by Calculated Risk on 9/13/2008 01:21:00 PM

From the WSJ: Lehman Deal Could Come Tonight As High-Level Talks Continue

Talks continued Saturday between federal officials and top Wall Street executives ... some sort of solution might be reached as soon as Saturday night ... the main task ahead ... is identifying whether a so-called "bad bank" structure could be designed to hold Lehman's souring assets.

Here is a partial list of attendees:

In addition to New York Fed President Timothy Geithner, government officials in attendance included Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox. The Wall Street executives included Morgan Stanley Chief Executive John Mack, Merrill Lynch Chief Executive John Thain, J.P. Morgan Chase CEO Jamie Dimon, Goldman Sachs Group CEO Lloyd Blankfein, Citigroup Inc. head Vikram Pandit and representatives from the Royal Bank of Scotland Group PLC and Bank of New York Mellon Corp.

Other industry leaders that attended were Credit Suisse CEO Brady Dougan, Morgan Stanley Chief Financial Officer Colm Kelleher, Citigroup Chief Financial Officer Gary Crittenden, UBS AG Chief Risk Officer Thomas Daula, J.P. Morgan investment bank co-head Steve Black and Goldman Sachs Co-president Gary Cohn ... In all, about 30 banks were represented at the meeting ...

The WSJ also notes that in addition to Lehman, the meeting included discussions about Merrill Lynch and Washington Mutual.

Nemo has some basic details: How big are Lehman, Merrill, and AIG?

by Anonymous on 9/13/2008 10:56:00 AM

From an email I got yesterday from a mortgage broker (with 28 years in the business), on the subject of loan modifications:

It really seems out of control with no one even able to get a straight answer. All the reports I see say that borrowers in trouble but who are willing to try to make a go of it are not getting help. Many are told, "Unless you are 90 days in arrears we can't help you, and BTW, we won't commit now to what we might or might not do if you do decide to miss a few payments."

I certainly see a lot of "reports" of this as well, which is why I think it's worthwhile to tackle the assumptions here (again).

First, what are "borrowers in trouble"? If they are current and have never been late on a payment, what kind of "trouble" are they in? Servicers do "loss mitigation" modifications when default on the loan is imminent or reasonably foreseeable. That is because there must be the probability of "loss" before anyone tries to "mitigate" it. How is default imminent or reasonably foreseeable if the borrower is paying as agreed?

Possibly we mean that the borrower is only one or two payments behind. The problem here is that most servicers do not consider default imminent after one missed payment. 30-day delinquencies are very likely to cure themselves: the borrower makes up the missed payment in the following month quite frequently, pays the late charge, and goes on. Obviously some do "roll" to 60 days down or worse; you can't have a 60-day delinquent loan that wasn't 30 days delinquent in the prior month. But even 60-day delinquencies have a fairly high "cure" rate.

It is very difficult to make the call at 60 days. As a matter of "traditional" loss mit practices (which may of course be undergoing some changes very recently), what the servicer does depends on what the borrower has told the collections department about the reason for delinquency. (Everyone has already had several collections calls by the 60th day of delinquency. If you refused to take those calls or refused to give a reason for your delinquency, you should not be surprised to find your "willingness to make a go of it" under some question.) If it appears to be a temporary matter (business was slow last month because of the hurricane, there were non-recurring unanticipated expenses to deal with), the servicer is likely to offer a forbearance or repayment plan rather than a modification. If it appears to be a longer-term problem (ARM reset, job loss, divorce), a servicer might consider a modification at this point. The two choices are not exactly mutually exclusive; a time-tested servicing strategy is to put the borrower on a repayment plan to verify his or her willingness to continue to make payments at the reduced level before going ahead with a permanent modification.

Those of you who are still convinced that it is somehow "unfair" that a loan really has to hit the 90-day down category before the servicer concludes that default is imminent should remind yourselves that it is extremely rare for a servicer to begin foreclosure proceedings until a loan is 90 days or more delinquent. Why is that? Because most loans with a 30- or 60-day delinquency cure themselves. If you want servicers to conclude that default is imminent the moment a borrower becomes one payment behind, you are really expecting servicers to start foreclosure proceedings that early in the game as a matter of course.

I don't happen to believe that borrowers are being told across the board that "unless you are 90 days in arrears we can't help you." I do believe that borrowers are regularly being told that unless they're 90 days in arrears they are not going to be considered for a permanent modification. The problem here is that we don't know what these borrowers asked for when they got that answer, what reason they gave for their "trouble," or what other options the servicer might have offered that they turned down. I have my suspicions about that, given that my broker correspondent indicates that the servicers are also saying "we won't commit now to what we might or might not do if you do decide to miss a few payments."

No sane negotiator would ever commit to modifying a loan as long as it was 90 days delinquent. Severe delinquency is a necessary, but not a sufficient condition. For one thing, if you are "deciding" to miss a few payments, there's some question about whether you are suffering a bona-fide hardship or not. It honestly really shocks me that people would expect a servicer to commit to giving you a deal prior to delinquency: that is simply inviting people to withhold payments in order to get their interest rates reduced. Why would anyone expect a servicer to do that?

