by Calculated Risk on 3/27/2008 09:39:00 AM

From homebuilder Lennar's press release:

Stuart Miller, President and Chief Executive Officer of Lennar Corporation, said, "Market conditions have remained challenged and continued to deteriorate throughout our first quarter of 2008. The housing industry continues to be impacted by an unfavorable supply and demand relationship, which restricts the volume of new home sales and, concurrently, depresses home prices in most markets across the country."

"Home inventories have been expanding due to the high number of foreclosures, negotiated 'short sales,' and stretched homeowners looking to sell homes they can no longer afford. While sales are occurring and clearing prices are being reached, the pace of overall housing inventory growth is exceeding absorption at the current time."

"Concurrently, lower consumer confidence has quieted demand among prospective homebuyers and deterred them from a buying decision, while contraction in the lending markets has reduced the availability of credit for those prospective homebuyers that do wish to buy a home."
emphasis added

by Anonymous on 3/27/2008 08:58:00 AM

This morning we have Vikas Bajaj in the NYT reporting on second-lien lenders refusing to go quietly:

Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.

To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.

Um. This isn't really a very helpful way to put it, you know. In the very concept of the "lien" is the idea that the lender gets to demand payment if you sell the property that is securing the loan, and in the very concept of "refinance" lurks the idea that you pay off the existing loan with the proceeds of the new one. These concepts are not "extraordinary."

What we mean here, I take it, is short sales and short refinances (or subordinations behind a distressed first-lien refinance). If so, we really ought to say that, because "in the past, when home prices were not falling," we didn't have a lot of short sales and short refis, so the occasion for second lienholders to object to them just didn't arise much.

The reason to insist on some clarity here is that I don't think it helps much to build up certain people's sense of entitlement on the matter. Or at least their occasionally fundamental confusion about what rights you give up to a lender when you sign this mortgage thingy.

There is an example in the Times article, of a couple who attempted a short sale which was derailed because the second lienholder wouldn't play nice:

Experts say it is in everyone’s interest to settle these loans, but doing so is not always easy. Consider Randy and Dawn McLain of Phoenix. The couple decided to sell their home after falling behind on their first mortgage from Chase and a home equity line of credit from CitiFinancial last year, after Randy McLain retired because of a back injury. The couple owed $370,000 in total.

After three months, the couple found a buyer willing to pay about $300,000 for their home — a figure representing an 18 percent decline in the value of their home since January 2007, when they took out their home equity credit line. (Single-family home prices in Phoenix have fallen about 18 percent since the summer of 2006, according to the Standard & Poor’s Case-Shiller index.)

CitiFinancial, which was owed $95,500, rejected the offer because it would have paid off the first mortgage in full but would have left it with a mere $1,000, after fees and closing costs, on the credit line. The real estate agents who worked on the sale say that deal is still better than the one the lender would get if the home was foreclosed on and sold at an auction in a few months.

I'm not here to make up details not in evidence in a newspaper story, so bear that in mind. But my attention was caught by that detail about retiring due to an injury. As presented, the story seems to be that the McLains took out a HELOC in January of 2007, and at some point "last year" the borrowers fell behind in payments because of the disability. We aren't told by the Times whether the income troubles led to drawing down the HELOC, and then being unable to keep up payments, or if the HELOC had been drawn to the full $95,000 back in January of 2007, and subsequently the income troubles led to the McLains being unable to keep up the payments.

I bring this up only because the following item caught my eye yesterday (via Mish), from someone who apparently purports to be a source of personal finance advice:

As many readers know, I’m a proponent of keeping an untapped home equity line of credit (HELOC) at my disposal for major emergencies. This isn’t my emergency fund. It’s what I call my catastrophe fund.

I’ve always believed that keeping a HELOC readily available is the best insurance policy and the back-up plan for if / when the emergency fund runs empty. Think about it… being able to tap this money could buy us time in the event of job loss or illness. And time is money. . . .

The HELOC is there strictly as a backup plan. For a catastrophe. Period. End of story. But with that said, I’ve always looked at that line of credit as my money. Money I could access at any time. . . .

