Refinance Free Credit

Less than two weeks after CEO Michael Perry infamously told investors that IndyMac Bancorp, Inc. (IMB: 3.07, -10.50%) had “turned a corner”, the Pasadena-based thrift said Monday that it lost $184.2 million during the first quarter — and suggested that it wouldn’t return to profitability during 2008.

“We do not expect that Indymac will be able to return to overall profitability until the current decline in home prices decelerates,” Perry said in a statement.

Perry pointed to the fact that IndyMac had narrowed its net losses by 64 percent during the first quarter, although investors clearly weren’t sold. The company’s stock took a beating to the tune of nearly 10 percent in trading on the New York Stock Exchange, dropping to a $3.08 share price when this post was published, giving back all of its previous gains from Perry’s earlier remarks — and then some.

The IndyMac CEO had said as recently as mid-February that he expected the lender to return to profitability by the second quarter. Monday’s drubbing in the stock market signals that investors may be tiring of the endless optimism: Perry had suggested last March, for example, that fears of subprime woes spreading into Alt-A were “overblown.”

In the face of a renewed forecast of year-long losses in 2008, Perry said that IndyMac had made the decision to defer interest payments on trust preferred securities at the bank’s holding company, and to suspend the dividend payments on its preferred stock.

Despite having to reel in the company’s latest forecast, and despite investor sentiment, IndyMac is set on a path to become the nation’s largest independent mortgage lender after Bank of America Corp. (BAC: 37.33, +1.86%) completes its anticipated purchase of Countrywide Financial Corp. (CFC: 4.735, +2.71%) in the third quarter of this year.

IndyMac said its production of single-family residence mortgages reached $9.6 billion by the end of the first quarter, down 62.5 percent from one year ago — and off 21.0 percent from the fourth quarter — as it looks to reinvent itself as a conforming/FHA lender. Once the largest Alt-A mortgage lender in the country in 2006, IndyMac saw 84 percent of its first quarter production sold to either Fannie Mae (FNM: 28.12, +1.11%), Freddie Mac (FRE: 25.65, +1.99%) or Ginnie Mae.

While production shifts towards conforming product, the bank also said that overall portfolio delinquencies are now worse than the industry average — and have been for roughly two quarters. IndyMac attributed this fact to a heavier concentration of loans in the 2005-2007 vintages; it also suggested that its Alt-A losses were below industry averages for the same collateral.

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

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

The PMI Group, Inc. (PMI: 6.09, +2.01%) said Monday morning that it lost $274 million, or $3.37/share, during the first quarter as its mortgage insurance operations in the U.S. continued to reel from increasing borrower defaults and rising loss severity. The first quarter loss compares to earnings of $102 million, or $1.16/share, in the year-ago period.

PMI’s U.S.-based mortgage insurance business lost $172.5 million during the first quarter, the company said, while it also wrote off $88 million of its investment into troubled bond insurer Financial Guaranty Insurance Company; the FGIC write-off represented that last of PMI’s investment into the bond insurer, which has seen its ratings slashed by all three rating agencies.

Losses tied to troubled borrowers outpaced growth in net insurance premiums earned during the first quarter, PMI said. Net premiums grew by 7.2 percent to $207.8 million, compared to $193.8 million in the first quarter of 2007; but this growth was more than offset by paid claims that far more than doubled their year-ago totals, amounting to $162.6 million during Q1.

Rising borrower defaults
PMI said that 8.78 percent of its 794,323 primary policies in force were in some stage of default by the end of the first quarter, a jump of 10.7 percent relative to the fourth quarter — underscoring that the number of troubled homeowners continues to grow. Flow-only defaults registered a more modest 7.57 percent rate of default, while structured transactions (i.e., bulk) posted a rate of 15.14 percent; both were up from quarter-ago and year-ago defaults.

The rest problems, however, appear to be in key loan segments. PMI provided details on primary default activity by loan types, and some of the numbers are downright scary.

