by Calculated Risk on 5/19/2008 05:01:00 PM

From Reuters: U.S. senators say have deal on housing rescue bill

The two top members of the U.S. Senate Banking Committee announced on Monday that they have a deal that will create a multi-billion dollar mortgage rescue fund and a new regulator for Fannie Mae and Freddie Mac.

No specifics yet.

And from the WSJ: New Housing Deal Reached

The committee didn't immediately release details of the agreement and what changes had been made to the bill. The legislation combines the regulatory reforms for government-sponsored enterprises Fannie Mae and Freddie Mac with a proposal to use the Federal Housing Administration to offer up to $300 billion in federal guarantees to help refinance struggling borrowers into new mortgage loans.

by Calculated Risk on 5/19/2008 01:19:00 PM

From DataQuick: Southland home sales highest in eight months

Southern California home sales surged last month to the highest level since August as bargain shoppers took advantage of price slashing. Although some higher-end costal markets also posted gains, the swell in transactions mainly reflects more sales of homes under $500,000 in inland areas where depreciation and foreclosures have been greatest, a real estate information service reported.

A total of 15,615 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in April. That was up 21.9 percent from 12,808 the previous month but down 19 percent from 19,269 in April last year, according to DataQuick Information Systems.

Sales from March to April have risen on average 1.2 percent since 1988, when DataQuick's statistics begin. Although last month's sales total was the highest for any month since August 2007, when 17,755 homes sold, it was still the weakest April since April 1995, when 15,303 homes sold, and the second-lowest April on record. Last month was 38 percent below of the April average of 25,311 sales.

Post-foreclosure homes continued to play a major role in the Southland market. Of all the homes that resold in April, 37.5 percent had been foreclosed on at some point in the prior 12 months, compared with a revised 35.8 percent in March and 4.6 percent a year ago. Across the six-county area, "foreclosure resales" ranged from 26.9 percent of resale activity in Orange County to 52.7 percent in Riverside County.

Last month's upswing in sales was most pronounced for homes priced under $500,000, which accounted for two-thirds of the Southland's sales gain over March. Riverside County, the epicenter of Southland foreclosure activity and price declines, posted the region's only year-over-year sales increase -– that county's first in two years.
...
"Quite a few more buyers stepped off the sidelines last month to snap up homes at substantial discounts relative to the market's short-lived peak," said Marshall Prentice, DataQuick president. "It's no surprise, given the magnitude of the price declines in inland areas and the fact sales have been so amazingly low for so long. We continue to look for evidence of a sales bounce in the mid-priced and higher-end markets along the coast. If the higher conforming loan limits are making a difference in those areas, it's certainly not a large one, at least not as of the end of April."

The median price paid for a Southland home was $385,000 last month, unchanged from March but down 23.8 percent from the peak median of $505,000 in April 2007.
...
Foreclosure activity is at record levels ...
emphasis added

This is interesting. The pickup in sales is mostly in the areas with steep price declines and severe foreclosure activity (like the Inland Empire).

by Calculated Risk on 5/19/2008 12:16:00 PM

From Reuters: US Commercial property price fall most since 2000 -Moody's

Moody's said prices of retail properties have dropped 5.7 percent from their peak in 2007, compared with declines of 3.4 percent for apartment buildings and 2.3 percent for industrial real estate, respectively. Office property prices are down 2 percent from their peak, according to quarterly data.

On a monthly basis, commercial property prices fell 2.3 percent in March, the most since Moody's began collecting the data in 2000.

The CRE bust is here.

by Anonymous on 5/19/2008 10:28:00 AM

Ken Harney reports in the LAT:

The FHA, which for decades has used a one-size-fits-all approach to pricing its insurance on home loans, plans to shift to a "risk-based" system keyed to FICO scores and down payments, beginning as early as mid-July. Private-sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down-payment amounts since the mid-1990s.

The agency's move, which will cover new applications including "jumbo" loans up to $729,750 in high-cost markets through December, will bring the FHA in line with the private sector's main approach. . . .

