Headlines (Scroll down for complete stories):
1. The Coming Fallout Over Mortgage Defaults
2. Oil Sands ETF: Too Late to the Party?
3. Kerkorian Surrenders on GM, Flack Resigns
4. Report: Consumers Maintain Spending in September
1. The Coming Fallout Over Mortgage Defaults
As the housing market slumps and mortgage defaults edge higher, The Wall Street
Journals asks, "Who takes the hit when loans go bad?"
Is it lenders, which originate the loans, or is it the big investment banks,
which repurchase the loans and package them into investment vehicles, called
mortgage-backed securities? Lenders, points out the Journal, are usually the
ones on the hook for defaulted mortgages.
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Repurchased loans have provisions that trigger the lender to buy back the
original loan in the event of a default early on in the mortgage's life or if
there are underwriting mistakes, which include padded property appraisals, says
the Journal.
"As the housing boom fizzles," writes the Journal, "cases of bad underwriting
are popping up and more mortgages are defaulting early. That has investment
banks and other mortgage buyers invoking these contract provisions and pressing
lenders to repurchase mortgages that get sold to third parties, creating big
losses for some lenders."
And in the $9.1 trillion mortgage market, that can mean big problems for some
lenders. As a result, some lenders are tightening their lending and underwriting
standards.
"In a rising market, even a bad loan is a good loan," said Nate Redleaf, a
research analyst with Imperial Capital LLC, a Beverly Hills, Calif., investment
bank. "You could be sloppy and it didn't matter. Now people really have to do
their jobs. They have to be more vigilant."
According to the Journal, H&R Block's $131 million loss for the quarter ending
July 31 was largely due to $102 million worth of loans its unit Option One
Mortgage Corp. had to repurchase.
"We experienced a significant and unanticipated increase in loan-repurchase
requests from investors as first payment defaults accelerated," Mark Ernst, H&R
Block chief executive, said at the time.
Fremont General Corp. of Santa Monica, Calif., announced it would eliminate or
scale back some of its low-down-payment loans and some loans to subprime
customers in order to stem the mortgage buybacks.
Impact Mortgage Holdings Inc., a Newport Beach, Calif., real estate investment
trust tells the Journal that repurchases tripled between the first and second
quarters of this year, rising to $100 million.
Plus, the Journal pointed to at least one investment banker, Bear Stearns, which
is suing lenders to get them to buy back some bad loans. Bear Stearns' EMC
Mortgage Corp. unit is suing MortgageIT Holdings, Inc., because MortgageIT is
refusing to buy back at least 587 loans totaling $70 million.
Bear Stearns, along with 11 other loan buyers, also unsuccessfully sued D&M
Financial Corp. because it wouldn't buy back it's defaulted loans, claiming that
the company "vastly inflated" appraisals and "altered or forged down-payment
checks." D&M is now in bankruptcy proceedings.
A study by Credit Suisse Group in which it examined 208 bond deals involving
pools of subprime mortgages totaling $234 billion found nearly half of the pools
had some loans repurchased in the first quarter of 2006. In the same period last
year, only a third of loans had some repurchase activity.
Doug Duncan, chief economist of the Mortgage Bankers Association, expects
delinquencies to increase modestly over the next year or two.
Christopher Mayer, director of the Paul Milstein Center for Real Estate at
Columbia Business School, tells the Journal, "This will continue to be an issue
even in the case of a soft landing."
Editor's Note:
2. Oil Sands ETF: Too Late to the Party?
A new exchange-traded fund will let investors buy into a basket of stocks
involved in Canada's oil sands. But now that oil prices are going down, is it
worth it?
Canada's oil sands are the world's second largest proven reserves with about 175
billion barrels. However, it is very difficult and expensive to turn the
tar-like petroleum into crude, and the oil sands currently produce just 1
million barrels per day compared to the 12 million coming out of Saudi Arabia.
Though technology has improved, oil prices would need to remain high for the oil
sands to be profitable. But ETF Zone points out that there are pluses for
investing in oil sands. They're not subject to disruption from hurricanes or
geopolitical uncertainty.
The Claymore Oil Sands Sector ETF, which is expected to begin trading in
mid-October, will track the Sustainable Oil Sands Sector Index. Claymore
Investments Inc. president Som Seif tells ETF Zone that the new ETF is designed
to give investors "as much exposure to companies with the greatest amount of oil
sands business and output."
Seif tells ETF Zone that companies in the index must meet three requirements:
1. Current oil sands production in barrels per day
2. Projected oil sands production in the year 2015
3. Percentage of total production focused on oil sands production
The ETF will likely hold such companies and royalty trusts as Suncor Energy,
Imperial Oil, Canadian Oil Sands Trust, Shell Canada, Opti Canada, Western Oil
Sands, Synenco Energy, UTS Energy, Petrobank Energy and Resources, and Canadian
Natural Resources.
