Archive for February, 2009
Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation reported Thursday a collective loss of $26.2 billion in the fourth quarter of 2008, a decline of $27.8 billion from the $575 million that the industry earned in the fourth quarter of 2007 — and the first quarterly loss recorded by the U.S. banking industry since 1990.
Rising loan-loss provisions, losses from trading activities and goodwill write-downs all contributed to the quarterly loss, as banks continued to repair their balance sheets, the FDIC said.
However, the FDIC said more than two-thirds of all insured institutions were profitable in the fourth quarter, but their earnings were simply overshadowed by large losses at a number of big banks. Nonetheless, troubled loans still battered the industry's viability. Insured institutions charged off $37.9 billion of troubled loans in the fourth quarter of 2008, up two-fold from the $16.3 billion charged off in the fourth quarter of 2007. At the end of 2008, a total of 2.93 percent of all loans and leases were noncurrent — the highest level for the industry since 1992.
Twelve FDIC-insured institutions failed during the fourth quarter, while over the course of 2008, a total of 25 insured institutions failed. Much more ominously, the FDIC's "Problem List" grew from 171 to 252 institutions in the fourth quarter, the largest number since mid-year 1995; HousingWire's sources have consistently said the number of troubled banks is likely much higher than the disclosed total.
As the number of "problem" banks continue to climb, the FDIC said Friday it would impose a special assessment on insured institutions of 20 basis points, effective the second quarter of this year. The change comes in addition to an amended restoration plan for the FDIC's deposit insurance fund that extends plan horizon to seven years "in recognition of the current significant strains on banks and the financial system and the likelihood of a severe recession," the FDIC said.
"Deposit insurance remains a good value," said FDIC chairman Sheila Bair. "Public confidence in the FDIC guarantee has helped assure a stable source of funding for banks in these troubled times."
Bankers immediately responded to the increase, suggesting that further insurance premiums would further constrain lending activity at banks. "The premium increases announced today by the FDIC are very significant and will pose an extra burden on every bank," Edward Yingling, president and CEO of the American Bankers Association, said in a press statement. "The additional premium charge will make it more challenging for banks of all sizes to meet the credit demands of their local communities."
Write to Kelly Curran at kelly.curran@housingwire.com.
JP Morgan Chase & Co. (JPM: 37.21 -0.75%) has said it is closing the warehouse lending division it bought from Washington Mutual. "Chase bought WaMu's warehouse lending business last spring," a company spokesperson told HousingWire. "We decided it didn't fit our long-term strategy. This decision affects less than 10 active customers and about two dozen employees." National Mortgage News broke the story earlier this week, saying Chase would give its non-bank customers a few months to find new warehouse lines of credit.
The announcement comes after Chase ceased its wholesale lending operations to brokers in mid-January, focusing its business on retail-oriented loans — but not broker-originated loans — through its correspondent channel. In a memo to employees, the bank explained the shift was necessitated not only by a concern for the quality of service at the time of origination, but by an increase in Chase’s presence as a branch-based franchise. Chase has historically relied on brokers and third-party originators when it had just 600 bank branches in four states — as recently as five years ago — according to the memo. With the addition of WaMu, Chase’s bank branch presence flourished and now stands at 5,000 branches serving 23 states, the memo said.
The troubled WaMu shut down in late September by regulators and its combined $307 billion in banking assets and total $188 billion in total deposits were sold off to Chase for just $1.9 billion. “The housing market downturn had a significant impact on the performance of WaMu’s mortgage portfolio and led to three straight quarters of losses totaling $6.1 billion,” said Office of Thrift Supervision director John Reich. The thrift regulator said it that “WaMu was in an unsafe and unsound condition to transact business,” and that the bank saw depositors yank $16.7 billion in deposits since Sept. 15.