So it came as a surprise yesterday when we got the letter from Citibank about our $168,000 line of credit:

We have determined that home values in your area, including your home value, have significantly declined. As a result of this decline, your home’s value no longer supports the current credit limit for your home equity line of credit. Therefore, we are reducing the credit limit for your home equity line of credit, effective March 18, 2008, to $10,000. Our reduction of your credit limit is authorized by your line of credit agreement, federal law and regulatory guidelines.

Reduced to $10,000!? Hello!? Please don’t f-ck with my house in Newport Beach…

Of course, I’m calling them today to dispute it.

I left out the parts about how this writer is such a great credit risk now, and was when she qualified for the HELOC originally. I am merely struck by how unaware she is of the essential problem in her understanding of a HELOC as a kind of disability insurance: she is saying that she qualified for the line of credit as an employed, cash-flush borrower, but plans to use it only if she becomes . . . the kind of borrower who couldn't qualify for a HELOC.

Now, let me say that lenders were fully complicit in this idea; I heard more than a few sales pitches for HELOCs over the boom years based on this "do it just in case you need it" idea. But it was a self-defeating plan then and it is so clearly still one now: how do you get out of problems making your mortgage payment by increasing your mortgage debt--and not coincidentally decreasing your odds of selling your home should you need to?

More to today's point, how do you ask the HELOC lender to advance you money to pay the first lien lender with--I assume that's the idea of using the HELOC to "tide you over" in a bad patch, you're borrowing the first lien mortgage payments from the HELOC lender--knowing you aren't really (currently, at least) in any position to pay it back, and then ask the HELOC lender to let the first lien lender get all the proceeds in a short sale? Don't get me wrong: I fully understand why people hate lenders these days and think they're just getting what they "deserve." I'm just shocked at the naive assumption that they wouldn't fight back a little here.

As I said, I don't really know what the McLains' situation was, since we don't get much detail. But one can understand Citibank's near-total erasure of Ms. Newport Beach's unused HELOC as a sensible precaution on Citi's part, and not simply because home values are falling. Now is probably not a good time for HELOC lenders to be sitting on their duffs waiting for borrowers to run into financial trouble and use those HELOCs as a way to limp along to the point where the HELOC lender gets nothing in a foreclosure.

Of course Ms. Newport Beach believes that her potential use of a HELOC as "insurance" wouldn't be doomed to failure. Nobody ever believes that doubling down is doomed to failure; that's why they do it. But if in fact that's what the McLains did, it doesn't seem to have done anything for them except buy them time to negotiate a short sale that then fell through because CitiFinancial didn't like being the patsy at the table.

by Calculated Risk on 3/26/2008 07:09:00 PM

From Bloomberg: Clear Channel, Bain, Lee Sue Banks Over Buyout Plan

Clear Channel Communications Inc., Bain Capital LLC and Thomas H. Lee Partners LP sued banks financing the $19.5 billion buyout of Clear Channel to force them to honor funding commitments.
...
The banks stand to lose at least $2.7 billion because loan prices have fallen since they agreed to finance the transaction last year.

The banks have about 2.7 billion reasons to find a way out of this deal.

by Anonymous on 3/26/2008 06:47:00 PM

Apparently, the accounting firms never learn. From Vikas Bajaj in the NYT:

In a sweeping accusation against one of the country’s largest accounting firms, an investigator released a report on Wednesday that said “improper and imprudent practices” by a once high-flying mortgage company were condoned and enabled by its auditors.

KPMG, one of the Big Four accounting firms, endorsed a move by New Century Financial, a failed mortgage company, to change its accounting practices in a way that allowed the lender to report a profit, rather than a loss, at the height of the housing boom, an independent report commissioned by a division of the Justice Department concluded. . . .

The 580-page report documents how New Century lowered its reserves for loans that investors were forcing it to buy back even as such repurchases were surging. Had it not changed its accounting, the company would have reported a loss rather a profit in the second half of 2006. The company first acknowledged that its accounting was wrong in February 2007 and sought bankruptcy protection less than two months later as its lenders stopped doing business with it.

