Refinance Free Credit

As we discussed the other day in our post about MBIA’s $2.4 billion quarterly loss, the bond insurers are seemingly sitting on the edge of a cliff waiting for loan performance to deteriorate to a tipping point that pushes these companies in to insolvency. Warren Buffett himself questioned the business models of these bond insurers (PDF) who have taken very ‘thin’ positions in terms of exposure to mortgage risk.

This risk is particularly high in the second-mortgage insurance business as now many second mortgages are essentially non-collateralized loans against properties that are now valued at far less than when the original second-mortgage lien was written.

Moody’s apparently feels the same way as they have issued fresh warnings on the ratings of bond insurers. While this presentation on the bond insurers seems to point to plenty of reasons for concern MBIA is (of course) protesting the warnings.

From Market Watch:

Poor performance of second-lien residential mortgage-backed securities could put pressure on the credit ratings of bond insurers, Moody’s said on Tuesday.

But there are “significant” differences between the subprime second-lien mortgage securities that Moody’s is worried about and the prime second-lien mortgage securities that the bond insurer has guaranteed, MBIA said.

Moody’s also said Tuesday that higher-than-expected losses on these types of securities could affect the amount of capital that some bond insurers need to keep their all-important AAA ratings.

MBIA countered that it’s unaware of any changes to capital requirements covering the securities it has guaranteed. “Nor do we believe any is warranted based on deal performance or expected losses,” the New York-based company said in a statement.

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The Federal Bureau of Investigation said late Tuesday that mortgage fraud looked to be a rampant problem during 2007, with the number of mortgage fraud Suspicious Activity Reports referred to law enforcement increasing 31 percent last year, to 46,717.

If you’ve ever wondered what fraud means for lenders’ loss severity, this picture has an answer; the appraisal described “recently renovated condominiums” to include Brazilian hardwood, granite countertops, and a condo value of $275,000. Click for larger view. (source: Federal Bureau of Investigation)

The total dollar loss attributed to mortgage fraud is unknown, the FBI said; however, seven percent of reports filed during 2007 indicated a specific dollar loss, which totaled more than $813 million.

“The $813 million loss denoted in this report is just the tip of the iceberg, reflecting only a small percentage of financial damage suffered by victims of mortgage fraud,” said Assistant Director Kenneth W. Kaiser, on the FBI’s Criminal Investigative Division. “The FBI remains committed to working with our law enforcement, regulatory, and industry partners to unravel these complicated fraud schemes and bring their perpetrators to justice.”

Click for larger view. (source: Federal Bureau of Investigation)

Fraud was a problem on the way up in many housing markets, to be sure, but FBI’s report signals an interesting shift towards the effect of the housing downturn on mortgage fraud activity, which is increasingly centered on suspect “foreclosure assistance” programs.

“The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes,” FBI analysts said in a mortgage fraud report, released Tuesday. “Emerging and re-emerging schemes in 2007 included builder-bailouts, seller assistance, short sales, foreclosure rescue, and identity theft exploiting home equity lines of credit.”

The top 10 mortgage fraud states for 2007 were Florida, Georgia, Michigan, California, Illinois, Ohio, Texas, New York, Colorado, and Minnesota, the FBI said. Other states significantly affected by mortgage fraud included Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut.

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

The Mortgage Bankers Association said Wednesday morning that its Market Composite Index of mortgage application activity rose 2.9 percent to 674.4 for the week ended May 9; applications remained off 1.1 percent compared to year-ago activity, the MBA said.

The application index is calibrated to March 16, 1990; a reading of 567.0 means that application activity was roughly 5.7 times greater than when the index was first established.

Primarily driving the increase were refinance applications, the MBA said, which rose 6.5 percent from the previous week; purchase applications, typically of more interest to economists, fell 0.7 percent on a seasonally-adjusted weekly comparison basis.

