Jumbo Lender's Shares Rise 36% on Private Placement

The New York Times
March 26, 2008 Wednesday
Late Edition - Final

BYLINE: By BLOOMBERG NEWS
SECTION: Section C; Column 0; Business/Financial Desk; Pg. 5

Shares of Thornburg Mortgage, a provider of jumbo mortgages that is trying to stave off a bankruptcy filing, rose 36 percent on Tuesday after the company disclosed plans to raise $1.35 billion.

The rescue plan gives new investors debt that pays 18 percent and a chance at ownership of as much as 90 percent of the company, according to terms of a private placement that Thornburg outlined in a statement Tuesday. Thornburg, based in Santa Fe, N.M., is asking the New York Stock Exchange for permission to issue new securities without a shareholder vote because delay ''would seriously jeopardize the financial viability of the company.''

Thornburg needs to raise almost $1 billion this week to meet margin calls from its bankers.

''Thornburg has a tight time window and you have to take measures you normally wouldn't employ,'' said Keith Gumbinger, vice president of HSH Associates, a mortgage industry research firm in Pompton Plains, N.J. ''An 18 percent yield attracts instant attention.''

In trading Tuesday, Thornburg rose 46 cents, to $1.73, on volume of more than 52 million shares. Last June, the stock sold around $28.

MaitlinPatterson Global Opportunities Partners III, which invests in bankrupt and distressed companies, agreed to buy $450 million of the notes, Thornburg said in a separate filing. Mark Patterson, a MaitlinPatterson founder, said current prices on distressed debt made this a ''great buying time.''

Thornburg has run short on cash as falling home sales cut into demand, and fixed-income investors, fearing losses on investments linked to subprime home loans, avoided the company's securities.

Thornburg, though, avoided subprime lending, which has the highest incidence of defaults. It specialized in mortgages of more than $417,000, which were typically used to buy homes by people with stronger credit records. Until recently, such loans were too big to qualify for purchase by government-sponsored entities like Fannie Mae, which limited their appeal to investors.

New Ceiling

Buyers in high-priced markets get a hand

The Boston Globe
March 8, 2008 Saturday
THIRD EDITION

BYLINE: Kimberly Blanton Globe Staff
SECTION: BUSINESS; Pg. F1

The federal government yesterday increased the limit for government-backed mortgages, a move that could make home loans cheaper for several thousand Boston-area borrowers.

The limit increased to $523,750 for mortgages in the Boston metropolitan area that would qualify for government backing from Freddie Mac and Fannie Mae, which purchase the loans in the secondary market. The previous limit was $417,000.

Mortgages above the Freddie and Fannie ceiling are jumbo loans, and carry a higher interest rate. During the credit crisis last year, rates on jumbo loans surged to more than a percentage point above so-called conforming loans, or those under the federal loan limit.

Congress adopted a temporary increase in the loan ceiling in the economic stimulus package passed last month, in an attempt to energize the moribund housing market. Higher limits would make it cheaper for more borrowers in high-price housing markets such as Boston to buy a home or refinance an existing mortgage. The limits apply to mortgages originated between July 1, 2007 and the end of 2008.

"A great thing has happened," said Sushil Tuli, president of Leader Bank in Arlington. "It should help people become homeowners, because the payments will be lower with the lower interest rate."

Loans that fall between the old loan ceiling and the new ceiling will likely still carry higher interest rates than traditional conforming mortgages, because of the way Fannie Mae and Freddie Mac will be forced to handle them. Tuli said he and other bankers are still examining the new limits, but he estimated the interest rate for a 30-year, fixed-rate mortgage under the new limit would be about 6.125 percent, versus jumbo rates of 6.75 percent or higher.

If the limits had been in effect last year, about 4,000 additional refinance loans and 1,600 additional home-purchase loans in Greater Boston would have been categorized as conforming and eligible for federal support, according to Warren Group, a Boston property research firm. About 14,500 jumbo purchase and refinance loans were made in the metropolitan area in 2007.

"In more expensive housing markets like Boston, where there are more expensive homes and large mortgage requirements, the raising of the conforming ceiling is going to have a bigger impact than it is in less expensive housing markets," said Alan Pasnik, Warren Group's analyst.

The $523,750 limit will apply to single-family mortgages in the Boston area, which includes Essex, Middlesex, Norfolk, Plymouth, and Suffolk counties. Elsewhere in Massachusetts, the federal government said the new loan limits were $462,500 for the Barnstable area; $475,000 for the New Bedford and Providence area; and $729,750 for Nantucket and Martha's Vineyard.

Stephen Cochran, a loan officer for Poli Mortgage Group in Norwood, said people have been inquiring in recent weeks about the change. "It's creating a lot of excitement out there," he said.

