by Calculated Risk on 2/22/2008 01:35:00 PM

Vacant homes are a negative externality for the neighbors; from unkempt yards, mosquito infected pools (see video at bottom of posts), fire hazards, and trespassers squatting in the homes (aka "bando", a homeless person living in an abandoned home) are just some of the problems.

To combat these problems, Minneapolis city leaders are encouraging neighbors to adopt vacant homes. From the StarTribune: City asks people to 'adopt' vacant houses

With the number of boarded homes increasing because of foreclosures, Minneapolis city leaders are encouraging neighbors and block clubs to "adopt" a vacant property on their block.

The article offers some advice for neighbors from the Police Department.

I had a vacant home next door to me for the last two years (now rented), and I picked up the flyers, performed minor yard work, and checked on the property on occasion. It was a minor inconvenience, but it was still a hassle.

by Calculated Risk on 2/22/2008 01:20:00 PM

UPDATE: I believe this to be a script blocking problem (not being able to see the word "comments"). If you are using FireFox, and have the NoScript plugin installed, you need to allow Haloscan.com and Blogspot.com. Thanks!

I've heard from two readers that say they can't see the comments. The comments appear OK to me, and there are many people participating in the comments. If you can't see the comments, please send me an email (topic "Comments") with the browser and O/S you are using. I'll forward this info to Haloscan and see if we can get this fixed. This is puzzling ...

by Calculated Risk on 2/22/2008 12:06:00 PM

CNBC reports: Is Time Running Out for Bond Insurers?

The decision by the big ratings agencies, Moody's, Standard & Poor's and Fitch is imminent, and at least one of the raters could make an announcement sometime today.
...
[A] downgrade of MBIA and Ambac could pose big problems for the banks that hold bonds they insure. Analyst Meredith Whitney said on CNBC yesterday that the downgrades could cause writedowns of another $75 billion at the big banks.
emphasis added

by Tanta on 2/22/2008 11:15:00 AM

I see America's mortgage lenders have put aside their differences long enough to unite against cram-down legislation:

The nation's largest lending institutions are lobbying hard to block a proposal in Congress that would give bankruptcy judges greater latitude to rewrite mortgages held by financially strapped homeowners.

The proposal, which could come to a vote in the Senate as early as next week, is being pushed by Democratic congressional leaders and a large coalition of groups that includes labor unions, consumer advocates, civil rights organizations and AARP, the powerful senior citizens' lobby.

The legislation would allow bankruptcy judges for the first time to alter the terms of mortgages for primary residences. Under the proposal, borrowers could declare bankruptcy, and a judge would be able to reduce the amount they owe as part of resolving their debts.

Currently, bankruptcy judges cannot rewrite first mortgages for primary homes. This restriction was adopted in the 1970s to encourage banks to provide mortgages to new home buyers.

The Democrats and their allies see the plan as an antidote to the recent mortgage crisis, especially among low-income borrowers with subprime loans. The legislation would prevent as many as 600,000 homeowners from being thrown into foreclosure, its advocates say.

"We should be giving families every reasonable tool to ensure they can keep a roof over their heads," said Sen. Richard J. Durbin (Ill.), the Senate's second-ranking Democrat and author of a leading version of the legislation.

But the banks argue that any help the proposal might provide to troubled homeowners in the short run would be offset by the higher costs that borrowers would have to pay to get mortgages in the future. The reason, banks say, is that they would pass along the added risk to borrowers in the form of higher interest rates, larger down payments or increased closing costs.

If banks were unable to pass on the entire cost, they could be forced to trim their profits.

"This provision is incredibly counterproductive," said Edward L. Yingling, president of the America Bankers Association. "We will lobby very, very strongly against it."

You are, of course, really and truly living in Wonderland if you think that larger down payments and higher credit-risk premiums aren't already starting to get here in part and will only get more "severe" until we return to something like normal lending practices. Just yesterday Freddie Mac published a new Bulletin, adding another 30 bps in delivery fees to loans with LTV/CLTV at or over 80% and FICOs less than 740 (that's 0.125 or less in rate), plus basically getting rid of almost all conventional (non-FHA) loans with LTV greater than 97%. This is "serious" credit tightening only in the context of the egregiousness of the last few years, of course. But it's rather amusing that the MBA seems to think that we could avoid reversion to mean lending standards if only we didn't approve bankruptcy changes to allow cram-downs.

