by Calculated Risk on 3/07/2007 12:31:00 PM

From the BofA Monthly Real Estate Agent Survey for February:

Market Downshifts in February, the Start of the Key Selling Season

Agents noted that traffic fell short of expectations in February, after coming in essentially in-line with expectations in January. Responses worsened over the month, suggesting that traffic lost steam.

by Calculated Risk on 3/07/2007 10:25:00 AM

NOTE: It's important to note that the ADP report is for private sector jobs only, and that the headline BLS number includes government jobs. Over the last year, the BLS has reported an increase of 2.148 million nonfarm jobs, of which 1.866 million were private nonfarm jobs. So about 15% of the overall net jobs added were government jobs, and these are not included in the ADP report.

Click on graph for larger image.

According to ADP:

Private nonfarm employment grew a modest 57,000 from January to February of 2007 on a seasonally adjusted basis.

After taking quite a beating, ADP has revised their methodology:

The February 2007 ADP National Employment Report released on Wednesday March 7, 2007 is the first regularly released ADP Report to incorporate key methodological revisions, including: (1) a larger sample of payrolls; (2) improved procedures for seasonal adjustment; (3) better detection of outliers; and (4) additional detail on private nonfarm employment by select industry and by size of payroll.

I've looked at the differences between the ADP and BLS reports before (see More BLS vs. ADP), and I'll update the analysis soon since ADP has changed their methodology.

by Calculated Risk on 3/07/2007 09:42:00 AM

The Mortgage Bankers Association (MBA) reports: Refinance Applications Jump As Mortgage Rates Decline

The Market Composite Index, a measure of mortgage loan application volume, was 671.6, an increase of 7.3 percent on a seasonally adjusted basis from 626.1 one week earlier. On an unadjusted basis, the Index increased 19.9 percent compared with the previous week and was up 15.6 percent compared with the same week one year earlier.

The Refinance Index increased 15 percent to 2234.2 from 1943.5 the previous week and the seasonally adjusted Purchase Index increased 1 percent to 405.3 from 401.3 one week earlier.

Mortgage rates declined:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.04 percent from 6.16 percent ...

The average contract interest rate for one-year ARMs decreased to 5.79 from 5.92 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 up slightly to 397.2 from 397 for the Purchase Index.

The refinance share of mortgage activity increased to 46.1 percent of total applications from 43.2 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 21.4 from 21.1 percent of total applications from the previous week.

by Calculated Risk on 3/06/2007 11:45:00 PM

For a variety of reasons, I've decided to take advertising for Calculated
Risk. I've really enjoyed being advertising free. Lately I've found myself spending more time with this blog, and I've also been spending a few more dollars on phone calls, subscriptions and research. So I've been on the fence.

However, over the last couple of weeks, some CR readers have sent me links to two sites scraping CR posts, and presenting it as their own content - and then running ads. This has pushed me over the fence!

When I asked Tanta for her opinion, she responded:

"I hate advertising. I also hate doing the dishes."

To minimize the intrusion, I'll only be adding side-bar and RSS advertising (no animated pop-overs or sound). I might also be adding some side-bar banner ads if anyone wants to advertise directly with this site.

Thanks to everyone that visits this blog, and a special thanks to all the wonderful commenters.

by Calculated Risk on 3/06/2007 05:15:00 PM

Reuters reports: Subprime guidance may hit 60% of Countrywide ARMs

Sixty percent of Countrywide's customers seeking hybrid adjustable-rate mortgages, or ARMs, such as "2-28" loans would fail to qualify under the guidance that urges lenders weigh the borrower's ability to repay at the highest possible rate during the life of the loan, Countrywide CFO Eric Sieracki said at a Raymond James Financial Inc. conference in Orlando, Florida.

It is not clear from the article what percentage of Countrywide borrowers use hybrid ARMs.

Click on graph for larger image.

UPDATE: Here is the Countrywide presentation (hat tip: Cal)

And an audio recording.

