by Calculated Risk on 6/19/2007 09:37:00 AM

From the LA Times: Report from UCLA team skirts the R-word

"We suspect that the weakness in the housing market is finally spilling over into consumption spending," wrote senior economist David Shulman in the quarterly forecast being released today. "Retail sales appeared to stall in April and automobile sales have become decidedly weak.

"This is not a recession, but it is certainly close," Shulman said.

And on California housing:

In a separate report on the California economy, UCLA forecasters predicted home values would continue to fall slightly or remain flat in most parts of the state as many homeowners struggled to make higher payments on adjustable-rate mortgages.

"The pipeline of mortgage resets suggests it may be mid-2009 before California sees a normal housing market again," said the report by economist Ryan Ratcliff.

This fits with this Financial Times article: Bernanke hints at thinking on housing (hat tip Roubini)

Changes in house prices could have a bigger effect on consumption than the traditional “wealth effect” suggests, Ben Bernanke said on Friday in comments that offer some insight into how the Federal Reserve may think about the continuing problems in the US housing market.

The Federal Reserve chairman told a conference hosted by the Atlanta Fed that, in addition to making homeowners richer or poorer, changes in house prices might influence the cost and availability of credit to consumers.

This is because people with equity in their homes have more at stake in avoiding default. That, in turn, reduces the premium char-ged by lenders owing to their imperfect knowledge of their borrowers’ financial circumstances.

If this theory is correct, Mr Bernanke said, “changes in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect”.

by Calculated Risk on 6/19/2007 09:13:00 AM

The Census Bureau reports on housing Permits, Starts and Completions. Seasonally adjusted permits increased:

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 1,501,000. This is 3.0 percent above the revised April rate of 1,457,000, but is 21.7 percent below the revised May 2006 estimate of 1,918,000.

Starts declined:

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,474,000. This is 2.1 percent below the revised April estimate of 1,506,000 and is 24.2 percent below the revised May 2006 rate of 1,944,000.

And Completions declined slightly:

Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,534,000. This is 0.5 percent below the revised April estimate of 1,542,000 and is 19.3 percent below the revised May 2006 rate of 1,901,000.

Click on graph for larger image.
The first graph shows Starts vs. Completions.

As expected, Completions have followed Starts "off the cliff". Completions are now at the level of starts. Starts will probably fall further, based on housing fundamentals of excess supply and falling demand, and completions will most likely again follow the next decline in starts.



This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions and residential construction employment were highly correlated, and Completions used to lag Starts by about 6 months.

Both of these relationships have broken down somewhat (although completions have fallen to the level of starts). Why residential construction employment hasn't fallen further is a puzzle. Also the time between start and completion has increased recently.

This report shows builders are still starting too many projects, and that residential construction employment is still too high.

by Anonymous on 6/19/2007 09:12:00 AM

It's 6:00 am. Do you know where your webmaster is?

From Dow Jones Newswire, via Brian (no link):

The Web site that takes in mortgage payments for New Century Financial Corp. was down for five days last week because the company didn't have staff capable of running it, according to a hedge fund that agreed to buy the mortgage provider's loan-servicing business.

The hedge fund, Carrington Capital Management, is set to complete its $188 million purchase of the loan-servicing business on June 29. . . .

Carrington said the Web site was out of service from June 9 through June 13 because the bankrupt company "did not have the appropriate personnel."

Among the thousands who lost or left their jobs when New Century filed for Chapter 11 protection April 2 were the people who designed system security, the hedge fund says.

A collapse of the loan servicing platform, Carrington said, could cost it $300,000 to $500,000 each day it can't use the technology to track troubled borrowers and collect on their loans.

Of course, I'm sure it's just the "people who designed system security" who walked out on the place. No reason to worry about the accounting department . . . or the file room . . .

by Calculated Risk on 6/19/2007 12:02:00 AM

From the WSJ: Bear-Led Fund Gets Reprieve

Lenders granted a beleaguered Bear Stearns Cos. hedge fund an additional day to finalize a last-ditch rescue plan ...

During a meeting at Bear's Madison Avenue headquarters that lasted nearly three hours, creditors were presented with a bailout plan that included $1.5 billion in new loans from Bear, backed by the fund's assets. The plan also would bring an infusion of $500 million in new equity capital from a group of other banks, and will allow some lender's to reduce their exposure by 15%, said people briefed on the meeting.

The soap opera continues ... This fund started last August with $600 million in equity and $6 Billion in borrowed capital (talk about leverage).

