US crisis deepens as home owners turn to short-term loans

The Straits Times March 25, 2008

Such ‘payday loans’ come with high interest rates, piling on the debts

CLEVELAND (OHIO) – AS HUNDREDS of thousands of American home owners fall behind on their mortgage payments, more are turning to short-term loans with sky- high interest rates to get by.

While hard figures are hard to come by, evidence from non-profit credit and mortgage counsellors suggests that the number of people using these so-called ‘payday loans’ is growing. This is a negative sign for economic recovery as the United States housing crisis deepens.

‘We’re hearing from around the country that many folks are buried deep in payday loan debts as well as struggling with their mortgage payments,’ said Mr Uriah King, a policy associate at the Centre for Responsible Lending.

A payday loan is typically for a few hundred dollars, with a term of two weeks, and an interest rate as high as 800 per cent. The average borrower ends up paying back US$793 for a US$325 loan, according to the centre.

The centre also estimates that these lenders issued more than US$28 billion (S$38.9 billion) in loans in 2005. This was the latest available figure.

In the Union Miles district of Cleveland, which has been hit hard by the crisis, all the regular banks have been replaced by payday lenders.

‘When distressed home owners come to us, it usually takes a while before we find out if they have payday loans because they don’t mention it at first,’ said Ms Lindsey Sacher, the community relations coordinator at non-profit East Side Organising Project, which works to refinance US sub-prime mortgage borrowers on the verge of default or foreclosure. ‘But by the time they come to us for help, they have nothing left.’

On top of the steep cost, payday loans have an even darker side, Ms Sacher noted. ‘We also have to contend with the fact that payday lenders are very aggressive when it comes to getting paid.’

Mr Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio, an umbrella group representing some 600 nonprofit agencies in Ohio, said the state is home to some 1,650 payday loan lenders. This is more than all of Ohio’s fast food franchises put together.

‘That’s saying something, as the people of Ohio really like their fast food,’ Mr Faith said. ‘But payday loans are insidious because people get trapped in a cycle of debt.’

Mr Robert Frank, an economics professor at Cornell University, equates payday loans with ‘handing a suicidal person a noose’.

‘These loans lead to more bankruptcies and wipe out people’s savings, which is bad for the economy,’ he said.

‘This is a problem that has been caused by deregulation’ of the US financial sector in the 1990s.

REUTERS

Opportunistic investors recoil from Asia property

Business Times – 11 Mar 2008

They see more scope for picking up cheaper properties in US, Europe; loans in Japan tougher

(HONG KONG) Opportunistic investors are pulling back from Asian property because they see more scope for picking up distressed assets in the United States and Europe, and loans are harder to get in Japan, one of their favourite markets.

Hedge funds have stopped dabbling in property in the region, fund managers say. And although private equity players will continue to develop property in India and China, they are more likely to buy buildings on the cheap in the West than in Asia.

‘Six months ago, it was quite straightforward. We didn’t have to answer questions about why to invest in Asia,’ Guy Cawthra, Asia fund strategist at Morley Fund Managers, told a recent conference in Hong Kong. ‘Now investors say ‘we might not want to invest in Asia; we want to invest in Europe, the UK and the US’.’

In the wake of the 1997-98 economic crisis, Asia – in particular, Japan and South Korea – drew a raft of investment from funds run by the likes of Morgan Stanley, General Electric and private equity firms such as Carlyle Group .

Many made fat profits on a revival by Asian property markets, which are now mostly strong because of a shortage of new supply and still buoyant economies.

Researchers at consultants Jones Lang LaSalle forecast Tokyo office prices will steady this year after a 28 per cent jump in 2007, while Seoul, Hong Kong, Singapore and Shanghai are still on the up.

Better opportunities now lie elsewhere for investors who think they can spot a market trough and  ride a recovery.

Because of tight credit and a worsening economy, US commercial real estate values could fall by 20 per cent in the next five years from their 2007 peak, JPMorgan analysts forecast, causing losses of about US$120 billion, including on commercial mortgage-backed securities.

London office values have dropped 12 per cent from a peak in the middle of last year, and they will be pressured further by forecasts of a 10 per cent decline in rental values through 2009.

‘I think a lot of investors will return to home markets,’ said Bart Coenraads, head of real estate at Fortis Investments. ‘Some will try to buy distressed core and refinance it. They could make good returns.’

Last year, total direct investment in the Asia-Pacific region jumped 27 per cent to US$121 billion – a sixth of the global total – with about half invested in Japan, which has been popular for its rock- bottom interest rates.

However, Japanese banks are getting cold feet on property, analysts say, giving loans worth only 60- 70 per cent of a building’s value, compared to 80-90 per cent a couple of years ago.

Lower debt gearing is likely to crimp returns for equity investors. But having spent years setting up teams, private equity funds are unlikely to withdraw completely from Asia, said Tim Bellman, global head of strategy for ING Real Estate.

Many, such as Morgan Stanley Real Estate Funds, no longer see themselves as ‘opportunistic’, and are in Asia for the long haul.

‘Funds have been raised and platforms are set up, and they don’t want to unwind them overnight,’ Mr Bellman said. ‘But at the margin, opportunistic investors who looked at Asia are finding those opportunities back home.’

Morgan Stanley is building housing in China and taking stakes in Indian developers in a high-risk, high-return strategy. But the US investment bank also bought the Tokyo headquarters of Citigroup last month, indicating it is still interested in ‘core’ assets that are low risk but give modest returns\. \–Reuters

Property investors set sights on market trough in US, Europe

March 11, 2008

HONG KONG – OPPORTUNISTIC investors are pulling back from Asian property because they see more scope for picking up distressed assets in the United States and Europe.

Hedge funds have stopped dabbling in property in the region, fund managers say.

Although private equity firms will continue to develop property in India and China, they are more likely to buy buildings on the cheap in the West than in Asia.

In the wake of the economic crisis from 1997- 1998, Asia, in particular Japan and South Korea, drew a raft of investment from funds run by the likes of Morgan Stanley, General Electric and private equity firms such as the Carlyle Group.

Many have made fat profits on a revival by Asian property markets, which are now mostly strong.

Researchers at Jones Lang LaSalle forecast Tokyo office prices will steady this year after a 28 per cent jump last year, while Seoul, Hong Kong, Singapore and Shanghai are still on the up.

Better opportunities, however, now lie elsewhere for investors who think they can spot a market trough.

Because of tight credit and a worsening economy, US commercial real estate values could fall by 20 per cent in the next five years from their peak last year.

London office values have dropped 12 per cent from a peak in the middle of last year, and they will be pressured further by forecasts of a 10 per cent decline in rental values through next year.

‘I think a lot of investors will return to home markets,’ said Mr Bart Coenraads, head of real estate at Fortis Investments.

‘Some will try to buy distressed core and refinance it. They could make good returns.’

Last year, total direct investment in the Asia-Pacific region jumped 27 per cent to US$121 billion (S$167.8 billion) – a sixth of the global total – with about half invested in Japan, which has been popular for its rock-bottom interest rates.

However, Japanese banks are getting cold feet on property, only giving loans worth 60 per cent to 70 per cent of a building’s value, compared to 80 per cent to 90 per cent years earlier.

But having spent years setting up teams, private equity funds are unlikely to withdraw completely from Asia.

‘Funds have been raised and platforms are set up, and they don’t want to unwind them overnight,’ said Mr Tim Bellman, global head of strategy for ING Real Estate.

‘But at the margin, opportunistic investors who looked at Asia are finding those opportunities back home.’

REUTERS

Source: The Straits Times

New rules ‘must keep sub-prime market open’

SPRINGFIELD (ILLINOIS) – LAWMAKERS must not be too heavy-handed as they react to the collapse of the United States sub-prime mortgage market and end up closing this source of credit forever, a senior Federal Reserve policymaker said yesterday.

St Louis Fed president William Poole said the sub-prime market was now basically shut and might never reopen if the regulatory backlash were too onerous.

‘The public policy problem is the danger that, with the sad record of so many mistakes and abuses in recent years, regulatory burdens to end the abuses will do so, but only at the cost of making sub-prime lending so costly and risky to lenders that they will have no interest in restoring this market,’ he said.

Mr Poole, who retires from the Fed at the end of this month, did not directly address the economic outlook, but stressed the housing market’s problems have been costly.

Source: REUTERS, BLOOMBERG NEWS (The Straits Times 8 Mar 08)

Citigroup to sell, close some US branches: WSJ

(NEW YORK) Citigroup has agreed to sell its network of retail banking branches in Amarillo, Texas, and plans to shutter other branches in the United States, the Wall Street Journal reported on its website on Wednesday.Citibank, its retail banking unit, has agreed to sell branches in Amarillo to local lender Happy State Bank for an undisclosed sum, according to an internal memo, the Journal reported on its website. The newspaper said the company confirmed the deal.Citibank also plans to close at least 11 other branches in May, including six in Florida, three in New Jersey, and one each in California and Maryland, the Journal reported citing people familiar with the matter. A Citigroup spokeswoman was not immediately available to comment.Meanwhile, Dubai International Capital LLC (DIC), the state-controlled buyout company, said it has not been approached by Citigroup for capital raising after mortgage losses wiped out half its market value.DIC has ‘not been privy to any non-public information about the company’, the company said. ‘Dubai International Capital has never expressed an opinion on the investment merits or financial condition of Citi,’ it added.Citigroup received US$7.5 billion in November from Dubai’s neighbour, Abu Dhabi, and theNew York-based company said in January it was getting another US$14.5 billion from investors, including the governments of Singapore and Kuwait.It will take a lot more money to rescue Citibank and other financial institutions from losses  stemming from the collapse of the sub-prime mortgage market, DIC chief executive officer Sameer al-Ansari said on March 4.Citigroup fell 4.3 per cent that day to its lowest in nine years after Mr al-Ansari’s comments  and analysts at Merrill Lynch and Goldman Sachs Group predicted a first-quarter loss on further writedowns.But, on Wednesday, investor Robert Olstein said Citigroup will not cut its dividend further or raise more capital and the shares may double over the next two years.Citigroup’s stock, which has tumbled 55 per cent in the past year, is attractive even if the biggest US bank by assets reports another US$60 billion of writedowns and loan-loss provisions over the next two years, Mr Olstein told Bloomberg Television.‘Even though there’s bad news still to come in Citibank, it’s discounted already,’ said Mr Olstein, who oversees about US$1.3 billion as chairman of Olstein Capital Management. ‘This stock in two years is going to be in the mid-40s. You’ve got to be forward looking.’ Source: Reuters, Bloomberg (Business Times 7 Mar 08)

Existing home sales stay at just short of record low

Home foreclosures and rate of homes entering the process at record highs in Q4

(WASHINGTON) Industry data released yesterday show January pending US home sales were below analysts’ expectations and remained at the second-lowest reading on record.

The National Association of Realtors said its seasonally adjusted index of pending sales for existing homes held at 85.9, the same reading as December and just short of a revised record low of 85.8 in August, at the start of the worldwide credit squeeze. The reading was 19.6 per cent below year-ago levels.

Wall Street economists surveyed by Thomson/IFR had predicted the index would inch up to a reading of 86.2. Typically there is a month or two lag between when a buyer signs a home sales contract and the closing of the deal. Sales completed last month and into this month should be reflected in the January reading.

An index reading of 100 is equal to the average level of sales activity in 2001, when the index started.

Lawrence Yun, the trade group’s chief economist, said in a statement that the reading is a sign the housing market is stabilising.

‘Our members are telling us there’s been a pick-up in shopping activity,’ Mr Yun said. ‘Our hope is that the increased traffic of buyers looking at homes will translate soon into more contract offers.’

The Realtors group, which is more optimistic about the housing market than most economists, projects home sales will start to rise during the second half of the year.

It forecast yesterday that total existing home sales will fall 4.8 per cent to 5.4 million this year, then rise to 5.6 million in 2009.

The trade group projected median US home prices – the point at which half of the homes sell for less and half sell for more – will fall 1.2 per cent to US$216,300 before rising to as much as US$2 23,800 in 2009.

Meanwhile, US home foreclosures and the rate of homes entering the foreclosure process rose to record highs in the fourth quarter led by failing sub-prime loans, the Mortgage Bankers Association said yesterday.

The rate of failing loans swelled across most mortgage types but was led by a growing wave of subprime borrowers unable to make payments, the trade group said in its delinquency and foreclosure survey.

A record 0.83 per cent of US loans were entering the foreclosure process in the last three months of 2007 compared to 0.54 per cent in the same time a year earlier. The US mortgage delinquency rate of 5.82 per cent was the highest since 1985 and up from the 4.95 per cent seen in the fourth quarter of 2006.

In another development, Federal Reserve Bank of Boston president Eric Rosengren yesterday called for aggressive action on credit market problems and falling home prices that are posing a risk to the US economy.

‘There may be a significant cost to delaying needed actions that could restore confidence in the ratings process, the pricing of financial assets, and the impact of declining home prices,’ Mr Rosengren said.

Mr Rosengren said that problems that have roiled Wall Street since summer ‘are beginning to significantly affect Main Street’, with falling home prices a key element. ‘As long as housing prices continue to fall, the decline increases the risks to borrowers, lenders, markets and the economy,’ he said.

Hopes that the United States could refinance its way out of the sub-prime mortgage crisis are fading, Mr Rosengren said.

Source: AP, Reuters (Business Times 7 Mar 08)

Fed and Bush moving closer to mortgage rescue

Bernanke calls for more action by banks and the govt to help millions of home owners

(WASHINGTON) However much they might oppose it on ideological grounds, the Bush administration and the Federal Reserve are inching closer towards a government rescue of distressed home owners and mortgage lenders.

Fed chairman Ben Bernanke told a group of bankers in Florida on Tuesday that ‘more can and should be done’ to help millions of people with mortgages that are often bigger than the value of their homes.

Though Mr Bernanke stopped well short of calling for a government bailout, he used his bully pulpit to try to push the banking industry into forgiving portions of many mortgages and signalled his concern that market forces would not be enough to prevent a broader economic calamity.

He also suggested that the Federal Housing Administration expand its insurance programme to let more people switch from expensive sub-prime mortgages to federally insured loans.

And he urged the two government-sponsored mortgage companies, Fannie Mae and Freddie Mac, to raise more capital so they could buy more mortgages. The companies already guarantee or hold as investments about US$1.5 trillion in mortgages.

Similarly, the Bush administration, despite its public opposition to bailouts, has set the stage for a bigger government role.

One month ago, President George Bush signed an economic stimulus bill that greatly increased the size of loans the FHA can insure, while allowing Fannie Mae and Freddie Mac to purchase significantly larger mortgages from lenders and guarantee them against default by homeowners.

The move, which administration officials had previously opposed, increases the limits on FHA, Freddie Mac and Fannie Mae mortgages from US$417,000 to as much as US$729,750.

Historically, the FHA and the mortgage companies have focused on conservative mortgages for people borrowing relatively modest sums. But they are now being encouraged to finance much bigger mortgages, in some cases to people who put almost no money down.

Last week, the administration went further by removing limits on the volume of mortgages that Fannie Mae and Freddie Mac can hold in their own portfolios. That means the two companies could buy up billions of dollars in mortgages that other investors have been too frightened to touch.

In theory, the change should not cost taxpayers. But because the companies are chartered by Congress, investors have assumed that Congress would bail them out if needed.

The Fed has been offering its own resources to soften the credit squeeze. In addition to sharply cutting interest rates, the Fed has lent more than US$160 billion to banks since mid-December.

Source: NYT (Business Times 6 Mar 08)

Scams and schemes compound woes of US housing crisis

(CHICAGO) As the US housing meltdown forces hundreds of thousands of Americans from their homes, the extent to which fraud was a factor in the crisis is just coming to light.Products such as stated-income loans – known as ‘liar loans’ because no proof of income was needed – led to widespread misrepresentation by borrowers about their earnings.But far more sinister forms of fraud, including identity theft and ’straw buyers’ – those created using fake documents – are also coming into the open.Mike Reardon of nonprofit lender Neighborhood Housing Services of Chicago (NHS) points out two such properties, both boarded up, on South Rockwell Avenue in Chicago’s blue-collar South Side.The owner of one of the homes was traced to Texas, he said. ‘Turns out it was a case of identity theft,’ Mr Reardon said, shaking his head. ‘He had no idea he owned a home in Chicago.’ Across the street, he points to another boarded, slowly rotting home, which had last been sold to a woman named Susan Haas.‘I may be wrong, but I’ve been looking for months and months and I can’t find any proof Susan Haas exists,’ he said. Many fraud schemes kept running as long as cash kept flowing from Wall Street. Once the credit crunch turned off the supply of easy money, the perpetrators simply walked away. Estimates vary as to how prevalent fraud was during the boom.Arthur Prieston, chairman of the Prieston Group, which provides mortgage-fraud insurance and training to lenders, said that ‘at least 30 per cent of the loans out there contain some form of misrepresentation’. ‘But because lenders often have to sell off properties quickly to cut their losses, we will never know exactly how much mortgage fraud has been committed,’ he added.Mr Prieston estimates that mortgage-fraud losses were around US$4.2 billion for 2006, adding that figures for 2007 ‘will be much higher’. In a recent case in Chicago, he said the authorities prepared to file charges against a woman who had fraudulently bought five properties.‘When we turned up to serve papers on her, we found she was nine years old,’ he said. ‘Her uncle had stolen her identity.’ The mortgage scam known as identity theft is relatively simple – the perpetrator uses a stolen identity to buy property with no money down, then rents it to tenants until it goes into foreclosure, collecting rent but never making a mortgage payment.A far more lucrative scam, using what are known as straw buyers, was much more common, according to Boston-based real estate analyst John Anderson.‘The vast majority of the cases I’m aware of involved straw buyers,’ he said. ‘Thanks to products like stated-income loans, people walked away with a ton of free money.’All you needed was to buy a foreclosed property at a bargain price, have it falsely appraised with a grossly inflated value, then sell it to a straw buyer at a big profit. The straw buyer never makes a payment and the home goes into foreclosure. The process was often repeated over and over again.‘We’ve seen some properties that were sold like this dozens of times,’ NHS’ Mr Reardon said. ‘This artificially pushed up prices in some neighbourhoods and when those fake buyers walked away, the abandoned homes pushed prices down.’‘The real victims are the genuine borrowers who bought here at inflated prices and are stuck now with mortgages worth more than their homes,’ he added.False appraisals were also used to fool genuine borrowers. ‘We get a lot of cases involving fraud that we refer to the state attorney general,’ said Lori Gay, CEO of Los Angeles Neighborhood Housing Services, a nonprofit lender that also offers financial counselling services. ‘Some 15 to 20 per cent of the cases we see have some element of fraud.’The US Federal Bureau of Investigation saw Suspicious Activity Reports (SARs) related to mortgage fraud rise to 47,000 in 2007 from 7,000 in 2003, spokesman Stephen Kodak said.‘This year it looks like we’re on track for 60,000 SARs, which is a significant rise,’ he said. ‘This has required more allocation of manpower to mortgage fraud cases.’ Mr Prieston, the mortgage insurer, said that had major lenders been proactive in checking the identities of the people who were buying properties using stated-income loans and similar products, then a lot of fraud could have been avoided.‘A lot of lenders claim they were victimised by fraud but helped to constitute it by looking the other way,’ he said. ‘The sad fact is that the vast majority of mortgage fraud out there could have been prevented.’Mr Anderson, the Boston-based real estate analyst, is among those who were warning for years that easy credit created an easy climate for fraud. ‘The banks on Wall Street had to know there would be fraud. If they didn’t they’re morons.’  Source: Reuters (Business Times 6 Mar 08)

The slow unwinding of the US housing crisis

IT is becoming increasingly evident that the US housing crisis – the root cause of the US economic slowdown and the turmoil in the financial markets – is getting worse by the day. Any hopes for an economic recovery and a restoration of market stability will turn on how this crisis unfolds, and how it is dealt with.

Recent statements and actions by US policymakers provide some clues of what is to come. In a widely reported address to American community bankers on Tuesday, US Federal Reserve chairman Ben Bernanke drew attention to rising delinquency rates on mortgages (and not only the sub-prime variety) and the likely persistence of this trend. Foreclosures too will rise, he said, as house prices decline further and interest rate resets on mortgages take effect.

Suggesting that ‘this situation calls for a vigorous response’, Mr Bernanke stressed the urgency of reducing ‘preventable foreclosures’. And then he dropped what many view as a bombshell: he asked for banks to not only provide interest rate relief to borrowers, but also to write down principal in some cases – in other words, to forgive part of the mortgage loans. If not, there would be a stronger incentive to default among homeowners who are in negative equity on their mortgages. And that, in turn, would accelerate the decline in housing prices and make things even worse for already beleaguered mortgage lenders.

A day earlier, US Treasury Secretary Henry Paulson – who also acknowledged that housing ‘poses the biggest downside risk’ to the economy – urged homeowners (including those ‘underwater’ on their mortgages) to continue servicing their loans, if possible. While this might not be a wholly realistic suggestion, it underlines US officials’ anxiety to stave off foreclosures.

Whether such exhortations will succeed, however, is moot. Bankers are generally loath to take ‘haircuts’ on loans except as the very last resort; and one can hardly count on most homeowners in negative equity being content to continue servicing huge mortgages when they’re better off walking away and handing their house keys to the bank.

Absent such voluntary market-based solutions, there would appear to be a strong case for government intervention. Mr Paulson and other lawmakers have publicly maintained that they oppose any bailouts. However, at the same time, the scope and mandate given to US government agencies such as the Federal Housing Administration, Fannie Mae and Freddie Mac to guarantee or take over mortgages have been significantly expanded. US lawmakers are also examining bolder options. It is probably inevitable that some of these will involve an element of bailout, even if politicians are reluctant to admit as much.

However, whether bailouts are involved or not, US policymakers need to address the US housing market bust urgently, despite the distractions of an election year. For it is now obvious that there is a systemic risk facing the US financial system – and that market mechanisms alone cannot deal with it.

Source: Business Times 6 Mar 08

US commercial property seen falling by 20%

But office properties should fare relatively well over the near term, say JPMorgan analysts

(NEW YORK) The US commercial real estate market could decline by as much as 20 per cent over the next five to eight years as tighter credit squeezes business property but with less ferocity than it choked the housing market.

‘We believe commercial real estate loan performance peaked in 2007 and will deteriorate on an accelerating trajectory through 2009,’ JPMorgan analysts said on a conference call on Tuesday.

They said they expect values to fall by 20 per cent from their peak last year, and losses to total about US$120 billion, or 4 per cent of the US$3.2 trillion outstanding commercial real estate loans.

Commercial Mortgage Backed Securities (CMBS) would account for about US$30 billion of the losses and collateralised debt obligations (CDOs) would account for about US$40 billion of the losses, they said.

CDOs are bonds based on pools of the riskiest CMBS bonds, leases, mezzanine loans and other real- estate related instruments.

CMBS, including CDOs, accounted for 23.6 per cent of lending at the end of the third quarter of 2007, JPMorgan said.

Problems in the CMBS market will become apparent between 2010 and 2012, as many five-year mortgages mature, the JPMorgan analysts said.

This would lead the commercial property market into a more gradual decline than the housing market, which has been slammed by losses related to sub-prime mortgages. Those losses are expected to reach US$200 billion, or 15 per cent of the US$1.25 trillion of outstanding loans, the JPMorgan analysts wrote in a report discussed on the call.

Many commercial properties have been financed with low-interest, five-year mortgages that will have to be refinanced or the properties will have to be sold.

Lenders who do not sell their loans but rather keep them on their balance sheets, such as insurance companies and commercial banks, are expected to loose US$50 billion over the five-to-eight year period, giving them enough time to adjust reserves, the JPMorgan analysts said.

‘The relatively conservative underwriting of banks and insurance companies is likely to insulate them from many of the problems that will plague loans securitised into fixed-rate CMBS,’ the JPMorgan report said.

Moody’s Investors Service recently said it expected commercial property values to decline 15-20 per cent over the next few years and the delinquency rate to increase into the 1-2 per cent range.

But Michael Pralle, former head of GE Real Estate and now president of JER Partners, a real estate private equity firm, said real estate values already have fallen by 10 per cent or 15 per cent. ‘It’s literally the arithmetic of the lending.’

He said many buyers have lowered offers as they factor in the higher costs of borrowing and lower amounts of cash available to borrow.

Office properties, the largest sector of the commercial real estate market ‘. . . should fare relatively well over the near term due to the longer-term nature of their underlying tenant leases’, the JPMorgan analysts wrote. But, they added, retail and hotel properties, which are very sensitive to changes in the overall economy, are expected to underperform.

Benjamin Lambert, chairman of commercial real estate brokerage Eastdil Secured, said values at the very top of the office market would slip slightly, but the overall market may see values decline 10 per cent or 15 per cent. Eastdil Secured is a subsidiary of Wells Fargo & Co.

JPMorgan analysts said they expected that the relatively restrained construction of offices, apartment buildings, warehouses, shopping centres and hotels that occurred between 2003 and 2007 would mitigate losses.

This compares to the residential market, which has suffered from a glut of houses for sale.

JPMorgan also said declines would not be limited to the United States, adding that UK commercial property prices are like to fall 23 per cent and commercial property prices in Europe and Australia are apt to decline by 5 per cent to 10 per cent.

Source: Reuters (Business Times 6 Mar 08)

US housing woes: It’s the affordability, stupid!

GLOOM. Doom. Calamity. Home prices are tumbling. We’re bombarded by sombre reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last. It’s elementary economics. Say, houses are apples. We have 1,000 apples, priced at US$1 each. They don’t sell. We can either keep the price at US$1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.

Even many economists – who should know better – describe the present situation as an oversupply of unsold homes. True, there is about 10 months’ supply of existing homes as opposed to four months a few years ago. But the real problem is insufficient demand. There aren’t more homes than there are Americans who want homes; that would be a true surplus.

There’s so much supply because many prospective customers can’t buy at today’s prices. By definition, the ‘housing bubble’ meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.

Look at some numbers from the (US) National Association of Realtors. From 2000 to 2006, median family income rose almost 14 per cent to US$57,612. Over the same period, the median-priced existing home increased about 50 per cent to US$221,900. By other indicators, the increase was even greater. But home prices could not rise faster than incomes forever.

Inevitably, the bust arrived. Credit standards have now been tightened, and the (false) hope of perpetually rising home prices – along with the possibility of always selling at a profit – has evaporated. For many potential buyers, prices have to drop for housing to become affordable.

How much? No one really knows. There is no national housing market. Prices and family incomes vary by state, city and neighbourhood. Prices rose faster in some areas (Los Angeles, Miami, Phoenix) than in others (Dallas, Detroit, Minneapolis). Some economists now expect an average national decline of about 20 per cent. The Federal Reserve estimates that owner-occupied real estate is worth almost US$21 trillion. A 20 per cent reduction implies losses of about US$4 trillion.

The largest part would be paper losses for homeowners: values that rose spectacularly will now fall less spectacularly – back to roughly 2004 levels; that’s still 30 per cent or so higher than in 2000. But hundreds of billions of dollars of other losses are already being suffered by builders (from the lower value of land and home inventories), mortgage lenders (from defaulting loans), speculators and homeowners (from lost homes). Mark Zandi of Moody’s Economy.com estimates that mortgage defaults this year will exceed 2 million, up from 893,000 in 2006.

To be sure, all this weakens the economy. No one relishes evicting hundreds of thousands of families from their homes. Eroding real estate values make many consumers less willing to borrow and spend. Some economists fear a vicious downward spiral of home prices. More foreclosures depress prices, increasing foreclosures as people abandon houses where

the mortgage exceeds the value. Losses to banks and other lenders rise, and they curb lending further. Particularly vulnerable would be Fannie Mae and Freddie Mac, the two government-sponsored housing lenders.

Up to a point, there’s a case for providing relief to some mortgage borrowers. In many cases, everyone would gain if lenders and borrowers renegotiated loan terms to reduce monthly payments. Losses to both would be less than if their homes went into foreclosure and were sold. The Treasury has organised voluntary efforts. Some measures being considered by Congress (for example, overhauling the Federal Housing Administration) might help. But other proposals – particularly empowering bankruptcy judges to reduce mortgages unilaterally – would perversely hurt the housing market by raising the cost of mortgage credit. Lenders would increase interest rates or downpayments to compensate for the risk that a court might modify or nullify their loans.

The understandable impulse to minimise foreclosures should not serve as a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today’s homeowners makes little sense if it penalises tomorrow’s homeowners. An unstoppable free fall of prices seems unlikely.

Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices.

Source: The Washington Post Writers Group(Business Times 6 Mar 08)

US regulators eye next trouble spots

(WASHINGTON) US regulators are watching credit cards and commercial construction loans for signs they may be the next trouble spots as strained financial markets constrain credit.

The housing downturn, with its epicentre in the sub-prime mortgage market, remained atop the list of concerns. But banking regulators and Federal Reserve officials expressed concerns on Tuesday that credit risks may extend beyond mortgages.

Federal Reserve chairman Ben Bernanke warned in a speech that mortgage delinquencies and foreclosures would likely rise and more house price declines could be expected.

Mr Bernanke’s second-in-command, Donald Kohn, said at a Senate Banking Committee hearing that the Fed was also keeping a close eye on credit card, home equity and commercial real estate loans as banks cope with a widening range of credit risks.

‘Federal Reserve supervisors are monitoring these consumer loan segments for signs of spillover from residential mortgage problems, particularly in regions showing homeowner distress, and are paying particular attention to the securitisation market for credit card loans,’ he revealed. Mr Kohn added that commercial real estate is ‘another area that requires close supervisory attention’.

Source: Reuters (Business Times 6 Mar 08)

US regulators look for signs of credit crisis spreading

They are keeping a keen eye on credit card, home equity and building loans

WASHINGTON – UNITED States regulators are watching credit card and commercial construction loans for signs that they may be the next trouble spots as strained financial markets constrain credit.

The housing downturn, with its epicentre in the sub- prime mortgage market, stayed atop the list of concerns. But regulators and Federal Reserve officials expressed concerns on Tuesday that credit risks may extend beyond mortgages.

Fed chairman Ben Bernanke said on Tuesday that credit-weary banks may be better off accepting lower home loan principal amounts rather than the bigger losses that would come from foreclosures.

He warned that mortgage delinquencies and foreclosures would likely rise as house prices fall further.

Mr Bernanke’s second-in- command, Mr Donald Kohn, said at a Senate Banking Committee hearing on the same day that the Fed was also keeping a close eye on credit card, home equity and commercial real estate loans as banks cope with a widening range of credit risks.

‘Federal Reserve supervisors are monitoring these consumer loan segments for signs of spillover from residential mortgage problems, particularly in regions showing home owner distress.

‘And they are paying particular attention to the securitisation market for credit card loans,’ he said. Mr Kohn added that commercial real estate is ‘another area that requires close supervisory attention’.

He noted that while personal bankruptcy rates remained below levels prior to bankruptcy law changes implemented in 2005, they ticked higher over the first nine months of last year and ‘could be a harbinger of increasing delinquency rates on other consumer loans’.

Despite those strains, Mr Kohn said the banking sector remained sound and he saw no threat to banks’ viability.

The credit mess that began with failing US sub- prime mortgage loans has left banks saddled with tens of billions of dollars in bad debts, prompting them to tighten lending standards. That has slowed the flow of cash to firms and consumers who power the US economy.

US Comptroller of the Currency John Dugan echoed concerns that the credit troubles may spread beyond mortgage loans.

‘Although credit card earnings have been fairly robust and portfolios are currently strong, we have a heightened level of concern in this area, even before the numbers confirm any significant deterioration,’ he said.

‘We expect losses from home equity loans to continue to escalate as, unlike first mortgages, these assets are largely held on banks’ balance sheets,’ he added.

But in a sign of how the Fed is conflicted in combating the competing threats of slowing growth and rising prices, another Fed official stressed that inflation was his top concern. ‘Containing inflation is the purpose of the ship I crew for,’ said Dallas Federal Reserve president Richard Fisher.

‘If a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient,’ he said.

Source: REUTERS (The Straits Times 6 Mar 08)

Banks hit by sub-prime may need more cash

Dubai fund chief says much more is needed to rescue Citigroup, others

(DUBAI) Banks and securities firms led by Citigroup may need more money from Arab states as losses stemming from the collapse of the US sub-prime mortgage market increase, the head of Dubai International Capital said.

Citigroup, the biggest US bank by assets, received a US$7.5 billion cash infusion from Dubai’s neighbour, Abu Dhabi, on Nov 27 to replenish capital after record mortgage losses destroyed almost half its market value, leading to the departure of chief executive Charles Prince. Citigroup has since received cash from Singapore and Kuwait.

‘In my view it will take a lot more than that to rescue Citi and other financial institutions,’ Sameer al-Ansari told a private equity conference in Dubai yesterday.

Gulf states including Qatar, Kuwait and the United Arab Emirates have bought into US financial institutions such as Merrill Lynch & Co, Morgan Stanley and UBS, after they lost more than US$163 billion betting on securities backed by sub-prime mortgages.

Banks and securities firms have raised US$105 billion from selling stakes to cover sub-prime losses.

Qatari Prime Minister Sheikh Hamad bin Jasim bin Jaber al-Thani said on Feb 18 that the emirate is buying shares in Credit Suisse Group and plans to spend as much as US$15 billion on European and US bank stocks over the next year.

Abu Dhabi is Citigroup’s largest shareholder, ahead of Los Angeles-based Capital Group Cos and Saudi billionaire Prince Alwaleed bin Talal, according to Bloomberg data.

State-managed funds in countries including Kuwait, Abu Dhabi and South Korea have ballooned to US$3.2 trillion in assets.

Fuelled by record oil prices and rising currency reserves, sovereign fund assets may gain four-fold to US$12 trillion by 2015, equal to the capitalisation of the Standard & Poor’s 500 Index, according to Morgan Stanley estimates.

Merrill Lynch & Co analyst Guy Moszkowski said that Citigroup will likely post a loss for the first quarter because the largest US bank by assets may take further ‘big writedowns’.

The analyst slashed his first-quarter estimate for Citigroup to a loss of US$1.66 per share from a profit of 55 cents a share. Mr Moszkowski cut his 2008 forecast to a profit of 24 cents a share from US$2.74.

The first-quarter estimate is based on an expected US$15 billion writedown related to sub-prime mortgages and so-called collateralised debt obligations, along with a US$3 billion writedown for other investments, Merrill said.

‘We remain concerned about loss provision potential, the direction of long-term strategy, and weak markets for the capital markets business,’ Mr Moszkowski wrote.

Citigroup posted a US$9.8 billion loss for the fourth quarter, the widest in its 196-year history, and wrote down CDOs linked to sub-prime mortgages by US$20 billion. The bank’s shares have tumbled 53 per cent in the past year.

Analysts surveyed by Bloomberg on average estimate that Citigroup will post a profit of 34 cents a share this quarter, excluding some items.

Merrill also cut its first-quarter profit estimate for Bank of America Corp, the second-biggest US bank by assets, to 58 cents a share from 94 cents. The brokerage trimmed its 2008 estimate for Wachovia Corp, the country’s fourth-largest lender, to US$2.50 a share from US$3.20.

Source: Bloomberg (Business Times 5 Mar 08)

Bernanke urges more action to fix housing slump

Vigorous response needed to reduce rising foreclosures, says Fed chief

(WASHINGTON) Federal Reserve chairman Ben Bernanke called yesterday for additional action to prevent more distressed US homeowners from falling into foreclosure.

‘This situation calls for a vigorous response,’ Mr Bernanke said in a speech to a banking group in Florida.

Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise ‘for a while longer’, Mr Bernanke warned.

Rising foreclosures threaten to worsen the problems in the housing market and for the US economy, which many fear is on the verge of a recession or in one already.

‘Reducing the rate of preventable foreclosures would promote economic stability for households, neighbourhoods and the nation as a whole,’ Mr Bernanke said. ‘Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should be, done,’ the Fed chief noted.

One of the suggestions Mr Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. ‘Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,’ Mr Bernanke explained.

With low or negative equity in their home, a stressed borrower has less ability – because there is no home equity to tap – and less financial incentive to try to remain in the home, he said.

Mr Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he noted, are reluctant to write down principal. ‘They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again,’ Mr Bernanke pointed out.

Still, Mr Bernanke suggested such longer-term permanent solutions may work better than shorter term and temporary ones, where the distressed homeowner could find himself in trouble again. ‘When the mortgage is ‘under water’, a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,’ he said.

To date, permanent home mortgage modifications that have occurred have typically involved a reduction in the interest rate, while reductions of the principal balance of the loan have been quite rare, he said.

‘Measures that lead to a sustainable outcome are to be preferred to temporary palliatives, which may only put off foreclosure and perhaps increase its ultimate costs,’ Mr Bernanke said.

Lenders last year were on pace to initiate roughly 1.5 million home foreclosure proceedings, up from an average of fewer than one million new foreclosures in the preceding two years, the Fed chief said.

More than one half of the foreclosures started in 2007 were on sub-prime loans given to borrowers with blemished credit histories or low incomes.

Source: AP (Business Times 5 Mar 08)

Bernanke urges banks to forgive part of mortgages

ORLANDO – FEDERAL Reserve chairman Ben Bernanke, battling the worst United States housing recession in a quarter century, has urged lenders to forgive portions of mortgages for more borrowers whose home values have declined.

‘Efforts by both government and private sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,’ he said in a speech yesterday. ‘Principal reductions that restore some equity for the home owner may be a relatively more effective means of avoiding delinquency and foreclosure.’

Mr Bernanke’s call goes beyond the stance of the Bush administration and previous Fed comments.

By comparison, the central bank’s Feb 27 report to Congress called for lenders to ‘pursue prudent loan workouts’ through means such as modifying mortgage terms and deferring payments.

‘Delinquencies and foreclosures likely will continue to rise for a while longer,’ Mr Bernanke said in his comments to the Independent Community Bankers of America.

‘Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest rate resets will, nevertheless, impose stress on many households.’

In the past, home owners could refinance, though that option is now ‘largely’ gone because sales of bonds backed by sub-prime mortgages ‘have virtually halted’, Mr Bernanke said. ‘This situation calls for a vigorous response.’

He acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal.

‘They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.’

Mr Bernanke said by cutting the amount of the loan, this ‘may increase the expected payoff by reducing the risk of default and foreclosure’.

Source: BLOOMBERG NEWS, ASSOCIATED PRESS (The Straits Times 5 Mar 08)

US housing crisis deters first-time buyers

US housing crisis deters first-time buyers

Greater security seen in renting as home prices fall and foreclosures surge

(BOSTON) For decades, buying a home was a key step on the path to financial security for the American middle class.

Home owners could count on a fixed mortgage payment rather than rising rent, take advantage of tax breaks, and build equity as their houses increased in value over time.

But with home prices falling and families losing their homes to foreclosure, some people who under other circumstances would be looking to buy their first home now see greater security in renting.

One such person is Lisa Chesnut, who lives in Tucson, Arizona, and works as an information systems coordinator. With a good job and two young sons, 29-year-old Chesnut and her husband, Bryan, look like classic first-time buyers.

They had considered it, until the market started to slide a year ago.

‘At first we thought, prices are falling, that’s good,’ she said in a phone interview. ‘Then we started reading about the foreclosures and the ARM (adjustable-rate mortgages) rates and people losing their homes,’ she said. ‘We thought, what if something happened where we could lose our house?’

Her big fear is falling behind on a mortgage. Having read about people who face higher payments on their adjustable-rate mortgages, she realises that being approved for a loan does not guarantee it will be affordable.

One sign that more people are choosing to remain in rental apartments while they wait out the slump comes from Equity Residential, one of the largest US apartment owners.

Fewer people have been moving out of its apartments – last year 63.3 per cent of its units changed hands, down from 64.9 per cent in 2006.

‘Turnover is slowing and the rate of moving out for home purchase we also saw slow throughout 2007,’ said Fred Tuomi, president of property management at the Chicago-based company, who oversees about 150,000 apartments nationwide.

And population projections by the National Association of Realtors (NAR) suggest hundreds of thousands of young Americans are sitting out the housing market entirely – neither buying nor renting.

‘There’s probably 700,000, maybe 800,000 people out there that are not getting into the market either as a renter or as a homebuyer,’ said Walter Molony, spokesman for the NAR. ‘Where are these folks? They’re out there, they’ve got jobs. Some of them are moving back with their parents, never left the house, they’re doubling up with roommates.’

There’s no scarcity of data to worry potential homebuyers.

Recent reports show that the average price of an existing single-family home in US metropolitan areas fell 6 per cent in the fourth quarter, while foreclosure rates in the top 100 metropolitan areas soared 78 per cent last year.

‘They’re the most nervous people I’ve ever met in my life,’ said Bob Moulton, president of Americana Mortgage Group, referring to the potential first-time buyers he speaks with.

‘They’ve seen what can go wrong in the mortgage market,’ said Mr Moulton, whose company brokers US$300 million of mortgages a year, mainly in suburban New York. ‘Everybody’s advising them, from the mother, to the father, to the uncle, their co-workers, telling them, ‘Don’t buy. Prices are coming down.’

Indeed, home ownership rates have fallen to 67.8 per cent of households at the end of last year from 69.2 per cent in 2004. That is below a 69.8 per cent rate in Britain, but still much higher than European countries such as France and Germany.

For young people who are unsure about whether to buy instead of renting, experts said the key thing to consider is how long one plans to live in a house.

During the boom years, from the late ’90s through the first half of this decade, rapidly rising house prices meant that in many parts of the country a buyer could turn an easy profit after owning a house for just a year or two.

Now young buyers should plan to stay in their homes longer than that, said Jim Gaines, a research economist at the Real Estate Center of Texas A&M University, in College Station, Texas. Even his own son, who recently married, has come to him with fears about buying real estate.

‘I told my son this, ‘Look, if you buy a home today, you better be prepared to stay in it for a minimum of five years. Don’t worry if it goes up or goes down (in value) a little bit in the next six months,’ Mr Gaines said.

That knowledge is another factor keeping some young Americans in their rental apartments.

‘A lot of people I know are in that position, where their home isn’t going to sell for what they paid for it right now,’ said Josh Stenger, a 37-year-old professor of film studies who lives in a rental apartment in Pawtucket, Rhode Island.

Prof Stenger said he has toyed with buying a house or condominium, but has held off until he was sure he would be staying put for several years.

‘I don’t foresee buying anything without planning to stay in it at least five years,’ he said. ‘If the economy was different and it looked like prices were going to start going up again, I might feel more pressure.’

Source: Reuters (Business Times 4 Mar 08)

US existing home sales fall to lowest in a decade

US existing home sales fall to lowest in a decade

Weakness in housing market continues as median prices drop 4.6% year-on-year

WASHINGTON – SALES of existing United States homes fell to the lowest level in nearly a decade last month, while the median price for a home dropped for the fifth straight month.

The National Association of Realtors (NAR) said yesterday that sales of single-family homes and condominiums dropped by 0.4 per cent last month to a seasonally adjusted annual rate of 4.89 million units, the slowest sales pace on record going back to 1999.

The median price of a home sold in January slid to US$201,100 (S$283,070), a drop of 4.6 per cent from a year ago. The fall in sales and the fifth consecutive decline in prices underscored the continued pressure facing housing, which is struggling to emerge from its worst slump in a quarter-century.

Sales were weak in all parts of the US except the Midwest, where sales posted an increase of 3.4 per cent. Sales dropped by 3.6 per cent in the North-east, 2.1 per cent in the West and 0.5 per cent in the West.

Sales of both existing homes and new homes tumbled for a second straight year in 2007, as the housing industry was battered by a severe credit crunch that hit in August.

This was around the same time that major financial institutions began reporting multibillion-dollar losses on their investments in risky sub-prime mortgages – loans made to home owners with weak credit.

The market for sub-prime mortgages has essentially dried up and other types of loans have become harder to obtain as lenders have tightened their standards.

Mr Lawrence Yun, chief economist for the NAR, said he believed that the housing market may be on the verge of bottoming out, with a rebound expected to start towards the end of this year.

‘Sub-prime loans and other risky mortgage products have virtually disappeared from the marketplace, and over the past five months, this has been reflected in soft but fairly stable home sales,’ he said.

He said he expected demand to be bolstered in the coming months by the actions of Congress in the economic stimulus Bill to raise the caps on the size of loans that can be backed by Fannie Mae and Freddie Mac and the Federal Housing Administration.

Not everyone agrees.

Housing is ‘a long-term negative that’s going to continue’, Mr Joshua Shapiro, chief US economist at Maria Fiorini Ramirez in New York, said before the report.

‘The trends are still weak. Prices haven’t come down enough.’

Mounting foreclosures are adding to a glut of unsold homes that is driving down property values. Would-be homebuyers may be waiting for even lower prices, keeping the housing market depressed for a third year and dragging the economy close to a recession.

ASSOCIATED PRESS, BLOOMBERG NEWS (Source: The Straits Times 26 Feb 08)

Banking regulator sees more US mortgage defaults

WASHINGTON – Defaults are increasing among US homeowners with good, but not perfect, credit histories who obtained a non-traditional mortgage, a top US banking regulator said on Friday.

More pain can be expected as both borrowers with poor credit, who hold sub-prime mortgages, and borrowers with good credit, who hold Alt-A mortgages, see their interest rates reset, Federal Deposit Insurance Corp Chairman Sheila Bair said in prepared remarks for a speech in California’s Silicon Valley.

The Alt-A loan is generally made to borrowers who have good, but less than perfect credit histories and may involve less documentation of income and assets.

Ms Bair, who has been pushing banks and loan servicers to modify home loans, said new rules are needed to protect all homeowners and end compensation plans for brokers who steer borrowers into unaffordable mortgages.

About 85 per cent of borrowers with payment-option loans, one type of Alt-A mortgage, now owe more than they did at the time of origination, she said. About 75 per cent are making the minimum payment.

‘The problems associated with these products are already evident,’ Ms Bair said. ‘We’re seeing a rash of ‘first-year defaults’ among Alt-A loans to speculators and borrowers who should never have been qualified for the loan in the first place.’

Ms Bair has warned that a wave of loan problems involving prime borrowers looms next year because about US$600 billion of nontraditional mortgages were issued to prime borrowers in recent years.

Non traditional mortgages flourished after 2003, thanks to easy credit and double-digit home price increases in some markets.

Ms Bair and other banking regulators say one of the causes of the sub-prime mortgage mess stems from non-bank lenders that flew under regulatory radar while criteria to get a loan were lowered.

She also said a recent proposal by the US Federal Reserve Bank to amend the Truth-In-Lending rules, which apply to advertising and disclosure of interest rates and terms, are an important first step forward.

‘The home mortgage market needs strong rules,’ she said. ‘We need rules that apply acrossthe-board so they protect all homeowners, regardless of who their lender is, or what state they live in. We need rules that apply to banks and nonbanks alike.’

Source: REUTERS (Business Times 23 Feb 08)

Banks caught in sub-prime limbo

AFTER the excitement of the previous week during which the Straits Times Index (STI) enjoyed a 156-point bounce, this week was much more sombre as US recession fears reared its head while oil crossed US$100 per barrel.

For the most part, trading exhibited the same two-tier pattern evident in previous weeks with large-cap blue chips and small-cap penny stocks occupying most of the market’s energies.

As always, direction was set by Wall Street’s overnight close and Hong Kong, though in yesterday’s case, plunges in China also played a part in causing weakness here. After dropping to an intraday low of 3,013 yesterday, a late bout of short-covering in mainly the banks and Keppel Corp lifted the index to a close of 3,048.64 for a net loss of 6.17 points.

For the week, the index dropped 40 points or 1.3 per cent.

There was a brief mid-week play on mid-caps from the water treatment sector such as Hyflux and Epure, thanks to a Morgan Stanley report that pointed out the burgeoning demand in this part of the world for clean water.

Banks, in the meantime, appear to be caught in a sub-prime-induced limbo. Prudent provisioning for sub-prime losses hasn’t yet restored the market’s confidence in their future bottom lines, at least judging by their share prices. However, also judging by share price behaviour, it does appear that downside could be limited from here onwards.

For the week, DBS was unchanged at $17.90 while UOB rose 40 cents to $18.68 and OCBC gained 18 cents to $7.68.

Analysts appear unsure of how to play the banking card over the next few months – most seem to be hedging their bets with ‘neutral’ or ‘hold’ recommendations until greater clarity emerges.

Citigroup, in a results preview on Monday, probably summed the situation up best when it said that because economic risks remain to the downside, banks may remain depressed. ‘So despite price falls of up to 33 per cent to 5-8 per cent above trough valuations, we fear banks could be near-term dead money until a clear catalyst emerges,’ said Citigroup.

The other finance sector counter to come under pressure was the Singapore Exchange (SGX) whose shares yesterday dropped 26 cents to $8.79. Apart from the overall soft sentiment, a Goldman Sachs downgrade was probably instrumental on the grounds that slowing growth, high inflation and US recessionary forces will likely dampen market sentiment and hence, SGX earnings.

‘Our new target price of $8.20 implies 9 per cent downside potential. We have also set a ’suggested entry level’ of $5.70 based on our worst-case EPS estimate (daily stock turnover of $1.6 billion, assuming velocity reverts to historical average),’ said Goldman Sachs.

On the state of the US economy, research outfit Ideaglobal during the week released a study of how the US Treasury yield curve tends to behave during V-shaped or U-shaped recessions and concluded that the present curve implied the latter. It said that the combination of high oil prices, collapsing property prices and financial market-induced slowdown is likely to result in a prolonged period of below-trend performance.

On what the charts say for the STI, Kim Eng’s online research unit KELive said in its ‘Long & Short Report’ yesterday that notwithstanding the recent post-Chinese New Year bounce, the long-term trend is down with a mid-term target of 2,650.

Source: Business Times 23 Feb 08

US commercial property prices slip 1.5% in Dec

(LOS ANGELES) Commercial real estate prices in the United States dropped 1.5 per cent in December, the second consecutive monthly decline, indicating that the market is at the start of a slump, Moody’s Investors Service Inc said.

The 1.5 per cent fall measured by the Moody’s/REAL Commercial Property Price Indices is worse than the 0.2 per cent drop in November, New York-based Moody’s said on Tuesdayday in a report. It was the fourth-largest month-on month drop in the 84-month history of the indexes, the credit-rating company said.

The commercial property market has been hurt by a decline in credit availability, making it costlier to buy real estate. While the number and total value of sales tracked by the indexes in December were above average for the last two years, it was the third price decline in the past four months, Moody’s said.

‘The jump in volume in December of 2007 is likely to be atypical before a softer pace sets in,’ analysts led by Moody’s senior vice-president Sally Gordon said in the report. In December, transactions tracked by Moody’s totalled US$7.1 billion. ‘Some borrowers and/or lenders are eager to close before year-end for one or another financial reason,’ it said.

The Moody’s indexes are based on the repeat sales of the same apartment, industrial, office and retail properties across the US at different points in time.

Moody’s tracked 352 transactions in December. 

Source: Bloomberg (Business Times 21 Feb 08)

Weak US$ lures foreign buyers to US property

Florida is the most popular state, accounting for 26% of all transactions

(MIAMI) Canadian retiree Sheldon Kovensky felt the lure that attracts so many foreign buyers to sunny Florida these days – falling prices for luxurious oceanfront condos that can be bought with weak US dollars.

Mr Kovensky has been scouring south Florida from Miami Beach to Palm Beach in search of a three-bedroom apartment on the sand.

Armed with a Canadian dollar that has gained 25 per cent against the greenback in the last two years, he is expecting a big bargain.

‘We’re hoping to get an apartment worth about a million (US dollars) that I can purchase for about 20 per cent less,’ he said by phone from his home in Unionville, Ontario, as he faced digging out from a snowstorm.

‘The Canadian dollar is on par and the Florida market has dropped 20 to 30 per cent, so you get a lot of bang for your buck,’ he added.

Realtors, analysts and buyers said that the strength of the Canadian dollar, the euro and other foreign currencies, on top of a falling real estate market, is making the United States an enticing place for foreigners looking to buy property.

In fact, they said, the combination of the weak US dollar and the allure of Miami as a cosmopolitan, multilingual city may be helping to prop up a faltering, overbuilt condo market that had been expected to crash but has seen, to date, only a small drop in prices compared to other Florida cities.

In a study by the National Association of Realtors last year, Florida was the top destination for foreign buyers, accounting for 26 per cent of all transactions, ahead of California at 16, Texas at 10 and Arizona at 6 per cent.

More than 7 per cent of all Florida homes were sold to foreigners, the study found, and 65 per cent of realtors said that they had brokered at least one foreign deal.

Online property auction site FastHomeAuction.com in December reported a record number of foreign visitors, citing the weakness of the US dollar as a key contributor.

Jan de Vetten, a Dutch toy trader who has built a side business helping friends and business associates buy Florida homes, said that in some cases they are getting properties at half price.

‘They negotiate typically 25 to 30 per cent off the asking price and the euro is almost a dollar and a half now, so they probably have another 10 to 15 per cent in value,’ he said.

Foreign buying was also reported brisk in Arizona, New York and elsewhere.

In New York, Manhattan’s average sales price soared to a record US$1.4 million in the fourth quarter last year as foreigners pushed up demand.

In Phoenix, cash-toting Canadians are snapping up second properties, mostly high end homes on golf courses as refuges from the harsh winter, agents said. Many hail from Calgary, Canada’s oil boomtown.

‘There’s definitely some Canadian money in town,’ said Julie Goodman, a Remax agent who said that she had sold six properties and had another four families coming this month for visits. ‘They pay cash and know that cash talks.’

After the US market peaked in late 2005 and the sub-prime mortgage crisis set in, sales and prices began tumbling across Florida. The worst was felt in west coast cities like Punta Gorda, where condo sales fell 50 per cent, and Fort Myers, where the median price of an apartment fell 21 per cent in 2007.

While Miami sales fell – 39 per cent for existing single-family homes and 41 per cent for condos – median prices remained resilient before finally weakening in December 2007.

For the year, the median Miami condo price rose 6 per cent. But analysts expected a drop in coming months as thousands of new condo units come onto the market.

The weakness in the greenback, agents said, is attracting buyers to Miami from continental Europe, Scandinavia and Canada in addition to the traditional influx of cash from volatile South American countries, particularly Venezuela.

A strong pound has Britons looking outside their traditional stomping ground in Orlando, Florida, said Vani Ungapen, director of research at the Florida Association of Realtors.

‘Most of them are buying high-end homes,’ she said. ‘They are looking for a big house with a swimming pool, and you can’t buy that in London.’

Brokers said that Miami Beach’s famous South Beach district is luring Italians, French and Germans; Russians are flocking to Sunny Isles Beach to the north; Venezuelans who may be fearing socialist President Hugo Chavez are buying in Doral, to the west.

Miami broker Brigitte Benichay said that middle- class French entrepreneurs are eager to join a 30,000-strong French community in Miami and open businesses here.

‘Because of the strength of the euro, they are paying cash,’ she said. ‘Eighty per cent of the ones I meet want to pay all cash. Business is very strong.’

The Beacon Council, Miami’s business development agency, said that foreign businesses are increasingly setting up shop in the city.

The number of multinational projects it is working on has virtually doubled in five years, and those companies are bringing employees interested in buying property.

‘The economic market here is diversified. We’re not any longer dependent on one industry, like tourism, or on one region, like Latin America,’ president Frank Nero said.

Despite explosive price increases in recent years, Mr Nero said, prices can look cheap to someone from Paris or Madrid. 

‘Because of the strength of the euro, they are paying cash. Eighty per cent of the ones I meet want to pay all cash. Business is very strong.’ – Miami broker Brigitte Benichay on French buyers

 

Source: Business Times 21 Feb 08

US homes market weakens while consumer prices rise

WASHINGTON – PERMITS to break new ground on US homes last month dipped 3 per cent to the lowest rate in more than 16 years while housing starts rose 0.8 per cent, showing signs of more struggles ahead for the homes market.

