From the Financial Times:

A Californian hedge fund has made more than 1,000 per cent return this year by betting against US subprime home loans, making it one of the world’s best-performing funds of all time.

Lahde Capital, set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000 per cent mark, after fees, following the latest leg of the credit market turmoil. The fall in the value of subprime-linked securities has boosted a group of funds which spotted the problems in advance.

The decision to use derivatives to short, or bet against, low-quality US home loans taken by a select group of hedge funds last year appears to have become the most profitable single trade of all time, making well over $20bn in total so far this year. John Paulson’s New York-based Paulson & Co, the biggest of the group with $28bn under management, is said by investors to have made $12bn profit from the trade already.

It’s a shame that the mortgage companies themselves had no such foresight.

David Ader, RBS Greenwich Capital:

It’s a big deal, maybe, but we’re holding judgment as to whether this staves off the economic repercussions of the problems already created. We don’t know how many are impacted. We don’t know how you unravel the homeowner from the long change to the mortgage owner. We don’t know how covenants come into play. Let’s say there’s room for skepticism, but the headline offers up a bit of flattening potential.

Nouriel Roubini, RGE Monitor:

So after wasting almost a year in supporting a case-by-case approach to loan modification and realizing that only a paltry 1% of such mortgages had been modified as lenders and servicers did not have either the skills or the human resources or the physical resources to modify one by one millions of loans after a dragged out negotiating process with the debtor, both the mortgage lenders and the US Treasury have now gotten religion and accepted an approach that they had vehemently opposed before: i.e. move from a case-by-case to an across-the-board approach to loan modification. Even Paulson finally got it that.

Yardeni Research:

Interest rates are set to reset next year on $362 billion worth of adjustable-rate subprime mortgages, according to Banc of America Securities. An additional $85 billion in such mortgages is resetting during the current quarter. The estimates include loans packaged into securities and held in bank portfolios. Ms. Bair observed that borrowers she would target are typically already paying between 7%-9% at their starter rate! (2/28 mortgages are fixed for two years at the teaser, then adjust every year for the next 28 years.) Will the farewell to ARMs end the credit crisis? Not by itself, but it is certainly a move in the right direction.

Tom Gallagher, ISI Group

We view an informal industry agreement…as likely to have a modest impact. At the margin, it will hurt the mortgage finance industry but help the economy in the short run by stretching out foreclosures and slowing the rate of home price declines (but not the end point.) Even if the loan modifications merely delay foreclosures, the push for loan modifications will probably help the economy a little in the short run if they slow the increase in foreclosures that would result in a shaper fall in home prices. Of course, home prices need to fall considerably to reach a new equilibrium… In a sense, voluntary loan modifications under regulatory duress is a softer version of the ‘cram down’ bankruptcy bill being considered in the House Judiciary Committee. It imposes soft pressure to modify instead of forcing lenders to do so as the bankruptcy bill would. If the voluntary loan modification approach doesn’t produce the hoped-for results, Treasury may be paving the way politically for the bankruptcy bill as it is based on a similar rationale.

Paul Krugman, The New York Times:

Kudos to the Bush administration. Yes, you read that right — although I need to see more detail before giving a thumbs up. But as of this morning, it seems that Henry Paulson is being much more proactive on the housing mess than I expected.

(as compiled by the Wall Street Journal)

From Reuters:

WASHINGTON – Mortgage industry executives are working to hammer out details of a homeowner rescue plan that would freeze interest rates on some U.S. sub-prime mortgages for up to seven years, but questions remain over how to avoid investor lawsuits and other legal challenges.

The negotiations among lenders, servicers, investor groups, regulators and other parties were aimed at allowing US Treasury Secretary Henry Paulson to announce a framework for the plan on Monday, with full details expected on Wednesday, said a mortgage sector source involved in the talks.

Mr Paulson on Friday said the mortgage industry was working with the Treasury on a broad plan to help save the homes of sub-prime borrowers with adjustable-rate mortgages who cannot afford higher payments as their interest rates reset in coming months, but who otherwise could afford to stay in their homes.

