Freddie Mac, in response to the recent credit crunch in the Alt-A mortgage market, released a statement (no link, sorry) regarding its support of Alt-A lending and its intentions to provide liquidity to that segment of the mortgage market.

From the release:

“Freddie Mac continues to be an active force in the Alt-A market and is taking steps to increase liquidity in the Alt-A market while maintaining its commitment to prudently and responsibly manage mortgage credit risk.

“Specifically, Freddie Mac is providing 90-day forward commitment capability on a negotiated basis to experienced lenders with credit terms that will accommodate a majority of the fixed and adjustable rate Alt-A product, including many of the reduced documentation mortgages underwritten with appropriate credit risk offsets that Freddie Mac now purchases on a bulk basis through structured transactions.

“Available credit terms specifically include reduced documentation mortgages under-written with appropriate credit risk offsets.

So let’s take a quick look at this one. Investors are running for the aisles in the Alt-A category as low documentation loans continue to tank in performance and Freddie Mac steps in to provide funding ” specifically [for] reduced documentation mortgages”? That doesn’t make a whole lot of sense to me.

Why would a government entity step in (it?) to take on risks deemed unacceptable to the greater market? I get the point of providing liquidity but Freddie and Fannie are already questionably positioned in terms of risk and this really just is asking for more bad loans to come surging through the doors. IndyMac, Impac and the other Alt-A behemoths must be lobbying extra hard up at the GSE offices.

In my humble estimation the words responsible and reduced documentation are strange bed-fellows don’t you think?

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Immediately.  That’s not a fun way to wake up on a Tuesday morning.  According to Market Watch, Luminent Mortgage Capitial is facing $1.6 billion in demands from 8 lenders who have declared the company in default of its lending agreements.  Surprisingly, shares are getting hammered down 41% today.  More from Market Watch:

 Luminent said the lenders alleged that the company has failed to meet margin calls or repurchase financial assets under these agreements. The lenders are now demanding immediate payment of roughly $1.6 billion, the company also noted in its filing with the Securities and Exchange Commission. That, in turn, caused a default under the indenture relating to $90 million of Luminent’s 8.125% Convertible Senior Notes due 2027. They also triggered a default on the asset-backed commercial paper issued by Luminent Star Funding Statutory Trust I, an affiliate, the company added. The agent for the holders of that commercial paper has demanded immediate payment of roughly $580 million, Luminent said.

Can’t you just hear the Luminent executives?  “Let me just get out my checkbook…who do I make that out to?”

We’ll keep an eye on them.

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How’s this for subprime containment theorists? Impac Mortgage Holdings plans to announce at its upcoming quarterly earnings call a loss of $152.5 million for the most recent quarter compared to $26.4 million in profit a year ago. It made the revelation in their statement regarding the delayed SEC filing of its quarterly 10-Q. A huge hat tip to Housing Wire for being all over this story.

How’d you like to pile up $152.5 million in front of Ben Bernanke and say “Containment? How you like that Containment?”

Impac Mortgage is 100% Alt-A; no subprime here. Just Alt-A loans all day long. We were an Impac correspondent seller and our rep would just push the fact that for Alt-A there was no one better than Impac. Well if there is no one better than Impac which other Alt-A companies are going to report massive losses to Wall Street upon their return from the back of the woodshed?

If I had a dollar for every time some pollyanna dragged the word containment or a version thereof out in some overly-simplified theory of why I’m over reacting I’d have close to … wait for it… $150 million.

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To my feed subscribers - I apologize if you’ve seen a lack of updates lately.  The site has been busy but during the server move the feed from the blog got crossed up at Feedburner. All should be well now.  Thanks for your patience.  - Morgan

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Neither does Lone Star. Lone Star had agreed to purchase Accredited Home Lenders for $400 million but in a recent SEC filing says in intends to back out of the agreement. From Housing Wire:

Lone Star — slated to purchase Accredited for $400 million — filed a statement with the SEC late Friday disclosing that it no longer intends to complete a purchase of the troubled subprime lender. Lone Star’s filing with regulators said that Accredited would fail to satisfy agreed-upon conditions of closing the deal.

I’d say SMART MOVE! Way to get the hell out of there. Why would you spend $400 million on a lender that is essentially tied to the whims of other banks who extend credit? You’re basically buying a middle-man with little to ZERO control over the types of loans it can and can’t make - who has little to no money of its own to lend (no small detail).

Of course, Accredited is kicking and screaming “breach of contract” as this sale may be its last good chance of getting out of this mess alive. (Remember they threw in those two little words “going concern” in to their most recent quarterly filing.)