Aftershock Rocks Credit Markets

Heightened concern about credit risk seeps further into segments of financial markets once thought safe

Investment Dealers Digest

March 17, 2008

BYLINE: Aleksandrs Rozens

If last August's credit problems were a high-powered quake, then the latest problems on Wall Street are its aftershocks. And while aftershocks may be expected, their intensity can be surprising. Such was the case in the early days of March.

While a broad range of securities saw a widening in yield premiums, investors were stunned by a rapid widening in spreads of bonds backed by home loans with Fannie Mae and Freddie Mac guarantees, securities seen as so pristine that they are purchased by foreign central banks and routinely used as collateral for loan agreements primary dealers have with the Federal Reserve.

Yield premiums for these housing agency mortgage securities were driven wider by well-publicized problems at a leading mortgage company as well as reports of margin calls faced by several notable hedge funds.

"The number of funds impacted and the securities impacted have grown," says Jeffrey Rosenberg, head of credit research at Bank of America. "As that credit unwind has occurred you are squeezing out leverage from more corners of the financial markets."

The widening of agency mortgage bonds early this month eclipsed what was seen in the wake of the 1998 Long Term Capital Management debacle and served as a reminder that credit woes in the financial markets are by no means over. The concerns about credit showed up in the credit default swaps market where it cost more to insure bank debt and interest rate swaps which are considered a barometer of credit conditions. In early March, the US central bank had to flood liquidity into the financial system through two separate actions.

"The spikes in volatility and price action are unfathomable," says the head of sales at one dealer firm's mortgage backed securities desk. "This is scary. Most people are shell-shocked," says the veteran of Wall Street who for over two decades has traded and sold mortgage bonds.

Jumpy credit markets

To get an idea of just how jumpy Wall Street has gotten when it comes to credit risk, investors ought to look at that gauge of credit conditions and economic well-being, interest rate swaps.

Ten-year interest rate swaps were at 87 basis points last week, having hit 91 in the first week of March. That is just shy of the autumn of 1998, when they were at 96-1/2.

Within the credit default swaps market, where investors purchase insurance against default, yield premiums, too, have widened. For example, Citigroup five-year credit default swaps were at 220 basis points, out from 10 to 20 basis points a year ago, while Bear Stearns five-year credit default swap spreads were at 510 basis points, out from roughly 35 basis points a year ago. JPMorgan spreads were at 150 basis points, out from 12 to 15 basis points a year ago.

Washington Mutual, a well-known participant in the mortgage market, saw its five-year credit default swaps move out to as much as 750 basis points. A year ago, insurance for five-year Wamu debt was at around 45 basis points.

Some of that widening in Wamu, no doubt, was tied to a recent downgrade in the thrift's credit rating by Standard & Poor's which warned of a "more severe residential mortgage credit cycle" and predicted that the severity of losses on all residential mortgages will be higher than initially expected.

Carlyle and Thornburg

When it comes to agency mortgage bonds, much of the widening was spurred by selling related to hedge funds having to meet margin call requirements.

"As mortgages got worse, people got more margin calls," says Art Frank, head of mortgage research at Deutsche Bank. "News of Carlyle and Thornburg prompted people to sell," says Deutsche Bank's Frank.

Among those facing margin calls was Carlyle Capital Corp., an affiliate of The Carlyle Group. Last week, Carlyle Capital was in discussions with lenders that held $16 billion of its securities, but these talks failed and on Wednesday the fund manager said lenders may seize its assets. According to Carlyle Capital's December 2007 annual report, the fund manager held $21.7 billion of residential mortgage-backed bonds, financed through $21 billion of one-month repurchase agreements with commercial and investment banks.

At the same time, financial markets have been surprised by problems encountered at Thornburg Mortgage. The 15-year old Santa Fe, N.M.-based lender specializes in jumbo loans that, by many accounts have performed well amid the nation's housing downturn. Thornburgh restated its financial statements for the year ended December 2007.

The mortgage lender said in filings with regulators that its board "decided that [Thornburg] should restate these financial statements after concluding that there was substantial doubt as to [its] ability to continue as a going concern."

As a result, Thornburgh warned, losses on its available-for-sale securities and securitized adjustable rate mortgage (ARM) loans pledged as collateral for repurchase agreements "were considered to be other-than-temporary impairments as of Dec. 31, 2007 since [Thornburg] may not be able to hold these securities for the foreseeable future because [it] may sell them to satisfy margin calls from [its] lenders or to otherwise manage [its] liquidity position."

In these same documents, the lender explained how last summer until recently the fair value of its ARMs as well as its hedges declined so margin requirements on its financing agreements increased.

