Crisis Looms in Mortgages

[Guest guest]

Dear list members,

 

The multiple affliction of the fourth house indications in the SAMVA

USA chart is consistent with the growing problems in the financing of

homes, with potential repercussions for the financial stability and

stock prices. A big mortgage lender in New York state now appears to

be headed for bankruptcy. Already over 20 so-called sub-prime (risky)

lenders have gone bankrupt nationwide.

 

The transits show this adverse development:

 

- Transit Ketu afflicts H2 MEP (of wealth)

- Transit Ketu afflicts natal L4 Venus (of fixed assets) in H6 (of

financial stability)

- Transit Rahu in H8 afflicts H6 MEP of financial stability

- Natal Rahu in H10 afflicts (by expanded orb as USA entity is more

than 50 years old) L4 Venus in H6

 

The redeeming factor is that L4 Venus has been strong in transit being

exalted in H9. However, it recently passed through the aspect of

transit L6 Jupiter in H5, drawing out this issue. In coming days Venus

will become weak in old age and then infancy of H10. At that time, the

weakness might be associated with some visible deterioration of this

sector, as the afflictions of the nodes on the even numbered house

MEPs will still be strongly felt. The problems are also likely to show

up when transit Venus passes over the natal nodes, under the aspect of

transit Ketu in H2, then the aspect of transit L8 Saturn in H1 and

finally into the aspect of natal L6 Jupiter in H5, beginning around 23

March.

 

Best wishes,

 

Thor

 

 

Best wishes,

 

Thor

 

 

Crisis Looms in Mortgages

By GRETCHEN MORGENSON

News Analysis - March 11, 2007

 

On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat

report on a company that specializes in making mortgages to cash-poor

homebuyers. The company, New Century Financial, had already disclosed

that a growing number of borrowers were defaulting, and its stock, at

around $15, had lost half its value in three weeks.

 

What happened next seems all too familiar to investors who bought

technology stocks in 2000 at the breathless urging of Wall Street

analysts. Last week, New Century said it would stop making loans and

needed emergency financing to survive. The stock collapsed to $3.21.

 

The analyst's untimely call, coupled with a failure among other Wall

Street institutions to identify problems in the home mortgage market,

isn't the only familiar ring to investors who watched the technology

stock bubble burst precisely seven years ago.

 

Now, as then, Wall Street firms and entrepreneurs made fortunes

issuing questionable securities, in this case pools of home loans

taken out by risky borrowers. Now, as then, bullish stock and credit

analysts for some of those same Wall Street firms, which profited in

the underwriting and rating of those investments, lulled investors

with upbeat pronouncements even as loan defaults ballooned. Now, as

then, regulators stood by as the mania churned, fed by lax standards

and anything-goes lending.

 

Investment manias are nothing new, of course. But the demise of this

one has been broadly viewed as troubling, as it involves the nation's

$6.5 trillion mortgage securities market, which is larger even than

the United States treasury market.

 

Hanging in the balance is the nation's housing market, which has been

a big driver of the economy. Fewer lenders means many potential

homebuyers will find it more difficult to get credit, while hundreds

of thousands of homes will go up for sale as borrowers default,

further swamping a stalled market.

 

" The regulators are trying to figure out how to work around it, but

the Hill is going to be in for one big surprise, " said Josh Rosner, a

managing director at Graham-Fisher & Company, an independent

investment research firm in New York, and an expert on mortgage

securities. " This is far more dramatic than what led to

Sarbanes-Oxley, " he added, referring to the legislation that followed

the WorldCom and Enron scandals, " both in conflicts and in terms of

absolute economic impact. "

 

While real estate prices were rising, the market for home loans

operated like a well-oiled machine, providing ready money to borrowers

and high returns to investors like pension funds, insurance companies,

hedge funds and other institutions. Now this enormous and important

machine is sputtering, and the effects are reverberating throughout

Main Street, Wall Street and Washington.

 

Already, more than two dozen mortgage lenders have failed or closed

their doors, and shares of big companies in the mortgage industry have

declined significantly. Delinquencies on loans made to less

creditworthy borrowers — known as subprime mortgages — recently

reached 12.6 percent. Some banks have reported rising problems among

borrowers that were deemed more creditworthy as well.

 

Traders and investors who watch this world say the major participants

— Wall Street firms, credit rating agencies, lenders and investors —

are holding their collective breath and hoping that the spring season

for home sales will reinstate what had been a go-go market for

mortgage securities. Many Wall Street firms saw their own stock prices

decline over their exposure to the turmoil.

 

" I guess we are a bit surprised at how fast this has unraveled, " said

Tom Zimmerman, head of asset-backed securities research at UBS, in a

recent conference call with investors.

 

Even now the tone accentuates the positive. In a recent presentation

to investors, UBS Securities discussed the potential for losses among

some mortgage securities in a variety of housing markets. None of the

models showed flat or falling home prices, however.

