by Calculated Risk on 2/08/2007 12:23:00 AM

From the WSJ: Mortgage Refinancing Gets Tougher

... borrowers are getting caught short by a changing housing market -- one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. ...

These new challenges come ... when .... about $1.1 trillion to $1.5 trillion in ARMs ... will face rate increases this year ... The MBA expects borrowers to refinance as much as $700 billion of those mortgages.

"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. U.S. Bank is seeing more loans fall through, particularly in markets such as Arizona, California, Colorado and Ohio, where home values have softened. It could be "the tip of the iceberg," Mr. Shanks says.

This probably explains some of the recent increase in the MBA index. Some of these loans are "falling through" and borrowers are having to apply elsewhere.

... there are signs that some lenders are beginning to tighten their standards. ... [as an example] This month, Wells Fargo & Co. will begin reducing by 5% the maximum amount it will lend to certain riskier borrowers in "declining" markets. Those markets, covering more than 150 counties in two dozen states, include parts of California, Florida, Michigan and Ohio.

The change "reflects the tighter requirements of our investors," a Wells spokesman says. "I think all lenders are experiencing this kind of tightening of credit standards."

There is no evidence yet of a general credit crunch, but there is clearly a growing sector–specific crunch in real estate mortgage lending. This credit crunch will make it harder for some people to buy a home. And it will make it harder for some existing homeowners to extract equity from their homes.

"Welcome to Phase II of the housing bust."
ac in the comments, Feb 7, 2007

by Calculated Risk on 2/07/2007 08:33:00 PM

From Reuters: HSBC warns 2006 bad debt charge jumps to over $10 bln

Europe's biggest bank, HSBC Holdings, said its charge for bad debts would be more than $10.5 billion for 2006, some 20 percent above analysts' average forecasts, due to problems in its U.S. mortgage book.

HSBC said in a shock trading update late on Wednesday that slowing house price growth was being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in more recent loans.

Analysts had expected HSBC's 2006 loan impairment charge to be $8.8 billion, according to the average of 11 analysts' forecasts, the bank said.

That figure is now expected to be about $1.8 billion higher, or near $10.6 billion.

Also from Reuters: NetBank sees 4th-qtr loss steeper than expected

Online bank and mortgage lender NetBank Inc. said on Tuesday it expected to post a much steeper than expected fourth-quarter loss as it moved to shut down its subprime mortgage business.

NetBank had previously forecast an aftertax loss of 74 cents to 87 cents in the quarter, but now expects the result to fall "far below" that estimate, provided on Dec. 18, it said in a regulatory filing.

As a result of its shutdown of the mortgage business, which was completed in the fourth quarter, NetBank has been forced to buy back from investors the loans that were defaulted, leading to $26 million more in provisions than it was expecting, the bank said.

by Calculated Risk on 2/07/2007 05:53:00 PM

Via MarketWatch (hat tip Tanta!)

New Century Financial Corporation (NYSE: NEW), a real estate investment trust (REIT), today announced that it will restate its consolidated financial results for the quarters ended March 31, June 30 and September 30, 2006 to correct errors the company discovered in its application of generally accepted accounting principles regarding the company’s allowance for loan repurchase losses.

The company establishes an allowance for repurchase losses on loans sold, which is a reserve for expenses and losses that may be incurred by the company due to the potential repurchase of loans resulting from early-payment defaults by the underlying borrowers or based on alleged violations of representations and warranties in connection with the sale of these loans. When the company repurchases loans, it adds the repurchased loans to its balance sheet as mortgage loans held for sale at their estimated fair values, and reduces the repurchase reserve by the amount the repurchase prices exceed the fair values. During the second and third quarters of 2006, the company’s accounting policies incorrectly applied Statement of Financial Accounting Standards No. 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Specifically, the company did not include the expected discount upon disposition of loans when estimating its allowance for loan repurchase losses.

In addition, the company’s methodology for estimating the volume of repurchase claims to be included in the repurchase reserve calculation did not properly consider, in each of the first three quarters of 2006, the growing volume of repurchase claims outstanding that resulted from the increasing pace of repurchase requests that occurred in 2006, compounded by the increasing length of time between the whole loan sales and the receipt and processing of the repurchase request.

Importantly, the foregoing adjustments are generally non-cash in nature. Moreover, the company had cash and liquidity in excess of $350 million at December 31, 2006.

Although the company’s full review of the legal, accounting and tax impact of the restatements is ongoing, at this time the company expects that, once restated, its net earnings for each of the first three quarters of 2006 will be reduced.

