This snippet is out of the examiner's handbook, barely. So yes, if the examiner decided that the lender's reserves did not adequately account for the number of loans negatively amortizing, somebody gets a demerit badge, which is cured by upping the reserves.
The home builders are also interesting today--down about 2.5% on the opening news about an increase in foreclosures but way up by noon. I especially wonder about Standard Pacific (SPF) a weak stocks with heavy California exposure (where foreclosures are up >40% month over month) and Pulte, which reports near the end of the month and is up about 3.3% so far. DSL and NDE are also big winners but just about all of the banks are up.
Capital One is also up tomorrow, who bought North Fork who bought GreenPoint, which was for quite some time one of the scariest Alt-A lenders out there (to me, at least). I'll be looking--not exactly forward, just looking--for Cap One's report.
I think number2son has this one right. Shorts covering and not a lot of sellers. The daily trading volumes are pretty low on average.
This could sink once the shorts stop covering. Not a lot of analysts covering this stock. I don't know why there isn't a lot of selling. That report is pretty scary.
Thanks for the clarification, Tanta. The way I read the Downey release, they're justifying not increasing the reserve based because of the reduction in their neg-am loan portfolio. I don't see anywhere that they've addressed the collectibility issues inferred by the increasing neg-am included in loan balances.
A homeowner who takes out a $200,000 ARM with a teaser rate of 4 percent, for example, initially pays $954.83 monthly in principal and interest. But when the interest rate jumps to 7 percent, say, in the second year of the mortgage, his payments rise to $1,320.59 a month -- a move that regulators call "payment shock."
So why is it that the teaser rate is not a payment shock but only a "teaser" again?
I am so impressed by these federal officials that want to see people stay in their homes...prolly want people to stay in their jobs too...that can only engage the house purchase with those "teaser" rates.
I'm getting angry...
Tanta, thanks for the clarification. The only thing I can conclude is either:
DSL went out on a flimsy limb and their next regulator visit could result in a suggestion to materially raise reserves
OR
the regulators are instructed to let the lenders take more risk as the systemic risk is too great that they might force too many lenders to fold. So, a wink by the regulator at the end of the visit...
I think the question is what is a reasonable reserve in relationship to the non-performing loan. For DSL, the non-perfoming loan is about 0.94%. And the 3/31/07 loss provision: $62m on $12.45b of loans = 0.50%. Anyone has a rule of thumb on what is reasonable reserve? It look o.k. to me since more than 1/2 of non-performing loan normal will get back on payment. And loan loss severity in subprime land is about 30 to 40% of loan once it default. So the acutal loss for 0.94% non-performing loan can be in the range of 0.94x0.5x0.4=0.19% of the overall loan.. Since DSL already reserved 0.5% of loan value. This look o.k. to me. Tanta and other who are more familiar with loan reserve requirement, what is your take?
Non-performing assets increased during the quarter by $33 million to $143 million and represented 0.94% of total assets, compared with 0.68% at year-end 2006 and 0.22% a year ago."
Freddie Mac Offers to Buy $20 Billion in Home Loans, Syron Says
By James Tyson
April 18 (Bloomberg) -- Freddie Mac, the second-largest source of money for U.S. home loans, is offering to buy as much as $20 billion of mortgages that were to be packaged into bonds as the company tries to help stabilize the subprime loan market, Chief Executive Officer Richard Syron said today.
Syron made the comments at a summit in Washington led by Senate Banking Committee Chairman Christopher Dodd.
Freddie Mac, Fannie Mae, lawmakers and regulators have been looking for ways to curb a surge in mortgage delinquencies and foreclosures among subprime borrowers, or people with poor or incomplete credit records. Late payments on subprime loans reached a four-year high of 13.3 percent in the fourth quarter, according to the Mortgage Bankers Association.
McLean, Virginia-based Freddie Mac, created by Congress to increase financing available to homebuyers, channels money into the mortgage market by buying home loans from lenders. It profits by holding mortgages and mortgage bonds as investments and by charging a fee to package together home loans as securities for sale to investors.
calmo, I hate to piss you off even more, but . . .
This whole legitimization of the "teaser" concept is just of a piece of what's been going on in the last several years.
Traditionally, an ARM could always be "discounted." In fact, most of us considered that it should be discounted: if you take the risk of future rate increases, I give you a little break on the present rate you pay.
A "teaser" rate is too deeply discounted: it is not a fair exchange for the rate risk, it's either a bait-and-switch thing ("teasing" you into taking the ARM) or it's a dishonest way of qualifying (a temporary low rate offered by the lender only to pretend that the borrower qualifies for the loan).
