by Calculated Risk on 3/09/2007 04:50:00 PM

From Bloomberg (hat tip: Brian): Subprime Defaults Are `Beginning of Wave,' Bies Says

Banks' losses from risky home loans made at low introductory rates are just beginning, U.S. Federal Reserve Governor Susan Bies said.

Bies, who has been Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.

"What's happening is the front end of this wave of teaser- rate loans that are coming into full pricing," Bies said at a risk-management forum in Charlotte, North Carolina. "So what we're seeing in this narrow segment is the beginning of the wave -- this is not the end, this is the beginning."

by Calculated Risk on 3/09/2007 09:16:00 AM

From Bloomberg: Rising Subprime Mortgage Defaults Add to Unsold Homes Inventory

Rising mortgage defaults by subprime borrowers may add more than 500,000 homes to a residential real estate market already beset by slumping prices, according to CreditSights Inc.

In January, 4.09 million new and existing homes were offered for sale, down from 4.43 million in July 2006, the National Association of Realtors and the U.S. Commerce Department said. New homes accounted for 536,000 of the January total, down from a record 573,000 in July.
...
"We estimate that the effect of looser lending standards could translate into another 533,000 homes coming onto the market as borrowers default -- an unwelcome phenomenon given the existing supply surplus," Sarah Rowin and Frank Lee of bond research firm CreditSights wrote in a March 1 report.

The article makes the point that New Home inventories are probably understated because of how the Census Bureau treats cancellations. But the comparison to July 2006 could also mention seasonal factors. It is common for inventory levels to fall during the holiday season, and then to rise again in the spring. A better comparison might be January 2007 to January 2006, and that shows existing home inventories are up 23% YoY from January 2006.

by Calculated Risk on 3/09/2007 08:28:00 AM

The BLS reports: U.S. nonfarm payrolls rose by 97,000 in February, after a revised 146,000 gain in January. The unemployment rate declined slightly to 4.5% in February.

Click on graph for larger image.

Here is the cumulative nonfarm job growth for Bush's 2nd term. The gray area represents the expected job growth (from 6 million to 10 million jobs over the four year term). Job growth has been solid for the last two years and is near the top of the expected range.

The following two graphs are the areas I've been watching closely: residential construction and retail employment.


Residential construction employment decreased by 23,500 jobs in February and is down 135.3 thousand, or about 4%, from the peak in February 2006. This is probably just the beginning of the loss of hundreds of thousands of residential construction jobs over the next year or so.

Note the scale doesn't start from zero: this is to better show the change in employment.

Nonresidential construction employment fell 38.5K in February. After increasing significantly in 2006 (up 4.6% in one year), nonresidential construction employment has been flat over the last four months. This might indicate the expected slowdown in nonresidential construction has started.


Retail employment gained 7,000 jobs in January. YoY retail employment is unchanged.

Overall this is a solid report. With the revisions to January and December, the economy has added 156K jobs net jobs per month for the last three months. The expected job losses in residential construction employment has just started, but the spillover to retail isn't significant yet. I expect the rate of residential construction job losses to increase over the next few months.

by Calculated Risk on 3/08/2007 04:32:00 PM

New Century filed an 8-K with the SEC (hat tip Brian):

One of the Company’s lenders has extended to the Company $265 million in financing secured by the Company’s REIT mortgage loan portfolio and certain residual assets. The net proceeds from the financing will be used to refinance and/or satisfy some of the Company’s existing obligations. This lender has also provided financing to the Company to refinance the remaining balance of approximately $710 million in mortgage loans currently financed through another lending facility. This refinancing was undertaken in response to that lender’s notice to the Company exercising its rights to effect a repurchase by the Company of the loans and other assets it had financed for the Company.

Furthermore, the Company is in discussions with lenders and other third parties regarding a refinancing and other alternatives to obtain additional liquidity. No assurance can be given that any of these discussions will be successful.

The Company has not yet obtained waivers of the net income covenant from its remaining five financing arrangements since filing the Form 12b-25 on March 2, 2007. In addition, the Company has received an aggregate of approximately $150 million of margin calls, approximately $80 million of which has been satisfied. The Company has approximately $70 million in outstanding margin calls from five lenders.

The Company has only been able to fund a portion of its loans this week. In addition, its capacity to fund new originations is substantially limited due to its lenders’ restrictions or refusals to allow the Company to access their financing arrangements. The Company has been in frequent discussions with its lenders to identify ways to address their concerns in order to allow a greater funding volume in the near term. However, there can be no assurance that these efforts will succeed.

As a result of the Company’s current constrained funding capacity, the Company has elected to cease accepting loan applications from prospective borrowers effective immediately while the Company seeks to obtain additional funding capacity. The Company expects to resume accepting applications as soon as practicable, however, there can be no assurance that the Company will be able to resume accepting applications.

by Calculated Risk on 3/08/2007 03:50:00 PM

From Reuters: New Century shares sink on bankruptcy speculation

New Century Financial Corp.'s shares fell by more than one-third on Thursday amid market speculation it would seek bankruptcy protection, a day after activist hedge fund manager David Einhorn quit the subprime lender's board.

New Century spokeswoman Laura Oberhelman said the real estate investment trust does not comment on market rumors.

A BK is definitely likely, and I wouldn't be surprised if a BK is announced at any time.