Category: subprime lending

Housing recovery?

Over the past year, more and more of the housing pundits, circa 2006, have resurfaced on Bloomberg and CNBC.  Many claim the bottom in housing is in as the US recovery continues due to low interest rates and a healing consumer.  Like any story, the devil is in the details so let’s parse the facts and make our own diagnosis.

Beginning in 2009 the new administration, assisted by the new wards of the state Fannie Mae and Freddie Mac (thank you Hank Paulson), began a series of mortgage moratoriums -aka “mortgage modifications.”  Essentially, the government would entertain a variety of mortgage defaults/delinquency cases with the intention of keeping bodies in their homes.  Can’t let the home ownership (or should I say “lease”) program go to waste now.  Since then we note the following facts provided by housing analyst Mark Hanson:

Mods are greater in number by 50% than legacy Sub prime loans in 2006. And they are worse in structure.

– There have been 9.953 MILLION loans “tampered with” through trials, mods and workouts based on OTS data through Q4 2012.  

– Bank “proprietary” Alt-A, high-risk mods outnumber HAMP (Home affordable modification program) mods by over 200%.   Banks have had a field day re-leveraging millions of bad loans into structures that would make Angelo Mozillo blush.  

– Mods are why banks brought back $10s of billions in loan loss reserves as revenue. And why they will have to add back reserves.  

– Mods are where all that housing “supply” went.

– Mods are why foreclosures are at pre-crisis lows.

– Mods turn people into underwater, over-levered renters of their own house.

– Mods prevent the deleveraging process needed for housing to achieve a “durable” recovery with “escape velocity”. 

– Mods compete fiercely with all those new-era buy and rent “investors” (Blackrock, Och-Ziff, Tom Barrack) whose top demand theme when raising opportunity capital a couple of years ago was all of the “millions of homeowners displaced through foreclosure who will need a place to rent until they can buy again”. 

If you look at mods structurally — sky-high DTI, LTV, CLTV and low credit score — they make legacy Subprime loans look sane.  People say “banks aren’t lending”. I say ‘go look at their loan mods volume’.  Loan mods are nothing more than low rate, exotic refi’s for people who can’t do a traditional refi. But they are so exotic they make Pay Option ARMs look structurally sound.  

To put this in context there were only about 4 million legacy Sub-prime loans in existence in 2007 when the wheels came off the sector spurred by the ‘Sub-prime Implosion”.

– Four million Sub-prime loans ignited the mortgage meltdown. So, six million or more ‘worse-than-Sub-prime’ loans hanging over housings’, banks’, and MBS investors’ heads probably isn’t a great thing. 

-HAMP mod redefaults are surging…but banks and servicers have been making much more risky “proprietary” mods than HAMP in much larger volume.   Thus, expect redefaults across ALL loan mods to increase significantly over the next year.  Obviously, this means more distressed supply and for many banks this could mean higher loan loss reserves, etc.  See picture below:

My Comment: So one should ask the question “How long can the government continue to hide inventory from the public”?  Or as importantly, since the public bailed out the banks shouldn’t they be entitled to purchase homes at reasonable price levels, not the artificially inflated kind?

Lenders of last resort

Since the implosion of asset backed commercial paper market 11 weeks ago lenders have implemented contingency plans for future funding requirements. According to a recent Bloomberg article, the 12 regional Federal Home Loan Banks came to the rescue as other government sponsored agencies moved to the background.

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

Of course the funding was subsidized by the American taxpayer…

To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs’ Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.

The government is “taking a lot of risks through the Federal Home Loan Banks that are unnecessary,” according to Peter Wallison, a fellow at the American Enterprise Institute, a Washington-based organization that analyzes public policy, and general counsel at the Treasury Department from 1981 until 1985.

More moral hazard?

A loss of confidence in the companies could prompt investors to dump FHLB debt, potentially causing the collapse of one or more banks, according to Wallison and lawmakers including Representative Richard Baker of Louisiana. If others were unable to meet the liabilities, taxpayers would be on the hook, they said.

U.S. lawmakers need to ensure “the institutions don’t blow up in the taxpayer’s face,” Representative Christopher Shays of Connecticut, a Republican on the House Financial Services Committee that is responsible for oversight of the system, said in an interview.

My comments: Where will the marginal mortgage companies go for future funding since all government entities have hit a wall? Looks like Bernanke will be fielding lots of phone calls this holiday season.

Biggest bank failure since the S&L crisis

No, not Countrywide but a significant demise nonetheless. I’m talking about Netbank, the $2.5 billion online bank in Alpharetta, Georgia which received notice from the FDIC last week.

Netherlands-based ING Bank, part of financial giant ING Groep, will assume $1.5 billion of NetBank’s insured deposits and its customers will automatically be transferred to ING. ING will also acquire $724 million in assets.

Can you guess the catalyst?

NetBank sustained significant losses last year “primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies,” the Office of Thrift Supervision said in a statement.

My comment: Note to Treasury Secretary Hank Paulson: The credit contagion is spreading like wild fire.

Subprime borrowers come up short

Recent rate cuts by the Fed offer little hope for the 450,000 subprime borrowers in the US according to Christopher Cagan, director of research and analytics at Santa Ana, California-based First American CoreLogic.

“Short of the cavalry riding in over the hill, a lot of these people are just stuck.”

The number of borrowers whose mortgage payments jump in the next three months will be the second-highest ever for a quarter, according to Credit Suisse Group, Switzerland’s second-biggest bank. Twenty-seven percent have already missed a payment, said First American LoanPerformance, which owns the largest database of U.S. mortgages. That makes them ineligible for the Federal Housing Administration bailout proposed last month by President George W. Bush.

There’s no lifeline in sight for subprime borrowers, who face an average increase of 26 percent, or $400 a month, according to CoreLogic. Falling prices and a rising inventory of unsold homes make it difficult or impossible to sell or refinance without losing money and government programs aren’t designed to aid the most desperate. That leaves foreclosure as the only alternative, and one that will deepen and prolong the worst housing downturn in at least 16 years.

Lower interest rates fail to save homeowners under water…

About 48 percent of subprime borrowers wouldn’t qualify to refinance into a mortgage that conforms to the underwriting rules established by government-sponsored agencies Fannie Mae in Washington and Freddie Mac in McLean, Virginia, according to a report by New York-based analysts for UBS AG, Switzerland’s largest bank.

“There are a number of people who have mortgage debt that’s more than the value of their house, and a lot of those people are going to walk away,” said David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland. “That will put more homes on the market, which already has too many.”

The Federal Reserve’s half-point benchmark interest rate cut yesterday will have little impact on borrowers whose mortgages are adjusting, said Ed Leamer, director of the UCLA Anderson Forecast in Los Angeles. It’s not going to alter the housing situation, or clarify defaults and delinquencies,” Leamer said.

My comments: We estimate over $1 trillion in dubious mortgages undergoing some type of reset over the next 12 months. US home price decline has entered the top of the fourth inning.

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