"Teaser" is to "discount" as "silent second" is to "subordinate financing" or "liar loan" is to "stated income." These are terms that were always perjorative until recently, when somehow they became widely used with no apparent irony. For someone like me to hear the word "teaser" used in an apparently unironic (or un-pissed-off) context is just mind-boggling. I have no beef with discounts, but teasers ought to be against the rules. I am therefore dumbfounded when I hear a regulator using that term in any context other than "you are busted."
Anthony, that Bloomberg report makes absolutely zero sense. What is it with these lazy goddamn reporters? "Mortgages that were to be packaged into bonds"? What the hell does that mean?
What I don't see in Syron's remarks is any reference to the lending guidance issues recently. If a subprimer (or any other borrower) doesn't qualify since the loan amount is too high for the underlying appraised value or their income is too low at the proposed interest rate, what happens then?
barely, what happens then is that this is one of the borrowers who doesn't get "rescued." I honestly didn't think Syron could have put it much more clearly.
Bloomberg: WaMu is offering to refi 10% of its sub-prime loan balance ($2bn out of $20 bn) to lower rates to help reduce payment shock. I wonder what the fees for these deals look like? I wonder how the other 80% feel?
So on Sunday we were invited by some friends over for dinner. The topic turned to real estate and the mortgage mess, and I say something like "...so a lot of people got these option ARM loans (way more than should have gotten them) and these kinds of loans allow people to make a minimum payment, but if they do that they're owing more on their home each month. It's called negative amortization. But it turns out that a lot of people with these kinds of loans have been making that minimum payment...". And then it got real quiet.
And then our friend's wife says "I think that's the kind of loan we've got. We generally try to pay more than the minimum payment...".
[this is one of the borrowers who doesn't get "rescued."]... By fannie.
There are a lot of politicians tripping over their dicks right now to get their smiling faces connected to any other bailout schemes being proposed. What else could be holding up all these mtg companies' shares? Sure isn't the coming torrent of defaults and their already poor financial performance in the mtg dept.
"The chief executives of mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) said that would each take steps to ease troubled subprime borrowers into more sturdy loans.
The nation's two largest sources of mortgage finance said they could help borrowers with 40-year mortgages, looser lending standards and credit counseling services."
BTW Booking interest that has not yet been paid as profit reminds of the pro forma profits of the dotcoms? Maybe this accounting method of booking phantom profits is something like the new math. I was never very good at the new math. Just couldn't get my head around the concept the 2 + 2 = 5.
But then I never understood the special purpose entities of Enron which moved Enron's debt off its books. Moving debt does not mean that the debt has been paid anymore then a ledger entry of interest that has not been paid makes the unpaid interest profit.
What I do understand is that in both cases, the point is to make the profit margin greater then it really is, thus keeping the value of your stock inflated. And they call this acceptable methods of accounting.
I just wish there was some similar method available to the average taxpayer to make the IRS think that they are getting paid with the some of these phantom profits.
Tanta,come on by anytime you are in the wine country,i generally have home smoked salmon and can usually come up with some Elk if you like red meat.I owe you more than a good dinner for the education i have recieved...so i'll throw in a clean limerick and a bottle of vino too.
BKUNA, Florida's version of DSL, reported today. They reported 24.4M in income, but their cash position fell by 60 million, their REOs went up 800% over last quarter, and capitalized neg-am interest was about double their reported "income."
Something in the BKUNA 8K I dont understand is in the listing of "non-performing assets" are "Non-accrual loans." This increased Q2Q from 44.7M to 70.4M. What are these?
BKUNA also does commerical loans. Is that what these are?
Their bread and better are the neg-am option loans though, these were 85% of new residential loan production.
YAL,
I feel your pain, I covered my DSL short position in after hours for a loss.
Dumb-ass Jim Cramer did a special on DSL today and said it was way undervalued. He said it should be at $110 per share and is a good buyout target.
It's hard for me to see any upside to a business with decreasing sales volumes and increasing expenses-losses, but when did economics have to make sense for a stock to move up?!
DSL is up strongly today.
I sincerely want to know what the techniques are that permit an analysis of this stock to reduce/minimize risk.
I'm experiencing shock and awe.
arbogast
"I'm experiencing shock and awe."
If the news is bad buy, if the news is good sell, got it? It's kind of like new math 1+1=3
Tanta, "Therefore, a strong indicator of potential credit risk is the number of an institutions option-ARM loans that actually negatively amortize"
So, what os OTS suggesting here? Would they require that provisions for losses go up in this case? Do they even do any analysis?
This snippet is out of the examiner's handbook, barely. So yes, if the examiner decided that the lender's reserves did not adequately account for the number of loans negatively amortizing, somebody gets a demerit badge, which is cured by upping the reserves.
Well, over 30% of the DSL float is short so it doesn't take much for the stock to run on days like this.
If this continues, I'm looking to go long some far out puts.
Not related to accounting but i just saw this....
