The CBA says mortgage rates to rise even if no RBA rise Non-bank lenders' rates likely to rise the most Australian stocks slumped almost 3% last week.
The nation's biggest home lender has warned that home-owners' mortgage rates will rise as the fallout from the US housing crisis continues to spread through global financial markets.
As the Australian stock market suffered another $48 billion plunge in value yesterday - taking its losses in the past three weeks to almost 10 per cent - Commonwealth Bank chief executive Ralph Norris said mortgage rates were likely to rise even if the Reserve Bank did not lift official rates.
Non-bank lenders most affected
Mr Norris said non-bank lenders - companies such as Bluestone, Wizard and Aussie Home Loans - would be more significantly affected by the credit crunch triggered by the crisis among poor-quality sub-prime home loans in the US.
He said the Commonwealth had no plans to lift rates, "but the market is driven by supply and demand, and if funding costs increase significantly, then we pass that on".
"The fact of the matter is the price of credit in the market internationally has moved, so there will at some stage be some increase in rates," he said.
"In regard to the level of those increases, non-bank lenders are going to be in a situation where they're going to have to pass on significantly greater increases than a bank like us."
Bluestone rates already raised above RBA rate
The Australian reported this week that Bluestone, hit by the higher cost of borrowing money to on-lend to its customers, had been forced to raise mortgage rates by 17-55 basis points.
Other lenders, particularly those offering low-documentation loans to customers with poor credit histories, are also likely to pass on the higher costs.
Aussie Home Loans' John Symond has warned rates will rise by about 0.25 percentage points.
And Mr Norris warned home-owners that he expected official interest rates to rise further after the Reserve Bank's increase of 0.25 percentage points last week to 6.5 per cent.
The sub-prime crisis continues to hurt international stock markets, with the Australian market, which took its lead from a falling Wall St, slumping almost 3 per cent yesterday.
The benchmark S&P/ASX 200 index, which yesterday fell 176.8 points to 5788 points, is down 9.9 per cent - just shy of the technical correction point of 10 per cent - since its record high of 6422.3 on July 24.
Aussie stock market falls
The Australian stock market, bolstered by the strength of its resources stocks, has in recent months been able to avoid following the big falls on Wall St.
But the Dow Jones Industrial Average is down just 7 per cent since the sub-prime crisis first broke three weeks ago, and in the past two trading sessions, the Australian stock market has suffered bigger falls than its New York counterpart.
Failures by mortgage lenders in the US, most of which were dealing in the riskier end of the housing market, have kept the US share market on tenterhooks for close to a month, and every day that provides a new financial hardship story pushes that market down further.
Investors in Australia's worst-affected hedge fund, Basis Capital's Yield Fund, were told yesterday by the fund's Sydney-based manager that they were now likely to lose more than 80 per cent of their money because of the sub-prime meltdown. Source: The Australian
Sunday, August 26, 2007
Mortgage Broker sees credit crisis as an opportunity
Mortgage broker Mortgage Choice sees ongoing concerns in global credit markets as an opportunity, rather than a risk to its business, the company's managing director Paul Lahiff said today.
The Sydney-based mortgage broker today reported a 9.7 per cent increase in net profit to a record $19.59 million for 2006/07, underpinned by an expansion of its business in states other than NSW.
Mr Lahiff said the result was achieved despite challenging market conditions.
"This result clearly demonstrates the strength of our national model," Mr Lahiff said.
"We were less reliant on what is currently a variable NSW housing market to provide the performance we were after.
"By contrast, Western Australia and Queensland have continued their strong growth off the back of the resources boom, while Victoria and South Australia performed in line with longer term historical trends.
"The results achieved underline the fact that Mortgage Choice has an extremely high quality, proven business model - one that is capable of delivering a sound performance even in challenging market conditions."
Mr Lahiff said ructions in financial markets stemming from problems in the US sub-prime mortgage sector had not impacted Mortgage Choice.
"We don't manufacture, we don't fund, we don't service the loans - that's the responsibility of the lenders.
"We don't have our own mortgage products which means we have no balance sheet or funding risk ... so (there's been) absolutely no impact from the events of the past few weeks."
