Housing Bubble Bursting?

[Randolph Kinney]

Credit-default swaps threaten major players

Goldman, Merrill, Morgan Stanley Are 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.

Traders of credit derivatives are more alarmed than stock and bond investors that a slowdown in housing and the global equity market rout have hurt the firms. Merrill since 2005 has financed two mortgage lenders that subsequently failed and purchased a third, First Franklin Financial Corp., for $1.3 billion.

``These guys have made a lot of money securitizing mortgages over the years in a mortgage boom time,'' said Richard Hofmann, an analyst at bond research firm CreditSights Inc. in New York. ``The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they're not able to keep that securitization machine humming along.''

Credit-default swaps on the debt of Goldman, the world's biggest securities firm, have risen to $32,775 per $10 million in bonds, up from $21,500 at the start of the year, according to prices compiled by London-based CMA Datavision. The price touched $35,000 on Feb. 28, the highest since June 2005.

 

[Randolph Kinney]

Subprime fears hang over financial stocks at the open

NEW YORK (MarketWatch) -- Instability in the subprime mortgage market rattled the banking sector Friday after the opening bell. New Century Financial Corp. fell 2.9% after it disclosed it was delaying the filing of financial statements and restating profits.

Countrywide Financial Corp. was the subject of a report in Friday's Wall Street Journal that said the largest U.S. home mortgage lender saw a sharp increase in late payments in 2006.

 

[Randolph Kinney]

More subprime lenders delay filings

http://www.bloomberg.com/apps/news?pid=20601208&sid=aPO8a.tvyV90&refer=finance

March 2 (Bloomberg) -- Impac Mortgage Holdings Inc. and Accredited Home Lenders Holding Co., two companies specializing in mortgage loans, said they won't be able to file their annual reports on time. Shares of both tumbled.


An increase in late payments and rising defaults on home loans is hurting companies that make or invest in mortgages. Shares of Fremont General Corp., which makes subprime home loans, plunged 24 percent on Feb. 28 when the company postponed release of its fourth-quarter earnings. More than 20 mortgage companies have closed, gone bankrupt or sought buyers since the start of 2006.


New Century Financial Corp., also based in Irvine, said yesterday it would file a form today used to notify regulators of a delay in filing a required financial report.

 

[Greg Bell]

Yikes..All of the pie in the sky folks told me it's going to be a soft landing.Better get a new pair of rose colored glasses....

 

[Randolph Kinney]

Mortgage defaults start to spread

http://www.azcentral.com/business/articles/0301wsj-mort-defaults01-ON.html

The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.

At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "subprime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans - which are known in the industry as "Alt-A" mortgages - were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16 percent of mortgage originations last year and subprime loans an additional 24 percent.

Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. "The credit deterioration has been almost parallel to what's been happening in the subprime market," says UBS mortgage analyst David Liu.

The UBS study found that the problems are greatest for Alt-A borrowers who took out interest-only adjustable-rate mortgages, which allow borrowers to pay interest and no principal in the loan's early years, with 3.71 percent of interest-only ARMs originated in 2006 at least 60 days past due. As in the subprime sector, the riskiest loans are those made to home buyers who put little, if any, money down and don't document their income or assets.

 

[Randolph Kinney]

A Painful Hiss from the Subprime Balloon

http://www.businessweek.com/bwdaily/dnflash/content/feb2007/db20070221_387085.htm?chan=top+news_top+news+index_companies

Subprime lender NovaStar's warning of little, if any, taxable income through 2011 sends another unwelcome jolt through mortgage company stocks.

In a quarterly report that staggered analysts with the breadth of its bad news, the Kansas City (Mo.) subprime mortgage lender revealed a quarterly loss, said it may not have any taxable income through 2011, and strongly hinted its days as a real estate investment trust (REIT) are drawing to a close.

