Refinance Free Credit

Cue more write-downs, as if there weren’t enough to begin with.

Moody’s Investors Service has decided that it’s finally time to downgrade investment grade subprime RMBS — you know, the Aaa-rated stuff? Between Monday and Tuesday, calculations by Housing Wire show that the rating agency has slashed ratings on 1,923 tranches from 232 seperate subprime RMBS deals from 2005-2007 vintages.

That total includes hundreds of formerly Aaa-rated securities, as Moody’s embarked on its largest round of downgrades to investment grade subprime MBS since the credit crisis began.

A little over one month ago, HW covered a Bloomberg special report that suggested that both Standard and Poor’s and Moody’s were holding back on downgrades to the most senior RMBS bonds.

Moody’s, at least, is no longer content to hold off. The agency said it downgraded the ratings over increasing delinquency, foreclosure and REO levels, although it did not provide details of the total dollar amount affected.

The downgrades surely tally into the multiple of billions worth of subprime debt, and portend additional earnings pain for many market participants — write-downs on the value of RMBS in a portfolio usually aren’t marked up until a downgrade takes place. Calls to Moody’s representatives for comment and clarification on the dollar amount affected were not immediately returned.

For the curious, below is the entire list of downgrades issued since Monday morning and through early Tuesday afternoon, along with links to information on each issuer and affected tranche:

• 59 tranches from 7 subprime RMBS transactions issued by Terwin (full list)
• 53 tranches from 10 subprime RMBS transactions issued by Popular (full list)
• 148 tranches from 19 subprime RMBS transactions issued by Soundview, Aaa downgrades to Soundview Home Loan Trust 2007-1, 2007-WMC1 (full list)
• 50 tranches from 6 subprime RMBS transactions issued by Wells Fargo, Aaa downgrades to Wells Fargo Home Equity Asset-Backed Securities 2007-1 Trust, 2007-2 Trust (full list)
• 131 tranches from 15 subprime RMBS transactions issued by HASCO, Aaa downgrades to HSI Asset Securitization Corp. Trust 2006-HE1, 2006-HE2, 2007-HE1, 2007-HE2, 2007-NC1; also Aaa downgrade to HASCO 2006-WMC1 (full list)
• 48 tranches from 5 subprime RMBS transactions issued by SG, Aaa downgrades to SG Mortgage Securities Trust 2006-FRE1, 2006-FRE2, 2006-OPT2, 2007-NC1 (full list)
• 43 tranches from 7 subprime RMBS transactions issued by Saxon (full list)
• 26 tranches from 3 subprime RMBS transactions issued by People’s Choice, Aaa downgrades to People’s Choice PFRMS 2006-1 (full list)
• 9 tranches from 1 subprime RMBS transaction issued by Wachovia (full list)
• 34 tranches from 5 subprime RMBS transactions issued by Accredited (full list)
• 43 tranches from 5 subprime RMBS transactions issued by ABFC (full list)
• 6 tranches from 2 subprime RMBS transactions issued by Aames Mortgage Investment Trust (full list)
• 8 tranches from 1 subprime RMBS transaction issued by Newcastle Mortgage Securities Trust (full list)
• 286 tranches from 30 subprime RMBS transactions issued by First Franklin, includes Aaa downgrades to First Frankline Mortgage Loan Trust 2006-FF11, 2006-FF12, 2006-FF13, 2006-FF14, 2006-FF15, 2006-FF16, 2006-FF17, 2006-FF18, 2006-FF9, 2007-FF1, 2007-FF2; Aaa downgrades also to Merrill Lynch First Franklin Mortgage Loan Trust, 2007-1, 2007-2, 2007-4 (full list)
• 14 tranches from 2 subprime RMBS transactions issued by Park Place (full list)
• 27 tranches from 3 subprime RMBS transactions issued by Aegis (full list)
• 208 tranches from 27 subprime RMBS transactions issued by SABR, includes Aaa downgrades to Securitized Asset Backed Receivables LLC Trust 2006-FR4, 2006-HE1, 2006-HE2, 2006-NC1, 2006-NC3, 2006-WM2, 2006-WM3, 2006-WM4, 2007-BR1, 2007-BR2, 2007-BR3, 2007-BR4, 2007-HE1, 2007-NC1, 2007-NC2 (full list)
• 90 tranches from 12 subprime RMBS transactions issued by SURF, includes Aaa downgrades to Specialty Underwriting and Residential Finance Trust 2006-AB3, 2007-AB1 (full list)
• 220 tranches from 25 subprime RMBS transactions issued by Citigroup Mortgage Loan Trust, includes Aaa downgrades to Citigroup Mortgage Loan Trust 2006-HE3,2006-NC2, 2007-AHL1, 2007-AHL2, 2007-AHL3, 2007-AMC1, 2007-AMC2 (full list)
• 234 tranches from 27 subprime RMBS transactions issued by JP Morgan Mortgage Acquisition Trust, includes Aaa downgrades to J.P. Morgan Mortgage Acquisition Corp. 2006-WMC2, 2006-WMC3, 2006-WMC4, 2007-HE1 (full list)
• 159 tranches from 17 subprime RMBS transactions issued by CSFB Home Equity Asset Trust, including Aaa downgrades to CSFB Home Equity Asset Trust 2006-6, 2006-7, 2006-8, 2007-1, 2007-2 (full list)
• 27 tranches from 3 subprime RMBS transactions issued by GE-WMC, including Aaa downgrades to GE-WMC Asset-Backed Pass-Through Certificates, Series 2006-1 (full list)

