More on Accredited & Lone Star

The details on Accredited Home Lenders and Lone Star’s merger negotiations are being discussed like a soap opera plot these days, with some writers calling Accredited the “love interest” of Lone Star. Unfortunately, Lone Star seems to find the lender less attractive these days, but Accredited refuses to sell itself at a lower price. On Friday, the mortgage company rejected Lone Star’s proposal and said it “will continue to pursue its lawsuit”. In an unexpected turn of events, this resulted in Accredited shares moving up 43% on Friday, to $9.05. And Lone Star wanted to buy this stock at $8.50? No way… Honestly, I still think Accredited should have accepted the new bid, or perhaps Lone Star should have given up, but obviously, the story line wasn’t written by me.

It’s official: Lone Star wants to amend tender offer

Yesterday, Lone Star delivered a letter to Accredited Home Lenders Holding Co.’s Board of Directors, which essentially asked for a substantial price cut on the company. It is clear to anyone that Accredited is worth well below $15.10 a share, and its price is declining with each passing day. Therefore, the new price Loan Star is offering is $8.50, “a premium of 35% over the closing price of the Company Common Shares on August 30, 2007”, according to the letter. Still a good price I would say, especially knowing that Lone Star could simply walk away from the deal – leaving the $12 million break up fee behind and after lengthy court proceedings, that is.

And as I read reports on home prices, I can’t help wondering what’s going on. Not that a decline of 0.1% vs. an increase of 0.1% makes much difference, but the way they present data is quite confusing. OFHEO (the Office of Federal Housing Enterprise Oversight, the regulator of Fannie Mae and Freddie Mac) came up with a 0.1% increase in home prices in Q2, and growth of 3.2% year-over-year, the slowest in a decade. Naturally, OFHEO Director James Lockhart didn’t fail to mention that “significant price declines appear localized in areas with weak economies”, but I would say these numbers are too vague because of the way they’re calculated. An index compiled by Standard & Poor’s Corp. showed that home prices declined 3.2% from last year, how’s that for slow house appreciation. Naturally these indices are calculated in different ways and based on different sets of data, so it’s hard to compare, but they both paint similar pictures of the housing market: no more “easy money” and “rapid appreciation”, this is the bursting of the housing bubble (or so say the pessimists).

Bernanke comments on the mortgage crisis

On Aug. 27^th, Fed Chairman Ben Bernanke sent a letter to Senator Charles Schumer, in which he said there’s no need to lift the caps on Fannie Mae’s and Freddie Mac’s portfolios. A similar opinion was expressed by OFHEO (Office of Federal Housing Enterprise Oversight), the federal regulator of the two GSEs’, and President George Bush a couple of weeks ago when a suggestion to lift the portfolio limitations on Fannie and Freddie was rejected. Bernanke said that policy makers may encourage Fannie and Freddie to package more loans into securities and sell them to investors, as these actions are not constrained by the portfolio caps. Bernanke also said that the Fed is closely monitoring the financial markets and “is prepared to act as needed” to prevent bigger problems.

Bernanke suggested developing new mortgage products for low- and moderate-income borrowers that would not cause unexpected spikes in mortgage payments. Clearer explanation of loan terms would also be beneficial to potential borrowers. He also noted that reforming the FHA (Federal Housing Agency) might be helpful.

Analysts believe that these comments spell a high likelihood of a Fed rate cut on the next meeting Sept. 18. Another speech by Bernanke is scheduled for this Friday, and it may well shed some more light on what the Fed is about to do.

IndyMac hiring former American Home employees

IndyMac has hired 600 loan officers who lost their jobs when American Home Mortgage filed for Chapter 11 bankruptcy protection a few weeks ago. American Home fired 6,000 employees when its lenders refused to provide further financing after the lender failed to meet margin calls.

Such a move by a mortgage lender is quite unusual in the current circumstances, as most mortgage companies are downsizing amid shrinking credit availability and financial turmoil. According to this website, more than 100 mortgage providers have gone out of business so far this year, but the problems are not contained to subprime lending alone or even to mortgage lenders in general. According to a CNNMoney article, credit card delinquencies have risen significantly from last year. Until recently, credit card payments could be financed by tapping home equity, but now that a large percentage of all homes have virtually no equity left in them, credit card delinquencies are likely to rise further.

Subprime crisis scarier than terrorism

A survey performed by the National Association of Business Economics found that experts believe loan defaults and the ensuing financial crisis are the biggest short-term threat to the U.S. economy. Until recently, terrorism was considered the #1 threat. 32% of the participants of the survey named the subprime crisis as the biggest threat to the economy. Terrorism came at #2 with 20%. Other issues on the list included inflation, government spending and the account deficit. The cost of health care was also mentioned as a major concern.

And now that everyone admits that subprime is indeed a problem and that it is already contaminating the entire economy, we don’t really see a solution coming from any of the usual suspects. What we’re seeing is more panic, because the current situation is unprecedented, so analysts don’t know what to expect. Nothing good in any case, I guess.

Credit panic and foreclosure bailouts

Brilliant “bright” ideas on how to prevent a looming financial crisis are raining from everywhere. Just in the past few days, the following proposals have been all over the news.

PIMCO’s Bill Gross urged the White House to bail out troubled home owners: “If we can bail out Chrysler, why can’t we support the American homeowner?” I would say that the Chrysler bailout wasn’t a very good idea either, but then the government had its own reasons for it. In my opinion, it would be totally unfair to pay for borrowers’ unsound financial decisions with other taxpayers’ money. According to this blog entry, it turns out Mr. Gross himself is heavily invested in mortgages and further foreclosures would sting him quite badly. So that’s why we need to bail out borrowers.

Another brilliant plan comes from presidential candidate Senator Christopher Dodd (D-Conn). What he suggests is, to allow the Federal Housing Administration (a.k.a. FHA) to refinance troubled loans. He believes that the FHA does not serve its purpose well and needs to be reformed is order to be able to help homeowners-to-be. Dodd suddenly appeared among those “concerned” about housing several months ago, and started criticizing the government and the existing system, proposing some rather dubious solutions. Dodd also supported the idea to lift the investment caps on Fannie Mae and Freddie Mac’s portfolio, a move that would allow an inflow of financing on the market. The idea was rejected.

I really wish all these activists were this creative a couple of years ago and invented an economically sound way of “saving the economy”. Unfortunately, right now we are indeed facing serious problems that need to be solved, and every solution seems to have “unwanted side effects” for the economy, the dollar, or the average consumer. Every foreclosure is a particular family’s tragedy, but many of the loans defaulting now should have never been made, and those who were involved in the process only have themselves to blame. It is true that the entire business was infested with fraudulent activity, but in the end everyone had a choice. Sadly, greed often prevailed.

Meanwhile, the Fed has some “bright” ideas of its own. According to CNN Money.com, the central bank has temporarily exempted Citigroup and Bank of America from limitations on the amount of money they can lend. So this is more of the same – a move to artificially boost cash flow in a market that is essentially stagnant. Sounds good for a short-term solution, but in the end market forces should be allowed to play their part in the whole thing.

Banks won’t borrow at the discount window

The Fed’s offer to lend at 5.75% to banks wasn’t exactly embraced this week, as only a total of $2 billion was borrowed. Most interestingly, the borrowers were four major banks – Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., and Wachovia Corp., each borrowing $500 million, to show solidarity with the Fed’s attempt to help the financial market. The problem is, the ones in need of financing are smaller companies, such as mortgage originators, hedge funds and their like, who generally borrow from some of the above mentioned, because they can’t borrow directly from the Fed. Banks, however, do not wish to have anything to do with mortgage companies at the moment, because the latter are very much likely to default on any loans extended to them. Therefore, the Fed’s move didn’t help anyone much.

According to an article on Bloomberg.com, all four banks had access to cheaper credit, so it’s definitely not urgent need for liquidity that made them borrow from the Fed.