The profit was important because it allowed executives to earn bonuses and convince Wall Street that it was in fine shape financially when in fact its business was coming apart, the report contended. But the report stopped short of saying that the company “engaged in earnings management or manipulation, although its accounting irregularities almost always resulted in increased earnings. . . .

“I saw e-mails from the engaged partner saying we are at the risk of being replaced,” Mr. Missal said in a telephone interview about a KPMG partner assigned to work on the audit of New Century. “They acquiesced overly to the client which in the post-Enron era seems mind-boggling.”

I have to say I have, really, no desire to read a 580-page report on this subject. But doesn't that seem like a lot of report to find one problem--under-reserving for repurchases that doesn't rise to the level of earnings management or manipulation?

(hat tip, sk)

by Anonymous on 3/26/2008 05:14:00 PM

Some of you have wondered from time to time what all the employment casualties of the credit and housing busts are going to do next.

This ought to keep you up at night:

NEW YORK (CNNMoney.com) -- When Heidi Sadowsky quit the finance sector, she abandoned a job market on the verge of collapse for one that may be air-tight: nursing.

"I was never happy in my life in finance," said Sadowsky, 39, a former liaison for institutional investors and money managers at Citibank and Invesco. "I always felt like a square peg in a round hole. I decided I had to get out of this business. I was never cut out for this."

Inspired by the compassion of nurses who cared for her terminally ill father, Sadowsky took up training last year at New York University's College of Nursing. Since she already had an undergraduate degree, she was accepted into the nursing school's accelerated 15-month bachelors program and she expects to graduate in May. . . .

Sadowsky picked the right time to switch careers. The finance sector has shed 124,000 jobs since the beginning of 2007, according to the Department of Labor, including 22,000 jobs in the first two months of this year. Major firms like Bear Stearns (BSC, Fortune 500), Merrill Lynch (MRL) and Sadowsky's old employer Citigroup (C, Fortune 500) have been hard-hit by the subprime collapse, and analysts expect up to 30,000 more job cuts in finance by the end of the year.

Meanwhile, hospitals, clinics and nursing schools are scrambling to fill vacant positions for nurses and teaching staff. The Department of Labor estimates the number of vacancies for registered nurses will expand to 800,000 in 2020, from its 2005 tally of 125,000.

I can pretty much vouch for the fact that having an undergraduate business degree and years of experience in finance qualifies you to give other people heart attacks. But is it really the kind of experience that should let you cram nursing school into 15 months?

"Tradition holds that a guy's going to be a doctor, and the female is going to be a nurse," Neville Lewis, 40, an NYU nursing student who is married to an RN.

Like Sadowsky, Lewis abandoned finance to take up nursing. Since he already had a bachelor's, he qualified for NYU's accelerated 15-month program. Lewis said he majored in political science and mass communications at Midwestern State University in Texas, and then embarked on a 15-year career in the bond and IPO sector at the investment firms Equiserve (now Computershare) and Fidelity Investments.

"I kind of fell into finance after graduation," said Lewis, who had felt the lucrative pull of the finance sector. "You make a lot of money, but do you enjoy it? I was not happy."

After getting laid off from Equiserve in 2002, Lewis took a job at Fidelity and considered going back to school to pursue tax law. But he changed his mind, quit Fidelity in 2007, and started at NYU's nursing school in January, 2008. He expects to graduate in 2009.

"I felt like I could accomplish more by working to heal people, then by helping people fight over money," he said. And as he watched his former sector collapse, Lewis realized that altruism wasn't the only motive to get into nursing.

"Seeing what's happening now, I have no regrets in leaving finance," he said. "People are always going to be sick. We live in an aging society."

by Calculated Risk on 3/26/2008 12:45:00 PM

How many people think the new "temporary jumbo conforming loan limits" are really temporary?

Apparently the Office of Federal Housing Enterprise Oversight (OFHEO) does.

From OFHEO: OFHEO Issues Final Guidance on Conforming Loan Limit Calculations

The final Guidance addresses the handling of decreases in the house price data used to set the conforming loan limit as well as procedural matters relating to calculation of the limit that determines the size of mortgages eligible for purchase by Fannie Mae and Freddie Mac.

