" "It is astonishing how fast the credit deterioration has occurred," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. who follows the savings and loans that specialize in these mortgages. "It took me and everybody else by surprise." "
Remind me never to do business with Friedman, Billings, Ramsey & Co.
FBR went through their own conniptions in 2006-2007; for an FBR analyst to make such a claim after their bloodbaths is, er, curious.
I'm confused; if Downey was keeping the O-ARMs on their books, they were presumably more careful than the bundle-and-sell crowd. So I would have expected the volume of their business to decline (as a percentage of business, and possibly even on absolute terms) as race-to-the-bottom competitors gobbled up rate-conscious buyers. (Elasticity clearly
This is totally OT, but fans of the late Herbert Kornfeld and his mad accounting skillz might be interested to know that his widow Marilyn Kornfled is now working in PR for Fannie Mae.
In related news, Fannie is paying servicers to refer borrowers to HOPE NOW.
More disturbingly, almost 60% of the stated amounts were exaggerated by more than 50%," the institute reported, saying the mortgages clearly deserve their "liar's loan" handle.
When that's the crap that you allow/encourage borrowers to do, you lose ALL right to be astonished at their subsequent delinquincy rate.
Remember that Countrywide has about $28 billion in Option ARMs in their portfolio. The losses on those loans could be shocking (to BofA).
I wonder if that's something they might have discussed with the Fed and the Treasury and got some reassurances that the risk they were taking on would be limited.
So if Downey was more carefull than the others, and was prudent because it kept it's loans ont he books. Then these might be the best perfromign option ARMs out there.
If true, I can only imagine how bad all the others out there are.
I don't know about you, but I am getting SOOO tired of hearing about people who "Can't pay their mortgage or CCs or car loan or anything else". If you borrow money in good faith and fall ill or lose your job, that's one thing, but to borrow money that you simply have no way to pay back is out and out fraud and theft.
There are 24 hours in a day. Deadbeats- get off your fat asses and show me that you are working at least 16 of those, 7 days a week, and then maybe I'll listen to you. Otherwise, you are just crooks, IMO.
FBR's subprime subsidiary declared bankruptcy Friday. FBR's calling card in their glory years was IPO & bridge financing of specialty finance companies. A "surprise" to the FBR business model, perhaps.
"It is astonishing how fast the credit deterioration has occurred," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. who follows the savings and loans that specialize in these mortgages. "It took me and everybody else by surprise."
Again, another variation of "No one could have seen this one coming." I'd say that Paul Miller analyst has been watching too much youtube instead of analyzing. What a dumbass.
The LA Times article reports the percentage of delinquent Option ARM loans in different communities and counties (e.g., 15% in Yuba City), but it does provide any information on the prevalence and distribution of Option ARMs in different communities. That is, the delinquency rate in Yuba City might be high, but there might be relatively few Option ARMs in that town. . .
Anecdotal reports I have seen on the web (but cannot recall citations) suggest that Option ARMs are heavily prevalent in Westside LA, Coastal OC, and presumably other very expensive districts in the Bay Area, etc.
Does anyone have data on the distribution of Option ARMs?
If they are as prevalent in Westside LA, etc, as I think they are, then short sale and REO doomsday is approaching fast, and those coastal neighborhoods will get to see yet another great sunset.
I must have missed something. Wouldn't BoA's losses be limited to the $ 4 bil they are paying to acquire CFC?
Certainly not on the surface. It's a stock-for-stock transfer and they are acquiring the company whole, including its liabilities.
Some people here are speculating that the Fed has secretly agreed to bail out BAC losses on CFC. But doing that could create a real scandal for the Fed, unless they provide transparency to Congress.
Assuming you are not - the $4 billion is to purchase the company assets and assume the liabilites at current booked value. BTW the book value is a fantasy...
I still don't understand. The money for the loans that CFC made has already been paid out. Now CFC is due payments. If the payments are made BoA gets them; if they aren't made, BoA gets zippo, but how are they out more than the $ 4 bil (plus the $ 2 bil they spent a couple of months ago)?
PayUp said :"If you borrow money in good faith and fall ill or lose your job, that's one thing, but to borrow money that you simply have no way to pay back is out and out fraud and theft."
I wonder if this ethical view isn't somewhat antiquated. The modern ethos seemed to be that if someone was willing to lend you money then you'd might as well take it. Hey, if the lenders didn't really care about digging into your credit worthiness, or ability to pay, then why should the borrower worry about such things? It's not so much that people purposefully borrowed money knowing they wouldn't repay: rather, they borrowed money believing that asset prices would keep going up allowing them to cover their obligations and get rich.
In fact, isn't the belief in the perpetual appreciation machine the driving force behind the entire credit bubble? Lenders weren't overly worried about unqualified borrowers because they figured the homes could always be sold to cover the liabilities if a problem ever did arise.
In any event, the lenders largely haven't cared about the borrower anyway since they were just flipping the loan to someone else in a security.
Heck, even guys like Donald Trump have become cultural icons for using (and abusing) debt with impunity. If creditors are still falling over each other to lend to the "the Donald" even after he has forced previous creditors into painful restructurings, then why should the average mortgage holder worry about having a big debt load?
I don't feel "sorry" for the struggling debtor, but I certainly don't feel sorry for the lenders or debt security investors who are crying foul either.
I call your attention to this Wall Street Journal story, "Countrywide Draws Ire of Judges," for three reasons. First is Countrywide schadenfreude. I freely admit to having what may be called a bias. I have read and been told enough about Countrywide to be persuaded that it is a corrupt organization, even if it manages to barely stay on the right side of the law (pending lawsuits will prove out how successful those efforts really were). So I take pleasure in seeing them get their comeuppance.
