by Calculated Risk on 5/09/2007 11:44:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Applications Increase in Latest MBA Survey

The Market Composite Index, a measure of mortgage loan application volume, was 680.7, an increase of 3.6 percent on a seasonally adjusted basis from 657.2 one week earlier. On an unadjusted basis, the Index increased 4 percent compared with the previous week and was up 19.9 percent compared with the same week one year earlier.

The Refinance Index increased 4.9 percent to 2115.2 from 2015.8 the previous week and the seasonally adjusted Purchase Index increased 2.6 percent to 438.3 from 427.3 one week earlier.

Click on graph for larger image.

This graph shows the Purchase Index and the 4 and 12 week moving averages since January 2002. The four week moving average is up to 418.3 from 412.2 for the Purchase Index.

Industry insiders are declaring the Spring Selling Season a "bust", yet the seasonally adjusted MBA purchase index is rising. What gives?

Fannie Mae's chief economist David Berson asks the same question this week: If purchase applications are stable, why are home sales so soft?

Why has the relationship between purchase applications and home sales weakened recently? One likely explanation is that the stricter guidance of depository institution regulators over the past year with respect to mortgage loans has made it more difficult for some households to qualify for a loan. As a result, those households have had to make multiple applications in order to get a mortgage loan -- thereby pushing up purchase applications without increasing home sales.

Just look at this recent Ad from Countrywide.

It's hard to imagine rejecting only 20% of applications is a selling point - but apparently Countrywide considers this a low rate.

This probably means other lenders have an even higher rejection rate, and Berson suspects the frequency of multiple applications has increased recently, leading to the MBA Index being less useful.

Another reason for the breakdown in correlation between applications and sales is how the MBA survey is conducted. According to the MBA:

The survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.

Since many smaller lenders have closed shop (see the Implode-O-Meter), more potential buyers may be applying for loans from the lenders covered by the MBA survey. As an example, suppose 1000 people applied for loans in a given week from 10 lenders.

Lender 1: 250
Lender 2: 150
Lender 3: 100
Lender 4-10: remaining 500 applications.

The MBA survey covers "approximately 50 percent of all U.S. retail residential mortgage originations", so in this example the MBA would only need to survey the top 3 lenders. Now if lender 10 closed shop (with 50 applicants), and the applicants all applied in equal proportions to the other lenders, the MBA index would increase 5% without any increase in overall activity.

My suspicion is this is what has happened lately, in addition to Berson's suggestion of more multiple applications. During this period of transition and instability, the MBA Index appears useless.

by Anonymous on 5/09/2007 08:57:00 AM

Bloomberg reports that HUD's Inspector General is trying, once again, to institute a ban on "down payment assistance" programs (DAP) that involve seller (builder) funds laundered through pseudo-non-profit organizations. HUD's first attempt to ban this practice, in 1999, failed in 2000 after the homebuilder and lender lobby pulled out all the stops. Since then, the IRS--that well-known consumer advocate--has gone after the "non-profit" status of these groups, but even with adverse IRS rulings, HUD has heretofore failed to curb this practice.

What we have this time that we didn't have last time, it seems, is hard evidence from the IG's office that 1) the foreclosure rate on these "assisted" loans is double the rate for the rest of the FHA portfolio and 2) the sales price on these homes is inflated by the amount of the "assistance." I doubt that will shock anyone here at Calculated Risk, but do bear in mind the following. Back in 1999/2000, all those of us who supported the ban had to go on was 500 or so years of experience with lending, which told us that the very concept of the "down payment" is defeated if it is made by the seller, and that in a transaction involving an unsophisticated buyer and a sophisticated seller, "freebies" often manage to get reimbursed somewhere.