Some economists and industry experts have suggested that the MBA index is prone to overstatement by counting multiple applications from the same borrower — particularly for refinancing activity — which may more directly indicate credit distress than market sentiment. Housing Wire covered the issue in a report published last week.

Refinance share of mortgage application activity jumped to 48.7 percent, compared to 47.1 percent one week earlier; ARM share of activity jumped to 8.3 percent, up sharply from 6.8 percent one week earlier.

The MBA said that mortgage rates eased last week somewhat, reporting that the average rate on a fixed 30-year mortgage fell 9 basis points to 5.82 percent. Formal rate reports from Freddie Mac (FRE: 27.43, +9.90%) and Bankrate.com are set to be released Thursday.

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

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

Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 243,353 properties in April, a 4 percent increase from March’s total and a nearly 65 percent increase from one year earlier. The data, reported Wednesday by foreclosure marketplace and data firm RealtyTrac, shows that the housing market has yet to cycle through a preponderance of bad mortgages.

“The total number of U.S. properties with foreclosure activity in April was the highest monthly total we’ve seen since we began issuing the report in January 2005,” said James J. Saccacio, chief executive officer of RealtyTrac.

“Although only about 2 percent of households nationwide are in foreclosure, these properties contribute to already bloated inventories of homes for sale, and put downward pressure on home values.”

California, Nevada and Arizona continue to be particularly hard hit, Saccacio said.

Despite a 5 percent month-over-month decrease in foreclosure activity in April, Nevada continued to document the nation’s highest state foreclosure rate: one in every 146 Nevada households received a foreclosure filing in April, 3.6 times the national average, and the state’s foreclosure activity was up 95 percent from April 2007.

California posted the second highest state foreclosure rate in April, with one in every 204 households receiving a foreclosure filing during the month. Foreclosure filings were reported on 64,683 California properties in April, down less than 1 percent from the previous month — but still the most of any state — and an increase of 112 percent from April 2007.

Arizona foreclosure activity in April increased 26 percent from the previous month and 181 percent from April 2007, helping to bump the state’s foreclosure rate up to third highest among the states. Foreclosure filings were reported on 11,620 Arizona properties in March, equaling one in every 224 total households.

California, Florida dominate metro foreclosures
Six California cities documented foreclosure rates that ranked in the top 10 among the 230 metropolitan areas tracked in the RealtyTrac report. Merced took the top spot, with one in every 66 households receiving a foreclosure filing during the month, followed by Stockton at No. 2, Modesto at No. 3 and Riverside-San Bernardino at No. 4. Other California cities on the list were Vallejo-Fairfield at No. 6 and Bakersfield at No. 8.

Three Florida cities registered foreclosure rates among the top 10: Cape Coral-Fort Myers at No. 5; Port Lucie-Fort Pierce at No. 9; and Fort Lauderdale at No. 10.

With one in every 116 households received foreclosure filings in April, the Las Vegas metro area documented the nation’s seventh highest metro rate, RealtyTrac said.

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

Fitch Ratings cut its core credit ratings on IndyMac Bancorp Inc. (IMB: 2.08, -10.34%) for the second time this year late Tuesday, moving the troubled lender further into junk territory over concerns about the bank’s “ability to manage capital.” The cut comes as analysts unloaded on the Pasadena, Calif.-based thrift yesterday, suggesting that it would need to raise substantial capital to remain solvent.

Fitch said it had cut its long-term debt rating to B- from a previous BB, while short-term debt was cut to C from a previous B rating — all ratings, both previous and new, are considered speculative-grade by the rating agency.

IndyMac posted a $184.2 million first quarter loss earlier in the week, and said that it likely wouldn’t post a profit until 2009; the bank also suspended dividend payments and deferred interest payments on its trust preferred securities in a move designed to preserve capital.

“While Fitch believes the company’s election to defer dividends and preserve capital was prudent, the deferral period, absent a meaningful capital raise, may not be temporary,” Fitch analysts said in a press statement.

