by Calculated Risk on 10/18/2007 11:48:00 AM

Quotes of the day from WaMu (via Seattle Times):

"This is perhaps the most challenging cycle for housing that we've seen in many decades," WaMu Chief Executive Kerry Killinger said in an interview. He and other WaMu executives said they don't see any improvement in the near term.

And from the WaMu CFO:

"I have never seen housing credit conditions change so significantly over such a short period of time, nor can I remember a period when there was less clarity about near-term housing and credit trends," [Chief Financial Officer Tom] Casey said

by Calculated Risk on 10/18/2007 10:15:00 AM

From MarketWatch: Bank of America's quarterly profit falls 32%

Bank of America Corp.'s third-quarter net income fell 32% from a year ago as trading losses, write-downs on a wide variety of loans and soaring reserves for likely future loan losses undermined profit, financial results showed Thursday.

The last of the nation's top three banks to report results this week, the Charlotte, N.C.-based company chalked up big charges due to credit-related turmoil, suggesting that the problems in the credit market may yet be closer to the beginning than to the end.
...
"The company also added reserves for its home equity and homebuilder loan portfolios in view of the impact of the weakened U.S. housing market," [from BofA statement] emphasis added

by Anonymous on 10/18/2007 09:38:00 AM

Shall we start a pool on whether Congress caves in or not? National Mortgage News via absnet.com:

The Department of Housing and Urban Development has stuck to its guns regarding seller-funded downpayment assistance on Federal Housing Administration-insured mortgages. But third-party conduits which funnel financial aid from buyers to sellers are not going away without a fight.

Practically before the ink was dry last week on the final rule prohibiting anyone except family members, employers, government entities or true charitable organizations from giving would-be buyers money to cover the 3% downpayment required on FHA loans, the two largest DPA providers filed separate suits in Federal Court seeking to overturn the controversial rule.

Scott Syphax, president of the Nehemiah Corp., Sacramento, Calif., called the rule "outrageous," saying it removes practically the only "lifeline" left for working families to achieve ownership.

"Privately funded downpayment assistance programs have helped over 600,000 families become home owners and have been credited not only for helping people buy homes, but also stabilizing neighborhoods and cities and creating stronger families," he said.

AmeriDream, Gaithersburg, Md., another major DPA provider, expressed "great confidence" on its website that HUD will be overturned in court. "HUD's action makes no sense," said chair Ann Ashburn.

Several lawmakers also cried foul, as did the Mortgage Bankers Association and the U.S. Conference of Mayors.

In an interview with Bloomberg News, Rep. Al Green, D-Texas, said the program "could have been fixed and need not have been nixed." Reps. Gary Miller, R-Calif., and Maxine Waters, D-Calif., joined Rep. Green in registering their disapproval and calling on HUD to correct whatever problems exist in the program rather than simply can it.

"If there are concerns with certain downpayment assistance providers, HUD should address these individual providers, and put the controls in place to weed out the bad actors, rather than completely eliminating a program that has successfully expanded homeownership opportunities for millions of families," the three congressmen said.

They also vowed "to fight every effort to eliminate rather than reform this important tool that has built financial strength and formed lasting communities."

Nevertheless, unless the court or Congress goes against HUD - the House-passed FHA reform bill sets new standards for DPA providers but the Senate Finance Committee's version prohibits such assistance - the prohibition that bans anyone who has a stake in the transaction from providing buyers with cash for a downpayment takes effect Nov. 1. . . .

Mr. Montgomery told reporters during an unusual conference call set up by HUD - "We wanted to give you folks a little advance notice," he said at the outset - that nonprofits can still provide downpayment assistance in the form of a gift "so long as they don't collect 'donations' from sellers."

And therein lies the rub, the FHA commissioner said, for in most cases, there is "a clear quid pro quo" between the purchase of a house and the seller's "contribution."

The so-called gift often functions as an incentive to buy the house, the FHA contends, but the gift is ultimately paid for by the buyer through a higher mortgage amount because sellers tend to raise their asking prices to cover the amount they are giving away.

Mr. Montgomery said in the current slow housing market, sellers are "more willing than ever to participate" in these programs, even though they "circumvent our restrictions" and buyers "are often unaware that the gift is something they end up paying for and not a gift at all."

The FHA also maintains that loans to those who rely on seller-funded don't perform nearly as well as they should. Indeed, the agency says they are almost two and a half times more likely to fail than other FHA-insured mortgages.

by Anonymous on 10/18/2007 09:15:00 AM

Michelle Singletary goes after college-sponsored programs to load students up with credit cards:

In a 2004 study of credit card usage by undergraduates, 56 percent of freshmen reported that they had obtained their first card at the age of 18. The student loan lender Nellie Mae, which conducted the study, said that as students progress through school, their credit card usage swells.

By the time they reach their senior year, 56 percent of students carry four or more cards, with an average balance of $2,864. Of course, some have much more than that. . . .

Not surprisingly, in the Nellie Mae report, only 21 percent of undergraduates with credit cards reported that they paid off all cards each month, and 11 percent said they made less than the minimum required payment each month.

