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Wednesday, January 16, 2008

Downey Financial Non-Performing Assets (update)

by Calculated Risk on 1/16/2008 11:30:00 AM

Tanta previously noted that Downey announced they were restating their Non-Performing Assets (NPAs). Here is the graph of the new percentages from the Downey Financial 8-K released yesterday. (Credit Bubble Stocks has been on top of this story).

Downey Financial Non-Performing AssetsClick on graph for larger image.

Update: added December at 7.8%.

The graph was ugly enough; NPAs were already going parabolic.

NPAs have increased from 1.53% in June to 7.8% in December - over five fold in six months!

The Economics of Second Liens

by Tanta on 1/16/2008 11:25:00 AM

From the Wall Street Journal:

In some cases, servicers are telling borrowers they will take 10 cents on the dollar to settle their claim, says Micheal Thompson, director of the Iowa Mediation Service, which runs a hotline for homeowners in financial distress. In other cases, they are selling these loans at large discounts to third parties, says Kathleen Tillwitz, a senior vice president at DBRS, a ratings agency.

Coming up with a plan that will get borrowers back on track is easiest if both the mortgage and home-equity loan are held by the same party. Countrywide will sometimes "whittle down" the payment on the second mortgage to come up with an amount that the borrower can afford to pay for both mortgages, or even eliminate that payment, Mr. Bailey says. The company doesn't publicize such efforts, he adds, because that might encourage "people not to make their payment and see what happens." In either case, "the borrower still owes the principal," Mr. Bailey says.

Solutions can be harder to come by when the two loans were made by different lenders and are held by different parties. "The people in the first position will say, 'Until you get a deal with the second, why should I make a deal with you?'" says Iowa's Mr. Thompson. Second-mortgage holders are often reluctant to approve a short sale or deed in lieu of foreclosure that could wipe out their claims, he adds.

FirstFed says it encourages borrowers in financial distress to contact the owner of their home-equity loan and sometimes offers to buy out a home-equity loan with no current value for a small sum -- $2,000, for example -- so that the entire mortgage can be restructured.

But the company says such offers are often rejected. "It's not worth their while to take the $2,000" because of the costs associated with evaluating the offer and releasing the borrower from the lien, says Ms. Heimbuch, the company's CEO. "The second forces you into foreclosure."
Scenario A: Expenses $0, Recoveries $0. Scenario B: Expenses $2,000, Recoveries $2,000. Amazingly enough, they're going for A.

Of course, eventually they'll be able to make it up on volume . . .

JP Morgan: Home Equity Delinquencies Higher than Expected "even at the peak of the cycle"

by Calculated Risk on 1/16/2008 09:52:00 AM

Quote of the day:

“For all consumer credit and I think we've pointed out consistently that we see in auto, home equity, subprime, credit card, that where home prices are down, delinquencies, charge-offs are going up, and so we've kind of been preparing for that, thinking about that and trying to build that into some of our models and that's what you see in home equity and I hope we get near the end of this but this was certainly higher than we would expect it even at the peak of a cycle.”
CEO Jamie Dimon, J.P. Morgan Chase, Jan 16, 2008
And on credit cards:
“So remember, credit card was always kind of abnormally low , so part of what you're seeing we think is the catch up to getting back to a more normal, forget everything else. The second effect is that in HPA's, where prices are down, think of California, Arizona, Miami, Michigan, Ohio, we have seen the credit card delinquency losses simply going up, so where we have real visibility, we know it's going to hit 4.5% or thereabout in the first and Second Quarter, we're obviously a little less certainly about the Second Quarter. What I'm saying is I believe that home prices are worse than people think. That's my own personal belief. Just looking at numbers and thinking at lags and what goes into those things and therefore, if you kind of roll that through, while there's nothing in the current data that shows it, I think that more likely than not it will be 5% [delinquency] by the end of the year and that's barring a real recession. Remember, in the credit card and the consumer business, on top of all of this other stuff we talk about which is normally driven credit losses, real cyclical credit losses is unemployment. I think that will still be a factor if you see unemployment going up on top of this other stuff.”
With a recession, and rising unemployment, it could really get ugly.

