By MARSHALL ECKBLAD
For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the U.S.
Option ARMs were typically issued to creditworthy homeowners and allow borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many such loans, balances have risen while values of the underlying properties have plummeted amid the housing crisis.
As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure, the figures show.
Payment-option mortgages are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making borrowers inordinately vulnerable to declining property values. The deepening loan turmoil could mean higher-than-expected losses for Wells Fargo & Co., J.P. Morgan Chase & Co. and the Federal Deposit Insurance Corp.'s own insurance fund.
"The realization of the issues related to option ARMs is just beginning," said Chris Marinac, director of research at Atlanta-based FIG Partners.
Option-ARM loans are a much smaller portion of outstanding mortgages than subprime loans, but they occupy substantial chunks of certain banks' balance sheets. San Francisco-based Wells Fargo holds a mountain of Pick-A-Pays, having acquired $115 billion of the loans in its purchase of teetering Wachovia Corp., which it agreed to buy late last year.
Due to complicated accounting rules, Wells Fargo assigns the loans a value of $93.2 billion, giving it room to absorb future losses on the loans. The bank, however, won't say whether losses from the loans have risen beyond the firm's original expectations. Wells Fargo declined to comment Friday.
In a securities filing in May, the company said that borrowers accounting for 51% of its outstanding Pick-A-Pay balances made only the minimum payment as of March 31. Wachovia used the Pick-A-Pay name for its option ARMs.
J.P. Morgan holds $40.2 billion in option ARMs that the bank acquired when it purchased most of Washington Mutual Inc. last year. The Seattle company's banking operations were seized by regulators, and the holding company filed for bankruptcy protection.
The New York company said in a filing it has some exposure to an additional $46.5 billion in option-ARMs sitting in complex off-balance-sheet entities. J.P. Morgan declined to comment.
The FDIC also could face future losses due to rising problems with the loans. The federal agency agreed to soak up most future losses from about $5 billion in option-ARMs once held by Coral Gables, Fla.-based BankUnited FSB, which the FDIC seized in May and sold to private investors.
Write to Marshall Eckblad at marshall.eckblad@dowjones.com
Monday, July 13, 2009
Boiling the Frog
By PAUL KRUGMAN
Published: July 12, 2009
Is America on its way to becoming a boiled frog?
I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive. Real frogs will, in fact, jump out of the pot — but never mind. The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time.
And creeping disasters are what we mostly face these days.
I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which there is a substantial lag before policy actions have their full effect — a year or more in the case of the economy, decades in the case of the planet — yet in which it’s very hard to get people to do what it takes to head off a catastrophe foretold.
And right now, both the economic and the environmental frogs are sitting still while the water gets hotter.
Start with economics: last winter the economy was in acute crisis, with a replay of the Great Depression seeming all too possible. And there was a fairly strong policy response in the form of the Obama stimulus plan, even if that plan wasn’t as strong as some of us thought it should have been.
At this point, however, the acute crisis has given way to a much more insidious threat. Most economic forecasters now expect gross domestic product to start growing soon, if it hasn’t already. But all the signs point to a “jobless recovery”: on average, forecasters surveyed by The Wall Street Journal believe that the unemployment rate will keep rising into next year, and that it will be as high at the end of 2010 as it is now.
Now, it’s bad enough to be jobless for a few weeks; it’s much worse being unemployed for months or years. Yet that’s exactly what will happen to millions of Americans if the average forecast is right — which means that many of the unemployed will lose their savings, their homes and more.
To head off this outcome — and remember, this isn’t what economic Cassandras are saying; it’s the forecasting consensus — we’d need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act. Now that the free fall is over, all sense of urgency seems to have vanished.
This will probably change once the reality of the jobless recovery becomes all too apparent. But by then it will be too late to avoid a slow-motion human and social disaster.
Still, the boiled-frog problem on the economy is nothing compared with the problem of getting action on climate change.
Put it this way: if the consensus of the economic experts is grim, the consensus of the climate experts is utterly terrifying. At this point, the central forecast of leading climate models — not the worst-case scenario but the most likely outcome — is utter catastrophe, a rise in temperatures that will totally disrupt life as we know it, if we continue along our present path. How to head off that catastrophe should be the dominant policy issue of our time.
But it isn’t, because climate change is a creeping threat rather than an attention-grabbing crisis. The full dimensions of the catastrophe won’t be apparent for decades, perhaps generations. In fact, it will probably be many years before the upward trend in temperatures is so obvious to casual observers that it silences the skeptics. Unfortunately, if we wait to act until the climate crisis is that obvious, catastrophe will already have become inevitable.
And while a major environmental bill has passed the House, which was an amazing and inspiring political achievement, the bill fell well short of what the planet really needs — and despite this faces steep odds in the Senate.
What makes the apparent paralysis of policy especially alarming is that so little is happening when the political situation seems, on the surface, to be so favorable to action.
After all, supply-siders and climate-change-deniers no longer control the White House and key Congressional committees. Democrats have a popular president to lead them, a large majority in the House of Representatives and 60 votes in the Senate. And this isn’t the old Democratic majority, which was an awkward coalition between Northern liberals and Southern conservatives; this is, by historical standards, a relatively solid progressive bloc.
And let’s be clear: both the president and the party’s Congressional leadership understand the economic and environmental issues perfectly well. So if we can’t get action to head off disaster now, what would it take?
I don’t know the answer. And that’s why I keep thinking about boiling frogs.
Published: July 12, 2009
Is America on its way to becoming a boiled frog?
I’m referring, of course, to the proverbial frog that, placed in a pot of cold water that is gradually heated, never realizes the danger it’s in and is boiled alive. Real frogs will, in fact, jump out of the pot — but never mind. The hypothetical boiled frog is a useful metaphor for a very real problem: the difficulty of responding to disasters that creep up on you a bit at a time.
And creeping disasters are what we mostly face these days.
