Refinance Free Credit

Shortly after trading in the company’s stock was halted Wednesday, Ambac released details of a capital strengthening plan that left investors disappointed. The plan involves a common stock offering of $1 billion and an additional $500 million in convertible equity units that must be converted to common stock in May 2011, according to a press statement released by Ambac Wednesday afternoon.

Earlier investor speculation had centered around a potential break-up of the monoline’s business. Investors that spoke with Housing Wire after Ambac’s announcement said they expected much more, even if the possibility of a split seemed remote.

“Who wants to throw money at a monoline right now, especially one heavily exposed to the ABS and CDO markets?” said one hedge fund manager, who asked not be named.

Ambac CEO Michael Callen, however, said the plan was targeting the company’s core long-term investor base.

“This capital raise, along with our recent strategic actions, our increased emphasis on risk-adjusted returns over the course of an economic cycle and a six-month suspension of the structured finance business, will strengthen our capital base,” he said. “We expect to be better positioned to take advantage of the current favorable market environment for credit enhancement.”

The Wall Street Journal found sources critical of the deal as well:

… more important, investing pros said the company’s offering plan carries risks of its own and does little to solve the broader credit crisis that has gripped Wall Street for months.

“People are looking around saying, how are they going to sell all this stock?” said Michael A. Church, portfolio manager at Church Capital Management, in Yardley, Penn. “I don’t think it’s going to be easy to price. Good luck to the underwriters who, by the way, will probably be the same banks that have been burned” by bad credit bets recently.

Rating agencies appeared to split on whether the move would be enough. Fitch Ratings said in a press statement that even if Ambac succeeds in raising an additional $1.5 billion, it likely would only be enough to bolster ratings at the AA-level, keeping the monoline locked out of that agency’s AAA insurer ratings class.

Moody’s Investors Service, however, indicated that the additional capital would likely be sufficient to support confirmation of a ‘AAA’ rating from the agency.

Ambac shares plummetted more than 15 percent after the news, trading at $9.02 towards the end of Wednesday’s trading session.

Disclosure: The author held no positions in ABK when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Fitch Ratings said Wednesday that its outlook on the title industry had turned negative, amid a sharp decline in revenue and profits and expectations for further deterioration in 2008 and 2009.

Driving the agency’s concern were rare net losses among the largest U.S. title insurers last year; four out of five publicly-traded, national title underwriters rated by Fitch reported net losses in 2007.

“As title insurance is a cyclical business, ratings are assigned at a level that can withstand a normal industry cycle,” said Doug Pawlowski, who leads title insurance ratings at Fitch. “However, the current downtrend may be unusually severe and longer in duration than past cycles, and create significant pressure on some company ratings.”

Leading indicators of future title insurance revenues, including mortgage origination and title insurance order flow, reveal that further challenges lie ahead, Pawlowski said.

Poor results in 2007 were also attributable to increasing loss reserves. Loss ratios higher than the agency had been expecting for the peak housing years of 2003-2006 indicate that underwriting quality “diminished greatly,” according to a press statement released by Fitch.

“There is some concern that these reserve deficiencies coupled with operating losses will affect capital adequacy within the title industry,” said Gerald Glombicki, director of Fitch’s insurance rating group.

The rating agency said it expects to complete a loss reserve adequacy and risk-based capital analysis for U.S. title insurers this spring.

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

While its formal earnings report won’t be available until next week, mortgage insurer the PMI Group, Inc. said earlier this week that its U.S. mortgage insurance operations lost $236 million during the fourth quarter of 2007, compared to earning of $77.2 million in the year-ago period. The fourth quarter loss pushed PMI into the red for the full year, with the company recording a net loss of $190.8 million for all of 2007.

PMI said that losses and loss adjustments likely totalled $1.1 billion, although formal consolidated earnings are pending, based on the company’s interest in troubled bond guarantor FGIC Corp. PMI had postponed its earnings report while waiting on the fourth quarter financials from FGIC, which PMI partly owns.

