Countrywide Settles Suit But Admits No Wrongdoing; How Secondary Prices Loans; Earnings from PHH, Radian, Ally;
If, as a kid, I had ever been caught cheating my younger cousin during Monopoly, I would have been in big trouble. Perhaps I could have countered, "I deny all allegations of wrongdoing and any liability under the Monopoly rules. But I will give him some money to avoid the additional time, hassle, and uncertainty associated with arguing about it."
For Countrywide, a judge has approved a $600 million settlement with shareholders. "Countrywide denies all allegations of wrongdoing and any liability under the federal securities laws," said Shirley Norton, a spokeswoman for Bank of America. "We agreed to the settlement to avoid the additional expense and uncertainty associated with continued litigation."
BofA will pony up $600 million, and KPMG, Countrywide's accounting firm, will pay $24 million. The agreement stands to return about 40 cents per share of Countrywide's common stock, before legal fees and expenses of $56 million (4 cents per share) - so if you had 100 shares and rode the stock down from its peak in early 2007 from $45 per share, you'll be receiving $40 for an investment that was once worth $4,500. Granted, shareholders do have some BofA stock now, and it has been on the rise. The settlement does not end the legal problems, since the Securities and Exchange Commission brought civil fraud charges against Angelo Mozilo and the two other former executives.
Shopping math dictates that a man will pay $20 for a $10 item he needs, but a woman will pay $10 for a $20 item that she doesn't need. How does the average "Secondary guy" price loans? Some use a larger investor's rate sheet - usually the "best efforts" category - and add whatever profit margin the president wants.
Let's say that mark-up is 50 basis points. When the loan funds, sometimes the secondary dude sells the loan under a mandatory execution, which let's say is 50bps better than best efforts. And why shouldn't he, given that the loan is funded and there is no risk of it falling out? But as any hedging firm will tell you, pricing a loan to a best efforts price and selling it under a mandatory price can be misleading from a pP&L viewpoint. Internal profit margins can be set, but the difference between the best efforts and mandatory pricing, which the Secondary guy may have been counting on, changes on a daily basis and changes between investors. So be careful when expecting or quoting future margins to the management team unless you're 100% sure that the margin is locked in and hedged appropriately. (More on this in coming days, including how large investors price.)
Yesterday $2 billion of MBS's traded hands, with over 10% being 3.5% Fannie's. Which leads to the question, "What is a 'short squeeze'?" With any security, where the investor has purchased them from a seller but when it comes time for the seller to deliver the loans that make up the security the seller doesn't have them, that results in a "short squeeze". The event usually happens in non-liquid instruments, which is why most pipeline hedging takes place in very liquid, vanilla instruments (Fannie 4's), rather than in securities where liquidity may be an issue (Fannie 3.5's). In a short squeeze, the price will often go up for no other reason than the demand is much higher than the supply, if the investor can even "find the bonds" to offer them back.
It is Wednesday, which means one week has passed since the last MBA applications numbers flashed. Today we have a new one. Apps last week were up a little over 1% from the week before, not much of a change but still it is the 3rd week in a row for increases. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 0.3 percent. Purchase apps were +1.5%.
PHH reported a wider loss of $133 million (up from $106 million) due to an unfavorable mark-to-market mortgage servicing rights adjustment of $273 million. Core earnings came in at $52 million, up 85% from $28 million in the year-ago quarter, which is good news - core mortgage results more than doubled, which the company attributed to strong purchase volumes, increasing margins and lower servicing run offs.
Ally Financial reported $565m net income in Q210, compared to a $3.9bn net loss in the year-ago quarter, partly due to improved mortgage operations. Its mortgage operations (including ResCap, Ally Bank, and ResMor Trust) posted $230m pre-tax Q210 income, improved from a $156m pre-tax income in the previous quarter and a $1.3bn pre-tax loss in the year-ago quarter. Ally attributed the gain in income to improved performance in the origination and servicing business, lower operating expenses and gains on the sale of legacy mortgage assets. Additionally, loan loss provision and repurchase reserve expenses were significantly lower from the corresponding period one year earlier.
