by Tanta on 9/04/2007 03:50:00 PM

Clyde sent me this jewel this morning: S&P answers its critics in "Don't Blame the Rating Agencies":

The fallout over subprime mortgages has provoked a rush to judgment, and some are now blaming the credit-rating agencies for the recent market turbulence. These charges reflect both a misunderstanding of the work carried out by rating agencies, and a misrepresentation of the overall credit performance of securities backed by residential mortgages

Much of the recent commentary has missed several critical facts. For example, our recent downgrades affected approximately 1% of the $565.3 billion in first-lien subprime residential mortgage-backed securities (RMBS) that Standard & Poor's rated between the fourth quarter of 2005 and the end of 2006. This represents only a small portion of the mortgage-backed securities market, which in turn represents a very small part of the world's credit markets. Additionally, our recent downgrades included no AAA-rated, first-lien subprime RMBS -- and 85% of the downgrades were rated BBB and below. In other words, the overwhelming majority of our ratings actions have been directed at the weakest-quality subprime securities.

Translation: we only screwed up on the stuff that is obviously risky, and we only misrated the stuff that involves first-loss position. The stuff that is obviously less risky and was never much in danger of taking write-downs is still OK.

Ratings are designed to be stable. Unlike market prices, they do not fluctuate on the basis of market sentiment. But they can and do change -- either as a result of fundamental adjustments to the risk profile of a bond or the emergence of new information.

Translation: ratings don't change with market sentiment because market sentiment changes only when ratings turn out to be unstable. Or something.

As part of the ratings process, we do engage in open dialogue with bond issuers. This dialogue helps issuers understand our ratings criteria and helps us understand the securities they are structuring, so we can make informed opinions about creditworthiness. We strive to make sure issuers and investors are fully aware of how we determine creditworthiness and believe that all parties are better served when the process is open and transparent.

Translation: And we only change our mind when we find out how closed and opaque the process really was, in hindsight.

I can't read any more of this . . .

by Calculated Risk on 9/04/2007 02:31:00 PM

From the WSJ: GM Sales Increase 6.1% As Ford Sales Tumble 14%

... Ford Motor Co. posted a 14% skid in sales for the month and said it sees higher fourth-quarter production. Toyota Motor Corp. posted a 2.8% sales drop in U.S. sales.

GM said its U.S. sales of cars and light trucks for August rose 6.1% from a year ago and lowered its third-quarter production forecast and sees lower fourth-quarter output.
...
Toyota blamed the credit crunch damping consumer confidence for its drop in U.S. sales in August.
...
Chrysler sales numbers will be released later in the afternoon.

by Tanta on 9/04/2007 12:15:00 PM

A deep curtsey to Ramsey for bringing this to my attention.

The Federal Reserve has released an Interagency Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages.

Servicers of securitized mortgages should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default. The governing documents may allow servicers to proactively contact borrowers at risk of default, assess whether default is reasonably foreseeable, and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage obligations. The Securities and Exchange Commission (SEC) has provided clarification that entering into loan restructurings or modifications when default is reasonably foreseeable does not preclude an institution from continuing to treat serviced mortgages as off-balance sheet exposures.2 Also, the federal financial agencies and CSBS understand that the Department of Treasury has indicated that servicers of loans in qualifying securitization vehicles may modify the terms of the loans before an actual delinquency or default when default is reasonably foreseeable, consistent with Real Estate Mortgage Investment Conduit tax rules.3

Servicers are encouraged to use the authority that they have under the governing securitization documents to take appropriate steps when an increased risk of default is identified, including:

• proactively identifying borrowers at heightened risk of delinquency or default, such as those with impending interest rate resets;
• contacting borrowers to assess their ability to repay;
• assessing whether there is a reasonable basis to conclude that default is “reasonably foreseeable”; and
• exploring, where appropriate, a loss mitigation strategy that avoids foreclosure or other actions that result in a loss of homeownership.