I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which there is a substantial lag before policy actions have their full effect — a year or more in the case of the economy, decades in the case of the planet — yet in which it’s very hard to get people to do what it takes to head off a catastrophe foretold.
And right now, both the economic and the environmental frogs are sitting still while the water gets hotter.
Start with economics: last winter the economy was in acute crisis, with a replay of the Great Depression seeming all too possible. And there was a fairly strong policy response in the form of the Obama stimulus plan, even if that plan wasn’t as strong as some of us thought it should have been.
At this point, however, the acute crisis has given way to a much more insidious threat. Most economic forecasters now expect gross domestic product to start growing soon, if it hasn’t already. But all the signs point to a “jobless recovery”: on average, forecasters surveyed by The Wall Street Journal believe that the unemployment rate will keep rising into next year, and that it will be as high at the end of 2010 as it is now.
Now, it’s bad enough to be jobless for a few weeks; it’s much worse being unemployed for months or years. Yet that’s exactly what will happen to millions of Americans if the average forecast is right — which means that many of the unemployed will lose their savings, their homes and more.
To head off this outcome — and remember, this isn’t what economic Cassandras are saying; it’s the forecasting consensus — we’d need to get another round of fiscal stimulus under way very soon. But neither Congress nor, alas, the Obama administration is showing any inclination to act. Now that the free fall is over, all sense of urgency seems to have vanished.
This will probably change once the reality of the jobless recovery becomes all too apparent. But by then it will be too late to avoid a slow-motion human and social disaster.
Still, the boiled-frog problem on the economy is nothing compared with the problem of getting action on climate change.
Put it this way: if the consensus of the economic experts is grim, the consensus of the climate experts is utterly terrifying. At this point, the central forecast of leading climate models — not the worst-case scenario but the most likely outcome — is utter catastrophe, a rise in temperatures that will totally disrupt life as we know it, if we continue along our present path. How to head off that catastrophe should be the dominant policy issue of our time.
But it isn’t, because climate change is a creeping threat rather than an attention-grabbing crisis. The full dimensions of the catastrophe won’t be apparent for decades, perhaps generations. In fact, it will probably be many years before the upward trend in temperatures is so obvious to casual observers that it silences the skeptics. Unfortunately, if we wait to act until the climate crisis is that obvious, catastrophe will already have become inevitable.
And while a major environmental bill has passed the House, which was an amazing and inspiring political achievement, the bill fell well short of what the planet really needs — and despite this faces steep odds in the Senate.
What makes the apparent paralysis of policy especially alarming is that so little is happening when the political situation seems, on the surface, to be so favorable to action.
After all, supply-siders and climate-change-deniers no longer control the White House and key Congressional committees. Democrats have a popular president to lead them, a large majority in the House of Representatives and 60 votes in the Senate. And this isn’t the old Democratic majority, which was an awkward coalition between Northern liberals and Southern conservatives; this is, by historical standards, a relatively solid progressive bloc.
And let’s be clear: both the president and the party’s Congressional leadership understand the economic and environmental issues perfectly well. So if we can’t get action to head off disaster now, what would it take?
I don’t know the answer. And that’s why I keep thinking about boiling frogs.
Jobless Recovery Would Call for Nuanced Investing
By JEFF D. OPDYKE
The unemployed don't spend much.
They do, however, brush their teeth and power their homes and seek medical care. And the companies that sell such products or services could remain attractive investments as the economy heads into what many see as a jobless recovery.
The U.S.'s unemployment rate recently hit 9.5%, its highest level since the early 1980s. Many economists see it going above 10% and only slowly receding. They say an economic recovery won't inspire much hiring as companies grapple with slower economic growth, overcapacity in numerous sectors, and slack demand driven in part by a newfound saving ethic among overleveraged consumers.
Double-digit unemployment, says Peter Gutmann, economics professor at Baruch College of the City University of New York, "could be with us for some time."
A jobless recovery might not decimate the stock market overall since high unemployment limits wage pressures and keeps interest rates low. Low rates "are helpful for the P/E [price/earnings] multiples on stocks" because investors perceive better upside in equities than in safe, low-return Treasury bonds, says Richard B. Hoey, chief economist at Bank of New York Mellon.
Investors accustomed to milder recessions in which consumer spending remained relatively strong may be in for a shock. Heavily indebted consumers are unlikely to resume spending for quite some time. That means investing in an era of high unemployment will be an exercise in nuance.
Health-care spending should generally hold up since sick people will still seek medical care. Yet increasing unemployment brings larger numbers of uninsured patients, possibly leading to "the largest shift in recent U.S. history" of patients away from health-maintenance organizations and into the ranks of Medicaid or the uninsured, says Jason Gurda, analyst at Leerink Swann. That pinches HMO providers such as Aetna Inc. and Humana Inc.
Unemployed, uninsured people will struggle to pay medical bills, and some will forgo elective procedures. Standard & Poor's analyst Jeff Englander has a "sell" rating on companies like AmSurg Corp., an operator of specialty hospitals, and a "hold" on community-hospital chain LifePoint Hospitals Inc.
He finds better health-care plays in stocks like St. Jude Medical Inc. and Boston Scientific Corp., medical-device makers tied to nonelective care; and in stocks of skilled-nursing and long-term care facilities such as Kindred Healthcare Inc. and Sun Healthcare Group Inc., which benefit from an aging populace unaffected by unemployment.
Retailing is equally bifurcated. Cash-conscious consumers are keeping their pocketbooks closed. That is troubling for retailers like clothier Abercrombie & Fitch and department-store chain Nordstrom Inc. that live on discretionary dollars. Low-price leaders such as Wal-Mart Stores Inc. and McDonald's Corp. could continue to hold up well. Share prices of the two companies are close to their market peaks. Even some sellers of discretionary products like clothiers Aeropostale Inc. and Buckle Inc. are hanging on to customers by aggressively lowering prices, says Brian Sozzi, analyst at Wall Street Strategies.
