Archive for March, 2009
So it's been awhile — you know, since this whole subprime debacle morphed into uncontained financial chaos? Remember early on when everyone was trying to peg blame on someone for this mess, and it was considered edgy to say that Wall Street didn't know what it was doing?
Sure you do. What I want to know now is what you think about the blame game — after all that's taken place. Who's really to blame for this mess? Is it still greedy homeowners? Greedy bankers? Greedy insurers? Hedgies?
Sound off and give me some answers worth printing. Click here to take our monthly Sounding Board — best answers make it into the magazine. It'll only take a few minutes of your time, and who knows? You just might find it therapeutic. So fire away, and don't be shy!
The U.S. government has warned this week of a severely troubled deposit insurance fund that risks tanking this year amid rapidly mounting bank failures.
"Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative," wrote Federal Deposit Insurance Corp. chairman Sheila Bair, in a letter to chief executives Monday.
Critics have said for months that the FDIC's deposit insurance fund just wasn't large enough to manage all the expected bank failures expected over the coming months and years — and it seems they were right on the money. Senate Banking Committee Chairman Christopher Dodd, as of Friday, is moving to allow the FDIC to temporarily borrow up to $500 billion from the Treasury Department, after key officials, including Bair, made subtle cries for help. The FDIC's current line of credit with the Treasury is $30 billion. And interestingly, the FDIC has not borrowed money from the Treasury in over a decade.
Dodd's bill could give the FDIC more power to address "systematic risks" in the economy, potentially creating another source of bailout funds in addition to the $700 billion already granted by Congress, according to a report by the Wall Street Journal. Bernanke said in a letter to Dodd in February that such a "mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system," essentially granting the FDIC a "greater cushion of support," the American Bankers Association said in a statement.
On Friday, the FDIC temporarily imposed higher premiums on banks in order to help keep the insurance fund solvent — a move the ABA stressed it's "deeply concerned" about, as banks are already struggling to increase lending. However, Bair said the higher premiums were critical.
The FDIC reported last week a collective loss — comprised of losses by all commercial banks and savings institutions insured by the FDIC — of 26.2 billion in the fourth quarter of 2008, marking its first quarterly loss since 1990.
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 for 2009, the FDIC said it has set aside an additional 22 billion dollars for estimated losses on anticipated failures.
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.
[Update 1 reflects statements from Northern Trust to Congress.]
Financial Services Committee chairman Barney Frank, D-Mass., told reporters Thursday that two major financial institutions were planning to return a combined $8.2 billion in TARP capital to the Treasury Department. Northern Trust Corp. (NTRS: 41.67 +1.44%) and U.S. Bancorp (USB: 27.86 +0.25%) are reported to be planning a return of some TARP capital, the former in the face of criticism over corporate spending behaviors. "The public has the right for us to be very tough on how recipients of TARP money spend it," Frank said Thursday, according to a Reuters article.
In late February, Frank and other House Democrats issued a letter demanding repayment of $1.6 billion after learning of Northern Trust's sponsorship of a luxury golf tournament. Officials from Northern Trust did not return messages seeking comment on repayment plans before this article was published, but the company on Feb. 27 sent a letter to Congress defending the golf tournament expenditures as a long-planned event not dependent any of the TARP capital. Northern Trust "has engaged [its] regulators with the goal of repaying Capital Purchase Program funds as quickly as prudently possible" under repayment guidelines released by the Treasury in late February, officials said in the letter.
U.S. Bancorp on Wednesday cut its common stock dividend 88 percent in a move that was estimated to help save $2.6 billion annually. The reduction "accelerates our ability to repay the $6.6 billion of TARP capital, which we hope to do as soon as possible" with the approval of U.S. Bancorp's regulators, spokesperson Steve Dale told HousingWire. However, "we have not filed a notice of redemption with the Treasury" and there is no time line for repayment in place at the company, he said.
A variety of banks and other financial institutions have issued media statements in recent months touting their refusal of TARP funds based on sufficient existing capital. After recent crack-downs on executive compensation and corporate expenditure for all institutions that participate in the TARP, what firms that remain willing and eligible to receive TARP capital may find themselves under strict regulation.
It appears what began as a race to Treasury funds on the hopes of rekindling investor confidence and beefing up liquidity has become a flight from the negative stigma associated with the program thanks to teetering giants like Citigroup Inc. (C: 30.87 +1.61%), which after $50 billion in infusions from the government ($25 billion through the Capital Purchase Program, $20 billion through the Targeted Investment Program and the promise of $5 billion more through the Asset Guarantee Program) still saw its shares end up in the dollar store briefly on Thursday.
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 role subprime lending played in the creation of the nation's housing boom has most likely been overstated, according to a recent analysis released this week from the Federal Reserve Bank of St. Louis.
