More ‘Other Than Temporary’ MBS Losses At FBR
Wall Street is focused on a non-event. “‘The Rudman report does a very good job at laying bare the earnings-at-any-cost culture that had developed over many years at Fannie Mae,’ Treasury Undersecretary for Domestic Finance Randal Quarles said. The portfolio should be cut back to reduce risks to the U.S. financial system, he added.”
But this story has stayed out of the spotlight. “Investment bank Friedman, Billings, Ramsey Group Inc. said on it swung to a fourth-quarter loss, hurt by write-downs in its portfolio of mortgage securities. The company posted a fourth-quarter loss of $271.6 million, compared with earnings of $86.6 million a year earlier.”
“The mortgage-backed securities (MBS) and merchant banking portfolio write downs and losses realized during the fourth quarter of 2005 totaled $261.6 million. Included in that figure were: $180.1 million in write-downs, net of hedging gains, of mortgage-backed securities, $7.0 million of realized losses on sales of mortgage-backed securities, and $74.5 million recognized in the write-down of nine equity investments to reflect ‘other than temporary’ impairments in the firm’s merchant banking portfolio.”
“‘There is no question that 2005 was a difficult and disappointing year in many respects,’ said Eric F. Billings, CEO. The adverse interest rate climate contributed to the difficult environment for non-conforming mortgage lenders in the fourth quarter. The compression between funding costs and coupons in the non-conforming mortgage business continued until late in the year, leading to deteriorating sale prices for mortgage originators throughout the fourth quarter.”
“Nonetheless, the environment remains challenging in the gain-on-sale business. FNLC is taking the necessary steps to quickly return to profitability, including headcount reductions in many areas and other cost reductions throughout its origination business, while continuing to serve its broad base of mortgage brokers and retail customers. For the full year, FNLC originated a record $6.0 billion in mortgages, an increase of 81% over 2004.”
Methinks this is only the tip of the iceberg…
Rudman was hired by Fannies board to investigate itself. This has been played to look like it was a congressional effort.
If one of the most prominent MBS players can’t make money while increasing business 70%+, what of the lower rung guys?
What of all the 401(K) plan participants (like my sister) whose “safest” fund choices are loaded up with Fannie Mae MBS?
The “safest” MBS securities get priority, so the riskier and higher yielding MBS paper will lose out first. Even in FNM fails altogether the paper backing it will still be there and the bond holders will likely get most of their money back as long as most people keep paying their mortgages. Even though house “prices” are way out of wack, there are still a lot of mortgages written against more sane house valuations.
It sure does illustrate, though, why it’s better to pay off you own debts before lending the money to others. Which begs another question: If 401k and IRAs are so good why is our savings rate lower now then when those programs never existed?
Partly because our incomes are lower, and partly because, unlike defined benefit pension plans, 401(K)s are discretionary — you have to elect to delay gratification and assume the risk of long-term asset accumulation. Many would rather buy toys now than sock away savings for the future. And many others simply cannot afford to “keep up with the Joneses” (that is, create the appearance of material wealth) while also saving. Finally, the go-go 90s created a “gambling-is-good” mentality which has not yet left the collective psychee, thanks in part to eighteen years of Greenspan puts (”over the long-term, stocks and houses always go up in value”). This was embodied in serial bailouts through liquidity injections, beginning in October 1987 and continuing through the period of negative real Fed Funds rates in the wake of the .com collapse and 9-11-01.
I’ve been advising people to dump all fannie mae, freddie mac, and other GSE holdings, and be wary of your 401ks and pension funds which include these. Pension funds are insured by the gov’t, but not 401(k)s. Better to be in CDs or stocks for now, until we know how deep Fannie’s problems are.
Rumor has it that Option laid off 600+ workers today. Can anyone confirm this?
