Refinance Free Credit

Calling so-called raw delinquency statistics “meaningless and misleading,” IndyMac chairman and CEO Mike Perry said late last week that the thrift — which lost $509 million in the fourth quarter and suspended its dividend amid increasing borrower delinquencies — would cease reporting them, as it looked to shift its reporting to so-called static-pool data. Perry said the company was “working feverishly” provide static-pool data to investors by the end of the second quarter, if not sooner, but would stop publishing raw data by product and channel, effective immediately.

Some background may be in order: Static-pool reporting is the practice of benchmarking performance data against total production in some given “static pool,” whereas the raw deliquency statistics Perry is mentioning benchmark against current unpaid principal balance.

Perry’s argument is illustrated simply. If a particular group of loans prepays to the tune of 80 percent, so that only 20 percent of the original group remains, benchmarking delinquencies against the remaining 20 percent would make delinquency numbers look a whole heck of a lot higher to investors than benchmarking against the original 100 percent. So the bottom line here — according to Perry — is that the performance of loans originated depends on what you’re comparing them against.

Perry said in his remarks that “sophisiticated” investors only rely on static-pool analysis, and that “the public, press and even some equity analysts are obsessed with raw servicing delinquency data.”

Despite Perry’s ranting on the subject, I have plenty of questions that I’d love to see answered.

First, it appears to me that Perry is confusing “static-pool analysis” with “vintage analysis.” The example he gives in his explanation — loans originated in 2002 — would be considered a vintage analysis by those so-called “sophisticated investors” he refers to in order to buttress his point. A static-pool analysis, by way of contrast, refers to an analysis of pooled loans within a particular securitized trust, which are usually some subset of a particular vintage and are likely also more stratified that a true vintage analysis would be.

Look at it this way. “All Alt-A loans originated in 2007″ are a vintage. “Alt-A loans, originated between January and March of 2007, with a weighted FICO of 700, originated by Countrywide and IndyMac, comprised mostly of no-doc and doc-lite underwriting” would comprise a static-pool, generally speaking. True static-pool analysis involves the performance tracking of a pool of investments with similar risk-return profiles, typically loans that have similar vintages and underwriting criteria. Not just all loans in a particular vintage.

So you’ll have to excuse me for being thrown off when Perry launches into the benefits of static-pool analysis and then proceeds to use a vintage analysis to justify his argument. The two serve very different purposes for that all-important “sophisticated investor,” and I’d expect the CEO of such a large lender and servicer to know the difference.

Perry does bring up a very useful point, in a general sense: delinquencies can be tough to read, especially since no company handles reporting consistently. Some report on UPB including foreclosures, others on UPB excluding foreclosures, and still others on actual units (rather than on a principal balance basis). It’s enough to make an analyst cringe and decide that an orange is, for all intensive purposes, an apple.

Which is part of the reason that a little thing called RegAB was tossed into the ring during 2004 by the Securities and Exchange Commission; organizations were required to be compliant fully by 2006 with the items defined by the regulation. One of those items requires static-pool disclosures by all issuers for any securitization, so that “sophisticated investors” could have a decent shot at making an apples-to-apples comparison.

And that lands me at my second question: what does Perry mean by saying that IndyMac wants to provide “static-pool” data to investors? For one thing, it’s already been doing just that for any loans it services that are part of a securitized trust, since RegAB requires it; so providing that data shouldn’t pose much in the way of “working feverishly” to prepare it.

For those whole loans it’s holding in portfolio (and that aren’t securitized), the question becomes what the definition of a “static-pool” really is in IndyMac’s eyes. We don’t yet have the answer to that. But in the meantime, why not pump out the static-pool data it does have on hand? If Perry is interested in fostering transparency with investors, that would seem to be a very good place to start.

On to question three: when are market participants going to recognize the effects of credit quality relative to, and directly on, prepayments? Perry points to prepayments as the chief reason raw servicing data is so skewed, because they reduce the denominator used in raw deliquency calculations. That’s only correct so far as it goes, and it likely signals a realization on his part that Alt-A and subprime aren’t coming back anytime soon — making now a “good” time to stop reporting the raw data by servicing category, since DQ percentages are only going to go up for each as a result.

