by Calculated Risk on 3/08/2007 08:41:00 AM

The Department of Labor reported today:

In the week ending March 3, the advance figure for seasonally adjusted initial claims was 328,000, a decrease of 10,000 from the previous week's unrevised figure of 338,000. The 4-week moving average was 339,000, an increase of 3,750 from the previous week's unrevised average of 335,250.

As the 4-week moving average has steadily increased over recent weeks, I've been watching the claims data a little closer.

Click on graph for larger image.

This graph shows the 4-week moving average of weekly claims since 1990. I think the level of concern for the 4-week moving average is around 350K (dashed line on graph).

Last week, Northern Trust VP and Economist Asha Bangalore suggested that the claims data might be starting to indicate a "significant weakness developing in the labor market". We will know more tomorrow.

by Calculated Risk on 3/08/2007 01:39:00 AM

From the FBI annual report on financial crimes, mortgage fraud:

... the true level of Mortgage Fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. However, based on various industry reports and FBI analysis, Mortgage Fraud is pervasive and growing.

Fraud is probably widespread, but I suspect the most common type of fraud - fraud involving borrower misrepresentations - will not be punished.

The FBI investigates Mortgage Fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and Mortgage Fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.

Fraud for Housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan.
...
Although there are many Mortgage Fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders.

So the FBI is focusing on industry insiders and will probably not pursue borrower misrepresentations. My guess is the second most common fraud is some sort of appraisal fraud.

Inflated Appraisals - An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

I suspect most appraisal frauds will be difficult to prosecute. Then there are cases like this:

Amerifunding was a Mortgage Brokerage owned and operated by Gerald Small in Colorado, which maintained two "warehouse" lines of credits, each at a large federally-insured financial institution in the U.S. In order to support a lavish lifestyle, Small created fictitious loans to live off of the lines of credit. The borrower information, name, and social security number, were invented. Eventually, one of the creditors asked for verification of identification thereby defeating the "invention" process. To deal with this, Small placed an advertisement for a $100,000+ Account Representative position at his company. Applicants eagerly completed applications inclusive of names, social security numbers and copies of driver's licenses which Small wasted no time in utilizing for more fictitious loans. Investigation determined that Small had kited over $200 million in fraudulent mortgage loans and used the stolen identities of 47 job applicants to obtain mortgage funding for fictitious home loans, or "air loans" totaling over $21.5 million during a 24-month period.

by Calculated Risk on 3/07/2007 07:53:00 PM

Here is the FDIC Cease and Desist Order announcement: FDIC Issues Cease and Desist Order Against Fremont Investment & Loan, Brea, California, and its Parents

FOR IMMEDIATE RELEASE
March 7, 2007

The Federal Deposit Insurance Corporation (FDIC) today announced it had issued a cease and desist order against Fremont Investment & Loan, Brea, California ("Bank"), and its parent corporations, Fremont General Corporation and Fremont General Credit Corporation. The bank and its parents, without admitting or denying the allegations, consented to the order.

In taking this action, the FDIC found that the bank was operating without effective risk management policies and procedures in place in relation to its subprime mortgage and commercial real estate lending operations. The FDIC determined, among other things, that the bank had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default or other loss to the bank.

The order sets forth a variety of corrective actions to be undertaken. The order requires that the bank adopt a five-year strategic plan for its business. The order also requires that the bank, within 90 days, adopt a subprime mortgage lending policy with provisions designed to correct its lending practices, including that it underwrite future subprime loans with an analysis of the borrower's ability to repay at the fully indexed rate and provide borrowers with clear information about the benefits and risks of the products.

The order also requires the bank within 90 days to describe efforts it will make to restructure loans in distress consistent with the marketability of such loans and with sound principles of underwriting. In addition, the order requires the bank to fully comply with all consumer protection laws. The order also requires the bank to correct its commercial real estate lending practices.

"Our concern has always been that banks make loans that borrowers are able to repay," said FDIC Chairman Sheila C. Bair. "We believe that the agreement with Fremont addresses this basic concern."

Attachment: http://www.fdic.gov/bank/individual/enforcement/2007-03-00.pdf - PDF

by Calculated Risk on 3/07/2007 04:43:00 PM

From Bloomberg: Toll Cancellations Drop; Horton to Miss Projections

``I don't want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year,'' D.R. Horton Chief Executive Officer Donald Tomnitz said at a Citigroup Inc. conference in New York. ``Our future is not as bright as what we would like it to be.''

by Calculated Risk on 3/07/2007 01:03:00 PM

The following graph shows the quarterly "Net Percentage of Domestic Respondents Loosening Standards for Mortgages to Individuals" from the Federal Reserve vs. the year-over-year change in real Personal consumption expenditures (hat tip: John).

Source: Federal Reserve, Figure 2, Panel 3 (inverted), and BEA.

Click on graph for larger image.

Changes in real PCE have tracked changes in lending standards fairly well since 1990 (start of available data from the Fed). The one period of divergence, from 1998 to 2000, might be related to the stock market bubble.

At the start of the year, I proposed three strikes from the housing bust: a sector-specific credit crunch leading to a further decline in the housing market, significant residential construction job losses, and less consumption due to declining homeowner equity extraction.

This graph is related to the third strike, and suggests that tighter lending standards might lead to lower YoY changes in consumption in the coming quarters.

Note: The correlation used data by quarter since Q3 1990. There are 14 degrees of freedom (since some of the YoY changes are not independent). We can be 99% confident that the YoY changes in real PCE are positively correlated with loosening mortgage lending standards.

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.