by Calculated Risk on 1/10/2008 05:22:00 PM

Herb Greenberg writes: The Real Story on Countrywide...

We’ll know it soon enough, but ... several things would appear apparent ...:

1. The Fed is behind the deal.
2. The Fed is behind the deal because the rumors yesterday of a near bankruptcy were probably true.
3. As part of the deal, the Fed likely agrees to guarantee BofA against Countrywide-related losses.

Read his eight points. Interesting speculation.

by Calculated Risk on 1/10/2008 04:37:00 PM

From MarketWatch: American Express To Take 4th Quarter Charge Of $275M Charge

American Express said it will take a fourth-quarter charge of $275 million, due to slower spending and higher delinquencies and loan write-offs in December.

by Calculated Risk on 1/10/2008 02:24:00 PM

From the WSJ by Damian Paletta, Valerie Bauerlein and James R. Hagerty: Bofa In Talks to Buy Countrywide

Bank of America Corp. is in advanced talks to acquire struggling Countrywide Financial Corp., according to people familiar with the situation.

... two people familiar with the matter said it could occur very soon. It also is possible that an agreement could be delayed or fall apart altogether.

by Calculated Risk on 1/10/2008 12:26:00 PM

From Chairman Bernanke: Financial Markets, the Economic Outlook, and Monetary Policy

Although the TAF and other liquidity-related actions appear to have had some positive effects, such measures alone cannot fully address fundamental concerns about credit quality and valuation, nor do these actions relax the balance sheet constraints on financial institutions. Hence, they cannot eliminate the financial restraints affecting the broader economy. Monetary policy (that is, the management of the short-term interest rate) is the Fed’s best tool for pursuing our macroeconomic objectives, namely to promote maximum sustainable employment and price stability.

Although economic growth slowed in the fourth quarter of last year from the third quarter’s rapid clip, it seems nonetheless, as best we can tell, to have continued at a moderate pace. Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced. Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets. In addition, a number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008.

Financial conditions continue to pose a downside risk to the outlook for growth.
emphasis added

Sounds like more rate cuts (no surprise, the market is pricing in a 50bp cut later this month).

by Tanta on 1/10/2008 10:31:00 AM

I'm a bit busy this morning disabling my telephone and hiding my mutual fund and retirement accounts, but I can get one post up.

From the CS Monitor:

A former computer developer, Thomas Banecke of Sandy Springs, Ga., spent most of the summer baby-sitting a new condo development – usually a plum assignment. But when the Atlanta condo market tanked, foot traffic dwindled to almost zero.

Mr. Banecke is now back in the computer business and is putting his real estate career on hold. In some ways, he says, the cold housing market forced real estate agents, especially rookies, to confront their own abilities, schemes, and dreams. Upfront costs, marketing, association fees, and the crucial contacts are either more costly or harder to procure than an aspiring real estate agent usually expects, Banecke says.

"This kind of thing will wipe up a whole bunch of people who thought they could do this to make a living," he says.

As for McMahon, the Atlanta agent, she still had a nice listing book and plenty of leads when she called it quits. In the end, unreliable buyers, surly sellers, and a lack of office camaraderie contributed to a decision that solidified when home sales and prices dipped. "I was waiting for a time to kind of swing out," she says. She's planning to become a high school science teacher.

One problem for out-of-work agents is that their skills may not transfer easily to other careers. California is waiting to hear on a $9 million federal retraining grant after 6,000 people lost their jobs in the housing industry since September.

But Dr. Baen of the University of North Texas is optimistic about their futures. "These people are hustlers, hard workers. They're used to getting on the phone," he says. "They'll end up in insurance, in mutual funds, in retirement planning, and commodities."

by Calculated Risk on 1/10/2008 09:16:00 AM

From AP: Capital One Cuts 2007 Earnings Forecast

by Calculated Risk on 1/10/2008 01:01:00 AM

A few people have asked me about this article from the LA Times: Lender stung by fears on finances

Delinquent loans create huge liquidity problems for loan servicers like Countrywide because the servicer becomes a middleman between the borrowers and the people who bought their loans.

When the borrower misses payments, as a record number of Countrywide's borrowers are doing now, these contracts require that the company advance those missed payments to investors until it's clear that the amounts won't be recovered.

With Countrywide having a $1.5-trillion servicing portfolio, that puts tremendous strain on its cash flow, Cannon said.

UberNerds already knew all this. From Tanta (February 2007): Mortgage Servicing for UberNerds

... the other side of “float” for the servicer is the usual requirement that the servicer advance interest (and possibly principal, although that’s less common) to the investor when it is “scheduled” to be due but wasn’t actually paid by the borrower. You’ll see, for instance, the term “scheduled/actual” used to refer to a servicing arrangement. That means that the servicer must pass through all scheduled interest each month, whether collected from the borrower or not, but only actually collected principal. Most deals these days are S/A or S/S. (A/A exists, but it’s like “with recourse,” which we talked about on a prior thread. It takes a very well-capitalized, high-risk tolerance investor to accept an A/A deal; most of the ones I see these days are old Freddie Mac MBS that are down to six loans each and just won’t die until the last payment is made.)