Mr Lahiff said the company's role as a mortgage broker, rather than a lender, meant it would remain well insulated from any further fallout in credit markets.
"We don't have a direct exposure there because we don't have any funding or manufacturing capabilities ... there will be some waves that flow out from that (which) will inevitably touch us in some shape or form (but) we don't believe those to be significant.
"We also believe that while (some) organisations may tend to batten down the hatches, we see a good opportunity to go forward."
Mr Lahiff said the portion of "non-conforming" loans - the equivalent of a sub-prime loan - originated by Mortgage Choice was "incredibly low".
"The latest set of data (shows) that of the total loans that we booked, 0.67 per cent were non-conforming ... it's not a major part of our business," he said.
And while the ongoing global credit crunch is likely to impact on lending rates in Australia, chiefly in the non-bank sector, chief financial officer Tony Crossley said Mortgage Choice was in a position to take advantage.
"Essentially, in the short term, there's certainly upward pressure on interest rates ... the extent to which it's passed on is really a judgement call for the lenders," Mr Crossley said.
"From our point of view we think we are reasonably well placed to take advantage of any of that because (of our ability) to shift from one type of lender to another."
Mr Lahiff said that given the current environment, the company would "be alert to acquisition opportunities" but that organic growth would remain its chief focus.
"In this market, visibility, strong brand values, quality, consistency and track record are the keys," Mr Lahiff said.
"Lenders are increasingly basing rewards on quality, sustainability and performance." "We are confident that Mortgage Choice is well placed to achieve profitable growth in the coming year.
"Improved broker recruitment, an increasing commercial and retail office presence and through our invest-to-grow strategy, the ability to scale up the business will continue to be important going forward."
Mortgage Choice declared a final fully franked dividend of 8.5 cents per share, bringing the total ordinary dividend for the year to 14 cents per share.
Source: AAP
The Sydney-based mortgage broker today reported a 9.7 per cent increase in net profit to a record $19.59 million for 2006/07, underpinned by an expansion of its business in states other than NSW.
Mr Lahiff said the result was achieved despite challenging market conditions.
"This result clearly demonstrates the strength of our national model," Mr Lahiff said.
"We were less reliant on what is currently a variable NSW housing market to provide the performance we were after.
"By contrast, Western Australia and Queensland have continued their strong growth off the back of the resources boom, while Victoria and South Australia performed in line with longer term historical trends.
"The results achieved underline the fact that Mortgage Choice has an extremely high quality, proven business model - one that is capable of delivering a sound performance even in challenging market conditions."
Mr Lahiff said ructions in financial markets stemming from problems in the US sub-prime mortgage sector had not impacted Mortgage Choice.
"We don't manufacture, we don't fund, we don't service the loans - that's the responsibility of the lenders.
"We don't have our own mortgage products which means we have no balance sheet or funding risk ... so (there's been) absolutely no impact from the events of the past few weeks."
Mr Lahiff said the company's role as a mortgage broker, rather than a lender, meant it would remain well insulated from any further fallout in credit markets.
"We don't have a direct exposure there because we don't have any funding or manufacturing capabilities ... there will be some waves that flow out from that (which) will inevitably touch us in some shape or form (but) we don't believe those to be significant.
"We also believe that while (some) organisations may tend to batten down the hatches, we see a good opportunity to go forward."
Mr Lahiff said the portion of "non-conforming" loans - the equivalent of a sub-prime loan - originated by Mortgage Choice was "incredibly low".
"The latest set of data (shows) that of the total loans that we booked, 0.67 per cent were non-conforming ... it's not a major part of our business," he said.
And while the ongoing global credit crunch is likely to impact on lending rates in Australia, chiefly in the non-bank sector, chief financial officer Tony Crossley said Mortgage Choice was in a position to take advantage.
"Essentially, in the short term, there's certainly upward pressure on interest rates ... the extent to which it's passed on is really a judgement call for the lenders," Mr Crossley said.
"From our point of view we think we are reasonably well placed to take advantage of any of that because (of our ability) to shift from one type of lender to another."