Editor's Note:
3. Kerkorian Surrenders on GM, Flack Resigns
Shares of General Motors Corp. drifted higher Monday following dissident
shareholder Kirk Kerkorian's announcement that he would not increase his stake
in the automaker and the resignation of a Kerkorian adviser from GM's board.
The world's largest automaker's shares rose 9 cents to $31.15 in midday trading
on the New York Stock Exchange, after falling as low as $30.52 earlier in the
session. Over the past 52 weeks, GM has traded between $18.33 and $34.
On Friday, Jerome York, key adviser to Kerkorian, resigned from the GM board,
and Kerkorian signaled he would not acquire more stock. Both developments came
after the automaker decided against pursuing an alliance with Renault SA and
Nissan Motor Co.
Kerkorian already controls 9.9 percent of GM shares and recently considered
raising his stake to 12 percent.
The developments sent GM shares down $2.08, or 6.3 percent, to close Friday at
$31.05 on the NYSE.
Robert Barry of Goldman Sachs said York's resignation and Kerkorian's actions
will make GM shares more volatile, but the debate surrounding whether a North
American turnaround is really under way will remain the main force behind the
stock.
"We doubt Kerkorian sells yet," Barry wrote in a Sunday note to investors. "For
one, such an acerbic (quickly leaked) resignation letter from Kerkorian adviser
York seems an illogical prelude to a sale.
"Rather, we think the letter sets the stage for a battle to restack the board
and/or executive suite."
Peter Nesvold of Bear Stearns also predicted that Kerkorian will hold on to his
stake in the Detroit-based automaker and may look for allies among its other
large shareholders.
"Our best sense is that Tracinda is unlikely to exit near term (the investment
company has a track record of typically being longer-term holders, and not
retreating after a few hiccups)," Nesvold said.
"However, we wouldn't be surprised if Mr. York and Tracinda were to take their
collective message directly to shareholders -- possibly arguing that a new slate
of directors would facilitate a purportedly 'more objective' second review of
the benefits of a Renault-Nissan hook-up."
© 2006 Associated Press.
Editor's Note:
4. Report: Consumers Maintain Spending in September
U.S. retail sales rose in September as lower gasoline prices and a soaring stock
market bolstered consumer spending, according to final data by SpendingPulse
Monday.
Americans splurged on clothes and back-to-school items last month, offering
retailers' hopes of a solid year-end shopping season, SpendingPulse said.
Seasonal adjusted retail sales, excluding autos, grew 0.3 percent for a second
straight month in September, below the preliminary reading of a 0.4 percent gain
released a week ago, said SpendingPulse.
In dollar terms, September seasonally adjusted ex-auto sales reached $287.7
billion, up 5.3 percent from a year ago,
"Overall the data are providing more optimism on consumer spending than a couple
of months ago," said Michael McNamara, vice president of research and analysis
at SpendingPulse, a retail data service of MasterCard Advisors, an arm of
MasterCard Worldwide.
Growth in consumer spending, which accounts for two-thirds of the economy,
showed signs of accelerating last month after falling this summer when gasoline
prices were hovering near record highs.
Regular unleaded gasoline averaged $2.31 a gallon in the last week in September,
down 62 cents from the same period a year earlier and at its lowest weekly level
since late February, according to the Energy Information Administration.
Factoring out gasoline and autos, retail sales improved 0.6 percent from
August's levels, SpendingPulse said.
Less money spent at the pump spelled more disposable income for spending on
clothes, which posted a 12.3 percent year-over-year increase in September,
McNamara said.
Strong clothing demand boosted the bottom line last month for retailers such as
Limited Brands Inc., J.C. Penney Inc. and Nordstrom Inc. .
In contrast, retailers like Wal-Mart and Costco missed sales expectations
against last year's results inflated by purchased in the aftermath of Hurricane
Katrina.
Moreover, the housing slowdown has been crimping furniture sales, which fell 10
percent in September from a year ago, McNamara said.
"Furnitures continued to show negative growth. They have been decelerating all
year," he said.
SpendingPulse's September retail sales, not adjusted for seasonal factors,
totaled $278.3 billion, down 5.4 percent from August and up 4.9 percent from a
year earlier.
Meanwhile, economists expected that ex-auto retail sales were stagnant in
September versus August. The median forecast on the government's seasonally
adjusted ex-auto sales likely showed zero growth in September, and overall sales
likely grew by 0.2 percent.
The government will release its September retail survey at 8:30 a.m. (1230 GMT)
Friday.
© 2006 Reuters.
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