But if we’ve learned anything in this credit mess, it’s that all prepayments are not created equal — and that prepayments aren’t the only reason loans in a portfolio will run off.

First off, there are prepayments that are voluntary, and those that aren’t. Think of it this way: a borrower that would have defaulted in 2006 refis into a new loan in 2006 and now defaults in 2008. That’s very different sort of prepayment than a creditworthy borrower deciding to refinance because they simply want a lower payment. The real problem with the 2006 and 2007 vintages, at the core, isn’t prepayments per se; it’s that the game of musical chairs finally stopped for those borrowers whose previous defaults had essentially been “revintaged.”

So the 2003-5 vintages end up looking great from a credit perspective, even if prepayment velocity is off the charts; analysts start making complex models that only look at the effect of prepayments in whatever static pool they’ve got, and everyone declares credit risk mostly irrelevant. In contrast, the 2006-7 vintages look horrible from a credit perspective, prepayments slow to a crawl, Wall Street takes a look at its models and realizes some important data was missing — and, of course, lender CEOs have to pen very public explanations explaining that prepayments are “screwing everything up.”

With all of this talk of Federal regulation, and with consumers and industry types all pointing at delinquency data to butress their own set of arguments, perhaps some of our collective energy would be better spent figuring out how to get delinquency data right. I mean, really right. Like maybe developing a national standard for loan portfolio reporting that matches what’s done on a securitized basis, and then forcing anyone holding a loan to adhere to that standard. Maybe that’s what IndyMac and its fearless leader are yet out to do.

But short of that, we’ll always end up with companies cherry picking a reporting standard that works well at the time.

Editor’s note: The author is indebted to numerous market participants, including Calculated Risk’s Tanta, for comments on an earlier draft of this story.

Discount Travel is a much sought after commodity these days. Small Business owners that are just starting do not have much money to stay in five star hotels. Most people do not have the time (or the money) to get away for an entire week without breaking the bank. There are a lot of services such as Orbitz, Travelocity and Hotels.com that help customers cut down on the drama of finding descent, low cost travel. All discount outlets have different inventory, just like the different travel agents do. What I have found helpful is to just go through a couple of the services online and comparison shop. This way, they will get a broader look at prices and ratings. Above all, if you are going on an extended vacation don’t under estimate your smaller or local travel agents. Especially with the more popular getaways, the smaller agencies put together low cost package deals that include hotel, airfare, and car rental in order to boost sales.

Market Watch has the details on the new home sales report and it doesn’t look pretty (lots more at Calculated Risk).  While sales are off 30% year-over-year we still have 10 months worth of new inventory, the highest since 1981.  On the bright side we’re slowly cutting in to excess inventory which is an important step in pulling out of this ridiculous tail spin.

Interesting note on the whole recovery debate.  The “bottom calling” has picked up a lot of momentum lately, and I think it is still largely unfounded.  I was talking to a couple of hedge fund folks yesterday and they referenced a new Goldman report which in essence estimates that we’ve seen only a fraction of the total losses (across all credit types from mortgages to synthetic CDOs to credit cards) that will result from this unwind.  To me it seems we have a long way to go.  

From Market Watch on the decline in new home sales:

 Sales of new homes in the United States fell to a 13-year low in February, dropping 1.3% to a seasonally adjusted annual rate of 590,000, the Commerce Department estimated Wednesday. Sales have fallen four months in a row and are off about 30% in the past year. The number of homes on the market dropped by 2.1% to 471,000, the lowest since July 2005, an indication that builders are trying to work off their bloated inventories of unsold homes. The inventory represented a 9.8-month supply at the February sales rate, unchanged from January and the highest since 1981. The median sales price fell 2.7% in the past year to $244,100. 

The Office of Federal Housing Enterprise Oversight issued final guidance on conforming loan limits Wednesday, and said it won’t lower traditional conforming limits as housing prices decline — a change in policy from earlier proposals that would have seen the GSE lending limit drop under certain conditions, as housing prices continue to fall.

Based on comments received in two public comment periods, OFHEO said its final guidance included provisions that keep the traditional conforming loan limit at $417,000 during 2009 and subsequent years. However, the traditional conforming loan limit will not increase, OFHEO said, until cumulative increases in house prices have exceeded cumulative decreases since the $417,000 limit was first established.

