Commercial Delinquencies Rise Again, Data Goes Ignored: Mortgage Bankers Association

  • Commercial Real Estate delinquency rates for loans held >30 days rose to 5.69% (as REITs continue to hit record highs)
  • CMBS debt has continued to have the highest delinquency rate of all debt by sector
  • For a reminder of the early warnings on regional bank exposure, see the Doo Doo 32
  • For my 2010 commercial real estate outlook (which thus far has been right on the money) see CRE 2010 Overview CRE 2010 Overview 2009-12-16 07:52:362.85 Mb

retail_cre_vs_cap_rate.png

Commercial Delinquencies Rise Again, Data Goes Ignored: Mortgage Bankers Association

  • Commercial Real Estate delinquency rates for loans held >30 days rose to 5.69% (as REITs continue to hit record highs)
  • CMBS debt has continued to have the highest delinquency rate of all debt by sector
  • For a reminder of the early warnings on regional bank exposure, see the Doo Doo 32
  • For my 2010 commercial real estate outlook (which thus far has been right on the money) see CRE 2010 Overview CRE 2010 Overview 2009-12-16 07:52:362.85 Mb

retail_cre_vs_cap_rate.png

From Capital.gr: Moody's Downgrades Five Greek Banks

Moody’s Investors Service said Wednesday it downgraded the deposit and debt ratings of five of the nine Moody’s-rated Greek banks due to a weakening in the banks’ stand-alone financial strength and anticipated additional pressures stemming from the country’s challenging economic prospects in the foreseeable future. [Moody's is late to the party, but their logic is solid, see "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!  followed by our forecast of the weaker vs. stronger Greek banks (premium content subscribers only) - File Icon Greek Banking Fundamental Tear Sheet]

 The affected banks are: National Bank of Greece (to A2 from A1), EFG Eurobank Ergasias SA (to A3/Prime-2 from A2/Prime-1), Alpha Bank AE (to A3/Prime-2 from A2/Prime-1), and Piraeus Bank (to Baa1/Prime-2 from A2/Prime-1). Moody’s has also downgraded the deposit and debt ratings of Emporiki Bank of Greece SA (to A3/Prime-2 from A2/Prime-1), but as a result of a reassessment of the credit enhancement associated with systemic support for this institution. The outlook on all five banks’ ratings remains negative. This action concludes the review of these banks initiated on 3 March 2010. [It looks as if Moody's peaked at the blog's subscription content :-)]

From Capital.gr: Moody's Downgrades Five Greek Banks

Moody’s Investors Service said Wednesday it downgraded the deposit and debt ratings of five of the nine Moody’s-rated Greek banks due to a weakening in the banks’ stand-alone financial strength and anticipated additional pressures stemming from the country’s challenging economic prospects in the foreseeable future. [Moody's is late to the party, but their logic is solid, see "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!  followed by our forecast of the weaker vs. stronger Greek banks (premium content subscribers only) - File Icon Greek Banking Fundamental Tear Sheet]

 The affected banks are: National Bank of Greece (to A2 from A1), EFG Eurobank Ergasias SA (to A3/Prime-2 from A2/Prime-1), Alpha Bank AE (to A3/Prime-2 from A2/Prime-1), and Piraeus Bank (to Baa1/Prime-2 from A2/Prime-1). Moody’s has also downgraded the deposit and debt ratings of Emporiki Bank of Greece SA (to A3/Prime-2 from A2/Prime-1), but as a result of a reassessment of the credit enhancement associated with systemic support for this institution. The outlook on all five banks’ ratings remains negative. This action concludes the review of these banks initiated on 3 March 2010. [It looks as if Moody's peaked at the blog's subscription content :-)]


 Two months ago I pointed out an anomaly in JP Morgan's "blowout" quarterly earnings release - Reggie Middleton on JP Morgan's "Blowout" Q4-09 Results. Let's reminisce...

Warranties of representation, and forced repurchase of loans

JP Morgan has increased its reserves with regards to repurchase of sold securities but the information surround these actions are very limited as the company does not separately report the repurchase reserves created to meet contingencies. However, the Company's income from mortgage servicing was severely impacted by increase in repurchase reserves. Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08.

Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud. I expect this activity to pick up significantly, and those banks that made significant use of brokers and third parties to place mortgages will be at material risk - much more so than the primarily direct writers. I'll give you two guesses at which two banks are suspect. If you need a hint, take a look at who is increasing reserves for repurchases! JP Morgan and their not so profitable acquisition, WaMu! 

http://boombustblog.com/images/stories/regional_banks/32bustedbanks/thumbnails/thumb_image020.png

As I said, losses should be ramping up on the mortgage sector. Notice the trend of housing prices after the onset of government bubble blowing: If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...

PNC Bank and Wells Fargo are in very similar situations regarding acquiring stinky loan portfolios. I suggest subscribers review the latest forensic reports on each company to refresh as the companies report Q4 2009 earnings. Unlike JPM, these banks do not have the investment banking and trading fees of significance (albeit decreasing significance) to fall back on as a cushion to consumer and mortgage credit losses.

Well, it looks as if I was onto something. From Bloomberg:

March 5 (Bloomberg) -- Fannie Mae andFreddie Mac may force lenders includingBank of America Corp.JPMorgan Chase & Co.Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

 That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.

...

Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.

....

The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying homehas plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.

Striking a Balance

“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.” [Of, course! Let the taxpayer eat the losses borne from our purposefully sloppy underwriting]

Bank of America recorded a $1.9 billion “warranties expense” for past and future buybacks of loans that weren’t properly written, seven times the 2008 amount, the bank said in a Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.

JPMorgan, based in New York, recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans and $1 billion to increase reserves for future losses, according to a Feb. 24 filing.

“It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years,” Charlie Scharf, JPMorgan’s head of retail banking, said at a Feb. 26 investor conference. He declined to say when the repurchase demands might peak.

...

“I can’t forecast the rates at which they’re going to continue,” she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. “The volume is increasing.”

Wells Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3 billion of loans in 2009, triple the year-earlier amount, according to a Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.

...

Citigroup increased its repurchase reserve sixfold to $482 million, because of increased “trends in requests by investors for loan-documentation packages to be reviewed,” according to a Feb. 26 filing.

“The request for loan documentation packages is an early indicator of a potential claim,” New York-based Citigroup said.

...

Banks that sell mortgages to Fannie Mae and Freddie Mac have to provide “representations and warranties” assuring that the loans conformed to the agencies’ standards. With more loans going bad, the agencies are demanding that banks turn over loan files, so they can scour the records for missing documentation, inaccurate data and fraud.

...

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

“They may do a drive-by for a visual inspection,” he said.

Wells Fargo said three-fourths of its repurchase requests came from Freddie Mac and Fannie Mae. While investors may demand repurchase at any time, most demands occur within three years of the loan date, Wells Fargo said.

The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”

...

Mortgage repurchases may crimp bank earnings through 2011, Oppenheimer’s Kotowski said. That’s because the worst mortgages -- those underwritten in 2007 -- are just now coming under the heaviest scrutiny, he said.

...

“The worst of the stress is the 2007 vintages, though 2006 and 2005 weren’t a whole lot better and 2008 wasn’t much better,” Kotowski said.

Next week, the Mortgage Bankers Association is holding a workshop in the Dallas area that promises to help banks “survive the buyback deluge” and “build up your repertoire of lender defenses.” According to the MBA’s Web site, the workshop is sold out.

 Two months ago I pointed out an anomaly in JP Morgan's "blowout" quarterly earnings release - Reggie Middleton on JP Morgan's "Blowout" Q4-09 Results. Let's reminisce...

Warranties of representation, and forced repurchase of loans

JP Morgan has increased its reserves with regards to repurchase of sold securities but the information surround these actions are very limited as the company does not separately report the repurchase reserves created to meet contingencies. However, the Company's income from mortgage servicing was severely impacted by increase in repurchase reserves. Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08.

Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud. I expect this activity to pick up significantly, and those banks that made significant use of brokers and third parties to place mortgages will be at material risk - much more so than the primarily direct writers. I'll give you two guesses at which two banks are suspect. If you need a hint, take a look at who is increasing reserves for repurchases! JP Morgan and their not so profitable acquisition, WaMu! 

http://boombustblog.com/images/stories/regional_banks/32bustedbanks/thumbnails/thumb_image020.png

As I said, losses should be ramping up on the mortgage sector. Notice the trend of housing prices after the onset of government bubble blowing: If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...

