Displaying items by tag: Mortgage Banking

From RGE Monitor:

  • FT: Financial Stability Forum urges prompt writedowns and warned that the full impact of the credit squeeze had yet to be felt. Banks wrote down $140bn by Q4 ($84bn in U.S., about $40bn in Europe) subprime securities so far, finance ministers expect $400bn. Half of it expected in U.S., other half rest of world.
  • Fitch: Basel II rules allow easier clean break with off-balance sheet vehicles.
  • SIFMA: Outstanding volume for the European securitization market stood at €1.32 trillion, as of 30 September 2007. Euro-denominated CDO market volume 2004-2007= €285.4bn (around $410bn)
  • WSJ: EU banks reported to be exposed to monoliners via popular 'negative basis trades' in past few years (arbitrage opportunity technically due to oversupply when CDS spread (i.e. cost to buy protection) on a single name is smaller than the bond yield--> buy both bond and protection from monoliner and cash in the risk-free spread difference.)
    --> 6 banks out of 8 planning monoline rescue were European; expected losses in $20-140bn range
  • European banks also reported to be exposed to commercial real estate loans/CMBS and leveraged loans stemming from buy-out boom. These markets are turning now and additional writedowns are expected ($100-200bn)
  • UK, Spain, Ireland financial sector additionally exposed to domestic housing bust--> Spanish banks e.g. less exposed to U.S. subprime fallout and off-balance sheet SIVs but draws heavily on ECB lending facility which delays actual writedowns on unviable collateral. I have warned members of this blog about this several times.
Published in BoomBustBlog

From the WSJ:

Stocks were unable to
hold onto Tuesday’s 400-plus point rally in the Dow industrials and
attendant rallies in other indexes, and steadily marched lower through
the afternoon, until news of a lawsuit filed by Merrill Lynch against a
unit of bond insurer Security Capital Assurance, alleging the company
is trying to avoid obligations of up to $3.1 billion under seven credit default swaps.
Merrill’s own CDS widened on the news, moving to 250 basis points from
210 basis points, according to Phoenix Partners Group, and the stock
market dove, with the Dow giving back a good lot of the previous day’s
massive rally.

I stated several
times in the comments that the CDS market may very well lead us into
the next serious leg down. Many of the guys who wrote these either
don't have the cash to pay up or are wrapped up in hedges using CDS
which will easily get @#$@ed up once one leg of the hedge falls.

Published in BoomBustBlog

My blog has been quite popular as of late,
most likely because it may appear to some that I have a crystal ball.
My last 5 or so warnings have resulted in 50 point or so price drops in
the shares of the companies in questions. Let me be both modest and
honest. I am not that smart and do not have a crystal ball. There is a
simple premise behind all of this that allows me to understand what is
going on, but this premise does not get any press play and is not
harped on by the analyst community. Many major players in our financial system are simply insolvent.
Plain and simple. The liquidity issues that you see are simply a result
of that insolvency, not a cause. When you lever up on assets at the top
of a bubble and that bubble pops, you become insolvent, delevered or
not. If forced to delever, the balance sheet insolvency now becomes an
income statement insolvency as the cash outflow outstrips the cash
inflows, but it all stems from the original balance sheet insolvency -
not the other way around.

Borrowing more money, no matter what the
terms, will not aide you in your dilemma. That is, of course, unless
you can borrow large amounts of that money quickly on non-recourse
terms. But that is not really borrowing money, it is someone giving you
money with the option to pay it back.
It is the equivalent of a straight bailout, isn't it? That is what just
happened last weekend, which leads me to the next paragraph...

