ANOTHER UK LENDER GONE BUST

Rooftop, the UK sub-prime lender owned by Bear Stearns is closing down with immediate effect. Its entire range will be withdrawn tomorrow according to Mortgage Strategy.

“Market conditions have continued to deteriorate and with no signs of recovery in the securitisation and whole loan trading markets, which underpin our strategy, Rooftop’s origination business has become unsustainable,”

claims Ginny Darrow, Rooftop CEO.

The company will operate a "pipeline business" with a view towards closing all operations in July.

Is the banking crisis a housing crisis?

I think I shocked a few people when I spoke last month at Zoomf's 'Searching for Profits' seminar. In the midst of my shambolic presentation (compared with the other magnificent presenters) I blurted out that the current banking crisis was not necessarily reflective of a housing downturn - certainly not in the London market.
People seem to mix the two issues together and it can be quite easy to do so. The banks supported 'sub-prime' borrowing and got done for it. Sub-prime is automatically equated with housing mortgages, but the true definition of a sub-prime borrower is a lot broader than that. Anybody who doesn't have a prime credit rating is considered sub-prime. So you can still get a mastercard, just at a higher interest rate. You can still buy that car, it'll just cost you more money, and yes you can get financing, just at a higher interest and you will most certainly have to pay a bigger deposit than your prime rated counterpart and so on and so forth. The same principle applies to housing and the mortgage markets. This is not the first time we have suffered a 'credit crunch', there were very famous 'crunches' in the 1960's, 70's, and 80's

Has Merv lost the plot?

Word on the street is that BoE Governor Mervyn King may be 'loosing the plot'.
In a stunning and uncharacteristic reversal on his word, King agreed with the FSA and other government regulatory bodies to do almost exactly what he said he wouldn't do and that is to use BoE resources and bail out 'unwise lenders'.
Surely 'unwise' is relatively tame to describe what the Rock has done - actually increasing the amount of loans on their books for the first half of this year, when all indications were that the market was going south, coupled with steadily rising interest rates, high inflation, the summer floods and decreased consumer spending:

In the first six months of 2007, its net lending rose 47 per cent to just under £11bn. And at June 30, it had a further £6.2bn pipeline of loans that had been agreed with customers but not yet delivered ... [w]hat’s perhaps even more embarrassing for Northern is that in its interim statement made earlier this summer, it was explicit that it continued to lend even as the interest rate environment turned against it.
[Peston]

Clearly that decision was unwise, but is Merv's decision any unwiser? Is he now under political duress to bail out banks?
Check the Northern Rock statement released today concerning the bailout:

...Northern Rock has agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England. Such repurchase facilities would include securities that have prime residential mortgage assets as underlying collateral. The collateral that can be used under this 'Repo' facility is similar in nature to the collateral currently utilised by many Eurozone banks with the ECB. This additional source of funding will enable Northern Rock to adapt its business model in line with the developing market conditions.

OK so get this, what Merv has actually done is collateralize the bailout using - guess what- "prime [read sub-prime - 'cause that's NR's main business] residential mortgage assets."
So the BoE - yes the Central Bank of England, Wales and Scotland - has now become a prime/sub-prime mortgage lender. But that's not the worse of it; now NR decides to adapt a business model in line with 'developing market conditions'; and King supports this?
To give yourself an idea of just what those conditions are, read what Rightmove had to say this afternoon about developing market conditions, then decide for yourself whether or not King is indeed - losing the plot.

