Archive for October, 2008
Half of U.S. homeowners live in a state of denial about falling home values, according to a third quarter homeowner confidence survey released Wednesday by real estate information providers Zillow.com. The survey found that while 74 percent of homes have lost value during the past year, a full 49 percent of homeowners said they believe their home had either maintained or gained value during that time.
Homeowners might be overly optimistic about home values, but at least the perception gap has lessened somewhat during the last quarter.
The survey showed that Zillow’s Home Value Misperception Index, which measures homeowners’ perceptions of their home’s value over time, decreased to 16 in the third quarter, down 50 percent from 32 in the second quarter. An index of zero would mean homeowners’ perceptions agreed with actual values, so the lower the number, the more realistic the perception. Read the survey results.
“After one of the most turbulent quarters in history for the U.S. economy and housing market, you’d expect the reality of dropping home values to start sinking in,” said Dr. Stan Humphries, Zillow vice president of data and analytics, in a press statement. “We are seeing some movement toward more accurate perceptions of home value declines, but there’s still a significant gap between reality and perception.”
Southern and western homeowners showed the most accurate home value perceptions, according to the report. The southern states showed 67 percent of homes decreased in value and western states showed 85 percent of homes declined in value. Homeowners in both areas demonstrated a Misperception Index of 13.
Homeowners in northeastern states showed perceptions most out of line with reality, Zillow said. While 71 percent of homes in the northeast lost value, the Misperception Index came in at 20.
A slim majority of U.S. homeowners — 51 percent — said they believed their home values had decreased. Only 40 percent said they think home values will continue to decrease, however; but 57 percent did say they expect home values in their local market will continue to decline during the next six months.
“We’re seeing a fascinating distinction in consumer psychology — on the one hand, homeowners appear to understand the reality of today’s economy and are curbing their household spending, but on the other hand they still aren’t ready to admit that these woes might extend to their own homes,” Humpries said. “There’s clearly still some denial.”
Write to Diana Golobay at diana.golobay@housingwire.com.
A Missouri real estate agent and two former loan officers were indicted in a $12.6 million mortgage fraud scheme that involved 25 residential properties in Lee’s Summit, Mo., and Raymore, Mo., U.S. Attorney for the Western District of Missouri John Wood said on Wednesday.
A 34-count indictment of individuals ranging in age from 29 to 50 years old was returned by a federal grand jury in Kansas City. That this sort of fraud could take place in Missouri — thousands of miles away from fraud hotbeds in California and Florida — is telling.
“This is one of the largest mortgage fraud cases ever prosecuted in our district, and illustrates that this is a problem that affects not only low-income neighborhoods, but also more affluent suburbs,” Wood said in a U.S. Department of Justice press statement.
“Mortgage fraud poses a significant economic threat and directly impacts the well-being of our neighborhoods. A number of financial institutions suffered significant losses and innocent homeowners in the targeted subdivisions continue to experience the fallout of this alleged scheme as many of these houses are now sitting empty, neglected and in foreclosure.”
Wednesday’s indictment alleges that real estate agent Angela Clark, along with former mortgage loan officers Cynthia Jordan and Stefan Guerra, were involved in a conspiracy with 14 property buyers to defraud mortgage lenders between June 2005 and May 2007.
According to the indictment, the defendants bought and sold new homes in several upscale subdivisions of Lee’s Summit and Raymore. Buyers allegedly provided false information to obtain mortgages, purchased homes at inflated prices and then kept the remaining funds. The indictment also alleges these buyers created shell companies to receive kickbacks–anywhere from $60,000 to $125,000–from home builder Jerry Emerick, who will be charged separately for his role in the scheme.
Mortgage lenders approved 25 loans totaling $12.6 million, according to the indictment. From that total, buyers allegedly received $2.3 million in excess funds without the lenders’ knowledge. Clark allegedly received approximately $381,495, and mortgage brokers received commissions.
Charges contained in the indictment are simply accusations and not evidence of guilt, which will be determined by a federal trial jury.
“We will continue to vigorously prosecute those who engage in mortgage fraud, and our efforts should help restore the integrity of the housing market,” Wood said.
