Stocks falter as credit woes weigh
· TSX -36.19pts continues its downwards spiral, closing 8 of the 9 last weeks lower than it opened them, mostly because of tumbling oil prices as well as weakness in gold and materials.
· Dow -139.88pts JPMorgan Chase said it has accumulated $1.5 billion of losses so far this quarter on mortgage-related assets. The news stoked concerns of more pain yet to come.
· Dollar +.57c to $94.09US
· Oil -1.44 to $113.01US per barrel. To a new 3 month low on more evidence that developed countries such as the United States are cutting back on their energy use· Gold plummets -$5.35 to $815.50US per ounce – to an 8 month low as a strong US dollar triggered a massive sell off
U.S. banks tighten credit
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August 12, 2008 The Associated Press WASHINGTON
More U.S. banks are tightening lending standards on home mortgages and other consumer and business loans as a deepening credit crisis exerts a heavier toll on the American economy.
The U.S. Federal Reserve said yesterday the percentage of banks reporting tighter lending standards rose across various loan types in its July survey. In April, the central bank had found that the percentage of banks reporting tighter lending standards was already near historic highs.
The new survey, conducted in early July, found that about 75 per cent of the banks surveyed indicated they had tightened their lending standards for prime mortgages. That was up from about 60 per cent of banks who said they were tightening lending standards for prime mortgages in the previous survey.
The Fed's July survey covered 50 banks which hold about 80 per cent of the residential mortgages on the books of all commercial banks.
Out of this group of 50 banks, 32 said they were still originating so-called non-traditional home mortgages. Among these 32 banks, about 85 per cent said they had tightened their lending standards, up from 75 per cent who said they were tightening lending standards for non-traditional mortgages in April.
The Fed survey found that only seven of the 50 banks said they were still participating in subprime mortgages, loans made to borrowers with weak credit histories.
Wednesday, August 13, 2008
Tuesday, August 12, 2008
Financial Update
· TSX -138.55pts to 13,203, pulled down lower again by resource shares, which fell with commodity prices
· Dow +48.03pts to 11,782
· Dollar -.17cto $93.52US Sharply lower oil prices and a broader correction among other major currencies against the greenback has helped push the Canadian dollar down almost 7% since last hitting par with its U.S. counterpart just three weeks ago. And if economic forecasts are correct, the loonie will decline further, boosting the prospects for industries like manufacturing, forest products, information technology and health care.
· Oil after falling $10 last week -$.75 to $114.45US per barrel falling to a new 3 month low as the U.S. dollar extended its rebound and more signs emerged that China's energy demand could be leveling off and traders monitored the conflict between Russia and Georgia that some believe could disrupt supplies
· Gold tanked 4% -36.50 to$820.85US per ounce to its lowest level in a year
· A strong US dollar also caused copper to hit a 6 month low
New home prices soften, construction plummets Gary Marr, Financial Post
New home construction, fuelled by a major drop in Ontario, continued to decline last month confounding economists who now say the housing market is falling faster than expected.
Canada Mortgage and Housing Corp. said they were 186,500 new homes constructed last month on a seasonally adjusted annualized basis, a 13.6% drop from a month earlier. The pain was felt hardest in Ontario's condominium market where the construction of multiple apartment units was down 57.9% in July from a month earlier.
Paul Ferley, assistant chief economist with RBC Economics, noted the slide in housing starts was worse than many economists had estimated. The consensus was for 210,000 starts in July which would have been only a 3.6% decline from June.
"The weakness is occurring much sooner than we expected," said Mr. Ferley, adding no one is expecting the Canadian housing market to get as ugly as its United States counterpart.
"The drop in starts in July was likely slightly overstated with the weakness largely concentrated in Ontario. However, housing activity is definitely on a downward trend consistent with indications of deteriorating affordability through last year," said the economist.
Most of the country was hit by the sudden dip with Alberta and British Columbia the only exceptions. Starts rose 23% in Alberta from a month earlier and 5% in B.C. from June to July.
While much is being made of the fact that the condominium sector skewed the July numbers, construction of single family homes is also waning. CMHC said urban single starts dropped 6.6% in July from a month earlier.
