by Calculated Risk on 8/17/2008 10:51:00 PM

A couple of articles on Lehman ...

From the WSJ: Lehman Faces Another Loss, Adding Salt To Its Wounds

With the end of the New York company's fiscal third quarter less than two weeks away, some analysts are girding for a loss of $1.8 billion or more ... [with] widely anticipated write-downs in a portfolio saddled with more than $50 billion in risky real-estate and mortgage assets ...

And on some of those real estate assets, from the Financial Times: Lehman faces fight to shed real estate assets

Lehman's near-term fate depends in large part on whether it can attract buyers for the assets and securities in its commercial real estate portfolio, valued at $40bn at the end of May.
...
Lehman's portfolio is very diverse. It consists of so-called whole loans, commercial mortgage-backed securities, risky financings such as equity bridges and individual projects.

In the Archstone deal, mentioned in the article, Lehman was in the riskiest position and it's very likely that their investment is now worthless.

For those interested in more details of the Archstone deal, from the NY Times (Oct 6, 2007): Deal Is Complete to Take Archstone REIT Private

And from the WSJ: Lehman's Property Bets Are Coming Back to Bite.

by Calculated Risk on 8/13/2008 10:41:00 AM

From Reuters: Countrywide option ARM home loans deteriorate more (hat tip Brian and Branden)

Countrywide Financial Corp said thousands of borrowers with $25.4 billion in option adjustable-rate mortgages (ARMs) owe almost as much as their homes are worth ...

Another sign of borrower distress: One in eight is at least 90 days late on payments.

As of June 30, the typical borrower owed 95 percent of the value of his home, up from 76 percent when the loan was made ...

Seventy-two percent of borrowers were making less than full interest payments, and 12.4 percent were at least 90 days delinquent.

Here is the CFC 10-Q filed with the SEC.

Click on table for larger image in new window.

This is the Option ARM table from the CFC 10-Q. Notice that 83% of loans were stated income.

From Reuters:

"People still don't understand what a catastrophe this is," said Christopher Whalen, senior vice president and managing director at Institutional Risk Analytics of Torrance, California. "The guys who are really on the hook are Bank of America shareholders."

I think it's the CFC bondholders who are "on the hook" since BofA hasn't guaranteed the CFC debt.

by Calculated Risk on 8/11/2008 11:23:00 PM

From the Financial Times: JPMorgan struck by $1.5bn writedown (hat tip Geoffrey)

In a regulatory filing, JPMorgan said since the beginning of July, trading conditions in the mortgage market “had substantially deteriorated . . . causing the company to incur losses” of $1.5bn, excluding hedges.

Bankers said July was the worst month for mortgage-backed bonds since the beginning of the crisis, as a combination of cut-price sales and waning demand from large investors helped to depress prices.

... people close to the company said it had been forced to write down the value of its $33bn in mortgage-backed securities as prices continued to drop in July.

They said the writedowns were partly driven by Merrill Lynch’s decision to sell $6.7bn in toxic securities ... for just 22 cents on the dollar.

Here is the full quote from the SEC filing:

For the third quarter to date, trading conditions have substantially deteriorated versus the second quarter. In particular, spreads on mortgage-backed securities and loans have sharply widened causing the company to incur losses (net of hedges) of approximately $1.5 billion for the quarter to date.

The confessional is still busy ...

by Calculated Risk on 8/08/2008 06:24:00 PM

Press Release: BankUnited Announces Fiscal 2008 Third-Quarter Results

The ratio of non-performing assets as a percentage of total assets increased to 7.73% at June 30, 2008, from 4.75% at March 31, 2008, and 0.86% at June 30, 2007.
...
Net charge-offs for the quarter ended June 30, 2008, were $22.7 million, or an annualized rate of 0.73% of average total loans. This compares to $13.3 million, or an annualized rate of 0.42% of average total loans, for the quarter ended March 31, 2008, and $1.1 million, or an annualized rate of 0.04% of average total loans, for the quarter ended June 30, 2007.
...
BankUnited’s option ARM loans are re-amortized over the remaining term at the earlier of five years from inception of the loan or upon reaching 115% of the original principal balance. As of June 30, 2008, a total of 128 loans had reached the maximum 115% of the original loan amount. These 128 loans had an aggregate balance of $42.9 million, or 0.41% of the total residential loan balance as of June 30, 2008. ...

