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Quote of the Day

“We’re going after them to get the resources we need to rebuild our city." – Cleveland Mayor Frank G. Mr. Jackson, explaining why Cleveland is suing some of the nation's largest banks and lenders for making so many subprime loans. (NY Times, Jan. 12th)

Subprime Fallout

FBI: Housing Scams More Than Double "Federal mortgage fraud convictions have more than doubled in the past year... As the crisis over substandard, high-interest home loans escalates, foreclosure rates for subprime loans are at historic highs, according to the Mortgage Bankers Association and government records. The FBI opened 1,210 mortgage fraud cases in fiscal year 2007, nearly triple the number of new cases in 2003. Convictions more than doubled from 123 in the 2006 fiscal year to 260 in 2007. "We expect that number to increase again in 2008," says FBI financial crimes section chief Sharon Ormsby." (USA Today, Jan. 14th)

Class Action Suit against MBIA: We Should Have Seen It Coming "Bernstein Litowitz Berger & Grossmann LLP Announces Filing of Class Action Suit Against MBIA, Inc.(NYSE:MBI)... The Complaint alleges that during the Class Period, MBIA and the individual defendants, CEO Gary C. Dunton and CFO C. Edward Chaplin, violated the federal securities laws by issuing false and misleading press releases, financial statements, filings with the SEC and statements during investor conference calls... Defendants misrepresented and/or failed to disclose the true extent of MBIA's exposure to losses stemming from MBIA's insurance of residential mortgage-backed securities ["RMBS"], including in particular its exposure to so-called "CDO-squared" securities that are backed by RMBS." (Reggie Middleton in Seeking Alpha, Jan. 14th)

US: Subprime Crisis Claims Another Victim "On 11 January, Friedman, Billings, Ramsey Group, Inc. announced that First NLC Financial Services, LLC, FBR Group's mortgage origination subsidiary, will liquidate its assets as a result of the continued deterioration of the non-prime market... FNLC's senior secured lender supports the orderly wind-down of FNLC's business. In addition, FBR Group announced that it would not close the previously disclosed recapitalisation and sale of FNLC. As previously disclosed, FBR Group has taken steps to limit its ongoing exposure to FNLC... FBR Group does not expect to recover its remaining USD12 million investment in FNLC." (Chief Officer's Network, Jan. 14th)

New Fannie, Freddie Fees Boost The Cost Of Mortgages "Many borrowers will be socked with a fee that amounts to $250 for every $100,000 borrowed, just because the mortgage market has gone so bad. Other customers will take bigger hits because their credit scores are lower than 680 and they're borrowing more than 70% of the home's value. The fees will be tacked onto mortgages guaranteed by Fannie Mae or Freddie Mac. The companies say they introduced the new charges to compensate for the risks inherent in guaranteeing mortgages in an era when house prices are declining, delinquencies are rising and mortgage investors are losing money." (Orlando Sentinel, Jan. 13th)

GM: No Spike In Car Loan Defaults "General Motors Corp.'s top finance executive said Sunday he doesn't see the subprime mortgage mess spreading into auto loans at the company's former credit arm, GMAC financial services. CFO Fritz Henderson said that although GMAC auto loan delinquencies were up slightly in Q3'07 compared with Q3'06, the problems are nowhere near the troubles due to real estate loans made to people with less-than-stellar credit. GMAC's auto loan delinquencies rose from 2.4% in Q3'06 to 2.6% in Q3'07, Henderson said." (Newsweek, Jan. 13th)

Area Mortgage Industry Battered Again In 2007 "Ohio: Lucas County recorder's office: Over the past two years, mortgage activity has plunged 40% in the region's biggest county... The number of mortgages slipped 30% to 7,575 in Monroe County, which includes the Toledo bedroom communities of Bedford Township, Temperance, and Lambertville. The county had half as many mortgages last year as two years earlier. Meanwhile, the number of mortgages in Lucas County dropped 24% to 19,605 from 26,849 the prior year. The value of those mortgages rose fourfold to $49 billion... At Fifth Third Bank: The number of mortgages in Lucas County fell 18% to 2,930 [to] a value of $408 million, down from $626M in 2006." (Toledo Blade, Jan. 13th)

