C.M.O. 2.9.2010
Credit Market Overview
February 9, 2010
“We have come to the inescapable conclusion that owning our own building is the smartest long-term investment for the association”, and thus spake Jonathan L. Kempner in July of 2007 when the Mortgage Bankers Association purchased its 10-story headquarters in Washington D.C. Mr. Kempner was to depart his role as CEO by July of the next year and by October of 2009 the new CEO and former MBA CEO John A. Courson would say that “continued ownership of the building would be ‘economically imprudent’”
With that the MBA began the process which has just resulted in a “short sale” of it’s headquarters. For those not fully steeped in the terminology of the current debacle a “short sale” as it pertains to real estate occurs when you sell your house for less than the amount owed on it and let the bank eat the leftovers.
Now it appears that the MBA has pledged to make good on the $37.7MM difference between the $79MM they paid for the building and the $41.3MM they just sold it for but the exact terms of the deal are not being disclosed. The irony here is of course, that the group that brought you liar loans et. al. has itself fallen victim to the bubble it helped create.
Not nearly as ironic but still quite interesting is that homeownership, as of December 2009, is now the lowest it has been in a decade with 67.3% of Americans owning their own home; that number reached 69% in 2004 according the National Association of Realtors. “The homeownership data I think really just underscores how this country as a whole became obsessed with getting people into homes” was how Mike Larson, an analyst at Weiss Research put it adding, “You can do all kinds of things to get people into a house, which we did; the real problem is making it so they can stay there”. Amazing what a little perspective will do for you.
Not helping of course is the most recent numbers out of the American Bankruptcy Institute which just announced that consumer bankruptcies rose 15% YoY in January “as consumers continue to struggle with high debt loads and elevated unemployment”.
The most recent slide in the S&P between 1/19 and 2/4 was about 7.6% which with slightly different dates 1/8 and 2/5 is slightly worse than the 7.4% drop in the XHB. The difference is that the fall in the S&P now puts it at levels not seen since last November while the XHB is sitting just about in the middle of a trading range bounded by a high last September and a low last October. Also worth noting is that this was one of the few groups to end with green numbers yesterday.
The relative strength exhibited by this group could be the result of a number of things not the least of which is a change in strategy. Promises of quick completions, lowering prices and added warnings of the troubles that can ensue from buying a foreclosed property are keeping companies like D.R. Horton (DHI) in the game and allowing them to report their first profit since the housing market crashed.
DHI’s CDS has been climbing recently, as has default protection for almost every company and country, but in a positive twist for DHI the CDS and equity appear to be positively correlated at the moment so while the CDS has risen from 195bps on 1/7 to 228bps last night the stock has move from $9.81 on 12/15/2009 to $12.92 by Monday’s close.
It is often said that the banks and the builders got us into this mess and they’re the ones that are going to get us out. It would appear that the builders, at least, are trying to do their part. The banks are another story but that could be more the result of the current administration’s populist urge to build back its own ratings by bashing the banks. With a little more perspective it might be seen that profitability on both Main Street and Wall Street are what’s going to get things turned around again.
Enjoy the week.
Jim Delaney
