Refinance Free Credit

In testimony delivered Thursday to the Senate Committee on Banking, Housing and Urban Affairs, Treasury Under Secretary for Domestic Finance Robert Steel provided some additonal insight into how adminstration officials are looking to handle a rising number of foreclosures.

Perhaps the most telling was an admission that foreclosures are likely to be a problem for at least two more years. “Over the course of the next two years, we expect the foreclosure rate to remain elevated above its historic level,” Steel said.

“A rising foreclosure rate during a period of housing price depreciation is not surprising,” he said. “Yet, largely because of relaxed underwriting standards in recent years – particularly in the subprime market – and resetting mortgages, the number of homeowners facing hardship will be higher than during other recent housing downturns.”

The Treasury expects 1.8 million subprime mortgages to reset in the next two years, Steel said. He also noted that “of the 2/28 subprime ARMs originated in 2005, 88 percent had not defaulted as of late last year” — while Steel used the point to imply that the reset problem may be blown out of proportion, industry experts that spoke with HW said the numbers are likely understated by a heavy reliance on repayment plans.

“There’s a reason Standard & Poor’s recently increased its loss assumptions to cover the entire lifetime of a RMBS deal,” said one source, who asked not to be identified.

Steel also reiterated the HOPE NOW statistics first reported a few weeks back, that show the industry outreach group making accelerated progress and intiating workouts with 370,000 subprime borrowers in the second half of 2007.

Click here to read the full transcript.

In passing its own version late Wednesday of the economic stimulus package now being considered by Congressional leaders, the Senate Finance Committee voted 14-7 to include changes that would allow states to issue municipal bonds to refinance subprime mortgage loans.

Under current law, state and local governments may issue bonds to finance new mortgage loans to first-time homebuyers; the added provision would temporarily expand the use of the bond program to include refinancing of subprime loans.

HW noted yesterday that Sen. Charles Schumer (D-NY) had suggested that the municipal bond legislation may be added to the Senate’s stimulus package.

The new housing-related measure came as senators John Kerry (D-MA) and Gordon Smith (R-OR) both pushed to include the legislation, which will allow states to issue up to $10 billion in additional bonds over the next three years for refinancing troubled subprime mortgages. A press statement by John Kerry’s office said that the National Council of State Housing Agencies believes the proposal would lead to roughly 80,000 new loans.

“At a time when families across the nation desperately need help to avoid foreclosure, these funds will provide thousands of safe, fair mortgages to homeowners facing foreclosure and families looking for their first home,” said Kerry.

“By including $10 billion in targeted mortgage relief to the homeowners, we are standing by our pledge to create a targeted, timely, effective stimulus package.”

The Senate is expected to vote on a final stimulus package before the end of this week.

You heard it right folks.  For those of you playing roulette trying to game the mortgage interest rate market in light of recent Fed activity let this be a good lesson.  The Fed cuts and mortgage interest rates go higher.  Don’t be fooled in to believing that the interest rates you pay on your mortgage are in lock-step with the Fed.  They aren’t, and if you try to game the system that way you’ll certainly miss out on opportunity.

From the Market Watch story covering the rising mortgage rates:

The 30-year fixed-rate mortgage averaged 5.68% during the week ending Jan. 31, up from last week’s 5.48%. The mortgage averaged 6.34% a year ago. The 15-year fixed-rate mortgage averaged 5.17%, up from 4.95%. The mortgage averaged 6.06% a year ago.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.32%, up from last week’s 5.13%. The ARM averaged 6.04% a year ago. And 1-year Treasury -indexed ARMs averaged 5.05%, up from 4.99%. The ARM averaged 5.54% a year ago.

To obtain the rates, the 30-year and 15-year fixed rate mortgage, along with the 5-year ARM, required payment of an average 0.4 point. The 1-year ARM required payment of an average 0.7 point. A point is 1% of the mortgage amount, charged as prepaid interest.

Graeme wrote an excellent post on the problems with gaming the mortgage interest rate market last week.  If you have a rate that puts you in a better financial situation take the opportunity to improve your loan; and ensure that the loan product you choose allows you flexibility to make additional changes.

This gives you the best of both worlds.  You get protection against rising rates with flexibility should rates start to fall again.

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Standard & Poor’s said Wednesday that it had downgraded or placed on negative watch 6,389 classes from subprime RMBS transactions rated between the start of 2006 and June 2007. The rating agency also placed 1,953 ratings from 572 CDOs of ABS and CDOs-squared transactions on negative watch.

