by Calculated Risk on 10/08/2007 05:51:00 PM

From Fannie Mae chief economist David Berson's Weekly Commentary

"... lenders reported a lack of investor demand for high credit quality jumbo mortgages and other mortgages not eligible for agency purchase. This dislocation pushed the cost of prime jumbo financing significantly higher relative to rates on conforming loans. Figure 1 shows the spread between rates being offered by lenders on prime jumbo and prime conforming 30-year fixed-rate mortgages. In mid-August this spread spiked to above 90 basis points after fluctuating between 15 and 25 basis points for the prior year-and-a-half (about equal to its historic spread). This spread has moderated somewhat over the past couple of weeks, however, and fell below 80 basis points in late September, suggesting some modest improvement in the market conditions for prime loans with balances above the conforming loan limit. Even so, the spread remains historically wide -- suggesting that the prime jumbo market remains in distress."

The key sentence: "the spread remains historically wide -- suggesting that the prime jumbo market remains in distress."

by Calculated Risk on 10/08/2007 12:18:00 PM

In a research note released today, titled "Time to Buckle Up the Seat Belts", Credit Suisse argues that consumer spending was weaker than expected in September, and they believe this may be "a sign of what's to come" in the 4th quarter.

In an earlier post, I noted that growth in real consumer spending was around 3% annualized in Q3 using the two month estimate (based on the first two months of the quarter). Usually I go with the two month estimate, however I think Q3 2007 might be an exception and real PCE growth could have slowed sharply in September.

UPDATE: From Ryder Press Release:

Economic conditions have softened considerably in more industries beyond those related to housing and construction.

On a related note, from MarketWatch: Ryder lowers quarterly, yearly profit outlook (hat tip Al, Brian)

... the truck leasing company warned that soft demand for its commercial rentals, lower used-vehicle prices and higher costs would yield lower third-quarter earnings than earlier forecast.

The company blamed a slowdown in the housing and construction industries for the lower outlook, a situation that Ryder said was likely to persist through the end of the year.
...
Though transportation fundamentals have been weak for the last couple of quarters, Ryder's case is surprising because it's been considered to have a more stable outlook as most of their business is contractual, said Todd Fowler, analyst with Keybanc Capital Markets.

by Anonymous on 10/08/2007 11:30:00 AM

I've been updating some old spreadsheets of mine, and I thought some of you might be interested in having some of the numbers. Data like the following, which involve national averages over entire years, are awfully blunt instruments for a lot of analytical purposes; I'm not offering these as "proof" of any particularly detailed claim about the world, nor am I suggesting that any particular set of numbers in this table can "explain" any other set in completely reliable ways.

Nonetheless, broad-brush numbers like these do provide a kind of context for certain discussions of the mortgage market. I tend, personally, to cringe a lot when certain numbers are reported in the press, because I possess a sense of context that, frankly, non-insiders don't have. It is second nature to me, for instance, to distinguish between origination volume and level of loans outstanding at the end of a period, but you will find press reports moving back and forth from originations and outstandings in blithe disregard of the issues.

So make of this what you will. A few nerdly observations about the data:

1. Total originations are hard to pin down; there's often a lot of vapor as well as volatility in those numbers. I pick what I think is the most reliable, but you should know that data collection and reporting practices change over time, and so a lot of the older numbers are pretty approximate. That's one reason why I don't care to go back before 1988.

2. The ownership rate statistical calculation changed significantly in the early 90s. The pre-1993 numbers should be thrown around with even more caution than the 1993-2006 numbers.

3. There are a lot of different rates you can use to establish an average mortgage interest rate. I chose the FHFB conforming fixed contract rate because it can be considered an index of "refinance incentive."

4. Mortgage FOR is a statistical measure of mortgage debt, property taxes, and insurance divided by disposable personal income for all homeowners with a mortgage. As a level, it's not particularly helpful, but it does help establish trends, and it is certainly more consistently calculated than DTI.

5. Refinance percent is all refinances. I am not yet ready to try to sort out the cash-out issue over this time period, and I may never be. But general refi share is a useful bit of context for those changes that you see in the other numbers.