 

[Randolph Kinney]

Risky Mortgages 'Coming Home to Roost'

http://www.bloomberg.com/apps/news?pid=20601087&sid=aW2jKmhubg.o&refer=home

The Fed and other U.S. banking regulators are under increasing scrutiny as loans turn sour amid higher interest rates and a housing downturn. In September, the agencies warned lenders to raise underwriting standards for risky mortgages to ensure borrowers can meet monthly payments for the life of the loan.

 

[Randolph Kinney]

Agencies Seek Comment on Subprime Mortgage Lending Statement

http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070302/attachment.pdf

March 2, 2007

The federal financial regulatory agencies today issued for comment a proposed Statement on Subprime Mortgage Lending to address certain risks and emerging issues relating to subprime1 mortgage lending practices, specifically, particular adjustable-rate mortgage (ARM) lending products.

The Agencies developed this Statement to address emerging issues and questions relating to certain subprime2 mortgage lending practices. The Agencies are concerned that subprime borrowers may not fully understand the risks and consequences of obtaining certain adjustable-rate mortgage (ARM) products. In particular, the Agencies are concerned with ARM products marketed to subprime borrowers with the following characteristics:

• Offering low initial payments based on a fixed introductory or “teaser” rate that expires after a short initial period then adjusts to a variable index rate plus a margin for the remaining term of the loan3;

• Approving borrowers without considering appropriate documentation of their income;

• Setting very high or no limits on how much the payment amount or the interest rate may increase (“payment or rate caps”) at reset periods, potentially causing a substantial increase in the monthly payment amount “payment shock”4;

• Containing product features likely to result in frequent refinancing to maintain an affordable monthly payment;

• Including substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period; and/or

• Providing borrowers with inadequate information relative to product features, material loan terms and product risks, prepayment penalties, and the borrower’s obligations for property taxes and insurance.

The consequences to subprime borrowers could include: being unable to afford the monthly payments after the initial rate adjustment because of payment shock; experiencing difficulty in paying real estate taxes and homeowners insurance that were not escrowed; incurring expensive refinancing fees frequently due to closing costs and prepayment penalties, especially if the prepayment penalty period extends beyond the rate adjustment date; and losing their home. The Agencies also are concerned about the elevated credit risk that is inherent in these products.

The Agencies note that many of these concerns are addressed in existing interagency guidance. The most prominent are the 1993 Interagency Guidelines for Real Estate Lending (Real Estate Guidelines), the 1999 Interagency Guidance on Subprime Lending (Subprime Lending Guidance), and the 2001 Expanded Guidance for Subprime Lending Programs (Expanded Subprime Guidance).5

While the 2006 Interagency Guidance on Nontraditional Mortgage Product Risks (NTM Guidance) may not explicitly pertain to products with the characteristics addressed in this Statement, it outlines prudent underwriting and consumer protection principles that institutions should also consider with regard to subprime mortgage lending. This Statement reiterates many of the principles addressed in existing guidance relative to prudent risk management practices and consumer protection laws.6

 

[Austin]

This just the beginning of the cascade effect. When this filters down to a recession and job losses the default rate will increase even more which will make more morttgage company problems and the cycle goes on... This is what I call a slow motion bubble burst. That is the way economic bubbles expire. Sounds kind of like a long slow flatulence bubble bursting event and smells like one too.

 

[Randolph Kinney]

Washington talks tough on risky lending

http://www.marketwatch.com/news/story/bank-regulators-demand-tougher-rules/story.aspx?guid=%7B13649CAD%2DC0A3%2D446D%2D8CC1%2DA46A6DAB468B%7D

Mortgage bankers criticize proposal; Senate banking chief praises it

WASHINGTON (MarketWatch) -- Federal bank regulators demanded tougher standards for subprime loans Friday, saying they're worried that borrowers of adjustable-rate mortgages may not understand the risks associated with them.

The Mortgage Bankers Association criticized the regulators' proposals, saying they could cut off credit to low-income homes and minorities. The chairman of the Senate Banking Committee, meanwhile, called the move "responsible."