Having to advance scheduled interest offsets the float; it’s another way to balance the incentives. It really starts to matter when we get to this thing called “nonaccrual.” Basically, a usual servicing contract will require the servicer to advance interest until the loan is more than 90 days delinquent, after which it is placed in “nonaccrual” status, meaning it is deemed uncollectable and no more interest has to be advanced.
...
Even if the servicer no longer has to keep advancing scheduled interest, though, it has to keep paying property taxes and insurance, if the borrower isn’t paying it, until the property is sold. It also has to cover the other expenses in a foreclosure (unless the contract specifies that the investor or mortgage insurer will advance for certain costs) until the final payday.
emphasis added

You can access Tanta's UberNerd series from the menu bar: The Compleat UberNerd

I believe the top five servicers are, in order, Wells Fargo, Countrywide, WaMu, Citigroup and Chase.

by Calculated Risk on 1/10/2008 12:17:00 AM

Before visiting the confessional, Citi and Merrill are out trying to raise more capital. From the WSJ: Citigroup, Merrill Seek More Foreign Capital

Two of the biggest names on Wall Street are going hat in hand, again, to foreign investors.
...
Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments.
...
Both Citi and Merrill are scrambling to nail down the details before they report earnings next week that are expected to include additional losses stemming from their exposure to mortgage-related investments. Together, these additional losses could reach as much as $25 billion.

Meanwhile, Capital One is already in line: Capital One Profit Expected to Fall Short As Loan Woes Worsen

Capital One is expected to announce today that it expects charge-offs of $5.9 billion in 2008, up from its October forecast of $4.9 billion to $5.5 billion, partly because of worsening economic indicators that include rising unemployment.

Ten billion here, ten billion there ... pretty soon you're talking real money.

For interest, I looked up the frequently quoted Senator Everett Dirksen line: "A billion here, a billion there, and pretty soon you're talking real money." Here is what the Dirksen center says:

Bottom line: the late Senate Minority Leader certainly would have endorsed the meaning behind the phrase, but it is questionable that he ever coined it.

Update, May 25, 2004. A gentleman who called The Center with a reference question relayed that he sat by Dirksen on a flight once and asked him about the famous quote. Dirksen replied, "Oh, I never said that. A newspaper fella misquoted me once, and I thought it sounded so go that I never bothered to deny it."

by Calculated Risk on 1/09/2008 07:36:00 PM

From Dow Jones (via the WSJ): Thornburg Sees Cuts In 4Q Book Value Due To Mtge Problems (hat tip idoc)

Thornburg Mortgage ... cut the book value of its portfolio by about $200 million in two months.
...
Thornburg also expects an additional $110 million decline in the market value of its adjustable rate mortgage portfolio during December, plus about $14 million in further declines due to changes in its interest rate swap agreements.

And from Bloomberg: Bear Stearns Shuts Asset-Backed Hedge Fund After Loss

Bear Stearns ... is closing a hedge fund that invested in asset-backed securities ... after the fund plummeted at least 39 percent last year.

... The fund lost more than $300 million between August and the end of November.

Bear Stearns said it would return $90 million in cash to investors immediately. The fund's remaining assets, which the company valued at about $500 million as of Nov. 30, will be sold and the proceeds refunded over an unspecified period of time ...

I wonder what investors think when the see the words "Bear Stearns" and "hedge fund"? Probably not happy thoughts.

by Calculated Risk on 1/09/2008 06:42:00 PM

This morning I excerpted from the WSJ: Goldman Sees Recession This Year. The WSJ quoted Goldman Sachs as believing the "latest data suggest that recession has now arrived, or will very shortly":

Here is the current Goldman GDP forecast by quarter:

Quarter	Change Real GDP
Q4 2007	1.5%
Q1 2008	0.0%
Q2 2008	-1.0%
Q3 2008	-1.0%
Q4 2008	0.5%

Note that they see Q4 2007 as positive. Growth appeared solid in October and November (see Professor Hamilton's calculation of the two month PCE estimate), but there is a good chance the recession started in December. The NBER dates recessions to the month.

Goldman also sees "a significant decline in profit growth" in 2008 and significant declines in house prices with "an ultimate peak-to-trough decline of 20%-25%". This decline in house prices would mean the value of existing household real estate, as reported by the Fed Flow of Funds report, would decline by $4 Trillion to $5 Trillion (yes, Trillion and I think that deserves a capital "T").

This also implies that households with mortgages would have very little remaining equity to withdraw in the aggregate (maybe about 20% remaining equity in the aggregate with a 20% price decline, and about 15% remaining with a 25% price decline). For a calculation of remaining equity vs. price decline, see: How Much Cash is Left in the Home ATM?

With tighter lending standards, 20% remaining equity probably spells the end of the Home ATM (far less mortgage equity withdrawal or MEW). This excludes the 31.8% or so of households with no mortgage debt, since it is unlikely that households with no mortgage debt will start borrowing en masse.

Finally note that Goldman sees the duration or the recession as less than one year, and therefore not as a severe recession. I tend to agree, but I think the recovery will be sluggish too, especially for employment growth following the recession, so it will probably feel like the recession is lingering into 2009.