The graph is from page 24 of the presentation.

by Calculated Risk on 3/06/2007 04:40:00 PM

Dallas Fed Executive Vice President and Director of Research, Harvey Rosenblum, spoke in Chile yesterday at the Global Interdependence Center. The text of Rosenblum's speech isn't available, but here are the slides he presented: Changing Risks in the Global Economy

Click on graph for larger image.

The first slide shows the increase in percentage of S&P rated junk bonds from 1980 to 2006. Another slide shows that credit spreads are quite low for junk bonds (see presentation, page 5)


This slides shows the firming credit standards for business loans. I expect standards to continue to tighten, especially for CRE and C&D loans.

See this Fed chart for CRE loan delinquency rates. Delinquency rates are rising for CRE loans - up to 1.28% in Q4 2006 from 1.12% in Q3 2006 - but they are still fairly low.


This third slides shows credit standards for consumer loans through 2006 The graph shows rapid tightening for mortgage loans at the end of 2006. However this graph stops before the significant tightening that started in February of 2007.

Right now the only credit crunch is sector-specific - mostly subprime mortgage loans. However credit standards for business loans are starting to tighten too.

by Calculated Risk on 3/06/2007 11:31:00 AM

Citigroup analysts have consistently been some of the most bullish on housing. So I was eagerly awaiting their first research note after the subprime implosion. Citigroup released a research note this morning and boldly stated that they are: "Bullish on Housing". There is no mention of subprime lending issues in the report, except in one chart. I find it hard to believe demand for housing will stabilize with the problems in the subprime sector (see Subprime: The impact on Existing Home Sales in 2007).

by Calculated Risk on 3/05/2007 04:24:00 PM

From MarketWatch (hat tip: yal): Builder CFO doesn't see spring turnaround for housing

Home sales haven't rebounded dramatically so far this spring selling season, which suggests a hoped-for recovery in the housing market won't play out as soon as some had expected, Toll Brothers Inc.'s chief financial offer said Monday. ... [CFO Joel Rassman] said headlines on the subprime market "make customers nervous" and added the housing market could feel significant impact in the next month, such as foreclosures and more speculators quitting the market.

Subprime is not directly "a big part of Toll's market", but real estate works like a sequence of chain reactions. If a subprime borrower can't purchase a starter home, the seller can't buy a move-up home, and that seller can't buy a Toll Brothers McMansion.

For the potential impact of the subprime implosion on the housing market, see Subprime: The impact on Existing Home Sales in 2007

by Calculated Risk on 3/05/2007 02:18:00 PM

Governor Kevin M. Warsh spoke in Washington, D.C. today: Market Liquidity: Definitions and Implications. Excerpts:

Consider liquidity, then, in terms of investor confidence. Liquidity exists when investors are confident in their ability to transact and where risks are quantifiable. Moreover, liquidity exists when investors are creditworthy. When considered in terms of confidence, liquidity conditions can be assessed through the risk premiums on financial assets and the magnitude of capital flows. In general, high liquidity is generally accompanied by low risk premiums. Investors’ confidence in risk measures is greater when the perceived quantity and variance of risks are low.

This view highlights both the risks and rewards of liquidity. The benefits of greater liquidity are substantial, through higher asset prices and more efficient transfer of funds from savers to borrowers. Historical episodes indicate, however, that markets can become far less liquid due to increases in investor risk aversion and uncertainty. ...

Therefore, I wish to advance a simple proposition: Liquidity is confidence.
...
Let me discuss sources of liquidity of the U.S. financial markets. By my proposed definition, we must ask what forces have increased liquidity (read: confidence) in the United States over the course of the last couple of decades. I will turn, first, to two key drivers of liquidity: rapid financial innovation and strong economic performance. A third important source of liquidity--resulting from the excess savings of emerging-market economies and those with large commodity reserves--has also found its way to the United States in pursuit of high risk-adjusted returns. We must judge the extent to which each of these three liquidity drivers are structural or cyclical, more persistent or more temporary. Understanding the sources of liquidity--and the causes thereof--should help inform judgments about the level and direction of market liquidity. In so doing, we may better understand its implications for the economy and policymakers alike.

