by Calculated Risk on 1/12/2010 10:41:00 PM

From Dow Jones: Financial-Crisis Panel Set To Grill Wall Street Executives

Wednesday's hearing marks the first of two days of testimony before the financial-crisis commission.
...
Top executives from Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) are likely to come under stiff questioning from members of the bipartisan Financial Crisis Inquiry Commission.
...
Top policymakers, including Securities and Exchange Commission Chairman Mary Schapiro and Attorney General Eric Holder, are scheduled to appear on Thursday.

The purpose of this commission is to determine the causes of the crisis, and I hope they don't spend the entire day on pay. I think they should spend a significant amount of time discussing the entire chain of the originate-to-distribute model and other financial innovations (such as automated underwriting), the interaction with the credit agencies, and what regulators were asking and being told.

The tendency will be to focus on pay and gotcha type questions (and that makes good theater), but asking question about the process would be far more helpful.

Here is the FCIC website.

by Calculated Risk on 1/12/2010 07:24:00 PM

From Mark Koba at CNBC: More Homeowners Struggling As Option ARMs Reset Higher

From Diana Olick at CNBC: Walkaways, Pay Option ARMS Hit Banks Bad

And from my earlier post: Option ARM Recast Update

This impact is still being debated, but the Option ARM fallout will hit the mid-to-high end bubble areas because it was used as an affordability product.

UPDATE: As Laurie Goodman at Amherst Securities noted yesterday, Option ARM borrowers were a self selecting group (people stretching to buy homes) and most have negative equity in their homes. The "payment shock" is unclear because of low interest rates and because of modifications. Many lenders will be willing to extend the term, and some lenders like Wells Fargo has reduced principal on a case-by-case basis.

Click on graph for larger image in new window.

On negative equity, this graph from Amherst shows the CLTV for various mortgage products. Note that subprime and Alt-A had a somewhat higher percent of borrowers with negative equity than prime - but Option ARMs (red) borrowers are mostly in negative equity!

by Calculated Risk on 1/12/2010 04:14:00 PM

From HUD: HUD Inspector General Probes Morgage Companies with Significant Claim Rates

U.S. Department of Housing and Urban Development (HUD) Inspector General Kenneth M. Donohue and Federal Housing Administration (FHA) Commissioner David H. Stevens announced today an initiative focusing on mortgage companies with significant claim rates against the Federal Housing Administration mortgage insurance program.

HUD Office of Inspector General (OIG) subpoenas were served to the corporate offices of 15 mortgage companies across the country demanding documents and data related to failed loans which resulted in claims paid out by the FHA mortgage insurance fund.

Inspector General Donohue said, “The goal of this initiative is to determine why there is such a high rate of defaults and claims with these companies and whether there is wrongdoing involved. We aren’t making any accusations at this time, we have no evidence of wrongdoing, but we will aggressively pursue indicators of fraud. We are members of the President's Financial Fraud Enforcement Task Force and today’s activities reflect our commitment to seeking information on red flags that may arise from data analysis.
...
“The FHA market share has skyrocketed,” Inspector General Donohue further said. “Our job is oversight. We work for the American taxpayer. Each loan on this list will be thoroughly examined and we will track down the reasons why it failed. Once we determine the causes, we will look to see whether there is a need for further review or remedial action. We want to send a message to the industry that as the mortgage landscape has shifted we are watching very carefully and that we are poised to take action against bad performers."

HUD has a great tool to track FHA lender performance: Neighborhood Watch Early Warning System

The default rates shown are for loans made during the last two years. As an example, according to the FHA, 15.97% of the loans originated by Pine State Mortgage Corporation of Atlanta, GA are in default or were claim terminated. The rate is 14.4% for Alacrity Financial Services, LLC of Southlake, TX, and 11.23% for Assurity Financial Services, LLC of Englewood, CO. All three have default rates well above the national average for loans originated during the last two years (5.05%), and all received subpoenas today.

by Calculated Risk on 1/12/2010 01:58:00 PM

Laurie Goodman and others at Amherst Securities released a new research note yesterday: Option ARMs - Performance and Pricing

They make several important points (quoted section are from Amherst):

Option ARM borrowers were a self selecting group: "option ARMs were the ultimate the ultimate affordability product, and borrowers who took them were a self-selected group."

Option ARMs have performed almost as poorly as subprime: "The cumulative default rate on option ARMs is higher than on any other category of loans except subprime. For 2006 securitized issuance, 61% of subprime loans have defaulted, as have 49% of the option ARMs, 39% of Alt-A loans, and 11% of prime loans."

Option ARMs are no longer experiencing negative amortization (this is because of the low index rates, and the annual increase in the payment.)

The two key problems for option ARMs are negative equity and the coming recasts (with payment shock). "Across all categories, option ARMs have more negative equity than other products." and "most of subprime pay shocks have already occurred, while most of the options ARM pay shocks are yet to come."

Click on graph for larger image in new window.

This chart shows the expected payment shock coming in 2010 and 2011 from Option ARMs. This chart includes projected increases in LIBOR (if LIBOR stays low, the shock will not be as high), and the recast due to reamortizing the loan over the remaining period.

Update: There is question on the size of the payment "shock". The report suggests many payments will double, but other estimate are much lower.

by Calculated Risk on 1/12/2010 12:39:00 PM

From the Financial Times: China raises bank reserve requirements (ht James)

China on Tuesday increased the required amount of deposits banks must keep as reserves in the clearest signal yet that the central bank was trying to tighten monetary conditions amid mounting concerns of overheating and inflation as a result of the ongoing credit boom.
excerpted with permission

More from the WSJ: China Cuts Amount Banks Can Lend, in Sign of Inflation Worries

As it orders banks to lock up more cash, Beijing is demonstrating it is on guard against asset bubbles that can accompany inflation. The initial impact may be to knock back China's stock market, which gained 80% last year according to the Shanghai Composite Index. ...

A sharp spike in bank lending starting in late 2008 was the central element to Beijing's effort to escape the global financial crisis. The forceful policy may have worked too well, allowing companies to gorge on easy credit and speculate on properties and stocks.

That calls for a graph ...

Click on graph for larger image in new window.

This graph shows the Shanghai SSE Composite Index and the S&P 500 (in blue).

The SSE Composite Index closed at 3,273.97, up about 90% from the low in 2008.