by Calculated Risk on 2/29/2008 01:35:00 AM

Here are a couple of interesting articles on "walking away", aka jingle mail, or more technically "ruthless defaults".

From Ruth Simon and Scott Patterson at the WSJ: Borrowers Abandon Mortgages as Prices Drop

As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes.
...
A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort, often because they couldn't afford to pay because of unemployment, illness, divorce or other life-altering changes that reduce income.
...
What's different now, analysts and economists say, is that home prices have fallen so far so quickly that some homeowners in weak markets are concluding that house prices won't recover anytime soon, and therefore they are throwing good money after bad. Also, many borrowers who bought in recent years have put down little if any equity. "If they haven't lived in [the home] very long and haven't put any cash in it, it's a lot easier to walk away," says Chris Mayer, director of the Milstein Center for Real Estate at Columbia Business School.

From John Leland at the NY Times: Facing Default, Some Walk Out on New Homes

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.
...
“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said
...
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College

Unfortunately these articles don't really advance the ball. Tanta did an excellent job of suggesting some question the MSM media could ask: Let's Talk about Walking Away

What we have, so far, is a series of industry insiders making a general claim that "ruthless default" is on the rise. What we do not have, so far, is any rigorous quantification of the extent of this problem, or even any really detailed definition of what "a borrower who could afford to pay" is. We have no one offering baseline measures (what, for instance, a lender's analytical models might have predicted is the "normal" level of walking away), and hence no clear sense of the magnitude of the "change" in borrower behavior and attitudes (not to mention much rigor in distinguishing between the two). Hence, we don't yet really know if it's a change in borrower behavior as much as a change in definitions, servicer data collection and interpretation, or media exposure. Or a handful of anecdotes that are being pluralized into "data."

by Calculated Risk on 2/28/2008 08:05:00 PM

From Bloomberg: AIG Posts Biggest Loss, Misses Analysts' Estimates

American International Group Inc., the world's largest insurer by assets, posted its biggest quarterly loss as a publicly traded company after an $11.1 billion writedown of guarantees sold to fixed-income investors.

The fourth-quarter net loss of $5.29 billion, or $2.08 a share, compared with profit of $3.44 billion, or $1.31, a year earlier, New York-based AIG said today in a statement.

... AIG guaranteed $62.4 billion in collateralized debt obligations that included subprime mortgages as of Nov. 25, securities that led to fourth-quarter losses for MBIA Inc. and Ambac Financial Group Inc., the largest bond insurers.

The losses keep adding up. The confessional is very busy.

by Calculated Risk on 2/28/2008 04:25:00 PM

Blown Mortgage has the details: Wells Fargo Names Most of California Severely Distressed

Wells Fargo has named nearly every California county a “Severely Distressed Market” which requires LTV reductions of 5% for any conforming loan over 75% LTV and also eliminates financing over 75% LTV for any non-conforming loan. The Wells Fargo Mortgage Express product (which is Wells Fargo’s stated income/stated asset program) is also not permitted in “Severely Distressed Market” areas.

Look for the rest of the market leaders to quickly follow suit. This immediately puts a huge swath of the state with increasingly limited refinance options. A huge portion of California loans are of the non-conforming variety and well over the 75% LTV mark ...

And from the BizJournals.com: Wells Fargo tightens mortgage guidelines (hat tip Michael)

The tougher lending standards take effect Feb. 29 ...

Twenty counties in California, including Los Angeles County and Orange County, are on the severely distressed markets list. At-risk markets around the country include 33 in Florida, 15 each in Michigan and Virginia, and 13 each in Maryland and Ohio. Many other states, including Arizona, Colorado, Connecticut, Louisiana, Massachusetts, Minnesota, New York, Nevada, New Jersey, Washington and Wisconsin had markets on the list.

by Calculated Risk on 2/28/2008 03:12:00 PM

From Dr. Tim Duy at Economist's View: This Train Doesn’t Stop

A choice has to be made in the short run. Focus on inflation, and hold policy relatively tight? Or focus on growth, hoping that soft economic growth will tame inflationary pressures? The Fed continues to choose the latter path.
...
The die is cast. Look for another 50bp in March and then two more 25bp cuts at subsequent meetings to bring the Fed Funds rate to 2%.

And on inflation:

Inflationary pressures are building globally (note that China is completing the chain that leads to an inflationary spiral, setting the expectation that high inflation will be matched by higher wages), reflected in surging commodity prices and the freefall of the dollar. The former is weighing heavily on US consumers. Indeed, I am amazed that this story is only starting to capture the attention of the press. So much attention is placed on the housing market as the source of declining consumer confidence, but over the last three months, headline CPI has surged 6.8% annualized. Sure doesn’t look like nominal wages gains are keeping up. No wonder confidence is collapsing.

