by Calculated Risk on 10/04/2007 04:34:00 PM

From Bloomberg: Subprime Borrowers' Payments Should Be Fixed, FDIC's Bair Says (hat tip Brian)

Federal Deposit Insurance Corp. Chairman Sheila Bair called for payments on most subprime mortgages to be fixed at current levels.

Lenders should extend "teaser" rates on all subprime adjustable-rate mortgages if the borrowers haven't missed any payments and they live in the homes, Bair said today in New York. Modifying loans on a case-by-case basis and fixing rates for limited periods won't avert enough foreclosures, she said.

And from Congress: (hat tip NYT junkie)

House: "Miller and Rep. Linda Sánchez Introduce Legislation to Protect Consumers in Financial Distress from Losing Their Homes"

Senate: Durbin Introduces Bill to Help Hundreds of Thousands of Homeowners Avoid Foreclosure

To help families save their homes, the Durbin bill would:

* Eliminate a provision of the bankruptcy law that prohibits modifications to mortgage loans on the debtor’s primary residence, so that primary mortgages are treated the same as vacation homes and family farms.

* Extend the time frame debtors are allowed for repayment, to support long-term mortgage restructuring.

* Waive the bankruptcy counseling requirement for families whose houses are already scheduled for foreclosure sale, so that precious time is not lost as families fight to save their homes.

To further help families get back on their feet financially as they go through bankruptcy, the bill would also:

* Combat excessive fees that are sometimes charged to debtors in bankruptcy.

* Maintain debtors’ legal claims against predatory lenders while in bankruptcy.

* Reinforce that bankruptcy judges can rule on core issues rather than deferring to arbitration.

* Enact a higher homestead floor for homeowners over the age of 55, to help older homeowners who are fighting to keep their homes as they go through bankruptcy but live in states with low homestead floors.

* Reinforce that consumer protection claims are still available in bankruptcy.

And from Sentor Specter: Specter Introduces Bill To Combat Home Mortgage Crisis

And there is a growing backlash against the bailout proposals, from CNNMoney Subprime: Bailout backlash

But judging from the hundreds of reader responses CNNMoney.com has received in recent weeks, "foreclosure prevention" sounds a lot like "bailout" to many Americans, and they don't like it one bit.
...
Joseph Mason, an associate professor of finance at Drexel University and a senior fellow at Wharton, argues in a research paper released Wednesday that proposed remedies could actually make things worse and even that troubled borrowers have gotten some benefit from their loans.
...
One proposal seems to be garnering support from everyone: exempting homeowners who foreclose or otherwise have some of their mortgage debt forgiven from having to pay income tax on the forgiven amount.

Who is this "everyone"? I support no income taxes on debt forgiveness on the purchase debt (or equal amount if the homeowner refi'd), but for homeowners that borrowed money on their home - tax free using their home as an ATM - shouldn't they be liable for the taxes on that forgiven debt? What a mess.

Note: Say someone bought a house with a $200K first, and then loses the house in foreclosure. I don't think there should be any tax consequences. But if they borrowed an additional $50K tax free (now owe $250K) and then lose their home in foreclosure, I think they should be liable for taxes on the additional $50K.

by Calculated Risk on 10/04/2007 03:58:00 PM

From MarketWatch: Citizens Banking Co. takes on Miami Valley deposits (hat tip REBear)

The Citizens Banking Company of Sandusky, Ohio, got federal approval to take over the insured deposits of the failed Miami Valley Bank on Thursday, a U.S. banking regulator announced.

The Ohio Superintendent of Financial Institutions' closure of Miami Valley, which had $86.7 million in total assets and $76 million in total deposits, marks the third FDIC-insured bank to fail this year.

FDIC link is here.

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

From Bloomberg: Subprime Delinquencies Accelerating, Moody's Says (hat tip Brian)

Subprime mortgage bonds created in the first half of 2007 contain loans that are going delinquent at the fastest rate ever, according to Moody's Investors Service.

The average rate of "serious loan delinquencies" in the bonds has been higher than 2006 bonds ...

"It is shocking what you see," said Kyle Bass of Hayman Advisors LP, a Dallas-based hedge fund that reported a 400 percent return on its bet the U.S. housing market would fall. "Anything securitized in 2007 has got to have the worst collateral performance of any trust I've seen in my life."

by Calculated Risk on 10/04/2007 10:35:00 AM

From the WSJ: Rent Growth Slows a Bit In Sluggish Office Market

... the three-and-a-half year old office recovery is still under way, if showing signs of weakness. The vacancy rate hit its lowest level in six years, dropping to 12.5% in the third quarter from 12.7% in the second quarter, though the pace of absorption -- the change in the total amount of space leased nationwide -- slowed. Absorption totaled 14.8 million square feet in the third quarter compared to 17.3 million in the second.

"There is a slowdown," said Barry M. Gosin, chief executive of Newmark Knight Frank, a New York-based commercial real-estate services firm.

For my area - Orange County, CA - Jon Lansner of the O.C. Register notes: O.C. office vacancies soar

Third-quarter data from commercial real estate brokers show that renting O.C. office space has gotten suddenly easier. Why? New buildings and shuttered mortgage makers add to supply. As a result, the countywide vacancy rate ... rose to 10.9% in the last quarter vs. an average of 7.1% a year ago.

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.