Bargain houses largely unsold

By J.N. SBRANTI
jnsbranti@modbee.com
last updated: December 15, 2007 04:23:07 PM

Courthouse-step auctions offer 1,336 properties in foreclosure -- 17 are sold

Another foreclosure record was set in November as 1,336 properties were offered to the highest bidder on the courthouse steps in Modesto, Merced and Stockton.

Now here's the real surprise: Only 17 of them sold, despite lenders offering deeply discounted prices.

Every weekday, starting about noon, auctioneers seek buyers for foreclosed properties of all shapes and sizes. But more times than not, no one bids.

That's because foreclosed homes typically have unpaid mortgage debt far in excess of their current value. When no bidder is willing to pay off that debt, lenders usually get stuck owning the homes.

That happened 411 times in Stanislaus County last month, sticking lenders with more than $139 million in unpaid mortgages, according to ForeclosureRadar, which tracks mortgage defaults.

Of the 419 Stanislaus County homes that went to foreclosure auctions in November, only eight attracted bidders.

Those who do bid are getting increasingly sweet deals, however, as lenders have begun slashing the prices they're willing to accept for foreclosed homes. To lure potential buyers, lenders have begun accepting starting bids far below the outstanding debt on foreclosed properties.

"Investors at auctions typically will buy at a 30 percent discount to market," explained Sean O'Toole, who owns ForeclosureRadar. "So lenders are trying to give as much of a discount as possible to entice investors to buy."

On Friday, O'Toole said, a foreclosed five-bedroom Modesto home on Hemstead Avenue went up for auction with a starting bid of $301,500, even though the lender was owed $537,000 from a delinquent mortgage.

But that $235,500 discount apparently wasn't enough. O'Toole said no one bid, so the lender now owns the house.

Lenders get more desperate

O'Toole said the size of these discounts continues to grow as lenders get more and more desperate to unload properties.

Early in 2007, O'Toole said, discounts were offered on about one-third of the homes in foreclosure auctions statewide, and those discounts averaged about $9,000. By November, he said, two-thirds of the state's homes in foreclosure auctions were discounted, with discounts averaging $48,000.

Many of the foreclosed houses in Stanislaus, San Joaquin and Merced counties, however, are being discounted by $100,000 or more, O'Toole said.

Dave Rhodes of Oakdale recently took advantage of one such deal. Two weeks ago, he bid $1 over the starting price for a 1,356-square-foot home on Poppy Patch Drive in Modesto. He was the only bidder and bought the house for $163,181, even though the lender had been owed about $264,000.

"I'm not a big spender. I'm a bottom feeder," said Rhodes, who has been a regular at Modesto's foreclosure auctions for more than a year. He researches many of the homes being foreclosed, but rarely bids at auctions. His last purchase was in January, when he bought a fixer-upper in Empire.

Hundreds receive no bids

Discounted starting bids "have become more and more prevalent the last three months" in Modesto, Rhodes said. That's why he comes prepared to bid on great deals.

Before potential buyers are allowed to bid, they must show the auctioneer a cashier's check for the full amount they're willing to bid. Rhodes said he had a cashier's check for $185,000 with him the day he bought the Poppy Patch home, so he could have gone higher had someone bid against him and he wanted to keep bidding.

Competitive bidding is rare, however, even with discounted starting prices.

Example: An Oakdale home on Ranger Street sold new in 2006 for $610,000. It went into default with an outstanding loan balance of $530,892. Last month at the foreclosure auction, the starting price was $395,000. No one bid.

Also last month, a Manteca home on South Sonora Avenue that had an outstanding loan balance of $487,956 was offered for a starting bid of $331,500. No one bid.

And in Merced, a home on West 22nd Street with an outstanding mortgage of $279,785 was offered at $153,000. No one bid.

"There are literally hundreds of examples in these counties," O'Toole said about discounted properties going unpurchased. "They ... represent good opportunities for folks to buy properties directly from the bank at a deep discount."

Lenders don't want the houses

In San Joaquin County last month, for instance, 664 foreclosed homes went to auction, but only eight were sold to bidders. Lenders took back 656 houses with unpaid debts of more than $245 million.

In Merced County last month, 253 homes went to auction, with only one receiving bids and being sold. Lenders took back the rest with unpaid debts of nearly $88.4 million.

