A forced marriage by the FED

FED must stop the chain reaction before it happens or almost every major finanical institute would face a severe counter party risk based write down(much more uglier than sub-prime).

cheap load(arranged friday) to BSC is useless too as no one would think that is enough and the run would continue and BSC would be forced to file chapter 11.

So they need some big guys to boost the confidence, i.e. JPM.

JPM doesn't really want it or else what would be the difference between 1.28B(that is more likely to be approved quickly by the share holders) vs 286M when they said it can make 1B/year after the completion and cleaning up the mess ? beside, it is not cash but printing more certs. A bit more dilution but worth it if they really want it so badly.

BSC's management doesn't want to give in yet or else they can play hard with the 'I am going to drag everyone down if I don't get say 12/share' trick. As they have depleted all the cash anyway so even their client want to draw money, they have still to wait for the liquidation(to find out what money belongs to whom). A no loss situation for the management(other employee must go immediately though) if they think 10/share is the max they can get(I believe the book is already negative).

the deal sounds more like a 'convertable note' style credit line to me where JPM+FED gives the backing to BSC for 12 months and they hope the situation(the so called dislocation in bond market) would improve and by that time, BSC has unwinded its huge position and have a positive book value and its share holders would reject the deal. And in the meantime, expect the reject it again and again(the agreement is very strange/smelly to allow the share holders to do this)

If that doesn't work, they would take it in and the 1B would be sort of a premium they received, to reduce the risk a bit.

Now whether this would work is beyond anyone's guess since it can send a signal of 'if BSC worth 2/share, how about LEH/GS/MER etc' ? We are already seeing LEH being punished, the next target may be.

I was thinking that the FED would broker a deal in the 30-50 range(forget whether BSC does worth that much as it doesn't matter) that would boost the overall confidence and buy the market some more time. May be they are playing a 'shock and awe' trick hoping a capitulation style bottoming.

Correction Appended

An investigation into the mortgage crisis by New York State prosecutors is now focusing on whether Wall Street banks withheld crucial information about the risks posed by investments linked to subprime loans.

Reports commissioned by the banks raised red flags about high-risk loans known as exceptions, which failed to meet even the lax credit standards of subprime mortgage companies and the Wall Street firms. But the banks did not disclose the details of these reports to credit-rating agencies or investors.

The inquiry, which was opened last summer by New York's attorney general, Andrew M. Cuomo, centers on how the banks bundled billions of dollars of exception loans and other subprime debt into complex mortgage investments, according to people with knowledge of the matter. Charges could be filed in coming weeks.

 

Here in California Gov. Arnold Schwarzenegger wants Congress to raise the Fannie Mae and Freddie Mac lending

limit from $417,000 to at least $625,000 as part of the economic stimulus package. State Assemblyman Ted

Lieu is pushing for a bill that requires mortgage lenders to tighten up already strict guidelines to make sure

homebuyers can afford their basic monthly bills before qualifying for a mortgage loan. This bill would also ban

certain designer mortgage loans such as the option arm mortgage. The option arm mortgage, also known as the

pay option arm, allows borrowers to pay less than the interest that is due by adding the unpaid interest to the

balance of the mortgage loan. The bill would also allow some homeowners to refinance their homes without

being responsible for any penalties or unnecessary fees.

Now what? Frankly, analysts feel that enactment is possible by mid-February but looks more likely by early March. No large investors will make any policy changes or announcements until the issues are less confusing, or even voted into law. Apparently, the bill would temporarily increase the limit on mortgages Fannie Mae and Freddie Mac may securitize from $417k to up to $730k. In addition, the bill would increase the limit on loans the Federal Housing Administration (FHA) may insure from $362k to $625k. This should help to reduce spreads in the jumbo mortgage market! One estimate mentioned that as many as $400-500 billion in loans could qualify for refinancing. As these loans refinance, it could ease pressure on capital-constrained bank balance sheets. And "temporary" items like this are difficult to rescind after a year, which would also be good news for originators.

 

As part of the economic stimulus package, an increase in the conforming limit could now be a reality, at least for

a brief period. Congress and President Bush agreed, but have not voted yet, on a 1-yr increase in the

conforming loan limit to $730K. There is not a lot of detail yet (there is confusion as to whether the $730K, or

$725, is for high cost housing areas, or everywhere, and just what high cost areas are?). Just when mortgage

originators everywhere were breaking out the Cold Duck, OFHEO's director James Lockhart (Office of Federal

Housing Enterprise Oversight, who oversees FNMA & FHLMC) issued a statement saying "We are very

disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the

absence of comprehensive GSE regulatory reform.  To restore confidence in the markets we must ensure that the

GSEs' regulator has all the necessary safety and soundness tools. Yesterday Chairman Dodd talked about

moving a GSE reform bill early this year.  We are ready to work with him and the Senate Banking Committee. 

