Blowing the Lid Off the Mortgage Industry
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We’re back with another edition. Same t-shirt, full-color. Work with me as I learn video editing! Today’s update - Fannie, Freddie and AIG losses and a potential major shift in underwriting guidelines as the GSE’s that would make broker-ordered and in-house appraisals unacceptable as documentation for conforming loan home values.
How does $11 billion roll off your lips? I find it a little sickening to try saying the words “lost $11 billion” and it’s not even my money. AIG reported today that not only did it find a way to lose $5.29 billion bucks this quarter; but it also reported a charge of $11.12 billion for credit derivatives going bad - like really bad.
From the Market Watch story on the massive AIG credit derivative charge down:
American International Group reported a $5.29 billion fourth-quarter net loss late Thursday after the insurance giant took a big charge related to the estimated market value of credit derivatives.
AIG shares fell 2.9% to $48.70 during late trading after the results.The net loss was $5.29 billion, or $2.08 a share, vs. net income of $3.44 billion, or $1.31 a share, a year earlier, the company said. The adjusted net loss for the fourth quarter of 2007 was $3.20 billion, or $1.25 a share.
AIG was expected to make 60 cents a share, according to the average estimate of 17 analysts polled by FactSet. The estimates varied widely though, ranging from a loss of $1.20 a share to a profit of $1.68 a share.
The fourth-quarter result included a pre-tax charge of roughly $11.12 billion from a net unrealized market valuation loss related to the super senior credit default swap portfolio of the company’s AIG Financial Products Corp. derivatives unit.
AIG said these unrealized valuation declines aren’t indicative of the actual losses the unit may realize over time. Any credit losses that do occur in future won’t have a big effect on AIG’s overall financial condition. However, the insurer also noted that credit losses that may be realized by its derivatives unit could have a material effect on operating results in specific future reporting periods.
Indeed, AIG’s fourth-quarter results included realized pre-tax losses of $2.63 billion from its investment portfolio and another $643 million of pre-tax losses related to securities that were held for sale by its derivatives unit.
I’ll be your huckleberry. The net operating loss dwarfs the losses posted by Freddie Mac and are a far cry from the paltry $3 billion in write downs that UBS first took back in August that everyone said were “conservative” and meant to “clean out the system in one fell swoop.” Yeah right. Look for more of this.
I’ll have more later on this weekend once I pick my jaw up off the floor.
photo credit: Darcy Knoll
President Bush urged Congress to reject a new bill that would allow bankruptcy judges to modify the terms of home loans included in bankruptcy cases. From the Market Watch story on the bankruptcy bill to change mortgage terms:
President Bush urged Congress to reject a Senate bill that would change bankruptcy laws by allowing judges to modify the terms of a mortgage as part of the restructuring of a debt. Instead, Bush said at a White House press conference, lawmakers should approve reforms to mortgage-buyers Fannie Mae and Freddie Mac and the Federal Housing Administration.
The president has a point here. While the government clearly isn’t done bailing out folks this change seems extremely dangerous to the stability of the secondary market. If investors are worried that judges are modifying loans pell mell they are going to be extremely reluctant to purchase securities made up of individual mortgages. Investor interest has to be protected in this process. Remember - they are the ones with the money! The government sure doesn’t have it, consumers sure don’t have it - it’s the investors.
If the investors take their money off the table, or, more likely, put greater costs associated with borrowing it, it hurts everyone. We need investor confidence to return money to the system. The secondary market only works when investors have confidence in it. Letting judges make changes as they see fit is a quick way to send investors running.
Week over week refinance applications are down 30.4% as mortgage interest rates continue to rise on fears of inflation. They are up slightly at 5% above 2007 levels. Rates are up almost a full 20 basis points (.18%). The slowdown in refinance applications makes sense in light of the recent wild swings of the mortgage market. With rates headed decidedly higher coming off a 4-year low point. If you were gambling on mortgage interest rates going lower a couple of weeks ago when we were looking at that low and telling you to lock some extremely good rates you have lost. Sorry.
More on the weekly interest rate changes from Market Watch:
The interest rate charged on 30-year fixed-rate mortgages averaged 6.27% last week, up from 6.09% the previous week, while the average on the 15-year fixed-rate mortgage increased to 5.77% from 5.55%. The one-year ARM averaged 5.84% last week, up from 5.72%.
We’re bringing back the Mortgage Market Minute. In this video I talk Case-Shiller, Countrywide eliminating option arms on the wholesale side, and Wells Fargo whacking LTV’s in California.
Bear with us as we get back up to speed and stay tuned for more video from Blown Mortgage.
Big hat tip to reader Don for sending this along. Wells Fargo has named nearly every California county a “Severely Distressed Market” which requires LTV reductions of 5% for any conforming loan over 75% LTV and also eliminates financing over 75% LTV for any non-conforming loan. The Wells Fargo Mortgage Express product (which is Wells Fargo’s stated income/stated asset program) is also not permitted in “Severely Distressed Market” areas.
Look for the rest of the market leaders to quickly follow suit. This immediately puts a huge swath of the state with increasingly limited refinance options. A huge portion of California loans are of the non-conforming variety and well over the 75% LTV mark (especially factoring in the major price drops over the last 16 months). This does not bode well for the folks in the Golden State.
