US Bank, Subprime & Alt-A Lender and Mortgage Holder?

Posted on October 21st, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Is anything sacred anymore! Being from the mortgage industry I was well aware of US Bank’s lending practices and assumed most others were as well. Apparently not.  Let me tell you how it really is.

US Bank is an interesting, misunderstood story. US Bank was a leader in alternative mortgage products focusing upon their ‘portfolio’ product line, which in retrospect is as ‘Subprime’ as it gets.  While they always had great alternative products, their big push came from 2006-2008.

What is the quality of the $73 billion in residential first and second mortgage loans and MBS they hold?

Below is an actual wholesale rate sheet from May 2008. There are several things to note when reading a) in May there was nobody to sell these to meaning they are likely still on balance sheet b) the guidelines below from May 2008, while incredibly loose, are even tighter than they were doing in months/years prior as they adjusted for the market environment as they went along like other lenders c) values have fallen in regions these product were most popular by 15-25% since May 2008 and 30% to 70% in the past 18-months making sure that even newly originated loans are underwater let alone product originated in prior years d) they have discontinued most of these products and banks do not discontinue profitable loan programs.

I will admit that arguably US Bank had better underwriting and quality controls than most other lenders.  But, how do you underwrite for a disaster so great that 750 credit score borrowers who put 20% down and got a 30-year fixed rate loan two years ago are walking away because their value is down 50% and its cheaper to rent?

Notes: Rates/programs shown below as of May 2008. Rates are high compared to what was being charged previously, as US Bank raised rates as the crisis worsened like everyone else. Yet, they were still one of the very last players offering Subprime loans. The higher rate structure below is not likely representative of the bulk of their mortgage portfolio. 1×90′ = one 90-day mortgage late for example.  US Bank allowed 50% debt-to-income ratios on most full-doc loans.

Below is what US Bank considered ‘Prime’. Much of it is of course, but this ‘Prime’ program line can be structured in many ways, as you can see by the adjusters below. It is very easy to turn a ‘Prime’ loan into a ‘Subprime’ loan. Banks thought they were pricing in the appropriate risks, as you can see in the ‘pricing adjusters’ below.  But in retrospect it is obvious nobody could have known how bad conditions would have become therefore there is no way to price risk accurately. That being said, nobody accurately accounted for how far values have fallen making their loss severities much greater than provisioned for.

Above, note their Home Equity (HELOC) offerings. As you can see they went to 95% CLTV and I believe to 100% in the past but don’t hold me to that. But even if they did only do 95% for the past several years, they have the same problem with their billions in HELOC’s that Wells, WaMu, CITI and Chase havethey are underwater and essentially huge unsecurred credit cards on which they can get no recovery through forelcosure.

Lastly, 40-year loans with 550 credit score is very aggressive if you ask me…especially in May 2008!

Q2 10q information – Say What?!?

Now, ask yourself how much of US Bank’s $41 BILLION on balance sheet first and second mortgages are of the above varieties. They also have $32 BILLION in questionable mortgage backed securities.

The first image clearly shows here that US Bank has $23.3 Billion in firsts and $17.5 billion in seconds. The third clearly shows $32 billion in non-Treasury/Agency MBS.

IMPORTANT: See below. Loan-to-Value ratios below are determined AS OF THE DATE OF ORIGINATION. With values down 30% to 70% is states in which their more alternative loans were very popular, this could be a nightmare of negative equity.

Yes, there is more. Below are what they defined as ‘Subprime’ at the time of origination.

Investment Securities – Below is another $32.3 Billion in ‘Mortgage Backed Securities’ of which I could not find the type. Please note that they break out ‘Treasury and Agencies’ below so I suspect these are far lower grade such as Subprime or Alt-A but that is just speculation on my part.

-Mortgage loan default, foreclosure and loss severity by lender, loan type region etc provided by Field Check Group, Real Estate & Finance.

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25 Responses to “US Bank, Subprime & Alt-A Lender and Mortgage Holder?”

  1. MM, sweet stuff!! I’ve noticed that many area’s of CA with homes in the $700K range are still holding value. Will this coming HELOC, Alt A and Prime/jumbo prime collapse effect them?

