Gov't more likely to crush cfc than bail them out.

HOUSE ON FIRE

By RICHARD WILNER

December 9, 2007 -- The heat Countrywide Financial Corp.'s Angelo Mozilo is feeling recently isn't from a nearby sunlamp.

Two bankruptcy judges have recently allowed federal investigators to grill Countrywide executives and pore over reams of mortgage contracts after allegations surfaced that the nation's No. 1 mortgage banker could have been running up fraudulent fee income by over-billing homeowners reorganizing under Chapter 13.

In just one court over just a few years, a court-appointed trustee claims Mozilo's Countrywide rang up thousands of dollars in phony fees in each of 293 court cases.

Countrywide created late fees by failing to timely cash checks sent to cover the mortgage payments and by posting the funds after the due date even though they had the money in hand prior to the due date, the trustee, overseeing Chapter 13 cases in Pittsburgh, claims in court papers.

Countrywide lawyers screamed and hollered and opposed having to open its books and records to examination and its officers to questioning - claiming the mistakes were human error and not part of a systemic plan to boost profits.

"The Trustee justifiably [questions] the integrity of the loan histories," Ronda J. Winnecour, the court-appointed trustee, Countrywide's chief protagonist, said in court papers.

Thomas and Maria Anne Balos, who have had money for their mortgage payments deducted from their paychecks and sent to Countrywide ever since they filed for bankruptcy, feel they may have been overcharged by Countrywide.

"I am very interested in the materials Countrywide is going to hand over and want to know if my clients have been billed for late charges or attorneys fees, because they shouldn't have," Michael S, JanJanin, the Balos' lawyer, told The Post on Friday.

Last Thursday, Countrywide short-circuited an order to hand over the materials by agreeing to do as much within 30 days.

Countrywide and its lawyers are also feeling the heat in Houston, where a judge will hold a hearing Dec. 12 to determine if the mortgage giant and its lawyers will be sanctioned for filing a motion for late fees.

The mortgage holder caught the mistake and Countrywide withdrew the motion. But not until the judge and trustee in the case became irked at the Countrywide pattern and ordered the mortgage company into court to explain its behavior.

To be sure, Countrywide, the nation's largest mortgage company, is not the only company being studied for possibly inflating fees. GMAC, Wells Fargo and others are also in the crosshairs of the U.S. Trustee, the arm of the Justice Dept. charged with overseeing the bankruptcy courts.

A study earlier this year by Katherine M. Porter, associate professor of law at the University of Iowa, revealed that collectively, mortgage companies could have padded their bottom lines by millions of dollars by inflating fees on mortgages held by folks in Chapter 13.

New Data

This chart goes further out than previous charts. Notice how the subprime resets give way to option ARM resets in 2010 and 2011. Option ARMS can blow up earlier by "recasting" to fully amortizing or PITI (principal+interest+tax+insurance) when the LTV (Loan to Value) ratio exceeds a certain threshold (usually 110-125%) due to minimum interest payments getting added to the principal and/or declining house values.

