by Calculated Risk on 3/08/2007 03:02:00 PM

The Federal Reserve released the Flow of Funds report today for Q4 2006. The report shows that homeowner mortgage debt increase $148.6 Billion in Q4, 2006, or at an annualized rate of 6.4% (NSA).

This is the slowest percentage increase in homeowner mortgage debt since Q1 2000, and in dollar terms, this is the slowest increase since Q1 2002.

Click on graph for larger image.

This graph shows the annualized percentage increase in homeowner mortgage debt, not seasonally adjusted.

Note from Fed: "Includes loans made under home equity lines of credit and home equity loans secured by junior liens".

The slower increase in mortgage debt is probably caused by both the housing slowdown, and less equity extraction from homes. I'll try to estimate the Mortgage Equity Withdrawal (MEW) for Q4 while we wait for the Fed's calculation.

by Calculated Risk on 3/08/2007 08:56:00 AM

From MarketWatch: Wal-Mart Feb. sales miss Street view

Wal-Mart Stores Inc. said Thursday that February same-store sales rose moderately, missing Wall Street's expectations, hurt by weakness in clothing, home merchandise and hardlines.

For March, the world's largest retailer expects sales at stores open at least one year to rise 1% to 2%, and it expects the softness in clothing and home goods to remain through spring.

Bentonville, Ark.-based Wal-Mart the world's largest retailer, said February total U.S. same-store sales rose 0.9%.

And from AP: Retailers Post Disappointing Feb. Sales

The nation's retailers had a slow start to the spring season as unseasonably cold weather in February chilled demand for lightweight apparel and left merchants with disappointing sales. The slowing economy, particularly the weakening housing market, could challenge shoppers in the months ahead.
...
"Cooler weather clearly dampened spring apparel sales," said Ken Perkins, president of RetailMetrics LLC ... But Perkins also said major concerns for consumer spending in the months ahead are the defaults and delinquencies in the mortgage industry. That, coupled with the decline of mortgage equity withdrawls that give consumers extra cash, could curtail spending.

According to Thomson Financial, of 35 merchants that reported February same-store sales results so far, 10 beat estimates, while 24 missed and one met expectations. Same-store sales are sales at stores open at least a year and are considered the best measure of a retailer's health.

Was it the weather? Or is this a sign of spillover from the housing slump? It is way too early to tell.

by Calculated Risk on 3/08/2007 08:41:00 AM

The Department of Labor reported today:

In the week ending March 3, the advance figure for seasonally adjusted initial claims was 328,000, a decrease of 10,000 from the previous week's unrevised figure of 338,000. The 4-week moving average was 339,000, an increase of 3,750 from the previous week's unrevised average of 335,250.

As the 4-week moving average has steadily increased over recent weeks, I've been watching the claims data a little closer.

Click on graph for larger image.

This graph shows the 4-week moving average of weekly claims since 1990. I think the level of concern for the 4-week moving average is around 350K (dashed line on graph).

Last week, Northern Trust VP and Economist Asha Bangalore suggested that the claims data might be starting to indicate a "significant weakness developing in the labor market". We will know more tomorrow.

by Calculated Risk on 3/08/2007 01:39:00 AM

From the FBI annual report on financial crimes, mortgage fraud:

... the true level of Mortgage Fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. However, based on various industry reports and FBI analysis, Mortgage Fraud is pervasive and growing.

Fraud is probably widespread, but I suspect the most common type of fraud - fraud involving borrower misrepresentations - will not be punished.

The FBI investigates Mortgage Fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and Mortgage Fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.

Fraud for Housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan.
...
Although there are many Mortgage Fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders.

So the FBI is focusing on industry insiders and will probably not pursue borrower misrepresentations. My guess is the second most common fraud is some sort of appraisal fraud.

Inflated Appraisals - An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

I suspect most appraisal frauds will be difficult to prosecute. Then there are cases like this:

Amerifunding was a Mortgage Brokerage owned and operated by Gerald Small in Colorado, which maintained two "warehouse" lines of credits, each at a large federally-insured financial institution in the U.S. In order to support a lavish lifestyle, Small created fictitious loans to live off of the lines of credit. The borrower information, name, and social security number, were invented. Eventually, one of the creditors asked for verification of identification thereby defeating the "invention" process. To deal with this, Small placed an advertisement for a $100,000+ Account Representative position at his company. Applicants eagerly completed applications inclusive of names, social security numbers and copies of driver's licenses which Small wasted no time in utilizing for more fictitious loans. Investigation determined that Small had kited over $200 million in fraudulent mortgage loans and used the stolen identities of 47 job applicants to obtain mortgage funding for fictitious home loans, or "air loans" totaling over $21.5 million during a 24-month period.

by Calculated Risk on 3/07/2007 07:53:00 PM

Here is the FDIC Cease and Desist Order announcement: FDIC Issues Cease and Desist Order Against Fremont Investment & Loan, Brea, California, and its Parents

FOR IMMEDIATE RELEASE
March 7, 2007

The Federal Deposit Insurance Corporation (FDIC) today announced it had issued a cease and desist order against Fremont Investment & Loan, Brea, California ("Bank"), and its parent corporations, Fremont General Corporation and Fremont General Credit Corporation. The bank and its parents, without admitting or denying the allegations, consented to the order.

In taking this action, the FDIC found that the bank was operating without effective risk management policies and procedures in place in relation to its subprime mortgage and commercial real estate lending operations. The FDIC determined, among other things, that the bank had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default or other loss to the bank.

The order sets forth a variety of corrective actions to be undertaken. The order requires that the bank adopt a five-year strategic plan for its business. The order also requires that the bank, within 90 days, adopt a subprime mortgage lending policy with provisions designed to correct its lending practices, including that it underwrite future subprime loans with an analysis of the borrower's ability to repay at the fully indexed rate and provide borrowers with clear information about the benefits and risks of the products.

The order also requires the bank within 90 days to describe efforts it will make to restructure loans in distress consistent with the marketability of such loans and with sound principles of underwriting. In addition, the order requires the bank to fully comply with all consumer protection laws. The order also requires the bank to correct its commercial real estate lending practices.

"Our concern has always been that banks make loans that borrowers are able to repay," said FDIC Chairman Sheila C. Bair. "We believe that the agreement with Fremont addresses this basic concern."

Attachment: http://www.fdic.gov/bank/individual/enforcement/2007-03-00.pdf - PDF