Housing Market Tracker - Subprime Review

| About: MGIC Investment (MTG)

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

"The No. 1 risk of across-the-board loan modification is losing investor confidence in mortgage backed-securities markets. If they no longer invest in mortgage-backed securities, you cut off the credit available for refinancing, you cut off the lifeblood of being able to give better loans.'' - Tom Deutsch, deputy executive director of the American Securitization Forum. (Bloomberg, Dec. 1st)

Subprime Fallout

  • Treasury's Subprime Rate Plan is a Great Big Zero (David Merkel in Seeking Alpha, Dec. 3rd): "Paying the mortgage payment is not the problem... The real problem is too many homes chased by too few people able to afford them at current prices. Subprime loans are a very modest portion of residential real estate finance. The Treasury [rate reset freeze] proposal... separates borrowers into healthy, dead, and savable. The savable are a small portion of a small component in the total residential financing scheme... Hedge funds that lose interest from the changes [will probably sue and] win... but not collect damages... The problem here is the overhang of excess houses. This does nothing to solve that problem."

  • Many Subprime Borrowers May Be Able to Refinance (Wall St. Journal, Dec. 3rd): "Eric Rosengren, Federal Reserve Bank of Boston president: ... [Borrowers of] 55% of subprime adjustable-rate mortgages, where the owner occupied the home [and] hadn't missed a mortgage payment in the past year... may be able to refinance into a less costly mortgage by taking advantage of government programs... That translates to about 1.2 million borrowers... Research by the Boston Fed shows that 20% of borrowers with subprime ARMS nationally -- and 26% of these borrowers in New England -- should be able to "relatively easily" refinance into a prime mortgage or a loan guarantee program. The Boston Fed... analysis looked at loans that were [securitized.]"

  • Moody's May Cut Ratings on $105 Billion of SIVs (Bloomberg, Dec. 3rd): "Moody's Investors Service is preparing the biggest credit rating cuts since subprime mortgages contaminated the bond market, foreshadowing losses for investments that pay Florida teachers and money market funds. Moody's may lower ratings on $105 billion of debt sold by structured investment vehicles after the net asset values of 20 SIVs sponsored by firms including New York-based Citigroup Inc. declined to 55% from 71% a month ago, Moody's said in a statement Nov. 30. The assets were valued at 102% in June."

  • Subprime Debacle Traps Even Very Credit-Worthy (Wall St. Journal, Dec. 3rd): "WSJ/First American LoanPerformance study: Of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms. In 2005... borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are... The proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans."

  • Subprime Risk Plan: A Great Step in the Right Direction (Accrued Interest in Seeking Alpha, Dec. 3rd): "[A] mass loan modification [would be] tremendous for senior ABS and CDO holders... Subordinated holders of subprime paper aren't likely to see much in principal payments anyway. And anything that reduces losses... will improve senior note performance markedly... Senior notes can typically handle a large amount of losses before getting touched... If we can take a pool which was going to suffer 40% foreclosures and 20% losses, and turn that into 30% foreclosures and 12% losses, that will make a huge difference for senior holders. Not only that, but the plan will likely extend the timing of losses... because ABS and CDO deals typically amass a collateralization account over time."

  • The Real Problem with Securitization (Felix Salmon in Seeking Alpha, Dec. 3rd): "[Nowadays,] the banks that originated loans [don't] keep the loans... Securitisation created the possibility of the originator having different information from the buyer. Not only is there information asymmetry but in this context there are perverse incentives [for] the originator to provide distorted information. The buyers... weren’t [entirely] aware of this... partly because they bought into the notion of risk diversification – they thought they didn’t need to worry about it because of the law of large numbers. But the law of large numbers says only that you don’t need to worry about a single one; you do need to worry about systemic risks. And securitisation helped create systemic risks."

  • ARM Loan Modifications: Delaying the Inevitable (Tim Iacono in Seeking Alpha, Dec. 3rd): "If the [Treasury's loan] plan is successful, look for it to be next applied to option adjustable rate (negative amortization) loans where buyers unwittingly secured a lower monthly payment by not only deferring all principle payments on the loan but by not even paying the accrued monthly interest. And then in 2010, holders of Alt-A loans, who unwittingly stated much higher incomes in order to get into a house that might have made them a small fortune if only real estate prices would have kept going up, well, they might see some relief as well."

  • Montana, Connecticut Hold SIVs Downgraded, Reviewed by Moody's (Bloomberg, Dec. 3rd): "Montana and Connecticut state-run investment funds hold debt tainted by the subprime mortgage collapse that was cut or put under review by Moody's Investors Service, leaving local governments vulnerable to losses. Moody's lowered its rating on commercial paper issued by the Orion Finance structured investment vehicle, or SIV, to ``Not Prime'' on Nov. 30, saying its net asset value is inconsistent with Orion's former Prime-1 rating. Montana owns $50 million of the paper. Moody's put another $105 billion of SIVs on review for a possible downgrade, of which Montana holds $80 million and Connecticut holds $300M, records show. "

  • Insured Home Mortgage Defaults Reach Six-Year High (Bloomberg, Nov. 30th): "Defaults by U.S. homeowners with private mortgage insurance rose last month to the highest since at least August 2001, adding to evidence that the housing slump is getting deeper at the start of its third year. Mortgage Insurance Companies of America, a Washington-based trade group: The number of insured borrowers falling more than 60 days behind on their home loans climbed to 59,308 in October, 28% more than October 2006. The missed payments, often a prelude to foreclosures, increased 8.4% from September, 2007."

  • MGIC To Raise Prices And Tighten Safeguards (MSN Money, Nov. 29th): "MGIC Investment (NYSE:MTG), the largest mortgage insurer in the US, will raise its prices and tighten policy requirements in a bid to increase revenue and stem payouts... Mortgage insurers help reimburse home lenders when borrowers default on their loans... MGIC will [now] limit its coverage of [stated-income] loans... as well as those to borrowers with low credit scores, CEO Curt Culver said. The company will raise prices on Alt-A loans, loans worth 95% of a home's value and loans to borrowers who provide only minimal down payments... MGIC predicts it will payout $875m in claims for the full year, up from $611m in 2006, [and] as much as $1.5bn next year."

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