearest Assessor’s District Office and discuss the results. The deadline for filing an assessment appeal is November 30. Homeowners who purchased their properties outside of the time period for the review (July 1, 2004 to June 30, 2007) and believe that their property is assessed above its actual value as of January 1, 2008, should file the simple, one-page Decline-in-Value application. The form can be downloaded from the Assessor’s Website at http://assessor.lacounty.go.