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”.
It turns out that investment bankers in “the City”, London’s equivalent of Wall Street, received £13bn bonuses this year.
Obscene bonuses when they are losing their clients money hand over fist….Gotta love Anglo-Saxon klepto-capitalism.
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.
In the Washington Independent, Jonathan Macey asks a very important question, one that I missed completely: If Bear Stearns was too big to allow it to fail, why was it not broken up under antitrust laws?
In fact, there are plenty of tools at the regulators’ disposal to deal with systemic risk and other catastrophes before a cataclysmic event occurs. In particular, the purpose of the antitrust laws is to promote and protect competition and make sure that no single firm grows so large that it threatens the entire economy.
I’m kind of embarrassed to have missed this.
I would also note that if regulators want to be proactive, the best solution for everyone right now is to break up the large investment banks so that they aren’t too big to fail.
Go read.
Seeing as how the FHA is a big part of the Congressional mortgage bailout bill, the fact that the FHA is making major changes to how it approves loans could be very significant.
Basically, it comes down to their using FICO scores to determine premium rates for their mortgage insurance, which is a major change.
Remembering that the GSEs are, after the US Government, the 2nd and 3rd largest borrowers in the world, one wonders if they are in trouble, if so, how badly, and what happens if things go pear shaped.
Read it, and take your time to absorb the information. It is a primer, but is by no means simple.
The basic rundown is that:
The question he doesn’t answer, and that neither he nor I can answer, is how much worse things will get, and whether the GSEs will need a bailout as a result.
Me, I’m a bear.
The employment data is done for the week, so we have energy news, where Oil, after breaking $135/bbl then settling around #131, is now back above $132/bbl, and gas prices are trending up again, though some of the latter is no doubt due to the upcoming 3 day weekend.
The dollar is trending down against all major currencies, hitting $1.5755:€1.0000, a bit below the $1.60 record, but not by much.
In real estate, we have existing home sales falling 1% in April, no signs of the foreclosure rate abating, and inventories soaring.
Is it any wonder that mortgage lenders are tightening standards to where they were a few deccades back?
This credit tightening is going to take an economy already in recession*, and throw it down a well.
On the brighter side, it appears that the municipal bond market has finally shaken itself out a bit, recovering from the auction rate security implosion of a few months back.
*Yes, I know that it’s not official yet, but we know the reality when it bites us on the ass.
In order to raise cash following its disastrous investments in the US mortgage market, UBS is holding a fire sale on its own stock, in order to raise needed capital.
UBS AG said Thursday that it would raise $15.5 billion in a rights issue at a 31% discount below the current share price.
UBS (UBS), hard hit by its exposure to the U.S. mortgage market, said it will sell new shares at $20.09 each to existing shareholders, compared with the closing price of $29.31 on the Zurich exchange Wednesday.
Shareholders will receive one subscription right per share held, with 20 of the rights entitling the holder to buy seven new shares. The new rights will be tradeable, the bank said.
Needless to say, this serves to dilute share holder equity, and it shows that there is just a bit of desperation here.
It’s pretty clear that if Bank of America does not go through with the purchase, Countrywide is insolvent, and it gets shut down, because it is, by any standard, insolvent without a white knight of some kind.
Nouriel Roubini considers this to be a distinct possibility:
The views of Whalen are – based on a survey I made of banking experts – shared by most bank analysts. On May 2nd S&P cut Countrywide’s rating to junk; while on May 5th a number of analysts recommended that BAC walk away from this lousy deal. BAC is already sitting on a potential loss of about $1.3bn from its initial $2bn stake in CFC but as one analyst put it: “I hope Bank of America isn’t throwing good money after bad”.
Thus he raises the question as to what exactly such a collapse might mean, given that Countrywide has originated nearly 1/5 of the mortgages in the US in recent years.
He takes a look at the bigger picture:
Of course the bust of CFC is only a symptom of a much bigger systemic banking problem in the US: with 47% of the assets of all large US banks being related to real estate (residential, commercial, etc.) and with 67% of assets of smaller banks being related to real estate hundreds of smaller community banks and dozens of regional banks and a few national banks will be bankrupt in the likely scenario that home prices fall at least 20% (they are already down 14.7% from peak based on the Case and Shiller/S&P Index) and possibly as much as 30% by the time they bottom out in 2009-2010.
That’s hundreds of banks, some of them of a fairly significant size, that end up liquidated and under FDIC stewardship.
If he is 10% right, then we aren’t even half way through the down slope on this thing.
That commie pinko rag the Financial Times discovered that Moody’s improperly rated a complex entity called a constant proportion debt obligations (CDPO) giving them the much desired AAA rating, when it should have been 4 levels lower, Baa.
Moody’s was the second rater, in addition to S&P, which also rated them as AAA, though a number of other ratings agencies, Fitch Ratings and DBRS, disputed rating these securities so highly. (There is a graphic at the link that is rather byzantine, which is a sign to run the other way):
The results showed that early CPDOs might lose between 1.5 and 3.5 notches in the Moody’s Metric, an internal measure, which equals up to four ratings notches.
Some Moody’s analysts had concerns. With so many transactions from other banks in the rating pipeline, the code could not be left as it was. The bug was corrected.
At the same time, the documents record that Moody’s staff looked at how they could amend the methodology to help the rating.
Some of the most senior managing directors in Moody’s European structured finance division were involved in meetings to discuss the updating of the methodology for rating CPDO-like transactions in February.
The staff also looked at reducing assumptions about the future volatility of the credit markets so that Moody’s model only anticipated minor moves in credit indices over the next 10 years.