 

The Bear Stearns analyst who upgraded New Century, Scott R. Coren,

wrote in a research note that the company's stock price reflected the

risks in its industry, and that the downside risk was about $10 in a

" rescue-sale scenario. " According to New Century, Bear Stearns is

among the firms with a " longstanding " relationship financing its

mortgage operation. Mr. Coren, through a spokeswoman, declined to comment.

 

Others who follow the industry have voiced more caution. Thomas A.

Lawler, founder of Lawler Economic and Housing Consulting, said: " It's

not that the mortgage industry is collapsing, it's just that the

mortgage industry went wild and there are consequences of going wild.

 

" I think there is no doubt that home sales are going to be weaker than

most anybody who was forecasting the market just two months ago

thought. For those areas where the housing market was already not too

great, where inventories were at historically high levels and it

finally looked like things were stabilizing, this is going to be

unpleasant. "

 

Like worms that surface after a torrential rain, revelations that

emerge when an asset bubble bursts are often unattractive, involving

dubious industry practices and even fraud. In the coming weeks, some

mortgage market participants predict, investors will learn not only

how lax real estate lending standards became, but also how hard to

value these opaque securities are and how easy their values are to

prop up.

 

Owners of mortgage securities that have been pooled, for example, do

not have to reflect the prevailing market prices of those securities

each day, as stockholders do. Only when a security is downgraded by a

rating agency do investors have to mark their holdings to the market

value. As a result, traders say, many investors are reporting the

values of their holdings at inflated prices.

 

" How these things are valued for portfolio purposes is exposed to

management judgment, which is potentially arbitrary, " Mr. Rosner said.

 

At the heart of the turmoil is the subprime mortgage market, which

developed to give loans to shaky borrowers or to those with little

cash to put down as collateral. Some 35 percent of all mortgage

securities issued last year were in that category, up from 13 percent

in 2003.

 

Looking to expand their reach and their profits, lenders were far too

willing to lend, as evidenced by the creation of new types of

mortgages — known as " affordability products " — that required little

or no down payment and little or no documentation of a borrower's

income. Loans with 40-year or even 50-year terms were also popular

among cash-strapped borrowers seeking low monthly payments.

Exceedingly low " teaser " rates that move up rapidly in later years

were another feature of the new loans.

 

The rapid rise in the amount borrowed against a property's value shows

how willing lenders were to stretch. In 2000, according to Banc of

America Securities, the average loan to a subprime lender was 48

percent of the value of the underlying property. By 2006, that figure

reached 82 percent.

 

Mortgages requiring little or no documentation became known

colloquially as " liar loans. " An April 2006 report by the Mortgage

Asset Research Institute, a consulting concern in Reston, Va.,

analyzed 100 loans in which the borrowers merely stated their incomes,

and then looked at documents those borrowers had filed with the I.R.S.

The resulting differences were significant: in 90 percent of loans,

borrowers overstated their incomes 5 percent or more. But in almost 60

percent of cases, borrowers inflated their incomes by more than half.

 

A Deutsche Bank report said liar loans accounted for 40 percent of the

subprime mortgage issuance last year, up from 25 percent in 2001.

 

Securities backed by home mortgages have been traded since the 1970s,

but it has been only since 2002 or so that investors, including

pension funds, insurance companies, hedge funds and other

institutions, have shown such an appetite for them.

 

Wall Street, of course, was happy to help refashion mortgages from

arcane and illiquid securities into ubiquitous and frequently traded

ones. Its reward is that it now dominates the market. While commercial

banks and savings banks had long been the biggest lenders to home

buyers, by 2006, Wall Street had a commanding share — 60 percent — of

the mortgage financing market, Federal Reserve data show.

 

The big firms in the business are Lehman Brothers, Bear Stearns,

Merrill Lynch, Morgan Stanley, Deutsche Bank and UBS. They buy

mortgages from issuers, put thousands of them into pools to spread out

the risks and then divide them into slices, known as tranches, based

on quality. Then they sell them.

 

The profits from packaging these securities and trading them for

customers and their own accounts have been phenomenal. At Lehman

Brothers, for example, mortgage-related businesses contributed

directly to record revenue and income over the last three years.

 

The issuance of mortgage-related securities, which include those

backed by home-equity loans, peaked in 2003 at more than $3 trillion,

according to data from the Bond Market Association. Last year's

issuance, reflecting a slowdown in home price appreciation, was $1.93

trillion, a slight decline from 2005.

 

In addition to enviable growth, the mortgage securities market has

undergone other changes in recent years. In the 1990s, buyers of

mortgage securities spread out their risk by combining those

securities with loans backed by other assets, like credit card

receivables and automobile loans. But in 2001, investor preferences

changed, focusing on specific types of loans. Mortgages quickly became

the favorite.

 

Another change in the market involves its trading characteristics.

