by Tanta on 7/21/2007 10:34:00 AM

As you all know, earnings season is upon us, wherein we shareholders of financial and real estate sectors will be treated to some cheerful news. I say we celebrate with one of the great rock classics.

by Tanta on 7/20/2007 09:19:00 PM

Fitch has affirmed ($2.383 billion) and downgraded/placed on watch negative ($32.2 million) a handful of classes of seven SASCO/Lehman RMBS. The two biggest problems are:

Structured Asset Securities Corp., Lehman Mortgage Trust (LMT), Series 2006-3
--Class A affirmed at 'AAA';
--Class M affirmed at 'AA+';
--Class B1 affirmed at 'AA';
--Class B2 affirmed at 'A';
--Class B3 downgraded to 'BB+' from 'BBB';
--Class B4 downgraded to 'BB' from 'BBB-';
--Class B5 downgraded to 'B' from 'BB';
--Class B6 downgraded to 'CCC/DR2' Distressed Recovery (DR) from 'B'.

For LMT 2006-3, the loans in 90+ delinquency at twelve months seasoning as a percentage of the current pool balance is 3.13%. The CE of the B3, B4, B5 and B6 classes are 1.39%, 1.21%, 0.80% and 0.39% respectively.

Structured Asset Securities Corp., Lehman Mortgage Trust (LMT), Series 2006-7
--Class A affirmed at 'AAA';
--Class M affirmed at 'AA+';
--Class B1 affirmed at 'AA';
--Class B2 affirmed at 'A';
--Class B3 affirmed at 'A-';
--Class B4 affirmed at 'BBB';
--Class B5 rated 'BBB-' placed on Rating Watch Negative;
--Class B6 downgraded to 'BB-' from 'BB';
--Class B7 downgraded to 'CCC/DR1' from 'B'

For LMT 2006-7, the loans in 90+ delinquency at eight months seasoning as a percentage of the current pool balance is 1.70%. The CE of the B5, B6 and B7 classes are 1.19%, 0.81% and 0.38% respectively.

LMT 2006-7 is Alt-A with some scratch & dent mixed in. LMT 2006-3 is Alt-A originated exclusively by Countrywide.

Then there was this:

Fitch Ratings-New York-20 July 2007: Fitch Ratings has taken various rating actions on the following Luminent Mortgage Loan Trust issue:
Series 2006-3:
--Class A affirmed at 'AAA';
--Class II-B-1 affirmed at 'AA';
--Class II-B-2 affirmed at 'A';
--Class II-B-3 affirmed at 'BBB';
--Class II-B-4 downgraded to 'B+' from 'BB';
--Class II-B-5 downgraded to 'CCC' from 'B' and assigned a Distressed Recovery (DR) rating of 'DR2'.

The collateral for subgroup II consists of 1,135 adjustable rate mortgage loans totaling $313,511,042, as of the cut-off date (April 1, 2006). The mortgage pool demonstrated an approximate weighted-average loan-to-value ratio (OLTV) of 76.51%. The weighted average FICO credit score was approximately 712. . . .

The downgraded classes reflect the deterioration in the relationship of CE to future loss expectations and affect approximately $3 million of outstanding certificates. Although the trust has experienced little loss thus far (0.01%), approximately 5.56% (as a percentage of the current pool balance) of loans are 60+ days delinquent at this time. This includes bankruptcy, foreclosures and real estate owned (REO) of 0.15%, 2.62% and 0.71%, respectively. The CE for the II-B-3, II-B-4 and II-B-5 classes is 1.9%, 1.14% and 0.5%, respectively.

The LUM deal is half neg am; 90% of the other half is IO.

Let me point out that so far we're talking about a few classes of a few securities at a modest total dollar amount on these Alt-A downgrades.

That tends to be how things start.

I'm just trying to make sure that if the day comes when the Alt-A downgrades come in a torrent, we are stunned but not surprised.

by Calculated Risk on 7/20/2007 04:20:00 PM

This is a preliminary update to my 2007 housing forecast (see bottom of post for graphs on inventory).

Let's review the basics of supply and demand.

This diagram shows a normal Supply and Demand relationship. When the supply curve shifts (dark blue to light blue) then the price falls from P0 to P1.