In fact, between 2001 and 2006, the number of terminated subprime purchase-money loans — those used to purchase rather than refinance a house – outweighed the estimated number of first-time-homebuyers with subprime mortgages. According to the analysis, many subprime borrowers may have intended to make a quick exit from subprime loans — using the loans as "bridge financing" to speculate on house prices and then sell for a profit after values increased.
Loans originated between 2001 and 2006 generally lasted less than three years, according to the report. About half the loans exited the market through pre-payment or default within the first two years of origination and nearly 80 percent did so within three years of origination. For loans originated when house prices appreciated the most, terminations were dominated by prepayments. When the housing market slowed, terminations were mostly in the form of defaults.
Yuliya Demyanyk, a senior research economist with the Federal Reserve Bank of Cleveland and author of the subprime report, said her findings are in line with an earlier study that found the housing crisis — the unusually high default rates among 2006 and 2007 — did not occur because more recent loans were in some respects much worse than all loans that originated earlier. Demyanyk said the quality of loans was declining for at least six consecutive years before the housing market crashed.
"Subprime mortgages were very risky all along," she said. "The extent of their risk, however, was hidden by the rapid appreciation in house prices, allowing terimination of the mortgage by refinancing or pre-payment. When pre-payment became to costly — with zero or negative equity in the house increasing the closing costs of refinancings — defaults took their place."
The study also found that subprime lending did not increase homeownership, as subprime activists believed it could. The number of defaults in a sample of subprime purchase-money mortgages within two years of origination is almost equal to the estimated number of first-time homebuyers who held subprime mortgages, the analysis found. And if the data for the rest of the market were available, Demyanyk said "the number of defaults would no doubt be even greater."
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 Federal Reserve purchased $58.999 billion in agency mortgage-backed securities from government-sponsored entities Fannie Mae (FNM: 0.00 N/A), Freddie Mac (FRE: 0.00 N/A) and Ginnie Mae in the week ending March 4, according to an announcement Thursday by the Federal Reserve Bank of New York. For the first time, the Fed began to list coupon sales as well as its usual MBS purchases from the agencies, and as a result it was able to report only $30.15 billion net in purchases after the sale of some $28.85 billion in agency MBS "by investment managers as agents for the System Open Market Account (SOMA)," the Fed said.
As far as purchases are concerned, it was an expensive week for the Fed; it bought $18.65 billion from Freddie, a whopping $39 billion from Fannie and $1.35 billion from Ginnie. The Fed's purchases marked the largest purchase week for both Fannie and Freddie. The bulk were purchases of coupons with 30-year maturities, with 4.5s taking the cake at a $18.85 billion price tag to the Fed. Nearly $28 billion in other purchases were concentrated in 5.5 and 6 coupons.
The Fed also sold in the same week nearly $29 billion in agency coupons, primarily 30-year 5.5 and 6 coupons. A slim $250 million of the week's sales were 15-year 4.5 coupons, while $3.2 billion in sales were smaller 30-year 4 and 5 coupons.
See a table of the week's purchases and sales.
The Fed's assets shrank $8.75 billion in the same week ending March 4, according to a balance sheet summary released Thursday. The data show the Fed's consolidated balance sheet fell to a value of $1.89 trillion from the previous week, but is up almost $1.02 trillion from the year-ago week ended March 5, 2008.
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.
Wells Fargo & Co. (WFC: 29.60 +1.89%) became the last major commercial bank to cut its dividend amid mounting pressure from bad mortgages and related loans on its books Friday morning, cutting its quarterly common stock dividend 85 percent, from $.34 to $.05 per share.
"This was a very difficult decision but it's absolutely right for our company and our shareholders because it will further strengthen our ability to grow market share and to continue our long track record of profitable growth," said president and CEO John Stumpf, who said operating results at the San Fransisco-based bank were 'strong' despite the dividend cut. "We will return to a more normalized dividend level as soon as practical."
That practical future, however, may be longer coming than most might think. In late January, analyst Paul Miller at FBR Capital Markets cut his price target on the bank and assigned shares an "underperform" rating, while suggesting in no uncertain terms that Wells would not be able to maintain its dividend.
"WFC is not earning its dividend, which is a $5.8 billion annual drain on valuable capital," Miller wrote in the Jan. 29 note to clients. "WFC needs to rebuild its capital ratios, whether measured by tangible common equity at 2.8% (which we prefer) or regulatory capital ratios."
Miller said then that Wells' capital levels "are just too low" and said that the bank may take another nearly $28 billion in loan loss provision expense this year, due to the absorption of a troubled Wachovia banking franchise. Wells now holds a $120 billion option ARM portfolio, as well as a substantial portfolio of second liens. With more than $200 billion of such loans on the books, any mortgage market participant should ask just how far that book needs to be marked down to (we won't tell you what second liens are trading at right now, but let's just say it's somewhere barely north of zero).
