by Anonymous on 5/11/2007 09:52:00 AM

From WSJ Online via Yahoo!, we meditate on the economics of the "sales inducement."

After sitting on the market from June to December 2006, the Chungs' 1,200-square-foot Cambridge, Mass. townhouse condominium sold for $70,000 less than the asking price. "The number of condos in our price point was at some record high," Mrs. Chung says.

To attract a buyer, their real-estate agent suggested purchasing a flat-screen TV and including it in the price of the house. When the home finally sold, the buyer didn't want the TV.

by Calculated Risk on 5/10/2007 09:41:00 PM

From Reuters: Impac Mortgage posts first-quarter loss

Impac Mortgage Holdings Inc., a specialist in mortgages whose risk levels rank between prime and subprime loans, reported a first-quarter loss ... of $121.7 million ...

Here is the Impac press release: Impac Mortgage Holdings, Inc. Announces Results of First Quarter 2007

by Calculated Risk on 5/10/2007 03:14:00 PM

From Nouriel Roubini: US Q1 growth likely to be revised to 0.7%: we are already in a “growth recession” range. And Q2 started even worse than Q1.

The revisions of Q1 GDP growth that will push the revised estimate of Q1 growth rate below 1% are:

Lower change in inventories than initially estimated reducing Q1 growth

Better construction spending than initially estimated increasing Q1 growth

Much worse trade balance in March than initially estimated reducing Q1 growth

The net effect of these three factors is an estimated 0.7% growth for Q1 (JP Morgan today revised its Q1 estimate downward to 0.8%).

Much more seriously, Q2 started on a very weak note for private consumption based on initial estimates of retail sales. I now expect Q2 growth to be closer to 0% or even negative (i.e an outright recession).

Meanwhile, the WSJ reports: Economists See Signs of a Rebound in Growth

The worst of the economic slowdown has passed, private economists said in the latest WSJ.com forecasting survey. But they don't see any reason to expect a significant acceleration.

By a more than 5-to-1 margin, the economists said they believe the first quarter's 1.3% growth -- the weakest in four years -- marked the low point in the slowdown that gripped the economy much of last year.

The average of these economists' forecasts is 2.2% (compared to 2.5% for Q1 in the February survey!).

by Calculated Risk on 5/10/2007 10:04:00 AM

From MarketWatch: Easter egged April sales; most results miss

April was largely a sales disaster for most of the nation's largest retail chain stores.
...
With more than three-quarters of retailers reporting to Thomson Financial, 86% of them missed expectations for same-store sales, the industry's benchmark for growth measured by receipts rung up at stores open longer than a year.
...
"April's negative (results) are not necessarily an indication that consumers are not spending or that the economy is going down," [Thomson Financial's Jharonne Martis] said. "They are simply the result of the shift in the Easter calendar."
...
Wal-Mart's results were far worse than expected, coming in lower by 3.5% compared with the minus 1.1% expected at Thomson Financial.

This is being blamed on poor weather and the calendar (Easter).

by Calculated Risk on 5/09/2007 02:04:00 PM

Professor Hamilton looks at one of the key questions: Why hasn't construction employment plunged?

This is a topic I'll return to soon.

by Calculated Risk on 5/09/2007 12:27:00 PM

"We are close to a time when we'll look back and say we did some stupid things. We need a little more sanity in a period in which everyone feels invincible and thinks this is different."
Bank of America Corp. Chief Executive Officer Ken Lewis, May 9, 2007

From Bloomberg: Bank of America's Lewis Calls for Lending `Sanity' (hat tip Brian)

Bank of America Corp. Chief Executive Officer Ken Lewis said a so-called credit bubble is about to break after six years of historically low interest rates and relaxed lending criteria.

And isn't just talking about housing:

The chief executive said that while the bank has turned down some corporate customers as too risky, "the deals we've turned down have been taken up quickly by others."

Lewis also made some positive comments (see story).

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.