by Calculated Risk on 8/13/2008 04:54:00 PM

From Andrew Galvin at the O.C. Register Mortgage Insider: Homebuilder warns foreclosure shoppers

“A foreclosure may appear to offer the best deal on a home, but there are numerous hidden costs,” [ John Laing Homes, an Irvine-based builder] said in a press release. “A foreclosed house is sold ‘as-is.’ At times there will be a lot of time and skill involved to undertake major renovations as well as financial costs, which should be considered if you value your leisure time.”

Do you think they are feeling the pain from all the distressed properties for sale?

by Calculated Risk on 8/13/2008 02:12:00 PM

It seems like just yesterday we passed the 1,000 per day mark, but that was way back in April.

From Peter Viles at the LA Times: Estimate: 1,300 foreclosures every business day in California

Banks and lenders have now foreclosed on $100 billion worth of California homes over the past two years, and are foreclosing at the rate of 1,300 houses every business day, according to a new report from ForeclosureRadar.com.

The report, covering foreclosure activity in California in July, notes that new mortgage defaults are declining, but foreclosures are continuing to rise sharply. "It is clear that far fewer homeowners are finding a way out of foreclosure," the company reports.

The pace of foreclosures in California -- 1,300 every business day -- has more than tripled from the year-ago rate of 415 per day, ForeclosureRadar estimates.

Note that the decline in defaults is related to changes at Countrywide.

by Calculated Risk on 8/13/2008 01:04:00 PM

Please don't miss Tanta's Reset Vs. Recast, Or Why Charts Don't Match

More demand destruction for oil ...

From the DOT: American Driving Reaches Eighth Month of Steady Decline

New data released today by the U.S. Department of Transportation show that, since last November, Americans have driven 53.2 billion miles less than they did over the same period a year earlier – topping the 1970s’ total decline of 49.3 billion miles.
...
Americans drove 4.7 percent less, or 12.2 billion miles fewer, in June 2008 than June 2007. The decline is most evident in rural travel, which has fallen by 4 percent – compared to the 1.2 percent decline in urban miles traveled – since the trend began last November.

Click on graph for larger image in new window.

This graph shows the YoY change in the rolling 12 month total miles driven. The rolling 12 months total is off 1.7% compared to a year ago, and with the June 2008 vs June 2007 change off 4.7%, this will probably fall significantly more.

The decline in miles driven is similar to the two oil crisis of the '70s.

Of course oil prices are falling (up a little today), and this will lead to lower gasoline prices and probably a few more miles driven.

by Calculated Risk on 8/13/2008 10:41:00 AM

From Reuters: Countrywide option ARM home loans deteriorate more (hat tip Brian and Branden)

Countrywide Financial Corp said thousands of borrowers with $25.4 billion in option adjustable-rate mortgages (ARMs) owe almost as much as their homes are worth ...

Another sign of borrower distress: One in eight is at least 90 days late on payments.

As of June 30, the typical borrower owed 95 percent of the value of his home, up from 76 percent when the loan was made ...

Seventy-two percent of borrowers were making less than full interest payments, and 12.4 percent were at least 90 days delinquent.

Here is the CFC 10-Q filed with the SEC.

Click on table for larger image in new window.

This is the Option ARM table from the CFC 10-Q. Notice that 83% of loans were stated income.

From Reuters:

"People still don't understand what a catastrophe this is," said Christopher Whalen, senior vice president and managing director at Institutional Risk Analytics of Torrance, California. "The guys who are really on the hook are Bank of America shareholders."

I think it's the CFC bondholders who are "on the hook" since BofA hasn't guaranteed the CFC debt.

by Calculated Risk on 8/13/2008 09:21:00 AM

From the WSJ: Retail Sales Fall on Soft Auto Demand

Retail sales decreased by 0.1%, the Commerce Department said Wednesday. ... The last time sales fell was in February, when demand tumbled 0.5%.

Pulling down overall retail sales were U.S. sales of automobiles and parts, which plunged 2.4% in July, Wednesday's data showed. June sales fell 2.1%. ...Sales of all other retailers excluding auto and parts dealers rose in July by 0.4%

This graph shows the year-over-year change in nominal and real retail sales since 1993.

Click on graph for larger image in new window.

To calculate the real change, the monthly PCE price index from the BEA was used (July PCE prices were estimated based on the increases for the last 3 months).

Although the Census Bureau reported that nominal retail sales increased 2.7% year-over-year (retail and food services increased 2.6%), real retail sales declined slightly (on a YoY basis).

Despite the stimulus checks, YoY real retail sales have remained negative all year.

by Anonymous on 8/13/2008 08:17:00 AM

The Washington Post has a lengthy article up this morning on bank failures:

First the borrowers. Now the banks.

Federal and state regulators have closed eight banks this year, four since the start of July, as rising borrower defaults on residential and commercial real estate loans start to push some lenders into default, too.

Um, did we like take a Rip Van Winkle nap in late 2006 and just now wake up? As I recall the last two years, it was first the borrowers, then all the wacky securities, then the GSEs, then the banks.