Not surprisingly, Accredited is fighting back as if the company’s life depended upon it. From a press release issued tonight:

Accredited noted that the Agreement and Plan of Merger with Lone Star expressly provides that changes generally affecting the non-prime industry in which the Company operates which have not disproportionately affected the Company do not provide a basis for Lone Star to not honor its obligations. Accredited said that it intends to hold Lone Star to its obligations, and to hold it fully responsible for any damages caused by its failure to satisfy those obligations.

This should get interesting. I wonder how many more of these deals will fall apart over the coming months as nervous buyers wake up and run for the exits?

UPDATE: Accredited has filed suit against Lone Star for failure to perform on the purchase. From Yahoo! Finance:

Accredited Home Lenders Holding Co. (NASDAQ:LEND - News; “Accredited” or “Company”) announced today that it has filed a lawsuit against Lone Star Fund V (U.S.), L.P. and two of its affiliates (”Lone Star”) seeking specific performance of Lone Star’s obligations to close Lone Star’s tender offer for the outstanding common stock of Accredited and to complete the merger with Accredited.

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Nouriel Roubini, the insightful economist who authors RGE Monitor has put together an article and argument that very clearly states the concerning features of the current asset/credit bubble when compared with the 90’s Long Term Capital Management bankruptcy and subsequent liquidity crisis.  The reason it is so timely is that anyone with any longevity in the mortgage industry can be heard saying “we made it through the 90’s” as some sort of battle scar that somehow qualifies them as more likely to successfully navigate the crunch ahead than the rest of us.  Roubini does an excellent job of showing why such an argument is foolish.  The 90’s and this episode are dissimilar in many ways as outlined in this summary article in the Financial Times.

Roubini argues that the 90’s meltdown in housing and today are dissimilar because the 90’s meltdown was based solely on a lack of liquidity in the market.  This cycle is based not only on illiquidity but also insolvency.  And insolvency (the inability to repay outstanding debt) is the element that makes this cycle a bird of a different feather:

A liquidity problem occurs when a household, firm, country, etc is still solvent, but faces a sudden crisis, where a creditor is unwilling to refinance their claims for example. An insolvent debtor does not only face a liquidity problem, but could not pay the claims upon them over time, even if there were no liquidity problem. One, broadly, suggests sound fundamentals; the other very much not so.

LTCM, says Roubini, was mostly a liquidity crisis:

The US was growing then at 4% plus, the internet bubble had not burst yet, we were in the middle of the “New Economy” productivity boom, households were not financially stretched and corporations were not financially stretched with debt either….

Today we do not have only a liquidity crisis like in 1998; we also have a insolvency/debt crisis among a variety of borrowers that overborrowed excessively during the boom phase of the latest Minsky credit bubble.

The real factors at stake in this unfortunate situation are, says Roubini:

• “You have hundreds of thousands of US households who are insolvent on their mortgages. And this is not just a subprime problem: the same reckless lending practices used in subprime….were used for near prime, Alt-A loans, hybrid prime ARMs, home equity loans, piggyback loans.”
• “You also have lots of insolvent mortgage lenders - not just the 60 plus subprime ones who have gone out of business - but also plenty of near prime and prime ones.”
• “You will also have - soon enough - plenty of insolvent home builders. Many small ones have gone out of business; now it is likely that some of the larger ones will follow in the next few months.”
• “We also have insolvent hedge funds and other funds exposed to subprime and other mortgages.”

The fusion of these factors lack of liquidity and the real threat of insolvency are coming together in a perfect storm as Roubini concludes:

… We are indeed at a “Minsky Moment” and this recent financial turmoil is the beginning of a much more serious and protracted US and global credit crunch. The risks of a systemic crisis are rising: liquidity injections and lender of last resort bail out of insolvent borrowers - however necessary and unavoidable during a liquidity panic - will not work; they will only postpone and exacerbate the eventual and unavoidable insolvencies.

As Aaron Krowne said in our recent podcast interview - “batten down the hatches.”

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My time away from blogging lately has consisted of visiting my wife in the hospital (she’s fine and home now, thank you), coordinating grandparent’s help with our 1 1/2 year old little man, and reading at her bedside. The latter a mix of company for her and rare quiet time for me to dive in to some great books. The book I am currently reading is one whose timing could be no less perfect. It is The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb. I highly recommend purchasing it and reading it.  Please note that as an Amazon Affiliate I do make a small percentage if you choose to purchase this book through the above link.

