Subprime crisis hits Narvik, Norway?

You read right. Narvik and other towns in Norway had their municipal governments invested in CDO-type securities. The four communities may have lost as much as $64 million or even more. It’s bad enough that Narvik, population 18,000, has missed one city payroll.

“The people in City Hall were naïve and they were manipulated,” said Paal Droenen, who was buying fish at a market across the street from the mayor’s office. “The fund guys were telling them tales, like, ‘This could happen to you.’ It’s a catastrophe for a small town like this.”

Now, the towns are considering legal action against the Norwegian brokerage company, Terra Securities, that sold them the investments. They allege that they were duped by Terra’s brokers, who did not warn them that these types of securities were risky and subject to being cashed out, at a loss, if their market price fell below a certain level.

“When you sell something that is not what you say it is, that is a lie,” Mayor Karen Kuvaas said. She disputed the suggestion that people here lacked the sophistication to understand what they were buying. “We’re not especially stupid because we live so far in the north,” she said.

Norway’s financial regulator agreed that the brokers had misled the towns, and it revoked the license of Terra Securities, prompting the company to file for bankruptcy. But the company’s parent, Terra Group, which is in turn owned by 78 savings banks and remains in business, rejected calls for it to compensate the towns. A spokesman for the group said it too had taken a hit from the episode.

Norway’s finance minister, Kristin Halvorsen, has ruled out the possibility of a state bailout, and Citigroup, which announced Thursday that it would shut down one of the money-losing investments Narvik bought, said it had no legal obligation to step in.

Narvik has investments like this equal to about one-quarter its annual budget. The problem seems to have been created in part by city officials who didn’t read original documents thoroughly, and in at least equal part by Citigroup and others who added fine print after the initial documents were signed.

I wouldn’t be surprised to see Citigroup sued in Norwegian court before this sorry episode is over.

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Wonder if any American mortgage lenders did this?

Beleaguered British lender Northern Rock put two-thirds of its mortgage portfolio into a separate offshore company. (The Channel Islands serve the same purpose in the U.K. that Bermuda and the Bahamas do here.) Given the way offshore entities have proliferated here in the U.S., I’m actually surprised we haven’t heard about this yet in our mortgage lending industry.

If we do here about something like this year, the subprime market will surely take an even more massive cratering.

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So much for the whistling in the dark that the subprime crisis won’t affect Texas

And what it might say nationally and politically

D/FW existing home prices are down 3 percent from a year ago. And, that’s worse than the national average fall-off of 2 percent.

Despite folks in Texas (that’s YOU, Gov. Helmethair) doing this whistling in the dark, this is just another sign that tells me it’s more and more likely we’re facing a recession sometime next year.

As a political issue, then, things that should be on the table are better regulation of banks, mortgage lenders, etc. on subprime loans; better regulation of lending institutions in requiring a higher actual percentage of capital backing outstanding loans, better regulation of CDOs and other investment vehicles, and yes, Chuck Schumer, taxing hedge fund management fees, and other things, as capital gains.

Since $100/bbl oil (or above) will exacerbate the financial situation, we need to have presidential candidates addressing other issues.

Peak Oil. Forget, or get beyond, the shibboleth phrase “energy security.” Actually start talking about Peak Oil. Stop putting blinders on this part of our future. Tell Americans unless major changes are made now, this will be far more gut-wrenching than global warming, with major changes happening sooner.

The dollar, world currencies, inflation, etc. Talk more about why you think a stronger or weaker dollar is better. Be realistic about how much you think China can be made to do with its currency. Maybe Richardson’s idea, of announcing proposed Cabinet appointments in advance of the general election, is one way to signal planned economic policies.

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The subprime madness merrily goes on — personal evidence

At my apartment complex, Gehan Homes just got done doing a mass windshield-flier bombing of all the cars on the parking lot. Read this:

Free on-site loan approval. Credit issues OK. Be sure to ask about lease buyout. $0 total move-in.

Gehan Homes can rot and burn, and so can the mortgage brokers working with it.

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Brookings tries to explain away subprime worries and cheats

Cutting some evidentiary corners, and looking past the CDO valuation issue for the most part, is an easy way of doing that. Take this bit of playing with the facts:

[A]mong all U.S. residential mortgage originations, subprime loans altogether comprised a cumulative total of under 13 percent from 1994 through 2005, though they rose to 19 percent in the year 2004 and 21 percent in 2005, according to the Mortgage Bankers’ Association (MBA). This means at least 87 percent of residential mortgages as of mid-2007 were not subprime loans, according to the MBA’s delinquency studies.

So, the study simply ignores 2006 and early 2007 data on subprime loans, despite the sudden increase in the percent of loans being subprime ones in 2004-05.

Brookings also claims the problem is confined to subprimes, when the number of defaults in the loan class above them, Alt-A, has also been increasing.

And, it claims there is no credit crisis even while admitting that CDOs and other mortgage securitizations have risk that it says, in not so many words, wasn’t priced to market.

The Brookings report is either ignorant or willful on the economic issue that lending institutions don’t know how many of these instruments could go bad, therefore don’t know how much money they’ll have to tie up to account for them.

It also has nothing unfavorable to say about Fed rate cuts.

The only thing I found myself in agreement with was no bailout for borrowers. On the other hand, it didn’t say anything against a bailout for lenders.

In other words, it sounds like it was written by two Wall Street bulls with connections to financial institutions.

