Both subprime and Alt-A borrower delinquencies continued to rise during February, with Alt-A delinquencies rising from 15.94 percent in January to 17.40 percent in February. According to a report released Thursday by risk management and due diligence provider Clayton Holdings, Inc., subprime delinquences now represent an eye-opening 33.14 percent of loans on a UPB basis, as well.

Delinquencies going up are one thing; but the continued drop in prices is having a more ominous effect on many investors, lenders, and insurers, as loss severity creeps upward. Average Alt-A loss severity, in fact, is now even approaching average severity numbers for subprime across all collateral. Clayton reported that subprime first lien average loss severity increased to 45.80 percent in February, up from 42.56 percent in January; Alt-A first lien average severity rose to 36.66 percent, in contrast.

Loss severity refers to the loss a lender is forced to take during foreclosure, as a percentage of unpaid principal balance.

The swift deterioration in Alt-A mortgages is taking place despite a low level of adjustable-rate Alt-A mortgages actually hitting a reset in the current period. The graph below, from the Clayton report, provides a look at Alt-A reset volume by month — note that very few Alt-A borrowers are staring down a pending reset throughout 2008. Yet they are defaulting in droves anyway.

While non-industry media are incorrectly and inexplicably zeroing in on rate resets as the driver behind the recent spike of Alt-A borrower defaults, most industry experts that have spoken with Housing Wire have suggested that as many as 70 percent of Alt-A loans originated in recent years have been fraudulent.

“It’s fraud [that is] now coming home to roost, higher lending limits or not,” said one source, who asked not to be named. “Rate resets aren’t the problem here, and even if they were, LIBOR is low enough right now that it would ease payment shocks for most borrowers.”

For more information, and to obtain a look at highlights from this month’s report, visit http://www.clayton.com.

The foreclosure bailout that almost blew up

Gail Burks, who counsels troubled Las Vegas homeowners, says she encounters endless obstacles as she tries to get people the help they need.

NEW YORK (CNNMoney.com) -- Lenders claim they want to help troubled mortgage borrowers stay in their homes. But the reality is that many foreclosure prevention counselors are running into lots of obstacles.

That frustrates Gail Burks, who counsels homeowners in Las Vegas. "If the securities industry can do what they claim, why is it so time consuming and difficult on every case?" she asked.

Burks, who is president of the Nevada Fair Housing Center and sits on the board of the National Community Reinvestment Coalition, started out fighting housing discrimination in 1993.

These days she devotes much of her work week to foreclosure prevention, a hot topic in Nevada, which now leads the nation in delinquency filings. Her job is to act as the middleman between the lenders, who want to protect their bottom lines, and homeowners desperate to hold onto their homes.

She often runs into problems as she tries to negotiate loan work-outs because most mortgages are packaged together and sold to investors. That makes it difficult to determine who owns the loans.

"You almost need a flow chart of potential investors so that you can call them. It's like trying to hit a continuously moving target," said Burks.

Take the case of one Las Vegas couple, who fell behind on their payments and faced foreclosure. For nearly two months Burks worked with them, and their lenders, to permanently lower their payments to affordable levels.

That task was challenging because it involved two different loans; the couple used a second mortgage, also called a piggy-back loan, to avoid having to come up with a down payment. Burks wanted to combine the two into a single loan and negotiate an interest rate reduction.

The primary loan, issued in 2005, was an adjustable rate mortgage (ARM) on a home purchase of $303,200. After two years, payments adjusted up from $1,667 to nearly $2,200 a month. The second loan was an adjustable rate home equity line of credit for about $61,000.

The couple could afford the original payments on the loans, but they told Burks that they didn't realize that their primary mortgage came with an adjustable rate that would reset higher, although they were aware that their home equity line was adjustable.

Since the husband was an injured Iraq War vet, the Veteran's Administration stepped in to help negotiate a mortgage modification, but the lenders didn't co-operate. The VA gave the case to Burks.

A single mortgage servicer administered both loans, but they were owned by two different investors. That led to complications. The primary loan holder was amenable to changing the terms of the couple's mortgage, but the secondary lender, which held 20% of the debt, was not.

Burks could not get any answer as to why.

"They just flatly refused to say," she said. She offered to ensure the payments by having the borrowers set aside funds, in cashiers checks, made payable to the lender. She pledged to monitor payments on the modified loan for one year. But it was still no go.

Weeks went by. She made little headway. The couple fell $17,000 behind. Since they were pursuing a work-out, they weren't in danger of getting thrown out of the house, but the process was rough on everybody, including Burks.

