Refinance Free Credit

GMAC LLC, corporate parent of ailing mortgage lender and servicer Residential Capital LLC, faces “substantial difficulty” if market conditions don’t improve, Bloomberg reported Thursday after obtaining an investor letter from Cerberus Capital Management LP.

From the report:

“We have detailed contingency plans in a continuing worsening environment,” [Steven Feinberg, Cerberus founder] wrote in a Jan. 22 letter to investors, a copy of which was obtained by Bloomberg News. “However, if the credit markets continue to decline and we find ourselves in a prolonged environment of capital market shutdown, GMAC could run into substantial difficulty.” …

“The good news is that we bought GMAC cheaply enough so that even with all the bad news in the mortgage market and credit markets, we still are in reasonable shape with our overall investment,” Feinberg, 47, wrote in the nine-page letter.

The letter outlines worst-case scenarios for investors, Cerberus partner Tim Price said in an interview today.

“The point of the letter was to underscore the risks in the investment,” Price said, referring to GMAC. “We don’t expect everything we outlined to go wrong and we remain bullish on the investment.”

GMAC reported a fourth-quarter loss of $724 million on February 5, with ResCap posting a $924 million loss on its own. ResCap lost $4.3 billion in 2007 as the mortgage industry endured perhaps its worst year ever, and shed 35 percent of its workforce.

In a scathing op-ed published Thursday at the Washington Post, current New York governor and former New York AG Eliot Spitzer accuses the Bush administration of being a ‘partner in crime’ to the current subprime mortgage debacle. Spitzer focuses on the Office of the Comptroller of the Currency, which he said was an instrument for “an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.”

Recalling the fight that helped him make his name, Spitzer writes:

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

In what’s clearly becoming an all-out assault on Bill Ackman’s short position and his allegations that the insurer is undercapitalized, after CFO Charles Chaplin earlier questioned Ackman’s motives in his testimony on Capitol Hill on Thursday, MBIA later this morning released the text of a letter sent to regulators in response to Ackman’s research (called the ‘Open Source Model’). Citing “major errors and omissions,” MBIA provides a detailed point-by-point rebuttal that some serious sources seem to be taking as a cogent response.

Via the Alea blog, some strong words:

The biggest flaw in Mr Ackman model is that he doesn’t appear to know the difference between an “insured credit default swap” and a plain vanilla credit default swap. That’s enough to dismiss his alleged analysis as self-serving propaganda. In most civilized countries, individuals actively campaigning to destroy important financial institutions would be behind bars where they belong.

Yves Smith, an investment banker blogging at Naked Capitalism, sees MBIA’s move to suggest further in its testimony that it doesn’t need a bailout as “a remarkable bit of chutzpah. Everyone agrees that a loss of a triple A rating will be extremely damaging to the two big bond insurers, but MBIA maintains otherwise.”

Smith also has questions about NY Insurance Superintendent Eric Dinallo’s plan to break up the bond insurers, shearing off the RMBS and mortgage-backed CDO junk portfolio and isolating it from the rest of the insurers’ book of municipal bond insurance:

… priorities have been turned on their head. Before, the reason for a rescue was to prevent carnage on Wall Street. That objective has now been shunted aside as municipalities are hit by the seize-up in the auction rate securities market ….

… This seems to be a misguided application of the “good bank-bad bank” approach used in the saving & loan workouts.

… It also isn’t clear if there is any precedent for setting priorities among policyholdiers in this fashion, by industry.

A further complication is that Dinallo does not regulate #2 monoline Ambac; that falls to the state of Wisconsin, and Dinallo’s counterparty there, Sean Dilweg, has been notably silent. And MBIA, the guarantor over which he does have authority, is fighting him tooth and nail.

I haven’t seen much discussion around Fitch’s assertion in its own testimony that the entire monoline business model may be approaching something akin to irrelevance, but I get the feeling that MBIA’s chutzpah is tied directly to defeating that sort of sentiment. A ratings downgrade of the number one player would clearly hasten the logic that is already asking: well, do we really need them? And I’d have to think that would be more damaging to MBIA’s business than any sort of actual downgrade — so the company is taking the fight to the industry, in an effort to ensure that its relevance, perceived or otherwise, doesn’t wane as the result of current market woes.

Personally, HW is with Felix Salmon at Portfolio.com; we don’t really have a dog in this fight, beyond an interest to see who — if anyone — will want to step up and insure new RMBS and (if they continue to exist) MBS-backed CDO issuances when the dust finally does settle.

While the monoline business may or may not be less important in the municipal bond markets due to the unbelievably low incidence of defaults, the guaranty business is actually far more important to the MBS business than most have given attention to thus far — precisely because defaults can and do happen.