In March, Thornburg said, "we have received a significant amount of margin calls ... which significantly exceeded [its] available liquidity ... as a result, [Thornburg has] been unable to meet a portion of our margin calls."

Thornburg also warned that while it has a temporary agreement with lenders halting additional margin calls through March 10, there was no assurance it will be able to get enough liquidity to satisfy its liabilities or that the value of its ARM loans or bonds pooling ARMs do not decline further.

Also, Thornburg said it could not assure lenders won't make additional margin calls or that the Sante Fe, N.M., company will be able to satisfy these margin calls and "continue as a going concern."

Margin Cascade

The latest worries in the US credit markets - to the surprise of many on Wall Street - come from an unusual source: bonds backed by home loans with Freddie Mac and Fannie Mae guarantees.

While these mortgages have seen an increase in the late payments and defaults, they are nowhere as bad as subprime home loans.

In February, many investors - including hedge funds - saw that mortgage bonds guaranteed by the housing agencies had seen their yield premiums widen to levels not seen in 15 years. Viewing the market as oversold, investors sold their US Treasury holdings and dove into the agency mortgage bonds.

What happened next, shocked even old hands in the US housing finance world. Agency mortgage bond spreads hit levels not seen since 1986 when the nascent mortgage bond market was buffeted by its first wave of home loan refinancings.

As the spreads widened and hit that 1986 level, lenders asked investors to make up for the difference in the value of securities used as collateral for the loans. This forced some investors to sell their most liquid securities, in this case the agency mortgage bonds. In some cases, lenders seized the collateral and put it out in the market.

For those who relied on leverage to amplify returns, the rapid widening in agency mortgage bonds came as a shock and brought about a cascade of margin calls.

"As you move to execute on your right to claim collateral you can exacerbate losses," says Bank of America's Rosenberg, adding that "you are reducing liquidity in the market."

"As more mortgages performed worse, people were more likely to get margin calls," says Deutsche Bank's Frank.

The selling also spurred sales by money managers and banks who wanted to get ahead of any further widening in agency mortgage bond spreads. At the same time, there were no notable buyers of agency mortgage securities even though they were broadly seen as oversold and even inexpensive.

"There was someone selling every minute every day," says Chris Low, chief economist at FTN Financial.

In 1998, a widening in mortgage bonds guaranteed by Freddie Mac and Fannie Mae in the wake of Long Term Capital Management's problems brought about buying by the two housing agencies. This time around, Fannie Mae and Freddie Mac have limits as to how much they can buy for their portfolio and they themselves face a jump in losses related to late payments as well as defaults for loans they have guaranteed. Also, agency borrowing costs have risen because investors are demanding more of a yield premium to buy their debt. For example, five-year credit default swaps insuring senior agency debt are at 91 to 92 basis points and 200 to 210 basis points for subordinate agency debt.

"There is no risk appetite," is how the veteran bond salesman with the Wall Street dealer firm characterized the current market. "People are worried about career risk. They can't be long" mortgages, he adds.

Just how much wider are US agency mortgage security yield premiums?

The interpolated current coupon agency mortgage bond in early March was at 190 basis points to seven-year swaps and it was 293 basis points over interpolated US Treasuries. "This is the widest mortgages have been since the summer of 1986," says Deutsche Bank's Frank.

Back then, the mortgage market was smaller. Today, the mortgage bond market is the largest credit market in the word. In 1986 the widening came after large influx of mortgage securities on the heels of a massive refinancing wave of home loans. The wider spreads prompted Wall Street to expand the structured mortgage bond market by repackaging simple agency mortgage pass throughs into bonds known as planned amortization class securities or PACs.

These days, the mortgage bond mart has seen little of this structured mortgage debt created.

In February, $19.5 billion of collateralized mortgage obligations were created. While that is up from January's $6.6 billion and December's $5.9 billion, it is off from $34.7 billion worth of CMOs created last June.

Although the widening was surely tied to massive sales by hedge funds and other investors, there is another reason behind the wariness about mortgage debt. What was once merely a problem within subprime debt is now a problem within Alt-A home loans and has crept into the prime market. Recent data from an industry trade group showed that fourth-quarter foreclosures for a wide range of home loans were at historic highs and delinquencies were at a pace not seen since the mid 1980s.

What next?

Early last week, the Fed came in again to support liquidity in financial market. Specifically, the US central bank expanded its securities lending program to include agency debt, agency mortgage bonds and AAA-rated residential mortgage bonds with loans that did not have the agency guarantee.

Also, the Fed increased temporary reciprocal currency arrangements with the European Central Bank and the Swiss National Bank. Financial markets saw prices of stocks soar higher with approval.

That said, credit on Wall Street remains tight. Lenders are asking for larger haircuts in repo agreements, meaning borrowers will have to post more collateral for less money.

