Archive for June, 2009
As shocking as it is, the story of the pay-option adjustable-rate mortgage (ARM) has become old news: A borrower buys a huge home worth $1m with a mortgage that seems too good to be true at little more than $2,500 per month.
After the bills start coming in, however, the borrower realizes it really was too good to be true. The bill had only prompted the minimum due, even though the total amount payable was more like $5,000. The bank conveniently loaned the borrower the remainder each month and tacked it onto the principal.
Then the monthly rate reset. The pile of debt that initially grew bit by bit now swells into a mountain.
And the borrower? Stuffed under too many helpings of debt, underwater on the home and losing any chance or hope to refinance.
Some groups, like the mortgage loan restructuring business segment of the Law Offices of Joseph R. Manning, Jr., promise relief through mortgage modification (although what can be said about the success of these efforts when the mortgages are already too deep underwater to qualify for refinance is unknown).
Sean Reynolds, the managing director of the legal office's restructuring business, calls pay-option ARMs the next wave of defaults plaguing the luxury home market — where many of these ARMs cropped up, as the average borrower couldn't afford them any other way. The law office is even prepared to go after lenders, brokers and servicers that violate borrowers' rights, according to a media statement.
Without getting into what responsibility the borrowers are expected to take in the origination process, it's understandable that home owners would attempt to do something about all that debt, regardless of whether they can actually repay it.
It's no wonder that consumers who took out pay option ARMs, subprime mortgages and other heaping helpings of debt are finding themselves in dire straits. With already expensive mortgage payments about to explode with reset rates, some home owners might even have to pass debts from one form to another to make ends meet each month.
One such option, credit card debt, is showing signs of the strain as some home owners are forced to use credit cards for living expenses after the mortgage payment wipes out a substantial portion of monthly income.
TransUnion.com, one of the major US credit bureaus, found the average bank card borrower's debt inched up 0.82% to $5,776 in Q109 and is up 4.09% from the year-ago quarter. Meanwhile, the bank card delinquency rate of borrowers 90+ days past due on one or more of their cards rose 1.32% in Q109 and is up 9.1% from the year-ago period.
"As the recession entered its sixth quarter, we saw continued increases in average bankcard balances, as consumers struggled to meet repayment obligations in a job market that continues to deteriorate," says Ezra Becker, director of consulting and strategy at TransUnion's financial services group, in a media statement today.
With the US unemployment rate now up to 9.4%, some borrowers that had relied first on refinanced mortgages and then on credit cards to get by may soon find themselves facing an unhappy alternative: foreclosure, repossession or bankruptcy.
In May alone, US consumer bankruptcy filings were up 37% from the year-ago levels, according to the American Bankruptcy Institute (ABI). The total volume of filings in the month — 124,838 — stayed roughly level with April's volume — 125,618 — although Chapter 13 filings made up 27% of all consumer cases in May, above the April rate.
A Chapter 13 case allows the debtor to keep his or her possessions and property, and to pay creditors under a budgeted plan. And, if Senate Bill 61 eventually goes through, a Chapter 13 debtor might also qualify for his or her bankruptcy judge to forgive — or "cram down" — a portion of the home mortgage balance or otherwise modify the mortgage to ensure affordability of payments going forward, again passing the debt further away from the borrower.
“As consumers continue to face increasing levels of unemployment and rising foreclosure rates, bankruptcy filings will continue to accelerate as families seek financial relief from the tough economic climate,” said ABI executive director Samuel Gerdano in a media statement.
With the ABI predicting more than 1.4m new bankruptcies by year-end, it seems like the cycle will continue to unwind as long as the housing market stumbles along toward bottom.
Job loss remains a critical threat to housing's recovery, as the loss of income continues to boost defaults and foreclosures.
The good news is an accelerated effort by the Obama administration to create over 600,000 jobs in the next 100 days is underway. Vice President Joe Biden calls the effort ambitious but realistic.
"In May, we lost 345,000 jobs, which marks the smallest monthly job loss since September but which nonetheless represents 345,000 terrible stories," said Biden today. "Our ultimate goal is making sure that the average family out there — mom working, dad working — that they are able to pay their bills, feel some job security, make their mortgage payments."
The initiative to create thousands of additional jobs is part of what the cabinet is calling a "Roadmap to Recovery," an outline of the administration's 10 most significant projects over the next three to four months.
Some of the projects include creating and building 1,129 health care facilities, improving veterans' medical centers across the country, putting 5,500 law enforcement officers on the streets, and creating 135,000 education jobs.