It's particularly amusing just after the OTS made a bit of a splash with its "Negative Equity Certificate" proposal, which is as close to a Chapter 13 cram-down as you can get without a judge involved. Regardless of what you might think about the NEC proposal--insofar as any of us really has enough detail to understand it at the moment--you must recognize that it represents a clear statement from the regulator of the largest thrifts and savings banks in the country--like, you know, Countrywide and WaMu--that principal is going to be charged off. Somehow. Some way. Sooner or later. The MBA can natter on all it wants to about how cram-downs would add 1.50% to mortgage interest rates (wherever that number comes from); if that's true, though, then it is entirely not clear why that 1.50% isn't already on its way even in the absence of cram-down legislation. As usual, the MBA lets the cat out of the bag in its breathless prose:

In December, the U.S. House of Representatives Committee on the Judiciary passed bankruptcy reform legislation that would allow bankruptcy judges to change unilaterally the terms of many mortgage loans, including the loan balance, as part of Chapter 13 bankruptcy proceedings. By granting judges this power, this bill throws into question the value of the collateral that backs every mortgage made in this country -- the home. Even a change Congress says will be temporary will be interpreted by the market as an additional risk, which lenders' prices must reflect.

That's right; there's no question about the value of the collateral now. It would only be in question if we let BK judges see those appraisals.

What this really means is that a successful cram-down would tell the investors in mortgage-backed securities that people can prove to a judge that 1) they cannot afford the mortgages they have and 2) the current value of the home is nowhere near the amount of the mortgage and 3) they do not, actually, want to just "walk away." (Nobody sane who really didn't care about keeping the home would subject themselves to a Chapter 13 just to get a cram-down; they'd mail in the keys.)

Apparently the MBA thinks that item 2) is not yet common knowledge among investors in mortgage-backed securities. This is ridiculous enough an idea that we have to assume it's willful smoke.

My own view is that a lot of mortgage lenders are still in serious denial on items 1) and 3). That'd be the whole "people who can afford their mortgages are just walkin' away" meme we've been dealing with. To admit to the fact that these mortgages are unaffordable for a lot of folks would be to admit that the whole stated-income/bogus DTI/teaser-rate qualifying games that lenders participated in for years was, in fact, what it appeared to be: a way to put people into mortgages who couldn't afford them. This is not a crisis of uncertainly about the collateral valuation. It is the recognition that the loans were made in the first place only because of the assumption that the borrower could always sell or cash-out when the true costs of the thing made themselves manifest, either through rate resets or just a couple of months of the reality of spending 50% or more of your gross income on house payments setting in. This recognition, which, frankly, the credit markets are actually getting to, contra MBA, is less about uncertain value of the collateral than exceptionally dubious reliance on such an uncertain thing to make loans work.

You have to keep remembering that the MBA is the same bunch who was all excited about increasing the conforming loan limits until mortgage bond traders--representatives to a man of that "market" the MBA is so solicitous of--announced, basically, that they had no intention of buying a pig in a poke (again). You do not make larger loan amounts less risky, especially in a declining value market, by simply declaring that "average" now means "125% of median." Mainstream media reports are getting fired up on the TBA issue, and as is generally the case with something this technical, they're not really getting it right. The issue isn't so much "segregation" of the new larger loans, it's specification.

In fact, there isn't any reason why the lower-balance currently-conforming loans couldn't go with the new higher-balance formerly-jumbo loans in a specified pool. (You just can't do it that way in a TBA pool.) It wouldn't necessarily be wise to do that, given that the lower-balance loans might get a better "execution" in TBA pools, but the point is that this isn't about "segregating" loans by balance. It's about, in essence, how much mortgage bond traders are willing to take on faith in "fungibility." TBA pools are sight-unseen: you are putting a price on loans not yet pooled, probably not yet even originated. You do this because you have the assumption that a conforming loan is a conforming loan, once it's got that GSE guarantee on it, so it doesn't matter which exact ones you get. The SIFMA announcement that the higher-balance loans would have to go in specified pools just means that you are putting a bid price on this exact pool of loans, and no other. If the loans are no longer truly "fungible"--if some of them are going to have characteristics that differ substantially from historical GSE pooling practices--then they're just not fungible. That doesn't mean they're bad loans or that nobody's going to bid on the things; it means traders need to know exactly what they're bidding on to price the prepayment risk adequately.

No, really. We've got specified pools. We have increased due diligence levels. We have the rating agencies adding additional data fields to pool-level tapes in order to rate them. We have the GSEs adding new loan-level reporting requirements so that correspondent and brokered loans can be identified in pools. This has all been going on for months and months now. "The market" wants to see, in rather more detail, just what it is we're putting in these pools. "The market" is already pretty sure there's some "uncertainty" here.