Added (hat tip Brian):
James Dimon:
This is a lesson that's been learned over and over about broker originations, they perform much worse than our own originations, and if you separate home equity into we call it kind of good bank, bad bank, and broker so I would say it's less than 20%, but a lot of the losses are coming from that 20%, which is high LTV, broker originated businesses. High LTV business is also bad in its own.

Analyst:
And the 20% you referred to a minute ago in round numbers is the sort of specifically high LTV and originated away [by brokers] is that right?

James Dimon:
It's been very consistent In both our own originated and broker originated, high LTV, stated income is bad. It is three times worse in broker than it is in our own.

Analyst:
Wow.
The broker model is broken.

Ambac Cuts Dividend, Takes $5.4 billion pre-tax mark-to-market loss

by Calculated Risk on 1/16/2008 08:27:00 AM

PR from Ambac: Ambac Announces Capital Enhancement Plan to Raise in Excess of $1 Billion

Ambac Financial Group ... today announced ... the issuance of at least $1 billion of equity and equity-linked securities. ... By raising at least $1 billion in capital, Ambac is expected to meet or exceed Fitch Ratings’ current triple-A capital requirements for the Company. ... As part of its capital initiative, Ambac also said that it will reduce the quarterly dividend on its common stock from $0.21 per share to $0.07 per share.
...
Ambac’s estimate of the fair value or “mark-to-market” adjustment for its credit derivative portfolio for the quarter ended December 31, 2007 amounted to an estimated loss of $5.4 billion, pre-tax, $3.5 billion, after tax.

JP Morgan: $1.3 billion in Write-Downs

by Calculated Risk on 1/16/2008 08:22:00 AM

From the WSJ: J.P. Morgan Posts 34% Fall in Net On Subprime-Related Write-Downs

J.P. Morgan Chase & Co.'s fourth-quarter net income fell 34% as the company recorded $1.3 billion in markdowns on subprime positions and saw sharply higher credit costs.
...
"We remain extremely cautious as we enter 2008," [Chairman and Chief Executive Jamie Dimon] said. "If the economy weakens substantially from here - for which, as a company, we need to be prepared - it will negatively affect business volumes and drive credit costs higher."
A billion here, a billion there ... even these small write-downs are adding up.

Tuesday, January 15, 2008

Housing Wire: S&P Revises RMBS Ratings Assumptions (Again)

by Calculated Risk on 1/15/2008 11:51:00 PM

From Housing Wire: Get Ready For More Downgrades: S&P Revises RMBS Ratings Assumptions (Again)

S&P said it has revised the assumptions it uses for the surveillance of U.S. residential mortgage-backed securities (RMBS) — chief among them, the rating agency said it has bumped up expected lifetime losses for the 2006 subprime vintage to 19 percent. The agency had previously forecast losses at 14 percent.

Beyond the 2006 vintage, S&P also said it will “recalculate lifetime loss expectations for all vintages of U.S. RMBS” — that means not just subprime, and not just 2006.
And Housing Wire concludes:
There’s also some very serious discussion about the fact that cumulative losses thus far have been far below expectations, while foreclosure volume is strongly outstripping projections — which means there is a whole lot of REO out there that isn’t getting sold. Losses don’t get recorded until they’re actually losses, meaning the REO inventory is sold off and losses start to get real.

Standard & Poor’s last put its RMBS criteria through a major revision in July 2007 (see HW’s coverage here), which lead to wide-scale downgrades of numerous subprime RMBS. I’d expect to see more in the wake of today’s announcement.

Brown: Northern Rock may be Nationalized

by Calculated Risk on 1/15/2008 11:32:00 PM

From Bloomberg: Brown Says U.K. May Take Over Northern Rock, Resell

Prime Minister Gordon Brown, in his clearest indication yet that Northern Rock Plc may be nationalized, said the U.K. is considering acquiring the mortgage-lender and reselling it when market conditions recover.

``Because stability is the issue, we will look at every option and that includes taking the company into public ownership and then moving it later back into the private sector,'' Brown said in an interview with ITN's News at Ten program last night. ``So that is, yes, one of the options that has got to be considered.''

The U.K. Treasury said it may nationalize the bank in order to recover more than 25 billion pounds ($49 billion) in loans it made to Northern Rock and to protect depositors.
And here are the betting lines from MarketWatch (everything in England seems to have betting lines):
Spread-betting firm Cantor Index is offering odds of 5-to-1 on Virgin winning and 7-to-2 on Olivant. Nationalization of the bank, however, is the clear favorite with Cantor at odds of 1-to-8.
The bettors clearly think that Northern Rock will be nationalized. Heck, the New England Patriots are overwhelming favorites to win the Superbowl, and the odds are only 2-to-7.