Consumer prices in the United States also rose for a second straight month in January.

Permits slipped to a 1.048 million annual rate, the weakest showing since 984,000 in November 1991. Analysts were expecting this key indicator of builder confidence in future housing activity to drop to 1.04 million.

Housing starts rose to a 1.012 million annual rate, but it was only a slight rebound from the revised 1.004 million pace in December, which was the lowest pace for starts since May 1991.

‘Housing continues to be an area that will act as a drag on the economy going forward, so no surprises there,’ said Mr Kevin Flanagan, fixed income strategist for Global Wealth Management at Morgan Stanley.

Rising food costs helped push US consumer prices up for a second straight month in January, by 0.4 per cent – more than offsetting a moderation in energy price rises as inflation showed signs of gaining steam, according to a Labour Department report yesterday.

The consumer price index, (CPI) the most broadly used gauge of inflation, has climbed 4.3 per cent since January last year.

More significantly, so-called core prices, which exclude food and energy items, rose 0.3 per cent last month, the strongest monthly rise since June 2006, after gaining 0.2 per cent in December.

Analysts said the rising prices at the same time that economic growth was slowing makes it more difficult for the US central bank to keep cutting interest rates. ‘This is going to raise the flag on the inflation front, but it’s not going to take away any of the front-end action from the Fed to support growth,’ said Ms Lindsey Piegza, a market analyst with FTN Financial.

The US dollar’s value rose against other major currencies as investors bet the stronger-than-forecast CPI number meant the Federal Reserve was less likely to cut interest rates aggressively. Prices for US Treasury debt securities and stock index futures also weakened.

The Labour Department said energy prices rose 0.7 per cent last month. But food costs jumped 0.7 per cent in January after rising a scant 0.1 per cent in December.

Source: REUTERS (The Straits Times 21 Feb 08)

Day of reckoning for banks hit by US mortgage crisis

WASHINGTON – IT IS D-Day for the world’s big banks as they finalise last year’s results and try to account for the full scale of the credit upheaval spawned by the United States sub-prime crisis that threatens to stall the global economy.

Over the next two weeks, most major US banks will file annual reports with the US Securities and Exchange Commission (SEC).

Several of Europe’s biggest financial firms will also release 2007 earnings statements.

For some, it will be the first audited reckoning of how badly they were burned by the market turmoil that began with defaulting US sub-prime mortgage loans.

Those reports should go a long way towards clarifying banks’ financial positions as at the end of last year.

Figuring out how far the credit crisis will spread is much harder and may determine whether the world economy is heading for a recession.

Banks buried in bad debts have less leeway to lend to consumers and companies that drive the economy.

They have also grown wary of lending to each other because of uncertainty about which firms face heavy losses.

To date, major banks have disclosed more than US$140 billion (S$198 billion) in losses tied to mortgages, complex debts and other bad credits.

German Finance Minister Peer Steinbrueck said total write-offs could reach US$400 billion, suggesting that the barrage of bad banking sector news was likely to continue.

Mr Torsten Slok, an economist at Deutsche Bank, said bank write-downs of US$400 billion would no doubt be painful, but the impact on lending – and, therefore, the economy – would depend on how widely the losses were spread.

‘How much is $400 billion? If it is spread throughout the financial system, it’s peanuts. If it’s concentrated among only a few banks, it’s serious,’ he said.

The deadline for most publicly traded US banks to file annual reports with the SEC is Feb 29.

Although many, like Merrill Lynch and Citigroup, already revealed heavy losses when they issued fourthquarter results in recent weeks, these final year-end reports face closer scrutiny from accountants and could contain some new shocks.

European banks slated to report earnings this week include Barclays, BNP Paribas and Societe Generale.

Last week, Swiss bank UBS reported a net fourth-quarter loss of US$11.3 billion.

It also revealed that it had tens of billions of dollars in exposure to US mortgage loans, leveraged finance and other potentially risky categories.

Mr Kenneth Rogoff, an economics professor at Harvard University and former chief economist of the International Monetary Fund, said sub-prime-related write-offs were just the beginning.

With losses from commercial real estate defaults, unpaid credit card bills, auto loans, corporate debt and other items added in, the grand total may top US$1 trillion, he said.

‘We haven’t, by any means, seen everything,’ Mr Rogoff said. ‘If it were just the sub-prime debt, it wouldn’t be so bad. We’re just entering the US recession, so the defaults are just beginning.’

Source: REUTERS (The Straits Times 19 Feb 08)

Global commercial property sales top US$1t mark

(LOS ANGELES) Global commercial real estate sales rose to US$1.04 trillion for the first time last year, driven by Blackstone Group LP’s purchase of Equity Office Properties Trust and land transactions in Asia.

One third of the total was office space, with nearly 1.2 billion square feet of offices worth US$434 billion changing hands, New York-based real estate research firm Real Capital Analytics said in a report on Tuesday.

In 2006, there were about US$700 billion of total global transactions.

Billionaire Sam Zell’s sale of Equity Office for US$39 billion including debt a year ago was the biggest leveraged buyout up to that time.

That deal and Blackstone’s subsequent sale of buildings from the Equity Office portfolio added US$66 billion to last year’s global transactions, Real Capital said in its report.

‘In the US, transaction activity was a record year, but it was all privatisation and massive portfolios,’ Robert White, president and founder of Real Capital, said in an interview.

‘In Asia, development land is where all the dollars are flowing to.’

Office space represented 32 per cent of total sales last year, Real Capital said. The total square footage that sold is equivalent to all of the office space in London, Tokyo and New York combined, the research firm said. With more than US$209 billion in transactions, the US accounted for half of global office sales.

Real Capital identified 114 cities worldwide that each had more than US$1 billion of commercial property sales.

Forty-eight of those cities were in North America, 35 were in Europe and 21 were in Asia. Real Capital limits the size of transactions it tracks to US$10 million or greater, meaning the total size of the global commercial real estate market last year may have been closer to US$1.5 trillion, the company said.

Almost half of all land acquired by developers around the world last year was in China. Land transactions totalled US$50.7 billion in China, more than double the US$25 billion in the US, the next most active country.

Land purchases in China and other parts of Asia were driven by a lack of available buildings in many growing regions, Mr White said. ‘There are really very limited institutional-quality, income-producing assets that are sold in the open market or even exist,’ he said. Commercial property sales slowed in the US and Europe in the fourth quarter of last year as the collapse of the sub-prime mortgage industry spread from the residential market to commercial lending, making it harder for real estate investors to find financing.

Growth in Asia will help make up for this year’s expected drop in transactions in the US and Europe, Mr White said.

‘The US was a little bit more than half of global volume in 2007,’ he said.

‘In 2008, it will most likely be well under half. Emerging markets will continue to grow.’

Worldwide property transactions this year likely will ‘be comparable’ to 2007, Mr White said. ‘It might even be off a little bit.’

Real Capital collects transactional information for property sales and financings and generates reports on capitalisation rates, market trends, pricing and sales volume.

The company compiled the Global Capital Trends report using its database of transactions. The sources of its information vary by country.

Its data partners include Property Data in the UK, Thomas Daily in Germany and HBS-Research in France.

 

Source: Bloomberg (Business Times 14 Feb 08)

CBRE Q4 earnings slide 2.1% on interest expenses

It also cites softer investment sales environment

(NEW YORK) CB Richard Ellis Group Inc, the world’s largest commercial real-estate broker by market value, said fourth-quarter profit fell 2.1 per cent on higher interest expenses.

Net income declined to US$122.4 million from US$125.1 million a year earlier, the Los Angeles-based company said on Tuesday in a statement distributed by Business Wire. Per share net income rose to 54 cents from 53 cents because of a stock buyback. Revenue increased 30 per cent to US$1.84 billion.

‘Our performance was especially strong over the first nine months of 2007 but moderated later in the year,’ Brett White, chief executive officer of CB Richard Ellis, said in the statement. ‘Fourth-quarter results were impacted by the softer investment sales environment brought about by the continuing difficulties in the credit markets.’ The broker paid US$118 million more last year in interest associated with financing its December 2006 acquisition of rival Trammell Crow Co. CB Richard Ellis earns nearly a third of its revenue from commissions on leasing commercial space and another 23 per cent from property management. US office building sales plunged as much as 50 per cent in the quarter on rising borrowing costs, according to New York- based Real Capital Analytics Inc.

CB Richard Ellis’ net income was projected to be 75 cents a share, according to a Bloomberg survey of two analysts. By that measure, the company missed estimates.

The broker reported net income, excluding items, of 63 cents a share, 10 cents less than the average estimate of eight analysts in a Bloomberg survey. That measure doesn’t conform with generally accepted accounting principles.

In the Americas, including the US, Canada and Latin America, CB Richard Ellis reported a 33 per cent increase in revenue to US$1.05 billion. European revenue rose 21 per cent to US$437.6 million and revenue from the Asia-Pacific region climbed 69 per cent to US$198.4 million, the broker said.

The company reported earnings after the close of US stock markets. CB Richard Ellis shares fell US$1.35, or 7.1 per cent, to US$17.75 at 4 pm in New York Stock Exchange composite trading. The stock is down 54 per cent in the past 12 months.

Jones Lang LaSalle Inc, the second-largest commercial real estate broker, last week report a 31 per cent profit gain on rising fees from investment and property management and on European property sales.

Jones Lang’s stock has fared better in the past year than CB Richard Ellis, which earns 65 per cent of its revenue from the Americas, a region where defaults on sub-prime mortgages have raised borrowing costs and made it harder for real estate investors to find lenders. Jones Lang gets about 31 per cent of its sales from clients in the Americas.

CB Richard Ellis has more than 24,000 employees in 300 offices worldwide. The company markets, sells and leases commercial real estate, manages property, appraises sites and manages real estate investments.

 

Source: Bloomberg (Business Times 7 Feb 08)

US banks raise standards on commercial property loans: Fed

(NEW YORK) The Federal Reserve said it became tougher for US companies and consumers to get loans in the past three months, particularly to buy real estate.

Most lenders anticipate more delinquencies and losses this year, assuming ‘economic activity progresses in line with consensus forecasts’, according to the central bank’s quarterly survey of senior loan officers released today in Washington.

The survey, conducted last month through Jan 17, was available to Fed policy makers last week and may help explain the central bank’s fastest easing of monetary policy since 1990. Chairman Ben S Bernanke and his colleagues lowered their benchmark rate by 1.25 percentage points last month, aiming to revive lending and spending, averting a recession.

About 80 per cent of banks raised standards on commercial property loans, a record, while a majority tightened terms on prime home mortgages.

Mr Bernanke warned in a Jan 10 speech that there was ‘considerable evidence that banks have become more restrictive in their lending to firms and households’.

‘Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,’ the Federal Open Market Committee said in its Jan 30 statement.

The survey covered 56 domestic banks and 23 foreign institutions. The 56 banks together have $5.95 trillion in assets, representing about 54 per cent of the country’s US$11.1 trillion total for all domestically chartered, federally insured commercial banks.

Investors anticipate the Fed will lower its benchmark rate by a further half-point by the March 18 meeting, according to futures contracts quoted on the Chicago Board of Trade. The central bank has lowered the federal funds rate to 3 per cent from 5.25 per cent since September.

About one-third of US banks said they increased their standards on commercial and industrial loans, while two-fifths said they widened spreads of interest rates over their cost of funds. Both responses represented an increase from the October.

In commercial real estate, the proportion of banks tightening terms was the highest since the Fed began seeking information on the subject in 1990. About 45 per cent, on net, of both US and foreign institutions said demand for such loans weakened in the past three months.

Many banks became stricter because of a ‘less favourable economic outlook’, and a ‘large fraction’ of US banks reported a ‘reduced tolerance for risk’, the Fed said. Examples of credit standards in commercial real estate include the maximum loan size and maturity and loan-to-value ratios, the Fed said. ‘The tightening there looks pretty significant,’ said Michael Feroli, an economist at JPMorgan Chase & Co in New York.

‘That sector is going to be challenged quite a bit this year.’

For home loans, about 55 per cent of US banks toughened terms for prime mortgages, up from 40 per cent in October, while 85 per cent of respondents made it tougher to get non-traditional loans, up from 60 per cent, the survey said. A majority of US respondents said demand worsened for prime, non-traditional and sub-prime mortgages.

 

Source: Bloomberg (Business Times 6 Feb 08)

US DATA: Dec home sales fall, cap biggest yearly slump

Purchases fall 2.2% to an annual rate of 4.89m; 1st fall in prices in 40 years

(WASHINGTON) Sales of existing homes in the US fell more than forecast in December, capping the biggest yearly slump in more than a generation.

Purchases fell 2.2 per cent to an annual rate of 4.89 million, the National Association of Realtors said yesterday.

For all of last year, sales of single-family homes declined 13 per cent, the most since 1982, and prices dropped for the first time in at least four decades.

Falling property values and tougher borrowing rules may lead to more foreclosures and depress housing for most of this year. The worsening real estate recession is at the core of the economic slowdown and will probably prompt the Federal Reserve to lower interest rates next week and in future meetings, economists said.

‘We are not at the bottom in the housing market,’ said Nigel Gault, director of US research at Global Insight Inc, a Lexington, Massachusetts, forecasting firm. ‘The Fed is trying to battle against the fundamentals which say housing is not going to recover until we have a substantial decline in prices.’

Economists forecast that sales would fall to a 4.95 million annual rate from November’s previously reported five million pace, according to the median estimate of 71 economists in a Bloomberg News survey. Projections ranged from 4.75 million to 5.15 million.

The median sales price fell 6 per cent to US$208,400 from December 2006 and was down 1.4 per cent for all of 2007 from the previous year.

The median price of a single-family home dropped 1.8 per cent in 2007, the first decline since records began four decades ago and probably the first since the Great Depression in the 1930s, the realtors group said.

‘I do expect sales to remain soft through the first quarter and possibly the second quarter,’ said Lawrence Yun, the real estate agents group’s chief economist.

The number of homes for sale at the end of December fell 7.4 per cent to 3.91 million. At the current sales pace, that represented 9.6 months’ supply, compared with 10.1 months in November. The realtors group has said that a five to six months’ supply is needed to stabilise the market.

‘With inventories at such high levels, it’s quite clear that the housing market is going to be in a decline for a long period of time,’ Zach Pandl, an economist at Lehman Brothers Holdings Inc in New York, said before the report.

Elevated inventories leave builders with little incentive to break ground on new projects and push down prices on new and existing homes.

The Commerce Department is scheduled to report new home sales next week. Purchases of new houses, which account about 15 per cent of the market, fell to a 12-year low in November.

Builders broke ground in December on the fewest houses since 1991, making last year’s decline in homebuilding the worst in almost three decades, the department said on Jan 17.

New home sales are considered a leading indicator of the market because they are tabulated when a contract is signed. Sales of existing homes reflect contract closings, which typically come a month or two later.

Resales fell in all four regions let by a 4.6 per cent decline in the north-east.

Sales of single-family homes decreased 2 per cent to a 4.31 million pace, according to yesterday’s report. Sales of condos and co-ops dropped 3.3 per cent to a 580,000 rate.

 

Source: Bloomberg (Business Times 25 Jan 08)

US home owner sues agent amid property woes

Case could be first of many as finger-pointing escalates; any player in the crisis may be sued

CARLSBAD (CALIFORNIA) – MS MARTY Ummel feels she paid too much for her house. So do millions of other Americans who bought their homes at the peak of the housing boom.

What makes Ms Ummel different is that she is suing her agent. In the midst of the United States housing and global credit crisis, the players are all pointing fingers at each other.

Home owners are suing mortgage lenders. Mortgage lenders are suing Wall Street banks. Wall Street banks are suing loan specialists. And investors are suing everyone.

Ms Ummel claims that the agent hid the information that similar homes in the neighbourhood were selling for less because he feared she would back out and he would lose his US$30,000 (S$43,000) commission.

Real estate lawyers and brokers say the case, which went to trial on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from their housing agents.

‘When your house appreciates US$100,000 in the first six months, you’re not quite as concerned that maybe the valuation was US$25,000 or US$50,000 off,’ said Mr Clifford Horner of the law firm Horner & Singer. ‘But when the value of your house goes down, you ask: ‘Who might have led me astray here?’ ‘

The agent in Ms Ummel’s case is Mr Mike Little who said the suit was motivated mainly by the declining market. ‘When people see their home values and assets declining, they always feel there’s someone to blame,’ he said.

Looking at the bigger picture, analysts said today’s legal and regulatory wrangles could dwarf the ones that followed the technology- stock bust. Worse still, the size and complexity of the modern mortgage market will make untangling the latest mess even trickier. Some cases stretch across continents. Others are likely to involve state and federal regulators.

Two questions lie at the heart of many of the cases. The first is whether lenders and investment banks alerted borrowers and investors to the risks posed by sub-prime loans or securities backed by them. The second is how much they were legally obliged to disclose.

 

Source: ASSOCIATED PRESS, NEW YORK TIMES (The Straits Times 23 Jan 08)

Next wave of US housing woes could come from the rich

At risk are owners who bought too many homes or borrowed too much against them

HINSDALE (ILLINOIS) – A HOUSE in the wealthy Chicago suburb of Hinsdale, Illinois, is far beyond the reach of most Americans.

Unfortunately, Hinsdale may also now be too expensive even for some of the people who already live there.

‘There is a section of the population here that overextended themselves to buy here and then keep up the facade of wealth,’ said Ms Sharon Sodikoff of local real estate agency Prudential Homelife Realty.

‘In the next year or so, they will be forced out in dribs and drabs.’

With prices of the average home at around US$1.15 million (S$1.64 million), Hinsdale seems a world away from the sub-prime housing crisis, involving modest homes bought by people with spotty credit histories, that may tip the US economy into recession.

Even here, however, far from the crisis’ epicentre, high-earners with good credit may be heading for trouble as their adjustable rate mortgages adjust beyond their means, local real estate agents and others say.

In a normal housing market, they would be able to sell their property, but now they are stuck.

‘The next wave of problems will come from prime borrowers who have bought too many houses or borrowed too much against them,’ noted Mr Michael van Zalingen, the director of home ownership services at the Neighbourhood Housing Services of Chicago. A ‘prime’ borrower is one with a good credit rating.

Real estate agents point out that some high-income borrowers have already been forced to sell or leave their homes and more will follow, especially those who used their homes as automated teller machines, withdrawing cash via home equity loans.

‘For those who utilised home equity loans for five to 10 years to finance their lifestyle, the chickens are coming home to roost,’ said real estate agent Marki Lemons.

There are also signs some lenders are warily eyeing ‘prime’ borrowers.

Mr Tom Kelly, a spokesman for Chase Home Lending, a unit of JPMorgan Chase, said the company raised its reserves for possible home-equity loan loss for subprime and prime borrowers by US$635 million in the second and third quarters of last year.

‘The concern is people who have borrowed a large percentage of the equity in their homes,’ Mr Kelly said.

‘Now, the value of their homes is falling and they cannot refinance. Some just stop paying and walk away.’

Getting into property during the boom years was easy, with mortgages freely available for no money down.

Then came the sub-prime crisis and the credit crunch, slowing the market, and pushing prices down and unsold homes up.

In Hinsdale, for instance, the supply of homes on the market rose to more than 17 months in early October from less than six months in January 2006.

While it is apparently a buyers’ market, Mr Lawrence Yun, the chief economist at the National Association of Realtors, says high-end borrowers are put off by the high interest rates now applied to so-called jumbo mortgages, those for US$417,000 or more.

‘Potential buyers say, ‘No way am I buying at that price’,’ Mr Yun said. ‘If some borrowers can’t get into the market, there are others who can’t sell to get out.’

Real estate agents say speculative investors who bought to make a profit are also walking away, as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust.

Unlike sub-prime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender rather than end up in foreclosure.

Alternatively, they can opt for a short sale.

Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated but is not stuck with a foreclosed property.

‘You won’t see many foreclosed homes here because that would involve public embarrassment,’ Prudential Homelife Realty’s Ms Sodikoff said.

‘But they will call their realtor and get them to quietly broker a deal to get out of their homes.’

 

Source: REUTERS (The Straits Times 18 Jan 08)

Merrill in hunt for more capital as losses set to hit US$15b

It’s wooing investors in US, Asia, Mid-East to shore up finances

(NEW YORK) Merrill Lynch is expected to suffer US$15 billion in losses stemming from soured mortgage investments, almost double its original estimate, prompting the firm to raise additional capital from an outside investor.

The largest US brokerage firm is expected to disclose the huge writedown when it reports earnings next week, according to people who have been briefed on its plans. The loss far exceeds the US$12 billion hit that many Wall Street analysts had forecast.

To shore up its deteriorating finances, Merrill is now in discussions with investors in the United States, Asia and the Middle East, including American private equity firms, to raise about US$4 billion in the coming days, these people said.

The developments underscore the rising toll that the mortgage crisis is taking on many once-proud Wall Street banks. In recent months, Merrill and several other firms have grabbed financial lifelines from wealthy foreign governments. Further investments by so-called sovereign wealth funds could prompt scrutiny by Congress.

The latest moves at Merrill come as John A Thain, who became the company’s chairman and chief executive in December, struggles to bolster the firm’s capital, burnish its reputation and avoid the toxic internal battles that have hurt the firm in the past.

Mr Thain, who won plaudits as head of the New York Stock Exchange, has wasted little time. After he took over in December, Merrill promptly sold a US$5.6 billion stake to Singapore’s Temasek Holdings, and Davis Selected Advisers, a money management firm based in Tucson, Arizona.

During a meeting in December in London, Mr Thain told anxious employees that Merrill expected further losses after an US$8.4 billion writedown in the third quarter. He also said that the firm would require additional capital.

He said that the fourth quarter would be a ‘very bad quarter’, those attending recalled.

Mr Thain has made clear that Merrill would not sell its 49 per cent stake in BlackRock, the global money management firm. But he has said that the firm is considering selling non-core assets like its stake in Bloomberg, the financial news and information company.

In a research report, Brad Hintz, a securities analyst at Sanford C Bernstein & Co, said that that stake was worth about US$4 billion.

Mr Thain also said at the London meeting that Merrill’s management style needed to change. Recalling his days as a co-president of Goldman Sachs, Mr Thain said that he wanted employees to build consensus.

Among other things, that means Merrill will now pay fewer bonuses based on individual performance and instead focus on the performance of a team. Many employees received bonuses this week that included a greater portion of stock than in the past.

Merrill is hardly alone in seeking capital from overseas. US financial institutions have raised more than US$29 billion from foreign governments and their related investment entities, according to market research firm Dealogic.

 

Source: NYT (Business Times 12 Jan 08)

LATEST US DATA: Existing home sales down 2.6% in Nov

Stringent lending practices, prospects that prices will keep falling deter buyers

(ATLANTA) The number of Americans signing contracts to buy previously owned homes fell more than forecast in November, signalling further deterioration in housing.

The National Association of Realtors’ index of pending home sales decreased 2.6 per cent to 87.6, following a revised 3.7 per cent gain in October that was larger than previously estimated, the group said yesterday in Washington.

More stringent lending practices after the collapse in sub-prime lending and prospects that home prices will keep falling are deterring buyers, economists said. The housing slump is likely to last well into 2008, hurting economic growth and prompting Federal Reserve policy-makers to lower interest rates.

‘We’re not at the bottom of the housing downturn yet,’ Nigel Gault, chief US economist at Global Insight Inc in Lexington, Massachusetts, said before the report. ‘Prices are probably going to go down for a while. Until people see things stabilising, they’re going to wait.’

Economists forecast the index of signed contracts for existing homes would fall 0.7 per cent following a previously reported 0.6 per cent October increase, according to the median of 33 projections in a Bloomberg News survey.

Estimates ranged from a drop of 3 per cent to a 0.3 per cent increase.

Compared with a year earlier, the index was down 19 per cent.

Yesterday’s report showed pending resales fell in three of four regions. Purchases decreased 13 per cent in the Northeast, 4.1 per cent in the Midwest and 2.1 per cent in the West. Sales rose 2.3 per cent in the South.

The bigger gain in October than previously estimated suggested the market may be stabilising, according to Lawrence Yun, the group’s chief economist.

‘Although there could be some minor slippage in the first quarter, existing home sales should hold in a narrow range before trending up,’ Mr Yun said in a statement. ‘The exact timing and the strength of a home-sales recovery is a bit uncertain.’

There was a 10.3 months’ supply of previously owned homes on the market in November at the current sales pace, compared with an average 6.5 months in 2006 and 4.5 months a year earlier.

That excess is one reason property values are dropping. Home prices in 20 US metropolitan areas fell in October by the most in at least six years, based on the S&P/Case-Shiller home-price index. The decrease, reported last month, was the biggest since the group started keeping year-on-year records in 2001.

Record foreclosures are adding to the supply of unsold homes and will weigh further on prices this year, economists said.

Tougher lending rules are adding to market woes. A third of planned home sales were cancelled or delayed in September, October and November because of loan problems, according to the results of a survey of 2,416 realestate agents issued on Monday.

The Realtors association estimates 5.7 million homes will be sold in 2008, little changed from an estimated 5.65 million last year. Purchases of new homes will fall to 669,000 from 773,000.

 

Source: Bloomberg (Business Times 9 Jan 08)

US state probes broker’s role in sub-prime losses

BOSTON – MASSACHUSETTS said last Friday that it launched an investigation to determine Merrill Lynch’s role in investments linked to sub-prime mortgages made by the city of Springfield that have fallen in value.

Merrill was subpoenaed by Massachusetts regulators after the value of collateralised debt obligations (CDOs) the United States brokerage firm sold to Springfield plunged 91 per cent because of losses tied to sub-prime mortgages.

Secretary of State William Galvin issued the request for information to New York-based Merrill.

Mr Galvin, the state’s top securities regulator, said last Friday he wanted the names and details of the CDOs by 3pm on Jan 10 (4am Singapore time on Jan 11).

Merrill said it will cooperate with the investigation.

US state and local governments, including Florida and Orange County, California, are vulnerable to losses as complex investments once sold as less risky high-yielding instruments are now backed by collateral that no one wants.

The investment is valued at US$1.2 million (S$1.7 million), down from US$14 million a year earlier, according to Mr Galvin.

 

Source: BLOOMBERG NEWS, REUTERS (The Straits Times 7 Jan 08)

Seattle on edge as housing gloom looms

Economists expect city to be caught in national slump

(SEATTLE) It’s the kind of house that a year or two ago would have been snapped up in days: a refurbished rambler in a woodsy residential neighbourhood minutes from downtown. The asking price: US$559,000.

But after seven weeks, Kristen and Al Dittmaier have not received a single offer on their Wedgwood home.

‘I really believed there would be no problem selling,’ Kristen Dittmaier said. ‘But the whole feel of the market has changed. We might have to drop the price.’ The Dittmaiers, along with local real-estate agents and economists, wonder whether sluggish sales are part of the usual winter slump or a sign that Seattle – a perennial most-livablecity contender – is joining the rest of the country in declining home sales.

The question has put many locals on edge.

‘Right now there’s not that urgency among buyers to pull the trigger,’ said Renee Menti Ruhl of Windermere Real Estate. Ms Ruhl, agent for the Dittmaiers, said that the true test will come in the next few months.

If sales are sluggish during the traditionally hot-selling months of February through April, she said, then people will have a better idea whether Seattle has joined the national trend.

Of 20 major US metropolitan areas, all but three – Seattle; Portland, Oregon, and Charlotte, North Carolina – experienced a decline in real-estate values in October compared with last October, according to the Standard & Poor’s/Case- Shiller composite price index, released last week.

Home prices have fallen most in the Midwest, Southwest, Florida and California. In Los Angeles, prices fell 8.8 per cent; in New York, 4.1 per cent.

Seattle prices increased 3.3 per cent, but that was the smallest year-to-year rise for the city in more than a decade.

The annual appreciation in Seattle has been slowing for more than a year and a half.

Some economists say it’s only a matter of time before Seattle joins the national slump. Although the city experienced a year-to-year increase, October prices fell 0.9 per cent from September, the third consecutive monthly decline.

Democratic governor Chris Gregoire told residents not to be affected by the gloom. Bad news elsewhere, she said, doesn’t have to translate into bad news here.

Seattle, Portland and Charlotte have bucked the trend partly because each has a relatively healthy local economy and all three continue to draw newcomers, which keeps demand steady.

Seattle has three ingredients that work together to keep home prices high, according to Seattle-area real-estate blogger Larry Cragun: ‘lakes, mountains and liberals.’ The lakes and mountains don’t need explaining. The liberals, Mr Cragun said, have created such an anti-development atmosphere that available land for building homes is extremely limited.

As for the Dittmaiers, they continue to hold their front door open to prospective buyers.

 

Source: LAT-WP (Business Times 3 Jan 08)

Lust for big homes in US recalls dotcom bubble

DOWN the block from my home, workmen are finishing a new house. It replaces a small bungalow that had measured about 1,500 square feet. The new home has a covered front porch, two fireplaces and a finished basement. It comes in at just under 5,700 sq ft. What is it with Americans and their homes?

Everyone knows the direct causes of the present housing collapse: low interest rates; lax mortgage lending; rampant speculation. But the larger force lies in Americans’ devotion to homeownership. It explains why government officials, politicians and journalists (including this one) overlooked abuses in ’sub-prime’ lending.

The homeownership rate was approaching 70 per cent in 2005, up from 64 per cent in 1990. Great. A good cause shielded bad practices. The same complacency lulled ordinary Americans into paying everrising home prices. Something so embedded in the national psyche must be okay.

‘House lust’ is what Dan McGinn calls it in his book by the same title. Mr McGinn documents – sympathetically, for he dotes on his own home – Americans’ housing excesses, starting with supersizing.

In Sweden, Britain and Italy, new homes average under 1,000 sq ft. By 2005, the average newly built US home measured 2,434 sq ft, and there were many double, triple or quadruple that.

After World War II, the first mass Levittown suburbs offered 750 sq ft homes. ‘We’re not selling shelter,’ says the president of Toll Brothers, a builder of upscale homes. ‘We’re selling extreme-ego, look-at-me types of homes.’

In 2000, Toll Brothers’ most popular home was 3,200 sq ft; by 2005, it had grown 50 per cent to 4,800 sq ft. These ‘McMansions’ often feature marble floors, sweeping staircases, vaulted ceilings, family rooms, studies, home entertainment centres, and more bedrooms than people.

In a nation of abundant land – unlike Europe and Japan – America’s housing obsession is understandable and desirable up to a point. People who own homes take better care of them. They stabilise neighbourhoods. In a world where so much seems uncontrollable, a house seems a refuge of influence and individuality.

In a 2004 survey, 74 per cent of would-be home buyers preferred a new home to an existing house. One reason is that a new house often allows buyers to select the latest gadgets and shape the design. The same impulse has driven the remodelling boom, which totalled US$180 billion in 2006.

Homes are a common currency of status. As Mr McGinn notes, many jobs in an advanced economy are highly technical and specialised. By contrast, a home announces that, whatever the obscurities of your work, you’ve succeeded. There’s a frantic competition to match or exceed friends, co-workers and (yes) parents.

Some house lust is fairly harmless. Several websites (www.zillow.com, www.realtor.com) provide estimated prices for homes. People can indulge their nosiness about their neighbours’, friends’, co-workers’ or relatives’ finances. They can also fantasise about their next real estate adventure by watching a cable channel devoted to houses, home buying and renovation.

Other effects are less innocuous. Although house prices recently exploded, they have increased only slightly faster than inflation since the 1890s, concluded a study by Yale economist Robert Shiller. The recent sharp run-up may imply years of price declines or meagre increases. ‘Buying a bigger house isn’t an investment,’ warned Wall Street Journal columnist Jonathan Clements. It’s ‘a lifestyle choice – and it comes with a brutally large price tag’.

Not only are mortgage payments higher; so are costs for utilities, furniture and repairs.

Worse, the government subsidises these supersized homes along with suburban sprawl and, just incidentally, global warming. In 2008, the tax deduction for mortgage interest payments will cost the federal government US$89 billion. The savings go heavily to the upper-middle class and wealthy – the least needy people – and encourage ever-larger homes. Even with energy-saving appliances, those homes are likely to generate more greenhouse gases than their smaller predecessors. As individuals and a society, Americans have over-invested in housing; they’d be better off if more of the savings went into productive investments elsewhere.

Sociologically, the ‘housing bubble’ resembles the preceding ‘tech bubble’. When people paid astronomical prices for profitless dotcom stocks, they doubtlessly reassured themselves that they were investing in the very essence of America – the pioneering spirit, the ability to harness new technologies. Exorbitant home prices inspired a similar logic. How could anyone go wrong buying into the American Dream? It was easy.

 

Source: The Washington Post Writers Group (Busines Times 2 Jan 08)

NY hotel boom to ease room shortage

But mid-market room rates of US$200-300 still too high for some

(NEW YORK) While planning her vacation to New York, Lisa Werness was so horrified by the prices in Manhattan that she chose cheaper lodging in Brooklyn – where she got a room rate of just US$400 a night.

‘Don’t remind me. I’m trying to forget about it,’ she said.

In a city where residents often pay more than half their salaries for a place to sleep, visitors have long faced a shortage of hotel rooms and rising prices.

Now, with 8,500 hotel rooms under construction in the city – a growth of more than 10 per cent – that crunch could ease slightly in the coming months. By comparison, it took from 1998 to 2007 to make a leap of the same size.

‘One of the challenges that New York has always had is having enough rooms for tourists,’ said Sean Hennessey, CEO of industry consulting firm Lodging Investment Advisors. ‘Most of the time, the corporate travellers are willing to pay more than the tourists, and the tourists kind of get crowded out.’

New York sees more overseas and domestic visitors than any other US destination except Orlando, Florida, according to analysts at Global Insight Inc. But it has fewer hotel rooms than less popular spots including Las Vegas, Chicago, the Los Angeles metro area and Atlanta, according to Smith Travel Research.

The resulting shortage leads many travellers to New York to look far afield of the usual tourist draws, and hotel developers have taken notice, with new lodging under construction or recently opened in the boroughs of Brooklyn, Queens and the Bronx, suburban Long Island and beyond.

Even with the weak US dollar making his trip to New York a bargain, London resident Mike Jones still found the price tag on his Brooklyn hotel room shocking.

‘All the hotels in Manhattan are pretty much full at whatever rate they want to charge,’ he said. ‘They’re operating at pretty much capacity, and they can charge pretty much what they like.’ Even in Brooklyn, he had a bill for close to US$600 a night, he said, adding: ‘That’s crazy.’

The city’s occupancy rate is much higher than elsewhere around the US – averaging 85 per cent in Manhattan during the first nine months of this year, compared to the national average of 65 per cent, according to Smith Travel Research. Manhattan’s hotels are at or near capacity most nights of the year, said Mr Hennessey, adding that the current growth is the largest he has seen in the city in 25 years.

Even the current influx of new rooms is unlikely to glut the market and knock down prices, Mr Hennessey said, although he noted that an economic downturn could lead companies to cut back on business travel, which could lead to cheaper rates.

As at October, New York had 59 hotels under construction – more than any of the 26 other US cities with the largest number of hotel rooms, according to Smith Travel Research. It also had 103 hotels in the planning stage, beating out all those other markets.

Most of those new properties are expected to charge what Mr Hennessey called ‘mid-market’ prices, although midrange in New York, at US$200 to US$300 per night, may still seem far too expensive for some.

While properties already under construction are unlikely to be called off, the mortgage crunch has some in the industry wondering if future projects might be slowed by the rising price of financing.

Either way, it seems unlikely that a city with such high real estate prices will soon be offering truly cheap hotel rooms.

 

Source: AP (Business Times 18 Dec 07)

Greenspan favours govt bailout for home owners

ATLANTA – FORMER United States Federal Reserve chairman Alan Greenspan says he favours using US government money to bail out mortgage borrowers who risk losing their homes because they cannot make payments.

Mr Greenspan, speaking on ABC’s This Week programme aired last Sunday, said cash bailouts, while creating a larger budget deficit, had the advantage of helping home owners without distorting property prices or interest rates on mortgages.

‘Cash is available, and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this,’ he said.

‘It’s far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it’ll drag this process out indefinitely.’

Mr Greenspan’s suggested approach differs from that of US Treasury Secretary Henry Paulson, who negotiated a freeze on the interest rates of some sub-prime mortgages without pledging any government money to help home owners or banks.

Mr Allan Meltzer, a professor of political economy at Carnegie Mellon University, said Mr Greenspan’s proposal for a cash bailout might cost ‘hundreds of billions’ of dollars and would be counterproductive.

‘It is not a good idea for the government to bail out people who make mistakes,’ said Mr Meltzer, the author of a 2002 book on the early history of the Fed.

US President George W. Bush announced this month that Mr Paulson and other members of his administration had reached an agreement with the mortgage industry to help as many as 1.2 million home owners avoid foreclosure when their adjustable-rate mortgages jump to higher rates.

Working with Mr Paulson and the government’s housing regulators, lenders and the companies who manage home loans agreed to freeze some adjustable mortgages at current rates for five years. Others will be given help refinancing or qualifying for loans backed by the Federal Housing Authority.

 

Source: BLOOMBERG NEWS (The Straits Times 18 Dec 07)

US sub-prime bailouts help stocks but STI runs into headwinds

IT HAS been bailout week as far as stock markets were concerned but judging by the performance of the past two days, scepticism abounds.

First, it was Fed officials dropping blatant hints about cutting interest rates at their Dec 11 meeting, then came the Bush administration’s mortgage-freeze offer to ease the sub-prime pressure.

It looks like everyone is pulling out the stops to try and make sure there’s no 2008 recession which, if it does occur, would be disastrous given that it’s an election year.

Even though many experts believe lower interest rates and the Bush bailout package are only temporary band-aids for a gaping housing wound, the short-term response last week was a large bounce in the major indices led by those on Wall Street.

The outcome here was that the Straits Times Index managed to rise 36 points or one per cent over the five days to 3,557.95.

But looking at the aggregate performance over the week doesn’t tell the whole story – on Thursday, the index reversed a 55-point rise to finish a nett 7 points down, a pattern that was repeated yesterday when it first shot up by 60-odd points only to collapse to a nett gain of just 5.4 points.

SingTel and the banks were the main index drivers throughout the week, displaying heightened volatility as the days passed. For SingTel there were no fresh broking reports to justify the vast swings. However, for the banks, several ‘overweight’ calls were issued, including those from Kim Eng, DBS-Vickers, Credit Suisse and BNP Paribas.

Most of these were written after the latest loan figures were issued. Using varying valuation methodologies, analysts still believe the banks to be undervalued, though upside from current levels appears to be between 10 and 20 per cent.

In the second line there was continued play on oil palm/commodity stocks such as Golden Agri, Indoffod Agri, Wilmar and Olam, supposedly because of rising oil prices. Also in focus was the construction sector, mainly featuring Lian Beng and Koh Brothers, while penny stocks such as E-Nets, Jade Technologies and Armada enjoyed some respite from the pressure they sustained throughout November.

In its weekly roundup, AMP Capital Investors said it expects equities to move higher into the year-end, thanks to the prospects of more US interest rate cuts and positive seasonal forces. ‘December has been the strongest month of the year on average over the last 20 years so . . . January is also a strong month.’

However, the fund manager said the next six months will be volatile because of US-led uncertainty.

US investment bank Morgan Stanley said in a Dec 6 currency report that the odds of a US recession are now about one in two.

‘As we expected, and despite the Fed cut, credit market conditions have deteriorated considerably and equity market performance has taken a dive. Accordingly, our preferred model implies a risk of US recession of 48 per cent in the coming 12 months,’ said MS.

In a Dec 3 US Economics report, Morgan Stanley said it believes an earnings recession has already begun, judging by Q3 reported profits. It said the market has not priced this in yet and thus poses a downside risk.

‘Earnings disappointments likely will drag equities lower,’ it said.

 

Source: Business Times 8 Dec 07

Bush’s mortgage plan draws mixed reactions

No relief for those who can’t keep up teaser rate payments

(WASHINGTON) President Bush’s plan to slow the mortgage meltdown could help hundreds of thousands of people from losing their homes, but many others would get no relief – and the plan’s effect on the broader economy remains a topic of sharp debate.

Under the plan outlined on Thursday, lenders would be given broad latitude to fix troubled loans, notably those with low introductory teaser rates that will reset to higher payments between Jan 1, 2008, and July 31, 2010.

Such modifications would remain voluntary, however, triggering strong criticism from Democrats and consumer advocates.

The biggest winners could be struggling borrowers who nonetheless have kept current with their adjustable loans but cannot afford to refinance when their teaser rates expire. There are an estimated 600,000 of these borrowers, and they might be able to have their low rates frozen for five years.

But borrowers who took out teaser-rate loans to speculate in the housing market likely would be losers, because the plan excludes mortgages where the borrower doesn’t live in the home as a primary residence.

People whose loans already have reset to higher rates won’t necessarily get relief either, nor would an estimated 600,000 borrowers who can’t keep up with their payments even at the low introductory rates. Officials acknowledged that for those borrowers, foreclosure and a return to the rental market is probably inevitable.

By some estimates, nearly 2 million Americans are in danger of losing their homes over the next two years.

Economists say a wave of foreclosures that large could sink the economy into a recession, raising unemployment and spreading hardship to many more Americans.

Treasury Secretary Henry Paulson, who spent weeks spearheading negotiations among mortgage servicers, investors and groups representing borrowers, said troubles in the housing market are the ‘biggest risk to the economy’.

‘This is not a silver bullet,’ Mr Paulson said after meeting with Mr Bush. ‘We can’t put together an industry-wide initiative and suddenly make the excesses and the bad lending practices and so on of the last number of years go away.’

Yet economist Edward Leamer, director of the UCLA Anderson Forecast, said the Bush plan does exactly the opposite of what is needed to revive the housing market by artificially propping up housing values.

‘The market needs buyers,’ Mr Leamer said, and they need to be lured by lower prices and lower mortgage rates.

The design of the Bush plan ‘is deleterious to both of those ends’ by enabling people to stay in houses they can’t afford, while driving lenders to raise rates on new mortgages.

Consumer advocates, however, contend that many of the people facing foreclosure were misled by brokers, who earn higher fees on sub-prime loans designed for people with shaky credit – the kinds of loans that are most likely to go into default.

 

Source: LAT-WP (Business Times 8 Dec 07)

US house prices to slide 30% before crisis is over: Moody’s

(NEW YORK) Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 per cent before the housing crisis is over, a report from Moody’s Economy.com said yesterday.

On a national level, the housing market recession will continue through early 2009, said the report, coauthored by Mark Zandi, chief economist, and Celia Chen, director of housing economics.

The report paints a worsening picture of the hard-hit housing sector, which is in the midst of its worst downturn since World War II.

While activity will stabilise in 2009, it will not be until 2010 before a measurable improvement in sales, construction and pricing will emerge, the report said.

House prices are forecast to fall 13 per cent from their peak through early 2009. After accounting for incentives home sellers are offering buyers, effective declines peak-to-trough will total well over 15 per cent, the report said.

Punta Gorda, Florida, and Stockton, California, are the hardest hit markets in the US, with price declines from peak-to-trough forecast at 35.3 per cent and 31.6 per cent, respectively.

These markets have been hard hit due to several reasons, namely the exiting of investors from the areas, a fair amount of subprime mortgage loans causing an increase in foreclosures and overbuilding by home builders, Mr Zandi said.

Home sales, however, should hit a bottom in early 2008, which will mark a 40 per cent drop from peak-totrough.

‘The housing market’s most fundamental problem is it is awash in unsold inventory,’ the report said.

In addition, the housing downturn will take a large toll on the rest of the economy. During the height of the boom in 2004-05, housing contributed nearly a percentage point to annual real gross domestic product, or GDP, growth.

In the current downturn, housing will subtract more than one percentage point from US economic growth this year, and a percentage point and a half in 2008, with the effect on growth seen most pronounced next spring and early summer. ‘The intensifying housing recession is expected to weigh on the broader economy, but not break it,’ the report said.

The Moody’s Economy.com’s report, titled ‘Aftershock: Housing in the Wake of the Mortgage Meltdown,’ said that when house prices hit their nadir, some 80 of the nation’s 381 metropolitan areas will experience a double-digit peak-to-trough price decline.

Price declines, however, will vary in degree throughout the nation, with more than a 15 per cent peak-totrough expected around Washington and Detroit.

Significant declines are also expected throughout most of Arizona, California, Florida and Nevada.

During the housing market’s heyday, speculative activity was rampant in these areas, causing prices to surge much higher than other regions.

The Northeast corridor, and markets such as Boise, Idaho, along with Denver and Salt Lake City, will experience between 5 per cent and 15 per cent declines. In the rest of the industrial Midwest and parts of the Mountain and Pacific Northwest, prices will fall more modestly.

While some point to rising default rates in the subprime mortgage market, which caters to borrowers with poor credit histories, as the root cause of the problems plaguing the housing market, Moody’s Economy.com said an unwieldy supply of unsold homes is the prime factor.

 

Source: Reuters (Business Times 7 Dec 07)

US mortgage relief package could avert 1m foreclosures

(WASHINGTON) A mortgage relief package hammered out by the US administration and major lenders could help more than one million homeowners avert foreclosure in the next two years, a White House official said yesterday.

The official said the plan, to be formally announced later in the day, would involve refinancings or freezing of interest rates or payment levels for borrowers with sub-prime loans, made to borrowers with poor credit records.

‘No one wins when a house is foreclosed on,’ the official said on condition of anonymity. The plan, devised by US Treasury officials with major lenders and investors, would help struggling homeowners refinance adjustable-rate loans to avoid a higher payment or freeze the current interest rates ‘for some time,’ the official said.

‘This private sector agreement could help more than a million qualified homeowners with sub- prime loans to avoid foreclosure over the next couple of years,’ the official added. The plan was set to be announced amid growing concerns that the slump in housing and rising home loan defaults could tip the US economy into a downturn.

Various estimates indicate two million or more homeowners are at risk of default because of a hike in interest rates that would mean higher payments on adjustable-rate mortgages or other sub-prime loans that offered low initial rates.

Others warn that an effort to impose new terms on mortgages could send a chill through financial markets and possibly deepen the crisis.

The White House official said the plan was agreed upon by the Hope Now Alliance, a group that includes mortgage lenders and services as well as investors holding mortgage-backed securities. The plan apparently would not be binding but could be widely implemented because it has the support of major lenders and investors.

The official said the plan is aimed at ‘qualified homeowners’ who live in their homes but are unable to make the higher payments on their sub-prime loans once the interest rates reset, but can at least afford the existing payments.

The official said the plan includes ‘a set of industry-wide standards’ to provide relief to these borrowers.

Democratic New York Senator Hillary Clinton said earlier that the administration appears to be seeking an interest-rate freeze for ‘a very narrow group of borrowers.’ ‘That is unfortunate because this crisis demands a more comprehensive approach that is adequate for the scale of the problem,’ the Democratic presidential candidate said.

Mrs Clinton has proposed a 90-day moratorium on all foreclosures on sub-prime, owner-occupied homes, an interest-rate freeze on all sub-prime adjustable mortgages for at least five years, and reports from lenders on their success rate in modifying loans.

 

Source: AFP (Business Times 7 Dec 07)

US housing slump could last up till early 2009

NEW YORK – HOUSING markets from Punta Gorda in Florida to Stockton in California will crash and suffer price drops of more than 30 per cent before the housing crisis is over, a report from Moody’s Economy.com said yesterday.

The United States housing recession will continue up till early 2009, said the report, co-authored by Mr Mark Zandi, chief economist, and Ms Celia Chen, director of housing economics.

The report paints a worsening picture of the housing sector, which is in the midst of its worst downturn since World War II.

While activity will stabilise in 2009, it will not be until 2010 before a measurable improvement in sales, construction and pricing will emerge, the report said.

House prices are forecast to fall 13 per cent from their peak up till early 2009. After accounting for incentives home sellers are offering buyers, effective declines peak-to-trough will total well over 15 per cent, the report said.

Punta Gorda, Florida, and Stockton, California, are the hardest hit markets in the US, with price declines from peak-to-trough forecast at 35.3 per cent and 31.6 per cent, respectively. ‘This is the most severe housing recession since the post-World War II period,’ Mr Zandi told Reuters.

Home sales, however, should hit a bottom early next year, which would mark a 40 per cent drop from peak-totrough.

‘The housing market’s most fundamental problem is it is awash in unsold inventory,’ the report said.

In addition, the housing downturn will take a large toll on the rest of the economy.

During the height of the boom in 2004 and 2005, housing contributed nearly a percentage point to annual real gross domestic product growth.

 

Source: REUTERS (The Straits Times 7 Dec 07)

Biggest drop in US home prices in 25 years

Freddie Mac index falls by 1.3% on tighter lending and turbulent markets

NEW YORK – HOME prices in the United States dropped the most in a quarter-century over the three months to end-September on an annualised basis as inventories, restrictive lending and a credit crunch yanked support from the market, a Freddie Mac index showed on Tuesday.

The Freddie Mac Conventional Mortgage Home Price Index Classic Series fell by an annualised 1.3 per cent last quarter, compared with appreciation of 0.5 per cent in the second quarter, the No.2 home funding company said in a statement.

Year over year, prices rose by 1.9 per cent, a sharp retreat from the 7.8 per cent growth seen a year earlier, it said.

‘Lenders have tightened underwriting standards and the turbulence in the capital markets led to a spike in the cost of jumbo loans,’ Mr Frank Nothaft, Freddie Mac’s chief economist, said in the statement. That added to the weight on prices from house inventories that have reached their highest level since 1985, he said.

The Freddie Mac index measures all loans outside government programmes and includes data from both home purchase transactions and mortgage refinancings based on appraisals.

The index echoes trends in other widely watched measures.

The Standard & Poor’s Case-Shiller National Home Price Index last month showed prices had fallen by 4.5 per cent in the third quarter from a year earlier.

Declining home prices have triggered a crisis in mortgage lending by revealing weaknesses across hundreds of thousands of loans made through the US housing boom.

Loans made to risky, sub-prime borrowers and those that required no equity from the borrower have led to soaring defaults, leading lawmakers and the Bush administration to pursue various efforts to stall resulting foreclosures.

A plan supported by Treasury Secretary Henry Paulson that aims to freeze rates on many sub-prime loans will do little to slow the housing downturn, analysts said.

‘Many government and policymakers feel this is a sub-prime problem, which is completely wrong,’ said Mr Paul Miller, an analyst at Friedman Billings Ramsey, in a research note. ‘This is a high loan-to-value and overvalued housing problem!’

 

Source: REUTERS (The Straits Times 6 Dec 07)

Fallout from sub-prime mess hits Florida public fund

(NEW YORK) Local governments and school districts in Florida scrambled on Monday to assess the damage to their investment portfolios from subprime mortgage loans, as the credit crisis reached into pockets of the investment world previously thought to be out of harm’s way.

Florida last Thursday froze withdrawals from its Local Government Investment Pool, a sort of money market fund for the state’s public agencies, after nervous investors pulled out US$10 billion in 15 days.

On Monday evening, public school superintendents, municipal finance directors and county clerks from all over Florida participated in a tense conference call to inquire about the fate of their money – money that was supposed to gain modest interest in a supposedly risk-free, easy-to-access fund.

‘We keep the lights on and we keep the buses running and we make payroll with that money,’ said Stephen Hegarty, a spokesman for the Hillsborough County School District, in Tampa, which has US$573 million invested in the frozen fund. ‘We’re paying very close attention to this thing.’ The run on Florida’s state fund was sparked after local governments discovered it held sub-prime mortgage assets that had soured.

The Florida fund had invested in about US$2 billion in what are known as structured investment vehicles and other debt instruments that have been downgraded by rating agencies and no longer meet the fund’s minimum requirement for investment. Those hard-to-value assets have been roiling financial markets for months as housing values decline and mortgage delinquencies rise.

 

Source: AP (Business Times 5 Dec 07)

US mortgage industry fleshes out rate-freeze scheme

Plan may offer relief of up to 7 years for some sub-prime loans

(WASHINGTON) Mortgage industry executives worked on Saturday to hammer out details of a homeowner rescue plan that would freeze interest rates on some US sub-prime mortgages for up to seven years, but questions remained over how to avoid investor lawsuits and other legal challenges.

The negotiations among lenders, servicers, investor groups, regulators and other parties were aimed at allowing United States Treasury Secretary Henry Paulson to announce a framework for the plan today, with full details expected on Wednesday, said a mortgage sector source involved in the talks.

Mr Paulson on Friday said that the mortgage industry was working with the Treasury on a broad plan to help save the homes of sub-prime borrowers with adjustable-rate mortgages who cannot afford higher payments as their interest rates reset in coming months, but who otherwise could afford to stay in their homes.

The plan’s details are now up to the mortgage industry and investors, the two groups that will have to absorb its costs.

‘The message is that everybody has to get on the bus,’ the source said of Mr Paulson’s directive.

Details over which mortgages would be considered for an automatic interest rate freeze of five to seven years are still sketchy. The source said that initially, only sub-prime loans with two- or three-year periods of low ‘teaser’ rates would be considered, but more traditional sub-prime loans with longer fixed-rate periods could also be modified.

A shorter freeze period was initially considered, but Federal Deposit Insurance Corp Chairman Sheila Bair pressed in the negotiations for a five- to seven-year freeze. Ms Bair was the first federal regulator to propose a broad rate freeze as California negotiated a similar deal with several top mortgage lenders in the state, hard-hit by the housing downturn.

Estimates of mortgage resets vary. Federal Reserve officials estimate that 2 million mortgages face resets and as many as 500,000 of these could lose their homes.

Deutsche Bank said in a report on Friday that the population Mr Paulson’s plan is aimed at – owner-occupants with at least some equity and facing their first reset – comprises 1.2 million loans valued at US$258 billion, or one third of outstanding ‘first-lien’ sub-prime loans.

A particularly thorny problem is the threat of lawsuits from investors who bought securities backed by the mortgages.

These investors were promised a certain yield, based on the expected hikes in interest rates, and an automatic freeze without reviewing individual loans may give them grounds to sue mortgage servicers.

‘You might end up benefiting borrowers who are perfectly capable of making payments,’ said Ajay Rajadhyaksha, head of fixed-income strategy at Barclays Capital in New York. ‘I’d be surprised if every investor out there agreed to give servicers carte blanche’ to freeze interest rates, he said.

Mortgage servicers asked for support from federal regulators, including the Office of Thrift Supervision and the Office of the Comptroller of the Currency, to help them deal with any legal backlash.

The American Securitization Forum, a trade group that represents large mortgage investors such as pension and mutual funds, said on Friday it could ’support loan modifications in appropriate circumstances’.

A streamlined approach to loss mitigation ‘will ultimately help servicers manage their responsibilities in a changing market, while appropriately balancing the interests of borrowers and investors’, Tom Deutsch, ASF deputy executive director, said at a housing hearing in Los Angeles.

While agreeing on mortgage changes on a large scale is difficult, it has been done before. After Hurricane Katrina in 2005, for instance, housing finance giants Fannie Mae and Freddie Mac provided prolonged forbearance that let devastated Gulf Coast homeowners miss loan payments.

‘This comes up every few years – a tornado in the Dakotas or flooding somewhere. We would be able to modify the loans a bit. The investors hated it but the politicians loved it,’ said a source familiar with how Fannie Mae and Freddie Mac have made allowances for stressed communities in the past. ‘It’s not easy, but it can be done.’

The population Mr Paulson’s plan is aimed at – owner-occupants with at least some equity and facing their first reset – comprises 1.2m loans valued at US$258b.

