Bloomberg reported last week — I meant to blog it earlier — that General Motors and Cerberus Capital Management may agree to guarantee part of a $3.5 billion debt package designed to help GMAC’s Residential Capital unit avert bankruptcy. (Costa Mesa-based Ditech.com is a unit of ResCap.)

GM, in a rivalry with Toyota for world dominance of the car market, and Cerberus, the New York-based private-equity firm, may pay debt holders as much as $750 million if ResCap defaults, GMAC said in a filing last week, reports Bloomberg. The cost would be split by the two firms according to their stakes in GMAC. GM sold 51 percent of GMAC to Cerberus-led investors in 2006.

The accord would mark a reversal for GM, which has said it has no obligation to support ResCap after the GMAC unit was battered by subprime mortgage losses. ResCap ranked among the 10 biggest U.S. mortgage lenders last year. The new arrangement is part of a financial plan that should provide enough liquidity for 12 months, GMAC said.

Related Links:

• Ditech owner in cash crunch
• Ditech owner posts $724 million loss, considers sale of units
• Update: ResCap cutting 3,000 jobs
• GM’s profits plunge 90%, GMAC injects $1 billion into mortgage unit

Turmoil in credit markets has sent politicians and investigators looking for the bad guy, the one who started it all.

Critics say the potential culprits include agencies that rate bonds, including ones backed by home loans, because many bonds have lost value as homeowners default on their mortgages. They are Standard & Poor’s, Moody’s and Fitch.

Mortgage Insider quizzed Timothy Canova, associate dean for academic affairs and professor of international economic law at Chapman University’s law school, about the agencies and their role in the housing boom and its subsequent collapse. He’s written critically about the deregulation of banking and finance for more than two decades.

In a wide ranging interview, Canova tackled some controversial fixes for the credit and housing markets, including a much maligned housing bailout.

Q. Do you think credit-rating agencies mislead investors with investment-grade ratings on some securities tied to subprime loans and other risky mortgages?

A. Yes. Moody’s, Standard & Poor’s, and Fitch got the ratings wrong on many securities tied to subprime mortgage loans. This is quite apparent in the fact that Moody’s had to downgrade more than 5,000 mortgage securities last year. Likewise, mortgage-backed securities rated by Standard & Poor’s and Fitch have been downgraded in large numbers. There were a number of factors that contributed to the agencies getting these ratings so wrong. They estimated delinquency rates on the underlying mortgages based on historical performance, in essence, looking through the rear view mirror to determine future performance. Meanwhile, the rear view mirror reflected constantly rising housing prices and inflated appraisals, a condition that could not possibly last. In addition, the agencies made ratings based on woefully incomplete information and without access to the individual mortgage loan files.

The ratings agencies are paid not by the investors but by the issuers of the securities, creating conflicts of interest. Since issuers could engage in ratings shopping by going to one of the other credit agencies, there was always pressure on the agencies to go along to keep up their business. Short-sighted greed was a big factor. It was in the interests of so many players to go along, from mortgage lenders to appraisers, issuers and rating agencies. Finally, the regulators, Congress, and the Clinton and Bush administrations all went along, failed to oversee the rating agencies, the lenders or the issuers even though they had the legal authority to do so.

Q. The counter argument is that the agencies rely on information provided by investment banks who are buying the loans from lenders. Supporters of the agencies say it is the lender’s job to properly underwrite each loan and the investment bank’s job to check at least a sample of loans it’s buying. Your thoughts?

Read the rest of this entry »

Fremont General Corp. says “it is the expectation of the board of directors” that it will file for voluntary Chapter 11 bankruptcy as the Brea-based subprime lender heads toward complete liquidation.

The parent of Fremont Investment & Loan said it reached an agreement Thursday with Litton Loan Servicing LP, an affiliate of Goldman Sachs & Co., to take over servicing of its $12.2 billion loan portfolio.

In April, Fremont announced a purchase agreement with CapitalSource TRS Inc. to assume ownership of Fremont’s branches and banking operations, a process that is still awaiting regulatory approval.

Fremont said the bankruptcy will not affect the federally-insured deposits of its clients as long as their total accounts are worth less than $100,000.

Click HERE to see the company’s latest filing.

Other related stories …

• Fremont to sell bank assets to CapitalSource
• Regulators give Fremont 60 days to raise capital or sell bank
• Fremont General running low on cash, will explore sale
• New Century’s bankruptcy report blames KPMG, executives for misstatements

Buyers of larger homes in Orange County got a break this week as rates fell on big home loans following a move by Fannie Mae, the largest U.S. funder of mortgages. Of course, buyers need to bring some hefty cash to the table to get the lower rate.

