by Calculated Risk on 7/16/2007 06:24:00 PM

Barry has the "very ominous charts".

Update: From Bloomberg: ACA Shares Fall 22 Percent on Subprime Debt Holdings (hat tip jim)

ACA Capital Holdings Inc. ... disclosed that it could lose money on contracts tied to $4.5 billion of subprime mortgage securities from 2006 and 2007.
...
ACA wrote contracts that represented AAA rated pieces of so-called collateralized debt obligations made up of derivative versions of subprime bonds. CDOs package securities such as mortgage bonds, then parcel them out to investors in different slices with different credit ratings. It was part of $15.3 billion total to CDOs of mortgage bonds. ACA also wrote contracts on $400 million in exposure to a CDO of CDO bonds, compared with $911 million of adjusted book value.
...
ACA was the eighth-largest manager of CDOs made up of asset-backed debt or related derivatives on Dec. 31, overseeing 12 vehicles that had issued $10.4 billion in securities, according to Standard & Poor's. Moody's Investors Service said July 11 that it may cut $5 billion of such securities; the firm and rival S&P last week downgraded billions of the underlying bonds.

I don't know if this is related.

by Calculated Risk on 7/16/2007 05:31:00 PM

Try it out: Cyberhomes.com

by Anonymous on 7/16/2007 01:08:00 PM

We were just talking about getting our stories straight, and what should appear (thanks, Brian!):

This year we’ve put up a valiant fight! One with integrity, dignity and never wavering determination, focused solely on how to succeed. We have reached out to everyone we know, and many that we don’t know, to tell our story, of how we have made it this far, of the expertise and skills that we have, of the quality of our organization, and of how we have refused to lose! We have received tremendous support and loyalty from our employees and business partners during this year’s extreme conditions. So many individuals and companies have believed in us and cheered us on as we’ve dodged the obstacles thrown in our path, obstacles that many others were unable to overcome. We have had extraordinary support from our ownership and Board of Directors. They have acted unselfishly, putting the company, its employees and creditors first and foremost. They are honorable people whom I highly respect.

Unfortunately the latest market was more than we were able to overcome. We have exhausted our resources and do not have the means to move forward. Therefore, it is with great sadness that I announce that we have ceased operations as of today, July 13th.

If that left you a little breathless, here's DJ Newswire's somewhat more restrained take:

Residential mortgage lender Alliance Bancorp has filed for Chapter 7 bankruptcy and will liquidate its assets. . . . Alliance Bancorp, formerly United Financial Mortgage Corp., specialized in lending to so-called Alt-A borrowers - mortgage borrowers with credit between those of prime and subprime borrowers.

I can't wait to find out what the "obstacles thrown in their path" were . . .

by Calculated Risk on 7/16/2007 12:12:00 PM

The FDIC is hosting an advisory committee meeting today: The Subprime Mortgage Situation - How Did We Get Here and What Can We Do?

If anyone sees any comments or quotes, please post them. Meanwhile a little Talking Heads:

by Anonymous on 7/16/2007 11:00:00 AM

You can't make stuff like this up. Well, OK, you can make stuff like this up, but you can't keep from snorting coffee through your nasal passages when you read it. From Securitization.net, "Subprime Downgrades Sideline ABS Issuance":

The asset securitization market usually does not stop issuing new deals for any reason, except perhaps the usual holiday breaks. After enduring several days of downgrades on subprime MBS by Moody's Investors Service, and warnings of more from Standard & Poor's, however, the ABS market largely decided to hold back from issuing new debt last week.

Except for our occasional visits to our second homes on Martha's Vinyard, we've never seen a good reason to stop issuing new deals. It took downgrades from the rating agencies to make us quit for a minute.

Initially stunned by the news, the ABS market drove the ABX indices to new lows and pushed spreads wider, according to market observers. Prices on the double-A tranche of ABX 2006-2 and 2007-1 fell three and four basis points, respectively, according to Credit Suisse. The triple-B prices had already dropped around two and three basis points over the past two weeks, respectively, and Wednesday's news only forced them to trade down further. The ABX 2007-1's triple-B-minus tranche breached the $50 point, when it traded at $49, said Credit Suisse.

Stunned, I tell you. We were totally blindsided here. We've never had to stop doing deals before.

"No one is surprised by it," one sell-side professional said. "People are very upset at the rating agencies, that they misjudged things as badly as they did."