PMI has said it expects to report a “signficant net loss” from FGIC, and that it will no longer provide additional capital to the company.

“Our preliminary fourth quarter results for our U.S. Mortgage Insurance and International Operations demonstrate that we are facing challenging market conditions, particularly in the U.S. housing market,” PMI chairman and CEO Steve Smith.

“We have implemented a plan to address these challenges, which we will discuss in detail on our conference call next week.”

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

Trading in shares of troubled bond guarantor Ambac Financial were halted early Wednesday afternoon for pending news, although no official statement has been released just yet.

Numerous news agencies are reporting that Ambac will announce a bailout agreement that will see the monoline split apart its municipal bond business and establish a seperate structured finance unit.

From the Associated Press:

The person who spoke on condition of anonymity said one of the details to be worked out with New York insurance regulators is when an announcement could be made without disrupting the markets. The announcement could be postponed until next week even if the deal is final. Ambac’s troubles have sent stock prices plunging in recent months.

“A lot of progress has been made” in the last two days, the person said.

A second person familiar with the talks who also spoke on the condition of anonymity said the deal is final and would be announced shortly.

Shares of rival insurer MBIA jumped on the expected news, and were up more than 4 percent to $13.48 in afternoon trading on the NYSE. Ambac’s shares were halted at $11.35, up 5.9 percent before trading was stopped.

The monolines provided the top-rated portions of MBS deals with a guarantee that essentially is designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that downgrades to bond insurers are wreaking havoc on the already unsteady mortgage-backed bond market, as investment-grade securities are seeing their top ratings vanish.

Sources suggested to HW that private equity funds were jumping at the chance to get into the municipal bond business, making pursuit of a split sensible for Ambac.

The yield spread between agency MBS bonds and 10-year U.S. Treasuries on Wednesday reached a level not seen since 1986, according to a report by Bloomberg’s Jody Shenn. The spread is boosting the cost of conforming mortgages for high-quality mortgage borrowers at time when mortgage affordability is a chief concern for many market participants.

The spread on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed rate mortgage bonds and 10-year government notes widened to 204 basis points on Wednesday, 70 basis points higher than January 15, Shenn reported. The yield spread is part of what determines prime, conforming mortgage rates.

From Bloomberg:

The spread for Fannie Mae’s current-coupon securities over the average of yields on 5-year and 10-year Treasuries, a benchmark closer to their expected lives, was already the widest since 1986, according to Bloomberg data. That spread today rose to 258 basis points from 170 basis points on Jan. 15, the recent low. The similar spread for bonds backed by the U.S. government are also at the highest since the 1980s, at 225 basis points.

Option-adjusted spreads followed the same pattern, reaching the highest level in at least 11 years according to data from Merrill Lynch & Co.

In a move that’s raising strong investor ire, Washington Mutual’s board voted this week to shield executive bonuses from the effects of the mortgage downturn. In a filing with the Securities and Exchange Commission earlier this week, the bank disclosed that it will carve out losses from the mortgage mess in calculating bonuses for senior executives, including CEO Kerry Killinger.

In the filing, WaMu said it would carve out loan loss provisions for its mortgage business as well as expenses related to foreclosed real estate in calculating the net profit target used to determine executive bonuses. It also said it would exclude resizing or restructuring charges, as well as expenses tied to foreclosures, in calculating a non-interest expense target.

Both the net profit and non-interest expense targets represent more than half of the weight assigned to the overall performance assessment used to determine bonus payouts.

WaMu’s Killinger, whose base salary is $5.07 million per year, stands to make nearly $28 million in bonuses during 2008 under the terms of plan — a bonus that can be earned irrespective of how the company manages its mortgage exposure throughout what many expect to be the toughest year in mortgage banking history.

