by Calculated Risk on 4/24/2008 09:20:00 AM

From the WSJ: Credit Suisse Swings to Large Loss, Taking $5.2 Billion in Write-Downs

Credit Suisse Group Thursday said it swung to a worst-than-expected first-quarter net loss after taking 5.3 billion Swiss francs ($5.2 billion) in write-downs for big buyout loans and mortgage securities.
...
Credit Suisse took the bulk -- 2.66 billion francs -- of write-downs for collateralized debt obligations, but also marked down 1.68 billion francs for buyout loans granted but failed to sell to investors, as well as 944 million francs for mortgage securities.

A few billion more.

by Anonymous on 4/24/2008 08:46:00 AM

Reuters has the news:

LIVONIA, Michigan (Reuters) - Realtors in many U.S. states say lenders are demanding excessively high prices before allowing distressed borrowers to offload their homes in "short sales," making the housing crisis worse.

In a short sale, a borrower dumps the home at below-market value and the bank forgives the rest of the debt. The borrower's credit rating is hurt but for less time than in a foreclosure. Such sales have been touted by banks as a way out for homeowners unable to pay their mortgages.

Below market, huh? And I thought the idea was they were trying to sell these homes at market, which unfortunately happens to be less than the loan amount. Whatever. My head is still spinning over the banks having "touted" such sales. Was I having a nap when that happened? How come nobody woke me up?

We get one "example":

Borrowers like Judie Quinn echo that, saying their lenders have been uncooperative and have passed up solid offers.

Quinn, 67, is a steel industry sales representative whose home in the Detroit suburb of Belleville had been on sale since August 2005. After back surgery in 2007 left her with large medical bills and out of work for two months, she decided she could not afford the $2,200 monthly mortgage payment.

"I wanted to save my credit rating, so I tried to arrange a short sale," Quinn said at the Livonia, Michigan, office of Linda McGonagle, a Realtor at Quality GMAC Real Estate.

The loan was from Wells Fargo & Co (WFC.N: Quote, Profile, Research) and serviced through an affiliate, America's Servicing Co.

Between April and October 2007, Quinn received four offers, McGonagle said. The first offer of $289,900 -- the asking price was $299,000 -- was rejected by the lender because Quinn was not yet in loan default. "No one at the bank mentioned she had to be in default until after that offer was rejected," she said.

She said the lender ignored the third and best offer of $299,000 long after the bidder had given up. The home went into foreclosure in October.

"The lender was unresponsive and unhelpful, so Judie wasted time and money trying to do the right thing," McGonagle said. "I tell other agents to avoid short sales because you just can't win. This is a commission-based business and if you can't get deals done, you don't get paid," she added.

How much does Judie owe on this house? We didn't get that part. Could the fact that the home had been "on sale" for two years before Judie decided she needed to sell short imply something problematic about Judie's expectations? When did she acquire this property, anyway? And at what exact time yesterday was her Real Estate Professional born? Nobody at the bank mentioned that short sales are widely held to be "work out options" for delinquent loans? That without any indication that the lender would have to foreclose, the lender is not highly motivated to accept a short sale that is "less loss" than the foreclosure that doesn't appear to be on the table? The bank has to mention this?

But I really liked this part:

Some Realtors said banks have an inflated view of what they can expect when home values in many areas have fallen sharply.

"Some lenders harbor unrealistic expectations of what they can get in a down market," said Van Johnson, president of the Georgia Association of Realtors.

He said widespread use by lenders of "broker price opinions" -- quick, inexpensive online property assessment -- resulted in only a "simple best guess."

Andrea Gellar, a Realtor at Sudler Sotheby's in Chicago, said property appraisals there are fair because "appraisers are being called on the carpet to be accurate" after years of inflated evaluations during the property boom.

Banks have inflated ideas of what these houses could sell for. How come? Because they rely on "price opinions" that are prepared by real estate brokers. Like the real estate brokers quoted in the article. Who are now claiming that it's really only the appraisers who have any clue. Because they've been "called on the carpet" and now are afraid to make stuff up.

The solution seems obvious to me: welcome to the carpet, brokers. We expect your next price opinion to be somewhat more sober.

by Calculated Risk on 4/23/2008 11:40:00 PM

Here are some more Ambac comments. Note: here is the referenced Ambac Presentation

Sean Leonard, CFO: ... David, you could discuss kind of the breakout of some of the HELOC portfolio being that big portion of the portfolio is related to large bank transactions versus [investment bank generated] shelf transactions.