Countrywide still sux

	December 7, 2007

HEARD ON THE STREET

Countrywide Isn't Out of Woods Yet By JAMES R. HAGERTY and LINGLING WEI December 7, 2007; Page C1 Since a credit crunch engulfed mortgage lenders in mid-August, analysts and investors have had nearly four months to think about whether Countrywide Financial Corp. can survive. Their conclusion? It is too early to tell. So far, the nation's largest mortgage lender has managed to limp along, largely by increasing its borrowings from the Federal Home Loan Bank of Atlanta and receiving $2 billion from Bank of America Corp. for preferred stock convertible into a stake of about 16% in Countrywide. Its executives have vowed to return to profitability this quarter after a $1.2 billion loss in the third quarter. "I'd rather be breathing than dead," Countrywide's chief executive, Angelo Mozilo, quipped at a conference Monday in Washington. The company's stock and bond prices, however, suggest that investors see a serious risk that Countrywide eventually could seek bankruptcy protection or resort to huge sales of new stock that would slash the value of existing shares. In 4 p.m. composite trading yesterday on the New York Stock Exchange, Countrywide's shares were up $1.68 to $12.10 amid a generally upbeat trading session in the financial sector sparked by falling lending rates. So far this month, Countrywide's share price is up 11.8%, but down 71.5% for the year. The stock is trading at about 53% of the Sept. 30 book value of $23 a share. The company's bonds are selling at "junk" levels. For example, the 5.8% bonds maturing in June 2012 are trading at about 76 cents on the dollar, for a yield of 13.16% "The market is really concerned about the possibility of default," says Steven Persky, chief executive of Dalton Investments LLC, a Los Angeles fund-management firm with $1.3 billion in assets. Mr. Persky, whose firm doesn't have any exposure to Countrywide, has been thinking of buying some of the bonds. He thinks the company is so big and important to the economy that regulators wouldn't let it fail. Still, he says, buying Countrywide bonds now would be "a dangerous game to play. Lots of people didn't believe Russia would default, but it did. On the other hand, in the U.S., when was the last time a large financial institution failed?" Here are some sobering thoughts for people tempted to buy Countrywide stock now: The company's fate hinges on how much worse the housing slump gets. Falling house prices cut the value of collateral backing the $83.56 billion of loans held by Countrywide as investments. Some economists say a recovery may be several years away. "I don't know where we are in the cycle," Mr. Mozilo said at the conference. "I wish I did." Countrywide's savings bank holds $26.84 billion of option adjustable-rate mortgages, which allow borrowers to start with minimal payments and face far higher ones later, and $32.47 billion of second-lien "home equity" loans, potentially worthless in a default because the first-lien holder gets first dibs on the home. These two categories of high-risk loans account for three-quarters of the bank's loan holdings. Countrywide says some of that risk is covered by mortgage insurance. As of Sept. 30, the company carried mortgage insurance on $23.05 billion of its bank's residential loan portfolio, which totaled $79.46 billion. But it isn't certain that mortgage insurers will have enough capital to meet all claims if the housing slump worsens. Countrywide's bank portfolio doesn't include subprime mortgages of the type subject to a rate-freeze program announced by the Bush administration yesterday. More bad news, such as ratings downgrades, could scare away depositors. Countrywide managed to halt a run on its savings bank in August by bringing in Bank of America as a big shareholder. But the company still has to offer premium rates on certificates of deposit to attract funds needed to support further lending. The high rates it must pay for funds will squeeze Countrywide's profit margins on loans. Insiders aren't showing obvious confidence. The company hasn't reported any purchases of shares by its senior executives in recent weeks, even though the stock recently touched an intraday low last month of $8.21. By contrast, executives of another big mortgage company with a drooping stock price, Fannie Mae, have bought shares over the past two weeks. Countrywide needs to repay a total of $26.38 billion in borrowings over the 12 months ending Sept. 30, according to the latest quarterly filing. Countrywide officials have said they can meet these payments -- a point that Moody's Investors Service affirmed -- but may have to sell some mortgages or related securities to do so. Investors are so wary of mortgages that it is impossible to know how much of a discount Countrywide would have to offer to find buyers for these assets. Investors will be looking for chances to force Countrywide to repurchase many of the loans it sold in recent years. Provisions of those sales require repurchases in some cases, such as when loans default early or otherwise don't live up to the "representations and warranties" provided by Countrywide at the time of the sale. "It is our intention to defend our positions vigorously," the company said in a recent securities filing. Loan losses are likely to be a huge drag on earnings for years, and the more-conservative loans being made now don't produce huge immediate gains when they are sold, as many of the more aggressive loans did during the housing boom As if it didn't have enough exposure to mortgages already, Countrywide's insurance arm has sold reinsurance to insurers that cover mortgage-default risk, taking on a portion of their potential liabilities. Countrywide has said its maximum potential losses on these reinsurance contracts were about $1 billion as of Sept. 30. There are some bright spots, however. The company's loan-servicing business, which gets fees for collecting payments and handling foreclosure cases, produces about $1 billion of cash flow each quarter, says Craig Emrick, an analyst at Moody's. Distressed borrowers often end up paying hefty fees. For example, Countrywide says it collected $93.6 million of late-payment charges in the third quarter, up 27% from a year earlier.

