by Calculated Risk on 9/05/2007 02:45:00 PM

From the Fed's Beige Book:

Reports from the Federal Reserve Districts indicate that economic activity has continued to expand.
...
Most Banks reported that the recent developments in financial markets had led to tighter lending standards for residential mortgages, which was having a noticeable effect on housing activity, and several noted that the reduction in credit availability added to uncertainty about when the housing market might turn around. While several Banks noted that commercial real estate markets had also experienced somewhat tighter credit conditions, a number commented that credit availability and credit quality remained good for most consumer and business borrowers. Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited.
emphasis added.

And on Real Estate and Construction:

Residential real estate and construction weakened further in most Districts while the commercial market remained steady. Most Districts reported weak or declining residential sales and declining or stable prices. Markets in a few Districts did show some strength. Both sales and prices have been increasing in the Massachusetts housing market; the New York City apartment market remains tight as rents rise; and home sales rose in Louisville. Inventories of unsold homes are generally reported to be high. Moreover, contacts in Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, and Dallas believe softness in the market will continue in the near future, with potential for further declines.

Commercial real estate and construction markets were generally stable to expanding across the Districts. Philadelphia, Minneapolis, and San Francisco indicated continued expansion in nonresidential construction and commercial real estate. Dallas described the level of nonresidential activity as high, and St. Louis said commercial construction remained strong. New York, Cleveland, Richmond, Atlanta, Chicago, and Kansas City indicated commercial construction and real estate markets were steady or stable. Vacancy rates are reported to be low or declining in most Districts, and rents are rising modestly in many. Boston, New York, Richmond, Chicago, Kansas City, and Dallas noted some tightening of credit in the commercial real estate market.

by Calculated Risk on 9/05/2007 12:23:00 PM

From Bloomberg: Commercial Real Estate in U.S. Poised for Price Drop (hat tip Brian, Ryan)

U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.

``People aren't willing to do deals right now,'' said Howard Michaels, the New York-based chairman of Carlton Advisory Services Inc., ... ``The expectation is that prices will come down.''

Investors in July bought the fewest commercial properties since August 2006 and apartment building acquisitions were down 50 percent from June, data compiled by industry consultants at New York-based Real Capital Analytics Inc. show. ...

``There are so many deals falling apart,'' said David Lichtenstein, chief executive officer of Lakewood, New Jersey- based Lightstone Group, an owner of more than 20,000 apartments and 30 million square feet of office and retail space. ``People who can get out are getting out.''

More hints of an impending slump in CRE.

by Calculated Risk on 9/05/2007 10:44:00 AM

From the NAR: Pending Home Sales Index Falls Largely on Mortgage Tightening

The Pending Home Sales Index, based on contracts signed in July, fell 12.2 percent to a reading of 89.9 in July from the June index of 102.4, and was 16.1 percent lower than July 2006 when it stood at 107.1.

Lawrence Yun, NAR senior economist, said abnormal factors are clouding the horizon. “It’s difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren’t closing because mortgage commitments have been falling through at the last moment,” he said.

The usual period from signing to closing is about 45 to 60 days for existing homes. This index is for contracts signed in July, so there will probably be some impact on the reported existing home sales for August (report due Sept 25th), but I think the real impact will show up in the report for September.

by Anonymous on 9/05/2007 08:10:00 AM

The Chicago Tribune tells a story about borrowers facing foreclosure.

PITTSBURGH - For Donna and Steve Love, the plan seemed perfect.

Priced out of the Boston-area housing market, where 2-bedroom homes can cost about $500,000, the working-class couple thought it was time to head to a more affordable market.

They chose Pittsburgh. They liked the city, thought they could get jobs there and were sure they could afford a home without having to win the lottery.

After finding their home -- a $59,000, 3-bedroom, brick row house near the city's downtown that they paid for with a subprime loan -- they moved in June of 2006 and tried to settle into their new life.

