by Calculated Risk on 2/07/2008 11:11:00 AM

From NAR: Existing-Home Sales to Hold in Narrow Range, then Begin Upward Trend

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in December, slipped 1.5 percent to a reading of 85.9 from a downwardly revised index of 87.2 in November, and was 24.2 percent below the December 2006 level of 113.3.

And here is the NAR's forecast for existing home sales in 2008 and 2009:

Existing-home sales are projected at an annual pace of around 4.9 million in the first half of this year, rising notably to 5.8 million in the second half, and totaling 5.60 million for all of 2009.

The NAR forecasts are always amusing. The recovery is always just around the corner!

by Anonymous on 2/07/2008 10:36:00 AM

Seems like a fair request to me. This is from OFHEO Director James Lockhart's testimony to the Senate Banking Committee, link brought to you by the indefatigable and industrious bacon dreamz:

The GSEs have become the dominant funding mechanism for the entire mortgage system in these troubling times. They are fulfilling their missions of providing liquidity, stability, and affordability to the mortgage markets. In doing so, they have been reducing risks in the market, but concentrating mortgage risks on themselves. . . .

The risks are beginning to take their toll. Public disclosures indicate that Freddie Mac will report annual losses for the first time in its history and Fannie Mae for the first time in 22 years. Their missions, as well as Congressional and many other pressures, are demanding that they do more and take on more risks in areas new to them – subprime and jumbo mortgages. As the safety and soundness regulator of Fannie Mae and Freddie Mac, I have to tell you that expansion of their activities would be imprudent unless the regulator has significantly more powers and more flexibility to use those powers. Given the tremendous stresses on the mortgage markets, the American people cannot afford to have Fannie Mae, Freddie Mac, or the 12 FHLBanks incapable of serving their mission. . . .

In 2006, Fannie Mae and Freddie Mac were losing market share to Wall Street private label MBS (PLS). There is a certain irony that one of the ways they prevented their market share from falling even farther was that they became the biggest buyers of the AAA tranches subprime and Alt-A of these PLS. The Enterprises’ earlier problems, OFHEO’s constraints, and the loose underwriting standards in the market made it hard for them to compete. Some observers even suggested that, due to shrinking of market share, their support of, and therefore their risk to, the mortgage market were no longer relevant.

In the last half of 2007, the PLS world shrunk to minimal levels as a result of a long list of well reported problems. As a result, even with the OFHEO constraints, Fannie Mae and Freddie Mac mortgage purchases as a share of new originations grew to unforeseen levels, rising from less than 38 percent in 2006 to over 60 percent in the third quarter of 2007. The just reported fourth quarter results of 75.6 percent are double 2006’s market share. If you add in the net increase in outstanding FHLBank advances, especially in the third quarter, the combined market share of the housing GSEs may be 90 percent. . . .

Another related change over the period was the growth of credit risk. Operational risk and to a lesser extent market risk had been the key focuses of the Enterprises and they still are extremely important with the volatility of the markets and heavy reliance on models for market and credit risk pricing. I remember listing credit risk concerns in an early presentation I did to one of their Boards. Some members were mystified that I thought it was an issue given their track record. I am afraid that was a sign of the times.

The Enterprises were then reporting credit losses of 1 to 2 basis points, a third of normal levels and now they are approaching double normal levels and climbing. Some of this growth in losses was because they lowered underwriting standards in late 2005, 2006, and the first half of 2007 by buying more non-traditional mortgages to retain market share and compete in the affordable market. They also have very large counterparty risks including seller/servicers, mortgage insurers, bond insurers and derivative issuers.

Basis points sound small, but they become important when you are leveraged the way Fannie Mae and Freddie Mac are . . .

Now, I will turn to the temporary increase in the Conforming Loan Limit (CLL) as proposed in the Economic Stimulus package. OFHEO believes any increase in the CLL should be coupled with quick enactment of comprehensive GSE reform. The CLL provision in the stimulus package would increase the Enterprises risks by allowing them to enter the “jumbo” loan market. It would increase the maximum size loan those GSEs could purchase or guarantee from $417,000, to the lower of 125 percent of median area prices or $730,000, for mortgages originated between July 1, 2007 and December 31, 2008. This change should help lower interest rates on some jumbo mortgages, but other potential implications deserve attention.