David Wallis, Chief Risk Officer: Yes, it is very striking. One has various hypotheses about this, and we are investigating those hypotheses. But it is very striking how concentrated, how very concentrated, some of the poor performers are, and that gives rise to all sorts of obvious questions.

I mentioned that we have diagnostic and forensic people working on some of these deals. We are beginning to see stuff back from that. The diagnostic is basically running tapes looking at delinquencies and trying to figure out given what you now know and what you knew then, would you have expected that delinquency or not? And if the answer is not, well, that is interesting.

So, in other words, you have an incredibly low FICO within a pool, and it is delinquent. Well, maybe you expected that. But if it is incredibly high and the LTV was incredibly low, then maybe you would not expect that.

So then what you do is, you take an adverse sample, so you run the tape through a program, take an adverse sample, i.e. looking for the suspicious ones, and then what you do is you go look at the files. That is a very difficult long process, but you look in the files. You look at the transcripts of servicing records, and you see what you see. And all I will say is that there is some pretty amazing stuff to see. So very concentrated adverse exposures, that is really the message here.
emphasis added

"Pretty amazing stuff to see." It's not clear if he is referring to fraud - but it sounds like it.

Q: Analyst: Can you clarify for the home equity and the Alt-A reserve strengthening, are the credit reserves there now kind of reflective of estimated lifetime losses? And if so, I guess that is my understanding of how it works per quarter. What has changed if you look at Q1 where we are versus Q4? And what could move us further down back that in terms of changes as we look forward through the year?

David Wallis, Chief Risk Officer: Sure, let me take a go at that ... the notion is that we're taking a present value of the losses or the claims that we expect to pay over the life of the deal.

Just to relate that, people always like to relate it to cumulative loss because that is the statistic that people bandy around. Let me just give you a bit more insight onto that. I think in the presentation we talked about -- in fact, it is the most egregious example, the Bear Stearns deal, where we are expecting or re-modeling at least around 82% of collateral loss. So you've got 100 people in the round that took out a closed-end second in this deal, 82 have walked out and not paid you a whole lot back, 100% severity.

Just in relation to other transactions, just to give you some more data and just be open with what we're looking at here, I mentioned that in mid prime [Alt-A], we are kind of 20 to 25% collateral loss. In HELOC they vary, the ones we have reserved from I think about a low of mid-20s to a high of just north of 50. So that is collateral loss.

In terms of what has happened and where does it go from here, probably a good thing to do is to look at the chart on page 31, and you get a pretty good sense of what has happened in the last few months. You know, basically losses have taken off in that transaction.

Sometimes you get perplexing movements. I will draw your attention to one. If you look at the First Franklin deal, which is also in the charts that I presented, you will see four months ago I think it was quite a marked flattening in delinquencies. That proved to be a false dawn because, although delinquencies -- the trajectory there has flattened, actually losses have continued to escalate. So the data is difficult. You get very odd data.

To give you a sense of how odd the data is, the remits are actually beginning to come in somewhat late because sometimes people don't believe the data that is being presented, and they send it back and say, well, that cannot be right. But, in fact, unfortunately some of it is right, and the numbers are huge.

Where can it go? Again, look at page 31, and I admit this is the extreme example. A criticism might be, well, look at the very sharp dimunition in monthly realized loss that is being projected here through the role rate methodology. And it is true, it is a fairly sharp diminution. However, it has to be because if it is not, you end up with more than 100% of collateral loss, which does not make any sense either.

So I think further discussion that Mike just had in relation to subprime and what is outstanding and what does that imply about future default and severity rates to get to a given collateral loss, we're seeing some of the same things certainly in relation to our most stressed transactions. You know, how bad can it get? 81 people in 100 walking away sounds pretty bad to me.

by Calculated Risk on 4/23/2008 08:28:00 PM

From Reuters: Foreclosures to affect 6.5 mln loans by 2012-report

Falling U.S. home prices and a lack of available credit may result in foreclosures on 6.5 million loans by the end of 2012 ...

The foreclosures could put 12.7 percent of all residential borrowers out of their homes ...

Credit Suisse expects home prices will fall by 10 percent in 2008 and 5 percent in 2009, before rebounding.

The forecast includes the 1.2 million homes currently in foreclosure or already bank Real Estate Owned (REO). Credit Suisse sees 2008 as the peak year for foreclosures, even though they see the price bottom (25% off the peak) in 2009. The normal pattern is for the foreclosure activity to peak in the same year as housing prices bottom. Note: I expect prices to decline for a few years in the bubble areas.

