Tag Archives: Real estate

The American Dream Hit By Foreclosure

For weeks now it seems the financial markets have been focused on anticipating the next FED move.  And chairman Ben Bernanke delivered – as usual. With the attention having been on quantitative easing for so long, it was inevitable that investors would focus on something else. So, this week the focus returned to where the troubles began – the housing market. But this time with a slight twist; the potentially errant foreclosure practices.

“Maybe the only winners are attorneys general with ambitions for higher office.”

Otis Casey


The markets expected a move for quantitative easing to happen before the end of this year, and they’ve priced it into asset prices close to fully with almost absolute certainty over the last week. It must have ben a relief when FED Chairman Ben Bernanke Friday seemed to confirm what most were expecting with the following statement: “Given the Committee’s objectives, there would appear…to be a case for further action.”

“A more cautionary or qualified statement could well have triggered a reversal of gains and significant volatility in the market,” vice president Otis Casey at  Markit Credit Research points out the weekly market wrap.

And with the attention being on quantitative easing for so long, I guess it was inevitable that investors would focus on something else.

So, according to Markit, the focus returned to where all of the trouble once began: the US housing market.

However, this time with a slight twist; the potentially errant foreclosure practices.

“It is hard to imagine what might raise populist ire more than the spectre of people being removed from their homes and thrown out into the streets”

“It is hard to imagine what might raise populist ire more than the spectre of people being removed from their homes and thrown out into the streets ‘unfairly’. This is especially true in the United States, where many view the chance of owning a house on the hill with a white picket fence as a birthright or something sacred. Recognizing this, some banks even though they had yet to find specific instances of errors in their foreclosure process put an immediate halt on foreclosures in all states,” Casey writes.

In particularly, US state attorneys general have been quick to respond, with many of them announcing forthcoming investigations into lending and foreclosure practices.

The office of attorney general has become more of a stepping stone towards higher office (usually governor or senator) ever since they learned that class action lawsuits against the tobacco industry were a convenient way to bring revenue to the state without passing a tax increase.

But delays in foreclosures often lead to ultimately depressed recovery values to lenders.  Combine this with uncertain litigation risk and the risk profile of major mortgage lenders shifts for the worse, Otis Casey at Markit notes, and points to the fact that the impact did not stop there.

Homebuilders and mortgage insurers also saw their CDS levels widen this week.

“While much of the public, many of whom are still quite upset about the use of taxpayer dollars to bail out banks (regardless of whether or not the funds have been repaid), was quick to cheer the troubles facing the banks this week, the impact into the homebuilding and mortgage insurance sectors should give them a little pause.”

Surely, the halt in foreclosures may give struggling families more time to figure out how to adjust their personal finances so they can resume payments (or even just give them more time) and it certainly is easy to sympathize with these families.

“Viewed in these terms it is hard to know what one should cheer about or imagine who the winners are in this scenario.”

But the halt is ultimately only temporary and the markets seem to be just beginning to determine what might be the possible downside, according to Casey.

Will the costs be passed on to future consumers causing higher mortgage rates and/or fees?  Will mortgage lenders have to consolidate in order to survive, also leading to higher rates?  Will lending standards be tightened so much that more and more first time buyers will find it harder or impossible to qualify for loans?

“Viewed in these terms it is hard to know what one should cheer about or imagine who the winners are in this scenario. Maybe the only winners are attorneys general with ambitions for higher office.  The fortunes for some of them are only a few weeks away,” Otis Casey concludes.

Related research report: The European ABS Market – Monthly Review.

Related by the Swapper:

Mandelbrot & Market Behavior: The Fractals of Life

How To Create A 3 Trillion Dollar Bubble And Burst It

Housing Bubbles In Australia, Canada, Norway, Sweden Worse Than In USA

Beware: Global Asset Bubbles Growing!

Daily Show: Jon Stewart Finds Humor In The Foreclosure Crisis

Dangerous Economic Misconceptions

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EU Stress Test May Trigger Capital Injection Of EUR 85 Billion

European banks may need to raise more than €85bn to bolster their capital after stress tests, according to Barclays Capital.