Statewide, 12,282 properties went to foreclosure auctions, but only 321 were sold to bidders. Lenders took back the rest, which had unpaid debts of nearly $4.8 billion.

Those lender-owned foreclosed houses then typically are listed for sale with real estate agents or are privately auctioned off. Either way, lenders end up paying assorted commissions and fees to sell the property. While waiting for deals to close, the lenders must maintain the homes and pay taxes, insurance and assorted other ownership costs.

"They don't want to hang onto those homes, mow those laws and pay those Realtor fees," said Rhodes, explaining why lenders are willing to give foreclosure auction bidders such good deals.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.

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Warsing used the United States mails to commit foreclosure fraud

December 12, 2007
U.S. Department of Justice
Northern District of Ohio

Gregory A. White, United States Attorney for the Northern District of Ohio, announced today that a federal grand jury in Cleveland, Ohio, charged James A. Warsing of Ashtabula, Ohio, with eight counts of Mail Fraud.

The indictment charges that between 2001 and 2005, James A. Warsing, using his company, WJW Enterprises, devised a scheme to defraud various homeowners threatened with foreclosures, by falsely promising he could save the homes from foreclosure. It was further alleged that Warsing fraudulently obtained large sums of monies from homeowners promising to use such monies to settle their accounts with lenders but used the money for other personal and business purposes.

As a further part of the fraud, Warsing used the United States mails to send advertisements for WJW Enterprises to prospective clients and to receive checks from homeowners. It was alleged that Warsing collected over $500,000 from homeowners during the period 2002 through 2004.
The actual sentence in this case, upon conviction, will be determined by the Court under the Federal Sentencing Guidelines which depend upon a number of factors unique to each case, including the defendant's prior criminal record, if any, the defendant's role in the offense and the unique characteristics of the violation. In all cases the sentence will not exceed the statutory maximum and in most cases it will be less than the maximum.

The case is being prosecuted by Assistant United States Attorney James C. Lynch, following an investigation by the Federal Bureau of Investigation, Painesville, Ohio.

An indictment is only a charge and is not evidence of guilt. A defendant is entitled to a fair trial in which it is the government’s burden to prove guilt beyond a reasonable doubt.

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China and the Arabian Peninsula as Market Stabilizers

So, you want to know one man's idea of why our economy hasn't crashed yet, despite oil nearing $100 a barrel, the subprime mess, and the current credit crisis? The following was authored by George Friedman, CEO of Strategic Forecasting, Inc.

He makes a very compelling case...

The single most interesting thing about today's global economy is what has not occurred. In 1979, oil prices soared to slightly more than $100 a barrel in current dollars, and they are approaching that historic high again. Meanwhile, the subprime meltdown continues to play out. Many financial institutions have been hurt, many individual lives have been shattered and many Wall Street operators once considered brilliant have been declared dunderheads. Despite all the predictions that the current situation is just the tip of the iceberg, however, the crisis is progressing in a fairly orderly fashion.

Distinguish here between financial institutions, financial markets and the economy. People in the financial world tend to confuse the three. Some financial institutions are being hurt badly. Those experiencing the pain mistakenly think their suffering reflects the condition of the financial markets and economy.

But the financial markets are managing, as is the economy.
What we are seeing is the convergence of two massive forces. Oil prices, along with primary commodity prices in general, have soared. Also, one of the periodic financial bubbles -- the subprime mortgage market -- has burst. Either of these alone should have created global havoc. Neither has. The stock market has not plummeted. The Standard & Poor's 500 fell from a high of about 1,565 in mid-October to a low of 1,400 on Oct. 19. Since then, it has rebounded as high as 1,550. Given the media rhetoric and the heads rolling in the financial sector, we would expect to see devastating numbers. And yet, we are not.

Nor are the numbers devastating in the bond markets. By definition, a liquidity crisis occurs when the money supply is too tight and demand is too great. In other words, a liquidity crisis would be reflected in high interest rates. That hasn't happened. In fact, both short-term and, particularly, long-term interest rates have trended downward over the past weeks. It might be said that interest rates are low, but that lenders won't lend. If so, that is sectoral and short-term at most. Low interest rates and no liquidity is an oxymoron.

This is not the result of actions at the Federal Reserve. The Fed can influence short-term rates, but the longer the yield curve, the longer the payoff date on a loan or bond and the less impact the Fed has. Long-term rates reflect the current availability of money and expectations on interest rates in the future.