For secondary mortgage market participants, resolving this crisis isn’t just a piece of the puzzle; it might be the puzzle. At the American Securitization Conference in Las Vegas last week, many investment bankers suggested on panels and in hallways that the bond insurer mess is the single largest issue keeping the private-party market from having a chance at establishing any modicum of recovery going forward.

Disclosure: The author held no positions in any company mentioned in this story at the time it was published.

In testimony delivered today to the House Financial Services subcommittee on capital markets, MBIA CFO Charles Chaplin blamed ‘activist’ short sellers for much of the company’s current predicament, and said that the maligned bond insurer was “well-capitalized” and not in need of any bailout attempt.

“First, the notion of a ‘bail out’ of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,” Chaplin said. “For this reason MBIA does not see the need for a Federal bailout of the financial guarantee industry.”

Numerous monolines have been the target of bank-led bailout efforts, in conjunction with an organizing effort from New York Insurance Superintendent Eric Dinallo. In his own testimony, Dinallo said that his office has been floating around the idea of breaking up the monolines in order to protect the “healthy” part of their businesses.

Insurers’ decision to provide financial guarantees on mortgage-backed securities and CDOs have driven all of the market problems thus far, and Dinallo apparently wants to isolate that book of business.

“We cannot allow the millions of individual Americans who invested in what was a low-risk investment [municipal bonds] lose money because of subprime excesses,” he said. “Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects.”

Looking for blame, a crisis of investor confidence
MBIA’s Chaplin also said “activist short sellers” have “gone to substantial effort to undermine the market confidence that is critical to MBIA’s business,” taking direct aim at Pershing Square’s Bill Ackman, whose well-documented short position and associated research suggesting that the monolines are undercapitalized have caused quite a stir.

Chaplin blamed Ackman nearly entirely for preventing MBIA from being able to raise additional capital, saying his “actions were carefully timed to coincide with individual elements of MBIA’s capital raising program.” The MBIA CFO said he wanted regulators to work with the Securities and Exchange Commission to “to curtail the unscrupulous and dangerous market manipulation activities of short sellers.”

The Financial Times’ Alphaville blog was buying none of it, however, in a post titled ‘Monowhine’:

Unable or unwilling to actually explain itself, or its problems, the bond insurer has decided instead that its whole crisis has been caused by Bill Ackman, who is shorting its stock via his hedge fund, Pershing Square.

Nevermind the fact that Bill Ackman has been shorting MBIA shares for two years - well before the problems for MBIA really took off …

The defence is patently absurd, and elsewhere in the deposition, MBIA is pointedly vague. Explaining its capital position, MBIA states “the standard has been somewhat of a moving target.” Odd that, for a sitting duck.

Michael Callen, Ambac’s newly-installed CEO, was more subdued in his remarks than his industry counterpart. Callen also suggested, however, that the current crisis was also one of investor confidence moreso than an issue of financial stability.

“The current uncertainty surrounding bond insurers’ ratings, when combined with illiquid and anxious credit markets, means greatly diminished demand from investors,” Callen said. “Demand from issuers, however, is not diminished. Issuers continue to anxiously await the reopening of the market.”

Keith Buckley, Fitch Ratings’ global head of insurance, said that despite issuer interest, such a market rebound may be further off than most would like.

“Fitch believes the outlook for the bond insurance industry is highly uncertain,” Buckley said, “and that it is likely that several companies may ultimately exit the market via voluntary runoff.” He also dropped perhaps the largest bomb in the entire hearing, suggesting “that bond insurance may be a helpful, yet nonessential product for the economy.”

More than a few commentators have speculated recently that the monolines are more or less fighting for their relevance; but Buckley’s remarks represent the first time a market participant has echoed such thoughts. (And a rating agency, no less.)

Reuters’ Al Yoon hits it out of the park today on the trouble that likely lies ahead for many of the nation’s servicing shops, both large and small:

“If they are not careful, servicers may be the next in line” to follow dozens of failed mortgage lenders, said Rick Smith, chief executive officer of Marix Servicing LLC in Phoenix, Arizona. “They are not getting more loans, but need twice as many people. How long can you operate at a negative cost of service?”

Servicers of subprime loans, such as Ocwen Financial Corp., are in the worst predicament since the companies must send payments to investors of mortgage-backed bonds created out of pools of home loans even if homeowners are delinquent, analysts said.

Ocwen, for the record, has a much-coveted servicing contract from the VA; and, of course, it’s not just Ocwen that’s having to provide advances — every servicer faces this problem. And that should provide some pause to a part of the mortgage industry that operates on pretty thin margins to begin with; doubly so when we hear broad public commitments to increasing loss mitigation from six of the nation’s largest financial institutions. Each of the big six has a sizeable servicing portfolio of its own.