"The cost of borrowing has risen and availability has gone down," says Bank of America's Rosenberg. "The increase in required margins have gone up significantly. The reason why is the perceived volatility of all assets used for collateral has gone up."

Meanwhile, spreads for many securities ranging from high yield corporate debt to commercial mortgage bonds have seen their yield premiums widen. Within the leverage loan market, paper that changed hands in January at 95 cents now trades at 88 cents. Last August when the subprime turmoil was first felt, these leverage loans could command a price of 95 cents.

An index of tracking home equity debt underwritten in 2006, the HEL ABX 06-2AA tranche, that is widely used on Wall Street to value securities is trading at 30 cents to the dollar. A year ago, these issues were at or close to par.

Just how much more does it cost for hedge funds to borrow? That depends on the securities being posted as collateral. But in the case of adjustable rate mortgage debt or collateralized mortgage obligations with loans guaranteed by Freddie and Fannie the cost has risen by 30 to 40 basis points.

"Usually you could borrow at Libor. Now it is at Libor plus 40 [basis points]," according to Andreas Pericli, chief executive officer of Wash., DC-based hedge fund Euclid Financial Group. "They need more collateral and they lend less."

Soon after the Fed action early last week, FTN's Low predicted that the central bank's move "should put a floor under prices."

Pericli agreed: "The Fed action will help significantly over time."

Deutsche Bank's Frank noted that last Tuesday's Fed action helped improve the tone to the US mortgage market. He said that the most actively traded mortgage bonds were nearly 20 basis points tighter at 171 basis points to swaps.

Rosenberg meanwhile was more reserved with his optimism. "The issues are not immediately solvable by the Fed. The can alleviate the credit crunch, but it takes time for policy levers to work through."

Joyce Delucca, managing principal at Kingsland Capital, was also circumspect.

"It is great to see that the stock market traded up (on news of the Fed move), but I don't think it fixes the problem. It does improve liquidity for banks and broker-dealers, but whether or not that liquidity reaches the broader system remains to be seen."

TOP OFFICIALS SEE BLEAKER OUTLOOK FOR THE ECONOMY

BYLINE: By EDMUND L. ANDREWS
The New York Times

February 15, 2008 Friday
Late Edition - Final

SECTION: Section A; Column 0; Business/Financial Desk; Pg. 1

With the credit markets once again deteriorating, the nation's two top economic policy makers acknowledged Thursday that the outlook for the economy had worsened, as both came under criticism for being overtaken by events and failing to act boldly enough.

In testimony to Congress, Ben S. Bernanke, the chairman of the Federal Reserve, signaled that the Fed was ready to reduce interest rates yet again, pointing out that problems in housing and mortgage-related markets had spread more widely and proved more intractable than he predicted three months ago.

His sobering assessment was echoed by Treasury Secretary Henry M. Paulson Jr., who appeared with him. Both continued to avoid predicting a recession but said they were scaling back the more optimistic forecasts they had issued in November.

Ethan S. Harris, chief United States economist for Lehman Brothers, said that both policy makers had ''come clean'' about the economy's problems but that investors were not impressed.

Stock prices, which normally rally when the Fed hints it will lower borrowing costs, tumbled instead. The Dow Jones industrial average dropped 175 points, or 1.4 percent; broader stock indexes dropped by similar amounts.

Anxiety is escalating among institutional lenders and major borrowers, as the panic over soaring default rates on subprime mortgages that began last summer continues to spread, freezing up credit for municipalities, hospitals, student loans and even investment funds holding the most conservative bonds.

On Capitol Hill, the economic policy makers found themselves in the line of fire. Senator Robert Menendez, Democrat of New Jersey, accused both Mr. Bernanke and Mr. Paulson of having ''hit the snooze button.''

Senator Christopher J. Dodd of Connecticut, chairman of the Banking Committee, told reporters after the hearing that ''it just seems as if they aren't as concerned about the magnitude of the problem.''

Testifying before the committee, Mr. Bernanke said he still expected the economy to grow at a ''sluggish'' pace over the next few months and to pick up speed later in the year. But he said ''the downside risks to growth have increased,'' noting that spiraling losses in home mortgages have dragged down the credit markets and shaken the broader economy.

While trying to be optimistic, Mr. Paulson said that the administration's forecast ''would be less, but I do believe we'll keep growing.''

Many Wall Street economic forecasters, however, are already estimating that the risks of a recession are at least 50-50, and a growing number of analysts contend that an economic contraction may have already begun.

Fed policy makers will release their newest forecasts on Wednesday, and Mr. Bernanke said they would be more in line with those of private-sector economists.

