by Calculated Risk on 11/12/2007 12:19:00 AM

From Eric Dash at the NY Times: Some Wonder if the Banks’ Stabilization Fund Will Work

... Will it actually help?

The answer, some analysts and big investors say, is probably not much. The backup fund will not save troubled structured investment vehicles, or SIVs, that hold billions of dollars in packaged loans, though it could delay their demise. It may help calm the turbulent credit markets by preventing a sharp sell-off of securities ...

The hope is that the backup fund will allow time for asset prices to recover, although most market analysts call that improbable. But if the backup fund helps SIVs avoid sell-off, those investors may lose less money. Prices vary, but even amid a deteriorating market, some analysts say that the bulk of SIV assets are still fetching between 97 cents and 98 cents on the dollar.
...
The backup fund will not purchase the most distressed assets in the SIVs. Bank organizers agreed that it would not accept any subprime mortgage-related assets and only certain types of risky complex instruments like collateralized debt obligations.
...
“Will this resolve the basic issue of the assets of the SIV trading below what they were originally?” asked Steven Abrahams, the chief interest-rate strategist at Bear Stearns. “No, it defers the day of reckoning.”

It doesn't sound bad with assets "fetching between 97 cents and 98 cents on the dollar", however, because of leverage, this puts the SIVs right on the threshold of a possible enforcement event.

As noted in my earlier SIV post, Fitch rated SIVs average 14 times leverage. So, if an SIV had $1 Billion in capital, and an additional $14 Billion in leverage (mostly from selling commercial paper and medium-term notes), the SIV would hold $15 Billion in assets. If the typical asset was "fetching between 97 cents and 98 cents on the dollar", that would be a loss of $300M to $450M, or a loss of 30% to 45% of capital (from the $1 Billion) giving a NAV of 55% (97 cents on the dollar) to 70% (98 cents on the dollar).

According to Fitch, if the NAV for an SIV falls below 50%, then the fund might face an enforcement event, and it might have to be liquidated. Once the assets of one fund were liquidated - say at 96 cents on the dollar - that would mean the NAVs for other SIVs would probably fall below 50% - and they might also have to be liquidated, further depressing prices.

by Tanta on 11/11/2007 05:26:00 PM

Angelo Mozilo, February 4, 2003, Washington, DC:

As we had envisioned in 1992, House America offers unique loan products that have been specifically designed to meet the needs of minority and low- to moderate- income borrowers. But it also does more. It has become not just a lending program, but a more comprehensive effort that devotes considerable intellectual and financial resources to increasing homeownership among minority and low- to moderate-income individuals and families.

It is an effort that includes a counseling center which provides free services by phone in a comfortable, no obligation environment where people can obtain information about the home-buying process. It is an effort that, in addition to providing loan products with flexible underwriting criteria such as home rehab loans, also specializes in being able to layer financing programs through participation in hundreds of down payment and closing cost assistance programs. House America also offers other tools to ensure that we are doing everything in our power to expand the opportunities for home-ownership. It is an effort absolutely committed to education and outreach, both in English and Spanish, both online and in local communities, both at local home-buyer fairs and at lending workshops, and with our many partners, like Fannie Mae, Freddie Mac, FHA, the Congressional Black Caucus, the National Council of La Raza, AFL-CIO, and faithbased groups across the Country, just to name a few.

I want to specifically and especially recognize Franklin Raines and his entire team at Fannie Mae for providing a great deal of the resources that have made it possible for us to achieve our House America objectives.

In 1993, Countrywide opened four dedicated House America retail branches, and now we have 23 staffed with local and diverse professionals in major metropolitan areas all across the Country.

It is an effort that has enabled Countrywide to become the number one lender to Hispanics for the last 6 years and the number one lender to African Americans for the past 3 years.1 It is an effort that is helping create, if you will allow me to paraphrase, a Field of American Dreams. “If you build it, and build it right, they will come.” Finally, House America is an effort that, as you can tell, makes all of us at Countrywide extremely proud. I could talk about it all night, but I won’t.

But I want to make the point that this outreach effort is imperative. Fortunately Countrywide isn’t alone – there are other mortgage lenders and financial institutions that are all making positive contributions. And the lesson we can take away from this is the following: for a long time, when it came to increasing low-income and minority homeownership, the message has always been “we should,” or “we must.” But the fact is, “we can,” and “we are.”

