Refinance Free Credit

RealtyTrac announced today that foreclosures are up markedly. While the number of foreclosure filings, which includes default notices, auction sales notices, and bank repossessions, rose 8% in January compared to the previous month, the new figures represent a 57% increase compared to a year ago.

While the number of subprime mortgages, especially those that were written in 2006 when rational lending guidelines took a hiatus, is a major factor contributing to this increase, another trend that’s emerging is painting a disturbing picture.

A few days ago, Global Economic Analysis (GEA) posted a screen shot from a particular Washington Mutual Alt-A mortgage pool known as WMALT 2007-0C1. The screen breaks down the pool of mortgages into the typical categories, including delinquencies. Here are some of the highlights from the pool:

Weighted Average LTV = 78%
Fico Score = 705
Full Doc Loans = 11%
Geography = 48% California, 15% Florida

The chart breaks down performance by month, starting with July 2007. By most standards, 705 is a respectable credit score, which makes the delinquency numbers all the more surprising. In a period of 7 months, this pool is showing a massive foreclosure rate of 13.17%. Add REOs into the mix and the figure goes to 15%. Even the vintage 2006 subprime pools didn’t default at such a rapid rate.

GEA poses an interesting question as to whether the FICO system has lost its mind or if maybe there’s a larger issue at work. Although it’s hard to imagine borrowers with a 20%+ equity stake (albeit phantom like) and strong credit scores defaulting at a rate that would lead any servicing portfolio manager to jump out of the nearest window, the numbers seem to indicate that borrowers may be walking away when they are 30 or 60 days delinquent, not even waiting for foreclosure. In December 2007, the 90 days delinquent category stood at 3.79%. Even if every one of these delinquencies became a foreclosure, the figure should only double to 7.58% in January. Instead, the foreclosure figure is 13.17%.

A look at the details shows that nearly 93% of the pool was rated AAA yet almost 15% of the entire pool is in foreclosure or REO after 8 months.

What does it all mean? Until recently, I may have been one of the last holdouts on the FICO bandwagon. I’ve seen enough delinquency reports to make me believe in the ability of FICO to accurately predict performance. But something is terribly wrong with this picture. Credit scores north of 700 have not, in my experience, shown such poor performance levels so quickly. While it’s possible that a deterioration in the underwriting guidelines (e.g. reverses after closing) that we saw on the subprime side became part of the fabric in Alt-A lending, it doesn’t explain these numbers, even if most of them were stated income loans. Unless of course, these were mostly No Doc loans, meaning that most of the borrowers didn’t have jobs. It’s hard to imagine just what was going on in the underwriting department.

If there was ever a doubt that the phenomenon recently dubbed as “jingle mail” actually exists, wonder no more. It’s alive and well. Hopefully, it won’t be still be around around come Christmas time. But given the recent trends, that may be wishful thinking.

Note: Richard Bitner is the author of Greed, Fraud and Ignorance: A Subprime Insider’s Look at the Mortgage Collapse. As a 14-year veteran of the mortgage industry, he spent five years as the President of Kellner Mortgage Investments, a subprime mortgage company. In addition, he was a Director for GMAC Residential Funding and the National Training Manager for GE Capital Mortgage Insurance (Genworth Financial).

U.S. home prices in the conforming mortgage market diverged sharply depending on whether the mortgage was a purchase or refinance transaction, according to data released Tuesday by the Office of Federal Housing Enterprise Oversight.

A price index looking only at conforming purchase transactions — excluding appraisals used for refinancing — found that prices fell dramatically, dropping 1.3 percent between the third and fourth quarters of last year. That’s a sharp decline when compared to the 0.3 decline posted between Q2 and Q3, and it led to a 0.3 percent annual price decline during 2007 for purchase transactions, OFHEO said.

The annual price decline was the first four-quarter decline in the purchase index since the series began in 1991.

Adding in refinancing appraisals, however, erased any evidence of a price decline: home prices actually appeared headed upwards when refinancing activity was included in the fourth quarter index. As a result, OFHEO’s all-transactions housing price index posted a 0.1 gain in the fourth quarter on a quarter-over-quarter basis, and 0.8 percent gain over the past year.

