Refinance Free Credit

Fitch Ratings today did what some thought might not happen — it downgraded a AAA-rated monoline insurer. The rating agency downgraded troubled guarantor Ambac Financial Group and its affliliates, after the insurer said Friday morning that it would abandon a plan to raise the additional capital needed to maintain its rating.

Ambac saw its insurer financial strength rating downgraded two notches to ‘AA,’ while the rating agency dropped a host of other ratings as well, including moving the insurer’s long term rating to ‘A’ from ‘AA.’

The downgrade came after U.S. bond markets had closed for a long weekend, due to the upcoming Martin Luther King, Jr. holiday in the United States.

From the press statement, Fitch said that the downgrade reflected “significant uncertainty with respect to the company’s franchise, business model and strategic direction,” as well as citing future capital strategy and loss levels in its insured portfolio as contributing factors.

This is going to be felt in the mortgage industry, without question; a number of downgrades on various Ambac-wrapped MBS will be forthcoming. And, of course, the question of whether Ambac goes into run-off has to now be asked.

This story from Dow Jones gives a hint of insight as to what this downgrade might end up meaning for firms like UBS, Merrill Lynch and Citigroup — just looking at already downgraded ACA Capital:

Using Merrill as a rough model, Oppenheimer analyst Meredith Whitney says the top 10 bank underwriters of collateralized debt obligations last year may have to write off $10.1 billion of the $12.7 billion of their bonds insured by ACA. And that estimate is based on her assumption that the insurance is worth 20 cents on the dollar - above the level of Merrill’s reserve.

At the top of the list is UBS AG (UBS), which was the biggest underwriter of asset-backed CDOs in last year’s third quarter when ACA was most active issuing CDO insurance. UBS will have to write down $1.4 billion of its ACA-backed hedges, Whitney estimates. It is followed by Citigroup Inc. (C) - the biggest CDO underwriter in last year’s second quarter - with an estimated $1.398 billion of losses, and Merrill, according to Whitney.

Representatives for Merrill and Citigroup declined to comment, and UBS did not immediately respond to requests for comment.

ACA likely sold protection on about 7% of all asset-backed CDO insurance sold in 2007, Whitney estimated, and on 32% in the third quarter when UBS was most active.

Ambac is much larger than ACA, so this could get ugly. And just for the record, I hate to see this.

A cross-industry mortgage coalition with the extremely long name of the National Industry Standards for Homeownership Education and Counseling — that’s NISHEC, in short — said today that it has released a set of recommended standards for foreclosure counseling.

The group is affiliated with Neighborworks America, a community development and borrower assistance nonprofit that has a long-standing relationship with the mortgage banking industry. Participants include such names as Bank of America, Chase, the NAR, Citigroup, Fannie Mae, Freddie Mac, and the U.S. Department of Housing and Urban Development, among others.

The new foreclosure counseling standards “aim to increase the professionalism, consistency and quality of service delivered by organizations and counselors providing assistance directly to consumers in delinquency and foreclosure,” the group said in a press statement. The standards provide a set of training and performance benchmarks designed to guide credit counselors working with delinquent homeowners.

Click here to read the full set of standards.

It’s unclear how many mortgage firms are actively supporting the new guidance.

Adherance to the new standards is voluntary, although it’s expected that participating institutions will require counseling agencies to adhere to the standards as part of their relationship with the mortgage banking industry.

“By carefully measuring the needs of the counseling industry and mortgage borrowers in responding to the foreclosure crisis, the Advisory Council thoughtfully developed these performance standards,” said Janya Bower, director of the NeighborWorks Center for Homeownership Education and Counseling, “keeping in mind how they will strengthen the confidence homeowners will have when discussing the details of their personal financial situation with a counselor.”

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

Taking issue with recent suggestions that mortgage lenders aren’t doing enough to help troubled borrowers, a report released Friday by the HOPE NOW Alliance suggests that servicers significantly ramped up loss mitigation efforts significantly during the fourth quarter.

Relying on data from nine of the nation’s largest servicers responsible for managing 4.1 million loans, or approximately 58 percent of outstanding subprime loans, HOPE NOW said that the mortgage industry assisted 370,000 homeowners during the second half of 2007. Of that number, 250,000 include formal repayment plans and 120,000 represent loan modifications.

“The number of borrowers being helped is accelerating rapidly,” said Faith Schwartz, executive director of HOPE NOW. “Our job is to get homeowners the help they need and we are doing that. HOPE NOW, which leverages the work already being done by servicers, is a program that yields significant results.”

HOPE NOW is an industry coalition comprised of counselors, mortgage market participants, and mortgage servicers to create a unified, coordinated plan to reach and help as many homeowners as possible; the coalition led efforts to formulate a voluntary streamlined mortgage-modification program (the so-called ARM freeze) in conjunction with the Treasury Department and officials within the Bush administration.

The HOPE NOW study follows a report by the Mortgage Bankers Association, which yesterday released similar data for the third quarter. MBA concluded 148,000 subprime homeowners were helped, including 120,000 formal repayment plans and 28,000 modifications. Modifications made in the third quarter were double those made in the first quarter.

Looking beyond the MBA survey, mortgage servicers were modifying subprime loans during the fourth quarter at triple the rate of the third quarter, HOPE NOW said.

Treasury Secretary Hank Paulson characterized the HOPE NOW report as “a promising development.”

“Entire industries do not adjust easily or quickly, even in times of market calm,” Paulson said. “But this alliance is demonstrating that an industry can improve its coordination and outreach to make a difference.”

In November 2007, HOPE NOW said it had sent out approximately 233,000 letters to at-risk homeowners asking them to call their servicer for assistance. As a result of these letters, more than 16 percent of borrowers responded by contacting their servicer, far more than the normal response rate of 2-3 percent.

Another 250,000 letters were mailed in December, the organization said.

A regional wholesale operation closed up shop today, with Orangeburg, South Carolina-based Community Bankshares Inc. reporting Friday that the bank’s mortgage division would exit broker-based lending and eliminate up to 14 jobs.

The division, Community Resource Mortgage, will instead focus exclusively on direct-to-consumer lending through its offices and the bank’s branch offices throughout central South Carolina.

The reduction in staff represents 40 percent of the mortgage employees and 6 percent of the bank’s total number of employees. It was unclear how much of the bank’s mortgage activity was originated via the broker channel.

“We determined the returns and risks from the wholesale mortgage brokerage function did not justify that line of business,” said Samuel Erwin, Community CEO. “We regret the loss of jobs, but believe these changes will provide for less risk going forward and, in all probability, a less volatile earnings stream for the bank.”

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

Astoria Financial Corporation, New York state’s largest thrift, said late Thursday that it will write-down the value of its holdings of Freddie Mac preferred stock, taking a charge of $13.3 million for the fourth quarter.

The charge will be recorded as a so-called “other-than-temporary impairment charge;” previously, impairment was recorded as an unrealized mark-to-market loss on securities available-for-sale, Astoria said.

“The decision to reclassify the unrealized mark-to-market loss on these investment grade securities to an other-than-temporary impairment charge is based on the significant decline in the market value of these securities caused by Freddie Mac’s recently announced negative financial results, capital raising activity and the unlikelihood of any near-term market value recovery,” said CEO George L. Engelke, Jr.

Astoria will report earnings on January 23rd.

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

The Financial Times reported Friday morning that UBS is the latest financial institution to shake up its fixed-income trading operations, after the bank has suffered from heavy losses tied to the implosion of the subprime mortgage market.

According to the story, an internal memo from CEO Marcel Rohner said that UBS will cut staff in its real estate and securitization businesses by 50 percent. The bank will also move its troubled mortgage investments into a separate restructuring unit, although it’s unclear if this move will encompass pushing these assets off of UBS’ balance sheet.

The bank will also pull out of proprietary ABS trading in the U.S., and combine its equity and debt underwriting as part of a restructuring move, the Financial Times said. (Proprietary trading refers to trading activity that takes place within a firm’s own investments, as opposed to the investments it manages for customers.)

Washington Mutual recently shuttered its ABS trading operations, although WaMu’s trade desk possessed a signficantly smaller footprint than that of UBS.

Sources have suggested that the move by UBS may be echoed by a few other investment banking operations, although not all. “Goldman and Credit Suisse are probably going to be the big winners here,” one source said to HW, on condition of anonymity.

In the face of a stock price that has been battered by more than 70 percent in two days, and bowing to pressure from shareholders, Ambac Financial Group, Inc. said Friday morning that it will ditch a previously-announced plan to raise additional capital.

“Raising capital is not an attractive option at this time,” the company said in a statement. On Wednesday, the insurer ahd said it would seek to raise $1 billion in equity as part of a bid to maintain its AAA ratings from each of the major rating agencies.

The move comes as an investor group led by Evercore Asset Management went public with its campaign to prevent Ambac from “throwing good money after bad,” as the investment manager said in a letter to Ambac’s board that “the sale of $1 billion or more of new equity amounts not so much to raising capital as it does to a sale of the company at an extremely depressed price.”

Ambac’s shares have been under siege the past two days, dropping more than 70 percent from $21.19 on January 15 to $6.13 on market close January 17.

Moody’s Investors Service said Thursday that it would reassess the capital adequacy of the bond insurer, one month after previously affirming the company’s financial strength, and placed the company on a negative ratings watch.

It’s unclear what Ambac’s next move is; some have suggested the insurer will cease underwriting new policies and allow its insured portfolio to run off.

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

Wall Street has a phrase for a short-lived rally of a stock on the way to the tank: Fool’s Rally.  Speculators try to “time” the stock and put in a temporary, artificial bottom by increasing demand through rapid buying.  This pushes stock prices back up for a brief moment at which point the bulls and other optimists call bottom and start to hint that maybe everything will be fine again.

The Mortgage Equivalent of a Fool’s Rally

We all know that it’s called a fool’s rally because people buying in to it are looking at a big loss as the stock returns to its downward trajectory; eventually finding a permanent bottom.  It is my opinion that the mortgage “mini-boom” we’re seeing right now is such a red herring.

Rates are low - allowing the best-qualified, best-documented borrowers who didn’t tap every last penny of equity to lock in a low, low rate.  Mortgage brokers rejoice!  The tide is turning the loans are rolling in through the door and the pipelines are full.

Alas, this boom is unsustainable and does not signal the bottom of the mortgage industry’s ills.  Has anyone been reading the news lately?  Citi, Merrill, JP Morgan, Wells, WaMu, Lehman - the beat goes on.  We’re still on the down escalator and we may be picking up speed.

Recession Imminent

Nouriel Roubini, the former White House economist is raising the alarm in a manner that might surprise you for this housing bear.  Roubini is calling for the Fed to cut rates faster to avert a systemic meltdown and a long, hard recession.

 The growing glut of unsold homes, big-ticket consumer items and autos implies that Fed easing will have only a limited effect on the rapidly sinking economy. Whatever the Fed does will be too little, too late to stop the recession altogether. But this does not imply that the Fed should allow massive unemployment to emerge just to teach a lesson to Wall Street and avoid a “bailout” of investors.

So Why the Confusion?

So why the confusion in the marketplace?  Why are the most respected economists signaling recession while mortgage brokers and lenders are signaling some return to “normalcy”?  Because we’re experiencing a fool’s rally.  The argument that banks are taking bigger-than-necessary losses to “purge” the system is laughable.  Nearly a quarter ago banks were giving that same argument as they took “conservative” positions to “purge” the system.  Banks can’t take conservative positions on write downs because no one knows what this stuff is currently worth.

Prime borrowers who have conforming loan limits with fully documented incomes may be getting great rates; but the secondary market is still non-existent and jumbo loans are either non-existent, on the endangered species list or impossible to qualify for.   And therein lies the problem.  An obscene amount of home loans are well over the conforming loan limits that are soon-to-be adjusting into a market that has no place for them.

And lower rates will not matter to those people.  Their ARM rates that are set by obscene margins.  Interest rates would need to be close to zero for them to have a shot at affording their adjusting payments.  And even at 1% their rate could still adjust higher!

This pain will continue to be felt.

Hold on to Your Butts

Those that buy in to this fool’s rally will be in trouble.  Do I recommend taking advantage of it if you’re in the business?  Absolutely.  Should you bet your money on this rally?  Absolutely not.

We’re looking at plenty of pain to come.  The mortgage industry is not done feeling their fair share of it.  Guidelines continue tighten, wholesale lending continues to be curtailed, eliminated and neglected.  Loans will continue to become harder; smaller operators will bear larger costs of doing business while witnessing smaller per-loan profits.  The big banks will monopolize the marketplace and the vetting will continue.

That you can bet money on.

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Washington Mutual, the nation’s largest thrift, reported a net loss of $1.87 billion for the fourth quarter after market close on Thursday. The loss was its first since 1997, and came as WaMu took a $1.6 billion after-tax charge to the value of its home mortgage unit and set aside $1.53 billion for credit losses.

Bloomberg reported that the $2.19 per share loss for the quarter was worse than analysts had expected; mean expectations were at $1.43 per share, the news service said.

The fourth quarter loss pushed WaMu into the red for the full year, with the bank reporting a net loss of $67 million for 2007. The Seattle-based thrift had announced drastic measures in December, including laying off 3,150 employees as it looked to adjust to market challenges it characterized as “unprecedented” at the time.

Mortgage losses continue to mount
“It’s clear that the weakness in both the housing and credit markets have led to a fundamental shift within the mortgage industry,” CEO Kerry Killinger said in a conference call with analysts.

Net charge-offs for the fourth quarter registered $747 million; the provision for future losses was roughly double the charge-off rate, bringing total allowance for loan losses to $2.57 billion at year end, WaMu said. Charge-offs in subprime and home equity loans dominated, accounting for approximately 70 percent of the total.

Non-performing assets grew to $7.1 billion in the fourth quarter, equalling 2.17 percent of total assets and increasing 52 basis points from the prior quarter (see below for a look at NPAs by quarter).

“Although we are not seeing significant changes in early stage delinquencies, once a borrower is delinquent it is difficult for them to cure their loan because home prices in many areas of the country are not only deteriorating, but homes are also taking longer to sell,” said CFO Tom Casey.

“In addition, liquidity for consumers has decreased with far fewer refinancing opportunities, especially for nonconforming loans.”

Beyond non-performing assets, Casey also discussed Wamu’s exposure to option ARMs, saying that the bank considers only $2.1 billion of its $57 billion option ARM portfolio as “at risk,” identifying high risk loans as those originated between 2005 and 2007 with an original LTV over 80 percent.

WaMu had better hope the rest of its option ARM portfolio is low(er) risk: below is a scary ARM reset chart covering option ARM recasting.

Looking ahead
Killinger said that WaMu will continue to focus on retail originations, and that it is expecting a 40 percent drop in overall originations in 2008, to $1.5 trillion. That number is well below the $1.96 trillion predicted by the Mortgage Bankers Association in a recent forecast.

Casey also noted that the thrift expects net charge-offs in the first quarter of 2008 to be up “20-30 percent” versus Q4, and that the loss provision will be in the “range of $1.8 to $2.0 billion.”

WaMu shares were down only slightly after hours on the New York Stock Exchange, off a quarter of a percent to $12.43.

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

Disclosure: The author held various put option contacts on Washington Mutual at the time this story was published.

The FDIC’s Sheila Bair warned Thursday that the pace of loan modifications has been too slow thus far, and suggested that if the mortgage industry needed to move more quickly to help troubled borrower. In remarks delivered at the Bear Stearns Mortgage and Structured Product Conference in New York, Bair said that loan modification efforts have the “way behind the curve.”

“We must see a pickup in the pace, and the sooner the better,” she said.

Should foreclosures continue to rise, Bair warned that the voluntary program spearheaded by the HOPE NOW Alliance and backed by the Treasury Department may be replaced by more stringent measures.

“Foreclosure rates may be a kind of barometer for what’s ahead. Lawmakers at all levels of government — local, state, and national — will look to take additional action if foreclosures keep rising, and the economic fallout continues,” Bair suggested. “This is the simple reality. Congress is already considering a number of proposals.

“I very much believe in the market. But if market solutions fail to solve the problem, government will step in.”

The MBA, looking to blunt some of the criticism the industry has received as of late over a lack of transparency, released a wide-ranging report covering loan workouts in the third quarter of 2007 earlier on Thursday. The report found that 235,000 borrowers had been involved in either loan modifications or repayment plans, although repayment plans were by far the majority of all workouts.

Bair also suggested that a lack of transparency in structured investment has “tarnished” Wall Street’s global leadership in capital markets, and said that it may be neccessary to beef up disclosure requirements.

“There was a general lack of reliable information to adequately assess the risks of the underlying assets for these securities,” Bair said.

“Many often failed to ask the most basic questions: What precisely are the risks? What kinds of underlying credits are these? What are the terms and conditions? What is the repayment capacity of the borrowers?”

Bair also deflected criticism from the rating agencies, saying that “ratings must not be a proxy” for investor due diligence.