Write to Diana Golobay at diana.golobay@housingwire.com.
Hey, buddy, can you spare a billion? I know, I know — bad joke. But last week, Freddie Mac asked the bankruptcy judge handling Lehman’s bankruptcy to investigate $1.2 billion in claims it says Lehman hasn’t yet paid. That’s not a small chunk of change, for one thing.
From Reuters, who reported on the story:
Freddie Mac, which was bailed out by the U.S. government last month, said it is missing $1.2 billion from two fund transactions conducted in August, according to court documents.
It said the money was due to be repaid to Freddie Mac on September 15, the day Lehman filed for bankruptcy protection in the largest U.S. bankruptcy filing in history.
Freddie Mac is seeking the return of the $1.2 billion plus interest.
Call it a hunch, but the largest bankruptcy in U.S. history is likely to have left a few very big, very empty bags in the hands of key creditors. It appears that Freddie Mac is officially one of them, although Lehman’s lawyers are claiming they need time to sort things out from the chaos of bankruptcy.
House Financial Services Committee chairman Barney Frank (D-MA) said late Wednesday that his committee would hold an oversight hearing Nov. 18 on the Troubled Asset Relief Program program being managed by the Treasury Department, the first such “check-in” on TARP by lawmakers since the plan was signed into law by President Bush on Oct. 3.
The hearing will also focus on “related initiatives taken by the Federal Reserve Bank and the FDIC in response to the turmoil in domestic and global financial markets,” according to a statement released by chairman Frank’s office. Testifying will likely be members of the Treasury and FDIC, although Frank said he also wants to hear from institutions using or affected by the initiatives, as well as and academic experts.
“While much of our attention is, appropriately, focused on the $700 billion TARP program recently passed by Congress; it is clear that Treasury has been working closely with both the Federal Reserve and the FDIC on broader coordinated initiatives,” Frank said. “The Committee is interested in exploring the rationale for the specific steps already taken and to better understand how the Treasury Department, Federal Reserve and the FDIC expect their actions to work and how, and over what time frame, they expect to be able to measure results.”
Frank has been vocal is voicing concern that the TARP funds aren’t doing enough to help Main Street borrowers avoid foreclosure, and has suggested to the current administration that FDIC chairman Sheila Bair be formally appointed to a role involving loss mitigation under the Treasury program.
Write to Paul Jackson at paul.jackson@housingwire.com.
And the real estate crunch continues to roll onward — but this time, it’s claimed the first collateral valuation provider, rather than a lender. Calgary-based Zaio Corp. said Thursday that it had “ceased operations” at Zaio Inc., its U.S.-based subsidiary that had been aggressively pushing its way into the real estate valuation and appraisal business in the States. The firm’s closing is immediate, and the company will begin selling off assets to fulfill payments to creditors, company officials said in a press statement.
All employees at the firm have lost their jobs, as well; the closure came as a shock to many, given Zaio’s presence at the recently-completed Mortgage Bankers Association annual conference in San Francisco.
The holding company, based in Canada, said it will look to “preserve capital and weather the current economic climate,” and that it would “redeploy its rollout strategy at a more favourable time in the economic cycle.”
Both James Kirchmeyer and Douglas Vincent have resigned from Zaio Corp.’s board of directors, as a result — Kirchmeyer re-assumed all of his prior assets sold to the firm when he joined the company from his own national appraisal management business, in a $3.2 million asset sale a few weeks ago that raised more than a few eyebrows at the time (including here at HW, which covered the transaction).
The surprise closure may likely leave more than a few appraisers — who paid the company to manage a so-called “appraisal zone” — in the lurch for the funds they paid to Zaio, as the company sells its U.S. assets to satisfy creditors. Officials at the Canadian-based parent company were not available for comment before this story was published.
As the economy has soured, the competition for real estate valuations has heated up significantly — collateral valuation is a critical part of managing troubled mortgage loans. A number of new players have recently entered the space this year, and a few of HW’s sources have mused in recent weeks that not all of the players vying for market share will survive.