OK, well, you see, "stunned" isn't the same thing as "surprised." See, us insiders knew a long time ago that this stuff was pretty squirrelly, but by God we weren't going to stop issuing more of it until the rating agencies told us what we already knew. It's not like we're going to do anything based on our own analysis.

Frequent MBS issuer C-BASS was planning to come to market with a $433 million transaction, but the latest news from the rating agencies appeared to have affected pricing on those bonds already. The triple-A rated tranches were getting price talk at 12 basis points over the one-month Libor for the bonds with two-year durations. Pricing was as wide as 34 basis points on the six-year triple-As. As for the deal's four-year triple-B tranches, pricing talk ranged from 300 basis points to 750 basis points.

"We're guessing that the mortgage guys are sitting on their hands," said one market source, noting that most deals that were expected to price last week would probably come from overseas.

I'm more inclined to think that there are a couple of "mortgage guys" who are sitting on some uncomfortable chairs in some upper-floor conference rooms across from some accounting guys who have that look on their sour little faces, myself, but by all means let them claim to be sitting on their hands if that's what they have to do to reassure their little account-holders.

How can you recognize a major market shift? Nobody can quite get their stories straight. Everybody was shocked by the rating agencies, but everybody is mad at them because everybody knew all along that this was coming. Everybody knows that the stuff hasn't even been downgraded enough, but everybody's shocked over the spreads on new deals of the same caliber. Clearly it's going to take a while before we figure out how to reconcile our wounded innocence with our seasoned vigilance. Stay tuned.

by Calculated Risk on 7/16/2007 09:59:00 AM

"Market conditions became increasingly challenging throughout the second quarter of 2007. The housing market continues to soften, and delinquencies and defaults continue to rise. Additionally, interest rates, price competition in the residential lending markets and secondary market volatility have all increased. However, Countrywide's residential funding volume in June was strong, driven primarily by seasonal purchase activity and higher application volumes in preceding months."
David Sambol, President and Chief Operating Officer, July 16, 2007.

by Anonymous on 7/16/2007 08:26:00 AM

I like Janet Tavakoli:

Hedge funds instead use mathematical models of their own to estimate and report the value of their CDO holdings to investors -- a practice known as "marking to model."

Recent troubles at hedge funds run by Bear Stearns, Braddock Financial Corp. and United Capital Markets have highlighted the problems inherent in that approach. Even so, fund managers are resisting market views on the value of subprime assets and continuing to "mark to model," claiming declines represent short-term volatility.

"'Mark to model' is a joke," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. "What you need to do now is vet the underlying collateral" in CDOs instead of just modeling, which wasn't done earlier, she said. "It's grubby, roll-up-your-sleeves kind of work."

Oh, now we find out that we should have skipped the install of Mathematica 6.0.1 and just handed some of those grubby loan files off to Euelna in the Collateral Review Department . . .

We seem to be on the verge of the revelation that pricing models and rating models and value-at-risk models and Excel spreadsheets and 10-key calculators only work when all of the relevant data inputs are collected and verified. Sit down, folks. If this keeps up, we will learn that those fancy automated underwriting systems that have been using the borrower's unverified assertions about income and the broker's bald-faced lies about the sales contract and the appraiser's idle musings about the market appetite for more granite countertops are producting unreliable estimates of default probability . . .

They shoot fund managers, don't they?

by Anonymous on 7/15/2007 12:37:00 PM

As some of you may remember, there was a fair amount of uproar late last year when the GSEs announced that the conforming loan limit--the maximum loan amount for mortgages purchased by the GSEs--would remain at $417,000. The limit remained unchanged even though the national average price calculated by the Federal Housing Finance Board, the number the GSEs are required by law to use, decreased by 0.16% (which would, applied directly, have resulted in a new conforming loan limit of $416,300).

The legal and regulatory issues surrounding the calculation of the conforming loan limit are so involved and confusing that even the more heroic UberNerds tend to give up in frustration. What frequently gets lost in arguments over interpretations of 12 U.S.C. 1717(b)(2) and methodological changes in FHFB's MIRS (go here for OFHEO's recap, if you dare) is the whole point of a conforming limit. Of course it's a safety and soundess concern, but it's also a question of mission or mandate for Fannie, Freddie, and FHA: these government-sponsored enterprises and agencies have always been mandated to provide liquidity to the low-to-moderate (moderate meaning "average") housing market, not its high end.

