by Calculated Risk on 5/14/2007 03:52:00 PM

From MarketWatch: Banks tightening mortgage-lending standards: Fed

U.S. banks dramatically tightened their standards for approving individual real-estate loans in the first quarter of 2007, the Federal Reserve said Monday.

In particular, banks made it harder to get a subprime residential loan, the Fed reported. In its quarterly senior loan officer survey, the Fed said 31% of banks surveyed "considerably" tightened credit standards for subprime loans, while 25% of banks tightened those rules "somewhat." None eased standards.

For non-traditional residential mortgages, credit standards also went up. Eleven percent tightened those standards considerably, while 34% tightened somewhat, the central bank said. No bank surveyed eased standards for those loans.

Meanwhile, 15% of banks tightened credit standards somewhat for prime residential mortgages.

Here is the Fed Survey: The April 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices. Notice that standards have also been tightened for Commercial Real Estate (CRE) loans.

Update: Add Graph of Net Percentage of Domestic Respondents Reporting Stronger Loan Demand - both C&I (Commercial and Industrial) and CRE (Commercial Real Estate). Note: for C&I, large and medium lender responses are average with small lender responses.

Click on graph for larger image.

Clearly loan demand is falling for all categories: residential, C&I and CRE. Standards are being tightened for residential (including some for prime loans) and CRE, but not for C&I - but the demand is falling for C&I anyway.

by Anonymous on 5/14/2007 11:26:00 AM

Via Reuters:

NEW YORK, May 14 (Reuters) - Accredited Home Lenders Holding Co. shares dipped on Monday after the struggling subprime mortgage lender projected a "significant" first-quarter loss and cut 1,300 jobs, but said it ended March with more than $350 million of available cash.

In a filing late Friday with the U.S. Securities and Exchange Commission, San Diego-based Accredited Home said it cut its work force to 2,900 as of March 31 from 4,200 at year end, to slash costs amid a "turbulent mortgage industry."

Accredited Home said it made $1.9 billion of mortgage loans in the quarter, down 47 percent from $3.6 billion a year earlier. It said its cash level stemmed mainly from its $230 million term loan from Farallon Capital Management LLC. Subprime lenders lend to people with poor credit histories.

"The company's cash and liquidity appear adequate at the moment, especially in light of actual and, most likely, continued declines in origination volume as well as the elimination of approximately one-third of its work force," wrote Roth Capital Partners LLC analyst Richard Eckert.

Delinquent loans as a percentage of loans serviced more than tripled to 8.96 percent from 2.85 percent a year earlier.

by Anonymous on 5/14/2007 09:14:00 AM

It appears that people are going to have to keep their cars almost as long as they keep their houses. This is not good news:

Despite a record U.S. population and more licensed drivers than ever, sales of new vehicles slipped nearly 3 percent last year to their lowest level since 1998 and are down the same amount this year.

Analysts and auto manufacturers cite several factors for the sales slide, including high gas prices, sagging home values and sluggish economic growth.

But those who study car-buying habits see another factor keeping a lid on car sales: the aggressive borrowing habits of consumers today.

They say borrowers have stretched out their car loans over such a long period of time that some can no longer afford to replace their vehicle.

"They would like to trade, but they can't. They have no equity," said Art Spinella, president of CNW Marketing Research, which studies consumer buying trends.

Three out of five new-vehicle loans made this year, or 60 percent, are for 61 months or longer, and nearly 20 percent are for longer than six years, according to a Consumer Bankers Association study. Some go as long as 96 months. . . .

As loan contacts have lengthened, so has the amount of time that consumers keep new cars. CNW says the average buyer keeps a car 59 months, up from 50 months in 2001. Most buyers would still like to get a new car every four years or sooner, Spinella said, but now fewer can afford to.

"There has been a two-decade trend to longer maturities. As an industry we have to deal with customers who have an upside-down situation. The bigger issue is that we're dealing with economic conditions that are less than ideal," said Paul Ballew, chief market analyst for General Motors.

"Once the housing correction is behind us and if there is less volatility in oil prices, it should improve. The underlying fundamentals of the industry are still very positive."

