by Calculated Risk on 2/28/2007 11:26:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Applications Increase

This week’s results include an adjustment to account for the Presidents Day holiday. The Market Composite Index, a measure of mortgage loan application volume, was 626.1, an increase of 3.2 percent on a seasonally adjusted basis from 606.6 one week earlier. On an unadjusted basis, the Index decreased 5.4 percent compared with the previous week and was up 8.8 percent compared with the same week one year earlier.

The Refinance Index increased 1.2 percent to 1943.5 from 1921.1 the previous week and the seasonally adjusted Purchase Index increased 5.2 percent to 401.3 from 381.4 one week earlier.

Mortgage rates were mixed:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.16 percent from 6.19 percent ...

The average contract interest rate for one-year ARMs increased to 5.92 from 5.81 percent ...

Click on graph for larger image.
This graph shows the Purchase Index and the 4 and 12 week moving averages since January 2002. The four week moving average is down 0.4 percent to 397 from 398.7 for the Purchase Index.

The refinance share of mortgage activity decreased to 43.2 percent of total applications from 44.9 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 21.1 from 21.2 percent of total applications from the previous week.

by Calculated Risk on 2/28/2007 10:12:00 AM

According to the Census Bureau report, New Home Sales in January were at a seasonally adjusted annual rate of 0.937 million. Sales for December were revised up slightly to 1.123 million, from 1.120 million. Numbers for October and November were revised downwards.


Click on Graph for larger image.
Sales of new one-family houses in January 2007 were at a seasonally adjusted annual rate of 937,000 ... This is 16.6 percent below the revised December rate of 1,123,000 and is 20.1 percent below the January 2006 estimate of 1,173,000.


The Not Seasonally Adjusted monthly rate was 70,000 New Homes sold. There were 89,000 New Homes sold in January 2006.

On a year over year NSA basis, January 2007 sales were 21.3% lower than January 2006. January '07 sales were the lowest since January 2002 (66,000).


The median and average sales prices were up. Caution should be used when analyzing monthly price changes since prices are heavily revised.

The median sales price of new houses sold in January 2007 was $239,800; the average sales price was $313,000.


The seasonally adjusted estimate of new houses for sale at the end of January was 536,000.

The 536,000 units of inventory is slightly below the levels of the last six months. Inventory numbers from the Census Bureau do not include cancellations - and cancellations are at record levels. Actual New Home inventories are much higher - some estimate about 20% higher.


This represents a supply of 6.8 months at the current sales rate.


More later today on New Home Sales.

by Calculated Risk on 2/28/2007 09:46:00 AM

From MarketWatch: Fourth-quarter GDP revised down to 2.2%

The U.S. economy has now grown at a rate of less than 3% for three quarters in a row, government data show, after a significant downward revision to fourth-quarter estimates.

The economy grew at a real annual rate of 2.2% in the three months of 2006, not at the 3.5% rate reported last month, the Commerce Department said Wednesday.

While consumer spending remained healthy, slower investments in homes, businesses and inventories were a major drag on growth in the quarter.

Gross private domestic investment was revised downwards significantly, even though residential investment (RI) was essentially unchanged. RI was revised slightly from -19.2% (SAAR) to -19.1% for Q4.

Perhaps ominously, nonresidential investment was revised downwards from -0.4% to -2.4%. Investment in equipment and software was revised downwards from -1.8% to -3.2%. And nonresidential structures (a key category) was revised downwards from 2.8% to -0.8%.

As mentioned yesterday, nonresidential investment typically trails residential investment by three to five quarters. So a nonresidential investment slump, starting about now, is expected based on historical investment patterns (See Investment Lags for an analysis of the lag times, as compared to residential investment, for equipment and software, and non-residential structures).

by Calculated Risk on 2/27/2007 09:52:00 PM

Press Release: Fremont General Corporation to Postpone Release of Results for 2006

Fremont General Corporation ... a nationwide residential and commercial real estate lender doing business primarily through its wholly-owned industrial bank, Fremont Investment & Loan, today announced that it will postpone the release of its fourth quarter and full-year 2006 results of operations, as well as the conference call to discuss such results, each previously scheduled for February 28, 2007. The Company also announced that it will not file its Annual Report on Form 10-K for the fiscal year ended December 31, 2006 by March 1, 2007 and that it intends to file a Form 12b-25 with the Securities and Exchange Commission explaining the reasons therefor.

by Calculated Risk on 2/27/2007 09:34:00 PM

From the NY Times: For Manufacturing, a Recession Has Arrived

The nation’s manufacturing sector managed to slip into a recession with almost nobody seeming to notice. Well, until yesterday.

And it's not just manufacturing. See Menzie Chinn's charts at Econbrowser: The Fundamentals Are...

by Calculated Risk on 2/27/2007 06:24:00 PM

From the FDIC: FDIC Reports that Housing Slowdown Poses Challenge to Bank Loan Growth

The recent slowdown in residential construction could reduce the demand for mortgages and commercial real estate and construction loans -- activities that have been important factors in loan growth for banks and thrift institutions in recent years. That's according to the Winter 2006 edition of FDIC Outlook released today, which analyzes economic and banking conditions in each of the eight FDIC regions.