The ventures are part of ongoing efforts under the Recovery Act — a plan championed by Biden today.
"Now I know that there are some who, despite all evidence to the contrary, still don't believe in the necessity and promise of this Recovery Act," Biden said. "And I would suggest to them that they talk to the companies who, because of this plan, scrapped the idea of laying off employees and in fact decided to hire employees. Tell that to the Americans who receive that unexpected call saying, come back to work."
Write to Kelly Curran.
Despite the green shoots spotted across the economy — recently by US Treasury secretary Tim Geithner — a long road remains before recovery, and the only thing powerful enough to sustain growth just might be tighter government regulation.
That is, according to one Federal Reserve Board member, Daniel Tarullo. In a speech given earlier today, he says he sees economic growth resuming later this year, despite "painfully slow" recovery to follow.
Tarullo points toward the slowed pace of decline in the last few quarters as an indication of the economy settling toward bottom and warns that continued economic strain may dull the slope on the upward side of the recession. Of particular concern to US households is rising unemployment — now up to 9.4% — and falling house prices.
But the strain felt across the economy didn't start with inflated house prices, Tarullo argues, but rather the failure or inability of the regulating agencies to prevent such bubbles in the first place.
Systemic, interconnected firms took risks that led to the scope of the recession, making a clear case for more regulation going forward, he says. Fallout from the Lehman Brothers' collapse and repercussions of government intervention in AIG and Bear Stearns demonstrates systemic risk is beyond current regulation.
Tarullo urges a "major reorientation of our regulatory and supervisory system," as this lack of regulation allowed rapid and unsustainable appreciation of some asset prices, including subprime mortgages, some securitization products and credit default swaps.
"There was a massive breakdown of risk management and a suspension of simple common sense within many financial firms" in the events that led to the recession, Tarullo says.
The solution? More government, according to Tarullo. Regulating agencies should adjust policies where needed, depending on the shortcomings observed from the past crisis. Regulators should discuss legislation that would proactively deal with systemic risk. They should develop ideas and proposals that might not be immediately adoptable but prove useful in the development of policy alternatives.
As for specific regulations, Tarullo suggests tighter capital requirements for financial institutions, in both the quality and amount of capital held. He calls for the supervision of bank holding companies as well as the development of a "resolution regime" for systemically significant non-banks similar to that of the Federal Deposit Insurance Corp. for depository banks. He recommends detailed requirements for assessing the stability of the US financial system and addressing the potential for systemic risk within payment and settlement systems.
There are limits to the extent of government control within the new regulation, Tarullo says. For example, restricting the size or degree of interconnectedness among financial institutions would mark a significant break the way the regulators have traditionally operated.
Write to Diana Golobay.
A new industry partnership has derived an online, third-party solution for home buyers and sellers to to process title insurance and closing settlements.
The partnership between LoanMarket.Net, an online marketplace for buying and selling real estate-secured note investments, and First American Title Insurance Company, aims to provide online buyers and sellers with a single source for efficient and cost-effective title and settlement services.
"We believe that our centralized national solution is a perfect fit for buyers and sellers operating in an online marketplace environment," said Vincent Foley, vice President of First American Title Insurance Co. in a press statement today.
LoanMarket.Net, designed to offer existing investors and potential investors, a neutral, open marketplace, said First American's proven technology, expertise and nationwide reach will ensure customers a seamless title and settlement process.
Write to Kelly Curran.
The countdown to see which banks' capital-raising efforts qualify them to repay US Treasury Department funds has begun.
Nine of the largest US banks will submit capital-raising plans to regulators today under a deadline set forth in the Supervisory Capital Assessment Program (SCAP). The stress tests found these banks needed additional capital to weather severe economic conditions.
The banks coped with the news in a strikingly similar way: raise capital, and do it fast.
Bank of America (BAC: 7.29 -0.14%), found to be in need of $33.9bn, last week announced it had already raised $33bn through various capital-enhancement measures and would meet the capital minimum comfortably. On Friday, BofA added four industry veterans to its board of directors and brought on strategists as it reorganized its executive hierarchy as part of a management assessment.
BofA isn't the only bank taking a critical look at its management. Citigroup (C: 30.87 +1.61%) was also said recently to be in discussions with the Federal Deposit Insurance Corp. to overhaul its executives, despite no official announcements on the issue.
