by Calculated Risk on 10/04/2005 03:16:00 PM

The US Treasury Department reports that the US National Debt increased $553.7 Billion in fiscal 2005 (ends Sept 30, 2005).

The total National Debt is now $7,932,709,661,723.50.


Click on graph for larger image.

The increase in the National Debt was slightly less than the record set in fiscal 2004 of $595.8 Billion in additional debt.

The initial estimates for fiscal 2006 are for a new record of approximately $650 Billion in new debt. On the positive side, tax revenues from the housing boom will help in fiscal '06. On the negative side are the additional expenditures for hurricane recovery.

In addition, if the economy weakens significantly, as the housing market slows, the increase in the debt could be substantially higher.

by Calculated Risk on 10/04/2005 11:54:00 AM

The Mercury News has an excellent series of articles called "Unreal Estate". Today's article is Part III: Loan landslide on shaky soil

The previous articles in the series:
Part I: Housing boom showing its age
Part II: How the boom has hit home
Also see the companion articles in the side bar.

Excerpt from Part III:

Almost overnight, a transformed mortgage industry has rewritten the rules for home-buying. Relying on improved credit scoring, better risk-analysis tools and abundant cheap capital from around the globe, lenders have flooded the market in the past two years with exotic loans that allow consumers to take on more debt and more risk. People who once would have been denied mortgages now get the chance to join the auction and bid up home prices.

Such loans are particularly popular in Silicon Valley, helping to push prices at a double-digit pace that many experts worry is unsustainable.

Interest-only loans, for example, accounted for more than half the purchase loans in the Bay Area in the first quarter of the year. That's nearly five times higher than in 2002, says LoanPerformance, a San Francisco firm that analyzes mortgage trends. And piggy-back loans -- which package two loans for borrowers putting less than 20 percent down -- accounted for about 60 percent of the loan volume in the Bay Area in the first half of 2005, according to SMR Research, a financial-services market research firm in Hackettstown, N.J.

But while exotic loans have swelled the ranks of potential buyers, slowing homes sales this summer are fueling worries about the economic aftershocks if the real estate market cools or slumps.

And for a description of some of the risky mortgage products available today, see Schwanhausser's companion article: The lowdown on loans

• Adjustable-rate loans with tantalizing "teaser" rates: Some ARMs dangle introductory interest rates as low as 1 percent. But beware: Some ARMs begin to adjust within as little as a month and can ratchet higher rapidly. That can lead to "payment shock."

• Hybrid ARMs: They start out like fixed-rate loans, charging the same flat monthly payment of principal and interest. After three to seven years, typically, they turn into adjustable-rate loans. The payment shock can be substantial if interest rates rise.

• Interest-only loans: Borrowers may pay only the interest portion of the monthly payment, typically for three to five years but sometimes up to 10 years. After that, the monthly payments can vault higher to pay off the principal over the remainder of the loan.

• Option ARMs: Every month borrowers get to choose from a handful of payment options. When times are flush, they can pay what they would owe under a standard 15- or 30-year fixed-rate mortgage. Or they can just pay the interest. But if cash is tight, they can make a minimum payment that is less than the interest charge.

The last option can result in "negative amortization" that leaves homeowners owing more than they borrowed in the first place. Also, monthly payments can jump after a number of years or if the negative amortization exceeds the "cap" allowed by the loan.

• "Piggyback" loans: This is an increasingly popular tactic that involves packaging two loans to avoid the hefty monthly bills for private mortgage insurance, or PMI, that is required when borrowers make a down payment of less than 20 percent. For example, lenders often package one mortgage for 80 percent of the home's value with a home-equity loan or line of credit for the remaining 20 percent.

Also the NY Times continues their reporting on the housing market: Slowing Is Seen in Housing Prices in Hot Markets and Home Builders' Stock Sales: Diversifying or Bailing Out?

by Calculated Risk on 10/03/2005 04:39:00 PM

"...make no mistake about it, the froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable." Bill Gross, PIMCO, October 2005

Here are two interesting perspectives on the economy going forward. The first is from Dr. Duy who ventures inside Greenspan's head: How Does the Fed See the Economy Evolving? And the second is from PIMCO's Bill Gross: Deliberate Acts Of Kindness.

