by Calculated Risk on 7/24/2007 11:34:00 AM

From Mathew Padilla at the O.C. Register reporting on DataQuick numbers:

There were 17,408 foreclosures in the Golden State in the second quarter — that’s the highest quarterly total since DataQuick began tracking them in 1988. It surpassed the previous high point of 15,418 foreclosures in the third quarter of 1996.
...
Notices of default, the first stage of foreclosure, totaled 53,943 in the second quarter, the highest since late 1996.

DataQuick reported 46,670 Notice of Defaults (NODs) in Q1.

Click on graph for larger image.

This graph shows the NODs filed in California since 1988. For 2007, the number is estimated at twice the NODs for the first half of 2007. This estimate is probably low, since the housing market appears to be deteriorating rapidly in California.

UPDATE: Here is the DataQuick press release: California Foreclosure Activity Continues to Rise

by Tanta on 7/24/2007 08:28:00 AM

This ought to calm the markets:

Management anticipates that the second half of 2007 will be increasingly challenging for the industry and Countrywide. Absent a reduction in mortgage interest rates, production volumes are expected to fall and competitive pricing pressures are expected to increase. In addition, volatility in the secondary markets has increased significantly early in the third quarter and liquidity for mortgage securities has been reduced as a result. These conditions are expected to adversely impact secondary market execution and further pressure gain on sale margins. Furthermore, additional deterioration in the housing market may further impact credit costs.

Management has taken, and is continuing to take, a number of actions in response to changing market conditions. These include tightening of credit guidelines, particularly related to subprime and prime home equity loans; further curtailment of subprime product offerings, including the recent elimination of certain adjustable-rate products; risk-based pricing adjustments; use of mortgage insurance for credit enhancement; and expense reduction initiatives. . . .

Credit-related costs in the second quarter included:

-- Impairment on credit-sensitive retained interests. Impairment charges of $417 million were taken during the quarter on the Company's investments in credit-sensitive retained interests. This included $388 million, or approximately $0.40 in earnings per diluted share based on a normalized tax rate, of impairment on residual securities collateralized by prime home equity loans. The impairment charges on these residuals were attributable to accelerated increases in delinquency levels and increases in the estimates of future defaults and loss severities on the underlying loans.

-- Held-for-investment (HFI) portfolio. The provision for losses on HFI loans incurred in the second quarter was $293 million, driven primarily by a loan loss provision of $181 million on prime home equity HFI loans in the Banking segment.

Guidance hereby reduced to $2.70 to $3.30/diluted EPS from April's $3.50 to $4.30.

I could be snarky about this, but since it's the first thing I've read today that didn't blame the rating agencies for all the problems, I'm giving extra credit.

by Tanta on 7/24/2007 08:11:00 AM

Continuing today's utter childishness:

Headline: "Basis Hires Blackstone to Limit Losses on Hedge Funds"

Funny Money Quote:

``The fallout from subprime is likely to impact most asset classes and investment strategies over the next couple of years because the ratings agencies completely goofed up,'' said Peter Douglas, the principal and founder of Singapore-based hedge fund research firm GFIA Pte. ``Basis Capital is viewed as a bellwether.''

Maybe Blackstone will help out by explaining what "basis risk" is.

by Tanta on 7/24/2007 07:35:00 AM

CR has been drawing our attention to what happens when "bridge loans" become "pier loans." There's another kind of what is supposed to be temporary financing on the Street known as "warehouse" lending. Mortgage bankers use warehouse lines of credit to fund loans as they are originated, carrying them in the warehouse until they can be sold to a whole-loan investor or securitized. What happens if the bottom falls out of the whole-loan or security market and nothing moves out of the warehouse? Long walk. Short pier.

CDO issuers also use warehouse funding to buy tranches of ABS and other securities to create the CDOs with. There are many different kinds of warehousing agreements, but I will note that one kind is known as a "gestational" facility. A better term might be "day care" facility, since the idea, like the bridge loan, is that somebody's going to show up at 5:30 and take the grubby little ankle-biters off your hands.

That's all in aid of extracting the utmost enjoyment out of the following, from Bloomberg, which I must say carries a headline we could only have dreamed of last year, "KKR, Homeowners Face Funding Drain as CDO Machine Shuts Down":

July 24 (Bloomberg) -- The Wall Street money-machine known as collateralized debt obligations is grinding to a halt, imperiling $8.6 billion in annual underwriting fees and reducing credit for everyone from buyout king Henry Kravis to homeowners.

Sales of the securities -- used to pool bonds, loans and their derivatives into new debt -- dwindled to $3.7 billion in the U.S. this month from $42 billion in June, analysts at New York-based JPMorgan Chase & Co. said yesterday. The market is ``virtually shut,'' the bank said in a July 13 report. . . .