Second is that I have said, repeatedly, that Bank of America buying such a disreputable operation is a bad move that they will come to regret. Some readers have suggested that this deal may nevertheless be the lesser of bad options, positing that BofA has large derivative exposures to CFC, and it may be cheaper for them to salvage the company than take those losses. Nevertheless, Bank of America does have a reputation to protect. In the stone ages of finance when I was growing up, no one would have considered acquiring a large, high profile entity like Countrywide unless it was on the verge of collapse (and we mean Chapter 11 about to be filed, not rumor-mongering) and all of the incumbent management was summarily shown the door. That isn't happening here. Continuing news of Countrywide's bad practices confirms that these problems are deeply rooted and will prove hard to eradicate.
Third, and most important, I am concerned that "mistakes as policy" is becoming established as acceptable practice in American companies, so I applaud the bankruptcy judges' moves against it. ...
Its still not clear that BofA has assumed the liabilities of CFC. The deal structure is as yet unknown, and it may well change between now and September. The experience of firms like Accredited and Option One is telling: each had an early-'07 deal, and each was forced to renegotiate or abandon the deal by 3q07. Its even possible that BofA sees the acquisition as a call option. If things go okay, they get cfc for $7 a share. If things go to heck, they walk away and wait for a better price or deal structure.
btw, the key details of the countrywide/bofa deal are the termination provisions. If they are weak, then the "purchase" is really a call option with the premium being the termination fee (presumably a measly $100m or so). If the provisions are strong, bofa means business.
The performance of Countrywide's Option Arm and home equity portfolios will likely provide ample grounds for divorce.
I second David's view. BoA should want to keep the toxic Countrywide entities separate, and I haven't seen anything indicating that they are doing otherwise.
Of course, they will still lose a lot of additional money because they will have to provide funding for the Countrywide entities to keep them out of bankruptcy.
BAC is NOT buying Countyslide until the 3rd quarter. Anyone want to bet on the probability that in the 3rd quarter BAC will actually do the deal? Wonder if the London bookies will give me odds. Between now and the 3rd quarter, if I read the reset and recast charts correctly, Countyslide may well slide beneath the debt waves. My uninformed take on the BAC deal is that the Fed is simply buying some time in an attempt to average out the write downs.
Different take on this. The relaxed loan requirements enabled home prices to skyrocket. It enabled speculators to take advantage of the loan requirements and flip homes. Now that they have been eliminated from the potential buyer pool real estate will correct back to normal income multiples.
There was little incentive for the public sector to increase regulation because 1) they wanted to relax requirements to increase home ownership of lower income families, who cares if they really qualified because it 'felt good' and 2) increase home prices resulted in increase tax revenue to fund the public sector compensation plans and buying votes with more spending.
California's deficit will be north of $20 billion.
It drives me nuts that the Golden West book is never discussed in this conversation.
They were tearing up the market through the height of the bubble, always claiming their underwriting was superior. But if it was why did they continue to gain share through the bubble??
Either the Sandlers are the smartest people in the room (by far) or that book of business is cratering.
Wachovia's not saying anything, and I can't see where anyone is asking.
As I recall, early last year BoA tried to buy CW's servicing unit -- which is the jewel in the middle toxic waste. When BoA made their 2bn investment last summer, it looked to me like an attempt to be first in line as a potential suitor.
Don't be surprised if BoA figures out a way to take over the assets, but not the liabilities of the toxic waste.
With the updated classification, non-performing assets at Downey Financial totaled 7.8 percent of total assets as of the end of 2007. Of the 7.8 percent, 40 percent are loans that were modified during the retention program. Of that portion, 95 percent continue to make on-time payments.
Kind of confusing. I guess after 90(?) days they can remove those modified loans which are current from the non-performing assets number?
FirstFed is another Option ARM lender and their non-performing assets were at 2.34% Nov 30th, but has a similar trajectory to DSL's.
I had heard too that Downey supposedly had a better than average portfolio, but some really are percent were low-doc/no-doc. I bought more DSL puts when they all jumped on the CFC news. Totally ridiculous.
When they annonced the "teaser-freezer" plan, all the home builders jumped for no apparent reason and I bought fresh puts which have already doubled in value.
These false hope rallies are definitely good shorting opportunities. ( actually use puts.)
FT - Data show huge withdrawals
"European asset managers have suffered a complete collapse in support for equity funds amid a sea of redemptions for almost all asset classes..." FT.com / FTfm / Investments - Data show huge withdrawals
My bets are most of the loans going bad are flippers/speculators who see no reason to pay any more or folks in real estate/construction who have lost their jobs.
What until the loans recast. That's when the default numbers that scare people.
I still don't understand. The money for the loans that CFC made has already been paid out. Now CFC is due payments. If the payments are made BoA gets them; if they aren't made, BoA gets zippo, but how are they out more than the $ 4 bil (plus the $ 2 bil they spent a couple of months ago)?
I'm just guessing here, but presumably CFC owes money to the entities who invested in the loans?
Golden West is an interesting case. I actually looked into their performance in the 1990's downturn and it was incredibly good. They made sure the LTV was never greater than 70% and very definitely verified income assets, when it was sold in 2006(?) they insisted this was still true. Of course, they did sell at the exact peak, so one has to wonder...
Re BOA purchase of CFC--what makes you think that BOA is serious about completing the purchase in the 3rd quarter?
The purchase annoucement has the purpose of restoring confidence and allowing BOA geniuses that gave $2B to CFC to look like brilliant schemers instead of foolish squandrels.
Consumation of the wedding will not occur because the bride will be dead by then.