If there were only a way to pay those car loans off with a 40-year cash-out refi mortgage, we could return the auto industry to its underlying fundamentals: short-term leases. Once the housing correction is behind us, of course.

by Anonymous on 5/14/2007 08:34:00 AM

From the OC Register's Lansner on Real Estate Blog, counsel from a renowned real estate broker (thanks, Kevin!):

Today's buyers are most active in the (relocation), second-home and (empty-nester) segments. The traditional family looking to move up is stagnant, as they have to sell a home first and are worried about values and higher property taxes. Buyers need to think long term, meaning 3 to 5 years of living in their next home. Fix-and-flippers are dead. Renters should strongly consider buying now due to an ample selection of homes and the after-tax cost of homeownership.

So 3-5 years is "long term" for a home purchase? Thank heavens we're injecting some sanity into this whole thing; otherwise these "permanent mortgages" would look like bridge loans.

Brigadier General Gavin: What's the best way to take a bridge?

Maj. Julian Cook: Both ends at once.

Brigadier General Gavin: I'm sending two companies across the river by boat. I need a man with very special qualities to lead.

Maj. Julian Cook: Go on, sir.

Brigadier General Gavin: He's got to be tough enough to do it and he's got to be experienced enough to do it. Plus one more thing. He's got to be dumb enough to do it... Start getting ready.

by Calculated Risk on 5/13/2007 08:26:00 PM

From the WSJ: Mortgage Woes Force Banks To Take Hits to Sell Homes

An auction of nearly 100 foreclosed homes [in San Diego] Saturday showed that mortgage lenders are having to accept huge discounts in some cases to unload such properties.

A surge of foreclosures over the past year or so has left lenders struggling to sell a growing backlog of homes.
...
At the San Diego sale, houses and condos typically sold for about 30% below the previous sale or appraisal prices. In a few cases, the discounts were around 50%.

... A glut of condominiums also is weighing on the market. Peter Dennehy, a senior vice president at Sullivan Group Real Estate Advisors, a research firm here, estimates that at the current sales rate there are enough condos on the market to last about 29 months.

by Calculated Risk on 5/13/2007 11:11:00 AM

From the O.C. Register: Lending's next tsunami?

... Indymac and others who deal in Alt-A loans, such as Impac Mortgage Holdings of Irvine and Downey Financial of Newport Beach, may not have time to wait. The same problems shaking up the subprime market are now emerging in the Alt-A industry.

What's more, a Register analysis shows reserves for loan losses by these companies are not keeping pace with delinquent loans.
...
[Manuel Ramirez, an analyst with Keefe Bruyette & Woods] said it's "eerie" how the subprime correction appears to be repeating in Alt-A.

"Compared to subprime it's at a snail's pace but I think it's real," Ramirez said.

Data on homeowners missing their monthly payments seem to fit his assessment.

Alt-A delinquencies hit 2.90 percent in February, more than double 1.23 percent a year ago, according to First American LoanPerformance, which tracks loans sold to investors as securities. Yet while that's much greater than 0.47 percent for prime loans, it's far from the 14.79 percent for subprime.

Analysts say delinquencies are rising in the Alt-A sector for the same reasons as subprime: too many loans made with little or no down payments combined with little or no proof of income.

by Anonymous on 5/13/2007 09:03:00 AM

One of the more annoying memes floating around these days is a certain misuse of mortgage delinquency or default rates in support of what appears to me to be a political argument. It goes like this: “only” x percent of subprime borrowers are delinquent; therefore x percent are not delinquent. Therefore . . . subprime creates opportunity. It is a political argument insofar as what lurks within the ellipsis is the dreaded “ownership society.”

This somewhat anemic logic has appeared in some fairly respectable sources: Austan Goolsbee in the New York Times writes, “When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.” James Surowiecki in the New Yorker makes the same gambit: “But what’s often missed in the current uproar is that while a substantial minority of subprime borrowers are struggling, almost ninety per cent are making their monthly payments and living in the houses they bought.”

I’m not here today to examine in detail the logical leap from a given rate of default to an acceptable social outcome; my experience is that those who are sufficiently ideologically averse to regulation of lenders tout court will find any delinquency rate up to 49.9% be consistent with the “most people win the bet” argument, and that those who have no a priori objections to regulated lending markets do not always begin by supposing that a non-delinquent subprime mortgage is always a sign of a borrower who is better off than a renter. In the sense that it isn’t really an argument about default rates anyway, parsing numbers about default rates isn’t going to solve it.

