by Anonymous on 6/05/2007 03:44:00 PM

From the Charlotte Observer:

Three Charlotte-area builders will forgive almost $2 million in mortgage loans they made as part of a scheme to sell homes that the buyers couldn't afford, state regulators announced Monday.

These were unusual mortgage loans, according to a complaint filed by regulators. They were set up without the knowledge of the borrowers. The amounts were small. And there was no attempt to collect monthly payments.

But in the strange world of mortgage lending, these loans ranging from $24,000 to $37,000 allowed the recipients to qualify for larger loans from other companies. With that money, they paid for homes.

The settlement with Dixie Homes LLC of Gastonia and MCE Properties Inc. and Evans-Davis Inc. of Kings Mountain resolves allegations that the companies violated state mortgage and consumer protection laws.

Dixie and its owners, Brian Bragg, Donna Bragg and Mark Penegar, will pay a civil penalty of $7,000, and MCE will pay a penalty of $18,000, according to the office of N.C. Attorney General Roy Cooper.

All three builders also will cooperate in the state's investigation of the company that arranged the large and small loans, Hall Financial Services of Matthews. . . .

Hall's customers mostly lacked the savings for a down payment, and could not qualify to borrow 100 percent of the sales price.

On paper, the builders made mortgage loans to the buyers that covered 20 percent of the sales price. Hall then arranged a loan for 80 percent of the sales price from a mortgage company, generally New Century Financial Corp. These 80 percent loans were easier to get because lenders are comfortable that the home can be sold to cover the loan.

But borrowers were generally unaware of the 20 percent loans until closing. Some were originally quoted a lower price, but at closing were given papers listing a price 20 percent higher, and offering a second loan.

The builder loans typically required interest payments each month, with the full amount due after three years. The loan also had to be paid if a buyer tried to sell the home or refinance the larger loan. Most buyers, lacking the savings for a down payment, had no hope of paying the loan when it came due.

Wonder if this will come up when NAHB defends subprime lending on Capitol Hill tomorrow . . .

by Calculated Risk on 6/05/2007 01:48:00 PM

From Rex Nutting at MarketWatch: Services growing at best pace in a year

The nonmanufacturing side of the U.S. economy grew at the best pace in a year in May, the Institute for Supply Management reported Tuesday.

The ISM nonmanufacturing index rose to 59.7% from 56% in April. It's the highest since April 2006.

This follows an improvement in manufacturing: Factories see higher orders, production and prices

More U.S. manufacturers were expanding their businesses in May than at any time in the past year, the Institute of Supply Management reported Friday.

The ISM index rose to 55% from 54.7% in April. It's the highest since April 2006.

These reports probably mean Q2 will look much better than Q1.

by Calculated Risk on 6/05/2007 11:56:00 AM

From the AP: Ga. home builder files for Chapter 11 (hat tip Dave)

Georgia builder Meyer-Sutton Homes Inc. filed for protection from creditors Monday in the U.S. Bankruptcy Court in Newnan, the result of a "sudden and dramatic" decline in business.
...
"The housing market has suffered a dramatic decline in demand, with the result problems of excess inventory and compressed profit margins," Buchanan said in court papers.

According to its bankruptcy filing, the company has cut new construction starts to two per month from 25 per month.

by Calculated Risk on 6/05/2007 10:42:00 AM

Chairman Bernanke spoke today: The Housing Market and Subprime Lending. This is basically the same speech Bernanke gave back in November 2006. Back then, Bernanke said:

"Over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy's long-run sustainable pace."

Now Bernanke says:

On average, over coming quarters, we expect the economy to advance at a moderate pace, close to or slightly below the economy’s trend rate of expansion.

Same thing. But the differences are interesting. Back in November, Bernanke talked about "stabilization" in the housing market. And as recently as April, the Fed's Mishkin saw "minimal" spillover from housing:

"... spillovers to other segments of the mortgage market or to financial markets in general appear to have been minimal."

Now Bernanke talks about further weakness in housing and no "major spillovers".

"... the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected.

... we have not seen major spillovers from housing onto other sectors of the economy."

I do have a problem with Bernanke's "fundamentals":

"... fundamental factors--including solid growth in incomes and relatively low mortgage rates--should ultimately support the demand for housing."