 

Source: Reuters (Business Times 3 Dec 07)

Asia may take a hit in ‘Act Two’ of sub-prime crisis

Stanchart S-E Asia chief says turmoil will hit export-driven regional economies

A TOP banker just posted to Singapore has warned that ‘it’s only the end of the beginning’ of the global credit crisis.

The world is still reeling from US$50 billion (S$72.3 billion) in losses linked to sub-prime home loans in the United States, Standard Chartered’s (Stanchart’s) new chief executive (CEO) for South-east Asia, Mr Ray Ferguson, said.

Asian economies, particularly Singapore and Hong Kong, are likely to be hit by the deepening crisis, he said at a luncheon hosted by the British Chamber of Commerce’s Professional Services Business Group.

Some analysts believe, on the other hand, that the sub-prime fallout will be limited in Asia. Last week, Henderson Global Investors’ director of economics and asset allocation, Mr Tony Dolphin, said while the shortterm outlook appears shaky, the Asian stock-market bull run would continue next year.

Several weeks ago, Senior Minister Goh Chok Tong also said Asia had emerged relatively unscathed from the crisis.

Mr Ferguson likened the crisis to a three-act play: ‘Act One has just ended, and the level of losses we have seen will look small compared to Act Two.’

He highlighted some analysts’ estimates that write-downs for sub-prime loans might eventually hit US$400 billion. He cited US reports suggesting 1.5 million to two million Americans could lose their homes next year.

All this is expected to undermine US consumer and investor confidence and take a toll on export-driven Asian economies still ‘very dependent’ on US consumption.

Mr Ferguson, who served as Stanchart’s US country CEO, rejected an emerging view that Asia’s growth has been decoupled from the US.

‘Asia will be affected… While the direct exposure of banks in the region to sub-prime loans is relatively limited, Asian debt markets have slowed and credit criteria have been tightened.’

Oil price hikes and a weaker US dollar are set to dent US consumer confidence, so Asia will ‘feel the force of a decline in the US economy’.

‘Singapore and Hong Kong, being small and export-dependent, will feel far more impact’, than other markets, such as India and China.

Still, ‘the feel-good factor in Raffles Place is not just based on the US’, he said. Singapore’s strategy of diversifying its economy away from electronics exports to the financial, biomedical and other sectors will help it to weather market volatility.

‘Act One has just ended, and the level of losses we have seen will look small compared to Act Two.’

MR FERGUSON, who likens the crisis to a three-act play

 

Source: The Straits Times 30 Nov 07

Grim US housing outlook in 2008

(CHICAGO) US homebuilders said the housing market probably will weaken in 2008 as foreclosures rise and banks tighten lending standards.

Demand has deteriorated in many markets, limiting the prospect of a rebound in new home sales, chief executive officers for D R Horton Inc and Beazer Homes USA Inc. said on Tuesday at a JPMorgan Chase & Co conference in Las Vegas.

Next year ‘is going to be worse than ‘07 for us and for the industry in general’, said Donald Tomnitz, CEO of Fort Worth, Texas-based D R Horton, the fourth- largest US homebuilder.

The housing slump that began in 2005 has erased about US$36 billion in stock market value for the largest 15 homebuilders this year.

New home sales dropped 23 per cent in the year through September and home delinquencies have reached a five-year high.

The California and Florida housing markets continue to weaken and the Las Vegas market is ’soft’, Mr Tomnitz said.

New home sales in Phoenix will probably get worse in 2008, he said.

Stephen Scarborough, Standard Pacific Corp’s CEO, said at the conference that his company isn’t planning on filing for bankruptcy.

Shares of Standard Pacific have fallen 91 per cent this year on concern the company can’t pay back its debt.

‘There’s no effort on our part and nothing is in process as far as filing for bankruptcy protection,’ Mr Scarborough said. ‘That is not our present intent. We have a multifaceted approach to conserve cash and generate cash,’ he said.

Homebuilders are cutting jobs and trying to reduce their construction costs to boost cash flow to pay off debt. They’re also selling land and writing down property values.

 

Source: Bloomberg (Business Times 29 Nov 07)

US commercial real estate set to take a hit

Traders see bond defaults rising to the highest level since Great Depression

(LONDON) In the bond market, commercial property investors are about as creditworthy as US homeowners with sub-prime mortgages.

‘Commercial real estate is a full-blown bubble that feels very much at a bursting point,’ said Christian Stracke, an analyst in London at CreditSights Inc, a fixed-income research firm. ‘There’s a fairly toxic mix of factors at work.’

The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by properties more than doubled in the past month, according to Markit Group Ltd.

Prices suggest traders anticipate defaults rising to the highest level since the Great Depression, according to analysts at RBS Greenwich Capital in Greenwich, Connecticut.

The seven-year rally in offices and retail properties ended in September when prices fell an average of 1.2 per cent, according to Moody’s Investors Service. More losses are likely because banks are holding US$54 billion of commercial mortgages they can’t sell, data compiled by New York-based Citigroup Inc showed.

Lenders are struggling to sell loans to investors after losses on debt backed by sub-prime mortgages to people with poor credit caused financial markets to seize up in July and August. Bonds with AAA ratings secured by properties ranging from the Sears Tower in Chicago to trailer parks in Delaware yield about 203 basis points more than similar maturity Treasuries, up from 92 basis points on Oct 12, according to Morgan Stanley indexes.

The benchmark CMBX-NA-AAA index of derivatives tied to the safest commercial mortgage securities rose to 102 basis points from 44 a month ago. It costs US$102,000 a year to protect US$10 million of bonds backed by property loans against default, up from US$44,000 a month ago.

Derivatives are contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as the weather or changes in interest rates.

Sales of debt secured by commercial mortgages tumbled 80 per cent to US$3.9 billion in October from a year earlier, data compiled by Bloomberg show. New securities backed by loans on buildings will fall 50 per cent in 2008 from US$220 billion this year, Moody’s said on Nov 2.

Real estate deals are coming apart at the fastest pace since September 2001, when the US economy was shrinking, because banks are tightening standards for loans, said Robert White, president of Real Capital Analytics, a New York-based research firm.

More than 75 deals have been withdrawn because banks aren’t lending, and that estimate is ‘probably conservative because not all deals that blew up were well-publicised’, said Mr White.

‘The commercial real estate market is imploding,’ said James Ortega, who manages US$150 million at Saenz Hofmann Fund Advisory in Sao Paulo. Mr Ortega has set trades to profit from a decline in property companies’ shares. ‘We’re about to experience a very significant correction.’

Mortgage brokers say traders are overreacting. Defaults are running at 0.4 per cent in the US, below the average of about one per cent over the past 10 years, according to Moody’s. That’s a fraction of the 15.2 per cent of subprime home loans that are at least 60 days in arrears, an index by the New York-based ratings company shows.

The decline in prices of the highest rated commercial mortgage-backed securities mostly reflects a slump in credit markets, not expectations of defaults on loans backing the securities, said Michael Sun, an analyst at Wachovia Corp’s Tattersall Advisory Group in Charlotte, North Carolina, which manages about US$5 billion of commercial mortgage securities.

‘They are, credit-wise, a no-brainer,’ Mr Sun said. ‘Nobody disagrees they are rock-solid credits.’

In Manhattan, the world’s largest office market, the vacancy rate rose to 7.6 per cent in October, the highest in a year, property brokerage Colliers ABR said. Rents rose 1.4 per cent on average to US$64.08 a square foot from September, the second-smallest month-to- month increase since June 2006.

The Bloomberg Real Estate Investment Trust Index measuring the stocks of 126 publicly-traded property companies fell 29 per cent from its peak in February.

Record-low interest rates in the past five years encouraged banks to loosen underwriting standards and caused prices to rise as much as 35 per cent a year.

Banks provided loans that allowed borrowers to pay only interest, not principal, and lenders offered financing that exceeded property values, according to Moody’s. The average loan-to-value ratio reached a record high of 117.5 in the third quarter for mortgages that were turned into bonds, from 90 in 2003, Moody’s said.

Bondholders helped feed demand for loans by purchasing a record US$273 billion of securities backed by commercial mortgages this year, up from US$95 billion in 2004, based on data compiled by Trepp LLC, a New York-based research firm.

Demand has dried up since July, when securities linked to sub-prime home mortgages contaminated credit markets and caused financial institutions to report losses or writedowns of more than US$66 billion.

Citigroup analysts said in a Nov 15 note to clients that derivatives indexes on commercial properties are priced for a ‘meltdown’.

 

Source: Bloomberg (Business Times 29 Nov 07)

US existing home sales fall to 8-year low

WASHINGTON – SALES of previously owned United States homes fell last month to the lowest level in at least eight years as loan restrictions and the prospect of further price declines deterred buyers.

Purchases dropped 1.2 per cent, more than forecast, to an annual rate of 4.97 million, the lowest since record keeping began in 1999, from a 5.03 million September pace, the National Association of Realtors said.

Sales were down 20.7 per cent from October last year and the median home price fell by the most on record.

Defaults on US sub-prime mortgages have prompted banks to tighten lending standards, while foreclosures add to a glut of unsold properties that is putting pressure on home prices.

Lower property values raise the risk that consumers will curtail spending, making firms more cautious about investing and compounding a slowdown in economic growth, economists said.

‘Credit conditions seem to be getting tighter again, the economy is likely to slow and falling prices may be causing people to wait before buying,’ Mr David Sloan, a senior economist at 4Cast Inc in New York, said before the figures were released. ‘There is plenty of downside left in this market.’

A government report showed last month’s orders for US durable goods fell more than forecast, signalling that businesses are losing confidence the economic expansion will be sustained.

Home resales were forecast to fall 0.8 per cent to an annual rate of 5 million from a previously reported 5.04 million pace in September, according to the median estimate of 70 economists in a Bloomberg News survey.

The median price dropped 5.1 per cent to US$207,800 (S$299,900), the biggest drop on record, compared with October last year.

The number of homes for sale at the end of the month rose 1.9 per cent to 4.45 million.

At the current sales pace, that represented 10.8 months’ supply, compared with 10.4 months in September.

‘If sales were to continue to decline at this rate, it would be a big concern, but we don’t expect major declines going forward,’ said Mr Lawrence Yun, the chief economist at the real estate agents’ group.

After half an hour of trading, the Dow Jones Industrial Average rose 163.48 points to 13,121.92 as investors snapped up shares in banks which they saw as being oversold.

 

Source: BLOOMBERG NEWS (The Straits Times 29 Nov 07)

Bond insurers affected by credit crunch

(NEW YORK) INVESTORS already burned by turmoil from the credit crunch are now worried about unwanted surprises in the industry that insures bonds. In the face of mounting losses in US mortgages, rating agencies are reviewing eight leading bond insurers, which could lead to downgrades. Such a move could ripple across the financial sector, because if a bond insurer is downgraded, most of the securities it has blessed as virtually risk-free are likely to follow. That could spark a new round of sell-offs and writedowns.

‘It would have a domino effect on all of the entities that hold these vehicles,’ said Ed Rombach, a senior analyst at Thomson Financial. ‘They would have to have more write-offs. It’s a vicious cycle.’

Moody’s Investors Service and Fitch Ratings are examining the capital levels and structured debt these firms have insured because they are worried that the deterioration in the mortgage market may expose them to greater losses. Moody’s is expected to finish its review next week. Fitch said that it would complete its review within three weeks. If any company is put on what’s known as negative watch, it would be given a month to increase its capital and have its rating affirmed.

Bond insurers play a critical role in the capital markets because they issue insurance that boosts the credit ratings of more than US$2 trillion in debt securities held in portfolios around the world, including municipal bonds, mortgage-backed securities and complicated debt instruments. The stock prices of leading insurers have been plummeting as investors worry that they may not have enough capital to cover projected losses from securities tied to delinquent mortgage loans. This has put pressure on guarantors to shore up their capital reserves to protect their coveted triple-A ratings. Last Thursday, the parent company of one bond insurer, CIFG Holding, gave it a US$1.5 billion capital infusion. Soon after, Fitch affirmed CIFG’s triple-A rating.

‘The triple-A rating is really the product that they’re selling,’ Thomas Abruzzo, an analyst with Fitch, said in reference to bond insurers in general. ‘They’re selling high financial strength. It’s the highest rating out there and, really, without that rating it’s going to be significantly more difficult to potentially sell your services.’

Jittery times

Just how much of a downgrade would devalue securities these companies insure is unclear, analysts said.

For example, if a company was downgraded to a double-A rating from triple-A, the impact might be minimal, since the spreads, or perceived risk, of owning similar securities with those two ratings may not be that wide.

However, these are jittery times. ‘The people watching this are not going to say, ‘I’m so happy they’re going to be downgraded only to double-A’,’ said Sylvain Raynes, a founding principle of R&R Consulting, a structured-finance consultancy. ‘They’re going to say, ‘This is the beginning of the end.’ And they’re going to want to go before everyone else goes. This is a stampede.’

Any downgrade of a financial guarantor would likely be more than just one notch, said Stanislas Rouyer, senior vice-president of Moody’s financial guarantors team. A downgrade, he said, would need to incorporate not only the reason for the downgrade but also the consequences of the downgrade on the business.

For years, the insurers mostly guaranteed bonds issued by municipalities, public schools and water authorities. Defaults were few, and bond insurers prospered. Triple-A ratings were a given. In recent years, however, many bond insurers have ventured into the business of insuring complicated mortgage securities such as collateralised debt obligations. And with credit markets deteriorating, they have had to write down the value of their insurance contracts on complicated debt and have posted some of their poorest quarterly results in years.

Some veterans on Wall Street are now questioning the viability of their business model. ‘As the credit market continues to weaken, our confidence that the guarantors will survive the credit meltdown is waning,’ Ken Zerbe, an analyst at Morgan Stanley, wrote in a research note this month. ‘At the current stock price, we believe the market is pricing in the loss of their triple-A ratings. Previously, we would have dismissed this as nearly impossible – now we are not so sure.’

The two largest bond insurers, Ambac Financial Group and MBIA, were recently described by Fitch and Moody’s as having moderate to little risk of falling below adequate capital levels. Nonetheless, their shares have fallen by at least half since the beginning of October.

Ambac spokesman Peter Poillon said last Friday that based on where the stock is trading, investors appeared to be doubting the company’s ability to hold on to its triple-A rating. He disagreed with that assessment, saying that the company has sufficient capital to meet the rating agencies’ requirements. ‘We value our triple-A. We know it’s our franchise and we will do anything to maintain it,’ he said.

 

Source: The Washington Post (Business Times 28 Nov 07)

Sub-prime crisis takes its toll on European markets

But stability can be expected if the US avoids recession: DTZ

(SINGAPORE) Shockwaves from the US sub-prime mortgage crisis a few months ago are reverberating through the real estate markets of the UK and Europe, with deals shelved or abandoned.

In its European Quarterly 2007 report, DTZ says the volume of transactions could fall at least 15-20 per cent in the third and fourth quarters this year, from record volumes of 48 billion euros (S$102.7 billion) and 53 billion euros in the first and second quarters respectively.

However, if the US avoids recession, stability can be expected.

DTZ group chief executive Mark Struckett says that in the UK other than central London, a price correction in commercial estate market has been underway since the second half of 2006, so the sub-prime fallout is less of a shock.

The current situation is also being ‘accepted by vendors’, he says.

DTZ says the effect so far is not so much the delaying of deals but renegotiation of price with the re-pricing of risk as providers of debt capital become much more risk-averse.

Given upward pressure on yields in many locations, DTZ believes property returns will be heavily dependent on sound occupier fundamentals and effective asset management.

Making a comparison between current market conditions and the period following the Sept 11, 2001 terrorist attacks in the United States, Mr Struckett says that unlike five years ago, ‘occupational demand still looks good’.

In general, DTZ does not expect rental prospects to be substantially undermined by recent developments, though there may be increased downside risk for areas such as London’s West End, where hedge funds and private equity firms are important players.

There could be wider adverse repercussions in the City of London and in Canary Wharf if reduced profitability affects the expansion plans of some banking sector firms.

Even so, Mr Struckett says a slowdown in new developments could lead to a supply shortage in 2010-2011, possibly curtailing any prolonged crisis.

So while debt-driven investors will find it more difficult to make deals add up, DTZ believes a correction in yields in some markets could present attractive opportunities for equity buyers such as life insurance and pension funds which to some extent may have been priced out of the market by highly leverage investors.

Quality assets in prime locations could benefit in a generally more risk-averse market.

DTZ believes a flight to quality is likely to put deals involving secondary locations or older stock most at risk, with investors increasingly willing to pay a premium for covenant strength and reliable rental income.

 

Source: Business Times 27 Nov 07

It wasn’t me, Greenspan says of housing mess

Sales and price slump not a reflection of Fed policies when he headed central bank

LONDON – FORMER Federal Reserve chairman Alan Greenspan said he has ‘no particular regrets’, and that the deepening slump in the United States housing market is not a result of his policies.

‘Markets are becoming aware of the fact that the decline in house prices is not stopping,’ he said on Sunday. ‘I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon.’

Home prices fell in a third of US cities last quarter, as stricter lending standards caused a 14 per cent drop in sales nationwide, the National Association of Realtors said last week.

Declines in sales and prices signal that the housing slump, which began last year, may extend into its third year, matching the slowdown 18 years ago that ended in the 1991 recession.

The collapse of the US sub- prime market ‘was a shocker because no one expected it’, Mr Greenspan said. ‘It was the weakest link in the international financial sector. The decline in subprime-financed housing starts is over. It went to zero and can’t get any lower.’

Professor Joseph Stiglitz, a Nobel Prize-winning economist, said on Nov 16 that there was a 50 per cent chance the US would slide into a recession after the ‘mess’ left by Mr Greenspan. The retired Fed chairman defended his record in a statement released the same day, saying the criticisms were ‘inaccurate or incomplete’.

After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 per cent. That move, along with a hands-off approach to regulation, has put Mr Greenspan under fire as the bursting of the housing bubble and the sub-prime mortgage crisis threaten to sink the economy.

‘The fact that the Fed funds rate went down to 1 per cent in 2002 was an important part of the latter stages of the housing boom,’ said Mr Bruce Kasman, chief economist at JPMorgan Securities. ‘It wasn’t the only thing, and it wasn’t necessarily a bad thing. In the end, we’re going to look back at what happens next to recognise what the trade-offs were.’

The US dollar’s slump to a record low against the euro may have to be addressed by central bank policymakers, according to Mr Greenspan. ‘Stable prices are necessary for maximum sustainable economic growth,’ he said.

Mr Greenspan, 81, is on a world tour to promote his memoirs.

 

Source: BLOOMBERG NEWS (The Straits Times 27 Nov 07)

US commercial property sales down 70% in Oct

But report says the five-year bull run may not be over

(NEW YORK) US office building sales fell 70 per cent in October from a year earlier, yet another sign the credit crunch that began in the US housing market has spread to the commercial real estate market, Real Capital Analytics said on Tuesday.

But the five-year bull run on commercial real estate may not be over, although the participants have clearly changed, the real estate research firm said.

The credit crisis has weighed on US commercial real estate and the office market in particular, making purchases funded nearly all by debt a thing of the past. Even lower-leveraged deals are harder to come by as borrowing rates rise and risk becomes a significant factor in obtaining a loan.

‘The remarkable increase in sales activity, rise in prices and compression of cap rates (the first year’s yield on the property) since 2001 ended abruptly in August,’ the Capital Trends Monthly report said. ‘Since then, the dramatic fall in sales volume, drop in prices and rise in cap rates certainly meets the definition of an inflection point.’

But capital has continued to flow into commercial property, especially globally, and the greater cycle may not be quite over, the firm said.

Sales of significant office properties – those more than US$5 million – fell to US$4.4 billion in October. More than US$14 billion are reported in contract, but only US$4 billion of these have been announced. Sellers have pulled properties off the market when they could not get the price they wanted.

New offerings have exceeded closings 2-to-1 over the past 60 days, the report said.

The credit crisis has meant cash rules again and those loaded with it – foreign and institutional investors – make up more of the buyers. Since the onset of tighter credit, their market share has grown to 38 per cent of purchases from 26 per cent. These buyers generally favour stable, steady cash producing properties in major markets.

The large, highly leveraged buyers, such as private equity players, acquired US$78.5 billion worth of office properties from January to August. But not a single significant acquisition involving those funds have been announced since then.

Real estate investment trusts also have not been active buyers since September. But the report said that may change soon. Some larger players, such as mall owner Simon Property Group Inc and apartment owner AvalonBay Communities Inc, have raised capital by increasing their credit facilities.

Apartments sales in general also have plummeted. Excluding the US$22 billion sale of Archstone- Smith Lehman Brothers Holdings Inc and a fund run by Tishman Speyer, sales fell 50 per cent from a year ago to US$3.3 billion.

The sales of garden apartments were even worse, down 60 per cent.

 

Source: Reuters (Business Times 22 Nov 07)

LATEST US DATA – Housing starts up 3% in Oct, permits down 6.6%

Building permits fall to 1.178m unit pace, the lowest level in 14 years

(WASHINGTON) US home construction starts were up 3 per cent in October, the biggest monthly gain in eight months but building permits were down 6.6 per cent to a level not seen in 14 years, a government report yesterday showed.

The Commerce Department said that housing starts set at an annual pace of 1.229 million units in October from a 1.193 million unit pace in September.

It was the biggest monthly increase since February and came after starts tumbled 11.4 per cent the prior month.

Economists were expecting to see a slight decrease in starts to a 1.17 million unit pace from the initially reported 1.191 million pace.

Building permits fell 6.6 per cent in October to a 1.178 million unit pace. That was the lowest level since July 1993 and well below the 1.200 million unit level economists were expecting.

Construction of single-family homes fell 7.3 per cent to the lowest since October 1991 but multi-family home building surged 44 per cent.

Sales of single-family homes are dropping as potential buyers wait for prices to fall even more and some banks make it more difficult to get mortgages.

Demand is declining as fast as construction, preventing builders from trimming inventories and suggesting that the real estate recession will linger into 2008.

‘The meltdown in residential construction will extend for many more months and represents a serious drag on economic growth,’ Robert Dye, senior economist at PNC Financial Services Group in Philadelphia, said before the report.

Permits were forecast to drop to a 1.2 million pace, according to the survey median, with projections ranging from 1.1 million to 1.324 million.

Construction of single-family homes dropped to a 884,000 pace while work on multi-family homes rose to a 345,000 annual rate.

The increase in starts was led by a 21 per cent jump in the Mid-west. Construction rose 8.5 per cent in the Northeast and 5.8 per cent in the West. Starts fell 4.6 per cent in the South.

A report on Monday added to evidence that housing was far from recovery. The National Association of Home Builders/Wells Fargo confidence index held at a record low of 19 in November.

Toll Brothers Inc, the largest US luxury homebuilder, said on Nov 8 that fourth-quarter revenue fell 36 per cent and the cancellation rate rose to the highest ever.

‘We do think that this is worse than it was in ‘88 through ‘90,’ chairman Robert Toll said on a conference call. ‘We can’t predict how long this down period will last.’

Declines in home construction have reduced growth since the start of 2006 and detracted 1.1 percentage points in the third quarter.

Homebuilding will drop at a 22 per cent annual pace this quarter, the most since the last three months of 1981, according to a forecast by economists at Lehman Brothers Holdings Inc.

Foreclosures doubled in September from a year earlier as sub-prime borrowers struggled to make payments on adjustable-rate mortgages, RealtyTrac Inc said on Oct 11.

Rising foreclosures and falling sales are adding to inventories and pushing down prices.

The Case-Shiller index of home prices in 20 major cities declined 4.4 per cent in the 12 months though August, the most since records began in 2001.

 

Source: Reuters, Bloomberg (Business Times 21 Nov 07)

Rise in US housing starts not sign of rebound for sector

Unexpected 3% rise due to surge in apartments; applications for building permits continue to fall

WASHINGTON – CONSTRUCTION of new homes and apartments in the United States rebounded last month by the largest amount in eight months, but the unexpected increase was not viewed as a signal of a housing turnaround.

The Commerce Department reported yesterday that housing construction rose by 3 per cent last month, the first increase after three months of declines and the biggest advance since a 6 per cent rise last February.

However, all of the strength came in the volatile apartment sector, which jumped by 44.4 per cent.

Construction of single-family homes fell for a seventh straight month, declining by 7.3 per cent last month compared with September.

Analysts believe that housing is likely to remain weak through much of next year as builders struggle with historically high levels of unsold homes and rising mortgage defaults which are dumping even more homes back on glutted markets.

The overall increase left construction last month at a seasonally adjusted annual rate of 1.229 million units, down 16.4 per cent from activity a year ago.

Applications for building permits, seen as a good sign of future activity, fell for the fifth straight month in October, dropping by 6.6 per cent to an annual rate of 1.178 million units. That is down a sharp 24.5 per cent from a year ago.

The rebound in overall construction came as a surprise to analysts who had forecast a drop of 1.3 per cent.

However, the 6.6 per cent slide in permit applications was more severe than the 4.8 per cent fall expected by Wall Street.

Troubles in housing are expected to seriously depress overall economic growth in the current quarter and early next year with some analysts growing more concerned about an outright recession.

Yesterday, Freddie Mac, the second-biggest buyer of US mortgages, posted its largest-ever quarterly loss – US $2 billion (S$2.9 billion) – and said it may cut its dividends to weather ’significant deterioration’ in the housing market.

The US Federal Reserve has cut interest rates twice since September but has signalled that it is not likely to make further reductions unless the economic weakness deepens significantly, because of worries that a surge in oil prices will make inflation worse.

In Europe, shares in UBS tumbled, but then clawed back, on concerns that the Swiss-based bank will suffer more losses due to exposure on assets hit by the US sub-prime mortgage crisis.

In Britain, buy-to-let mortgage lender Paragon Group said it may need to raise £280 million (S$831 million) from shareholders because of difficulty faced in raising funds in the credit crunch, prompting its shares to plunge nearly 40 per cent.

 

Source: ASSOCIATED PRESS, BLOOMBERG NEWS, REUTERS (The Straits Times 21 Nov 07)

SCALE-BACK IN LOANS – US could face $3 trillion lending shock: Goldman

LONDON – THE impact of the United States mortgage market crisis on the underlying economy could be ’dramatic’ as leveraged investors may need to scale back lending by up to US$2 trillion (S$2.9 trillion), according to investment bank Goldman Sachs.

In a report on Thursday, Goldman’s chief US economist Jan Hatzius said a ‘back-of-the-envelope’ estimate of credit losses on outstanding mortgages, based on past default experience, was around US$400 billion. But unlike stock-market losses, which are typically absorbed by long-term investors, this mortgagerelated hit is mostly borne by leveraged investors such as banks, broker-dealers, hedge funds and government-sponsored enterprises.

As these investors depend on loans, they react to losses by actively cutting back lending to keep capital ratios from falling. A bank targeting a constant capital ratio of 10 per cent, for example, would need to shrink its balance by US$10 for every US$1 in losses.

‘The macroeconomic consequences could be quite dramatic,’ Mr Hatzius said. ‘If leveraged investors see US $200 billion of the US$400 billion aggregate credit loss, they might need to scale back their lending by US$2 trillion. This is a large shock.’

He added that the number equates to 7 per cent of total debt owed by US non-financial sectors.

 

Source: REUTERS (The Straits Times 17 Nov 07)

UK’s Land Securities plans 3-way split

(LONDON) Land Securities, Britain’s largest real estate firm, is to consult shareholders on plans to demerge its retail, London office and property outsourcing businesses into three separate quoted companies, it announced yesterday.

The company said that the plan – which would be executed only in favourable market conditions – was in shareholders’ best interests, enabling each division to pursue its own strategy and allocate capital without competing demands from a different property segment.

‘Our board … recognised the need to test our current business structure,’ said chief executive officer Francis Salway.

‘We have concluded that the development of these businesses … are best served by demerger into three separate, specialised businesses, each of which will be of a scale to be at the forefront of their sectors,’ he said.

The announcement was made as Land Securities posted results for the six months to end-September. It reported a 2.5 per cent increase in the adjusted diluted net asset value to 2,236 pence and a 0.9 per cent increase in the value of its investment portfolio to £15billion pounds (S$44.8 billion).

In a separate statement, Land Securities said that it had formed a joint venture with British supermarket J Sainsbury to maximise the property potential of three Sainsbury’s branches with a total value of £113.4 million.

 

Source: Reuters (Business Times 15 Nov 07)

Casinos unfazed by ongoing mortgage crisis

Credit downturn not as bad as previous cycles: analyst

(LAS VEGAS) Casinos have little to fear from the credit crunch sparked this summer by the sub-prime mortgage crisis, according to finance professionals who addressed the issue at the Global Gaming Expo on Tuesday.

Steve Croxton, co-head of gaming and leisure investment banking and managing director at Jefferies and Co, set the tone by saying the credit downturn was ‘not terrible compared to previous cycles’.

Besides, MGM Mirage chief financial officer Daniel D’Arrigo said his company had effectively become a real estate company with large holdings on the Las Vegas Strip, and would use its assets to fund development. Wynn Resorts Ltd, Las Vegas Sands Corp and Harrah’s Entertainment Inc were following the same pattern, he said.

The falling dollar was also creating financial opportunities that would offset the credit crunch impact.’With the dollar down, America is on sale,’ Mr D’Arrigo said. ‘We get offers every day from overseas seeking to be joint-venture partners.’

Australia’s Crown-PBL and developers Kerzner International and Elad were part of that investment wave, said Carlton Geer, global gaming group head at CB Richard Ellis.

The land boom, which has seen parcels on the Strip selling for as much as US$37 million an acre, has insulated Las Vegas properties from any financing difficulties, he said.

Mr Geer added, ‘In fact, the MGMs of the gaming industry may have a competitive advantage because of their balance sheets and their existing relationships.’

The falling dollar would also generate more business for destinations like Vegas, by encouraging Americans to vacation at home and bringing in more foreign tourists, Mr D’Arrigo said. SG Americas Securities managing director Michael Kim struck a slightly sceptical note.

‘We all know there are cycles,’ he added, ‘and credit will prove more difficult for those who cannot monetise their land value’.

Future deals for more marginal casino operators would have to include greater equity, making them more expensive, he said.

Beyond the Strip, lenders were looking to the fundamentals of the business, said Stephen Turpin of Atlanta-based ORIX Finance. He finances projects in small and emerging markets.’I want to know how well you operate, what the rate of return is and what your leverage point is,’ Mr Turpin said.

But the home foreclosure crisis may be having an impact on spending among Las Vegas locals.

Mr Geer said CB Richard Ellis has a preliminary study showing locals revenue on a ’same-store basis’ is down between 5 per cent and 10 per cent since the summer. ‘We’re going to keep tracking those data,’ he said.

 

Source: Reuters (Business Times 15 Nov 07)

MGM Mirage to open first casino in Macau in Dec

(LAS VEGAS) Casino developer MGM Mirage Inc said on Monday it would open its debut property in the Chinese gambling destination of Macau on Dec 18.

The US$1.25 billion project is a joint venture with Pansy Ho, daughter of Hong Kong billionaire Stanley Ho, a gambling industry veteran.

The resort will feature 600 rooms, suites and villas, 375 table games, 900 slot machines and 16 high-end private gambling salons.

It also has a conservatory called Grand Praca that is three times the size of a seasonal botanical garden at its Las Vegas property, Bellagio, and was designed with the traditional Portuguese architecture of the former colony in mind, said MGM Mirage spokesman Gordon Absher.

MGM Mirage chief executive Terry Lanni said in a statement that the opening would mark ‘the beginning of a new era in Macau’, which has overtaken the Las Vegas Strip as the top gambling revenue generator in the world.

 

Source: AP (Business Times 14 Nov 07)

NY mayor’s housing plan faces risks: report

More progress made in preserving existing homes than creating new units

(NEW YORK) New York Mayor Michael Bloomberg’s 10-year plan to create 165,000 new and renovated units of below-market ‘affordable’ housing by 2013 may encounter difficulty reaching its goal, the city’s Independent Budget Office said.

In a study released on Friday, the agency created to monitor New York’s finances said the city had achieved about 40 per cent of its target, creating almost 64,000 units in the past four years.

‘More progress has been made towards the 10-year goal of preserving 73,000 units of existing affordable housing than the goal of creating 92,000 new affordable housing units,’ the report said. Another 101,000 units, mostly new, would need to be financed in the next six years, it said.

The housing plan – first announced in 2003 with a 68,000-unit goal by 2008, then expanded to 165,000 last year – has been described by Mr Bloomberg as the largest city affordable housing project in US history. Last week, the Real Estate Board of New York reported the average price of a city home jumped 20 per cent in the third quarter of 2007 compared with last year, to US$782,000.

Mr Bloomberg is scheduled to leave office on Dec 31, 2009.

Neill Coleman, spokesman for the city Department of Housing Preservation and Development, said the

administration will have committed enough funding to pay for completion of all 165,000 units – enough to house 500,000 people – by then. ‘We are pleased the report confirms that we’re basically on track with 40 per cent funded or built four years into the 10-year plan,’ he said.

‘Certainly there’s an emphasis on preservation rather than new construction in the first years because they’re the easiest and fastest to pay for and get done,’ Mr Coleman said. ‘The housing plan is flexible enough that we can succeed in financing 165,000 units within the 10-year time frame.’

In July, Mr Bloomberg said the city had financed 83,000 units of affordable housing, or half of the goal, since he took office on Jan 1, 2002, and created 64,000 since he announced his ‘New Housing Marketplace Plan’, Mr Coleman said. The administration reached that target a year ahead of schedule, he said.

The blueprint will not be easily fulfilled, the report said. ‘Over the plan’s remaining six years and with over 100,000 units still to go – two-thirds of which will have to be new construction in order to achieve the plan’s goals – the city faces some potential challenges to building on the progress to date,’ the report said.

Of the US$7.5 billion planned administration expenditure between 2004 and 2013, US$2.5 billion was spent through the 2007 fiscal year, it said.

Almost 64,000 units of housing have been created, including 24,000 new units, or 26 per cent of the administration’s goal, and 40,000 renovated units, or 55 per cent of the goal.

The city has struck agreements with building owners to charge below market rents as a condition for giving them low-cost mortgages and other financing. Buildings taken over because owners failed to pay property taxes accounted for about 9,300 units preserved. They have been transferred to private ownership, the report said.

The plan envisions about 68 per cent of the units be ‘low- income housing’, with rents for people earning 80 per cent or less of Area Median Income, or US$56,700 for a family of four.

Another 11 per cent are for ‘moderate-income households’, earning as much as US$85,080 for a family of four the report said. The remaining 21 per cent would be for ‘middle-income’ households earning 250 per cent of the area median, or US$177,000 for a family of four.

 

Source: Bloomberg (Business Times 13 Nov 07)

Mortgage market losses may hit US$400b

(NEW YORK) Losses from the falling value of sub-prime mortgage assets may reach US$300 billion to US$400 billion worldwide, Deutsche Bank AG analysts said.

Wall Street’s largest banks and brokers will be forced to write down as much as US$130 billion because of the slump in subprime-related debt, according to a report yesterday by Mike Mayo, a New York-based analyst. The rest of the losses will come from smaller banks and investors in mortgage-related securities.

Citigroup Inc, Merrill Lynch & Co and Morgan Stanley led more than US$40 billion of writedowns of assets as record US foreclosures plundered asset prices. About US$1.2 trillion of the US$10 trillion of outstanding US home loans are considered to be sub-prime, Mr Mayo said in the note.

‘We’re not out of the woods yet,’ said Mondher Bettaieb-Loriot, who helps manage the equivalent of about US$58 billion at Swisscanto Asset Management in Zurich. ‘There are more losses to be taken and there’s more negative news to come. At some point it will be a buying opportunity but we’re not there yet.’

Deutsche Bank expects 30 per cent to 40 per cent of sub-prime debt to default. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mr Mayo wrote. The forecasts on total writedowns are based on ’seat-of-the-pants’ estimates using losses announced by the biggest securities firms, he said.

Banks and brokers may have to write off US$60 billion to US$70 billion this year, Mr Mayo wrote. The estimate is based on known charges of US$43 billion and expected additional losses of US$25 billion.

The report didn’t include writedowns at Frankfurt-based Deutsche Bank, which were 2.16 billion euros (S $4.56 billion) in the third quarter. Loss rates on about US$200 billion of securities based on derivatives linked to sub-prime debt will run to as high as 80 per cent, Mr Mayo wrote.

Estimates of losses have soared this year as defaults and foreclosures increased.

Meanwhile, Morgan Stanley analysts said that HSBC Holdings may have to set aside more money for bad loans in the US. They cut the stock’s rating to ‘equal-weight’, from ‘overweight’. Morgan Stanley expects ‘a significant jump in credit costs across consumer loan classes,’ Hong Kong-based analyst Anil Agarwal wrote in a note yesterday. With defaults increasing, HSBC’s US$2.1 billion of provisions against its US $45 billion mortgage services business ‘looks light’, he said.

 

Source: Bloomberg (Business Times 13 Nov 07)

Foreign cash could provide relief for US housing market

Some mortgage brokers are already seeing a boost in inquiries about buying property from overseas

(NEW YORK) The weakening dollar has caused many problems for consumers, but it may also be providing the fuel for one unintended – and very welcome – benefit: a rally in the struggling US housing market driven by foreign investors.

For an individual or developer trying to sell a home, interested buyers are just as likely to already have a place in London or Paris as they are to be first-timers new to the market.

‘European investment is likely to pick up,’ said Mark Vitner, chief economist for Charlotte, North Carolina-based Wachovia Corp. ‘Now is the time to come over and take advantage.’

The theory goes that foreign investors step in and replace first-time home buyers who have been squeezed out of the housing market during the recent downturn. These new investors in turn allow current homeowners to sell and trade up to larger homes.

That will help restart owners moving up the housing ladder, a process that had been key to economic growth in recent years.

Some mortgage brokers are already seeing a boost in inquiries about buying property from overseas. Dan Green, a certified mortgage planning specialist and author of TheMortgageReports.com, said the number of inquiries he has received from outside the US is probably five to 10 times larger than it was a year ago. A boost in the number of homebuyers would provide needed relief for the beleaguered housing market.

Home sale prices fell every month in 2007 through August, according to the S&P/Case-Shiller index. Existing home sales have declined for eight straight months through September, according to the National Association of Realtors.

As the housing market has plummeted, the dollar has also sunk to record lows compared to other currencies, such as the euro, meaning more spendable cash in the US.

‘The dollar is on sale,’ said Susan Wachter, a professor of real estate at the Wharton School at the University of Pennsylvania.

Today, a foreign buyer would need only 34,100 euros to make a US$50,000 down payment on a house. At the beginning of the year, the same buyer would have needed 37,920 euros to make the same down payment.

The influx of foreign investors can help set a floor for the real estate market, Mr Green said.

Because lending guidelines have been so restricted in recent months due to rising delinquencies and defaults, it is more difficult for US customers to get a home loan. First-time homebuyers are especially being squeezed right now, Mr Green said, and that is where the foreigners can provide support.

For investors from countries like Ireland, the exchange rate is providing a boost in spending power, said Phillip Hegarty, the sales director for Castleroc Estates, a Dublin, Ireland-based firm that works with Irish investors to buy residential and commercial real estate in the United States. ‘It’s an enticing investment,’ Mr Hegarty said.

Mr Hegarty said there is plenty of demand for investment in locations like Chicago and New York, and often that demand exceeds supply.

But New York and Chicago are not the only locations likely to provide popular options for foreign investors.

Places like Florida and California are likely to see a surge in foreign investment.

‘In a market with great turmoil, (the weak dollar) is one factor supporting some key markets,’ Prof Wachter said of the weakening dollar.

Prof Wachter said markets like Miami and San Francisco, which are under pressure from the US slowdown, are increasingly being supported by foreign investors.

 

Source: AP (Business Times 13 Nov 07)

Soros warns of ’serious’ US economic correction

He says things are worse than what Fed chief sees

(NEW YORK) Billionaire investor George Soros has forecast that the US economy is ‘on the verge of a very serious economic correction’ after decades of overspending.

‘We have borrowed an awful lot of money and now the bill is coming to us,’ he said during a lecture at the New York University, adding that the war on terror ‘has thrown America out of the rails’.

Asked whether a recession was inevitable, Mr Soros said: ‘I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing.’

On the same note, David Rosenberg, chief economist for North America at Merrill Lynch & Co in New York, forecast that the US economy will come close to stalling in the fourth quarter.

The economy will probably grow at an annual rate of between zero per cent and one per cent, Mr Rosenberg said in his weekly report to clients dated Nov 2. He currently forecasts a 0.7 per cent pace of expansion this quarter.

The third-quarter’s 3.9 per cent growth rate was artificially boosted by ‘non-recurring factors’ that will disappear in the last three months of the year, Mr Rosenberg said.

Add to that the collapse in sub-prime-mortgage lending and a worsening housing slump and the expansion will slow, he said in an interview on Monday.

‘This is by far the most leveraged economic expansion in modern history,’ Mr Rosenberg said in the interview.

Parts of the mortgage market ‘just aren’t coming back. This is going to have a deleterious impact on growth.’

A drop in gasoline prices even as oil prices jumped, a surge in auto inventories before threatened strikes and an increase in defence spending propelled third-quarter growth and won’t be repeated, Mr Rosenberg’s report said.

On the forex market, Mr Soros, famous for his speculative attack on the Bank of England that made him more than US$1 billion, declined to nominate which currencies were more vulnerable currently. He also declined to comment specifically on the dollar.

‘I know exactly where the currencies are going to but I’m not going to tell that to you,’ he told the audience.

Last week, investment guru Jim Rogers, who co-founded the Quantum Fund with Mr Soros in the 1970s, recommended selling the dollar as well as US investment banks and US housing stocks.

In an interview with Bloomberg News Agency, Mr Rogers said that US credit markets are enduring their worst bubble ever and forecast that it may take six years for them to return to normal.

‘Never in American history have people been able to buy a house with no money down,’ Mr Rogers said. ‘We have the worst credit bubble, and it’s going to take a long time to work its way out. You don’t cure a bubble in five or six months. It takes five or six years.’

Mr Rogers, the chairman of Beeland Interests Inc, also said he’s pessimistic on the US dollar. He said he hoped the Fed raises interest rates to stem inflation, but if it does ‘the dollar is going to collapse’.

 

Source: Reuters, Bloomberg (BusinessTimes 7 Nov 07)

COMMENTARY – Bank’s explanation for sub-prime losses defies belief

NEW YORK – CITIGROUP says it isn’t sure how much its United States sub-prime-related assets have fallen in value this quarter. Maybe it is US$8 billion (S$11.6 billion). Maybe it is US$11 billion.

On one point, though, Citigroup is not budging: It says none of these declines began until after the last quarter ended.

The news from the nation’s biggest bank evokes memories of the scene from the 1984 hit comedy Beverly Hills Cop where Eddie Murphy’s character, detective Axel Foley, hands a valet the keys to his beat-up Chevy Nova at a pricey country club he’d never visited before. ‘Can you put this in a good spot? Cause all of this s*** happened the last time I parked here,’ Mr Foley said, straight-faced.

It is as if we are supposed to believe that all this stuff at Citigroup happened after September ended, notwithstanding the US$8.4 billion of bad US sub-prime mortgage stuff at Merrill Lynch that happened before September ended. And we are also supposed to believe that Citigroup’s brass did not have a clue any sooner.

In its Sunday press statement, issued the same day Mr Charles Prince resigned as chief executive officer, the company said: ‘These declines in the fair value of Citi’s sub-prime related direct exposures followed a series of rating agency downgrades of sub-prime US mortgage-related assets and other market developments, which occurred after the end of the third quarter.’

In other words: We did nothing wrong. And there is no reason to question the US$2.21 billion of net income Citigroup reported for the third quarter, down a mere 60 per cent from a year earlier.

As Citigroup chief financial officer Gary Crittenden said on Monday during a conference call with analysts, the declines were ‘driven by some events that have happened during the month of October’.

To believe Citigroup, until the rating companies’ post-Sept 30 downgrades, the US sub-prime holdings in its securities-and-banking business were still worth US$55 billion, as reflected on the company’s latest balance sheet.

Perhaps it is true. But Citigroup has given investors little evidence to believe it is.

Rather, the line that Citigroup has served up for investors is that it is the rating companies’ doing. Forget the year-long wave of articles chronicling how far behind Moody’s Investors Service and Standard & Poor’s (S&P) were in downgrading all the AAA-rated toxic waste that Citigroup and other banks gorged on during the US sub-prime mortgage binge.

Never mind that the downgrades came long after the values of so many of these collateralised debt obligations and other Wall Street exotica had plunged. And put aside the publicity about all the government investigations that began last quarter – the ones probing the degree to which the rating firms were either out to lunch or too close to the companies that paid them to size up their deals.

No, Citigroup’s faith in the rating companies’ abilities appears to have been so unshaken that it waited until Moody’s and S&P spoke before determining that its US sub- prime holdings had tumbled by an additional US $8 billion to US$11 billion.

For all the armies of employees at Citigroup whose job it is to monitor these assets’ values, the bank outsourced a large chunk of its critical-thinking skills to the numbers jockeys at the rating companies. And that is putting a positive spin on it.

What really should concern investors, though, is that Citigroup and Merrill can’t possibly be alone.

Source: BLOOMBERG NEWS (The Straits Times 7 Nov 07)

Sub-prime woes may hit 10-year Treasuries next

(NEW YORK) The US housing slowdown that propelled 10-year Treasuries to their biggest gains since 2002 may soon make the same securities laggards in the government bond market.

The notes returned 9.6 per cent since mid-June as investors sought a haven from credit market losses caused by sub-prime mortgages, Merrill Lynch index data shows. Sales of bonds backed by housing loans have dropped 20 per cent this year as home purchases fell, according to Citigroup, reducing the need for longer-maturity Treasuries as a hedge.

Fund managers may ‘no longer buy the 10-year Treasury’ to protect their holdings, said Ajay Rajadhyaksha, head of interest rate strategy in New York at Barclays Capital.

The mortgage market’s influence over Treasuries has increased as the amount of home loans quadrupled to US$10.9 trillion since 2001, according to the Mortgage Bankers Association. More than US$6 trillion of securities backed by home loans are outstanding, compared with US$4.5 trillion of US government debt securities, Treasury data shows.

About US$100 billion of 10-year Treasuries trade every week among the primary dealers. Hedging by owners of housing- related bonds surges to as much as 45 per cent of that amount when yields drop by about a quarter percentage point.

 

Source: Bloomberg (Business Times 6 Nov 07)

High US home inventories a major concern: Greenspan

TOKYO – Former Federal Reserve Chairman Alan Greenspan said on Tuesday that falling US home prices and high home inventories raised major concerns amid the ongoing turmoil in the sub-prime mortgage market.

He added that the slide in the dollar was neutral for the economy, and that the currency would slide in the long run relative to East Asian currencies.

‘I don’t think it’s favourable or unfavourable,’ Mr Greenspan said when asked about the falling dollar.

‘What is not true is that because we have a large current account deficit, the dollar has to weaken,’ said Mr Greenspan, who was speaking to a CEO conference in Tokyo via video link from Washington.

 

Source: REUTERS (Business Times 6 Nov 07)

US rate cut seen buying Fed breathing space

(CHICAGO) The Federal Reserve’s decision on Wednesday to cut interest rates for a second consecutive meeting could buy policymakers a few months’ grace to watch incoming US economic data before deciding whether to move rates again. The Federal Open Market Committee, as expected, lowered its target for the federal funds rate to 4.5 per cent from 4.75 per cent, taking the benchmark rate back to early – 2006 levels.

In their statement, policymakers said that upside risks to inflation now roughly balance downside risks to growth.

‘The data and the circumstances suggest to me that the Fed need not commit itself and it probably has time to see what direction the data will go in,’ said Marvin Goodfriend, a professor at Carnegie Mellon University in Pittsburgh.

After reading the statement, dealers shifted their bets to guess that the Fed is more likely to hold rates steady than to cut them at its next meeting on Dec 11 as it evaluates how the growth and inflation outlook is evolving.

Short-term rate futures, which measure market expectations on Fed policy, knocked the implied chances of a December rate cut as low as 40 per cent from 64 per cent overnight.

Already hanging over the market before the FOMC decision was Wednesday’s surprisingly strong reading on third-quarter gross domestic product which rose at a solid 3.9 per cent annual rate. ‘There will be no additional rate cuts unless the economic outlook deteriorates further,’ said Chris Low, chief economist at FTN Financial in New York.

In the immediate term, the Fed decision probably will not do much for banks struggling with rising credit losses as the housing market retreats.

The cut will lower a variety of rates pegged to short-term market rates. Yet, because rate cuts typically take six months to work into the economy, the latest reduction and even the cut in September would need time to have their full effect.

 

Source: Reuters (Business Times 2 Nov 07)

US rate cuts won’t defuse sub-prime mess: ‘Mr Yen’

Asia, though not much affected so far, must be vigilant

(SINGAPORE) Interest rate cuts by the US Federal Reserve – which have amounted to 75 basis points since Sept 18 – are unlikely to defuse the US sub-prime mortgage crisis, according to the influential economist Eisuke Sakakibara.

Mr Sakakibara, formerly Japan’s vice-minister for finance and international affairs and now a professor at Tokyo’s Waseda University, also warned that global financial markets are likely to face further bouts of volatility. What we have seen thus far ‘is only the tip of the iceberg’, he said, adding that the problem will probably linger for 6-18 months.

Speaking at a lunchtime forum organised by newly listed Uni-Asia Finance Corporation, Mr Sakakibara pointed out that interest rate cuts by the Fed were likely to be ineffective in addressing the problems emanating from the US sub-prime mortgage sector because the cost of funding is not the key issue; rather it is the uncertainty surrounding the valuations of sub-prime assets and other structured products held by many financial institutions.

He indicated, however, that the ’superfund’ proposed by some major American banks (including Citigroup, Bank of America and JPMorgan) to buy sub-prime assets could be helpful, as might a move to provide government financial support to distressed borrowers, which is being discussed in the US Congress. But such initiatives would take time to work.

Mr Sakakibara, who was Japan’s vice-minister for finance during the Asian crisis of 1997/98, cautioned that although Asia has been relatively unaffected by the US sub-prime woes thus far, it needs to be vigilant. He recalled that during the Asian crisis, US policymakers thought that the American economy would be relatively insulated – until they were shocked by the Russian bond default of 1998 and the ensuing collapse of a large hedge fund.

The world economy is highly integrated now, he said, and it is highly possible that the US – still its primary engine – will slow down sharply or even go into recession. In such an event, Asia cannot be unaffected.

While Asian economies are doing well and will account for an increasing share of the global economy, right now, Asian asset markets are ’somewhat bubbly’, Mr Sakakibara said. ‘The situation in Asia seems too good, and usually a ‘too good’ situation doesn’t last.’

When it does turn, the decline could happen ‘very abruptly’.

Of all the Asian markets, China is ‘the biggest bubble’, Mr Sakakibara added, with both investment and GDP growth expanding at breakneck speed.

Chinese policymakers know they have to tighten monetary policies sooner or later, and a major adjustment in China’s asset markets is inevitable, perhaps in 2008, after the Olympics. If China’s economy slows down in tandem with the US, that would exacerbate the problems for the global economy, Mr Sakakibara warned.

The economist – who was known as ‘Mr Yen’ when he was a policymaker because his statements were viewed as affecting currency markets – said that as long as the Bank of Japan is unable to raise interest rates, the Japanese yen will remain undervalued. The bank actually did want to raise rates in September, he added, but refrained from doing so on account of the US sub-prime mortgage problem.

With near-zero interest rates at home, Japanese investors are continuing to seek higher-yielding investments overseas, and while this trend persists the yen will probably continue to trade within the range of 110-115 to the US dollar, he said. But if, owing to some trigger such as a dramatic US slowdown, the outflows from Japan dry up or reverse, the yen would rebound sharply from its ‘really cheap’ current level, he said.

 

Source: Business Times 2 Nov 07

UBS hit by bigger than expected loss

First quarterly loss in 5 years, investment bank unlikely to break even in Q4

(ZURICH) UBS AG reported a higher-than-expected third-quarter loss after hefty writedowns on sub-primerelated investments, but said it expects to turn in a group profit in the last quarter.

The Swiss bank, which took charges of 4.2 billion Swiss francs (S$5.22 billion) on sub-prime-related losses in fixed income in the third quarter, said yesterday its investment bank was unlikely to break even in the final quarter.

‘While we are still disappointed with the result, we have a very strong set of numbers in particular in assetgathering and the commission-based businesses,’ chief executive officer Marcel Rohner told journalists on a conference call.

It was UBS’s first quarterly loss in five years and the first significant loss in a three-month period since 1998, when the bank was hit by the economic crisis in Russia.

UBS repeated warnings of further write-downs, but Mr Rohner declined to give any detailed forecasts. ‘The range of possible outcomes is widening,’ he said.

UBS made a 726 million franc pretax loss in the third quarter, after a 2.199 billion francs net profit a year ago.

The third-quarter net loss was 830 million francs, higher than a Reuters poll of 14 analysts giving an average forecast of a 668 million franc loss.

Analysts said they were now bracing for more writedowns in the final quarter of the year. ‘At the moment it looks like further writedowns are probable,’ said Andreas Venditti, an analyst at ZKB here.

Banks worldwide have taken charges totalling more than US$20 billion on holdings in mortgage-backed securities which have been hit by a meltdown in US sub-prime mortgages – loans extended to borrowers with patchy credit histories.

‘The first quarter will depend on where we end with the US housing market,’ Mr Rohner said in a conference call.

The fourth quarter had started profitably for all businesses, including the investment bank, he said.

‘However the FICC (fixed income, currencies and commodities) business remains exposed to further deterioration in the US housing and mortgage markets,’ a UBS statement said.

Ratings downgrades by credit ratings agencies for mortgage-related securities could trigger more writedowns on the bank’s securities portfolio, it said.

Net new money in wealth management was 40.2 billion francs in the third quarter, up from 26.8 billion francs in the third quarter of 2006. Net new money inflows were 35.2 billion francs in the second quarter of 2007.

‘Our third quarter result was unquestionably disappointing. However, we have introduced a number of measures to improve performance,’ Mr Rohner said in a statement. ‘We are also taking steps to strengthen our market risk management.’

UBS made a second-quarter net profit of 5.62 billion francs, including a windfall from the sale of a minority stake in Swiss private bank Julius Baer.

UBS on Monday confirmed guidance issued at the start of October that it faced a third-quarter pretax loss of 600 million to 800 million francs.

 

Source: Reuters (Business Times 31 Oct 07)

US sub-prime losses slow BOC Q3 net growth

(SHANGHAI) Bank of China Ltd (BOC), the nation’s third-largest bank, reported third-quarter profit growth that trailed rivals as losses related to US sub-prime mortgages dented earnings.

Net income climbed to 15.9 billion yuan (S$3.1 billion), or 0.06 yuan a share, from 13 billion yuan, or 0.05 yuan a year earlier, the Beijing-based bank said in a statement yesterday. Profit growth slowed to 22 per cent after a US$322 million writedown on US securities linked to borrowers with poor credit.

BOC’s US$7.9 billion of sub-prime-linked holdings countered gains from a domestic market where the fastest economic growth in a decade stoked loan demand. Industrial & Commercial Bank of China Ltd (ICBC), the nation’s largest, posted 76 per cent profit growth for the quarter and China Merchants Bank Co said earnings surged 144 per cent.

‘We are really downbeat on Bank of China,’ said Jim Antos, a Hong Kong-based analyst at Bear Stearns Asia Ltd who rates the stock ‘underperform’. ‘What we’ve seen so far is more like 90 per cent average growth for Chinese banks.’ BOC gets about 35 per cent of profit from outside the mainland, compared with less than 5 per cent for ICBC.

