by Calculated Risk on 2/27/2008 04:00:00 PM

From AP: S&P: Mortgage Bond Credit Worsens (hat tip nades)

The good news is delinquencies for HELOCs issued in 2007 have moderated. That is probably a combination of tighter lending standards, and that the loans are new - the borrowers haven't run out of cash yet!

by Calculated Risk on 2/27/2008 03:11:00 PM

Nouriel Roubini, Professor of Economics at at the Stern School of Business, NY University testified to the House of Representatives’ Financial Services Committee: The Current U.S. Recession and the Risks of a Systemic Financial Crisis

Thanks to Dr. Roubini for the kind mention!

by Calculated Risk on 2/27/2008 02:20:00 PM

Click on graph for larger image.

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001.

Note that the escalation of the Vietnam War in the '60s kept the economy out of recession, even though New Home sales were falling. Although Chairman Bernanke didn't use the word "recession", it appears the U.S. economy is now in recession - possibly starting in December - as shown on graph.

This is what we call Cliff Diving!


The second graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red column in January 2008. This is the lowest sales for January since the recession of '91.

As the graph indicates, the next 2 to 3 months are critical for the homebuilders. Right now it isn't looking good. Toll Brothers CEO stated this morning:

“The selling season, which we believe starts in mid-January, has been weak ..."

by Tanta on 2/27/2008 01:31:00 PM

Some snippets from the Fannie Mae 10-K, if for some reason you didn't eagerly read the whole thing as soon as it hit the SEC website . . .

On losses:

We have experienced increased mortgage loan delinquencies and credit losses, which had a material adverse effect on our earnings, financial condition and capital position in 2007. Weak economic conditions in the Midwest and home price declines on a national basis, particularly in Florida, California, Nevada and Arizona, increased our single-family serious delinquency rate and contributed to higher default rates and loan loss severities in 2007. We are experiencing high serious delinquency rates and credit losses across our conventional single-family mortgage credit book of business, especially for loans to borrowers with low credit scores and loans with high loan-to-value (“LTV”) ratios. In addition, in 2007 we experienced particularly rapid increases in serious delinquency rates and credit losses in some higher risk loan categories, such as Alt-A loans, adjustable-rate loans, interest-only loans, negative amortization loans, loans made for the purchase of condominiums and loans with second liens. Many of these higher risk loans were originated in 2006 and the first half of 2007. . . .

We expect these trends to continue and that we will experience increased delinquencies and credit losses in 2008 as compared with 2007. The amount by which delinquencies and credit losses will increase in 2008 will depend on a variety of factors, including the extent of national and regional declines in home prices, interest rates and employment rates. In particular, we expect that the onset of a recession, either in the United States as a whole or in specific regions of the country, would significantly increase the level of our delinquencies and credit losses. Increases in our credit-related expenses would reduce our earnings and adversely affect our capital position and financial condition. . . .

On counterparty risk and the CFC-BoA merger:

The challenging mortgage and credit market conditions have adversely affected, and will likely continue to adversely affect, the liquidity and financial condition of a number of our institutional counterparties, particularly those whose businesses are concentrated in the mortgage industry. One or more of these institutions may default in its obligations to us for a number of reasons, such as changes in financial condition that affect their credit ratings, a reduction in liquidity, operational failures or insolvency. Several of our institutional counterparties have experienced ratings downgrades and liquidity constraints, including Countrywide Financial Corporation and its affiliates, which is our largest lender customer and mortgage servicer. These and other key institutional counterparties may become subject to serious liquidity problems that, either temporarily or permanently, negatively affect the viability of their business plans or reduce their access to funding sources. The financial difficulties that a number of our institutional counterparties are currently experiencing may negatively affect the ability of these counterparties to meet their obligations to us and the amount or quality of the products or services they provide to us. A default by a counterparty with significant obligations to us could result in significant financial losses to us and could materially adversely affect our ability to conduct our operations, which would adversely affect our earnings, liquidity, capital position and financial condition.

Our business with our lender customers, mortgage servicers, mortgage insurers, financial guarantors, custodial depository institutions and derivatives counterparties is heavily concentrated. For example, ten single-family mortgage servicers serviced 74% of our single-family mortgage credit book of business as of December 31, 2007. In addition, Countrywide Financial Corporation and its affiliates, our largest single-family mortgage servicer, serviced 23% of our single-family mortgage credit book of business as of December 31, 2007. Also, seven mortgage insurance companies provided over 99% of our total mortgage insurance coverage of $104.1 billion as of December 31, 2007, and our ten largest custodial depository institutions held 89% of our $32.5 billion in deposits for scheduled MBS payments in December 2007.

Moreover, many of our counterparties provide several types of services to us. For example, many of our lender customers or their affiliates also act as mortgage servicers, custodial depository institutions and document custodians for us. Accordingly, if one of these counterparties were to become insolvent or otherwise default on its obligations to us, it could harm our business and financial results in a variety of ways. . . .