One thing that needs to be mentioned on why housing prices went up so much is restrictive zoning laws, passed largely to protect existing homeowners. Car companies offer 0 % financing from time to time, yet that doesn't materially increase prices. Why is that? Because the number of cars that can be made is virtually infinite, or close enough that no one feels they must buy a car now or they'll never have one.
If builders were allowed to build at whatever density it took to fully satisfy housing demand, prices would rapidly reach an equilibrium level. For instance, prices in Texas went up only modestly during the boom, because there are minimal restrictions on building compared with CA or the Northeast.
Speaking as a Californian: the Inland Empire, Sacramento Area, and Modesto may be suffering first and worst, but the option ARM problem is going to hit the higher-value coastal areas in a year or two as well.
Stated income may or may not be one of the issues; but always the main issue will be that the house will be worth less than they own.
I've been asking around, and I can now say I know two people with option ARMs expiring in '09 here in Santa Cruz County. Neither of them expects that their house could be worth less than they own on it at that time. It's going to be quite a surprise.
OT - I don't know if anyone has posted on this yet, but it should probably be read along with FFDIC's Possible Citi layoffs article -- The Chinese Government may block China Development Bank's proposed $2 Billion investment in Citigroup -- Seems even the Chinese are getting nervous about subprime financial contagion.
Golden West was a stated income OA lender just like Downey. They pointed to low LTV's as evidence of their superior underwriting. To their credit, they did not buy their loans from brokers like Downey did, so the truth is they were able to exercise a lot more quality control. Also, I believe they only used in-house appraisals. Still, when all is said and done, the loans will not perform that differently from Downey's: falling house prices and payment shock will do them both in.
That's the thing about all this, it just is going to continue and feed on itself. People are waiting for the market to "discount" the problem so they can jump back in, but the ultimate level of distress is essentially unknowable, add in CRE, CDS counter-party problems, etc., and the idea that anyone has any idea of when this end seems absurd.
Sorry about reposting the DSL news, I missed Tanta's earlier post, I was out shoveling snow...
I have a question on people walking from houses that are now worth less than they owe:
When will college graduates start walking away from college debts? I mean, when they figure out that their future earning power (due to layoffs, job scarcity in their fields, etc) is worth less than they owe?
I mean hey, if home borrowers do it...I'm sure we can find the same justification for college loans, surely?
As the economy slows down, properly tax goes down and income tax goes down (out of work realtors, construction workers, loan officers, etc.), we now have at least one well known actor encouraging non-payment of federal income tax. I guess it's good for joe6pack who can opt out of taxes to preserve cash flow but what will happen to government employees?
I guess it was matter of time: as people learn to walk way from mortgages (jingle mail) and local property taxes, people will stop paying other taxes: local/state/fed income taxes....
Assuming that BofA is not completely out of its mind, BofA will own all the stock in Countrywide but the the acquired entity will still survive as a wholly owned subsidiary with the BofA investment at risk just like any other investor. The seperate corporate structures would then be a firewall between the two in the worst case.
As an accountant, I've seen some very credit worthy stable income people who have bought houses with option ARMS that they would not have otherwise been able to afford. Anyone who ever asked me about any of these crazy mortgages I advised not to do it. Everyone always said the same thing, "I'll refinance...." And I always told them the same thing and that is to never ever count on a bank or other financial institution to be there to lend you money when you need it.
BA will have to consolidate the cfc balance sheet into theirs in a normal deal. Therefore, they have to show the losses even though there is no actual money changing hands. This affects there capital requirements and will force infusions of capital or selling of more stock. Translated, the fed will jump in to take some of the toxic stuff, the deal will not go through or some imaginative lawyer will enable them to keep CFC crap off of their balance sheet.
Anyone who ever asked me about any of these crazy mortgages I advised not to do it. Everyone always said the same thing, "I'll refinance...."
I've seen and been around dozens of them myself (I live and work in the NY-DC corridor).
Your rejoinder was a common one. And even more depressing, the worst case scenario your average Option-ARM holder could come up with is that, 3 or 5 years down the road, they'd have to sell before the rate reset ... in which case they'd "only" walk away with the 10x or 20x profit on their 5% down payment that everyone else was collecting.
The 70+ years since our last Depression has virtually ensured that no one still in the active workforce can envision what a "worst-case scenario" REALLY means.
"It is astonishing how fast the credit deterioration has occurred," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. who follows the savings and loans that specialize in these mortgages. "It took me and everybody else by surprise."
---Gee, there's very little surprise among the commenters on this blog...
Verdict: He's an idiot who is surrounded by idiots. Groupthink at work.
I have a question for the blog. Why can't other bidders make an offer for CW? How can CW management take a $2B bribe from BAC and refuse to open its books to other potential buyers? I would think stockholders and/or the BOD would revolt, and file a huge lawsuit. Am I missing something?
Mr. Thomas, if your firm has $4 billion laying around and can operationally handle swallowing up a trillion-dollar servicing portfolio, and it would be kosher in a baseltooey sorta way...then guess what? - you won't be "refused"; rather, you will probably be given an eleventh-hour grand tour, right down to the corporate tanning beds.
BofA will of course have to consolidate CW on the balance sheet. But assuming CW remains a separate corporate entity limited liability is still there as an investor. But, if the deal does go through, perhaps they will just scrap it out keeping the good pieces.
According to a Bloomberg 1/11/08 article, CW total consolidated assets (thrift and mortgage co.) are $209 Billion. The author estimated losses as high as 10%, or $20B. This would result in negative equity of $5B (total equity of $15B less $20B). At purchase, the assets will be written to market recognizing these losses. The thrift will then have to be recapitalized to the tune of $10B, so add another $10 B to BAC purchase price if it really wants the entire company. If it only wants the servicing and origination platforms, I would think it would be in heavy competion with other bidders, not true?
