PIMCO, Phil Gross – MOOOOO

From the above articles, there looks to be an additional 33% decline in real prices over the next 5 years for San Francisco.  This is good news for those saving to buy a house in 5 years but bad news for everyone else. If you buy now and the prices sinks down 33% over 5 years, you’ll have negative equity even with a 20% down payment. Negative equity is a usual stop along the way to bank foreclosure. This is bad news for those looking to buy now.

The above graph is from PIMCO. See where we are right now at the beginning of a small cliff and how much farther down we have to go through 2010.

PIMCO’s Phil Gross argues that the best way to stop the coming decline is to restore affordable credit. Unfortunately, while Federal interest rates have declined from 5.25% to 2%, mortgage interest rates have risen from 5.5% to about 6.5%, currently. The way to do this is through some sort of legislation. He seems to be in support of the brand new housing bill that’s going on through, but I’m unsure as to how that will affect interest rates (I don’t know).

The other amusing solution that he throws out from a friend of his is the Government buying 1 million new/unused homes and blowing them up to reduce supply. This would likely work economically, but certainly not politically.

We have seen further deterioration in the residential land portfolio during the second quarter. … M&I has $2.3 billion in residential land loans to individuals and developers. $1.5 billion, or 66%, are located in Arizona . The bulk of the Arizona loans, nearly 70%, are in Maricopa County . … LTVs are approximately 115%. Residential land accounts for $219 million of nonperforming loans of which 55% are based in our Arizona business unit.

LTV is the amount of a loan that is paid off. 0% means it’s paid off completely. 100% means nothing has been paid. 115% means people owe 15% more than when they did when they originated their loans. This is across all of their loans! And apparently, they’re stating that they took on NO subprime loans. When your regular prime loans have such high LTV, that’s a terrible thing for the state of the bank. Imagine what that means for all banks if even those who loan properly are getting hammered?

Freddie Mac Freefall

Click on these for the full % drops. They’re both down around 50% since Thursday.

Fannie Mae Freefall

Gov’t Plan to bail out Fannie Mae & Freddie Mac

The above are a couple good links describing the current state of affairs and the Fed’s plan to lend them cheap money. The links say it better than I can. Check them out. Especially the first one.

IndyMac Bank fails, seized by FDIC

Fannie Mae & Freddie Mac in trouble

The second largest bank failure in US history happened yesterday around 5:30pm. They held a majority of junk mortgages and were technically insolvent. NY Senator Chuck Schumer publicized a few letters to regulators questioning IndyMac’s solvency. Everyone ran to take out their deposits before the bank collapsed in on itself which it was forced to do. About $1billion of its holdings were not FDIC insured and will be repaid at 50% of their holding size. Goodbye, $500million! Schumer saved those smart enough to get out when he put up the warning sign. Others may blame him for causing the run, but it would have happened sooner than later.

IndyMac was the 11th largest mortgage lender at the time of its failure. This should have some effect on interest rates, but the scarier issue is what happens to Fannie Mae & Freddie Mac.  Together, they back half of all US mortages at $5trillion in value. They are also responsible for about 80% of new mortgages, from what I’ve read recently.

Much has been said about their potential insolvency lately and their share prices have dove off a cliff the past week as it looks like they may be bailed out if the worst happens. If that happens, shares of the company are effectively worthless. These companies can simply not be allowed to fail. If they do, mortgage interest rates would skyrocket to the 10-15%+ range as banks would have to assume the risk themselves, instead of getting guarantees from Fannie Mae & Freddie Mac. (That’s their primary business model, guaranteeing the loans will be paid out in exchange for a fee.) If the rates skyrocket to those levels, the housing market will fall even further than it currently is looking to do. On top of that, if the FDIC takes them over, they’d sell all their assets to pay out their dues. That would flood the market with many more homes and you know what happens then.

One option for those companies besides failing, is to stop to taking on new loans, which would force rates to skyrocket as well and is a slightly better option. They will also likely not give out dividends to their shareholders which would send the stock down further as its return on investment would be less. (Dividends for both companies are hefty.)

Much of this hinges on what happens on Monday when they will be auctioning off $2 billion in their current loans. If they can sell these, they will be able to raise capital to continue taking on new mortgages.  If they don’t, the above options come into play.

The result of all of this should be their stock prices flying down over the next week (SHORT SHORT SHORT) even further and the housing market starting to have its shaky legs cut out from under them. The market was looking for buyers as home prices were flying down and rates stayed acceptable and mortgages were attainable.  It looks like prices will continue to fall but rates will be jacked up and mortgages will be harder to get. Either of which will send the market further downward.

Buckle up!

Maps + Statistics = Happy Me. You can get a great view of the % of income people spend on housing, gasoline, transportation, mass transit, etc…

What’s scary is that the majority of home owners in San Francisco spend over 45% of their income on housing + transportation costs alone. The numbers seem freakily high when you’re talking about income percentage. However, after thinking about it and the fact that I’m looking to buy, that seems about right for percentage and my income level. Ack!