HW broke the story on revised rating criteria for subprime RMBS on January 15, noting then that a wide swath of downgrades were likely to result. Wednesday’s ratings actions were a direct result of the new criteria.

The affected U.S. RMBS classes represent an issuance amount of approximately $270.1 billion, or approximately 46.6 percent of the par amount of U.S. RMBS backed by first-lien subprime mortgage loans rated by Standard & Poor’s during 2006 and the first half of 2007, the agency said in a press statement.

Click here to read a complete list of all affected RMBS securities.

Click here to read a complete list of all affected CDO ratings.

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

For those of you who have bought a house you know how hard you must fight to get the best deal possible for you. There is always a seller out there who will meet your needs; you just need to find them. Buying a home is a game that few master, but it is very possible to do so. The following are some of the things you can do to ensure that you have a good buying experience on your next house.

Tips for Intelligent Buyers

One of things that sellers will try to convince you of is the national market. They may try to tell you that the national market is high right now, so that is why the house is more expensive then you may have thought. But buying houses is a local market. You should only take into account your local area and how those houses are selling. If they are selling high then expect high prices, but if they sell low then make sure you can get it low. It is all about your local area.

This may be the house of your dreams and there is no way you will ever move again. Even so, you must keep the potential of a resale in mind. If worst comes to worst and you need to move, will this house be a house that you can turn around and sell? You do not want to be locked into a house that you would not be able to sell if need be. Also, try to buy a house around growing areas, or areas where there are schools. Houses by schools will generally be in demand at all times, by families who will be sending their kids.

As usual you need to negotiate as well as you can. Make them want to give you the best deal. Do not be so settle on one house that you will take any deal thrown your way. That is how you wind up with a bad payment on a house that can hurt you for year to come. If there is something wrong with the house then you need to call it to their attention and get it fixed as quickly as possible. You should not have to pay for it because it is not your house currently. You need to use whatever leverage you might have in this situation. Find out how much they paid for the house and why they are selling it. If it is a buyers market then you need to realize that you will be on control. It may be a little more difficult if you are trapped in a sellers market.

Get the Best Deal

This is the overall goal of the whole process. You need to make sure that the deal you get is one that you are comfortable with, and will be fine with for the long haul. If at any time you believe this will become a burden then it is time to step back and rethink this whole process. These steps will help you become one of the lucky ones who found their perfect home.

Additional Resources:

• First Time Home Buyer Tips
• Prospective Buyers Playing Waiting Game

Freddie Mac said Thursday morning that 57 percent of the nation’s late-paying borrowers still don’t know their lenders may offer alternatives to help them avoid foreclosure. The results, reported in a joint survey from Roper Public Affairs and Media and Freddie Mac, show that despite a historic surge borrower defaults and a resulting crush of press attention, many borrowers aren’t sure how to resolve financial difficulties involving their mortgage.

A previous study in 2005 found that 61 percent of delinquent borrowers didn’t know their lender offered workout options, equating to an improvement in awareness of 4 percent — give or take a margin of error — in three years.

The news wasn’t all bad, however; the survey also found an increase in the percentages of delinquent borrowers who recall their lenders reaching out to them (86 percent) and who in turn reached out to their lender (75 percent) to discuss workout options. And borrowers are becoming more aware of third-party counseling, with awareness increasing from 36 percent in 2005 to 44 percent today.

“This new survey shows efforts to get borrowers to call counselors are starting to work, but that too many at-risk borrowers are still unaware their servicers routinely provide alternatives that can help them stay in their homes,” said Ingrid Beckles, Freddie Mac’s vice president of servicing and asset management.

“This fact underscores the importance of convincing borrowers to pick up the phone, call their servicer, and find out whether they can avoid foreclosure.”

So why is it that some borrowers still won’t contact their servicers?

Freddie Mac said that one in four deliquent borrowers chose not to accept an invitation to discuss workout options, for one thing. (Fraud, anyone?) Those that didn’t return a servicer’s call because they said they didn’t have enough money to make a payment rose from 7 percent to 16 percent, and the percentage who denied they were having trouble making their payment doubled from six to 12 percent.

HOPE hotline having a positive impact
The survey found that collective awareness of the HOPE hotline at 888-995-HOPE has increased dramatically, signaling that at least some borrower outreach programs are having an impact.

According to the survey, nearly one in four delinquent borrowers (23 percent) report seeing the ads and one in ten (9 percent) who are aware of the HOPE Hotline have made the call. HPF says the toll-free number now receives between 1500 and 3000 calls per day, up from 250 per day one year ago. More than 200,000 homeowners have called the hotline since June 25 of last year, according to HPF.