Evidence of inflated appraisals?
OFHEO director James Lockhart only indirectly addressed the divergence in price trends, saying that the results illustrated greater stability in the conforming mortgage market.

“Both OFHEO’s purchase-only index and the all-transactions index show relatively greater house price stability than do other nationwide house price indexes,” he said. “That may reflect, in part, the greater stability in the prime, conforming mortgage market served by the Enterprises than in other segments of the mortgage market,” Lockhart said.

Or it may reflect inflated appraisals, according to sources interviewed by Housing Wire, who said that appraisers face greater pressure to be aggressive on their valuation opinions when the transaction is a refinance.

During the housing boom, that pressure was to hit a target value often so that the borrower could obtain cash-out from the transaction. During the bust, the new pressure appraisers face may be to hit a target value high enough so that the same borrower doesn’t lose their house.

“You’re not looking at the potential loss of a home if an appraisal comes in too low for a purchase transaction,” said one source, who asked not be named in this story. “So the appraisals are sort of more free there to come in where the appraiser really thinks market value is. That’s not always the case if we’re talking about refinancing in this market.”

The mortgage industry has been under intense pressure from the public and from government officials to help millions of borrowers that are faced with the prospect of a mortgage rate reset refinance into a GSE-backed or government-insured fixed-rate loan. But faced with prices that are declining in many neighborhoods, refinancing has become increasingly problematic as highly-leveraged borrowers find themselves owing more on their house than it is currently worth.

It’s pressure that some industry sources think appraisers feel, even if only indirectly.

“Do you think an appraiser wants to be the reason that someone didn’t get refinanced, and as a result lost their house? No way, no how,” said one source that spoke with HW on the condition of anonymity.

Both Fannie Mae and Freddie Mac, who are regulated by OFHEO, were subpoenaed in November of last year by New York Attorney General Andrew Cuomo, who is suing the First American Corp. over the appraisal practices of its subsidiary eAppraiseIT.

The Wall Street Journal reported Tuesday that both GSEs are nearing a deal with Cuomo’s office that would eliminate broker-ordered appraisals completely, potentially in response to claims that appraisals were being inflated as housing prices rose — and, now, that in some cases they’re being inflated as prices drop.

Disclosure: The author held no positions in any publicly-held company mentioned in this story. HW reporters and writers follow a strict financial disclosure policy, the first in the mortgage trade.

Talk about putting a market into the deep freeze. MBIA Inc., the nation’s largest bond insurer and one of the giants in the mortgage-backed securities market, said yesterday that it has suspended underwriting any new structured finance deals pending a possible split up of the company.

In a letter to shareholders published late Monday, MBIA CEO Jay Brown wrote that the beleaguered monoline — which saw its ratings affirmed earlier in the day by rating agency Standard & Poor’s — has “suspended the writing of all new structured finance business for approximately six months.”

It’s unclear if other insurers will follow suit — particularly Ambac, which also saw its ratings preserved yesterday by S&P — but MBIA’s decision clearly dampers any hope secondary market participants had for a short-term rebound in the MBS market.

Brown also said that MBIA will eliminate its quarterly dividend in an effort to preserve capital going forward, and warned that more market-to-market activity lay ahead.

“It is clear that the continued lack of any market valuations based on cash trades continues, and the extreme spread widening we and others are forced to rely on for valuation in the credit derivative market means we are likely to have another MTM [mark-to-market] in the first quarter,” he wrote. “And the continued uncertainty surrounding the housing market, liquidity for refinancings, impact of the interest rate cuts and Congress’ economic stimulus legislation mean we will need to continuously review our loss reserve modeling assumptions.”

MBIA remains concerned about Pershing Square investor Bill Ackman, whose short position and publicly-circulated research on the monoline have caused investor and market concern. Brown characterized Ackman as someone who “will stop at nothing to increase his already enormous personal profits as he systematically tries to destroy our franchise and our industry.”

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

Hat tip to good friend of Blown Mortgage, Chris, for sending this along:

US Bank is eliminating its 100% financing product on the wholesale channel as of tomorrow.

No word on whether this is a regional or nation-wide change nor if it’s been eliminated from the retail channel.

Countrywide out of Option ARMs, 100% disappearing. We’re definitely in another tightening cycle.

If you have any additional information send it along!

