Regional bank M&T Bank Corp. said today that fourth-quarter earnings slid 70 percent thanks in part to the falling value of its CDO holdings and higher provisions for loan losses.
M&T’s fourth-quarter income dropped sharply to $64.9 million, or 60 cents a share, compared to $213.3 million, or $1.88 per share, during the same period last year.
Analysts polled by Thomson Financial had expected fourth-quarter earnings of $1.63 a share on average.
“The past year was marked by unprecedented turbulence in the financial markets and, in particular, in the residential real estate arena,” CFO Rene Jones said in the earnings release.
The company took a $127 million charge in the fourth quarter related to the falling value of its collateralized debt obligation holdings, reducing earnings by 71 cents per share.
On a positive note, the bank said it reduced its exposure to the risky investments to just $4.4 million as of December 31, 2007.
“M&T has quickly taken the necessary actions to appropriately address a few areas of heightened concern,” Jones added.
“We have eliminated all but $4.4 million of our exposure to collateralized debt obligations backed by residential mortgages and have adequately reserved for losses inherent in the Alt-A residential real estate loan portfolio.”
The Buffalo, NY-based bank pumped up its loan loss reserves to cope with rising mortgage defaults, setting aside $101 million during the quarter, up from just $28 million the prior year.
The total provision for credit losses in 2007 totaled $192 million, up from $80 million a year earlier.
Net loan charge-offs for the year totaled $114 million, or .26% of average loans outstanding, including $53 million in the fourth quarter, up from $68 million, or .16% of average loans in 2006.
“While it is likely that weakness in this sector will continue for some time, we believe that our exposure to residential real estate has been appropriately provided for,” Jones added.
According to a DataQuick report released today, mortgage defaults in California rose to the highest level in more than 15 years during the fourth quarter, while the total number of defaults was the highest since the company began gathering statistics in 1992.
The real estate information company said mortgage lenders sent California homeowners 81,550 default notices during the October-to-December period, a 12.4 percent increase from the 72,571 in the previous quarter, and a 114.6 percent from the 37,994 notices in the fourth-quarter of 2006.
“Foreclosure activity is closely tied to a decline in home values. With today’s depreciation, an increasing number of homeowners find themselves owing more on a property than it’s market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move,” said Marshall Prentice, DataQuick’s president.
The company said the median price paid for a California home peaked at $484,000 last March and fell to $402,000 by the end of 2007.
The bulk of the loans that went into default last quarter were originated between August 2005 and October 2006, with a median age of 22 months, up from 15 months a year earlier.
Those behind on first mortgages statewide were on average five months behind on their payments when the lender started the default process, owing an average $11,121 on a median $340,000 mortgage.
On home equity lines of credit, the typical homeowner was seven months behind on their mortgage payment, owing $3,379 on a median $56,000 credit line.
Of the homeowners in default, an estimated 41 percent emerge from the foreclosure process by refinancing, selling the home, paying off what they owe, or becoming current on the loan, down from 71 percent a year ago.
The company also noted that mortgages were most likely to go into default in Merced, San Joaquin and Stanislaus counties, and least likely in San Francisco, Marin, and San Mateo counties.
Trustees Deeds, or those recorded when a home is lost as a result of foreclosure, totaled 31,676 during the fourth quarter, the highest level since DataQuick began tracking them in 1988.
That marked a 30.8 percent increase from the 24,209 recorded in the third quarter, and a whopping 421.2 percent from the 6,078 in fourth quarter 2006.
Some Americans who are high earners, but not rich yet are opting for non-traditional mortgages.
Interest-only mortgages offer lower monthly payments, at least initially, but can be risky.
They’re best suited for buyers of higher-end property who invest their money elsewhere.
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With home prices and mortgage rates sky high, potential homeowners — even those with deep pockets — are looking for ways to ease the cost burden.
