by Calculated Risk on 10/03/2005 12:11:00 PM

From the WSJ: Mortgage lenders tighten loan standards (hat tip: Bailey and pwilliamson)

After years of easy money, some mortgage lenders are beginning to tighten their standards.

Lenders have rolled out a raft of mortgage products in recent years that have made housing purchases more affordable and allowed many people to extract cash from their homes' equity without boosting their monthly payments.

Now, in what could be the first signs of a reversal, some lenders are starting to raise the bar on making these products available to new borrowers.

The article mentions that rates are rising and offers examples of some lenders tightening lending standards. Some examples:

Two weeks ago, Washington Mutual, one of the nation's biggest mortgage lenders, told mortgage brokers that it will make it more difficult for borrowers to qualify for its option ARMs, which carry an introductory rate of as low as 1.25 percent. Under the new rules, which are expected to take effect next month, borrowers will have to show they can afford the monthly payment if the interest rate on the loan is 6 percent - or 6.25 percent for borrowers purchasing a second-home or investment property - after the introductory rate expires. Currently, the bank's rate for qualifying borrowers for these loans is roughly 5.25 percent.

New Century Financial Corp., a mortgage lender in Irvine, the same week said it was aiming to reduce the amount of interest-only loans it grants to less than 25 percent of total loan production from 33 percent in the year's first half. New Century said it was making the move in an effort to boost profit margins.

Some lenders are making their loans more costly, which could discourage borrowing. Last month, Option One Mortgage, a unit of H&R Block Inc., boosted the rates on all of its mortgage products by 0.40 percentage point. Option One says the move reflects both rising interest rates and changes in investor appetite for its loans.
...
Among other changes, Countrywide Financial, another big lender, earlier this month made it tougher for borrowers to qualify for a 1 percent teaser rate on its option ARMs. Countrywide now considers a number of factors in setting the introductory rate, including the size of the loan, how much documentation the borrower provides and whether the property is a second home or for investment. The teaser rate for borrowers with multiple risk factors can be as high as 3 percent, the company says.

These are small steps in the right direction but probably too little, too late. In the comments to the previous post, Tanta is "underwhelmed":

" ... this strikes me as the usual "find a couple of examples and make it sound like a trend" crap the press is so good at.

Of the four lenders mentioned in this article, exactly one is a regulated financial institution: WAMU. And WAMU's big tightening is . . . 100 bps increase on the qualifying rate. I'm underwhelmed.

Two of the other four lenders are subprime. New Century is a REIT. Option One is owned by H&R Block. And Option One is "tightening standards" by repricing its rate sheet by 40 bps? When they came right out and said that part of the reason for that is that, well, market rates are going up?

The last is Countrywide. In my view they're the only ones listed here doing anything actually meaningful: they're upping the start rate on loans with a lot of layered risk, which means that if the borrower chooses the neg am option, it will negatively amortize more slowly. Still, this is adjusting the price for the risk you're taking on, not limiting the risk by changing the underwriting guidelines.
...
if this is the best the Wall Street Journal could come up with, we haven't even skimmed the surface yet.

And even with these "tighter standards" and rising rates, the number of mortgage applications is still strong. Fannie Mae Chief Economist David Berson, writing in his weekly economic commentary, still sees a strong housing market based on new loan applications: Housing: The good, the bad, and the ugly.

"...the Mortgage Bankers Association’s (MBA) weekly survey of mortgage applications (for home purchases) provides a pretty good leading indicator for home sales one-to-three months ahead. Purchase applications had risen to record highs in each of May, June, and July -- helping to power new and existing home sales to either high or record sales in those months. There was a small decline in August (reflected in the dip in August new home sales), but purchase applications have increased again thus far in September. In fact, purchase applications have climbed to a record high in September, presaging strong home sales figures for the September-November period."

Berson also comments on rising inventories as a potential problem for housing - and I think rising inventories are the first sign of a slowing housing market. But I don't think we have seen any real tightening in lending standards as suggested in the WSJ article.

by Calculated Risk on 10/02/2005 09:27:00 PM

My most recent post is up on Angry Bear: Mortgage Rates.

Here is a commentary from Fleck on housing: Empty houses, falling prices: A boom dies

Best to all.

by Calculated Risk on 10/01/2005 10:50:00 PM

The NYTimes offers a few anecdotes of homeowners using their houses as ATMs. This has allowed homeowners in financial trouble to stall off bankruptcy. A few quotes from the article:

"When you're living in a place with home values up 50 percent, you have what Alan Greenspan calls a piggy bank," said Elizabeth Warren, a Harvard law professor and an author of "The Fragile Middle Class" (Yale University Press, 2000), a study of bankruptcy. "The bubble has operated like wreckage from the Titanic - you could climb on and float along for a while. The question is for how long."
...
"Some people have been spared filing the petitions because they have home equity," said Andrew Thaler, a bankruptcy trustee on Long Island. "My guess is when the housing market flattens, people are not going to be able to sustain the lifestyle they've been maintaining, and you'll suddenly see a lot more bankruptcies."
...
"Two or three years ago, mortgage companies were giving money to anyone," Mr. [Heath Berger, a bankruptcy lawyer in Woodbury] said. "They didn't care whether they could afford it, just that they had a house. Now I'm seeing all these people who never had the income to pay these loans in trouble."