Loss mitigation techniques that preserve homeownership are generally less costly than foreclosure, particularly when applied before default. Prudent loss mitigation strategies may include loan modifications; deferral of payments; extension of loan maturities; conversion of adjustable-rate mortgages into fixed-rate or fully indexed, fully amortizing adjustable-rate mortgages; capitalization of delinquent amounts; or any combination of these. As one example, servicers have been converting hybrid adjustable-rate mortgages into fixed-rate loans. Where appropriate, servicers are encouraged to apply loss mitigation techniques that result in mortgage obligations that the borrower can meet in a sustained manner over the long term.

In evaluating loss mitigation techniques, servicers should consider the borrower’s ability to repay the modified obligation to final maturity according to its terms, taking into account the borrower’s total monthly housing-related payments (including principal, interest, taxes, and insurance, commonly referred to as “PITI”) as a percentage of the borrower’s gross monthly income (referred to as the debt-to-income or “DTI” ratio). Attention should also be given to the borrower’s other obligations and resources, as well as additional factors that could affect the borrower’s capacity and propensity to repay. Servicers have indicated that a borrower with a high DTI ratio is more likely to encounter difficulties in meeting mortgage obligations.

Some loan modifications or other strategies, such as a reduction or forgiveness of principal, may result in additional tax liabilities for the borrower that should be included in any assessment of the borrower’s ability to meet future obligations.

When appropriate, servicers are encouraged to refer borrowers to qualified non-profit and other homeownership counseling services and/or to government programs, such as those administered by the Federal Housing Administration, which may be able to work with all parties to avoid unnecessary foreclosures. When considering and implementing loss mitigation strategies, servicers are expected to treat consumers fairly and to adhere to all applicable legal requirements.

Please join me in congratulating the regulators for this document, and falling to my knees in desperate prayer that this will eliminate some of the confused and backwards reporting on this issue in the financial press. Thank you very much.

by Calculated Risk on 9/04/2007 10:00:00 AM

From the Census Bureau: July 2007 Construction Spending at $1,169.1 Billion Annual Rate

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during July 2007 was estimated at a seasonally adjusted annual rate of $1,169.1 billion, 0.4 percent below the revised June estimate of $1,173.2 billion. The July figure is 2.0 percent below the July 2006 estimate of $1,192.9 billion.

During the first 7 months of this year, construction spending amounted to $657.7 billion, 3.4 percent below the $680.9 billion for the same period in 2006.
...
[Private] Residential construction was at a seasonally adjusted annual rate of $534.0 billion in July, 1.4 percent below the revised June estimate of $541.8 billion.

[Private] Nonresidential construction was at a seasonally adjusted annual rate of $346.0 billion in July, 0.4 percent above the revised June estimate of $344.5 billion.

Click on graph for larger image.

This graph shows private construction spending for residential and non-residential (SAAR in Billions). While private residential spending has declined significantly, spending for private non-residential construction has been strong.

The second graph shows the YoY change for both categories of private construction spending.

The normal historical pattern is for non-residential construction spending to follow residential construction spending. However, because of the large slump in non-residential construction following the stock market "bust", it is possible there is more pent up demand than usual - and that the non-residential boom will continue for a longer period than normal.

The question is: Will we see the normal pattern? I think the answer is yes.

by Tanta on 9/04/2007 09:16:00 AM

A consensus is emerging in some quarters that a lot of the bad borrowing decisions people appear to have made during the boom had to do with consumers being insufficiently informed. I, who have been doing internet searches on mortgage-related topics since the invention of the internet, and who have learned how to weed out the jillions of "personal finance advice" articles in my quest for actually useful information, am here to tell you that something doesn't add up.

One of these days I'm going to write a nice retrospective post on all the really spiffy advice all those advice columnists handed out to mortgage-wannahaves over the 2002-2006 period, just to see what a "well-informed consumer" might have been expected to have assumed about the world.

Today, though, I'll just content myself with this nice example of post-turmoil wisdom from MarketWatch, whose editors really ought to know better, but consumer-advice-filler-drivel is such a staple of the financial press model that it apparently will take the Second Coming to shock some folks out of it.

