As London Firm Shuts Down, Worries Spread
This also cam from Ron Tennant at Metrocities Mortgage. He can be reached at rtennant@metrocitiesmtg.com
As London Firm Shuts Down, Worries Spread
To American Home Loans Made Back in 2005
By CARRICK MOLLENKAMP, MICHAEL HUDSON and SERENA NG
June 29, 2007
Bond market turmoil spread yesterday as a London investment fund shut down because of bad bets on mortgage-backed securities and, separately, banks were left holding part of a closely watched corporate bond offering.
The London fund, Caliber Global Investment Ltd., announced it was shutting down because of souring investments in bonds backed by mortgages to American homeowners with sketchy credit. So far, most of the pain in the mortgage market was caused by loans made in 2006, when lending standards reached a low. Caliber, a unit of hedge-fund operator Cambridge Place Investment Management LLP, was hurt by loans made in 2005. Delinquencies in these older loans are also building, and investors have been selling off bonds backed by these mortgages in anticipation of problems.
Caliber, which listed on the London Stock Exchange in June 2005, lost 53% of its value. It said it will unwind the fund and attempt to return about $900 million to investors in the next 12 months. The company said in a statement there was “insufficient demand currently for investment through listed investment companies exposed to this asset class.”
In the corporate debt market, Dollar General Corp. raised $1.9 billion in a junk-bond sale to fund its buyout, though investors balked at the terms on one part of the offering, which gives the company the ability to halt interest payments if its business sours, and take on more debt instead.
It is known as a “payment-in-kind toggle” provision and the underwriters of the offering — which included Goldman Sachs, Citigroup, Lehman Brothers and Wachovia — were left holding $725 million worth of the bonds with this provision. They plan to sell it later.
Problems have been mounting in credit markets for the last few weeks. (See related article.) One problem has been the struggles of two hedge funds run by Wall Street firm Bear Stearns Cos., which invested in debt backed by subprime mortgages. After a near collapse, Bear had to pledge a loan of up to $3.2 billion to rescue at least one of the funds. Meanwhile, investors have been balking at a wave of new bond and loan issues being brought to the corporate credit market, uneasy with terms that they consider too easy on borrowers. Many of these corporate issues are related to buyouts.
In the mortgage sector, the 2006 vintage of subprime loans have already been labeled a bust because delinquencies and defaults on these loans started rising shortly after they were made. The 2005 vintage is now showing more signs of stress.
Among its mortgage bond holdings, those tied to 2005 loans were most prominent in Caliber’s portfolio. As of March 31, Caliber had $320.1 million worth of 2005 residential mortgage backed securities, versus $40.5 million worth of 2006 securities. The bonds tied to these 2005 loans are losing their value.
Caliber’s unrealized losses for its 2005 holdings were $58.4 million, including a $12 million second-quarter charge, are $46.4 million, the company said in a report last month. This week, Caliber threw in the towel.
Defaults and foreclosures on 2006 loans are worse than 2005. But the rates of bad loans for 2005 are rising and are considerably worse than for 2004 and 2003.
According to First American LoanPerformance, 19.6% of 2006 subprime home loans that are at least 15 months old were delinquent as of April. The 2005 loans are going bad at a slower pace — but the delinquencies are mounting. As of April, delinquencies accounted for 18.9% of 2005 subprime loans that were at least 26 months old. A delinquency is a loan that is 60 days or more overdue or already in foreclosure.
One portfolio manager, Bryan Whalen at Metropolitan West Asset Management, said the worst loans were made between September 2005 and November 2006, as cutthroat competition encouraged some lenders to push down their lending standards to new lows.
Investors are also concerned about borrowers who took out 2005 adjustable-rate mortgages, many of which will reset with higher interest rates this year. In some cases, the value of bonds backed by these mortgages are falling in anticipation of problems. Moreover, borrowers have had trouble refinancing out of these loans and into fixed rate mortgages because lenders have been tightening their credit standards.