Most Chinese banks have little direct investment in securities linked to US home loans to people with poor credit, compared with their global peers. The fallout from rising sub-prime mortgages cost financial firms worldwide more than US$30 billion in the third quarter in writedowns and bad debt.

 

Source: Bloomberg (Business Times 31 Oct 07)

No certainty of Fed rate cut this week

(TOKYO) A Federal Reserve interest rate cut this week is no sure thing and officials are not seriously considering a half-point reduction in overnight rates, The Wall Street Journal reported yesterday without citing sources.

The article by Greg Ip, the Journal’s Fed watcher who is known for sometimes reflecting the views of senior central bankers, said that policymakers view this week’s decision as a choice between a quarterpoint cut to 4.5 per cent and not moving at all.

Investors have widely expected the Fed to cut rates at a two-day meeting ending today, following a halfpoint slash in September, to limit the economic damage from the housing market’s incessant slide. Futures on the fed funds rate have shown a small chance of a half-point cut.

Currency traders in Tokyo said that the article helped nudge the US dollar up slightly from near record lows against the euro and multi- decade lows against other major currencies.

Mr Ip said that perhaps the biggest risk for the Fed is that the market’s certainty on a pending rate cut puts a burden on the central bank to deliver. ‘But the current market environment is more fragile than usual, and thus the consequences of disappointing the market are potentially more damaging. Against that, the Fed will have to weigh the risk that a cut will stoke inflationary psychology,’ Mr Ip writes in the article on the Journal’s website.

The Fed can mitigate such risks with its post-meeting statement by either leaving the door open to a future cut if it does not move this week or by dampening expectations for future monetary easing if it does lower rates, Mr Ip said.

He added that the case for keeping policy on hold comes down to the economic outlook. While the housing market has deteriorated further, there has been little evidence of spillover into the broader economy, he said.

 

Source: Reuters (Business Times 31 Oct 07)

Sub-prime losses up to 30b yen: Mitsubishi UFJ

IN TOKYO

EVIDENCE of increasing international fallout from the US sub-prime mortgage crisis mounted yesterday as Japan’s biggest bank, Mitsubishi UFJ Financial Group, said it would need to write down the value of sub-prime-related investments by up to 30 billion yen (S$379 million) – six times more than previously announced.

The bank is expected to cut its profit forecast for this year by 25 per cent as a result. While small relative to the spectacular losses suffered by Merrill Lynch and other Wall Street houses as a result of the subprime crisis, Mitsubishi UFJ’s admission is likely to unnerve markets, analysts said.

Shortly after the market turmoil of August, the Washington-based Institute of International Finance, which represents several hundred of the world’s leading financial institutions, warned that fall-out in Asia and elsewhere from the sub-prime crisis could prove to be worse than generally expected.

Mitsubishi UFJ (MUFG) said that appraisal losses related to the sub-prime mortgage market had probably risen to 20 to 30 billion yen as at the end of September, compared with the five billion yen the group announced in August. But a spokesman for the bank declined to confirm reports that profits would be reduced sharply as a result.

MUFG is the latest of several Tokyo financial institutions to announce greater-than-expected losses from sub-prime investments during the past week. Nomura Holdings, Japan’s largest brokerage, posted its first quarterly net loss in four and a half years last week owing to losses on mortgage-backed securities.

MUFG’s exposure to sub-prime-related investments was 280 billion yen as at July, according to the latest figures available from the bank reported by Reuters. That compares with the 95 billion yen held by Sumitomo Mitsui Financial Group, Japan’s third-largest bank, by the end of September. Mizuho Financial Group, Japan’s second-largest bank, said in the summer that it had sold off almost all of its sub-prime investments.

Another leading Japanese bank, Shinsei, said yesterday that its exposure to the sub-prime housing market was largely unchanged since August, when it said it had about US$500 million in investments tied to US mortgages. The bank last week cut its full-year profit forecast by 14 per cent and said it would not pay a dividend for the first half because it was forced to write down the value of sub-prime investments.

The IIF report said that the immediate effect of recent turmoil on emerging markets has been diminished by global investor appetite for risk and a lowering of credit ratings. But it added that ‘other influences will take more time to play out – for example, the damage done to longer-term economic growth in emerging markets and whether US mortgage damage dampens growth of mortgage markets in emerging economies’.

So far, all the high-profile losses suffered by holders of securities linked to the US sub-prime mortgage sector have been in mature economies, but the institute warned: ‘Watch out for losses by asset holders domiciled in emerging economies that have not yet been publicly acknowledged.’

 

Source: Business Times 30 Oct 07

Affluent Asians buck downtown LA trends

Koreans and others helping fuel resurgence of area as a place to live, not just work

(LOS ANGELES) Architect Christopher Pak understands what upwardly mobile Koreans want and that’s why his latest project, a 22-storey residential tower, has no apartments on the fourth and fourteenth floors.

The number 4 sounds like the word ‘death’ in Korean, Mr Pak says.

So in his building the fourth level will be for parking and the residential floors will skip the fourteenth.

Pleasing Korean clients is a key part of keeping the downtown and near-downtown Los Angeles property market hot, in stark contrast to the chilly sales in most of Southern California in the wake of the sub-prime lending crisis.

Koreans and other affluent Asians are joining the ranks of young loft dwellers who have fuelled a resurgence of downtown Los Angeles as a place to live, not just work.

‘Koreans have a natural affinity to downtown,’ said Mr Pak, a Korean American who is also a partner in the US $160 million development, due to be completed in 2008.

Koreans, he said, believe urban cores as having better quality of life than rural or suburban areas – an idea counterintuitive to many in this sprawling city of 3.8 million with few high rises.

The near-downtown neighbourhood of Koreatown had already been undergoing a major rehabilitation from its days of devastation in the 1992 race riots.

Today, the neighbourhood is completely different, bustling with activity day and night and increasingly awash in wealth.

After the Korean government relaxed overseas investment limits in 2006, individuals and real estate firms have descended on the Los Angeles market – home to the largest Korean community in the world outside of Korea.

While Koreatown was an obvious first destination, this affluent group has rapidly expanded into the dynamic downtown market down the street.

More than 7,000 new residential units have opened in downtown Los Angeles since 1999, with another 7,500 under construction and several larger projects close to breaking ground, according to the downtown Los Angeles Business Improvement District. The BID estimates the population will double from the current 29,000 to 58,000 by 2009.

Almost 25 per cent of downtown’s residents are Asian.

‘The sub-prime meltdown has not affected our downtown market,’ said Robert Cipolloni, a real estate consultant at Windermere Properties who also moved downtown in 2006. ‘Yes, there’s a glut with all of the new condos being built, but at the pace that people are moving into downtown LA, that glut is going to be eaten up.’

The anticipated growth has recently sparked some eye-opening projects. The largest is Park Fifth, a 270-metre, US $1 billion high-rise condominium that will house 726 residential units ranging in price from US$400,000 to US$5 million.

The building, to be completed in 2010, has been in presales for just over two months and 50 per cent of the units have been sold, according to developers.

Mr Cipolloni recalled a gathering hosted by a Korean agent that resulted in 40 people each putting down US $10,000 deposits to reserve units in Park Fifth.

Money appears not to be an issue, especially compared with prices back home.

In a 2007 cost-of-living survey from Mercer Human Resource Consulting, Asian cities were three of the top five most expensive in the world, with Seoul in third place, followed by Tokyo and Hong Kong. Los Angeles was a relative bargain in 42nd place.

‘We definitely have a large Asian element,’ said Richard Marr, Park Fifth’s project manager, who says he can’t say for certain how many of Park Fifth’s presales are Asian buyers. ‘If you go to Seoul, Shanghai, Singapore, there’s a certain prestige in living in taller buildings on the higher floors.’ Korea’s largest real estate development company, Shin Young, is buying a parcel of downtown land for a 334-unit condominium building.

The company is already building a 40-storey condo skyscraper in the heart of Koreatown. However, its downtown building won’t contain the accoutrements to appeal to Korean buyers. It’s an investment property for American buyers, the company said.

Koreans aren’t the first Asian community to invest heavily in downtown Los Angeles. In the 1980s, Japanese companies were on a tear to acquire downtown real estate.

‘When the Nikkei was booming, the Japanese bought into trophy Los Angeles properties at prices that were too high,’ said Stuart Gabriel, director of UCLA’s Richard S Ziman Center for Real Estate. ‘The regional downturn of the 1990s crushed them.’

Despite the new arrivals, including the area’s first supermarket, downtown remains the home of the country’s largest skid row and parts are deserted after dark. That’s why Mr Gabriel strikes a cautionary note about the downtown housing rush.

‘If I were the developer of (Park Fifth), I’d be concerned about the timing of that play,’ he said. ‘You don’t want to repeat the mistakes of Miami and San Diego.’

 

Source: Reuters (Businss Times 30 Oct 07)

Rise in US new home sales ‘too good to be true’

WASHINGTON – LAST month’s surprising rise in new home sales in the United States is too good to be true and will likely be revised away, say analysts.

Troubles in the US housing market have made tracking new-home sales activity more difficult and more volatile in recent months, resulting in huge downward revisions to government data.

The government reported on Thursday that new home sales showed a nearly 5 per cent rise in sales last month.

But that figure was driven by a massive downward revision to the prior month’s figure, which brought August sales to an 11-year low.

So while September saw a ‘gain’ in sales, that came on the heels of revisions of the prior three months that sliced off 167,000 units, or nearly 3 per cent of total sales, in that period.

Economists say this uncertainty will likely continue, particularly as builders see a rise in cancellation rates.

‘The scale and persistence of the downward revisions to this data series is now in unchartered territory,’ said Mr Richard Iley at BNP Paribas, cautioning that the true take on last month’s performance is probably a couple of months away when the government makes its revisions.

‘September’s apparent ‘improvement’ will likely be revised away over the next two months,’ he said.

When government statisticians calculate their monthly home sales figures, they assume they will receive late reports from builders and, therefore, estimate that amount when producing their initial estimate.

In addition, the statisticians assume they will receive reports from builders of so-called prior sales, or contracts made years earlier for new homes.

Later, they will reconcile the late reports from builders in addition to these prior sales reports and revise their figures.

But in recent months, they have been receiving fewer late reports and prior sales reports – all signs of deterioration in the housing market.

Said Mr Bernard Baumohl, managing director of The Economic Outlook Group: ‘This may turn out to be the worst housing recession since the end of World War II. It’s a slow bleed and it continues to deteriorate.’

Source: REUTERS (The Straits Times 27 Oct 07)

LATEST US DATA – New home sales in surprise Sept upturn

But orders for durables fall 1.7% in the first back-to- back decline in a year

(WASHINGTON) Sales of new homes in the US posted an unexpected gain in September although the improvement came after sales had fallen to the slowest pace in more than a decade.

The Commerce Department reported yesterday that sales of new homes rose by 4.8 per cent last month to a seasonally adjusted annual rate of 770,000 units. That level of activity was still 23.3 per cent below a year ago, indicating that housing remains in a steep downturn.

Analysts had been expecting sales would fall by 2.5 per cent last month from an August sales pace that had originally been reported as 795,000 homes. However, that figure was revised sharply lower in the new report to show a sales rate of just 735,000 in August, the slowest sales pace in 11 years.

Meanwhile, a second report showed that orders for big-ticket long-lasting manufactured goods dropped an unexpected 1.7 per cent last month following an even bigger 5.3 per cent plunge in August while the Labor Department reported that the number of people filing new claims for unemployment benefits was higher than expected, painting a picture of a weakening economy.

The first back-to-back declines in factory orders in more than a year raised new worries about how much harm would be inflicted on the economy from a severe housing slump and credit crunch.

The Labor Department said that the number of newly laid off workers filing claims for unemployment benefits fell by 8,000 last week to 331,000.

The report on home sales showed that the median new home price in September rose to US$238,000, up 2.5 per cent from August, which had seen prices fall to their lowest level in nearly a year.

The reports released yesterday sent US Treasury bonds higher, while stock futures pared their gains and the dollar fell.

‘Durables are negative and a bit of a disappointment. The report does fall into the picture of a slowing US economy and therefore heightens expectations for a rate cut. That of course puts pressure on the dollar,’ said Brian Dolan, director of foreign exchange strategy at Forex.com.

Even when volatile data for transportation and defence orders were stripped away, the total was weaker than expected.

‘It’s perhaps not quite as weak as the headline suggests,’ said Adam York, an economist at Wachovia Corp.

‘Manufacturing will have slow-but-steady growth through the end of the year.’ Mr Wachovia projected the biggest decline among economists surveyed by Bloomberg News.

Initial claims for state unemployment insurance benefits totalled 331,000 in the week ended Oct 20 following the prior week’s upwardly revised 339,000, which originally had been reported as 337,000. Economists surveyed by Reuters had forecast a much lower total of 320,000 claims for last week.

Many analysts however believe that the economy will still be able to avoid an outright recession because the Federal Reserve, which cut a key interest rate for the first time in four years, will keep cutting rates to stimulate economic growth. The Fed meets again next week.

In a new report released yesterday, the congressional Joint Economic Committee estimated that two million subprime mortgages could go into foreclosure over the next 18 months as initially low introductory rates reset at much higher levels.

 

Source: AP, Reuters, Bloomberg (Business Times 26 Oct 07)

Falling property could cost US$4t

Financial firms could face aggregate losses of some US$400b says NYT

(NEW YORK) US real estate wealth is expected to fall anywhere from US$2 trillion to US$4 trillion when the total costs of the recent credit crunch are tallied, the New York Times reported yesterday, citing economists.

Household real estate wealth – the equity people own in their homes, rather than what they owe lenders – currently totals about US$21 trillion, according to the Federal Reserve.

And financial firms could face aggregate losses of some US$400 billion from expanding troubles related to the subprime mortgage market fallout, the paper said.

That is higher than the roughly US$240 billion in financial institution losses from the savings and loan crisis of the early 1990s, adjusted for inflation, the paper said.

The losses in real estate wealth, while large, are substantially less than what investors suffered in the stock market collapse earlier this decade, which erased more than US$7 trillion, or about 40 per cent of market value, the paper said.

However, the recent declines are likely to have a significant impact on consumer spending, since owners will not be able to cash out as much equity from their property, the paper said.

It said the economists’ loss estimates for both real estate and financial firms are preliminary and could get much higher.

The Joint Economic Committee of Congress, in a report issued yesterday, predicted about two million foreclosures by the end of next year in homes purchased with sub-prime loans, the paper said.

That’s much higher than the Bush Administration forecast in September of some 500,000 foreclosures, the paper said.

In recent years, the rise in real estate values has helped propel consumer spending, as homeowners refinanced mortgages and took out home equity loans.

‘There weren’t a lot of people living off their capital gains from stocks,’ said Jane Caron, chief economic strategist at Dwight Asset Management. ‘There were a lot of people using their home as a piggy bank.’

Of course, many people who bought their houses several years ago are still ahead financially, because the sharp run-up in home values is still far greater than the expected decline. Those who bought close to the peak stand to lose the most if they have to sell in the near future.

The Joint Economic Committee estimates that the loss of real estate wealth just from foreclosures on sub-prime loans will be about US$73 billion.

Another US$33 billion would be lost because foreclosed homes tend to drive down the prices of other houses in the neighbourhood.

Those figures include US$951 million in lost property tax revenue to state and local governments, which will also have to spend more on policing neighbourhoods with vacant homes.

The states most likely to be hard hit fall into two categories: those where prices had been rising fastest, like California and Florida, and Midwestern states with weak economies, like Michigan and Ohio, where people with low or moderate incomes made heavy use of sub-prime loans to become homeowners and consolidate debts.

Global Insight, a research firm, predicts that the national average for housing prices will drop 5 per cent over the next year and 10 per cent before mid-2009, for a total of about US$2 trillion.

Economists at Goldman Sachs have predicted prices will drop by 15 per cent, meaning an overall decline of more than US$3 trillion; other forecasters have said the decline could be 20 per cent or more.

Economists continue to update their predictions on how the loss of housing wealth might affect the overall economy.

Nigel Gault, chief domestic economist at Global Insight, said he assumes that consumers reduce their spending by about six US cents for every dollar of lost wealth.

If prices drop 5 per cent next year, that would mean a decline of US$60 billion in spending, all else being equal.

That would be a noticeable slowdown, but not enough to cause a recession.

 

Source: Reuters, NYT (Business Times 26 Oct 07)

US sub-prime solution flies in face of ‘97 advice to Asia

ASIANS could be excused for looking askance at Henry Paulson’s plan to calm credit markets. The reason: It’s the sort of thing that had US Treasury secretaries browbeating Asians a decade ago. One thinks back to the whistle-stop Asian tours then-treasury secretary Robert Rubin did 10 years ago. Such trips became more numerous as Asia’s financial crisis spread from Bangkok to Jakarta to Seoul to Kuala Lumpur and beyond.

At every stop, Treasury bigwigs lectured leaders to scrap the financial socialism and crony capitalism feeding the excesses behind Asia’s turmoil. They counselled fiscal belt-tightening, higher interest rates, stronger currencies, avoiding asset bubbles and for limits on bailing out reckless investors.

Basically, the US told Asia to avoid doing much of what the US is doing today amid its own crisis. Take the Federal Reserve, which cut interest rates twice and hinted at doing more. Investor Marc Faber is absolutely right when he says the Fed acted ‘like a bartender’ and that its actions are contributing to asset bubbles. The US also has avoided reining in imbalances, including huge current-account and budget deficits.

The US is arguably devaluing its way to faster growth, something Treasury officials chastised Asians for in 1997. Mr Paulson puts on a good poker face, saying he favours a strong US dollar to placate Europe’s concerns. He hardly seems bothered by the euro’s 14 per cent surge against the dollar this year. As for crony capitalism, Asians can turn the mirror on the US with one word: Halliburton. The region also watched with a mixture of horror and satisfaction when free-market symbols such as WorldCom Inc and Enron Corp blew up a few years back.

Asians were berated for a lack of transparency. In the late 1990s, the US demanded that reserves figures be published and that clear lines be drawn between governments and private sectors. In the US, dubious mortgage products were sold, repackaged and resold with negligible transparency, while ratings companies approved of the process. The government and the Fed just stood by.

Now, the US is at the centre of what Nouriel Roubini, chairman of Roubini Global Economics LLC in New York, calls the ‘first crisis of financial globalisation and securitisation’. And what is the US doing?

Playing a role in hypocritically bailing out those who should have known better.

Mr Paulson’s team brokered negotiations between US banks, leading to the creation of what is essentially a bailout fund. His involvement is drawing criticism that the US is shielding gamblers from the consequences of poor bets. It doesn’t help that White House officials are simultaneously deflecting calls for regulation to keep the sub-prime crisis from happening again.

The advent of what investors are terming a ’superfund’ is hardly in the best interest of the world’s No 1 economy. Just as Asians did a decade ago, the US is bailing out financiers who made bad decisions. But it’s one thing for Bank of America Corp to throw Countrywide Financial Corp a US$2 billion lifeline. It’s another thing for the Treasury to involve itself in creating a company that will buy assets from structured investment vehicles (SIVs), which were set up to purchase securities such as bank bonds and sub-prime mortgage debt.

Mr Paulson and Robert Steel, the Treasury’s top domestic finance official, seem to think the end justifies the means. Their plan would help SIVs to avoid dumping their US$320 billion in holdings, further roiling the credit markets. The banks would instead create a fund to absorb the debt, using the proceeds of new commercial paper sales to finance the purchases. The new assets would be financed by selling mediumterm notes and commercial paper to investors.

Appearances matter. To many Asians, there’s a whiff of two former Goldman Sachs Group Inc guys – Mr Paulson and Mr Steel – helping their buddies out of a rough spot, including Mr Rubin, now head of the executive committee of Citigroup Inc, the bank that stands to gain most from such a bailout.

Critics such as former Fed chairman Alan Greenspan and former International Monetary Fund managing director Michel Camdessus are right to warn about the so-called moral hazard being created here. If banks and investors avoid the consequences of their mistakes, they will make even bigger ones next time. The notion that a safety net will be rolled out each time things go awry makes the global economy more dangerous.

It’s this and other lessons the US tried to teach Asia 10 years ago. Officials in Washington may want to begin listening to their own lectures.

 

Source: Bloomberg (Business Times 26 Oct 07)

Gloomy prognosis for US housing market

Analyst who predicted slump before it happened reckons on a 50-60% chance of recession

(CHICAGO) Ivy Zelman’s view of the US housing market is gloomy, but it is probably the most realistic.

A veteran Wall Street analyst, Ms Zelman, chief executive of the research firm Zelman & Associates, says it is unlikely that the US housing market will recover before 2009, adding that there is a ‘50 to 60 per cent chance of a recession’, as the housing slump curbs consumer spending.

Ms Zelman paints a much darker picture than Federal Reserve chairman Ben Bernanke, who said last week that housing will be a ’significant drag’ on the economy into next year.

When you consider the huge home inventories and tight-as-a-drum mortgage restrictions, it is easy to conclude that the housing slump could extend well past 2008. Unless financing loosens up and buyers return, her prophecy will become a reality.

‘I’ve never seen the market as bad as this,’ Ms Zelman said. ‘And it could get worse. The home-price decline could range from 16 per cent to 22 per cent.’ Monitoring inventory, builder incentives and demand, Ms Zelman is also watching adjustable-rate mortgage resets.

Homeowners with these loans will automatically face higher monthly payments that they may not be able to afford, another trigger for foreclosures or sales. Some US$500 billion of these loans will re-adjusted through 2008, Ms Zelman says.

While foreclosures have declined somewhat from August to September, they still doubled from a year ago, according to RealtyTrac Inc, which monitors the housing market. More homes are still coming on the market, and Ms Zelman says that will only add to the misery.

‘These are the worst inventories we’ve seen as a nation,’ she says. Ms Zelman originally presented her report on Oct 10 to the Home Improvement Research Institute, a trade group based in Florida.

Ms Zelman’s words carry some weight because she was one of the few major Wall Street analysts to warn of a housing decline months before it began late last year.

She was alarmed that home prices far outpaced personal-income increases during the boom, which is how the economic disconnect began. A bubble created artificially high demand that had to deflate sometime. Now, economists and analysts are trying to assess the collateral damage of the bust and sub-prime mortgage meltdown.

Meanwhile, builders are stuck with thousands of new homes they cannot sell and potential buyers are cancelling in droves or are unable to get a mortgage. Housing starts fell to a 14-year low in September.

‘Builders are desperate now and blowing through inventory,’ says Ms Zelman of homebuilders who are doing anything they can to sell homes. ‘Their revenues are shrinking so fast, they can’t keep up.’ The mass psychology that amplifies and spreads the angst of home sellers will put a brake on overall consumer spending, Ms Zelman predicts.

‘Some 74 per cent of consumer expenditures are correlated to housing. I don’t think the consumer will hold up.

They will cut back on things like buying cars and vacations.’ While Ms Zelman forecasts that sales will drop for the next two years, she is not as optimistic on home prices, which she says may continue falling until 2010 or 2011.

‘We’d be better off if prices corrected all at once. It will get worse before it gets better.’

Places where sales were strongest and speculators were most active before the bust will be bedeviled by high home inventories for more than a year. Cities that scored lowest with an ‘F minus’ grade, described as ‘very competitive with a negative bias’ in her firm’s September homebuilding survey, included San Diego, Phoenix, Inland Empire (California), and Fort Myers, Florida. Those rated ‘moderate and stable’ – a ‘C’ in their rankings – were Philadelphia; Raleigh, North Carolina; and San Antonio.

Areas connected to car-related job cuts in Michigan and Ohio will continue to feel pain. Not every market will get pummelled, though. Manhattan seems to be holding up for certain kinds of housing. Prices of co-op apartments with four bedrooms or more, for example, rose 19 per cent in the third quarter from a year ago.

Major markets with the lowest level of housing distress include Bethesda, Maryland; Boston-Cambridge, Massachusetts; and Manchester and Rockingham, New Hampshire. That is according to HomeSmartReports, a service that tracks six variables of home-market risk. ‘Boston is pretty moderate in terms of risk,’ says Mike Ela, president of the service. ‘Lenders have pulled back aggressively.’

But do not expect to land properties at bargain-basement prices. One assumption is that the best values will be in areas glutted with properties. Yet, many sellers will be holding out for prices that they saw at the peak of the boom.

Motivated property owners, though, may be willing to deal.

If you are buying a second home or investment properties, keep in mind that your credit record should be up-todate.

You may also find it easier dealing with institutions that sell ‘real-estate-owned’ homes, or properties that went into foreclosure.

Mr Ela, who has ‘low-ball offers’ pending on two bank-owned properties, prefers dealing with institutions ‘because you’re not dealing with the emotion of the seller; it won’t take too long to get a decision’. Because lending standards have tightened, if there are any errors on your credit report that show missed payments or outstanding balances, you should get them corrected. Do not open any new lines you will not use and pay your bills on time. These variables will affect your score and may disqualify you from obtaining financing.

Keep in mind that job growth and consumer spending bear close scrutiny. If Ms Zelman is right about a recession coming, then prices may fall more, plunging the housing market into an even sorrier state.

 

Source: Bloomberg (Business Times 25 Oct 07)

Global property investment expected to fall

Mortgage defaults in US may prompt lenders to tighten credit, says JLL

(TOKYO) Global direct real estate investment may fall this year as concerns about defaults on US mortgages prompted lenders to tighten credit, said Jones Lang LaSalle Inc, the world’s second-largest commercial real estate broker.

Asia may be the only market to experience an increase in investment in the second half of this year, Jane Murray, Asia-Pacific head of research at Jones Lang LaSalle, said in Tokyo yesterday. Global direct property investment rose 41 per cent in 2006 to US$699 billion, advancing for a third-straight year.

‘The highly leveraged players who were very active earlier in the year are certainly sitting on the sidelines at the moment,’ Ms Murray said.

The four-year boom in real estate is threatened after the US housing slump raised concerns about the value of mortgages and bonds linked to those loans. Investors are finding it harder to borrow money when they want to fund property acquisitions.

Japan, Singapore, China and India are among the markets offering the best opportunities for investors, according to Jones Lang LaSalle research.

Grade A office rents in Japan have gained 80 per cent in the past three years and have more than doubled in Singapore, Ms Murray said. Grade A buildings are no more than 25 years old, with total leasable floor area of more than 10,000 square metres and more than 800 square metres a floor, according to Jones Lang LaSalle.

Japan features strong economic growth in a large market and is the only country where returns on office buildings exceed local interest rates, also known as a positive yield spread, Ms Murray said.

Morgan Stanley raised a record US$8 billion for a real estate investment fund in June. In April the firm agreed to buy 13 Japanese hotels from All Nippon Airways in the country’s biggest real estate deal.

Japan offers a positive yield spread of 1.56 per cent, compared with negative spreads in other major cities including London, Paris, Frankfurt and New York, said Takeshi Akagi, local director in Japan for Jones Lang LaSalle.

Investment in China rose 23 per cent in the first half of the year even after the government sought to curb property investment to cool gains in housing prices. India, where more than half the population is under the age of 25, doesn’t have enough offices, shops and houses to meet demand, Ms Murray said.

‘It will require major additions to the stock base across every sector over the coming years to accommodate its rapidly growing services sector and the increasing wealth of its population,’ Ms Murray said.

‘When the Indian government begins to deregulate investment for foreign players, we will see a flood of money pouring into that market.’

 

Source: Bloomberg (Business Times 25 Oct 07)

US$1b renovation to boost Holiday Inn sales

(LONDON) InterContinental Hotels Group plc said Holiday Inn owners and franchisees will boost sales by investing US$1 billion on renovations and new bedding, along with the first change to the chain’s green logo in 50 years.

InterContinental will spend £30 millionpounds; (S$89.7 million) to speed the rebranding, which will be reported as a one-time charge, the Windsor, UK-based company said yesterday. The first revamped hotel will open in the United States next year, with the improvements finished across the chain by 2010.

Holiday Inn, founded in 1952, will have ’significantly higher’ revenue per available room after the renovations, InterContinental said. The chain’s US sales growth has trailed the British company’s more upscale brands, such as Crowne Plaza.

The International Association of Holiday Inn, which represents about 3,000 Holiday Inn owners and operators, said in the statement that it ’strongly supports this development and looks forward to the business improvement it will deliver’.

InterContinental shares slipped 8 pence, or 0.7 per cent, to 1,028 pence at 8.28am in London. Before yesterday, the stock had fallen 20 per cent in 2007, after adding about 75 per cent over the previous two years.

The company owns, manages or franchises more than 3,800 hotels in nearly 100 countries. It has sold hotels to property investors and turned to management or franchise contracts to make its revenue stream more stable.

Holiday Inn’s third-quarter revenue per available room (revpar) in the US rose 4.5 per cent in the third quarter, compared with 5.4 per cent growth for all InterContinental US hotels. Crowne Plaza’s so-called revpar grew 7.7 per cent, while the InterContinental brand increased 8.9 per cent.

Bass plc, InterContinental’s now-defunct former parent company, bought Holiday Inn in 1998.

Source: Bloomberg (Business Times 25 Oct 07)

LATEST US DATA – Existing homes sales at record low in Sept

Turmoil in mortgage markets adds more problems to housing industry slump

(WASHINGTON) Sales of existing homes in the US plunged by a record amount of 8 per cent in September to a record low 5.04 million unit pace as turmoil in mortgage markets added more problems to a housing industry in its worst slump in 16 years, the National Association of Realtors said yesterday.

It was the lowest sales pace since the group began tracking both single-family and condo sales jointly in 1999.

Total existing home sales, which include condominiums, fell in September from a downwardly revised pace of 5.48 million in August.

The weakness in sales translated into further pressure on prices. The median price – the point at which half the homes sold for more and half for less – fell to US$211,700 in September, down by 4.2 per cent from the sales price a year ago. It marked the 13th time out of the past 14 months that the year-over-year sales price has decreased.

Analysts blamed the bigger-than-expected slump on the turmoil that hit credit markets and mortgage markets in August as worries increased over rising mortgage foreclosures.

Those worries resulted in a drying up of the availability of so-called jumbo mortgages – loans over US$417,000, which are particularly important in high-cost areas such as California.

The slowdown in sales meant that the inventory of unsold homes rose to 4.4 million units in September.

Economists are worried that the huge levels of unsold existing and new homes will put further downward pressure on prices. But many private economists believe that the Federal Reserve will continue cutting rates in a campaign to make sure that the weakening economy does not tumble into a full-blown recession.

Meanwhile, Countrywide Financial Corp, the largest US mortgage lender, offered on Tuesday to refinance or modify up to US$16 billion in adjustable- rate mortgages till the end of 2008 to help about 82,000 borrowers who face higher payments stay in their homes.

Countrywide plans to offer new mortgages to 52,000 sub-prime borrowers with US$10 billion in home loans. It also plans to modify US$4 billion in loans for 20,000 prime and sub-prime borrowers who cannot refinance, and US$2.2 billion in mortgages for 10,000 sub-prime borrowers who are already delinquent.

 

Source: AP, Reuters (Business Times 25 Oct 07)

Bloomberg

Dow hit by poor US existing home sales

WASHINGTON – SALES of previously owned homes in the United States fell 8 per cent last month to a record low 5.04 million-unit pace, thus sending US stocks crashing down yesterday.

After two hours of trading, the Dow Jones Industrial Average was down 198.43 points, or 1.45 per cent, at 13,477.8. The Nasdaq Composite Index slid 78.82 points, or 2.82 per cent, to 2,720.44.

It was the lowest sales pace since the National Association of Realtors (NAR) began tracking both single-family and condominium sales jointly in 1999, said the group yesterday.

‘Home sales fell in September, but it was certainly due to the August credit crunch,’ said NAR economist Lawrence Yun.

Total existing home sales, which include condos, fell last month from a downwardly revised pace of 5.48 million in August. Economists polled by Reuters were expecting home sales to fall to a 5.25 million-unit sales pace.

‘The housing data…tells us that we are not out of the woods yet. It increases the uncertainty regarding the US economic outlook and reinforces the view the Fed may have to cut rates at its meeting next week,’ said Mr Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

The slower pace of sales helped drive up the inventory of homes available for sale by 0.4 per cent at the end of last month to 4.4 million units, which represent a 10 1/2-month supply at the current sales pace.

‘Housing has weakened more over the past few months, and chances are this is not the bottom,’ said senior economist James O’Sullivan at UBS Securities. ‘This certainly helps make the case for the Federal Reserve to keep lowering interest rates.’

Single-family home sales fell 8.6 per cent last month to a seasonally adjusted 4.38 million-unit pace from 4.79 million units, which was the slowest pace in nearly 10 years.

The national median existing home price for both single-family and condos dropped 4.2 per cent from a year ago to US$211,700 (S$310,268).

Source: REUTERS (The Straits Times 25 Oct 07)

US housing slump may extend into 2009

There’s a 50 to 60% chance of a recession as consumers curb spending: analyst

(CHICAGO) Ivy Zelman’s view of the US housing market is gloomy, but it’s probably the most realistic.

A veteran Wall Street analyst, Zelman, chief executive of the research firm Zelman & Associates, says it’s unlikely the US housing market will recover before 2009, adding there’s a ‘50 to 60 per cent chance of a recession’, as the housing slump curbs consumer spending.

Ms Zelman paints a much darker picture than Federal Reserve chairman Ben Bernanke, who said last week that housing will be a ’significant drag’ on the economy into next year.

When you consider the huge home inventories and tight-as-a-drum mortgage restrictions, it’s easy to conclude that the housing slump could extend well past 2008. Unless financing loosens up and buyers return, her prophecy will become a reality.

‘I’ve never seen the market as bad as this,’ Ms Zelman said. ‘And it could get worse. The home-price decline could range from 16 per cent to 22 per cent.’

Monitoring inventory, builder incentives and demand, Ms Zelman is also watching adjustable-rate mortgage resets.

Homeowners with these loans will automatically face higher monthly payments that they may not be able to afford, another trigger for foreclosures or sales. Some US$500 billion of these loans will re-adjust through 2008, Ms Zelman says.

While foreclosures have declined somewhat from August to September, they still doubled from a year ago, according to RealtyTrac Inc, which monitors the housing market. Since more homes are coming on the market, Ms Zelman says that will only add to the misery.

‘These are the worst inventories we’ve seen as a nation,’ she says. Ms Zelman originally presented her report Oct 10 to the Home Improvement Research Institute, a Tampa, Florida-based trade group.

Ms Zelman’s words carry some weight because she was one of the few major Wall Street analysts to warn of a housing decline months before it began late last year.

She was alarmed that home prices far outpaced personal-income increases during the boom, which is how the economic disconnect began. A bubble created artificially high demand that had to deflate sometime. Now economists and analysts are trying to assess the collateral damage of the bust and sub-prime mortgage meltdown.

Meanwhile, builders are stuck with thousands of new homes they can’t sell and potential buyers are cancelling in droves or are unable to get a mortgage. Housing starts fell to a 14-year low in September.

Mass psychology

‘Builders are desperate now and blowing through inventory,’ says Ms Zelman of homebuilders who are doing anything they can to sell homes. ‘Their revenues are shrinking so fast, they can’t keep up.’ The mass psychology that amplifies and spreads the angst of home sellers will put a brake on overall consumer spending, Ms Zelman predicts.

‘Some 74 per cent of consumer expenditures are correlated to housing. I don’t think the consumer will hold up. They will cut back on things like buying cars and vacations.’

While Ms Zelman forecasts that sales will drop for the next two years, she isn’t as optimistic on home prices, which she says may continue falling until 2010 or 2011.

‘We’d be better off if prices corrected all at once. It will get worse before it gets better.’ Places where sales were strongest and speculators were most active before the bust will be bedevilled by high home inventories for more than a year.

Not every market will get pummelled, though. Manhattan seems to be holding up for certain kinds of housing.

Prices of co-op apartments with four bedrooms or more, for example, rose 19 per cent in the third quarter from a year earlier.

‘Boston is pretty moderate in terms of risk,’ says Mike Ela, president of the service. ‘Lenders have pulled back aggressively.’

Don’t expect to land properties at bargain-basement prices. One assumption is that the best values will be in areas glutted with properties. Yet many sellers will be holding out for prices that they saw at the peak of the boom.

Motivated property owners, though, may be willing to deal.

If you are buying a second home or investment properties, keep in mind that your credit record should be up-todate.

You may also find it easier dealing with institutions that sell ‘real-estate-owned’ homes, or properties that went into foreclosure.

Mr Ela, who has ‘low-ball offers’ pending on two bank-owned properties, prefers dealing with institutions ‘because you’re not dealing with the emotion of the seller. It won’t take too long to get a decision.’

Because lending standards have tightened, if there are any errors on your credit report that show missed payments or outstanding balances, you should get them corrected.

Don’t open any new lines you won’t use and pay your bills on time. These variables will affect your score and may disqualify you from obtaining financing.

Keep in mind that job growth and consumer spending bear close scrutiny. If Ms Zelman is right about a recession coming, then prices may fall more, plunging the housing market into an even sorrier state.

 

Source: Bloomberg (Business Times 23 Oct 07)

Bleak house – Recession fears grow as US property slump worsens

WASHINGTON – THE risk of an outright recession is mounting for the United States as the housing slump heads towards ‘perfect storm’ conditions, say economists.

The cloudy US housing picture has become even grimmer, as housing starts sank 10.2 per cent last month to a 14-year low, government data revealed on Wednesday.

The report also showed the pace of new home construction at an annualised rate of 1.191 million units, the lowest since July 1993, and much weaker than the average forecast of 1.3 million.

The September report showed building permits, a sign of future construction activity, fell 7.3 per cent to a weaker- than-expected annual pace of 1.226 million.

The figures highlight the horrific slump in US real estate after a sizzling market turned suddenly cold last year.

Economists say the slump is the main drag on US growth.

‘The contraction in the housing sector is transitioning from an average downturn to among the worst in the post-World War II history of the US economy,’ said Mr Michael Gregory, economist at BMO Capital Markets.

‘As the current downturn probes deeper depths, the risk of outright  recession will mount.’

Mr Brian Bethune, economist at Global Insight, said: ‘The housing market is now navigating through ‘perfect storm’ conditions – a downward spiral involving reductions in demand, repetitive slashing of output, downward pressure on prices, tightening credit conditions and rising foreclosures.’

He saw the downturn persisting: ‘It is likely that the peak of this storm will have an impact on the economy in the fourth quarter of 2007 and first quarter of 2008.’

Over the past 12 months, US housing starts were down 30.8 per cent and permits down 25.9 per cent.

The massive declines highlight the fact that builders have a big inventory of unsold homes that are keeping prices down.

But potential buyers are having a harder time getting mortgages, and companies have reported cancellation rates of 50 per cent or more on sales contracts.

Consumers are also beginning to ignore the builders’ incentives and are waiting for even better deals as the housing crunch worsens.

Some analysts say the extended decline in housing will prompt the Federal Reserve to cut rates further after last month’s half- point cut.

‘The main concern that declining housing activity presents going forward is that the longer it persists, the greater the risk that it could spread to other areas of the economy such as consumer spending,’ said Mr Paul Ferley, economist at RBC Financial Group.

Source: AGENCE FRANCE-PRESSE (The Straits Times 19 Oct 07)

US leading economic indicators rebound

WASHINGTON – A forward-looking gauge of US economic activity rebounded in September, pointing to ’slow but steady’ growth, the Conference Board reported on Thursday.

The business research group said its index of leading economic indicators, a gauge of activity in the coming six to nine months, increased 0.3 per cent to a reading of 137.9 after a revised fall of 0.8 per cent in August.

The reading, in line with Wall Street forecasts, was the third rise in the past six months as the index swung back and forth between gains and losses.

‘While the financial markets gyrated and the slump in housing intensified, the economy continued to perform at a slow but steady pace,’ said Conference Board economist Ken Digesting.

‘The leading index has increased in two of the past four months, suggesting that this slow pace of economic activity could continue into the early months of 2008.’

Other indexes in the survey were higher. The coincident index of current activity increased 0.2 per cent following a 0.1 per cent increase in August. The lagging index advanced 0.5 per cent following a 0.3 per cent gain in August.

 

Source: AFP (Business Times 18 Oct 07)

US homebuilders’ sentiment at record low

Bigger discounts and sweetened incentives have yet to revive demand, survey finds out

(WASHINGTON) CONFIDENCE among US homebuilders fell to a record low in October as declining prices, higher mortgage rates and loan restrictions scared off buyers.

The National Association of Home Builders/Wells Fargo index of builder sentiment fell to 18, more than economists had forecast, from 20 in September, the Washington-based association said on Tuesday. Levels lower than 50 mean most respondents view conditions as poor. The index averaged 42 last year.

Bigger discounts and sweetened incentives have yet to revive demand as buyers wait for even bigger bargains, builders said. The report underscores Federal Reserve Chairman Ben Bernanke’s warning this week that the housing slump will constrain economic growth into next year.

‘The contraction in housing is going to be deeper and more prolonged than many people thought,’ said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, who correctly forecast the decline. ‘It doesn’t look like home sales are reacting to discounted prices. A lot of buyers will wait until the market hits bottom.’ The confidence index was forecast to drop to 19 this month, according to the median estimate of 38 economists surveyed by Bloomberg News. Projections ranged from 17 to 21.

Treasury Secretary Henry Paulson on Tuesday said the decline in the housing market is ‘the most significant current risk’ to the economy and called for an ‘aggressive plan’ by mortgage lenders to head off foreclosures.

The homebuilders’ group started tracking sentiment in 1985. The survey asks builders to characterise current sales as ‘good,’ ‘fair’ or ‘poor,’ and to gauge prospective buyers’ traffic. The survey also asks participants to assess the outlook for the next six months.

The group’s measure of single-family home sales fell to 18, from 20 in September. A measure of sales expectations for the next six months held at 26, while the index of buyer traffic fell to 15 from 17.

A meltdown in subprime-mortgage lending during August probably extended the real-estate slump for many more months, economists said. Reports last week highlighted housing’s dim prospects.

New-home sales may decline 24 per cent to a 10-year low of 804,000 and existing home sales will fall 11 per cent, the National Association of Realtors said last week. The report marked the 10th time this year the Chicago-based group lowered some portion of its housing and economic forecast. The median new-home price may decline 2.1 per cent to US$241,400, the group said.

Dallas-based Centex Corp, the fourth-largest US homebuilder, on Oct 12 said it will generate less cash from sales than forecast, and Moody’s Investors Service cut the credit ratings of Lennar Corp, Centex and Pulte Homes Inc to junk. Moody’s cited the rising inventory of unsold homes, tighter mortgage lending standards and falling property prices.

‘We expect the housing environment to remain challenging,’ DR Horton Inc chairman Donald Horton said in a statement on Tuesday. ‘Buyers continued to approach the home buying decision cautiously.’ Fort Worth, Texasbased DR Horton, the second-largest US homebuilder, said orders in the fiscal fourth quarter plunged to the lowest in almost six years as customers cancelled and banks restricted lending.

Cancellations are adding to already swollen supplies of unsold homes. A government report last month showed inventories rose to 8.2 months at the August sales pace, nearly double the average of the past decade.

The confidence index fell in three of four regions this month. It declined four points in the West, to 14 from 18.

The index dropped to 26 in the Northeast and to 21 in the South, both a point lower than in September. It rose to 15 from 13 in the Midwest, the first gain for the region since February.

Construction companies are delaying new projects. The Commerce Department said on Sept 19 that builders began work on the fewest homes in 12 years during August. Building permits also dropped to the lowest since 1995.

Some builders have boosted discounts to attract buyers. Red Bank, New Jersey-based Hovnanian Enterprises Inc held a three-day sale last month to reduce the glut of unsold homes. The builder said the event exceeded expectations and increased traffic at its developments nationwide.

‘Builders in the field are reporting that, while their special-sales incentives are attracting interest among consumers, many potential buyers are either holding out for even bigger deals or hesitating due to concerns’ about reports of falling home prices, Brian Catalde, president of the builders group, said in a statement.

 

Source: Bloomberg (Business Times 18 Oct 07)

US mortgage volume likely to dip to a low next year

(BOSTON) Mortgage originations will fall next year to the lowest levels since 2000, forcing job losses for at least 30,000 more home finance professionals, according to a forecast released yesterday by the Mortgage Bankers Association.

Inventories of homes for sale will remain high as tighter lending standards across the industry reduce available credit for prospective home-buyers, said Doug Duncan, the MBA’s chief economist.

Foreclosures as a result of increasing payments on adjustable-rate loans or poor underwriting will exacerbate the problem, he said.

‘We have not yet seen fully the impact of the credit shock to the US and world economies, and the severity of that impact will depend on how long it takes for the markets to return to normal functioning,’ Mr Duncan said at the annual meeting of the Mortgage Bankers Association.

Total mortgage originations will likely decline 18 per cent to US$1.89 trillion, the lowest volume of purchase and refinance loans since US$1.14 trillion in 2000, according to the forecast.

Loan volume will slide another 6 per cent in 2009, it said.

Reduced volume means less business for mortgage bankers, who have already seen their ranks thinned by 60,000 to 70,000 people in the housing downturn, Mr Duncan said.

It’s ‘tough times’, he said. ‘Continued consolidation is to be expected in the industry.’ Housing will be a drag on US gross domestic product through the second quarter of 2008, Mr Duncan said.

Existing home sales will probably fall 12 per cent this year to a 5.72 million unit pace, and another 10 per cent in 2008, the MBA predicted. It said sales will rebound in 2009 by 5 per cent.

 

Source: Reuters (Business Times 18 Oct 07)

US home building hits 14-yr low as inflation kicks up

Data seen by some as sign of continuing headwinds for the economy

(WASHINGTON) US home construction starts fell in September to their lowest level in more than 14 years, while consumer prices rose at the sharpest rate in four months, separate reports showed yesterday.

Weak housing data boosted US government bond prices and the US dollar slipped versus euro and yen as some investors saw the data as a sign of continuing headwinds for the economy.

The International Monetary Fund yesterday cut US economic growth this year and next to 1.9 per cent saying the housing correction will continue well into 2008, and warned that a sharper decline would weaken household balance sheets, hurt consumption and mean a loss of jobs.

‘Against this backdrop, risks of a recession have risen, although the Federal Reserve would be expected to respond quickly by easing monetary policy further,’ the IMF said.

The 2008 outlook compares with a July estimate of 2.8 per cent, the IMF said in its bi-annual World Economic Outlook. The fund had previously estimated US growth this year of 2 per cent. The world’s largest economy expanded 2.9 per cent in 2006.

Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson both warned this week that the worst housing slump in 16 years is the greatest risk to economic growth. The Fed lowered its benchmark interest rate by a half point to 4.75 per cent on Sept 18, the first cut in four years, to revive credit markets and stave off a recession.

‘Ongoing difficulties in the mortgage market are expected to extend the decline in residential investment, while higher energy prices, sluggish job growth and weaker house prices are likely to dampen consumption spending,’ the report said.

‘We knew housing was weak, but these numbers show another pretty big drop, so the sector remains soft overall,’ said Shaun Osborne, senior currency strategist at TS Securities in Toronto.

US home construction starts fell 10.2 per cent in September, while building permit activity, a sign of future construction plans, also dropped to the lowest level since mid-1993, a Commerce Department report yesterday showed.

It said housing starts set an annual pace of 1.191 million units in September, lower than the 1.285 million units expected by economists. It was the lowest pace for housing starts since the March 1993 rate of 1.083 million units.

‘There is no end in sight,’ said Kurt Karl, chief US economist with Swiss Re in New York. ‘The builders didn’t realise how many cancellations they are going to face. If we hit 1.0 million start range, it’s consistent with recessions in the past. And we are heading in that direction.’

Building permits fell 7.3 per cent, the sharpest decline since January 1995, to an annual rate of 1.226 million.

Economists polled by Reuters had forecast September permits to fall to a 1.298 million rate from the 1.322 million rate of August.

US consumer prices rose at the sharpest rate in four months during September, the government reported yesterday, as energy costs picked up after three months of decline.

The Labor Department said the Consumer Price Index (CPI) rose at a 0.3 per cent rate last month after declining 0.1 per cent in August. The September rise in overall CPI was slightly ahead of Wall Street economists’ forecast for a 0.2 per cent rise and was the largest since a 0.7 per cent jump in May.

So-called core prices that exclude food and energy costs were up 0.2 per cent in September, in line with economists’ expectations.

 

Source: Reuters, Bloomberg, AP (Business Times 18 Oct 07)

Foreign investors dump US assets at record rate

Sales hit high of $102b in August, when credit woes were most intense

NEW YORK – FOREIGN investors dumped United States stocks, bonds and notes by a record amount as the credit squeeze intensified, according to the latest US Treasury figures.

Until now, US policymakers have appeared relatively relaxed about the US dollar’s decline, since there has been little sign to date that this has been triggered by a broader global aversion to US assets.

However, that attitude could change if signs emerge in the coming months that non-US investors are becoming more nervous about holding dollar assets because of the recent credit squeeze.

‘The bad news is that the data plainly shows how vulnerable the dollar is to a continuation of the credit crunchrisk averse environment,’ said Mr Alan Ruskin, the chief international strategist at RBS Greenwich Capital.

He added: ‘There is no way to get away from the lack of corporate bond inflows, the foreign selling of US equities and the countervailing strong US purchases of foreign equities and bonds.’

The Treasury said net sales of US market assets – including bonds, notes and equities – were US$69.3 billion (S $101.7 billion) in August, exceeding the previous record decline of US$21.2 billion in March 1990. July had a revised inflow of US$19.5 billion.

Some analysts said on Tuesday that the August data might turn out to be an aberration, since it occurred during the most intense period of this summer’s credit squeeze – when investors were arguably most uneasy about the market outlook.

Consequently, some said they hoped that the outflows would have been reversed last month.

‘There was clear panic- selling of equities in August, but given the market’s subsequent rebound, those flows should have reversed,’ said Mr Dominic Konstam, the head of interest rate strategy at Credit Suisse.

‘If foreign investors return to buying equities, it is not obvious that there will be a capital flight from the US that will lead to a dollar crisis.’

However, others suggested that the scale of the swing in August indicated that more fundamental pressures were now bubbling – not least because the dollar continued to decline last month.

The greenback has declined by 7 per cent this year, to a record low against the euro, as the Federal Reserve cut interest rates last month to support the housing market, making holding US assets less attractive.

A breakdown of the data showed that one key reason for the outflows was that there were net foreign sales of US equities of US$40.6 billion in August, which more than reversed the purchase of US$21.2 billion in July.

Reflecting the pressure on US markets and the dollar, US residents purchased a net US$34.5 billion of long term foreign securities.

In the debt world, there were net sales by foreign investors of US corporate bonds – but overall holdings of US government debt remained relatively balanced.

Source: FINANCIAL TIMES (The Straits Times 18 Oct 07)

Home starts dive to 14-year low; consumer prices up

WASHINGTON – HOME construction starts in the United States fell last month to their lowest level in more than 14 years.

Meanwhile, consumer prices in the US rose at the sharpest rate in four months, separate reports showed yesterday.

‘We knew housing was weak, but these numbers show another pretty big drop, so the sector remains soft overall,’ said TS Securities senior currency strategist Shaun Osborne in Toronto.

Yesterday, US stocks rose in early trade. The Dow Jones Industrial Average was up 61.29 points, or 0.44 per cent, at 13,974.23. The Nasdaq Composite Index climbed 31.03 points, or 1.12 per cent, to 2,794.94.

US home construction starts fell 10.2 per cent last month, while building permit activity, a sign of future construction plans, also dropped to the lowest level since mid-1993, a US Commerce Department report showed.

It said housing starts set an annual pace of 1.191 million units last month, lower than the 1.285 million units expected by economists. It was the slowest pace for housing starts since March 1993.

‘There is no end in sight,’ said Mr Kurt Karl, the chief US economist with Swiss Re. ‘The builders didn’t realise how many cancellations they are going to face. If we hit the one million start range, it’s consistent with recessions in the past. And we are heading in that direction.’

US consumer prices rose at the sharpest rate in four months as energy costs picked up after three months of decline.

The US Labour Department said the Consumer Price Index, the most broadly used gauge of inflation, rose at a 0.3 per cent rate last month after declining 0.1 per cent in August.

The September rise in the overall index was slightly ahead of economists’ forecast for a 0.2 per cent rise and was the largest since a 0.7 per cent jump in May.

Source: REUTERS (The Straits Times 18 Oct 07)

US$80b fund planned to mop up bad mortgage loans

US Treasury, global banks talking to find way out of looming credit crunch

(WASHINGTON) Major banks including Citigroup are looking at setting up a roughly US$80 billion fund to buy ailing mortgage securities and other assets, sources said.

Representatives from the US Treasury have organised discussions among top global banks in a bid to prevent the crunch from further hurting the global economy, the sources said.

Financial institutions are growing increasingly concerned that a certain type of investment funds linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.

A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and, in the worstcase scenario, tip the US or Europe into recession.

The fund is the latest response to a global credit hangover after at least three years of easy credit that fuelled massive mortgage lending in the US and spurred record levels of leveraged buyouts.

‘Banks made unwise business decisions, and now they’re scrambling to save themselves,’ said Steve Persky, chief executive at Dalton Investments in Los Angeles.

Citigroup, JPMorgan Chase & Co and Bank of America Corp are involved in the discussions, according to people familiar with the situation. The three banks declined to comment.

Though the US Treasury is involved in the discussions, taxpayer money is not expected to be used, they said.

The Financial Services Authority, the UK market regulator, has suggested British banks consider participating in the fund, The Wall Street Journal reported on Saturday, citing a person familiar with the situation.

Details concerning the fund the banks are setting up, including its size, are still being hammered out and may change as other banks and investors become involved, sources said. The fund that is being contemplated would bail out funds known as ’structured investment vehicles’ or SIVs.

SIVs bought assets like mortgage securities from banks, and financed their purchases using short-term debt known as commercial paper. They make money by earning more from their investments than they have to pay to fund them.

But if SIVs cannot sell commercial paper, they must sell their assets, and many of the assets do not trade often and would be hard to sell.

The idea for a fund was first broached at a meeting at the US Treasury on a Sunday in mid-September in Washington, DC, according to a person familiar with the details of the meeting.

That meeting was led by Robert Steel, US undersecretary for domestic finance, and Anthony Ryan, US assistant secretary for financial markets.

The informal meeting lasted four-and-a-half hours as banks came up with ideas to jump-start the short-term lending markets. Outstanding commercial paper has dropped since the summer.

According to the US Federal Reserve, there was US$1.865 trillion in commercial paper outstanding in the week ended Oct 10, down from US$2.187 trillion outstanding in July.

 

Source: Reuters (Business Times 15 Oct 07)

MGM’s casino resort to rival Vegas’ best

AN OTHERWISE dismal year for the Atlantic City casino industry turned a bit brighter on Wednesday when gambling giant MGM Mirage, announced plans to build a huge resort hotel that would rank among the most expensive casino projects in history. The casino hotel, to be called the MGM Grand Atlantic City, will cost US$4.5 billion to US$5 billion, it said.

The current Las Vegas record holder is Wynn’s, which cost US$2.7 billion and opened in 2005, though there are several casino hotel projects on the drawing boards in Las Vegas in the US$4 billion to US$5 billion range.

The project, expected to be completed by 2012, includes three distinct hotel towers. One is expected to have a ‘more contemporary feel,’ Gordon Absher, an MGM spokesman said, while a second will be more upscale. A third, he said, will be an all-suites tower ‘for high rollers or those who are willing to pay to be treated like high rollers’. The property will also include a 1,500-seat theatre, a spa, a convention centre and up to 500,000 square feet of retail space.

The MGM announcement comes at a time of declining gambling revenue as Atlantic City faces increased competition from slot parlours that have recently opened in Pennsylvania and New York. Through the first nine months of 2007, the city’s casinos won a combined US$3.8 billion, a 5 per cent drop compared with figures in the period a year earlier, according to the New Jersey Casino Control Commission.

