by Calculated Risk on 8/07/2008 10:02:00 AM

From the NAR: Pending Home Sales Rise

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in June, rose 5.3 percent to 89.0 from a downwardly revised reading of 84.5 in May, but remains 12.3 percent below June 2007 when it stood at 101.4.

The pending home sales index has been between 83 and 90 for almost a year. This shows the impact of foreclosure sales - according to the NAR, "short sales and foreclosures [account] for approximately one-third of transactions". This foreclosure activity will probably keep existing home sales (and the pending home sales index) elevated for some time.

by Anonymous on 8/07/2008 09:40:00 AM

From the Boston Globe:

The credit warnings reported by the Times came not long after Syron arrived in 2004 to fix Freddie, reeling from an accounting scandal in which executives misstated some $5 billion in earnings. In addition, Freddie's commitment to affordable housing had declined to the point it employed gimmicks to meet congressional goals.

For example, said Syron, Freddie would essentially rent loans to meet affordable housing goals, buying them from lenders to carry on the books at year end, then selling them back. Syron ended that practice and re-emphasized the housing mission.

That put him in conflict with other executives, who believed Freddie's most important duty was to ensure investments were safe and sound. The chief risk officer at the time, David A. Andrukonis, warned Syron the loans Freddie was buying risked the financial position and reputation of the company and the country, the Times reported.

But Freddie had to balance the risks against affordable housing goals, Syron said. Andrukonis and other executives disagreed on that balance, he said. Andrukonis was later fired, Freddie officials said.

"The place didn't have enough orientation towards its housing mission," Syron said, "and he disagreed with that approach." Andrukonis couldn't be reached.

This certainly puts matters in a different light. Syron is claiming that when he arrived at Freddie Mac, Freddie was "gaming the system" on affordable housing loans. It was buying pools of these loans, but carrying them only long enough to count them in its year-end affordable housing goals. In the new year, it would sell them back to lenders.

In Syron's version of the story, Andrukonis was advocating that Freddie continue this practice in the name of reducing the risk to Freddie Mac. Syron, on the other hand, felt that Freddie had to take the risk of keeping the affordable housing loans it bought, since that was the whole point of the mandate for the GSEs to buy a certain amount of these loans every year. In this version of events, what Syron was "ignoring" was not the claim that these loans were risky, but the claim that Freddie could avoid this risk just by engaging in "round-trip" transactions that served no economic purpose except fluffing up Freddie Mac's affordable housing goal numbers.

If Syron's version is anywhere near the truth, we have yet more evidence that no good deed ever does go unpunished.

(Thanks, Arnold!)

by Anonymous on 8/07/2008 08:51:00 AM

The Wall Street Journal continues our run of bad news about the 2007 mortgage vintage:

An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months. The data reflect delinquencies as of April 30. . . .

Data on other classes of mortgages suggest the same trend. Freddie Mac reported Wednesday that 1.38% of the 2007-vintage loans it purchased were seriously delinquent after 18 months compared with 0.38% of 2006 loans at the same point in their life. Freddie Mac generally purchases loans made to creditworthy borrowers.

Last month, J.P. Morgan Chase & Co. said it expects losses on prime mortgages that weren't securitized and remain on its books to triple from current levels. The increase in bad loans is driven mostly by jumbo mortgages originated in the second half of 2007, a company spokesman said. . . .

Economists and industry officials say several factors may account for the dismal performance of the class of 2007. Home prices were falling sharply in much of the country by 2007, meaning many borrowers who took out loans in that year for nearly the full price of the home now owe more than the home is worth. These borrowers are particularly vulnerable to a weakening economy, and have difficulty selling or refinancing if they lose their job.

Questionable business practices may have played a role, too. Some of the 2007 loans "were knowingly originated as really bad loans," says Chris Mayer, a professor of real estate at Columbia University's business school. Mortgage originators who profited handsomely from the housing boom "realized the game was completely over" and pushed mortgages out the door, says Mr. Mayer.

As credit began to tighten last year, some mortgage brokers and borrowers tried to circumvent tougher restrictions by inflating borrowers' credit scores and appraisal values, says Jay Brinkmann, vice president of research and economics for the Mortgage Bankers Association.

