It's been another busy week in the mortgage markets, as readers of this blog know. But there were plenty of stories I didn't have time to highlight this week -- so I'm going to take some time to highlight some coverage I've seen in the media and across the blogosphere that mortgage industry professionals need to know about... Merrill Lynch's subprime exposure: The Wall Street investment bank hinted on Friday that it may take a hit in the third quarter in connection with its mortgage-related business activities. From the SEC filing:
Credit market conditions have continued to remain challenging in the third quarter, and the firm, as part of its regular accounting processes, has made requisite fair value valuation adjustments as appropriate to certain of these exposures, which are reflected in our third quarter to date results.
The Wall Street Journal covered market reaction to the filing, and also published a dynamic look at how third quarter earnings at all Wall Street investment banks will likely be closely watched for information regarding just how much exposure the financial titans have to subprime mortgage-backed securities and associated derivative instruments. Risk-based pricing and pricing transparency: Tanta at Calculated Risk has written a long and winding missive on risk-based pricing and what it really might mean for consumers. It's worth a read, purely because she asks some very good questions -- like whether or not a mortgage broker has any real interest in helping borrowers. A mortgage that adjusts to pricing indexes? Mathew Padilla at the OC Register's Mortgage Insider blog interviews an assistant professor from UC Berkeley who is proposing a mortgage that sees payments adjust relative to a national price index (such as the Case-Shiller indices). I think the plan is nuts, personally, and if I had the time I'd lay out why -- suffice it to say that such a plan would essentially vaporize any future price gains from the housing market. Talk about a "giant sucking sound." If you thought underwriting standards were tightened months ago, you'd better think again: Most of us keep hearing from the press how lenders are or have been tightening various underwriting standards, a common response to current-period losses reported by most for the second quarter. Morgan Brown at Blown Mortgage provides a post that suggests that much of that posturing may have been hot air, noting that Chase just this week eliminated stated & no income Alt-A loans. I'd noted in a post in late August that early performance of the 2007 vintage appears to be questionable, and news like this suggests that it won't just be the 2006 vintage that performs poorly. To blame the reset, or not to blame the reset: National Mortgage News editor Paul Muolo teases an upcoming interview with Countrywide CEO Angelo Mozilo:
He [Mozilo] blames a majority of the problem on job losses and sagging home prices -- not ARM resets. "Resets are not the issue," he stressed.
A recent study put out this past week by Danske Bank (hat tip, Bill Coppedge) would seem to take issue with Mozilo's characterization, noting that the current mortgage crisis is living in ARMs -- subprime and otherwise:
As we have stressed repeatedly, the rise in foreclosures and delinquencies is occurring among households with ARM loans in general. There is actually no major rise in delinquencies and foreclosures among subprime households with fixed-rate mortgages. Evidently this is an ARM crisis more than a subprime crisis.
Be sure to look at the performance charts provided in the study. My take here is that subprime mortgage resets lit the fuse to a larger credit crunch, which has issued feedback signals now hitting the broader ARM and second-lien mortgage markets. Next up would appear to be an impact to prime and conforming mortgage portfolios, according to industry sources I've spoken with that say they're seeing early evidence of this. In a sense, then, Mozilo's probably correct: this isn't an ARM issue. But it's most certainly shown up there first. UK bank run: Alluding to the broader risk re-alignment in the global financial markets, U.K. mortgage bank Northern Rock is seeing a classic run on its deposits after the bank requested emergency funding from the Bank of England. The Wall Street Journal has the latest update, and reports:
The bank made the request Thursday because it relies heavily on wholesale money markets for cash, and had been unable to borrow the amounts it required from other banks since the money markets choked up last month. That was caused in part by U.S. banks making mortgage loans to U.S. borrowers with poor credit histories.
The problems at Northern Rock underscore another aspect of "what's different" with the current downturn in mortgage banking. As I've noted before, this is a cyclical industry, but we've never really experienced a strong industry downswing as an interconnected part of the world's global financial markets -- which in some ways puts us into uncharted territory. The folks over at Housing Doom have posted a video of a purported run on one of the bank's branch locations. GMAC fishing for more cash: On the heels of ResCap's sale of its healthcare-related financial assets a few weeks back, it looks like GMAC has arranged some extra liquidity in the form of a $21 billion financing arrangement from Citigroup. Terms of the credit deal weren't disclosed, but most analysts took the move to mean that GMAC is bidding to add liquidity to its troubled ResCap unit, which lost more than $1 billion in the first two quarters of this year. Credit repair, booming again? Rick Grant notes that the subprime credit crunch has led to what he calls the "inevitable rise of credit repair." The reason here is simple:
When it becomes impossible for a broker to find a program for a C-credit borrower, it is suddenly very important to find a way to make that borrower look like a B-credit risk.
Very thought-provoking, especially in light of the credit-piggybacking scam I blogged about in June. I'm curious how many of these "repair" efforts are merely smoke and mirrors, designed to get a boost in credit score and a closed loan on the books. Jobs and videos: Lastly, amid what I expect will be mortgage industry job losses surpassing 100,000 this year alone, I wanted to remind readers about the Job Board here at Housing Wire. I started the service a few months back to help those displaced hopefully find new work, and to help companies looking to hire get in front of a very targeted audience. So far, companies including GMAC Mortgage have been featured on the Job Board -- it's a low-cost way to reach those who read this blog each day, and whether you work in secondary markets or loan origination, if you're currently looking for work I hope you'll find something of interest there. Learn more by clicking here. And don't forget the Video Channel, either -- if you're looking for direct access to relevant Bloomberg video clips and industry interviews, look no further. At any rate, thanks for making HW part of your daily routine. See you next week.