On the heels of an announcement to start February that saw $139 billion of subprime residential mortgage-backed securities put on negative watch by Fitch Ratings, the agency has been busy slashing the ratings of nearly every large RMBS deal issued in 2006. The latest series of cuts was announced late Monday, with 10 Ameriquest and Argent-originated subprime deals affected.

Total downgrades were an eye-popping $8.1 billion, while affirmations totalled just $1.6 billion, Fitch said in a press statement. $4.3 billion remains on negative rating watch, even after downgrades to numerous ‘AAA’ rated tranches.

The downgrades here are noteworthy for two reasons: one, because the vast majority of downgrades came on Argent-originated deals — Argent was the wholesale counterpart to Ameriquest’s retail origination business. Many in the industry have noted the brokered subprime deals have suffered significantly worse performance relative to direct originations.

Two, because more than a few senior bondholders are going to be forced to mark their holdings to market, what with the number of former ‘AAA’-rated bonds taking a hit:

In some commentary published in mid-January, I’d noted that sources were suggesting that the Federal Deposit Insurance Corp. was beefing up staff in anticipation of a spate of possible bank failures.

Which brings us to the Wall Street Journal’s coverage Tuesday of, ahem, the FDIC beefing up staff in anticipation of a spate of possible bank failures. Same story, different month:

The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation’s housing and credit markets continue to worsen.

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up “for preparedness purposes.”

… The agency, which insures accounts at more than 8,000 financial institutions, is also seeking to hire an outside firm that would help manage mortgages and other assets at insolvent banks, according to a newspaper advertisement.

If anyone is bidding for the failed-bank mortgage servicing business and can share details — on or off the record — let us know.

Home prices fell at a record pace in December, with 20 of the nation’s largest metropolitan areas recording an annual price decline of 9.1 percent during 2007. According to the Standard & Poor’s/Case-Shiller national price index, prices fell 8.9 percent during the fourth quarter compared to one year earlier, the largest drop in the series’ 20-year history.

“We reached a somber year-end for the housing market in 2007,” says Robert J. Shiller, professor at Yale University and chief economist at MacroMarkets LLC. “Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates.

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All MSAs trending down in price; a record pace
Miami remained the weakest market, according the the index data, reporting a double-digit annual decline of 17.5 percent, followed by Las Vegas and Phoenix at -15.3 percent each. In December, San Francisco slipped into negative double-digit territory with an annual return of -10.8 percent.

Charlotte, Portland and Seattle are the only three MSAs still experiencing positive annual growth rates; however, all MSAs recorded a drop in prices between the third and fourth quarters of last year.

“Looking closely at these negative returns, you will see that 14 of the metro areas are also reporting record lows and eight are in double digit decline,” Shiller said. “The monthly data paint a similar picture, with all metro areas now reporting at least four consecutive negative monthly returns.”

Notes

Many economists have taken to comparing the current downturn in housing to the early 1990s … such a comparison might not make sense, given that during the 1990-1991 recession, the annual price rate bottomed out at -2.8 percent .. currrent annual prices drops are more than 3 times as great as those seen in the early 1990s.

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

Home prices fell at a record pace in December, with 20 of the nation’s largest metropolitan areas recording an annual price decline of 9.1 percent during 2007. According to the Standard & Poor’s/Case-Shiller price indices, released Tuesday, fourth quarter home price declines were the largest in the series’ 20-year history.

“We reached a somber year-end for the housing market in 2007,” says Robert J. Shiller, professor at Yale University and chief economist at MacroMarkets LLC. “Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates.

click for larger version

All MSAs trending down in price; a record pace
Miami remained the weakest market, according the the index data, reporting a double-digit annual decline of 17.5 percent, followed by Las Vegas and Phoenix at -15.3 percent each. In December, San Francisco slipped into negative double-digit territory with an annual return of -10.8 percent.

Charlotte, Portland and Seattle are the only three MSAs still experiencing positive annual growth rates; however, all MSAs recorded a drop in prices between the third and fourth quarters of last year.

“Looking closely at these negative returns, you will see that 14 of the metro areas are also reporting record lows and eight are in double digit decline,” Shiller said. “The monthly data paint a similar picture, with all metro areas now reporting at least four consecutive negative monthly returns.”