The company estimates that approximately $48 million of option ARM loans will reach the 115% limit during the remaining quarter of fiscal 2008, and that $686 million will reach the 115% limit during fiscal year 2009.
emphasis added

Fiscal 2009 will be interesting with so many more Option ARMs reaching the 115% limit. Fiscal 2010 will probably be even worse (based on industry data, not BankUnited data).

by Calculated Risk on 8/06/2008 06:25:00 PM

From Bloomberg: AIG Posts Third Straight Quarterly Loss on Housing

American International Group ... posted a $5.36 billion loss as writedowns tied to the housing slump wiped out profit for a third straight quarter. ...

The insurer reduced the value of credit-default swaps, guarantees AIG sold to protect fixed-income investors, by $5.56 billion and marked down other holdings by $6.08 billion before taxes.
...
The biggest insurers in the U.S. and Bermuda posted more than $77 billion in writedowns linked to the collapse of the mortgage market from the start of 2007 through the first quarter, with AIG representing about half that total.

The confessional is still very busy.

by Calculated Risk on 7/29/2008 05:19:00 PM

"The housing market worsened in the June quarter, and I don't expect to see it improve this fiscal year,"
Tim Eller, chairman and CEO of Centex Corp.

Note that Centex's fiscal year starts in April, so the CEO is seeing no improvement through March 2009.

From Centex: (hat tip Ken) Centex Reports First Quarter Results

Fiscal 2009's first quarter revenues were $1.13 billion, 41% lower than the same quarter last year. The loss from continuing operations for the first quarter was $169 million ... up from a loss of $132 million ... in the previous year's fiscal first quarter. Included in the first quarter of fiscal 2009's loss from continuing operations are $80 million of impairments and other land-related charges, including the Company's share of joint venture impairments.

The land impairments continue.

From the Centex Investor Materials (from 8-K filed with SEC):

Market conditions worsened in the quarter

Foreclosures are rising

Employment is weakening

Consumer confidence is waning

Mortgage qualification standards are tightening

Traffic and sales have diminished

Not exactly the most positive investor material I've seen!

Also, Centex is one of the companies I use to track changes in cancellation rates. They didn't report cancellations in the 8-K, so we will have to wait for the 10-Q. Cancellations had been trending down for Centex, but with these very negative comments, we might see another increase in cancellation rates.

by Calculated Risk on 7/29/2008 05:13:00 PM

A little spillover from the Merrill Lynch CDO sale ...

From Bloomberg: Citigroup Markdowns May Rise $8 Billion, Analyst Says

Citigroup Inc. will probably write down the value of collateralized debt obligations by $8 billion in the third quarter, Deutsche Bank AG analyst Mike Mayo said ...

by Calculated Risk on 7/28/2008 05:47:00 PM

From Merrill Lynch: Merrill Lynch Announces Substantial Sale of U.S. ABS CDOs, Exposure Reduction of $11.1 Billion

First, here are the write-downs:

As a result of the transactions announced today, the company expects to record a pre-tax write-down in the third quarter of 2008 of approximately $5.7 billion. This write-down is comprised of a $4.4 billion loss associated with the sale of CDOs, a $0.5 billion net loss on the termination of hedges with XL Capital Assurance and an approximately $0.8 billion maximum loss related to the potential settlement of other CDO hedges with certain monoline counterparties.

Here is the info on the CDO sale:

On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

On a pro forma basis, this sale will reduce Merrill Lynch’s aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral – 2005 and earlier. The pro forma $8.8 billion super senior long exposure is hedged with an aggregate of $7.2 billion of short exposure, of which $6.0 billion are with highly-rated non-monoline counterparties, of which virtually all have strong collateral servicing agreements, and $1.1 billion are with MBIA. The remaining net exposure will be $1.6 billion. The sale will reduce Merrill Lynch’s risk-weighted assets by approximately $29 billion.

Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction.

There is much more in the press release.

by Calculated Risk on 7/24/2008 05:39:00 PM

From MarketWatch: National City swings to loss, but shares rise

[T]he company reported a second-quarter loss of $1.76 billion ... "Credit quality deteriorated, but there are some signs of stabilization in the nonprime mortgage book," wrote BMO Capital Markets analyst Lana Chan

From the NY Times: Stocks Drop Sharply; Banks Lead Decline

Financial shares ... plunged after the regional bank National City and Washington Mutual, the nation’s biggest savings and loan, were besieged by gloomy analyst reports.

WaMu was forced to take the unusual step of issuing a public statement about its financial strength, for the second time in a week.

National City shares ... reported a $1.8 billion loss for the second quarter.

Sorry - a little late, I'm somewhat out of touch while at the real estate conference in San Francisco. Having a great time ... I've met several people that comment frequently, including having lunch today with Nemo!

by Tanta on 7/24/2008 09:37:00 AM

Well, yesterday was quite the odd day. I was having a late afternoon nap when I suddenly awoke, heart pounding and skin crawling, with that horrible spooky sense of being watched. I decided it was a bad dream, made a cup of tea, and wandered over to the computer, only to discover that my co-blogger had just a few minutes earlier put up a post letting us all know that the FDIC is going to be keeping its eyes on bloggers.

There's only one thing for it, then. If the FDIC is going to be worrying about the bloggers, the bloggers are going to have to be worrying about the insured depositories. I don't know that that's an ideal setup, exactly, but someone has to worry about the banks and thrifts, not just about bad PR for the FDIC, and if Sheila Bair is going to ruin my naps I'm going to have time on my hands.

Which brings us to Downey Financial, who visited the confessional this morning. It was pretty ugly. What we got, for the first time as far as I can remember (I nap a lot these days, you know, or at least I used to), is some post-modification performance information on the infamous "retention modifications."

If you remember, Downey got everybody a little fired up back in January when it announced that its auditor was making it restate its Non-Performing Asset (NPA) numbers for the second half of 2007. Downey had put in place a program to offer "market rate" modifications to performing borrowers in its loan portfolio. These were, apparently, mostly Option ARM borrowers whose rates had adjusted to pretty high levels. Downey modified them into amortizing ARM loans at the same interest rate that a new ARM borrower would have gotten. Because there was not a below-market rate given to these borrowers, and because they were current at the time of modification, Downey decided it did not need to count these loans as "troubled debt restructurings," which would mean including them in the NPA category. However, KPMG told Downey that the loans did indeed need to be considered "troubled debt restructurings," for a very specific reason: Downey did not re-underwrite these loans at the time of modification to verify and document that the "market rate" given to the borrowers was truly the rate that a new borrower of the same credit quality would have gotten. Downey agreed to count all of these "retention mods" as NPA until each borrower had made six consecutive payments under the new loan terms. Ever since then, Downey has been reporting separate numbers for total NPA including the retention mods, plus NPA without the retention mods. They clearly believe that having to include the retention mods in NPAs makes their NPA number look worse than it "really" is. Whatever that means.

In today's press release, we got some additional information about the performance of these loans:

To the extent borrowers whose loans were modified pursuant to the borrower retention program are current with their loan payments and included in non- performing assets, it is relevant to distinguish those from total non- performing assets because, unlike other loans classified as non-performing assets, these loans are paying interest at interest rates no less than those afforded new borrowers. At June 30, 2008, $548 million or 82% of such borrowers had made all loan payments due. Accordingly, the 15.50% ratio of non-performing assets to total assets includes 4.34% related to performing troubled debt restructurings, resulting in an adjusted ratio of 11.16%.

Through June 30, 2008, $347 million of loans modified pursuant to our borrower retention program have been removed from non-performing status because they met the six-month payment performance threshold. Of all loans modified pursuant to the borrower retention program, including both those classified as non-performing as well as those removed from non-performing status, 87% have made all payments due.