But because, for 500 years or so, no one was really dumb enough to allow this sort of thing, we in the civilian reality-based community didn't really have hard statistical evidence that it was merely a bonanza for builders and a disaster for vulnerable homebuyers. And--this will shock you--HUD seemed to have a hard time coming up with hard statistical data, too. Turns out, lenders were not supplying the full loan-level data to HUD that would allow these loans to be easily identified. Even so, in September 2002, with the cruddy data reporting it faced, the HUD IG managed to pull off a statistical sampling and file-level review of selected loans that showed 1) DAP loans on the rise and 2) DAP loan defaults at double the rate of other loans in the portfolio. The IG suggested that HUD ban the program.

HUD's response?

The Office of Housing believes that OIG's work has been beneficial in providing information on downpayment assistance programs, and appreciates the opportunity to work with OIG in developing the analytical framework for the audit. As your audit report notes, the loan sample does not contain enough defaults to accurately project the default rate on loans with downpayment assistance. Consequently, FHA is procuring the services of a contractor to conduct a more extensive analysis using the framework developed by the OIG. This is necessary because of the effect that changes in these programs may have on all program participants. We anticipate that procurement action will be finalized by November 30, 2002. The final report should be submitted to the Department by September 30, 2003. The Department is confident that it will be able to act upon the report's findings no later than December 2003.

So the IG's work isn't good enough; we need to hire some private contractors to noodle around for another year. What happened in December 2003? Well, nothing. But by the following February 2004 we did get a report from the private contractor, which found:

Below are a list of key findings related to data quality, gifts and other characteristics of the sample:

o TINs were missing 74% of the time when the binder indicated the presence of a non-profit gift.
o Gift source and amount were missing from the CHUMS 28 % and 22% of the time respectively when a gift was known to be present based upon the binder review.
o In the binder, supporting documents such as gift letters were frequently missing or incomplete.
o The average gift from a relative was 9% higher than the average gift from a non-profit.
o Median House prices and seller contributions tended to be higher when gifts from non-profits were present.
o The CHUMS data quality was not greatly compromised by the limitation posed by the lack of multiple gift source fields. The number of instances where more than one gift source was present was minimal, 155 cases.
o Use of gifts from non-profit organizations increased over time (FY 1999 – FY 2002). This is especially evident in the SMSA sample.
o In most cases total assets reported in the CHUMS were higher than total assets found during the binder review.
o The binder review revealed an additional 1,012 gifts not reported by lenders via the CHUMS, representing over 28% of all gifts.

Our recommendations relate to the key findings above: (1) address ways to improve data quality by enhancing validation capabilities in CHUMS for gift-related data fields, (2) conduct further study to determine the relationship between non-profit gifts and other file characteristics to including median house price and seller contribution, and (3) conduct primary research and analysis to determine the underlying source of discrepancies between CHUMS and the binder for borrower required investment and total assets available fields.

Ah, yes, further study required. And did we get that further study? Why, yes, we did. Our intrepid private contractor put another year into this, and issued a report on March 1, 2005:

This report is the culmination of a ten-month effort, beginning in January, 2004, to understand the influence of seller-funded nonprofit downpayment assistance on the origination of FHA-insured home loans. The study involved travel to ten cities and interviews of over 400 persons involved in mortgage transactions—from homebuyers and sellers to realtors, appraisers, underwriters, loan officers, builders, and downpayment assistance providers. The report concludes that seller-funded downpayment assistance for mortgage downpayments has led to underwriting problems that require immediate attention. . .

So did we get "immediate attention"? Well, if you root through the first 356 pages of the FY 2006 Performance and Accountability Report, past all the high-priority stuff like the "faith-based initiatives," you get this little item on page 357 from the OIG:

At our urging and in light of recent Internal Revenue Service ruling regarding nonprofits that provide seller funded downpayment assistance, [HUD is] proposing a rule that would establish specific standards regarding a borrower's investment in the mortgaged property when a gift is provided by a nonprofit organization.

Would you like to see the text of this proposed rule? So would I; it's not actually available yet. Per Bloomberg,

HUD plans to propose the ban this month for public comment, possibly as early as this week, Wooley said. More than 100,000 low- and moderate-income consumers bought homes using such programs last year. The percentage of foreclosures on these homes is more than double that on other loans sponsored by the Federal Housing Administration, according to agency audits.