"NO NEED TO PANIC !" as Northern Rock effectively goes bust

The writing's on the wall for UK sub-prime industry as Northern Rock arguably the biggest sub-prime mortgage bank in the UK effectively goes bust, were it not for another Bank of England bailout; yet some politicians feel that there is 'no need to panic'.
However, there certainly is need for concern in Northern Rock's situation because the cash crunch problem affecting UK lending institutions, is being caused mainly by irresponsible lending in US housing, particularly the sub-prime market.
Northern Rock, solely a UK lender, brings the problem close to home.
The actions by the UK central bank appear in some way to contradict the policy Mervin King outlined a few weeks ago, when he stated that the Bank of England would not support 'unwise lenders', although his comments were with regards to interest rate policy. However, today's bailout indicates he may be having a problem sticking to his words

RELATED : HAS MERV LOST THE PLOT

The Bush initiative may actually save US housing

Seattle based Jillayne Schlicke, winner of this weeks 'Odysseus Medal'; highlights in her post what she believes to be the hypocrisy in President Bush's Homeownership Financing initiative, which is supposedly a 'common-sense, risk-based pricing structure' scheduled to begin January 1st 2008.
The main aim of the initiative appears to be a modernization program aimed at the Washington based Federal Housing Administration (FHA), a government agency that provides mortgage insurance to borrowers through a network of private sector lenders.

"In the coming days, the FHA will launch a new program called FHA-Secure. This program will allow American homeowners who have got good credit history but cannot afford their current payments to refinance into FHA-insured mortgages. This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes. In other words, we're going to start reaching out and making sure people know that this option is available to them so they can stay in their homes" according to the president.

The problem with the above statement is that homeowners with good credit history aren't usually the ones with sub-prime loans and are therefore less likely to be the ones feeling the effects of the current crises. Furthermore current indications in the prime mortgage market appear stable; but that may change as the credit crunch continues to bite.
Schlicke's argument also suggests that it takes an enormous amount of effort for a mortgage broker to become FHA-approved, and that it's really not worth it because of the 'small details'; including net worth requirements, audited financial statements, quality control and compliance issues, plus a rigorous employee payment requirement.
According to Ms Schlicke, for some small to medium sized broker firms, it was:

"a business decision: make more money selling subprime and leave the hassle of originating FHA loans to the banks. “See ya, wouldn’t want to be ya” was the motto when bank [loan officers] left to work for a brokerage firm where all the women and men were hotties, yield spread rapes were encouraged and celebrated and the underwriters gave unconditional loan approvals because the underwriters reported to the sales manager or were threatened with baseball bats."

Bush also claimed in his statement that if a mortgage broker was 'cheating somebody', his administration would 'find you and hold you to account', reminiscent of the 'with us or against us' war on terror rhetoric, which - if history is our best teacher, well, need I say more?
Needless to say, any Bush initiative at this stage of his presidency will most likely be dismissed as hogwash by most people as its become way too easy to dismiss the man as a buffoon.
Truthfully, at the moment his words appear to be shallow political rhetoric, but if the credit crunch hits the prime mortgage industry, they may prove to be a little deeper than first imagined. And if the US economy recedes because of housing, his words may actually resonate further than we would all like to hear. If it gets to that stage, the program may not appear to be so useless after all.

London mortgage fraud investigation

City of London Police have launched an investigation into allegations of commercial and residential mortgage fraud in London. Reports have led police to believe that criminal gangs, working with corrupt valuers and solicitors, are obtaining fraudulent mortgages, enabling them to build multi-million pound commercial and buy-to-let property portfolios worth millions of pounds. The investigation was launched after a rise in the number of complaints about the use of fake self-cert documents and fraudulent papers by individuals to inflate their earnings according to The Times:

Fake P60 forms, used to illustrate earnings, are widely available online. The Council of Mortgage Lenders (CML) yesterday confirmed that lenders face serious risks from fake documentation rackets ... Detective Chief Inspector Oliver Shaw, of the City of London fraud squad, said: “We have identified criminal networks that have obtained very large commercial and residential portfolios by working with corrupt valuers and solicitors. ... James Cotton, from London & Country, a broker, said yesterday that lenders also faced risks from self-certification mortgages: “We have seen the impact of people lying in America. It is the same here. It’s just difficult to know the extent to which borrowers have lied about their income because the point of self-certification deals is that lenders don’t check.”
The first stage of the police investigation - establishing the lenders’ potential liability over defaults from fraudulent loans - is expected to be completed by the end of the year.

