Disquieting Mortgage Trends in JP Morgan, Wachovia Results - Housing Tracker

Quote of the Day

"It could take six to 12 months for banks to grow themselves out of losses of this size, and longer if capital for actual expansion were required." – Organisation for Economic Cooperation and Development, Financial Markets Committee chairman Thomas Wieser, who is also head of Austria’s finance ministry, commenting on the OECD’s assessment that subprime-induced losses could reach $422 billion eventually. (AFP, Apr. 16th)

Subprime Fallout

J.P. Morgan Hit Hard by Credit Crisis. J.P. Morgan Chase (JPM) reported Wednesday that its first-quarter profit fell by half, showing how credit troubles in subprime home loans are now spreading to other types of consumer and business debt. Earnings at the country's second-largest commercial bank, were hurt by $2.6 billion in write-downs as the firm restated the value of distressed assets on its books, including subprime and other mortgages, and leveraged loans for corporate takeovers… The bank [also] decided to set aside $2.5B more to cover expected losses on a wide range of loans. Still, the results came in above the expectations of most analysts.” (Washington Post, Apr. 17th)

JP Morgan's Net Income Drops, EMC Cooperates with FTC Probe. “In the Q1 report, Bear Stearns said its net income hovered at $2.4 billion -- a significant loss when compared to the $4.8B it secured during Q1’07. In Bear Stearns' latest SEC filing, the investment bank said its EMC Mortgage Corp. mortgage platform is now in the process of complying with a Federal Trade Commission [FTC] probe. Bear Stearns added that the FTC is specifically seeking “documents and data” associated with EMC's servicing activities.” (Default Servicing News, Apr. 16th)

MBA Responds to Foreclosure Prevention & Sound Servicing Act. Mortgage Bankers Association on the Foreclosure Prevention and Sound Servicing Act: “Mandating debt-to-income ratios on first loans would require holders of first liens to subordinate their economic interests to the interests of junior lien holders and unsecured creditors, which may be the source of the borrower's inability to stay current on the mortgage payments in the first place…” MBA: Laying out specific loss mitigation criteria also could have the negative effect of hindering lenders and servicers in their quest for the right home retention solution.” (Default Servicing News, Apr. 16th)

FHA Is Cornerstone Of Housing Rescue. “While the White House wants to avoid moves it sees as bailing out irresponsible mortgage borrowers… lawmakers will likely… expand the reach of the Federal Housing Administration to keep more borrowers in their homes… Democrats favor a large new financial responsibility, a move that concerns conservatives. [Both sides are] encouraging lenders to write down loan values -- a move that the Bush administration’s… FHASecure program would allow FHA to insure higher value loans… The president could sign FHA modernization into law by the end of June, according to observers.” (MarketWatch, Apr. 16th)

US Subprime Losses Could Total 422 Billion Dollars: OECD. “Organisation for Economic Cooperation and Development: Losses because of the financial crisis sparked by the US subprime mortgage crisis could rise as high as $422 billion. That figure was far lower than the $945B estimated last week by the International Monetary Fund [and] included losses of $90B in the U.S. alone. In 2007, the OECD's committee on financial markets estimated the losses at around $300B, "the highest, but correct, official estimate at that time.” OECD’s Thomas Weiser: "If losses reach this level, the recapitalization of banks would be essential to avoid the harsher economic impacts of de-leveraging, including a pronounced drop-off in credit extension. (AFP, Apr. 16th)

Lehman Chief: Subprime's End--Near; Pain--Not Over. “Lehman Brothers (LEH) CEO Richard Fuld said that that tension in the credit markets has begun to let up but still believes the environment "will remain challenging." Though the firm hasn't been hit as hard with write-downs as its competitors, Lehman has still fallen by around 45% in the past 12 months. Similar hopeful words came last week from two other investment firm chiefs--Goldman Sachs (GS)'s Lloyd Blankfein and Morgan Stanley (MS)'s John Mack. Both said during shareholder meetings that the end is near for the credit crunch, though it might last a few more quarters.” (Forbes, Apr. 16th)

Mueller: 'Subprime Debacle' Probe Expanded. “FBI director Robert Mueller: The FBI is now investigating 19 lending institutions… in the subprime mortgage collapse… Mueller told the Senate Appropriations subcommittee that… the investigation has been growing since January, when the FBI began looking at 14 firms… Officials have declined to name the companies that are under scrutiny, but two Justice Department officials confirmed reports that Countrywide Financial (CFC), the nation's largest mortgage lender, is a subject of the probe… Federal filings submitted by Bear Stearns (BSC) in January indicated a possible probe… Mueller [told] the senators… that the FBI "will need additional resources" to handle the increased case load.” (ABC News, Apr. 16th)

S&P May Cut $57 Bln Subprime Debt, Reviewing Loss. “Standard & Poor's will likely lower many of the ratings… on $57.1 billion of subprime-related debt… over the next few weeks because monthly performance data shows delinquencies and foreclosures continue to rise for deals issued in H2’07…. S&P said it is reviewing loss expectation for more than 17% of U.S. subprime debt deals issued in H2’07… It is also reviewing its rated collateralized debt obligation transactions with exposure to the affected U.S. subprime mortgage debt... A completed global review of its rated asset-backed commercial paper conduits and structured investment vehicles with exposure to these U.S. subprime bonds confirms that [those] ratings… are not adversely affected by the rating actions.” (Reuters, Apr. 16th)

Subprime Crisis’s Next Stop: Prime Mortgages. “[In] JPMorgan Chase earnings report Wednesday, nearly 3.5% of the bank’s prime mortgages now stand at least 30 days past due, up more than 200% over a year ago [and up] 40% since December. [In] Wachovia’s (WB) earnings… the number of souring “traditional mortgage” loans… stands at 1.15% of the business’s $48.9 billion in mortgages, an increase of more than double in the last three months alone… Should the trend [continue, it] will affect pools of mortgages that are much larger than… subprime debt. Mortgage Bankers Association: The mortgage industry wrote $656B in home loans during H1’07, and 69% were prime loans… only 26% were subprime mortgages.” (Wall St. Journal Blogs, Apr. 16th)

Experian Has Record Rise After Sales Beat Analysts' Estimates. “Experian Group Ltd., the world's largest credit-checking company, rose the most ever in London trading after saying second-half sales rose 21%, beating analysts' estimates, as growth in Latin America offset a slowdown in financial services in the U.S. and U.K… Sales excluding acquisitions, or organic sales, for the six months ended March 31 rose 2%, the Dublin, Ireland-based company said. Analysts had estimated total sales growth of 17.5% and organic growth of 1%.” (Bloomberg, Apr. 16th)

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Comments

[Chris1206]

FHA will be the government's cash cow. Every FHA loan has an upfornt mortgage insurance premium payment (UFMIP) of 1.5% of the loan amount that goes immediately into the US Treasury. Until 2005, that amount could be partially refunded to the borrower if the loan was paid off or refinanced. Today a client only gets his partial refund if he refinances the loan (and pays the new amount of UFMIP) into another FHA loan. This doesn't even address the .5% of the loan amount that is collected annually in the borrower's monthly payment. Has anyone seen an estimate of estimated revenue for FHA?

[Robert Trudeau]

Chris, the losses to the government on non-performing loans will far exceed the UFMIP revenue. Would you guarantee a loan on an asset that is falling in value? We are in unchartered water here.