by Calculated Risk on 9/12/2007 05:40:00 PM

From Law.com: Real Estate Deals Are Feeling the Credit Pinch (hat tip Vader)

The sudden queasiness of lenders has cast a pall over the once-robust real estate market in the last six weeks, [Stephen Cowan, a DLA Piper real estate partner] and other lawyers report. Deals have been interrupted mid-stride. Some have been re-jiggered and others have just died.
...
The up-and-down nature of the real estate practice is nothing new. What is new, lawyers say, is the quickness with which this dip descended.

"I've been through cycles in the '70s, '80s and '90s -- this was a very sudden change," said DLA's Cowan. "It caught everyone off guard -- even though everyone was saying, 'It's coming, it's coming.' It was like an earthquake."

The landscape has shifted. The CRE slump is here.

by Anonymous on 9/12/2007 03:33:00 PM

Normally I see very little point in reading press releases, but this one caught my eye. Worried about lenders using those AVMs to value real estate in mortgage lending transactions? Worry no more! You can now buy a cheap piece of software to "test" the results of your cheap piece of software! It will either still be cheaper than sending an appraiser out to look for foundation cracks, which will mean no one will ever look for foundation cracks, or it will be even more expensive what with running both kinds of software, in which case, we'll pass that "savings" on to you, the consumer, and still not use professional appraisers! You have to love simple solutions to regulatory policy changes.

Is it happy hour yet?

AUSTIN, Texas, Sep 12, 2007 (BUSINESS WIRE) -- FirstClose, a service of First Lenders Data, Inc. (FLDI), an Austin, Texas-based provider of bundled mortgage settlement services, announced today that it has developed a comprehensive approach to back-testing Automated Valuation Models (AVMs), entitled ValueTest(TM).

The ValueTest(TM) program is designed to help lenders satisfy recent regulations and guidelines from Fannie Mae, Freddie Mac, the OCC, the NCUA, and other regulatory bodies that have imposed requirements or guidelines on lenders to "back test" AVMs regarding their accuracy. Utilizing a vast array of the mortgage industries top AVM companies and collateral risk assessment tools, ValueTest(TM) provides lenders with a simple, easy, and inexpensive way to satisfy regulatory requirements.

"We are excited about offering an inexpensive, yet comprehensive solution to our mortgage lending customers to help them satisfy regulatory requirements," said Tedd R. Smith, Chief Executive Officer of First Lenders Data, Inc. "Back Testing AVMs has been an ongoing concern of our customers since regulatory inception and no one seems to be able to provide a safe and inexpensive solution until now."

According to Fannie Mae's Perspective on Automated Valuation Models (AVMs), "It is critical that users of AVMs design an appropriate use and implementation strategy that considers the overall credit risk of the loan and reflects the specific strengths and weaknesses of the particular AVMs they use, particularly the property data supporting those products." The ValueTest(TM) program works well for any mortgage lender offering both first and second mortgage loans. As part of quality control checks and balances, the ValueTest(TM) program can be custom designed to fit any lenders needs and requirements.

Oh, the vendor of this wildly exciting product also sells "settlement services," meaning it has a vested interest in seeing to it that closings don't get cancelled because of those pesky "valuation" problems. Surprise! Could that be why this is so "inexpensive," or is it just some PlaySkool My First Laptop-quality version of everyone's favorite game, Regulatory Evasion? Or both?

As soon as I finish development of HorseHockeyTest™, I'm going to quit blogging and get rich. You have been warned.

by Calculated Risk on 9/12/2007 02:12:00 PM

From DataQuick: SoCal home sales at 15-year low, prices edge down

Home sales in Southern California dropped to their lowest level since 1992 as buyers, sellers and lenders held back in an environment of market uncertainty. Prices are off their peak, markedly so in lower cost neighborhoods, a real estate information service reported.

A total of 17,755 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 0.6 percent from 17,867 for the previous month, and down 36.3 percent from 27,857 for August last year, according to DataQuick Information Systems.

Last month's sales were the slowest for any August since 1992, when 16,379 homes sold, the lowest for any August in DataQuick's statistics, which go back to 1988. The strongest August was in 2003, when 39,562 homes sold. The August sales average is 28,160.

For existing homes August typically has more sales than July, so on a seasonally adjusted basis, this report is worse than it appears.