The Fed has reduced its benchmark interest rate, called the federal funds rate, five times since September, including two cuts within eight days last month. The rate has fallen to 3 percent; as recently as late summer of last year it was 5.25 percent.

Mr. Bernanke assured lawmakers that the Fed would ''provide adequate insurance'' against a downturn in the form of cheaper money.

But neither investors nor politicians have responded particularly favorably to Washington's moves. Yields on asset-backed securities that hold mortgages and other debt have risen to levels almost as high as they were last August, when financial markets first seized up in response to soaring default rates on subprime mortgages.

The Fed's rate cuts have led to a more modest decline in mortgage rates for borrowers with good credit, but they have done little to ease the broader credit squeeze.

Mr. Bernanke agreed that banks and other lenders have been pulling back, both because of increased aversion to risk and because they have been forced to book huge losses from soured loans and to repurchase troubled mortgages and loans they had sold to investors.

The unexpected losses and growing pressures, he continued, have prompted banks to become more restrictive in their lending and more ''protective of their liquidity.''

Mr. Bernanke said the economy would grow slowly but pick up speed later in response to both the Fed's lower interest rates and the $168 billion economic stimulus package that President Bush signed Wednesday.

''At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year,'' he told lawmakers. But in cautioning that his outlook could turn out to be wrong, the Fed chairman left the door open to additional rate reductions.

Mr. Paulson tried to sound less downbeat. ''I believe we are going to continue to grow, albeit at a slower rate,'' he told the Banking Committee, insisting that the plunge in housing and credit markets was a correction rather than a crisis.

Mr. Bernanke said a wide variety of economic indicators had declined in recent months, as the meltdown in the housing and mortgage markets rippled through the broader economy.

The Fed chairman said the job market had worsened, noting employment fell by 17,000 jobs in January, according to the Labor Department. That was down from an average rise of 95,000 jobs a month in the final three months of 2007. Unemployment, though still comparatively low, at 4.9 percent, has edged up from 4.7 percent a few months ago.

Nationwide, housing prices have declined and show no signs of having hit bottom, while the stock markets have fallen sharply from their highs late last year.

Mr. Dodd has proposed legislation to create an agency to bail out many homeowners by buying up and restructuring troubled mortgages. He painted a particularly bleak picture.

''The current economic situation is more than merely a 'slowdown' or a 'downturn,' '' he said. ''It is a crisis of confidence among consumers and investors.''

Mr. Paulson and other administration officials staunchly oppose a government buyout program, arguing that the tax rebates and business tax cuts in the new stimulus package should keep the nation out of a recession.

But Senator Richard C. Shelby of Alabama, ranking Republican on the Banking Committee, predicted the bill's tax rebates and temporary tax cuts for business would have a negligible impact.

''I have equated it to pouring a glass of water in the ocean and expecting it to make a difference,'' Mr. Shelby said.

Though lawmakers welcomed the Fed's willingness to lower interest rates, investors had already been assuming that events would force the Fed's hand.

Prices in the federal funds futures market, which allows investors to bet on the coming course of rates, indicate investors expect the central bank to reduce its benchmark overnight rate another full percentage point, to 2 percent, by the end of June.

Falling Mortgage Dominos

Like its subprime sibling, the Alt-A mortgage mart sees rise in late payments and defaults

Investment Dealers Digest
January 28, 2008
BYLINE: Aleksandrs Rozens

The Alt-A mortgage market, which once accounted for 1%-2% of the MBS market but now makes up as much as 20% of the securitized mortgage universe, has seen a rise in late payments and defaults, spurring warnings by credit rating agencies.

While the problems with Alt-A home loans have been ascribed to poor underwriting standards among mortgage lenders, what may be worrisome to investors is that credit scores for many of these borrowers are what would be considered prime or credit-worthy.

"The Alt-A market is displaying the same symptoms as the subprime market," says Thomas Zimmerman, head of asset-backed and mortgage credit research at UBS in New York. "2006 and 2007 loans were as weakly underwritten as subprime loans."

"These are issues we're seeing in all mortgages. We are in a housing correction so all mortgages are seeing an increase in delinquencies off of what were record lows," says Karen Weaver, global head of securitization research at Deutsche Bank. Alt-A "is in some ways a sister product to subprime. Some Alt-A pools are very, very close to subprime quality. There is a pretty big divergence (among loan underwriting practices and standards)."

Alt-A loans have been around since at least the 1990s when they were introduced as a mortgage product designed for small business owners whose income patterns were different from that of a typical borrower.

This meant that borrowers could offer less documentation detailing their earnings. In recent years, these loans were more broadly adopted, particularly among borrowers who used these loans to buy investment properties. In some cases, borrowers who did not qualify for a regular mortgage product because they did not earn enough opted for Alt-A loans where they could "state" their income even though they paid a slightly higher rate.

