by Anonymous on 8/09/2007 08:47:00 AM

Says the MBA-in-Chief:

For his part, Mr. Bush, in a verbal tour of the current economic scene, was eager both to calm the markets and knock down the Democratic calls for the administration to intervene, predicting that the turmoil in the housing sector would end with a “soft landing” and would not damage the larger economy.

“I believe that markets ultimately look at the fundamentals of any economy,” Mr. Bush said. “And the fundamentals of our economy are strong. Inflation is down. Real wages are increasing. The job market is a strong job market. People are working. Small businesses are flourishing.”

Mr. Bush, who has a master’s degree in business administration from Harvard, confidently used phrases like liquidity, risk assessment and market adjustment to describe complex economic conditions.

Asked about collapsing housing markets, and the risk of them declining further, Mr. Bush said: “In a way it’s a necessary reaction to a flood of liquidity that came into the market in the past couple years.” That was financial jargon referring to the past several years of easy money, some of it from overseas, at low interest rates.

Mr. Bush said that as a result of the deep pools of money available, “housing got really hot” and that a decline was inevitable. He added that “if the market functions normally” it will lead to a soft landing. “That’s kind of what it looks like so far,” he contended.

by Anonymous on 8/09/2007 07:49:00 AM

From Bloomberg:

Aug. 9 (Bloomberg) -- The European Central Bank said it will launch an unlimited fine-tuning operation today to add liquidity at 4 percent after demand for cash in the European money market drove interest rates higher. . . .

Money-market traders are reporting a reluctance to lend money after concern over U.S. subprime mortgage losses roiled credit markets. That pushed overnight rates to as high as 4.7 percent today, compared with the ECB's benchmark refinancing rate of 4 percent.

``The underlying issue here reverts back to something we have mentioned before in that no one really knows how big the current credit problems are,'' said Charles Diebel, head of European rate strategy at Nomura International Plc in London in a note e-mailed after the ECB announced it's liquidity providing operation. ``This is undermining confidence in the system as a whole and hence the reaction this morning.''

BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds today because it couldn't ``fairly'' value their holdings. BNP joins Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemptions. Dutch investment bank NIBC Holding NV said today that it lost at least 137 million euros ($188 million) on U.S. subprime investments this year.

``There is a lot of uncertainty in the market about the subprime crisis and which banks may be affected by it,'' said Ina Steinke, a money-market trader at NordLB in Hannover. She added that overnight rates have fallen back to around 4.25 percent. ``Every bank is being suspected now, so no one is willing to lend money to anyone.''

by Anonymous on 8/09/2007 07:31:00 AM

This is the sort of thing that can help drive up the MBA Application Index:

Like Mr. Sanders, Joel Kaufman, president of Pittsburgh National Lending, works primarily with subprime lenders. When he saw problems developing in the subprime market several months ago, his South Side-based company changed its approach to getting customers qualified for loans. In the past, Mr. Kaufman would submit a customer's loan application to a single lender, then submit it to a different lender only if the first one did not work out.

Now, he said, "We like to submit our loans to at least three different lenders" from the outset.

by Calculated Risk on 8/08/2007 06:25:00 PM

Minneapolis Federal Reserve President Gary H. Stern spoke today: Comments on Release of the Nation’s Report Card: Economics 2006

... I regret to note that today we are again witnessing some painful and belated learning, by policy-makers and consumers alike, in our consumer financial markets.

As you are probably well aware, consumers today have access to a wide array of borrowing and savings options. In itself, variety is good, because it expands choice and opportunity. However, variety also fosters complexity, which challenges both consumers in their decision-making and financial regulators in their writing and enforcement of rules.

... I view consumer regulation and consumer education as substitutes. If consumers are more educated and able to make good decisions on their own, regulations can be narrower and more focused on clearly abusive practices such as deceit and fraud.

This is valuable, because as the scope of regulation widens, so does the cost. ...