Now, we must take the energy and expertise and the ideas and the innovation that we’ve brought to increasing the overall homeownership rate, and apply them to creating reasonable parity among homeowners. It is time, once and for all, to narrow and ultimately eliminate the homeownership gap. I believe we can eliminate the gap and it is, in large part, why I got into this business. [Emphasis added]

Angelo Mozilo, October 29, 2007, Los Angeles:

In just the period from second quarter 2005 to second quarter 2007, California delinquency rates have climbed more than 180 percent. But State Treasurer Bill Lockyear said that while he anticipates some economic ripple effect across the state, "it's still too early to measure." Next year, California’s deficit is expected to reach $9 billion, he noted, and while the subprime effect will be "significant," he anticipates that the state will be shielded by its strong and diverse economy.

Countrywide's Chairman and CEO, Angelo Mozilo, took pains to explain what precipitated the subprime problem. First, he said, easy money began to drive up home prices at the start of the decade. When the Fed began to raise interest rates -- after some six or seven times, in fact -- people suddenly began to scramble to get into houses before the next rate hike. In addition, lenders were facing pressure from minority advocates to help people purchase homes. Lenders felt pressure to lessen their loan standards.

by Calculated Risk on 11/11/2007 10:09:00 AM

NOTE: See update on NAV in post.

From the NY Times: Banks Said to Agree on Credit Backup Fund

The country’s three biggest banks have reached agreement on the structure of a backup fund of at least $75 billion to help stabilize credit markets ...the proposed fund could begin operating by the end of December ...

Henry M. Paulson ... acknowledged that the proposed backup fund would not rescue troubled SIVs, only lead to a longer and more orderly demise.

Originally the Super Fund was going to buy only the best assets from the SIVs to provide liquidity - but I guess people realized that wouldn't help. Now, apparently, the Super Fund will buy anything:

... the fund will not distinguish between the assets it buys from each SIV; instead, it will assign the same risk level to all their troubled securities.

If the Super Fund will buy anthing, it will likely end up with the worst assets. From Reuters: Fitch may cut Citi's Sedna-managed SIV notes

Fitch Ratings on Friday said it may cut its ratings on notes from a structured investment vehicle managed by Citi Alternative Investments, called Sedna Finance ...

"The rating action reflects Fitch's view that significant refinancing requirements in the first quarter of 2008 might have to be covered by asset sales, leading to a realization of net asset value (NAV) losses," Fitch said in a statement.

The NAV of the notes is now 72.5 percent, Fitch said.

"Fitch recognizes that there is no imminent pressure for Sedna Finance to sell assets, as the vehicle is funded into January 2008," Fitch said. "However, significant amounts of funding mature in the first quarter of 2008."

This low NAV isn't unique to assets held by Citigroup managed SIVs. On a conference call on Thursday, Moody's says some SIV NAVs have fallen below 50%

... that the average NAV across the SIV sector has fallen from 101% at the beginning of July to 71% at the beginning of November

UPDATE: I misread the NAV here, and the difference is important. (hat tip jck at Alea Blog) From Fitch Ratings: Rating Performance of Structured Investment Vehicles (SIVs) in Times of Diminishing Liquidity for Assets & Liabilities See: NAV Deterioration on page 11.

As the prices of the underlying assets of the SIV decline the NAV of the capital note reduces at a magnified level due to the 14 times leverage found on average within the SIV market. Hence, a 0.5% price drop on all assets across the portfolio would result in the NAV declining by 7%.

Click on graph for larger image.

During the past 10 weeks, Fitch has observed the NAV of each SIV to decline. The above chart presents the weighted-average NAV of the Fitch-rated SIVs. In early July, the weighted-average NAV was slightly above par. However, over the past ten weeks it has reduced down to 76%.

So, using a NAV decline to 71% (from Moody's), the underlying asset losses are around 2% for an average SIV. With the NAV at 50%, the loss would be closer to 3.5%.

This reminds me of when Bernanke talked about an "orderly" decline in the housing market:

... Federal Reserve Chairman Ben S. Bernanke said [May 18, 2006] that the U.S. housing market ... slowdown is "moderate" and "orderly" ...

Now Paulson is talking about an "orderly demise" for these SIVs.

Perhaps "Orderly" is the new "Contained".

by Tanta on 11/11/2007 09:18:00 AM

If you are a veteran of the United States Military (and thank you very much), or if you have ever attempted to moderate blog comments, you will find the following video too painful to watch. For everyone else I expect it's a scream.

(Via Balloon Juice)

by Tanta on 11/10/2007 02:11:00 PM

My recent posts on WaMu’s Very Bad No Good Rotten Day involving inflated appraisals have drawn a lot of questions. One question I keep getting is a variant of “What’s so wrong with the alleged conduct anyway? Why is it such a big deal for WaMu to insist on a list of approved appraisers? Isn’t that just good risk management on WaMu’s part?”

