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Thread: The US housing market: A wild card

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    Default The US housing market: A wild card

    Published March 14, 2007

    The US housing market: A wild card


    THE ongoing troubles of the second largest US sub-prime lender, New Century Financial, are but the latest tremor in the now-decidedly-wobbly US real estate market. And there may be many more to come. With over two dozen US sub-prime lenders (which lend to borrowers at the low end of the creditworthiness scale) having already gone under and several more in dire straits, questions are being raised as to whether the financial woes will spread, how far, and with what consequences.

    The verdict from economists is mixed. Some suggest that with US unemployment still low and household balance sheets holding up, the problem is well contained. They add that, while some air has indeed come out of the housing bubble, with new home starts and new home sales now converging, the worst is over. The US Federal Reserve, too, is showing few signs of concern. In his testimony to the Senate Banking Committee on Feb 14, Fed chairman Ben Bernanke said that he didn't think the losses within the sub-prime sector have implications for the aggregate economy 'at this point'. Fed governor Susan Biers also said: 'We're watching for contagion, we haven't seen it.' But she did acknowledge that 'what we're seeing in this narrow (sub-prime) segment is the beginning of the wave.'

    Others are less sanguine. For instance, UBS mortgage analyst David Liu has pointed to rising default rates for so-called Alt-A mortgages (where borrowers are more creditworthy than sub-prime, but less so than prime borrowers). It is widely noted that many of the questionable lending practices prevalent in the sub-prime sector (such as teaser-rate, and interest-only loans, and loans given without income verification) had spread to other sectors as well, so it's only a matter of time before serious problems start to show up outside the sub-prime segment.

    There is evidence, too, that pain is being felt in the broader financial sector. Many big-name Wall Street firms, including Morgan Stanley, Merrill Lynch and Goldman Sachs have either invested in sub-prime lenders, lent to them or packaged and sold securities with sub-prime housing loans as the underlying asset. Many hedge funds, too, are reckoned to be exposed, as well as some money-centre banks. Most visibly, HSBC was, last month, forced to set aside more than US$10.5 billion to cover losses on its US sub-prime business. And across the banking industry, there has been a tightening of mortgage loan standards.

    As to how much further the rot will spread, there remain many unanswered questions that will remain high on analysts' (and, no doubt, the Fed's) radar screens: how far up the housing value chain will the ripples be felt? Will there be a broader credit crunch? How will investment be affected? And above all, will US consumption demand take a major hit, given the extent of home equity-based borrowing? These questions are very relevant to Asian economies - many of which, like Singapore, are sensitive to movements in US economic growth and consumption. The wild card that is the US housing sector warrants close scrutiny, even from this distance.

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    Default Re: The US housing market: A wild card

    Global stock markets roiled by US housing worries

    Posted: 14 March 2007 1531 hrs


    TOKYO : A fresh sell-off on global stock markets spilled over into Asia Wednesday with share prices sharply lower in early trade as investors fretted over more signs of trouble in the US housing sector.

    The falls reversed much of the markets' recent recovery from the worldwide rout that began late last month with a slump in Shanghai.

    Jitters over the Chinese markets resurfaced after recent data on inflation, loans and trade boosted speculation that the authorities there may be forced to take further steps to cool the booming economy, dealers said.

    At the same time, the US housing worries drove the dollar down towards new three-month lows against the yen in a setback to Japanese exporters, contributing to a slump of 512.04 points or 2.98 percent in Tokyo in morning trade.

    The falls mirrored heavy losses across Asia after the Dow Jones Industrial Average dropped 1.97 percent Tuesday when data showing rising mortgage delinquencies stoked unease about the slowing housing sector.

    Dealers said the figures fanned concerns about a possible credit crunch in the world's largest economy that could put the brakes on consumer spending.

    "The sell-off in the local market was due to the correction in overseas markets amid mortgage loan concerns," said Celestial Asia Securities director Kitty Chan in Hong Kong where shares were down 2.74 percent in early trade.

    "Bad debts and all these issues could take the market lower still if more (bad) news is uncovered in the near term," she said.

    Adding to the housing worries, the US Mortgage Bankers Association said delinquencies for all home loans rose to a three-year high of 4.95 percent in the fourth quarter, and to 13.33 percent in the risky "sub-prime" market.

