Blown Mortgage

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UBS posted a $11 billion first quarter loss after taking a whopping $19 billion in mortgage-related losses. The company will cut 5,500 jobs in a restructuring effort to save the banking giant. Ironically, UBS was praised as being conservative as the credit crunch got underway with it’s first $3 billion write down at the end of last year. Now the bank stands as the poster-child for mortgage-related beatings with write downs totaling $37 billion, and is downsizing and pulling out of several higher-risk banking enterprises in an attempt to save itself as a going concern.

From Market Watch on the UBS mortgage losses:

the Swiss investment-banking giant, swung to a first-quarter net loss of 11.54 billion Swiss francs ($11 billion) after posting some $19 billion of losses tied to U.S. mortgages and related securities as well as other structured products.

On the 5,500 job cuts at UBS by 2009:

UBS said Tuesday it plans to cut 5,500 jobs by the middle of next year, an effort meant to restructure the Swiss giant’s troubled investment bank. The Zurich-based bank will axe the jobs after massive write-downs on dud mortgage securities, totaling over $37 billion thus far.

It’s no wonder the bank is under investigation for improperly valuing its assets. $3 billion was touted as a purging of the system when UBS first came forward. Now with losses at 10x it looks more like fraud.

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A new memo from Fifth Third notifies recipients that effective immediately (with a little time to fund the existing pipeline) that the bank is out of the Alt-A business entirely. And in a refreshing turn - all sales channels are affected. Retail and wholesale alike will lose Alt-A products previously offered by the “super-regional” bank.

Here’s a copy of the announcement:

Important Announcement
Please circulate as appropriate

BULLETIN

Announcing Alt A Lending Program Discontinued
Effective In All Channels

To: All Mortgage Sales and Operational Personnel

Fifth Third Mortgage is announcing they are discontinuing offering Alt A lending programs in all Channels.

What needs to happen in managing your pipeline:

Retail/Direct:

• All Alt A applications in the pipeline dated on or before Monday May 5, 2008, must be locked by close-of-business Monday May 5, 2008 by 5PM Eastern Standard Time.
• All loans must be closed by May 23, 2008

Wholesale:

• All Alt A applications in the pipeline must be registered and locked by close-of-business Friday May 2, 2008, by 5PM Eastern Standard Time.
• No registrations will be accepted after 5PM Eastern Standard Time, May 2, 2008
• All loans must be closed and funded by May 23, 2008

NO EXTENSIONS WILL BE GRANTED TO CLOSE/FUND BEYOND MAY 23, 2008 (ALL CHANNELS)

Thank You,
Fifth Third Mortgage Company

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Subprime loan delinquencies have stabilized after their torrid run-up in late payments according to the latest remittance reports. This is obviously a positive sign for the housing market as fewer 60-day delinquencies mean fewer eventual 90-day delinquencies and NOD’s. While analysts caution against over-reaching in the importance of the improvement they do note that it is significant.

Unfortunately, the metrics for foreclosures, REO properties and vacancies were all higher - which may negate any improvement in the delinquency number. Further, a full 33% of all tranches of the 80 deals tracked on the ABX index are rated ‘CCC’ which mean they are in imminent danger of default.

Compounding the problem is that subprime is just a small chunk of the market that is going to see delinquencies and NOD’s as we move through 2008-11. A majority of the loans that will be hardest hit are the limited-documentation, I/O, and Neg Am option ARMs that make up the Alt-A bucket of lending.

From the Reuters article on the slowing subprime loan delinquencies:

The performance of subprime mortgage loans pooled into U.S asset-backed securities showed signs of stabilizing in April, although analysts signal caution ahead.

Remittance reports, which provide a snapshot of subprime loan performance over the last 30 days, showed the pace of delinquencies slowed from the sharp climb in previous months, snapping a long period of pronounced deterioration.

“The deceleration is partly attributable to seasonality (tax refunds), but is nevertheless a fairly significant slowdown,” said Chris Flanagan, analyst at JPMorgan Securities.

…

“Given the historical seasonal pattern of significant percentage change improvements in 30- and 60-day delinquencies in April, we believe the latest report portends additional collateral performance deterioration over the next several months,” the firm said.

Cumulative losses on the risky home loans that support the series of ABX indexes continue to rise.

“This translates to 33 percent of all outstanding bonds across ABX reference entities are in imminent default. Even bonds originally in the ‘AA’ category have fallen to ‘CCC’ or lower,” said Flanagan.

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The rating agency downgraded $247 million in Countrywide subprime loan transactions as the transactions experienced 60-day delinquency rates of ranging from 7-40%. In the process the ratings agency affirmed the ratings of $2 billion of the subprime-based transactions. Here’s the breakdown - check out the delinquency numbers on these things!

CWABS 2003-BC3 60+ day Delinquency: 26.73%
CWABS 2003-BC4 60+ day Delinquency: 18.01%
CWABS 2003-BC5 60+ day Delinquency: 16.06%
CWABS 2003-BC6 60+ day Delinquency: 12.35%
CWABS 2003-5 Group 1 60+ day Delinquency: 6.79%
CWABS 2003-5 Group 2 60+ day Delinquency: 40.99%
CWABS 2004-BC4 60+ day Delinquency: 18.59%
CWABS 2004-1 60+ day Delinquency: 14.92%
CWABS 2004-5 60+ day Delinquency: 19.51%
CWABS 2004-8 60+ day Delinquency: 28.68%
CWABS 2004-11 60+ day Delinquency: 28.76%

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In a tense shareholder meeting that opened with the call for his ouster, Wachovia CEO Ken Thompson stated the obvious that Golden West Financial Corp (parent to World Savings) was a “poorly-timed” acquisition. I’m giving Ken Thompson a belated “Captain Obvious” award for that admission.

I remember saying that when Wachovia acquired World it was disastrous timing. It’s like coming in to a car dealership and buying the shiny new car that’s about to explode the next time it’s turned on. I don’t care what anyone says about the strict value guidelines used by World and their mitigating affects for recouping value from defaults, etc. The World appraisals were not so tight to support a home decline of 20% plus across California. They were not so tight to support that loss and allow for their most-aggressive 125% maximum negative amortization cap. (Most option ARMs recast at 110% of the loan balance - World’s don’t reset until 125%).

These two equity sucks (depreciation and excessive negative amortization) leave Wachovia out in the cold on a ton of loans that are just going to go further south over the next 2 to 5 years.

Unfortunately for the shareholders of Wachovia the admission comes juuuust a bit too late to save them from a dividend cut an the dilution of their holdings due to the additional capital raised by the bank.

But at least they’ll feel better after venting:

For roughly an hour, Thompson faced a parade of upset shareholders who questioned him on topics that included the Golden West acquisition, his compensation and how the company will extricate itself from its current difficulties. Shareholders in the audience often applauded comments critical of Thompson or the board.

“I have no confidence in you whatsoever,” one shareholder told Thompson.

“Thank you very much,” the CEO responded wryly.

My advice to Mr. Thompson would be to watch your mouth for fear of one of your shareholders throwing a sucker punch as a last resort to get the message across. (I hold no shares in Wachovia.)

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