‘What this says is that, like us, MGM sees this decline as a temporary phenomenon,’ said Michael Pollock, publisher of trade journal The Gaming Industry Observer.

Mr Absher said MGM did not look at the overall performance of Atlantic City’s 11 casinos but instead focused on the experience of a single property: the Borgata, the first billion-dollar casino in a market that still ranks as the second-largest in the US. Despite new competition from nearby markets, at the Borgata, which opened in 2003, revenue from slot machines and table games has risen modestly in the first nine months of 2007. MGM owns 50 per cent of the Borgata.

MGM is only the most recent company to wager large sums that Atlantic City can transform itself from a low-rent gambling factory on the Jersey Shore into a world-class entertainment destination. In that view, Atlantic City would become a kind of Las Vegas East that lures younger tourists who spend as much money on fine food, big-name performers, expensive hotel rooms and other amenities as they do gambling.

Harrah’s, for instance, has spent hundreds of millions of dollars in Atlantic City over the last couple of years to improve its four properties there.

And Pinnacle Entertainment, which operates six casinos across the country, announced plans last year to build a US$1.5 billion casino hotel in place of the Sands, which closed last year. ‘For those casino companies willing to make the investment, the upside in this market is enormous,’ Mr Pollock said.

 

Source: NYT (Business Times 12 Oct 07)

Existing and new-home sales expected to drop

‘Exceptionally weak’ US housing market may lead to recession

BOSTON- EXISTING home sales this year probably will fall to a five-year low – worse than forecast – signalling that the United States housing market is far from hitting its bottom.

New-home sales may decline 24 per cent to a 10-year low of 804,000, and existing home sales, to 11 per cent, the National Association of Realtors said in a news statement on Wednesday. It was the 10th time this year the group had lowered some part of its monthly housing and economic forecast.

Home resales tumbled to a five-year low in August as prices declined, sub-prime mortgage defaults soared and lenders such as Countrywide Financial raised standards even for borrowers with the best credit.

US Federal Reserve policymakers have said the housing market is ‘exceptionally weak’, and some economists think the slump may push the US into a recession.

‘The credit tightening is knocking homebuyers out of a market that already was quite weak,’ said Mr Brian Bethune, an economist at Global Insight.

A month ago, the Realtors called for an 8.6 per cent decline in sales of previously owned homes, which account for about 85 per cent of the market.

Existing home sales may drop to 5.78 million this year from 6.48 million last year, and prices for both new and existing homes are also forecast to fall, the Realtors said.

The decline in new-home sales forecast for the year by the Realtors would put sales 37 per cent down from the record of 1.28 million in 2005. That would exceed the 25 per cent three-year drop that ended in 1991, the last housing recession.

The Fed cut last month the rate it charges banks, by half a percentage point to 4.75 per cent. The first reduction in four years was double the amount most economists had forecast.

The rate cut probably will not give a boost to the housing market until next year, Mr Donald Kohn, the vicechairman of the Fed, said last week.

‘Housing markets are likely to remain depressed in the coming months, as housing demand is restrained by the difficulty in obtaining mortgages and perhaps also by spreading expectations on the part of buyers that house prices will fall, as they already have in a number of markets,’ Mr Kohn said.

‘A cutback in housing construction is a positive sign for the market because it will help lower inventory and firm up home prices,’ Mr Lawrence Yun, an economist with the Realtors, said in the report.

With prices in the existing home market falling, home builders have slashed prices and abandoned land purchases.

 

Source: BLOOMBERG NEWS (The Straits Times 12 Oct 07)

World’s wealthy still eyeing property

They are undeterred by the market turmoil triggered by the US sub-prime crisis

(GENEVA) The wealthy have lost none of their appetite for property despite the market turmoil triggered by the sale of risky sub-prime mortgages in the US, according to some of the world’s top private bankers.

Clients of wealth managers are, however, on the lookout for the next big areas of growth and want products that will enable them to reduce their exposure to any one property or market.

‘We’re seeing heavy levels of investment in property in Hong Kong (and) throughout Asia,’ said Peter Flavel, global head of private banking at Standard Chartered. ‘You can’t get office space in Singapore, you can’t get it in Dubai.’

Speaking at the Reuters Wealth Management Summit, Mr Flavel said there was a ‘group of Asians that love real estate’ and that their ardour showed no sign of fading. ‘They’d see the situation in America as specific to America and the situation in the UK as specific to the UK,’ he added.

Samir Raslan, head of Citibank’s wealth management operations in central and eastern Europe, Middle East and Africa, said his clients also remained alive to potential opportunities in world real estate markets.

‘We haven’t seen any change in our clients,’ he told the summit held at Reuters offices here.

Nicolas Cagi Nicolau, global head of structured product solutions at SG Private Banking, said demand so far in 2007 had been particularly strong.

In Ireland, where fortunes have been made on the back of the country’s decade-long property boom, a fast-cooling domestic market and recent global market turmoil may have had a short-term impact, but investors’ love of property is intact.

‘All that we may be seeing is that people are just waiting to see what may well happen either domestically or internationally, but the appetite for further investment is undoubtedly there,’ said Mark Cunningham, managing director of Bank of Ireland Private Banking.

He said his main problem was persuading Ireland’s growing ranks of self-made millionaires to diversify into assets other than real estate. ‘The first love has always been property and will continue to be property for a lot of these people.’ In Spain, which like Ireland is experiencing a rapid cooling in its property market, the wealthy remain committed to real estate, although not necessarily in their own country.

Daniel de Fernando, head of asset management and private banking at Spain’s BBVA , said a new product offering clients a chance to invest in the Mexican property market had proved particularly popular. ‘People are asking us for more ideas on that front,’ he said of a fund bought into by 60 people within two weeks of its launch at a minimum investment of 2.5 million euros (S$5.2 million) each.

In the Netherlands, property also continues to be popular, according to Bernard Coucke, deputy chief of private banking at ING Groep. ‘On the contrary, more and more programmes are being set up, not only in residential but also commercial. Why? Because, for instance in the Netherlands, demand is high . . . and I think it will continue to go up.’

For some rich investors, however, there is a growing belief that other assets can offer better returns.

‘I think that the appetite for real estate is decreasing a lot,’ Paolo Molesini, head of private banking at Italy’s Intesa Sanpaolo said of a country where up until now the wealthy have held about 70 per cent of their assets in property.

‘Property costs a lot and gives you a very, very low revenue . . . There is no equilibrium from the price of the asset and the earnings that you can get out of it.’ Mr Molesini said his clients were looking to invest in foreign property, particularly in Germany, eastern Europe and Paris.

 

Source: Reuters (Business Times 11 Oct 07)

Sub-prime defaults could total US$150b, says S&P

Crisis will not peak until 2009, but emerging markets offer silver lining

(MUMBAI) The US subprime housing crisis will not peak until 2009 and total defaults could reach US$150 billion, rating agency Standard and Poor’s said yesterday, but robust emerging markets would help keep global growth strong.

S&P expected the world economy to grow 3.6 per cent in 2007 and 3.5 per cent in 2008. The US economy would lag at 2 per cent in both years, down from 2.9 per cent in 2006.

‘World growth remains strong despite the weaknesses seen in the US economy – especially in emerging markets because of healthy domestic demand conditions and export strength to non-US markets,’ S&P said in a report released in Mumbai.

‘The fact that the US slowdown is concentrated in housing, which has relatively low import content, helps,’ it said.

Emerging markets were far less vulnerable to credit market turmoil than during previous crises because of the capital flows attracted by high economic growth coupled with improved corporate governance standards, S&P said.

Moreover, high commodity prices were also helping many emerging market economies, such as Latin American and African countries that are major exporters.

S&P estimated that, on a purchasing-power parity basis, the United States would contribute only 9 per cent of world growth in 2007, compared to China’s 33 per cent and India’s 12 per cent.

Housing was the major weakness in the US economy and the sub-prime crisis – which roiled global markets in late July and August – was far from over, although its shock value was wearing off, David Wyss, S&P’s chief economist, said.

‘We think in the United States the housing market is not going to bottom until winter. We think the losses in these sectors won’t really hit their peak until 2009,’ he said.

That would feed through to unemployment and remain a brake on growth.

‘Housing starts are going to drop further, the unemployment rate is going to tick up further, we are expecting another year of sluggish US economic growth,’ Mr Wyss said.

‘We are not halfway through with this crisis yet.’ Mr Wyss expected the US trade deficit to shrink in coming months as stronger overseas growth and a weaker dollar would make US exports more competitive.

 

Source: Reuters (Business Times 10 Oct 07)

Housing slump set to cut volume at LA ports

(LOS ANGELES) The busiest port complex in the US could see its first decline in container traffic in four years because of the housing market slump and a loss of consumer confidence that is making retailers cautious about importing goods.

Volume at the adjoining Los Angeles and Long Beach ports had been expected to increase by 5 per cent to 9 per cent this year over 2006 figures, but now container traffic may remain flat or even decline, officials said Friday.

The ports handled about 15.8 million cargo containers last year and they had record growth in exports this summer, but that won’t be enough to offset lost import volume, Port of Long Beach spokesman Art Wong said. October typically is the peak month for the ports as merchants stock up for holiday season sales.

However, volume is expected to be down slightly from last year, said Paul Bingham with Global Insight, a retail tracking group.

‘Retailers have a good sense of the economy, and are planning their inventories carefully,’ said National Retail Federation Vice President Erik Autor.

‘The lower volume of containers means merchants shouldn’t be left with unsold goods or forced into unplanned markdowns.’

 

Source: AP (Business Times 8 Oct 07)

US real estate agency files for bankruptcy

NEW YORK – FOXTONS, a discount real estate agency, has joined mortgage lenders that have buckled under the weight of United States sub-prime woes and filed for bankruptcy protection.

The company listed debt of US$480,944 (S$710,354) and assets of US$2.6 million in the Chapter 11 documents it filed on Friday.

The agency, which pioneered selling homes for only a 3 per cent commission, fired 350 of its 380 workers last month.

The National Association of Realtors forecasts this year will see the first national decline in the median home price since the Great Depression.

At least 16 mortgage lenders in the US collapsed when investors refused to buy loans made to borrowers with poor credit.

They include American Home Mortgage Investment and New Century Financial.

American Home is being sold to billionaire investor Wilbur Ross, who offered US$435 million. An auction for the company was cancelled because Mr Ross’ bid was the highest one received by Friday’s deadline, according to creditor lawyer Mark Indelicato.

Foxtons attorney Michael Holt said in an interview on Saturday: ‘It’s my client’s intent to oversee an orderly liquidation of assets.’

When the company ceased operations last month, general counsel John Blomquist commented: ‘The plain fact is that we have been battling against a real estate market that recently has turned into a sharp decline, and the company no longer has the liquidity to operate.’

Source: BLOOMBERG (The Straits Times 8 Oct 07)

Sub-prime delinquencies accelerating, Moody’s says

(NEW YORK) Sub-prime mortgage bonds created in the first half of this year contain loans that are going delinquent at the fastest rate ever, according to Moody’s Investors Service.

The average rate of ’serious loan delinquencies’ in the securities has been higher than 2006 bonds, Moody’s analysts Ariel Weil and Amita Shrivastava wrote in a report.

Serious loan delinquencies are those 60 days or more past due, including properties in foreclosure or already foreclosed upon.

‘It is shocking what you see,’ said Kyle Bass of Hayman Advisors. ‘Anything securitised in 2007 has got to have the worst collateral performance of any trust I’ve seen in my life.’

Moody’s, Standard & Poor’s and Fitch Ratings have been downgrading sub-prime securities issued in 2006, and Fitch said it’s now reviewing ratings on bonds created in 2007.

Moody’s has cut ratings or placed on review 496 bonds backed by first mortgages issued last year, or 3 per cent of such bonds created in 2006.

Through Sept 21, S&P had cut ratings on 433 securities from last year and backed by sub-prime loans, or 9.1 per cent of the total.

Fitch on Wednesday cut ratings on US$18.4 billion of bonds backed by sub-prime loans.

The Moody’s report compares with research from S&P in March that said 2006 bonds may be the worst performing ever.

For bonds older than six months, 2006 was the worst year for serious delinquencies since at least 2000, Moody’s said in the report. Data in the Moody’s report suggests that accelerating delinquencies from 2007 bonds are likely to eclipse 2006.

 

Source: Bloomberg (Business Times 6 Oct 07)

Merrill sacks 2 top execs over mortgage crisis

Firings show more bankers are being held liable for failed investments

NEW YORK – MERRILL Lynch, facing the prospect of losing billions from its exposure to the sinking United States mortgage market, fired the global chief of its fixed-income division and one of his top two American deputies.

The dismissals are the latest sign that investment banks, facing big losses after years of big profits, are moving quickly to hold senior executives accountable for having succumbed too readily to the credit and buyout boom.

Bear Stearns fired its co-president, Mr Warren Spector, in August; Mr Huw Jenkins stepped down early this week as the chief of UBS’ investment bank; and in February, HSBC dismissed the head of its North American business, Mr Bobby Mehta.

The firings also signalled that the aggressive push by Merrill’s chief executive (CEO), Mr Stanley O’Neal, into riskier markets like leveraged loans, sub-prime mortgages and complex structured investments – all of which lie beyond the firm’s traditional areas of expertise – may be coming back to haunt him.

Merrill is expected to make a pre-earnings announcement in the coming days that it will write down more than US$4 billion (S$5.92 billion) in mortgage and other structured investments tied to the beleaguered credit market.

Several banks have also reported large write-downs in the quarter, including Citigroup, which this week said it would write off US$5.9 billion in the third quarter, causing its profit to drop 60 per cent.

The write-down will come as an embarrassment for Mr O’Neal, who during his time as CEO pushed the bank into in-vogue, high-risk areas of the market ranging from sub- prime to private-equity investments, as well as loans.

The focus was a departure for Merrill, a company that has traditionally looked to its legion of more than 15,000 brokers for both its financial and cultural strength.

But in recent years, as Goldman Sachs continued to generate extraordinary profits from its proprietary trading and principal investment units, Merrill, along with other companies, took steps to increase its risk profile.

One of those axed at Merrill was Mr Osman Semerci, 39, the head of its fixed-income division. He was among the vanguard of young, hard-charging and, in many cases, foreign-born executives that Mr O’Neal promoted when he became CEO in 2002 and shook up the old guard at the firm.

Mr Semerci had been in the position for little more than a year when the meltdown in the credit markets began.

Also let go was Mr Dale Lattanzio, 43, who was the head of structured credit products, the locus of many of Merrill’s recent investment problems.

While Mr O’Neal has received credit for cutting costs and making the firm more nimble and efficient, one criticism has been that he has pushed out a large number of experienced executives, replacing them with younger ones like Mr Semerci.

Source: NEW YORK TIMES (The Straits Times 5 Oct 07)

Credit crisis hits US high-end property

Until recently, this segment had defied the two-year broader market slide

(GREENWICH, Connecticut) There’s an indoor lap pool, eight-car garage and four-storey elevator. But the 26,000 sq ft Tuscan-style home features something even more unusual in this ritzy suburb of gated estates and mansions – a US$3 million discount on its price.

As the credit crisis started to shake global financial markets in August, the owners of the nine-hectare estate at 309 Taconic Road in Greenwich, Connecticut, cut their price to US$19 million, showing turbulence in the US housing market penetrating the wealthiest strata of American society.

‘People are looking instead of buying, maybe since the second week of August,’ said Julianne Ward, director of fine homes at broker Prudential in Greenwich, a coastal town of 61,000 about 48 km from New York City.

Until recently, the nation’s most extravagant homes had defied the two-year slide in prices and surge in foreclosures roiling the broader property market, where existing home sales are down more than 20 per cent from a 2005 peak, according to industry data.

Ultimate Homes, a publication that ranks the nation’s 1,000 priciest homes, began its survey in 2005 with the cheapest on the list at US$7.9 million. That jumped to US$10 million this year with a record six homes now selling for US$100 million or more.

‘In the last couple of years, the most expensive home on the market has gone from US$75 million to US$165 million,’ said Rick Goodwin, the magazine’s publisher. ‘This market is still very strong. The rich are doing very well.’ The nation’s wealthiest communities were largely unscathed by turmoil in the broader housing market through the second quarter of this year, according DataQuick, which analyses data on real-estate markets nationally.

In California, for example, the number of homes that sold for US$10 million or more rose nearly 40 per cent between the first quarter and second quarter, while the number in New York grew 15 per cent and Connecticut’s more than doubled, according to public records examined by DataQuick.

DataQuick mines records where a price or loan amount is available, which means there can be some gaps, but the numbers are a reliable indicator of trends, said DataQuick analyst Andrew LePage who compiled the data for Reuters.

‘Certainly through mid-summer it appears to be holding up just fine, and faring better than most other segments of the market,’ he said of homes selling at US$10 million or more.

Like the Bel Air section of Los Angeles and many other exclusive coastal communities, Greenwich has a long association with wealth. Its typical family earns more than US$120,000 – more than double the national average – while its investment bankers are among the country’s highest paid, taking home on average US$23,846 a week – 28 times the national average, according a recent government survey.

But the global credit crunch is stirring caution among its newest crop of wealthy elite. Greenwich is the unofficial capital of the US hedge fund boom. More than 100 of the private investment pools for the wealthy have set up in the town. That worries economist Edward Deak at Fairfield University in Connecticut.

‘The hedge funds, private equity firms are taking a hit,’ he said. ‘I’m concerned about what the mortgage meltdown is going to mean for bonus incomes coming into Connecticut in January ‘08 and also January of ‘09.’

Some developers are changing course, or delaying the start of sales or construction.

‘Buyers are doing a lot more due diligence and not pulling the trigger as quickly,’ said Ms Ward, who has sold real estate in the town for more than two decades.

A vivid illustration of the divergent housing trends of the last two years is on display about an hour-and-a-half drive from Greenwich on Avon Mountain in West Hartford, Connecticut, where local businessman Arnold Chase is building a new home.

His 53,000 sq ft estate, complete with 100-seat cinema, would be New England’s largest private home, eclipsing even the mansions of Newport, Rhode Island, that typified the gilded age of America’s industrial revolution. ‘At the highest end, there’s been no slowdown at all,’ said Joseph Beninati, partner and co-founder of Antares Investment Partners, a private-equity and development firm that caters to Greenwich’s hedge funds.

According to town records in Greenwich cited by Antares, the number of closed transactions on homes sold at prices greater than US$8 million grew 50 per cent in 2006, a record. Mr Beninati said he expects that figure to rise again this year.

‘The luxury market tends to be a little isolated from the market swings. This time around it’s a little different because the bottom half of the upper tier is softening a bit,’ said Laurie Moore-Moore, founder of the Institute for Luxury Home Marketing, a trade body for high-end property brokers.

The bottom tier comprises homes that sell for US$2 million or less, she said. ‘As the market softens I think we are seeing that segment of the market falling out,’ she said.

 

Source: Reuters (Business Times 4 Oct 07)

Wise not to ignore market risks

SINCE the US Federal Reserve’s somewhat surprising 50-basis points interest rate cut on Sept 18, investors all over the world have piled back into stocks with much gusto. Wall Street on Monday rose to a new all-time high while most Asian markets continue to set records of their own.

The mood is once again bullish, restored by a seemingly unshakeable confidence that the Fed can be relied upon to cut rates further to keep the ball rolling. While the momentum is clearly positive however, over-eager investors have to be mindful of making the same mistake as before – ignoring risks while focusing solely on returns.

Although the Federal funds futures market is pricing in a further 25 basis points cut at the end of this month, this is by no means a certainty. September’s rate lowering has seriously undermined an already weak US dollar – which has now declined even against currencies such as the Turkish lira, Saudi rial and Canadian dollar – and over time, this cannot be good for an-already slowing economy labouring under the burden of a crashing housing market. Moreover, various Fed governors warned this week that more rate cuts can only be justified if the economy shows signs of very drastic weakness, which means that perversely, investors are buying stocks today in the hope that growth worsens significantly tomorrow – Monday’s Wall St record for example, was set after release of a weak manufacturing report that showed new orders dropping for the third consecutive month. This is an anomalous state of affairs. While it might last for a while, eventually reality will prevail.

Speaking of reality, the full extent of the sub-prime mess may not have been revealed yet. US and European banks have only just started to show alarming profit weakness stemming from sub-prime losses and there is doubt over whether rate cuts are sufficient to reverse losses.

That said, markets could continue to rally in the short term. One likely explanation for the strong bounces seen over the past fortnight is that they have come from widespread programme trading – with markets as interconnected as they are today, the big money has to employ sophisticated computer-driven trading strategies in order to react quickly enough and capitalise on shifts in economic and sentiment indicators.

As such, once certain parameters are met, powerful momentum forces take over and markets move almost as one. Invariably, the targets are always the largest stocks – that is why in Singapore at least, while the Straits Times Index has very rapidly regained new ground, the broad market has lagged.

The real danger however, is that the same momentum shifts work equally effectively on the downside.

Given that volatility has not subsided over the past few months – it has in fact increased – and given that the chances of a US recession are quite real, it would be wise for investors to be as cognisant of risks as they are of returns.

 

Source: Business Times 4 Oct 07

Greenspan: Home market long way from stabilising

But he says lending crisis is ending as demand for more risky assets grows

(LONDON) The US housing market has a long way to go before stabilising after the sub-prime crisis, spelling bad news for consumers in the world’s biggest economy, former Federal Reserve chief Alan Greenspan said yesterday.

Mr Greenspan, who has been outspoken throughout the credit crunch, said more house price declines were likely given a surfeit of supply but pointed to signs the lending crisis could be coming to an end as demand for more risky assets grows.

However, he warned that any speculative market fever must be allowed to run its course to enable a full recovery.

‘As in similar situations of inventory excess, I would expect home price declines to continue until the rate of inventory liquidation reaches its peak,’ Mr Greenspan told an audience at Reuters in London.

‘There is little relevant American history to guide us in judging the ultimate extent of home price decline or the timing of a new price recovery, or by extension, the economic impact on the rest of our trading partners.’

The US housing market remains extremely fragile after a crisis in low-end mortgage borrowing spread fear of a global economic slowdown and put a squeeze on lending conditions.

The Fed has slashed US interest rates by half a percentage point to try and stabilise markets and encourage banks to increase their lending to each other.

But official data shows a US housing recovery is some way off with new home sales falling more than expected in August to notch their slowest rate in seven years and prices recording their sharpest annual fall since 1970.

Analysts said those figures largely reflected conditions before the mid-August market turmoil set in.

‘All that I conclude is that the process of inventory adjustment has just started and we have a long way to go before residential housing and mortgage markets stabilise in the US,’ Mr Greenspan said.

Mr Greenspan said likely victims of sustained weakness in the housing market would include the consumer and, consequently, the world’s biggest economy.

‘Recent declines in home prices are already eating into home equities and unless stock prices resume their pace of increase of earlier this year, US consumer spending and GDP will be under pressure from declining household wealth,’ he said.

But he said signs were emerging the credit crisis could be coming to an end.

‘To be sure, lenders in recent days have been reaching out for longer term, lesser quality assets and that is a good sign,’ he said. ‘Is this August-September credit crisis about to be over? Possibly.’

 

Source: Reuters (Business Times 2 Oct 07)

Flipping homes in the US – it’s a flop

NEW YORK – MS SHERRILL Zenie said all she wanted was a piece of the American Dream. But what she got was ‘a kick in the rear’.

Ms Zenie is one of a legion of a relatively new type of home owner, a flipper, who sought fast money by rapidly buying and selling homes to capture a profit on each as prices soared.

Speculators who bought multiple homes like Ms Zenie were once a boon to the United States economy when they pushed home prices to record levels over a five-year period.

Now their unsold homes are the bane of a sickly housing market.

Many are stuck with unoccupied properties they cannot sell and mortgages that are bigger than the appraised value of the home, a situation known as being ‘upside down’.

The glut of unsold homes comes as lenders are making it harder for borrowers to get loans, causing defaults to escalate and home prices to decline further.

‘Investors that initially purchased a property with no money down or a very low down payment could now find themselves upside down, and without prospects of selling the property soon, may opt to just walk away,’ says

Mr Greg McBride, senior financial analyst, Bankrate in North Palm Beach, Florida.

The Federal Reserve’s half percentage point interest rate cut will do more to stimulate inflation than to slice long-term mortgage rates, providing scant relief, some economists say.

‘Nobody is looking, either to rent or to buy,’ says Ms Zenie, 60, of Delray Beach, Florida, who is stuck with two unsold condominiums there after profitably selling two others.

She owns the condominiums outright, as well as her own home, part of a vacation home in Vermont.

But taxes, maintenance and a home equity credit line cost over US$2,000 (S$2,982) a month for the two condominiums alone, a stretch for Ms Zenie, who is out of work on disability.

‘I wanted to follow the American Dream,’ she says. ‘I wanted to be an entrepreneur and make some money – not a killing, but some money.’

Her husband has found a job in another state to help pay the bills.

‘Am I panicking? I would be hysterical if my husband weren’t in Mississippi working.’

Said Mr Barry Habib, chief executive of Mortgage Market Guide: ‘That’s the American way. Speculators add jet fuel both on the way up and on the way down.

‘Nobody was saying ‘hey, the speculators were bad’ on the way up, when people were selling their homes and making lots more money.’

Source: REUTERS (The Straits Times 2 Oct 07)

Citigroup seeks buyer for Manhattan tower

Deal could fetch US$1.8b; company to lease back property: executive

(NEW YORK) Citigroup is seeking a buyer for the former Travelers Group headquarters in lower Manhattan. The deal could fetch US$1.8 billion.

The 40-storey tower at 388 Greenwich St that once carried the red neon umbrella logo of Travelers is being marketed with a connected 10-storey property, said Richard O’Day, a director of Citigroup’s real estate investment banking unit.

The complex has a total of 2.7 million square feet of space and is about 10 blocks north of the World Trade Center site.

The buildings are among at least three offerings in Manhattan that will test whether the most expensive US office market is holding value as borrowing costs rise.

Prices last year rose above US$1,000 per square foot for the first time on sales of such buildings as 5 Times Square and 666 Fifth Ave.

‘The market is still robust for trophy assets in Manhattan,’ Mr O’Day said. He estimated that the Greenwich Street buildings could sell for US$1.6 billion to US$1.8 billion.

Mr O’Day compared the value of 388 Greenwich to 60 Wall St, Deutsche Bank’s New York headquarters, which the bank sold in June to Paramount Group for US$1.18 billion, or US$732 per square foot. That transaction set a record for a lower Manhattan office tower. Paramount is the US real estate investment unit of Germany’s Otto Group.

Citigroup’s global markets unit is advising the company on the sale and Cushman & Wakefield has been hired as a broker, Mr O’Day said. Citigroup plans to remain in the building and lease the space back from the new owner, he said. ‘We’re committed to staying in Manhattan,’ he said.

The sale and leaseback is part of a long-term strategy to get company-occupied properties off its balance sheet, Mr O’Day said. In the last two years, Citigroup has sold office buildings it owned at 333 West 34th St and 250 West St.

In 2002, Citigroup sold Travelers Property Casualty Corp and, in 2005, announced plans to sell Travelers Life & Annuity and substantially all of its international insurance businesses to MetLife Inc. Sanford Weill had his office at Greenwich Street when he ran Travelers.

Citigroup is selling just as several Manhattan properties may be coming onto the market.

Paramount Group said in a statement that it may sell 1177 Avenue of the Americas, a 47-storey, one million sq ft tower at West 45th Street, three blocks south of Rockefeller Center.

‘We have been approached by a couple of potential investors and a sale is under consideration,’ said Paramount spokeswoman Kathleen McMorrow.

Altria Group Inc, owner of the world’s biggest cigarette company Philip Morris USA, is selling its headquarters at 120 Park Ave, according to Real Estate Weekly. The company has hired CB Richard Ellis Group, an Altria spokeswoman said. She declined to say if the building was for sale.

The 26-storey, 554,000 sq ft property sits across East 42nd Street from Grand Central Terminal. In March 2003, the company said that it would move Philip Morris’s headquarters to Richmond, Virginia.

The two mid-town buildings have similar characteristics to towers that have sold for more than US$1,000 psf.

They have locations that could appeal to hedge funds and financial firms that have bid rents beyond US$100 psf.

While the market for securitised commercial mortgages remains constricted, New York skyscraper values should hold up, said Peter Hauspurg, president of Eastern Consolidated, a New York-based commercial broker.

Foreign buyers and US investors who intend to back their purchases with equity may replace those that bought primarily with debt, he said.

‘If there were eight or 10 bidders at the top, now two or three are gone,’ Mr Hauspurg said. ‘There’re still guys with real equity who would rather accept a 3 per cent return on a Manhattan asset like that than a 4-point-something on a US treasury bill. Manhattan is on fire and underpriced, according to the rest of the world.’

 

Source: Bloomberg (Business Times 1 Oct 07)

US real estate firm closing its doors on mortgage slump

(MELVILLE, New York) Foxtons, the one-time 800-pound gorilla of the 2 percent market place in the New York area, said it might file for bankruptcy and close its business, explaining it ‘can’t stand in the way of a hurricane’ that has come about as a result of the decline in the home mortgage industry.

The New Jersey-based company, which once rocked the real estate industry by selling homes for as little as 2 per cent commission – compared with commissions of up to 6 per cent at other brokers – said in an announcement that it is ‘releasing’ 350 of its 380 employees ‘and may be filing for bankruptcy protection in order to close the business in an orderly fashion’.

No one answered the phone at the company’s headquarters on Thursday.

In a statement, John Blomquist, Foxtons senior vice-president and general counsel, said the company had been ‘well run, very efficient’ and had ‘a great team that has pioneered a new model in the real estate business – a model which has proven itself and, we believe, will have lasting influence on our sector’.

But, he added, ‘The plain fact is that we have been battling against a real estate market that recently has turned into a sharp decline, and the company no longer has the liquidity to operate as a going concern.

‘We understand the impact of the action we are taking, but there comes a point where you can’t stand in the way of a hurricane, and it is a property hurricane we are facing.’

The company said it has about 4,400 listings and plans to ‘preserve the value of these listings to minimise customer disruption and to dedicate the anticipated revenues to pay creditors’.

Robert Campbell, a professor of real estate finance at Hofstra University, said the low-price agency might have been underpricing its services and working in narrow financial margins, a move that could have hurt the company in the weaker market.

Prof Campbell added that sellers in a struggling market also want an agency to devote more time and resources to selling their home, something he said Foxtons could not do with such low commission rates.

Foxtons’ website said the agency opened in March 2000 in North America and in the early years had more than 1,000 employees and more than 10,000 homes for sale.

 

Source: LAT-WP (Business Times 29 Sept 07)

August new-home sales tumble to 7-year low

Report shows US economy has lost momentum, as housing slump worsens

WASHINGTON – NEW home sales in the United States tumbled last month to their lowest level in seven years, a stark sign that the credit crunch is aggravating an already painful housing slump.

Sales of new homes dropped by 8.3 per cent last month from July, the Commerce Department reported yesterday, driving down sales to a seasonally adjusted annual rate of 795,000 units.

That was the lowest level since June 2000, when sales clocked in at a pace of 793,000 units.

The home sales report came on the same day that the government reported a relatively brisk business growth rate in revised figures for the second quarter.

The 3.8 per cent gross domestic product figure, however, was less than first estimated, and it occurred before the credit crisis and its repercussions across the broad spectrum of the US economy had taken hold.

The median sales price last month fell by 7.5 per cent from a year earlier to US$225,700 (S$337,737) . That was the biggest drop in percentage terms in nearly 37 years.

The median price is the middle point at which half sell for more and half for less. The average sales price dropped by 8 per cent last month from a year earlier to US$292,000. That was the biggest decline in 17 years.

The new-homes sales report, combined with other recent economic data showing a sharp drop in demand for big-ticket manufactured goods last month, suggests that the US economy has lost momentum as it headed into the autumn.

Another report issued by the Commerce Department showed that the US economy staged a rebound in the spring before a credit crisis raised new fears about longer-term business health.

The economy grew at a 3.8 per cent annual rate in the April-June quarter, the strongest showing in just over a year.

Although the new reading for the second quarter was slightly less robust than a previous estimate of a 4 per cent growth rate, it nonetheless marked a substantial improvement over the feeble 0.6 per cent growth rate registered in the first quarter.

The increase in the rate of growth, though, is likely to be fleeting.

A deepening housing slump and a painful credit crunch since the spring has darkened the mood of individuals and businesses alike. That has led analysts to predict that economic growth has slowed considerably in the quarter that ends on Sunday.

The National Association for Business Economics says it believes growth in the third quarter slowed to a pace of around 2.4 percent.

Source: ASSOCIATED PRESS (The Straits Times 28 Sept 07)

Sub-prime woes: rating agencies face SEC probe

Regulator checking whether they inflated ratings of mortgage- backed securities

(WASHINGTON) The Securities and Exchange Commission (SEC) has opened an investigation into whether the credit-rating agencies improperly inflated their ratings of mortgage-backed securities because of possible conflicts of interest, the head of the commission told Congress on Wednesday.

At a hearing before the Senate Banking Committee, the chairman, Christopher Cox, said the commission was examining whether the credit agencies had ‘compromised their impartiality’ when they simultaneously rated various mortgage- backed securities and provided advice to Wall Street investment firms about how to package them so as to gain higher credit ratings.

The credit agencies also receive fees from the investment firms. Mr Cox said President George W Bush had instructed an inter-agency committee headed by Treasury Secretary Henry Paulson to examine the role of the rating agencies in lending practices by the mortgage industry.

Mr Cox was the first witness in two days of congressional hearings over the roles of the two major credit-rating agencies, Moody’s Investors Service and Standard & Poor’s, in the growing problems plaguing the sub-prime mortgage lending markets. In recent months, the agencies have quickly, though critics say belatedly, downgraded hundreds of mortgage bond ratings.

With the explosive growth in the market for mortgage-backed securities, the rating agencies have come to play a central role in the housing market.

After a homeowner gets a mortgage, the lending institution usually sells the loan to a Wall Street firm, known as an underwriter, where it is repackaged with other loans and sold to investors as a mortgage- backed security. Rating agencies grade those securities to let investors know the chances of default.

As the sub-prime market has been rocked by a wave of mortgage defaults and worthless mortgage- backed securities, the rating agencies have come under renewed scrutiny by regulators and lawmakers.

After criticism of the credit agencies for their role in the corporate accounting scandals earlier in the decade, Congress adopted a law last year that gave the SEC new authority to inspect and punish the agencies.

But the new law also prevents the commission from regulating the procedures and methods the agencies use to determine ratings.

Although there is no expectation that Congress will rewrite the new law soon, executives from the rating agencies tried to defend themselves from an onslaught of criticism from Democrats and Republicans on the Banking Committee. ‘It seems to me that credit-rating agencies are playing both coach and referee,’ said Senator Robert Menendez.

Senator Charles Schumer dismissed the observation of one of the heads of a rating agency who had told him in a private meeting that the agencies had done nothing wrong. ‘To say nothing went wrong, that ain’t going to fly,’ he said. ‘We need to find ways to prevent this crisis from happening again.’

He proposed that the system be changed so that investors, rather than underwriters, pay the credit agencies’ fees.

Senator Richard Shelby, the senior Republican on the committee, joined other lawmakers in complaining that the credit agencies were being paid by the underwriters instead of investors. ‘It seems to me that money’s trumping ethics,’ Mr Shelby said.

 

Source: NYT (Business Times 28 Sept 07)

Vegas prices will indicate US home values

Sin City acts as a barometer because it shows investor movement

(BOSTON) What happens in Las Vegas doesn’t stay in Vegas when it comes to the city’s housing market.

Tumbling home prices in the city will show how far and how fast US property values will fall in 2008 as the housing decline enters its third year, said William Wheaton, an economics professor at the Massachusetts Institute of Technology (MIT) in Cambridge, outside of Boston.

‘Las Vegas is an important barometer for where the rest of the nation’s home prices are going because it’s going to show us how quickly the investors head for the doors,’ he said. ‘It will put the floor under the housing correction.’

Futures contracts on the housing market that trade at Chicago-based CME Group Inc, the world’s largest exchange by market capitalisation, indicate Las Vegas will have the largest decline in the nation. Investors expect a 5.6 per cent drop by next May, said Justin Walters, co-founder of Harrison, New York-based money management and research firm Bespoke Investment Group LLC. New York prices may fall 2.6 per cent, the least of the 10 US cities on the exchange.

Home values in Nevada fell 1.6 per cent in the second quarter from a year earlier, the biggest drop in the US, according to the Office of Federal Housing Enterprise Oversight (OFHEO) in Washington. Michigan, hard-hit by car industry layoffs, was second, with a 1.42 per cent decline; followed by California, with a 1.38 per cent drop, the government agency said in an Aug 30 report.

‘They had the biggest price bubble, so they’re going to have the biggest price drops,’ said Patrick Newport, chief US economist at Lexington, Massachusetts-based Global Insight Inc.

The slump in Las Vegas could last until 2010, even if gamblers and vacationers continue to boost the city’s economy, Mr Newport said. Prices have already dropped 5 per cent from last year’s peak and may fall another 15 per cent over the next three years, he said.

Property values in Las Vegas rose 44 per cent in the third quarter of 2004, driven by speculators and the lowest borrowing costs in four decades. It was the biggest US gain recorded by OFHEO in 22 years.

As homebuyers descended on the desert city, it changed the way Americans look at real estate, said Diane Swonk, chief economist at Mesirow Financial Inc in Chicago. After Las Vegas, the investment boom spread across the country from Florida to Arizona and California, she said.

‘The city that gave us gambling gave us house gamblers,’ she explained. ‘Buying a home became like buying a stock on margin, with no money down.’

Almost half of Las Vegas home sales in 2005 and 2006 were to people who intended to resell quickly for a profit, according to data compiled by Fannie Mae, the world’s largest mortgage buyer. Nationally, investment purchases accounted for 28 per cent of sales in 2005, the peak of the housing boom, according to the National Association of Realtors.

Las Vegas had 24,341 single-family houses on the market in August, up 19 per cent from a year earlier, and 6,221 condominiums, a gain of 23 per cent, according to the Greater Las Vegas Association of Realtors. Both were records.

 

Source: Bloomberg (Business Times 27 Sept 07)

Big loan problem credits up: US regulators

WASHINGTON – The value of big loans with problems held by US banks rose 20 per cent in 2007, but the volume of syndicated credit commitments worth US$20 million or more also rose, bank regulators said on Tuesday.

Adversely rated credits – loans that are likely to result in some loss for the lender without corrective action – rose to US$114.1 billion from US$95.2 billion in 2006, regulatory agencies said in the annual ‘Shared National Credit’ review.

The review, published annually by the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp, and the Office of Thrift Supervision, looks at syndicated loans and loan commitments of at least US$20 million that are shared by three or more regulated financial institutions.

Despite the rise, the volume of adversely rated credits as a share of total shared national credits is low by historical comparison and is indicative of satisfactory credit quality, the agencies said.

At the same time, regulators warned of the possibility of credit risks as a result of rapid portfolio growth and weakening of underwriting standards.

‘Banking organisations should ensure that underwriting standards are not undermined by competitive pressures,’ the agencies said.

Large loans rose to US$2.3 trillion in credit commitments, 21 per cent more than in 2006.

Portfolio growth reflects substantial merger and acquisition financing provided during 2006 and early 2007, the banking agencies said.

Adversely rated credits are still at less than half of their peak dollar level of US$236.1 billion in 2002.

Problem credits were heavily concentrated in the manufacturing and telecommunications sectors, regulators said.

 

Source: REUTERS (Business Times 26 Sept 07)

US consumer confidence tanks, home sales slide

Weaker business conditions, less favourable job market cast cloud over consumers

(WASHINGTON) Sales of existing homes, depressed by turmoil in credit markets, fell for a sixth straight month in August, pushing activity to the lowest point in five years.

Meanwhile, US consumer confidence tanked in September to almost a two-year low amid weakening business and job market conditions, the Conference Board said yesterday.

The National Association of Realtors said that sales of existing single-family homes dropped by 4.3 per cent in August, compared to July. Sales at a seasonally adjusted annual rate dropped to 5.5 million units, the slowest pace since August 2002.

The Conference Board said that its consumer confidence index fell to 99.8, down from a revised 105.6 in August.

The confidence reading was sharply below Wall Street forecasts of 104.5 and was at its lowest since hitting 98.3 in November 2005. Last month the index dropped from 111.9 in July.

‘Weaker business conditions combined with a less favourable job market continue to cast a cloud over consumers and heighten their sense of uncertainty and concern,’ said Lynn Franco, the group’s research director.

‘Looking ahead, little economic improvement is expected, and with the holiday season around the corner, this is not welcome news.’ The confidence index is closely watched by the markets as an indicator of consumer spending, which accounts for roughly two-thirds of US economic activity.

The housing market has been battered by the steepest downturn in 16 years. Those problems were exacerbated in August by turmoil in credit markets, reflecting new worries about rising defaults in sub-prime mortgages.

The median price of an existing home – the point where half sold for more and half for less – edged up slightly in August to US$224,500 , an increase of 0.2 per cent from August 2006.

It marked the first year-over-year price increase after a record 12 straight months of declining prices.

However, many analysts believe that sales and prices will fall further as the housing market receives additional blows from rising default rates that are dumping more homes on an already glutted market and causing lenders to tighten standards. These factors have made it harder for potential borrowers to qualify for loans.

The Federal Reserve responded last week to fears that all the problems in housing and credit markets could cause a recession by cutting a key interest rate by a bigger-than-expected half point. Many economists believe that if the Fed continues to cut rates for the rest of the year that should be enough to keep the country out of a recession.

Sales were down in all parts of the US in August. The West saw the biggest drop, a decline of 9.8 per cent, followed by declines of 5.2 per cent in the Midwest, 2.7 per cent in the South and 2 per cent in the North-east.

The fall in sales pushed the inventory of unsold homes to a record 4.58 million in August. That means it would take 10 months to exhaust the inventory of homes on the market at the August sales pace, also a record figure.

Meanwhile, home prices in the 10 largest cities suffered their sharpest annual fall in 16 years, according to the Standard & Poor’s/Case Shiller national home price index yesterday. The composite month-over-month index of 20 metropolitan areas fell 0.4 percent in July from June, bringing the measuredown 3.9 per cent from a year earlier.

S&P said its composite month-over-month index of 10 metropolitan areas declined 0.6 per cent in July to 215.94, for a 4.5 per cent year-over-year drop. It was the worst rate of decline since July 1991, when the economy was emerging from recession.

 

Source: AP, AFP, Reuters (Business Times 26 Sept 07)

Defaults on sub-prime loans ’stabilising’

THE default rate for strife-hit United States sub-prime mortgages is stabilising, a US housing official said yesterday at a housing conference in Singapore.

Defaults on these loans, issued to homebuyers with low income or a poor credit history, triggered global shock waves recently and sparked intense scrutiny of Singapore banks’ exposure to them.

Assistant secretary of policy development and research at the US Housing and Urban Development Department, Dr Darlene Williams, indicated that she did not expect last week’s half-point US interest rate cut to affect the number of defaults significantly.

Speaking to reporters at the inaugural Asia-Pacific Housing Forum, she said: ‘The hope is that the Fed rate cut would send the signal that the government is concerned and willing to continue to analyse the situation so that the market can relax.’

‘We believe we still have a market that is correcting, but we don’t expect any drastic changes to the rate of defaults.’

Dr Williams said sub-prime loans form only a small percentage of the US mortgage market and only 20 per cent of such mortgages are at risk of default.

‘Our economic fundamentals are strong. The loan defaults are half of what they were in the 1980s and interest rates are low compared with the double-digit rates of 20 years ago,’ she said.

Sub-prime loans play a role in helping people own homes, she said. ‘Sub-prime mortgages democratise credit, so we don’t want to throw that option away.’

The three-day housing forum is organised by Habitat for Humanity and the Singapore Institute of Planners.

At the same event, Singapore National Development Minister Mah Bow Tan shared the Republic’s successful experience of housing its citizens at affordable prices.

 

Source: The Straits Times 25 Sept 07

Irish investors buy iconic Beverly Hills shopping centre

(BEVERLY HILLS, California) Two Rodeo, a well-known Beverly Hills shopping centre that houses some of the world’s biggest names in luxury goods, has been bought by Irish investors for US$275 million.

The purchase of the complex at Rodeo Drive and Wilshire Boulevard by Sloane Capital demonstrates how choice real estate remains in demand even though the recent credit crunch related to sub-prime home loans is sending jitters through the financial and residential real estate markets.

Tiffany & Co, Lalique and Versace are among the upscale stores along a cobblestone path in the outdoor shopping centre, which is meant to evoke a small European street. Few changes for shoppers are expected at the complex, which contains the largest single block of retail space in the Rodeo Drive shopping district.

‘This is clearly an icon among cosmopolitan trophy properties,’ said Pierre Rolin, chairman of Strategic Real Estate Advisors, the London-based representative of the sellers. He identified them only as a European family trust.

Completed in 1990 at the southern entrance to the Rodeo Drive shopping district, Two Rodeo has entered popular culture as a retail shrine that attracts millions of tourists and other visitors annually.

‘It’s one of the most photographed locations in the city,’ said Thomas J Blumenthal, president of the Rodeo Drive Committee merchants group. The centre ‘has always represented what we are all very proud of in Beverly Hills’, he added.

Although Two Rodeo sits high in the retail firmament now, it has had rocky times. It was conceived in the late 1980s real estate boom by developer Doug Stizel, who spared no expense building the two-storey complex that includes a piazza and fountains. He imported the cobblestones from Italy.

After the complex was finished and occupied by Christian Dior, Valentino and other swanky stores, Mr Stizel sold majority ownership to Japanese investors for an estimated US$200 million. But a deep and prolonged recession swept Southern California in the 1990s, and even luxury shopping took a beating.

Several stores closed. The Japanese partners bailed out in 2000 after the retail market had improved, but they took a loss when they sold Two Rodeo for US$131 million to the family trust. More hard times followed with the collapse of the dotcom bubble and the 2001 recession.

Occupancy fell to 60 per cent and rents dropped to about US$125 per square foot (psf) per year, said Mr Rolin of Strategic Real Estate Advisors, which will continue to serve as asset managers for the new owners.

Today, Two Rodeo is fully occupied by 27 retailers, and rents are surpassing US$500 psf, Mr Rolin said.

European publications describe the new owners as horse racing tycoons John Magnier and JP McManus, and property investor Aidan Brooks.

The three friends invest in top-drawer retail properties and also own the Bulgari store across the street from Two Rodeo. Other holdings include the Rhindlander Mansion in New York, which is home to Ralph Lauren’s flagship store, and the Harry Winston jewellery store buildings in London and New York.

Investors ‘are still willing to make big bets on prime real estate’, said retail consultant Greg Gotthardt of Alvarez & Marsal.

And to international players who buy property in the globe’s most glamorous cities, ‘Beverly Hills is still relatively cheap’.

 

Source: LAT-WP (Business Times 20 Sept 07)

FED RATE CUT – Shares of banks, mortgage lenders, home builders rise

But size of reduction signals that there’s much risk lurking under the surface

(NEW YORK) The Federal Reserve came to the aid of US banks on Tuesday when it cut rates in a move that should improve their lending margins and give them breathing space to deal with the fallout from the sub-prime mortgage crisis.

The Fed’s half percentage point cut in the federal funds rate to 4.75 per cent reduces the short-term cost of money that banks lend for longer periods, boosting their bottom line.

Lower rates could also revive some of the mergers and acquisitions idled by a global credit squeeze if investor confidence gets a sufficient boost.

‘It’s an old adage, that when the Fed start cutting, it’s good for banks. Their cost of funds goes down, and their net interest margin usually rises,’ said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management.

Bank stocks surged on the rate cut, with Bank of America Corp and Citigroup closing up 3.5 per cent and 5.2 per cent, respectively. Mortgage lenders and home builders also got a boost. Shares of No 1 US mortgage lender Countrywide Financial Corp rose 3 per cent and luxury home builder Toll Brothers climbed 8.7 per cent.

But Toll Brothers chief executive Robert Toll said that he does not believe it is time to call the bottom of the housing market and is worried about the magnitude of the cut.

‘I would have done a quarter instead of a half because it signals we’re in deep doodoo,’ said Mr Toll, speaking at the Credit Suisse Homebuilder Conference.

Private equity firms and investment bankers who handle their deals were keeping a close eye on the Fed’s decision.

The credit squeeze has left investment banks with more than US$300 billion of leveraged buyout debt stuck on their balance sheets, as debt investors have largely steered clear of the loans.

The debt load has caused some banks to take losses on the loans and kept them from earning lucrative fees through lending to corporate and private equity deal makers.

The Fed rate cut could help entice hedge funds and other debt investors to take some, or a large chunk, of that debt off the banks’ balance sheets. The rate cut, if nothing else, may help restore confidence in the leveraged loan market that banks have been hoping for.

‘Lowering rates for someone like Lehman Brothers, I would imagine they can be more aggressive at funding some deals they were looking at,’ said Jim Huguet, co-chief executive of Great Companies LLC, which has US$400 million in assets under management.

But the rate cut will not ease all of the pain being felt in the US housing market. And it will not bail out borrowers who stretched to buy homes they thought would skyrocket in value over the short term, analysts said.

‘Banks are on the hook, too, if they lent money to people with poor credit,’ said Ken Crawford, a portfolio manager at Argent Capital.

Mr Huguet was also concerned by the steepness of the rate cut.

‘It makes me concerned about how bad things could get,’ he said. ‘There is a lot of risk lurking under the surface, or they would not have made that kind of move.’

 

Source: Reuters (Business Times 20 Sept 07)

Housing starts at lowest in 12 years

WASHINGTON – HOME construction starts in the United States fell 2.6 per cent last month to their lowest level in more than 12 years, a government report showed yesterday.

Building permit activity, a sign of future construction plans, also dropped to a low not seen since mid-1995.

The Commerce Department said housing starts set an annual pace of 1.331 million units last month, slightly lower than the 1.35 million units expected by economists and the upwardly revised pace of 1.367 million rate for July.

It was the lowest pace for housing starts since the June 1995 rate of 1.281 million units.

‘The housing market continues to be under pressure, constraining economic growth well into next year,’ said Ms Lindsey Piegza, a market analyst with FTN Financial in New York.

Building permits fell 5.9 per cent to an annual rate of 1.307 million, also the lowest since June 1995 when they were at 1.305 million.

Meanwhile, consumer prices in the US fell 0.1 per cent last month as energy prices retreated, a US Labour Department data showed yesterday.

The department’s consumer price index (CPI) compared with analysts’ expectations for a flat reading. It was the first decline in the headline inflation index since October last year.

The core CPI, which excludes food and energy costs, rose 0.2 per cent, in line with Wall Street’s expectations.

The relatively tame inflation report comes a day after the Federal Reserve cut key interest rates by a bigger than- expected half point, saying that even though inflation pressures remain, lower rates are needed to avert an economic downturn.

AGENCE FRANCE-PRESSE, REUTERS

US home foreclosures jump 36% in Aug

(NEW YORK) The number of homes entering foreclosure, being auctioned and repossessed by banks jumped by 36 per cent in August from the month before, with cities in California, Florida and Nevada showing the biggest increases, according to a report scheduled to be released yesterday.

The report from RealtyTrac, a company that tracks public foreclosure filings nationally, attributes a big part of the rise to mortgage companies being forced to take ownership of homes because borrowers have fallen behind on payments and their properties were not sold at auction.

The sharp increases provide more evidence that the troubles in the housing and mortgage markets may prove long-lived, given that home prices are falling in many parts of the country, there is a large inventory of unsold homes and the job market is starting to weaken.

Housing specialists are also concerned about a big wave of adjustable-rate mortgages that will be reset to higher, variable interest rates in the coming months.

Nationally, there were 243,947 foreclosure filings in the month, accounting for one in every 510 households, according to the report. That is up 36 per cent from July and 115 per cent from August 2006.

Filings were up 48 per cent from July in California, 77 per cent in Florida and 21 per cent in Nevada, which has the highest foreclosure rates in the country at one in 165 households.

Foreclosure filings rose across most of the country, and the biggest increases were in Midwestern states that have struggled with job losses in manufacturing industries and in states where the real estate boom was most frenzied.

RealtyTrac’s data is based on courthouse filings from 2,500 of the nation’s more than 3,000 counties.

Some mortgage industry officials caution that data based on those filings may be incomplete or may lead to double counting of some homes.

Meanwhile another survey showed that confidence among US chief executives fell this quarter to the lowest point in four years, causing more companies to scale back hiring plans.

According to the Business Roundtable in Washington, the group’s economic outlook index fell to 77.4, the lowest since the third quarter of 2003, from 81.9 in the second quarter. Still, a reading greater than 50 signals expansion.

The decline in hiring plans raises the risk that employment won’t pick up after payrolls fell in August for the first time in four years.

 

Source: Reuters, Bloomberg (Business Times 19 Sept 07)

WORLD HOUSING MARKETS – Bubble trouble

By Robert J. Shiller

THE future of the housing boom, together with the possible financial repercussions of a substantial price decline in the coming years, is a matter of mounting concern among governments around the world.

I learnt this first-hand while attending this year’s Jackson Hole Symposium in the remote wilderness of Wyoming where, ironically, there are almost no homes to buy. The howls of coyotes and bugling of elk rang out at night. But, by day, everyone was talking about real estate.

This conference has grown to be a major global event for government monetary policymakers, with governors or deputy governors of 34 central banks attending this year. Roughly two-thirds of these countries have had dramatic housing booms since 2000, most of which appear to be continuing, at least for the time being. But there was no consensus on the longer-run outlook for home prices.

Of all these countries, the United States appears to be the most likely to have reached the end of the cycle.

According to the Standard & Poor’s/Case-Shiller US National Home Price Index, US home prices rose 86 per cent in real, inflation-corrected, terms from 1996 to last year, but have since fallen 6.5 per cent – and the rate of decrease has been accelerating.

That looks like the beginning of the end of the boom, though, of course, one can never be sure. I presented a bearish long-run view, which many challenged, but no one obviously won the argument.

Nevertheless, an outside observer might have been struck by the weight given to the possibility that the decade-long boom might well suffer a real reversal, followed by serious declines.

Weaker standards

THERE seems to be a general recognition of substantial downside risk, as the current credit crisis seems to be related to the decline in US home prices that we have seen.

The boom, and the widespread conviction that home prices could only go higher, led to a weakening of lending standards. Mortgage lenders in the US seem to have believed that home buyers would not default, because rising prices would make keeping up with their payments very attractive.

Also, the boom resulted in some financial innovations, which may have been good ideas intrinsically, but which were sometimes applied too aggressively, given the risk of falling prices. Mortgage- backed securities were urged onto investors for whom they were too risky. As with homebuyers, all would be well, the reasoning went, on the premise that home prices continue to rise at a healthy pace.

At the Jackson Hole conference, Mr Paul McCulley of Pimco, the world’s largest bond fund, argued that in the past month or two we have been witnessing a run on what he calls the ’shadow banking system’, which consists of all the levered investment conduits, vehicles and structures that have sprung up along with the housing boom.

The shadow banking system, which is beyond the reach of regulators and deposit insurance, fed the boom in home prices by helping to provide more credit to buyers.

Bank runs occur when people, worried that their deposits will not be honoured, hastily withdraw their money, thereby creating the very bankruptcy that they feared. It is no coincidence that this new kind of bank run started in the US, which is the clearest example of falling home prices in the world today.

When home prices stop rising, recent homebuyers may lose the enthusiasm to continue paying their mortgages – and investors lose faith in mortgage-backed securities.

