by Calculated Risk on 2/12/2008 11:35:00 PM

From Ruth Simon and Tom McGinty at the WSJ: Earlier Subprime Rescue Falters

In the past two months, the 1-888-995-HOPE hotline received roughly 176,000 calls, according to the nonprofit Homeownership Preservation Foundation, which operates the hotline. During that time, hotline counselors recommended a workout for 9,975 borrowers -- and told an additional 4,410 people to "seriously consider selling their home," the group says. Another 12,113 borrowers were referred for in-person counseling and services such as job-placement help.

Nodoby could have known.

by Calculated Risk on 2/12/2008 08:50:00 PM

From the WSJ: Delphi's Bankruptcy Exit Hits a Snag

The $6.1 billion plan to pull auto-parts supplier Delphi Corp. out of bankruptcy protection was in jeopardy yesterday ... J.P. Morgan Chase & Co. and Citigroup Inc.'s Citigroup Global Markets, are having difficulties syndicating the loan to other lenders...

Luckily for the banks, this won't become a pier loan:

J.P. Morgan and Citigroup are bound only on a "best-efforts basis" to arrange the loan. That is a lesser commitment than the "material adverse change" clause, which binds banks to a deal barring only a steep decline in a client's performance.

And over in the Muni market from AP: Failed Bond Autions Total $6B Tuesday

These failed auctions are probably related to the problems with the monoline insurers. The Credit Crunch continues ...

by Calculated Risk on 2/12/2008 05:07:00 PM

A couple of YouTube videos from today's Press Conference (hat tip Anthony):



Q for Paulson: Is the worst over?

Paulson: The worst is just beginning.

by Anonymous on 2/12/2008 12:48:00 PM

In the beginning, there was a Plan Hope.

Now, there is a Project: toss out a lifeline to those who just dipped under the waves for the third time.

I just listened to the live webcast of the Treasury Department's big announcement. I spent 40 minutes on this. I feel obligated to blog about it.

Project Lifeline involves servicers sending letters to borrowers--prime, Alt-A, or subprime, we're past pretense on that part--who are very seriously delinquent (90 days or three payments down or more). The letter says that if the borrower contacts the servicer within ten days, agrees to homeowner counseling, and provides sufficient financial documentation that the servicer can consider a case-by-case, deep-analysis style modification of the mortgage terms, the servicer will agree to put the foreclosure process on hold for 30 days while the workout is considered. If the borrower fails to respond to the letter, foreclosure proceeds.

The difference between this and the way the loss mitigation process has always worked is . . . the letter part.

What is implied here is that servicers are, in fact, staffed up to do these time- and labor-intensive modifications that include real examination of the borrower's circumstances, real counseling, and loan changes that are much harder to process than just a teaser freeze. They're just waiting by the phone for borrowers to call. Why am I skeptical about that?

Highlight of the whole thing:

Q to Paulson: "Is the worst over?"

Paulson: "The worst is just beginning."

Lowlight: Alphonso Jackson, whose soporific discourse leads the viewer's mind to abandon the struggle to pick content out of the bromides and focus instead on that oddly expressionless, smooth, unwrinkled, ageless baby face of his. What, you wonder, would it take to make this man look a little troubled? Armageddon?

Anyway, Jackson repeated the claim that over 200,000 (I think he said 228,000) applications for refinance have been received by HUD "since the President announced" the FHASecure plan in October. Once again, this statement implies, but does not exactly say, that all 200,000-odd applications were under the FHASecure program, as opposed to being all refinance applications, including those under standard FHA programs that would have been made anyway. And it says nothing about how many cases actually got endorsed.

(Civilians: FHA isn't a lender, so what it really gets "applications" for is insurance of a loan. It calls these "cases." When it insures a loan, it calls that an "endorsement." You need to know the lingo if you are enterprising enough to go root through HUD reports looking to see how many FHASecure loans actually have been endorsed. Good luck to you if you do: I'm having a hard time finding this information.)

Jackson did say that of the 200,000 and some "applications," "over 5,000" involved original loans that were already in default. I'm guessing that the true FHASecure caseload is about, um, 5,000. Anyone with better data is hereby invited to share. Jackson keeps repeating these numbers--which have been questioned before--and nodoby's calling him on it.

