Barron's: The Subprime Crisis May Be Over [Housing Tracker]

by: Judy Weil

Subprime Fallout

Buyers Seek to Force Repurchase by Banks; Potential Liability Could Reach Billions. “Unhappy buyers of subprime mortgages, home-equity loans and other real-estate loans are trying to force banks and mortgage companies to repurchase a growing pile of troubled loans, [using] provisions in many loan sales that require lenders to take back [bad] loans... Some major lenders are setting aside large reserves to cover potential repurchases. Countrywide Financial Corp. (CFC) SEC filing: CFC’s estimated liability for such claims climbed to $935 million as of March 31 from $365M a year earlier. Countrywide also took a first-quarter charge of $133 million for claims that already have been paid.” (Wall St. Journal, May 28th)

ABX Index Not Reflective of AAA RMBS Market: Standard & Poor’s. "S&P: One of the most widely used performance-tracking indexes for the U.S. structured finance market, the ABX Index, might not be as good a gauge of credit risk for AAA-rated mortgage bonds as some might think. Andrew Giudici, a director in S&P’s U.S. RMBS surveillance group: 'The ‘AAA’ tranches that were included in the original ABX indices were the last-pay ‘AAA’ bonds in their respective deals, which are relatively more exposed to losses than ‘AAA’ classes with a priority claim on cash flow.' The ‘AAA’ classes share equally in any losses on a pro rata basis once credit enhancement is exhausted, structural subordination does exist in the form of payment priority — and that subordination often serves to protect senior-most bondholders.” (Housing Wire, May 27th)

Signs of a Waning Subprime Crisis. “1) Conservatively, the financial community has, in response to prospective subprime losses, written off, written down, and lost market value to the tune of some $350 billion. 2) If all $1.2 trillion of outstanding subprime debt were to go bad, of course, these write-offs, etc., would be inadequate. Since some two-thirds of subprime borrowers, even at this late date, are still current on their obligations, such a severe outcome is, however, hardly likely. 3) A more reasonable expectation, then, if still a pessimistic one, is a default on the one third of the subprime mortgages that are either already in foreclosure or are significantly late on their payments, about $340B in all.” (Barron’s, May 27th)

Questions Bubbling on Bear Stearns’ Mortgage Book. “Sources have suggested… that JPMorgan (NYSE:JPM) executives would need to reconcile the values assigned in Bear Stearns’ mortgage book with valuation methods already in place at JPMorgan. While none of our sources have explicitly said that Bear’s mortgage book is misvalued… the Financial Times suggests that some problems may yet be in the offing: “Two senior Bear Stearns executives who moved to senior positions at JPMorgan Chase just weeks ago are leaving the bank. The departure of Jeff Mayer and Craig Overlander comes amid questions about the value of the Bear Stearns mortgage book.” (Housing Wire, May 27th)

ResCap Increases Loan Modification Limits, Alters PSA Terms. “Moody’s Investor Service: Troubled lender Residential Capital, LLC is taking key steps to enable easier loan modifications on mortgages involved in certain RMBS transactions it backs. The rating agency said that Residential Funding Company, LLC — a ResCap subsidiary that was at one time among that largest underwriters/issuers of subprime RMBS — had increased the limits on the number of loans in certain residential mortgage pools that were permitted to be modified, although further details weren’t made available.” (Housing Wire, May 27th)

NPR on Mortgage Quality Control. “A bankruptcy examiner in the case of the collapsed subprime lender New Century recently released a 500-page report, and buried inside it is a pretty interesting detail. According to the report, some investment banks agreed to reject only 2.5% of the loans that New Century sent them to package up and sell to investors.” (Calculated Risk, May 27th)

Tentacles Of Subprime Crisis Reach To Duluth's Rainy-Day Fund. Minnesota: “Duluth's reserve fund… has been left precariously low after a bad investment tied to a subprime mortgage lender. If the city were financially healthy, it would have about $8 million in the reserve fund, or [around] 10% of the general fund budget... In fact, the fund has about $1.6M, or about 1% of the general fund balance… The fund balance is also crucial when the city borrows money for a project, because… Moody's and S&P look at the reserve fund when assigning ratings to a borrower. On July 24, the city plans to bond for more than $40Mto finance the Duluth Entertainment Convention Center expansion." (Star Tribune, May 27th)

Fannie, Freddie See Retained Portfolios Surge in April. “As legislators and regulators look to both Fannie Mae (FNM) and Freddie Mac (FRE) to prop up an ailing U.S. housing and mortgage market, both GSEs ramped up their portfolio purchases dramatically in April as wide MBS spreads in March led each to bulk up on holdings of their own securities. Freddie Mac saw its retained portfolio soar to a record $737.54 billion in April — even making the rare run past sister GSE Fannie Mae, which saw its portfolio grow to $728.41B.” (Housing Wire, May 26th)

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