Refinance Free Credit

Ambac Financial Group, Inc., the first monoline bond insurer to see its AAA credit rating wiped out because of ill-timed mortgage exposure, said it is pursuing “strategic alternatives” after reporting a $3.2 billion quarterly loss — that’s $31.45 per share — on Tuesday.

“Strategic alternatives” usually refer to the pursuit of a sale. From Bloomberg:

“They can’t issue equity and they can’t issue debt,” said Robert Haines, an analyst at bond research firm CreditSights Inc. in New York. “The new CEO might be prepping the company for a potential sale.”

The loss comes as Ambac absorbed a $5.2 billion write-down to its credit derivative exposures, primarily related to underwriting insurance ono collateralized debt obligations. CEO Michael Callen, however, said that both investors and the rating agencies are “underestimating Ambac’s strengths and future potential.”

“Claim payments in 2007 were negative $2 million and we paid no claims related to our CDO of ABS portfolio.” Callen said. “We believe that Ambac can realize new business opportunities in our core markets and through reinsurance while we strengthen our capital position further to maintain our triple-A ratings under S&P and Moody’s and seek to regain it under Fitch.”

An article over at Bloomberg paints a very different picture, suggesting that many of the monolines now face a crisis of investor confidence as much as they face the spectre of holding the bag on billions of dollars worth of mortgage-backed CDOs:

ACA founder [H. Russell] Fraser says the bond insurance industry needs to do more than raise capital: It needs to restore faith in its unquestioned ability to assess credit risk …

“There’s no reason for an AAA-rated bond insurer to be doing anything with subprime mortgages,” Fraser says. “It’s going to hurt their business because municipalities are going to ask, ‘Is this insurance really worth it?”

By chasing the higher profits of CDOs while underestimating the risks, the bond insurers jeopardized their basic business: insuring municipalities against default …

That unsexy, basic business is something that I’m sure Warren Buffett will gladly stake a claim to.

Disclosure: At the time this post was published, the author held no positions in ABK.

Per MarketWatch, the rumor mill is bandying about both Wells Fargo and Merrill Lynch as potential purchase targets for JP Morgan Chase:

First Washington Mutual, now Wells Fargo, and even talk (we’re told) of Merrill Lynch. Everyone, it seems, wants to know who JP Morgan Chase is taking to the proverbial prom.

A source had suggested Wells Fargo to me privately, but seeing it mentioned in another news report gives me an excuse to bring it up as water-cooler fodder.

HW reported earlier on rumors that JPMorgan may have an interest in Washington Mutual, the nation’s largest thrift.

At this point, I think the question is no longer who JPMorgan is thinking about taking to the prom — it’s who isn’t on that short list.

Disclosure: At the time this post was published, the author held various put option contracts on WM; no positions in other companies mentioned.

The number of mortgage default notices filed against California homeowners jumped to its highest level in more than fifteen years during the fourth quarter of 2007, a real estate information service reported Tuesday.

Lending institutions sent homeowners 81,550 default notices during the October-to-December period. That was up by 12.4 percent from 72,571 the previous quarter, and up 114.6 percent from 37,994 for fourth-quarter 2006, according to DataQuick Information Systems.

Last quarter’s number of defaults was the highest ever recorded by the real estate information provider, who maintains stats going back to 1992.

“Foreclosure activity is closely tied to a decline in home values. With today’s depreciation, an increasing number of homeowners find themselves owing more on a property than it’s market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move,” said Marshall Prentice, DataQuick’s president.

DataQuick reported that most of the loans that went into default last quarter were originated between August 2005 and October 2006, while the median age of a defaulted mortgage was was 22 months, up from 15 months one year earlier.

On primary mortgages statewide, homeowners were a median five months behind on their payments when the lender started the default process, DataQuick said. The borrowers owed a median $11,121 on a median $340,000 mortgage.

On lines of credit, homeowners were a median seven months behind on their payments. Borrowers owed a median $3,379 on a median $56,000 credit line, although the amount of credit actually in use is unknown from an analysis of public records.

Southern California saw the most new foreclosures of any region in the state, registering nearly a 100 percent increase in NOD activity during the fourth quarter relative to one year earlier. Orange County saw NOD activity surge nearly 116 percent, DataQuick said.

Trustees Deeds recorded in California — that’s the actual loss of a home to foreclosure — totaled 31,676 during the fourth quarter, the highest on record.

Last quarter’s total rose 30.8 percent from 24,209 in the previous quarter, and jumped a stunning 421.2 percent from 6,078 in the fourth quarter of 2006. In the last real estate cycle, Trustees Deeds peaked at 15,418 in third-quarter 1996.

I’m starting to sound like a broken record: we’re in uncharted territory.

(H/T: the Calculated Risk blog, who has some scary charts worth reading)

The parade of bad earnings continued Tuesday, as Regions Financial Corp said that its fourth-quarter net income fell 80 percent as it faced what CEO Dowd Ritter called “an increasingly challenging operating environment.”

The bank recorded net income of $70.6 million, or $.10 per share, compared with $361.6 million, or $.56 per share, one year earlier.

Regions hiked its provision for loan losses to $358 million — nearly triple the charge recorded for the third quarter. The provision increase comes as charge-offs accelerated to $107.5 million in the fourth quarter of 2007.

The charge was largely expected, as the bank had warned in early January of losses in its residential construction portfolio, and cited weakness in both Florida and Atlanta.

Residential homebuilder loans represent approximately 8 percent, or $7.2 billion, of Regions’ total loan portfolio of $95.4 billion.

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

Disclosure: At time this story was published, the author held no positions in RF.

Fifth Third Bancorp said today that it earned $38 million ($.07 per share) in the fourth quarter, a drop of 42 percent from year-ago levels and off 88 percent from one quarter earlier. The drop came as the bank absorbed a non-mortgage-related hit to earnings in the form of a $155 million charge associated with an insurance policy.

“While we have not had any significant market-related losses on structured securities, loans, or funds we manage for others, one of our BOLI [bank-owned life insurance] insurance policies was invested in assets that experienced significant market declines due to widening credit spreads, which negatively impacted our reported results,” said Kevin Tabat, CEO of Fifth Third.

“However, the credit environment remains challenging, and we expect credit conditions and the performance of our loan portfolio to continue to deteriorate in the near term.”

Looking at the bank’s mortgage banking activities, net revenue in the segment remained flat in the fourth quarter at $26 million. Production decreased to $2.7 billion versus $3.0 billion in the third quarter, but remained up over the $2.3 billion originated in the fourth quarter of 2006.

Net servicing revenue, before mortgage servicing rights valuation adjustments, totaled $14 million in the fourth quarter, compared with $14 million last quarter and $12 million a year ago. Fifth Third maintains a servicing portfolio of $34.5 billion.

A look at mortgage credit quality
While revenue remained flat, a look at sources of expected future losses suggest some mortgage-related earnings pressure to come.

Charge-offs in residential mortgage loans doubled during the quarter to $18 million, while home equity loans only saw a modest increase in charge-off activity: $32 million in Q4, versus $27 million in Q3. Total charge-offs reached $174 million during the quarter, compared to $97 million one year ago.

The provision charge trumped charge-offs, however, coming in at $284 million for the fourth quarter. Total loan loss allowances reached $937 million, as a result, up 13 percent from the third quarter.

Non-performing assets jumped from $706 million in Q3 to $1.06 billion in the fourth quarter, driven primarily by emerging weaknesses in commercial real estate; that being said, residential mortgages saw NPAs jump nearly 50 percent in one quarter — shooting up to $91 billion in Q4 from $61 billion just one quarter earlier.

Fifth Third noted that $75 million of a total $212 million in residential and home equity NPAs was tied to “debt restructurings,” which I’m assuming would include loan modificiations and/or forbearance agreements.

For more information, visit http://www.53.com.

Disclosure: When this post was published, the author held no positions in FITB.

National City Corporation may have sold off its subprime mortgage unit, First Franklin Financial, but the lingering effects of First Franklin’s loan portfolio — as well as weaknesses in home equity loans — are proving costly for the Ohio-based bank.

National City posted a quarterly loss of $333 million on Tuesday, or $.53 per diluted share, citing mortgage-related concerns. The Q4 loss compares to net income of $842 million, or $1.36 per share, one year earlier.

Mortgage banking operations lost $445 million, National City said, swamping gains in retail banking and steady performance in commercial banking.

A $691 million provision for mortgage loan losses contributed to the quarter’s poor results, while National City also took a $181 charge to goodwill associated with its mortgage business, and lost $149 million on the value of loans it held for sale.

Peeking at credit quality
Charge-offs rose to $319 million, up from $189 million in Q3; $122 million of Q4 charge-offs were in residential real estate, National City said. Despite increasing charge-off activity, total loan loss reserves ballooned to $1.76 billion, cushioned by the large provision for future expected losses.

Non-performing assets continued their steep upward climb, rising to $1.52 billion from $1.21 billion one quarter earlier; NPAs are now up 90 percent from their year-ago levels. The vast majority of the increase in NPAs is being seen in loans originated by National City Mortgage — these are primarily home equity loan products, and the bank reported that NPAs in this area rose from $193 million in Q3 to $307 million in Q4.

While it’s clear that First Franklin is hurting National City’s mortgage book — NPAs in the former subprime unit’s loan portfolio jumped from $86 million to $119 million on a linked-quarter basis — it’s worth remembering that First Franklin loans comprise just 20 percent of the bank’s $30.2 billion residential real estate portfolio.

The good news? National City appears to be raising its loan loss allowance in step with NPAs, as loss coverage (loan loss allowance as a percentage of portfolio loans) reached 1.52 percent in the fourth quarter against an NPA percentage of 1.31 percent of loans. Those numbers stood at 1.23 and 1.08 percent, respectively, one quarter ago.

National City has been slashing headcount in its consolidated mortgage operations, with the bank most recently confirming three weeks ago that it will exit wholesale mortgage origination while it continues to reduce headcount in its National City Mortgage subsidiary. The bank has announced cuts to more than 2,700 mortgage jobs in 2007 and early 2008.

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

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

From Market Watch:

Acting forcefully against economic risk and financial market meltdown, the Federal Reserve cut its overnight lending rate by 75 basis points to 3.50%, the Fed announced Tuesday. It was the first time the Fed had cut interest rates between meetings since the 9/11 attacks in 2001. “The committee took this action in view of a weakening economic outlook and increasing downside risks to growth,” the Federal Open Market Committee said in a statement.

In related news in my house we’re now considering using our dollar bills as toilet paper and have put our dream European vacation on permanent hold.

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From Market Watch:

Acting forcefully against economic risk and financial market meltdown, the Federal Reserve cut its overnight lending rate by 75 basis points to 3.50%, the Fed announced Tuesday. It was the first time the Fed had cut interest rates between meetings since the 9/11 attacks in 2001. “The committee took this action in view of a weakening economic outlook and increasing downside risks to growth,” the Federal Open Market Committee said in a statement.

In related news in my house we’re now considering using our dollar bills as toilet paper and have put our dream European vacation on permanent hold.

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Fourth quarter profit at Wachovia Corp. fell 98 percent to $51 million ($.03 per share), versus $1.6 billion one quarter earlier and $2.3 billion one year earlier, as the nation’s fourth largest bank was socked by mortgage-related charges. Bloomberg reported that Wachovia’s earnings missed analysts estimates badly, who had been expecting earnings of $.33 per share for the quarter.

“The continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth quarter results substantially,” said Ken Thompson, Wachovia chairman and chief executive officer.

(Do you think? The bank actually posted an operating loss of $190 million for the quarter.)

Wachovia wrote down $1.875 billion in its investment holdings, including $1.0 billion in subprime RMBS and CDOs and $600 million in CMBS and related securities.

Golden West is in there, somewhere
Wachovia — which owns option ARM specialist Golden West Financial but doesn’t report on the unit serparately — booked a $1.5 billion provision for credit losses during the fourth quarter, against net charge-off activity of $468 million. Provision charges were up substantially from $408 million booked in the third quarter and $206 million in the year-ago period, with the bank citing “significant deterioration in the residential housing market and the related portions of the commercial real estate portfolio.”

Non-performing assets reached $5.2 billion during Q4, or 1.08 percent of loans; NPAs represented 0.63 percent of loans in the third quarter, and just 0.32 percent one year earlier.

Looking at loss coverage ratios, the allowance for loan losses as a percentage of loans increased to nearly 1 percent during Q4, up from 0.78 one year earlier. However, Q4 represents a sea change in terms of reserving credit losses, in spite of the hike in reserves — the NPA percentage of loans (1.08 percent) now exceeds the loss coverage ratio (0.98), which means there are now more loans delinquent than there are reserves set against those delinquencies.

Given the current market environment, and the hidden wild card of Golden West Financial, I’d expect that a build-up of loss reserves will need to accelerate further in the quarters ahead.

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

Disclosure: The author held no positions in WB when this post was originally published.

“Better get under cover, Sylvester. There’s a storm blowin’ up, a whopper.” Professor Marvel; The Wizard of Oz

Just when you thought it was going to be a light week on the Economic Calendar, the Fed comes out with an Emergency Rate Cut! A total of 75 basis points (.75% down to 3.50%).

The Bond Market is performing well in light of the rate cut (which is good for mortgage rates) but keep an eye on the market. Remember, Stocks and Bonds compete for the same investment dollar. This means that investors can choose to invest their money in the Bond Market or they can choose to invest their money in the Stock Market. If they choose the latter, expect a deterioration in mortgage rates.

More to come…

For now, continue to lock-in new loan applications.

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