Blown Mortgage » Wall Street

Is Trust Returning to the Mortgage Industry?

Jay Hammond — Wed, 01 Jul 2009 16:12:57 +0000

“The economy is based on trust,” said Dean Johnson, associate professor of finance at Michigan Technological University in Houghton, Michigan.

In situations like the recent housing bubble, or even the stock market collapse of 1929, where markets were driven by debt and fueled by the false expectation that values can only increase, trust can be a very fragile thing.

“One little blip and everything started to unwind,” Johnson said. “The particulars are different, but the basics are familiar.”

Trust, however, seems to be coming back, according to Johnson. If people are cautious and not spending money, the government and financial industry must take action to encourage capital liquidity. During the first half of 2009, this is exactly what they have been doing. And if the effects have not been as immediate as some would like and others needed, at least their efforts are beginning to take effect.

Why does Johnson believe trust is returning? He points to the Volatility Index, or VIX, which measures investors’ expectations of how volatile the stock markets will be. The VIX reached all-time highs in 2008.

“People think of it as the fear gauge,” Johson explained. “it’s encouraging that the VIX, though still high be historical standards, is down about 60 percent from what it was at its peak in November.”

Other, more recent, signs that trust is being rebuilt in the American housing/real estate markets and the financial industry include:

USA Today reports that while the construction market remains weak the housing market may be improving slightly. Residential construction reportedly dropped to the lowest level since December 1995. Pending homes sales increased slightly in May, according to the National Association of Realtors (NAR).
Proposed legislation to create a Consumer Financial Protection Agency is making progress at the federal level, according to the Washington Post. The Post reports that the Treasury Department’s proposal for a new federal agency to consolidate the plethora of state and federal regulators responsible for overseeing the lending industry arrived on Capitol Hill on Tuesday.
At the end of June, Fannie Mae, which is still under the conservatorship of the federal government, reported its mortgage portfolio grew at a compound annual rate of more than 35 percent in May. A report from Dow Jones appearing in the Wall Street Journal indicates a large jump in the issuing of mortgage-backed securities offset continued rises in single-family and multi-family mortgage delinquencies.

Notes of caution, however, are also being heard. Yale University economist and co-founder of the S&P/Case-Schiller home-price index, Robert Schiller told Bloomberg: “At this point, people are thinking the fall is over. The market is predicting the declines are over.” At the same time he is “not optimistic that we’re going to see any sharp rebound.”

Johnson agrees with Schiller.

“It’s still a risky market,” Johnson stresses. “This is the first time in history that you’ve been better off if you’d put your money under a mattress 10 years ago. But hopefully, this indicates that the financial markets are returning to normal.”

Of course this doesn’t mean the housing market or the financial industry will be returning to the halcyon days of pre-mortgage crisis days anytime soon. It doesn’t matter how badly investors, bankers, consumers, lenders, the government or the world at large want it.

“There’s no easy fix,” Johnson concluded. “We have to take our medicine. It took 20 years to create the over-leverage and it will take time to undo that.”

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Goldman bonuses largest in firm’s 140-year history

Morgan — Mon, 22 Jun 2009 06:05:54 +0000

The Guardian is reporting that Goldman Sachs staff can expect the largest bonuses in the firm’s 140 year history as the investment bank has leveraged (pun intended) dwindling competition and the brokering of US debt issuances to massive first quarter profits. The bank, on track for a $2.5+ billion profit will be doling out large chunks to the bankers that helped rake in the cash.

Funny, how a bank that recently owed $10 billion to the US government and defined the corporate excess that sent Wall Street into a tailspin is now readying itself for massive bonuses. I wonder what they’re doing in the PR department? Sweating bullets is my guess.

This ridiculous profiteering and payout adds a bunch of credibility to the TARP as elaborate ruse to protect Citibank theory that’s been bandied about as of late.

I’m just glad so much has changed. Sigh.

From the article:

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

…

In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year’s payouts are on track to be the highest for most of the bank’s 28,000 staff, including about 5,400 in London.

