by Calculated Risk on 3/03/2007 04:50:00 PM

"We're all going to be struggling, struggling more than we are today. We're headed halfway down the mountain, and we've got a ways to go."
Robert A. Camerota, Sr., GMAC Mortgage Group senior vice president, March 3, 2007

From North County Times: Prominent mortgage exec sees further dip in market

by Calculated Risk on 3/03/2007 01:18:00 PM

Floyd Norris writes in the NY Times: When It Comes to House Prices, the Bloom Is Off the Cactus

The [Standard & Poor’s/Case-Shiller home price] indexes, which now cover 20 regions, ... [record] all sales in an area, and then [compare] the price with the price that house fetched the last time it changed hands. They include only single-family homes, not condominiums or cooperative apartments, which can distort the picture in areas where such apartments form a major part of the housing market.

Click on graph for 12 areas.

The graphic shows the performance of the indexes, year over year, for 12 areas. They illustrate the wide regional variances, showing that Phoenix was not the only part of the desert that boomed. Las Vegas, with a 53 percent year-over-year rise in the fall of 2004, set the mark for best annual performance. In 2006, prices there rose just 0.9 percent.

Big coastal markets also did very well, although not to that extreme, and are now coming down. Prices in the New York region slipped just a bit in 2006, although that figure is distorted because it ignores Manhattan apartment prices, which have been strong. Larger declines were recorded in Boston, Washington, San Francisco and San Diego, but Los Angeles eked out a 2 percent rise for the year.

by Calculated Risk on 3/02/2007 09:11:00 PM

New Century Financial filed their "Notification of Late Filing" today with the SEC. A few excerpts:

To date, six of the Company’s 11 financing arrangements whose agreements contain this rolling two-quarter net income covenant have executed waivers. Certain of these waivers will become effective when the Company receives similar waivers from each of the other lenders having the rolling two-quarter net income covenant.
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In the event the Company is unable to obtain satisfactory amendments to and/or waivers of the covenants in its financing arrangements from a sufficient number of its lenders, or obtain alternative funding sources, KPMG has informed the Audit Committee that its report on the Company’s financial statements will include an explanatory paragraph indicating that substantial doubt exists as to the Company’s ability to continue as a going concern.

And on the criminal probe:

On February 28, 2007, the Company received a letter from the United States Attorney’s Office for the Central District of California (the “U.S Attorney’s Office”) indicating that it was conducting a criminal inquiry under the federal securities laws in connection with trading in the Company’s securities, as well as accounting errors regarding the Company’s allowance for repurchase losses. The U.S. Attorney’s Office is requesting voluntary assistance by the Company, which the Company has agreed to provide.

by Calculated Risk on 3/02/2007 05:34:00 PM

From the Fremont SEC filing:

Fremont General Corporation (the "Company") could not file its Annual Report on Form 10-K for the fiscal year ended December 31, 2006 by March 1, 2007 without unreasonable effort or expense for the reasons set forth below.

In light of the current operating environment for subprime mortgage lenders and recent legislative and regulatory events, Fremont Investment & Loan, the Company's wholly owned industrial bank subsidiary ("FIL"), intends to exit its subprime residential real estate lending business. Management and the board of directors are engaged in discussions with various parties regarding the sale of the business.

Additionally, the Company expects that it, FIL and the Company's wholly owned subsidiary, Fremont General Credit Corporation ("FGCC"), will enter into a voluntary formal agreement, to be designated as a cease and desist order (the "Order"), with the Federal Deposit Insurance Corporation (the "FDIC"). Among other things, the Order will require FIL to cease and desist from the following:

o Operating with management whose policies and practices are detrimental to FIL;

o Operating FIL without effective risk management policies and procedures in place in relation to FIL's brokered subprime mortgage lending and commercial real estate construction lending businesses;

o Operating with inadequate underwriting criteria and excessive risk in relation to the kind and quality of assets held by FIL;

o Operating without an accurate, rigorous and properly documented methodology concerning its allowance for loan and lease losses;

o Operating with a large volume of poor quality loans;

o Engaging in unsatisfactory lending practices;

o Operating without an adequate strategic plan in relation to the volatility of FIL's business lines and the kind and quality of assets held by FIL;

o Operating with inadequate capital in relation to the kind and quality of assets held by FIL;

o Operating in such a manner as to produce low and unsustainable earnings;

o Operating with inadequate provisions for liquidity in relation to the volatility of FIL's business lines and the kind and quality of assets held by FIL;

o Marketing and extending adjustable-rate mortgage ("ARM") products to subprime borrowers in an unsafe and unsound manner that greatly increases the risk that borrowers will default on the loans or otherwise cause losses to FIL, including (1) ARM products that qualify borrowers for loans with low initial payments based on an introductory rate that will expire after an initial period, without adequate analysis of the borrower's ability to repay at the fully indexed rate, (2) ARM products containing features likely to require frequent refinancing to maintain affordable monthly payment or to avoid foreclosure, and (3) loans or loan arrangements with loan-to-value ratios approaching or exceeding 100 percent of the value of the collateral;

o Making mortgage loans without adequately considering the borrower's ability to repay the mortgage according to its terms;

o Operating in violation of Section 23B of the Federal Reserve Act, in that FIL engaged in transactions with its affiliates on terms and under circumstances that in good faith would not be offered to, or would not apply to, nonaffiliated companies; and

o Operating inconsistently with the FDIC's Interagency Advisory on Mortgage Banking and Interagency Expanded Guidance for Subprime Lending Programs.

