![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
Distressed
Dec. 4th, 2007 10:45 amAnd so, another bit of the jigsaw falls into place in the subprime crisis. You may recall that one of the intangibles in this whole affair was, until yesterday, the problem of "valuing" the underlying securities in CDOs. Put simply, it's all very well repossessing a piece of land and property that has been put up as security, which you know in a decade's time will be worth more than you lent on it, but that's not much use if there are no buyers around now.
But today we got at least some kind of clue what those properties are worth now. Morgan Stanley has bought an 80% stake in 11,000 home sites for $525m, and Lennar, the distressed seller, will take a $775m book writedown on the deal. So, there you have it. 40 cents on the dollar. Now, in your hand, guv, no questions asked.
For Lennar it looks horrific, but it's a good solution, because it's being retained as the manager of the operation. It's still a housebuilder; it just doesn't own the land.
Could this spell the eventual end for land banks? But, that's a side issue.
The main point is that we can now assign a tentative value to stuff being repossessed, should it come to that. Borrowers can effectively offer to cut their current mortgage payments in half, and the ultimate lender will still be getting the best end of the deal. Expect new companies to appear in the US which will package together buyouts that stop homes being repossessed, restructure the loans, and generate a lower income on assets bought at a discount. Everybody's happy.
I mean, the original investors have still lost money, but they haven't lost all of it (which looked to be a possibility). The new investors are generating an adequate rate of return on a lower absolute income level (because the assets have been bought at a 40% to 60% discount) and people aren't evicted. And its politically neat.
It won't be that simple, because that 60% discount includes a management contination agreement. Other, clean break, 'distressed' sellers will be looking to cut a better deal. So, at what level? I reckon a 40% discount would now be a fair settlement price.
But today we got at least some kind of clue what those properties are worth now. Morgan Stanley has bought an 80% stake in 11,000 home sites for $525m, and Lennar, the distressed seller, will take a $775m book writedown on the deal. So, there you have it. 40 cents on the dollar. Now, in your hand, guv, no questions asked.
For Lennar it looks horrific, but it's a good solution, because it's being retained as the manager of the operation. It's still a housebuilder; it just doesn't own the land.
Could this spell the eventual end for land banks? But, that's a side issue.
The main point is that we can now assign a tentative value to stuff being repossessed, should it come to that. Borrowers can effectively offer to cut their current mortgage payments in half, and the ultimate lender will still be getting the best end of the deal. Expect new companies to appear in the US which will package together buyouts that stop homes being repossessed, restructure the loans, and generate a lower income on assets bought at a discount. Everybody's happy.
I mean, the original investors have still lost money, but they haven't lost all of it (which looked to be a possibility). The new investors are generating an adequate rate of return on a lower absolute income level (because the assets have been bought at a 40% to 60% discount) and people aren't evicted. And its politically neat.
It won't be that simple, because that 60% discount includes a management contination agreement. Other, clean break, 'distressed' sellers will be looking to cut a better deal. So, at what level? I reckon a 40% discount would now be a fair settlement price.
