Mover Mike

The WSJ outlines a problem that is coming like a freight train toward us and they use FirstFed Financial Corp (FED) in LA as an example.

You know all about sub-prime loans and how they wrecked havoc in the mortgage industry. The Mortgage Lender Implode-O-Meter shows 272 U.S. lending operations have failed since 2006. That’s due to sub-primes. Now get ready for option ARMS!

Option ARMs typically carry a low introductory rate and give borrowers multiple payment choices, including a minimum payment that may not even cover the interest due. Borrowers who make the minimum payment on a regular basis — as many do — can see their loan balance rise, known as negative amortization. Monthly payments can increase by 60% or more once borrowers begin making payments of principal and full interest. That typically happens after five years or earlier if the amount owed reaches a preset amount, typically 110% to 125% of the original loan balance.

Click to enlarge.

You can see from this WSJ chart that we go from nothing to $32 Billion a quarter of option ARMS that will be recast at higher rates.

The numbers from First Fed are astonishing!

Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast. The number of foreclosed homes held by the bank doubled in the second quarter from the first quarter.

As of the end of June, nonperforming assets climbed to 8.2% of total assets, compared with 0.85% a year earlier.

Barclays Capital estimates that as many as 45% of option ARMs, as they are often called, originated in 2006 and 2007 could wind up in default. Another analysis, by UBS AG, suggests that defaults on option ARMs originated in 2006 could be as high as 48%, slightly higher than its estimate for defaults on subprime loans. Both studies looked at loans that were packaged into securities.

FirstFed was one of the conservative lenders. It dragged its feet to be involved, then got out of the option ARMS market in 2005, yet still the bank lost $70Million in the first quarter.

Two banks loaded with option ARMS are Wachovia (WB) and Washington Mutual (WM)!

Tags: Investing, Mortgages by MoverMike
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Here’s one Democrat hoping to increase his ratings as a presidential candidate by asking questions of Treasury Secretary Paulson. Questions raised by the Ben Stein in the NYT and covered by this blog here.

(Sen. Christopher) Dodd, who also is a contender for the 2008 Democratic presidential nomination, said he was concerned about issues raised in a New York Times column on Sunday, December 2, about the activities of Goldman Sachs in reportedly selling collateralized mortgage obligations (CMOs) while Paulson led the Wall Street firm.

The article, by columnist Ben Stein, said Goldman also was selling the securities short. It said a Goldman Sachs spokesman told the newspaper it “routinely shorts the securities it underwrites and said that this is disclosed.”

Treasury Secretary Paulson Ben Stein Goldman Sachs

Tags: Mortgages, Troubled Companies by MoverMike
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From Bloomberg

Moody’s Investors Service is preparing the biggest credit rating cuts since subprime mortgages contaminated the bond market, foreshadowing losses for investments that pay Florida teachers and money market funds.

[…]

School districts, towns and cities across Florida were denied access to their money after the State Board of Administration halted withdrawals from the Local Government Investment Pool on Nov. 29 to stem a run on the fund, which had $2 billion in SIVs and other debt tainted by the subprime collapse, state records show.

Let’s go back and look at Oregon’s Local Government Investment Pool.

(The Pool) is an open-ended, no-load diversified portfolio offered to eligible
participants, including any municipality, subdivision, or public corporation of the state who
by law is made the custodian of, or has control of, any public funds. State agency participants
are considered internal involuntary participants, because state law requires state agencies to
deposit all funds with depositories qualified by the Office of the State Treasurer (Treasury).

In June, 2007 the fund had almost 17% in ABCP and yet Ley Garnett said the ABCP as of November 15 was down to 1.29%. I asked how Oregon was so smart and the other states so dumb. Today, Moodys is downgrading more firms who offer ABCP and sales of ABCP have falled from an average of 102% to 55%

Michael Shedlock reports that a Freeze Is On In Florida and Maine, Maine Treasurer Lemoine Criticizes Merrill for Subprime Bet, and in Montana, Run on a Montana Fund and King County Disaster For Public School Funds

King County finance director Ken Guy says he thought the fund was making a safe investment when it bought $53.5 million in commercial paper of an SIV-lite called Mainsail II in July. Mainsail failed to make payments to investors, including King County, on Oct. 4.

