Merrill Lynch’s John Thain: Credit crisis getting better

Filed under: Management, Merrill Lynch (MER), Housing

Merrill Lynch and Co., Inc. (NYSE: MER) CEO John Thain said today that the risk in the housing market is “much lower” than it has been recently as the credit crisis in the U.S. is “getting better.” Leave it to the leader of a company which has written off over $30 billion in mortgage lending investment to make this claim. But the thing is, could he be right?

Although Thain said “economic pressure” will remain high over the next year, he expressed confidence that the end of the housing bubble, which is still popping in many parts of the country, is now in sight. Thain also indicated that food prices and shortages as well as higher unemployment will continue to have an impact on the U.S. economy. Of course Merrill has had three quarters of disastrous results like other large investment banks, and the company is still toiling with the idiocy of incredibly risky investments that have left it weakened financially.

Even if Thain had been hired by Citigroup, Inc. (NYSE: C) last year, he’d be in the same mess in the same industry. I’m not sure what “much lower” risk in the housing market means, although he’s probably talking about his company’s reduced exposure to those SIVs and other vehicles from the Flintstone era that start off fast before the wheels fall off.

I hope Thain is correct in his assessments, and Merrill Shareholders are probably wanting the same thing, just much more badly than myself.

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Filed under: Forecasts, Bad news, Housing, Recession

Median home prices fell in two-thirds of American cities in Q1 2008, the National Association of Realtors announced Tuesday.

The median price fell 7.7% to $196,300 in Q1 2008 down from $212,600 for the same period a year ago, the NAR said. It was the largest year-over-year decline since the NAR started keeping comprehensive records of median home prices in 1979.

Median prices declined 12.3% in the West, 7.9% in the Midwest, 7.5% in the South, and 3.32% in the Northeast.

Median prices fell in 100 of 149 U.S. metropolitan areas, rose in 48, and 1 market was unchanged. The largest declines occurred in California: Sacramento, down 29%; Riverside and San Bernardino, each down 28%, and San Diego, 23%. On the positive side was Binghamton, N.Y., which registered the largest increase, up 11.8%, followed by Peoria, Illinois, up 10.4%.

‘Housing market looks stalled’

Economist Peter Dawson did not mince words regarding the U.S. housing sector’s condition, circa spring 2008. “The median price declines are large and show a housing market with an enormous inventory build, a housing market that looks stalled,” Dawson said. “With inventories this high, prices are likely to continue to decline for at least another 3-4 quarters, unless we see a sudden recovery by the U.S. economy, which isn’t likely. It remains a buyers market in most American cities, to say the least.”

Further, the above price decline occurred despite a drop in fixed mortgage rates. The NAR said the national average rate for a 30-year, conventional, fixed-rate mortgage fell to 5.88% in Q1 2008 from 6.23% in Q4 2007; the rate was 6.22% in Q1 2007, the NAR said. However, Dawson was quick to point out that although mortgage rates are lower, year-over-year, lenders’ mortgage requirements are “much more rigorous, for most potential borrowers” compared to a year ago, which “has almost certainly reduced the total number of mortgages approved” — a factor in the current low home sales rate and large inventories.

The NAR said there were about 4.1 million U.S. homes for sale at the end of Q1 2008, about a 9.5- to 10-month supply at current sales rates. A typical/normal market has about a 3-4 month supply of homes for sale.

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Filed under: International markets, Bad news, Housing

U.K. home repossession claims by mortgage lenders increased 16% from a year ago to their highest level since the early 1990s, Bloomberg News reported Friday.

The U.K.’s Ministry of Justice said possession claims, the first step in the foreclosure process, increased to 38,688 in Q1 2008, from 27,530 in Q1 2007, Bloomberg News reported.

Anglo-American housing slump

London-based economist Mark Chandler told BloggingStocks Friday the large foreclosure rise indicates that the air is easing out of the housing balloon, and that the housing correction that began in the United Says, is “clearly washing shore in the U.K.”

