by Anonymous on 4/21/2008 06:50:00 PM

I have been trying to ignore this story in the LA Times all day, but people will keep sending it to me. I excerpt the relevant parts:

Some folks . . . some people . . . what appears to be . . . a jump in . . . believed to have been . . . The numbers are small, but . . . a dramatic increase . . . surprising some officials . . . making nationwide figures elusive. Still . . . a significant increase . . . questionable home fires, with foreclosure as a possible factor . . . potential fraud . . . would not provide further details . . . has not identified a rise in . . . does not support that . . . But some observers say . . . That's the question.

Yes, people have been known to engage in insurance fraud before. Yes, some of these people are probably emotionally disturbed--like a lot of amateur arsonists--in ways that both predate their mortgage loans and may well have little to do with those loans. No, I don't think this is one more thing for lenders to be afraid of--the lender being the loss payee on the hazard insurance policy, actually, that's the first place I'd look. I have no evidence that lenders are out torching homes instead of foreclosing on them, but then again I bet I could get an unnamed source to opine that it's possibly a dangerous trend . . .

by Calculated Risk on 4/21/2008 06:41:00 PM

Press Release: Downey Announces First Quarter 2008 Results and Dividend

Downey Financial Corp. reported a net loss for first quarter 2008 of $247.7 million or $8.89 per share ... The Board also decided to suspend future dividend payments.

During the current quarter, the provision for credit losses totaled $236.9 million, up $236.3 million from a year ago.

Non-performing assets increased during the quarter by $521 million to $1.562 billion and represented 11.90% of total assets, compared with 7.77% at year-end 2007 and 0.94% a year ago.

The increase in NPAs is stunning.

by Calculated Risk on 4/21/2008 06:16:00 PM

From Reuters: Citigroup launches $6 billion preferred share sale: IFR

Citigroup on Monday will sell $6 billion in non-cumulative perpetual preferred shares, said International Financing Review, a Thomson Reuters publication.

The shares are expected to pay a fixed 8.4 percent dividend for 10 years and pay a floating rate after that.

And from the WSJ on CIT Group (a commercial finance company): CIT Plans $1 Billion Stock Offering

CIT Group Inc. said it plans to offer $1 billion in common and convertible preferred shares, in a move that will seriously dilute current shareholders' holdings.

To the shareholders: the good news is your companies might survive, the bad news is you don't own as much of the company as before. But something is better than nothing.

by Calculated Risk on 4/21/2008 03:10:00 PM

From The Arizona Republic: More homeowners mailing keys to lenders instead of payments

Joan Shaffer is turning in the keys of the north Phoenix Tatum Ranch home she bought with her daughter in late 2005. They put nothing down on the home, took out a loan that let them pay less than they owed each month and now their loan is $200,000 more than the house is worth.

"We paid $585,000. It was the peak of the market, but no one told us," said Shaffer, a real-estate agent from Colorado. "We would probably have to spend the next 20 years trying to get right on the mortgage. That's crazy."

It's amusing that she is a real estate agent. Still the article has no hard figures:

The mortgage industry is struggling to estimate how many homes are going into foreclosure because of people who don't want to pay, rather than because of people who can't afford to pay.

Industry estimates and anecdotes suggest the figure is climbing ...

What industry estimates?

by Calculated Risk on 4/21/2008 12:39:00 PM

From Dow Jones (no link): Most Home-Equity Line Delinquencies Keep Rising

Standard & Poor's said delinquencies on home-equity lines of credit issued in 2005 and 2006 shot up in March, underscoring continued trouble in the U.S. economy.
...
S&P said that 9.19% of lines issued in 2005 and 11.45% of loans issued in 2006 are delinquent, up 6.49% and 6.51% from February.

This fits with the comments from BofA today:

"Credit quality in our consumer real estate business mainly home equity deterioriated sharply in the first quarter as a result of the weaker housing market."

by Calculated Risk on 4/21/2008 11:18:00 AM

Here are a few excerpts from the BofA conference call:

CEO Kenneth D. Lewis on outlook:

"As you realize by now, first quarter was much worse than our expectations three months ago with the most notable duration in the latter part of the quarter. The issues we faced in capital markets in the fourth quarter continued into the fourth quarter with March being particularly difficult. Consumer credit quality deteriorated substantially from fourth quarter, particularly in home equity. ... Credit quality will continue to be an issue with charge-offs at least at first quarter levels but probably higher for the rest of the year."
emphasis added

Here is another CEO saying that March was really bad.

