Refinance Free Credit

Yves Smith over at the Naked Capitalism blog asks a poignant — and pertinent — question: did Lehman, or someone connected to Lehman, violate SEC disclosure laws by leaking an internal memo covering details of alleged deleveraging at this week’s favorite short-sale target, Lehman Bros?

Here at HW, we covered a leak from CNBC’s Charlie Gasparaino that suggested Lehman was selling off assets as part of a strategy to delever its balance sheet — news that has become contested by coverage at the New York Times and the WSJ as well. (Lehman also apparently engaged in some buyback activity yesterday, too, but that’s another story).

Yves’ question is pointed and clear enough:

Now to the tactics, which stink to high heaven. Why, pray tell, is Lehman resorting to leaks and whispers rather than the proper procedure of public disclosure via a press release?

… leaking an internal memo with non-public, material financial information to Gasparino is an SEC violation, although I am highly confident it was done in such a way the the firm has plausible deniability if questioned. Don’t tell me this may have been an unauthorized employee leak; if this memo was circulated broadly to employees, it was done with the full intent that word would get outside the firm. That happens predictably with mass employee communications. And if it was limited distribution, the recipients, as anyone who has passed a Series 7 exam ought to know, are fully aware that selective disclosure of material information is a big no no under SEC Rule FD.

Well, to those of HW, we’ll weight in with out feeling that it looks like what we’ve got here is a company heading into some guerrilla warfare with short sellers making some very public ploys about Lehman’s future? (We’re looking at you, David Einhorn).

Not that it makes any dirty game justifiable, but if Lehman was feeling threatened enough by the “next Bear Stearns” speculation that had send its market cap down the toilet this week and last, some strategies seem more justifiable when in a fox hole than others. All that matters is the depth to which the perceived hole has been dug, really, in such situation.

Smith makes essentially the same point, noting that management always has much more on the line in a battle with shorts than does the actual investor in a short position.

Disclosure: HW’s authors on this story had no positions in Lehman.

On the heels of a warning from Moody’s Investors Service on Wednesday, Standard & Poor’s Rating Services on Thursday said it had gone one step further and knocked both MBIA Inc. (MBI: 5.92, +5.15%) and Ambac Financial Corp. (ABK: 2.60, +4.42%) from their respective AAA-ratings perches. Citing concerns over a lack of new business prospects and concerns over continuing declines within the residential mortgage market, S&P said that it had cut both bond insurance giants’ financial strength ratings to the AA level.

“The rating actions on the companies reflect our belief that these entities will face diminished public finance and structured finance new business flow and declining financial flexibility,” S&P said in a statement.

“In addition, we believe continuing deterioration in key areas of the U.S. residential mortgage sector and related CDO structures will place increasing pressure on capital adequacy.”

Yesterday, chief execs at both MBIA and Ambac took issue with news of the pending downgrades. MBIA CEO Jay Brown questioned why the firms were affirmed in February, only to be on the chopping block again less than six months later.

“When Moody’s affirmed our rating with a negative outlook in February, we believed that it would refrain for six to 12 months from taking additional ratings actions unless the environment or MBIA’s position changed materially,” he said in a press statement released Wednesday.

Ambac CEO Michael Callen questioned the timing of any downgrades as well, saying that the rating agencies were overreacting to what he characterized as “temporary” problems, although he did concede the company is seeing some significant problems in its mortgage-related book of business.

Insurers like MBIA and Ambac provided the top-rated portions of private-party RMBS and related CDO deals with a guarantee that essentially was designed to serve as a 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 assumptions of increasing losses for investors by rating agencies, imperiling both the insurers that guaranteed principal payments as well investors in some of the most senior tranches of securitized transactions.

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

New York Attorney General Andrew Cuomo confirmed Thursday morning that his office had entered into an agreement with key rating agencies that will see Fitch Ratings, Moody’s Investors Service and Standard & Poor’s Ratings Services make some big changes to the process of rating residential mortgage-backed securities.

News of the deal was leaked to the media on Wednesday.

