Previously, Fannie Mae and Freddy Mac required larger down payments (5% vs 3%) for areas that they designated “declining markets”, but they are dropping this classification, claiming that their improves underwriting systems make it unnecessary.
As a cynic, my guess what really happened is that they’ve discovered that most of the US is now a “declining market”.
That’s the gist of this article. Banks can’t resell the loans to make the deals, so they don’t make the loans, and so the deals do not go through.
The usual suspects say that it’s the bottom of a trough, though I wonder if there isn’t a lot further down to go.
Here Is The City News does a rundown on, “ust how much in writedowns and credit losses firms have written off per wholesale banking employee”, since the beginning of last year.
Dagon’s Donuts, this is grim.
The top 4 lost over a $million/employee, and the top 8 at are over $500K.
The always thoughtful Nouriel Roubini wonders, “How will financial institutions make money now that the securitization food chain is broken?”
In the good old days, you made money by originating a loan, and then collecting revenue from it, but today you make money by originating and then reselling the loan.
The resale, and the fees involved in what Roubini calls it “originate & distribute”, model generate your profit.
The kicker is that but the new model appears to have broken down:
This food chain of fees on top of fees is now broken: securitization of mortgages, that was running at the annual rate of $1,000 billion in January of 2007, was down 95% to an annual rate of $50 billion by January of 2008. So the process of generating fees and commissions is broken.
It’s really scary, because these companies, by which I mean investment banks and a lot in the way of commercial banks, increasingly look to have no business model at all. The model until mid 2007 was “make income out of securitization fees rather than by holding the credit risk”, but no one trusts securitized debts any more.
What’s more, it’s clear that the flight from these instruments is a rational act by the market. What’s more, it is reasonable to expect, even in the absense of regulatory reform, that these instruments will not be accepted by the market for the next decade, the time that lessons stay learned in Wall Street.
So, somewhere north of 20% of our financial industry has no reason to exist any more.
Foreclosures are up 16% over a year ago. It’s not just the US.
Of course, the UK has in recent years hewed as closely as possible to the US in terms of banking and financial regulation, hence my frequent references to the contagion of Anglo-Saxon capitalism.
Rolfe Winkler of Option ARMageddon makes a very simple point, that housing affordability is based on monthly payments, not on house price, and since house prices are falling with historically low mortgage rates, we can reasonably expect further price drops as mortgage rates return to their historical numbers.
With real inflation nearing double digits, and there being an eventual limit to just how long foreigners are willing to supply us cheap money, mortgages have to return to something nearer to their historic rates of around 9%, possibly with some overshoot.
BTW, here is how interest at a given rate influences house price:
By my maths, it looks like we might see an inflation adjusted drop of around 50% from peak, which means that people who bought a house at peak might be under water for more than 10 years barring significant inflation.
Which makes me more inclined to support.
It appears that they object to the idea that they will have to take a haircut to get FHA insurance, specifically that the FHA will not insure a loan unless the principal is reduced to 85% of a home’s worth.
Boo f&%4ing hoo.
Maybe they can sue Alan “Bubbles” Greenspan for the difference.
After raising the limits for loans that purchased by Fannie and Freddie, which carry a lower interest rate, in February, Barney Frank is now looking into why so few of the new “non-jumbo jumbo” loans have been made.
The raising of the cap from $417,000 to $729,750 was intended to help property move in high cost markets, like Frank’s district.
The simple reason that he is not seeing much in the way of these loans is because banks are not lending to anyone.
We are seeing an unprecedented tightening in mortgage lending standards, and so very few loans are being made.
With all the hooplah over Congressional action to allow Fannie Mae and Freddie Mac to make more and larger loans, the financial press is just starting to notice that maybe it will mean larger, and perhaps a quicker problems for the GSEs.
I said this when they originally expanded their services to some “Jumbo” mortgages that this was ill advised, and with them controlling about 80% of the mortgage loans bought by investors, this is going to get ugly.
BoA has announced in a regulatory filing with the SEC that, “hasn’t decided whether to guarantee Countrywide debt after BofA’s $4 billion takeover of Countrywide, which is supposed to be completed in the 2nd half of the year.
Basically, once it’s bought, if the corporate structure is right, Countrywide could declare bankruptcy and leave the bond holders with nothing, which would mean that it would not BoA’s problem.
Alternatively, BoA could be attempting to spook the bond holders so that they sell to BoA at a discount.
This system of corporations and shell companies is completely out of control.
I’m just saying.
It’s called the Home Ownership Preservation Loan program.
Looking at the program, I think that it is directed primarily at the people who should have known better, mortgage lenders and home builders, with benefits “trickling down” to ordinary programs.