After weeks of criticism from brokers and lenders, Fannie Mae cut a premium it had been charging on so-called jumbo-conforming loans above the old conforming limit of $417,000 and the new one of nearly $730,000 in high-cost markets like Orange County. (The higher limit is good until Jan. 1, 2009, though the U.S. House on Thursday passed a bill to make the increase permanent. President Bush has threatened to veto the bill, which also would let the government insure up to $300 billion in mortgages to help homeowners avert foreclosure.)

Al Hensling, head of United American Mortgage in Irvine, said about the change: “Christmas came early.”

Hensling said on Tuesday, before Fannie’s change, a 30-year fixed jumbo-conforming loan went for 6.5 percent with a one-point fee. On Wednesday, after the announcement, the rate on the same loan with a one-point fee dropped to 5.75 percent.

The catch: borrowers must come up with 15 percent down on a purchase. However, if Fannie already owns the loan, it will allow a refinance up to 120 percent of the home’s current market value to give homeowners a break if property values have plummeted in their neighborhood and they have kept current with their mortgages, Hensling said. (No ‘cash-out’ refinances allowed.)

However, according to data aggregator Newspaper Chart Services the average jumbo-conforming rate in Orange County on Thursday was 6.833 percent with a one-point fee, down from 6.927 percent on Wednesday. That makes me think only some lenders immediately dropped their rates following the news from Fannie.

Dena Bunis, Washington bureau chief for the Register, writes for Mortgage Insider…

Rep. Gary Miller has been trying to find a way for years to get the loan limits raised for Fannie Mae, Freddie Mac and the Federal Housing Administration. He has been among those trying to convince his colleagues that for states like California, the current limits are unrealistic.

He got his wish today when language he and Pleasanton Democrat Jerry McNerney drafted was included in HR 3221, the bill the House passed today to help deal with the housing crisis.

“The bill today creates a real opportunity for homeowners in California to refinance into safe, affordable mortgages,’’ Miller, R-Diamond Bar, said in a statement. “I call on the Senate to follow the House’s lead and enact a permanent loan limit increase as quickly as possible.”

(Editor’s Note: Earlier in the year, Congress passed a bill to raise until Jan. 1, 2009 the conforming loan limit from $417,000 to nearly $730,000 in high-cost markets like Orange County. Conforming loans are eligible for sale to government-sponsored buyers like Fannie Mae.)

And Bloomberg reports…

The U.S. House of Representatives approved legislation to let the government insure up to $300 billion in mortgages to help homeowners avert foreclosure over White House objections the measure would force the government and taxpayers to take on excessive risk.

The House voted 266-154 for the housing package offered by Massachusetts Democrat Barney Frank. The measure would have the Federal Housing Administration insure refinanced mortgages after loan holders agree to reduce principal to make payments affordable.

“We’re in a recession and a major cause of that recession is the subprime crisis,” Frank, chairman of the House Financial Services Committee, said today on the House floor. “We do not see any alternatives to this bill to try to work on that.”

Democrats in Congress are at odds with Republican lawmakers and the Bush administration over efforts to stem foreclosures amid the worst housing slump in a quarter century. The White House favors a voluntary, industry-led program to modify loan terms and yesterday issued a veto threat against Frank’s bill.

Read the Bloomberg story HERE.

Related Links:

• Bush expands FHA, again, to aid subprime borrowers
• 2009 loan limit — and beyond — back to $417,000, says OFHEO
• Web voices unite against housing bailout
• Are mortgage ‘cramdowns’ really so bad?
• Paulson denounces ‘bailouts’
• Shopping for jumbo loans? FHA your best bet, broker says
• O.C.’s FHA loan limit raised to $729,750

On the heels of Fannie Mae’s $2.2 billion loss reported Tuesday, the New York Times published a story questioning its solvency and that of its little sibling Freddie Mac. I recommend the read, and here are some key points from it:

• Fannie and Freddie handled more than 80 percent of all mortgages bought by investors in the first quarter of this year, more than double their market share in 2006.
• They have a combined $83 billion in capital to offset $5 trillion in debt and other financial commitments.
• They suffered more than $9 billion in mortgage-related losses last year, “and analysts expect those losses to grow this year.”

