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Lenders say billions more in write-downs, losses expected
Fannie Mae returns to regular financial reporting
Wednesday, November 14, 2007Inman News
HSBC Holdings PLC, Bear Stearns Cos., Bank of America Corp., E*Trade and mortgage repurchaser Fannie Mae are among the latest companies to reveal billions in lending-related losses.
HSBC today said it would take a $3.4 billion charge during the third quarter related to worsening losses at HSBC Finance Corp., the company’s U.S.-based mortgage lending business.
The charge was $1.4 billion greater than expected by a simple extrapolation of trends during the first half of the year, suggesting losses are accelerating, HSBC said in a press release.
“Deterioration in U.S. housing markets is affecting consumer finance credit quality more broadly than hitherto and loan impairment charges are expected to remain high in these conditions,” the company said. “There is the probability of further deterioration if the current housing market distress continues and further impacts the broader economy.”
In an advisory to investors, HSBC warned there is evidence of “changed customer behavior” as foreclosures increase, repossessed properties remain unsold and rental alternatives become more attractive — all factors contributing to increased loan delinquencies.
Bear Stearns
Bear Stearns said today that the company expects to post a loss in the fourth quarter, with exposure to residential mortgages, mortgage-backed securities and collateralized debt obligations prompting $1.2 billion in write-downs with two weeks remaining in the quarter.
Bear Stearns took $700 million of write-downs on mortgages and leveraged buyout loans during the quarter ending Aug. 31, and reported a 61 percent drop in earnings to $171.3 million.
Bank of America
Bank of America Corp. announced Tuesday it anticipates taking $3 billion in fourth-quarter write-downs related to collateralized debt obligations, and said its losses could grow if housing and mortgage market conditions worsen.
Although Bank of America does not make subprime loans, it has approximately $400 million in subprime-backed exposure in its collateralized debt obligations warehouse, Chief Financial Officer Joe Price said at an investment conference Tuesday.
Consumer real estate, including first mortgages and home equity loans, accounted for only 6 percent of the consumer and small business bank’s earnings this year, but Bank of America is looking to grow market share in the mortgage business, Price said.
Bank of America’s new “No Fee Mortgage PLUS” loan “has really helped us gain share,” Price said, “even as others pull back in the current environment.”
E*Trade
Online stock brokerage E*Trade last week warned investors to expect write-downs on the company’s $3 billion securities portfolio.
The company’s stock has been on a wild ride this week after Citi Investment Research analyst Prashant Bhatia said the company faced a 15 percent chance of bankruptcy. In a statement Monday, the company called the report “sensationalism based on unfounded speculation.”
Fannie Mae
As it returned to regular financial reporting last week, government-sponsored mortgage repurchaser Fannie Mae disclosed $1.4 billion in third-quarter losses. The losses were blamed on $1.2 billion in credit losses in loans Fannie owns or guarantees and $2.24 billion in write-downs on the value of derivative contracts.
The company also reported results for the first and second quarters, catching up on a backlog of financial reports stemming from the management and accounting scandals that forced Fannie and Freddie Mac to restate several years of earnings.
Net income for the first three quarters of 2007 was $1.5 billion, compared with $3.5 billion for the same period a year ago.
While a return to regular financial reporting could help Fannie win support for relaxing restrictions on its loan portfolio, the company has now become embroiled in an examination of alleged collusion between lenders and appraisers in New York state.
New York Attorney General Andrew Cuomo on Nov. 1 announced a lawsuit against First American Corp. and its subsidiary eAppraiseIT. The lawsuit accuses the companies of bowing to pressure from Washington Mutual to use preferred appraisers Cuomo alleges provided inflated property appraisals (see Inman News story).
On Nov. 7, Cuomo said he had subpoenaed Fannie and Freddie as part of a probe into widespread collusion between lenders and appraisers. That action prompted a scolding from James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, the regulator that oversees the government sponsored entities, or GSEs.
“I feel that you and your staff may not fully understand the differences between the mortgage-backed securities issued by the GSEs and those issued by other entities,” Lockhart said in a letter to Cuomo. Unlike “private label” issuers of mortgage-backed securities, Lockhart said, Fannie and Freddie “retain the credit risk on the underlying mortgages by guaranteeing repayment to MBS holders. Consequently, they have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals.”
