by Calculated Risk on 6/11/2008 10:18:00 AM

It appears the MBA Purchase Index might be useful again. Note: the index wasn't useful when lenders were going out of business because of the method used to calculated the index.


The MBA reports that the Purchase Index increased 12.8 percent to 376.2 from 333.6 one week earlier. The four week moving average (removes the weekly noise) declined, and is at the lowest level since early 2003. Because of the changes to the index, we can't compare directly to 2003, but clearly the index is weak.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index, and four week and twelve week moving averages.

Although we can't compare directly to earlier periods because of the changes in the index, this does suggest that sales of homes are continuing to decline.

by Calculated Risk on 6/11/2008 09:52:00 AM

From Professor Duy: Fed Watch: Between a Rock and a Hard Place

Fedspeak turned decidedly hawkish this week, and market participants responded accordingly, moving up expectations for a rate hike to as early as this August. But is Federal Reserve Chairman Ben Bernanke really ready to follow through? The answer could make or break the Dollar in the coming weeks.

Tim covers the current situation, the recent Fedspeak, the arguments for and against raising rates and keep rates steady - and the politic issues. Duy concludes:

Bottom Line: The Fed has no one to blame for their predicament but themselves. Bernanke & Co. cut rates too deeply, fighting a battle against deflation that never was. Now they are backed into a corner; either raise rates and risk upsetting a very fragile economy, or stay the path and risk the inflationary consequences. If the Fed is truly concerned about the Dollar and commodity prices – and their open talk about currency values implies real and serious concerns – Bernanke will have to follow through with his newfound hawkish side. The bluntness of Fedspeak looks to signal a dramatic shift in thinking on Constitution Ave., and that argues for a rate hike by September, earlier than I had previously expected, and I cannot rule out an August move. Such a move is not without considerable risk for the economy.

The Fed is still data dependent, and unless the economic numbers improve, it seems unlikely the Fed will raise rates. But, as Tim notes, the Fedspeak has turned decidedly hawkish.

by Calculated Risk on 6/10/2008 11:04:00 PM

From the WSJ: Some Buy a New Home to Bail on the Old

Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine ...

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.
...
The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae.
...
Under revised Fannie Mae guidelines, which could take effect next week, loan applicants who claim they will rent out their first home will have to produce supporting evidence, including an executed lease agreement. Borrowers also will have to prove that they can pay the mortgage, property taxes and insurance for both residences.

So far there are only a few anecdotal reports of "buy and bail", so this might be much ado about nothing. This is certainly fraud (if they sign a false loan document). But just like fraud for housing (when people lie about their income to buy a home), this type of fraud is almost never prosecuted - and extremely difficult to prove, unless someone tells a reporter what they're going to do.

by Calculated Risk on 6/10/2008 06:09:00 PM

The buzz on the street is that the Fed might raise the Fed Funds rate 25 bps at the August meeting.

Click on graph for larger image in new window.

Here are the probabilities from the Cleveland Fed. As of yesterday, the market was still expecting no move in June - with the odds of a 25 bps rate hike increasing only slightly.

But all the tough talk about inflation and supporting the dollar is getting some attention.

The 2nd graph shows the August meeting probabilities as of yesterday.

As of yesterday, the implied probability of a 25 bps rate hike in August was below 40%.

However, according to a private calculation (using the August Fed Funds future contract), the odds of a 25 bps rate hike increased to over 70% today!

Raising rates with unemployment rising, and the economic risks to the downside, seems very unusual - but that is what the market expects.

by Anonymous on 6/10/2008 02:29:00 PM

Our soberer readers (I know we have them) will remember California Congresswoman Laura Richardson (D-Speculator), who is facing foreclosure proceedings on three homes. The uproar began with the foreclosure of sale her unoccupied "second home" in Sacramento, which Richardson claimed was an "error" on WaMu's part, since (she claimed) she had worked out a last-minute modification agreement with WaMu the week before the sale. According to the Daily Breeze, WaMu has filed paperwork to rescind the foreclosure sale, and the man who bought the home is not happy:

The real estate broker who bought Rep. Laura Richardson's house at a foreclosure sale last month is accusing her of receiving preferential treatment because her lender has issued a notice to rescind the sale.

James York, owner of Red Rock Mortgage, said he would file a lawsuit against Richardson and her lender, Washington Mutual, by the end of the week, and has every intention of keeping the house.

"I'm just amazed they've done this," York said. "They never would have done this for anybody else."

York bought the Sacramento home at a foreclosure auction on May 7 for $388,000. Richardson had not been making payments on the property for nearly a year, and had also gone into default on her two other houses in Long Beach and San Pedro.

Richardson, D-Long Beach, has said that the auction should never have been held, because she had worked out a loan modification agreement with her lender beforehand and had begun making payments.

