by Calculated Risk on 9/05/2007 10:44:00 AM

From the NAR: Pending Home Sales Index Falls Largely on Mortgage Tightening

The Pending Home Sales Index, based on contracts signed in July, fell 12.2 percent to a reading of 89.9 in July from the June index of 102.4, and was 16.1 percent lower than July 2006 when it stood at 107.1.

Lawrence Yun, NAR senior economist, said abnormal factors are clouding the horizon. “It’s difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren’t closing because mortgage commitments have been falling through at the last moment,” he said.

The usual period from signing to closing is about 45 to 60 days for existing homes. This index is for contracts signed in July, so there will probably be some impact on the reported existing home sales for August (report due Sept 25th), but I think the real impact will show up in the report for September.

by Tanta on 9/05/2007 08:10:00 AM

The Chicago Tribune tells a story about borrowers facing foreclosure.

PITTSBURGH - For Donna and Steve Love, the plan seemed perfect.

Priced out of the Boston-area housing market, where 2-bedroom homes can cost about $500,000, the working-class couple thought it was time to head to a more affordable market.

They chose Pittsburgh. They liked the city, thought they could get jobs there and were sure they could afford a home without having to win the lottery.

After finding their home -- a $59,000, 3-bedroom, brick row house near the city's downtown that they paid for with a subprime loan -- they moved in June of 2006 and tried to settle into their new life.

But within a year, they were facing foreclosure. . . .

In March 2006, they reached what they thought were final terms for the loan: $5,000 down, a 7.75 percent interest rate, fixed for two years and then adjustable for the remaining 28 years, with a cap of 14.75 percent.

The $429 mortgage payments would be higher than they expected, but still within their budget -- equal to less than one week of Steve's salary with CVS. Plus, it was still cheaper than their $700-a-month rent in a suburb of Boston.

Then, on April 20, two weeks before the May 3 closing date, they said they got mortgage documents in the mail with a letter that said they should sign all the papers and return them as soon as possible.

But they quickly noticed the final contract listed a higher interest rate of 12.125 percent, with a cap of 19.125 percent. That pushed the monthly mortgage payments up more than $200 to $692 a month.

"We both said, 'Oh my God!' and started reading page by page," recalled Steve Love.

They called Countrywide and talked to several representatives who told them "that the fluctuating market went up and investors had asked for a higher percentage rate on the loans, and this was the best they could do," he said.

So, the CFC flack quoted says there's more to the story than that. I'm sure there is. There is always more to most stories.

However, I'm having a hard time figuring out what could possibly be the story that would justify a 12.125% start rate on a 2/28 ARM in April of 2006. The 6-month LIBOR, the index for this loan, was 5.2879% in April 06. That means these borrowers were paying 6.8371% over the index for two years' worth of "rate protection." That's why they aren't having a "reset" payment shock problem; their payment was not discounted in the least in the initial fixed period of the loan.

I for one do not remember the major credit market crisis of April 2006 that suddenly required subprime borrowers to get premium ARMs. I cannot think of anything that might "change" between original underwriting and closing of the loan that would move the borrower's interest rate from 7.75% to 12.125%. Even if they didn't have a rate lock agreement.

But notice the situation these borrowers were in: they had already left their jobs and given up their apartment in preparation for moving, and they had a deposit on the home at stake. Allow me to observe that we lenders have known, since dirt, that this happens frequently on purchase money loans. People make hard-to-revoke decisions based on the commitment letters we send out. We therefore took great care to make the terms of the commitment letter accurate. You simply do not pull the rug out from under a relocating borrower unless you're a predator trying to squeeze someone who has no negotiating position. (I don't think you ought to do this with anyone, of course; I'm simply pointing out that lenders understand how the purchase-relocation process works. It might be a new thing to some consumers, but not to us.)

And all of this over a $59,000 120-year-old home in Pittsburgh for borrowers who can find work at the going rate for Pittsburgh, but are being charged a mortgage interest rate as if they worked in Boston. CFC would rather own that REO than give up some of 12.125%.

I don't think any purpose is served by turning this into an argument over who "deserves" sympathy. I think a good purpose is served by looking at the economics of the thing and asking how this could possibly make any sense. If Donna and Steve's credit history or employment prospects or debt load was "so bad" that they "deserved" a rate of 12.125% (but CFC didn't notice that until the second set of paperwork got drawn up), then they simply should have been denied a loan: they can't afford 12.125%. CFC extended a loan knowing that the borrower couldn't afford it. Now they refuse to play ball on a workout?

by Calculated Risk on 9/05/2007 02:14:00 AM

From Mathew Padilla at the O.C. Register: First American CFO sees weakness in commercial real estate

Frank McMahon, chief financial officer of The First American Corp. in Santa Ana, said during a conference call today that the market for securities backed by commercial loans dropped dramatically in August.

He said it’s natural for borrowing costs to rise and price appreciation to slow on commercial real estate as a result.

The CRE slump may be here.

Also, Padilla notes that First American is cutting 1,300 jobs, and that there are rumors of large layoffs at Countrywide:

National Mortgage News reports that Countrywide Financial Corp. may cut 7,000 to 10,000 jobs, citing “industry officials close to the situation.”

by Calculated Risk on 9/05/2007 01:22:00 AM

From the WSJ: Why Libor Defies Gravity

The Federal Reserve could cut short-term interest rates in the weeks ahead, but right now one key rate is going in exactly the opposite direction, something that could have a big impact on markets and the economy.

That rate is the London interbank offered rate, or Libor. It is an important benchmark for everything from adjustable-rate mortgages in the U.S. to giant floating-rate bank loans taken out by global corporations.

Credit-market turmoil has pushed the Libor higher, even as other short-term interest rates, such as the interest rate on Treasury bills, are falling.
...
U.S.-dollar Libor rates usually closely track the federal-funds rate, which is the overnight lending rate managed by the Federal Reserve. But the two rates are now parting ways, complicating matters for the Fed as it tries to manage the global credit crisis and pushing up many short-term interest rates for borrowers.

For the first eight months of this year, the U.S.-dollar Libor rate for three-month loans between banks nudged between 5.34% and 5.36%. Yesterday, the rate hit 5.7%, marking the rate's fastest rise in several years. ...
...
When Chrysler and its finance unit borrowed $20 billion from banks in July as part of the auto maker's acquisition by Cerberus Capital Management, its loans were indexed to Libor interest rates.

Maybe this is a temporary divergence in rates, but a rising Libor rate will have a negative impact on the economy and housing.

by Calculated Risk on 9/04/2007 04:55:00 PM

Papers to read from the Jackson Hole 2007 Symposium:

The Housing Finance Revolution, Richard K. Green and Susan M. Wachter

Understanding Recent Trends in House Prices and Home Ownership, Robert J. Shiller

Housing and the Business Cycle, Edward E. Leamer

Housing, Credit and Consumer Expenditure, John N. Muellbauer

Housing and the Monetary Policy Transmission Mechanism, Frederic S. Mishkin

Housing and Monetary Policy, Stefan Ingves

Housing and Monetary Policy, John B. Taylor

There will be a quiz later ...

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?