by Tanta on 1/14/2008 10:26:00 AM

More pleasant news from the Platinum card crowd, courtesy of the LAT:

Option ARM delinquencies are at double-digit levels in many areas of California, including the Inland Empire. . . .

"This is not a sub-prime crisis. This is a stated income crisis," said Robert Simpson, chief executive of Investors Mortgage Asset Recovery Co. in Irvine, which works with lenders, insurers and investors to recover losses related to mortgage fraud. . . .

The percentage of option ARMs with payments behind by at least 60 days in California is in double digits in the Inland Empire, San Diego County, Santa Barbara County, Sacramento, Salinas and Modesto, according to data provided to The Times by mortgage researcher First American Loan Performance.

The more recent loans appear to be faring the worst, reaffirming the conclusion that lending standards had become overly lax throughout the mortgage industry in the middle of this decade, as competition for fewer good loans intensified amid skyrocketing home prices.

In Yuba City, north of Sacramento, 15% of option ARMs made in 2005 were delinquent at the end of October, the Loan Performance tally showed, and in Stockton-Lodi the delinquency rate on option ARMs from both 2005 and 2006 was over 13%.

"It is astonishing how fast the credit deterioration has occurred," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. who follows the savings and loans that specialize in these mortgages. "It took me and everybody else by surprise."

Miller said Downey Financial Corp. was "the canary in the coal mine." The Newport Beach S&L has specialized in making option ARMs since the 1980s and keeps them as investments. Option ARMs make up about three-quarters of Downey's loan portfolio, with most of the rest being similar loans that allow interest-only payments during the first five years but don't allow the loan balance to rise.

Miller thought Downey had shown prudence in cutting back on lending in 2006, when home prices stopped rising and competition intensified from option ARM newcomers such as Countrywide and IndyMac Bancorp of Pasadena.

But a key indicator of loan troubles -- the ratio of nonperforming assets to total assets -- shot up from 0.55% to 3.65% at Downey over the last year, with the dud loans on Downey's books growing by $80 million in November, Miller said. That number, disclosed last month, was larger than the entire amount of non-performers Downey had a year earlier.

The quality of option ARMs appears to have deteriorated quickly when Wall Street began buying them to create mortgage bonds in the middle of this decade, drawing IndyMac, Countrywide and others into the business, Miller said.

by Calculated Risk on 1/14/2008 10:21:00 AM

From the NY Times: Banks to Try Chrysler Loan Sale Again (hat tip Brian)

Remember the $10 billion in financing for Chrysler that five banks were unable to place last year during the midst of the credit crunch?

... JPMorgan Chase, Citigroup and Goldman Sachs, are still trying to syndicate the loans.

... bankers have had a difficult time trying to find takers for the auto company’s debt. There have been two efforts at syndicating the loans, one in July and most recently in November ... Now, the banks will wait until conditions improve. “We will be opportunistic,” [Chad Leat, the vice chairman of capital markets origination at Citibank] said. “So far, January is not welcoming at all.”

Third time a charm?

by Tanta on 1/14/2008 07:58:00 AM

Or, "The Revenge of SFAS 114." Or, possibly, "KPMG Can Has Accountants." Choose your own subtitle.

NEWPORT BEACH, Calif., Jan 14, 2008 /PRNewswire-FirstCall via COMTEX/ -- Downey Financial Corp. announced today changes to previously reported levels of non-performing assets. These changes pertain to non-performing asset levels since June 30, 2007.

Rick McGill, President, commented, "As previously reported, we implemented at the beginning of the third quarter of 2007 a borrower retention program to provide qualified borrowers with a cost effective means to change from an option ARM to a less costly financing alternative. We contacted borrowers whose loans were current and we offered them the opportunity to modify their loans into 5-year hybrid ARMs or ARMs with interest rates that adjust annually but do not permit negative amortization. The interest rates associated with these modifications were the same or no less than those rates afforded new borrowers but they were below the interest rates on the original loans. We initially did not consider these modifications of performing loans to be troubled debt restructurings, as the modification was only made to those borrowers who were current with their loan payments and the new interest rate was no less than those offered new borrowers. KPMG LLP, our independent registered public accounting firm, did not object to this assessment during its third quarter review."