Brian Johnston, president of Monarch Corp. a major developer in the Toronto region, said the problem is the housing sector just cannot compete with its own past record. Starts hit a 19-year in 2006 and dropped only marginally last year.
"I would suggest there is a worrying trend that we are seeing such significant drop offs," said Mr. Johnston. "Starts always follow sales and I can tell you sales are definitely trending down in 2008."
Mr. Monarch said the market is cooling and builders are feeling it because they are unable to raise prices at a time when some of their costs are going up. Market conditions for existing homes are the same, with sales dropping and prices flat or falling across the country.
"It's a tougher market out there. I don't think we are in panic mode, there isn't a huge concern but we are definitely slowing down to some extent," said Mr. Johnston.
CMHC said it still expects for the seventh straight year that starts will top 200,000, the strongest housing run in Canadian history.
"It's not that bad," said Bertrand Recher, senior economist with CMHC. "What you saw was a one-month blip due to the multiple starts in Ontario and that's mainly Ontario."
In the first six months of the year, condo construction soared in Ontario and now it appears that run is over. "This is a readjusting because of those strong months," said Mr. Recher.
Pascal Gauthier, an economist with TD Bank Financial Group, echoed those comments. "There will be a natural tendency to read too much into this monthly decline," he said. "We think it's important to caution observers against such knee-jerk reaction to this month's CMHC report. Residential construction is easing and should continue to do so."
· Dow +48.03pts to 11,782
· Dollar -.17cto $93.52US Sharply lower oil prices and a broader correction among other major currencies against the greenback has helped push the Canadian dollar down almost 7% since last hitting par with its U.S. counterpart just three weeks ago. And if economic forecasts are correct, the loonie will decline further, boosting the prospects for industries like manufacturing, forest products, information technology and health care.
· Oil after falling $10 last week -$.75 to $114.45US per barrel falling to a new 3 month low as the U.S. dollar extended its rebound and more signs emerged that China's energy demand could be leveling off and traders monitored the conflict between Russia and Georgia that some believe could disrupt supplies
· Gold tanked 4% -36.50 to$820.85US per ounce to its lowest level in a year
· A strong US dollar also caused copper to hit a 6 month low
New home prices soften, construction plummets Gary Marr, Financial Post
New home construction, fuelled by a major drop in Ontario, continued to decline last month confounding economists who now say the housing market is falling faster than expected.
Canada Mortgage and Housing Corp. said they were 186,500 new homes constructed last month on a seasonally adjusted annualized basis, a 13.6% drop from a month earlier. The pain was felt hardest in Ontario's condominium market where the construction of multiple apartment units was down 57.9% in July from a month earlier.
Paul Ferley, assistant chief economist with RBC Economics, noted the slide in housing starts was worse than many economists had estimated. The consensus was for 210,000 starts in July which would have been only a 3.6% decline from June.
"The weakness is occurring much sooner than we expected," said Mr. Ferley, adding no one is expecting the Canadian housing market to get as ugly as its United States counterpart.
"The drop in starts in July was likely slightly overstated with the weakness largely concentrated in Ontario. However, housing activity is definitely on a downward trend consistent with indications of deteriorating affordability through last year," said the economist.
Most of the country was hit by the sudden dip with Alberta and British Columbia the only exceptions. Starts rose 23% in Alberta from a month earlier and 5% in B.C. from June to July.
While much is being made of the fact that the condominium sector skewed the July numbers, construction of single family homes is also waning. CMHC said urban single starts dropped 6.6% in July from a month earlier.
Brian Johnston, president of Monarch Corp. a major developer in the Toronto region, said the problem is the housing sector just cannot compete with its own past record. Starts hit a 19-year in 2006 and dropped only marginally last year.
"I would suggest there is a worrying trend that we are seeing such significant drop offs," said Mr. Johnston. "Starts always follow sales and I can tell you sales are definitely trending down in 2008."
Mr. Monarch said the market is cooling and builders are feeling it because they are unable to raise prices at a time when some of their costs are going up. Market conditions for existing homes are the same, with sales dropping and prices flat or falling across the country.