Moody's Investors Service has some concern here, too. The rating agency warned earlier this week that it was reviewing the long-term ratings of the bank for a possible downgrade. Analysts with the rating agency cited "a concern that Wells Fargo's capital ratios could deteriorate in 2009 from their current levels, which are comparatively low, because of the potential need to take high loan loss provisions in 2009."
Rochdale Securities analyst Dick Bove suggested to Reuters on Thursday that the government may have forced Wells into cutting its dividend, after the bank accepted federal funds via the Treasury's Capital Purchase Program. "Is the bank healthy enough to pay the dividend? I think the answer to that is yes. Is the bank likely to be pressured into reducing its dividend? The answer to that is I don't know," Bove told the news service.
I tend to think Bove might be shopping his own book here, after putting a "buy" rating on WFC in January when the bank's stock was solidly in the 20's. Shares in Wells were up 4.56 percent in early trading Friday, to $8.49. I've expressed pretty strong skepticism about Wells' loan book in the past, and that skepticism remains today. While I think the bank has smartly avoided some of the larger pitfalls that have befell its peers — ahem, subprime, anyone? — it's clear there is still plenty of losses that need to be accounted for going forward.
There is an adage here any of us would do well to remember: actions speak louder than words. An 85 percent cut in a dividend? While the core business allegedly remains strong? If the business was that strong, why cut the dividend now, especially in this market? I understand all banks need more capital right now, but the smell test here suggests that Wells' management is saying one thing while doing another. Caveat emptor.
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.
Non-farm payroll employment contracted by 651,000 in February, effectively pushing unemployment to 8.1 percent from 7.6 percent he previous month, according to data released Friday by the U.S. Department of Labor. The economy has shed a total 2.6 million paid, non-farm jobs in the past four months alone, according to the payroll data. The employed sector of the population shrank by about 5 million during the past 12 months, while the unemployment rate has risen by 3.3 percentage points.
The unemployment rate for adult men rose to 8.1 percent, while the rate for women came in at 6.7 percent. The white population experienced 7.3 percent unemployment, while blacks saw 13.4 percent, Hispanics reported 10.9 percent and Asians experienced only 6.9 percent. The percentage of unemployed teenagers remained high, with 21.6 percent unemployment in February, according to the data. The population with the largest increase in its unemployment rate since January was that of Hispanic or Latino ethnicity, which posted a 1.2 percentage point increase. The population with the smallest increase was white workers, who experienced only a 0.4 percentage point incline.
The sharp inclines in joblessness have sparked a number of relief efforts. Citigroup Inc. (C: 30.87 +1.61%) was the recent and perhaps the largest player to come out in support this week for recently unemployed borrowers. Beginning March 3, CitiMortgage customers meeting certain criteria who have recently lost their jobs are eligible to participate in the new assistance program, the company said in a press statement Tuesday morning. The bank will actually drop the required monthly payments for the “majority of qualifying customers” to an average of $500 for three months — $500 is below the cost of the nationwide average rent for a one-bedroom residence.
“Unemployment is a major concern facing the American economy right now, and it especially worries mortgage holders,” said Sanjiv Das, CEO of CitiMortgage. “Our Homeowner Unemployment Assist program is intended to serve as a bridge toward a longer-term solution, helping homeowners stay in their homes and in their communities while they get their feet back on the ground.”
Another 787,000 people were forced to work part-time "for economic reasons" — meaning their hours were cut or they were unable to find full-time positions — in the month. The professional and business services sectors shed 180,000 positions in February, while manufacturing posted a 168,000 paid position decline. Employment in financial activities slipped by 44,000 jobs in February. Only health care — often seen as recession-proof — bucked the trend, continuing to add jobs in the month. Hospitals nationwide hired 7,000 workers, while 16,000 people found work in ambulatory health care in the month.
Write to Diana Golobay at diana.golobay@housingwire.com.
Citing "outstanding growth in 2008," Mequon, Wisc.-based Mortgagebot LLC said Friday it had acquired Bellevue, Wash.-based Netupdate from Canadian-based Most Home Corp. Mortgagebot provides point-of-sale lending technology to the mortgage industry; Netupdate has been a direct competitor for roughly a decade, and the acquisition underscores much of the consolidation now taking place in the origination tech space.
Most Home had been shopping its POS origination platform for the past few months, recently seeing a tentative deal to sell Netupdate to Data-Vision, Inc. fall through in early February. Most Home acquired Netupdate in early 2008, just as the nation's lending crisis was gathering a full head of steam.
Terms of the sale were not disclosed by either company. Scott Happ, president and CEO at Mortgagebot, said the acquisition will bring together clients of the two largest online mortgage lending platforms; clients of the Netupdate platform will be migrated to the Mortgagebot platform.