(I'll post a link to the transcript whenever it is available.)

by Calculated Risk on 2/12/2008 11:46:00 AM

From Brett Arends at the WSJ: Homes in Bubble Regions Remain Wildly Overvalued

... the really bad news is that, even after a year of misery and falling prices, homes ... remain wildly overvalued compared to average personal incomes.

There is a strong long-term correlation between the two figures. And in many regions, house prices would still have to fall a very long way to get back into line.

How far?

Try around a third in Florida and Arizona -- and closer to 40% in California.

Price to income isn't a perfect tool, but it does provide a gross estimate of how far house prices are still above "normal".

This points out the mistake many homebuyers made during the boom - they only looked at the monthly payment, and not the price. With low teaser rates, optional negative amortizing payments, and other mortgage innovations, it was easy for a homebuyer to get into a home at 13 or 14 times income.

Imagine a home purchased at 13 times income, with a 10% down payment. Say the homeowner switches to a 30 year fixed rate loan with a 6% interest rate. Just the P&I (principal and interest) would equal 84% of the homebuyers gross income!

This is called being "house poor". (Owning a home, but not exactly enjoying life).

by Anonymous on 2/12/2008 09:32:00 AM

Buffett offers to separate the sheep from the goats. The goats are not happy:

Feb. 12 (Bloomberg) -- Billionaire investor Warren Buffett said he offered to assume responsibility for $800 billion of municipal bonds guaranteed by MBIA Inc., Ambac Financial Group Inc. and FGIC Corp.

Buffett's Berkshire Hathaway Inc. would put up $5 billion as part of the plan that would exclude subprime-related obligations. One company has already rebuffed the proposal and the two others haven't responded, Buffett told CNBC television.

Buffett is attempting to take advantage of the distress among bond insurers by picking off the profitable municipal guaranty business and leaving MBIA, Ambac and FGIC with debt that has caused more than $5 billion in losses. The three companies are struggling to maintain their AAA ratings after writedowns on the value of mortgage guarantees.

``If you gave up your entire municipal business, that's the book of business where the value in the companies is right now,'' said CreditSights Inc. analyst Robert Haines. ``You'd essentially be ceding that whole book to Buffett and what you'd be left with would be the book of business where all the troubles are.'' . . . .

If the municipal debt was reinsured by AAA rated Omaha, Nebraska-based Berkshire, the municipalities would also retain the top rating, Buffett said.

``The insurance in the market is not doing bondholders any good and is in some cases penalizing bond investors,'' Buffett said. ``Our proposal puts the municipals at the front of the line.''

The downgrade of a large bond insurer would force some insurers to sell any municipal debt that didn't have an underlying AAA rating.

``It would solve it in one stroke of a pen,'' Buffett said of the plan.

*Everything But Subprime

by Anonymous on 2/12/2008 08:35:00 AM

It just looked like it to impartial observers. From IndyMac's shareholder letter:

Who is to blame for the mortgage industry's financial losses and also the record number of Americans losing their homes?

All home lenders, including Indymac, were a part of the problem, and, as Indymac's CEO, I take full responsibility for the mistakes that we made. However, objective reviewers of this mortgage crisis understand that home lenders and mortgage brokers were not the only ones responsible. Systemic problems in our secondary mortgage markets and credit markets, and our government's over-stimulation of the housing market via monetary and tax policies (the capital gains tax break on home sales encouraged speculation), were all major factors that contributed to the problem. Indymac and most home lenders were not "greedy and stupid". Most of us believed that innovative home lending served a legitimate economic and social purpose, allowing many US consumers to be able to achieve the American dream of homeownership ... and we still do.

Homeownership is the main way we Americans accumulate wealth, and, in fact, a recent Federal Reserve Bank study shows that homeowners on average have 46 times the personal wealth of renters. As innovative home lending and loan products became more widespread, the result was more people succeeding (in homeownership) and more people failing (losing their home) than ever before. But everyone, including both the government and consumer advocate groups who encouraged this lending via enforcement of CRA lending requirements, also bought into the concept that, if lenders and investors could properly price this increased risk, the higher number of failures was worth the social and economic goals of expanded homeownership. And it worked for many years; the homeownership rate, which had not moved in several decades, expanded from 64% to 69% from 1994 to 2006, allowing 4 million additional Americans the opportunity to have the American dream and build wealth.