“For about the last six months there had been considerable debate on the depth to which the U.K. would be experience a housing slump similar to America’s housing recession, but I think now the evidence is mounting that the housing slump is well under way here,” Chandler stated. “Prices have dropped about 8-15% just about everywhere in the past year, except in sections of London, and there were those who argued the slump would not be that deep. But the new foreclosure data says that’s definitely not the case.”

However, Chandler said the impact of the housing correction on Britain’s economy is still a matter of considerable debate. Some data he reviewed from the Bank of England advocates that Britain will be in worse shape than the U.S., because Britain’s housing boom features a higher median sales price per median income than the U.S., he said. Other data recommends it may not contract the economy as much as it has it the U.S. because Britain has a lower percentage of mortgage resets, which recommends a lower U.K. mortgage default rate in the year ahead, all other factors being equal, he said.

BOE rate cut fait accompli?

In either event, Chandler stated Friday’s foreclosure data “will rachet-up pressure on the Bank of England to lower interest rates.” On Thursday the Bank of England left its key, short-term interest rate unchanged at 5%.

“The bank has been nearly as much of a hawk on inflation as the ECB,” Chandler stated. “Everyone is concerned about rising inflation driven by oil, but oil isn’t as much of a threat in the U.K. as it is in America because of our transportation system,” Chandler stated. “I fully expect at least a quarter-point cut at their next meeting to stimulate growth.”

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U.S. housing slump may require tax credit to encourage buyers

Filed under: Forecasts, Housing, Recession

In the private sector, as in public policy, sometimes blinders prevent one from seeing the entire landscape, and a good example of that may be the current status of the U.S. housing sector.

Banks, mortgage lenders, mortgage-backed securities holders and public officials have tended to focus on the plight on subprime and comparable mortgages, and rightfully so, as these loans constitute the largest pool of non-performing assets secured by homes.

U.S. housing: A psychological shift

Still, as economist Glen Langan points out, the uncommon focus on subprime has caused the nation to overlook a broader trend regarding the housing sector — namely, the psychology of the housing market.

“What we’re not grasping yet, as a nation, is that even with programs to help people stay in their homes and avoid foreclosure, the public’s stance toward the housing market has changed,” Langan said. “The psychology of the housing market has changed. And this has tiny to do with at-risk mortgages. This a psychological shift among middle-income and upper-middle-income homeowners and taxpayers. It looks like they’ll be sitting on the fence for a long period of time, and this will delay the housing recovery, hurting the economy in the process.”

What’s at the root of the psychological shift? Langan said factors that clearly indicate that tougher economic times are here and up ahead (higher oil prices, food prices, job lay-offs and tiny or no U.S. economic growth) combined with high home inventory levels — about a 9.5- to 10-month supply at current sales rates — telegraph to Americans that, unless you live in an oil boom town, median home prices are not going to recover any time soon, “not this year, and probably not in 2009.”

“Now, in a market with these kind of characteristics, why would a young couple or a single, first-time purchaser buy a home?” Langan stated. “You wouldn’t. You’d wait, of course, and that’s the psychological shift, the expectation that buying now is foolish because prices aren’t likely to rise, that’ll delay the recovery in housing.”

Further, Langan underscored that Americans’ changed attitude toward housing cuts across society — it’s not simply a view held by ‘first-time buyers’ or ‘young couples starting a family.’ Also, in that the mortgage assistance programs lower foreclosures, they do help the sector, he stated, but they don’t eliminate (or reverse) the psychology of the current housing market.

Even more significant, Langan stated what the nation might find is that in the quarters ahead foreclosure rates may decline, on-time mortgage payments increase, but home sales still don’t rise … and median home prices continue to fall.

More pump-priming?

A sobering projection, to be sure. But is life in housing’s state of nature, to paraphrase Hobbes, all nasty and brutish? Not quite.

Langan said there’s an antidote, but there may not yet be enough political support to pass the policy: a home buyer tax credit.

Langan argued that, ultimately, the U.S. Congress may have to authorize a temporary tax credit for home buyers to encourage more activity — more home buying by fence sitters to cease the upward trend in inventories, and by extension, stop the downward trend in prices.

