by Calculated Risk on 6/18/2007 07:50:00 PM

Click on graph for larger image.

NAHB Press Release: Builder Confidence Slips Again in June

Ongoing concerns about subprime-related problems in the mortgage market and newfound concerns about rising prime mortgage rates caused builder confidence to decline two more points in June, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), released today. With a reading of 28, the HMI now is at the lowest level in its current cycle and has reached the lowest point since February 1991.

“Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of nonprice incentives to work down sizeable inventory positions,” said NAHB President Brian Catalde, a home builder from El Segundo, California.

“It’s clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates,” added NAHB Chief Economist David Seiders. “Home sales most likely will erode somewhat further in the months ahead and improvements in housing starts probably will not be recorded until early next year. As a result, we expect housing to exert a drag on economic growth during the balance of 2007.”

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as either “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes declined in June. The index gauging current single-family sales slipped two points to 29, the index gauging sales expectations for the next six months fell two points to 39, and the index gauging traffic of prospective buyers fell one point to 21.

Three out of four regions posted declines in the June HMI. The Midwest posted a three- point decline to 19, the South posted a one-point decline to 32 and the West posted a five- point decline to 27. The Northeast recorded a three-point gain to 35 following a six-point loss in May.

by Tanta on 6/18/2007 04:34:00 PM

Hey! Calculated Risk got an honorable mention by the Associated Press, for which we apparently have Barry Ritholtz to thank (don't worry, Barry, I don't think this is your fault). Here we are:

Calculated Risk -- A philosophical blog on finance and economics. No stock tips or fancy charts -- just an anonymous business executive seeking the truth about the market. Some of it is worrisome, and blunt. Investment banks have been selling the riskiest slices of debt to pension funds, he says, which are entrusted with providing for the retirement of public workers. He calls these debt offerings, called unrated collateralized debt obligations "a pig of a pig, distilled essence of pig, ur-pig, Total Ultimate X-Treme Mega Pig" and says that buying them is "playing with matches."

"No fancy charts?" What does it take to get recognition for CR's excellent and legendary charts? Animated recession bars?

We will pass over in silence the true authorship of the cascade of pig jokes. Ahem.

We may now resume being philosophical.

by Tanta on 6/18/2007 11:39:00 AM

Everybody's all fired up about this report this morning from Fannie Mae's Berson's Weekly Commentary. I'm not, frankly, sure why; the insight about prepayments (specifically, refinance options) and subprime loan performance is not exactly news. But it does include a nice chart, helpful for those who don't tend to think in terms of mortgage flows.




The pie on the left represents 2/28s closed in late 2003 to late 2004 (which gives them a first payment adjustment date in calendar year 2006). The pie on the right represents 2/28s closed in late 2004 to late 2005. The clear implication is that delinquency and default in the earlier vintage was mitigated by refinance (or home sale) opportunities that are sorely lacking in the later vintage.

One has to remember, though, that separating the vintages like this does not mean the two pie charts include two mutually-exclusive groups of borrowers. Because these are two sequential years and the loan type in question is a 2/28, it is likely that most of the refinances of the earlier vintage do not appear as new loans in the later vintage; they would appear in a "future" pie with a reset in 2008 (or later). The point, though, is that what you see in the left-hand pie, for instance, is a very big pile of refinances that were originated in 2006, a year notorious for wretched underwriting guidelines. The slowing of the prepayments in the right-hand pie suggests that that party's over, but it also clearly means that we still have a lot of loans that "rolled" to a new loan in 2006 and 2007 and that may or may not have an escape route in 2008 or 2009 when the next reset problem arises.

by Tanta on 6/18/2007 10:32:00 AM

I don't often find myself making confident predictions these days--the market can stay irrational longer than I can--but I will do so on this subject: some hedge funds are about to discover what is Different about home mortgage lending, with unfortunate results for the hedgies.

Bloomberg, via John M. (thanks!):

June 18 (Bloomberg) -- James E. ``Jimmy'' Cayne helped make Bear Stearns Cos. the mortgage king of the securities industry by packaging home loans into bonds and selling them to clients like Michael Vranos. Now Vranos, who manages $29 billion at Ellington Management Group LLC, is cutting Cayne out of the middle and buying mortgages on his own.

On Wall Street, they call that disintermediation, and it's eating into almost $9 billion of fees that firms including New York-based Bear Stearns earn from securitizing mortgages. Instead of buying such bonds at markups of 1 percent or more, hedge funds expect to make better returns by taking over bad debts and pressing borrowers to pay up.

Well, guys, welcome to the most-regulated lending industry in history, with the biggest middle-class political constituency imaginable, and some major honkin' participants who happen to be giant financial institutions whose calls are taken by the Federal Reserve.

Hope you find enough "inefficiencies" to make it fun while it lasts.

by Tanta on 6/18/2007 09:47:00 AM

The New York Times does us the major favor of helping to define the term "housing bust" as distinct from the less threatening "housing slump"(thanks, Walt!).

Two economists with the Federal Deposit Insurance Corporation, Cynthia Angell and Norman Williams, have studied housing cycles since 1978 and have come up with a definition of a housing bust. In a paper published in February 2005, they called it a decline of at least 15 percent in nominal prices, meaning not adjusted for inflation. While economists tend to focus on real prices over time, the authors argue that in housing, nominal prices are a better measure of distress because homeowners, rarely think in inflation-adjusted terms in assessing market conditions.

