by Calculated Risk on 1/16/2008 05:42:00 PM

From Bloomberg: S&P Will Review Bond Insurers With New Assumptions

Standard & Poor's will re-examine the AAA credit ratings of bond insurers including MBIA Inc. and Ambac Financial Group Inc. after deciding that the housing slump will cause bigger losses from subprime mortgages than anticipated.

S&P, which completed a review of the bond insurers in December, will rerun a stress test ... The test will be completed within a week ... The ratings company is now assuming losses on 2006 subprime mortgages will reach 19 percent, up from 14 percent ... That may make S&P more likely to downgrade mortgage-backed securities guaranteed by the bond insurers.

I'm not sure if the current review will also include downgrades to the CDOs based on the new assumptions; if it doesn't, then the insurers will probably be reviewed again in a couple of months.

by Calculated Risk on 1/16/2008 04:07:00 PM

Remember when the credit problems were contained to subprime mortgages? From Greg Ip in July 2007:

"Despite fears in the markets and press that subprime problems would trigger broader contagion, the Federal Reserve has repeatedly predicted that what started in subprime would stay in subprime. Chairman Ben Bernanke largely echoed that sentiment in congressional testimony today ..."

Now from the WSJ: Lax Lending Standards Could End Up Fueling Sudden Acceleration in Auto-Loan Delinquencies

It is becoming clear that several auto lenders let lending standards slip substantially in 2006-07. ... There is also some evidence that credit-card companies made the same mistake.

"The problem of lax loan-underwriting standards was not just concentrated in the mortgage sector; it's looking like it took place across the consumer-finance sector, from credit-card loans to auto loans to motorcycle loans," says William Ryan, consumer-finance analyst at Portales Partners, a research firm.

... Certain classes of loans made in 2006-07 are reporting some of weakest early credit performances in recent memory.

For instance, 2.06% of prime auto loans made in 2006 were more than 30 days past due in November, according to a Standard & Poor's Corp. survey. That past-due number for loans in their first year exceeds the historical high rate recorded in 2001 -- and it is well up from the 1.75% for prime auto loans made in 2005, S&P says.

The past-due numbers for loans made in 2007 are even worse than the 2006 credits -- a trend that exists for both prime and subprime loans, according to S&P.

For both "prime and subprime loans". Just six months ago the Fed thought the problems were contained to subprime mortgages. Well, we're all subprime now.

by Calculated Risk on 1/16/2008 02:56:00 PM

Remember those surplus notes that MBIA sold yielding 14%? See: "How many other AAA rated companies are raising money at 14%?"

I guess a 14% yield isn't enough anymore, from Reuters: MBIA's Surplus Notes Plunge to 89.50 Cents - Investor

MBIA Insurance Corp's recently issued $1 billion of surplus notes plunged on Wednesday to about 89.50 cents on the dollar from 95 cents on the previous day, according to a portfolio manager.

Nice haircut.

by Calculated Risk on 1/16/2008 02:19:00 PM

I recommend this article from the Sunday New York Times magazine The Education of Ben Bernanke, by Roger Lowenstein. It is long, but well worth reading.

“I think Bernanke is in a very difficult situation. Too many bubbles have been going on for too long. The Fed is not really in control of the situation.”
Former Fed Chairman Paul Volcker (Chairman from 1979 to 1987) to Roger Lowenstein.

While on the subject of Paul Volcker, here is a speech he gave in February 2005.

Click image for video. Former Fed chief Paul Volcker spoke in Feb 2005 at the second annual summit of the Stanford Institute for Economic Policy Research. In his keynote speech he warned that the nation was facing 'huge imbalances and risks'.

Volcker always talks about fiscal discipline, and that bring us back to the Lowenstein piece:

Bernanke updates Bush and Vice President Cheney several times a year, but he prizes his political independence. Unlike Greenspan, he has avoided taking positions on economic issues that do not relate to the Fed’s mission. (An exception is his affirmation that he “believes in the laws of arithmetic,” a none-too-subtle rejection of the Bush ideology that championed deficit-spawning tax cuts.)

I couldn't have said it better.

by Calculated Risk on 1/16/2008 12:55:00 PM

Click on graph for larger image. The NAHB reports that builder confidence was at 19 in January, up from a revised 18 in December. Confidence in January would have been at a record low without the revision to December.

Here are the individual components. The slight increase in the HMI was mostly because builders are hoping for a slight increase in sales over the next 6 months. "Hoping" is the right word.

NAHB: Builder Confidence Virtually Unchanged In January

Builder confidence in the market for new single-family homes was virtually unchanged for a fourth consecutive month in January as mortgage-market problems and inventory issues continued to pose challenges, according to the latest NAHB/Wells Fargo Housing Market Index (HMI), released today. The HMI rose a single point to 19 this month following a downwardly revised 18 reading in December and 19 readings in both October and November of 2007.
...
“The HMI has held within a narrow two-point range for the past five months, indicating that builder views of housing market conditions essentially haven’t changed over that time,” said NAHB Chief Economist David Seiders. ...

In January, the index gauging current sales conditions for single-family homes remained unchanged at 19, while the index gauging sales expectations for the next six months rose two points to 28. Meanwhile, the index gauging traffic of prospective buyers rose one point to 14.

Regionally, the HMI results were mixed in January. The Northeast posted no change at 20, while the Midwest reported a two-point gain to 17 and the South registered a three-point gain to 23. The West posted a five-point decline to an HMI reading of 13.

by Calculated Risk on 1/16/2008 11:30:00 AM

Tanta previously noted that Downey announced they were restating their Non-Performing Assets (NPAs). Here is the graph of the new percentages from the Downey Financial 8-K released yesterday. (Credit Bubble Stocks has been on top of this story).