The guidance only applies to traditionally conforming loans, and does not affect the recently instituted “jumbo conforming” loan program enacted by Congress earlier this year through the end of 2008.

“This revised guidance responds to the comments that we received and OFHEO’s belief that stability in the mortgage market is very important,” said OFHEO director James B. Lockhart. “Not decreasing the limit will eliminate potential operational and implementation issues.”

The conforming loan limit is adjusted annually through a calculation of year-over-year October changes to the level of home prices based on data from the Federal Housing Finance Board’s Monthly Interest Rate Survey (MIRS).

Industry participants had argued that the MIRS price survey is too volatile, which was part of the reason OFHEO agreed to stabilize conforming loan limits during the housing downturn. Lockhart suggested that pending GSE reform legislation would allow the selection of a broader and more comprehensive price index.

For more information, visit http://www.ofheo.gov.

Mortgage applications nearly doubled last week after the Federal Reserve slashed interest rates by 0.75 percent last week.

Refinance mortgage applications increased by 82 percent last week as mortgage rates begun to decline for the first time since February 2008. Home purchase applications also increased last week by 10.6 percent which helped bring the overall mortgage application increase to 48.1 percent.

Over the past two weeks the fixed cost of borrowing dropped 0.63 percentage points, which is the largest drop in over four years. In response homeowners raced to refinance by applying for more mortgages in any one week period since the beginning of 2001.

Mortgage rates have also been declining since the Federal Reserve announced an interest rate cut on March 18. The 30 year fixed rate mortgage is ranging anywhere from 5.75 percent to 5.875 percent, which is also the lowest the 30 year fixed rate mortgage has been since February 2008.

According to the National Association of Realtors existing home sales for the month of February increased for the first time since July of 2007. This could be a sign that the housing industry is beginning to stabilize and home values have hit rock bottom.

Monoline bond insuer Security Capital Assurance Ltd said Wednesday that it will reduce its workforce by approximately 60 positions, as it continues to reposition itself amid a loss of its top credit ratings. The reductions, not surprisingly, are focused largely on the insurance business origination staff and are intended to reduce long term operating costs and align resources with current needs, the company said in a press statement.

SCA said earlier in March that it had ceased writing new business via its XL Capital Insurance and XL Financial Assurance subsidiaries as a measure to preserve capital.

“Decisions such as this one are always difficult, but as we are not writing new business at this time, today’s action was necessary,” said Paul Giordano, SCA’s president and chief executive officer.

“Our action today is consistent with our recently described plans, and we intend to treat our employees as fairly as we can under the circumstances. I am grateful for all the hard work and dedication of our employees, and for their continued professionalism in this very difficult environment.”

Insurers like SCA provided the top-rated portions of RMBS and related CDO 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 have wreaked havoc on an already unsteady mortgage-backed bond market.

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

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

PMI Mortgage Insurance Co., a subsidiary of The PMI Group, Inc., said Wednesday that it had formed a new homeownership preservation team led by John Jelavich, PMI’s newly appointed vice president of Homeownership Preservation Initiatives.

The initiative is different than a lender ramping up staff in loss mitigation, and signals a stark change in strategy for one of the nation’s largest mortgage insurers. Rather than sitting in the background and managing incoming claims, PMI is committing resources to supplement efforts already in place at lenders and servicers, whose loans it insures against loss.

“The insurers stand to lose quite a bit from increasing foreclosures, and many servicers are just simply strapped,” said one source, who works in the mortgage servicing industry. “Insurers aren’t saying ‘enough’ to servicers, I don’t think, but they are stepping in much more directly.”

PMI said it will expand its National Accounts Servicing team whose primary responsibility will be to partner with lenders in the development of creative solutions to help Americans avoid foreclosure.

“PMI has a history of working with our customers to develop innovative solutions that preserve homeownership,” said Gene Campion, senior vice president of servicing operations, loss mitigation and claims. “We’re confident that providing additional manpower and resources to aid our customers will ultimately help people who have the ability to make a reasonable mortgage payment preserve their home.”

“It is important for borrowers who are in trouble to contact their lender and see if they have options other than foreclosure,” said Jelavich. “The team will reach out to lenders and borrowers to try and bring both groups together and find creative solutions to save the borrower’s home.”