Under the agreements, the credit rating agencies will fundamentally alter how they are compensated by investment banks for providing ratings on loan pools. In addition, the ratings firms will all now require that investment banks provide due diligence data on loan pools for review prior to the issuance of ratings–something that wasn’t required in the past, and that rating agencies had said hampered their ability to correctly rate new issuances.

“The mortgage crisis currently facing this nation was caused in part by misrepresentations and misunderstanding of the true value of mortgage securities,” said Cuomo. “By increasing the independence of the rating agencies, ensuring they get adequate information to make their ratings, and increasing industry-wide transparency, these reforms will address one of the central causes of that collapse.”

As expected, as part of the agreemnt, the New York AG’s office said it had terminated its inquiry major credit rating agencies, which began in August 2007.

Investor anger, new standards for originators
While Cuomo painted the agreement as a step forward for the industry at a press conference Thursday morning, investors that spoke with HW earlier on Wednesday were incensed at the deal.

“[The rating agencies] commit highway robbery, and get off scot-free because they’re going to name the make and model of the car they drove to do it?” said one MBS investor, who asked that his name not be used. “Unbelievable.”

While not confirmed by Cuomo’s office, it’s believed by sources close to the negotiations that all three agencies will also assist the state AG in an ongoing investigation into the practices of investment banks responsible for issuing mortgage-backed and related securities.

Among the changes put into place, the rating agencies will establish a fee-for-service structure, where they will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS. In the past, agencies were only paid if an issuer selected them to rate a deal.

Perhaps more importantly, the agreements stipulate that the agencies develop criteria for and begin rating originators responsible for providing the collateral that forms the core of any RMBS securitization. Ratings of individual mortgage lenders, as well as lenders’ origination processes, will feed into the overall ratings process for any new deal; currently, only mortgage servicers have been rated on a third-party basis as relevant to deal performance.

Also being put into place are stringent due diligence requirements prior to issuance — using criteria they will define, rating agencies will receive loan level results of due diligence and review those results prior to issuing ratings.

All are big changes for an industry that has been placed under fire from investors, the media, and legislators as partly fueling the mortgage credit mess — but investors that spoke with HW had mixed reactions to the news.

“We need this sort of reform, yes,” said one fund manager, who asked not to be named. “But to allow the Moody’s of the world to increase their revenue base, dictate the future terms of engagement, while getting a hall pass for prior misconduct, it just doesn’t pass the smell test.”

A potential larger question remains yet unanswered as well: how will the agreed-upon changes be received by the Securities and Exchange Commission? SEC chairman Christopher Cox has said the regulator will roll out a new set of standards for the ratings process on June 11, and it’s unclear if or how the agreement announced today will play into any new regulation put in place by the SEC.

Calls to Cox’s office for comment were not returned by the time this story was published.

Home improvement loans can never hurt the individual. A lot of people would rather sell their house on the market and get the “as-is” price for their home without putting forth the effort to clean the home up. I am here to tell you that from personal experience applying for a home loan and fixing up your house before it goes to market will put an amazing increase on the value of your existing home. Of course there is reason to believe that selling your home without fixing it up is easier, but sometimes the harder paths in life can save you thousands of dollars. I have seen home quotes gain over $10,000 just because of the repair of $1000 worth of work. Applying for a home improvement loan is a good route to take, so when you are ready to get the money out of your home that you are looking for when you sell it contact us. We have a variety of lenders who can help you out in your endeavor.

Federal Home Improvement Loans

The Federal Housing Administration administers quite a few mortgage insurance programs for those in need of housing. The Department of Housing and Urban Development has a program called Section 203(k) that partners with housing agencies to improve and repair properties. You can use this program to help fund the improvement of your home by combining it with your financial resources. To be eligible:

• Home must be a one to four family dwelling
• Home must be at least one year old
• The mortgage cannot exceed 100% of the improved value

Improve That Home

It may be easier to get a private home improvement loan, as they are most common. The most common way to go about getting your home improved is to take out a second mortgage. A second mortgage can allow you to take out almost the entire appraised value of your house in the form of a loan. Second mortgages have become extremely popular ways to improve your home and are the best way for you to improve your home. Depending on your home you can get a very nice sum of money to improve your house, or use part of your loan to improve yourself and use the rest of the loan to pay off other expenses.