I was asking about the prevalence of Option ARMs in particular localities - i.e., what percent of total loans in Santa Monica, Beverly Hills, WLA, etc were Option ARMS in a given period (say 2005, 2006, 2007), not the rate of delinquency.
r0m30 posted a map I have seen before, with data for cities or counties, but within LA county there are such great disparities that it would be great to have more localaized data, or at least a couple of samples to illustrate the range of prevalence.
My hunch is that expensive parts of California were chock full of Option ARMs 2005-07, and a smaller percentage of mortgages in places like Yuba City were Option ARMs.
Yuba City is seeing a higher rate of delinquency because house values fell there first. But I think the really huge damage on Option ARMs will come in much pricier localities that are just beginning their descent downward.
B of A is offering to buy the stock of CW not the assets and liabilities directly. So then, even though B of A becomes the sole shareholder, CW remains a separate and distinct legal entity with its own assets and liabilities unless B of A's appointed board of directors should decide to disolve CW. Probably all under Delaware law.
All true, but as a separate entity with a $20B writeoff and $15B of capital CW will be bankrupt, and the trift subsidiary will be out of compliance with regulatory capital requirements. Not a good situation, I think.
It was my understanding that the sub prime problem is a result of high risk mortgages that are repackaged as triple A rated Collateralized Dept Obligations that increase the market for even more risky mortgages.
Without this investment grade rating, the mortgage bubble and subsequent collapse would not be a problem.
Now you say that Countrywide actually holds on to these problem mortgages as investments. My head is spinning. What really bugs me is that Countrywide had such nice people on their commercials.
Someone needs to say something about this! http://www.fakepaycheckstubs.com IS THIS LEGAL? No wonder why we have the subprime mess we have when lenders USE FAKE DOCUMENTATION to help PUSH the loan through Quickly SO THAT EVERYONE DOWN THE FOOD CHAIN (from loan processor to the loan officer to the actual lender) can make the commissions they "WERE" making during the booming 90's!! Now we are BAILING OUT THESE CROOKS....SOUNDS LIKE the good ol' 1980's Savings and Loan BAILOUT DAYS to me! http://www.fakepaycheckstubs.com see it with YOUR OWN EYES!
Don't have time to deal with your lender or are you going nowhere fast?
This is what we like to call the fix your loan and save your home service for homeowners. Let's face reality, most lenders are completely unresponsive to many of the homeowners who reach out to them for help with their mortgage. In fact hundreds of thousands of homeowners have lost their homes and many more will as a result of miscommunication, servicing abuse and just plain neglect.
A loan modification is when the lender modifies your current mortgage in order to work with you and make your mortgage more affordable. In the past this was only used when a borrower was delinquent but now it is being used before someone is delinquent to give them relief from a future mortgage adjustment.
As many borrowers know from their own experience is that the resistance form their lender or mortgage servicer is high and just getting through to the appropriate person is very difficult. However, when a lawyer is involved it seems as if the calls start to get answered and the letters responded to. Often everything you say, can and will be used against you. With the best Hud advisor involved, you have an important ally in your corner.
We use powerful laws like the Truth in Lending Act (TILA) and the Real Estate and Settlement Procedures Act (RESPA) to bring lenders to their knees. These laws MUST be followed and failure to do so can result in significant damages to the lender. So, naturally, they will be very amicable to working your loan out to more affordable terms to avoid costly litigation.
Many times the borrower is charged a lot of unexplainable fees and charges for the the lender cannot back up these charges. The Myrecast Team, demand that these fees be fully documented to the penny and we insure that our clients are not being over charged by their lender or servicer.
We do not tolerate abuse and command respect with our thorough knowledge of the law. We are consumer and homeowner advocates that will protect you and your home.
Yeah, but "We're all stated income now" doesn't sound quite as snappy.
" "It is astonishing how fast the credit deterioration has occurred," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. who follows the savings and loans that specialize in these mortgages. "It took me and everybody else by surprise." "
Remind me never to do business with Friedman, Billings, Ramsey & Co.
A blind man could see this coming.
This is a stated income crisis
No doubt if people had stated their incomes higher they'd have more to spend now.
"It is astonishing how fast the credit deterioration has occurred,"
Drink...
"It took me and everybody else by surprise."
Drink...
Miller said Downey Financial Corp. was "the canary in the coal mine."
Drunk.
CR, please if we are going to play the Mortgage Pig Drinking GameĀ can you at least wait until after breakfast?
FBR went through their own conniptions in 2006-2007; for an FBR analyst to make such a claim after their bloodbaths is, er, curious.
I'm confused; if Downey was keeping the O-ARMs on their books, they were presumably more careful than the bundle-and-sell crowd. So I would have expected the volume of their business to decline (as a percentage of business, and possibly even on absolute terms) as race-to-the-bottom competitors gobbled up rate-conscious buyers. (Elasticity clearly
This is totally OT, but fans of the late Herbert Kornfeld and his mad accounting skillz might be interested to know that his widow Marilyn Kornfled is now working in PR for Fannie Mae.
In related news, Fannie is paying servicers to refer borrowers to HOPE NOW.
Remember that Countrywide has about $28 billion in Option ARMs in their portfolio. The losses on those loans could be shocking (to BofA).
Best to all.
Ken Houghton
"they were presumably more careful than the bundle-and-sell crowd."
u just answered your own Q
More disturbingly, almost 60% of the stated amounts were exaggerated by more than 50%," the institute reported, saying the mortgages clearly deserve their "liar's loan" handle.
When that's the crap that you allow/encourage borrowers to do, you lose ALL right to be astonished at their subsequent delinquincy rate.
Remember that Countrywide has about $28 billion in Option ARMs in their portfolio. The losses on those loans could be shocking (to BofA).
