ABX indices also hitting new lows at various levels. Things are getting uglier, the thing is, the underwriting has only tightened a small amount. All of the subprime guys know they cant have tight guidelines AND survive, but the secondary market is killing them because they realized the junk won't perform in a down market.
Grab the popcorn. The next few months will be fascinating.
S&P says downgrades 7 bonds backed by 2nd-lien mtgs
"S&P has stepped up actions on securities backed by second-lien loans -- often called "piggyback" loans since they are created concurrent with first-lien mortgages -- as the cooling housing market sparks losses just months after the loans were created."
MOM pointed out in an earlier post that any sort of tightening will greatly reduce the amount of homes sold, by shutting out FTHBs and the "trickle up" effect. Are we at the point yet where we can say that if sales aren't contracting (or beginning to contract), then there's really no tightening? I don't think prices have fallen enough anywhere yet to have improved affordability to the point where high LTV loans and little downpayment have become a significant part of the market.
Oops, correction... that last line should read "I don't think prices have fallen enough anywhere yet to have improved affordability to the point where lower LTV loans and a higher downpayments have become a significant part of the market."
Ohhh yeah, the onerous REIT regulatory environment. That's it. Not obscence bonuses, not loose lending, not bets gone bad.
Somebody tell me the generic unit value of a REIT that makes no money for the foreseeable future backed by an asset with high carrying costs, high management costs and significant downside risk? Now tell me the value for a specific company that expresses concern that reporting rules may negatively impact percieved valuations? LEPROSY! Unclean! The thee out of my house.
Nikki - we will not know until we get pending home sales for February and March. Pending home sales for January aren't due out until March 6th, so we have a long time to wait.
Also, the effect of tightening will be felt unevenly across the country. I expect the results in the west to be particularly intense.
Nor is this a single step process - what will happen is that everyone will try to adjust their underwriting to get the maxium of business that they can profitably sell. However, judging by the statements of brokers, the credit tightening is real.
Novastar Q4 Call Notes (warning reader discretion advised, may not be suitable for those with weak stomachs or NFI shares in their portfolio):
Reviewing REIT status:
Have $170MM of 2006 earnings that they must distribute in 2007
Beyond that see no taxable income until 2011
Given the lack of taxable income going forward, REIT status is under review
Capital Availability/ Needs:
Will need to raise capital to grow portfolio
Claim to be incompliance with all their covenants (note to self get number of banker who wrote that loan)
Closed a CDO on 2/8 (how's that for timing), could see MTM loss in Q1 given that "spreads have gotten a little wider in Q1" (you could say that)
Charges out the wazoo:
$17MM impairment of available for sale mortgages
$10MM provision for 06-1 on balance sheet securitization
$22MM EPD provision (in gain on sale)
$4MM mark to market loss on trading securities for CDO from spread widening
EPDs/Repo:
Their EPDs increased from 1.25-1.0% in 2005 to 3.5-4.0% in 2006.
2006 figure is average for the year so Q4 must be mid-high single digits
On EPDs, they assume 2/3rds will go bad and assume a 35% loss severity on those that go bad
Underwriting:
Started tightening in September
Recently reviewed last 5Qs production against tightened set of guidelines, but didn't get sufficient return
Implemented second stricter set of guidelines (focus on layered risk, duh!)
Result was that 25% of production fell out with new guidelines (yet they don't see a problem with existing loans needing to refi - go figure)
Have increased staff for LM and delinquency mgmt
Production:
Claim it grew due to more feet on the street
Analysts question re: adverse risk selection given volume increase in declining market
Expect to see cost to originate risk in 1H 07
Have seen coupons rise 35-60 BP for base rate and see more add-ons for specific risk factors
Rates still need to go up more given risks in this paper
Portfolio:
Will try to move up the capital structure
Buy more BBB paper and CDOs
Last trade on stock 12.13 down 5.43 from the close. Quote from the call: "Our primary concern is maximizing shareholder value"
February is shaping up to be a rough month according to foreclosure.com. Their numbers seem to correlate fairly well with RealtyTrac, so I'm thinking they might be a reliable indicator (I'm too afraid of commitment to sign up for RealtyTrac):
Date - Foreclosures
2/1/2007\t144346
2/6/2007\t145789
2/15/2007\t151105
2/19/2007\t152283
2/20/2007\t155280
They think the loss severity will be 35% on the EPDs? The loans that just got closed with 100% financing on a non-amortizing loan? Those will be only 35%?
Well if that's true, then why are all these people shoving that stuff back as if it were radioactive? People who are foreclosing seasoned loans with less-than-100% financing are taking 35% losses. Are you sure they didn't mean 35% net of MI? (Now that would be a cruddy haircut.)
"...on the buybacks we take the status of the loans. Some of the loans we bought back are current. Some are down a payment. Some down a couple of payments. We look at our historical migrations and use those to determine which of those loans we think will eventually go bad, and which ones will cure and be a good loan. And then we have applied a 35% loss severity number to the loans that we think are going to go bad. So generally for the loans that we have bought back, we think about -- what we have bought back to date on an average about two-thirds of them probably will go bad, and one-third we think will become current. And we apply a 35% severity for the loans that we think are going to go bad."
He was not asked if that was net of MI. There was reference made to their use of MI later in the call, but I don't remember if that referred to a specific pool of loans or not.
Well there has been plenty of driving through the rear view mirror in this cycle so why stop projecting off "historical" experience now.
Speaking of adding REO mitigation capacity:
"REOTrans Announces Expansion
Kerri Panchuk | 02.09.07
Southern California-based REOTrans, a platform that helps lenders manage and sell foreclosed homes, has announced plans to double its existing office space by creating ergonomic office environments inside its Los Angeles headquarters.
The company, which already has existing server facilities in Dallas and Los Angeles, also announced plans to add a second office in Dallas and a new server facility in Herndon, Virginia.
Chris Saitta, president of REOTrans, says the expansion is critical for the company's long-term growth plan, which includes an on-going recruiting effort to fill multiple positions."
Of course they need to change their status. How could they cover the risk if they are giving 90% of the profit away, and they've been doing it for years. Infact, I bet they would have been able to cover the risk had they kept the revenue as retained earnings vested in US treasury bonds. The issue isn't about attracting investors and attempting to maintain value for the share holder - infact the opposite occurred. It's about running your company responsibly.
