The tightening continues. Look for an announcement later today that all agency SISA is discontinued immediately from Citi Wholesale. More as it develops.
Both Fannie Mae and Freddie Mac face strong capital pressures, even as a Federal regulator has eased up on prior limitations in an effort to boost liquidity in the mortgage-led secondary markets. According to a report published this week by analysts at UBS Investment Research, both GSEs continue to face a likely need for fresh capital.
“As we have looked critically at these organizations, it is clear that there is a conflict between their mission — to guarantee as many mortgages as they can to keep the housing market from going into freefall — and the fact that they are thinly capitalized,” the analysts wrote.
Counting measures put in place by OFHEO this week, Fannie Mae and Freddie Mac are currently sitting on $7.1 billion in excess capital each. Yet both face multi-faceted losses from their exposure to mortgage insurers, continued expansion of their guarantee business, as well as potential mark-to-market losses with each company’s retained portfolio, UBS said.
The fair value of Fannie’s exposure to mortgage insurers alone, for example — estimated by the GSE at $4.6 billion in the fourth quarter — is itself more than half of the excess capital now available to it.
Yet, despite expected losses elsewhere, it’s the more immediate mark-to-market activity in each GSE’s retained portfolio that may ultimately prove to be the most problematic. It shouldn’t be hard for regular HW readers to fathom why, if you’ve been reading our front-page coverage recently.
UBS analysts estimated that, net of write-downs already on the books for Q4, Freddie Mac could face as much as $30 billion in write-downs in the first quarter of 2008. Likewise, Fannie Mae faces a possible $15.5 billion in write-downs, based on UBS’ pricing estimates. Whether such substantial expected write downs would impact regulatory capital would depend on whether a given security is likely to take a principal loss, UBS said.
The great capital raise
Faced with losses this large, more capital is clearly on the menu. And not just a small amount, like an extra $2 billion. We’re talking gobs of it. The Wall Street Journal reported earlier this month that Friedman, Billings, Ramsey & Co. analyst Paul Miller had estimated that Freddie requires $38 billion of capital, while Fannie would need $41 billion.
For their part, both GSEs earlier this week said they would “begin a process to raise significant capital,” as part of an agreement between OFHEO and Adminstration officials. Yet Freddie Mac has already gone on record saying that it won’t dilute existing shareholders by issuing more stock.
“From a defensive position we feel okay,” Piszel was quoted by Reuters as saying at recent investor conference. “There is no dilutive capital raise planned.”
Which, of course, doesn’t mean that capital can’t be raised; only that doing so will cost more. “If they raise capital, it could well be more expensive risk-based stuff,” said one source that spoke with Housing Wire earlier this week. But there is only so much of that sort of capital that can be prudently had, even in the case of a partly-public institution.
Astute observers, like John Dizard at the Financial Times, have argued that the endgame here is a likely nationalization of the GSEs — and, by extension, much of the U.S. residential housing market.
“These ‘public-private’ mutants will simply become public agencies,” he wrote in a recent column. “There is no way to raise the equity capital for them to remain halfway in the private sector.”
Here's an excellent article about whether you should waive your real estate property tax escrow when you close on your home loan mortgage.
Let your escrow grow for you, not your lender
By Michael D. Larson
Bankrate.com
Are you a do-it-yourselfer who wants to make a few extra bucks? Or would extra money lying around burn a hole in your pocket and leave you without enough cash to pay tax and insurance bills?
Depending on the answers to those and other questions, you may be someone who can do without a mortgage escrow account. Lenders require high-risk borrowers to establish escrow accounts -- and suggest lower-risk customers do, too -- to ensure they can pay real estate tax and homeowners' insurance bills when they come due.
But many consumers have the option of foregoing them and saving money for those bills on their own.
If you've got what it takes
Financially savvy shoppers can earn a few extra dollars in interest, save money on taxes and avoid lender snafus by doing so. But forgetful consumers who can't budget wisely should leave the work to their lenders.
