Refinance Free Credit

To say that write-downs have many bank’s income statements and balance sheets in a pinch is probably an understatement; the mortgage and credit mess has hit nearly every major financial market participant with a vengeance, to a tune louder than $300 billion thus far. And it’s likely to continue to do so, if you believe many of the analysts that follow credit markets closely enough.

In some ways, then, it seems to have been an inevitability that at some point the world’s largest financial institutions would chafe under having to account for all of these losses; shareholders, after all, tend not to like such things. The Financial Times, citing a proposals on “fair value” accounting by the Institute of International Finance that it obtained, said Wednesday evening that top banks are now upping the pressure on relaxed write-down rules they claim will help the market gain greater stability.

In particular:

Under the plan, which has been obtained by the Financial Times, banks that decided to keep assets on their balance sheet would also be freed from the requirement to hold them to maturity and would be able to sell them after two years …

The IIF’s paper says: “The writedowns required under current interpretations may be substantially in excess of any actual or reasonably probable loss on many instruments”.

In plain English — and to generalize some very complex accounting rules — banks faced with assets that are devaluing at rocket-ship speed have two options: recognize the losses on assets held for sale, which then flow through to the income statement and impact earnings; or recognize the devalued assets as held for investment, which means the losses stop on the balance sheet and don’t hit earnings unless they are deemed “other than temporarily impaired.”

An asset held for investment must be held to maturity, which is somewhat problematic for a financial institution that may want to periodically purge its balance sheet of trash; hence the proposal that would allow a bank to unload an asset after just two years.

As for assets held for sale, they must be marked to market, which can also be problematic if you stubbornly believe the market has devalued the assets beyond some instrinsic value — under the IIF proposal, the FT reports that banks want to be able to mark assets using historical prices instead.

Here at HW, we don’t pay for access to Lex, the FT’s expensive alter-ago — but it’s clear that even Lex has a bad taste in (her?) mouth over the proposal.

To say that write-downs have many bank’s income statements and balance sheets in a pinch is probably an understatement; the mortgage and credit mess has hit nearly every major financial market participant with a vengeance, to a tune louder than $300 billion thus far. And it’s likely to continue to do so, if you believe many of the analysts that follow credit markets closely enough.

In some ways, then, it seems to have been an inevitability that at some point the world’s largest financial institutions would chafe under having to account for all of these losses; shareholders, after all, tend not to like such things. The Financial Times, citing a proposals on “fair value” accounting by the Institute of International Finance that it obtained, said Wednesday evening that top banks are now upping the pressure on relaxed write-down rules they claim will help the market gain greater stability.

In particular:

Under the plan, which has been obtained by the Financial Times, banks that decided to keep assets on their balance sheet would also be freed from the requirement to hold them to maturity and would be able to sell them after two years …

The IIF’s paper says: “The writedowns required under current interpretations may be substantially in excess of any actual or reasonably probable loss on many instruments”.

In plain English — and to generalize some very complex accounting rules — banks faced with assets that are devaluing at rocket-ship speed have two options: recognize the losses on assets held for sale, which then flow through to the income statement and impact earnings; or recognize the devalued assets as held for investment, which means the losses stop on the balance sheet and don’t hit earnings unless they are deemed “other than temporarily impaired.”

An asset held for investment must be held to maturity, which is somewhat problematic for a financial institution that may want to periodically purge its balance sheet of trash; hence the proposal that would allow a bank to unload an asset after just two years.

As for assets held for sale, they must be marked to market, which can also be problematic if you stubbornly believe the market has devalued the assets beyond some instrinsic value — under the IIF proposal, the FT reports that banks want to be able to mark assets using historical prices instead.

Here at HW, we don’t pay for access to Lex, the FT’s expensive alter-ago — but it’s clear that even Lex has a bad taste in (her?) mouth over the proposal.

Mirroring a similar move this week by UBS AG (UBS: 29.81, +1.60%), Wall Street firm Merrill Lynch & Co. (MER: 44.35, -1.42%) is carving out a team of top sales executives to purge distressed mortgage-related assets from the company’s books. The new division, called FICC Asset Management, includes some of the company’s top fixed-income sales leaders and will be headed up by Doug Mallach, the company’s top fixed income sales exec, according to a report Thursday by Bloomberg News.

The new team will look to unload collateralized debt obligations backed by subprime mortgage bonds, as well as ostensibly subprime RMBS and other assets that are now trading for pennies on the dollar thanks to continued mortgage and credit woes in the primary housing market.