If I was a lendor I would try to make them change their REIT status so they don't have to pay the $170 million dividend. IMO they may need all their equity to cover future writedowns on their portfolio and potential operating losses.
The above analysis is flawed if the assets have already been written down to Feb. 20 values.
I listened to a conference call with the head of the FDIC today. She said lending guidlines for subprime mortgages was very much a front burner issue. They were particularly focussed on subprime hybrids, and that there was consideral pressure from Capitol Hill to issue regs on this topic. A particular focus for the FDIC is underwriting at the fully indexed rate. The days of the exploding ARM are number. When asked if they were worried about troubles spreading to Alt-A loans she said she had just discussed that topic with their chief economist today and they were looking at the data.
I listened to a conference call with the head of the FDIC today.
Is it okay if I fantasize about that? I mean if I do it in private and don't tell anyone?
I only got to listen to it with my youngest (a bored teenager) sitting behind me (gaming) and a hunting dog sleeping on my feet. They were not impressed. But then I have no life.
What is adverse consequences of ABX indices hitting low?
As I understanding it basically the expectation for defaults is rising, and therefore the cost to get "insurance" against these defaults is rising. That in turn means interest rates on sub-prime mortgages have to rise to compensate the lenders/investors against higher default risk.
Realistically, since these borrowers are already tenuous to begin with, the rising interest rates would probably just make the loans that much more likely to default, so I think a good portion of would be sub-prime borrows are no longer going to be viable, uh, victims.
Subprime mreits just don't make sense -- a way for the street to farm out risk and reap the fee income. The high dividend must have confused so many retail investors. Poor souls. I pointed out earlier that NFI was trading above book, alone. They had been paying really big dividends. Now they are saying no taxable income between now and 2011! They are back to book. Really not an instrument fit for the public. Didn't bring myself to short it though -- so call it hindsight 20/20.
"We all have a tendency to say stupid things. About seven months ago, some members of the economic fraternity created a lot of noise with widely reported warnings that we were recession bound. Especially outspoken in this respect was New York University's professor of economics, Noriel Roubini."
"In retrospect, those recession forecasts now shape up as pretty outlandish, if not outright dumb."
"Mr. Roubini, the skipper of New York-based Roubini Global Economics, also blundered badly in his market forecast, predicting the onset of sharply falling stock prices in September, with the S&P 500 between then and June of 2007 plummeting some 1.5% to 2%. Following his forecast, about 10 market averages, including the Dow, charged to new all-time highs over the next six months. So (Roubini) flunked on both the economy and the market."
"How does Mr. Roubini explain away his ATROCIOUS forecasting and is he still sticking with his prediction of a recession? Not surprisingly, he doesn't want to talk about that, refusing to respond to repeated calls seeking comment."
"No recession yet. And now - gasp - prices and sales in NYC have jumped double digits!!"
Could you ask for a surer sign the finance-based economy is taking Main Street and the US middle class to the dumps? This is straight out of Hayek and Mises texts.
The above is a snapshot of the New Century Niche Rate Sheet (for California if that matters) on 2/07/07 vs 02/17/07 it shows the combo (80/20) stated income AA (their designation) credit loan.
Min FICO is 700+ now and pricing on the first is 35 basis points higher. The AAA versions shows a similiar change.
The 100% 1 loan only shows a 640 min FICO score and 35 basis point increase, but I presume there is mortgage insurance on top of that making it extremely expensive as well.
Stated wage earners also get a 50 basis point add on (actually NINA will as well making them effectively the same). Add on IO and you get another 35bp.
"Could you ask for a surer sign the finance-based economy is taking Main Street and the US middle class to the dumps? This is straight out of Hayek and Mises texts."
Man, it is sounding more and more like a financialsense.com forum in here than the good old calculated risk blog. Strangely, the rationalists gradually seem to be leaving the building, only to be have fundamentalists take their place. The data driven arguments are becoming few and far between, because, well, the data is not supporting a hard landing at all right now. Too many fluffy doom comments if you ask me.
If you read Roubini's stuff or see him on CNBC, he's definitely backed off of his recession call. How nows says a "recession is possible," rather than "an absolute certainty and anyone who disagrees with me is a damn fool!"
Okay, that last part may not be an exact quote, but it's pretty close.
If I could pick one person whose offputting arrogance does more to undermine the bear case than anyone else, it would be a really tough call between Roubini and iTulip's Eric Janzen.
The New York City data is not entirely unexpected.
If I recall, financial firms based in NY handed out $40 billion (yes, Dr. Evil, billion) in bonuses.
Okay, I live in a walk-up on 23rd street, and Goldman Sachs just handed me $5 million.
Just a wee problem. Goldman Sachs' largesse was restricted to its hotshot gunslingers in the Big Apple. Apparently, trickle down is having trouble trickling.
America's prostate will decide the issue. If the creditor class has a really ugly prostate, then things will get tough.
A nice, young, well-behaved prostate: Goldilocks here we come.
BTW there are two memes that are very heavily subscribed to by the prostatically challenged class (PCC):
1) Everything will be fine unless the Democrat Congress makes it harder for the PCC to make loans with zero down, negative amortization, and punitive interest rates.
2) The data look really good, why is everyone moaning and groaning?
The mouthpiece of the PCC, that would be the Editorial Page of the WSJ (and, believe me, those boys have prostates that won't quit), is beginning to back off of 2) and go with 1) exclusively.
That doesn't mean the data are bad. Just that if it is, it's time to load for bear to blame it on the Democrat Party.
Question for Tanta (BTW thanks for the great Servicing post),
NFI mentioned on the call that they were willing to modify portfolio loans at reset to keep borrowers out of FC. What are the implications of modification for a securitization?
-After modification, and assuming the borrower pays the new P&I, is the loan listed as "current"?
-Does the Trustee have the right to put back a modified loan if the investors request it?
-Does the trust accrue deffered interest?
-What's the nature of most modifications? (Interest deferral vs. reduction)
-What is servicer's experience collecting on mod's?
Sorry for all the questions, but I think we'll be hearing lots more about this in the next year.
From the article, "Average U.S. farm prices increased by 15 percent in 2006, Agriculture Department data show. The cost of buying corn farms in Argentina, the world's second-largest exporter of the grain, jumped 27 percent, according to Buenos Aires industry newsletter Margenes Agropecuarios."
And it is all based on corn for ethanol.
To paraphase the song...money for nothing and your corn for free...?