"A lot of people just don't want to worry about something like this," says Frances Graham, extension housing specialist at Mississippi State University in Starkville, Miss. "They don't want to have to worry about insurance being paid and when it's due and there's something to be said for someone else handling it.
"But it depends upon the individual," she adds. Responsible homeowners "have the opportunity to earn a little interest if they put their money aside in a special account that they handle and that they save regularly in."
Escrow explained
Escrow accounts (also called "impound" or "reserve" accounts in different parts of the country) offer customers the chance to save money incrementally for big bills associated with homeownership. Mortgage lenders maintain these accounts on behalf of borrowers, who make payments into them each month along with their regular principal and interest payments. Lenders keep the money from those payments on deposit, then disburse it to local governments and insurance companies when those entities send out their bills. That usually happens twice a year for taxes and once annually for insurance, though billing frequency varies.
Lenders want their borrowers to establish escrow accounts for a couple of reasons. For one thing, they make money off of them. Most states don't require lenders to pay borrowers any interest on the money they hold on their behalf. Lenders can therefore "play the float," or earn money off the cash borrowers send in but that they don't have to pay to governments and insurance companies for a couple of months. Secondary market buyers who purchase mortgages from banks and other lenders pay more for loans with escrow accounts attached to them, too. So by convincing borrowers to establish them, they can pad their profits a bit.
Benefits for both parties
Escrow accounts help lenders avoid problems that can arise if taxes and insurance go unpaid, too.
"The only lien that takes a higher priority than a first mortgage lien is a tax lien. That supersedes a mortgage note. Lenders prize dearly their primary mortgage liens and they're not going to give them up or let anything happen without a fight," says Ilyce Glink, author of 100 Questions Every First-Time Home Buyer Should Ask. "Also, they want to make sure the property is insured. If it's not insured and there's a catastrophe, the lender can end up losing money."
Escrow accounts provide benefits for borrowers, too. In essence, they work like automatic, forced savings plans. By paying a smaller portion of their taxes and insurance every month, homeowners can avoid having big bills come due at a time when cash is short. Simplicity plays a role as well. Customers with escrow accounts don't have to worry about tracking tax and insurance bills because their lenders do it for them. That can come in handy for people who just want to get a mortgage and forget about it.
"Knowing what I do and having had a number of mortgages myself, I've had it both ways and I cannot think of an advantage of not having an escrow account," says Rich Bennion, executive vice president at HomeStreet Bank in Seattle. "It's so convenient. It's kind of like having an automatic payment out of your checking account -- you never have to worry about it."
Most customers agree, he adds. Out of roughly 40,000 mortgages serviced by the bank, 90 percent have escrow accounts attached to them.
"People are much better off having the reserve accounts just for ease and convenience."
But that convenience comes with a price that many borrowers don't have to pay.
Whose money is it, anyway?
By telling their lenders before closing that they don't want to establish escrow accounts, they can take charge of their finances themselves.
That lets them earn discounts -- such as those offered by tax authorities to people who pay early -- that might not be available otherwise. It also prevents lender servicing errors, such as missed tax payments, from cropping up.
"They may be late making the payments. The account gets sold. Taxes don't get paid. The buyer gets a notice of default of unpaid taxes and all hell breaks out," says Glink.
By socking away the money they would otherwise have to send to their escrow accounts, consumers can pocket some interest, too. Plus, they avoid the escrow account setup fees some lenders charge.
"Say you've got $10,000 in taxes because you've got a large house," Glink says. "That's no small change in terms of interest over the course of a year."
Not everyone can waive escrow accounts, though. Most lenders prevent borrowers with small down payments from doing so. The loan-to-value threshold below which they can be waived varies by lender, but experts say it typically ranges from 80 percent to 65 percent.
