Wednesday, June 3, 2009

Wednesday afternoon....

AlphaNinja - Bob Rodriguez of First Pacific Advisors, on our expanding debt and whether we can support it....

"I ESTIMATE THAT BY THE close of 2011, Treasury debt outstanding will be between $14.6 and $16.6 trillion and that the U.S. debt-to-GDP ratio will rise to between 97% and 110%. By comparison, the highest ratio ever attained was 121% at the end of World War II. Furthermore, my estimates do not include entitlement liabilities or the effective guarantee of trillions of dollars of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) obligations. Treasury debt service will likely rise by 50% to 100% above the present $450 billion rate and this is with interest-rate levels near record lows. A critical question is, "How do we finance all this debt?"

AlphaNinja - Those $8k tax credits for first time homebuilders can be used as down payments or closing costs, effectively enabling ZERO down payments again. And this time the taxpayer pays for it. Disgusting.

"while seller financing is riskiest, buyers who get down payment help have higher default rates, whether the money comes from government or other sources. That was shown in research by Austin Kelly—who oversees risk modeling at Fannie Mae and Freddie Mac for the FHA—published late last year in the Journal of Housing Research. FHA data on foreclosures show the same pattern."

AlphaNinja - As Extended Stay defaults on debt covenants, the complex debt seniority structure is causing more than a headache...

"The suit, filed in the New York State Court, alleges that the banks colluded with the borrower and "hatched a Machiavellian scheme to wipe out entirely" the investors who bought the $3.3 billion in mezzanine debt. Representatives at the banks weren't immediately available for comment.
The lawsuit highlights Extended Stay's complicated debt structure. The hotel chain has $4.1 billion in a senior first mortgage that was sold to investors. Behind those secured lenders is the $3.3 billion of mezzanine debt divided into 10 classes ranked one through 10 in seniority.
Creditors and David Lichtenstein, the founder of Lightstone, have been in talks for months over restructuring the debt because it was clear to all that Extended Stay would soon fall short on paying debt service, given the market downturn. At one point, there appeared to be a deal that would have involved mezzanine investors exchanging their debt for preferred equity in the property, according to people familiar with the matter.
But that deal has collapsed. "

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