So far, City Police have released no details on the extent of the alleged fraud, or names of companies or individuals who are being investigated or arrested.

CLICK HERE FOR UPDATE AND EXCLUSIVE INTERVIEW WITH CITY OF LONDON POLICE

Bailey gets it wrong on London real estate

I'm going out on a limb and publicly challenge Liam Bailey [pictured], head of Knight Frank residential research and one of the most respected and influential real estate analysts anywhere in the world.
This past weekend, in a front page FT article on the subprime fallout and London property, Bailey is quoted, claiming that if there is an expected and highly probable "downturn in City profits and employment levels, [read: smaller bonuses] you couldn't be surprised if central London prices fall". The article also paraphrases Liam claiming "a correlation between the health of the City and London residential prices' and that prime London property "suffered badly in 2002 and 2003 after prices of technology and telecommunications shares crashed."
What makes the 2007 property market different to 2002, and what Liam (and the FT) failed to highlight in this weekends article is the growing influx of foreign property ownership in central London and its impact on the property market. Bailey and the FT writer failed also to highlight Bank of England interest rate policy, which towards the end of 2003 was on the rise and may also have had an impact on the percieved slowdown in prime London real estate.
Again, another article writen by the same FT writer (Jim Pickard) in June 2007 and also quoting Liam Bailey:

The central London market has been propelled as never before by a surge of buyers from overseas, in particular the Middle East, Russia, India and China but also from European countries. The price of a top-end house in London has risen 46 per cent in the past two years, a rate of inflation four times the national average, according to research by the FT.
Liam Bailey, Knight Frank research head, says price rises in parts of London - Belgravia and Knightsbridge - have hit 45 per cent. But he predicts: "We believe that by the late summer price growth will begin to become much more subdued."
In 2004 and 2005, Knight Frank had 16 applicants per top-end property. This rose to 32 per property during 2006 - but has since dropped to 18.

The article highlights 271 central London homes sales closing at over a million pounds in February of this year, a 33% increase over last years figures. So what are we supposed to believe?
Montreal based Rodrigue Tremblay, the noted political economist, claims that the practice of sub-prime loans and the creation of "derivative financial products" is much more widespread in the USA than in other countries. High risk loans represent 20% of mortgage loans in the U.S., compared to 5% in Canada according to Tremblay. Of the $10 trillion mortgage market, about $2 trillion constitute the sub-prime mortgage market, which is a sh*tload amount of money.
But back to London, have you seen the number of '07 Lambo's and Ferrari's cruising Knightsbridge this summer? Well expensive sport cars in Knightsbridge is nothing new you say; but have you seen the increasing foreign registration, mostly Dubai licence plates? That my friend certainly is something new and something to think about

Is this a good time to buy US property (part 1)

With all the sub-prime turmoil that's happening stateside and the fact that house prices are dropping - even in Manhattan; plus the dropping US dollar, the question has to be asked, is it the right time to buy?
[update - I don't have the answer to this question, I'm hoping you could help me by dropping a comment, or sending an email. If you're in the States and know any great investment opportunities, feel free to share them with us]

Comments on Wall Street jitters and UK housing

Reputable economist Fionnuala Earley of Nationwide Building Society this afternoon released the following statement on the Wall Street selloff and its potential impact on the UK housing sector:

the implications for the UK housing market ... could mean that wholesale funding costs will increase and that lenders tighten up their own criteria, particularly those that are very dependent on wholesale funding. However, if the Bank of England see these current developments as a real threat to the City, this is likely to reduce the risk of further increases in interest rates, counteracting some of that effect.” [emphasis added]