In the U.S. stock market -- and world markets, for that matter -- we have seen nothing like the devastation prophesied. As we have said in the past, the subprime crisis compared with the savings and loan crisis, for example, is by itself small potatoes. Sure, those financial houses that stocked up on the securitized mortgage debt are going to be hurt, but that does not translate into a geopolitical event, or even into a recession. Many people are arguing that we are only seeing the tip of the iceberg, and that defaults in other categories of the mortgage market coupled with declining housing markets will set off a devastating chain reaction.

That may well be the case, though something weird is going on here. Given the broad belief that the subprime crisis is only the beginning of a general financial crisis and that the economy will go into recession, we would have expected major market declines by now. Markets discount in anticipation of events, not after events have happened.

Historically, market declines occur about six months before recessions begin. So far, however, the perceived liquidity crisis has not been reflected in higher long-term interest rates, and the perceived recession has not been reflected in a significant decline in the global equity markets.

When we add in surging oil and commodity prices, we would have expected all hell to break loose in these markets. Certainly, the consequences of high commodity prices during the 1970s helped drive up interest rates as money was transferred to Third World countries that were selling commodities. As a result, the cost of money for modernizing aging industrial plants in the United States surged into double digits, while equity markets were unable to serve capital needs and remained flat.

So what is going on?

Part of the answer might well be this: For the past five years or so, China has been throwing around huge amounts of cash. The Chinese made big, big money selling overseas -- more than even the growing Chinese economy could metabolize. That led to massive dollar reserves in China and the need for the Chinese to invest outside their own financial markets. Given that the United States is China 's primary consumer and the only economy large and stable enough to absorb its reserves, the Chinese -- state and nonstate entities alike -- regard the U.S. markets as safe-havens for their investments. That is one of the things that have kept interest rates relatively low and the equity markets moving. This process of Asian money flowing into U.S. markets goes back to the early 1980s.

Another part of the answer might lie in the self-stabilizing feature of oil prices, the rise of which should be devastating to U.S. markets at first glance. The size of the price surge and the stability of demand have created dollar reserves in oil-exporting countries far in excess of anything that can be absorbed locally. The United Arab Emirates , for example, has made so much money, particularly in 2007, that it has to invest in overseas markets.

In some sense, it doesn't matter where the money goes. Money, like oil, is fungible, which means that if all the petrodollars went into Europe then other money would flow into the United States as European interest rates fell and European stocks rose. But there are always short-term factors to consider.

The Persian Gulf oil producers and the Chinese have one thing in common -- they are linked to the dollar. As the dollar declines, assets in other countries become more expensive, particularly if you regard the dollar's fall as ultimately reversible. Dollars invested in dollar-denominated vehicles make sense. Therefore, we are seeing two massive inflows of dollars to the United States -- one from China and one from the energy industry. China 's dollar reserves are derived from sales to the United States , so it is stuck in the dollar zone. Plus, the Chinese have pegged the yuan to the dollar. The energy industry, also part of the dollar zone, needs to find a home for its money -- and the largest, most liquid dollar-denominated market in the world is the United States.

The United States has created an odd dollar zone drawing in China and the Persian Gulf . (Other energy producers such as Russia , Nigeria and Venezuela have no problem using their dollars internally.) Unhinging China from the dollar is impossible; it sells in dollars to the United States , a linkage that gives it a stable platform, even if it pays relatively more for oil. Additionally, the Arabian Peninsula sells oil in dollars, and trying to convert those contracts to euros would be mind-bogglingly difficult.

Existing contracts and new contracts managed in multiple currencies -- both spot and forward managed -- would have to be renegotiated. Any business working in multiple currencies faces a challenge, and the bigger the business, the bigger the challenge. The Arabian Peninsula accordingly will not be able to hedge currencies and manage the contracts just by flipping a switch.

This provides an explanation for the resiliency of U.S. markets. Every time the news on the subprime situation sounds so horrendous that it seems the U.S. markets will crash, the opposite occurs. In fact, markets in the United States rose through the early days, then sold off and now have rallied again.

Where is the money coming from?