David Kovacs, chief investment officer of quantitative strategies at Turner Investment Partners, likes consumer-products companies like Philip Morris International Inc., Kraft Foods Inc., Colgate-Palmolive Co., Coca-Cola Co. and PepsiCo Inc. -- all "businesses that supply what people need." And with consumers scaling back restaurant outings, low-price grocer Kroger Co. looks to be the "best-positioned supermarket," according to a recent research report from Andrew Wolf, analyst at BB&T Capital Markets.
Banks would normally be heading into an easier environment, since low interest rates associated with a jobless recovery typically help banks boost profits. Yet heavily indebted consumers have little reason to borrow, and persistent joblessness raises the risk of more home foreclosures in a financial system already crippled by homeowners unable to repay mortgages.
"We estimate another $1 trillion of losses in the next few years, and we see another big wave of foreclosures coming," says Barry Knapp, head of U.S. portfolio strategy at Barclays Capital. Regional banks will have it the hardest, Mr. Knapp says, in part because of their heavy construction lending, while banks like J.P. Morgan Chase & Co. "will be well-positioned for whatever kind of recovery we have."
As the economy recovers, companies often employ temporary help before hiring full-time workers. Yet Jeff Silber, analyst at BMO Capital Markets, says that historically, companies like Manpower Inc., Robert Half International Inc. and others surge early, only to sink later. The BMO Capital Markets Staffing Index shows staffing companies typically hit their ultimate trough "just about the same time a jobless recovery ends," which is usually well after the economy has turned around, Mr. Silber says.
Finally, Deutsche Bank chief U.S. economist Joseph Lavorgna says U.S.-based, export-dependent companies that sell into emerging markets "make a lot of sense" in a jobless recovery. That is because those areas of the world continue to grow at a faster pace than the U.S., and the expanding consumer base there remains relatively healthy and unencumbered by debt. Companies that stand to benefit include firms such as Honeywell International Inc., United Technologies Corp. and Tyco International Ltd.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com
The unemployed don't spend much.
They do, however, brush their teeth and power their homes and seek medical care. And the companies that sell such products or services could remain attractive investments as the economy heads into what many see as a jobless recovery.
The U.S.'s unemployment rate recently hit 9.5%, its highest level since the early 1980s. Many economists see it going above 10% and only slowly receding. They say an economic recovery won't inspire much hiring as companies grapple with slower economic growth, overcapacity in numerous sectors, and slack demand driven in part by a newfound saving ethic among overleveraged consumers.
Double-digit unemployment, says Peter Gutmann, economics professor at Baruch College of the City University of New York, "could be with us for some time."
A jobless recovery might not decimate the stock market overall since high unemployment limits wage pressures and keeps interest rates low. Low rates "are helpful for the P/E [price/earnings] multiples on stocks" because investors perceive better upside in equities than in safe, low-return Treasury bonds, says Richard B. Hoey, chief economist at Bank of New York Mellon.
Investors accustomed to milder recessions in which consumer spending remained relatively strong may be in for a shock. Heavily indebted consumers are unlikely to resume spending for quite some time. That means investing in an era of high unemployment will be an exercise in nuance.
Health-care spending should generally hold up since sick people will still seek medical care. Yet increasing unemployment brings larger numbers of uninsured patients, possibly leading to "the largest shift in recent U.S. history" of patients away from health-maintenance organizations and into the ranks of Medicaid or the uninsured, says Jason Gurda, analyst at Leerink Swann. That pinches HMO providers such as Aetna Inc. and Humana Inc.
Unemployed, uninsured people will struggle to pay medical bills, and some will forgo elective procedures. Standard & Poor's analyst Jeff Englander has a "sell" rating on companies like AmSurg Corp., an operator of specialty hospitals, and a "hold" on community-hospital chain LifePoint Hospitals Inc.
He finds better health-care plays in stocks like St. Jude Medical Inc. and Boston Scientific Corp., medical-device makers tied to nonelective care; and in stocks of skilled-nursing and long-term care facilities such as Kindred Healthcare Inc. and Sun Healthcare Group Inc., which benefit from an aging populace unaffected by unemployment.
Retailing is equally bifurcated. Cash-conscious consumers are keeping their pocketbooks closed. That is troubling for retailers like clothier Abercrombie & Fitch and department-store chain Nordstrom Inc. that live on discretionary dollars. Low-price leaders such as Wal-Mart Stores Inc. and McDonald's Corp. could continue to hold up well. Share prices of the two companies are close to their market peaks. Even some sellers of discretionary products like clothiers Aeropostale Inc. and Buckle Inc. are hanging on to customers by aggressively lowering prices, says Brian Sozzi, analyst at Wall Street Strategies.
David Kovacs, chief investment officer of quantitative strategies at Turner Investment Partners, likes consumer-products companies like Philip Morris International Inc., Kraft Foods Inc., Colgate-Palmolive Co., Coca-Cola Co. and PepsiCo Inc. -- all "businesses that supply what people need." And with consumers scaling back restaurant outings, low-price grocer Kroger Co. looks to be the "best-positioned supermarket," according to a recent research report from Andrew Wolf, analyst at BB&T Capital Markets.
Banks would normally be heading into an easier environment, since low interest rates associated with a jobless recovery typically help banks boost profits. Yet heavily indebted consumers have little reason to borrow, and persistent joblessness raises the risk of more home foreclosures in a financial system already crippled by homeowners unable to repay mortgages.
"We estimate another $1 trillion of losses in the next few years, and we see another big wave of foreclosures coming," says Barry Knapp, head of U.S. portfolio strategy at Barclays Capital. Regional banks will have it the hardest, Mr. Knapp says, in part because of their heavy construction lending, while banks like J.P. Morgan Chase & Co. "will be well-positioned for whatever kind of recovery we have."
As the economy recovers, companies often employ temporary help before hiring full-time workers. Yet Jeff Silber, analyst at BMO Capital Markets, says that historically, companies like Manpower Inc., Robert Half International Inc. and others surge early, only to sink later. The BMO Capital Markets Staffing Index shows staffing companies typically hit their ultimate trough "just about the same time a jobless recovery ends," which is usually well after the economy has turned around, Mr. Silber says.