I think you get the point. If either company fails, taxpayers could be looking at a steep bill, and the mortgage market would lose its only lubricant, the Times reports. Scary thought.

Citigroup said today it plans to close offices in Orange and Irvine, eliminating 419 local jobs, as part of a previously announced consolidation of its home lending businesses amid a housing slump and drop in demand for mortgages.

The New York-based financial services giant is shutting down and integrating the subprime operations it bought from billionaire Roland Arnall last year, before his death, and will cut 1,860 jobs nationwide, the company said. It’s keeping 70 sales positions.

The move is the latest blow to Orange County’s once mighty subprime lending industry. All the major players are gone or winding down operations as investors shun bonds backed by riskier mortgages.

Last summer Citigroup bought for an undisclosed sum Arnall’s wholesale and loan servicing businesses based in Orange. It dubbed them Citi Residential Lending.

Back in March, Citigroup said it would consolidate all home lending under its CitiMortgage name, which lately has focused much more on loans it can sell to government sponsored buyers Fannie Mae and Freddie Mac. The fate of Orange and Irvine employees was unknown until now.

Citigroup is immediately eliminating 22 jobs in Orange. The remaining jobs will be phased out as the company restructures through March 2009.

The company said all employees are invited to apply for open positions within Citigroup, which is offering job fairs and severance based on experience and position.

Mark Rodgers, a spokesman, said in a statement, “Under the direction of Chief Executive Vikram Pandit, Citi continues to identify organizational efficiencies and streamline its business operations.”

The job cuts were first reported by the Web site Implode-O-Meter, which tracks mortgage industry consolidation. It quotes an anonymous source as saying as many as 3,000 jobs could be impacted.

Roland Arnall, founder of Orange-based subprime lenders Ameriquest Mortgage and sister company Argent Mortgage, died in March of cancer at age 68. Retail lender Ameriquest stopped making loans in August 2007, when Citigroup bought the wholesale platform — the business of making loans via mortgage brokers — of Argent.

Related Links:

• Citigroup consolidation hits Orange office
• Ameriquest to shut down
• Arnall resigning as U.S. Ambassador
• Was Citi’s purchase of Argent “akin to catching a falling knife”?
• Ameriquest employees speak
• Texas Rangers nix Ameriquest moniker
• Ameriquest parent and Citigroup reach agreement

Fed Chairman Ben Bernanke gave a speech Tuesday on foreclosures and loan delinquencies. You can read about it by CLICKING HERE.

What interested me are the maps on the Federal Reserve’s Web site that accompany the speech.

For example, here’s an edited map of loan delinquencies by county at the end of 2004. Dark green means less than 0.6% of borrowers are 90 days or more behind. Red means more than 2.5% of borrowers are 90 days or more delinquent. Notice no red counties in California:

And now the same map at the end of 2007. Orange County is colored Orange, which means 1.8% to 2.5% of borrowers were 90 days or more delinquent.

And below is a U.S. map of second mortgages, or ‘piggybacks’, by county. The colors are explained beneath map.

Related Links:

• Fed map shows more bad loans in inland Orange County
• Fed signals it’s done cutting rates, expert says
• Closing HELOCs could bite banks, report says
• California homes entering foreclosure hit record high
• Foreclosure rate in central O.C. 10 times that of coast

See me chat on KOCE:

SNL Financial on Tuesday released its 2007 thrift-industry rankings, which showed Downey Financial of Newport Beach dropped 59 slots to No. 64. For 2006, it ranked No. 5.

Still, Downey beat out Washington Mutual, which fell 68 slots to No. 94, from No. 26 a year earlier. Pasadena-based Indymac Bancorp, however, fared the worst, sliding 89 slots to No. 99, from No. 10.

SNL looks at six categories, including return on assets, and weighs them for one overall score.

Who topped the list? Washington Federal, another Seattle-based savings and loan. It rose from No. 4 in 2006.

Maria Tor, senior analyst for SNL, said in a statement, “The stand-out thrifts of 2007 were those that maintained a conservative balance sheet and kept expenses low. Thrifts that resisted the tempting high margins of riskier loans in 2005 and 2006 were rewarded in 2007.”

Imagine that. Prudence paid off for some.

Related Links:

• Downey’s problematic assets increase by $521 million in Q1
• Downey reports $248 million loss, says reduced pay-option loans
• WaMu to cut 3,000 jobs nationwide, gets $7 billion infusion
• WaMu said to get $5 billion infusion
• IndyMac suspends dividend, posts $509 million loss