In the short term, the key fundamentals for housing are supply and demand. Income growth is important for the long term. Perhaps Bernanke should read my recent post: Housing Update, June 2007. The outlook for housing is dismal.

And finally, I wish Bernanke would stop talking like a NAR economist when he talks about interest rates. In the near future I'll discuss interest rates and the impact on housing.

by Anonymous on 6/05/2007 08:21:00 AM

From Forbes, "Homebuilders Hit the Hill":

Washington, D.C. - On Wednesday, 1,300 home builders will call on Capitol Hill as part of a legislative conference organized by their trade group, the National Association of Home Builders. They'll do so against a grim industry backdrop.

"For the first summer in many summers, we're not helping to keep unemployment numbers down," says Jerry M. Howard, 51, the NAHB's chief executive. "For the first time in six years, we are a drag on the economy rather than a plus." . . .

"Our strategy is to remind policymakers of our importance in economic and societal terms," he says, "and to convince them to take no action that would exacerbate this downturn in the housing industry."

One area of potential exacerbation: immigration. The NAHB has come out strongly against the proposed immigration overhaul now being considered by the U.S. Senate, particularly its portions cracking down on employers that hire illegal workers, directly or through subcontractors. . . .

Naturally, maintaining government support for home finance is also an area of interest. Another talking point the NAHB reps will take with them to Capitol Hill Wednesday is to defend subprime lending . . . "If we only lent to people with prime credit ratings," counters Howard, "the homeownership rate in this country would be incredibly low."

I see. If we have to have illegal employment practices and predatory lending in order to achieve the American Dream, well, then, dream on . . .

by Anonymous on 6/04/2007 06:22:00 PM

Fitch Ratings has a new Special Report out today, "Changing Loss Mitigation Strategies for U.S. RMBS." (You will have to register if you want to see the full document.) See below for the text of the press release.

My reading of the document is that Fitch's servicing analysts are, like the servicers themselves, not exactly thrilled to be dealing with what could be construed as mistakes that were made somewhat earlier in the process:

The volume of defaulted loans in subprime portfolios has exceeded the expected levels for this product, and with the number of adjustable-rate mortgage (ARM) loans still moving into the reset phase, this number will increase unless an aggressive stance to work out these cases is adopted. This report does not delve specifically into the reasons for these increased defaults, except as they affect the timing and/or opportunities available to the servicer to develop workable solutions.

Quite honestly, if I were Fitch, I wouldn't want to "delve specifically into" that either. As I am not Fitch, I wonder how long they'll be allowed to get away with that. If a rating agency is supposed to do anything, it is supposed to be good at predicting "expected defaults." That these subprime pools have fallen apart so far, so fast, is a problem the servicers have inherited. That some of these servicers have fallen apart so far, so fast, is a problem the bondholders are inheriting in bankruptcy court. One needs to read this report with that context in mind.

Each of the items discussed below have a direct impact on the servicer’s cost to service by requiring additional staff or technology expenditures, increased costs of vendor services, carrying cost of advances, and development and performance of initiatives outside the normal expected scope of activities for a residential servicer. The servicers of subprime loans closely monitor and manage their cost to service and have indicated that, for the most part, they expect the current servicing fees in transactions to cover their increased costs. However, Fitch believes this is an area of concern for certain servicers who either do not have a diversified portfolio or who are not continuing to take in new production, which would improve the ratio of performing to nonperforming loans. This concern could also arise upon the need to transfer a subprime portfolio that contained high default levels, as the number of servicers willing to take on this servicing at current fee structure levels could be limited.

If that doesn't mean "Look, bondholders, you'll either approve some modifications or your servicer will fold beneath you and any substitute servicer will be able to name its price because you need them waaay more than they need you," well, then Tanta's never read a ransom note.

Servicers have also noted that they believe there will be longer foreclosure timelines on the horizon due to the increased volume of filings and repeat actions required after multiple efforts with borrowers. In addition, increased foreclosures are causing delays with county recorders, broker price opinion (BPO) providers, property inspection and preservation vendors and REO networks. Some servicers have indicated that vendors and, particularly, attorney networks may be adversely affected by increased foreclosures, property preservation and inspection orders, and REO listings, noting that vendors must also increase their ranks with experienced staff. In addition, local jurisdictions and courts are becoming backlogged and overloaded with foreclosure cases, which have negatively affected foreclosure timelines and translated into higher costs to carry.