Our ability to generate revenue from the purchase and securitization of mortgage loans depends on our ability to acquire a steady flow of mortgage loans from the originators of those loans. We acquire a significant portion of our mortgage loans from several large mortgage lenders. During 2007, our top five lender customers accounted for approximately 56% of our single-family business volume. Accordingly, maintaining our current business relationships and business volumes with our top lender customers is critical to our business. Some of our lender customers are experiencing, or may experience in the future, liquidity problems that would affect the volume of business they are able to generate. If any of our key lender customers significantly reduces the volume or quality of mortgage loans that the lender delivers to us or that we are willing to buy from them, we could lose significant business volume that we might be unable to replace, which could adversely affect our business and result in a decrease in our market share and earnings. In addition, a significant reduction in the volume of mortgage loans that we securitize could reduce the liquidity of Fannie Mae MBS, which in turn could have an adverse effect on their market value.

Our largest lender customer, Countrywide Financial Corporation and its affiliates, accounted for approximately 28% of our single-family business volume during 2007. In January 2008, Bank of America Corporation announced that it had reached an agreement to purchase Countrywide Financial Corporation. Together, Bank of America and Countrywide accounted for approximately 32% of our single-family business volume in 2007. We cannot predict at this time whether or when this merger will be completed and what effect the merger, if completed, will have on our relationship with Countrywide and Bank of America. Following the merger, we could lose significant business volume that we might be unable to replace, which could adversely affect our business and result in a decrease in our earnings and market share. . . .

On reserve calculations:

As the housing and mortgage markets deteriorated during 2007, we adjusted certain key assumptions used to calculate our loss reserves to reflect the rise in average loss severities, which more than doubled from 2006, and default rates. Prior to the fourth quarter of 2006, we derived loss severity factors using available historical loss data for the most recent two-year period. We derived our default rate factors based on loss curves developed from available historical loan performance data dating back to 1980. In the fourth quarter of 2006, we shortened our loss severity period assumption to reflect losses based on the previous year rather than a two-year period to reflect a trend of higher loss severities. Given the significant increase in loss severities during 2007 resulting from the decline in home prices, in the fourth quarter of 2007 we further reduced the loss severity period used in determining our loss reserves to reflect average loss severity based on the previous quarter. Additionally, for loans originated in 2006 and 2007, we transitioned to a one-year default curve and subsequently to a one-quarter default curve to reflect the increase in the incidence of early payment defaults on these loans. Statistically, the peak ages for mortgage loan defaults generally have been from two to six years after origination. However, our 2006 and 2007 loan vintages have exhibited a much earlier and higher incidence of default.

On the book of business:

Our conventional single-family mortgage credit book of business continues to consist mostly of traditional fixed-rate mortgage loans and loans secured by one-unit properties. Approximately 89% of our conventional single-family mortgage credit book of business consisted of fixed-rate loans, and approximately 96% consisted of loans secured by one-unit properties as of December 31, 2007. The weighted average credit score within our single-family mortgage credit book of business remained high at 721, and the estimated mark-to-market LTV ratio was 61% as of December 31, 2007.

Approximately 20% of our conventional single-family mortgage credit book of business had an estimated mark-to-market LTV ratio greater than 80% as of December 31, 2007. Of that 20% portion, over 62% of the loans were covered by credit enhancement. The remainder of these loans, which would have required credit enhancement at acquisition if the original LTV ratios had been above 80%, was not covered by credit enhancement as of December 31, 2007. While the LTV ratios of these loans were at or below 80% at the time of acquisition, they increased above 80% subsequent to acquisition due to declines in home prices over time. There was no metropolitan statistical area with more than 4% of these high LTV loans; the three largest metropolitan statistical area concentrations of these high LTV loans were in New York, Detroit and Washington, DC.

The most significant change in the risk characteristics of our conventional single-family business volume for 2007, relative to 2006 and 2005, was an increase in the percentage of fixed-rate mortgages acquired and a decrease in the percentage of adjustable rate mortgages acquired, driven in part by the shift in the primary mortgage market to a greater share of originations of fixed-rate loans. Fixed-rate mortgages represented 90% of our conventional single-family business volume in 2007, compared with 83% in 2006. Additionally, based on the higher risk nature of interest-only and negative amortizing ARMs, we significantly reduced our acquisition of these loans to less than 7% of our business volume in 2007, from 12% in each of 2006 and 2005. We anticipate relatively few negative amortizing ARM loan acquisitions in 2008.

The most significant change in the risk characteristics of our conventional single-family book of business as of the end of 2007, relative to the end of 2006, was an increase in the weighted average mark-to-market LTV to 61% as of December 31, 2007, from 55% as of the end of 2006. This increase was driven by a decline in home prices across the country, particularly in states such as California and Florida, which had previously experienced rapidly rising rates of home price appreciation and are now experiencing sharp declines in home prices.

In recent years there has been an increased percentage of borrowers obtaining second lien financing to purchase a home as a means of avoiding paying primary mortgage insurance. Although only 10% of our conventional single-family mortgage credit book of business had an original average LTV ratio greater than 90% as of December 31, 2007, we estimate that 15% of our conventional single-family mortgage credit book of business had an original combined average LTV ratio greater than 90%. The combined LTV ratio takes into account the combined amount of both the primary and second lien financing on the property. Second lien financing on a property increases the level of credit risk because it reduces the borrower’s equity in the property and may make it more difficult for a borrower to refinance. Our original combined average LTV ratio data is limited to second lien financing reported to us at the time of origination of the first mortgage loan. . . .