The home buyer tax credit could match a percentage of a home buyer’s down payment, up to a maximum: for example, a $3,000 annual tax credit for five years in moderate-price regions, up to a $10,000 annual tax credit for five years for the high-cost home areas of New York, San Francisco, Boston, Los Angeles, etc.

Nevertheless, some might counter that the market should be left to itself, that the nation should let the housing sector recover naturally, when the fence sitters start buying. “That might sentence the U.S. to a very long economic slump,” Langan stated. “There are going to be a lot of fence sitters in this market.”

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What’s your take on the housing sector? Do you think homes prices will recover in your region of the United States by early 2009? Or are prices prone to remain the same or fall more? Let us know how things are where you live.

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Filed under: Other issues, Housing, Recession

The ever-incisive FT columnist Martin Wolf offers prudent and timely advice concerning the reforms needed to ease credit market doldrums and right the global financial state of things.

One key practice Wolf would like to see addressed is bank / mortgage lender selling of mortgages they originate.

Designers of the practice had good intentions: It was designed to free-up capital so banks / mortgage lenders could have more money available for future homebuyers. A noble intention.

Unfortunately, as tradition reminds us, the road to perdition (and record housing sector slumps) is paved with good intentions. The problem, Wolf notes, is that the originate-and-distribute model encouraged banks / mortgage lenders to originate (in many cases for handsome fees) high-risk, very-poor-credit-quality mortgages with reckless abandon, because originators knew that the loan would be sold, and its status as a performing asset would be entirely someone else’s problem. Save the best (mortgages), get rid of the rest.

It’s not surprising, Wolf notes, that the originate-and-distribute model became laden with sloppy, irresponsible and even fraudulent loans. Wolf’s reform: originators must be required to retain a portion of the equity of securitized loans. Hence, if / when they go bad, the originator loses money too.

Economic Analysis: Wolf’s proposed financial / bond market reform is on the mark. If every party, including the originator, has a stake in a mortgage’s repayment status, that will lead to higher-quality loans, while at the same time retaining the secondary market’s benefit of freeing-up capital for new mortgages.

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Filed under: Forecasts, Consumer experience, Economic data, Housing, Recession

George Soros, the billionaire money manager, claims to be old and wise, and able to guess the market’s turns better than most. Given the compensation he has collected on Wall Street over his lifetime, it is hard to quarrel with that.

Soros, who still manages several hedge funds, says that the U.S. is in a “bear market rally,” according to The Wall Street Journal. Like many pundits, he stakes his claim primarily on the American housing market. If home prices keep up their sharp decline, how, he reasons, can the rest of the economy do well?

He may have a point. Much of what economists have said recently is based on a recession being avoided because consumer spending has slowed but not halted. People are still going to Wal-Mart (NYSE: WMT). Thank goodness for that.

But Soros and his intellectual allies look at a housing market that will continue to decline into 2009 and say that this must force a deeper and deeper downturn.

No one wants to believe Soros. The thought is too grim. But the logic is hard to dispute.

Douglas A. McIntyre is an editor at 247wallst.com and the author of the Ten Stocks Under $10 letter.

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Filed under: Before the bell, Earnings reports, Deals, Google (GOOG), Cisco Systems (CSCO), Intel (INTC), Market matters, Walt Disney (DIS), Sprint Nextel Corp (S), Comcast Cl’A’ (CMCSA), Economic data, Time Warner Cable (TWC), Oil, Housing

U.S. stock futures were lower early Wednesday as investors, worried about inflation, await data on pending home sales and labor costs. Earnings news in focus this morning comes from tech bellwether Cisco Systems, which gave a cautious outlook, and from Walt Disney, which reported good results.

After that, weekly crude inventories are scheduled to be reported. Crude futures have held up near $122 a barrel despite the dollar advancing against the yen and the euro.

There are lots of companies in focus this morning too. Cisco Systems (NASDAQ: CSCO) reported sales and earnings that exceeded analysts’ expectations after the close Monday, but gave a sales guidance that was somewhat conservative.

