Archive for May, 2009

Good News on the Mortgage Mess (BusinessWeek Online)

Thursday, May 28th, 2009 | Finance News

Smart shoppers for used cars know how to avoid lemons. Now buyers of residential mortgage-backed securities are likewise learning how to distinguish the bad from the good. That bodes well for healing housing finance.

Prices of privately issued mortgage bonds, which fell sharply earlier this year, have rebounded well since early March. According to Amherst Securities Group, a specialized broker-dealer, mortgage bonds backed by 30-year fixed-rate prime loans issued in 2006-07 are trading for a little less than 80% on the dollar, up from just 55% in March. Adjustable-rate loans rated in between prime and subprime and issued in 2006-07 are trading for about 60% on the dollar, up from less than 40% in March. That's evidence that buyers are scouting for value instead of treating the whole market as undifferentiated toxic waste.

Meanwhile, early repayments of principal are rapidly shrinking the $3.7 trillion pool of residential mortgage-backed securities that were issued privately during the go-go years, 2004 through 2007. The smaller the pool gets, the less trouble it can cause. When a borrower pays off a mortgage ahead of schedule, the owners of the mortgage-backed securities get their money back early, and the face values of their bonds shrink. The shrinkage is happening on both ends of the spectrum: Creditworthy borrowers are prepaying as they refinance into cheaper mortgages made possible by easy monetary policy. The least creditworthy, meanwhile, are losing their homes to foreclosure. That's cleansing the system as investors receive whatever the foreclosed house resells for (minus fees) and write off the rest of what they were owed as a loss.

Help from the Market

Amazingly, only $1.7 trillion worth of the $3.7 trillion in securities remains, according to Standard & Poor's Market, Credit, & Risk Strategies group (mhp.), which, like BusinessWeek, is a unit of the McGraw-Hill Companies. All this even before the launch of the government's Public-Private Investment Program, which is intended to move those assets into stronger hands. "The market has kind of resolved a lot of the problem," argues Michael G. Thompson, the managing director who runs the S&P group, which is separate from the ratings group.

As any used-car dealer knows, you can't fetch a decent price for your good cars if shoppers suspect that all you have on the lot is lemons. In the mortgage market, that problem is slowly being solved through improved disclosure. Credit bureaus and loan servicers are getting better at disclosing the existence of second-lien mortgages upon request. An interindustry group called the American Securitization Forum plans to make second liens and other data available automatically starting in 2010. Spying an opportunity, companies such as LoanInsights of San Francisco are valuing iffy mortgage portfolios by figuring out how much of a hit investors will have to take on each loan that is underwater.

The mortgage market is far from healthy. Home prices are falling, and foreclosures keep rising. Rates on Fannie Mae and Freddie Mac mortgage bonds have spiked upward in recent days. "The fundamentals remain very negative," says Laurie Goodman, a veteran analyst who is senior managing director of Amherst Securities. Nevertheless, it's good news that the market is getting better at figuring out which assets are lemons and which have real value.


European stocks follow US down on debt concerns (AP)

Thursday, May 28th, 2009 | Finance News

LONDON – European stock markets fell Thursday following big losses on Wall Street as investors worried that a rise in U.S. bond yields could derail any nascent global economic recovery.

The FTSE 100 index of leading British shares was down 48.79 points, or 1.1 percent, at 4,367.44 while Germany's DAX was 50.51 points, or 1 percent, lower at 4,950.26. The CAC-40 in France fell 35.87 points, or 1.1 percent, at 3,258.99.

The losses in Europe came in the wake of the retreat on Wall Street, when investors were spooked by the ongoing rise in bond yields, particularly 10-year Treasury notes, whose yields have risen to a six-month high of 3.7 percent. Yields rise as bond prices fall.

Higher bond yields have the potential to raise the cost of borrowing for homeowners and businesses, stoking fears that any recovery could face immediate hurdles. The Dow Jones industrial average ended 173 points lower Wednesday while the broader Standard & Poor's 500 index fell 16 points.

"The rise in U.S. bond yields has finally put equity markets under pressure," said Hans Redeker, an analyst at BNP Paribas.

The increase in bond yields and the consequent fall in bond prices has occurred even though the U.S. Federal Reserve's purchases of Treasuries should typically bring rates lower and increase prices. Investors seem to be worried by the concern that the Fed will create new money to pay the government's debts and unleash an inflationary tide that will require sharply higher interest rates to control.

Also undermining investor confidence somewhat was the growing expectation that General Motors Corp. will be forced into bankruptcy court as soon as Monday after bondholders rejected a debt for equity swap.

Despite the recent lull — the Dow has lost ground for five out of the last six days — stocks around the world have rallied strongly over the last few weeks, with some major indexes moving into positive territory for the year.