Of the 1.2 million current foreclosures, Credit Suisse estimates about half are due to subprime borrowers, and about half other borrowers (alt-A, prime). Although Credit Suisse expects a much higher percentage of subprime borrowers in foreclosure (over 50%!), the pool of other borrowers is much larger, and Credit Suisse expects close to 4 million other borrowers to lose their homes to foreclosure through 2012.

by Calculated Risk on 4/23/2008 06:27:00 PM

From the WSJ: Starbucks Blames Weak Economy In U.S. for Lower Outlook for Year

Citing "the sharp weakness in the U.S. consumer environment," ... Starbucks said U.S. comparable-store sales fell by the mid-single digits on a percentage basis amid lower traffic. ...

The company Wednesday highlighted California and Florida, which have been two of the hardest-hit states during the housing downturn ...

"The current economic environment is the weakest in our company's history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers," said Chairman and Chief Executive Howard Schultz.

Just another company reporting disappointing sales.

by Calculated Risk on 4/23/2008 05:04:00 PM

Video: Joseph Mason Says `Way Past Time' for Ambac Rating Cuts (click link for video)

Joseph Mason, an associate professor of finance at Drexel University, and Julia Coronado, a senior economist at Barclays Capital Inc., talk with Bloomberg's Kathleen Hays about Ambac Financial Group Inc.'s credit rating, economic and financial-market conditions, and the outlook for Federal Reserve monetary policy.

(Source: Bloomberg)

by Calculated Risk on 4/23/2008 01:55:00 PM

On the AMBAC conference call this morning, David Wallis, Ambac's chief risk officer noted that their 'losses are heavily concentrated in a small number of deals which they characterized as “striking” and essentially suspicious' (reader Brian's description). The also made some comments on their Alt-A deals - AMBAC has half a dozen deals now projecting cumulative losses of 20-25% vs initial expectations of approximately 6%.

According to Brian, AMBAC hinted that they might pursue legal action against Bear Stearns and First Franklin.

Here is a story from Dow Jones on the conference call: Ambac: Lawyers Scrutinizing Contracts On 17 Transactions

Bond insurer Ambac Financial Group Inc. (ABK) has hired legal and forensic experts to examine 17 of its financial guarantee transactions covering residential mortgage-backed securities as performance deteriorates.
...
[David Wallis, Ambac's chief risk officer] suggested that one prime candidate for legal scrutiny is a deal with Bear Stearns Co. (BSC) it closed in April 2007. ...

Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral, a transaction that has seen an unexpectedly "rapid escalation of losses," and represents an outsized percentage of the insurer's expected credit impairment, Wallis said.

by Anonymous on 4/23/2008 10:23:00 AM

The State Foreclosure Prevention Working Group released its second report on loss mitigation efforts yesterday, and frankly it is just as disappointing as the first one. I see our colleague PJ at Housing Wire has already blown his stack over it. Allow me to pile on; someone has to.

The report finds:

Seven out of ten seriously delinquent borrowers are still not on track for any loss mitigation outcome. While the number of borrowers in loss mitigation has increased, it has been matched by an increasing level of delinquent loans. The number of home retention solutions (forbearance, repayment plan, and modification) in process, as compared to the number of seriously-delinquent loans, is unchanged during the four month period. The absolute numbers of loss mitigation efforts and delinquent loans have increased, but the relative percentage between the two has remained the same. [Emphasis in the original.]

This "seven out of ten" statistic comes from measuring all 60+ day ("seriously") delinquent loans against the percentage that have been identified by the servicer as "in process." There is no definition of "in process" in the report; my best guess is that these are loans for which the servicer's loss mit department has made actual contact with a borrower. (That does not mean merely that the servicer has made contact; collections department contacts are not, as far as I know, considered "loss mit contacts.") Even more importantly, the report does not define "closed" in terms of loss mitigation efforts. I cannot tell from this report whether, for example, a loan that has a repayment plan instituted is counted as "closed" when the plan is agreed to, or only when the plan period ends and the loan is either brought current (successful repayment plan) or referred to foreclosure (unsuccessful). If the former is the case, then loans that are still delinquent would fall out of the "loss mit in process" category, but you would hardly say that they are "not on track for any effort." They would simply be part of a delinquent loan pipeline that is not referred to FC, because the repayment plan is still underway. It actually gets worse if "closed" cases for the purpose of this report really mean the latter--loans where the repayment plan ended either successfully or not. Let's go to the further "findings":

Data suggests that loss mitigation departments are severely strained in managing current workload. For example:
a. Almost two-thirds of all loss mitigations efforts started are not completed in the following month. Most loss mitigation efforts do not close quickly. This consistent trend over the last three months suggests that many proposed loss mitigations fail to close, rather than simply take longer than a month to work through the system. Based on anecdotal reports of lost paperwork and busy call centers, we are concerned that servicers overall are not able to manage the sheer numbers of delinquent loans.
b. Seriously delinquent loans are “stacking up” on the way to foreclosure. The primary increases in subprime delinquency rates are occurring in very seriously delinquent loans or in loans starting foreclosure. This suggests that the burgeoning numbers of delinquent loans that do not receive loss mitigation attention are clogging up the system on their way to foreclosure. We fear this will translate to increased levels of vacant foreclosed homes that will further depress property values and increase burdens on government services.