Most Fitch-rated servicers have strict timeline adherence policies and clearly delineated options. However, ultimately, servicers have agreed that current measurements for foreclosure and REO liquidation timeline management will need to be closely monitored and reset as the market reacts to the pressure of quickly changing volumes.

The worse it gets, the worse it gets. I honestly don't know how Fitch expects us to read the two paragraphs above. Are there those for whom this is news? Are they, um, investors in Fitch-rated securities?

Let us be clear. Foreclosure waves create additional losses just by being foreclosure waves. You can try to rush for the exits all you want; it takes too long to get out of this door if there are too many people in line. This has always been true. I read things like the above and wonder whether Fitch's loss models ever considered that when declining home values (a key element in the loss severity calculation) get to a certain point, the foreclosure volume gets to a point such that the operational risk explodes, which drives those loss severities even deeper. The beginning of that paragraph, "servicers have also noted that they believe," quite honestly makes me wonder whether this is news to Fitch.

This report raises the question of the authority given servicers under the RMBS documents, including the limitations of REMIC law and FASB 140 accounting rules. Curiously, it doesn't actually really answer those questions. It simply states:

For the purpose of this report, Fitch is taking the view that modifications within RMBS transactions are permitted and, as such, the focus is more on the processes and controls around the strategy than offering an opinion on the legality of the strategy itself. As stated, Fitch expects each servicer, with the counsel of their legal staff and accountants, to make an independent assessment and determination of the use and type of loss mitigation strategies allowed within their portfolio. However, based on projections from servicers, Fitch believes that over the next 12–18 months, modifications could be used on as many as 5%–10% of the loans, based on the original outstanding balance of the deal, and could be the only viable loss mitigation strategy for as much as 40%–50% of the loans in default or determined to be a reasonably foreseeable default scenario.

Uh, the original outstanding balance of all subprime securitizations in just 2006 was in the neighborhood of $450 billion. $45 billion in mulligans in the second year of the whole thing?

Oh well, at least this time nobody's pretending we have any real idea whether all these do-overs are going to work:

There is no adequate historical data on which to base projections of the redefault rate for loans that have been modified or the effect these will ultimately have on the losses within the RMBS pools. Therefore, it is very important that servicers accept and endorse the request for this information from the various parties. The industry is being asked to accept the belief that the servicers can and will adequately manage and affect procedures that will impact not only the lives of the homeowners but also the return on investments for many investors.

I can hear it now. We bondholders are being asked to just take the servicer's word for it? Whose word did you take for it when you bought this stuff?

To summarize: Fitch does not know how bad this could get. Fitch does not know if all of these servicers can afford it to get bad as it could get. Fitch does not know how legal all these loss-mit options are. Fitch does not know if these loss-mit options will work. Fitch knows that its servicers believe that there are no other good choices. Fitch is working on getting some better trustee reports for y'all. You will be kept posted, otherwise: just watch for the downgrades and step-down failures.

by Calculated Risk on 6/04/2007 03:45:00 PM

04 Jun 2007 12:46 PM (EDT)

Fitch Ratings-New York-04 June 2007: Increased use of loan modifications as a loss mitigation tool may cause larger numbers of poorly performing subprime loans to be reported as performing well. This could allow for early overcollateralization (OC) release in securitizations, according to Fitch Ratings, which has amended its rating criteria for U.S. subprime RMBS/HEL ABS to better reflect this trend in its rating opinions. The changes will be effective for transactions closing in August 2007.

As U.S. home price growth has slowed and begun to fall, mortgage delinquency rates, particularly subprime mortgage delinquencies, have risen. The concomitant rise in mortgage foreclosures has resulted in a focus by policy makers, regulators, community groups and mortgage/securitization industry participants on ways to assist homeowners in avoiding foreclosure. One approach that is gaining increasing favor is loan modification, which means changing the terms of the mortgage in order to make the payments more affordable to the borrower. Successful loan modifications can preserve homeownership and reduce loss to securitizations. However, when loan terms are changed, common servicing industry practice is to report borrowers payment performance under the new terms, so that the high risk of such loans is not apparent. This has implications for securitization structures that are addressed in Fitch's revised criteria.

Fitch's new rating criteria will reflect the risk of early OC release followed by high levels of borrower re-default, where such risk is deemed to be substantial. Analysis of various loss timing and cash flow scenarios will be incorporated into Fitch's rating opinions. Fitch's criteria will also consider any structural features within a securitization that may reduce the risk of OC release as a function of modification practices.

