Refinance Free Credit

Interest Rates Rising

It turns out that the fears of inflation are starting to come true. We have been advising clients for some time now that this summer rates would begin to inch up due to inflationary concerns. In fact this has been the subject matter of our last three newsletters as well as some of my blog posts and other online commentary. So if you have been thinking about refinancing or buying that home, my recommendation is for you to contact your local mortgage planner now to see what your options look like. If you are waiting until the “bottom” of the interest rate market to do something you missed it. The bottom of any market always reveals itself after the fact and sorry to say but it happened several months ago and we do not see it getting much lower any time soon. Take control of your financial future and review your options today.

Dave Muti Author of Mortgaes: What You Need to Know

An international uproar over allegations that some banks intentionally manipulated LIBOR, a key interest rate used to determine rate adjustments for many adjustable-rate mortgage holders, is likely to have a real-world impact for many adjustable-rate mortgage borrowers, sources told Housing Wire Thursday.

At the heart of the debate is a report by the Wall Street Journal, first published on April 16, that questioned the accuracy of the benchmark lending rate; the Journal provided evidence that suggested some major banks were helping keep reported LIBOR rates artificially low. See interactive charts.

The WSJ Journal revisited the story on Thursday, ahead of adjustments to the LIBOR system that appear likely to be introduced by the British Bankers Association on Friday:

The Journal analysis indicates that Citigroup Inc., WestLB, HBOS PLC, J.P. Morgan Chase & Co. and UBS AG are among the banks that have been reporting significantly lower borrowing costs for the London interbank offered rate, or Libor, than what another market measure suggests they should be. Those five banks are members of a 16-bank panel that reports rates used to calculate Libor in dollars.

That has led Libor, which is supposed to reflect the average rate at which banks lend to each other, to act as if the banking system was doing better than it was at critical junctures in the financial crisis.

The one-month and six-month dollar LIBOR is used to benchmark a large number of adjustable-rate mortgages in the U.S.; the one month rate has remained extremely low, currently at 2.46 percent, and has fallen dramatically from 5.22 percent just six months ago. The six month LIBOR follows a similar trajectory.

The result has been an veritable erasing of any potential adjustable-rate payment reset shocks for subprime and Alt-A borrowers — certainly a positive outcome for millions of potentially troubled borrowers, given that the U.S. is still facing a flood of subprime resets through the end of this year (Alt-A resets don’t begin in earnest until the middle of 2009, according to available data).

The WSJ estimates that an artifically-depressed LIBOR may have given homeowners and other consumer debtholders a $45 billion break through the first four months of this year. What happens with that sort of unintended stimulus vanishes?

It’s not known exactly how many borrowers with adjustable-rate mortgages are tied to LIBOR, versus the yield on short-term Treasuries, but HW’s sources suggest that number could be as large as half of ARM borrowers. That number is likely even higher among subprime borrowers, our sources said.

“We’ve got an entire class of borrowers right now that is absolutely dependent on LIBOR sitting low,” said one source, an MBS analyst who asked not to be identified by name. “Tinkering with the how the rate is calculated doesn’t seem likely to push it down, although I can see plenty of reasons it might jump upward.”

The Journal, citing sources close to the BBA, said that any changes to LIBOR calculations aren’t likely to represent a “radical redesign.” Which means that — even if only for a brief moment — the interests of millions of subprime borrowers and those of the banking crowd are in alignment.

And so it ended on Thursday morning, rather quietly, for one of Wall Street’s largest mortgage-backed securities players. Bear Stearns Cos. investors approved JPMorgan & Chase Co.’s (JPM: 43.80, +2.19%) $2.2 billion buyout of the once high-flying firm, with Bear chairman Jimmy Cayne facing investors and apologizing to shareholders — many of them employees.

“I personally apologize,” attendees quoted Cayne as saying, according to the Wall Street Journal. He apparently fiddled with the microphone as he spoke, as well, the Journal said; the Associated Press characterized the Bear Stearns chairman as “disheveled.”

“I’m sorry,” he said. “Words can’t describe the feelings that I feel.”

JPMorgan’s buyout essentially pegs Bear Stearns’ stock at about $10/share; that came after Bear shareholders had balked at an earlier $2/share offer. Of course, even the larger offer is of little consolation for many, given that the stock traded well above $150/share last year. Many will be wiped out after the deal is closed, which is expected to take place on Friday.