Lockhart called for a meeting with Cuomo to discuss his demand that Fannie and Freddie stop doing business with WaMu — which has yet to be charged or subpoenaed — and the potential expansion of the investigation to other institutions from which the GSEs’ purchase mortgages.
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Here is what is happening:
Up until now, the lenders have been trying to hold the price of REO’s at an unrealisticly high price.
They have been very difficult to deal with and have been slow to reduce prices.An example: You put in a bid and they might give you an answer in a couple of months! (this is a recent experience dealing with a bank).
Since several lenders have announced these loses some changes are occuring.
The most dramatic is that they are beginning to lower asking prices by large amounts.
Today a local bank owned house was reduced from $350,000 to $248,000!
While the $350M was a little too high, the new price is substantially under even the current market for this house. It got several showing today and will probably be sold by tomorrow.
It just goes to show that the market is extremely unsettled.
What seems like a super deal today, may seem like a poor deal tomorrow!
Use caution, this downturn has a long time to run!
My theory, is to buy only houses that would provide positive cash flow and that you would be happy to keep for long term investments if you could not sell them.
Sarah,
Your accessment is accurate for this area too. Lenders are just now starting to lower proces on REO properties. I got one last week for $99,785 and retail is $220,000. It does need about $20k in repairs.
But still a great keeper.
A buy and sell business is all but DEAD around here. Even wholesaling has dramatically slowed down.
The only game in town is to buy and hold
The big auctions are also presenting some great opportunity – see my post about http://www.ushomeauction.com
This is going to be FUN!
Jackie Lange
Jerry,
Get that “lender” thing out of your mind. Forget about going to a mortgage company to buy a house — and the possibilities are endless!
Let’s say you find a great deal on an REO property – 50%-65% of market value.
You find a private lender or anyone who would like to make money in real estate but does not have the time or skill to find good deals.
The private lender puts up all the money to buy the house.
You provide the management skills. You split the cash flow and any repair costs.
Your agreement might state that you’ll sell the house in 5 years and split the profit. Let’s say you did two houses with the same person.
Jackie:
LOL!
It took me reading your reply again before “I got it.”
Regarding your opening statement about lenders, it sounds like you have great disdain for lenders. They’re not all bad; in fact, any of us who lend money are lenders. It is true that some loan officers and lenders were/are unscrupulous in their dealings. Like in any industry, there are bad apples everywhere. It’s ‘no excuse’; it just is.
That being said, I look at my time as a mortgage banker as a great education. I’m proud of what I did and how I did it.
Regarding my question to you, I’m just trying to leverage my contacts in my warm network for any deal I can put together. I am really not partial to whom it is.
Fortunately for me, I met you. I have no intention of every borrowing money from a major lender again, thanks to you. So, rest assured, your lessons are welcome with me.
You have exposed me to a whole new world of deal-making and problem-solving. Thanks!
Therefore, just know that when I refer to any publicly-traded lender, I’m not their apologist; I am simply acknowledging that they are players and may be ‘over a barrel’ when it comes to making a deal. If anyone, lenders included, have a property to sell at a 50+% discount, I’ll listen.
I’m here to learn. For example, in last night’s call with David Phelps, you and he agreed that ‘staying current’ in the market is crucial, as there are constant changes. As David pointed out, having the head knowledge is only as good as it is used, while there is no ‘one size fits all’ answer to every real estate ‘problem.’
Thank you for your answer. It makes sense to me; “I got it.”
Jerry,
For a civilian who has not been trained in creative real estate techniques, the primary way they can buy their personal residence is by going to a mortgage company or bank. So, there is a place for mortgage companies in this world.
But for those who have been trained to buy more than the house they live in and for those who have learned to use OPM ( other people’s money) to buy houses, there are many benefits.
Here are some of the benefits:
1. you don’t have to fill out a bunch of paperwork and reveal a lot of personal information and a pile of paperwork
2. you are not restricted to whatever the current credit requirements are
3. you don’t have to do deals that fit in the box
4. you don’t have to pay all the junk fees that a mortgage broker adds on
5. you can close in a few days when you use OPM compared to usually 30 days with a conventional loan
6. The terms of the deal are more important than the price often. You can get better terms when you use OPM
the list goes on and on.
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