Fitch has long been of the opinion that loan modifications are an important part of a mortgage servicer's loss mitigation strategy for limiting loss on defaulted mortgages. Successful loan modification programs can benefit investors in RMBS through maximizing cash flow and reducing loss. Fitch has discussed the challenges facing servicers in its report 'U.S. RMBS Servicer Workshop' May 18, 2007. Today Fitch has also released a new report analyzing loan modifications and other loss mitigation tools ('U.S. RMBS Loss Mitigation Strategies').

While Fitch recognizes the value of loan modification programs, the extensive levels of modifications that some servicers are contemplating, and that others have already initiated, presents new challenges in analyzing the credit risk of securitizations. Varying practices with respect to capturing and reporting data on loan modifications can make it difficult to track the quantity and characteristics of modified loans. Moreover, the performance of mortgages post-modification may vary widely and the timing and amount of re-default and loss is uncertain.

Loan modifications and subsequent loan performance is also of concern when considering the effectiveness of trigger events designed to prevent OC step-down. These trigger events are based on performance tests which compare delinquency rates to available credit enhancement. In a trigger event, the securitization fails the performance test and enhancement is not released as it would be if the test was passed. While there has been much discussion of the effectiveness of the standard trigger language in use today, extensive use of modifications, coupled with the reporting of modified loans as contractually current, presents a new situation. It is quite conceivable that securitizations with high levels of mortgage defaults will not fail delinquency trigger tests, thus allowing OC to step down. Fitch believes that recognition of this risk requires a change in rating criteria for subprime RMBS/HEL ABS.

Fitch announces the following change to its criteria: When analyzing new securitizations, if a trigger event's performance test definition effectively counts modified loans as part of the '60+ day' delinquency calculation, Fitch will continue to assume for modeling purposes that trigger events will be in effect in its rating stress scenarios. Effective inclusion of modified loans in performance tests could be achieved through reporting mortgage delinquency status on an original contractual basis, or adding new terms to trigger definitions. For example, recent transactions from one issuer have featured the following amendment to the definition of 60+ day delinquency: 'each Mortgage Loan modified within 12 months of the related Distribution Date'. Fitch sees this amended definition as having two benefits: First, it addresses the risk described above by including modified loans in the trigger definition. Second, by limiting the inclusion to a 12-month period, transactions containing performing modified loans are not unduly penalized under the performance test.

When analyzing proposed securitizations that allow for extensive modification without reporting original contractual delinquency status, Fitch will consider the likelihood of OC stepping down, potentially followed by subsequent high defaults. In some instances Fitch's credit ratings may be lower on securitization classes which Fitch views as having heightened risk of substantial loss relative to post step-down credit enhancement. Analysis of various loss timing and cash flow scenarios will be incorporated into Fitch's rating opinions. Fitch's approach will be further elaborated in an update to the U.S. RMBS cash flow modeling criteria, currently described in the report 'U.S. RMBS Cash Flow Modeling Criteria: Updated' February 6, 2007. Fitch's updated criteria will be effective for deals closing in August 2007. The August effective date allows for sufficient time for Fitch to describe its revised methodology in detail and consider any market commentary.

Fitch's rating opinions on new securitizations will reflect the potential impact of the extensive use of loan modifications. However, Fitch recognizes that many existing securitizations may release OC despite high levels of mortgage default, if large numbers of modified loans are reported as current. This may in turn result in downgrades, depending on analysis of available credit enhancement and forecasted levels of re-default. However it must be stressed that more severe rating actions could result if modifications were not made. Outstanding transactions that allow for original contractual delinquency reporting may exhibit greater rating stability reflecting trigger events and higher subordination levels, particularly if data on the amount of cash flow being generated by modified loans is provided. Additionally, while changes to the documents of existing deals is difficult, servicers may find that they have some discretion under the documents as to when and if to report a modified borrower as current, thus achieving similar results as that for new deals outlined above. Fitch will be in on-going discussions with servicers to determine what reporting practices are being put in place alongside modification programs.

Emphasis Added.

by Calculated Risk on 6/04/2007 01:58:00 PM

From the Modesto Bee: Realty Red Flags (hat tip Brian)

“This year, we’re going to see prices drop in every market across the country for the first time since the Great Depression,” said Steven Smith, a property appraiser and consultant from San Bernardino.