“Many factors, during one of the worst financial climates in US history, have proved insurmountable,” Kirchmeyer said in a memo sent to Zaio appraisers on Wednesday. “Despite the state of the economy and mortgage industry, we were able to maintain our level of superior customer service in the valuation industry.”
Write to Paul Jackson at paul.jackson@housingwire.com.
Lender Processing Services, Inc. (LPS: 41.00 -1.18%) said Thursday that earnings fell 24.6 percent during the third quarter, as strength in the company’s default businesses largely offset growing weakness in mortgage origination products and services at the Jacksonville, Fla.-based firm.
LPS earned $51.3 million during the third quarter, compared to $68 million in earnings in the year-ago period; earnings were adjusted for the effect of the company’s recent spin-off from financial services transaction management provider Fidelity National Information Services (FIS: 23.63 +0.25%). Adjusted net earnings for third quarter 2008 were $57.8 million, or $.61/share, compared to an adjusted $59.7 million, or $.61/share, one year earlier, the company said.
Consolidated revenues rose 11.1 percent to $472.7 million, primarily on the back of astounding growth in the company’s default outsourcing business line. The company is the mortgage market’s largest outsourcing provider of products and services targeting the management of foreclosures and borrower defaults, and has seen demand in this area soar as lenders and servicers grapple with a historic surge in bad loans.
The company operates two segments, a data and analytics division and a loan transaction services division (which includes the company’s default management operations). Operating revenue from the company’s default businesses totaled an astounding $241.8 million during the third quarter — up 97.1 percent over year ago numbers, and nearly 23 percent above the $197.2 million in revenue booked just one quarter earlier. The company said that expanded demand from existing customers, as well as expanded market share in the default space, led to the large gain.
As a result of strength in default services and in the company’s LPS Desktop application, revenue declines seen elsewhere in the firm’s business have mattered little. During the first nine months of 2008, revenue growth in every other area of LPS’ business has been negative — but revenue growth in default services, up more than 85 percent this year alone, helped push consolidated revenues to a 17.8 percent gain between January and August.
LPS has received some press as of late, becoming a favorite “recession pick” of CNBC Mad Money host Jim Cramer in recent weeks. Analysts at Keefe Bruyette also upgraded the company’s stock from “market perform” to “outperform” earlier this week.
Shares were at $22.00, down 8.1 percent, when this story was published.
Write to Diana Golobay at diana.golobay@housingwire.com.
Editing by Paul Jackson.
Disclosure: The author held no positions in any of the stocks mentioned when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
Fixed mortgage rates jumped up significantly this week, as investors in the secondary mortgage market wrestled with supply and demand issues in the agency MBS market. Freddie Mac (FRE: 1.32 0.00%) reported Thursday that the average rate on a 30-year fixed-rate mortgage jumped 42 basis points to 6.46 percent with an average 0.7 point for the week ending Oct. 30. Rates are above last year’s levels, when the 30-year fixed-rate mortgage was at an average of 6.26 percent.
Bankrate.com’s own weekly rate survey of 100 or so lenders found rates at their highest level in three months, and said that 30-year fixed mortgage rates had soared from 6.32 percent to 6.77 percent.
The rate increases posted this week were largely expected given continuing problems in the agency MBS market; some of the issues were the subject of earlier coverage on HousingWire. The spread between between Fannie’s current-coupon 30-year fixed-rate mortgage securities and interpolated 5 and 10-year U.S. Treasuries had soared to 277 points on Monday, according to UBS data, and headed north from there the rest of this week.
The previous all-time high in mortgage credit spreads was a spread of 284 points in March of this year, ahead of the failure of Bear Stearns & Cos; spread levels should historically be closer to 180 basis points or so. Bankrate.com reported Thursday that the spread had reached near 300 basis points by market close on Wednesday.
Freddie Mac, for its part, did not mention current market issues in its rate commentary this week, focusing instead on modest rises in Treasuries. “Long-term mortgage rates followed long-term Treasury bond yields higher this week, pushing fixed-rate mortgages up to levels of two weeks ago,” said Frank Nothaft, Freddie Mac vice president and chief economist.
