by Anonymous on 10/04/2007 08:49:00 AM

Reader Avinash sends us the following from "Creditflux," which is not something I made up either:

In a new research report entitled "Leveraging CLO illiquidity premia", JP Morgan says that the combination of historically wide CLO liability spreads and near-zero default rates makes this an optimal time for buy-and-hold investors to consider investing in CLOs-squared. It says this is a way to efficiently monetise the current illiquidity created in the "spread rout of 2007".

The report concludes that CLOs-squared offer reasonably low risk relative to the underlying CLOs. Junior tranches in particular offer higher spreads than triple B and double B tranches of regular CLOs with similar or lower risk.

The researchers point out that CLOs-squared are conceptually similar to ABS CDOs, but that they are better suited for leverage. Corporate loans are simpler than subprime mortgages and hence more predictable, argues the report.

Yes, that makes a great deal of sense. These stupid subprime borrowers have been taking mortgage loans that are more complex than corporate loans, but we have no idea why nobody seems to understand what got signed at the closing table. Also, it's an excellent time for investors to look for more leverage opportunities, because this whole problem, you see, was just a matter of the underlying collateral and had nothing whatsoever to do with levering up complex derivatives or having to unwind some goofy structured deal.

Just shoot me . . .

by Anonymous on 10/04/2007 07:20:00 AM

Sorry my posting was so light yesterday, but I was working on my Ten Point Plan in anticipation of being named Mortgage Czar. I actually completed Point One, no sacraments for any public figure who recommends negative amortization ARMs. Then--get this--I find out that apparently this "church-state separation" and "free speech" and some nonsense about these products being legal are going to hamper my plan. Well, jeepers, why call it a "czar" if it can't involve theocratic absolutist ukases? I mean, if it's just going to involve a bunch of posturing with no ability to imprison dissidents, I'll stick to blogging. Why bother to change out of my pajamas for that?

Fear not, though, innovation in the mortgage gig continues apace. From the Washington Post:

CitiMortgage plans to announce today that it has set aside $200 million for mortgages to Washington area residents who have limited credit histories and therefore often end up with high-cost or risky home loans. . . .

To qualify for the program, a person must be in the country legally and have alternate credit lines -- such as rental payments, utility bills or a tithing record -- that a lender can use to evaluate creditworthiness.

Gathering the paperwork to confirm these trade lines historically has been a laborious process that could take months, which often discouraged potential buyers and hurt their chances of closing a deal.

But Neighborhood Housing Services, a sister organization of District-based housing advocacy group NeighborWorks America, will use a system that automates the credit-verification process and delivers results to CitiMortgage within 48 hours.

The technology evaluates whatever information is available at the national credit bureaus as well as from other sources. . . .

Mary Lee Widener, president and chief executive of Neighborhood Housing Services, said the program is set up to comply with technical rules that allow CitiMortgage to service or collect payments for all the loans, even though the loans are resold. CitiMortgage has agreed to work with Widener's group to keep borrowers in their homes should they face job loss, illness or other events that temporarily prevent them from making payments.

"It's important to us that we have one lender to deal with in those situations," Widener said. "Our borrowers have more than their share of life events, but we've been able to stick with them, and it's very rare that we have to move to foreclose." . . .

If the best loan is with CitiMortgage, then CitiMortgage will fund that loan and sell it to Neighborhood Housing Services. The nonprofit group will then sell the loans to State Farm and Fannie Mae.

So, basically, we have CitiMortgage offering to do $200MM of "nontraditional credit history" loans, which have been around for what, 20 years? Only this time, they'll be really fast because technology is involved, and we know that the biggest problem with loans to first-time homebuyers and persons with possibly shaky credit has always been speed: you really need to do those loans just as fast as you do the ones based solely on simple-minded FICO qualification. And that thing about the importance of a single lender/servicer? Yeah, well, that would involve having some outfit like Citi actually hold the risk on these loans, and we can't have that. So let's think outside of the box: we'll sell the loans to an investor, just like we always have, and Citi will just be the servicer, like it always has, and the answer to all questions will be "I can't do that, it's not in my PSA."

Mortgage Czar? We don't need no steenkin' Mortgage Czar. We're doing just fine innovating our way out of this mess.

by Calculated Risk on 10/03/2007 08:45:00 PM

From Reuters: Congress calls for "mortgage czar"

Lawmakers called on Wednesday for a 'mortgage czar' to help cope with an expected wave of foreclosures from the U.S. housing slump but Alan Greenspan said the credit crunch was past the worst.

"We are beginning to see the frenzy calm down," the former chairman of the Federal Reserve told a conference in Lisbon. "Unless we get secondary effects the worst is over."

Whoa! Hold it right there. Whenever Greenspan says the 'worst is over', watch out! Here is a quote from October 9, 2006 (almost exactly one year ago) via Bloomberg: Greenspan Says `Worst' May Be Past in U.S. Housing

Former Federal Reserve Chairman Alan Greenspan said the ``worst may well be over'' for the U.S. housing industry that's suffering its worst downturn in more than a decade.

