by Tanta on 9/27/2007 07:06:00 AM

I know, it's not Saturday yet, but CR's little caption contest below was just too tempting.

by Calculated Risk on 9/26/2007 09:06:00 PM

From the LA Times:

News item: "For 10 days now, a sagging house parked on the Hollywood Freeway's northbound shoulder in the Cahuenga Pass has had people gawking -- and talking."

Some of the captions are great. My favorites:

"If you lived here, you'd be home now!"
Gary

"Halfway to Calabasas, Bob realizes his mistake and decides to mail in the keys instead."
Raughle

by Calculated Risk on 9/26/2007 08:50:00 PM

From Bloomberg: Subprime-Mortgage Defaults Rose Last Month, Data Show (hat tip John & Jim)

Late payments and defaults among subprime mortgages packaged into bonds rose last month ...

After August payments, 19.1 percent of loan balances in 20 deals from the second half of 2005 were at least 60 days late, in foreclosure, subject to borrower bankruptcy or backed by seized property, up from 17.5 percent a month earlier, according to a report yesterday from Wachovia Corp.

Prepayment speeds for the loans slowed, suggesting it's more difficult for borrowers to sell their homes or refinance, according to another report by New York-based analysts at UBS AG. Record levels of delinquencies and defaults on subprime mortgages are worsening as home prices decline and interest rates on loans adjust higher for the first time. As lenders tighten standards, borrowers are finding it harder to refinance into new mortgages with lower payments.

The ``reports showed the first inkling of the impact of shutdown of subprime market,'' the UBS analysts led by Thomas Zimmerman wrote late yesterday. ``In our opinion, the full impact is yet to come.''

by Calculated Risk on 9/26/2007 04:58:00 PM

From MarketWatch: Sallie Mae says deal to buy lender threatened

The group of investors that agreed to buy SLM Corp. has said that it can't close the deal under the agreed-upon terms, the giant student lender announced Wednesday.

SLM, commonly known as Sallie Mae said that the group "has no contractual basis to repudiate its obligations" under the agreement, and pledged to pursue "all remedies available" to get the deal done.

The NY Times had an article on the Sallie Mae deal last week: Deal to Buy Sallie Mae in Jeopardy

While the group is hoping to renegotiate the price of Sallie Mae, these people said, it may also be willing to walk away and pay the $900 million breakup fee.

The $900 million breakup fee is a little higher than the reported percentage writedowns at Lehman and Morgan Stanley. The total deal value is $25 Billion.

by Calculated Risk on 9/26/2007 01:07:00 PM

My apologies to Tanta, this is my version of an UberNerd post: How to graph housing prices.

The NY Times included a graph of real house prices based on the Case-Shiller index in the following article: They Cried Wolf. They Were Right.

Click on graph for larger image in new window.

The graph has several interesting events annotated, including when economist Dean Baker sold his condo in May 2004, and Fed Chairman Ben Bernanke's comment in Feb 2006 that Fed policy makers "expect the market to cool but not to change very sharply".

Unfortunately I think this graph is somewhat misleading and technically incorrect. So I'd like to use this graph to illustrate how to graph housing prices.

This graph is based on the quarterly S&P/Case-Shiller® U.S. National Home Price Values. The S&P/Case-Shiller® index is for nominal house price (not adjusted for inflation).

To adjust for inflation, the NY Times used the CPI from the BLS. This is a slight technical error; an economist would adjust the Case-Shiller index using "CPI less shelter". Admittedly the differences are minor.

Setting Q1 1987 to 100, the NY Times calculated prices fell to 92 in Q4 1996. Using CPI less Shelter, prices would have only fallen to 93 (minor difference).

However, the NY Times calculated prices peaked at 171 in Q1 2006. Using CPI less Shelter, the peak was actually 176, about a 3% difference.

The other problem with the NY Times graph is the choice of scale without warning the reader. IMO the starting value for the y-axis should be clear. This graph is fine if the reader understands that the graph shows the changes in real values, but not the relative absolute values.

Click on graph for larger image.

The second graph shows the same data with the scale starting at zero (the blue line is the NY Times calculation of real values, the shaded area is the technically correct calculation).

