by Anonymous on 9/16/2007 10:41:00 AM

A new paper by Federal Reserve Board analysts I highlighted the other day contains some discussion of the issues of loan pricing and fairness to consumers. I encourage anyone who is interested in this issue to read the entire paper. However, I promised to write something UberNerdy about loan pricing, and this bit from the Fed paper provides me with a place to start:

As price flexibility has emerged in the mortgage market, so have concerns about the fairness of pricing outcomes. Such concerns generally fall into four broad categories. First are concerns about possible discrimination based on the race or ethnicity of the borrower. Such concerns are heightened because loan prices are not always determined strictly on the basis of credit risk or cost factors but can involve elements of discretion, in which loan officers or loan brokers may seek prices that differ from those on rate sheets or other techniques used by lenders to establish baseline prices.

Second are concerns about whether borrowers in the higher-priced segment of the loan market are sufficiently informed and whether they are willing or able to shop effectively for the loan terms most appropriate to their circumstances. For example, it may be difficult for borrowers to determine where they fit along the credit-risk spectrum.

For the moment I am going to largely ignore the first issue, of discrimination based on race or ethnicity. This is not because I don’t think it’s important; I do. But I don’t think we can really get there, in terms of understanding how pricing of a loan can be manipulated at the primary market level (in discriminatory or just equal-opportunity predatory ways) without getting a grip on how it works. What I will propose is that, indeed, it is very “difficult for borrowers to determine where they fit along the credit-risk spectrum.” Not only do borrowers, on the whole, lack the ability to size up their own risk, they don’t know how lenders price that risk. As long as information about “the market price” for certain risk factors is non-public, the public will not know whether the price it gets is the best on offer or not.

It is supposed to be the role of a mortgage broker to locate the best price for a consumer, since the idea is that the broker receives rate sheets from many wholesale lenders, and can choose the best-priced one on any given day or for any given kind of loan. This presumes that the broker is mostly motivated to offer a “competitive” rate/price to the borrower, not to maximize its own compensation by offering a worse-than-market rate/price to the consumer in exchange for higher fees from the wholesaler. The standard riposte of the brokers is that this kind of gouging can’t really happen, because the customers will “shop around” and know whether or not they’re getting the best deal. Or, at least, they should shop around, and if they don’t, it’s their own fault.

As I have argued before, this creates an odd conception of the broker’s role: the broker with access to all those wholesalers is supposed to be “shopping around” for you. If you go to another broker to get a “comparison” quote, you’re going to someone else who is “shopping” the same universe of wholesalers your original broker was, as a rule. So, in practical terms, what you would be “shopping” for here is differences in broker “markup” practices, not “best market rate.” Why you would pay a broker to “shop” for you and then do your own “shopping” is one of those things that beats me.

That’s my whole argument about “fiduciary” responsibilities in a nutshell: if the broker isn’t obligated to give you the best rate out there, what’s the point of using a broker? If you’re going to do your own shopping, why not shop a couple of different retail loan officers? Your loan is going to end up with the wholesaler anyway; you might as well skip dealing with someone who may not be around if problems ensue, or may not have regulators breathing down its neck about origination practices as a depository lender will (relatively speaking).

But in reality the whole “shop around” business is nearly meaningless when we look at this “risk based pricing” thing. You might know, from reading blogs or something, that, say, the Freddie Mac conforming fixed rate national average loan last week involved a rate of around 6.375% and 1.00% in points. Do you have any idea if you qualify for that? Are you “average”? Is the kind of loan you want “average”? If you were quoted a higher rate than this, would that mean that you are riskier than “average”? Says who?

It’s not easy to find lots of wholesale rate sheets on the web to do comparisons, because most wholesalers put them behind registration walls to keep people like us out. There are, however, a few exceptions, and I found this one. Please understand that I am not “picking on” this lender because I have any particular beef with Chevy Chase, although I will say this “Cashflow Monthly ARM” you encounter on the first page of the rate sheet is perfectly nauseating. Other lenders have equally or probably even worse products, of course, but CCB is dumb enough to make its rate sheet publically available.