Reverse Mortgages Growing

With much of the “baby boomer” population beginning to reach their senior citizen and retirement ages, many people are relying on their home’s equity for income. Their home equity is even more important considering how difficult it has become for many people to have a financially secure retirement. Perhaps the most popular way to utilize home equity is through a reverse mortgage. Reverse mortgages are available to people over the age of 62 and allows home equity to be released through multiple payments or a lump sum to the home owner. It allows people to get the income they need during retirement while deferring their mortgage payments during that period. It’s a great opportunity if it fits your financial situation, but there are some potential hazards you need to be aware of.

Reverse Mortgage Hazards

• When reverse mortgages were first created, they were offered exclusively with adjustable interest rates. As you know, adjustable interest rates are usually a gamble that the homeowner doesn’t end up winning. With a little persistence, you may be able to get a fixed rate.
• One of the major hazards of a reverse mortgage is the rule that states you must pay back any cash you receive from a reverse mortgage if you sell the home or no longer use it as your primary residence. This could be a very expensive debt at a time when you don’t have a lot of extra cash.
• Another possible problem is the high upfront costs of a reverse mortgage. Closing costs are comparable to a traditional mortgage, except there’s also the 2% mortgage insurance premium the FHA charges.
• When you eventually pass on, whoever is the heir to your home will have a choice to sell the home and repay the loan or keep the home and continue paying the loan. However, if they cannot afford to make the payments, they will have to forfeit the home.
• Ask your lender about their policies on home upkeep and repair. Your home’s condition is an important part of the mortgage and you should always have enough money to take care of future repairs.

Related Links:

• A New Mortgage Mess on the Way?
• Before shifting into a reverse mortgage, get all the facts

Trouble in the U.S. housing market continued unabated last month, as sales of existing homes recorded their seventh decline in eight months, and sales volume in March was the weakest for the month in one decade.

Existing home purchases fell 2.0 percent to a seasonally-adjusted rate of 4.93 million units last month, according to statistics released Wednesday by the National Association of Realtors; March’s rate of sales is 19.3 percent below year-ago levels, and is the worst March since 1998.

A drop in single-family home sales more than offset condo sales, the NAR said, with single-family home sales falling 2.7 percent to 4.35 million in March, seasonally-adjusted. Median single-family home prices fell a sharp 8.3 percent from year-ago levels to $198,200.

Separate data released Tuesday by the Office of Federal Housing Enterprise Oversight found that conforming housing prices were off a more moderated 2.4 percent annually during February. The NAR’s data tracks pricing trends outside of the conforming market, meaning the group’s pricing trends are likely to be more volatile during market downturns.

From Bloomberg:

“The housing downturn continues in full swing,” Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said in an interview with Bloomberg Radio. “Potential home buyers are sitting on the sidelines. They do sense that prices are going to go down further. We’re still a good six, 12 months away before we see buyers come in.”

The NAR said that inventory rose 1 percent at the end of March to 4.6 million existing homes for sale — a clear sign that pressures in the housing market have not yet begun to abate. Most economists look to inventory levels as a leading indicator for the health of the nation’s housing markets, and increasing inventory while sales continue to decline portends a rough selling season ahead.

March is traditionally the start of the spring selling season, and inventories typically climb throughout the spring and into the summer months. With inventories already high on a historical basis — March inventory is the highest level in at least 7 years — many industry pundits think it will be tough for housing to rebound before the end of this year.

The NAR’s Lawrence Yun, clearly concerned that housing may be facing a long summer ahead, focused his attention on the effect of monetary policy on mortgage rates — and, indirectly, buyer interest.