Piggy-back, no-down loans are particularly vulnerable to default, because there's often little or no equity for owners to draw upon if they hit a rough financial patch. Indeed, the delinquency rate for them is growing much faster than for traditional mortgages, according to Keith Gumbinger of mortgage research firm HSH Associates, more than doubling since 2004.

And these secondary loans often complicate foreclosure prevention.

"Piggy-backs are hard to restructure because the two loan holders have competing interests," said real estate attorney, Don Lampe. Both lenders have to agree to any mortgage modifications. And secondary lenders often balk because, when a foreclosed home is sold, the owner of the first mortgage gets all of its debt repaid before the second gets a penny.

These days, "The second lender is not going to get a damn thing most of the time," said Gumbinger. "Even where house prices haven't fallen, the [foreclosure] costs eat up the home's value."

In the case of the Vegas couple, the home equity lender refused to agree to a loan modification and then, after weeks of negotiations, sold the loan to another lender, jeopardizing all of Burks' work.

"We then had to modify the two loans separately," said Burks, "and we're still awaiting paperwork on the modification for the second loan. At least the foreclosure is on hold."

The work-out she put together is a very good deal for the couple. The entire debt will be in a fixed-rate loan at 3.75% for five years. After that, Burks will work with them to refinance into a long-term, fixed-rate loan .In addition Burks succeeded in getting all fees and penalties waived.

It's nice to get a win, but once in a while, she'd like an easy one.

In a conference call held Thursday, Fitch Ratings said that the subprime crunch isn’t over — and is actually gaining speed, despite mass media wear-out on the subject. Glenn Costello, co-head of the U.S. RMBS group at Fitch, and Grant Bailey, director in RMBS surveillance, both said that home price declines are continuing to create significant problems in the mortgage market.

“Loan modifications have not significantly reduced foreclosure efforts to date,” Costello said.

click for larger view

Roll rates for subprime first liens are significantly higher than in previous deals; those roll rates are provided in the graph to the right. Roll rates capture the number of loans moving from current to deliquent each month — and the graph shows that 2007 vintage loans are rolling into default at a greater than 4 percent rate. Per month. Every month. Consistently. And that only includes originations through the third quarter of last year, to boot.

That’s huge, for anyone outside of the industry that hasn’t seen this sort of data before, especially given how new these loans are.

What’s worse, we’re not just looking at a subprime problem, as many HW readers already know. Below is a look at annualized default rates for Alt-A mortgages.

click for larger view

Note that the Q307 vintage was already above a 10 percent annualized monthly default rate by end of December. Astounding. The culprit, or course, was an acceleration in housing price declines that put many borrowers upside down — and, given the incidence of fraud in most recent Alt-A vintages, a whole bunch of borrowers suddenly found themselves unable to refinance their way into another loan as lenders finally began to tighten their underwriting standards.

Fitch released a report in November of last year detailing the high incidence of borrower fraud in recent originations, particular Alt-A.

I’ve written before that until home prices stabilize, we’re going to be looking at a free fall in the large parts of the RMBS market; this sort of data helps tell the story of why this will be the case.

The full Fitch presentation — sans some slides used in the call and presented above — is available here. For more information, visit http://www.fitchratings.com.

Mortgage rates fall, 1st time since February

Fed actions spur drop in 30-year fixed-rate mortgages, but ARM rates still climb.

NEW YORK (CNNMoney.com) -- Borrowers looking for fixed-rate mortgages can now find the lowest rates in more than a month. But experts warn the decline may not last for long.

Rates on fixed-rate mortgages dropped sharply in the past week, after the Federal Reserve took several historic steps to shore up the financial markets. The rate on a 30-year loan dropped to an average of 5.87%, down from 6.13% a week ago, according to new Freddie Mac figures released Thursday. A 15-year mortgage now can be had for 5.27%, down from 5.60%

Mortgage rates had been climbing since mid-February as investors turned away from securities backed by traditional loans issued by Fannie Mae and Freddie Mac. This market had remained fairly stable throughout the mortgage meltdown, which started last summer and made it much tougher and more expensive to get subprime and jumbo mortgages.

But even traditional mortgages became costlier after investors started to question the value of these agency securities when Fannie and Freddie reported a combined $6 billion in losses last month. Then, financial fund Carlyle Capital announced its lenders wanted more money to make up for the depressed value of the agency mortgage-backed securities Carlyle had put up as collateral for loans.

