Housing Market Tracker - Investors Won't Like Monoline Solutions

Quotes of the Day

"It is the equivalent of going to a casino and trying to keep only the winning bets.'' - Tim Mercer, CIO at hedge fund Musashi Capital Ltd., about the proposal to split up the monoline insurers according to good and bad portfolios. (Bloomberg, Feb. 19th)

"We're trying to help the mortgage insurers.'' - Brad German, a spokesman for Freddie Mac. The government-backed funder of U.S. home loans will purchase loans covered by mortgage insurers that don't meet its standards for the amount of capital backing their policies. (Bloomberg, Feb. 14th)

Subprime Fallout

Bernanke Turns 10-Year Notes Into Losers as Refinancing Surges. "Consumers taking advantage of lower borrowing costs have pushed the Mortgage Bankers Association's refinancing index to its highest level since March 2004. Ten-year notes fell 4.83% in April 2004 as the extra cash homeowners pocketed from replacing high-rate loans spurred bigger gains in retail sales and consumer confidence than forecast." (Bloomberg, Feb. 19th)

Ambac Hopes Capital Infusion Will Save Rating. "Ambac Financial Group Inc. (ABK) is discussing a plan to raise at least $2 billion in much-needed capital to help the world's second-biggest bond insurer retain its top-notch credit rating... The extra cash, to be raised by selling shares to existing investors at a discount, would likely be a prelude to a trickier and lengthier move: splitting itself into two businesses... Fitch Ratings has downgraded Ambac's bond-insurance subsidiary to double-A from triple-A, while Moody's Investors Service Inc. and S&P's Ratings Services have put Ambac on review for possible downgrade." (Wall St. Journal, Feb. 19th)

Bond Insurer Split Threatens $580 Billion of Asset-Backed Debt. Sources: "Credit ratings on more than $580 billion of asset-backed securities may be cut, sparking writedowns by banks, under New York Insurance Department regulator Eric Dinallo's plan to break up bond insurers. Dinallo proposed splitting the companies' municipal insurance units from their unprofitable businesses of guaranteeing debt linked to subprime mortgages. A separation may preserve AAA rankings for securities sold by local governments and agencies, while allowing asset-backed securities to slide... Morgan Stanley: Lower ratings would force banks that own the mortgage-backed debt to write down the value of the securities by as much as $35B." (Bloomberg, Feb. 19th)

Bond Insurer Split May Trigger Lawsuits, Analysts Say. "Bank of America: Regulators' plans to break up bond insurers into "good'' businesses covering municipal debt and "bad'' businesses liable to subprime-related losses may trigger "years of litigation." FGIC Corp., the fourth-largest of the so-called monoline insurers, asked to be split on Feb. 15 after Moody's Investors Service cut the company's top Aaa ranking." (Bloomberg, Feb. 18th)

Nonprofits To Lose Mortgage License Exemption. Massachusetts: "Nonprofit agencies from around Worcester say the state Division of Banks [is] right to require nonprofits that provide home loans to become licensed mortgage lenders or brokers... Early last month... those agencies [were notified] that the division had done away with an exemption for nonprofits from mortgage broker or lender licensing. The elimination of the exemption is part of the state's Act Protecting and Preserving Home Ownership, which was signed into law in late November. Now, any nonprofit that acts as a mortgage lender five or more times per year must be licensed as a lender or broker." (Worcester Business Journal, Feb. 18th)

No Lull in Mortgage Pitches. "The mortgage industry has not reduced its ad spending. Mortgage experts say spending will be strong into the spring... Sally Greenberg, executive director of the National Consumers League, a nonprofit organization in Washington. “Many of these companies are bleeding, and these ads are a way to get more money into the door.” Mortgage Bankers Association: The total value of mortgages produced [this year] will be down 16% from its level last year. TNS Media Intelligence: Mortgage companies spent nearly $409 million on ads in Q3'07... higher than the industry’s ad spending during the peak of the housing boom." (NY Times, Feb. 18th)

