Following is a June update from Mike Morgan at MorganFlorida. I will dispense with blockquotes in the interest of saving space. Note: I receive weekly updates but only have permission to post one a month. Here goes from Mike Morgan, with a specific focus on WCI….

June Update
Mike Morgan

Quote of the Week
– “I don’t believe time is on their (WCI) side, given the deterioration of the Florida condo market.” Dan Oppenheim, Banc of America

What Was He Thinking Quote – “We do think if you’re dumb enough to buy a home builder, you ought to buy us,” Ryland Group Inc. Chairman and Chief Executive Officer R. Chad Dreier, at the JP Morgan Conference this week.

Market Conditions – We’re seeing a pickup in traffic, but the buyers have become quite aggressive in low bidding. One of my clients offered $300,000 on a $350,000 home and would not raise the bid. The seller was not interested in even considering the bid, and did not want to counter. With rising inventory, the only way for public builders to compete with traditional sellers, foreclosures and short sales, is to drop prices. I believe we have reached a point where builders’ margins have been reduced to low single digit and negative margins.

WCI – The big news is certainly WCI. The Board decided to delay the annual meeting at Icahn’s request. This gives him time to unravel his positions. WCI noted that Icahn is conducting tours of the properties. Unfortunately, he’s touring the properties with WCI representatives instead of someone who would show him what the real story is.

Debt – Icahn must have realized, if he gained Board seats it would have triggered the debt at 101%. This alone was reason enough for Icahn to walk away. Even without triggering the debt, I believe WCI is facing a debt crisis. They either are or will shortly be in violation of covenants. Will the banks declare a default? No. The banks realize there is no equity, and the banks already have enough problem loans in the housing industry. Recent downgrades of several major builders to junk status is warning enough that WCI or anyone considering WCI has a debt crisis looming.

[Mish note: I asked Mike to clarify that debt triggering event. This was his response: The debt covenants have restrictions for control of the company. If somebody new gets on the board, the debt holders can call in the debt at 101% of face value immediately. You can find that in the offer Icahn made under some of the notes. So, as you can see, there was never any chance of Icahn getting on the board. If they were going to say yes to him, he would have figured out a way to wiggle out. Instead, Ackerman and Company made Icahn’s job a lot easier by keeping the stock high to give Icahn a chance to unravel his positions. This may have been nothing but a shell game from the start … with Icahn NEVER having any intentions of buying WCI at $22.]

Lawsuits – We’re hearing of more lawsuits brought by buyers against WCI for delay in delivering units. I also anticipate a lawsuit from Ichan against WCI, Ackerman and Hoffman. Ackerman and Hoffman sold stock north of $21, even though they told shareholders Icahn’s offer was not enough at $22. When Icahn completes his due diligence, I would find it unlikely that he doesn’t realize WCI has misrepresented the health of the company.

Votes – I believe Icahn had more than enough votes to get on the board. Here are the 10 largest institutional holders as of March 31, 2007:

Carl Ichan and Affiliates – 14.5%
Sandell Asset Management – 9.7%
SAC Capital Advisors 9.5%
Highbridge Capital Management – 8.5%
Dimensional Fund Advisors – 7.1%
Hotchkis & Wiley – 6.6%
Canyon Capital Advisors – 5.9%
Morgan Stanley – 4.9%
D.E. Shaw – 4.9%
Neuberger Berman – 4.8%

In addition to the institutional holders, Hotchkis controls another 7.6% of the stock through two of their funds.

The problem he faces is demonstrating what he is going to do with the debt and the company if he influenced enough of the large holders to back his efforts. With no hidden value coming to the surface, it’s clear Icahn has no choice but to back away swinging.

Time – Dan Oppenheim summed it up best with our Quote of the Week. As we move into the slowest selling season, and the Florida inventory of towers and single family homes continues to build, WCI’s value drops daily.

Listings at Bal Harbour – There was one new listing in Bal Harbour this week, but the startling fact here is the withdrawal of 29 listings. As of Saturday, there were 69 active listings in on the Miami-Dade MLS board. The drop in the number of listings can only be attributed to what I discussed last week. If your property is listed within a time period set by the lender, they know you are a flipper, and they will not finance the property.

It’s obvious now that sellers are finding this out the hard way. As we get closer to the WCI proposed closing date, buyers are finding it difficult to obtain financing. Absent financing, many of these buyers will not be able to close . . . even if they were dumb enough to think they can flip these properties.

I must update last week’s number, since I found a glitch in the Miami-Dade MLS system. It appears three agents have listed properties with a misspelling of Bal Harbour as Bal Harbor. This means there were 102 listings last week, one new listing this week, and 29 withdrawals. The current number of MLS listings in Bal Harbour are 69. However, there may be more listings entered improperly, and there are many pocket listings that agents will not put on the MLS in order to get around the financing restrictions.

Listings at Harbour House – This is the condo that shares the Bal Harbour property and entrance. There are 26 listings in the Harbour House.

