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Thursday, August 02, 2007

More on Alt-A

by Calculated Risk on 8/02/2007 12:53:00 PM

I've seen several unconfirmed reports of Alt-A products being discontinued at various lenders. Mathew Padilla has a follow-up on the Wells Fargo Alt-A story: Wells Fargo scales back Alt-A loans

I'm hearing similar reports regarding the discontinuation of products from IndyMac, WaMu and Wachovia. Note: none of these stories have been confirmed.

As I mentioned in the comments, it appears August rhymes with February. In February standards started to be tightened for many subprime products - or the products were eliminated completely. Now the same appears to be happening for Alt-A.

UPDATE: IndyMac comments (hat tip Brian)

Advance Mortgage Equity Withdrawal Estimate Click on graph for larger image.

IndyMac CEO says mortgage markets "panicked and illiquid"

IndyMac CEO says AAA private MBS bonds are difficult to trade.

IndyMac CEO says disruption "broader and more serious" than past.

From IMB report:

... here is a copy of an email CEO Mike Perry sent out to all Indymac employees yesterday on this subject:

Unfortunately, the private secondary markets (excluding the GSEs and Ginnie Mae) continue to remain very panicked and illiquid. By way of example, it is currently difficult, at present, to trade even the AAA bond on any private MBS transaction. In addition, to give you an idea as to how unprecedented this market has become…I received a call from U.S. Senator Dodd this morning who seeking an understanding of “what is really going on and how can I and Congress help?” I also have talked to the Chairman of Fannie Mae this morning and have traded calls with the Chairman of Freddie Mac (Fannie Mae’s Chairman telling me that they are “prepared to step up and help the industry”).

Unlike past private secondary mortgage market disruptions, which have lasted a few weeks or so…our industry and Indymac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself. As a result, we have seen just since yesterday, many major mortgage lenders announce additional product cutbacks…some leaving subprime, Alt-a, and other products altogether or restricting some products to only their own retail channel (and possibly wholesale) and significant, additional price widening.

While we have very strong liquidity, a good amount of excess capital and there are no realistic scenarios that I can foresee that would impair Indymac’s viability (thanks to our Federal Thrift structure), as I said on the earnings conference call yesterday…we cannot continue to fund $80 to $100 billion of loans through a $33 billion balance sheet….unless we know we can sell a significant portion of these loans into the secondary market…and right now, other than the GSEs and Ginnie Mae….the private secondary market is not functioning.

As a result, Indymac like all major lenders, will continue to widen its pricing and tighten product and underwriting guidelines to ensure that a much great percentage of our production qualifies for sale to the GSEs or through a GNMA security (we sold 40% to the GSEs in the 2nd quarter, up from 30% in Q107 and 19% in 2006, and we want to get it up to at least 60% asap). We are hopeful that private AAA MBS bonds begin to trade soon…and have encouraged the GSEs to step in and provide additional liquidity to the secondary markets (their primary role) for both these private securities and other loans.

While this is an abrupt and uncomfortable change, it is a change that all of our competitors are making just as abruptly, if not more abruptly…so it should not result in one mortgage company having a competitive advantage over another. The reality is I have a lot of confidence in our industry’s mortgage originators (and in particular Indymac’s customers and retail loan officers)….to quickly move as many borrowers as possible to this more full doc, conforming loan environment. I remain hopeful that these very major changes which are clearly negative for our and industry’s loan volumes…will be largely offset for Indymac by the fact that we have fewer players left in the business….we are certainly seeing it play out this way so far this week.

More specific details on products and channels will follow in the next few days. Thanks. Mike

P.S. We will still originate product that cannot be sold to the GSEs…just less of it and we will have to assume we retain it in portfolio (until the AAA private MBS market recovers).