Caliber said the decision was made after a review that began in early May. Later, Caliber told investors it was witnessing a “deterioration” in the U.S. subprime market and it had sold six positions in investments backed by 2006 subprime mortgages, including three at a loss.
In other developments, five U.S. bank, thrift, and credit union regulators plan to release final guidelines for subprime mortgage lending this Friday morning, several people familiar with the matter said. The guidelines direct lenders to use more caution when underwriting “teaser” rate adjustable-rate mortgages, among other things. The guidelines don’t apply to state-licensed nonbank lenders.
Subprime: Point to Where It Hurts
From Ron Tennant At Metrocities Mortgage. Ron can be reached via email at rtennant@metrocitiesmtg.com
Steps to Modify Loans And Avert Foreclosures Has Investors Clashing
By LINGLING WEI, RUTH SIMON and JAMES R. HAGERTY
June 29, 2007; Page C1
As defaults on home loans mount, mortgage companies are scrambling to work out deals to help as many borrowers as possible stay in their houses.
On the surface, it seems an obvious tactic. Lenders usually end up losing money on foreclosed homes because of legal and other costs and the need to sell those properties fast, often at a knockdown price. Also, politicians are pressing mortgage companies to minimize the damages foreclosures cause to families and neighborhoods.
Still, the effort to hold down foreclosures threatens to create clashes between mortgage companies and investors in securities backed by bundles of home loans, a $6 trillion market that has been shaken recently by losses on some of the riskier types of mortgage bonds. And because of the way these securities are sold, these efforts can pit groups of holders against each other.
“It’s going to create a class warfare” among different types of investors, predicts Kyle Bass, managing partner of Hayman Capital Partners LP, a Dallas hedge fund.
Foreclosures are rising fast partly because lenders in recent years rushed to make no-money-down loans to people with weak credit records and didn’t always verify their income. At the same time, the decline in housing prices in much of the country makes it hard for borrowers who fall behind to sell their homes for enough money to pay off the loan.
When borrowers can’t keep up, lenders typically consider whether it makes sense to offer a loan modification. Such workout deals, known as “mods,” often involve lowering the interest rate or stretching out the term. Lenders have used mods for years, but the practice is expected to proliferate as defaults rise.
Sharon Greenberg, an analyst for Credit Suisse Group in New York, estimates that before this year modified loans typically accounted for less than 2% of all those outstanding. Within the next couple of years, she says, they may peak at several times that level.
Investors holding mortgage-backed bonds are watching nervously because mods may not always be in their best interest. Some investors fear that loan servicers — the firms, often owned by lenders, that collect payments and deal with defaults — will make too many mods. Generally, investors favor mods that ease a normally reliable borrower through a rough patch, but not those that merely buy time for deadbeats.
Investors doubt some homeowners merit a rescue plan. In some cases, says Kishore Yalamanchili, a fund manager with BlackRock Inc., New York, “by making these people current, you are pushing losses to another year or so.”
Credit Suisse analysts recently examined loans that had been modified over the past few years by one nationwide lender and found that borrowers missed at least one monthly payment after a mod in nearly 40% of the cases. (That failure rate may have been skewed upward by victims of Hurricane Katrina who never returned to their homes.)
If the borrower is unlikely to keep up with payments even after a mod, many investors would prefer that servicers pursue a foreclosure quickly, especially in regions where house prices are falling, reducing the value of the collateral.
Servicers are required by their contracts to act in the interests of the investors and modify loans only when that can be expected to reduce losses. That puts servicers in the tricky position of trying to figure out which borrowers are basically sound and when it makes more sense to foreclose quickly.
One complication is that different classes of investors have different interests, reflecting the complicated mechanics of mortgage securities. Issues of mortgage-backed securities are divided into slices with various ratings, depending on the level of risk. Holders of the highest-rated slices (those with the lowest risk) are first in line to collect payments of interest and principal flowing from the loans. Many such bond issues are structured so that there is initially more than enough cash flow available to cover obligations to all the investors, leaving a cushion to cover potential losses from loan defaults. If after three years or so the loans have performed well enough to meet certain performance measures, the cushion may be reduced.