Mr Lahiff said that given the current environment, the company would "be alert to acquisition opportunities" but that organic growth would remain its chief focus.
"In this market, visibility, strong brand values, quality, consistency and track record are the keys," Mr Lahiff said.
"Lenders are increasingly basing rewards on quality, sustainability and performance." "We are confident that Mortgage Choice is well placed to achieve profitable growth in the coming year.
"Improved broker recruitment, an increasing commercial and retail office presence and through our invest-to-grow strategy, the ability to scale up the business will continue to be important going forward."
Mortgage Choice declared a final fully franked dividend of 8.5 cents per share, bringing the total ordinary dividend for the year to 14 cents per share.
Source: AAP
Sunday, August 12, 2007
Interest rates, unemployment will soar under Labor, says Liberal funded report on workplace reform by Labor arch rivals Australian Chamber of Commerce
A new report has warned that Labor's promise to abolish the Coalition's WorkChoices reforms if its wins government would push up mortgage interest rates and unemployment. Labor denies this as a false assumption, and the report is written by liberal pals ACC.
The Australian Chamber of Commerce and Industry (ACCI) commissioned the economic consultants Econtech to model the consequences if the industrial relations landscape of 1993 was restored.
Its study predicted that would result in a 1.3 per cent hike in inflation and interest rates would climb by 1.4 per cent, pushing up the average mortgage by $273 a month.
ACCI spokesman Peter Hendy says the axing of WorkChoices alone makes up a sizeable share of the predictions.
"You would see about a third of the results here, so a very, very significant impact on the Australian economy," he said.
Mr Hendy says the report also forecasts major job losses.
"If you reverse industrial relations reform, you will have a massive impact upon the job market," he said.
"There would be something like up to 316,000 jobs lost.
"We're sending a message to both major political parties that you cannot afford to roll back the industrial relations reforms we've had to date."
But deputy Opposition leader Julia Gillard has told Channel Nine the report does not make sense and is based on a false assumption.
"The key claim in it is that Labor's industrial relations system is somehow going to have pattern bargaining in it," she said.
The report is being officially released later today.
Source: ABC
The Australian Chamber of Commerce and Industry (ACCI) commissioned the economic consultants Econtech to model the consequences if the industrial relations landscape of 1993 was restored.
Its study predicted that would result in a 1.3 per cent hike in inflation and interest rates would climb by 1.4 per cent, pushing up the average mortgage by $273 a month.
ACCI spokesman Peter Hendy says the axing of WorkChoices alone makes up a sizeable share of the predictions.
"You would see about a third of the results here, so a very, very significant impact on the Australian economy," he said.
Mr Hendy says the report also forecasts major job losses.
"If you reverse industrial relations reform, you will have a massive impact upon the job market," he said.
"There would be something like up to 316,000 jobs lost.
"We're sending a message to both major political parties that you cannot afford to roll back the industrial relations reforms we've had to date."
But deputy Opposition leader Julia Gillard has told Channel Nine the report does not make sense and is based on a false assumption.
"The key claim in it is that Labor's industrial relations system is somehow going to have pattern bargaining in it," she said.
The report is being officially released later today.
Source: ABC
Monday, August 06, 2007
Labor broadside at PM's mortgage rate blame game
Labor has hit back at John Howard after he and Finance Minister Nick Minchin blamed the states for pushing up interest rates.
Ahead of an expected interest rate rise this week, federal Finance Minister Nick Minchin today said the Labor states were putting upward pressure on rates by accruing too much debt.
The Reserve Bank of Australia (RBA) is widely tipped to raise interest rates by one quarter of one per cent on Wednesday.
Senator Minchin said the Federal Government was minimising upward pressure on inflation and mortgage interest rates.
"Our fiscal policy settings are such that we are minimising the pressure on inflation and mortgage interest rates while we observe that the state Labor governments all going into deficit, racking up debts,'' he told the Ten Network.
"They're going to rack up $80 billion in debt over the next four years, so we are concerned about the extent to which state Labor governments are putting upward pressure on interest rates.''