CFO on Home Equity Book:

"Credit quality in our consumer real estate business mainly home equity deterioriated sharply in the first quarter as a result of the weaker housing market. The problems to date have been centered in higher LTV home equity loans particularly in states that have experienced significant decreases in home prices. Almost all of these states have been growth markets in the past several years. Our largest concentrations are in California and Florida [40% of portfolio]. Home equity net charge-offs increased to 496 million or 1.71% up from 63 basis points in the prior quarter. 30-day performing delinquencies are up 7 basis points to 1.33%. Nonperforming loans in home equity rose to 1.51% of the portfolio from 1.17% in the prior quarter. 82% of the net charge offs related to loans where the borrower was delinquent and had little or no equity in the home. Loans with the greater than 90% CLTV on a refreshed basis currently represent 26% of loans versus 21% in the fourth quarter. This change reflects the continued decline in home prices most acutely in the states I noted earlier. ... We believe net charge offices in home equity will continue to rise given softness in the real estate values and seasoning in the portfolio. We increased reserves for this portfolio to 215 basis points reflecting the continued elevated level of delinquency roles, loss occurrences and loss severities. As a result, we would expect to see losses cross the 200 basis points market by the middle of this year as we work through these issues. We instituted a number of initiatives to mitigate risk and new originations as well as existing exposure including lower maximum CLTV across geography and borrower. Two issues that is playing home equity and could drive losses are a prolonged deterioration in home values and further deterioration in the economy."

And a question from analyst Meredith Whitney on how far along BofA is in the write down process:

Question, Meredith Whitney: So my final wrap up is when you see CEOs mainly CEOs from brokerage firms saying that we're beyond the worst of things, can you comment in terms of the regulators involvement with the housing situation and make any similar type of comment?

Answer: Well, in a broad sense, and just talk about regulators or the government, I think first it would be too early to strike up the band and sing happy days are here again, but from the investment banking standpoint, that is the right [view], I do think we're in the last innings or last quarter whatever sports a analogy you wanted to use, and then the other credit issues is so housing dependent and related and economic and economy related I think we're not in the last inning or the last few innings, and we have at least the rest of this year to go.

Once again, March was very weak, and there is much more to come.

by Calculated Risk on 4/21/2008 09:54:00 AM

From the WSJ: National City to Raise $7 Billion; Bank Cuts Dividend, Posts a Loss

National City Corp. will raise $7 billion in capital, slashed its dividend to 1 cent a share and reported a first-quarter net loss.
...
The latest quarter included $1.4 billion in loan-loss provisions, partially offset by $772 million in gains related to Visa Inc.'s initial public offering. ...

Net charge-offs, loans it doesn't think are collectable, tripled to 1.88% of total average loans, while nonperforming assets surged to 1.95% from 0.8%.

The new capital was raised at $5 per share, only 40% off the closing price on Friday.

by Calculated Risk on 4/21/2008 09:35:00 AM

From the WSJ: Bank of America's Net Drops 77%

Bank of America Corp. ... provisions for credit losses quintupled to $6 billion and investment banking write-downs cost at least another $1.91 billion.

The big increase in credit costs was driven by weakness in home equity loans and credit extended to small businesses and home builders ..

Net charge-offs for loans the bank doesn't think are collectable jumped to 1.25% from 0.81% of total average loans and leases, reflecting deterioration in the housing market and a slowing economy. Nonperforming assets surged to 0.90% from 0.29%.
...
"We remain concerned about the health of the consumer given the prolonged housing slump, subprime issues, employment levels and higher fuel and food prices," Chief Executive Kenneth D. Lewis said ...

Just a few more billion ...

by Calculated Risk on 4/20/2008 10:45:00 PM

On Friday I posted a video of an interview of Professor Roubini on Canadian TV. It is well worth watching.

On Saturday, I posted a few comments on why I thought Professor Roubini might be a little too pessimistic. I gave three reasons: 1) I believe starts of single family homes built for sale has finally fallen below the current level of new home sales (note: I'll have more on the housing starts vs. new home sales issue soon.) 2) I think we may be a little further along in the write down process than Roubini, and 3) I felt Roubini might be overestimating the number of homeowners that "walk away'.