Other Listings – In Area 22, where Bal Harbour is being built, there are condo 1,813 listings over $500,000. There are another 3,500 under $500,000!

Builder Downgrades – Lennar joins the ranks of builders facing downgrades by Moody’s and S&P.; On Friday, Moody’s put Lennar on a watch list, which means they see at least a 40 percent chance of a downgrade to negative at some point in the next 18 months.

Bankruptcies – The Wall Street Journal reported on Georgia home builders this week, and the bankruptcy filing of Meyer-Sutton. It’s a small builder, but is it just a sign of what is to come. In Pennsylvania, Elliott Building Group filed for bankruptcy last week. And let’s not forget Kara Homes, the largest private builder in New Jersey. They filed for bankruptcy as well.
The Journal also noted that BOA foreclosed on five property developments in Georgia, and they did so at a loss to the 20% hit to the original principal amount. For the larger banks, these failures are not a problem But for the smaller local and regional banks, these issues spell disaster.

Here are some startling statistics about banks with Georgia loans: First Nation, Gainesville Bank & Trust, NetBank, Community Bank and Bankers Bank all had more than 50% of their total loans in construction, ranging from 54.2% to a whopping 78.8%.

Subprime Goes to Wall Street – Goldman Sachs noted that earnings were hit by subprime problems. Goldman Chief Financial Officer David Viniar said in a conference call that the subprime sector’s woes are not over and to expect “more pain” before the problem is purged.
“The subprime saga will not be sufficient to derail the U.S. and world economy,” Lehman’s Jack Malvey said at the Reuters Investment Summit in New York.” Well, you’ve got to wonder why he would even make this statement, unless some of his colleagues are discussing a crisis far greater than the talking heads will lead you to believe.

And here’s the proof: ABN Amro fears a world housing crisis is looming. A note from ABN Amro noted fears for the health of the US housing market have captured headlines, but the degree of over-valuation is more severe in Britain, Australia, Spain and Ireland. ABN Amro found that UK residential property is 50% overvalued, whereas US houses are 25% too expensive.

Last month UBS said it would shut down Dillon Read Capital Management after they lost $123 million . . . and subprime was cited as a chunk of this. And this week Bear Stearns seized control of $400 million of the assets of an internal hedge fund out of fear they were not going to meet a margin call. Bear Stearns puts the finger on the fund’s bets on risky home loans. We’ve got a more than a trillion dollars in questionable housing boom related loans out there, including residential, commercial and builder loans.

Subprime Goes to College – It’s not just housing. Here is a link to an article from The New York Times about subprime college loans, with grads burdened with $900 a month payments at rates as high as 20%.

Mortgage Rates – At the beginning of 2007 the rate on a 30 year fixed was 6.18. It now stands at 6.74. On a $300,000 home, that means an additional $1,680 a year in mortgage payments or $140 a month. Adjustable rate loans have accounted for 25-33% of loans since 2004.

Most of these loans are at rates under 4%. Now you have a hike in the monthly mortgage payment approaching $700. Between now and the end of the year, it is estimated more than $100 billion in subprime loans are scheduled to reset.

The rise in rates means a much lower affordability index for seller, including builders. A homeowner that qualified for a 4% interest only ARM a couple of years ago based on a $1,500 a month mortgage could afford a $450,000 home. If that buyer were able to find an interest only mortgage today, they could only afford a $267,000 home! That’s a 40.66% hit to the price of the home they can afford. I don’t know of any builders that had 40% margins . . . even at the peak.

It gets worse. It is tough to find 100% financing – interest only lenders now. So if this were a 90/10 loan that cuts a lot of other folks out of the market.

Mortgage Games – Despite what you hear from the mortgage companies and the feds, you still see an awful lot of commercials and internet ads for no-doc loans, 100% loans, etc. And then there is the cash back deal. This involves hiking the sales price of the home artificially. As long as you can get an appraiser to manipulate the numbers, you can pull this off. Basically, the price goes up on paper, but the seller agrees to give the buyer cash-back at the closing. Nothing new here, but it seems to be new for Wall Street and the media. Here is a link to an article from The New York Times called Payback Time discussing Cash Back.

And if you think Cash Back is creative, how about loans piggybacking on someone else’s credit. The New York Times is definitely on the case of mortgage fraud.

Spillover – When a family in a $300,000 homes is faced with a $700 a month mortgage hike, there will be spillover.

Condo Spillover – Here’s one you will not hear from many folks. When units in a condo are foreclosed there is no unit owner to pay the Condo Association Fees for maintenance, taxes, insurance, utilities, etc. The burden falls on the folks that did close and are still alive. If you have a building with a 50% foreclosure, that means the COA fees double for the remaining owners. This will have a domino effect on foreclosures, sales prices and overall sales.

Lawsuits – This is a booming area of the economy. Lawyers continue to file lawsuits against builders for a host of issues ranging from defective homes to predatory lending. But here’s a twist. Coast Bank (Florida) shareholders filed suit against borrowers. Fifty borrowers shot back with their own lawsuit claiming the bank schemed to defraud them. The attorney for the borrowers says he is going to file another 75 lawsuits for borrowers who claim they are stuck with homes and lots worth less than what they owe.

