by Calculated Risk on 1/14/2008 02:02:00 PM

OFHEO has released a preliminary analysis of the Potential Implications of Increasing the Conforming Loan Limit in High-Cost Areas.

The conforming loan limit is the maximum loan that Fannie and Freddie can buy. An overview:

For mortgages that finance one-unit properties, [the conforming loan] limit is $417,000 in 2008, as it was in 2006 and 2007. Higher limits apply to loans that finance properties with two to four units. The limits for properties of all sizes are 50 percent higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. The limits are adjusted each year to reflect the change in the national average purchase price for all conventionally financed single-family homes, as measured by the Federal Housing Finance Board’s (FHFB’s) Monthly Interest Rate Survey (MIRS). Conventional single-family loans with original balances above the conforming loan limit are generally known as jumbo mortgages.

And here is some interesting data on the Jumbo Market:

Click on graph for larger image.

According to Inside Mortgage Finance Publications, originations of jumbo mortgages have ranged from 15 percent to 21 percent of the total single-family market from 2000 through the first half of 2007.
...
The jumbo market is much more geographically concentrated than the conventional mortgage market as a whole. Data from First American LoanPerformance suggest that California accounted for 49 percent of the dollar volume of first lien jumbo mortgages originated in the first half of 2007 and later securitized (Chart 1). In a comparable sample of conventional loans purchased by the Enterprises, the California market share was 14 percent.

Jumbo loans are not only larger, and geographically concentrated (almost 50% are in California!), but they also have many risky features:

First American LoanPerformance data also suggest that interest-only (IO) loans and negatively-amortizing adjustable-rate mortgages (ARMs) comprised nearly two-thirds of the dollar volume of first lien jumbo loans originated in the first half of 2007 and later securitized, whereas traditional (fully amortizing) fixed-rate mortgages (FRMs) comprised only a quarter of those loans (Chart 2). In contrast, FRMs comprised over 88 percent of non-jumbo conventional loans originated in the first half of 2007 and purchased by Fannie Mae and Freddie Mac.

With falling prices, many of these jumbo loans with IO or neg-Am features will probably be underwater soon. This will probably be a huge story in '08 and '09. (Note: There is much more in the OFHEO report).

by Calculated Risk on 1/14/2008 12:10:00 PM

From Bloomberg: Sovereign Posts Charge on Loans, Independence Results

Sovereign Bancorp ... said a pullout from auto lending in some regions and the 2006 purchase of Independence Community Bank Corp. led to $1.58 billion in fourth-quarter pretax charges.

The company stopped making auto loans in the Southeast and Southwest and bolstered its provision for bad loans of all kinds ... The bank also reduced the value of its consumer and New York regional units, with Brooklyn-based Independence producing less revenue and deposit growth than expected.

Just another $1.5 billion.

by Calculated Risk on 1/14/2008 11:43:00 AM

CNBC Charlie Gasparino reports that Citigroup CEO Vikram Pandit - on Tuesday - will disclose a $24 billion write-down and announce job cuts of between 17,000 and 24,000 for 2008.

Also, the WSJ reports: China Balks at Pumping Fresh Capital to Citigroup

Once again, Wall Street came knocking on Beijing's door. This time it went home empty-handed.

The Chinese government's apparent rejection of a planned multi-billion-dollar investment in Citigroup Inc. by state-owned China Development Bank suggests there may be limits to Beijing's status as a cash source for Western banks eager to plug holes in their balance sheets. ...

People familiar with the situation say China's senior leadership decided against backing the investment plan ...

Tomorrow should be interesting!

by Anonymous on 1/14/2008 10:26:00 AM

More pleasant news from the Platinum card crowd, courtesy of the LAT:

Option ARM delinquencies are at double-digit levels in many areas of California, including the Inland Empire. . . .

