Archive for August, 2008

Texas Ratio Anyone?

Tuesday, August 19th, 2008
SAN FRANCISCO (MarketWatch) — Banks remain under pressure after bad loans increased during the second quarter, according to one measure of financial strength in the industry. Downey Financial may be among the lenders that are suffering most, while National City and UCB Holdings are in better positions, judging by a measure of these companies known as the Texas Ratio.
 
The number basically measures credit problems as a percentage of the capital a lender has available to deal with them. It’s calculated by dividing a bank’s non-performing loans, including those 90 days delinquent, by the company’s tangible equity capital plus money set aside for future loan losses.
 
The ratio was developed by RBC Capital analyst Gerard Cassidy and colleagues as an early-warning system for spotting future trouble at banks. During the Texas banking crisis in the late 1980s, Cassidy noticed that when problem assets grew to more than 100% of capital, most of the banks in that precarious position ended up failing. A similar pattern occurred in the New England banking sector during the recession of the early 1990s. Since the mortgage-fueled credit crunch erupted last year, Cassidy and his colleagues have applied the ratio to commercial banks and other lenders.
 
At the end of the first quarter, IndyMac had a Texas Ratio of 140%. In July, federal regulators shut down the thrift in one of the largest bank failures in U.S. history. Cassidy recently updated Texas Ratios for the 50 largest commercial banks in the U.S., incorporating results from the second quarter. None of these banks are in anywhere near as much trouble as IndyMac. However, increases in bad loans continued at a worrying pace, the analyst reports.
 
As of the end of the second quarter, First Horizon National of Memphis, Tenn., had a Texas Ratio of 33%, the highest of the 50 largest U.S. commercial banks, according to RBC Capital. That was up from 30.6% at the end of the first quarter and 10.6% on June 30, 2007. First Horizon raised $690 million selling new shares in the second quarter. The company also agreed to sell its mortgage business outside Tennessee. These steps helped strengthen its capital ratios. However, the bank also said second-quarter net charge-offs increased to $127.7 million from $99.1 million in the previous quarter. Non-performing asset were 3.88% of total loans, up from 2.78% in the first quarter.
 
Fifth Third makes it into the Top 10, with a Texas Ratio of 27.9% at the end of June. That’s up from 23.4% on March 31 and 8.5% a year ago, according to RBC. The North Carolina company lost almost $9 billion in the second quarter after huge write-downs and charges. It cut its dividend for a second time, saving $700 million of capital per quarter and is planning other steps to conserve capital including shrinking its balance sheet, cutting costs and selling units that aren’t central to its business.

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DPA Programs Ending

Tuesday, August 19th, 2008

Effective with all FHA loans underwritten on or after October 1, 2008, Seller-Funded DPAs are prohibited. 
 
In order to be excluded from this prohibition the final approval and sign off of the MCAW MUST precede October 1, 2008.  All loans containing a Seller-Funded DPA must close by October 31, 2008.

 
If you have a buyer needing down payment assistance through one of the DPA programs and have any questions, please don’t hesitate to give me a call.

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Option ARM Woes. . .

Tuesday, August 19th, 2008
In case you haven’t heard: option ARMs are a problem, and Countrywide holds ‘em in spades. The Calabasas, Calif.-based lender’s latest 10-Q filing with the Securities and Exchange Commission underscores the pain that’s now flowing through the veins of Bank of America (BAC: 30.70 +1.72%) (Countrywide filed a Q2 report because its acquisition wasn’t complete until July 1, for those curious to know).
Countrywide held $25.4 billion in pay option mortgages at the end of June; a full 12.4 percent of those loans were 90 or more days delinquent. Want to know more? Get ready to cringe: 83 percent of the portfolio was underwritten via low-doc or no-doc programs, and 72 percent of those borrowers still paying on the loans elected to make less than a full interest payment in June.
Average original LTV of 76 percent had increased to refreshed LTV of 95 percent - that’s the average for the entire portfolio, folks - by the end of April. What to know still more? Despite a severe delinquency rate well into double-digits, Countrywide’s own recast projections suggest that the worst of the portfolio’s recasts won’t hit until sometime in 2011 ($6.96 billion in projected recast volume, net of repayments).
All of which means that 90+ day delinquency figure really only has one direction to go from here. And Countrywide knows it, too; the company, like other lenders with significant option ARM exposure, has been aggressively looking to restructure loans for borrowers stuck in pay-option mortgages, to the tune of $1.2 billion in troubled debt restructuring this year alone.

Countrywide, by the way, also holds $32.3 billion in home equity loans in portfolio; the performance there isn’t likely to be much better than what’s being seen in option ARMs, although the company didn’t break out credit performance for the area in its filing.
While Countrywide’s option ARM holdings are large, the company doesn’t hold the largest such portfolio of loans. That distinction would go to Wachovia Corp. (WB: 15.57 -1.52%), which holds $122 billion in option ARMs, a substantial part of the bank’s $488.2 billion in total loans; no other U.S. bank has as much exposure to option ARMs in real-dollar terms. The North Carolina-based bank yanked its option ARM lending program earlier in the year, as mounting losses and continuing home price declines made the product unprofitable.

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