by Calculated Risk on 8/16/2007 09:51:00 AM

From the WSJ: Fannie Mae Profit Fell in 2006, Expects Higher Delinquencies

Fannie Mae ... said it expects higher delinquencies and credit losses this year amid the ongoing credit market turmoil.
...
Fannie said negative-amortizing adjustable rate mortgages -- loans on which homeowners don't even have to pay the full monthly interest payments -- made up close to 3% of its single-family business volume in 2005 and 2006, while interest-only ARMs were roughly 9% of volume and about 7% as of June 30. Combined, Fannie said both loans represented roughly 6% of its credit book of business at the end of 2005 and 2006 and June 30.

Fannie's mortgage credit book of business, which includes mortgage assets in its investment portfolio, the firm's mortgage-backed securities held by third parties and credit enhancements provided on mortgage assets, was $2.6 trillion as of Mar. 31, or approximately 23% of total U.S. residential mortgage debt outstanding.

Fannie said as of June 30, about 12% of the single-family mortgage book of business was Alt-A, or near-prime, mortgages or structured Fannie mortgage-backed securities backed by Alt-A loans. That is up from 11% as of Dec. 31.

Subprime loans made up 2.2% of the single-family book of business as of June 30 and the end of 2006, with most of that in private-label mortgage-backed securities.

Looking ahead, Fannie expects higher delinquencies and credit losses this year compared with 2006, "and the increase in our exposure to credit risk resulting from our purchase or securitization of loans with higher credit risk may cause a further increase in the delinquencies and credit losses we experience." Such an increase "is likely to reduce our earnings ... and also could adversely affect our financial condition."

by Calculated Risk on 8/16/2007 08:33:00 AM

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

Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,373,000. This is 2.8 percent below the revised June rate of 1,413,000 and is 22.6 percent below the revised July 2006 estimate of 1,774,000.

Starts declined:

Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,381,000. This is 6.1 percent below the revised June estimate of 1,470,000 and is 20.9 percent below the revised July 2006 rate of 1,746,000.

And Completions declined slightly:

Privately-owned housing completions in July were at a seasonally adjusted annual rate of 1,512,000. This is 0.1 percent below the revised June estimate of 1,513,000 and is 22.2 percent below the revised July 2006 rate of 1,944,000.

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

As expected, Completions have followed Starts "off the cliff".

My forecast is for starts to fall to around the 1.1 million units per year level; a substantial decline from the current level. The decline in Starts for July appears to be the beginning of this next down leg for starts and completions.


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.

Why residential construction employment hasn't fallen further is a puzzle. See The Residential Construction Employment Puzzle for an overview of several explanations of why employment hasn't fallen.

Even with the declines in permits and starts, this report shows builders are still starting too many projects, and that residential construction employment is still too high.

by Anonymous on 8/16/2007 07:46:00 AM

Press Release:

CALABASAS, Calif., Aug 16, 2007 /PRNewswire-FirstCall via COMTEX News Network/ -- Countrywide Financial Corporation (NYSE: CFC) announced today that it has supplemented its funding liquidity position by drawing on an $11.5 billion credit facility. In addition, the Company has accelerated its plans to migrate its mortgage production operations into Countrywide Bank, FSB.

"As we have previously discussed, secondary market demand for non-agency mortgage-backed securities has been disrupted in recent weeks," said David Sambol, President and Chief Operating Officer. "Along with reduced liquidity in the secondary market, funding liquidity for the mortgage industry has also become constrained.

"For many years, Countrywide's liquidity management framework has focused on maintaining a diverse, multi-layered assortment of financing alternatives," said Sambol. "A primary component of this framework is a committed, unsecured credit facility of $11.5 billion provided by a syndicate of 40 of the world's largest banks. In response to widely-reported market conditions, Countrywide has elected to draw upon this entire facility to supplement its funding liquidity position. Over 70 percent of this facility has an existing term greater than four years and the remainder has a term of at least 364 days.

"Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the Company to meet its funding needs and continue growing its franchise. Importantly, in addition to the significant liquidity which we have accessed from our bank lines, the Company's primary strategy going forward is to fund its production through Countrywide Bank, FSB. We are already originating in excess of 70 percent of our total origination volume through the Bank, and expect to accelerate our strategy so that nearly all of our volume will be originated in our Bank by the end of September.

"Furthermore, as a result of lessened liquidity for loans which are not eligible for delivery to the GSEs, Countrywide has materially tightened its underwriting standards for such loans, and, we now expect that 90 percent of the loans we originate will be GSE-eligible or will meet our Bank's investment criteria.

"Our objective is to navigate the difficult conditions in today's market as we complete the transition of our Bank business and funding strategy," Sambol concluded. "With these changes, we believe we are well-positioned to leverage opportunities presented by a consolidating industry."

by Anonymous on 8/16/2007 07:21:00 AM

From the Washington Post, "Approved Home Loans No Longer Done Deals":

"What I'm telling people is that they should not shop around for the lowest rate necessarily," Binstock said. "Go with the lender who you think is going to be there in the end."

That's right, folks. No more of that "stated lender" folderol. Make 'em show you their balance sheet before you agree to accept whatever interest rate they're willing to quote.

by Anonymous on 8/16/2007 07:06:00 AM

Reuters, "Asian central banks patrol as credit fears rise":

SINGAPORE/HONG KONG (Reuters) - Asia Pacific central banks and financial chiefs kept a tight watch on money markets and attempted to reassure investors on Thursday as fears of a worsening global credit storm gripped the region.

There's a degree of panic over the uncertainty induced by the subprime sector in the United States," said P.K. Basu, Singapore-based chief economist for Asia ex-Japan at Daiwa.

"The economic fundamentals in Asia are very sound. However, the final residing place of these CDOs (collateralized debt obligations) and the derivatives issued on the subprime mortgages is difficult to predict."

by Calculated Risk on 8/16/2007 01:07:00 AM

From the WSJ: Paulson Expects Markets to Slow, Not Stall, Growth

Treasury Secretary Henry Paulson, in his first public comments since the sharp downturn in financial markets, said the turmoil "will extract a penalty on the growth rate" of the U.S. economy. But he expressed confidence that "the economy and the markets are strong enough to absorb the losses" without provoking a U.S. recession.
...
[Paulson] said that, beyond the steps already taken to encourage more transparency among hedge funds and the like, the ability of the Bush administration to react constructively is limited. It has largely relied on the Federal Reserve and other central banks to fight the financial fire by pumping large amounts of liquidity into parched money markets.

"There is nothing, in my judgment, that we should be doing in terms of guaranteeing market participants against losses or in terms of restraining risk taking," Mr. Paulson said. "One of the natural consequences of the excesses is that some entities will cease to exist."

He hesitated to specify areas where he and regulators will focus in coming months as they draw lessons from recent weeks. "Clearly, there really needs to be a focus on mortgages and how the product is originated and sold," he said. A major source of today's problems was deterioration of the standards used to issue mortgages, particularly in the subprime market, and the ripple effects when delinquency rates on those loans began to rise.

What happened to "containment"? And what happened to calling the housing bottom?

by Calculated Risk on 8/15/2007 07:27:00 PM

From Bloomberg: Poole Says No Subprime Impact Yet on `Real Economy'

Federal Reserve Bank of St. Louis President William Poole said there's no sign that the subprime- mortgage rout is harming the broader economy and an interest-rate cut isn't yet needed.

"It's premature to say that this upset in the market is changing the course of the economy in any fundamental way," he said in an interview in the bank's boardroom. "Obviously, there could be an impact, but we have to rely on some real evidence."

Barring a "calamity," there is no need to consider an emergency rate cut, Poole said. ...