In late November, Chase said it would cut 9,200 WaMu jobs; 4,000 were slated to be cut by the end of January with the remaining cuts to occur before the end of 2009.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
President Barack Obama on Thursday submitted to Congress his proposed 2010 fiscal year budget, a sweeping government spending plan that will cost $3.6 trillion over the next decade, will run a $1.75 trillion deficit and would reserve $250 billion for additional effort to stabilize the banking system. The budget includes the cost of war in Afghanistan in a move the President and administration officials have repeatedly touted as a new era of transparency and honesty. "…[W]hile our budget will run deficits, we must begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our nation on sound fiscal footing," Obama said Thursday in his remarks on the budget.
The budget identifies $2 trillion in deficit reduction, nearly $1 trillion in reduced spending and nearly $1 trillion in added revenue compared with the current budget plan, according to the Office of Management and Budget director Peter Orszag. "We're inheriting a cumulative deficit over the next decade of $9 trillion," Orszag said Thursday at a press briefing on the budget. It proposes $150 billion in energy efficiency investments, to be funded in $15 billion increments over 10 years. It proposes a $634 billion health care "down payment" also funded over the next decade. It provides $533.7 billion for the Department of Defense — a 4 percent increase over 2009 — and $4.5 billion in funding for the Community Development Block Grant program.
The budget also includes a $250 billion reserve that would support $750 billion in asset purchases and fund future efforts to stabilize the financial system. "The existence of this reserve in the budget does not represent a specific request," the report on the budget reads, in part. "Rather as events warrant, the administration will work with the Congress to determine the appropriate size and shape of such efforts, and as more information becomes available the administration will define an estimate of potential costs."
Download the full budget proposal.
Write to Diana Golobay at diana.golobay@housingwire.com.
Delinquent mortgages are continuing to pile up according to a new report released Friday by Equifax Inc., which showed the number of mortgage holders who were 30-days-past due in January was up 50 percent from last January. Projections indicate, according to the report, that 30-day mortgage delinquencies, which have continued to increase, will result in even more 60- and 90-day delinquencies.
To add to the economic woes, home equity line of credit 30-day delinquency rates saw an accelerated month-over-month increase, Equifax said, rising 3.39 percent from December to January — the largest jump in 10 years.
"The rapid increase in unemployment in the fourth quarter of last year may have led to many of the economic ills that the data shows were even more pronounced in January," said Dann Adams, president of Equifax's U.S. Consumer Information Systems.
Adams said that the continued increase in mortgage delinquencies indicates that a housing correction has yet to take hold. "The latest measures such as loan modification programs and declining interest rates have yet to kick in," he said.
The Credit Trends report found that approximately 65 percent of all current home equity delinquencies are in the South Atlantic and Pacific regions, not surprisingly, reflecting two states – Florida and California — where the housing bubble was the greatest.
The report also found that consumer bankruptcies and credit card delinquencies surged over the past year. The volume of consumer bankruptcies in January 2009 was 25 percent higher than January 2008. Most of the increase was in Chapter 7 filings, which is 37 percent higher than the same period last year. Chapter 13 filings increased only six percent. As for credit card delinquencies, they reached their highest level in five years.
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
The First American Corp. (FAF: 14.98 +0.07%) on Thursday reported a $66.9 million — or 72 cents per share — net loss in the fourth quarter, driven by $50.7 million in increased reserves, $13.7 million in intangible asset impairments and $11.3 million in employee separation and other restructuring costs. This compares with an $8.3 million net loss posted in the third quarter. The Santa Ana, Calif.-based title insurer and real estate information services giant posted a $26.3 million net loss for all of 2008, up dramatically from the $3.1 million net loss in 2007.
The company's earnings were not immune to the continued weak housing market, which affected title insurance operations. First American reported a 32 percent decline in revenue for its title insurance business since the same quarter in 2007. The weakened business was driven not only by a decrease in orders, but also by a decrease in the average revenue per order closed.
A $94.2 million pretax loss was also at the helm of the title insurance operations' weak revenue. The business had increased its loss provision to 17 percent of operating revenues in the quarter, from 14.8 percent in the year-ago quarter. It also cut 1,210 employees at a cost of $8 million.
