Oh How The Outlook Changes

I read two good posts today about how the outlook for the "recovery" is changing, and how optimism is sometimes, well, optimism, not reality.

First, Floyd Norris at NYT writing about MBIA's CMBS (commercial mortgage backed securities) insurance losses.  Norris points out how the company has gone from describing their portfolio as "nearly bulletproof," to expecting losses of $123MM as of three months ago, to currently expecting losses of $230MM.

He excerpts the company's prior 10q:

Although we have observed very few loan liquidations or property sales within the underlying C.M.B.S. securities and we believe that the probability of substantial losses from these exposures is small, observed underlying loan delinquencies in this sector continue to rise.

and then the current one:

Although we have observed very few loan liquidations or property sales within the underlying MBIA Corp.-insured C.M.B.S. transactions and although we believe that the probability of substantial losses from these exposures is small, observed underlying loan delinquencies have accelerated and certain debt coverage ratios have deteriorated in this sector.

and notes, emphasis mine:

Company boilerplate from one quarter to the next seldom changes without a reason.  So it may be significant that while the probability of substantial losses remains small, in the company’s opinion, loan delinquencies have gone from rising to accelerating, and the company mentions deteriorating debt coverage ratios.

This is a company that took forever to admit it had problems in residential mortgage securities, and that vigorously argued with anyone who disagreed. Could this be history repeating itself?

Indeed - I feel like we've heard this story before!

Invictus, writing at Barry Ritholtz's blog notes the changes in the Fed's housing outlook, based on their statements from the FOMC meetings over the past year:

Sept. 23, 2009 (link is to all statements and minutes):

Conditions in financial markets have improved further, and activity in the housing sector has increased.

Nov. 4, 2009:

Activity in the housing sector has increased over recent months.

Dec. 16, 2009:

The housing sector has shown some signs of improvement over recent months.

Mar. 16, 2010

However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.

April 28, 2010

Housing starts have edged up but remain at a depressed level.

June 23, 2010

Housing starts remain at a depressed level.

Aug. 10, 2010

Housing starts remain at a depressed level.

Invictus asks: "When something is “depressed” long enough, is it fair to say it’s a “depression”?"

-KD