by Calculated Risk on 4/23/2007 07:19:00 PM

From Reuters: US new home market may take til 2009 to rebound-S&P (hat tip Roy)

"We do not expect to see a recovery for most rated home builders until 2008, under the best of circumstances," the [Standard & Poor's] rating agency said in a research note. "In fact, a rebound could easily slide into 2009 if a subprime contagion spreads to the Alt-A and prime products."

by Calculated Risk on 4/23/2007 02:11:00 PM

From Realty Times: NAHB's Chief Economist Releases Housing Forecast. See the link for excerpts from Seiders' forecast.

The overall economic forecast is still pretty positive on GDP growth with "major uncertainties" and significant downside risk. Seiders says the probability of recession later this year has risen, and he puts the odds around 25%.

The NAHB housing forecast is grim. Rising inventories, especially a record number of vacant housing units, combined with falling demand, because of the subprime and Alt-A debacle, "has downside implications for house prices and has prompted downward revisions to NAHB's forecasts of home sales and housing production for the balance of 2007-2008."

Nothing new here except that this is the forecast from the National Association of Home Builders!

by Calculated Risk on 4/23/2007 12:53:00 PM

From the WSJ: Home Equity Is Rising Source Of Funds, Greenspan Paper Says

Housing equity served as a growing source of funds for U.S. consumer spending between 2001 and 2005, financing close to 3% of total personal consumption expenditures, according to a paper co-authored by former Federal Reserve Chairman Alan Greenspan.

In the paper, posted on the Fed's Web site Monday, Greenspan and Fed Economist James Kennedy estimate that between 1991 and 2005, equity extracted through home sales, home-equity loans and cash-out refinancings freed up about $530 billion per year in cash available for other uses, such as consumption and debt repayment.

The paper provides new estimates on how MEW is used. However, the paper does not provide data after Q3 2006.

by Anonymous on 4/23/2007 06:43:00 AM

In late 2006, the Massachsetts Commissioner of Banks convened a "Mortgage Summit" to address issues of foreclosures, predatory lending, and mortgage fraud. The report of the working groups formed at the summit was published on April 11, 2007, and is definitely worth a read for anyone interested in the issue of regulating lending practices or dealing with a foreclosure epidemic.

I will say, as I've said before, that one frequently sees--and the Massachusetts report is no exception--the objection arising to certain legislative or regulatory reforms that it involves the potential for increased costs of mortgage credit. In the Massachusetts example, the proposal to require judicial foreclosures in all cases is met with the utterly predictable response from the lending industry that such a requirement makes foreclosures more expensive, and that lenders would pass such costs on in the form of marginally more expensive mortgage rates.

What frustrates me is that no one--including the Massachusetts task force--is coming back with the response of "And so?" I have some dusty old Econ 101 textbook that is probably filled with a fair amount of nonsense, but I remember it implying that moral hazards can be dealt with by imposing failure costs on the risk-taker. From a rather different economic perspective, I note that extremely cheap mortgage credit, backed by cheaper non-judicial foreclosure options, has really done a lot for us lately.

There is also the predictable claim that regulation of predatory or potentially predatory loan products or brokering relationships would "hurt the poor." This, coming out of the mouths of for-profit lenders, is pretty rich. The idea seems to be that "suitability standards" are OK for middle-class financially-literate people, but they get in the way of making loans to low-to-mod income wage earners who may not have been through Econ 101 and don't run Excel. I'll go on record with the thought that anyone who believes that "democratizing" homeownership means that the poor are helped most by getting loans at any cost is full of MBS.

For discussion purposes, here are a few of the recommendations the working groups were able to agree on (which doesn't mean they'll happen, of course, unless and until not just MA but other states get on board with regulating and legislating these issues).

• Pre-payment penalties should not be charged after the initial reset period of an ARM product.

• Full, simple, and clear disclosure of all the features of the loan that might affect the monthly payment and borrower equity, should be provided.

• Full, simple, and clear disclosure of the incremental cost of each of the risk layering features of the approved loan should be provided.

• Changes in loan terms at or just prior to closing that adversely affect the borrower by increasing costs, fees, or rates or changing other terms are inappropriate and should be considered predatory.

• Require that the name and license number of the mortgage broker be added to the mortgage so that it becomes a public record.

• Require all licensed mortgage lenders and mortgage brokers to report through the annual report to the Division of Banks the number of loans that they originated that went into foreclosure.

• Require all licensed mortgage lenders and mortgage brokers to report through the annual report to the Division of Banks the number of loans originated in Massachusetts that meet the definition of a high APR loan (HAL) under the Home Mortgage Disclosure Act (HMDA)7 and the percentage of all loans originated in Massachusetts that are HALs.

• Based on the HAL data reported by mortgage lenders and mortgage brokers, consideration should be given to the following:

1. If the majority of a lender’s or broker’s business are HALs, the lender or broker must disclose this to the customer in writing, along with information that better pricing and terms may be available from another lender.
2. If the majority of a mortgage lender’s or broker’ closed loan business is defined as HALs, a separate license designation could identify them as a High APR lender or broker. This High APR identification would also have to appear in all advertising.

by Anonymous on 4/21/2007 10:30:00 AM

. . . my name is Alt-A.

That pretty much sums up the message this earnings season from the mortgage lenders.

Yes, if I could have found a YouTube of Jessi Colter, or even Erika Jo, I'd have chosen it. So sue me. Let me remind you that if you are looking for good taste in music, you should go bug Barry Ritholtz.

Oh yeah, and "rock" means whatever I say it means. I'm a mortgage lender, dudes.

by Calculated Risk on 4/20/2007 08:15:00 PM

IndyMac provided an (pdf) Update on First Quarter Mortgage Loan Production today. Here are a couple of interesting tables.

