The New York Times reports that Federal National Mortgage (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) have a tiny sliver of capital to support a mountain of mortgages. To put it in perspective, their level of borrowing is almost twice that of the enormously over-leveraged investment banking and hedge fund industries. With the collapse of the housing market, Freddie and Fannie are in trouble. And when you get to the scale of these two, so is America.

As I posted last month, it could cost $1 trillion to bail out Fannie and Freddie. These hybrid organizations are a key cog in the mortgage industrial complex (MIC) that has gotten the world into its current capital crisis. Fannie and Freddie buy "conforming" mortgages from their originators and then package and sell the mortgages as securities. But these two have a mere $83 billion in capital to support $5 trillion worth of debt and other commitments.

This 60-to-1 ratio is almost twice the 32-to-1 ratio of the highly leverage investment banks and hedge funds. And like any company with hard-to-value assets, Fannie and Freddie have unrealized losses. In their case, those total $20 billion -- they've already taken $9 billion worth so far this year. By 2007 they had guaranteed or invested in $717 billion of subprime and Alt-A loans, up from almost none in 2000. And many of those are not worth that much.

Continue reading Fannie and Freddie 60-to-1 leverage could drive $1 trillion bailout

Fannie and Freddie 60-to-1 leverage could drive $1 trillion bailout originally appeared on BloggingStocks on Tue, 06 May 2008 09:13:00 EST. Please see our terms for use of feeds.

AP reports that home sales dropped to levels not seen since the George H. W. Bush housing recession in 1991. And home prices are plummeting faster than they have since 1970.

Here are the details: new homes dropped by 8.5% in March to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991. And the median price of a home sold in March dropped by 13.3% compared to March 2007, the biggest annual price decline since a 14.6% plunge in July 1970.

What the current Bush housing collapse and the earlier one share is the after math of too much capital flowing in to the housing market. Under Bush the elder, the capital flowed in due to the deregulation of the Savings & Loan industry -- resulting in a $250 billion bailout. Under Bush II, the problem was the $1.3 trillion subprime mortgage market which made capital available to people who couldn't afford to pay the mortgage -- after all, 47% of those loans required no documentation of borrower's income.

Continue reading Home prices fell 13.3% in March

Home prices fell 13.3% in March originally appeared on BloggingStocks on Thu, 24 Apr 2008 12:05:00 EST. Please see our terms for use of feeds.

AFXNews reports that Thornburg Mortgage Inc. (NYSE: TMA) has defaulted on a credit agreement with one of its banks. That's because it could not come up with $28 million it owed JPMorgan Chase & Co. (NYSE: JPM). Specifically, Thornburg needed to pay JPMorgan -- to whom it owes $320 million -- the $28 million for a margin call.

According to The Associated Press, the notice of default from JPMorgan triggered cross-defaults "under all of the company's other reverse repurchase agreements and its secured loan agreements." According to MarketWatch, Thornburg has been facing margin calls due to a 15% drop in the value of mortgage-related securities in early February.

Margin calls are a common response from investors when securities purchased with loans rapidly lose value. If they fall too far too fast, they may hit triggers that require the issuing company to either shore up their position or sell off additional assets.

Continue reading Thornburg receives default notice as its mortgage assets tumble

Thornburg receives default notice as its mortgage assets tumble originally appeared on BloggingStocks on Thu, 06 Mar 2008 08:35:00 EST. Please see our terms for use of feeds.

The Wall Street Journal [subscription required] adds a new wrinkle to the story of efforts by subprime mortgage lender Ameriquest to use campaign cash to curry favor with the government. Ameriquest's parent, ACC Capital Holdings, has paid $325 million to settle regulators' claims that it charged excessively high mortgage rates and didn't adequately disclose loan risks. The Journal's story today highlights the $20.5 million Ameriquest spent at the state and federal government levels to block legislation that would have limited its predatory lending practices.

