From: "Crowley" 
Newsgroups: uk.politics.misc uk.finance
Subject: Re: SIPPS shock as Brown shelves tax loophole for residential property.
Date: 6 Dec 2005 09:09:19 -0800
   posting-account=yGNAvw0AAABsgRsckUU2yFAQy4yH8Lsf


M Holmes wrote:
> In uk.finance Richard Faulkner  wrote:
>
> >>> Given that he has another 3 years to screw things up even further, it
> >>> will probably take another 5 year for the Conservatives to get us back
> >>> on track - I just hope they are given the time.
>
> >>Oh dear. You had to blow it didn't you. Believing in the Tories is no
> >>different to believing in Labour.
>
> > Yes.... I thought for a minute or so about the last part of the last
> > paragraph, and decided life's too short, so let it go 
>
> > Who would it be best to believe in???
>
> Personally I root for no government at all, but I'd be prepared to
> compromise if politicians were there strictly to run national defence on
> no more than 5% of GDP and were banned outright from interfering in the
> economy in any way whatsoever.
>
> > If your theories are correct, we're all in the shit anyway
>
> I'm not predicting apocalypse followed by survivalism (though in the
> nuclear age it can never be entirely ruled out) just some rough
> financial problems ahead for the world. After a couple of decades we'll
> probably come through OK.
>
> > (except those rich in cash and gold??)
>
> Finally it's starting to look not entirely insane to tell people to buy
> gold.
>
> > so what to do?
>
> Fortunately the advice to reduce debt as much as humanly possible and
> save as much cash as possible by cutting down on as much as possible is
> very sound advice irrespective of whether I'm right and can be done to
> some degree by everyone.
>
> If I am right then the key to survival will be having as little debt as
> possible and holding on to income while cutting expenses, while the key
> to prospering will be to have free cash available for when assets are
> being sold at distress prices.
>
> Timing Note: My expectation that Fannie and Freddie would be Ground Zero
> of the coming crisis is beginning to bear fruit. Between them they now
> have between 15 and 19 billion Dollars of miscounted money, and
> counting. Given that this resulted in 40 million of bonuses for the top
> guy, he may well be going to jail. Meanwhile Fannie says that it will
> take 8 million man hours of their own accountants to try to get accurate
> numbers for three years ago. That doesn't count investigation time by
> the SEC and other interested parties. I daresay there's more fun to come
> there but it's safe to conclude that the main conduits of credit
> recycling are being welded shut (they've even been ordered to sell
> mortgage-back assets they were holding on their own books because (and I'm
> quoting Sir Printsalot here, not my own ravings on the subject) they
> pose a threat to the global financial system.
>
> In short: we've pretty much hit all my targets for the pre-game warmup.
> The game, my dear Watsons, is now very much afoot...
>
> FoFP

>From Bloomberg today.......

Housing Bubble Bursts in the Market for U.S. Mortgage Bonds

Dec. 6 (Bloomberg) -- In the U.S. bond market, the housing bubble has
burst.

Bonds backed by home loans to the riskiest borrowers, the fastest
growing part of the $7.6 trillion mortgage market, have lost about 2.5
percent since September on concern an 18-month rise in interest rates
may force more than 150,000 consumers to default.

``We've been hearing about risks of a house price bubble, easy credit
and loans to borrowers that really don't qualify, and now in the last
couple of months we're starting to see things turn for the worse,''
said Joseph Auth, a bond fund manager who helps oversee $135 billion at
Standish Mellon Asset Management in Boston. ``We don't know if it's
going to be a hard or soft landing.''

Mortgage securities with low ratings and loans from Ameriquest Mortgage
Co. and New Century Financial Corp., two Irvine, California-based
companies that specialize in lending to the 50 million people with
histories of late payments and bankruptcies, yield the most in two
years. The rise in yields reduced the value of loans made by lenders,
resulting in lower profit margins and higher rates for consumers with
bad credit.

The slump in the bonds is one of the first signs the housing boom is
ending after the Federal Reserve's 12 interest- rate increases. Real
estate has accounted for about half the economy's growth since 2001,
according to Merrill Lynch & Co.

Growing Market

About 13.4 percent of all mortgages at the end of June were to
borrowers considered most likely to default, such as those with high
credit card balances, up from 2.4 percent in 1998, according to the
Mortgage Bankers Association. The Washington- based trade group's 2,700
members represent 70 percent of the home-loan business.

The amount of bonds backed by these high-risk loans has more than
doubled since 2001, to a record $476 billion, according to the Bond
Market Association, a New York-based trade group of more than 200
securities firms.

The market ``will deteriorate as housing slows down,'' said Christopher
Flanagan, who runs asset-backed debt research at New York-based
JPMorgan Chase & Co., the fourth-largest mortgage lender in the U.S.
The amount of loans made next year may fall by as much as 25 percent,
he said.

Borrowers with credit scores below 620 as measured by Fair Isaac Corp.
have a higher risk of defaulting, and loans to these people are
considered subprime. About 20 percent of the U.S. adult population has
a score below 620, according to Fair Isaac, the Minneapolis-based
company whose FICO ratings are the benchmark for loans and credit
cards. The test scores borrowers from 300 to 850 and the lower the
mark, the riskier the credit.

