Reggie Middleton's Boom, Bust & Bling Blog - HAS MOVED TO REGGIEMIDDLETON.BOOMBUSTBLOG.COM!!!

New guidelines on cost reduction for all mortgage related Government Sponsored Entities with subprime losses

From one of my readers:
It's not a news story; it's something I witnessed personally.  Freddie Mac lost $2B last quarter and plans to lose another $2B next quarter on $9B in revenue (20% losses).  To celebrate, they threw a decadent holiday party at the Ritz Carlton in exclusive McLean, VA.  They had a laser printer that printed pictures on chocolate lollipops for the kids, hors d'oeuvres, entertainment.  You'd think it was the Goldman Sachs partners dinner.  Alas, it was a Government Sponsored Enterprise pissing away money right before they're going to need a taxpayer bailout.

Editor's note: I know sometimes you need to motivate the troops, but this does look rather awkward considering the current state of affairs. Maybe its time to start cutting back on the chocolate lollipop laser printers???

ACA Capital Holdings has stopped trading - Is this the first monoline to go?

ACA is a holding company that provides financial guaranty insurance products to participants in the global credit derivatives markets, structured finance capital markets and municipal finance capital markets. I believe it may be close to its  death knell, and possibly delisted. Expect to see an announcement like this for Ambac Financial  over the next 8 quarters.

Tie-in to the Halloween Story

Will the downgrading of one, albeit small, insurer cause a daisy chain effect that will pressure other similarly insured securities and vehicles downward? If downgraded, the bonds insured by ACA will be downgraded, forcing some selling which will cause devaluation (by marking to market) which may cause the value of holdings of other entities to drop, which may cause further downgrading - and so on. Just a thought - I haven't performed any research on this.

NEW YORK, Nov 9 (Reuters) - Standard & Poor's on Friday said it may cut its ratings on ACA Financial Guaranty Corp, the insurance arm of ACA Capital (ACA.N: Quote, Profile , Research), saying the company's substantial loss in the third quarter may impair its ability to generate a satisfactory level of new business.

ACA Capital on Thursday reported a $1.0 billion net loss for its third quarter, compared with earnings of $16.1 million during the same period in 2006, S&P said in a statement.

"Exacerbating the issue is the fact that the significant slowing of the subprime mortgage market directly affects two of ACA's three product lines, possibly necessitating significant changes to the company's business model," S&P said.

"Also relevant is the potential deterioration of collateral in ACA's structured credit transactions and the company's constrained liquidity, resulting from a lack of access to its existing liquidity facility," S&P said.

Deutsche Bank Foreclosures Dismissal Verified

The post regarding the granted motion to dismiss has been verified.  See the previous post for details. In a nutshell, the owner of pooled mortgage assets sought to foreclose on properties backing the mortgages, and the judge found that they did not show proper assignment from the mortgage originator or servicer, or any evidence that they actually owned the mortgages. This has the potential for wide reaching consequences. I doubt if most of the CDO's have properly had their alleged mortgages properly assigned (and this might have had to happen several times as the mortgage was bounced around the food chain). If you think certain tranches of structured products have been considered worthless in the past...

Click here to download the judge's ruling - Download Deutsche Bank foreclosure motion dismissed.pdf.

PS

It appears as if Plaintiff's counsel insulted the court by stating "You just don't understand how these things work, your honor". Yep! Real bright move...

Deutsche Bank Foreclosures Tossed Out of Ohio Federal Court - "They Own Nothing!"

This story has not been verified, and I am not vouching for it, but it does bring up an interesting point.

The Eastern Ohio United States District Court, on October 31, 2007 dismissed 14 Deutsche Bank-filed foreclosures in a ruling based on lack of standing for not owning/holding the mortgage loan at the time the lawsuits were filed.

Judge Boyko issued an order requiring the Plaintiffs in a number of pending foreclosure cases to file a copy of the executed Assignment demonstrating Plaintiff (Deutsche Bank) was the holder and owner of the Note and Mortgage as of the date the Complaint was filed, or the court would enter a dismissal.

