Bad Paper

According to Moody’s Investor Services, the sheer size of the Credit Default Swap market in notional terms and its exposure to “credit events” among underlying securities do not, in and of themselves, pose undue concern. However, Moody’s did report that the potentialfailure of an investment bank as counterparty would poses a large systemic risk.

According to Financial News Online the size of the credit derivatives market has ballooned in the past 11 years from $180bn in 1997 to $62 trillion in notional, sparking concerns by some investors and analysts, who fear that if a borrower underlying the contracts defaults, this could create large and widespread losses.

Standard & Poor’s Ratings Services lowered the ratings on 1,326 classes of U.S. residential mortgage-backed securities (RMBS) certificates issued in the first half of 2007 backed by Alt-A mortgage loans. In addition, S&P placed the ratings on another 567 Alt-A classes on CreditWatch, with negative implications.

According to Standard & Poors the projected credit support for the affected classes is insufficient to maintain the previous ratings, given S&P’s current projected losses.

Swiss bank UBS AG has stated that more losses on mortgage assets are possible. The Zurich based bank stated that losses on real estate related assets could increase in the future. Also, according to Bloomberg, the bank is also evaluating whether to limit or discontinue one or more of its so-called U.S. reference-linked note programs which could result in a charge to income.

Mitsubishi UFJ Financial Group, Japan’s largest bank, reported a 28% decline in profits due to write-downs related to U.S. subprime assets. MUFG reported profits of 636.6 billion yen ($6.10 billion U.S.) for the 12 months ending in March.

Prices in the more affluent areas of Southern California are now beginning to fall according to an article in the Los Angeles Times. The information, obtained from DataQuick Information Systems, indicates that median home prices in Beverly Hills fell 13% in April while Rancho Palos Verdes dropped 18%. Newport Beach fell a whopping 34%.

At least someone is benefiting from the rising tide of bad debt. Business is good for the repo man. A New York Times article details the booming business of Jeff Henderson, who operates an asset recovery operation specializing in boats. His firm, Harrison Marine, is experiencing an uptick in business this year in what is normally a slow time for boat repossessions.

Finally he remembered: “I’ve taken this boat before.” Owners of repossessed boats have a few weeks to redeem them, and this fellow had availed himself of the opportunity. Now, a few years later, he was in trouble again. Mr. Henderson shrugged. “I took it before, I’ll take it again. After I take it a few more times, he’ll be eligible for a Christmas card. One guy, I took his boat four times.”

French bank Natixis SA reported lower profits after a sizeable write-down related to subprime credits and trading losses. The bank’s net income dropped 88% to $106.9 million (US).

Barclays profits declined after taking a $3.3 billion (US) write-down related to losses in the credit markets.  According to Bloomberg, The U.K. bank’s write-downs included 495 million pounds for collateralized debt obligations and 1.21 billion pounds for ‘other credit market exposures” . The securities unit took 598 million pounds in bad debt defaults.

According to Zillow.com over one half of borrowers who took a mortgages in 2006 have negative equity on their loans. Things are not that much better for 2007 borrowers as 45% have negative equity. According to the Zillow report nearly 90% of Vegas homeowners now owe more than their homes are worth.

Mortgage giant Fannie Mae reported a first quarter loss of $2.19 billion as the fallout from the mortgage meltdown continues. They also cut the dividend and announced plans to raise an additional $6 billion in capital.

Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital, was quoted in an article in Bloomberg stating ‘They are now starting to realize the fact that their credit losses will be considerably higher than they were in 2007. Things in the housing and credit markets are deteriorating very fast.”

Fannie’s regulator, the Office of Federal Housing Enterprise Oversight said it
will lower requirements for surplus capital to 15 percent from 20
percent once the $6 billion is raised. This would enable Fannie Mae to buy more
mortgages. The limit could be reduced to 10 percent by September if
Fannie Mae continues to retain excess capital.

UBS, Switzerland’s largest bank reported $17.3 billion of first-quarter losses at its investment-banking unit. The bank will also sell $15 billion in distressed assets to Blackrock Inc. and slash 5,500 jobs. The bank reported that wealth management clients withdrew over $12 billion dollars.

Analyst Paul Miller at Friedman Billings Ramsey recommended that Bank of America walk away from its deal to acquire Countrywide Financial Corp. Miller projects that writedowns could reach $11 billion on Countrywide’s portfolio of option ARMs and $5 billion on hybrid ARMs and other loans. Miller wrote that “The issue of fair value marks was a significant part of the reason that National City failed to find an acquirer. If fair value marks sufficiently exceed BAC’s projections at the time of its due diligence, we believe the deal price for the purchase of CFC could be renegotiated lower, or BAC could (and should) decide to walk away.”

Standard & Poor’s lowered the debt rating of Countrywide Financial Corp to junk bond status. S&P cut its long-term rating on Countrywide Financial by 3 notches to BB+from BBB+. The short-term rating was lowered to B from A-2. S&P prompted the lower rating because of disclosures from Bank of American that it may not stand behind some of the Countrywide debt after their planned acquisition of the mortgage giant.

Home prices in the U.K. posted the first annual decline since 1996, evidence that the real estate contagion may be spreading around the globe. The cost of an average house in the U.K. declined just under 1%. Phillip Shaw an economist at Investec Securities in London is quoted in Bloomberg stating ‘There’s no doubt that the housing market continues to weaken and construction is having a hard time with lower business investment”.

Former major league baseball player Jose Canseco became one of the more notable people to suffer a recent foreclosure.  Canseco admitted on a recent episode of Inside Edition that he lost his 7,300 square foot home in Encino, California .  The show stated that records indicate that the former ballplayer owed mored than $2.5 million on the mansion.  According to Canseco, his financial problems were the result of failed marriages.  “I had a couple of divorces that cost me $7 or $8 million,” he said.