However, in retrospect, like many innovations (e.g., the Internet, railroads, etc.), innovative home lending went too far. The housing bubble, caused primarily by the low interest rates for ARM mortgages fostered by the Fed's accommodative monetary policy and even lower rates for fixed/long-term mortgages due largely to tremendous global liquidity, combined with strong demand by institutional investors for assets with higher yields, resulted in a "systemic" underestimation of credit risk. This systemic underestimation of credit risk was not just for mortgages but for many forms of credit. By way of example, Indymac (and many other major financial institutions) has for years used one of the major credit rating agencies' models to assess and price credit risk on home loans. This model estimates expected lifetime losses on a loan level basis, and we closely monitor these average estimated lifetime losses for all of our loan production (that can be evaluated) on an ongoing basis. This particular rating agency revised its model in November 2007 (from version 6.0 to 6.1). Applying version 6.0 to our Q4-06 production (the version in place at that time) indicated an average expected lifetime loss rate of 0.88%, which we felt was a reasonable level of expected losses at which we could properly and adequately price the loans. However, now applying the updated version 6.1 to this same Q4-06 pool of loans results in an average expected lifetime loss rate of 1.88%, a 114% increase in expected losses in one year. This clearly indicates the extent to which the systemic underestimation of credit risk took place in the mortgage markets. As we began to realize this, we tightened our guidelines throughout the last year, with the result that our average expected lifetime loss rate for Q4-07 declined to 0.45% based on version 6.1, a 76% reduction in credit risk as compared to Q4-06, boding well for the future credit quality and related credit provisions/costs of our new business model.

Why didn't mortgage lenders see that things were going too far?

Lenders didn't see that things were going too far, partly because we were too close to it, but mostly because objective evidence of this credit risk did not show up in our delinquencies and financial performance until it was too late to prevent significant losses. And there were many events along the way that confirmed for those of us who believed that innovative home lending was possibly a paradigm shift (similar to widespread ownership of stocks by consumers) and definitely a legitimate marketplace: major financial institutions were offering these products and spending billions to purchase companies who specialized in these products; Wall Street firms and broker/dealers of major banks were underwriting our and others' transactions and also spending billions as recently as 2006 to buy non-GSE lenders in order to vertically integrate their home lending and securitization activities; major mortgage and bond insurers were insuring individual mortgages and pools of mortgages or bonds created from these mortgages; major credit rating agencies were providing strong ratings on our and others' transactions; and major investors around the world were purchasing these mortgage-backed bonds and even CDOs backed by these bonds (something we home lenders had no involvement in or awareness of). Very few in the private sector or in government predicted that the bursting of the housing bubble would be so severe and would result in the current wave of delinquencies, foreclosures and credit losses and the eventual collapse of the non-GSE secondary market ... even for high credit quality, full-documentation, jumbo home loans.

It is also important to understand that the rapid rise in housing prices is one of the key culprits in this current housing and mortgage crisis. In modern times, housing prices have declined in certain regions of the country but never on a nationwide basis. As a result of this fact and the important social and economic benefits that are clearly derived from homeownership, the government (first through FHA/VA programs and then through the GSEs) encouraged a USA mortgage market built upon very high leverage, with LTV ratios nearing 100% for first-time homebuyer programs. However, as home prices decline, either regionally or nationally, the leverage in a home loan, combined with the leverage of a financial institution or securitization structure, can result in significant losses for financial institutions, investors and consumers. Add to this mix a housing market that has not had a single regional market decline in over 15 years and, in fact, had a huge boom in prices from 2003 to 2006, and you can begin to understand how home lending was impacted. Automated risk-based models, on which the entire market relied, replaced portions of traditional underwriting and credit evaluation, and only in retrospect is it now clear that these models did not perform as predicted during a period of severe economic stress. As events unfolded, this proved to be particularly the case with respect to programs such as piggyback loans and high LTV cash-out refinance transactions, including home equity and second mortgages.