Rather stupid to go make ethanol using corn in Argentina, when you can make it a lot more efficiently using sugar cane in Brazil (right next to Argentina).
what i would like to know if subprime implosion would mean no 80/20, NINA,no money down loans in a few months(weeks?)
this would crimp the spastic (housing market) even more and prices will collapse in bubble areas...
but i suspect there would be some players who would still roll out these products albeit in a very small number.
"but i suspect there would be some players who would still roll out these products albeit in a very small number."
It's not up to the "players" that would want to do that, it's up to the investors that buy the damned things. And it's doubtful that there will be any demand for them (what with the secondary market provinding much higher margins for whoever wants the risk).
NFI mentioned on the call that they were willing to modify portfolio loans at reset to keep borrowers out of FC.
David, I think the operational term here is "portfolio." I didn't listen to the call--some days I have my limits--but I suspect when they say "portfolio" they mean it--namely, those are whole loans they own that show up on the books as "held for investment." You can do any damn thing you want on a whole loan.
If they've securitized those loans, then they don't have limitless options: it depends on the legal structure of the security and the facts of the actual underlying loan pool. On a REMIC, the trustee is required to put back a modified loan because REMIC law doesn't allow a loan to be modified. It has to be bought out of the security in order to be modified. Then it becomes part of someone's "portfolio."
What the nature of these mods are isn't quite clear to me. If we're talking fixed rate or long-fixed-period hybrids, I suspect most of them are just capitalizing past due interest and resetting the term (to effectively lower the monthly payment), while leaving the rate in place. Even with that, though, you can create cash-flow issues if the loan is securitized (because extending the amortization slows the repayment of principal: great news for the IO strip, bad news for the PO strip).
If they're those "exploding ARMs," then I suspect we're talking lowering the interest rate and/or margin or both, or at least putting off the rate reset for another year, which effectively lowers the true yield on the loan even if the interest rate doesn't change today.
Basically, there's no way you can modify a loan (whatever you did to it) because it was in trouble, and then turn around and call it a prime loan even if it's now current. There aren't hard-and-fast rules for this stuff, accounting-wise or otherwise, but for the most part it's scratch & dent until it has been current at the mod terms for another year (which "seasons" it). So after the mod, you've just taken an impairment of some sort on that asset, and you have to reserve for it as a high-risk loan. If you're not doing that (one doubts that NEW, for instance, was doing that properly), then you're cruising for a restatement.
I'm not sure what you mean by asking about the deferred interest.
Thanks. In NFI's and NEW's case, all their portfolio loans are structured as securitizations. That's the reason I asked -- seems like it would be tougher for them to modify the loans than they let on. As you imply it can create conflicting interests amongst the different classes. By deferral I meant that they would leave the re-set interest rate in place and simply add unpaid interest to principal (like a neg-am).
It seems that all the lenders will try to "modify" themselves out of their problems this year. The attitude towards mod's, however, depends on collateral values. I believe the market will tip from a, "house prices never fall in nominal terms" attitude towards a "grab the deed and sell it before it goes down more" attitude. Not much scope for forbearance in the latter.
I have a question to ask the board about CDO and rating agency scrutiny of servicers. This would, AFAIK, affect commercial credit more than consumer. <a href="http://www.reiresearch.com/public/3099.cfm>Mortgage News Weekly: Rating agency Standard & Poor's says that the growth of collateralized debt obligation issuance poses challenges for the servicers of real estate loans that are pooled into these deals.
S&P said the 'inherent complexities' of CDOs require special consideration in evaluating the servicing of CDO assets. S&P recently issued a report detailing how it evaluates servicers and special servicers assigned to manage the cash flows and collections associated with loans backing CDO transactions.
There's much more at the link. I had expected this question to arise in the summer, not now. I wondered if anyone has any comments/insights? The CDO structure hasn't been tested under these conditions.
This one's in your neck of the woods. What kind of a reputation does this outfit have?
"GAINESVILLE, Ga., Feb. 20, 2007 (PRIME NEWSWIRE) -- GB&T Bancshares, Inc. (NasdaqGS:GBTB - News) today announced that it will increase its allowance for loan losses through an additional provision of approximately $9.7 million in the fourth quarter ended December 31, 2006.
The increase in the allowance for loan losses arises out of a recent examination conducted by the Federal Deposit Insurance Corporation (``FDIC'') at one of the Company's wholly owned banking subsidiaries, HomeTown Bank of Villa Rica, and relates primarily to several loan relationships originated by the president of that bank in which it is apparent that this officer did not follow numerous bank loan policies and procedures, including loan approval authorities, collateral requirements, inadequate documentation, and other underwriting guidelines. This officer is no longer employed by the bank."
MBA Purchase Index is down again. Four week moving average for Feb 16th fell to 398.7. Average contract rate for 30 year fixed down again on weaker demand, I suppose. More striking:
"The seasonally adjusted Conventional Index decreased 4.8 percent to 908.2 from 954.3 the previous week, and the seasonally adjusted Government Index decreased 10.1 percent to 103.7 from 115.4 the previous week."
Are you familiar with Ambac (ABK)? Any opinions on the risk this oufit may have systemically on the great unwind? I dont believe this will be restricted to sub prime. Thanks!
Thanks on FINB. Apparently they didn't get the memo on the housing market. The OH rate sheet is truly frightening. Maybe they can partner with NFI and be the place their reset customers go to when they no longer qualify under their newfound sobriety or when there is no one left at NFI to answer the phone.
Strangely, the rationalists gradually seem to be leaving the building, only to be have fundamentalists take their place. The data driven arguments are becoming few and far between, because, well, the data is not supporting a hard landing at all right now. Too many fluffy doom comments if you ask me.
Talk about fluff - NY Sun? What, didn't the Enquirer have a piece to quote? It is one thing to complain about others not being 'data driven'... then to follow up with this puffery as 'data'... shame.
The NYT piece was pretty interesting. arbogast | 02.21.07 - 5:25 am | analysis has it right, credit record bonuses for the jump. The money quote is here:
Then came this years stratospheric Wall Street bonuses, and the market exploded, real estate executives said.
Maybe those bonuses will continue & even grow in '07... maybe not. Realize a lot of those bonuses were a result of the revenue from IB activity around MBS securitization & marketing. From what I read a lot the IP & M&A activity that USED to puff up NYC RE is increasingly being done in London (see their RE market lately as a result, up even more than NYC).