In fact, as I recall things, we were once pretty much encouraged not to worry too much about the banks, because the storyline was that all the risky lending involved selling and securitizing loans, not stuffin' them on the old balance sheet. Here's a blast from the past, which I fondly remember as the day the NYT editorial board first learned about this thing called securitization. From September of 2006:

The housing boom would never have lasted as long as it did if mortgage lenders had to worry about being paid back in full. But instead of relying on borrowers to repay, most lenders quickly sell the loans, generating cash to make more mortgages.

For the past few years, the most voracious loan buyers have been private investment banks, followed by government-sponsored housing agencies, like Fannie Mae. The buyers carve up the loans into mortgage-backed securities — complex i.o.u.’s with various terms, yields and levels of risk. They then sell the securities to investors the world over, at breathtaking profit. The investors earn relatively high returns as homeowners repay their mortgages.

Back in 2006, the fashionable thing to say was that if banks had only held their loans rather than securitizing them, they would have controlled credit risk better because they had skin in the game.

I guess it was a bit more complicated than that.

by Anonymous on 8/13/2008 07:52:00 AM

My post yesterday featuring some rate reset charts from Clayton prompted a good deal of concern in the comments regarding the issue of Option ARMs and the differences between the Clayton chart and some others that have been published lately. Reader Greg kindly emailed me copies of two charts on Option ARMs that have been published in the WSJ and Business Week recently, with a request that I comment on the apparent differences between and among these charts in terms of the timing of "reset" problems.

As far as I'm concerned, a large part of the confusion here is that our friends in the media are not very careful about using the terms "reset" and "recast" consistently, like us UberNerds do. Take this chart from Business Week:



The chart title says "Reset Schedule," but the legends make it clear that what you have here is actually a "Recast Schedule." No wonder people are encouraged to use these terms interchangeably.

This chart from the Wall Street Journal doesn't use the term "reset" at all, which is good since it clearly explains that it is talking about "recast":



Do note, though, that the WSJ chart uses only "scheduled recast dates." The Business Week chart above contrasts "scheduled" recast with projected actual recast based on the rate of growth in actual negative amortization balances as of the chart date.

And, finally, we have our Clayton chart I posted yesterday that avoids the whole lingo problem by opting for the title "Loans With Rate Changes." Maybe the Clayton analysts got tired of the "reset vs. recast" confusion and just decided to go long-form. In any case, the Clayton chart, unlike the two above, includes but is not limited to Option ARMs; it is looking at the whole "Alt-A" pile which includes amortizing hybrid ARMs and lots of interest-only ARMs as well as OAs.

There obviously isn't perfect consensus here on terminology. All I can really do is make clear how I am using these two terms. I think my usage conforms to the way industry wonks talk, but I can't promise you that anyone outside the wonkosphere will be as careful with these distinctions. Caveat lector.

"Reset" refers to a rate change. "Recast" refers to a payment change.

On a normal fully-amortizing ARM, the interest rate resets on what is called the "Change Date" (five years out for a 5/1 ARM, three years out for a 3/27 ARM, each year thereafter for the 5/1 and every six months thereafter for the 3/27, etc.). The payment recasts exactly one month after the rate resets. Mortgage interest is paid in arrears, so first you reset the rate, then the following month you recast the payment. "Recast" is really just a shorter word for "reamortize": you take the new interest rate, the current balance, and the remaining term of the loan, and recalculate a new payment that will fully amortize the loan over the remaining term.

On an interest-only ARM with a rate change that happens during the interest-only period, the rate resets on the Change Date and then the interest payment is recalculated on the next payment date. I wouldn't tend to use the term "recast" here since with an IO, you aren't actually amortizing or "casting" a new payment, just adjusting the interest due given current balance and new rate. The big issue with IOs is the end of the IO period, when the payment has to be amortized over the remaining term. This date is what I would call the "recast" date of an IO. It may or may not coincide with the first interest rate reset date. Some 5/1 IOs, for example, reset and recast both at the end of five years. Some have a 10-year IO period, meaning they reset annually between years 5-10 but do not recast until year 10. If the rate resets to a higher rate in that period, the required IO payment increases, but not as much as it will when the recast hits and principal must also be repaid on a 20-year schedule.

On a typical Option ARM, the rate resets monthly beginning as early as the first month of the loan. The payment is adjusted, but not recast, annually; usually the payment increases by no more than 7.5% each year. It is that mismatch between rate reset and payment change that actually creates the potential for negative amortization; the "minimum payment" gets outstripped by the actual interest due because it increases much more slowly than the rate does.

Option ARMs do not "recast" until the sooner of 1) the loan reaching its balance cap or 2) the first "scheduled" recast date, which is usually 60 months from origination. What you see in the Business Week chart is the difference between the two: the recast projections come a lot earlier if you look at how close loans are actually getting to their balance caps, rather than just assuming they'll all recast on their five-year anniversary.

