Countrywide sent out a notice today that as of the 19th of November any loan that is requested as an interest only loan must still be qualified at the full monthly payment for debt to income purposes.  This is a major blow for many people living in high-cost areas who used interest only loans to qualify for larger loan amounts (even on fixed loans).  This removes another option for people in over their heads on adjustable rate mortgages who were using fixed-rate interest only loans as an escape route out of exploding adjustable rate mortgages.

This single handedly will increase the speed of price declines in areas like California where interest only loans and other exotic mortgages make up more than 40% of the total loans written on real estate in the area.

Here’s the email:

To all business partners.

–> As of the 11/19/2007 we will not longer be qualifying off IO payments on IO first trust deeds.
–> DTI’s calculated on IO payments must be locked and fully underwritten and approved by the 19th and fund under the lock date.
–>There will be no extensions on locks after the 19th in regards to DTI being an issue.
–>There will be no exceptions to this policy. 

What’s next?  Oh wait - look for the next post on WaMu.

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Hat tip Chris, who sent me this Reuters article that highlights the rampant fraud that took place within the mortgage industry as a result of the recent housing boom.  The story highlights the fate of a particular downtown Miami condominium building where nearly 1/3 of the building 640+ condos are now in foreclosure.  The reason?  Straw-buying, cash out at close, mortgage loans that have been abandoned.

First, a primer on how these cash out at close deals work with a straw buyer.  First, you find someone with great credit who is willing to go on the loan in exchange for some money (say $5-10K).  Then you have an appraiser inflate the value of the property as much as possible so that the loan size is as big as possible.  Then you buy the property for the actual listing price and pocket the difference.  Finally, you pay the straw buyer, and then walk away.  The money in your pocket, the unit empty, the loan unpaid, and the time to start all over again.

As the head of funding in our mortgage banking operation is was my job to watch out for these types (and other) schemes that could send a loan repurchase back our way.  I’m sure most banks will tell you that these loans come in from shady brokers, which is probably true; but I am sure a fair deal went through the retail channel as well.

From the article:

“It’s an epidemic,” said Nancy Hogan, a veteran realtor and former head of the Florida Real Estate Commission.

“The cash back, the fraud for profit, is what has been so rampant,” she said.

Florida leads the nation when it comes to mortgage fraud, according to the Virginia-based Mortgage Asset Research Institute, a group that works closely with the U.S. Mortgage Bankers Association.

Ken Thomas, a Miami-based banking expert and lecturer at the Wharton School at the University of Pennsylvania in Philadelphia, said there was little surprise Florida led the country in mortgage fraud.

It stems, at least in part, in the way lenders plowed “easy money” into the local condo market before Florida’s recent housing boom turned to bust, Thomas told Reuters.

“We’re going to see a lot more of this fraud being exposed, especially as these units go into foreclosure,” Thomas said.

“We were the poster child of the housing bubble … maybe we should have expected more of this.”

While subprime lending is going to take its share of foreclosures watch for the Alt-A segment especially in Florida, Vegas, California and other over-heated condo markets to see similar action.  Cash back at close is what fueled Casey Serin’s run and many other ‘investors’ businesses.  When the merry-go-round stopped many of them just walked away.  We’ll be hearing a lot more about this as these properties fall in to foreclosure.

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The Implode-O-Meter is reporting a vicious, but oft-repeated, rumor that Countrywide is shuttering its Specialty Lending Division nationwide.  You can read more about it if you’re an Implode-O-Meter premium subscriber.  I can’t confirm this, although it wouldn’t be out-of-line with Countrywide’s proposed layoffs and Mozilo’s very public proclamation that Countrywide is out of subprime.

If you’ve been affected or know any more about this please leave a comment or let me know.

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Nova Star today reported nearly $600 million in losses for the 3rd quarter due to the deteriorating mortgage environment said representatives of the much beleaguered subprime originator.

From Market Watch:

NovaStar has been hit hard by rising delinquencies on subprime mortgages, which are offered to less creditworthy borrowers. It was a top-20 subprime mortgage lender last year, originating more than $10 billion in loans, according to industry publication Inside Mortgage Finance. The company has lost more than 95% of its market value so far this year.

NovaStar said on Wednesday that subprime lending fundamentals and the secondary mortgage market have continued to deteriorate.

“As the mortgage environment has grown progressively worse through 2007, we have greatly reduced our business activity and simplified our organization,” NovaStar Chief Executive Scott Hartman said in a statement. “Going forward, our strategy is to manage the cash flows from our portfolio of mortgage-backed securities and operate our retail brokerage operations.”

