Ally Pays Fannie - Robbing from Peter...

Recall that Ally is, for the most part, owned by Uncle Sam.  This is kinda like a little New Year's gift to himself.  While the payment is somewhat more than Ally had set aside, there is no way that our benevolent government ("OBG") would have financially harmed its investment.

(NYT) Ally Financial said Monday that it would pay $462 million to settle buyback claims on $292 billion in home loans it sold to Fannie Maebefore the industry tightened underwriting standards in the wake of the financial crisis.

GMAC Mortgage, which is part of Ally’s Residential Capital unit, originates and services loans then sells them to the government-sponsored mortgage companies Fannie Mae and Freddie Mac. As part of their repurchasing deals, Fannie and Freddie have the option to challenge Ally’s underwriting standards. If successful, they could have required Ally to buy back the loans in question.

The settlement covers loans that GMAC serviced for Fannie Mae before June 30 and all mortgage-backed securities that Fannie Mae bought from the company. The $462 million is slightly more than the reserves that Ally had set aside to cover a potential deal.

Mortgage Rates Head Up

Mortgage rates are increasing, which should slow prepayment rates and cause the mortgage market to begin to see its duration extend.  Should this trend continue, look for increased hedging activity and the effects on the treasury curve.

(AP) Rates on fixed mortgages rose for the fourth straight week this week, hitting 4.61 percent. The surge could slow refinancings and further hamper the housing market.

Freddie Mac said Thursday that the average rate on a 30-year fixed loan increased sharply from last week's rate. And it is well above the 4.17 percent rate hit a month ago -- the lowest level on records dating back to 1971.

The average rate on a 15-year fixed loan rose to 3.96 percent. Rates hit 3.57 percent last month -- the lowest level since 1991.

Rates on five-year adjustable-rate mortgages averaged 3.60 percent, up from 3.49 percent. The five-year hit 3.25 percent last month, the lowest rate on records dating back to January 2005.

Rates on one-year adjustable-rate home loans slipped to 3.27 percent from 3.25 percent. 

Investec Looks to Bring a Subprime Deal

(Bloomberg) Investec Plc, the South African bank, is seeking to revive the market for subprime mortgage bonds in Europe three years after the securities were blamed for the worst financial crisis since the Great Depression.


Investec is selling as much as 130 million pounds ($205 million) of top-rated five-year notes at a yield spread that’s 16 times pre-crisis levels, according to two people familiar with the deal. U.K. buy-to-let specialist Paragon Group of Cos. Plc is also preparing a sale of non-conforming mortgage bonds.

Investec’s notes may yield about 3.25 percentage points more than the London interbank offered rate, said the people, who declined to be named because the sale isn’t completed. That compares with 0.2 percentage point on non-conforming notes sold by a Lehman Brothers Holdings Inc. unit in August 2007, Europe’s last public sale of the debt, JPMorgan Chase & Co. data show. 

It will be interesting to see investor reception of this type of deal.  While risk appetite is in place, housing prices and trends don't help and burned investors are still working through the issues they have. Would you hit them at L+325?   That said, if the bonds are tranched right and modeled under severe conditions, they might have some value.

Bank of America - Mortgage Data (Reps and Warranties)

BAC released earnings this morning (they beat) and rather than focus on the earnings and the segment revs and earnings, I wanted to address the reps and warranties issues (aka the mortgage mess).

From the investor presentation (full presentation here:  BAC Investor Presentation);

Outstanding claims increased by $1.7B from Q2 to Q3.  The pace of growth slowed due to a slowdown in monoline claims.

Now that we have a claim number (or a snapshot of 9/30s claim number), lets look at what they have reserved for these claims:

The provision for reps and warranties has dropped due to a reduction in monoline provisioning.  Using these numbers, BAC is holding about 30% of the claims in reserves.


Whole Loan Investors/Private Label Securitizations
$3.9 billion of repurchase claims received through 9/30/10; $1.0 billion remain outstanding of which $0.5 billion already reviewed and declined to repurchase;  Approximately $1.0 billion approved for repurchase. 
This seems to point to a repurchase rate of approximately 50%. Claims received to date equate to approximately 86bps of the outstanding balance thus far.

Private Label Securities wrapped by monolines
As of 9/30/10, $4.8B of repurchase claims received; $4.2B remain outstanding of which $2.7B already reviewed and declined to repurchase;  Approximately $550M approved for repurchase.
It looks like a "declined" rate of around 65%, will probably head higher, lets call it a 70% "declined" rate, which should imply a 30% "approved" rate. As an aside, the claims equate to approximately 6% of outstanding loans.


$1.2T loans sold to GSE's, $18B of claims received to date (1.5%).  Does 30% provisioning rate seem enough?  No, it doesn't.

JPMorgan Finds Itself an Ally.

JPMorgan Chase reportedly is delaying foreclosure proceedings to systematically review documents after alerting attorneys that employees may have signed affidavits without personally reviewing the documents, the same issue that has plagued GMAC Mortgage (Ally).

"It has come to our attention that in some cases employees in our mortgage foreclosure operations may have signed affidavits about loan documents on the basis of file reviews done by other personnel – without the signer personally having reviewed those loan files," Kelly said.

Story here: Robo-signer

The implications of this are pretty big.  The bank cannot foreclose where affidavits are required and someone has not actually reviewed the file.  Think of the size of the foreclosure pipeline.  This will stall the process then clog the courts for some time.  Until this foreclosure process continues and the market is allowed to clear, housing cannot begin to recover.