by Anonymous on 2/14/2008 08:29:00 AM

I had a feeling this sort of thing might get underway:

McLean, VA – Freddie Mac (NYSE: FRE) today announced it is temporarily changing its Private Mortgage Insurer Eligibility Requirements [PDF 160K] in order to increase the claims-paying and capital retention capacities of its mortgage insurance counterparties during the current market correction.

Effective on or after June 1, 2008, Freddie Mac-approved private mortgage insurers may not cede new risk if the gross risk or gross premium ceded to captive reinsurers is greater than 25 percent. Beyond limiting the allowable cede to 25 percent, the temporary policy does not limit the mortgage industry's use of captive reinsurance.

Triggered by the ongoing decline in home prices and poor performance of subprime, Alt A and other higher-risk mortgages, Freddie Mac says the temporary change is intended to allow mortgage insurers to retain more insurance premiums to pay current claims and re-build their capital base.

Today's announcement applies to all Freddie Mac-approved private mortgage insurers. In addition, Freddie Mac is now requiring all eligible private mortgage insurers to provide additional information about their business activities to better monitor the state of the industry.

Private mortgage insurance enables Freddie Mac to buy loans when a borrower makes a downpayment of less than 20 percent of the purchase price. In a captive reinsurance structure, the mortgage insurer cedes a portion of its premium income to a special trust set up to cover an agreed upon share of losses from a pool of mortgages.

Freddie Mac also announced it is suspending its Type II Insurer requirements otherwise automatically applicable to mortgage insurers that are downgraded below AA- or Aa3 by the rating agencies provided the mortgage insurer commits to submitting a complete remediation plan for our review and approval within 90 days of the downgrade. Freddie Mac also reserves the right to impose additional restrictions in its sole discretion.

The GSEs have enormous exposure to the MIs. Their own risk management depends on how they maintain eligibility standards for MI carriers; if they accept policies written by lower-grade insurers with less certain claims-paying ability, their own reserves for loss have to increase. On the other hand, if they cut off an insurer that gets notched under AA-, they're not just losing new insured mortgage business, they're increasing the pressure on the MI by cutting off its main source of new policies written. The problem with a downgraded MI for the GSEs: you can't live with them, and you can't shoot them.

So the "workout" proposals begin. Whether this is a wise response that will avert major catastrophe in the MI business, or the first step in following a failing MI down, is anyone's guess. I personally can't see how they can not "work things out" with the MIs right now, even as I see it as just one more reason that Congress needs to give it a rest with these plans for the GSEs to take on more and more of the risk of failing private sector mortgage portfolios.

by Calculated Risk on 2/13/2008 10:39:00 PM

From the WSJ: Worried Bankers Seek to Shift Risk to Uncle Sam

The banking industry ... is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.
...
The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.

This plan makes no sense. Why should the taxpayers bailout the lenders and investors?

by Calculated Risk on 2/13/2008 06:48:00 PM

From the WSJ: S&P Cuts Ratings On $6.75 Billion In CDO Tranches

Standard & Poor's lowered its ratings on 66 tranches with a total value of $6.75 billion, from 10 U.S. cash-flow and hybrid collateralized-debt-obligation transactions.
...
So far, S&P has cut ratings on 1,567 tranches from 434 U.S. cash-flow, hybrid, and synthetic CDO transactions ... In addition, 2,305 ratings from 589 transactions are on watch for possible downgrades. The affected CDO tranches have a total value of $343.63 billion.

The slow steady drumbeat of downgrades continues ...

by Calculated Risk on 2/13/2008 02:01:00 PM

From DataQuick: Southland home sales slowest for any month in 20 years

Southern California home sales dipped below 10,000 transactions for the first time in more than 20 years last month as most potential buyers and sellers appear to be waiting out market turbulence, a real estate information service reported.

A total of 9,983 new and resale houses and condos were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in January. That was down 24.6 percent from 13,240 for the previous month, and down 44.9 percent from 18,128 for January last year, according to DataQuick Information Systems.

Last month's sales total was the lowest for any month in DataQuick's statistics, which go back to 1988. Since September, sales for each calendar month were a record low for that particular month.
...
The median price paid for a Southland home was $415,000 last month, the lowest since $414,000 in January 2005. Last month's median was down 2.4 percent from December's $425,000, and 14.4 percent below $485,000 for January 2007.