FYI- HRB just warned on earnings after hours and said they’re cutting jobs. Not sure if all at Option One, but here’s the news item…
Here’s a snippet:
As part of their continuing efforts to improve cost structures and streamline processes, Option One and H&R Block Mortgage are consolidating a number of operations to better compete in the aggressive operating environment that has developed over the past year. These actions include consolidation of Option One branch offices and, within H&R Block Mortgage, the closing of small financial centers and consolidation of regional call centers. The actions will reduce staffing by about 600 positions and result in a pretax charge of approximately $10 million to $12 million to be recorded in the fourth quarter of fiscal 2006.
Link: http://biz.yahoo.com/bw/060223/20060223005898.html?.v=1
FROM SOCAL MORT GUY’S SITE. WANTED TO SHARE WITH MORE FOLKS. LET’S ENCOURAGE THE REALTOR.
you wanna see what $419,000 gets you in Bayonne, NJ?
looky here: http://tinyurl.com/khcd2
you think it looks bad in a photo? I walk by this crumbling pile of shit twice a day. it’s an insult to the eyes. it needs about 100,000 worth of reno.
Bayonne is full of old shitboxes like this. there’s lots of nice houses too, but the city’s housing stock is close to 100 years old and there’s no more land as we’re on a peninsula (not counting the toxic industrial area to the south-east, and who wants to live next to an oil refinery anyway). mitigating factors: cheaper than Hoboken/Jersey City, 30 minutes to lower Manhattan or 33rd/6th.
I realized tonight that it’s had a for-sale sign in front since I moved here last June.
Thanks for the picture of that NJ $hitbox. I couldn’t help but make a comment to the realtor that it was ugly and overpriced. How about all of us flooding the realt whore with such comments. I am sure it will make his day.
This whole house of cards in CA is going to end badly for a lot of folks. No sympathy for flippers and stupid investors. Some sympathy for the uneducated who were encouraged to buy something that the realtor/mort broker, etc knew they couldn’t afford. Some people belong in hell for what they have done to some people.
” This mid-town one family is a “work in progress”. Interior renovation is top notch and must be seen.”
sounds like a flipper got in way over his head and realized, after he did a lot of work on the interior, that the exterior needs a ton of work too!
on the plus side, you could start up your own little crack/meth business in that driveway area
Does it come with the car on the lawn?
If you can call a wrecking ball “my own signature,” then I could put my own signature all over that lovely home.
Subprime is just going to get wasted this year. With what’s been happening in the rates and yield curve, their profit margins have dwindled big time. Big problem for these guys is so many new subprime lenders have been added in the last couple of years has greatly increased competetion among themselves, thus making it difficult to raise their rates, and therefore profits. Also, many of them are aware that with where we are in the market, they can’t raise their rates much more and keep their loan products looking attractive. That being said, something is going to have to give real soon in the subprime market. They can’t keep operating much longer with where they’re at now.
Keep in mind this is where the majority of the 100% - 105% financing comes from. In my opinion, it’s subprime with it’s tireless pursuit for higher and higher risk loan programs, that has kept the bubble alive when it should have died long ago. If these guys suffer a big shake-up, which they will, the bubble dies all the quicker.
It raises the question, as rates have gone up, why don’t they raise mortgage %’s accordingly? Other than competition, IMO they realize that those of lesser credit can’t qualify for most homes in the bubble markets, were that to happen. It’s a dead-end street and the financial media has largely missed it.
A couple more rate hikes will spell the end for a lot of these guys by squeezing out that last bit of profit. (Bill Gross of PIMCO contiunues to put his spin on all of this, perhaps because he holds so much of this garbage)
A lot in my industry have taken comfort in the fact that the rate hikes haven’t affected the benchmark 10yr too adversly, thus keeping long term fixed rates relatively low. What they don’t understand is what we have explained here. (although I find it funny they take comfort in long term fixed rates being low when no one has been interested in the 30yr or 15yr products for some time now. It’s all been toxic crap for some time now. Besides, no one qualified for the 30yr fixed when it was 5.5%, let alone the 6.25% it is today.)
Who is left holding these mortgages? Eventually they will figure it out, and then not buy them from the mortgage loan companies. Until that happens, and as long as the originators can sell the loans, they will continue to market aggressively.