We’ve detailed the painfully slow death of Nova Star here in the past, and one has to wonder how much blood this stone has left in it?  Just to boot their shares are most-likely going to be delisted from the NYSE; an announcement on the determination is scheduled for December 5th.

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Filed under: Other issues, Google (GOOG), Marketing and advertising, Market matters

Google, Inc. (NASDAQ: GOOG) continues to be a high-flying stock, closing yesterday at $641.68. While some think Google will reach $1,000 per share in the near future, some aren’t sure. With “growing signs that the U.S. economy may be headed for a downturn,” can Google keep up its magnificent pace as a growth stock and a company known for ever-growing quarterly revenues?

Google’s business model could actually be helped by an economic downturn. The company is in a position to weather conditions that would make many industries swoon, and that’s by design. By being a virtual company, you can imagine the layers of insulation Google has from nastiness in the economy. No physical inventory, no product cycles, no commodities, etc. Must be nice.

But if advertisers lessen their spending during times of financial crises, Google could get hit. Its network completely relies on advertisers and little else at this time. This is where the difference between graphic and text ads show up — those Google text ads are displayed while customers are actively engaged (at least, partially) in searching for a product or service.

Though Google’s graphic ads are threatening the revenue base of television networks and other types of media, advertisers still want to value for their money. If advertisers start to think Google ads are losing their effectiveness,
the stock is not headed to $1,000 anytime soon.

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Filed under: Before the bell, Analyst reports, Analyst upgrades and downgrades, Deals, Google (GOOG), Microsoft (MSFT), Starbucks (SBUX), International Business Machines (IBM), Citigroup Inc. (C), Penney (J.C.) (JCP), Merrill Lynch (MER), Kohl’s Corp (KSS), Intuit Inc (INTU), Kraft Foods’A’ (KFT), Bear Stearns Cos (BSC)

Before the bell: Futures lower ahead of CPI, after AMAT

Standard & Poor’s lowered the credit rating on Bear Stearns (NYSE: BSC) to A from A+, saying the outlook is negative.

Earnings season rolls on with results from J.C. Penney (NYSE: JCP) - $1.01 per share expected, Kohl’s Corp. (NYSE: KSS) - 60 cents per shares expected, Intuit (NASDAQ: INTU) - 12 cents per share, Starbucks (NASDAQ: SBUX) - 21 cents per share expected.

Merrill Lynch (NYSE: MER) confirmed yesterday the appointment of NYSE Euronext Chief Executive John Thain as its new CEO. MER shares are up nearly 1% in premarket trading after analysts wrote favorably of the appointment. Credit Suisse analyst Susan Roth Katzke upgraded Merrill to Outperform from Neutral. Sandler O’Neill & Partners LP analyst Jeff Harte also said Thain is “the right man for the job.”
Citigroup Inc. (NYSE: C) still looking for its next leader.

TheStreet.com takes a long, hard look at Google Inc. (NASDAQ: GOOG), trying to decide whether it is recession proof.
IBM (NYSE: IBM) announced Wednesday it has a new initiative, staking out a major new source of business helping clients like banks or retailers manage data centers on a par with Internet players such as Google or Microsoft.

eWeek.com brings a research from Forrester calling desktop Linux a credible threat to Microsoft Corp.’s (NASDAQ: MSFT) Windows.

Private-label cereal maker Ralcorp Holdings Inc. (NYSE: RAH) will purchase Kraft Foods Inc.’s (NYSE: KFT) Post cereals unit. The deal includes stock valued at $1.65 billion (€1.12 billion) and that Ralcorp will also assume $950 million (€646.26 million) in debt, making the total deal worth about $2.6 billion.

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Filed under: Before the bell, After the bell, Earnings reports, Bad news, Competitive strategy

JCPenney (NYSE: JCP) said this morning that its net income in the third-quarter dropped 9% to $261 million, or $1.17 per share, the first profit decline in three quarters. Excluding a 14-cent tax credit, earnings totaled $1.03 per share, above analysts’ expected $1.01 per share (though well below the retailer’s earlier outlook of $1.28 per share). Last month, the company reduced its third-quarter outlook to a range of $1.00 to $1.04 per share (excluding the tax-credit item).

