Dec. 5, 2007: Mortgages: SUV…SIV… what’s the difference?

Dec. 5, 2007: Mortgages: SUV…SIV… what’s the difference? Rob Chrisman

The latest survey showed that three out of four people make up 75% of the population!

Company news:

• Wells Fargo reportedly shut their Dallas wholesale office Monday. They also made a structural pricing change, saying that “nonconforming ARM adjusters will be expanded for FICO scores from 620-679. Previously, these adjusters applied to FICO scores from 620-660, and Interest-Only nonconforming ARMs will be charged .250 for LTVs and CLTVs > 75%. CLTV only applies on loans with subordinate financing.”
• H&R Block said in shutting down Option One’s lending business, it would cut 620 mortgage jobs and close three offices.
• In a news story that was exposed recently, the Directors and Executives of Washington Mutual (WAMU is in the worst shape of the large banks with their capital adequacy ratios below average, their stock down 55%, their dividend questionable, and unknown mortgage-related losses) have changed the deferred compensation plan to allow executives to withdraw lump sum assets in July of 2008. “WAMU is in need of capital and should not be increasing outflows to management”. http://seekingalpha.com/article/55246-wamu-executive-privilege-trumps-shareholder-interests

Hard money lending is booming! Check out http://online.wsj.com/article/SB119681505468613756.html?modgooglenews_wsj “Unlike a traditional mortgage, which is defined largely by credit scores and a borrower’s ability to repay, hard-money mortgages are based almost entirely on the value of the underlying asset. That means a borrower’s income and credit score aren’t nearly as important as they otherwise might be. Hard-money lenders protect themselves by requiring that borrowers have substantial equity in their collateral — either their home, investment property or a business — of 30% to 40% or more. Moreover, interest rates are generally in the low teens, and fees can be as much as 5% of the loan’s value.”

What is the latest on the massive note modification proposals? Besides receiving a tremendous amount of negative press for helping/rewarding delinquent borrowers at the expense of borrowers who are making their payments on time, Federal regulators and U.S. lenders are focusing on five years as the duration of an interest-rate freeze on subprime mortgages. President Bush and Secretary Paulson may announce the plan tomorrow, said two people familiar with negotiations.

More than 30 percent of borrowers with subprime adjustable rate mortgages are behind on their payments before their loans reset higher and 775,000 homes with $143 billion of mortgage debt will go into foreclosure over the next two years, according to estimates from analysts at Credit Suisse.

The market today is off a little after a strong ADP employment number is causing some economists to revise their estimates for Friday’s employment data upward. This higher-than-expected ADP survey, although not an official government number & with somewhat of a spotty prediction record, has moved rates higher (10-yr at 3.95%), stocks higher, and mortgage prices down (worse by .125 versus yesterday afternoon). We did have a 3rd Quarter Productivity number (+6.3%) and Costs (-2.0%) but they had little impact on the market.

SUV’s versus SIV’s? The first is a Sport Utility Vehicle. The second is often mentioned in the financial press recently, and is part of the overall asset-backed commercial paper (ABCP) market, at the center of the liquidity crisis in the capital markets has shrunk by close to 10% in the last two weeks but still measures in the trillions. With the negative headlines around the sector and concerns around mortgage/subprime exposures of conduits, CP (commercial paper) investors are essentially boycotting ABCP paper. Instead, they have been choosing the relative security of non-financial CP or T-Bills instead. One category of conduit is the structured investment vehicles (SIVs). These are “mark-to-market” entities, meaning that mark-to-market losses can cause these structures to unwind – sold.

SIVs are typically offshore companies created by banks and other firms to sell short-term debt to buy mortgage securities and finance company bonds with higher yields. They profit on the spread between the two. Banks such as New York-based Citigroup, which manages $83 billion in SIVs, collect fees for running SIVs while keeping their contents off the bank’s books. SIVs finance themselves by selling asset-backed commercial paper, or short-term loans backed by collateral such as mortgages. The banks have sold SIV paper to their clients, including state officials who oversee pools of taxpayer funds (gulp), but municipal money managers face a dilemma because the credit raters have proved unreliable in grading SIVs and CDOs.

If you ever get the sudden urge to run around naked, you should drink some Windex first.  

It’ll keep you from streaking.