"[Real estate] investors wanted it done rapidly. They wanted to capture price gains. They didn't want to provide much documentation. The idea was to sell the property or refi the loan," says Douglas Duncan, chief economist at the Mortgage Bankers Association.

In recent weeks, credit rating agencies have downgraded several securities backed by Alt-A loans, including deals with fixed and floating rate mortgages from Indymac, Countrywide, Goldman Sachs, Citigroup and American Home. All of the transactions subject to downgrades in recent weeks have been 2007 deals, but the problems may also crop up in transactions from 2006.

The underlying reason for the downgrades or warnings of bonds being put on review for a downgrade is the higher-than-anticipated rates of delinquency, foreclosure and real estate-owned properties.

"The Alt-A market is a little better than subprime. People were focused on subprime as the most extreme, but some Alt-A is almost as bad as subprime," says Zimmerman. "We're seeing an increase in delinquencies. It is well beyond normal levels."

According to Deutsche Bank's Weaver, Alt-A delinquency rates rose to 6.2% in December 2007 from 1.4% in December 2006. That magnitude of change was greater than that seen in subprime loan delinquencies.

Understanding the loans backing the bonds

The Alt-A mortgages backing the bonds include floating rate and fixed rate mortgages. The loans are first-lien mortgages and their credit scores can run over 700, a level comparable to prime mortgages guaranteed by Freddie Mac and Fannie Mae. (You can get a 95% LTV agency loan with a 660 credit score).

What makes Alt-A paper different is that their loan documentation is not as thorough and Alt-A mortgages have increasingly become the loan of choice for borrowers looking to buy investment properties. Housing finance professionals generally believe that a borrower who lives in a home will be less likely to default than the borrower who sees the property as merely an investment. According to MBA's Duncan, Alt-A mortgages have been very popular in states that saw the biggest run-up in prices and speculation: California, Arizona, Nevada and Florida. "The Alt-A was very popular in the same areas where there was speculative buying," says Duncan.

Nevada and Florida are two states which have seen a marked rise in problem loans.

Realtytrac, a firm that keeps tabs on foreclosure activity, reported last month that Nevada was the leading state in terms of foreclosure activity where one household out of every 152 had a property foreclosure. Florida had a rate of one foreclosure per every 282 households, while Ohio had one foreclosure for every 307 households. Foreclosures in November 2007 were up 68% from a year ago.

Standard & Poor's recently noted that severe delinquencies among Alt-A loans from 2006 - that is 90-days or more, including loans in real estate owned or foreclosure - have seen two times the number of delinquencies of mortgages underwritten in 2005. The number of delinquencies for those 2006 mortgages is more than four times the number seen among loans created in 2003 and 2004.

"The 2006 and 2007 vintages are problematic, but the [borrowers] from 2004 and 2005 still have positive home price growth. The 2006 and 2007 buyers have seen a drop in their home values," says Fitch's Glenn Costello, a managing director at the credit rating agency and co-head of its residential mortgage backed securities group.

Market watchers believe that borrowers who have seen their property retain more of its value are less likely to default, while those who purchased homes in 2006 and 2007 did so at the very peak of the housing boon and may be more apt to fall behind on payments or simply abandon the property.

According to S&P, Nomura Securities was the issuer with the most severe delinquencies, but others with problem loans in their securities included Bear Stearns, Goldman, Impac, Credit Suisse and Morgan Stanley.

ARMs can hurt investors The Alt-A universe includes largely three types of loans: payment option ARMs, hybrid ARMs and fixed-rate loans. Fixed-rate borrowers have been the least problematic because these have not seen the payment shock associated with adjustable rate loans. When it comes to hybrid ARM loans, a rise in borrowing costs often trips up homeowners.

"A hybrid ARM homeowner is presumably more financially stretched than a fixed-rate homeowner and ... is more likely to be falling behind on his or her mortgage payments," according to S&P, which noted that payment option ARMs are the riskiest because the pay shock for these loans is much more dramatic.

"While in the past POA (payment option ARM) borrowers have been afforded ample opportunity to refinance, in the current market environment, troubled POA borrowers no longer have abundant liquidity available to them," S&P warned in its report, adding that "many borrowers in the future may find it difficult to avoid foreclosure."

Declines in home prices have made things even tougher for the Alt-A market because some borrowers purchased their homes with little or no down payment with the help of piggy-back mortgages, says Fitch's Costello. As a result, these borrowers will have little or no equity, hurting their chances of qualifying for a refinance.

While there are parallels to the subprime situation, market observers believe the problems in the Alt-A market likely took longer to surface because these homeowners are of better quality.

