by Calculated Risk on 1/18/2008 11:13:00 PM

by Calculated Risk on 1/18/2008 09:05:00 PM

From MarketWatch: Fitch Downgrades 420 ABS Bonds Following Ambac Rating Downgrade; Watch Negative (hat tip Risk Capital)

Fitch Ratings downgrades 420 classes of asset-backed securities (ABS) Additionally, the ratings remain on Rating Watch Negative by Fitch. This action follows Fitch's downgrade of the ratings on Ambac ...

Check out the ABS list at MarketWatch: aircraft transactions, student loan bonds, auto loans - the impact from a bond insurer downgrade is widespread.

Finally it feels like a Friday night!

by Calculated Risk on 1/18/2008 08:08:00 PM

According to the Cleveland Fed, the market expects a 75 bps cut in the Fed Funds rate on January 31st, with the odds of a 100bps rate cut rising rapidly.

Click on graph for larger image.

Source: Cleveland Fed, Fed Funds Rate Predictions

It is no longer a tossup; market expectations are for a rate cut to 3.570% or almost 75bps.

Professor Tim Duy argues: Odds Still Favor a 50bp Cut

I think odds still favor 50bp – it would be more consistent with the Fed’s medium term objectives, and help maintain policy flexibility over the first half of the year. Moreover, this cut will do nothing to support the current environment, and the Fed needs to be looking at what it means for 2009. The case for 75bp relies largely on meeting market expectations, expectations that may be driven by an excessive level of fear.

If 75 bps is based on "an excessive level of fear", I wonder what Tim thinks of 100bps?

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

From Christine Richard at Bloomberg: Ambac Insurance Loses AAA Ranking at Fitch Ratings

Ambac ... became the first bond insurer to lose its AAA rating after Fitch Ratings downgraded the company.

Ambac Assurance Corp. was lowered two levels to AA and may be reduced further ... Fitch said today in a statement. ... The downgrade throws doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by Ambac.
...
The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg.

Moody's and S&P are also reviewing the bond insurers, see:

S&P: Bond Insurer Review to be Completed Next Week

Moody's: Ambac Under Review for Possible Downgrade

by Calculated Risk on 1/18/2008 04:32:00 PM

From the WSJ MarketBeat by David Gaffen: Writedowns Surpass $100 Billion. Note: Here are the write-downs in a spreadsheet.

The great 2007-2008 parade of writedowns, which was hovering around the $100 billion mark already, has pushed far past that thanks to Merrill Lynch’s $14.5 billion in assets lost ...

The thing is, the writedowns aren’t finished. Several firms retain significant exposure to subprime, such as Citigroup, which still has $37 billion in subprime exposure. Back in November, Goldman Sachs economist Jan Hatzius estimated about $200 billion in mortgage-related losses on the big banking balance sheets. (He was ridiculed for this and charged with “talking his book;” but the figures show his gloomy forecast is on the way to being fulfilled.)

There are many more write-downs to come.

by Calculated Risk on 1/18/2008 03:44:00 PM

To illustrate the seasonal pattern for housing, here is some housing data (through December) for Washington D.C. sent to me by reader dc1000. The data shows a 13% decline in inventory, from 3,307 units in November to 2,880 units in December. Sales for December were at the lowest level since dc1000 has been keeping statistics, starting in '97.

Click on graph for larger image.

This graph shows the sales, inventory and months of supply for Washington, D.C.

Note the sharp decline in inventory in December (and months of supply).

Inventory and "months of supply" are not seasonally adjusted in this calculation. The normal seasonal pattern (nationally) is for inventory to decline about 15% in December as sellers remove their homes from the market for the holidays.

Remember this when the National Association of Realtors (NAR) announces that inventory declined in December!

Note: in this case both sales and inventory are NSA (not seasonally adjusted). So "months of supply" is also not seasonally adjusted. The NAR seasonally adjusts sales, but not inventory. So the NAR "months of supply" calculation is a little weird; a seasonally adjusted number being compared with a non-seasonally adjusted number. For new homes sales, the Census Bureau seasonally adjusts both sales and inventory.

by Calculated Risk on 1/18/2008 02:46:00 PM

From MarketWatch: Fitch cuts Ambac rating to AA from AAA

This will probably mean some more write-downs from the banks.

