by Calculated Risk on 4/02/2007 11:16:00 AM

Bloomberg reports: New Century Files for Bankruptcy Following Subprime Defaults

by Calculated Risk on 4/02/2007 10:44:00 AM

This is a key issue. According to the UCLA Anderson Forecast, Orange County, California (where I live) will avoid the worst of the housing bust. The logic goes something like this: Since there are very few first time buyers in O.C., there are very few subprime loans. Therefore there will be fewer homes in foreclosure, and less pressure on housing prices.

I disagree somewhat with this view. The areas with a high percentage of both housing related employment and subprime loans will most likely get hit the hardest (like California's Inland Empire). However areas like Orange County will not escape the carnage. In O.C., a large percentage of buyers used affordability products (like option ARMs) to purchase or refinance their homes. Many of these buyers will also get in trouble as housing prices stagnate and fall - it will just take a little longer than with the subprime borrowers.

Also, housing is a series of small chain reactions.

Click on graph for larger image.

Not all chain reactions start with a first time buyer using a subprime loan, but the loss of a large number of subprime buyers will impact an entire chain.

And it doesn't matter if the subprime buyer is in Orange County. The loss of a subprime buyer in Riverside means a moveup buyer can't purchase a home somewhere in Orange County.

Here is the story ...

From the O.C. Register: O.C.'s housing market to be spared worst of subprime fallout

The troubles in the subprime mortgage industry could bring stagnation to California's housing market, but Orange County should be spared the worst fallout, according to a UCLA economist.

In a report to be released today, Ryan Ratcliff, an economist with the UCLA Anderson Forecast, points out that markets with a higher proportion of first-time buyers and new homes – such as the Inland Empire and Ventura County – are seeing a bigger surge in defaults, or borrowers who fall 90 or more days behind on their mortgage payments, than areas like Orange County.
...
Orange County is "not a first-time buyer market or a market with a lot of new building," Ratcliff said in an interview. For those reasons, the recent rise in defaults is of a lesser magnitude here.
...
"Since the subprime market was almost the only thing keeping sales volume buoyant in the last years of the boom, the drying up of subprime credit suggests that home sales in California will be stagnant for some time to come," he writes.

by Tanta on 4/02/2007 10:43:00 AM

CFC's Angelo Mozilo reminds us why letting lenders regulate themselves has worked out so well.

He said adjustable-rate mortgages and loans made without a downpayment have been used for more than a generation with proven results.

“It’s very important that we put liquidity back in the system,” Mozilo said while co-hosting "Squawk Box." “It’s important that that the Fed backs off on these guidelines and that people realize hybrids are very good loans.”

We're from the mortgage industry and we're here to help.

by Calculated Risk on 4/02/2007 12:17:00 AM

From the WSJ: New Century May Announce Bankruptcy Filing

New Century Financial Corp. is expected to make an announcement early Monday ... people familiar with the situation said.

The company is widely expected to seek relief from creditors through a bankruptcy filing.

by Tanta on 4/01/2007 09:01:00 AM

CR may have posted on this study by researchers at the OCC and Federal Reserve Bank of St. Louis early last year just after it was published; at the time I was distracted by my post-surgical morphine pump (and you think I’m a Luddite?) and quite honestly was paying no attention to such matters. It’s not just that I’m too lazy to check the archives. Some questions have arisen in the comments recently about the history of subprime lending, as well as the extent to which depository institutions are implicated in it. So this may be worth a read even if we’ve been there before.

It’s a good paper; it’s also worth thinking about how off the mark some of its predictions about the direction of the subprime market turned out to be, just a year or two later. The authors were using data sets up to about mid-2004 and were writing in 2005, at what now appears the top of the real estate market in a lot of places. Even the list of subprime originators is sorely out of date: note the statement that “Household Financial Services, one of the original finance companies, has remained independent and survived the period of rapid consolidation. In fact, in 2003 it was the fourth largest originator and number two servicer of loans in the subprime industry.” Of course HSBC, a depository, was busy negotiating the purchase of HFS at the moment that sentence was written.

So the discussion here of the recent history of subprime originating is a bit dated in spots. What disappoints me is that the authors do not address one of the key facts about the situation in the 90s that I happen to remember: how the prime-lender depositories got their feet wet in subprime to start with.