The plan’s details are now up to the mortgage industry and investors, the two groups that will have to absorb its costs.

“The message is that everybody has to get on the bus,” the source said of Mr Paulson’s directive.

Details over which mortgages would be considered for an automatic interest rate freeze of five to seven years are still sketchy. The source said that initially, only sub-prime loans with two- or three-year periods of low “teaser” rates would be considered, but more traditional sub-prime loans with longer fixed-rate periods could also be modified.

A shorter freeze period was initially considered, but Federal Deposit Insurance Corp. Chairman Sheila Bair pressed in the negotiations for a five- to seven-year freeze. Ms Bair was the first federal regulator to propose a broad rate freeze as California negotiated a similar deal with several top mortgage lenders in the state, hard-hit by the housing downturn.

Estimates of mortgage resets vary. Federal Reserve officials estimate that 2 million mortgages face resets and as many as 500,000 of these could lose their homes.

Deutsche Bank said in a report on Friday that the population Mr Paulson’s plan is aimed at — owner-occupants with at least some equity and facing their first reset — comprises 1.2 million loans valued at $US258 billion, or one third of outstanding “first-lien” sub-prime loans.

(more)

But not all agree that this leads to a rosy situation, especially for investors involved in the securitization of loans. Forbes reports that any attempts to freeze sub-prime interest rates could lead to investor protests:

One obvious problem with the proposal is that in many cases, the sub-prime loans in question have already been securitized and sold to investors. And many of these investors could oppose efforts to modify these loans, which are their investments.

‘The banks don’t own the loans anymore,’ Harm Bandholz of Unicredit said. ‘Even if the lenders agree, there could be lots of lawsuits.’

But there seems to be flexibility among lenders who, of course, are not wanting foreclosures en-masse:

Blackwell testified in California [Friday] that about 3 pct of the 7.9 m loans backed by Wells Fargo are sub-prime adjustable rate mortgages, and said most of these can be modified.

‘At this time, it appears that we can find workable solutions for the vast majority — 80 to 88 pct — of these loans,’ he said.

Michael Albon, Senior Vice President of Washington Mutual said in testimony for the same hearing that his company has modified 720 mln in loans so far.

Ongoing discussions on how to help struggling homeowners are taking place under the Hope Now Alliance, a group of mortgage servicers, counsellors, and non-profit groups that were brought together by Paulson.

Surprisingly, the plan is gaining support from unexpected places…

The outline of the Bush administration plan won praise from a diverse spectrum. Paul Krugman, the liberal New York Times columnist, offered “kudos to the Bush administration” on his blog, saying that while he needed to see more details, “It seems that [Treasury Secretary] Henry Paulson is being much more proactive on the housing mess than I expected.”

House Financial Services Chairman Barney Frank, a Massachusetts Democrat, offered legislative help for the large-scale modification of loans, saying he was “encouraged by reports of progress” in efforts to help borrowers who are in danger of losing their homes.

(more from the Wall Street Journal)

Unfortunately, Californians will not be receiving an increase in Fannie Mae and Freddie Mac loan limits for 2008 (obviously, no one will). From the OFHEO (Office of Federal Housing and Oversight) Press Release Issued on Tuesday, November 27th:

Washington, DC - Office of Federal Housing Enterprise Oversight Director James B. Lockhart today announced the maximum 2008 conforming loan limit for single-family mortgages purchased by Fannie Mae and Freddie Mac (the Enterprises) will remain at the 2007 level of $417,000 for one-unit properties for most of the U.S. Higher limits apply to Alaska, Hawaii, Guam and the U.S. Virgin Islands as well as to properties with more than one unit.

The conforming loan limit refers to the maximum amount of a loan that an Enterprise can secure or purchase. It is based upon the October-to-October change in the average home price in the Monthly Interest Rate Survey (MIRS) of the Federal Housing Finance Board (FHFB):

The FHFB reported the decline in the average price was $10,685 or 3.49 percent, from $306,258 in October 2006 to $295,573 in October 2007.

“While the house price survey data used in determining the conforming loan limit show a decline over the past year, as previously announced and consistent with the proposed new conforming loan limit guidance, the level will remain at $417,000 for the third straight year,” said Lockhart.