This is just more proof that if liquidity continues to flow it will distort & expand a bubble somewhere... if not suburban developments then maybe NYC flats or Iowa farm land or equity fund buyouts of manufacturers.
So the question is will the liquidity continue to flow? That's the bet.
BTW - I'll comment on the farm land link provided by kett later - I've run some of those numbers a few years ago when my father & I were looking at buying a distressed farm... understand I used to be a process engineer at one of the more advanced & efficient ethanol plants, I get this stuff. There is NO WAY $5000/acre land pays EVEN if oil goes to $100/bbl.
cccactii, I don't know anything useful about ABK; I'll take a look if I get a chance.
I will say that AHM has been making me rather nervous lately. Nothing obvious anywhere, except that they seem to be selling everything whole loan they can get their hands on. That could be smart, in the sense that securitizations are no longer the money-maker they once were. (Even though, as Brian has noted, LEND tells us it's the other way.) But who's cheered up by the idea that securitizations are no longer the magic answer? As I said, selling whole loans can be smart, and it can also be a way to get Cash Now. After I read their last financials, I did not come away with a clear idea of what they might want to do with all that cash except keep supporting their origination network and pay salaries (rumor mill has it they're paying some big ones).
"Man, it is sounding more and more like a financialsense.com forum in here than the good old calculated risk blog. Strangely, the rationalists gradually seem to be leaving the building, only to be have fundamentalists take their place. The data driven arguments are becoming few and far between, because, well, the data is not supporting a hard landing at all right now. Too many fluffy doom comments if you ask me."
Funny, I was just thinking how the bull screeching seems to be getting louder and louder in here. Too much like the Housing Panic troll wars if you ask me.
It is most difficult to make money betting against financial companies as they can play with the numbers so much until the end game hits like we are seeing with NEW and NFI. FNM is still a black box. I think ABK is nuclear waste all dressed up. Reminds me of the old saying - " Things are not what they seem, skim milk masquerades as cream". In any event I have been fortunate to capture the NEW and NFI collapse and I am always reading to try and learn and test my thesis. I am also a very long time Fleck reader. His contact in London had some interesting things to say today. I will pass them on if folks are interested.
I know that ABK is a pretty well run outfit, or at least it used to be, followed it closely several years ago when I was a PM and it was a core position. At one point owned about 1.5% of the firm. Their muni insurance business is a goldmine, and it is a very clubby ologopoly in that market. However, the muni insurance market was pretty slow growth and they branched into insuring more structured finance deals. Hard to evaluate from the outside, but knowing the culture of the company would guess that they did a pretty good job. In general they were a much more conservative bunch than MBIA, who wasd their biggest rival. Again, however Billy was in the White House when I was following the firm closely. Things may have changed since then, and the structured finance business always worried me much more than the muni business.
cccatic, Curious about what Fleck's contact was saying. My feeling is that if the unwind gets really bad most of the Financial Guarantee outfits probably have serious problems. Don't agree with MBIA"s accounting that provides for virtually no loss reserves.
Interesting to see someone else questioning MBIA's viability. Though as a software developer I'm outside my area of expertise in this, I spent some time looking through their 10K a few years ago, and was fascinated by how little capital they have to back up their insurance commitments. It looks as if the assumptions they've made about loss rates turn out to be more than a little wrong, they could be wiped out very quickly. Of course they'll tell you that all those assumptions are solidly based on historical experience -- but in an era of unprecedentedly loose lending throughout the system, is that historical experience really valid?
Thank you for the reply. I am sure Ambac was a well run outfit, I think times have changed. My suspicion is that they have much more risk than the stock price reveals. They look like they are involved in all matters of black box financial derivative collateralized debt mortgage back re-insured finacially guaranteed productions (LOL) we have come to know and love so well these past few years. It reminds me of FNM Enron AIG type of stuff, and I am not a believer of the guarantees and assumptions in these transactions. I am hoping someone more informed may shed some light on the realities of ABK's business. Thanks again!
jm, I also looked at in detail last year. Most of their guarantees would have extremely low chances of default. Could not identify any obvious problems but my general comfort level with the company was very low.
Not sure if CR will be following up with Flecks friend, but he basically said that a few people have been aware of sub-prime problems the last few months but today was the first day equity managers came in to ask questions. These managers assumed the problems were contained and not a problem for wider credit market, economy etc...He walked them through the numbers and the ABX charts and these managers were apparently stunned. He said slowly but surely people are starting to get it and the tipping point in credit via sub prime and shambles in CDO land is closer than anybody imagines.
My take is that it is now and a wild guess is that the gold/silver market reflected that recognition today. I think culturally we are seeing a momentous shift from risk taking to risk aversion. Might possibly mean that ESPN will show sports again and the poker games end.
It's going to be another ugly day for the sub prime market tomorrow
ABX indices also hitting new lows at various levels. Things are getting uglier, the thing is, the underwriting has only tightened a small amount. All of the subprime guys know they cant have tight guidelines AND survive, but the secondary market is killing them because they realized the junk won't perform in a down market.
Grab the popcorn. The next few months will be fascinating.
S&P says downgrades 7 bonds backed by 2nd-lien mtgs
"S&P has stepped up actions on securities backed by second-lien loans -- often called "piggyback" loans since they are created concurrent with first-lien mortgages -- as the cooling housing market sparks losses just months after the loans were created."
Business & Financial News, Breaking US & International News | Reuters.com
MOM pointed out in an earlier post that any sort of tightening will greatly reduce the amount of homes sold, by shutting out FTHBs and the "trickle up" effect. Are we at the point yet where we can say that if sales aren't contracting (or beginning to contract), then there's really no tightening? I don't think prices have fallen enough anywhere yet to have improved affordability to the point where high LTV loans and little downpayment have become a significant part of the market.
Oops, correction... that last line should read "I don't think prices have fallen enough anywhere yet to have improved affordability to the point where lower LTV loans and a higher downpayments have become a significant part of the market."
asset, income and other REIT-related restrictions
Ohhh yeah, the onerous REIT regulatory environment. That's it. Not obscence bonuses, not loose lending, not bets gone bad.
Somebody tell me the generic unit value of a REIT that makes no money for the foreseeable future backed by an asset with high carrying costs, high management costs and significant downside risk? Now tell me the value for a specific company that expresses concern that reporting rules may negatively impact percieved valuations? LEPROSY! Unclean! The thee out of my house.
http://www.novastarmortgage.com/pdf-bin/presentations/2006Q4Earnings.pdf
PDF for the CC
Nikki - we will not know until we get pending home sales for February and March. Pending home sales for January aren't due out until March 6th, so we have a long time to wait.
Also, the effect of tightening will be felt unevenly across the country. I expect the results in the west to be particularly intense.
Nor is this a single step process - what will happen is that everyone will try to adjust their underwriting to get the maxium of business that they can profitably sell. However, judging by the statements of brokers, the credit tightening is real.
They said on CC that they intend to pay $170 mil of dividends for 2006. I have no clue where they will get money.
Novastar Q4 Call Notes (warning reader discretion advised, may not be suitable for those with weak stomachs or NFI shares in their portfolio):
Reviewing REIT status:
Have $170MM of 2006 earnings that they must distribute in 2007
Beyond that see no taxable income until 2011
Given the lack of taxable income going forward, REIT status is under review
Capital Availability/ Needs:
Will need to raise capital to grow portfolio
Claim to be incompliance with all their covenants (note to self get number of banker who wrote that loan)
Closed a CDO on 2/8 (how's that for timing), could see MTM loss in Q1 given that "spreads have gotten a little wider in Q1" (you could say that)
Charges out the wazoo:
$17MM impairment of available for sale mortgages
$10MM provision for 06-1 on balance sheet securitization
$22MM EPD provision (in gain on sale)
$4MM mark to market loss on trading securities for CDO from spread widening
EPDs/Repo:
Their EPDs increased from 1.25-1.0% in 2005 to 3.5-4.0% in 2006.
2006 figure is average for the year so Q4 must be mid-high single digits
On EPDs, they assume 2/3rds will go bad and assume a 35% loss severity on those that go bad
Underwriting:
Started tightening in September
Recently reviewed last 5Qs production against tightened set of guidelines, but didn't get sufficient return
Implemented second stricter set of guidelines (focus on layered risk, duh!)
Result was that 25% of production fell out with new guidelines (yet they don't see a problem with existing loans needing to refi - go figure)
Have increased staff for LM and delinquency mgmt
Production:
Claim it grew due to more feet on the street
Analysts question re: adverse risk selection given volume increase in declining market
Expect to see cost to originate risk in 1H 07
Have seen coupons rise 35-60 BP for base rate and see more add-ons for specific risk factors
Rates still need to go up more given risks in this paper
Portfolio:
Will try to move up the capital structure
Buy more BBB paper and CDOs
Last trade on stock 12.13 down 5.43 from the close. Quote from the call: "Our primary concern is maximizing shareholder value"
February is shaping up to be a rough month according to foreclosure.com. Their numbers seem to correlate fairly well with RealtyTrac, so I'm thinking they might be a reliable indicator (I'm too afraid of commitment to sign up for RealtyTrac):
Date - Foreclosures
2/1/2007\t144346
2/6/2007\t145789
2/15/2007\t151105
2/19/2007\t152283
2/20/2007\t155280
They think the loss severity will be 35% on the EPDs? The loans that just got closed with 100% financing on a non-amortizing loan? Those will be only 35%?
Well if that's true, then why are all these people shoving that stuff back as if it were radioactive? People who are foreclosing seasoned loans with less-than-100% financing are taking 35% losses. Are you sure they didn't mean 35% net of MI? (Now that would be a cruddy haircut.)
Tanta,
Here's the transcript.
"...on the buybacks we take the status of the loans. Some of the loans we bought back are current. Some are down a payment. Some down a couple of payments. We look at our historical migrations and use those to determine which of those loans we think will eventually go bad, and which ones will cure and be a good loan. And then we have applied a 35% loss severity number to the loans that we think are going to go bad. So generally for the loans that we have bought back, we think about -- what we have bought back to date on an average about two-thirds of them probably will go bad, and one-third we think will become current. And we apply a 35% severity for the loans that we think are going to go bad."
He was not asked if that was net of MI. There was reference made to their use of MI later in the call, but I don't remember if that referred to a specific pool of loans or not.
Finally settled at 33% down after hours.
Will the street see the pattern, finally?
Brian, that so sounds to me like someone using "historical" experience to plan for a historically unprecendented series of events.
Thanks for subjecting yourself to it and sharing with the rest of us!
Thanks Brian for the excellent summary!
Tanta,
Well there has been plenty of driving through the rear view mirror in this cycle so why stop projecting off "historical" experience now.
Speaking of adding REO mitigation capacity:
"REOTrans Announces Expansion
Kerri Panchuk | 02.09.07
Southern California-based REOTrans, a platform that helps lenders manage and sell foreclosed homes, has announced plans to double its existing office space by creating ergonomic office environments inside its Los Angeles headquarters.
The company, which already has existing server facilities in Dallas and Los Angeles, also announced plans to add a second office in Dallas and a new server facility in Herndon, Virginia.
Chris Saitta, president of REOTrans, says the expansion is critical for the company's long-term growth plan, which includes an on-going recruiting effort to fill multiple positions."
Oxford Funding Corp. to Acquire $1.5 Million in Mortgages
Summary of Q&A...
"We feel comfortable with our liquidity but we won't tell you how much that is...."
Of course they need to change their status. How could they cover the risk if they are giving 90% of the profit away, and they've been doing it for years. Infact, I bet they would have been able to cover the risk had they kept the revenue as retained earnings vested in US treasury bonds. The issue isn't about attracting investors and attempting to maintain value for the share holder - infact the opposite occurred. It's about running your company responsibly.
If I was a lendor I would try to make them change their REIT status so they don't have to pay the $170 million dividend. IMO they may need all their equity to cover future writedowns on their portfolio and potential operating losses.
The above analysis is flawed if the assets have already been written down to Feb. 20 values.
I listened to a conference call with the head of the FDIC today. She said lending guidlines for subprime mortgages was very much a front burner issue. They were particularly focussed on subprime hybrids, and that there was consideral pressure from Capitol Hill to issue regs on this topic. A particular focus for the FDIC is underwriting at the fully indexed rate. The days of the exploding ARM are number. When asked if they were worried about troubles spreading to Alt-A loans she said she had just discussed that topic with their chief economist today and they were looking at the data.
I listened to a conference call with the head of the FDIC today.
Is it okay if I fantasize about that? I mean if I do it in private and don't tell anyone?