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Roubini: Obama banking reforms get it 75% right

Morgan — Sat, 20 Jun 2009 19:03:06 +0000

Nouriel Roubini thinks that the new Obama banking reform plan gets it 75% right. This in a video interview on Yahoo! Finance. His one caveat is that the previous Fed under Greenspan had all the power, but didn’t care about managing risk, they wanted innovation at any cost. That mindset led us to the big bust – so that in addition to the reforms, there must be people who believe that their job is to minimize and manage risk, no push the market towards untested innovation and accumulation of risk.

An overview of the reforms by the WSJ:

Roubini’s interview:

I imagine our regular commenter Capitan Ned has something to say about this. That the push towards unifying regulatory control under one or two federal bodies reduces regulation to the lowest common denominator, easily influenced by the lobbying of the biggest players in Washington, while the people are left hung out to dry. Better, let the states enact and enforce lending at their level, where more oversight and a better understanding of local markets and trends can be applied towards common sense regulation. Further, haven’t we seen concentrated power at the federal level already? And didn’t that precipitate the bust? Letting big, federally chartered banks run rampant with state governments unable to reign in predatory practices? See Wachovia. At least, that’s what I think he’d say.

I’d make a slightly different argument. That we have all the laws we need currently. Maybe a few need to be tightened up, and I’m fine with that. However, instead of simply passing new legislation dollars must be invested in oversight and regulatory scrutiny and prosecution. Laws without enforcement are worthless, and that’s the system we’ve been dealing with over the last decade. In fact, regulatory bodies have been so thinly staffed on the enforcement side that they were unable to keep up with the boom and growth in the market. (For example, California’s department of real estate only had 37 enforcement officers for 500,000 licensed individuals.) This cannot happen again if we’re to expect the new legislation to make one iota of a difference.

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Largest Bankruptcies in History

Morgan — Sun, 14 Jun 2009 20:52:09 +0000

GOOD Magazine has a great graphic representation of the biggest bankruptices in history. (click link for bigger size) Check out Lehman bro’s $691 billion BK, more than 7 times the size of GM’s recent bankruptcy. (h/t Boing Boing for the image)

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Where’s Wells Fargo in the TARP repayments?

Morgan — Wed, 10 Jun 2009 05:31:04 +0000

We reported earlier that 19 banks were OK’d by the Treasury to pay back the TARP funds that were injected in to them during the first round of the bailout. According to the naked capitalism here are the banks that passed stress tests and will get to pay their TARP funds back:

The institutions are the following:

Passed the stress tests: JPMorgan Chase & Co., American Express Co., Goldman Sachs Group Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp. and BB&T Corp.
Failed the stress tests: Morgan Stanley
Was not subject to stress tests: Northern Trust

Bank of America and Citi have been told to bolster their reserves after failing to meet the Treasury’s standard. That leaves Wells Fargo, who was nowhere to be found on this list. So what to make of the absence of Wells? Bloomberg reports that Wells never applied, while others believe that Wells was denied by Geithner and the Treasury because of a still-shaky balance sheet.

From The Business Insider:

This is an important question. There is already speculation that Wells Fargo may have asked to get out of the TARP and been rejected. After all, Wells Fargo has been very vocal about wanting out. In fact, it’s been widely reported that Wells never wanted to take TARP funds at all.

I believe that Wells was told not to even apply. The problem with Wells is that they still have massive exposure in the Western bubble states where the biggest devaluations are occuring. This makes millions of dollars of second mortgages and home equity loans worth ZERO. Imagine writing off to zero your entire portfolio of second mortgages and HELOCs. Now that’s some serious pressure on your balance sheet and capital reserves.

Whether Wells wanted the TARP funds, I believe it’s a smart move that they’re not allowed to pay them back yet. With California still yet to experience the crushing reset problems of the Option ARM loans that will start rolling in at the end of this year, the real estate market is anything but clear. Those assets could fall further – which could result in Wells Fargo needing MORE TARP funds, not less.

From last April right here on Blown Mortgage:

In Moody’s affirmation of Wells Fargo’s Aaa credit rating the rating agency pointed to the health of Wells Fargo’s $83.68 billion home equity portfolio as a key driver in the company’s rating. If this portfolio should see degradation then the bank’s rating could suffer, said Moody’s in a press release.