"It's a tougher market out there. I don't think we are in panic mode, there isn't a huge concern but we are definitely slowing down to some extent," said Mr. Johnston.
CMHC said it still expects for the seventh straight year that starts will top 200,000, the strongest housing run in Canadian history.
"It's not that bad," said Bertrand Recher, senior economist with CMHC. "What you saw was a one-month blip due to the multiple starts in Ontario and that's mainly Ontario."
In the first six months of the year, condo construction soared in Ontario and now it appears that run is over. "This is a readjusting because of those strong months," said Mr. Recher.
Pascal Gauthier, an economist with TD Bank Financial Group, echoed those comments. "There will be a natural tendency to read too much into this monthly decline," he said. "We think it's important to caution observers against such knee-jerk reaction to this month's CMHC report. Residential construction is easing and should continue to do so."
Friday, July 25, 2008
Financial Update
TSX tumbles as banks get hit hard
· TSX -306.52pts (Reuters) - The TSE's main index sank more than 2% in a broad decline sparked by losses in financial-services shares -down 4.1% from this past week's strong 6 session rally, as sour data provided a reminder of the dreadful state of the U.S. housing sector and concerns over the U.S. economic outlook, which showed a 2.6% drop in sales in existing U.S. homes. All of the major banks were down, including Canadian Imperial Bank of Commerce, which lost 5.9% after the filing of a multibillion dollar class action law suit.
· Dow -283.10pts also sharply lower amid mixed corporate results, including an $8.7b quarterly loss posted by Ford and a dismal housing report and another selloff of financial stocks.
· Dollar -.22c to $98.73US
· Oil +$1.05to $125.49US per barrel. Americans used 2.4% less fuel over the past 4 weeks than they did last year, the latest figures by the U.S. Energy Department's Administration show. While that may not sound like much, industry experts say it represents a significant shift by the world's largest energy consumer. A bigger-than-expected increase in gasoline supplies only added to concerns that drivers are cutting back. "We've grounded airplanes. People are driving less, they're trading in their SUVs," said James Cordier, president of Liberty Trading Group and OptionSellers.com. "For the foreseeable future - at least for the next 6 to 12 months - we have demand destruction." · Gold +$4.40 to $928.400US per ounce Gold regained strength after an earlier drop to a 2 week low attracted buying from jewellers, the electronics sector and bargain hunters
Some great info in the attached article to assist you when clients question the need for documentation…..
A message to lenders: know your borrowers
By Burton Frierson - Analysis
NEW YORK (Reuters) - The sweltering days of late July may seem an odd time to revisit the Christmas classic "It's a Wonderful Life," but the 1946 movie teaches a timeless lesson in finance: that lenders must always know their borrowers and have a stake in the debts being repaid.
As the United States struggles to cope with the worst housing slump since the Great Depression, some have sought to explain the latest boom and bust in mortgages as innovation gone awry.
But much of it is not new at all. There were six U.S. mortgage meltdowns between 1870 and World War Two and all taught the same lesson -- that some loans should never be made.
"Apparently no single person on Wall Street knew about these six earlier blow-ups. If they had they would have held back," said Robert E. Wright, financial historian at New York University's Stern School of Business.
"They all happened for the same reason and that is the same reason that the seventh one blew up: the originators had incentives to make as many mortgages as quickly as possible and not to really care about the borrowers' long-term ability to pay."
To prevent future housing crashes, analyst suggestions run the gamut from returning to more community-focused banking to market mechanisms to prevent bubbles from developing.
Meanwhile, lawmakers in Washington have crafted a package to rescue the market and shore up Fannie Mae and Freddie Mac, which own or have guaranteed almost half of the $12 trillion in U.S. mortgage debt outstanding.
There are also efforts to tighten standards among the brokers who made the high-risk loans that were repackaged into complex securities and sold on around the world to investors eager for the extra bit of interest on offer.
NOTHING NEW
According to research by Kenneth Snowden, associate professor of economics at the University of North Carolina at Greensboro, mortgage securitization appeared in 6 different forms between 1870 and 1940. Each time the market for mortgage-backed securities grew rapidly for a few years and then collapsed.