This had the effect of reducing the negative impact on the ratings of correcting the code error.
So, they goofed on a rating, but S&P thought that everything was just ducky, and their reaponse was how do we cover this up.
It’s no wonder then that the agencies are vehemently opposed to the idea of guaranteeing the quality of their ratings. Because it’s a fundamentally dishonest mindset in a business that appears increasingly dodgy.
As Tanta of calculated risk notes, it’s the last two paragraphs of the story (first link)that are scary:
The world’s other major credit agency, Standard and Poor’s, was the first to award triple A status to CPDOs but many investors require ratings from two agencies before they invest so the Moody’s involvement supplied that crucial second rating.
S&P stood by its ratings, saying: “Our model for rating CPDOs was developed independently and, like our other ratings models, was made widely available to the market. We continue to closely monitor the performance of these securities in light of the extreme volatility in CDS prices and may make further adjustments to our assumptions and rating opinions if we think that is appropriate.”
This implies a sort of mutual back scratching to generate fees that makes all of the ratings suspect.
Federal Reserve Vice Chairman Donald Kohn is now giving some pretty strong signals that there will be no further rate cuts, which indicates that the Fed might be a bit concerned about inflation now.
The currency markets are most definitely concerned about inflation (which is another word for currency devaluation), and so the dollar has dropped. It’s near a month low.
Oil just smashed the $130 barrier, settling at $133.17/bbl, and retail gasoline hit another record.
Real estate continues to face downward pressures, with Mortgage applications falling 7.8%last week. So even though we are in buying season, people are not looking to buy.
Finally, we have what appears to be the collapse of a monoliner insurer with CIFG Guaranty having its rating cut to junk status. They were downgraded from AAA in March, and Moodys just downgraded them further from A1 to Ba2, 7 levels at one swoop.
The business for monoliners is dependent on having an AAA rating. Put a fork in them, they are done.
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.
In the middle of a housing crash, with prices still falling, Fannie Mae has reduced down-payment requirements to as low as 3% on some loans.
The only thing that I can think of is that they hope that this sort of gesture will keep Congress from looking too closely at tighter restrictions.
Bad move, because it opens them up to even more risks.
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.
It looks like that will be one of the conditions set down by the Senate Republithugs to allow the bill housing bailout to the floor.
Senator Dodd’s bill also creates a housing trust fund with resources from Fannie Mae and Freddie Mac to build or preserve rental housing for extremely low and very low income people. Senator Shelby wants those funds to be used to pay for the new FHA program instead.
I’m not sure what upsets me more, the ‘Phants balancing the budget on the back of people who are closest to being homeless, or the fact that I’m not surprised by their venality and evil.
On the good news side, Leading indicator increased 0.1% to 102, the first back to back gain in about 6 months. I’m calling a dead cat bounce.
One of the reasons is because of good news like, southern California house sales “surging” 22% from March to April, where the reporter ignores the fact that while this is a month-to-month gain, year over year, it’s still a 19% drop, and one of the weakest Aprils on record.
So Cal has a Mediterranean climate, which means that March is wet. People don’t house sit when it’s wet.
It also ignores the small fact that 34% of those sales were REOs, real-estate owned properties. So these were basically foreclosed properties.
It’s why California Luxury home prices fell for the 2nd straight quarter.
Not only are real estate prices still falling, but Commercial property prices are falling, the most since 2000. (A critique of the financial press on this in a later post)
In contrast to Bernanke and Paulson, Jean-Claude Trichet, head of the European Central Bank is saying that the credit crunch is ongoing. I think that this is true, and portends a major shift in the financial markets. (Again, I’ll go into more detail in a later post)
As to why, perhaps the fact that banks are doing accounting backflips to keep $35 billion in losses off of their balance sheets justifies a lack of faith in the financial markets and financial industry.
Of course, boneheaded moves like UBS blowing $24 billion by deciding to expand into asset based securities further erodes people’s confidence in financial “professionals”.
My cats could do better on the cat-turd futures market than these guys.
As a result, we are seeing another big LBO foundering, this time the the $51.8 billion Bell Canada takeover, what is (was?) to be the largest LBO ever.
The homeowner was $365,000 under water after buying the house with no money down in June 2005, according to a spreadsheet listing about 30 loans for sale by a national mortgage servicer that Gutierrez referred to in his truck. If Gutierrez bought the note for 20 cents on the dollar, or $73,000, he could probably get the owner to leave by giving her $5,000 for moving expenses, then sell the home for about $150,000, well below even the neighborhood’s declining market value, he said. That would leave him a profit of about $70,000.
I’m not sure how I feel about the ethics of all this.
It seems that lenders, who should have known better, are the ones who are getting the worst haircut.
It appears that Freddie Mac has made some significant changes to its accounting system, to the tune of 2.6 billion dollars.
“They put a lot of lipstick on this pig including several accounting changes that have given them a one time step-up,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York.
Only they are implicitly backed by the taxpayers.
Once again, it’s, “Level 3 assets, a category that indicates the holdings are so illiquid that they can only be priced using the firm’s own valuation models.”
There’s that word again, illiquid. And it’s the valuation model for level 3 assets that got us into this mess.
They’ve just found a pile of crap, and concluded that there is a pony beneath.
The answer is because they actually have no contact with those homeowners.
Most interaction on the loan is being done by servicers who were hired to process payments, not the holder of the loan. It’s a fairly low margin business, 0.25% of the principal, and a lot of the profit is in things like late fees, etc.
They don’t negotiate because their skin is not in the game, and because it is more profitable for them not to negotiate.
Capitalism 101.