by Anonymous on 2/23/2008 09:42:00 AM

The Washington Post reports on the freezing of Home Equity Lines of Credit:

"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation's largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it's just not good for the borrowers to get so overextended."

Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.

The company declined to disclose how many of the affected borrowers lived in the Washington area. About 381,000 borrowers in the region had home equity lines at the end of last year, according to Moody's economy.com.

USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.

Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.

"We know this can cause hardship to our customers," Francisco said. "If they used the credit to make payments that are in the pipeline, we will work with them to make sure the payment goes through."

Well, that last sentence pretty much took care of any desire I had for breakfast.

The obligatory borrower anecdotes are, I must say, priceless examples of the genre. You have a realtor and a mortgage-loan processor, neither of whom seems to have grasped the "equity" part of HELOC. This implies that people who don't work in the industry probably think things I don't care to know about.

Larry F. Pratt, chief executive of First Savings Mortgage in McLean, said most mortgage documents he has seen give lenders wide latitude to suspend or freeze credit lines.

"A layperson would not recognize the language because it's not that blatant," Pratt said. "It talks about deterioration of the value of the asset or the value of the collateral. . . . It's not boilerplate language by any means."

Maggie DelGallo did not realize that when she took out a home equity line a few years ago on her home in Loudoun County. Her lender recently froze the line.

DelGallo, a real estate broker, has used some of her credit line over the years. Had she known the freeze was coming, "I would have drained it," she said. "I would have taken every dime and possibly placed it in a money-market vehicle."

DelGallo said she does not think she is in dire straits. "It's more like a huge disappointment," she said. "I have this line of credit attached to my home that's useless."

Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. Another 31 percent used them to pay for other things, such as medical bills, weddings or vacations.

Corazzi initially used her line to consolidate debt. She and her husband took out the credit line in October because they thought her job was in jeopardy.

It was. In December, her salaried position as a loan-processing manager at a local mortgage bank changed to a commission-only job.

Given the slowdown in the industry, Corazzi has collected only one paycheck since then. Her husband, Ron, sells large-format copiers and printers to builders, and his salary alone cannot support them and their four children, ages 4 to 8.

By the time their lender called, the couple had $45,000 remaining unused on the credit line. Ron Corazzi is now looking for a second job, and his wife is hoping to pick up work as a substitute teacher.

Meanwhile, they are trying to open a new home equity line elsewhere, but chances are slim given the change in Nancy Corazzi's job status and the drop in their home's value. Five months ago, the Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.

"I told them, 'You guys are wrong,' " Nancy Corazzi said. "They said, 'Sorry, this is what we're doing in the entire area.' "

Corazzi said she was blindsided by what's happened. "I didn't know they could do that. I thought I was too smart to have something like this happen to me."

There's an old apocryphal story that has been told in banking circles for decades about the customer who cries, "But how can I be overdrawn? I still have checks left!"

At least, I always thought that was apocryphal.

by Anonymous on 2/23/2008 08:02:00 AM

I have no particular qualms about hanging BoA's name on this proposal. For one thing, they seem to have sent the memo. For another, they just "bought" Countrywide. (Who knows what the price would be net of this proposed government buyout of all the bad loans?) Edmund Andrews in the New York Times:

WASHINGTON — Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for “financial innovation.”

But as losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted.

So that answers the questions everyone had about the OTS-NEC proposal, such as how the hell it would work with securitized loans: it wouldn't. The government would buy those loans out of those pools first, so the NEC thingy wouldn't be owned by the security. But if you "position" it as a bailout of homeowners, nobody will "perceive" it to be a bailout of the bond market?

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government’s $200 billion bailout of the savings and loan industry in the 1990s. The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

A rescue would also create a “moral hazard,” many experts contend, by encouraging banks and home buyers to take outsize risks in the future, in the expectation of another government bailout if things go wrong again.

If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.