    The Dow Jones industrial Average fell more than 240 points overnight for its second-biggest drop in almost four years, with news of a tepid 0.1 percent rise in US retail sales in February providing little cheer for investors.

    But barring a really severe economic downturn in the United States, the Asian economies should continue to enjoy solid growth, said Tim Rocks, Asian equities strategist at Macquarie Securities in Hong Kong.

    "We see the outlook as fundamentally very, very strong. Domestic conditions in Asia are very, very healthy. We don't see the Asian markets as particularly expensive overall," he said.

    "We think it's a danger to become too defensive in this environment. Obviously we're not going to know the full extent of this slowdown in the US for some time now so there's some reason for caution," he added.

    Across the region, stock price screens were awash with red. Sydney was down 1.77 percent, Shanghai lost 2.16 percent, Manila fell 3.26 percent, Kuala Lumpur gave up 2.87 percent and Singapore shed 3.04 percent.

    ABN AMRO Morganís private client adviser Kylie Macdonald in Sydney said the market there had rebounded too rapidly from the recent sell-off and investors were waiting for value to re-emerge.

    "It looks like it's becoming a self-fulfilling prophecy, everyone's willing it (the market) down," Macdonald said.

    "I still think it's not the end of the weakness. Today's loss is not surprising given the Dow falling overnight and the different concerns that seem to be surfacing.

    In Tokyo, Societe Generale Asset Management chief economist Akio Yoshino said it was unavoidable that the Japanese market would follow Wall Street lower.

    "But if we make an objective analysis of the issue, you can understand that this is a problem unique to the US housing loan sector and that this will not pose a serious threat to the overall financial system there," he added.

    - AFP/ir

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    Default Subprime loans crisis offers some lessons

    Published March 15, 2007

    Subprime loans crisis offers some lessons

    Rising defaults on non-traditional loans cast a pall over the nation's financial sector

    By LEON HADAR
    WASHINGTON CORRESPONDENT


    SOMETIMES you don't need a professional economist to warn you that there might be an economic problem on the horizon. When a friend had told me in 1998 that he was leaving his (quite lucrative) regular job to become a 'day trader' and that he was pulling some of the money out of his pension plan to invest it in a new and promising dot.com company, I had a strange sensation of hearing a balloon burst. I decided that it was time to sell my 'aggressive' technology stocks.



    Troubles looming: A woman talks to her husband about the windows in their new home in Atlanta, Georgia, on Nov 29, 2006. In a recent Senate testimony, a pro-consumer body chief says the situation in the subprime lending market is akin to a quiet disaster


    So when a few months ago, one of the nice ladies who cleans my apartment once a week told me that she was about to purchase a home in Washington, DC, I was once again hearing a balloon burst.

    The cleaner is a young immigrant from El Salvador, unmarried and with three kids, a member of what sociologists would refer to as the 'lower-middle class' or even 'poor', which was certainly not the profile of the average American homebuyer, most of whom need to qualify for a mortgage loan, which requires the borrower to provide documentation of their annual income as well as some down payment.

    I knew that the housing market in the Washington area was quite expensive and I doubted very much that my cleaner had that kind of money or that she could even apply for the loans from a Federal government agency which usually offer liberal qualifying criteria and require smaller down payments. Perhaps she had won the lottery or did her rich aunt pass away?

    US housing market struggles

    In a way, the lady from El Salvador helped to introduce me to the subprime mortgage market which provides non-traditional loans or mortgages to borrowers even if they had bad credit or couldn't document their income or provide a down payment. Subprime mortgages generally have interest rates at least 2 or 3 per cent higher than prime loans.

    This market in which lenders had made US$640 billion in mortgage loans last year, about a fifth of the total mortgage market, has been quite a lot in the news in recent weeks. Concerns over the financial health of this sector were highlighted after the announcement by New Century Financial Corporation, which used up its cash reserves as rising default numbers forced it to buy back bad loans it had sold to investors, that it would stop making new loans, triggering speculation among analysts that the company was close to filing for bankruptcy protection.

    Indeed, New Century warned on Monday of a series of serious financial problems that cast its future in doubt and a pall over much of the nation's financial sector. The problems at New Century, which is considered the number two among subprime lenders, could have a devastating effect on America's struggling housing market as a major source of mortgage financing dries up, especially when one considers that about 35 per cent of all mortgage securities issued last year were in the 'subprime' category, up from 13 per cent in 2003.