Whilst we are on this subject, notice the verbiage at the bottom of the page: “These rates are solely for the use of mortgage brokers, correspondent lenders, and other arrangers of credit and are not to be distributed to potential loan applicants.” All rate sheets have words to that effect on them. You are not given a copy of a rate sheet like this, if you are a loan applicant, and invited to price your own loan. The better reason for that is that you need a “professional” to assist you in this complex process (i.e., we acknowledge you do not understand “where you fit along the credit risk spectrum”). The less better reason is that if you can’t see the rate sheet, you won’t know if you got a higher rate than the best one you qualified for in order to increase the broker’s compensation. In any case, if CCB doesn’t want to see some blogger go to town with its wholesale rate sheet, CCB can invest in a better (more protected) web portal.

I am not, in fact, going to get anywhere near that “Cashflow Monthly ARM” today. We’re just going to look at the pricing for a plain old vanilla conforming fixed rate. If that makes your eyes cross, then do think about how lost in the weeds people are over these toxic ARMs. If you get the hang of the fixed rate pricing, you can play around with how to determine the price to the customer on the goofy ARM. So we’re going to look at page 5 of the rate sheet (page 6 of the "All Other Property States" pdf), which you might want to print if you’re following along at home, although you will need a magnifying glass to read it. Please note that if you’re following the link, the discussion below refers to the “all other states” rate sheet dated 9/14/2007 at 10:00 a.m. If you are now seeing different numbers, you’re looking at an updated rate sheet.

The first thing you see is a rate/price matrix. Eventually you will see that CCB doesn’t use the word “price.” It calls this “premium.” If you know anything about bond pricing, this will drive you crazy right off the bat. If you don’t know anything about bond pricing, it’ll just keep you very confused. “Everybody” knows (uh huh) about this thing called “discount points,” which are a fee, paid at closing, expressed as a percentage of the loan amount. You pay discount points in order to get a lower interest rate (from the lender’s perspective, the points bring the yield on the loan back to up to market).

“Premium points” would be, logically, money the lender pays you to take a higher rate. Now, lenders don’t hand out premium points in cash to anyone. If you the consumer get “paid” a premium, what you are getting is a credit on the final settlement statement against your closing costs (such as your credit report and appraisal fees, title fees, etc.). The “no cost” loan works on premium pricing; “no cost” just means “no cash outlay,” because the costs are there but paid for with premium. However, you do not always get that premium: it can be paid to the broker, not to you. We call this “back-end points” or “yield spread premium” (YSP).

So, anyway, CCB calls everything “premium” instead of “price," which in itself tells you something about the mindset here. I’m going to keep talking “price,” because I have a point to make. Another thing you bond-people will notice immediately is that the prices on this rate sheet are expressed in a “retail” format, not a dollar price (or “buy price”) format. This varies in the industry. Most correspondent rate sheets (remember, that’s a lender buying a closed loan from another lender) use dollar prices, and some wholesale (broker) rate sheets do. (Dollar prices are things like “par” or 100.00, 101.00, or 99.00, which numbers mean “percent of face value” of the bond or mortgage. The equivalent “retail” or consumer price would be 0.00, (1.00), or 1.00, respectively. Subtract the retail price from 100 to get the dollar price, and remember to change the sign on the adjustments. If that last sentence confused you, ignore it.)

That means that CCB’s rate sheet expresses a premium price as a negative number and a discount price as a positive number. You may also notice that CCB quotes 15-day locks in rounded ticks (1/32 increments) and 45-60 day locks in even eighths. This means that at any given rate, the borrower pays around 0.187 to go from 15 to 45 days, and .125 to go from 45 to 60 days.

