Friday, November 30, 2007

US Treasury deperate to forstall disaster

The Treasury Dept is recommending that mortgage servicing companies extend the low "teaser" rates for up to seven years. Mortgage bonds will lose about half of their value and the losses will have to be declared immediately. This cannot work because it would instantly make all banks insolvent.

The Wall Street Journal

November 30, 2007


U.S., Banks Near A Plan to Freeze Subprime Rates

November 30, 2007; Page A1

WASHINGTON -- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.

An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years. It could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.

The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.

[Turning Point]

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.

Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.

Mortgage servicers -- the companies that collect loan payments -- are a key part of the coalition, because they are the companies that deal directly with borrowers. Often the servicer is different from the company that originally made the loan. Citigroup and Countrywide are among the nation's biggest mortgage servicers. The mortgage servicers in the coalition represent 84% of the overall subprime market. The coalition also includes lenders, investors and mortgage counselors.

The Bush administration has been looking for ways to stem the fallout from the mortgage crisis. Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson helped assemble the coalition so that government officials could have a single counterpart with which to discuss terms of a plan.

While the government can't force the industry to modify loans, Mr. Paulson and other administration officials have been using moral suasion to push for workouts, telling the companies it is in their interest to avoid foreclosure since most parties can lose money when that happens. A similar plan to freeze interest rates temporarily was recently announced by California Gov. Arnold Schwarzenegger and four major loan servicers, including Countrywide.

Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all.

[Still Ahead]

At a meeting at the Treasury Department yesterday, coalition members told Mr. Paulson and other regulators that they are on track to announce the new industry guidelines by year's end, according to a senior Treasury official. Among those attending were representatives of Wells Fargo, Washington Mutual, Citigroup and the American Securitization Forum, a group whose members issue, buy and rate securities backed by bundles of mortgages.

"There has been a convergence of thought on this," said William Ruberry, spokesman for the Office of Thrift Supervision, which is also involved in the discussions.

A spokeswoman for the American Securitization Forum, which earlier resisted a broad approach to changing loan terms, said: "We support loan modifications in appropriate circumstances and are working to establish systematic procedures to facilitate their delivery."

Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help.

The creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.

Mr. Paulson, who is philosophically opposed to federal meddling in markets, at first rejected a sweeping approach to loan modifications when the idea was floated by Federal Deposit Insurance Corp. Chairwoman Sheila Bair. But he shifted his position recently. He told The Wall Street Journal last week that it would be impossible to "process the number of workouts and modifications that are going to be necessary doing it just sort of one-off."

As a drumbeat of bad news about housing has continued -- including news of fewer home sales, falling prices and higher foreclosures -- the Bush administration has come under pressure to be seen as actively addressing the problem.

"There seems to be a vacuum in terms of leadership," said Brian Bethune, U.S. economist at Global Insight, a research firm. Mr. Paulson and Federal Reserve Chairman Ben Bernanke need "to build up the public's confidence that they will do what is necessary to avoid recession," said Mr. Bethune.

Officials in Washington have been cautious about steps that would be seen as rescuing borrowers, lenders and investors from the consequences of their own bad decisions. That is why few are suggesting direct support for borrowers who can't afford their loans. Mr. Paulson has decided his best option is to prod the markets to sort matters out themselves, as long as companies bear in mind the public interest in keeping people in their homes. "There's not some silver-bullet piece of legislation out there," a senior Treasury official said.

Mr. Paulson, who spent 32 years at Goldman Sachs Group Inc., has been on the phone nearly every day in recent months with the heads of financial institutions such as J.P. Morgan Chase & Co., Bank of America Corp. and Lehman Brothers Holdings Inc. He has talked to chief executives to find out what they're doing to help borrowers and get their take on the extent of the losses and accompanying credit crunch roiling Wall Street.

"Where I'm spending most of my time is in the mortgage market," Mr. Paulson said in another interview this week. He convened a 7 a.m. staff meeting the Monday after Thanksgiving "to find out what are we learning."

"If I ever saw a role for government, it bring the private sector together when innovation has really outrun our ability to deal with it," Mr. Paulson said. He is expected to talk about the administration's approach to the housing crisis at a conference Monday.