First American, like many other title insurers, has had to shed staff amid the falling revenue; it also let 1,250 employees go in the third quarter. “In 2008, we responded aggressively and decisively to restructure our company in the face of a very difficult economic environment,” said chairman and CEO Parker Kennedy. “We are encouraged by the recent government actions, which we feel will materially improve the real estate economy."
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
Fannie Mae (FNM: 0.00 N/A) reported Thursday a loss of $25.2 billion, or $4.47 per share, in the fourth quarter of 2008, as it also requested additional capital from the Treasury.
"Fourth-quarter results were driven primarily by $12.3 billion in net fair value losses, credit-related expenses of $12.0 billion, and securities impairments of $4.6 billion, as deterioration in mortgage performance, home prices, and in the credit markets continued to adversely affect our financial results," Fannie Mae said in a press release.
Investment losses were $4.6 billion in the fourth quarter, up from $1.6 billion in the third quarter. Those losses were driven by "other-than-temporary impairments of available-for-sale securities backed by Alt-A and subprime mortgages," Fannie Mae said, as home values continued to decline. Total nonperforming loans were $119.2 billion at year-end, compared with $63.6 at the end of Q3 and $27.2 billion at the close of 2007.
Fourth-quarter's loss was less severe than third-quarter's $29 billion loss, but full-year 2008 losses still mounted to $58.7 billion, or $24.04 per share — sky high in comparison to the $2.1 billion loss in 2007.
The Director of FHFA, acting as conservator, submitted Wednesday a request for $15.2 billion from the U.S. Treasury on Fannie Mae's behalf under the terms of the Senior Preferred Stock Purchase Agreement, in order to eliminate its net worth deficit as of December 31, 2008. Under the agreement, active as of September, the Treasury is required to provide funds whenever the GSEs report a negative net worth. FHFA has requested the Treasury provide the funds by March 31, 2009.
Just last week the government doubled Fannie Mae and Freddie Mac's lifelines to $200 billion each to guarantee they wouldn't fail. The increase in cash was "not a judgment about the expected losses ahead," said Treasury Secretary Timothy Geithner, according to a New York Times report. "It's just a way to make sure people understand that they will be able to play this role going forward."
Government entities Fannie Mae and Freddie Mac are crucial to the Obama administration's housing rescue plan aimed at lowering mortgage costs and preventing foreclosures, but the companies themselves may have some waters to wade as the nation rides out the housing crisis.
"We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth," Fannie Mae said in a statement.
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
Federal Reserve chairman Ben Bernanke on Wednesday responded to questions from the House Financial Services Committee on bankruptcy judges rewriting mortgage terms for borrowers at risk for foreclosure. Bernanke acknowledged the popular "moral hazard" argument against such modifications, but suggested the consequences of doing nothing in the face of sweeping foreclosures would outweigh the moral benefit of forcing irresponsible borrowers to face the music of foreclosure.
"We have to trade off the short-term moral hazard issues against the broader good," he said. We have to consider "going forward in terms of regulation…how we can avoid these problems in the future." Bernanke referenced regulated underwriting and lending standards — a check on bad lending practices — as a necessary step to prevent another crisis.
Committee chairman Barney Frank seemed to agree, also citing the moral hazard argument against foreclosure prevention efforts that states if a person is absolved from the consequences of a mistake, they are likely to make the mistake again. But what people forget is "when we talk about stopping this from repeating itself, we're not relying on people having had a bad feeling about it, but we're talking about rules and laws that will make it impossible," Frank said.
"We have an unhappiness on the part of all the citizens who are suffering deeply from the consequences of mistakes which most of them didn't make — some did," Frank said. "There are people who took out loans they shouldn't have taken out, there are people who have been irresponsible in other ways. But fundamentally, people are now being victimized for things for which they are not to blame."