``We're walking on thin ice,'' said Alexander Baskov, a fund manager who helps oversee $25 billion of high-yield debt for Pictet Asset Management SA in Geneva. ``People are trying to find value and the right price and right now nobody knows what it is. Pretty much everyone is in the dark.'' [Insert Patsy Cline chorus here] . . .

The shakeout is leading firms from Maxim Capital Management in New York to Paris-based Axa Investment Managers to delay or scrap planned CDO sales.

Maxim began buying mortgage bonds for a new CDO after completing its second deal in March. Chief Investment Officer Doug Jones in New York said he slowed the purchases, having acquired only a third of the assets planned, partly because the bank underwriting the deal grew concerned it could lose money as volatility increased. He declined to name the underwriter.

``We don't want to get too far along and create something that's not sellable,'' said Jones, who manages $4 billion of CDOs.

Banks are becoming more skittish about providing credit lines, called warehouse financing, managers use to buy assets that go into CDOs in the months before the securities are issued, said James Finkel, chief executive officer of Dynamic Credit Partners. The New York-based company manages $7 billion in 10 CDOs and a hedge fund.

``There are just very few, if any, bankers opening new warehouses,'' said Finkel.

"We don't want to get too far along." Uh huh. Today you're a little bit pregnant, tomorrow you're loading up the cart with Pampers.

by Calculated Risk on 7/23/2007 08:18:00 PM

From the WSJ: GM's Allison Hits a Financing Snag

Wall Street firms postponed a sale of $3.1 billion in loans that would pay for the leveraged buyout of General Motor Corp.'s Allison Transmission unit ...

The snag reflects difficult conditions in the market for risky corporate debt and raises questions over the prospects of other buyout-related debt financings that need to be completed this summer ...

GM ... agreed to sell Allison Transmission ... to private equity firms Carlyle Group LP and Onex Corp. for $5.6 billion. ...

Underwriters, including Citigroup, Lehman Brothers and Merrill Lynch, were planning to sell, or syndicate, $3.1 billion of the loans to investors. ...

The buyout is still on track to be completed in the third quarter. If the debt hasn't been distributed by then, the deal will be financed directly by the underwriters ...

Another possible "pier" loan for the underwriters.

Note: A bridge loan is short term financing provided by the underwriters until they can syndicate the debt. If the underwriters can't syndicate the debt, and they have to keep the loan (the short term financing becomes long term financing), it's frequently called a "pier loan"; i.e. a bridge to nowhere.

by Calculated Risk on 7/23/2007 07:19:00 PM

Is it Friday? The downgrades are coming every day now! (hat tip Cal)

From Reuters: Moody's cuts CSFB Home Equity tranches

Moody's Investors Service cut 22 CSFB Home Equity Asset Trust securities on Monday while placing 32 other classes under review for downgrade, citing an increasing rate of delinquent loans.

Also from Reuters: S&P may cut $1.76 bln in ABS CDOs backed by subprime

Standard & Poor's on Monday said it may cut $1.76 billion in collateralized debt obligations backed by asset backed debt, citing exposure to residential mortgages that have undergone downgrades.

And the details from Standard & Poor's: Various Ratings On 8 Cash Flow, Hybrid CDOs Put On Watch Neg; $1.76 Billion In Notes Affected

by Calculated Risk on 7/23/2007 04:32:00 PM

From Reuters: Wells Fargo pulls popular subprime loan from mix.

Wells Fargo & Co. ... on Monday said it stopped offering a popular subprime mortgage product in response to market and regulatory pressure.

The company in an e-mail said it ended on Friday retail offerings of so-called 2/28 loans, which at 65 percent of all subprime mortgages last year are the staple of the industry. ...

Decisions were partly driven by the $583 billion market for subprime mortgage bonds, where sales rely on opinions of rating companies such as Moody's Investors Service, Wells Fargo said. Rating companies in the past two weeks have unleashed a flood of downgrades on subprime bonds in response to rising delinquencies and increased their assumptions of losses that new loans will produce.

"These changes are being made to align our practices with industry guidance, as well as appropriately respond to recent downgrades by key ratings agencies regarding subprime bonds," the San Francisco-based bank said in a statement. ...

Other big lenders including Countrywide Financial Corp., Washington Mutual Inc., Merrill Lynch & Co.'s First Franklin and H&R Block Inc.'s Option One Mortgage have also said they would stop making 2/28s.

by Calculated Risk on 7/23/2007 11:33:00 AM

"Our recent conversations with builders around the country find that housing demand has continued to wilt in the summer heat, with conditions sequentially worsening in the past four to six weeks,"
Deutsche Bank analysts Nishu Sood, Lou Taylor and Rob Hansen in a research note.

From MarketWatch: Deutsche Bank analysts say spring weakness carrying over into summer

by Tanta on 7/23/2007 08:46:00 AM

Captain Obvious! Please report to the Marketing Department!

