S&P: Subprime Delinquencies Still Rising - Housing Tracker

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Includes: AIG, CFC, FMCC, FNMA, GM, IMPM, MER, NCC
by: Judy Weil

Subprime Fallout

S&P: Subprime Delinquencies Continue To Climb. “S&P: Subprime mortgages bundled into securities that were rated between 2005-2007 continue to increasingly default… At the end of April, delinquencies among 2005 vintage loans reached 36.8%, an increase of 2% from the previous month. Delinquent loans from 2006 totaled 37.1%, a 4% jump from March. About 25.9% of loans from 2007 were delinquent at the end of April, a 6% increase from March. Loans from 2007 continue to be the worst-performing of the bunch. After 12 months, cumulative losses in 2007 represent 0.49% of the original aggregate size of securities. After a similar period, 2006 vintage loans cumulative losses were 0.29%.” (AP via CNN Money, May 22nd)

Encouraging News on Subprime Mortgage Delinquency Roll Rates. “To get an early read on changes in credit quality in subprime… look at 1) the inflows, in dollars, of newly delinquent loans, and 2) the roll-rates of problem loans from early-stage delinquency, to later-stage, to foreclosure. [In February] dollar inflows to early-stage delinquency buckets had been falling for months… Roll rates are [still] improving… Of the four ABX indices of subprime mortgage debt: The level of new problem loans has declined for six straight months in the ABX 06-1 index, and has fallen for three consecutive months in the other three relevant indices… Deterioration in roll rates this year is running significantly lower than it was at this time last year.” (Tom Brown in Seeking Alpha, May 22nd)

ResCap Says Bondholders Tender $9.5 Billion of Notes. “Residential Capital LLC, the distressed mortgage-finance company, won support from most bondholders for a debt restructuring plan needed to stave off bankruptcy. GMAC LLC, ResCap's parent company: Investors tendered about $9.5 billion of notes as part of an offer to exchange or buy back $14B of debt for as little as 80 cents on the dollar. The tenders may be a temporary reprieve for ResCap, which said this month it may not be able to meet its June debt obligations. After six quarterly losses totaling $5.3B, ResCap is close to violating loan covenants and may still need $600 million to avoid default.” (Bloomberg, May 22nd)

When Hedges Fail. “Last month, it was UBS (NYSE:UBS), which made a decision based on "statistical analyses of historical price movements" that if it hedged its super-senior bonds against a price fall of somewhere between 2%-4%, then those bonds were fully hedged. Now it's Lehman Brothers (LEH): “Erin Callan, Lehman CFO, has said publicly that Lehman's previously successful hedges, which included bets against indexes such as the CMBX, which tracks the performance of commercial mortgage backed securities, are no longer performing well... Any second-quarter loss would be driven by both a reduction in the value of those holdings as well as the less effective hedging.” (Felix Salmon in Seeking Alpha, May 22nd)

The Systemic Effects of Countrywide Going Bust. “It looks increasingly likely that the deal of Bank of America (NYSE:BAC) buying Countrywide (CFC) may collapse: according to many banking experts once BAC does its due diligence on this deal it will become obvious that Countrywide is effectively bankrupt (negative equity) and saddled with a mountain of litigation and potential liabilities whose size are likely to be extremely large and uncertain… So if CFC goes bankrupt… what will be the systemic implication of the biggest banking bust in US history? Remember that CFC originated almost 20% of all mortgages in the US in the last few years.” (Nouriel Roubini’s RGE Monitor, May 21st)

Impac Loses $2.05 Billion, Gets SEC Inquiry. “Once an Alt-A powerhouse, Impac Mortgage Holdings Inc. (NYSEMKT:IMH) said Wednesday that it lost $2.05 billion during 2007, or ($27.10)/share, in a delayed SEC filing. The annual loss compared with a $75.3 million loss recorded one year earlier. Estimated taxable loss available to common stockholders for 2007 was $136M, or $(1.79)/share, compared to estimated taxable income of $79.5M or $1.05/diluted common share for 2006. Driving the loss was a huge $1.4B provision for loan losses, which Impac said was the “result of deteriorating market conditions, higher delinquencies and higher severities.” The lender shut down all origination activity in September 2007.” (Housing Wire, May 21st)

US Mortgage Applications Near Slowest Of 2008-MBA. “Mortgage Bankers Association: Applications for U.S. home mortgages fell to the second-lowest level of the year last week as interest rates rose. The MBA’s seasonally adjusted index of mortgage application activity fell 7.8% to 621.6 in the week ended May 16. The index touched its 2008 low in the week of April 25, when it hit 567. The MBA's seasonally adjusted index of refinancing applications declined 8.7% to 2,210.5 last week. The gauge of loan requests for home purchases dropped 6.9% to 352.5 in the period. Applications for refinancings fell 8.7%, to 2,210.5 from 2,422.1 the previous week.” (Reuters, May 21st)

Defective Moody's Program Issues Billions of Erroneous Aaas. “Moody's had a bug in a program used to rate complex debt securities (constant proportional debt obligations, a troubled subsector) in 2006 that led billions to be rated Aaa when they deserved grades as much as four notches lower… Moody's became aware of the error in early 2007 but did not mark the paper down to its correct level till 2008 when it was downgrading lots of other subprime paper. In other words, it waited until it could cover its tracks.” (Naked Capitalism, May 21st)