I hope I didn’t get snookered by Mr. Garnett. I tried to contact him for a follow up, but he responded “We are swamped with calls. I can’t promise a quick answer.” Apparently, others want to be reassured.

After checking back into OSTF, I checked on the biggest fund in Oregon, PERS. Now PERs literature as far as I can tell only wants to talk about performance. You can pull up an Excel file showing monthly breakdowns of assets, and as of October, 2007 had 27% or $17.25 Billion in fixed assets. I cannot find a listing of the assets. There is an PERS annual report published online, but that is dated for 2005.

Fixed assets then, in 2005, were $13.55 Billion and managed by

Wellington Management Company $ 2,496,515;
Western Asset Management 2,588,098;
Alliance Capital Management 2,493,132;
BlackRock 2,632,385;
Fidelity Investment Management 2,519,150; and
BGI U.S. Debt Index Fund

Guess what, in the story quoted at the top we find that

Baltimore-based brokerage firm Legg Mason Inc. said two money funds run by its Western Asset Management Co. unit own debt of Orion, representing 1 percent of the assets in the funds. Montana’s short-term investment pool, which suffered more than $250 million of withdrawals last week because of its SIV holdings, had $50 million of Orion debt.

Then there’s this,

Alliance Capital Management LP was forced to pay $600 million to settle state and federal charges of improper mutual fund trading last December.

Then there’s BlackRock,

A significant step in this ongoing effort was the 2006 merger with Merrill Lynch Investment Managers (MLIM).

Merrill Lynch owns 49%. It was Maine’s Treasurer Lemoine that criticized Merrill Lynch and it was Montana and King County that bought Mainsail pushed by Merrill brokers.

Come on Mr Garnett are you trying to tell me that the Oregon IAC managed to step around all those traps?

At 1:45 I received this email fro Mt Garnett

I’m out of the office until Friday and don’t have access to our website. Try a search on the home page.

The heat may be too intense!

Moody’s Investors Service Florida teachers subprime collapse

ABCP Mainsail Western Asset Management

Tags: Investing, Mortgages by MoverMike
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Back in June of 2007, I posted about CDOs and CMOs Bring Street Terror

Hammered by exposure to a risky type of mortgage-backed security, Brookstreet Securities Corp. of Irvine, Calif., yesterday told its 500 or so affiliated reps and advisers that “disaster” had struck, and that the firm could close if it doesn’t come up with at least $5 million.

I checked back to see if they had raised the necessary money. Sadly, Brookstreet closed its doors.

The firm’s 650 independent contractor brokers have been terminated, says Stanley Brooks, President of the firm. Brookstreet clients are left in limbo, many with huge losses in their accounts.

Some of Brookstreet’s clients report that their accounts continued to fall in value this week. Yet, if they attempted to do anything NFS (Fidelity’s National Financial Services (NFS), which cleared trades and maintained accounts for Brookstreet.) told them they must talk to their (Brookstreet) broker, but their broker was not answering the phone. Meanwhile, Some of these clients’ margin accounts slipped into the “red”, meaning not only have these investors’ funds disappeared but NFS now claims the investors owe it money!

The son of Brookstreet Securities founder, joined Wedbush Morgan and invited Brookstreet brokers to join him at that firm.

Recently, a group on nuns, who claim they were led to believe they were making safe investments, apparently had their funds invested by Wedbush into mortgage-backed CMO securities which were just pools of mobile home loans. They soon lost $1 million, according to a complaint filed by The Sisters of St. Joseph of Carondelet in California against Wedbush Morgan in arbitration through the National Association of Securities Dealers.