Alt-A mortgage loans, whether held in our portfolio or backing Fannie Mae MBS, represented approximately 16% of our single-family business volume in 2007, compared with approximately 22% and 16% in 2006 and 2005, respectively. During 2007, private-label securitization of Alt-A loans significantly decreased and Fannie Mae assumed a larger role in acquiring Alt-A mortgage loans; however, the actual amount of our acquisitions of Alt-A loans decreased in 2007 from 2006. In order to manage our credit risk in the shifting market environment, we lowered maximum allowable LTV ratios and increased minimum allowable credit scores for most Alt-A loan categories. We also limited our acquisition of some documentation types and made other types ineligible for delivery to us. Finally, we implemented pricing increases to reflect the higher credit risk posed by these mortgages. As a result of these eligibility restrictions and price increases, we believe that our volume of Alt-A mortgage loan acquisitions will decline in future periods.

We estimate that Alt-A mortgage loans held in our portfolio or Alt-A mortgage loans backing Fannie Mae MBS, excluding resecuritized private-label mortgage-related securities backed by Alt-A mortgage loans, represented approximately 12% of our total single-family mortgage credit book of business as of December 31, 2007, compared with approximately 11% and 8% as of December 31, 2006 and 2005, respectively. The majority of our Alt-A mortgage loans are fixed-rate, and the weighted average credit score of borrowers under our Alt-A mortgage loans is comparable to that of our overall single-family mortgage credit book of business. . . .

We estimate that subprime mortgage loans held in our portfolio or subprime mortgage loans backing Fannie Mae MBS, excluding resecuritized private-label mortgage-related securities backed by subprime mortgage loans, represented approximately 0.3% of our total single-family mortgage credit book of business as of December 31, 2007, compared with 0.2% and 0.1% as of December 31, 2006 and 2005, respectively. . . .

We have also invested in highly rated private-label mortgage-related securities that are backed by Alt-A or subprime mortgage loans. As of December 31, 2007, we held or guaranteed approximately $32.5 billion in private-label mortgage-related securities backed by Alt-A loans and approximately $41.4 billion in private-label mortgage-related securities backed by subprime loans. These amounts include resecuritized private-label mortgage-related securities backed by Alt-A and subprime mortgage loans.

On workouts:

Of the conventional single-family problem loans that are resolved through modification, long-term forbearance or repayment plans, our performance experience after 24 months following the inception of these types of plans, based on the period 2001 to 2005, has been that approximately 60% of these loans remain current or have been paid in full. Approximately 9% of these loans were terminated through foreclosure. The remaining loans continue in a delinquent status.

by Tanta on 2/27/2008 11:10:00 AM

OFHEO Press Release:

Fannie Mae published its timely, audited financial statement for 2007 today and Freddie Mac anticipates publishing its statement tomorrow. These steps constitute an important milestone in remediation of their respective operational and control weaknesses that led to multi-year periods when neither company released timely, audited financial statements.

Both companies have been operating under regulatory restrictions stemming from these past problems. These restrictions include growth limits on their retained mortgage portfolios, Consent Orders prescribing necessary remediation actions, and required 30 percent capital cushions above the statutory minimum capital requirements.

Mortgage Portfolio Growth Caps

In recognition of the progress being made by both companies, as indicated by the timely release of their 2007 audited financial statements, and consistent with the terms of the relevant agreements, OFHEO will remove the portfolio growth caps for both companies on March 1, 2008.

Consent Orders

Both companies have also made substantial progress with respect to completing the requirements of their respective Consent Orders. As each Enterprise nears completion, OFHEO is working with them to undertake a thorough review and validation of the completed work and will test the new systems and controls, as needed. To the extent that OFHEO finds the Enterprise has fulfilled the requirements of its Consent Order and the Enterprise has continued to file timely, audited financial statements, OFHEO will lift the Consent Order.

Fannie Mae has reported to us that its remediation activities under the Consent Order are nearing completion. Freddie Mac has completed most of the requirements under its Consent Order, but still faces the requirement of separating the CEO and Chairman position. Although not in the Consent Order, completion of the SEC registration process is a critical step.

OFHEO-Directed Capital Requirements

Since agreements reached in early 2004, OFHEO has had an ongoing requirement on each Enterprise to maintain a capital level at least 30 percent above the statutory minimum capital requirement because of the financial and operational uncertainties associated with their past problems. In retrospect, this OFHEO-directed capital requirement, coupled with their large preferred stock offerings means that they are in a much better capital position to deal with today’s difficult and volatile market conditions and their significant losses.

As each Enterprise nears the lifting of its Consent Order, OFHEO will discuss with its management the gradual decreasing of the current 30 percent OFHEO-directed capital requirement. The approach and timing of this decrease will also include consideration of the financial condition of the company, its overall risk profile, and current market conditions. It will also include consideration of the importance of the Enterprises remaining soundly capitalized to fulfill their important public purpose and the recent temporary expansion of their mission.