“With elevated inflation, the Federal Reserve should be extra careful about further rate cuts,” he said. “Mortgage interest rates, which do not move directly with Fed funds rates, may rise measurably and hurt the housing recovery if inflation gets out of hand.”

CNN reports that Bank of America will eliminate all but the most sound mortgage products as it attempts to complete its takeover of Countrywide. Countrywide was made famous by its option ARM and other non-traditional products which have clearly back-fired. Which begs the question - why Countrywide mortgage at all?

Bank of America announced that the main asset that they wanted from Countrywide was the midwestern retail bank operations where BofA is currently lacking (and the massive servicing customer base), so it makes sense that with their booming retail business they aren’t working hard to make sure that Countrywide’s mortgage-units have a product worth selling.

From the CNN report on Bank of America exiting the risky-mortgage biz:

Bank of America says it will alter its mortgage product menu once it completes its acquisition of mortgage lender Countrywide Financial.

Bank of America (BAC, Fortune 500) says it will offer traditional mortgages that fit government-sponsored enterprise guidelines. It will also offer interest-only fixed-rate and adjustable-rate mortgages that have long reset periods to lessen the likelihood of short-term payment spikes.

The Charlotte, N.C.-based bank will not originate subprime mortgages or loans that allow customers to make payments for less than the monthly interest due.

Conforming home prices appear to have taken a surprising jump in February, according to data released Tuesday morning by the Office of Federal Housing Enterprise Oversight. An index of purchase-only transactions rose roughly 0.6 percent on a seasonally-adjusted basis in February, the agency said in a press statement, after posting a revised 1.0 percent decline in January. The report clearly bested most economists’ expectations, with most predicting a 1.5 percent monthly decline ahead of the report.

Year-over-year, conforming home prices are still off 2.4 percent; since a peak in April 2007, home prices have fallen 3.1 percent, OFHEO said.

The apparent rise in conforming prices caught more than a few industry participants off guard, and had some wondering if a data quirk might explain the month-to-month rise. Other February price data, including data released Tuesday by First American CoreLogic, suggests that prices continued to head downward nationally during the month.

The OFHEO data is less likely to show severe price downturns because it tracks only the conforming housing market; price corrections during times of market stress are historically more severe in the jumbo lending market.

“There has to be something in the data, or how its collected,” said one source, who asked not to be identified. “Prices did most certainly not go up in California during February.”

The OFHEO monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac, and does not include refinance transactions that might upwardly distort pricing information.

“It’s important to keep in mind that this is the only part of the market that’s moving right now,” said one source, an MBS analyst. “While it’s certainly possible prices increased in general, it’s also possible that many would-be jumbo buyers, unable to get financing, finally caved and bought at the higher-end of the conforming limit.”

One thing that would appear to be clear is that prices were not distorted by the use of so-called jumbo conforming loans, which were added to the GSEs repertoire in February. While both Fannie and Freddie are temporarily authorized to purchase loans up to $729,500 in certain high-cost markets, most sources have made it clear that so called “jumbo-lites” have yet to really move onto either GSE’s books at a meaningful rate.

For its part, OFHEO said that the rise in prices was due in part to a change in the geographic mix — while such changes are usually small, OFHEO said that during February, states with stronger housing markets rebounded strongly, significantly shifting the national mix in their favor. Had the weights for each state been held constant, the national increase would have been only 0.3 percent in February, the agency said.

For the nine Census divisions tracked via the OFHEO HPI, seasonally-adjusted monthly price changes from January to February ranged from -0.6 percent in the Mountain Census Division to 2.2 percent in the New England Division.

Perhaps the most surprising statistic, however, was a 0.3 percent gain recorded for the month in the hard-hit Pacific region, which includes California and Nevada — a gain that homeowners in the state didn’t seem to feel.

“If prices went up here in February, nobody here felt it,” said one homeowner in Southern California’s Huntington Beach.

New details emerged Tuesday morning about Bank of America’s plan to integrate Countrywide Financial Corp. (CFC: 5.5222, -0.32%) into its mortgage business — although the future of Countrywide’s substantial wholesale mortgage platform was not discussed.

In testimony before the Federal Reserve in Chicago, Bank of America Corp. (BAC: 37.10, -1.36%) executives confirmed that the combined mortgage operation will not originate subprime mortgages following a pending acquisition of Countrywide. BofA also announced changes to its overall lending program, including the elimination of option ARMs, and said it would “significantly curtail” low-documentation loans.

The bank also said it would voluntarily impose limits on prepayment penalties and establish limits on interest-only and hybrid ARMs, in order to limit payment shock.