"This is not a sub-prime crisis. This is a stated income crisis," said Robert Simpson, chief executive of Investors Mortgage Asset Recovery Co. in Irvine, which works with lenders, insurers and investors to recover losses related to mortgage fraud. . . .

The percentage of option ARMs with payments behind by at least 60 days in California is in double digits in the Inland Empire, San Diego County, Santa Barbara County, Sacramento, Salinas and Modesto, according to data provided to The Times by mortgage researcher First American Loan Performance.

The more recent loans appear to be faring the worst, reaffirming the conclusion that lending standards had become overly lax throughout the mortgage industry in the middle of this decade, as competition for fewer good loans intensified amid skyrocketing home prices.

In Yuba City, north of Sacramento, 15% of option ARMs made in 2005 were delinquent at the end of October, the Loan Performance tally showed, and in Stockton-Lodi the delinquency rate on option ARMs from both 2005 and 2006 was over 13%.

"It is astonishing how fast the credit deterioration has occurred," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. who follows the savings and loans that specialize in these mortgages. "It took me and everybody else by surprise."

Miller said Downey Financial Corp. was "the canary in the coal mine." The Newport Beach S&L has specialized in making option ARMs since the 1980s and keeps them as investments. Option ARMs make up about three-quarters of Downey's loan portfolio, with most of the rest being similar loans that allow interest-only payments during the first five years but don't allow the loan balance to rise.

Miller thought Downey had shown prudence in cutting back on lending in 2006, when home prices stopped rising and competition intensified from option ARM newcomers such as Countrywide and IndyMac Bancorp of Pasadena.

But a key indicator of loan troubles -- the ratio of nonperforming assets to total assets -- shot up from 0.55% to 3.65% at Downey over the last year, with the dud loans on Downey's books growing by $80 million in November, Miller said. That number, disclosed last month, was larger than the entire amount of non-performers Downey had a year earlier.

The quality of option ARMs appears to have deteriorated quickly when Wall Street began buying them to create mortgage bonds in the middle of this decade, drawing IndyMac, Countrywide and others into the business, Miller said.

by Calculated Risk on 1/14/2008 10:21:00 AM

From the NY Times: Banks to Try Chrysler Loan Sale Again (hat tip Brian)

Remember the $10 billion in financing for Chrysler that five banks were unable to place last year during the midst of the credit crunch?

... JPMorgan Chase, Citigroup and Goldman Sachs, are still trying to syndicate the loans.

... bankers have had a difficult time trying to find takers for the auto company’s debt. There have been two efforts at syndicating the loans, one in July and most recently in November ... Now, the banks will wait until conditions improve. “We will be opportunistic,” [Chad Leat, the vice chairman of capital markets origination at Citibank] said. “So far, January is not welcoming at all.”

Third time a charm?

by Anonymous on 1/14/2008 07:58:00 AM

Or, "The Revenge of SFAS 114." Or, possibly, "KPMG Can Has Accountants." Choose your own subtitle.

NEWPORT BEACH, Calif., Jan 14, 2008 /PRNewswire-FirstCall via COMTEX/ -- Downey Financial Corp. announced today changes to previously reported levels of non-performing assets. These changes pertain to non-performing asset levels since June 30, 2007.

Rick McGill, President, commented, "As previously reported, we implemented at the beginning of the third quarter of 2007 a borrower retention program to provide qualified borrowers with a cost effective means to change from an option ARM to a less costly financing alternative. We contacted borrowers whose loans were current and we offered them the opportunity to modify their loans into 5-year hybrid ARMs or ARMs with interest rates that adjust annually but do not permit negative amortization. The interest rates associated with these modifications were the same or no less than those rates afforded new borrowers but they were below the interest rates on the original loans. We initially did not consider these modifications of performing loans to be troubled debt restructurings, as the modification was only made to those borrowers who were current with their loan payments and the new interest rate was no less than those offered new borrowers. KPMG LLP, our independent registered public accounting firm, did not object to this assessment during its third quarter review."