Later, the Liberal Party launched an ad on internet video website YouTube called Labor can't manage money, attacking the states' escalating debt.
"Never forget, it is governments who borrow money and get into debt who put upward pressure in interest rates,'' the ad says.
Senator Minchin indicated he did not think the expected interest rate rise later this week was warranted, pointing out underlying inflation was running at 2.6 per cent.
"From our point of view, their job is to keep inflation between two to three per cent and that's where inflation is,'' he said.
However, National Australia Bank chief executive John Stewart today said he thought there was a 50/50 chance the RBA would lift rates this week.
Opposition Leader Kevin Rudd said Prime Minister John Howard and the Federal Government were trying to pass the buck.
"Mr Howard seems to now be saying that if there's a problem with interest rates in Australia, it's because of the states, it's because of anybody else apart from Mr Howard,'' he said.
"I find that a very interesting exercise in the blame game.''
West Australian Premier Alan Carpenter also accused the Federal Government of trying to shift blame ahead of the federal election.
"John Howard and Nick Minchin are asserting states are running deficits and that's affecting interest rates,'' Mr Carpenter said.
"It doesn't work that way.
"John Howard told people he'd keep interest rates down and he hasn't.
"So he's looking for people to blame - he's to blame.''
Senator Minchin today also responded to calls from the Real Estate Institute of Australia to double the first home buyers grant to $14,000 to give people a better chance of entering the market.
He said such a move would drive up housing prices unless state governments released more land for housing.
"I do caution against those advocating doubling it because that will end up just feeding into prices and no one will be better off,'' Senator Minchin said.
"The trouble with that is that it adds to demand.
"You would not want to double the first home owners grant unless you were sure there was going to be a supply response at the state level.''
Source: AAP
Ahead of an expected interest rate rise this week, federal Finance Minister Nick Minchin today said the Labor states were putting upward pressure on rates by accruing too much debt.
The Reserve Bank of Australia (RBA) is widely tipped to raise interest rates by one quarter of one per cent on Wednesday.
Senator Minchin said the Federal Government was minimising upward pressure on inflation and mortgage interest rates.
"Our fiscal policy settings are such that we are minimising the pressure on inflation and mortgage interest rates while we observe that the state Labor governments all going into deficit, racking up debts,'' he told the Ten Network.
"They're going to rack up $80 billion in debt over the next four years, so we are concerned about the extent to which state Labor governments are putting upward pressure on interest rates.''
Later, the Liberal Party launched an ad on internet video website YouTube called Labor can't manage money, attacking the states' escalating debt.
"Never forget, it is governments who borrow money and get into debt who put upward pressure in interest rates,'' the ad says.
Senator Minchin indicated he did not think the expected interest rate rise later this week was warranted, pointing out underlying inflation was running at 2.6 per cent.
"From our point of view, their job is to keep inflation between two to three per cent and that's where inflation is,'' he said.
However, National Australia Bank chief executive John Stewart today said he thought there was a 50/50 chance the RBA would lift rates this week.
Opposition Leader Kevin Rudd said Prime Minister John Howard and the Federal Government were trying to pass the buck.
"Mr Howard seems to now be saying that if there's a problem with interest rates in Australia, it's because of the states, it's because of anybody else apart from Mr Howard,'' he said.
"I find that a very interesting exercise in the blame game.''
West Australian Premier Alan Carpenter also accused the Federal Government of trying to shift blame ahead of the federal election.
"John Howard and Nick Minchin are asserting states are running deficits and that's affecting interest rates,'' Mr Carpenter said.
"It doesn't work that way.
"John Howard told people he'd keep interest rates down and he hasn't.
"So he's looking for people to blame - he's to blame.''
Senator Minchin today also responded to calls from the Real Estate Institute of Australia to double the first home buyers grant to $14,000 to give people a better chance of entering the market.
He said such a move would drive up housing prices unless state governments released more land for housing.
"I do caution against those advocating doubling it because that will end up just feeding into prices and no one will be better off,'' Senator Minchin said.
"The trouble with that is that it adds to demand.
"You would not want to double the first home owners grant unless you were sure there was going to be a supply response at the state level.''