Most of the “risk based pricing adjustments” on this rate sheet are also quoted in even eighths, although you’ll notice that the LMPI and Expanded Approval (EA) adjustments are not necessarily expressed in eighths. I will observe that: eighth increments are “traditional” in primary market pricing, and when you see pricing in other increments, you are likely to be seeing pricing that was derived from a much more exact model. The LPMI adjustments are based on the actual cost to the lender of mortgage insurance policies; the EA adjustments are based on the guarantee fee or loan-level pricing adjustments Fannie Mae comes up with in its Desktop Underwriter AUS. The rest of this stuff, my consumer friends, is ballpark. I know; I’ve been in the meetings. For years. We’ve been charging a quarter of a percent for escrow waivers since before Windows was copyrighted. If you tell me that number comes from some fancy cutting-edge servicing valuation model that looks at exact current float costs and some razor-sharp analysis of marginal credit risk differences, I will laugh in your adorable nerdly little face. I’m sure we had some data when we first made that one up, but we used a sextant, not LORAN and certainly not GPS.

In order to see how this works, let us imagine that Tanta wants a loan: a $140,000 cash-out refi. Tanta’s LTV is 90%, the property is her principal residence, a 1-unit home, and she is providing full documentation of income. However, since she has no idea where her tax returns are hiding, she needs a 45-day lock. Her FICO is 655. Because her brother-in-law’s boss’s Avon Lady’s financial advisor said it had “tax advantages,” she asks for an interest-only loan with “no MI” (that is, LPMI). On the other hand, Tanta read on some website that you should never pay points, so she wants the “no point” rate. You may reflect on how far Tanta and her loan request are or are not “average.”

You can see right now that you have to supply a lot of information to a broker or loan officer these days to get a simple rate quote. Actually, you can’t even get a real rate quote without someone running a credit report on you, because you do not know your own FICO (and even if you think you do, your lender will get that information directly from the credit bureaus anyway). You are already handing over your Social Security Number and incurring cost to someone who will want to recoup it by making a loan, even if all you thought you were doing was “comparison shopping.” And we’re just guessing on LTV at this point; that value isn’t conclusive until some sort of appraisal or AVM determines the value part. But you’ll be in this process fairly deep by the time that happens. Remember that this is a refi request: do you know, really, what your house is worth today? Does Tanta?

So how do we go about quoting a rate/price here? Well, what your broker is likely to do is first add up all the price adjustments you would be subject to. Tanta’s loan gets the following (COR = cash out refi):

Loan amount: 0.125
FICO: 0.750
COR: 0.750

Total: 1.625

Since Tanta doesn’t want to pay points, we must find a 45-day rate that shows premium of at least (1.625). Let’s take that 7.375 rate: it pays exactly (1.625) in premium. So Tanta’s base rate is 7.375: we add 1.625 to (1.625) to get zero points. However, Tanta has some rate adjustments in store:

Interest Only: 0.25
LPMI LTV: 0.30
LPMI FICO: 0.10
LPMI COR: 0.10

Total: 0.75

Therefore, Tanta gets a rate of 8.125% (base 7.375 plus 0.75 adjustments) at zero points. Now, the trouble here is that the broker still has to make some money for going to all the trouble of taking Tanta’s loan application, so Tanta is highly likely to pay one or more “origination points.” Of the many things that makes Tanta a crazy person, indiscriminate use of the term “points” is one of them. Traditionally, the “origination fee” on a loan is the lender’s overhead, which includes commission to the loan officer or profit to the broker. Because it was traditionally expressed as a percentage of the loan amount, it is referred to as a “point,” but it is very important not to confuse it with a discount point: it does not “buy down” the interest rate.

Brokers (or lenders) don’t have to charge origination points; you can and people do just throw in a bunch of flat fees for this and that which end up being profit to someone. I bring this up in part to highlight a real problem in “predatory pricing” land, which is the concept of the “bona fide discount point.” Things have gotten so bad that we actually have to use that term, because you see loans where a borrower got charged one origination point and one “discount” point (they show up separately on the disclosures and settlement statement), but the rate didn’t get discounted appropriately. A whole lot of brokers seem to think that you can charge “discount points” without reducing a premium rate. A whole lot of consumers can never know whether this is happening or not, since, of course, the consumer doesn’t see this rate sheet.