What do you think? Why wasn’t Wells Fargo anywhere to be seen in the repayment news?

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Incoming! 19 banks to repay TARP funds

Morgan — Tue, 09 Jun 2009 15:31:40 +0000

The Treasury announced today that 19 banks have been allowed repay a total of $68 billion in TARP funds. The banks, who remain nameless were granted permission to buy back the warrants that the Treasury holds in each company at “fair market value.” These 19 banks are in addition to 22 smaller institutions which have already repaid their TARP dollars to the Treasury.

While some analysts are calling this a sign of stabilization in the banking system one has to wonder if enough has been done to ensure that the money won’t need to go back to these banks when they’re in more dire straits (i.e. need more capital to survive). In fact, the Washington Post today reports that the Congressional Oversight Panel responsible for overseeing the bailout recommends new stress tests due to increasingly grim unemployment numbers.

The original stress tests (the basis of which these banks are being allowed to repay their TARP funds) assume a national unemployment rate of 8.9%. Now at 9.4% and accelerating; the Panel believes that banks should be reassessed under worsening conditions.

Unemployment chart from Paper Money (See more great charts there!):

From HuffPo:

Among the banks that passed government “stress tests” last month and likely were approved to repay the bailout funds are: Goldman Sachs Group Inc., JPMorgan Chase & Co., and American Express Co.

Experts say allowing 10 banks to return $68 billion in bailout money illustrates some stability has returned to the system but caution that the crisis isn’t over. Some worry the repayments could widen the gap between healthy and weak banks.

More than 600 banks nationwide have received nearly $200 billion in TARP money and 22 smaller banks already have repaid it.

“These repayments are an encouraging sign of financial repair, but we still have work to do,” Treasury Secretary Tim Geithner said in a statement.

From the Washington Post:

But the panel, headed by Harvard Law School professor Elizabeth Warren, noted that the stress tests assumed an average unemployment rate of 8.9 percent this year under the worst-case scenario. The unemployment rate for last month, however, climbed to 9.4 percent, meaning the assumptions by regulators might have been too optimistic.

…

While the oversight panel praised the Fed for releasing an unprecedented amount of information about banks, the report criticized the regulators who performed the tests for not releasing enough information about how the evaluations were conducted, saying the lack of transparency raised “serious concerns” and left “unanswered questions.”

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Stay or Go? Freddie Mac changes offer homeowners more refinancing choices

Jay Hammond — Mon, 08 Jun 2009 13:23:18 +0000

“We are responding to consumers’ desires to have more refinancing options,” said Freddie Mac Executive Vice President Don Bisenius. “As an added benefit, we are expanding the program and providing greater flexibility in financing closing costs. Freddie Mac is committed to doing everything we can to bring the benefits of the Administration’s Making Home Affordable program to as many borrowers as possible.”

In changes announced last week, Freddie Mac aims to assist borrowers current on their mortgage payments who would benefit from refinancing into mortgage with better terms that will put them in a better position for long-term homeownership. The changes, when they become available, would allow borrowers to refinance their Freddie Mac-owned or guaranteed mortgage with any lender affiliated with Freddie Mac. In addition, Freddie Mac will allow the lesser of 4 percent of the new refinance mortgage amount or $5,000 of closing costs, financing costs and prepaid/escrows to be rolled into the new refinance mortgage. Freddie Mac’s standard post-settlement delivery fees, up to a maximum of 2 percent, will apply to the Relief Refinance Program.

Borrowers can continue to work with their existing servicer to refinance the mortgage. In the majority of cases, if a borrower works with their current servicer, the borrower will not need to be re-underwritten. If the borrower chooses to work with another Freddie Mac-affiliated lender, the mortgage will need to be re-underwritten.

Borrowers should complete the online form at https://www.freddiemac.com/corporate/ to determine if Freddie Mac owns their mortgage.