Via Bloomberg (which gets Merrill stories early and often, given that the i-banking giant owns a 20 percent stake in the news platform):

Mallach’s appointment is “part of our ongoing effort to optimize our asset and risk profile,” David Sobotka, who oversees Merrill’s Fixed Income, Currencies and Commodities division, wrote in a May 21 memo that was confirmed by spokeswoman Danielle Robinson.

Merrill, the third-largest U.S. securities firm, had about $26 billion of senior collateralized debt obligations — securities formed by pooling mortgage bonds and other forms of debt — as of March 28. Investors are wary of assets linked to mortgages because of the U.S. housing market’s decline, and Merrill has had to write down its CDOs to about 32 percent of their original value, based on an April 17 estimate by Oppenheimer & Co. analyst Meredith Whitney.

CEO John Thain has been on a mission to eradicate bad MBS bets from the Wall Street giant’s balance sheet since taking the helm from ousted CEO Stan O’Neal. While the move isn’t as radical as UBS’ strategy of selling the assets off of its balance sheet to a third party and then looking for market vultures to buy, it’s a clear signal that many of Wall Street’s larger players are now looking to trade some of the more illiquid bonds on their books in an effort to clear the playing field.

Thain had originally begun talking up CDOs as a “good value” during January’s earning call in the hopes hedge funds and other investors might bite, but few funds had jumped into the mortgage-ridden junk bond market until recently.

Even those that are now looking to buy, are doing so “very selectively,” one fund manager told Housing Wire on Thursday.

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

We’ve all heard of rent-to-own, but a new idea from House Rep. Raúl M. Grijalva (D-AZ) would turn troubled former homeowners into renters, sort of an own-to-rent housing proposal. On Thursday, Grijalva unveiled the proposal — H.R. 6116, the Saving Family Homes Act of 2008 — ahead of a House Committee on Oversight and Government Reform subcommitee meeting. The Subcommittee on Domestic Policy, headed up by Dennis Kucinich (D-OH), had scheduled a hearing for Thursday afternoon to discuss how to target federal funds towards managing vacant and abandoned properties.

Grijalva’s proposal would grant homeowners whose mortgages have been foreclosed the right to petition a judge to allow them to remain in the home as renters, and pay a fair market rent. The rent would be set by a court-appointed appraiser and adjusted annually for inflation, the Congressman’s office said in a press statement.

The proposal would limit eligibility to mortgages on single-family, principal residences, occupied for at least 2 years, which sold for less than the median home value in the metropolitan statistical area in which the home resides, or the median value in the state, if MSA-level pricing information is not available.

“This bill is urgently needed for the millions of American families facing risk of foreclosure, and I am glad to have had the opportunity to make this statement that the sanctity of the American home and family should take precedence in this time of crisis,” said Grijalva.

The bill incorporates many of the ideas put forth by housing policy wonk Dean Baker, co-director of the Center for Economic and Policy Research, an economic think-tank. Baker first proposed his “Own to Rent” strategy for subprime borrowers in an op-ed last year.

Of course, more than a few in the industry see the bill as a form of rent control; which is a pretty bad word for anyone that has spent time in the mortgage servicing industry, to say the least.

“Sure, let’s just let the government manage rents and set allowable charges,” said one servicing manager sarcastically, who asked not to be named. “That’s worked out really well for places like Oakland [California].”

Nonetheless, the idea of “own-to-rent” is one that enjoys some support from from conservative economists, including American Enterprise Institute (AEI) Fellow Desmond Lachman and former economic advisor to President Bush, Andrew Samwick.

Reuters has the 411 on mortgage repayment and the results shouldn’t surprise anyone.  Alt-A (your good credit no income) loans and subprime (bad credit, not-so-much income) loan repayments are slowing and delinquencies are rising.

No surprise either that the 2007 vintage of subprime mortgages is the worst on record as those that got in last are giving up first.  Little to gain, little to lose.

From Reuters on the increase in loan delinquencies:

Delinquencies for Alt-A mortgages rated between 2005 and 2007 are climbing, with total delinquencies rising as high as 17 percent in some cases, more than 6 percentage points higher than previous estimates, the ratings agency said in a report.

Lower-quality subprime mortgage delinquencies soared as high as 37 percent for mortgages originated in 2006, 4 percentage points higher than previous estimates, S&P said.

Subprime mortgages originated in 2007 saw delinquencies climb to almost 26 percent, 6 percentage points higher.

“The 2007 issuance year continues to be the worst-performing vintage in terms of cumulative losses,” S&P said, regarding subprime mortgages. “Serious delinquencies” of payments 90 days late or more and foreclosures also are rising, S&P said.

Hat tip Calculated Risk for the link.

