by Anonymous on 5/17/2008 09:49:00 AM

Floyd Norris thinks this Merrill Lynch subprime second lien security issued a year ago this month is "a candidate for the title of worst ever." I suspect there are measurably worse deals out there whatever criteria you happen to be using, but Norris's observation that this one closed right at the time when a number of ugly facts--like the bankruptcy of the major originator and Merrill's involvement in it--were actually all over the newspapers (not to mention the blogs) is quite relevant. If you were reading the daily paper, not to mention your Bloomberg terminal, you knew about the problem. But somebody bought this dog anyway.

If you care to know, the deal in question is Merrill Lynch Mortgage Investors Trust, Series 2007-SL1. Norris runs down the list of ugly characteristics of this deal, but here are a few additional uglies:

• 81% of the loans were purchase-money.
• Nearly 98% of them were fixed-rate loans (only slightly more than 2% were HELOCs).
• The weighted average Debt-to-Income ratio was 44.27%. As the overwhelming majority of the loans were stated income, and as it is likely that the first-lien mortgage payment used to calculate the DTI was based on a teaser-rate ARM, you can confidently assume that the true average DTI was significantly higher than that.
• The weighted average loan age was 7 months when the deal closed in May of 2007, meaning that most of the loans were originated in Q4 2006. By and large, this pool of loans would have had most of the "EPDs" (Early Payment Defaults) selected out of it.
• The A classes originally had 45.20% credit support and were rated Aaa by Moody's. As of last week, the A-1 bond is rated B3 and the A-2 bond is rated Caa1.

How fast did it all unwind? That, I think, is an interesting question given the reports we've seen in the last few days of an acceleration in losses on HELOC pools. Cumulative losses for the pool for its first twelve remittance months were: 0.00 0.01 0.01 0.15 0.95 2.70 5.50 7.81 10.59 13.37 16.00 19.40.

But nobody could have seen this coming.

by Calculated Risk on 5/16/2008 08:38:00 PM

Here is Paul Volcker's testimony to Congress this week (7 min 33 sec - just a portion of testimony):

by Calculated Risk on 5/16/2008 02:33:00 PM

"In general, most markets are pretty tough. We're still seeing pricing pressure out there and I think for the foreseeable future we're still going to see it."
Beazer Homes CEO Ian McCarthy on conference call, May 16, 2008

And some other recent home builder comments:

"I don't think we're anywhere near a bottom in housing. We're going to have a big inventory of unsold, unoccupied homes that's going to take three or four years to clear out."
Eli Broad, founder, KB Homes, April 28, 2008

From MarketWatch: Spring a bust for housing market (hat tip charts)

[Toll Brothers] chief executive, Robert Toll, said traffic levels at its communities were "the worst that we have ever seen."

And from the NAHB:

"[T]he message is very clear: The single-family housing market is still deteriorating..."
NAHB President Sandy Dunn

"[T]he housing market has shown no evidence of improvement thus far. In fact, conditions have continued to deteriorate in recent times...”
NAHB Chief Economist David Seiders

There is a reason home builder confidence is near record lows.

by Calculated Risk on 5/16/2008 01:32:00 PM

From AP: US will stop sending oil into strategic reserves

Although 76 thousand barrels is a small percentage of the 85 million barrels per day of world demand (about 0.1%), this could make some difference in the price because both the supply and demand curves for oil are very steep.

by Calculated Risk on 5/16/2008 12:58:00 PM

FDIC Chairman Sheila Bair at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another

[W]e have some significant challenges ahead of us. And while some credit markets may be stabilizing, families, communities, and the economy continue to suffer.

Frankly, things may get worse before they get better.

As regulators, we continue to see a lot of distress out there.
...
[A]ll of us can see the strain on state and local government budgets and the impact on the banking and financial systems.

And there is more uncertainty ahead.

Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.

Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.

The slowdown we've seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.

Bair goes on to call for more government action.

BTW, I wonder - are Friday bank failures about to become routine?

by Calculated Risk on 5/16/2008 10:38:00 AM

I don't spend much time looking at consumer confidence, because for the most part it tells you what you already know. And right now confidence is saying that for most Americans these are tough economic times.

But this is pretty impressive Cliff Diving ...

Click on graph for larger image.

According to the University of Michigan, consumer confidence in the U.S. fell to 59.5 in May, the lowest level since June 1980 (58.7). Confidence was at 62.6 in April, and 88.3 last May.

This is lower than for the recession of '81/'82 (with double digit unemployment), the recession of '90/'91, and the recession of '01. Once again, the current recession is "probable".

by Calculated Risk on 5/16/2008 08:39:00 AM

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

Building permits increased:

Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 978,000. This is 4.9 percent above the revised March rate of 932,000, but is 34.3 percent below the revised April 2007 estimate of 1,489,000.

