Refinance Free Credit

Jody Shenn at Bloomberg uncovers an interesting trend: banks with the largest portfolios of mortgage-backed securities are bulking up their portfolio of non-agency holdings, even as the market for such securities has all but disappeared — to the tune of an estimated $48 billion in new additions during the fourth quarter, according to a Barclays report released yesterday.

That boost came while the same banking institutions, including Bank of America and Citigroup, divested more than $11 billion of agency MBS. The result was that banks’ MBS portfolios reached roughly $582 billion by the end of the quarter, Bloomberg reported.

The reason for the jump isn’t because banks wanted to actively grow their positions in a troubled security class, Shenn notes:

The banks, which also include Wells Fargo & Co., Wachovia Corp. JPMorgan Chase & Co., probably boosted non-agency holdings, the analysts wrote, because of the dearth of investor demand for new securities backed by loans they were making, a need to consolidate off-balance-sheet vehicles that lost other funding, and margin calls on “leveraged” investment funds.

“It seems unlikely that banks were active non-agency buyers,” the analysts wrote.

In addition to possibly reducing the banks’ appetite for other forms of asset-backed bonds — ahem, CMBS, anyone? — it seems possible that the portfolio bulk-up is likely to keep some of the larger banks more exposed to the mortgage downturn than they might otherwise like to be.

Treasury Undersecretary for Domestic Finance Robert Steel said Thursday that current mortgage-related initiatives — including HOPE NOW’s loss mitigation programs, an ASF-led “rate-freeze” plan, and Project Lifeline — need time to work, and that now was not the time to be considering a Federally-funded mortgage bailout.

In remarks delivered at Reuters’ Housing Summit in New York, Steele provided wide-ranging insight on the broad-based repricing of risk now gripping most financial markets, led by the ongoing mortgage industry debacle:

“You can pull that thread into rating agencies. You can pull that thread and go onto the banks’ balance sheets. You can pull that thread into lots of places, but it’s the same thread,” said Steel, a former Goldman Sachs executive.

… “What should we do, if we should do anything? If we shouldn’t do anything, what are the likely ways in which it will unfold so that we can prepare?” he said.

“What we’ve tried to say from the beginning of last summer is that the repricing of risk will take time. It will work through.”

Coverage by Reuters’ Patrick Rucker focused on the prospects for a mortgage bailout:

Treasury Undersecretary Robert Steel told the Reuters Housing Summit it is proper for homeownership to hold a special status for policymakers because it is such an overwhelming share of consumer debt and so closely tied to an individual’s sense of his own wealth.

“If I default on my credit card debt, no one here knows and it has no affect on your credit card debt. If I am your next-door neighbor and I get foreclosed and thrown out, and the grass goes to heck and the home is boarded up … that affects you,” he said at the Reuters Summit in New York and Washington.

… “If I start talking about what we might do if this happens, if that happens … We want to stay on our message with what we are trying to do. Right now is a critical time to make sure we are doing as much as we can for Hope Now,” he said.

Steele did note, however, that the Treasury was evaluating a plan floated late Wednesday by the Office of Thrift Supervision to establish a secondary market for “negative equity certificates.”

Housing Wire covered the proposed plan in an earlier story Thursday.

The real estate downturn is hurting some of the nation’s largest title insurance conglomerates, with both Land America Financial Group, Inc. and Stewart Information Services, Inc. reporting fourth quarter losses this week.

LandAmerica said Thursday that it lost $45.9 million, or $3.31/share, during the fourth quarter as the real estate slump worsened, driving down transaction volume and pushing up claims reserves among the company’s title operations. The fourth quarter loss contrasts with $34.3 million in profit, or $5.61/share, in the year-ago period.

The company laid off 1,700 employees in the fourth quarter as revenue plunged more than 22 percent, it said. While LandAmerica does not break out its default services seperately, the company said robust growth in its outsourced management of foreclosures and lien monitoring helped offset losses in its lender services division.