First, liquidity is significantly higher than it would otherwise be due to the proliferation of financial products and innovation by financial providers. This extraordinary growth itself is made possible by remarkable improvements in risk-management techniques.
...
The second factor, perhaps equally persistent, supporting strong investor confidence in U.S. markets has been our economy’s strong macroeconomic performance. Researchers have documented the so-called “Great Moderation” in which the U.S. economy has achieved a marked reduction in the volatility of both real gross domestic product (GDP) and core inflation over the past twenty years or so. In theory, reduced volatility, if perceived to be persistent, can support higher asset valuations--and lower risk premiums--as investors require less compensation for risks about expected growth and inflation. In this manner, confidence appears to beget confidence, with recent history giving some measure of plausibility to the notion that very bad macroeconomic outcomes can be avoided. The Great Moderation, however, is neither a law of physics nor a guarantee of future outcomes. It is only a description--an ex post explanation of a period of relative prosperity. If policymakers and market participants presume it to be an entitlement, it will almost surely lose favor.

Warsh suggests "Liquidity exists when investors are confident in their ability to transact and where risks are quantifiable". And although Warsh does not mention the mortgage market, subprime or otherwise, by his definition liquidity is drying up in the subprime mortgage sector.

by Calculated Risk on 3/05/2007 10:56:00 AM

The following is a Tantamentary (by Tanta) on a New York Times column (pay, excerpted to put Tanta's comments into context).

NY Times columnist Gretchen Morgenson writes: Mortgages May Be Messier Than You Think

WHAT investors don’t know about why the home mortgage securities market is in distress could fill volumes. ... only after fiery markets burn out do we see the risks that buyers ignore and sellers play down.

... Unlike recent corporate disasters that have occurred at hyperspeed ... the mortgage securities boom seems to be unwinding in slow motion.

Tanta: Explain that to FMT and NEW. It looks like the tempo is picking up.

...by the end of last week, many there were celebrating the fact that the indexes on mortgage securities ... had stabilized. Big brokerage firms have also tried to persuade investors that mortgage woes would be limited to subprime loans — those given to people with weak credit histories.

But last Thursday, the annual report from Countrywide Financial, a major lender, told a different story. While it confirmed fears about subprime loans — 19 percent of those in its portfolio were more than 30 days delinquent at the end of last year, up from 15 percent in 2005 — Countrywide also indicated that the percentage of prime borrowers encountering difficulties is rising. Delinquencies in the company’s prime home equity loan portfolio totaled 2.93 percent, almost double last year’s 1.57 percent.

Tanta: You had to have believed in the 1.57 as a reasonable number to be really shocked by this. No, I’m not in that crowd who thinks CFC has been lying in the reports. I’m in that crowd who has believed for years that the DLQ numbers were “masked” by easy lending conditions and a hot RE market, not by loss-mit games. This does beg for the “spread to prime” meme to be placed into some context, namely, that during the boom prime even performed better than prime. As it were.

And consider the disclosure last Thursday of American Home Mortgage Investment, a home mortgage originator and investor that specializes in loans to those with middle-tier, not weak, credit histories. As of year-end, the company said, 8.13 percent of its loans held for sale (not investment) were non-accruing. During the same period in 2005, that figure was just 0.43 percent.

Tanta: Having non-accrual loans in the held-for-sale pipeline is like having delinquent loans in the warehouse. They aren’t supposed to be there long enough for that to happen. What is getting me at this point is not, actually, AHM’s nonaccrual rate (although 8.13% is some major ick). It’s that anyone is allowed to continue to call them “held for sale.” Think of it like a grocery store. If you have bananas that are starting to turn black, do you leave them out in the produce section and pretend that someone might buy them, or do you trot them out to the dumpster and take a charge-off? You can ask someone like me all day long how one handles nonaccrual loans in the sale pipeline. And I’ll tell you all day long that I have no idea, because it’s never happened to me before. If I ever had loans that were starting to look that bad in the sale pipeline, I either sold them immediately to a scratch & dent dealer or, more likely, put them in the portfolio and took the write-down, hoping to cure them, season them, and then unload them later at a better price, while following the rules about where they go on the books while I am taking this risk. I never let anything get old enough to go nonaccrual in the HFS. The HFS is funded by the warehouse (a literal borrowed warehouse or an internal corporate warehouse, the latter being the way a bank that funds its own loans does it. In either case, it’s “temporary financing.”) The end of the story is that we’re in some brave new world of accounting, as far as I can tell, not just some brave new world of loan failures.