Mr. McGill continued, "During December 2007, KPMG advised us that upon further review of the modification program, it was likely the loan modifications should be recorded as troubled debt restructurings. After reassessing our initial analysis, we determined these modified loans should be accounted for as troubled debt restructurings. This conclusion was reached because in the current interpretation of GAAP, especially in the current housing market, there is a rebuttable presumption that if the interest rate is lowered in a loan modification, the modification is deemed to be a troubled debt restructuring unless the modified loan can be proved to be at a market rate of interest based upon new underwriting, including an updated property valuation, credit report and income analysis. We did not perform these additional steps since borrowers who qualified for our retention program were current and we were trying to streamline the process for qualified borrowers to modify their loans at interest rates no less than that being offered to new borrowers. Inasmuch as we chose not to perform these additional measures, we are now required to make this reporting change and, as such, our non- performing assets will increase from what has been previously reported. While periods prior to the third quarter of 2007 are not impacted by this change, it will result in $99 million of loans being classified as non-performing at September 30, 2007."

Brian Cote, Chief Financial Officer, commented, "As required for all loans classified as troubled debt restructurings, loans modified as part of our borrower retention program must now be placed on non-accrual status but interest income will be recognized when paid. If borrowers perform pursuant to the modified loan terms for six months, the loans will be placed back on accrual status and, while still reported as troubled debt restructurings, they will no longer be classified as non-performing assets because the borrower has demonstrated an ability to perform and the interest rate was no less than those afforded new borrowers at the time of the modification."

Mr. Cote further commented, "We believe that when loans modified under our borrower retention program are current, it is relevant to distinguish them from total non-performing assets because, unlike other loans classified as non-performing assets, these loans are effectively performing at interest rates no less than those afforded new borrowers. Accordingly, when performing troubled debt restructurings are excluded from the revised ratio of non- performing assets to total assets, the revised ratio of all other non- performing assets to total assets is not materially different from that previously reported."

The take-away, for those of you unmoved by financial accounting esoterica: KPMG is now conditioned to bark every time it hears "streamlined process." That's progress.

Now we wait to see who else was using Downey's interpretation of "troubled debt restructurings."

by Calculated Risk on 1/13/2008 09:41:00 PM

From Wolfgang Münchau at the Financial Times: This is not merely a subprime crisis (hat tip FFDIC)

If this had been a mere subprime crisis, it would now be over. But it is not, and nor will it be over soon. The reason is that several other pockets of the credit market are also vulnerable. Credit cards are one such segment, similar in size to the subprime market. Another is credit default swaps, relatively modern financial instruments that allow bondholders to insure against default.

The article focuses on Credit Default Swaps (CDS) and suggests the current downturn could be longer than most anticipate (including me):

The German experience has taught us that persistent problems in financial transmission channels cause long economic downturns. Today, the really important question is not whether the US can avoid a sharp downturn. It probably cannot. Far more important is the question of how long such a downturn or recession will last. An optimistic scenario would be a short and shallow downturn. A second-best scenario would be for a sharp, but still short, recession.

A truly awful scenario would be a long recession.

And from Robin Sidel and David Enrich at the WSJ: High-End Cards Fall From Grace (hat tip Brian)

The luster on all those silver, gold and platinum credit cards is getting tarnished.

For the past few years, banks that issue credit cards have aggressively wooed affluent customers with lavish perks and fat credit lines. Now, that high-end strategy is coming back to bite the banks: There are growing signs that some of those consumers are having a hard time paying their bills.

Affluent customers aren't paying their credit card bills? How did the credit card companies define "affluent"? The same standard as the mortgage lenders: Fog a mirror, get a Platinum card?