Smith predicted that home values throughout the country will fall 25 percent to 50 percent below what they were at their peak, which was in 2005 or 2006, depending on the region.

This seems like an excessive price decline to me. I think prices might fall 20% in some bubble areas, in nominal terms, over several years. In real terms (adjusted for inflation), prices might fall 30% to 40% in some areas - but not "throughout the country".

by Calculated Risk on 6/04/2007 10:25:00 AM

Mathew Padilla at the OC Register reports delinquency numbers from LoanPerformance: Delinquencies keep rising for subprime and Alt-A loans

In March, subprime loan delinquencies rose to 14.83%. Alt-A, the catch-all category above subprime, increased to 3.05%.

Of course, remember these numbers do not include foreclosures. According to the MBA:

... our latest subprime numbers are 14.4% delinquent by at least one payment, plus another 4.5% in foreclosure, for a total of 18.9% either delinquent or in foreclosure. For just subprime ARMs that number is 21.1%...

And it is probably going to get much worse, from Bloomberg:

"The 2006 vintage is the weakest in terms of underwriting standards," [Sheila Bair, chairman of the Federal Deposit Insurance Corp.] said. "We are expecting 2008 and early 2009 to be somewhat nasty." Next year the delinquency rate on such loans may hit 30 percent, she said.

by Anonymous on 6/04/2007 09:38:00 AM

Yes, well, read the whole thing if you want the important information. I'm here to lose myself in those minor details that provide verisimilitude:

Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.

Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.

"Two forgotten cell phone bills and identity theft." Let us imagine the person ahead of us in line at the CVS busted for trying to pass a forged prescription for Oxycontin: "Well, I had a couple of hang nails a few months ago, plus I was beaten savagely by a gang of street thugs." It makes perfect sense that this person couldn't get a real doctor to help.

Now, you know I do have real sympathy for victims of identity theft. The very first thing I expect them to do is depend on the kindness of strangers.

The pitch to those who are essentially renting their credit history for pay is seductive: You don't need to worry about users of this service receiving duplicate copies of your credit cards, account numbers or any of your personal information. It's essentially free money, they are told.

Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his job working at a Farmers Insurance agency and uses the ICB income to tide him over until he starts his own insurance agency. . . .

Kinney, the retired Army officer in California, said those borrowing his good credit history don't get his personal information, full credit card number or credit card expiration dates. Any sensitive data is handled through ICB, and Kinney adds the users himself by calling his credit card company. ICB also destroys any duplicate cards that are issued to the credit renter, according to its contract.

Instead of being worried about risks he may be assuming, Kinney said borrowers are the ones vulnerable to scammers posing as do-gooders. Those seeking a credit hike give the cardholder their names and Social Security numbers, which, in the wrong hands, could lead to identity theft. Kinney said he also receives credit card offers in the mail for the credit borrowers on his accounts, opening up another possibility for fraud, but he throws them away.

"I know the whole thing sounds kind of odd and not very legitimate, but it is for now," Kinney said. "I don't know how long before someone will decide it's illegal. But I'm not counting on this for the long-term."

You cannot but admire Mr. Kinney's approach to advertising for his soon-to-be launched insurance agency. Don't ask me what kinds of policies Mr. Kinney intends to write; I limit myself to mortgage fraud.

You cannot also but admire Mr. Estruch, who helpfully provides the name of his mortgage lender to the reporter. I have made many representations and warranties over the years; I have never personally had one falsified in an AP story picked up by the New York Times, nor have I discovered this falsification while sitting in my bathrobe drinking coffee on a rainy Sunday morning at home. What, do you wonder, is American Home Mortgage going to do now? Hope whoever bought that loan doesn't read the papers?

There are people who tell me that I should lighten up on brokers and lenders, you know, because really anyone can get taken advantage of by unscrupulous borrowers. Am I the only one who wondered just how carefully concealed this sort of fraudulent behavior might have been at the time the loan was made, given an environment in which the happy participants, Mr. Estruch and Mr. Kinney, are so cheerfully willing to spill the beans to an AP reporter? Is there a plainer sight in which one might hide? Mortgage lenders, do you have that odd sensation that you are being laughed at behind your back? If so, you really ought to seek psychiatric assistance. No one is waiting until your back is turned.