Source: AAP
Saturday, August 04, 2007
Subprime mortgage meltdown could hurt Macquarie Bank
Australia's biggest investment bank, Macquarie, has become the latest local fund manager to confirm its potential exposure to the US subprime mortgage market. Two of its funds face losses of up to 25 per cent, or as much as $300 million.
Macquarie has made its name around the world for delivering big returns for investors.
That global reputation is a key selling point in Macquarie Fortress Investments (MFI), a retail arm managing high returns for small investors prepared to take a risk.
Some of that risk has been in the US mortgage market and last night, Macquarie told investors that two high-yield funds might be hurt by the widening crisis in subprime mortgage defaults.
In a statement to the Australian Stock Exchange last night, MFI director Peter Lucas said imbalances caused by a spillover from subprime defaults could mean losses of up to 25 per cent.
"While Fortress notes have no direct exposure to US subprime mortgages, the portfolio continues to be adversely impacted by price volatility in the US credit markets," a statement said.
Mr Lucas said while there was no reason to believe Macquarie would not be able to meet interest and principal payments, he was working to avoid a margin call when worried lenders call in their loans.
"As the market value of the portfolio has decreased further, it has become necessary for the investment manager to sell selected loans and apply the proceeds to reduce the leverage facility so that the loan-to-value ratio meets the applicable borrowing covenants," the statement said.
Macquarie's Fortress Investments joins two other Australian funds exposed to the US subprime crisis, Basis Capital and Absolute Capital, which have flagged potential losses over the past fortnight.
Wall Street losses
There was also more bad news at the subprime epicentre this morning.
The Dow Jones Industrial Average plunged more than 1 per cent in late trade after two home loan insurers said their billion-dollar stake in a subprime mortgage company might be worthless.
The late news caused a sell off in the banking sector, erasing earlier gains on Wall Street.
Still, market watchers like UBS senior economist Paul Donovan are continuing to focus on the fundamentals, such as a strong underlying US economy.
"It's essentially an issue of confidence - are investors willing to take risks or not?" he said.
But Mr Donovan says widening subprime mortgage defaults first need to be contained.
"If that spreads and we see lenders refusing credit elsewhere, it becomes more significant," he said.
Today's good news in the US was consumer confidence for June, which hit its highest level in almost six years.
But the next reading will be critical, and any sign that Americans are dramatically trimming household budgets on mortgage concerns could put a shadow across assurances that the world's biggest economy is in the best of health.
Macquarie has made its name around the world for delivering big returns for investors.
That global reputation is a key selling point in Macquarie Fortress Investments (MFI), a retail arm managing high returns for small investors prepared to take a risk.
Some of that risk has been in the US mortgage market and last night, Macquarie told investors that two high-yield funds might be hurt by the widening crisis in subprime mortgage defaults.
In a statement to the Australian Stock Exchange last night, MFI director Peter Lucas said imbalances caused by a spillover from subprime defaults could mean losses of up to 25 per cent.
"While Fortress notes have no direct exposure to US subprime mortgages, the portfolio continues to be adversely impacted by price volatility in the US credit markets," a statement said.
Mr Lucas said while there was no reason to believe Macquarie would not be able to meet interest and principal payments, he was working to avoid a margin call when worried lenders call in their loans.
"As the market value of the portfolio has decreased further, it has become necessary for the investment manager to sell selected loans and apply the proceeds to reduce the leverage facility so that the loan-to-value ratio meets the applicable borrowing covenants," the statement said.
Macquarie's Fortress Investments joins two other Australian funds exposed to the US subprime crisis, Basis Capital and Absolute Capital, which have flagged potential losses over the past fortnight.
Wall Street losses
There was also more bad news at the subprime epicentre this morning.
The Dow Jones Industrial Average plunged more than 1 per cent in late trade after two home loan insurers said their billion-dollar stake in a subprime mortgage company might be worthless.
The late news caused a sell off in the banking sector, erasing earlier gains on Wall Street.
Still, market watchers like UBS senior economist Paul Donovan are continuing to focus on the fundamentals, such as a strong underlying US economy.