Digging Deeper:

Check out this interview with Fannie Mae President and CEO, Daniel Mudd, in the San Francisco Chronicle, in which he blames overconfidence in the real estate market for the current crisis.

 

Experts say that the recent fed rate cuts won’t have a positive impact on the economy until late 2008.

From the Wall Street Journal:

Those hoping that recent Federal Reserve rate cuts would be an immediate tonic for the economy’s ills may be disappointed, according to a Federal Reserve policy maker.

Fed Governor Frederic Mishkin said in a speech Thursday that Fed policy changes may not affect the economy for at least a year, meaning forecasts need to play a “central role” in policy making.

Because of the “inertial” aspect to changes in supply and demand, “monetary policy actions have little or no instantaneous effect on the economy,” Mr. Mishkin said in prepared remarks to the Massachusetts Institute of Technology.

From the Sacramento Bee:

The concept of historically low interest rates is a constant refrain in the real estate industry’s favorite saying: “Now is a good time to buy.”

This week, the industry has history on its side. Interest for 30-year fixed-rate loans fell to a two-year low – to 6.10 percent nationally – federal mortgage titan Freddie Mac said Thursday.

That’s the cheapest rate for long-term home loans since the week of Oct. 13, 2005, the agency said.

Okay, people are truly starting to freak out in Sacramento. But not all the news is doom and gloom. Matt Woolsey at Forbes argues that Sacramento has the worst housing market in the country, stating that, “over-building and speculation helped the Sacramento housing market become one of the fastest gainers in the country during the housing boom. It’s now in a near free-fall.”

This past week, the National Association of Realtors noted that prices throughout the country are down 2% overall, but Sacramento has had one of the worst price drops this past quarter at a whopping 10.5%.

Sacramento Landing points to an article in the Wichita Eagle that reports that while speaking in Wichita, the Chief Economist for the National Association of Home Builders, Bernie Markstein, noted that: “‘This is fun talking to you guys…Imagine trying to pump up the people in Sacramento’.”

So, is there anything to be “Thankful” for this season? Well, if you look hard, there is a bit of a silver lining:

First, The National Association of Realtors predicts a “Modest Recovery for Existing-Home Sales in 2008 as Credit Crunch Subside“:

Lawrence Yun, NAR chief economist, said the housing market will improve from a steady unleashing of pent-up demand, and from a wide abundance of safer mortgage products. “The level of pent-up demand reaching the market next year is a bit uncertain, and it is possible for even higher home sales activity than we’re forecasting if buyers regain their confidence about the long-term benefits of homeownership. Over the near term, home sales are likely to be fairly flat as the lingering impact of the credit crunch filters through the system through the end of the year.”

Second, amazing news: Gov. Schwarzenegger met this past week with the for largest loan servicer of sub-prime loans and brokered an agreement for them to wait up to five years before adjusting them upward. This should offer much relief to many Sacramento residents who were fearing foreclosure. The Sacramento Bee reports:

The state’s voluntary arrangement with Countrywide Financial Corp., GMAC Mortgage, Litton Loan Servicing and HomeEq Servicing covers more than 25 percent of California’s subprime mortgage loans, which generally involve homebuyers with weak credit and require periodic increases in payments after initial low teaser rates.

The deal asks lenders to freeze low interest rates for subprime homeowners who reside in their property, are current in their payments and show they cannot afford a scheduled rate increase. Those homeowners who already have missed payments and who are threatened with foreclosure don’t appear to benefit from Tuesday’s agreement.

Third, there is plenty of evidence that a market correction was in much need after years of skyrocketing prices in the Sacramento area. This correction will most likely create a favorable environment for homebuyers to re-enter the market. The Bee reports:

Think back now to mid-2004 when Sacramento County’s median sales price for resale homes broke through the $300,000 barrier. It was a sensational moment.

“Housing prices hit milestone,” The Bee reported. The newspaper account said it took 13 years for prices to climb from $100,000 to $200,000 – and only two to “rocket” to $300,000.