Expired
Great 40 year notes.... lets start this run-up all over again...
The home builders are also interesting today--down about 2.5% on the opening news about an increase in foreclosures but way up by noon. I especially wonder about Standard Pacific (SPF) a weak stocks with heavy California exposure (where foreclosures are up >40% month over month) and Pulte, which reports near the end of the month and is up about 3.3% so far. DSL and NDE are also big winners but just about all of the banks are up.
Capital One is also up tomorrow, who bought North Fork who bought GreenPoint, which was for quite some time one of the scariest Alt-A lenders out there (to me, at least). I'll be looking--not exactly forward, just looking--for Cap One's report.
I think number2son has this one right. Shorts covering and not a lot of sellers. The daily trading volumes are pretty low on average.
This could sink once the shorts stop covering. Not a lot of analysts covering this stock. I don't know why there isn't a lot of selling. That report is pretty scary.
Thanks for the clarification, Tanta. The way I read the Downey release, they're justifying not increasing the reserve based because of the reduction in their neg-am loan portfolio. I don't see anywhere that they've addressed the collectibility issues inferred by the increasing neg-am included in loan balances.
From michael's link:
A homeowner who takes out a $200,000 ARM with a teaser rate of 4 percent, for example, initially pays $954.83 monthly in principal and interest. But when the interest rate jumps to 7 percent, say, in the second year of the mortgage, his payments rise to $1,320.59 a month -- a move that regulators call "payment shock."
So why is it that the teaser rate is not a payment shock but only a "teaser" again?
I am so impressed by these federal officials that want to see people stay in their homes...prolly want people to stay in their jobs too...that can only engage the house purchase with those "teaser" rates.
I'm getting angry...
Tanta, thanks for the clarification. The only thing I can conclude is either:
DSL went out on a flimsy limb and their next regulator visit could result in a suggestion to materially raise reserves
OR
the regulators are instructed to let the lenders take more risk as the systemic risk is too great that they might force too many lenders to fold. So, a wink by the regulator at the end of the visit...
I think the question is what is a reasonable reserve in relationship to the non-performing loan. For DSL, the non-perfoming loan is about 0.94%. And the 3/31/07 loss provision: $62m on $12.45b of loans = 0.50%. Anyone has a rule of thumb on what is reasonable reserve? It look o.k. to me since more than 1/2 of non-performing loan normal will get back on payment. And loan loss severity in subprime land is about 30 to 40% of loan once it default. So the acutal loss for 0.94% non-performing loan can be in the range of 0.94x0.5x0.4=0.19% of the overall loan.. Since DSL already reserved 0.5% of loan value. This look o.k. to me. Tanta and other who are more familiar with loan reserve requirement, what is your take?
Expired
"Non-Performing Assets
Non-performing assets increased during the quarter by $33 million to $143 million and represented 0.94% of total assets, compared with 0.68% at year-end 2006 and 0.22% a year ago."
Freddie Mac Offers to Buy $20 Billion in Home Loans, Syron Says
By James Tyson
April 18 (Bloomberg) -- Freddie Mac, the second-largest source of money for U.S. home loans, is offering to buy as much as $20 billion of mortgages that were to be packaged into bonds as the company tries to help stabilize the subprime loan market, Chief Executive Officer Richard Syron said today.
Syron made the comments at a summit in Washington led by Senate Banking Committee Chairman Christopher Dodd.
Freddie Mac, Fannie Mae, lawmakers and regulators have been looking for ways to curb a surge in mortgage delinquencies and foreclosures among subprime borrowers, or people with poor or incomplete credit records. Late payments on subprime loans reached a four-year high of 13.3 percent in the fourth quarter, according to the Mortgage Bankers Association.
McLean, Virginia-based Freddie Mac, created by Congress to increase financing available to homebuyers, channels money into the mortgage market by buying home loans from lenders. It profits by holding mortgages and mortgage bonds as investments and by charging a fee to package together home loans as securities for sale to investors.
Freddie Mac to Buy $20 Billion in Subprime Home Loans (Update3) - Bloomberg.com
calmo, I hate to piss you off even more, but . . .
This whole legitimization of the "teaser" concept is just of a piece of what's been going on in the last several years.
Traditionally, an ARM could always be "discounted." In fact, most of us considered that it should be discounted: if you take the risk of future rate increases, I give you a little break on the present rate you pay.
A "teaser" rate is too deeply discounted: it is not a fair exchange for the rate risk, it's either a bait-and-switch thing ("teasing" you into taking the ARM) or it's a dishonest way of qualifying (a temporary low rate offered by the lender only to pretend that the borrower qualifies for the loan).