Sales fell 1.1% to $4.73 billion, as same-store sales dropped 3.5%. Gross margin was down 1.8 percentage points to 39.7%. During the period, the company slashed prices to reduce inventory. Calendar shifts also had a negative impact, as the 2006 third quarter had an extra week’s worth of sales. Bloomberg quoted CEO Myron Ullman as noting, “We were disappointed to see sales weaken dramatically in September and October.” Like many retailers that posted lackluster sales results last month, JCPenny cited unseasonably warm weather and rising fuel costs, which have crimped consumers.

Continue reading Bad news all inside JCPenney for 3Q earnings, outlook

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Filed under: Law, Rants and raves, Rich in America, Politics, Headline news

In testimony to congress, Warren Buffett expressed his opinion that the inheritance taxes were meant to recirculate accumulated great wealth and that repealing them would support an undesirable “aristocratic dynasty of wealth.”

Republican arguments in favor of repealing the so called “death tax,” permanently, mention two concepts they think are unfair. One is that the money has already been taxed and the other is that to satisfy inheritance tax requirements, heirs are forced to break up family businesses or farms and sell assets at what might not be an appropriate time or fair value.

The idea that our earnings are taxed more than one time is pretty weak to me. First of all, we are not taxing the one that earned it (they’re dead), we’re taxing the heirs who did not earn it. Besides, most money is taxed every time it changes hands. It is taxed when earned, when you buy or sell something, when you win the lottery, gamble or make money on a game show, receive a large gift and more. Using gift taxes as the most similar — are not the heirs receiving a large gift?

Continue reading Buffett wants a tax increase, not an aristocracy

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Filed under: Analyst upgrades and downgrades, Nokia Corp. (NOK), QUALCOMM Inc (QCOM)

MOST NOTEWORTHY: Sierra Wireless, Navteq, Goldleaf Financial, Infineon and VeriSign were today’s noteworthy downgrades:

• Piper downgraded shares of Sierra Wireless (NASDAQ: SWIR) to Market Perform from Outperform to reflect increasing competition for the company’s core businesses and longer term margin concerns. Based on comments from Qualcomm (NASDAQ: QCOM), Piper believes the new Gobi embedded solution is gaining more traction than previously anticipated.
• The firm also downgraded Navteq (NYSE: NVT) to Market Perform from Outperform as they believe the Nokia (NYSE: NOK) acquisition will close.
• Credit Suisse lowered its rating on Goldleaf Financial (NASDAQ: GFSI) to Market Perform from Outperform following its weak Q3 report and guidance.
• ABN Amro downgraded shares of Infineon (NYSE: IFX) to Hold from Buy as they believe the strength of the euro will hurt margins.
• VeriSign (NASDAQ: VRSN) was downgraded to Hold from Buy at Hambrecht to reflect the uncertainty surrounding the company’s numerous divestitures as well as the execution risk.

OTHER DOWNGRADES:

• JP Morgan removed Pilgrim’s Pride (NYSE: PPC) from its Focus List.
• Bear Stearns downgraded European Pharmaceuticals to Market Weight from Market Overweight.
• Wachovia downgraded AmeriGas Partners (NYSE: APU), Exelon (NYSE: EXC) and FPL Group (NYSE: FPL) to Market Perform from Outperform.

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Filed under: Goldman Sachs Group (GS), Lehman Br Holdings (LEH), Blackstone Group L.P (BX), Initial public offerings

Just imagine if hedge fund giant Och-Ziff (NYSE: OZM) went public earlier this year. It certainly would have been a stellar performer. Unfortunately, the public offering came Wednesday with the stock falling 4.2% to $30.65.

Ironically, Och-Ziff seems well-positioned for the volatile markets. Since 1994, the CEO of the firm, Daniel Och, has built a global franchise that spans the markets in the US, Asia and Europe. What’s more, he has taken a multi-strategy approach, which involves merger arb, convertible arb, equity restructuring, distressed credit investments and so on.

More importantly, Och-Ziff is a big believer in strong risk management. In fact, this was a key for the firm’s strong performance in 2001-2002.

As a result, Och-Ziff has picked up a large amount of assets (the current amount is about $30 billion). In fact, the mega sovereign fund, Dubai International Capital, agreed to invest $1.15 billion in the firm.

With the awful performances of the IPOs of Blackstone (NYSE: BX) and Fortress (NYSE: FIG), it was no surprise that Wall Street was lukewarm on Och-Ziff. Taking the long view on things, however, the growth prospects look promising as major investors seek out diversified alternative asset managers.

The lead underwriters on the Och-Ziff deal include Goldman Sachs (NYSE: GS) and Lehman Brothers (NYSE: LEH).

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements.

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