"And the recent temporary expansion of their mission." It does sound like Lockhart is still pissed about the jumbo thingy.

(Hat tip, bacon dreamz!)

by Calculated Risk on 2/27/2008 10:40:00 AM

According to the Census Bureau report, New Home Sales in January were at a seasonally adjusted annual rate of 588 thousand. Sales for December were essentially unchanged.

Click on Graph for larger image.

Sales of new one-family houses in January 2008 were at a seasonally adjusted annual rate of 588,000 ... This is 2.8 percent below the revised December rate of 605,000 and is 33.9 percent below the January 2007 estimate of 890,000.

The seasonally adjusted estimate of new houses for sale at the end of January was 482,000.

The 482,000 units of inventory is slightly below the levels of the last year.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are once again at record levels. Actual New Home inventories are probably much higher than reported - my estimate is about 100K higher.

This represents a supply of 9.9 months at the current sales rate.

This is another VERY weak report for New Home sales. More later today on New Home Sales.

by Calculated Risk on 2/27/2008 10:14:00 AM

From Chairman Bernanke's Semiannual Monetary Policy Report to the Congress

The economic situation has become distinctly less favorable ...

Many of the challenges now facing our economy stem from the continuing contraction of the U.S. housing market. In 2006, after a multiyear boom in residential construction and house prices, the housing market reversed course. Housing starts and sales of new homes are now less than half of their respective peaks, and house prices have flattened or declined in most areas. Changes in the availability of mortgage credit amplified the swings in the housing market. During the housing sector's expansion phase, increasingly lax lending standards, particularly in the subprime market, raised the effective demand for housing, pushing up prices and stimulating construction activity. As the housing market began to turn down, however, the slump in subprime mortgage originations, together with a more general tightening of credit conditions, has served to increase the severity of the downturn. Weaker house prices in turn have contributed to the deterioration in the performance of mortgage-related securities and reduced the availability of mortgage credit.

The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries.

Consumer spending continued to increase at a solid pace through much of the second half of 2007, despite the problems in the housing market, but it appears to have slowed significantly toward the end of the year.
...
Slowing job creation is yet another potential drag on household spending, as gains in payroll employment averaged little more than 40,000 per month during the three months ending in January, compared with an average increase of almost 100,000 per month over the previous three months.
...
The business sector has also displayed signs of being affected by the difficulties in the housing and credit markets. Reflecting a downshift in the growth of final demand and tighter credit conditions for some firms, available indicators suggest that investment in equipment and software will be subdued during the first half of 2008. Likewise, after growing robustly through much of 2007, nonresidential construction is likely to decelerate sharply in coming quarters as business activity slows and funding becomes harder to obtain, especially for more speculative projects.
emphasis added

Sounds like a recession to me!

by Tanta on 2/27/2008 09:06:00 AM

This is what the Financial Times is reporting:

A leading Democratic lawmaker on Tuesday called for $20bn in public funds to be made available to the Federal Housing Administration to purchase and refinance pools of subprime mortgages. . . .

Mr Frank said “we can do it through an existing vehicle rather than a new vehicle”. But the underlying logic of the two proposals is similar.

Mr Frank said that under his plan, the FHA would “buy up packages of mortgages but at a substantial discount”. It would then refinance the loans.

This would require about $20bn up front, but Mr Frank stressed that “the FHA would be repaid” as the loans were refinanced. The ultimate cost of the scheme to US taxpayers, under Congressional scoring practices, would probably be about $3bn to $4bn.

Mr Frank also called for between $5bn and $10bn in loans to the states, which would be used to purchase and refurbish foreclosed homes, and extra funding for counselling services.

Mr Frank said the “lesser efforts” to tackle the mortgage crisis to date “have not been very successful”. The housing crisis was “getting worse not better”.

The externalities involved in foreclosures justified the commitment of public funds. “We are talking about terrible impact on society.”

The main difference between the Frank plan and some of the other proposals circulating is the scale of the intervention envisaged.

Alan Blinder, a professor of economics at Princeton, has called for a new government vehicle modelled on the Home Owners Loan Corporation of the 1930s to borrow between $200bn and $400bn to buy up and restructure distressed loans.

Mark Zandi, chief economist at Moody’s Economy.com told the House financial services committee that it would take about $250bn in upfront funds to purchase all 2m loans expected to end in foreclosure by the end of this decade.

Mr Frank said “reality constrains” and his plan was limited to $20bn for the FHA because of the budget deficit and the need to meet pay-as-you-go spending rules.

So far this morning, my attempts to find more details on the Frank plan have not succeeded. I did, however, find this recently published statement of priorities for the House Committee on Financial Services, of which Frank is the chair:

The Committee on Financial Services urges the congressional budget resolution to prioritize the following critical issues:

(1) Housing Initiative. Over the last six months, the nation has experienced a significant increase in the number of homeowners facing the risk of foreclosure, with estimates of as many as 2.8 million subprime and “Alt A” borrowers facing loss of their homes over the next five years. We have already experienced declining home prices in many areas of the country, and the physical deterioration of certain communities, as a result of waves of vacant homes that were foreclosed or abandoned.