Finally, Deutsche Bank chief U.S. economist Joseph Lavorgna says U.S.-based, export-dependent companies that sell into emerging markets "make a lot of sense" in a jobless recovery. That is because those areas of the world continue to grow at a faster pace than the U.S., and the expanding consumer base there remains relatively healthy and unencumbered by debt. Companies that stand to benefit include firms such as Honeywell International Inc., United Technologies Corp. and Tyco International Ltd.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com
U.S. Airlines Fly Into Credit Squeeze
Plunge in Travel Demand Could Result in Bankruptcy Filings by Winter if Conditions Don't Improve
By SUSAN CAREY and MIKE ESTERL
The recession, plunging travel demand and a tough lending environment are battering U.S. airlines, raising the prospect of a liquidity squeeze that could lead to bankruptcy filings by winter if conditions don't improve.
The five largest hub-and-spoke carriers are expected to report second-quarter losses, starting with AMR Corp.'s American Airlines on Wednesday and followed by Delta Air Lines Inc., UAL Corp.'s United Airlines, Continental Airlines Inc. and US Airways Group Inc. next week.
Darkening Landscape
The second quarter normally brings strong traffic and profitability, but this wasn't a typical spring. The few bright spots in a darkening industry landscape are the modest second-quarter profits expected from discount carriers Southwest Airlines Co., JetBlue Airways Corp. and AirTran Holdings Inc., and from Alaska Air Group Inc. Those four will also report earnings next week.
"Just as the airline industry was not built for $130 [per barrel] oil, neither was it built for an environment of negative global economic growth and nonfunctioning capital markets," Gerard Arpey, AMR's chief executive, said last month at an investor conference.
The recession continues to discourage high-yield business traffic, forcing carriers to discount heavily to fill planes with leisure travelers. May passenger revenue was down 26% on 9.5% fewer passengers paying nearly 18% less per ticket than a year earlier, according to the Air Transport Association trade group.
Continental and US Airways reported that their unit revenue -- the amount taken in for each seat flown one mile -- fell 20% in June compared with the year-ago month. Meanwhile, American's June traffic declined 8% and United's 10%. In a research note last week, Morgan Stanley estimated revenue at U.S. airlines will drop 18% for all of 2009.
Burning Cash
Pinched capital lending remains a problem for airlines trying to maintain or build cash balances as they're burning cash. Only Southwest has an investment-grade credit rating, and Moody's Investors Service has negative outlooks on eight of the nine biggest U.S. airlines.
Reflecting pessimism about autumn bookings, Southwest last week launched one of its biggest fare sales ever, offering one-way tickets for as little as $30 starting in September, when demand historically tails off. "A recovery doesn't appear to be on the way yet," said Laura Wright, Southwest's chief financial officer, in an interview.
Fuel prices, which a year ago shattered records, are now at about $60 a barrel, $10 below the June 2008 average. But carriers' savings on one of their top expenses aren't enough to offset the plunge in demand, even though airlines have slashed the number of seats they're offering.
"The sheer collapse in unit revenue is pretty much unprecedented," said Bill Warlick, an airline bond analyst for Fitch Ratings.
Mr. Warlick recently cut the corporate credit ratings of Delta and United, pushing them deeper into speculative territory. While Delta has a relatively strong $5.3 billion in unrestricted cash, the company faces scheduled debt maturities of roughly the same amount before the end of 2011. Delta's ability to maintain its liquidity at current levels depends on improved credit-market openness and industry stabilization in 2010, Mr. Warlick said.
United, with about $2.5 billion in cash, must meet more than $650 million of debt and lease payments later this year and more than $1 billion in 2010. With this "unsustainable" capital structure, United may have trouble raising a large amount of fresh capital in the near term, Mr. Warlick said. United declined to comment.
Some carriers may have no choice but to seek protection from creditors this winter, when cash flow typically dries up. United, American and US Airways are the most vulnerable among large carriers, according to credit-rating agencies and Wall Street investment houses.
While he doesn't rule out one or more carriers filing as soon as this fall, Philip Baggaley, a debt analyst for Standard & Poor's Corp., says that "the more likely scenario is that they will manage to scrape by again." He adds, though, that "there's not a lot of room for error."
US Airways has been through Chapter 11 twice since the 2001 terrorist attacks, and United and Delta, as well as Delta's recent acquisition, Northwest Airlines, have been through it once.
Some analysts wonder what good further restructurings would do.
"We might lose one along the way," said Bill Swelbar, a researcher at the Massachusetts Institute of Technology's International Center for Air Transportation. "It's hard to restructure zero demand."
Write to Susan Carey at susan.carey@wsj.com and Mike Esterl at mike.esterl@wsj.com
By SUSAN CAREY and MIKE ESTERL
The recession, plunging travel demand and a tough lending environment are battering U.S. airlines, raising the prospect of a liquidity squeeze that could lead to bankruptcy filings by winter if conditions don't improve.
The five largest hub-and-spoke carriers are expected to report second-quarter losses, starting with AMR Corp.'s American Airlines on Wednesday and followed by Delta Air Lines Inc., UAL Corp.'s United Airlines, Continental Airlines Inc. and US Airways Group Inc. next week.
Darkening Landscape
The second quarter normally brings strong traffic and profitability, but this wasn't a typical spring. The few bright spots in a darkening industry landscape are the modest second-quarter profits expected from discount carriers Southwest Airlines Co., JetBlue Airways Corp. and AirTran Holdings Inc., and from Alaska Air Group Inc. Those four will also report earnings next week.
"Just as the airline industry was not built for $130 [per barrel] oil, neither was it built for an environment of negative global economic growth and nonfunctioning capital markets," Gerard Arpey, AMR's chief executive, said last month at an investor conference.