We would argue that the money is coming from the dollar bloc and its huge free cash flow from China , and at the moment, the Arabian Peninsula in particular. This influx usually happens anonymously through ordinary market actions, though occasionally it becomes apparent through large, single transactions that are quite open. Last week, for example, Dubai invested $7 billion in Citigroup, helping to clean up the company's balance sheet and, not incidentally, letting it be known that dollars being accumulated in the Persian Gulf will be used to stabilize U.S. markets.

This is not an act of charity. Dubai and the rest of the Arabian Peninsula, as well as China , are holding huge dollar reserves, and the last thing they want to do is sell those dollars in sufficient quantity to drive the dollar's price even lower. Nor do they want to see a financial crisis in the U.S. markets. Both the Chinese and the Arabs have far too much to lose to want such an outcome. So, in an infinite number of open market transactions, as well as occasionally public investments, they are moving to support the U.S. markets, albeit for their own reasons.

It is the only explanation for what we are seeing. The markets should be selling off like crazy, given the financial problems. They are not. They keep bouncing back, no matter how hard they are driven down. That money is not coming from the financial institutions and hedge funds that got ripped on mortgages. But it is coming from somewhere. We think that somewhere is the land of $90-per-barrel crude and really cheap toys.

Many people will see this as a tilt in global power. When others must invest in the United States , however, they are not the ones with the power; the United States is. To us, it looks far more like the Chinese and Arabs are trapped in a financial system that leaves them few options but to recycle their dollars into the United States . They wind up holding dollars -- or currencies linked to dollars -- and then can speculate by leaving, or they can play it safe by staying. In our view, these two sources of cash are the reason global markets are stable.

Energy prices might fall (indeed, all commodities are inherently cyclic, and oil is no exception), and the amount of free cash flow in the Arabian Peninsula might drop, but there still will be surplus dollars in China as long as it is an export-based economy. Put another way, the international system is producing aggregate return on capital distributed in peculiar ways. Given the size of the U.S. economy and the dynamics of the dollar, much of that money will flow back into the United States . The United States can have its financial crisis. Global forces appear to be stabilizing it.

The Chinese and the Arabs are not in the U.S. markets because they like the United States . They don't. They are locked in. Regardless of the rumors of major shifts, it is hard to see how shifts could occur. It is the irony of the moment that China and the Arabian Peninsula, neither of them particularly fond of the United States , are trapped into stabilizing the United States . And, so far, they are doing a fine job.

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'Too Little, Too Late' Subprime Solution

ECONOMY OF APATHY:
On Thursday, President Bush stood with Secretary of the Treasury Henry Paulson and Secretary of Housing and Urban Development Alphonso Jackson to announce an agreement with the mortgage industry to provide relief to families facing home foreclosures.

"The holidays are fast approaching and, unfortunately, this will be a time of anxiety for Americans worried about their mortgages and their homes. There's no perfect solution, but the homeowners deserve our help," Bush said.

His plan would freeze mortgage rates for some troubled borrowers. Yet the vast majority of Americans facing foreclosure would be left out by the Bush plan, including the record 351,000 people who fell into foreclosure in the third quarter of this year. The deal asks for only a voluntary freeze on interest rates, and does not require congressional approval or funds.

The effects of the subprime mortgage crisis have spread throughout other sectors of the economy, an estimated 800,000 Americans have are already faced foreclosure since mid-2007, and 3.5 million loans are expected to default before the end of 2010.

Although Bush's plan will offer substantial help to thousands of families, it is, as The New York Times editorial board described it, "too little, too late and too voluntary." Andrew Jakabovics of the Center for American Progress said, "As with other serious crises that have happened on Bush's watch, the solution is to make it the next administration's problem."

SMALL HELP FOR THOUSANDS:
After months of ignoring the mortgage crisis, Bush's acknowledgment of the problem is certainly a step in the right direction.

For those who qualify -- an estimated 250,000 borrowers -- Bush's plan would give them a five-year freeze on their adjustable loan rates. "Bush will also ask Congress to temporarily expand the authority of states and localities to issue tax-exempt mortgage-revenue bonds to help people refinance their mortgages."

Further, those borrowers who do not qualify for a rate freeze can still receive help from mortgage counselors, who can walk them through the process of refinancing and help them stay on top of their payments.

Secretary Paulson described the HOPE NOW program as "a coalition of mortgage servicers, counselors and investors that are working to avoid preventable foreclosures and to improve the functioning of the mortgage markets." Paulson said that 50 percent of foreclosures occur "without borrowers ever talking with a mortgage counselor."

