So when these builders go BK, wouldn't we see even more pressure on house prices? Anyone have any guess on what it will mean in terms of inventory and prices in the short run?
I would expect if there is a small group of senior debt holders they may prefer selling the finished inventory as quickly as possible -- hence more downward pressure on prices. Then there is the question of what will those do who are currently in contract with the BK builder. Can you get out of a deposit if the builder goes BK?
Homebuilder bankruptcies will likely put a lot of pressure on home prices short-term. As they go bankrupt, their inventory will get sold off to satisfy creditors, which means fire-sale prices. The new owners will not have the incentive to hold back on selling them to prop up prices--they'll put them up for auction and be done with it.
Long term, of course, bankruptcies will be good for home prices as the addition of new supply decreases. But given that we have what may turn out to be years of extra supply, that's very long term.
that is the addition of 2008 securities - though I believe you are correct for the existing indices - as the default/foreclosure rates ramp due to the feedback effects of a bona fide recession brought on by the housing market cratering (which does seem to be different this time, as historically the economy goes south first and then the foreclosures and defaults ramp, no?).
I think there were just more publicly traded homebuilders than the market would bear. A smaller homebuilder, if they see a downturn coming, can simply reduce operations and become appreciably smaller. Some stop building entirely. But a publicly traded builder won't be able to get away with that. I think that's why there was so much more building into the glut this time, the proportion of homes built by publicly traded companies much higher.
The problem with shorting/buying puts on any one homebuilder right now is someone may come in and buy them. It might not be a wise decision, but neither was buying Amazon at $350. I do have some puts on the HGX index. That seems a little safer.
NEW YORK (Reuters) - Barclays Bank Plc (LSE:BARC.L - News) on Wednesday accused Bear Stearns Co Inc (NYSE:BSC - News) of using two hedge funds that collapsed last summer as places to unload troubled assets.
HBs going BK doesn't presage lower new home prices by any means. Right now the HBs are incorporating lots of subtle incentives. Take them out of the picture and it will take time for their successors to emulate and/or discount based on those actions.
It may do little or nothing or even drop inventory depending upon the way the transaction is structured. For but one instance a block of several houses sold to a subcontractor to settle a lien could be booked as a sale.
And of course there is "control." BK can reshuffle the deck as to who has first thru last claim in addition to putting the courts and the lawyers in upfront positions.
No, NKs will add confusion not inventory. At least at first.
NEW YORK--(BUSINESS WIRE)--December 19, 2007
Markit, the leading provider of independent data, portfolio
valuations and OTC derivatives trade processing and owner of the
Markit ABX.HE index, today announced that the roll of the Markit
ABX.HE has been postponed for three months. The Markit ABX.HE is a
synthetic index of U.S. home equity asset-backed securities.
The new series, the Markit ABX.HE 08-1, was scheduled to launch on
19 January 2008. The decision to postpone its launch was taken
following extensive consultation with the dealer community. It follows
a lack of RMBS deals issued in the second half of 2007 and eligible
for inclusion in the forthcoming Markit ABX.HE roll. The Markit ABX.HE
07-2 remains the on-the-run series until further notice.
Under current index rules, only five deals qualified for inclusion
in the Markit ABX.HE 08-1. Markit and the dealer community considered
amending the index rules to include deals which failed to qualify
initially but decided against this approach at this time.
Markit and the dealer community remain fully committed to the
index and will update the market as and when appropriate.
I can see it now all over the globe, little children going door to door with tin cans, begging for money for American CEOs that have been hard hit by a liquidity tsunami; bonuses cut, stocks driven down maybe 5 or 10%, corporate jets unable to land in Aspen due to bigger better jets from China, which block runways, wifes unable to buy jewels and fashions....oh God, the humanity!
And now, more homebuilders put in the limelight with junk ratings, soon unable to build wall to wall communities of million dollar homes for those without collateral or common sense..Oh, God, please let these children of the global marketplace find the welath to restore our staus in time for christmas dinner and let peace reign down upon those that have goodwill and justice for all ame
There are many half-built developements scattered throughout the so cal area. If one or more go BK then who is going finish the neighborhood? Who will buy a house in a half finished community where the builder is gone? Who is gonna pay the HOA fees, the Mello Roos? Who is gonna pay the cities their fees they have already budget and spent?
There are alot of reprocussions that are hard to envision until it actually happens.
Oh and on BSC and legal trouble, whatever became of that original suit that pierced the fiction of the Cayman Island's being the central place of business (forgot the exactl legal term, but big implications as I recall)?
Bob_in_MA:
The most exposed builders are the regional builders. They don't have the diversification to survive by shifting operations to more stable areas, and they can't get small enough to just ride out the storm. The truly small builders will get by with one-off jobs, remodelings, small commercial projects, etc. But regional builders exposed to the wrong markets--CA, FL, MA, NY, AZ--are in serious, serious trouble.
Rob:
You may be right, but the confusion won't last for long. A couple of months of legal wrangling, but once those finished homes get into the hands of creditors they will hit the auction block faster than you can say "liquidation", and then you can kiss the comparables good-bye.
Rob:
You may be right, but the confusion won't last for long. A couple of months of legal wrangling, but once those finished homes get into the hands of creditors they will hit the auction block faster than you can say "liquidation", and then you can kiss the comparables good-bye.
Exactly. Then the real fun begins. Will appraisers use them as comps seeing as they represent a majority of all recent sales? Will there develop a split comp system of sales?
The confusion may last a lot longer than people expect. Look how long the IBs have managed to avoid marking to market their portfolios. We will know when the time comes when lenders start announcing their direct management of property as a new corporate function.
well, if the HB's go bankrupt, not only does someone own the houses, but they also own all the developed empty lots. How cheap could they build houses and sell them? Could we see a resurgence of building long enough to clear the land and these new houses would really undercut the existing home inventory.