Dr. Duy writes:

"... the Fed has shown concern that economic slack has evaporated, and, with rising energy prices in the background, inflationary pressures are building. To stem these pressures, they have tightened policy to reduce growth. They are not targeting the housing market directly, but recognize that since housing has been a driving force in the expansion, it will likely be the recipient of the brunt of their policy efforts.

A cooling of the housing market, however, is not undesirable, and a major decline in values is unlikely. ... And, under the Greenspan scenario, a housing slowdown is necessary to trigger a needed rebalancing of economic activity. Moreover, with excess slack drying up, some sector needs to pull back, especially with any sense of fiscal discipline long gone."

Of course this will lead to a slowdown in consumption, but Dr. Duy believes the Fed is looking for investment to fill the gap. The Fed's soft landing:

"The upshot it that the economy evolves in such a way that consumption slows, savings rises, and, as long as investment spending continues to grow, we avoid a recession."

Bill Gross is not quite as optimistic and summarizes his "sequence for house bubble popping or froth skimming" as:

1) Housing prices will cool/stop going up very much/even go down in some cities, WHEN...

a. Interest rates rise to a high enough level to make the purchase of a new home a burden instead of a boon for first time buyers.

b. Mild regulatory pressure begins to reduce the amount of funny-money lending.

c. Speculators sniff the beginning of the end.

2) Home equitization should retreat shortly thereafter.

3) Consumption/the U.S. economy will then weaken when the house ATM starts running out of fresh new $25,000/$50,000/$100,000 home equity loan dollar bills.

4) The Fed will cut interest rates in order to start the game all over again.

Let me state categorically that the above sequence is barely questionable, almost inevitable, 99% unavoidable, and in modern parlance - "slam-dunk." In so saying, I hope I am not being unkind to those of you who think otherwise - IÂ’m trying to do you a favor!

Mr Gross sees a recession as likely:

How weak the U.S. economy gets will depend on numerous factors: oil/natural gas prices, China's continuing growth miracle, and of course the level of U.S. interest rates - themselves a function of the Fed and foreign willingness to buy our Treasury and corporate bonds. But make no mistake about it, the froth in the U.S. housing market is about to lose its effervescence; the bubble is about to become less bubbly. If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable. If higher yields simply slow the pace of appreciation to a more rational single digit number, then we could escape with a 1-2% GDP economy.

The consistent theme is a slowing housing market and the questions are: What will the housing slowdown look like? And how large an impact will that have on US economic growth?

If the housing slowdown is gradual, and investment can replace the lost consumption associated with equity extraction, GDP growth will slow but the economy will stay healthy. Savings will rise, the current account deficit will fall and Americans will all hold hands and sing Kumbaya. Very unlikely in my view for several reasons:

1) The excessive leverage and speculation in the housing market means achieving a soft landing is very difficult. Many recent buyers will be hurt if house prices just flatten, making the FED's job very difficult.

2) The transition from a housing centric economy to a more balanced economy will involve significant dislocations. Many jobs in the housing related industries have non-transferable skills, require low levels of education, and are relatively well paying. These jobs will be difficult to replace.

3) The lowering of US consumption will have a worldwide ripple effect and especially impact China and other countries currently running trade surpluses with the US. These countries will probably sell US assets for domestic purposes (to minimize economic weakness) leading to higher rates in the US - exacerbating the US housing slowdown.

I'm sure I've left off several other problems (I need to read Dr. Setser and Dr. Kash Mansori). As much as I would like to see a soft landing, I think a hard landing is very likely.

NOTE: Please read Dr. Duy's piece - it is excellent. Also, Gross' piece starts with a nice tribute to his wife and the wonders of kindness in our everyday life.

Best to all.

by Calculated Risk on 10/03/2005 12:11:00 PM

From the WSJ: Mortgage lenders tighten loan standards (hat tip: Bailey and pwilliamson)

After years of easy money, some mortgage lenders are beginning to tighten their standards.