Now, I have no idea what marketing people do when Captain Obvious is temporarily off the premises, but I have always believed that it involved "networking" and "teambuilding" with occasional bouts of "work" such as calling a very busy person in Secondary Marketing at market open on quarter-end during a blizzard resulting in severe short-handedness to ask whether a pricing special from two months ago was for all the "Super Expanded" loans or just the "DeLuxe ARM Super Expanded" loans. But I may be jaded by my own sad personal baggage.

It appears that at Countrywide they do really empirical scientific methodologically-rigorous stuff like asking complete strangers whether they would prefer to choose from a list of options or just get handed the same thing everyone else gets. Sit down, folks: this being early 21st century America, not the Politburo under Stalin, a majority of respondents picked "choice"! I am like so totally stunned and surprised. Who'd of thunk?

CALABASAS, Calif., July 23, 2007 /PRNewswire via COMTEX/ -- Countrywide Home Loans today unveiled a broad national initiative designed to educate mortgage consumers about the fact that they have many options available to them regarding how certain costs are paid when refinancing or obtaining a home loan, no matter which mortgage lender they choose. Countrywide is arming its more than 9,000 loan officers and mortgage sales force with new and improved tools, such as specialized mortgage cost calculators, that will allow them to thoroughly and transparently show customers cost-effective choices for structuring their home loan packages.

To understand how strongly consumers feel about the issue of choice versus a one-size-fits-all mortgage, Countrywide commissioned a national survey of more than 2,280 homeowners. The results show that the majority of respondents (76%) strongly agreed that they wanted to be informed by mortgage lenders about as many closing cost choices as possible in order to arrive at a decision best suited to their individual circumstances.

"Specialized mortgage cost calculators." What will they think of next? Fax machines?

I don't know exactly how many hours (days, weeks, months) my own personal butt has spent parked in a conference room listening to some front-end mortgage software vendor go through the dog and pony show on the "specialized mortgage cost calculators" that are included in the package and that allow the loan originator to run something between six and eleventy-jillion "scenarios" for a customer since the mid-90s, but it's a lot. I will say that back in '97 probably only the bigger shops had this cool technology, but then only the bigger shops in those days had fax machines that didn't use thermal paper rolls. If there is one mortgage originator out there today doing more than $25,000 a month in volume that does not use a multi-scenario pre-qual module, I want to know who it is.

You see, this isn't just a rant about stupid marketing strategies. This is about whether we did or did not just spend the last six years or so inventing endless new products, new fee schedules, and new underwriting "guidelines" such that every consumer had a giant Chinese menu to choose from. Word on the street is that a large percentage of these folks chose the one with the smallest monthly payment and the smallest cash-outlay at closing, since they really didn't have any other choice. Word in the back room, which is trickling out into the street, is that a very large portion of those folks are doomed.

But by all means, let's keep encouraging people to think that "I'm only going to be in the house for two years" is something other than the wallpaper on the corridor to Hell. The diaper aisles are full of people who were only going to have two children. The universities are full of 24-year-olds who were only going to take 4 years to get a degree. The county jails are full of penitents who were only going to have one more drink. The bankruptcy courts are getting a tad crowded with REITs who were only going to buy back less than 1% of their mortgage loans. You think there are some folks who bought in mid-2005 with no-down low monthly payments whose plans are under adjustment right about now?

When Countrywide has to drag out a marketing campaign that was stale before the invention of the internet and is putrefying since then, you know we're getting a little desperate to keep clinging to the illusions. What a bunch of tools.

by Calculated Risk on 7/22/2007 10:01:00 PM

Click on graph for larger image.
Last week, Chairman Bernanke presented this chart to Congress. At the time, Greg Ip at the WSJ noted:

Despite fears in the markets and press that subprime problems would trigger broader contagion, the Federal Reserve has repeatedly predicted that what started in subprime would stay in subprime. ...

A key reason for that confidence is this chart ... showing that the sharp rise in delinquencies has been confined to one class of loan: subprime variable-rate mortgages.

Here is the referenced report: Monetary Policy Report to the Congress My reaction was that Bernanke's chart was flawed, and that we already know that "what started in subprime" has not stayed in "subprime".

This chart is from the WSJ today: States Aim to Stem Tide Of Home Foreclosures With Funds for Refinancing

The two charts present different pictures of homeowner distress. Bernanke's chart shows loans that are 90 days delinquent (as of April and May); the WSJ's chart shows loans already in foreclosure. The WSJ chart clearly shows what we already know: the mortgage problems have spread to Alt-A.

Note: I'd just ignore these state programs. They are very small, and appear to be designed to show politicians are "doing something". The fact that the programs bailout lenders, more than borrowers, is probably lost on most constituents.