So. The "retention program" has been in place for one year now. If I am reading this correctly, a total of $1.015 billion in loans have been modified under this program. $347 million have made at least six consecutive on-time payments and are no longer included in NPA. Of the $668 million still in NPA, $548 million have made all payments due so far (that might be less than six, since some of these mods will be less than six months old).

This means that of a group of modified loans that are no more than one year old, 87% are performing. If you remove the oldest performing loans from that group--the ones that have had six payments actually due and have made those payments--you get 82% performing loans. A delinquency rate of 13-18% in the first year would probably be something to be proud of if these were "classic" troubled debt restructurings--namely, workouts of delinquent loans that required below-market interest rates to result in payments the borrower could afford.

But Downey tells us these "retention" mods were done for borrowers who were current on their loans at the time of modification, and who were given rates no better or worse than market. The very idea of a "retention" program, of course, is that (in theory at least) these are borrowers whom you don't want to refinance away from you with another lender, because they're good borrowers. You "retain" them by offering them a less expensive alternative to refinance, namely a modification that keeps the loan with the same lender and servicer.

And 13-18% of these "keepers" went bad within a year or less of a modification that supposedly improved their risk profile? Perhaps people are getting used to seeing such high delinquency rates on subprime and "worked out" loans that figures like this seem normal. But these are supposed to be prime loans, and that level of early delinquency or default in a book of "retention" mods is just awful. Downey says these borrowers got the same modified rate and terms that a new refinance borrower would have gotten. Were they expecting that 13-18% of their newly-originated refinance transactions would be delinquent in the first year?

If nothing else, I'd say this demonstrates a good call by KPMG. Downey called these "retention" mods--implying that they were the kind of high-quality borrowers you don't want to lose to the competition--and failed to re-underwrite the loans to verify that claim. The results of this program suggest to me that it was less a classic "retention" program than a pre-emptive strike: Downey made a big effort to modify as many of its then-current Option ARMs as it could into better loan terms, not because they were the kind of borrowers you necessarily want to "retain" but because they were probably not going to get a decent refi anywhere else and if they'd stayed in the Option ARM program the delinquency rate would likely have been worse than 13-18% a year later.

I don't actually think that a "proactive" modification program is necessarily a bad thing. But I think calling it a "retention" program is disingenuous at best, and I think that Downey's experience is proving the point that it really does matter whether you re-underwrite those loans before you modify them. But then, forcing outfits like Downey to call these programs "pre-delinquency workouts because letting them ride is too dangerous" programs rather than "retention" programs would probably spook people, and we know the FDIC doesn't want that.

by Calculated Risk on 7/22/2008 05:23:00 PM

Also on regional banks see the WSJ: Regional Banks Battered Amid Turmoil in Markets

Here are some comments from the Regions Financial conference call (hat tip Brian):

“Given the continuing deterioration in residential property values, especially in Florida , and a generally uncertain economic back drop, we expect credit costs to remain elevated. While we're not predicting the duration of this economic downturn, we think it is prudent to plan for no real improvements until 2010.”

And on home equity in Florida:

“Home equity credits caused over half the increase [in net charge offs] rising to an annualized 1.94% of outstanding lines and loans, up from 57 basis points last quarter. We are clearly experiencing greater deterioration in this portfolio than originally expected. Mostly due to Florida based credits which account for approximately $5.4 billion or one third of our total home equity portfolio. Of that balance, approximately 1.9 billion represents first liens. Second liens which total $3.5 billion or 22% of our home equity portfolio are the main sources of loss. In fact, the second quarter annualized loss rate on Florida 's second liens was 3.5 times the rate of first lien home equity loans and lines - 4.74% for second liens versus 1.37% for first liens in Florida. So to emphasize this point, 22% of our total home equity portfolio or $3.5 billion had a 4.7% net charge off rate. The remaining 78% had about a 1.1% net charge off rate. The problems in this portfolio are very concentrated.