And I sense it’s going to get worse ...

Tim Duy is very good at looking inside the Fed's thinking. Unfortunately, the situation isn't pretty.

by Calculated Risk on 2/28/2008 11:48:00 AM

From Bankrate.com: Fixed Mortgage Rates at 4-Month High

Fixed mortgage rates increased for the third week in a row, with the average conforming 30-year fixed mortgage rate now 6.41 percent.

(graphic from Bankrate.com)

Holden Lewis at Bankrate.com writes: Fixed rates up, ARMs decline

ARMs are becoming more compelling each week, and this week is no exception, as the most popular fixed rate went up while adjustable rates went down.

The benchmark 30-year fixed-rate mortgage rose 4 basis points, to 6.41 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.4 discount and origination points. One year ago, the mortgage index was 6.2 percent; four weeks ago, it was 5.88 percent.

From Chairman Bernanke yesterday: Bernanke says 'we have a problem' controlling long-term mortgage rates

'We have a problem, which is that the spreads between the Treasury rates and lending rates are widening, and our policy is essentially, in some cases just offsetting the widening of the spreads, which are associated with signs of illiquidity,' Bernanke told the House Financial Services Committee.

'So in that particular area, it's been more difficult to lower long-term mortgage rates through Fed action,' he said.

The Bernanke conundrum: In the short term, the more he cuts short rates, the more certain long rates may rise.

by Calculated Risk on 2/28/2008 10:43:00 AM

From MarketWatch:

Housing downturn leads to Freddie Mac losses The weakened U.S. housing market took a toll on Freddie Mac's bottom line in the fourth quarter and for 2007 as a whole, the mortgage-finance giant said Thursday as it reported worse-than-expected financial results.

Richard Syron, Freddie Mac's chief executive, also said the company's "extremely cautious" as 2008 moves forward.

McLean, Va.-based Freddie posted a quarterly net loss of $2.5 billion ...

The company is "extremely cautious" just as everyone is calling for an expanded role in mortgage lending for Freddie and Fannie. I expect more visits to the confessional.

by Anonymous on 2/28/2008 08:17:00 AM

To refresh memories: Last fall, New York AG Andrew Cuomo sued an outfit called eAppraiseIt and its parent company, First American, for conspiring with WaMu to pressure appraisers to produce inflated appraised values. WaMu was not part of the suit, since for legal reasons state AGs can't sue federally-chartered thrifts in state court. Fannie Mae and Freddie Mac were not being sued either, but they were quickly served with subpoenas for documentation involving inflated appraisals on loans they may have purchased. The GSEs quickly agreed to appoint independent examiners to review appraisal practices, with the direct threat that lenders would be forced to buy back loans that failed to meet existing GSE rules.

It appears that Fannie Mae has finished or nearly finished its review, and is about to ruin several very large aggregators' and thousands of pissant brokers' day with a new set of rules regarding how appraisals can be obtained and what affiliations between lender and appraiser are acceptable:

Feb. 27 (Bloomberg) -- Fannie Mae, the biggest source of financing for U.S. home loans, told lenders it will probably ban their use of appraisals by in-house employees or those arranged by brokers.

Fannie Mae distributed the proposal, a response to New York Attorney General Andrew Cuomo's yearlong mortgage probe, to lenders in a ``talking points'' memo this week, according to a person familiar with the document. The memo was published on American Banker's Web site yesterday.

``It would be a monumental change because it would require a shift in the way that the lending industry does business,'' said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. ``I think it would be tremendous.'' . . .

``Fannie Mae wishes to cooperate with the New York AG's investigation and, as part of a cooperation agreement, will likely agree to a number of items,'' according to the memo.

The proposed changes include banning Fannie Mae's partners from using appraisers employed by their wholly owned subsidiaries. Mortgage lenders that own appraisal companies include Countrywide Financial Corp., the nation's largest home- loan originator.

The restrictions would apply to loans acquired after Sept. 1, according to the memo. Fannie also told lenders that an independent appraisal clearinghouse likely would be established.

`Laughable' Practice

About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice ``laughable'' because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said. . . .

Cuomo spokesman Jeffrey Lerner said today in an e-mail that that Cuomo, Fannie Mae and Freddie Mac hadn't reached an agreement.

``We have had ongoing discussions for several months,'' Lerner said. ``At the end of the process, we will either have agreements or we will take other appropriate action.''

Cuomo prefers to pursue cooperative resolutions before litigating, Lerner said.

``We are continuing our discussions and we are making progress,'' said Corinne Russell, spokeswoman for the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac. . . .

Freddie Mac hasn't sent any memo similar to Fannie Mae's, said company spokeswoman Sharon McHale.

``We are cooperating fully with the attorney general's investigation, but at this point it would be premature to speculate as to what the outcome will be,'' McHale said.