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U.S. home prices fell in the first quarter of 2008 — and at a record pace, too, if you look only at purchases and exclude refinancing activity. The Office of Federal Housing Enterprise and Oversight said Thursday morning that its seasonally-adjusted first quarter index for purchases dropped 1.7 percent from the fourth quarter of 2007, the steepest quarterly decline in the purchase-only index’s 17-year history.

Annually, purchase prices have fallen 3.1 percent between Q1 2007 and Q1 2008, OFHEO said — also the largest annual price decline on record.

Refinancing activity remains problematic
Those sharp price decline numbers contrast with an all-transactions index, however, which adds in refinancing activity. OFHEO reported that its all-transactions house price index fell just 0.2 percent on a quarterly basis, and was actually flat on an annual comparison basis.

It’s not immediately clear why refinancing transactions would so strongly moderate price declines in the purchase only index. Sources that spoke with Housing Wire Thursday said that one reason may be that borrowers in neighborhoods less affected by the housing slump would be likely more able to refinance; others suggested that the pressure to hit target values could lead to inflated home prices in refinancing transactions.

Housing Wire has asked OFHEO for comment on the divergence between refinancing and purchase prices in the past; the agency has yet to issue a formal comment on the matter.

OFHEO researchers did note, however, that refinancing activity has been a “important factor that has affected” the overall HPI in recent quarters. Approximately 82.3 percent of all transactions in the first quarter all-transactions HPI were refinancings, OFHEO said, the highest such share of activity since the third quarter of 2003.

click for larger view

A look at the effect of appraisal data from refinance loans on the OFHEO HPI (right) shows that refinancings led the OFHEO HPI to significantly overshoot the purchase-only HPI during the housing boom, and that now refinancing activity is leading the HPI to undershoot purchase-only transactions during the bust.

“I’d call that [graph] a smoking gun,” said one MBS analyst, who asked that his name not be used. “Appraisers were inflating home values on refis during the boom, enabling the home ATM, and now they’re faced with trying to keep homeowners in their home in many cases.”

While the refinance/purchase divergence remains unsolved from a substantive standpoint, OFHEO directory James Lockhart did offer commentary on why OFHEO’s price index appears to show less severe price corrections relative to other indices, such as the Standard & Poor’s/Case-Shiller price index.

“While house price declines are widespread, homes financed with prime, conforming mortgages continue to hold up better than those financed with other types of mortgages, a phenomenon we’ve been observing for the last several quarters,” Lockhart said.

Between February and March, OFHEO purchase-only figures show that home prices have fallen 0.4 percent nationally, and are now 3.7 percent below the April 2007 peak in conforming home prices. Looking at purchase-only transactions, eight states posted quarterly price declines above 3 percent; two states — California and Nevada — saw prices fall more than 8 percent.

Every Census Division experienced a price decline in the latest quarter when looking at purchase-only transcations, OFHEO said; declines were strongest in the Pacific Census Division, which saw purchase prices fall 5.9 percent. Using the all-transactions index, however, 164 of 292 MSAs tracked by OFHEO posted positive quarterly price gains — underscoring the wide divergence in price trends when refinancing activity is included in the data.

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

I just found out about PolicyMap a new service that lets you map an insane amount of data by region on all subjects ranging from mortgage originations, neighborhood crime stats and income demographics (and tons more).  This could become a killer tool for homeowners looking to buy a home and for real estate agents and mortgage originators to use for everything from farming to advising clients.  It can also be used by lenders to make risk assesments on properties and more.

Since I’m a tech geek at heart this site really appeals to me and could become a useful tool for you.  It’s also an interesting toy to play around with to learn a bit about your neighborhood.

I pulled the below graph for Walnut Creek, CA that shows the percent of all purchase loans in the area that were made with subprime piggyback second financing.  This data is pulled from lender’s HMDA reporting and broken down by census tract.

Let’s not overlook the scary fact that in 2006 more than 55% of all subprime purchase loans in the purple areas had piggyback 2nds.  Of course this means that half of the subprime home purchases in these areas were made with zero down payment.

Here’s the legend:

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The wild gyrations in mortgage rates that characterized much of the first quarter of this year appear to be a distant memory at this point, as mortgage rates were mostly unchanged last week according to a report Thursday by Freddie Mac (FRE: 26.4444, +1.09%). Average rates on a traditional 30-year fixed-rate mortgages fell slightly this week, dropping 3 basis points to 5.98 percent with an average 0.5 point, the GSE said. Rates are well below year-ago levels, when they averaged 6.37 percent.

15-year fixed-rate mortgages averaged 5.55 percent with an average 0.6 point, Freddie Mac said, down from last week when it averaged 5.60 percent. A year ago at this time, the 15-year FRM averaged 6.06 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.61 percent this week, with an average 0.6 point, up from last week when it averaged 5.57 percent. A year ago, the 5-year ARM averaged 6.02 percent.