Some lenders charge a fee for the "privilege," too. That covers two things -- the increased risk to the lender that taxes and insurance won't be paid and the loss of income resulting from the fact that non-escrow loans are worth less in the secondary market. The charge can be a flat fee of, say, $250 to $500 or a percentage of the loan amount. At HomeStreet, for instance, borrowers can waive escrow below 80 percent LTV. But they typically have to pay a quarter-point, or one-fourth of a percentage point of their loan amounts, to do so.
If the fees for avoiding escrow would outweigh the potential earnings from interest, borrowers should either find another lender with cheaper fees or just accept the escrow account. Borrowers without a lot of budgeting discipline should consider letting someone else worry about payments, too.
But for prospective home buyers who want to avoid servicing screw-ups and who have large enough tax and insurance bills that saving money for them on their own is sufficiently profitable, waiving escrow makes sense.
-- Posted: April 19, 2001
Here's an excellent article about whether you should waive your real estate property tax escrow when you close on your home loan mortgage.
Let your escrow grow for you, not your lender
By Michael D. Larson
Bankrate.com
Are you a do-it-yourselfer who wants to make a few extra bucks? Or would extra money lying around burn a hole in your pocket and leave you without enough cash to pay tax and insurance bills?
Depending on the answers to those and other questions, you may be someone who can do without a mortgage escrow account. Lenders require high-risk borrowers to establish escrow accounts -- and suggest lower-risk customers do, too -- to ensure they can pay real estate tax and homeowners' insurance bills when they come due.
But many consumers have the option of foregoing them and saving money for those bills on their own.
If you've got what it takes
Financially savvy shoppers can earn a few extra dollars in interest, save money on taxes and avoid lender snafus by doing so. But forgetful consumers who can't budget wisely should leave the work to their lenders.
"A lot of people just don't want to worry about something like this," says Frances Graham, extension housing specialist at Mississippi State University in Starkville, Miss. "They don't want to have to worry about insurance being paid and when it's due and there's something to be said for someone else handling it.
"But it depends upon the individual," she adds. Responsible homeowners "have the opportunity to earn a little interest if they put their money aside in a special account that they handle and that they save regularly in."
Escrow explained
Escrow accounts (also called "impound" or "reserve" accounts in different parts of the country) offer customers the chance to save money incrementally for big bills associated with homeownership. Mortgage lenders maintain these accounts on behalf of borrowers, who make payments into them each month along with their regular principal and interest payments. Lenders keep the money from those payments on deposit, then disburse it to local governments and insurance companies when those entities send out their bills. That usually happens twice a year for taxes and once annually for insurance, though billing frequency varies.
Lenders want their borrowers to establish escrow accounts for a couple of reasons. For one thing, they make money off of them. Most states don't require lenders to pay borrowers any interest on the money they hold on their behalf. Lenders can therefore "play the float," or earn money off the cash borrowers send in but that they don't have to pay to governments and insurance companies for a couple of months. Secondary market buyers who purchase mortgages from banks and other lenders pay more for loans with escrow accounts attached to them, too. So by convincing borrowers to establish them, they can pad their profits a bit.
Benefits for both parties
Escrow accounts help lenders avoid problems that can arise if taxes and insurance go unpaid, too.
"The only lien that takes a higher priority than a first mortgage lien is a tax lien. That supersedes a mortgage note. Lenders prize dearly their primary mortgage liens and they're not going to give them up or let anything happen without a fight," says Ilyce Glink, author of 100 Questions Every First-Time Home Buyer Should Ask. "Also, they want to make sure the property is insured. If it's not insured and there's a catastrophe, the lender can end up losing money."
Escrow accounts provide benefits for borrowers, too. In essence, they work like automatic, forced savings plans. By paying a smaller portion of their taxes and insurance every month, homeowners can avoid having big bills come due at a time when cash is short. Simplicity plays a role as well. Customers with escrow accounts don't have to worry about tracking tax and insurance bills because their lenders do it for them. That can come in handy for people who just want to get a mortgage and forget about it.
