by Calculated Risk on 5/04/2007 08:39:00 AM

The BLS reports: U.S. nonfarm payrolls rose by 88,000 in March, after a downward revised 177,000 gain in February. The unemployment rate increased slightly to 4.5% in April.

Click on graph for larger image.

Here is the cumulative nonfarm job growth for Bush's 2nd term. The gray area represents the expected job growth (from 6 million to 10 million jobs over the four year term). Job growth has been solid for the last 2 1/4 years and is near the top of the expected range.

The following two graphs are the areas I've been watching closely: residential construction and retail employment.


Residential construction employment decreased by 4,100 jobs in April, and including downward revisions to previous months, is down 139.5 thousand, or about 4.1%, from the peak in March 2006. This is probably just the beginning of the loss of hundreds of thousands of residential construction jobs over the next year or so.

Note the scale doesn't start from zero: this is to better show the change in employment.


Retail employment lost 26,100 jobs in April. As the graph shows, retail employment has turned positive in recent months. YoY retail employment has also turned positive.

Overall this is a somewhat weak report. With the revisions to prior months, the economy has added 118K net jobs per month for the last three months. The expected job losses in residential construction employment still haven't happened, and any spillover to retail isn't apparent yet. With housing starts off over 30%, and residential construction employment off about 4%, I expect the rate of residential construction job losses to increase over the next few months.

by Anonymous on 5/04/2007 07:19:00 AM

The AP reports that New Century has failed to find a buyer for its loan origination business, and has laid off over 2,000 employees in a conference call:

Speaking on the call, New Century President and Chief Executive Brad A. Morrice said despite a number of potential buyers for its wholesale and consumer-direct operations, "none of those potential deals have come to pass."

The deadline for bids for the business unit was Wednesday. New Century's request to extend the deadline was not supported by its creditors committee, Morrice said, adding that efforts to sell the unit had stopped.

New Century will retain only service personnel and about 250 members of its corporate team as the company continues efforts to liquidation, Morrice said.

"I realize that today's announcement was not the news that any of us hoped to hear," Morrice said, his voice quivering at times. "I would be remiss if I did not say how sorry I am for any grief or hardship that any of you may experience as a result of this situation."

That "quivering voice" is a nice touch, isn't it? For some reason, it reminded me of this other AP item from Wednesday:

In court papers filed Tuesday evening, New Century sketched out a revised scheme for bankruptcy bonuses for 34 high-ranking executives, one that replaces a package of executive rewards that drew criticism from U.S. Trustee Kelly Beaudin Stapleton.

Chief Executive Brad Morrice, who was in the original bonus plan, does not appear to be on the extra-pay list in the revised version. However, people named by Morrice or New Century's board to policy-making positions are still in the company's bankruptcy bonus pool. . . .

New Century, which hasn't yet revealed what it paid top executives in 2006, says it won't reveal the names or bonuses for the policy-making leaders it wants to pay extra. Meola, Theologides and two other upper-echelon leaders were named in court papers.

Before New Century's April 2 bankruptcy filing, the Securities and Exchange Commission began probing sales of stock by company leaders who may have known in advance of problems that would take New Century down.

In addition to renewing its request to pad the pay packages of top executives left on the job, New Century this week asked for clearance to hire two law firms in addition to the three already put on the payroll for the Chapter 11 case.

I wonder how quivery Morrice's voice got when he was in there asking for bonuses for the big dogs and justifying retaining 250 managers while unloading all the managees.

Anybody else ready to go back to the Old Century, or is it just me?

UPDATE: (Thanks, jb!) I am not going to say that if you've ticked off KPMG, you've really been and gone and done it. That would be rude, for Peat's sake. So I simply provide the following without further comment:

NEW YORK (Reuters) -- KPMG has quit as auditor of bankrupt subprime lender New Century Financial Corp., which has hired forensic accountants to investigate how the company valued its stake in mortgage-backed bonds.

KPMG notified New Century last week that its client-auditor relationship had ceased, the subprime lender said on Thursday in a regulatory filing.

by Calculated Risk on 5/03/2007 12:55:00 PM

From Rex Nutting at MarketWatch: Fed to consider new rules against abusive lending

The Federal Reserve will hold a public hearing June 14 to consider adopting new rules to combat abusive lending, especially in the subprime market, the Fed announced Thursday.

Here is the Fed press release: Board to hold public hearing under the Home Ownership and Equity Protection Act on June 14, 2007

by Anonymous on 5/03/2007 08:44:00 AM

The intrepid team at the Charlotte Observer is maintaining its irritating habit of keeping its eyes on Beazer:

But among the more outrageous recent examples of the dark side of the carrot culture is this. Beazer Homes USA paid some homebuyers for good marks on a customer satisfaction survey. An article by the Observer's Binyamin Appelbaum on Sunday told of six Beazer customers who said they got letters in 2001 promising $100 if they'd rate the company highly.

Why bother? It's just a customer satisfaction survey. Scott Thorson, who signed a letter the Observer saw and is now president of Beazer's South Atlantic region, didn't return a call for comment. But he was among executives who could earn a bonus based on good survey results. It isn't clear whether Mr. Thorson got the bonus. Nor is it clear whether he was the only executive sending the letters.

