by Calculated Risk on 6/13/2007 03:17:00 PM

From DataQuick: Continued slow for Southland home sales

Last month was the slowest May for Southern California home sales in 12 years, mainly because of sharp declines in lower-cost markets. The Southland's median sales price was unchanged, a real estate information service reported.

A total of 19,874 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 3.1 percent from 19,269 for the month before, and down 34.4 percent from 30,303 for May last year, according to DataQuick Information Systems.

Last month's sales were the lowest for any May since 1995, when 17,712 homes sold. The May 1995 total was the lowest for any May in DataQuick's statistics, which go back to 1988. The strongest May was in 2005, when 35,557 homes sold. May has averaged 27,123 sales.

And DataQuick has changed their comments on foreclosures. Last month, they wrote:

Foreclosure activity is rising but is still within the normal range in most areas.

But now they note:

Foreclosure activity is high, although foreclosure properties are not yet a drag home on home values in most markets.

Rising inventories, high foreclosure activity, and falling sales ... it's not hard to connect the dots on what will happen to prices.

by Calculated Risk on 6/13/2007 02:56:00 PM

From the Census Bureau: Advance Monthly Sales for Retail Trade and Food Services

"The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $377.9 billion, an increase of 1.4 percent (±0.7%) from the previous month and 5.0 percent (±0.7%) above May 2006."

Click on graph for larger image.

This graph shows the nominal and real YoY changes in retail sales (excluding food service). Note: real prices are adjusted using the PCE deflator, and are estimated for May.

This is a series with significant volatility month-to-month, and May was an up month, but the trend still apprears down. I'd need a few more up months to change my view of the trend for retail sales.

The reporting for May is misleading. Like this article from the AP: Retail Sales Surge 1.4 Percent in May

Consumers brushed off rising gasoline prices and slumping home sales to storm the malls in May, pushing retail sales up by the largest amount in 16 months.

Yes, the advance sales estimate was up strongly in May, but does anyone care that the month-to-month volatility was the greatest, on the upside, in "16 months"? YoY real retail sales are up just over 2%, and that is still weak. As I've noted before, I expect Q2 GDP to be stronger than Q1, but I'm not so sanguine for the 2nd half of the year.

by Calculated Risk on 6/13/2007 12:02:00 PM

The Federal Reserve reports that household debt service, as a percent of personal disposable income (DPI), declined slightly in Q1 to 14.33% from 14.49% in Q4 2006. The homeowner mortgage Financial Obligation Ratio (FOR) also declined slightly.

Click on graph for larger image.

This graph shows the homeowner mortgage FOR since Q1 1980. The ratio is near an all time high, even though interest rates are still fairly low.

Note: The Fed cautions that it is useful to look at changes in the ratio, not the absolute number:

... the calculated series is only a rough approximation of the current debt service ratio faced by households. Nonetheless, this rough approximation may be useful if, by using the same method and data series over time, it generates a time series that captures the important changes in household debt service payments.

This shows that households are dedicating a near record percentage of their DPI to debt service, but also that the situation is improving slightly. Of course with rising interest rates, we might see record levels again in Q2.

by Calculated Risk on 6/13/2007 10:56:00 AM

From Reuters: Fed mulling ban on some mortgage lending

The Federal Reserve Board is weighing whether it should ban some mortgage lending practices that fueled the recent housing market boom, Fed governor Randall Kroszner told a panel of lawmakers Wednesday.

"We will also seriously consider whether there are mortgage lending practices that should be prohibited," Kroszner said in prepared remarks at a U.S. House of Representatives Financial Services Committee discussion on consumer protection.

Kroszner said the Fed was specifically eyeing 'stated-income' loan applications and prepayment penalties, as well as considering whether lenders should require monthly payments of annual fees like taxes.

by Calculated Risk on 6/13/2007 12:57:00 AM

From Professor Hamilton: Reconciling the BED, CES, and birth/death employment data

A great analysis, with some important corrections.

by Calculated Risk on 6/12/2007 04:24:00 PM

Bloomberg reports: Treasury Yields Rise to Highest in Five Years on Growth Concern

Yields on benchmark 10-year Treasuries rose to the highest in five years ... The yield on the benchmark 10-year note rose to 5.25 percent, an increase of 9 basis points, or 0.09 percentage point, at 3:24 p.m. in New York ...