Five-year Treasury-indexed hybrid ARMs averaged 6.36 percent this week, Freddie’s survey found, up from last week when it averaged 6.06 percent. A year ago, the 5-year ARM averaged 5.98 percent.
“The Federal Reserve’s 0.50 percentage point cut in the discount rate and federal funds target rate on Wednesday was widely anticipated in the financial markets, and is likely to keep short-term interest rates low,” Nothaft said. “Consequently, initial interest rates on ARMs, which tend to be set relative to other short-term rates, may remain near current levels. ”
For all of the recent volatility in mortgage rates, it’s worth reiterating that primary mortgage rates aren’t exactly high by historical standards. Despite the huge credit spreads, we’re still not staring at 15 percent mortgages any time soon — and for most borrowers, underwriting criteria represent a far tougher hurdle in obtaining a mortgage relative to whatever movement rates are making right now.
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held no positions in any of the stocks mentioned when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
The First American Corp. (FAF: 34.92 -2.16%) reported a $8.3 million net loss — or 9 cents per share — for the third quarter, compared to net income of $46.6 million, or 49 cents per share, in the year-ago period. The Santa Ana, Calif.-based title insurer and real estate information services giant swung into the red as it absorbed an after-tax loss of $29.6 million on its investments, and another $19.3 million in losses tied to employee layoffs and benefits restructuring.
Not surprisingly, also driving losses were strong headwinds in the nation’s battered housing market, which affected title insurance operations. First Am said its title insurance services business lost $27 million during the quarter, as revenues fell to $964.7 million, off 30 percent from one year earlier. See the full earnings report.
As is the case with other title insurers, First Am saw direct title orders fall sharply: the company closed 323,200 title orders in Q3, off 22 percent from the 415,000 orders closed in the third quarter of 2007.
It’s worth noting that competitor Fidelity National Financial Corp. (FNF: 14.72 -1.41%) saw a similar decline in direct title orders during Q3, closing just 260,600 orders during the second quarter, off more than 23 percent from one year earlier.
First American, like other title insurers, is shedding staff amid falling revenue — and said it let go of approximately 1,250 employees during the third quarter. It’s also boosting its reserves for claim losses on title policies, and said its loss provision rate was equal to 7.1 percent of operating revenues during the quarter, compared to 6.5 percent one year earlier.
Not surprisingly, the company also said it is expecting more claims on its policies, as well — such claims usually tend to spike along with default activity. First Am said its expected claims experience for policy year 2008 was increased to 6.5 percent from 6.2 percent.
Heat felt outside of title insurance, too
Company officials have been moving aggressively to both right-size and restructure First American’s sprawling non-title information and outsourcing businesses, as well. Among some changes is a realignment of the company’s information services businesses, including the company’s default-related outsourcing businesses.
In general, First American’s overall information services and outsourcing business lines saw revenues fall for those products/services tied to origination activity, while a pickup in demand for default-related and risk management-related services helped cushion the blow somewhat.
In particular, the company’s data and analytic solutions line of businesses — which include the well-known LoanPerformance, among others — was hit particularly hard during Q3, and saw pretax income fall more than 60 percent year-over-year, with the company citing ongoing mortgage market woes.
Poor market conditions “have resulted in a decrease in demand for many of the segment’s products sold to home equity lenders, mortgage bankers and title insurance companies,” the company said, although it noted that an increase in risk analytics sales to investors helped offset losses somewhat. The company is aggressively looking to bring new products and services to market for the investment community, Frank McMahon, First American’s vice chairman and chief executive officer of the Information Solutions Group, said.
The company had planned to earlier this year spin off its information services business, a plan that has since been shelved while the company waits for improved market conditions.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no positions in any of the stocks mentioned when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
GMAC Financial Services is in formal discussions with federal regulatory authorities regarding a potential shift into bank holding company status under the Bank Holding Company Act of 1956, the ailing financial services giant confirmed Wednesday morning.
HousingWire covered news of GMAC’s pending transition on Wednesday, which would give the auto and mortgage financier direct access to taxpayer funding under the U.S. Treasury’s Troubled Asset Relief Program, or TARP.