But a growing number of policy makers and community advocacy activists argue that a government rescue may nonetheless be the most sensible way to avoid a broader disruption of the entire economy. . . .

Ellen Seidman, a former director of the Office of Thrift Supervision and now a senior fellow at the moderate-to-liberal New America Foundation, said the government’s first challenge is to buy mortgages at their true current value. If the government overpaid or became caught by an even further decline in the market value of its mortgages, taxpayers would indeed be bailing out both the industry and imprudent home buyers.

“It’s not easy, but it’s not impossible,” Ms. Seidman said. “There are various auction mechanisms, both inside and outside government.”

A second challenge would be to start a program quickly enough to prevent the housing and credit markets from spiraling further downward. Industry executives and policy analysts said it would take too long to create an entirely new agency, as Bank of America suggested. But they expressed hope that the government could begin a program from inside an existing agency.

But even if the government did buy up millions of mortgages and force mortgage holders to take losses, the biggest problem could still lie ahead: deciding which struggling homeowners should receive breaks on their mortgages.

Administration officials have long insisted that they do not want to rescue speculators who took out no-money-down loans to buy and flip condominiums in Miami or Phoenix. And even Democrats like Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, have said the government should not help those who borrowed more than they could ever hope to repay.

But identifying innocent victims has already proved complicated. The Bush administration’s Hope Now program offers to freeze interest rates for certain borrowers whose subprime mortgages were about to jump to much higher rates. But the eligibility rules are so narrow that some analysts estimate only 3 percent of subprime borrowers will benefit.

Bank executives, meanwhile, warn that the mortgage mess is much broader than people with subprime loans. Problems are mounting almost as rapidly in so-called Alt-A mortgages, made to people with good credit scores who did not document their incomes and borrowed far more than normal underwriting standards would allow.

Borrowers who overstated their incomes are not likely to get much sympathy. But industry executives and consumer advocates warn that foreclosed homes push down prices in surrounding neighborhoods, and a wave of foreclosures could lead to another, deeper plunge in home prices.

Right or wrong, the arguments for rescuing homeowners are likely to be blurred with arguments for rescuing home prices. At that point, industry executives are likely to argue that what is good for Bank of America is good for the rest of America.

Nobody is going to create a functioning new agency with the relevant expertise and staffing and funding and clear mandate out of thin air fast enough to do what this wants to do, if what we want to do is stave off recession. FHA probably has the expertise to credibly attempt the loan-level workouts, but not enough hands to get saddled with $739 billion worth that has to be dealt with before everybody's lawns go brown. Ginnie Mae is, in my view, one of the most efficient and quietly professional government agencies ever: they run a highly successful program with a tiny staff. I can't imagine Ginnie Mae is ready to manage reporting and remittances on a brand-new government-owned pool o' junk of this size with existing resources.

So of course the whole thing would be outsourced to some private company. I'm sure there's a financial institution out there willing to write up a proposal for how the government can pay it a management fee to orchestrate the government's bailout of its last attempt to manage mortgage-lending-related program activities.

by Calculated Risk on 2/22/2008 04:09:00 PM

UPDATE: The Financial Times is reporting that the banks most exposed to a downgrade are discussing injecting more capital into Ambac, and that the plan includes splitting the company.

From the Finanical Times: Banks look to bolster Ambac with $2bn

A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.

The money from the banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.

From Reuters: Ambac rescue could be announced Mon or Tues: report

Banks rescuing Ambac ... could announce a plan as soon as Monday or Tuesday, CNBC's Charles Gasparino said on Friday.

The details of the deal are still being worked out and the plan may fall through ...

by Calculated Risk on 2/22/2008 02:22:00 PM

From Moody's (login required):

On February 22, 2008, Moody's placed CIFG's financial strength ratings on watch for possible downgrade. Because of the large volume of watchlist changes resulting from this action, ratings appearing on this website may not yet reflect current information.

by Calculated Risk on 2/22/2008 01:35:00 PM

Vacant homes are a negative externality for the neighbors; from unkempt yards, mosquito infected pools (see video at bottom of posts), fire hazards, and trespassers squatting in the homes (aka "bando", a homeless person living in an abandoned home) are just some of the problems.