You will notice that, in our example, we picked 7.375 as the “base rate” because we are an honest broker who will get compensation for this loan on the “front end,” by charging some kind of origination fee to Tanta. However, we could have chosen 7.50 as our base rate, which paid (1.750) in premium. If we had done that, after our price adjustments, there would be 0.125% of the loan amount to end up in someone’s pocket. If the broker applies it as a closing credit, Tanta’s closing costs will be reduced by that amount (she would, say, pay a 0.875 origination fee instead of a 1.00 fee). If the broker doesn’t give it to Tanta, it becomes YSP or compensation to the broker. If Tanta doesn’t know that 0.125 is on the table someplace, Tanta doesn’t know whether she should be paying 0.875 or 1.00 in origination fee (or the equivalent in flat fees). She also probably doesn’t know that it doesn’t have to be on the table, because she could have gotten that 7.375 base rate.

Does Tanta have any idea whether that 0.75 add-on for LPMI compares favorably to paying MI herself? Not unless somebody runs some “scenarios” and gives her the figures, carefully explaining the advantages and drawbacks of LPMI. Does she know whether CCB’s add-ons for LPMI are going to be the same at any other lender or not?

Does she understand that the biggest impacts on the price she was offered were her FICO and the fact that she’s taking cash out at a high LTV for cash-outs? If the amount of cash she’s taking is rather modest, does she know that it might not be worth it, considering that she might be able to save up that modest amount of cash in a fairly short time by doing a rate/term refi at a lower rate and therefore lower payment? On the other hand, does she realize that if she reduced her loan amount significantly, her loan amount adjustment would increase?

Does she know she’d get a better rate/price with 5 more FICO points? Is there a way for her to manipulate her FICO in the short term to squeeze 5 more points in? Is there a “credit counseling” company who would be willing to extract some fee from her for assistance in this matter? Will that fee be worth the rate/price break on a 660+ FICO loan?

If this whole rate quote blows up when the appraisal comes back, showing that unfortunately our LTV is over 90%, what will happen? Will the broker go back to Tanta and tell her she has to borrow less, which reduces any of the broker’s compensation that takes the form of a percentage of loan amount, or will the broker lean on the appraiser until a “better” number comes back (or fool around with the inputs on an AVM until it complies)? In the latter case, will Tanta even know that that is going on?

An important thing to bear in mind is that we just looked at one rate sheet by one wholesaler. For some if not most of you, this will be the only exposure to this sort of thing you’ve ever had. If you are now thinking something along the lines of, “OK, so 75 bps is a normal market price adjustment for a FICO in the 620-659 range,” you are making a logical error. It would be a profound logical error if you then assumed that a different wholesaler’s rate sheet with a higher or lower FICO adjustment were “overcharging” or “undercharging.”

The fact is, it depends on how you calculate that base price up in the rate/lock days matrix. A competitor of CCB’s could easily calculate a base price that is better, relative to CCB’s, by 25 bps. That competitor’s FICO adjustments could, then, be worsened by 25 bps, so the FICO adjustment for 620-659 might be 100 bps, not 75 bps, although the end price to the consumer is the same. Even those things that are fairly consistent throughout the industry—like the classic 25 bps adjustment for escrow waivers—can confuse the unwary: some lenders calculate the base price assuming that all loans have escrows, and then worsen the price by 25 bps if escrows are waived. Some lenders calculate the base price assuming all escrows are waived, and improve it by 25 bps if escrows are established. You might see the same value but different signs on different rate sheets.

A casual comparison of price adjustments across even a large number of wholesaler rate sheets will not tell you what the “going market price” of a given risk factor is; you have to analyze the base prices together with the adjustments to get that. “You” in this case are a broker or a loan officer; “you” are unlikely to be a consumer.