Click on graph for larger image. Update: added December at 7.8%. The graph was ugly enough; NPAs were already going parabolic. NPAs have increased from 1.53% in June to 7.8% in December - over five fold in six months!

by Anonymous on 1/16/2008 11:25:00 AM

From the Wall Street Journal:

In some cases, servicers are telling borrowers they will take 10 cents on the dollar to settle their claim, says Micheal Thompson, director of the Iowa Mediation Service, which runs a hotline for homeowners in financial distress. In other cases, they are selling these loans at large discounts to third parties, says Kathleen Tillwitz, a senior vice president at DBRS, a ratings agency.

Coming up with a plan that will get borrowers back on track is easiest if both the mortgage and home-equity loan are held by the same party. Countrywide will sometimes "whittle down" the payment on the second mortgage to come up with an amount that the borrower can afford to pay for both mortgages, or even eliminate that payment, Mr. Bailey says. The company doesn't publicize such efforts, he adds, because that might encourage "people not to make their payment and see what happens." In either case, "the borrower still owes the principal," Mr. Bailey says.

Solutions can be harder to come by when the two loans were made by different lenders and are held by different parties. "The people in the first position will say, 'Until you get a deal with the second, why should I make a deal with you?'" says Iowa's Mr. Thompson. Second-mortgage holders are often reluctant to approve a short sale or deed in lieu of foreclosure that could wipe out their claims, he adds.

FirstFed says it encourages borrowers in financial distress to contact the owner of their home-equity loan and sometimes offers to buy out a home-equity loan with no current value for a small sum -- $2,000, for example -- so that the entire mortgage can be restructured.

But the company says such offers are often rejected. "It's not worth their while to take the $2,000" because of the costs associated with evaluating the offer and releasing the borrower from the lien, says Ms. Heimbuch, the company's CEO. "The second forces you into foreclosure."

Scenario A: Expenses $0, Recoveries $0. Scenario B: Expenses $2,000, Recoveries $2,000. Amazingly enough, they're going for A.

Of course, eventually they'll be able to make it up on volume . . .

by Calculated Risk on 1/16/2008 09:52:00 AM

Quote of the day:

“For all consumer credit and I think we've pointed out consistently that we see in auto, home equity, subprime, credit card, that where home prices are down, delinquencies, charge-offs are going up, and so we've kind of been preparing for that, thinking about that and trying to build that into some of our models and that's what you see in home equity and I hope we get near the end of this but this was certainly higher than we would expect it even at the peak of a cycle.”
CEO Jamie Dimon, J.P. Morgan Chase, Jan 16, 2008

And on credit cards:

“So remember, credit card was always kind of abnormally low , so part of what you're seeing we think is the catch up to getting back to a more normal, forget everything else. The second effect is that in HPA's, where prices are down, think of California, Arizona, Miami, Michigan, Ohio, we have seen the credit card delinquency losses simply going up, so where we have real visibility, we know it's going to hit 4.5% or thereabout in the first and Second Quarter, we're obviously a little less certainly about the Second Quarter. What I'm saying is I believe that home prices are worse than people think. That's my own personal belief. Just looking at numbers and thinking at lags and what goes into those things and therefore, if you kind of roll that through, while there's nothing in the current data that shows it, I think that more likely than not it will be 5% [delinquency] by the end of the year and that's barring a real recession. Remember, in the credit card and the consumer business, on top of all of this other stuff we talk about which is normally driven credit losses, real cyclical credit losses is unemployment. I think that will still be a factor if you see unemployment going up on top of this other stuff.”

With a recession, and rising unemployment, it could really get ugly.

Added (hat tip Brian):

James Dimon:
This is a lesson that's been learned over and over about broker originations, they perform much worse than our own originations, and if you separate home equity into we call it kind of good bank, bad bank, and broker so I would say it's less than 20%, but a lot of the losses are coming from that 20%, which is high LTV, broker originated businesses. High LTV business is also bad in its own.

Analyst:
And the 20% you referred to a minute ago in round numbers is the sort of specifically high LTV and originated away [by brokers] is that right?

James Dimon:
It's been very consistent In both our own originated and broker originated, high LTV, stated income is bad. It is three times worse in broker than it is in our own.

Analyst:
Wow.

The broker model is broken.

by Calculated Risk on 1/16/2008 08:27:00 AM

PR from Ambac: Ambac Announces Capital Enhancement Plan to Raise in Excess of $1 Billion

Ambac Financial Group ... today announced ... the issuance of at least $1 billion of equity and equity-linked securities. ... By raising at least $1 billion in capital, Ambac is expected to meet or exceed Fitch Ratings’ current triple-A capital requirements for the Company. ... As part of its capital initiative, Ambac also said that it will reduce the quarterly dividend on its common stock from $0.21 per share to $0.07 per share.
...
Ambac’s estimate of the fair value or “mark-to-market” adjustment for its credit derivative portfolio for the quarter ended December 31, 2007 amounted to an estimated loss of $5.4 billion, pre-tax, $3.5 billion, after tax.

by Calculated Risk on 1/16/2008 08:22:00 AM

From the WSJ: J.P. Morgan Posts 34% Fall in Net On Subprime-Related Write-Downs

J.P. Morgan Chase & Co.'s fourth-quarter net income fell 34% as the company recorded $1.3 billion in markdowns on subprime positions and saw sharply higher credit costs.
...
"We remain extremely cautious as we enter 2008," [Chairman and Chief Executive Jamie Dimon] said. "If the economy weakens substantially from here - for which, as a company, we need to be prepared - it will negatively affect business volumes and drive credit costs higher."

A billion here, a billion there ... even these small write-downs are adding up.