Housing Market Tracker - Subprime Review

Here's our summary of articles and data points on the housing market. It's part of Seeking Alpha's coverage of the real estate market and homebuilder stocks. Like all other topics and stock coverage from Seeking Alpha, you can have this sent to your Blackberry or desktop email by signing up for our no-spam free email subscription service.

Quote of the Day

"Pick a different job." - Jeffrey Appel, VP at Preferred Empire Mortgage Co. Some 70,000 mortgage jobs have been cut this year in the U.S. Appel was replying to NY real estate magazine The Real Deal's survey of the city's top mortgage brokers for advice to new mortgage business workers. (The Real Deal, Nov. 13th)

Comics of the Day

by Kahunabear

Mortgages and Real Estate Lending

• Countrywide Loan Production Up Slightly In October (Inman News, Nov. 13th): "Countrywide Financial Corp. (CFC) boosted October loan production by 4% over September, to $22 billion... Compared to a year ago, October loan production was down 48%... Of Countrywide's $1.47 trillion loan servicing portfolio... delinquencies as a percentage of unpaid principal balance rose to 5.94%, [from] 3.97% a year ago. Foreclosures pending rose to 1.28%, more than double the 0.58% registered by October 2006... Countrywide slashed subprime loan production to $42 million in October -- just 0.2% of loans funded -- compared with $3.2B in October 2006. Year-to-date, Countrywide made $17B in subprime loans, compared with $33.8B in Jan.- Oct. 2006."

• A Credit Scenario That Had Been Unheard Of (Housing Bubble Blog, Nov. 13th): "The Boston Herald reports from Massachusetts: “Bank of America (BAC), Wells Fargo (WFC), Lehman Brothers (LEH) and other financial powerhouses are threatening to pull out of the wholesale mortgage-lending market in Massachusetts because of Attorney General Martha Coakley’s proposed new mortgage-broker regulations, the Herald has learned. Such lenders account for about one-third of all mortgage loans issued in Massachusetts.”

Subprime Fallout

• GE Lets Investors Eat Money Fund Losses (10Q Detective in Seeking Alpha, Nov. 15th): "Barron’s Online reported a $5 billion money market fund run by General Electric Co.'s (GE) Asset Management unit offered a handful of outside investors—who put money alongside GE's assets (primarily from GE's pension trust and other GE employee benefit plans)—an option to redeem their holdings at 96 cents on the dollar. Ironically, prior to Wednesday, shareholders thought that ongoing turmoil in the mortgage markets would no longer have a material impact on GE’s Money Segment unit. As a result of pressures in the U.S. subprime mortgage industry, GE previously committed to a plan to sell its U.S. mortgage business."

• Could Housing Panic Actually Save Countrywide? (John Micheline in Seeking Alpha, Nov. 15th): "Only 1% of all loans originated in Countrywide's history have completed foreclosure. Of [all] subprime loans... less then 4% are currently in default... Countrywide's... reported net loss of $1.2B in Q3'07 [is] their first quarterly loss in 25 years... The troubles affecting Countrywide are industry broad, not a specific operating mistake of Countrywide itself... Countrywide [also] has large revenue streams from other services and subsidiaries. For example, Countrywide is the third largest Federal Reserve Bank in the nation. Banking Operations' assets were $106B in October 2007, compared to $83B in October 2006... I am not saying this is the lowest point to come, but the stock is cheap for a company of this quality."

• Financial Sector Value Trap: The Worst is Far From Over (Markham Lee in Seeking Alpha, Nov. 15th): "Billions worth of ARMs are scheduled to reset over the coming months... Rate cuts won’t help... because in many cases the ARMs teaser rate payment is about as much as the borrower can afford... Borrower[s]... can’t afford their loan even [at] an uber-prime fixed rate mortgage, and rate cuts won’t prevent the loan from resetting to a rate that’s higher than the teaser rate. Over the next 2-4 months there is going to be a spike in ARM resets, followed by an accompanying spike in foreclosures 3-6 months later... Things are going to get worse for the banks before they get better."

• Investor Safe Haven Becomes a Concern (NY Times, Nov. 14th): "Large investment firms, having sought out the high yields for their money market funds, are being forced to protect the funds from losses brought on by investments that no longer seem safe... Bank of America said yesterday that it would provide... $600 million to prop up several Columbia Management money market funds, which bought large amounts of debt issued by structured investment vehicles, or SIVs... Credit Suisse booked about $125M in unrealized losses after it bought notes issued by collateralized debt obligations and SIVs in its money market fund. The Wachovia Corporation... recorded a $40M loss to buy distressed notes from its Evergreen money-market fund."