PNC Bank and Wells Fargo are in very similar situations regarding acquiring stinky loan portfolios. I suggest subscribers review the latest forensic reports on each company to refresh as the companies report Q4 2009 earnings. Unlike JPM, these banks do not have the investment banking and trading fees of significance (albeit decreasing significance) to fall back on as a cushion to consumer and mortgage credit losses.

Well, it looks as if I was onto something. From Bloomberg:

March 5 (Bloomberg) -- Fannie Mae andFreddie Mac may force lenders includingBank of America Corp.JPMorgan Chase & Co.Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

 That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.

...

Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.

....

The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying homehas plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.

Striking a Balance

“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.” [Of, course! Let the taxpayer eat the losses borne from our purposefully sloppy underwriting]

Bank of America recorded a $1.9 billion “warranties expense” for past and future buybacks of loans that weren’t properly written, seven times the 2008 amount, the bank said in a Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.

JPMorgan, based in New York, recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans and $1 billion to increase reserves for future losses, according to a Feb. 24 filing.

“It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years,” Charlie Scharf, JPMorgan’s head of retail banking, said at a Feb. 26 investor conference. He declined to say when the repurchase demands might peak.

...

“I can’t forecast the rates at which they’re going to continue,” she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. “The volume is increasing.”

Wells Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3 billion of loans in 2009, triple the year-earlier amount, according to a Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.

...

Citigroup increased its repurchase reserve sixfold to $482 million, because of increased “trends in requests by investors for loan-documentation packages to be reviewed,” according to a Feb. 26 filing.

“The request for loan documentation packages is an early indicator of a potential claim,” New York-based Citigroup said.

...

Banks that sell mortgages to Fannie Mae and Freddie Mac have to provide “representations and warranties” assuring that the loans conformed to the agencies’ standards. With more loans going bad, the agencies are demanding that banks turn over loan files, so they can scour the records for missing documentation, inaccurate data and fraud.

...

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

“They may do a drive-by for a visual inspection,” he said.

Wells Fargo said three-fourths of its repurchase requests came from Freddie Mac and Fannie Mae. While investors may demand repurchase at any time, most demands occur within three years of the loan date, Wells Fargo said.

The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”

...

Mortgage repurchases may crimp bank earnings through 2011, Oppenheimer’s Kotowski said. That’s because the worst mortgages -- those underwritten in 2007 -- are just now coming under the heaviest scrutiny, he said.

...

“The worst of the stress is the 2007 vintages, though 2006 and 2005 weren’t a whole lot better and 2008 wasn’t much better,” Kotowski said.

Next week, the Mortgage Bankers Association is holding a workshop in the Dallas area that promises to help banks “survive the buyback deluge” and “build up your repertoire of lender defenses.” According to the MBA’s Web site, the workshop is sold out.
 Johnathan Weill has an excellent article on Bloomberg today illustrating just how BS the BS FASB accounting changes regarding mark-to-market really were. For all of those who wondered why I have stayed so bearish on the banks, stay tuned, but before we read this oh so interesting story, let me provide you with a graphical recollection of recent history via this chart sourced from Bloomberg:

fasb_mark_to_market_chart.png

If the engineered bear market rally is running off of the FASB generated lies, then we certainly do have another crash coming, don't we?

 Johnathan Weill has an excellent article on Bloomberg today illustrating just how BS the BS FASB accounting changes regarding mark-to-market really were. For all of those who wondered why I have stayed so bearish on the banks, stay tuned, but before we read this oh so interesting story, let me provide you with a graphical recollection of recent history via this chart sourced from Bloomberg:

fasb_mark_to_market_chart.png

If the engineered bear market rally is running off of the FASB generated lies, then we certainly do have another crash coming, don't we?

Here are some very interesting facts on the latest trend in Alt-a mortgages that have been in the news as of late. The following charts were culled from my mortgage default model which was built primarily from date gathered from the FDIC and the NY Fed.
Here are some very interesting facts on the latest trend in Alt-a mortgages that have been in the news as of late. The following charts were culled from my mortgage default model which was built primarily from date gathered from the FDIC and the NY Fed.
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