Tanta for Mortgage Czar!

by Calculated Risk on 10/03/2007 08:28:00 PM

From the Telegraph: Dollar's double blow from Vietnam and Qatar

The Saigon Times said this morning that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8pc.

Vietnam, which has mid-sized reserves of $40bn, is seen as weather vane for the bigger Asian powers.

...Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings of its $50bn sovereign wealth fund from 99pc to 40pc, switching into investments in China, Japan, and emerging Asia.
..
The drastic shift by the Qatar Investment Authority is a warning that petro-dollar powers with some $3,500bn under management may pull the plug on the heavily endebted US economy.

An insightful blog to read on these issues is Brad Setser's Blog; in his own words, Brad has been "reserve-obsessed for quite some time now".

by Calculated Risk on 10/03/2007 04:25:00 PM

From Fitch Ratings: Fitch Completes U.S. 2006 Subprime RMBS Review (hat tip bacon dreamz)

Fitch Ratings-New York-03 October 2007: Fitch Ratings has completed the 're-rating' of its rated universe of 2006 vintage U.S. Subprime RMBS transactions. ...

Fitch initiated a review of subprime RMBS ratings in July 2007 due to the unprecedented reversal in home prices and the resulting impact on high-risk mortgage products. In August, Fitch began taking rating actions on some of the worst performing subprime transactions. Upon conclusion of the initial review, Fitch proactively has re-rated its entire universe of rated 2006 vintage subprime RMBS transactions. This review was completed in September.

Fitch's rated universe of 2006 vintage subprime is 228 transactions comprised of 3,231 rated classes with an outstanding balance of $173 billion.

Fitch's most severe rating actions affected a sub-sector of the subprime market, those RMBS transactions exclusively backed by closed-end second-lien loans (CES). These RMBS comprise 274 rated classes with a par balance of $6.6 billion. Fitch has downgraded 32 of 51'AAA' CES classes from this cohort. Investors should note, that Fitch has affirmed 100% of its 'AAA' ratings backed primarily by first-liens. First-lien transactions make up the largest segment of the market.

For first- and second-lien transactions combined, Fitch has affirmed 2,228 classes with a par balance of $155.1 billion and downgraded 1,003 classes with a par balance of $18.4 billion. While Fitch's reviewed all rating categories, downgrades were most heavily concentrated among classes originally rated 'BBB+' or lower. Fitch believes that those classes that have been downgraded to below-investment grade have substantial risk of principal loss. However those bonds remaining investment grade still exhibit the ability to withstand the higher projected collateral default and loss expectations without principal loss. Those classes affirmed at 'AAA' are able to withstand a substantial multiple of expected collateral performance without experiencing loss.

Fitch will continue to actively monitor the performance of the 2006 subprime RMBS as part of its normal monthly review cycle. Fitch is currently reviewing subprime RMBS ratings from the first quarter of 2007.

And from Bloomberg: Fitch Downgrades $18.4 Billion of 2006 Subprime Bonds (hat tip energyecon)

Fitch rated 51.3 percent of all subprime mortgage bonds in 2006 compared with more than 96 percent each for Moody's and S&P, according to industry newsletter Inside B&C Lending.

So Fitch only rated about half the 2006 subprime mortgage bonds.

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

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

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

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

by Calculated Risk on 10/03/2007 01:23:00 PM

From the San Jose Mercury News: Home appraisers pushed to inflate values

Pushed to exaggerate home values during Silicon Valley's real estate run-up, appraisers say agents and homeowners are now pressuring them to prop up those values as prices decline.

People "are trying to refinance to get their butts out of trouble, and the values aren't there," said Mike Terry of MK Terry Appraisals, who appraises homes in San Mateo County.

... Many appraisers say they routinely feel some pressure to inflate home values. A national industry survey shows that the number reporting such pressure has grown by more than half over the past four years.
...
"Exaggerated appraisals are not the entire reason these agencies and financial institutions are in financial distress, but they are a piece of the puzzle," said John Brenan, director of research and technical issues for the Appraisal Foundation.

..."What a lot of them do is what I call dialing for dollars," said Jim Manning, a semiretired appraiser with 32 years in the business who lives in Half Moon Bay. "They get on the phone and start dialing appraisers, asking, 'Who can come up with this value,' and 'We don't want it if you can't.'

by Calculated Risk on 10/03/2007 10:56:00 AM

Professor Hamilton looks at auto sales and more.

We've been dwelling here quite a bit on the bleak incoming housing data. But I have to admit that I'm not seeing that spilling over so far into some of the other key economic indicators.

Auto sales usually fall a bit between August and September, and perhaps declined slightly more than normal this fall, with total light vehicles sold in the U.S. in September down 3% from September 2006.

...taking August and September together, I think we can safely say that the bottom did not fall out of the market in some kind of psychological reaction to events in mortgage and financial markets over the last two months.