His book talks about the errors that humans make in viewing the world and events both in corroborating supporting evidence and oversimplifying things - plus a host of other errors that will surely reveal themselves as I conclude this book. It is extremely relevant to the housing fiasco and some of the commentary that we’ve heard from those who continue to postulate that the subprime problem is “contained” and that housing is in for a soft-landing.

Let’s look at a couple of those errors and how they relate to what we’re seeing today:

Corroborative Evidence

Taleb argues that one of our biggest faults as a species is looking for (and accepting) evidence that supports our world view at the expense of the entire body of evidence. He suggests that rather we should look for information that disproves our assumption as a far better method of ascertaining the truth. This plays out daily in the media and on blogs as the “homers” (those in the REIC) point to low rates of foreclosure overall, the stability of home prices and slight reductions in inventories as signs that those of us yelling fire are doing so in a crowded theatre with out reason. Of course the inverse has to be honored as well; that those of us with a pessimistic view need to be alert to signs that maybe an orderly wind-down is, in fact, upon us.

The Narrative Fallacy

We as humans also have a unique habit of over-simplifying things - maybe more than a habit - more likely it is hard-wired in to our DNA; and this causes us to tell each other convincing, simplified stories that allow us to wrap our brains around complex situations. This is clearly what has been happening over the last few years as home prices have continued to rise. Those who have argued that this bubble “is different” from other bubbles use this fallacy to defraud the rest of us. They tell us a simple story of how low unemployment, increased liquidity in capital markets (hah!) and other factors have collided to keep the housing market moving forward-in defiance of other, historical bubbles. It is painfully evident now that the simple storytellers are at best unwitting accomplices - at worst the are much worse.

How is applies to the housing problem:

As the housing, mortgage and now global credit markets unwind it becomes clear that the problems of corroborative evidence and the narrative fallacy have helped push our markets to the point of a violent and precipitous correction; one that is currently ongoing. Those that point to a small percentage of foreclosures or a small percentage of subprime loans are the most guilty. They tell a simple story that paints the problems in to a small, nicely contained corner of the market; where its effects are minimal and that all is right with the world.

It’s a fool’s paradise this version of events. Taleb’s analogy of the turkey who learns that the farmer is a friend bearing food for the first 1,000 days of its life only to go through a “revision of beliefs” on the 1,001 day of its life (the Wednesday before Thanksgiving perhaps?) fits well with the simplified view of the market. For if the events of last week are any indication (with U.S. and European Central Banks “saving the day” with the injection of $200 billion in capital in to the markets - the most since 9/11) this is a much more complex problem. It cannot be explained with a pedestrian statistic sliced to make it look as insignificant as possible. This problem is much more complex; derived from the inter-connectivity of markets, credit, complex and opaque financial vehicles, hedge funds, leverage, Wall Street and main street greed, incompetence, ignorance, arrogance and downright stupidity.

We can continue to tell ourselves the false, simple story of a small, contained problem affecting only a small percentage of homeowners; or we can admit that the evidence we choose is not always as powerful as the evidence we choose to exclude. Further we can admit that the problem is not a simple main street or Wall Street problem; it is an every-street problem that will cause a “Black Swan” event (one so rare that the possibility of its existence is laughable) that will impact our economy and understanding of financial markets and bubbles in ways not yet fathomed. It will rewrite history as a true test of how sound (or fool-hardy) our financial models, matrices and algorithms truly are.

Those that choose the simple story are the ones that will be hurt the most. Read Taleb’s book soon - and stay with me for more of his work and its relationship to this historic time.

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In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. In part 2 of the credit series we looked at the elements that comprise your credit score. Part 3 covered improving your score on your own and outlined the importance of credit management and protecting your credit report. In part 4 examined the pros and cons of using and outside credit repair service.  Our conclusion was that it probably made sense to try to fix credit errors yourself.  In the conclusion of the series we look at the best ways to manage your score and ensure you’ll keep your score heading up, up, up!  Here is a recap of the series so far and where we are at to date:

Credit Series Overview

1. Why credit is so important
2. Understanding elements of credit
3. Improving your score organically
4. Improving your score using 3rd party help
5. Managing your score

The Goal

Over the past four articles we’ve examined credit and how your actions can improve or damage it.  We’ve given you some tools to repair and improve it.  Today we will give you some tips for maintaining your score and improving it.  The main goal of this series is to help people with short-term adjustable rate mortgages improve their credit enough to enable them to refinance in to a better loan when the first rate adjustment date arrives.  This is the best chance you have to avoid the ARM Reset Foreclosure Trap if you are planning on staying in your home.