I have been alleging that many investment banks, monoline insurers, home builders and commercial banks are effectively insolvent. Nouriel Roubinin wrote an accurate piece on the topic.
Between that and the the five or six major analytical pieces that I put
together, I believe a pattern emerges (please take note of the dates
the pieces were written and the share prices at the time of the post).
I believe the pattern is indisputable. You could have made a fortune on
the short side of these analyses, and you could have lost a fortune on
the long side, just ask the employess and shareholders of Bear Stearns,
Ambac, MBIA, Lennar, etc. My condolences go out to the rank and file
employees of all of these companies whose savings have been lost in the
share price devalution. Hopefully, there is a lesson to be learned
here:



More on Insurers and Insurance

More on Commercial Real Estate

More on Residential Real Estate


More on Investment Banks

As you can see, the path was not impossible to determine as
practically all of these companies shared the same catalyst to their
downfall - excessive leverage at the top of an asset and credit cycle
bubble. Now, the Fed is attempting to lend directly to institutions
that it has no jursidiction over. If I am not mistaken, the Fed's
balance sheet is only good for $400 billion dollars or so. There are a
lot of potential "runs on the non-bank" coming down the pike, enought
to drain the coffers. This is an ingenious, albeit very risky endeavor.
Moral hazard abounds. I know the Fed believes that they have nixed the
moral hazard argument in the butt by wiping out the Bear Stearns
shareholders, but this is an imperfect argument. The shareholders have
to approve this $2 buyout deal, and $2 is low enough to risk a battle
with the Fed and their agents. This is a major flaw in the plan that I
see as coming back to bite the markets. If this happens when the next
shoe drops, I can see the Fed getting overwhelmed.

As an investor and analytical pundit, I will be looking for the next
shoe to drop, which I believe I have found. I will keep you posted.

Published in BoomBustBlog

JP Morgan bought Bear Stearns for $230 something million, about 7%
of its closing price Friday, and about 2% of what it was trading for 2
weeks ago. On top of it, this was an all stock deal with the government
funding more tha 100% of it (the Fed will be financing $30 billion of
non-liquid BSC securities, the back stop that I said would happen).

To
put this into perspective (I'm a NYer, so I am quite familiar with the
landscape), the BSC headquarters is worth at LEAST $1 to $2 billion.
Between the clearing infrastructure, asset management, structured
product assets and real estate, there is at least a $1.5 billion
immediate gain here. How much that will be offset by litigation risk is
an unknown. The CEO got up on CNBC and clearly told the world that BSC
had no problems. Lawyers must be getting a boners in real time.

I
will admit to a big mistake that I made. I hedged my gains at $35
Friday to lock in the profts. Those calls are literally worthless now.
I shouldn't be complaining since my gains as of this post are averaging
over 800% on this trade, it was the largest position in my portfolio,
and that was after taking profits last week. Just thought I would be
honest and let everyone know that I am far from perfect, thus as I have
said so often, no one should be taking anything I say as investment
advice.

Now, as for Monday's trading.... I am not a trader, and
I believe in medium to long term investment horizons, but there is a
LOT of opportunity to be had here. Lehman is probably going to get a
drubbing. Morgan Stanley is being overlooked by the Street. Citibank
will get no love. I already covered on WaMu, with all of the
opportunities abound, I don't believe that I should be trying to dabble
below $10 when I have ridden shares down from last year in the $30's.

I
fear Goldman will be seeing a lot of devaluation. Don't forget the
companies that we have covered earlier in the blog. There financing is
damn near gone. GGP, the builders, etc.

The Fed is working hard
to help the country. That is undeniable. They have cut rates, extended
financing directly to non-banks, cut more rates - but, and as I
thought, the markets are ignoring these actions and driving financials
down and commodities up.

Lehmans asset make up will make it a
target in US trading. I will probably attempt to expand my position and
will be willing to pay premiums. My small position is quite profitable
already. I will attempt to expand the financials on my list in
aggregate, and MS (who is my 2nd largest position in the financials)
will be expanded as well.