“We view the upcoming release of the European banks stress tests as a potentially important inflexion point for the market.”

Barclay’s Capital


Spanish savings banks, or cajas, may require €36bn, German Landesbanks could need €34.5bn, while the Greek banks may have to raise €8.6bn, according to analysts led by Jeffrey Meli in New York.

Portuguese lenders may require €5.9bn, the Irish Independent reports.

“We view the upcoming release of the European banks stress tests as a potentially important inflexion point for the market,” the analysts writes.

Adding: “They may ease concerns by ensuring that the sovereign crisis and a likely slowdown in European growth will not result in widespread bank failures.”

Investors are concerned that soured loans to real estate developers and holdings of bonds issued by governments of nations on Europe‘s periphery mean some lenders may have burned through their capital.

The European regulators are running stress tests on a total of 91 of the biggest banks, representing 65% of the European financial industry.

The results are due for partial publication on July 23.

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Fitch: Spanish House Prices To Fall Another 20%

Fitch Ratings comments today that Spanish house prices will likely continue to decline over the near-term and remain under pressure, at least until 2012. From the peak in 2008, Spanish home prices have declined 11,2% – according to the Fitch analysts the slide is moving towards 30%.

“Fitch estimates that there are over one million units of housing stock available for sale throughout Spain.”

Fitch Ratings


Fitch maintains its forecast of a 30% decline in Spanish residential property values, on average, from the peak recorded in 2008. The agency therefore expects that declining home prices will negatively affect existing Spanish RMBS transactions due to lower recoveries on defaulted loans over the near-term.

“Fitch believes that Spanish house prices remain over-valued relative to income thresholds and need to decline further to improve affordability dynamics,” says Rui Pereira, Managing Director and Head of Fitch’s Spanish Structure Finance in Madrid.

“The supply overhang of unsold homes, more pro-active sales strategies by financial institutions, and reduced credit availability are also expected to weigh on Spanish home prices over the near-term.”

Spanish house prices have gone through a nominal adjustment that statistics from the Ministry of Housing place on a national average of 11.2% for the period Q1 2008 to Q1 2010.

However, Fitch believes this aggregate data does not appropriately reflect current market conditions as the market has become increasingly illiquid.

Compared to their peak in mid-2006, home sales had declined 48% at the end of 2009 on a quarterly basis.

Market illiquidity is weighing on home prices and individuals forced to sell in the current environment are incurring significantly higher price declines than those suggested by the government index.

Fitch’s home price projection, which was included as a baseline scenario in the agency’s RMBS criteria addendum for Spain published on 23 February 2010, was developed based on the evolution of affordability measures in Spain, the house price long term equilibrium and the imbalances of demand and supply.

(For further information, please see the 23 February 2010 criteria addendum, entitled ‘EMEA Residential Mortgages Loss Criteria Addendum-Spain’, which is available at www.fitchratings.com.)

Spanish borrower affordability suffered significantly during the boom, with the number of years of gross household income necessary to acquire a property growing to 7.7 at the peak of the market from around 3.9 years in 1995-2000.

While there are unique factors in Spain to support a higher income multiple relative to other jurisdictions, including a high home ownership rate at approximately 80%, affordability measures look stretched in absolute and relative terms.

Affordability should be in the range of 5 years of gross household income in order to be sustainable, which would result in a 30% price correction from the 2008 market peak.

Despite a sharp contraction in housing starts, there is a significant oversupply of properties, which will take considerable time to clear. Fitch estimates that there are over one million units of housing stock available for sale throughout Spain.

This overhang results from years of overbuilding, particularly in coastal areas and city suburbs, and banking system housing inventory growth.

Fitch believes there will be significant variations around its average house price decline expectation, reflecting regional housing and economic differentials.

Markets along the Mediterranean coast, with a heavy second home component, are likely to experience the sharpest adjustments.


Here’s a copy of the press release.

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