by Calculated Risk on 10/03/2007 03:26:00 PM

From the Financial Times: Mortgage lenders face subprime ‘traffic jam’ (hat tip James)

US mortgage companies are being overwhelmed by the large numbers of homebuyers who need to renegotiate their loans to avoid default, creating a “subprime traffic jam” that could frustrate efforts by regulators to prevent foreclosures, experts say.
...
“Servicers have failed because there’s a huge resourcing issue,” said Barefoot Bankhead, managing director at Navigant Consulting. “As lenders have gone out of business, the servicing arms have been in transition without the resources to handle the enormous number of requests for loan modifications and restructuring.”

The problem could grow more severe as more than $350bn in adjustable-rate mortgages reset at higher rates in the next 18 months.

by Tanta on 9/26/2007 11:19:00 AM

Many of our commenters have expressed concern over the possibility that servicers offering workout modifications will lead to "freeloading" by borrowers who could make their payment, but who wish to tell the servicer a sob story and get a rate break. I thought you might find the following from American Banker (subscription only) interesting:

In an interview this month, J.K. Huey, the senior vice president of home loan servicing at IndyMac Bancorp Inc., said that more than half of the borrowers who call the company for a workout or a loan modification do not qualify.

"We want to help people stay in their home provided they have the financial ability to do so," she said. "But we have to make sure they're going to be successful and the loan is going to perform. We can't do a modification just for the sake of it."

Of those whose requests for relief are rejected, roughly 60% did not respond to written requests for financial information, such as the borrower's last two pay stubs, a W-2 form or the last income tax return. "A lot of people do not want to send the financial information needed to prove what their income is," Ms. Huey said. "They really don't want to take the time to work with us."

The other 40% of loans that are denied loss mitigation are to borrowers who are current on their mortgage payments but who contacted IndyMac in an effort to get a lower rate, she said.

"We do have some customers calling us that shouldn't be calling us," Ms. Huey said. After reviewing those customers' finances, "we say that they have a $4,000 surplus and are able to make their payments, and they say they just wanted to check."

The gist of the article is that modification rates are still very low relative to the number of troubled borrowers; Moodys estimates that about 1.00% of 2005-vintage ARMs have been modified this year.

For those interested in data sources, the article quotes a spokesman for First American Title indicating that requests for modification-related title updates are up about 40%. (A modification does not require a new title insurance policy, as a refinance does, but it does need a "date-down" endorsement to bring the mortgage date down to the modification date, which is much cheaper than a new refi policy.) So title update volume might be a useful proxy for modification activity outside the securitized sector (which a source like the investment banks or rating agencies will limit themselves to).

by Calculated Risk on 9/26/2007 10:26:00 AM

Mathew Padilla at the O.C. Register has an updated ARM reset chart from Bank of America analyst Robert Lacoursiere.

Click on graph for larger image.

See Mathew's blog for more discussion and a comparison to the previous chart.

Some readers have noted that the BofA numbers are higher than the Credit Suisse and UBS reset numbers. CS and UBS are apparently only looking at securitized loans, and BofA includes unsecuritized loans.

Also, CS and UBS apparently only include the first reset when the loan goes from "fixed to floating". Perhaps BofA includes subsequent resets too, double counting some loans.

by Tanta on 9/26/2007 08:27:00 AM

Well, you know what's in your cornflakes--I hope. Do you know what's in your ARM index? According to the Financial Times, the London Interbank Offered Rate may well mean Selected London Inter-Marginal Bank Offered Rate:

“The Libor rates are a bit of a fiction. The number on the screen doesn’t always match what we see now,” complains the treasurer of one of the largest City banks.

Such criticism is, unsurprisingly, rebuffed by those who compile the index each day. However, it highlights two other trends that have emerged in the money markets in recent weeks.

One of these is a growing divergence in the rates that different banks have been quoting to borrow and lend money between themselves.

For although the banks used to move in a pack, quoting rates that were almost identical, this pattern broke down a couple of months ago – and by the middle of this month the gap between these quotes had sometimes risen to almost 10 basis points for three month sterling funds.

Moreover, this pattern is not confined to the dollar market alone: in the yen, euro and sterling markets a similar dispersion has emerged. However, the second, more pernicious trend is that as banks have hoarded liquidity this summer, some have been refusing to conduct trades at all at the official, “posted” rates, even when these rates have been displayed on Reuters.

“The screen will say one thing but people are actually quoting a different level, if they are quoting at all,” says one senior banker.

Some observers think this is just a short-term reaction to the current crisis. However, it may also reflect a longer-term shift. This is because one key, albeit largely unnoticed, feature of the banking world in recent years is that many large banks have reduced their reliance on the interbank market by tapping cash-rich companies and pensions funds for finance instead.

The recent crisis appears to have accelerated this trend. In particular, it appears that some large banks have in effect been abandoning the interbank sector in recent weeks, turning to corporate or pension clients for funding by using innovative repurchase agreements.

This trend is bad news for smaller institutions, such as British mortgage lenders, because these, unlike large banks, generally do not have any alternative ways of raising funds outside the interbank world.

Almost all subprime ARMs, the vast majority of Alt-A ARMs, and a significant chunk of prime ARMs are indexed to 6- or 12-month (dollar-denominated) LIBOR in the U.S. (I'm still looking for a source of exact figures.) One of the ways LIBOR was "sold" to consumers who were used to old-fashioned indices like Constant Maturity Treasury (CMT) or Cost of Funds (COFI) was that it "lagged" these U.S.-centric indices on the upside, implying that LIBOR ARM rates would not rise as quickly. That was mostly nonsense then, and it may be pretty painful nonsense now if the interbank borrowing practices on which LIBOR is based shift such that it becomes a "penalty rate" for bank borrowing.