But while all servicers will face this new sort of crunch, it is particularly firms like Ocwen — stand-alone servicing shops that aren’t married to a deep-pocketed bank — that are most likely to be sent reeling by a flood of troubled borrowers. While servicers are likely to eventually recoup most of their advances, the time horizon on collecting those repayments is increasing exponentially as REO inventory continues to pile up and goes unsold for months on end.

Which leads us to what could end up being the single largest inflection point in the servicing industry’s history. This is an industry — particularly in default management — that has long operated under cost mandates moreso than any sort of real value proposition:

“There are a lot of actions (by servicers) that are cost-minimizing and not performance-maximizing,” Rod Dubitsky, a managing director at Credit Suisse, said on an American Securitization Forum panel, the nation’s biggest bond lobbying group, in Las Vegas last week.

Reuters cites Marix in particular, a new-entrant into the servicing space, as a servicer looking to differentiate by paying the bucks needed to bulk up loss mitigation. The company is putting a focus on loss mit specialists instead of bulking up call center staff as part of a way to win servicing contracts from frustrated investors, according to Reuters.

But it’s not just loss mitigation that’s being put under the microscope now that the number of distressed borrowers is rising; foreclosure and REO management also face similar strains, as many servicers outsourced these two areas during the housing boom in an effort to keep costs as low as possible.

As the volume of defaults have continued to rise dramatically, servicers are now finding themselves increasingly reliant on an often unregulated and patchwork network of vendors to ensure that foreclosures are properly processed, evictions are managed properly, and so forth. Some servicing executives I’ve spoken to recently have said they’re having to rethink their operating strategy. “We can’t be held hostage by fact that one of our vendors is the weakest link,” said one executive, who asked not to be named.

Reuters quotes Bear Stearns’ Tom Marano as saying that “servicing is going to be the focus…of how we get out of all this,” and I agree. But, as the Reuters story highlights, I’d suspect that more than a few servicers will be rethinking the rules of the game needed to get there.

In a wide-ranging interview with Bloomberg TV yesterday immediately after President Bush’s signing of the economic stimulus bill, Treasury secretary Henry Paulson said that the Presidential Working Group on Financial Markets — including Fed chief Ben Bernanke and SEC chairman Christopher Cox — will be looking to propose changes to the securitization process.

“You can’t have gone through the process we have gone through without knowing there needs to be some changes,” Paulson said. “First, we need to get through this period with as little impact as possible on our economy. And, secondly — just as importantly — we need a strong policy response.”

The full interview is below.

(Those reading HW via email will need to visit the site to see the video; more are available on HW’s video channel.)

Morgan Stanley is cutting more than 1,000 jobs here and in the U.K. as it scales back its residential mortgage lending division in both countries.  Pundits have argued that European housing markets may be more overheated than here in the states and Morgan Stanley is taking its remaining chip stack off the table and waiting for a better game. (apologies for the random poker reference)

From the Market Watch article on the Morgan Stanley job cuts and mortgage lending scale down:

Morgan Stanley said Wednesday that it is scaling back its residential mortgage business and ending its lending program in the United Kingdom, becoming the latest victim of the ravaged home lending business.

The firm said the moves would eliminate a cumulative 1,000 jobs the U.S. and the U.K.

“Given the continued dislocation in the mortgage markets, we have restructured our residential mortgage business to ensure we are appropriately positioned for the environment going forward,” Anthony Meola, chief operating officer Morgan Stanley’s  U.S. residential business, said in a statement.

As part of the change, the world’s second-largest securities firm will close its British mortgage business, Advantage Home Loans.

The bank said it would still offer residential mortgages through the Morgan Stanley Credit Corporation, but only through its residential brokerage. The arrangement will continue an existing partnership between the bank’s global wealth management and institutional securities business.

Morgan Stanley said it will continue servicing mortgage loans through its Fort Worth, Texas-based Saxon Mortgage Service platform.

Can you blame them?  Hemmoraghing cash, taking massive losses, attempting to mend relationships with wealthy overseas investors, and sitting on a big pile of who-knows-what in mortgage debt can make anyone gun shy.

Charlotte, N.C. (PRWEB) February 1, 2008 -- You always hear about refinancing, but when exactly is the right time for you to consider making a change to your mortgage? LendingTree.com shares three scenarios in which refinancing might be attractive to homeowners and may also save them some money:

When interest rates drop
If interest rates have dropped at least half of one percentage point from the level they were when you acquired your original mortgage, you might want to weigh the financial advantages of refinancing. For example, if you started with a 30-year fixed rate mortgage of $150,000 at 5.5 percent, but rates have dropped to 4.5 percent, you would realize a principle and interest savings of $91.65 per month. Check out the LendingTree refinancing calculator to see if now is a good time for you.