So once again, we see socialism for the fat cats, and capitalism for the tax payers.
As Tanta of CR notes, this would be at little cost to the government, at least if the borrower does not walk away from the home, and there are incentives to prevent that, but the lender (more accurately the holder of the loan) may not be willing to make the concessions to qualify.
If the borrower is at low risk of default, why should the lender take a haircut, if it they are at high risk, do they want to be at the behind the US Treasury in line?
Tants’s take, and mine, is that it’s PR more than a serious program.
The FDIC proposal from their web page:
Home Ownership Preservation Loans
The FDIC is proposing that Congress authorize the Treasury Department to make loans to borrowers with unaffordable mortgages to pay down up to 20 percent of their principal. The repayment and financing costs for these Home Ownership Preservation (HOP) loans would be borne by mortgage investors and borrowers. This approach is scaleable, administratively simple, and will avoid unnecessary foreclosures to help stabilize mortgage and housing prices.
This proposal is designed to result in no cost to the government:
- Borrowers must repay their restructured mortgage and the HOP loan.
- To enter the program, mortgage investors pay Treasury’s financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment.
- Treasury would have a super-priority interest — superior to mortgage investors’ interest — to guarantee repayment. If the borrower defaulted, refinanced or sold the property, Treasury would have a priority recovery for the amount of its loan from any proceeds.
- The government has no continued obligation and the loans are repaid in full.
Mortgage Restructuring:
- Eligible, unaffordable mortgages would be paid down by up to 20 percent and restructured into fully-amortized, fixed rate loans for the balance of the original loan term at the lower balance. New interest rate capped at Freddie Mac 30-year fixed rate.
- Restructured mortgages cannot exceed a debt-to-income ratio for all housing-related expenses greater than 35 percent of the borrower’s verified current gross income (‘front-end DTI’). Prepayment penalties, deferred interest, or negative amortization are barred.
- Mortgage investors would pay the first five years of interest due to Treasury on the HOP loans when they enter the program. After 5 years, borrowers would begin repaying the HOP loan at fixed Treasury rates.
- Servicers would agree to periodic special audits by a federal banking agency.
Process:
- Mortgage investors would apply to Treasury for funds and would be responsible for complying with the terms for the HOP loans, restructuring mortgages, and subordinating their interest to Treasury.
- Administratively simple. Eligibility is determined by origination documentation and restructuring is based on verified current income and restructured mortgage payments.
Funding:
- * A Treasury public debt offering of $50 billion would be sufficient to fund modifications of approximately 1 million loans that were “unsustainable at origination.” Principal and interest costs are fully repaid.
Eligible Mortgages:
Applies only to mortgages for owner-occupied residences that are:
- Unaffordable – defined by front-end DTIs exceeding 40 percent at origination.
- Below the FHA conforming loan limit.
- Originated between January 1, 2003 and June 30, 2007.
Well, the consumer confidence index fell to its lowest level in 5 years, what’s more, the Frog consumers are bumming more than they have in 20 years.
Sarkosy is not going to find a lot of support for making the French economy more “Anglo-Saxon” right now.
In real estate, foreclosures jumped 23% in 1Q of 2007, which is on a pace for a 200% increase in foreclosures in 2008, while the Case-Shiller Home Price index fell 13% year over year in February.
This is not over. It’s not close to being over.
In the ever entertaining Countrywide sage, the mortgage lender posted a $893 million first-quarter loss.
I still wonder when some Bank of America investor finally starts screaming about a proxy fight over their purchase of Nationwide. Every day, the deal looks worse and worse.
As to energy, oil is down, but gasoline is up.
The dollar is doing better now, $1.5613:€1.0000, as I type this, which is about 3% stronger than when it was above $1.60.
I put down most of the movement over the past week to people betting on what the Fed will do in interest rates, and the consensus that it will not cut.
Oil, however, just went up again, as did gasoline, because of reports of a pipeline attack in Nigeria. The reality is that supplies are so tight that even a minor disruption causes a minor panic.
The New York Times has discovered that the housing crisis has moved to tony Greenwich, CT. And so they cover it with wringing hands, because it interests their readers.
For the rest of us, the fact that the mosts states are having financial meltdowns, and many are near broke, because of falling tax revenues, are a matter of greater concern.
Also, Consumer confidence is at a 26 year low. That’s as in 1982, when we were at 10% unemployment, and so consumers are scaling way back on spending.
In a sign of the apocalypse, Moody’s is downgrading some more of the Alt-A mortgage backed slop. Who knew that a ratings firm would actually do its job.