That said, the claim that “only” 13% or so of subprime mortgages are seriously delinquent does get waved about as an “economic indicator,” at least in the comment section of this blog. As far as I can tell, this purports to be an argument about the percentage of borrowers who are surviving their mortgages, and so for that reason, if no other, I’d like to take the opportunity to remind everyone what mortgage delinquency numbers actually tell you—and what they don’t.

In general, a delinquency or default rate on a given book of mortgages is calculated as the balance of delinquent or defaulted mortgages at the end of a reporting period divided by the total balance of the book as of that reporting period. For anything other than a mortgage security with a static pool, any given reporting period will involve new loans added, old loans paid off, existing loans paid on time and catching up, and existing loans becoming or continuing as delinquent.

In a static pool, such as a REMIC, no new loans are added, and so a calculation on current balances might be useful to an investor wanting to buy a seasoned security, but is less useful to anyone who wants to use delinquency rates to answer some general question about credit quality. Therefore, with static pools, one generally needs to calculate the delinquency rate in reference to the original balance, or to apply the “pool factor” (the percent of original balance remaining) to the delinquent balance, in order to account for the effect of prepayments of performing loans, which will, over time, push up the ratio of delinquent balances to total current balances even if no more loans become delinquent.

Prepayments, of course, create their difficulties even in calculating a delinquency rate on a non-static universe of loans like a servicer’s portfolio. In a static pool, a prepayment is a net decrease in the total pool balance; in a non-static book, a prepayment can simply be a rollover within a portfolio, or a movement of a loan from X’s book to Y’s book.

It does appear, sadly, that some people think that “national delinquency rates” are based on some total database of all outstanding loans, rather than on a sample of various reporters, some of whom report on static pools and some on active pools or books. If you’ve been thinking that, please adjust: these reported rates, such as the MBA’s, are based on a sampling of servicers, and they are adjusted statistically, in some manner, for the effect of prepayments.

The point here is that all you are getting is a percent of delinquent balances to total balances as of a date. First of all, “balance” is not “units.” Without further data-crunching, you cannot leap from a balance of delinquent loans to a number of delinquent borrowers; even if you have an average balance per loan to work with, you need an average loan per borrower to work with as well. That’s not a trivial issue: not only do individuals quite frequently carry two or even three mortgages per property, individuals can own more than one mortgaged property, and what we do know so far suggests that speculators have been getting caught in a delinquency problem in droves lately. Casey Serin may be—we hope—an extreme case, but he is a case of one borrower leaving a long trail of many defaulted loans in his wake.

Second, these are not “historical” numbers. Once a loan is removed from a book, through refinance, sale, final amortization or REO liquidation, it is no longer a balance on the original lender’s book. If a servicer liquidates REO in June, there is no longer a delinquent balance to report in July. Therefore, if the delinquent balance in July is identical to June’s, you have at least one new delinquent loan.

Some servicers may not even report loans in foreclosure—a state a loan may be in for many months before it becomes REO and the REO is liquidated—in the “delinquent” category, which is why you find nerds like me getting occasionally rather anal about the terms “delinquent” and “defaulted,” or “seriously delinquent,” or “non-accrual,” or “non-performing,” or “collateral-dependent,” or any of the other categories problem loans may be found in, depending on what one is up to and whose book is involved (servicing a loan, accounting for assets or loan income, taking an impairment, etc.). Even with a "vintage anaysis" that separates loans into year of origination, you have the potential problem of a purchase loan that closed in January being refinanced in September and becoming delinquent in December. That's two loans, one early payoff, one EPD, one year, and one borrower.

Third, loans go in and out of delinquency. You need the rate of “conversion” of mildly delinquent to seriously delinquent loans, just as you need the rate of conversion of NOD to FC, to use these numbers to predict eventual loss of a home. In markets where unemployment rates are low, for instance, loans that are delinquent due to sudden job loss can catch up in a month or two when the borrower finds new work. Over time, once-delinquent loans tend to converge on foreclosure; the recovery is often only temporary. But it does mean that any given month’s delinquency rate can be the same as the prior month’s, but a new set of loans has rotated into the delinquent pool.