``It's painted to be helping homeowners get into houses,'' HUD Inspector General Kenneth Donohue said in an interview. ``But it is circumventing good business practices, and you bet it has resulted in foreclosures.''

Once HUD issues its rule proposal, industry and consumer groups will have 60 days to submit comments.

So, it looks like we're about 100,000 loans too late just for 2006. But since house price declines are obligingly putting those borrowers even further underwater than they probably were when the loan was made, it looks like time to get right on this.

I'll keep you posted if the proposed rule ever actually gets released. Perhaps Calculated Riskers would like to comment on it.

by Calculated Risk on 5/09/2007 12:58:00 AM

"Our contacts have officially declared the spring selling season a bust."
Ivy Zelman, Credit Suisse, May 8, 2007

From the WSJ: Supply of Homes Continues to Grow

The supply of houses and condominiums available for sale continues to grow quickly in much of the U.S., reflecting weak sales.

Zelman also noted:

Many people who had expected a recovery by year end "now believe the market rebound will be pushed out until 2008 at the earliest."

At the earliest.

by Calculated Risk on 5/08/2007 03:36:00 PM

"People are taking out these loans and they realize they can't make payments on them. The first one they're going to default on is the second lien, not the first lien, because many times a servicer will write off the second lien and not foreclose."
Terry G. Osterweil, an analyst at New York-based S&P, May 8, 2007.

From Bloomberg: S&P to Require More Protection on Second-Lien Debt (hat tip: Brian)

S&P's new views would have raised the required amount of "over-collateralization," or investor protection created by having more underlying loans than bonds backed by them, to 8.10 percent, from 5.45 percent in an example the firm used in a report. The amount of debt created with AAA ratings in the issue would have been lowered to 68.30 percent, from 72.25 percent.

This is a significant increase in protection.

by Anonymous on 5/08/2007 11:40:00 AM

CR used to like to quote this one every now and again, back in the days when this blog was just a little back-water hand-wringer in a sea of housing and mortgage bulls:

"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."

John Maynard Keynes, "Consequences to the Banks of a Collapse in Money Values", 1931

It's amazing how ever-fresh this particular avoidance of blame is. There's the CEO of Countrywide:

"I've been doing this for 54 years," Mozilo recently said during a speech in Beverly Hills, California. For many years, he said, "standards never changed: verification of employment, verification of deposit, credit report."

But then new players came in with aggressive lending policies. Names like Ameriquest, New Century, NovaStar Financial and Ownit Mortgage Solutions set a new, lowered standard, changing the rules of the game, Mozilo said.

"Traditional lenders such as ourselves looked around and said, 'Well, maybe there's a (new) paradigm here. Maybe we've just been wrong. Maybe you can originate these loans safely without verifications, without documentation,"' Mozilo said.

There's Tom Marano of Bear Stearns:

But Tom Marano, who heads the mortgage business at Bear Stearns, disputed the contention that Wall Street pressure led to the loosening of credit standards. Investment banks, he said, do not directly make many loans.

“If enough independent companies set standards, that becomes the market,” he said. “Wall Street’s role is largely one where we assess risk, we purchase loans.”

And there is our famous Bill Dallas of Ownit Mortgage:

Bill Dallas, chief executive of Ownit, the nation's 20th-largest subprime lender in 2006, said he saw the handwriting on the wall in April 2005 after he overheard a rival account executive tell a customer how to get a better rate by committing occupancy or income fraud.

"I just went, 'We are hosed as an industry,"' Dallas said. "I told our guys, 'We're the problem."

The structure of the industry was part of the problem, he said: "Our account reps are talking to the mortgage broker, the mortgage broker is talking to the borrower, and they're teaching them all the wrong things."