"It's essentially an issue of confidence - are investors willing to take risks or not?" he said.
But Mr Donovan says widening subprime mortgage defaults first need to be contained.
"If that spreads and we see lenders refusing credit elsewhere, it becomes more significant," he said.
Today's good news in the US was consumer confidence for June, which hit its highest level in almost six years.
But the next reading will be critical, and any sign that Americans are dramatically trimming household budgets on mortgage concerns could put a shadow across assurances that the world's biggest economy is in the best of health.
Friday, August 03, 2007
US credit market and subprime mortgage securities meltdown creates opportunities for scavengers
Not everyone's afraid of the credit market meltdown. For some firms subprime slaughter has a whiff of opportunity to it. Now they're coming out to hunt.
They're working in scary territory. Tuesday analysts following insurance giant AIG calculated that the company might have lost as much as $2.3 billion from its holdings of securities backed by subprime mortgages. Macquarie Bank of Australia disclosed that two of its investment funds could lose up to 25%, or $300 million, of their value because of exposure to the market.
A third Bear Stearns fund had been closed to redemptions, a month after the bank, which happens to be among the biggest packagers of mortgage securities, shut down two of its other mortgage-laden hedge funds in June amid margin calls and redemptions.
Bear Stearns, whose shares were down more than 2% Wednesday and are at a 19-month low, also faces an arbitration suit by a 73-year-old investor who claims the firm misled investors about its exposure to subprime mortgages.
Still, it wasn't a complete bloodbath. Several firms came out to deny rumors of their imminent demise--Beazer Homes being one. The mortgage company denied it is approaching the bankruptcy abyss, refuting rumors that started after American Home Mortgage shares plunged 90% Tuesday when the company said it was having trouble getting funding.
Caxton Associates, an $11 billion New York hedge fund firm, said Wednesday that contrary to rumors on the Internet, its flagship fund is up 3.2% for the year after fees. Caxton did say the fund was down 3% in July and that it had moved to reduce its value-at-risk (how much it could lose at any one time under certain market conditions) to 0.5% of capital.
Caxton president Peter D'Angelo wrote in a letter to investors Wednesday that circulated on the Internet, "We believe that this market change will continue to provide renewed opportunities in the macro trading environment."
He's not the only one to think this subprime meltdown may lead to profits. Several funds specializing in buying up distressed debt are swooping in, hoping the paper was written down to artificially low levels and will rebound once investors regain their sea legs.
Citadel Investments, the Chicago hedge fund, bought the credit portfolio of Sowood Capital earlier this week after the troubled fund ran into problems with the repricing of assets in the subprime sector. Marathon Asset Management, a $9 billion New York fund firm, is said to be setting up a distressed subprime fund, seeing "significant" opportunity in the sector. Another fund that specializes in distressed assets, Harbinger Capital, is thought to have logged double-digit gains in July.
Official performance figures for hedge funds will be released next week by Hedge Fund Research, the Chicago firm that keeps track of the industry.
Fund managers who had sold short the shares of mortgage lenders and other financial firms over the last few months have also made money.
Charles Gradante, research director at the Hennessee Group, which advises clients on hedge fund investments, said many long/short hedge funds had earmarked 5% to 10% of fund assets to be short the lenders and the subprime index since last year. The group is up 9% year to date, one-third of that gain attributable to making the right bet on subprime.
But most funds aren't crazy enough to risk buying up the distressed debt and riding out the market, Gradante says.
Many hedge fund managers have been moving to cash until the panic subsides. "The fundamentals are still good, but the big unknown is how much the panic is building up," he says. "It's like a kettle with steam. You just don't know when it's going to blow."
On Wednesday, Fitch Ratings affirmed $20 billion worth of residential mortgage backed securities and downgraded $2.4 billion. It has been reviewing 170 deals, about $7 billion worth, and will be announcing its ratings action over the next two weeks. This first $2.4 billion batch was what was considered the worst performing of the 170 deals.
