The Wall Street Journal reports that a growing number of investors, including big companies, are trying to force companies that sold them bum real-estate loans to take them back.
On its Money & Investing front, the paper says companies like Fannie Mae and bond insurers MBIA and Ambac Financial are looking at forcing lenders to take back the loans under clauses in sales contracts that allow it if the loans “default unusually fast or contained mistakes or fraud.”
The Journal notes that Countrywide Financial reported in its first-quarter earnings that its liability for returned loans rose to $935 million from $365 million in a year.
The fight over mortgages that lenders thought they had largely offloaded is another reminder of the deterioration of lending standards that helped contribute to the worst housing bust in decades.
Such disputes began to emerge publicly in 2006 as large numbers of subprime mortgages began going bad shortly after origination. In recent months, these skirmishes have expanded to include home-equity loans and mortgages made to borrowers with relatively good credit, as well as subprime loans that went bad after borrowers made several payments.
Many recent loan disputes involve allegations of bogus appraisals, inflated borrower incomes and other misrepresentations made at the time the loans were originated. Some of the disputes are spilling into the courtroom, and the potential liability is likely to hang over lenders for years.
The paper says that an increasing number of these claims are ending up in court. That’s just one more (well-deserved) headache for banks and other lenders already slammed by their overaggressive lending.
More bad home-sales news
New-home sales rose 3.3 percent last month from March, but only because that month’s previously announced number was revised downward. Sales of new homes were down 42 percent in April from a year ago.
Meanwhile, the Standard & Poor’s/Case-Shiller index of existing-home prices showed their decline is picking up speed. They fell 14.1 percent in the first quarter from a year ago. The papers are pessimistic about the news. The Journal:
Home prices nationwide are now 16% below their peak in the second quarter of 2006. Prices rose almost 90% from the beginning of this decade to that peak and now are at levels seen in the third quarter of 2004.
Despite the declines, prices are still almost 60% higher than at the start of the decade.
Many analysts expect prices to decline an additional 10% or more before hitting bottom as the housing market is battered by tighter lending standards and a wave of foreclosures that is boosting supply.
The New York Times calls it a “bleak picture” and reports that the housing glut means there is nearly eleven months worth of inventory on the market, the highest since the early 1980s “when the economy was in a deep recession and interest rates were two to four times as high as they are today.” But that’s not technically true, according to Bloomberg, which reports that inventories fell from 11.1 months in March to 10.6 months in April.
A consumer-confidence measure hit the lowest in nearly sixteen years, with fewer Americans saying they will be buying homes in the next six months.
Breaking the brokers’ grip
The Times on C1 and the WSJ on B1 report that the federal government has reached a settlement in its antitrust case against Realtors, forcing the group to put real-estate listings on the Web. It was a rare antitrust move by the Bush administration, and one that was applauded by consumer advocates. We’ll put our hands together, too. Markets don’t work well if information is hoarded by one group, which is able to boost (or at least maintain) its prices that way. Brokers collect a median commission of nearly $12,000 for selling a house.
Both papers note that the government says those commissions will come down, but the Journal says that’s unlikely at least in the “near term” as it hasn’t worked so far.
Over the past decade, the Internet has given consumers access to far more information about homes on the market. But, in contrast to its success in bringing down the costs of stock trading and booking hotels and airline tickets, it hasn’t lived up to expectations that it would slash home-sales commissions.
SEC Bears down on trades
The WSJ continues its good page-one “Fall of Bear Stearns” series with part two, in which chairman Jimmy Cayne continues to play bridge while the company spiraled down the toilet. Did this guy ever do anything besides play cards (golf doesn’t count)? The Journal gets the Quote of the Day in recounting just how quickly the panic overtook the investment bank and its CEO Alan Schwartz, who told incredulous execs the day before he had to seek the bailout by JPMorgan Chase and the Federal Reserve:
“This,” he said, “is a whole lot of noise.”
It also reports on A1 that Bear is turning over documents to the Securities and Exchange Commission that show who was bailing out of their trades with the company in the weeks before the bailout. The three biggies were Goldman Sachs, Citadel Investment Group, and Paulson & Company, who all either had insider information or were simply smart enough to get the heck out of Dodge.
Supremes issue labor-friendly ruling
The Supreme Court ruled in two cases that federal civil-rights laws protect whistleblowers from retaliation in the workplace, a shift from recent business-friendly decisions. The Journal on A3 says the ruling frustrated business, which was “hoping for a more sympathetic hearing from a court now bolstered by two Bush appointees” and The Washington Post reports that the U.S. Chamber of Commerce was “surprised by the margin.”
The Times on A1 says:
The decisions are significant both as a practical matter and as evidence of a new tone and direction from the court this year, following a term in which there were sharp divisions and an abrupt conservative turn.
The Los Angeles Times writes that the support for workers’ rights contrasts with “a series of pro-business rulings by the high court last year that limited the rights of workers,” but also says it’s not a big change in the law.
Russians get pinched
Bloomberg reports that hedge funds “and other investors” are raising the cost of debt for Russian companies, “threatening the country’s economic resurgence by forcing more than 200 companies to increase the interest they pay to as much as 16 percent.”
It’s a holdover from the country’s 1998 financial crisis, which threatened the global financial system and brought hedge fund Long Term Capital Management down. Investors are demanding that Russian companies pay off their bonds that are coming due or pay much higher interest rates.
The financial saber-rattling from the Kremlin will commence in 3…2…
UB persona non grata
The Financial Times reports on its front page that Swiss banking giant UBS, under investigation for helping clients evade taxes, is telling its former U.S. team of private bankers not to go to the U.S. after a former exec was arrested and charged earlier this month.
The FT says the move signals that UBS thinks the investigation “may widen,” which seems like a euphemism for “UBS thinks it’s in deep doo-doo.” It says many of the bankers have already left UBS because of the investigation “and fears that the bank might not support them if arrested,” though UBS has provided lawyers to more than fifty of them.
In other corporate-investigation news, the WSJ reports on C1 that the Securities and Exchange Commission is widening its probe of the credit-ratings firms and that Moody’s is taking a harsher tone toward itself in its investigation of ratings errors it appears to have covered up.
In an interview, one person familiar with Moody’s structured-finance ratings said data errors had occurred in numerous deals over the past 10 years. In some cases, the error was corrected by taking the problem to the issuers so that the deals could be restructured, but in the case of some lower-rated issues, the error went uncorrected, this person said.
Regulators, mount up
The FT on page one says investment banks are “split” on whether they should continue to take Fed cash and risk new regulation or whether it’s not worth it. Not surprisingly, those more in need of the cash are more inclined to take it. The paper also reports that the Fed is going to limit how much they can borrow from it by September, though it says that’s expected to be pushed back.
The Fed initiative, spurred by the collapse of Bear Stearns, allows investment banks to pledge investment-grade securities, including mortgage-backed securities, in return for low-interest cash loans. The rationale for the facility was to ensure that none of the other banks would suffer the same kind of evaporation of short-term liquidity that sank Bear Stearns…
Such direct borrowing from the Fed has typically been reserved for commercial banks. The trade-off has been that those banks must operate with stricter risk controls.
The paper doesn’t say the obvious, though: Regulation is coming whether Wall Street likes it or not. They can’t threaten to bring down the global economy in a reckless pursuit of profits (and bonuses) and not expect to be hit with new regulation.
CEO pay to stall until nobody’s looking
The Chicago Tribune reports that the movement to rein in excessive executive pay has “stalled,” despite “rising populist sentiment and a litany of economic woes.”
Yet about halfway through the shareholder voting season, support for advisory pay resolutions is running about the same as last year, an average of about 43 percent, according to RiskMetrics Group. At 10 of 16 companies where say-on-pay proposals were considered for a second consecutive year, they received fewer votes.
The paper says that’s because people aren’t sure what’s the best way to rein them in, but it also says it’s because the outlandish increases already have effectively been reined in, at least according to some compensation measures. The Trib quotes a Mercer consulting survey that says pay for 350 CEOs in the Fortune 1000 found that pay fell 5.5 percent last year.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at firstname.lastname@example.org. Follow him on Twitter at @ryanchittum.