I wonder if that's something they might have discussed with the Fed and the Treasury and got some reassurances that the risk they were taking on would be limited.
So if Downey was more carefull than the others, and was prudent because it kept it's loans ont he books. Then these might be the best perfromign option ARMs out there.
If true, I can only imagine how bad all the others out there are.
I never closed an Option Arm, because my now out of business mtg broker buddies didn't believe in them. So some brokers had some trepidations.
Looking at all the information, I don't see how we can't have a strong second half recovery in 2008.
Please send your million dollar investements to 12th Percentile Investments.
Herbert Kornfeld -
Props out to my bro, Kornshizzle.
I don't know about you, but I am getting SOOO tired of hearing about people who "Can't pay their mortgage or CCs or car loan or anything else". If you borrow money in good faith and fall ill or lose your job, that's one thing, but to borrow money that you simply have no way to pay back is out and out fraud and theft.
There are 24 hours in a day. Deadbeats- get off your fat asses and show me that you are working at least 16 of those, 7 days a week, and then maybe I'll listen to you. Otherwise, you are just crooks, IMO.
FBR's subprime subsidiary declared bankruptcy Friday. FBR's calling card in their glory years was IPO & bridge financing of specialty finance companies. A "surprise" to the FBR business model, perhaps.
"It is astonishing how fast the credit deterioration has occurred," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. who follows the savings and loans that specialize in these mortgages. "It took me and everybody else by surprise."
Again, another variation of "No one could have seen this one coming." I'd say that Paul Miller analyst has been watching too much youtube instead of analyzing. What a dumbass.
"Remember that Countrywide has about $28 billion in Option ARMs in their portfolio. The losses on those loans could be shocking (to BofA)."
I must have missed something. Wouldn't BoA's losses be limited to the $ 4 bil they are paying to acquire CFC?
The LA Times article reports the percentage of delinquent Option ARM loans in different communities and counties (e.g., 15% in Yuba City), but it does provide any information on the prevalence and distribution of Option ARMs in different communities. That is, the delinquency rate in Yuba City might be high, but there might be relatively few Option ARMs in that town. . .
Anecdotal reports I have seen on the web (but cannot recall citations) suggest that Option ARMs are heavily prevalent in Westside LA, Coastal OC, and presumably other very expensive districts in the Bay Area, etc.
Does anyone have data on the distribution of Option ARMs?
If they are as prevalent in Westside LA, etc, as I think they are, then short sale and REO doomsday is approaching fast, and those coastal neighborhoods will get to see yet another great sunset.
Data, anyone?
Thanks
Joe
"I must have missed something. Wouldn't BoA's losses be limited to the $ 4 bil they are paying to acquire CFC?"
LOL. Are you serious?
Certainly not on the surface. It's a stock-for-stock transfer and they are acquiring the company whole, including its liabilities.
Some people here are speculating that the Fed has secretly agreed to bail out BAC losses on CFC. But doing that could create a real scandal for the Fed, unless they provide transparency to Congress.
Assuming you are not - the $4 billion is to purchase the company assets and assume the liabilites at current booked value. BTW the book value is a fantasy...
2008 Word of the Year Candidate
"Coodanode"
Who coodanode?
Washington Mutual has almost $60B OAs, 50% in Ca. Probably why their stock is down today.
I hope Sebastian BB and Minski are also watching TNX 10 year bond.
not moving much but this is like the Dog that did not bark...
Joe Shmoe - here is a nibble for ya:
Yuba City:
4.3% overall are 90+
3.9% of the POAs are 90+
36% of the 2/28s are 90+
9% of loans are POAs
San Diego:
2.1% overall are 90+
3.3% of the POAs are 90+
40% of the 2/28s are 90+
20% of loans are POAs
I still don't understand. The money for the loans that CFC made has already been paid out. Now CFC is due payments. If the payments are made BoA gets them; if they aren't made, BoA gets zippo, but how are they out more than the $ 4 bil (plus the $ 2 bil they spent a couple of months ago)?
PayUp said :"If you borrow money in good faith and fall ill or lose your job, that's one thing, but to borrow money that you simply have no way to pay back is out and out fraud and theft."
I wonder if this ethical view isn't somewhat antiquated. The modern ethos seemed to be that if someone was willing to lend you money then you'd might as well take it. Hey, if the lenders didn't really care about digging into your credit worthiness, or ability to pay, then why should the borrower worry about such things? It's not so much that people purposefully borrowed money knowing they wouldn't repay: rather, they borrowed money believing that asset prices would keep going up allowing them to cover their obligations and get rich.
In fact, isn't the belief in the perpetual appreciation machine the driving force behind the entire credit bubble? Lenders weren't overly worried about unqualified borrowers because they figured the homes could always be sold to cover the liabilities if a problem ever did arise.
In any event, the lenders largely haven't cared about the borrower anyway since they were just flipping the loan to someone else in a security.
Heck, even guys like Donald Trump have become cultural icons for using (and abusing) debt with impunity. If creditors are still falling over each other to lend to the "the Donald" even after he has forced previous creditors into painful restructurings, then why should the average mortgage holder worry about having a big debt load?
I don't feel "sorry" for the struggling debtor, but I certainly don't feel sorry for the lenders or debt security investors who are crying foul either.
Ruh-roh -- (via NakedCapitalism)
Judges Catching on to Countrywide's Policy of "Mistakes"
Judges Catching on to Countrywide’s Policy of "Mistakes" « naked capitalism
I call your attention to this Wall Street Journal story, "Countrywide Draws Ire of Judges," for three reasons. First is Countrywide schadenfreude. I freely admit to having what may be called a bias. I have read and been told enough about Countrywide to be persuaded that it is a corrupt organization, even if it manages to barely stay on the right side of the law (pending lawsuits will prove out how successful those efforts really were). So I take pleasure in seeing them get their comeuppance.