Additional Resources

• Rehab a Home w/HUD’s 203(k) Rehab Program
• Home Improvement Loans

While foreclosure activity hit an all-time record in the first quarter, according to statistics released Thursday morning by the Mortgage Bankers Association, an alarming shift of the mortgage mess towards prime borrowers appears to be taking place as well — signaling that the credit crunch that began among those with less-than-perfect credit is now marching onward towards borrowers usually deemed better credit risks.

It shouldn’t surprise anyone at this point to learn that first quarter foreclosure activity was the highest since 1979, the first year MBA’s data on foreclosure activity is available. The percentage of loans in the foreclosure process was 2.47 percent at the end of the first quarter, the MBA said, an increase of 43 basis points from the fourth quarter of 2007 and 119 basis points from one year ago.

The percent of loans on which foreclosure actions were started during the quarter was 0.99 percent on a seasonally-adjusted basis, 16 basis points higher than the previous quarter and up 41 basis points from one year ago, the MBA said.

And while the overall numbers for the first quarter show that the majority of troubled borrowers are in the subprime credit category, the pace at which prime borrowers are running into a wall now strongly outstrips anything being seen in the subprime arena.

Velocity shifts away from subprime
Among subprime borrowers, severe delinquencies — a measure that includes 90+ day delinquencies and foreclosures — increased from 14.44 percent of loans in the fourth quarter to 16.42 percent in Q1. In contrast, just 1.99 percent of all prime borrowers were severely delinquent at the end of Q1, compared to 1.67 percent at the end of last year, numbers that illustrate the relatively greater distress felt by subprime borrowers.

But it’s the velocity of these changes that’s most worth noting from an investor’s perspective — the Q4 to Q1 change in severe delinquencies strongly favors prime borrowers, for example, with severe DQs increasing by 19.2 percent for prime and 13.7 percent for subprime borrowers.

By splitting out fixed-rate and adjustable-rate DQs, the increasing distress now being felt by prime borrowers becomes even more evident: prime ARMs showed the highest velocity of change of any major loan category in nearly every measure of distress published by the MBA. Severe delinquences increased a whopping 28.71 percent among prime ARMs during Q1, while in comparison, subprime ARMs saw severe DQs jump 18 percent.

It’s a pattern repeated outside of ARMs, too. The velocity of severe delinquencies among prime, fixed-rate borrowers actually came close to doubling that recorded by subprime FRMs during the first quarter. Prime FRMs saw severe DQs increase 12.1 percent in the first quarter, while subprime FRMs posted a 6.7 percent increase in severe delinquencies over the same time frame.

It’s a difference Jay Brinkmann, MBA’s vice president for research and economics, took notice of.

“Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started,” he said. “Out of the approximately 516,000 foreclosures started during the first quarter, subprime ARM loans accounted for about 195,000 and prime ARM loans 117,000, but the increase in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.”

Location, location, location
The old real estate mantra that location matters is proving true as the mortgage and housing mess rolls on, as well. The MBA said that a continued increase in the overall delinquency rate was driven by increases in the number of loans 60 and 90 or more days past due, primarily in California and Florida.

“The problems in California and Florida are extraordinary and they are the main drivers of the national trend,” Brinkmann said. “The quarterly rate of foreclosure starts on subprime ARM loans in California was 9.24 percent.

“This rate, combined with Florida’s rate of 8.25 percent, drove up the national average foreclosure start rate to the point where 43 states were below the national average of 6.32 percent.”

California saw a total of approximately 109,000 foreclosure starts and Florida 77,000, the MBA reported; in contrast, the next highest states were Texas, Michigan and Ohio with between 24,000 and 20,000 each. Taking California, Florida, Arizona and Nevada together, the four states represented 62 percent of all foreclosures started on prime ARM loans, and 84 percent of the increase in prime ARM foreclosure, Brinkmann noted.

“About 20 states had drops in their number of foreclosures started, including Michigan, Ohio and Indiana where problems have been the most severe for the last several years,” he said.