According to the article the fund lost 23% from the beginning of the year through the end of April. Add: Perhaps the 23% is referring to losses on the equity, but then the fund must have suffered more losses since that time based on the size of the bailout. If the 23% refers to the entire fund, then 23% of $6.6 Billion is about $1.5 Billion - not only wiping out all the equity in the fund, but almost $1 Billion in debt too.

UPDATE: From the NY Times: Mortgages Give Wall St. New Worries. This article covers the Bear Stearns hedge fund, but also wonders about the impact on mortgage lending:

After the first cracks in the subprime mortgage business appeared late last year, several large lenders were forced into bankruptcy.

Now, the stress is sending tremors down Wall Street, as investment funds that bought a stake in those loans are starting to wobble.

Industry officials say they expect this second act to be longer and slower, unwinding over the next 12 to 18 months. The fallout could further constrict consumers with weak, or subprime, credit while helping to prolong the housing downturn.

On Wall Street, the impact could be far more significant: It could force banks, hedge funds and pension funds to acknowledge substantial losses, which had been tucked away in complex investment vehicles that are hard to evaluate. In turn, that could limit the money available for mortgage lending.

by Calculated Risk on 6/18/2007 07:50:00 PM

Click on graph for larger image.

NAHB Press Release: Builder Confidence Slips Again in June

Ongoing concerns about subprime-related problems in the mortgage market and newfound concerns about rising prime mortgage rates caused builder confidence to decline two more points in June, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), released today. With a reading of 28, the HMI now is at the lowest level in its current cycle and has reached the lowest point since February 1991.

“Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of nonprice incentives to work down sizeable inventory positions,” said NAHB President Brian Catalde, a home builder from El Segundo, California.

“It’s clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates,” added NAHB Chief Economist David Seiders. “Home sales most likely will erode somewhat further in the months ahead and improvements in housing starts probably will not be recorded until early next year. As a result, we expect housing to exert a drag on economic growth during the balance of 2007.”

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as either “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes declined in June. The index gauging current single-family sales slipped two points to 29, the index gauging sales expectations for the next six months fell two points to 39, and the index gauging traffic of prospective buyers fell one point to 21.

Three out of four regions posted declines in the June HMI. The Midwest posted a three- point decline to 19, the South posted a one-point decline to 32 and the West posted a five- point decline to 27. The Northeast recorded a three-point gain to 35 following a six-point loss in May.

by Anonymous on 6/18/2007 04:34:00 PM

Hey! Calculated Risk got an honorable mention by the Associated Press, for which we apparently have Barry Ritholtz to thank (don't worry, Barry, I don't think this is your fault). Here we are:

Calculated Risk -- A philosophical blog on finance and economics. No stock tips or fancy charts -- just an anonymous business executive seeking the truth about the market. Some of it is worrisome, and blunt. Investment banks have been selling the riskiest slices of debt to pension funds, he says, which are entrusted with providing for the retirement of public workers. He calls these debt offerings, called unrated collateralized debt obligations "a pig of a pig, distilled essence of pig, ur-pig, Total Ultimate X-Treme Mega Pig" and says that buying them is "playing with matches."

"No fancy charts?" What does it take to get recognition for CR's excellent and legendary charts? Animated recession bars?

We will pass over in silence the true authorship of the cascade of pig jokes. Ahem.

We may now resume being philosophical.

by Anonymous on 6/18/2007 11:39:00 AM

Everybody's all fired up about this report this morning from Fannie Mae's Berson's Weekly Commentary. I'm not, frankly, sure why; the insight about prepayments (specifically, refinance options) and subprime loan performance is not exactly news. But it does include a nice chart, helpful for those who don't tend to think in terms of mortgage flows.




The pie on the left represents 2/28s closed in late 2003 to late 2004 (which gives them a first payment adjustment date in calendar year 2006). The pie on the right represents 2/28s closed in late 2004 to late 2005. The clear implication is that delinquency and default in the earlier vintage was mitigated by refinance (or home sale) opportunities that are sorely lacking in the later vintage.

One has to remember, though, that separating the vintages like this does not mean the two pie charts include two mutually-exclusive groups of borrowers. Because these are two sequential years and the loan type in question is a 2/28, it is likely that most of the refinances of the earlier vintage do not appear as new loans in the later vintage; they would appear in a "future" pie with a reset in 2008 (or later). The point, though, is that what you see in the left-hand pie, for instance, is a very big pile of refinances that were originated in 2006, a year notorious for wretched underwriting guidelines. The slowing of the prepayments in the right-hand pie suggests that that party's over, but it also clearly means that we still have a lot of loans that "rolled" to a new loan in 2006 and 2007 and that may or may not have an escape route in 2008 or 2009 when the next reset problem arises.

by Anonymous on 6/18/2007 10:32:00 AM

I don't often find myself making confident predictions these days--the market can stay irrational longer than I can--but I will do so on this subject: some hedge funds are about to discover what is Different about home mortgage lending, with unfortunate results for the hedgies.