We're all subprime now.

by Calculated Risk on 1/13/2008 08:09:00 PM

The WSJ reports that Bernanke (or Vice Chairman Kohn) will speak more frequently. From the WSJ: Fed Retools Its Messages Amid Call for More Clarity

... a new strategy of having the central bank's top leaders discuss the economic outlook in public more often, so that markets won't depend on remarks by lower-ranked policy makers who may not represent Fed thinking. Thus, either Mr. Bernanke or Mr. Kohn will likely address the outlook in public at least once between meetings of the FOMC.

Jan 10, 2008: Chairman Bernanke talks about his stint at the NBER, and the difficulties in calling a recession.

There is also this tidbit in the WSJ story:

There is speculation the Federal Open Market Committee, the group of Fed governors and regional bank presidents that sets the federal-funds rate, met by conference call preceding Mr. Bernanke's speech, but the Fed hasn't confirmed that.

Oh great, more Fed speak! But stock market participants like it when Bernanke speaks: the S&P500 has been up an average of 1.4% on days that Bernanke has spoken (last 3 speeches).

by Anonymous on 1/13/2008 10:43:00 AM

And Gretchen Morgenson has real live scientific evidence to prove it:

BUT it is possible to get a feel for what is happening on the ground from a new survey of 2,400 real estate agents sponsored by Inside Mortgage Finance Publications. The survey taps into the outlook of people who see troubled borrowers firsthand, when they try to sell their homes before foreclosure occurs.

For example, agents participating in the survey confirmed what many borrowers say: that loan servicers are downright unresponsive. This is especially true when distressed owners try to sell their homes before being put through the trials of foreclosure. When they sell at a price that is lower than the outstanding mortgage debt, that is known as a short sale.

Asked how servicers could streamline such sales, one said: “Allow you to go directly to the loss mitigation department without having to speak or argue with eight people before they finally give in and transfer you.” Another said: “Respond to offers within five business days — they are killing the market by taking upwards of three months to respond to an offer.”

A third participant said: “Answer their phone, make it easier to talk with the appropriate people, instead of playing Mickey Mouse games. I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents who are trying to sell these homes.”

Thomas Popick, principal at Geosegment Systems, the designer of the survey and a supplier of data to financial services firms, said its findings show that loan servicers are averse to short sales, even though they may be the best solution for many borrowers, lenders and the overall real estate market.

“In many cases, loan modifications — no matter how generous the terms — only delay foreclosures on properties where the mortgage balance far exceeds the current property value,” he said. Homeowners who try instead to sell “know they cannot afford the property and are trying to do the responsible thing — sell the property to someone else who can afford it.”

Mr. Popick, if they were selling the property to someone else who could "afford it," would we be talkin' short sale here? Do you folks actually listen to yourself talk?

It seems like a good time to discuss short sales in simple, basic terms that everyone can follow without moving their lips. First of all, anybody at any time can sell a home for less than the amount owed on it. There is no law against this. However, the buyer will not get clear title until the lender is either paid in full from other sources that make up for the shortfall, or agrees to "settle for less" and release the lien with less than full payment. So when we talk about "short sales," what we really mean are the ones where the lender is being asked to just take less than a full payoff of the loan while releasing the lien.

Why would any lender accept a short sale? Well, the idea is that a short sale is a form of loss mitigation or workout: the lender (investor) is presented with a choice between a smaller loss in a short sale or a larger loss in foreclosure, so accepting the short sale "mitigates the loss."

The first thing you need, then, is a lender who believes that it would have to foreclose, if it doesn't approve the short sale. Traditionally, you see, short sale offers come up when borrowers are already delinquent, and have probably already been having some contact with the servicer's collection department, and the idea of possible foreclosure isn't coming out of the blue for any party. In cases like this, even a cruddy servicer will probably have already given this borrower a contact in the default servicing department somewhere who, when reached on the phone, will have access to logs of the previous contacts and be able to respond to the idea of a short sale without being unduly startled.