You can’t control the value of your home, you can’t control the interest rate your loan will reset to when the fixed period ends, you can’t (assumably) pay down your mortgage balance significantly; the one thing you can do is improve your credit.  You do this by managing your score.

Manage Your Score

Managing and improving your score is kind of like exercise.  The more you use it, condition it, and look after it the better and stronger it becomes.  If you go to the gym, eat well, keep track of your weight, caloric intake and improvements at the gym you become healthier and stronger.  Same goes for credit.

Track Your Score

It is important to keep track of your score, its changes and performance and whether it is increasing or decreasing.  The best way that I have found to monitor your score is through myFICO.com’s Score Watch program.  This program monitors your Equifax credit score daily and your FICO score weekly.  It does the work for you.  For about the cost of 2 cups of Starbucks a month you’ll be alerted to any changes to your credit report and score.  This is a valuable service that anyone who wishes to invest in protecting and improving their credit score should use.

I’ve stated through out this series that my wife and I both used the Score Watch program while improving our credit and it helped me add well over 100 points in the last year through proper management and payment history.  Please note again that I am an affiliate of myFICO.com and do get compensated for sales through my site.  However, I have been promoting myFICO.com for over 3 years now and have only recently in the last two months become and affiliate.  It is a great service.

The nice part about this service is that if anything derogatory appears on your credit  you can research and dispute it right away to have it removed.  You can also take a proactive approach to managing your scores.  If you see your scores decline you can look at your report and determine what may be negatively impacting your score.

Proactive Management

Just like anything else of great import in life; it is better to be proactive about your credit score than reactive.  The worst feeling in the world is applying for credit and not knowing if you’ll be approved or not.  Not knowing your score puts you at a disadvantage.  It gives people power to tell you what you do and don’t qualify for.  It puts you at the mercy of people who would try to take advantage of you by your ignorance in this arena.  Know your score.  It is as important as your social security number, and more important than your drivers license number.

Take these steps to actively manage your credit:

1. Sign up for Score Watch from myFICO.com
2. Watch for any changes in your score, positive or negative
3. Maintain a close eye on your credit card balances - keep your balances ideally under 33% of your credit limit and definitely under 50%
4. Always make your mortgage payment - missing a mortgage payment can be the single most devastating thing you can do to negatively impact your credit score
5. Sign up for automatic payments on all revolving accounts - this simple move is guaranteed to improve your score; especially if you have a tendency to be lazy with bill payments
6. Promptly follow up with all disputed items - work quickly to remove erroneous items from your credit report and payment history
7. Get everything in writing - it is extremely important that you keep a written record of any and all disputes you have regarding your report and payment records on your credit report.  Keeping written documentation will help you whenever another party or opinion is needed to settle a credit matter.

If your score is going down

If your score is dropping it is important to obtain a copy of your credit report and ascertain why the score is declining.  Remember your score can be impacted negatively by any of the following:

• Too many inquiries on your credit report
• Balances on revolving accounts of more than 50% of your credit limit
• Reporting of a late payment on your mortgage or other reporting accounts
• Too much debt, for example another car, second home or other large debt item
• Public judgment, tax lien, unpaid parking tickets, etc.

When you review your report take a look at what may be dragging your score down and work to rectify it quickly.  Here are some common ways to rectify a score drop:

• If your score is hit by excess debt it may be because an old mortgage or automobile account is still showing as active even if you’ve already refinanced that old mortgage, or turned in a leased vehicle or sold your old car.  While you no longer have that debt the bureau may count it against you if the account is not properly recorded as closed.
• If you’ve been shopping excessively for items that require a credit inquiry your score will take a temporary hit.  Take a break from running your credit for about 3 to 6 months to allow your score to recuperate.  Too many inquiries make you look desperate for credit - which hurts your score.  Time will clean this up.
• If your balances are getting large it may make sense to open another card and transfer some of the debt to the new card.  This may be effective if you only have one or two cards with high balances.  Having a third may allow you to return your debt levels to under 50% of the credit limits.  This takes discipline however; do not use the new card to rack up additional debt.