Prediction: If we "innovate" back to Treasury-based ARM indices (by pulling those dusty old CMT notes out of the drawer), it will be sold to you all on the basis that CMT is a "lagging" index.

by Calculated Risk on 9/20/2007 10:36:00 AM

From the WSJ: Late Mortgage Payments Continue to Climb

Mortgage delinquencies jumped again in August, according to new data from Equifax and Moody's Economy.com. ...

Nationwide, 3.56% of mortgages were at least 30 days past due last month, up 0.31 percentage points from July. The delinquency rate has increased about 1.5 points since bottoming out at the end of 2005, with fully half of that increase coming in the last three months.

... The rise in bad loans is "broad based," says Mark Zandi, chief economist at Moody's Economy.com. "That signals that foreclosure problems are going to be widespread."

As a reminder, here is a chart from BofA analyst Robert Lacoursiere via Mathew Padilla at the O.C. Register. Please see Mathew's discussion from June 29th: (updated URL) BofA Analyst: Mortgage correction just 'tip of the iceberg'.



ARM resets are just one cause of rising delinquencies, and most of the problems from resets are still ahead of us.

by Tanta on 9/12/2007 09:30:00 AM

I saw another media piece on ARM resets this morning. The last time we posted on ARM resets, there came to pass some confusion about the differences among the various published numbers. My very simple purpose today is to help everyone understand why you can, legitimately, get very differing numbers, and what questions you should ask of any data so that you can understand what you’re being told.

It comes down to several questions: Are we using originations data or outstandings data, and if the latter, from what point in time? Are we looking at all ARMs, or just securitized ARMs? (Do note that investment bank sources generally focus on securitized ARMs only, because the performance of securities is their concern, not necessarily the performance of all mortgage loans.) Are we looking only at first reset, or at all resets? What prepayment and cumulative foreclosure assumptions are we using?

Here’s a very concrete example to flesh out the issues. You have a hypothetical 2/28 ARM portfolio of $1.2 million original balance. It contains 12 $100,000 loans, one originated per calendar month of 2005. Each loan will have a first rate adjustment in each calendar month of 2007. The “12-month reset projection” for this pool, considering only the first adjustment, is very simple: each month, 1 loan resets, for a dollar amount of $100,000 per month or $300,000 per quarter.

But what if you do not limit yourself to just the first reset? The 2/28 will, if it does not prepay, reset every six months after the first reset. If we assume no prepayment, then, and include subsequent adjustments, we get 1 loan resetting in January-June, but 2 loans resetting each month from July-December. Starting in July, there is 1 loan hitting its first reset and 1 loan hitting its second reset. If you simply counted resets, you would show 2 loans in July-December, for a balance of $200,000 per month. If you tried to total up the monthly balances for a year, you’d end up showing $1.8 million in resets on a $1.2 million portfolio of loans. You could say, in a certain context, that $1.8 million in resets are scheduled for 2007, but that is not saying that $1.8 million worth of loans are “at risk.”

And, of course, not every loan will survive on the books after its first adjustment. It could pay off voluntarily (refi, home sale) or involuntarily (short sale, foreclosure). If you wanted to take a vintage of originations and project out a reset schedule, you would have to make projections of prepayment and default. If you started with current outstandings, you would already have your prior prepayments and defaults removed from your pool, but you would still have to project these into the future, unless your goal was a “what if” scenario that involved no loan paying off or defaulting until its reset date.

Even if you wanted to do that, there’s no reason to assume that all reset-related defaults will be due solely to the effect of the first adjustment. It is the most wicked reset for the borrower, but the ugly fact of the 2/28 ARM is that borrowers who survive the first adjustment, possibly just barely, will get another smaller one in six months, and then another one in another six months, until the loan reaches either fully-indexed (then-current 6-month LIBOR plus margin) or its lifetime cap (usually start rate plus 6.00 points). Given the depth of the teaser discounts, the hefty margins, and the movement in LIBOR since these loans were originated, there is no reason to think many of them won’t keep adjusting upward every six months for two years until they hit indexed or capped. So the borrower who just barely survived the first reset might go down at the second one. The borrower who more comfortably survived the first reset might go down at the third one. There is a point to “cumulative” projections of resets.

However, you would still have to adjust these numbers further. You would also project index values forward (to guess when caps will come into play and loans would stop adjusting), and you would have to take into account varying margins. I could assume for our hypothetical pool that all loans have the same margin, but in the real world they don’t.

You will, therefore, see differing presentations of reset volume, and those differences may have a lot to do with prepayment speed assumptions, underlying index movement assumptions, or the weight of caps and margins in a particular pool of loans. That does not mean that someone is lying to you, although you may or may not find the underlying assumptions reasonable (assuming you can figure out what they are).

Today, Reuters reports this:

About $75 billion in adjustable-rate U.S. mortgages are going to reset in the fourth quarter, most of which will emerge next month. Of the loans resetting, around 75 percent are subprime mortgages.

As far as I can determine, this $75 billion number includes only the first reset of any ARM (the date on which it changes from “fixed to floating” rate), based on Q207 securitized outstandings, and has no prepayment adjustments. If you assume even conservative prepayment speeds, the actual number of resets will be lower. However, if you “add back” subsequent adjustments for loans that survived their first adjustment, the raw number of resets is higher. The Bank of America chart CR posted several weeks ago shows securitized plus non-securitized, which is why it has such large numbers compared to the Reuters number. I believe, but cannot verify, that it also includes only the first adjustment.

There is no “right number.” There is only a number in context.