Hedge Funds Buying Mortgages, GM loses $15.5 billion-GMAC Not Immune, Indy files, Freddie Ups Workout Payments

As August begins, many remember that it was a year ago when the wheels really began to come off the mortgage bus. One producer noted, “Just yesterday, they closed one eye, ignored your legal resident status, real income, credit worthiness and gave you an interest-only loan….now, they glare at you, scrape you with a fine-tooth comb and shuffle you out of the door empty-handed.”

Yesterday’s news helped rates: Initial Jobless Claims rose by 44,000 to Five-Year High of 448,000, and the four-week moving average of initial claims, a less volatile measure, increased to 393k from 382k.The weekly jump in continuing claims was the biggest since June 1998. We also had the Chicago Purchasing Managers’ Index, which increased to 50.8 this month from 49.6 in June (higher than the 50.0 “dividing line” between growth and contraction). The employment index decreased, the production gauge rose, the inventories index increased, and prices paid for raw materials jumped to the highest level in 28 years! Rates got some help from that news, but we’ll see what happens later this morning. In less than an hour we’ll see July’s Nonfarm Payrolls (expected: -60k), the Unemployment Rate (expected unchanged at 5.5%), and then later on July’s ISM Manufacturing Business Index and Construction Spending. The Fed meets again on the 5th, and is generally expected to leave overnight rates unchanged. We’ve seen a flight to quality, with the 10-yr down to 3.93% and mortgages better by .125-.250 in price.

GM announced a loss of $15.5 billion for the 2nd quarter. Incredible. GMAC LLC, the finance arm of GM, lost money for the fourth consecutive quarter as slumping resale values of used cars and souring mortgage investments took their toll. GMAC had a net loss of $2.48 billion in the second quarter, compared with a profit of $293 million during the same period a year ago. Most of the losses were $717 million stemming from auto leases and $1.86 billion from Residential Capital LLC, or ResCap. GMAC is owned by Cerberus (51%) and GM (49%). GM will post its second-quarter results today. (Compare this versus Exxon, the world’s largest publicly traded oil company, which turned a profit of $11.7 billion for the second quarter, up 14% versus a year ago.)

Freddie Mac said it was doubling the amount of money it pays mortgage servicers for each workout that helps a delinquent borrower with a Freddie Mac-owned mortgage avoid foreclosure, and will reimburse servicers for the cost of door-to-door outreach programs, as well as make changes intended to streamline the workout process. The compensation for repayment plans will double to $500 from $250 while loan modification compensation will increase to $800 from $400, effective today. In order to qualify for the reimbursement, the mortgage must be at least 90 days delinquent, the servicer has to have had no prior contact with the borrower, and the outreach must have been done by an independent third party vendor.

It should come as no surprise that IndyMac Bancorp, once the second- largest independent mortgage lender in the U.S., filed for bankruptcy after a run by depositors left the California mortgage lender short on cash. They are seeking relief under Chapter 7 of Title 11 of the U.S. code. Chapter 7 seeks for all debts to be discharged if there is proof of no ability to pay. This is not a re-organization.

Are “hedge fund guys” the smartest ones in the room? Hedge funds, private equity groups and other investors are making a market by buying tens of thousands of distressed loans and foreclosed properties around the country. They hope to profit from the woes of banks and other investors holding mortgages that have plummeted in value as home values sink and defaults soar. So when Merrill Lynch sells assets for 22 cents on the dollar, who buys them? Hedge funds, who feel that they’re more nimble and more open to working out payment plans with borrowers to avoid default. But at 22 cents on the dollar, even if they can’t work something out and sell the house at an auction, they will still make a profit.

As an example, a California investment firm has agreed to modify 200 Massachusetts homeowners’ subprime mortgages (lower interest rates and forgiving thousands of dollars in late charges, legal fees and past-due interest). WMD Capital Markets LLC recently bought the mortgages from Fremont Investment & Loan (remember them?). Massachusetts sued Fremont last year, winning an injunction that limited the firm’s right to foreclose on its 2,200 Massachusetts customers.

Thanks Mike C. –
A guy walked into the local welfare office to pick up his check. He marched straight up to the counter and said, “Hi. You know, I just hate drawing welfare. I’d really rather have a job.”
The social worker behind the counter said, “Your timing is excellent. We just got a job opening from a very wealthy old man who wants a chauffeur and bodyguard for his beautiful daughter. You’ll have to drive around in his Mercedes, and he’ll supply all of your clothes. Because of the long hours, meals will be provided. You’ll be expected to escort the daughter on her overseas holiday trips and all that it entails. You’ll be provided a two-bedroom apartment above the garage. The salary is $200,000 a year.”
The guy, wide-eyed, said, “You’re “b.s.’ing” me!”
The social worker said, “Yeah, well . . . . you started it.”