Investors are upset, said the Wall Street Journal:

The new formula angered some WaMu investors, who have seen the value of their holdings shrivel as the thrift’s mortgage troubles worsened. In the past year, WaMu’s share price has tumbled about 70% — to where it was about 12 years ago. The shares fell 26 cents, or 1.9%, to $13.39 in New York Stock Exchange composite trading. “They’ve cost their shareholders a lot of money,” said David Dreman, chairman of Dreman Value Management LLC, which holds 27.9 million WaMu shares. “Bonuses should be given to the executives who enhance shareholder value, not destroy it.”

In a research report, Frederick Cannon, an analyst with Keefe, Bruyette & Woods, expressed concern that the cash-bonus formula “could result in executive focus away from issues, particularly credit management, that we feel are critical to the success” of WaMu. Mr. Cannon, who is forecasting a steep loss by WaMu this year largely because of housing woes, called on the company’s directors to “revisit the 2008 compensation plan and make managing credit a top priority of senior management with objective rather than subjective measurements.”

U.S. consumer bankruptcy filings increased more than 15 percent nationwide in February over the previous month, according to data made available earlier this week from the National Bankruptcy Research Center. The jump may reflect worsening credit problems from an extended downturn in the housing market, and comes as Congress is considering a measure to allow changes to Federal bankruptcy code for mortgages.

Overall consumer filings totaled 76,120 in February, up from the 66,050 consumer filings recorded in January. February’s total represented an increase of 37.3 percent in filing activity from one year earlier. Chapter 13 filings, the center of an ongoing debate involving the mortgage industry, constituted 36.4 percent of all consumer cases in February, down slightly from last month.

“February’s bankruptcy spike — the highest single month since the 2005 law changes — forecasts the start of more to come for the balance of 2008,” said Samuel J. Gerdano, executive director of the American Bankruptcy Institute.

Many of the bankruptcies are coming in California, according to coverage in the New York Times, which reported that the Golden State had recorded a 33 percent jump in filing activity during the first two months of the year, the highest percentage jump in the nation.

Senate Democrats have been pushing a bill positioned as a foreclosure relief package that would amend the Federal bankruptcy code to allow judges to write-off principal amounts on mortgages for primary residences in Chapter 13 debt restructuring.

The proposal has met with stiff resistance from industry participants and current adminstration officials alike, with Republicans recently blocking an attempt by Democrats to push the bill through Congress without debate.

Countrywide Financial Corp. voluntarily delayed 103 foreclosure sales in Texas yesterday, the Wall Street Journal reported Wednesday. The nation’s largest servicer is reeling from lawsuits by the U.S. Trustee Program in three states that claim “bad-faith conduct” and “abuse” of the courts, as well as a class-action lawsuit in Texas claiming that the lender has routinely attempted to foreclose on borrowers recently discharged from bankruptcy.

From the WSJ:

The Texas lawsuit, a putative class-action suit filed last month by five borrowers in Brownsville, alleges that the country’s No. 1 home lender by volume is foreclosing or attempting to foreclose on borrowers who had been discharged from bankruptcy and were current on their loans, and that Countrywide added hidden fees to debtors’ accounts. The suit seeks to stop the company from doing those alleged acts and asks for damages. The suit claims the company, in part because of flawed computer systems, “does not have policies and procedures in place” to properly account for borrower payments.

“Countrywide denies the allegations in the related complaint,” the company said in a statement.

“Countrywide’s failure to ensure the accuracy of its claims and pleadings has resulted
in an abuse of the bankruptcy process and has prejudiced, and will continue to prejudice, parties in interest in the bankruptcy cases in which Countrywide participates,” the U.S. Trustee said in court filings in Florida, Georgia and Ohio.

“Absent injunctive relief … Countrywide’s practices and conduct are likely to continue to prejudice parties in interest and result in additional abuses of the bankruptcy process.”

