by Calculated Risk on 5/17/2008 06:06:00 PM

I've reviewed a copy of a memo from Sun Trust concerning HELOCs (Home Equity Line of Credit) that I believe to be authentic. In the memo, dated yesterday, Sun Trust announced new HTLTV ("HELOC Total Loan To Value") restrictions in certain circumstances (like declining markets, new condominiums, 2nd homes), and they are apparently even eliminating their Flex Equity program completely in several key states (like Arizona, California and Nevada).

This is nothing new. A number of banks have announced HELOC restrictions this year, see Chase: Max HELOC LTV 70% in Certain Areas

Note: HousingWire has been covering the HELOC news extensively: Focus shifts to HELOCs

Bill Fleckenstein also wrote about HELOCs in his Daily Rap on Thursday (with comments from his source the "Lord of the Dark Matter). For more excerpts, see: Fleck: HELOCs: The New Subprime

"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."
excerpted with permission, emphasis added

Is this really the reason FSA (and BofA) provided poor guidance recently ... servicer delays?

Perhaps something more fundamental is happening. What if certain HELOC borrowers were using the HELOCs as ATMs, paying their HELOC (and first lien) monthly payments using borrowed money? Yes, a different bred of NegAm loans! Then, when the lenders started to rescind or reduce these HELOCs earlier this year, many of these Home ATM junkies were stuck without a fix.

Then - if this story is correct - as the Home ATM junkies have started to default, the lenders have discovered that their secured lines of credit were really unsecured (there was no "HE" in the "HELOC") - and the lenders' losses on home-equity loans started to rise rapidly. This seems more likely to me than "servicer delays".

For more on HELOCs, I recommend Tanta's HELOC Nonsense, The HELOC As Disability Insurance and Banks Freezing HELOCs.

by Calculated Risk on 5/17/2008 02:57:00 PM

From Atlanta Fed President Dennis Lockhart: Emerging Economies and Global Capital Flows

It used to be said that when the United States sneezes, the world catches pneumonia. A better metaphor for today would be that when the United States gets a cold, the world gets a cough and the sniffles. Questions about decoupling are frequently heard in economic discourse, and they include the following:

• Will the U.S. downturn drag the rest of the world down, especially China and other consumer product exporters?
  
• Is the rest of the world positioned to withstand a negative demand shock of some duration from the United States?
  
• Is global growth being driven by increasingly mature, independent, and sustainable sources of economic dynamism?
  
• Do the larger economies—BRICs included—have tools to stimulate countercyclical activity in the face of weakness on the part of the United States?
  

I won't discuss these questions in detail, but let me make a few observations. In the narrow sense, the decoupling debate has been about whether slower spending in the United States will lead to slower GDP growth in countries dependent on U.S. import demand. This concern is then broadened to a global slowdown or recession.

My view is the following: Global economic integration has progressed in recent years to the point that a slowdown in the United States will unquestionably be felt, but not as severely as imagined by some. Domestic growth momentum in many emerging economies will attenuate the influence of U.S. weakness. And the accumulation of foreign currency reserves by these countries—the result of trade surpluses—provides an accessible resource to stimulate their own domestic growth to offset weaker exports, should that weakness materialize.

I've highlighted the last point, because this raises an interesting question: What happens if these countries use these accumulated surpluses to stimulate their domestic economies to offset weaker exports to the U.S.? Wouldn't they have to sell U.S. assets? And wouldn't that push up interest rates in the U.S. - further weakening the U.S. economy - and further weakening exports for these same countries? I'm not sure spending these surpluses will work as well as Lockhart envisions.

by Anonymous on 5/17/2008 12:14:00 PM

Well, that's what it says.

Newsday:

Nowadays, when just touting the Jacuzzi, crown molding and new roof won't do, many home sellers have resorted to challenging their property assessments. They're contacting assessors in droves. Some pay hundreds of dollars for appraisers' reports. Others promise to forfeit half the first year's tax savings to firms that win reductions.

Some listings even reserve special punctuation for taxes: One reads "Village Tax Grievance Filed and Approved" while another says "Taxes in Process of Grieving!!!!!"

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.