But even this graph could mislead the reader. Will prices return to 100 (the Q1 1987 price)? Unlikely. First, 1987 was chosen because that is one the Case-Shiller index starts. We do not know from this chart if prices in 1987 were too high, too low, or just about right.

Second, real prices for houses do increase over time - perhaps on the order of 1% to 2% per year. Using 1987 as a starting point, a 2% real return would have put current real prices at 150; a 1% annual return would put the current value at 122.

What people really want to know is what will happen to nominal prices in the future. But the focus on real prices helps predict changes in future nominal prices. I'll have more on this later.

by Tanta on 9/26/2007 11:19:00 AM

Many of our commenters have expressed concern over the possibility that servicers offering workout modifications will lead to "freeloading" by borrowers who could make their payment, but who wish to tell the servicer a sob story and get a rate break. I thought you might find the following from American Banker (subscription only) interesting:

In an interview this month, J.K. Huey, the senior vice president of home loan servicing at IndyMac Bancorp Inc., said that more than half of the borrowers who call the company for a workout or a loan modification do not qualify.

"We want to help people stay in their home provided they have the financial ability to do so," she said. "But we have to make sure they're going to be successful and the loan is going to perform. We can't do a modification just for the sake of it."

Of those whose requests for relief are rejected, roughly 60% did not respond to written requests for financial information, such as the borrower's last two pay stubs, a W-2 form or the last income tax return. "A lot of people do not want to send the financial information needed to prove what their income is," Ms. Huey said. "They really don't want to take the time to work with us."

The other 40% of loans that are denied loss mitigation are to borrowers who are current on their mortgage payments but who contacted IndyMac in an effort to get a lower rate, she said.

"We do have some customers calling us that shouldn't be calling us," Ms. Huey said. After reviewing those customers' finances, "we say that they have a $4,000 surplus and are able to make their payments, and they say they just wanted to check."

The gist of the article is that modification rates are still very low relative to the number of troubled borrowers; Moodys estimates that about 1.00% of 2005-vintage ARMs have been modified this year.

For those interested in data sources, the article quotes a spokesman for First American Title indicating that requests for modification-related title updates are up about 40%. (A modification does not require a new title insurance policy, as a refinance does, but it does need a "date-down" endorsement to bring the mortgage date down to the modification date, which is much cheaper than a new refi policy.) So title update volume might be a useful proxy for modification activity outside the securitized sector (which a source like the investment banks or rating agencies will limit themselves to).

by Calculated Risk on 9/26/2007 10:26:00 AM

Mathew Padilla at the O.C. Register has an updated ARM reset chart from Bank of America analyst Robert Lacoursiere.

Click on graph for larger image.

See Mathew's blog for more discussion and a comparison to the previous chart.

Some readers have noted that the BofA numbers are higher than the Credit Suisse and UBS reset numbers. CS and UBS are apparently only looking at securitized loans, and BofA includes unsecuritized loans.

Also, CS and UBS apparently only include the first reset when the loan goes from "fixed to floating". Perhaps BofA includes subsequent resets too, double counting some loans.

by Tanta on 9/26/2007 08:27:00 AM

Well, you know what's in your cornflakes--I hope. Do you know what's in your ARM index? According to the Financial Times, the London Interbank Offered Rate may well mean Selected London Inter-Marginal Bank Offered Rate:

“The Libor rates are a bit of a fiction. The number on the screen doesn’t always match what we see now,” complains the treasurer of one of the largest City banks.

Such criticism is, unsurprisingly, rebuffed by those who compile the index each day. However, it highlights two other trends that have emerged in the money markets in recent weeks.

One of these is a growing divergence in the rates that different banks have been quoting to borrow and lend money between themselves.

For although the banks used to move in a pack, quoting rates that were almost identical, this pattern broke down a couple of months ago – and by the middle of this month the gap between these quotes had sometimes risen to almost 10 basis points for three month sterling funds.

Moreover, this pattern is not confined to the dollar market alone: in the yen, euro and sterling markets a similar dispersion has emerged. However, the second, more pernicious trend is that as banks have hoarded liquidity this summer, some have been refusing to conduct trades at all at the official, “posted” rates, even when these rates have been displayed on Reuters.

“The screen will say one thing but people are actually quoting a different level, if they are quoting at all,” says one senior banker.