With the Netupdate acquisition, Mortgagebot will see its client base of banks, thrifts, and credit unions move to more than 900 organizations nationwide.
Write to Paul Jackson at paul.jackson@housingwire.com.
The House approved a hotly-contested measure that would grant bankruptcy judges the authority to alter mortgage terms to help homeowners skirt foreclosure, 234- 191, in a late Thursday vote.
Bankruptcy courts are currently barred from rewriting the loan terms on a primary residence, but under the proposed legislation, judges could reduce the interest rate, reduce the principal or extend the life of an existing loan — but only for loans underwritten prior to the enactment of the bill, at least for now.
The bill, called the Helping Families Save Their Homes Act of 2009, has been painted by key Democratic lawmakers as essential in easing the housing crisis, and was central to President Obama's election platform; nonetheless, the original version hit a snag last week when some Democrats, who likely heard complaints from the lending community and even the general public, voiced their concerns that homeowners might abuse bankruptcy to obtain reductions in mortgages they can actually still afford.
“Our intention was to make sure this was available, but as a last resort,” said Ellen Tauscher (D-CA), a leader in the quest for provisions.
Tauscher, joined by colleagues Zoe Lofgren (D-CA) and Dennis Cardoza (D-CA), helped to hammer out a compromise to the housing bill. The compromise requires bankruptcy judges to consider whether banks offered homeowners a “qualified” loan modification –- defined as one that set monthly payments equal to approximately one-third of a borrower’s income — before opting to grant judicial aid.
“The concern is that we want to ensure that those people who get relief have tried other avenues,” House majority leader Steny Hoyer, (D-MA), said Tuesday, according to Yahoo! News. In other words, borrowers must prove they’ve thoroughly attempted to help themselves, although critics suggest such hurdles are more a decoration than any real impetus to preventing the abuse of the bankruptcy system.
The revised bill would require homeowners facing foreclosure to seek a loan modification 30 days prior to pursuing one in court, and provide their lender with the necessary personal financial information — “not just [make] a phone call to an answering machine,” said Lofgren.
Judges would also have to use federally approved appraisal guidelines in determining a home’s value and weigh a borrower’s income against their current payments before deciding whether an interest rate or principal reduction was essential.
“Some may think the changes made to the bill go too far, while others will contend that they do not go far enough,” wrote Tauscher, Lofgren and Cardoza to their colleagues. “Given the ever deepening housing crisis, however, we ask you to place such differences aside — as we have done — and support this effort.” Democrats say the legislation could cut foreclosures 20 percent.
The mortgage industry still argues that such loose access to bankruptcy court mortgage modifications could impose significant costs on its companies, which would eventually be handed off to borrowers in the form of higher fees and rates — although, the revised bill may seem somewhat more appealing to the mortgage industry.
Efforts to pass cramdown legislation has faced tough opposition in the Senate, too, at least previously, which could consider its own version of the bill later this month according to sources.
Write to Kelly Curran at kelly.curran@housingwire.com, and Paul Jackson at paul.jackson@housingwire.com.
Mortgage delinquencies piled up at record pace in the fourth quarter of 2008, hitting an all-time, seasonally-adjusted high of 7.88 percent of loans outstanding, the Mortgage Bankers Association said Thursday.
The delinquency rate, which includes loans that are at least one payment past due but not yet in foreclosure, was up from 6.99 percent in the third quarter and 5.82 percent a year ago. The volume of loans in the foreclosure stage jumped 3.30 percent, also reaching a new record high, according to the MBA's report.
“Unfortunately, the mortgage sector continues to experience increases in the delinquency rate due to worsening economic conditions in both the labor and financial markets,” said Keith Carson, a senior consultant in TransUnion’s financial services group.
“When it’s a loan structure issue, you can deal with that, but when it’s an unemployment issue, unless you go out and find them a job there’s not much you can do,” Jay Brinkmann, American CoreLogic's chief economist told Bloomberg. “Eventually that loan will go into foreclosure.”
The combined percentage of loans in foreclosure and loans past due in the fourth quarter was 11.18 percent, the highest since the MBA began tracking delinquencies in 1972. The percentage of loans 60 days past due and 90 days or more past due, also broke records set last quarter.
On Monday, Housing Wire reported that TransUnion recorded a 53 percent rise in fourth-quarter delinquencies, bringing the national delinquency average, based on their findings, to 4.58 percent of outstanding loans — a seemingly astonishing figure, yet still well below MBA's findings. Information for TransUnion's analysis is pulled quarterly from approximately 27 million anonymous, individual credit files.
TransUnion found that delinquency rates in the fourth quarter were highest in Florida and Nevada, sitting at 9.52 percent and 9.01 percent, respectively. The lowest mortgage delinquency rates were found in North Dakota, at 1.21 percent, and Alaska, at 1.74 percent.
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.
