Caution, Slippery Slope Ahead: The biggest story of this week broke today, regarding the Treasury Department's efforts to establish a widespread bailout of troubled subprime borrowers -- an effort that is allegedly going to be inked before the end of this year. Details are scarce at this point, but one thing is clear: investors have been buoyed by the news, and there are going to be plenty of pissed off mortgage holders among the more prudent borrowing public. The Asssociated Press ran a story Friday evening on this, and even managed to quote Spider Man on the issue:
"It's people's own fault that they didn't pay attention to what was going on," said Cincinnati high school teacher Peter Parker, 32, who cautiously borrowed more than $400,000 in the last two years to buy two investment properties. "It's not the government's job to bail them out."
Peter Parker was Spidey's alter ego in the famous comic book series, for those that don't know - and it's not wise to upset Spidey. On a more serious note, I'll have some analysis around what the bailout plan likely means, including the good, the bad, and the ugly, later this weekend. In the meantime, I'd recommend HW readers revisit a post I published way back in August about why any sort of bailout plan is likely to backfire. At least the coverage is closer to accurate: A reporter at a news outlet I'll keep anonymous sent me a link to the U.S. Business headlines today for the Wall Street Journal, which contained a story titled Judges Tackle 'Foreclosure Mills'. The story covers some of the same points I made in recent coverage on Housing Wire regarding a series of recent foreclosure rulings affecting assignment and release procedures (see "The Mess that Boyko Made: Pot, Meet Kettle"). It's getting a little closer to accurate. I'm glad to see media outlets like the WSJ attempt to focus their coverage on the real issue behind the Boyko ruling, even if they aren't getting it exactly right, especially after the joke of a story put out there by the New York Times. Is the mortgage crunch hitting state-run investments? The short answer is an ominous yes; Florida officials suspended withdrawals earlier in the week from an investment fund for schools and local governments after redemptions sparked by downgrades of debt held in the portfolio reduced assets by 44 percent. From Bloomberg's coverage on the matter:
The Local Government Investment Pool had $3.5 billion of withdrawals today alone, putting assets at $15 billion, said Coleman Stipanovich, executive director of the State Board of Administration, at a special meeting held to address the crisis. The board manages the fund along with other short-term investments and the state's $137 billion pension fund.
The problem is making it hard for school districts, counties and cities across Florida to make payroll. And all because fund managers decided to chase high yields in asset-backed paper, without knowing they were buying part of the toxic mortgage mess. Marketwatch reports that other states are very, very concerned:
The Montana Board of Investments, which manages the state's money, has seen $247 million withdrawn by local governments in the past three days from a $2.5 billion money-market-like fund called the Short Term Investment Pool. "We've had some local government withdrawals in the past few days because of reports about Florida's problems," Carroll South, executive director at the Montana Board of Investments, said in an interview on Thursday.
New Century asks for more time: Failed subprime lender/servicer New Century Financial Corp. said this week that it needs more time to prepare its Chapter 11 liquidation plan, citing bickering among its creditors. From the Associated Press:
In papers filed Wednesday with the U.S. Bankruptcy Court in Wilmington, Del., the failed subprime-mortgage lender said its lawyers have already challenged some of the claims, and it is trying to knock others out of consideration as well. But the Irvine, Calif., company said that sifting through claims, including "a vast amount" of damages sought by Wall Street investors, has been so time-consuming that the company hasn't been able to complete its Chapter 11 plan.
There can't be much blood left in this turnip, so it'd be surprising if creditor unrest is really holding things up here -- either that, or New Century has more assets remaining than most might think. Automated Underwriting isn't dead yet: Rick Grant has a thought-provoking look at Loan Score Decisioning Systems, LLC, a technology provider that makes it possible to combine multiple underwriting engines into one tool -- the idea is similar to what you might see in so-called cascading AVM tools. It's worth a read, given how much heat AUSes have been taking lately in the lay press -- and probably wrongfully so. Lax underwriting standards are one thing, while the software that automates whatever standards that exist (or don't) is another. More innovation in AUS technology is absolutely needed right now; and the sort of thing Rick is discussing is where mortgage technology in origination is headed next. E*Trade Gets ABS Haircut: Hedge fund Citadel Investment Group agreed to buy a $3 billion ABS portfolio from E*Trade Financial Corp. for $800 million, while agreeing to provide roughly a $2.55 billion cash infusion to the troubled brokerage. Note that's roughly 27 cents on the dollar for the ABS portfolio, which could make the "mark to market" debate a source of indigestion during the fourth quarter for more than a few financial institutions. The Calculated Risk blog has posted some strong commentary and information on the issue worth your read. Alt-A MI gets scarce: You might not have noticed, but MGIC said this week that it's changing its underwriting criteria for mortgage insurance -- in particular, the insurer is nearly getting rid of underwriting policies on Alt-A loans. Any wonder why stated income underwriting at most lenders is quickly being limited to self-employed borrowers only? HW broke the story last week that AIG United Guaranty also was changing to its MI underwriting guidelines as well. Something tells me the mortgage insurance industry was expecting a bigger bump in revenues from recently-passed legislation that made premiums deductible for certain borrowers. IndyMac, expanding Alt-A offerings? An interesting auto-reply from an unnamed IndyMac originator today (spelling errors intact):
I have received your e-mail. I have GREAT news. We have drastically increased our conformng balance Alt A product offering. This is so new our marketing department hasn't had time to update the matrices. Guidelines are in QP and e-MITS. I am working on my own updates for you and hope to get them out Monday morning. Feel free to tryi all scenarios in QP. I have a conference call this afternoon to cover these changes and I will be available to personally assist with all scenarios on Monday.
If you have any details on this, feel free to email Branding goes both ways: Per a post on Bill Coppedge's site, an example of branding gone awry:
When you type in the URL, it takes you right to MortgageIT's website! That should give the investment community security when investing in Deutsche Bank MBS's.
Something tells me that wasn't how the marketers who dreamed that one up intended things to turn out. On that note, have a great weekend - and be sure to check back early next week for commentary on the Treasury's proposed "rate freeze" program.