PV,
And where might those more stable areas be? (I doubt there are any, but if there are all the builders will go ruin/oversupply those places). 75% of builders will go bankrupt or simply cease operations until homebuilding is profitable again in about 5 years. Just watch.
From today's Cleveland Plain Dealer: Forest City starts work on Yonkers, N.Y., project | Business Archive Site - cleveland.com.
Basically, Forest City broke ground on a $700 million development in Yonkers, NY including 1000 residences and 160000 sqft of retail. It will come on line in 2009, probably at the bottom of the market. In other news, a developer is planning a 1150 condo/retail development outside Cleveland. The only reason I can see for building enormous new project in this market is that they got the financing before the collapse, and if they don't build their losses will be even greater. Somebody will probably lose a lot on the construction loans.
if the HB's go bankrupt, not only does someone own the houses, but they also own all the developed empty lots.
All in the worst places and with all the worst prices for development. Remember, there is a CR endorsed 1.6-1.8m supply overage and an estimated 4m overage by yours truly.
I assert that some of these lots are worth less than zero as they cannot be disposed of or abandoned without consequences.
That last has some nasty bits. In California the "members" of a HOA obligation or Mello-Roos district are jointly liable for the entire nut. Fewer members doesn't matter.
Will appraisers use them as comps seeing as they represent a majority of all recent sales? Will there develop a split comp system of sales?
As a real estate appraiser, the correct answer is -- it depends.
The market is what it is, and reports will be written with comps that best reflect fair market value. If there is value stratification between REO and Owner Occupied sales, the report should reflect that. This is what I call a rainbow bridge value graph -- the top of the market nearly level, while the bottom of the chart rises or falls dramatically.
There often comes a point where the sheer volume of REOs and other discounted sales overwhelm the demand, at which point the top of the market also collapses.
With the exception of entry level neighborhoods, here in the Denver Metro Area, the top of the market has generally remained stable; high value, trendy, and other high demand neighborhoods have seen values go up. What will happen next year remains to be seen.
Robert C- do you think that qualifies for a death spiral style of financing?
Homeowners will go Ch 13 to stiff the melloroos? Or will we see giant property tax sales of undeveloped properties by the counties? That would be fun, indeed. I bid $1 and I will pay the mellos for that previously quarter million dollar lot;-}
It will be interesting to see this up close and personal in Phoenix, right now the center is holding up quite nicely while the destruction is quite active at the margins. I predict much more damage to established neighborhoods as the tide goes out.
Condos are notorious for that HOA problem, they need money now and those liens against lender owned property take forever to clear;-}
That does it- going to the tax lien sales this year! First year gets priority in right to foreclose!!!
Robert Cote,
I agree with your 4M oversupply, too. Developed lots in many places are worth only their development costs or less. The pain is only starting. Right now it is a sore tooth. By the end it will be a root canal with no drugs by the guy in Marathon Man.
That last has some nasty bits. In California the "members" of a HOA obligation or Mello-Roos district are jointly liable for the entire nut. Fewer members doesn't matter...
Ok so what if you only have 5 homeowners in a developement that has 30-40 homes already built, and the builder filed for BK? I'm thinking Dunmore homes. How are those five h/o supposed to pay out for a development that isn't even built yet?
Not saying prices will recover, just that BK is a positive factor.
Name | 12.19.07 - 5:14 pm | #
And it depends if they reorg or liquidate... If they reorg they might have enough cash flow pressure taken off that they can hold inventory longer and not discount so deeply.
But I think Name has it right - the carnage will flow down the supply chain regardless as builders also don't have the debt pressure forcing them to build, build, build to monetize the land. That is of course if the reorg.
Rights to Accelerated Foreclosure. It is important for CFD property owners to pay
their tax bill on time. The CFD has the right (and if bonds are issued, the obligation) to
foreclose on property when special taxes are delinquent for more than 90 days.
Additionally, any costs of collection and penalties must be paid by the delinquent property
owner. This is considerably faster than the standard 5 year waiting period on county ad
valorem taxes.
Arrgh- more damage:
ACA Downgrade May Mean Losses For Clients Who Bought Hedges
57 minutes ago - Dow Jones News
By Lavonne Kuykendall
Of DOW JONES NEWSWIRES CHICAGO -(Dow Jones)- Standard & Poor's steep downgrade of ACA Capital Holdings Inc.'s (ACAH) troubled bond-insurance unit to junk status will have a ripple effect for the companies to whom ACA provides credit protection and hedges and also puts the company's survival in question.
The downgrade - 12 notches to CCC, just above default territory - reflects S&P's judgment that the insurer might not have sufficient capital to cover the commitments it has taken on. That is bad news for customers who bought credit protection from the insurer. If ACA can't pay, then the hedges it sold are worthless, and counterparties will have to take the risk - and the losses - back onto their own books. ACA Financial, meantime, will be unable to take on new business as long as potential losses outstrip its available capital.
Banks with potential exposure as investors or counterparties include Canadian bank Canadian Imperial Bank of Commerce (CM), Merrill Lynch & Co. (MER) and Bear Stearns Cos. (BSC).
"While ACA has been diligently working to address contingent liquidity concerns, it has not focused significantly on raising additional capital," S&P said. "The magnitude of the gap is large enough to create significant doubt that the company could possibly access sufficient hard capital resources to resolve the problem."
Robert C- do you think that qualifies for a death spiral style of financing?
Homeowners will go Ch 13 to stiff the melloroos?
No, munis will have to switch to a more of a pay-go model and the residents will have to accept a greater share of future growth impact costs.
Or will we see giant property tax sales of undeveloped properties by the counties? That would be fun, indeed. I bid $1 and I will pay the mellos for that previously quarter million dollar lot;-}
If only it worked that way. The "system" needs to break before you and I can step in to reestablish a rational development paradigm.