Years ago, mortgage-backed securities appealed to a buy-and-hold

crowd, who kept the securities on their books until the loans were

paid off. " You used to think of mortgages as slow moving, " said Glenn

T. Costello, managing director of structured finance residential

mortgage at Fitch Ratings. " Now it has become much more of a trading

market, with a mark-to-market bent. "

 

The average daily trading volume of mortgage securities issued by

government agencies like Fannie Mae and Freddie Mac, for example,

exceeded $250 billion last year. That's up from about $60 billion in 2000.

 

Wall Street became so enamored of the profits in mortgages that it

began to expand its reach, buying companies that make loans to

consumers to supplement its packaging and sales operations. In August

2006, Morgan Stanley bought Saxon, a $6.5 billion subprime mortgage

underwriter, for $706 million.

 

And last September, Merrill Lynch paid $1.3 billion to buy First

Franklin Financial, a home lender in San Jose, Calif. At the time,

Merrill said it expected First Franklin to add to its earnings in

2007. Now analysts expect Merrill to take a large loss on the purchase.

 

Indeed, on Feb. 28, as the first fiscal quarter ended for many big

investment banks, Wall Street buzzed with speculation that the firms

had slashed the value of their numerous mortgage holdings, recording

significant losses.

 

As prevailing interest rates remained low over the last several years,

the appetite for these securities only rose. In the ever-present

search for high yields, buyers clamored for securities that contained

subprime mortgages, which carry interest rates that are typically one

to two percentage points higher than traditional loans. Mortgage

securities participants say increasingly lax lending standards in

these loans became almost an invitation to commit mortgage fraud. It

is too early to tell how significant a role mortgage fraud played in

the rocketing delinquency rates — 12.6 percent among subprime

borrowers. Delinquency rates among all mortgages stood at 4.7 percent

in the third quarter of 2006.

 

For years, investors cared little about risks in mortgage holdings.

That is changing.

 

" I would not be surprised if between now and the end of the year at

least 20 percent of BBB and BBB- bonds that are backed by subprime

loans originated in 2006 will be downgraded, " Mr. Lawler said.

 

Still, the rating agencies have yet to downgrade large numbers of

mortgage securities to reflect the market turmoil. Standard & Poor's

has put 2 percent of the subprime loans it rates on watch for a

downgrade, and Moody's said it has downgraded 1 percent to 2 percent

of such mortgages that were issued in 2005 and 2006.

 

Fitch appears to be the most proactive, having downgraded 3.7 percent

of subprime mortgages in the period.

 

The agencies say that they are confident that their ratings reflect

reality in the mortgages they have analyzed and that they have

required managers of mortgage pools with risky loans in them to

increase the collateral. A spokesman for S. & P. said the firm made its

ratings requirements more stringent for subprime issuers last summer

and that they shored up the loans as a result.

 

Meeting with Wall Street analysts last week, Terry McGraw, chief

executive of McGraw-Hill, the parent of S. & P., said the firm does not

believe that loans made in 2006 will perform " as badly as some have

suggested. "

 

Nevertheless, some investors wonder whether the rating agencies have

the stomach to downgrade these securities because of the selling

stampede that would follow. Many mortgage buyers cannot hold

securities that are rated below investment grade — insurance companies

are an example. So if the securities were downgraded, forced selling

would ensue, further pressuring an already beleaguered market.

 

Another consideration is the profits in mortgage ratings. Some 6.5

percent of Moody's 2006 revenue was related to the subprime market.

 

Brian Clarkson, Moody's co-chief operating officer, denied that the

company hesitates to cut ratings. " We made assumptions early on that

we were going to have worse performance in subprime mortgages, which

is the reason we haven't seen that many downgrades, " he said. " If we

have something that is investment grade that we need to take below

investment grade, we will do it. "

 

Interestingly, accounting conventions in mortgage securities require

an investor to mark his holdings to market only when they get

downgraded. So investors may be assigning higher values to their

positions than they would receive if they had to go into the market

and find a buyer. That delays the reckoning, some analysts say.

 

" There are delayed triggers in many of these investment vehicles and

that is delaying the recognition of losses, " Charles Peabody, founder

of Portales Partners, an independent research boutique in New York,

said. " I do think the unwind is just starting. The moment of truth is

not yet here. "

 

On March 2, reacting to the distress in the mortgage market, a throng

of regulators, including the Federal Reserve Board, asked lenders to

tighten their policies on lending to those with questionable credit.

Late last week, WMC Mortgage, General Electric's subprime mortgage

arm, said it would no longer make loans with no down payments.

 

Meanwhile, investors wait to see whether the spring home selling

season will shore up the mortgage market. If home prices do not

appreciate or if they fall, defaults will rise, and pension funds and

others that embraced the mortgage securities market will have to

record losses. And they will likely retreat from the market, analysts

said, affecting consumers and the overall economy.

 

A paper published last month by Mr. Rosner and Joseph R. Mason, an

associate professor of finance at Drexel University's LeBow College of

Business, assessed the potential problems associated with disruptions

in the mortgage securities market. They wrote: " Decreased funding for

residential mortgage-backed securities could set off a downward spiral

in credit availability that can deprive individuals of home ownership

and substantially hurt the U.S. economy. "