Earley's comments are somewhat contradictory in nature to the tone Mervyn King and the BoE set in his press conference 2 days ago. Paul Tucker, the banks Executive Director for Markets stated that the fundamental pressures in the financial markets - driven mainly by the subprime crises - was isolated.
King said that he doesn't make any predictions on the housing market, but that he was 'surprised' by housing's resilience. He adamantly stated he would not use interest rate policy to bail out 'unwise lenders' and claimed to find no real challenge to the global 'macro-economic outlook'.
However, it appears central banks around the world beg to differ with King's analysis. In response to the crises, Japan's central bank injected one trillion yen (£4.2bn) into the Tokyo market, The European Central Bank pumped €61bn (£41bn) into European markets; Bernanke's Fed added $24bn (£12bn) to the US banking system and the Australian central bank took similar action.

What prompted the interventions from the central banks was that overnight money interest rates shot up this week because cash was scarce. In other words, the price of money rose because it was in short supply.
As of late today, it appeared that the huge injections of funds in the US, Europe and beyond had had the effect of pushing those overnight rates back down again, relieving the pressure on the banking system, for now at least.
[guardian emphasis added]

With the price of money rising, no doubt consumer banks will pass those rising cost onto consumers. Yet King remains silent, even though the FTSE's crumbling.
Will or will not his actions prove beneficial to UK consumers is the 64 billion dollar question du jour.

Subprime meltdown: New Century virtually bankrupt

If this is a "shade of the new blue chip", then we're all in deep shit!

[From WSJ via Seeking Alpha]

Analysts are speculating that New Century Financial, the beleaguered subprime mortgage lender, will shortly file for Chapter 11 bankruptcy protection. Their evidence is the disclosure that Barclays and Morgan Stanley, two of New Century's main lenders, are repossessing loans that had been used to secure financing. New Century will hand over the loans it made with Barclays credit lines; in exchange, it will be forgiven the obligation to buy back $900 million of those loans. Morgan Stanley will auction off $2.48 billion of New Century subprime mortgages that constitute the collateral behind New Century's $2.5 billion credit line from the investment bank. Stifel Nicolaus analyst Christopher Brendler: Both banks "felt so uncomfortable with" New Century's ability to repay them that "they decided to just take the loans and auction them off themselves...I'm surprised that New Century hasn't filed for bankruptcy already." All New Century's lenders are pulling their financing, and it has received default notices from Barclays, Bank of America, Citigroup, Credit Suisse, Goldman Sachs and Morgan Stanley, among others. If all its lenders demand mortgage repurchases simultaneously, New Century could owe $8.4 billion, an impossible sum that would force the company's liquidation.

The Economist covers housing

Unfortunately, I don't have an online subscription, but the teaser reads quite lovely ...

JUNE is National Homeownership Month in America. National Foreclosure Month would be more apt. Some corners of the mortgage market—notably subprime loans aimed at those with poor credit records—have a nasty case of dry rot.…

What's going on with subprime?

All the talk on Wall Street and in the financial world this week has been centered around subprime mortgages and its effect on stock markets in particular and the overall economy in general. With the spectacular collapse of a few US based subprime lenders, many are proclaiming the end to end all ends. But is this really so?
Closing Specialist Diane Cipa in her blog offers some insider insight into the world of the subprime lender:

I believe subprime mortgage lenders and investment bankers factored into their risk analysis ridiculous lending standards and even probably accounted for a certain amount of borrower fraud. Anyone who makes loans without documentation and without borrower equity does so with open eyes. The yield offset the risk, so la-de-da.
The flaw in their analysis, the missing layer of risk to which lenders themselves were oblivious was fraud perpetrated by lending personnel, both inside employees and mortgage brokers. That's the nasty secret blatantly obvious to me and I have to think many honest lending and title professionals. Maybe not. Maybe I just thought it had to be obvious because of my underwriting background.
I have wondered for years why lender quality control departments weren't picking up the garbage and doing away with it.

Food for thought and as Buffett told us last week: be greedy when others are fearful, and fearful when others are greedy. I'm about to get my greed on