Bear fell into trouble in June of last year when two of its hedge funds collapsed. From that point forward, the firm never really recovered from the mortgage mess.

The Wall Street Journal’s three part series on the fall of Bear Stearns concluded today, appropriately enough, with a look at the company’s harried last few days. The story noted that the Wall Street firm had actually neared collapse twice before Treasury Secretary Henry Paulson stepped in to orchestrate the deal with JPMorgan.

WSJ reporter Mike Spector also has live-blogged the sights and sounds of the final shareholders’ meeting.

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

Here in the BuzzPost, we’ve been sounding the horn over the prevalence of mortgage fraud in recent weeks — witness an earlier discussion of Ambac’s education on the matter — and yesterday’s Wall Street Journal picked up a strong, smelly scent.

(You know, the same one that’s already got insurers and investors up in arms?)

From the WSJ, a mention of the obvious:

Unhappy buyers of subprime mortgages, home-equity loans and other real-estate loans are trying to force banks and mortgage companies to repurchase a growing pile of troubled loans. The pressure is the result of provisions in many loan sales that require lenders to take back loans that default unusually fast or contained mistakes or fraud …

Countrywide Financial Corp., the largest mortgage lender in the U.S., said in a securities filing this month that its estimated liability for such claims climbed to $935 million as of March 31 from $365 million a year earlier. Countrywide also took a first-quarter charge of $133 million for claims that already have been paid.

Calculated Risk picked up the story as well, calling it “the bagholder battles.” Very apropos, in our eyes.

More than a few HW readers have asked us to comment on the rep and warranties issue that underlies the WSJ story, and our only real take on it is that this activity has been going on for some time now. It’s just that the press is finally picking up on the scent. The business of “reverse due diligence” — hiring slueths to dig through loan files, in the hopes of identifying a reason not to pay on a claim or to push a loss back to the bank that sold the loan — has been booming for over a year now.

And it really shouldn’t be surprising, either. Given the broad-scale failure of much of the private-party mortgage market, it’s pretty much inevitable that insurers and investors will do what they can to ensure their bottom lines get hit as little as possible; it’s really no different than attempting to make a hazard insurance claim, for those who have been through that sort of wringer before.

The only difference here is two fold: one, we’ve got a whole hell of a lot of loans to parse; and two, more loans than most might want to admit have the word “fraud” written all over them. Which is either a saving grace or damnation, depending on which side of the fence you happen to be on.

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation continued to see their loss coverage ratios erode during the first quarter, despite ever-increasing provisions for expected loan losses — a troubling trend that suggests the full impact of the mortgage crisis has yet to be absorbed by many of the nation’s insured banking institutions.

According to the FDIC’s latest quarterly profile of banks, released Thursday, loan-loss reserves increased by 18.1 percent to $18.5 billion — the largest quarterly increase in more than 20 years — but the larger increase in noncurrent loans meant that the coverage ratio fell from 93 cents in reserves for every $1.00 of noncurrent loans to 89 cents. That’s the lowest loss reserve level since 1993, the FDIC said.

“This is a worrisome trend,” FDIC chairman Sheila Bair said. “It’s the kind of thing that gives regulators heartburn.

“The banks and thrifts we’re keeping an eye on most are those with high levels of exposure to subprime and nontraditional mortgages, with concentrations of construction loans in overbuilt markets, and institutions that get a large share of their revenues from market-related activities, such as from securities trading.”

Loans that were noncurrent — defined as 90 days or more past due, or in nonaccrual status — increased by $26 billion to $136 billion during the first quarter, the FDIC said. That followed a $27 billion increase in the fourth quarter of 2007.

Almost 90 percent of the increase in noncurrent loans in the first quarter consisted of real estate loans, but noncurrent levels increased in all major loan categories.

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

It’s been twenty years since the now-ubiquitous e-doc provider DocMagic first began, and the company said that it sees more opportunity for electronic document management services now than at any time in the company’s history.

Document Systems, Inc., based in Carson, CA, passed its 20-year anniversary on Thursday — when the company was founded, mortgage loan officers completed applications with clipboards and pens. Since then, DSI has been part of an industry constantly facing change and reinvention; its DocMagic software began as simple software designed to let brokers easily produce and print out error-free closing documents. The platform has evolved to offer a complete range of solutions that provide millions of fully compliant disclosures and closing document packages each year to originators of all sizes.