Interest rates are set to reset next year on $362 billion worth of adjustable-rate subprime mortgages, according to Banc of America Securities. An additional $85 billion in such mortgages is resetting during the current quarter. The estimates include loans packaged into securities and held in bank portfolios.

Borrowers whose loans are resetting are likely to have a tougher time sidestepping the rising payments by refinancing or selling their homes. Lending standards have tightened and many borrowers can't qualify for refinancing. And falling home prices mean that many borrowers have little or no equity in their homes. Some owe more than their homes are worth.

Top Treasury officials fear that unless creditors agree to relax the terms on many of those mortgages, borrowers will default at a higher pace. About 6.6% of subprime mortgages were in foreclosure as of August, the most recent data available, according to First American LoanPerformance.

Tuesday, November 27, 2007

What Next?

So now that countrywide is toast, what next?

I think that the blame for this debacle will fall mostly on Moody's (ticker symbol: MCO). They help investment banks package "dodgy mortgages" into packages (CDOs) and then publish credit ratings on them. They are the ones who have "blessed" these CDOs as AAA rated (same as US government debt) so that pension funds and bank savings accounts can invest in them. They are rapid losing all credibility.

The Federal Reserve Bank is in the horns of a dilemma. They can cut interest rates to increase the money supply so that troubled banks can raise cash; however, this causes the dollar to fall against foreign currencies and commodities such as oil and gold, and increases inflation.

The question is, how long will the Fed keep it's inflationary policy of cutting interest rates. My cynical view is that they will keep cutting rates until the fat cats trade out of their positions, then they will increase interest rates and look out below! Otherwise they will end up creating a market bubble, probably in a different market, such as oil or gold.

If you don't think the Fed would do that, consider that that Federal Reserve Bank is privately owned by it's member banks and has a fiduciary duty to act on their behalf. I'm not getting on a soapbox about that fact. I don't care. I just understand it and profit from it.
The New York Times

November 28, 2007

Foreclosures by Lender Investigated

The federal agency monitoring the bankruptcy courts has subpoenaed Countrywide Financial, the nation’s largest mortgage lender and loan servicer, to determine whether the company’s conduct in two foreclosures in southern Florida represented abuses of the bankruptcy system.

The subpoenas for Countrywide documents were issued in late October by the United States Trustee after the agency announced an effort to move against mortgage servicing companies that file false and inaccurate claims in foreclosure cases. The inquiries into Countrywide by the trustee’s office, a division of the Justice Department, come as foreclosures are increasing across the country.

The ways that lenders and loan servicers deal with troubled borrowers are also coming under increased scrutiny by judges. In recent weeks, three federal judges in Ohio have dismissed 73 foreclosure cases brought by lenders and loan servicers against borrowers because the companies failed to show proof that they owned the notes underlying the properties they were trying to seize.

In Florida, one of the trustee’s inquiries involves Manuel Del Castillo and Maria E. Pena, Miami borrowers who filed for protection last May under Chapter 13 of the bankruptcy code. In July, Countrywide Home Loans filed a claim, saying that the borrowers owed almost $279,000 on their loan.

Included in the figure, court documents show, was an $11,924 advance Countrywide said it had made to an escrow account before the borrowers filed for bankruptcy as well as an insufficient- funds fee of almost $683.

In the second case, the trustee has asked for documents relating to Countrywide’s claim for almost $101,000 against William and Joyce Chadwick, borrowers in Boca Raton, who filed for Chapter 13 protection in October 2005. Included in that figure was $2,400 in overdue mortgage payments.

The borrowers in both cases objected to Countrywide’s claims of what was owed. In court documents, the Del Castillos argued that Countrywide had not provided an itemized list of the charges, while the Chadwicks contended that their mortgage payments were current.

Countrywide failed to appear at hearings on both borrowers’ objections, and judges ordered the fees stricken from the claims.

The United States Trustee took an interest in both matters after Countrywide did not respond to the borrowers’ objections.

In court documents, the trustee said that it intended to examine the procedures Countrywide used to determine that it had a valid claim to the properties and that it had correctly calculated the amounts it said the borrowers owed. The trustee’s office asked Countrywide to produce a copy of the notes and mortgages, a payment history on both loans and the correspondence it had with the borrowers.

