by Calculated Risk on 10/16/2007 01:00:00 PM

Click on graph for larger image. The NAHB reports that builder confidence fell to 18 in October, from 20 in September.

NAHB: Builder Confidence Erodes Further In October

Builder confidence in the market for new single-family homes was further shaken in October due to continuing problems in the mortgage market, substantial inventories of unsold units and the perceived effect that negative media coverage is having on potential buyers, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI fell two more points to 18 in October, its lowest point since the series began in January of 1985.

“Builders in the field are reporting that, while their special sales incentives are attracting interest among consumers, many potential buyers are either holding out for even better deals or hesitating due to concerns about negative and confusing media reports on home values,” said NAHB President Brian Catalde.

“Consumers are still trying to sort out market realities and get the best deals they can,” noted NAHB Chief Economist David Seiders. “Many prospective buyers may very well have unrealistic expectations regarding new-home prices as well as how much they can expect to receive for their existing homes. When the market is in proper balance, people can recognize a good deal when it comes along; at this point, they view a good deal as a moving target.”

The positive news from today’s report, said Seiders, is that builder expectations for sales conditions in the next six months held steady at 26. “Builders believe they are taking the right steps to reduce inventories and position themselves for the market recovery that lies ahead,” he said. “Indeed, NAHB’s housing forecast indicates that home sales should stabilize within the next six months and show significant improvement during the second half of next year.”

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.

Two out of three component indexes of the HMI declined in October. The index gauging current single-family home sales and the index gauging traffic of prospective buyers each declined two points, to 18 and 15, respectively, while the index gauging sales expectations for the next six months remained unchanged at 26.

Regionally, the West accounted for a substantial portion of the decline in builder confidence this month, with a four-point reduction in its HMI to 14. The Northeast and South each reported one-point declines to 26 and 21, respectively, while the Midwest posted a two-point gain to 15.

by Anonymous on 10/16/2007 12:46:00 PM

There has been a fair amount of reporting in the last two days on a survey of ARM borrowers commissioned by the AFL-CIO. As is often the case, what we learn seems to be more about the press's ignorance than anything else.

The clearest description of the results that I've found comes from the AFL-CIO's blog (surprised?):

The poll shows that of those homeowners whose ARMs had reset, 37 percent had interest rates at 8 percent or higher, above the current market rate for prime, fixed-rate loans, and 16 percent had interest rates at 10 percent or higher. After the reset, the average increase in monthly mortgage payments is approximately $291, a 10 percent cut in after-tax pay for a family earning $50,000 a year.

Two in three (64 percent) of those whose rate has reset do not recall their lender telling them how much more their payment would increase, and 32 percent don’t recall being told when their interest rate would increase. Twenty-three percent of all respondents say they had been late making a mortgage payment at least once in the past 12 months. That proportion jumps to 37 percent among those whose rate has increased.

The poll also found substantial support for government action to protect consumers. Fifty-one percent say they think the government should assist people with ARMs facing foreclosures, and 77 percent say the government should do more to regulate the mortgage industry.

Despite a general lack of understanding about their adjustable rate mortgages, 79 percent say they believe the information they received from their lenders was mainly accurate and truthful. Sixty percent say they got their ARMs from mortgage brokers, and 39 percent directly from banks. [Emphasis added]

Without seeing the actual survey question, I am at a loss to know what, precisely, we are to make of the fact that two thirds do not remember the lender disclosing how much the payment would rise. That implies that one third of the respondents seem to remember the lender disclosing an unknowable "fact." ARMs adjust on specified dates, and the rate (and hence payment) are adjusted to a specified formula (index plus margin, subject to caps), but since the index at adjustment is a future value, there is no "disclosure" of how much the payment will increase. If a third of respondents remember being told what their future payment would be (not, say, what it might be if the index value does not change, which is the standard disclosure), then we got some serious problems here, but I don't think it's the same problem that the press thinks it is.

It's also curious that 79% of people feel that the lender disclosed facts honestly, when it seems clear that a majority of borrowers aren't sure what the facts are. There are several possibilities here, one being that borrowers on the whole are likely to trust people who work in financial services and talk in numbers, whether that trust is misplaced or not. Another is that borrowers recognize that they were in fact given truthful information, they simply do not understand it. They don't even know what they're supposed to "know": you cannot, in fact, "know" what your future payment will be with an ARM. If you think you "know" that, you are confused. Similarly, if you don't remember being told when your ARM will adjust, you can actually look at your copy of the note you signed. Do people rely on memories of oral explanations because they do not know how to read these notes? Would they ever have known how to read these notes?

However, press reports don't seem to see the real problem here:

A study commissioned by the AFL-CIO shows that nearly half of homeowners with ARMs don't know how their loans will adjust, and three-quarters don't know how much their payments will increase if the loan does reset.

Nearly three quarters of homeowners (73%) with ARM's don't even know how much their monthly payment will increase the next time the rate goes up.

Not a single one of these sources explains how a person with an ARM might go about finding the information and the calculator necessary to determine what the adjusted payment might be if the index value available today is the one that will be used in a future adjustment.