The expansions included financing booms for building cities in the American West, settlement of the Great Plains and agricultural expansion during and after World War I. In all of the breakdowns, the willingness of bankers and agents to write loans that never should have been made played a crucial role.
"In securitization what you have are originators who are really very distinct from the ultimate holders of the risk," Snowden told Reuters in a telephone interview.
"How are the incentives maintained through that chain to maintain good credit quality? That's what's key. That's what's proven to be hard to do," says Snowden, adding, though, that he thinks securitization is beneficial when properly done.
Snowden says as housing markets grow increasingly exuberant, maintaining credit standards becomes more difficult, especially as companies fight to maintain market share. He suggests putting in place regulatory mechanisms to cool off markets off when they begin to expand too rapidly.
KNOW WHERE THE MONEY IS
For the Hollywood audience, It's a Wonderful Life leading man James Stewart demonstrated the valuable link between lender and borrower in the film's bank-run scene. Here, protagonist George Bailey convinces small-town depositors to stick with the local building and loan he runs.
Bailey's clinching argument is that they know their money is safe because they have loaned it to other residents of Bedford Falls, whose financial prospects they know intimately.
"Well, your money's in Joe's house. That's right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others," Stewart, as Bailey, tells distressed depositors. "Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can."
The community building and loan survives because the investors know who they are underwriting.
"That's the scene where he explains basically the philosophy and rationale of community banking," says Wright, the financial historian at Stern School of Business. "In fact that's the part of the movie where I cry."
Fast-forward to the latest debacle and ask whether investors have the same confidence. The answer is a resounding 'no', expressed in loss of confidence throughout the global financial system.
Wright says the credit crunch shows the virtues of the community banking system, where financial institutions operate locally, originate their own loans and tend to hold onto the debts as investments.
Greater emphasis on this approach may also help lay the foundations for a more stable housing market in the future
They know their borrowers," Wright added.
Some argue that an end to securitization and a return only to community banking would not look nearly as idyllic as it does on film. A "return to the old days of the Bailey Building and Loan," analysts at Merrill Lynch wrote in a July 16 research note, would be "to the detriment of U.S. growth prospects" by making capital and credit more difficult to obtain.
If that's the case then the onus is on regulators and financiers to figure out the conundrum that has been the undoing of so many U.S. mortgage booms.
"Who shouldn't write a bad loan?" asks Snowden. "When you think of incentives, who should say 'no' to a poor quality loan?"
Have a great day! I will be back from vacation Aug 11!
· TSX -306.52pts (Reuters) - The TSE's main index sank more than 2% in a broad decline sparked by losses in financial-services shares -down 4.1% from this past week's strong 6 session rally, as sour data provided a reminder of the dreadful state of the U.S. housing sector and concerns over the U.S. economic outlook, which showed a 2.6% drop in sales in existing U.S. homes. All of the major banks were down, including Canadian Imperial Bank of Commerce, which lost 5.9% after the filing of a multibillion dollar class action law suit.
· Dow -283.10pts also sharply lower amid mixed corporate results, including an $8.7b quarterly loss posted by Ford and a dismal housing report and another selloff of financial stocks.
· Dollar -.22c to $98.73US
· Oil +$1.05to $125.49US per barrel. Americans used 2.4% less fuel over the past 4 weeks than they did last year, the latest figures by the U.S. Energy Department's Administration show. While that may not sound like much, industry experts say it represents a significant shift by the world's largest energy consumer. A bigger-than-expected increase in gasoline supplies only added to concerns that drivers are cutting back. "We've grounded airplanes. People are driving less, they're trading in their SUVs," said James Cordier, president of Liberty Trading Group and OptionSellers.com. "For the foreseeable future - at least for the next 6 to 12 months - we have demand destruction." · Gold +$4.40 to $928.400US per ounce Gold regained strength after an earlier drop to a 2 week low attracted buying from jewellers, the electronics sector and bargain hunters
Some great info in the attached article to assist you when clients question the need for documentation…..