In a similar fashion, Stewart reported a $40.2 million quarterly loss one day earlier, or $2.21/share, compared to a $43.3 million profit, or $2.36/share, one year earlier. The company saw revenue drop roughly 23 percent and laid off 675 employees during the quarter, it said.

Both companies cited increasing claims as well as increasing losses from large claims, and said that they had bumped up their claims provisions as a result.

First American, the largest title insurer in the nation, is scheduled to report earnings on February 28.

Disclosure: The author held no positions in any publicly-traded firm mentioned in the story when it was originally published.

The U.S. Department of Housing and Urban Development is fighting accusations Thursday from some in the mortgage banking industry that claim it engaged in “illegal kickbacks” to brokers as part of an incentive program designed to boost FHA origination volume.

The now-defunct pilot program paid brokers $500 dollars to steer HUD-eligible buyers into FHA-insured loans, a paid incentive that the Michigan Mortgage Brokers Association said Thursday violated the Real Estate Settlement and Procedures Act.

Via the Detroit Free Press:

Last week, HUD stopped the 3-month-old program, which offered $500 bonuses to real estate brokers who got HUD home buyers into Federal Housing Administration (FHA) home loans, after Bloomfield Hills attorney Howard Lax contacted HUD and claimed the program was an illegal kickback.

… Pava Leyrer, legislative chair for the Lansing-based Michigan Mortgage Brokers Association, also said she believes the program was illegal.

The program served several states, including Michigan, which has more than 2,100 HUD homes in Wayne, Oakland, Livingston, Monroe and Washtenaw counties. Roughly 1,300 of those are in Detroit, said Nathan Boji, a real estate agent with Re/Max Classic in Farmington Hills and HUD’s listing agent in those counties.

HUD spokespersion Brian Sullivan is quoted as denying the allegations that the program was illegal, but said that HUD had awarded the $500 bonus to about 200 brokers since November, according to the story. He’s quoted as characterizing the program as “inappropriate.”

Those interviewed by the Free Press said that they believe HUD had good intentions with the program; but Audrey Acquisti, president of the MMBA, notes:

“If anyone should know those laws,” Acquisti said, “it would be HUD.”

Clayton Holdings, Inc. said Thursday that it lost $91.7 million during the fourth quarter, as revenues in a key segment of the firm’s business fell more than 85 percent amid continuing problems in the mortgage market.

The company absorbed a $92.8 million charge to reflect the impairment of goodwill and other assets tied to its transaction management business, which includes due diligence and underwriting; it had warned of the impairment charge in early December.

Revenues, predictably, took a turn for the worse during the fourth quarter, falling to $24.7 million. That’s 58 percent off of the revenue total from one year earlier; much of the drop was driven by an associated decline in revenue contribution from Clayton’s transaction management business, which saw revenue drop to $4.9 million compared to $33.2 million in the fourth quarter of 2006.

Despite the loss, the loan survelliance business saw revenue increase slightly during the quarter to $10.4 million, compared to $10.3 million in 2006. Some investors and lenders have turned to Clayton’s surveillance services during the downturn as confidence in the rating agencies has eroded, sources suggested to HW, driving a 29 percent increase in survellience-based revenue during 2007.

The surveillance business monitored $454 billion in MBS assets at the end of last year, the company said.

“The new issuance market for nonconforming securities remained virtually shut down in the fourth quarter and our volumes were negatively impacted,” said Frank Filipps, Clayton CEO. “However, our strong cash generation enabled us to repay $25 million of debt and renegotiate our bank credit facility, giving us greater flexibility to weather this market.”

The company has been moving to position itself as a resource for servicers during the downturn, as the need to work with troubled borrowers in loss mitigation and default management outstrips available resources at many servicing shops. It announced a partnership with Experian in early February to provide services tied to ’streamlined loan modifications’ under the joint Treasury/ASF “rate-freeze” program.

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

The PMI Group said late Wednesday that it will postpone the release of its fourth quarter earnings due to delays in obtaining fourth quarter 2007 financial results from FGIC Corporation. The insurer said results for its mortgage insurance operations were complete, but that it could not release its full results without FGIC’s financials.