You must also remember that risk adjustments are tailored to the guidelines of the loan program being priced. Why is there no adjustment for cash-outs over 90%? This loan program does not allow an LTV that high, so it does not price one. If you wandered over to an Alt-A or subprime rate sheet, you would see additional risk adjustments because crazier things are allowed; you might also find very different values in those adjustments, because the “base price” is set very differently.

I’m guessing by now that you all have spotted the trouble with the idea that risk based pricing is “individualized”: it is, but what an individual loan gets are adjustments based on average performance of loans of that type. How reliable those calculations are will be a matter, among other things, of how a pricing model considers variables singly or in conjunction. In other words, these adjustments you see may be “net of” a lot of factors that aren’t obvious to consumers.

Let me observe that I purposely picked an example loan with a lot of risk-based adjustments on it, so you could see how the process works. But if you hypothesize a loan with fewer adjustments, you can see that a broker could end up with a lot more than 0.125 in YSP off of this CCB rate sheet (and there are, or at least were until recently, wholesale rate sheets out there paying a lot more premium—quoting much higher rates—than CCB’s. We are looking at a “post-turmoil” rate sheet.). It may seem counterintuitive to you, but quite often it is the borrowers with the best credit history and the most conservative loan terms who are most at risk for getting a high interest rate—as long as they stay ignorant about what “YSP” is and why it is showing up as a charge on their settlement statement.

It is perfectly true that a similar mechanism works in retail loan origination; in that context this additional premium is generally referred to as “overage” rather than “yield spread,” and it can, depending on the lender’s practices, be additional profit to the lender or additional commission to the loan officer or (frequently) a split. However, it is even less visible in a retail environment, since "overage" isn't disclosed on the settlement statement the way YSP is. On the other hand, depository retail lenders (so far) face a great deal more regulatory pressure to keep "overages" under control than brokers do.

But to get back to the question raised by the Fed analysts, does every borrower with good credit and conservative loan terms think of him or herself that way? Does the rest of the world, or a vocal subset of it, think that way? How widespread is the belief that minority and low-income people are almost always “subprime” borrowers? If you can make a 110-pound adult believe she’s “fat,” or a college student who gets a C believe he’s “stupid,” can you convince someone who makes $30,000 a year fixing cars and happens to have a Hispanic surname that a 655 FICO makes you “subprime”?

I think you can. If I tried to link to every media article that defines “subprime” as “loans to low-income people,” I would blow the server. A loan to a low-income person that the person cannot, patently, afford is certainly subprime. That is not the same thing as saying that all low-income people are “subprime credits,” but how often do you hear that distinction being made?

How often are prime-credit borrowers given subprime loans? Good question, and I am not making or endorsing a particular claim about an empirical matter for which I don’t have satisfactory data (see the Fed's analysis for the difficulties in sorting that out). I am pointing out that we have the necessary if not always the sufficient conditions for predation when we have “risk based pricing” that is opaque to consumers, and consumers who are not educated about what constitutes “risk.” We are not exactly making it hard for discrimination or predation to occur here.

We also have an industry which hasn’t done a particularly fine job lately proving that it really knows how to price risk anyway. Do price adjustments (of any amount) for FICOs “make sense”? Are they enough? Too much? Beside the point? Are you sufficiently convinced of the predictive power of a FICO score to want to justify pricing a loan on that basis? Particularly when an entire sub-industry of various forms of more or less “respectable” FICO manipulation has grown up around this practice? In the midst of all of that, are you confident that putting the onus on consumers to “shop around” still makes the most sense as a “solution” to the problem of pricing distortions? I’m not.

by Calculated Risk on 9/16/2007 01:14:00 AM

From the LA Times: Buyer be where?

It was supposed to be a blowout sale for home builder Standard Pacific Corp.

For days, the Irvine company has been touting its "Mission: Possible" extravaganza in 49 communities throughout Southern California, with bonuses for buyers totaling as much as $20 million. Standard Pacific is aiming to sell 200 homes by offering mortgage loans with rates of less than 6% and other perks, including a free 42-inch plasma-screen television with every home purchase.