What we seem to have going on, at least in some cases here, are borrowers who are not delinquent, who have attempted to sell the property, who have ended up with no offers except short ones, and whose Relitters therefore dial up the 800 number for the servicer, wanting someone who can make a deal, right now, soup-to-nuts in five days. Strangely enough, they're talking to your basic customer service rep who doesn't make short sale deals. And the CSR doesn't just transfer them to the Loss Mit Squad because, well, the loan isn't delinquent, which the CSR can see just by typing in a loan number and looking at the monitor. Are you likely to get someone saying, "Um, are you sure we're talking about the same customer?" Yes. You are likely to get that. Can you see why?

You can call this "Mickey Mouse" all you want, and we all know there's plenty of bureaucratic nonsense all over the corporate world, including but not limited to mortgage servicers. But the first necessary condition for "loss mitigation" is "evidence that loss will occur." Nobody takes the lesser of two evils unless both evils are on the table. If you have never been delinquent on your mortgage, and your financial situation has not changed since the loan was made (you still make what you made then, your non-discretionary expenses are still what they were), and you don't have some other circumstance like a forced job relocation, your servicer isn't exactly being dense by wondering why we're already supposed to be negotiating a short sale.

Every servicer, even the cruddy ones, has a process in place for dealing with this situation. If you "cannot afford the property," as Mr. Popick says, you are going to have to call your servicer and explain that you will very soon default, if you have not missed a payment already. The servicer will request financial information from you--possibly more of it than it asked for when the loan was made, but that's where we are. The servicer will also order an appraisal with an interior and exterior inspection. If you do not allow an appraiser (or broker for a BPO) access to the interior of your home, your case will go directly to the foreclosure department without passing "Go." If you have already listed the property, the servicer will need all the information from you about the listing date and the list price to determine whether your property has been "exposed to the market" adequately.

No servicer will ever, as far as I know, approve a short sale without asking you to pay something--even if it's just a token amount--in cash to offset the lender's loss. That might take the form of signing away your rights to your current escrow balance. It might mean you write an actual check. A large part of the reason that the lender makes you go through the part about sending copies of your bank statements to the Loss Mit people before a short sale is approved involves the lender making sure that you are either really a hardship case, or if not, that it removes some money from your pocket. Short sales are not actually "free puts."

You will absolutely be required to show evidence that the proposed short sale is an arm's length transaction. If the buyer of the property is getting "creative financing" from somebody in order to make the deal work, count on extra time while the servicer of your mortgage exercises its rights to examine the terms of the buyer's financing, even if the servicer of your mortgage isn't providing that financing. If the deal being contemplated involves this nice guy in a suit who came to your door and had you sign over title to your home with a promise that he could arrange a short sale for you for just a modest fee, your servicer is going to object.

If you, the borrower, are a real estate agent and plan on making a commission on the short sale of your own property, the servicer is going to double-object. If the buyer making the short offer is an LLC formed by a principal in another LLC who happens to be, um, you, the servicer will extra-triple-super object. This kind of thing happens--or tries to happen--often enough that investors do in fact demand a lot of details about the proposed transaction to prevent being scammed. Yes, we are aware that they should have been this vigilant when they made your loan to you, but they weren't and here we are. No deals are going to get made, start to finish, in five business days, just to make an RE broker happy.

If you have a second lien on the property with another servicer, you'll be dealing with two sets of negotiations. This will not speed things up any. If you have only one loan, but you originally had mortgage insurance, the MI will be a party to the negotiations as well. The MI takes most or all of the loss here. The MI gets to have an opinion.

Any sales contract you sign will have to have special contingencies in it reserving rights to the mortgage servicer. When the transaction actually closes, you will not be allowed to receive any funds directly. This will mean that the Settlement Statement will have to be sent to your mortgage servicer for review before your buyer gets the keys. It may all strike you as "Mickey Mouse." I can pretty much promise you that if you let that attitude show in your conversations with the servicer, the process will get even longer.

Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn't be. There cannot be.