In light of the pending restatements, the company’s previously filed condensed consolidated financial statements for the quarters ended March 31, June 30 and September 30, 2006 and all earnings-related press releases for those periods should no longer be relied upon. The company expects to file amended Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2006 as soon as practicable, with a goal to file by March 1, 2007. The company also expects that the errors leading to these restatements constitute material weaknesses in its internal control over financial reporting for the year ended December 31, 2006. However, the company has taken significant steps to remediate these weaknesses and anticipates remediating them as soon as practicable.

The company’s fourth quarter and full-year 2006 earnings announcement, originally scheduled for February 8, 2007, has been postponed to an undetermined future date, which will follow the company’s filing of its amended Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2006.

And on developments in the fourth quarter:

The increasing industry trend of early-payment defaults and, consequently, loan repurchases intensified in the fourth quarter of 2006. The company continued to observe this increased trend in its early-payment default experience in the fourth quarter, and the volume of repurchased loans and repurchase claims remains high.

In addition, the company currently expects to record a fair value adjustment to its residual interests to reflect revised prepayment, loss and discount rate assumptions with respect to the loans underlying these residual interests, based on indicative market data. While the company is still determining the magnitude of these adjustments to its fourth quarter 2006 results, the company expects the combined impact of the foregoing to result in a net loss for that period.

by Calculated Risk on 2/07/2007 04:50:00 PM

"Real home-price gains, adjusted for inflation, will be negative this year, next year and possibly the year after that."
David Berson, Fannie Mae Chief Economist, Feb 7, 2007

From MarketWatch: Housing still on down slope

"I don't think we've seen the bottom," said David Berson, chief economist for Fannie Mae. "We're going to see a much bigger drop in investor demand this year. But by the second half of the year the market will stabilize, if investors pull out quickly."

Berson said he expects the home-price index calculated by the Office of Federal Housing Enterprise Oversight will show a nationwide decline in values for 2007, the first time that will have happened since the data began being collected in 1975. Unlike other measures, the OFHEO data measure the price changes on the same homes over time, meaning the index is less likely to be skewed by the types and locations of sales.

"It won't be a big decline, maybe 1%. And the declines will be far more centered in areas that have had the most investor activity," he said. "Real home-price gains, adjusted for inflation, will be negative this year, next year and possibly the year after that."

My forecast that "prices will fall nominally by 1% to 3% nationwide" is similar to Berson's.

Here are a few more recent forecasts:

Home prices will fall 10% on average in 2007
UBS analyst Margaret Whelan, Nov 6, 2006

"We believe nationwide home prices -- as measured by the federal OFHEO repeat sales index -- will be roughly unchanged in 2007. ... The risk to our price forecast is to the downside."
Saumil Parikh, PIMCO Portfolio Manager, Dec 27, 20062007

"Whether prices go down or stay the way they are, you can pretty much guarantee that whatever the value of your house now, that's going to be the value of your house in 2011."
Dr. Christopher Thornberg, October 19, 2006

"I expect at least a 20% decline in median single-family house prices nationwide, and that number may be way understated."
A. Gary Shilling, August 29, 2006, for the entire bust, not 2007.

[Orange County] house prices this year will increase 7 percent
Broker Gary Watts, Feb 7, 2007

by Calculated Risk on 2/07/2007 03:56:00 PM

From Northern Trust: The Fed Probably Thinks It Is On Hold for All of 2007

We don’t. We continue to believe that the Federal Reserve’s next move is to cut the federal funds rate. However, the first interest rate cut now appears likely later in the year, perhaps on August 7, than we had been forecasting in recent months. The trigger for the Fed to decrease the federal funds rate will be the combination of lower inflation and persistent below-potential economic growth.

On housing:

We believe that the bottom of the current housing recession lies quarters ahead. An average post-WWII era housing recession entails about a 25% peak-to-trough decline in real residential investment expenditures. As of the fourth quarter of 2006, these expenditures were down about 13% from their Q3:2005 peak. So, unless this is a milder-than-average housing recession, the trough lies ahead.

And on tighter lending standards:

Click on graph for larger image.

... effective housing affordability is likely to fall as federal and state financial regulators clamp down on “exotic” mortgage products as well as the mortgage market itself. In the past couple of months a number of exotic mortgage lenders and brokers have closed their doors as intermediate buyers/securitizers of this product have pulled back. The Fed’s latest survey of bank lending standards shows a sharp rise in the number of banks tightening their lending standards for residential mortgages (see Chart 2). In other words, credit conditions in the mortgage market are tightening.

by Calculated Risk on 2/07/2007 11:32:00 AM

"... many families found it cost effective to cash-out equity through a new first mortgage even though it raised their rate."
Amy Crews Cutts, Freddie Mac deputy chief economist, Feb 6, 2007

Freddie Mac reports: Refinance Activity Remains High; Cash-out Share Falls in Fourth Quarter

In the fourth quarter of 2006, 84 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac’s quarterly refinance review. This percentage is down from the third quarter of 2006, when the share of refinanced loans that took cash out was a revised 87 percent.