To combat these problems, Minneapolis city leaders are encouraging neighbors to adopt vacant homes. From the StarTribune: City asks people to 'adopt' vacant houses

With the number of boarded homes increasing because of foreclosures, Minneapolis city leaders are encouraging neighbors and block clubs to "adopt" a vacant property on their block.

The article offers some advice for neighbors from the Police Department.

I had a vacant home next door to me for the last two years (now rented), and I picked up the flyers, performed minor yard work, and checked on the property on occasion. It was a minor inconvenience, but it was still a hassle.

by Calculated Risk on 2/22/2008 01:20:00 PM

UPDATE: I believe this to be a script blocking problem (not being able to see the word "comments"). If you are using FireFox, and have the NoScript plugin installed, you need to allow Haloscan.com and Blogspot.com. Thanks!

I've heard from two readers that say they can't see the comments. The comments appear OK to me, and there are many people participating in the comments. If you can't see the comments, please send me an email (topic "Comments") with the browser and O/S you are using. I'll forward this info to Haloscan and see if we can get this fixed. This is puzzling ...

by Calculated Risk on 2/22/2008 12:06:00 PM

CNBC reports: Is Time Running Out for Bond Insurers?

The decision by the big ratings agencies, Moody's, Standard & Poor's and Fitch is imminent, and at least one of the raters could make an announcement sometime today.
...
[A] downgrade of MBIA and Ambac could pose big problems for the banks that hold bonds they insure. Analyst Meredith Whitney said on CNBC yesterday that the downgrades could cause writedowns of another $75 billion at the big banks.
emphasis added

by Anonymous on 2/22/2008 11:15:00 AM

I see America's mortgage lenders have put aside their differences long enough to unite against cram-down legislation:

The nation's largest lending institutions are lobbying hard to block a proposal in Congress that would give bankruptcy judges greater latitude to rewrite mortgages held by financially strapped homeowners.

The proposal, which could come to a vote in the Senate as early as next week, is being pushed by Democratic congressional leaders and a large coalition of groups that includes labor unions, consumer advocates, civil rights organizations and AARP, the powerful senior citizens' lobby.

The legislation would allow bankruptcy judges for the first time to alter the terms of mortgages for primary residences. Under the proposal, borrowers could declare bankruptcy, and a judge would be able to reduce the amount they owe as part of resolving their debts.

Currently, bankruptcy judges cannot rewrite first mortgages for primary homes. This restriction was adopted in the 1970s to encourage banks to provide mortgages to new home buyers.

The Democrats and their allies see the plan as an antidote to the recent mortgage crisis, especially among low-income borrowers with subprime loans. The legislation would prevent as many as 600,000 homeowners from being thrown into foreclosure, its advocates say.

"We should be giving families every reasonable tool to ensure they can keep a roof over their heads," said Sen. Richard J. Durbin (Ill.), the Senate's second-ranking Democrat and author of a leading version of the legislation.

But the banks argue that any help the proposal might provide to troubled homeowners in the short run would be offset by the higher costs that borrowers would have to pay to get mortgages in the future. The reason, banks say, is that they would pass along the added risk to borrowers in the form of higher interest rates, larger down payments or increased closing costs.

If banks were unable to pass on the entire cost, they could be forced to trim their profits.

"This provision is incredibly counterproductive," said Edward L. Yingling, president of the America Bankers Association. "We will lobby very, very strongly against it."