Jumbo loans would present new risks to the already challenged GSEs. The prepayment and credit risks are different than those of conforming loans. The provision also pushes the GSEs to increase their geographic concentration in some of the riskiest real estate markets. Roughly half of all jumbos are in California. Underwriting them successfully will require new models and systems to ensure safe and sound implementation. Capital also would present challenges even if all newly conforming mortgages are securitized. A $600,000 loan requires as much capital as three $200,000 loans. . .

by Anonymous on 2/07/2008 10:02:00 AM

P.J. at Housing Wire reports that FASB (the Financial Accounting Standards Board) is threatening to end the arguments over "the Q election" by simply eliminating QSPEs entirely:

In an accounting standards session at this past week’s American Securitization Forum, FASB director Russell Golden told audience members that the standards board has since decided to eliminate QSPEs altogether; the focus now is now on how to best to handle the issues created by so doing.

You could have heard a pin drop among audience members after Golden said FASB would “eliminate QSPEs.”

Attempting to fix one problem kept causing other problems to pop up, Golden said. He also hinted that the recent SEC letter by chief accountant Conrad Hewitt, which apparently gave the green light to fast-track loan mods, understated the real discussions that have been taking place in private between SEC and FASB officials.

Bloomberg’s Weil suggests that FASB officials have been irked at what they saw as the SEC undermining FASB due process — a line of motiviation that I think misses the truth behind what’s really been going on.

It’s probably fairer to say that FASB had been letting sleeping dogs lie in this area after shoring things up in the wake of the Enron scandal in 2001; and those dogs are no longer sleeping — or lying down — thanks to the ARM rate freeze plan. Forced to address the issue of loan servicing, FASB apparently decided it was easier to eliminate the concept of a QSPE altogether than to try to modify the rules under which it should be allowed to exist.

It’s unclear, exactly, how a ‘Q-less’ world ultimately would affect the secondary markets; many of the details have yet to be nailed down. One thing, however, would seem to be crystal clear: loans would, in all likelihood, no longer be able to be transferred off of a lender’s balance sheet. Golden said that FASB is still working through details of a proposal in this area, however, and would want input from market participants.

At this point, I take this to mean that mortgage loan (and other asset-backed) securitizations would have to be treated as financings, rather than sales, of the underlying assets. Therefore both the assets and the corresponding liabilities would be reflected on the issuer's balance sheet, with the (presumed) effect of increasing the issuer's capital requirements as well as the cost of financing (investors would have to be compensated for the loss of the "bankruptcy remote" vehicle structure). I think we can pretty much guess what the "input from market participants" is going to be.

In case you missed this in yesterday's New York Times:

Until the banks rebuild their capital, they will not have the wherewithal to lend money and support economic growth. If banks of all sizes could regain their capital immediately and easily, it would be a tremendous benefit to the American economy.

The federal government could make this happen by entering into an arrangement with American banks that hold subprime mortgages, in which homeowners typically pay a low interest rate for two or three years then face much higher payments. Here’s how it would work: The government would guarantee the principal of the mortgages for 15 years. And in exchange the banks would agree to leave their “teaser” interest rates on those loans in effect for the entire 15 years.

This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value — and a significant amount of the banks’ lost capital would be restored. Plus, the banks would receive, from most of the homeowners with subprime mortgages, up to 15 years of teaser-rate payments.

Certainly a government guarantee of principal--with no guarantee fees, insurance premiums, or interest income to the guarantor, like those mean GSE and FHA alternatives require--would take care of the capital problem.

by Calculated Risk on 2/07/2008 09:53:00 AM

From the WSJ: Wal-Mart Reports 0.5% Rise In Sales, Below Its Forecast

Wal-Mart posted a 0.5% gain in January U.S. same-store sales excluding fuel, well below the company's 2% growth forecast. Its namesake stores had a 0.2% increase, while Sam's Club had growth of 2.1%.
...
For the fiscal year, Wal-Mart's U.S. same-store sales rose 1.4%, the lowest figure since the company began releasing such data nearly 30 years ago.