Click on graph for larger image.

This shows the breakdown of loans by documentation. Most of their loans fall into Type 2:

Borrower states income and documents employment and assets. Lender assesses income for reasonableness and verifies employment, assets, credit history and home value (by appraisal).

Click on graph for larger image.

The second image (two tables) shows the actual loan production in Q1 by documentation type, and the Proforma Loan Production had their new guidelines been in place on Jan. 1, 2007. Overall production would have declined by about one third. Type 2 loan production would have decreased from $13.161 Billion to $8.066 Billion.

by Calculated Risk on 4/20/2007 06:49:00 PM

Every month, for most of the last year, we have seen some prominent economist, analyst, or government representative call the housing bottom. My only regret is I didn't keep a list of their erroneous calls!

Of course someone will eventually be correct, and maybe it will even be Treasury Secretary Hank Paulson, from MarketWatch 4/20/2007 (hat tip Anthony Fleming):

In a question-and-answer session, Paulson delivered an upbeat assessment of the economy, saying growth was healthy and the housing market was nearing a turnaround.

"All the signs I look at" show "the housing market is at or near the bottom," Paulson said.

This is the start of a list of bottom callers. Please post any other prominent bottom calls (not Lereah!).

by Calculated Risk on 4/20/2007 05:32:00 PM

From MarketWatch: California home prices to weaken further: Goldman

Investment bank Goldman Sachs is increasingly concerned about the health of California's real estate market ...

Mortgage delinquencies jumped 46% in California last year, vs. a 5% increase nationally, Goldman said in a note to clients late Thursday.

Delinquencies on prime and subprime adjustable-rate mortgages in California soared by 78% and 60% respectively, vs. 33% and 24% across the U.S., the bank added, citing recent data from the Mortgage Bankers Association.

Median California home prices are still creeping up, and the state's strong employment trends should support the real estate market. But Goldman is worried that surging prices in the state in recent years weren't driven by traditional factors such as strong employment and income growth. Instead, the bank reckons an increase in ARM mortgages offered to borrowers who were already stretching to buy high-priced homes fueled the boom.

Now that lenders are cutting back some of these types of loans and regulators are beginning to crack down, California home prices could begin falling later this year, especially in high-price cities and towns, Goldman said.

by Calculated Risk on 4/20/2007 04:08:00 PM

UPDATE: A couple of commenters believe I misinterpreted the excerpted sentence. I agree, but I'm not sure of the correct interpretation. Apparently the writer meant that the average unemployment rate for the current decade (since 2000) is the lowest for any decade since 1970. However, doesn't the "past four decades" still include the '60s? The average for the '60s was lower than the current decade.

This article from the AP: Factory jobs: 3 million lost since 2000 contains the following claim:

"Even though manufacturing jobs have been declining, the country is enjoying the lowest average unemployment rates of the past four decades."

Click on graph for larger image.

This graph shows the monthly U.S. unemployment rate for the last four decades. The red line is the current unemployment rate of 4.4%.

At no time, during the "past four decades" did the blue line dip below the red line - or so the AP claims.

by Calculated Risk on 4/20/2007 01:30:00 PM

Here are some excerpts from Governor Frederic S. Mishkin speech today: The U.S. Economic Outlook

Regarding the housing adjustment ... At the beginning of the year, the ongoing cutbacks in starts of new homes, together with a lowered but fairly steady pace of home sales, were beginning to reduce the elevated backlog of new homes for sale. However, a further weakening in sales of new homes in January and February reversed some of the progress in reducing those inventories. As a result, cutbacks in new residential construction may well persist for a while.

Towards the end of last year, the Fed's view was that the housing market was near the bottom for this cycle. That viewed seemed to ignore housing fundamentals (like, say, record supplies and falling demand), and now the Fed is finally acknowledging that problems in housing "may well persist for a while."

More recently, developments in the subprime mortgage market have raised some additional concern about near-term prospects for the housing sector. The sharp rise in delinquencies on variable-interest-rate loans to subprime borrowers and the exit of a number of subprime lenders from the market have led to tighter terms and standards on such loans. While these problems have caused undeniable hardship for many families and communities, spillovers to other segments of the mortgage market or to financial markets in general appear to have been minimal.

The spillover is minimal if you ignore Alt-A, prime HELOCs, and C&D loans to condominium developers. As an example, here is an excerpt from Corus Bankshares' press release this morning:

"With a loan portfolio consisting, almost exclusively, of condominium construction and conversion loans, the nationwide slowdown in the residential housing market is impacting Corus' business. Evidence of this slowdown is clear from the decline in loan originations, the resulting decline in loans outstanding and an increase in problem loans. The current quarter's earnings declined as a result, and it would not surprise us to see an even greater impact on earnings over the next several quarters, or even years, depending on when the market improves," said Robert J. Glickman, President and Chief Executive Officer.

And back to Mishkin:

I should note some positive news for the housing sector. Sales of existing homes strengthened a bit during January and February, and the Mortgage Bankers Association index of applications for home purchase suggests that demand has been fairly steady through early April. Also, mortgage rates are still at historically low levels, and mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to show low rates of delinquency.

The MBA index has held up pretty well, probably due more to how their survey is conducted than any real strength in the housing market. On the existing home news, Mishkin is simply looking at the data incorrectly. And yes, delinquency rates are rising for all borrowers, including prime borrowers and those with fixed rate mortgages.

And away from housing:

The second major area of concern in the near-term outlook, and one that perhaps could pose noticeable downside risks, is business investment.

A downturn in business investment definitely wasn't a surprise since that is the normal historical pattern (non-residential investment follows residential investment). There is much more in the speech, especially concering inflation expectations.