The recession continues to discourage high-yield business traffic, forcing carriers to discount heavily to fill planes with leisure travelers. May passenger revenue was down 26% on 9.5% fewer passengers paying nearly 18% less per ticket than a year earlier, according to the Air Transport Association trade group.
Continental and US Airways reported that their unit revenue -- the amount taken in for each seat flown one mile -- fell 20% in June compared with the year-ago month. Meanwhile, American's June traffic declined 8% and United's 10%. In a research note last week, Morgan Stanley estimated revenue at U.S. airlines will drop 18% for all of 2009.
Burning Cash
Pinched capital lending remains a problem for airlines trying to maintain or build cash balances as they're burning cash. Only Southwest has an investment-grade credit rating, and Moody's Investors Service has negative outlooks on eight of the nine biggest U.S. airlines.
Reflecting pessimism about autumn bookings, Southwest last week launched one of its biggest fare sales ever, offering one-way tickets for as little as $30 starting in September, when demand historically tails off. "A recovery doesn't appear to be on the way yet," said Laura Wright, Southwest's chief financial officer, in an interview.
Fuel prices, which a year ago shattered records, are now at about $60 a barrel, $10 below the June 2008 average. But carriers' savings on one of their top expenses aren't enough to offset the plunge in demand, even though airlines have slashed the number of seats they're offering.
"The sheer collapse in unit revenue is pretty much unprecedented," said Bill Warlick, an airline bond analyst for Fitch Ratings.
Mr. Warlick recently cut the corporate credit ratings of Delta and United, pushing them deeper into speculative territory. While Delta has a relatively strong $5.3 billion in unrestricted cash, the company faces scheduled debt maturities of roughly the same amount before the end of 2011. Delta's ability to maintain its liquidity at current levels depends on improved credit-market openness and industry stabilization in 2010, Mr. Warlick said.
United, with about $2.5 billion in cash, must meet more than $650 million of debt and lease payments later this year and more than $1 billion in 2010. With this "unsustainable" capital structure, United may have trouble raising a large amount of fresh capital in the near term, Mr. Warlick said. United declined to comment.
Some carriers may have no choice but to seek protection from creditors this winter, when cash flow typically dries up. United, American and US Airways are the most vulnerable among large carriers, according to credit-rating agencies and Wall Street investment houses.
While he doesn't rule out one or more carriers filing as soon as this fall, Philip Baggaley, a debt analyst for Standard & Poor's Corp., says that "the more likely scenario is that they will manage to scrape by again." He adds, though, that "there's not a lot of room for error."
US Airways has been through Chapter 11 twice since the 2001 terrorist attacks, and United and Delta, as well as Delta's recent acquisition, Northwest Airlines, have been through it once.
Some analysts wonder what good further restructurings would do.
"We might lose one along the way," said Bill Swelbar, a researcher at the Massachusetts Institute of Technology's International Center for Air Transportation. "It's hard to restructure zero demand."
Write to Susan Carey at susan.carey@wsj.com and Mike Esterl at mike.esterl@wsj.com
Sunday, July 12, 2009
CIT Red Flags
The company is heading for bankruptcy or debt restrcture.
One thing stands out in terms of its financial condition is its leverage. By the end of Q1 2009, CIT group Inc's total debt was $68 bil while equity was $7.5 bil. The company funds its operations primarily through long term debts. By the end of Q1 2009, $59.5 bil out of $68 bil was long term borrowing. Its interest income shrank to nearly 1 bil to 640 mil while interest payment decreased from 765 mil to 633 mil. The earning power from the rest was limited in helping paying off interests. Net income before tax from the rest non-interest earning business could only contributed to $220 mil in Q3. The credit provision further deteriorated the company's capability to cushion against intereset payment. It provisioned $535 mil in Q1 2009, increasing from 247 mil in Q1 2008.
The pressing issue is that the company has to pay back $1 bil debt principal in August, $1.4 bil by the end of year and another $8 bil by 2010. But the company has been downgraded in June to junk status. Its long term 10 year bonds are trading at 16%. Its stock traded at 1.15 by 07/11/2009, the historic low. Given no clear sign of economic recovery in the near term and the company's deteriorating financial condtions, its equity and bond financing power might be puny and expensive. The implcation is that the company could only raise money from public market, from government. It has borrowed $2.3 bil tarp money. FDIC has said on July 10th to withhold CIT debt garantuee due to its risk. This would be a devastating blow to the company. The hawk stance would take a toll on the company.
It seems that the only solution is either bankruptcy or asking debt holders for concession. Government are unwilling to broker a debt concession deal since the company's failure might not pose systematic risk to the financial markets. It will become clear next week that the bankruptcy might be only option.
One thing stands out in terms of its financial condition is its leverage. By the end of Q1 2009, CIT group Inc's total debt was $68 bil while equity was $7.5 bil. The company funds its operations primarily through long term debts. By the end of Q1 2009, $59.5 bil out of $68 bil was long term borrowing. Its interest income shrank to nearly 1 bil to 640 mil while interest payment decreased from 765 mil to 633 mil. The earning power from the rest was limited in helping paying off interests. Net income before tax from the rest non-interest earning business could only contributed to $220 mil in Q3. The credit provision further deteriorated the company's capability to cushion against intereset payment. It provisioned $535 mil in Q1 2009, increasing from 247 mil in Q1 2008.
The pressing issue is that the company has to pay back $1 bil debt principal in August, $1.4 bil by the end of year and another $8 bil by 2010. But the company has been downgraded in June to junk status. Its long term 10 year bonds are trading at 16%. Its stock traded at 1.15 by 07/11/2009, the historic low. Given no clear sign of economic recovery in the near term and the company's deteriorating financial condtions, its equity and bond financing power might be puny and expensive. The implcation is that the company could only raise money from public market, from government. It has borrowed $2.3 bil tarp money. FDIC has said on July 10th to withhold CIT debt garantuee due to its risk. This would be a devastating blow to the company. The hawk stance would take a toll on the company.