Possibly it is just good risk management on WaMu’s part: an indictment is, after all, an allegation of misconduct, not a verdict. However, what WaMu is alleged to have done is itself the kind of conduct that is an automatic “red flag” for anyone who knows anything about how the appraisal management business works. Since most of you are fortunate enough to be entirely innocent of that, I thought I’d go through some issues here.

First off, I’m talking about how the business works, not about how the principles of appraiser independence are derived by the Appraisal Foundation or why they matter so much. I’m taking as a given that we accept the axiom that when an appraiser’s compensation is based on his or her willingness to come up with the answer an interested party wants, instead of the answer he or she thinks the facts of the subject property, the transaction requested, and the local real estate market warrant, an appraisal is nothing more than a ratification of the loan amount someone has already decided on, and that “someone” isn’t the ultimate bagholder. The real bagholder wants to know whether it is lending too much or risking owning an unsalable piece of REO. That an individual loan officer or broker just wants to know how high we can make the loan amount—and thus a commission—is an artifact of a business structure in which a lender’s own employees or agents are not aligned with its own corporate best interests. At some level the appraisal problem will never get solved until the compensation of loan processing employees and intermediaries gets solved, but that’s not today’s argument.

In the olden days of local lenders, you had either staff appraisers or “fee appraisers.” You could actually have appraisers on your payroll because you lent in a defined local area: you didn’t have to worry about needing an appraisal for a property six states away that your staff appraisers couldn’t get to, even if they were licensed in that state. If you relied on fee appraisers, possibly because it was too expensive to keep appraisers on the payroll during down-cycles in RE, you still worked in a local market, you got to know all of them, and you could order appraisals from people whose work was familiar. If you were smart, you worked with the best appraisers there were. If you were stupid, you channeled business to your golf buddies. A number of S&Ls did the latter, and they did not live happily ever after. We have this thing called FIRREA, which brought into being USPAP, in large part because of that second option.

Once local lenders became regional lenders and then national lenders, the distance between corporate headquarters, the Appraisal Department, and the actual properties and markets grew to the point that having staff appraisers was impractical and hiring fee appraisers was a crap-shoot. You can pick up the Yellow Pages to find an appraiser in a market you just entered, but this means you will learn by doing in terms of quality. That goes double if you entered this market via wholesale lending: you now have a broker you don’t know much about hiring an appraiser you don’t know anything about in an RE market you’ve never done business in before.

The early years of national wholesale lending supplied lots of excitement, as Podunk National Bank changed its name to Ubiquitous, Inc. and charged into market areas about which it knew nothing, on the assumption that, say, Miami is just like Podunk except the loan amounts are bigger. Sometimes this was actually retail lending: Ubiquitous, Inc. started buying up branches in all these new and exciting markets, with the plan of managing them long-distance from corporate headquarters. Often those branches (complete with their employees) could be acquired for amazingly cheap sums of money. The Lender Formerly Known As Podunk often didn’t ask itself why the current owner of that branch wanted out so badly, but that’s hardly a problem unique to mortgage lending or banking.

Eventually, everyone had to deal with the hard knocks. You might be able to justify taking risks on the unknown when you move into a new market, but you still have to do something about the problems that crop up. Everyone got at least some really bad appraisals from the Yellow Pages approach, and had to start making some lists. I really think that a major problem lurking in the industry happened right here, when wholesalers and correspondent lenders made a decision about what kind of list to make. Do you make an “Approved Appraiser” list of the ones you haven’t had problems with, or do you make an “Excluded Appraiser” list of the ones you have had problems with?

There is no question that logically, the most efficient thing to do is make the exclusion list. Even if you believe that there are more than just a few bad apples, you don’t get into the national mortgage lending business if you believe that bad appraisers outnumber good appraisers by a wide margin. Exclusionary lists are just shorter and easier to administrate.

If you’re still a retail lender (just a long-distance one), you can keep the shorter exclusionary list internal to your own organization. The major disadvantage of exclusionary lists developed for the wholesale and correspondent lenders, and for any lender in the “originate and sell” rather than “originate and hold” business. If you are contracting with brokers, correspondent lenders, third-party investors and servicers and other folks who need to conduct due diligence on your loans, you end up having to make your list available to all those parties. It becomes nearly impossible to keep it confidential.