42.95 percent of 2/28 hybrid ARMs were in some stage of default at the end of the first quarter. That’s up from 18 percent one year ago — and no, it isn’t a misprint.

Nearly 21 percent of PMI-insured subprime loans are in default — not at all surprising, given the numbers we’ve seen from outfits like Countrywide Financial Corp. (CFC: 4.80, +4.12%) lately — but compare that to a default rate of 17.5 percent for Alt-A mortgages. Payment option ARMs are approaching a near-20 percent default rate, too, according to PMI.

These are default rates that are for the most part increasing dramatically, too. For example, interest-only mortgage defaults hit 15.04 percent in Q1, PMI said, up 37 percent in just one quarter. Alt-A deliquencies are up 26 percent in just one quarter. Defaults on ARMs other than 2/28s are up 23 percent in just one quarter.

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

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

A report from Goldman Sachs, released late Friday, said that losses from the mortgage mess — subprime and otherwise — could reach as high as $500 billion. According to Reuters, which first broke news of the Goldman analysis, economists at the financial firm see any potential bounce in the U.S. economy this year as being temporary at best.

Via Reuters:

“Excess supply in the housing market is still growing; home prices are already falling at rates that are very rapid by the standards of previous housing downturns around the world; and U.S. loan-to-value ratios are much higher than in those previous downturns,” he said.

“Ultimately, a painful adjustment needs to take place, certainly in the housing and credit markets and likely in the broader economy as well,” Hatzius said.

The remarks are those of Jan Hatzius, Goldman’s chief U.S. economist; he also goes on to suggest that he expects a “renewed” slowdown in the U.S. economy to start 2009, as a “stimulus-fueled bounce” wears off in the back half of this year.

The idea that a fundamental, needed correction underlies the current financial crisis is not a new one, although Hatzius is among the more visible to suggest that fiscal measures by the current Bush administration to solve for the financial mess are likely to do little in the long run.

For what it’s worth, Hatzius also said he believes the Fed will not begin tightening monetary policy in 2009, as a result — many market pundits have said recently that they expect the Fed to begin raising its target federal funds rate in 2009, as the market crisis recedes. If Hatzius is correct in suggesting that we’re merely forestalling an inevitable correction, questions in 2009 instead will more likely center on what the Fed has left in its monetary arsenal.

Clayton Holdings Inc. (CLAY: 5.87, +0.51%) said Monday morning that it lost $6.6 million during the first quarter, or $0.31/share, as the analytics, consulting and due diligence firm continued to feel the effects of a frozen secondary market. The quarterly loss compares to a $2.3 million loss in the year ago period, and a $91.8 million loss in the fourth quarter of 2008.

The company said its surveillance business unit — one of the Clayton’s bright spots amid the industry downturn — was monitoring approximately $434 billion in assets primarily for investment banks and institutional investors in mortgage-backed securities at the end of March; revenues from the business segment were $10.1 million in the quarter, off slightly from $10.4 million in revenue one quarter earlier.

Shelton, Conn.-based Clayton agreed in mid-April to be acquired by Greenfield Partners, LLC in a deal worth approximately $34 million; as with other firms set to be acquired, including Countrywide Financial Corp. (CFC: 4.70, +1.95%), Clayton said it would not hold an earnings call pending completion of the pending deal. So-called quiet periods are common ahead of mergers and related business transactions.

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

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

MBIA the large bond insurer posted a nifty $2.4 billion loss for the quarter on the back of losses tied to the mortgage bust. Bloomberg has the full details.

If you are interested in why the bond insurers play such a central role in this mess (and how they are essentially teetering on insolvency) check out this great presentation on MBIA and AMBAC. It goes way in-depth about the problems with the bond insurers.

From the report, this graph below shows how MBIA has reduced cash reserves even as the company continues to be exposed to CDO losses.

As Warren Buffett says about the problems with bond insurers’ business models:

“We see a Baa credit enhanced to a Aaa credit by someone guaranteeing it for a 10-15 basis point charge. Yet, the spread in the market yield might be 100 basis points. Well, that doesn’t strike us as smart. … I would say that at some point, you can get into a lot of trouble at 140-to-1 insuring credits.”