Countrywide spokeswoman Ginny Zoraster declined to comment on Fannie Mae's proposals.

``The company does not believe this case has merit and expects to present a vigorous defense,'' Zoraster said in an e- mailed statement.

My observations:

1. So much for "synergy." I only hope that if this puts a stop to large lenders buying appraisal firms (and destroying appraiser independence), we can next move on to large lenders buying title companies (and destroying escrow officer independence).

2. Insofar as brokering of mortgages is going to survive this bust--and the indications are that any bank with a shred of sense right now is shutting down its wholesale division--they will go back to being application-takers, for which they will earn a modest fee. They will have a hard time maintaining their current pose of a "full-service lender" by also processing loans--including ordering appraisals, selecting a closing agent, etc.--which are a huge source of fees collected from consumers and which tend to give consumers the (false) impression that brokers are actually lenders.

What has been going on for some time now is that the massive failures in the wholesale model have forced the wholesale lenders to, in essence, redundantly process these loans, as everything the broker does has to be checked and rechecked and in some cases simply repeated. (You let brokers order appraisals, and once you get it, you order a second appraisal or field review appraisal or run an AVM in order to reality-check the appraisal you got. The process pretty much ceases to be efficient here.) If the GSEs just come out and force wholesalers to take control of the appraisal process from the very beginning, then the kabuki ends and we stop pretending that brokers are doing anything except bringing in a consumer willing to sign an application. The rest of the loan processing is turned over to the wholesaler.

3. An "independent appraisal clearinghouse" would, presumably, be intended to remove some of the problems I discussed in this post with individual lenders managing approved or excluded appraisal lists. Without details I can't really say what they're doing here, but it sounds like Fannie and Freddie are seriously considering getting into approving or excluding individual appraisers or appraisal firms. FHA has always done that in some fashion or another; the GSEs never have. That's a very substantial change to the way the GSEs do business with lenders.

by Calculated Risk on 2/28/2008 12:31:00 AM

Here is partial excerpt from a great Saturday Night Live piece in the late '70s, with Dan Aykroyd impersonating Jimmy Carter:

Inflation is our friend.

For example, consider this: in the year 2000, if current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean - most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn't you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would! But what about people on fixed incomes? They have always been the true victims of inflation. That's why I will present to Congress the "Inflation Maintenance Program", whereby the U.S. Treasury will make up any inflation-caused losses to direct tax rebates to the public in cash. Then you may say, "Won't that cost a lot of money? Won't that increase the deficit?" Sure it will! But so what? We'll just print more money! We have the papers, we have the mints.

Click on graph for larger image.

And here is a graph of the Case-Shiller index in both nominal terms and real terms (adjusted using CPI less shelter).

In nominal terms, the index is off 8.9% over the last year, and 10.2% from the peak.

However, in real terms, the index has declined 12.9% during the last year, and is off 14.6% from the peak.

Inflation is helping significantly in lowering real house prices. If prices will eventually fall 30% in nominal terms, then we are only about 1/3 of the way there. But if the eventual decline is 30% in real terms, then we are about half way there.

Wouldn't you like to own a million dollar home? With 4% inflation per year, many people will.

by Calculated Risk on 2/27/2008 11:48:00 PM

From the WSJ: New Monkey, Same Backs

A new round of higher debt costs confronts some states and cities as another usually humdrum part of the credit markets runs into trouble. This time, the culprits are variable-rate demand notes. And banks that guarantee they will act as buyers of last resort face something they never expected -- having to purchase many of them at once.

Variable-rate demand notes let issuers borrow for long periods -- but at short-term interest rates. Like auction-rate securities, interest payments adjust on a weekly or even daily basis. The difference is that for variable-rate demand notes, securities firms sell the debt at whatever interest rate meets the market's demand.

The problem: Just like many issuers of auction-rate securities whose interest costs soared after auctions for some of their debt failed, an increasing number of municipalities are being hit with sharply higher interest on their variable-rate demand notes because dealers of the debt are having trouble selling it.

Last week, rates on $300 million of California's variable-rate demand notes rose to 8.25% from 2% the previous week.

Another borrow short, lend long (or invest long) strategy. New monkey, same backs. Great title.

by Calculated Risk on 2/27/2008 07:20:00 PM

From Bloomberg: California City Moves Closer to Bankruptcy Filing

Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed.

Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.

The city council is scheduled to consider a resolution tomorrow to file for Chapter 9 bankruptcy protection, after negotiations with labor unions to win salary concessions broke down Monday.

Many cities in California are struggling with falling revenue and rising pension costs. Vallejo is just the first in line.

``What happens in Vallejo is going to be the model for what happens across the state. It will have a big impact.''
[Clark Stamper of Stamper Capital & Investments]