August 20, 2007
JustQuotes: Upping The Underwriting Ante (And Industry Layoffs)
“Capital One Financial Corp., a credit card and banking company, slashed its earnings forecast on Monday and said it plans to eliminate 1,900 jobs, following its decision to stop arranging mortgages through brokers....The credit card and banking company said it expects to continue to make home loans in its bank branches, where it has more control of the underwriting process.”
"The Wall Street Journal, citing an internal e-mail sent Friday to employees of Countrywide's Full Spectrum Lending unit, said the company has laid off workers in that division, which handles home loans rated between prime and subprime [i.e., Alt-A]."
First Published: August 20, 2007 3:20 PM
Comments from "Plugged In" Readers
It was a surprise to our office--we're one of the big players in the bond business--that GreenPoint went under. This seems to be just the beginning... Once the subprimes for those "richer clients"--who purchased multimillion-dollar homes with their stated-income loans--reset in the fall, there'll be a lot of slashing and burning in the rest of the industry.
Posted by: Born and Raised in S.F. at August 20, 2007 4:26 PM
Perhaps, but it will probably take a lot longer than you think before the loans start to sour. At first people will cut their spending: they have to to ship an extra $300-500 a month to the bond holders in Germany and Asia. Some will walk, but even the zero downers will try to stick around if they can.
When they start doing that, they won't spend as much elsewhere and this country will slowly move into a recession. Only that will cause housing prices to fall significantly, not the relatively few number of foreclosures nor the resets by themselves. When people are both struggling to pay their mortgages, the mortgage is worth more than the house, and home prices continue to slowly fall, then they'll give up and walk away.
That will be further down the road than this October. What you'll hear about then will be how the great reset fear never materialized, and real estate is saved. By next fall, the mood will have reversed and the slashing and burning in the industry will start in earnest.
Posted by: tipster at August 21, 2007 6:57 AM
Have the ratings agencies lost all credibility? That's what scares me about the liquidity issues for asset-backed securities getting sold.
Posted by: Jamie at August 21, 2007 9:27 AM
has anyone else heard of or experienced low appraisals that blew up even cash rich recent deals?
Posted by: james at August 21, 2007 10:11 AM
I don't think the rating agencies have lost their credibility at all... They've said all along that their methodologies are public and that their decisions are forward-looking statements that shouldn't be the sole opinion used for investment decisions. Really--did investors *not* see this coming?
Posted by: Born and Raised in S.F. at August 21, 2007 11:36 AM
Well, I ask my question after reading an article about how the ratings agencies helped fuel the flames of the subprime mess due in part to the fact that they were paid twice as much to rate mortgage-backed securities and the underwriters shopped around for more attractive ratings. The bond market's lack of liquidity and the spiking spreads (risk premiums) also seem to indicate investors are scared out of their wits of anything but the safest investments - Treasuries. Even Agencies are a little tough to sell because of liquidity risk (ability to easily sell them). It is absolutely nuts to see the 2-year Treasury 125 basis points below the Fed Funds overnight target rate. There are not a lot of buyers for anything but ... my understanding is that the Treasury barely had enough bids to sell a recent 4-week Treasury offering ... with the first bids going around 2.7% yields and the tail (remainder) going for 4.75% ... for the same bonds in the same auction. Whoa!
Posted by: Jamie at August 21, 2007 2:05 PM
Article reference: Wall Street Journal, Wednesday, August 15, 2007, Page 1, title "CREDIT AND BLAME - How Rating Firms' Calls Fueled Subprime Mess Benign View of Loans Helped Create Bonds, Led to More Lending"
By AARON LUCCHETTI and SERENA NG
High-quality ratings on subprime-dominated tranches? That's pretty damaging to credibility if you ask me.
Posted by: Jamie at August 21, 2007 2:09 PM
Fool me once, shame on you. Fool me twice, shame on me...
Posted by: peanut gallery at August 21, 2007 3:16 PM
the credit agencies have clearly lost significant credibility. If they hadn't, then AAA would still trade. AAA securities aren't trading because nobody trusts what the other party has regardless of what Moody's or Fitch or Standard and Poor says.
You had high risk subprime mortgages rated (AAA), the same as Treasuries (which have practically no default risk).
Everything seems to be rated AAA until AFTER it has lost a ton of value, THEN it's downgrated. Well duh.
so some AAA stays at AAA, some AAA downgrades to junk, but nobody can tell WHICH AAA is "really" AAA, and which AAA is really junk.
hence the standstill.
Posted by: ex SF-er at August 21, 2007 5:12 PM