Breaking News. CNBC is reporting that Massachucettes is charging Wall Street giant Merrill Lynch with fraud relating to their collateralized debt obligation (CDO) issuances.
More as it develops. And oh yeah, we all saw this coming, didn’t we?
Trying to follow mortgage rates has rarely been so dizzying.
Freddie Mac said Thursday that 30-year fixed-rate mortgages averaged 5.68 percent for the week ending January 31, up from an average of 5.48 percent one week earlier.
Five-year Treasury-indexed hybrid ARMs averaged 5.32 percent, up from 5.13 percent; a year ago, the 5-year ARM averaged 6.04 percent.
“Mortgage rates ended their four-week descent this week, with average rates on 30-year and 15-year fixed rate mortgages coming up by about 0.2 percentage points,” said Frank Nothaft, Freddie Mac vice president and chief economist.
Freddie Mac said that the movement in fixed mortgage rates was “broadly consistent” with the movements of Treasury bonds over the week, although brokers corresponding with HW have noted that rates have been changing — often wildly — within a given day.
Take today, for instance.
One day after Freddie’s report, an unexpectedly horrible jobs report already has mortgage rates dipping again as bond yields fall.
Tax-free bonds or no, state housing agencies are finding out that dealing with the subprime borrower mess is harder than it looks.
Bloomberg reported Friday morning that housing agencies in Massachusetts, Ohio and New York are “turning away so many applicants that they’ve had no need to raise funds.”
The news comes on the heels of a proposal by Sens. John Kerry and John Kerry (D-MA) and Gordon Smith (R-OR) to tack an extra $10 billion onto the economic stimulus package being considered by Congress to enable states to issue tax-free bonds backed by subprime mortgage refinancings.
Since New York said it would commit $100 million in July, three of the 500 loans envisioned have been made. Massachusetts extended four loans under a $250 million program started in August, and Ohio made just 36 of the thousands anticipated by Governor Ted Strickland.
… More than 50 percent of subprime borrowers are being rejected by state programs because their homes have lost too much value or they’ve accumulated excessive debt, estimates Geoffrey Cooper, emerging markets director at a unit of MGIC Investment Co., the country’s biggest mortgage insurer.
“These things are basically public relations gimmicks,” said Bruce Marks, chief executive officer of Neighborhood Assistance Corp. of America.
In other words, even if the states get $10 billion in Federal funding and are allowed to issue tax-exempt bonds backed by refinancing troubled subprime borrowers into new mortgages, very few such borrowers will likely be able to take advantage of the program — at least, not unless Capitol Hill wants to also let state agencies offer no-doc, interest-only adjustable rate mortgages.
Bloomberg reported that at least 10 states have introduced subprime refinancing programs to help stem foreclosures. Goldman Sachs has estimated that state housing agencies had planned to raise at least $430 million through the sale of taxable bonds — plans that many housing agencies are now realizing won’t be needed:
Housing officials in Ohio, Massachusetts, New York, Connecticut, and Maryland say they underestimated the extent of the crisis as well as the number of applicants.
“Often the borrower just has too much debt and the home does not have the value to support the refinancing,” MGIC’s Cooper said at a conference in Washington on Jan. 17.
Bloomberg reported Friday that Merrill Lynch agreed to pay Springfield, Mass. $13.9 million to settle a dispute over mortgage-related CDOs it sold the city. Merrill said it agreed to refund the city’s money after finding that the original purchase was made without the city’s consent.
Springfield bought its CDOs between April and June of last year from Merrill, according to city records. The value of those securities fell to $1.3 million in November …
Merrill, the world’s largest brokerage, sold Springfield investments in S Coast FD V CDO, TABS CDO, and Centre Square CDO, according to city records.
“After carefully reviewing the facts, we have determined the purchases of these securities were made without the express permission of the city,” Merrill said in a statement. “As a result, we are making the city whole and we have taken appropriate steps internally to ensure this conduct is not repeated.”
Springfield, obviously, isn’t the only local government that has lost plenty on CDO investments. While I realize that Merrill did the right thing here, and probably canned whoever executed the original trade, I can’t help but wonder if other cities aren’t going to start looking for remuneration — even if this is an isolated incident.
After all, if Cleveland can decide it’s worthwhile to sue essentially the entire mortgage industry under a “public nuisance” ordinance, I’d have to think that anything is pretty much possible at this point.