Their ability to readily refinance from one Alt-A loan to another was hindered by last summer's credit storm that claimed a well known Alt-A lender - American Home Mortgage. Problems in subprime were first beginning to be felt in late 2006, and were very evident by April 2007 when New Century, a leading subprime mortgage lender, filed for bankruptcy.

American Home filed for bankruptcy on Aug. 6 because it was unable to readily resell mortgage loans into securities. The bankruptcy added to concerns about mortgage credit risk and likely prompted many lenders to hold off from underwriting more Alt-A home loans.

For now, holders of highly-rated securities, AAA paper, backed by Alt-A loans have not experienced massive downgrades. But investors ought to remember that 90-95% of an Alt-A bond transaction - these deals typically total $500 million - is AAA. So, if and when losses pick up and eat through the support classes that higher rated paper could be impacted.

"It could be possible that AAA paper could be downgraded," says Fitch's Costello.

Meanwhile, some participants may have been cheered by the Federal Reserve's dramatic rate cut last week. The easier money likely will aid the economy, but many borrowers with little or no equity in their homes will continue to have a tough time refinancing their mortgage.

Additionally, the problems within the Alt-A mortgage market promise to seep into other areas of the credit markets, notably the collateralized debt obligations (CDO) that bundled low rated classes of various types of mortgage debt. Downgrades of subprime mortgage-backed securities last year led to downgrades of some CDO transactions.

"Yes, we may see some downgrades in CDOs," that included low-rated classes of Alt-A mortgage backed securities, says Deutsche Bank's Weaver.

THE ECONOMIC STIMULUS PLAN

Big loans could get cheaper;
Supporters say the proposal would help borrowers and stabilize the housing market

Los Angeles Times
January 25, 2008 Friday
Home Edition

BYLINE: E. Scott Reckard and Peter Y. Hong, Times Staff Writers

SECTION: BUSINESS; Business Desk; Part C; Pg. 1

The economic stimulus plan worked out Thursday in Washington would provide nearly a year of cheaper loans for Californians buying or refinancing higher-cost homes, and the news elicited jubilation in the beleaguered housing and mortgage industries. Leaders of the House of Representatives and the White House agreed that the size of loans that can be purchased by government-sponsored mortgage buyers Fannie Mae and Freddie Mac should be increased sharply for a year from the current cutoff of $417,000.

The plan also would nearly double the size of loans insurable by the Federal Housing Administration, from $367,000 to $729,750.

The FHA was set up to provide mortgages to first-time buyers, including many with less-than-perfect credit, and insures loans to borrowers with down payments or home equity of as little as 3%.

Currently, any loans above $417,000 are considered "jumbo" mortgages. In recent months, they have become harder to obtain because skittish private investors have become reluctant to buy them.

Interest rates on jumbo loans were running about 6.5% this week -- 1 percentage point higher than rates on the so-called conforming loans that Fannie and Freddie could buy. Someone who wanted to borrow $500,000 would save about $330 a month, or $3,960 a year, if such a loan were considered conforming and thus had a lower rate.

"It's the single most effective step they could take to stabilize the housing and mortgage market," said Rick Simon, a spokesman for Calabasas-based Countrywide Financial Corp., the nation's largest home lender, which had led the lobbying to raise the loan limits.

The precise increase on the "conforming" ceiling was still being debated late Thursday. House Republicans said they had agreed to temporarily raise loan limits for Fannie Mae and Freddie Mac to $625,500 while Democrats said the deal would boost limits to $729,750.Either way, the increased limit on loans eligible to be bought by Fannie Mae and Freddie Mac would be temporary, expiring Dec. 31. It was not clear if the higher FHA limit would be temporary or permanent.

Lobbying for an increase, the National Assn. of Realtors had estimated that increasing the conforming loan limit to $625,000 would strengthen current home prices by 2% to 3% and generate $42 billion in increased economic activity.

Higher loan limits would be especially significant in California, where the median home price is $597,640, housing and lending industry officials said.

Among other things, it would make it easier for battered lenders such as Countrywide, which lost $1.2 billion in the third quarter, to sell new fixed-rate loans to borrowers at risk of defaulting when their adjustable-rate mortgages reset to higher payments.

"This is a very positive development for California's lenders and homeowners," said Susan DeMars, executive director of the California Mortgage Bankers Assn. The California Assn. of Mortgage Brokers said the plan would "increase much-needed liquidity in today's struggling housing market, giving homeowners and home buyers access to safe, sustainable loans."

Not all observers were so optimistic.

Among those sounding skeptical notes was UCLA economist Edward E. Leamer, who said higher loan limits "are not going to matter much now" because the housing markets are still destabilized by bubble-era home prices that must continue to fall.