Strangely enough, at the same time the MBA is basically saying that all borrowers will get "priced" to the risk of underwater borrowers if cram-downs are allowed, as if we've never heard of the practice of risk-based loan-level pricing before. Either that, or everyone will have to make a down payment and verify income and meet reasonable ratio requirements. Which would, if it happened, pretty much make those loans "fungible" again, besides making them much less likely ever to end up in Chapter 13.

The mortgage industry's major lobbying group is coming out and telling you, explicitly, that cram-downs would ruin the party because we'd either have to disclose these bankruptcy-in-the-making loans to "the market" and watch it slap a punitive bid on the things, resulting in a rate the borrowers could never afford, or we'd have to stop making bankruptcy-in-the-making loans. Or perhaps we are being told that the MBA knows of no possible way to screen loan applications to cull out the ones most likely to end up in BK. That's rather a startling point of view from the folks who are supposed to be experts in mortgage lending.

To be perfectly honest, I'm not especially impressed with the rationale given for the cram-down proposal. I'm not convinced that 600,000 families are going to flock to Chapter 13 if the bill passes and end up financially better off and still in possession of their homes as a result. Most likely, they'll either be financially better off or still in possession of their homes, but not both. I support the bill, nonetheless, because giving residential mortgage lenders preferential treatment in BK proceedings has not worked out well for us, and if it takes the threat of cram-downs to sober everyone up on credit standards and pricing, then let's get on with it. At the very least we ought to be able to force the MBA to come clean on its rhetoric.

by Calculated Risk on 2/22/2008 10:50:00 AM

In the current Situation Room report (no link), BofA analysts suggest the monoline insurer breakup could lead to $30 Billion in write-downs for banks. BofA suggests further capital infusions, aimed at stabilizing the monolines at AA, would be a possible alternative.

This is the first suggestion I've seen of trying to stabilize the ratings at AA. I'm not sure how that would impact the muni bond market.

by Calculated Risk on 2/21/2008 11:16:00 PM

From Edmund L. Andrews and Louis Uchitelle at the NY Times: Rescues for Homeowners in Debt Weighed (hat tip SC)

Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com.

This article is mostly about the various bailout plans being proposed. But there is this comment (something I've been meaining to mention) on the impact of the housing bust on mobility in the U.S.:

People cannot move easily to jobs in other cities if they have to sell their homes at a loss.

I haven't seen the new Economy.com estimate, but I think the 8.8 million number might be a little high. However it is definitely in the ballpark. The 10.3 percent is of total homes including second homes (see here for data). I think a better number would be the percent of owner occupied homes with mortgages: 8.8 million underwater of the 51.2 million owner occupied homes with mortgages (see here) is about 17% of homeowners with mortgages are underwater according to Economy.com.

by Calculated Risk on 2/21/2008 05:13:00 PM

From Bloomberg: MBIA Advocates Severing Municipal, Corporate Units

MBIA Inc.'s new Chief Executive Officer Jay Brown, under pressure to come up with a plan to rescue the troubled company, said bond insurers must separate their municipal guarantees from asset-backed securities.

...Bond insurers should also stop issuing credit-default swaps, Brown said.

Moody's Investors Service, which has AAA ratings on the insurance arms of MBIA and Ambac, has said it plans to complete a review of the ratings by the end of the month. Standard & Poor's is also considering a downgrade of the companies' ratings.

The three largest insurers all want to split their businesses.

From the WSJ Feb 17th: Ambac in Talks to Split Itself Up

From the WSJ Feb 15th: FGIC Will Request Break-Up

by Calculated Risk on 2/21/2008 03:09:00 PM

From the WSJ: Fitch: Unrealized Subprime Losses For Insurers May Reach $8 Billion

Fitch Ratings said U.S. life insurers have an estimated $7 billion to $8 billion in unrealized losses on subprime and Alt-A investments.

The credit rater said that amount totals 13% of exposure and 3% of total industry capital. Fitch expects the industry to have recorded losses of $2 billion to $3 billion in the fourth quarter.

Just a few billion more here and a few billion more there ... the losses keep adding up.

by Tanta on 2/21/2008 02:21:00 PM

This is certainly innovative:

The Office of Thrift Supervision is preparing a plan to help mortgage borrowers who owe more than their homes are worth and to discourage them from abandoning those properties, agency officials said yesterday.