Treasury Secretary's Plan is a joke

If stocks rise tomorrow, take advantage and add to your short positions.

The plan will help very few people but will permanently destroy investor confidence.

The media is catching on to the fact that it is declining home prices, not bad credit that is causing the problems. This is unstoppable. The question is, is the government going to let it self correct or will we have to suffer through 15 years of slow house price declines like Japan.

MBIA facing downgrade

On monday MBIA went up about 15% on monday on the announcement of the Treasury Secretary's bailout proposal. Today Moody's said that MBIA may get it's credit downgraded sending share prices down almost 16% because MBIA's business model is predicated on a AAA credit rating. The lesson here is SHORT any and every pop. Pops is the price will be caused by talk of government interventions. You can't predict when they will leak bailout proposals, but you can predict that they won't be beneficial to the stock price in the long run, so make the money on the way back down.

MBIA

As a basline, I assume that most financial assets will return to 2002 prices by the time this debacle is over. MBIA is already gone down to 2002 prices but this article raises some interesting points. The author has been short since 2002, so he must think it has farther to go.

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December 1, 2007

Talking Business

Short Seller Sinks Teeth Into Insurer

By JOE NOCERA

“I’m going to try to give shorter answers,” said William Ackman, with an awkward smile.

It was Wednesday, and Mr. Ackman, a 41-year-old hedge fund manager, was in the middle of a surprisingly well-attended news conference. He had just finished an hourlong presentation at an investment conference in Midtown Manhattan, and if truth be told, the only reason it had been contained to an hour is that Mr. Ackman had rushed through it, burying his audience in a blizzard of facts, while flipping through an astonishing 145 slides.

If the presentation and ensuing news conference proved anything, it was that Mr. Ackman was incapable of giving short answers. Then again, that’s usually the way it is with obsessives.

Mr. Ackman is an emerging star in the “shareholder activist” division of the hedge fund big leagues. In the last few years, he has taken aim at McDonald’s, Wendy’s and, most recently, Target, usually emerging from these tugs of war with profits for his hedge fund.

His firm, Pershing Square Capital, which he founded in 2004, now bulges with over $6 billion in assets. “If I think I’m right, I can be the most persistent and most relentless person in America,” he says. But for sheer, obsessive doggedness, nothing he has ever done can compare with his pursuit of a company called MBIA Inc. In fact, I don’t think I’ve ever seen a fund manager grab a company by the tail and simply not let go the way Mr. Ackman has done with this once-obscure holding company, whose main subsidiary, MBIA Insurance, is the nation’s largest bond insurer.

Though he says he is not typically a short seller, Mr. Ackman has been shorting MBIA’s stock since 2002. He began his assault with a highly unusual move for a short seller — he posted a lengthy report, laying out his case against MBIA, on the Internet, for all to see. (“I believe in free speech,” he says now, by way of explanation.)

He purchased credit default swaps as a way to profit in the event of a bankruptcy by the holding company. He talked to the S.E.C., the New York State Insurance Commission and the New York attorney general’s office about the company. (He also claims that MBIA was behind a short-lived investigation by the attorney general’s office aimed at him. MBIA declined to comment on the accusation.)

And that’s not all. He held hours of meetings with analysts at Moody’s and Standard & Poor’s, the two big bond rating agencies, trying to persuade them to lower MBIA’s credit rating. He once buttonholed the chief executive of PriceWaterhouseCoopers, MBIA’s accountant, at a charity dinner, and sent him his report. He has made allegations of accounting shenanigans. He has talked to reporters and analysts, and given presentations like the one he gave this week. All the while, he has continued to dig into the company, searching for dirt he could use against it.