Mr. McGill continued, "During December 2007, KPMG advised us that upon further review of the modification program, it was likely the loan modifications should be recorded as troubled debt restructurings. After reassessing our initial analysis, we determined these modified loans should be accounted for as troubled debt restructurings. This conclusion was reached because in the current interpretation of GAAP, especially in the current housing market, there is a rebuttable presumption that if the interest rate is lowered in a loan modification, the modification is deemed to be a troubled debt restructuring unless the modified loan can be proved to be at a market rate of interest based upon new underwriting, including an updated property valuation, credit report and income analysis. We did not perform these additional steps since borrowers who qualified for our retention program were current and we were trying to streamline the process for qualified borrowers to modify their loans at interest rates no less than that being offered to new borrowers. Inasmuch as we chose not to perform these additional measures, we are now required to make this reporting change and, as such, our non- performing assets will increase from what has been previously reported. While periods prior to the third quarter of 2007 are not impacted by this change, it will result in $99 million of loans being classified as non-performing at September 30, 2007."

Brian Cote, Chief Financial Officer, commented, "As required for all loans classified as troubled debt restructurings, loans modified as part of our borrower retention program must now be placed on non-accrual status but interest income will be recognized when paid. If borrowers perform pursuant to the modified loan terms for six months, the loans will be placed back on accrual status and, while still reported as troubled debt restructurings, they will no longer be classified as non-performing assets because the borrower has demonstrated an ability to perform and the interest rate was no less than those afforded new borrowers at the time of the modification."

Mr. Cote further commented, "We believe that when loans modified under our borrower retention program are current, it is relevant to distinguish them from total non-performing assets because, unlike other loans classified as non-performing assets, these loans are effectively performing at interest rates no less than those afforded new borrowers. Accordingly, when performing troubled debt restructurings are excluded from the revised ratio of non- performing assets to total assets, the revised ratio of all other non- performing assets to total assets is not materially different from that previously reported."

The take-away, for those of you unmoved by financial accounting esoterica: KPMG is now conditioned to bark every time it hears "streamlined process." That's progress.

Now we wait to see who else was using Downey's interpretation of "troubled debt restructurings."

by Calculated Risk on 1/13/2008 09:41:00 PM

From Wolfgang Münchau at the Financial Times: This is not merely a subprime crisis (hat tip FFDIC)

If this had been a mere subprime crisis, it would now be over. But it is not, and nor will it be over soon. The reason is that several other pockets of the credit market are also vulnerable. Credit cards are one such segment, similar in size to the subprime market. Another is credit default swaps, relatively modern financial instruments that allow bondholders to insure against default.

The article focuses on Credit Default Swaps (CDS) and suggests the current downturn could be longer than most anticipate (including me):

The German experience has taught us that persistent problems in financial transmission channels cause long economic downturns. Today, the really important question is not whether the US can avoid a sharp downturn. It probably cannot. Far more important is the question of how long such a downturn or recession will last. An optimistic scenario would be a short and shallow downturn. A second-best scenario would be for a sharp, but still short, recession.

A truly awful scenario would be a long recession.

And from Robin Sidel and David Enrich at the WSJ: High-End Cards Fall From Grace (hat tip Brian)

The luster on all those silver, gold and platinum credit cards is getting tarnished.

For the past few years, banks that issue credit cards have aggressively wooed affluent customers with lavish perks and fat credit lines. Now, that high-end strategy is coming back to bite the banks: There are growing signs that some of those consumers are having a hard time paying their bills.

Affluent customers aren't paying their credit card bills? How did the credit card companies define "affluent"? The same standard as the mortgage lenders: Fog a mirror, get a Platinum card?

We're all subprime now.

by Calculated Risk on 1/13/2008 08:09:00 PM

The WSJ reports that Bernanke (or Vice Chairman Kohn) will speak more frequently. From the WSJ: Fed Retools Its Messages Amid Call for More Clarity

... a new strategy of having the central bank's top leaders discuss the economic outlook in public more often, so that markets won't depend on remarks by lower-ranked policy makers who may not represent Fed thinking. Thus, either Mr. Bernanke or Mr. Kohn will likely address the outlook in public at least once between meetings of the FOMC.