"Knowing what I do and having had a number of mortgages myself, I've had it both ways and I cannot think of an advantage of not having an escrow account," says Rich Bennion, executive vice president at HomeStreet Bank in Seattle. "It's so convenient. It's kind of like having an automatic payment out of your checking account -- you never have to worry about it."
Most customers agree, he adds. Out of roughly 40,000 mortgages serviced by the bank, 90 percent have escrow accounts attached to them.
"People are much better off having the reserve accounts just for ease and convenience."
But that convenience comes with a price that many borrowers don't have to pay.
Whose money is it, anyway?
By telling their lenders before closing that they don't want to establish escrow accounts, they can take charge of their finances themselves.
That lets them earn discounts -- such as those offered by tax authorities to people who pay early -- that might not be available otherwise. It also prevents lender servicing errors, such as missed tax payments, from cropping up.
"They may be late making the payments. The account gets sold. Taxes don't get paid. The buyer gets a notice of default of unpaid taxes and all hell breaks out," says Glink.
By socking away the money they would otherwise have to send to their escrow accounts, consumers can pocket some interest, too. Plus, they avoid the escrow account setup fees some lenders charge.
"Say you've got $10,000 in taxes because you've got a large house," Glink says. "That's no small change in terms of interest over the course of a year."
Not everyone can waive escrow accounts, though. Most lenders prevent borrowers with small down payments from doing so. The loan-to-value threshold below which they can be waived varies by lender, but experts say it typically ranges from 80 percent to 65 percent.
Some lenders charge a fee for the "privilege," too. That covers two things -- the increased risk to the lender that taxes and insurance won't be paid and the loss of income resulting from the fact that non-escrow loans are worth less in the secondary market. The charge can be a flat fee of, say, $250 to $500 or a percentage of the loan amount. At HomeStreet, for instance, borrowers can waive escrow below 80 percent LTV. But they typically have to pay a quarter-point, or one-fourth of a percentage point of their loan amounts, to do so.
If the fees for avoiding escrow would outweigh the potential earnings from interest, borrowers should either find another lender with cheaper fees or just accept the escrow account. Borrowers without a lot of budgeting discipline should consider letting someone else worry about payments, too.
But for prospective home buyers who want to avoid servicing screw-ups and who have large enough tax and insurance bills that saving money for them on their own is sufficiently profitable, waiving escrow makes sense.
-- Posted: April 19, 2001
This just in - Countrywide has discontinued all HELOC and Closed End 2nd products on the wholesale side. More details coming as available.
The old adage doesn’t apply to everyone. Not every kid who touched the hot stove never touched it again. Maybe 1 out of a thousand kids doesn’t learn that the darn thing is still hot. Call them challenged, slow, what-have-you, but they don’t get it.
Accredited Home Lenders is that kid. It’s been widely reported that Accredited was trying to regroup and start securitizing subprime mortgages but their recent broker-facing flyers look like the same old mistakes that put them in a world of hurt to begin with. So they are looking at full doc only, but it would be interesting to know the ratios that they’e approving at since they are going to 500 scores again.
Check out the flyer from one of their reps - this looks like a repeat disaster waiting to happen. As the reader that sent this in said “who is buying this stuff?” — and you could easily insert an explicative in that question and still have it be totally valid.
Click for a larger image.
So how much did technology and more specifically, automated underwriting, factor into the current subprime crisis? In this former lender’s opinion, the impact was substantial.
The widespread use of automated underwriting (AU) technology eventually brought subprime lending into the 21st century. Although systems were slow to develop, most lenders had some form of AU technology in place by 2004. The more robust systems used risk-based decision-making that went beyond basic underwriting guidelines. If a borrower’s compensating factors warranted a loan exception, the best systems could make that call.
