Refinance Free Credit

On the heels of a ratings downgrade by Standard & Poor’s last week, bond guarantor ACA Capital Holdings said late Wednesday in a filing with the Securities and Exchange Commission that it has ceded control of the company to the Insurance Commissioner for the State of Maryland.

The troubled insurer said it had entered a Letter of Representations and Agreements and a Consent Order with the Maryland regulator as part of a move to prevent deliquency proceedings.

“ACA FG … agreed not to engage in certain activities without providing prior notice and opportunity to object to the MIA [Maryland Insurance Administration] including, without limitation, pledging or assigning any assets, paying dividends or engaging in certain material transactions,” the company said in a statement. “ACA FG is similarly limited under the forbearance agreement from engaging in activities consistent with the Letter Agreement and must also comply with financial covenants.”

Bloomberg, reporting on ACA’s move, cited sources saying bankruptcy was inevitable. “It’s given them breathing room and a month to stave off bankruptcy,” Nigel Sillis, director of fixed income and currency research at Baring Asset Management in London, was quoted as saying.

The downgrade at ACA Capital has the potential to impact a large number of Wall Street banks and associated mortgage banking operations, as a downgrade of any insurer usually means a downgrade of any bonds it insures (including RMBS issues).

Bear Stearns, one such bank with counterparty exposure, yesterday characterized that exposure as “well contained.”

MarketWatch reports that Bear CFO Sam Molinaro told investors in a conference call Wednesday that the Wall Street giant’s exposure to ACA Capital was already reflected in earnings. “We have no additional exposure to them so I think that that is quite well contained and behind us, whatever the exposure was,” Molinaro is quoted as saying.

The Associated Press ran a story Wednesday that asserted bond insurance may soon become a thing of the past, at least for munis — what the AP story fails to note is the often critical role the bond insurers play in the mortgage-backed and related derivatives markets, given the comparatively higher risk of default in many mortgage-related structured securities.

I personally doubt that the current crisis will render irrelevant the financial guaranty business, at least within the mortgage industry, but the price of any such ‘AAA’ guaranty will certainly rise for those insurers left standing when the dust settles. We’re already seeing GSE g-fees rise; private sector guarantys will likely see a similar premium.

Disclosure: The author holds no positions in ACA Capital.

Purchase and refinance applications dropped precipitously during the week ended Dec. 21, according to data released Thursday by the Mortgage Bankers Association.

The Market Composite Index, a measure of overall mortgage loan application volume, fell 7.6 percent on a seasonally-adjusted basis to 603.8; in spite of the weekly drop, application activity remained up 9.9 percent compared with the same week one year earlier.

(The index is calibrated to March 16, 1990; a reading of 603.8 means that application activity is roughly 6 times greater than when the index was first established.)

Refinance applications fell 8.5 percent to 1915.3, the MBA said, while purchase applications fell 6.6 percent to 394.5 in spite of a drop in interest rates.

Refinance share of overall mortgage applicatins activity decreased to 53 percent of total applications from 53.2 percent the previous week. Adjustable-rate mortgage share, however, increased to 10.4 from 9.9 percent of total applications from the previous week.

For more information, visit http://www.mortgagebankers.org.

Goldman Sach analysts said Thursday that Citigroup Inc. may cut its dividend by up to 40 percent as the financial giant faces mortgage-related writeoffs that could total $18.7 billion in the fourth quarter.

According to Reuters, who obtained a copy of an investor newsletter penned by Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal, Citigroup will announce write-downs as much as 70 percent greater than the $8 to $11 billion forecast in early November.

“Although we have seen many firms take the appropriate actions in recent weeks as they relate to write-downs and capital raises, we still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets,” the analysts are quoted as saying.

Goldman also said it expects to see increased writeoffs at Merrill Lynch as well as the investment bank reels from historic upheaval in the secondary market. Reuters reported that Goldman’s analysts expect an additional $11.5 billion write-off from Merrill Lynch & Co. in the fourth quarter.

The news of increased losses comes as a news brief at National Mortgage News Online on Wednesday alleged that Merrill’s subprime lending arm First Franklin Mortgage had seen 60 percent (400 positions) of account executives eliminated at the firm since late August.

Shares of both Merrill Lynch and Citi were off prior day’s market close in pre-market trading, as of when this post was published.

Disclosure: The author holds no positions in MER or C.

It may seem at times as if every residential mortgage-backed security — particularly in subprime — is in the process of being downgraded (which is, to a large extent, exactly what’s been going on). You may be surprised, however, to learn that not all RMBS deals are collapsing under the weight of a housing market gone south.

Fitch Ratings said Wednesday that it had affirmed $1.01 billion from a single 2007 subprime RMBS deal — J.P. Morgan Acceptance Corp 2007-CH3. True mortgage nerds might be interested in the prospectus for such a trend-breaker.