In that case, some of the excess cash available goes to holders of lower-rated securities and “residuals,” the highest-risk parts of the securities that are last in line for payments.
If loan mods delay the onset of foreclosures, holders of the lower-rated securities and residuals are more likely to get those payments. But, holders of AAA and other high-rated securities may argue that the loan mods have artificially boosted the performance of the loans and that the holders of lower-rated securities and residuals are getting payments that should be preserved to protect owners of higher-rated paper against the risk of a resurgence of defaults later.
Even where there are no clashes among investors, servicers face restrictions on how they modify loans.
Moody’s Investors Service, a ratings provider, recently reviewed roughly 400 subprime mortgage-security transactions issued last year: 5% of those deals prohibit any kind of loan mod; among those that allow mods, about a third stipulate that no more than 5% of the loans backing the securities can be modified. Subprime loans are those to people with spotty credit histories.
“Those restrictions may prevent servicers from doing the things they need to do,” says Larry Litton Jr., chief executive of Litton Loan Servicing, a unit of C-BASS LLC, New York. Mr. Litton says his firm hasn’t bumped up against any ceilings. Still, he favors eliminating restrictions in future issues of mortgage securities to give servicers more flexibility.
June 27, 2007
Standard & Poor’s sees dramatic rise in Alt-A delinquencies
From Ron Tennant at Metrocities Mortgage.
Loans in 2006 vintage going bad four times as often as similar loans
Tuesday, June 26, 2007
Inman News
Alt-A mortgage loans made in 2006 are going bad at more than four times the rate as similar loans made in 2004, analysts at Standard & Poor’s said Tuesday.
Alt-A loans are offered to home buyers who don’t have perfect credit, but who are considered less of a risk than subprime borrowers.
After 14 months of seasoning, 4.21 percent of Alt-A loans securitized and sold on Wall Street in 2006 are 90 days or more delinquent, or have been foreclosed. That compares with 1.59 percent for 2005 vintage Alt-A loans, and .91 percent for the 2004 vintage with the same amount of seasoning, Standard & Poor’s said, citing data from First American CoreLogic’s LoanPerformance.
Standard & Poor’s attributed the higher rate of serious delinquencies in the 2006 vintage to a greater proportion of loans made to borrowers with limited income documentation and little equity in their homes.
“The most disconcerting trend is how quickly the performance of these delinquent borrowers has deteriorated,” Standard & Poor’s analysts said. “We continue to see migration from 60-plus-day to 90-plus-day delinquencies within the 2006 vintage, suggesting that homeowners who experience early delinquencies are finding it increasingly difficult to refinance or work out problems.”
In 2006, “Lenders became increasingly comfortable with offering higher-risk loans in substantially greater numbers not only to subprime homeowners, but also to Alt-A homeowners,” Standard & Poor’s said. “As underwriting standards have tightened in 2007 and rates of home-price appreciation slowed or declined, indebted homeowners who experience financial trouble may have fewer refinancing options and may find it difficult to avoid going into foreclosure.”
Maryland Home inspectors must now be licensed
I found this article online relating to Home Inspectors. I believe that in Delaware Home Inspectors do not have to be licensed. Carol
State program, mandated in 2001, designed to protect buyers
by Liza Gutierrez | Staff Writer
Copyright 2007 Post-Newsweek Media, Inc./Gazette.Net
Baltimore, MD- A state home inspector licensing program mandated in 2001 has finally begun. Under the program, prospective homebuyers now know they are getting a technical expert, said Elwood A. Mosley, executive director of the state Real Estate Appraiser and Home Inspector Commission. The licensing program strengthens the quality and professionalism of the business, he said.
Now, if the consumer has a complaint about an inspector, state officials can help sort it out, he said. ‘‘We’re going to protect the consumer, but we’re also going to protect the home inspector.” Although the General Assembly voted six years ago to launch the program, it was deferred because full funding was not available until nearly last fall, Mosley said.