But in Victorville on Friday, the blowout looked more like a washout. Only a trickle of potential buyers showed up on the first day of the 10-day event.

It will be interesting to see if the Hovnanian 3-day sale is more successful. According to Bloomberg, Hovnanian "hopes to sell 1,000 homes this weekend" by offering incentives of up to $100,000.

by Calculated Risk on 9/15/2007 09:14:00 PM

From the Telegraph: Angry savers force Northern Rock to be sold (hat tip FFDIC)

Northern Rock, the crisis-hit bank under siege from thousands of its customers, was preparing itself last night for a sell-off, The Sunday Telegraph can reveal.

One plan being worked on by City bankers was to divide the company's £100 billion mortgage portfolio between the other major banks, in what would amount to a private-sector rescue of the lender.

And The Times: Bankers fear £12bn run on Rock (hat tip Barley)

NORTHERN ROCK, the mortgage bank rescued by the Bank of England last week, could see as much as £12 billion - nearly half of its deposits - withdrawn by worried savers, experts say.
...
Senior executives at Northern Rock spent yesterday at its New-castle head office monitoring events, but the lender is seen to have little future as an independent entity. It held talks about a possible takeover by Lloyds TSB before the crisis and is expected to be sold off cheaply to a rival.

The Guardian reports: Fears grow for British economy as panic over Northern Rock spreads

US Treasury Secretary Hank Paulson flies in to London tomorrow to discuss the worsening global credit crisis with Chancellor Alistair Darling, as fears intensify that the lending squeeze could be the last straw for Britain's buy-now-pay-later economy.

by Calculated Risk on 9/15/2007 04:39:00 PM

From the Telegraph: Customers outside a Northern Rock branch in Kingston Upon Thames.

From the Telegraph: Police help to disperse Northern Rock queues (hat tip DannyHSDad)

Northern Rock has apologised to customers who spent a second day queuing to withdraw money after the company asked the Bank of England for emergency funding.

A spokesman has asked customers to remain calm and repeated assurances that money is available.

The bank's website had crashed but is currently running with a message asking users to be patient and claiming that transactions will be dealt with.

Long lines formed at 72 branches across the country even before counters opened this morning.

Here is a Bloomberg article: Northern Rock Experiences Second Day of Withdrawals (hat tip energyecon)

A key question is: Does the UK have something similar to the U.S. FDIC insurance?

I've found this: the Financial Services Compensation Scheme

1. I have my money in a joint account in a High Street bank. How would FSCS pay compensation if the bank failed?

The compensation limit of £31,700 applies to each depositor for the total of their deposits with an organisation, regardless of how many accounts they hold or whether they are a single or joint account holder. In the case of a joint account FSCS will assume that the money in that account is split equally between account holders, unless evidence shows otherwise.

This means that each account holder in a joint account would be eligible for compensation up to the maximum limit.

by Anonymous on 9/15/2007 12:05:00 PM

Because I got up this morning and the first thing I fished out of my inbox involved a review of Easy Al Greenspan's new book, that's why.

If you can think of a better response to that, fire away in the comments. I'm just going to dance.

by Calculated Risk on 9/14/2007 08:35:00 PM

From the FWDailyNews: Midwest commercial real estate index tanks (hat tip vader)

The Midwest led the biggest-ever drop in the national quarterly commercial real-estate index compiled by the Society of Industrial and Office Realtors.

The national index dropped nearly 4.5 points, to 113.7, for the summer of 2007. That is the weakest score since SIOR began compiling the index nearly two years ago.
...
Nationally, the weakness was broad-based, with all 10 components measured in the index down from the spring. The industrial market was the hardest hit, scoring 112.3, down about 7 points. The office market dipped less than 1 point, scoring 114.9.

This article is referring to the August survey. The SIOR puts out a CRE report every quarter (the Q3 report isn't on their website yet), but here is the Q2 report. SIOR is the Society of Industrial and Office Realtors®.