The affirmation here by Fitch would seem on the surface to fly in the face of two poorly-performing, recently-downgraded WaMu subprime deals from 2007 that have been mentioned on this blog recently (first deal mentioned here; second deal mentioned here).

The loans in this deal are predominantly first-lien 2/28s and 3/27s, and a good chunk were originated via the wholesale channel at Chase Home Finance; most of the loans are in Florida, California, Illinois and New York. I could not find any material differences in disclosed underwriting standards or deal structure, either. In other words, there doesn’t appear to be much different here versus the loans pooled in the two troubled WaMu deals and originated via Long Beach Mortgage.

It’s interesting to ponder — for a minute — why Chase-originated subprime loans are performing (and are expected to perform) infinitely better than subprime loans originated by Long Beach Mortgage.

Disclosure: The author holds various put option contracts on WM; no positions in others mentioned.

I think Benjamin Franklin was the one who said that the definition of insanity is doing the same thing over and over again and expecting a different result.   As we wrap up 2007, a year that ended, I would dare say, significantly different than most people expected, and move into 2008, how does that saying apply to each of our businesses?   What am I going to do differently as a mortgage lender for a “super regional bank” in the Midwest?   What is Morgan going to do differently as the owner of a mortgage company in California?  

So I want to raise this question - whether you are a Realtor, Builder, Banker, Broker, Home seller, prospective home buyer or whatever role you play in the real estate world…..

 What are you going to do differently in 2008 than you did in the first half of 2007?   And why?

I’ll do another post later on this week with my thoughts, but first, I want to hear what our readers have to say.

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Fitch Ratings on Wednesday warned that it may downgrade the ratings of 205 RMBS classes wrapped by four different guarantors, underscoring the stress now facing the secondary markets surrounding mortgage-backed securities. Those not familiar with the financial guaranty business should not that all 205 classes are high-investment grade — nothing remotely close to junk here. Yet.

All RMBS deals backed by a financial guaranty from any of MBIA, Ambac, FGIC and XL Capital were put on negative watch by the rating agency — 87 insured by MBIA, 64 insured by Ambac, 35 insured by FGIC, and 19 insured by XL Capital. The warning came as the four guarantors eacg face a potential downgrade of their Insurer Financial Strength (IFS) ratings, which assess the insurer’s ability to pay claims.

Click here to see a list of all affected securities.

The move comes as Fitch is assessing the capital adequacy of each of the four guarantors, which made headlines last week when MBIA was surprisingly included on the list of potential downgrades; the warning followed on the heels of the bond insurer’s bombshell last week covering its collateralized debt obligation (CDO) exposure. Many CDOs have rapidly been losing value as the subprime mortgage crisis has continued unabated in the back half of 2007.

The rating agency said it will review each affected class to determine which will be able to maintain their ‘AAA’ ratings independent of a financial guaranty; any bonds determined to be dependent on a guaranty due to insufficient additional credit enhancement will remain on negative watch pending any ratings action on the relevant insurer.

For more information, visit http://www.fitchratings.com.

I was just catching up on some “in between holiday” mortgage reading and I happened to stumble on an article that lead to another, and low and behold, I discovered that Morgan won the Odysseus Medal for his brilliant expose’ on how the government is struggling in quicksand.    Congrats to Morgan!   If you haven’t read what he wrote, you should!

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Raleigh, North Carolina-based Capital Bank Corporation (NASDAQ:CBKN), a regional bank with $1.5 billion in assets, said Wednesday that it would absorb a write-down of between $2.6 and $2.8 million as the bank adjusts to what it called the “current economic environment.”

The bank did not specify the exact nature of the loans that were tied to the write-down.

“While Capital Bank has no subprime mortgage exposure, the current housing market is soft throughout the franchise, thereby causing difficulty in the liquidation process of certain nonperforming loans on our balance sheet,” said Mark Redmond, executive vice president and chief credit officer.

“Capital Bank’s loan portfolio has not experienced any significant new problems during the most recent quarter; however, we feel that given the current market conditions we would be better served to strengthen our reserve position.”

This is a small bank, writing off the value of non-subprime loans — my guess here would be residential construction or commercial. Capital Bank also said it would recognize reorganization charges of approximately $1.3 million to $1.4 million “related to multiple projects that the company has undertaken in an effort to refocus to its core markets.” (Although it wasn’t said in the press statement, I’d also guess the restructuring charges have something to do with the write-downs as well.)

As we move into 2008 and nearly every financial institution comes to terms with the extended slump in real estate finance, I think more write-offs like this will become much more common and more banks will choose to “refocus on core markets.”

Disclosure: The author holds no positions in CBKN, although he does hold various long and short positions on national banks.

If you’re in the process of refinancing your home loan you might be concerned with finding the right lender and interest rate for your new loan. Finding the lowest mortgage rate will save will save you thousands of dollars over the lifetime of your loan. What many homeowners don’t ...