Credit markets have seized up in the last few weeks after a record first half of the year, when $452 billion worth of leveraged loans and $98 billion of high-yield bonds hit the market, according to Standard & Poor's. The average quality of those new issues was lower than in the same period last year--about 48% of it was rated B-minus or below, compared with 32% of new issues in the first half of 2006.
But some point out that the credit markets are not so much in severe distress as they are coming down off remarkably good times. Spreads between Treasurys and speculative grade credit are 417 points. But the longer-term average is more like 450 points, according to S&P, meaning spreads have a way to go to meet the average.
The widest spreads came after the dot-com bubble burst, when speculative grade credit traded at 1,000 basis points or more over Treasurys. "The market needed to be prepriced," says Diane Vazza, managing director of fixed income research at S&P. "But you can argue that the market has gone too far the other way, and we would say that is the case."Source: Forbes.com
They're working in scary territory. Tuesday analysts following insurance giant AIG calculated that the company might have lost as much as $2.3 billion from its holdings of securities backed by subprime mortgages. Macquarie Bank of Australia disclosed that two of its investment funds could lose up to 25%, or $300 million, of their value because of exposure to the market.
A third Bear Stearns fund had been closed to redemptions, a month after the bank, which happens to be among the biggest packagers of mortgage securities, shut down two of its other mortgage-laden hedge funds in June amid margin calls and redemptions.
Bear Stearns, whose shares were down more than 2% Wednesday and are at a 19-month low, also faces an arbitration suit by a 73-year-old investor who claims the firm misled investors about its exposure to subprime mortgages.
Still, it wasn't a complete bloodbath. Several firms came out to deny rumors of their imminent demise--Beazer Homes being one. The mortgage company denied it is approaching the bankruptcy abyss, refuting rumors that started after American Home Mortgage shares plunged 90% Tuesday when the company said it was having trouble getting funding.
Caxton Associates, an $11 billion New York hedge fund firm, said Wednesday that contrary to rumors on the Internet, its flagship fund is up 3.2% for the year after fees. Caxton did say the fund was down 3% in July and that it had moved to reduce its value-at-risk (how much it could lose at any one time under certain market conditions) to 0.5% of capital.
Caxton president Peter D'Angelo wrote in a letter to investors Wednesday that circulated on the Internet, "We believe that this market change will continue to provide renewed opportunities in the macro trading environment."
He's not the only one to think this subprime meltdown may lead to profits. Several funds specializing in buying up distressed debt are swooping in, hoping the paper was written down to artificially low levels and will rebound once investors regain their sea legs.
Citadel Investments, the Chicago hedge fund, bought the credit portfolio of Sowood Capital earlier this week after the troubled fund ran into problems with the repricing of assets in the subprime sector. Marathon Asset Management, a $9 billion New York fund firm, is said to be setting up a distressed subprime fund, seeing "significant" opportunity in the sector. Another fund that specializes in distressed assets, Harbinger Capital, is thought to have logged double-digit gains in July.
Official performance figures for hedge funds will be released next week by Hedge Fund Research, the Chicago firm that keeps track of the industry.
Fund managers who had sold short the shares of mortgage lenders and other financial firms over the last few months have also made money.
Charles Gradante, research director at the Hennessee Group, which advises clients on hedge fund investments, said many long/short hedge funds had earmarked 5% to 10% of fund assets to be short the lenders and the subprime index since last year. The group is up 9% year to date, one-third of that gain attributable to making the right bet on subprime.
But most funds aren't crazy enough to risk buying up the distressed debt and riding out the market, Gradante says.
Many hedge fund managers have been moving to cash until the panic subsides. "The fundamentals are still good, but the big unknown is how much the panic is building up," he says. "It's like a kettle with steam. You just don't know when it's going to blow."
On Wednesday, Fitch Ratings affirmed $20 billion worth of residential mortgage backed securities and downgraded $2.4 billion. It has been reviewing 170 deals, about $7 billion worth, and will be announcing its ratings action over the next two weeks. This first $2.4 billion batch was what was considered the worst performing of the 170 deals.
