by Calculated Risk on 2/09/2007 12:01:00 AM

From MarketWatch: Winter's arrival warmed up sales

Same-store receipts at 55 of the nation's top chain-store retailers climbed 3.9% last month, according to Thomson Financial. That's above the 3.1% forecast. Same-store sales, considered the best measure of retail growth, are gleaned from the receipts rung up at stores open longer than a year.

At the International Council of Shopping Centers, which calculates same-store sales in a slightly different manner, the results were 3.7% higher, exceeding the 3% projection.

"Overall, the tone was pretty good," said Michael Niemira, ICSC's chief economist. "It was certainly a nice finish to the fiscal year -- and a nice start to the calendar year."

So I was asked today:

"Where is the consumer bust?"

Last month I wrote:

Professor Leamer identified two key missing ingredients for a recession: enough job losses, and a credit crunch. These are the two issues I wrestled with over the holidays, and I couldn't come to a definitive conclusion.

At the core, recessions are about jobs, and it is easy to imagine scenarios with job growth slowing to 100K per month, maybe even 50K per month. But that isn't a recession.
...
So how can the U.S. economy slide into recession in '07?

Some possible sources: a credit crunch based on bad loans in the RE sector (and possibly in CRE and C&D too), less consumer spending based on falling MEW, and another downturn in the housing market. If all of these can be avoided, a recession is unlikely.

We are now seeing a sector-specific credit crunch. However we are still waiting for a significant decline in MEW, and another downturn in the housing market.

This is just Act II. The future is uncertain, and the odds of a 2007 recession are still about a coin-flip ... but if the play unfolds as I suspect it might, Hamlet dies in Act V.

by Calculated Risk on 2/08/2007 10:47:00 AM

From the AP: Toll Brothers 1st-Quarter Building Revenue to Fall 19 Percent

Toll Brothers ... said Thursday that it expected its first-quarter home building revenue to fall by 19 percent, signaling that the housing market is likely to remain feeble early in 2007.
...
The company also expects first-quarter writedowns to "significantly exceed" previous estimates and could range from $60 million to as high as $160 million or more.
...
the first-quarter's cancellation rate fell to 29.8 percent, however, from 36.9 percent in the prior quarter. The pace of cancellations still far exceeded the builder's historical average of about 7 percent.

by Calculated Risk on 2/08/2007 12:23:00 AM

From the WSJ: Mortgage Refinancing Gets Tougher

... borrowers are getting caught short by a changing housing market -- one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. ...

These new challenges come ... when .... about $1.1 trillion to $1.5 trillion in ARMs ... will face rate increases this year ... The MBA expects borrowers to refinance as much as $700 billion of those mortgages.

"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. U.S. Bank is seeing more loans fall through, particularly in markets such as Arizona, California, Colorado and Ohio, where home values have softened. It could be "the tip of the iceberg," Mr. Shanks says.

This probably explains some of the recent increase in the MBA index. Some of these loans are "falling through" and borrowers are having to apply elsewhere.

... there are signs that some lenders are beginning to tighten their standards. ... [as an example] This month, Wells Fargo & Co. will begin reducing by 5% the maximum amount it will lend to certain riskier borrowers in "declining" markets. Those markets, covering more than 150 counties in two dozen states, include parts of California, Florida, Michigan and Ohio.

The change "reflects the tighter requirements of our investors," a Wells spokesman says. "I think all lenders are experiencing this kind of tightening of credit standards."

There is no evidence yet of a general credit crunch, but there is clearly a growing sector–specific crunch in real estate mortgage lending. This credit crunch will make it harder for some people to buy a home. And it will make it harder for some existing homeowners to extract equity from their homes.

"Welcome to Phase II of the housing bust."
ac in the comments, Feb 7, 2007

by Calculated Risk on 2/07/2007 08:33:00 PM

From Reuters: HSBC warns 2006 bad debt charge jumps to over $10 bln

Europe's biggest bank, HSBC Holdings, said its charge for bad debts would be more than $10.5 billion for 2006, some 20 percent above analysts' average forecasts, due to problems in its U.S. mortgage book.