Loose policy

THE US Federal Reserve is sometimes blamed for the current mortgage crisis, because excessively loose monetary policy allegedly fuelled the price boom that preceded it. Indeed, the real (inflation-corrected) federal funds rate was negative for 31 months, from October 2002 to April 2005. The only precedent for this since 1950 was the 37-month period from September 1974 to September 1977, which launched the worst inflation the US had seen in the last century. What then helped produce a boom in consumer prices now contributed to a boom in home prices.

Loose monetary policy is not the whole story. The unusually low real funds rate came after the US housing boom was well under way. According to the Standard & Poor’s/Case-Shiller US National Home Price Index, home prices were already rising at almost 10 per cent a year in 2000 – when the Fed was raising the federal funds rate, which peaked at 6.5 per cent. The rapid rise thus appears to be mostly the result of speculative momentum before the interest-rate cuts.

Former Fed chairman Alan Greenspan recently said that he now believes speculative bubbles are important driving forces, but at the same time, the world’s monetary authorities cannot control bubbles. He is mostly right: The best thing that the monetary authorities could have done, given their other priorities and concerns, is to lean against the real estate bubble, not stop it from inflating.

Today’s fall in home prices is linked just as clearly with waning speculative enthusiasm among investors, which is likewise largely unrelated to monetary policy. The world’s monetary authorities will have trouble stopping this fall, and much of the attendant problems, just as they would have had stopping the ascent that preceded it.

The writer is professor of economics at Yale University and author of Irrational Exuberance And The New Financial Order: Risk In The 21st Century.

 

Source: The Straits Times 19 Sept 07

I was late to see sub-prime storm brewing: Greenspan

(WASHINGTON) Former US Federal Reserve chairman Alan Greenspan said he was late to see the storm gathering around US mortgage lending practices and commended his successor Ben Bernanke’s handling of the crisis, saying he would likely be responding in a similar fashion. ‘I think he is doing an excellent job,’ Mr Greenspan said of Mr Bernanke in a television interview scheduled to air tomorrow.

Mr Greenspan was asked if he would lower interest rates as dramatically and quickly now as he did just ahead of, during and in the wake of the 2001 recession, according to excerpts of the CBS 60 Minutes interview released on Thursday.

‘I’m not sure that’s true,’ he said. ‘We were dealing with an environment back then when inflation was easing. We could have acted without the fear of stoking inflationary pressures. You can’t do that anymore . . . I’m not sure I would have done anything different (if chairman today).’

The comments from Mr Greenspan, who was tested early in his tenure by the October 1987 stock market crash, come as Mr Bernanke’s skills are challenged by rising defaults in the US sub-prime mortgage market, which caters to risky borrowers, and a related global credit squeeze.

Mr Bernanke’s Fed has come under fire from some quarters for not acknowledging quickly enough how deeply the current crisis could harm the economy or responding aggressively enough to keep the US expansion on track. Some analysts have speculated that Mr Greenspan would have acted more swiftly.

Mr Bernanke and his colleagues will meet on Sept 18. They are widely expected to lower benchmark overnight interest rates, which the Fed has held at 5.25 per cent since June 2006, by at least a quarterpercentage point.

Mr Bernanke had justified holding rates at that level despite some clamouring in markets for lower borrowing costs, on the grounds that inflation has remained troublingly high and needed to recede first.

Only in recent weeks, as credit stress mounted in financial markets and it became clear a housing recovery was a long ways off, have Fed officials suggested that worries about growth have supplanted longstanding concerns on inflation. The Greenspan interview – on the No. 1 US news programme with an average 13.2 million viewers – is the first in a series of public appearances the former Fed chairman is making to publicise his memoir, The Age of Turbulence, which is being released on Monday.

Mr Greenspan, who stepped down from the helm of the US central bank in January 2006, said that as Fed chief he knew about questionable lending practices that were leaving sub-prime borrowers with adjustable rate loans vulnerable to harm from rising interest rates, but did not recognise those loans would trigger broader problems until fairly recently, CBS said. ‘While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,’ Mr Greenspan said. ‘I really didn’t get it until very late in 2005 and 2006.’

Mr Greenspan, 81, has received credit for leading the economy to its longest-ever expansion in the 1990s and many economists have praised his handling of a sequence of crises.

Indeed, some have hailed him as the greatest central banker in US history. However, others criticise him for sowing the seeds of successive asset bubbles, first in US stock markets and later in housing.

He has also come under fire for suggesting during his Fed tenure that adjustable rate mortgages could be a cost-saving financing option for many borrowers, just shortly before the Fed embarked on a long push to move rates higher.

In the interview, Mr Greenspan defended the Fed’s decision under his leadership to hold interest rates at or near lows not seen in four decades between December 2001 and June 2004, a period in which the economy was enjoying only a lacklustre recovery from recession. The interview is scheduled for broadcast at 2300 GMT tomorrow.

 

Source: Reuters (Business Times 15 Sept 07)

Sub-prime crisis needs multilateral solution

By ANTHONY ROWLEY

TOKYO CORRESPONDENT

NORMALLY, when there is a major financial crisis of one kind or another, it is easy to find someone to blame. In the case of the Asian crisis 10 years ago, for example, fingers were quickly pointed at the International Monetary Fund (IMF). When Japan’s bubble economy collapsed, the Bank of Japan (BOJ) was identified as the villain. Also, former US Federal Reserve chairman Alan Greenspan blamed ‘irrational exuberance’ among investors for the rise and fall of the IT bubble.

But whom are we supposed to blame for the crisis that is still evolving out of the sub-prime mortgage market debacle in the US? No one has mentioned the IMF this time and the BOJ has been only indirectly implicated for allowing the yen carry trade phenomenon to swell to proportions where it contributed to a global liquidity bubble. As for irrational exuberance, stock markets can scarcely be blamed this time around.

It is no use pointing fingers at the likes of any single institution. The truth of the matter is that none of these institutions has been given the authority to deal with a ‘new style’ financial crisis such as the current one. I was chatting about this the other day with Japan’s former vice-finance minister for international affairs, Eisuke Sakakibara and he was quick to go to the heart of the matter. The IMF, he declared has become ‘irrelevant’ as an agent for dealing with global financial issues and so has the G-7/G-8. Both should be ‘abolished’, he (only half) joked.

What does this have to do with the sub-prime crisis? A good deal, because the same kind of outdated mentality which allows seven or eight countries (half of them European) to pronounce upon global economic issues, and control the IMF, is also responsible for allowing problems for global fall-out to develop within national borders.

On top of that, there is the arrogance of financial markets which until recently were bold in declaring that multilateral institutions such as the IMF were no longer necessary and that the markets could police the new world financial order by themselves.

If the current financial crisis does not convince both governments and markets of the need for a ‘new financial architecture’ then surely nothing ever will. Money moves around the world nowadays in amounts that make official resources look puny and with a speed and complexity that is matched only by rockets and rocket science. Financial engineering produces products of such complex nature that they can be understood only by rocket scientists. The potential that these developments have to do harm as well as good is enormous, and yet the ‘control centre’ is still in the steam age.

True, there are institutions such as the Bank for International Settlements (BIS) to deal with central banking issues on a global basis and there are any number of national financial and accounting regulatory bodies. But none of these has the power to demand the kind of information that might have indicated just what kind of risks were developing in the sub-prime mortgage market, the financial derivatives market, the yen carry trade area and so on. What then of the IMF? Mr Sakakibara has little doubt about what is wrong there. ‘The IMF is too macro-oriented’, he told me. ‘It needs to go deeper into finance. World finance has changed and they need to address issues like sub-prime issues or systemic risks in international financial markets, rather than sticking to outdated macro-economic analysis.’ Some might add that since the days of former managing director Michel Camdessus, the IMF has become too preoccupied with Third World issues of poverty and development, to be able to focus on global financial market and exchange rate issues.

But this is not so much the fault of the IMF as of the G-7 governments who insisted that they could manage complex issues of global finance on their own, forcing the IMF to find new activities at the margin. This is as absurd as it is presumptuous. No national government has the intellectual resources (or the budget) to analyse the global financial system in all its evolving complexity, let alone the authority to intervene when problems arise. In Mr Sakakibara’s view, the only hope is a new and expanded government group, such as the G-20, to consider global policy issues and a more focused IMF to provide the analytical and research back-up needed.

Yet, the kind of arrogance which allows so-called superpowers to ignore the United Nations in security matters and to prefer unilateral solutions would surely doom any such initiative from the outset. Perhaps the failure of military intervention in Iraq – based on the doctrine of pre-emptive strike – to secure any lasting solution to the problem of ‘terrorism’ might induce sufficient humility to consider reverting to multilateral solutions. But that won’t happen before the sub-prime crisis has done a lot more damage than it has already.

 

Source: Business Times 13 Sept 07

Fed officials see threat to growth in sub-prime mess

Concrete risks of broader slump pose downward pressure on economic activity

(WASHINGTON) Three senior Federal Reserve officials said on Monday that the turmoil in housing and mortgage lending had begun to threaten the overall economy, a condition policy makers have said is the crucial test for deciding whether to lower interest rates at their meeting next Tuesday.

A Fed governor, Frederic Mishkin, told an audience in Manhattan that the risk of a broader downturn ‘cannot, in my view, be ruled out’ and ‘poses an important downside risk to economic activity’.

In unusually direct language for a Fed policy maker, Mr Mishkin said that inflation pressures had become less of a problem – a judgment that, if embraced by other Fed officials, would remove a major argument against lowering interest rates.

‘I believe that the risks to the inflation outlook have become more balanced,’ he said, ‘given the greater downside risks to real growth’. Mr Mishkin is a relatively new member of the Fed board, but he was a well-known specialist in monetary policy at Columbia University with longstanding ties to the chairman of the Federal Reserve, Ben Bernanke. In 1997, while Mr Mishkin and Mr Bernanke were university professors, they wrote a book that called on central banks to base policy around a public target for inflation.

In speeches on Monday, two other Fed officials sent a similar message. Janet Yellen, president of the Federal Reserve Bank of San Francisco, predicted that the housing decline would probably continue and would impose ’significant downward pressure’ on consumer spending.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, admitted that an unexpectedly bleak unemployment report on Friday made him more worried about a slump. Neither Mr Lockhart nor Ms Yellen are currently voting members of the Federal Open Market Committee, which sets interest rates. But both sit in on the meetings.

On Wall Street, the debate among analysts was no longer about whether the Fed would reduce rates but by how much.

Several analysts predicted that the central bank will lower the Federal funds rate, for overnight loans between banks, by half of a percentage point, to 4.75 per cent from 5.25 per cent. Until a few days ago, most analysts were betting on a quarter-point cut.

Fed officials in their comments said nothing about how much they wanted to lower rates.

In Monday’s speeches, given before the central bank begins a week-long silent period ahead of its policy meeting, several made it clear they now see concrete risks of a downturn.

In Atlanta, Mr Lockhart went so far as to retreat from a more optimistic stance he had taken a few days ago. He said last Thursday that he had not seen any ‘conclusive signs of weakness in the broader economy’. On Monday, he delivered the same speech but acknowledged that he had been jolted by last Friday’s surprisingly dismal report that the economy had shed 4,000 jobs in August.

In her speech, Ms Yellen said that a housing downturn and tighter credit were likely to cause ’significant downward pressure’ on consumer spending and thus on economic growth.

‘The financial market turmoil seems likely to intensify the downturn in housing,’ she predicted. Even if investors overcome some of their fears, mortgage rates are likely to remain higher on a long-term basis and could continue to push housing prices down.

 

Source: NYT (Business Times 12 Sept 07)

Lessons from a blow-up

SHANE OLIVER goes back to the scene of the crime and uncovers the damning caveats

THE last month or so has seen big swings in markets on the back of the turmoil in credit markets. By and large though, most investors should have come through reasonably unscathed. However, some would not have been so lucky. Funds reported to have had the greatest losses seem to fall into three categories – funds with a heavy direct and geared exposure to US sub-prime debt, some of which have seen 80 per cent to 100 per cent of their capital wiped out; funds with a geared exposure to corporate debt which has been caught up in the fallout from the subprime problems; and quantitative equity hedge funds which have been caught out by the volatility in investment markets.

While conceding that the period of share market weakness and credit turmoil ‘ain’t necessarily over yet’, and without getting into the surrounding economic issues and the outlook going forward (which I have covered in previous reports), the blow-up in credit markets provides a number of lessons for investors. Specifically, these relate to financial engineering, diversification, gearing, the fact that there is no such thing as a free lunch and the need to invest in only what you understand.

Lesson 1: Beware of financial engineering

Financial engineering is at the centre of the storm now engulfing credit markets. Mortgages to very low quality borrowers (sub-prime mortgage borrowers) were packaged up into securities (collateralised debt obligations, or CDOs) which were sold off in various parcels, some of which came with high risk like equity but some of which came with AAA credit ratings (the highest possible credit rating).

So, due to the magic of modern finance, a portion of something which was regarded as high risk was able to be marketed as low risk. Hence it was always an artificial construct. And more fundamentally, because of a limited track record (usually just covering the last few years of relatively favourable conditions) risk was dramatically underestimated. Risk was underestimated both in terms of the performance of the underlying sub-prime mortgages and how the securities themselves would behave in times of market stress and poor liquidity (like we have seen over the last few months).

What’s more, this re-packaging and underestimation of risk arguably made the whole situation worse. By encouraging demand for the securities more money became available for lending to sub-prime borrowers which meant that lending standards became ever more lax. Such complex arrangements also led to a poor alignment of interests. Everyone was paid up front – the mortgage originators, the banks underwriting the securities, the ratings agencies, the CDO managers – except the end-investor who held all the risk. And mortgage originators had an incentive to write loans regardless of the quality of the borrowers. On top of all this, these complex securities were poorly understood and irregularly traded, adding to the difficulties involved in undertaking a decent risk analysis.

So when all is going well, there are no problems. But once the underlying investment (ie, mortgages to borrowers with poor credit histories) started to turn sour, the credit ratings proved unreliable. The securities proved impossible to sell because they were so complex and no one really understood them, let alone knew their true worth. And everyone ran for the exits at once.

The key lesson for investors from all this is to be sceptical of investments which rely heavily on financial engineering to meet their objectives, particularly if they haven’t been tested in both good and bad times. Such constructs often have a poor alignment of interests, the true risks may be poorly understood or hidden and, because so many parties are involved, the underlying fees may be excessive.

Lesson 2: Gearing is great – till it isn’t

We all know the benefits of gearing. Investing $1 of borrowed capital for every $1 of your own capital can turn a 10 per cent gross return into a 20 per cent gross return. But of course when returns are negative it can go badly wrong. In fact, very high gearing (eg 5 to 10 times) was at the centre of most of the big fund losses announced recently. For example, if debt is running at five times capital then just a 5 per cent drop in the value of the underlying investments will lead to a 30 per cent drop in the value of the fund for investors, viz: If initial capital in a fund from investors is $1 million and $5 million is borrowed, then the fund’s total investment is $6 million. If the underlying investments fall in value by 5 per cent to $5.7 million the lenders to the fund are still owed $5 million, but the investor’s capital in the fund drops to $0.7 million, or a 30 per cent decline.

Excessive gearing on top of the losses in the underlying securities explains why some funds with direct exposure to sub-prime debt have seen all or most of their value wiped out. It also explains the severity of the decline in value for some funds which were not directly invested in sub-prime related investments, but may have had an exposure to high yield corporate debt, where the decline in value has been modest.

A high level of gearing of this nature can also make the problem a lot worse. An ungeared fund might (depending on the ‘patience’ of its investors and whether it can freeze fund withdrawals if they are not patient) be able to ride out any market turmoil until pricing improves or the underlying securities simply mature by which time any actual losses (eg. owing to mortgage defaults) may be far less than current market conditions imply. But when gearing is huge, the fund’s creditors may seize the assets and sell them into weak markets pushing down their value even further (the equivalent of margin calls). Such fire sales only lock in the losses for investors.

It should also be noted that not only were the funds investing in sub-prime related securities geared, but there was additional gearing in the securities themselves. For example, CDOs that contain sub-prime debt could be up to 25 times geared. In this context it only takes a small increase in mortgage defaults to start causing big losses. As a result, there was effectively gearing on top of gearing.

So be wary of investments that rely on excessive gearing, both at the fund level and in the underlying investments.

Lesson 3: Diversification is good

Many of the funds at the centre of the recent storm appear to have been poorly diversified (particularly those with an excessive exposure to sub-prime related debt) and this has only magnified their losses. More diversified credit focused funds have held up much better.

Similarly, the events of the past month or so have also highlighted the downside of concentrated exposure to hedge funds. Some hedge funds, particularly quantitative long/short equity funds, had a particularly rough month with losses of around 30 per cent being reported at one point.

However, well-constructed funds-of-hedge-funds have generally come through in far better shape.

The point is that investors are always wise to make sure that funds they invest in are well diversified and not overly reliant on a particular type of investment or investment strategy.

Lesson 4: There is no such thing as a free lunch

Investor interest in credit investments and more recently in highly complex yield-based securities has its origin in the long-term decline in interest rates and bond yields on the back of the shift to low inflation over the last two decades.

Somehow, getting a 6 per cent return from government bonds in a world of 2.5 per cent inflation doesn’t sound quite as good as getting a 12 per cent return from bonds in a world of 8.5 per cent inflation (the 1980s). So investors with a desire for a high income flow, such as self-funded retirees, have been prepared to go in search of higher returns moving from government bonds into corporate debt. This was probably all fine because most corporate debt has a long history and so the risk involved can be reliably estimated and managed. In recent years though this has started to morph into funds investing in highly complex securities such as CDOs where risk was less well known.

However, while risk may remain dormant for many years leading investors to forget about it, the events of the past few months highlight that higher returns also come with higher risk. In other words, there is no such thing as a free lunch. The trick for investors is to make sure that they are aware of the extra risk they are taking on and to then make sure that it is managed appropriately in terms of diversification and gearing levels.

Lesson 5: Only invest in what you understand

A key lesson for investors from the events of the last few months is to only invest in what you understand. Modern credit instruments are incredibly complex and it would appear that many (including market participants) did not understand the nature of the investments being undertaken. Until recently most investors would not have known what a sub-prime mortgage was and most would have thought that a CDO was just another acronym for a senior company executive.

The writer is head of investment strategy and chief economist at AMP Capital Investors

 

Source: Business Times 12 Sept 07

US home sales not likely to recover next year

Moody’s says slump may last till 2009 as buyers struggle to get mortgages

(NEW YORK) The US housing slump will probably last until 2009 and home sales will take a ’substantial hit’ in the next several months as borrowers struggle to get mortgages, Moody’s Investors Service said.

‘The downturn is more severe and more protracted than we had expected,’ Joseph Snider, a credit officer at Moody’s, said. Home sales will be hurt by the lack of sub-prime and Alt-A mortgage lending and the difficulty borrowers with good credit are having obtaining mortgages, Moody’s said on Monday.

A glut of new and existing homes for sale is prompting potential buyers to wait for prices to fall before purchasing.

The Moody’s forecast contrasts with the National Association of Home Builders, which expects housing to begin rebounding in mid-to-late 2008. It also came as Federal Reserve Bank of San Francisco president Janet Yellen said the economy is under ‘downward pressure’ from turmoil in credit and housing markets.

The worst housing market in 16 years has sent a Standard & Poor’s measure of 16 US homebuilders down 49 per cent this year.

Moody’s said on Monday it has taken 38 negative ratings actions on the 22 US homebuilders it rates over the past year and more downgrades are possible. Builders may also begin violating credit agreements and banks may tighten restrictions placed on companies.

‘Tighter lending and credit standards, diminished consumer home-buying confidence, rising cancellation rates, and falling home prices – especially in the most reliable strong real estate markets prior to 2006 – have exacerbated the industry’s woes and further deepened our year-long negative view,’ the report said.

A recovery for housing could be hastened should the Federal Reserve take ‘frequent and concerted action’, the report said. Moody’s said it doesn’t expect that kind of action to occur unless the economy heads into a recession.

Mr Snider said that Moody’s had estimated there might be a second-half housing recovery in 2008. That forecast has now ‘been pushed back some’, he said.

Meanwhile, Fannie Mae and Freddie Mac, the biggest sources of money for US home loans, adopted rules intended to discourage the funding of high-risk sub-prime mortgages, the Office of Federal Housing Enterprise Oversight said.

The rules require Fannie Mae and Freddie Mac to buy home loans from originators that ‘help prevent abuses’ in mortgage lending, Ofheo said on Monday.

The two companies can only purchase home loans after verification of the borrowers’ income and ability to adjust to higher interest rates, according to the guidelines.

 

Source: Bloomberg (Business Times 12 Sept 07)

Housing turmoil ‘threatens US economy’

Fed officials say there is a risk of broader downturn; comments set stage for rate cut

WASHINGTON – TWO senior Federal Reserve officials said on Monday that the turmoil in housing and mortgage lending has begun to threaten the overall US economy.

Their statements set the stage for a likely cut in the Fed’s benchmark interest rate next week.

Fed governor Frederic Mishkin told a group of investors on Monday that the risk of a broader downturn ‘cannot, in my view, be ruled out’.

Mr Mishkin said inflation pressures had become less of a problem – a judgment that, if embraced by other Fed officials, would remove a major argument against lowering interest rates.

Fed Bank of San Francisco president Janet Yellen said a housing downturn and tighter credit were likely to cause ’significant downward pressure’ on consumer spending and, thus, on economic growth.

Even if investors overcome some of their fears, mortgage rates are likely to remain higher on a long-term basis and could continue to push housing prices down, she said.

‘Should the decline in house prices occur in the context of rising unemployment, the risks could be significant,’ she added.

Her comments highlighted a point recently stressed by Fed chief Ben Bernanke, that officials do not plan to wait for irrefutable statistical evidence of an economic downturn.

Rather, they are ready to act on warning signs, including anecdotal business reports, that the probabilities of a downturn are too high to ignore.

In response to the comments, Fed watchers said it seems likely that an interest rate cut will take place.

However, they said it is not clear if Mr Bernanke and his colleagues are ready to cut as much as investors expect, and many economists say they must, to keep the United States out of a recession.

The contrasting remarks made by two other Fed officials indicated that there may be some divide among the policymakers themselves as to what to do next week.

Dallas Fed president Richard Fisher said on Monday that the bleak jobs report was merely a ‘discordant note’, and that he was still unpersuaded about a broader downturn.

Philadelphia Fed president Charles Plosser said earlier last Saturday that policymakers should not put too much stress on the loss of jobs last month, and that he had not made up his mind yet on a rate cut.

The scope of remarks may reflect a debate inside the US central bank over whether to lower the benchmark rate on Tuesday by a quarter-percentage point, or a half-point, as some investors expect.

Meanwhile, market conditions have turned investors jittery.

On Monday, European Central Bank president Jean-Claude Trichet warned of ‘hectic behaviour’ in the global economy and urged central bankers to keep a close eye on the US for signs of an economic slowdown.

‘This is no time for complacency. The current situation calls for close observation and monitoring,’ said Mr Trichet at a gathering in Basel, Switzerland, of the world’s top central bankers, including US Federal Reserve chairman Ben Bernanke and the Bank of Japan governor Toshihiko Fukui.

A survey by the US National Association for Business Economics, meanwhile, lists a recession as the greatest risk to the US economy over the next year, outpacing inflation as the biggest concern by a two-to-one margin.

The economists forecast a half-point cut in the federal funds rate by the end of the first quarter of 2008, up from May’s forecast of a quarter-point cut.

Source: NEW YORK TIMES, REUTERS, BLOOMBERG NEWS (The Straits Times 12 Sept 07)

Sub-prime crisis may envelop whole of US economy

Central banks say they will remain alert but won’t bail out bad investors

(BASEL) The crisis in the US housing market risks spreading to the whole of the nation’s economy, European Central Bank chief Jean-Claude Trichet said yesterday on behalf of world central bankers.

He was speaking in his capacity as head of the G-10 group of central bankers from industrialised and emerging economies, who met at the Bank for International Settlements here.

‘There is a probability of fallout on the real economy in the USA,’ Mr Trichet said. ‘We will have to follow very carefully what happens particularly in the USA. We will remain . . . alert, (there is) no time for complacency,’ he added.

Mr Trichet said central banks had an interest in securing market stability but this did not extend to giving lifelines to imprudent investors who have got their fingers burned in the recent turbulence.

‘It’s certainly the sentiment of central bankers who are around the table that bailing out bad investors would be the worst thing to do,’ he said.

US Federal Reserve chairman Ben Bernanke, Bank of Japan governor Toshihiko Fukui, Bank of England governor Mervyn King, Zhou Xiaochuan from the People’s Bank of China and Bank of Canada Governor David Dodge were among those who attended the meeting.

Mr Trichet stressed the relative good health of the rest of the global economy outside the US, and of emerging markets in particular. ‘The global economy has solid fundamentals,’ he said. ‘Very significant progress has been made in the emerging world. The fundamentals have been considerably improved, progress has been made in fostering local financial markets,’ he added.

The ECB last Thursday voted to keep its interest rates on hold amid financial market and credit jitters. The US Federal Reserve is widely expected to trim borrowing costs at a scheduled Sept 18 meeting.

The US home loan trauma has prompted banks to choke off lending to each other as they strive to calculate exposure to the sector, forcing central banks to pump emergency funds into the financial system.

Official figures yesterday showed that Japan’s economy shrank more than expected in the second quarter. The 0.3 per cent fall was bigger than forecasts for a 0.2 per cent contraction.

That followed data on Friday showing US payrolls shrank in August for the first time in four years. The twin reports hardened prospects that the Bank of Japan will hold interest rates steady and the Fed will cut them to temper the worst effects of the crisis.

 

Source: AFP, Reuters, Bloomberg (Business Times 11 Sept 07)

A quick guide to sub-prime issues

How individual loan defaults in a faraway land can have a domino effect all over the world – including here

PAUSE for a moment to consider these facts: HSBC, the world’s third-largest bank, announced that 50 per cent of its earnings in 2006 were wiped out by sub-prime losses from its US subsidiary. Since the beginning of that year, over 50 US mortgage companies have put themselves up for sale, closed or been declared bankrupt. In July this year, Bear Stearns closed two of its ailing hedge funds, while in June, BNP Paribas announced the suspension of three of its funds due to exposure to US mortgages.

With news like this making waves in financial markets lately, it is hardly surprising to see the proliferation of doomsday headlines like ‘Market falls parallel previous collapses’, and ‘Anxiety attack knocks markets down’. No longer confined to the US real estate or financial markets, the topic of America’s sub-prime mortgage market has taken centre-stage, as fears of a spillover spread to financial markets in Europe and Asia – even Singapore.

How did it all begin?

Before the US real estate bubble burst, sub-prime lending was a rapidly growing segment of the mortgage market.

It worked by banks extending credit to borrowers who, for a number of reasons, would otherwise be unable to qualify for credit. According to the US Department of Treasury guidelines issued in 2001, ’sub-prime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments and bankruptcies’.

Most US sub-prime mortgages have an attractive initial fixed-rate mortgage payment for a few years, followed by a higher adjustable rate for the remaining life of the mortgage. The sub-prime mortgage industry began to proliferate earlier this century and estimates say that about 21 per cent of all mortgage originations from 2004 to 2006 were sub-prime – a sharp increase from 9 per cent in 1996-2004. At its height in 2005, sub-prime mortgages were worth US$805 billion.

Although not all sub-prime loans are necessarily high-risk, many of them were made to homebuyers with poor credit or little income. As the US housing market boomed, thousands of lenders greedily sought greater profits by aggressively touting loans to individuals with poorer credit ratings and making greater exceptions to guidelines. In certain cases, individuals were not even required to produce any proof of their income.

These sub-prime loans were bought mainly by big banks which bundled the debt and sold them to Wall Street firms. To sell these ticking time bombs, Wall Street packaged these risky loans with supposedly safer loans to create instruments known as collateralised debt obligations (CDOs) – making them more attractive to risk-averse investors. In 2006, an estimated US$100 billion of sub-prime debt went into US$375 billion worth of CDOs.

In pursuit of higher yields, investors stretching from Europe to Asia invested in these instruments for their potentially higher returns, as compared to bonds with the same ratings.

What went wrong?

Trouble started brewing when the US economy began showing signs of slowing down. Interest rates crept up, house prices tumbled and sub-prime mortgage defaults began climbing at an alarming rate, reaching 12.6 per cent at one point.

As default rates soared, creating losses on the underlying mortgages of CDOs, investors began to question the reliability of the models and ratings which valued these CDOs; indeed, credit rating agencies like Moody’s have come under fire for misjudging default rates in sub-prime mortgages. With the uncertainty surrounding the current analysis and valuation of credit risk, many investors have decided to pull back on investments in CDOs and hedge funds with stakes in such securities.

Explained Jeremy Goh, an associate professor of finance at the Singapore Management University (SMU): ‘When investors heard all these negative things about default rates in the news, they started withdrawing their money from hedge funds and parked them in safer money market instruments like treasury bills.’

The result was a triggered chain of reactions which affected markets worldwide. Hedge funds were forced to unload their assets in order to raise cash.

The scattered ownership of CDOs has in turn created widespread loss of confidence in financial markets. Besides affecting all holders of sub-prime-related assets, the greater and more serious implication of the sub-prime crisis is a squeeze on liquidity. Due to the uncertainty over other financial institutions’ exposure to sub-prime losses, they became unwilling to lend to each other.

A tsunami or ripple effect?

However, central banks around the world have responded by injecting liquidity into the markets to ease fears of a liquidity crunch. The US Federal Reserve has also cut its discount rate (which it charges for emergency lending to banks) from 6.25 per cent to 5.75 per cent.

Asian equity funds have also been hit hard, and among those affected the most are funds from Singapore and Malaysia. Data from Morningstar Asia showed that funds from both countries sank an average of 10 per cent.

Asian stock markets has also been tumultuous, spreading fears that a slowdown in the US economy will extend to the rest of the world.

Although the sub-prime crisis in the US may be a cause for concern, investors here should not be overly worried as Asian fundamentals remain strong. Many industry watchers agree that Asia’s economies are no longer as reliant on the US as in the past. As intra-regional trade grows, Asian giants like China and India have become increasingly important trade partners for other Asian countries instead of the US.

Fundamentals of Singapore’s economy remain firm as well, analysts agree. With the introduction of Formula One and the integrated resorts in the coming years, demand and consumption is likely to continue to propel Singapore’s growth.

Prof Goh concurs: ‘I think the jittery stock market in Singapore is only temporary, and I believe that highly-rated CDOs are still safe. Even if the US economy is heading for a recession, it will be a mild one, so the problem could be due to panic selling in the markets or hedge funds unloading some illiquid assets.

‘ As a result, it triggers fear in the lending market. Lenders are more reluctant to lend, which might have some effect on the economy – but nothing major, in my opinion.’

 

Source: Business Times 10 Sept 07

Rate cut not always needed: Fed official

Market disruptions can be addressed using tools available

(NEW YORK) Federal Reserve Bank of Philadelphia president Charles Plosser said there is an ‘underlying stability’ in the US economy and officials need not always cut interest rates in response to turmoil in financial markets.

‘Disruptions in financial markets can be addressed using the tools available to the Federal Reserve without necessarily having to make a shift in the overall direction of monetary policy,’ Mr Plosser said on Saturday at a conference in Waikoloa, Hawaii.

Mr Plosser said while the housing slump has lowered forecasts for the expansion and there is ‘considerable uncertainty’ about the outlook, he expects economic growth to return ‘toward trend later in 2008.’ The drag from housing will ‘gradually’ ease, concluding sometime next year.

The comments suggest that Mr Plosser has yet to conclude a reduction in the Fed’s benchmark rate is critical to safeguard the economy, which lost jobs for the first time in four years in August. The Philadelphia Fed chief doesn’t vote on the rate-setting Federal Open Market Committee until next year.

Lowering the benchmark rate is an ‘option if financial sector problems spill over to significantly harm the outlook for the broader economy,’ said Mr Plosser, 58, who took office a year ago. And, when shocks threaten market stability, a central bank ‘must be prepared to act promptly,’ he said.

Mr Plosser said that the US has coped with blows in the past, such as the devastation of Hurricane Katrina in 2005 and oil-price shocks, and that a decline in one industry ‘does not always imply major problems in the economy as a whole.’

‘It is important to understand and appreciate this underlying stability of the economy in the face of temporary disturbances as we seek to assess monetary policy,’ Mr Plosser told the Pennsylvania Association of Community Bankers convention.

Investors and economists said on Friday there’s little doubt Fed policy makers will lower the main rate after a government report that day showed employers unexpectedly cut 4,000 from payrolls in August.

‘The committee usually does not base its decision to change monetary policy on any one number,’ Mr Plosser said, without referring specifically to the August jobs report.

Answering questions following his speech, Mr Plosser said the outlook for inflation is ’still up in the air,’ and it’s not clear that the moderation in prices of recent months will be sustained.

 

Source: Bloomberg (Business Times 10 Sept 07)

LATEST US DATA – US home sales dip; layoffs worsen

Reports show that labour market is cracking: analyst

(NEW YORK) Pending sales of previously owned US homes plunged 12.2 per cent in July and planned layoffs by US companies surged 85 per cent in August due to turmoil in the sub-prime mortgage market, independent reports showed yesterday.

Also, employers added jobs at the slowest pace in four years in August, according to a separate private report.

Together, the data raised expectations of a weak employment from the government tomorrow and added to the view that the Federal Reserve could lower its overnight benchmark interest rate at its Sept 18 monetary policy meeting.

The National Association of Realtors’ Pending Home Sales Index, based on contracts signed in July, fell to a reading of 89.9, the lowest since September 2001 when the index stood at 89.8.

The association attributed some of the decline to mortgages falling through at the last moment.

The fall was much bigger than the 2 per cent decline in the index economists were expecting for July and helped paint a bleaker picture of the housing market moving forward.

‘The decline in the pending sales index in the past three months has been by far the fastest at any time since the housing market began to slow,’ said Ian Shepherdson, chief US economist at High Frequency Economics in Valhalla, New York. ‘This is disastrous.’

Stocks weakened following the data, with the Standard and Poor’s 500 index and the Dow Jones industrial average both falling more than one per cent in late morning trade.

The US dollar tumbled, falling more than one per cent against the yen and dipping against the euro. US government bond prices rose sharply.

Mortgage market troubles also played a big role in announced layoffs in August, which rocketed to 79,459 from 42,897 in July, according to Challenger, Gray & Christmas Inc, an employment consulting firm. August’s job cuts were the highest since February, when they totalled 84,014.

‘Nearly half of the August cuts came from the financial sector, as dozens of mortgage and sub-prime lenders caved under the pressure of a sinking housing market,’ Challenger, Gray & Christmas said in a statement.

Financial job cuts totalled 35,752 in August, the highest monthly total for the industry since Challenger, Gray & Christmas began tracking in 1993, the firm said.

Separately, a report from ADP and Macroeconomic Advisers LLC showed that US private employers added 38,000 jobs in August, well below the 83,000 that analysts had expected and the slowest rate of growth in four years.

July’s private sector job growth was revised downward to 41,000 from the originally reported 48,000 jobs.

‘In short, evidence is starting to emerge that the labour market is finally cracking,’ said Mr Shepherdson.

Economists reckoned the Fed will not cut interest rates until signs of stress emerge in the labour market, which has remained relatively tight despite the slowdown in the housing market.

According to the latest Reuters poll of economists, the US Labour Department is expected to report tomorrow that 110,000 non-farm payroll jobs were created in August, down from 92,000 in July.

 

Source: Reuters (Business Times 6 Sept 07)

15% price fall seen in US commercial property

Rising borrowing costs forcing owners to accept less or postpone sales

(SAN FRANCISCO) US commercial real estate prices may fall as much as 15 per cent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.

‘People aren’t willing to do deals right now,’ said Howard Michaels, the New York-based chairman of Carlton Advisory Services Inc, which has arranged financing for real estate purchases including the Lipstick Building in midtown Manhattan. ‘The expectation is that prices will come down.’

Investors in July bought the fewest commercial properties since August 2006 and apartment building acquisitions were down 50 per cent from June, data compiled by industry consultants at New York-based Real Capital Analytics Inc show. Archstone-Smith Trust in August postponed its US$13.5 billion sale to a group led by Tishman Speyer Properties LP until October. Mission West Properties Inc, the owner of commercial buildings in Silicon Valley, said on Aug 13 that the company’s US$1.8 billion sale may fail after a bank withdrew funding.

‘There are so many deals falling apart,’ said David Lichtenstein, chief executive officer of Lakewood, New Jersey based Lightstone Group, an owner of more than 20,000 apartments and 30 million square feet of office and retail space. ‘People who can get out are getting out.’

About 930 commercial real estate transactions valued at US$5 million or more closed in July, preliminary data from Real Capital show. That count could climb as much as 15 per cent when all of the month’s deals are tallied, which would still be the lowest this year, said Dan Fasulo, director of market analysis for Real Capital.

Average prices for commercial properties might drop 5-15 per cent in the next two years depending on the type of property and its quality and location, said Matthew Ostrower, an industry analyst at New York-based Morgan Stanley, the second largest US securities firm by market value.

Commercial mortgage rates have climbed as defaults rose in the sub-prime part of the residential real estate market. About six months ago, a 30-year commercial loan with 5-10 years of interest-only payments would have cost the borrower about 120 basis points more than the yield of the 10-year Treasury note. A similar loan would now cost about 160-200 basis points more than the 10-year Treasury’s yield of 4.6 per cent, data compiled by New York-based Cushman & Wakefield Sonnenblick Goldman show.

The increase has halted a rally that lifted prices for office buildings, apartments and hotels to records this year. The average price paid for high-quality office properties in city centres reached US$291 psf, up from US$188 in 2005 and almost double the average US$152 in 2001, Real Capital reported.

Real estate investors typically purchase properties with the expectation that the yield will outstrip conventional investments and make their financing affordable.

When prices for prime urban office buildings fell in 2002, capitalisation rates (or a property’s net operating income divided by the purchase price) rose to an average 9.25 per cent, according to Chicago-based data provider Real Estate Research Corp.

That was almost 500 basis points more than the average rate of 10-year Treasury bonds at the time. Such yields attracted investors and by this year’s first quarter, the average cap rate had fallen to 6.5 per cent.

New York-based Blackstone Group LP, manager of the world’s largest buyout fund, purchased Sam Zell’s Equity Office Properties Trust for US$23 billion in February to gain about 540 office buildings in the US. That worked out to a capitalisation rate of about 5.3 per cent – a record low for an acquisition of a real estate investment trust

(Reit), according to Green Street Advisors Inc. Including debt, the price was US$39 billion.

Regency Centers Corp lost an equity partner in May for the US$80 million purchase of four shopping centres in Florida because financing costs exceeded the projected cash flow, said CEO Martin ‘Hap’ Stein in an interview.

Jacksonville, Florida-based Regency is the third-largest company by market value in the Bloomberg Reit Shopping Center index.

‘You’ve got a lot of fear in the system from the capital markets,’ Mr Stein said. ‘As far as the pricing of credit, it was greed six months ago and it’s fear today.’ Tighter credit standards at banks have given an advantage to investors with ample cash, said Joaquin de Monet, CEO of General Electric Co’s Arden Realty Inc. All-cash buyers might include insurance companies, pension funds and Reits.

Los Angeles-based Arden bought 5.9 million sq ft of offices from Blackstone in July. The properties, part of CarrAmerica Realty Corp when Blackstone acquired it last year, were in San Diego, San Francisco and Orange County, California; Portland, Oregon; Salt Lake City, Utah; and Seattle.

‘The private equity firms used to be the winners, but now lower leveraged and all-cash buyers are more competitive,’ Mr De Monet said in an interview.

Even so, sellers are pulling properties from the market, said James Corl, chief investment officer for real estate securities at New York-based Cohen & Steers Inc, which manages almost US$35 billion for clients.

‘No one’s going to want to sell in this environment, because you’re not going to get your price,’ Mr Corl said.

 

Source: Bloomberg (Business Times 6 Sept 07)

No sub-prime miracle cure, says OECD chief economist

Increased scrutiny; borrower education; pugnacious rating analysis needed

(MADRID) The surge in short-term rates caused by rising defaults of US sub-prime mortgages exposed ’serious imperfections’ in the way global credit and housing markets function, OECD chief economist Jean-Philipe Cotis said.

‘Recent developments have revealed serious imperfections in the functioning of US housing markets and, more broadly, in credit markets worldwide,’ said Mr Cotis, chief economist at the Organisation for Economic Cooperation and Development.

Mr Cotis suggested that increased supervision of US sub-prime mortgages, more information and education for borrowers, and more ‘pugnacious’ analysis from credit rating companies, may help avoid future losses of confidence.

‘More transparency also seems to be called for in credit markets,’ Mr Cotis said. ‘I don’t think there’s a miracle cure readily available.’

Some so-called asset-backed securities lost more than 50 per cent before credit agencies downgraded them in July.

US Senate Banking Committee chairman Christopher Dodd said last month that the rating agencies’ failure to act sooner caused ‘great damage’.

Meanwhile, the Dutch central bank said that uncertainty has risen in the Netherlands’s financial system over the past six months and the full impact of the recent increase in borrowing costs ‘cannot be determined’.

The outlook for the financial system depends on ‘the extent to which the decreasing risk tolerance among investors continues and how much farther it spreads’, the central bank said in a report issued yesterday.

The European Central Bank and other monetary authorities around the world injected more than US$350 billion into money markets last month to prevent a wider crisis as investors shunned assets linked to US mortgages and corporate borrowing costs rose.

The US sub-prime meltdown has revealed that ‘unfavourable developments in one segment could lead to an overall deterioration of the market climate’, the Dutch central bank said. The ‘direct exposures’ of Dutch financial service companies to the sub-prime mortgage market are ‘relatively limited’, according to the report.

Meanwhile, tight money markets showed no sign of let-up in a liquidity squeeze caused by banks clamming up on lending over the past month as they scrambled to calculate exposure to mass defaults in the US sub-prime mortgage market.

Australia held interest rates steady yesterday, the first piece in a monetary jigsaw which investors expect to show euro zone policy on hold and a US rate cut in response to a global credit crisis.

Overnight interbank lending rates in the euro zone approached six-year highs, after Tuesday’s injection of liquidity by the ECB failed to sate demand for ready cash.

‘The fact that overnight is trading so high at the moment shows that the cash is not spreading out across the system, there are institutions which are struggling to get short-term needs filled,’ said a euro zone trader.

In Britain, sterling three-month money rates hit fresh 81/2-year peaks. The Bank of England – which has stood back until now – decided to act, but focused on overnight rates.

The BOE raised its aggregate reserves target for the next month by 6 per cent and said that it stood ready to add 25 per cent more if overnight interest rates stayed high.

It said that it aimed to ‘relieve some pressure on interest rates for overnight borrowing which have, at times during the maintenance period over the past month, been unusually high’.

The Reserve Bank of Australia does not explain its reasoning when leaving interest rates steady but has been striving daily to add liquidity to the banking system as market rates climbed.

The Bank of Canada was expected to follow Australia’s example late yesterday, and the European Central Bank and the BOE are seen keeping rates on hold today, while the calming of market turmoil depends overwhelmingly on the delivery of an expected Federal Reserve rate cut on Sept 18.

The Fed is expected to cut rates at its meeting after chairman Ben Bernanke said last week that he would take any steps needed to shelter the economy from the credit squeeze.

Richmond Fed president Jeffrey Lacker said on Tuesday that he would back a rate cut if the evidence showed slowing growth and lower inflation, but said that the case was not yet made.

‘If evidence arrives that we need a policy move, of course I will consider it and I will take that evidence seriously,’ he said.

‘That evidence would be of the nature of information that alters the outlook for real spending and inflation.’

Further diagnosis of the US economy will be provided later by the Fed’s Beige Book on regional economic conditions, while tomorrow’s August non-farm payrolls figures loom large.

 

Source: Bloomberg, Reuters (Business Times 6 Sept 07)

US pending home sales plunge, layoffs surge

New data raises expectations the Fed will cut key interest rate

WASHINGTON – PENDING sales of existing homes in the United States fell in July to their lowest level in nearly six years, as the mortgage market’s troubles made it tough for many borrowers to finalise home purchases.

Planned layoffs by US companies surged 85 per cent last month, independent reports showed yesterday.

Also, employers added jobs at the slowest pace in four years last month, according to yet another separate private report.

Together, the data raised expectations of a weak employment from the government and added to the view that the US Federal Reserve could lower its overnight benchmark interest rate at its Sept 18 monetary policy meeting.

The National Association of Realtors (NAR) said its index of pending home sales for July fell 16.1 per cent from a year ago and 12.2 per cent from the prior month.

July’s reading of 89.9 was the second lowest ever for the index and its lowest since September 2001, when the US economy was jolted by terrorist attacks.

A reading of 100 is equal to the average level of pending sales activity in 2001, when the index began.

The fall was much bigger than the 2 per cent decline in the index economists were expecting for July and helped paint a bleaker picture of the housing market moving forward.

‘It’s difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren’t closing because mortgage commitments have been falling through at the last moment,’ the NAR’s senior economist, Dr Lawrence Yun, said.

But he added that while some concerns remain, the market appears to have been stabilising since the middle of last month.

Mortgage market troubles played a big role in layoffs announced last month, which rocketed to 79,459 from 42,897 in July, according to Challenger, Gray & Christmas, an employment consulting firm.

Last month’s job cuts were the highest since February, when they totalled 84,014.

Separately, a report from ADP and Macroeconomic Advisers showed that US private employers added 38,000 jobs last month, well below the 83,000 that analysts had expected and the slowest rate of growth in four years.

The bigger-than-expected decline in home sales in July led some analysts to believe that the Fed would be more likely to cut interest rates at its next meeting later this month.

Source: ASSOCIATED PRESS, REUTERS (The Straits Times 6 Sept 07)

Istithmar eyes sub-prime stricken firms

(DUBAI) Dubai government-owned Istithmar is considering buying into two US companies hit by exposure to sub-prime, or high-risk, mortgages after defaults triggered a global flight to safer assets.

The agency, which has bought a stake in Standard Chartered and acquired fashion retailer Barneys New York in the past year, said one of its targets was a financial services firm with potential to expand abroad.

‘For every loser, there is a winner; and some institutions may have to sell some good assets because of bad assets hit by sub-prime,’ Felix Herlihy, chief investment officer of Istithmar, told Reuters in an interview.

‘Now could be the time to invest,’ he said, declining to be identify either target.

Other government agencies from the world’s top oil exporting region have said turmoil in global credit markets in July triggered by US home loan defaults had opened up opportunities for acquisitions.

Abu Dhabi-based Mubadala Development Co and Dubai International Capital said rising borrowing costs and reluctance to take on risk were making it easier for them to compete with private equity funds, which rely on cheap credit.

Istithmar is, however, the first Gulf investor to say it is targeting the companies that took a hit from subprime defaults.

‘They are businesses that have been painted with some kind of sub-prime brush, when maybe they should not have been,’ Mr Herlihy said of the two candidates for investment.

Istithmar chief executive David Jackson said in July the agency could benefit from the credit crisis because it took a long-term view of investments.

Istithmar, Dubai International Capital and other Gulf funds typically borrow about 70 per cent of their investment cost.

Mubadala said in March it leveraged its investments to help maintain financial discipline.

Although Dubai exports little oil compared with its neighbours, the government is tapping the region’s windfall from record crude prices by selling real estate, and through tourism and trade.

Istithmar made its first investment in China in July, taking a 10 per cent stake in oil-storage firm Hans Energy Co for US$51 million.

Source: Reuters (Business Times 5 Sept 07)

Sub-prime rout less severe than in ‘98: BIS

Swiss body’s view contrasts with grim outlook of S&P

(BASEL, Switzerland) The market fallout from the sub-prime mortgage slump is less severe than in 1998 after Russia’s default and the collapse of Long-Term Capital Management (LTCM), the Bank for International Settlements said.

The assessment from the BIS, which monitors financial markets for central banks and regulates lenders, contrasts with analysis from Standard & Poor’s, which last week said that the outlook for securities firms is worse than in 1998.

‘Some investors began to draw parallels with the autumn of 1998, when the collapse of LTCM had triggered fears of instability in the banking system as a whole,’ the BIS in Basel, Switzerland, said in a report published yesterday.

‘However, the recent rise in US 10-year swap spreads was less sharp than at the time of the LTCM crisis.’

Investors are demanding a yield premium over 10-year Treasury notes of 70 basis points to swap floating-rate interest payments for fixed rates, up from 54 basis points in May. The premium, which increases as the perception of risk deteriorates, had more than doubled in 1998 to 97 basis points.

Bank stocks dropped as much 17 per cent this year, half the 35 per cent decline in 1998, according to the Standard & Poor’s Banks Index.

Declines in stock markets ‘largely reflected investors’ anticipation of losses related to speculation in the sub-prime market and other credit products, as well as expected declines in bank profits due to lower M&A-generated fees’, the BIS said.

‘Despite such losses, the overall decline amongst US banks had not by late August been as severe as in 1998.’ Bank Revenue S&P, based in New York, last week said that revenue from investment banking and trading may fall 47 percent in the final six months of this year, compared with a 31 per cent decline nine years ago. Moody’s Investors Service on Aug 16 said that a hedge fund collapse on the same scale as LTCM was possible.

LTCM, the Greenwich, Connecticut-based fund run by John Meriwether, failed after Russia defaulted on US$40 billion of debt in August 1998 and investors sought the safest securities, including US Treasury notes.

LTCM had been betting on financial markets becoming less risky, borrowing from Wall Street banks to make wagers of about US$125 billion that global bond prices would converge, according to accounts of the debacle including When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein.

The BIS, formed in 1930, polled 62 institutions for its semi-annual report.

Separately, China said yesterday that none of its massive foreign exchange stockpile was invested in the teetering US sub-prime mortgage sector, while a top EU official predicted the crisis would not choke off economic recovery.

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia told newspaper El Pais that lower credit growth and tighter credit conditions were ‘very possible’ but that Europe’s economic recovery would continue.

‘There is no reason that financial turbulence … will put an end to a phase of economic recovery which is solidly based,’ he said.

A senior Chinese foreign exchange agency official helped sentiment by saying none of Beijing’s US$1.33 trillion stash of foreign exchange reserves – the world’s largest – was in US sub-prime mortgage-backed securities, underscoring China’s earlier assertions that it had only limited exposure.

 

Source: Bloomberg (Business Times 4 Sept 07)

How far will the Fed chief go?

In a speech last Friday, US Federal Reserve chairman Ben Bernanke gave his first detailed analysis of the turmoil in financial markets and what actions the Fed could take. Ann Williams summarises what he spoke on.

The sub-prime crisis and the fallout

MR BERNANKE begins by explaining why the sub-prime crisis happened and admits that the fallout has been more severe than expected.

He acknowledges that the turmoil in mortgage markets had caused a broader credit crunch that could damage the fundamental economy.

In doing this, the Fed chief is also setting out to reassure investors that the United States central bank understands the severity of the crisis.

Mr Bernanke starts by saying the housing downturn has been ’sharp’ and has been responsible for reducing the annual rate of US economic growth by about three-quarters of a percentage point over the past 11/2 years. The downturn, he says, looks set to continue.

He talks about how this has had an impact on the mortgage market, particularly the fate of sub-prime borrowers – those with poor credit histories – who borrowed during the housing boom and are now struggling to hold on to their homes as rates have risen.

‘With many of these borrowers facing their first interest rate resets in the coming quarters, and with softness in house prices expected to continue to impede refinancing, delinquencies among this class of mortgages are likely to rise further.’

Mr Bernanke also discusses how, as a result of problems in the secondary market for mortgage-backed securities, borrowers currently faced ‘noticeably tighter terms and standards’ for nearly all housing loans.

Worse, the ‘financial stress has not been confined to mortgage markets’ but has spread to credit and equity markets: There were ‘pronounced declines in investor demand’ for asset-backed commercial paper, a ‘flight to quality’ in the Treasury market, a widening of credit spreads and ’sharp’ swings in stock prices.

Mr Bernanke acknowledges that ‘global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans’.

These losses reflect more than concerns that weakness in US housing will restrain overall economic growth.

They reflect investor uncertainty that ‘has increased significantly, as the difficulty of evaluating the risks of structured products that can be opaque or have complex payoffs, has become more evident’.

‘Liquidity dried up as uncertainty, the higher cost of capital and fears that credit risks might be larger and more pervasive than thought previously, deterred new loans and investment.’

Additional Fed actions

MR BERNANKE then says that ‘the Fed stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets’.

While noting it is not the Fed’s role to protect investors from losses, he makes clear that the central bank has a stake in maintaining smoothly functioning financial markets.

‘Developments in financial markets can have broad economic effects felt by many outside the markets, and the Fed must take those effects into account when determining policy.’

His basic position – that the Fed will not cut rates to help investors but will take into account the effects of market turmoil on the economy when setting monetary policy – is the same one laid out in its inter-meeting policy statement a fortnight ago.

What is new is his detailed discussion of what is happening in the financial markets and the ways in which these developments can have an impact on the economy, particularly the housing sector.

Mr Bernanke’s speech does appear to nudge the Fed in the direction of a cut in its key federal funds rate because it does not deter investors from their expectation of such a move. But it falls short of committing to that cut.

He also spells out a much tighter and more explicit link between the next decision on interest rates and what happens in the housing market.

This is important because the Fed has traditionally focused on the health of the overall economy rather than on individual sectors.

‘Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the rest of the economy. We are following these developments closely.’

In an added attempt to soothe investors, Mr Bernanke also suggests that the central bank will focus less heavily than usual on incoming economic data, which has yet to signal a clear downturn.

‘Economic data bearing on past months or quarters may be less useful than usual for our forecasts.

‘As a result, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country.’

 

Source: The Straits Times 4 Sept 07

Housing crisis heats up White House race

Bush sees limited govt role but rivals say more to be done

(WASHINGTON) The maelstrom engulfing the US housing market and threatening to throw millions onto the streets is moving up the agenda in the race for the country’s most prestigious address, the White House.

US President George W Bush unveiled last Friday measures to help some Americans keep their homes during a credit crunch that has up-ended financial markets, saying that it was a top priority.

He acknowledged that there had been ’some excesses’ in the lending market that helped fuel the nation’s housing boom in the early 2000s.

But he insisted that the federal government has only a ‘limited’ role to play in helping millions of people now struggling to hold onto their homes amid rising interest rates.

‘It’s not the government’s job to bail out speculators. Or those who made the decision to buy a home they knew they could never afford,’ he said.

However, his view is not shared by many of the candidates eyeing his job in the November 2008 presidential elections. The crisis, fuelled by the so-called sub-prime mortgages granted to those with risky credit histories, attacks the heart of the American dream of home ownership.

Democratic Party presidential hopeful Barack Obama warned in the Financial Times last week that it was ‘more than a temporary blip in our economic progress, it is a cancer that threatens to spread with devastating impact to housing and to our economy as a whole’. He proposed that unscrupulous lending companies should be penalised and that borrowing criteria should be standardised.

Former Democratic senator John Edwards has proposed setting up a national fund which would allow those property owners facing foreclosure to refinance their loans without losing their homes.

And former Cleveland mayor Dennis Kucinich, also running for president, has been scathing in his attacks on mortgage lenders snaring vulnerable clients by offering low-interest rates which soar after an initial introductory period.

Christopher Dodd, another Democratic hopeful, urged the Federal Housing Administration to take action after talks with Treasury Secretary Henry Paulson and the Federal Reserve chairman, Ben Bernanke.