But as I posted in August, Ameriquest's cash helped boost the fortunes of president Bush. Bush, who used home ownership politics to get re-elected, received $7.8 million from Ameriquest for his 2004 reelection campaign, his inauguration and for Laura Bush's library foundation.

Ameriquest's most interesting pay-to-play technique was to give Rolling Stones tickets and cash to state legislators. For instance, according to the Journal, "Arnold Schwarzenegger's campaigns received at least $1.4 million, along with stacks of tickets to a Rolling Stones concert that were used to lure big donors." And Ameriquest also handed out Rolling Stones tickets to state legislators in Georgia, Maryland, Nevada, Oregon, Utah, Washington and California.

What did Ameriquest get for all its giving?

Continue reading Does Ameriquest's campaign cash tie Bush to the subprime mortgage meltdown?

Does Ameriquest's campaign cash tie Bush to the subprime mortgage meltdown? originally appeared on BloggingStocks on Mon, 31 Dec 2007 11:30:00 EST. Please see our terms for use of feeds.

Continue reading Hillary Clinton vs. Maria Bartiromo on CNBC!

Hillary Clinton vs. Maria Bartiromo on CNBC! originally appeared on BloggingStocks on Thu, 06 Dec 2007 14:28:00 EST. Please see our terms for use of feeds.

Continue reading The dollar continues its fall

The dollar continues its fall originally appeared on BloggingStocks on Fri, 23 Nov 2007 08:40:00 EST. Please see our terms for use of feeds.

It looks like people in power are getting beyond the point of denying that subprime is a problem. And now they're onto the next stage of trying to decide just how big a problem it is. I have seen estimates ranging from as high as $4 trillion to as little as $104 billion. (This is one area where the son will beat the father. Bush I's Savings & Loan crisis cost $240 billion but Bush II's looks likely to be far more costly.)

While each estimate covers different aspects of the cost, the big questions that need to be answered are:

• What caused the problem?
• What can and should be done to minimize the damage? and
• What changes can be made to keep it from happening again?

I don't have real answers to these questions but I think a look at the different estimates of the subprime mortgage meltdown's damage can shed some light on the problem. Here's my take on the three estimates:

Continue reading Will subprime meltdown cost $4 trillion, $400 billion, or $104 billion?

Will subprime meltdown cost $4 trillion, $400 billion, or $104 billion? originally appeared on BloggingStocks on Fri, 26 Oct 2007 13:25:00 EST. Please see our terms for use of feeds.

I've been talking about the Super SIV bailout plan since the plans for the fund first became public October 14. Today The Wall Street Journal is questioning whether the Super SIV bailout fund can be funded in time [subscription required] to help struggling SIVs who need to find investors for $100 billion in debt coming due in the next six to nine months. The Journal reports some of the biggest SIV operators already are selling their assets, including Citigroup (NYSE: C), the Super SIV champion and the operator of the largest chunk of SIVs, and Rabobank of the Netherlands. Moody's Investor services continues to downgrade the types of assets held by the SIVs, especially assets based on subprime mortgages in the U.S.

Why should you care? You may be holding a money market fund or mutual fund that holds debt from these SIVs in trouble. If the bailout doesn't arrive in time, SIVs will have to restructure their debt, wind down, or in the worst-case scenario become unable to pay their debt investors. When the Journal first started talking about this mess, it reported SIVs held $400 billion in assets globally. Today, because of the write-downs and sale of assets, the Journal is estimating the total value of SIV assets at $350 billion.

Continue reading Will the SIV bailout arrive in time?

Will the SIV bailout arrive in time? originally appeared on BloggingStocks on Wed, 24 Oct 2007 16:25:00 EST. Please see our terms for use of feeds.

It's a bit more than 20 years since the Dow fell 508 points, or 22.6%, in a single day. With Asian and European markets down a mere 1% to 4% today, it does not look like we'll have a repeat of that 23% decline today. What's happening in world markets? According to the New York Times, Hong Kong fell 3.3%, Japan tumbled 2.2%. South Korea was down 3.25%. In Europe the early news was not as bad -- London's FTSE 100 was down 1.4%, the German DAX dropped 1.3%, and Paris slid 1.8%.