In other news, Freddie Mac also attempted last week to reduce the organization’s short-tern debt by buying back $30 billion of its debt. According to the New York Times DealBook, it would be the largest tender offer in the organization’s history. The Home Builders blog reports that Congressional hearings began last week on the future of both Freddie Mac and Fannie Mae after both companies reported losses during the first quarter. Both remain a critical concern for the federal government although mortgage rates, which have risen for two consecutive weeks are inspiring optimism in some quarters.

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Lewis: We’ve arrived at a point of madness

Morgan — Mon, 08 Jun 2009 01:24:27 +0000

Excellent interview with Michael Lewis who talks about his days at Solomon and how the 1980’s were really the start of this era of greed and malfeasance that led to the economic calamity we’re currently going through. He goes on with the following insight regarding the players in the game that portends future disaster (h/t HuffPo):

…one of the things that’s odd about the current situation is that the people who created the problem are so powerful in deciding what the solution to the problem is going to be. There is a great tradition on Wall Street of making a fortune, creating a mess, and then making a fortune cleaning it up. But to do it on this scale is breathtaking to me.

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The Tale of Two Countrywides & Maybe Bank of America

Jay Hammond — Fri, 05 Jun 2009 01:35:38 +0000

“This is the tale of two companies,” Robert Khuzami, Director of the Security and Exchange Commission’s (SEC) Division of Enforcement explained in a public statement announcing the filing of financial fraud charges against Countrywide Financial CEO Angelo Mozilo and two other former executives. “Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one countrywide product as ‘toxic,’ and said another’s performance was so uncertain that Countrywide was ‘flying blind.’”

The SEC alleges that Mozillo, former chief operating officer (COO) and president David Sambol and former chief financial officer (CFO) Eric Sieracki deliberately mislead investors about the significant credit risks Countrywide was taking in an effort to build an maintain the company’s market share. The enforcement action further alleges that from 2005 through 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company’s ability to sell them. Countrywide failed to disclose these important trends to its investors in its SEC filings as required by law. The complaint, which alleges Mozilo, Sambol and Sieracki actually knew, and acknowledged internally, that defaults in the loans Countrywide serviced and loans the company packaged and sold as mortgage-backed securities, was filed in federal district court in Los Angeles.

Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits. From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares pursuant to written trading plans. Bloomberg reports that Mozilo, “the most prominent executive targeted by regulators investigating the subprime mortgage crisis, also issued internal warnings and admitted the company had no means of quantifying the risk associated with some mortgages. Mazilo’s attorney, David Siegel of Irell & Manella LLP in Los Angeles, told Bloomberg the charges were “without merit” while Sambol’s attorney, Walter Brown, maintains the complaint is the result of public and political pressure.

“Angelo Mozilo had access to detailed and alarming information about Countrywide’s operations,” said Rosalind Tyson, Director of the SEC’s Los Angeles Regional Office. “He knew that countrywide was gambling with increasingly risky mortgage and he kept those details from investors while he was actively taking his own chips off the table.”

He may have known it, but he certainly did not reveal his knowledge outside the company in obvious disregard for the law as well as consumers. In fact, when he left Countrywide in 2008 he said: “My primary focus today – as it has been for the past 40 years – is to do what is in the best interests of Countrywide’s employees, customers and shareholders.”

Countrywide merged with and became a wholly owned subsidiary of Bank of America (BoA) in 2008. In October, Countrywide Financial Corp., Countrywide home Loans, Inc., Countrywide Capital IV and Countrywide Capital V notified the New York Stock Exchange (NYSE) of their intention to voluntarily delist certain securities. Following the delisting the Countrywide issuers withdrew the securities from registration with the SEC and suspended their reporting obligations. Separately, Bank of America applied for the listing of trust preferred securities related to the obligations assumed under the merger agreement.

BoA, who is not named in the SEC complaint, recently announced the departure of Chief Risk Officer Amy Woods Brinkley and director Robert Tillman. Their abrupt departures again raises speculation regarding the role the federal government is playing in bank’s decisions, according to the Wall Street Journal. In addition, the San Fernando Business Journal reports BoA has offered to modify more than 100,000 mortgage loans. The modifications, according to the L.A. Times, are part of the bank’s agreement settling state cases brought by several states against Countrywide for predatory lending practices.