Jan 10, 2008: Chairman Bernanke talks about his stint at the NBER, and the difficulties in calling a recession.

There is also this tidbit in the WSJ story:

There is speculation the Federal Open Market Committee, the group of Fed governors and regional bank presidents that sets the federal-funds rate, met by conference call preceding Mr. Bernanke's speech, but the Fed hasn't confirmed that.

Oh great, more Fed speak! But stock market participants like it when Bernanke speaks: the S&P500 has been up an average of 1.4% on days that Bernanke has spoken (last 3 speeches).

by Tanta on 1/13/2008 10:43:00 AM

And Gretchen Morgenson has real live scientific evidence to prove it:

BUT it is possible to get a feel for what is happening on the ground from a new survey of 2,400 real estate agents sponsored by Inside Mortgage Finance Publications. The survey taps into the outlook of people who see troubled borrowers firsthand, when they try to sell their homes before foreclosure occurs.

For example, agents participating in the survey confirmed what many borrowers say: that loan servicers are downright unresponsive. This is especially true when distressed owners try to sell their homes before being put through the trials of foreclosure. When they sell at a price that is lower than the outstanding mortgage debt, that is known as a short sale.

Asked how servicers could streamline such sales, one said: “Allow you to go directly to the loss mitigation department without having to speak or argue with eight people before they finally give in and transfer you.” Another said: “Respond to offers within five business days — they are killing the market by taking upwards of three months to respond to an offer.”

A third participant said: “Answer their phone, make it easier to talk with the appropriate people, instead of playing Mickey Mouse games. I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents who are trying to sell these homes.”

Thomas Popick, principal at Geosegment Systems, the designer of the survey and a supplier of data to financial services firms, said its findings show that loan servicers are averse to short sales, even though they may be the best solution for many borrowers, lenders and the overall real estate market.

“In many cases, loan modifications — no matter how generous the terms — only delay foreclosures on properties where the mortgage balance far exceeds the current property value,” he said. Homeowners who try instead to sell “know they cannot afford the property and are trying to do the responsible thing — sell the property to someone else who can afford it.”

Mr. Popick, if they were selling the property to someone else who could "afford it," would we be talkin' short sale here? Do you folks actually listen to yourself talk?

It seems like a good time to discuss short sales in simple, basic terms that everyone can follow without moving their lips. First of all, anybody at any time can sell a home for less than the amount owed on it. There is no law against this. However, the buyer will not get clear title until the lender is either paid in full from other sources that make up for the shortfall, or agrees to "settle for less" and release the lien with less than full payment. So when we talk about "short sales," what we really mean are the ones where the lender is being asked to just take less than a full payoff of the loan while releasing the lien.

Why would any lender accept a short sale? Well, the idea is that a short sale is a form of loss mitigation or workout: the lender (investor) is presented with a choice between a smaller loss in a short sale or a larger loss in foreclosure, so accepting the short sale "mitigates the loss."

The first thing you need, then, is a lender who believes that it would have to foreclose, if it doesn't approve the short sale. Traditionally, you see, short sale offers come up when borrowers are already delinquent, and have probably already been having some contact with the servicer's collection department, and the idea of possible foreclosure isn't coming out of the blue for any party. In cases like this, even a cruddy servicer will probably have already given this borrower a contact in the default servicing department somewhere who, when reached on the phone, will have access to logs of the previous contacts and be able to respond to the idea of a short sale without being unduly startled.

What we seem to have going on, at least in some cases here, are borrowers who are not delinquent, who have attempted to sell the property, who have ended up with no offers except short ones, and whose Relitters therefore dial up the 800 number for the servicer, wanting someone who can make a deal, right now, soup-to-nuts in five days. Strangely enough, they're talking to your basic customer service rep who doesn't make short sale deals. And the CSR doesn't just transfer them to the Loss Mit Squad because, well, the loan isn't delinquent, which the CSR can see just by typing in a loan number and looking at the monitor. Are you likely to get someone saying, "Um, are you sure we're talking about the same customer?" Yes. You are likely to get that. Can you see why?