The proposed new conforming loan limit is far beyond the reach of most people, Leamer said. "Most Americans can't afford a $700,000 house," he added. "They don't have the down payment; they don't have the income."

Mortgages that size seem realistic only because "in the good old days, a year or two ago, you didn't have to have the down payment or income" to get such a loan, he said.

A bill wasn't expected to be signed for six weeks. Banking consultant Bert Ely of Arlington, Va., a frequent critic of Fannie Mae and Freddie Mac, said the final version could be considerably watered down -- restricted by region or available only to borrowers with significant equity in their properties.

Ely said opposition remains strong from critics who believe the plan shifts too much risk from the private housing markets to the government, because FHA insurance is a federal program and investors regard Fannie and Freddie as having the implicit backing of the federal government.

Such observations weren't enough to put a damper on mortgage brokers such as Jeff Lazerson of Laguna Niguel, who said the prospect of higher loan limits was "just fantastic."

Lazerson said he dropped out of the FHA loan program two years ago because home prices had risen so high and his customers with marginal credit found it easy to get sub-prime loans or "alt-A" mortgages from private lenders that didn't require proof of income.

FHA loans, by contrast, are notorious for requiring careful documentation.

Despite that, Lazerson said he was eager to resume providing loans backed by the FHA, which allows borrowers to raise money from family members to make the low 3% down payment.

$417,000 - Current cap of cheaper, non-"jumbo" mortgages.

$625,500 - New cap for non-jumbo loans under Republican plan.

$729,750 - Democrats proposed cap for non-jumbo loans.

$367,000 - Current cap for loans insured by the Federal Housing Administration, which is expected to be raised to as much as $729,750.

A Break on 'Jumbo Loans'

The New York Times
December 9, 2007 Sunday
Late Edition - Final

BYLINE: By BOB TEDESCHI
SECTION: Section 11; Column 0; Real Estate Desk; MORTGAGES; Pg. 11

PROSPECTIVE borrowers in the New York area who are likely to be in the market for a mortgage that is close to the ''jumbo loan'' category have received a break from Washington.

Late last month, the federal government held steady at $417,000 the so-called conforming loan limit -- the line above which mortgages become jumbo loans, and typically carry higher rates.

The limit, which is annually adjusted, usually moves in lock step with average home prices across the country, at least when prices are rising. There was some speculation earlier this year that the government could drop the conforming loan limit because house prices have been dropping.

The national average home price in October, for instance, was $295,573. That was $10,685 lower than a year earlier -- a 3.5 percent drop.

While not falling quite as sharply, parts of the New York area have registered declines. For instance, the median sale price of a home in Nassau and Suffolk Counties was 1.4 percent lower in the third quarter of this year than in the second quarter, according to a report late last month by the Office of Federal Housing Enterprise Oversight.

But some towns have fared far worse. According to First American LoanPerformance, a San Francisco-based mortgage industry consultancy, home prices on Centerport in Suffolk County were 8.6 percent lower in September 2007 than a year earlier.

Thanks to those drops -- and the fact that the conforming loan limit was held steady -- home buyers have somewhat better odds of seeking mortgages that are below the jumbo loan threshold. Jumbo loans typically carry interest rates about one percentage point higher than conventional loans.

Late last month, for instance, borrowers could find a 30-year fixed-rate mortgage for 5.875 percent on a loan of $417,000. For a jumbo loan of $418,000 from the same lender, the rate would rise to 7 percent, said Marc Schwaber, president of Preferred Empire Mortgage, a Manhattan-based brokerage. The monthly principal and interest payment for the jumbo loan would be $2,780.96, compared with $2,466.71 for the conventional loan. Over five years, the jumbo loan would cost $18,855 more.

''Because of the drop in housing prices,'' Mr. Schwaber said, ''many more people are going to qualify for less expensive conventional loans.''

Mr. Schwaber says borrowers who seek conventional mortgages also have an easier time qualifying for a loan because federal law requires Fannie Mae and Freddie Mac to buy conventional loans from lenders. Knowing there is a secondary market for their loans, lenders can offer more generous terms.

Practically peaking, Mr. Schwaber said, borrowers with good credit can often qualify for a conventional loan with a down payment of 5 percent, and borrow extra money to cover two months of principal, interest, taxes and insurance. Borrowers seeking jumbo loans must typically offer significantly higher down payments, and have reserves to cover several months of principal, interest, taxes and insurance.

Borrowers in the tristate area suffer under the yoke of jumbo loans far more than those in many other states, said First American LoanPerformance.

New York, New Jersey and Connecticut were among the six states with the highest percentages of jumbo loans. New York was the highest in the area, at 9.6 percent. California led the nation, with more than 25 percent of its mortgages in the jumbo category