We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit

moves through their rigorous new product approval process quickly and has appropriate risk management

policies and capital in place."

 

Psssst... wanna buy a foreclosed property? After a default and after the house does not sell at the Trustee Sale,

the bank/lender owns it. As most know, this is called "REO", for Real Estate Owned. Currently mortgage

companies continue selling their REO's through real estate agents, who list them on the MLS. You would probably

need to make an offer through an agent, but here are some sites which list the properties:

http://www.countrywide.com/purchase/f_reo.asp

http://www.downeysavings.com/ffs/properties

http://www.pasreo.com/reo/ (Wells Fargo)

http://www.homesteps.com/hm01_1featuresearch.htm (Freddie Mac)

http://www.mortgagecontent.net/reoSearchApplication/fanniemae/reoSearch.jsp (Fannie Mae)

Is the term "blood bath" over-used and lost its impact? "It's a blood bath," said a VP at PIMCO about the

current market conditions. Yes, rates have crept up. Yes, property values have gone down in some over-inflated,

speculative areas of the nation, and the national median home price may have its first annual decline since the

1930's.  Yes, some portions of the economy are slower than others: confidence among homebuilders fell in June

to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index. But

overall consumer confidence is stable, rates are still low by historical standards, and property values in many

parts of the US are constant or rising.

 

 

Speaking of which, in a move that surprised no one and didn't move the markets too much yesterday, the

Federal Open Market Committee (FOMC) decided to keep its target for the federal funds rate at 5.25%.

Economic growth is "moderate", despite the housing market, and the Fed feels that the economy seems likely to

continue to expand at a moderate pace. So, growth is rebounding after a slowdown earlier in the year, while

inflation has eased from its level in February, which matched a four-year high, and rates are on hold. We started

off with a 10-yr yielding 5.09% this morning, and after Personal Income (+.4%) and Personal Consumption

(+.5%) were released, it went to 5.07%. Mortgage prices are a touch better. Ahead of us we still have the

Chicago Purchasing Manager's survey, Construction Spending, and the Michigan Consumer Sentiment survey.

 

But possibly the bigger news is that S&P said that it would change its methodology for ratings hundreds of

billions of dollars in residential mortgage-backed securities, and review its ratings on hundreds of billions of

dollars in the more complex collateralized debt obligations based on those subprime loans. It is expected that a

lot of debt will be downgraded to junk status and may have to be sold at fire-sale prices. Therefore many

pension and hedge funds that once thrived on the high returns they could get from investing in subprime junk

are expected to lose a lot of money. The effects of the US market shock have been felt around the world with

German and Japanese debt markets rallying from the news and expectations for a Fed overnight rate cut this

year have moved back up to 22%.

 

Lastly, FHLMC forecast that U.S. home sales in 2007 will decline to their lowest since the start of the five-year

housing boom in 2001 as mortgage rates and foreclosures increase. Are we having fun yet?

 

What are mortgage brokers doing to decrease the number of loan repurchase requests? Although this isn't much

of a surprise, according to a poll by Inside Mortgage Finance, 63% are now using automatic desktop underwriting

systems, 60% are doing VOE's, and most others have beefed up verifications, credit checks, documentation, and

quality control measures.

How much did you make last year? (That was a rhetorical question.) The president of Countrywide earned $48

million, the president of Freddie Mac $15 million, WAMU $8 million, Indy Mac $4 million.

 

According to Goldman Sachs and Wells Fargo, jobless subprime mortgage lenders are looking for employment in

the booming market for loans to senior citizens. So far the mortgage industry has lost 15,000 employees, and

obviously some will enter the growing market for reverse mortgages. Some bankers worry the market's rapid

growth may make reverse mortgages vulnerable to fraud and increased litigation, which has plagued subprime

loans. "As you look at what's going on in the subprime market, are those the types of folks who are really

appropriate for pursuing reverse mortgages?" asked Rolf Edwards, a vice president at Goldman, Sachs & Co. in

New York. The number of federally insured reverse mortgages has skyrocketed, climbing to 76,351 in 2006 from

7,781 in 2001. So-called HECM loans, or Home Equity Conversion Mortgages, make up 90% of them, according

to the National Reverse Mortgage Lenders Association. In another sign of growth, Bank of America Corp. in April

said it agreed to buy the reverse mortgage business of Seattle Mortgage Co., making it the third-largest U.S.

provider. IndyMac Bancorp Inc. is the industry leader. At Wells Fargo, for example, about 700 loan officers

specialize in reverse mortgages.

 

In a surprising survey (very surprising?) released last week, Experian showed that data indicates that many

subprime borrowers are paying off their credit card bills before their mortgage payment! Do they think that they

don't have much to lose by not paying their mortgage? Are their credit cards more important? Prime borrowers,

by the way, haven't changed: they are still less likely to be late on their mortgage than on their credit cards.

Check out: http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070620_271294.htm