Last month's median was 17.8 percent below the $505,000 peak reached last spring and summer. While the steep decline in median sales price does reflect a drop in prices, it also reflects significant shifts in the types of homes selling. Particularly noticeable is a drop-off in sales of more expensive homes financed with "jumbo" mortgages.
...
Foreclosure activity is at record levels, financing with adjustable-rate mortgages or with multiple mortgages has dropped sharply.

by Calculated Risk on 2/13/2008 01:21:00 PM

From SignOnSanDiego: Median housing prices in county hit 4-year low (hat tip iceman)

San Diego County median home prices fell last month to their lowest level in four years with nearly half of existing homes selling at a loss in the face of mounting foreclosures, DataQuick Information Systems reported yesterday.
...
[DataQuick analyst Andrew LePage] said a record 34 percent of resale homes last month were previously in foreclosure and 9 percent were in default. Nearly half of all resale houses and condominiums were sold at a loss from when they were last purchased. The median loss was about 25 percent.

By comparison, 5.3 percent of resales in January 2007 had been in foreclosure.
...
The overall median price slipped $1,000 from December and $43,000 from a year ago to $429,000, the lowest since February 2004.

Prices are back to Feb 2004, and based on future prices, probably headed much lower.

by Calculated Risk on 2/13/2008 12:42:00 PM

Last March, I wrote about a couple that had to bring $20 thousand to escrow to sell their home: Escrow to Seller: "Bring Money". Since they bought the condo with no money down, this was a downpayment in arrears.

Today, with house prices falling even more, they would have to bring $80 thousand or more to escrow, or arrange a short sale with the lender, or just walk away and suffer the consequences.

Bloomberg has an article on this phenomenon: Americans Selling Homes See Prices Go Below Mortgage (hat tip SC)

When Mary Kamanu paid $409,000 for a house in Folsom, California, she never imagined that three years later it would be worth about 20 percent less and she would have to pay the bank more than $80,000 just to sell the place.

``I'm completely upside-down on my mortgage, like a lot of people,'' said Kamanu, who wants to move 12 miles away to live with her fiancé in a suburb of Sacramento. ``I know I'm going to have to come up with a big chunk of change.''

This sounds like another "no money down" purchase with a 20% down payment in arrears.

by Calculated Risk on 2/13/2008 11:09:00 AM

From David Lazarus at the LA Times: Shadow victims of the mortgage crisis: renters

Salgado, 40, is one of many renters who have found themselves homeless after their cash-strapped landlords stopped making mortgage payments and their houses or apartment buildings were foreclosed upon.

The California Apartment Assn., the state's largest organization of rental property owners, estimates that as much as a quarter of all foreclosed single-family residences are occupied by renters. The number of renters ensnared in the foreclosure fiasco is even larger when duplexes and other multi-unit buildings are factored in.
...
State officials said that under California law, existing rental agreements are essentially wiped out when a property is foreclosed upon. All that's required is that a tenant be given at least 30 days' notice that he or she is being evicted.

Lenders are not in the business of being landlords, and they typically want a house vacant so they can sell it as quickly as possible.

The article also touches on the impact on rents:

... this can mean even steeper rents because the wave of foreclosures has spurred greater demand for rental housing

In the short term, the housing bust has probably helped push rents up in many areas.

by Calculated Risk on 2/13/2008 10:07:00 AM

From the National Retail Federation: Jan. Retail Sales Show Consumers Spending on Essentials

As expected, January retail sales demonstrated that consumers last month were focused on buying necessities more than discretionary items. According to the National Retail Federation, retail industry sales for January (which exclude automobiles, gas stations, and restaurants) rose 2.0 percent unadjusted over last year and 0.1 percent seasonally adjusted from December.

January retail sales released today by the U.S. Commerce Department show total retail sales (which include non-general merchandise categories such as autos, gasoline stations and restaurants) increased 0.3 percent seasonally adjusted from last month and 4.6 percent unadjusted year-over-year.

“The January numbers are indicative of the issues consumers are facing, including the housing slump, a sluggish employment sector and high energy prices,” said NRF Chief Economist Rosalind Wells. “We expect to see marginal improvements in the second half of the year once consumers begin to receive their rebate checks.”

That was the fairly negative take from a major retail group. Others were more positive; from the WSJ: Retail Sales Post Surprise Jump

Retail sales unexpectedly climbed in January, given a boost by demand for cars and gasoline in a positive sign for the economy. ... Retail sales increased by 0.3%, the Commerce Department said Wednesday. Sales went down an unrevised 0.4% in December.