The Court's amended General Order No. 2006-16 requires Plaintiff (Deutsche Bank) to submit an affidavit along with the complaint, which identifies Plaintiff as the original mortgage holder, or as an assignee, trustee or successor-interest.

Apparently Deutsche bank submitted several affidavits that claim that Deutsche was in fact the owner of the mortgage note, but none of these affidavits mention assignment or trust or successor interest.

Thus, the Judge ruled that in every instance, these submissions create a "conflict" and they "do not satisfy" the burden of demonstrating at the time of filing the complaint, that Deutsche Bank was in fact the "legal" note holder.

While the decision is great for homeowners in distress (due to providing a new escape hatch out of foreclosure), it is a big blow to the cause of sorting out the high-finance side of the mortgage mess.

Jacksonville Area Legal Aid Attorney, April Charney, broke this news to us via email and made these comments in regards to the Ohio Federal Court ruling (emphasis ours):

This court order is what I have been saying in my cases. This is rampant fraud on every court in America or nonjudicial foreclosure fraud where the securitized trusts are filing foreclosures when they never own/hold the mortgage loan at the commencement of the foreclosure.

That means that the loans are clearly in default at the time of any eventual transfer of the ownership of the mortgage loans to the trusts. This means that the loans are being held by the originating lenders after the alleged "sale" to the trust despite what it says per the pooling and servicing agreements and despite what the securities laws require.

This also means that many securitized trusts don't really, legally own these bad loans.

In my cases, many of the trusts try to argue equitable assignment that predates the filing of the foreclosure, but a securitized trust cannot take an equitable assignment of a mortgage loan. It also means that the securitized trusts own nothing.

So with this decision, it appears confirmed that investors in the mortgage debacle may in fact own nothing---not even the bad loans they funded! It seems their right to the cash flow from the underlying properties does not extend to ownership of the properties themselves; thus clouding the recovery picture considerably.

Charney further remarked to us:

This opinion, once circulated and adopted by state and Federal courts across the country, will stop the progress of foreclosures, at first in judicial foreclosure states, across America, dead in their tracks.

See http://iamfacingforeclosure.com/article/20071113_Boyko/01.html for the full article.

Beware the short squeeze Monday in Builders???

The SEC exception that allowed naked short selling ends Monday. This may or may not cause short covering that can drive up the stock of heavily shorted companies such as the home builders. This would be what is called a sucker's rally, for once the short covering is over and any company that deserved to be shorted reaches an even higher basis, the shorts will be even more aggressive on the way down for the stock will be trading higher than its perceived fundamental value.

For more on the SEC rules, click here: http://sec.gov/rules/final/2007/34-56212.pdf

Rambling thoughts to recap the last few posts...

Well, a quick recap... If you remember my tale derived from Drobny's "Great Macro Experiment", you know how I feel about the boom-bust behavior of investors from all stripes. Well, let's take a look at what happened after the latest rate cut in the Greenwich mansion market, the impenetrable Manhattan residential real estate market (not), the home building industry (believe it or not), and practically every risky asset available to investors.

• High end mansions, see more supply than demand, prices weaker yet speculation continues...
• Manhattan real estate high end drops as much as 75% - the financial sector in NYC has cut 130,000 jobs for '07, more than '05 and '06 combined, and the largest number since the numbers have been compiled by Challenger and Gray in 1993. Bonuses and Wall Street jobs tend to drive both Greenwich and Manhattan.
• The home builders up 20%+ despite receiving the worst news in the industry's history, ever, with no relief in sight according to CEOs (and really smart people, like me:-). Even Hovnanian increased, and their CEO is worst than the average subrpime junky.
• Emerging markets are on a tear, just about all of them.
• Bubblicious China soars in the face of multiple rate hikes.
• Hard commodities flying through the roof. Look at wheat, corn, gold, oil, etc.
• Speculation is even returning to real estate, with newbie investors trying to pick up foreclosures, unable to realize that even at auction many of those properties are at negative cap rates due to the amount of debt that was on them in the first place. So,there goes the rent model. You can't flip in a depreciating market with a glut of supply.