All about capital
Fitch’s suggesting that IndyMac may need capital was echoed by a score of analysts earlier on Tuesday, including Friedman, Billings and Ramsey analyst Paul Miller, who cut his price target on the lender from $3 to $1 per share.

Via Reuters:

Miller, who rates the stock “underperform,” said that with an estimated capital cushion of just $107 million, which includes stock issued to date, IndyMac would struggle with losses of over $200 million through year-end.

“Our primary concern is that IndyMac has minimal capital cushion, but losses will continue at least through year-end,” Miller wrote. “IndyMac needs to raise additional capital - the question is not if, but how much and at what cost.”

IndyMac is set to become the nation’s largest independent lender, once Bank of America Corp. (BAC: 36.67, +0.16%) completes its contemplated purchase of Countrywide Financial Corp. (CFC: 4.93, -1.00%). That transaction is expected to close sometime in the third quarter.

Perry had earlier suggested to investors ahead of the earnings report that the bank had “turned a corner.”

Disclosure: The author was long CFC, and held not other relevant positions, when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Troubled lender Impac Mortgage Holdings, Inc. (IMH: 1.30, +0.78%) said late Tuesday that it won’t file its first quarter earnings report until June at the earliest, as the struggling company looks to complete its as-of-yet incomplete 2007 earnings report. The Irvine, Calif.-based company cited a reduction in personnel as substantial enough to limit its ability to prepare financial reports — underscoring just how badly the lender has been hit by the mortgage crisis.

“The company anticipates a signficant change in its results of operations and it may experience a loss for the first quarter of 2008,” it said in a filing Tuesday with the Securities and Exchange Commission.

Impac has been the subject of speculation that it may not survive the crunch pushing many independent mortgage lenders out of business, having posted a net loss of $1.3 billion during the third quarter, the last quarter results were available for the ailing company. The loss pushed the company’s net worth into negative territory, it said at the time.

The company also lost Chief Investment Officer Andrew McCormick and Chief Operating Officer Richard Johnson at the end of March. Neither positions were filled upon the executives’ departures, with Impac citing “changes to the company’s business plan.”

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

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

The subprime mortgage mess is mostly over, as global banks have already written down more than 80 percent of their losses from subprime mortgages and related assets, Fitch Ratings said in a report released Wednesday. The rating agency estimated that total market losses from subprime mortgage assets at $400 billion, though losses could go as high as $550 billion, depending on the method of calculation used.

The loss estimates come as many market participants have jumped in recently to assess the damage inflicted thus far by subprime mortgage bonds and CDOs of ABS backed by subprime RMBS.

Fitch’s own calculations of losses, based on its internal estimates of loss rates for RMBS and CDOs of ABS, suggest that subprime losses will reach $401 billion. Analysts at the rating agency said they believe that roughly 50 percent of subprime-driven exposure — anywhere from $200 to $275 billion — are held by banks, with the remainder held by financial guarantors, insurance companies, asset managers and hedge funds.

Given $165.3 billion in reported losses at banks thus far — or 80 percent of its own estimate of banks’ collective exposure — Fitch suggested that the subprime mortgage mess is nearing an end; to say nothing, of course, of larger credit problems plaguing the mortgage sector.

Fitch’s internal models assumed an average loss rate of 17 percent and 53 percent, respectively for subprime RMBS and CDOs of ABS; declines in the ABX and TABX, two indices broadly used as a proxy for subprime MBS and CDO market trending, suggest that investors have priced in a far more severe loss experience for subprime RMBS than Fitch said it believed to be appropriate.

“Subprime mortgage-related losses for the total market vary considerably depending on the methodology used,” says Krishnan Ramadurai, managing director in Fitch’s financial institutions group.

“Given the problems associated with methods of calculation based on ABX and TABX indices, we believe that Fitch’s internal loss estimate of $400 billion is a more appropriate reflection of losses, though they are also sensitive to assumptions made on underlying loss rates.”