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MBIA the large bond insurer posted a nifty $2.4 billion loss for the quarter on the back of losses tied to the mortgage bust. Bloomberg has the full details.

If you are interested in why the bond insurers play such a central role in this mess (and how they are essentially teetering on insolvency) check out this great presentation on MBIA and AMBAC. It goes way in-depth about the problems with the bond insurers.

From the report, this graph below shows how MBIA has reduced cash reserves even as the company continues to be exposed to CDO losses.

As Warren Buffett says about the problems with bond insurers’ business models:

“We see a Baa credit enhanced to a Aaa credit by someone guaranteeing it for a 10-15 basis point charge. Yet, the spread in the market yield might be 100 basis points. Well, that doesn’t strike us as smart. … I would say that at some point, you can get into a lot of trouble at 140-to-1 insuring credits.”

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Proving that bad news can be good news, MBIA Inc. (MBI: 9.93, +5.30%) saw investors reward it for posting better-than-expected results during the first quarter — although the results weren’t exactly the sort of thing to cheer over. The troubled bond insurer said that it lost $2.4 billion, or $13.03/share, during the first three months of 2008, primarily due to $3.6 billion in unrealized losses on credit default swaps.

“[W]hile the size of this mark-to-market adjustment is attention-getting, the Company does not believe it is representative of actual expected impairments,” MBIA said in a press statement Monday morning.

Analysts has expected a much wider loss, according to Bloomberg News. Further, the company also said it pushed $900 million into its ailing insurance unit, quelling concerns from the insurer’s regulator last week that the company might decide against capitalizing its insurance business after raising $2.6 billion in new capital during the quarter.

A narrower loss, and news of capitalization at it insurance unit, led MBIA shares on a surge that nearly reached 10 percent in early trading; shares were up more than 5 percent at $9.92 when this story was published.

“We have ample liquidity, our balance sheet is built to withstand credit stress levels many multiples of what we’re experiencing now, and our business model is proving that we are adequately capitalized to satisfy any potential claims on our insured portfolio,” said Jay Brown, MBIA’s chairman and CEO. He said the results were “consistent” with the direction of the overall credit markets.

The company has $4.2 billion in direct exposure to subprime mortgages, and acknowledged Monday that “like many market participants, [MBIA] made some underwriting assumptions that have proved inaccurate and led to losses.” In the first quarter, those losses amounted to $1.34 billion of pre-tax impairments and loss reserves on its housing-related insured portfolio, the company said.

MBIA is still rated AAA by Standard & Poor’s and Moody’s Investors Service, although it lost its AAA standing at Fitch Ratings in early April and has since asked Fitch to withdraw its ratings, as a result. Both S&P and Moody’s affirmed MBIA in March, with a negative outlook.

MBIA voluntarily suspended writing new structured finance business — including RMBS and related securities — in February.

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

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

HSBC Holdings Plc said Monday morning that bad bets on U.S. mortgages continued to eat away at the company’s bottom line, but not enough to offset strong growth in markets outside the United States. Europe’s largest bank by assets said it set aside $3.2 billion during Q1 in loan impairment charges, compared to $1.6 billion in the year-ago period.

The impairment charges, however, came in less than analysts had expected; which means investors rewarded the company’s stock — both abroad and here in the States, where the company’s stock (HBC: 86.25, +2.59%) was up nearly 3 percent by Monday afternoon.

Higher margins in international markets, including Asia, Latin America and the Middle East, generally served to more than offset U.S.-based losses; two-thirds of the bank’s profits come from emerging markets, making the bank overall less susceptible to the ongoing mortgage mess in the United States, and to a lesser extent, the UK.

“It seems likely that the deterioration in the US housing market will extend into 2009,” the bank said in a press statement Monday. “[I]t is also clear that US economic growth has slowed and there is an increased likelihood of a recession this year.”

