Interest Rate Roundup

Tuesday, July 24, 2007

Luminent and Countrywide shed light on just how cruddy conditions are in mortgage-land

Luminent Mortgage Capital is one of many mortgage investment firms and REITs that buy mortgage-backed securities, throwing off income from those portfolios. In a fantastic SEC filing yesterday, which you can obtain here, the company really went off about the problems in the mortgage industry. In fact, CEO S. Trezevant Moore Jr. went so far as to say "In my almost 30 years in the U.S. mortgage-backed securities market, I have never before seen the intensity of confusion, uncertainty and outright fear as right now."

Other noteworthy excerpts:

"I have experienced the Volcker recession of ‘79-‘81, the Oil Patch and New England corrections in the mid-to-late 80’s, California ’89 to ‘94, and significant bond market corrections in ‘87, ‘94 and ‘98. At none of these times has the distaste for mortgage and mortgage-related securities been as high as we see now."


"Many residential mortgage-backed securities are or will default because investors do not have the capacity or legal ability to actually review a reasonable sample of individual loans in a pool."


"In our view, the mortgage market is perhaps a little more dependent on analysis of loan characteristics without actually ever reviewing the loan. Investors often cannot or are unable to examine the accuracy of the data used to make investment decisions."

No sugarcoating there, to be sure. Of course, the official party line is that there's nothing to see here, that we should all just move along, etc.. Treasury Secretary Henry Paulson implied as much in a CNBC interview yesterday, saying that housing is "at or near the bottom" and that the subprime mortgage fallout is "containable."

But you have to wonder about the veracity of those comments. Certainly Countrywide Financial wouldn't agree. The giant mortgage lender slashed its forecast for full-year profit and, more importantly, warned that "softening home prices continue to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result."

A whopping 23.71% of the subprime loans in its servicing portfolio were delinquent in the June quarter, up from 15.33% a year earlier. More noteworthy: delinquency rates on PRIME home equity loans jumped to 4.56% from 1.77% a year ago, while delinquencies on conventional first mortgages rose to 3.35% from 2.05%. In other words, it's not just a subprime problem any more.


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