Real Estate Insights

If you have been thinking about refinancing lately then this may be your last signal to get it out of the way…that is before the mortgage market goes completely ”belly up.” This week has been incredibly tough on the mortgage industry as more and more well known lenders are cutting back on the loan programs they offer, while some are even going out of business. Even just today, American Home Mortgage a.k.a. America’s Broker Conduit, one of the larger and more recognized mortgage lenders went out of business. And over the past few weeks they have been preceded by over 100 other lenders including Fieldstone Mortgage, Alliance Bancorp, Stone creek, Steward, Aegis, MLN, and more. This list includes many “sub-prime” lenders but also many Alt-A and A-paper lenders as well. To find out more about which lenders have gone away and which are considered the next victims, go to http://ml-implode.com/. And for more details on the possible impact of the mortgage market on the economy please see the following article.

Subprime woes have moved far beyond the mortgage industry. Already, at least five hedge funds have blown up. The latest worry is that a recent slump in the markets for corporate loans and junk bonds will deepen, jeopardizing the financing of leveraged buyouts, a big profit driver for investment banks. What's more, fears are growing that banks may be on the hook for some of the $300 billion in loan commitments they've made for buyouts already in the pipeline. The mood has gone so somber that derivatives traders are betting that bonds issued by major investment banks will tumble to near junk territory. Goldman Sachs Group (GS) and Lehman Brothers (LEH) are being seen as no more creditworthy than casino operator Caesars Entertainment, according to an analysis of derivatives trades by Moody's Credit Strategies Group….

…If debt investors remain wary, banks may have no choice but to reprice loans and junk bonds at higher interest rates—and eat the difference. Deutsche Bank (DB) analyst Michael Mayo estimates that lenders could lose as much as $6 billion for this reason alone….

…The ultimate worry is that the trouble in the junk-debt markets will spread to the traditional corporate bond market and create a full-fledged credit crunch that would threaten the economy. That scenario may be unfolding. Issuance of investment-grade corporate bonds fell 72% in July from June's level and 34% from July, 2006, according to Dealogic. And some say the subprime-mortgage and leveraged-loan markets are harbingers of wider credit troubles. Greg Jensen, co-chief investment officer for money-management firm Bridgewater Associates, wrote in a July 31 client note: "Both problems are just the symptoms of…a significant financial fragility built on too much liquidity for too many years." Adds Leslie Rahl, president of Capital Market Risk Advisors in New York and former co-head of Citibank's (C) derivatives group: "Nothing stays rosy forever. We've been in a rosy world, with credit spreads at historically tight levels for some time now. But we seem to be leaving it."

“The blowup at American Home is a reminder that the mortgage market remains a major threat as well. American Home's customers, after all, were borrowers with generally good credit histories—an indication that the mortgage mess is no longer confined to risky subprime borrowers. Through the rest of this year and into next, a raft of adjustable-rate mortgages will begin adjusting to higher interest rates. The higher monthly payments could squeeze even borrowers with good credit histories, leading to a new round of mortgage defaults.

All this could mean more pain for the financial sector—and for the broader stock market. Warns Bradley Golding, a managing director at Christofferson, Robb & Co., a money manager that invests in bonds: "The stock market has not caught up to the severity of the situation."