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The Crash

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Confessions of a subprime lender

Bubbles

Europe's Banks Facing Further EU120 Billion in Losses

July 21 (Bloomberg) -- Banks in Europe are set to post further losses of 120 billion euros ($191 billion) on retail lending as they reel from credit and mortgage writedowns, according to New York-based management consultants Oliver Wyman.

Losses from now to 2010 will ``rapidly increase'' especially in Britain, Spain and Ireland, according to the report, issued jointly today with Intrum Justitia, the Swedish debt collector.

``The combination of aggressive lending by the banks and the risk of the macroeconomic environment significantly changing for the worse, means that these countries stand out as the worst-hit,'' the report said.

Banks are curbing lending following the collapse of the U.S. subprime mortgage market, which so far has cost financial institutions worldwide $448 billion in losses and writedowns.

Next year, credit and mortgage lending losses in Britain will rise 44 percent to more than 21 billion euros over 2007, the report said. U.K. mortgage loss rates are set to increase as much as tenfold, it added.

British house prices will fall about 10 percent this year and 6 percent next year, the Ernst & Young Item Club, a forecasting group which uses the same model as the Treasury, said today. Britons are saddled with a record 1.4 trillion pounds of debt.

HBOS Plc, the U.K.'s biggest mortgage lender, has undertaken a 4 billion-pound rights offering after writing down a similar amount on credit-related investments. The bank said earlier today that 92 percent of shareholders shunned the offering, leaving underwriters seeking buyers for 3.8 billion pounds ($7.6 billion) of shares.

Losses in Spain will be 2.1 billion euros higher than 2007 levels and 400 million euros higher in Ireland, the report said.

Bloomberg

Falling off a cliff

SOLICITORS who specialised in conveyancing and property deals are now seeking to retrain and upskill as the housing market collapses and leaves them with drastically reduced levels of work.

The Irish Independent has learned that the Law Society has seen significant increases in the number of lawyers applying for courses that would enable them to branch out into areas where they previously had little experience.

In particular, the Law Society has received increased applications for courses in insolvency, litigation and other dispute-related areas which traditionally experience an upturn in times of recession.

Although unable to provide exact figures, the society's director general Ken Murphy says there are solicitors who were kept busy at the height of the building boom but now have "little or nothing to do" since construction-related work has "fallen off a cliff".

The Indo

The Debt Trap

Roubini:By far the worst financial crisis since the Great depression

ARM resets to hit peak this summer

By Renae Merle | The Washington Post
July 13, 2008

The number of homeowners facing an increase in their subprime adjustable-rate mortgage payments will peak this summer, testing the efforts of lenders and others to keep those people out of foreclosure and stabilize the housing market.

The timing reflects the height of subprime lending in the summers of 2005 and 2006, when many borrowers secured loans scheduled to adjust in two or three years. For many, an adjustment means their interest rate will go up 2 to 3 percentage points.

"The next six months, the industry, all of the folks that are out there trying to solve this problem, they are going to be very busy," said Mark Fleming, chief economist for First American CoreLogic, a California research firm. "There are a lot of people facing their resets right now. A good share of them don't have the refinance option."

Nationally, the number of subprime adjustable-rate loans resetting peaked at 7.61 percent of the loans outstanding last month, according to data from CoreLogic. More than 300,000 such loans will adjust this summer. CoreLogic's data covers about 80 percent of the mortgage market.

Lenders, federal officials and housing counselors have worried that borrowers will not be able to afford the higher payments after the reset and will quickly fall into foreclosure. Declining home prices have made it impossible for many of these homeowners to refinance.

It will not be clear for months how many will lose their homes, Fleming said. "A lot of those are resetting now," he said. "We may not see the impact in foreclosures until the middle of 2009."

Chicago Tribune

A Hard Landing

Dr Alan Ahearne, economics lecturer at the National University of Ireland, Galway, puts little stress on who sits behind the finance minister's desk. “I think we have had good policy makers, and the decisions don't depend on one man,” he said. “There are going to be many people involved in the decision making. But you can't make good policy without good analysis, and that is vital over the next few [fiscal] quarters.”

Three years ago, Ahearne warned that an Irish property crash was impending, while others were promising continuing buoyancy and growth. The economist later poured scorn on the forecasts of a soft landing. Bertie Ahern, the former taoiseach, promised one in the course of the last general election, but he was not alone.

In an interview last December with Reuters, the financial news service, John Hurley, the governor of the Central Bank, was still talking about a soft landing for the economy and 3% growth in 2008, down from its October forecast of 3.5%. That same intelligence probably fed into the Department of Finance's budget day calculation that month of 3% growth in GDP.

“We were never going to have a soft landing,” said Ahearne. “This is a crash in the housing market. Look at what is happening to price, to transactions [volume], to building activity.”

Ireland can now be added to the list of classic modern property crashes, from London and Boston through Scandinavia and Japan. The length of time we take to ride it out, though, will depend on the banks' readiness to bankrupt liquidity-challenged developers. Will they choose to flush the bad debts off their books as soon as possible?

Analysts say serious inroads must be made into the overhang of unsold housing stock - estimated to be at least 12 months' supply. There has to be a decline in the value of the euro, and a fall in inflation, before we can start supping skinny lattes with a clear conscience again.