Like anyone else with a functioning brain, I accept the principle of loss mitigation: a smaller loss on a short sale beats a larger loss on a foreclosure. However, I have a little bit of a problem with being told by an RE broker that I'd better hurry up and complete this short sale "before it gets worse." Are you telling me that the current transaction isn't, actually, short enough? In that case, are we transferring this property to "someone who can afford it," or are we just throwing in a "pinch borrower" who will be calling me up in six months with the same story I just heard from the former owner? Just exactly how often does an arm's length market produce a short sale price that is so much better than a foreclosure auction price? Why does it do that? You might want to think about it for a minute.

Real estate agents: you might want to be careful what you wish for. I don't know what all the various servicers will do--or will be forced by circumstances to do--but I know what I do every time someone tells me to hurry up and take a pig in a poke.

*From the CS Monitor:

But Dr. Baen of the University of North Texas is optimistic about their futures. "These people are hustlers, hard workers. They're used to getting on the phone," he says. "They'll end up in insurance, in mutual funds, in retirement planning, and commodities."

And this guy is one of your defenders, my friends on the RE sales side.

by Calculated Risk on 1/12/2008 11:32:00 PM

First a couple of excerpts:

From MarketWatch: B. of A. gets a bargain in Countrywide deal

Bank of America is getting Countrywide for less than a third of book value (the mortgage company's assets minus its liabilities) and roughly 2.9 times forecast 2009 earnings, Chief Financial Officer Joe Price said. Lenders typically change hands for at least one times book and seven times estimated future earnings.
...
But the bank has also taken on a huge chunk of new credit risk ... How big a bargain the deal ends up being will depend on how badly Countrywide's mortgage portfolio performs as house prices fall and foreclosures climb.

How big is that credit risk? From the WSJ: Behind Bank of America's Big Gamble

As of Sept. 30, Countrywide's savings bank held about $79.5 billion of loans as investments. Three-quarters of these loans were second-lien home-equity loans ... or option adjustable-rate mortgages...

Just using BofA CFO Joe Price's numbers, if Countrywide didn't have the credit risk, Price suggests a good price would have normally been about one times book value or about $12 billion (the article states that $4 billion is less than one third book value). So basically - in the simplest view - BofA is gambling that the losses on that $80 billion portfolio are $8 billion or less ($12 billion minus the $4 billion BofA is paying).

Even without the actual details of Countrywide's mortgage portfolio, a $8 billion write down might be optimistic. According to another WSJ article:

...Countrywide has $32 billion in second-lien, home-equity loans. Of these, 44% have a loan-to-value ratio over 90%.

This suggests there are about $28 billion in option ARMs in the portfolio. When a house goes into default, the loss on the 2nd lien is frequently 100%. For homes in foreclosure with option ARMs, a 50% loss might be common.

Much depends on how far house prices fall, and how many homeowners with negative equity walk away from their homes. We can be pretty sure that house prices will fall significantly, but no one knows how homeowners will react to owing significantly more than their homes are worth.

Although we don't know all the details, it is possible to imagine scenarios with losses of more than $10 billion on this mortgage portfolio (we really haven't seen the pain from the option ARMs yet, but it is coming).

As an example, if 25% of the second liens go into default, the losses would be $8billion ($32 billion X 0.25 X 100% loss rate). And if 15% of the first lien Option ARMs go into default, add another $2.1 billion in losses ($28 billion X 0.15 X 50% loss rate). These default rates might seem too high right now, but no one is really sure how many homeowners will default when house prices fall 15%, 25% or more over the next few years.

This does look like a good strategic fit for BofA, but I agree with Robert Shiller:

``There's a tendency for people to underappreciate the risk of the housing market,'' Shiller said. ``I might have a lower valuation of Countrywide than Bank of America does.''
...
``Maybe Countrywide and Bank of America are going to have some problems going forward,'' he said. ``When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default. The troubled mortgages that Countrywide already has will be followed by even more troubled ones.''