Interest Rate Roundup

Wednesday, January 09, 2008

MBIA to raise capital ... Countrywide reports surging delinquency rates ... and some thoughts on the latest MBAA applications data

Good morning -- lots going on right now, so let's get right to it:

* First, bond insurer MBIA slashed its dividend to 13 cents per share per quarter from 34 cents. The move is designed to save $80 million per year. It also said it would raise $1 billion by selling debt. On the upside, Fitch said it would likely affirm MBIA's "AAA" rating if it sells $1 billion or more in notes. On the downside, MBIA said it would lose $737 million in the fourth quarter due to credit quality problems. And we all know the ratings agencies' ratings are extremely suspect these days, given their dismal track record in the mortgage and structured finance arenas.

Here's Bloomberg's coverage of the MBI news and here's a story from Reuters. Market reaction has been mixed -- the stock surged in the pre-market, but has since given up all those gains and then some (recently down just under 5%)

* Second, Countrywide reported a sharp 16.9% decline in average daily mortgage loan applications between November and December. Countrywide chalked it up to seasonal factors. But the change in ADMLA in 2006 between November and December was actually +0.2%. In 2005, there was a drop off, but it was only 7.5%. In 2004, Countrywide experienced a drop off of just 1.3%. In 2003, the decline was 9.5%. So this is the sharpest decline in recent history.

Moreover, the nation's largest mortgage lender reported that 7.2% of the mortgages in its servicing portfolio were delinquent (measured as a percentage of unpaid principal balances). That was up sharply from 6.52% in November and 4.6% a year earlier. Foreclosure activity rose to 1.44% from 1.28% a month earlier -- and more than doubled from 0.7% in the year-earlier period.

* Lastly, the Mortgage Bankers Association reported a surge in mortgage applications in the week ended January 4. Purchases rose 14.7% on the week, while refis jumped 53.9%, resulting in a market index increase of 32.2%. Or so the numbers say. But you have to understand that the MBA has history of reporting volatile weekly moves around the holidays.

Consider that over the last three weeks, the overall index fell 11.6% in the week of 12/28, dropped 7.6% in the week of 12/21 and tanked 19.5% the week of 12/14. Now, during the week that incorporated the New Year's holiday, we're to believe applications skyrocketed more than 32%?

The fact is, we saw a similar pattern around the calendar year turnover in December 2006 - January 2007. Volume tanked 10.2% the week of 12/15/06 and 14.2% the week of 12/22/06, followed by a bounce of 3.6% the week of 12/29/06 and a surge of 16.6% the week of 1/5/07.

In the 2005-2006 turnover, the magnitude of the decreases and increases were smaller. But the pattern was similar. Declines of 5.7%, 4%, 6.8% and 1.5% in December, followed by a sharp gain in the first week of January of 9.9%. In 2004-2005? Down 10.6% the last week of December, followed by a 16.2% surge just two weeks later in earlier January. What about 2003-2004? Down 6.8% and 9.1% for the last two weeks of December, followed by early January gains of 4.5%, 17.1% and a whopping 30.4%.

Even if you take the index at face value, the latest reading of 706 is only back up to its early December level. So be careful about reading too much into the latest data. I believe we WILL see more rate-and-term refis in the prime market as conventional rates fall, but that purchase activity will remain subdued. Only if purchase activity gains consistently through February would I take it as a sign of a notable bounce.


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