On prices:

The median price paid for a Southland home was $500,000 last month, down 1.0 percent from $505,000 in July, and up 2.7 percent from $487,000 for August last year.

When adjusted for shifts in market mix (i.e. fewer lower-cost homes selling now), year-over-year price changes went negative in January and are now 3.5 percent below year-ago levels.

On foreclosures:

Foreclosure resales accounted for 8.8 percent of August's sales activity, up from 8.3 percent in July, and up from 2.2 percent in August of last year. Foreclosure resales do not yet have a marketwide effect on prices, although foreclosure discounts appear to be emerging in some local Inland Empire and High Desert markets.

by Calculated Risk on 9/12/2007 01:05:00 PM

From the WSJ on Orange County, CA: Troubled Lenders May Chill Once-Hot Market

The subprime-mortgage industry crisis and Orange County's economic tailspin are likely to have a chilling effect on nearly all types of commercial real estate in this formerly go-go market, some analysts say.

A number of shrinking mortgage companies are already dumping office space on the market. The area's weakening job and housing market will also pinch consumer spending ...

...many office landlords are trying hard to win tenants with deals of free rents and other concessions that have masked the downward pressure ... Asking rents on premium space that now average about $35 a square foot are likely to fall as much as 15% over the next 18 months as building owners face the double whammy of a drop in demand and a surge of new speculative construction coming on line, Mr. Ingham says.

The CRE story: falling demand, rising supply.

In the previous story on shopping centers, Orange County was consider one of the strong areas:

In metropolitan areas with strong population growth, like Phoenix and Orange County, Calif., new shopping centers are easily attracting tenants, according to a report by the CoStar Group, a research company in Bethesda, Md. But new centers in several other metropolitan areas — Memphis, Cleveland, Indianapolis, Tucson, Southwest Florida and Nashville — are having trouble leasing space, CoStar said.

Phoenix and Orange County are the strong areas? Oh my ...

by Calculated Risk on 9/12/2007 12:03:00 PM

More on CRE.

From the NY Times: Shopping Centers Begin to Feel Ripples of Housing’s Ills (hat tip vader)

... shopping centers have been caught in the credit squeeze that has transformed the capital markets. Private buyers, who were once able to finance 95 percent or more of the cost of a transaction, are being driven out of the market because such high leverage is no longer available.

According to investors, brokers and analysts, deals are taking longer to complete, and prices — at least for the second- and third-tier properties — are declining by as much as 10 percent.
...
While demand for space remains strong at the high-end regional malls, the average vacancy rate at strip malls, which are generally anchored by supermarkets, has been creeping up for more than two years, even though relatively little new space has been developed, according to Sam Chandan, the chief economist for Reis, a New York research company.

Mr. Chandan said the vacancy rate stood at 7.3 percent at the end of June and was expected to rise to 7.6 percent by the end of the year, its highest level since 1995.

In the second half of the year, he said, about 26.2 million square feet in strip malls will be completed, which would contribute to an oversupply. “That’s the highest level of completions we’ve seen in many years, and it coincides with the slowdown in the underlying drive for space,” he said.

Rising vacancy rates, falling prices, increasing supply and tighter credit: a prescription for a CRE slump.

by Anonymous on 9/12/2007 11:25:00 AM

This is an absolute horror. It's the kind of thing I have had in mind when, in the last few months, I have expressed generalized terror over the idea of large servicer failures.

Thousands of homeowners face an "imminent risk" of losing their homes because of clashes between American Home Mortgage Investment Corp. and its former financial backers, according to Freddie Mac, a government-chartered housing financier.

In documents filed with the U.S. Bankruptcy Court in Wilmington, Del., Freddie Mac said it seized $7 million that homeowners sent to American Home to cover principal and interest payments, property taxes and insurance just before the company's Aug. 6 collapse. American Home quit making payments to tax authorities and insurance companies Aug. 24.

Freddie Mac said 4,547 loans valued at nearly $797 million are at stake. It said it doesn't have the loan files necessary to pay insurance premiums and property taxes on them, however. "Therefore, there is the imminent risk that borrowers' insurance policies may lapse for nonpayment, subjecting the borrowers to a risk of loss of their mortgaged properties," Freddie Mac said.

Property-tax bills will go unpaid, Freddie Mac said, "resulting in increased tax liabilities and possible tax-foreclosure sales." It added it needs a court order allowing it to seize American Home's loan files "to avoid these serious consequences stemming from AHM's inability to service the Freddie Mac mortgage loans." . . .