Poole, 70, said businesses have maintained their hiring and investment plans and banks have sufficient capital to weather the credit-market turmoil. The St. Louis Fed chief stressed that the best course is for policy makers to assess the latest economic data when they next meet Sept. 18. The comments contrast with the certainty that traders put on a rate cut next month.

"If the data confirm the market's view that the economy is sagging, we'll have to decide whether to share that view," said Poole, who votes on the rate-setting Federal Open Market Committee this year. He cited the monthly jobs, retail sales and industrial production reports as key gauges he'll be watching.
...
Poole rebutted comments from some Fed watchers that the central bank may be out of touch with market developments. The criticism followed comments the St. Louis Fed chief made to reporters on July 31 that the slump in stocks was ``a typical market upset.''

"No one has called up and said the sky is falling," Poole said today. "As I talk to companies, their capital spending plans are intact."
...
Poole said he didn't regret that the Aug. 7 statement retained a bias against inflation. He also said that while consumer price gains are "moving in the right direction," the "job is not done."

Prediction: Cramer's head will explode.

by Anonymous on 8/15/2007 04:33:00 PM

This Reuters article has everyone very concerned, since it seems to be saying that Freddie is now going to buy more Alt-A loans. Its description of the actual announcement from Freddie is pretty garbled, but we get a lot of that.

I have not yet found this Freddie Mac Media Advisory on Freddie's website, but I do have a copy of it and this is exactly what it says:

McLean, VA . . . Paul E. Mullings, senior vice president for single family sourcing at Freddie Mac (NYSE:FRE) today released the following statement regarding the Alternative-A market:

“Freddie Mac continues to be an active force in the Alt-A market and is taking steps to increase liquidity in the Alt-A market while maintaining its commitment to prudently and responsibly manage mortgage credit risk.

“Specifically, Freddie Mac is providing 90-day forward commitment capability on a negotiated basis to experienced lenders with credit terms that will accommodate a majority of the fixed and adjustable rate Alt-A product, including many of the reduced documentation mortgages underwritten with appropriate credit risk offsets that Freddie Mac now purchases on a bulk basis through structured transactions.

“Available credit terms specifically include reduced documentation mortgages under-written with appropriate credit risk offsets. This will give more Alt-A borrowers the security of being able to lock in their rate for up to three months.

“At the same time, we are committed to continuing our current bulk purchases of a wide range of Alt-A products on a spot bid basis.

“Going forward, based on our continual assessment of credit performance and market conditions we may determine to restrict credit terms available for certain higher risk mortgage products, including no-documentation and high LTV Alt-A mortgages.

“By taking these steps, Freddie Mac continues to fulfill its mission to provide stability, liquidity, and affordability to the US housing finance system and put more people in homes they can afford and keep.”

Here's what it means:

1. Freddie may or may not be increasing the total dollar amount of Alt-A loans it buys. This document doesn't say, one way or the other.

2. Freddie is now buying Alt-A loans in two ways, where it used to buy them only one way. The old way was through "bulk purchases" of loans the lenders had already closed. These bulk purchase transactions have always competed with the private "non-agency" securitization market, and over the last several years Freddie has lost most of those auctions: like the MIs, the GSEs have often refused to lower their risk-based pricing for this stuff. But now that the private securitization market has had a pall cast upon it, Freddie is making some purchases in the bulk side.

3. But bulk purchases only take closed loans off an originator's warehouse line. They don't provide "liquidity" to current originations. So what Freddie is doing is offering a "forward commitment" version of this to selected lenders, where Freddie will agree in advance to buy a bulk package of loans (at guidelines negotiated between Freddie and the lender) at a specified guarantee fee. This allows these lenders to start originating the product again, because now they have a price to put on their rate sheets. Remember that in the last few weeks, we've seen lenders with "no bid" or "this product not priced" showing up on their rate sheets.

4. This announcement doesn't say what kind of a price Freddie is offering on these forward deals, just that it is willing to put out a forward price. I would bet a fair pile of change that nobody is really going to like this price. But if it's a choice between using a forward commitment with Freddie to keep one's operation going until the private market "unfreezes" or just throwing in the towel today, I suspect a number of lenders will put Freddie's price on the rate sheet.