I anticipate some howls of outrage about now. You mean to tell me that these delinquency numbers are just ballpark estimates and are not historical? These servicers are allowed to lie to us? Scratch a free-marketer, and you’ll find someone who secretly believes that a vast, heterogenous, discontinuous, non-centrally-planned and inconsistently regulated industry with participants who enter and exit over time not only can be but has been reporting uniform historical data to some central database which is freely and unproblematically available to the public, and therefore any inconsistency or incommensurate data must be another Enron. Go figure. It’s rather like arguments over MEW; there are always those who think that number gets “pulled off reports,” or that if it isn’t just “pulled off reports,” it’s “only” an estimate, and therefore invalid. I, who have spent many years in debates over “regulatory burdens” with people who do not understand that the industry is not exactly burdened by uniform centralized data reporting regulations, am here to tell you about pointless arguments.

Using delinquency data that we have, such as it is, to make certain claims about “subprime borrowers” as such is also a bit puzzling to those of us who recognize that “subprime credit,” in general, is composed of a lot of borrowers who have defaulted on debts in the past. If you put these borrowers into a new loan, for whatever reason you might want to do that, and that loan performs, at least for a while, it is going to show up in someone’s reporting somewhere as part of the “total balance” or denominator for which delinquent balances are the numerator.

By definition, however, it used to be in someone’s “delinquent balance” reporting. This is true to some extent even in the prime world; some people do manage to re-establish themselves after a credit disaster, and eventually work their FICOs back up into prime territory. Any given performing prime loan can represent either replacement of bad debt with (heretofore) good debt, or new debt to a borrower who has somehow managed to retire or bring current old bad debt with income or asset liquidation. In any case, the credit category at origination of any loan is not necessarily the credit category at payoff, or at any point in between, and it can be better or worse.

That may sound like a trivial point, but not only do you have serious writers like Goolsbee and Surowiecki wanting to get from delinquency rates to homeowners in an unproblematic fashion, you have people tossing around originations and outstandings in a rather startling way. For instance, somewhere between $450 and $650 billion in subprime mortgages were originated in 2006—it will depend on how you define “subprime” as well as whether you look at securities only or securities plus portfolios, and no, there is no law defining “subprime,” either. That does not mean that subprime mortgages outstanding increased by that amount. Only loans to first-time homebuyers (or refinancers who are currently free and clear) generate a net increase at the level of loan count outstanding within a lien category if they exceed the count of borrowers (or estates) who pay off in cash. Only net cash-outs plus net move-ups (where the new mortgage on the new home is larger than the old mortgage paid off by the seller) plus new home purchases (where commercial, rather than residential, mortgage debt is paid off by the seller) represent a net increase at the level of outstanding balance.

There is no law of nature that says that a subprime mortgage originated in 2006—or any year—replaced a previous subprime mortgage loan, either. A traditional use of subprime financing is to refinance a loan that started out “prime” and went downhill from there. And since mortgage debt is frequently used to replace non-mortgage debt, one cannot be sure that subprime mortgage originations are not a matter of moving delinquent debt off a credit card or auto book onto a mortgage book. This can happen in non-obvious ways. “Debt consolidation” mortgages are obvious, if not always easy to “read off a report” (see Greenspan and Kennedy’s major data problems). A refinance that merely extends the mortgage term to 40 or 50 years, without adding to the balance, can represent a freeing up of cash-flow that is redirected to retiring or bringing current delinquent non-mortgage debt. Once the market conditions are created whereby the mortgage book becomes the eventual home of a lot of consumer debt via refinance, and once mortgage refinance upfront costs become negligible in a way that vastly speeds them up—so that you can see a mortgage loan refinancing in its first year—delinquency patterns across debt types need very careful analysis.

One excellent counter to the argument that homeownership is always a better deal for lower-income wage-earners is the problem of immobility of labor: it’s a lot harder and more expensive to move to where the jobs are if you own a home. Another problem is the immobility of secured debt: you can transfer a credit card balance or an auto loan to a mortgage loan, but it’s rather difficult to transfer a mortgage balance to a credit card or do a cash-out refi on a car to retire that HELOC. Once you’ve secured non-purchase-money debt by a lien on your home, you have further immobilized not just your income capacity but your housing asset: one definition of a “lien” is non-transferability of the collateral under any circumstance except paying off the lienholder, and one definition of “innocence lost” is someone in shock over having to bring cash to closing in order to sell a home.