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

Federal Reserve Vice Chairman Kohn said he expects to see weaker bank earnings and continued write downs from both banks and home builders in the coming months as the credit and housing bust continues.  He was urging banks and home builders to build capital as they can in order to protect themselves from insolvency related to write downs and losses.  He was disappointed that banks weren’t increasing reserves faster in the face of challenging conditions.

One has to wonder though - are they not raising reserves because they know the Fed is right behind them with a golden net?

From Bloomberg:

Fed officials are urging banks to raise capital and operate with less debt to revive financial markets and the economy buffeted by the 10-month credit contraction.

The turmoil has led the world’s biggest banks and brokerages to report more than $386 billion in losses and writedowns. Financial-services firms have raised $283 billion to cover the losses, according to data compiled by Bloomberg.

“We expect bank holding companies to continue to report weak earnings and further asset valuation writedowns” in the coming months, Kohn said in remarks for a hearing on the banking industry. Banks aren’t increasing reserves for losses enough to keep pace with problem assets, he said, while reiterating the Fed’s call for raising capital and reducing dividends.

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During a week when mortgage applications took a nose dive, average mortgage rates tended to hold tight as inflation concerns dominated bond investors’ attention. According to a weekly rate survey compiled by Freddie Mac (FRE: 24.53, +2.76%), rates for a 30-year fixed-rate mortgage averaged 6.09 percent with an average 0.6 point for the week ended June 5 — up only one basis point from last week.

Rates remain higher than one-year ago, however: the GSE said that the 30-year FRM average 6.53 percent at this time last year.

“Interest rates for fixed-rate mortgages were nearly unchanged this week over reports of continued inflation,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Although the gross domestic product grew at a faster rate in the first quarter than originally reported, consumer spending rose only 1 percent, representing the smallest increase since the 2001 recession.

“In addition, the core price deflator was revised downward to an annualized rate of 2.1 percent and remained at that pace in April, but this is still above the Federal Reserve’s stated comfort zone.”

While fixed-rate mortgages held steady, adjustable-rate mortgages saw rates move downward. Five-year Treasury-indexed hybrid ARMs averaged 5.51 percent this week, Freddie said, down 11 basis points from last week. One year ARMs indexed to Treasuries also fell sharply to 5.06 percent, 16 basis points lower than one week earlier.

The lower ARM rates may translate into increased refinancing activity, some lending executives suggested to Housing Wire Thursday morning.

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.

Homes in foreclosure and homes entering the foreclosure process are up to levels not seen since 1979 reported the MBA today.  For those that say we’re coming to the bottom, I say either you’re full of it or we’re picking up speed for a nasty crash landing in to the bottom - either way it ain’t go to be pretty.  Oh, and the total percentage of mortgages in some form of delinquency (excluding foreclosure) is also at it’s highest point since 1979 - so it doesn’t look like making your mortgage payment has gotten any easier, no matter who you are.

From Market Watch:

he percentage of loans in the foreclosure process at the end of the first quarter rose to 2.47% of all mortgages outstanding on one- to four-unit properties, up from 2.04% in the fourth quarter, according to the Mortgage Bankers Association’s National Delinquency Survey, released on Thursday. Loans entering the foreclosure process in the first quarter rose to a seasonally adjusted 0.99%, up from 0.83% in the fourth quarter. Both the rate of foreclosure starts and the percent of loans in the foreclosure process were the highest recorded since 1979, according to the group. The seasonally adjusted delinquency rate for mortgage loans also was the highest since 1979, with 6.35% of all loans at least one payment past due during the first quarter, up from 5.82% in the fourth quarter.

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As the mortgage mess has rolled on, many community and regional banks have been using the downturn as a chance to build their mortgage origination business. Many local banks were relegated to an afterthought in the mortgage origination business during the housing boom, as larger Wall Street firms and national banks pushed the originate-and-sell models out to consumers.

With many of those larger national players scaling back or exiting the business altogether, the playing field has changed dramatically.

Companies like Florida Bank Group, Inc., a small bank holding company with $810 million in total assets, epitomize the re-emergence of local banks in the mortgage space — the bank said in January that it had formed Florida Bank Mortgage, as part of an effort to offer wholesale mortgage services statewide.

