by Calculated Risk on 2/26/2007 12:26:00 PM

"Loose lending would be more correctly stated as no lending standards."
Jeff Lazerson, president of Mortgage Grader in Laguna Niguel, Feb 26, 2007

From the O.C. Register: Insider Q&A on home lending pitfalls

Q. Lets talk about loose underwriting standards. How big of an impact has loose lending had on home prices in Orange County?

A. "Loose lending would be more correctly stated as no lending standards. I would say that in Orange County and across the country prices have gone up, I would estimate 50 percent more than they should have, just because of no standards in underwriting and lending … Anyone could purchase a property as long as they could manipulate through the paperwork.”

I don't know if half of the recent price increases were due to "no lending standards", but I do agree that speculation, using non-traditional loans, played an important part in the price boom. I also agree with Lazerson on defaults:

"We haven’t seen anything yet with defaults. It’s going to get a lot worse before it gets better.”

by Calculated Risk on 2/26/2007 12:50:00 AM

From the WSJ: Home Lenders Cut the Flow Of Risky Loans

Fears about defaults are slowing the gusher of investor funds going to riskier segments of the mortgage market. That means less money available for "subprime" loans to riskier borrowers, forcing lenders to focus more on borrowers who can afford down payments and have well documented finances. With fewer lower-income Americans able to buy homes, downward pressure on prices will probably increase.

These pressures have intensified in recent days. The cost of insuring mortgage-bond holders against default risk, as measured by the so-called ABX index, has soared, deepening the concerns of investors in collateralized debt obligations, among the biggest holders of riskier mortgage bonds. Managers of some CDOs are delaying new offerings to "wait for the dust to settle," a process that could take weeks or months, says Chris Flanagan, head of CDO research at J.P. Morgan Chase & Co.

"CDO managers and hedge funds still want to do CDOs, but the conditions are much, much tougher," David Liu, a mortgage analyst with UBS AG, adds.

Interesting. And on the same topic, Fleck shares another email: Subprime housing game is over

"... today (last Wednesday) is the first day where equity managers have been in to us, asking questions about subprime. Until today, most of the equity managers knew something bad was happening in subprime, but were prepared to assume it was not going to be a problem for the wider credit market, the economy, and so on. ...

Slowly but surely, people are starting to get it, and slowly but surely, I am starting to think that the tipping point in credit -- via a subprime-generated shambles in CDO (collateralized debt obligation) land -- is closer than anybody imagines."

by Calculated Risk on 2/25/2007 11:30:00 PM

With the recent subprime mortgage news and the somewhat disappointing economic numbers, I've been looking to see if economists would start revising their forecasts for 2007.

Sure enough, the National Association for Business Economics (NABE) released their quarterly survey of 47 economists, from AP:

... forecasters now believe housing construction will plunge by 14.9 percent this year. That would be nearly three times bigger than the 5.5 percent fall in residential construction they had projected [for 2007] in the [November survey].

So once again these economists are "surprised" by housing.

And the impact on GDP?

The panel predicted that the overall economy will grow by 2.7 percent this year. ... NABE's November forecast put GDP growth this year at 2.5 percent.

So, three months later, these economists revised their forecasts down significantly for the housing market, and their GDP growth forecast up slightly. Uh, OK.

by Calculated Risk on 2/25/2007 12:46:00 PM

From U.S. News & World Report on Denver: A House Unsold, the Dream Dims

The ... result is ... [a] vicious cycle of "for sale" signs, foreclosures, then more "for sale" signs that is all but devastating Montbello. Bank-owned properties now represent more than 80 percent of all homes on the market there, putting even seemingly stable homeowners like Garcia up against a financial wall.

"I just can't take it anymore," he says of his street's overgrown yards, abandoned houses, and declining property values. "I put so much into this house and this community, but I don't have no equity."

With more than 2,500 square feet, new kitchen cabinets, tile, and a recently finished basement apartment, Garcia's house two years ago "would have gone for $210,000, maybe more," says David Cabrera, the real-estate agent whom Garcia hired last fall to sell the home, now priced at $195,500. "But nobody's buying now with all the foreclosures."

Garcia orginally paid $207,000 for this house four and a half years ago.

by Calculated Risk on 2/24/2007 01:02:00 AM

From CR: Every time Tanta posts on this blog, I receive a number of emails asking: Who is Tanta? Unfortunately her real identity is a state secret, but hopefully it is sufficient to say that Tanta is an experienced mortgage banker, and also an excellent and entertaining writer.

Holden Lewis recently mentioned Tanta at Bankrate.com:

Tanta ... has vast knowledge of the mortgage biz ... and is an excellent writer. ... if you're a mortgage loan officer or broker, o[r] if you're merely a homeowner who wants to understand the mortgage-servicing business, you must read Tanta's latest post, "Mortgage Servicing for Ubernerds."