While the factors that created this downturn are different than any other throughout our 48-year history, we know that stronger demand for new homes will return," the CEO said. "What is not known is how long the market will take to rebound."
RE: he Red Bank, N.J.-based company (HOV:
7.44, -0.96, -11.4%) said its net loss for the period ended in October increased to $466.6 million, or $7.42 a share, from $115.3 million, or $1.88 a share in the same period a year earlier. Meanwhile, revenue fell to $1.39 billion, from $1.75 billion.
the rest of it- bad news keeps on coming!:
The ratings company estimated losses on ACA Capital's portfolio could run almost $2.2 billion over the company's Dec. 31, 2007, adjusted capital cushion of $650 million.
Sean J. Egan, managing director of independent ratings agency Egan-Jones Ratings Co., estimated ACA would have to raise at least $5 billion over the next couple of days in order to calm investor fears, or "it better find some good bankruptcy attorneys."
A spokesman for ACA didn't return a call for comment.
Egan said the lack of investor confidence in the bond insurer, which had a recent market value of about $17 million, made it virtually impossible for ACA to come up with that much money.
He also called a bailout by large investors unlikely, "for the simple reason that ACA has a huge number of losses coming in the pipeline" of its credit default swap contracts.
The New York Times reported Wednesday, citing two people briefed on the matter, that some ACA investors including Merrill Lynch and Bear Stearns might come to the company's rescue with new capital infusions in order to avoid having to write down the value of their investments.
Bear Stearns and Merrill Lynch spokesmen declined to comment on whether the banks are considering taking action to bail out ACA. Shares in both banks were trading down more than 1% on the day, when their U.S. investment-bank peers were all higher.
A research note from Lehman Brothers analysts in November estimated that, should ACA default, $5 billion of collateralized loan obligations would return to Merrill Lynch's balance sheet, and cause the bank to write down $3 billion.
CIBC acknowledged Wednesday that ACA Financial Guaranty Corp. is its counterparty on hedges for $3.5 billion of subprime real-estate exposure and said there is a "reasonably high probability" it will take a large charge against earnings in the quarter ending Jan. 31 as a result. Shares of CIBC fell on the news, and were recently down 1.9% to $71.09.
The issue for ACA Financial is that nonprime residential mortgage-backed securities it insured are performing much worse than originally expected, which will likely result in the insurer having to pay off more than expected as the bonds underperform. If it can't cover those payments, then counterparties aren't truly hedged.
S&P noted that ACA Financial - alone among the larger bond insurers - faces potential collateral posting requirements.
The company - which recently had its shares delisted by the New York Stock Exchange - has previously noted the potential negative implications of an S&P downgrade.
In its third-quarter earnings filing with the Securities and Exchange Commission, ACA said a downgrade below A- would trigger contractual requirements that it post collateral to cover the fair value of its credit default swap agreements or be in default. "Based on current fair values, neither the Company nor ACA Financial Guaranty would have the abili
As someone who has been buying puts on the hb stocks for 2 1/2 years, I am now long the Jan XHB. The Hb's are due for a bounce, although they will go down again if we really have a recession. So, my position is a shorter term play. The 5-d stochastic is now oversold and predicts a bounce in the hbers.
I read one analyst who recommended buying the xhb index but not individual hb stocks, because of the potential for bk. So, I wouldd not be too confident that a bankruptcy will drive a further downturn in the HB stocks.
"Based on current fair values, neither the Company nor ACA Financial Guaranty would have the ability to post such collateral or make such termination payments," ACA said in the filing.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141;
As the appraiser from Denver mentioned, the high end is holding up well in some places. I am north of Houston. Within a 100 miles of Hoston it is still business as usual. Recreational places in country $500,000 and up are still appreciating 15% or so a year.
Ridge Hill is one of the worst conceived projects ever. It was DOA even before this downturn.
That area of Yonkers, on the NY State Throughway, near the trotting track, is vibrantly lower middle class Hispanic. There's a Home Depot near there where 75% of the customers and staff speak Spanish. Not knocking them. But it's not the market for the upscale crap Ratner is building. Cross County mall near there is struggling with a lot of empty space. What a nightmare.
He got sweetheart tax deals for building in Yonkers. But it won't make Yonkers Manhattan.
As the appraiser from Denver mentioned, the high end is holding up well in some places. I am north of Houston. Within a 100 miles of Hoston it is still business as usual. Recreational places in country $500,000 and up are still appreciating 15% or so a year.
I hear the same thing about the lake country in northern Minnesota... but when I ask if places are selling the answer I get is "Um, well its slow now, wait 'till next spring." Meaning 'no'.
Houston has one thing going for it N Minnesota doesn't - oil money... so maybe its 'different' there.
For some reason I've suddenly got a Lilly Allen song running through my head:
Oh Jesus Christ almighty,
Do I feel alright? No not slightly,
I wanna get a flat I know I can't afford it,
It's just the bureaucrats who won't give me a mortgage,
Well it's very funny cos I got your fuckin money,
And I'm never gonna get it just because of my bad credit
Oh well I guess I mustn't grumble,
I suppose that's just the way the cookie crumbles.
I read one analyst who recommended buying the xhb index but not individual hb stocks, because of the potential for bk. So, I wouldd not be too confident that a bankruptcy will drive a further downturn in the HB stocks.
BillD
i'm surprised i'm hearing this from you Bill. be careful in trying to time the rhythms of the mkt. the avalanche of bad news and the successive capitulation of sector after sector bodes poorly for the stock mkt holding up especially for January. we've entered a bear mkt with that Dow Theory signal we got i Nov and as retail sales numbers come out in Jan we could get a selloff. if i were you i'd stick with the primary trend of the mkt esp. in the HB sector which is clearly down. even one BK will pull the entire XHB down in sympathy.