    Concerns over risky borrowers

    Last month, Federal Reserve Chairman Ben Bernanke expressed concerns about the subprime market risks, as he told the US Congress that while household finances appeared to be strong, 'the exception is subprime mortgages with variable interest rates, for which delinquency rates have increased appreciably'.

    Most analysts agree that as they tried to increase their profits, lenders applied lax underwriting standards, in some case requiring no documentation of incomes and assets and no down payment to very risky borrowers, including those with history of bad debt and bankruptcy. The result is that delinquencies surpassed 13 per cent in on subprime loans in the latest quarter, and that small and large companies that invest in subprime loans - in the US and abroad - are facing financial difficulties, including possible defaults and delinquencies.

    It's not surprising therefore that US Congress is starting to focus on the subprime lending sector and try to figure out if Washington can 'do something' to its problems.

    The issue has been discussed in several Congressional hearings. In one recent Senate testimony, Martin Eakes, who heads the pro-consumer Center for Responsible Lending, described the situation in the subprime lending market as 'a quiet but devastating disaster' and warned that the 'ultimate effects are very much like Hurricane Katrina,' and was taking place 'every single day across the country, house by house and neighbourhood by neighbourhood'.

    Democrats who now control Congress, including Senate Banking Committee, Senator Christopher Dodd (who is also a presidential candidate), have called on the heads of the subprime industry to tighten underwriting standards and deny loans to very high-risk borrowers and they are considering the possibility of imposing tougher regulation on the industry.

    But economist Howard Husock from the Manhattan Institute has suggested that congressional Democrats and others 'are seemingly learning the wrong lessons from the subprime crisis, if it is one'. As Mr Husock sees it, both banks and lower-income consumers have been getting used to 'a new financial world', where those formerly shut out of credit markets are now included, but at interest rates that reflect their risk. 'If we want poorer households to manage their money and assets better, we have to be prepared for them to make some mistakes, and not hurry to overprotect them,' Mr Husock argues.

    He thinks that the problems could be managed by requiring lenders to disclose fully the terms of loans and ensure that borrowers read and understand the small print. At the same time, Mr Husock urges consumers and Congress to recognise that America's credit markets today 'are far better than a generation ago - when mortgage lending was confined to savings-and-loan institutions limited in the interest rates they could charge.'

    The result then was that institutions avoided risks and were said to deny credit to poorer neighbourhoods. The banking deregulation of the early 1980s, which changed the mortgage industry and allowed lenders to adjust interest rates to risk, has given millions of 'subprime' customers access to credit markets and has helped push homeownership rates to a record level. Mr Husock warns that if lenders were not permitted to adjust rates to risk, they would shy away from higher-risk lending.

    'Far better to expect that as Americans get used to knowing their credit score and become familiar with various available loans, they will learn from their mistakes and take the steps necessary - including living within their means - to get loans on favourable 'prime' terms,' he concludes.

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    Default Subprime contagion fears subside as lenders get funds

    Published March 23, 2007

    Subprime contagion fears subside as lenders get funds


    (NEW YORK) Fears that turbulence in the high-risk mortgage market would spread eased on Wednesday after two battered lenders managed to secure enough money to stay afloat.

    Fremont General Corp announced it is selling US$4 billion of subprime residential loans to an unidentified buyer, a move that propelled a rebound in the company's beleaguered shares.

    Meanwhile, hedge fund operator Citadel LP has taken a 4.5 per cent stake in Accredited Home Lenders Holding Co, a San Diego-based subprime lender.

    Fremont's stock jumped 16.1 per cent, or US$1.41, to US$10.19 on the New York Stock Exchange, while Accredited shares climbed 11.1 per cent, or US$1.19, to US$11.96 on the Nasdaq.

    'That consolidation effort makes it less of a contagion,' said Mark Ficke, head of US government bond trading at investment bank BNP Paribas in New York.

    Still, troubled lenders were paying a steep price for their newfound cash.

    Accredited will pay a hefty 13 per cent annual interest to Farallon Capital Management, a San Francisco hedge fund that has offered the company a five-year loan for US$200 million. Fremont itself acknowledged it was taking a US$140 million pre-tax hit on the sale of its loans.

    It was too early to say whether such fresh sources of funding would be enough to keep a lid on the housing debacle, which many analysts worry could have a ripple effect through the US economy.