These AU systems also helped remove the guesswork. With AU approval, a broker had something more tangible to tell his borrower and his Realtor. Since lenders stood behind their systems, an approval all but guaranteed a loan would fund. As long as the property value could be substantiated and the information on the application could be verified, there was a good chance the loan would close.
AU systems not only modernized the subprime industry, they helped address the greatest frustration for lenders and brokers –– scores that declined from lenders reordering credit reports. When I opened my company back in 2000, before AU technology became the norm, most brokered loans underwent a similar process. The broker started by sending a loan application and credit report to his wholesale account executive for prequalification.
For example, let’s assume the borrower had a 590 credit score and was pre-approved for 100 percent financing. When the loan arrived at the lender’s office three weeks later, the lender ordered a new credit report; standard operating procedure. In this case, the score dropped to 550. Since the lender used their scores to underwrite the loan, the borrower was no longer eligible for 100 percent financing. With no cash available for a down payment, the deal quickly fell apart.
AU technology was instrumental in solving this problem. When a broker used a lender’s AU system to approve a loan, he could utilize his credit report to run the deal. Once the loan file arrived at the lender’s office, the underwriter would access the system and print out the broker’s credit report in the lender’s name. The issue of falling credit scores became a thing of the past.
The issue of course, is that the system was being gamed. When a credit score drops, it means one of three things:
When any or all of these happen, the borrower becomes a greater credit risk, which causes his score to deteriorate.
Most investors considered credit reports to be valid for 60 days. This meant a loan had two months to close from the date the credit report was issued, otherwise a new report had to be ordered. Some investors were more aggressive: credit reports issued through Assetwise, GMAC Residential Funding’s AU system, were valid for 120 days. Although it provided lenders with a great selling tool to brokers, this may have been the single worst risk policy implemented in the history of RFC. The 60-day time limit has a purpose: high-risk borrowers are less responsible than prime borrowers when it comes to managing their credit.
Allowing them 120 days between the time credit is ordered and a loan is closed is long enough to have every account go to collection, file for bankruptcy, get divorced, and have time to spare.
This credit policy created a Catch-22. When a broker’s credit report being used through Assetwise was over 60 days old, many lenders who sold to RFC pulled credit again to be certain nothing drastic had happened with the borrower. When the credit score dropped significantly, it left them with two choices: decline the loan and upset the broker by not standing behind the AU system, or close a mortgage for a borrower who no longer qualified.
The challenge was that if a lender didn’t stand behind the automation, it was no longer viewed as a worthwhile tool. Since lenders were falling over each other doing whatever was possible to get the broker’s business, choosing not to close the loan and essentially announce to the broker community you only stood behind your technology on occasion, created a challenge.
For all the benefits AU technology brought to subprime lending, one thing is clear––automation helped lenders close loans that should’ve been declined. Eight years ago, the issue of falling credit scores was a common occurrence in subprime lending. Until automation became a standard part of the business, 10-15 percent of loans that brokers submitted to my underwriting department were turned down for this reason.
Getting an AU approval for loans that should’ve been denied didn’t make the borrowers credit-worthy –- it meant technology had found a way to circumvent the issue.
Note: Richard Bitner is the author of Greed, Fraud and Ignorance: A Subprime Insider’s Look at the Mortgage Collapse, and has appeared on CNBC and in Newsweek, among other media outlets. 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).
Earlier this week, rating agency DBRS decided that the slow-death approach to RMBS wasn’t, apparently, good enough. The company downgraded 676 classes from 113 different residential mortgage-backed securities deals, citing an “increase in serious delinquencies relative to the available credit enhancement.” Most of the downgrades involve first-lien collateral.
“Given the level of serious delinquencies in the current pipeline and corresponding potential for significant future losses, excess spread is not expected to be sufficient to cover anticipated losses,” the agency said in a press statement.
The company managed to list all 676 affected classes and their affected dollar amounts — for each individual class. Most of the affected classes are not at the AAA level, and most deals are from the 2005 and 2006 vintages.