If the expectation is that loss mit cases would reasonably "close" in the month after they were "started," then it sounds as if in fact "closed" refers to the date an agreement was put in place, not the date of final resolution. If that is true, then one could expect closure to occur by the following month. However, that has to mean that there is a pipeline of "closed" but not yet "cured" loans out there, which makes hash of that claim that 7 of 10 are "not on track."

Furthermore, although this summary finding refers to loss mit efforts that are "started," in the remaining detail areas of this report I see no numbers that look clearly like "starts" to me. The tabular data all measures loss mit "in process," not "started." Again, "starts" can be usefully defined only if "completions" can be usefully defined; if there are thousands of loans on repayment plans or forbearance periods that have not yet finished or expired, and they are not counted as "closed," then the "in process" data would include workouts started many months previously that are still underway.

As far as seriously delinquent loans "stacking up," I simply note that nowhere does this report ever address things like a servicer's bankruptcy pipeline. How many delinquent loans are under a BK stay? Once the stay is in place, the servicer can neither initiate foreclosure nor unilaterally offer workouts without court approval; for that reason, all servicers I am familiar with handle those loans in a bankruptcy department that is separate from the loss mitigation group. If, in fact, these servicers reporting here are including BK loans in the loss mit pipeline, I for one would like to know that.

This is the part of the report that sent PJ over the edge:

New approaches are needed to prevent millions of unnecessary foreclosures. Without a substantial increase in loss mitigation staffing and resources, we do not believe that outreach and unsupervised case-by-case loan work-outs, as used by servicers now, will prevent a significant number of unnecessary foreclosures.

That phrase "unnecessary foreclosures" is not simply tendentious in the extreme; it totally misses the whole point of "loss mitigation." Unless you grant that foreclosure can at least in theory be "less loss" to an investor than a workout option--as the converse can be true--then you do not understand that "loss mit" is the process of deciding which action is less expensive to the investor and pursuing it. In such a context no foreclosure is "unnecessary"; it is simply the better or the worse choice in dealing with a severely delinquent loan.

But in the same breath, the report asserts that "case by case" analysis of each loan is a problem. How can anything other than a case by case analysis determine whether a foreclosure is "necessary" or not? Besides the fact, as PJ notes, that the Working Group is entirely ignoring fraudulent loans, what about those loans where the loss mit people discover, after reasonably diligent efforts of analysis, that there's just no way the borrower can afford modified loan terms that remain less expensive to the investor than foreclosure? Or that the borrower is not cooperating in good faith with the servicer? You do not have to assume that all servicers are expending the correct level of diligence to be able to see that they need to, if we are to determine whether foreclosure is necessary or not. This report simply assumes, prima facie, that foreclosures are unnecessary, and then advocates that servicers slap together "New Hope" style one-size-fits-all quickie workouts in order to decrease the "backlog." Dear heavens above, a subcommittee of a conference of state regulators is on record encouraging servicers to cynically reduce their delinquent loan backlogs by just inking some "standard" modification or repayment agreement with the borrower, and call it "closed" after that?

I am not a knee-jerk defender of the mortgage servicing industry by any measure. These are the last people I would encourage to behave any worse than they already do. But even I am troubled by the gross naivete about delinquent loan servicing implied by this report:

Loss mitigation proposals do not close for a variety of reasons; one reason is the level of paperwork required to close a loan modification. Servicers have told us that borrowers simply do not return the required documentation to complete the modification, and borrowers and counselors have reported that servicers lose paperwork they have sent in to the servicer. Regardless of where the problem arises, it appears that the level of paperwork required is a barrier to preventing unnecessary foreclosures.