Come on guys, that can't be the real O-Joe, much as I wish it was.
Watching the market continue to defy gravity in contravention of all facts and logic, I'm beginning to think this won't be a gradual slide, but a sudden and violent implosion.
My father is a retired home builder. He almost went bankrupt a few times - and retired right before the 73-74 recession (which probably would have bankrupted him or killed him). But builders are like cats - they have many lives. Quite a few building now have seen the inside of a bankruptcy court before.
Mello Roos = California special parcel tax used to pay for specific improvements that benefit a property. These taxes are often imposed on new developments to pay for schools, roads and so on.
Mello-Roos Community Facilities Districts often exist mainly to pay off construction bonds. They are one of many kinds of special district in California (which has over 2300 special districts of various kinds) and are unusual in that they can be created by agreement between a landowner (say a property developer) and the government. A typical example would be a developer with a large parcel (say 600 acres) of land that has minimal infrastructure. The county or city wants the property tax revenue to fund existing services and is unwilling to allow development unless the developer widens the freeway, builds a new interchange, provides schools, parks and roads, fire stations and so-on. The developer says "sure, but we need to create a Mello-Roos district." This district then issues bonds to pay for many (or all) of the improvements that were required as a condition to develop the land. Those bonds are paid off by a parcel tax on the new properties. Sometimes this tax can be quite large - I've seen Mello-Roos fees as high as $300 per month. For the homebuyer, these are a double edged sword. On one hand, you usually get better facilities someplace with Mello-Roos fees (for example, the schools in that part of town may be very good and lightly utilized while the schools in the rest of town are in poor condition and overcrowded), but you have to pay dramatically higher taxes for the having functional infrastructure.
Nuke, you think that's something? Have you ever heard the words "Atlantic Yards"?
That's a piker's ante by comparison.
Gary,
yah.. I'm right down the street from the proposed site. I didn't realize Barclay's bought naming rights to the arena. See excerpt below.. SHORT BARCLAY'S NOWW!!!
"The naming rights to the arena were purchased by Barclays, the British bank, for a record-setting price of nearly $400 million over 20 years. This eclipsed the previous record for naming rights to an American indoor arena. The previous record, set by Royal Philips Electronics in 1999, was for $185 million over 20 years paid to name Philips Arena in Atlanta."
I know the largest public builder in the DC area got stuck last time, so now they require a developer to purchase the land and builder purchases only finished lots from the developer.....4-10 lots at a time to limit exposure.
I aree with waitinginPNW, Jay and DarthToll-
This tax change was a big factor in the bubble, regardless of how you feel about Clinton (which shouldn't be the issue). And perhaps it did seem like a good change (I didn't protest it-- did anyone on this list?).
"In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities.
Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies.
Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures - a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking."
The development is < 1 mile from my home. Are they crazy or crazy like foxes? Perhaps, smart builders who target aging boomers will still do well even in this market. Now, I know, the aging boomers have to sell their houses. But most folks around here have been in their homes for 20 or 30 years (we are newbies on our block having been here only 11 years) so they are looking at big profits, regardless of the short-term market. So, niches may still be there.
Speaking of Moody's, I received an e-mail solicitation from them this morning. Special study available now "Aftershock Housing in the wake of the mortgage metldown". Sounded interesting so I clicked the Purchase now button - $3,995!!! But they do include 2 copies for that price. Guess the fees for new MBS ratings are a little thin lately!
Yeah, they're pretty common, they're only special because they're one of the few ways to get around prop 13 in California which limits property taxes to 1% (And leads to them dropping every year you own a property)
All the ABX and CMBX indices deteriorated today - not cliff diving - but perhaps noteworthy that it was all of both.
So when these builders go BK, wouldn't we see even more pressure on house prices? Anyone have any guess on what it will mean in terms of inventory and prices in the short run?
I would expect if there is a small group of senior debt holders they may prefer selling the finished inventory as quickly as possible -- hence more downward pressure on prices. Then there is the question of what will those do who are currently in contract with the BK builder. Can you get out of a deposit if the builder goes BK?
energyecon, the ABX index is no more:
Closely watched ABX subprime index postponed for lack of deals - MarketWatch
The chief economist of Nomura just sent a Christmas poem out about the capital markets. I posted it on my blog - feel free to repost here.
Homebuilder bankruptcies will likely put a lot of pressure on home prices short-term. As they go bankrupt, their inventory will get sold off to satisfy creditors, which means fire-sale prices. The new owners will not have the incentive to hold back on selling them to prop up prices--they'll put them up for auction and be done with it.
Long term, of course, bankruptcies will be good for home prices as the addition of new supply decreases. But given that we have what may turn out to be years of extra supply, that's very long term.
Question I am asking myself is "when it a good time to cover my HB shorts?"
I think the best time is when two HBs file for BK, after that the prices will be the lowest and psychology the worst for this sector.
What do you guys think?
Carlo,
that is the addition of 2008 securities - though I believe you are correct for the existing indices - as the default/foreclosure rates ramp due to the feedback effects of a bona fide recession brought on by the housing market cratering (which does seem to be different this time, as historically the economy goes south first and then the foreclosures and defaults ramp, no?).
Suggested RockBlog to hum along to while perusing ratings downgrades and financial unravelings:
Chris Rea: Road to Hell
YouTube -
energyecon,
I know, - just using some poetic licence...
I think there were just more publicly traded homebuilders than the market would bear. A smaller homebuilder, if they see a downturn coming, can simply reduce operations and become appreciably smaller. Some stop building entirely. But a publicly traded builder won't be able to get away with that. I think that's why there was so much more building into the glut this time, the proportion of homes built by publicly traded companies much higher.
The problem with shorting/buying puts on any one homebuilder right now is someone may come in and buy them. It might not be a wise decision, but neither was buying Amazon at $350. I do have some puts on the HGX index. That seems a little safer.
