by Calculated Risk on 2/02/2007 03:56:00 PM

From the Boston Globe: Subprime borrowers facing tougher qualifications for mortgages

"It's tightening up a lot," said Eddie Carmona, branch manager at Homewood Mortgage in Carrollton, Texas, a mortgage broker that handles subprime borrowers.

Carmona said down payment requirements are the biggest change he's seen.

"Before, you didn't have to bring a down payment," Carmona said.

Other changes:

Higher credit scores. Previously, borrowers with a FICO credit score as low as 570 (out of 850) could qualify for a single loan financing 100 percent of their home purchase, Carmona said.

"Now, across the board, it's jumped up to a 600 FICO score for an 80/20 loan," Carmona said, in which a second loan has to be taken out to finance the remaining 20 percent of the home value.

Rising interest rates. Rates on subprime mortgages have risen about a full percentage point since September, Carmona said, while regular mortgage rates have been relatively steady.

More stringent savings requirements. "They want to see borrowers have at least three months of reserves in their account in case of an emergency," Carmona said.

And from the AP: California lawmakers question risky mortgage lending practices

California lawmakers on Wednesday began considering restrictions on unorthodox mortgage-lending practices that have allowed hundreds of thousands of Californians to buy homes they otherwise could not afford.

About half of all new home loans in California are something other than the traditional 30-year fixed loan. They use features such as no money down and variable interest rates, while giving borrowers creative monthly payment options - such as paying only the interest or even less than that.

Such low introductory payments - or teaser rates - are offered in exchange for higher bills that will kick in years later, sometimes tripling or quadrupling monthly payments. Regulators said many of those riskier loans were taken out in 2004 and 2005 and will start resetting to higher rates this year.

"The exposure to these sorts of products, the growth, is unprecedented," Raphael Bostic, an associate professor at the University of Southern California School of Policy, Planning and Development, told a Senate committee. "The regulatory oversight of these types of practices is relatively lax."

I've been watching for California on the CSBS site, and it sounds like California will adopt the Guidance soon.

For some lively discussion of the tighter standards, try the BrokerOutpost. First a complaint from a broker:

Had my a.e. prequal a file...80/20 719 stated at FIELDSTONE...underwriter approved file, was called conditions on its way...2 days pass, where are conditions...only to find out, file went to 2nd underwriter for 2nd signature who declined it for PAYMENT shock...

call my A.E. in shock, we went overguidlines together...guidelines state if payment shock is over 200 then MUST have 3 mnths sourced and seasoned reserves (my client had 6 months)

And the response from an apparent company representative:

Our guidelines do read that payment shock in excess of 200% require 3 months PITI sourced and seasoned. My guess is that there were other issues with the file and an extreme payment shock created multiple layers of risk. Remember, guidelines are exactly that-a guide. If an underwriter doesn't feel comfortable with something in the file, they go to another U/W or Branch manager for a second opinion. With defaults and fraud on the rise, who can blame a person for wanting a second opinion when they don't feel comfortable. I would talk to your AE and ask what the real problem with the file was....chances are there was something else. As far as your AE's files being declined, yes our programs have changed, so have everyone elses. If AE's don't study up on new products, their files will be declined because of changing guidelines....maybe your file was one of them.

The "programs have changed, so have everyone[s]".

by Calculated Risk on 2/02/2007 08:44:00 AM

The BLS reports: U.S. nonfarm payrolls rose by 111,000 in January, after a revised 206,000 gain in December. The unemployment rate rose slightly to 4.6% in January. Note: The establishment survey data in this release have been revised as a result of the annual benchmarking process.

Click on graph for larger image.

Here is the cumulative nonfarm job growth for Bush's 2nd term. The gray area represents the expected job growth (from 6 million to 10 million jobs over the four year term). Job growth has been solid for the last two years and is near the top of the expected range.

The following two graphs are the areas I've been watching closely: residential construction and retail employment.


Residential construction employment decreased by 11,400 jobs in January and is down 112.2 thousand, or about 3.2%, from the peak in February. This is just the beginning of the loss of several hundred thousand residential construction jobs over the next year or so.

Note the scale doesn't start from zero: this is to better show the change in employment.


Retail employment gained 4,000 jobs in January. The YoY change in retail employment is now -0.2%.

