Countrywide’s Sambol To Run BofA Mortgage Unit

Bank of America announced that David Sambol, currently Chief Operating Officer at Countrywide, will run the bank’s consumer mortgage business after it acquires the mortgage lender. Sambol is the second highest executive at Countrywide, after the CEO Angelo Mozilo. He doesn’t usually attract much of the media’s attention, probably because he doesn’t spend as much time tanning or cooking scandals, but he seems to be a great executive and BofA must have an eye for talent. Great, get rid of Mozilo and keep Sambol, he’s the smart one.

Just as the soap opera was drawing toward a happy end, a hedge fund called SRM Global, which holds a 5.19% share of Countrywide, announced that it’s not happy with the acquisition price and will vote against the transaction. Hm, doesn’t Countrywide stock trade below the transaction price? And besides, who would pay more for a troubled mortgage lender holding toxic mortgages?

Subprime mortgage bonds losing value

According to Moody’s Investors Service, bonds securitized in 2007 may be the worst vintage ever, exceeding the delinquency rates of 2006 securities. Moody’s, S & P and Fitch Ratings are downgrading 2006 and 2007 subprime securities, as loan delinquencies and defaults reach record highs. We had a wave of downgrades shortly after the two Bear Stearns hedge funds collapsed, but the “party” is not over yet: a lot of this paper is still being reviewed by ratings agencies and more downgrades are on the way.

In this situation, the ones who get to win are hedge funds and investors who made bets on bad loan performance and high foreclosure rates, all the while lenders and funds that invested in subprime, or any mortgage-backed securities, suffered losses or went out of business altogether.

FDIC says, cancel interest-rate adjustments

It sounds a little off to me, but that’s the next brilliant bailout idea: modify loans that are about to adjust and “freeze” the interest rates. This is exactly what FDIC’s (Federal Deposit Insurance Corp) Chairman Sheila Bair asked lenders to do. Naturally, the changes should only affect “good” borrowers who occupy their homes, are current on their payments and own adjustable mortgages that haven’t reset yet.

However, surveys show that only a fraction of the ARMs scheduled to adjust in the coming months get modified, partly because of restrictions in the servicing agreements that limit the number of loans that can be modified. Investors who own the loans are unwilling to allow modifications because this will cause mortgages and the securities backed by them to lose value.

OK, ARMs were designed to adjust at some point, that’s their essence. Converting them to fixed home loans is against the rules – after all, they were marketed as a bet against economic fundamentals and market conditions that affect interest rates. And if a large number of ARMs do somehow get modified, who knows what may happen next? More troubled hedge funds? More credit rating downgrades? Elimination of all types of ARMs? I don’t think this is the solution yet.

Mortgage rates drop, BNP Paribas freezes securities funds

BNP Paribas, the biggest French investment bank, said it cannot value the assets in three of its asset-backed securities funds and is therefore temporarily suspending redemptions. The funds have lost $0.9 billion in the past three weeks, almost a third of their value in July. BNP Paribas said in a statement that, “regardless of their quality and credit rating”, it is impossible to value the assets because they don’t get any bids from investors. Approximately a third of the funds’ investments are backed by subprime paper but the panic in the U.S. credit market itself has caused much of the problem. Other funds are also losing value or being frozen by financial institutions in the current market, because the underlying assets cannot be sold at what would be considered fair prices.

Amid such problems in the financial markets, interest rates dropped this week, with the 30-year fixed home loan declining to 6.59% from 6.68% last week. The 15-year adjustable-rate mortgage averaged 6.25%, down from 6.32% a week ago. 5-year adjustable mortgages carried an interest rate of 6.33%, compared to last week’s 6.29%. 1-year ARMs were at 5.65%, up from 5.59%.

Bear Stearns fires president

Warren Spector, Bear Stearns’ President and co-Chief Operating Officer resigned on Sunday, as the financial giant faces its biggest downturn in decades. Spector was expected to succeed the current Chairman and Chief Executive James Cayne. Rumors of the possible firing of Spector were already circulating on Saturday, so the board met to discuss the matter on Sunday, although a meeting was scheduled for Monday. Bear Stearns Chairman and CEO James Cayne asked for Spector’s resignation earlier last week.

Some shifts have happened within the company, with Alan Schwartz, president and co-chief operating officer since 2001, becoming the sole president, and Samuel Molinaro becoming COO and CFO.

Standard & Poor’s Rating Services changed Bear’s rating outlook from ‘stable’ to ‘negative’, meaning that the chances of a credit downgrade have increased. Shares plunged immediately and the company arranged a conference call, featuring some awkward behavior from CEO Cayne, which didn’t help improve investor sentiment much. Bear tried to convince investors that its “balance sheet is strong and liquid”, but this didn’t help to dissipate concerns over troubled hedge funds and market instability. Shares of Bear Stearns have lost more than 30% so far this year.

More troubled hedge funds

The two troubled Bear Stearns hedge funds, the High-Grade Structured Credit Strategies Master Fund and High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, that suffered devastating losses from bad bets on subprime loans filed for bankruptcy protection earlier this week. Investors are taking legal action against Bear Stearns Cos., accusing the company of providing misleading information regarding exposure to mortgage-backed securities.

Another hedge fund firm, Sowood Capital Management LP, announced that it’s liquidating its Alpha funds after they lost more than 50% of their market value in July. Sowood lost more than $1 billion in a month, as its asset value plunged from $3 billion to approx. $1.5 billion. Fearing that it will not be able to meet its margin calls, Sowood sold most of its portfolio to Citadel Investment Group LLC.

In other signs of spreading contagion from the housing market, car manufacturers are posting double-digit declines in sales in July, and companies from chemical maker DuPont to insurers and transportation companies are blaming low revenue on the weak housing market. Speculation is mounting that homebuilder Beazer Homes USA may file for bankruptcy after its quarterly report showed loss of $123 million, sending shares down 18%.