Under the old approach, [Montgomery] noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That amounted to a pricing inequity for applicants who presented a low risk of default on loans and an inappropriate subsidy of applicants who were likely to default.

A study of an entire year's applications turned up the additional fact that the FHA's lower-income borrowers typically had higher FICO scores than those with larger incomes.

"Is it counterintuitive? Yes," Montgomery said.

According to the study, applicants with FICO scores of 680 to 850 had a median income of $48,756 last year, while those with low scores of 500 to 559 had a median income of $53,388. Fair Isaac Corp.'s FICO scores range from about 300 to 850 -- the higher, the better -- and are predictive of future defaults and foreclosures. Even at rock-bottom down payments of 3%, applicants with lower incomes had higher credit scores than applicants with bigger incomes making similar-size down payments.

I would like to get my hands on that study, which I haven't yet found online. (If any of you have a link, please drop it in the comments.) I did locate this HUD document that outlines the actual premium schedule currently proposed; it provides only one chart with aggregated information on income/FICO breakouts for 2007 FHA applicants in the Appendix. You might be interested to know that the original proposal for risk-based premium pricing distinguished between source of downpayment funds, with borrowers using such things as the notorious DAP (seller-funded "assistance") paying higher premiums than borrowers making downpayments from their own funds or a gift from relatives. That provision has been eliminated.

As far as I know, there is better data on relative performance of FHA loans with or without DAP than there is on relative performance of FHA loans with FICOs just over or just under 600. But HUD is forging ahead with FICO-based pricing while pulling back on downpayment-source-based pricing. I'm having some problems with that.

I think it's important to concede that FICOs do indeed have an established track record of establishing relative default probabilities. The trouble we have had recently with FICOs is mostly, in my view, that they were relied on to offset extremely high risk characteristics in loans with a lot of "risk layering." The problem is not that a 90% LTV loan with a 720 FICO won't outperform, statistically, a 90% loan with a 620 FICO. It will, although it isn't always clear that the difference in performance is all that substantial. The problem is that a 100% loan with a 720 FICO will not necessarily outperform a 90% loan with a 620 FICO. The idea that a high(er) FICO offsets lack of downpayment or high DTI is currently dying a painful death.

The difficulty, however, with deciding that a (theoretical) 90% loan with a 720 should pay a lower risk premium than a 90% loan with a 620 (all other things being equal) is the problem of calibration. How significant is the difference in default probability? Of course, with the FHA premiums the question is how significant the difference in default probability is in some pretty small FICO buckets that are already well within the "subprime" or high-default-probability range. For instance, in the highest-LTV group of loans, the new upfront premium is 200 bps for FICOs from 560 to 599 and 225 bps for FICOs from 500 to 559. But is there really a significant difference in default probabilities in these two FICO buckets? Enough to warrant 25 bps in premium? I would really like to see more information on how HUD calculated all this.

Part of what is bothering me is this set of charts provided in a recent Moody's investor presentation. These numbers are based on a representative sampling of loans closed between the first quarter of 2006 and the second quarter of 2007.

This is of course only one data point, but it certainly raises a question in my mind about making FICO-based premium distinctions within the general category of subprime FICOs, particularly since in the new premium scheme a loan with a downpayment made by the builder gets treated the same as a loan with a downpayment coming from the borrower's own funds. I would really like to see the work on this one.

It gets Nerdier from here . . .

by Calculated Risk on 5/19/2008 09:53:00 AM

From the WSJ: Lowe's Posts 18% Fall in Net, Lowers Earnings Outlook

Lowe's Cos. reported an 18% drop in fiscal first-quarter net income and lowered its outlook for the year ...

Looking forward, the ... company lowered its guidance ... with same-store sales expected to fall 6% to 7%.

Chairman and Chief Executive Robert A. Niblock said consumer confidence slipped during the latest quarter and discretionary home purchases were called back, reflecting "the generally poor economic outlook" due to housing pressures, rising food and fuel prices and "a more negative employment picture."