What a nice Xmas present from Moody's!!!
All I can say is thanks!!!
Oh yeah, and about time, dang it.
Now for some serious carnage!!!
Not that they are going to go broke quite yet, but I sure wouldn't want to be long.
WM must be shaking in their boots, all the HELOC equity they have provided loans against will be underwater shortly!
Someday this war's gonna end...
More fun!
Barclays sues Bear Stearns over hedge funds
Reuters
Barclays sues Bear Stearns over hedge funds
Wednesday December 19, 4:51 pm ET
NEW YORK (Reuters) - Barclays Bank Plc (LSE:BARC.L - News) on Wednesday accused Bear Stearns Co Inc (NYSE:BSC - News) of using two hedge funds that collapsed last summer as places to unload troubled assets.
[snip]
The contagion has been contained.
HBs going BK doesn't presage lower new home prices by any means. Right now the HBs are incorporating lots of subtle incentives. Take them out of the picture and it will take time for their successors to emulate and/or discount based on those actions.
It may do little or nothing or even drop inventory depending upon the way the transaction is structured. For but one instance a block of several houses sold to a subcontractor to settle a lien could be booked as a sale.
And of course there is "control." BK can reshuffle the deck as to who has first thru last claim in addition to putting the courts and the lawyers in upfront positions.
No, NKs will add confusion not inventory. At least at first.
from bloomberg, no link:
NEW YORK--(BUSINESS WIRE)--December 19, 2007
Markit, the leading provider of independent data, portfolio
valuations and OTC derivatives trade processing and owner of the
Markit ABX.HE index, today announced that the roll of the Markit
ABX.HE has been postponed for three months. The Markit ABX.HE is a
synthetic index of U.S. home equity asset-backed securities.
The new series, the Markit ABX.HE 08-1, was scheduled to launch on
19 January 2008. The decision to postpone its launch was taken
following extensive consultation with the dealer community. It follows
a lack of RMBS deals issued in the second half of 2007 and eligible
for inclusion in the forthcoming Markit ABX.HE roll. The Markit ABX.HE
07-2 remains the on-the-run series until further notice.
Under current index rules, only five deals qualified for inclusion
in the Markit ABX.HE 08-1. Markit and the dealer community considered
amending the index rules to include deals which failed to qualify
initially but decided against this approach at this time.
Markit and the dealer community remain fully committed to the
index and will update the market as and when appropriate.
Everything's fucking great. FUCKING GREAT I TELL YOU.
O-Joe
I can see it now all over the globe, little children going door to door with tin cans, begging for money for American CEOs that have been hard hit by a liquidity tsunami; bonuses cut, stocks driven down maybe 5 or 10%, corporate jets unable to land in Aspen due to bigger better jets from China, which block runways, wifes unable to buy jewels and fashions....oh God, the humanity!
And now, more homebuilders put in the limelight with junk ratings, soon unable to build wall to wall communities of million dollar homes for those without collateral or common sense..Oh, God, please let these children of the global marketplace find the welath to restore our staus in time for christmas dinner and let peace reign down upon those that have goodwill and justice for all ame
There are many half-built developements scattered throughout the so cal area. If one or more go BK then who is going finish the neighborhood? Who will buy a house in a half finished community where the builder is gone? Who is gonna pay the HOA fees, the Mello Roos? Who is gonna pay the cities their fees they have already budget and spent?
There are alot of reprocussions that are hard to envision until it actually happens.
Sure is for me.
I am short RYL, LEN, WM, and BSC.
Ground zero for this week's bad news.
Tomorrow's confessional by Bear should be outstanding.
Everything's fucking great. FUCKING GREAT I TELL YOU.
" So when these builders go BK, wouldn't we see even more pressure on house prices? "
When BK starts, hammers and saws stop. House prices under less pressure, granite countertop polishers under more pressure.
Not saying prices will recover, just that BK is a positive factor.
AJ,
All that at a time when sales tax receipts are declining in those formerly bubblicious locales...
Oh and on BSC and legal trouble, whatever became of that original suit that pierced the fiction of the Cayman Island's being the central place of business (forgot the exactl legal term, but big implications as I recall)?
Everything's fucking great. FUCKING GREAT I TELL YOU.
O-Joe
Optimistic Joe
i think OJoes losing it. my bet is he's a 20 yo hedge fund manager that wants his rate cut and HE WANTS IT NOW!
Optimistic Joe, congratulations on your first likeable post.
Everything is for the best in the best of all possible worlds.
And halted development in new neighborhoods might be a life saver for those trying to escape older inventory.
Bob_in_MA:
The most exposed builders are the regional builders. They don't have the diversification to survive by shifting operations to more stable areas, and they can't get small enough to just ride out the storm. The truly small builders will get by with one-off jobs, remodelings, small commercial projects, etc. But regional builders exposed to the wrong markets--CA, FL, MA, NY, AZ--are in serious, serious trouble.
Rob:
You may be right, but the confusion won't last for long. A couple of months of legal wrangling, but once those finished homes get into the hands of creditors they will hit the auction block faster than you can say "liquidation", and then you can kiss the comparables good-bye.
Rob:
You may be right, but the confusion won't last for long. A couple of months of legal wrangling, but once those finished homes get into the hands of creditors they will hit the auction block faster than you can say "liquidation", and then you can kiss the comparables good-bye.
Exactly. Then the real fun begins. Will appraisers use them as comps seeing as they represent a majority of all recent sales? Will there develop a split comp system of sales?
The confusion may last a lot longer than people expect. Look how long the IBs have managed to avoid marking to market their portfolios. We will know when the time comes when lenders start announcing their direct management of property as a new corporate function.
well, if the HB's go bankrupt, not only does someone own the houses, but they also own all the developed empty lots. How cheap could they build houses and sell them? Could we see a resurgence of building long enough to clear the land and these new houses would really undercut the existing home inventory.