"While employment and income trends are positive in almost every region, the effects of the slowdown in residential construction activity are clearly visible," said FDIC Chairman Sheila C. Bair. "Going forward, insured banking institutions should pay careful attention to risk-management processes in this slower-growth environment."

Here is the conclusion from the San Francisco Region report:

Despite current strong economic and banking conditions in the West, increased reliance on historically volatile construction activity may stress local economies and the banking sector should the housing sector continue to weaken. An extended or sharp slowdown in construction activity could ripple through local economies and bank balance sheets and income statements. Although strength in other sectors—particularly the services sector—has emerged recently and could mitigate some of the negative effects of a slowing construction sector, elevated CRE and construction lending concentrations at FDIC-insured institutions will continue to be monitored closely for any signs of weakening in credit quality.

This is an understated warning. Especially concerning is the "elevated construction lending concentrations at FDIC-insured institutions". A CRE and C&D slump could exacerbate the economic problems caused by the housing sector slowdown.

Unfortunately nonresidential investment typically trails residential investment by three to five quarters. So it would not by unusual to see a CRE and C&D investment slump later this year with rising delinquency rates (See Investment Lags for an analysis of the lag times, as compared to residential investment, for equipment and software, and non-residential structures).

And here are the Commercial Bank Delinquency Rates released today by the Federal Reserve (through Q4 2006).

Click on graph for larger image.
Although commercial real estate delinquency rates are still historically low, they have started to move up. With the heavy concentration of CRE and C&D loans at FDIC institutions, a significant slump (like the early '90s) could pose a serious risk to these financial institutions.


As a review: this graph shows the YoY change in residential investment vs. nonresidential investment through Q4 2007. 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 - but it is reasonable, from a historical perspective, to expect a nonresidential investment slump in 2007.

by Calculated Risk on 2/27/2007 11:24:00 AM

"Some of these products that worked in the past don't work going forward," Chairman and Chief Executive Richard F. Syron, Freddie Mac 2/17/2007

From Freddie Mac: Freddie Mac Announces Tougher Subprime Lending Standards to Help Reduce the Risk of Future Borrower Default

Freddie Mac (NYSE: FRE) today announced that it will cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure. First, Freddie Mac will only buy subprime adjustable-rate mortgages (ARMs) – and mortgage-related securities backed by these subprime loans – that qualify borrowers at the fully-indexed and fully-amortizing rate. The goal is to protect future borrowers from the payment shock that could occur when their adjustable rate mortgages increase.

Second, the company will limit the use of low-documentation underwriting for these types of mortgages to help ensure that future borrowers have the income necessary to afford their homes. In addition, Freddie Mac will strongly recommend that mortgage lenders collect escrow accounts for borrowers’ taxes and insurance payments.

In keeping with its statutory responsibility to provide stability to the mortgage market, Freddie Mac will implement the new investment requirements for mortgages originated on or after September 1, 2007, to avoid market disruptions.
...
Freddie Mac’s new requirements cover what are commonly referred to as 2/28 and 3/27 hybrid ARMs, which currently comprise roughly three-quarters of the subprime market. Specifically, the company is requiring that borrowers applying for these products be underwritten at the fully- indexed and amortizing rate, as opposed to the initial "teaser" rate. The company also will limit the use of low-documentation products in combination with these loans. For example, the company will no longer purchase "No Income, No Asset" documentation loans and will limit "Stated Income, Stated Assets" products to borrowers whose incomes derive from hard-to-verify sources, such as the self-employed and those in the "cash economy." There will be a reasonableness standard for stated incomes.

In addition, Freddie Mac will require that loans be underwritten to include taxes and insurance and will strongly recommend that the subprime industry collect escrows for taxes and insurance, as is the norm in the prime sector. Because the maintenance of escrow accounts requires significant infrastructure and is not widely used in the subprime sector, Freddie Mac does not believe it is practical to unilaterally mandate it as a purchase requirement at this time.

by Calculated Risk on 2/27/2007 10:18:00 AM

The National Association of Realtors (NAR) reports: Existing-Home Sales Improve in January

Click on graph for larger image.

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – increased 3.0 percent to a seasonally adjusted annual rate1 of 6.46 million units in January from an upwardly revised pace of 6.27 million in December. Sales were 4.3 percent below the 6.75 million-unit level in January 2006.

The above graph shows NSA monthly sales for 2005, 2006 and 2007. On an NSA basis, sales were 2.7% below January 2006.

Total housing inventory levels rose 2.9 percent at the end of January to 3.55 million existing homes available for sale, which represents a 6.6-month supply at the current sales pace – unchanged from the revised December level. Supplies peaked at 7.4 months in October.

Usually 6 to 8 months of inventory starts causing pricing problems, and over 8 months a significant problem. With current inventory levels at 6.6 months of supply, inventories are now well into the danger zone.

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."