  2. No, Peter, you can expect the $700k homes to hold their values thru all of this turmoil. In fact, why don’t you go buy a couple more as safe places to hide your money.

  3. If you look at RE history in CA, during the last two recessions some area’s actually held their values to within a few percentage points through the entire down cycle. SF and Marin Counties were quite strong. So, it’s a valid question. Granted this looks to be a stronger down cycle than any other we’ve seen, but nonetheless, worth discussion on this point due to historical behavior.

  4. i thought us bank was ok?? jesus i was going to move my money from wamu!…….

  5. Peter, according to London estate agents who deal in top end properties, only homes in the £5 million + range will not be effected by the recession. People who can afford houses in this range are rich enough that their spending is not materially effected by economic cycles.

  6. Have to disagree w/ majority of your article for the simple fact, how many borrowers actually qualified for such products for which they still published and made available in May…let alone May of 2007? Not many. Yes they advertised “sub prime” but in reality they did not do sub prime loans. We have both sold and brokered to them – of which was not many because of the strict qualifications (meaning, read between the lines which includes more than just the rate sheet). They were never doing stated (even prior to May – so I don’t necessarily get the “Alt A”), bank stmt program for them was a joke (never could qualify) and most importantly, they only took Owner Occ properties. I do agree though w/ your Heloc comments – many of these could be or should be underwater today…but good news here is that those pmts today are low and should be getting lower as rates are again reduced next week

  7. I’m sure Wells is in the same boat. Oh wait, according to their upper management they were never a sub-prime lender!

  8. I have to agree with “blah” on some points. I did mostly conforming/FHA loans but did look at US Banks HELOCs and “Alt-A” every once in a while. On the HELOC end I have to agree that they are in some trouble… they allowed high LTV until just a few months ago and many of those loans, even if to sound borrowers, are likely upside down.

    On the A- and “sub-prime” side the rate sheets are misleading. US Bank only did full doc loans and they were difficult in underwriting. So while the rate sheets might indicate flexibility, from the little I worked with them I foudn them very difficult on appraisals and underwriting. I tried them for a few clients to avoid PMI at 90% LTV, but they were harder and higher cost than simply doing LPMI with Fannie Mae. I didn’t get it… when you can get a cheaper loan with less work (on high quality loans) going conforming, why were people using US Bank?

  9. One quick second here…

    1. Nothing originated ‘back then’ are now what they once were. We have seen this across all ratings. Therefore, subprime of a year ago is much worse, Alt-A is more like Subprime etc. This is due to a) easier qualifying b) crashing values.

    2. 55% of all Subprime loans were full-doc and 45% limited doc. With respect to defaults and Subprime, the doc type as a leading indicator of default is a bad indicator because full doc and stated Subprime ARMs and Fixed default very close to the same rate.

    3. All thier full doc program allowed a 50% DTI. This is a major problem when values are down 70% in harder hit Alt-A/Subprime areas. This makes the walk-away decision much easier. When it comes to consumer deleveraging, letting go the 50% DTI and renting becomes the easist way to maintain lifestyle.

    4. USB sold all their Fannie/Freddie paper service retained therefore, the $73bb on balance sheet is likely this type of paper whether or not it is AS BAD as New Century or not. I don’t think it is as bad by the way. But it does not need to be with a shareholder equity of only $16 billion. If this $73 billion only takes a 10% haircut, which you have to admit likely has already happened, nearly half their SE gets wiped away. I would expect US Bank going to Treasury for a loan or selling stock to raise capital in short order.

  10. Mr. Mortgage,

    It would be great if you could improve your column by removing the overly dramatic and erroneous statements from your posts. Lots of good stuff here, but a very, very small piece of 1 percentage of full doc, 700+, 20% down prime loans are delinquent. Why make claims like this when you have so much other interesting material to share?

  11. Just spoke to a friend that worked at US Bank and according to him the article was pretty dead on. He said quote you haven’t seen nothin yet unquote

  12. Hi Mortgage Analyst – I have proprietary real time default data across all loans originated in CA since 2002 by lender and can tell you that it is higher than you say. As a matter of fact, Alt-A led by the Pay Option ARM and loans like the 5/1 Interest Only from Wells Fargo for example are leading the crisis out of subprime and into the second quarter.