It’s been a busy day for AMBAC, the monoline insurer, with a report that it may need to seek more capital after posting a $1.66 billion dollar loss for the quarter. Further confirming this report is the fact that their interim CEO is saying that there are no liquidity issues and that its ratings are solid.
S&P is back stopping Ambac on this explicitly stating that the loss will not lead to a downgrade.
Of course if the ratings agencies, or for that matter the financial markets, were at all honest, most the monoliners would already be rated as junk.
Barney Frank’s bill is better than the Senate version, but I think that any bill that does not allow for restructuring of mortgages through bankruptcy is a lose.
First, the Euro just hit an all-time high, $1.5968:€1.0000 (see also here)
I don’t think that it’s going to get better either, because its clear that Bernanke is not going to raise rates any time soon, because Euro zone inflation just hit an all time high of 3.6%, which means that the ECB will raise rates, as their only official duty is to prevent inflation, as opposed to the Feds dual roles of both price and employment stability.
This seems to be reinforced by the statements of Jean-Claude Trichet, the president of the ECB, who is saying that the European Central Bank is still focused in inflation, and that there is, “a strong belief that a solid anchoring of inflation expectations is of the essence”.
US inflation was pretty much in line with forcasts in March, 0.3% for the CPI, and 0.2% for the so called “core rate”
Finally, oil broke the $115/bbl barrier, hitting $115.07/bbl.
Real estate is still trending worse. We have the New York Times writing about how the troubles have gone global.*
We also are now seeing discounts up to 60% on the last sale price in bank auctions on properties in South Florida.
And it won’t get better soon, because when pollsters ask about buying a home, respondents reply, “What??? buy a house now??? Are you out of your bloody mind???“.
Energy prices are surging, with oil closing at a new all time high, $111.76/bbl.
Also, it looks like Wachovia is hemorrhaging, and so is cutting dividends and planning to offer stock for much needed capital.
*As an aside, I’m not surprised that Ireland is in this select group. The “Celtic Tiger” has always seemed to me to be closer to Thailand and Indonesia than the rest of the EU with its prosperity being almost completely driven by low wages and real estate, and Spain is a close second on this. This is not to say that they will become 3rd world countries, but that they both may end up far closer to EU members like Poland, Slovakia, Hungary, and Croatia than they had previously imagined.†
†Mass flows of speculative capital always produce a nasty hangover.
Foreclosures since late 2006
Foreclosures in Denver, care of The Big Picture
The average consumer is smarter than Alan Greenspan and the rest of the economic glitterati, because consumer sentiment dropped to a long time low (also here).
In energy, gasoline prices have hit another all time high, and oil prices seemed to have settled comfortably about $110/bbl.
That being said, it’s not just oil imports, inflation in non-energy imports in March surged 1.1%, with a year over year increase of 5.4%.
That 1.1% number is the largest jump ever recorded.
There is a smidgen of bright news, the Fed’s excrement for cash exchange program did not sell out this time, with only $33.95 billion of the $50 billion offered being taken.
In real estate, we have US banks killing the no down payment loan, which is long overdue. Even with a small amount of skin in the game, home borrowers tend to be much better risks.
Housing is tanking overseas too, with UK mortgage rates going up, despite BoE rate cuts, so they are pushing on a string there too.
But’s it’s not just us Anglo-Saxons, because Dutch home sales are tanking too, and let’s not talk about Spain.
Also, GE released earnings, and they sucked, which surprised the experts, but not me.
People are scared and not buying stuff. GE makes stuff. Any questions.
So, FDIC Chairwoman Sheila Bair calling for an “activist” government response to the mortgage meltdown. Let’s make this clear, Ms. Bair is a Bush appointee, and when a Bush appointee is asking for government activism, we can be sure that we are well past being up to our hips in alligators.
We’re at least nipple deep in alligators.
In the world of pipe dreams, we have the EU calling for a coordinated response to the credit squeeze.
The Euro-Wimps just don’t get it. This is America. We don’t do joint action based on a deliberate approach to everyone’s long term best interest. We shoot first, and ask questions later, and when the dead guy we shot doesn’t answer, we water board him, and then we bail out the bad actors, like Bear Stearns.
In the ever entertaining world of the monoliners, Fitch has cut MBIA’s rating to AA from AAA, because they are under capitalized (broke).
The disgrace here is that it took so long, though you knew that it was coming when MBIA asked Fitch to stop rating it about 3 weeks ago.
In the no surprise category, bankruptcies jumped 30% over in march 2007 year over year.
And for those of you who think that commercial real estate will be uneffected by the crash, vacancies at malls have skyrocketed.