“The problems are far broader than subprime,” said Josh Rosner, a managing director at Graham-Fisher ... Mr. Rosner says he believes that ... investors will soon recognize that credit quality problems have also begun to seep into “the upper tranches” of the loan market.

Credit risk ... shows up over months and years, while market risk plays out in seconds and minutes. ... it is easy for some to say that a big decline in the mortgage securities index is an overreaction.

Perhaps it is. But the fact that loan losses have not yet shown up in mortgage holdings should calm no one. The way Wall Street packages home loans and sells them to investors adds to their complexity and makes them far tougher to value than other securities.

Tanta: True. The way Wall Street does this is pretty hard to figure. But to what extent is the Street playing in the prime mortgage loan market? I begin to sense, once again, that tranche/pool problem in play here. I mean, a Freddie Gold 30-year MBS is AAA. Some senior tranche of some whacko Alt-A or subprime security is AAA. These are both “prime” ratings of the security or small slice thereof. They don’t have the same loans backing them. This confusion is going to get worse before it gets better, I fear.

Moreover, a lag in reported defaults is almost certainly attributable to the increasingly aggressive practice of loss mitigation among lenders, in which they try to keep stretched borrowers from defaulting. But investors get little to no information about how lenders work with troubled borrowers and whether those efforts actually cure the problem — or simply postpone the inevitable. As a result, investors do not know whether the default figures they are seeing reflect reality.

Tanta: Translation: “I have no actual information about what the lenders are doing. Therefore, I am “almost certain” that they are doing the wrong thing. Of course, would I pick up the phone and call one or two mortgage servicers to get a comment on record? Nah! It’s much more fun to speculate and call it certainty.”

In 2002, the Office of Inspector General in the Department of Housing and Urban Development reviewed the department’s loss-mitigation program and found some disturbing practices. Financial institutions that were surveyed from May 1999 to April 2001 in many cases chose to delay foreclosures even when it was obvious that loan workouts would probably not succeed ...

Mortgage servicers “are approving borrowers for loss mitigation when, based on the servicers’ expertise and past experience with delinquent borrowers, the workout is unlikely to succeed,” the report said. “These actions are delaying the foreclosure process, increasing the cost of foreclosure, and subsidizing borrowers who do not pay their mortgage for extended periods of time.”
...
Loss-mitigation practices grew out of the significant losses incurred by big lenders in the real estate collapse of the late 1980s. Because lenders were experiencing losses of 30 percent to 60 percent of the outstanding home loans in foreclosures, they started identifying ways to keep borrowers in their homes.
...

Tanta: Nice selective paraphrasing from that IG report. How about the full context?

“In our opinion, servicers should be allowed to determine whether the borrower had a hardship when exercising good business judgment. Otherwise the Department is only encouraging irresponsible behavior. For example, we reviewed a case where the borrower’s hardship letter explained that their increase in expenses was due to gambling losses. Since the borrower had an increase in expenses, the servicer felt obligated to approve a partial claim. The borrower subsequently filed for bankruptcy protection. In another case, a servicer granted loss mitigation to a borrower who was current on their Mercedes payments but was not making payments on the less expensive home mortgage.