HSBC said in a shock trading update late on Wednesday that slowing house price growth was being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in more recent loans.

Analysts had expected HSBC's 2006 loan impairment charge to be $8.8 billion, according to the average of 11 analysts' forecasts, the bank said.

That figure is now expected to be about $1.8 billion higher, or near $10.6 billion.

Also from Reuters: NetBank sees 4th-qtr loss steeper than expected

Online bank and mortgage lender NetBank Inc. said on Tuesday it expected to post a much steeper than expected fourth-quarter loss as it moved to shut down its subprime mortgage business.

NetBank had previously forecast an aftertax loss of 74 cents to 87 cents in the quarter, but now expects the result to fall "far below" that estimate, provided on Dec. 18, it said in a regulatory filing.

As a result of its shutdown of the mortgage business, which was completed in the fourth quarter, NetBank has been forced to buy back from investors the loans that were defaulted, leading to $26 million more in provisions than it was expecting, the bank said.

by Calculated Risk on 2/07/2007 05:53:00 PM

Via MarketWatch (hat tip Tanta!)

New Century Financial Corporation (NYSE: NEW), a real estate investment trust (REIT), today announced that it will restate its consolidated financial results for the quarters ended March 31, June 30 and September 30, 2006 to correct errors the company discovered in its application of generally accepted accounting principles regarding the company’s allowance for loan repurchase losses.

The company establishes an allowance for repurchase losses on loans sold, which is a reserve for expenses and losses that may be incurred by the company due to the potential repurchase of loans resulting from early-payment defaults by the underlying borrowers or based on alleged violations of representations and warranties in connection with the sale of these loans. When the company repurchases loans, it adds the repurchased loans to its balance sheet as mortgage loans held for sale at their estimated fair values, and reduces the repurchase reserve by the amount the repurchase prices exceed the fair values. During the second and third quarters of 2006, the company’s accounting policies incorrectly applied Statement of Financial Accounting Standards No. 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Specifically, the company did not include the expected discount upon disposition of loans when estimating its allowance for loan repurchase losses.

In addition, the company’s methodology for estimating the volume of repurchase claims to be included in the repurchase reserve calculation did not properly consider, in each of the first three quarters of 2006, the growing volume of repurchase claims outstanding that resulted from the increasing pace of repurchase requests that occurred in 2006, compounded by the increasing length of time between the whole loan sales and the receipt and processing of the repurchase request.

Importantly, the foregoing adjustments are generally non-cash in nature. Moreover, the company had cash and liquidity in excess of $350 million at December 31, 2006.

Although the company’s full review of the legal, accounting and tax impact of the restatements is ongoing, at this time the company expects that, once restated, its net earnings for each of the first three quarters of 2006 will be reduced.

In light of the pending restatements, the company’s previously filed condensed consolidated financial statements for the quarters ended March 31, June 30 and September 30, 2006 and all earnings-related press releases for those periods should no longer be relied upon. The company expects to file amended Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2006 as soon as practicable, with a goal to file by March 1, 2007. The company also expects that the errors leading to these restatements constitute material weaknesses in its internal control over financial reporting for the year ended December 31, 2006. However, the company has taken significant steps to remediate these weaknesses and anticipates remediating them as soon as practicable.

The company’s fourth quarter and full-year 2006 earnings announcement, originally scheduled for February 8, 2007, has been postponed to an undetermined future date, which will follow the company’s filing of its amended Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2006.

And on developments in the fourth quarter:

The increasing industry trend of early-payment defaults and, consequently, loan repurchases intensified in the fourth quarter of 2006. The company continued to observe this increased trend in its early-payment default experience in the fourth quarter, and the volume of repurchased loans and repurchase claims remains high.

In addition, the company currently expects to record a fair value adjustment to its residual interests to reflect revised prepayment, loss and discount rate assumptions with respect to the loans underlying these residual interests, based on indicative market data. While the company is still determining the magnitude of these adjustments to its fourth quarter 2006 results, the company expects the combined impact of the foregoing to result in a net loss for that period.