It seems that the only solution is either bankruptcy or asking debt holders for concession. Government are unwilling to broker a debt concession deal since the company's failure might not pose systematic risk to the financial markets. It will become clear next week that the bankruptcy might be only option.
Major Lender Faces Crunch
CIT Hires Bankruptcy Adviser as Payment Looms; Financier to 1 Million Businesses
By JEFFREY MCCRACKEN and SERENA NG
CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.
To prepare for a possible filing, CIT has retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, which has a prominent bankruptcy practice, these people said.
The mere hiring of bankruptcy counsel doesn't mean a company will actually make a bankruptcy filing. CIT has been pressing its case "with increased urgency to the government," said a person familiar with the matter, and is hopeful because "the government has not said absolutely no to anything."
CIT has a $1 billion payment due in mid-August and it is unclear the company "will be able to handle that," said this person. The company will give more guidance when it discusses second quarter earnings in two weeks.
CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.
CIT is registered as a bank holding company and has a bank in Utah with roughly $3.5 billion in deposits. But to get most of its funds to lend, it has historically relied on bonds and the short-term debt market known as commercial paper. It has been largely unable to tap the credit markets since mid 2007 and is trying to raise more money through its bank.
The New York-based lender has been stuck for months in a bureaucratic tangle over government assistance. It received $2.3 billion from the federal Troubled Asset Relief Program in December, after winning approval to become a bank holding company. But CIT has so far been unable to access another federal program, one that helps banks and thrifts sell debt with government guarantees. Access to that program would enable CIT, which has a below-investment-grade, or "junk," credit rating, to sell bonds at a low interest rate.
CIT confirmed Friday that the Federal Deposit Insurance Corp., which oversees the debt guarantee program, has yet to approve its application. CIT said that its application to the FDIC remains outstanding and the company "continues to be in active dialogue with the government."
A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners and clothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.
On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.
The company's most pressing issue, said those familiar with the situation, is that it has a debt payment coming due in August. In all, CIT has about $2.7 billion that comes due this year and $8 billion more due next year.
The FDIC has been considering CIT's application for a federal debt guarantee since January and hasn't reached a decision. The agency is concerned about CIT's deteriorating financial position and operating losses.
A few months ago, CIT hired former Deputy Treasury Secretary Roger Altman and his boutique investment bank Evercore Partners to try to get more TARP funds or find another financial solution with the government, said the people familiar with the matter.
One problem with getting more aid is that the government has made it clear it doesn't see the company as a systemic risk to the financial system. The people familiar with the matter said the government feels that other lenders, such as J.P. Morgan Chase & Co. or Deutsche Bank AG, can handle many of the same loans that CIT specializes in, such as loans to small retailers or rail-car leasing firms.
Meanwhile, competitors like GE Capital Corp. and GMAC LLC have been able to sell debt with the backing of the government's top credit rating.
According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.
CIT competes with the likes of Wells Fargo, Bank of America, General Electric Capital Corp. and regional banks in the sectors in which it is active. But many CIT customers say that the lender is often willing to make loans to businesses and borrowers that most banks typically shun. CIT now ranks 20th among U.S. bank holding companies, with assets of over $75 billion.
Heard on the Street: CIT Offers Litmus Test for Washington's Faith in the System Founded in 1908, CIT, which used to be known as Commercial Investment Trust, has had a somewhat tumultuous history, its fortunes rising and falling during past credit cycles. In the 1990s it expanded into areas such as manufactured housing and financing technology equipment, only to get burned when those bubbles burst.
In 2001, following the dot-com bust, the company was acquired by Tyco International Ltd. , but was spun off in mid-2002 when Tyco became ensnared in an accounting scandal.
In 2003, CIT appointed its current chairman and chief executive, Jeffrey Peek, a former Merrill Lynch executive. Under his leadership, it expanded consumer-finance activities such as student lending. It also increased its presence in subprime mortgage lending during the credit boom.
When the credit crunch hit, the company rushed to leave those two businesses, concentrating instead on lending to small businesses and midsize companies, leasing railcars and providing cash advances to manufacturers and companies in exchange for their receivables.
"They are our sole financing partner and we are heavily reliant on them," said Haresh Tharani, founder and president of the Tharanco Group, a company in the apparel business.
Tharanco has a loan from CIT and also gets cash advances from the lender for its receivables. "I worry about the company.... If CIT fails, it would be detrimental to the confidence of many businesses," Mr. Tharani said.
Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Serena Ng at serena.ng@wsj.com
By JEFFREY MCCRACKEN and SERENA NG
CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.
To prepare for a possible filing, CIT has retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, which has a prominent bankruptcy practice, these people said.
The mere hiring of bankruptcy counsel doesn't mean a company will actually make a bankruptcy filing. CIT has been pressing its case "with increased urgency to the government," said a person familiar with the matter, and is hopeful because "the government has not said absolutely no to anything."
CIT has a $1 billion payment due in mid-August and it is unclear the company "will be able to handle that," said this person. The company will give more guidance when it discusses second quarter earnings in two weeks.
CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.
CIT is registered as a bank holding company and has a bank in Utah with roughly $3.5 billion in deposits. But to get most of its funds to lend, it has historically relied on bonds and the short-term debt market known as commercial paper. It has been largely unable to tap the credit markets since mid 2007 and is trying to raise more money through its bank.
The New York-based lender has been stuck for months in a bureaucratic tangle over government assistance. It received $2.3 billion from the federal Troubled Asset Relief Program in December, after winning approval to become a bank holding company. But CIT has so far been unable to access another federal program, one that helps banks and thrifts sell debt with government guarantees. Access to that program would enable CIT, which has a below-investment-grade, or "junk," credit rating, to sell bonds at a low interest rate.
CIT confirmed Friday that the Federal Deposit Insurance Corp., which oversees the debt guarantee program, has yet to approve its application. CIT said that its application to the FDIC remains outstanding and the company "continues to be in active dialogue with the government."