Published in BoomBustBlog

One thing of note - The Fed's attempts to prop up the market should
help most banks, but the issue is that the bank's problems are that of
solvency and not liquidity. Liquidity problems have popped up, but they
are a consequence of the market being fearful of insolvency. The Fed
has created a limited backstop against general liquidity issues, but if
there is another run on the bank the Fed will not be able to afford to
stop it. Even if they could, they can't stop all of them by supplying
money. If there is a run on the bank, Lehman is next in line. I mention
this because if you really read my pieces - Banks, Brokers, & Bullsh1+ part 1
and Banks, Brokers, & Bullsh1+ part 2 you should walk away appreciating the risk between large private
investors and the I Banks. The I banks are starving for liquidity to
balm their solvency issues, so if they get money from the Fed you can
bet your booty that they will not be lending it back out (I was told that the banks were told by the Fed to allow their clients to borrow through them to the Fed window, but seeing is believing). They will
also be very jittery about collateral and credit risks, which means
more margin calls. The calls will be devastating. That means that if or
when banks start calling in collateral, the crash just may occur in the
hedge fund/private institutional investor arena before the actual I
bank arena. I that happens, the collateral will devalue futher as
deleveraging occurs, and it will put a liquidity strain on the I banks
again as they bang against the Fed's lending facility. I can't
guarantee this will happen, but it is a distinct possibility.

Published in BoomBustBlog

While I can't know for sure which IB it may be, my studies tell me it is either the Bear with the Broken Back or the Riskiest Bank on the Street, and that's where I'm concentrating my bets...

From the London Business Times:


Published in BoomBustBlog

As I have said previously, instruments written at the top of a bubble will not return to the pre-bubble burst levels for quite some time, if ever. If your company's well being relies on these values returning anytime soon (ex. mortgage bankers/REITs or structured product insurers), you are going to have so serious problems. Thornburg Mortgage appears to be one of the most conservative players in the industry, sort of the anti-Countrywide, yet look at their problems... The market is not mispricing their assets, the market IS the price. You are mispricing your assets if you feel that your CDS, CMBS or RMBS will reverse back to bubble market prices within 7 years or so.

From Housingwire.com :

Thornburg Mortgage Tanks as Liquidity Concerns Mount

Ultra-prime mortgage lender Thornburg Mortgage Inc. said on Monday
that it had failed to meet $270 million in margin calls received since
just last week. On Thursday, the company had disclosed in a 10-K filing
with the SEC that it had already been subject to $300 million in margin calls on its $2.9 billion portfolio of Alt-A mortgage-backed securities.

Nearly
$600 million in margin calls over the past few weeks — and failing to
meet the most recent round of $270 million — have put a serious strain
on the company’s liquidity, with Bloomberg reporting Monday that at
least one analyst has suggested that bankruptcy is possible for the lender. This is pertinent to those who need to mark RMBS assets to market. If or when these assets fire saled, it will daisy chain throughout the system. These assets are at the top of the food chain in terms of relative quality AAA, and will push much under them downward.

Thornburg
said it is working to meet the outstanding margin calls by selling
securities or raising additional debt, and characterized the latest
liquidity crisis as “strictly the result of continued deterioration of
prices of mortgage-backed securities precipitated by difficult market
conditions.

MarketWatch’s Alistair Barr reported last week that Thornburg is riding the tail of a Valentine’s Day disclosure by UBS AG
that it is highly exposed to Alt-A MBS, sparking investor concern that
UBS may become a forced seller of Alt-A mortgage securities. That
disclosure, sources suggest, is behind most of the current margin calls and forced sales — setting off a potentially dangerous chain reaction for market participants in the RMBS spa
ce.

Published in BoomBustBlog

I remember just a few months ago, Mervyn King et. al. were quite harsh on the US and the Federal Reserve for coddling our markets instead of having it take its medicine. Fast forward few months and a few billion pounds of "bailout money" and here we have the same crew nationalizing banks. Hmmm!!!

The US may have some rough waters ahead, but we damn sure won't be swimming in them alone!

Alistair Darling on Sunday announced the first nationalisation of a sizable British bank in a quarter of a century as he put Northern Rock into public ownership, infuriating shareholders and shocking the two private bidders hoping to take over the stricken mortgage lender.

Visibly concerned to avoid queues forming outside branches this morning, the chancellor and Ron Sandler, Northern Rock's new executive chairman, insisted it would be "business as usual".

News of an emergency loan to Northern Rock from the Bank of England last September triggered the first run on a British bank in more than a century. The government has been trying since then to find a buyer for the bank that would enable the £25bn in Bank of England loans to be repaid.