With the large revisions to previous reports, it is difficult to judge this report. Overall this is a solid report. The expected job losses in residential construction employment has just started, but the spillover to retail isn't significant yet. I expect the rate of residential construction job losses to increase over the next few months.

by Calculated Risk on 2/01/2007 11:51:00 PM

Molly Ivins died on Wednesday.

Maya Angelou: Molly Ivins Shook the Walls With Her Clarion Call

Up to the walls of Jericho

She marched with a spear in her hand

Go blow them ram horns she cried

For the battle is in my hand

The walls have not come down, but they have been given a serious shaking.

That Jericho voice is stilled now.

Molly Ivins has been quieted.

Economist's View has excerpts of Paul Krugman's tribute to Molly: Missing Molly Ivins

Molly wrote for many of us during those dark days of '02 and '03, when it seemed that America had lost its collective mind. But we were never alone. We had a strong voice in Molly Ivins. And although we failed to stop the war, whenever someone says "no one knew" - well, someone did know. And maybe next time more people will listen.

Thank you Molly!

by Calculated Risk on 2/01/2007 03:04:00 PM

Professor Chinn writes at Econbrowser: Trends in exports and imports

An excellent analysis.

by Calculated Risk on 2/01/2007 12:17:00 AM

From the WaPo: Economy Gained Strength In 2006

The [GDP] report from the Commerce Department ... dispelled any lingering doubts about the momentum of the economy going into this year. ... gone are the recession worries of last summer.

"Nothing, other than an external shock, will derail the economy this year," said Eugenio J. Alemán, senior economist at Wells Fargo. "The economy's in good shape."

by Calculated Risk on 1/31/2007 08:33:00 PM

Note from CR: A friend sent me an excerpt from Fleckenstein's newsletter yesterday and I forwarded it to Tanta. First, from Fleck:

Turning to the subprime industry, once again I heard from my friend who has been staggeringly accurate. He continues to feel that things are about to really get worse. In an email to me, he wrote: "Scratch and dent loans are killing everybody. Bids that were 92 or 93 are now low to mid-80s. It is a bloodbath, and is pressuring even strong companies to buckle. NO ONE is making any money in the market right now. We are at a point of no return for many. The next two weeks will be wild."

I've been in the investment business over 25 years, and again, I have rarely seen someone so accurately call a turn in the market as he has done. Remember, we are just now witnessing a change in lending standards, and these will ripple all through the lending food chain, though thus far only small changes have occurred.

And the following are Tanta's comments:

Thanks for the tidbits--a former colleague of mine used to get Fleck’s newsletter and you could frequently hear some serious snickers from that cubicle—we’d all have to go over and hear what Fleck said this time. Mortgage punks—the Secondary Marketing ones, at least--aren’t, in my experience, mostly permabears, but they’re cynical as the day is long. It comes from constant exposure to the underbelly of the credit monster.

“Scratch and Dent” is a real industry term. The approximate meaning is “loan with incurable defect.” “Curable” is a real industry term and indicates something like a loan that closed with too little MI coverage (a kind of “bad stuff that happens”): you can “cure” that by buying more coverage. If you can’t get the customer to pay for it, though (usually because you didn’t disclose the correct MI on the regulatory docs, and so if you start charging the borrower more MI, you then provide yourself lawsuit or pissy regulator material), the loan has a serious long-term yield problem and qualifies for a “scratch & dent” pool. A loan that once had a 30-day late but then made the last six payments is just “seasoned,” unless the late was EPD (Early Payment Default), in which case the loan, assuming it’s performing again, is S&D. (You can’t “cure” an EPD. It’s the mortgage equivalent of the unforgivable sin.) The stuff the rating agencies call “reperforming” is S&D. 99% of performing loans that are repurchased from an investor are sold by the repurchaser as “S&D.”

The actual industry term for seriously nonperforming loans (in BK, 90 days, nonaccrual, in FC, etc.) is “nuclear waste.”

I suppose you could get someone to take a loan with certain kinds of “misrepresentation” evidenced as S&D or NW—the ones, say, where income has been proven to be “exaggerated” but there is no other evidence of fraud that could mean a payable claim for the property seller or some other party. The ones with incurable title problems? No exit. If nobody can convey title, you can’t foreclose. Your only possible recovery comes from criminal prosecution, if you’re lucky enough not to be an unindicted co-conspirator yourself and therefore have standing in the courts. That will, of course, take longer than a lot of these folks can stay solvent.