No date for a rescheduled earnings release was set.

PMI, along with private equity firms Blackstong Group LP, Cypress Group and CIVC Partners LP, is one of the owners of troubled bond insurer FGIC. The monoline recently has been seeking a split-up of its municipal bond and structured credit insurance businesses.

PMI’s insurance operations likely posted a loss for the fourth quarter, according to most analysts. Recently, the company said it would alter its underwriting criteria to require at least 3 percent down on any new mortgages it insures, a move expected to push down new insurance issued down dramatically during 2008 as the company looks to manage an extended downturn in the U.S. housing market.

32 percent of primary new insurance written in 2007 at PMI was for loans with an LTV above 97 percent.

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

Mortgage rates jumped dramatically during the past week, rising to an average of 6.37 percent for a 30-year conforming fixed-rate mortgage — 41 basis points above the average rate just one week earlier. According to Bankrate.com’s weekly national survey of large lenders, rates on 30-year jumbos soared to 7.55 percent. The jump in rates represents the single largest weekly increase since April 1994.

Housing Wire reported Wednesday that mortgage application activity has fallen off of a cliff as rates have risen amid a renewed focus on inflation within the bond market.

But inflationary concerns aren’t the only driver behind the mortgage rate increase, according to traders on Wall Street that agreed to speak with HW on an anonymous basis. One of the key factors now driving mortgage rates, they say, is growing secondary market sentiment that even conforming mortgages will soon be less fungible than they have been in the past.

“That sort of uncertainty gets priced into the trade, no question about it,” said one source.

In particular, while SIFMA has said it will keep newly-conforming jumbo mortgages trading on a specified-pool basis rather than including such loans in TBA trades, investors face a growing uneasiness over just what else is going to be thrown at the market. Congress is already considering a housing stimulus package that would make modifications of mortgage principal allowable in Chapter 13 bankruptcies, for one; news today that the OTS is considering the creation of a “negative equity certificate” market is another source of uncertainty.

Sources suggested to HW this week that federal regulators, as well, are considering new rules surrounding securitization designed to help provide rate benefits for ‘jumbo conforming loans.’ It’s unclear how any move by the Treasury here would impact the TBA market, in particular, but it appears that what is already out there is enough to move prices in the short-term.

The TBA trade is hinged on the perceived fungibility of mortgages being traded — on other words, that one mortgage pool is more or less similar to another mortgage pool. With the uncertainty now hanging over the mortgage markets, investors are seeing the potential for much greater risk, even in TBAs.

“What we’re seeing now may be an overreaction,” said one source, “but in the current market environment, you just can’t seem to tell what’s coming next.”

The Office of Thrift Supervision is weighing a proposal that would allow lenders to refinance underwater borrowers into a government-insured loan without immediately forgiving principal, creating a so-called “negative equity certificate” to cover the difference between the original loan amount and current property values.

The idea is that OTS-regulated lenders would establish a nominal certificate representing the negative equity from the original mortgage when refinancing a borrower into a government-insured mortgage — and that this certificate would then be used to create a tradeable market for underwater debt, rather than having the lender write-off principal completely and immediately.

From the WaPo:

The plan would separate a troubled mortgage into two parts. The first would cover the current fair-market value of the home and would be refinanced by the Federal Housing Administration. The remainder would be issued to the original lender as a certificate.

If the borrower eventually sells the home, the FHA mortgage would be paid off first. Remaining cash would be applied to paying off the value of that certificate. Anything left over would go to the borrower.

If there’s not enough profit to pay off the certificate, the original lender would take a loss, which makes this proposal a gamble. However, the plan anticipates that there would be a market where these certificates are traded. That means the lenders could sell them immediately to offset some of the loss or hold them with the hope that they will appreciate, said Jaret Seiberg, an analyst at Stanford Policy Research.