For most of that time, his efforts have come to naught. Despite the fact that MBIA, at one point, had to restate five years of earnings — after being tripped up on an accounting problem that Mr. Ackman brought to light — its stock continued to do well. The analysts and rating agencies continued to side with the company. Indeed, the more dogged Mr. Ackman became, the more the company seemed impervious to his slings and arrows.

And then came the subprime crisis, which in recent months has wreaked havoc on MBIA’s stock price, and raised questions about its business model. Sean Egan, the co-founder of Egan-Jones, an independent bond rater, believes that MBIA and the other big bond insurers will be saddled with billions of dollars in losses as collateralized debt obligations stuffed with subprime debt — so-called C.D.O.’s — they have insured continue to go south. So does Mr. Ackman, who believes that as losses pile up and the bond insurer has to pay them off, it will have to shut off the supply of money it sends to the holding company.

At the investor presentation he held this week, Mr. Ackman predicted that the holding company could be bankrupt by February, which MBIA says is preposterous. (“MBIA does not expect material losses in its C.D.O.’s because they were structured with high levels of subordination in excess of triple-A levels and other structural protections,” said its chief financial officer, Chuck Chaplin.) Mr. Ackman now stands to make, personally, hundreds of millions of dollars on his bet against MBIA — which he says he will donate to his charitable foundation. If you sense some defensiveness in that gesture, well, so do I. The question — and it’s the one that always seems to crop up when short sellers are involved — is whether Mr. Ackman’s single-minded pursuit of MBIA is something he should feel defensive about.

•

There’s no doubt about what drives Bill Ackman crazy about MBIA. For all the many issues he has raised, his objection really comes down to a single fact: MBIA has a triple-A rating, the highest any company can get — indeed, a rating more normally associated with Treasury bills, which are backed by the full faith and credit of the federal government. And it’s not just the fact of MBIA’s triple-A rating that drives Mr. Ackman batty; it’s its transcendent importance to the company’s business. As Gary C. Dunton, the company’s chief executive, told me recently, “Our triple-A rating is a fundamental driver of our business model.” No triple-A, no business.

This fact has been widely accepted on Wall Street and in the marketplace. “The model is the model,” shrugged one person who keeps close tabs on the company (and who declined to be quoted by name because he isn’t supposed to talk to the press). Mr. Ackman, however, thinks it is lunacy — and he’s right.

Think about it: if a company needs a triple-A rating just to stay in business, that fact alone probably means it doesn’t deserve the rating. After all, if triple-A-rated General Electric got a downgrade, would it really affect its business? Not really. Companies that merit triple-A ratings are those that are impervious to small — or even medium-sized — bumps in the road. Besides, MBIA takes on a lot of risk for a company with a triple- A rating.

It wasn’t always thus, which explains how MBIA got its rating in the first place. MBIA began life in the early 1970s guaranteeing nice, safe municipal bonds. (Its initials originally stood for Municipal Bond Insurance Association.) But while municipal bonds rarely default, most don’t get triple-A ratings — and the lower the rating the more a municipality had to pay in interest. By “wrapping” such bonds, MBIA could envelop them in its triple-A rating, and in so doing save money for towns and cities all over the country.

Gradually, though, the business model changed. In the 1990s, MBIA began to guarantee not just muni bonds but so-called structured finance vehicles, including those now infamous C.D.O.’s that are causing so much trouble. “If you analogize it to life insurance,” said Mr. Egan — who uses the kind of pithy language that escapes Mr. Ackman — “it is as if they once insured only 18-year-old women who didn’t smoke or drink. Now they are insuring the Evel Knievels of the world.” (He said this before Mr. Knievel died yesterday.)

Nonetheless, MBIA insists that the C.D.O.’s it guarantees are the crème de la crème — not just plain-vanilla triple-A tranches, but the so-called “super senior triple-As.” (“Super senior?” You gotta love Wall Street.) These C.D.O.’s, it says, are the least likely to default, and, according to its analysis, it would take an unprecedented cataclysm for it to have to pay off insurance claims.