But lack of funding did not stop the group from working internally to position commissioners on the board to work on policy and regulations, he said. ‘‘There was a lot of behind-the-scenes work,” Mosley said.
When the time came to start licensing, procedures were relatively straightforward, he said. The program began in April.
‘‘Buying a home is probably the most expensive purchase a person will ever have,” said Frank Lesh, president of the American Society of Home Inspectors. ‘‘To spend a few hundred dollars to make sure the house is OK is money well-spent.”
Home inspections have been performed since the mid-1950s, but more buyers began to consider it an essential part of the purchasing process by the early 1970s, according to a society report.
Texas was the first state to regulate home inspection, in 1985. Six years later, it was the first to establish a full licensing law. Now 31 states have adopted some form of regulation for the profession. Regulations vary widely, from laws dictating what is required in a home inspection to those requiring inspectors to be registered, certified or licensed, according to the report.
The trouble with establishing state regulations is that often they set the bar too low, whereas his organization’s standards ‘‘far exceed the minimum,” he said. The American Society of Home Inspectors is a nonprofit with more than 6,000 members.
Lesh would ‘‘absolutely” recommend that buyers look for an inspector with more than just the state license requirements. ‘‘I want someone who exceeds the minimum,” he said. ‘‘Who wouldn’t?”
An unforeseen consequence of a state license program is that schools spring up and market to people who may not have normally chosen this industry, Lesh said. Usually home inspectors come from construction trades, he said.
In Illinois, there were about 450 home inspectors before state regulations, he said. After the rules were adopted, more than 3,000 became licensed.
A consumer may think all licensed inspectors are the same, but some may never have done any work in a home before, he said.
Ilene Kessler, president of the Maryland Association of Realtors, said she does not know exactly how the licensing program will affect the industry, but additional licensing or certifications are ‘‘always a better thing.” Kessler, a 22-year practitioner, has referred buyers to inspectors her clients have used and been happy with, she said. ‘‘I won’t put anyone on my list who is not … certified” by the Lesh’s organization, she
said.
Many people think brokers will recommend home inspectors who will just help push the deal through, Kessler said, but brokers want a good inspector on the job to minimize liability. ‘‘If we do make recommendations [for an inspector], it’s [for] risk reduction,” she said.
AT A GLANCE
Home inspectors in Maryland must be licensed by 2008.
Violators could face criminal charges, up to a one-year jail sentence and a $5,000 penalty.
Cost of a home inspector license is $400; it remains valid for two years.
Applicants must have 48 hours of an on-site training course approved by the commission, a high school diploma and general liability insurance of at least $50,000.
No examination is required to obtain a license at this time.
Once home inspectors are licensed, similar to home appraisers, the commission will provide a service where people can search for active licensees who may practice in the state.
Source: The Maryland Department of Labor, Licensing and Regulation
June 26, 2007
Foreclosures Hit 37-Year High
June 15, 2007
Ron Tennant, Loan Officer from Metrocities Mortgage, located at 17316 Coastal Highway in Lewes, Delaware found this article in REALTOR® Magazine Online as well as The Wall Street Journal,
Written By Damian Paletta and James R. Hagerty
Foreclosures Hit 37-Year High
More home owners entered the foreclosure process during the first three months of 2007 than during the record-setting final quarter of 2006, according to a report by the Mortgage Bankers Association.
The MBA’s Chief Economist Doug Duncan predicts that delinquencies would continue to rise, peaking later this year. He also points out that the rate would have fallen if it weren’t for substantial increases in seven states.
“The percentage of loans in foreclosure would be well below the average of the last 10 years were it not for Ohio, Michigan, and Indiana,” Duncan says. “And the rate of foreclosures started nationwide would have fallen were it not for the big jumps in California, Florida, Nevada, and Arizona. Those states have special circumstances that do not reflect what is happening in the rest of the country.”
Seasonally adjusted, 0.58 percent of loans entered the foreclosure process last quarter, compared with 0.54 percent in the fourth quarter of 2006 and 0.41 percent in last year’s first quarter. The rates for the past two quarters are the highest in the survey’s 37-year history.