Countrywide objected to the trustee’s examination and subpoenas in both cases, saying that they were overly broad and exceeded the office’s powers. But the bankruptcy judge hearing the Del Castillo case ruled against Countrywide last week and the examination will go forward. A hearing on the Chadwick case is scheduled for Dec. 3.

A spokeswoman for the United States Trustee’s office in Washington declined to comment further. A Countrywide spokesman said the company did not comment on pending litigation, but added that it had intended to appear at the hearings and was investigating why its outside counsel did not do so.

Questionable or nonitemized charges levied on imperiled borrowers by lenders and loan servicers are an industrywide problem, consumer advocates contend. A recent study of more than 1,700 foreclosure cases by Katherine M. Porter, an associate professor of law at the University of Iowa, showed that questionable fees had been added to almost half of the loans she examined.

In a case involving Wells Fargo and a Louisiana borrower, for example, the court found that the bank assessed improper fees and charges that added more than $24,000 to a loan, some 12 percent more than the court said was actually owed.

In another case, Ms. Porter found that a lender had claimed that the borrower owed more than $1 million but that an examination of the loan history showed the true balance to be $60,000.

William J. Brennan Jr., director of the Home Defense Program of the Atlanta Legal Aid Society, said dubious fees were common among the cases he sees.

“Since there has been so little response from the federal regulators in terms of addressing mortgage lending abuses, including adding post-petition bankruptcy fees to borrowers’ loans, it is refreshing and gratifying to see that the U.S. Trustee is taking an interest in this,” Mr. Brennan said. “We see so many instances where our clients have filed Chapter 13 bankruptcies, and property inspections, broker price opinions, late fees will appear. Those fees are improper and illegal and should be credited back to the homeowners.”

Monday, November 26, 2007

Hilarious, but true

Hilarious, but true (Part 2)

Updated chart of upcoming mortgage resets

Shows even more resets in '08 than '07.

Source of CFC funding

We'll we've finally figured out where Countrywide is getting it's operating funds from FHLB. Unlike Fannie Mae and Freddie Mac, FHLB is not publicly traded, so you can't short it. It's privately owned by the member banks like the Federal Reserve Bank.


Schumer: Loans to Countrywide need a look

Senator says troubled mortgage company is default risk for billions in loans from Federal Home Loan Bank.

WASHINGTON (AP) -- Sen. Charles Schumer urged a federal regulator Monday to examine whether loans to troubled Countrywide put at risk a network of regional government-sponsored lenders.

Countrywide (Charts, Fortune 500), plagued by a surge of defaults among loans made to borrowers with weak credit, is the largest borrower from the Federal Home Loan Bank of Atlanta, with $51 billion, or 37 percent of the bank's total advances as of Sept. 30, according to a Securities and Exchange Commission filing.

The Federal Home Loan Bank system, created by Congress during the Depression, has some 8,100 members around the country including banks, savings and loans and credit unions.

As the upheaval in the mortgage market worsened this year, the 12 regional banks that make up the system have made billions available to banks and thrifts that make mortgage loans. Because members are government-insured deposit takers, they are subject to stricter federal regulation and underwriting guidelines.

However, the New York Democrat, a member of the Senate Banking Committee, said in a letter Monday to Ronald Rosenfeld, chairman of the Federal Housing Finance Board, that Countrywide's loans are likely to be at risk of default.

"At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk," Schumer said in a prepared statement Monday, citing Countrywide's emphasis on so-called "payment-option" mortgages, a loan in which the borrower has the option to allow the principal balance to increase.

Schumer's letter was prompted by a story Monday in The Wall Street Journal that highlighted concerns about Countrywide's reliance on the Atlanta bank for funding.

A spokesman for the Atlanta bank declined to comment. The bank said in a September SEC filing that it "has minimal exposure to subprime loans." A spokesman for Rosenfeld couldn't be reached for comment.

Like mortgage finance giants Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500), the federal home loan banks are government-chartered enterprises, benefiting from the widespread assumption on Wall Street that the federal government would bail them out in the event of a crisis.

That implicit backing enables the home loan banks as a group - made up of 12 individual cooperatives - to borrow cheaply on global markets by issuing hundreds of billions of dollars in top-rated securities backed by mortgages.