    US Federal Reserve officials certainly seemed to fear that prospect, signalling in their post-meeting statement that they were increasingly worried about the risk from troubles in the housing sector to the broader economy.

    The latest data rein forced such concerns, with US mortgage applications slipping even as interest rates hovered near recent lows. As the troubles in the subprime market simmered, politicians in Washington have been calling for greater oversight, with a congressional panel expected to hold a hearing on the matter yesterday.

    But executives from New Century Mortgage Corp refused to testify at a Senate Banking Committee hearing on the issue, although executives from four other major subprime lenders are expected to make an appearance.

    Subprime lenders are struggling because of rising delinquencies and defaults, and in many cases because they lowered their underwriting standards too far. Many, including Fremont, have announced plans to cut jobs.

    The layoffs have extended beyond the subprime sector, affecting larger banks like Wells Fargo. The fifth-largest US bank said on Tuesday it was eliminating 121 jobs in Tempe, Arizona in a unit that offers mortgages to higher-risk borrowers. - Reuters

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    Default Sub-prime fears persist despite top testimony

    March 30, 2007

    Sub-prime fears persist despite top testimony

    Bernanke, Paulson say problem is contained, but market not swayed


    NEW YORK - TESTIMONY by the top two United States economic officials on Wednesday has raised fresh concerns about the deteriorating housing market, despite their view that sub-prime mortgage problems are 'contained'.

    The practices of lenders in the US$1 trillion (S$1.5 trillion) sub-prime sector have drawn scrutiny from regulators and law enforcement officials who believe some borrowers have been fraudulently induced to take on more debt than they can handle.

    While most of the activity has involved civil actions, the No. 6 home builder in the country, Beazer Homes USA, said it has received a request for documents from federal prosecutors in a probe relating to its mortgage business. This sent its shares down as much as 11.8 per cent on Wednesday.

    The builder specialises in lower-priced homes, the sector of the market where subprime lending has been most prevalent.

    The Federal Bureau of Investigation said it was looking at 'a potential fraud investigation' into Beazer.

    The financial markets' worst fear has been that problems with sub-primes - loans aimed at borrowers with weak credit - will spill into the overall housing sector and push the slowing economy into reverse.

    On Wednesday, Federal Reserve chairman Ben Bernanke said in testimony to Congress that the impact of the problem has been 'moderate' in the big picture, while US Treasury Secretary Henry Paulson said the problem 'appears to be contained'.

    Mr Paulson, testifying before a House Appropriations sub-committee, said the Treasury was monitoring housing market developments closely but was encouraged by signs that the housing downturn was at, or near, a bottom.

    However, the Treasury chief said he had 'grave concern' for the many Americans who will be adversely affected by the resetting of adjustable rate sub-prime mortgages.

    Mr Bernanke said the tighter credit conditions taking over in the sub-prime market are desirable because they will counter excessively lax vetting of applicants.

    US stock markets were hit on Wednesday with the Dow Jones industrial average closing down 96.93 points, or 0.78 per cent, after Mr Bernanke said he was uncomfortable with inflation and uncertain about the economy. This compounded the impact of a weaker-than-expected durable goods report, released just two hours before the Fed chief's appearance.

    Orders for big-ticket durable items such as appliances and airplanes, rose 2.5 per cent, below the consensus for a 3.5 per cent increase. The big surprise was in orders excluding transportation, down 0.1 per cent against a consensus forecast of 1.8 per cent.

    The term 'manufacturing recession' was bantered about by economists after the report and some said they were preparing to ratchet down their estimates for first-quarter economic growth.

    In his testimony, Mr Bernanke reiterated the Fed's forecast for moderate growth over coming quarters. But some economists said the central bank would likely be disappointed.

    'GDP growth, at a minimum, will continue to undershoot substantially the Fed's expectations of 'moderate' growth,' said economist Richard Iley, at BNP Paribas.

    In particular, business investment is turning out to be weaker than the Fed had expected. That has created a new layer of uncertainty in an economy struggling with the fallout from the sub-prime mortgage sector, which could have a knock-on effect on consumer spending.

    In a sign of deepening problems at one of the biggest sub-prime lenders, New Century Financial, the company said it had voluntarily terminated its relationship with Freddie Mac and that several of its own lenders plan to sell loans that had backed US$17.4 billion of credit lines.

    The developments may move New Century closer to bankruptcy, an outcome many analysts already expect.

    REUTERS

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