“It’s an effort to prevent foreclosures while minimizing the hit lenders might take, without socking it to the taxpayer,” said Richard Bitner, a former subprime lending executive and author of the book Greed, Fraud and Ignorance. “Compared to freezing rates, it’s an improvement.”

Bitner, however, doesn’t see the proposal having much impact because participation would likely be voluntary, he said.

The proposal is still in its early stages, and hasn’t been vetted by policymakers or banking regulators, but OTS spokeperson Kevin Petrasic told the press Wednesday that the idea is an attempt to find a solution that doesn’t use taxpayer dollars and represents a better alternative to foreclosure.

Questions, however, remain about the proposal’s effect on the secondary market. Sources that spoke with HW wondered how such “tradable IOUs” would impact original investors, given that creating a tertiary market for “negative equity certificates” would likely still entail RMBS investors taking a bath on the original loan.

“I’m concerned here about how something like this gets applied,” said another source, who asked not to be identified. “Are we talking about any borrower that’s upside down getting this sort of program?” If so, the source said, losses may actually be greater than if such a program didn’t exist. Economist Nouriel Roubini suggested yesterday that 10 to 15 million borrowers may soon owe more on their mortgage than the current value of their home.

“Not all underwater borrowers are financially-strapped,” she said. “There would have to be some mechanism for limiting who this could be applied to before I could see investors even considering the idea.”

The Govenator, Arnold Schwarzenegger unvelied a rather extensive plan to help “offset the housing slump” in California and by building new affordable housing and assistance retraining the 8,400 employees of former mortgage companies to help them corrupt move in to other industries such as health care and biotech. (Remind me to read the labels of any new medicines closely.)

The plan includes a bunch of worker retraining for those laid off by the industry. (As an aside we all know that the 8,400 is a joke, since many of the job losses were suffered by 1099 contractors in small shops who wouldn’t be reported as laid off.) Most surprisingly the plan calls for the building of new “affordable” housing. Which is where things start to get hazy for me. But first a recap of the plan.

From Governor Schwarzenegger’s plan to reduce the housing slump’s impact on California’s economy:

Governor Arnold Schwarzenegger today awarded $73 million for 40 housing projects in 26 cities across the state, helping 1,611 California families rent or purchase affordable housing.

The Governor also announced that the federal government today awarded up to $5.6 million to help mortgage and banking industry workers laid off as a result of the subprime crisis make career transitions to high-demand jobs in other industries. “We applied for this grant because we want to help displaced workers transition to new jobs and the money will go to the counties with the greatest need. We are not just sitting by and waiting for the economy to pick back up. We are taking all the action we can to keep people working and rebuilding California,” said Governor Schwarzenegger.

“Many of these laid-off workers have skills that are transferable to jobs in high-growth, high-demand industries, such as healthcare and biotech. We want to do whatever is possible to help them make this transition,” said Labor and Workforce Development Agency Secretary Victoria Bradshaw.

The grant from the U.S. Department of Labor will focus on 12 areas with the highest needs located in the following counties: Alameda, Contra Costa, Los Angeles, Orange, Riverside, San Diego, Sonoma and Stanislaus. One-Stop Centers in these counties have been providing rapid response services to the affected mortgage and finance workers and employers. These rapid response services, conducted with Workforce Investment Act funds, include information on the availability of unemployment insurance benefits and other employment services.

More Housing?

So let me get this straight? We’re going to pump another $100 million in to government sponsored building of new homes? What are they smoking up in Sacramento, and can a brother get some love? I mean I get helping displaced workers, and providing homeowner awareness and pushing for higher loan limits; but building affordable housing seems like a tremendous waste of money.

My thinking: if they just sit tight long enough pretty much everything inside of California (save the coast) will be affordable again. More housing cannot be the answer to an economic crash caused by? A GLUT OF HOUSING!

And to add insult to injury, wasn’t this whole mess precipitated by trying to get non-traditional homeowners in to homes? People bought homes they couldn’t afford, who didn’t have the credit stability to maintain the payments. Does anyone in Sacramento remember this? Wowsers. I’m truly baffled.