... Customers who did not live in the properties but purchased them to be used as an investment home or second home were more prevalent in Florida than our other markets and have been especially problematic. As property values have dropped, so has the equity supporting these loans, exacerbating home equity write-offs. Significant income losses are also negatively affecting a growing number of borrowers’ ability to repay home equity loans.”

A comment from reader Brian: "Those second liens in Florida are starting to resemble credit cards with respect to their charge off rates, unfortunately the interest rates on the loans are not 18%!"

by Calculated Risk on 7/22/2008 04:14:00 PM

From WaMu: WaMu Reports Significant Build-Up of Reserves Contributing to Second Quarter Net Loss of $3.3 Billion

WaMu today announced a second quarter 2008 net loss of $3.33 billion as it significantly increased its loan loss reserves by $3.74 billion to $8.46 billion.
...
The increase in provision for loan losses reflected the further decline in house prices which increased expected loss severities, increased delinquencies, reduced availability of credit, and the weakening economy. Total net charge-offs in the loan portfolio rose to $2.17 billion from $1.37 billion in the prior quarter. Nonperforming assets grew to 3.62 percent of total assets at June 30 from 2.87 percent at the end of the first quarter.

by Calculated Risk on 7/22/2008 09:21:00 AM

From the WSJ: Wachovia Posts $8.66 Billion Loss, Slashes Dividend, Will Sell Assets

Wachovia ... posted a net loss of $8.66 billion ... Net charge-offs -- loans the company doesn't think are collectible -- soared to 1.10% of total loans from 0.14% a year earlier and 0.66% in the first quarter. Nonperforming loans -- those near default -- rose to 2.41% from 0.49% and 1.70%, respectively.

The confessional business is booming.

by Calculated Risk on 7/21/2008 08:11:00 PM

A few comments from the American Express conference call: (hat tip Brian)

“Over the past month or so, we have seen clear signs that the US economy is weakening. Unemployment rates, as we know, took the largest jump in over 20 years. Home prices declined at the fastest rate in decades, and consumer confidence is at one of its all-time low points. Card member spending particularly among consumers slowed sharply during the latter part of the quarter. Credit indicators as we signaled a few weeks ago deteriorated beyond our expectations, and by almost any measure the US economy and business environment are much weaker than the assumptions we first spoke to you about back in January and the conditions that existed in early June. Now this fallout was evident across all consumer segments, even our longer-term super prime card members.”

We are all subprime now!

Here are the AmEx slides. Several are interesting and show the credit deterioration.

Click on graph for larger image in new window.

“Affluent customers in some situations are cutting back on discretionary spending…we’re seeing a slowdown in spend across the board”

U.S. Card Services billing only increased 2% year-over-year in June - less than inflation.

And AmEx expects the economy to worsen:

“The severe decline in home prices and the marked rise in oil prices have had a fundamental impact on consumer budgets and behavior. Not just as it relates to mortgages and home-related spending, but also across the full spectrum of the consumer economy. We saw the first signs of weakness in our credit indicators at the end of last year and communicated this to you in January when we reported our fourth-quarter results. At that time we took a credit-related charge in order to recognize the deterioration by strengthening our lending and charge card reserves, coverage ratios and levels. In the first quarter, US lending write-off rates rose further, and at that time we indicated that the second-quarter loan-loss rate would be higher than the first quarter, which has proven to be the case. In April and May US lending write-off rates were generally consistent with the 4% to 6% EPS growth plan that we discussed with you in early June. However, as I showed you on the slide package, we saw our credit deteriorate in June beyond our expectations as the write-off rates rose and roll rates within the portfolio deteriorated versus prior months. In other words, more and more consumers who are falling behind in their payments are remaining delinquent. This causes us to assume that a greater percentage of past-due loans will not be repaid. In light of the magnitude of the negative economic trends and our experience, we now believe the economic weakness in the US will likely worsen throughout the remainder of the year and negatively impact credit and business trend ... we now expect that our lending write-off rate in the third and fourth quarter will be higher than June levels.”

by Calculated Risk on 7/21/2008 06:20:00 PM

Several companies visited the confessional today, but the quote of the day goes to Texas Instruments:

"If demand strengthens as quickly as it slowed, we are well-positioned to meet it."