The HOPE NOW program, which will use a national letter campaign as well as other publicity efforts to reach homeowners, will thus provide needed assistance and advice to millions of Americans unsure of how to cope with rising interest rates. Additionally, some homeowners may be able to refinance into private, fixed-rate mortgages, or use Federal Housing Administration loans.

Article source: Center for American Progress

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A Mortgage History Lesson & Foreclosure Tax Repercussions

The current mortgage environment has drawn many comparisons with the 1930's, when the government stepped in. It is generally agreed that without those fundamental changes, the Great Depression could have been much worse than it was. In the early part of the last century, most home loans were a 5-yr ARM with a balloon payment. Keeping that in mind, here's a brief summary:

In 1932, the National Association of Real Estate Boards proposed (and Congress created) the Federal Home Loan Bank System, modeled after the Federal Reserve System. Twelve regional banks were created, and a Federal Home Loan Bank Board, like the Federal Reserve board, was set up to oversee them. The Appraisal Institute was also founded in 1932 by the appraisal industry. Bankruptcy and eviction laws were modified and in 1933, Congress created the Home Owners Loan Corporation to help borrowers move from 5-yr balloon loans to 15-year amortizing mortgages.

In 1934, Congress created the Federal Housing Administration (FHA) to insure mortgages and the Federal Deposit Insurance Corporation (FDIC), intended to prevent runs on banks from depleting resources for home mortgages. Lastly, in 1938, Congress created the Federal National Mortgage Association (FNMA or Fanny Mae). Some argue that it is very early in this current business cycle; however it is easy to see the amount of government intervention juxtaposed with today's market, especially at the Federal level.

A plan is nearing fruition on a plan to freeze some subprime rates, but that won't help those already foreclosed upon. As most originators know, in many states (including California), most mortgages that are used to purchase a residence are nonrecourse, but mortgages from refinancing a previous mortgage are usually recourse, based on the note. So, can the lender come after the borrower for the difference? If the loan (Deed of Trust) is a purchase money loan secured by a house that is the borrower's principal residence, the answer is generally "no."

California's anti-deficiency laws [California Code of Civil Procedure Section 580(b)-(d)] protect homeowners by preventing lenders from doing any more than taking back the property. These anti-deficiency laws were enacted during the Depression to give homeowners a fresh start, without a deficiency judgment hanging over their heads. However, the code section is fairly specific. The loan had to be for the purchase of the property and the borrower has to occupy it as his or her principal residence: (No non-owner or vacation homes.) The lender can choose to file a judicial foreclosure against the borrower. For loans involving a refinance or line of credit (technically not purchase money loans) a lender could go after the borrower for the difference.

Regarding tax consequences, here are some sites that may be of help for you:
Questions and Answers on Home Foreclosure and Debt Cancellation -- IRS http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Interest/Dividends/Other Types of Income: 1099 Information Returns (All Other) -- IRS http://www.irs.gov/faqs/faq4-4.html

Foreclosures and Repossessions -- IRS http://www.irs.gov/publications/p544/ch01.html#d0e914
Tax Consequences of a "Short Sale" of Real Estate vs. Foreclosure - CPA's website http://www.realestateinvestingtax.com/shortsale.shtml

Blog worth checking on-- http://dirtlaw.typepad.com/blog/2007/02/preforeclosure.html

In recent weeks jumbo loans have worsened relative to conforming prices, almost back to where they were when they were "bad" a few months ago, and currently have a difference of roughly 1%. So, as usual, headline-grabbing Treasury yields are improving, yet mortgages are plodding along. Conforming rates have improved slightly, jumbo prices hardly at all, while Treasury rates are down. If asked why, the primary reasons are:

1. Continued fear of delinquencies and foreclosures with mortgages (something not present with Treasury securities)


2. Investors nervous about declining property values in many markets (not a factor with Treasury securities)


3. The fear of early pay-offs on current mortgages if rates continue to move down (also not a factor with Treasuries).

The investor perceptions of mortgage companies and FNMA & FHLMC (their stocks are down 50% in recent months) are not helping either.

News today that "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," is helping us somewhat. In fact, financial stocks are up significantly today. But the 10-yr bond continues to dance around 4% and mortgage prices are roughly unchanged.