A first vice president of another servicer told us that HUD criticized it for not doing enough for borrowers whose expenses increased and income decreased. The HUD National Servicing Center told the servicer to make it work. HUD instructed the servicer that if a borrower meets all of the guidelines for a specific loss mitigation tool, the servicer could not deny the loss mitigation action, even though past experience shows that a borrower under the same circumstances will default again, resulting in foreclosure. The first vice president said that the servicer has to do what HUD says, because the servicer has not been given any authority or charter to make decisions. The serivcer would like to see the initiation of more discretion by HUD to the loan servicer on whether a borrower should be given additional chances to correct their delinquency. If the loss mitigation tool or tools do not work based on circumstances, then the servicer should end the process.

Finally, a senior vice president of a third large servicer said there are borrowers who learn the system and take advantage of it, as well as borrowers who do not want to deal with the fact that they are defaulting on their mortgage and may lose their home. The servicer believes they should be able to look at the behavior patterns of the borrower and decide on no more workouts when the behavior indicates that the borrower is going to default again. The servicer believes, in these instances, that providing the loss mitigation tool is just delaying the inevitable.

These servicers stated to us that they interpreted instructions from the National Servicing Center that any borrower who has had either an increase in expenses or decrease in income must be approved regardless of the borrower’s hardship or circumstances. Such action only delays the foreclosure process.

Using this criterion, virtually every interested delinquent borrower qualifies for loss mitigation. The servicers are reluctant to use good business judgment because HUD may require them to indemnify the loan if loss mitigation is denied. Consequently, servicers are delaying the foreclosure process, which increases the cost of foreclosure, and subsidizes borrowers who do not pay their mortgage for extended periods of time.

A HUD official with the National Servicing Center told us that trainers tell servicers that they must consider all borrowers for loss mitigation but are to use their best judgment when determining whether a loss mitigation tool is beneficial and warranted. If HUD expects the program to succeed, HUD needs to clarify instructions to servicers to eliminate the misunderstanding or perception that is preventing servicers from using good business judgment when working with delinquent borrowers.

A HUD official advised us that one of the biggest problems with the assignment program, which the loss mitigation program replaced, was the different ways the field offices applied it. For example, some field offices were very diligent in permitting borrowers into the program while other offices had very liberal policies and let almost anyone participate. Indications are that differing interpretations of HUD requirements by servicers, as previously discussed, may be creating a similar problem with the loss mitigation program.

We also reviewed 105 cases where the borrower continued to miss mortgage payments after receiving home retention loss mitigation assistance for the first time. The cases were reviewed to determine whether servicers are performing due diligence when approving borrowers for loss mitigation and are taking appropriate actions to apply disposition options or initiate foreclosure when it is clear that the borrower does not have the ability to repay their mortgage. We found that servicers were performing due diligence when approving the borrowers for loss mitigation. The servicers based their decisions on the information provided by the borrower. If the borrower does not have a history of problems, the servicers are inclined to take the borrower’s assertions at face value.

HUD commissioned a study by Abt Associates on the loss mitigation program. The Abt Associates report, issued in November 2000, stated that in order to evaluate program effectiveness, it is important to have information on current borrower circumstances, including their credit score, income, and expenses, as well as the property’s condition and the current estimated loan-to-value ratio. However, we found during our review that the biggest factor in determining whether loss mitigation will be effective relates to social conditions, such as desire to maintain the home, family problems, drug or alcohol abuse, and gambling.

Several servicers have done extensive analysis of their data to identify statistical factors that may dictate whether a workout will be successful. One servicer told us that they found no correlations in its statistical information to identify workouts that may or may not succeed. Another servicer had some similar results. For example, the servicer did not identify any significant trends when analyzing success rates by the credit quality, age of the loan, loan-to-value ratio, interest rates, or surplus/deficit amounts. Although, the servicer found that when borrowers surplus cash was higher than $1,000 the success rate started to drop. From this unusual trend, the servicer learned that they were not getting an accurate picture of the borrower’s actual expenses and instituted procedures to improve the gathering of expense related information.”

Long quote there, but I’m fascinated by the way an Inspector General report that found perverse incentives by well-meant HUD regulations and field office interpretations thereof is now being used to “prove” that servicers do not exercise good business judgment, or that servicers use loss-mit to “hide” delinquencies. There was, of course, never any time at which HUD did not consider these loans as under-performing. Furthermore, one could use this IG report as a useful way to consider the wisdom of stated income/stated asset/no doc loans rather than an argument against loss mit. But that would interfere with today’s story line.