In the meantime, the government is digging in, making retrenchment plans for at least two years of little or no growth, rising welfare bills, and stagnant stamp duty and CGT revenues. Poor forecasting means that the remedial measures required are not in place. This is likely to increase the pain before we get back to what government and the Central Bank like to call “trend growth” of 4-4.5%.

A year ago, forward indicators such as planning permissions suggested the drag on the economy from homebuilding was going to be significant in 2008, yet many forecasters were still calling strong growth in the economy, which Ahearne said defied economic logic and common sense.

Many private sector, rent-a-quote forecasters, he said, appeared to “make up numbers on the way in on the bus” or simply followed the herd. Meanwhile, there was a triumph of hope over realism in some state institutions, where a fear of talking down the economy made them adjust their forecasts down incrementally from quarter to quarter rather than produce a forecast “that was consistent with rigorous analysis”.

Challenged on its December forecast last week, the Central Bank said: “We have emphasised on a number of occasions that there were many downside risks and vulnerabilities in our forecasts that could push growth lower.

“These risks related to the potential for interaction between protracted global financial market turbulence, rising global energy and food prices and the slowing of activity within the economy, which was already under way. In recent months, almost all of these downside risks have materialised and this has led to a greater than expected slowdown in growth and higher than anticipated inflation.”

Dan McLaughlin, Bank of Ireland's chief economist, pointed out that everything that could go wrong for the Irish economy had gone wrong: the credit crunch has lasted a year, oil rose from $100 to $145 per barrel in the three months to July, Irish equities have fallen 30% this year, the European Central Bank (ECB) has raised rates despite slowing activity on the Continent, and sterling and the dollar have remained weak.

As its share price crashed alarmingly last week, Bank of Ireland was again cutting its economic growth forecast for 2008 - forecasting a flat year for GDP, down from the 3% growth previously forecast - and predicting unemployment would reach 6%.

Austin Hughes, the chief economist of IIB Bank, floated ideas such as temporary income tax cuts, Vat reductions or even stamp duty cuts as a balm on bruised consumer confidence. Ahearne is horrified at these notions, and warns government to stay clear of economic advice offered through the media for the coming two years.

“We should not have had tax cuts in the past few budgets - they added fuel to the fire,” said Ahearne. “They increased disposable income and therefore we had more consumer spending which was inflationary.

“It also allowed banks to give bigger loans, since they were doing that on the basis of disposable income. When the economy is overheating, the last thing you should be doing is tax cutting, but most economists were arguing for tax cuts.”

Alan Cooke, chief executive of the Irish Auctioneers and Valuers Institute, is among those who suggest that Irish banks are not helping the situation. “Look at what has happened to property prices and compare it to what has happened with equities as one of the main forms of investment,” he said. “The banks are down 70% on the year, the others are down 40-50%, we are down by 10% - I'd take that any day of the week.

“The only thing stopping much more activity in the market at this point is the banks, because they don't have the money to lend.” They were no longer lending to the buy-to-let market, he said, and they had increased margins on interest rates by 0.25-0.35%, adding to the pressure on domestic buyers already at the mercy of the ECB.

The Sunday Times

Freddie and Fannie

iPhone 3G

British house prices in fastest decline since 1990s as Bank holds rates

Britain is experiencing the fastest decline in house prices since the crash in the 1990s but the Bank of England is holding interest rates.

Britain is experiencing the fastest decline in house prices since the crash in the 1990s according to the country's biggest mortgage lender.

Figures from the Halifax show houses have lost 6.1 per cent of their value during the past year and potential buyers are staying away from the market.

Current building projects are also being suspended.

The Bank of England has left interest rates unchanged at five per cent but that does little to help homeowners and borrowers.



Channel 4 news

Roubini: Credit losses from the crisis up to $1.6 Trillion

Recession fear weighs on Ireland’s banks

“It’s time for hard hats, I’m afraid. It’s time to run this bank in a very conservative way,” Richard Burrows, governor of Bank of Ireland’s board, told shareholders at the company’s annual meeting on Tuesday.

Brian Lenihan, Irish finance minister, admitted last month that Ireland’s once booming housing market had come to a “shuddering halt”. Bank lending growth has slowed sharply. In addition, the higher cost of funding resulting from the international credit crunch has hit net interest margins, making lending less profitable.

“But the bad news hasn’t really started yet,” Eamonn Hughes, bank analyst with Goodbody Stockbrokers, said. He believes many investors expect banks to incur large bad debt charges as developers and home owners are unable to service their borrowings in the face of the property slowdown.

CB Richard Ellis last week estimated that prime shop values in Grafton Street, Dublin’s premier retail location, had fallen 50 per cent this year.

Anglo Irish Bank, the specialist business lender, is considered the most exposed to a property slump, according to Citigroup, which last week downgraded the stock to a sell. It said that 80 per cent of the loan book was secured on Irish and UK property.

Problems at Irish Life & Permanent are a direct result of the growth of its loan book. With a much smaller deposit base than Bank of Ireland or AIB, it has come to rely on wholesale funding.

Financial Times

Country Tom

UK house prices

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