Walt Disney (NYSE: DIS) also reported quarterly results after the market close Tuesday that also beat expectations. Interestingly, it seems that of all companies, the entertainment giant isn’t getting hit by the economic slowdown as other companies do. Disney shares were up 2.3% in premarket trading.

And in deal news, Sprint Nextel (NYSE: S) and Clearwire (NASDAQ: CLWR) announced Wednesday the formation of a joint venture for the high-speed wireless network WiMax to create a $14.55 billion communications company in which Sprint will hold a 51% stake. The new company, to be named Clearwire, will receive a $3.2 billion investment from Intel Corp. (NASDAQ: INTC), Google Inc. (NASDAQ: GOOG), Comcast Corp. (NASDAQ: CMCSA), Time Warner Cable Inc. (NYSE: TWC) and Brighthouse Networks. Sprint shares are up over 7.7% in premarket trading, CLWR almost 14.5%.

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Housing crash claims a whole city as Vallejo, CA declares bankruptcy

Filed under: Housing, Recession

Chrissy Hynde of the Pretenders once sang about going home and finding that her hometown (Akron, Ohio, I think) was no more. “I went back to Ohio but my city was gone.” Developers had destroyed the downtown and paved over the fields and all that was left was parking lots and shopping malls.

The people of Vallejo, California might be singing a similar song today, as the town’s city council voted to declare bankruptcy. Vallejo is facing a budget crisis driven by the collapse of the housing bubble in California. And while the town is still there, its finances have been ravaged by falling property values (and thus taxes) and reduced economic activity (ditto). Once again, developers went too far, and now the hangover is setting in.

Critics point out that the housing bubble is only part of the problem. The fat tax flow during the housing boom masked deeper problems of high pay and benefits for municipal workers and unfunded but growing pension liabilities. Vallejo is now facing a $16 million shortfall and has no money in the bank.

The larger question is whether this will encourage other towns to take the same path. Lots of cities in the U.S. are hurting from lower property values and tax payments these days, and bankruptcy may become a more attractive option as the recession — oops, sorry, I meant “rough patch” — gets worse.

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Filed under: Management, Economic data, Housing

Someone had to pay for the fact that Moody’s (NYSE: MCO) is being blamed for not doing a better job predicting the mortgage securities crisis. The reasoning is that the credit ratings bureau was too close with some of the companies that issued the paper and didn’t look hard enough at how the system might come apart in a subprime lending meltdown.

As usual, it isn’t the CEO who is leaving. Moody’s is dumping its president, a sign that the company is contrite, sees the error of its ways, and wants to do superior. According to The Wall Street Journal Brian Clarkson’s departure “effective by July, marks the highest-profile casualty to date in the controversy over the complicity of credit-rating firms in the subprime meltdown.”

Of course, Mr. Clarkson didn’t act alone. Moody’s has scores of analysts who looked at the data on the subprime market. Clarkson was at the top of the pyramid. Of course, the company’s CEO was even more so.

The great tradition in American management is that blame should always fall to one person, or a small group of people, when something significant goes off-track at a company. The thinking is usually muddled. Responsibility nearly always extends over a wider number of persons.

But, having Clarkson leave is good window dressing.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Earnings reports, Forecasts, Deals, Bad news, Industry, Employees, Housing

UBS (NYSE:UBS) is making a bid to increase the unemployment rate all on its own. The bank will lay-off 5,500 people, mostly investment bankers. It will also sell a package of $15 billion portfolio of subprime mortgages to Blackrock (NYSE:BLK). According to Reuters,”UBS cautioned that conditions in financial markets were still tough and declined to offer any results forecast.”

The UBS comments about what happens next are a coded message that layoffs at the firm may not be over. UBS has suffered as much or more from subprime write-downs as any bank in the US or abroad.

The news is especially bad for people employed at brokerages and big banks. A continuing spike in mortgage defaults could cause more difficulty in the pool of financial instruments created around the market. That, in turn, could cause more write-offs at large banks triggering the need to raise capital and cut costs.

Tens of thousands of people have been fired on Wall Street already. The news out of UBS shows that the process is far from over.

Douglas A. McIntyre is an editor at 247wallst.com.

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