Remember that back in the early-to-mid 90s, FICOs and AUS were still in development or not widely used, and nearly every loan was originated as “full doc” or what was called “alt doc,” which simply meant that it used borrower-provided documents (pay stubs, bank statements) instead of the probably more accurate but more expensive and time-consuming employer-provided or bank-provided documents (the Verification of Employment and Verification of Deposit forms a lender mailed to the relevant third party and received back, in the mail, with original signatures and in-depth information). Credit history was analyzed by looking at a full credit report (the old “RMCR” or “long-form” credit report ordered specially for residential mortgage applicants). Appraisals were all submitted on paper, with ink signatures and original photographs. Processing and then underwriting loans was time-consuming, and the application fee charged to a borrower was generally only enough to cover the actual cost to the lender of obtaining the credit report and appraisal. So the effort made by the lender to order verifications and evaluate the loan was sunk cost if the loan request was denied.

Several contexts converged here: after the S&L fiasco, prime depository lenders were finding themselves under some more attentive than usual regulatory supervision on safety and soundness issues, which, combined with RE busts, tended to make the declination rate for loan applications go up. At the same time, Fair Lending laws were getting enforced, which tended to make lenders less casual about having a high declination rate that they couldn’t justify on strictly credit-related grounds. For a lot of banks, specifically, the mortgage lending department (as opposed to other sources of loan assets like commercial, consumer, etc.) was a cyclical overhead-sink when rates went up (as they did in 1994-1995) and the refi boom of the early 90s came to an end.

Therefore, the issue of how one might recover some of those costs expended on loan applications one had ended up denying converged with the by-now commonplace idea that the prime-denied borrower class is an “underserved borrower segment” to create a willingness to dabble in subprime. If you, like me, had ever been handed a coffee mug with “There is no problem; there is only opportunity” emblazoned on it in some corporate pep rally in those days, you are familiar with the approach.

But the prime depositories of those days weren’t necessarily interested in placing these loans in their own investment portfolios, and they weren’t eligible for sale to the GSEs, which were the major buyers of loans the depositories didn’t hold. So banks and thrifts started developing whole-loan servicing-released loan sale programs, where the “fallout” from the prime pipeline could be recaptured by making a subprime loan and then selling it outright to a subprime conduit. Everybody gets a loan; all costs are eventually recouped; opportunity thrives. The subprime conduits could securitize the stuff and lay off the risk. It was great.

Except. There’s always an except. One unforeseen difficulty was that it became possible for certain participants who had always lived in the prime world to compare the profit margins on good old Fannie Mae fixed rates (maybe 50 bps if you were good at it) to those subprime deals (easily 150-200 bps if you were fair-to-middlin’ fastidious). Increased subprime lending could even improve those prime margins: as more and more of your weakest loans fell out of the bottom tier of your GSE loans and into the top tier of your subprime loans, you got paid better by the GSEs in the form of improved guarantee fees (since your average credit quality was so much better) and by your subprime investors (since your average credit quality was so much better). There was, in short, a moral hazard in play: in the shift from non-price to price rationing, more borrowers got mortgages, but it wasn’t always clear that they got the cheapest mortgage they should have gotten.

Those of us who were there at the time that the story about how “subprime is a way of serving the poor” got written do, then, tend to be somewhat more skeptical of this claim than others. The fact that many participants did not start out with the intention of preying on borrowers doesn’t change the fact that predation became widespread, or that a form of lending that had once been reserved for people with a lot of equity became associated just a few years later almost exclusively with people who had no money at all.

We can certainly debate the extent to which price-rationed lending provides true benefit to the historically credit-constrained. I’m game. I just think that market participants with short institutional memories are a menace. To all of us.

by Tanta on 3/31/2007 04:07:00 PM

Because you all need something else to talk about.

Yes, I remember what I was doing when this song came out.

Yes, I used to have a bat-winged blouse that tied at the hip just like that.

You wanna make something of it?

by Tanta on 3/31/2007 10:53:00 AM

From "Housing Crisis Knocks Loudly in Michigan":

For most of the past year, Michigan has ranked among the three states with the highest percentage of late mortgage payments and foreclosures, surveys by the Mortgage Bankers Association show. In the fourth quarter, it came in third, behind Ohio and Indiana, with 2.39 percent of its loans in foreclosure.

Many economists say, and union officers agree, that those hardest hit are not auto workers who lost jobs. Many received buyouts that should keep them afloat for a while. And because they tend to be older, some have paid off their mortgages.

