by Calculated Risk on 9/06/2007 12:22:00 AM

This is a story (sorry no link) that is of interest because the economists at Bear Stearns have been among the most bullish on Wall Street.

Bear Stearns economists have lowered their forecast for U.S. growth, and are now forecasting U.S. real GDP growth at 1.5% in Q4 2007, and 1.25% in the first half of 2008, with a 35% chance of recession. As a comparison, here is an excerpt from their June forecast:

"We're maintaining our forecasts for ... more [than 3% real GDP growth] in the second half of 2007, a decline in the unemployment rate, one or two Fed hikes in the second half, and a somewhat stronger dollar as the Fed shift toward hikes becomes apparent."

Now they are forecasting unemployment to "rise above 5%" in 2008. They also expect "incremental weakness" in consumption and commercial construction. They must be reading this blog!

Imagine what the more bearish economists are thinking.

by Calculated Risk on 9/05/2007 08:32:00 PM

From the WSJ: Countrywide Cuts 900 More Jobs

Countrywide Financial Corp. announced another 900 job cuts as the company slashes costs in the face of a drop in lending volumes and rising defaults.
...
On Wednesday, Countrywide said the 900 layoffs were mainly in its mortgage-production divisions. ...

The company's work force totals around 60,000.

Every rumor I heard seemed to increase the number of job cuts. Nine hundred is still a large number, especially if you are 1 of the 900.

by Calculated Risk on 9/05/2007 07:02:00 PM

NOTE: This graph is from ADP and shows total private employment based on ADP and BLS reports (in thousands). Both reports are currently showing around 115.5 million employed (SA). Ignore the "change" label on the side of the ADP graph.

The following graphs compares the ADP vs. the BLS reports.

Click on graph for larger image.

ADP August Employment Report

Nonfarm private employment grew 38,000 from July to August of 2007 on a seasonally adjusted basis, according to the ADP National Employment ReportTM.

This month’s ADP National Employment Report suggests that a deceleration of employment may be underway. The August increase of 38,000 was the smallest since June of 2003 and the second consecutive weak monthly reading.

Last month ADP wasn't close to the BLS data for private sector employment. Still, this is the second consecutive month with the ADP report showing weak employment gains for the private sector. Last month the ADP report showed private sector employment increased by 48,000; the BLS report showed the private sector increased 120,000.

Perhaps the BLS is missing the turning point.

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 ...