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

Senator and Republican Presidential candidate John McCain gave a speech in Orange County, Calif. yesterday that has clearly vexed many mortgage industry participants.

In his remarks, he appeared to call for the industry to voluntarily offer zero percent mortgages to troubled borrowers:

We should also convene a meeting of the nation’s top mortgage lenders. Working together, they should pledge to provide maximum support and help to their cash-strapped, but credit worthy customers. They should pledge to do everything possible to keep families in their homes and businesses growing. Recall that immediately after September 11, 2001 General Motors stepped in to provide 0 percent financing as part of keeping the economy growing. We need a similar response by the mortgage lenders. They’ve been asking the government to help them out. I’m now calling upon them to help their customers, and their nation out. It’s time to help American families.

Frank James at the Baltimore Sun took the comments at face value, and noted that “McCain might also want to propose that we repeal the phenomenon called inflation, since that’s about as likely as mortgage bankers offering zero percent interest rates.”

McCain’s campaign managers, of course, are now hotly contesting the notion that McCain was actually suggesting free mortgages — instead, they say, he was only intending to illustrate how an industry came together to deliver a solution during a past crisis.

“If he had been suggesting zero-percent mortgages, don’t you think he’d just say that?” Brian Rogers, a McCain campaign spokesperson said yesterday.

(Pardon our confusion here, but we thought he just did.)

Hullaballoo over his zero-percent comments aside, McCain did make it clear that he’s against public intervention in the mortgage markets.

“I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers,” he said. “Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.”

Mortgage refinance applications soared last week according to the MBA on the heels of the Fed rate cut.  With all the volatility in the marketplace however; many would-be refianciers may be disappointed at the constantly changing rate moves in the market.  When a loan officer tells you to lock your rate these days, I would generally take their advice.  If you have a rate that you like, that makes sense for you, take it off the table by locking it in.

From the Market Watch article on increased mortgage refinancing activity last week:

 Reflecting a surge in refinancing activity, the volume of mortgage applications rose a seasonally adjusted 48.1% in the week ended March 21 from the prior week, the Mortgage Bankers Association said Wednesday.

Applications filed to refinance existing mortgages increased 82.2% on a week-to-week basis, according to the MBA’s weekly survey. Filings for mortgages to buy homes also rose, up a seasonally adjusted 10.6%.

After the Federal Reserve moved last week to help stabilize the mortgage-backed securities market, “we saw an immediate impact with a drop in mortgage rates,” said Jay Brinkmann, MBA’s vice president of research and economics, in a news release. He noted “a drop in the 30-year fixed rate of at least a quarter of a point.”
Specifically, the 30-year fixed-rate mortgage averaged 5.74% last week, down from 5.98% a week earlier, according to the MBA survey.

Interest in refinancing among borrowers led to a huge jump in application activity last week, as rates fell amid an easing of selling pressure in key parts of the secondary market for mortgages. According to statistics released Wednesday morning by the Mortgage Bankers Association, a composite index of overall application activity surged by 48.1 percent to 965.9 for the week ended March 21.

The application index is calibrated to March 16, 1990; a reading of 965.9 means that application activity was roughly 9.6 times greater than when the index was first established.

Driving the rebound was a huge increase in refinancing activity — the MBA reported that applications to refinance shot up by 82.2 percent compared to one week earlier, while an index of purchase activity increased 10.7 percent.

FHA application activity remained strong, increasing 10.1 percent as well; borrower interest in FHA loans has been high throughout most of March, according to MBA’s statistics.

“The Federal Reserve acted last week to bring some stability to the mortgage-backed securities market and we saw an immediate impact with a drop in mortgage rates,” said Jay Brinkmann, MBA’s vice president of research and economics. “With a drop in the 30-year fixed rate of at least a quarter of a point, we saw a sharp increase in refinance applications, but applications for home purchases also increased over where they have been the last few weeks, although still below where they were this time last year.”

Reflecting the rebound in refinancing interest, the refinance share of total mortgage activity increased to 62.0 percent of total applications from 49.7 percent the previous week, the MBA reported. Borrowers looking to take out adjustable-rate mortgages continued to plummet, however, as most are flocking to fixed-rate products — ARM share of activity decreased to 3.8 from 7.9 percent of total applications from the previous week.

For more information, visit http://www.mortgagebankers.org.