See Hamilton's post for graphs of auto sales.

by Anonymous on 10/03/2007 10:20:00 AM

I'm up late again this morning, and what do I have to show for it?

From the Wall Street Journal:

For Countrywide Financial Corp., this time it's personal. At least that's what a top executive says.

Having suffered a barrage of negative headlines while battling to shore up its finances and shrink its work force of 60,000 by as much as 20%, the nation's largest home-mortgage lender is launching a PR blitz aimed at repairing its reputation. And it starts inside the company.

For the demoralized employees who remain, the new campaign means wristbands with the phrase "Protect Our House" and pep talks promising to keep "amply" rewarding the most successful among them amid a struggle with the sharp drop in mortgage lending as defaults soar and house prices decline.

Leading the counterattack is Andrew "Drew" Gissinger III, a former offensive lineman for the San Diego Chargers football team who serves as executive managing director, residential lending, at Countrywide. . . .

"Let's call it like it is, as I mentioned earlier, it's gotten to the point where our integrity is being attacked. NOW IT'S PERSONAL!" says the transcript of a talk made last week by Mr. Gissinger. "... And, WE'RE NOT GOING TO TAKE IT!"

The transcript, prepared from a phone call with 250 "opinion leaders" at Countrywide on Sept. 26, offers a peek inside one of the biggest crisis-management efforts under way in an American corporation. Along with Mr. Gissinger on the call was Jason Schechter from WPP Group's Burson-Marsteller, a public-relations firm with a long history of crisis management.

"We wanted to assure you that my firm and I have brought companies through the worst type of publicity," Mr. Schechter said, according to the transcript. He added that a six-person Burson team was ensconced at Countrywide's Calabasas, Calif., headquarters, and about 25 people overall were working on the campaign.

Rick Simon, a Countrywide spokesman, said the transcript was sent to employees Friday. It says that employees are expected to sign a pledge to "demonstrate their commitment to our efforts," and Mr. Simon says about 11,000 have signed. Each employee who signs up receives the Protect Our House wristband made of green rubber. "We believe there's a great story about the strength of the business," says Mr. Simon.

To counter criticism that its lending practices are to blame for a surge in foreclosures, Countrywide plans to emphasize its "mission" of helping Americans become homeowners, the transcript says. "I want employees to look down at their wristbands and remember our fundamental mission to help customers achieve the American Dream, and to help them withstand those malicious outward attacks and to motivate them to continue on our journey with unwavering conviction," the transcript quotes Mr. Gissinger as saying.

The company also is reaffirming its pugnacious side. "We're competitive to a fault," he says in the transcript, adding: "Our divisions will have clear goals, built on our ruthless attack strategies to continue to grow profitably. Growing, winning and being the best is also hard wired into our DNA." . . .

"We're demonized something fierce," Mr. Mozilo said in an interview two weeks ago.

Mr. Mozilo, 68 years old, the self-made son of a butcher from New York's Bronx borough, knows how to fight back. He often has skewered his competitors as incompetent or irresponsible during conference calls with analysts. In a call last year, he said big Wall Street firms competing with Countrywide "don't know anything about the mortgage business."

According to trade publication Inside Mortgage Finance, Countrywide had a market share of more than 17% in this year's first half. And Mr. Mozilo's compensation last year, including the exercise of stock options, totaled $120 million. Even so, he said last month that he still sometimes feels like "a poor kid from the Bronx."

In the transcript, Mr. Gissinger takes up that viewpoint: "As always, we embrace the role of being the underdog. Our commitment and ability to win is demonstrated where it counts -- the scoreboard."He also warns employees to expect more "bad press." Some of that is likely on Oct. 26, when the company is due to report third-quarter results.

Kenneth Posner, an analyst at Morgan Stanley, has forecast that Countrywide will have a loss of $2.4 billion, or $3.47 a share, in the third quarter, compared with earnings of $647.6 million, or $1.03 a share, a year earlier. Countrywide hasn't provided a third-quarter forecast.

Mr. Gissinger sought to reassure employees about sticking with the company in the transcript: "I've made a lot of people rich or richer who have joined me on my past crusades. Please trust the same holds true here."

The WSJ links to the call transcript here.

by Calculated Risk on 10/02/2007 03:18:00 PM

More on auto sales from Bloomberg: Ford, Toyota Say U.S. Sales Decline; GM, Honda Gain

... Toyota Motor Corp. fell 4.4 percent ... Honda, Japan's second-biggest automaker, reported a 9.4 percent increase. GM rose less than a percentage point.
...
The industrywide annualized sales rate probably fell to 15.9 million last month, according to eight analysts and nine economists surveyed by Bloomberg. The September 2006 rate was 16.6 million.

The two month estimate for PCE (personal consumption expenditures) suggests real PCE growth in Q3 will be about 3.0%. However I think PCE slowed sharply in September - as suggested by auto sales, Redbook and other sources.