Random thoughts.
PV,
And where might those more stable areas be? (I doubt there are any, but if there are all the builders will go ruin/oversupply those places). 75% of builders will go bankrupt or simply cease operations until homebuilding is profitable again in about 5 years. Just watch.
From today's Cleveland Plain Dealer:
Forest City starts work on Yonkers, N.Y., project | Business Archive Site - cleveland.com.
Basically, Forest City broke ground on a $700 million development in Yonkers, NY including 1000 residences and 160000 sqft of retail. It will come on line in 2009, probably at the bottom of the market. In other news, a developer is planning a 1150 condo/retail development outside Cleveland. The only reason I can see for building enormous new project in this market is that they got the financing before the collapse, and if they don't build their losses will be even greater. Somebody will probably lose a lot on the construction loans.
O Joe is capitulating! Time to go long!!
if the HB's go bankrupt, not only does someone own the houses, but they also own all the developed empty lots.
All in the worst places and with all the worst prices for development. Remember, there is a CR endorsed 1.6-1.8m supply overage and an estimated 4m overage by yours truly.
I assert that some of these lots are worth less than zero as they cannot be disposed of or abandoned without consequences.
That last has some nasty bits. In California the "members" of a HOA obligation or Mello-Roos district are jointly liable for the entire nut. Fewer members doesn't matter.
Will appraisers use them as comps seeing as they represent a majority of all recent sales? Will there develop a split comp system of sales?
As a real estate appraiser, the correct answer is -- it depends.
The market is what it is, and reports will be written with comps that best reflect fair market value. If there is value stratification between REO and Owner Occupied sales, the report should reflect that. This is what I call a rainbow bridge value graph -- the top of the market nearly level, while the bottom of the chart rises or falls dramatically.
There often comes a point where the sheer volume of REOs and other discounted sales overwhelm the demand, at which point the top of the market also collapses.
With the exception of entry level neighborhoods, here in the Denver Metro Area, the top of the market has generally remained stable; high value, trendy, and other high demand neighborhoods have seen values go up. What will happen next year remains to be seen.
Robert C- do you think that qualifies for a death spiral style of financing?
Homeowners will go Ch 13 to stiff the melloroos? Or will we see giant property tax sales of undeveloped properties by the counties? That would be fun, indeed. I bid $1 and I will pay the mellos for that previously quarter million dollar lot;-}
It will be interesting to see this up close and personal in Phoenix, right now the center is holding up quite nicely while the destruction is quite active at the margins. I predict much more damage to established neighborhoods as the tide goes out.
Condos are notorious for that HOA problem, they need money now and those liens against lender owned property take forever to clear;-}
That does it- going to the tax lien sales this year! First year gets priority in right to foreclose!!!
Someday this war's gonna end...
Robert Cote,
I agree with your 4M oversupply, too. Developed lots in many places are worth only their development costs or less. The pain is only starting. Right now it is a sore tooth. By the end it will be a root canal with no drugs by the guy in Marathon Man.
That last has some nasty bits. In California the "members" of a HOA obligation or Mello-Roos district are jointly liable for the entire nut. Fewer members doesn't matter...
Ok so what if you only have 5 homeowners in a developement that has 30-40 homes already built, and the builder filed for BK? I'm thinking Dunmore homes. How are those five h/o supposed to pay out for a development that isn't even built yet?
Not saying prices will recover, just that BK is a positive factor.
Name | 12.19.07 - 5:14 pm | #
And it depends if they reorg or liquidate... If they reorg they might have enough cash flow pressure taken off that they can hold inventory longer and not discount so deeply.
But I think Name has it right - the carnage will flow down the supply chain regardless as builders also don't have the debt pressure forcing them to build, build, build to monetize the land. That is of course if the reorg.
How does the following rule of Mello_Roos Community affect the current situation?
Rights to Accelerated Foreclosure. It is important for CFD property owners to pay
their tax bill on time. The CFD has the right (and if bonds are issued, the obligation) to
foreclose on property when special taxes are delinquent for more than 90 days.
Additionally, any costs of collection and penalties must be paid by the delinquent property
owner. This is considerably faster than the standard 5 year waiting period on county ad
valorem taxes.
Arrgh- more damage:
ACA Downgrade May Mean Losses For Clients Who Bought Hedges
57 minutes ago - Dow Jones News
By Lavonne Kuykendall
Of DOW JONES NEWSWIRES CHICAGO -(Dow Jones)- Standard & Poor's steep downgrade of ACA Capital Holdings Inc.'s (ACAH) troubled bond-insurance unit to junk status will have a ripple effect for the companies to whom ACA provides credit protection and hedges and also puts the company's survival in question.
The downgrade - 12 notches to CCC, just above default territory - reflects S&P's judgment that the insurer might not have sufficient capital to cover the commitments it has taken on. That is bad news for customers who bought credit protection from the insurer. If ACA can't pay, then the hedges it sold are worthless, and counterparties will have to take the risk - and the losses - back onto their own books. ACA Financial, meantime, will be unable to take on new business as long as potential losses outstrip its available capital.
Banks with potential exposure as investors or counterparties include Canadian bank Canadian Imperial Bank of Commerce (CM), Merrill Lynch & Co. (MER) and Bear Stearns Cos. (BSC).
"While ACA has been diligently working to address contingent liquidity concerns, it has not focused significantly on raising additional capital," S&P said. "The magnitude of the gap is large enough to create significant doubt that the company could possibly access sufficient hard capital resources to resolve the problem."
Robert C- do you think that qualifies for a death spiral style of financing?
Homeowners will go Ch 13 to stiff the melloroos?
No, munis will have to switch to a more of a pay-go model and the residents will have to accept a greater share of future growth impact costs.