Added: For a discussion of the possible implications, see Alistair Barr's piece at MarketWatch: Bond-insurer woes may trigger more write-downs (hat tip Barley)

Just when you thought it was over, trouble in the $2.3 trillion bond-insurance business could trigger another wave of big write-downs from banks and brokerage firms, experts said Friday.
...
Bond insurers agree to pay principal and interest when due in a timely manner in the event of a default -- a $2.3 trillion business that offers a credit-rating boost to municipalities and other issuers that don't have AAA ratings. Without those top ratings, their business models may be imperiled.
...
The destruction of the bond insurers would likely bring write-downs at major banks and financial institutions that would put current write-downs to shame," Tamara Kravec, an analyst at Banc of America Securities, wrote in a note Friday.

by Tanta on 1/18/2008 12:15:00 PM

The MBA has a report out on foreclosure and workout data from the third quarter of 2007 (thanks, Clyde!). The data is in tabular form that's a bit unwieldy, but here's part of the summary:

[D]uring the third quarter the approximately 54 thousand loan modifications done and 183 thousand repayment plans put into place exceeded the number of foreclosures started, excluding those cases where the borrower was an investor/speculator, where the borrower could not be located or would not respond to mortgage servicers, and when the borrower failed to perform under a plan or modification already in place.

Of the foreclosure actions started in the third quarter of 2007, 18percent were on properties that were not occupied by the owners, 23 percent were in cases where the borrower did not respond or could not be located, and 29 percent were cases where the borrower defaulted despite already having a repayment plan or loan modification in place. . . . the degree to which invest investor-owned properties drove foreclosures in the third quarter differed widely by state and by loan type. They ranged from a high of 35 percent of prime ARM foreclosures in Montana to a low of 6 percent of prime fixed-rate foreclosures in South Dakota. For the nation, investor loans comprised 18 percent of subprime ARM foreclosures, 28 percent of subprime fixed-rate foreclosures, 18 percent of prime ARM foreclosures and 14 percent of prime fixed-rate foreclosures. Table 6 shows, for example, that while 11 percent of foreclosures on prime ARM and prime fixed-rate loans were on non-owner occupied properties, the percentages for subprime loans were almost double that — 19 percent for subprime ARMs and 20 percent for subprime fixed-rate. In Ohio, a state that has had some of the highest foreclosure rates in the nation, investor owned properties accounted for 21 percent of subprime ARM foreclosures and 34 percent of subprime fixed-rate foreclosures, versus 18 percent of prime ARM and 14 percent of prime fixed-rate foreclosures. Nevada had among the highest investor-owned share of foreclosures, with investors accounting for 36 percent of subprime fixed-rate foreclosures, 18 percent of subprime ARM foreclosures, 24 percent of prime ARM foreclosures and 14 percent of prime fixed-rate foreclosures.

Borrowers who could not be located or who would not respond to repeated attempts by lenders to contact them accounted for 23 percent of all foreclosures in the third quarter, 21 percent of subprime ARM foreclosures, 21 percent of subprime ARM [sic; FRM?] foreclosures, 17 percent of prime ARM foreclosures and 33 percent of prime fixed-rate foreclosures. Thus, as a percent of foreclosures, the inability to get a borrower to respond to a mortgage servicer is a much bigger problem for prime-fixed rate borrowers than for subprime borrowers. Again the results differed widely by state and loan type. The highest was 69 percent for prime fixed-rate foreclosures in Oklahoma versus a low of 7 percent of prime ARM foreclosures in Wisconsin. Table 7 shows that in Ohio and Michigan, 25 and 26 percent respectively of all foreclosures started in those states were for borrowers who would not respond to repeated attempts to contact them or could not be located.

Borrowers who had worked with their lenders and established loan modification or formal repayment plans, and then failed to perform according to those plans, accounted for 29 percent of all foreclosures in the third quarter. The inability of borrowers to meet the terms of their repayment plans or loan modifications accounted for 40 percent of subprime ARM foreclosures, 37 percent of subprime fixed foreclosures, 17 percent of prime ARM foreclosures and 14 percent of prime fixed foreclosures. Table 8 shows that the states of Vermont, North Dakota, New Mexico and Arkansas, with little else in common, had the highest shares of foreclosures due to the inability of borrowers to live up to prior plans.

During the third quarter, mortgage servicers put in place approximately 183 thousand repayment plans and modified the rates or terms on approximately 54 thousand loans. Lenders modified approximately 13 thousand subprime ARM loans, 15 thousand subprime fixed rate loans, 4 thousand prime ARM loans and 21 thousand prime fixed-rate loans. In addition, servicers negotiated formal repayment plans with approximately 91 thousand subprime ARM borrowers, 30 thousand subprime fixed-rate borrowers, 37 thousand prime ARM borrowers and 25 thousand prime fixed-rate borrowers.
During this period the industry did approximately one thousand deed in lieu transactions and nine thousand short sales.