I only got to listen to it with my youngest (a bored teenager) sitting behind me (gaming) and a hunting dog sleeping on my feet. They were not impressed. But then I have no life.
Dryfly,
Whatever floats your boat. Have at it.
What is adverse consequences of ABX indices hitting low?
Does it mean that interest rate would go up? How does it work? Thanks.
Tanta,
NFI paid $12MM in premiums for mortgage ins last year, so maybe that 35% is after the insurance payment. Ouch.
What is adverse consequences of ABX indices hitting low?
As I understanding it basically the expectation for defaults is rising, and therefore the cost to get "insurance" against these defaults is rising. That in turn means interest rates on sub-prime mortgages have to rise to compensate the lenders/investors against higher default risk.
Realistically, since these borrowers are already tenuous to begin with, the rising interest rates would probably just make the loans that much more likely to default, so I think a good portion of would be sub-prime borrows are no longer going to be viable, uh, victims.
I bet somebody else could explain it better.
Tighter underwiting started in September? Sounds like NovaStar let the horse get over the horizon, before they closed THAT barn door.
Uh, oh... could be a bad day for the carry trade.
Media report BOJ's Fukui proposes target rate at 0.5%
We have 7 years of home buyers that cannot imagine rates abover 6.5%.
Hmm.
And we have how many years of traders who cannot imagine Japan rates abover 1% ???
Return to normal times, will be quite interesting indeed.
Subprime mreits just don't make sense -- a way for the street to farm out risk and reap the fee income. The high dividend must have confused so many retail investors. Poor souls. I pointed out earlier that NFI was trading above book, alone. They had been paying really big dividends. Now they are saying no taxable income between now and 2011! They are back to book. Really not an instrument fit for the public. Didn't bring myself to short it though -- so call it hindsight 20/20.
The Bank Of Japan rate raise to 0.5% is in.
Business & Financial News, Breaking US & International News | Reuters.com
No recession yet. And now - gasp - prices and sales in NYC have jumped double digits!!
HOUSING MARKET HEATS UP IN CITY - NY Times
wow:
"We all have a tendency to say stupid things. About seven months ago, some members of the economic fraternity created a lot of noise with widely reported warnings that we were recession bound. Especially outspoken in this respect was New York University's professor of economics, Noriel Roubini."
"In retrospect, those recession forecasts now shape up as pretty outlandish, if not outright dumb."
"Mr. Roubini, the skipper of New York-based Roubini Global Economics, also blundered badly in his market forecast, predicting the onset of sharply falling stock prices in September, with the S&P 500 between then and June of 2007 plummeting some 1.5% to 2%. Following his forecast, about 10 market averages, including the Dow, charged to new all-time highs over the next six months. So (Roubini) flunked on both the economy and the market."
"How does Mr. Roubini explain away his ATROCIOUS forecasting and is he still sticking with his prediction of a recession? Not surprisingly, he doesn't want to talk about that, refusing to respond to repeated calls seeking comment."
read it all here: Recession Forecasters Spoke Too Soon - February 21, 2007 - The New York Sun
"No recession yet. And now - gasp - prices and sales in NYC have jumped double digits!!"
Could you ask for a surer sign the finance-based economy is taking Main Street and the US middle class to the dumps? This is straight out of Hayek and Mises texts.
http://img120.imageshack.us/img120/1566/comboaa100an5.gif
The above is a snapshot of the New Century Niche Rate Sheet (for California if that matters) on 2/07/07 vs 02/17/07 it shows the combo (80/20) stated income AA (their designation) credit loan.
Min FICO is 700+ now and pricing on the first is 35 basis points higher. The AAA versions shows a similiar change.
The 100% 1 loan only shows a 640 min FICO score and 35 basis point increase, but I presume there is mortgage insurance on top of that making it extremely expensive as well.
Stated wage earners also get a 50 basis point add on (actually NINA will as well making them effectively the same). Add on IO and you get another 35bp.
"Could you ask for a surer sign the finance-based economy is taking Main Street and the US middle class to the dumps? This is straight out of Hayek and Mises texts."
Man, it is sounding more and more like a financialsense.com forum in here than the good old calculated risk blog. Strangely, the rationalists gradually seem to be leaving the building, only to be have fundamentalists take their place. The data driven arguments are becoming few and far between, because, well, the data is not supporting a hard landing at all right now. Too many fluffy doom comments if you ask me.
If you read Roubini's stuff or see him on CNBC, he's definitely backed off of his recession call. How nows says a "recession is possible," rather than "an absolute certainty and anyone who disagrees with me is a damn fool!"
Okay, that last part may not be an exact quote, but it's pretty close.
If I could pick one person whose offputting arrogance does more to undermine the bear case than anyone else, it would be a really tough call between Roubini and iTulip's Eric Janzen.
The New York City data is not entirely unexpected.
If I recall, financial firms based in NY handed out $40 billion (yes, Dr. Evil, billion) in bonuses.
Okay, I live in a walk-up on 23rd street, and Goldman Sachs just handed me $5 million.
Just a wee problem. Goldman Sachs' largesse was restricted to its hotshot gunslingers in the Big Apple. Apparently, trickle down is having trouble trickling.
America's prostate will decide the issue. If the creditor class has a really ugly prostate, then things will get tough.
A nice, young, well-behaved prostate: Goldilocks here we come.
If Tanta can write about oval pads...
BTW there are two memes that are very heavily subscribed to by the prostatically challenged class (PCC):
1) Everything will be fine unless the Democrat Congress makes it harder for the PCC to make loans with zero down, negative amortization, and punitive interest rates.
2) The data look really good, why is everyone moaning and groaning?
The mouthpiece of the PCC, that would be the Editorial Page of the WSJ (and, believe me, those boys have prostates that won't quit), is beginning to back off of 2) and go with 1) exclusively.
That doesn't mean the data are bad. Just that if it is, it's time to load for bear to blame it on the Democrat Party.
Question for Tanta (BTW thanks for the great Servicing post),
NFI mentioned on the call that they were willing to modify portfolio loans at reset to keep borrowers out of FC. What are the implications of modification for a securitization?
-After modification, and assuming the borrower pays the new P&I, is the loan listed as "current"?
-Does the Trustee have the right to put back a modified loan if the investors request it?
-Does the trust accrue deffered interest?
-What's the nature of most modifications? (Interest deferral vs. reduction)
-What is servicer's experience collecting on mod's?
Sorry for all the questions, but I think we'll be hearing lots more about this in the next year.
Dear Dryfly,
I thought you might enjoy reading about this: Corn Farms Replace New York Lofts as Hottest Property.
From the article, "Average U.S. farm prices increased by 15 percent in 2006, Agriculture Department data show. The cost of buying corn farms in Argentina, the world's second-largest exporter of the grain, jumped 27 percent, according to Buenos Aires industry newsletter Margenes Agropecuarios."
And it is all based on corn for ethanol.
To paraphase the song...money for nothing and your corn for free...?
Rather stupid to go make ethanol using corn in Argentina, when you can make it a lot more efficiently using sugar cane in Brazil (right next to Argentina).
what i would like to know if subprime implosion would mean no 80/20, NINA,no money down loans in a few months(weeks?)
this would crimp the spastic (housing market) even more and prices will collapse in bubble areas...
but i suspect there would be some players who would still roll out these products albeit in a very small number.
"but i suspect there would be some players who would still roll out these products albeit in a very small number."
It's not up to the "players" that would want to do that, it's up to the investors that buy the damned things. And it's doubtful that there will be any demand for them (what with the secondary market provinding much higher margins for whoever wants the risk).
NFI mentioned on the call that they were willing to modify portfolio loans at reset to keep borrowers out of FC.
David, I think the operational term here is "portfolio." I didn't listen to the call--some days I have my limits--but I suspect when they say "portfolio" they mean it--namely, those are whole loans they own that show up on the books as "held for investment." You can do any damn thing you want on a whole loan.
If they've securitized those loans, then they don't have limitless options: it depends on the legal structure of the security and the facts of the actual underlying loan pool. On a REMIC, the trustee is required to put back a modified loan because REMIC law doesn't allow a loan to be modified. It has to be bought out of the security in order to be modified. Then it becomes part of someone's "portfolio."
What the nature of these mods are isn't quite clear to me. If we're talking fixed rate or long-fixed-period hybrids, I suspect most of them are just capitalizing past due interest and resetting the term (to effectively lower the monthly payment), while leaving the rate in place. Even with that, though, you can create cash-flow issues if the loan is securitized (because extending the amortization slows the repayment of principal: great news for the IO strip, bad news for the PO strip).
If they're those "exploding ARMs," then I suspect we're talking lowering the interest rate and/or margin or both, or at least putting off the rate reset for another year, which effectively lowers the true yield on the loan even if the interest rate doesn't change today.
Basically, there's no way you can modify a loan (whatever you did to it) because it was in trouble, and then turn around and call it a prime loan even if it's now current. There aren't hard-and-fast rules for this stuff, accounting-wise or otherwise, but for the most part it's scratch & dent until it has been current at the mod terms for another year (which "seasons" it). So after the mod, you've just taken an impairment of some sort on that asset, and you have to reserve for it as a high-risk loan. If you're not doing that (one doubts that NEW, for instance, was doing that properly), then you're cruising for a restatement.
I'm not sure what you mean by asking about the deferred interest.
Strangely, the rationalists gradually seem to be leaving the building,
That's what you get when you read comments at 3AM. All the rationalists are in bed.
Tanta,
Thanks. In NFI's and NEW's case, all their portfolio loans are structured as securitizations. That's the reason I asked -- seems like it would be tougher for them to modify the loans than they let on. As you imply it can create conflicting interests amongst the different classes. By deferral I meant that they would leave the re-set interest rate in place and simply add unpaid interest to principal (like a neg-am).
It seems that all the lenders will try to "modify" themselves out of their problems this year. The attitude towards mod's, however, depends on collateral values. I believe the market will tip from a, "house prices never fall in nominal terms" attitude towards a "grab the deed and sell it before it goes down more" attitude. Not much scope for forbearance in the latter.
I have a question to ask the board about CDO and rating agency scrutiny of servicers. This would, AFAIK, affect commercial credit more than consumer. <a href="http://www.reiresearch.com/public/3099.cfm>Mortgage News Weekly:
Rating agency Standard & Poor's says that the growth of collateralized debt obligation issuance poses challenges for the servicers of real estate loans that are pooled into these deals.
S&P said the 'inherent complexities' of CDOs require special consideration in evaluating the servicing of CDO assets. S&P recently issued a report detailing how it evaluates servicers and special servicers assigned to manage the cash flows and collections associated with loans backing CDO transactions.
There's much more at the link. I had expected this question to arise in the summer, not now. I wondered if anyone has any comments/insights? The CDO structure hasn't been tested under these conditions.
NFI and non sequiturs:
Winter (Economic and Market) Watch » Canaries in the Mine Shaft & Non Sequiturs
MaxedOutMom,
This one's in your neck of the woods. What kind of a reputation does this outfit have?
"GAINESVILLE, Ga., Feb. 20, 2007 (PRIME NEWSWIRE) -- GB&T Bancshares, Inc. (NasdaqGS:GBTB - News) today announced that it will increase its allowance for loan losses through an additional provision of approximately $9.7 million in the fourth quarter ended December 31, 2006.
The increase in the allowance for loan losses arises out of a recent examination conducted by the Federal Deposit Insurance Corporation (``FDIC'') at one of the Company's wholly owned banking subsidiaries, HomeTown Bank of Villa Rica, and relates primarily to several loan relationships originated by the president of that bank in which it is apparent that this officer did not follow numerous bank loan policies and procedures, including loan approval authorities, collateral requirements, inadequate documentation, and other underwriting guidelines. This officer is no longer employed by the bank."
Expired
I cannot comment because of a prior business relationship.
I can comment on FINB, First Indiana Bank. I do not like the looks of what they are doing now. This domain is available for purchase. Call 781-839-7903 or 866-866-2700. for wholesale. Look at those seconds and the >100% financing. Also they are offering 5% on money markets.
MBA Purchase Index is down again. Four week moving average for Feb 16th fell to 398.7. Average contract rate for 30 year fixed down again on weaker demand, I suppose. More striking:
"The seasonally adjusted Conventional Index decreased 4.8 percent to 908.2 from 954.3 the previous week, and the seasonally adjusted Government Index decreased 10.1 percent to 103.7 from 115.4 the previous week."
Tanta, MOM or anyone?
Are you familiar with Ambac (ABK)? Any opinions on the risk this oufit may have systemically on the great unwind? I dont believe this will be restricted to sub prime. Thanks!
