Oct. 23, 2007: Mortgages: CW to the rescue, and what the heck is a MLEC?

Oct. 23, 2007: Mortgages: CW to the rescue, and what the heck is a MLEC? Rob Chrisman

According to a news story in Bloomberg, Countrywide plans to refinance or restructure as much as $16 billion of debt for home buyers facing higher payments on adjustable-rate mortgages before the end of 2008. Countrywide has already refinanced $5 billion of loans and plans to contact 52,000 subprime borrowers with $10 billion of debt to offer new loans. It may modify terms on as much as $6.2 billion of mortgages for borrowers ineligible for refinancing. “Countrywide believes that none of our subprime borrowers that have demonstrated the ability to make payments should lose their home to foreclosure solely as a result of a rate reset,” David Sambol, the company’s president and chief operating officer, said in the statement.

The $80 billion fund created last week by Bank of America, J.P. Morgan Chase, and Citigroup is being called a “master liquidity enhancement vehicle”, or MLEC. It will use their pooled monies to help alleviate the asset-backed commercial paper market  by buying assets from structured investment vehicles (“SIV”’s), which are off-balance sheet investment pools that issue short-term commercial paper and medium-term notes, and use the money to buy higher yielding, longer-term assets. I don’t know exactly why they are off company’s balance sheets, but these SIV’s are facing near collapse if forced to sell assets at current prices.

Yesterday the House Financial Services Committee introduced the “Mortgage Reform and Anti-Predatory Lending Act of 2007.”  If enacted, the bill would call for licensing and registration of mortgage originators, regardless of where they work, in addition to criminal background checks, testing and continuing education. The bill also prohibits steering; establishes a federal duty of care; creates an ability to repay standard; and imposes limited liability to secondary market securitizers. NAMB issued a press release praising the all-originator approach of the bill, but expressed strong concern over language that could be interpreted as banning the yield spread premium.

In spite of no economic news, and the 10-yr hovering around 4.41%, it is firmly believed by the market that the Fed will cut interest rates not only at their next meeting (Halloween) but also at each of the next four meetings! This would take overnight Fed Funds down to 3.75% in an effort to stop a recession as the economic outlook has become bearish. Of course, that will not help the dollar, which is weak – in August the US actually saw net selling of US treasuries and agency debt by foreign investors.

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