American Home has resisted demands that it give up loan-servicing files, hoping to auction its loan-servicing business intact in an effort to raise money for creditors. Loan-servicing businesses have proven to be among the few valuable assets left in the wreckage of the failed lenders. Some of Wall Street's biggest investment banks are fighting for control of them.

For ordinary homeowners, however, the results could be dire, consumer lawyers say. "Companies receive the loan files that they are supposed to be servicing, but the payments don't catch up," said Jill Bowman, an attorney with James Hoyer Newcomer & Smiljanich, a Tampa, Fla., law firm that represents consumers in class-action suits against mortgage companies. "Payments are being deemed late, even when they're not, because they can't catch up with the paper." The result is additional insurance costs and accumulating late fees. . . .

Just days before American Home's bankruptcy filing, Freddie Mac and Ginnie Mae terminated the company's loan-servicing rights. They also sent representatives to collect loan files from American Home's servicing facility in Irving, Texas.

In court documents, American Home said Ginnie Mae representatives "stood in a line in front of the doors and sat on the stairs, preventing AHM Servicing employees from entering the office." Freddie Mac said American Home "had its security personnel escort the Freddie Mac representatives out."

In addition to Freddie Mac and Ginnie Mae, several Wall Street banks are fighting to extract their loans from American Home's servicing operation. The list includes Morgan Stanley, Deutsche Bank AG, Credit Suisse Group and EMC Mortgage.

In an interview last week, Ginnie Mae's senior vice president, Theodore B. Foster, said Ginnie Mae had seized from American Home some of the insurance and tax payments collected from homeowners. "What's occurred is that we have the money, but AHM hasn't been able to or willing to pay the taxes and insurance, and they have the loan records," Mr. Foster said. "Therefore, we don't know who to pay, and we don't know how much."

HousingWire has more on the story here.

Bottom line: attempts to "preserve values" in bankruptcy proceedings pit the servicer's creditors against the interests of the borrowers. Investors like Freddie Mac have to seize custodial accounts to make sure they don't disappear, but without cooperation of the servicer they can't apply that money to customer accounts. The servicer presumably knows how to apply it, but the investors aren't willing to let them.

Oh yeah, and all that dope we've been smoking for years about how it's all electronic and online now and we don't have to actually have physical brawls in the corridors over actual physical loan files? That was, well, dope. It isn't clear to me why Freddie and Ginnie folks had to show up on the doorstep if all they needed were computer files. Of course, the problem is that Freddie and Ginnie don't use AHM's servicing software, so a computer file of loan data (including tax and insurance payment information) wouldn't help them any.

This makes people like me want to throw up, when you think about the number of times mortgage servicers screw up escrow payments when there is no BK and they use their normal systems. You have to imagine investors like Freddie getting ahold of a paper file, and then doing all this manual processing to cover the tax and insurance disbursements. Freddie Mac and Ginne Mae (and Fannie Mae) are not mortgage servicers; their capacity to handle this sort of thing is limited. But even if they could find a substitute emergency servicer, it looks like the substitute servicer would have been thrown out by AHM as well.

OTOH, the idea of Ginnie Mae reps forming a human chain across AHM's door and singing "We Shall Overcome" until someone handed over the damned files does warm the cockles of my pinko little heart. Ginnie Vive!

by Calculated Risk on 9/12/2007 10:55:00 AM

From the NY Times: Housing Costs Consumed More of Paychecks in 2006

Housing costs ate up more of the monthly paycheck for millions of Americans in 2006 than the year before, despite signs of a slowdown in the housing market, according to figures made public today by the Census Bureau.

Click on map for larger image.

Nationally, half of renters and more than one third of mortgage holders — 37 percent, up from 35 percent in 2005, or a rise of more than 1.5 million households — spent at least 30 percent of their gross income on housing costs, the level many government agencies consider the limit of affordability.

by Anonymous on 9/12/2007 09:30:00 AM

I saw another media piece on ARM resets this morning. The last time we posted on ARM resets, there came to pass some confusion about the differences among the various published numbers. My very simple purpose today is to help everyone understand why you can, legitimately, get very differing numbers, and what questions you should ask of any data so that you can understand what you’re being told.