"Teaser" is to "discount" as "silent second" is to "subordinate financing" or "liar loan" is to "stated income." These are terms that were always perjorative until recently, when somehow they became widely used with no apparent irony. For someone like me to hear the word "teaser" used in an apparently unironic (or un-pissed-off) context is just mind-boggling. I have no beef with discounts, but teasers ought to be against the rules. I am therefore dumbfounded when I hear a regulator using that term in any context other than "you are busted."
Anthony, that Bloomberg report makes absolutely zero sense. What is it with these lazy goddamn reporters? "Mortgages that were to be packaged into bonds"? What the hell does that mean?
I think it means that the taxpayer will be bailing out the mortgage companies that are holding the bag.
Where should I point out a typo in that OTS pdf link? See PAYMENT SHOCK section.
Well, Anthony, it looks to me like it means nothing of the sort. See thread above for "updated" Bloomberg report.
What I don't see in Syron's remarks is any reference to the lending guidance issues recently. If a subprimer (or any other borrower) doesn't qualify since the loan amount is too high for the underlying appraised value or their income is too low at the proposed interest rate, what happens then?
barely, what happens then is that this is one of the borrowers who doesn't get "rescued." I honestly didn't think Syron could have put it much more clearly.
Bloomberg: WaMu is offering to refi 10% of its sub-prime loan balance ($2bn out of $20 bn) to lower rates to help reduce payment shock. I wonder what the fees for these deals look like? I wonder how the other 80% feel?
So on Sunday we were invited by some friends over for dinner. The topic turned to real estate and the mortgage mess, and I say something like "...so a lot of people got these option ARM loans (way more than should have gotten them) and these kinds of loans allow people to make a minimum payment, but if they do that they're owing more on their home each month. It's called negative amortization. But it turns out that a lot of people with these kinds of loans have been making that minimum payment...". And then it got real quiet.
And then our friend's wife says "I think that's the kind of loan we've got. We generally try to pay more than the minimum payment...".
[this is one of the borrowers who doesn't get "rescued."]... By fannie.
There are a lot of politicians tripping over their dicks right now to get their smiling faces connected to any other bailout schemes being proposed. What else could be holding up all these mtg companies' shares? Sure isn't the coming torrent of defaults and their already poor financial performance in the mtg dept.
Hey bofiz, at least you still get invited to dinner parties.
I have to sit at my desk eating a partially-frozen burrito and scaring the hell out of you guys, 'cause nobody will invite me over any more . . .
Let's all chip in and buy Tanta a microwave.....
Tanta, I think we're being bushwacked...
"The chief executives of mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) said that would each take steps to ease troubled subprime borrowers into more sturdy loans.
The nation's two largest sources of mortgage finance said they could help borrowers with 40-year mortgages, looser lending standards and credit counseling services."
Limited options for subprime woes, lawmakers hear
| Reuters
So what is the conclusion ? Does DSL resreve enough ?
hard 3 days for me at this market. lost a lot.
BTW Booking interest that has not yet been paid as profit reminds of the pro forma profits of the dotcoms? Maybe this accounting method of booking phantom profits is something like the new math. I was never very good at the new math. Just couldn't get my head around the concept the 2 + 2 = 5.
But then I never understood the special purpose entities of Enron which moved Enron's debt off its books. Moving debt does not mean that the debt has been paid anymore then a ledger entry of interest that has not been paid makes the unpaid interest profit.
What I do understand is that in both cases, the point is to make the profit margin greater then it really is, thus keeping the value of your stock inflated. And they call this acceptable methods of accounting.
I just wish there was some similar method available to the average taxpayer to make the IRS think that they are getting paid with the some of these phantom profits.
Clever that, making money out of thin air.
check out DSL AH. Now over $69??
Tanta,come on by anytime you are in the wine country,i generally have home smoked salmon and can usually come up with some Elk if you like red meat.I owe you more than a good dinner for the education i have recieved...so i'll throw in a clean limerick and a bottle of vino too.
BKUNA, Florida's version of DSL, reported today. They reported 24.4M in income, but their cash position fell by 60 million, their REOs went up 800% over last quarter, and capitalized neg-am interest was about double their reported "income."
Something in the BKUNA 8K I dont understand is in the listing of "non-performing assets" are "Non-accrual loans." This increased Q2Q from 44.7M to 70.4M. What are these?
BKUNA also does commerical loans. Is that what these are?
Their bread and better are the neg-am option loans though, these were 85% of new residential loan production.
YAL,
I feel your pain, I covered my DSL short position in after hours for a loss.
Dumb-ass Jim Cramer did a special on DSL today and said it was way undervalued. He said it should be at $110 per share and is a good buyout target.
It's hard for me to see any upside to a business with decreasing sales volumes and increasing expenses-losses, but when did economics have to make sense for a stock to move up?!
As a followup to my post on the Downey story, does anyone remember the names:
IMC Mortgage
Amresco
Saxon Mortgage
Those who don't remember history....
JW