Notes

Many economists have taken to comparing the current downturn in housing to the early 1990s … such a comparison might not make sense, given that during the 1990-1991 recession, the annual price rate bottomed out at -2.8 percent .. currrent annual prices drops are more than 3 times as great as those seen in the early 1990s.

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

The home foreclosure train isn’t slowing down yet. The number of foreclosure filings — default notices, auction sales notices and bank repossessions — rose 8 percent on a monthly comparison basis during January, with 233,001 properties recording some form of foreclosure action during the month.

Forty-eight percent of filings represented new borrower defaults, indicating that troubles in the nation’s housing markets have yet to recede. January’s totals represent an increase of nearly 57 percent from year-ago levels, according to data released Tuesday by property listing service RealtyTrac. REO properties in total increased 90 percent versus last January.

“January’s foreclosure numbers demonstrate that foreclosure activity is continuing on its upward trend, substantially increasing from a year ago in many states,” said James J. Saccacio, chief executive officer of RealtyTrac. “However, the 8 percent monthly increase in January is not as precipitous as the 19 percent spike we saw in January of 2007, and several key states actually experienced decreasing foreclosure activity from the previous month.”

Saccacio said that effort by the Bush adminstration and industry officials to stem the tide of foreclosures may be beginning to take effect, in spite of the monthly increase.

“The big question is whether those efforts are truly helping homeowners avoid foreclosure in the long term or if they are just temporarily forestalling the inevitable for many beleaguered borrowers,” he said.

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Boom to bust
Nevada, California and Florida all posted the top foreclosure rates relative to statewide population during January, with Nevada documenting the highest rate in the nation. Foreclosure filings were reported on a total of 6,087 Nevada properties during the month, a 45 percent decrease from the previous month but still a 95 percent increase from January 2007.

Other states with foreclosure rates ranking among the top 10 were Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan, RealtyTrac said.

California, however, was home to by far the most foreclosure volume; the Golden State recorded foreclosure filings on a total of 57,158 properties in California in January. Florida, with a total of 30,178 properties with at least one filing, ranked a distant second.

Notes

The state with the most REO? Not surprisingly, California, with 10,528 properties in banks’ possession, according to the report … the largest montly percentage increase for overall foreclosure activity sits with the state of Delaware, although the state only reported a total of just 173 total foreclosure actions during the month … surprisingly, Texas ranks second in REO volume, ahead of both Michigan and Ohio, both of which are traditionally heavy in REO listings.

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

Countrywide appears to be eliminating the Option ARM, at least from the wholesale channel.  Another sign of the tightening taking place at the beleaguered lender in an attempt to finalize the Bank of America purchase earlier this year.  How do I know they are eliminating the Option ARM (known commonly as the neg am or pick-a-pay loan)?  I got this note from a processor on a file:

This file has been denied with countrywide because they are ending the option arms – did you want me to sub this to world – or did you want to do a 5y i/o?

It wouldn’t surprise me if they are eliminating the option ARM from wholesale.  With Bank of America estimating that $739 billion in mortgages could be in danger over the next 5 years (many of them surely option ARMs) the bank understandably is being quick to eliminate any additional exposure to the exploding loan.

The King is Dead

Countrywide was the king of Option ARMs (particularly the low and no doc liar loans) with nearly 35% of their originations over the last 5 years comprised of the loan that lets homeowners “pick their payment” by offering 4 payment options, including one that accrues interest on top of their loan balance to make monthly payments deceivingly affordable.

Many borrowers took the low payment and ran, betting on rising home prices to bail them out of the negative amortization run up in their loan balance.  Loan officers were more than happy to write them.  Little documentation and huge fees made it an easy and very attractive loan to write.  California option arm loans netted commissions in yield spread premiums in the tens-of-thousands of dollars.  30-60k in commission wasn’t unheard of on these loans.

Now many “good credit” borrowers are upside down in their homes with little chance of making the fully amortized payment that results when the loan balance hits 115% of the original balance (of 5 years passes, which ever comes first).  This is part of the Option ARM shockwave that will hit when these negative amortization loans start to recast.

I’ll let you know when we get an official announcement and any updates about the wholesale vs. retail channel offering.