IndyMac CEO: "Conditions have gotten worse", Cuts 2,403 jobs

by Calculated Risk on 1/15/2008 06:18:00 PM

From Reuters: IndyMac slashes 2,403 jobs

IndyMac ... said on Tuesday it is eliminating 2,403 jobs, or 24 percent of its workforce
...
"The reality is that since October 12 conditions have gotten worse," Perry wrote.
Thanks to all for sending me the early reports. The job cuts were even worse than expected.

From Mathew Padilla at the O.C. Register, here is Perry’s email.

DataQuick: SoCal Record Low December Sales, Prices off 15.8% From Peak

by Calculated Risk on 1/15/2008 01:24:00 PM

From DataQuick: Continued nose-dive for Southland home sales

A total of 13,240 new and resale houses and condos were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in December. That was up 0.5 percent from 13,173 for the previous month, and down 45.3 percent from 24,209 for December last year, according to DataQuick Information Systems.

Last month's sales were by far the lowest for any December in DataQuick's statistics, which go back to 1988. The sales count was 23.5 percent below the previous December low of 17,272 in 1990. The average December over the past 20 years is 25,543, the all-time peak for the month was reached in 2003 when 36,865 homes were sold.
I'd call that Cliff Diving!
The median price paid for a Southland home was $425,000 last month, the lowest since $420,000 in February 2005. Last month's median was down 2.4 percent from November's $435,000, and 13.3 percent below $490,000 for December 2006.

Last month's median was 15.8 percent below the $505,000 peak reached last spring and summer. While the steep decline in median sales price does reflect a drop in prices, it also reflects significant shifts in the types of homes selling. Particularly noticeable is a drop-off in sales of more expensive homes financed with "jumbo" mortgages.
...
Foreclosure activity is at record levels ...
UPDATE: Mathew Padilla at the O.C. Register has the foreclosure activity for Orange County: O.C. foreclosures approach record high. Data for all of California will probably be released next week.

Citi Dividend, Future Prospects and Credit Cards

by Calculated Risk on 1/15/2008 12:00:00 PM

There comments are very telling about the future return on capital, and possible additional shocks. (all emphasis added). Also see the comments on tightening credit card standards, evaluating current customers and the trade-offs between HELOCs and credit cards.

From the Citi conference call:

“The dividend reduction reflects the approximate sizing of our dividend relative to our growth opportunities and the volatility of each of our businesses. After a careful analysis of our businesses, given the normal risk that we have on an ongoing basis, we were faced with two choices -- either increase the excess capital that we carried permanently to reflect the ongoing exposures of the Company or better align our payout ratio so as to be able to restore our targeted capital ratios in a reasonable timeframe after a capital-reducing event. We recommended a dividend policy change to the Board alongside the capital raise and they approved this change yesterday. When the Company returns to a more normalized level of earnings generation and capital ratios, we have the flexibility to supplement the dividend with share repurchases.”
And from the Q&A:
Richard Bove, Punk Ziegel:

The second question would relate to the cash flow indication that you just mentioned and that is, to my knowledge, the $26 billion that has been taken either in write-downs or in loan loss provision are all non-cash charges. I think I heard it said that the equity raises will put the relevant ratios above what they were targeted to be let's say three months ago. Given the fact that there is no significant cash charge here, given the fact that the Company is going to wind up with perhaps some excess capital, I find it difficult to understand why you would cut the dividend. In addition, since by cutting the dividend, you have knocked, at least today, $5 billion off the value of the stock, I am wondering where do the shareholders show up in this whole calculation? You've lost 40% of his dividend, his stock price is down $5 billion in value, and from what I think I heard you say, if there is no prospect of the dividend going back up again, there is going to be share repurchases as opposed to replacing the dividend. So how does the stockholder benefit by this?