5. Notice that Freddie is also saying they might change their guidelines so they no longer buy Alt-A at the same standards they used to. I doubt this is an idle threat.

6. This has nothing to do with raising the portfolio caps or the conforming loan limit.

7. Remember back in June when Freddie announced it would commit $20 billion over 4-5 years to help with the subprime problem? The press went on and on about a bailout, but clearly Freddie's $20 billion wasn't quite enough to cover that bar tab. This won't be, either. But something is being done and is being seen to be done.

I'll keep you posted if I get any more real information regarding the dollar amounts in play here.

by Calculated Risk on 8/15/2007 02:44:00 PM

From DataQuick: Bay Area home prices steady, slow sales

Bay Area homes continued to sell at their slowest pace since 1995 last month ... median prices remain stable at near-record highs...

A total of 7,423 new and resale houses and condos were sold in the nine-county Bay Area in July. That was down 6.8 percent from 7,964 in June, and down 12.4 percent from 8,476 for July a year ago, according to DataQuick Information Systems.

Sales have decreased on a year-over-year basis the last 30 months. Last month's sales count was the lowest for any July since 6,666 homes were sold in 1995. The strongest July in DataQuick's statistics, which go back to 1988, was in 2004 when 14,258 homes were sold. The July average is 9,800.

"The trend we're seeing statewide is that more expensive neighborhoods are doing better than less expensive neighborhoods. The Bay Area has always been a high-cost market, and we're not seeing the declines in prices or sales volume that we're seeing elsewhere in California. There certainly is a lull in sales, but it appears that both buyers and sellers are taking a wait-and-see stance," said Marshall Prentice, DataQuick president.
...
Foreclosure resales accounted for 4.5 percent of July's sales activity, up from 4.1 percent in June, and up from 1.5 percent in July of last year. Foreclosure resales do not yet have a regional effect on prices.

The more expensive areas will probably start seeing price declines soon with rising rates on jumbo prime loans. The sales decline in California is stunning, with sales running at about half the rate of a few years ago.

by Calculated Risk on 8/15/2007 01:00:00 PM

Click on graph for larger image.

The NAHB reports that builder confidence fell to 22 in August, from 24 in July. The record low was 20 in January 1991.

NAHB Press Release: Credit Tightening Weighing On Builder Confidence In August

Highly visible problems in the housing finance system are contributing to a wait-and-see attitude among prospective home buyers and reducing builder confidence in the single-family housing market, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI declined two points to 22 in August, its lowest level since January 1991.

“Builders realize that issues related to mortgage credit cost and availability have become more acute, filtering some prospective buyers out of the market and prompting others to delay their decision to purchase a new home,” said NAHB President Brian Catalde, a home builder from El Segundo, Calif. “Builders are responding by trimming prices and stepping up non-price incentives to bolster sales and limit cancellations, although we’re dealing in a difficult market environment.”

“There is no question that problems in the subprime mortgage sector have spilled over to other components of housing finance, including the Alt.-A and jumbo markets, delaying a revival of the single-family housing market,” added NAHB Chief Economist David Seiders. “However, the government-related parts of the mortgage market still are functioning well and the underlying economic fundamentals promise to remain solid for some time – providing support to the longer-run housing outlook. We now expect to see home sales return to an upward path by early next year and we expect housing starts to begin a gradual recovery process by mid-2008. From there, the market will have plenty of room to grow in 2009 and beyond.”

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 August. The index gauging current single-family home sales fell a single point, to 23, while the index gauging sales expectations for the next six months declined two points to 32 and the index gauging traffic of prospective buyers declined three points to 16.

Three out of four regions of the country posted declines in the August HMI. While the South’s HMI reading remained unchanged at 25, the West recorded a one-point decline to 23, the Northeast posted a two-point decline to 30 and the Midwest posted a five-point decline to 14.