“Interest rates for fixed-rate mortgages fell slightly this week on news of both weaker industrial production in April and consumer sentiment falling in May to its lowest level since June 1980,” said Frank Nothaft, Freddie Mac vice president and chief economist. Weak economic results tend to boost demand for Treasury and mortgage bonds, which in turn decreases bond yields, and tends to ease rate pressure on traditional mortgages.

Rates on adjustable rate mortgages, however, moved upward slightly as the market digested sentiment that the Federal Reserve may be done cutting its target Federal Funds rate in the near term.

One-year Treasury-indexed ARMs averaged 5.24 percent this week with an average 0.6 point, up6 basis points from last week when it was 5.18 percent, Freddie Mac said.

“The federal funds futures market suggests virtually no change in monetary policy over the next few months and the Fed viewed the last rate cut to be a ‘close call,’ according to the minutes of its most recent policy Committee meeting,” Nothaft said.

Nothaft also suggested that if anything, rates aren’t likely to increase in the near term.

“Housing woes still plague the economy,” he said. “Although housing starts unexpectedly rose in April, all of the gains were in multifamily properties. New construction on one-unit homes fell to 692,000 homes (annualized), which was the least since January 1991 and almost 62 percent below the peak set in November 2005.

“In addition, homebuilder confidence matched an all-time record low in May.”

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

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.

Two separate mortgage fraud rings in two different states made headlines Thursday morning, with federal indictments accusing them of more than $34 million dollars worth of mortgage fraud. In Idaho, five were indicted in a scheme that is alleged to have defrauded a bank in the state of more than $20 million, while a $14 million indictment in New York followed a similar track.

Both cases involve alleged “straw buyer” schemes, in which buyers are fronted and used to flip properties for inflated values. In the Idaho case, the accused include two building contractors, a mortgage broker and a realtor, all from the Boise, Idaho area; the group attempted to buy and flip 49 different properties, Reuters reported Thursday.

In New York, eleven defendants include brokers, realtors and attorneys that are accused of conspiracy, wire fraud and bank fraud, as part of a scheme to recruit straw buyers and flip properties in the Brooklyn, Queens and the Bronx areas. A press statement Wednesday evening detailed the charges.

In the New York case — as in Idaho — the alleged scheme is the same. A group of real estate agents, brokers and attorneys recruit straw buyers with good credit ratings to purchase residential properties lby promising that, among other things, rental incomes from the properties would ensure that the purchasers would never have to make payments on the mortgages or take possession of the houses. Once the buyers were signed up, conspiring brokers allegedly generate false documents to support inflated income and asset statements in the mortgage applications.

At closing, the alleged fraudsters assigned their rights to purchase the properties to the straw buyers for fees totaling up to $600,000. The straw buyers’ mortgages — which had been secured through fraudulently inflated financial statements — covered both the sales prices and the assignment fees, which were then distributed among all parties.

The banks and mortgage companies, of course, were never made aware of the assignments or the true market value of the purchased properties.

“Earlier this month we announced the formation of an EDNY task force comprised of federal, state and local law enforcement agents and investigators to address the burgeoning problem of mortgage fraud in the Eastern District of New York,” said Benton J. Campbell, U.S. Attorney for the Eastern District of New York.

“Investigating and prosecuting mortgage-related fraud is a priority program, and we and our partners in the task force are determined to bring to justice those who line their pockets at the expense of mortgage lenders.”

The FBI noted in a report last week that mortgage fraud continues to be a large problem for lenders and investors; the number of of Suspicious Activity Reports forwarded to law enforcement officials rose 31 percent in 2007 relative to one year earlier.

CBS Channel 5 up here in the Bay Area blows the cover off of some internal World Savings “Broker Training” videos that show brokers how to obfuscate and sell the Pick-a-Pay Option ARM to borrowers. You can view the training video here.

My favorite line?

“Most brokers refer to them as negative amortization, but we try to use the words a little more user friendly, ‘deferred interest.’”

I think this guy used ‘deferred interest’ don’t you?

More from the CBS article:

But what concerns Brown even more was the way World Savings employees were instructed to answer questions about the minimum payment on those option ARM’s.

“So if I’m paying that minimum payment, I’m not actually putting a dent in my principal though right? My principal and interest they’re just going to keep climbing up right?” the borrower asks in the video tape. “It’s optional,” the broker in the video replied.

“What kind of answer is that?” said Brown after watching the video. “The answer would really be ‘Yes.’ That’s the right answer, that to me would be the true clear straightforward truthful simple answer.”

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