Saturday, August 9, 2008

This Weekend's Contemplation - Are the Bank's Beginning to Sieze Up?

The real issue for me, the thing I worry most about is when the banks start refusing to lend. This past week was scary to me. The ultimate demand for housing is not the ratio of rent to house payment or the price of homes, it is the ability of a consumer to borrow the money for a home. Banks stop lending, the demand for homes decreases, so what is going to happen to the price of homes? The price of homes goes down, banks have to take additional charge-offs, so now they have less money to lend due to impairmants on capital, therefore, the banks stop lending. It is a vicious circle. Below are comments from 3 articles this week that may more strongly effect our respective futures than any other news this week.

From Yahoo News:

Fannie Mae on Friday posted a much larger-than-expected second-quarter loss and slashed its dividend more than 85 percent to preserve capital as home loan defaults accelerated in the bleakest U.S. housing market since the Great Depression. . . . .

. . . . . Fannie also said it will cease buying certain risky mortgages that accounted for nearly half of its credit losses in the quarter and set a year-end target for doing so.

The loss reversed a profit of $1.95 billion, excluding preferred dividend payments, from a year earlier. Excluding extraordinary items, the second-quarter loss equaled $2.51 per share, more than two-and-a-half times greater than the average estimate among Wall Street analysts of 98 cents per share, according to Reuters Estimates.

"The key for Fannie and Freddie both, and also for banks, is 'Do they have the capital to get through the next year or so?"' said David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management, LLC, a large holder of Fannie and Freddie Mac shares. . . . .

. . . . . By year's end, Fannie Mae will stop buying Alt-A mortgages, riskier mortgages that require less proof of borrower income. These loans made up about 11 percent of the company's total single-family mortgage credit business, but spurred about half of its credit losses in the second quarter.

Fannie said it has already reduced its holdings and purchases of Alt-A mortgages by 80 percent from peak levels. Far fewer such loans are being originated under tighter lending standards imposed as a result of the subprime lending crisis.

From Yahoo News:

Wachovia Corp, the fourth-largest U.S. bank, will stop making mortgage loans through its branch offices in 19 U.S. states, a published report said.

The bank will eliminate 125 jobs in connection with the cutback, but still plans to offer mortgages through branches in 18 other states, Bloomberg News reported on Friday.

The latest cuts extend the fallout from the Charlotte, North Carolina-based bank's failed $24.2 billion purchase in 2006 of California mortgage lender Golden West Financial Corp.

A surge in mortgage losses contributed to an overall $8.86 billion second-quarter loss at Wachovia. . . . . Wachovia is eliminating more than 10,700 jobs and plans to reduce expenses by $2 billion by the end of 2009. In July, it said it had already eliminated 2,000 retail mortgage jobs this year, and planned to cut 4,400 more over 12 months.

From Market Watch:

Freddie Mac's $821 million second-quarter loss makes it more likely that the government will have to bail out the mortgage giant, experts said on Wednesday.

In addition to reporting the loss, Freddie also slashed its dividend and set aside $2.5 billion in provisions to cover credit losses, more than twice as much as in the first quarter. The company reiterated a commitment to raise $5.5 billion in new capital and said that it may raise more than that if needed.

However, experts said after the results that the company may struggle to raise the capital it needs by selling new common stock and preferred securities in the private market. That may force the Treasury to lend more money to Freddie and buy equity in the company, they explained.

Freddie and rival Fannie Mae guarantee roughly half of all residential mortgages in the U.S. With home prices falling and foreclosures surging, they're suffering billions of dollars in losses and have been under pressure to raise new capital.

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