Coast Bank made $110 million in loans to 500 customers of Construction Compliance Inc., a now bankrupt home builder on the Gulf Coast. The attorney for the borrowers said he may wind up working out the loans with the FDIC if they take over the bank. And he may succeed, since regulators recently hit Coast Bank with a cease and desist order for unsafe and unsound banking practices.

Countrywide Financials REO’s – A picture is worth a 1,000 words. Or in this case, 8,726. This is a visual of Countrywide Financials REO’s

Duetsche Bank – DB initiated 325 foreclosures against condo owners in Miami-Dade, Broward and Palm Beach during the first four months of this year for a total unpaid mortgage value of $70 million. DB claims they have either sold these loans, securitized them or they are acting only as a trustee. Okay, I’ll buy that. But what I won’t buy, is the condo crisis is not going to touch anyone. Somebody, somewhere is going to get clobbered. U.S. Bank and Bank of New York are two other banks that have initiated large numbers of foreclosures, 211 and 164 respectively. Not far behind is Wells Fargo with 131 and HSBC with 104. I guess they sold all their loans as well.

Unfortunately for these big banks, I think we are going to see some lawsuits from the people and pools that bought these loans . . . and there are still more than 100,000 condo units that have not been delivered.

DB was overall the top dog in foreclosures with 2,125 condo and single family foreclosures in the first four months of this year, representing $507 million. DB’s share of the South Florida mortgages in foreclosure represents 17% of the total.

Virginia Market Numbers – These are April numbers, as they lag in reporting like so many other boards. For the Metro DC market sales fell 12.17% in April from 1,857 in April 2006 to 1,631 in April 2007. So despite what you hear, this market is not “dancing on the bottom,” “ready to rocket,” or “holding up well.” And the average price fell 2.43% from year ago pricing to $543,166.

Orlando Market Numbers – For the Orlando MSA new listings rose 6.31% in May from April with 6,200 new listings. A year ago there were 2,842 new listings in May.

Sales – Sales in the Orlando MSA for May rose 1.30% to 1,550 from April, but May’s numbers represented a 45.46% drop from May 2006 sales of 2,842. What more can I say.

Florida Woes – This week our legislature passed a proposed tax relief bill. It will go on the ballot on January 29. It’s ugly. Local governments must roll back budgets by $15.6 billion. Florida schools lose more than $7 billion over the next five years. That should be great for a state that already lags the nation in education. Florida ranks 32 in teacher salaries.

Florida is going to be facing monumental budget problems over the next 3-5 years. On the bright side, this will probably attract more buyers, but for those that understand the dynamics, it will be an easy decision to look at NC, SC or GA versus Florida.

One more comment here that is going to hurt. Businesses do not have a property tax cap. We have already seen 400% jumps in property insurance for businesses over the past few years. If the current tax proposal passes, everyone agrees businesses will be the hardest hit . . . with no protection, no caps and a big budget deficit to fill.

NAR Economist in Florida – The NAR’s new Chief Economist, Lawrence Yun, spoke in Florida this week. He predicted a “sonic boom” for Florida if the Legislature succeeds in bringing insurance premiums back to earth. He didn’t paint as rosy a picture as David Lereah has done, but he is sorely mistaking if he thinks Florida can control the insurance premiums.

The State of Florida is now the largest insurer of homes in Florida. They lost a couple billion dollars two years ago. They are facing more red ink now . . . and that’s without any hurricanes in two years. A repeat of a Hurricane Andrew today, would bankrupt the State of Florida.

In addition to the property tax issues discussed above, taxpayers foot the bill for the homeowner insurance deficits. So that means if you are insured with Allstate, and your neighbor is insured with the State of Florida, you are paying part of your neighbors insurance bill!

Yun did follow in Lereah pattern as Chief Cheerleader, when he said there is nothing alarming about the housing markets in this region. “It is very, very manageable,” he added. That doesn’t balance very well with a report in the St. Petersburg Times, where they noted that, “an economist suggested the gap between incomes and home prices would depress housing values 40 percent.” Unfortunately, they didn’t name this brave soul.

Mortgage Bankers Association on Florida – According to Doug Duncan, MBA’s Chief Economist, “[t]he number of houses and condos on the market is so large that it would take almost three years to sell them all in Palm Beach and 31 months in Broward, if the pace of recent sales continue.” He categorized the foreclosure crisis in Florida as acute. But he didn’t limit it to Florida. He said the percentage of payments nationwide for subprime that were more than 30 days past due has jumped to 15.75%.

Video of the WeekFlorida Auctions. The builder is Levitt.

Disclosure: Of the stocks referenced today, I have no positions but I am involved in two lawsuits with Lennar. I am the defendant.

The Shadow

Thanks “Shadow
Mike Shedlock / Mish/