It comes down to several questions: Are we using originations data or outstandings data, and if the latter, from what point in time? Are we looking at all ARMs, or just securitized ARMs? (Do note that investment bank sources generally focus on securitized ARMs only, because the performance of securities is their concern, not necessarily the performance of all mortgage loans.) Are we looking only at first reset, or at all resets? What prepayment and cumulative foreclosure assumptions are we using?

Here’s a very concrete example to flesh out the issues. You have a hypothetical 2/28 ARM portfolio of $1.2 million original balance. It contains 12 $100,000 loans, one originated per calendar month of 2005. Each loan will have a first rate adjustment in each calendar month of 2007. The “12-month reset projection” for this pool, considering only the first adjustment, is very simple: each month, 1 loan resets, for a dollar amount of $100,000 per month or $300,000 per quarter.

But what if you do not limit yourself to just the first reset? The 2/28 will, if it does not prepay, reset every six months after the first reset. If we assume no prepayment, then, and include subsequent adjustments, we get 1 loan resetting in January-June, but 2 loans resetting each month from July-December. Starting in July, there is 1 loan hitting its first reset and 1 loan hitting its second reset. If you simply counted resets, you would show 2 loans in July-December, for a balance of $200,000 per month. If you tried to total up the monthly balances for a year, you’d end up showing $1.8 million in resets on a $1.2 million portfolio of loans. You could say, in a certain context, that $1.8 million in resets are scheduled for 2007, but that is not saying that $1.8 million worth of loans are “at risk.”

And, of course, not every loan will survive on the books after its first adjustment. It could pay off voluntarily (refi, home sale) or involuntarily (short sale, foreclosure). If you wanted to take a vintage of originations and project out a reset schedule, you would have to make projections of prepayment and default. If you started with current outstandings, you would already have your prior prepayments and defaults removed from your pool, but you would still have to project these into the future, unless your goal was a “what if” scenario that involved no loan paying off or defaulting until its reset date.

Even if you wanted to do that, there’s no reason to assume that all reset-related defaults will be due solely to the effect of the first adjustment. It is the most wicked reset for the borrower, but the ugly fact of the 2/28 ARM is that borrowers who survive the first adjustment, possibly just barely, will get another smaller one in six months, and then another one in another six months, until the loan reaches either fully-indexed (then-current 6-month LIBOR plus margin) or its lifetime cap (usually start rate plus 6.00 points). Given the depth of the teaser discounts, the hefty margins, and the movement in LIBOR since these loans were originated, there is no reason to think many of them won’t keep adjusting upward every six months for two years until they hit indexed or capped. So the borrower who just barely survived the first reset might go down at the second one. The borrower who more comfortably survived the first reset might go down at the third one. There is a point to “cumulative” projections of resets.

However, you would still have to adjust these numbers further. You would also project index values forward (to guess when caps will come into play and loans would stop adjusting), and you would have to take into account varying margins. I could assume for our hypothetical pool that all loans have the same margin, but in the real world they don’t.

You will, therefore, see differing presentations of reset volume, and those differences may have a lot to do with prepayment speed assumptions, underlying index movement assumptions, or the weight of caps and margins in a particular pool of loans. That does not mean that someone is lying to you, although you may or may not find the underlying assumptions reasonable (assuming you can figure out what they are).

Today, Reuters reports this:

About $75 billion in adjustable-rate U.S. mortgages are going to reset in the fourth quarter, most of which will emerge next month. Of the loans resetting, around 75 percent are subprime mortgages.

As far as I can determine, this $75 billion number includes only the first reset of any ARM (the date on which it changes from “fixed to floating” rate), based on Q207 securitized outstandings, and has no prepayment adjustments. If you assume even conservative prepayment speeds, the actual number of resets will be lower. However, if you “add back” subsequent adjustments for loans that survived their first adjustment, the raw number of resets is higher. The Bank of America chart CR posted several weeks ago shows securitized plus non-securitized, which is why it has such large numbers compared to the Reuters number. I believe, but cannot verify, that it also includes only the first adjustment.

There is no “right number.” There is only a number in context.

by Calculated Risk on 9/12/2007 02:18:00 AM

From the LA Times: Economy will hover near recession, forecast says

The nation's economy will be so sluggish well into next year that any major hiccup could tip it into recession, UCLA's latest economic forecast predicts.