The following graph covers a longer time period (since April 1971) as compared to the graph presented this morning (since January 1999).

Click on graph for larger image.

Here is a scatter graph showing the 30 year fixed rate mortgage (Freddie Mac average monthly rate) vs. the monthly average Ten Year treasury yield for every month since April 1971.

The Green line shows the approximate current 10 year yield. This shows rates are still low compared to the last 35 years. Mortgage rates in the '50s and '60s were on the low end of the scale, but Freddie Mac doesn't provide any data for those periods.

It now appears the 30 year fixed rate will move up to 6.75% to 7% this week. As an aside, I'm always amused when the article tries to explain why rates are moving.

by Calculated Risk on 6/12/2007 02:46:00 PM

From Bloomberg: U.S. Mortgage Foreclosure Filings Rise 90% in May (hat tip Brian)

U.S. foreclosure filings surged 90 percent in May from a year earlier as more homeowners fell behind on their monthly mortgage payments, RealtyTrac Inc. said.

There were 176,137 notices of default, scheduled auctions and bank repossessions last month, led by California, Florida and Ohio, the Irvine ...

"Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year," [James Saccacio, chief executive officer of RealtyTrac] said in the report. That will add "to the downward pressure on home prices in many areas."

by Anonymous on 6/12/2007 11:00:00 AM

I thought we might look at some details in this piece in the New York Times by our dependable Vikas Bajaj, "Effort to Advise on Risky Loans Runs Into Snag." As usual, Bajaj pulls together enough information to allow us to get past the spin, without actually crossing the line into editorializing. But hey! I'm a blogger. About editorializing I have no scruples.

I strongly encourage you to read the whole thing. A few choice bits:

Now, the state is retooling the program to include all of Cook County, which encompasses Chicago and many of its suburbs. Under the proposal, first-time home buyers and borrowers who are refinancing would be referred to counseling only if they selected certain loans like adjustable-rate mortgages that reset in five years or less, or loans that initially require only interest payments. A state agency is drafting the rules, which must be approved by a committee of lawmakers.

Even as that process plays out, the Illinois General Assembly is considering legislation that would enshrine the new counseling rules in law. In addition, the bill would require mortgage brokers to act in their clients’ best interest and bar state-regulated lenders from making loans without verifying borrowers’ income with tax returns, paycheck stubs or other documents.

Interesting, is it not? Illinois is taking the position that certain kinds of mortgage transactions are so risky--so, shall we say, likely to be "non-economic" for the borrower--that the fact that the borrower elected to apply for such a loan is a presumption that counseling is appropriate. Someone needs to alert the hedge funds.

Furthermore, Illinois is connecting the dots between the fiduciary duty of the broker and the terms of the loan. The implication is that a stated income loan is simply not sufficiently in any borrower's best interest such that it is presumptively a failure of fiduciary duty to originate one. I haven't seen the text of the Illinois statute and I'm prepared to be as disappointed as I usually am once this stuff gets out of committee, but let me say good on Illinois for having advanced the ball this far. I'm rather hoping ISDA is taking notes.

And while we're on the subject of brokers earning their fees by providing services to borrowers:

A report compiled by an advocacy group, Housing Action Illinois, shows that the majority of borrowers who were about take on adjustable-rate mortgages believed that they had fixed-rate loans. More than two-thirds of the borrowers were spending more than 60 percent of their take-home pay on housing expenses. And 75 percent of the borrowers were refinancing existing debts; the rest were buying a home.

If I'm reading this correctly, these folks have already talked to a mortgage broker and they're still this confused. Do I believe this data? With all my heart and all my soul and all the decades I've spent trying to explain how ARMs work to people with bachelor's degrees in financial fields. Of course an advocacy group might have an interest in portraying these borrowers as more ignorant than they are. Did anyone else see this little survey that Lending Tree published recently?

81% of on-line consumers who are paying a mortgage or are planning on buying a home in the next 12 months say they understand how an ARM works. (See q31.)
−Young Singles are the least likely to understand how an ARM works.

On-line consumers are not as informed about their ARM as they first indicated. When asked what they know about their ARM, the majority did not know the interest rate cap, the adjustment schedule, the index their ARM was tied to, or the interest rate ceiling. (See q46.)