Delinquency Rates

The last time delinquency rates on lower-rated mortgages jumped was in
2000 as economic growth slumped following the Fed's six rate increases.
The central bank has lifted rates 12 times since June 2004, to 4
percent from 1 percent.

The weighted average default rate on the riskier loans rose to 10.1
percent in November 2001 from about 7 percent in early 2000, according
to Michael Youngblood, a managing director of asset-backed debt at
Friedman, Billings, Ramsey Group Inc., an Arlington, Virginia-based
securities firm that specializes in mortgage-related assets.

The late payment rate is 5.51 percent now. Every 1 percentage point
increase in that rate means another 34,700 home-loan defaults,
according to Youngblood's calculations.

``Employment drives credit conditions in subprime loans and as long as
we see a robust labor market we should not expect deterioration in
subprime performance,'' said Youngblood, who expects the default rate
to reach 5.75 percent by August.

The Labor Department said last week that the unemployment rate in
November held at 5 percent for a second month, below the 5.64 percent
average over the past 20 years.

`Big Fear'

Irene Von Toussaint, a 33-year-old married mother of one from Bayville,
New York, said she's depending on improvements to her credit to avoid
paying a rate of as much as 12 percent when the fixed period of her New
Century interest-only loan expires in two years. Von Toussaint's credit
score is 584.

November 1985 was the last time any prime borrower paid 12 percent on a
30-year fixed-rate mortgage, according to Freddie Mac. Von Toussaint
now pays 7.1 percent, compared with about 5.25 percent for a so-called
prime customer.

``Paying bills on time is the big fear because I've been
disorganized,'' said Von Toussaint, who now has her payments deducted
automatically from her checking account.

Loss Estimate

Losses on mortgage bonds backed by subprime loans that will be made
next year may rise to 7 percent, contrasting with 2 percent for bonds
issued the past two years, should home prices hold steady, said Kenneth
Posner, a New York-based finance analyst at Morgan Stanley.

The average yield on bonds rated BBB-, the lowest investment-grade
ranking, and backed by payments on adjustable rate mortgages made to
the riskiest borrowers is 7.23 percent, the highest since December
2003, according to JPMorgan. The yield was 5.7 percent in October.

The 1.53 percentage point increase compares with a rise of 0.4
percentage point to 5.93 percent for higher quality 30-year mortgage
securities guaranteed by Fannie Mae.

Lenders that rushed to provide mortgages amid rising home prices are
now stuck with loans worth less than they expected because bond
investors are demanding more protection. They are raising mortgage
rates help to make up the difference.

`Changing Environment'

``In a rapidly changing environment, you can find yourself ahead or
behind the yield curve,'' Robert Cole, chief executive officer of New
Century, the No. 2 lender to people with the lowest credit scores, said
in a Nov. 15 interview in New York. ``With rates going up, it's more
likely behind.''

Profit margins for New Century may narrow to 15 to 25 basis points this
quarter from 61 basis points in the third quarter, and 175 basis points
in 2004, Chief Financial Officer Patti Dodge said in an interview. A
basis point is 0.01 percentage point.

New Century is increasing rates twice as fast for subprime borrowers
than for others, Cole said. The company lifted its weighted average
rate to about 7.9 percent in November from 7.18 percent in August,
pushing up the cost of a $200,000 loan by $98 a month. A prime borrower
would only have to pay about $56 more.

Gains from sales of loans at New Century fell 13 percent to $176.2
million in the third quarter from a year earlier even as sales rose 43
percent.

At Kansas City, Missouri-based NovaStar Financial Inc., another lender
to borrowers with poor credit histories, profit from sales tumbled 23
percent.

Yield Spreads

``Originators don't charge enough for the risk'' and will lose money as
investors demand higher yields, said Alex Wei, who co-manages $3
billion in bonds at Philadelphia-based Delaware Management.

Ameriquest, the largest company specializing in loans to subprime
borrowers, had to pay investors a yield of 2.75 percentage points more
than benchmark one-month lending rates to sell $14 million of BBB rated
mortgage bonds last month.

The extra yield was 1 percentage point higher than on a similar issue
sold by the company in June, according to data compiled by Bloomberg.
The $1.2 billion AAA rated portion was priced at 24 basis points, 1
basis point higher than in June.

Sales of bonds backed by risky loans will fall next year to about $375
billion, JPMorgan's Flanagan said.

The Fed is signaling that it's unlikely to stop lifting borrowing costs
until housing cools. The Commerce Department said last week that new
home sales in October increased 13 percent, the most since April 1993,
to a record 1.424 million annual rate.

``Froth'' in housing markets may be spilling over into mortgage
markets, Fed Chairman Alan Greenspan warned an American Bankers
Association convention in September. A rise in interest- only loans
that initially don't pay down principle and the introduction of
``exotic'' variable-rate mortgages ``are developments that bear close
scrutiny,'' he said.

To contact the reporter on this story:
Al Yoon in New York at  ayoon@bloomberg.net.
Last Updated: December 6, 2005 00:02 EST

http://www.bloomberg.com/apps/news?pid=10000103&sid=aDSB370ItSJU&refer=us