Moody’s Investors Service joined Standard & Poor’s late Thursday in updating loss projections for subprime RMBS, saying that it now expects lifetime losses on the 2006 subprime vintage to range from 14 to 18 percent.
On January 15, S&P said it had bumped up its lifetime loss estimate for the same collateral vintage to 19 percent.
“We are updating our views on the possible loan losses on the 2006 subprime vintage in response to current performance that is proving to be much worse than in prior years and is demonstrating a progressive deterioration,” said Moody’s Chief Credit Officer Nicolas Weill.
Such losses are likely to take some time to materialize, Moody’s said. Loan modifications and the unknown impact of 2008 interest rate resets, as well as a potential recession, all create what the rating agency said was “significant uncertainty” over ultimate losses.
“Current losses are still low in part because the loans remain relatively unseasoned and in part because foreclosures are taking longer than in previous years for those mortgages that have already fallen behind,” Weill said.
Not surprisingly, Moody’s warned that additional negative ratings actions are likely on 2006 subprime RMBS, and said it will look to extend its loan loss projections to 2007 originated subprime RMBS and for 2006 and 2007 Alt-A backed transactions.
“We expect the performance of subprime loans backing the 2007 vintage will be more like the performance of the loans backing the third and fourth quarter vintages of 2006 than that of the loans from earlier in 2006,” Weill said.
Which means Moody’s is expecting the 2007 vintage to really, really suck. In its report, the rating agency noted that projected losses on the 2006 Q4 vintage were as high as 35 percent.
The full report is available here.
For more information, visit http://www.moodys.com.
A brief diversion from HW’s usual coverage, but worth noting: Comptroller of the Currency John C. Dugan told a bank conference Thursday that the OCC is focusing increased attention on problems arising from high community bank concentrations in commercial real estate (CRE) at a time of significant housing market turmoil.
“The combination of these conditions is putting considerable stress on one particular category of commercial real estate lending: residential construction and development – and other categories of CRE loans will feel similar stress if general economic activity slows materially,” Mr. Dugan said in a speech before a meeting of the Florida Bankers Association.
A quick scan of recent coverage bears out Dugan’s concern; HW has covered numerous banks that have recently reported earnings problems due to residential construction exposure (Webster Financial, for one; First Horizon, for another; Mercantile Bank, for yet another).
IndyMac is rumored have dropped its construction lending division this week, as well.
Friday morning, almost right on cue, Birmingham, Ala.-based CapitalSouth Bancorp. said it recorded a $2.1 million provision for loan losses for the fourth quarter, and extra $1.1 million over the provision charge recorded in Q3. The culprit? Residential construction, of course. NPAs jumped 115 percent in one quarter to $17.4 million, the bank said.
The OCC noted that nonperforming C&D (construction & development) loans in community national banks amounted to 1.96 percent of the total at the end of the third quarter, double the rate of the year before.
The fourth quarter, so far, clearly isn’t looking much better.
Just a quick note to let everyone know that HW will be reporting on news and events from ASF 2008 next week — an important event for anyone in the secondary mortgage market. If you’ll be there, let me know: pjackson@housingwire.com. I’d be happy to take some time to meet.
Also, as of today, HW is a full-time venture for me. Which means I’ll be wearing the hat of publisher and sales rep, at least while starting up. A media kit is already in production (as is a redesign of this site), but if you’d like to get full details on advertising before creative finishes making everything look pretty, I can share the less-pretty version.
Thanks much for your support!
SunTrust is planning on closing their Denver, Dallas and Richmond wholesale branches within the next 60 days according to a highly reliable source.
From the SunTrust Web site:
We’ll provide more details as they come available; but for now just more of the same. Wholesale branches seem to be the first on the chopping block for any lender looking to weather the storm.
Excerpt:
Refinancing A Mortgage? Move Fast
Liz Moyer and Tatyana Shumsky 01.31.08, 6:00 AM ET
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The Federal Reserve has chopped short-term rates twice in the span of eight days, pushing the overnight rate to 3%, the lowest since September 2005. Can we refinance our mortgages now?A lot of homeowners certainly think so. Refinance applications made up 73% of total mortgage applications in the last week, up from 66% the previous week. The Mortgage Bankers Association's refinance index is up 29.3% in the last month and has doubled since August.
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