The Baltimore Sun is asking What will happen if Fannie and Freddie go bust?
In a recent Securities and Exchange Commission filing, Fannie noted that it backs $2.6 trillion worth of single-family home loans. Underneath this pile of debt, the company has only $42 billion of capital. If the value of mortgages backing Fannie’s debt falls a few percentage points, the company’s capital could be wiped out. And because of the implicit government guarantee backing Fannie’s debt, American taxpayers would be on the hook for whatever debt Fannie couldn’t cover.
Consider Fannie’s exposure to high-risk loans: about $300 billion of stated-income “liar loans,” $200 billion of interest-only mortgages, $120 billion of subprime mortgages and $330 billion of high loan-to-value mortgages.
Some of these high-risk loans fall into multiple categories and shouldn’t be double-counted, but you get the picture: Fannie has significant exposure to high-risk loans and only a small capital cushion to protect itself.
Freddie Mac has a few hundred billion dollars of high-risk loans in its $2.1 trillion book of mortgages. And Freddie’s capital cushion is a meager $40 billion.
In 2005, Mr. Paul introduced an amendment in Congress to end the implicit taxpayer guarantee backing Fannie’s and Freddie’s debt. He said at the time: “I hope my colleagues join me in protecting taxpayers from having to bail out Fannie Mae and Freddie Mac when the housing bubble bursts.”
It’s a shame others in Congress weren’t listening to Ron Paul in 2005.
Bloomberg is reporting Australia Bond Risk Rises to Record as Banks Lift Mortgage Rate.
The risk of Australian companies defaulting rose to a record as two of the nation’s biggest banks increased mortgage rates after the collapse of the U.S. subprime market drove up funding costs.
National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. lifted home-loan charges without the central bank changing benchmark rates, the first time that’s happened in a decade. Losses in the U.S. caused Centro Properties Group in Melbourne to put itself up for sale, triggered the collapse of Sydney-based hedge fund Basis Capital Fund Management Ltd. and contributed to the highest bank borrowing costs in 11 years.
Centro Properties, which owns 700 shopping centers in the U.S., is up for sale ahead of a Feb. 15 deadline to refinance A$3.9 billion ($3.4 billion) of debt. The Melbourne-based company took on debt to help fund $9 billion of U.S. acquisitions in the past two years.
“Concerns about Centro saw spreads on Australian listed property push wider,” said Damian Rowe, a credit trader at Citigroup in Sydney. “2008 has kicked off with thin liquidity and spreads moving in sympathy” with the U.S., he said.
The Financial Times is reporting Spain’s house of cards has started tumbling down.
Last spring, the Spanish property developer Astroc started the ball rolling. Its debt servicing problems triggered the first serious plunge in the shares of Spain’s financially over-stretched property and construction companies. Before crashing, Astroc shares had increased 10-fold since first listing in 2006. Its chairman, Enrique Banuela, who had been catapulted into the Fortune 100 list of the world’s richest tycoons, was also forced to step down.
It has become clear the heavily indebted business model behind the spectacular rise in Spanish property companies will simply cease to function in the current environment. The problem in Spain is all the greater given that the country during the past five years or so has been building about 800,000 homes a year – that is the combined annual total of France, Britain and Germany.
The UK Guardian is commenting on The dire state of real estate.
It was barely six months ago that the global banking group HSBC was celebrating the biggest ever commercial property deal seen in Britain as it sold its headquarters in London’s Canary Wharf for £1.1bn. HSBC’s move was quickly followed by that of its rival Citigroup, which reached another billion-pound deal just a few weeks later.
But the good times have come to a juddering halt and some now fear that Britain is facing the kind of commercial property crash not seen since the early 1990s when Olympia & York, the main developer of the wider Canary Wharf scheme, was forced into administration.
Central London offices took the biggest tumble, while the capital value of retail warehouses has fallen 34% on a three-month annualised basis.
Investment funds specialising in office blocks and retail developments are under serious threat with Friends Provident suspending the right of individuals to take money out of its £1.2bn commercial property fund. Britain’s largest such fund – run by Norwich Union – has admitted its cash reserve to deal with sudden withdrawals has fallen from 17.5% to 7.5%.
The problem extends way beyond these shores: property analysts at the investment bank Morgan Stanley warn that the world’s largest banks could have about $212bn (£110bn) of assets at risk of default as a result of the global contraction in the commercial property market and the slump in prices.
Peter Damesick, head of commercial property at CB Richard Ellis, said: “It is clear that property values did get over-inflated and did rise too much. Now there is a sharp and painful rewinding taking place. There has been a 9% reduction in capital values since the middle of the year. It is all driven by sentiment, by uncertainty and a lack of confidence caused by the [difficult] debt markets.”
Morgan Stanley estimated recently that based on its revised estimates of capital growth values, big property groups such as British Land, Hammerson and Land Securities were nearly one-third overvalued on recent share prices.
Richard Brown, head of property development at the Newcastle-based lawyers Hunt Kidd, also warns that “the worst is yet to come” but firmly believes there will be no dramatic slump. He said: “It is becoming increasingly difficult for developers to get the kind of easy credit they have been used to and so confidence is being adversely affected. But there should be no crash. The economy is in far better shape than it was 17 years ago.”
Damesick is adamant that there will be no return to the dark days of the early 1990s, pointing out the changes that have taken place over the intervening period. “There are many fundamental differences between then and now,” he said.
“We have not had the punitively high interest rates; not got the large bank lending on speculative, rather than income-producing, properties; and central London – the traditional bellwether – has not got the scale of new developments waiting to hit the market as we had in the past.”
He also said availability and vacancy rates in London were still in low single figures, compared with 19% in the past, and the wider economy was not in wholesale recession, at least for now. “Clearly, there are risks but this is not a rerun of 1991.”
The GlobeAndMail Canada is reporting Confidence in Newfoundland sets off home buying binge.
The historic agreement that put the massive Hebron offshore oil project back on track last summer has set off a boom in consumer confidence and an unprecedented home buying binge in parts of Newfoundland.
Any “decent” home is now subject to a bidding war, and even run-down properties are selling quickly, Ms. Brophy said. New homes are selling as soon as the foundations are laid, she added.
The UK Independent is reporting Banks move to head off repossessions.
Banks are set to contact thousands of at-risk borrowers under plans to stave off fears of a huge rise in the number of home repossessions.
The move, under the auspices of the British Bankers’ Association, will see banks agreeing to contact borrowers over the coming months, before financial difficulties turn into a full-blown crisis.
The demand that banks contact at-risk consumers and work on alternatives to repossessions is set to be made mandatory as part of a revised Banking Code to be published in March. It is hoped it will not only stave off repossessions, but also head off accusations from consumer groups that banks have indulged in “irresponsible lending”. Last year Abbey, in particular, faced criticism after it emerged the bank was offering loans of up to five times’ salary.
The Bank of England is under mounting pressure to cut interest rates for the second consecutive month on Thursday. But spread-betting firm Cantor Index rated the prospect of a cut at no more than 50 per cent.
These housing bubble stories are but a small part of global credit bubble that is unwinding practically everywhere but Canada.