This index might be worth watching.

by Calculated Risk on 9/14/2007 07:27:00 PM

From the Dow Jones: Morgan Stanley Doesn't Like Revised Reddy Ice Deal (hat tip idoc)

Reddy Ice Holdings Inc.'s (FRZ) path to completing its $1.1 billion buyout by GSO Capital Partners LP looks rocky, after the company revealed in a filing that Morgan Stanley, the bank that has agreed to provide financing for the deal, disagrees with amended terms of its merger agreement.

This deal is small compared to many of the other deals in the pipeline, but I think it shows the investment banks are looking for any reason to exit from these LBO deals. I'm not sure Morgan Stanley is objecting to the amended terms - the amendments do not appear detrimental to Morgan Stanley - instead they appear to be arguing that the deal is off simply because they didn't consent to the amended terms. Here is the Reddy Ice SEC Schedule 14A:

Following the execution of the amendment to the merger agreement, GSO informed Morgan Stanley that the amendment had been executed. Morgan Stanley then informed GSO that Morgan Stanley believed that by entering into the amendment without Morgan Stanley's consent, the Buyers had disabled themselves from satisfying certain conditions to Morgan Stanley's commitment to provide the debt financing pursuant to the debt financing commitment letters, and, furthermore, that Morgan Stanley was reserving its rights with respect thereto. In response, GSO reiterated its position to Morgan Stanley—that Morgan Stanley's consent was not required in order to enter into the amendment, and that the Buyers had not disabled themselves in any manner from satisfying all of the conditions to Morgan Stanley's commitment. GSO promptly notified the Company of Morgan Stanley's position and GSO's response to Morgan Stanley.

More work for the lawyers.

by Calculated Risk on 9/14/2007 04:36:00 PM

More on potential 'pier loans' ... (bridge loans by investment banks that stay on the balance sheet, aka 'bridges to nowhere').

From Bloomberg: First Data Bankers Reduce Buyout Loan, Offer Discount

Kohlberg Kravis Roberts & Co.'s bankers, struggling to find investors to finance the purchase of First Data Corp., reduced the loan sale to $5 billion and are offering the debt at a discount...

Credit Suisse, which is leading the financing, will meet with investors Sept. 17 to seek buyers for a seven-year loan at 96 cents on the dollar ... The loans will be offered at 2.75 percentage points more than the London interbank offered rate. Credit Suisse is also offering to lend some investors money to help them buy the debt ...
...
``It's a good sign that they were able to agree to a package to bring to investors,'' said Robert L. Lee, the analyst who covers First Data for KDP Investment Advisors Inc. in Montpelier, Vermont. ``It sounds like the terms are firm.''

Even if this goes through, the banks will still be stuck with substantial pier loans. The total financing consists of $16 billion in loans and another $8 billion of junk bonds.

by Calculated Risk on 9/14/2007 04:07:00 PM

Some background: back in June, Finish Line agreed to acquire Genesco for $1.5 Billion. See: Finish Line to acquire Genesco for $1.5 billion in cash

From Finish Line: Finish Line Receives Letters from UBS Regarding Genesco Transaction (hat tip Brian)

In its September 11, 2007 letter, UBS states, among other things,

"We hereby notify you that we reserve all rights with respect to our obligation to complete the financings as outlined under the commitment letter. While we will continue to pursue this matter in good faith, we are extremely concerned about the apparent deteriorating financial position of [Genesco]. We are continuing to actively monitor this situation, and look forward to your continued cooperation."

In reviewing its concerns regarding Genesco's financial performance, UBS states, among other things, in its September 13, 2007 letter that:

"[O]ur agreement to perform under the Commitment Letter may be terminated if a Material Adverse Effect has occurred with respect to Genesco. As of today, we are not yet satisfied that Genesco has not experienced a Material Adverse Effect."

This is one way to avoid a pier loan.

by Anonymous on 9/14/2007 03:11:00 PM

Maybe readers of this blog will knock out the Federal Reserve's server. We are nerds.