Second is that I have said, repeatedly, that Bank of America buying such a disreputable operation is a bad move that they will come to regret. Some readers have suggested that this deal may nevertheless be the lesser of bad options, positing that BofA has large derivative exposures to CFC, and it may be cheaper for them to salvage the company than take those losses. Nevertheless, Bank of America does have a reputation to protect. In the stone ages of finance when I was growing up, no one would have considered acquiring a large, high profile entity like Countrywide unless it was on the verge of collapse (and we mean Chapter 11 about to be filed, not rumor-mongering) and all of the incumbent management was summarily shown the door. That isn't happening here. Continuing news of Countrywide's bad practices confirms that these problems are deeply rooted and will prove hard to eradicate.
Third, and most important, I am concerned that "mistakes as policy" is becoming established as acceptable practice in American companies, so I applaud the bankruptcy judges' moves against it. ...
Its still not clear that BofA has assumed the liabilities of CFC. The deal structure is as yet unknown, and it may well change between now and September. The experience of firms like Accredited and Option One is telling: each had an early-'07 deal, and each was forced to renegotiate or abandon the deal by 3q07. Its even possible that BofA sees the acquisition as a call option. If things go okay, they get cfc for $7 a share. If things go to heck, they walk away and wait for a better price or deal structure.
2008 Word of the year
Baseltooey?
CNBC's Charlie Gasparion is out today with 24,000 Citi layoffs yet to be formally announced but likely.
btw, the key details of the countrywide/bofa deal are the termination provisions. If they are weak, then the "purchase" is really a call option with the premium being the termination fee (presumably a measly $100m or so). If the provisions are strong, bofa means business.
The performance of Countrywide's Option Arm and home equity portfolios will likely provide ample grounds for divorce.
Shnaps
Thanks for the data. I assume the figures "90+" means more than 90% LTV, right?
Anyone have similar data for OC and LA. . . and maybe even for a few representative communities in those counties?????
Joe
I second David's view. BoA should want to keep the toxic Countrywide entities separate, and I haven't seen anything indicating that they are doing otherwise.
Of course, they will still lose a lot of additional money because they will have to provide funding for the Countrywide entities to keep them out of bankruptcy.
It's not just in California. We spent the holidays in Florida & saw plenty of candidates for similar "issies":
http://www.viewfromsiliconvalley.com/id384.html
http://www.viewfromsiliconvalley.com/id385.html
Thanks!
This looks like the making of a CR thread to me...
Citigroup's Layoffs Could Reach 24,000 This Year & $24 Billion write off (1,000 employees cut per each billion in write offs)
Citigroup Layoffs Could Reach 24,000 This Year - CNBC
BAC is NOT buying Countyslide until the 3rd quarter. Anyone want to bet on the probability that in the 3rd quarter BAC will actually do the deal? Wonder if the London bookies will give me odds. Between now and the 3rd quarter, if I read the reset and recast charts correctly, Countyslide may well slide beneath the debt waves. My uninformed take on the BAC deal is that the Fed is simply buying some time in an attempt to average out the write downs.
Different take on this. The relaxed loan requirements enabled home prices to skyrocket. It enabled speculators to take advantage of the loan requirements and flip homes. Now that they have been eliminated from the potential buyer pool real estate will correct back to normal income multiples.
There was little incentive for the public sector to increase regulation because 1) they wanted to relax requirements to increase home ownership of lower income families, who cares if they really qualified because it 'felt good' and 2) increase home prices resulted in increase tax revenue to fund the public sector compensation plans and buying votes with more spending.
California's deficit will be north of $20 billion.
We are all stated income.
Most Credit Card applications are stated income in effect.
Bongwater.
It drives me nuts that the Golden West book is never discussed in this conversation.
They were tearing up the market through the height of the bubble, always claiming their underwriting was superior. But if it was why did they continue to gain share through the bubble??
Either the Sandlers are the smartest people in the room (by far) or that book of business is cratering.
Wachovia's not saying anything, and I can't see where anyone is asking.
As in, we are all Bongwater now.
fffffffffffffffffffffffffffffffffffffffffffffffff.
Don't see how BofA can't be liable for CW. Anything else is --but, but, you own the company. And most importantly-- you've got deep pockets.
Where the Dude?
Huh?
Due diligence (Dude illigence).
Another take on the BoA CountryWide deal --
As I recall, early last year BoA tried to buy CW's servicing unit -- which is the jewel in the middle toxic waste. When BoA made their 2bn investment last summer, it looked to me like an attempt to be first in line as a potential suitor.
Don't be surprised if BoA figures out a way to take over the assets, but not the liabilities of the toxic waste.
There's a related AP story out today: Downey Reclassifies $99 Million in Loans
With the updated classification, non-performing assets at Downey Financial totaled 7.8 percent of total assets as of the end of 2007. Of the 7.8 percent, 40 percent are loans that were modified during the retention program. Of that portion, 95 percent continue to make on-time payments.
Kind of confusing. I guess after 90(?) days they can remove those modified loans which are current from the non-performing assets number?
FirstFed is another Option ARM lender and their non-performing assets were at 2.34% Nov 30th, but has a similar trajectory to DSL's.
I had heard too that Downey supposedly had a better than average portfolio, but some really are percent were low-doc/no-doc. I bought more DSL puts when they all jumped on the CFC news. Totally ridiculous.
When they annonced the "teaser-freezer" plan, all the home builders jumped for no apparent reason and I bought fresh puts which have already doubled in value.
These false hope rallies are definitely good shorting opportunities. ( actually use puts.)
