by Calculated Risk on 2/05/2007 03:06:00 PM

The Hartford Courant reports: Mortgage Lenders Network Files For Bankruptcy

Middletown-based Mortgage Lenders Network, which once promoted itself as a model for building financial services employment in Connecticut, filed for bankruptcy protection today.

by Calculated Risk on 2/05/2007 12:53:00 PM

From the MBA: The Residential Mortgage Market and Its Economic Context in 2007

Some interesting data and comments. The MBA is fairly optimistic:

Click on graph for larger image.

The housing market is nearly back to normal. The housing market will regain its footing by mid-to-late 2007, depending on what measure is used. Home sales and starts will likely begin to increase in mid-2007, but, given the large inventory overhang, prices are unlikely to show any significant increase until late 2007 or early 2008.

On the trade deficit:

The primary reason for the relatively low level of long-term interest rates is the massive inflows of global capital into U.S. fixed income markets. These capital inflows are the flip side of the historically large U.S. trade deficit.

On mortgages:

Interest only (IO) loans, with both adjustable- and fixed-rates, and payment option loans that allow negative amortization, have become a very important part of the market. In the second half of 2005 and the first half of 2006, IOs accounted for about 25 percent of the dollar volume of originations. In addition to their use as affordability products, these products offer homeowners an innovative and flexible means to more actively manage their home equity.
...
Much of the stock of outstanding loans has been originated in the past three years. This has implications for mortgage delinquencies and foreclosures, as loans tend to hit their peak delinquency rates three to five years after origination. We estimate that more than 80 percent of outstanding loans have been originated since 2002.

by Calculated Risk on 2/05/2007 11:13:00 AM

"We are concerned that there could be downward pressure on [housing] prices for awhile."
J.P. Morgan economist Haseeb Ahmed, Feb 5, 2007

From the WSJ: Vacant Homes For Sale Cloud Economic Hopes

... the overhang of vacant housing stock could erode existing home values as sellers slash prices to move their vacant properties. Economists fear that many vacant homes are owned by speculators who are stuck with investment properties that they can't sell and may be under increasing pressure to drop their prices. "We are concerned that there could be downward pressure on prices for awhile," Mr. Ahmed says.

Such worries could cloud hopes for a swift housing rebound. ...

The homeowner vacancy-rate increase "does temper your outlook" for new construction, says David Seiders, chief economist at the National Association of Home Builders in Washington. Mr. Seiders is forecasting largely flat housing sales this year followed by a strong rebound in housing starts in 2008. "There clearly are uncertainties about how this is going to work its way out," says Mr. Seiders. "I keep preaching to builders it's not time to ramp up production."
...
The recent vacancy data may be a useful measure of speculative activity and its fallout.

"I think a persuasive case can be made that the reason we are seeing such extraordinarily excessive vacancy is because of the heavy investor demand over the past few years," said Richard DeKaser, chief economist at National City Corp.

What's troubling is that speculators may not act like typical home sellers. When they sell their vacant home in a down market, they don't necessarily purchase another home. By contrast, people selling the homes they live in will most often buy another house -- thus fueling a healthy market of buying and selling.
...
"This whole thing has been new," says Mr. Seiders, the National Association of Home Builders' economist. "We've never seen this kind of investor activity and we've never seen this kind of [vacancy] resale. It's an extra complication moving forward."

by Calculated Risk on 2/03/2007 11:43:00 PM

"I think clearly that '07 will be a challenge for us, and likely – unless there's a dramatic pickup – '08 will be a sub-par year from a return perspective as well. I think it's way too early to say when that will happen."
Stephen Scarborough, CEO of Standard Pacific, Feb 3, 2007

From the OC Register: No housing rebound in '07, CEO says

Standard Pacific Homes CEO Stephen Scarborough said Friday that he doesn't foresee a huge recovery in the national new-home market at least for a year or more.

Scarborough, speaking during the Irvine homebuilder's fourth-quarter earnings conference call, said earnings won't improve significantly through 2008.

It is pretty clear that by every material measure for housing, 2007 will be worse than 2006: prices, sales, residential construction employment, starts, MEW, percentage of homeowner equity, and the number of foreclosures. As Scarorough noted, it is way too early to be looking for a rebound.

by Calculated Risk on 2/02/2007 06:33:00 PM

From the FDIC: Failed Bank Information

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved the assumption of the insured deposits of Metropolitan Savings Bank, Pittsburgh, Pennsylvania, by Allegheny Valley Bank of Pittsburgh, Pittsburgh, Pennsylvania.

Metropolitan Savings, with total assets of approximately $15.8 million at the end of the third quarter 2006, was closed today by the Pennsylvania Department of Banking, and the FDIC was named receiver.

This is a very small bank, but it is the first bank failure since 2004.

Metropolitan Savings is the first FDIC-insured institution failure in the country since June 25, 2004, and the first in Pennsylvania since Pulaski Savings Bank, Philadelphia, was closed on November 14, 2003.

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."