Credit markets have seized up in the last few weeks after a record first half of the year, when $452 billion worth of leveraged loans and $98 billion of high-yield bonds hit the market, according to Standard & Poor's. The average quality of those new issues was lower than in the same period last year--about 48% of it was rated B-minus or below, compared with 32% of new issues in the first half of 2006.
But some point out that the credit markets are not so much in severe distress as they are coming down off remarkably good times. Spreads between Treasurys and speculative grade credit are 417 points. But the longer-term average is more like 450 points, according to S&P, meaning spreads have a way to go to meet the average.
The widest spreads came after the dot-com bubble burst, when speculative grade credit traded at 1,000 basis points or more over Treasurys. "The market needed to be prepriced," says Diane Vazza, managing director of fixed income research at S&P. "But you can argue that the market has gone too far the other way, and we would say that is the case."Source: Forbes.com
APRA to change rules that will hurt fist home buyers and low income earners buying a home according to Mortgage Insurers PMI
APRA may change the rules for first time home buyers and low-income borrowers making them pay a higher interest rate as a result of new capital rules announced by APRA, Australia's financial services industry regulator, according to one of Australia's two providers of lenders mortgage insurance, PMI.
PMI Australia chief executive Ian Graham condemned the proposed changes announced by APRA on Monday, which reduce concessions for the amount of regulatory capital required to be held by lenders in support of home loans protected by LMI cover.
With less incentive to use LMI, lenders were likely to lift interest rates for the more disadvantaged borrowers, Mr Grahame said.
The changes to the capital rules governing home loans from banks, building societies and credit unions are part of the so-called Basel II accord.
Basel II aims to harmonise principles governing regulatory capital and how lenders manage risk, with the overall objective of reducing volatility in the global financial system.
Mr Graham said PMI was concerned that the Australian Prudential Regulation Authority had taken a too narrow view of the proposed changes.
Source: The Australian
PMI Australia chief executive Ian Graham condemned the proposed changes announced by APRA on Monday, which reduce concessions for the amount of regulatory capital required to be held by lenders in support of home loans protected by LMI cover.
With less incentive to use LMI, lenders were likely to lift interest rates for the more disadvantaged borrowers, Mr Grahame said.
The changes to the capital rules governing home loans from banks, building societies and credit unions are part of the so-called Basel II accord.
Basel II aims to harmonise principles governing regulatory capital and how lenders manage risk, with the overall objective of reducing volatility in the global financial system.
Mr Graham said PMI was concerned that the Australian Prudential Regulation Authority had taken a too narrow view of the proposed changes.
Source: The Australian
Thursday, August 02, 2007
Macquarie bank stocks fall in credit confidence loss due to US subprime mortgage crisis
The stocks of Macquarie Bank have fallen over seven per cent after it revealed last night that two of its funds faced losses related to the US sub-prime mortgage crisis of up to 25 per cent.
The listed Macquarie Fortress Notes fund has about $140 million of investors' money and the unlisted Macquarie Fortress Fund has about $80 million.
Neither fund has direct exposure to US subprime mortgages, but both have been hit by price volatility in US credit markets triggered by the sub-prime crisis.
Macquarie said it had been forced to sell some of the loans in the portfolio in a subdued market after receiving margin calls on the funds, which are highly geared at six to seven times.
The average price of assets in the two funds fell four per cent in June.
"We expect the impact of the price declines in July to result in a further deterioration in NAV (net asset value) for 31 July 2007 of approximately 20 to 25 cents,'' Macquarie said last night.
Source: Courier Mail
The listed Macquarie Fortress Notes fund has about $140 million of investors' money and the unlisted Macquarie Fortress Fund has about $80 million.
Neither fund has direct exposure to US subprime mortgages, but both have been hit by price volatility in US credit markets triggered by the sub-prime crisis.
Macquarie said it had been forced to sell some of the loans in the portfolio in a subdued market after receiving margin calls on the funds, which are highly geared at six to seven times.
The average price of assets in the two funds fell four per cent in June.
"We expect the impact of the price declines in July to result in a further deterioration in NAV (net asset value) for 31 July 2007 of approximately 20 to 25 cents,'' Macquarie said last night.
Source: Courier Mail
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