Reply #26: Credit Bubble Bulletin was pretty interesting last week.....

[54anickel]

http://www.prudentbear.com/index.php?option=com_content&view=article&id=4771&Itemid=55

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GSE Watch:
Fannie expanded its "Book of Business" (held mortgages and outstanding MBS) by almost $30bn during August (17.1% annualized) to $2.279 TN. Year-to-date, Fannie's Book of Business has expanded at a 12.9% pace. Freddie's Book of Business increased about $19bn during the month, an 11.6% growth rate, to $1.983 TN. Year-to-date, Freddie's Book of Business has expanded at a 12.9% pace.

Mortgage Finance Bust Watch:
September 26 – Bloomberg (Brian Louis): “Lennar Corp., the largest U.S. homebuilder, reported the biggest quarterly loss in its 53-year history after $848 million of costs to write down the value of real estate. The third-quarter net loss was $513.9 million… exceeding the most pessimistic estimates from analysts and suggesting the worst housing market in 16 years shows no signs of stabilizing. Revenue at Miami-based Lennar fell 44% to $2.34 billion, the lowest in more than three years.”

Foreclosure Watch:
September 28 – Bloomberg (Hugh Son and Josh P. Hamilton): “Defaults on privately insured U.S. mortgages climbed 30% last month from year-earlier levels, an industry trade group reported, adding to evidence that home foreclosures may continue to rise. Insured borrowers more than 60 days behind on their payments rose to 58,441 in August…Mortgage Insurance Companies of America said…”

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
September 26 - Financial Times (Richard McGregor): “Losses in the US subprime mortgage market are set to escalate as falling house prices prevent borrowers with adjustable-rate mortgages from refinancing on better terms, data released yesterday suggest. Housing prices in the main 20 US cities fell 3.9% in July from the previous year, the worst performance this decade, according to…Case Shiller. Analysts expect house prices to decline further and predict such falls could devastate homebuyers who took out subprime mortgages in late 2005 and 2006. Many of these borrowers took out adjustable-rate mortgages in the belief that rising housing prices would increase their home equity and enable them to refinance loans before rates rose.”

September 26 – Bloomberg (Jody Shenn): “Late payments and defaults among subprime mortgages packaged into bonds rose last month, according to data for loans underlying benchmark ABX derivative indexes. After August payments, 19.1% of loan balances in 20 deals from the second half of 2005 were at least 60 days late, in foreclosure, subject to borrower bankruptcy or backed by seized property, up from 17.5% a month earlier, according to…Wachovia… Prepayment speeds for the loans slowed, suggesting it’s more difficult for borrowers to sell their homes or refinance, according to…UBS AG. Record levels of delinquencies and defaults on subprime mortgages are worsening as home prices decline and interest rates on loans adjust higher for the first time. As lenders tighten standards, borrowers are finding it harder to refinance into new mortgages with lower payments. The ‘reports showed the first inkling of the impact of shutdown of subprime market,’ the UBS analysts…wrote… ‘In our opinion, the full impact is yet to come.’”

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Clash of the Paradigms:

David Tice, banking analyst Charlie Peabody (Portales Partners), and I led a panel discussion, “End Game for Credit Bubble: Implications for Financial Markets & Wall Street Finance,” last Thursday at an Argyle Executive Forum (“Alternative Thinking About Investments” in NYC). It was moderated by the wonderfully talented Kate Welling (welling.weedenco.com). The following is certainly not an official transcript of David and my comments but, rather, Q&A expanded in hope of providing more complete responses:

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To summarize, we believe the current fragile boom – one characterized by unprecedented imbalances and maladjustments – can only be sustained by ongoing massive Credit creation. In an increasingly risk-averse world, this poses a colossal risk intermediation challenge. Thus far, the confluence of a highly inflationary global backdrop, extraordinary central bank interventions, and a major expansion of U.S. banking system Credit has sufficed. We, however, view Fed and the U.S. banking system capabilities as constrained and aggressive actions feasible only over the short-term. Importantly, an impaired Wall Street risk intermediation mechanism – the main source of finance behind the past few years of “blow-off” excess - will be hard-pressed to meet challenges and new realities.

Likely, liquidity issues and faltering asset markets will instigate problematic de-leveraging upon highly over-leveraged Credit and economic systems. We expect significant unfolding tumult in the securitization, derivatives, and risk “insurance” marketplaces. We view ballooning Credit insurance and derivatives markets as a bull market phenomenon that won’t withstand the test of the downside of the Credit Cycle. We believe the stock market has of late benefited from a combination of complacency, misperceptions with respect to Fed capabilities, and its newfound status, by default, as favored risk asset class. We see US equities, in particular, highly susceptible to unfolding detrimental financial and economic forces. We expect the economy to soon succumb to recession. California and other inflated real estate Bubble markets are now poised to suffer severe price declines – residential as well as commercial. And we expect contemporary “Wall Street Finance” to face a crisis of confidence – to suffer on all fronts – liquidity, Credit losses and regulatory. Our faltering currency is, as well, a major issue.