In the past week, the Federal Reserve worked to calm the markets by taking a series of steps, including allowing investment banks to borrow funds and put up mortgage-backed securities as collateral. Also, it backed JPMorgan Chase's fire-sale purchase of Bear Stearns and cut the interest rate by three-quarters of a point. Finally, regulators enabled Fannie and Freddie to invest more in mortgages by lowering the amount of capital they have to hold as a reserve against potential losses.

Still, rates are much higher than they should be based on the interest rate of the 10-year Treasury, which is a benchmark for mortgage rates, said Greg McBride, senior financial analyst at Bankrate.com. Rates on home loans usually average about 1.8 percentage points above the Treasury, which should translate into 5.25% mortgage rates. But continued anxiety in the markets are pushing the spread higher.

Rates on adjustable-rate mortgages, however, continue to climb, averaging 6.44%, up from 6.21% last week, according to Bankrate.com. That's because these loans have higher default and delinquency rates so investors continue to demand a premium, said McBride.

"Between institutions unloading existing bonds and the lack of appetite for new securities, the rates have climbed in an effort to attract investors," he said.

But it's too early to tell what will happen to rates in coming weeks, experts said. It will take time, possibly months, for the Fed's moves to soothe the markets long-term. Another round of bad news could easily spook mortgage-backed security investors again, experts said.

"Every time we think we see a trend, it seems to reverse itself," said Gregory Heym, chief economist with Terra Holdings, parent company of two of Manhattan's largest real estate brokerage companies.

Perhaps the most widely-watched among economic analysts when it comes to recession is the Economic Cycle Research Institute, or ECRI. The group has correctly called the past two U.S. recessions, and most tend to have the view that the U.S. economy won’t be in a recession until the ECRI says so.

Well, the ECRI now says so.

In a report not released widely to the press, but reported on by a few outlets, the economic think-tank on Thursday reversed a prior course of reluctance to call a recession and said the U.S. in unquestionably in the midst of a recession.

Reuters covers the ECRI’s own index:

The Economic Cycle Research Institute, which correctly predicted the 2001 recession at a time when many on Wall Street still maintained a rosy outlook, said their numbers indicate the economic contraction is already under way.

Extending its weakening trend, the firm’s Weekly Leading Index fell to 130.8 in the week of March 14 from 132.1 in the prior week, revised down from 132.2.

“It is exhibiting a pronounced, pervasive and persistent decline that is unambiguously recessionary,” said Lakshman Achuthan, managing director at ECRI.

Chris Isidore at CNNMoney gets into the details with Lakshman Achuthan, a managing director at the ECRI, who had some harsh word for policymakers and members of the Administration:

Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, said the economy has now fallen into what he calls “a recession of choice.”

He argues that the economic stimulus package passed by Congress this year is too late to help many consumers and businesses and that the Federal Reserve was too timid when it started trimming interest rates last fall …

He said low business inventories at the end of last year gave policymakers a chance to avoid the recession, because any spur to spending by businesses or consumers would have resulted in a quick pick-up in production.

“There was an opportunity that was wasted by policymakers because they didn’t understand those dynamics,” he said. “That is one aspect of how the policymakers have goofed and why this recession is a choice, not something that happened by bad luck and chance.”

There’s much more to Laks’ argument, including what he called “horrible execution” of an economic stimulus package, lamenting the fact that most won’t see checks until May at the earliest.

Personally, I don’t see how a $600 check is supposed to offset a high rate of inflation and mortgage payment resets that would eat up a single “stimulus payment” in just one month for the most troubled mortgage borrowers.

Perhaps it is more accurate to say that this is a recession that was set into motion years ago, when subprime lending first took off, and trying to claim now that it could have been prevented by acting one quarter earlier demonstrates the continued and inexplicable discounting most economists give to the idea that housing could, in fact, drive our economy into a recession.

Perhaps the most widely-watched among economic analysts when it comes to recession is the Economic Cycle Research Institute, or ECRI. The group has correctly called the past two U.S. recessions, and most tend to have the view that the U.S. economy won’t be in a recession until the ECRI says so.

Well, the ECRI now says so.

In a report not released widely to the press, but reported on by a few outlets, the economic think-tank on Thursday reversed a prior course of reluctance to call a recession and said the U.S. in unquestionably in the midst of a recession.

Reuters covers the ECRI’s own index:

The Economic Cycle Research Institute, which correctly predicted the 2001 recession at a time when many on Wall Street still maintained a rosy outlook, said their numbers indicate the economic contraction is already under way.

Extending its weakening trend, the firm’s Weekly Leading Index fell to 130.8 in the week of March 14 from 132.1 in the prior week, revised down from 132.2.

“It is exhibiting a pronounced, pervasive and persistent decline that is unambiguously recessionary,” said Lakshman Achuthan, managing director at ECRI.

Chris Isidore at CNNMoney gets into the details with Lakshman Achuthan, a managing director at the ECRI, who had some harsh word for policymakers and members of the Administration:

Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, said the economy has now fallen into what he calls “a recession of choice.”

He argues that the economic stimulus package passed by Congress this year is too late to help many consumers and businesses and that the Federal Reserve was too timid when it started trimming interest rates last fall …

He said low business inventories at the end of last year gave policymakers a chance to avoid the recession, because any spur to spending by businesses or consumers would have resulted in a quick pick-up in production.

“There was an opportunity that was wasted by policymakers because they didn’t understand those dynamics,” he said. “That is one aspect of how the policymakers have goofed and why this recession is a choice, not something that happened by bad luck and chance.”

There’s much more to Laks’ argument, including what he called “horrible execution” of an economic stimulus package, lamenting the fact that most won’t see checks until May at the earliest.

Personally, I don’t see how a $600 check is supposed to offset a high rate of inflation and mortgage payment resets that would eat up a single “stimulus payment” in just one month for the most troubled mortgage borrowers.

Perhaps it is more accurate to say that this is a recession that was set into motion years ago, when subprime lending first took off, and trying to claim now that it could have been prevented by acting one quarter earlier demonstrates the continued and inexplicable discounting most economists give to the idea that housing could, in fact, drive our economy into a recession.

Fixed mortgage rates fell sharply in the past week, with the average conforming 30-year fixed mortgage rate now 5.98 percent — a 41 basis-point drop from last week. According to Bankrate.com’s weekly national survey of large lenders, the average 30-year fixed mortgage has an average of 0.38 discount and origination points.

The average 15-year fixed rate mortgage popular for refinancing revisited a five week low of 5.46 percent, while the average jumbo 30-year fixed rate declined modestly to 7.43 percent.

Adjustable mortgage rates were up sharply for the second week in a row, with the average 5/1 ARM jumping nearly one-quarter percentage point to 6.44 percent.

With ARM rates sitting so high relative to fixed-rate mortgages, it’s no wonder that the Mortgage Bankers Association reported this week that ARM share of overall application activity has fallen to near-record lows. For the week ended March 14, the MBA reported Wednesday that ARMs represented just 7.9 percent of overall application activity versus nearly 16 percent just one week earlier.

Despite the drop in fixed-rate mortgages, volatility continues to rule the day as markets swing wildly in one direction one day, and just as wildly in the other the next. Bankrate.com’s Holden Lewis reports:

On Tuesday, the day the Federal Reserve cut short-term interest rates by three-quarters of a percentage point, Dowling got an initial rate sheet late in the morning, and then four over the next six hours. “A total of five different rates,” he says. “Depending on what time of day you called me, I could have given you five different interest rates.”

Dan Green, an independent originator with Mobium Mortgage and a well-known industry personality on the consumer side of the business, said last week that borrowers looking to buy now may as well buy now.

“Now is a good time to buy — not because home prices are flat or because sellers are willing to make like Monty Hall — but because none of us mortgage guys can predict what the mortgage market will look like later,” he wrote last week.

Sources on the secondary market side of the business that speak with Housing Wire have suggested recently that rates are likely uniformly headed upward over the course of the rest of this year. In a recent story looking at Fannie Mae and Freddie Mac, one source suggested to HW that rates might actually reach as high as 10 percent before 2008 is out.

Fixed mortgage rates fell sharply in the past week, with the average conforming 30-year fixed mortgage rate now 5.98 percent — a 41 basis-point drop from last week. According to Bankrate.com’s weekly national survey of large lenders, the average 30-year fixed mortgage has an average of 0.38 discount and origination points.

The average 15-year fixed rate mortgage popular for refinancing revisited a five week low of 5.46 percent, while the average jumbo 30-year fixed rate declined modestly to 7.43 percent.

Adjustable mortgage rates were up sharply for the second week in a row, with the average 5/1 ARM jumping nearly one-quarter percentage point to 6.44 percent.

With ARM rates sitting so high relative to fixed-rate mortgages, it’s no wonder that the Mortgage Bankers Association reported this week that ARM share of overall application activity has fallen to near-record lows. For the week ended March 14, the MBA reported Wednesday that ARMs represented just 7.9 percent of overall application activity versus nearly 16 percent just one week earlier.