On the issue of moral hazard, Bernanke agreed that although some borrowers supposedly knew what they were getting into when they closed on mortgages they couldn't afford, there's also a portion of bad mortgages pushed through by lenders that did not uphold their responsibilities in disclosing all the details of the loans. In such a situation, "there's a case to unwind some of adverse that on the borrower," he said. Regardless of who had initial responsibility in bad mortgages, the ultimate issue is a large number of foreclosures that are detrimental to the borrower, the lender, the community and the broader system, according to Bernanke.
"I agree with the issue of getting houses back down to their fundamental value…but the problems in the mortgage market combined with the supply of housing…put us in real danger of driving house prices below the fundamental low levels," he said.
In the committee hearing Wednesday, Bernanke also soothed fears of a government takeover of the banking system, saying there are no plans for "anything like" nationalization of major U.S. banks and the elimination of value to shareholders. His comments came just days before Citigroup Inc. (C: 30.87 +1.61%) announced its agreement to exchange common stock for the preferred securities obtained by the Treasury Department through the Capital Purchase Program (CPP), effectively increasing the government’s share of the company to 36 percent. The announcement stoked investor fears of government ownership in other major banks, and Citi shares consequentially dropped as much as 37 percent of their value in early trading Friday.
See archived video of the committee hearing.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
Citigroup Inc. (C: 30.87 +1.61%) with the U.S. Treasury Department on Friday announced it would exchange common stock for the preferred securities obtained by the Treasury through the Capital Purchase Program (CPP), effectively increasing the government's share of the company to 36 percent. The transaction was designed to increase Citi's tangible common equity and restore investor confidence "without any additional U.S. government investment," the bank said. The offer to exchange common stock for preferred securities will also apply to other preferred holders, up to $27.5 billion of Citi's existing preferred securities, at a conversion price of $3.25 per share.
The Treasury said it had agreed to convert its security to match the private preferred exchanges dollar-for-dollar, to convert up to the $25 billion of preferred stock issued under the CPP, and that it would "receive the most favorable terms and price offered to any other preferred holder through this exchange." The Treasury also said any remaining preferred issued under the Targeted Investment Program and Asset Guarantee Program would be converted into a trust preferred security "of greater structural seniority" with the same 8 percent cash dividend rate inherent in the existing issue.
Citi first in October received $25 billion through the CPP; then in December it received another $20 billion through the TIP. In mid-January, the Treasury pledged up to $5 billion as its portion of the government AGP. Despite the handful of lifelines tossed to Citi, the bank announced in mid-January it would reorganize into two businesses after suffering $18.7 billion in fourth-quarter losses. It seems not enough could be done to prop up investor confidence in the bank, which also announced Friday it would begin a major overhaul on its board of directors, building a majority of "new independent directors as soon as feasible."
Citi stocks were down as much as 37 percent in early trading Friday after the announcement shook investors and rekindled doubt in the U.S. banking system outside of nationalization — or at least partial government ownership.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
The Federal Reserve Bank of New York on Thursday announced the purchase of another $24.999 billion in agency mortgage-backed securities for the week ending Feb. 25, officially the largest week in MBS purchases since the program began in early January. The second-largest week of purchases, the week ending Jan. 14, boasted a close runner-up of $23.4 billion in purchases. The running total of MBS bought from Freddie Mac (FRE: 0.00 N/A), Fannie Mae (FNM: 0.00 N/A) and Ginnie Mae topped $159.83 billion, as of Thursday's announcement.
The Fed purchased $8.43 billion from Freddie in the week ending Feb. 25, took a whopping $15.57 billion off Fannie's books — also marking the largest week of purchases for Fannie — and bought $1 billion in MBS from Ginnie. Purchases from both Freddie and Fannie picked up from the previous week, but Ginnie's purchases remained at a program-long low, unchanged from last week. So far, the Fed has purchased a total $74.2 billion from Freddie, $71.6 billion from Fannie and $14 billion from Ginnie.