The Order will also require FIL to take a number of steps, including (1) having and retaining qualified management; (2) limiting the Company's and FGCC's representation on FIL's board of directors and requiring that independent directors comprise a majority of FIL's board of directors; (3) revising and implementing written lending policies to provide effective guidance and control over FIL's residential lending function; (4) revising and implementing policies governing communications with consumers to ensure that borrowers are provided with sufficient information; (5) implementing control systems to monitor whether FIL's actual practices are consistent with its policies and procedures; (6) implementing a third-party mortgage broker monitoring program and plan; (7) developing a five-year strategic plan, including policies and procedures for diversifying FIL's loan portfolio; (8) implementing a policy covering FIL's capital analysis on subprime residential loans; (9) performing quarterly valuations and cash flow analyses on FIL's residual interests and mortgage servicing rights from its residential lending operation, and obtaining annual independent valuations of such interests and rights; (10) limiting extensions of credit to certain commercial real estate borrowers; (11) implementing a written lending and collection policy to provide effective guidance and control over FIL's commercial real estate lending function, including a planned material reduction in the volume of funded and unfunded nonrecourse lending and loans for condominium conversion and construction as a percentage of Tier I capital; (12) submitting a capital plan that will include a Tier I capital ratio of not less than 14% of FIL's total assets; (13) implementing a written profit plan; (14) limiting the payment of cash dividends by FIL without the prior written consent of the FDIC and the Commissioner of the California Department of Financial Institutions; (15) implementing a written liquidity and funds management policy to provide effective guidance and control over FIL's liquidity position and needs; (16) prohibiting the receipt, renewal or rollover of brokered deposit accounts without obtaining a Brokered Deposit Waiver approved by the FDIC; (17) reducing adversely classified assets; and (18) implementing a comprehensive plan for the methodology for determining the adequacy of the allowance for loan and lease losses.

In addition, the Company is analyzing, in connection with the preparation of the Company's consolidated financial statements as of and for the period ended December 31, 2006, the FDIC's criticism with respect to the Company's methodology for determining the carrying value of the Company's residential real estate loans held for sale.
...
In addition, the Company is analyzing, in connection with the preparation of the Company's consolidated financial statements as of and for the period ended December 31, 2006, the FDIC's criticism with respect to the Company's methodology for determining the carrying value of the Company's residential real estate loans held for sale.

The Company will report a net loss from continuing operations for the fourth quarter of 2006 as compared to net income of $54.5 million for the fourth quarter of 2005. The net loss to be reported for the fourth quarter of 2006 will be due in part to increased provisions for loan repurchase and repricing, valuation and premium recapture reserves. In light of the Company's reported operating results for the nine months ended September 30, 2006, and the fact that the Company will report a net loss for the fourth quarter of 2006, the Company's operating results for the fiscal year ended December 31, 2006 will represent a significant change from the Company's operating results for the fiscal year ended December 31, 2005.

The Company is unable to estimate its results of operations for the fourth quarter of 2006 and full-year 2006 until it completes its review of its methodology for determining the carrying value of its held-for-sale residential real estate loan portfolio, as discussed above.

by Calculated Risk on 3/02/2007 02:06:00 PM

From MarketWatch: Bond default protection shoots up for banks

The cost of insurance against a default by top investment banks Goldman Sachs Group Inc., Merrill Lynch & Co Inc, Lehman Brothers Holdings Inc and Morgan Stanley ballooned this week, amid increased nervousness about their exposure to the shaky subprime lending market.

The trend toward more expensive credit-default swap protection for these four banks began last week and accelerated this week, said Michael Fuhrman, an institutional equities salesman for GFI, an inter-dealer broker for credit derivatives.
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On Friday credit default swaps for Goldman Sachs, the world's biggest securities firm, grew to $33,000 per $10 million in credit protection instruments, up from $26,000 per $10 million on Monday, according to GFI data.

Merrill Lynch CDS cost $25,000 per $10 million in instruments on Monday and grew to $33,000 per $10 million at the end of the week; Lehman CDS protection rose from $28,000 per $10 million in instruments to $35,000 per $10 million and Morgan Stanley CDS protection rose from $27,000 per $10 million to $33,000 per $10 million in the last five days, GFI said.

And from Bloomberg (hat tip: Brian): Goldman, Merrill Almost `Junk,' Their Own Traders Say

Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.

Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.