Translation: “We lose money on every mortgage we originate, but we’re making it up in volume!”
U.S. home affordability index falls to record low
Print | | Disable live quotes By Rex Nutting
Last Update: 1:14 PM ET Feb 23, 2006
WASHINGTON (MarketWatch) — More potential homeowners are being priced out of the housing market. The home opportunity index fell to record low 41.0 in the fourth quarter, meaning that families with the median household income could qualify to buy just 41% of the homes sold during the quarter, the National Association of Home Builders said Thursday. In the third quarter, the home affordability index was at 43.2; a year ago it was 52.0. The most affordable market was Indianapolis, where families with the median income could afford 88.7% of homes sold. In Los Angeles, the median income qualified buyers for just 2.3% of the homes sold.
“Included in that figure were: $180.1 million in write-downs, net of hedging gains, of mortgage-backed securities, $7.0 million of realized losses on sales of mortgage-backed securities, and $74.5 million recognized in the write-down of nine equity investments to reflect ‘other than temporary’ impairments in the firm’s merchant banking portfolio.””
can someone translate and explain how this happens? how do you lose money on an MBS deal?
wow, don’t tell washington they’ll create more gov free sht programs- the community banking bill has alot to do with where we are headed =bk
Raines will still get 100k a month for life- good pay for a gov clerk
If I understand it correctly this bubbles up to the consolidators and will infect a huge default swap market?
If I’m getting this wrong please tell me how… I don’t have a background in finance, just what I can piece together from the outrageously horrible business reporting we get.
Table 15 in the First American report tells the tale.
http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf
And the reports that I’ve been putting up on my blog, point to much weaker pricing. See springhopemania:
http://www.xanga.com/russwinter
I think the market may be down 10% from last summer (the basis of the FA report). So if we assume the market is down or soon will be off 10%, here’s what the three colors look like in the 2004-2005 cohorts:
red (high reset sensitivity) 430.5 billion:
no equity: 34% or 146.4 billion
neg 5% equity: 25% or 107.5 billion
neg 10% equity: 18% or 77.5 billion
yellow (medium reset sensitivity) 820.0 billion:
no equity: 39% or 319.8 billion
neg 5%: 29% or 237.8 billion
neg 10%: 21% or 177.2 billion
orange (subprime, supposedly small reset sensitivity) 637.5 billion
no equity: 49% or 312.4 billion
neg 5%: 39% or 248.6 billion
neg 10%: 30% or 191.3 billion
The FA report just skips over the 2003 cohort but 20% of that group has no equity either. 16-18% of 2000, 2001 and 2002 don’t either. But just taking all colors of the 2004 and 2005 with no equity, I come up with $778.6 billion, and $446 billion of those have negative 10% equity. Add the 03’s and you’re talking about a trillion in loans without equity, and really that’s conservative as just leaves out all the earlier years. Think there are plenty of default, short sale and REO candidates to weigh on an already weak market? And we haven’t even seen any credit spread widening or “normalization” yet, indeed it’s even narrower. Financial commercial paper is being treated as the same risk as T-bills, and two year agencies are only 21 bp above Treasuries, really unbelievable.
OCDevil, do you mean “Option One”? Where did you hear this?
Sorry I did mean Option One. It is just a rumor. I saw some messages posted on the NEW and HRB message board on Yahoo. HRB did close a mortgage shop in Philly so it may be true. HRB announces earnings after the close today so they may disclose something then.
As part of their continuing efforts to improve cost structures and streamline processes, Option One and H&R Block Mortgage are consolidating a number of operations to better compete in the aggressive operating environment that has developed over the past year. These actions include consolidation of Option One branch offices and, within H&R Block Mortgage, the closing of small financial centers and consolidation of regional call centers. The actions will reduce staffing by about 600 positions
Shhhhh… be vewwy vewwy quiet…
I’m sewwwing mortgage backed secuwwiteeez…