Subprime Crisis Leaves Vacant Homes Open To Squatters. "Squatters and drug dealers are moving into homes left vacant by the subprime crisis. In Cleveland and its suburbs, there are more vacant homes than homeless people. In Queens, the problem of vacant homes has grown as foreclosures have skyrocketed in Jamaica, South Ozone Park and Rochdale." (The Real Deal, Feb. 18th)

Congress Looks Into Reverse Mortgages As Abuses Begin To Appear. "Now that the subprime mortgage business has crashed, many lenders are reviving their incomes by persuading older homeowners to take out reverse mortgages... Consumer advocates say Congress should move faster to protect the elderly from unscrupulous lenders pushing mortgages that sometimes cost far more than borrowers realize... Last month, Florida Attorney General Bill McCollum warned people considering reverse mortgages that "deceptive practices and allegations of high-pressure sales tactics are being more frequently encountered." (Palm Beach Post, Feb. 18th)

Auction-Rate Bonds Lure Investors With 20% Interest. "Bank of America: The U.S. market for auction-rate securities that failed to draw enough buyers last week is luring new investors as interest rates soar to as much as 20%. Less than a quarter of auctions failed that offered interest above 10%, analysts... wrote. The failure rate was as high as 98% at auctions offering 4% interest. Banks including Citigroup Inc. and Goldman Sachs Group Inc. allowed hundreds of sales in the $330 billion market for the securities to fail last week after they couldn't attract bidders and didn't step in to buy unwanted debt." (Bloomberg, Feb. 18th)

Financials: Insiders Buying on Consistent Basis. "Wachovia (WB) insiders are buying shares... SEC filing Friday: Lanty L. Smith, a director of Wachovia Corp. bought 40,000 shares of common stock... This follows purchases earlier by other insiders, including Smith himself... Berkshire Hathaway's (BRK.A) Warren Buffett and Wilbur Ross are getting interested, Leucadia (LUK) is buying up shares of AmeriCredit (ACF), Citigroup (C) has seen insider buying and Bank of America (BAC) has got what will be seen as perhaps the bargain of the year in Countrywide (CFC). Richard Pzena is buying shares of Citi and Freddie Mac (FRE). Financials (XLF) seemed to have bottomed on Jan. 18th." (Todd Sullivan in Seeking Alpha, Feb. 17th)

Credit Crisis Losses Will Put Black Monday in the Shade. "Bank of America chief market strategist Joseph Quinlan: the current credit crisis [has caused] world market capitalisation [to lose] 14.7%, three months after a peak in late October. He has compared this with similar losses three months down the road of 13.2% after the LTCM crisis, 9.8% for Black Monday and 6.1% after the Brazil crisis. The losses were also greater than those suffered after the September 11, 2001 terror attacks, the Asian financial crisis starting in 1997, Argentina's default on its debt in 2001, and the 1994 Mexican peso crisis." (Andy Abraham in Seeking Alpha, Feb. 17th)

A Common Sense Look at MBIA. "If [Pershing Square's] Ackman is completely incorrect and MBIA is financially secure then: Why didn't Warren Buffett attempt to acquire the entire firm? Why haven't any international or domestic firms acquired the firm? It's a fantastic value at this level if it's actually financially secure... Why [can't] they raise [enough] capital to ensure liquidity and financial security? With the USD's [slide] we should be seeing international firms pouring money into MBIA if there's no significant danger. If Ackman's firm's analysis is even somewhat correct... then the fact that none of the above has occurred would make perfect sense." (David Schrader in Seeking Alpha, Feb. 17th)

Banks Denying Approval on Most Miami Condo Mortgages. "South Florida Business Journal: BankUnited (BKUNA) has virtually eliminated condo lending and Washington Mutual (WM) is severely restricting lending. BankUnited’s "confidential” Non-Permissible Condominium Project List... included virtually every condo building in Miami... The two most popular reasons are declining market value and high investor concentration. These were followed by the number of foreclosures in a building, delinquent association dues, litigation, and the bank’s current exposure to a particular building... Fannie Mae (FNM) and Freddie Mac (FRE) also have their own building eligibility lists and guidelines. A condo building must be a least 70% owner-occupied to be considered." (Michael Steinberg, Feb. 17th)