But within a year, they were facing foreclosure. . . .

In March 2006, they reached what they thought were final terms for the loan: $5,000 down, a 7.75 percent interest rate, fixed for two years and then adjustable for the remaining 28 years, with a cap of 14.75 percent.

The $429 mortgage payments would be higher than they expected, but still within their budget -- equal to less than one week of Steve's salary with CVS. Plus, it was still cheaper than their $700-a-month rent in a suburb of Boston.

Then, on April 20, two weeks before the May 3 closing date, they said they got mortgage documents in the mail with a letter that said they should sign all the papers and return them as soon as possible.

But they quickly noticed the final contract listed a higher interest rate of 12.125 percent, with a cap of 19.125 percent. That pushed the monthly mortgage payments up more than $200 to $692 a month.

"We both said, 'Oh my God!' and started reading page by page," recalled Steve Love.

They called Countrywide and talked to several representatives who told them "that the fluctuating market went up and investors had asked for a higher percentage rate on the loans, and this was the best they could do," he said.

So, the CFC flack quoted says there's more to the story than that. I'm sure there is. There is always more to most stories.

However, I'm having a hard time figuring out what could possibly be the story that would justify a 12.125% start rate on a 2/28 ARM in April of 2006. The 6-month LIBOR, the index for this loan, was 5.2879% in April 06. That means these borrowers were paying 6.8371% over the index for two years' worth of "rate protection." That's why they aren't having a "reset" payment shock problem; their payment was not discounted in the least in the initial fixed period of the loan.

I for one do not remember the major credit market crisis of April 2006 that suddenly required subprime borrowers to get premium ARMs. I cannot think of anything that might "change" between original underwriting and closing of the loan that would move the borrower's interest rate from 7.75% to 12.125%. Even if they didn't have a rate lock agreement.

But notice the situation these borrowers were in: they had already left their jobs and given up their apartment in preparation for moving, and they had a deposit on the home at stake. Allow me to observe that we lenders have known, since dirt, that this happens frequently on purchase money loans. People make hard-to-revoke decisions based on the commitment letters we send out. We therefore took great care to make the terms of the commitment letter accurate. You simply do not pull the rug out from under a relocating borrower unless you're a predator trying to squeeze someone who has no negotiating position. (I don't think you ought to do this with anyone, of course; I'm simply pointing out that lenders understand how the purchase-relocation process works. It might be a new thing to some consumers, but not to us.)

And all of this over a $59,000 120-year-old home in Pittsburgh for borrowers who can find work at the going rate for Pittsburgh, but are being charged a mortgage interest rate as if they worked in Boston. CFC would rather own that REO than give up some of 12.125%.

I don't think any purpose is served by turning this into an argument over who "deserves" sympathy. I think a good purpose is served by looking at the economics of the thing and asking how this could possibly make any sense. If Donna and Steve's credit history or employment prospects or debt load was "so bad" that they "deserved" a rate of 12.125% (but CFC didn't notice that until the second set of paperwork got drawn up), then they simply should have been denied a loan: they can't afford 12.125%. CFC extended a loan knowing that the borrower couldn't afford it. Now they refuse to play ball on a workout?

by Calculated Risk on 9/05/2007 02:14:00 AM

From Mathew Padilla at the O.C. Register: First American CFO sees weakness in commercial real estate

Frank McMahon, chief financial officer of The First American Corp. in Santa Ana, said during a conference call today that the market for securities backed by commercial loans dropped dramatically in August.

He said it’s natural for borrowing costs to rise and price appreciation to slow on commercial real estate as a result.

The CRE slump may be here.

Also, Padilla notes that First American is cutting 1,300 jobs, and that there are rumors of large layoffs at Countrywide:

National Mortgage News reports that Countrywide Financial Corp. may cut 7,000 to 10,000 jobs, citing “industry officials close to the situation.”

by Calculated Risk on 9/05/2007 01:22:00 AM

From the WSJ: Why Libor Defies Gravity

The Federal Reserve could cut short-term interest rates in the weeks ahead, but right now one key rate is going in exactly the opposite direction, something that could have a big impact on markets and the economy.