Troubled stateside borrowers
HSBC noted that its retail originations continue to perform better than its wholesale (and primarily subprime) originations from recent years. At the end of Q1, HSBC said that five percent of US branch-based mortgages were severely delinquent, up 19 percent from one quarter earlier. In contrast, loans originated via wholesale channels — including the now-defunct Decision One Mortgage — jumped to a severely delinquent rate of 12.5 percent by the end of Q1, up 11.6 percent from one quarter earlier.

HSBC singled out California, Florida, Arizona, Virginia, Washington, Maryland, Minnesota, Massachusetts and New Jersey as particularly problematic — and said that the nine states accounted for roughly half of the increase in all delinquencies during the quarter. The bank in particular singled out second liens as key drivers of future expected losses, particularly in situations where the second is tied to an adjustable-rate first mortgage.

HSBC said it held $17.1 billion in adustable rate mortgages at the end of the quarter, and nearly $12.7 billion in second liens; it’s worth noting as well that $7.2 billion of the company’s $81.9 billion mortgage portfolio are in stated income mortgages.

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

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

E*Trade Financial (ETFC: 3.99, +3.64%) said in a filing with the Securities and Exchange Commission late Friday that it had exited the retail mortgage origination channel in April 2008, amid continuing troubles with U.S. mortgages — and mounting losses at the financial services brokerage. On April 17, the company reported a $91.2 million loss for the first quarter as it boosted losses for the mortgages still on its books.

E*Trade exited wholesale origination in September of last year, but continued to originate mortgages directly via its retail branches nationwide. Its decision to shutter retail effectively pushes the company out of the mortgage origination business, although the company said that “after we complete the exit of this business, we expect to partner with a third party company to provide access to real estate loans for our customers.”

No further details were provided, although a source close to the company said E*Trade is likely to simply provide qualified leads to a third party originator.

The company said its retail channel had originated roughly $116 million in first-lien, prime credit-quality mortgages during the first quarter, before being shut down.

HELOCs are, by far, the largest area of concern for most investors — E*Trade held $5.6 billion in outstanding lines of credit at the end of the quarter, down from $6.3 billion previously, as the company froze roughly $900 million in credit lines during the first quarter.

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

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

The Royal Bank of Scotland disclosed over the weekend that it’s involved in an ongoing series of inquiries by the Securities and Exchange Commission over its subprime mortgage exposure. The Sunday Times, a UK-based newspaper, first reported on the story.

The Sunday Times report noted that the disclosures were “buried in the bank’s prospectus for its imminent £12 billion rights issue.”

The documents reveal that RBS subsidiaries have received requests for information from “various US governmental agencies and self-regulatory organisations” in relation to the sub-prime mortgage crisis.

The documents add: “In particular, during March 2008 RBS was advised by the SEC that it had commenced a nonpublic, formal investigation relating to RBS’s US sub-prime securities exposure and US residential mortgage exposures. RBS and its subsidiaries are cooperating with these various requests for information and investigations.”

RBS’s latest capital raise heads to a shareholder vote this week; the bank is far from the latest across-the-pond financier to look for additional liquidity as it deals with the fallout from a U.S. mortgage market gone awry.

The SEC — along with the FBI and other government agencies — has opened a slew of subprime-related investigations within the past 8 months. Sources suggested to HW that the RBS investigation was far from extraordinary in that regard.

“Pretty much any financial firm of sufficient scale has come under scrutiny,” said one source, a fund manager tied to RBS who asked to remain unnamed. “I don’t think this sort of investigation is unique, as a result.”

Last year, the SEC began probing investment banks regarding the pricing and mark-down strategies tied to subprime RMBS and related mortgage-backed bonds, over allegations that firms were more aggressively making margin calls based on pricing updates than they were marking down their own inventory. It’s not clear, however, what the focus of the latest formal investigation is likely to be.

RBS officials have not commented to the press beyond the disclosure made in its offering prospectus.