Fleck’s informant is saying that scratch & dent is getting nuclear waste bids. This implies that nuclear waste is probably heading for “no bid.” In any case, one is generally made to repurchase a loan at par (you might have to give back any actual premium paid if it’s an EPD, depends on the contract). So passing it off to a junk dealer, in turn, at a bid in the 80s is a painful thing. Hanging on to it, if you’re as thinly capitalized as your average subprime mortgage banker, is out of the question. Hence the “bloodbath.”

If it hits an outfit like Fremont—which is an FDIC-insured thrift and can therefore hang onto this stuff a lot longer than a mortgage banker can—we’ll be out of “thinning the herd” and into “decimation.” One reason it’s so hard to tell at the moment how bad this might get is that it’s hard to tell how many more “pending” repurchases we have out there. The EPD garbage is just the first wave. Every NOD in that big pile you see reported has been most thoroughly examined for other potential rep and warranty “issues” if the investor is any kind of awake, and they seem to be waking up. There used to be this idea that you didn’t push so hard on your correspondents and brokers that you broke their backs—you need a counterparty to keep having a business model. That’s a “normal” downturn idea. The current one seems to be more like “close the gates of mercy, shoot the wounded, and sink the lifeboats.” That does imply—as JPMorgan also implies—that the Big Dogs have more cooties on the balance sheet than they’re prepared to tolerate. Looks like total war to me.

by Calculated Risk on 1/31/2007 04:11:00 PM

This graph shows Residential Investment as a percent of GDP.

Click on graph for larger image.

Residential investment (RI) has now fallen to 5.3% of GDP from the peak of 6.3% in the second half of 2005.

If RI falls back to the median level of the last 35 years (4.5% of GDP), then the RI declines are just over half over. If RI falls to the '80s and '90s bust lows (below 3.5% of GDP), then the RI bust has just started.

by Calculated Risk on 1/31/2007 10:28:00 AM

From MarketWatch: GDP surges at 3.5% rate in fourth quarter

Fed by robust consumer spending, a drop in energy prices and big turnaround in the trade balance, the economy notched its highest growth in a year, offsetting the drag of the weak housing and auto sectors.

The 3.5% growth rate was much stronger than the 2% recorded in the third quarter, and handily beat the 3% expected by economists surveyed by MarketWatch.

Consumer prices fell 0.8% annualized in the quarter, the first quarterly decline in 45 years and the biggest drop in 52 years.

As predicted, PCE inflation was negative in Q4, for the first time in 45 years. And PCE was everything in this report. Residential investment fell 19.2% annualized. Nonresidential investment fell 0.4%, the biggest drop in nearly four years.

UPDATE: On Investment.

Click on graph for larger image.

This graph shows the YoY change in residential investment vs. nonresidential investment. In general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong.

Another interesting period was 2001 when nonresidential investment fell significantly more than residential investment. Obviously the fall in nonresidential investment was related to the bursting of the stock market bubble. But typically changes in residential investment lead changes in nonresidential investment, and GDP, by three to five quarters. Something to watch.

by Calculated Risk on 1/31/2007 09:59:00 AM

The Mortgage Bankers Association (MBA) reports: Refinance and Purchase Applications Both Increase

Click on graph for larger image.

The Market Composite Index, a measure of mortgage loan application volume, was 631.3, an increase of 3.2 percent on a seasonally adjusted basis from 611.3 one week earlier. On an unadjusted basis, the Index increased 5.9 percent compared with the previous week and was up 0.7 percent compared with the same week one year earlier.

The Refinance Index increased by 4.9 percent to 1940.2 from 1848.8 the previous week and the seasonally adjusted Purchase Index increased by 1.3 percent to 408.0 from 402.7 one week earlier.

Mortgage rates were mixed:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.29 from 6.22 percent ...

The average contract interest rate for one-year ARMs decreased to 5.86 percent from 5.91 ...

The second graph shows the Purchase Index and the 4 and 12 week moving averages since January 2002. The four week moving average is up 0.1 percent to 430.8 from 430.5 for the Purchase Index.

The refinance share of mortgage activity decreased slightly to 47.4 percent of total applications from 47.8 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 21.4 from 20.3 percent of total applications from the previous week.

by Calculated Risk on 1/31/2007 01:38:00 AM

Jim Clash interviews Sasha (part II)

Part I was here.