Those feeling the worst squeeze, rather, are workers at the auto supply companies, such as Max, 44, an engineer who spoke on condition that his last name not be used because he is embarrassed by his situation.

Max bought a condominium in the Detroit suburb of Plymouth using a traditional fixed-rate mortgage more than five years ago. But three years later, his firm took away company cars from its workers, hiked insurance premiums and cut raises and bonuses -- raising Max's monthly living expenses and reducing his pay.

Max responded by refinancing his condo twice. Though he did not realize it then, the second loan was adjustable. Over time, his monthly payments rose from $1,500 to $1,800 to $1,950.

"I wasn't even reading the paperwork," said Max, who makes $106,000 a year.

Weeks ago, Max turned in his keys to his lender. The bank paid him $500 and took possession of the condo earlier than it otherwise could under Michigan law.

by Tanta on 3/31/2007 08:46:00 AM

Hat tip to jmf!

Fulton Financial reports on repurchases of loans originated through its Resource Bank subsidiary:

In recent months, Resource has experienced an increase in the rate of EPD and corresponding requests to repurchase such loans, primarily related to one specific product sold to one investor. This product, referred to as the 80/20 Program, involves financing of up to 80% of the lesser of the purchase price or appraised value for a first lien mortgage loan and up to an additional 20% of the lesser of the purchase price or appraised value for a second lien home equity loan. Investor underwriting requirements for the 80/20 Program do not require independent verification of the borrower's income. To be eligible for loans under the 80/20 Program, borrowers are generally required to have a credit score of 620 or greater.

Fun facts:

• Loans originated for sale under the 80/20 Program in 2006: $247MM
• Pending repurchases of 2006-originated 80/20 Program loans: $22MM
• Remaining 2006 80/20 loans still subject to potential repurchase: $72MM
• Average FICO on requested repurchase loans: 653
• Percent of repurchase requests due to Early Payment Delinquency: 80%
• Date Resource quit offering this loan program: February 2007

These are fairly small absolute numbers for a lender of this size. The point is that this is under any definition Alt-A, not subprime.

by Calculated Risk on 3/30/2007 07:16:00 PM

From Reuters: M&T Bank says Alt-A loan woes will hurt earnings

M&T Bank Corp. said on Friday that problems with mortgages that have limited income documentation will hurt first quarter profit.

The bank, based in Buffalo, New York, said the carrying value of its Alt-A loan portfolio that had been held for sale was reduced by $12 million in the first quarter.
...
Meanwhile, the bank also said it would have to repurchase problem loans sold to investors.

Added: Just to make this clear, the problem loans that M&T will repurchase are Alt-A. From the M&T Bank press release:

In addition, M&T is contractually obligated to repurchase previously sold Alt-A loans that do not ultimately meet investor sale criteria, including instances when mortgagors fail to make timely payments during the first 90 days subsequent to the sale date. Requests from investors for M&T to repurchase Alt-A loans have recently increased. As a result, during the first quarter of 2007, M&T accrued $6 million to provide for declines in market value of previously sold Alt-A mortgage loans that are expected to be repurchased.

by Calculated Risk on 3/30/2007 02:17:00 PM

OCC Reports Record Bank Trading Revenues of $18.8 Billion for 2006

Insured U.S. commercial banks posted a record $18.8 billion in trading revenues in 2006, up 31 percent from the previous annual record of $14.4 billion set in 2005, the Office of the Comptroller of the Currency reported today in the OCC Quarterly Report on Bank Derivatives Activities. In the fourth quarter, commercial banks generated revenues of $3.9 billion from trading cash instruments and derivative products, off slightly from the $4.5 billion in trading revenues for the third quarter of 2006.

“Bank trading revenues have been strong the past few years due in large part to robust client demand, especially from large institutional investors such as hedge funds,” said Deputy Comptroller for Credit and Market Risk Kathryn E. Dick.

The OCC also reported that the notional amount of derivatives held by insured U.S. commercial banks increased $5.3 trillion, or 4 percent, to a record $131 trillion in the fourth quarter, 30 percent higher than year-end 2005.

The report noted that a fast-growing area has been credit derivatives, which increased to $9.0 trillion at year-end 2006, representing a 55 percent increase from the $5.8 trillion reported at year-end 2005. ...

Here is the report: OCC’s Quarterly Report on Bank Derivatives Activities: Fourth Quarter 2006