Shaken subprime credit on path to renewal

[HenryTo]

Keeping a close eye on this but not buying anything (such as LEND) just yet. My guess is that some of these lenders may represent a good trade in the next market decline, such as the homebuilders back in the May to July 2006 decline.
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Shaken subprime credit on path to renewal
Wed Jan 24, 2007 2:13 PM ET

By Al Yoon

NEW YORK (Reuters) - Wall Street is taking a cautiously optimistic stance on subprime mortgage credit for the new year after being surprised by deterioration of the riskiest home loans produced in 2006.

A surge in defaults on last year's loans from abnormally low levels in 2003-2005 came as subprime underwriters loosened underwriting standards to maintain volume in a shrinking market. The loans, most of which are collateral for the $575 billion home-equity asset-backed bond market, are being returned to lenders by investors at alarming rates, hurting profits, analysts said. The weakest lenders failed or are up for sale.

"The amount of bad loans put back have taught a lesson" to the underwriters, said Scott Eichel, head of asset-backed securities trading at Bear Stearns, at a conference last week. Bear Stearns is "pretty bullish" on 2007 credit because of better underwriting and a surplus of cash seeking yield, he said.

Defaults on subprime loans in 2006 were rising at a rate near 6 percent, more than twice that of 2005 and making last year one of the worst in terms of credit quality, according to UBS Securities. As much as 5 percent of a typical subprime deal is tainted by defaults in the first few months of a loan, compared with 1.5 percent to 3 percent in 2005, the firm said in a research note.

Lenders such as Accredited Home Lenders Holding Corp. <LEND.O> that have admitted they went too far on easy credit have toughened criteria on loans to high-risk borrowers who lost the crutch of a booming U.S. housing market. Among steps, they are cutting back on allowing stated, rather than proven, income documentation in mortgage applications.

Investors are waiting for hard data to show that tighter underwriting will result in fewer defaults. House price gains that had boosted borrower equity have stalled, hurting homeowners' ability to avoid higher payments by refinancing to a new loan. Most subprime loans are adjustable after two or three years.

Home prices will probably decline nationally in 2007 before rebounding in 2008 and 2009, according to Moody's Economy.com.

"Based on what we are hearing about tightening guidelines and some hard lessons learned by certain originators, you could argue that the 2007 vintage will perform better than 2006," said Brian Vonderhorst, an analyst at Standard & Poor's, which has increased credit enhancement requirements. "But there are many variables that could change that view."

Analysis of subprime loans by Wall Street sources so far this year reveals some optimism, if only for the 2007 loans. Recent loans are showing a decline in so-called early payment defaults, according to Rod Dubitsky, head of asset-backed securities research at Credit Suisse in New York.

Meantime, subprime bond issues this year are drawing a kinder response from investors jaded by the poor performance of loans created in 2006, said Dan Castro, chief credit officer at GSC Group in New York.

"We've seen a couple of issuers where EPDs have dropped recently following underwriting improvements," Dubitsky said. "We haven't seen the housing market improve much, so we believe the improvement in EPDs is a result of underwriting changes."

The gravity of the issue for Wall Street, whose bond units contributed to record earnings in 2006, is luring 6,000 market participants to the largest-ever conference on securitizations in Las Vegas next week. Mortgage credit will be a key theme for the American Securitization Forum given its impact to other markets, said George Miller, the ASF's executive director.

Improving the quality of bonds is important not only to profits of monoline lenders but also to investment banks that have added their own originations units, analysts said.

Aggressive bidding for loans in the wholesale market by Wall Street firms has also left those companies more exposed to losses, Angelo Mozilo, chief executive officer of Countrywide Financial Corp. <CFC.N>, said in September.

Originators tied to Morgan Stanley <MS.N>, Goldman Sachs Group Inc. <GS.N>, General Electric Co. <GE.N>, Credit Suisse <CSGN.VX> and Lehman Brothers Holdings Inc. <LEH.N> have all underperformed the market average for delinquencies of 2006 loan collateral, according to UBS research.

Securities with older mortgage collateral will likely remain troublesome, especially those 3 years old, or the age at which delinquencies typically rise, analysts said. Bonds created today could still include loans made under looser underwriting guidelines, said Alex Wei, who manages ABS at Delaware Investments in Philadelphia.

Expectations that more monoline subprime lenders may fail will also keep the rate of loan repurchases high as investors avoid connections with weak sellers, UBS said. The firm doesn't expect much improvement in credit for 2007.

"The broader market is still weak," Wei said. "We are taking a wait-and-see approach. "Even though people are telling us things are better already, it takes originators time" to improve the quality of their loans, he said.

[rffrydr]

And this....
http://seekingalpha.com/article/28278

....turns into this:

http://www.cnbc.com/id/19085195
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

And Freddie and Fannie enjoy the spillover:

http://www.bloomberg.com/apps/news?pid=20601103&sid=axfeEvVeLwww&refer=us
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

LEND bought out at 10% premium:


http://www.forbes.com/feeds/ap/2007/06/04/ap3784037.html
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Bloomberg account of serial borrower's lawsuit against Subprime. How Novastar "spread it's tentacles":

http://www.bloomberg.com/apps/news?pid=20601109&sid=a8VFwgtdQ9FM&refer=home
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

....And it's happening.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Merrill, Lehman, MS put in an encouraging word.

Watch for Expenses to shoot up. "Sevicing" foreclosures is a pricey business.
_________________
Today is the Tomorrow you worried about Yesterday!

[dash]

Seems like just yesterday that worries about subprime defaults were daily news, and commentator after commentator was talking about the coming collapse in consumer spending and rise in risk aversion. Now it hardly gets a mention:

[rffrydr]

There's newmoney here, Ichahn money:

http://online.wsj.com/google_login.html?url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB116977900589488559.html%3Fmod%3Dgooglenews_wsj

While in the press:

"In one indication that investors are losing their taste for mortgages, hedge funds that specialize in mortgage-backed securities had an outflow of $1.8 billion in 2006, down from an inflow of $1.8 billion in 2005, according to Hedge Fund Research. It was the only category of hedge funds to have a negative flow for the year."

http://www.nytimes.com/2007/01/26/business/26mortgage.html?_r=2&oref=slogin&ref=business&pagewanted=print&oref=slogin
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Best of Breed:

http://stockcharts.com/h-sc/ui?s=NFI&p=D&b=5&g=0&id=p73310047939
_________________
Today is the Tomorrow you worried about Yesterday!