Except that Merrill Lynch and Citigroup and a dozen other big investment banks held super senior C.D.O.’s, and they have indeed dropped in value — so much so that the banks have written down billions of dollars. The market has come to realize that the triple-A rating for these derivatives is pretty meaningless — that the rating agencies were just as blind to the coming subprime meltdown as everyone on Wall Street, and developed models for rating C.D.O.’s that were far too optimistic.

The problem for investors is that it is impossible to know what, exactly, is in the individual C.D.O.’s that MBIA insures. “The company is something of a black box,” said that same person who won’t be quoted by name. MBIA executives have been loudly making the case that the C.D.O.’s it insures are fine, that it has plenty of capital to cover any possible claims, and that its triple-A rating is safe — even though the rating agencies are currently reviewing their ratings of the bond insurers. But the rating agencies know full well how important the triple-A is to these companies, and they are loath to lower the ratings.

(When I spoke to Moody’s, its executives denied showing any special favoritism toward MBIA, and insisted that its rating system was as pure as the driven snow.)

Which brings me back to Mr. Ackman. On Wall Street, his nonstop assault on MBIA is highly controversial, and a number of people I talked to about MBIA spoke of it — and him — with distaste. Their central point is that MBIA is in a business that depends, to a large degree, on the market’s confidence in its ability to insure bonds — and that Mr. Ackman’s attacks are an effort to undermine that confidence. They pointed to his prediction that the holding company might soon be bankrupt as an example.

MBIA insists that the holding company has only $80 million in corporate debt and $500 million in cash and that it is completely healthy. Indeed, it says that his bankruptcy prediction “reflects a fundamental misunderstanding of MBIA Inc.’s capital structure and financial statements.” When Mr. Ackman uses the word bankruptcy, he is, in effect, tossing gasoline on a fire.

On the other hand, Mr. Ackman has been remarkably prescient. When I went back and reread his original report, “Is MBIA Triple- A?,” I could see a few incendiary claims. But I also saw him make the case that those C.D.O.’s MBIA insures would eventually come a cropper. And now they have. Companies that are knee-deep in C.D.O. exposure have routinely had their own debt downgraded in recent months, as the rating agencies have belatedly woken up to the problem. Why should the bond insurers be exempt?

It is easy to understand why MBIA’s executives are unhappy with Mr. Ackman. But the other participants in the marketplace — the analysts and rating agencies and institutional investors? They should be thanking him. He may be aggressive, he may be over the top, he may not be able to speak in short sentences. But he’s doing the hard work, and thinking the hard thoughts, that they refused to do for far too long.

Teaser Freezer

Treasury Secretary Paulson's proposal is not a bailout because no government money or government guarantee is involved.

The mortgage servicing companies generally have the authority to modify loans if it is in the best interest of the investors. The government could protect the mortgage companies from being sued by the investors in exchange for extending the teaser rates.

Teaser rates are generally negatively amortizing. If Countrywide and others have agreed to extend the teaser rates, you had better believe that the interest differential is merely deferred.

In order to defer immediate foreclosures, under this plan, cashflows to the investors will be partially deferred and risk of eventual default will increase because the loan-to-value ratio is decreasing, especially if house prices continue to decline.

There is already a bailout plan for insolvent homeowners. It’s called foreclosure. It’s a pretty good deal. You get out of your debt and you don’t even have to go to debtor’s prison.

Is Secretary Paulson trying to keep homedebtors slaves to debt for life, or just until after the election?

I don’t see how this plan addresses the basic issue of insolvency.

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.
	November 30, 2007

PAGE ONE

U.S., Banks Near A Plan to Freeze Subprime Rates By DEBORAH SOLOMON and MICHAEL M. PHILLIPS 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. 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. 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 is...to 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.

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.

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November 28, 2007

Foreclosures by Lender Investigated

By GRETCHEN MORGENSON

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.”

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.

November 26 2007: 7:22 PM EST

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.

Aloha, CFC

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

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?

Too Bad, So Sad

Reuters
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.

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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.

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.

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.