A message to lenders: know your borrowers
By Burton Frierson - Analysis
NEW YORK (Reuters) - The sweltering days of late July may seem an odd time to revisit the Christmas classic "It's a Wonderful Life," but the 1946 movie teaches a timeless lesson in finance: that lenders must always know their borrowers and have a stake in the debts being repaid.
As the United States struggles to cope with the worst housing slump since the Great Depression, some have sought to explain the latest boom and bust in mortgages as innovation gone awry.
But much of it is not new at all. There were six U.S. mortgage meltdowns between 1870 and World War Two and all taught the same lesson -- that some loans should never be made.
"Apparently no single person on Wall Street knew about these six earlier blow-ups. If they had they would have held back," said Robert E. Wright, financial historian at New York University's Stern School of Business.
"They all happened for the same reason and that is the same reason that the seventh one blew up: the originators had incentives to make as many mortgages as quickly as possible and not to really care about the borrowers' long-term ability to pay."
To prevent future housing crashes, analyst suggestions run the gamut from returning to more community-focused banking to market mechanisms to prevent bubbles from developing.
Meanwhile, lawmakers in Washington have crafted a package to rescue the market and shore up Fannie Mae and Freddie Mac, which own or have guaranteed almost half of the $12 trillion in U.S. mortgage debt outstanding.
There are also efforts to tighten standards among the brokers who made the high-risk loans that were repackaged into complex securities and sold on around the world to investors eager for the extra bit of interest on offer.
NOTHING NEW
According to research by Kenneth Snowden, associate professor of economics at the University of North Carolina at Greensboro, mortgage securitization appeared in 6 different forms between 1870 and 1940. Each time the market for mortgage-backed securities grew rapidly for a few years and then collapsed.
The expansions included financing booms for building cities in the American West, settlement of the Great Plains and agricultural expansion during and after World War I. In all of the breakdowns, the willingness of bankers and agents to write loans that never should have been made played a crucial role.
"In securitization what you have are originators who are really very distinct from the ultimate holders of the risk," Snowden told Reuters in a telephone interview.
"How are the incentives maintained through that chain to maintain good credit quality? That's what's key. That's what's proven to be hard to do," says Snowden, adding, though, that he thinks securitization is beneficial when properly done.
Snowden says as housing markets grow increasingly exuberant, maintaining credit standards becomes more difficult, especially as companies fight to maintain market share. He suggests putting in place regulatory mechanisms to cool off markets off when they begin to expand too rapidly.
KNOW WHERE THE MONEY IS
For the Hollywood audience, It's a Wonderful Life leading man James Stewart demonstrated the valuable link between lender and borrower in the film's bank-run scene. Here, protagonist George Bailey convinces small-town depositors to stick with the local building and loan he runs.
Bailey's clinching argument is that they know their money is safe because they have loaned it to other residents of Bedford Falls, whose financial prospects they know intimately.
"Well, your money's in Joe's house. That's right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others," Stewart, as Bailey, tells distressed depositors. "Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can."
The community building and loan survives because the investors know who they are underwriting.
"That's the scene where he explains basically the philosophy and rationale of community banking," says Wright, the financial historian at Stern School of Business. "In fact that's the part of the movie where I cry."
Fast-forward to the latest debacle and ask whether investors have the same confidence. The answer is a resounding 'no', expressed in loss of confidence throughout the global financial system.
Wright says the credit crunch shows the virtues of the community banking system, where financial institutions operate locally, originate their own loans and tend to hold onto the debts as investments.
Greater emphasis on this approach may also help lay the foundations for a more stable housing market in the future
They know their borrowers," Wright added.
Some argue that an end to securitization and a return only to community banking would not look nearly as idyllic as it does on film. A "return to the old days of the Bailey Building and Loan," analysts at Merrill Lynch wrote in a July 16 research note, would be "to the detriment of U.S. growth prospects" by making capital and credit more difficult to obtain.
If that's the case then the onus is on regulators and financiers to figure out the conundrum that has been the undoing of so many U.S. mortgage booms.
"Who shouldn't write a bad loan?" asks Snowden. "When you think of incentives, who should say 'no' to a poor quality loan?"
Have a great day! I will be back from vacation Aug 11!
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