FT - Data show huge withdrawals
"European asset managers have suffered a complete collapse in support for equity funds amid a sea of redemptions for almost all asset classes..."
FT.com / FTfm / Investments - Data show huge withdrawals
My bets are most of the loans going bad are flippers/speculators who see no reason to pay any more or folks in real estate/construction who have lost their jobs.
What until the loans recast. That's when the default numbers that scare people.
I still don't understand. The money for the loans that CFC made has already been paid out. Now CFC is due payments. If the payments are made BoA gets them; if they aren't made, BoA gets zippo, but how are they out more than the $ 4 bil (plus the $ 2 bil they spent a couple of months ago)?
I'm just guessing here, but presumably CFC owes money to the entities who invested in the loans?
Golden West is an interesting case. I actually looked into their performance in the 1990's downturn and it was incredibly good. They made sure the LTV was never greater than 70% and very definitely verified income assets, when it was sold in 2006(?) they insisted this was still true. Of course, they did sell at the exact peak, so one has to wonder...
Re BOA purchase of CFC--what makes you think that BOA is serious about completing the purchase in the 3rd quarter?
The purchase annoucement has the purpose of restoring confidence and allowing BOA geniuses that gave $2B to CFC to look like brilliant schemers instead of foolish squandrels.
Consumation of the wedding will not occur because the bride will be dead by then.
One thing that needs to be mentioned on why housing prices went up so much is restrictive zoning laws, passed largely to protect existing homeowners. Car companies offer 0 % financing from time to time, yet that doesn't materially increase prices. Why is that? Because the number of cars that can be made is virtually infinite, or close enough that no one feels they must buy a car now or they'll never have one.
If builders were allowed to build at whatever density it took to fully satisfy housing demand, prices would rapidly reach an equilibrium level. For instance, prices in Texas went up only modestly during the boom, because there are minimal restrictions on building compared with CA or the Northeast.
Speaking as a Californian: the Inland Empire, Sacramento Area, and Modesto may be suffering first and worst, but the option ARM problem is going to hit the higher-value coastal areas in a year or two as well.
Stated income may or may not be one of the issues; but always the main issue will be that the house will be worth less than they own.
I've been asking around, and I can now say I know two people with option ARMs expiring in '09 here in Santa Cruz County. Neither of them expects that their house could be worth less than they own on it at that time. It's going to be quite a surprise.
"Coodanode"
Who coodanode?
muzical chairzz |
Amen.
Nobody coodanode.
It's a stated outcome crisis.
OT - I don't know if anyone has posted on this yet, but it should probably be read along with FFDIC's Possible Citi layoffs article -- The Chinese Government may block China Development Bank's proposed $2 Billion investment in Citigroup -- Seems even the Chinese are getting nervous about subprime financial contagion.
Business, financial, personal finance news - CNNMoney.com
Bob_in_MA,
Golden West was a stated income OA lender just like Downey. They pointed to low LTV's as evidence of their superior underwriting. To their credit, they did not buy their loans from brokers like Downey did, so the truth is they were able to exercise a lot more quality control. Also, I believe they only used in-house appraisals. Still, when all is said and done, the loans will not perform that differently from Downey's: falling house prices and payment shock will do them both in.
Bob,
That's the thing about all this, it just is going to continue and feed on itself. People are waiting for the market to "discount" the problem so they can jump back in, but the ultimate level of distress is essentially unknowable, add in CRE, CDS counter-party problems, etc., and the idea that anyone has any idea of when this end seems absurd.
Sorry about reposting the DSL news, I missed Tanta's earlier post, I was out shoveling snow...
I have a question on people walking from houses that are now worth less than they owe:
When will college graduates start walking away from college debts? I mean, when they figure out that their future earning power (due to layoffs, job scarcity in their fields, etc) is worth less than they owe?
I mean hey, if home borrowers do it...I'm sure we can find the same justification for college loans, surely?
Whoops.. Slow on the draw again. That possibly blocked $2B is a sub-topic in CR's latest post.
OT, but related: Wesley Snipes income tax case:
Wesley Snipes To Go on Trial In Tax Case - NY Times
As the economy slows down, properly tax goes down and income tax goes down (out of work realtors, construction workers, loan officers, etc.), we now have at least one well known actor encouraging non-payment of federal income tax. I guess it's good for joe6pack who can opt out of taxes to preserve cash flow but what will happen to government employees?
I guess it was matter of time: as people learn to walk way from mortgages (jingle mail) and local property taxes, people will stop paying other taxes: local/state/fed income taxes....
You can't walk away from Student Loans, not even in Bankruptcy.
They are like herpes until you pay them off.
(that's my worst analogy ever)
In related news, Fannie is paying servicers to refer borrowers to HOPE NOW.
with an easy-to-remember number:
1-888-955-HOSED
Assuming that BofA is not completely out of its mind, BofA will own all the stock in Countrywide but the the acquired entity will still survive as a wholly owned subsidiary with the BofA investment at risk just like any other investor. The seperate corporate structures would then be a firewall between the two in the worst case.
As an accountant, I've seen some very credit worthy stable income people who have bought houses with option ARMS that they would not have otherwise been able to afford. Anyone who ever asked me about any of these crazy mortgages I advised not to do it. Everyone always said the same thing, "I'll refinance...." And I always told them the same thing and that is to never ever count on a bank or other financial institution to be there to lend you money when you need it.
You can't walk away from Student Loans, not even in Bankruptcy.
They are like herpes until you pay them off.
(that's my worst analogy ever)
Ah...college nights...
The fed left rates low for far too long. They fucked up. And they know it.
Didn't the Party retain control of the levers of power in 2004? I would argue this is quite, quite a mitigating factor.
