Category: forbearance

St. Valentine’s day massacre

Latest figures out of the Mortgage Bankers Asscociation clearly rang the alarm bells this week on Capital Hill.

The Mortgage Bankers Association says default rates on all outstanding home loans in the US have reached 7.3%, the highest level since modern records began in the 1970s.
The default rate in America’s ‘prime’ mortgage market has hit a record 4%, prompting fears of house prices crashing by 25%. Arrears on “prime” mortgages have reached a record 4%, confounding expectations that middle-class Americans with good credit records would be able to weather the storm.
While sub-prime and close kin “Alt A” total $2,000bn of debt, the prime market in all its forms is roughly $8,000bn. If prime default rates rise on their current trajectory, they could ultimately cause huge financial damage.

Across the pond our friends in Switzerland were obviously drinking excess mortgage koolaid circa 2002-2006:

UBS reported a fourth-quarter net loss of 12.45 billion Swiss francs ($11.23 billion), including a $13.7 billion write-down on investments tied to U.S. mortgage investments. The bank posted its first full-year net loss — 4.4 billion francs — in the 10 years since it emerged from a megamerger between Swiss Bank Corp. and Union Bank of Switzerland in 1997. Write-downs for 2007 were $18.4 billion.
For the first time, UBS provided details of nearly $70 billion in holdings of subprime-mortgage and other problematic securities — an exposure that led analysts to predict more trouble.

Finally, as Rome continues to burn the noise on Capital Hill sounds more and more like a coordinated bailout is in the works:

Bank of America Corp., Citigroup Inc. and four other U.S. lenders will announce steps today to help borrowers in danger of default stay in their homes, according to three people familiar with the plans.

Encouraged by Treasury Secretary Henry Paulson, the banks will offer a 30-day freeze on foreclosures while loan modifications are considered, two people said on condition of anonymity. The initiative, which follows a week of talks with Bush administration officials, will apply to customers who are at least three months late on payments and include prime borrowers, as well as those with poorer credit histories.

Make sure the Swiss are included in the bailout mission.

The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.
Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal. The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.

My comments: Record mortgage defaults of prime residential mortgages will continue to impede commercial bank lending for many quarters to come. And to think most analysts and money managers believed the fiduciaries back in December when they echoed “the worst is behind us”. Fool me once shame on you, fool me twice shame on me.

The subprime crisis: scofflaws & scapegoats

Last week the people at Institutional Risk Analytics hosted “Subprime Crisis: Scofflaws & Scapegoats”. Here are some of the comments from several panelists.

Josh Rosner, managing director of independent investment firm Graham Fisher & Co., spoke about two decades of “home ownership” hysteria:

Regarding the origins of the subprime disaster, Rosner provided a fascinating history of the policy roots in Washington. “The reason for the boom in housing in the past decade [was] the result of structural changes in the housing industry over a decade before. I would argue that most of these changes were a result of the 1980s recession. We came out of the 1980s recession and a lot of the industry players had lost their shirts in the S&L crisis. We saw Fannie Mae (NYSE:FNM) insolvent on a mark-to-market basis in 1986 and that was largely because of the OREO portfolio. We saw housing in 1993 and 1994 with home ownership rates stagnant, exactly where they were at the beginning of the 1980s.

Home ownership rates have consistently ranged in this country between 62 and 64 percent during the post-WWII period, and yet affordability had actually locked people out.” “So what we saw actually was the largest public-private partnership to date, started as the National Partners in Home Ownership in 1994. It was signed onto by the realtors, the home builders, Fannie, Freddie, the mortgage bankers, HUD. It was a massive effort, with more than 1,500 public and private participants, and the state goal was to reach all time home ownership levels by the end of the century. And the stated strategy proposal to reach that goal was, quote: “to increase creative financing methods for mortgage origination.” Those seeds were sown in 1994. Those policies were put in place in 1994.”