Lenders have rolled out a raft of mortgage products in recent years that have made housing purchases more affordable and allowed many people to extract cash from their homes' equity without boosting their monthly payments.

Now, in what could be the first signs of a reversal, some lenders are starting to raise the bar on making these products available to new borrowers.

The article mentions that rates are rising and offers examples of some lenders tightening lending standards. Some examples:

Two weeks ago, Washington Mutual, one of the nation's biggest mortgage lenders, told mortgage brokers that it will make it more difficult for borrowers to qualify for its option ARMs, which carry an introductory rate of as low as 1.25 percent. Under the new rules, which are expected to take effect next month, borrowers will have to show they can afford the monthly payment if the interest rate on the loan is 6 percent - or 6.25 percent for borrowers purchasing a second-home or investment property - after the introductory rate expires. Currently, the bank's rate for qualifying borrowers for these loans is roughly 5.25 percent.

New Century Financial Corp., a mortgage lender in Irvine, the same week said it was aiming to reduce the amount of interest-only loans it grants to less than 25 percent of total loan production from 33 percent in the year's first half. New Century said it was making the move in an effort to boost profit margins.

Some lenders are making their loans more costly, which could discourage borrowing. Last month, Option One Mortgage, a unit of H&R Block Inc., boosted the rates on all of its mortgage products by 0.40 percentage point. Option One says the move reflects both rising interest rates and changes in investor appetite for its loans.
...
Among other changes, Countrywide Financial, another big lender, earlier this month made it tougher for borrowers to qualify for a 1 percent teaser rate on its option ARMs. Countrywide now considers a number of factors in setting the introductory rate, including the size of the loan, how much documentation the borrower provides and whether the property is a second home or for investment. The teaser rate for borrowers with multiple risk factors can be as high as 3 percent, the company says.

These are small steps in the right direction but probably too little, too late. In the comments to the previous post, Tanta is "underwhelmed":

" ... this strikes me as the usual "find a couple of examples and make it sound like a trend" crap the press is so good at.

Of the four lenders mentioned in this article, exactly one is a regulated financial institution: WAMU. And WAMU's big tightening is . . . 100 bps increase on the qualifying rate. I'm underwhelmed.

Two of the other four lenders are subprime. New Century is a REIT. Option One is owned by H&R Block. And Option One is "tightening standards" by repricing its rate sheet by 40 bps? When they came right out and said that part of the reason for that is that, well, market rates are going up?

The last is Countrywide. In my view they're the only ones listed here doing anything actually meaningful: they're upping the start rate on loans with a lot of layered risk, which means that if the borrower chooses the neg am option, it will negatively amortize more slowly. Still, this is adjusting the price for the risk you're taking on, not limiting the risk by changing the underwriting guidelines.
...
if this is the best the Wall Street Journal could come up with, we haven't even skimmed the surface yet.

And even with these "tighter standards" and rising rates, the number of mortgage applications is still strong. Fannie Mae Chief Economist David Berson, writing in his weekly economic commentary, still sees a strong housing market based on new loan applications: Housing: The good, the bad, and the ugly.

"...the Mortgage Bankers Association’s (MBA) weekly survey of mortgage applications (for home purchases) provides a pretty good leading indicator for home sales one-to-three months ahead. Purchase applications had risen to record highs in each of May, June, and July -- helping to power new and existing home sales to either high or record sales in those months. There was a small decline in August (reflected in the dip in August new home sales), but purchase applications have increased again thus far in September. In fact, purchase applications have climbed to a record high in September, presaging strong home sales figures for the September-November period."

Berson also comments on rising inventories as a potential problem for housing - and I think rising inventories are the first sign of a slowing housing market. But I don't think we have seen any real tightening in lending standards as suggested in the WSJ article.

by Calculated Risk on 10/02/2005 09:27:00 PM

My most recent post is up on Angry Bear: Mortgage Rates.

Here is a commentary from Fleck on housing: Empty houses, falling prices: A boom dies

Best to all.