While it is a splendid idea to do whatever is necessary to try to cure a sick borrower, it is worth remembering that the rollover of nonperforming loans was central to what made the savings and loan mess of the early 1990s so disastrous. And it is well worth asking: are loss-mitigation practices predatory since they give lenders an opportunity to squeeze the last ounce of blood out of a terminally ill patient?

Tanta: It might be worth talking to the 99% of students of the S&L crisis who thought that there were a whole lot of other candidates for the “central” problem. Holy Selective Memory, Batman. (Hint: can you spell “commercial loans”?) And it is well worth asking: are NYT business columnists so bird-witted that they really think that tossing people out onto the street in a foreclosure could not, on the “ounce of blood” theory, be considered just as predatory? Can anyone imagine the next story in the NYT, showing the heart-breaking pictures of the laid-off uninsured family with a sick breadwinner standing on the curb in the snow while the sheriff evicts them from the foreclosed property? What, we’re now making financial services policy based on who can print the saddest story, the pro-loss-mit or the pro-FC crowd? We just looked at an IG report that indicates that the big problem was servicers doing loss mit for borrowers WHO ASKED FOR IT, but should probably not have been given it. Um, Gretchen, borrowers who scam the HUD system by getting forbearance while driving a Mercedes are probably not the terminally ill prey of the servicers. Just sayin’. Let’s face the real issue: why were these people put in these loans in the first place by lenders? What were their financial incentives for doing so? Who provided those financial incentives? Can you spell “investors”?

Aggressive approaches to loss mitigation, Mr. Rosner said, mean that less than half of mortgages that in prior years would have been foreclosed no longer are. Unfortunately, how many of these workouts actually succeed is a question for which investors and even regulators have no answer.

Tanta: So since we have no answer, let’s assume that it’s a bad thing. Absence of evidence means never having to say you’re full of shit.

Academic studies suggest that within the first two years of a workout, re-defaults can approach 25 percent. But there are no publicly available data to analyze the success rates of loss mitigation. And this is something investors sorely need.

Tanta: Betcha there’s some privately-available data. How about placing a call to, oh, TIAA, and asking if someone there is responsible for analyzing the performance metrics of the mortgage-backed securities and/or whole loans they’re buying? Did you do that, and find that TIAA doesn’t have any information on its own investments? Can you quote them on that? Or do you mean that you and I don’t know what TIAA knows? I’m getting confused about whom I’m supposed to be disgusted with here. I mean, I’d absolutely love to see publically-available data on the performance of these mortgages. I wonder why it is that publically-traded companies and rating agencies and outfits like Loan Performance don’t give it away to us. Sheesh—and people think I’m some kind of socialist.

“There is nothing particularly wrong with loss mitigation,” Mr. Rosner said. “What is wrong is a lack of transparency in whether it is effective or predatory. How can we be surprised when volatility rises? The buyer is recognizing that he does not have appropriate information.”

... But experienced investors know that a reliance on fantasy will only prolong the pain that is racking the huge and important mortgage market.”

Tanta: “Experienced investors,” ahem, are presumably those who read the prospectus and the servicing agreement. They might even read the delinquency reports. They might even be investing in REMICs where loss mit options are extremely limited by REMIC law. They might even be buying No Doc subprime high-LTV loans, which are, ahem, pretty much guaranteed to generate excessive numbers of losers. But is that a fantasy? Nooooo. The “fantasy” is, apparently, that some servicers are probably trying to make loss-mit lemonade instead of flooding the market with REO. I’ll agree that that’s probably, in some of these cases, just prolonging the pain. But this business of crying for those innocent investors is getting on every nerve I have left. Next thing you know, someone is going to tell me that shareholders in pets.com weren’t told that it didn’t have a business plan, and I’m going to be so shocked I’ll fall off my Aeron chair.