Radian, the second-biggest U.S. mortgage insurer, reported a loss for the 2nd quarter of $475 million, worse than expected. It compares unfavorably with a profit of $232 million a year ago. The news drove down stock prices of all the public MI companies, and follows PMI's loss of $151 million reported last week as claims paid on U.S. mortgages more than doubled in the three months ended in June.
Starting today, ING is improving its IO adjustment, lowering it from a .5 hit to the interest rate down to .375.
The folks in the news seem very concerned with next week's Fed meeting, since the economic recovery seems to be faltering. As always, mortgage originators want the best of both worlds: low interest rates (which usually come from a slow economy), yet an expanding economy where salaries and property values are increasing. Sometimes you can't have both! Anyway, back to the topic - there is conjecture about what the government will do with all of the cash that is coming in from maturing asset holdings, or mortgages that are paying off early. The Central Bank's portfolio stands at $2.3 trillion. (The Fed's mortgage holdings inched down from $1.129 trillion in mid-July to $1.117 trillion at month's end, mostly due to refinancing.) Will the money go into the MBS and Treasury markets, keeping their portfolio from shrinking (policy tightening) at a time when the economy is wavering? Practically every MBS out there is trading at a premium - only 3.5%'s are below par - so is the only place for these to go (in price) is down? Any change in strategy would indicate a deepening concern about the economic outlook. If the Fed's forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy. There is general agreement that it will depend on economic news as it comes out. It is doubtful that Fed officials will resume outright, large-scale, purchases of MBS's - if a person can't refi now out of their 5.5% loan due to underwriting issues or property values, will lower rates make any difference? And buying more would burden the Fed with an even larger portfolio to unwind later. READ THE FULL STORY
Yesterday we learned that the NAR Pending Home Sales index declined 2.6% in June. (The PHSI was down in the Northwest, Midwest and West, and rose in the South.) The NAR economist said that lower home sales are expected in the short term, but that some local markets continue to show strengthening prices. We also learned that Factory Orders declined by 1.2%, weaker than forecast. The decline was led by a slump in orders for construction machinery, which fell 23.2% from May. Our 10-yr Treasury note closed at 2.91%, a nice rally due mostly to conjecture about the Fed discussing buying more fixed-income paper, and mortgage security prices gained back the .250 they lost on Monday - woe to anyone who locked on Monday and could have waited until Tuesday - or even today. Whether or not the price improvement was passed on by investors remains to be seen. READ MORE ABOUT WHAT IS MOVING MORTGAGE RATES
But that was yesterday - what about today? This morning the ADP employment data (not always directly correlated to the employment data that comes out Friday) came out as expected at +42,000. So this probably won't change anyone's estimate for Friday's Nonfarm Payroll number, expected to be +90k. We will have the ISM Non-Manufacturing Index for July at 7AM PST, expected to show a slight decline, and the announcement for next week's auctions. They are all new issues, no re-openings look for $34 billion of 3-yr on Aug 10th, $24 billion of 10s on the 11th, and $16 billion 30-yr bonds on the 12th.
A cowboy from Laramie, Wyoming, walked into a bank in New York City and asked for the loan officer. He told the loan officer that he was going to Paris for an international rodeo for two weeks and needed to borrow $5,000 and that he was not a depositor of the bank.
The bank officer told him that the bank would need some form of security for the loan, so the cowboy handed over the keys to a new Ferrari. The car was parked on the street in front of the bank. The Cowboy produced the title and everything checked out. The loan officer agreed to hold the car as collateral for the loan and apologized for having to charge 12% interest.
Later, the bank's president and its officers all enjoyed a good laugh at the cowboy from Wyoming for using a $250,000 Ferrari as collateral for a $5,000 loan. An employee of the bank then drove the Ferrari into the bank's private underground garage and parked it.
Two weeks later, the cowboy returned, repaid the $5,000 and the interest of $23.07.
The loan officer said, "Sir, we are very happy to have had your business, and this transaction has worked out very nicely, but we are a little puzzled. While you were away, we checked you out on Dunn & Bradstreet and found that you are a highly sophisticated investor and multimillionaire with real estate and financial interests all over the world. Your investments include a large number of wind turbines around Laramie. What puzzles us is - why would you bother to borrow $5,000?"
The good 'ole Wyoming boy replied, "Where else in New York City can I park my car for two weeks for only $23.07 and expect it to be there when I return?"
Don't mess with cowboys.