By and large, the biggest danger for Option ARMs and IO ARMs is the recast date, not the first or subsequent rate reset dates. However, for any ARM borrower who qualified at the highest possible debt-to-income ratio they could manage, any payment change, even one not quite as shocking as the recast on an OA or an IO, can tip the balance. As we are talking in this specific context about Alt-A, I for one believe that most of these loans did stretch too far in the beginning, and so even first rate resets on IOs or fully-amortizing ARMs will cause a marked increase in delinquencies in the absence of the borrower's ability to refinance at reset into a new discounted ARM, which will be the case for some time.

I hope that clears it up a bit, at least for the next week or two.

by Calculated Risk on 8/13/2008 12:35:00 AM

From the Money & Co. blog at the LA Times: FDIC slashes estimate of IndyMac's uninsured deposits

John Bovenzi, who was named to head the Pasadena bank when the Federal Deposit Insurance Corp. took control of it July 11, said in a memo to the staff today that "it now appears that there were about $600 million in uninsured deposits" when the government seized the lender.

That’s 40% less than the FDIC’s original $1-billion estimate.

An FDIC spokesman said the reduced figure stemmed from the agency’s work since July 11 to identify jointly held accounts, trust accounts and other ways that customers had structured their deposits to stay within FDIC insurance limits.

Joint accounts are a common way to get around the FDIC insured limit. I'll have some more comments on this, but I think the FDIC will find this is common with failed banks, since the banks actively marketed this method of having more FDIC insurance.

There are a few other items in the story.

by Anonymous on 8/12/2008 05:00:00 PM

Clayton has kindly given us permission to excerpt some information from their monthly RMBS performance newsletter, InFront. Clayton's report suggests that we may have now seen the beginning of the end of the subprime meltdown, but we are only at the end of the beginning of the Alt-A wave that is following it.

According to Clayton, subprime delinquencies appear to have peaked in December of 2007, and subprime foreclosure starts may have peaked in January of 2008. The volume of foreclosures in process will remain elevated for a long time as these things work their way through lengthy foreclosure timelines, but the peak in FC starts is good news.

Unfortunately, Alt-A seems nowhere near its peak yet. Clayton's report, based on May data, indicates that both new delinquencies and foreclosure starts in Alt-A pools are still rising. Fannie Mae's recent conference call suggesting that Alt-A deteriorated even more sharply in July is yet more evidence that the Alt-A mess is still ramping up.

These two charts from Clayton, on subprime and Alt-A ARM resets, tell the same tale.

Click on graph for larger image in new window.

Based on remaining active loans, we are at about the peak for subprime rate resets. However, Alt-A is a different picture:

As Housing Wire reported yesterday:

When it comes to RMBS, it’s not about the sheer volume of securities issued; it’s about the credit enhancement that exists to protect investors once collateral defaults occur. And comparing Alt-A issues to subprime, it’s no contest: Alt-A is so much thinner in its padding for losses that a lower default rate could hurt investors in Alt-A deals far worse than anything we saw in subprime. The only saving grace here is reach; because Alt-A deals didn’t yield what subprime did, fewer got pulled into CDO issues.

There are large chunks of Alt-A that didn’t get securitized, but instead were held in portfolio for the interest income benefits: and that would be your option ARMs. Which means that while mushrooming defaults may not hit RMBS investors, they will hit the loan portfolios of more than a few commercial banks.

If the "subprime crisis" was about "exotic securities," the "Alt-A crisis" is going to be about bank balance sheets. And the fun is only beginning.

by Calculated Risk on 8/12/2008 04:09:00 PM

Alt-A; the new subprime. Or “We’re all subprime now!”

There is some evidence that subprime defaults have peaked, but Alt-A defaults are picking up steam (Tanta will have more today). The next wave is here, and these defaults will impact house prices in the mid-to-high range.

And on house prices:

In general – on a national basis - I think nominal house prices have probably fallen more than half way from the peak to the trough. There are some areas where prices are probably closer to the eventual nominal bottom than others; these are low end areas with high foreclosure rates and high demand for housing - or areas that saw little appreciation during the boom years. But in other areas, prices have really just begun to fall.

There will be two housing bottoms.

A bottom for new construction is very different than a bottom for existing home sales. For existing homes, the most important number is price. So the bottom for a particular area would be defined as when housing prices stop declining in that area. Historically, during housing busts, existing home prices fall for 5 to 7 years - so I'd expect to start looking for the bottom in the bubble areas in 2010 to 2012 or so.

For new construction, we have several possible measures of a bottom. These include Starts, New Home Sales, and Residential Investment (RI) as a percent of GDP. These measures will hit bottom much sooner than for prices for existing home sales, and one or more of these measures might even bottom in the 2nd half of this year. However ...

There will be no rapid recovery for housing.

Usually, following a housing bust, new home sales pick up pretty quickly. However this time, with the huge overhang of excess housing inventory, new home sales and starts will probably not be an engine of recovery for the economy. Without a contribution from housing, I expect the economy will remain sluggish well into 2009 and the effects of the recession will linger.

These are some housing themes we will be discussing over the next few months.