Bad Paper

Is prime the new subprime? According to this article in boston.com, housing advocates in New Hampshire have noticed an increase in prime borrowers having problems keeping up with their mortgage payments. The article quotes Robert Tourigny, executive director of NeighborWorks in Manchester, “Those, I think, are what’s really troubling, because that’s a sign of the tough economy. If you don’t have the ability to pay, it doesn’t matter what your interest rate is.”

Investors in auction rate securities issued by student loan agencies are receiving 0% interest in some cases.  Securities issued by the Pennsylvania Higher Education Assistance Agency have been paying no interest since a failed auction on April 4, 2008.  A Utah State Board of Regents bond is also currently paying zero interest.  This is the result of provisions in bond agreements to insure that interest payments on the securities do not exceed the amount of interest received from the underlying loans.  The 0% provisions usually kick in after a run up in the interest rate following a failed auction.

Mike Saunders, an asset manager for Roundstone Advisors is quoted in Bloomberg saying “It’s hard to explain, to conceptualize or even understand how someone can borrow money and not pay you interest. The investor loves you when he sees the 10 percent coupon, but how do you explain to him that it’s gone from 10 percent to zero?”

Credit Suisse is the latest financial institution to announce large losses related to credit market write-downs. Switzerland’s second largest bank reported a loss of $5.2 billion dollars in the first quarter and the company announced that management was comfortable with the current capital position.

CEO Brady Dougan stated that “things have stabilized a bit in April. While we’re certainly hopeful that things will improve from here, we’re not counting on it.” He also stated that he will manage the bank under the assumption that things will continue to be difficult.

Ohio’s biggest bank, National City Corp., may be the latest bank to get an outside capital infusion. According to an article this morning in Bloomberg, Corsair Capital LLC may provide as much as $6 to $7 billion in new equity. The bank has lost 78 percent of its market value over the last year due mainly to its exposure in subprime lending.

Australia’s central bank has now joined the party in buying mortgage assets in an effort to provide liquidity to the troubled market.  The central bank purchased $780 million of home-loan bonds according to an article in Bloomberg.

Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors is quoted in the article saying “The Reserve Bank’s attempt to kick-start the mortgage-backed securities market would be having a positive impact on the banks. They don’t normally buy mortgage-backed bonds for that length of time and it may help kick start that part of the market.”

According to the The Sunday Times, the fate of Royal Bank of Scotland CEO Sir Fred Goodwin will be decided today at a board meeting of the bank. Reportedly, Goodwin will confirm this week that the bank will raise as much as £12 billion in new capital. Also expected to be announced are write-offs from exposure to American sub-prime mortgages of £5 billion to £7 billion.

Royal Bank of Scotland, hit by credit losses, may sell Direct Line Insurance in an effort to raise as much as 5 billion pounds ($10 billion U.S) in new capital.  According to the Times, as reported today in Bloomberg, the Edinburgh-based bank may also consider selling other holdings to raise additional capital.

The Bank of England will reportedly announce a plan to buy 50 billion pounds (about $100 million US) of mortgages from British banks, swapping government bonds for the loans.  According to the BBC, as reported in Bloomberg, the plan will be announced next week and will involve bonds with maturities up to one year. The bonds could be rolled over up to three years.

RealtyTrac reports that foreclosures for March 2008 were up 5 percent from February and up 57 percent from the previous year. The report indicates that one in every 538 U.S. households received a foreclosure filing during the month of March.

According to james J. Saccacio, the CEO of RealtyTrac, “The March numbers show that overall foreclosure activity so far this year continues to run nearly 60 percent above the levels we saw last year. On a year-over-year basis, default notices were up nearly 57 percent and bank repossessions were up nearly 129 percent, but auction notices were up only 32 percent, indicating that more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender.

Washington Mutual shareholders voted today to ask the bank’s CEO to step down as chairman of the financial institution.  The Seattle thrift later announced that it would consider the nonbinding shareholder proposal at the next board meeting. WaMu also reversed an earlier controversial plan to ignore credit losses when awarding executive bonuses.

According to the Los Angeles Times, WaMu also announced the resignation of director Mary Pugh, head of the bank’s finance committee.

The Times article quotes CEO Kerry Killinger saying “I’m not happy. This thing has hurt. I just want people to calm down.”

The SEC has asked major Wall Street Firms to provide information on the sale of auction rate securities. The Financial Times reported that Goldman Sachs disclosed in a regulatory filing on Wednesday that it had “received requests for information from various governmental agencies and self-regulatory organizations relating to certain auction products … and the related recent failure of such auctions”. Goldman stated that it was cooperating with the investigation.

The article also stated that sources have mentioned Merrill Lynch, UBS, JPMorgan Chase and Bear Stearns as having received similar request for information.

Highly leveraged companies are often drawing down on lines of credit, a potential problem for banks. Bradley Rogoff, analyst at Lehman Brothers is quoted in a recent Financial Times article, “The easy conclusion to make is that a lot of companies may now draw on their revolvers because they are concerned about counterparty risk and the implications of banks’ trying to walk away from the deal” .

These increases in outstanding debt to highly leveraged borrowers comes at a time when banks are trying to clean up their balance sheets and reduce risk.

Home sales in New Zealand dropped 53 percent, another signal that the real estate flu is spreading around the globe. According to Bloomberg, the number of homes sold dropped from 10,989 last year to only 5,129 last month. Sales were the lowest reported since 2001. Further declines seem likely. The article quotes Nick Tuffley, the chief economist at ASB Bank Ltd. in Auckland as saying “There is a glut of supply and the mechanisms to reduce that are weaker prices or sellers withdrawing from the market.”

The International Monetary Fund said that losses related to the U.S. mortgage crisis may total as much as $945 billion. Residential losses could total $565 billion with commercial real estate accounting for the rest. Bloomberg quotes the IMF report “The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted. The report also states that “a serious funding and confidence crisis that threatens to continue for a significant period.”

I am not sure how the IMF managed to be so precise with their estimate. However just for the sake of simplicity let’s just say it is an even trillion. After all the next estimate is probably going to blow through the trillion mark anyway.

The International Monetary Fund warned in a report this week that the U.S. isn’t the only developed country with significantly overvalued home prices. According to the report there are several nations where real estate values are more overpriced than in America. The report concluded that homes were overpriced by a mere 11 percent in the U.S., but more than 32 percent in Ireland. In addition, home prices in Britain, Australia, France, Norway, and the Netherlands were overvalued more than 20 percent.