These numbers are subject to revisions, but overall this report was stronger than expected.

by Anonymous on 2/13/2008 09:05:00 AM

MILWAUKEE, Feb 13, 2008 /PRNewswire-FirstCall via COMTEX/ -- MGIC Investment Corporation today reported a net loss for the quarter ended December 31, 2007 of $1.47 billion, including certain items described below. This compares with net income of $121.5 million for the same quarter a year ago. Diluted loss per share was $18.17 for the quarter ending December 31, 2007, compared to earnings per share of $1.47 for the same quarter a year ago.

Included in the quarterly results is the establishment of a pre-tax premium deficiency reserve of approximately $1.2 billion relating to Wall Street bulk transactions. The premium deficiency reserve reflects the present value of expected future losses and expenses that exceeded the present value of the expected future premium and already established loss reserves for these bulk transactions. Also included in the quarterly results is an after-tax charge of $33 million related to equity losses incurred by C-BASS in the fourth quarter that reduced the carrying value of the $50 million note from C-BASS to zero.

Curt S. Culver, chairman and chief executive officer of MGIC Investment Corporation and Mortgage Guaranty Insurance Corporation (MGIC), said that the low cure rates coupled with higher loss severities and higher delinquencies had a material impact on the company's financial results both in the quarter and for the year. Mr. Culver said that given the company's expectations for credit loss development, unless the cure rate and loss severity improves, the company does not foresee net income for 2008. . . .

As of December 31, 2007, the delinquency inventory is 107,120. At December 31, 2007, the percentage of loans that were delinquent, excluding bulk loans, was 4.99 percent, compared with 4.08 percent at December 31, 2006, and 4.52 percent at December 31, 2005. Including bulk loans, the percentage of loans that were delinquent at December 31, 2007 was 7.45 percent, compared to 6.13 percent at December 31, 2006, and 6.58 percent at December 31, 2005.

Losses incurred in the fourth quarter were $1.35 billion, up from $187.3 million reported for the same period last year due primarily to the increase in both the number and size of loans that are delinquent, increased loss severity, decreased cure rates in certain markets, particularly California and Florida, continued weakness in the Midwest, and increased paid losses. . . .

Historically a significant portion of the mortgage insurance provided by MGIC through the bulk channel has been used as a credit enhancement for securitizations. During the fourth quarter, the performance of loans included in Wall Street bulk transactions deteriorated materially. Therefore, during the fourth quarter of 2007, we decided to stop writing that portion of our bulk business. A Wall Street bulk transaction is any bulk transaction where we had knowledge that the loans would serve as collateral in a home equity securitization. In general, these bulk transactions on average reflect lower average FICO scores and a higher percentage of ARMs, compared to our other bulk business. We plan to continue to provide mortgage insurance on bulk transactions with the GSEs or portfolio transactions where the lender will hold the loans. Wall Street bulk transactions represented approximately 41%, 66% and 89% of our new insurance written for bulk transactions during 2007, 2006 and 2005, respectively, and at December 31, 2007 included approximately 145,000 loans with insurance in force of approximately $25.5 billion and risk in force of approximately $7.6 billion (which is 74% of our total bulk risk in force).

Guess they won't be holding the bag on those "Super Duper Seniors" any more . . .

by Anonymous on 2/13/2008 08:20:00 AM

I will have you know I did not make that up.

Aside from the small trickle of deals, UBS highlighted a new structuring technique for Alt-A hybrid deals, which involves carving out ultra high-quality bonds out of the super senior triple-A classes and calling them super duper senior bonds.

"Many investors are reluctant to buy MBS backed by Alt-A collateral including super senior paper, as they fear credit losses," UBS analysts wrote.

In a hypothetical super duper triple-A deal, the bonds have twice the credit enhancement of the super senior triple-A bond and four times the credit support of the straight triple-A bond. After running the structure through hypothetical scenarios, UBS determined that the super duper senior Alt-A hybrids offer great value relative to prime jumbo super senior hybrids and agency hybrids, and virtually eliminate the credit component.

Some market participants, however, were not as delighted with the prospect of the new structure. "I don't think it will be anything big," one trader said. "I don't think anyone is overwhelmed by it."

I'd think not. "Super Duper" sounds like the kind of thing you hear at a Junior League luncheon (not that I've ever been invited to one, you know, but you hear stories). I think they need a better name for this.

Belt and Suspenders Bonds? Belt and Suspenders and Duct Tape Bonds? Belt and Suspenders and Duct Tape and Airbag Bonds? Belt and Suspenders and Duct Tape and Airbag and Flame-Retardant Jammies Bonds? If we're going to act like we found the recipe for a quintuple-A rating, we might as well be vivid.