Twenty years ago, the CEO of the company I worked for sent one of my colleagues to figure out good stocks to buy -- considering the market plunge an opportunity to buy good stocks at a discount. It turned out that he was right. The cause of the crash was found to be related to simultaneous computer driven-selling that somehow took the rationality out of stock valuations.

But will today's potential plunge also turn out to be a buying opportunity? The answer depends on your time frame and which stocks you buy. It's never clear to me why markets go up and down although "explanations" get printed every day. But it could be that the big reason for the selling in global markets is fear. In particular, investors fear that the U.S. has unleashed a subprime mortgage-backed securities (MBS) financial virus that is sucking an unknown -- but enormous -- quantity of credit out of the global financial system.

Hank Paulson's floundering effort to rescue the world from this MBS viral epidemic is not inspiring confidence. So I would not be eager to rush out and buy stocks in this market. Unlike the computer-driven selling of 1987, the economic costs of MBS's financial "innovation" are still too difficult to count.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Black Monday 2007 originally appeared on BloggingStocks on Mon, 22 Oct 2007 08:45:00 EST. Please see our terms for use of feeds.

Although the Federal Reserve can seek to provide a more stable economic background that will benefit both investors and non-investors, the truth is that it can hardly insulate investors from risk, even if it wished to do so. Developments over the past few months reinforce this point. Those who made bad investment decisions lost money. In particular, investors in subprime mortgages have sustained significant losses, and many of the mortgage companies that made those loans have failed. Moreover, market participants are learning and adjusting--for example, by insisting on better mortgage underwriting and by performing better due diligence on structured credit products. Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before.

Ben Bernanke never promised you a rose garden originally appeared on BloggingStocks on Tue, 16 Oct 2007 08:10:00 EST. Please see our terms for use of feeds.

Large mortgages quickly become more expensive originally appeared on BloggingStocks on Mon, 13 Aug 2007 17:45:00 EST. Please see our terms for use of feeds.

Continue reading Countrywide Financial (CFC) adds to subprime panic

Countrywide Financial (CFC) adds to subprime panic originally appeared on BloggingStocks on Fri, 10 Aug 2007 09:00:00 EST. Please see our terms for use of feeds.

Dealbook reports that the subprime meltdown does not just hurt the poor. It also hurts those who profit from helping put the poor into debt over their heads. Take the case of John Devaney.

Devaney's sour bets on subprime have forced him to put his second home and his yacht -- Positive Carry (a reference to an arbitrage-like trading technique) -- on the market.

Devaney's remarks on subprime remind me of the adage "Be careful what you wish for..." Here's what he had to say back in January: "I personally hate subprime and I'm kind of hoping the whole thing explodes.''

Meanwhile, Dealbook suggested these possible names for the new owner of Devaney's yacht:

• Margin Call
• Sinking Ship
• No Doc Dinghy
• Sub-Merged
• Not so FICO

Feel free to comment with a better one.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Subprime meltdown claims a wealthy trader's yacht originally appeared on BloggingStocks on Mon, 30 Jul 2007 13:22:00 EST. Please see our terms for use of feeds.

• Bill Miller, despite being wrong on this investment since 1999, believes Eastman Kodak Company (NYSE: EK) will turnaround and is worth $45 per. As we have blogged in the past, the new CEO is very close to getting this business model to work, meaning this company could turn into a free cash flow machine.
• Steve Mandel, formerly of Tiger Management and now running a fund at Lone Pine Capital, likes EMC Corporation (NYSE: EMC), which was up big last week. In addition, he likes other large cap stocks such as General Electric Company (NYSE: GE) and Goldman Sachs Group Inc (NYSE: GS). He also has has postive comments on Google Inc (NASDAQ: GOOG).
• Wilbur Ross is still pushing his commodities turnaround plays, in particular International Coal Group Inc (NYSE: ICO). Ross's thinking is as follows: Coal pricing should reach healthy levels as excess inventory is burned off. Coal will account for 57% of U.S. electricity generation, up from 50% today, in the next twenty five years. Appalachian coal, in which ICO is rich, has considerable pricing power since East Coast supply is limited and demand is strong.

