Tuesday, October 30, 2007

Foreclosures, housing slump hurting California economy

California faces a potentially grim economic outlook as the effects of growing foreclosures amid a faltering housing market ripple statewide, experts warned Monday.

"We are on the verge of recession," economist Ross DeVol of the Milken Institute said at the institute's annual State of the State Conference in Beverly Hills.

And DeVol, part of a panel examining the impact of problems in the subprime-mortgage industry, said a drop in home sales affects everything from employment and consumer confidence to retail sales and tax revenue.

The problems also come as oil prices reach record levels and lenders move to tighten consumer-credit regulations, he said.

And he warned that if reduced consumer spending leads to a recession in California, the programs could spread nationwide.

DeVol said it likely will require government action to ease strains in the financial market and prevent a recession.

Angelo Mozilo, chairman of Calabasas-based Countrywide Financial Corp., echoed that view. Countrywide, the nation's largest lender, announced plans last week to restructure $16 billion in consumer loans.

Mozilo, whose company has become a symbol for the problems in the housing market, said his firm has received no help from the government and is bearing the brunt of criticism for the current problems.

The bonfire of subprimes

n hindsight, it's not hard to see why so many home buyers got burned in the subprime mortgage meltdown. They might not have fully grasped the risks they were taking. Or perhaps they refused to believe housing prices could actually fall, or were desperate to keep up with others and achieve the goal of homeownership.

But if that explains the unsophisticated home buyer, what explains Stanley O'Neal?

He was CEO of Merrill Lynch as it lost a staggering $8 billion on mortgage-backed investment products. He's a smart man, surrounded by smart people. Surely he should have known better than to allow so much of Merrill's money to be bet on dicey instruments built on what former Fed chairman Alan Greenspan called a housing market "froth."


Monday, October 29, 2007

UBS warns that further write-downs are possible

UBS said Monday that the slumping U.S. housing market may lead to further write-downs on debt securities following the company's first quarterly loss in almost five years.

UBS, the largest bank by assets in Europe, is at risk from "further deterioration in the U.S. housing and mortgage markets as well as rating downgrades" on mortgage-related securities, the bank, based in Zurich, said in a statement. UBS reiterated that its third-quarter loss was between 600 million francs, or $516 million, and 800 million francs.

Banks around the world have taken big write-downs on exposures to investments linked to risky U.S. subprime mortgages, loans often made to people with patchy credit histories.

The UBS statement was highly unusual, coming only one day before the formal announcement of its third-quarter results.

Reacting to a weekend newspaper report saying that more hefty write-downs could lead to a much-bigger-than-expected quarterly loss, UBS also said that it had begun the fourth quarter well in all business areas, including its investment bank.


American Nightmare

Eleanor Hall is a single mother with two children and has a steady job as a market researcher. Five years ago she bought a house which she has lovingly restored.

What she didn't realise was that her mortgage was a subprime - a home loan designed for people with a low income or bad credit. They cost more than ordinary mortgages to cover the risk of the banks making the loan.

Now, she is unable to pay and left facing homelessness. "I'm truly at rock bottom," she says, "and I have nowhere else to go".

Eleanor is not alone - over two million families are expected to lose their homes in the US within the next couple of years.


What a Difference a year makes

end-of-October update

So its coming to the end of October, and I think its fair to say that the past 2 months have been a complete washout.

Dont get me wrong, some properties are selling so long as the price is realistic (c20% below last years boom price). Nonetheless, even at those levels its certainly not guaranteed.
Buyers are simply not there and Banks have stopped throwing the cash about. Fall-throughs are endemic especially if the property is involved in a chain (which most second hand houses are). Having to go sale agreed 3 or 4 times on the same property is normal.

Given the drop in prices and the increases in rent, yields have risen close to c4% - yet still no investors have surfaced. All appear to be sitting tight.

Word from new-home sales are even worse. Given that FTBs have gone AWOL, and the fact that new builds are primarily targeted at this group, this sector is going through a catastophic slump. Developers I have spoken to, and who have been in the business for decades, have described current market conditions as similar to the UK in the 80s. The only building going on relates to the completion of current projects i.e. it would be too costly to stop. Where possible, all new projects have been put on ice ... then in the deep freeze ... then sent packing to the north pole. Literally all residential starts have ceased.

Ominously, non-food retail building has slowed dramaticially too.
Only sector holding up is commercial.

General consensus among my professional developer and investor clients is that the market wont turn for at least another year and a half. Truth is, of course, nobody knows.
From an estate agents prospective a short sharp shock is required as the quicker it happens, the sooner its over. Currently, thats the best we can hope for.

Sunday, October 28, 2007

Runaway lawyer was used by criminals to launder drug money

THE solicitor who disappeared owing more than €36m to banks was under investigation by gardai for allegedly arranging finance for Dublin criminals.

Thomas Byrne, whose Walkinstown practice was shut by the Law Society last Monday, was suspected of applying for multiple loans on behalf of several suspected gangland figures in south and west Dublin.

A Garda report on Mr Byrne's activities was prepared by detectives more than six months ago. The Criminal Assets Bureau (CAB) separately began making inquiries about him in recent months. His name cropped up during their investigations into several criminals, who were targeted by the bureau as part of the clampdown on gangland crime.

Garda sources said that Mr Byrne, 41, was suspected of arranging finance for some suspect clients, drawing down several loans from different financial institutions secured on the same property.

Mr Byrne has been missing since his practice was shut down, with debts of €36m established so far. "Gardai were making inquiries about him," a garda source confirmed this weekend.

There were growing fears for his safety this weekend. The activities of his more dubious clients may now be exposed as a result of the collapse of his business.

Cowboy solicitors

AIB has notified three solicitors involved in property development that they must pay up their debts or they will be pursued through the courts.

The biggest bank in the country is preparing to take High Court action against the three practices in order to recover several million euro in borrowings.

The move last week on the law firms marks a further escalation in the property controversy surrounding members of the legal profession and follows the closing down of two legal practices in the last two weeks. In both cases, concerns have centred on mortgages obtained by the solicitors.
The other law firms now subject to action by AIB were uncovered in the past ten days, as the bank carried out a major trawl of its mortgage exposure.

AIB intends to take legal actions over the coming three weeks if it is not repaid in full or provided with immediate guarantees.

All three practices are outside Dublin. In one case, the legal firm has amassed a €13 million debt through a failed property investment.

In the other two cases, AIB is concerned that some properties provided as security for the loans by the solicitors were already mortgaged with other lenders.

Meanwhile, several banks are involved in trying to recover debts accumulated by Thomas Byrne, a solicitor based in Walkinstown in Dublin. Byrne’s whereabouts is not known.

Gardai investigating Byrne’s business dealings are also examining the backgrounds of a small number of his clients who are known to the Gardai.

Several banks are concerned that a number of the houses Byrne purchased in his name could have been on behalf of some clients, who wanted to avoid being linked with the properties.

It now appears that Byrne may have borrowed more than €40 million from institutions including IIB Bank, Irish Nationwide and EBS, on the back of his property deals.

Several banks have now told their staff to insist that solicitors do not represent themselves in property transactions.

Further changes to the current guidelines are expected to emerge in the coming weeks, as the institutions analyse their lending procedures.

The fallout from the collapse of the legal practice of Michael Lynn will also continue in court this week. First Active and Allied Irish Bank will tomorrow petition the High Court to have their cases against Lynn admitted to the Commercial Court in an effort to speed up the process.

The Commercial court is a division within the High Court that fast tracks large business disputes.

Permanent TSB also intends to make an application in relation to Lynn tomorrow.