A couple of general observations I would make about this data:

1. Notice the volatility of origination volume compared to mortgage outstandings. A large part of some of the knotty issues we've talked about on this blog, like use of brokers, barriers to entry (or the lack thereof) for mortgage originators, and historical changes in quality of mortgage origination personnel (including loan officers and appraisers), has to do with that volatility. The short version is that originators staff up and staff down in the cycle, and that loan quality (not just borrower credit quality, but accuracy of paperwork, depth of documentation, clarity of disclosures) zigs and zags along that cycle. In the early part of those big booms, for instance, you can see a lot of novice work. In the troughs, you can see a lot of desperate commission-paid people doing desperate things. That's something to take into account when you look at, say, vintage charts of loan performance. I believe, for instance, that a lot of the problems with the (in)famous 2001 vintage had to do with a huge crop of brand-new brokers and loan officers and appraisers getting into the business to cope with the volume. A lot of the problems with the 2000 vintage is that a bunch of originators who had been, in the past couple of years, making plenty of money off the refi boom started scraping the bottom of the barrel when volume dropped off. The 1993-1994 period had a similar problem.

2. There has always been much more stability on the servicing side; the problems there in terms of expertise are more a function of technological "productivity" changes and outsourcing reducing the cadre of gray-haired veterans of past crises. The thing to notice here is the level of turnover in the outstandings. In 2003, for instance, around a third of the outstanding mortgage book turned over in refinances. Mortgage sevicers can do a lot of work to stay in the same place, let alone to grow a servicing portfolio.

3. Whatever generalizations you want to make about earlier periods, the 2004-2006 period confounds them.

by Calculated Risk on 10/08/2007 10:39:00 AM

Jon Lansner writes at the O.C. Register: Distressed properties 12% of O.C. housing supply

Market watcher Steve Thomas at Re/Max Real Estate Services in Aliso Viejo notes the impact of distressed properties in his biweekly summary of housing supply ...

After finding a new way to search for short sales and foreclosures on the market and in escrow, the new findings are disconcerting. Currently, short sales and foreclosures in Orange County account for 12% of the active inventory and 15% of all escrows opened within the prior month.

Thomas also calculates “market time,” a benchmark of how many months it theoretically takes to sell all the inventory in the local MLS for-sale listings at the current pace of pending deals being made. This index shows the inventory-to-selling ratio continuing to erode. By this Thomas logic, it would take 15.17 months for buyers to gobble up all homes listed for sale at the current pace of deals vs. 14.73 months two weeks earlier and vs. 7.10 months a year ago.

by Anonymous on 10/07/2007 11:09:00 AM

A lot of people have raised questions in the comments regarding proposed changes to federal bankruptcy law to accommodate modifications of mortgage loans.

Here's the issue, in a nutshell. Until the 2005 bankruptcy reform, insolvent homeowners could choose Chapter 7 (liquidation) or Chapter 13 (repayment plan) bankruptcy. After the reform bill, for practical purposes most homeowners are limited to Chapter 13.

Chapter 7 filings usually do not result in borrowers keeping their homes, although they can (if the borrower reaffirms the mortgage debt, the court accepts the reaffirmation, and the borrower has the financial capacity to continue to make mortgage payments). In most cases, the BK stay is lifted and the loan is foreclosed.

You can think of Chapter 13 as itself a kind of loan modification: the court establishes a 3-5 year repayment plan for all the borrower's debts, with the unpaid remainder discharged at the end of the repayment plan period. In Chapter 13, the debtor can keep a mortgaged home, as long as he continues to make mortgage payments throughout the plan period, and makes up any past-due amounts (including fees) during the repayment period as determined by the repayment plan. If the borrower does not or cannot continue to pay the mortgage, the stay is lifted and the lender can foreclose.

However, secured debts can be restructured or modified in a Chapter 13 bankruptcy, and secured creditors, except the mortgage lender on a principal residence, can be subject to what is called a "cram down." This happens when the amount of the debt is greater than the value of the collateral securing it; the court reduces the value of the secured debt to the market value of the collateral, with the remainder being treated as unsecured (and subject to the same repayment plan/discharge terms as any other unsecured debt). The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978; between 1978 and 1993 most bankruptcy courts interpreted the law to mean that while interest-rate reduction or term-extension modifications were not allowed, home mortgages could still be crammed down.

In 1993, with Nobleman v. American Savings Bank, the Supreme Court held that the prohibition on modifications of principal-residence mortgage loans also included cram downs. The result is that borrowers who are upside down and who have toxic, high-rate mortgages are simply, in practical terms, unable to maintain their homes in Chapter 13.