Based on previous housing downturns, there is much more pain to come for the home improvement bust. For a couple of historical charts on home improvement spending, see More on Home Improvement Investment.

by Calculated Risk on 5/18/2008 11:00:00 PM

First a great quote via CNNMoney:

"On the commercial side, best I can tell the problems are in all of it - offices, retail, hotels. I think we will see a prolonged decline."
Kermit Baker, chief economist for the American Institute of Architects, CNNMoney May 17, 2008

Wow. Clearly Kermit Baker is not a NAR economist! I think he is correct, and here is my analysis of three key categories of commercial: office buildings, multimerchandise shopping, and lodging with some estimated declines in investment.

And from a Reuters article: Retail properties dressed for distress

The retail sector is expected to soften through 2009, according to a report by real estate brokerage Marcus & Millichap. The report, obtained by Reuters, forecasts the overall retail real estate vacancy rate will rise 1.4 percentage points this year to 11.1 percent, after a 0.9 percentage-point increase last year.
...
While demand slows, the supply of new shopping centers is expected to continue to grow, albeit at a slower pace. Marcus & Millichap forecasts about 131 million square feet of new shopping centers should be completed this year, down from 145 million square feet in 2007.
...
Properties in once-hot residential markets of southwest Florida; the California's Inland Empire areas, such as Riverside and San Bernardino; Phoenix; and Las Vegas are of particular concern.

"In some of those markets, what you saw were properties that were built to service a consumer base that never materialized," [Spencer Haber, chief executive of H2 Capital Partners] said.

Another great quote: "a consumer base that never materialized".

For more, here is my recent and somewhat lengthy overview on CRE.

by Calculated Risk on 5/18/2008 08:58:00 PM

From the WSJ: PIK and Roll: Companies Seize On Perks of Loose Lending Terms

Last week costume-jewelry retailer Claire's Stores Inc. told investors it intends to pay interest on $350 million of its bonds with additional debt rather than cash.
...
Seven companies have flipped the switch on $2.4 billion in PIK-toggle bonds, according to Standard & Poor's Leveraged Commentary & Data. Univision Communications Inc., which recently tapped its revolving-credit agreement with banks for $700 million in cash, also may switch to paying interest on some of its PIK-toggle bonds with debt, a Fitch Ratings report suggested.

Bonds with PIK (payment-in-kind) toggles are the NegAms of the corporate world. Paying debt with more debt can't be a good thing. This shows how loose the lending standards were for corporate debt.

by Anonymous on 5/18/2008 05:25:00 PM

Thanks to Clint for this terrifying story in The Oregonian:

Fitzsimons, of Prineville, started his first residential construction company, called Sunrise Northwest, when he was 19. In August 2004, he joined forces with close friend Shannon Egeland, co-founding Desert Sun. . . .

At its peak, Desert Sun employed more than 110 people. The company's success enabled Fitzsimons to buy expensive toys, including a 2006 Ferrari 430 Spider, boasting a base ticket price in excess of $200,000.

Desert Sun had no retirement plan, but it did offer the employee homeownership program, which its Web site likened to a 401(k).

The plan seemed straightforward enough: Desert Sun would build a home for employees, taking care of design, materials and construction. Employees could buy the completed home from Desert Sun at cost and assume monthly mortgage payments, or sell it and split proceeds 50-50 with the company. . . .

The Desert Sun plan was not without risk for participants. The company pledged to cover all costs, but to fund the building, employees had to take out construction loans in their own names. . . .

Deschutes County property records indicate that the company enjoyed six-figure profits on the sales of some of the lots.

On July 5, 2007, for example, Desert Sun Holdings bought lot 24 in the Village Meadows subdivision in Sisters from Redmond-based Allen-Rose Homes for $155,000. That same day, the company flipped the lot to employee Roger Howell for $269,900.