Perhaps we all have widely-varying points of view about the wisdom of negotiating with hostage-takers, but I suspect that most of us believe that the police would be in error by declaring in advance that anyone who takes a hostage will have his demands met. It might, you know, encourage hostage-taking. What I suspect we're hearing from here are those unhappy campers who are basically telling their servicers they want a rate- or principal-reduction modification or else they'll "walk." The servicer tells them that nothing is on the table unless they're 90 days down, because that, at minimum, tests the seriousness of this threat to walk away. They come back with "So if I miss three payments, you'll modify my loan?" and the servicer says "Maybe. Maybe not." Of course that's what the servicers say. The rules of the game of chicken require this.

I think it is disingenuous to characterize this as borrowers "not getting any help." I think it is disingenuous to characterize this as not getting a "straight answer." It is a perfectly straight answer; it's probably too straight, if anything. While servicers who tell borrowers that modifications aren't on the table until the 90th day of delinquency are at least being honest, it appears that you can't really be that honest with a certain class of borrowers. That's because they interpret this as meaning that they "qualify" for a mod once they're 90 days down, as if that were the only issue.

The OCC's second Mortgage Metrics Report came out yesterday, and it shows that not only are repayment plans and especially modifications increasing, they are increasing at a faster rate than new foreclosure starts. I think one of the most useful metrics in the report is the number of new loss mitigation actions as a percentage of all seriously delinquent loans:



This is not a "cumulative" metric in any sense: it measures new actions taken in the month, not a cumulative total of actions taken, and the denominator is not all loans that have ever been seriously delinquent, but only those loans that are seriously delinquent in the report month. But given that most loans have to be seriously delinquent before loss mitigation is an option, this gives you a sense of how many eligible loans are given repayment plans or modifications (those are the only loss mit activities measured by this report).

What it shows is that "prime" serious delinquencies are consistently the least likely to receive a repayment plan or modification. (It doesn't matter that prime loans are least likely to be seriously delinquent; we are only counting serious delinquencies here.) There are a number of possible reasons for this:

1. Prime borrowers may be less likely to experience serious delinquency for "temporary" or curable reasons. That is, prime borrowers may have more stable employment, more savings, and better financial management habits, such that they are less likely to become seriously delinquent because of work slow-downs or unanticipated expenses, which are the sorts of temporary hardships most likely to be cured with a repayment plan or modification that capitalizes arrearages. That would imply that when prime borrowers do become seriously delinquent, the underlying problem is more severe--less "curable"--than with other loans. Another possibility is that prime loans are more likely to become seriously delinquent for reasons such as need to relocate; in those cases, a short sale or deed-in-lieu may be a better option for both borrower and servicer than a repayment plan or modification.

2. Most of the prime loans in the OCC/OTS database (serviced by large depositories) are conforming loans in GSE securities. That suggests that they are less likely to be concentrated in the former "bubble markets" than the Alt-A and subprime loans. Insofar as a substantial fraction of these loans have much lower loss severities in foreclosure than the Alt-A and subprime loans, they are less likely to pass the "least loss to the investor" test.

3. Prime borrowers are possibly trying to play chicken with their servicers and are not winning. I have no idea whether such a thing is true or not, but these anecdotes we keep hearing like the one above have to be accounted for, if true. If anyone is "deciding" (rather than being forced by simple inability to pay) to become delinquent, you'd think it would most likely be the prime borrowers.

The question remains whether an overall monthly new loss mit rate of 8.83% of all seriously delinquent loans is much too low or much too high or about right. We really aren't given enough data in this report to judge that. (Just for one thing, we don't know how many of the seriously delinquent loans are speculative purchases or abandoned properties; those would be highly unlikely candidates for a repayment plan or modification.) Measuring new loss mit actions against all seriously delinquent loans, rather than against newly seriously delinquent loans, also leads to a question about the denominator. Since this category will include loans in the foreclosure process that have been and will be there for many months, and that may well be past the point where a workout is even appropriate, the metric will be skewed because of the sheer number of months loans in foreclosure spend in the process. But even if we conclude that this number is "too low," it certainly isn't zero.

Eventually, the OCC is really going to have to refine these metrics if we are going to have reliable data with which to answer the question of how much is enough, loss mit-wise. Certainly, proponents of this silly 90-day foreclosure moratorium for the GSEs need to explain why, exactly, they think that the number of successful workouts per delinquent loans will increase simply by eliminating foreclosure starts or delaying foreclosure completions. My fear is that we're basing public policy recommendations here on the kind of anecdote I started with, not on good data; if Congress and the regulators have better data than what's in this report, I don't know why they aren't sharing it with us. And this report still doesn't tell us how many seriously delinquent loans can practically or effectively be worked out short of foreclosure.

by Calculated Risk on 9/13/2008 01:45:00 AM

More on the emergency Fed and Wall Street meeting ...