Similar to guideline changes announced recently by Citigroup Inc. (C: 24.99, -0.16%), BofA’s combined mortgage business will focus on originating conforming mortgages, as well as limiting interest-only mortgages to a minimum 10-year interest-only period; BofA also will offer adjustable-rate mortgages only when borrowers are protected against “steep increases in payment amounts.”

But, by far, the largest source of speculation surrounding the BofA/Countrywide merger has been reserved for the future of Countrywide’s wholesale lending operation; Countrywide is one of the last major lenders still offering a wholesale platform to brokers, with many other banks — including Bank of America — having exited the channel during the past 12 months.

I’ve speculated in past commentary that BofA will shutter wholesale upon completing the acquisition.

With Washington Mutual recently deciding to shutter its wholesale lending division (see HW’s earlier report), options for brokers are becoming increasingly thin as the marketplace continues to shift its focus toward retail origination.

Not everyone, however, sees an imminent wholesale exit and BofA/Countrywide. More than a few sources suggested the dearth of major players in the industry was a strong reason that BofA would likely keep wholesale operating.

“There aren’t too many players left,” said one source, a banker who asked not to be named. “It could make very good sense for BofA to keep wholesale going, because they could very well end up owning that channel.”

“With fewer players, and a strong broker network, Countrywide’s wholesale arm may actually one of the few profitable plays out there in wholesale right now,” the source said.

Disclosure: The author held no positions in BAC or other publicly-traded companies mentioned in this story when it was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Option ARM specialist Downey Financial Corp. (DSL: 14.23, +2.89%) said after market close on Monday that it lost $247.7 million — $8.89 per share — during the first quarter of 2008, as the volume of sour loans on its books continued to skyrocket upward. The first quarter loss compares to earnings of $42.9 million, or $1.54 per share, one year earlier.

Not surprisingly, Downey said it would suspend future dividend payments as chairman Maurice McAlister said the Newport Beach, Calif.-based lender would look to “preserve capital during this difficult operating environment.”

We can already hear investors asking: so, when’s the capital raise? Downey as of yet hasn’t said it will seek to raise capital, but sources suggested to us that it may be a matter of time relative to the losses piling up, thanks to a heavy concentration of option ARMs in California.

Downey president Rick McGill noted that the lender has been scaling back on option ARM activity as quickly as possible, amid even more quickly deteriorating conditions in key local housing markets across the state.

“The improved quality of our current loan portfolio also is reflected by the significant decline in our concentration of Option ARM loans,” he said. “Our option ARM loans declined by $3.1 billion from a year ago and currently represent 65 percent of our single family loans, compared to 81 percent a year ago.”

That being said, 65 percent of a $10.7 billion residential mortgage portfolio is still plenty of exposure left to burn.

The lender said it provisioned $236.9 million for credit losses, up slightly from $236.3 one year ago — leaving it with $546.7 million reserved for loan losses, net of $37 million in quarterly charge-offs, against a looming $1.562 billion in non-performing assets on its books. With reserves just 35 percent of NPAs, and NPAs mostly of the upside-down borrower, negative-equity type, it’s probably not surprising to see why most analysts think a significant jump in credit loss provisioning lies in the company’s future.

Total NPAs now represent 11.9 percent of total assets, Downey said; a forced inclusion of troubled debt restructuring activity boosted reported NPAs at the end of the quarter by 4.49 percent.

click for larger version

Downey has been aggressively putting option ARM borrowers into fixed-rate loans lower than their original option ARM rate without going through formal underwriting, as it looks to stay ahead of declining markets in many California locales; it said it modified $280 million worth of loans as part of this program during the first quarter of 2008.

The graph to the right illustrates the rise in NPAs and break down troubled debt restructuring activity — and it’s clear that NPAs are going up regardless of the measure used.

Downey said it was seeing losses accelerate in key areas of the Golden State, including: Sacramento, Stockton, Modesto and Contra Costa areas of Northern California, the Inland Empire and San Diego County.

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

If Fannie and Freddie fail the price tag is somewhere between $400 billion and a shade over a trillion of taxpayer money to bail them out. How do you like them apples? A trillion bucks? Big enough to sink the government’s AAA rating. Big enough to make LTCM look like child’s play. This is some scary stuff folks.

Some comparisons shall we?

Clinton’s proposed universal health-care coverage
10-15 years of Obama’s plan @ $50-65 billion per year
Cost of the Iraq war

From CNN’s trillion-dollar mortgage time-bomb:

Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.

This dwarfs how much it cost to help banks during the savings and loan crisis of the late 1980’s and early 1990’s. That cost taxpayers about $250 billion in today’s dollars.