And, of course, this all seems to have been effected by fraudulent mortgage applications. Read the whole thing, but put down your drink before the last paragraph.

by Calculated Risk on 5/18/2008 03:21:00 PM

Note: Don't miss Tanta's take this morning on: Shiller on the Psychology of Foreclosure

It is difficult to compare monthly housing starts directly to sales. The monthly housing starts report from the Census Bureau includes apartments, owner built units and condos that are not included in the New Home sales report. However, every quarter, the Census Bureau releases Starts by Intent, and it is possible to compare "Single Family Starts, Built for Sale" to New Home sales.

Click on graph for larger image.

This graph compares quarterly starts of single family homes built for sale (and completions of single family homes built for sale in red) with New Home sales.

This data is not seasonally adjusted for any series. There are clear seasonal patterns for all series, and completions lag starts by about 6 months.

The period of significant overbuilding in recent years is highlighted. It now appears that starts are running below sales, and completions have fallen to the level of sales. Note: when adjusted for cancellations, completions are probably also below sales, and the inventory of New Homes is finally declining.

The second graph shows the quarterly starts by intent at an annual rate through Q1 2008. This shows 1) Single Family starts built for sale, 2) Owner built units, 3) Units built for rent, and 4) Condos built for sale.

As of Q1, Single Family starts built for sale, had declined to about 460 thousand on a non seasonally adjusted annual rate (a little over 500 thousand seasonally adjusted). As noted above, this level of starts is below the current level of New Home sales.

Starts for Owner built units has fallen to the lowest level since the severe recession of 1982.

And starts for condos has fallen significantly - just slightly above the average level of the '90s.

Rental units are the lone bright spot, and it was rental units that accounted for the small increase in overall starts for April. This despite the near record rental vacancy rate of 10.1%.

There is still a huge overhang of existing home inventory for sale (especially distressed inventory including short sales and REOs), and until that inventory declines significantly, starts and housing prices will remain under pressure. However this report does provide some minor positive news for starts - especially starts for single unit structures.

by Anonymous on 5/18/2008 12:07:00 PM

Gather 'round, children, because Tanta is about to engage in a curiously hard-headed look at an editorial by a famous economist that demands, in every sincere and decent sentence, our kindness and compassion instead. This is blogging at its finest: nobody should get away un-pissed-off about something. And on a Sunday, too.

It's also long blogging at its finest. You knew I'd have to try to figure out how to use the Read More thingy eventually . . .

* * * * * * * *

The editorial in question is by Robert J. Shiller, who is a professor of economics and finance and famous analyst of speculative bubbles. A specialist in behavioral economics, in the application of psychology to understanding financial markets. A co-founder of Case Shiller Weiss, that house price index we talk about a lot. His editorial, "The Scars of Losing a Home," speaks not of lofty academic economic concepts but of human sympathy, of things that are "really important." With references from famous academic psychologists. I haven't taken this kind of a tiger by the tail since I went after Austan Goolsbee last year.

Yes, it was only a year ago that the distinguished Dr. Goolsbee wrote this on the same editorial page:

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

I actually think Goolsbee's piece was the high-water-mark of the "subprime helps the poor" talking point. You certainly don't hear much about that these days. Less than two months after Dr. Goolsbee's earnest op-ed, we got an interview in the very same NYT with one Bill Dallas, CEO of the famously defunct Ownit Mortgage, effusively testifying to his own burning desire to help out the unfortunate in a way that finally put paid to the respectability of that line ("'I am passionate about the normal person owning a home,' said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. 'I think owning a home solves all their problems.'") Plus by now we've got some numbers on the 2007 mortgage vintage, the one that Dr. Goolsbee was afraid wasn't going to ever materialize if we tightened up lending standards too much. A year ago we were looking at a 13% subprime ARM delinquency rate. Per Moody's (no link) the Q4 07 subprime ARM delinquencies were running 20.02%. And that is not, you know, "just" another 7%. By now, those delinquent borrowers in Goolsbee's 13% have probably mostly been foreclosed upon and are off the books. The 20% or so who are now delinquent were either part of the 87% that Goolsbee thought were "successful homeowners" last year, or else they're those lucky duckies who bought homes after the publication date of Goolsbee's plea that we not tighten standards too much.

Of course Shiller wasn't exactly spending his time a year ago defending the subprime mortgage industry on the grounds that it put poor and minority people into ever-so-humble homes with balloons attached. I seem to recall him mostly arguing that homebuyers were engaged in a speculative mania. In a June 2007 interview:

Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it'll go up. It's the easiest way to get rich.

At the time, that kind of statement struck some of us, at least, as not possibly the entire story either, but in any event a useful corrective to the saccharine silliness of the "Ownership Society" and Bill Dallas solving everyone's problems by letting them put Roots in a Community (for only five points in YSP).

So I hope I can be just a tad startled by the New Shiller:

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

So it's no longer irrational exuberance or plain old speculating; it's now an instinctive affirmation of some eternal verity of the human psyche? The ultimate patriotism: the definition of self so tied up in ownership of a slice of the motherland that to rent becomes not only psychologically dangerous--these people without selves can't be up to anything good--but politically dangerous as well? Is it possible that Shiller can mean what he is writing here?

If you just scanned the first few paragraphs of Shiller's op-ed you might come away with the impression of a sincere but somewhat hackneyed plea for us all to have a bit of sympathy for the foreclosed among us, foreclosure not in anyone's experience being a walk in the park. Fair enough. It being Sunday in America, I suspect millions of us are being treated to exhortations to take a kinder view of the unfortunate than we often do; we need those exhortations; we are often lacking in sympathy. Hands up all who disagree.

But you keep reading and you find Shiller trying to explain the "trauma" of foreclosure. And that's where this really gets weird:

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

We need to modify mortgage contracts to keep homeowners from becoming cynical? That's somehow more respectable an idea than the one saying we should throw them out on the street to "teach them a lesson"? If Shiller is serious that all those other parties are "to blame," then why isn't the obvious solution to throw them out on the street? There seems to be an assumption here that nothing can be done to punish those who are "really" to blame, so we're left managing the psyches of those who can be punished. And that's not cynical?

This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the "fundamental" psychology of homeownership:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Now, that's breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the "Self" (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn't find some psychological insight about the emotional relationship of people to their homes that doesn't speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?

(James on the psychological effect of losing one's property: " . . . although it is true that a part of our depression at the loss of possessions is due to our feeling that we must now go without certain goods that we expected the possessions to bring in their train, yet in every case there remains, over and above this, a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness, which is a psychological phenomenon by itself. We are all at once assimilated to the tramps and poor devils whom we so despise, and at the same time removed farther than ever away from the happy sons of earth who lord it over land and sea and men in the full-blown lustihood that wealth and power can give, and before whom, stiffen ourselves as we will by appealing to anti-snobbish first principles, we cannot escape an emotion, open or sneaking, of respect and dread.")

I'm actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.

It is undeniably true, I assert, that not everyone was a speculatin' spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class "homeowner." But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.

It's worse than odd--it's downright reactionary--to then go on to that evocation of homeownership as good citizenship and good citizenship as "feel[ing] at one with [the] country." This puts a rather sinister light on Shiller's earlier insistence that we need to make sure people don't get too "cynical."

I see that Yves at naked capitalism was just as disgusted by Shiller as I am:

Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.

Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we'll pursue efficiency that first cost blue collar jobs, and now that we've gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).

But efficiency arguments don't apply to housing since we are sentimental about it. And it's that sentimentality that bears examination, since it engendered policies that helped produce this mess.

I would only add that we are about five years too far into a war that has not made a majority of us "feel at one with that country." I think of another really important policy change we could be pursuing right now to shore up everyone's psychological estrangement from their patriotic self-satisfaction. But "efficiency arguments" don't apply to wars, either.

My fellow bleeding heart liberals like Goolsbee found themselves defending the subprime industry in the name of increasing minority homeownership. Now we're treated to the spectacle of Shiller arguing for homeowner bailout legislation in the same terms that Bush used to defend the "Ownership Society." Housing policy, I gather, makes strange bedfellows. It certainly makes strange editorials.

Read on . . . if you dare . . .