In Mr Bernanke’s first speech since the global markets were roiled by fears of a housing-sparked liquidity crisis, he said that the Fed wanted to avoid ‘further tightening of credit conditions’, which could have ‘adverse effects on consumer spending and the economy more generally’. Markets viewed the chairman’s remarks as opening the door to a potential rate cut that could lower overall borrowing costs and stimulate frozen credit markets.

As for the leading Democratic favourite, New York Senator Hillary Clinton, she has urged that borrowers be given access to expert advice on mortgages and their risks.

Republican candidates have been less ambitious in their proposals. Former Massachusetts governor Mitt Romney said that the ‘bad actors’ in the crisis should be punished and lending procedures simplified so borrowers know exactly what they are getting into. Former New York mayor, Rudolph Guiliani, who leads Republican hopefuls in the polls, was even more cautious about any government intervention. ‘Let’s get ourselves through this first, then take a look back and see what more could be required,’ he told CNN recently.

 

Source: AFP (Business Times 3 Sept 07)

TAKING STOCK – Market lifted by hopes US mortgage crisis will ease

Bush, Bernanke seen taking steps to help sub-prime creditors pay their mortgages THE local bourse yesterday shrugged off losses on Wall Street to post strong gains amid hopes that United States authorities would soon tackle the sub-prime mortgage crisis.

The Straits Times Index (STI) surged 71.76 points, or 2.1 per cent, to 3,392.91 points, helped in large measure by the three local banks’ solid rises.

The surge came despite the Dow Jones Industrial Average’s fall of 50.56 points to 13,238.73 points on Thursday.

Investors are hopeful a speech by US Federal Reserve chairman Ben Bernanke, due last night, and moves by US President George W. Bush will ease the crisis that has rocked markets.

President Bush is set to announce plans to help US home owners with sub-prime mortgages pay their loans, The New York Times reported.

Analysts said moves like these helped push up the local market yesterday. Another possible factor for the sharp uptick was month-end ‘window-dressing’, when fund managers tidy up their portfolios.

The local benchmark index hit an intra-day high of 3,399.35 points in early afternoon trading before declining.

Just before the close, however, a sharp spike in the index brought it to within points of its intra-day high.

Despite the strong STI upswing, volume was thin – at only 1.93 billion shares, down from 2.49 billion shares on Thursday.

The value of the shares was higher, though, at $2.39 billion, compared with $1.99 billion the previous day.

Dealers said retail investors stayed on the sidelines. Trading activity was largely confined to traders and investors who were ‘bottom-fishing’ for bargains.

‘With the lack of liquidity, it is easy for the index to move up or down,’ said one.

DBS Group Holdings rose 50 cents to $20, likely buoyed by a Standard & Poor’s report that its exposure to collateralised debt obligations is unlikely to affect its ratings.

Other banking stocks also enjoyed a reprieve. United Overseas Bank rose 50 cents to $20.80, while OCBC Bank improved 10 cents to $8.55.

SingTel rose 10 cents to $3.64 and contributed 10.3 points to the STI’s rise.

On the economic front, there was good news on tourist arrivals, with Singapore receiving 951,000 visitors in July, up 4 percent from a year earlier and a record number for any month.

Labroy Marine continued its slide, after CLSA raised concerns over its head of rig building, Mr K.K.Ng, moving to a business development role. It fell four cents to $1.98.

The usual suspects featured on the top volume list. Centillion was unchanged at 11 cents, with a volume of 128 million shares. Genting International was also unchanged at 63.5 cents with 108.2 million shares.

Construction company Yongnam Holdings rose two cents to 43.5 cents, while Liang Huat Aluminium was two cents weaker at seven cents. Volume was 58.5 million shares.

 

Source: The Straits Times (1 Sept 07)

Fed ready to act to limit damage from sub-prime: Bernanke

But Fed chief gives no clear signal for interest rate cut at next meeting on Sept 18

(JACKSON HOLE, Wyoming) Ben Bernanke, chairman of the Federal Reserve Board, declared yesterday that the central bank ’stands ready to take additional actions as needed’ to prevent the chaos in mortgage markets from derailing the broader economy.

Mr Bernanke offered no explicit hint that the central bank will reduce the benchmark federal funds rate at the next policy meeting on Sept 18, and his remarks suggested that the Fed was unlikely to take any action before that date unless economic conditions deteriorate.

But he said nothing to dissuade investors from expecting a rate cut at that meeting, and financial markets have been betting on the near-certainty of such a move ever since the Fed took a partial step on Aug 17 of reducing its discount rate, which applies to emergency short-term loans to banks.

In anticipation of the speech, Wall Street rallied, with the Dow Jones industrial average jumping as much as 140 points.

Once Mr Bernanke’s remarks were released at 10 am, investors trimmed those gains slightly. But all three major American stock indexes remained up nearly one per cent at 11 am.

In the long-awaited speech, his first since the nation’s credit markets began to seize up several week ago, Mr Bernanke made it clear that the Fed’s decision to cut interest rates will heavily depend on what happens to the housing and housing finance.

‘Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the rest of the economy,’ he told listeners at the Federal Reserve’s annual symposium here in the Grand Tetons. ‘We are following these developments closely,’ he added.

Mr Bernanke walked a tight line between trying to reassure financial markets and locking the Federal Reserve into a rescue effort that could prove either unwarranted or unwise over the longer term.

Investors around the world had awaited his speech with an almost obsessive fixation in recent days, as what began as a panic in sub-prime mortgages for people with weak credit continued to freeze up lending on scores of other fronts, from ‘jumbo’ mortgages to borrowers with good credit to a growing number of billion-dollar leveraged buyouts.

Mr Bernanke spelled out a much tighter and more explicit link between the next decisions on interest rates and what happens in the housing market.

That was important, because the Fed has generally focused on the health of the overall economy rather than individual sectors. In an added attempt to soothe investors, Mr Bernanke also suggested that the central bank would focus less heavily than usual on incoming economic data, which has yet to signal a clear downturn.

‘Economic data bearing on past months or quarters may be less useful than usual for our forecasts,’ he said. ‘As a result, we will pay particularly close attention to the timeliest indicators, a well as information gleaned from our business and banking contacts around the country.’

Meanwhile, US President George Bush yesterday pledged to help people with risky sub-prime mortgages keep their homes and tighten safeguards against predatory lending, while rejecting a bailout for ’speculators’. ‘I plan to help homeowners, the government’s got a role to play,’ Mr Bush said. ‘But it’s not the government’s job to bail out speculators or those who made the decision to buy a home they couldn’t afford.’ Mr Bush said that he will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favourable rates.

Tighter credit and higher borrowing costs threaten the housing market, which has been an engine of U.S. economic growth.

Source: Bloomberg, NYT (Business Times 1 Sept 07)

Bush to outline sub-prime mortgage initiative

WASHINGTON – President George W Bush will outline reforms on Friday intended to help homeowners

with sub-prime mortgages avoid default, a senior US administration official said on Thursday.

‘He will also discuss reform efforts to prevent these kinds of problems from arising in the future,’ the

official said on condition of anonymity.

Financial markets have been in turmoil over the fallout from these credit problems for several weeks.

Source: REUTERS (Business Times 31 Aug 07)

California househunters sit on fence despite price dive

Fear of prices falling further is keeping them out of the residential market

(LOS ANGELES) For some prospective home buyers in Southern California, the effect of the US mortgage crisis has been to keep them on the sidelines of the home market, wary of stepping in for fear prices will fall further.

Sheila Hill, 35, is no closer to making a downpayment on a house than she was a year ago, when she began shopping in the San Diego area, even though prices on some of the single-family homes she has seen have fallen US$200,000.

‘It’s kind of an awkward time right now to be a buyer,’ Ms Hill, director of a human resources organization, said in an interview. ‘I have the credit, but with the market slipping down so much it’s hard to know when to jump in.’ Last month Southern California recorded its weakest July home sales since 1995 because potential buyers were holding out for lower prices, according to real estate research firm DataQuick Information Systems.

A total of 17,867 new and resale homes were sold in Southern California in July, down 27.4 per cent from the same period in the previous year, DataQuick said.

‘They are terrified to purchase a home and have it decline in value,’ said Steve Johnson, director of the Southern California region for market research firm Metrostudy. ‘We haven’t seen this kind of buyer apathy in regards to committing to real estate in 15 years.’ Ed Smith, vice-president of government affairs for the California Association of Mortgage Brokers, blamed ‘media hype’ for the worries over declining property values. ‘It’s not fueled by empirical data,’ he said.

To a certain extent, that is true. The median price paid for a Southern California home was US$505,000 in July, the same as a record high posted earlier this year. However, that data is skewed by the fact that most home sales are occurring in the high-end markets as a spate of foreclosures and the collapse of the sub-prime mortgage market has damaged the lower end.

Brokers and other industry veterans are telling prospective buyers with good credit who can afford homes in good neighbourhoods that buying a home in the current market is still likely to be a good long-term investment. ‘I’ve been saying to people, if you can afford to buy in a decent neighbourhood right now with a decent (mortgage) product, you should do that,’ said Lori Gay, chief executive of Los Angeles Neighbourhood Housing Service, a nonprofit affordable housing lender and developer. ‘Hoping that there might be a phenomenal deal a year from now in that nice neighbourhood might not be the way to play it.’ And, if they wait too long, getting a mortgage with low interest rates may get tougher. Already, interest rates on jumbo loans – those of more than US$417,000 – are on the rise.

Because of high property prices in California, most buyers need jumbo loans.

Still, prospective buyers like Ms Hill and Chanette Duplessis, a 53-year-old publicist in the entertainment industry, would rather sit on the sidelines for now.

‘I’m a little hesitant to jump right in immediately, because I think that prices are still going to go down,’ said Ms Duplessis, who has been paying US$2,600 a month in rent since she sold her last home in the city of Inglewood near Los Angeles a year and a half ago.

‘I’m not at this point too anxious,’ she said. ‘You know why rich people are rich? Because they shop around.’

 

Source: Reuters (Business Times 30 Aug 07)

Sub-prime culprit: irrational exuberance

(WASHINGTON) We are now in the ‘blame phase’ of the economic cycle. As the US housing slump deepens and financial markets swing erratically, Americans have embarked on the usual search for culprits. Who got us into this mess?

Our investigations will doubtlessly reveal, as they already have, much wishful thinking and miscalculation. They will also find incompetence, predatory behaviour and probably some criminality.

But let me suggest that, though inevitable and necessary, this exercise is also simplistic and deceptive. It assumes that, absent mistakes and misdeeds, we might remain in a permanent paradise of powerful income and wealth growth. The reality, I think, is that the economy follows its own Catch-22: by taking prosperity for granted, people perversely subvert prosperity. The more we – business managers, investors, consumers – think that economic growth is guaranteed and that risk and uncertainty are receding, the more we act in ways that raise risk, magnify uncertainty and threaten economic growth. Prosperity destabilises itself.

This is not a new idea. Indeed, it explains why terms such as ‘the business cycle’ and ‘boom and bust’ survive. But it gets overlooked in periods of finger-pointing: now, for instance. The housing downturn and credit fears are undeniable. Someone or something must be held responsible. Here’s a rundown of popular suspects:

• The Federal Reserve. It allegedly held short-term interest rates too low for too long. From late 2001 to late 2004, the overnight Fed funds rate was 2 per cent or less. Credit was supposedly ‘too easy’.

• The Chinese. They funnelled their huge export surpluses (mostly in US dollars) into US Treasury bonds. That kept long-term interest rates low even after the Fed began raising short-term rates in 2004. China’s foreign exchange reserves now exceed US$1.3 trillion.

• Mortgage bankers. They relaxed lending standards for weak borrowers, leading to numerous defaults. In 2006, about 90 per cent of new ’sub-prime’ mortgages had adjustable interest rates. That exposed borrowers to future rate increases – which many now can’t afford.

• Wall Street. The mortgage bankers got giddy only because they could sell the loans to pension funds, hedge funds and others as mortgage-backed securities (bonds created by bundling loans).

• Credit rating agencies. Moody’s and Standard & Poor’s – which rate the creditworthiness of bonds – allegedly weren’t tough enough on sub-prime mortgages. That fanned investor appetite.

Did the Fed foster easy credit for too long? Maybe. But economist Mark Gertler of New York University argues that if this were so, inflation would have exploded. It didn’t. From 2003 to 2005, it rose modestly, from 1.9 per cent to 3.4 per cent.

What seems to have happened was a broad and mistaken reappraisal of risk. Bonds that were once considered highly risky were judged much less so. China’s appetite for Treasury bonds may account for some of this. It may have lowered interest rates on Treasuries and sent investors scurrying into riskier bonds with higher rates (corporate ‘junk’ bonds, mortgage bonds, and bonds of ‘emerging market’ countries like Brazil).

But that can’t fully explain the extraordinary drop of interest rate ’spreads’ – the gap between rates on riskier bonds and safer Treasuries. In early 2003, junk bonds carried rates eight percentage points above Treasuries; early this year, the gap was less than three percentage points. Somehow, junk bonds were no longer so risky; therefore, it was okay to accept lower rates.

Paradoxically, the fact that the US economy grew in spite of so many daunting obstacles – corporate scandals, 9/11, higher oil prices – may have created a false sense of confidence that it could overcome almost anything.

Sophisticated investors and ordinary consumers alike seem to have fallen under the spell of this logic.

Believing risks had declined, the first group actually adopted ever riskier investment strategies – and unknowingly increased financial risk. The second, believing in continuing economic growth and rising home prices, assumed ever heavier debt burdens – and created potential obstacles to future spending. In 2000, household debt was 103 per cent of disposable income; in 2007, it’s 136 per cent.

Mistakes and misdeeds do not occur in a vacuum. The ultimate culprit here may be irrational exuberance.

As economic expansions lengthen, people become more complacent and careless. The very fact that the economy has done well creates conditions in which it may – at least temporarily – do less well. Prosperity inevitably interrupts itself with losses, popped bubbles and recessions. This produces recriminations and promises to do better, but there is always a next time.

 

Source: The Washington Post Writers Group (Business Times 30 Aug 07)

US sub-prime crisis may worsen: Nobel laureate

(KUALA LUMPUR) The US sub-prime mortgage crisis will probably ‘get worse’ as banks tighten lending rules and borrowing rates increase, Nobel laureate Joseph Stiglitz said.

The sub-prime fallout has roiled global markets as investors dumped riskier assets and lenders tightened credit.

US homes facing foreclosure almost doubled in July as property owners with adjustable-rate mortgages saw their payments rise and were unable to refinance because of the sub-prime crisis, RealtyTrac Inc said last week.

‘People assumed they could roll over their mortgages when the teaser rates ended and they had to pay the full interest rate, because after all the price would go up,’ Prof Stiglitz said in an interview. ‘Now credit standards are getting tighter and more people are going to have debt beyond their ability to pay.’

An increase in foreclosures will add more homes to the market and further erode values.

US home sales dropped to a four-year low in the second quarter and prices fell in a third of US cities, according to the National Association of Realtors.

‘House prices in the country as a whole are beginning to fall,’ he said. ‘There’s a very high probability problems in the subprime markets are going to start showing up in the markets that are a little bit above the sub-prime.’

The global credit crisis sent benchmark indexes in the US, Europe and Asia to their lowest levels in five months earlier in August after investors withdrew from riskier assets.

Financial institutions, including Barclays plc and State Street Corp, may be facing losses from units they set up that bought collateralised debt obligations. The credit crunch forced central banks to inject money into their financial systems to boost liquidity.

‘These toxic sub-prime mortgages – the result of predatory lending where financial institutions took advantage of the least-informed Americans – were hidden in all kinds of complicated financial products and shipped overseas,’ he said. ‘People are discovering all over the world that they own billions of dollars’ of such products.

Investors will demand higher yields to hold fixed-income assets they deem risky, said Prof Stiglitz, who is in Kuala Lumpur to present a lecture organised by Khazanah Global Lectures.

‘The countries which are most adversely affected are the countries like Indonesia,’ he said. ‘The overall risk premia will go up and those countries, innocent bystanders to this crisis which are viewed to be somewhat riskier, will find that markets will demand higher rates.’

Prof Stiglitz won the Nobel prize for economics in 2001.

 

Source: Bloomberg (Business Times 30 Aug 07)

US home price index suffers worst fall ever

NEW YORK – AN INDEX measuring United States house prices suffered its worst decline since its creation 20 years ago, and there is no sign of a bottom, according to a report compiled by Standard and Poor’s (S&P) and economist Robert Shiller.

The S&P/Case-Shiller US National Home Price Index fell 3.2 per cent to 183.89 last quarter from the same period in the previous year, the sharpest decline in the index’s history dating back to 1987, S&P said in a statement.

The pace of decline accelerated from 1.6 per cent in the first quarter.

‘The pullback in the US residential real estate market is showing no signs of slowing down,’ Mr Shiller, the creator of the index and chief economist at MacroMarkets in Madison, New Jersey, said in the statement.

The report adds to recent indications that the US housing slump that began in late 2005 may worsen.

On Monday, the National Association of Realtors said inventories of homes rose 5.1 per cent last month, boosting the overhang of supply that tends to put downward pressure on prices.

Reports this week on sub-prime mortgage securities show delinquencies on loans backing the bonds continued to rise this month.

Falling house prices are fuelling concerns that the economy may head towards a recession as home owners with little equity in their properties are unable to refinance adjustable-rate loans at better terms before monthly payments rise.

At the same time, lending in the past two months has been restricted even to ‘prime’ borrowers, suggesting that US housing data will soften in the months ahead, economists said.

Two-thirds of the US’ home builders said tighter underwriting standards have hurt business in the past month, up from a third in March, according to a National Association of Home Builders poll.

‘Plainly, there will be worse to come when the heady cocktail of a large inventory overhang is mixed with tighter lending standards,’ said Mr Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

Source: REUTERS (The Straits Times 30 Aug 07)

Greenback falls on weak US housing data

(TOKYO) The US dollar edged down against the yen in Asian trade yesterday as weak data renewed market vigilance over the troubled US home loan market, dealers said.

They also said the euro was weaker against the greenback after European Central Bank (ECB) president Jean-Claude Trichet said overnight that the ECB was not pre-committed to any rate moves.

The dollar fell to 115.47 yen in Tokyo afternoon trade from 115.87 in New York on late Monday. The euro declined to 1.3624 US dollars against 1.3645, and to 157.32 yen after 158.16.

Global markets have been in turmoil in recent weeks over problems in the US sub-prime home loan market, where borrowers with shaky credit histories defaulted on mortgages, raising fears of a liquidity shortage as investors cover losses.

Data released on Monday said that US existing home sales fell in July to the lowest level in nearly five years. While the data came within expectations, it was a letdown after surprisingly strong new home sale data last week.

‘Players cannot buy the dollar actively as the conclusion of the sub-prime loan issue has yet to be seen,’ said Satoshi Tansho, a dealer at Chuo Mitsui Trust Bank. ‘First, we want to know how seriously the issue has affected consumer sentiment,’ Mr Tansho said, adding that the market will look closely at the US consumer confidence index for August to be released later in the day.

The euro faced mild selling pressure after Mr Trichet implied on Monday that the ECB jury was still out regarding an interest rate increase owing to the financial market turbulence. ‘Following Trichet’s remarks, players were forced to reset their interest rate hike scenario,’ Mr Tansho said.

Mr Trichet declined to answer reporters’ questions about whether the bank would raise rates in the 13- nation eurozone on Sept 6, but said: ‘We are never pre-committed, to qualify what I have said on strong vigilance.’ ‘Strong vigilance’ is an ECB code phrase for raising rates in the near term.

The ECB has been expected to raise its main interest rate, but there is now pressure on central banks to alleviate the effects of the US credit crisis.

The crisis has strengthened the yen as dealers unwind risky ‘carry trades’ in which they borrow in Japan, which has ultra-low interest rates, to invest in higher-yielding economies.

The market largely ignored the impact of Monday’s reshuffle of beleaguered Japanese Prime Minister Shinzo Abe’s Cabinet, dealers said.

The dollar was firmer against other Asian currencies, rising to 940.50 South Korean won from 938.60, to 46.74 Philippine pesos from 46.65 and to 9,405.5 Indonesian rupiah from 9,382.50. It gained to 1.5229 Singapore dollars from 1.5192, to 33.05 Thai baht from 32.98, and to 33.01 Taiwan dollars from 32.96.

 

Source: AFP (Business Times 29 Aug 07)

Home prices, consumer confidence tumble

LATEST US DATA

(NEW YORK) Home prices fell by a record amount in the second quarter as sales fell and mortgage lenders made it tougher to get a loan. At the same time, Americans’ confidence in the economy also fell to its lowest since Hurricane Katrina two years ago.

Home values dropped 3.2 per cent in the three months through June from the same period a year before, according to a report yesterday by S&P/ Case-Shiller.

The report suggests that sellers were taking further steps to attract buyers even before the recent rout in credit markets. Tighter loan restrictions, a result of delinquencies and defaults that have driven some lenders out of the market, will probably extend the two-year housing slump and apply more pressure to prices, economists said.

Adding to the gloom, tumbling stock prices and lower home values left Americans feeling less wealthy and the New York-based Conference Board’s index of confidence declined to 105 from 111.9 in July.

Confidence averaged 105.9 in 2006. The housing recession is making it harder for Americans to tap home equity to finance the spending that accounts for 70 per cent of the economy. A slowdown in hiring and slimmer pay raises may further weaken consumer sentiment and buying power.

‘We’re looking at a slower pace of consumption growth for the rest of the year, mainly due to the housing spillover,’ Nathaniel Karp, chief US economist at BBVA USA Inc in Houston, said before the report.

‘There are also downside risks from the financial turmoil.’

The Case-Shiller report also showed that prices in June in 20 US metropolitan areas fell 3.5 per cent from a year before. The decline compares with a 2.9 per cent year-over-year drop in May.

‘Given the tightening in underwriting standards and the credit freeze, it’s going to be very difficult for buyers to purchase homes,’ said Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pennsylvania, before the report.

The June index covering transactions in 20 metropolitan areas showed that home prices declined 0.4 per cent from a month earlier, following a 0.3 per cent decline in May. The figures aren’t adjusted for seasonal effects, so economists prefer to focus on year-over-year changes.

‘The pullback in the US residential real estate market is showing no signs of slowing down,’ said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, said in a statement.

 

Source: Bloomberg, Reuters (Business Times 29 Aug 07)

Expected impact of US sub-prime woes on stock markets overblown

Real problem is lack of transparency by banks in dealing with the risk: UBS banker

A TOP banker with one of Europe’s leading financial institutions was in Singapore this week with a message for investors still rattled over volatile markets: It’s not as bad as it looks.

Zurich-based Dr Klaus Wellershoff, a member of UBS Group’s managing board and global head of its wealth management research, said the fragile United States real estate market would not have the impact on global financial institutions that many are predicting.

Even if defaults on US home loans rise to US$200 billion (S$304 billion) or US$300 billion as borrowers fail to pay up, the amount would still be much smaller than the US$2.5 trillion loss in value suffered by global equities market in the past three weeks.

And this, said Dr Wellershoff, is the real problem – the lack of trust and transparency in dealing with a problem where the ‘underlying risk is relatively small’.

‘What is disconcerting is not the sub-prime market, where loans are made to individuals with poor credit history, but the contagion that problem has spread to other asset-backed instruments,’ he said.

Repackaging the bonds does not multiply the risk, as it is like discharging a small spray of water. ‘You find some contamination everywhere, but it is never going to be as big as the initial risk.’

But the fear of any form of contamination has led to an absurd situation where even triple- A-rated banks ‘do not trust each other – to the extent that they wonder if the other party is more involved in the issue’.

Even though US banks have probably suffered bigger losses, European institutions have also grabbed headlines as the US sub-prime crisis unfolded.

Dr Wellershoff said: ‘Europeans are too honest for this world. The two German banks that suffered losses are very minor institutions. The actual losses are not that big.’

Still, he observed that while central banks managed to stave off a global liquidity crisis by pumping billions to prop up the banking system, there is a real crisis in the US real estate market and it is far from over.

Dr Wellershoff believes the US Federal Reserve will cut interest rates to ease the pain of the country’s construction sector.

‘Construction activity has shrunk by one-third. It is not a slowdown in growth rate anymore and it is a crisis and so it is fair to assume that the Fed will act on it,’ he said.

Cutting US interest rates will not cause the unwinding of yen carry trades where investors borrow massively in yen to buy higher-yielding assets. ‘Investors who indulge in yen carry trades don’t buy US government bonds.

They buy something that yields higher returns…A cut in US interest rates will yield more investment opportunities,’ he said.

As US interest rates fall, the returns of the equity market may improve, and this should be lucrative for carry trade investors, Dr Wellershoff added.

 

Source: The Straits Times 29 Aug 07

Mortgage meltdown survivors say affected owners not ideal neighbours

Investors flipped homes for a quick profit, they complain

(CORONA, California) Bhaviesh and Varsha Shah bought their dream home in a new development east of Los Angeles two years ago, planted flowers around an emerald lawn and picked out wicker furniture for sitting outside on cool afternoons.

Today the view from their porch is a street pocked with boarded windows and dead lawns – homes now repossessed after buyers failed to make mounting mortgage payments.

The Shahs live on a street with 10 large homes of 3,000 sq ft or more, four of them now in foreclosure. Although they are surviving the mortgage meltdown, their dream development – like many in this arid corner of Southern California known as the Inland Empire – is an early casualty.

‘We’re not surprised. We had a feeling it was coming,’ said Mrs Shah.

They found out which way the wind was blowing about a year ago when several families moved into some of the homes and never bothered to water the grass or pick up beer cans. Unlike the Shahs, they didn’t seem to be in Towne Square and its 49 Spanish-style and 1920s inspired Craftsman homes for the long haul.

The Inland Empire, 80km east of Los Angeles, was a latecomer to the housing boom in California as buyers squeezed out of high-price coastal Los Angeles and Orange counties found large homes going up on the region’s vast supply of vacant land.

And it has been one of the most hard hit by foreclosures.

The Inland Empire’s combined Riverside and San Bernardino counties reported the fourth highest number of foreclosure filings of any of the United States’ 229 largest metro areas in July, behind Atlanta, Los Angeles and Detroit, according to market tracker RealtyTrac.

Survivors of Towne Square find themselves not only with unsightly, empty properties next door, but also with home values plummeting amid the fire sales on foreclosed homes.

So selling and moving to a better neighbourhood is not much of an option because many owe more on their mortgage than they would get for the sale – what the industry calls ‘upside down’. And real estate agents note that California’s market is likely to rebound as it has in the past, underpinned by high population growth.

‘Everything goes in cycles. I think we’ll be OK if people don’t panic,’ said Patricia Patton, who has been a real estate agent in the area for over 14 years.

Joe and Mary Gordon don’t feel much like sticking around, but have little choice. They bought an about 4,000-sq-ft home on the street behind the Shahs for US$741,000, thinking it would be their last home after moving from Orange County, just west of the Inland Empire.

Two homes on the Gordons’ street are going through foreclosure and one of them, comparable in size to theirs, is being offered by the bank for US$550,000.

The Gordons fear they will lose hundreds of thousands of dollars in equity. ‘We have no recourse. We’ll have to live here eight to 10 years before we get our equity back,’ said Mr Gordon.

Bob Taylor, president of the development’s homeowners association, said his family thought about moving, but with the installation of a pool and landscaping, they didn’t think they would break even after the market turned south.

The frustrated families stuck in Towne Square are critical of the developer Centex Corp for failing to exclude investors and scammers who bought 14 to 17 of the 49 homes in what was billed as a ‘family centred executive development’.

The families believe the investors were not just people flipping houses for a quick profit, but also a group of scammers taking advantage of lax lending rules that permitted 100 per cent financing with no money down and minimal documentation.

For the Gordons and Taylors, these are the people who ruined the neighbourhood by using their homes like revolving night clubs, cramming cars into the cul de sacs and threatening neighbours who complained.

The Corona Police Department said it was called about neighbourhood disturbances on Towne Square’s Summerset St, where the Shahs live, 35 times in 2006.

‘How did we feel? Sick!’ Mr Gordon yelled, throwing up his hands. ‘We’d go to work, then just come in the house and hide. You never knew what was going to happen.’ Now, many of the investors have disappeared and their homes have gone into foreclosure.

 

Source: Reuters (Business Times 28 Aug 07)

July home resales drop for 5th consecutive month

(NEW YORK) Sales of previously owned homes in the US fell in July for a fifth consecutive month, adding to the inventory of unsold properties and showing the housing slump that triggered a collapse in credit markets will drag on.

Purchases declined 0.2 per cent, less than forecast, to an annual rate of 5.75 million, from 5.76 million in June, the National Association of Realtors said yesterday in Washington.

That was the slowest pace since November 2002. Sales dropped 9 per cent compared with a year earlier. With no recovery in sight for residential real estate, lower property values and harder-to-get mortgages threaten to weaken consumer spending, economists said.

The Federal Reserve this month acknowledged a growing risk to economic growth in the wake of subprime mortgage defaults and a plunge in stock prices.

‘We are very likely to see home sales continue to drop through the year,’ said Ethan Harris, chief economist at Lehman Brothers Inc here, who accurately forecast the July sales rate.

‘There’s a big imbalance between supply and demand with lots of people who want to sell and lots of hesitant buyers.’

After the report, the yield on the benchmark 10-year US Treasury note was down one basis point at 4.6 per cent. Stocks were lower.

Resales were forecast to fall 0.9 per cent to a 5.7 million annual rate, according to the median forecast of 74 economists in a Bloomberg News survey.

Estimates ranged from 5.5 million to six million. Existing home sales averaged 6.51 million in 2006.

The median price of an existing home dropped 0.6 per cent in July from a year ago to US$228,900, the Realtors group said.

The supply of homes for sale at the end of the month climbed 5.1 per cent to 4.59 million.

At the current sales pace, that represented 9.6 months’ worth, up from 9.1 months’ worth at the end of the prior month.

The inventory of single-family homes represented a 9.2 months’ supply, the most since October 1991.

Resales of single-family homes declined 0.4 per cent to an annual rate of five million.

Sales of condos and co-ops rose 1.4 per cent to a 750,000 rate.

Monthly figures on home resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier, while new home purchases are recorded when a contract is signed, making them a more timely barometer.

Resales account for about 85 per cent of the US housing market.

New home sales unexpectedly rose in July for the second time this year, to an annual pace of 870,000, the Commerce Department reported on Aug 24.

Purchases may show renewed weakness as turmoil in credit markets pushes some mortgage lenders out of business and prompts others to restrict lending, economists said.

 

Source: Bloomberg (Business Times 28 Aug 07)

July sales of existing US homes dip 0.2%

WASHINGTON – THE pace of existing home sales in the United States fell slightly last month to a 5.75 million unit annual rate, the National Association of Realtors (NAR) said yesterday.

The report also said that the supply of unsold single- family homes hit its highest since 1991.

Total existing home sales, which include condominium units, fell 0.2 per cent last month from an upwardly revised 5.76 million seasonally adjusted annual rate in June. It was first reported as 5.75 million.

The NAR’s senior economist, Dr Lawrence Yun, said the market is holding on despite temporary mortgage disruptions from the fallout in the sub-prime market and rising foreclosures.

‘In the aggregate, we don’t see the sub-prime market damaging the economy,’ he said.

But the inventory of homes for sale rose 5.1 per cent to 4.59 million, representing 9.6 months’ worth of supply at the current sales pace. This total, which includes condo units, is the highest on record since the NAR began tracking both single-family and condo sales together in 1999.

The supply of single-family home sales, which accounts for the bulk of existing home sales, was at 9.2 months’ worth last month, the highest level since 9.3 months in October 1991.

‘This shows that the housing downturn continues to intensify. It shows no signs of abating,’ said Dr Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania.

Last month’s decline in existing home sales was smaller than expected. Economists polled ahead of the report forecast home resales to drop to a 5.7 million unit pace.

Median home prices fell 0.6 per cent from a year ago to US$228,900 (S$347,700).

Source: REUTERS (The Straits Times 28 Aug 07)

Home sales, factory orders rise in July

(WASHINGTON) Sales of new homes perked up, while factory orders took off in July, raising hopes that the economy can safely weather financial turmoil that has shaken Wall Street.

The Commerce Department reported yesterday that new-home sales rose 2.8 per cent in July, after falling 4 per cent in June. The increase in July lifted sales to a seasonally adjusted annual rate of 870,000 units. A second report showed that orders to factories for big-ticket goods jumped 5.9 per cent in July, the most in 10 months.

Both reports were better than analysts expected. They were forecasting home sales to fall and were calling for a much smaller, one per cent gain in factory orders.

In the housing report, the improvement in sales reflected gains in the West and the South, where sales went up by 22.4 per cent and 0.6 per cent respectively. Sales, however, tumbled 24.3 per cent in the Northeast and were down 0.9 per cent in the Midwest.

Even with the overall increase in home sales for July, sales are down a deep 10.2 per cent from a year ago, underscoring the toll of the housing slump.

The median price of a new home, meanwhile, was US$239,500 in July, up from US$238,100 in July a year ago. The median price means half sell for more and half sell for less. The average home price, however, dropped to US$300,800 in July, down from US$311,300 for the same month last year.

Yesterday’s reports offered a spot of relief amid recent turbulence on Wall Street, which has darkened investors’ feelings about the nation’s financial prospects.

Fears that the worsening housing slump and credit crunch could hurt the economy have gripped Wall Street investors in recent weeks, causing stocks to swing wildly.

‘The downside risks to growth have increased appreciably,’ Fed chairman Ben Bernanke and his colleagues concluded on Aug 17. It was a much more sober assessment than they had offered just 10 days earlier when they met to examine economic conditions and interest rates. Against this backdrop, the central bank sliced the rate it charges banks for loans, a narrowly tailored move aimed at propping up sagging financial markets.

 

Source: AP (Business Times 25 Aug 07)

US new home sales rise by surprising 2.8%

July orders for durable goods, meanwhile, grow 5.9%, also beating expectations

Washington – SALES of new homes in the United States last month unexpectedly rose for a second time this year, suggesting the housing market was stabilising before the rout in credit markets.

Purchases increased 2.8 per cent to an annual pace of 870,000 last month – greater than previously estimated – from a revised 846,000 in June, the US Commerce Department said yesterday.

New-home sales are likely to show renewed weakness, as the turmoil in credit markets pushes some mortgage lenders out of business and prompts others to tighten requirements for loans. Federal Reserve policymakers are predicting the worst housing slump in 16 years will remain a drag on economic growth.

‘Given the current restrictiveness of credit, there’s no question that home sales are going to be curtailed, certainly in the short run,’ said chief economist Stephen Stanley at RBS Greenwich Capital.

The median price of a new home rose 0.6 per cent to US$239,500 (S$364,854) last month, yesterday’s report showed. Inventories of unsold homes dropped to 7.5 months at the current sales pace.

The number of homes for sale declined to 533,000 at the end of last month from 538,000 at end-June. The number of places that are completed and waiting to be sold fell by 4,000 to 175,000.

Meanwhile, another report by the Commerce Department showed that orders for US-made durable goods rose more than forecast last month, suggesting business spending remains a bright spot in an economy hobbled by a housing recession.

Demand for products meant to last several years rose 5.9 per cent after a revised 1.9 per cent gain the prior month, the report said yesterday.

Excluding orders for transportation equipment such as aeroplanes, durable-goods orders rose 3.7 per cent, the most since August 2005.

Gains in manufacturing, spurred by lean inventories and increased export demand, may keep the economy growing in the face of a credit crunch triggered by the biggest slump in housing in 16 years.

‘Strong orders point to continued business spending, which is sorely needed to keep the US economy alive throughout the current credit squeeze,’ said economist Ellen Zentner at Bank of Tokyo-Mitsubishi UFJ in New York.

On Thursday in an interview, Countrywide Financial chief executive Angelo Mozilo said the US housing downturn is likely to lead the country into a recession, but that the largest US mortgage lender will survive.

Countrywide announced an unexpected drawdown of an entire US$11.5 billion credit line last week because it had trouble selling short-term debt. But on Wednesday, Bank of America said it would invest US$2 billion in Countrywide, easing fears about its fate.

Source: BLOOMBERG NEWS, REUTERS (The Straits Times 25 Aug 07)

Rosy time for California’s luxury home market

Prices are rising even as foreclosures across the US doubled in July

(SAN FRANCISCO) Luxury home prices continued to rise in some of California’s wealthiest communities, according to a survey by First Republic Bank, even as the state posted the highest number of homes entering foreclosure in decades.

High-end buyers shrugged off a nationwide housing slump, as the average price for a luxury home in Los Angeles in the second quarter rose 4.5 percent from a year ago to US$2.46 million. San Diego prices rose 2.4 per cent to US $2.19 million and San Francisco prices gained 2.3 per cent to US$3 million, according to the survey.

The advances compare with annual increases in the second quarter of 2006 of 12.8 per cent in Los Angeles, 6.4 per cent in San Diego and 4.8 per cent in San Francisco, First Republic, a private bank based in San Francisco, said.

‘Year-over-year, increases are moderating, but overall most of California’s luxury home markets remain active,’ Katherine August-de Wilde, chief operating officer of First Republic, said in a statement. Prices rose ‘because of continued demand, a limited inventory and historically low interest rates’. Stricter lending standards amid a sales slump and price declines in a third of US cities haven’t dampened California’s high-end market, said David Lichtman, chief credit officer at First Republic, whose average loan is about US$1 million.

‘The luxury market is holding up well,’ with buyers paying in cash or financing with large loans, Mr Lichtman said in an interview. The bank had ‘record dollar volumes in loan originations’ in the second quarter, he said.

Across the US, homes facing foreclosure almost doubled in July as property owners with adjustable-rate mortgages saw their payments rise and were unable to refinance because of the sub-prime crisis, data provider RealtyTrac Inc said on Tuesday.

Lenders sent 179,599 notices of default, scheduled auctions or bank repossessions last month, a 93 per cent increase from a year earlier, Irvine, California-based RealtyTrac said on Tuesday in a statement. California, Florida, Michigan, Ohio and Georgia accounted for more than half of the country’s total filings.

‘It’s too soon to tell whether tighter lending standards will lead to price declines at the high end, Mr Lichtman said.

‘It’s business as usual for us. We’re lending to qualified buyers to finance home purchases.’ Brokers say there are ‘generally fewer sales’ Mr Lichtman said.

First Republic tracks prices, not the number of transactions, for a basket of homes in cities including Beverly Hills, Malibu, Santa Monica and La Jolla in Southern California and Hillsborough, Los Altos, Portola and Woodside in Northern California.

The homes in the Los Angeles and San Diego areas cost US$1 million in 1985; those in the San Francisco area cost US$600,000 in 1985.

‘The upper end is doing wonderful, better than ever,’ said broker Benjamin Guilardi of Alain Pinel Realtors in Los Gatos, south of San Francisco. ‘We have an extreme shortage of properties, and we have a very intelligent group of buyers.’

The lower end of the luxury market is experiencing slower sales as buyers wait for prices to fall, said Michele Hall of Coldwell Banker in the Brentwood section of Los Angeles.

‘Anything US$3.5 million and below is struggling a bit. The inventory is staying on the market longer, unless it is extremely well priced,’ Ms Hall said.

 

Source: Bloomberg (Business Times 23 Aug 07)

US architecture firms’ July billings rise

(LOS ANGELES) Billings by US architecture firms rose in July for the fifth month, nearing their all-time high and indicating construction of commercial properties including warehouses and offices likely will increase into next year.

The Architecture Billings Index rose to 60 last month from 59.3 in June, the Washington-based American Institute of Architects said yesterday. Any score above 50 indicates an increase in billings. The only time the index reached a higher point was at 60.2 in September 2005.

The measure’s advance suggests commercial development will be strong into next year because construction spending usually follows architecture billings by about nine to 12 months. The increase comes amid tightened lending standards following the collapse of the sub-prime mortgage market, the institute said.

‘The architecture firms are continuing to see great business conditions,’ Kermit Baker, the institute’s chief economist, said. ‘I think it is significant that the credit-market woes didn’t begin until early August. I think we have to wait a little bit to see if that took the wind out of the sails of the commercial-development market.’ Architecture billings rose in all US regions last month, with the largest increase in the North-east with a score of 68.5, followed by the West at 60.7, the South at 57.2, and the Midwest at 55.9, the institute said.

The index is based on a survey of firms owned by members of the institute. Participants are asked each month whether billings rose, fell or stayed the same in the month that just ended. Responses are used to generate the score. The institute has conducted the survey since 1995

 

Source: Bloomberg (Business Times 23 Aug 07)

Mortgage crisis widens at Accredited, HSBC, Lehman

NEW YORK – The US mortgage and credit crisis deepened on Wednesday, as Accredited Home Lenders Holding Co, HSBC Holdings and Lehman Brothers Holdings announced a total of 3,400 job cuts, as concern mounted about the longer-term impact on the economy.

Accredited, a subprime mortgage lender, said it stopped taking loan applications and would cut 1,600 of its 2,600 jobs as it shuts most of its retail and wholesale operations by Sept. 5.

Lehman, based in New York, said it would close its BNC Mortgage LLC subprime unit, affecting 1,200 workers in 23 US offices. It plans to continue making mortgages through its Aurora Loan Services LLC unit.

London-based HSBC, Europe’s largest bank, said it would close a Carmel, Indiana office and cut 600 jobs.

Many lenders face a credit shortage because investors are not buying debt they consider less-than-pristine.

This includes asset-backed commercial paper, which matures within 270 days and is backed by such things as mortgages.

Liquidity problems have spread beyond subprime lenders, which make loans to people with poor credit, raising fears of a global credit shortage.

Another lender, Woodbury, New York’s Delta Financial, fired 300 of its roughly 1,500 employees, while Houston’s Amstar Financial Holdings Inc said it will close its mortgage unit and turn over its 118-branch network to The Money Store of Florham Park, New Jersey.

Separately, tax preparer H&R Block Inc said its Block Financial unit drew down US$200 million from a credit line on Aug 16, and repaid it when it borrowed US$850 million four days later. The Kansas City, Missouri-based company said it was having too much difficulty selling commercial paper.

H&R Block, which plans to sell its Option One subprime unit to private equity firm Cerberus Capital Management, has investment-grade credit ratings.

Accredited made US$15.8 billion of loans in 2006 and said it plans to honour existing loan commitments.

It was unclear how the cuts might affect Accredited’s lawsuit seeking to force private equity firm Lone Star Funds to complete its announced US$400 million purchase of the company, The cuts at HSBC Finance were announced three weeks after Europe’s largest bank said US subprime exposure helped push overall bad debts from January to June up 63 per cent from a year earlier to US$6.35 billion.

As other lenders struggled with credit, IndyMac Bancorp, a Pasadena, California thrift and mortgage specialist, said it was resuming making prime, one-family ‘jumbo’ home loans that are too large to be eligible for purchase and guarantee by Fannie Mae and Freddie Mac.

 

Source: REUTERS (Business Times 23 Aug 07)

US architecture firms’ July billings rise

(LOS ANGELES) Billings by US architecture firms rose in July for the fifth month, nearing their all-time high and indicating construction of commercial properties including warehouses and offices likely will increase into next year.

The Architecture Billings Index rose to 60 last month from 59.3 in June, the Washington-based American Institute of Architects said yesterday. Any score above 50 indicates an increase in billings. The only time the index reached a higher point was at 60.2 in September 2005.

The measure’s advance suggests commercial development will be strong into next year because construction spending usually follows architecture billings by about nine to 12 months. The increase comes amid tightened lending standards following the collapse of the sub-prime mortgage market, the institute said.

‘The architecture firms are continuing to see great business conditions,’ Kermit Baker, the institute’s chief economist, said. ‘I think it is significant that the credit-market woes didn’t begin until early August. I think we have to wait a little bit to see if that took the wind out of the sails of the commercial-development market.’ Architecture billings rose in all US regions last month, with the largest increase in the North-east with a score of 68.5, followed by the West at 60.7, the South at 57.2, and the Midwest at 55.9, the institute said.

The index is based on a survey of firms owned by members of the institute. Participants are asked each month whether billings rose, fell or stayed the same in the month that just ended. Responses are used to generate the score. The institute has conducted the survey since 1995

 

Source: Bloomberg (Business Times 23 Aug 07)

Capital One to close residential mortgage business

(NEW YORK) In yet another casualty of the fallout in the mortgage industry, Capital One Financial Corp said on Monday that it would stop making residential mortgages and close GreenPoint Mortgage, its wholesale mortgage banking unit.

As part of this decision, about 1,900 employees will be laid off, most of them by the end of the year. The company will also close GreenPoint’s headquarters in Novato, California, along with 31 locations in 19 states.

Capital One acquired GreenPoint as part of its purchase in December of the North Fork Bancorp. During the first six months of 2007, GreenPoint was the 23rd largest mortgage company after making US$12.3 billion in loans, a 30 per cent drop from the period a year ago, according to Inside Mortgage Finance, a trade publication.

Although GreenPoint declined to comment, it said in a news release that it would stop making new loan commitments immediately but that it would continue to meet contractual obligations to customers for loan commitments that are in the pipeline with rates locked.

The chief executive officer of Capital One, Richard D Fairbank, said that GreenPoint had made a valiant effort to ‘weather the challenges currently facing the mortgage industry’. ‘However, the market disruption is too great to continue with GreenPoint’s originate-and-sell business model,’ he said. Capital One said that the total after-tax charge associated with the move would be roughly US$860 million, or US$2.15 a share.

 

Source: Business Times 22 Aug 07

Sub-prime effect on US spending ‘will be modest’

WASHINGTON – UNITED States Federal Reserve vice- chairman Donald Kohn said the sub- prime crisis’ effect on US consumer spending will likely be ‘modest’, though there is risk of a bigger slump.

‘The number of troubled sub- prime borrowers may be sufficiently small that the direct effect will be modest,’ he said in a paper dated Aug 8 for a conference in Sydney yesterday.

Still, delinquencies may make investors less willing to provide credit, prompting a ‘more significant effect on aggregate spending’, Mr Kohn said.

He said many consumers were counting on borrowing against rising asset prices to smooth future spending.

Thus, ‘an unexpected levelling out or decline in that value could have a more marked effect on consumption by, in effect, raising the cost or reducing the availability of credit’. Mr Kohn, the Fed’s longest-serving governor and former chief policy strategist, co-wrote the paper with Ms Karen Dynan. She is the chief of household and real estate finance in the Fed’s division of research and statistics.

In their paper, they said that rising home prices in recent years probably played the central role in lifting the ratio of household debt to income. That makes spending more vulnerable to changes in home and stock prices and interest rates, the authors said.

By contrast, the economy is now less vulnerable to price shocks, Mr Kohn said. ‘With inflation expectations well anchored, such shocks have had diminished effects on inflation in recent years, thereby reducing the need for policy reactions.’

‘The number of troubled

sub-prime borrowers may be sufficiently small that the direct effect will be modest.’

MR KOHN, US Fed vice-chairman

 

Source: BLOOMBERG NEWS, REUTERS 21 Aug 07

Swiss central bank chief slams US system

Sub-prime situation encouraged from financial institutions to ratings agencies

(GENEVA) Swiss central bank chief Jean-Pierre Roth has sharply criticised the US economic system in an interview published yesterday.

‘Something unbelievable happened,’ Mr Roth said in an interview in the Swiss newspaper NZZ am Sonntag, commenting on the home loan crisis that caused turmoil on world financial markets.

The chairman of the Swiss National Bank indicated that he did not foresee a swift end to the crisis triggered by the US sub-prime, or high-risk, home loan market in the United States.

Dozens of US mortgage lenders have been put out of business and major US and European banks have also taken a hit, making them more wary about granting new loans.

Mr Roth told the newspaper that many questions remained unanswered, generating a high degree of volatility and mistrust.

‘We’re certainly not at the end of the story with developments in the US mortgage market. The source is bad loans.

People there who had neither income nor capital got credit with very attractive conditions that could only be tightened with time.’

Mr Roth underlined that the situation was encouraged throughout the US economic system: from financial institutions that set up structured products covering such lending, to ratings agencies that gave their seal of approval.

‘And now, we’re seeing that there isn’t a market for such papers. Now, reality is striking back. That leads to massive losses and there will be victims,’ he added.

He also told another paper that central banks should not seek to eliminate market volatility; otherwise, markets risk becoming a one-way street leading to excess.

‘We hope that volatility stays higher. What we had was not normal, namely, practically no volatility,’ Mr Roth told the Neue Zuercher Zeitung in an interview.

‘Markets cannot be a one-way street, or you will get excess.’

Mr Roth’s remarks appeared after the US Federal Reserve on Friday cut the discount rate it charges banks in an effort to stabilise credit markets, prompting a rally in stock prices on Wall Street.

 

Source: Business Times 20 Aug 07

Lenders sour on sub-prime market

Gone are the days when a new immigrant could get easy credit to buy a home

WASHINGTON – WHEN Ms Genevieve Florendo decided to buy a house this year, she had no idea it could be done in a snap.

It turned out that she could. As recently as this year, lenders were still giddily offering mortgages to subprime buyers like Ms Florendo, although the sector’s fallout has tightened the faucets.

Ms Florendo, 32, who arrived from the Philippines to work in the United States as a nurse less than five years ago, had always assumed she would need to pay a sizeable down payment to own a home. As a new immigrant, she was almost sure she could not afford it.

A friend referred her to a realtor and a lender who assessed her  creditworthiness, her income and bank balance. And before a month had passed, she was the proud owner of a US$275,000 (S$423,000) townhouse in Glen Burnie, Maryland.

‘All I paid was US$7,000 towards the closing fee, the expenses towards securing the title and other formalities.’

She felt lucky, she added. ‘Some of my friends are buying houses now, and they are getting loans at 7 per cent to 7.5 per cent. Just a few months ago, when I signed the deal, the rates were lower. I pay a fixed rate of 6.65 per cent.’

Ms Florendo is what is called a sub-prime borrower – the term used for a borrower who does not qualify for the lowest rates at which banks extend loans.

Usually, sub-prime rates are applied because the borrower has a patchy credit history and so is charged more for the greater risk he represents to the lender. Or the borrower may simply lack the extensive credit and employment histories that get the best rates and terms.

Was she nervous, given the unsavoury sub-prime label?

‘Well, I got my accountant brother in Singapore to vet the terms and conditions in the loan contract, and I felt more confident after that,’ she said.

By some estimates, sub-prime lending has accounted for as much as half of the past decade’s rise in the US home ownership rate from 65 per cent to 69 per cent.

The rates for a sub-prime loan can go as high as 10 per cent, said Mr Kenny Sylvestor, who is with a mortgage company based in Rockville, Maryland.

Lately, sub-prime borrowers have spelled bad news for investors as the housing market slumped and loan defaults soared. That has left a sour taste in the mouths of investors in the US and as far away as Germany and Japan.

Chances are bright that Ms Florendo, with her steady income of US$7,000 a month and a spouse who works part-time, will turn out to be among the four out of five sub-prime borrowers who do not default on payments.

On the other hand, among the sub-prime borrowers are also fraudsters who meant to make the most of deals that required no upfront payments or even documentation; and the ignorant and the poorly educated who became victims of unscrupulous loan sharks with little grasp of the payments involved. Hundreds of thousands of them have lost their homes.

In some cases, borrowers could opt for variable-rate loans that offered low starter rates for the first two years and then adjusted for the remaining 28 years to a rate that was often three percentage points higher than what a prime customer normally paid.

Also in the sub-prime category are people buying vacation homes or investment properties.

At first, delinquencies were low. But that was mainly because home prices were rising so much that borrowers who fell behind could easily refinance their loans.

Over the last six months, and dramatically in the last three months, lending regulations have been tightened and it is difficult to take out a loan without putting up a 20 per cent down payment.

‘It is not easy any more,’ said Mr Sylvestor, who has been a mortgage broker for 12 years. About 10 per cent of his clients are sub-prime, he said.

 

Source: The Straits Times 18 Aug 07

Bursting of sub-prime bubble healthy, says economist

WHILE much uncertainty remains over the equity markets, the unravelling of the US sub-prime mortgage problems is a healthy development that should benefit economies over the longer term, a Singapore conference was told yesterday.

At the CPA Forum, Deutsche Bank’s chief economist Sanjeev Sanyal said it was a welcome sign that the bubble should burst, adding that this is ‘better than allowing the problem to fester’.

He was referring to knock-on effects of the crash in the US sub-prime mortgages market, which has resulted in stockmarket downturns across the world.

Some of the major issues from the fallout include the ownership of financial products backed by subprime loans, and the absence of a secondary market for these instruments. As a result, these products cannot be easily priced, and the uncertainty over the investment climate continues.

Mr Sanyal believes that the credit crunch in the US may affect consumption there, hitting Asian exports as a result.

However, the impact on India could be limited owing to its strong domestic demand, said Satyanarayan Ramamurthy, head of corporate finance at KPMG Singapore. Speakers pointed out that savings rates in India have been rising in recent years, and this provides more resources for the country to undertake capital-intensive projects.

As for Singapore, Mr Sanyal believes the fundamentals remain strong owing to robust domestic demand here, backed by the retail sales numbers. ‘There is a growth engine particularly led by investments in building and construction which I think is very visible and which we have seen come through in the numbers in recent months,’ he said.

He noted that domestic demand had driven second-quarter growth here to an impressive 8.6 per cent.

Also at the forum was Macquarie Bank’s Simon Lyons, head of financial services group in Asia, who believes that there will be a lot more due diligence carried on investments in future.

Moreover, transparency levels may rise and ‘we should come out of this far better than before’, he said.

Yesterday, conference participants were also told that the infrastructure sector may benefit from the current crisis, as investors look to such assets as ‘long-term investments with low risk characteristics’, said Mr Ramamurthy.

And Asia is an attractive destination, due to the shortage of quality infrastructure assets in emerging markets here. ‘However, the challenge is for the governments to create frameworks for investors to reap returns from their investments,’ he said.

Mr Lyons has this advice for long-term investors: ‘Just stick to the fundamentals – good-quality stocks in the appropriate markets, diversification is key, and avoid leveraged positions.’

 

Source: Business Times 18 Aug 07

Mortgage crisis: Workouts, not bailouts

IN APRIL, US Treasury Secretary Henry Paulson declared that all the signs he saw indicated the housing market was ‘at or near the bottom’. Earlier this month he was still insisting that problems caused by the meltdown in the market for sub-prime mortgages were ‘largely contained’.

But the time for denial is past.

According to data released on Thursday, both housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall. And if historical

relationships are any guide, home prices are still way too high. The housing slump will probably be with us for years, not months.

Meanwhile, it is becoming clear that the mortgage problem is anything but contained. For one thing, it is not confined to sub-prime mortgages, which are loans to people who do not satisfy the standard financial criteria.

There are also growing problems in so-called Alt-A mortgages (don’t ask), which are another 20 per cent of the mortgage market. Problems are starting to appear in prime loans, too – all of which is what you would expect, given the depth of the housing slump.

Many on Wall Street are clamouring for a bailout – for Fannie Mae or the Federal Reserve or someone to step in and buy mortgage-backed securities from troubled hedge funds. But that would be like having the taxpayers bail out Enron or WorldCom when they went bust – it would be saving bad actors from the consequences of their misdeeds.

For it is becoming increasingly clear that the real estate bubble of recent years, like the stock bubble of the late 1990s, both caused and was fed by widespread malfeasance. Rating agencies like Moody’s Investors Service, which get paid a lot of money for rating mortgage-backed securities, seem to have played a similar role to that played by complaisant accountants in the corporate scandals of a few years ago.

In the 1990s, accountants certified dubious earning statements; in this decade, rating agencies declared dubious mortgage-backed securities to be highest-quality, AAA assets.

Yet our desire to avoid letting bad actors off the hook should not prevent us from doing the right thing, both morally and in economic terms, for borrowers who were victims of the bubble.