No doubt all of these factors are in play, even though I'm not yet convinced that they were that much more in evidence in 2007 than in 2006.

It seems to me that one thing that would help us understand this marked difference in performance between these two vintages is an analysis of the "cure" rate and method of cure of the 2006 vintage delinquent loans, as well as some analysis of the actual loan life (number of months to payment in full) of the higher-risk 2006 loans. I think we need this before we conclude that either the 2007 vintage contained worse loans than 2006 or that house price depreciation itself is an unproblematic "cause" of the elevated early delinquencies in 2007.

What I am saying is that when you compare two vintages like this, you want to know whether the loans in the earlier vintage experienced a lower serious delinquency rate because fewer of those loans were "bad," or because more of those loans had an "exit" short of foreclosure when they went bad. Another way to say this is that we are not simply asking about what origination practices or loan characteristics were at the time of origination of these loans; we are looking at what mortgage market (and RE market) conditions are at the time of first delinquency of these loans.

I am personally not ready to believe, without more data, that inflated FICOs, inflated appraisals, fraudulent income claims, etc. were more prevalent in the 2007 vintage than in 2006. I think it's possible that the marked difference in the early serious delinquency rate is more a function of the choices that a delinquent borrower had in mid-2007 compared to mid-2008. Assuming for the sake of argument that these two vintages were of either comparable quality at origination--or that the 2006 vintage was even worse at origination than 2007--you can still get a higher serious delinquency rate at 18 months for the 2007 vintage just because at 18 months out, 2006 borrowers could still refinance, get a HELOC, or sell their homes when they were still current or only mildly delinquent. No doubt some of those 2006 borrowers refinanced--in 2007, meaning that they just got "revintaged." But the 2007 vintage is hitting its 18-month history right now, when they cannot "escape" into the 2008 vintage or sell or get a HELOC to make first-lien mortgage payments with.

That's just a way of saying that credit tightening will in the nature of things--along with home price drops--increase the serious delinquency rate of a book of mortgages compared to earlier books even if the original credit quality is similar across books. The classic metaphor is "musical chairs."

One thing that was in the Freddie Mac investor slides we didn't look at yesterday was some data on "roll rates" from 2007-2008. I sure wish we had comparable charts from 2006 for comparison purposes. The "roll rate" is the percentage of loans that were in a given status last month and a given status this month. For instance, the "30 to 60" roll rate tells you what percentage of loans that were 30 days delinquent last month became 60 days delinquent this month. You need to bear in mind that a couple of things could have happened to the loans that didn't "roll to 60": they could have become current (the borrower caught up on the missing payment), or stayed at 30 days (the borrower made the next month's payment but never caught up on the missing payment). When you begin to get into the roll rate of serious delinquences, especially 90 to FC, you can also have loans that didn't roll to the next status because of a workout (modification, forbearance, repayment plan).

These roll rates are based on Freddie's total portfolio, not just the 2007 vintage. What they show is that roll rates from 30 to 60 and 60 to 90 increased from January 2007 to June of 2008 for any loan in Freddie's total portfolio in that delinquency category. The 90 to FC roll rate also increased, but seems to have hit a plateau in 2008. I suspect that is because of Freddie's major efforts in the workout department.

But very few if any 30-day or 60-day loans get workouts. Loans that "cure" from a 30-day or 60-day delinquency are almost exclusively a matter of the borrower making up missed payments from his or her own funds, whatever the source of those funds. One possible explanation of the rising roll rates here is that those funds in at least some cases were coming from HELOCs or credit cards until those got maxed out or frozen. Again, that doesn't necessarily mean that the loans that rolled to serious delinquency were "worse" at origination than the loans that cured; it may simply mean that the most recently-originated loans had fewer opportunities to avoid serious delinquency.