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Subprime crisis could out-cost 1980s S&L debacle

A new estimate places the final cost of the subprime crisis/housing bubble at $400 billion, while, in inflation-adjusted dollars, the S&L crisis weighs in at $240 billion.

In a new report to be issued today, the Joint Economic Committee of Congress predicts about two million foreclosures by the end of next year on homes purchased with subprime mortgages. That estimate is far higher than the Bush administration’s prediction in September of 500,000 foreclosures, which in itself would be a tidal wave compared with recent years. Congressional aides provided details of the report yesterday to The New York Times.

The Joint Economic Committee estimates that the lost of real estate wealth just from foreclosures on subprime loans will be about $71 billion. An additional $32 billion would be lost because foreclosed homes tend to drive down the prices of other houses in the neighborhood.

Those figures would cause a decline of $917 million in lost property tax revenue to state and local governments, which will also have to spend more on policing neighborhoods with vacant homes.

And, you wonder why people like me warn about a pending recession?

Global Insight, a research firm, predicts that the national average for housing prices will drop 5 percent over the next year and 10 percent before mid-2009, for a total of about $2 trillion. Economists at Goldman Sachs have predicted prices will drop by 15 percent, meaning an overall decline of more than $3 trillion; other forecasters have said the decline could be 20 percent or more.

That’s why.

Don’t forget, we haven’t even talked about spending downturn due to fewer home equity loans being taken out, or ones already on the books turning upside-down due to downturns in home value.

Economists continue to update their predictions on how the loss of housing wealth might affect the overall economy. Nigel Gault, chief domestic economist at Global Insight, said he assumes that consumers reduce their spending by about 6 cents for every dollar of lost wealth.

If prices drop 5 percent next year, that would mean a decline of $60 billion in spending, all else being equal. That would be a noticeable slowdown, but not enough to cause a recession.

In the last several years, Americans have increased spending faster than their incomes by borrowing against the rising value of their homes. Economists estimate that such mortgage-equity withdrawals may have added one-quarter of a percentage point to consumer spending growth — a boost that could now disappear.

That’s why presidential candidates better recognize this is going to be a serious issue next year.

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Why banks aren't renegotiating defaulted home loans

MSN's Jim Jubak does his normal excellent, reader-friendly job of financial explanation, this time telling why mortgage lenders are so loath to refinance defaulting subprime mortgage loans:

Who has an incentive to work out a deal with that mortgage borrower before he or she gets into trouble? Not the mortgage service company. These companies operate on the slimmest of margins, and any mortgage that requires extra work eats into that profit. Not the mortgage broker, certainly. Many brokers have gone out of business in the housing slump. Those that haven't, having already been paid for originating the mortgage, have no incentive to help with any debt workout. ...

And there's no reason to think that Countrywide Financial is the only mortgage company feeling this squeeze. Remember, 1.3 million subprime adjustable-rate mortgages are due to reset between October 2007 and the end of 2008.

That's much more than the number that have reset in the past 18 months.

More below the fold, including a non-economist reader-friendly explanation of just what these collateralized debt obligations are and how they got started.

Meanwhile, here's a new acronym you'll hear more of: SIV, for structured investment vehicle. It's an attempt to package those mortgage-based collateralized debt obligations into some even newer package.

The SIVs were set up as off-balance-sheet vehicles so that banks could invest in these markets without putting the risk of these deals on their own books. This is especially important for Citigroup, which, as the largest creator of SIVs, is on the hook for about $100 billion. ... By creating this conduit, the banks that created these SIVs — and that are on the line to fund them — avoid having to shell out big dollars or take these assets onto their own balance sheets.

But, because these SIVs, like their predecessor CDOs, haven't been priced on the market yet (amazing how places like banks and hedge funds can scream about capitalism until they get hoist by their own petard) SIVs are moving slowly:

This workout for SIVs and the big banks (and investment companies such as Fidelity Investments and Federal Investors that hold a lot of asset-backed commercial paper in their money market funds) is turning out to be a hard sell. Some big banks and investment companies are balking at the idea of ponying up money to buy risky assets that don't have market prices. How can they be sure, they ask, that the conduit will pay a reasonable price for these assets when there is no public market for them and no accurate method of assessing their risk?

Jubak says this could be very good for mortgage holders, in that it would finally forces lenders such as banks to revisit the idea of negotiating more of their bad loans to where they were still repayable.

Bonus: to help understand what these collateralized debt obligations are all about, Jubak gives an easy-to-understand explanation:

Think about the life history of the average mortgage.

* Some company originates it. That could be a mortgage broker, who qualifies a potential borrower and then puts that borrower together with a mortgage lender, or it could be a mortgage lender itself that also serves as the originator.

* That mortgage is usually then sold to another mortgage company, to a quasi-governmental entity like Freddie Mac (FMC, news, msgs) or to an investment bank.

* After purchase, those mortgages are most commonly bundled into securities, called residential-mortgage-backed securities, that are then sold to investors such as insurance companies and pension funds.

* Even that's not the end of the road for many mortgages because many residential-mortgage-backed securities, a bundle of, say, 1,000 or more mortgages, are then themselves bundled and then re-sliced into pieces of varying risk. These are then sold as collateralized debt obligations (CDOs) that might own as many as 100 residential-mortgage-backed securities, or 100,000 mortgages.

And, columns like this are why I'm a regular reader of his.

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