"... many families found it cost effective to cash-out equity through a new first mortgage even though it raised their rate." said Amy Crews Cutts, Freddie Mac deputy chief economist. "This quarter we saw $70.7 billion cashed out, down from a revised $80.2 billion cashed out in the third quarter of 2006. Cash out refinance volume is expected to decline over 2007, due to lower expected refinance shares overall and lower mortgage origination activity than in 2006."

"... there are roughly $500 billion in outstanding first-lien adjustable-rate mortgages that will see a monthly payment increase due to an interest-rate reset, the start of amortization, or both, in 2007, and a large number of homeowners with second liens that adjust each month depending on changes in the prime rate. We expect that many borrowers facing payment increases this year will refinance prior to their payment adjustment."

by Calculated Risk on 2/07/2007 10:57:00 AM

The Mortgage Bankers Association (MBA) reports: Market and Purchase Applications Decrease in This Week’s Survey

Click on graph for larger image.

The Market Composite Index, a measure of mortgage loan application volume, was 630.1, a decrease of 0.2 percent on a seasonally adjusted basis from 631.1 one week earlier. On an unadjusted basis, the Index increased 3 percent compared with the previous week and was up 1.4 percent compared with the same week one year earlier.

The Refinance Index increased 0.2 percent to 1943.4 from 1940.2 the previous week and the seasonally adjusted Purchase Index decreased 0.8 percent to 404.7 from 408 one week earlier.

Mortgage rates decreased slightly:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.23 percent from 6.29 percent ...

The average contract interest rate for one-year ARMs decreased to 5.84 from 5.86 percent ...

The second graph shows the Purchase Index and the 4 and 12 week moving averages since January 2002. The four week moving average is down 4 percent to 413.78 from 430.8 for the Purchase Index.

The refinance share of mortgage activity decreased to 46.1 percent of total applications from 47.4 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 22.3 from 21.37 percent of total applications from the previous week.

by Calculated Risk on 2/07/2007 12:53:00 AM

From the AP: California short $1 billion in tax revenue, controller says

"Tax payments are down about $1 billion, and we don't yet have the source of that decrease," said Controller John Chiang, holding a news conference at the state's tax-collection center, where 2006 tax returns have begun to trickle in.

Chiang speculated that the state's slumping housing market might be a cause of the revenue decline.

by Calculated Risk on 2/06/2007 03:56:00 PM

Rex Nutting at MarketWatch writes: Many layoffs coming in housing, economists say

The home-building industry collapsed in 2006, but surprisingly few workers lost their jobs, revised government data show. That could change this year, economists said.

Between December 2005 and December 2006, the number of building permits for new homes plunged 23.5%, while spending on residential construction projects fell by 12.4%. But over that time, employment in residential construction fell by just 1.4% from 3.38 million to 3.34 million. ...

Click on graph for larger image.

This graph shows residential construction employment vs. completions and starts (Starts are shifted 6 months into the future). Part of my Housing 2007 forecast concerned the loss of 400K to 600K residential construction jobs over the first 6 months of 2007.

"What it means is that we have a steeper cliff to fall off from," wrote David Rosenberg, chief North American economist for Merrill Lynch ...

"We are doubtful, however, the gross job losses tied to the housing cycle are any more than one-third complete," [Steven Wieting, an economist for Citigroup] wrote. He's looking for losses to "easily exceed a half million."

Rosenberg estimates that employment in residential construction will fall about 20% in 2007, or about 600,000 jobs. In essence, the number of jobs in home-building will return to 2002 levels as the pace of home building does.

In addition, of some 3 million manufacturing jobs tied directly to housing, about 10% will disappear, Rosenberg estimated.

All told, that's about 900,000 jobs likely to be lost this year, and it doesn't include a large number of threatened jobs in real estate, mortgage banking and other housing-related fields.

by Calculated Risk on 2/06/2007 12:47:00 AM

Our net sales orders for the month ended January 31, 2007 decreased as compared to the same period in 2006 at a greater rate than the 23% decrease we experienced in our most recent quarter. Our cancellation rate for the month ended January 31, 2007 was similar to our cancellation rate during our most recent quarter.
D.R. Horton, 10-Q filing with SEC, Feb 5, 2007