Some highlights:

On consolidation and concentrations in the industry:

For both the 2004 and 2005 HMDA data, nearly 80 percent of the reporting institutions were depositories (commercial banks, savings associations, or credit unions); independent mortgage companies or mortgage companies affiliated with banking institutions or their holding companies accounted for the rest. Although mortgage companies represented only 22 percent of the reporting institutions, they submitted information on more than 60 percent of all the reported loans and applications.

Most lenders reported relatively little home lending. The most active lenders (those providing information on 5,000 or more loans or applications) accounted for about 5 percent of the reporting institutions and nearly 90 percent of all the reported loans and applications.

On the composition of 2006 originations:

For 2006, lenders covered by HMDA reported information on 27.5 million applications for home loans. Almost all the applications were for loans to be secured by one- to four-family (so-called single-family) houses, as follows: 10.9 million applications to purchase a home, 2.5 million to make home improvements, and 14.0 million to refinance an existing home loan. The balance (about 0.1 million) was for loans secured by multifamily dwellings—those for five or more families (table 1 [tables appear after main text]). These applications resulted in nearly 14 million loan extensions. Lenders also reported information on 6.2 million loans they purchased from other institutions and on 411,000 requests for pre-approvals of home purchase loans; the pre-approval requests either were turned down by the lender at the time the pre-approval was sought or (not shown in table) were granted but not acted on by the applicant.

The total number of reported applications and purchased loans fell 2.3 million, or 6 percent, from 2005; most of the decline was for refinancings. The number of applications for loans to refinance an existing loan fell 1.9 million, or about 12 percent; the number declined most likely because short-term interest rates increased from the end of 2005 through much of 2006 and thereby reduced the number of existing loans that could be refinanced at a lower rate. Slower house-price appreciation and, in some areas, outright declines in property values also likely diminished the attractiveness of refinancing or the borrower’s ability to refinance.

On denial rates:

The HMDA data for 2006, like those from earlier years, indicate that lenders approve most of the applications they receive, although the proportion approved or denied varies by loan purpose, type of loan and property, and lien status. In general, denial rates are higher for refinancings and for home-improvement loans than for home-purchase loans, perhaps because of the prequalification and financial counseling activities that many prospective borrowers go through before purchasing a home (table 4). Denial rates are lower for government-backed loans than for conventional loans but are especially high for loans to purchase manufactured homes. Overall, the denial rate for all home loans in 2006 was 29 percent, compared with 27 percent in 2005.

On loan size:

For 2006, about 90 percent of conventional loans for purchase and likewise for refinancing, whether higher-priced or not, were within the conforming loan limit (table 6). Higher-priced loans tended to be somewhat smaller than others; for example, among conventional home-purchase loans, the mean size of higher-priced mortgages was $209,000, compared with $246,000 for others. . . . Among those obtaining conventional home-purchase mortgages, the mean income of individuals [Tanta: I believe this means the total income of all borrowers on an individual loan] with a conforming loan was $82,400, versus a mean income of $258,000 for those with a jumbo loan. And, again among borrowers using conventional loans, those using higher-priced loans either to purchase a home or to refinance had a mean income about 20 percent lower than borrowers not paying higher prices.

On owner occupancy:

After declining in the early 1990s, the share of non-owner-occupant lending among first-lien loans to purchase one- to four-family site-built homes began rising in 1994, and it has risen in every year between 1996 (when it was 6.4 percent) and 2005, when it reached 17.3 percent (table 8). For 2006, the share fell somewhat, to 16.5 percent. Further, in line with the experience for home purchase loans to owner-occupants, the number of conventional first-lien loans to purchase homes by non-owner-occupants fell about 17 percent from 2005.

There's a great deal more in here, including a lot of information on high-priced lending and minority/low-income lending patterns which needs to be digested by your intrepid blogger. But if you don't have a date lined up for tonight, there's 77 pages of HMDA data analysis waiting for you in the Nerd Cave . . .