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Quote of the Day

“Every central-bank governor goes through tests of some sort. Usually, the gods oblige by providing a test early on.” - Stanley Fischer, the governor of the Bank of Israel and also Federal Reserve Chairman Ben Bernanke’s thesis adviser at M.I.T., on the subprime crisis. (NY Times, Jan. 20th)

Subprime Fallout

Fitch Revises U.S. CMBS B-Piece Repack Criteria on Higher Loan Default Risk; $8B on Watch Negative "Given the recent increases and future expectation for higher U.S. commercial mortgage loan defaults and losses, Fitch Ratings has revised its surveillance review methodology for U.S. CMBS B-piece resecuritizations and has placed 188 tranches from 18 transactions (representing $8.4 billion) on Rating Watch Negative. The total includes $928 million of commercial real estate (CRE) CDO liabilities previously placed on, and remaining on Rating Watch Negative, for performance issues. Of the bonds placed on Rating Watch Negative, $3.2B represent tranches which are currently rated 'AAA' by Fitch... The ratings from these transactions are expected to suffer the most severe downgrades. Fitch expects to resolve these rating actions within the next 90 days." (Press Release, Jan. 16th)

Bond, Mortgage Insurers Dip "Shares of bond and mortgage insurers mostly fell Wednesday after Ambac Financial Group Inc. (ABK) said it plans to boost its capital reserves by $1 billion, fueling concern that insurers could ultimately bear the brunt of the current credit crisis. Ambac also sliced its dividend by two-thirds to $0.07, replaced its CEO and said it planned to write down $5.4B in its credit derivative portfolio... Fitch Ratings has warned it would downgrade Ambac if it was unable to shore up at least $1B to cover potential future losses. Ambac plans to raise the money through the issue of equity and securities." (CNN Money, Jan. 16th)

Tax Break Aimed at New Mortgages "The qualified mortgage insurance deduction lets taxpayers with an adjusted gross income of less than $100,000 write off the full cost of mortgage insurance. Folks who earn less than $109,000 can take a write-off for part of it. To qualify, the mortgage must have originated between 2007-2010. The deduction can be taken for insurance on a principal residence or a second home. Introduced by the Tax Relief and Health Care Act of 2006, the break initially applied only to the 2007 tax year, but it was extended through 2010 by the Mortgage Forgiveness Debt Relief Act of 2007." (Wall St. Journal, Jan. 16th)

Mortgage Application Volume Skyrockets "Mortgage Bankers Association's weekly application survey: Mortgage application volume skyrocketed for the second consecutive week, rising 28.4% during the week ending Jan. 11. The MBA's application index rose to 906.4 from 706 the previous week, which was shortened due to the New Year's holiday. Mortgage volume slows during the winter, which can lead to greater volatility. Application volume jumped 39% during the same week a year ago. Refinance volume rose 43.4%, while purchase volume jumped 11.4%. Refinance volume accounted for 62.7% of total application volume, compared with 57.7% the previous week." (BusinessWeek, Jan. 16th)

S&P Revising Mortgage Loss Assumptions "Credit rating agency Standard & Poor's said Tuesday evening it is increasing its loss assumptions for subprime mortgages originated in 2006 and packaged in bonds sold to investors. When reviewing ratings, S&P will now assume a 19% loss rate on 2006-vintage subprime loans, compared with a 14% loss assumption previously. Cumulative losses from 2006-vintage subprime bonds have more than doubled since July 2007... The revisions may adversely affect ratings on outstanding mortgage-backed securities in an upcoming review, S&P said." (BusinessWeek, Jan. 16th)

Wealthy May Be Next In Line In U.S. Home Crisis "Illinois: Headrick-Wagner Consulting Group: "High earners with good credit may be heading for trouble as their adjustable rate mortgages adjust beyond their means, local real estate agents say. [Especially those who] have borrowed against their home equity... In a normal housing market they'd be able to sell, but now they are stuck... Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow... Chase Home Lending, a unit of JPMorgan Chase & Co, said the company raised its reserves for possible home equity loan loss for subprime and prime borrowers by $635 million in Q2'06 and Q3'06." (Reuters, Jan. 16th)

Adjustable Rate Mortgages Lose Their Luster "Mortgage company Freddie Mac: New adjustable rate mortgage borrowers are getting a smaller interest rate break than borrowers did a year ago as lenders raise the price on products that helped fuel the recent housing boom... Starting rates for ARMs in mid-December were close to or above year-ago levels... even though the Federal Reserve's target interest rate was 4.25% compared with 5.25% at the end of 2006. "Disruptions in the capital markets beginning in August and an increase in delinquencies on ARM product has led to a sharp decline in interest-rate discounting and a tightening of credit underwriting on ARMs in recent months," said Frank Nothaft, Freddie Mac chief economist." (Reuters, Jan. 15th)

Bank Of America To Cut 650 Jobs; Shut CDO Unit "Bank of America Corp. (NYSE:BAC) said Tuesday that it will cut 650 jobs from its corporate and investment bank, many of them in New York, and sell its prime brokerage unit. The bank is exiting its collateralized debt obligation business, which is a subset of the structured products business, and will also reduce investment banking in Europe and the U.S. The job cuts represent around 12% of the unit’s staff, and come on top of an internal review first announced in October. BAC CEO Kenneth Lewis said the cuts are in addition to previous plans to lay off 3,000 people, including 500 in the corporate and investment bank divisions." (Crain's NY Business, Jan. 15th)

Global Subprime Fallout

Brown: Northern Rock may be Nationalized "From Bloomberg: The U.K. Treasury said it may nationalize Northern Rock PLC in order to recover more than 25 billion pounds ($49B) 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." (Calculated Risk, Jan. 15th)

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Source: Housing Market Tracker - Subprime Outlook