More evidence of a consumer led recession.

by Calculated Risk on 2/07/2008 01:35:00 AM

From MarketWatch: Deutsche Bank 4th Quarter Net Profit -48% On Higher Taxes, Upgrades Dividend

Deutsche Bank ... reported no write-downs related to structured products and less than EUR50 million net write-downs in leveraged finance. ... The bank also reiterated its EUR8.4 billion pretax profit goal for 2008, even though it said it expects "conditions to remain challenging in 2008."

What? No visit to the Confessional?

by Calculated Risk on 2/06/2008 11:27:00 PM

From Bloomberg: MBIA to Raise Additional $750 Million of Capital

MBIA ... plans to raise an additional $750 million by selling about 50.3 million common shares, bolstering capital in an attempt to retain its AAA credit rating.
...
``The most significant fact is that they're raising the amount of capital from what they previously announced,'' Wilbur Ross, an investor in distressed companies, said in an interview with Bloomberg TV. ``I would be astonished if they hadn't consulted with the rating agencies before they made this announcement,' he said, adding that MBIA may retain its AAA.

And from the WSJ: Rescue Plans Won't Prevent Downgrades

... some banks and investors working toward salvaging the bond insurers ... are realizing that even the best plans could require them to settle for less -- less risk, less reward and bond insurers with less-than-triple-A ratings in the future ...

The banks are trying to figure out how to commute, or unwind, their credit-default swaps, which are contracts they entered into with ... bond insurers to guarantee their portfolios of complex debt securities known as collateralized-debt obligations, or CDOs ... In exchange for unwinding the contracts, FGIC and Ambac could give the banks stakes in their companies through warrants ...

The banks, then, would share in the proceeds that the bond insurers would make as they collect premiums and wait for their existing portfolio of policies to expire, or "run off." In this scenario, the most the banks are hoping for is that the bond insurers' credit ratings don't fall below double-A ...

If some of the recent loss estimates are even remotely correct, these are just delaying tactics.

by Calculated Risk on 2/06/2008 08:33:00 PM

Just a note to subscribers, the February Newsletter was emailed today. If you haven't received your newsletter, please check your spam / bulk email folders. If there is any problem, please email me (with subject "newsletter").

If you can't read the attachment (it is PDF version 7 for some subscribers), please follow the link for a PDF version 5 file.

Here is a response I received today:

"I think you could easily double or even triple your subscription [rate] ... and not miss a beat."

Thank you! Yes, we've been told many times that we underpriced the newsletter. Please take advantage of us! If you'd like to subscribe ($60 per year), here is the sign up page. And a sample: January CR4RE Newsletter.

Best Wishes to All.

by Calculated Risk on 2/06/2008 05:17:00 PM

From MarketWatch: Cisco shares fall on disappointing revenue forecast

Cisco ... issued a lower-than-expected revenue forecast for its third fiscal quarter, citing the slowing economy. ... CEO Chambers said order-growth rates in the month of January were below expectations, leading the company to be cautious about the outlook for the next few months.

There are two categories for non-residential investment: 1) Structures, and 2) Equipment and Software. I've written extensively about the looming slowdown in non-residential structure investment, and these CISCO comments suggest a possible slowdown in Equipment and Software investment too.