... In some cases it is necessary and appropriate that we bear these costs in order to prevent even greater abuses elsewhere. However, regulation involves a tradeoff between preventing harm to some and allowing innovation, gains from trade, and free choice for others. At any given time, we write regulations as best we can to balance that trade off. Over time, however, we hope that better economic education will soften the trade off and allow us to rely more on the informed decision-making of consumers and less on formal restrictions.

Stern's subject was economic education. He appears to suggest policy makers overestimated the skills of American consumers, and therefore underestimated the need for more regulation - obviously referring to the housing slump.

This assertion seems absurd.

It was the policy makers who didn't recognize rampant speculation in the housing market. While we joked about "liar loans" here on Calculated Risk, the policy makers were congratulating themselves on the "ownership society". I'd argue home buyers who used no money down option ARMs were making a rational choice: they were balancing the odds of a big payday with little financial risk - if the property continued to appreciate - with the stigma of a foreclosure on their record. Obviously many home buyers felt the stigma was worth the risk. I don't see that as a lack of economic education, rather a rational choice given the circumstances.

But I can't think of a good excuse for the inaction of the policy makers.

by Calculated Risk on 8/08/2007 05:04:00 PM

From the Financial Times: Toll warns on deepening housing slump

The chief executive of Toll Brothers said buyer interest in its homes was at the lowest in 20 years in the last quarter, as the largest luxury home builder warned on Wednesday that the US housing slump might get even worse.

Six weeks in the earlier part of the quarter, which ran until the end of July, saw the "lowest traffic on a per community basis that we have ever had", said Robert Toll, meaning that the company's housing developments had received on average less visitors than at any time since it went public in 1986.
...
[Toll] cautioned that increasingly tight lending standards for mortgages would deepen the crisis.
...
“We are now in the 23rd month of a down housing market,” Mr Toll said.

He added: “Surely it can go on for another year to a year and a half with no problem at all.”

Toll's comments about this being the lowest buyer interest in the company's history are interesting.

by Calculated Risk on 8/08/2007 01:22:00 PM

From Bloomberg: U.S. MBA's Mortgage Applications Index Rose 8.1% (hat tip Rich)

Mortgage applications in the U.S. rose last week by the most since January, as cheaper borrowing costs encouraged more Americans to seek loans for home purchases and refinancing.
...
A resilient labor market and lower home prices may support sales and eventually help reduce the glut of unsold properties, economists said. A report last week showed Americans signed more contracts to buy previously owned homes in June, a sign the weakness in the housing market may not get much worse.

"We're at the bottom right now in housing," said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. "The biggest declines are over."

Uh, no.

Back in May I pointed out why the MBA Index is now useless: Is the MBA Index Currently Useless? Several analysts have noted that the relationship between housing sales and the MBA index has broken down. One reason is more borrowers are applying multiple times. From David Berson at Fannie Mae (note: this is a few months old, but the analysis is good): If purchase applications are stable, why are home sales so soft?

Click on graph for larger image.

One likely explanation [of the breakdown between sales and the MBA Index] 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.

But I suspect the main 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 another wave of lenders have recently closed shop, 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 50 applications each.

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.

This is most likely what happened last week.

Right now the MBA Index is not useful, and analysts that rely on the index are most likely wrong.

by Calculated Risk on 8/08/2007 11:18:00 AM

From the National Association of Realtors (NAR): Near-Term Home Sales to Hold in Modest Range

Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006.

Last month, the NAR forecast was for 6.11 million existing home sales and 865,000 new home sales.

This current forecast appears absurd. Existing home sales through June were 2.929 million units. And in a typical year, about half the sales happen by the end of June. So the NAR is forecasting sales will pick up in the 2nd half of 2007 - something that seems very unlikely with the most recent changes in lending standards.

by Calculated Risk on 8/08/2007 10:09:00 AM

"In absolute numbers, third-quarter cancellations, at 347, were the lowest in a year, although our third-quarter cancellation rate (current-quarter cancellations divided by current quarter signed contracts) was 23.8%, compared to 18.9% in the previous quarter and the high of 36.7% in FY 2006's fourth quarter."
Joel H. Rassman, chief financial officer, August 8, 2007

The cancellation rate is rising again for Toll, although still below the cycle high. However, with the most recent changes in lending standards, the cancellation rate will probably rise significantly in the coming quarters.