“To the extent that institutions have effectively hedged their exposures with financially sound counterparties, these loss figures may be over-estimated,” says Gerry Rawcliffe, managing director and group credit officer for Fitch’s financial institutions group. “Nevertheless, for those institutions that did not hedge a sufficient portion of their super-senior exposures, mark-to-market losses on these residual exposures have been so large that their capital ratios have come under acute stress.”

The subprime market originated as much as $1.4 trillion of loans voer the course of the past three years, Fitch estimated.

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

For the first time in California’s history, foreclosure sales exceeded 1,000 properties per day in April, according to a report released Tuesday afternoon. Foreclosure sales at auction — the last step in the foreclosure process — jumped 44 percent in April to 22,838 sales, representing $9.45 billion in combined loan value, according to foreclosure data firm ForeclosureRadar.

The vast majority of properties sold at auction received no third party bids, despite ever-increasing discounts from lenders anxious to prevent further build-up in REO inventories.

click for larger view

Average discounts at auction hit 25 percent in April, ForeclosureRadar said, but nearly half of all properties taken to foreclosure sale even offered discounts of 30 percent or more from the current loan balance. The majority of these loans were 80 percent LTV first mortgages, making discounts of 40 to 50 percent from the prior sales price common in many parts of the state — and yet, almost nobody bid on the properties, forcing lenders to add to their already bloated REO books.

The largest discounts offered in major Southern California counties were in luxe Santa Barbara, where properties auctioned off at a 29 percent discount, and Riverside, where the discount averaged 28 percent for the month. Even Orange County — home to such glitzy locales as Newport Beach and Laguna Beach — saw lender bids at foreclosure sales average 21 percent less than the amount originally owed.

“We expected a significant increase in auction sales based on previous default patterns,” said Sean O’Toole, founder of ForeclosureRadar. “Unfortunately, the continued increases in defaults tell us that the worst is still ahead.

“It is time for lenders to accept this reality, and start approving short sales rather than forcing more than two-thirds of troubled homeowners through the entire foreclosure process.”

New borrower defaults, referenced by filings of Notices of Default, increased slightly from March’s numbers to set another new record high, reaching 44,101 new filings during April. Notices of Trustees Sale, issued approximately 3 months following a Notice of Default, jumped 7.8 percent in April — surpassing the previous record with a total of 29,892 new filings.

Lenders added 22,324 properties to their real estate owned inventory in April, ForeclosureRadar said, and are increasing REO on their books an average of 1.36 times faster than they can sell the properties in inventory, O’Toole said.

Amazingly, and in a sign that foreclosures are spreading to every part of the state, foreclosure sales nearly doubled in both Marin County — a 96 percent increase — and Orange County, up 82 percent in just one month alone. Orange County posted 1,133 foreclosure auctions during April.

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

Freddie Mac (FRE: 27.27, +9.25%) said Wednesday that it lost $151 million, or $.66/share during the first quarter of 2008 as it dealt with what it called a “challenging” mortgage and housing market and absorbed $1.4 billion in credit costs. The quarterly loss compares to a $133 million loss, or $.35/share in the year-ago period, and was significantly better than analysts had expected.

MarketWatch reported that analysts had expected a loss of $.91/share for the quarter. Freddie’s first quarter loss compares to a $2.2 billion quarterly loss at sister GSE Fannie Mae (FNM: 29.70, +5.62%), which reported results last week.

“Market and credit conditions remained challenging during the first quarter of 2008,” said Richard F. Syron, Freddie’s chairman and chief executive officer. “This stress is particularly evident in our increased credit-related expenses. However, Freddie Mac on the whole had a better first quarter than what we experienced in the third and fourth quarters of last year.”

Like Fannie Mae, Freddie Mac said it would seek to raise new core capital — $5.5 billion of it — which Syron said the company would use to “serve our mission and build long-term, durable shareholder value.” $2.75 billion of the capital is likely to come in the form of common stock, while another $2.75 billion will consist of a preferred offering; company officials had insisted earlier in the year that a dilutive capital raise wouldn’t be needed. Obviously, that earlier assessment has changed.