Aside from the capital-raising plans and management review required under the SCAP, the driving goal for many banks remains proving their viability outside of government aid in order to receive clearance to repay capital gained through the Troubled Asset Relief Program. (TARP) To qualify for repayment, banks must prove they can issue debt in the absence of government aid as well as raise capital on their own.
The latest reports out of the Wall Street Journal name Goldman Sachs Group (GS: 111.77 +2.96%) and JP Morgan Chase (JPM: 37.21 -0.75%), among others, as potential candidates for repayment authorization. Both banks were found under the stress tests to be sufficiently capitalized, and announcements of their approval for repayment could come as early as this week.
As of the latest TARP transaction report dated Friday, 22 financial institutions had repaid a total $1.87bn. If US banks begin returning capital on a massive scale, the effect on the TARP balance sheet would be dramatic; If Goldman and Chase alone repaid their funds, TARP would see $35bn in bailout capital return.
Any influx in TARP repayments should put the Treasury in an unusual position of possessing an excess of bailout funds. Congressional Democrats and Republicans that spoke with the WSJ are split on the issue of returned funds, whether the Treasury should reuse the capital for other investments or return it to help offset the country's staggering deficit.
Write to Diana Golobay.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Freddie Mac (FRE: 0.00 N/A) on Friday ended its largest ever cash tender offer, reporting it bought back $18.04bn of its securities.
The tender was announced June 1 in attempt to reduce the GSE's effective short-term debt and move toward larger, longer-term deals with lower rates. The offered debt contained issues totaling nearly $70bn.
Those securities accepted held maturities between September 2009 and August 2010.
Mohit Sudhakar, senior director of debt portfolio management at Freddie Mac, told Reuters the size of the buyback was within the company's expectations and in line with prior tender offers. "All tender offers or any repurchase activities that we do are designed also for supporting not only the liquidity but also the price performance of our securities, which over the long run helps us achieve better funding," Sudhakar said.
Freddie Mac’s short-term funding fell in first-quarter 2009 by $35bn, while its long-term funding increased by $64bn, according to RBS Securities data — signaling the strategic shift toward long-term funding.
All purchases have been offered through lead dealer manager, Barclays Capital, Inc. (BCS: 14.09 +1.15%), and managers Morgan Stanley (MS: 18.56 +2.26%) and Deutsche Bank (DB: 44.44 +2.40%).
The tender offer expired at 5pm EST Friday. The company says the settlement date for all securities tendered and accepted is June 9, 2009. All accepted securities must be delivered to one of the dealer managers no later than 1:30 pm EST, on the settlement date.
Write to Kelly Curran.
[Update 1 includes new details on departures from BofA.]
Of the 19 largest US banks, a few passed the government-initiated stress tests with plenty of capital, some were found to be lacking a few billion dollars, and then there was Bank of America (BAC: 7.29 -0.14%).
In need of billions dollars in fresh capital and reeling from a board of directors exodus — including the departure of 13-year company veteran O. Temple Sloan Jr. from the lead post on the board — BofA needed some new talent. And quick.
With its balance sheet still bearing fresh ink from the recent Countrywide Financial and Merrill Lynch acquisitions, BofA seemed to represent the exception to the government stress test. Arguably the largest US bank still standing, it also took one of the largest capital injections from the US Treasury Department — a total $45bn — and was found to be lacking the most capital of all banks tested.
Regulators determined BofA would need $33.9bn in fresh capital to withstand more severe economic circumstances. The bank touted last week it would "comfortably exceed" that requirement through certain capital-enhancing measures.
That didn't stop the bank, however, from initiating a substantial shuffling of executives and strategists in an effort to restructure its executive hierarchy. The latest hiring spree came Friday as BofA brought on four new directors to its board.
Susan Biles, a former governor of the Federal Reserve system and former CFO and executive in asset liability and risk management at First Tennessee National Corp., joined the board of directors. Former Federal Deposit Insurance Corp. chairman Donald Powell joins the board after 38 years of banking experience.
William Boardman brings a history in law practice to BofA's board. He chaired Visa International until his retirement in 2005 and served in executive roles at Bank One Corp. before that. D. Paul Jones joins the board with executive experience at Compass Bancshares.
BofA's chairman Walter Massey said in a media statement that the additions will help the bank in "achieving its true potential."
On Monday, the bank suffered two more departures from the board of directors although no formal announcement had been made at the time this story went to press. Jackie Ward and Patricia Mitchell both resigned from the board of directors effective June 3, "not as a result of any disagreement with the corporation or its management," according to a filling with the Securities and Exchange Commission Monday.