The SEC’s complaint against the Countrywide executives seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants and the disgorgement of ill-gotten gains with prejudgement interest against Mozilo and Sambol.

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New Commercial Real Estate Lending Index Introduced

Jay Hammond — Mon, 18 May 2009 20:56:23 +0000

“Commercial Real Estate lending conditions will likely deteriorate further after a sharp drop in the first quarter of 2009, creating both new opportunities and challenges for community banks,” said Chris Nichols, CEO of Banc Investment Group the capital markets group of Pacific Coast Bankers’ Bancshares. “CRE lending conditions were impacted by a perfect storm of economic uncertainty, tighter credit, failing consumer confidence and substantially higher unemployment. Of particular note was the reversal of fortunes in the multifamily market, which had been fairing well, but turned negative in the first quarter.”

That is the conclusion drawn by the BIG CRE Index. Launched this month, the BIG CRE Index is the nation’s only forward-looking benchmark of the relative strength of commercial real estate (CRE) market conditions. The BIG CRE Index is published quarterly and focuses on the four major commercial real estate sectors – multifamily, office, retail and industrial – in America’s largest metro areas.

According to the CoStar Group, the so-called stress tests administered to banks by the Federal Reserve indicate that under worse case scenarios the 19 largest banks in the country could see commercial real estate losses of $53 billion in 2009 and 2010. This represents only 8.5 percent of all commercial real estate loans.

The initial BIG CRE Index reveals that CRE conditions worsened during the first quarter of 2009, falling nearly 11 percent to 80.58. The baseline period was defined as April 30, 2007.

Retail:

The retail sector index fell more than 11 percent to 78.36 from 88.07 in the fourth quarter of 2008. The retail sector has declined more than 20 percent from the 103.50 level seen during the second quarter of 2007.
Vacancy rates for neighborhood shopping malls soared to 9.5 percent.
Vacancy rates in regional malls rose to a record high of 7.9 percent.
Overall, 63 out of the 76 markets for which data was collected experienced a rise in vacancy rates. All but one posted negative rent growth.
Rent fell by 1.8 percent declining more in the first quarter of 2009 than the 1 percent decrease measured for all of 2008.

Office:

The office sector fell 10.62 percent during the first quarter of 2009 to 82.72 down from 92.55 during the previous quarter.
The office sector was hurt by the consolidation and downsizing in the financial services sector.
Office vacancy rates rose sharply during the first quarter of 2009 and now stand at 15.2 percent.
During the first quarter, 12.3 million square feet of office space was completed having vacancy rates of between 50 and 60 percent compared to the 30 to 40 percent vacancy rates of 2007 and 2008.
Nationally, rents declined by 2.3 percent.

Industrial:

The industrial sector of the index decline by nearly 17 percent during the first quarter of 2009 to 29.80. During the fourth quarter of 2008 the sector stood at 83.96. The sector is down more than 31.5 percent from the 101.91 reported during the second quarter of 2007.
The Index predicts the domestic warehouse market will soften as a result of weakness in the domestic shipping business.
Inventory is building up in coastal ports as less consumer spending decreases demand, a condition expected to further impact the industrial sector in coming quarters.

Multifamily:

The multifamily sector of the index dropped more than 6 percent to 91.43 in the first three months of 2009 from the 97.42 level of the final quarter of 2008. The sector is off only 3.81 percent from the second quarter 2007.
Vacancy rates rose to 7.2 percent during the first quarter.
Rent growth for the quarter was negative 1.1 percent.
Compared to the second quarter of 2007, the multifamily sector actually improved slightly during 2008. The economic downturn began making itself felt in the sector during the first quarter of 2009 as the number of vacancies increased while rents declined. Construction continued at a steady pace while net absorption rates dropped.

The quarterly percentage change in the Big CRE Index takes into account both macro economic factors and the specific default probabilities of each category such as employment, income, rents, vacancy and absorption rates. Movements of the Index are expresses as percent changes rather than changes in index points. Point changes are affected by the level of the BIG CRE Index in relation to the baseline period (second quarter 2007). Percentage changes are not.

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