Richardson continues to refuse to authorize WaMu to release any information on her case, although frankly I'm not sure if I were WaMu I'd want to talk about it. This smells terrible, indeed. Perhaps reporters could simply ask some general questions of WaMu about its foreclosure workout policies. Like:

• How often are modifications or repayment plans offered to owners of vacant investment properties with no or negative equity that have never been listed or rented?
• How often are modifications offered to borrowers with two other properties currently in foreclosure?
• How often are modifications arranged in the week before the scheduled trustee's sale, following nearly a year of no contact?
• Does WaMu's policy on modifications make any reference to requiring a "commitment to homeownership" on the borrower's part? How, normally, is that established?
• Does WaMu's policy on modifications make any reference to establishing that the borrower does not display a "disregard for debt obligations"? How, normally, is that established?

If, for instance, we had some evidence that stiffing creditors and getting the taxpayers to subsidize her financial imprudence was, like, a pattern of Richardson's long before the house payments went into default, would that, like, indicate that her mortgage problems may not have much to do with "extenuating circumstances"? WaMu may not be able to read a credit report, but the Press-Telegram ferreted this out:

In 2005, when she was still on the Long Beach City Council, she left one mechanic in a lurch with an unpaid bill, then later had her badly damaged BMW towed to an auto body shop but didn't pay for any work and abandoned the car there, owners of the businesses said this week.

The next day, Richardson began using a city-owned vehicle - putting almost 31,000 miles on it in about a year - and continued driving the car five days after she had left the council to serve in the state Assembly, city records show. . . .

Labreche said he spent months leaving messages on Richardson's cell phone voice mail, then he got a collection agency involved, but still the bill went unpaid. . . .

In December 2005, Lillegard filed for a mechanic's lien on Richardson's car to pay the towing, storage and administrative costs, he said. Lillegard said the lien was finalized in February 2006 and he sold the car to a junkyard, though a few days later - too late - Richardson sent him money to put toward the bill.

So in January of 2007, WaMu gave Richardson a 100% loan to purchase a second home, when her credit report would have shown recent derogatories related to the car repair bills, plus the payments on two other homes, on a State Assembly salary that I can't quite see being equal to her existing debts, let alone a new house payment. In other words, she got your basic subprime loan that relied on nothing other than a fervent belief in endless house price appreciation--in January of 2007. Or else she got a loan because she's a VIP.

I continue to want to know why WaMu is bailing out a deadbeat and a speculator at the expense of a good-faith buyer of a foreclosure property, and wasting operational capacity on a deal like this instead of working with struggling owner-occupants who might actually pay back the modified loan. I will leave it to the citizens of California to explain why you want this woman anywhere near fiscal, budgetary, or housing policy power.

(Hat tip to Brian!)

by Calculated Risk on 6/10/2008 12:37:00 PM

There is a growing concern that interest reserves are masking problems with Construction & Development (C&D) and Commercial Real Estate (CRE) loans. In their Summer 2008 Supervisory Insights released today, the FDIC provides a primer on interest reserves.

Interest reserves are common for new construction projects. Basically the lender loans the developer enough to build the project, and then loans the developer the interest payment each month during the development phase.

Although potentially beneficial to the lender and the borrower, the use of interest reserves carries certain risks. Of particular concern is the possibility that an interest reserve could mask problems with a borrower’s willingness and ability to repay the debt consistent with the terms and conditions of the loan obligation. For example, a project that is not completed in a timely manner or falters once completed may appear to perform if the interest reserve keeps the troubled loan current. This is a much different scenario from most credit transactions in which cash flow problems are eventually reflected in late or past-due payments and sometimes even in nonpayment. A loan with a bank-funded interest reserve would not exhibit these warning signs.

With little potential for monetary default during the interest reserve period, some lenders may delay recognizing and evaluating the financial risks in a troubled ADC loan. In some cases, lenders may extend, renew, or restructure the term of certain ADC loans, providing additional interest reserves to keep the credit facility current. As a result, the true financial condition of the project may not be apparent and developing problems may not be addressed in a timely manner. Consequently, a bank may end up with a matured ADC loan where the interest reserve has been fully advanced, and the borrower’s financial condition has deteriorated. In addition, the project may not be complete, its sale or lease-up may not be sufficient to ensure timely repayment of the debt, or the value of the collateral may have declined, exposing the lender to increasing credit losses.
emphasis added

This happens every down cycle. The interest reserves are masking the problems with C&D loans - usually because of the inability of the developer to sell or lease the developed property - and suddenly the noncurrent loans at financial institutions increase dramatically. This has just started happening:

[The acquisition, development, and construction] loan segment almost tripled, from $231 billion to more than $600 billion, and grew from 9 percent to 13 percent of total real estate loans from 2001 to 2007. Delinquency rates for the ADC portfolio were historically low during much of this time. However, credit quality began to show signs of weakening in 2006 as the level of noncurrent ADC loans began to rise. By year-end 2007, noncurrent loans had reached 3.15 percent—the highest level in more than 10 years—and more than triple the rate for other commercial real estate loans.