You can call this "Mickey Mouse" all you want, and we all know there's plenty of bureaucratic nonsense all over the corporate world, including but not limited to mortgage servicers. But the first necessary condition for "loss mitigation" is "evidence that loss will occur." Nobody takes the lesser of two evils unless both evils are on the table. If you have never been delinquent on your mortgage, and your financial situation has not changed since the loan was made (you still make what you made then, your non-discretionary expenses are still what they were), and you don't have some other circumstance like a forced job relocation, your servicer isn't exactly being dense by wondering why we're already supposed to be negotiating a short sale.

Every servicer, even the cruddy ones, has a process in place for dealing with this situation. If you "cannot afford the property," as Mr. Popick says, you are going to have to call your servicer and explain that you will very soon default, if you have not missed a payment already. The servicer will request financial information from you--possibly more of it than it asked for when the loan was made, but that's where we are. The servicer will also order an appraisal with an interior and exterior inspection. If you do not allow an appraiser (or broker for a BPO) access to the interior of your home, your case will go directly to the foreclosure department without passing "Go." If you have already listed the property, the servicer will need all the information from you about the listing date and the list price to determine whether your property has been "exposed to the market" adequately.

No servicer will ever, as far as I know, approve a short sale without asking you to pay something--even if it's just a token amount--in cash to offset the lender's loss. That might take the form of signing away your rights to your current escrow balance. It might mean you write an actual check. A large part of the reason that the lender makes you go through the part about sending copies of your bank statements to the Loss Mit people before a short sale is approved involves the lender making sure that you are either really a hardship case, or if not, that it removes some money from your pocket. Short sales are not actually "free puts."

You will absolutely be required to show evidence that the proposed short sale is an arm's length transaction. If the buyer of the property is getting "creative financing" from somebody in order to make the deal work, count on extra time while the servicer of your mortgage exercises its rights to examine the terms of the buyer's financing, even if the servicer of your mortgage isn't providing that financing. If the deal being contemplated involves this nice guy in a suit who came to your door and had you sign over title to your home with a promise that he could arrange a short sale for you for just a modest fee, your servicer is going to object.

If you, the borrower, are a real estate agent and plan on making a commission on the short sale of your own property, the servicer is going to double-object. If the buyer making the short offer is an LLC formed by a principal in another LLC who happens to be, um, you, the servicer will extra-triple-super object. This kind of thing happens--or tries to happen--often enough that investors do in fact demand a lot of details about the proposed transaction to prevent being scammed. Yes, we are aware that they should have been this vigilant when they made your loan to you, but they weren't and here we are. No deals are going to get made, start to finish, in five business days, just to make an RE broker happy.

If you have a second lien on the property with another servicer, you'll be dealing with two sets of negotiations. This will not speed things up any. If you have only one loan, but you originally had mortgage insurance, the MI will be a party to the negotiations as well. The MI takes most or all of the loss here. The MI gets to have an opinion.

Any sales contract you sign will have to have special contingencies in it reserving rights to the mortgage servicer. When the transaction actually closes, you will not be allowed to receive any funds directly. This will mean that the Settlement Statement will have to be sent to your mortgage servicer for review before your buyer gets the keys. It may all strike you as "Mickey Mouse." I can pretty much promise you that if you let that attitude show in your conversations with the servicer, the process will get even longer.

Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn't be. There cannot be.

Like anyone else with a functioning brain, I accept the principle of loss mitigation: a smaller loss on a short sale beats a larger loss on a foreclosure. However, I have a little bit of a problem with being told by an RE broker that I'd better hurry up and complete this short sale "before it gets worse." Are you telling me that the current transaction isn't, actually, short enough? In that case, are we transferring this property to "someone who can afford it," or are we just throwing in a "pinch borrower" who will be calling me up in six months with the same story I just heard from the former owner? Just exactly how often does an arm's length market produce a short sale price that is so much better than a foreclosure auction price? Why does it do that? You might want to think about it for a minute.