Executives at GMAC also said the company — should it become a commercial bank — would look to raise what was characterized in a press statement as “significant” additional capital, and would look to make a private offer that would exchange existing debt for “a reduce principal amount of new indebtedness.” No further details on the pending exchange offer were provided on Wednesday, but the extra capital would be required to move GMAC to a level consistent with regulatory standards for commercial banks.
“The benefits of this type of restructuring would allow us to put additional capital and liquidity resources immediately to work in financing consumers and automotive dealers,” said GMAC CEO Alvaro de Molina.
The plan involves a complex GM-Chrysler merger discussion that would give Cerberus a much larger stake than its current 51 percent in GMAC, allowing the lender to convert to a commercial banking charter, according to previous media reports.
While much of the discussion around GMAC has thus far centered on the financial company’s auto financing arm and lobbying by Detroit around the importance of saving the U.S. auto industry, the firm also owns troubled residential mortgage lender Residential Capital, LLC — so a conversion to a bank holding company would allow ResCap to tap into TARP funding, as well. On Sept. 3, ResCap cut 60 percent of its workforce and exited wholesale mortgage banking amid continuing struggles, leaving it with only a small correspondent and direct lending channel to fund future originations.
ResCap reported a net loss of $1.86 billion for the second quarter at the end of July; the loss came after a massive $60 billion refinancing package earlier in the quarter had saved it from likely bankruptcy. That package saw debtholders agree to modified terms, as well.
The Treasury has already marked $250 billion in TARP funds as capital injections for approved commercial banks; the capital needs at GMAC alone would use up a good chunk of the remaining funds, HW’s source said. In other words, as we’ve heard from sources since the TARP was first announced, $700 billion isn’t nearly enough.
Write to Paul Jackson at paul.jackson@housingwire.com.
The rubber is hitting the road, now that the government has begun doling out taxpayer funds to key banking institutions. Wells Fargo & Co. (WFC: 30.38 +0.30%) got $25 billion from the U.S. Treasury yesterday, as the first of the $700 billion in U.S. Treasury funds was doled out to key banks, the bank said in a press statement.
Wells Fargo issued 25,000 preferred shares at $1 million per share, under the Treasury’s Troubled Asset Relief Program, or TARP. The shares pay a 5 percent annual dividend for the first five years, and 9 percent thereafter.
The deal was announced after market close; Wells said the issuance also gave the Treasury warrants to purchase 110,261,688 shares of its common stock at an initial per share exercise price of $34.01 — above the bank’s $32.11 closing price on Wednesday. To put the warrants into perspective, given Wells’ market cap of $106.64 billion on Wednesday, the bank has roughly 3.32 billion shares currently outstanding.
The question now: will they lend?
There has been a growing dust-up over the belief that many of the larger banks don’t intend to use the capital to begin lending, but instead to bolster their own balance sheets against further market decline. Yesterday, Henry Waxman (D-CA), chairman of the House Committee on Oversight and Government Reform, said he is investigating executive compensation at the nine banks receiving the first round of Treasury funding; the investigation comes amid allegations that the TARP taxpayer funds will be used to pay outsized bonuses to banking managers.
Wells’ executives, for their part, were careful not to explicitly note that the Treasury funds would be used exclusively for lending activities. “We believe the Treasury’s plan is a positive step toward providing much needed capital for financial institutions in the best position to deploy it effectively to stimulate the U.S. economy and strengthen confidence in the U.S. banking system,” CFO Howard Atkins said in a press statement.
Wells Fargo plans to raise an additional $20 billion of capital, primarily via common stock, as part of its pending acquistion of Wachovia Corp. (WB: 0.00 0.00%).
“The combination of the market capital and the capital investment from the government will enable us to finance the Wachovia acquisition, to continue to build our franchise and gain market share as we’ve done throughout the credit crunch and to maintain one of the strongest balance sheets and highest capital ratios among U.S. financial services companies,” Atkins said during a third quarter earnings call.
Shares in Wells Fargo were at $32.47, up 1.1 percent, in early trading Thursday.
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held no positions in any of the stocks mentioned when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