A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners and clothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.
On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.
The company's most pressing issue, said those familiar with the situation, is that it has a debt payment coming due in August. In all, CIT has about $2.7 billion that comes due this year and $8 billion more due next year.
The FDIC has been considering CIT's application for a federal debt guarantee since January and hasn't reached a decision. The agency is concerned about CIT's deteriorating financial position and operating losses.
A few months ago, CIT hired former Deputy Treasury Secretary Roger Altman and his boutique investment bank Evercore Partners to try to get more TARP funds or find another financial solution with the government, said the people familiar with the matter.
One problem with getting more aid is that the government has made it clear it doesn't see the company as a systemic risk to the financial system. The people familiar with the matter said the government feels that other lenders, such as J.P. Morgan Chase & Co. or Deutsche Bank AG, can handle many of the same loans that CIT specializes in, such as loans to small retailers or rail-car leasing firms.
Meanwhile, competitors like GE Capital Corp. and GMAC LLC have been able to sell debt with the backing of the government's top credit rating.
According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.
CIT competes with the likes of Wells Fargo, Bank of America, General Electric Capital Corp. and regional banks in the sectors in which it is active. But many CIT customers say that the lender is often willing to make loans to businesses and borrowers that most banks typically shun. CIT now ranks 20th among U.S. bank holding companies, with assets of over $75 billion.
Heard on the Street: CIT Offers Litmus Test for Washington's Faith in the System Founded in 1908, CIT, which used to be known as Commercial Investment Trust, has had a somewhat tumultuous history, its fortunes rising and falling during past credit cycles. In the 1990s it expanded into areas such as manufactured housing and financing technology equipment, only to get burned when those bubbles burst.
In 2001, following the dot-com bust, the company was acquired by Tyco International Ltd. , but was spun off in mid-2002 when Tyco became ensnared in an accounting scandal.
In 2003, CIT appointed its current chairman and chief executive, Jeffrey Peek, a former Merrill Lynch executive. Under his leadership, it expanded consumer-finance activities such as student lending. It also increased its presence in subprime mortgage lending during the credit boom.
When the credit crunch hit, the company rushed to leave those two businesses, concentrating instead on lending to small businesses and midsize companies, leasing railcars and providing cash advances to manufacturers and companies in exchange for their receivables.
"They are our sole financing partner and we are heavily reliant on them," said Haresh Tharani, founder and president of the Tharanco Group, a company in the apparel business.
Tharanco has a loan from CIT and also gets cash advances from the lender for its receivables. "I worry about the company.... If CIT fails, it would be detrimental to the confidence of many businesses," Mr. Tharani said.
Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Serena Ng at serena.ng@wsj.com
Thursday, July 9, 2009
Subprime Resurfaces as Housing-Market Woe
By CARRICK MOLLENKAMP
The U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.
While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.
Fire Sale
Resale prices for four foreclosed houses in the Atlanta area Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.
"While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.
In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year's fourth quarter and the first quarter of 2009, according to data compiled by Data Intelligence Corp., a Marietta, Ga., real-estate analytics firm which reviewed the records for The Wall Street Journal. That was more than double the 2,737 foreclosures by banks in the same period.
Of those foreclosures, securitization entities sold 2,963 homes during the same period for an average of 62% of the original loan amount. Banks unloaded just 442 of the homes they foreclosed upon, with an average selling price of 69% of the original loan amount.
There still is much more inventory that mortgage-servicing firms are racing to sell for securitization trusts. Such entities tend to sell in bulk so that they can cut losses, finding it more cost-efficient to move homes through foreclosure and subsequent sale than to try to restructure the mortgage with the borrower. Securitization trusts also realize that potential buyers won't step in unless the price is attractive.
"You have to haircut that in a big way," said Christopher Marinac, managing principal at FIG Partners, a bank-research firm in Atlanta.
According to Karen Weaver, global head of securitization research at Deutsche Bank AG, the steepest losses are on subprime loans, where lenders generally are recovering just 26% of the original loan amount.
Analysts said Atlanta is typical of a pattern that is emerging across the U.S. In the first quarter, Atlanta had the 35th-highest foreclosure rate out of 203 metropolitan areas with a population of at least 200,000, according to RealtyTrac Inc. Nine Georgia banks have failed so far this year.
On a nationwide basis, foreclosures were started on a record high of nearly 1.4% of all first-lien mortgages in the first quarter, according to the Mortgage Bankers Association. U.S. home prices in 20 major cities fell an average of 0.6% in April, a smaller decline than March's drop of 2.2%, according to the Standard & Poor's/Case-Shiller index released last week.
Residential mortgage-backed securities helped feed the subprime boom, winding up in the hands of investment funds or in more complicated pools known as collateralized debt obligations, where underlying mortgage pools were ultimately sliced into different risk tranches. Insurance contracts known as credit-default swaps often were sold on top of the CDOs.
Securities sold by Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co., companies that filed for bankruptcy protection or were sold in the past 14 months, included residential loans from Atlanta.
In March, the mortgage-processing firm that works on behalf of a Goldman Sachs Group Inc. mortgage trust sold a house in southwest Atlanta for $17,000 -- a markdown of 87% from the original loan value. A Goldman spokeswoman declined to comment.
In the fourth and first quarters, Bear-issued trusts sold 29 properties in Fulton County, which includes Atlanta, for a total of $3.5 million. That was 60% of the combined original loan amounts of $5.8 million.
The loans were pooled in the vehicle during a period of Bear securitizations that were sold to investors prior to the firm's sale to J.P. Morgan Chase & Co. a little more than a year ago.
A J.P. Morgan spokesman said the depressed prices are representative of a housing market correcting itself in a period that is vastly different from a few years ago. Many of the regions facing the largest declines in value are the same ones that soared and saw a frenzy of construction during the housing boom.
In comparison, Countrywide Financial Corp., now owned by Bank of America Corp., completed the sale of 23 properties in Fulton for $3.7 million, or 86% of the original loan amount during the same time period, the real-estate records analyzed by Data Intelligence show.