That rate is the London interbank offered rate, or Libor. It is an important benchmark for everything from adjustable-rate mortgages in the U.S. to giant floating-rate bank loans taken out by global corporations.

Credit-market turmoil has pushed the Libor higher, even as other short-term interest rates, such as the interest rate on Treasury bills, are falling.
...
U.S.-dollar Libor rates usually closely track the federal-funds rate, which is the overnight lending rate managed by the Federal Reserve. But the two rates are now parting ways, complicating matters for the Fed as it tries to manage the global credit crisis and pushing up many short-term interest rates for borrowers.

For the first eight months of this year, the U.S.-dollar Libor rate for three-month loans between banks nudged between 5.34% and 5.36%. Yesterday, the rate hit 5.7%, marking the rate's fastest rise in several years. ...
...
When Chrysler and its finance unit borrowed $20 billion from banks in July as part of the auto maker's acquisition by Cerberus Capital Management, its loans were indexed to Libor interest rates.

Maybe this is a temporary divergence in rates, but a rising Libor rate will have a negative impact on the economy and housing.

by Calculated Risk on 9/04/2007 04:55:00 PM

Papers to read from the Jackson Hole 2007 Symposium:

The Housing Finance Revolution, Richard K. Green and Susan M. Wachter

Understanding Recent Trends in House Prices and Home Ownership, Robert J. Shiller

Housing and the Business Cycle, Edward E. Leamer

Housing, Credit and Consumer Expenditure, John N. Muellbauer

Housing and the Monetary Policy Transmission Mechanism, Frederic S. Mishkin

Housing and Monetary Policy, Stefan Ingves

Housing and Monetary Policy, John B. Taylor

There will be a quiz later ...

by Anonymous on 9/04/2007 03:50:00 PM

Clyde sent me this jewel this morning: S&P answers its critics in "Don't Blame the Rating Agencies":

The fallout over subprime mortgages has provoked a rush to judgment, and some are now blaming the credit-rating agencies for the recent market turbulence. These charges reflect both a misunderstanding of the work carried out by rating agencies, and a misrepresentation of the overall credit performance of securities backed by residential mortgages

Much of the recent commentary has missed several critical facts. For example, our recent downgrades affected approximately 1% of the $565.3 billion in first-lien subprime residential mortgage-backed securities (RMBS) that Standard & Poor's rated between the fourth quarter of 2005 and the end of 2006. This represents only a small portion of the mortgage-backed securities market, which in turn represents a very small part of the world's credit markets. Additionally, our recent downgrades included no AAA-rated, first-lien subprime RMBS -- and 85% of the downgrades were rated BBB and below. In other words, the overwhelming majority of our ratings actions have been directed at the weakest-quality subprime securities.

Translation: we only screwed up on the stuff that is obviously risky, and we only misrated the stuff that involves first-loss position. The stuff that is obviously less risky and was never much in danger of taking write-downs is still OK.

Ratings are designed to be stable. Unlike market prices, they do not fluctuate on the basis of market sentiment. But they can and do change -- either as a result of fundamental adjustments to the risk profile of a bond or the emergence of new information.

Translation: ratings don't change with market sentiment because market sentiment changes only when ratings turn out to be unstable. Or something.

As part of the ratings process, we do engage in open dialogue with bond issuers. This dialogue helps issuers understand our ratings criteria and helps us understand the securities they are structuring, so we can make informed opinions about creditworthiness. We strive to make sure issuers and investors are fully aware of how we determine creditworthiness and believe that all parties are better served when the process is open and transparent.

Translation: And we only change our mind when we find out how closed and opaque the process really was, in hindsight.