The day before the four additions to the board, 31-year bank veteran Gregory Curl was named chief risk officer. Curl takes over for Amy Woods Brinkley, who remains at BofA until her retirement later this summer.
Write to Diana Golobay.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Mortgage advisor and portfolio manager National Asset Direct (NAD) is expanding its platform into originations, as the investor/servicer looks to integrate across the mortgage banking value chain.
NAD said Monday it had acquired Scottdale, Ariz.-based United Residential Lending, an FHA lender in 18 states including California, for an undisclosed amount. Additional details surrounding the acquisitions were not made public.
United Residential will operate under the new nameplate iServe Residential Lending, and joins the existing umbrella of iServe business affiliates under NAD, including iServe servicing and real estate asset disposition segments. The newly-branded lender will retain United Residential's co-founders Gary Willis and Doug Wilson as chief operating officer and chief financial officer, respectively.
"United Residential Lending, which has multiple retail branch partners, strong warehouse lending and take-out lending relationships, and a broad geographic footprint, is the ideal addition to our suite of integrated iServe affiliates," says NAD CEO Jeffrey Kaplan in a media statement.
For NAD, the move is one that takes the firm closer to integrating across all mortgage banking activities — meaning the firm can purchase loans, service loans, and originate and underwrite loans. All are critical functions for a firm that specializes in acquisitions of sub-performing and distressed residential mortgages, according to company executives.
"The addition of iServe Residential Lending transforms NAD into a true 'one-stop shop' and provides a significant competitive advantage as we are one of the few companies in this space with servicing, mortgage and real estate under one roof," says Louis Amaya, chief investment officer and chief operating officer at NAD.
Write to Diana Golobay.
As some of the nation's largest banks rush to meet a deadline today to turn in sufficient capital-raising plans for the government's stress tests and others await regulators' permission to repay capital to the US Treasury Department, another failed community bank finds its operations spun off through receivership.
After taking a week off, the Federal Deposit Insurance Corp. (FDIC) on Friday saw another bank failure hit its deposit insurance fund, putting $214m in total assets on the line for sale or disposition.
The banking division of the Illinois Department of Financial and Professional Regulation shut down Bank of Lincolnwood as the extent of the damage from a weak economy continues to pressure the US banking industry. The bank had offered both home equity and mortgage loans, among other business segments.
The FDIC became receiver of Bank of Lincolnwood and entered an agreement with Republic Bank of Chicago to assume all of the failed bank's deposits and $162m in assets. As of late May, Lincolnwood sported $214m in total assets and $202m in total deposits. Its impact on the FDIC's insurance fund is estimated around $83m.
Bank of Lincolnwood's two offices reopened Saturday as branches of Republic Bank of Chicago.
The news marks the latest in a string of busy Fridays in terms of closures. So far in 2009, 37 FDIC-insured banks failed, compared with four at the same time last year.
Read the FDIC's statementon Lincolnwood.
Write to Diana Golobay.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
A look at the stories on HousingWire's weekend desk… with more coverage to come on bigger issues.
Fitch Ratings tightened its criteria on rating US commercial mortgage-backed securities (CMBS) servicers in light of changed market circumstances. Fitch managing director Stephanie Petosa said the market has grown "increasingly vulnerable" and the changes will lead to both upgrades and downgrades among various servicers. The changes:
The Illinois Department of Financial and Professional Regulation shut down Illinois-based Bank of Lincolnwood with its $214m in total assets and $202m of deposits on the line for sale or disposition. Republic Bank of Chicago purchased all deposits and $162m of assets. The Federal Deposit Insurance Corp. assumes all remaining deposits and estimates an $83m loss to the deposit insurance fund.
Discussion around the administration's possible marriage of the Securities and Exchange Commission (SEC) to the Commodity Future Trading Commission (CFTC) and effectual creation of a single derivatives regulator might soon come to a screeching halt. A report filed at Market Watch indicates sources within the administration are altering the president's proposal for regulatory reform to do away with the merger, which poses complications for Capitol Hill. From the report:
The Canadian government touted headway in its own housing stimulus plan designed to encourage home owners to invest in energy-saving home renovations. The plan aims to create jobs and improve the economy by making significant tax credits available to home owners that make some sort of home renovation effort. Since April, for example, an average 21,000 homeowners ordered energy evaluations each month, a 75% increase over April 2008.
Write to Diana Golobay.
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