A Bank of America spokesman said prices being fetched in the Atlanta area for the Countrywide portfolio reflect a reluctance to dump properties far below prevailing market values. The bank is getting an average of 99% of the appraised value of homes on an average sale, while selling within one year 99% of the properties that end up on its books.
"We see local and regional banks having to withstand continued devaluation pressure from the disposition of mortgage-backed securitized properties," said Mason Maynard, founder of Data Intelligence.
The good news is that at least foreclosed homes are moving -- up to a point. And buyers of houses being dumped by securitized trusts are getting a very good deal. Late last year, for example, a property at 1169 Old Fincher Trail in Cherokee County, Ga., that was in a Bear trust was foreclosed on, Data Intelligence said. The original loan was $292,000. When the owners couldn't keep up with the payments, the home fell into foreclosure.
Realtor Tim Hamill of Re/Max Greater Atlanta, who was handling the sale for an asset-management firm working on behalf of the trust, said his mandate had been to sell homes in 30 days.
Greg Foster, a neighbor who built the home 13 years ago, saw an opportunity to buy it for his 25-year-old daughter, Ashleigh, a nurse and single mother of two children. When she wasn't able to secure financing in time, her grandfather bought the house for $164,000 -- or 56% of the original loan amount -- and then sold it to Ms. Foster.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com
The U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.
While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.
Fire Sale
Resale prices for four foreclosed houses in the Atlanta area Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.
"While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.
In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year's fourth quarter and the first quarter of 2009, according to data compiled by Data Intelligence Corp., a Marietta, Ga., real-estate analytics firm which reviewed the records for The Wall Street Journal. That was more than double the 2,737 foreclosures by banks in the same period.
Of those foreclosures, securitization entities sold 2,963 homes during the same period for an average of 62% of the original loan amount. Banks unloaded just 442 of the homes they foreclosed upon, with an average selling price of 69% of the original loan amount.
There still is much more inventory that mortgage-servicing firms are racing to sell for securitization trusts. Such entities tend to sell in bulk so that they can cut losses, finding it more cost-efficient to move homes through foreclosure and subsequent sale than to try to restructure the mortgage with the borrower. Securitization trusts also realize that potential buyers won't step in unless the price is attractive.
"You have to haircut that in a big way," said Christopher Marinac, managing principal at FIG Partners, a bank-research firm in Atlanta.
According to Karen Weaver, global head of securitization research at Deutsche Bank AG, the steepest losses are on subprime loans, where lenders generally are recovering just 26% of the original loan amount.
Analysts said Atlanta is typical of a pattern that is emerging across the U.S. In the first quarter, Atlanta had the 35th-highest foreclosure rate out of 203 metropolitan areas with a population of at least 200,000, according to RealtyTrac Inc. Nine Georgia banks have failed so far this year.
On a nationwide basis, foreclosures were started on a record high of nearly 1.4% of all first-lien mortgages in the first quarter, according to the Mortgage Bankers Association. U.S. home prices in 20 major cities fell an average of 0.6% in April, a smaller decline than March's drop of 2.2%, according to the Standard & Poor's/Case-Shiller index released last week.
Residential mortgage-backed securities helped feed the subprime boom, winding up in the hands of investment funds or in more complicated pools known as collateralized debt obligations, where underlying mortgage pools were ultimately sliced into different risk tranches. Insurance contracts known as credit-default swaps often were sold on top of the CDOs.
Securities sold by Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co., companies that filed for bankruptcy protection or were sold in the past 14 months, included residential loans from Atlanta.
In March, the mortgage-processing firm that works on behalf of a Goldman Sachs Group Inc. mortgage trust sold a house in southwest Atlanta for $17,000 -- a markdown of 87% from the original loan value. A Goldman spokeswoman declined to comment.
In the fourth and first quarters, Bear-issued trusts sold 29 properties in Fulton County, which includes Atlanta, for a total of $3.5 million. That was 60% of the combined original loan amounts of $5.8 million.
The loans were pooled in the vehicle during a period of Bear securitizations that were sold to investors prior to the firm's sale to J.P. Morgan Chase & Co. a little more than a year ago.
A J.P. Morgan spokesman said the depressed prices are representative of a housing market correcting itself in a period that is vastly different from a few years ago. Many of the regions facing the largest declines in value are the same ones that soared and saw a frenzy of construction during the housing boom.
In comparison, Countrywide Financial Corp., now owned by Bank of America Corp., completed the sale of 23 properties in Fulton for $3.7 million, or 86% of the original loan amount during the same time period, the real-estate records analyzed by Data Intelligence show.
A Bank of America spokesman said prices being fetched in the Atlanta area for the Countrywide portfolio reflect a reluctance to dump properties far below prevailing market values. The bank is getting an average of 99% of the appraised value of homes on an average sale, while selling within one year 99% of the properties that end up on its books.
"We see local and regional banks having to withstand continued devaluation pressure from the disposition of mortgage-backed securitized properties," said Mason Maynard, founder of Data Intelligence.
The good news is that at least foreclosed homes are moving -- up to a point. And buyers of houses being dumped by securitized trusts are getting a very good deal. Late last year, for example, a property at 1169 Old Fincher Trail in Cherokee County, Ga., that was in a Bear trust was foreclosed on, Data Intelligence said. The original loan was $292,000. When the owners couldn't keep up with the payments, the home fell into foreclosure.
Realtor Tim Hamill of Re/Max Greater Atlanta, who was handling the sale for an asset-management firm working on behalf of the trust, said his mandate had been to sell homes in 30 days.
Greg Foster, a neighbor who built the home 13 years ago, saw an opportunity to buy it for his 25-year-old daughter, Ashleigh, a nurse and single mother of two children. When she wasn't able to secure financing in time, her grandfather bought the house for $164,000 -- or 56% of the original loan amount -- and then sold it to Ms. Foster.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com
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