The result is that while origination volume has plummeted in total, many community banks are seeing production volume increase.

The Wall Street Journal reports on the case of Boston-based Hingham Institution for Savings, for example, that handles underwriting via pen and paper; the local bank has seen originations increase 20 percent, the Journal reported. Others, like New Jersey-based thrift Hudson City Bancorp Inc. (HCBK: 17.46, +1.16%), have seen a 26 percent jump in mortgage loan production.

As the Journal notes, the return of consumers to community banks has helped firms like Taylor, Bean & Whitaker Mortgage Corp. — the company provides private-label origination services to community banks, since many smaller institutions don’t have the wherewithal to hold the assets on their own books. Which, in some ways, puts community banks into direct competition with mortgage brokers.

Credit crunch gets local
Just as community and regional bankers are now sensing renewed opportunity in residential mortgage lending, however, many of the nation’s smaller banks are just now beginning to feel the effects of a credit crunch that has reached well outside of the mortgage sector.

The result is an interesting tug-of-war between fresh opportunity and emerging capital constraints that serve to limit a bank’s ability to take advantage of changing market conditions.

Case in point: Michigan-based Citizens Republic Bancorp, Inc. (CRBC: 4.99, -3.85%), which said Thursday morning that it would raise $200 million as it looks to deal with $180 million in goodwill impairment and write-downs of $47.1 million tied to its commercial real estate exposure. The regional bank operates in Michigan, Ohio, Wisconsin and Indiana.

Webster Financial Corporation (WBS: 23.00, -10.23%), a $17.2 billion bank based in Connecticut, said on Thursday that it, too, would look to raise up to $250 million in fresh capital to meet its liquidity needs. And PFF Bancorp, Inc. (PFB: 1.34, +5.51%) said Thursday that it wants to raise $460 million in a private placement of both debt and stock.

Officials are taking notice of the increasing risk for problems among the nation’s smaller banks. Boston Fed president Eric Rosengren said last week that continued weakness in housing likely would strain many of the nation’s smaller banks.

“Problems could expand beyond securitized assets to have an impact on the nonsecuritized assets held by smaller banking institutions,” he said. “It is possible that these institutions may not be able to tap additional capital quite as easily as larger institutions, and if so they may be forced to constrain other lending to address any losses.”

Or course, a number of smaller banks have already crashed this year, with more failures already expected by FDIC officials in the next year. Failed Bentonville, Arkansas-based ANB Financial, NA is one such example — the bank had overextended itself into residential construction lending, and became the second-biggest federally insured bank failure since 2001 late last month.

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

Selling REO is big business these days; the firms that specialize in the business of managing, listing and selling bank-owned real estate assets have been flooded with new assets as foreclosures nationwide have soared in the past 12 months.

And while many origination tech providers are scrambling to integrate and partner up in an effort to weather the current storm, many technology providers that specialize in the oft-hidden (and often ignored) default servicing segment have hit their proverbial end-of-the-rainbow.

REOTrans, LLC — one of the larger tech providers you’ve never heard of, unless you happen to work in REO disposition — is the latest beneficiary of the industry’s shift away from origination, and said late Wednesday that more than 150,000 homes representing $22 billion in total value have been sold through its web-based platform.

The company provides banks with a software system to manage and sell REO homes nationwide, providing its software to 16 of the top 25 mortgage institutions in the country — it also provides foreclosed property listing services via its own Web site, although its the management platform used by servicers that the company is best known for.

REOTrans said that approximately 175,000 properties currently available through its own platform.

“We continue to see substantial additions of foreclosure properties to our system each month,” says Chris Saitta, CEO of REOTrans. “On the plus side, we are definitely starting to see higher numbers of properties selling, even in areas like California and Florida, which have been significantly impacted by the current real estate and mortgage crisis.

“Homebuyers and investors are becoming more active and starting to buy properties once again – there are a lot of good values being offered by sellers.”

REOTrans’ core business involves connecting servicers with local real estate agents; more than 15,000 listings per month are assigned by sellers to real estate agents through the REOTrans platform, the company said.

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