Real estate agents: you might want to be careful what you wish for. I don't know what all the various servicers will do--or will be forced by circumstances to do--but I know what I do every time someone tells me to hurry up and take a pig in a poke.

*From the CS Monitor:

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."

And this guy is one of your defenders, my friends on the RE sales side.

by Calculated Risk on 1/12/2008 11:32:00 PM

First a couple of excerpts:

From MarketWatch: B. of A. gets a bargain in Countrywide deal

Bank of America is getting Countrywide for less than a third of book value (the mortgage company's assets minus its liabilities) and roughly 2.9 times forecast 2009 earnings, Chief Financial Officer Joe Price said. Lenders typically change hands for at least one times book and seven times estimated future earnings.
...
But the bank has also taken on a huge chunk of new credit risk ... How big a bargain the deal ends up being will depend on how badly Countrywide's mortgage portfolio performs as house prices fall and foreclosures climb.

How big is that credit risk? From the WSJ: Behind Bank of America's Big Gamble

As of Sept. 30, Countrywide's savings bank held about $79.5 billion of loans as investments. Three-quarters of these loans were second-lien home-equity loans ... or option adjustable-rate mortgages...

Just using BofA CFO Joe Price's numbers, if Countrywide didn't have the credit risk, Price suggests a good price would have normally been about one times book value or about $12 billion (the article states that $4 billion is less than one third book value). So basically - in the simplest view - BofA is gambling that the losses on that $80 billion portfolio are $8 billion or less ($12 billion minus the $4 billion BofA is paying).

Even without the actual details of Countrywide's mortgage portfolio, a $8 billion write down might be optimistic. According to another WSJ article:

...Countrywide has $32 billion in second-lien, home-equity loans. Of these, 44% have a loan-to-value ratio over 90%.

This suggests there are about $28 billion in option ARMs in the portfolio. When a house goes into default, the loss on the 2nd lien is frequently 100%. For homes in foreclosure with option ARMs, a 50% loss might be common.

Much depends on how far house prices fall, and how many homeowners with negative equity walk away from their homes. We can be pretty sure that house prices will fall significantly, but no one knows how homeowners will react to owing significantly more than their homes are worth.

Although we don't know all the details, it is possible to imagine scenarios with losses of more than $10 billion on this mortgage portfolio (we really haven't seen the pain from the option ARMs yet, but it is coming).

As an example, if 25% of the second liens go into default, the losses would be $8billion ($32 billion X 0.25 X 100% loss rate). And if 15% of the first lien Option ARMs go into default, add another $2.1 billion in losses ($28 billion X 0.15 X 50% loss rate). These default rates might seem too high right now, but no one is really sure how many homeowners will default when house prices fall 15%, 25% or more over the next few years.

This does look like a good strategic fit for BofA, but I agree with Robert Shiller:

``There's a tendency for people to underappreciate the risk of the housing market,'' Shiller said. ``I might have a lower valuation of Countrywide than Bank of America does.''
...
``Maybe Countrywide and Bank of America are going to have some problems going forward,'' he said. ``When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default. The troubled mortgages that Countrywide already has will be followed by even more troubled ones.''

by Tanta on 1/12/2008 09:33:00 AM

Here's an update from Vikas Bajaj and Jenny Anderson of the NYT on Cuomo's "due diligence" investigation, "Inquiry Focuses on Withholding of Data on Loans."

But as home prices surged, subprime lenders, which market to people with weak credit, relaxed their guidelines. They began lending to people who did not provide documents verifying their income — so-called no-doc loans — and made exceptions for borrowers who fell short of even those standards.

The New Century Financial Corporation, for instance, waived its normal credit rules if home buyers put down large down payments, had substantial savings or demonstrated “pride of ownership.” The once-highflying lender, based in Irvine, Calif., filed for bankruptcy last year.

William J. McKay, who was the chief credit officer at New Century, said the company usually made exceptions so homeowners could borrow more money than they qualified for under its rules. In most cases, the decisions raised borrowers’ credit limits by 15 percent, he said.