I have, of course, never claimed that it was merely the lenders at fault, not Wall Street or the Fed or the rating agencies or other culprits. Nonetheless, I am still capable of being amazed that the party with the most information about the loans is still willing to blame the party with probably the least information (the rating agencies) for the faulty loss estimates. Yes, the rating agencies should have demanded more information. I say this as someone, like Michael Perry, who knows damned good and well that there is much more information to be had.

I'll skip the part about how we didn't know about those CDOs because it's early in the day and I need more coffee before I can wrap my mind around the implications of that.

Otherwise, for practical matters:

In addition, to prevent consumers from making the wrong mortgage choice in the future, Indymac has decided to adopt as our policy that borrowers without $50,000 in demonstrated liquid assets or $250,000 in demonstrated net worth are not eligible for the following products(2):
1. ARM loans with initial fixed terms of less than five years.
2. Loans with negative amortization or prepayment penalties.
3. Limited documentation loans.

"To prevent consumers from making the wrong mortgage choice." God help me.

by Anonymous on 2/12/2008 08:08:00 AM

We welcome Vikas Bajaj and Louise Story of the New York Times to the clubhouse. Budge over, everyone.

From "Mortgage Crisis Spreads Past Subprime Loans":

The credit crisis is no longer just a subprime mortgage problem.

Word.

As usual, I enjoy the borrower anecdotes. These are, you remember, prime-credit well-educated borrowers with good jobs. What does this heretofore under-recognized not-just-subprime group have to say about the pickle it's in?

Ms. Harris, who has a new home in a neighborhood in which the builder is slashing prices to move vacant units:

In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.

But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.

She said that she now wishes she had taken a traditional fixed-rate loan when she bought the home.

She cannot afford a fully-amortizing principal and interest payment. So she wishes she had taken a loan that would have required a fully-amortizing principal and interest payment from day one?

Mr. Doyle has a "six-figure" income and is upside down with a $740,000 loan.

In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.

The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000. Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.

Still, Mr. Doyle does not regret refinancing in 2004. “My goal was clear: I wanted to help my daughter go through college,” he said. “It wasn’t like it was for us.”

Is that, one wonders, what Mr. Doyle thinks is the difference between those subprime people and "us"? That while the subprime people hopelessly bungled their finances for selfish reasons, the prime people hopelessly bungled their finances for unselfish reasons?

I am tempted to say that the real difference between prime and subprime borrowers is that in the former case the denial lasts a lot longer.

(Hat tip Bode & Buzz.)

by Calculated Risk on 2/11/2008 07:58:00 PM

From the WSJ: Macklowe Receives Default Notice As His Debt Negotiations Stall

New York developer Harry Macklowe was served a notice of default Monday and the possibility of a foreclosure action loomed larger as his negotiations with his lenders over $7 billion of debt on seven Manhattan buildings bogged down ...

This is a story we've been following since last September. It appeared Macklowe bought these buildings right at the top of the commercial real estate cycle using short term financing. As the loans come due, Macklowe has been unable to refinance because the properties are clearly upside down.

by Calculated Risk on 2/11/2008 06:11:00 PM

From the WSJ: Lenders Team Up on Plan To Prevent Foreclosures

Prodded by politicians alarmed by a surge in defaults, six major mortgage lenders are due to announce Tuesday another effort to prevent foreclosures.

Under the latest plan, dubbed Project Lifeline ... the lenders are to seek contact with homeowners who are 90 or more days overdue on their mortgages. ... Unlike the recently announced plan to freeze interest rates at current levels on certain subprime loans, this latest drive would involve all kinds of home loans...

The participating banks are Bank of America Corp., Citigroup, Countrywide Financial Corp., J.P. Morgan Chase, Washington Mutual and Wells Fargo & Co. -- all members of the so-called Hope Now Alliance. They are working with the U.S. Treasury and Department of Housing and Urban Development. Those two departments scheduled a briefing on the plan for 11:15 a.m. Tuesday.

Countrywide unveiled another subprime plan workout today, from MarketWatch: Countrywide debuts subprime 'workout' plan (hat tip Anthony)

The Calabasas, Calif.-based company is teaming up with the Association of Community Organizations for Reform Now, the advocacy group also known as Acorn, to expand an existing $16 billion program to help subprime borrowers avoid foreclosure and work out more manageable rates on their mortgages.

We're all subprime now!