by Calculated Risk on 12/11/2007 12:35:00 PM

From Bloomberg: Freddie Expects 4th-Quarter Loss, Record Default Rate

Freddie Mac ... said default rates on mortgages it owns or guarantees are rising to a record, likely leading to a fourth-quarter loss similar to its largest-ever loss last quarter.

``Our fourth-quarter results are not going to be effectively better than they were in the third quarter,'' Chief Executive Officer Richard Syron told investors today at a conference in New York sponsored by Goldman Sachs Group Inc. ``We are not promising a silver bullet, a short-term quick fix.''

Freddie Mac expects a 3 percent to 3.5 percent default rate, exceeding the record 2.4 percent rate on its books in 1991, the company said, according to a slide presentation. Credit losses on the current book of business will be $10 billion to $12 billion, Syron reiterated today. Almost half the impairments were reflected in third-quarter results reported on Nov. 20, the company said.

The decline in housing ``will get tougher before it gets better,'' Syron said.

by Calculated Risk on 12/11/2007 11:34:00 AM

Jon Lansner at the O.C. Register writes: Home-sale commissions off $13 billion from ‘05 peak

Want to see more housing pain? Real estate agent commissions nationwide will tumble $10 billion to $55 billion this year, says figures from ForSaleByOwner.com.

By this Web site’s math, commissions nationwide peaked at $68 billion in 2005, and dipped to $65 billion last year. Now, $55 billion isn’t bad, by this math. The last time agents’ total take was lower was 2003 ($51 billion) — and in 2000, for example, it was just $36 billion.

This data is apparently a subset of the total brokers' commissions on sale of residential structures.

According to the BEA, total residential broker's commissions peaked at $109.9 billion in 2005 ($116.5 billion in Q3 2005 at a seasonally adjusted annual rate) and have declined to $81.1 billion (SAAR) in Q3 2007. Commissions have declined by $35 billion (SAAR) from the peak in Q3 2005.

Here is the BEA and NAR data for the last 3 years, and Q3 2007:

	2004	2005	2006	Q3 2007 (SAAR)
BEA Broker's Commissions (millions)	$96,077	$109,855	$101,518	$81,081
NAR Existing Home Sales	6,778,000	7,076,000	6,478,000	5,420,000
NAR Average Sale Price	$244,400	$266,600	$268,200	$267,500
Commission Percentage (calculated)	5.80%	5.82%	5.84%	5.59%

Click on graph for larger image.

This graph shows real broker's commissions (adjusted by PCE deflator), compared to existing home sales since 1969. Obviously commissions have tracked sales pretty well, although there was a strong growth in real commissions, since the late '90s, as house prices surged.

As sales and prices continue to fall in 2008, commissions will probably decline significantly.

by Anonymous on 12/11/2007 11:08:00 AM

There have been some questions about what this means (thanks, Ramsey, for bringing it to my attention):

MCLEAN, Va., Dec. 10 /PRNewswire-FirstCall/ -- Freddie Mac (NYSE: FRE - News) announced today that the company will generally purchase mortgages that are 120 days or more delinquent from pools underlying Mortgage Participation Certificates ("PCs") when:

-- the mortgages have been modified;
-- a foreclosure sale occurs;
-- the mortgages are delinquent for 24 months;
or
-- the cost of guarantee payments to security holders, including advances
of interest at the security coupon rate, exceeds the cost of holding
the nonperforming loans in its mortgage portfolio.

Freddie Mac had generally purchased mortgages from PC pools shortly after they reach 120 days delinquency. From time to time, the company reevaluates its delinquent loan purchase practices and alters them if circumstances warrant.

Freddie Mac believes that the historical practice of purchasing loans from PC pools at 120 days does not reflect the pattern of recovery for most delinquent loans, which more often cure or prepay rather than result in foreclosure. Allowing the loans to remain in PC pools will provide a presentation of its financial results that better reflects Freddie Mac's expectations for future credit losses. Taking this action will also have the effect of reducing the company's capital costs. The expected reduction in capital costs will be partially offset by, but is expected to outweigh, greater expenses associated with delinquent loans.

Attentive readers Calculated Risk addicts will remember the big tizzy last month over Fannie Mae's presentation of its credit loss ratio, and the confusion-party in the press that it engendered. As you recall, the issue was that Fannie Mae had been exercising its option (not obligation) to buy delinquent loans out of its MBS in order to pursue workout efforts with them. Because that requires the MBS to be paid off at par, but the accounting rules require Fannie to take these loans to their portfolio at the lower of cost (par) or fair market value, and since "fair market value" right now for a delinquent loan, even one you think can be cured (made reperforming with a workout), is terrible, doing this means that Fannie booked big write-downs at the time. Fannie then backed some, but not all, of that write-down out of its credit loss ratio on the portfolio, to distinguish between true foreclosure-related charge-offs and these fair value adjustments, and uproar ensued, with Fortune's Peter Eavis implying that they were cooking the books and hiding losses.

It appears to me that Freddie Mac has decided it doesn't want to go there. It is therefore doing what, presumably, Peter Eavis wants it to do: leave the delinquent loans in the MBS pools unless and until that becomes more expensive than taking them out.