Bloomberg, via John M. (thanks!):

June 18 (Bloomberg) -- James E. ``Jimmy'' Cayne helped make Bear Stearns Cos. the mortgage king of the securities industry by packaging home loans into bonds and selling them to clients like Michael Vranos. Now Vranos, who manages $29 billion at Ellington Management Group LLC, is cutting Cayne out of the middle and buying mortgages on his own.

On Wall Street, they call that disintermediation, and it's eating into almost $9 billion of fees that firms including New York-based Bear Stearns earn from securitizing mortgages. Instead of buying such bonds at markups of 1 percent or more, hedge funds expect to make better returns by taking over bad debts and pressing borrowers to pay up.

Well, guys, welcome to the most-regulated lending industry in history, with the biggest middle-class political constituency imaginable, and some major honkin' participants who happen to be giant financial institutions whose calls are taken by the Federal Reserve.

Hope you find enough "inefficiencies" to make it fun while it lasts.

by Anonymous on 6/18/2007 09:47:00 AM

The New York Times does us the major favor of helping to define the term "housing bust" as distinct from the less threatening "housing slump"(thanks, Walt!).

Two economists with the Federal Deposit Insurance Corporation, Cynthia Angell and Norman Williams, have studied housing cycles since 1978 and have come up with a definition of a housing bust. In a paper published in February 2005, they called it a decline of at least 15 percent in nominal prices, meaning not adjusted for inflation. While economists tend to focus on real prices over time, the authors argue that in housing, nominal prices are a better measure of distress because homeowners, rarely think in inflation-adjusted terms in assessing market conditions.

Other economists, however, argue that 15 percent may be too restrictive a definition. Mark Zandi, chief economist of Moody’s Economy.com, says a better one would be a decline of 10 percent or more from peak to trough. “When you see a decline in home prices of 10 percent, you get significant credit problems and it’s enough to wipe out equity in most cases,” he said.

Mr. Zandi also said that once prices have dropped 10 percent, there tends to be a self-reinforcing downward cycle. If borrowers can’t afford their mortgages and banks foreclose, their homes are generally sold at significant discounts to the market. That creates an added drag on overall prices, resulting in greater numbers of foreclosures, followed by even greater price slides.

Another reason Mr. Zandi argues for 10 percent is the tendency of housing-price measurements to underestimate declines. Sellers often provide discounts that may not show up in the measured price, but are still significant. Today, some homebuilders are discounting the sales price of new homes by an average of 5 percent, Mr. Zandi said.

My own undoubtedly naive view of the matter is that there ought to be a terminological difference between a decline of any appreciable magnitude in the presence of measurable stress to the local economy, on the one hand, and what from all appearances is a housing price decline that has caused itself. I propose a "housing funk."

by Anonymous on 6/18/2007 07:07:00 AM

Mamas, don't let your babies grow up to be marketers who send "test mailings" to reporters:

Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?"

Then came the kicker: "Allow us to help you refinance your mortgage with the rate and term that best suits your needs."

GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.

Even more troubling was the impression GMAC gave of the lender its letter appeared to be targeting, Washington Mutual. WaMu spokeswoman Libby Hutchinson calls the mailing "false and misleading," and she's absolutely right. GMAC - now majority-owned by private equity firm Cerberus Capital, with General Motors retaining a minority stake - touts itself as "a stable and established lender" in its mailing, but its below-investment-grade credit rating is actually several notches below that of WaMu.

To be sure, WaMu's home-loan business is struggling - subprime-related losses contributed to a 20 percent decline in bank profit during the last quarter. However, WaMu's overall exposure to the subprime market pales in comparison to GMAC's own. At the end of last year, subprime comprised 10 percent of WaMu's mortgage portfolio - about $20 billion total. GMAC, meanwhile, reported $48 billion in subprime loans, 76 percent of its total home-loan portfolio.

So what does GMAC have to say for itself? I called the company to ask about the letter, and GMAC spokesman Stephen Dupont sounded genuinely apologetic. The letter was part of "test mailing," Dupont said. "It's not something that we're going to be repeating."

Looks like GMAC needs a new statement-stuffer marketing strategy. Something tells me the Calulated Risk commenters are probably bubbling over with good ideas . . .