Florida Mortgage Report

As Expected, Mozilo Kool-Aid Flows

As I had expected, I came across an article of how Countrywide denies the rumors of bankruptcy.  In this NY Times article, Countrywide said there was “no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company.”

Yet, if the litigation they are facing goes against them (previous post), bankruptcy will almost decidedly occur.  So, the statement above is very questionable as there is some substance to the rumors.

Now, add to that the fact that Countrywide saw delinquencies rise in December and even more substance is shown.  So, the Kool-Aid flows at the corporate level as they try to bail out their sinking ship.

Here are some of the excerpts from Wall Street Journal Online that came out as I was writing this post...

Countrywide's loan delinquency rate surged to 7.2% of unpaid principal balances from 4.6% a year earlier and 6.52% in November.

No substance to the rumors, right?

Countrywide and E*Trade Financial Corp., both of which have been hit hard by the credit crunch, are offering some of the industry's highest rates on products like certificates of deposit.

A very good sign that both companies are struggling and desperately are seeking any "liquidity" gains they can get.

Egan Jones, a ratings company, wrote in a report on Tuesday that Countrywide is "severely challenged and might falter if it does not receive an infusion of at least $4 billion within the next couple of weeks." It said funding is needed because of a 40% decline in mortgage originations at the savings-bank company and a shift away from formerly profitable subprime-mortgage loans.

Again, more substance and proof that the rumor mill may in fact not be a rumor at all.

Fannie and Freddie to Go Jumbo? Is the Government Going Insane?

"Stop the insanity" is the first phrase that comes to mind after reading this headline.  Why?  Think about what is truly happening in the mortgage market and where all of this is headed.

Basically, the government is trying to overtake the mortgage market through endless regulation.  They feel they must do something or else and are succumbing to pressures to "bail out" a market that was in desperate need of a correction to bring itself back to reality.

But is "over-regulation" what we truly need?  Don't take me wrong here as I am all for added regulation which protects the consumer, but when the government steps in, they tend to overdo it.  Allowing Freddie and Fannie to go into the Jumbo market, even if only temporarily, is one case in many of how the government is throwing Band-Aids on the gaping wound.  Sure it stops the bleeding some, but basically just prolongs death.

Paulson and Bernanke are doing everything in their power to Band-Aid the mortgage market.  Bernanke and crew are cutting the Fed Funds Rate and Discount Rates even with inflation showing signs of growing and the economy slowing.  He is giving stagflation an "open door".  Both are looking for any changes they can make or get other parts of the government to make in order to "save homeowners from foreclosure." 

Who stands to win though?  The homeowner?  Not likely.

The real winners in this game they are playing are the lenders and other financial institutions that are struggling due to their risky lending practices or over leveraged positions on mortgage backed securities.  Citigroup, Wachovia, Bank of America, Washington Mutual, Countrywide, the list goes on and on.  All are shouldering huge losses and will likely continue to do so into 2008.  They "need" the government to do something.

The homeowner's facing foreclosure, for the most part, deserve to be foreclosed upon.  While the media and government play that the typical foreclosure is a subprime borrower facing increased mortgage costs due to their payment adjusting, that represents the minority, yes the minority of foreclosures out there.  Factor in that the government portrays the mortgage professional that sold them the loan as an unscrupulous one and reality shrinks even further from the truth.

Again, don't get me wrong.  There are unscrupulous originators and there are homeowners that truly should be helped somehow, but they are the smallest percentage of the pie. 

So, why is the government willing to screw up the entire industry over the few?  Well, because that is what they do.  They disguise "bail outs" as "homeowner salvation plans".  They usually go out of their way to appease the minority groups on an issue, while sacrificing the desires of the majority groups. (Note:  I am not talking about racial or ethnical issues here, so don't even go that route in any comments please).

What Will Happen If Citigroup Gets Priced Like E*Trade?

E*Trade experienced a fire sale of mortgage backed securities that resulted in a worst case scenario of pricing subprime assets lower than expected.  Analysts say E*Trade got as little as 11 cents on the dollar for its $3.1 billion portfolio of asset-backed securities.

Since this was among few observable trades, the negative connotations for the valuation of other financial institutions own portfolios, namely Citigroup's.

Citigroups' own analyst stated E*Trade received 11 cents on the dollar.  Goldman Sachs analysts said they were surprised by the size of the discount considering 73 percent of the E*Trade portfolio consisted of prime mortgages, loans to people with good credit.

So, what would happen if we are to see similar pricing with other financial companies, like Citigroup?  Simply put, it will be ugly, very ugly.  Here are numbers presented by Susan Katze of Credit Suisse, assuming 26 cents (numbers would be even higher with only 11 cents)...

• Citigroup's after tax write down would be around $26 billion
• Merril Lynch's after tax hit would be around $9 billion on subprime paper

One thing to note, Susan's take on Merrill is on subprime paper only and E*Trade's markdown was on all paper, including 73% of which was prime mortgages!

So, the government, including Bernanke (behind the scenes) backs a SIV bailout, which Treasury Secretary Paulson announced is a failure already.  With that failing, and the fact Citigroup is over leveraged, the losses if required to price to market would be enormous.

Citigroup may be facing major losses, even potentially exceeding the "equity" shown on their September 30th balance sheet.

What Should be Done About the Continued Credit Crunch? How About Nothing?

The economy runs in cycles and that is a healthy thing.  When the government steps in to try and "fix" it, that is a bad thing as it prolongs the process.  Why doesn't the government just let it go, stop screwing around with the economy trying to fix things and just let it run its course?

Politics is politics, but politicians need to stop trying to "look good" and focus on reality.  Of course, it isn't just the politicians trying to fix things either.  What about Big Ben and the gang, making statements letting the market at least believe there is another rate cut coming?

Why can't we just let things work through the cycle, so the cycle can complete itself and start moving in the opposite direction?

That's right, it may get worse, but it always ends up getting better down the road, but only when the cycle has a chance to complete itself.  It is all part of a healthy economy.  Screwing with it only makes things worse, as we are seeing now.

• Let the foreclosures happen and affordable housing will be a reality again.
• Raise rates and recession (if the economy decides that's what it needs) will happen, then be over and we will see an economic bounce later.  At least the dollar won't continue its death spiral and we won't continue to have stagflation (that's when the economy slows, yet inflation increases).
• Countrywide, Citigroup, whoever deserves to go under for their past mistakes, let them fail.  It is a necessary part of the solution.  Bail outs only cause more problems and prevents companies from learning from their mistakes.
• Sellers need to lower prices to that which buyers are willing to pay, then the inventory will shrink and eventually the market will start moving higher again.

I could go on and on, but I think you get the point. 

E*Trade Going Down the Toilet?

On rumors (at least for now) that E*Trade is heading for bankruptcy and its downgrade from Fitch, its shares fell apart, dropping more than 50% today.  So, the final nail is likely in the coffin as they lost so much "value" they likely cannot avoid BK now.

Couple this wonderful news today with that of it being the target of an informal SEC investigation, and doom is too pretty a word for the picture of E*Trade's future.

E*Trade's President and COO says they can absorb over $1B in losses, but with Citi estimating the losses at $5B, where does that leave them?  Sounds like this guy took lessons from Mozilo.

So, if you have money in an E*Trade account, you may want to remove it yesterday.