Under the regulatory agency's proposal, still in its early stages, these borrowers would refinance into government-insured loans that cover the current value of their homes. The refinancing would pay part of what's owed to the original lender. For the remainder, the lender would get what the plan's backers call a "negative equity certificate." The lender could redeem the certificate if the home is eventually sold at a higher price. . . .

The proposal was briefly mentioned at a regular quarterly news briefing. More details should emerge over coming weeks, Petrasic said. The plan has been extensively analyzed internally and is now being discussed with policymakers and industry officials, he said.

The plan would separate a troubled mortgage into two parts. The first would cover the current fair-market value of the home and would be refinanced by the Federal Housing Administration. The remainder would be issued to the original lender as a certificate.

If the borrower eventually sells the home, the FHA mortgage would be paid off first. Remaining cash would be applied to paying off the value of that certificate. Anything left over would go to the borrower.

If there's not enough profit to pay off the certificate, the original lender would take a loss, which makes this proposal a gamble. However, the plan anticipates that there would be a market where these certificates are traded. That means the lenders could sell them immediately to offset some of the loss or hold them with the hope that they will appreciate, said Jaret Seiberg, an analyst at Stanford Policy Research.

The certificates would likely trade for small amounts, maybe $2 for every $100 in home value, and the amounts would increase as the housing market strengthens, Seiberg said.

But there are still many political and logistical hurdles.

This plan has not been vetted by the White House, Congress or other policymakers. The FHA declined to comment on the specifics except to say it is "regularly looking at new ideas and actively exploring ways to expand the eligible pool of creditworthy borrowers FHA can serve."

Whether investors will embrace the idea depends on many details that aren't resolved, Seiberg said. But it could be a way for lenders to cut their losses. "It beats foreclosure," Seiberg said. "These certificates enable [investors] to share in the upside if the housing market recovers."

For borrowers, avoiding foreclosure means they get to keep their homes and reduce damage to their credit.

"What we tried to do is figure out the best way to create market incentives for all the parties involved," Petrasic said.

That's a real twist on the idea of taking back a lien on a property to recapture any future equity. Apparently, only the FHA mortgage would be a lien against the property, with the certificate being an obligation of FHA? It certainly surprises me that the OTS feels confident it can work out the legal kinks with that quickly enough to make a difference.

by Calculated Risk on 2/21/2008 09:56:00 AM

Mastercard has invested some of their working capital in Auction Rate Securities (ARS). Right now they can't sell the ARS. There is little credit risk, but this could be a liquidity concern for other companies.

From the Mastercard SEC 10-K filing today (hat tip BR):

The Company sold approximately $100 [million] in auction rate securities subsequent to December 31, 2007, however starting on February 11, 2008, the Company experienced difficulty in selling additional securities due to the failure of the auction mechanism which provides liquidity to these securities. The securities for which auctions have failed will continue to accrue interest and be auctioned every 35 days until the auction succeeds, the issuer calls the securities, or they mature. Accordingly, there may be no effective mechanism for selling these securities and the Company may own long-term securities. As of February 15, 2008, the Company had approximately $252 [million] of auction rate securities and at this time it does not believe such securities are impaired or that the failure of the auction mechanism will have a material impact on the Company’s liquidity.

And it appears, according to the following Bloomberg article that the reason the auctions are failing is because the investment banks are no longer backstopping the auctions: Auction Debt Succumbs to Bid-Rig Taint as Citi Flees

The collapse of the auction-rate bond market, where state and local governments go to raise cash, demonstrates that regulators are no match for Wall Street.

Hundreds of auctions have failed this month, sending borrowing costs as high as 20 percent because dealers from Goldman Sachs Group Inc. to Citigroup Inc., UBS AG and Merrill Lynch & Co. stopped using their own capital to support the sales. Regulators, who allowed the manipulation of bids and lack of information to persist even after two probes in the past 15 years, are now watching a $342 billion market evaporate at the expense of taxpayers.

Inadequate disclosure ``may have masked the impact of broker-dealer bidding on rates and liquidity,'' Martha Haines, head of the Securities and Exchange Commission's municipal office, said in an interview. ``The large numbers of recent auction failures, which are reported to have occurred due to a reduction in bidding by broker-dealers, appears to indicate those concerns were well founded.''

This shows the spread of the credit crunch. The banks are suffering a liquidity crisis (because of a solvency crisis). They are not backstopping the ARS, forcing state and local governments to pay higher rates on the ARS or refinance at a higher rate with longer term maturities - and causing a potential liquidity problem for corporations.