The Financial Services Committee is developing a number of proposals to address these growing problems. Given the urgency to take action, a significant portion of the cost of such proposals will likely be incurred in the current fiscal year. However, there would be some loan activities, FHA administrative costs, and additional housing counseling funding that would be needed over the period of the Budget Resolution.

First, the Committee is working on a proposal to provide refinancing opportunities to save as many as 1 million distressed homeowners from having their homes go into foreclosure. Such a proposal will likely involve using FHA and may involve the federal government purchasing loans. It would be implemented through separate authorizing legislation. Any proposal will require the existing holder to write down the loan to a level that is consistent with the homeowner’s ability to pay, and would exclude investor-owned and second homes. The estimated credit subsidy cost could be as much as $15 billion over the next five years. The Committee is also exploring options to limit federal government exposure and thus reduce costs. We could, for instance, require a limited soft second mortgage to the government that would enhance recoveries resulting from future property sales.

Second, the Committee is working on a proposal to provide as much as $20 billion in the form of grants, loans, or a combination of the two, for purchase of foreclosed or abandoned homes at or below market value. The purpose would be to help stabilize home prices and to begin to reverse the serious physical deterioration of neighborhoods with high numbers of subprime borrowers, defaults, and foreclosures. The structuring of such an initiative as a loan program would help to minimize the cost of the federal government, through net recoveries from the subsequent sale of properties.

Third, a substantial expansion of FHA to help keep homeowners in their home will require the contracting out by FHA for independent expertise for the development of underwriting criteria for refinanced loans and for quality control of the loans as they are being made, as well as increased FHA personnel costs for such activities as loan processing. This will require additional FHA administrative funding in the Budget Resolution for FY 2009 and possibly in subsequent years, in an estimated range of several hundred million dollars a year.

Finally, it is important for Congress to increase funding over FY 2008 levels by at least an additional $200 million a year for federal housing counseling grants. Such grants would increase capacity, in order to ensure that sufficient numbers of borrowers are assisted in implementing these and other initiatives to keep people in their homes.

I still have no particular idea where the "one million distressed homeowners" figure comes from, but we can, I think, conclude that it would be a total number of all FHA-related initiatives, including FHASecure and other kinds of fairly straightforward refinance programs, not just a program that involves FHA purchasing an existing loan in order to refinance it.

If the FT has the number right, we're looking at $20 billion for loan purchases. It's hard to calculate how many loans that would be without knowing just what kind of a discount is on the table. If you assumed a 10% discount and an average original loan balance of $200,000, you'd get just over 100,000 loans. At a 50% discount you could buy around 200,000 loans. That's a long way from a goal of one million loans, however you slice it.

On the other hand, there's the potential of several hundred million dollars a year on the table for independent experts who want to write FHA's credit guidelines for them. We knew that was coming.

The sanity level of this kind of plan still depends on why it is we want FHA to buy these loans and then refinance them, as opposed to simply refinancing them. The risk in the buyout, of course, is always that FHA pays too much for the loan; if buyer and seller need to do the full loan-level analysis to calculate the amount of the necessary loan balance to write off before establishing a price, then the practical thing to do at that point is simply a refinance, without FHA ever owning the old loan. If the point is that there isn't time or capacity for current loan holders to do that analysis, then the amount of the discounted price FHA would pay is uncertain at best.

I am also still eager to hear how this proposes to work from the perspective, specifically, of buying loans out of REMIC pools--and that is, presumably, where the problem loans in question are likely to be, not in bank whole loan investment portfolios. REMICs just cannot sell loans at less than par under current rules; without a change to those rules, it seems likely to me that in the process of selling defaulted loans to the government at a discount, the sponsors of these securities are committing themselves to bringing the deals onto their balance sheets, and possibly facing taxation of the trust itself (not just the investors receiving pass-through income). This is one of the several important differences between the current situation and the old HOLC situation in the Depression (where loans were being purchased from banks and were not securitized).

At this point I'm tempted to think it's a lot of additional mess for $20 billion. The Securities Lawyer Full Employment Act probably wasn't what anyone had in mind . . .

by Calculated Risk on 2/26/2008 01:30:00 PM

From the FDIC: Quarterly Banking Profile. A few headings:

Quarterly Net Income Declines to a 16-Year Low

One in Four Large Institutions Lost Money in the Fourth Quarter

Margin Erosion Persists

Full-Year Earnings Fall to Five-Year Low

Net Charge-Off Rate Rises to Five-Year High

Growth in Noncurrent Loans Accelerates

Large Boost to Loss Reserves Fails to Stem Decline in Coverage Ratio

On Bank Failures: "Three Failures in 2007 Is Most Since 2004"

At the end of 2007, there were 76 FDIC-insured commercial banks and savings institutions on the “Problem List,” with combined assets of $22.2 billion, up from 65 institutions with $18.5 billion at the end of the third quarter.

And a graph from the FDIC:

Click on graph for larger image.