A rapid rise in noncurrent ADC loans, combined with the heavy concentration at certain institutions of CRE and C&D loans, will probably be the main reason for a large number of bank failures over the next couple of years.

As an aside, the FDIC argues interest reserves "might not be appropriate" for certain transactions, including:

Loans secured by income-producing rental properties (residential or commercial) that should be amortizing.

It was just yesterday that we discussed the interest reserve in Lehman's investment in Archstone-Smith. If Lehman was regulated by the FDIC that structure would probably be considered too risky and inappropriate.

by Anonymous on 6/10/2008 11:28:00 AM

Well Glory Be. FHA Commissioner Brian Montgomery, that well-known Ownership Society Koolaid drinker, went before the National Press Club yesterday and made noises to the effect that FHA will resurrect its efforts to rid the world of the DAP scourge:

The Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans, officials said Monday.

Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years. . . .

But Mr. Montgomery warned that the F.H.A. would have to renew its efforts to end the seller-financed down payment program, which accounted for 35 percent of its loans in 2007.

He said the mortgages had foreclosure rates three times those of traditional loans and would push the F.H.A. to the brink of insolvency.

“Let me repeat: F.H.A. is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”

The Times writer notes that FHA has tried for years on end to get rid of this practice without success. However, the explanation of what these programs really do isn't very helpful. I call them "DAP" (Downpayment Assistance Program) because that's the term HUD uses, and the term you will find in the HUD-sponsored research on the performance of these loans. The term "seller financed" isn't exactly helpful; if we are to use our own term for these deals, I'd suggest "seller money laundered" instead.

I have written about DAP loans and the effort to get rid of them before. Here's an UberNerdly post explaining how the loans work. Here's a post from a year ago summarizing the long tedious and ultimately unsuccessful efforts of the HUD Inspector General to get rid of the program. Let us all devoutly hope that it will work this time.

by Calculated Risk on 6/10/2008 10:50:00 AM

From the NY Times: A Shift in Real Estate Books

A few years ago, when the housing market was white-hot, companies that publish how-to books were tripping over themselves to pump out titles about buying property and making money in the real estate business.

Now that the bottom has fallen out of the housing market, the opposite is true: publishers are updating their backlist titles as well as rushing out newly acquired manuscripts to advise consumers who may have stumbled in the housing game.

These two covers tell the story.

From "Flipping Houses" to "Foreclosure Investing" in just a couple of years.

And, yes, both books are by the same authors.

by Calculated Risk on 6/10/2008 09:13:00 AM

From the WSJ: Oil Prices Push Trade Gap Wider

The U.S. deficit in international trade of goods and services increased by 7.8% to $60.90 billion from March's revised $56.49 billion, the Commerce Department said Tuesday.
...
The U.S. bill for crude oil imports in April increased. It totaled $29.34 billion, up from $25.03 billion in March. The average price per barrel increased by $6.96 to a record $96.81 from $89.85.
...
The U.S. paid $38.19 billion for all types of energy-related imports, up from $33.15 billion in March.
...
The U.S. trade deficit with China expanded to $20.24 billion from March's $16.08 billion.

The average price per barrel of oil was $96.81 in April - and the current world spot price is around $136 per barrel - so oil import prices will increase over the next few months.

The following graph shows import prices vs. U.S. spot prices (shifted one month into the future).

Click on graph for larger image in new window.

Since import prices lag spot prices by about one month, import prices will probably jump to around $102 per barrel for May - and $116 per barrel in June (based on May spot prices).

Any progress on reducing the trade deficit, due to the weak dollar, is now being offset by rising oil prices.

by Calculated Risk on 6/10/2008 12:38:00 AM

Click on graph for larger image in ewn window.

The Shanghai Composite Index is off over 5% tonight to 3140.

From MarketWatch: China, Hong Kong drop in reaction to new bank rule

Asian markets traded broadly lower Tuesday, led down by Shanghai and Hong Kong, where banking and property shares fronted declines as investors fretted about the impact of the latest round of anti-inflationary measures announced over the weekend.

And also from MarketWatch: China takes aim at inflation, speculative fund flows

The People's Bank of China said over the weekend that it would require banks must put aside 17% of deposits as reserves, effective June 15. A second hike to 17.5% will go into effect June 25, for a total rise of 100 basis points above the current requirement of 16.5%.