The core issue spanning all cases appears to be what one industry source, a manager at a national servicing operation, called “sloppiness” on the part of Countrywide. “They’re lacking in both systems and process, as are many servicers,” he said. “It’s just that these sort of deficiencies get magnified when you’re talking about the company that’s responsible for servicing 40 percent of the residential mortgage market.”

Most servicers operate on small margins and didn’t invest heavily in default management during the recent housing boom, or outsourced much of the default functions to vendors that haven’t experienced a strong industry downswing. The result is that many servicers have found themselves ill-prepared to manage a flood of borrower defaults and an associated spike in bankrtupcy activity, the source suggested.

First American CoreLogic used a study in the most recent version of LoanPerformance’s Market Pulse newsletter to tout the accuracy of its new automated valuation model targeting the default industry, called ValuePoint 4 Default.

In the study, the company compared the accuracy of broker price opinions to its AVM platform — and I don’t think HW readers would be shocked at all to find out that the study found that the AVM performed as good or better than BPOs in hitting “distressed property value.”

What was shocking, however, was to see what’s become of the LoanPerformance newsletter. Once considered cutting edge for the industry, the LP newsletter now pushes out data that’s six months old and blatantly shills for its corporate sponsor, the First American Corp.

It didn’t always used to be this way.

The LP newsletter once ran credible analyses by economists at such places as Credit Suisse, JP Morgan, and elsewhere, who were looking to research important industry issues — rather than pushing out a litany of basic formulas for mean, median and standard deviation in the hopes that some x’s and y’s would make a product sales pitch look less like a sales pitch.

And the data? The current issue discusses data from September 2007. That’s old hat in the current mortgage environment, where other analytics firms pump out the same deliquency and vintage trend data much more quickly.

There was a time when LoanPerformance was known as the gold standard for industry analytics; looking at the current newsletter the company now puts out, it appears those halcyon days are long gone. And it’s too bad, especially given where the industry is right now: market insight is more valuable than ever before.

I don’t have a problem with a company pushing its products; that’s what it exists to do. I don’t even have a problem with a company masking a sales pitch behind a branded white paper. That sort of “soft sales” approach happens all the time, and I can’t blame First American for engaging in the sort of marketing efforts that are common among any technology niche.

But it feels cheap, somehow, coming from a newsletter that once had such high stature and helped put the LoanPerformance brand at the center of mortgage finance intelligence. And I think the company would have been better off recognizing what really drove the newsletter’s original readership and its presence — the halo effect of that sort of credibility would have done more for First American’s business development efforts than anything else that could be done with a newsletter like this one.

Instead, I think this sort of effort actually ends up hurting the Core Logic brand.

There are plenty of other firms out there that are putting out their own newsletters today — and I think the lesson of First American and Loan Performance should be front and center for anyone attempting to use an industry newsletter to gain meaningful market reach.

In a bet that recent steep drops in short-term interest rates may be coming to an end, Franklin Credit Management Corporation said Wednesday that it had entered into interest rate swap agreements, hedging a portion of its interest-rate-sensitive borrowings against future increases in short-term interest rates.

The scratch-and-dent mortgage operation said it entered into $725 million of fixed-rate interest rate swaps in order to effectively stabilize the future interest payments on a portion of its interest-sensitive borrowings. The fixed-rate swaps are for periods ranging from one to four years, are non-amortizing, and are in effect for the respective full terms of each swap agreement.

The swaps will reduce the company’s exposure to future increases in interest costs on a portion of its borrowings due to increases in LIBOR. The one-month LIBOR rate was 3.12% at the time the swaps were executed.

“We were able to take advantage of favorable swap rates in the capital markets and fix the cost of a significant portion of our interest-sensitive debt at a weighted average fixed rate of 2.81 percent,” said Paul Colasono, Franklin Credit’s CFO.

The hedges come at a time when the one-month Libor rate had declined over 200 basis points since mid-December 2007, and swap rates at the one- and two-year maturity points were lower than 30 day Libor, Colasono noted.

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