A lot has happened to the subprime
market and the players in it since the virtual meltdown two weeks ago. This
does not purport to be a definitive roundup of activities in the last week,
there has been a lot going on.
New Century Financial continues its downhill spiral. While
it voluntarily stopped accepting new mortgage applications (after most of its
warehouse lines were closed) several weeks ago, it has been out and out forbidden
to write mortgages by California, Ohio, and several other states. One of its
major creditors, Morgan Stanley, will accept preliminary bids on $2.48 billion
of New Century loans which the bank holds as collateral on March 29 in an attempt
to recoup some of its lending loses.
Conversely, some subprime lenders are rallying. Accredited Home Lenders
has secured bridge financing from Farallon Capital Management, a huge hedge
fund firm. The five year loan will give Accredited time to secure new warehouse
lines or to sell its lending operations and may signal a move by hedge funds
into assuming risky loan portfolios. Frontier Financial has sold some of its
loans to buy time to sell off its mortgage business.
Some experts speculate that the next few shoes will drop as investors begin
to review their loan portfolios looking for excessive delinquencies. Most loan
purchase contracts require the underwriting firm to repurchase loans with defaults
or possible defaults above a certain level and some subprime lenders may not
have the available capitol to redeem the bad mortgages.
Congress, sensing impending problems, has jumped into the
fray and, what else? Multiple hearings have been held and others are scheduled.
The Senate Banking, Housing, and Urban Affairs Committee held two hearings
on the subprime situation within the last week. At the first one on Thursday,
March 22 testimony was heard from representatives of the Office of Comptroller
of the Currency, The Federal Deposit Insurance Corporation, mortgage lenders
such as Countrywide and HSBC Financial, consumers and, representing minority
consumers, The National Council of La Raza. At the second hearing held on Tuesday,
March 27 the Federal Reserve Board was expected to testify that, while the subprime
market was rallying, problems might be expected to continue for several years.
Two different House committees are also conducting hearings; The House Financial
Services Subcommittee on Financial Institutions and Consumer Credit and the
Subcommittee on Domestic Policy.
Some of the testimony at these hearings was interesting and at least one smoldering
dispute that we reported on earlier between the National Association
of Mortgage Brokers and the Conference of State Bank Supervisors (CSBS)
was stoked into flames. We will report on some of the testimony at these various
hearings later this week.
In other relevant news, the Case-Shiller price indexes for January were released
on Tuesday by Standard & Poors and MacroMarkets LLC. The 10 city index was
down 0.7 percent in the past year, representing the first year-over-year negative
reading in 11 years. The 20-city index was down 0.2 percent for the same period,
the first time it has ever registered a negative number. Robert Shiller, MacroMarkets'
chief economists said that these declines were a "good indicator of the dire
state of the U.S. residential real estate market."
Detroit and Boston led the downward trend with price declines of 6.9 percent
and 5.6 percent respectively. Seattle prices increased 11.1 percent and Portland,
Oregon was up 8.7 percent.