  13. Aside from a very few folks close to the matter I doubt anyone really knows exactly what kind of balance sheet USB has. I would not bet against Mr. Mortgages’ track record though. My observation is that banks in general have been pulling everyone’s chain when it comes to revealing true assets. Call me pessimistic but I can’t see a reason why these guys would be any more honest than the rest of the financials crowd has been to date. Credibility is still an issue that hasn’t been dealt with.

  14. WELCOME TO 1984. Orwell would be fascinated by these bankers. The true asset of USB is the taxpayer, like all of them, naturally untill the taxpayer dies and also goes bankrupt. What credibility ? These bankers have no credibility. They should be put in prison.

  15. Didn’t citi subprime still buy subprime in May 2008? I thought they were still around then and everyone that offered subprime during that time sold it to citi.

  16. http://market-ticker.denninger.net/

    Mr. Mortgage—

    This article was just put out my Denninger on the Market Ticker. My head hurts after reading it. Can you give us the executive summary “Mr. Mtg” style on what it means???

    THANKS
    Dave

  17. Mortgages ?
    cmon… CDS it is a mess…

  18. David –

    Mr. Denninger smells what many others do. Not hard to decipher. The ‘unseen hand’ is moving and just about the only thing reliable in this current economic climate is the sunrise.

    He’s right in that we are at the point where something catastrophic could happen – without warning. Doesn’t mean we won’t wake up & have coffee, but existence could become very different in short order.

    Not to doom & gloom (easy these days right?), but look at this:

    I tell my kid the other day – Take a look out there: Cars still running; people shopping, buying food, stuffs, etc; trains still running; companies still purchasing/selling. Hospitals still operating.

    All ‘normal’ & good.

    Now, what in your mind, holds all of this together? What could possibly happen to disrupt what is normal & good?

    Explosions?

    Or does it necessarily always have to be a physical event to turn our little worlds upside down?

    In other words, how could something as ‘remote’ as an entity not being paid (or paid in currency that has effectively become worthless), make the grocery store shelves empty or the gas station dry?

    See, we’ve never known it (extreme disruption, that is.) My Dad did for a brief time during his youth in the early 30’s to early 40’s., but most of us rambling about here have not.

    This is what I believe Mr. Denninger is trying to communicate – that the seriousness of the current situation has more grip than most are prepared to admit or foresee.

    I made a statement about 10 years ago, that the commodities which would never be in short supply as our country approached an area of strain that could not be moved any further (debt), would be: Fear & Panic.

    I think those two gents are here. How long they stick around is up to guys like Denninger – and us.

    Let’s do what we can while we can. Make the calls. Pass along sites like this one to your friends & family. Get the ground moving.

    Peace –

    C.C.

  19. 1) You don’t have a proprietary real time database. Maybe you think you do, but you don’t have anything proprietary. In fact, there is no such thing as “real time” default database anywhere. Servicers have to remit the loan’s performance history, which would support a McDash or LoanPerformance service, at the end of the month and county records have to record the defaults so if you are getting real property record info, it is also not real time. Perhaps, if one aggregated, daily, information from the large servicing sytems such as Fidelity, something close to real time could be produced.

    2) I stated that the 20% down, prime, 30 year fixed loans do not have an even 1% sdq rate. You came back with a statement about option ARMs and IOs in California…

  20. Right now California is the market…

  21. C.C.,

    I completely agree with you regarding fear and panic being the most prevalent driving forces in today’s economy. It’s true that from a distance everything seems normal on the streets, but when you talk to your neighbors, parents from your kid’s soccer team, co-workers, or even people in these blogs, it is clear that fear and panic is driving a lot of major financial decisions by consumers.

    Neighbors of mine put $130k down on a $525k house two years ago and are considering walking away from it because it is now worth ~$300k. However their major driving force is not the loss of equity, but the fear of everyone else walking away and ruining the neighborhood.

    It seems as though nobody wants to be the last one standing. Just as the last people to act when the housing market was booming look like real suckers, people I have spoken to feel like the last ones to walk away are going to look like fools. Who knows how the foreclosure laws will change in the future? (I live in CA where walking away is relatively penalty free) I would be quite surprised if we don’t see some major reform in the near future making it much more difficult to simply stop paying, live rent free for several months, and move on with a decent sum of money in your pocket.