"A Growing Number of Institutions Have Concentrations of Exposure to Construction Lending"

This graph shows the number of institutions, by quarter, where the construction loans exceed total capital.

These are the higher risk institutions. There are 2,368 institutions that met this criteria in Q4 2007, out of 8500 insured institutions.

No wonder the FDIC is hiring.

by Tanta on 2/26/2008 11:54:00 AM

Some day I will learn to stop ignoring stuff. I saw this Bloomberg piece on the day it was published, my eyes rolled into the back of my head, and I realized that on a good day I haven't got the ability to unscramble this frittata of anecdote, conflation, fact and side-issue in less than 10,000 words. I certainly have a hard time doing that temporarily blinded. But I have now received a round dozen emails from you all drawing my attention to it, plus all the uncounted times it has come up in the comments. Okay, fine.

The thing starts off with its one and only specific example, and it's a doozy:

Feb. 22 (Bloomberg) -- Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.

That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents's mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

``If you're going to take my house away from me, you better own the note,'' said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

"Former CEO" seems a tad bit complimentary to Lents here--perhaps Bloomberg is afraid of getting sued by this particular piece of work. We do get this:

Lents is former CEO of Investco Inc., a Boca Raton, Florida-based developer of voice recognition software. In 2002, the U.S. Securities and Exchange Commission sanctioned Lents and others for stock manipulation, according to the SEC Web site. He lost his job, was fined and his assets were frozen. That's the reason he couldn't pay his mortgage, he said.

Well, I never miss an opportunity to go wade through the SEC website. As far as I can determine, Lents cooked up a pump-and-dump scheme, and then found a company he could take over to implement it. This part is amusing: "Investco, Inc. is a Nevada corporation headquartered in Boca Raton, Florida. Investco formerly purported to be a provider of voice recognition technology and now claims to be a provider of financial services." If it takes one to know one, we have one.

This article from January in the South Florida Business Journal gives us a touch more color on the Lents foreclosure:

Somebody has been trying to foreclose on Joseph Lents' Boca Raton home for five years. So far, they have been unsuccessful because he has legally fought them every step of the way. . . .

"I probably have been to the Palm Beach County courthouse 100 times or more over the last five years, just to observe," Lents said. "In 99 percent of the residential foreclosure cases, plaintiffs are asking the court to accept a promissory note copy as the original because it is presumed lost."

Resistance doesn't come cheap. Lents has paid more than $120,000 in legal fees and costs so far to save his 5-acre, $2.5 million home. . . .

The Lentses built their home in 1992 and, on May 15, 2001, according to public records, refinanced it for $1.49 million with Washington Mutual Bank (NYSE: WM).

Lents, a retired CPA, lost his corporate job in 2002 when the SEC charged the company he led (Ivesco/Intraco) with a pump-and-dump scheme, according to SEC documents. While the SEC agreed that Lents had not made money - he actually lost money on the transactions - the damage was done. His income stopped and he fell five months behind on his mortgage payments.

"I tried contacting WaMu [Washington Mutual] and couldn't get through to anyone who could help me reset or recast the mortgage," Lents said. He contacted the mortgage broker, Express Financial, which had helped him shop around for the best mortgage in 2001. "They contacted WaMu and were told it couldn't do anything because, even though they were servicing the mortgage, the loan had been sold. It was a Catch-22," Lents said.

In January 2003, WaMu filed for foreclosure against the Lentses.

Where's the note?

The first count of the complaint was curious, according to Lents. It said the $1.49 million promissory note was lost.

"Now, I have audited a number of banks and credit unions in my time, and I can tell you they don't lose million-dollar notes," Lents said. "If auto dealers can keep track of auto titles, surely banks can keep track of promissory notes."

West Palm Beach attorney Brook Fisher filed an objection, and WaMu filed an affidavit, swearing the note had been lost.

The employee who filed the lost note affidavit was deposed. Under sworn testimony, she said she hadn't searched for the note and just signed a stack of lost note affidavits.

WaMu's attorney filed for summary judgment in 2003. However, since the facts surrounding the allegedly lost note were in dispute, the judge set the case for trial and allowed discovery for records and depositions.

Lents acknowledged that he owed the money, but would only pay the legal note holder, whoever that might be.

In October 2003, WaMu dismissed the suit.

Nothing more happened until February 2005, when Donaldson Lufkin Jenrette (acquired in 2000 by Credit Suisse) filed a foreclosure suit against the Lentses.

In a September 2005 mediation meeting, the attorney representing Donaldson Lufkin Jenrette said it had paid a premium for the Lentses' mortgage, apparently purchased as part of a package of non-performing loans. . . .

The Lentses' case is coming to a head. A hearing is set for Jan. 8 in which Donaldson Lufkin Jenrette is seeking summary judgment. Their attorney, Miami-based Jane Serene Raskin of Raskin & Raskin, will probably be asking for the same thing. (She did not return calls for comment.)

I have so far been unable to find an update on the DLJ hearing. I cannot even tell, from this narrative, whether DLJ was the "investor" to whom WaMu had sold the loan at the time it defaulted, or if WaMu subsequently sold the loan to DLJ after it dismissed FC proceedings, as a "non-performing loan." If the latter is the case, I admit I'd like to know just how much "premium" DLJ paid for it. (Note to the irony impaired: no, I don't want to know that. I sleep better not knowing that.)