The accounting here is rather complex (which won't stop some people from having a cow over it, but I can't help that). The somewhat simplified view is this: the GSEs guarantee timely payment of principal and interest to MBS investors. They do not guarantee that investors will earn interest forever, but only as long as principal is invested. If a loan payment is not made by the borrower, either the GSE or the servicer (depending on the contract) has to advance scheduled principal and interest payments to the MBS until such time as the loan catches up (the borrower makes up the past due payments) or is foreclosed and liquidated.

The GSEs collect guarantee fees from seller/servicers (it works like servicing fees: it comes off the monthly interest payment). They also collect some other lump-sum fees when pools are settled. This is revenue to the GSEs, with a corresponding liability (to make the advances, with the risk that the advances will not be reimbursed completely at liquidation of the loan).

Therefore, when there are deliquent loans in an MBS, and the servicer is not obligated to advance for them, the GSE has a choice: it can buy the loan out of the MBS, put it into the GSE's own portfolio, and take any and all losses directly as any other investor would (and also any income). Or, it can leave the loan in the pool, while advancing the scheduled P&I to the pool investors. Only in some specific cases is the GSE obligated to take out a loan: when mortgages are modified, when the foreclosure sale occurs, or when the loan has been delinquent for 24 months or more. In other situations, it comes down to the question of which is cost-effective for the GSE: to leave it there and continue to advance, or to take it out with portfolio capital and do the fair value write-down.

Do note that if Fannie Mae had adopted this policy that Freddie has just announced--basically, that buying the loan out of the MBS will be the last rather than the first resort--it would not have shown big fair value write-downs, those would not have affected the credit loss ratio, and a big dust-up would not have occurred. There would still have been an effect on the financials, but just in a different place: in advances (coming out of G-fees received). So you either have expense (P&I advanced to bondholders) or you have expense (capital used to buy out the loans).

Insofar as everyone has been all worked up about the GSEs' capital ratios, this should be good news: they are levering investors' capital to carry delinquent loans until they can be cured (or liquidated). Insofar as investors want principal back faster, it's maybe not good news. But you can't really have it both ways.

I think it is important to understand that the GSEs are supposed to cover guarantee costs out of g-fees, not with portfolio purchases. You might have noticed that both Fannie and Freddie are increasing the g-fees and postsettlement/loan level pricing adjustments they charge seller/servicers. So they are beefing up the funds they have to cover MBS losses with. Nothing guarantees that will be enough; I don't think anybody knows right now what will be enough. But for what it's worth, I don't see this as "playing games" with capital requirements. I guess we'll have to see what Fortune Magazine thinks.

by Calculated Risk on 12/10/2007 09:29:00 PM

From the WSJ: Investor Withdrawals Shut BofA Fund

Columbia Management is shutting its Strategic Cash Portfolio ...

Only some investors will get their cash out. The fund's biggest investors will be paid "in kind" -- that is, they will be given their share of the underlying securities, rather than a cash payment. Smaller shareholders can cash out at the fund's share price, which is currently 99.4 cents on the dollar. The fund required a minimum investment of $25 million.

So small investors - with just $25 million - will receive 99.4 cents on the dollar. Large investors will be paid "in kind". Ouch!

Some enhanced funds are doing even worse:

A report Monday by Standard & Poor's found that about 30 U.S.-oriented enhanced cash funds rated by S&P had lost a total of $20 billion, or 25% of their assets, in the third quarter. In one of the more dramatic instances, one fund (which S&P declined to identify) saw its assets under management shrink by 98% or $2.5 billion.

Even traditional money-market funds have felt pressure. ... at least a half-dozen financial institutions, including Bank of America, have taken steps such as buying the funds' troubled securities to protect their money funds....

Money-market funds are required to maintain an unchanging $1-per-share net asset value; if they waver from that they are said to "break the buck." Enhanced cash funds don't have the same requirement.

by Calculated Risk on 12/10/2007 06:02:00 PM

Update: Here is the Morgan Stanley piece. (hat tip Carlomagno)

From Rex Nutting at MarketWatch: Mild recession likely, Morgan Stanley says

The U.S. economy is likely to slip into a mild recession in 2008, said economists at Morgan Stanley, which is the first major Wall Street firm to predict a recession.

Domestic demand is expected to fall 1% annualized over the next three quarters with zero growth in gross domestic product and a 5% to 10% drop in corporate earnings, said chief economist Richard Berner and U.S. economist David Greenlaw in an updated forecast on the firm's Global Economic Forum Web site. For the full year, Morgan Stanley sees 1% growth.
...
"Those negatives sound like the recipe for a serious recession, so why do we think it will be mild?" Berner and Greenlaw wrote. "Although it is slowing, global growth is still strong, and we expect that net exports will add about 3/4 percentage point to growth through the end of 2008. In addition, we think that corporate capital and hiring discipline in this expansion mean that there are no business-investment or labor-market excesses to unwind, adding to U.S. economic resilience."

Also moving into the recession camp, according to the Wall Street Journal, is Paul Kasriel of Northern Trust, the 2006 recipient of the Lawrence R. Klein Award for Blue Chip Forecasting Accuracy.