You are, of course, really and truly living in Wonderland if you think that larger down payments and higher credit-risk premiums aren't already starting to get here in part and will only get more "severe" until we return to something like normal lending practices. Just yesterday Freddie Mac published a new Bulletin, adding another 30 bps in delivery fees to loans with LTV/CLTV at or over 80% and FICOs less than 740 (that's 0.125 or less in rate), plus basically getting rid of almost all conventional (non-FHA) loans with LTV greater than 97%. This is "serious" credit tightening only in the context of the egregiousness of the last few years, of course. But it's rather amusing that the MBA seems to think that we could avoid reversion to mean lending standards if only we didn't approve bankruptcy changes to allow cram-downs.

It's particularly amusing just after the OTS made a bit of a splash with its "Negative Equity Certificate" proposal, which is as close to a Chapter 13 cram-down as you can get without a judge involved. Regardless of what you might think about the NEC proposal--insofar as any of us really has enough detail to understand it at the moment--you must recognize that it represents a clear statement from the regulator of the largest thrifts and savings banks in the country--like, you know, Countrywide and WaMu--that principal is going to be charged off. Somehow. Some way. Sooner or later. The MBA can natter on all it wants to about how cram-downs would add 1.50% to mortgage interest rates (wherever that number comes from); if that's true, though, then it is entirely not clear why that 1.50% isn't already on its way even in the absence of cram-down legislation. As usual, the MBA lets the cat out of the bag in its breathless prose:

In December, the U.S. House of Representatives Committee on the Judiciary passed bankruptcy reform legislation that would allow bankruptcy judges to change unilaterally the terms of many mortgage loans, including the loan balance, as part of Chapter 13 bankruptcy proceedings. By granting judges this power, this bill throws into question the value of the collateral that backs every mortgage made in this country -- the home. Even a change Congress says will be temporary will be interpreted by the market as an additional risk, which lenders' prices must reflect.

That's right; there's no question about the value of the collateral now. It would only be in question if we let BK judges see those appraisals.

What this really means is that a successful cram-down would tell the investors in mortgage-backed securities that people can prove to a judge that 1) they cannot afford the mortgages they have and 2) the current value of the home is nowhere near the amount of the mortgage and 3) they do not, actually, want to just "walk away." (Nobody sane who really didn't care about keeping the home would subject themselves to a Chapter 13 just to get a cram-down; they'd mail in the keys.)

Apparently the MBA thinks that item 2) is not yet common knowledge among investors in mortgage-backed securities. This is ridiculous enough an idea that we have to assume it's willful smoke.

My own view is that a lot of mortgage lenders are still in serious denial on items 1) and 3). That'd be the whole "people who can afford their mortgages are just walkin' away" meme we've been dealing with. To admit to the fact that these mortgages are unaffordable for a lot of folks would be to admit that the whole stated-income/bogus DTI/teaser-rate qualifying games that lenders participated in for years was, in fact, what it appeared to be: a way to put people into mortgages who couldn't afford them. This is not a crisis of uncertainly about the collateral valuation. It is the recognition that the loans were made in the first place only because of the assumption that the borrower could always sell or cash-out when the true costs of the thing made themselves manifest, either through rate resets or just a couple of months of the reality of spending 50% or more of your gross income on house payments setting in. This recognition, which, frankly, the credit markets are actually getting to, contra MBA, is less about uncertain value of the collateral than exceptionally dubious reliance on such an uncertain thing to make loans work.

You have to keep remembering that the MBA is the same bunch who was all excited about increasing the conforming loan limits until mortgage bond traders--representatives to a man of that "market" the MBA is so solicitous of--announced, basically, that they had no intention of buying a pig in a poke (again). You do not make larger loan amounts less risky, especially in a declining value market, by simply declaring that "average" now means "125% of median." Mainstream media reports are getting fired up on the TBA issue, and as is generally the case with something this technical, they're not really getting it right. The issue isn't so much "segregation" of the new larger loans, it's specification.