Mr. Lewis also suggested that "a lot of this will be over your head", but I think you'll find that Tanta makes the inner workings of the mortgage business both interesting and understandable. So if you are interested in the mortgage business - and who isn't right now? - here are a few of Tanta's recent posts:

Tanta 2/20/2007: Mortgage Servicing for UberNerds

Tanta 1/31/2007 on "Scratch and Dent" Loans

Tanta 1/15/2007: Information is Power, Which is Why You Don’t Get Any

Tanta 12/21/2006: On Hybrids, Teasers, and Other Mortgage Guidance Problems

Tanta 12/15/2006: Let Slip the Dogs of Hell

Read, learn, and you'll probably laugh some too! All my best to Tanta.

by Calculated Risk on 2/23/2007 03:27:00 PM

From the San Diego Union: Lenders told foreclosure picture grim

Mortgage professionals who are struggling with a national spike in residential foreclosure rates were warned yesterday to expect more of the same in 2007.

Unemployment, mortgage fraud and speculative buying are among the factors behind the recent surge in filings, experts said at a conference of the Mortgage Bankers Association.

And this year $1 trillion in adjustable-rate mortgages are due to reset before Dec. 31.

“This is really a wild card,” said Rick Sharga of the Irvine firm RealtyTrac. “We don't have a precedent.”

Record inventories (see previous post) and rising foreclosures in 2007 is two of the keys to my 2007 housing predictions.

Mortgage attorney Daniel D. Phelan echoed Sharga's concerns.

“I personally think we are at the beginning of this cycle,” he said. “It is going to get worse before it gets better.”

The following graph shows Notices of Default (NOD) by year in California since 1992.

Click on graph for larger image.

Home mortgage loans in California went into default last quarter at the highest rate in more than eight years, according to the DataQuick Information Systems research firm. Lenders sent notices of default, the first step in the foreclosure process, to 37,273 California homeowners during the fourth quarter.

by Calculated Risk on 2/23/2007 12:28:00 PM

From the Chicago Tribune: Canceled contracts masked glut of homes, economist says

Housing analyst David Seiders told Chicago-area builders Thursday that the federal estimate of 3.5 million homes for sale at the end of 2006 is "grossly understated."

"There is a big inventory overhang out there, and it's bigger than anybody understands," he said.

In an annual forecast on the local industry in Addison, Seiders, chief economist of the National Association of Home Builders, cited the high level of sales contract cancellations in 2006. It created a snag in the recordkeeping, so many homes marked as sales in government data ended up back on the market too late to be counted as inventory, he said.

"Cancellation rates more than doubled between the end of 2005 and the end of 2006, meaning that net sales for the year nationally may be down 65 percent."

Caroline Baum reported on this issue last September: Think Housing's Stabilized? See Cancellations

Of course Seiders thinks the bottom is near:

But Seiders was not all gloom, saying the market is probably at the year's low spot right now. He expects slight improvement at midyear.

by Calculated Risk on 2/23/2007 12:20:00 AM

"We're a little more disappointed than two weeks ago. For President's Day weekend we had good sales, but we didn't have anywhere near the bump up that we normally see. That's disappointing."
Robert Toll, Chief Executive, Toll Brothers

From AP: Toll Brothers 1Q Profit Falls 67 Percent

Alex Barron, an analyst with JMP Securities in San Francisco, said he wasn't surprised that Toll's comments have taken a more sober tone.

"Now, he's sounding a bit more concerned and depressed," he said. "You can't have five years of a good time and fix everything in a few quarters."

by Calculated Risk on 2/22/2007 08:42:00 PM

From Bloomberg: Subprime Mortgage Derivatives Extend Drop on Moody's Reviews

The perceived risk of owning low- rated subprime mortgage bonds rose to a record for a fifth day after Moody's Investors Service said it may cut the loan servicing ratings of five lenders.

An index of credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and sold in the second half of 2006 today fell 5.6 percent to 74.2, according to Markit Group Ltd. It's down 24 percent since being introduced Jan. 18, meaning an investor would pay more than $1.12 million a year to protect $10 million of bonds against default, up from $389,000.

Graph from Markit:

The BBB- rated portions of ABX contracts are ``going to zero,'' said Peter Schiff, president of Euro Pacific Capital, a securities brokerage in Darien, Connecticut. ``It's a self- perpetuating spiral, where as subprime companies tighten lending standards they create even more defaults'' by removing demand from the housing market and hurting home prices, he said.

by Calculated Risk on 2/22/2007 10:43:00 AM

From the Department of Labor:

In the week ending Feb. 17, the advance figure for seasonally adjusted initial claims was 332,000, a decrease of 27,000 from the previous week's revised figure of 359,000. The 4-week moving average was 328,000, an increase of 1,250 from the previous week's revised average of 326,750.

Click on graph for larger image.

This graph shows the four moving average weekly unemployment claims since 1968. Although the four week moving average has recently been trending upwards, the level is still fairly low and not a concern.

Also, from the Conference Board today: Help-Wanted Advertising Index Dips Two Points

The Conference Board Help-Wanted Advertising Index — a key measure of job offerings in major newspapers across America — declined two points in January. The Index now stands at 32. It was 38 one year ago.

Although both claims and the help-wanted index were slightly weaker than expected, there is nothing indicating a significant slowing of the labor market.