And when the demand curve shifts, perhaps due to the changes in lending standards (from dark red to light red), the price falls again, this time from P1 to P2.

So, given a normal market, with the given shifts in supply and demand, we would expect prices to fall, keeping the quantity demanded in balance with the quantity supplied.

The above diagram works well for commodities, like corn, and these facts - shifts in supply and demand - would lead to falling prices, bringing the quantity demanded and the quantity supplied back into equilibrium. But, for housing, prices are sticky because sellers tend to want a price close to recent sales in their neighborhood, and buyers, sensing prices are declining, will wait for even lower prices.

With perfect information, sellers would reduce their prices to P2, and the markets would clear. However, with imperfect information and sticky prices, we usually see a precipitous decline in the quantity demanded instead.

Look at the diagram and imagine that the price stays at P0. What happens? The quantity demanded is where the light red line and P0 cross. Meanwhile the quantity supplied is determined by where the light blue line would cross P0 (imagine the P0 line extends to the light blue line). This implies transaction volumes would decline and inventory levels would rise - exactly what is happening right now.

The Supply and Demand Curves shifts

This post would get very long if I tried to explain why and when the demand and supply curves shifted. Obviously the demand curve has shifted to the left recently due to the tightening of lending standards. But the first shift in the demand curve actually occurred towards the end of 2005 - because so many buyers were "speculating" with leverage and pulling demand forward during the boom. (Not to be confused with speculators buying investment homes).

As a reminder of the buying frenzy back in April, 2005, in an LA Times article "They're In — but Not Home Free", the writer described a woman that was "able to afford, barely, her first home". She had taken out "an adjustable-rate mortgage that won't require her to pay any principal for three years". She was already strapped, working overtime to pay her bills, and didn't know what she would do in early 2008. She was gambling that either her income would increase or that the value of her home would rise enough to sell at a profit. From the article:

Californians are adopting a "buy now, pay later" strategy on a massive scale. The boom in interest-only loans — nearly half the state's home buyers used them last year, up from virtually none in 2001— is the engine behind California's surging home prices.

This type of leveraged activity pulled demand from future periods (i.e. now) shifting the demand curve to the right during the boom, and has shifted the demand curve to the left during the bust.

The supply curve was shifted to the right during the bust for at least two reasons: 1) investors were buying homes in record numbers to flip during the boom. This can be described as "storage", reducing supply during the boom, and increasing supply during the bust as investors try to unload their properties, and 2) rising foreclosures also increases the supply during the bust.

I'll update the 2007 housing forecast next week, after the June New and Existing home sales reports are released. Meanwhile, here is a look at inventories through May:

Inventories are at record levels and rising.

This graph shows the year end total houses for sale since 1982 (2007 inventory is for May). Existing home inventories are currently at a record 4.431 million units, and new home inventories of 0.536 million units are near the record.

And the situation appears to be getting worse. Based on ZipRealty data, existing home inventories were probably over 4.5 million units in June. And since cancellations for new home builders are increasing - for examples, see here and here - the number of new homes for sale is probably understated (note: see Caroline Baum on how cancellations impact new home inventory levels).

In the second graph, inventory levels are normalized by the number of owner occupied units (OOU). Normalizing by OOU isn't perfect, since it doesn't account for changes in 2nd home ownership, but it does show that inventories are at record levels even compared to the growth in homeownership.

The third graph uses the "months of supply" metric for both new and existing homes. The "months of supply" metric is now above the level of the previous housing slump in the early '90s, but still below the peak levels of the housing bust in the early '80s.

The "months of supply" is calculated by dividing the total inventory by the seasonally adjusted annual rate (SAAR) of sales, and multiplying by 12. Currently inventory is 4.431 million, SAAR sales are 5.99 million giving 8.9 months of supply.

Both the numerator and the denominator are moving in the wrong direction. Not only is inventory at record levels and increasing, but sales are falling ...

Demand is falling.

It is difficult to graph "demand", but we should be aware of the incredible increase in turnover of existing homes during the recent housing boom (due to excessive leverage as described above). This graph shows existing and new home sales normalized by the number of owner occupied units. Existing home sales reached 9.5% of owner occupied units in 2005, far above the median level of 6.0% for the last 35 years.

