by Calculated Risk on 10/17/2007 10:21:00 AM

Quote of the day from MGIC Investment Chief Executive Curt Culver during the conference call:

"The books of business written in 2005, 2006 and most of 2007 will be difficult books financially. These books feature weaker underwriting, and will play out in an environment of deteriorating real estate values. In fact, we modeled an approximate 10% nationwide decline impacting these books. The declines are even more extreme in various MSAs. Frankly, the loss side has hit us much harder and more quickly than we could have ever anticipated. From the loss guidance estimates, we have seen revised from our industry, as well as a number of mortgage originators who are no longer in business, it was not anticipated by many. The ramp-up of loss performance relative to delinquencies, the severity and the cure rate deterioration in California and Florida has been at speeds not seen in previous books of business.” emphasis added

From MarketWatch: MGIC posts loss on C-Bass investment

MGIC Investment Corp. Wednesday reported a third-quarter net loss of $372.5 million, or $4.60 a share, compared with net income of $130 million, or $1.55 a share the previous year. The company said its quarterly results included a $303 million write-down related to the impairment of its investment in Credit Based Asset Servicing and Securitization LLC, known as C-Bass, a joint venture owned by MGIC and Radian Group Inc. ... MGIC said "unless the cure rate and loss severity improves, the company does not foresee net income for the fourth quarter of 2007 and the full year 2008."

by Calculated Risk on 10/17/2007 08:30:00 AM

The Census Bureau reports on housing Permits, Starts and Completions.

Seasonally adjusted permits fell sharply:

Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 1,226,000. This is 7.3 percent below the revised August rate of 1,322,000 and is 25.9 percent below the revised September 2006 estimate of 1,654,000.

Starts declined sharply:

Privately-owned housing starts in September were at a seasonally adjusted annual rate of 1,191,000. This is 10.2 percent below the revised August estimate of 1,327,000 and is 30.8 percent below the revised September 2006 rate of 1,721,000.

And Completions declined sharply:

Privately-owned housing completions in September were at a seasonally adjusted annual rate of 1,391,000. This is 8.2 percent below the revised August estimate of 1,516,000 and is 31.1 percent below the revised September 2006 rate of 2,019,000.

Click on graph for larger image.

Here is a graph of starts and completions. Completions follow starts by about 6 to 7 months.

My forecast is for starts to fall to around the 1.1 million units per year level; a substantial decline from the current level. Goldman Sachs' forecast is for 1.1 million units, and UCLA is for 1.0 million units.

Even with the declines in permits and starts, this report shows builders are still starting too many projects. Starts will probably continue to decline in coming months.

by Calculated Risk on 10/16/2007 04:02:00 PM

Quote of the day from the Mortgage Bankers Association's (MBA) new Chairman Kieran Quinn (no link):

"We're going back to lending the way it was in the 1950s and 60s. Mortgages will be made mostly by bankers and their employees, and compensation will be based on who's making good loans and who's not."

Securitization is here to stay; Quinn is saying third party origination is mostly going away.

by Calculated Risk on 10/16/2007 03:39:00 PM

From Bloomberg: KKR Bankers Sell $2.2 Billion of First Data Bonds

Banks for Kohlberg Kravis Roberts & Co. sold $2.2 billion of First Data Corp. notes ...

The eight-year, 9.875 percent senior securities priced to yield 10.875 percent, according to data compiled by Bloomberg. The offering leaves banks led by Citigroup Inc. and Credit Suisse Group with $10.4 billion of debt on their books from Greenwood Village, Colorado-based First Data.

by Anonymous on 10/16/2007 02:00:00 PM

From the OFHEO Press Release:

Washington, DC – The Office of Federal Housing Enterprise Oversight (OFHEO) announced today three actions regarding the calculation of the conforming loan limit, which establishes the maximum mortgage loan value eligible for purchase by Fannie Mae and Freddie Mac.

OFHEO Director James Lockhart announced that, based on provisions in the proposed guidance, the current conforming loan limit will not be reduced for 2008. If the index used to calculate the maximum loan level should increase, the amount of the increase in 2008 would be reduced by the decline calculated in 2006 of 0.16%. Under no circumstance, however, would the maximum loan level for 2008 drop below the 2006 and 2007 limit of $417,000.

Background information on the conforming limit history and calculations from OFHEO is here.

by Calculated Risk on 10/16/2007 01:34:00 PM

From DataQuick: September Southland home sales lowest in more than 20 years

Home sales in Southern California plunged to the lowest level in more than two decades, as financing with "jumbo" mortgages dropped by half. The median price paid for a home dropped sharply as a result ...

A total of 12,455 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in September. That was down 29.9 percent from 17,755 for the previous month, and down 48.5 percent from 24,195 for September last year, according to DataQuick Information Systems.

Last month's sales were the slowest for any month in DataQuick's statistics, which go back to 1988. The previous low was in February 1995 when 12,459 homes sold. The September sales average is 25,258.
...
The number of Soouthland homes purchased with jumbo mortgages dropped from 5,359 in August to 2,681 in September, a decline of 50.0 percent. A jumbo mortgage is a home loan for $417,000 or more. For loans below that threshold, the sales decline was 19.3 percent, from 9,237 in August to 7,459 in September. Historically, sales drop by about 10 percent from August to September.

The median price paid for a Southland home was $462,000 last month, down 7.6 percent from $500,000 in August, and down 4.0 percent from $481,000 for September last year. If the jumbo-financed portion of the market had remained stable, last month's median would have been $487,000.
...
Foreclosure activity is at record levels ... emphasis added

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.