Sound bankers, to a man.

by Anonymous on 5/08/2007 10:11:00 AM

Sorry I'm up so late this morning. Those of you who were hanging out here yesterday may already be tired of this new genre of news story, but I'm not. I read everything by Vikas Bajaj on principle, and today I was once again not disappointed. "A Cross Country Blame Game" is chock-full of good stuff. It gives us the touching story of Bill Dallas, owner of the now-defunct Ownit Mortgage:

That desire to expand homeownership fed Mr. Dallas’s own entrepreneurial fire.

“I am passionate about the normal person owning a home,” said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. “I think owning a home solves all their problems.”

As he discusses homeownership, Mr. Dallas becomes animated and his voice rises. He fetches copies of a booklet, “Strategic Financing: A Survival Guide for Loan Originators,” he helped write for loan officers and brokers, and points to charts and tables to help explain his thinking. His speaking style seems part revival preacher and part courtroom lawyer.

Mr. Dallas created Ownit from a small mortgage company he and his partners bought in 2003 for $30 million. Two years earlier, he had left First Franklin, a lender he co-founded in 1981 and which was then owned by National City. (Merrill Lynch bought First Franklin last year for $1.3 billion.)

Ownit was different from other subprime lenders. About 70 percent of the company’s loans were made for the purchase of homes, while about 60 percent of all subprime loans were used to refinance existing debts.

Mr. Dallas, a native of Ohio who moved to California as a young adult, said he created Ownit to serve borrowers who earned less than $100,000 and had less than $100,000 in assets, a group he calls the “mass nonaffluents.”

I think we've just figured something out about that "subprime serves the poor" argument.

by Calculated Risk on 5/07/2007 03:09:00 PM

From the BEA:

Investment in residential structures consists of new construction of permanent-site single-family and multi-family units, improvements (additions, alterations, and major structural replacements) to housing units, expenditures on manufactured homes, brokers'commissions on the sale of residential property, and net purchases of used structures from government agencies. Residential structures also include some types of equipment that are built into residential structures, such as heating and air-conditioning equipment.

The breakdown by each category is available in the BEA underlying detail tables. The only significant categories are: permanent site (single and multi-family structures), improvements and broker's commissions.

Click on graph for larger image.

This graph shows that investment in single family structures is the most important category of residential investment. This amount is based on the Census Bureau data: Construction Spending and is included when the value is put in place.

A few things to note: Broker's commissions and improvements tend to track investment in single family structures, and investment in multi-family structures are not correlated with single family structures. In the current downturn, investment in improvements has only just started to decline as a percent of GDP, and will probably decline much further as MEW declines. Investment in multi-family structures will probably stay fairly low since the vacancy rate for rental units is still near the all time highs (this is definitely a local issue - some areas will have a low vacancy rate and see more multi-family construction).

by Anonymous on 5/07/2007 10:27:00 AM

Holy Em Dash, Batman, I'm saying nice things about the press two posts in a row. Did anyone buy lottery tickets today?

From the Washington Post's David Cho, "Pressure at Mortgage Firm Led To Mass Approval of Bad Loans":

Traders familiar with the bidding process said competition for mortgages from New Century began to heat up in 2005. Mortgage-backed securities based on New Century loans had been performing better for investors than those from other subprime lenders, in some cases producing two or three times the return of a U.S. Treasury bond. Many banks felt they had to loosen their standards and agree to return fewer bad loans in order to win the auctions, the traders said.

The head of a large Wall Street bank's mortgage group contended that his firm regularly lost out on New Century's business because its due diligence process was stringent and it had been returning a high number of loans. New Century wanted the bank to ease its standards, and the issue became a source of friction between the companies.

"The entire industry, over time, became more lax," he said, speaking on condition of anonymity because he was not authorized to talk about his company's inner workings. "The more [loans] you accepted, the better relationship and the better price you would have. The name of the game was definitely volume."

A New Century spokeswoman said negotiating with banks to reduce both their due diligence and the number of loans they returned was a "generally accepted practice" that was "always a matter of discussion." . . .