The raise of fresh capital will free Freddie, like Fannie before it, from capital restrictions placed on it by the Office of Federal Housing Enterprise Oversight. In a separate statement Wednesday, OFHEO director James Lockhart said the GSE regulator would reduce its capital surcharge on Freddie Mac to 15 percent above statutory minimum capital; a further reduction to a 10 percent surcharge was likely in September, Lockhart said.

Housing Wire reported Tuesday night that a group of Republican Senators, led by Chuck Hagel (R-NE), has questioned OFHEO’s reduction in capital surcharge at Fannie Mae; it’s unclear if similar concerns exist for Freddie Mac.

Freddie Mac’s core capital rose, thanks to an accounting quirk, to $38.3 billion at the end of the quarter, Freddie said; the total is an estimated $6 billion above the OFHEO-directed capital surplus requirement. It’s worth noting that this total is balanced against $738 billion in mortgage held in Freddie’s retained portfolio and $1.8 trillion held in the GSE’s credit guarantee portfolio at the end of April.

Credit quality deteriorates, again
Freddie said it absorbed $1.4 billion in credit loss provisioning and REO operations expense during the first quarter, compared to $912 million for the fourth quarter. Actual credit losses totaled $528 million, more than double the $236 million recorded just one quarter earlier; credit losses translated to an annualized 11.6 basis points of the Freddie Mac’s average total mortgage portfolio.

Freddie Mac said it now expects credit losses to register roughly 16 basis points — or $3.1 billion — relative to its overall mortgage portfolio; the GSE had earlier forecast losses of 12 basis points.

Severe delinquencies 90+ days or more in arrears also continued to increase during the first quarter, Freddie Mac said, reaching 77 basis points of the GSE’s retained portfolio. The first quarter increase amounted to a jump of 18.5 percent relative to fourth quarter’s DQ total.

It’s interesting to note that areas that had been a strong source of fourth quarter losses for Freddie Mac reversed course in the first quarter earnings report, due to the company’s adoption of FAS 157 and FAS 159 — accounting standards that govern so-called “fair value accounting.” Relative to fourth quarter totals, Freddie recorded a $1.05 billion gain in mark-to-market on its trading securities, thanks to FAS 159; it also recorded a gain of $1.3 billion in reduced losses on its credit guarantees, thanks to FAS 157. Those gains clearly enabled Freddie to post a much better first quarter than

OFHEO had issued a warning on the use of of fair-value accounting methods ahead of both GSEs’ earnings reports, in April.

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

The financial impact of the mortgage and credit crisis is far from over, according to the chairman of The Carlyle Group, one of the world’s largest private equity firms. In remarks made at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington Tuesday, Carlyle chairman David Rubenstein said that “enormous losses” yet lie ahead for many of the worlds largest banks and financial institutions.

Rubenstein even expects some financial institutions to fail, although he didn’t name any companies, according to Bloomberg News, which initially reported on the remarks.

From Bloomberg:

“The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions,” Rubenstein said. “Many financial institutions aren’t going to be able to survive as independent institutions.”

Rubenstein said sovereign wealth funds are becoming wary after losing $25 billion on their investments in struggling banks and securities firms worldwide.

The Carlyle chairman also said that he sees the U.S. hitting the economic skids through the rest of this year, saying that “I don’t think it’s going to be over for quite a while.”

Rubenstein didn’t mention the enormous growth in distressed mortgage assets, tied to the current industry downturn. Billions of dollars of capital have flowed into a growing number of hedge funds and private investors that are looking to capitalize on both the whole loan and bond side of the mortgage mess.

Some funds have already begun buying up assets, although HW’s sources on the Street suggest that deals are often still few and far between; most expect that to change within the next six months as the market continues to roil from increasing borrower defaults.

“The bid-ask spread, if you will, on these loans is still too far apart,” said one source. “It will come down.”