Essential Reminders

1. Do not miss a mortgage payment, please.  This is one of the worst things you can do.  There was a study recently that showed Americans are more likely to make their credit card payment than their mortgage payment.  If you are in a short-term adjustable ARM and are planning on refinancing in the next 12-18 months this is a terrible decision.
2. Know what is on your report.  I’ve seen loan applications declined because borrowers didn’t know that their gym membership was reporting on their credit and they neglected to pay their gym dues.  I’ve seen a late library book from a University library shave 30 points of a credit score.  Don’t let trivial items hurt your chances at getting a great loan.
3.  Fight erroneous information. No one is going to clean up your credit report for you with out you being vigilant about keeping it clean and pristine.  Dispute errors quickly and in writing to document your efforts.  Your credit is your responsibility.

Avoiding the ARM Reset Foreclosure Trap

If you refinanced to a high loan-to-value (85% or higher) loan over the last two years; and chose a short-term adjustable rate mortgage in the process - these articles are for you.  Regardless if your loan expires in 6, 12, or 18 months it is important to begin working on your credit now.  The reason is simple.  The combination of falling home prices, rising interest rates and tighter underwriting guidelines will make high loan-to-value loans available only to those with the best credit.  If you are not in that group you will have to deal with the consequences of an ARM Reset and payment adjustment which can be financially devastating.

Work now to avoid that trap.

First time homebuyers

This advice applies to you as well.  By managing your score before you begin the home buying process  you will ensure yourself access to the best rates and loan programs on the market.  The more programs you have to choose from the more manageable owning your first home becomes.

Conculsion

Credit is essential.  Access to credit is a major determinant to your success and quality of life; especially in regards to your home.  Please understand that recent events in the mortgage market make it essential-now more than ever-to improve your score to protect yourself from deleterious changes.  I hope that you are able to use some of these concepts and skills to raise your score.  Using these same skills I personally raised my score over 100 points in two years and 200 points in a little over 3 to put me in the best position possible for my financing needs.  You can do it too.

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Mortgage Market Update Weekend Edition is here! What Angelo Mozilo thinks about the Fed’s move to add liquidity…

Update: I’m an idiot for trying to run out the door and posting this at the same time. For the 70 people that saw the uncut version, I apologize - here it is in its correct format. Peace.

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Will Countrywide be the Titanic of the mortgage industry? Will it be the massive cratering that forces regulators, government and the media to shine a bright light on the lending industry and blow-up and re-write the way business is done in this industry? Is Countrywide the next Enron? Is Angelo Mozilo this decade’s Kenneth Lay? Will the rapid unwinding of the secondary market mechanism leave them no option but to go belly-up?
Countrywide filed its quarterly 10-Q statement with the SEC and while the mainstream media was following the run on European banks the company slipped some disturbing news in to its report. Here are the highlights:Risk Factors

Item 1A of our 2006 Annual Report presents risk factors that may impact the Company’s future results. In light of recent developments in the mortgage, housing and secondary markets, those risk factors are supplemented by the following risk factor:

Debt and secondary mortgage market conditions could have a material adverse impact on our earnings and financial condition

We have significant financing needs that we meet through the capital markets, including the debt and secondary mortgage markets. These markets are currently experiencing unprecedented disruptions, which could have an adverse impact on the Company’s earnings and financial condition, particularly in the short term.

Current conditions in the debt markets include reduced liquidity and increased credit risk premiums for certain market participants. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future. The Company attempts to mitigate the impact of debt market disruptions by obtaining adequate committed and uncommitted facilities from a variety of reliable sources. There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate or that the cost of debt will allow us to operate at profitable levels. The Company’s cost of debt is also dependent on its maintaining investment-grade credit ratings. Since the Company is highly dependent on the availability of credit to finance its operations, disruptions in the debt markets or a reduction in our credit ratings, could have an adverse impact on our earnings and financial condition, particularly in the short term.

The secondary mortgage markets are also currently experiencing unprecedented disruptions resulting from reduced investor demand for mortgage loans and mortgage-backed securities and increased investor yield requirements for those loans and securities. These conditions may continue or worsen in the future. In light of current conditions, we expect to retain a larger portion of mortgage loans and mortgage-backed securities than we would in other environments. While our capital and liquidity positions are currently strong and we believe we have sufficient capacity to hold additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate, our capacity to retain mortgage loans and mortgage backed securities is not unlimited. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition.

While this isn’t groundbreaking (we’ve heard this from everyone else) it is just another sign that Countrywide is really not that much different from everyone else. They do have a depository arm in Countrywide Bank which should help (some) but they fund so many loans and rely on investor purchases to such an extent that their deposits could not even come close to keeping up with the funding requirements of the mortgage lending group.

Without the capital markets these mortgage lenders are all screwed. If liquidity and investor confidence does not return quickly to these markets the major depositories will be the only ones that will get out alive.

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