Despite this, job losses on the street and throughout mortgage America are rampant. Forget what the government job numbers say, just look at what the companies are doing. Ever since the gov't tried to state that core inflation was under control while energy, food, education, health care and housing were skyrocketing (food, health and warmth are CORE in reality) I find it hard not only to trust gov't numbers but also to believe in the intelligence of any who fall for the gov't. numbers.

The recent home builder's run is ridiculous. If this is not the most obvious case of bubble-based speculation that makes the dot.com boom look like peanuts, I don't know what is.

“Big Loan” problem at Wachovia

I warned of the commercial real estate sector some time ago. It is soon time for the chickens to come home to roost.

From Reuters:

"Big Loan has done quite a job building Wachovia’s commercial mortgage backed securities business — the bank more than doubled the amount of loans it placed in CMBS during the first half of this year, at $18.23 billion from $8.89 billion in the same period of last year.    
   
Did “Big Loan” make some of its clients an offer they couldn’t refuse? If he did, there may be some regrets now. Some rival bankers called Wachovia “reckless” in building its CMBS market share and say it is now sitting on billions of property debt that investors find too risky. Wachovia declined to comment on this as well."

Deutsche Bank to Take $3.09 Billion Charge

From the WSJ:

"FRANKFURT -- Deutsche Bank AG Wednesday said it will take charges of up to 2.2 billion euros ($3.09 billion) for the third quarter on leveraged loans, structured credit products and mortgage-backed securities, although it will still achieve a sizable net profit due to one-time gains.

The German banking giant said the charge on leveraged loans and loan commitments will be up to €700 million, in addition to charges taken on such loans and commitments during the second quarter. It will also take approximately €1.5 billion in charges on structured credit products, residential mortgage-backed securities and valuation losses on both debt and equities.

It said its Corporate Banking & Securities unit is likely to report a pretax loss in the quarter between €250 million and €350 million. Still, overall net profit is expected to exceed €1.4 billion, up from €1.24 billion a year earlier, due to tax credits and other gains, such as on the sale of its New York City property. The bank also reaffirmed its financial targets for 2008.

"We see substantial opportunities in investment banking after this period of correction. Therefore, we stay the course and remain committed to our publicly-stated financial targets for 2008, including pretax profits of €8.4 billion, assuming normally functioning markets," Chief Executive Josef Ackermann said in a statement.

Ahead of the statement, Deutsche Bank's shares were trading flat to lower. Recently they were trading 1.5% higher at €94.89.

--Ragnhild Kjetland of Dow Jones Newswires contributed to this article

Now, if there operating profit is negative this quarter, primarily due to mortgage backed securities and assumably mortgage related structured credit products, and the accounting profit is due solely to one time gains, what makes management think they will have a profitable quarter going forward? After all, the mortgage morass is just getting started. We are just entering the real estate bubble bust, and adjustable rate mortgages from the height of the boom are just starting to reset. Odds are this is going to get much worse next quarter, not better. That is probably why the caveat/disclaimer as thrown in there, "assuming normally functioning markets". The issue is, markets are functioning normally. They are marking to market the junk that was previously underwritten as investment grade paper, now known as poorly underwritten toxic waste.

What I hear on CNBC just doesn't make sense!!!

I was listening to CNBC a few minutes ago, and heard the pundits (several) say that the declining wealth effect of the bust in housing is being offset by rising stock prices. WHAAATTT! The average person is leveraged at least 4:1 or 5:1 in housing, which makes every 1 percent drop in housing equivalent to whole lot more in actual wealth lost. Further more, much more wealth is held in real estate than the stock market, at least by the average family. The list can go on. Why do those smart pundits say such things.