Counties that Need Help the Most

I love seeing Orange County on the list of counties that will receive the most worker retraining aid. Can you see the parking lot at the government offices during a training session? Unemployed loan officers in 525 BMW’s learning how to transition to biotech. I get giggly just thinking about the irony of it all.

Schwarzenegger Hard at Work

This is not the first package put together by the California government in an attempt to relieve some of the effects of the crashing California housing market. Here are a few others:

• Announced $69.5 million in permanent low-interest loans from the Proposition 1C housing bonds to jumpstart 14 affordable multi-family projects up and down the state helping more than 1,000 California families and individuals realize the dream of an affordable rental home.
• Announced more than $72 million in federal HOME Investment Partnerships Program funds to provide assistance to first-time homebuyers, reduce the number of bank owned homes and increase the number of rental properties.
• Called on Congressional leaders to quickly pass legislation to raise limits for government loan programs to help reduce foreclosures and allow more people to achieve the American dream with solid, responsible loans.
• Joined the OneCalifornia Foundation to announce a bridge loan fund for homeowners facing foreclosure in Oakland.
• Launched a $1.2 million public awareness campaign to help educate homeowners about options that can help them avoid losing their homes to foreclosures.
• Announced an agreement with major loan servicers to streamline the loan modification process for subprime borrowers living in their homes.
• Signed legislation to increase protections for Californians who own or plan to purchase homes and to expand affordable housing opportunities.

Of course Schwarzenegger has been campaigning hard for the conforming loan limit increase from the outset of the meltdown. Passed in the recent federal stimulus package, it now seems the loan limit increases will have a decidedly smaller impact than originally hoped for.
You Can’t Stop them from Trying

So while we’re all worried about a federal government bail out the legislators up in Sacramento have been busy printing money and spreading the love with an assortment of bond and other debt measures to ensure that I won’t be seeing a state tax break any time this millennium.

When Will They Realize?

When will the realization hit that they cannot control the crashing housing market? They cannot control the overbuilding that has been done. They can’t undue the rampant fraud that was perpetuated at all levels of the California real estate and mortgage pyramid. They can’t make Riverside a more desirable place to live. They can’t make everyone who was 100% financed equity positive.

They can do a little, and it will help a little - but no matter what this state is going to hurt bad for some time to come.

First lets take a look at what exact they do. A mortgage broker (or consultant/specialist) is an independent agent, an intermediary between you the consumer and the mortgage lender. The mortgage broker /specialist will shop the available lenders to find the mortgage product that offers the best combination of features, options and rates to suit your individual circumstances. The best part - depending on your credit picture - there is no charge to the consumer for the service! The mortgage broker /specialist’s fee is normally paid by the lender. With fluctuations in interest rates, homeowners have become more aggressive in seeking out the best terms from a lender. According to stats culled by the Canada Mortgage and Housing Corporation (CMHC) more than 50 percent of Canadian home buyers accept the first rate their bank offers. Not only does that mean most of them are settling for the first quote, but that the majorities are not using a mortgage broker. When applying for a mortgage at your local bank they can pull anywhere from 1 to 2 credit checks on you. As we know the more credit checks the lower your credit score will be. When applying for a mortgage through a mortgage broker /specialist they check your credit only once and they are able to use that report and submit your application to over 30 mortgage lenders multiple times. Another plus about going to a mortgage broker is that some lenders only accept applications from mortgage brokers only. A mortgage broker can also be a source of information and an unbiased help in finding the options available in the mortgage industry today. Wondering about the advantages of refinancing? Want more information on the Home Buyers Plan? How about advice on adjustable term mortgages? Having problems getting a mortgage because you’re self-employed? Or maybe you need special help arranging financing for an investment property. These are the kinds of issues a mortgage broker can help with, and at no cost to the buyer. To find your local mortgage broker /specialist use this member search on Xpress Property Xchange (XPX.ca) to find one closest to you!