Now it’s just as sensational seeing it slide back below $300,000.

That’s what happened in October, according to La Jolla-based DataQuick Information Systems. Half the resale homes that closed escrow last month in Sacramento County were priced below $295,000. From a buyer’s viewpoint, that’s an encouraging sign of growing affordability that will eventually revive this market.

Fourth, unless you just entered the Sacramento Real Estate Market within the past six months, you should be pretty happy. TrendGraphix reports that, since 2001, the average home’s value in Sacramento has increased more than 70% (if you live in the urban core, you saw an increase of 110%!).

Fifth, if you live in the urban core (or other more established parts of Sacramento), not only has the current market had much less of an effect on your home value, your homes are the most likely to see the quickest market turn-arounds (according to TrendGraphix).

While these little evidences of a silver lining do little to comfort those (especially in the suburbs) of Sacramento who have lost tens of thousands of dollars worth of equity, we are reminded that the current real estate market in Sacramento is a complex one. Over the next weeks in this blog, I will attempt to cut through some of that complexity an help to offer sober and realistic assessments of it. Please come back and make your comments.

After lots of blustering from opponents in the debate over the future of its project, Thomas Enterprises gets the unanimous recommendation from the City Planning Commission for approval. With few hurdles left, the Sacramento landscape seems bound for some change.

From the Sacramento Bee:

“This project has been like many chapters in a book. … We just need the opportunity to move to the next chapter of this great project we’re trying to bring to the city of Sacramento,” he said.

While commissioners took care to endorse the railyard project overall, some raised issues with certain aspects of it.

Is there a solution to the current housing crisis? Today in Forbes.com, Matt Woolsey noted that experts are saying “yes“:

1. Federal Oversight Of Lending Industry
2. Restore Investor Faith
3. Expand The Scope Of Fannie, Freddie And The FHA
4. Jobs, Jobs, Jobs
5. Cut Prices And Construction
6. Non-Agency Loans Need To Return To The Market
7. Investors Need To Learn From Their Mistakes
8. Don’t Cut Rates, Cut Inventory
9. Buyers Need To Look At The Market In A Long-Term Sense
10. Buyers Need To Realistically Assess What A Price Trough Means

Yes, there are solutions out there.  That being said, unfortunately, the market is not rational.  Many sellers are asking upwards of twenty percent more than the market value (and often times fifteen to twenty percent more than their homes were valued at during the market’s peak).  Meanwhile–due, in part, to all the negative press–buyers are expecting to pay “fire sale” prices.  Over the past few years we haven’t needed to be “realistic” about the market.  Let’s stop the hyperbole and take a rational look the market and its possibilities.

I would love to hear your comments…

Pardon the cliché, but, yes, all real estate is local.  As many of you know, the current market looks very different in the urban core than it does in the suburbs right now.  But there may be hope even for those who currently own in neighborhoods affected by the recent slump…and a great opportunity for those who want to!

From the Sacramento Bee:

We know. We know. The real estate news these days is always about home sales hitting a new low and values falling.

As 2007 nears an end, everyone who owns a house is longing for something better – a recovery or at least some stability for the Sacramento region. Most local experts counsel it’s still a little early to be talking about either.

But for the sake of all anxious homeowners standing around the wishing well, let’s look at local history. If it has anything to tell us, it’s that real estate recoveries – and that dependable upward trajectory for California home values over the long run – usually come pretty fast once they start.

I wonder how many people are out there saying, “Boy, I sure am glad that I stayed out of the 1997 real estate market.”  The recent slow-down in some areas (and downturn in others) should be a simple reminder that real estate has always been the best and safest long term investment.

The article goes on to point out exactly what happened in Sacramento County after the last slump:

September 1997 delivered a $119,000 median price – still below the $138,000 median from September 1991. But the median climbed to $140,000 in 1999 and $154,000 in 2000. In September 2001 it hit $180,000 and then soared away. The September 2007 median: $307,000.

The market will always have ups and downs.  If I checked on my stock portfolio on a daily basis, I would have a definite blood pressure problem.  Your house value may be down today, but it will be up again, before you know it.