Some Americans who are high earners, but not rich yet, known as HENRYs, are opting for unusual interest-only mortgages that boost affordability, at least in the short-term. These loans allow the borrower to pay just interest and none of the principal for a certain number of years. The loans are generally reserved for more affluent buyers of higher-end property who can afford a sizeable down payment and have sufficient money saved.
There are some attractive benefits of this kind of loan. They offer lower monthly payments at first, which allow borrowers to invest the money they would otherwise spend to pay off their house on other, higher-return investments. They also allow borrowers whose incomes are expected to rise in the future to buy more expensive homes than they otherwise would be able to afford.
There are also higher risks than a conventional mortgage. Borrowers won’t gain equity in their home, beyond the down payment they made. They’re on the hook for potentially higher mortgage payments in the future, and if their home value declines, they could lose the equity they have or the ability to refinance. Some interest-only loans require borrowers to pay off the entirety of the principal once the interest-only period ends.
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When Sam, whose last name is known to Business Insider, and his wife were looking to buy a home in Brooklyn in the spring of 2022, the homes they liked largely exceeded their budget, which was between $2–$2.5 million.
But one day they got an unexpected opportunity. Their neighbors directly across the street from their rental apartment in Carroll Gardens were about to put their three-bedroom brownstone on the market. The house was exactly what they were looking for, except it was priced at $3.1 million. But their neighbors offered to sell it to them before putting it on the market. Without broker’s fees, the home would cost about $2.8 million.
Sam, a self-employed marketing consultant, was initially concerned the house was just too risky and expensive of a purchase. The future of New York City real estate was still somewhat unclear as many who fled the city when the pandemic hit were slow to return.
But when First Republic bank offered him and his wife a 40-year interest-only loan, they sprung for it. They paid a 20% down payment and locked in a low mortgage rate of between 2.6 and 2.7% for the first 10 years of the loan, and a guarantee that their rate would double at that point.
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Their monthly, interest-only mortgage payment is just under $5,000 per month, which is just a few hundred dollars more than they were previously spending on rent.
Eighteen months later, Sam and his wife are still happy with their decision. They can easily afford their payments now, are saving up for the future rate-hike, and Brooklyn real estate is booming. The couple thinks they’ll be in the house for fifteen or twenty years, at which point their kids will be through high school and they might downsize or leave the city.
“These days, it seems like a pretty safe bet that in 10 to 20 years from now, the value will be higher,” he said. “I don’t know if it’s going to skyrocket or be a little bit higher, but we don’t think it’ll go down.”
A deal for ‘sophisticated investors’
Sam and his wife are the target demographic suitable for an interest-only loan. But these mortgages can be very risky if a borrower doesn’t have sufficient funds to handle higher payments down the line, or the property loses value, in which caseborrowers have to be prepared for potentially higher interest rates after the initial stage of their loan is over.
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These loans are a “niche product” that should be reserved for high-end real estate purchases by borrowers who are “sophisticated investors,” said Chen Zhao, the head of economic research at Redfin. Since you’re not building equity in your home under an interest-only mortgage, those who take out these loans should be investing their money in other ways that are likely to give them a better return, Zhao said.
The proliferation of interest-only mortgages could also evenhurt buyers who can’t afford to take advantage of them. Because they allow affluentborrowers to buy more expensive homes, they can help inflate prices in already high-cost markets. Claes Bäckman, a researcher at the Leibniz Institute for Financial Research SAFE in Germany who has studied the introduction of interest-only mortgages in Denmark, says the loan type doesn’t significantly boost affordability or allow more young people to become homeowners.
“I think it will certainly help the buyers who can afford to get one of these, but if they are competing against other buyers who can also get an interest-only mortgage, they might not get much of a benefit in terms of affordability,” Bäckman said.
A history of predatory lending
Interest-only mortgages were much more common, especially for less-affluent borrowers, in the years leading up to the 2008 financial crisis. At the time, many homebuyers were offered risky loans they couldn’t afford, which ultimately led to the subprime mortgage crisis.