Professor Warren of Harvard believes that disaster lurks as homeowners borrow against their homes to forestall bankruptcy. When the stock market tumbled five years ago, people in trouble could sell stocks to stay afloat, she said. But home equity doesn't work the same way. As she put it, "You can't sell a part of your home like you could a stock in the stock market bubble."
...
"When a family uses its home like a piggy bank and then a job loss, a divorce or an increase in the adjustable-rate mortgage leaves them unable to make the payments, the family is out of options," Professor Warren said. "That's true before and after Oct. 17. Borrowing against a home leaves a family with the fewest possible options when something goes wrong."

"After Oct. 17, bankruptcy gets harder for everyone - more expensive, more traps, less coverage," she said. "And that means more families are set up to lose their homes."

Housing prices do not need to fall, just flatten, and then I believe serious problems will be revealed.

by Calculated Risk on 9/30/2005 09:32:00 PM

This hurricane and typhoon season is very active in the Pacific Ocean too.


Click on photo for larger image.

Typhoon Longwang is threatening Taiwan and is expected to make landfall this weekend.

Here is the projected track from the US Navy.

And here is the most recent Guam IR satellite loop - incredible. The typhoon will probably impact the entire island of Taiwan.

by Calculated Risk on 9/30/2005 05:29:00 PM

Occasionally people ask me: "Can there be a bubble when so many people think there is a bubble?"

The answer is: The prevailing opinion on housing is that there is no bubble. From MarketWatch:

A survey out this week from RBC Capital Markets shows U.S. homeowners have little regard for talk of a housing bubble; nearly 60% expect that the value of their homes will increase at least 5% annually over the next several years -- not a bad guess given home prices historically have risen a percentage point or two higher than inflation every year.

But one-quarter of homeowners say they still think their houses will go up in value 10% or more a year, despite strong price hikes in most parts of the country in the last few years that economists say aren't sustainable. Only 3% of homeowners said they think their home will decline in value -- pessimists who probably fear they mistakenly jumped into homeownership.

Greenspan sees a little "froth". Others see some local bubbles, but not a national problem. Only 3% of homeowners think prices will decline.

Only a few contrarians think there is a housing bubble. If the contrarians are correct this time (and I think they are), when sentiment changes, housing prices will start to fall.

by Calculated Risk on 9/29/2005 02:55:00 PM

CNN had an online poll today on the cause of rising gas prices. Without getting into the flaws of online polls (a self selecting sample), this poll shows several other problems. First the results:

Q: What do you think is the main cause of rising gas prices?

Cause	percent	votes
Hurricanes	4%	6738 votes
Lack of refining capacity	21%	33619 votes
Price gouging	65%	104096 votes
Other market forces	10%	16527 votes

My first problem with this poll is the lack of a clear time period being considered. The primary reason for the price spike in the last month was the loss of refining capacity due to damage from hurricane Katrina. For the month of September, an answer of "hurricanes" or "lack of refining capacity" would be reasonable.

However gas prices have been rising for some time. This wasn't due to hurricanes or the lack of refining capacity. Instead this was due primarily to market forces.

Regardless of the time frame used, "price gouging" (the most popular answer) is incorrect.

by Calculated Risk on 9/29/2005 01:17:00 PM

Knight Ridder reports: Economists mention the ‘R’ word

Economic forecasters and Wall Street analysts are quietly hedging their bets after months of rosy reports about a vibrant U.S. economic outlook. They’re now mentioning the growing possibility of recession.

Why? Soaring gas prices, nightmarish home-heating costs this winter, plunging consumer confidence, rising interest rates and falling new-home sales.

The article quotes Ed Yardeni of Oak Associates:

"The U.S. economy has been remarkably resilient in recent years, but consumers may start to postpone discretionary spending to build some cushion to pay their higher heating bills on top of paying more to fill up their gasoline tanks," he wrote to investors. "In other words, I am not sure that the economy is resilient enough to withstand the one-two punches from the Katrina-Rita tag team."

Yardeni said it was "increasingly likely" the U.S. economy soon could face a six-month bout of stagflation — in which prices rise but wages and hiring stagnate — the economic curse of the 1970s.

Also the Conference Board reported that the help wanted market weakened in August, BEFORE the storms hit: U.S. Help-Wanted Advertising Index Declines Four Points

The Conference Board Help-Wanted Advertising Index - a key measure of job offerings in major newspapers across America - declined four points in August. The Index now stands at 35, down from 39 in July. It was 37 one year ago.

In the last three months, help-wanted advertising declined in seven of the nine U.S. regions. Steepest declines occurred in the West South Central (-19.4%) and West North Central (-10.8%) regions.

Says Ken Goldstein, Labor Economist at The Conference Board: "Key market indicators gave ground just before the storms and flooding. While print want-ad volume rose a bit in June and July, it sagged to May levels in August. Consumers' concerns about finding a new job were also essentially the same in August as in May, but declined noticeably in September, after the hurricanes and flooding. Latest readings show that job growth has been downsized significantly. Before the storms, there was a chance for 150,000 to 175,000 jobs per month over the near term. However, prospects may now be reduced by as much as half of that."