Wedbush has been named in over 40 complaints over CMO products.

Brookstreet Securities Corp. Wedbush Morgan Mover Mike

Tags: Investing, Mortgages by MoverMike
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Hat Tip to Mish’s Global Economic Trend Analysis for SIV Debts A Disaster For Public School Funds.

Bloomberg on Nov 15th reports in Public School Funds Hit by SIV Debts Hidden in Investment Pools

…state-run pools have parked taxpayers’ money in some of the most confusing, opaque and illiquid debt investments ever devised.

These include so-called structured investment vehicles, or SIVs, which are among the subprime mortgage debt-filled contrivances that have blown up at the biggest banks in the world.

Oregon has such a pool, the $8 Billion Local Government Investment Pool.

(The) LGIP or the “Pool” is an alternate investment vehicle offered to participants that includes, but is not limited to, any municipality, political subdivision or public corporation of this state that by law is made the custodian of, or has control of, any public funds. The LGIP is commingled with the State’s short-term funds. Since its inception, over 900 local governments in Oregon have participated in the pool.

I emailed Ley Garnett, Press liason from the Office of the State Treasury asking “Can you assure me that Oregon has no exposure to SIV? If it does, what percent and how big of a problem are we looking at.” He’s out for the holiday until Friday. I’ll let you know if he replies.

It’s best to know right now if we have a problem and correct it!

Local Government Investment Pool structured investment vehicles SIVs Mover Mike

Tags: Investing, Mortgages by MoverMike
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BankNet360.com has this chart of mortgage resets and the type of mortgages:

Click to enlarge

The chart shows that subprime resets peak in mid-2008, but the Option Adjustables don’t peak until mid-2011. So this problem is going to be with us for some time.

What are Option Adjustables?

There are typically 4 payment options to choose from each month and you actually get to elect which one you make. This is the primary advantage of choosing this type of mortgage. These options will help you better manage your monthly cash flow, and provide more liquidity in the day to day operations of the normal household. The monthly payment options you have each month will depend on which version of this hybrid loan program you have. The following is the basic options that exist:

1. THE MINIMUM PAYMENT OPTION - The minimum payment option is the LOWEST of the 4 payments and should be considered like a credit card payment for the simple reason that with this payment you are paying neither the principal nor the entire amount of interest due on the loan. The interest that does not get paid gets added back into the interest due on the loan and this increases your actual loan balance

2. INTEREST ONLY PAYMENT - The interest only payment - you avoid deferring interest but at the same time you are not making a principal reduction payment. This payment option is your second lowest payment type. As with most interest only payment loans, there is a clause in the mortgage note that will dictate how long you can make interest only payments.

3. 30-YEAR PAYMENT - The 30-year payment or 30-Year Fully Amortizing Payment is the regular vanilla payment most people are probably used to making with payment going towards principal and interest. Consistently making this payment will payoff the loan in 30-Years.

4. 15-YEAR PAYMENT - The 15-year payment or Accelerated Payment Option will payoff the loan in 15 Years - both principal and interest are being paid.

Lynxbanc Mortgage IN fLORIDA offers this summary of Option Adjustables

This loan program is not for everybody; however, for those comfortable with a little risk, in exchange for a great deal of flexibility together with the discipline to check the mortgage statement every month, this could be the right loan.

It is a great loan for someone wishing to leverage their house as an investment, and invest some of those hard earned dollars elsewhere for possibly a greater return, for example an annuity offered by a financial planner. It is also excellent for those that derive their income from commissions or any other potentially fluctuating source.

Lynxbanc even has a landing site to apply for one of these loans

Two items to research:|

First, this item,

INITIAL INTEREST RATE - The interest rate applied to the ARM from the time it is originated until the first adjustment date.

Second, the MINIMUM PAYMENT OPTION is like “a credit card payment.” I wonder if you are late or miss a payment, does the interest rate go to 36%, like many credit cards?

