Stopping the Subprime Crisis http://www.nytimes.com/2007/07/25/opinion/25rosner.html By JOSHUA ROSNER THE NEW YORK TIMES Published: July 25, 2007 FOR five months, it has been clear that rising delinquencies and foreclosures, coupled with higher interest rates on adjustable mortgages and declining home price appreciation, would undermine the market for mortgage securities. Yet it took Moodyâs Investors Service, Fitch Ratings and Standard & Poorâs, the three leading agencies that rate long-term debt, until this month to react to this looming financial crisis, which involves more than $1.2 trillion of subprime mortgages originated in 2005 and 2006 alone. As one investor asked during a recent S.&P. conference call, âWhat is it that you know today that the markets didnât know three months ago?â The two largest credit rating agencies, Moodyâs and S.&P., announced two weeks ago that they are reviewing and lowering ratings on many of the $17.2 billion in residential mortgage-backed securities. They are doing the same for the pools of these loans known as collateralized debt obligations. The effort is, to use a well-worn but apt phrase, too little, too late. But it is not too late for regulators and legislators to take steps to restore investor confidence and to ensure the future of these markets. The subprime crisis has not been averted. In fact, it is still largely ahead of us. The downgrades represent only a small fraction â about 2 percent of the mortgage-backed securities rated for the year between the fourth quarters of 2005 and 2006 â of what the rating agencies suggest could be a mountain of bad debt held by investors, including pension plans, banks and insurance companies. The agencies are primarily downgrading assets with expected losses that are already working their way through the pipeline. They are not projecting future losses. Nor do the downgrades apply only to lower-rated securities. Some even relate to the performance of debts that are rated AAA, meaning the agencies judged them to be of the best quality â bulletproof. The credit ratings agencies play a more important role in debt markets than stock analysts do with regard to equities. No one was told they could buy a certain stock only if, for example, an unscrupulous stock analyst said it was a âbuy.â But regulators require banks, insurance companies and pension managers to purchase only high-quality debts â and the quality is judged by ratings agencies. And the ratings agencies are far from passive arbitrators in the markets. In structured finance, the rating agency can be an active part of the construction of a deal. In fact, the original models used to rate collateralized debt obligations were created in close cooperation with the investment banks that designed the securities. Fitch, Moodyâs and S.&P. actively advise issuers of these securities on how to achieve their desired ratings. They appear to be helping investment banks, hedge funds and fund companies, all of which have a fiduciary obligation to investors, to develop the worst possible product that would still achieve a certain rating. Only slightly more than a handful of American non-financial corporations get the highest AAA rating, but almost 90 percent of collateralized debt obligations that receive a rating are bestowed such a title. The willingness of Fitch, Moodyâs and S.&P. to rate as investment grade many assets that are apparently not has made structured securities ratings their fastest-growing line of business. Are we to believe that these securities are as safe as those of our most honored corporations? Fitch and Moodyâs claim they are not obligated to verify information or âto conduct any investigation or review, or take any other action, to obtain any information that the issuer has not otherwise provided,â as Fitch puts it in its code of conduct. This disclaimer flies in the face of reason and seems to violate the obligations of Fitch, Moodyâs and S.&P. as âinvestment advisersâ under the 1940 Investment Advisers Act. It also seems to violate the mandate by securities regulators that rating agencies adopt and enforce written procedures to ensure that their opinions are based on a thorough analysis of all known and relevant information. S.&P. has stated that it now has reason to âcall into question the accuracy of some of the initial data provided to us.â This suggests that S.&P. may have chosen either to merely accept the data offered it by issuers without doing its own due diligence. Or worse, S.&P. could have ignored other information because it might have hurt revenues by reducing the number of assets it could have rated. The Securities and Exchange Commission, working with Congress if necessary, should require the credit rating agencies to regularly review and re-rate debt securities. Rating agencies are typically paid by issuers and only for initial ratings, which leads to much of the shoddy analysis and questionable timing in the re-rating of securities. Training and qualification standards for ratings analysts should also be required to help create consistent, objective, transparent and replicable methods. Moreover, rating agencies should put in place automated and objective systems, based on the changing value of underlying assets, to continuously re-rate debt structures. Lastly, many accountants and government officials endure a âcooling offâ period before they can work for a client. A similar delay for ratings analysts would greatly enhance the integrity and independence of the rating process. Right now, nothing stops a ratings analyst from taking a lucrative job at a bank whose deal he has just rated. Each of these actions would serve the interest of investors large and small, public and private. Unless the government acts, the credit ratings agencies will stand on the sidelines of the coming crisis, doing nothing until itâs already happened. Joshua Rosner is a managing director of a research firm for institutional investors.
