I keep close tabs on the news flow all day long but only chose to cover certain events. This is because other, more cross-sector bloggers such as Barry Ritholtz and Paul at Housing Wire quite frankly do a better job. But, you know if I can add my spin I will. Below are two stories I did not see get much attention today that I wanted to bring to your attention. Bad news is definitely mounting fast. I changed the titles of the original stories for your reading pleasure. Best, Mr Mortgage
1. Bank of America Cites Over 50% of it Builder/Construction Loans are ‘Troubled’
Source: Bloomberg – By David Mildenberg Sept. 10 Bank of America Corp., the biggest U.S. consumer bank, said credit weakness is spreading to commercial borrowers from residential customers and loan losses probably will deepen in the third quarter.
Home builders unable to repay their loans are contributing to deterioration among commercial borrowers, said Brian Moynihan, head of the global corporate and investment banking unit, at a New York conference today. More than half the Charlotte, North Carolina-based bank’s $13.4 billion in loans to builders are considered troubled, 19 percent are not paying interest and losses are likely to mount, Moynihan said.
To contact the reporter on this story: David Mildenberg in Charlotte at email@example.com
Funny stuff below. On Sunday night in my final of five Fannie/Freddie stories over the weekend, I was concerned when I discovered that the conservatorship did in fact constitute an ‘event of default’ tripping about $1.4 trillion in credit default swaps. The nay-sayers were everywhere including in the comments section of my blog and all over the mainstream media. Well, it looks like they discounted this a little too early. The problem here is the very banks that lost so much on their Preferred holdings were also the largest writers of the insurance against FanFred default.
2. Fannie/Freddie Credit Default Swaps More of a Problem Than Everyone Thought
Source: FT,com By Aline van Duyn in New YorkPublished: September 10 2008 23:30 | Last updated: September 10 2008 23:30
The default of up to $500bn of Fannie Mae and Freddie Mac credit derivatives contracts triggered by the US Government’s seizure of the mortgage groups could result in billions of dollars of losses for insurance companies and banks who offered credit insurance in recent months.
The potential losses, as well as uncertainty about exactly how the derivatives contracts will be settled and unwound, is putting strains on the unregulated $62 trillion credit derivatives market, which has been a target of regulators worried about the hidden risks it could hold for the financial system.
The exact number of credit default swaps – a kind of insurance against debt default – outstanding on Fannie Mae and Freddie Mac are not known, reflecting the private nature of the sector. However, according to the latest estimates from dealers and analysts, there could up to $500bn of contracts outstanding.
Michael Hampden-Turner, credit strategist at Citigroup in London, estimates there are $200bn-$500bn of outstanding CDS and other credit derivatives referencing Fannie and Freddie.
This would make their default the biggest the market has encountered. The previous record was held by Delphi, the US carparts maker that went bankrupt in 2005 and which had about $25bn of CDS.
Currently, the recovery value of the Fannie Mae and Freddie Mac CDS is expected to be about 95 cents in the dollar, leading to a potential 5 per cent loss for insurance companies or banks who offered protection against a default.