In any case, it has long been a source of amusement to industry-watchers to hear the endless whining of the mortgage lobby over the question of increasing conforming loan limits (which by statute increase the FHA limit accordingly). The same market participants who regularly have a cow over Fannie and Freddie's retained portfolios and capital adequacy do have a tendency to throw that "safety and soundness" religion out the window when it comes to the loan limits.

To whit, here's the joint response of MBA, NAHB, and NAR to OFHEO's (modest) proposal to adjust the regulatory guidance for conforming loan limits in such a way that would allow for potential decreases to the limit after two years of declining home prices:

Our three organizations represent major components of the housing and mortgage markets – builders, realtors and lenders. It is our concerted view that the Proposed Guidance would be detrimental to the national economy, home buyers, current home owners, the industries that serve homeownership, and to the success of the housing missions of the Enterprises, the Federal Housing Administration (FHA), and the Veterans Administration (VA). Given the importance of the CLL to the housing industry, changes such as those OFHEO proposes should be widely circulated for public comment through the Federal Register. Not only is the proposal bad public policy, it does not appear to be authorized under current law, which only permits increases in the loan limit.

The current statutes state that the conforming loan limit is adjusted annually by “adding to each such [previous] amount . . . a percentage thereof equal to the percentage increase during the twelve-month period ending with the previous October in the national average one-family house price in the monthly survey of all major lenders conducted by the Federal Housing Finance Board” (emphasis added).1 The Enterprises may not purchase loans above the conforming loan limit. The conforming loan limit also impacts limits for FHA and VA loans, as FHA and VA loan limits are tied to the CLL. In fact, a decrease in the CLL could have an adverse budget impact if the result is that borrower access to the FHA and VA loan programs is limited and the two agencies produce lower guarantee and insurance fee income.

As you are aware, the housing sector is currently undergoing a correction, and there is concern about the availability of funds for the refinancing of loans and for new loans. Reductions in the conforming loan limit could impair the ability of some borrowers to refinance out of subprime mortgages, which is of particular concern for families with problematic mortgages, as well as prevent some first-time home buyers from obtaining lower cost financing on conforming, FHA or VA loans.

It's hard to match the hilarity of the straight-faced claim that a 1.00% decrease in the FHA loan limit would have an "adverse budget impact" that we should worry about. (It is a fact that the FHA's mortgage insurance fund is currently a "negative subsidy," meaning that the excess of premiums over losses does show as a gain to the federal balance sheet. That doesn't exactly make it a source of revenue.)

But I'm more interested in how a decrease in the conforming limit "could impair the ability of some borrowers to refinance out of subprime mortgages." How many, do you suppose, is "some"? Strangely enough, our friends at MBA, NAHB and NAR don't quantify that.

Courtesy of S&P:

According to S&P, the average subprime loan balance in Q107 was $190,832. These balance figures come from rated RMBS subprime securitizations, which by S&P's estimate include about 10% second liens (most second liens are securitized in the ABS category, not the RMBS category). So that average will be lower than the actual average indebtedness of subprime borrowers in recent vintages. Credit Suisse estimates the average loan size for subprime purchase-money mortgages at $181,300 in 2004, $197,900 in 2005, and $199,800 in 2006.

You can do a lot of upward adjustments to those numbers to account for subordinate financing and still wonder just how many subprime borrowers' refinance problems have anything to do with loan amount (rather than LTV and CLTV, for instance). Of course the whole exercise is a bit pointless if you simply stop to ask why conforming loan limit calculations should have anything to do with bailing out near-jumbo subprime loans in the first place. Nonetheless, I'd like to hear the MBA cough up some data to back up their claim that some non-trivial number of subprime borrowers could lose a refinance opportunity in the absence of an increase to the conforming limits. If you're going to ask the GSEs and FHA to take on the increased marginal risk of higher-balance loans of worse quality, you might want to actually quantify the risk of their failure to do so.

by Anonymous on 7/14/2007 12:02:00 PM

Dedicated to all the paranoiacs of the web.

(Yes, I'd really like to dedicate one to all the sockpuppets of the web using a different song by the same artist, but this blog has a G rating to maintain.)