PALM BEACH GARDENS, Fla. (MarketWatch) -- You still may qualify for a mortgage, regardless of a shaky credit market. But you need to know the ropes because many lenders have tightened standards. So what should you do if you're buying a home today or you need to refinance? . . .

Five steps to a mortgage

Before applying for a home loan, consider taking these steps:

1. Pay down credit balances. That will make you look less risky and might help your credit score, suggests Tom Quinn, vice president of scoring for Fair Isaac Corp., Minneapolis. If you have good credit, it may be possible to raise your credit score by asking existing creditors to raise your credit limits. But ask the lender not to pull your credit report to do it. Credit-report inquiries or deteriorating credit can lower credit scores.

Is it really very helpful to tell people who think they need credit that they should reduce the amount of credit they use in order to get more credit? Bad news, folks: if you have $20,000 in credit card debt and $20,000 in your savings account and you use the money to retire the cards, you will be denied a mortgage loan because in the Brave New World the mortgage lender wants that $20,000 as a down payment. If your credit card debt is trivial, so is this advice. And for the love of God, can we stop talking about what makes you "look risky"? What, "risky" is just some subjective attribute, like "fat in horizontal stripes," that can be fixed by changing your outfit? After all this turmoil, we're still making people think that it's just a matter of appearances and easy steps. MarketWatch, for shame.

2. Get a copy of your credit report from each of the three major credit bureaus. Fix errors and get as much adverse information removed as possible. You're entitled to one free credit report annually from each credit bureau at www.annualcreditreport.com. Read six steps to correct your credit report.

I'll forgive the editors of MarketWatch when they produce empirical evidence quantifying the number of people whose difficulty getting a mortgage comes down to credit report errors. You get bonus points if you ask yourself how "fixing errors" became code, during the boom, for fraudulent "credit repair." You get double bonus points for asking how some people became able, easily and without cognitive dissonance, to tell themselves that their debt problems were "all a big mistake."

3. Check licenses of lenders you're considering. This may not be easy because state licensing requirements vary by state and lender. Banks and thrifts can be checked out at www.fdic.gov by clicking on "Institution Directory."

Do you yet know whether all depository lenders actually require state licenses? I didn't think so. Do you yet know how many imploded, bankrupt, and criminally-investigated lenders so far this year had perfectly valid licenses? I didn't think so.

4. Shop several lenders. Don't assume if you get one quote of an unusually high interest rate, all will be high. Negotiate lower rates and seek removal of unnecessary fees.

Do you know what "unusual" is? Do you know what fees are "necessary"? Please analyze and evaluate your "negotiating" strength in a credit crunch. You can use the back of this paper if you need more space. (Hint: it's called a "credit crunch" when you have no position from which to negotiate because you need a loan more than the lender needs to make one.)

5. Consider that interest rates and terms may change daily. Also, a low interest rate could mean more upfront points or added fees. Get all pricing information in writing before obtaining a written commitment for your loan. Get a commitment letter directly from the lender who's financing the mortgage, which may be different from the loan originator.

This one may be my favorite. You aren't likely to get a written price quote until your loan has been underwritten these days. That means that the written price quote is in the commitment letter. It still isn't a "rate lock" until you get a "rate lock agreement." Much, much more to the point is that a "commitment letter" commits the lender to lend at the specified terms. It does not commit the borrower to borrow. You are not obligated for diddlysquat until you sign something with "Note" at the top and "I promise to pay" somewhere in the first line. We have heard story after story about people who didn't think they could "back out" when they were confronted with closing documents that didn't look right. Helpful advice might involve explaining that issue.

I conclude that the authors of this article have never been any closer to the actual mortgage business than standing around taking up space in my lobby, eating my LifeSavers and reading my back issues of House Beautiful, before getting tired of that and going home to surf the web for stupid "consumer advice" articles from 2004 that can be rehashed into filler for today's column.

MarketWatch editors: Now do you understand why I get so "mercurial" when you do this?