Floyd Norris: Notions on High and Low Finance

August 31, 2007, 2:09 pm

Having it Both Ways

Quotes from President Bush’s speech today:

“A federal bailout of lenders would only encourage a recurrence of the problem. It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.”

“In the coming days, the FHA will launch a new program called FHA-Secure. This program will allow American homeowners who have got good credit history but cannot afford their current payments to refinance into FHA-insured mortgages. This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes.”

Just how do those deserving homeowners differ from “speculators” who bought a home “they knew they never could afford?” And why is this not “a federal bailout of lenders?” The president did not say.

What it will mean is that the federal government will decide which overleveraged homeowners deserve to keep their homes, and which lenders will have bad mortgages repaid in full.

The issues are not easy ones, and I do not have my own solution. But don’t be surprised if, in a year or two, we learn that lobbyists swarmed all over “FHA-Secure” and that a good part of the money went to those with good political connections.

August 28, 2007, 5:56 pm

Home Prices, Down Again

The S.&P./Case-Shiller indexes are out for June, and there are more dismal figures. Fifteen of the 20 markets they cover show prices down, year-over-year. That helps to explain why 2006-vintage mortgages are in such trouble.

But it is the two-year picture that is most disturbing. Prices are now lower than they were two years ago in 6 of the 20 markets. That is bad news for people in those markets who took out 2-28 mortgages — the ones that had a low teaser rate for two years, and then reset to a higher rate. The assumption was that the homeowner could then refinance. But that does not work if the house is worth less than the mortgage amount.

The markets that are lower in June 2007 than they were in June 2005 come in two flavors. First are Rust-Belt markets that did not boom but now are suffering — Detroit (off 12.7 percent over two years), Cleveland (-3.2 percent) and Minneapolis (-0.4 percent).

The others — and the ones where the most homeowners are likely to be moaning — are the boom markets gone bad. San Diego is down 5.7 percent over two years, Boston is off 5.5 percent and Washington is down 0.5 percent. San Francisco and Las Vegas — two other former boom areas — are now virtually even over two years.

I have long maintained that there are really two different prices in the boom market. The first is the seller’s price. That is the one usually reported, of, say $300,000 or $500,000. The second is the buyer’s price. That figure is $2,500 a month, or whatever.

For much of the boom, sellers’ prices soared while buyers’ prices rose much more slowly. First, declining interest rates meant you could buy more home for the same monthly payment. Then funny mortgages — teaser rates, interest only, pay-option — kept the monthly payments low, for a limited period, even if the seller was getting much more.

Now those funny mortgages are hard, if not impossible, to get. A buyer who must take a conventional mortgage to buy a house will pay a lot more, per month, than he expected to pay. Making homes affordable under the new mortgage regime may mean much lower prices for the seller.

****************************************

August 26, 2007, 4:27 pm

The Ignorant CFO

Ignorance remains a popular defense among executives.

The tale of Stephen Bennion, who just lost his job as CEO of Selectica, is discussed in this item from a blog at the San Jose Mercury News, the hometown paper in Silicon Valley.

Jack Davis of the Merc summarizes part of the conclusions of the special committee of directors, who decided that Mr. Bennion, who was CFO when the options were backdated, had to step down as CEO:

“As for the back dating activity he was ‘aware of or was involved with,’ the committee can’t prove he was ‘intentionally’ doing wrong, or that he ‘understood’ the activity ‘would result in a misstatement of the company’s financial results.’

Why would a CFO know about stuff like that?”

An excellent question, particularly given that the executive in question is also a CPA.

The company, Selectica, is best known for its own market timing. It went public on March 10, 2000, the very day the internet bubble peaked, with Frank Quattrone’s group at CS First Boston as the lead underwriter. The shares were sold (to those with enough pull to get in on the offering) at $30 a share, opened above $90 and traded at $154 that day.

Since then, alas, the company has yet to earn a quarterly profit, and revenues are declining. As for the share price, it is basically the same as it was that first day, if you ignore decimals. If you don’t ignore those pesky things, it is down 99 percent, at $1.54.

The company tells us that Mr. Bennion did not exercise his own backdated options, but does not say why. Could it be that they are worthless?

Mr. Bennion, by the way, is not leaving the company. He is so valuable that he will stay on as a vice president. We are assured he will have nothing to do with accounting.

P.S. I am back from vacation.