Most of the proposals I have seen for dealing with the problems of sub-prime borrowers are of the locking-thebarn-door-after-the horse-is-gone variety: They would curb abusive lending practices – which would have been very useful three years ago – but they would not help much now.

What we need at this point is a policy to deal with the consequences of the housing bust.

Consider a borrower who cannot meet his or her mortgage payments and is facing foreclosure.

In the past, as Gretchen Morgenson, a New York Times business reporter, recently pointed out, the bank that made the loan would often have been willing to offer a workout, modifying the loan’s terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the home. That would have been especially likely in the face of a depressed housing market.

Today, however, the mortgage broker who made the loan is usually, as Ms Morgenson says, ‘the first link in a financial merry-go-round’. The mortgage was bundled with others and sold to investment banks, who in turn sliced and diced the claims to produce artificial assets that Moody’s or Standard & Poor’s were willing to classify as AAA. And the result is that there’s nobody to deal with.

This looks to me like a clear case for government intervention.

There’s a serious market failure, and fixing that failure could greatly help thousands, maybe hundreds of thousands, of Americans. The federal government should not be providing bailouts, but it should be helping to arrange workouts.

And we have done this sort of thing before – for Third World countries, not for US citizens.

The Latin American debt crisis of the 1980s was brought to an end by so-called Brady deals, in which creditors were corralled into reducing the countries’ debt burdens to manageable levels. Both the debtors, who escaped the shadow of default, and the creditors, who got most of their money, benefited.

The mechanics of a domestic version would need a lot of work. My guess is that it would involve federal agencies buying mortgages – not the securities conjured up from these mortgages, but the original loans – at a steep discount, then renegotiating the terms. But I am happy to listen to better ideas.

The point, however, is that doing nothing is not the only alternative to letting the parties who got us into this mess off the hook.

Say ‘no’ to bailouts – but let us help borrowers work things out.

 

Source: The Straits Times 18 Aug 07

BNPP: Sub-prime risk limited, manageable

(PARIS) France’s biggest listed bank, BNP Paribas (BNPP), said that its exposure to sub-prime risk was limited and manageable as it moved to reassure investors a week after rattling markets by freezing three of its funds.

French Economy Minister Christine Lagarde also sought to calm nerves yesterday, saying that the country’s banks were in good shape, but added that she would ask BNPP chief executive Baudouin Prot about the way the bank had handled news of its problems.

‘Of course, I will ask Mr Prot for explanations as to how they managed that moment,’ she told RTL radio. ‘I think they are looking again at how they communicate and manage this type of question.’

BNPP announced on Aug 1 that it was not directly impacted by problems in the US sub-prime mortgage market, but on Aug 9, it said that it was freezing 1.6 billion euros (S$3.3 billion) worth of funds hit by the crisis, triggering a global drop in stock markets.

The bank had no immediate comment on Ms Lagarde’s remarks.

BNPP’s shares have fallen nearly 10 per cent over the past week, but Alain Papiasse, the bank’s head of asset management and services, played down worries over its sub-prime problems.

‘The direct exposure to sub-prime appears limited, and any losses should be manageable for the bank,’ he said yesterday on a conference call monitored in South Korea. ‘We should be one of the most resistant institutions to sub-prime.’

Mr Papiasse said that BNPP expected no risk to quarterly earnings from the potential exposure of these funds to sub-prime debt, since any potential risks were being held by investors.

 

Source: Business Times 17 Aug 07

US housing starts for July at a 10-year low

WASHINGTON – BUILDERS in the United States started work on the fewest homes in a decade last month, as the industry showed no signs of recovering from an 18-month recession.

The greater-than-forecast 6.1 per cent decrease to an annual rate of 1.38 million followed a 1.47 million pace in June, the US Commerce Department said yesterday. Building permits also fell to a 10-year low.

Stock markets worldwide have tumbled on concern that sub-prime mortgage defaults will bankrupt more lenders and destabilise the financial system. Consumer spending, which accounts for more than two-thirds of the US economy, may weaken as falling prices and limits on borrowing prevent owners from tapping home equity.

‘The housing market is still in a downward spiral,’ said economist Brian Bethune at Global Insight.

Permits, a sign of future construction, decreased 2.8 per cent to a 1.373 million annual pace, the lowest since October 1996.

They were also forecast to drop to a 1.4 million rate, according to the survey median, with projections ranging from 1.375 million to 1.441 million.

Mr William Poole, president of the Federal Reserve Bank of St Louis, said in an interview on Wednesday that the sub-prime mortgage rout does not threaten economic growth, and only a ‘calamity’ would justify an interest-rate cut now.

Mr Poole, who confers regularly with regional business contacts, said in an interview yesterday that ‘no one has called up and said the sky is falling’.

 

Source: The Straits Times 17 Aug 07

New York rentals reach new levels of luxury

Developers seem likely to continue their efforts to outdo one another

(NEW YORK) A golf simulator that lets residents imagine they’re playing the 18th hole at St Andrews in Scotland.

A penthouse party room with sweeping city views where residents can entertain, say, 50 of their closest friends.

Swimming pools, yoga studios and massage rooms that would satisfy even the most driven New Yorkers.

And finally, the one thing that should make any apartment dweller’s heart skip a beat: a washer and dryer, even in a 450-square-foot studio.

These are the kinds of amenities that developers are using to redefine the term ‘luxury rental’ in Manhattan, and, perhaps more to the point, to justify a whole new level of prices for people who want the feel of a high-end condominium but don’t want to buy.

With rental vacancies hovering at less than one per cent, developers are confident that the rental market is strong enough to absorb thousands of new apartments, even if they come with rents that are two to three times current averages.

That means studios that rent for as much as US$3,500 a month, one-bedrooms for US$6,000, and two-bedrooms for US$11,000. These are, incidentally, the kind of prices that owners of high-end condos might get if they rented out their apartments, brokers say.

In recent years, developers have been focused more on condo development than on rental construction, but at least nine rental buildings have opened within the last year, and at least a dozen more are scheduled to open in the next two years. Most of these buildings are highrises, which means that thousands of new apartments will become available in the next 18 months.

‘Builders are realising that they can build rentals with high amenities and real wow factor because people are willing to pay for it,’ said Gary Malin, the chief operating officer of Citi Habitats.

In many ways, the market for new rental buildings is merely following the lead set by the condominium market in the last five years, when developers raced to find the most talked-about new amenity.

The developers of these new rental buildings are also giving them a Club Med vibe. Some even have created the land-based equivalent of a cruise director – someone to organise Halloween parties, a softball team and the occasional ski trip or scuba diving lesson. All with particular renters in mind, of course.

‘These are people who know how they want to feel when they walk into their lobby and their home,’ said Cliff Finn, the managing director of new development marketing at Citi Habitats. ‘It’s about feeling successful.’

The Chelsea Landmark, a 38-storey tower with 407 apartments at 25 W 25th St, opened five months ago. The developer, Rose Associates, built 22,000 sq ft of amenities that include a gym, the golf simulator, a Zen garden, a spa with an oversize whirlpool and sauna, two lounges with billiards tables, wireless Internet connections and free juice and coffee, and a demonstration kitchen where local chefs will be featured at monthly events.

‘Not every builder is willing to spend the money to get the high rents,’ said Adam Rose, the president of Rose Associates. ‘But we knew that with this building we would be able to skim off the top 5 per cent of renters in every building around here,’ including people from older Rose rental buildings, he said. About half of the 20,000 apartments that Rose owns and manages across the city are rentals.

Mr Rose said his company would not have built a building as well-appointed as the Chelsea Landmark a few years earlier. ‘What’s acceptable to the marketplace has changed drastically,’ he said. ‘What we delivered 20 years ago in condos wouldn’t make it today in even the lowest-level rental building.’

New rental apartments now include name-brand stainless-steel kitchen appliances, granite countertops, marble baths and hardwood floors. ‘The days of parquet are gone,’ Mr Rose said.

The quality of apartment fixtures and the kinds of amenities in a building naturally vary, depending on a building’s location and the kind of tenant that the developer hopes to attract.

Brokers and developers agree that the target audience for many of the new high-rises is young professionals in their 20s and early 30s who may earn as much as US$300,000 a year but who just aren’t ready to own yet.

The people moving into 37 Wall St, for example, are ‘downtown-oriented people who are still early in their careers, and they choose to rent, but they have a condo sensibility’, said Finn of Citi Habitats. They are people who can afford a US$4,800 two-bedroom but who might not have the US$300,000 they would need for a down payment on a comparable condo that might cost US$1.5 million, he said.

Thirty-seven Wall is a former bank building that has been converted to 373 rental apartments. Amenities include a gym, a yoga studio, a screening room, a lounge and billiards room with a lush clubby feel, and 150 channels of DirecTV in each apartment.

Chris Mazzarella, who works at a market research company in SoHo and who moved into 37 Wall in May, said the building’s amenities were ‘a major decision-maker on my part.’

He lives in a studio and plans to spend plenty of time in the lounge either shooting pool or on his laptop, and in the gym working out. He also hopes to give a Super Bowl party in the screening room.

Mr Mazzarella, who is 27, said most of his neighbours seem to be young professionals. ‘I definitely feel like I’m in my element,’ he said.

A building like One Carnegie Hill, at 215 E 96th St, has a slightly broader mix of renters: singles in their 20s and couples in their early 30s, some with young children. The building, which opened a year ago, has an enormous fitness centre and a rooftop party room, but it also has a charming children’s playroom that comes with free child care on weekend mornings when parents might be working out in the gym.

It has a roof terrace for sunbathing and a third-floor terrace with a playground and three separate barbecue areas, where residents can give outdoor dinner parties.

Mindy Jaffe said she and her fiance, Per Chilstrom, have made good use of the barbecue areas. ‘We’ve had people over, and you just can’t believe you’re in the city,’ she said. ‘It’s like being in your own private outdoor space.’

Ms Jaffe said she and Mr Chilstrom, who are both 32 and who rent a one-bedroom, have each lived in all kinds of buildings, including walk-ups and buildings without doormen. ‘We’ve thought about buying but haven’t been ready to do it,’ she said.

Looking ahead, with many more rental buildings on the horizon, developers seem quite likely to continue their efforts to outdo one another and even themselves.

 

Source: Business Times 14 Aug 07

Sub-prime mess just a Chicken Little flap

Recent global market tremors are a disturbing commentary on the power of fear

THE job of an economist, among many other duties, is to put things into perspective. So, because I am an economist, among other duties, here is a little perspective on the recent turmoil in the stock and bond markets.

First, when the story of this turbulence is reported, the usual explanation mainly has to do with some new loss in the sub-prime mortgage world – the universe of mortgages and mortgage-backed instruments related to buyers with poor credit histories or none at all.

Here is the first instance in which proportion tells us that something is out of whack: The total mortgage market in the United States is roughly US$10.4 trillion. Of that, a little over 13 per cent, or about US$1.35 trillion, is subprime – certainly a large sum. Of this, nearly 14 per cent is delinquent, meaning late in payment or in foreclosure.

Of this amount, about 5 per cent is actually in foreclosure, or about US$67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. So now we are down to losses of about US $33 billion to US$34 billion.

The rate of loss in sub-prime mortgages keeps climbing. In time, perhaps it will double, maybe back to US$67 billion. This is a large sum by absolute standards, and I would sure like to have it in my bank account.

But by the metrics of a large economy, it is nothing. The total wealth of the United States is about US$70 trillion.

The value of the stocks listed in the United States is very roughly US$15 trillion to US$20 trillion. The bond market is even larger.

Much more to the point, the fears and terrors about sub-prime mortgages have helped knock off about 6 per cent of the stock market’s value in recent weeks. This amounts to about US$1.1 trillion or more than 30 times the losses so far in the sub-prime market. In other words, these sub-prime losses are wildly out of all proportion to the likely damage to the economy from the sub-prime problems.

The disconnect goes even further. The Dow Jones industrial average has been heavily moved by fears about the sub-prime market. But how are most of the Dow 30 affected by sub-prime mortgages in any meaningful way? No Dow company is short of liquidity, and consumer spending is still strong.

Foreign stocks, especially in developing countries, have been hard hit, and this is supposedly connected with a ‘repricing of risk’, which in turn is connected with sub-prime mortgages. But how are the risks in Thailand or Brazil or Indonesia closely related to problems in a housing tract in Las Vegas? The developing countries are fantastically strong and liquid.

Why would problems at a mortgage company in Long Island have anything to do with them? European stocks have also been hard hit, and this has to do with relatively small amounts of sub-prime in some European banks. On a global scale, the numbers in Germany and France are minuscule for sub-prime exposure. For European markets to fall on sub-prime issues makes no sense.

News last Thursday that a small amount of unpriceable sub-prime mortgages was in a BNP Paribas fund in France sent the markets in Europe and the US sharply lower. Why? The losses in France are at most in the single billions, while the losses in US markets alone were in the hundreds of billions on the BNP news.

Then there is the supposed ‘drying up’ of credit for private equity deals because of fears of risk. But this is also puzzling. I can’t think of a single recent major private equity deal in which the bonds have defaulted.

Major hits

More to the point, suppose that all private equity deals were stalled for a year. Why would this affect the Dow?

None of companies in the Dow 30 is having trouble raising cash. And suppose that all private equity deals went away for good.

Taken together, they are not all that big a piece of the US economy. Why should they put the markets of the richest nation in the world, as well as all of the world’s other markets, into turmoil? Then let’s take a peek at Bear Stearns.

This venerable and clever financial house has taken some major hits on sub-prime mortgages lately. That is sad for the stockholders (I am a very small stockholder), and the price of Bear Stearns stock has tumbled.

A little over a week ago, news about Bear Stearns’ liquidity issues lowered the market value by more than US$1.2 billion.

That is a big hit to a single company, to be sure, but then came the shocker: that news also helped wipe out hundreds of billions of dollars off the total value of US stocks.

My point is this: I don’t know where the bottom is on sub-prime. I don’t know how bad the problems are at Bear. Yet I do know that the market reactions are wildly out of proportion to the real problems that have been revealed or even hinted at. Maybe there is some giant thing hiding in the closet that might rationalise the market’s fears.

But if it’s hidden, how can the market be reacting to it in the first place? More will be revealed, as the saying goes.

But recently investors have been selling out of all relation to what we know.

Reassurances in word and deed from Ben Bernanke, chairman of the Federal Reserve, helped calm the markets on Friday.

But recent events are a disturbing commentary on the power of fear.

This economy is extremely strong. Profits are superb. The world economy is exploding with growth. To be sure, terrible problems lurk in the future: a slow-motion dollar crisis, huge Medicare deficits and energy shortages. But for now, the sell-off seems extreme, not to say nutty.

Some smart, brave people will make a fortune buying in these days, and then we’ll all wonder what the scare was about.

 

Source: Business Times 14 Aug 07

Portfolios take a ’sub-primal’ beating

HOW quickly investment sentiment can sour. Up till a few weeks ago, punters were still betting on penny stocks like there was no tomorrow. But the turning point came last month when a US bank, Bear Stearns, spooked the markets with news of major losses and accounting difficulties with its investments linked to risky US housing loans.

Losses by other banks and investment funds have led to what has been termed the ‘US sub-prime housing crisis’ – the source of turbulence and uncertainty in global financial markets in the last couple of weeks.

How these financial losses will trickle down to the real economy – the consumers and companies – remains to be seen.

Meanwhile, banks are now setting aside cash as a precaution against further losses from their bad investments and have become far more cautious about lending.

This is known as a ‘credit squeeze’, but the fear is that this could become a veritable ‘credit crunch’ in which companies and consumers have inadequate access to loans, according to an AFP report.

‘As private sector banks, in a time of uncertainty, set aside more funds for their own funding needs, we are seeing a shortage of liquidity in the money markets,’ AFP quoted Societe Generale’s chief Asia economist Glenn Maguire as saying.

A shortage of liquidity would restrict the ability of companies, and eventually consumers, to borrow, potentially slowing economic growth worldwide.

In an attempt to avert a crisis of confidence in global credit markets, central banks in the US, Europe, Japan, Australia and Canada last week added about US$136 billion to the banking system.

The Federal Reserve, in a second day of action in concert with the European Central Bank (ECB), provided US$38 billion of reserves and pledged more ‘as necessary’, in a statement unprecedented since after the Sept 11, 2001 attacks.

Money market rates had risen worldwide in the previous two days on evidence that the sub-prime crisis is spreading.

By the end of Friday, the central bank actions helped spark a turnaround in American stocks and drive the US overnight bank lending rate below the Fed’s target.

The Dow Jones Industrial Average recovered from a 210-point deficit to end just 31 points lower.

‘They accomplished their short-term mission to make sure the market stabilised ahead of the weekend,’ Bloomberg quoted David Resler, chief economist in New York at Nomura Securities International Inc, as saying. ‘It remains to be seen how much more they’ll have to do.’

Our portfolios declined by an average of 7.5 per cent last week. The one which fell the least – the analysts’ upgrades portfolio – is also the one with the highest cash component. This illustrates the truth of the saying ‘cash is king’ in a turbulent market.

It slid only 2.2 per cent. It had about 30 per cent cash as at last week due to the privatisation of companies like MMI and Amtek, and Want Want Holdings soon.

Meanwhile, small-cap stocks with dubious fundamentals which have been carried along in the wave of euphoria until a few weeks ago have seen the biggest declines.

The one-month top winners portfolio and the one-year top losers portfolio shed the most last week. Each fell by 9.4 per cent.

Big losers included General Magnetics, JK Technology and China Education. The lowest forward PE portfolio and the lowest price-to-book portfolio were down by 8.5 per cent and 7.9 per cent respectively.

 

Source: Business Times 13 Aug 07

Prices slump amid US housing woes

(LONDON) Global commodity prices slumped last week as speculators rushed to bank profits amid concern that demand for oil and metals will slide should the world economy dampen due to the US housing crisis.

Oil: World oil prices dived, with a barrel of Brent below US$69 for the first time since June, on concern that energy demand may weaken amid the US sub-prime crisis. By Friday, Brent North Sea crude for September delivery plunged to US$69.70 a barrel on Friday, compared with US$75.57 a barrel a week earlier.

New York’s main oil futures contract, light sweet crude for delivery in September, plummeted to US $70.68 a barrel, from US$76.67 a barrel.

Gold: Gold prices dipped as the dollar rose. On the London Bullion Market, gold fell to US$668.50 an ounce at Friday’s late fixing, from US$670.50 a week earlier.

 

Source: Business Times 13 Aug 07

Markets fear more volatility ahead

Uncertainty as traders watch developments

THE dramatic intervention by the world’s central banks helped to calm jittery bourses on Friday, but as Asian markets reopen for trading today, investors will be watching to see if the relief is only temporary.

Many traders believe that any move by the more optimistic investors or ‘bulls’ to stage a rally today will be met by an equally determined attempt by pessimistic ‘bears’ to sell into any rebound in share prices.

So, share prices are likely to remain volatile today as traders react to any fresh developments coming out of the credit markets, where investors’ appetite for risk has been soured by the crisis-hit mortgage market in the United States.

Bank of America senior economist Gilles Moec told AFP: ‘One of the big issues is that no one has any real clue of the amount of sub-prime loans which have been purchased by foreigners.

‘The big question is what is the overall amount, and this is bad for the markets because if there is one thing that the markets hate, it is uncertainty.’

Sub-prime loans are offered at high interest rates to Americans who have a poor credit rating and might otherwise be denied credit.

But Commerzbank analyst Andreas Huerkamp was more optimistic and predicted that the crisis would blow over.

‘There are strong parallels with the crisis in the mid-1990s, so you have to be a brave investor to buy shares at the moment,’ he said. ‘But history shows that everything will be forgotten in six months, and the market will recover.’

But given the state of uncertainty that now exists in global financial markets, most analysts believe it may be better for investors to simply sit on the sidelines while waiting for the mortgage crisis in the US to blow over.

Share prices in Singapore and other major regional bourses had see-sawed last week as fears of tightening credit gripped financial markets globally.

Even the commodities markets were whiplashed as traders unwound risky positions, leading to hefty falls in the prices of crude oil and base metals.

The current panic started last Thursday after French bank BNP Paribas froze three hedge funds with US mortgage exposure, sparking widespread fears the contagion had spread to European financial institutions.

This caused international banks to be so risk-averse that they refused to take any form of debt securities as loan collateral, causing interbank lending to come to a virtual standstill.

The European Central Bank was forced to pump 95billion euros (S$197billion) on Thursday and another 61billion euros on Friday to restore calm to the banking system.

The US Federal Reserve followed with a US$24billion (S$36billion) infusion on Thursday, and another US $38billion in three separate operations on Friday to ease a growing liquidity crunch as stock markets crashed across the globe.

What made the Fed’s intervention as ‘lender of last resort’ all the more significant was its decision to accept mortgage bonds as collateral from banks – shoring up investors’ confidence in the badly shaken credit markets.

In Asia, Singapore managed to escape relatively unscathed, with the benchmark Straits Times Index closing down just 53.99 points, or 1.6 per cent, at 3,359.18 on Friday after dropping 115 points at one stage.

But European markets suffered their worst one-day drop in more than four years as London’s FTSE-100 Index slumped 3.7per cent down, while in Paris, the CAC-40 Index was down 3.2 per cent.

Wall Street, however, managed to steady itself, with the Dow Jones Industrial Average recovering to close a mere 31.14points lower at 13,239.54 following the Fed’s intervention after initially crashing by 200 points.

Phillip Securities’ managing director Loh Hoon Sun said yesterday the local stock market is likely to remain vulnerable to any bad news coming out of Europe and the US in the coming weeks.

And this may leave traders to bet on two scenarios with few alternatives in between – a swift recovery or a meltdown.

‘Stocks will look cheap if international banks can swiftly work out the extent of the credit woes arising from the sub-prime loans and chop off their losses,’ a stockbroking director said.

But share prices may fall a lot more if a few big financial institutions could not take the heat and collapse, he warned.

The only good news is that retail investors here have been partly spared from the financial carnage because of the trading curbs imposed recently by local brokerages on highly speculative penny stocks after their daily traded volumes exceeded a few hundred million shares each.

The big concern now is whether the booming residential property market will be affected if the international credit crunch continues.

‘Some investors are obviously growing uneasy about the ability of private equities funds to complete some of the collective property sales which had been announced recently,’ said a dealer.

The abortion of any blockbuster en bloc property sales may hurt the share prices of listed real estate developers and construction counters quite badly, he said. 

 

Source: The Straits Times 13 Aug 07

IN ASIA: Rough ride for many more weeks: Analysts

HONG KONG – IF THE past week’s roller-coaster ride in Asian stock markets is anything to go by, investors should strap in tight for another bumpy ride in the coming sessions.

Ongoing jitters about a global credit squeeze and uncertainty about the fallout from the US sub-prime mortgage crisis will continue to roil markets, analysts say.

‘We’re going to see a pretty volatile ride over the next couple of months,’ said Mr Shane Oliver, head of investment strategy at AMP Capital in Australia.

‘But it’s not a bear market. As is often the case, the longer the bull market, the deeper the corrections become, and that’s exactly what we’re seeing at the moment.

‘The fundamentals globally still look pretty good…and most companies are in pretty good shape to deliver ongoing profit growth.’

Mr Sean Darby, a regional strategist at Nomura, said he expected ‘ongoing indiscriminate selling’ in regional markets as banks were likely to sell Asian stocks to fund their losses in illiquid assets such as sub-prime debt.

‘Irrespective of their fundamentals, Asian equities will be used as a source of funding to meet cash calls,’ he said. ‘It’s going to be a rough ride for the next couple of weeks.’

Analysts and economists differed on just how long or how closely Asian markets would remain tethered to the unfolding drama in the US housing market.

Most predictions have to do with ongoing debates about the vulnerability of the Asian economic and financial boom to the sub- prime fallout.

The first debate centres on the relative Asian dependence for growth on US demand for imports.

While some say Asian economies have generated enough trade with one another to offset a US slowdown, others say Asia will be hurt if the sub-prime mess translates into broader US housing problems and lower consumer spending.

The second debate centres on the source of the cash driving up Asian asset prices.

Some say the bulk of those funds comes from Asia’s own vast pile of savings, and that they are bound to find their way back into local markets once calm returns.

Others, however, contend that the sub-prime fiasco is part of a broader retreat by global capital – a retreat from risk.

Mr Christopher Wood, CLSA’s Hong Kong-based chief Asian equity strategist, said investors should consider the current drop in global stocks as a chance to acquire Asian shares that will rise once the crisis has passed.

 

Source: The Straits Times 12 Aug 07

Morgan Stanley adds more sub-prime loans

MORGAN Stanley’s Saxon Mortgage is expanding its presence in sub-prime mortgages, capturing borrowers turned away by skittish lenders and taking business from rivals that abandoned the struggling market.

Saxon representatives on Thursday moved to assure brokers that Morgan Stanley is a strong backer and is giving business won from other lenders first priority, according to an e-mail obtained by Reuters.

Saxon is maintaining most loan products as other lenders nix theirs, giving it a leg-up in a market where borrowers are getting desperate to refinance.

‘We are still here now and are very willing to help you with any fallout loans you have had from previous companies. They get top billing, and we can get them moved through ASAP,’ the note said.

Saxon’s rates have increased, but mortgage offerings have ’stayed pretty much the same’, it said.

Saxon’s strategy to get a competitive edge on the sub-prime business where losses are causing upheavals in global financial markets compares with other lenders that have sought to reduce their market share.

Maintaining sub-prime loan programmes may be helpful for customers who need to refinance at least US$335 billion (S$504 billion) in loans whose payments are set to jump this year and next, analysts said.

That would alleviate some concern that sub-prime borrowers who obtained the adjustable-rate mortgages in 2005 and last year would find loan programmes too strict – and default.

‘Every day, we’re more inundated with pre-qualifications as my competitors are falling off the face of the earth,’ said Ms Deborah Cox, a Saxon account executive. ‘We are going to be one of the last standing.’

 

Source: The Straits Times 11 Aug 07

Sub-prime domino hits Asia again

Painful pattern takes shape as US ripples exact their toll

(SINGAPORE) For the fourth time in two weeks, stock markets in Asia plunged following steep losses in the United States and Europe the previous trading day.

As the fallout from rising defaults in US sub-prime mortgages continues to spread, the Straits Times Index fell 53.99 points or 1.6 per cent to end at 3,359.18.

Earlier in the day, the index was down as much as 3.8 per cent before clawing back some ground.

A distinct pattern – that seems set to continue for some time – has been unfolding of late. Each new piece of bad news related to the US sub-prime mortgage market has been followed by a plunge in the Dow Jones Industrial Average. This has invariably been mirrored the following trading day in Asia.

Fears of a global credit crunch hung over the US for the second day running as, shortly after opening yesterday, the Dow Jones index was down 124.8 points at 13,145.9.

Europe reflected the strain, too, as in London the FTSE 100 fell 3.1 per cent in morning trade, the Paris index was down 3 per cent and German shares slumped 1.6 per cent as fear of more bad news to come in credit markets gripped investors.

On Thursday, the trigger had been provided by French banking group BNP Paribas, which stopped withdrawals from three of its funds which own US sub-prime mortgages citing a ‘complete evaporation’ of liquidity.

Central banks across the globe have since been pumping in doses of liquidity to ease the crunch.

Here, the Monetary Authority of Singapore said it is monitoring developments in the markets and is ready to inject additional liquidity ‘if the situation so warrants’.

Meanwhile, Fullerton Fund Management, a unit of Temasek Holdings, told Bloomberg that it has no direct exposure to US sub-prime loans and its investments in collateralised debt obligations or CDOs amount to less than one per cent of its total assets under management.

Over the past week, banks and asset managers here have sought to reassure analysts and investors by releasing details of their exposure to US sub-prime property loans through their investments in CDOs.

The sub-prime woes in the US have already caused several hedge funds to suspend withdrawals by investors, usually seen as a sign that the value of the assets they hold may not be enough to repay investors in full.

‘The markets will remain volatile for a few more weeks. More hedge funds are going to have some terrible announcements to make,’ said economist David Cohen at Action Economics. But he added: ‘I wouldn’t get too upset by the fact that the central banks were injecting liquidity today – they were just accommodating the public want to hold cash rather than stocks.

‘That would have caused some cash-flow problems in the banking system, so they added some reserves. It’s not as if they’re bailing out the economy.’

In Asia-Pacific, stocks were again battered as all major markets in the region suffered losses.

South Korea saw the worst fall in percentage terms with a 4.2 per cent plunge, followed by Australia, where shares fell 3.6 per cent.

In Japan, the Nikkei 225 lost 2.4 per cent, while Hong Kong’s Hang Seng Index fell 2.9 per cent. China’s CSI 300 index slid 1.1 per cent.

In South-east Asia, the Kuala Lumpur Composite Index ended 2 per cent lower, while key indices in Thailand, Indonesia and the Philippines also lost 0.9-3.1 per cent.

 

Source: Business Times 11 Aug 07

How a liquidity crunch affects global economies

(NEW YORK) A capital crisis that roiled Wall Street on Thursday and took nearly 400 points off the Dow Jones Industrials has the potential to impact regular people on Main Street as well. Here are some questions and answers about exactly what a ‘liquidity crisis’ is and how it impacts global economies.

Q. What is a liquidity squeeze and why should I care if the Wall Street banks are having troubles?

A. Think of what people call ‘liquidity’ in the financial markets as being something like a faucet. When water pours from it at full blast, you can get a glass of water quickly and easily. But as the water pressure falls, it becomes increasingly difficult and takes more time to fill up a glass.

In periods of liquidity, there is plenty of trading, and big institutional buyers and sellers easily move into and out of stocks, bonds and other instruments. But during a ‘liquidity crisis’ the big banks get nervous about risk and become more cautious about doing deals and making trades. They’re less likely to extend the easy credit that has fuelled the economy in the past few years, and that makes it more difficult to match buyers with sellers. That is what happened to markets around the world on Thursday.

The fallout from a liquidity crunch causes a ripple effect. The most immediate impact is that loans could become harder to get. But troubles can spread to the wider economy, hurting people’s investments and endangering their long-term financial plans. If banks are not lending and no one will extend credit to anyone else, markets seize up and economic growth disappears.

Q. Why are these big firms so easily affected?

A. Major financial institutions can absorb hefty losses without toppling. However, liquidity concerns cause institutions to become reluctant to lend money to other banks. Loans between banks on an overnight basis, one of the primary ways they fund their operations, have become more expensive as concerns arise about their ability to repay the loans – and that forces costs up.

Banks also bring debt offerings to the market on behalf of their clients. But if investors are reluctant to buy them, many times the banks will be left holding the debt.

Q: How do central banks inject money into the economy?

A: As an example, the Federal Reserve carried out a US$12 billion one-day repurchase agreement and a US$12 billion 14-day repurchase agreement. In a repurchase agreement, or ‘repo’, the Fed arranges to buy securities from dealers, who then deposit the money the Fed has paid them into commercial banks.

The cash infusion adds stability to the market, and fosters more buying and increased cash reserves. When the banks get this unexpected windfall of deposits, it increases their confidence that there is enough money to fund operations and make trades.

Q. I thought this was an American problem. What’s the deal with Europe, and should we be worried about China and Asia too?

A. The sub-prime mortgage mess might be a problem in the US as risky borrowers default on their loans and banks become increasingly shy about offering credit. But it impacts European and Asian players who invest heavily in bonds and other products made up of pools of mortgages.

European investors were said to be heavily involved in two hedge funds operated by Bear Stearns that are now bankrupt after bad sub-prime bets. The announcement by BNP Paribas that it was blocking investors from taking their money out of some mortgage-exposed funds raised the spectre of a widening impact of US credit market problems.

These high-yield investments have been attractive because they offered big returns, and that caught the interest of investors globally.

Q. Aren’t the bad sub-prime loans contained, and what kind of impact would this have for regular Americans if they’re not?

A. Defaults in the US$2.6 trillion sub-prime mortgage market have caused many homeowners to lose their homes, while scores of others have reined in spending to keep on top of their payments. There has been some indication that fears about the housing industry have caused borrowers to watch their wallets. And that’s evident in the US economy, with retailers reporting sluggish sales figures in July.

 

Source: Business Times 11 Aug 07

US growth may slow in H2

Sub-prime impact on big banks expected to be limited: IMF

(NEW YORK) The US economy will grow less than previously forecast as a rout in sub-prime borrowing hampers consumer spending, according to economists. Growth will slow to an average 2.6 per cent annual pace in the second half of the year, 0.2 percentage point less than economists forecast in July, according to the median of 66 estimates in a Bloomberg News Survey taken Aug 1 to Aug 8.

Rising delinquencies in the sub-prime mortgage market are prompting lenders to limit the availability of credit.

Lenders like Wells Fargo & Co and Wachovia Corp are raising rates and restricting access to loans even for some of their most creditworthy borrowers. The slackening expansion won’t force the Federal Reserve to lower interest rates for the rest of the year as officials stay focused on taming inflation, economists said.

‘The longer the housing downturn goes on, the more spillover there will be,’ said Nigel Gault, chief US economist at Global Insight in Massachusetts. ‘The Fed doesn’t have a lot of room to manoeuvre because inflation is still at the high end of what they want to see.’ Global Insight reduced its growth forecast for the last six months of 2007 by a quarter percentage point.

A Reuters survey of economists also echoed similar sentiments. The US economy will lose steam in the second half of this year, it said but inflation should remain just high enough to make the Fed reticent about cutting interest rates. At the same time, concern over tightening credit has heightened speculation that eventually the Fed will have to push rates lower to prevent the expansion from sliding off track.

But that view, shared more widely among big Wall Street bond dealers, is not the majority. Most economists foresee a pick-up in growth with little change in core inflation moving into next year, leaving rates on hold until the end of 2008.

‘Growth is likely to be mixed, but relatively soft in the near term, improving in the fourth quarter and in 2008,’ said Scott Brown, chief economist at Raymond James & Associates in Florida.

Economists look for growth to taper off to a more subdued rate of 2.5 per cent in the fourth quarter of this year following a 3.4 per cent increase in Q2. ‘The housing market correction will last longer than most had anticipated.

The direct impact should fade, but spillover effects will become more meaningful,’ Mr Brown added. Earlier, the International Monetary Fund warned that damage from the risky loans could climb. It said on Wednesday that major US financial institutions have been shielded from problems in the sub-prime mortgage market so far, as banks used securitisation to offload risky debt. Soaring foreclosures in the sub-prime mortgage market has shaken confidence and prompted the Fed to note in a policy statement on Tuesday that credit was tightening for some businesses and households.

But the IMF said in a working paper that shrewd lending practices had protected big financial institutions, at the expense of borrowers. ‘New origination and funding technology appear to have made the financial system more stable at the expense of undermining the effectiveness of consumer protection regulation,’ noted the paper, entitled Money for Nothing and Checks for Free: Recent Developments in US Sub-prime Mortgage Markets.

Criticising the fee-driven nature of the loan origination process for undermining credit quality, the IMF noted that banks had been largely spared by removing risky debt from their balance sheets through securitisation. But this just pushes losses into a different corner of the financial services industry, and although the damage done so far has been relatively light it could climb quickly. The IMF estimates the mortgage-backed securities market will suffer mark-to-market losses of US$18 billion and US$25 billion in the next two years, assuming house prices stay flat, with losses of up to US$60 billion if prices dip 5 per cent.

Meanwhile US President George Bush sought on Wednesday to reassure Americans about the economy and said that recent financial market turbulence was not a cause for worry but a natural adjustment from the improvident lending of recent years. Speaking at the Treasury Department, Mr Bush said that his economic advisers would be ‘paying close attention as the market begins to readjust its assessment of risk’ in housing and other sectors.

Mr Bush was eager to both calm the markets and bat down the Democratic calls for the administration to intervene, predicting that the turmoil in the housing sector would end with a ’soft landing’ and would not damage the larger economy.

Source: Business Times 10 Aug 07

Stocks tumble worldwide as liquidity dries up

BNP’s freezing of US$2b withdrawal from funds triggers sell-off

(LONDON) World financial markets tumbled yesterday as the US subprime fallout spread; forcing both the US Federal Reserve and European Central Bank (ECB) to pump in emergency liquidity amid the tightening credit squeeze around the world.

The catalyst for the latest market rout appeared to be a move by BNP Paribas to freeze over US$2 billion worth of funds as problems in risky US sub-prime mortgages and diminishing liquidity prevented it from calculating their value.

The idea that anyone – institutions, investors, companies, individuals – can’t get money when they need it unnerved a stock market that has suffered through weeks of intense volatility triggered by concerns about available credit.

The news sent shivers through markets already nervous that troubles in US mortgages would spread globally, hitting banks and the broader financial system.

Investors rushed to buy safe-haven bonds and the low-yielding yen to preserve capital. London, Paris and Frankfurt bourses fell more than 100 points after the BNP announcement.

The Dow Jones Industrial Average opened down 1.01 per cent at 13,520.40 points, the Nasdaq composite slumped 1.62 per cent to 2,570.54 points and the broad-market Standard Poor’s 500 index shed 1.18 per cent to 1,479.81.

New York Stock Exchange trading curbs kicked in early in the session.

While most Asia markets closed higher yesterday, the latest development from the subprime fallout is likely to weigh on these markets today.

The ECB’s move to provide more cash to money markets intensified Wall Street’s angst. Although the bank’s loan of more than US$130 billion in overnight funds to banks at a bargain rate of 4 per cent was intended to calm investors, Wall Street saw the step as confirmation of the credit markets’ problems.

The Fed followed the ECB move later in the morning and added US$24 billion in temporary reserves to the banking system.

The Fed’s daily money market operations yesterday were larger than usual, but were not injections of liquidity similar to those made earlier in the day by the ECB, analysts said.

The Fed’s money market operations were to bring down US benchmark overnight rates, which were trading at 5.5 per cent in the morning, above the US central bank’s target of 5.25 per cent, they said.

Overnight euro and dollar deposit rates hit six-year peaks at one point with concerns growing there could be more sub-prime-related problems from financial institutions. The so-called dollar London interbank offered rate rose to 5.86 per cent yesterday from 5.35 per cent and in euros gained to 4.31 per cent from 4.11 per cent.

‘There appears to be a dash for cash both in dollars and in euros,’ said Nick Parsons, head of market strategy at nabCapital.

‘Because liquidity in the market is drying up and because financing is also becoming more difficult, it seems that investors who need to finance their holdings of securities are not being able to draw on credit facilities and instead having to finance in the cash market. That’s putting up rates on cash,’ Mr Parsons said.

Euro deposit rates for overnight and tomorrow/next day deliveries hit their highest in October 2001. US dollar deposit rates for tomorrow/next day delivery posted their biggest one-day rise in eight years.

Jonathan Mullen, a spokesman for BNP, said that the credit squeeze in the United States had made it impossible to calculate the value of the underlying assets of the funds and that the bank was obliged by market conditions to halt holders of the funds from cashing out or new investors from buying shares in the funds.

‘It’s quite exceptional to suspend funds, and it means that people can’t buy in or sell out of the funds,’ Mr Mullen said. ‘But we hope this is going to be temporary and that the market will come back.’

Mr Mullen said that about one-third of the funds were exposed to sub-prime loans but that those investments were in high-quality parts of that market.

‘We’ve seen no degradation in the quality of these assets, none of which have been put on watch for a downgrade,’ Mr Mullen said. ‘This is just a technical problem about liquidity.’

BNP shares fell more than 5 per cent in early trading, but Mr Mullen reiterated that the bank itself had almost no exposure to the sub-prime crisis. He said the funds are held by BNP clients and represent just a fraction, or 1.6 billion euros (S$3.3 billion), of the 600 billion euros the bank currently has under management.

‘Liquidity in the market has completely dried up as investors aren’t recycling their money back because of subprime concerns,’ said Saher Bin Jung, a trader on the commercial paper desk at Commerzbank AG. ‘Levels have shot up dramatically since yesterday as issuers are trying to entice investors back.’

‘No one really knows how big the current credit problems are and who does or does not have significant risk exposure. This is undermining confidence in the system as a whole,’ said Charles Diebel, head of European rates strategy at Nomura International.

 

Source: Business Times 10 Aug 07

Fed notes sub-prime crisis but leaves key rate unchanged

Investors shouldn’t expect change in rate stance anytime soon, it says

IN NEW YORK

FEDERAL Reserve chairman Ben Bernanke and the Federal Open Market Committee (FOMC) had the chance on Tuesday to stem the bleeding in the stock market caused by the crisis in the sub-prime mortgage market.

Instead, they somewhat surprisingly offered little more than a pat on the head that the economy is resilient enough to withstand the debt market’s troubles. And even more surprisingly, Wall Street reacted positively to the Fed’s relative insensitivity to its pain.

‘The economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy,’ said the Fed’s statement after a brief acknowledgement of the credit market crisis.

‘Although the downside risks to growth have increased somewhat, the committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected.’

The statement emphasised that investors should not expect a change in the central bank’s interest rate stance any time soon.

‘There was some initial disappointment, but ultimately, nobody was really surprised,’ said Jim Awad, chairman of WP Stewart. ‘The Fed made clear it is aware of what is going on, but that its thinking is the economy remains on track, so no action from it is required.

‘I think they did the right thing. Traders and institutional investors decided, for the day at least, that they liked the Fed’s calm in the face of this storm, and felt assured the central bank doesn’t see a need to react as though there is a crisis.’

The Fed, as expected, kept its Fed funds target rate at 5.25 per cent for a ninth straight meeting and its statement made clear to all that with inflation remaining its primary focus, an interest rate cut is not on the horizon.

Many on Wall Street had hoped that the recent tightening in credit markets would prompt the Fed to signal a shift in its focus from concern about inflation towards a greater fear of an economic downturn.

It was a jolt of hard medicine for an ailing equities market, but after the initial bitter taste of the Fed’s mostly hawkish statement went down – and sent the major US stock indexes into a brief free-fall – Wall Street found just enough assurance in the statement to right itself and finish the day with modest advances, along with the feeling that the central bank remains open to a rate cut later in the year.

Stocks took a wild ride on Tuesday as traders digested the Fed’s policy statement. Blue chips swooned as much as 121 points and then leaped by as many as 139 points after the Fed’s 2.15 pm EDT announcement. The Dow Jones Industrial Average finally ended the day with a 35.32 point or 0.26 per cent advance to 13,504.30. The S&P 500 rose 9.04 points or 0.62 per cent to 1476.71, while the Nasdaq Composite climbed 14.27 points or 0.56 per cent to 2561.60.

Wall Street seemed to be keeping to its moderately bullish outlook in early going yesterday. Seemingly relieved that the Federal Reserve still predicts moderate economic growth despite credit concerns, stocks were on the rise soon after the opening bell, with the Dow trading 50 points or 0.4 per cent higher at 13,554.62 and the Nasdaq Composite up 30 points or 1.15 per cent.

The initial sell-off was hardly surprising, given the anticipation on Wall Street on Tuesday ahead of the Fed’s announcement. Traders were speculating just how far the FOMC would go towards signalling to investors that it was prepared to take action to calm the turmoil in the credit markets sparked by the collapse of the sub-prime mortgage market.

‘The crisis in the debt markets could easily spread into the larger economy and it makes sense for the Fed to shift toward an easing bias here, which would set us up for a rate cut in another couple of months,’ said Mark Malone, a money manager for Siegal Companies.

Instead, the Fed made only a single alteration in its statement from the last one it issued back in June – to acknowledge the crisis that has befallen the housing market, dried up the debt market and shaken financial markets in general.

 

Source: Business Times 9 Aug 07

Investors lining up for a piece of Seattle’s property comeback

Rosy office sector due to booming trade with Asia and job market recovery

(SEATTLE) The Seattle office market has made a spectacular recovery in the last few years. As a result, many real estate investors want to park their money there. No one knows that better than Alfred Clise.

His real estate investment company, Clise Properties, is selling a 5.3 hectare parcel in downtown Seattle that his family cobbled together over 80 years. The land, amounting to nearly seven blocks, now mainly occupied by parking lots and low-rise office buildings, has no asking price.

Still, there have been plenty of suitors. Mr Clise has fielded 69 requests for tours since he put the parcel on the market in June. It is the biggest piece of land for sale in any downtown in the country, brokers say, and could sell for as much as US$1 billion, according to an estimate by Real Capital Analytics, a national research and consulting company.

The Clises, one of Seattle’s oldest families, won’t sell to just anyone. The buyer, if one emerges by the family’s October deadline, must have a grand vision for the parcel – a development like Rockefeller Center in New York or Canary Wharf in London – or the family will not part with the land. Family members say they will not sell it in pieces.

‘You really can do anything you want with it’ because it is already zoned for a wide variety of uses, said Mr Clise, chairman and chief executive of Clise Properties and the fourth generation to run the company. ‘It’ll have a major impact and reshape the city.’ A buyer could put as much as 14 million square feet of offices, condominiums and rental apartments on the parcel.

Seattle is now on every investor’s shopping list. This year, the city was deemed the best place in the country to buy and sell office buildings in the Urban Land Institute’s annual survey of real estate professionals. Office vacancies are at a six-year low of 7.7 per cent, and downtown landlords are getting as much as US$50 per square foot (psf) annually, according to Grubb & Ellis, a real estate brokerage firm.

Booming trade with Asia and a recovery in the job market are the secrets behind the rosy office market. Blue-chip companies like Starbucks, Amazon.com and Microsoft call the Seattle area home and have been steadily hiring thousands of new workers and funnelling millions into the local economy.

Boeing demoralised the city when it moved its headquarters to Chicago a few years ago, but it still has extensive production operations in the area.

The unemployment rate has slipped by 2 percentage points, to 4 per cent, in the last few years, and Seattle seems to be doing better than ever.

‘It’s not just Microsoft and Boeing,’ said Kelly Mann, executive director of the Urban Land Institute’s Seattle office.

‘It’s Starbucks, Costco and a wide array of small companies that were started by people from those corporations that are driving the growth.’

It is a big change from a few years ago. Seattle’s economy, hammered by the tech bust and a drop-off in jet orders after the Sept 11, 2001 attacks, was on life support. Computer programmers, who had fielded multiple job offers only a year before, were suddenly out of work. Tens of thousands of people were laid off. Vacancy rates for offices topped out at 18 per cent, rents sank to US$26.30 psf and new construction ground to a halt.

Then, three years ago, Seattle emerged from its economic deep freeze. Companies resumed hiring, developers started building and the port handled record cargo shipments. The recession, which hit Seattle harder and lasted longer there than elsewhere in the country, was finally over.

The current construction surge might eclipse the last one. There are now 31 projects, with more than 7.5 million sq ft of space, on the books in the city. In a previous construction boom that ended in 2001, more than 4 million sq ft of office space was built.

A zoning change that occurred last year may help. In April 2006, the City Council allowed office, apartment and condo buildings to go as high as 500 feet in parts of downtown, up from an earlier maximum of 360 feet. Mr Clise’s parcel sits squarely in that section.

Source: Business Time 9 Aug 07

US foreclosures up 90% to new high in May

Real estate hotspot Nevada leads with 1 out of 166 rate of foreclosure, followed by Colorado, California

(NEW YORK) US home foreclosures in May jumped 90 per cent from a year earlier, reflecting a poor spring

housing market and foreshadowing even higher levels later in 2007, real estate data firm RealtyTrac said on Tuesday.

The May foreclosures – a sum of default notices, auction sale notices and bank repossessions – totalled 176,137, up 19 per cent from April, the firm said in its May 2007 US Foreclosure Market Report.

The number of filings in May was the largest amount since RealtyTrac started tracking foreclosure activity in January 2005.

‘After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May,’ James Saccacio, chief executive officer of RealtyTrac, said in a statement.

‘Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year,’ said Mr Saccacio. ‘Certainly not every community nationwide is seeing an increase in foreclosures, but foreclosed properties are becoming more commonplace and adding to the downward pressure on home prices in many areas.’

RealtyTrac said there was a national foreclosure rate of one foreclosure filing for every 656 US households during May.

The default rates in the subprime segment of the US mortgage market, which caters to borrowers with poor credit histories, have jumped in recent months as the housing industry has slowed and prices have fallen.

More than two dozen lenders in the subprime mortgage sector have collapsed as rising defaults drove them out of business during a downturn in the housing market.

Market observers are keeping a watchful eye on the subprime crisis because it has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy.

Nevada, once one of the hottest real estate markets and a favourite among investors, led the nation in May with one foreclosure filing for every 166 households, which was the nation’s highest for the fifth month in a row and nearly four times the national average.

Nevada’s foreclosure activity, at 5,235 foreclosure filings during the month, rose 40 per cent from April and was nearly five times the number reported in May of 2006.

Colorado came in second with one foreclosure filing for every 290 households, which was 2.3 times the national average. Colorado’s foreclosure activity, at 6,231 foreclosure filings in May, rose 9 per cent from the previous month and was an increase of more than 50 per cent from May 2006.

The state’s foreclosure total was the eighth-highest among the states.

California, the largest state, reported foreclosure activity increasing by 30 per cent from the previous month and more than 350 per cent from May 2006, which boosted the state’s foreclosure rate to the third highest in the country.

California documented one foreclosure filing for every 308 households, which as more than twice the the national average.

Florida, Ohio, Arizona, Georgia, Michigan, Indiana and Connecticut were some of the other states with foreclosures rates ranking among the nation’s 10 highest in May.

The cities with the nation’s top three metropolitan foreclosure rates were all located in California, and three other California cities also documented foreclosure rates among the top 10.

A 49 per cent increase in foreclosure activity ensured that Stockton, California, would register the nation’s highest metropolitan foreclosure rate at one filing for every 88 households, which was nearly 7.5 times the national average.

Merced, California, documented the second highest metro foreclosure rate, one foreclosure filing for every 100 households, followed by Modesto, California, with one foreclosure filing for every 118 households. Other California metros in the top 10 were Riverside-San Bernardino at No 5, Vallejo-Fairfield at No 6, and Sacramento at No 7.

Las Vegas at No 4, Denver at No 7, Detroit and No 8, and Miami at No 10 were other top 10 cities. — Reuters

Source: Business Times 14 Jun 07

Goldman to build condo in San Francisco

(SAN FRANCISCO) Goldman Sachs Group Inc’s urban real estate investment unit and homebuilder Noteware Development bought 5.75 acres in San Francisco’s Bayview-Hunters Point section for US$19 million and will build 338 condominiums there.

The property, a former Coca-Cola plant at 5800 Third St near Monster Park at Candlestick Point, will have about 291 market rate condos priced above US$500,000. The US$146 million project will also have 47 affordable units priced above US$200,000 and stores occupying 11,000 square feet, the companies said on Tuesday.

The project, situated along the new Third Street light rail line that connects the Bayview to downtown, comes amid efforts to provide mid-priced housing in one of the most expensive US real estate markets.

The median price for a single-family home in April in San Francisco was US$850,000, up 4.9 per cent from a year ago, and the median condominium price was US$782,000, up 1.2 per cent, according to DataQuick Information Systems.

‘We believe in building moderately priced, quality housing that working families can afford, and bringing much needed retail to diverse and vibrant neighbourhoods like the Bayview,’ Alicia Glen, managing director of Goldman Sachs’s Urban Investment Group, said in a statement.

The national median home price in March was US$215,300, according to the Chicago-based National Association of Realtors.

The first apartments will open next fall, Noteware spokesman Claude Everhart said.

Houston-based Noteware, founded by former Maxxam Property Co real estate executive James Noteware, has completed a 66-unit condo project in Phoenix and is building a 356-unit project in Las Vegas and a 198-unit building in San Francisco, near Third Street, according to the company’s website.

The Goldman Sachs Urban Investment Group funds real estate projects in emerging or transitional urban areas. Since 2001, it has invested over US$200 million.

The Third Street site was previously owned by Lennar Corp, the largest US homebuilder by revenue, and Levin Menzies & Associates, the statement said.

Lennar received approval from the San Francisco Board of Supervisors last month to build a mixed-use complex nearby that includes a new stadium that could be home to the National Football League’s 49ers.

The team is negotiating with Santa Clara, 44 miles south, to build a stadium in that city.

Citigroup Inc, the world’s biggest financial firm, is providing construction financing for the Goldman-Noteware project. — Bloomberg

Source: Business Times 14 Jun 07

Developer’s Labour of Love over Coney Island

Hotel, water park, retail outlets, residences are possible projects

(NEW YORK) The view from the Coney Island boardwalk depends on the perspective: The long shadows of the Cyclone roller coaster evoke the past. The lounging sun worshippers dotting the beach belong to the present.

And the makeshift plywood fences, the empty lots and ancient arcades – well, Joe Sitt surveys them and sees the future: a US$2 billion facelift for the shabby seaside resort, a return to the halcyon days when this stretch along the Atlantic Ocean was indisputably the nation’s playground.

‘Yeah, OK, it’s a little bit grimy, et cetera,’ says Mr Sitt, his voice rising with an enthusiasm belying his surroundings. ‘But it’s got so much potential, calling out for someone to do something. I want to bring it back.’

Brooklyn-born Mr Sitt, 43, envisions an entertainment mecca reminiscent of Coney Island in the early 20th century, when Sigmund Freud toured the Dreamland amusement park and Charles Lindbergh raved that a ride on the Cyclone out-thrilled flying the Atlantic.

Mr Sitt conjures something even more breathtaking, more bombastic, more Brooklyn: A year-round resort unlike anything previously seen in his native borough.

He does this while roaming the neighbourhood’s well-worn boardwalk, where the breeze off the ocean mingles with the lingering scent of slow ruin. He views the revitalisation project as part investment, part enjoyment.

‘Everybody has a labour of love, something that they do in life,’ he explains in a voice still bearing a trace of Brooklynese. ‘Playing with cars, sports, whatever. Other guys like going to the beach and creating a castle, even knowing there’s a chance the water’s going to come and wash it away.

‘They do it for the passion. For me, that’s what Coney Island is.’ Mr Sitt, the son of a textile merchant, founded Thor Equities in 1986. The real estate acquisition and development company now boasts a portfolio of more than 15 million sq ft valued at more than US$2 billion, with properties in Philadelphia, Houston, Chicago and other cities.

‘Big picture, who we are, what we’re about, is guys trying to pioneer retail development in communities and neighbourhoods coming back (from hard times) around the United States,’ says Mr Sitt, whose first huge financial success came with the 1990 launch of Ashley Stewart, a chain of stores aimed at plus-size African-American women.

Thor Equities has spent more than US$100 million to acquire about 10 acres of Coney Island real estate over the last several years.

Construction equipment is already on site, where a variety of projects – including a high-end hotel (perhaps shaped like a roller coaster), a water park, retail outlets and residential property – are under consideration.

Mr Sitt’s company still needs a city zoning change for its residential and hotel components; if all goes according to plan, the project would open in 2011.

On a weekday morning, Mr Sitt – in a dark blue pinstriped suit, lighter blue shirt and striped tie – appears incongruous with the local environment, strolling up Stillwell Avenue towards the beach. But it soon becomes clear that he’s equally at home on the boardwalk as in the boardroom.

A worker from the Grill House restaurant rushes to shake Mr Sitt’s hand, followed shortly by the man whose business best epitomises the ‘old’ Coney Island. Anthony Berlingieri runs the popular (if politically incorrect) ‘Shoot The Freak’ game, where patrons fire paintballs at a live target.

‘Joe has a dream,’ says Mr Berlingieri, 44, a fellow Brooklynite. ‘And Joe has stepped up. He’s from the neighbourhood.’

Back on the boardwalk, Mr Sitt discusses Coney Island’s worldwide cachet. His office has recently fielded calls from Italy, England, Singapore and Israel about the project.

Each stroll through Coney Island fills his head with new ideas – today, he’s riffing on the need to replace the rows of decrepit metal garbage cans lining the boardwalk.

‘Every single time I come out here, I get another vision,’ he says. – AP

Source: Business Times 12 Jun 07