“We took a month-long, paper-based process that involved hours of manual labor to gather, fill-in, copy, collate and store hundreds of different documents and turned it into a simple process of choosing a loan program and pushing a button,” said Don Iannitti, founder and CEO of DSI. “The loan was no longer the Deed of Trust and all the supporting documents, it was a deal that was supported by a closing package.”

While Iannitti is proud of what his company has accomplished thus far, he says that even greater opportunity lies ahead for lenders and settlement services providers that can adapt to a changing marketplace.

“The mortgage industry is at a crossroads today, a challenging time that will change this business once again,” he said. “The lending community is ready now to move into fully electronic lending, the paperless processing of all loan documents. Lenders must save time and money if they hope to remain competitive.”

Companies like Iannitti’s have been ready to deliver electronic mortgage documents for years now, but neither lenders nor borrowers have been eager to adopt completely paperless lending. That is changing, Iannitti said, and the industry will see greater adoption in 2008.

“Soon, all lenders will realize that the documents aren’t just forms filled with information, they are living instruments that contain electronic data, much of it pulled automatically from the lender’s other systems,” he said.

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

Average mortgage rates rose to an eleven-week high, with rates on a traditional 30-year fixed-rate mortgage averaging 6.08 percent with 0.6 points for the week ended May 29, Freddie Mac (FRE: 25.48, +1.27%) said Thursday morning, up from an average of 5.98 percent one week earlier. The 10 basis-point jump reflected investors’ growing concern over inflation, as record oil prices continue to fuel expectations for a reversal in recent U.S. monetary policy.

While average rates continue to move higher, they remain below the average of 6.42 percent recorded for 30-year fixed-rate mortgages last year, according to Freddie Mac.

“Mortgage rates drifted up this week over market concerns that the Federal Reserve Board may raise short-term rates later this year,” said Frank Nothaft, Freddie Mac’s chief economist, in a statement. “A recent working paper published by the Federal Reserve Bank of Minneapolis suggested that the recent rate cuts run a risk of unhinging long-term market expectations for inflation.”

Yields on the benchmark 10-year Treasury note jumped above 4 percent for the first time since January, as a result, reaching as high as 4.07 percent in early trading Thursday morning — up seven basis points from yesterday’s close. Rising bond yields tend to presage increases in most mortgage rates.

Federal Reserve Bank of Dallas President Richard Fisher added fuel to the inflationary fire late Wednesday, suggesting that the Fed’s monetary policy could change “sooner than later” if inflation expectations worsen.

The Federal Open Market Committee has cut the federal funds target rate by 3.25 percentage points in the past seven months; the target rate now stands at 2 percent.

“If inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario,” Fisher said in remarks delivered at San Francisco’s Commonwealth Club of California Wednesday evening.

The Financial Times reported Thursday that futures trading now pegs at 60 percent the chances of a rate rise by October; such speculation had stood at virtually nil less than three weeks ago, the FT reported, signaling a dramatic shift in investor expectations — and likely continued upward pressure for mortgage rates in the weeks ahead.

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

It’s a theme we’ve been reiterating here at HW, but the credit crunch that has roiled markets since the back half of last year is proving that it still has bite left. The latest example comes courtesy of troubled monoline bond insurer Ambac Financial Group, Inc. (ABK: 3.01, +2.38%), which said Wednesday afternoon that it absorbed net write-downs of $176 million on its insured credit derivatives portfolio during April.

The insurer took a $228 million write-down on the value of collateralized debt obligations backed by mortgage-backed securities, commonly called CDOs of ABS. The complex financial instruments have been among the hardest hit throughout the credit crisis, and Ambac’s disclosure of further write-downs in April suggests that a bottom has yet to be reached.

Ambac also reduced the value of its investment portfolio by $53.4 million during the month, including unrealized and realized losses, it said in a press statement.

The troubled monoline lost nearly $1.7 billion during the first quarter, as write-downs and loss provisions in Q1 reached $2.8 billion.

Ambac had more than $1.28 billion in cash and short-term investments available at the end of April, it said.

