Alt-A Default Warnings Grow Louder [Housing Tracker]

Mortgage Trends 

Fixed Rates Draw Most U.S. Refinancing. “Freddie Mac (FRE): Borrowers are moving from adjustable- to fixed-rate mortgages even though some fixed rates are higher. In Q2, 97% of prime borrowers with conforming adjustable rate mortgages and 87% of those with hybrid adjustable rates moved to fixed rates when they refinanced… Frank Nothaft, VP and chief Freddie economist: Borrowers are choosing fixed rates, although borrowers with 1-year adjustable-rate mortgages would currently save about 3/4 of a percentage point compared with 15-year, fixed-rate mortgages… "Teaser rates on ARMs have largely disappeared… Without an extra discount ARMs just aren't attracting many borrowers in today's market." (The Money Times, Aug. 12)

Fannie Mae Raises Mortgage Servicer Incentives. “Fannie Mae (FNM) is raising the fees it pays servicing companies to renegotiate loans, aiming to cut costs by averting more mortgage defaults. The new incentive fees are for repayment or loss mitigation plans. Fannie said it will pay $700 for each successful modification completed on a conventional home loan, for example. The servicer also must stop charging the borrower $500 to cover administrative processing costs but can keep charging for out-of-pocket expenses for credit reports and other allowable documentation… On July 31, Freddie Mac boosted the incentives it pays mortgage servicers to help more borrowers renegotiate loans and curb rising delinquencies.” (Reuters, Aug. 12)

Freddie Mac Q2’08 Earnings Call Transcript. David Hochstim – Buckingham Research Group: “Fannie Mae earlier this week announced an increase in delivery fees on certain loans. Have you – you haven't done anything like that, I guess. And if you haven't, are those possible fee increases reflected in your assumptions and reflected in the capital requirement on 11 or is that another potential benefit? …There is a spread between jumbo rates and conforming rates today. It's over 100 basis points. It would seem that you have a lot of room to capture some of that value for shareholders.” Patti Cook, EVP, Chief Business Officer: “Everything in our presentation today reflects the g-fee and delivery fees that are currently in force. We regularly, constantly are reviewing the adequacy of those fees in this market environment, and we will continue to do so and consider the appropriateness of our pricing. I think your comment on the jumbo market, the jumbo market is interesting, so far the volumes there have been really small, and we will continue to evaluate our pricing, but I don't see it right now as having meaningful impact on any of our financial results or our capital management.” (Seeking Alpha, Aug. 6)

A Danish Fix For The US Mortgage Crisis. “Treasury secretary Hank Paulson has suggested the use of covered bonds, a mortgage-financing vehicle popular in Europe. I would recommend the system of mortgage credit used in Denmark, where loan-to-value ratios and underwriting standards are strictly enforced by a single, strong regulator. These mortgages are transformed into instantly tradable bonds. Cover for the bonds is provided by both the mortgages and the credit of the financial institutions issuing them. The mortgages remain on the balance sheets of the issuers, eliminating the moral hazard inherent in the US system, which is based on earning fees from selling them on to the market.” (Financial Times, Aug. 11)

Real Estate and Credit Woes Take Toll on Title Insurers: Report. “Insurance data firm A.M. Best: Direct premiums written for the title insurance industry were down 14.3% in 2007, driven by sharp reductions in premium volume for California and Florida. Further, title industry policyholder surplus declined by nearly 22%, largely the result of national writers; regional companies posted a modest gain in surplus. Pretax operating income and net income were down 64.7% and 69.9%, respectively, driven by net underwriting losses of $80 million last year. Investment income was flat, too, at $508M vs. $509M in 2006.” (Housing Wire, Aug. 11)

Lex Gets It Very, Very Wrong On Alt-A. “[Optimists say] Alt-A borrowers have better credit records than sub-prime debtors, and the pool of Alt-A mortgage backed securities is smaller… [But] take a borrower with poor credit history, add in an adjustable-rate loan, DTI underwritten at the teaser, stated-income underwriting, and you’ve got a layer cake of risk... Alt-A borrowers face similar risk-layering, including piggybacked second liens and stated income borrowing. When it comes to RMBS, it’s not about the sheer volume of securities issued; it’s about the credit enhancement that exists to protect investors once collateral defaults occur… Alt-A is so much thinner in its padding [than subprime] for losses that a lower default rate could hurt investors in Alt-A deals far worse than anything we saw in subprime.” (Housing Wire, Aug. 11)

Mortgages Made in 2007 Go Bad at Rapid Clip. “WSJ/FDIC report: Mortgages issued in H1’07 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated. The analysis shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months. The data reflect delinquencies as of April 30.” (WSJ, Aug. 7)

 

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Comments

[billddrummer:]

Hi Judy,

Something else that I've mentioned previously is the impact of rate resets on the Alt-A mortgage tranches. Many borrowers in Northern NV took out Alt-A loans with teaser rates, piggybacked a variable rate second, and thought their homes would appreciate fast enough to refinance in a couple of years to a fixed rate.

As we've all found out, that's not happening now. With home prices falling, many of those borrowers are underwater now. And when the resets kick in, they won't be able to handle the new, higher payments.

A second wave of defaults seems more than plausible, as these newer mortgages reset and payments cripple the buyers.

The good news is that for people with cash and good credit, there will be some great homes available at a fraction of their previous prices.

The bad news is that not too many people have cash and good credit, who want to try to catch a falling knife.

2008 Aug 13 12:50 PM

[SA Editor J...:]

Hi Bill,
I thought of you when I was posting this one. I know you've commented on this before. Thanks for keeping up,
Judy

2008 Aug 13 05:42 PM

[billddrummer:]

Thanks for the kind words. I truly enjoy your commentary!!

Bill


On Aug 13 05:42 PM Judy Weil, SA Editor wrote:

> Hi Bill,
> I thought of you when I was posting this one. I know you've commented
> on this before. Thanks for keeping up,
> Judy

2008 Aug 14 11:48 AM