In the week ending Feb. 25, the Fed purchased $100 million in coupons with 15-year maturities (specifically, 4 percent coupons), while all other purchases were of coupons with 30-year maturities. The predominant product for the week was the 30-year, 4.5 percent coupon (of which the Feds bought $16.15 billion). This purchase was ruled by Fannie's $12.25 billion, which pushed the GSE into its single largest week of purchases by the Fed.
Of the Fed's total purchases so far, approximately 95 percent have been purchases of agency coupons with 30-year maturities (43.4 percent of total purchases were 4.5 coupons alone). About 4.5 percent have been purchases of coupons with 15-year maturities, and less than 1 percent has been purchases of coupons with "other" maturities — 20- and 40-year, for example.
See details on the Fed's purchases.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
The House of Representatives will on Tuesday consider a sweeping homeowner assistance legislative package that would allow bankruptcy judges to modify mortgage debt on a borrower's principal residence. The bill, HR 1106, or the Helping Families Save Their Homes Act, contains the controversial "cramdown" measure originally passed by the House Judiciary Committee in early January. The bill had potentially been slated for possible vote today, but various media reports as well as sources that spoke with HousingWire have suggested that negotiations over the hot-button issue are yet continuing. Read the full legislation.
"To allow time for more discussion, I expect to complete consideration and vote on the bill likely Tuesday of next week," House majority leader Steny Hoyer (D-MD) told MarketWatch Thursday.
Some of those discussions include linking any bankruptcy cramdowns to the Obama administration's newly-announced mortgage modification plan, as well as potentially limiting cramdown authority (at least initially) to subprime mortgages only. Marketwatch reported Thursday afternoon that a group of 67 centrist House Democrats are pushing for an explicit loan modification-cramdown link, meaning that no mortgage could see its principal balance reduced by a bankruptcy judge unless the borrower had first sought out relief under the terms of the administration's loan modification guidelines. See earlier coverage of the Homeowner Affordability and Stability Plan.
Senator Richard Durbin (D-IL), the lead sponsor of the cramdown legislation, suggested to American Banker on Tuesday that Democrats might be willing to limit cramdown authority to just subprime mortgages, in an effort to quell industry unrest and long-standing opposition to the proposal. Subprime loans are not available for modification under the administration's HASP.
"We've talked about that as a possibility," he told the news service. "I am willing to negotiate. I want this to be a reasonable approach, but we have to include [bankruptcy]. If we don't include it, we'll be stuck in the same mess we're in today."
HR 1106 also includes so-called safe-harbor legislation for servicers, designed to protect servicers from legal liability in the event of massive-scale mortgage modifications. Investors have already begun litigation over bulk loan modifications in some cases; HousingWire broke the story late last year of a case involving Countrywide and Bank of America (BAC: 7.29 -0.14%). Investors sued the mortgage giant over a multi-state predatory-lending settlement that will see Countrywide modify as many as 400,000 loans, reducing payments due on mortgages it services by as much as $8.4 billion.
Critics have suggested the so-called safe-harbor legislation undermines the sanctity of contract terms, an issue that goes well beyond mortgage markets but would also serve to make mortgages more costly as investors factor in the reality that contractual terms may prove an ineffectual source of limiting their risk. Others have suggested that the contractual terms commonly binding servicers' activity in loan modifications are often so vague that it's not clear what the servicer's obligation really is beyond maximizing net present value.
The Mortgage Bankers Association this week sent a letter to U.S. Department of Housing and Urban Development secretary Shaun Donovan and Treasury chief Tim Geithner that reiterated long-standing industry opposition to cramdown legislation, advocating principal deferment instead.
An upcoming feature in the March issue of HousingWire Magazine explores just how far reaching the consequences of mortgage cramdowns may really be, beyond their effect on the primary market and an expected surge in bankruptcy filings by borrowers. There are complex issues involving how losses from a cramdown in bankruptcy would cascade through to investors in ABS/MBS, as well as issues involving a servicer's ability to recoup advances — these are issues that lawmakers on Capitol Hill have clearly not considered fully in crafting legislation focused intently on the front-end of the modification process. To subscribe, click here.
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