Bank on Wells Fargo – Barron's. "Barron's picks Wells Fargo & Company (WFC) as the best U.S. bank amid the credit crisis of 2007-8. Wells [has few] risky debt-based assets like CDOs and SIVs that have wreaked havoc on its peers; doesn't carry a large subprime mortgage portfolio; and is the only AAA-rated bank by both major credit ratings agencies. Warren Buffett's Berkshire Hathaway (BRK.A) recently raised its stake to 9.4% of the company. WFC's dividend currently yields 4.2%, while its impressive 17.1% return-on-equity ranks first among major banks. Yet shares are down 22% from their highs, and trade for just 10x 2009 earnings." (Eli Hoffmann in Seeking Alpha, Feb. 17th)

Some Subprime Mortgage Loans Are Actually Current. "The credit quality among the different bonds varies enormously... Last fall, Moody's... broke out subprime originators into three tiers... Wells Fargo (WFC) is a superior subprime mortgage underwriter... WMC was in the lowest tier, while Countrywide (CFC) was in the middle... In [the] ABX 06-1, 06-2, 07-1, and 07-2 [representing a meaningful cross section of subprime mortgages underwritten in those time periods,] the Wells Fargo-originated loans have shown a 30% lower delinquency rate than the WMC-Countrywide pool. Moreover, since the Wells pool has a much lower level of balances still outstanding, we estimate its lifetime losses will be only one-third of the mixed pools." (Tom Brown in Seeking Alpha, Feb. 17th)

A Trader's Dream: Handicapping Indymac. "If it's in the news, it's in the price." Don't talk about additional credit write downs. Mortgage and homebuilder stocks have never been cheaper this cycle. While the overall market may well make new lows this year, the lows are in for these two groups, in our humble opinion, for the financial sector as a whole. Pullbacks should be bought, and rallies should be sold... Until Indymac (IMB) reaches book value, and shorts buy back the 38 million shares, this name will be a money machine for nimble traders." (FIG Trader in Seeking Alpha, Feb. 17th)

Uncle Sam Opens Doors For Stressed Homeowners. "A bright spot or two for homeowners: Foreclosure comes with a tax break, and 2007 mortgage insurance payments may be tax-deductible. Congress acted on both provisions late last year, extending the mortgage insurance deduction for three more years and creating a new tax break for homeowners facing foreclosure. The mortgage insurance deduction will help certain low- and moderate-income homeowners, especially first-time homebuyers and those struggling with higher house payments as adjustable rate mortgages reset." (Chron.com, Feb. 16th)

Radian Group Swings To 4Q Net Loss; Says Challenges Will Remain Near-Term. "Radian Group (RDN) Inc. Friday reported Q4'07 net losses of $618 million, or $7.74/share, compared to net income of $158.4M, or $1.96/share, in Q4'06... Analysts [expected] a loss of $2.38/share. Q4 revenue fell to negative $130.3M from $347.9M in Q4'06. Net premiums written rose to $309.6M to $278.7M. The Philadelphia-based credit enhancement company said its fourth-quarter mortgage insurance loss reserves rose to $1.3 billion. (CNN Money, Feb. 15th)

Countrywide's Overdue Mortgages Increase to 7.47%. "Countrywide Financial Corp. (CFC), the biggest U.S. mortgage lender, said late loans were at their highest level in at least six years during January... Overdue loans rose to 7.47% of unpaid principal balances from 7.2% in December and 4.32% in January 2007, according to Countrywide. Foreclosures advanced to 1.48% in January, also a six- year high, from 1.44% in December and 0.77% a year earlier." (Bloomberg, Feb. 15th)

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