In an effort to put these numbers into context, Tables 9 through 13 also provide a comparison with the repayment plan and loan modification numbers. They show a breakdown of the number of foreclosures started net of those that clearly could not be helped due to reasons already discussed — investor-owned, borrower would not respond or could not be located, or borrower failed to live up to an agreement already in place. As previously discussed, the
percentages were adjusted downward to eliminate double counting for those borrowers who fell into more than one category. Therefore, while an estimated 166 thousand subprime ARM foreclosures were started during the third quarter, only 50 thousand did not fall into one of those three categories. In comparison, about 90 thousand repayment plans were renegotiated and 13 thousand loan modifications were done, for a total of 103 thousand.

Of the net 50 thousand foreclosures, many of these likely occurred due to the traditional reasons for default, loss of job, divorce, illness or excessive debt burden relative to income, not just the impact of rate resets, thus eliminating any possible benefit of a rate freeze.

What jumps out at me:

1. For the purpose of this study, servicers identified "investor-owned" loans as those with a billing address different from the property address. This is a much better measure than the occupancy code the databases carry, since it is based on the declarations made by the borrower at loan closing, and we know how reliable some of those were. There would be no distinction here between a property that was never occupied by the owner and one that was occupied originally but subsequently rented.

2. The vast number of forbearances relative to modifications should give us all pause. As its name implies, forbearance is the servicer's agreement to forbear from foreclosing for a temporary, stipulated period of time, during which the borrower agrees to resume making contractual payments and make up the delinquent payments, generally in an extra monthly installment. While it is possible that a modified loan was not delinquent prior to the modification, all forbearances by definition were previously delinquent. Forbearances are faster and cheaper than modifications; servicing agreements generally give the servicer wide latitude to enter into forbearances. It is quite possible (although this issue is not addressed in the MBA report) that many forbearances are the initial stage of a modification deal: the borrower is in essence put on a "probationary" plan to catch up on payments at a temporarily reduced level, and given a permanent modification only if the borrower performs at the forbearance terms. The precise situation in which a forbearance makes sense--a borrower who occupies and is committed to homeownership and who is experiencing some temporary inability to make payments--is the precise situation in which the "Hope Now" plan makes most sense. It therefore troubles me to see no discussion of whether forbearances are being used as an initial stage of the modification process, or as a cheap, not-well-thought-out substitute that is setting repayment installments too high for borrowers to reach.

3. The data on borrowers not located or not responding merely raises the question of why that is the case. We really need to know more about this borrower group: some will be "demoralized" borrowers who simply cannot cope adequately with their distress; some will be speculators not caught with the billing address check; some will no doubt have been straw borrowers. Some will be ruthless senders of "jingle mail." But without further information, we're not able to say from this data what the best response is to this group.

by Calculated Risk on 1/18/2008 11:50:00 AM

From AP: Bush calls for $145 billion economy plan

Apparently the proposal will be to provide tax rebates of up to $800 for individual taxpayers and $1,600 for families.

by Tanta on 1/18/2008 10:56:00 AM

Sorry to be so behind today, but I've been staring at these paragraphs of Floyd Norris's for a couple of hours. I still don't quite know what to say. But I'm sure you all do:

The ideal home buyer now — in a reverse of what was true for years — is a renter who is not burdened with a house. Such a buyer will need a down payment from somewhere, and he or she will need enough income to meet the monthly payments for the foreseeable future, including any increase in adjustable rates that seems probable.

But not owning a home, which may be hard to sell, is a big plus.

A year ago, having a home that had appreciated in value meant that an owner could trade up to a more expensive home. Now it means that the homeowner cannot move until the old home is sold, and that is getting more difficult.

First, the seller has to find a buyer who can get a mortgage. Second, the price has to be high enough to pay off the old mortgage and leave enough cash for the down payment on a new home. Both were taken for granted a year ago. In many markets, neither is a sure thing now.

If I'm reading this correctly, the suggestion is that we could use a real economy (one that, say, provides down payments from something other than home sales and income from something other than home sales) to create first-time homebuyers who will buy existing homes from people who want to upgrade into a new home by selling the old home for a profit. Have I been drinking too much cough syrup?