Option Adjustables Mortgages Mover Mike

Tags: Economics, Investing, Mortgages by MoverMike
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California renters having problems with landlords that go bust.

Foreclosure California Mover Mike

Tags: Economics, Mortgages, Uncategorized by MoverMike
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The Mortgage Lender Implode-O-Meter reports that Reps. Brad Miller (D-NC) and Linda Sánchez (D-CA) have introduced a bill in the House,

Called the Emergency Home Ownership and Mortgage Equity Protection Act (H.R. 3608), the bill would make it possible for a bankruptcy court to restructure a home mortgage — meaning a bankruptcy judge could change interest rates or alter principal amounts as part of a Chapter 13 restructuring plan.

Bottom line, you get into trouble with one of those sub-prime loans and are forced into bankruptcy, the judge can restructure the loan. If you had a 1% loan and were able to make the payments prior to bankruptcy, what would prevent the judge from changing the loan to a 60-year loan? That would certainly mess up buyers of mortgages and Implode-O-Meter is right, new originated loans would have higher interest rates to compensate for the added time risk.

H.R. 3608 Sub-prime Mover Mike

Tags: Government Spending, Housing, Mortgages by MoverMike
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On August 9th, I wrote about the MGIC (MTG), Radian merger. C-BASS hit the skids and the joint investment by MGIC and Radian was lost and jeopardizing the merger.

On August 7, 2007, …MGIC made public comments on the status of the merger…, S&P placed the insurance financial strength ratings of our mortgage insurance subsidiaries on CreditWatch with negative implications and placed the credit rating of Radian Group on CreditWatch Negative. S&P commented that its ratings for Radian Group and its mortgage insurance subsidiaries would likely be removed from CreditWatch and affirmed if the merger is completed…

Today it was announced that

MGIC Investment Corp. and Radian Group Inc. (RDN) …will not follow through with their merger, valued at $4.9 billion, because of “current market conditions” that made the deal more challenging than was expected when it was announced earlier this year.

As a result credit default swaps on Radian widened to about 650 basis points on Wednesday, out from about 458 basis points on Tuesday night. Will the news doom Radian?

MGIC Investment Corp. (MTG)
href=”http://technorati.com/tag/Radian+Group+Inc.+(RDN)” rel=”tag”>Radian Group Inc. (RDN)
href=”http://technorati.com/tag/C-BASS” rel=”tag”>C-BASS

Mortgages
href=”http://technorati.com/tag/credit+default+swaps” rel=”tag”>credit default swaps
href=”http://technorati.com/tag/Mover+Mike” rel=”tag”>Mover Mike

Tags: Mortgages by MoverMike
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Rumors were flying early this week that Warren Buffet might be readying his war chest to takeover Countrywide (CFC) after CFC took $11.5 Billion from its credit line with 40 banks. Today the WSJ reports:

Bank of America will purchase $2 billion worth of preferred Countrywide stock yielding 7.25%, and that can be converted into common stock at $18 a share, those people said.

How close to the edge did CFC get? Is CFC too big to fail?First Magnus fired 5,900 and wasn’t too big to fail. It filed for bankruptcy!American Home Mortgage quit writing home loans Aug. 3 and filed for bankruptcy. It wasn’t too big to fail.Mish Shedlock writes

88,000+- people in financial services lost their jobs this year (nearly 22,000 of them in August alone). And that does not count 6,000 from Magnus so make it 28,000

Does CFC get special treatment because we have revived the policy of “too big to fail?”Countrywide (CFC) href=”http://technorati.com/tag/Mortgages” rel=”tag”>Mortgages href=”http://technorati.com/tag/Bank+of+America+(BAC)” rel=”tag”>Bank of America (BAC) href=”http://technorati.com/tag/Mover+Mike” rel=”tag”>Mover Mike

Tags: Mortgages, Uncategorized by MoverMike
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