Clearly we agree on more points than we disagree, and I hold Professor Roubini in the highest regard (for those that don't know, Roubini is very well respected among his peers).

Today Roubini wrote: The worst is ahead of us rather than behind us in terms of the housing recession and its economic and financial implications. Here is an excerpt on the write downs:

[M]y most recent estimates have been that credit losses on mortgages could be as high as $1 trillion and total credit losses for the financial system could be as high as $1.7 including all the other losses (commercial real estate loans, credit cards, auto loans, student loans, leveraged loans, industrial and commercial loans, corporate bonds, muni bonds, losses on credit default swaps). How many of these losses are borne by banks (I meant both commercial and investment banks in my use of the term “banks”) depends on the allocation of these impaired assets among banks and non-banks.

The argument for a trillion dollar of losses on mortgages alone is based on the following three parameters (two of which an undisputed while a third is more subject to uncertainty. First, let’s conservatively assume that home prices fall about 20% rather than 30% so that only 16 million households are underwater; this assumption is not very controversial as most now would agree that a cumulative fall in home prices of 20% is a floor, not a ceiling to such price deflation. Second, lets assume – as Goldman Sachs does – that a foreclosed unit causes a loss of 50 cents on a dollar of mortgage for the lender as, in addition to the fall in the home price one has to add the large legal and other foreclosure costs including loss of rent on empty properties, risk of the property being vandalized and cost of maintaining an empty property before resale. Third, lets assume – and this is more controversial – that 50% percent of households who are underwater eventually walk away or are foreclosed. Then, since the average US mortgage is $250k total losses from borrowers walking away from their homes are $1 trillion. Goldman Sachs agrees with me on two parameters (20% fall in home prices and 50% loss on a mortgages) but more conservatively assumes that only 20-25% of underwater home owners will walk away. In this case mortgage losses would be “only” $500 billion. But home prices may likely fall more than 20% and with a 30% fall in home prices 21 million households (40% of the 51 million with a mortgage) would be underwater. So, there is certainly uncertainty on how many underwater households will walk away but given the recent evidence of subprime but also near prime and prime borrowers walking away even before they are foreclosed one can be pessimistic on this.

This uncertainty is why Tanta and I have been begging for better data on how many homeowners are actually resorting to ruthless default. Tanta wrote a great primer for the media: Let's Talk about Walking Away (hint to the media!!!)

I certainly agree Roubini's scenario is possible. Last December, I wrote:

If every upside down homeowner resorted to "jingle mail" (mailing the keys to the lender), the losses for the lenders could be staggering. Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion.

Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion.

Although possible, I felt this was somewhat the worst case.

On recourse loans and 'walking away', Roubini argues:

I have for a while argued that in the US mortgages are de-facto, if not always de-jure, non recourse. Indeed, even in states where mortgages (or refinanced ones) are de jure recourse loans these mortgages become de facto non-recourse as the legal cost for lenders to pursue such legal action against jingle mail borrowers can be massive.

Tanta commented on this, and generally agreed with Roubini:

Back in my day working for a servicer, we never went after a borrower unless we thought the borrower defrauded us, willfully junked the property, or something like that. If it was just a nasty RE downturn, it rarely even made economic sense to do judicial FCs just to get a judgment the borrower was unlikely to able to pay. You could save so much time and money doing a non-judicial FC (if the state allowed it) that it was worth skipping the deficiency.

But notice the "willfully junked the property" phrase - aren't these the homeowners that we are talking about when we say someone will "walk away"? Aren't these the solvent homeowners who can make the payment, but decide not to simply because they are underwater? This is one of the great uncertainties, or as I wrote last year:

One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.

This is a critical issue, and hopefully someone will provide some research on the number of homeowners actually walking away.

by Calculated Risk on 4/20/2008 09:23:00 PM

The WSJ reports: NatCity Close To $6 Billion Cash Infusion

National City Corp was closing in Sunday night on a capital infusion of more than $6 billion from a private-equity firm and a number of large shareholders ...

The plan calls for the investors to pay about $5 a share ... In 4 p.m. New York Stock Exchange composite trading Friday, National City shares fell 16 cents to $8.33.

Hey, that is only 40% below market. Ouch.