Gary Crittenden, Citi CFO:

Let me talk first of all, Dick, about the way we have thought about the dividend and just give you a little bit more color around that. So if you took the kind of a normalized situation -- so if you go back over the last few years and we have had say a $20 billion earnings level and you assumed a 55% payout ratio or something like that, that gave you 45% of that capital essentially to allow the business to grow and to take care of any shocks that might happen in the system assuming that we ran the Company right at the kind of targeted ratios that we have, right at 6.5% in TCE and 7.5% in terms of our tier one ratio. That is basically the assumption that you made. That essentially, even under that scenario, gives you relatively little capital to rebuild your capital in the event of a shock scenario and obviously one of the things that I have to, as part of my job, think about all the time is what is the implications of the Company of having a shock scenario happen and we have just experienced one of those. We have just been through that and we have obviously taken the charge associated with that in this quarter. And that kind of an event could happen at some point down the road. If it did happen at some point down the road, the proper way I think to manage this would be to do one of two things -- either to hold significant additional excess capital -- so even in the event of a shock, you are able to recover relatively quickly -- or alternatively, to reduce the payout ratio that would reflect what you believe the growth prospects of the business and the inherent exposures of the Company to be. Those are kind of the opposing trade-offs that we have as an organization and having thought through very carefully the amount of excess capital that we would need to hold the return on capital implications associated with that and looked at the trade-off of that relative to the payout ratio given the businesses that we are in and the inherent volatility that we think exists in those businesses, we tried to make the right long-term decision. So this was not a -- this decision was not made for the next quarter or the quarter after that. It was a recommendation that we made looking forward overtime, trying to consider the growth prospects of the Company and as I say, the inherent exposures that the Company has and with an eye towards trying to maximize the return on equity that we can provide back to our shareholders. And all of that kind of taken together really reinforced the decision that we made around the dividend. Now there is no doubt that this is a short-term difficult decision for us, but we felt, in the context of the uncertainty that exists in the environment, as well as the growth opportunities that exist in front of us, that both the capital raise made a lot of sense for us, as well as a dividend policy that positions us appropriately to rebound in the event of an exposure event down the road.

Bove:

A final thought on that and that is that I think I heard a number of times said that the dividend was being sized relative to the growth prospects of the Company. So if I assume a 40% payout ratio and a dividend of about 28, presumably the Company is setting out a 320 if you will, ability to show earnings over some timeframe, which would be substantially lower than let's say the $1.25 inherent in the second-quarter numbers. So is the Company, in fact, saying that it's earning capacity is substantially less and because it's earning capacity at substantially less, shareholders should take a $5 billion one-day hit in their holdings and a 40% reduction in their dividends?

Crittenden:

Dick, obviously, we don't give forecasts for where we think the future is going to go. We also carefully did not talk about a payout ratio here. We didn't think about it necessarily in terms of a specific payout ratio. We thought about it in terms of the capital formation and our ability to respond relatively quickly to a stress scenario in the environment. And it doesn't -- I mean it mathematically calculates into a payout ratio, but that is not the way we derived it.
And the following exchange on consumer credit cards:
Mike Mayo, Deutsche Bank:

Good morning. Can you talk some about the trade-off between pursuing growth and managing risk and as you pointed out, the credit card losses are up over 100 basis points in three months with unemployment only at 5% and mortgages getting worse. At the same time, short-term funding costs are higher over the last three months. So does that encourage you to pull back growth at all? ... specifically, as it relates to US credit cards, the margin was down linked quarter. Is that an area where you might want to pull back or increase pricing or neither?

Cittenden:

Actually all of the above is happening, Mike. So we are tightening underwriting standards as you might guess. We are evaluating the open lines of credit that exist with current customers. We are doing cross reference work between customers where we have the mortgage position and where we hold the credit card and obviously, we are off of promotional balances essentially as we go through this fourth quarter. So this is a time -- as you no doubt have read -- there was a good article in the New York Times a couple of days ago about this. This is no doubt a time where, in the credit card business, you could make some substantial missteps if you weren't careful in watching the credit because there is some natural growth in outstandings that will take place. There's a bit of a substitution effect between home-equity loans and credit card loans and we are very aware of what those trade-offs are. This falls into the second category that Vikram just talked about. There is some growth that's good growth and there is other growth, which can be dangerous if it is done without the proper kind of risk parameters around it. But I think our team is very focused on these issues right now in the card business. Obviously, we have taken a bit of a reserve increase in the card business in this quarter, but we are very focused on what the risks are around the inherent or natural growth that is going to happen in that business over the next year.