There are rumors about UBS having huge losses. Bear Stearns, the second largest underwriter of mortgage-backed bonds in the U.S., will write down the value of its subprime-related assets by $1.2 billion in the fourth quarter, cut 900 jobs, and seen its shares drop 38% this year. Barclays, the U.K.’s third largest bank, wrote down $2.7 billion due to credit-related securities tied to the U.S. subprime-mortgage market collapse. Morgan Stanley, Goldman Sachs, Merrill Lynch, the list rolls on and on.What seems to be safe? The short end of the curve is where the safe haven buying is strongest. The long end of the curve, while doing better, is not doing well due to inflation worries. And therefore mortgage prices are not really benefitting from the strength in bonds.
According to Reuters, Wells Fargo & Co, which has been fortunate enough (so far) to have sidestepped many of the credit and liquidity problems plaguing most U.S. mortgage lenders, believes the nation's housing slump is the worst since the Great Depression and is far from being over. Chief Executive John Stumpf said on Thursday that the second-largest U.S. mortgage lender and fifth-largest U.S. bank is "not immune" from the storm, but is well-positioned to ride it out, despite expectations for "elevated" credit losses from home equity loans into 2008.
"We have not seen a nationwide decline in housing like this since the Great Depression," Stumpf said at a Merrill Lynch & Co banking conference in New York. "I don't think we're in the ninth inning of unwinding this," he continued, "If we are, it's an extra-inning game."
Shares of Wells Fargo fell $1.13, or 3.4 percent, to $32.12 in afternoon trading on the New York Stock Exchange.
Where’s the good news? Besides oil prices sliding back to $93 per barrel, the MBA said that mortgage loan application volume was up 5.5% on the week. The refinance numbers were +6.4% and purchases increased 4.8%. The news out this morning is certainly good for bonds. Treasury rates have dropped dramatically, however mortgage prices have not followed.
Today the 10-yr is at 4.24%, yet conforming rates are still in the low 6’s. Something similar happened 5 years ago, when the Fed began lowering rates in spite of no one having a good sense for where rates were heading. When uncertainty is present, investors require a greater relative yield to compensate for prepayment risk: "Is the loan I buy now for 102 going to pay off in 4 months?" Until there is better consensus about rates, or things stabilize, expect the same issue to exist.
- Our flat yield curve has certainly gone away: the spread between a 2-yr and a 10-yr Treasury security is over .75%, whereas a year ago it was less than .12%.
The Consumer Price Index was as expected (+.3%, core rate +.2%, year-over-year up 3.5%, core up 2.2%), and Jobless Claims moved up 20k to 339k. - Bill Beckman, the president of CitiMortgage, sent out a letter stating that "…at CitiMortgage we continue to focus on growing profitable share through a balanced sourcing model via Correspondent, Wholesale and Retail channels….We continue to be a leader and supporter of the mortgage banking community by supporting and promoting the long-term health and viability of the mortgage lending community…. Our acquisition of ABN AMRO Mortgage Group/InterFirst earlier this year, year-to-date Citi maintains its #3 market share in both originations and servicing, our continued support of non-conforming and non-prime products...."
- From the LA Times: Countrywide said its monthly mortgage volume fell 48% in October from a year earlier as it all but stopped making sub-prime loans and sharply cut back on home equity lines of credit. Meanwhile, delinquencies on the mortgages for which Calabasas-based Countrywide handles the billing and other services continued to mount, and their stock is down 68% this year. CW funded $22 billion in home loans last month, down from $41.9 billion a year earlier but up 4% from September's $21.2 billion. Countrywide funded just $3.2 billion in mortgages through loan brokers last month, a startling 57% decline from the level of a year earlier.
- In addition, CW’s Home Equity group eliminated the reduced doc option above 80% CLTV, entirely eliminated CLTV’s above 90%, and disbanded all ARM subprime lending.
- Wells Fargo wholesale announced to their broker clients that non-Full Doc 2nds are "going away" next week, which impacts standalone and piggyback transactions.
- Fannie Mae said its third-quarter loss widened to $1.52 billion. For the first nine months of the year, Fannie Mae's net income plummeted to $1.5 billion from $3.0 billion in the same period in 2006.
- Wachovia Corp. said the pretax value of collateralized debt obligations (CDOs) invested in asset-backed securities declined by $1.1 billion last month. That's on top of a $1.3 billion write-down during the third quarter.
- Fitch Ratings downgraded the ratings on $37.2 billion in collateralized debt obligations that were part of 84 transactions. Fitch also affirmed ratings on $6.9 billion worth of CDOs.
- E*Trade Financial, not to be confused with ELoan, saw its stock price crumble 55% Monday morning after an analyst at Citigroup said there's a 15% chance the depository could go bankrupt.
At this point, 2nd mortgages are "few and far between," enforced by recent studies that show piggyback loans with FICO scores of 660 or below were 43% - 50% more likely to go into default. This alone would cause investors to switch their focus from buying 2nds to buying larger first mortgages with mortgage insurance and sure enough, loans with MI tend to receive more Accept/Approve recommendations and are a credit enhancement.
Mortgage insurance companies tout the "simpler financing": one loan to close, one interest rate, one set of underwriting guidelines, and they state that this typically results in competitive monthly payment & lower life-of-loan costs.
MI can generally be cancelled (based on loan servicer's requirements) which will lower the monthly payment, but in the mean time there are two annual premium types: annual (level or declining) and split-premiums. Annuals are the old way of MI: MI is collected annually (included in PITI), it is cancellable, it is refundable (prorated), it is tax-deductible, and the first year premium could be paid as an NRCC.
Splits are a hybrid of One-Time MI and Monthlies: an upfront premium is paid by the builder/seller/borrower (there are limitations on concessions), there is a significantly reduced monthly policy that the borrower is then responsible for (through PITI), it is cancellable, it is refundable, it is tax deductible, and it is also available on Alt-A products.
There's also One-Time MI, where the MI is collected upfront in a single premium... it offers some advantages, but is expensive. Most people opt for LPMI. From a pricing standpoint, MI companies say that the splits are good because of pricing to the borrower once the up-front portion is paid. They are limited by investors, though. Annuals are widely accepted but are more costly to the borrower over the long-run, even if the first year is paid.
Speaking of mortgage insurance, news came out late last week that Old Republic bought a stake in PMI & MGIC. The parent company of Republic Mortgage Insurance Co., Old Republic International, disclosed the acquisition of 15% in two of its rivals in the mortgage insurance business
Thought For the Day: "Finish each day and be done with it . . . You have done what you could; some blunders and absurdities no doubt crept in; forget them as soon as you can. Tomorrow is a new day; you shall begin it well and serenely." ~ Ralph Waldo Emerson