From the SEC:

Senior representatives of major financial institutions are meeting at the Federal Reserve Bank of New York Friday evening to discuss recent market conditions. Also participating in the meeting are Treasury Secretary Henry M. Paulson, Jr., U.S. Securities and Exchange Commission Chairman Christopher Cox, and Federal Reserve Bank of New York President Timothy F. Geithner.

From Jenny Anderson, Edmund L. Andrews, Vikas Bajaj and Eric Dash at the NY Times: U.S. Gives Banks Urgent Warning to Solve Crisis

Timothy F. Geithner, the president of the New York Federal Reserve, called a 6 p.m. meeting so that bank officials could review their financial exposures to Lehman Brothers and work out contingency plans over the possibility that the government would need to orchestrate an orderly liquidation of the firm on Monday ...
emphasis added

Mr. Geithner told the participants that an industry solution was needed, no matter what, and that it was not about any individual bank ... They said he told them that if the industry failed to solve the problem their individual banks might be next.

Pretty strong stuff for a Friday night.

by Calculated Risk on 9/12/2008 08:51:00 PM

Here is the story from the WSJ: New York Fed Holds Emergency Meeting On Lehman's Future

In attendance were Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox, Morgan Stanley Chief Executive John Mack and Merrill Lynch Chief Executive John Thain, among others.
...
"Senior representatives of major financial institutions met at the Federal Reserve Bank of New York Friday evening to discuss recent market conditions," a spokesman for the New York Fed said.

I expect some sort of announcement this weekend.

by Calculated Risk on 9/12/2008 06:30:00 PM

From the WSJ: AIG May Hold Analyst Call As S&P Threatens Downgrade

American International Group Inc. will likely hold an analyst call Monday morning where it could announce a series of steps, possibly including asset sales ... Also, late Friday, ratings agency Standard & Poor's threatened to downgrade the company ...

Sounds like I need to get up early on Monday! Hmmm, perhaps AIG should ask Lehman how their conference call worked out.

by Calculated Risk on 9/12/2008 04:05:00 PM

These are headlines of comments from analysts at Stifel Nicolaus & Co:

WaMu Loans Losses rising rapidly, may be understated.

WaMu Q3 Loss estimate widens.

WaMu biggest risk is run on deposits.

WaMu Retail deposit franchise is "huge concern".

by Calculated Risk on 9/12/2008 02:42:00 PM

Not sure if I should be watching the Weather Channel or CNBC.
Atrios, Sept 12, 2008

I feel the same way. Hopefully this graphic is helpful. It's from Stormpulse.com. As Ike approaches Texas, this will show the radar images of the storm.


Powered by hurricane-tracking software from Stormpulse.com.

Update: The Oil Drum has a nice discussion of the possible impact on oil and gasoline production: Hurricane Ike, Energy Infrastructure, Refineries and Damage Models Thread

Here are some other excellent sites to track hurricanes:
National Hurricane Center
Weather Underground Note: See Jeff Master's blog.

by Calculated Risk on 9/12/2008 01:35:00 PM

Update from WSJ: WaMu CEO Brings in Former Aide

A person close to the company also discounted suggestions Friday that serious talks are underway between WaMu and J.P. Morgan Chase & Co. ...

From The American Banker: JPMorgan Chase in Advanced Talks to Buy Wamu: Sources

JPMorgan Chase is in advanced discussions to buy Wamu, sources said Friday. While a deal has not been struck, and could fall apart, talks are ongoing at the highest levels ...

by Calculated Risk on 9/12/2008 12:25:00 PM

Just to see if investors were buying Lehman bonds in anticipation of a deal this weekend - with some anticipation that the debt holders would be made whole - I checked some of the bond pricing in the secondary market (offered for resale, not by Lehman).

The 6 month Lehman Brothers notes due March 13, 2009 are being offered at a yield to maturity (annualized) of 34%.

The one year senior notes due August 15, 2009 are being offered at a yield to maturity of 36%.

I'd say debt investors are not sanguine.

by Calculated Risk on 9/12/2008 12:08:00 PM

This article is interesting because some analysts following California's Inland Empire housing market were pointing to the declines in foreclosure activity for the last two months as a possible sign that the market was nearing a bottom.

From the Press Enterprise: Inland defaults change direction, rising after two months of declines

Mortgage defaults ... spiked in Riverside and San Bernardino counties in August after a two-month decline, smashing hopes that the flood of home foreclosures might be about to ebb.

In Riverside County, total foreclosure-related filings were up 58 percent from a year ago and 39 percent from July, while in San Bernardino County, total filings increased 98 percent from August 2007 and 34 percent from the month before.

There is more coming. And the Alt-A defaults are just starting to increase. From Bloomberg: Alt-A Mortgages Next Risk for Housing Market as Defaults Surge

Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods,
according to RealtyTrac Inc., an Irvine, California-based foreclosure data provider.
...
About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance ...