Refinance Free Credit

Refinancing activity hit its highest level since November amid declining mortgage rates this past week, according to a report released Wednesday by the Mortgage Bankers Association.

The Market Composite Index, a measure of aggregate mortgage loan application volume, was 981.5 for the week ended January 18 — an increase of 8.3 percent on a seasonally adjusted basis from 906.4 one week earlier. The index was up 11 percent versus the same week one year ago, the MBA said.

The application index is calibrated to March 16, 1990; a reading of 981.5 means that application activity is nearly 10 times greater than when the index was first established.

Refinancing application activity jumped 16.9 percent, the MBA said; purchase activity actually decreased 4.6 percent, driven primarily by a drop in conventional applications. Interest in refinancing has skyrocketed among borrowers to start 2008, as mortgage rates have fallen to lows last seen since the housing boom in 2005.

The jump doesn’t directly translate into mortgage fundings, according to Jay Brinkmann, vice president of research and economics at the MBA. “With tighter credit conditions we do not know how many of these applications will become loans,” he said, “but it is clear that borrowers are responding to the 40-80 basis point drop in rates we have seen since November 2 across products.”

Not surprisingly, refinance share of mortgage activity increased to 66.0 percent of total applications, the MBA said, up from 62.7 percent the previous week. ARM share also increased slightly to 9.3 percent, from 9.2 percent one week earlier.

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

California Governor Arnold Schwarzenegger called on Congressional leaders Wednesday to raise the conforming loan limit in the state hardest hit by the nation’s mortgage meltdown and housing crisis.

In a letter sent to U.S. Senate majority leader Christopher J. Dodd, Senate minority leader Mitch McConnell, House of Representives speaker Nancy Pelosi and House minority leader John Boehner, the Calif. governor argued for “fair access to housing capital” and said the current GSE conforming loan limit is disproportionately affecting Californian homeowners.

“Raising these limits would do more than anything else to pump badly needed credit back into our housing market and revive our economy,” Schwarzenegger said. “It will also help reduce foreclosures and will allow more people to achieve the American Dream with solid, responsible loans.”

The current conforming lending limit is $417,000; real estate data provider DataQuick reported recently that the median price paid for a home in California during December 2007 was was $402,000, down 2.9 percent from $414,000 for the month before, and down 14.8 percent from $472,000 for December a year ago.

The governor said, however, that the conforming limit was well below median housing prices in local high-cost areas, including Los Angeles.

“A starter loan in Los Angeles usually puts a buyer outside the GSE loan limit and into the so-called ‘jumbo’ loan market, a market that sprang largely from a permissive Federal Reserve policy that dropped interest rates dramatically and encouraged widespread jumbo lending,” Schwarzenegger wrote in a letter sent to legislators.

“That market has now largely disappeared and, where it remains, lenders are requiring expensive and onerous terms from borrowers that in some cases are fully one percentage point higher than GSE terms.”

Schwarzenegger also met today with construction and building industry leaders to discuss the potential release of billions of dollars in infrastructure bonds; the governor has said he wants to use $29 billion in unallocated funds from a 2006 series of bonds to expedite major infrastructure projects and keep contruction workers employed.

Industry headwinds grew into a hurricane as 2007 came to a close, helping push mortgage origination volume down 21 percent in the fourth quarter relative to third quarter production. Inside Mortgage Finance reported Wednesday that industry activity totalled an estimated (and meager) $450 billion in the fourth quarter, off 38 percent from one year earlier. Fannie Mae and Freddie Mac, along with FHA, dominated the market: three out of four originations during the quarter were tied to the government lenders.

If total production numbers hold up — far from a sure thing, at this point — 2008 originations would come in at $1.8 trillion, below the $1.96 trillion recently forecast by the Mortgage Banker’s Association.

Notwithstanding the drop in industry production, the new king is the same as the old king — and that would be Bank of America’s newest bride, Countrywide Financial Corp.

IMF reported that a soon-to-be-published ranking of originators placed the the troubled lender with 17 percent of overall industry production for 2007. Wells Fargo, in comparison, posted the largest drop in production of any lender in the top five; Wells ended the year with $272 billion in total originations.

Downey Financial Corp. reported a loss of $108.8 million, or $3.90 per share, for the fourth quarter as the option ARM specialist continues to feel the impact of the housing crunch, especially in California. The quarterly loss compares to net income of $52.1 million, or $1.87 per share, in the fourth quarter of 2006; MarketWatch reports that the earnings badly missed analysts’ expectations of a $.06/share loss.

“We are clearly disappointed with our results,” said Rick McGill, Downey’s president.

“The continued weakening of the housing market and its uncertain future have unfavorably impacted our borrowers and the value of their loan collateral. As a result, single family loan delinquencies, as well as losses from foreclosures, rose significantly during 2007 and led to the large increase to the allowance for loan losses.”

Downey absorbed a $274.4 million hit to income in the fourth quarter, driven primarily by a $218.4 million provision for future credit losses. Total allowance for credit losses ended the quarter at $349 million, net of $12.2 million in charge-off activity.

Loan production totalled just $618 million in Q4, down 53.9 percent from $1.34 billion a year ago, Downey said.

Downey noted that it had modified $322 million of loans associated with its portfolio retention program, designed to get performing but high-risk borrowers out of existing payment-option ARMs and into fixed-rate loans. Downey holds $7.5 billion of mortgages subject to negative amortization, equal to 69 percent of its single-family residential loan portfolio held for investment.

Downey was recently forced by its auditors to report loan modifications to its performing borrowers as part of its non-performing assets, which bumped reported NPAs to 7.8 percent of loans during the fourth quarter.

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

SunTrust Banks Inc., which has been forced to prop up two of its troubled money market funds, reported fourth quarter earnings today of just $3.3 million — that’s $.01 per share — as the Altanta-based bank reeled from the cost of bailing out its funds as well as the cost of increasing borrower defaults. The fourth quarter earnings represented a 98 percent drop from earnings of $506.4 million, or $1.39 per share, one year earlier.

The money-fund bailout contributed to the lion’s share of the quarterly loss, with the bank taking a $555 million writedown on assets — mostly ABS — that it purchased from its two troubled money market funds. More direct mortgage banking-related costs, however, also affected the bottom line.

First, the good: mortgage-related income actually increased $23.3 million, or 41.2 percent compared to the fourth quarter of 2006, SunTrust said. Higher servicing income generated from the servicing portfolio, which increased over 15 percent in 2007, and a $19.2 million gain on sale of mortgage servicing rights drove the jump in segment income. Offsetting the net increase were $78 million in valuation losses on mortgages held-for-sale.

SunTrust said it transfered approximately $840 million in residential real estate loans into its own portfolio from loans held for sale during the fourth quarter, citing a “lack of marketability of the loans and SunTrust’s intent to hold these loans to maturity.”

NPAs outstrip loss reserves
Residential mortgages totalled $32.8 billion at year’s end, with 11 percent of the portfolio in home equity loans and another 12 percent in prime seconds. Non-performing assets in residential mortgages reached $841 million, SunTrust said, with $276 million of that total coming from Alt-A firsts held in portfolio.

The bank also reported that 2.29 percent of its $14.9 billion HELOC portfolio was more than 30 days delinquent, primarily due to weakness in HELOCs originated by third parties.

See the investor presentation here.

Credit quality continued to deteriorate such that non-performing assets at the end of Q4 are now greater than remaining loss reserves — usually a signal that larger provision charges will be needed in future quarters.

Total NPAs reached $1.46 billion, or 1.19 percent of total loans, in the fourth quarter; that compares to $1.0 billion, or 0.83 percent of total loans in Q3. The allowance for loan and lease losses, net of charge-offs, reached $1.29 billion — 1.05 percent of total loans — in the fourth quarter; that compares to 0.91 percent in Q3.

SunTrust was up nearly 3 percent in morning trading on the New York Stock Exchange, to $62.63 at 11:24am US EST.

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

Disclosure: The author held no positions in STI at the time this story was published.

Like many of you out there reading “Blown Mortgage” and other real estate related blogs, I have to use my intelligence and an air freshener to sift through all the information-overload that is thrown my way every day.

But then there are days like yesterday when I had puke up a lung. I could pick on Bernice Roos, who writes for a Realtor trade group and Inman News, but that would be too easy.

My story happened when a top producing Realtor came into my office to discuss the realty market and a new marketing plan my firm is rolling out. My opening question was, “Tell me how you feel about our local real estate market today?”

And how did he respond, you ask? With the usual NAR/CAR pull-the-string-on-the puppet Realtor line of, “Interest rates are approaching an all-time low, home prices have stabilized and more inventory is hitting the market to give buyers a wider choice of homes to buy.” (the daily chorus)

Okay, I know I’m supposed to be in sales and all, but WTF?!

I smile back and reply, “Pretend I’m a potential home buyer. What are you going to do to convince me that now is a good time to buy?”

Puppet Realtor says, “We’re gonna take a slide show presentation out to the local City Council, County Board of Supervisors, Rotary, Kiwanis and Lions Clubs, to anyone and everyone who will listen and tell them this is all a media driven scare. Real estate is still the best investment they can purchase because of … (see above chorus).”

He didn’t like the look on my face. My jaw dropped and I had the “yeah, but…” eyes.

And he says, “What would you recommend?”

So I tell him. “I would advise all my clients that real estate, a home, is a great place to live – if you can afford to make the payments. That includes principal and interest on a 30 or 15-year fixed rate loan, property taxes, homeowners insurance, mortgage insurance, HOA fees, Mello-Roos supplemental taxes, repairs, upkeep, etc.”

“I would advise any investor clients that if you can’t qualify for a 30-year fixed rate, full doc loan, then pass on the deal. That if a property doesn’t cash flow including PITI and at least a 10% vacancy factor, then walk away.”

“Yes, interest rates are low because the Fed is desperately trying to fend off not a
soft landing like they predicted, but a crash landing.”

“Real estate prices have not stabilized. The average closed sale in our market is sold 15-20% of the original list price. That is a severe downward trend that will probably last a few more years.”

“Inventories are increasing, but that’s mainly because of those trying to bail out of their ticking mortgage bomb. Did you see that “a record 31,676 Californians lost their homes to foreclosure in the three months ended Dec. 31, the third-straight quarter of record-breaking foreclosures, up 421% from last year?”

Blank look on his face. He has drunk too much NAR/CAR kool-aid.

We all have very short memories. I can remember talking to a Realtor back in early 2000 who was spending most of her time on the Internet trading stocks online to make her money (on paper). She was bragging how Yahoo (ticker: “YHOO”) was up another 40 points that day to $500 a share.

I asked her if she sold and took her profit.

She said, “No. Why would I sell when the stock is going up?”

So I told her Yahoo is trading at over 800 times earnings (P/E ratio) and that by historical standards an 80 P/E was an expensive stock. This means that Yahoo could fall 90% and still be expensive.

Now granted that Yahoo has had two 2-for-1 stock splits since, but that makes the split adjusted price $125. Yahoo trades today at $19. It’s not that Yahoo was a bad company, just grossly overvalued in early 2000.

Please read the following article in today’s New York Times and repeat this mantra to yourself, “The situation with house prices looks worse. Until 2000, the relationship between house prices and rents remained fairly steady. The same could be said about house prices relative to household incomes and mortgage rates. But the boom of the last decade changed this entirely.”

“For prices to return to the old norm, they would still need to fall 30 percent across much of Florida, California and the Southwest and about 20 percent in the Northeast. This could happen quickly, or prices could remain stagnant for years while incomes and rents caught up.”

Econ 101 my blog friends. It’s not that real estate is a bad investment, but at what price?

I love real estate, but for the right reasons. Much like some girlfriends from my previous life (I’m married now) that I had to say, “No, this isn’t right for me.”

Our industry needs to clean up itself. We all need to learn to tell more borrowers “no”. You can’t afford this monthly payment. You have no down payment or even closing costs. You should rent, improve your credit score, pay down your bills and save at least a 3% down payment, then come back to me in 1-2 years and we’ll talk.

I don’t want you to buy a home. I want you to stay in the home for as long as you want without the stress of losing your home via foreclosure.

Like Martin Luther King, I have a dream too. My dream is that more mortgage lenders/originators think long-term and about the relationship with their clients. Not about the one time commission.

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AIG unit American General Finance, Inc. will purchase Equity One, the U.S. consumer finance operations of Puerto Rico-based Popular, Inc., in a deal worth $1.5 billion. The sale includes “a signficant portion” of Equity One’s mortgage loan and consumer loan portfolio, Popular said in a press statement Wednesday morning.

“We are doing the things we have to do in the U.S. mainland as we focus on our core banking franchise,” said Richard L. Carrion, CEO at Popular.

Under the agreement, AIG will look to hire an unspecified number of Equity One’s employees and will consider retaining an unspecified number of branch locations — all remaining consumer branches will close, Popular said. It’s unclear how many Equity One employees are expected to lose their jobs, although both companies said affected employees will receive severance and job counseling.

The deal is expected to close this quarter, and Popular said that it expects to take a $17.5 million charge in Q1 related to the sale.

A quirk in Fannie Mae’s charter allows the government-sponsored enterprise to purchase loans with an LTV ratio over 80 percent, fueling speculation that the GSE may be facing additional risk as insured mortgage losses mount, according to a story published Wednesday morning by TheStreet.com.

From the story:

There are a few looming questions regarding Fannie Mae’s exposure to the private mortgage insurers. One is whether Fannie Mae has adequately reserved for possible losses, because the company operates with the understanding that the insurers will pay it back.

The other issue is that if one of these insurers takes a massive hit, then Fannie Mae’s underwriting standards may come under scrutiny, and the firm may be forced into buying fewer high-LTV mortgages in the future.

Fair questions, all, in light of MGIC’s disclosure yesterday that it faces $1.3 billion in paid losses for the fourth quarter alone, and that it expects rising defaults, lower cure rates, and greater loss severity to continue to affect claims payments well into 2008.

This is, in many ways, sort of the whole-loan corollary to the counterparty risk that investment banks are now having to face in regards to bond insurers like ACA Capital and Ambac Financial (and, perhaps, MBIA). What’s less known, however, is the degree of risk that’s been taken on at major mortgage insurers.

A review of Fannie Mae’s most recent 10-K says that $272.1 billion of loans in the GSE’s portfolio or underlying MBS it issued were covered by primary mortgage insurace — that’s 12 percent of the entire single-family mortgage book of business at the end of 2006. Pool mortgage insurance covered $106.6 billion of single-family loans, according to the filing.

High LTV is in many ways the new subprime, at least in that it’s now become area of concentrated credit risk as housing prices continue to fall.

“Today, as a higher percentage of people own homes and many of them have taken on ‘too much house’ or high LTV loans, things are different,” CIBC analyst Meredith Whitney is cited as saying in TheStreet.com’s coverage. “Many previously considered ‘prime’ customers who took on 80+% LTVs are performing closer to sub-prime loans.”

Disclosure: The author held numerous put options on PMI, a large mortgage insurer, at the time this post was published; no positions in FNM or MTG.

(Hat tip, Calculated Risk) MGIC released a market update late Tuesday warning that mortgages it insures are seeing a significant increase in defaults, while cure rates are touching historic lows.

From the press statement:

Cure rates have continued to deteriorate, resulting in a higher percentage of delinquent loans that become claims, and average claim size has also continued to increase.

The bottom line: the insurer said it expects incurred losses for the fourth quarter to approximate $1.3 billion as a result. And talk about missing by an entire continent — earlier guidance, provided in October, had suggested paid losses would be between $270 to $290 million.

Looking to 2008, MGIC also revised its paid loss forecast for the year to $1.8 to $2.0 billion, up from its earlier forecast of $1.2 to $1.5 billion.

Underscoring the difficulties facing capital markets for mortgages, MGIC noted that during the fourth quarter it had halted writing bulk insurance for “loans included in Wall Street securitizations” — codespeak for all non-agency loans — and said that it was “analyzing the accounting implications of that decision on its fourth quarter results.” That last part is codespeak for we’re probably going to lose money.

Regular HW readers have seen ample previous coverage here bringing attention to historic lows in insured mortgage cure rates (see this post from September; and this post from December). The most recent 12-month moving average for cure rates stood at just 68.6 percent; the industry has never recorded an annual cure rate below 79 percent, according to available data provided by MICA.

Disclosure: The author held numerous put options on PMI, a large mortgage insurer, at the time this post was published; no positions in MTG.

Via Bloomberg, Credit Suisse estimates that both Fannie Mae and Freddie Mac face $16 billion in losses for the fourth quarter:

The government-chartered companies’ earnings and capital haven’t yet been hurt by declines in the $230 billion of AAA rated “non-agency” mortgage-backed bonds they hold, according to New York-based analysts Moshe Orenbuch and Kerry Hueston …

With other financial companies this quarter already reporting “other than temporary impairments” of mortgage-related holdings that they wouldn’t normally need to report under accounting rules, Fannie Mae and Freddie Mac may need to follow suit, the analysts wrote in a report today.

“We believe that this will likely spur the GSEs’ regulator to compel similar actions,” they wrote, referring to the Office of Federal Housing Enterprise Oversight, regulator to the so-called government-sponsored enterprises.

McLean, Virginia-based Freddie Mac’s subprime securities may be worth $8 billion to $11 billion less than the prices at which the company is carrying them on its books, while Washington-based Fannie Mae’s bonds may be worth $2.25 billion to $5 billion less, according to Credit Suisse.

These are the sort of losses that could hamper capitalization, without question.