So here's what seems to be the deal. Lents, who knows a little something about obfuscation and has a lot of free time since the SEC took care of his employment opportunities, hung out at the courthouse long enough to notice that FCs are routinely filed with either a certified true copy of the promissory note or a Lost Note Affidavit (LNA), which in every instance I have ever personally seen is a sworn statement that the original note is lost, and is accompanied by a certified true copy of the lost original. (It is theoretically possible to submit an LNA without a copy, if there were a case that both the original and all copies of the note were lost. However, there would have to be other documents attached to the LNA that would provide evidence that it once existed, such as other closing documents, the loan payment history, a sworn statement of the notary or escrow officer, etc. As I said, I've never actually seen an LNA without a copy of the note attached to it.)

Having noticed that, Lents filed an objection to the FC based on the dubious standing of the LNA; discovery proceeded and it turned out, not surprisingly to me, that there was no particular evidence that WaMu had lost the note. Someone simply decided that the quick and easy way to process a batch of foreclosure filings was to grab the copy of the note that was easily available in the servicing file, slap an LNA on it, and go with that, rather than going through the process of locating the custodian who held the original note, filing the paperwork required to have it released to WaMu, etc. Based on the article, it seems possible to conclude that the original note really was lost, but since WaMu made no effort to find it in the first place, it's a no-brainer to conclude that at least one statement in that LNA was false. (They all say something to the effect that all practicable efforts to locate the original have been made and have failed, and that the affiant has personal knowledge of this.)

What this article does not say is whether DLJ has an original note or not. If DLJ owned the note at the time WaMu, the originator and servicer, tried to foreclose on an LNA, that might be why WaMu didn't have it: DLJ had it and either WaMu didn't try to get it from them or DLJ failed to produce it. If DLJ purchased the loan subsequently, as "non-performing," then either DLJ bought with an LNA (it allowed the sale to go through with only an LNA to evidence the note), or WaMu found some note for DLJ. It really drives me nuts that these news reports bring all this stuff up, and then never really report all the relevant details. My best guess is that DLJ bought a pool of junk loans and accepted an LNA instead of requiring the original note. That's probably why DLJ is having to bring other evidence into court, such as the evidence of its purchase of this pool.

I note for y'all that I have personally executed one or two LNAs in my day, and have therefore had all known hard file folders associated with this loan (the servicing file, the branch's copy, the custodial file, whatever there is), as well as all correspondence with the warehouse bank or custodian or whoever else might have had it brought to my desk, so I could personally root through it all once more before I put my officer's signature on an LNA. In all but one of the LNAs I can remember executing, I had documentation from FedEx or some other shipper that a package had indeed been lost, plus clear documentation in the loan file that this specific note had been included in that specific lost shipment. (My shipping department always put the copy of the airbill in the loan file. Always.) And of course I always had a certified true and correct copy of the note to attach to the affidavit.

I bring all this up because, Lents' self-serving nonsense aside, not only can original notes be lost or damaged, so can car titles and any other piece of paper. (I have a friend who once had to execute over 100 LNAs after a fire in an adjoining office suite triggered the sprinkler system in her post-closing department. Those LNAs were accompanied by copies of sodden bits of semi-readable paper that had been patched together on the copier plate, one at a time.) A financial institution in the business of making mortgage loans has no business routinely losing or damaging original promissory notes, and any institution that does so should be shut down by the federal regulators and I mean that.

But if consumer attorneys want to create a situation in which the simple fact of loss of or irreparable damage to an original note vacates the debt, I can promise you you will not like the consequences of that. If it turns into Total War here, don't ever lose an original cancelled check. You should know that there is actually one fairly respectable reason for doing FC filings with note copies, besides servicer laziness or loan sale screw-ups: taking your original note out of the custodian's vault to send to some local attorney to attach to a court filing creates several more opportunities for it to get lost. If it becomes a requirement that FC can proceed only with the original note in the courtroom, and the presence of an LNA always means dismissal, then the things are going to have to be handled and shipped and received with the same level of security as a million-dollar bearer bond. Like, a Brink's truck and a bonded courier carrying a briefcase handcuffed to his wrist. You want to pay the cost of that? No. You don't. But you will.

The problem here, I suspect, is that the jurisdiction in question does not provide for a legitimate way to file with a true and correct certified copy of the original note; the only way servicers can get by without giving up their original notes to the county clerk is by filing an LNA, which at minimum makes them look bad (and involves false statements). I'll leave it to the lawyers to argue about the wisdom of forcing servicers to hand over original notes at the same time they are offered no legal remedy if counsel or clerk or FedEx misplaces it. I am simply observing, once again, that this kind of half-serious half-frivolous objection to a foreclosure action can end up having consequences nobody is going to be happy with.