Furthermore, you might be able to improve your future access to unsecured credit by improving things you can to some extent control, like your payment history, income, and cash assets, but you can’t always improve your future access to a HELOC that way unless you can also do something about your local real estate market. If in the boom we tended to substitute quality of collateral for quality of borrower, we may find in the bust that quality of borrower cannot be substituted for quality of collateral. That may strike you as obvious, but apparently not everybody got that memo.

A “credit crunch” is a crunch: the famous immovable object meets the irresistible force, and the sound you hear is not a pleasant one. A rising delinquency rate can mean that more borrowers are delinquent than in the past; it can mean that fewer delinquent loans are rolling over into new loans as refi opportunities diminish; it can mean that fewer first-time homebuyers and less MEW are impacting the denominator. We may be seeing record delinquencies of subprime credit borrowers who got purchase mortgage loans they shouldn’t have gotten, and we may be seeing the bottom of the cascade, as many years’ worth of failing but not yet utterly failed mortgages, substantial numbers of which started out “prime” and many of which accreted a fair amount of consumer debt balances along the way, sift down into the subprime bucket, from which there is now a nasty line at the exit.

There is no particular reason to think any of this is good news, just because it may mean that the absolute number of delinquent borrowers at the moment is less than the current delinquency rate might imply. This is not a new problem. Subprime lending has never made any sense at all as a business proposition outside of expectations of continuing liquidity of the collateral; that’s why it periodically blows up in ways that prime lending historically has not. The question is whether prime has finally fallen into the old liquidity trap.

We are, therefore, back to using delinquency rates in the only way they make analytic sense, which is to look at the rate of increase as an indicator of distress without trying to map delinquent balances onto homeowner units, and to watch the relative mix of new prime and subprime originations. The “subprime contagion” meme is, in my view, creating analytic confusion in part because we are thinking about growth in prime delinquency as a matter of deterioration in the ability of some static pool of prime borrowers to manage their mortgage payments. What an increase in prime delinquencies may tell you, though, is that the cascade stopped or slowed significantly. A delinquent prime borrower is, ipso facto, a member of the subprime customer base. If the subprime lenders are not taking new customers at the moment, there’s a problem.

Without more data than a simple delinquency rate, one cannot rule out the possibility that the distress in prime has been there for some time, but the ability of delinquent prime to cascade into current subprime via refinance, and delinquent subprime to exit via sale of the home to a new prime or subprime borrower, have been sharply curtailed. Something, in other words, has plugged up the drain. Pick your metaphor—infection or hairball, they’re equally unappealing topics of Mother's Day dinner table conversation. Just don’t use the percentage of non-delinquent mortgages alone to “prove” anything unproblematic about the health of the consumer or the wisdom of homeownership.

by Anonymous on 5/12/2007 02:45:00 PM

Forgive both me and Haloscan for being nonfunctional for most of today, if you will. I don't know what Halo's excuse is, and you don'd wad to dow what bide is. (O welcome Spring! Break out the Benadryl . . .)

Ministry of Truth suggested this one as today's escape from serious commentary, and I appreciate the assistance. It isn't decent music, but it's very funny. After a week of leopard-print chairs and the retail-sales-excusathon, we could use funny.

by Calculated Risk on 5/11/2007 08:25:00 PM

From O.C. Register: LendingTree lays off 20% of 2,200 workers

LendingTree ... laid off 20 percent of its 2,200 workers nationwide today, the company said.

Rebecca Anderson, a spokeswoman for the company ... said the company is getting more consumer interest, but less of that is being translated into loans funded. She said the subprime correction has now spread to all credit categories of loans.

The "more consumer interest" not translating into "loans funded" fits with the MBA Purchase Application Index no longer correlating with housing activity. It appears a growing percentage of loan applications are being denied.

by Anonymous on 5/11/2007 10:28:00 AM

Via Marketwatch:

WASHINGTON (MarketWatch) -- U.S. retail sales fell a weaker-than-expected 0.2% in April, the Commerce Department estimated Friday.

This marked the biggest decline in retail sales since last September. Excluding automobiles, retail sales were flat. . . .

Economists had been expecting a soft report, but not one this weak. The average forecast in a MarketWatch survey called for a 0.3% rise in retail sales in April. Excluding autos, sales were expected to rise 0.5%.

The report would have been weaker except for the high price of gasoline. Excluding gas, retail sales were down 0.4%. Excluding both autos and gas, retail sales were down 0.2%.

So many condos, so few flat-screen TVs . . .