New Century measured pride of ownership in part by how well buyers maintained their homes relative to their neighbors, Mr. McKay said, adding that this usually was not enough on its own to qualify a borrower for an exception.

Investment banks often bought the exception loans, sometimes at a discount, and packaged them into securities. Deutsche Bank, for example, underwrote securities backed by $1.5 billion of New Century loans in 2006 that included a “substantial” portion of exceptions, according to the prospectus, which lists “pride of ownership” among the reasons the loans were made.

Nearly 26 percent of the loans backing the pool are now delinquent, in foreclosure or have resulted in a repossessed home; some of the securities backed by the loans have been downgraded.

Mr. McKay defends the lending and diligence practices used in the industry. He said Wall Street banks examined exception loans carefully and sometimes declined to buy them. But they often bought them later among mortgages that New Century sold at a discount, he said.

Some industry officials said weak lending standards, not exceptions, were largely to blame for surging defaults. “The problem is not that those exceptions are going bad — you don’t have a lot of exceptions in the pools,” said Ronald F. Greenspan, a senior managing director at FTI Consulting, which has worked on the bankruptcies of many mortgage lenders. “To me it’s a more fundamental underwriting issue.”

To vet mortgages, Wall Street underwriters hired outside due diligence firms to scrutinize loan documents for exceptions, errors and violations of lending laws. But Jay H. Meadows, the chief executive of Rapid Reporting, a firm based in Fort Worth that verifies borrowers’ incomes for mortgage companies, said lenders and investment banks routinely ignored concerns raised by these consultants.

“Common sense was sacrificed on the altar of materialism,” Mr. Meadows said. “We stopped checking.”

And as mortgage lending boomed, many due diligence firms scaled back their checks at Wall Street’s behest. By 2005 , the firms were evaluating as few as 5 percent of loans in mortgage pools they were buying, down from as much as 30 percent at the start of the decade, according to Kathleen Tillwitz, a senior vice president at DBRS, a credit-rating firm that has not been subpoenaed. These firms charged Wall Street banks about $350 to evaluate a loan, so sampling fewer loans cost less.

Furthermore, it was hard for due diligence firms to investigate no-doc loans and other types of mortgages that lacked standard documentation.

“Years ago, it used to be, ‘Did the due diligence firm think it was a good loan?’ ” Ms. Tillwitz said. “We evolved into the current form, which is, ‘Did I underwrite these loans to my guidelines, which can sometimes be vague and allow exceptions?’”

"Pride of ownership" isn't actually the dumbest "compensating factor" I've ever run across, but it's up there. (The ultimate is always the old depository's standby, "existing bank relationship," which generally means we need to make sure this borrower has some more cash so he can make installment payments on all the other dumb loans we made to him last year. In comparison to that, making a dumb loan because the borrower appears to spend it all at HomeDepot seems almost sensible.)

While I have to agree with Ronald Greenspan that it's the rules, not the exceptions, that are the biggest problem, I do appreciate someone pointing out that some pools apparently got issued with 5% due diligence review. I used to buy whole loan pools for a federally-chartered depository and I can remember buying a prime-quality pool from another well-capitalized depository "preferred counterparty" from whom I had bought loans for years with "only" 10% pre-purchase credit due diligence (100% pre-purchase "collateral" or closing document review). Five percent for subprime loans from New Century? That boggles the mind.

But that's the thing; I can also remember losing deals because I wanted 20% or 30% due diligence and some other bidder would allow 10%. All over the mortgage world in 2003-2006 there were credit analysts being backed into corners by furious salespeople and traders and everyone else whose visions of the deep end of the bonus pool were evaporating when the credit people wouldn't race to the bottom on due diligence levels. You can try telling these people that you don't want to own loans that someone else doesn't want you to look at closely beforehand, but that won't work. It certainly didn't work well back in 2005 when nobody was taking any credit losses and the RE party was still white-hot. There was always someone saying, "Look, those geniuses on Wall Street will take it with 5%. What exactly is it you think you know that they don't?"

Wall Street basically set a standard--a terrible one--that everyone else had to compete with. I calculated a while ago, using numbers provided by the MBA, that fraud costs in 2006 were around 18 bps on gross 2006 mortgage production. A $350 due diligence charge on a $200,000 loan is, um, 17.5 bps. Of course the real fraud costs don't show up until much later, and looking at it now that 17.5 bps on due dilly looks like quite the bargain. But it didn't look like it then to too many people.

And, of course, the whole point of AUS/low-doc/brokered transactions was to shave the $350 or thereabouts off the transaction; this is the much-vaunted "cost savings" of "innovations." Once you close a loan, no further costs can be charged to that borrower (unless, um, you get "creative" with your servicing practices). The overall logic of the situation dictated that spending that $350 out of the lender's pocket was a "waste of money."

In the case of New Century, I'd probably have been willing to believe that it was. Why pay $350 to verify that this stuff is toxic waste when a casual perusal of the data tape makes that pretty damned obvious? But that wasn't quite the reasoning the Street was using. It is, however, why I am skeptical about how far Cuomo's investigation is going to go on this "failure to disclose" grounds. The prospectus did in fact say that the pools were full of third-party originated subprime loans with no docs, absurd LTVs, and toxic product terms. If you can swallow all that, why would you have been kept up at night by the thought that a few of them exceeded even these rules?

The reality of the situation is that "pride of ownership" was a concept that made sense to buyers of securities. And a whole bunch of other rubes, dupes, scoundrels, and pigs. New Century might as well have called them "Ownership Society™ Loans" and made it a product rather than an exception. Probably they were working on that very thing (with a lot of $350 flip charts) when BK interrupted the meetings.

by Calculated Risk on 1/11/2008 04:55:00 PM

Charlie Gasparino reported on CNBC that sources inside the firm have told him the Citigroup write downs could be $24 billion when earnings are announced next Tuesday.

Usually I wouldn't post every discussion of possible future write downs, but these whisper numbers are getting huge. Yesterday, the NY Times reported the Merrill write downs could be $15 billion.

The confessional is definitely open.

UPDATE: From the WSJ: Alwaleed, China to Invest in Citi (hat tip Zigurrat)

... Citigroup ... is hoping to collect a total of $8 billion to $10 billion from a number of investors, likely including at least one fund affiliated with a foreign government ... it isn't clear how much Prince Alwaleed will invest, the Chinese entity is expected to invest roughly $2 billion ...

UPDATE2: From the Financial Times: Citi looks to secure further $14bn in new capital (hat tip Michael)

Citigroup is putting the final touches on its second major capital-raising effort in as many months, seeking up to $14bn (€9.5bn) from Chinese, Kuwaiti and public market investors, people familiar with the negotiations say.

Under the proposal being discussed, the bulk of the money – roughly $9bn – would come from China.

by Calculated Risk on 1/11/2008 04:09:00 PM

From Bloomberg: Shiller Says Bank of America May `Have Some Problems'

``There's a tendency for people to underappreciate the risk of the housing market,'' Shiller said. ``I might have a lower valuation of Countrywide than Bank of America does.''
...
``Maybe Countrywide and Bank of America are going to have some problems going forward,'' he said. ``When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default. The troubled mortgages that Countrywide already has will be followed by even more troubled ones.''

How far will prices fall? How many homeowners will be upside down? Will it become socially acceptable for upside down homeowners to walk way from their homes? What will be the impact on Countrywide (and BofA) if house prices fall 20%? If prices fall 30%? What if 10 million homeowners default over the next few years?

Those are some of the questions I'd be asking if I was at BofA. I've tried to quantify some of these numbers, and the downside risks are huge. From the earlier post:

The following graph shows the number of homeowners with no or negative equity, using the most recent First American data, with several different price declines.

At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages).

By the end of 2007, the number will have risen to about 5.6 million.

If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million.

The last two categories are based on a 20%, and 30%, peak to trough declines. The 20% decline was suggested by MarketWatch chief economist Irwin Kellner (See How low must housing prices go?) and 30% was suggested by Paul Krugman (see What it takes).

I think Shiller is correct; the risks from housing are still underappreciated.