A plethora of stock ideas originally appeared on BloggingStocks on Tue, 29 May 2007 15:20:00 EST. Please see our terms for use of feeds.

After the recent pounding that the subprime mortgage sector has been taking, you're probably not thinking about its investment opportunities. But that's what I'll be talking about on CNBC at 11 a.m. with Becky Quick and Tom Gardner of Motley Fool.

There are two reasons for thinking there might be opportunities here:

• Investment banking put - Investment banks are putting a floor under the stock price of many subprime lenders. For example, Goldman Sachs Group Inc. (NYSE: GS), Lehman Brothers Holdings, Inc. (NYSE: LEH) and Bear Stearns Companies, Inc. (NYSE: BSC) have all said they may commit more funds to subprime. Yesterday, Accredited Home Lenders Holding Co. (NYSE: LEND) added $3.39, or 56%, to $9.43, helped by apparent takeover speculation in the wake of its statement Tuesday that it would explore "strategic options." On the pink sheets, New Century Financial rose 68 cents to $1.35, more than doubling its share price from a day earlier. NovaStar Financial Inc. (NYSE: NFI) is also up 50% since it bottomed out at $3.43 on Tuesday.
• Picking the long term survivors - Not every industry participant will be wiped out. For example, Countrywide Financial Corp. (NYSE: CFC) -- which only has 7% of its loans in subprime -- added $376 million in cash for a total of $1.4 billion in 2006. Nevertheless, it is far from being out of the woods: it recently reported a rise in bad loans across the board -- i.e., payments were 30 days late at the end of 2006 on 2.9% of prime home-equity loans serviced by CFC, up from 1.6% a year earlier and payments were late on 19% of subprime mortgage loans [subscription required], up from 15.2% at the end of 2005. If it reports worse than expected damage in future quarters, CFC will drop further, which could represent buying opportunities that lower an investor's cost basis. Despite the medium term pain of such a strategy, if CFC survives until the next housing upturn, investors will profit.

Continue reading Subprime investment opportunities?

Subprime investment opportunities? originally appeared on BloggingStocks on Fri, 16 Mar 2007 10:00:00 EST. Please see our terms for use of feeds.

This morning's Wall Street Journal [subscription required] leads with a discussion of the unexpectedly severe deterioration of the subprime mortgage industry. And the process that led to the subprime decline is happening now in private equity. This suggests the potential for an unpleasant surprise in the business of lending money to private equity firms.

Subprime mortgages are loans made to borrowers who are considered to be higher credit risks because of past payment problems. Since these loans are so profitable, the market has grown at a 39% annual rate from $120 billion in 2001 to $625 billion in 2005.

But if a borrower can't pay back the loan, the costs of this rapid growth become apparent. Up until 2005, if a borrower could not pay back the mortgage, the borrower could sell the house and use the proceeds to pay the mortgage company. But with prices falling, this strategy does not work anymore. In October, borrowers were 60 days or more behind in payments on 3.9% of the subprime home loans packaged into mortgage securities this year -- nearly twice the delinquency rate on new subprime loans recorded in 2005. And UBS expects 2006 to be "one of the worst ever for subprime loans" with 80,000 subprime borrowers behind on their payments.

Continue reading Today sub-prime mortgages, tomorrow private equity debt

Today sub-prime mortgages, tomorrow private equity debt originally appeared on BloggingStocks on Tue, 05 Dec 2006 09:55:00 EST. Please see our terms for use of feeds.