The end of easy credit and a further decline in home construction are sending the economy into a "near-recession," with growth hovering at just above 1% through the first three months of 2008, according to the UCLA Anderson Forecast to be released today.

The forecast presents a gloomier outlook for jobs and the housing market. The nation's unemployment rate will rise to 5.2% by mid-2008, up from the current 4.6%.

And the forecast for housing starts is grim:

The group sees [housing starts] bottoming out at 1 million units annually, down from the previous forecast of about 1.2 million.

Home construction is seen as "barely recovering" to 1.4 million units annually by the end of 2009. By comparison, housing starts peaked with more than 2 million units annually in 2005.

This is below both my forecast (1.1 million units) and the forecast of Goldman Sachs (1.1 million units).

And this is interesting:

Even the sales of office supplies -- viewed by some as an indicator of where the economy is headed -- are off, according to Pasadena-based Avery Dennison Corp.

"Short-term economic conditions are challenging," Avery's chief financial officer, Daniel R. O'Bryant, told analysts this week.

by Calculated Risk on 9/11/2007 09:35:00 PM

From Bill Fleckenstein: Leveraged Black Boxes (Fleck's Site):

Note: Excerpted with permission. SIV: Structured Investment Vehicles.

"... though London appears to be the epicenter of conduit angst these days, our homegrown Citicorp appears to have plenty of exposure. That, according to the Lord of the Dark Matter, who in an email to me rattled off the following list of its SIVs: Beta Finance, Centauri, Dorada, Five Finance, Sedna Finance, Vetra Finance, and Zela Finance. He was able to obtain a portfolio commentary for Beta Finance ...

First of all, for those folks who can't quite wrap their arms around what an SIV, SPIV, or conduit is, those names all stand for pretty much the same thing -- special-purpose entities that reside off balance sheet. Think of them as virtual S&Ls, which can be quite sizable. ... And, because they're off-balance-sheet, they operate with little regulation.

The better question is: why these entities exist in the first place, and in such size. I think we know the pat answer -- so that financial institutions can employ them and utilize even more leverage than they are legally allowed to. ... Citicorp notes that the leverage in this particular vehicle, Beta Finance, is "only 14.24 times." Thus, Citicorp, a leveraged entity, owns a gaggle of leveraged S&Ls. ...

Next, Citicorp says: "We highlight that all US CMBS exposure is super-senior." What I find interesting in that comment: They've taken pains to note that their commercial mortgage-backed paper is the highest rated -- implying that there might be a problem with lesser-rated tranches of commercial mortgaged-backed paper.

That echoes a data point provided by someone wishing to remain anonymous, who resides near the top of the lending food chain at one of the world's largest banks. The source indicated to me that commercial mortgage-backed securities will also see problems. Though I did not get the impression from her that the timing was imminent, the weakness in the commercial version of the ABX index indicates that some pain is already being dispensed, even if there has been little spilled on this subject."

Note: According to Goldman Sachs, the problem is more acute in Europe, because the European regulations allow SIVs that would be on balance sheet in the U.S., to stay off balance sheet in Europe.

Earlier this year from Fleck:
January 14, 2007:

... a former top executive at a subprime lender (whose chronicling of the unwind has been amazingly accurate and timely), told me that serious issues are developing, and that large companies like New Century Financial (NEW, news, msgs), Accredited Home Lenders (LEND, news, msgs) and NovaStar Financial (NFI, news, msgs) will, in his words, "hit the wall" very soon.

January 30, 2007:

Turning to the subprime industry, once again I heard from my friend who has been staggeringly accurate. He continues to feel that things are about to really get worse. In an email to me, he wrote: "Scratch and dent loans are killing everybody. Bids that were 92 or 93 are now low to mid-80s. It is a bloodbath, and is pressuring even strong companies to buckle. NO ONE is making any money in the market right now. We are at a point of no return for many. The next two weeks will be wild."

Note: A wild two weeks indeed as subprime blew up in early February.

March 14, 2007:

My friend in subprime updated me last night, as follows: "The Alt a space has deteriorated very quickly, but not yet public. $40 billion in subprime still waiting to find a home. No loans will be bought at attractive prices until May production as it will be underwritten to new guidelines. The triple bbb's are a mess. The hedge funds that bought it are all in trouble. ... warehouse guys and Alt a guys are now next. Alt a guys may be worse as less insurance on those loans to protect them. The loan sizes are bigger as well."