Most on-line consumers (91%) with an ARM are aware that their rate will adjust. (See q41.)

In what was quite possibly a sample of savvier-than-usual borrowers, you could still find 9% who are not aware that their ARM will adjust. You can also get a bunch of people to say "yes" to the question "Do you understand ARMs?" But if you ask them any trick questions involving, you know, how ARMs work, the majority has no idea. The usual justification of collecting an origination fee from a borrower involves at least some implicit claim that part of the effort of originating a loan is explaining it to the borrower.

Back to the Times:

The president of the Illinois Association of Mortgage Brokers, Bill McNamee, said the nonprofit agencies’ analysis could not be trusted because they have an incentive to play up problems — they receive $300 for each counseling session, which is paid for by brokers and lenders. “They are going to want to justify their existence so they can continue to collect their fees,” he said.

Delicious. Irony, with a touch of vermouth. My favorite cocktail.

But don't think those brokers are just anti-education:

John West, a mortgage broker, said the government should emphasize first-time home buyer classes and a more rigorous financial education curriculum in public schools. “People want government to safeguard them,” Mr. West said. “But I don’t want to be turning my head and seeing the government saying, ‘We think you should make another decision.’ ”

You know, one of these days, someone is going to explain to Mr. West the connection between public schools and the government. It won't be me, though; I can see a losing battle coming.

Not that the local regulator comes off sounding that much brighter:

Dean Martinez, secretary of the state’s Department of Financial and Professional Regulation, says that the uproar is missing the point and suggests that the term “counseling” may be the problem. He views the sessions as akin to state driving tests. They are there to make sure borrowers fully comprehend what they are doing, not to watch over their every action.

“Mario Andretti has to take a driver’s license test,” Mr. Martinez said, “even though he is one of the best drivers in the world. No one disputes that.”

Well, forgive me for having thought that the point of a driver's license test was to make sure you know how to drive, not to make sure you understand why the hell anyone would want to drive in the first place. What a terrible analogy. The issue is not that Mario Andretti has to have a driver's license; the issue is that not even Mario is allowed to drive an Indy 500 race car on the suburban streets at 150 mph, whether he is considered "capable" or not.

Mr. Martinez is letting himself fall into the trap here. The state of Illinois appears to be on the verge of declaring certain loan types to be so dangerous that anyone offering to get one is going to have to prove to the party who is going to have to pay the eventual bar tab--and that'll be the states, the counties, and the townships, not the NAMB--that it is "informed consent." And the very fact that we don't seem to be able to find many people who can pass the quiz at the end of class ought to be telling us that there's something markedly wrong with these loan products. Any good teacher will tell you that it isn't always the students' fault or the teachers' fault; sometimes it's the material.

Possibly you do not understand your mortgage loan because you keep trying to tell yourself that it benefits you somewhere. Free yourself of that a priori problem, and the pieces might fall into place for you.

by Calculated Risk on 6/12/2007 09:40:00 AM

Click on graph for larger image.

Here is scatter graph showing the 30 year fixed rate mortgage (Freddie Mac average monthly rate) vs. the monthly average Ten Year treasury yield for every month since January 1999.

The parallel lines show the 30 year rate 150 bps and 200 bps above the Ten Year yield. Although there are other factors in determining the 30 year rate, the Ten Year yield (and adding 150 to 200 bps) gives a pretty quick approximation.

Currently (this morning) the Ten Year yield is at 5.2% implying a 30 year rate of 6.7%+.

by Calculated Risk on 6/12/2007 09:27:00 AM

From the WSJ: For Troubled Firms, A Flood of Big Loans

In a world awash in investable funds, even many of the most troubled companies are finding lenders willing to offer them big money. This rescue financing, as it's sometimes called, can give companies time to clean up their balance sheets and avoid a trip to bankruptcy court. U.S. filings for bankruptcy reorganization ... are at a 10-year low. Also at historic lows are U.S. corporations' debt defaults.
..
It ... can be risky to have so much debt sloshing around the economy's shakier regions. When rescue lending fails, the extra debt can make a bust just more spectacular. Among lenders that risk taking it on the chin are some hedge funds, which have largely replaced banks as lenders in this kind of finance.

See the story for some nice graphs of the rapid increase in speculative grade loans.