Based on comments received in two public comment periods, OFHEO is issuing a final Guidance that provides that the conforming loan limit would not decrease from its current level of $417,000 in 2009 and subsequent years. However, the conforming loan limit will not increase until cumulative increases in house prices exceed cumulative decreases since the $417,000 limit was first reached.

This means the conforming loan limit can never decrease, but it will not increase until prices have returned to earlier levels. Under the old guidance, the conforming loan limit was supposed to move with house prices, both up and down.

Of course, "temporary" probably means "permanent", and the limit will vary by MSA (Metropolitan Statistical Area).

by Calculated Risk on 3/26/2008 11:31:00 AM

There is actually some good news in the Census Bureau's New Home sales report this morning. But first a few more ugly graphs (see February New Home sales for earlier graphs).

Click on graph for larger image.

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001.

It appears the U.S. economy is now in recession - possibly starting in December - as shown on graph.

This is what we call Cliff Diving!


The second graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red columns in January and February 2008. This is the lowest sales for February since the recession of '91.

As the graph indicates, the spring selling season has started - and started poorly. Toll Brothers CEO said last month:

“The selling season, which we believe starts in mid-January, has been weak ..."

And one more long term graph - this one for New Home Months of Supply.


"Months of supply" is at the highest level since 1981. Note that this doesn't include cancellations, but that was true for the earlier periods too.

The all time high for Months of Supply was 11.6 months in April 1980.

Once again, the current recession is "probable" and hasn't been declared by NBER.

So what is the good news?

There are actually two pieces of good news in the report. First, inventory levels (even accounting for cancellations) are clearly falling. This is a small first step in correcting the huge overhang in new home inventory.

Note: The inventory (and sales) reported by the Census Bureau doesn't account for cancellations, and the Census Bureau doesn't include many condos (especially high rise condos).

The second piece of good news is revisions. During periods of rapidly declining sales, the Census Bureau routinely overestimates sales in the initial report - and then revises down sales over the next few months. In this report, sales were revised up slightly for November (from 630K to 631K), December (605K to 611K) and January (588K to 601K). This is actually a positive sign that New Home sales might be nearing a bottom. However, a quick rebound in sales is unlikely with the huge overhang of both new and existing homes for sale.

by Calculated Risk on 3/26/2008 11:20:00 AM

From Bloomberg: Citigroup Estimates Cut by Oppenheimer's Whitney

Whitney predicted the bank will lose $1.15 a share in the quarter because of potential markdowns of $13.1 billion on assets including leveraged loans and collateralized debt obligations.

Hopefully there will be no death threats for Ms. Whitney this time.

by Calculated Risk on 3/26/2008 10:00:00 AM

According to the Census Bureau report, New Home Sales in February were at a seasonally adjusted annual rate of 590 thousand. Sales for January were revised up to 601 thousand.

Click on Graph for larger image.

Sales of new one-family houses in February 2008 were at a seasonally adjusted annual rate of 590,000 ... This is 1.8 percent below the revised January rate of 601,000 and is 29.8 percent below the February 2007 estimate of 840,000.



The seasonally adjusted estimate of new houses for sale at the end of February was 471,000.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are once again at record levels. Actual New Home inventories are probably much higher than reported - my estimate is about 100K higher.

Still, the 471,000 units of inventory is below the levels of the last year, and it appears that even including cancellations, inventory is now falling.


This represents a supply of 9.8 months at the current sales rate.

This is another weak report for New Home sales, and I'll have some analysis later today on New Home Sales.

by Calculated Risk on 3/26/2008 09:45:00 AM

From Rex Nutting at MarketWatch: Demand for durable goods falls 1.7% in Feb.

Demand for machinery and other capital goods sank in February, driving orders for durable goods down 1.7%, the Commerce Department reported Wednesday.

The unexpected decline in orders for big-ticket items marked the second straight monthly drop, an indication that domestic demand is weakening faster than exports can grow.

"This is another report that has a strong recessionary feel about it," wrote John Ryding, chief U.S. economist for Bear Stearns.

Another indicator suggesting recession.