by Calculated Risk on 9/08/2009 11:12:00 PM

From David Streitfeld at the NY Times: The House Trap

An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

There are a several fascinating anecdotes in the article, including a professor who teaches real estate finance. Here is one:

“I understand I took a risk,” said [Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004] “But I did not anticipate that the real estate market would go down 30 percent.” He talked with Wells Fargo about his options, and the lender said he had none.

IOs. Another wonderful affordability product.

by Calculated Risk on 9/08/2009 10:22:00 PM

HUD has a great tool to track FHA lender performance: Neighborhood Watch Early Warning System (ht TL)

Although the overall FHA default rate is 4.63%, the following lenders had 2 year default rates of 15% or more (only lenders with 100+ originations included). (Added: these are the two year default rates).

There are ten lenders with "perfect" records (100% default), but they only have one or two originations each.

And the winner is Mortgage Depot Inc. with a 48.65% default rate!

Note that Countrywide Home Loans Inc. is not Countrywide Bank FSB.

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header to sore

by Calculated Risk on 9/08/2009 05:58:00 PM

From Fitch: $134B of U.S. Option ARM RMBS To Recast by 2011

Of the $189 billion securitized Option ARM loans outstanding, 88% have yet to experience a recast event ... Of these loans that have not yet recast, 94% have utilized the minimum monthly payment to allow their loans to negatively amortize.
...
Further evidence of option ARM underperformance in the last year lies in the number of outstanding securitized Option ARMs either 90 days or more delinquent, in foreclosure or real estate-owned proceedings, which has increased from 16% to 37%. Total 30+ day delinquencies are now 46%, despite the fact that only 12% have recast and experienced an associated payment shock. Instead, negative and declining equity has presented a larger problem: due to high concentrations in California, Florida, and other states with rapidly declining home prices, average loan-to-value ratios have increased from 79% at origination to 126% today. 'Negative equity and payment shocks will continue as Option ARM loans recast in large numbers in the coming years,' said Somerville.

Fitch is just looking at securitized Option ARMs, not loans in bank portfolios like Wells Fargo with all the 10 year Pick-a-Pay recast periods.

The second paragraph is key - many of these borrowers are defaulting before the loans recast! From Bloomberg on a Barclays report in July: Option ARM Defaults Shrink Recast Wave, Barclays Says

The wave of “option” adjustable- rate mortgages recasting to higher payments, projected by some economists to represent a looming source of foreclosures that will hurt housing markets over the next few years, will be smaller “than feared” because many borrowers will default before their bills change, Barclays Capital analysts said.
...
About 40 percent of borrowers with option ARMs are already delinquent, and “many” of the others will start missing payments before their obligations change, the Barclays mortgage- bond analysts wrote in a July 24 report. ...

“The additional risk really will only be for borrowers who manage to stay current over the next couple of years and might default due to a payment shock,” the New York-based analysts including Sandeep Bordian and Jasraj Vaidya wrote.
...
More than $750 billion of option ARMs were originated between 2004 and 2008 ...

The real problem for Option ARMs is negative equity, and the surge in defaults is happening before the loans recast. As Fitch notes, modifications haven't been helpful for Option ARM borrowers because many are too far underwater:

To date, 3.5% of the approximately one million 2004-2007 vintage securitized Option ARM loans have been modified, in an attempt to mitigate effects from the payment shock. Modification types have included term extension, conversion to interest only loans, interest rate cuts, and others. These modifications have been somewhat successful, with 24% of modified Option ARM loans being 90+ days delinquent, compared with 37% of the overall Option ARM universe. However ... Fitch expects a high default percentage for modified Option ARM loans.

This is a somewhat confusing press release. The recasts will probably lead to higher defaults, but negative equity is the real problem.

by Calculated Risk on 9/08/2009 03:10:00 PM

From MarketWatch: U.S. consumer credit down record amount in July

UU.S. consumers reduced their credit burden by a record amount in July, the Federal Reserve reported Tuesday. Total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July to $2.47 trillion. This is the sixth straight monthly drop in consumer credit. ... This is the record 11th straight monthly drop in credit card debt.

Click on graph for larger image in new window.

This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 4.2% over the last 12 months. The previous record YoY decline was 1.9% in 1991.

Here is the Fed report: Consumer Credit

Consumer credit declined from $2,493.6 billion in June to $2,472.1 in July. Note: The Fed reports a simple annual rate (multiplies change in month by 12) as opposed to a compounded annual rate.

Note: Consumer credit does not include real estate debt.

by Calculated Risk on 9/08/2009 02:33:00 PM

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year.

Click on graph for larger image in new window.

This really shows the collapse in retail hiring in 2008. This also shows how the season has changed over time - back in the '80s, retailers hired mostly in December. Now the peak month is November, and many retailers start hiring seasonal workers in October.

Here is a story from Bloomberg: Retail Hiring Shift May Show Growing Confidence in Recovery (ht Brian, Mike)

U.S. discount, grocery and restaurant chains are hiring a larger percentage of job applicants than seven months ago, signaling confidence the economy may be improving, software maker Kronos Inc. said.

Kronos analyzed the 8.9 million job applications received by 68 retailers in the first seven months of the year. In July, 2.99 of every 100 applications resulted in a hire, compared with 2.75 in January, a three-year low, the Chelmsford, Massachusetts-based company said today in a statement.

“We are seeing a turnaround that reflects an increase in confidence by individual managers,” Robert Yerex, Kronos’s chief economist ... “It may take quite a bit longer to come back than it did to drop off.” This is the first time Kronos has publicly issued a monthly retail labor index.

Unfortunately this data is new and the season hasn't started yet. This hiring will be watched closely, and I suspect seasonal hiring will be stronger than in 2008, but not as strong as the 700+ thousand jobs in 2004 through 2007.