Is that whole process over a lot of folks' heads? Sure it is. That's why offering ARMs in the mass market to people without much financial sophistication, who probably do really need to know what their payment will be in the future to budget around it, and therefore should be put in fixed rate loans, remains a thoroughly stupid idea. I, however, remain stunned that the press can report that "only" 73% of borrowers do not claim to know the unknowable as if that's the problem.

by Calculated Risk on 10/16/2007 11:46:00 AM

From the WSJ: Paulson Says Housing Is Likely To Adversely Affect Economy

U.S. Treasury Secretary Henry Paulson offered a sobering view Tuesday of the pressure the housing market was having across the country, saying the decline stood "as the most significant current risk to our economy."

Mr. Paulson even acknowledged that problems in credit, mortgage, and housing markets were much more severe than anticipated.

Click on Headlines for Larger Image. (thanks to Brian for headlines)

"The ongoing housing correction is not ending as quickly as it might have appeared late last year," he said in a speech to Georgetown University Law Center, according to prepared remarks. "And it now looks like it will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet." (Read the full text of Paulson's remarks.)
...
"The problem today is not limited to subprime mortgages as the number of homeowners having trouble making payments on prime mortgages is also increasing," he said.

Mr. Paulson said the housing correction was having a "real impact on our economy," citing how annual housing starts have fallen off more than 40% since early 2006. "It looked like housing construction had reached a bottom in the first half of this year, but starts have declined again since June and data on permit applications and inventories of unsold homes suggest further declines lie ahead," he said.

What a change in views. Just three months ago I was asking if Paulson worked for the National Association of Realtors: Is Paulson the New Lereah?

by Calculated Risk on 10/16/2007 11:10:00 AM

From VIKAS BAJAJ at the NY Times: As Defaults Rise, Washington Worries

During the summer’s credit crisis, investors concluded that the default rates on subprime mortgages made last year would probably prove to be the highest in the industry’s history.

But there now appears to be another contender for that dubious honor: loans made in the first half of this year.

Click on graph for larger image.

Borrowers who took out loans in the first six months of 2007 are falling behind on payments faster than homeowners who took out loans last year ...

As of August, default rates on adjustable-rate subprime mortgages written in 2007 had reached 8.05 percent, up from 5.77 percent in July, according to Mr. Youngblood’s analysis of pools of home loans put together by Wall Street banks and sold to investors. By comparison, only 5.36 percent of such loans made last year had defaulted by August 2006. Default rates on fixed-rate subprime mortgages were lower, but were rising at a similar pace.
...
Job losses in the housing industry have put pressure on the economies of formerly fast-growing states like Arizona and Florida. And declining home prices have made it harder for borrowers to refinance loans, especially in cases where the buyers could afford the homes only with the help of the low introductory rates on adjustable mortgages.

Those borrowers are expected to encounter further strain in the months and years ahead as their loans are reset to higher variable rates.

It just keeps getting worse.

by Calculated Risk on 10/16/2007 10:48:00 AM

From D.R. Horton, Inc. Reports Net Sales Orders for the Fourth Quarter of Fiscal Year 2007

D.R. Horton, Inc. ... the largest homebuilder in the United States, Tuesday (October 16, 2007), reported net sales orders for the fourth quarter ended September 30, 2007 of 6,374 homes ($1.3 billion), compared to 10,430 homes ($2.5 billion) for the same quarter of fiscal year 2006. Net sales orders for fiscal year 2007 totaled 33,687 homes ($8.2 billion), compared to 51,980 homes ($13.9 billion) for fiscal year 2006. The Company's cancellation rate (sales orders cancelled divided by gross sales orders) for the fourth quarter of fiscal 2007 was 48%.

Donald R. Horton, Chairman of the Board, said, "Market conditions for new home sales declined in our September quarter as inventory levels of both new and existing homes remained high while pricing remained very competitive. We also experienced reduced mortgage availability due to tighter lending standards, and buyers continued to approach the home buying decision cautiously. We expect the housing environment to remain challenging.

emphasis added

The year ago cancellaton rate was 40%. Last quarter was 39%. Horton's normal cancellation rate is in the 16% to 20% range.

by Anonymous on 10/16/2007 09:22:00 AM

Looks like we're going to need a bigger microwave.

Orchestrating the pooling of hundreds of billions worth of illiquid assets into a single conduit strikes us as a bad move. In analytics, we call such proposals a "difference without distinction." Instead of seeking to restore the abnormal and manic market conditions that prevailed in the world of structured finance prior to Q2 2007, we think Secretary Paulson and his Street-wise colleagues should be trying to reach a more stable formulation.

The subsidiary banks of C, for example, have about $112 billion in Tier One Risk Based Capital supporting 10x that in "on balance sheet" assets, assets which typically throw off 3x the charge offs of C's large bank peers. A modest haircut of C's total conduit exposure of $400 billion could leave that capital decimated, forcing C into the hands of the New York Fed and FDIC. Of note, looks like the ratio of Economic Capital to Tier One RBC for C at 3.75:1 calculated by the IRA Bank Monitor was not so severe as some Citibankers previously have suggested.