When interest rates may rise
Obviously you may want to consider refinancing when rates drop, but what about when the market is anticipating that rates will rise? This is also a good time to lock in a new rate, particularly if you have an adjustable rate mortgage (ARM), and would like to move to a fixed rate mortgage to insulate yourself from a rising and falling interest rate environment.

When you want to accelerate equity
If your income has risen, you might want to consider paying off your mortgage faster by moving from a 30-year term to a 15-year term. This refinancing route will help accelerate the equity buildup in your home, while also cutting down the amount you will pay in interest costs. In this scenario, your monthly payments will likely rise, so make sure that your higher income is enough to accommodate the increased amount.

One last tip - Keep in mind that refinancing isn't free. There are fees involved, and you may even need to pay for points to obtain a lower interest rate, so weigh the financial advantages carefully to ensure that refinancing is indeed a good move for you.

For more information on refinancing a home, please visit the LendingTree Smart Borrower Center.

About LendingTree, LLC
LendingTree, LLC is the nation's number one online lending exchange, providing a marketplace that connects consumers with multiple lenders that compete for their business. Since inception, LendingTree has facilitated more than 23 million loan requests and $185 billion in closed loan transactions. LendingTree provides access to mortgages and refinance loans, home equity loans/lines of credit, auto loans, personal loans, credit cards and high-yield savings accounts via www.lendingtree.com and 800-555-TREE.

Launched in 1998 with headquarters in Charlotte, North Carolina, LendingTree, LLC also owns and operates LendingTree Loans sm, LendingTree Settlement Services, LLC, GetSmart®, and HomeLoanCenter.com. LendingTree, LLC is an operating company of IAC.

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President Bush on Wednesday signed H.R. 5140, the Economic Stimulus Act of 2008, making official a temporary boost to both conforming and FHA loan limits. The new law boosts the GSE conforming limit to as much as $729,750 through the end of this year, and also raises FHA lending limits to the same level for high-cost areas.

“I know many Americans are worried about meeting their mortgages,” President Bush said prior to signing the bill. “My administration is working to address this problem.” Bush cited HOPE NOW and the recently announced Project Lifeline initiative as examples of ongoing work by the administration to address the housing crisis.

A White House-produced fact sheet covering the new growth package is available here.

The U.S. Department of Housing and Urban Development now has 30 days to publish a database of house prices that will be essential in determining which markets get access to the new ‘jumbo conforming’ or ‘expanded FHA’ loan products.

Of course, that could prove to be bit of a problem in and of itself, given that HUD doesn’t currently gather or publish home price data. Bankrate’s Holden Lewis was on this right from the start; he and I had chatted briefly on the matter when Congress first passed the bill:

The Office of Federal Housing Enterprise Oversight, or OFHEO, compiles periodic indexes of home prices. Fannie Mae and Freddie Mac use the OFHEO data each November to update the next year’s conforming limit.

The Federal Housing Finance Board and the National Association of Realtors both collect and publish home prices. The FHA takes information from both entities to calculate the FHA limits for each metro area.

Congress could have pegged the conforming and FHA limits to data collected by OFHEO, the Federal Housing Finance Board or the Realtors. But it didn’t. Instead, the law says: “The secretary of Housing and Urban Development shall publish the median house prices and mortgage principal obligation limits … for all areas as soon as practicable.” The law gives HUD 30 days to publish the database of house prices.

The simplest solution would be for HUD to use the same house price information it uses to calculate FHA loan limits. But a HUD spokesman says: “We have not yet determined if the same data will be used to make the new calculations.”

That leaves lenders in the dark until HUD makes a decision.

While price designations aren’t yet known, a few industry sources close to the process have suggested that the new conforming limits won’t be as broadly applied as many might expect; just 15 counties in California might be designated as eligible for the loan limit increase, for example.

That’s not the only grey area out there, of course — there’s also the as-of-yet unclear issue of TBA trading in the secondary market that will need to be settled, something HW has covered often recently. (The unconfirmed word from our sources today is still that SIFMA wants to keep the new ‘jumbo conforming’ loans out of TBA pools.)

It’s also unclear exactly how the GSEs will price the newly-conforming loans, given that neither Fannie nor Freddie have experience underwriting within the jumbo mortgage market.

Similarly, it isn’t exactly clear what the initial underwriting criteria will be, although most expect it to at least sit close to existing ‘traditional conforming’ guidelines — if not ending up more restrictive. “OFHEO has already gone on record saying that jumbo loans are more risky, so I wouldn’t be surprised if the underwriting guidelines end up being tighter than what you’d see for usual conforming products,” said one executive at a large lender, who asked not to be identified.