Enjoy, my crazies.

by Anonymous on 7/14/2007 09:00:00 AM

I don't know if you all have been following the story of Whole Foods CEO John Mackey, who has apparently been frittering away his free time posting comments on Yahoo! Finance message boards under the handle "rahodeb." The burden of wisdom of "rahodeb" appears to have been to talk up Whole Foods and talk down Wild Oats Markets, a competitor and recent acquisition target. "Rahodeb" is, apparently, an anagram of Deborah, Mackey's wife's first name. There's some stunning creativity.

Herb Greenberg has been a little disappointed in his blog commenters, who haven't shown enough moral outrage over this, so do let me officially register moral outrage. Mackey's behavior shows what the great Molly Ivins once called "the ethical sensitivity of a walnut," and I for one hope the SEC cleans his clock but good. The fact that the SEC occasionally displays the regulatory sensitivity of a peanut cluster is neither here nor there. A girl can dream.

That said, I have to admit that my moral outrage over Mackey's dishonesty is rather tempered by my inability to take seriously the forum in which this behavior was displayed. I have, on a few occasions, descended into the cesspool of Yahoo! Finance message boards, in a more or less ethnomethodological mood, and my unscientific findings--I couldn't possibly read enough of that semi-literate flaming nonsense to achieve anything like respectable sampling--echo Obi Wan Kenobe's assessment of Mos Eisley: you will never find a more wretched hive of scum and villainy. While of course Mackey has no business playing stockpuppet, on the other hand I can't think of a better place for him to do it. Anyone who trades with real money based on anything gleaned from these boards probably deserves to be fleeced by an insider.

Those of you who have been hanging around this site for a while may remember that I got a bit severe in the comments a few months ago with our resident short-sellers. Anyone who trades short is of course welcome to read and participate in this blog, and any reader and participant is welcome to short, if that's what you want to do with your money. However--and this will probably become relevant again as Q2 earnings releases are upon us again--no one is welcome to try to turn this blog into a short forum.

More particularly, no one is invited to take anything that CR or I might say about homebuilders or mortgage originators or any other publically-traded party as investment advice. We can't stop you from doing that; we can only warn you that neither of us invests our own money based on the ramblings of anonymous internet posters, and we therefore wouldn't recommend the strategy to anyone else. If you are not treating what you read on this blog with the same critical thinking skills and fact-checking habits that you would use for any other part of the internet (not to mention the daily papers), then you aren't calculating your risk.

My own take on the Yahoo! boards is that they're generally a recreational form. So is this blog. The difference, by and large, involves what you find amusing. I'm personally enough of a libertarian to be unperturbed by other people's tastes in recreation, as long as all parties are of the age of consent and the decibel level stays under control, particularly on those days when it's cool enough for us to have our windows open (hint, Tanta's neighbors). So people who wish to spend their time on message boards in which flames, insults, and merely asinine comments way outnumber anything that could be called information or intelligent analysis are free to do that, as far as I'm concerned.

Readers of this blog tend to want something else, and we try to maintain an environment in which they'll get something else. There are any number of ways one can do that, and we are perfectly willing to use the delete key in the comment section when we need to. Mostly, though, we just keep posting on the things we find interesting--many of which are guaranteed to bore the pants off the Yahoo! crowd--and relying on our regular commenters to help us set standards of discourse that discourage long threads composed entirely of "this stock sux."

We have, however, occasionally had someone pop up in the comments who claims to be an insider or a high-roller investor who, out of perfectly altruistic motives, wants to tell us all about some great long or short opportunity. We are not, on the whole, kind to such people, although I like to think we are unkind with more grace, wit, and literacy than you'll find in other parts of the net. Broad-minded as we are, we believe that Calculated Risk is not a public accommodation: sockpuppets and stockpuppets and astroturfers (and garden-variety flamers) have plenty of places to play on this big world wide web--Yahoo! comes to mind as an example--and so we are not under any first amendment obligation to allow them to play here.

We are, as a community, so sensitive to this matter that we have, I think, gone rather overboard on one or two occasions in tossing around accusations of "shilling" or "talking up one's book" to posters who are simply making their case with too much enthusiasm and too little self-consciousness. That's unfortunate; there is always the danger of confusing skeptical-minded caution with mere contempt for difference of opinion. I was, personally, rather disgusted a few months ago by some of the comments about Freddie Mac's economist Frank Nothaft, regarding whose projections for home sales CR had posted some critical comments. Like CR, I think Nothaft's projections were too optimistic. Like CR, I also think rational, informed, highly-skilled people can be wrong--it's happened to me once or twice, you know--and I was highly put off by comments branding the man a "shill."