According to the Center for Responsible Lending:

The language we seek to change was enacted in 1978, a time when virtually all home mortgages were fixed-interest rate instruments with low loan-to-value ratios. The loans were rarely the source of a family’s financial distress. As originally introduced, the House legislation permitted a plan to modify any secured indebtedness, including that represented by a home mortgage.21 During Senate hearings on the proposed legislation, advocates for secured lenders suggested that home-mortgage lenders were “performing a valuable social service through their loans,” and “needed special protection against modification.” At their urging, the original proposal was subsequently amended to insert the exception for mortgages on primary residences. 22 This claim likely succeeded through effective lobbying since, as described below in section III, the merits of the argument are groundless. Whatever the merits of this claim in 1978, however, when home mortgage loans were responsibly underwritten thirty-year fixed rate loans, it plainly does not apply to the practices of subprime mortgage lenders during the last decade.

As far as I'm concerned, if you believe that prior to 1978, when modifications of home mortgages were unrestricted, and in the period of 1978-1993, when term modifications were restricted but cram downs were widely practiced, mortgage lenders offered higher-rate (relative to prevailing market), higher-LTV mortgage terms than they have in the post-1993 period, when they are safe from any restructurings, I would like to discuss a bridge purchase with you. Nonetheless, that reliable source of comic relief, the Mortgage Bankers Association, wants you to think that allowing cram downs or other kinds of loan restructuring would, um, ruin the party:

“Giving judges free rein to rewrite the terms of a mortgage would further destabilize the mortgage backed securities market and will exacerbate the serious credit crunch that is currently hindering the ability of thousands of Americans to get an affordable mortgage,” said Kurt Pfotenhauer, Senior Vice President for Government Affairs and Public Policy for MBA. “The current legislation gives no guidance as to the proper parameters for judges to modify existing loan contracts.”

By allowing judges to rewrite loan contracts and provide whatever relief they individually deem appropriate, HR 3609 would cast doubt on the value of the asset against which the mortgage loan is secured. As a result, lenders and investors would likely demand a higher premium for offering these loans. This premium could come in the form of higher fees, a higher interest rate or the requirement for a larger downpayment, all of which would serve to make the American dream of homeownership less attainable for many Americans.

In other words, the MBA implicitly admits that in the post-1993 era lenders have made low- or no-down loans at interest rates that, while high enough in terms of the blood they extract from strapped borrowers, are still lower than what they would have been if the lenders had had a healthy fear of BK court restructurings. Of course it's beyond ludicrous to argue that being forced to take what they can reasonably get by a BK judge is the "destabilizing" factor here, but you can count on the mortgage industry be ludicrous when dollars are on the table.

In fact, I have some sympathy with the view that mortgage lenders "perform a valuable social service through their loans." That's why, when they stop doing that and become predators, equity strippers, and bubble-blowers instead of valuable social service providers, I like seeing BK judges slap them around. Everybody talks a lot about moral hazard, and the reality is that you're a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are "affordable" only for a year or two, if you face having that loan restructured in Chapter 13. If you are aware that your mortgage loan can be crammed down, I'm here to tell you that you will certainly not "forget" to model negative HPA in your ratings models, and will probably pay more than a few seconds' attention to your appraisals. You might even decide that, if a loan does get into trouble, you're better off working it out yourself, via forbearance or modification or short sale, rather than hanging tough and letting the BK judge tell you what you'll accept. That would be a major bummer, right?

But I think my favorite part of the MBA lament is this: "HR 3609 would cast doubt on the value of the asset against which the mortgage loan is secured." Translation: lenders mark to model, but if you let them, BK judges will mark to market.

Is it possible that BK judges would use the lowest plausible "distressed liquidation value" to determine the secured part of the mortgage loan? Sure it is. BK judges don't have parts of their job descriptions that refer to supporting home values or keeping those comps up or controlling "price discovery." The cram down is, precisely, the "mark to market" you don't want to get, which is why the risk of it used to function as a brake on lender stupidity.

I am fully in favor of removing restrictions on modifications of mortgage loans in Chapter 13, but not necessarily because that helps current borrowers out of a jam. I'm in favor of it because I think it will be part of a range of regulatory and legal changes that will help prevent future borrowers from getting into a lot of jams, which is to say that it will, contra MBA, actually help "stabilize" the residential mortgage market in the long term. Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under BK law.