http://money.cnn.com/2007/07/25/real_estate/prime_catching_subprime_ills/index.htm?cnn=yes Prime borrowers catching subprime ills Countrywide Financial's quarterly report revealed a spike in delinquencies. Why even high-quality borrowers are falling behind. By Les Christie, CNNMoney.com staff writer July 25 2007: 3:45 PM EDT NEW YORK (CNNMoney.com) -- The subprime mortgage meltdown has begun to spread to prime loans as even credit-worthy borrowers have started to fall behind on payments. On Tuesday, Countrywide Financial (Charts, Fortune 500), the nation's largest mortgage lender, attributed a big drop in profits to a spike in delinquencies among prime borrowers of "second-lien loans," including home equity loans and home equity lines of credit...
Devil's advocate http://www.minyanville.com/articles/arm-mortgage-black+swan-subprime/index/a/13417 "the amount wagered against sub-prime borrowers possibly dwarfing the amount borrowed that may actually be at risk."
Lax home sales push Pulte loss to $593M Nation's third largest home builder has a backlog of 14,528 units, valued at $5.2 billion. Nathan Hurst / The Detroit News Bloomfield Hills-based Pulte Homes Inc., the nation's third largest home builder, reported a second-quarter loss of $507.6 million, or $2.10 per share, down from year-earlier earnings of $243 million, or 94 cents a share. Revenue was down from $3.36 billion to $2.02 billion. The loss marks the second consecutive quarter of losses for the company, following Pulte's first-quarter loss of $85.6 million. This year, Pulte has lost $593.2 million, the company said. Richard J. Dugas Jr., Pulte's president and CEO, said in a statement that the second-quarter loss stemmed from national housing market issues, including "record existing and new home inventory levels, intense price competition and weak consumer sentiment for housing." Pulte's losses included a $40 million charge that resulted from layoffs initiated in May, which slashed the company's nationwide work force by more than 1,900 workers, including a significant number in Michigan. The company is one of many U.S. home builders suffering from two years of slumping demand because of a glut of unsold properties, foreclosed homes, tighter lending standards and rising mortgage rates. Concerned that a recovery is not at hand, home builders are lowering prices, writing off land values and abandoning deposits for some parcels they no longer need. The National Association of Realtors said Wednesday that single-family home sales fell 3.5 percent in June as the number of available homes rose to its highest level in 15 years. Pulte said it has a contract backlog of 14,528 homes, valued at $5.2 billion. Dugas said the company expects third quarter income between $0.10 and $0.20 per share, but declined to make any longer-term predictions. Analysts polled by Thomson Financial, had expected Pulte to show, on average, a loss of $2.04 per share on revenue of $2.04 billion for the quarter. Pulte had said last week it expected to lose between $2 and $2.10 per share.
Who do you feel sorry for.... the fool who buys a 300 grand house on a crappy salary or the fool bank who loaned him the money. as the saying goes ' a fool and his money.....'
The "fool" bank more than likely bundles and sells off in the secondary with that intent before origination. Goes to the garbage dump Fannie Mae, a QUASI-govt sponsored yet for profit agency. As for the fool who buys, he gets functional utility (and maybe a little ego gratification) until booted out. Loses a modest downpayment on par with rent. Factor in an appraiser and his pencil whipping fee and PMI premiums, why it's win-win for all involved.
As usual, the New York Times gets it right. Perhaps the only truly great newspaper left in the US, because they do their own leg work, or as in this case, publish opinion pieces by outside experts rather than the watered down crap internally produced by other newspaper chains. The only thing i would take issue with in this entire article is the statement that we have known about this problem for 5 months, when actually we knew two years ago that this fiasco was going to hit somewhere down the road. Read Fleckenstein's internet columns for example. He's been harping about the Greenspan Housing-ATM, credit crunch, mortgage derivative disaster-in-the-making for at least two years.
"Fitch, Moodyâs and S.&P. actively advise issuers of these securities on how to achieve their desired ratings. They appear to be helping investment banks, hedge funds and fund companies, all of which have a fiduciary obligation to investors, to develop the worst possible product that would still achieve a certain rating."...... oh boy..... :eek: