Housing Bubble Bursting?

[Restrain]

Fed Judge in Cleveland is stopping foreclosures. Deutchbank (sp) has so far had 50 foreclosures halted because it couldn't prove it had title to the note. The securitization of the note had so fouled up the line of title that the judge said the bank couldn't proceed with foreclosures. Several other judges in the Ohio area are following suit.

Something else to watch.

However, there is a silver lining. Was in Vegas last week, saw an ad where they're trying to hire more locksmiths. Also, there's a big opening for auctioneers and pitch-men for home auction agencies. Anyone want to change professions?

 

[Pamela Crowley (Florida)]

The CEO of Arvest Bank (out of Arkansas?) specifically stated that their approved appraisers keep their bank safe and that their exceptionally low rate of defaults and foreclosures were because of their appraisers.

Did say almost ALL problems found were originated in their wholesale division (mortgage broker originators... what a shock...).

 

[JSmith43]

The CEO of Arvest Bank (out of Arkansas?) specifically stated that their approved appraisers keep their bank safe and that their exceptionally low rate of defaults and foreclosures were because of their appraisers.

Did say almost ALL problems found were originated in their wholesale division (mortgage broker originators... what a shock...).

Pam, you're not one to let someone off the hook or defend bad practices. So, I do not mean to imply anything like that by my following comments.

We've all experienced badly behaving brokers and, we have all been familiar with badly performing appraisers. A financial entity large enough to take on wholesale operations, establishes broker relationships and set up the rules for sourcing and delivery.

They review, at least on a sampling/auditing basis, the appraisal reports, the quality of documentation (does the ink run, pay stubs faxed from the RE agent, whatever).

These so called direct lenders send account execs to the brokers that pitch certain products (including payment option arms with neg. amort.), products eventually bound to Fannie, Freddie, some to the wall street based market makers.

Guess what? They know some of their brokers perform better than others. I was at a good broker for several years and we were constantly rewarded with risk based pricing incentives that most brokers did not receive. Yes, across the board favorable pricing adjusters, sometimes given out in the form of a semi-annual rebate (just to make sure the behavior wouldn't change??), but often negotiated with the broker for a bigger share of delivery. My broker had +/-30 active wholesale accounts at any particular time.

The wholesale operations of the big banks, etc, were calling the shots and essentially got the quality of product they desired. If they wanted more volume, they had the option of being more risk tolerant by not being fussy picking brokers for which to do business. Or they simply adjusted their risk based pricing and rewarded the good, and punished the bad actors with sour pricing. I guess the risk premium could be used to fend off future complaints, if necessary

So, when appraisers use the broad brush and paint all brokers as the source of evil with that brush, they are carrying the water, unintentionally, for some of the big fish who chose to be more risk tolerant. You know, the ones making the headlines.

Seeking ever more market share, they first might loosen up the wholesale side and solicit and purchase more risk laden volume through the brokers with high volume and sloppy standards, since there would be less risk to their branding when something went wrong (only the broker, and the broker's appraisers would get blamed-that was probably the plan).

So, here we are, appraisers, making it easy for the bad players to hide among the better players that had more wholesome wholesale operations, by blaming brokers for the problem.

This is so much like blaming appraisers for all the problems that I just had to offer this rant.

I am being sincere & I think there is a way to express disdain for sloppy broker sourcing in such a way that it doesn't keep the room filled with smoke. Without large financial entities, willing to sponsor the brokers, there would be how many broker originated loans????

Pam, do you buy my logic? I know you want all of the pieces of the puzzle to fit

 

[Pamela Crowley (Florida)]

No problem Roger. That is just for that particular bank, for it's own retail originations within 4 states. They stuck to being very particular about which appraisers were approved, AND, did not offer many of the loan programs that have caused many of the problems in the rest of the country. Arvest Bank did not do what the vast majority of the others did. Their wholesale dept was also small.

I tend to think 'originators are originators' and like any group, consist of both good a bad people. We have just had a long cycle of the bad boys in charge much more than any other recent cycles - mortgage brokers had an unusually large number of really bad boys.

 

[Randolph Kinney]

Suprises for investors and employees of lenders

Do you suppose that management of lending institutions manipulate their balance sheet to boost earnings and hide losses?

Over the past few months, we can see a parade of banks and lenders involved with mortgage lending taking huge write downs for loan losses and reserving against future losses. Was this unexpected? Or did management know something all along? There was a tendency during the mortgage boom "to report numbers that were artificially high." There were a variety of ways to do that, all of them completely legitimate and blessed by the gods of financial accounting rules otherwise known as the Financial Accounting Standards Board.

One of the most popular tactics was front loading income and cash flows through what is known as "gain on sale" accounting, as loans were packaged and sold to other investors. The amount recognized largely reflected what the company expects to receive at some point in the future, based on predictions of such things as delinquencies, prepayments and interest rates. It is totally discretionary; the more conservative the predictions, the lower the gain.

Just as companies may have been reporting numbers that were too high, some might now be reporting losses and charges that are artificially low, hoping they will somehow get bailed out before the situation worsens.

This is being done by such things as deferring recognition of losses; transferring mortgages that are likely to default from one part of the balance sheet to another, where management has more discretion in determining the seriousness of the loss; somehow concealing "the aftereffects" of aggressive gain-on-sale accounting, and reliance on interest income from negatively amortized mortgages. Neg Am mortgages are those in which the amount owed rises if payments don't cover all the interest due, which in this environment at best appears dicey.

Mortgages that are being held as portfolio loans or loans for investment have a more lenient standard of accounting for when you recognize a gain or loss while holding the loan.

Going forward, it will be a shock to employees and investors alike when some of these lenders have to adjust their balance sheets for the accounting manipulation for over estimating gains and under stating losses. The financial survival of some lenders will be in question while they mercilessly cut cost by firing employees and shutting down portions of their lending operations. Investors will feel the pain as the dividend is cut or entirely eliminated along with a falling stock price. The insult to investors is not over as these lenders try to raise additional capital selling preferred stock with a conversion feature to common stock.

No, it is not by chance that some lenders are harder hit with this loan environment than others. The end is coming. Just make sure you are not an employee or an investor in these companies.

 

[Randolph Kinney]

Fannie Mae raises mortgage rate with market condition charge

Fannie Mae Plan to Raise Housing Finance Costs Highlights Need for ...

WASHINGTON (Map) - WASHINGTON, Dec. 7 /PRNewswire-USNewswire/-- In response to Fannie Mae's announced plan to impose an "Adverse Market Delivery Charge" for all mortgages purchased after March 1, 2008, National Association of Home Builders (NAHB) Executive Vice President and CEO Jerry Howard today issued the following statement:

"Fannie Mae's new fee is a broad tax on homeownership that ultimately will be passed along to consumers. It's certain to be more difficult for the housing market to regain its footing when steps are being taken to drive up mortgage costs. This is the exact opposite of what needs to be done and underscores the importance of Congress quickly enacting legislation that would strengthen regulatory oversight of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac while also preserving their vital housing mission.

"As of March 1, 2008, Fannie Mae plans to charge lenders an additional 25 basis points across the board for loans purchased for portfolio as well as for loans delivered into its guaranteed mortgage-backed securities. It appears this action is being taken specifically to ensure that Fannie Mae meets a 30 percent minimum capital surcharge imposed by the Office of Federal Housing Enterprise Oversight (OFHEO) as a result of financial difficulties that Fannie Mae has been working through since 2004.

This is like a mini perfect storm created by Congress's inability to pass meaningful GSE reform and OFHEO's regulatory inflexibility in a time of crisis. So it should be of little surprise to anyone that, under these circumstances, a GSE would resort to a mortgage surcharge to meet capital requirements.

Raising capital by charging more for loans? What a novel way, instead of selling more preferred stock.

Oh, what will rising mortgage interest rates on conforming loans do for non-conforming loans?

 

[Randolph Kinney]

Pork chops - 10 cents a pound

Fannie Mae having to impose a market surcharge for mortgages to raise additional capital reminds me of a little story concerning economics. Selling pork chops for 10 cents a pound results in a demand that can't be met. So too is Fannie Mae's loan program where it is capital constrained to making new loans. The proposal by Bernanke and Congress to up the lending limit on Fannie Mae and Freddie Mac will not solve a thing either if both are capital impaired and cannot make new loans. It is like selling pork chops for 10 cents a pound. The solution is obvious: expect the amount of regulatory capital required to be lowered.

Mortgage rates are going to disconnect from 10-year treasuries over default concerns. Add capital impairment as another reason for further disconnect. Mortgage rates will rise as the demand for mortgages rise with out an increase in the supply of mortgages.

Pork chops 10 cents a pound, anyone?

 

[Randolph Kinney]

Money market fund halted cash withdrawals

Bank of America shutting $12 billion enhanced-cash fund

SAN FRANCISCO (MarketWatch) -- Bank of America Corp. said Monday that it's shutting a $12 billion a money-market fund of sorts and halting cash withdrawals after losses from complex investments tied to the mortgage crisis.

The so-called enhanced-cash fund, which was only offered privately to institutional investors, saw its net asset value dip below $1 recently. It closed at 99.42 on Friday.

Big investors that want to redeem are being paid "in kind," which means they get their share of the fund's assets put into a separately managed account, according to Jon Goldstein, a spokesman for Bank of America.

The fund, run by Columbia Management, a unit of Bank of America, had some money invested in so-called structured investment vehicles, which have been buffeted by this year's credit crisis.

 

[Randolph Kinney]

Another Countrywide type lender is biting the dust

WaMu to cut dividend, raise $2.5 bln, end subprime lending

SAN FRANCISCO (MarketWatch) -- Washington Mutual Inc. said late Monday it will slash its dividend, raise $2.5 billion in new capital and end subprime mortgage lending as the company tries to adjust to the credit crisis.

The dividend will drop to 15 cents a share from 56 cents a share, while the sale of convertible preferred stock will raise $2.5 billion, the lender said.

WaMu said it will stop lending through its subprime mortgage channel; close roughly 190 of its 336 home loan centers and sales offices; shut down nine home loan processing and call centers and cut about 2,600 home loan positions and 550 corporate and support employees.

As delinquencies and foreclosures surged this year, WaMu has been hit hard. The lender's shares have dropped more than 55% so far in 2007. Fourth-quarter provisions for loan losses will be $1.5 billion to $1.6 billion. Provisions will rise to a range of $1.8 billion to $2 billion in the first quarter of 2008.

Well now, it looks like some of that "rubber balance sheet" accounting is coming out. Investors and employees share the pain.

 

[Randolph Kinney]

IndyMac making new lows

Market is up, IndyMac is down to $6.44, off $1.17 during inter day trading, a new record low.

A warning - don't be fooled into thinking this bank is a bargain.