Oil has dropped into the $89/barrel range for the first time in over a month. The economic news this morning was mixed. Personal Income was +.2 Personal Consumption was +.2%, with no revisions, but the price deflator moved up year-over-year. Unfortunately rates had crept up overnight, given the potential rally in the stock market.

Besides announcing $1.4 billion in HELOC-related write-downs, Wells Fargo engaged in further product changes. Effective today, for all of their nonconforming Verification of Assets loans, the maximum debt-to-income ratio requirement will decrease from 45% to 38%, and non-self-employed borrowers now have reduced eligibility for Limited Doc/VOA. At least one of the borrowers on the loan application must have their income derive from self-employment to be eligible for Limited Doc/VOA documentation option.

Speaking of Wells Fargo, they are absorbing $1.4 billion in losses on home equity loans that borrowers have stopped repaying. Well Fargo's troubled home equity loans, totaling $11.9 billion, represent about 14 percent of the bank's total home equity portfolio of $83.4 billion. The bank has said most of the delinquent loans originated from mortgage brokers or other lenders on the wholesale market. Wells Fargo is now steering clear of virtually all home equity loans made outside its own offices.

FNMA announced changes to their Alt-A program, effective March 1, 2008. (Remember that most, if not all, investors will probably follow suit.) "In light of the continuing deterioration of market conditions," FNMA will no longer purchase No Income/No Assets (NINA) documentation loans, or No Ratio (No Income/Verified Assets [NIVA]) documentation-type loans. Beginning then, FNMA will only purchase Stated Income/Verified Assets (SIVA) and Stated Income/Stated Asset (SISA) loans, with the following eligibility adjustments: for cash-out refinance loans, the maximum LTV/CLTV is reduced to 75% for all except 1-unit primary residence, the minimum FICO score is increased to 660 regardless of LTV/CLTV, and for 3- to 4-unit properties, the minimum FICO score is increased to 700.

Chase, effective today, is changing their risk-based price adjustments for Agency fixed rate products. Needless to say, they are not for the better. This is in reaction to FNMA and FHLMC's loan level pricing adjustments based on LTV and FICO scores. In addition, JP Morgan Chase will be cutting 91 jobs at a Southern California Mortgage Operations Center.

Freddie Mac is offering $6 billion of preferred stock, saying that the capital will be used for their base requirements. Freddie also cut their dividend by 50%.

Quote of the Day: "This time, like all times, is a good one if we but know what to do with it." ~ Ralph Waldo Emerson

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Even my parents own a shredder

Even my parents own a shredder. (It sits, still wrapped in the box, under their rotary dial telephone that they lease every month from AT&T.)

Experts say that estimating how frequently confidential mortgage data is leaked is difficult, because many breaches go unnoticed. For three days in July, however, Bob Segall, a reporter at WTHR-TV in Indianapolis , Indiana , looked into 40 dumpsters behind loan branches and title companies that handle mortgage documents. In 18 of them he discovered sensitive information about various borrowers. "You could see their complete financial lives on paper, dating back 20, 30, 40 years," he said. Among the finds inside the mortgage files: a letter from one borrower's counselor saying he was doing well in alcohol rehab . . . .

Who were the top non-conforming lenders for the first half of 2007? There are no surprises: Countrywide, Wells Fargo, Citibank, Chase, Bank of America, WAMU, Residential Capital, Wachovia, Indymac, and American Home.

Is there any good news out there? Evidently not right now.

• Total Existing Home Sales fell 8.0% and are 19% below a year ago. The national median existing-home price for all housing types was $211,700 in September, down 4.2% from September 2006. Total housing inventory inched up 0.4 percent at the end of September to 4.40 million existing homes available for sale, which represents a 10.5-month supply at the current sales pace.
  


• The price of the average home Centex sold fell 8% from a year ago, and in some locations prices were slashed 15 to 20 percent, executives said.
  


• Merrill Lynch took an $8.4 billion hit in the third quarter from revaluing bonds backed by mortgages and other write-downs, and recorded a $2.24 billion loss for the quarter compared with a profit of $1.94 billion a year earlier.
  


• National City said third-quarter earnings fell 80% and recorded a net loss of $152 million in its mortgage banking business in the third quarter.

• Bank of America issued a short statement announcing the closing of their wholesale operation: “Today Bank of America announced that it will exit the wholesale mortgage business in order to devote increased energy to its expanding retail channels."

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The Great Depression Comparison & A Short Course in MI

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