Countrywide, Mozilo in Hot Water Over Troubled Borrower Flap. “Countrywide Financial Corp. CEO Angelo Mozilo… and by extension the company he runs, found themselves in renewed hot water Wednesday after the Countrywide CEO mistakenly replied directly to a troubled homeowner Daniel Bailey’s form hardship letter, characterizing it as “disgusting.” Mozilo wrote: “This is unbelievable. Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the internet. Disgusting.” Bailey picked up the form letter off of the Web site LoanSafe.org, a borrower advocacy site started up to ostensibly help troubled borrowers navigate the maze of loss mitigation procedures.” (Housing Wire, May 21st)

Fed: Delinquency Rates Rose Sharply in Q1. “Residential real estate delinquencies are at the highest level since the Fed started tracking the data (since Q1 '91).Goldman Sachs chief economist Jan Hatzius: "The Fed’s first-quarter report on loan performance at commercial banks shows mortgage credit quality deteriorating at an accelerating pace… particularly significant because the mortgage holdings of commercial banks appear to be tilted toward higher-quality loans, with more prime and less subprime... The Fed data suggest that mortgage credit performance outside the subprime sector is deteriorating rapidly… Although subprime borrowers are more likely to encounter financial stress than prime borrowers… the qualitative outlook for the trajectory of credit losses in the much larger prime market is not all that different." (Calculated Risk, May 21st)

National City Eyes Sale Of Mortgages, Problem Assets. “After large mortgage losses drove National City Corp (NCC) to raise $7 billion of capital, CEO Peter Raskind said NCC… could review "various forms of good bank/bad bank structures" for troubled assets, including several billion dollars of lower-quality mortgages it kept when it sold its First Franklin Financial Corp subprime lending business to Merrill Lynch & Co (MER) in 2006. It said it was still trying to sell $5.3B of non-prime home loans as of March 31, after getting rid of just $407 million in Q1. Raskind [cautioned] that… sale prices for distressed assets remained "punitive," ensuring losses for sellers.” (Reuters UK, May 21st)

Housing Bill Could Be Bad News For Expensive Mortgages. “A Senate bill aimed at reviving the beleaguered U.S. housing market could make borrowing for a home more expensive in high-priced markets such as California and New York. If the bill passes, the limit on the size of loans that can be purchased by government-sponsored mortgage finance companies Fannie Mae (FNM) and Freddie Mac (FRE) will drop to $550,000 after spending 2008 at nearly $730,000. Loans purchased by Fannie and Freddie typically have lower interest rates because of the perception on Wall Street that the government-sponsored companies would be bailed out in the event of default.” (BusinessWeek, May 21st)

The Risks of Rescuing Borrowers. “Fannie Mae and Freddie Mac… are essential lubricants in today’s housing finance market, and if either stumbled, it could set off a worldwide economic slowdown. Howard Glaser, a mortgage industry consultant: “There’s real concerns about the degree of risk that F.H.A. is taking on… At what point does imposing new costs on [Fannie and Freddie] undermine their financial safety?” Lawmakers of both parties say… that the housing plan’s estimated $1 billion cost will be more than offset by the $700 million a year that Fannie and Freddie will hand over and by the billions of dollars in new fees the F.H.A. will charge borrowers and lenders.” (NY Times, May 21st)

TED Spread at Nine-Month Low, Signals Credit Easing. “Lending confidence at banks rose to the highest level in more than nine months, signaling the global credit crunch may be easing. The so-called TED spread, the difference between what the U.S. government and banks pay to borrow in dollars for three months, dropped to 77.7 basis points today, the lowest since August… The spread averaged 39 basis points in the seven months through July last year, before the global credit squeeze began… The TED spread, the difference in the yield on three-month U.S. Treasury bills and the three-month London interbank offered rate… for dollars was as wide as 2.03 percentage points in March.” (Bloomberg, May 20th)

Economic Outlook. “Nonprime mortgages have all but disappeared from the mortgage market. Moreover, with only limited securitizations of prime jumbo loans, rates on those loans are relatively high, and their share of total originations has shrunk significantly since last July. Rates for fixed-rate conforming loans have dropped to close to 6%... The persistence of relatively wide spreads in many markets suggests that investors continue to be worried about credit quality; Speculative-grade bonds [issuance] has been scant this year; and securitization markets for many types of mortgages continue to be impaired… Banks and other lenders [are] conserving capital and liquidity and limiting risk-taking.” (Forex Hound, May 20th)

AIG Raising $20B In Capital, Plans Asset Sales. “American International Group Inc. (NYSE:AIG) said Tuesday that it will raise $20 billion in new capital. It has raised $13B through selling common shares and equity units and will raise the balance by issuing debt. The capital is 60% more than the insurer had planned when it reported a $7.8B first-quarter loss. AIG also said it would sell “non-core” assets and cut operating costs... Oppenheimer analyst Meredith Whitney projected that big U.S. banks will have to set aside $170B in reserves to cover losses from delinquent mortgages, home equity loans, and credit cards by the time the crisis is over.” (Crain’s NY Business, May 20th)



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