The fact that much of the debt issued by C-controlled SIV's was maturing in November seems to have prompted the Treasury to act, yet another example of "limited government" under President George W. Bush. Apparently there are some people at the Treasury who think that aggregating large bank conduit risk into a single subprime burrito will somehow draw foreign and domestic investors back to the structured asset trough. This notion would be laughable were the situation not so perilous.

(For you beginners, "C" is the ticker symbol for Citicorp, not 983,571,056 feet per second.)

Hat tip to Clyde!

by Calculated Risk on 10/15/2007 07:04:00 PM

From Fed Chairman Ben Bernanke: The Recent Financial Turmoil and its Economic and Policy Consequences. A few excerpts:

... despite a few encouraging signs, conditions in mortgage markets remain difficult. The markets for securitized nonprime (that is, subprime and so-called alt-A) loans are showing little activity, securitizations of prime jumbo mortgages reportedly have increased only slightly from low levels, and the spread between the interest rates on nonconforming and conforming mortgages remains elevated. These continued problems suggest that investors will need more time to gather information and reevaluate risks before they are willing to reenter these markets.
...
Since the September meeting, the incoming data have borne out the Committee's expectations of further weakening in the housing market, as sales have fallen further and new residential construction has continued to decline rapidly. The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year. However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions. We will be following indicators of household and business spending closely as we update our outlook for near-term growth. The evolution of employment and labor income also will bear watching, as gains in real income support consumer spending even if the weakness in house prices adversely affects homeowners' equity. The labor market has shown some signs of cooling, but these are quite tentative so far, and real income is still growing at a solid pace.

On the inflation side, prices of crude oil and other commodities have increased somewhat in recent weeks, and the foreign exchange value of the dollar has weakened. However, overall, the limited data that we have received since the September FOMC meeting are consistent with continued moderate increases in consumer prices. As the Committee noted in its post-meeting statement, we will continue to monitor inflation developments carefully.

It does seem that, together with our earlier actions to enhance liquidity, the September policy action has served to reduce some of the pressure in financial markets, although considerable strains remain. From the perspective of the near-term economic outlook, the improved functioning of financial markets is a positive development in that it increases the likelihood of achieving moderate growth with price stability. However, in such situations, one must also take seriously the possibility that policy actions that have the effect of reducing stress in financial markets may also promote excessive risk-taking and thus increase the probability of future crises. As I indicated in earlier remarks, it is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy. In particular, as I have emphasized, the Federal Reserve has a mandate from the Congress to promote maximum employment and stable prices, and its monetary policy actions will be chosen so as to best meet that mandate.

Indeed, although the Federal Reserve can seek to provide a more stable economic background that will benefit both investors and non-investors, the truth is that it can hardly insulate investors from risk, even if it wished to do so. Developments over the past few months reinforce this point. Those who made bad investment decisions lost money. In particular, investors in subprime mortgages have sustained significant losses, and many of the mortgage companies that made those loans have failed. Moreover, market participants are learning and adjusting--for example, by insisting on better mortgage underwriting and by performing better due diligence on structured credit products. Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before.

by Calculated Risk on 10/15/2007 05:48:00 PM

U.S. Subprime Classes Issued During First Three Quarters Of 2005 Affected By Oct. 15, 2007, Rating Actions (hat tip Brian)

From Reuters: S&P cuts $4.6 bln of subprime mortgage backed assets (hat tip FFDIC)

Standard & Poor's on Monday cut its ratings on $4.6 billion worth of residential mortgage-backed securities exposed to subprime mortgages, citing expectations of further defaults and losses in the securities.

The downgrades include 402 pieces of 138 transactions. All are backed by first-lien subprime mortgage loans issued in the first three quarters of 2005.

The majority of the ratings cuts were in the "BBB" category, which is the lowest tier of investment grade.

"These rating actions incorporate our most recent economic assumptions, and reflect our expectation of further defaults and losses on the underlying mortgage loans and the consequent reduction of credit support from current and projected losses," S&P said in a statement.

by Calculated Risk on 10/15/2007 03:07:00 PM

Click on graph for larger image.

From barchart.com.

This chart tells the what. The question is why?

From MarketWatch: Oil futures probing uncharted territory

Crude-oil futures advanced Monday into uncharted territory ... as the market continued to take momentum from supply concerns due to risks to production in the Middle East and declines in U.S. crude inventories.

by Calculated Risk on 10/15/2007 11:09:00 AM

From the WSJ: Nomura to Close U.S. Mortgage Business

Nomura said it would take a loss of $621 million on write-downs of residential mortgages and an additional charge of about $85 million for restructuring the business. That will swing Nomura to a pretax loss of as much as $510 million in the quarter ended Sept. 30, 2007. In the same quarter a year earlier, Nomura posted a net profit of about $2.1 billion.

"This is an extremely regrettable result," said Nobuyuki Koga, Nomura's president and chief executive officer.

It appears Nomura wrote down more than they made from the mortgage business in earlier periods:

... the $620 million Nomura has written off on subprime loans dwarfs the estimated $108 million in revenue it generated on residential mortgage-bond underwriting between 2002 and 2006, according to Dealogic.

Regrettable indeed.