Some of the sales were for investment and second homes, but normalizing by owner occupied units probably provides a good estimate of normal turnover. If existing home sales fell back to 6% that would be about 4.6 million units. If sales fell back to the level of 1998 to 2001 (7.3% of total owner occupied units sold) that would be about 5.6 million units in 2007.

This graph also shows that new home sales, as a percent of owner occupied units, has already fallen back to the median level of the last 35 years. However existing homes are a competing product for new homes, and the record inventory of existing homes for sale will probably continue to put downward pressure on new home sales.

And finally a word on prices: Sticky doesn't mean stuck. Prices are now falling by most measures, and will probably continue to fall slowly over the next several years. While we wait for prices to fall to P2, it is easy to predict that transaction volumes will decrease, but it is difficult to predict by how much. The housing market moves in slow motion, so I think my sales prediction of between 5.6 and 5.8 million existing homes in 2007 still looks pretty good. Sorry for the long post!

by Calculated Risk on 7/20/2007 12:10:00 PM

On Wednesday, it was JPMorgan expressing concern about "hung" bridge loans. Today it is Citigroup.

From the WSJ: Citi May Be Stuck With Bridge Loans

Citigroup Inc. is bracing for the possibility that it will get stuck holding more leveraged loans for corporate buyouts ... On four deals in the second quarter, Citigroup was unable to sell debt to investors, leaving the world's biggest bank and its peers holding so-called bridge loans on their balance sheets, said CFO Gary Crittenden. ...

In the third quarter, Citigroup is likely to find itself in similar situations with other deals, which likely "will impact our revenue," Mr. Crittenden said in an interview. ...
...
Asked in the interview whether the Chrysler loan could get stuck on banks' balance sheets, Mr. Crittenden said he wouldn't comment on specific transactions. "But it's a question of pricing and terms generally...but we have the capacity along with many other syndicate partners to have that be on the balance sheet if that's the right decision at the time the deal needs to get done," he said.

by Calculated Risk on 7/20/2007 11:22:00 AM

St. Louis Fed President William Poole spoke this morning: Reputation and the Non-Prime Mortgage Market.

... the non-prime mortgage market—with 2006 originations of about one trillion dollars —clearly is large enough to affect aggregate homebuilding activity and consumer spending.
...
Most of the news, and most of the problems, relate to the highest risk part of the non-prime mortgage market—the subprime market. There have also been some problems in the so-called “Alt-A” market, which lies between prime and subprime. What I am calling the non-prime market covers subprime and Alt A.

The discussion has now expanded beyond subprime to include Alt-A.

by Tanta on 7/20/2007 10:20:00 AM

There appears to be some questions about Alaska Senator Lisa Murkowski's recent real estate deal. (Stunning? Surprising? On tenterhooks yet?) It seems the parcel traded at the assessed value, not the appraised value. So?

SOLDOTNA -- U.S. Sen. Lisa Murkowski is drawing criticism this week over Kenai River property she bought late last year from real estate developer and political supporter Bob Penney. . . .

After two days of criticism online and on talk radio, both Penney and a spokesman for Murkowski described the deal as a fair trade between people who chose to become neighbors on the river.

They said Murkowski, R-Alaska, and husband Verne Martell paid Penney the amount of the Kenai Peninsula Borough's most recent assessment on the 1.27 acres: $179,400. Murkowski's spokesman said there was nothing improper about the sale.

This year's borough assessment, completed after the sale, is for $214,900. . . .

Penney said he was surprised that the assessed value was as high as it was -- and that the family agreed to the price. The assessed value the year before the sale was $120,300, and Penney said he didn't know it had changed in 2006.

"Word of honor, I did not know what the assessed value was," he said. "I thought it was still $120,000."

The 2005 assessment was up only about $11,000 from 2004, compared to the $59,000 increase last year and $36,000 this year.

"Who the hell would ever think it would jump like that?" Penney said.

Who the hell would ever think it would jump like that? How about everybody in the universe?

by Tanta on 7/20/2007 07:53:00 AM

From Bloomberg, "Miami Condo Glut Pushes Florida's Economy to Brink of Recession":

In the 1970s, when condos were a new product, Florida developers built 500,000 units and prices fell 50 percent, said Brad Hunter of MetroStudy, a research firm in West Palm Beach.

``The difference is, back then they were two-story condo buildings that had $50,000 units,'' Hunter said. ``Nowadays they are $700,000 units in 20-story buildings. Instead of building too much stuff that people could afford like we did then, this time we built too much stuff that people can't afford.''

by Calculated Risk on 7/19/2007 08:53:00 PM

From Reuters: Chrysler sweetens pricing on loans

Pricing has been sweetened on Chrysler Financial Services' $6 billion of first- and second-lien term loans, sources told Reuters Loan Pricing Corp. on Thursday.

The $4 billion first-lien loan pricing is being raised by 25 basis points to 300 basis points over the London interbank offered rate, while the $2 billion second-lien term loan is being raised by 50 basis points to 550 basis points over Libor, sources told Reuters LPC.

Call language on both term loans also is being tightened.
...
The changes come on the heels of talk of revisions to the Chrysler Corp. deal earlier this week.

Also from Reuters: Tower Automotive sweetens pricing on loan

Pricing has been sweetened on Tower Automotive's $895 million of first and second-lien bank loans, sources told Reuters Loan Pricing Corp. on Thursday.

The first-lien term loan has been increased to 400 basis points over the London interbank offered rate from 325 basis points to 350 basis points over LIBOR, while the second-lien term loan is being raised to 750 basis points over LIBOR from 625 to 650 basis points over LIBOR, sources said.

The first-lien loan, which did not have call language earlier, now benefits from 101 soft-call and is being issued at 98.5.

Call language on the second-lien loan is being tightened ...

by Calculated Risk on 7/19/2007 03:04:00 PM

From Greg Ip at the WSJ economics blog: Bernanke Rains on Theory of Houses as ATMs

Fed Chairman Ben Bernanke said the role of home equity as source of purchasing power isn’t significant, a clear break from the views of Alan Greenspan and many economists.
...
Mr. Bernanke ...: “Our sense — and this so far seems to be borne out by the data — is that consumers respond to changes in the value of their home essentially because there’s a change in their wealth, not because there’s a change in their access to liquid assets.”

Bernanke has been wrong about everything else related to housing, but maybe he'll be correct here. However, clearly Bernanke's view is "not borne out by the data" - at least not yet. Based on most research on MEW, the impact of declining MEW, if any, would probably hit consumption in the 2nd half of '07. We already know there was a sharp slowdown in Q2 PCE growth, but that might be related to higher gas prices and not declining MEW.

Mr. Bernanke went on to reiterate it’s the price of homes, not MEW or financial contagion that represents the biggest risk of spillover from the housing slump. “House prices, nationally speaking, have not declined,” he said. “They’ve only risen more slowly, and so we have not yet seen anything except in a few local areas akin to a decline in house prices.” If they do decline, he said a hit to consumer spending could be expected on the order of “4 cents and 9 cents on the dollar” of lost home wealth.

Although prices have increased slightly according to OFHEO, prices have fallen nationwide by several other measures (NAR, FHFB):

The FHFB reported the decline in the average price was $501, or 0.16 percent, from $306,759 in October 2005 to $306,258 in October 2006. This is the first decline in the MIRS since 1992-93.

And prices have most likely fallen more since October of last year.

by Calculated Risk on 7/19/2007 01:47:00 PM

More downgrades from Standard & Poor's:

Standard & Poor's Ratings Services today lowered its ratings on 93 tranches from 75 U.S. synthetic collateralized debt obligation of asset-backed securities (CDO of ABS) transactions.

The downgrades follow a review of all of Standard & Poor's rated synthetic CDO transactions with exposure to U.S. residential mortgage-backed securities backed by subprime first-lien collateral ("U.S. subprime first-lien RMBS") that saw ratings lowered on July 12, 2007 (see the related press release, "Various U.S. First-Lien Subprime RMBS Classes Downgraded," published July 12, 2007, on RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com, and on Standard & Poor's Web site, www.standardandpoors.com).