Despite the drop in fixed-rate mortgages, volatility continues to rule the day as markets swing wildly in one direction one day, and just as wildly in the other the next. Bankrate.com’s Holden Lewis reports:

On Tuesday, the day the Federal Reserve cut short-term interest rates by three-quarters of a percentage point, Dowling got an initial rate sheet late in the morning, and then four over the next six hours. “A total of five different rates,” he says. “Depending on what time of day you called me, I could have given you five different interest rates.”

Dan Green, an independent originator with Mobium Mortgage and a well-known industry personality on the consumer side of the business, said last week that borrowers looking to buy now may as well buy now.

“Now is a good time to buy — not because home prices are flat or because sellers are willing to make like Monty Hall — but because none of us mortgage guys can predict what the mortgage market will look like later,” he wrote last week.

Sources on the secondary market side of the business that speak with Housing Wire have suggested recently that rates are likely uniformly headed upward over the course of the rest of this year. In a recent story looking at Fannie Mae and Freddie Mac, one source suggested to HW that rates might actually reach as high as 10 percent before 2008 is out.

In yet another round of subprime RMBS downgrades, Fitch Ratings said late yesterday that it had downgraded a total of nearly $700 million from four different Ameriquest RMBS deals.

The majority of the downgrades hit a 2005 transaction, Argent Securities Inc. (ARSI) series 2005-W4, which saw $414.8 million from 8 classes downgraded. None of the downgrades were to AAA-rated tranches, although loss coverage ratios for the most senior bond classes are nearing dangerous territory.

(For the uninitiated, loss coverage ratios form the basis for most RMBS rating actions; they’re calculated by dividing expected losses what what are known as the break loss, which is loss a bond can withstand before investors start seeing a hit to principal).

The 2005 ARSI deal contains loans originated by Argent Mortgage Co., the wholesale arm of now-defunct AMC Mortgage Services, which also was the parent of Ameriquest Mortgage Co. Argent was among the nation’s largest subprime wholesale mortgage operations during the housing boom, and as the mortgage market has imploded in recent months, brokered loans have consistently been singled out as particularly poor performers.

In the Argent deal in question, 60+day delinquencies now stand at 31.09 percent; Fitch said it is expecting remaining losses to account for 19.08 percent of current balance.

Outside of the 2005-W4 deal, Fitch also downgraded 13 classes from three additional Ameriquest-originated deals. One deal, ARSI 2004-W4 — another Argent loan pool — saw a AAA tranche downgraded to AA, although Fitch did not provide loss coverage information or deliquency data on the affected deal.

Argent was assumed by Citigroup in the middle of 2007 as the subprime industry fell apart, along with AMC’s servicing platform; Ameriquest, the retail lending arm at AMC Mortgage Services, has since gone out of business.

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

In yet another round of subprime RMBS downgrades, Fitch Ratings said late yesterday that it had downgraded a total of nearly $700 million from four different Ameriquest RMBS deals.

The majority of the downgrades hit a 2005 transaction, Argent Securities Inc. (ARSI) series 2005-W4, which saw $414.8 million from 8 classes downgraded. None of the downgrades were to AAA-rated tranches, although loss coverage ratios for the most senior bond classes are nearing dangerous territory.

(For the uninitiated, loss coverage ratios form the basis for most RMBS rating actions; they’re calculated by dividing expected losses what what are known as the break loss, which is loss a bond can withstand before investors start seeing a hit to principal).

The 2005 ARSI deal contains loans originated by Argent Mortgage Co., the wholesale arm of now-defunct AMC Mortgage Services, which also was the parent of Ameriquest Mortgage Co. Argent was among the nation’s largest subprime wholesale mortgage operations during the housing boom, and as the mortgage market has imploded in recent months, brokered loans have consistently been singled out as particularly poor performers.

In the Argent deal in question, 60+day delinquencies now stand at 31.09 percent; Fitch said it is expecting remaining losses to account for 19.08 percent of current balance.

Outside of the 2005-W4 deal, Fitch also downgraded 13 classes from three additional Ameriquest-originated deals. One deal, ARSI 2004-W4 — another Argent loan pool — saw a AAA tranche downgraded to AA, although Fitch did not provide loss coverage information or deliquency data on the affected deal.

Argent was assumed by Citigroup in the middle of 2007 as the subprime industry fell apart, along with AMC’s servicing platform; Ameriquest, the retail lending arm at AMC Mortgage Services, has since gone out of business.

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