Shares in the bank, which closed at 90p on Friday, will be suspended this morning and shareholders can expect virtually no compensation for their equity.

Mr Darling said the legislation to be brought to parliament on Monday would appoint independent arbiters to determine what the shares were worth, but the legislation would propose that the government should not be required to compensate shareholders for any value that is dependent on taxpayers' support.

The government's move stunned shareholders, who were last night considering action. Jon Wood of the SRM hedge fund, the bank's biggest shareholder, said: "This is a very sad day for the stock market, banking industry and the reputation of the UK as a financial centre."

Noting that the chancellor insisted the bank was solvent, he added: "We will pursue all avenues to protect that value for shareholders."

Robin Ashby, founder of the Northern Rock small shareholders group, said he was "shocked and appalled" that shareholders "were having the bank stolen away from them".

Published in BoomBustBlog
Thursday, 07 February 2008 05:00

More Centex funding issues coming down the pike

In my very first post on this blog, I shared my "Thoughts on the Homebuilders" about 5 months ago. In particular, I was skeptical about their abilitiy to maintain swap agreements to fund their mortgage facilities, and the lingering (and value damaging) liabilites that the builders will be stuck with. Now that builders are forced to rely on warehouse credit lines for funding mortgages, they are very vulnerable to the whims of banks, who themselves are hurting for capital and not very willing to take risk. The next step in the saga is the pulling of credit lines and the sticking of bad morgtages back to the builders, which will choke them. The following is from Centex's latest 10Q:

Funding of Mortgage Loans

CTX Mortgage Company, LLC has historically funded its origination of mortgage loans through the sale of such mortgage loans to Harwood Street Funding I, LLC (“HSF-I”) and, to a lesser extent, through borrowings under more traditional committed bank warehouse credit facilities and mortgage loan sale agreements. As a result of the significant disruptions in the mortgageasset-backed commercial paper markets and , beginning in the second quarter of fiscal year 2008, HSF-I was unable to finance the purchase of mortgage loans from CTX Mortgage Company, LLC. In November 2007, HSF-I and the related swap arrangements were terminated and all outstanding obligations were redeemed. The termination of HSF-I was entirely due to these external market factors and not to any quality or performance issues related to HSF-I or its underlying collateral.

CTX Mortgage Company, LLC is currently funding its mortgage originations primarily through borrowings under a committed bank warehouse credit facility and a mortgage loan sale agreement. The warehouse facility generally allows CTX Mortgage Company, LLC to sell to the bank, on a revolving basis, mortgage loans up to an aggregate specified amount. Simultaneously, the bank has entered into an agreement to transfer such mortgage loans back to CTX Mortgage Company, LLC on a specified date or on the Company’s demand for subsequent sale by CTX Mortgage Company, LLC to third parties. Mortgage loans eligible for sale by CTX Mortgage Company, LLC under the warehouse facility are conforming loans, FHA/VA eligible loans, and jumbo loans meeting conforming underwriting guidelines except as to the size of the loan. The bank has the option to convert the facility to an amortizing loan based on the ultimate sale of the underlying collateral and not to purchase any additional mortgage loans under the warehouse facility if the Company’s long-term unsecured debt ratings fall below BB+ by Standard & Poors (“S&P”) or Fitch or below Ba1 by Moody’s Investors Service (“Moody’s”). The Company’s long-term unsecured debt is currently rated BBB- by S&P, BBB by Fitch and Ba1 by Moody’s. CTX Mortgage Company, LLC may also seek to enter into additional mortgage warehouse facilities with other lenders. Borrowings under the warehouse facility constitute short-term debt of Financial Services.

CTX Mortgage Company, LLC bears the credit risk associated with loans originated until such loans are sold to third parties. In connection with the loans it originates and sells to third parties, CTX Mortgage Company, LLC makes representations and warranties to the effect that each mortgage loan sold satisfies the criteria of the sale agreement. CTX Mortgage Company, LLC may be required to repurchase mortgage loans sold to third parties if such mortgage loans are determined to breach the representations and warranties of CTX Mortgage Company, LLC, as seller. CTX Mortgage Company, LLC records a liability for its estimated losses for these obligations and such amount is included in its loan origination reserve.

Published in BoomBustBlog

This topic was brought up September of last year, one of the first posts of this blog - The Performance of Centex's Mortgage Origination. The mortgage origination units of the builders are not getting enough attention, and they are significant drags on performance (as if this group needs any more of that) as well as dangerous liabilities on the balance, and often off balance sheet as well. There may be some very turbulent and adverse price action as the shares of Centex have surged with the "bear market sucker;s rally" and are at levels that can in no way be justified by valuations.

The latest quarters results were pretty bad, but the media didn't catch all that there is to tell... From Bloomberg.com:

Centex Loss Widens as Slump, Lending Woes Cut Demand (Update1)

By Brian Louis

Jan. 29 (Bloomberg) -- Centex Corp., the second-largest U.S. homebuilder, reported a $975.2 million third quarter loss as the housing slump and tighter lending standards cut demand. The net loss amounted to $7.94 a share in the three months ended Dec. 31, seven times more than analysts' projections. Revenue fell 30 percent to $1.9 billion, the Dallas-based company said today in a statement. In the year earlier period, Centex had a loss of $228 million, or $1.90. Centex wrote down $554 million in land and property values in the quarter and has cut more than 40 percent of its workforce since 2006. New home sales in the U.S. fell to a 12-year low in December, capping the biggest annual decline since records began in 1963, the Commerce Department said yesterday.

``There's too much existing home inventory on the market to prevent any sort of significant increase in the pace of housing starts,'' said James McCanless, an analyst at FTN Midwest Securities Corp. He rates the shares ``buy.'' Whaaaatttt???

Centex was projected to report a net loss of $1.13 a share, according to the average estimate of nine analysts in a Bloomberg survey. Orders fell 10 percent in the quarter to 5,537. The company closed on 6,657 houses, a 20 percent decline from a year earlier. The average price fell 11 percent to $268,588. Centex also recorded a write down on the value of future tax benefits totaling $500 million.

``The housing market continues to correct and tighter mortgage underwriting standards are affecting home prices,'' Tim Eller, Centex's chief executive officer, said in the statement.

The company's backlog, or homes under contract and not yet sold, fell 36 percent to 8,513 homes. The value of the backlog tumbled 47 percent to $2.3 billion. This means that the company lost over $2 billion (nearly 50%) in projected revenue. In case anybody is having a problem parsing this, let me help you - This is very bad news...

Centex rose 36 cents to $29 in New York Stock Exchange composite trading today. Of course it did. These shares are being set up for a nasty fall. The shares have dropped 43 percent over the past 12 months, compared with a 46 percent decline in a Standard & Poor's measure of 15 homebuilders.Centex, founded in 1950, sold the most homes in its fiscal third quarter in Texas.

And from Reggie...

What is not captured is the half billion dollars or subprime home equity loans sitting on(and off) Centex's balance sheets. They just happen to be concentrated in the most toxic vintages possible (2005H2, 2006, 2007H1). This is the most dangerous cocktail possible:

  1. subprime
  2. home equity
  3. toxic vintages
  4. loans orginated from a builder who is trying to move inventory
  5. loans originated off of a warehouse credit line that have no place to go due to a very tight market and next to zero demand
  6. worsening macro conditions for housing, foreclosures, and declining prices.

Stephen King couldn't script a scarier scenario. These loans performed awful last year (see the link to the earlier post above), as is to be expected considering how easily Centex probably gave them away in an effort to move homes. Well, this year it is abysmal. I am expecting nearly a quarter billion dollars of actual losses on these assets, and Centex cannot move these at all - there is zero market for them.

Why recommend a sector that, even in normal times, would hand in average utility-like performance with greater than utility risk when this is probably the most difficult period ever in the history of public homebuilders? This will be a very bad year for this industry, and if you bottom fish you are taking undue risk that you will not be compensated for in terms of potential for reward.

See the itemization of Centex's subprime assets, security by security in the following chart...

Published in BoomBustBlog
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