It's nice to see that Beazer remains in a heap of trouble with the Charlotte Observer. Observer, please accept my deep graceful ladylike curtsey for deciding that when the carrots get rotten, the press should be the stick.

by Calculated Risk on 5/03/2007 12:53:00 AM

From the WSJ: Bond Investors' Lament

Over the past two weeks, Moody's Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of "subprime" mortgages, home loans made to consumers with troubled or sketchy credit histories. ...

More than half the bonds that were downgraded were originally rated "investment grade" but were cut to "junk" status ...

"It's unusual to see downgrades in subprime deals so soon after they were issued," said Jay Guo, a director of asset-backed securities research at Credit Suisse Group. "This is not a normal phenomenon and is a cause of concern."

by Calculated Risk on 5/02/2007 11:20:00 AM

From the NY Times: A Warning on Risk in Commercial Mortgages

Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate.

Low interest rates and an abundance of investment capital have led to heady times for buyers and sellers of office buildings, hotels and other income-producing property.
...
“Underwriting has gotten so frothy that we have to take a stand,” said Jim Duca, a group managing director at Moody’s Investors Service. “The industry was heading to Niagara Falls.”

The readjustment is occurring just as signs are emerging that the office market is slowing down nationwide.

by Calculated Risk on 5/02/2007 11:18:00 AM

For what it's worth, ADP reports:

Private nonfarm employment grew 64,000 from March to April of 2007 on a seasonally adjusted basis

by Anonymous on 5/02/2007 07:00:00 AM

Freddie Mac issued its quarterly cash-out refinance report yesterday:

McLean, VA – In the first quarter of 2007, 82 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac' quarterly refinance review. The revised share for the fourth quarter of 2006 was also 82 percent.

"Fixed-rate mortgages averaged 6.2 percent for 30-year product and 6.0 percent for 15-year loans during the first quarter of 2007, well below the current rates offered on home equity loans," said Frank Nothaft, Freddie Mac vice president and chief economist. "Home equity loans are generally indexed to a bank's prime rate, currently averaging 8.25 percent. This interest-rate difference provides a big incentive to borrowers to use cash-out refinance as an alternative to a home equity loans. . . .

"This quarter we saw $70.5 billion cashed out, down from a revised $77.0 billion cashed out in the fourth quarter of 2006," said Amy Crews Cutts, Freddie Mac deputy chief economist. "Cash-out refinance volume is expected to decline over 2007, due to an expected 6 percent reduction in overall mortgage origination activity and a fall in the refinance share of originations to around 44 percent for the year.

"Most borrowers with prime adjustable-rate mortgages (ARMs) that were scheduled for an interest-rate adjustment sometime in 2007 have already refinanced these loans. Freddie Mac estimates that in September 2006, there were about $170 billion in prime ARMs outstanding with scheduled rate resets in 2007. As of March 2007, just over $30 billion of these loans remained active."

The Cash-Out Refinance Report also revealed that properties refinanced during the first quarter of 2007 experienced a median house-price appreciation of 24 percent during the time since the original loan was made, down from a revised 27 percent in the fourth quarter 2006. For loans refinanced in the first quarter of 2007, the median age of the original loan was 3.3 years, unchanged from the median age of loans refinanced during the fourth quarter of 2006.

by Calculated Risk on 5/01/2007 10:00:00 PM

Bear Stearns chief economist David Malpass writes in Barron's: Two Fed Hikes Loom in the Second Half

The first-quarter GDP data show residential investment just now getting back to its normal share of GDP (4.5% in the first quarter versus the 4.4% average in the 1990s).

These numbers are incorrect and apparently led Bear Stearns to believe that the housing market will stabilize soon. In fact, Residential Investment (RI) as a percent of GDP is currently 5.04% (not 4.5%) and the average in the '90s was 4.08% (not 4.4%).

How is this ratio calculated? The following table shows the ratio using both nominal and chained dollars. It appears Bear Stearns incorrectly used the chained dollars. This is incorrect because the price indexes are different for both series (RI and GDP). The correct calculation is to use nominal dollars for both series for each period (we are calculating RI as a percent of GDP for each period, so RI is normalized by GDP).

Calculating Residential Investment (RI) as a Percent of GDP
	Q1 GDP (billions)	Q1 RI (billions)	RI as Pct GDP
Nominal	$13,632.60	$687.2	5.04% correct
Chained Dollars	$11,549.10	$515.1	4.46% wrong

This graph shows RI as a percent of GDP with both actual (Blue) and the current trajectory into the future (Red). Note that the red line is just an extension of the current rate of decline, and is not a forecast.

For those that believe RI as a % of GDP will bottom out at around 4.5%, the bottom would come in Q3 2007 (at the current rate of decline). This would be the mildest housing slump on record.

For the more pessimistic, they probably believe the current bust will be the worst on record, and the bottom would then come in Q3 2008 or later (assuming current trends).

If Bear Stearns is basing their housing forecast on RI getting back to level of the '90s, they just missed by about a year.

by Calculated Risk on 5/01/2007 09:51:00 PM

From Mathew Padilla at the O.C. Register: Merrill Lynch scraps Option One's $1.5 billion credit line

The company said in a filing today that its mortgage unit lost a $1.5 billion credit line from Merrill Lynch & Co. Other investment banks reduced or rearranged their financial backing. For example, UBS cut its credit line from 1.5 billion to $750 million.

The changes in financing amount to a red flag because Option One needs to have $8 billion worth of credit lines as part of its agreement with potential buyer Cerberus. Bloomberg calculates that after the changes, Option One still has $12.25 billion of credit lines.