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After the financial crisis, the federal government passed regulations on risky mortgages, making interest-only loans much less common. But with home prices soaring and interest rates stubbornly high, buyers are again opting for riskier loans, including interest-only.
Hillary, whose last name is known to Business Insider but requested partial anonymity to protect her husband’s business, and her husband were victims of these predatory lending practices. In 2007, the couple took out an interest-only mortgage to buy a $585,000 home in San Diego. The house was down the street from Hillary’s motherand the couple wanted it to be their forever home, so they splurged. While their real estate agent warned them against taking out such a large, high-interest loan, the bank encouraged them to take on two loans without any down payment — one at 8% and the other at 9% interest.
When the financial crisis hit, Hillary’s husband, a commission-based financial advisor, saw his income plummet. Hillary, a self-employed photographer, also took a hit. Then the couple had a new baby. They were soon forced to take out loans to make their $4,000 monthly mortgage payments. When they asked their bank to modify the terms of the loan, it refused. The couple declared bankruptcy and ultimately sold the house in 2012 for just $365,000.
Looking back now, Hillary thinks she and her now ex-husband were too optimistic about their future income when they bought the house, but that her bank was reckless.
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“They clearly should never have given us a loan,” Hillary said. “But when you’re young and it’s the, quote, perfect home for you, you know, what are you supposed to do?”
She’s concerned that some buyers are now falling into a similar trap of believing they’ll be able to refinance their loans later for a better deal.
In the broader world of real estate, interest-only mortgages could be contributing to another crisis. These days, interest-only mortgages are increasingly popular among commercial real estate buyers. They made up 88% of new commercial mortgage-backed issuances in 2021 — an increase from 51% in 2013, The Wall Street Journal reported based on data from the company Trepp.
And it’s not going well for borrowers. Commercial mortgage defaults are on the rise. With interest rates so high, many office building owners aren’t able to secure new loans they can afford. In May 2023, Fitch Ratings estimated that 35% of pooled securitized commercial mortgages due between April and December of this year would be ineligible for refinancing.
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Consumer protection advocates are are concerned that homebuyers are increasingly opting for non-traditional mortgages that carry higher risks. Some borrowers are attracted to interest-only loans by the lower monthly costs, but aren’t prepared for worst-case scenarios, and to ultimately pay more to own their home.
“It’s a question of, do people understand that this is a product that’s going to be more expensive for them long term, or are they just enticed by the lower monthly payments?” Bäckman said.
Research and consulting firm Celent released a study yesterday titled, “Pathology of the US Mortgage Crisis,” which examines the evolution of the credit crunch from its humble beginnings as a U.S. subprime mortgage problem to the subsequent global liquidity crisis that ensued.
The Boston-based firm noted that the global credit market saw a “flight of uncertainty” over the past nine months that led to billions in associated write-downs, the fall of investment banking giant Bear Stearns, and multiple emergency rate cuts by the Fed.
Not to mention scores of layoffs and lender closures throughout the United States, including the collapse of Countrywide, Greenpoint, NovaStar, and other big names.
Celent noted that behind the mortgage crisis was the shift from an “originate and hold” mentality to an “originate to distribute” model, a veritable game of hot potato that surged in popularity in recent years.
Essentially, most originating banks and mortgage lenders only held onto mortgages long enough to sell them off to investors, promoting a higher-risk environment for loan origination.
Under this system, mortgage brokers and originating banks had volume-based incentives that weakened underwriting standards, while investment banks and Wall Street firms worked on loan performance incentives.
This disparity caused scores of low quality loans to funnel through the system and find their way into structured investments that eventually spoiled as home prices began to stagnate and fall, and mortgage defaults began to surge.
This isn’t the first time the originate and distribute model has been blamed for the mortgage crisis.
Fed Chief Ben Bernanke has called the system into question on numerous occasions, noting that a large number of high-cost mortgages were made by unregulated independent mortgage companies that sold nearly all of the mortgages they originated.