Adjustable Loans Spur New Worries "Numbers from industry trackers suggest that [borrowers] of adjustable-rate mortgages that allow borrowers to pay so little every month that their loan balances rise rather than fall-- most of whom boast respectable and often top-tier credit scores and appear to have substantial incomes and home equity -- are starting to create a second tide of defaults for lenders swamped by the meltdown in sub-prime loans made to people with bad credit or overstretched finances. Option ARM delinquencies are at double-digit levels in many areas of California, including the Inland Empire." (Los Angeles Times, Jan. 13th)

Cleveland Sues 21 Lenders Over Subprime Mortgages "Cleveland’s law director, Robert J. Triozzi: Cleveland is suing 21 of the nation’s largest banks and financial institutions... for “at least” hundreds of millions of dollars in damages... accusing them of knowingly plunging the city into a financial crisis by flooding the local housing market with subprime mortgage loans to people who could never repay... The list of defendants includes... Citigroup (NYSE:C), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Merrill Lynch (MER) and Countrywide Financial (CFC)... Cleveland [had] more than 7,000 foreclosures in each of the last two years... Entire city blocks have been abandoned. The city’s budget has been strained by the effort to maintain thousands of boarded-up homes, and... by a rise in violent crime and arson." (NY Times, Jan. 12th)

BoA Buys Countrywide - Implications for Main Street "The really big change, I think, is that [Bank of America CEO] Ken Lewis has explicitly stated that a BofA-owned Countrywide will not make any subprime loans. This means that for subprime borrowers, it's going to be harder than ever to find a mortgage. And for everybody else, less competition in the mortgage-origination sector is likely to mean higher mortgage prices. The combined company will have 25% of all mortgage-origination business: in the UK, that would officially make it a monopoly." (Felix Salmon in Seeking Alpha, Jan. 12th)

Bank of America’s Chief Makes Big Bet "Bank of America (BAC) announced it was buying the Countrywide Financial Corporation... The expected price is about $4 billion. While that amount is relatively small, the risks to Bank of America far outweigh what the company is paying... Chief among those challenges will be converting Countrywide’s mortgage customers into profitable clients of other financial services... integrating two vastly different cultures, preventing or at least hedging against further declines in the value of Countrywide’s assets and soothing anxious investors — all as the housing market weakens and the economy teeters on the edge of a recession." (NY Times, Jan. 12th)

Escalating Losses Force Citigroup to Seek More Foreign Investment "Sources: Citigroup is in talks to sell a large stake to a Chinese bank and several other investors, including foreign governments, in a deal that could raise $10 billion... The China Development Bank, which is controlled by the Chinese government, is expected to invest at least $2B... Citigroup is also in talks with the Government of Singapore Investment Corporation and the Kuwait Investment Authority. Large investors like Prince Walid bin Talal of Saudi Arabia... and money manager Capital Research and Management... the bank’s biggest shareholder, are being offered the chance to invest as well to avoid having their current stakes diluted." (NY Times, Jan. 12th)

The Real Story on Countrywide: Fed Behind the Deal? "Lost in the in the noise Thursday was that Moody’s downgraded the ratings on 30 (count ‘em — THIRTY!) tranches of Countrywide’s mortgage debt by more than a few notches. They did something similar before American Home Mortgage filed for bankruptcy." (Herb Greenberg in Seeking Alpha, Jan. 11th)

Rates On 30-Year Mortgages Drop Below 6% "Freddie Mac weekly survey: Rates on 30-year mortgages fell below the 6% mark for only the second time in more than two years... Other types of mortgages also showed declines. Thirty-year, fixed-rate mortgages fell to 5.87% this week from 6.07% last week. Rates on 15-year mortgages dropped to 5.43% from 5.68%. Rates on five-year adjustable-rate mortgages declined to 5.63% from 5.78%. Rates on one-year ARMs fell to 5.37% from 5.47%... A year ago, 30-year mortgages stood at 6.21%." (Sign on San Diego, Jan. 11th)

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Source: Housing Market Tracker - Mortgage/Subprime Outlook