Insurers like Ambac provided the top-rated portions of RMBS and related CDO deals with a guarantee that essentially was designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie mortgage bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that increasing MBS losses have led to downgrades affecting both the securities in question as well as the insurers that guaranteed principal payments to investors.

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

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

Right now, it’s a pretty good idea for investors to get a handle on the balance sheets of key financial institutions — in light of recent bank failures, and a looming spate of further failures ahead, grappling with capital adequacy and even the direction of future earnings is a key question.

Philip van Doorn at TheStreet.com takes a swing at identifying the ten largest banks and ten smallest banks in need of capital, like right now. Some of the obvious suspects are on the list, like Fremont General Corp., but there are others he identifies.

van Doorn makes a good attempt, but we think he’s focusing on a measure isn’t as forward looking as it could be — his list ranks banks using the total risk-based capital ratio. A good stat in theory, but it rolls up capital classifications and is dependent on the risk-weightings banks assign to asset classes.

(We’re skeptics at heart here at HW, which means we don’t take at face value a bank’s assessment of the risk on its own books.)

Being the mortgage nerds we are, we tend to focus in on a ratio that’s a little cleaner: loan loss reserves against non-performing loans. It’s a quick and easy way to see directionally where a bank’s income statement is going to head in future quarters, and following it the past few quarters has demonstrated a pretty uncanny predictive ability. In general, if a bank hasn’t set aside close to 100 percent of its NPL base, we tend to think they’re going to be upping reserves. The further from 100 percent a bank gets, the larger that provision charge is likely to be.

By that measure, and looking at van Doorn’s list of top ten large banks that are “undercapitalized,” Fremont Investment & Loan is clearly in the red — loss reserves comprise just .02 percent of non-performing loans. But others pop out as well.

Reno, Nevada-based First National Bank of Nevada, a privately-held bank with $1.6 billion in assets, posted a reserve ratio of 41.74 percent at the end of the first quarter. $4.1 billion PFF Bank & Trust (PFB: 1.32, 0.00%), based in Pomona, Calif., posted an even more woeful 22.92 percent reserve ratio — and NPAs represent nearly 11 percent of assets. Yet the bank is considered “adequately capitalized” under risk-based capital measurements.

We can’t help but wonder what that capital might look like if the bank were required to reserve something closer to 100 percent of current NPLs on its books.

Note: authors held no stock in publicly-traded firms mentioned in this BuzzPost.

Despite an economy affected by a stagnant housing market, decreasing home values and upheaval among lenders, overall customer satisfaction with the home equity line of credit/loan origination process has improved since 2007, according to a study released Thursday by J.D. Power and Associates.

Overall customer satisfaction in 2008 averaged 780 on a 1,000-point scale, increasing by 14 points from 766 in 2007 — surprising results, given the number of lenders that have been pulling back on even existing lines of credit from borrowers who are seeing their available home equity vanish amid a record drop in prices.

Tim Ryan, senior research director of the finance and insurance practice at J.D. Power, said the results likely prove the old adage of “under promise, over deliver.” Consumers are now operating with a different baseline than in the past.

“Ongoing troubles in the housing and mortgage lending markets have had the effect of lowering customer expectations around the home equity loan and line of credit origination process,” Ryan said. “Since homeowners may have feelings of uncertainty toward property values and lenders, they may associate the loan application process with hassle and frustration.”

The result is that those getting a home equity loan or line of credit of all might be pleasantly surprised that they got the loan at all, leading to improved perception of satisfaction — although J.D. Powers’ study found that key measures of service remained flat year over year.

The study found that for consumers shopping for a home equity loan or line of credit lender, closing costs and price — including interest rates and fees — are particularly important considerations.

The best of the best
Bank of America Corp. (BAC: 33.87, 0.00%) ranked highest in satisfying customers who recently obtained a home equity product, receiving an overall index score of 811 and performing particularly well in the application/approval process factor, J.D. Powers said.

SunTrust Banks Inc. (STI: 51.81, 0.00%) — scoring 809 — and Wachovia Corp. (WB: 23.80, 0.00%), with an 807 score, followed Bank of America in the rankings. SunTrust performed particularly well in the loan officer/representative or banker factor, while Wachovia performed well in the closing factor, according to the study.

“Bank of America, SunTrust and Wachovia all perform well in specific areas that are important to customers, including having problem incidence rates and application approval times that are better than the industry average,” said Ryan.

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