Monday, November 19, 2007

Aloha, CFC

I'm starting to close out my options positions. I'm looking to be out by $6.

Thursday, November 15, 2007

Countrywide Financial: About to Hit the Mat?

The financial sector has been taking it on the chin over the last half of 2007 due to the collapse in the subprime mortgage sector.

Countrywide to Fitch: Please Do Not Downgrade Our Debt

Given that Fitch is implicitly admitting that it is making rating decisions not on merit alone, but on perceived implications of what a rating change might do to the company being rated (see Any Credibility Left At Fitch?) what does Countrywide Financial have to lose by pleading downgrade could weaken business?

Saturday, November 10, 2007

Too Bad, So Sad

Countrywide says downgrade could weaken business
Friday November 9, 11:38 pm ET

NEW YORK (Reuters) - Countrywide (NYSE:CFC - News), the largest U.S. mortgage lender, said in a U.S. regulatory filing on Friday, that if its credit rating dropped below its current lowest rating, this would "severely," limit its access to the public corporate debt market and that could have repercussions on its business.

A below investment-grade rating also would mean Countrywide would face more restrictive terms and higher rates when it renegotiated or refinanced its existing borrowings, the company said in a U.S. Securities and Exchange Commission filing.

"While we retain our investment grade ratings, all three rating agencies have placed our ratings on some form of negative outlook," the company said in the filling.

Additionally, a below investment-grade rating also could affect the company's bank subsidiary's ability to capture custodial deposit accounts on deposit.

"As of September 30, 2007, up to $5.5 billion of our custodial deposits may be subject to placement with another bank if our credit ratings were reduced below investment grade," Countrywide said in the filing.

A ratings downgrade also would harm its ability to retain commercial deposits.

Countrywide suffered a mortgage and capital markets crisis that peaked in August and which some critics say it helped create. In the third quarter, the company posted a $1.2 billion loss.

To mitigate the risk, Countrywide said it has procured other sources of liquidity, including $9.2 billion of cash and cash equivalents in the bank at the end of the quarter.

Countrywide also said it has focused more on loans that it can be directly sold or securitized into programs by government-sponsored agencies, such as Fannie Mae, Freddie Mac and Ginnie Mae.

By the end of the third quarter of 2007, 4.9 percent of subprime loans it serviced were pending foreclosure, up from 2.9 in the year-earlier quarter. Delinquent subprime loans rose to 29.9 percent from 16.9 percent.

The foreclosure rate for all its loans in its servicing portfolio rose to 0.9 percent from 0.5 percent.

Thursday, November 8, 2007

Creative Accounting

Countrywide, Washington Mutual Play Shell Games: Jonathan Weil

By Jonathan Weil

Nov. 8 (Bloomberg) -- Thanks to some snazzy accounting moves, this quarter's earnings at Countrywide Financial Corp. and Washington Mutual Inc. probably won't look as bad as they otherwise would. The flip side is that any resulting improvements will be purely cosmetic.

The balance-sheet maneuvers are a classic case of earnings management. Last quarter, both companies changed the asset- classifications for billions of dollars of mortgages to ``held for investment'' from ``held for sale.'' While the distinction may look arbitrary, the effect on short-term earnings under the accounting rules can be huge when loan values are falling, as they are now.

That's because mortgages classified as held for sale must be carried on the balance sheet at cost or market value, whichever is lower, with any declines hitting quarterly earnings. Mortgages held for investment, by contrast, need be written down only if they have suffered an ``impairment'' that is ``other than temporary,'' which can mean different things to different people.

A loan's real-life value, of course, won't stop falling just because the accounting treatment changes. Yet by reclassifying loans as investments, banks can postpone big losses, hoping the values rebound later. The problem is they might not, in which case investors could get blindsided.

Countrywide, which reported a $1.2 billion net loss for the third quarter, transferred $12.32 billion of prime mortgages to held-for-investment, after first marking them down by $418 million. The loans all were of the ``non-conforming'' variety that don't qualify for sale to Fannie Mae and Freddie Mac -- which in this market means there are few, if any, buyers. The biggest U.S. mortgage lender finished the quarter with $30.86 billion of loans held for sale and $83.56 billion in the investment category.