Tell that to the homebuilders ...

by Calculated Risk on 7/21/2008 04:29:00 PM

From American Express:

The second quarter results included a $600 million ($374 million after-tax) addition to U.S. lending credit reserves that reflects a deterioration of credit indicators beyond our prior expectation, and a $136 million ($85 million after-tax) charge to the fair market value of the Company’s retained interest in securitized Cardmember loans.
...
“Fallout from a weaker U.S. economy accelerated during June with consumer confidence dropping, unemployment rates moving sharply higher and home prices declining at the fastest rate in decades,” said Kenneth I. Chenault, chairman and chief executive officer. “Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations.

“In light of the weakening economy, we are no longer tracking to our prior forecast of 4-6 percent earnings per share growth. That outlook was based on business and economic conditions in line with, or moderately worse than, January 2008. The environment has weakened significantly since then, particularly during the month of June.
emphasis added

by Calculated Risk on 7/21/2008 09:35:00 AM

From the WSJ: Bank of America's Net Slides, But Results Beat Expectations

Bank of America reported write-downs of $1.22 billion related to market disruptions, down from $2.81 billion in the first quarter.

Credit-loss provisions more than tripled to $5.83 billion from $1.81 billion a year ago amid rising costs in the home-equity, small-business and home-builder portfolios.
...
Net charge-offs, loans it doesn't think are collectable, jumped to 1.67% from 0.81% of total average loans and leases a year ago and 1.25% in the first quarter, reflecting housing market deterioration and slowing economic conditions. Nonperforming assets surged to 1.13% from 0.32% a year ago and 0.9% in the first quarter.

This does not include Countrywide's results.

by Calculated Risk on 7/18/2008 09:08:00 AM

From MarketWatch: Citigroup swings to loss on $7.2 billion write-down

Citigroup ... said on Friday that it lost money for the third consecutive quarter after writing down $7.2 billion of investments related to fixed-income weakness and consumer credit woes.
...
The consumer area showed worse performance than some other businesses on a quarter-to-quarter level, as the $3 billion second-quarter figure was down just a fraction from the $3.1 billion first-quarter figure.

"Higher credit costs reflected a weakening of leading credit indicators, including higher delinquencies in first and second mortgages, and unsecured personal and auto loans. Credit costs also reflected trends in the macro-economic environment, including the housing market downturn," Citi said.

by Calculated Risk on 7/17/2008 05:19:00 PM

From the WSJ: Write-Downs Push Merrill Lynch Into Red for 4th Straight Quarter

Merrill Lynch & Co. posted its fourth consecutive quarterly loss on $9.75 billion in additional write-downs on assets tied to the tanking housing market.
...
The negative revenue resulted from $3.5 billion in write-downs on collateralized debt obligations, a $2.9 billion loss related to hedges with financial guarantors, a $1.7 billion write-down on the investment portfolio of Merrill Lynch's U.S. banks, and $1.3 billion write-down related to residential mortgage exposures and a $348 million write-down related to leveraged finance commitments.
...
Moody's Investors Service downgraded Merrill's senior long-term debt after the report one notch to A2 ...

This is far worse than expected. CNBC forecast write downs of $3 billion to $5 billion. Ouch.

by Calculated Risk on 7/17/2008 04:23:00 PM

Update: Here is the Merrill Press Release. (hat tip Dwight)

From MarketWatch: Merrill reports quarterly net loss of $4.65 billion

Merrill Lynch ... reported a $4.65 billion second-quarter net loss late Thursday as the brokerage firm continued to be hit by write-downs on large mortgage-related exposures.

On Capital One: Capital One income falls 40% on drop in U.S. card income

Capital One ... added $37.6 million to its second-quarter provision expenses. The managed charge-off rate for its national lending division increased 0.33 of a point to 5.67% from the first quarter.

The Merrill story (waiting for details) is more mortgage losses. The Capital One story is the spillover into credit card debt.