Below is a great model from Celent that maps out the originate to distribute model, revealing the fragility of such a system.
Private mortgage insurance company Triad Guaranty said today via an SEC filing that it may stop writing new business because of rising mortgage defaults and costly claims.
The Winston-Salem, North Carolina-based company noted that the mortgage industry boomed during the last five years, but in 2007 property values began to decline and mortgage defaults shot upward, especially in markets that experienced high rates of appreciation.
“The ability to refinance with relative ease coupled with strong home price appreciation contributed to a lower default rate and facilitated loss mitigation efforts, particularly in fast growth states such as California and Florida,” the company said in the filing.
“Over the past six to nine months, however, these distressed markets have experienced substantial growth in default rates and also have significantly higher average loan amounts. As a result, our average reserve and claim size on defaulted loans is significantly greater in these distressed markets than with respect to our overall portfolio.”
The company added that its risk-to-capital ratio has “risen dramatically” over the last 12 months, driven by a significant increase in risk-in-force coupled with operating losses during the second half of 2007.
“Based on our internal projections, we must significantly augment our capital resources in the second quarter of 2008 in order to preserve our ability to continue to write new insurance.”
“The proposals that have been considered involve structures under which Triad would implement a “run-off” plan and a newly formed mortgage insurer would acquire certain of Triad’s employees, infrastructure, sales force and insurance underwriting operations. In addition, we would cease writing new business.”
A month ago, Triad reported a $75 million fourth-quarter loss and a net loss of $77.5 million for 2007, compared to net income of $65.6 million in 2006.
The company blamed ongoing deterioration in the housing and mortgage markets, particularly in states like California and Florida, where default counts rose a combined 85 percent.
Shares of Triad Guaranty were down $1.32, or 25.14%, to $3.93 in afternoon trading on Wall Street, more than 90 percent below their 52-week high.
MGIC Investment Corp., the largest provider of private mortgage insurance, said today it lost $273.3 million during the fourth quarter, compared to a quarterly loss of $1.47 billion a year earlier.
But though losses have decreased, the company doesn’t expect profitability during 2009, and worse, warned that it may need additional capital to continue writing new business.
Not that business is booming anyways. New mortgage insurance written during the quarter totaled just $5.5 billion, down from $24 billion a year earlier.
For all of 2008, new insurance written totaled $48.2 billion, off from $76.8 billion last year.
Meanwhile, 12.37 percent of the company’s insured loans were delinquent, up from 7.45 percent last year and 6.13 percent at the end of 2006.
The Milwaukee-based insurer noted that the mortgage industry is experiencing material losses on 2006 and 2007 books, which could push MGIC’s risk-to-capital ratio beyond levels necessary to meet regulatory demands.
“Because we cannot predict future home prices or general economic conditions with confidence, we cannot predict with confidence what our ultimate losses will be on our 2006 and 2007 books,” the company said in its earnings release.
“Our current expectation, however, is that these books will continue to generate material incurred and paid losses for a number of years.”
“As a result, we are considering options to obtain capital to write new business, which could occur through the sale of equity or debt securities and/or reinsurance. We cannot predict whether we will be successful in obtaining capital from any source but any sale of additional securities could dilute substantially the interest of existing shareholders.”
The company made a series of underwriting changes over the last year and change to mitigate losses, but continues to experience painful losses on the high-risk loans it insured during the tail end of the housing boom.
Their outlook certainly doesn’t bode well for mortgage insurers, much less the industry as a whole.
Last June, mortgage insurer Triad Guaranty halted new business and cut jobs because of rising mortgage defaults and costly claims.
I wouldn’t be surprised to see a few more follow down that path this year.
There’s always been a house-sized gap separating homeowners from homebuyers. But as home prices and mortgage rates continue creeping higher, they’re increasingly living in different worlds.
