Regulators Put the Squeeze on Subprime - Housing Tracker

Subprime Regulation Comes to the Fore

Wall Street, Lenders Face Subprime Scrutiny. “Federal prosecutors are stepping up their scrutiny of players in the subprime-mortgage crisis, with a focus on Wall Street firms and mortgage lenders. Prosecutors in the Eastern District of New York in Brooklyn have formed a task force of federal, state and local agencies that will involve as many as 15 law-enforcement agents and investigators. The U.S. attorney for the office, Benton J. Campbell, who supervises about 150 prosecutors, said the group will look into potential crimes ranging from mortgage fraud by brokers to securities fraud, insider trading and accounting fraud.” (Wall St. Journal, May 5th)

UBS May Cut 8,000 Jobs After 12 Billion-Franc Loss. “UBS AG may cut as many as 8,000 jobs as it grapples with the biggest credit writedowns of any European bank and a 12 billion-franc ($11.4B) first-quarter loss. Switzerland's biggest bank, which had a 3 billion-franc profit a year earlier, is set to spell out plans for layoffs when it reports detailed results tomorrow. The company will probably say it's eliminating between 2,500-3,000 jobs in its investment bank, more than 10% of the division, two people familiar with the matter said May 2.” (Bloomberg, May 5th)

FASB to Get Tougher on Subprime Loan Sell-offs. “The Financial Accounting Standards Board may change some accounting rules to make it more difficult for banks to get subprime loans off their books. [WSJ reports] FASB Chairman Robert Herz: The rules might require banks to keep loans on their books that they previously have been able to package and sell off or securitize. FASB voted last month to eliminate special securitization vehicles. Herz said banks would have to use other rules for off-balance-sheet vehicles and that these rules might get tougher as well. In addition, banks could face more rigid tests for which assets could remain off their books.” (Web CPA, May 5th)

Buffett Buys Subprime Mortgages, Freezes Resets. “Berkshire Hathaway has bought portfolios of subprime mortgages and has frozen resets that were due to send the interest rate on those home loans higher... Clayton Homes, which makes and provides financing on manufactured homes, purchased these subprime mortgages and sent letters out to all the borrowers involved telling them the interest rates will not be reset higher. Chairman Warren Buffett: “That's even though the contracts allow Clayton to increase the interest rates on these loans, the rates won't change. We're not in the business of resetting mortgages higher.” Clayton is a unit of Berkshire.” (MarketWatch, May 4th)

A Lender Gets Caught in the Currents. “An ill-timed expansion… into subprime-mortgage lending and the costly acquisition of a student loan firm — twin moves carried out near the top of frothy markets that quickly collapsed, [left lender] CIT on the financial precipice. In its 100-year history, CIT has traditionally engaged in the meat-and-potatoes business of providing loans and leases for heavy machinery, tech equipment and other staples of the manufacturing economy. But under CEO Jeffrey Peek, CIT spread its wings, offering a tour of the perils awaiting any firm that jumps into seemingly lucrative new arenas at the expense of focusing on markets that it knows and understands best.” (NY Times, May 4th)

Downgrades Show Storm Isn't Over. “ResCap’s credit rating was cut deep into “junk” territory after it unveiled plans to restructure $14 billion of debt and possibly borrow billions more from its parent, GMAC LLC. Countrywide’s debt rating was slashed to junk from investment grade by S&P after Bank of America Corp. (BAC) said it isn’t sure it will stand behind roughly $38B of Countrywide debt… Subprime-mortgage lender ResCap’s… proposal is aimed at averting a default that could force ResCap into bankruptcy and lead to more losses for GMAC and its owners, Cerberus Capital Management and General Motors… ResCap has around $4B in debt that comes due this year, and barely enough cash to cover it. (Wall St. Journal, May 3rd)

What’s Subprime’s Magic Number? “Will [H2’05-H1’07-issued subprime] loans follow the same path as in previous years? In 2000 and 2001, the growth in the 60-day delinquency rate slowed when those subprime loans were about three years old and peaked after a little more than four years, then started to fall… First American: For loans issued in 2005, the growth in 60-day delinquency rates has been effectively flat for four months at just over 30%... If delinquency rates begin to decline, it would mean that 2005 is following the pattern of previous years, even though underwriting standards were already weakening. That would give investors confidence that 2006 and 2007 might do the same, even though default rates would likely be higher.” (Wall St. Journal, May 3rd)

Insurers' Subprime Exposures Generally Relatively Low - S&P. “S&P said a vast majority of rated European and North American insurance companies, and the sector as a whole, have sufficient capital to withstand identified problems in their residential mortgage backed security [RMBS] exposures. S&P believes that the losses resulting from write-downs of underperforming RMBS, even after taking into account the financial strength of the bond insurers, will not generally present significant challenges for individual industry participants or for the industry… However, S&P said since it surveyed the North American and European insurance sectors for subprime-related RMBS exposures in August 2007, fundamental credit deterioration in the underlying mortgages has increased.” (Forbes, May 2nd)

Pimco Sees Hiring Opportunity In Wall Street Crunch. “Financial Times: Pimco is making it known on Wall Street that it is hiring. It has apparently approached between five and 10 top banks… and asked them to inform pink-slipped employees of openings at the big California fund manager... Pimco plans to increase its workforce, currently 1,100, by more than a quarter as it expands. It has conducted nearly 500 interviews, so far. Given the level of layoffs, it can afford to be very picky. As asset managers go, Pimco has fared relatively well, as many of its peers suffer outflows, especially from equity funds.” (Wall St.net, May 1st)

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