But luckily for Toll, business is declining so fast, that the "absolute number" of cancellations is the "lowest in a year".

by Anonymous on 8/08/2007 08:04:00 AM

Boy howdy, things had really calmed down there for a while on the purple prose front. It's been a few days since I've seen anything like this:

The credit default swaps market is an immature market, prone to irrational swings as a sudden spike in uncertainty can breed fear among traders. Such fears have spread like wildfire as evidence mounts that credit defaults in the so-called subprime lending market are spilling over into consumers with stronger credit histories, calling into question the reliability of credit ratings on which investors have relied.

Who among us cannot relate to the image of the CDS as the hormonally turbo-charged adolescent, moodily breeding--

Uh, no. Let's not go there. Stick to fears spreading like wildfire as defaults spill over like water--

No. No. We'll go with uncertainty spiking as evidence mounts.

by Calculated Risk on 8/08/2007 12:14:00 AM

Mathew Padilla at the O.C. Register reports on comments from Impac Mortgage CEO Joseph Tomkinson:

Tomkinson said regulators need to let the GSEs buy loans greater than the $417,000 conforming loan limit today. The market needs liquidity and the limit doesn’t reflect current home prices, he said. He’d like to see it raised to somewhere in the range of $500,000 to $550,000.

Perhaps the conforming limit "doesn't reflect current home prices" because the prices are too high, and are based on the excessive speculation of the last few years. Here are the historical conforming loan limits including the higher limits for certain high cost areas.

And from the WSJ: Big Fans for Fannie, Freddie

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, yesterday called on the companies' regulator to consider raising the caps placed last year on the amount of mortgages and related securities Fannie and Freddie can hold, as a way of ensuring that plenty of money is available to fund mortgage loans.

Sen. Charles Schumer (D., N.Y.) also called for higher caps. Both Fannie and Freddie are pushing for the same move. A spokeswoman for their regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, said the agency will respond to the senators shortly.

Are Fannie and Freddie really "pushing for the same move"? I don't think so (see Freddie's Syron's comments)

And this suggestion does not make economic sense. House prices in many areas are currently unrealistic when compared to incomes, and the sooner prices return to more normal levels, the better for the economy.

As Tanta noted in Conforming Loan Limits: The Subprime Excuse

"... it's also a question of mission or mandate for Fannie, Freddie, and FHA: these government-sponsored enterprises and agencies have always been mandated to provide liquidity to the low-to-moderate (moderate meaning "average") housing market, not its high end."

Back to the WSJ:

Joshua Rosner, an analyst at the New York research boutique Graham Fisher & Co., describes as "mass delusion" the idea that they can save the day for investors exposed to billions of dollars of ill-advised home loans now heading toward foreclosure. For one thing, he says, Ofheo has required Fannie and Freddie to follow stricter standards, recently imposed by banking regulators, in assessing borrowers' ability to repay. So they can't buy up loads of reckless loans to speculators or people failing to pay bills.

Richard Syron, chief executive of Freddie, agrees that there are limits to what his company can do. "Neither we nor anyone else can buy at par loans that probably shouldn't have been made in the first place," he says.

I think Syron is correct, these are loans that "shouldn't have been made in the first place" - and there is no reason to bail out the investors who bought those loans - or the lenders who made them.

It might be reasonable to have different limits for different areas, based on the median income for each area. As an example, a low to moderate income in California is much higher than a low to moderate income in Mississippi, and the loan limit should probably reflect the median income in each local Metropolitan Statistical Area (MSA). This might be something worth discussing over the next few years as house prices decline, but I suspect that will mean lowering the limit in Missisippi, not increasing the limit in California.