Some observers think this is just a short-term reaction to the current crisis. However, it may also reflect a longer-term shift. This is because one key, albeit largely unnoticed, feature of the banking world in recent years is that many large banks have reduced their reliance on the interbank market by tapping cash-rich companies and pensions funds for finance instead.

The recent crisis appears to have accelerated this trend. In particular, it appears that some large banks have in effect been abandoning the interbank sector in recent weeks, turning to corporate or pension clients for funding by using innovative repurchase agreements.

This trend is bad news for smaller institutions, such as British mortgage lenders, because these, unlike large banks, generally do not have any alternative ways of raising funds outside the interbank world.

Almost all subprime ARMs, the vast majority of Alt-A ARMs, and a significant chunk of prime ARMs are indexed to 6- or 12-month (dollar-denominated) LIBOR in the U.S. (I'm still looking for a source of exact figures.) One of the ways LIBOR was "sold" to consumers who were used to old-fashioned indices like Constant Maturity Treasury (CMT) or Cost of Funds (COFI) was that it "lagged" these U.S.-centric indices on the upside, implying that LIBOR ARM rates would not rise as quickly. That was mostly nonsense then, and it may be pretty painful nonsense now if the interbank borrowing practices on which LIBOR is based shift such that it becomes a "penalty rate" for bank borrowing.

Prediction: If we "innovate" back to Treasury-based ARM indices (by pulling those dusty old CMT notes out of the drawer), it will be sold to you all on the basis that CMT is a "lagging" index.

by Calculated Risk on 9/25/2007 05:57:00 PM

On Bloomberg Video: Shiller of Yale Sees `Years of Decline' for U.S. Housing.


Click image for video.

September 25 (Bloomberg) -- Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, talks with Bloomberg's Kathleen Hayes from New Haven, Connecticut, about the state of the U.S. housing market, the outlook for home prices and the likelihood of a recession. Home prices in 20 U.S. metropolitan areas fell the most on record in July, indicating the threat to consumer spending was rising even before credit markets seized up in August, according to the S&P/Case-Shiller home-price index. (Source: Bloomberg)

And check out the video on the Miami condo auction at the bottom of the posts.

by Calculated Risk on 9/25/2007 05:18:00 PM

For more existing home sales graphs, please see the previous post: August Existing Home Sales

Here are a few more graphs on inventory and months of supply.

Click on graph for larger image.

The first graph shows the monthly inventory levels for the last four years. There is somewhat of a seasonal pattern, with inventory peaking in the summer months.

This wasn't true in 2005 - as inventory continued to increase throughout the year - and that was one of the indicators that the housing boom had ended.

For 2007, I expect that inventory levels are close to the peak level.



The second graph shows the monthly 'months of supply' metric for the last four years.

Even if inventory levels stabilize, the months of supply could continue to rise - and possibly rise significantly - if sales continue to decline.


To put the NAR numbers into perspective, here are the year-end sales, inventory and months of supply numbers, since 1969.

This graph shows the actual annual sales, year end inventory and months of supply, since 1982 (sales since 1969). For 2007, the August inventory and Seasonally Adjusted Annual Rate (SAAR) for sales were used.

The current inventory of 4.581 million is the all time record. The "months of supply" metric is 10.0 months. The "months of supply" is now above the level of the previous housing slump in the early '90s, but still below the worst levels of the housing bust in the early '80s.

Both the numerator and the denominator are moving in the wrong direction. Not only is inventory at record levels, but sales - though falling - are still significantly above the normal range as a percent of owner occupied units.

Forecasts

The following graph shows the actual cumulative existing home sales (through August) vs. three annual forecasts for 2007 made at the beginning of the year (NAR's Lereah, Fannie Mae's Berson, and me).

My forecast was for sales to be between 5.6 and 5.8 million units (shown as 5.7 million).

NSA sales are 4.074 million units through August. In a typical year, sales through August are about 69% of the sales for the year. So at the current pace, sales will be around 5.9 million. However sales have slowed, and will probably slow further in the months ahead.

To reach the NAR forecast, revised downward again on Sept 11th to 5.92 million units, sales would have to be at the 2006 levels for the remainder of the year. Given tighter lending standards, we can probably already say that even the September NAR forecast was too optimistic.