…the role of the GSEs:

Rosner continued: “By 1995 we saw home prices start to rise and home ownership levels also start to rise. How did we do that? There was no private label [mortgage] market at that point. We were really dealing in a world of enterprise [GSE] paper. We saw most of the features [of CDOs and structured assets] that we are now looking at as having been atrocious or irresponsible or poor risk management having started in the enterprise markets. We saw changes in the LTV, changes from manual underwriting to automated underwriting. The approval models used were easy to game. We saw reductions in documentation requirements. We saw changes for mortgage insurance requirements. We saw the perversion of the appraisal process and a move to automated appraisals. All of these features which we now look at and point our fingers at the subprime originators and say ‘you bad boys,’ all started in the enterprise market. This, by the way, is why I believe there is still significant risk [in the GSEs].

…the trouble with forbearance:


Rosner argues that besides low interest rates c/o of Alan Greenspan and the FOMC, mortgage lenders “began to see loss mitigation as a very valuable tool. So whereas in 1998, about 77 percent of 90-day plus borrowers ended up loosing their homes, by 2002 the measure had dropped to only 16 percent did. There is very little disclosure. Most investors don’t know [when a default has actually been] cured because when you modify you go from ‘delinquency risk’ to ‘current’ without putting out a penny. And this [example] actually suggests where we are going because there is still no transparency, still no standards for disclosure. Loss mitigation is becoming the next biggest predatory lending problem out there. When you speak to servicers, they tell you that the first thing they consider when entering into a loss mitigation is how much more capital they can drain out of the borrower before he blows up again. You have to wonder. When re-default rates on modified loans are 20-25 percent within two years, you have to ask if there is a social benefit of saving those remaining 80 percent of borrowers or not?”

…and speculators looking to front-run the home ownership drive:

“The structural change [put in place in the 1990s] drove housing to be a speculative asset,” continues Rosner. “Historically, investor share in the housing market was only about 8-9 percent. In the past three years, roughly 40 percent of sales have been for investment purposes. That creates what I call phantom inventory, usually in the fastest appreciating markets. These homes were purchased for speculative purposes with the most risky loan structures which required the least documentation… There is a lot of inventory that is not showing in the official numbers. At some point, that [inventory] gets thrown into the market.”

My Comments: 1500 public/private entities financed with below market interest rates generating tens of billions of dollars annually for the Wall Street structured finance crowd-priceless! According to a fellow credit bear I was wrong about the third inning so please stand for the national anthem.

Homeowner preservation assistance

We’re the government and we’re here to help! So says the state of Pennsylvania who created a mortgage refinance product deemed REAL, Refinance to an Affordable Loan. The program has been adopted by 67 lenders including Countrywide Financial Corp., Sovereign Bank, GMAC Financial Services and JPMorgan Chase. Borrowers generally must not make more than $120,000, among other conditions. The state will lend up to 100 percent of the mortgage.

Joining the forbearance party was none other than Angelo Mozilo and his ARM’s dealers at Countrywide. According to the Countrywide announcement over 35,000 “homeowners” have received assistance by contacting the mortgage retention center.

In addition to direct outreach, Countrywide’s efforts include working with non-profit and community groups across the country to create grassroots efforts to contact and counsel distressed borrowers, particularly in communities that are experiencing unusually high foreclosures. “There is an unprecedented effort among lenders, investors, community groups and the industry to work together to help homeowners,” said Bailey. “No one benefits from foreclosure, and counseling and intermediary support from these groups can be fundamental to the success of our borrowers.

Of course this press release by Moodys may have something to do with the press releases above:

Lenders did little to help subprime borrowers with adjustable-rate mortgages stay in their homes, even as it became clear many homeowners would struggle to keep up with their payments, a study released on Friday shows.
Moody’s Investors Service said banks eased borrowing terms on just 1 percent of subprime mortgages with interest rates that reset higher in January, April and July. It said that “only recently” have servicers begun to modify more loans to help homeowners avoid foreclosures, “despite much industry dialogue and heavy press attention” on the problem.

My comments: We’ve seen this movie before. During the 1930s numerous state and local governments intervened with forbearance programs which inevitably failed for obvious reasons. This grand experiment will also fail as wages continue to decline, adjusted for inflation while the financial obligations ratio hits an all time high.

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