Although there were variations in their descriptions of the atmosphere in their offices, most said they were pushed to approve questionable loans. Several of the interviewed employees said they faced "unofficial quotas" of loans that had to be approved each day. The pressure to meet these expectations was so unrelenting that a worker in Foxboro, Mass., collapsed from stress and was taken to the hospital, two employees said. In the firm's Long Island branch, the atmosphere resembled a fraternity, largely because the average age was 23, an appraiser there said.

That's more interesting than a fake Enron story.

by Anonymous on 5/07/2007 07:32:00 AM

As it is not possible these days to pick up a paper--any paper, it seems--without reading yet another sorry anecdote about some sorry subprime borrower who never should have gotten a mortgage in the first place, I must say I'm refreshed by Lynda V. Mapes' approach in The Seattle Times ("Borrower Beware"). Here, we get the other side of the anecdote, the sorry story of some sorry broker who put this sorry deal together.

Mills specializes in clients like Fultz and Swartz. At it for 17 years, she caters to people with bad credit, low incomes and no savings.

"Hey, babe, it's Kathy, " Mills said on a recent workday, dialing up one of the dozens of lenders she says she works with regularly to hook her clients up with a loan. Mills is adamant that she explained the terms of the deal to Fultz and Swartz, just as with her other clients.

"We do this with all varieties of people, all nationalities, every brain level," Mills said. If anything, she remembered the lengths she went to, talking the couple through the deal. "They were very high maintenance," said Mills, swiveling in her leopard-print office chair.

She sees herself as serving a real need for borrowers struggling month to month with their bills, who want a home of their own, just like everyone else.

"I feel sorry for anyone who can't get into a house," Mills said. "We beg the banks to give us their turn downs. I help people; that's the bottom line."

And as for those borrowers?

Reviewing documents Fultz and Swartz provided, Huelsman concluded the couple's credit scores should have qualified them for a better loan, with a lower interest rate, especially on their second mortgage. She also found it odd that several different applications for the loan reported varying income levels, even on documents faxed the same day.

Asked about that, Mills said, "We only write down what the borrower tells us." For his part, Fultz said he never reviewed his final loan documents or looked to see what Mills wrote down.

Huelsman said she found some of the documents incomplete and confusing.

Based on what she knew so far, Huelsman said, "I don't think there is any way in the world they could have understood what they were getting into."

Asked about the forms Huelsman questioned, Mills said, "I agree, it isn't explaining it in full." But Mills said she makes up for that as she talks to borrowers: "It's explained to the client 47,000 freaking times."

Broker sounds a little on edge, doesn't she?

The pullback has cratered the business model for brokers like Mills. She used to write 10 to 15 loans a month. In March, she wrote two. In February? None.

"I didn't make my own mortgage payment this month," Mills said in April. "But nobody feels sorry for me."

Nor does she feel sorry for Fultz and Swartz, Mills said.

"We didn't do anything wrong," Mills said of her firm. "She quit her job and now they can't make their payments. Well, I didn't make mine this month, either. How do you help someone like that? I wish I could help myself."

Perhaps the next time we are dragged into some pointless "debate" about subprime that degenerates into "We're helping the poor!" "Are not!" Are too!", we could remember this one. If we have to make social and economic policy based on sorry stories and anecdotes, let's get all the sorry stories and anecdotes out on the table.

by Calculated Risk on 5/06/2007 08:00:00 PM

Crux: an essential point resolving an outcome.(m-w online 2)
The predominant view on Wall Street is that the current economic sluggishness is a mid-cycle slowdown, and that slow growth would bottom in Q1 2007, and then improve over the remainder of the year.

Click on graph for larger image.

This graph shows the YoY change in GDP and employment since the early '60s. Most forecasters believe the current period is similar to the mid-cycle slowdowns in the '80s and '90s.

Other less common views include: a weaker economy going forward, with a possible recession; and the view that a hard landing is almost unavoidable. My view is that the economy will be weaker, with the probability of a recession in 2007 about a coin-flip.

Although the last two views still have time, the next couple of quarters are critical for the consensus view. Further weakness in Q2, and the consensus view on the economy will have been too optimistic. For these forecasters, the economy is at the crux.