I can't read any more of this . . .

by Calculated Risk on 9/04/2007 02:31:00 PM

From the WSJ: GM Sales Increase 6.1% As Ford Sales Tumble 14%

... Ford Motor Co. posted a 14% skid in sales for the month and said it sees higher fourth-quarter production. Toyota Motor Corp. posted a 2.8% sales drop in U.S. sales.

GM said its U.S. sales of cars and light trucks for August rose 6.1% from a year ago and lowered its third-quarter production forecast and sees lower fourth-quarter output.
...
Toyota blamed the credit crunch damping consumer confidence for its drop in U.S. sales in August.
...
Chrysler sales numbers will be released later in the afternoon.

by Anonymous on 9/04/2007 12:15:00 PM

A deep curtsey to Ramsey for bringing this to my attention.

The Federal Reserve has released an Interagency Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages.

Servicers of securitized mortgages should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default. The governing documents may allow servicers to proactively contact borrowers at risk of default, assess whether default is reasonably foreseeable, and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage obligations. The Securities and Exchange Commission (SEC) has provided clarification that entering into loan restructurings or modifications when default is reasonably foreseeable does not preclude an institution from continuing to treat serviced mortgages as off-balance sheet exposures.2 Also, the federal financial agencies and CSBS understand that the Department of Treasury has indicated that servicers of loans in qualifying securitization vehicles may modify the terms of the loans before an actual delinquency or default when default is reasonably foreseeable, consistent with Real Estate Mortgage Investment Conduit tax rules.3

Servicers are encouraged to use the authority that they have under the governing securitization documents to take appropriate steps when an increased risk of default is identified, including:

• proactively identifying borrowers at heightened risk of delinquency or default, such as those with impending interest rate resets;
• contacting borrowers to assess their ability to repay;
• assessing whether there is a reasonable basis to conclude that default is “reasonably foreseeable”; and
• exploring, where appropriate, a loss mitigation strategy that avoids foreclosure or other actions that result in a loss of homeownership.

Loss mitigation techniques that preserve homeownership are generally less costly than foreclosure, particularly when applied before default. Prudent loss mitigation strategies may include loan modifications; deferral of payments; extension of loan maturities; conversion of adjustable-rate mortgages into fixed-rate or fully indexed, fully amortizing adjustable-rate mortgages; capitalization of delinquent amounts; or any combination of these. As one example, servicers have been converting hybrid adjustable-rate mortgages into fixed-rate loans. Where appropriate, servicers are encouraged to apply loss mitigation techniques that result in mortgage obligations that the borrower can meet in a sustained manner over the long term.

In evaluating loss mitigation techniques, servicers should consider the borrower’s ability to repay the modified obligation to final maturity according to its terms, taking into account the borrower’s total monthly housing-related payments (including principal, interest, taxes, and insurance, commonly referred to as “PITI”) as a percentage of the borrower’s gross monthly income (referred to as the debt-to-income or “DTI” ratio). Attention should also be given to the borrower’s other obligations and resources, as well as additional factors that could affect the borrower’s capacity and propensity to repay. Servicers have indicated that a borrower with a high DTI ratio is more likely to encounter difficulties in meeting mortgage obligations.

Some loan modifications or other strategies, such as a reduction or forgiveness of principal, may result in additional tax liabilities for the borrower that should be included in any assessment of the borrower’s ability to meet future obligations.

When appropriate, servicers are encouraged to refer borrowers to qualified non-profit and other homeownership counseling services and/or to government programs, such as those administered by the Federal Housing Administration, which may be able to work with all parties to avoid unnecessary foreclosures. When considering and implementing loss mitigation strategies, servicers are expected to treat consumers fairly and to adhere to all applicable legal requirements.

Please join me in congratulating the regulators for this document, and falling to my knees in desperate prayer that this will eliminate some of the confused and backwards reporting on this issue in the financial press. Thank you very much.