| After the Deluge
In addition, companies like Citigroup (ticker: C), Merrill Lynch (MER) and others have to re-equitize their balance sheets, and that process is just beginning. People are way underestimating the dilution this will cause financial-services companies. They are in an awkward position. The faster they take writeoffs, the less capital they have and the less lending they can do. The market has not fully appreciated how much more equity will have to be raised. The first half looks awful, but it doesn't mean the whole year will be awful. I'm a big believer in not trying to anticipate the end of the world. Hickey: Only home mortgages have blown up. There are problems in auto loans, student loans, leveraged-buyout and junk-bond loans. Wherever people were lending, they were lending stupidly. Delinquencies have risen across the board, but defaults haven't come yet.
Let's make a deal: loan mod for 50% of price appreciation
(This is Part 2 of a two-part series. Read Part 1, "Too much equity can deny homeowners loan mods.") The first article in this series pointed out that when a mortgage borrower is unable to make the required payments, the servicing agent has an obligation to the owner of the mortgage to resolve the problem in the way that is least costly to the owner. The usual method is foreclosure, but an alternative is to modify the loan contract to make the payment more affordable. In making their decisions, loan servicers usually ignore an asset possessed by the borrower that could shift it from foreclosure to modification. This asset is the right to a share of the future appreciation in the value of the borrower's house. To make the decision process easier, I have designed a new calculator, numbered 7e on my Web site.
Not So Benign Neglect
At $213bn, y-t-d Home Equity ABS sales are 51% off last year's pace. Year-to-date US CDO issuance of $274 billion is running 2% below 2006 sales. Fed Foreign Holdings of Treasury, Agency Debt last week (ended 10/10) increased $5.5bn, surpassing $2.0 TN for the first time. "Custody holdings" were up $252bn y-t-d (18.2% annualized) and $317bn during the past year, or 18.8%. Federal Reserve Credit last week declined $3.3bn to $858.3bn. Fed Credit has increased $6.1bn y-t-d and $27.2bn over the past year (3.3%). International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.050 TN y-t-d (28% annualized) and $1.189 TN year-over-year (25.4%) to a record $5.861 TN. Credit Market Dislocation Watch: October 10 - Financial Times (Saskia Scholtes): "Banks and investors are still struggling to value mortgage securities backed by subprime home loans more than four months after valuation disputes came to light...
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