And that started the defamation fear. Too many lenders faced real or imagined threats of lawsuits from appraisers who did not want their names appearing on what had basically become a public hall of shame list. (I hasten to add that these things were not “public” to you, the consumer. They were an open secret to everyone in the business except the consumer.) So even though an approved appraiser list was a much more expensive, time-consuming, cumbersome way to get there, more and more big operations started keeping one. (Why not go to the regulators and beg for a "safe harbor" against defamation liability for exclusion lists? Because lenders are almost never long-sighted enough to ask for regulation that benefits them. They're too afraid that it always comes with the wrong strings attached. Then after the criminal probes and class actions and general shirt-losing, we look back wistfully on those strings we were so afraid of, wondering why we didn't snap that deal right up.)

The alternative to exclusionary lists opened up the problem of what it means to be “approved.” The handy thing about the exclusionary list was that its criteria were easier to understand: anyone on that list gave me at least one bogus appraisal, or a series of very weak appraisals, or did some other bad thing like turning in all assignments late and never answering the phone. The lender would have documentation of this, since that’s where the exclusionary lists came from: a review of the lender’s internal notes and logs and quality control reports and so on. The approved appraiser list, however, didn’t just include appraisers whose work you really liked; it included appraisers whom you hadn’t yet caught red-handed, at least in theory. Many people became a bit queasy about the potential liability of appearing to put the Good Housekeeping Seal of Approval on a bunch of appraisers when the actual purpose of the list was just to indicate ones that could still be hired by the branches or brokers because we don’t know any reason why not yet.

Furthermore, these lists were (and are) huge work projects. It’s not just that a national lender has thousands and thousands of appraisers to deal with. It’s that if you’re any kind of conscientious about risks, you don’t limit your internal appraiser management functions to sitting around waiting for your QC department to find an obviously bogus one. You get a giant database going of all your appraisals, including the appraiser’s name and license number and a bunch of other facts, and you manipulate that information looking for patterns. A lot of lenders actually started stratifying the approved appraiser list: there was the A-team, whose appraisals got normal review, and the B-team, whose work could be ordered by a branch, but which had to undergo an extra layer of review or an AVM backup or something. The results of that had to be fed back into the model to see if anybody qualified for upgrade or downgrade. Plus you had to have a “probationary” list or some way of dealing with a new appraiser you’d never done business with before. Plus somebody had to monitor state licensing boards and other sources to pick up on appraisers with invalid or expired licenses or insufficient certification to handle large jumbo loans and so on.

Even worse, every big national lender was doing the same tedious expensive administrative work independently. This is why companies like eAppraiseIT exist. It didn’t take all that long for the lenders to figure out that this work could be outsourced, and for some enterprising party to offer to do it. Besides offloading the liability onto the vendor, the big lenders offloaded a whole bunch of those back-office corporate mouths to feed in the appraisal analysis department.

So fast forward to the specific allegations about WaMu and eAppraiseIT. It is utterly normal in the current environment for a big national wholesaler/correspondent buyer like WaMu to outsource appraisal administration. It is not usual for a lender to pay a vendor to make up a list of approved appraisers, and then for that company to continue to make its own list, and to demand that the vendor use the lender’s list. The whole idea is getting out from under having to make and maintain these lists, not to pay someone to do something and then incur all the expenses of doing it yourself at the same time. This would be a bug, not a feature.

I am theorizing that this is one reason why what WaMu wanted struck at least one manager at eAppraiseIT as out of line. It doesn’t have to involve any evidence anywhere that any individual appraisal is bad: you have to wonder what’s in it for WaMu to do business this way. From the facts alleged in the indictment, it sounds like eAppraiseIT asked why this was happening, and WaMu admitted that it was happening because WaMu wanted to make sure that one criterion for the “real” approved appraiser list was “the ones who hit the numbers we like,” not the ones eAppraiseIT’s database shows are not subject to documented lender or licensing board complaints.

You have to be aware that eAppraiseIT and its competitors do not base their management of individual appraisers on just one lender’s experience: that’s the beauty of the service they offer. To an individual lender, the sales pitch is something like this: why should you make the same mistakes Ubiquitous, Inc. has already made? With a third-party vendor, you get the benefit of the collective experience of every client. No appraisal management vendor expects a client to pipe up and say we want an “approved panel” that includes appraisers we know will wag their tails, roll over, and show us their bellies when one of our loan officers or correspondents or brokers asks for a certain value. Or if they do, they expect some circumspection about it. I don’t know if WaMu’s request was unusual because of its nature or because of its brazenness, but it seems to have struck someone at eAppraiseIT as a downright regulatory violation. Given the amount of interpretation and so on of a lot of regulations, many practices can be considered kinda squirrelly but allowable. It’s not that common for an outfit like eAppraiseIT to baldly assert that what’s going on is a clear violation of FIRREA.