I am willing to believe that servicers do lose or misplace paperwork, although I'd really like someone to look into these claims rather than just engaging in he said-she said. On the other hand, this is default servicing we're talking about. I mean, the phrase "the check is in the mail" is a culture-wide joke of long lineage; you don't have to have ever worked for a servicer to know that people claim to have sent stuff they never in fact sent all the time. People are given explicit instructions to send things via trackable mail to the Loss Mit department, and they send them via regular mail to the payment address (which is usually just a lockbox, often located ten states away from the loss mit people). And sometimes borrowers do return only some of the paperwork, somehow "forgetting" the items like tax returns, pay stubs, or bank statements requested by the servicer to assure that the borrower qualifies for the deal offered. You know. I am not "blaming the borrower" here; I am pointing out that different stories between servicer and borrower are just like different stories between the two parties to a divorce: it is not wise to take only one version at face value without checking out the other, if for no other reason than this is a situation in which people are not exactly at their best, emotionally, psychologically, or indeed morally. That is a fact of life in default mortgage servicing. Any group affiliated with a state regulator who seems to want to pretend that this is not a fact is not, frankly, competent.

Beyond that, to conclude that "paperwork is the barrier" should strike fear in the hearts of everyone. It isn't just investors and servicers who are put at risk when we decide--you know this is coming--to just skip the part about executing formal agreements and start servicing these loans to "informal" relaxation of terms. It's the borrowers who are at risk as well. I've heard enough lately to last my lifetime about borrowers in FC and BK courts objecting to servicers unable or unwilling to produce the exact mortgage note executed by the borrower, which determines not just "standing" for the servicer, but the exact terms of the indebtedness. What defense does a borrower have if he or she is foreclosed against after failure to perform under an undocumented, unsigned agreement? What defense does the servicer have if it cannot prove failure to perform? What god-awful horrible mess are the courts going to inherit down the road a ways if we just dismiss formal agreements as "barriers" that servicers should dispense with?

The lesson of the "stated" disaster--stated income, stated assets, stated appraised values, oral "promises" of loan originators rather than clear written disclosures, the whole cluster of practices that removed the "barrier" of "paperwork"--is apparently still lost on the Working Group. We started this by being "efficient" about the documentation and casual about the borrower's own statements; we aren't going to get out of it that way. This report just reeks of political grandstanding. I'm sure I know at least one journalist who will love it.

by Calculated Risk on 4/23/2008 09:28:00 AM

From the UPS conference call: (hat tip Brian)

Chief Executive Scott Davis:

UPS's first quarter results illustrate the dramatic slowing in the U.S. economy. At our investor conference on March 12th, we told you that volume growth in January had been up 3%. But in the six weeks prior to the conference, it had been negative. We also said if these trends persisted through March, we would not achieve the earnings guidance we had provided for the quarter. [The] trends did continue. Many have become sharply more negative in the last two months. ... The great unknowns are the severity and the duration of the current economic slowdown. Many of our customers have tightened their belts resulting in a shift away from our premium air products to ground shipments.
emphasis added

Chief Financial Officer Kurt Kuehn:

These results reflected a noticeable tradedown in service levels from express to saver, saver to deferred, and deferred to ground. As customers worked hard to reduce their costs. Tradedown was evident across all customer sectors but was most prevalent in retail. This is a tell tale sign of a progressively worsening economic environment. In addition, the timing of Easter had a negative impact on average daily volume.

CFO: UPS Cutting investment and spending:

As Scott mentioned, we have put an action plan in place to address the impact of economic slowing on our U.S. business. We will, one, use the expansiveness of our service portfolio to help our customers navigate through these challenging times. Two, exercise discipline with respect to investment, supporting only those projects that are essential. And three, remain diligent in managing variable and semi-variable costs. With regard to the last point, we have a number of initiatives in place. We are restricting hiring, except in the sales arena. We are stopping all non-critical projects. And limiting discretionary spending including business travel, relocations and consulting services.

Outlook:

Turning now to our outlook for the second quarter and the rest of the year. At this point, we see no immediate signs of economic improvement. ... On the international front, cross border trade remains robust, despite pockets of economic slowing.

Q&A on internation shipments:

Analyst: Soes the 12 to 15% goal for international, does that suggest that we're not going to see a slowdown in that arena or is that consistent with kind of a decoupling where the brunt of recession is felt here in the U.S. and not beyond.

UPS: We're seeing certainly changing trade flows and U.S. imports are slowing, but at the same time, U.S. exports are increasing. Asia to the U.S. is perhaps not as robust as it was but Asia to Europe remains robust.

by Calculated Risk on 4/23/2008 09:17:00 AM

From the WSJ: Credit Crunch Weighs On Ambac Results

Ambac Financial Group Inc. swung into the red in the first quarter on a further $1.73 billion in collateralized-debt-obligation losses and $1.04 billion in loss provisions ...

That pretty much wipes on the $1.5 billion raised last month.