    Most couples I know have a split opinion in their households as to whether they should stay or go when it comes to their home. Women seem to view the house as a home and men tend to look at it as a business decision. But more and more the women seem to be leaning towards walking as they see more people walking. What is driving this? In my opinion it is fear of the unknown.

    They don’t know who will be living next door to them next year. They don’t know if massive foreclosures will bring increased crime to the area and schools. As the family budgets get tighter, parents are having to work longer hours or take on second jobs to make ends meet leaving less time to supervise and guide their children. This will likely have a large negative impact on the peer environment their kids live in at school, at the parks, and in the neighborhood. This fear is going to spurn the foreclosures on, even for families who can afford to stay put. And sadly, these fears are very likely justified.

  22. Partyboy,

    In short, I think what you and others have described (walking away) is referred to as: ‘Cutting your losses’.

    And I cannot necessarily argue with it, given the times. It would be great if we all stood firm on our obligations – especially when in the form of a contract and given the fact that we are adults and should be able to discern (i.e., not get caught up in the hype of a market trend), what is within our means and what is not. In other words, signing onto a $600k house on a $50k salary. Even $100k for that matter. But I’m not going to belabor this, as it’s already been round & round here and elsewhere. We’re done.

    What’s looming right around the corner, are the social implications of this economic disaster. Don’t discount it.

    This isn’t the 19030’s where in the midst of 25% unemployment, people still went to bed with only the screen door closed. There are many social norms either missing or long forgotten since that time, but they are going become front & center as we roll on into quasi third-world status.

    The consistent theme with regard to most of my commentary revolves around what happens when a void (lack of responsibility) is created and what subsequently steps in to fill that void.

    In times past, it was individuals, families and like-minded groups of people stepping in the gap to help each other and start anew. Today, it is more along the lines of ‘it’s somebody else’ fault’, let somebody else come in a pick up the pieces.

    That somebody else is Government.

    Abrogation of financial responsibility is pandemic of late – from the corporate boardroom, to the government, right down to the people who comprise our form of representative government – that would be you & me in case you’re one of those who think government is some nebulous entity that simply appears on cue.

    In my mind, the first step to recovery will begin with the individual, the family and the local community. I will guaran-damn-tee you that recovery will Not begin with government – unless of course, recovery to you means having a bureaucrat dictating how to live your life.

    Peace –

    C.C.

  23. AP
    US foreclosure filings up 71 percent in 3Q
    Thursday October 23, 5:44 am ET
    By Alan Zibel, AP Business Writer
    Foreclosure filings surge 71 percent in third quarter as mortgage crisis worse

    http://biz.yahoo.com/ap/081023/foreclosure_rates.html

  24. “”In my mind, the first step to recovery will begin with the individual, the family and the local community. I will guaran-damn-tee you that recovery will Not begin with government – unless of course, recovery to you means having a bureaucrat dictating how to live your life.””

    It does begin with .gov. They stepped in and started this whole ball of wax with wanting loans for people that shouldnt get them. Created the whole bubble with all the new “owners” coming in. Screwed it up for the rest of us. Now they step in and “help” us by taking our money thats left and giving it away to wall st. Now we are supposed to step up? F_THAT!! They should have never jumped in and personally I see this as the best way to get them out. LET THE SYSTEM TANK!!! We need it to get back down to the reality level wher wages really are.

  25. people are people and when they get in a bind becuase of unseeable situations they panic ok they have kids they dont wanna loose and i feel the banks should be able to modify loans faster and you should not have to ruin yr credit aka be 30 to 90 days late untill they see a problems present. Especially if you have 75 to 100plus equity they should bam have a modification say 12 payments put on the principle to allow people to get on their feet.I had a friend who was down to like 3000 and wels fargo made em wait 2 months then came back and said yr not delinquent it doesnt fit out criteria to help you out denied when the guy merely asked for a simple 6 month extension to throw it on the principle untill he could get on his feet.Id say the banks are the problem for the melt down 100% they dont care to help people sure theyll take their friggin money for 30 years but god forbid they help someone out

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