“The public service campaign is working,” said Ken Wade, CEO of NeighborWorks America.

“Every day, through our partnership with the Homeownership Preservation Foundation, we’re helping thousands of homeowners in financial stress take steps to prevent foreclosure with the 888-995-HOPE hotline. Moreover, those homeowners who call and need additional counseling are being referred to local NeighborWorks organizations for one-on-one, face-to-face foreclosure prevention counseling.”

Click here to read the full survey results.

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

Jonathan Weil at Bloomberg is getting more mileage out of a formerly obscure accounting rule than any financial columnist in recent memory; his latest coup d’état revisits a SEC clarification of the so-called “Q election” used by most securitization trusts. It’s only slightly less overstated than his earlier diatribe on FASB 140 that likened its use in securitization trusts to “crack cocaine.”

Some folks just don’t know when to let go, I suppose.

Let’s at least start with the facts as it relates to his most current bit of misinformation, because what he’s reporting is in fact old news. On January 9, HW reported on SEC clarification of FASB 140, designed to green-light so-called “fast-track” loan modifications under the rate-freeze program brokered by the Treasury Department and outlined by the ASF.

It’s that three-week old interim clarification that sent Weil rocketing off into outer space yesterday, saying that lenders were getting “a huge exemption from the normal rules for off-balance-sheet accounting.” Given that the SEC letter provides only interim clarification a long-standing grey area in “the normal rules,” I find it disingenuous — at best — for Weil to claim that the SEC’s clarification represents an exemption.

And he’s making essentially the same point he’s made since July, all over again:

The accounting standard at issue is FASB Statement No. 140. Its rules had envisioned QSPEs as brain-dead vehicles, akin to wind-up toys. Their actions are supposed to be automatic responses that “were entirely specified in the legal documents that established” the trusts. When servicers do exercise discretion, it must be “significantly limited.”

Weil, as best I can tell, has a hard time understanding the concept of loss mitigation altogether. Think of it this way: if servicers did nothing but tell borrowers facing default that nothing could be done until they, in fact, defaulted — what then? If you think the media din is bad now about how “uncaring” servicers are, you’d have reached a whole new level in the world Weil’s got in store for us. And, of course, there’s the itty-bitty little problem about investors losing their shirts and their shorts, as well.

Tanta unloaded on Weil in July of last year, and what she said then is appropos now:

Oh, I suppose, if you’re some perfect righteous Bloomberg columnist investor type, you’d never ever have such a problem and you don’t give a rat’s patootie about the unwashed masses who might need “judgement exercised” instead of Catch-22. You’re free to feel that way, but as far as I’m concerned you’re not free to pretend like this is some conspiracy on the part of some crackheads to mess with your NAV. There are huge, massive, deeply important public policy issues around home mortgage lending, which makes it a little bit of a problem to treat mortgages like any other “financial asset.” We have entire neighborhoods and communities falling apart because of the Wall Streetization of mortgage finance, and now that someone’s trying to deal with the mess, it’s not a good time to suggest that we pile on the punishments just so you can figure out how to read a balance sheet.

Bingo.

The problem here isn’t how servicers approach and account for their loans; it isn’t even the fact that the industry is now grappling with how to handle a swarm of loan modifications.

It’s the fact that some loans were made at all in the first place. If Weil wanted to be righteously indignant over anything, he’d have been better off focusing on what sort of alternate universe led all of us to believe we could originate boatloads of stated-income 2/28s and completely disintermediate the astronomical risk that came with so doing. Or railing against risk management practices that slid to the point that nobody was actually doing any real sort of due diligence prior to issuance of these ticking time bombs.

But that would require actually knowing something about the industry you’re being paid to cover.

Jobless claims surged and sent stocks plummeting in the opening minutes today as traders worried about the possible onset of the credit/housing-bust led recession.  First time claims rose by 69,000 to 375,000 smoking estimates of a smaller rise of jobless claims to 320,000.

Even factoring in for seasonal volatility the number came as a shock to people on Wall Street.  From the Market Watch story on the higher jobless claims:

Initial claims for state unemployment benefits rose 69,000 in the week ended Jan. 26, reaching 375,000, the Labor Department reported Thursday. It marked the highest level since early October — and the biggest weekly jump since September 2005 in the wake of Hurricane Katrina.

Non-seasonally adjusted claims actually fell in the latest week, but seasonal factors expected a much steeper decline.

All the same, Robert Brusca, chief economist at FAO Economics, said that, despite the technical noise, claims are now indicating a “border-line recession warning.”

The spike in jobless claims tied with the continued turmoil in the credit markets and the tapering-off of consumer spending are not the way most people bullish on the economy would like to see them headed.  Consumer spending is an important one to watch as many believe the economy was propped up on home equity withdrawals as part of the housing bubble.

In addition, the Commerce Department reported that real consumer spending flattened out in December, further evidence that the economy was getting weaker as the fourth quarter sputtered to an end.

 

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It’s enough to make you wonder when we’ll be running out of shoes: the latest shoe to drop in terms of a burgeoning mortgage-backed credit crisis was MBIA’s midnight release of fourth quarter earnings Thursday, which found the world’s largest monoline reporting a quarterly loss of $2.3 billion, or $18.63 per share — its biggest-ever loss.

MBIA’s market cap is just $1.75 billion; the insurer said it would look to find even more ways to raise capital after the loss, as it continues to fight to hold onto its own AAA rating.

Warburg Pincus must be tickled pink at the news. The private equity firm’s $500 million investment into the troubled bond insurer closed and funded one day earlier, with MBIA chief Gary Dunton touting a $1.5 billion boost to its capital position.

“We believe that these steps, along with reduced capital requirements resulting from slower business growth,” Dunton said, “will result in our capital position surpassing rating agency Triple-A requirements as currently articulated and will allow us to continue serving the needs of our clients and investors.”

As currently articulated is the key phrase from above; in addition to Fitch, which has already begun downgrading various monolines, many expect both Standard & Poor’s and Moody’s to update their assessment of the capital needs of bond insurers within the next few days.

Via Bloomberg:

Bond insurers guarantee $2.4 trillion of debt combined and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts. Their downgrades could force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report …

“MBIA can raise more capital, but will probably need to sell the attractive parts of its business to do so,” said Toby Nangle, who helps oversee $37 billion as head of global aggregate business at Baring Asset Management in London. “They’re a long way from being out of the woods. A downgrade is still a real possibility.”

Felix Salmon at Portfolio.com thinks MBIA is a downgrade waiting to happen, and links in to the latest research by Pershing Square’s Bill Ackman that’s been causing a stir. If Ackman’s right, after reading his letter, I don’t know how MBIA holds on to its AAA-rating.

Shares of MBIA were trading down roughly 14 percent in pre-market activity on the New York Stock Exchange Thursday morning.

Disclosure: The author held no positions in MBI when this story was originally published.

Making it the third AAA-rated bond insurer to lose its top credit rating, Fitch Ratings said Wednesday that it had downgraded Financial Guaranty Insurance Company, the fourth largest monoline, to a AA rating. The two-notch downgrade comes as the guarantor failed to meet a deadline for strengthening capital, Fitch said.

From the press statement:

As Fitch announced on Dec. 17, 2007, when it placed FGIC on Rating Watch Negative, the company has a modeled capital shortfall of more than $1 billion at the ‘AAA’ rating threshold. The existing capital deficiency, which Fitch now believes totals approximately $1.3 billion, resulted from rapid credit deterioration in FGIC’s insured portfolio in particular: transactions backed by structured finance collateralized debt obligations backed by subprime residential mortgage-backed securities (RMBS) and direct exposure to RMBS, namely prime second-lien mortgages. The downgrade places FGIC’s IFS ratings at a level commensurate with an ‘AA’ rating stress level under Fitch’s most recent capital modeling.

The downgrade marks Fitch’s third hit to a AAA-rated bond insurer. The rating agency downgraded Security Capital Assurance Ltd. on January 24, and Ambac Financial Group on January 18.

The bond guaranty business in mortgage banking is coming under fire, as HW readers know. Various plans are being floated in an attempt to save many of the troubled insurers, but it appears — for now, at least — that any help is too late in arriving.

Part of the reason that help is delayed, or may not be coming altogether, is because few have a handle yet on the enormity of exposure involved in both insuring mortgage-relative derivatives and maintaining more direct exposure to RMBS issues.

Pershing Square Capital’s Bill Ackman suggested today (H/T, Calculated Risk) in a letter sent to the SEC and New York state insurance regulators that both MBIA, who his hedge fund in short on, and Ambac are understating their losses by more than $20 billion.

Disclosure: The author held no positions in any company mentioned in this story when it was originally published.