Giving a college student one low-balance card as a form of "starter credit" is, possibly, defensible. Giving a college student four cards? That's the kind of extra credit that prepares them to be subprime borrowers for the rest of their lives.

by Calculated Risk on 10/17/2007 09:41:00 PM

From Bloomberg: Cheyne Finance SIV Won't Pay Debt as It Falls Due

Cheyne Finance Plc, the structured investment vehicle managed by hedge fund Cheyne Capital Management Ltd., will stop paying its debts, a receiver from Deloitte & Touche LLP said.

... Cheyne Finance's debt with different maturities will now be pooled together, rather than shorter term debt being repaid sooner, Neville Kahn, a receiver from Deloitte said today in a telephone interview.

``It doesn't mean we have to go out and fire-sell any assets, quite the opposite in fact,'' Kahn said. ``The paper that falls due today or tomorrow won't be paid as it falls due.''

Cheyne Finance appointed receivers in September to oversee the management of its assets after the SIV was forced to liquidate assets to repay maturing commercial paper.
...
Cheyne issued $8 billion of short-term debt to buy securities linked to home loans, according Moody's Investors Service.

The receivers declared an ``insolvency event,'' Deloitte said. That means the SIV is unable to pay its debts when they are due, according to its prospectus.

Borrow short, lend long, go broke; one of the oldest stories in lending, but somehow rediscovered by every generation. The new wrinkle here was to make some especially bad loans too.

by Calculated Risk on 10/17/2007 06:19:00 PM

From the WSJ: Washington Mutual Net Dives 72%

Washington Mutual Inc. third-quarter net income plummeted 72%, as the company took a bruising hit to cover home-loan losses.
...
"We're disappointed with our third quarter results but they reflect the increasingly difficult market conditions that are challenging the banking industry," said WaMu Chairman and Chief Executive Officer Kerry Killinger.
...
WaMu also had a $147 million write-down on mortgage loans it planned to sell but were instead were moved to the company's investment portfolio due to the summer's credit-market seizure that essentially dried up demand for mortgage-related securities.

In addition, the firm recorded $153 million in trading losses and losses of $104 million on investment-grade mortgage-backed securities that are available for sale.

And from Reuters: Washington Mutual CEO sees no end to housing slump

"We were going through an orderly correction in the housing market until the middle of the year, when there was a significant falloff," [Washington Mutual Chief Executive Kerry Killinger] said in an interview. "That has continued in the fourth quarter, accelerated by the lack of liquidity in the capital markets.

"We are not making projections as to when the market will stabilize," he added. "At this point, we have not seen signs of stabilization."

The losses keep piling up with no end in sight.

by Calculated Risk on 10/17/2007 05:54:00 PM

From MarketWatch: Mortgage meltdown leads E-Trade to $58 million loss

"A lot of people think that sub-prime loans is where the problems center," [Jarrett Lilien, E-Trade's president] said. "But that's not our problem. Our issue is that the value of high quality loans is underperforming."

E-Trade says its issues in the quarter were with home equity lines and home installment loans. "That's where we're seeing worse performance," Lilien said.
...
E-Trade also wrote down about $200 million in asset-backed securities. "That pretty much took the most risky types of assets off the table," Lilien said.

And from the conference call (hat tip Brian):

“ As a part of our guidance release last month, with respect to securities impairments, we forecasted we could see up to $100 million in the second half of 2007 and an additional 50 to 100 million in 2008 for a total of up to $200 million over six quarters. These impairments were primarily related to two categories within our asset backed securities portfolio which we identified to have the highest risk. Specifically, these were collateralized debt obligations or CDOs, and securities collateralized by second lien mortgages. Since the September guidance release, upon evaluation and refinement of our forecast, we determine that had certain writedowns needed to be taken in the third quarter. Additionally, we decided to accelerate the sale of the highest risk portions of these portfolios, writing down securities rated lower than double A by more than an average of $0.50 on the dollar. By changing the intent and designation to no longer hold these securities to recovery. The combined effect is that we recorded an impairment charge of approximately $197 million in the third quarter” emphasis added

Note that they haven't yet sold the CDOs and the 2nd lien RMBS'; they just moved them from "held to maturity" portfolio to "available for sale".

by Calculated Risk on 10/17/2007 01:07:00 PM

S&P: Review Of 1H07 US RMBS Yields Downgrades, Watch Placement (hat tip Brian)

Oct. 17, 2007--Standard & Poor's Ratings Services today lowered its ratings on 1,713 classes of U.S. RMBS backed by first-lien subprime mortgage loans, first-lien Alternative-A (Alt-A) mortgage loans, and closed-end second-lien mortgage loans issued from Jan. 1, 2007, through June 30, 2007. These classes are from 136 subprime transactions, 128 Alt-A transactions, and 19 closed-end second-lien transactions. The downgraded classes represent approximately $23.35 billion of original par amount, which is 6.28% of the $371.9 billion original par amount of these three types of U.S. RMBS rated by Standard & Poor's between Jan. 1, 2007, and June 30, 2007, and 4.71% of the approximately $495 billion original par amount of all
U.S. RMBS rated during this period.

In addition, we placed the ratings on 646 other classes from 109 transactions backed by U.S. RMBS first-lien subprime mortgage loans and U.S. RMBS first-lien Alt-A mortgage loans issued during the same period on CreditWatch with negative implications.

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.