Roll rate analysis like this has a major drawback: it doesn't tell you about prepayments. Roll rates are calculated on how many loans you still have on your books today that were in a certain status last month. It is possible to have a rising roll rate but a more stable delinquency rate: the loans you still have on the books get worse (roll to a more serious delinquency at a higher rate), but if at the same time a lot of loans that were mildly delinquent last month paid off this month, your total percentage of seriously delinquent loans can be unchanged or rise at a much slower rate than your roll rate.

We do know that 2006 vintage loans prepaid at a faster rate than 2007 vintage loans. One way of looking at the matter is that you simply have to expect delinquency levels to be higher for 2007 than for 2006 simply due to loan life: the fewer high-risk-at-origination loans in the vintage that refinance (or sell the home) in the first 18 months, the higher the serious delinquency rate will be just because these loans got old enough to go bad.

We have to think about that because we have to understand that the process of credit tightening inevitably forces delinquency rates up. This is the thing that a lot of our politicians just don't get: you cannot "return to sane lending standards" and still prevent the "insane" loans from earlier vintages from ending up in foreclosure. You have to consider the possibility that at least some of the nasty performance of the 2007 vintage is a function of lenders having originated fewer high-risk loans in 2007 than in 2006, not more. It's just that the bad loans they didn't originate in 2007 were things like HELOCs that 2007 borrowers might have used to stave off serious first-lien delinquencies in the first 18 months of their loan lives. Obviously any first-lien loan that basically requires the availability of high-CLTV HELOCs in order to perform for a year and half is not a "good" loan. I'm just not sure that more of that kind of loan was originated in 2007 than 2006. I think it's possible that more of them are getting "flushed out" earlier because of credit tightening in 2008 is putting a stop to their ability to limp along as earlier vintages did.

by Calculated Risk on 8/06/2008 09:32:00 PM

From the NY Sun: Commercial Rental Rates Plummet in Manhattan

The slowdown in the real estate market is finally hitting New York office space ... Asking rent declined 2.2%, to $69.29 a square foot, while Class A rents plummeted 4.4%, to $90.65, according to Studley's second-quarter market report ...

Meanwhile, the availability rate jumped half of a percentage point, to 8.2% — nearly a full percentage point higher than a year ago. ... the supply of sublet space is increasing, up 34% versus the prior quarter, to 8.3 million square feet.

Sublease space really hurt the NY commercial market in the previous downturn, and it appears to be happening again.

And all those CMBS - with the assumed yearly rent increases - are about to discover what happens when vacancy rates rise and rents decline.

Click on graph for larger image in new window.

Most of the CMBX indices are near new record lows again.

Note: Up is down for the CMBX indices. The CMBX is quoted as spreads, whereas ABX is quoted as bond prices. When the spreads increase - chart going up - the bond prices are going down.

This graph is the CMBX-NA-BB-4 close today.

by Calculated Risk on 8/06/2008 06:25:00 PM

From Bloomberg: AIG Posts Third Straight Quarterly Loss on Housing

American International Group ... posted a $5.36 billion loss as writedowns tied to the housing slump wiped out profit for a third straight quarter. ...

The insurer reduced the value of credit-default swaps, guarantees AIG sold to protect fixed-income investors, by $5.56 billion and marked down other holdings by $6.08 billion before taxes.
...
The biggest insurers in the U.S. and Bermuda posted more than $77 billion in writedowns linked to the collapse of the mortgage market from the start of 2007 through the first quarter, with AIG representing about half that total.

The confessional is still very busy.

by Calculated Risk on 8/06/2008 05:31:00 PM

From auto lender AmeriCredit: AmeriCredit Reports Fourth Quarter and Fiscal Year 2008 Operating Results

AmeriCredit today announced a net loss of $150 million ...

The allowance for loan losses as a percentage of receivables increased to 6.3% at June 30, 2008, from 5.7% at March 31, 2008.
...
Originations were $780 million for the quarter ended June 30, 2008, compared to $2.51 billion for the same quarter last year.
...
"We have taken proactive steps to conserve liquidity and position the business to withstand the weak macroeconomic environment and the dislocation in the capital markets," said AmeriCredit President and Chief Executive Officer Dan Berce.

Wow. Originations were off almost 70% compared to the same quarter last year. Talk about less lending.

by Calculated Risk on 8/06/2008 04:03:00 PM

UPDATE: Newer table showing round trip on lending standards.