• Stocks Finish Lower in Erratic Session (Yahoo! Finance, Nov. 14th): "Bear Stearns Cos.(BSC) CFO Sam Molinaro said the investment bank's leveraged finance business is improving. He said the company expects to take a $1.2 billion writedown during Q4, which eased worries of even higher losses... Goldman Sachs, the world's most profitable investment bank, said yesterday it doesn't plan to take significant mortgage-related writedowns... Britain's HSBC Holdings PLC said it would have to write down a further $3.4B from its U.S. business during Q3 because of exposure to subprime loans, after writing down billions earlier in the year."

• Impac In Default On $407 Million (OC Register, Nov. 13th): "SEC filing: Impac Mortgage Holdings Inc. of Irvine has not received a waiver on a $407 million reverse repurchase facility, throwing the company into technical default. In the filing, Impac said it was in technical default on arrangements with UBS Real Estate Securities and Colonial Bank worth $407M, because it was in violation of income and tangible net worth covenants and had not received a waiver from the two companies."

• What is Andrew Cuomo Up To? (Mortgage Orb, Nov. 13th): "On NY AG Cuomo's probe [of] Washington Mutual [and] appraiser First American for collusion: None of the companies [ being investigated] is headquartered in New York. Washington Mutual is based in Seattle, First American eAppraiseIT is in California, and Fannie Mae and Freddie Mac are Washington, D.C.-area entities. Why did Cuomo go after out-of-state players instead of New York-based corporations (particularly the Wall Street firms that tried to muscle Fannie and Freddie aside in their pursuit of secondary market power)? Coincidence? Or does it help to gain national media attention by reaching far and wide rather than keeping the probe close to home?"

• CDOs: When is a Hedge Not a Hedge? (Felix Salmon in Seeking Alpha, Nov. 13th): "Banks were able to hedge their CDO holdings by insuring them against loss – but now the insurers are at risk of going bust... Morgan Stanley's "hedge" on its bearish mortgage-bond bet seems to have been much riskier than the original bet itself... The trade looks as though it was... a simple long-senior, short-junior play. {But] if you really wanted to make a bearish bet on mortgage bonds, why on earth would you fund it with a long position in mortgage bonds? Why not use emerging-market debt, or Treasury bonds, or something – anything – which wouldn't go down when mortgage debt fell in value?"

• Subprime Becomes 'Non-Prime' (The Real Deal, Nov. 13th): "Some lenders are shying away from referring to loans made to non-creditworthy borrowers as subprime, choosing instead to call them "non-prime," a term widely used in the industry about 10 years ago. Observers say non-prime loans are the same, and lenders are simply trying to avoid the negative vibes surrounding the subprime mortgage crisis."

• Credit Crisis May Prove Windfall for Berkshire - WSJ (Eli Hoffmann in Seeking Alpha, Nov. 13th): "WSJ: Over the past few weeks, sources say, every major bond insurer has reached out to insurer Berkshire Hathaway for a source of capital relief... giving CEO Warren Buffett the opportunity to size up various firms' operations. Besides municipal bonds... they also collectively insure some $100 billion of riskier CDOs (collateralized debt obligations), which have recently become the subject of ratings downgrades... The need for contingent capital and a dry-up in debt markets has them turning to Berkshire -- the only AAA-rated reinsurer in the world. Buffett... has been betting investors are overestimating the risks of certain investments. While bond insurers need not reinsure CDOs specifically to tune-up their portfolios... Buffett could reinsure some highly-mispriced CDO portfolios at a hefty premium."

Global Subprime Fallout

• Most Mortgage Deals Hit By Global Credit Crunch (Mortgage Solutions, Nov. 15th): "GE Money Research [says] 87% of mortgage deals currently being handled by UK mortgage brokers have suffered due to lenders changing product rates or criteria at short notice... One in every four deals being handled by brokers has felt a direct impact from the current global credit crunch and almost 1 in 5 (17%) claim deals are not being honoured after a decision in principle. However, most brokers stated they were understanding of brokers problems with 59% saying it was acceptable for lenders to withdraw deals with as little as one week’s notice and 85% of brokers requesting two week’s notice as a reasonable time frame."

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