However, online help wanted "ad volume continued to edge higher".

It appears the economy was starting to weaken prior to the devastation of Hurricanes Katrina and Rita. But one thing is certain, all problems will be blamed on the hurricanes.

by Calculated Risk on 9/28/2005 05:22:00 PM

The Federal Reserve released the "Household Debt Service and Financial Obligations Ratios" for Q2 2005 today.

DEFINITIONS: The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

The household DSR (Debt Service ratio) set another record at 13.55%, up from 13.46% in Q1 '05.

The owner FOR (Financial Obligation Ratio) set a new record of 16.37%, up from 16.25% in Q1 '05.

The mortgage portion of the FOR set a new record at 10.55%, up from 10.41% in Q1 2005.

With low interest rates, one would expect the mortgage portion of the FOR to be lower - not higher! The third quarter will be even higher, and the increase in the minimum credit card payments will impact the 4th quarter DSR.

by Calculated Risk on 9/28/2005 11:28:00 AM

UPDATE: on credit cards, the Post has an explanation of how payments will increase (its not a hard and fast rule): We'll Have to Pay More. Good! (Thanks to Shawn for link)

The Mortgage Bankers Association reports:

The Market Composite Index — a measure of mortgage loan application volume – was 721.2, a decrease of 6.6 percent on a seasonally adjusted basis from 772.2 one week earlier. On an unadjusted basis, the Index decreased 7.1 percent compared with the previous week and was down 0.5 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index decreased by 3.4 percent to 483.1 from 500.3 the previous week whereas the Refinance Index decreased by 10.5 percent to 2106.6 from 2353.7 one week earlier.

And the American Bankers Association reported:

... the seasonally adjusted percentage of credit card accounts 30 or more days past due rose in the April-to-June quarter to 4.81 percent. That followed a delinquency rate of 4.76 percent in the first quarter and was the highest since the association began collecting this information in 1973.

The rise in late payments was blamed on the increase in gas prices:

The rise in gas prices is really stretching budgets to the breaking point for some people," the association's chief economist, Jim Chessen, said in an interview. "Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations."

And the situation will probably get worse since the minimum credit card payment is set to rise on Oct 1st (hat tip to Paul Williamson at Property Economics):

Next month, people who have held a credit card for some time should get a surprise: each month, they will have to pay 4 percent of the outstanding balance on the card, not 2 percent. This move was dictated by the federal government's comptroller of the currency in 2003. The phase-in for new customers began in the summer, and October is the big month for existing customers. It's not small change. Almost 40 percent of credit-card holders pay only the minimum balance, according to Cardweb.com.

The average household credit-card balance is around $9000, according to Boston's Babson Capital. Previously, families paid a minimum of $180 a month. Now, they will have to pay $360 each month.

A housing slowdown, less equity extraction, rising gasoline bills, rising late payments ... not a good combination.

by Calculated Risk on 9/28/2005 02:45:00 AM

Economists at the UCLA Anderson Forecast will present their quarterly outlook today in Los Angeles. The LA Times previews the report: "Peak for Housing Said to Be Near"

California's housing boom appears to be peaking, and the resultant slowdown is expected to produce "weak growth" in the state's economy during the next two years and a possible recession by the end of 2007.

That's the view of economists at the UCLA Anderson Forecast... "There are some signs that the housing party is ending," said Christopher Thornberg, senior economist at the UCLA group and author of its California forecast.

UCLA forecasts that prices may just stablize, not fall:

Thornberg said that a peaking housing market doesn't necessarily mean prices will plunge. Prices could continue to rise, but at a much slower rate. That's already started to happen in previously hot markets such as San Diego and the Bay Area, he said.

The latest UCLA outlook is slightly more downbeat than its previous report in June "because I think we're at the peak" of housing, Thornberg said. UCLA economists have long warned that a decline was coming and could end badly, but this is their strongest suggestion yet that the top may finally be at hand.

And UCLA projects that the slowing housing market will impact consumer spending, especially in California:

Because the state's job growth and consumer spending have been supported by rising home prices, any flattening of real estate values would cut into overall hiring and prompt consumers to rein in their pocketbooks, the UCLA forecast said. Job creation in other sectors is not strong enough to fully offset declines in housing-related fields such as construction, the state's fastest-growing job sector, the report said.

"When consumers realize they can no longer expect that appreciation bonus to subsidize their consumption habits, they will very likely pull back on spending," Thornberg said.

How soon?

Typically, it takes 12 to 18 months before a slowdown in housing dampens the overall economy, UCLA's Thornberg said. The UCLA forecast calls for the state's job growth — the best indicator of expansion — to slow from 1.6% this year to 1.2% in 2006 and 0.8% in 2007.

I think the economy will slow significantly about 8 to 10 months after the housing peak - sooner than Dr. Thornberg is projecting. I base this prediction on previous housing slow downs. If New Home Sales peaked in July, then I would expect the economy to slow in early '06. However one month does not make a trend, and it is possible but unlikely that housing will rebound.