Or will we see giant property tax sales of undeveloped properties by the counties? That would be fun, indeed. I bid $1 and I will pay the mellos for that previously quarter million dollar lot;-}
If only it worked that way. The "system" needs to break before you and I can step in to reestablish a rational development paradigm.
This is funny stuff:
While the factors that created this downturn are different than any other throughout our 48-year history, we know that stronger demand for new homes will return," the CEO said. "What is not known is how long the market will take to rebound."
RE: he Red Bank, N.J.-based company (HOV:
7.44, -0.96, -11.4%) said its net loss for the period ended in October increased to $466.6 million, or $7.42 a share, from $115.3 million, or $1.88 a share in the same period a year earlier. Meanwhile, revenue fell to $1.39 billion, from $1.75 billion.
the rest of it- bad news keeps on coming!:
The ratings company estimated losses on ACA Capital's portfolio could run almost $2.2 billion over the company's Dec. 31, 2007, adjusted capital cushion of $650 million.
Sean J. Egan, managing director of independent ratings agency Egan-Jones Ratings Co., estimated ACA would have to raise at least $5 billion over the next couple of days in order to calm investor fears, or "it better find some good bankruptcy attorneys."
A spokesman for ACA didn't return a call for comment.
Egan said the lack of investor confidence in the bond insurer, which had a recent market value of about $17 million, made it virtually impossible for ACA to come up with that much money.
He also called a bailout by large investors unlikely, "for the simple reason that ACA has a huge number of losses coming in the pipeline" of its credit default swap contracts.
The New York Times reported Wednesday, citing two people briefed on the matter, that some ACA investors including Merrill Lynch and Bear Stearns might come to the company's rescue with new capital infusions in order to avoid having to write down the value of their investments.
Bear Stearns and Merrill Lynch spokesmen declined to comment on whether the banks are considering taking action to bail out ACA. Shares in both banks were trading down more than 1% on the day, when their U.S. investment-bank peers were all higher.
A research note from Lehman Brothers analysts in November estimated that, should ACA default, $5 billion of collateralized loan obligations would return to Merrill Lynch's balance sheet, and cause the bank to write down $3 billion.
CIBC acknowledged Wednesday that ACA Financial Guaranty Corp. is its counterparty on hedges for $3.5 billion of subprime real-estate exposure and said there is a "reasonably high probability" it will take a large charge against earnings in the quarter ending Jan. 31 as a result. Shares of CIBC fell on the news, and were recently down 1.9% to $71.09.
The issue for ACA Financial is that nonprime residential mortgage-backed securities it insured are performing much worse than originally expected, which will likely result in the insurer having to pay off more than expected as the bonds underperform. If it can't cover those payments, then counterparties aren't truly hedged.
S&P noted that ACA Financial - alone among the larger bond insurers - faces potential collateral posting requirements.
The company - which recently had its shares delisted by the New York Stock Exchange - has previously noted the potential negative implications of an S&P downgrade.
In its third-quarter earnings filing with the Securities and Exchange Commission, ACA said a downgrade below A- would trigger contractual requirements that it post collateral to cover the fair value of its credit default swap agreements or be in default.
"Based on current fair values, neither the Company nor ACA Financial Guaranty would have the abili
As someone who has been buying puts on the hb stocks for 2 1/2 years, I am now long the Jan XHB. The Hb's are due for a bounce, although they will go down again if we really have a recession. So, my position is a shorter term play. The 5-d stochastic is now oversold and predicts a bounce in the hbers.
I read one analyst who recommended buying the xhb index but not individual hb stocks, because of the potential for bk. So, I wouldd not be too confident that a bankruptcy will drive a further downturn in the HB stocks.
"Based on current fair values, neither the Company nor ACA Financial Guaranty would have the ability to post such collateral or make such termination payments," ACA said in the filing.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141;
As the appraiser from Denver mentioned, the high end is holding up well in some places. I am north of Houston. Within a 100 miles of Hoston it is still business as usual. Recreational places in country $500,000 and up are still appreciating 15% or so a year.
Ridge Hill is one of the worst conceived projects ever. It was DOA even before this downturn.
That area of Yonkers, on the NY State Throughway, near the trotting track, is vibrantly lower middle class Hispanic. There's a Home Depot near there where 75% of the customers and staff speak Spanish. Not knocking them. But it's not the market for the upscale crap Ratner is building. Cross County mall near there is struggling with a lot of empty space. What a nightmare.
He got sweetheart tax deals for building in Yonkers. But it won't make Yonkers Manhattan.
I believe that downgrade constitutes a default by ACA.
So, off to the races to start marking down the bad paper to whatever market exists.
Counterparty risk has made a comeback!!!
Bring out your dead, Wall Street!!!
BillD,
There's not a bit of difference between the HBers and the dot.coms.
Amazon survived and prospered. Most of the rest went to zero.
So, your strategy is flawed. You'd be better off picking the one or two that will survive and shorting the index.
As the appraiser from Denver mentioned, the high end is holding up well in some places. I am north of Houston. Within a 100 miles of Hoston it is still business as usual. Recreational places in country $500,000 and up are still appreciating 15% or so a year.
I hear the same thing about the lake country in northern Minnesota... but when I ask if places are selling the answer I get is "Um, well its slow now, wait 'till next spring." Meaning 'no'.
Houston has one thing going for it N Minnesota doesn't - oil money... so maybe its 'different' there.
"Can you get out of a deposit if the builder goes BK?"
Heck no, you wind up in the worst possible spot -- that of an unsecured creditor.
For some reason I've suddenly got a Lilly Allen song running through my head:
Oh Jesus Christ almighty,
Do I feel alright? No not slightly,
I wanna get a flat I know I can't afford it,
It's just the bureaucrats who won't give me a mortgage,
Well it's very funny cos I got your fuckin money,
And I'm never gonna get it just because of my bad credit
Oh well I guess I mustn't grumble,
I suppose that's just the way the cookie crumbles.