That’s actually why I find those emails quoted in the indictment to be so explosive. I have spent a lot of years learning to decipher coded language about regulatory-not-exactly-improprieties-but-perhaps-areas-of-concern and other corporate-speak ways of putting it that I’m utterly blown away by the unvarnished language being used here. You just don’t accuse a major account like WaMu of out-and-out violation of safety and soundness regulation unless the conduct is egregious in the extreme, or you think it is clear that you are being lined up for bagholder duty, or both. It sure sounds to me like WaMu wanted to tell eAppraiseIT what to do, while having eAppraiseIT do the scut work plus the small matter of making all the relevant warranties in the utterly certain event it backfired. Mortgage market participants can be so amazingly short-sighted sometimes it’s hard to believe, but somebody at eAppraiseIT seems to have figured out who the sucker at the table was. No doubt they wouldn’t be on the receiving end of a civil suit from Mr. Cuomo if someone higher-up had listened to whatever internal employee called bull on this one.

Why didn’t they listen? Why doesn’t any corporation ever listen? Because the WaMu account is huge, and nobody wants to stop a gravy train. The indictment also includes snippets of emails suggesting that WaMu dangled other business relationships outside the appraisal management function in front of First American if it rolled over. Which is more or less exactly what lenders to do appraisers all the time: offer repeat business if they play ball, or being kicked off the team if they don’t.

I don’t want to sound too terribly nostalgic for the old days. Was it impossible to manipulate a staff appraiser? Of course not. They worked for you. You could saunter down the hall to their cubicles and make their lives a living hell in a very direct and personal way. As long as you didn’t think of yourself as the bagholder. And staff appraisers would roll over because you do that for the party paying your health insurance premiums. Especially when you believe that if it blows up, your employer, not you personally, is going to be liable.

These days appraisers have the same pressures to play ball and absolutely none of the protections of being employees. I wonder if we haven’t gotten to that point where someone with nothing left to lose has nothing left to lose. The lenders are asking appraisers to take personal liability for inflated appraisals, while offering them no salary (protection from falling volume cycles), no benefits, no institutional legal or compliance support. Even the per-deal fee we pay has become typically paid only out of closing proceeds. (We used to pay for the appraisals up front out of an application fee, so the appraiser got paid even if the loan didn’t close. These days the appraiser often never gets paid if the loan doesn’t close because the broker has nothing to pay it with.) And guess who is the target of the Cuomo indictment? Not the lender doing the bullying. At some point these appraisers have to realize that they don’t lose much by going state’s evidence and providing the other half of those email chains. And that would mean a Very Bad No Good Rotten Day for everybody.

by Calculated Risk on 11/10/2007 12:39:00 AM

Dow Is Down

Hat tip to lumpeninvestor who noted that this song was recorded in 2000, but the lyrics seem to fit today.

Enjoy!

by Calculated Risk on 11/09/2007 11:50:00 PM

From the Charlotte Observer: Beazer to delay paying subcontractors (hat tip idoc)

Beazer Homes USA is delaying payments to subcontractors in Nashville ...

The Observer obtained a letter dated Nov. 5 and signed by Beazer's Nashville division President David Hughes, who said, "It is unfortunate, but we cannot continue the prompt payments you have received in past years."

Not BK, but this doesn't sound good. Beazer is the 7th largest home builder in the U.S. according to BuilderOnline.

by Calculated Risk on 11/09/2007 09:04:00 PM

From Reuters: Levitt & Sons files for bankruptcy protection

Levitt Corp home-building unit Levitt & Sons said on Friday that it had filed for bankruptcy protection ..
...
Levitt & Sons is ranked as the 50th-largest U.S. home builder by trade publication BuilderOnline.

Here are the BuilderOnline top 100.

by Calculated Risk on 11/09/2007 06:29:00 PM

From AP: S&P Lowers Credit Outlook on Three Banks (hat tip 4wards, dotcommunist)

S&P downgraded its outlook for Washington Mutual Inc. and IndyMac Bancorp Inc. to "Negative" from "Stable," and for Capital One Financial Corp. to "Stable" from "Positive.

It must be Friday!

by Calculated Risk on 11/09/2007 05:54:00 PM

From MarketWatch: E-Trade backs off earnings forecast

E-Trade said the fair value of its $3 billion asset-backed securities portfolio has continued to decline since the end of the third quarter. ...

The drop in value will result in further write-downs in the fourth quarter ... Those extra write-downs weren't expected when E-Trade updated its 2007 earnings outlook on Oct. 17.

"Investors should no longer expect these earnings levels to be achieved," the broker said in a statement.

The beat goes on ...