Housing starts increased:

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 1,032,000. This is 8.2 percent above the
revised March estimate of 954,000, but is 30.6 percent below the revised April 2007 rate of 1,487,000.

Housing Completions declined:

Privately-owned housing completions in April were at a seasonally adjusted annual rate of 1,000,000. This is 16.0 percent below the revised March estimate of 1,190,000 and is 34.9 percent below the revised April 2007 rate of 1,535,000.

The graph shows Total housing starts vs. Single family housing starts.

This graph shows that single family starts are at the lowest level since 1991.

More on starts and completions later.

by Calculated Risk on 5/16/2008 12:38:00 AM

From Bill Fleckenstein's Daily Rap: HELOCs: The New Subprime (Here is Fleck's Site for the Daily Rap):

Note: excerpted with permission.

The following is from Fleck's source: "The Lord of the Dark Matter"

"A couple of us tuned into Dexia's conference call yesterday, looking for clues on HELOCs. We got plenty, and they were important. In February Dexia said the absolute worse case loss for their monoline subsidiary FSA was going to be $125 million. Yesterday, they added $195 million to that. The reason given on the conference call for the poor guidance is that the servicer on their wrapped HELOC portfolio, Countrywide, had such a backlog that FSA didn't get the news that delinquencies were skyrocketing until very recently.

There is no doubt that US mortgage servicers are swamped right now, but I think there is a bigger story here, which ties in with BAC quietly announcing their HELOC loss estimates have gone up from a 2.0% to 2.5% range to 'over 2.5%.' Servicer backlogs could well be the reason why so many CEOs and CFOs are running around telling investors they are not seeing deteriorations in HELOC delinquencies.

The truth is their data is wrong. The market has, obviously, taken the view that the worst of the writedowns are behind us, and if anything it's now just a macroeconomic problem we face. I think that's dead wrong. We're now entering the phase where the macro impacts earnings, but also the stage where real cash losses start to hit the banks (subprime and Alt-A is primarily a mark-to-market issue, but HELOCs are going to be large, outright losses). Once WAMU, WFC, BAC and JPM start to get data through on how rapidly their HELOC portfolios are deteriorating, watch the losses pile up. I'm talking realised losses, not mark-to-market writedowns."
emphasis and link added

Watch HELOCs closely! Fleck's source nailed subprime last year, as an example on January 30, 2007:

Turning to the subprime industry, once again I heard from my friend who has been staggeringly accurate. He continues to feel that things are about to really get worse. In an email to me, he wrote: "Scratch and dent loans are killing everybody. Bids that were 92 or 93 are now low to mid-80s. It is a bloodbath, and is pressuring even strong companies to buckle. NO ONE is making any money in the market right now. We are at a point of no return for many. The next two weeks will be wild."

Note: A wild two weeks indeed as subprime blew up in early February.

by Calculated Risk on 5/15/2008 08:04:00 PM

From the WSJ: Fannie Is Poised To Scrap Policy Over Down Payments

Fannie Mae is expected to announce Friday that it is scrapping a policy requiring higher down payments on home mortgages in areas where house prices are falling.

The change comes in response to protests from vital political allies of the government-sponsored provider of funding for mortgages, including the National Association of Realtors, the National Association of Home Builders and organizations that promote affordable housing for low-income people.
...
The current policy, adopted in December and now due to end June 1, limits loan amounts in areas with declining home prices, including most of the densely populated parts of the country.
...
Under the new policy that is taking effect next month, Fannie will have the same maximum loan percentages across the country for people purchasing single-family homes that they intend to occupy, according to people familiar with the plan.

by Calculated Risk on 5/15/2008 07:42:00 PM

From Fed Governor Frederic S. Mishkin: How Should We Respond to Asset Price Bubbles?

Rex Nutting at MarketWatch has the story: Fed should deflate some bubbles, Mishkin says

The Federal Reserve should try to aggressively deflate some types of asset bubbles before they can harm the economy, Fed Gov. Frederic Mishkin said Thursday.

But raising interest rates isn't the way to prick a bubble, he said. And some types of bubbles, such as the dot-com bubble of the late 1990s, probably shouldn't be pricked at all, he said.

On the other hand, the housing bubble of this decade was the type of bubble that should have been targeted with closer supervision and tighter regulation to prevent widespread economic damage, Mishkin said.

The Fed should watch for bubbles that are associated with a fast expansion of credit, he said, because these bubbles have the potential to inflate bank balance sheets on the way up and destroy them on the way down.

I'll have more later ...