S&P added that saving Fannie (FNM) and Freddie (FRE, Fortune 500) might cost so much that the federal government’s AAA credit rating, the top possible rating, might even be at risk. If that was lost, then all federal government borrowing would become more expensive.

But other experts expect that declining home values will force more borrowers who have a Fannie- or Freddie-backed loan to stop making payments in the coming months, rather than continuing to make payments on a home now worth less than their loan balance.

Rising job losses may also make it difficult for other borrowers who formerly had good credit to stay current on their mortgage payments.

“The real fundamental problem is real estate prices have been falling and they might fall substantially more,” said Robert Shiller, a Yale University economist who argued for years that a bubble was forming in real estate prices. “OFHEO and Fannie and Freddie never considered the possibility of a massive real estate correction.”

Some economists suggest that if investors start to see problems in the performance of loans backed by Fannie and Freddie, they’ll dumping them. And that would force the federal government to step in.

“I would say there’s at least a 50-50 chance of some sort of bailout. I’m not saying it will necessarily cost $1 trillion, but they’ll need some kind of help, and it very well could happen this year,” said Dean Baker, co-director of the Center for Economic and Policy Research

Investors are signaling growing concern as well. The yield premium for securities backed by Freddie and Fannie compared to the yield on Treasury bills has grown to about 2.25 percentage points from 1.7 percentage points at the beginning of the year. That’s a sign that the investors see a greater risk of Fannie and Freddie running into bigger problems.

I’m guessing there’s a school, a child, a homeless person, a neighborhood, a teacher, a firefighter, a veteran that could all use more help - I hope we don’t end up costing them that help by recklessly throwing Fannie and Freddie in front of this train.

And Fannie and Freddie’s role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages, up to $729,750, up from the previous limit of $417,000.

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets.

The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts.

Quantitative Easing. Get ready for those two words to dominate the press over the next 18 months as the Federal Reserve attempts to cut off the credit crunch. As the LIBOR stymies the efforts of Fed rate cuts they have limited arrows left in the quiver, and Quantitative Easing is going to look more and more attractive.

What is Quantitative Easing? Ask the Bank of Japan. It’s taking interest rates to near zero and flooding the markets with manufactured liquidity to promote private lending. Ask Japan how that’s worked out for them…

From a 2001 paper on the Bank of Japan’s Quantiative Easing policy:

The BOJ initially switched from the usual approach to expansionary monetary policy—namely, a reduction in the target short-term interest rate—to quantitative easing because by that time it had been pursuing a target very close to zero (0.15%). The BOJ argued that, at an interest rate so close to zero, further nominal interest rate target reductions were constrained to be small, as under normal circumstances nominal interest rates are bounded at zero. As a result, the possible stimulus obtained through further reduction in the interest rate target was likely to be limited.

Under quantitative easing, the BOJ conducts open market operations aimed at increasing the money supply and reducing long-term interest rates. The recent intensification of the program has come in a number of forms. The increase in quantitative easing involves the BOJ engaging in open market transactions aimed at increasing its balance of current bank accounts held at the BOJ.

Oh yeah, and don’t count on that to work either:

The data provide little evidence that the new steps taken by the BOJ are having far greater effects than previous efforts. There has been little downward pressure on long-term nominal rates in Japan since the inception of the quantitative easing program.

National City took on $7 billion in additional capital at a 40% discount to market price, sending shares tumbling as the beleagured bank looks to shake off bad mortgage bets and make it through the crisis. National City was reportedly looking to sell itself and has now turned to opportunistic Corsair Capital.

It’s interesting to see these banks eviscerated by these capital infusions. Talk about hard money. When a borrower doesn’t have FICO scores above 500 but still needed financing there is hard money which is based on equity rather than credit. The fees are typically exorbitant and the interest rate will make you blush; but at least the financing was available. Many people called hard money lenders “loan sharks” and other pejoratives.

I got to tell you - those guys ain’t got nothing on these institutional investors buying up positions in these ailing banks at 60 cents on the dollar.

From the Bloomberg article on National City’s sell-out:

National City Corp. joined Wachovia Corp. and Washington Mutual Inc. to tap what KBW Inc. calls “an abundance” of capital, after losses tied to the slumping housing market made U.S. financial companies a bargain for investors.

National City, Ohio’s biggest bank and subprime lender, agreed to sell a $7 billion stake to a group led by Corsair Capital LLC yesterday, at a 40 percent discount to market price. The move, which would dilute existing shareholder value by more than half, sent the stock plummeting.

“There’s an appetite out there for risk, but at a price,” Jason Arnold, an analyst at RBC Capital Markets in San Francisco, said yesterday in a phone interview. “Companies themselves are really desperate to get capital.”