Housing Wire has gone to the trouble of calculating the mind-numbing totals for our readers, because we like you so darn much: $4.35 billion in total issuance value was downgraded in one fell swoop.
Of that total, $2.96 billion represents downgrades to deals backed by first-lien collateral, while another $1.2 billion represents downgrades to deals backed by second-lien collateral. An additional $189.3 million was downgraded, as well, after DBRS ceased accounting for the value of any credit guaranty wrap provided by Financial Guaranty Insurance Corp.
The downgrades span pretty much every issuer and trustee out there, but a few do stand out in terms of the dollar value involved. For example, one deal — Long Beach Mortgage Loan Trust 2005-3 — saw downgrades totalling just under $200 million. Long Beach Mortgage Company was the former subprime wholesale arm under Washington Mutual.
DBRS is a smaller and newer agency than the so-called “holy trinity” of Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings. The SEC granted official status to DBRS in 2003, giving it equal status with the other bond raters in the US, despite its smaller stature.
For more information, visit http://www.dbrs.com.
Fremont General Corporation said late Thursday that it will sell servicing rights on $1.9 billion in mortgage loans — 13 percent of its existing servicing portfolio — back to an affiliate of private equity firm Carrington Capital Management, as the troubled thrift looks to generate additional liquidity to fund its own operations.
The loans being transferred are held in securitization trusts sponsored by an affiliate of Carrington, Fremont said. Carrington, you’ll recall, scooped up failed subprime lender New Century Financial Corp.’s servicing platform after the Irvine, Calif.-based company filed for bankruptcy last year.
It now operates the servicing shop under the name Carrington Mortgage Services, LLC, which at last count managed 90,000 loans with an outstanding principal balance of over $16 billion. The acquisition would stand to grow Carrington’s servicing portfolio by roughly 12 percent.
Terms of the deal were not disclosed, but Fremont said it expects to close the sale before the start of April. In addition to the purchase price for the mortgage servicing rights, Fremont will be reimbursed over a twelve month period for outstanding servicing advances, it said.
Fremont did not comment on whether the sale would affect employees in its servicing operations. The troubled thrift has been the subject of strong industry speculation since it first disclosed a cash crunch at the end of February. The bank has said it may sell itself, among other options.
For more information, visit http://www.fremontgeneral.com.
With Good Friday upon us, news today is centering on more i-bank layoffs amid a troubled market for MBS and related securities; which means this won’t be the sort of holiday that many on the Street might have liked. The New York Post’s Zachery Kouwe reported Friday morning that Goldman Sachs will cut up to 15 percent of its workforce in capital markets and related areas — the Wall Street giant currently employs 32,000. Affected employees were allegedly notified this week of their fate.
Earlier this week, Goldman posted a better-than-expected quarterly profit of $1.5 billion in the first quarter, although its fixed income division absorbed $1.8 billion in total writedowns and saw its revenue contribution fall 88 percent versus year-ago levels.
Goldman, however, isn’t alone. Rumors surrounding more cuts at Citigroup Inc. have proven to be true, with the Wall Street Journal reporting Friday that the company plans to lay off another 2,000 employees from its invement banking unit. That’s on top of 4,000 job cuts disclosed in January.
The WSJ cites a Citi spokesperson describing the cuts as what can only be described as a case of Jack Welch-style leadership on steroids:
“Each year, we identify the bottom 5% of performers in the Institutional Clients Group, and some number of these people leave the firm,” said Dan Noonan, a spokesman for Citigroup. “This year we will have a larger number of reductions as we continue to strengthen the business and lower our expense base.”
With that as the cheery backdrop, one source that wrote to HW earlier in the week said that many traders in the secondary mortgage market are simply biding their time until the inevitable pink slip arrives.
“Imagining the landscape over the next few years is like listening to ‘Empty Chairs at Empty Tables’ from Les Miserables over and over,” said the source. “All my friends are counting the days till gone.”