Other economists, however, argue that 15 percent may be too restrictive a definition. Mark Zandi, chief economist of Moody’s Economy.com, says a better one would be a decline of 10 percent or more from peak to trough. “When you see a decline in home prices of 10 percent, you get significant credit problems and it’s enough to wipe out equity in most cases,” he said.

Mr. Zandi also said that once prices have dropped 10 percent, there tends to be a self-reinforcing downward cycle. If borrowers can’t afford their mortgages and banks foreclose, their homes are generally sold at significant discounts to the market. That creates an added drag on overall prices, resulting in greater numbers of foreclosures, followed by even greater price slides.

Another reason Mr. Zandi argues for 10 percent is the tendency of housing-price measurements to underestimate declines. Sellers often provide discounts that may not show up in the measured price, but are still significant. Today, some homebuilders are discounting the sales price of new homes by an average of 5 percent, Mr. Zandi said.

My own undoubtedly naive view of the matter is that there ought to be a terminological difference between a decline of any appreciable magnitude in the presence of measurable stress to the local economy, on the one hand, and what from all appearances is a housing price decline that has caused itself. I propose a "housing funk."

by Tanta on 6/18/2007 07:07:00 AM

Mamas, don't let your babies grow up to be marketers who send "test mailings" to reporters:

Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?"

Then came the kicker: "Allow us to help you refinance your mortgage with the rate and term that best suits your needs."

GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.

Even more troubling was the impression GMAC gave of the lender its letter appeared to be targeting, Washington Mutual. WaMu spokeswoman Libby Hutchinson calls the mailing "false and misleading," and she's absolutely right. GMAC - now majority-owned by private equity firm Cerberus Capital, with General Motors retaining a minority stake - touts itself as "a stable and established lender" in its mailing, but its below-investment-grade credit rating is actually several notches below that of WaMu.

To be sure, WaMu's home-loan business is struggling - subprime-related losses contributed to a 20 percent decline in bank profit during the last quarter. However, WaMu's overall exposure to the subprime market pales in comparison to GMAC's own. At the end of last year, subprime comprised 10 percent of WaMu's mortgage portfolio - about $20 billion total. GMAC, meanwhile, reported $48 billion in subprime loans, 76 percent of its total home-loan portfolio.

So what does GMAC have to say for itself? I called the company to ask about the letter, and GMAC spokesman Stephen Dupont sounded genuinely apologetic. The letter was part of "test mailing," Dupont said. "It's not something that we're going to be repeating."

Looks like GMAC needs a new statement-stuffer marketing strategy. Something tells me the Calulated Risk commenters are probably bubbling over with good ideas . . .

by Calculated Risk on 6/18/2007 01:23:00 AM

From the WSJ: Ills Deepen in Subprime-Bond Arena

A few weeks ago, the market for bonds backed by risky home loans looked like it was calming down. Now, problems are quickly mounting.
...
On Friday, credit-rating firm Moody's Investors Service slashed ratings on 131 bonds backed by pools of speculative subprime loans because of unusually high rates of defaults and delinquencies among the underlying mortgages. The ratings company also said it is reviewing 247 bonds for downgrades, including 111 whose ratings it had just lowered. All the bonds were issued as recently as last year.

The latest moves by Moody's affected around $3 billion worth of bonds, which represent less than 1% of the over $400 billion in subprime mortgage-backed bonds that were issued in 2006.
...
"The wave of downgrades will continue" among subprime bonds issued in 2006, says Jay Guo, director of asset-backed research at Credit Suisse ...

These downgrades are mostly for bonds backed by second-lien loans:

Just 1.5% of bonds from 2006 that are backed by first-lien subprime mortgages have been downgraded or are being reviewed by Moody's for downgrades.

by Calculated Risk on 6/17/2007 11:07:00 PM

From the WSJ: A 'Subprime' Fund Is on the Brink (hat tip to many - thanks!)

Concerned that an internal hedge fund at Bear Stearns Cos. wouldn't be able to meet a margin call, Merrill Lynch & Co., one of the fund's biggest lenders, seized $400 million of its assets and is preparing to auction them off.

This follows the sale of $4 Billion investment-grade bonds by the same hedge fund last week.

Bids for the securities are scheduled to be negotiated starting at noon on Monday.

This could be interesting.

by Calculated Risk on 6/17/2007 11:01:00 PM

From the LA Times: It's the New Normal Sellers try for the right price off the bat, while buyers take their time deciding. (hat tip Neal)

By a widely used measure of inventory, there has been an average 8.3-month supply of homes on the market in Los Angeles County over the last 19 years, according to the California Assn. of Realtors. That's how long it would take for the supply of homes to be exhausted at the prevailing sales pace. In April, that supply was 12.1 months in L.A. County and 22 months in Orange County.

12.1 months of inventory in L.A. County? 22 Months of inventory in Orange County? That is higher than I realized.

by Calculated Risk on 6/17/2007 01:41:00 PM

Rex Nutting at MarketWatch previews the coming week: Housing market hasn't bottomed yet

The depression in the home building sector is no longer news; even Federal Reserve officials seem resigned to months if not years of weak activity.
...
The data in the coming week "will be a sobering reminder that the housing market has yet to bottom out," said Brian Bethune and Nigel Gault, economists for Global Insight ...

There is no way the news will be "good" for housing. If starts decline - as expected - that means more weakness in the housing sector. And if starts unexpectedly increase that just means more supply and more weakness to come.

Few analysts see any bottom in home building.

It might be hard to remember, but the consensus view at the end of '06 was that housing would bottom in Q1 or Q2 of '07. Oops.