Brian has sent me this table (from UBS) summarizing the percentage of high LTV (loan to value), and low FICO loans made by Fannie and Freddie each year.

Click on table for larger image in new window.

UBS commented:

"We expect the delinquencies to rise considerably further, given the deterioration of the GSE book of business in 2007. As the non-Agency markets shut down in 2007, conforming product that had risk layering came into Agency space.
...
No matter what box one looks at, the results are the same - in the first 8 months of 2007, the % of Freddie and Fannie issuance with risky characteristics rose considerably. ... It is well documented that increased risk layering causes losses to multiply."

by Calculated Risk on 8/06/2008 03:43:00 PM

From Bloomberg: Pimco's Gross Says U.S. Will Rescue Fannie, Freddie (hat tip Yal)

``By the end of the third quarter, the preferred stock in Fannie and Freddie will be issued, the Treasury will have bought it,'' Gross, co-chief investment officer at Pacific Investment Management Co., said today in an interview on Bloomberg Television. ``We'll be on our way toward a joint Treasury-agency combination.''
...
The government will probably buy $10 billion to $30 billion of preferred stock, Gross said.

This will probably happen the first week of September since I'll be on a hiking trip! No worries - Tanta and friends will have it covered.

by Calculated Risk on 8/06/2008 01:21:00 PM

Here is another index to track; the Restaurant Performance Index from the National Restaurant Association (NRA). (hat tip Lyle)

From the NRA: Restaurant Performance Index Declined in June as Same-Store Sales and Customer Traffic Slipped

"The June decline in the Restaurant Performance Index was the result of a drop in the current situation component," said Hudson Riehle, senior vice president of research and information services for the Association. "Restaurant operators reported negative same-store sales and customer traffic levels in June, after posting somewhat stronger results in May."

"The uncertain economy and rising food costs continue to create a challenging business environment for restaurant operators," Riehle added. "A record 29 percent of restaurant operators said the economy is the number-one challenge facing their business, while 22 percent identified food costs as their top challenge."

Click on graph for larger image in new window.

Unfortunately the data for this index only goes back to 2002.

The index values above 100 indicate a period of expansion; index values below 100 indicate a period of contraction.

Based on this indicator, the restaurant industry has been contracting since mid-year 2007.

by Calculated Risk on 8/06/2008 12:18:00 PM

On Alt-A from Brian:

[Freddie has] $190B of Alt-A in the guarantee portfolio, $93B of which is in their 7 high DQ states (CA, FL, AZ, VA, NV, GA, MI, MD), and $115 of which is 06/07 vintage. 29% have current LTV>90% and 17% have current LTV >100% (chart 27 has a matrix of different cuts at the guarantee portfolio - there are quite a few high risk loan categories where the % of loans with current LTV>100% is in the range of 15-30% of the portfolio - with more to come as house prices decline further - chart 28 is worth a look too - there is going to be a lot of loss content in some of the cells on that matrix)

90+ day DQ's on their Alt-A book increased from 2.32% in Q1 to 3.72% in Q2!

They have $82B of uninsured 1st Lien subprime ABS, $65B of which is 06/07 vintage. The have $21B of ALT-A ABS.

On the credit enhancement question from before, for their guarantee portfolio as a whole, 18% has credit enhancement, but 92% of the loans with >90% LTV have enhancement, but only 16% of the Alt-A have it, only 14% of the IO loans have it, and 13% of option ARMs have it.

Click on graph for larger image in new window.

This graph from the Freddie investor's slides shows the default rates of Alt-As vs. the rest of the portfolio.

As we've been discussing, the 2nd wave of defaults it just starting, and Alt-A will be ground zero this time.

The second graph shows delinquencies by year, and shows the impact of the credit crunch.

From Brian:

Finally, Chart 32 is a great graphical depiction of moral hazard in action. It shows delinquencies by book year and 2006 is looking very good, but 2007 (on a relative basis) is off the charts because they caved to political pressure and took on all those crappy loans when the private label MBS market shut down.