Update: comments from conference call (hat tip Brian)

“While we continue to be extremely comfortable with our vision and differentiated strategy, the value that intelligent networks will bring across all of our customer segments and geographies, we also see the economic challenges that the U.S. is experiencing. Our customers in many of the emerging countries, especially in India and China and the Middle East , remain optimistic about their business momentum. However, we are seeing our U.S. and European customers become increasingly cautious. This was my key take-away from the World Economic Forum two weeks ago. While we were pleased with our revenue growth slightly above 16% in Q2, our product order growth in Q2 was in the low teens. The second quarter was unusual by month in terms of these order growth rates. December was strong, with year-over-year growth in terms of orders in the high teens. Our January growth was less than we expected, with order growth rates of approximately 10%. Again, let me repeat, with our usual caveats discussed earlier, that we continue to believe in our long-term growth guidance at 12% to 17%. While it is always possible that January's order growth rates were an aberration, given the uncertainties of the global financial markets and the cautiousness we are seeing from some of our customers and our peers, we believe that the proper approach to guidance, with our usual caveats at this point in time, is to assume that January's order growth rates may continue over the next several months…Secondly, with all of the appropriate caveats, our best estimate is that this is a relatively short-term challenge going forward… Therefore, our revenue guidance for Q3 fiscal year 2008, including our usual caveats as discussed earlier and in our financial reports, is for revenue growth of approximately 10% year-over-year..”

He later added:
-this is the first time in a long time that they have missed a Janaury forecast

-that he didn’t think things would get worse from here and that the slowdown might be a one or two quarter event

-the US financial sector actually did better than expected, retail and transportation were worse….what we are seeing on a broader basis is a confidence issue with CEOs driven by what they are reading and hearing

-in Europe and US,saw orders slip at the end of January, particularly after the stock market swoon over MLK weekend

by Calculated Risk on 2/06/2008 03:01:00 PM

From Philly Fed President Charles I. Plosser: The Economic Outlook and Challenges for Policymakers. A couple of excerpts:

On housing:

Two adjustments will continue to be needed to help work down the large number of unsold homes: further cuts in construction and declines in housing prices. I expect the decline in housing starts will bottom out in the middle of this year, but starts are likely to then be quite flat through the end of 2009 as the inventory of unsold homes is reduced gradually.

These are two key points: House prices must fall further (probably significantly further in many areas), and the current large inventory overhang will depress housing activity for some time.

On Inflation:

Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help.
...
There are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible. To borrow a line attributed to that famous, or perhaps infamous, Union Admiral David Farragut at the Battle of Mobile Bay, it is sort of a “damn the torpedoes, full speed ahead” approach to policy. But the Fed has a dual mandate for a reason. Price stability is a necessary component for achieving sustained economic growth. Ignoring price stability during times of economic weakness risks undermining our ability to achieve economic growth over the long run. It fuels higher inflation down the road and risks inappropriate risk taking and recurring boom/bust cycles. This would be counterproductive.

With these comments on inflation, it's important to note the Plosser is a voting member of the FOMC. Still, even with these concerns about inflation, and depending on the data, I expect a 50bps or 75bps Fed Funds rate cut at the March meeting.

by Calculated Risk on 2/06/2008 01:42:00 PM

From the WaPo: Housing Crisis Casts a Cloud Over Sun Belt (hat tip Atrios)

When residents of Maricopa, Ariz., south of Phoenix, vote in the presidential primaries Tuesday, it will be against a backdrop of vacant storefronts and sprawling, terra-cotta-roofed subdivisions that are studded with for-sale signs as far as the eye can see.

The state government is staring at a billion-dollar shortfall in its $11 billion budget. Forecasters expect a region that grew 7 percent in 2006 to contract this year. Retail sales, which rose 16 percent in 2006, are dropping. Dennis Hoffman, an economics professor at Arizona State University, said he had never seen such a sharp turnabout in 25 years studying the local economy.
...
The decline in residential activity is leading to downturns in retail and commercial construction as well. While long-planned projects in close-in communities are being built, many economists expect few to come in behind that construction for several years.
...
Many business people and economists here do not expect things to pick up until the area works through its inventory of about 37,000 unsold homes, which could take three or four years.
emphasis added

This is the normal pattern; residential investment leads non-residential investment in structures - both up and down. Builders are finishing up "long-planned projects" keeping non-residential construction spending strong, but few new projects are getting started, and, according to Richmond Fed President Jeffrey Lacker yesterday, a "dramatic change" is probably underway in commercial real estate (CRE). In other words, the expected slump is here.