Under No. 3

Seattle-based Washington Mutual, where net income dropped 72 percent to $210 million last quarter, transferred $17 billion of loans to its investment portfolio, after first marking them down by $147 million. That left the nation's largest savings and loan with $7.59 billion in the held-for-sale category at Sept. 30 and $235.2 billion of loans classified as investments.

Banks can't avoid losses entirely just by reclassifying mortgages as investments. They still must set up valuation allowances and record charges to quarterly earnings for estimated credit losses, which hinge on the loans' collectability. But they don't have to record losses to reflect other variables that affect their loans' market values, such as quarterly interest-rate changes or a sudden lack of liquidity in the resale market.

Market Disrupted

Executives from Countrywide and Washington Mutual declined to be interviewed. In a statement, a Countrywide spokeswoman, Jumana Bauwens, said the Calabasas, California-based company made its reclassifications ``because the secondary market was disrupted in the third quarter, and the returns for holding the loans once marked down were attractive.''

When I asked if a desire to boost future earnings played a role in Countrywide's decision, she said the company had no comment.

A Washington Mutual spokeswoman, Libby Hutchinson, also declined to answer that question. In a statement, she said ``the transfer was the result of unprecedented disruption in the secondary mortgage market for nonconforming mortgage loans. As a result, today, nonconforming loans are primarily originated for our investment portfolio, and conforming loans are primarily originated for sale into the secondary market.''

Under the accounting rules, companies can label mortgages as investments only if they intend to hold them for the foreseeable future or to maturity. Countrywide and Washington Mutual no doubt would sell their reclassified loans today if they could. The accounting change tells you they can't and that they see no end in sight to the current market mess.

Good Cancels Bad

Other problems lurk. Because the transparency is so poor, investors can't see if the companies might have sold their best loans and stashed the bad ones in their investment portfolios. Such ``gains trading'' was a big problem during the 1980s savings-and-loan crisis, notes Donn Vickrey, editor in chief at Gradient Analytics Inc. an investment-research firm in Scottsdale, Arizona.

``From the disclosures they provide, you really can't tell the extent to which gains trading may have occurred,'' he says.

The markdowns the companies took before reclassifying their loans also are open to question. The rules known as Financial Accounting Standard No. 65 let lenders review their mortgages in pools, which are easy to gerrymander, rather than individually. They also can offset loans with embedded gains against those with embedded losses.

Intent's Value

The notion that a loan's value hinges on a holder's intent has some merit. Asset values are supposed to reflect the present value of future cash flows. If a lender plans to hold a loan to maturity, it might earn more money over the long term than if it sold the loan today.

For investors looking at a bank's current financial position, though, what matters is what the loan is worth now. That has nothing to do with the lender's stated intent.

It's become fashionable for corporate executives to complain that today's accounting rules are too complex. Yet when companies don't like the answers that simple rules provide, they often resort to complexity to get around them.

It would be much simpler if the rules said all loans must be carried at cost or market value, whichever is lower, even with all the subjectivity involved in estimating market values. Investors would be better informed, too.

Friday, November 2, 2007

More pathetic desperation

November 1, 2007, 2:52 pm
With Six CDs, You Get an Eggroll
Posted by David Gaffen
There’s something to be said for being relentlessly positive, no matter what’s happening. An upbeat attitude during Countrywide Financial’s most recent earnings release gave shares of the beleaguered mortgage lender a 32% bounce last week.
Rather than wallow in its funding issues, the company is instead putting the word out that it’s offering better rates on certificates of deposit than basically everybody, at 5.65% for a nine-month CD, which is terrific considering long-term Treasurys aren’t even close to that.
But it’s hard not to detect a whiff of desperation in these efforts. You see, instead of just advertising on the Web, or in major newspapers, the company is taking the scattershot approach of leaving doorknob flyers (see at right) at various residences in highly populated areas, such as Prospect Heights in Brooklyn, N.Y., to try to entice people to come down and open a CD.
If anything underscores a company’s need for short-term funding, it’s a low-yielding, “throw everything against the wall and see what sticks” approach such as this one, which is likely to result in most of these flyers getting thrown in the garbage. Shares of the stock are down another 6% today, getting swept along with the rest of the sagging banking industry.