Plus you can't have a national asset fire sale without a fiscal conflagration first.
BA will have to consolidate the cfc balance sheet into theirs in a normal deal. Therefore, they have to show the losses even though there is no actual money changing hands. This affects there capital requirements and will force infusions of capital or selling of more stock. Translated, the fed will jump in to take some of the toxic stuff, the deal will not go through or some imaginative lawyer will enable them to keep CFC crap off of their balance sheet.
"Noone could have anticipated the breach of the levies."
Anyone who ever asked me about any of these crazy mortgages I advised not to do it. Everyone always said the same thing, "I'll refinance...."
I've seen and been around dozens of them myself (I live and work in the NY-DC corridor).
Your rejoinder was a common one. And even more depressing, the worst case scenario your average Option-ARM holder could come up with is that, 3 or 5 years down the road, they'd have to sell before the rate reset ... in which case they'd "only" walk away with the 10x or 20x profit on their 5% down payment that everyone else was collecting.
The 70+ years since our last Depression has virtually ensured that no one still in the active workforce can envision what a "worst-case scenario" REALLY means.
Until it happens.
"It is astonishing how fast the credit deterioration has occurred," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co. who follows the savings and loans that specialize in these mortgages. "It took me and everybody else by surprise."
---Gee, there's very little surprise among the commenters on this blog...
Verdict: He's an idiot who is surrounded by idiots. Groupthink at work.
Joe Shmoe -
NO. The 90+ refers to days past due. In other words, the percentage that are 3 or more payments in arrears.
Your original posts was asking about delinquency rates, right?
I have a question for the blog. Why can't other bidders make an offer for CW? How can CW management take a $2B bribe from BAC and refuse to open its books to other potential buyers? I would think stockholders and/or the BOD would revolt, and file a huge lawsuit. Am I missing something?
Joe Shmoe - This map
shows option ARM distribution across the country. No arrears data though.
Why can't other bidders make an offer for CW?
No reason.
Mr. Thomas, if your firm has $4 billion laying around and can operationally handle swallowing up a trillion-dollar servicing portfolio, and it would be kosher in a baseltooey sorta way...then guess what? - you won't be "refused"; rather, you will probably be given an eleventh-hour grand tour, right down to the corporate tanning beds.
rather, you will probably be given an eleventh-hour grand tour, right down to the corporate tanning beds.
did you know that back before everything blew up, they also had free coconut tanning oil and blue speedos for all senior executives?
BofA will of course have to consolidate CW on the balance sheet. But assuming CW remains a separate corporate entity limited liability is still there as an investor. But, if the deal does go through, perhaps they will just scrap it out keeping the good pieces.
Shnaps, that Baseltooey entry is divine! Did you do that?
Sort of. Hetemeel did the heavy lifting.
According to a Bloomberg 1/11/08 article, CW total consolidated assets (thrift and mortgage co.) are $209 Billion. The author estimated losses as high as 10%, or $20B. This would result in negative equity of $5B (total equity of $15B less $20B). At purchase, the assets will be written to market recognizing these losses. The thrift will then have to be recapitalized to the tune of $10B, so add another $10 B to BAC purchase price if it really wants the entire company. If it only wants the servicing and origination platforms, I would think it would be in heavy competion with other bidders, not true?
Don't see how BofA can't be liable for CW. Anything else is --but, but, you own the company. And most importantly-- you've got deep pockets.
You've also got 7-9 months to lobby Congress to fiddle the tax code to make this less painful for everyone concerned.
mmhmmm ?
Shnaps
I was asking about the prevalence of Option ARMs in particular localities - i.e., what percent of total loans in Santa Monica, Beverly Hills, WLA, etc were Option ARMS in a given period (say 2005, 2006, 2007), not the rate of delinquency.
r0m30 posted a map I have seen before, with data for cities or counties, but within LA county there are such great disparities that it would be great to have more localaized data, or at least a couple of samples to illustrate the range of prevalence.
My hunch is that expensive parts of California were chock full of Option ARMs 2005-07, and a smaller percentage of mortgages in places like Yuba City were Option ARMs.
Yuba City is seeing a higher rate of delinquency because house values fell there first. But I think the really huge damage on Option ARMs will come in much pricier localities that are just beginning their descent downward.
Joe
B of A is offering to buy the stock of CW not the assets and liabilities directly. So then, even though B of A becomes the sole shareholder, CW remains a separate and distinct legal entity with its own assets and liabilities unless B of A's appointed board of directors should decide to disolve CW. Probably all under Delaware law.
Ed,
All true, but as a separate entity with a $20B writeoff and $15B of capital CW will be bankrupt, and the trift subsidiary will be out of compliance with regulatory capital requirements. Not a good situation, I think.
It was my understanding that the sub prime problem is a result of high risk mortgages that are repackaged as triple A rated Collateralized Dept Obligations that increase the market for even more risky mortgages.
Without this investment grade rating, the mortgage bubble and subsequent collapse would not be a problem.
Now you say that Countrywide actually holds on to these problem mortgages as investments. My head is spinning. What really bugs me is that Countrywide had such nice people on their commercials.
Someone needs to say something about this! http://www.fakepaycheckstubs.com IS THIS LEGAL? No wonder why we have the subprime mess we have when lenders USE FAKE DOCUMENTATION to help PUSH the loan through Quickly SO THAT EVERYONE DOWN THE FOOD CHAIN (from loan processor to the loan officer to the actual lender) can make the commissions they "WERE" making during the booming 90's!! Now we are BAILING OUT THESE CROOKS....SOUNDS LIKE the good ol' 1980's Savings and Loan BAILOUT DAYS to me! http://www.fakepaycheckstubs.com see it with YOUR OWN EYES!
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