MOM,
Thanks on FINB. Apparently they didn't get the memo on the housing market. The OH rate sheet is truly frightening. Maybe they can partner with NFI and be the place their reset customers go to when they no longer qualify under their newfound sobriety or when there is no one left at NFI to answer the phone.
Strangely, the rationalists gradually seem to be leaving the building, only to be have fundamentalists take their place. The data driven arguments are becoming few and far between, because, well, the data is not supporting a hard landing at all right now. Too many fluffy doom comments if you ask me.
Talk about fluff - NY Sun? What, didn't the Enquirer have a piece to quote? It is one thing to complain about others not being 'data driven'... then to follow up with this puffery as 'data'... shame.
The NYT piece was pretty interesting. arbogast | 02.21.07 - 5:25 am | analysis has it right, credit record bonuses for the jump. The money quote is here:
Then came this years stratospheric Wall Street bonuses, and the market exploded, real estate executives said.
Maybe those bonuses will continue & even grow in '07... maybe not. Realize a lot of those bonuses were a result of the revenue from IB activity around MBS securitization & marketing. From what I read a lot the IP & M&A activity that USED to puff up NYC RE is increasingly being done in London (see their RE market lately as a result, up even more than NYC).
This is just more proof that if liquidity continues to flow it will distort & expand a bubble somewhere... if not suburban developments then maybe NYC flats or Iowa farm land or equity fund buyouts of manufacturers.
So the question is will the liquidity continue to flow? That's the bet.
BTW - I'll comment on the farm land link provided by kett later - I've run some of those numbers a few years ago when my father & I were looking at buying a distressed farm... understand I used to be a process engineer at one of the more advanced & efficient ethanol plants, I get this stuff. There is NO WAY $5000/acre land pays EVEN if oil goes to $100/bbl.
cccactii, I don't know anything useful about ABK; I'll take a look if I get a chance.
I will say that AHM has been making me rather nervous lately. Nothing obvious anywhere, except that they seem to be selling everything whole loan they can get their hands on. That could be smart, in the sense that securitizations are no longer the money-maker they once were. (Even though, as Brian has noted, LEND tells us it's the other way.) But who's cheered up by the idea that securitizations are no longer the magic answer? As I said, selling whole loans can be smart, and it can also be a way to get Cash Now. After I read their last financials, I did not come away with a clear idea of what they might want to do with all that cash except keep supporting their origination network and pay salaries (rumor mill has it they're paying some big ones).
Hey, it's now yielding 32%! Just think if you loaded up on NEW and NFI and Canadian trusts last year for income.
I loaded up on Canroys in November and am happy as a pig in s***.
"Man, it is sounding more and more like a financialsense.com forum in here than the good old calculated risk blog. Strangely, the rationalists gradually seem to be leaving the building, only to be have fundamentalists take their place. The data driven arguments are becoming few and far between, because, well, the data is not supporting a hard landing at all right now. Too many fluffy doom comments if you ask me."
Funny, I was just thinking how the bull screeching seems to be getting louder and louder in here. Too much like the Housing Panic troll wars if you ask me.
"Corn Farms Replace New York Lofts as Hottest Property"
Amazing. There was a corn belt bubble in the 1920s, which you can read about in "Money of the Mind". How little things change.
Tanta Thanks.
It is most difficult to make money betting against financial companies as they can play with the numbers so much until the end game hits like we are seeing with NEW and NFI. FNM is still a black box. I think ABK is nuclear waste all dressed up. Reminds me of the old saying - " Things are not what they seem, skim milk masquerades as cream". In any event I have been fortunate to capture the NEW and NFI collapse and I am always reading to try and learn and test my thesis. I am also a very long time Fleck reader. His contact in London had some interesting things to say today. I will pass them on if folks are interested.
Thanks again!
I know that ABK is a pretty well run outfit, or at least it used to be, followed it closely several years ago when I was a PM and it was a core position. At one point owned about 1.5% of the firm. Their muni insurance business is a goldmine, and it is a very clubby ologopoly in that market. However, the muni insurance market was pretty slow growth and they branched into insuring more structured finance deals. Hard to evaluate from the outside, but knowing the culture of the company would guess that they did a pretty good job. In general they were a much more conservative bunch than MBIA, who wasd their biggest rival. Again, however Billy was in the White House when I was following the firm closely. Things may have changed since then, and the structured finance business always worried me much more than the muni business.
cccatic, Curious about what Fleck's contact was saying. My feeling is that if the unwind gets really bad most of the Financial Guarantee outfits probably have serious problems. Don't agree with MBIA"s accounting that provides for virtually no loss reserves.
Interesting to see someone else questioning MBIA's viability. Though as a software developer I'm outside my area of expertise in this, I spent some time looking through their 10K a few years ago, and was fascinated by how little capital they have to back up their insurance commitments. It looks as if the assumptions they've made about loss rates turn out to be more than a little wrong, they could be wiped out very quickly. Of course they'll tell you that all those assumptions are solidly based on historical experience -- but in an era of unprecedentedly loose lending throughout the system, is that historical experience really valid?
Dirk,
Thank you for the reply. I am sure Ambac was a well run outfit, I think times have changed. My suspicion is that they have much more risk than the stock price reveals. They look like they are involved in all matters of black box financial derivative collateralized debt mortgage back re-insured finacially guaranteed productions (LOL) we have come to know and love so well these past few years. It reminds me of FNM Enron AIG type of stuff, and I am not a believer of the guarantees and assumptions in these transactions. I am hoping someone more informed may shed some light on the realities of ABK's business. Thanks again!
jm, I also looked at in detail last year. Most of their guarantees would have extremely low chances of default. Could not identify any obvious problems but my general comfort level with the company was very low.
vicjim,
Not sure if CR will be following up with Flecks friend, but he basically said that a few people have been aware of sub-prime problems the last few months but today was the first day equity managers came in to ask questions. These managers assumed the problems were contained and not a problem for wider credit market, economy etc...He walked them through the numbers and the ABX charts and these managers were apparently stunned. He said slowly but surely people are starting to get it and the tipping point in credit via sub prime and shambles in CDO land is closer than anybody imagines.
My take is that it is now and a wild guess is that the gold/silver market reflected that recognition today. I think culturally we are seeing a momentous shift from risk taking to risk aversion. Might possibly mean that ESPN will show sports again and the poker games end.