The trigger for the gains has been better than expected economic news, particularly in the U.S., which has fueled an increase in appetite for risk on hopes that the global recession is receding. Stock markets usually start recovering between 6-9 months before an actual economic recovery emerges.

There are some concerns that the markets, having rallied since March, are now being largely driven by speculative capital flows searching for short-term returns, and that the liquidity boost from the world's central banks over the last few months has pushed stock prices above what many companies can actually earn without a dramatic pick up in economic activity in the coming months.

"The jury is still out as to whether a recent pullback in equities is a buying opportunity and economic data during the summer will provide a test of the thesis that economic recovery is around the corner," said Neil Mackinnon, chief economist at ECU Group.

Wall Street was poised to recoup some of Wednesday's losses when it opens for business later. Dow futures rose 36 points, or 0.4 percent, to 8,333, while S&P 500 futures were up 3.9 points, or 0.4 percent, to 896.40.

Earlier, Asian markets were mixed as the looming bankruptcy of auto giant General Motors and sliding retail sales in Japan undercut optimism about a global recovery.

Japan's benchmark index edged up to a three-week high as the weaker yen prompted investors to buy exporters like Toyota and Sanyo. The Nikkei 225 stock average rose 12.62 points, or 0.1 percent, to 9,451.39.

South Korea's Kospi, hit the past few days by rising tensions with North Korea, rose 2.2 percent to 1,392.17.

On the downside, Singapore's Straits Times index fell 1 percent, Australia's key benchmark declined 1.2 percent and Malaysia's lost 0.9 percent.

Markets in Hong Kong, mainland China and Taiwan were closed for holidays.

In oil, crude prices eased from six-month highs as investors looked to a weekly U.S. inventory report for signs that crude demand may be recovering. Benchmark crude for July delivery was down 9 cents at $63.36 a barrel.

Meanwhile, the dollar rose to 96.84 yen from 95.35 yen. The euro was up to $1.3873 from $1.3963.


AP Business Writer Stephen Wright in Bangkok contributed to this report.


Two U.S. auto parts makers file for Chapter 11 (Reuters)

Thursday, May 28th, 2009 | Finance News

BANGALORE (Reuters) –
Auto parts makers Visteon Corp (VSTN.PK) and Metaldyne Corp filed for Chapter 11 bankruptcy protection for their U.S. operations, becoming the latest casualties of the global auto industry crisis.

Both Visteon, which Ford Motor Co (F.N) spun off in 2000, and Metaldyne Corp, a unit of Japan's Asahi Tec (5606.T), said on Thursday that the bankruptcy filings do not include their non-U.S. entities or operations.

The announcements came as automaker General Motors Corp (GM.N) moved closer to filing the largest bankruptcy ever for a U.S. industrial company. The worst economic crisis in decades is re-shaping the global auto industry, driving the weakest to the wall and hammering sales and profits across the board.

In a filing with the U.S. Bankruptcy Court for the District of Delaware, Visteon listed total assets of $4.58 billion and total debts of $5.32 billion.

Visteon's unsecured creditors include a unit of Bank of New York Mellon Corp (BK.N) holding bond debts, the Pension Benefit Guaranty Corp and IBM (IBM.N), which is a trade creditor.

Visteon said it filed certain customary "first day motions" with the court to ensure a smooth transition into Chapter 11.

"During the reorganization period, we will seek to address our capital structure and legacy costs that are not sustainable given the current economic environment," Visteon Chief Executive Donald Stebbins said in a statement.

Visteon said it would continue its operations throughout the reorganization process.


Visteon said the Ford had made a commitment to support debtor-in-possession (DIP) financing for the restructuring efforts and to ensure long-term continuity of supply.

Ford is still Visteon's biggest customer and accounted for about 31 percent of its $1.35 billion of sales last quarter.

Earlier this month, Ford assumed a $163 million secured revolving credit facility from Visteon's lenders.

The health of the U.S. auto parts supply base has been a priority for Ford with Chrysler in bankruptcy and General Motors close to a government-imposed deadline to restructure or follow Chrysler down that road.


Plymouth, Michigan-based Metaldyne, a supplier of metal-based auto components which filed for Chapter 11 late on Wednesday, said it would sell a majority of its assets as going concerns under a court supervised process.

RHJ International SA (RHJI.BR), which owns a 60 percent stake in Asahi Tec, and private equity firm Carlyle Group (CYL.UL), separately submitted letters of intent to purchase different portions of Metaldyne assets, Metaldyne said.

Metaldyne said Asahi Tec will not continue its economic support for the company.

RHJ said it would buy a majority of Metaldyne's assets under the court-supervised sale. Carlyle has proposed a purchase of certain of Metaldyne's Chassis business assets in the United States, Mexico and Spain, Metaldyne said.

(Editing by Erica Billingham)