I suppose shilling, like beauty, is in the eye of the beholder, but I am willing to flat-out assert that not everybody with an institutional affiliation is a shill, and that overuse of that epithet doesn't get us anywhere. Real shills should be exposed whenever one can do so--we've devoted a fair amount of time to laying into David Lereah, formerly of NAR--when they appear to be getting enough attention or taken seriously enough by the mainstream press or financial community that exposure of them matters. But, for this blog at least, "exposure" means going after the details and facts presented with analytical rigor; you need to do your homework before you earn the right to brand someone as dishonest.

Mackey, of course, deserves heaps of contempt not just for being dishonest, but for contributing to the cynicism about the internet as a form of information sharing within the financial community. Had he posted to message boards--or even something as respectable as this blog--under his own name, declaring clearly his interest in the matter and staying on the right side of Reg FD, among other things, he would undoubtedly have been welcomed into the community as a participant (subject to the same critical standards as anyone else is). Having shown himself to be just another shill trying to manipulate small-time retail investors unwary enough to rely on Yahoo! messages for investment advice, of course, he simply provides more reason for us to think that corporate America still considers the internet to be just one more space that can be polluted with ugly marketing strategems and milked for enough chatter to boost value of the executives' stock options.

I still think the best possible response to that is to fail to fall into the trap, or to make it easier for the likes of Mackey (or his smaller-time fellow puppets) to manipulate us. That requires that we keep our bullshit detectors functioning at all times, and also that we refuse to become so cynical that we trust no one. My own strategy is to focus not on identities--we're mostly all anonymous here--but on the words on the screen. Anonymity can, of course, open the door to Mackey-style dishonesty, but it can also force us to stop giving an idea or an analysis too much or too little credit based on the identity of the writer, and force us to engage directly with the ideas and facts themselves. Certainly one always wants to ask of anyone--me, CR, our commenters--why we're taking the time and energy to do this. What do we gain?

In our particular case, what we gain is a kind of intellectual pleasure (and a few generous tips to keep us in coffee and hiking boots, as the case may be). Speaking for myself, there is no intellectual pleasure in arriving at the conclusion that everyone else in the world is either a shill or an idiot, and then repeating that bit of wisdom endlessly. Frankly, when one does encounter shills and idiots, it's rather more a chore than a lark to have to drag them into the light of day, although that's a chore we're willing to perform when it seems important to do so. It's a chore because you need some good hard facts behind you before you make such accusations, if you're going to be something other than a Yahoo! board.

Both CR and I write anonymously, but we do it in a certain way: we write as if we were writing under our own names. In other words, we think of our online identities as having a reputation, as much as our personal identities do, and all reputations have to be maintained by a consistency of approach. It takes time and painstaking effort to build an online reputation, since of course the normal cues people rely on--your resume, as it were--are absent. In short, insofar as people decide CR and I know what we're talking about, it's because people analyze what we say, compare it to other sources, subject it to fact-checking, and come to a more or less rational assessment of it. It's absolutely worthless to try to hide the fact that both of us have a number of years of experience in corporations, but the point for our readers remains what we're doing with that experience right now--what we have to say, today, on the blog--not whether some past title at some company or another gives us some kind of authority to which anyone should appeal.

Mackey is simply a predator: someone who decided that the anonymity of the internet provided a great cover under which he could disseminate information that would put money in his pocket. Undoubtedly everyone on the Yahoo! boards is trying to make a buck--more or less successfully, of course. But I also don't doubt that most of the posters on Yahoo! are, in fact, the amateurs they sound like. Many of our commenters are the professionals they sound like, which is one reason why we are so vigilant in our comments about problems of insider dissemination or degeneration of discussions into stock tips. (Stock tips seem to be the problem; I can't get anyone interested enough in coupon-clipping to have problems with bond tips.) Of course, we have a few yahoos too.

All we can do is remain vigilant, and remind each other that online communities can be very fragile: too little skepticism and the trolls and flamers and true shills take over, too much and the thing becomes another Church of the Paranoid, where every post and every comment is just another bit of preaching to that section of the choir that spends its days being consumed by its own need to believe the worst about the world and everyone in it.

All that was probably more than a thousand words--I do natter on--so here, for those of you who made it all the way to the end, is something worth more, courtesy of a dear commenter of ours who will be given credit for it if he so requests. I think it sums up our approach to blogging rather well: