Headlines...

NEW -> Contingent Buyer Assistance Program
President Bush Signs H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007

http://www.whitehouse.gov/news/releases/2007/12/20071220-3.html

Text of the act

http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.3648:

From the comments on http://calculatedrisk.blogspot.com/2007/12/bofa-attitudes-changing-towards-default.html

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By the way, President Bush today signed legislation into law that will

eliminate tax liability for mortgage debt forgivess. Debt forgivness is only frozen until 2009 I believe.

I can guarantee this will make jingle mail more "socially" and financially acceptable.

They want a controlled burn.

MAB | 12.20.07 - 5:09 pm | #
 
Eff-you are scaring me to death again.

But what are the percentages in normal times.

Assuming the word "normal" really means anything.

Besides my motto that 90% of everything is cr*p, I live by the following:

There is no normal.

As to garbage and throwing away, There is no away.

And finally the every popular, The map is not the territory.

And the Buddhists say, Whereever you go, there you are.
 
I know quite a bit about municipal bonds. I am very disappointed at both the media and the typical blogger's discussion of what bond insurer downgrades mean. Let me separate it out for you. It's not much of al problem for solvent munis.

1. Fixed rate bond that is already issued. Means nothing to the city or county that issued it. They will still pay the same interest rate. For the bondholders, it means a bit of a loss due to the bond now having a lower rating, but they only encounter that loss if they sell before maturity. If the bond pays as scheduled, which the vast majority if muni bonds do, they will lose nothing.

For someone who wants to buy one of these bonds, it is slightly cheaper than before the bond downgrade.

2. Fixed rate bond not yet issued. A. Get another bond insurer. B. Issue uninsured, which is just fine with many public entities. C. Hang out and wait for a few months and see if new capital infusions or M&A activity raise the bond insurer ratings. Don't forget that interest rates are pretty low right now. Issuing without bond insurance at all is cost effective for an awful lot of people. For many others, the change is a nuisance which can be dealt with. It's typically a speed bump, and not a road closure. The problems are worse if you are only a day or two away from issuing. Then you have to redo a bunch of documents and perhaps remarket.

3. Auction rate bonds already issued. Here there may be a problem. It could be somewhat more expensive for the muni. It's my understanding that they could change insurers. Since these auctions happen frequently (e.g., monthly) it could cause a short term mess.

4. Auction rate bonds not yet issued. Consider waiting, or issuing fixed.

5. Various swaps. This might, or might not, be a problem. Most swaps have credit requirements regarding counterparties. Downgrades might result in posting collateral or having to unwind a swap at an inconvenient time.
 
So, it's not true that there are oodles of pension funds or other entities that are only allowed to hold triple A paper? To me the problem wasn't defaults, munis very seldom default, it's the possibility of firesale prices due to necessity of having to get rid of less than AAA paper.

Ok, that is a relief.

So maybe some municipalities will have to pay a bit more interest, charge slightly higher fees/taxes.

No biggie.
 
"5. Various swaps. This might, or might not, be a problem. Most swaps have credit requirements regarding counterparties. Downgrades might result in posting collateral or having to unwind a swap at an inconvenient time."

Hmmm-m-m-m, why do I think that this "might, or might not, be a problem" is something huge? Ohh-h-h, I am probably just a worry wart. It is probably nothing. After all, the counterparties have credit requirements. And the inconvenient time couldn't posssibly be when the counterparty is insolvent. And of course, the counterparty always has the collateral available. Nah, everything will be just fine. The risk has been spread out. No biggie. Ahh-h-h heck, what do Warren Buffett, James Sinclair, and the IBS know anyway?

Fitch Places 173,022 MBIA-Insured Issues on Rating Watch Negative

http://www.businesswire.com/portal/site/home/index.jsp?epi-content=GENERIC&newsId=20071220006121&ndmHsc=v2*A1198155600000*B1198219069000*DgroupByDate*J1*N1000837&newsLang=en&beanID=202776713&viewID=news_view
 
Muni Insurance Worthless as Borrowers Shun Ambac (Update2)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUinEIdJ4QBo

Dec. 21 (Bloomberg) -- State and local borrowers are discovering that buying municipal bond insurance from MBIA Inc. and Ambac Financial Group Inc. is a waste of money.

…

Wisconsin, California, New York City and about 300 other municipal issuers sold bonds without buying insurance in recent weeks, avoiding premiums that are as high as half a percentage point of the bond issue, according to data compiled by Bloomberg. The amount of insured bonds sold fell about 15 percent in November from a year earlier, according to Thomson Financial figures cited in the Bond Buyer, an industry trade publication.

Municipal issuers paid an annual average of $1.99 billion in premiums over the past five years to gain the AAA ratings granted by insurers on $1.86 trillion of interest and principal payments, Standard & Poor's says.

States and local governments with investment-grade ratings default on less than 1 percent of their debt because they can raise taxes and fees, according to a March report by Moody's Investors Service. They may be better credit risks than their ratings indicate.

…

Many investment-grade munis would have AAA ratings without insurance if they were ranked the same way as corporate debt. Every state except Louisiana would be Aaa, based on the scale for companies, which ranks borrowers on the probability of default, according to the report by Moody's.

Municipal issuers are ranked on their fiscal health relative to other municipalities. Investors' increased willingness to buy state and local government debt without guarantees suggests that borrowers may not require the backing of insurance companies.

``We have already begun to notice investors getting more comfortable with the primary payer and a willingness to forgo insurance for AA tax-backed credits,'' Bear Stearns said in its Dec. 13 report.

=================

Older article on credit ratings linked below

http://nakedshorts.typepad.com/nakedshorts/files/EinhornOnCredit.pdf

“Consider municipal bonds. According to S&P’s long-term data the 10 year default rate on an A rated municipal bond is 1%; while a corporate bond’s default rate is 1.8%; and a CDO’s is 2.7%. An A rated muni has the same chance of default as a AA/AA- rated corporate and a AA+ rated CDO. When municipal bonds default the expected recovery rate is 90% compared to 50% on corporate and CDOs.”
 
[Not a ton of new info here, but this Australian article paints just about as bleak a picture as any. Also, Calculated Risk received another shoutout.]

Americans 'walk' from loans

David Hirst

December 23, 2007

"The depth of the housing crisis was underscored by the head of one of America's largest banks, Bank of America, the straight-speaking Kenneth Lewis, who warned of a completely new attitude by Americans to their homes amid fears that as many as 20 million householders may "walk" from them, further deepening the crisis."

http://business.theage.com.au/americans-walk-from-loans/20071223-1iqr.html?page=fullpage#contentSwap1
 
This is the sound of the bubble bursting.



“It was as if someone turned off the faucet,” Mr. Carey said. “It just came to a screeching halt. When it stopped, people started dumping property.”



When Andrea Drewyor, 24, moved to Cape Coral from Ohio this year to take a teaching job, she found a brand-new two-bedroom waterfront duplex in a gated community with a fitness center, a swimming pool and a Jacuzzi — all for $875 a month in rent.

At night, most of the units around her are dark. The developer can moan.

Not Ms. Drewyor.

“I like not having a lot of people living here,” she said. “This place is awesome.”
 
Crisis may make 1929 look a 'walk in the park'

"The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor."

Merry ho ho.
 
According to Case/Shiller via Calculated Risk October in Miami was down over 12%.

Way worse than listed California cities. Things get bad enough, will Cubans go back to Cuba? Not!!
 
That article from the UK is astonishing. I found it amusing that they refer to our "The Great Depression" as "The Slump."

That was the only amusing part as the rest was sheer terror.
 
Ya gotta wonder who at Warburg-Pincus is gonna get fired. Warburg just threw $1 billion at MBI and then Warren Buffett comes along and says he is going to compete against MBI. Can you imagine the feeling in the stomachs of the guys at Warburg?

Can you say, "OOPS" ?
 
The really interesting aspect to the decreasing November new home sales report is that the sales will be revised DOWNWARD next month, just like October was revised downward in this report. In other words, the decreasing November new home sales report is optomistic.
 
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