In fact, there isn't any reason why the lower-balance currently-conforming loans couldn't go with the new higher-balance formerly-jumbo loans in a specified pool. (You just can't do it that way in a TBA pool.) It wouldn't necessarily be wise to do that, given that the lower-balance loans might get a better "execution" in TBA pools, but the point is that this isn't about "segregating" loans by balance. It's about, in essence, how much mortgage bond traders are willing to take on faith in "fungibility." TBA pools are sight-unseen: you are putting a price on loans not yet pooled, probably not yet even originated. You do this because you have the assumption that a conforming loan is a conforming loan, once it's got that GSE guarantee on it, so it doesn't matter which exact ones you get. The SIFMA announcement that the higher-balance loans would have to go in specified pools just means that you are putting a bid price on this exact pool of loans, and no other. If the loans are no longer truly "fungible"--if some of them are going to have characteristics that differ substantially from historical GSE pooling practices--then they're just not fungible. That doesn't mean they're bad loans or that nobody's going to bid on the things; it means traders need to know exactly what they're bidding on to price the prepayment risk adequately.

No, really. We've got specified pools. We have increased due diligence levels. We have the rating agencies adding additional data fields to pool-level tapes in order to rate them. We have the GSEs adding new loan-level reporting requirements so that correspondent and brokered loans can be identified in pools. This has all been going on for months and months now. "The market" wants to see, in rather more detail, just what it is we're putting in these pools. "The market" is already pretty sure there's some "uncertainty" here.

Strangely enough, at the same time the MBA is basically saying that all borrowers will get "priced" to the risk of underwater borrowers if cram-downs are allowed, as if we've never heard of the practice of risk-based loan-level pricing before. Either that, or everyone will have to make a down payment and verify income and meet reasonable ratio requirements. Which would, if it happened, pretty much make those loans "fungible" again, besides making them much less likely ever to end up in Chapter 13.

The mortgage industry's major lobbying group is coming out and telling you, explicitly, that cram-downs would ruin the party because we'd either have to disclose these bankruptcy-in-the-making loans to "the market" and watch it slap a punitive bid on the things, resulting in a rate the borrowers could never afford, or we'd have to stop making bankruptcy-in-the-making loans. Or perhaps we are being told that the MBA knows of no possible way to screen loan applications to cull out the ones most likely to end up in BK. That's rather a startling point of view from the folks who are supposed to be experts in mortgage lending.

To be perfectly honest, I'm not especially impressed with the rationale given for the cram-down proposal. I'm not convinced that 600,000 families are going to flock to Chapter 13 if the bill passes and end up financially better off and still in possession of their homes as a result. Most likely, they'll either be financially better off or still in possession of their homes, but not both. I support the bill, nonetheless, because giving residential mortgage lenders preferential treatment in BK proceedings has not worked out well for us, and if it takes the threat of cram-downs to sober everyone up on credit standards and pricing, then let's get on with it. At the very least we ought to be able to force the MBA to come clean on its rhetoric.

by Calculated Risk on 2/22/2008 10:50:00 AM

In the current Situation Room report (no link), BofA analysts suggest the monoline insurer breakup could lead to $30 Billion in write-downs for banks. BofA suggests further capital infusions, aimed at stabilizing the monolines at AA, would be a possible alternative.

This is the first suggestion I've seen of trying to stabilize the ratings at AA. I'm not sure how that would impact the muni bond market.

by Calculated Risk on 2/21/2008 11:16:00 PM

From Edmund L. Andrews and Louis Uchitelle at the NY Times: Rescues for Homeowners in Debt Weighed (hat tip SC)

Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com.

This article is mostly about the various bailout plans being proposed. But there is this comment (something I've been meaining to mention) on the impact of the housing bust on mobility in the U.S.:

People cannot move easily to jobs in other cities if they have to sell their homes at a loss.

I haven't seen the new Economy.com estimate, but I think the 8.8 million number might be a little high. However it is definitely in the ballpark. The 10.3 percent is of total homes including second homes (see here for data). I think a better number would be the percent of owner occupied homes with mortgages: 8.8 million underwater of the 51.2 million owner occupied homes with mortgages (see here) is about 17% of homeowners with mortgages are underwater according to Economy.com.