Oct. 5, 2007: What is Form 885? And does WAMU need a loan?

Oct. 5, 2007: What is Form 885? And does WAMU need a loan? Rob Chrisman

Effective last Friday, the California Department of Real Estate (DRE) is requiring “Form 885 Mortgage Loan Disclosure Statement / Good Faith Estimate – Nontraditional Mortgage Product” to be completed and a copy retained in the file for all loan transactions in which a non-traditional loan product is used. Although this form is very seldom required by funding lenders, its use is mandatory for all DRE-regulated transactions. For a copy of Form 885 and related information, visit the California Department of Real Estate website at: http://www.dre.ca.gov/ Go to the heading “Featured Items” for this information.

Ahead of the three-day weekend, we had a jobs number this morning that was pretty much as expected. Non-farm Payroll was +110k, the Unemployment Rate went from 4.6% to 4.7%, and Hourly Earnings were +.4% (year-over-year was +4.1%). What drove the 10-yr yield from 4.52% to 4.60% and mortgage prices worse by .250-.375 in price was the back-month revisions to Non-Farm Payroll: combined they were +118k. Yesterday’s Factory Orders falling by a larger-than-expected 3.3% in August yesterday has been forgotten, and with this morning’s numbers suddenly the odds of another rate cut by the Fed on Halloween dropped to only 36%! “One and done”?

Washington Mutual said this morning it expects a 75% drop in third-quarter net income because of adverse housing market and credit conditions. The bank, whose shares were down 2.2% in pre-market trading, said its loan loss provision for the quarter will be $975 million. It also expects $150 million in losses in its trading securities portfolio. They join Citigroup (the largest U.S. bank by market value), UBS, and now Merrill Lynch, in preparing the markets for large losses.

What is the latest estimate of aggregate mortgage credit losses? The broad consensus appears to be that a 10%-20% drop in US house prices would translate into aggregate mortgage credit losses of $100-$200 billion.  But given the distribution of loan-to-value ratios in the population, we know that a 15% price drop would put roughly 20% of all US mortgage holders (a group that owes an estimated $2.5-$3trn of mortgage debt) into negative equity.  Since many of these negative-equity households a) already have poor credit ratings and may be tempted to walk away from an asset that is deeply under water, b) will also experience a mortgage reset in the next couple of years, and c) are at relatively high risk of job loss if the labor market slows, some believe that lenders will in fact bear significantly more than 5% of the aggregate capital loss.