Update: I’ve taken the link to the PDF down. Here’s a link to the entire PDF of the Wells Fargo product changes and below I’ve posted a list of the California counties listed in the changes.
No word on whether this is a wholesale-only change or across the company. If you know please drop us an email.
Hat tip to good friend of Blown Mortgage, Chris, for sending this along:
US Bank is eliminating its 100% financing product on the wholesale channel as of tomorrow.
No word on whether this is a regional or nation-wide change nor if it’s been eliminated from the retail channel.
Countrywide out of Option ARMs, 100% disappearing. We’re definitely in another tightening cycle.
If you have any additional information send it along!
Countrywide appears to be eliminating the Option ARM, at least from the wholesale channel. Another sign of the tightening taking place at the beleaguered lender in an attempt to finalize the Bank of America purchase earlier this year. How do I know they are eliminating the Option ARM (known commonly as the neg am or pick-a-pay loan)? I got this note from a processor on a file:
This file has been denied with countrywide because they are ending the option arms – did you want me to sub this to world – or did you want to do a 5y i/o?
It wouldn’t surprise me if they are eliminating the option ARM from wholesale. With Bank of America estimating that $739 billion in mortgages could be in danger over the next 5 years (many of them surely option ARMs) the bank understandably is being quick to eliminate any additional exposure to the exploding loan.
The King is Dead
Countrywide was the king of Option ARMs (particularly the low and no doc liar loans) with nearly 35% of their originations over the last 5 years comprised of the loan that lets homeowners “pick their payment” by offering 4 payment options, including one that accrues interest on top of their loan balance to make monthly payments deceivingly affordable.
Many borrowers took the low payment and ran, betting on rising home prices to bail them out of the negative amortization run up in their loan balance. Loan officers were more than happy to write them. Little documentation and huge fees made it an easy and very attractive loan to write. California option arm loans netted commissions in yield spread premiums in the tens-of-thousands of dollars. 30-60k in commission wasn’t unheard of on these loans.
Now many “good credit” borrowers are upside down in their homes with little chance of making the fully amortized payment that results when the loan balance hits 115% of the original balance (of 5 years passes, which ever comes first). This is part of the Option ARM shockwave that will hit when these negative amortization loans start to recast.
I’ll let you know when we get an official announcement and any updates about the wholesale vs. retail channel offering.
Sorry Countrywide correspondent sellers. No posh ski trip to Avon, Colorado this year. Countrywide canceled the excursion, replete with Kobe beef, caviar and a trip to Spago due to the recent mortgage crunch. Not that cash is so tight - just the negative PR around the event seemed to be a bit too much.
So why does Freddie Mac get a pass on the Ritz-Carlton holiday party but Countrywide gets lambasted? I guess the sensitivity has been cranked up a notch in the press.
From the New York Times on the canceled Countrywide ski trip:
Countrywide Financial, the besieged mortgage lender, has canceled a gathering of bankers from smaller mortgage banks at the Ritz-Carlton Bachelor Gulch ski resort (where room rates begin at $725), Countrywide said in a statement on Sunday.
The company was to pay for 30 invited guests’ hotel rooms, meals, skiing and tips.
In the statement, the company said that “in light of recent events” it had decided to cancel all gatherings with business partners and clients for the rest of the year, moving quickly after being criticized for planning such an extravagant event.
The three-night gathering, which was to include business meetings as well as skiing, drinking and sampling expensive meals like $140 caviar and Kurobuta pork osso bucco at the Spago restaurant, had already drawn negative press. “Let ’Em Eat Kobe Steak,” a headline in The New York Post sneered on Saturday.
Don’t be. Hat tip to Keith at Housing Panic. The FBI says that pursuing and prosecuting consumers who lied on their home loan applications by inflating their income to obtain a loan is at the bottom of a very long mortgage-related investigation list. So breathe a sigh of relief if you were one of the 60% who had their income pumped up over 50% in order to get the dream McMansion of your choice.
More on stated income loans and the lack of FBI interest:
FBI Will Not Go After Borrowers Who Lied on Mortgage Applications
Borrowers who defrauded lenders by lying on their mortgage application could be thrown in prison for up to 30 years and forced to pay a $1 million fine under the current federal law. But the FBI says there is no intention to pursue borrowers at this time.
Almost 60 percent of stated-loan applicants inflated their incomes by at least 50 percent, according to the Mortgage Asset Research Institute. The worst part is that everyone knew the income was being inflated. The industry even had a name for these kinds of loans–’liar’s loans.’
Although lying on a mortgage application is a federal crime, borrowers who committed mortgage fraud are low on the FBI’s list of priorities. Joseph Schadler, an FBI spokesman, said investigators will be focusing on organized property flipping rings and bogus foreclosure rescue schemes instead of lying buyers.
While getting the flipping rings and foreclosure rescue schemes are critical you can bet that lenders will be doing their part to “encourage” a recovery of capital and assets that were lost due to fraudulent loan files…
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Morgan Brown writes Blown Mortgage tracking the latest news on the mortgage mess. The goal - to keep you informed so you don't get a blown mortgage. Friend Me:          |