To return to Bloomberg, though, you will notice that an article that goes on and on at length about the dangers of the secondary market in mortgage loans and originators going out of business and so on has exactly one example, which appears to be of a loan with a note that doesn't seem to have been lost in a loan sale and the originator in question is still in business. Meanwhile, some slick operator for whom $120,000 in legal fees is cheaper than five years of mortgage payments and whose hobby is hanging out at the courthouse is creating a precedent for FC filings in Florida that will no doubt be hailed by so-called consumer advocates as a victory for the little guy.

Lost in all of this is the apparent fact, once again, that WaMu was and probably still is exceptionally sloppy with its handling of original notes; that an outfit like DLJ will apparently buy loans with nothing other than a note copy (and pay premium, too!); and that in the absence of the industry getting serious about confronting its true operating costs and failed "efficiencies," its practices are being "criminalized." Back to Bloomberg:

Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures.

``The best thing to do is to keep people in their homes and for everybody to take steps necessary to make that happen,'' said Chris Geidner, an attorney in Dann's office. ``These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people. They become foreclosure machines.''

Joe Lents is not the victim of a "foreclosure machine." He's a deadbeat who has found a way to go five years without making a mortgage payment. He can apparently afford $120,000 in legal fees. But little people who cannot afford the mortgages they have are being convinced to let a lawyer fight their foreclosure on the grounds that the original note wasn't in the courtroom, and all that's going to do is delay the inevitable, add legal fees and even more accrued interest to the deal, and draw this whole horrible unwind of the RE bust out into years and years of hell.

I'm sorry, but AG Dann needs to go after predatory lenders who took advantage of borrowers. If he has evidence that loans were originated with the intent to foreclose--which is predatory by definition--then he should go after that. Intervening to stop a foreclosure because an assignment was filed after the loan purchase is just pandering and grandstanding and wasting resources.

The WaMu problem needs to be taken care of by the OTS: how, I want to know, does anyone pass a safety and soundness examination with a pattern of being unable at any given time to tell you where its notes are? With a pattern of requiring some low-level employee to fill out LNAs with false declarations in them to "save time"? If this isn't a pattern, then what's with all the insinuations in the Bloomberg article that it is? If it is a pattern, it's unsafe and unsound and WaMu's charter should be in danger. This is not the kind of problem you "solve" by challenges to individual FC cases, particularly ones like Lents's--the man by his own admission hasn't made a mortgage payment in five years. He deserves to lose that house, yesterday. I wouldn't go on record defending DLJ's loan purchase due diligence practices here, but DLJ deserves to win.

The rest of us deserve to have this kind of crap prevented, rather than enabled. The regulators and the investment community have to stop putting up with sloppy operations and cavalier attitudes toward document custody. At the risk of repeating myself once more, the true costs of the secondary market in mortgages has to come onto somebody's income statement sooner or later. We are seeing what happens when you claim to have careful operations at the same time you go on a cost-cutting spree to get rid of all that back-room stuff. This problem will not be solved by enriching foreclosure-avoidance attorneys.

I suppose I should end with a nod to this one, which got featured yesterday at The Big Picture and which many of you have also emailed to me. From the Chicago Tribune:

The new buyers of a rundown graystone on the South Side showed up Jan. 9 to look at the house they won at a foreclosure auction. They took the plywood off the front door and went inside to make sure the utilities had been shut off. Then they called the police.

Sitting upright in the corner of a bedroom off the kitchen was a human skeleton in a red tracksuit. Next to him lay a dead dog. Neighbors told police the corpse was almost certainly Randy Johnson, a middle-age man who lived alone in the North Kenwood house.

The cause of Johnson's death has not yet been determined, but it is just one of the mysteries about 4578 S. Oakenwald Ave. Somehow, Johnson's house was transferred three times to new owners without anyone noticing he was inside. It's a story involving forged deeds, a corrupt title company and a South Side family that has been under investigation for mortgage fraud.

Keep reading, and you'll find that Countrywide made a 100% financing deal on this thing, either without requiring an appraisal with a physical inspection, or by having relied on a fraudulent appraisal made by an appraiser who never entered the premises, or that corpse wasn't there until after the loan was made. You really can't conclude anything with the evidence we've been given. I confess I'm a bit more startled by this part:

When Johnson hadn't appeared outside for weeks in early 2006, neighbors called the city's non-emergency number asking for well-being checks, fearing he might have had an accident. Firefighters broke down the front door and searched but didn't locate Johnson. His death remains under investigation.

Sure, the thing is worth a few bad jokes at Countrywide's expense, but honestly. If the fire department broke in and searched and didn't find a corpse in 2006, nearly a year before the CFC mortgage was made, you have to wonder when the corpse got put there. As there is evidence that the 2007 purchase with the CFC loan was entirely fraudulent, there's certainly reason to suspect that the body was hidden in the home after the loan was made and the conspirators skipped out with the money. Until we get more information, I'm not inclined to see this as "three transfers without anyone noticing."

But consider it useful evidence that the mortgage mess has gotten bad enough that absolutely any insinuation against lenders, especially Countrywide, is now considered plausible. I'm personally a bit more concerned that certain parties have figured out that foreclosed properties are great places to hide corpses in. Those green pools may not end up being the neighbors' biggest complaint . . .