While homebuyers grapple with affordability problems, existing owners are enjoying near record-low monthly payments and increasing equity levels, an analysis by Black Knight says.
Home price increases are driving each, and their growth rate keeps accelerating: the Black Knight home price index went up by 0.8% in June, a record high.
“We’ve been noting for some months that the recent rate of home price gains would have a lagging, but significant, impact on the annual rate of appreciation,” Black Knight’s vice president of enterprise research, Andy Walden, said in a press release. “Well, June marked that inflection point.”
After slowing for 14 months, Walden said, the pace of increases jumped up in June “amid widespread growth that saw annual rates of appreciation inflect and begin to trend higher in more than 80% of markets.”
In almost every city measured by Black Knight, home values rose month-to-month. Hartford, Connecticut; Seattle; and San Jose, California led the pack, with a rise of 1.2% in each. Only two Texas cities, Austin and San Antonio, saw price drops versus May, but they were still modest, at 0.3% and 0.2% respectively.
Year-over-year, prices grew in 60% of U.S. markets. But patterns vary by region — values rose the most in the Midwest and Northeast, while in some western cities prices still remained lower than last year’s, the report says.
More than anything else, prices are ballooning because of a housing stock shortage. Average inventory levels are still 51% lower than they were before the pandemic, and the gap has grown in over 90% of U.S. markets over the past year, Black Knight says.
The city with the highest monthly and yearly price gains, Hartford, is also the one with the biggest loss in housing stock since 2019. Since the pandemic, its deficit grew by 81%. Most other cities are struggling with the same issue: only Austin, Texas and Las Vegas’ housing inventories are larger than they were pre-pandemic.
But the report notes that since the pandemic, inventories have often peaked late in the year, so homebuyers could get some good news this winter.
Right now, though, stunted supply is forcing prices higher, and debt-to-income ratios are rising with them — for Federal Housing Administration loans, the average DTI was 45% in July.
Down payments are on the rise, too. Black Knight said July’s average down payment for primary residences reached $90,200, another high. All loan types showed similar patterns. For conforming mortgages, the average down payment was over $110,000, for FHA, it was $21,000 and for Veterans Affairs loans, it was $29,400.
These prices, coupled with mortgage rates hovering near 7%, means homes are less affordable than ever. It now requires 12.6 percentage points more of buyers’ income to afford the average priced home compared to that of the last 25 years. Homes are less affordable now than the average in all 100 markets studied by Black Knight.
An average priced home purchased in July would cost $2,308 a month in mortgage payments, Black Knight estimated. That makes up 36.4% of the median household income, which is “close to the worst it’s been in 37 years,” the report says.
Current homeowners’ payments are much lower. On average, they pay $1,355 a month, which only makes up 21% of the median household income, lower than it’s been since 2001.
The average interest rate of these homeowners is 3.94%. Many refinanced their mortgages during 2020 and 2021, when interest rates hung around 2.7%. Black Knight says refinancing saved homeowners a cumulative $42 billion over the past three years.
Existing homeowners also benefit from rising prices because they inflate home equity. Total mortgage equity in the U.S. reached $16 trillion in June and tappable equity reached $10.5 trillion, close to an all time high set last summer. On average, mortgage holders have $199,000 available in equity, Black Knight said.
Outstanding mortgage debt, on the other hand, reached $13 trillion for the first time ever. Underwater borrowers, who owe more than they own, also increased dramatically year-over-year, but Walden doesn’t think the uptick is cause for alarm.
“Yes, it’s true that is a 70% jump from this time last year – which may sound ominous – but everything is relative,” he said. “There are less than half as many underwater homeowners than there were in 2019 before the onset of the pandemic.”
Black Knight also saw a small bump in the national delinquency rate, along with small increases in borrowers who missed one and two payments. But serious delinquencies fell to their lowest point since 2006, which the analysis attributed to “the strong credit quality of today’s mortgage holders and an acute focus on loss mitigation by the industry at large.”