I read one analyst who recommended buying the xhb index but not individual hb stocks, because of the potential for bk. So, I wouldd not be too confident that a bankruptcy will drive a further downturn in the HB stocks.
BillD
i'm surprised i'm hearing this from you Bill. be careful in trying to time the rhythms of the mkt. the avalanche of bad news and the successive capitulation of sector after sector bodes poorly for the stock mkt holding up especially for January. we've entered a bear mkt with that Dow Theory signal we got i Nov and as retail sales numbers come out in Jan we could get a selloff. if i were you i'd stick with the primary trend of the mkt esp. in the HB sector which is clearly down. even one BK will pull the entire XHB down in sympathy.
Come on guys, that can't be the real O-Joe, much as I wish it was.
Watching the market continue to defy gravity in contravention of all facts and logic, I'm beginning to think this won't be a gradual slide, but a sudden and violent implosion.
It's going to be uglier than I imagined.
What makes you think bankruptcy automatically voids a home sale contract?
Those contracts could be among the few assets the builders have left.
Nuke, you think that's something? Have you ever heard the words "Atlantic Yards"?
That's a piker's ante by comparison.
Atlantic Yards - Wikipedia, the free encyclopedia
"I hear the same thing about the lake country in northern Minnesota"
Dryfly,
I know a realtor who works on the North Shore. Things are going great, just great, but she's just not selling much lately. Other than that...
What is Mello Roos?
My father is a retired home builder. He almost went bankrupt a few times - and retired right before the 73-74 recession (which probably would have bankrupted him or killed him). But builders are like cats - they have many lives. Quite a few building now have seen the inside of a bankruptcy court before.
Robyn,
Mello Roos = California special parcel tax used to pay for specific improvements that benefit a property. These taxes are often imposed on new developments to pay for schools, roads and so on.
Thanks Winston. Are they entities which can issue municipal bonds (like MUDs in Texas)? Doesn't sound like it.
Mello-Roos Community Facilities Districts often exist mainly to pay off construction bonds. They are one of many kinds of special district in California (which has over 2300 special districts of various kinds) and are unusual in that they can be created by agreement between a landowner (say a property developer) and the government. A typical example would be a developer with a large parcel (say 600 acres) of land that has minimal infrastructure. The county or city wants the property tax revenue to fund existing services and is unwilling to allow development unless the developer widens the freeway, builds a new interchange, provides schools, parks and roads, fire stations and so-on. The developer says "sure, but we need to create a Mello-Roos district." This district then issues bonds to pay for many (or all) of the improvements that were required as a condition to develop the land. Those bonds are paid off by a parcel tax on the new properties. Sometimes this tax can be quite large - I've seen Mello-Roos fees as high as $300 per month. For the homebuyer, these are a double edged sword. On one hand, you usually get better facilities someplace with Mello-Roos fees (for example, the schools in that part of town may be very good and lightly utilized while the schools in the rest of town are in poor condition and overcrowded), but you have to pay dramatically higher taxes for the having functional infrastructure.
By construction bonds, I meant municipal bonds with all the tax advantages etc that they usually carry.
Nuke, you think that's something? Have you ever heard the words "Atlantic Yards"?
That's a piker's ante by comparison.
Gary,
yah.. I'm right down the street from the proposed site. I didn't realize Barclay's bought naming rights to the arena. See excerpt below.. SHORT BARCLAY'S NOWW!!!
"The naming rights to the arena were purchased by Barclays, the British bank, for a record-setting price of nearly $400 million over 20 years. This eclipsed the previous record for naming rights to an American indoor arena. The previous record, set by Royal Philips Electronics in 1999, was for $185 million over 20 years paid to name Philips Arena in Atlanta."
-ck- are you on the preferred list?
I know the largest public builder in the DC area got stuck last time, so now they require a developer to purchase the land and builder purchases only finished lots from the developer.....4-10 lots at a time to limit exposure.
I aree with waitinginPNW, Jay and DarthToll-
This tax change was a big factor in the bubble, regardless of how you feel about Clinton (which shouldn't be the issue). And perhaps it did seem like a good change (I didn't protest it-- did anyone on this list?).
As for the Glass-Steagall repeal, that may bear some looking into
frontline: the wall street fix: mr. weill goes to washington: the long demise of glass-steagall | PBS
"In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities.
Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies.
Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures - a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking."
and
http://www.altruists.org/static/files/wizom10%20-%20Back%20to%20the%20Twenties%20thro%20the%20Looking%20Glass-Steagall.mp3
Looks like Volcker may have been more insightful than Theobald.
Winston - We have pretty much the same thing in Florida - except they're called Community Development Districts.
Volcker was right, which is not surprising. He should give Greenspam the "Just shut up now!" award, or something like that.
This is from my local paper in Albany, NY
Story not found -- StoryID: 648841 -- Times Union - Albany NY
The development is < 1 mile from my home. Are they crazy or crazy like foxes? Perhaps, smart builders who target aging boomers will still do well even in this market. Now, I know, the aging boomers have to sell their houses. But most folks around here have been in their homes for 20 or 30 years (we are newbies on our block having been here only 11 years) so they are looking at big profits, regardless of the short-term market. So, niches may still be there.
Speaking of Moody's, I received an e-mail solicitation from them this morning. Special study available now "Aftershock Housing in the wake of the mortgage metldown". Sounded interesting so I clicked the Purchase now button - $3,995!!! But they do include 2 copies for that price. Guess the fees for new MBS ratings are a little thin lately!
Robyn,
Yeah, they're pretty common, they're only special because they're one of the few ways to get around prop 13 in California which limits property taxes to 1% (And leads to them dropping every year you own a property)