by Calculated Risk on 3/09/2007 08:28:00 AM

The BLS reports: U.S. nonfarm payrolls rose by 97,000 in February, after a revised 146,000 gain in January. The unemployment rate declined slightly to 4.5% in February.

Click on graph for larger image.

Here is the cumulative nonfarm job growth for Bush's 2nd term. The gray area represents the expected job growth (from 6 million to 10 million jobs over the four year term). Job growth has been solid for the last two years and is near the top of the expected range.

The following two graphs are the areas I've been watching closely: residential construction and retail employment.


Residential construction employment decreased by 23,500 jobs in February and is down 135.3 thousand, or about 4%, from the peak in February 2006. This is probably just the beginning of the loss of hundreds of thousands of residential construction jobs over the next year or so.

Note the scale doesn't start from zero: this is to better show the change in employment.

Nonresidential construction employment fell 38.5K in February. After increasing significantly in 2006 (up 4.6% in one year), nonresidential construction employment has been flat over the last four months. This might indicate the expected slowdown in nonresidential construction has started.


Retail employment gained 7,000 jobs in January. YoY retail employment is unchanged.

Overall this is a solid report. With the revisions to January and December, the economy has added 156K jobs net jobs per month for the last three months. The expected job losses in residential construction employment has just started, but the spillover to retail isn't significant yet. I expect the rate of residential construction job losses to increase over the next few months.

by Calculated Risk on 3/08/2007 04:32:00 PM

New Century filed an 8-K with the SEC (hat tip Brian):

One of the Company’s lenders has extended to the Company $265 million in financing secured by the Company’s REIT mortgage loan portfolio and certain residual assets. The net proceeds from the financing will be used to refinance and/or satisfy some of the Company’s existing obligations. This lender has also provided financing to the Company to refinance the remaining balance of approximately $710 million in mortgage loans currently financed through another lending facility. This refinancing was undertaken in response to that lender’s notice to the Company exercising its rights to effect a repurchase by the Company of the loans and other assets it had financed for the Company.

Furthermore, the Company is in discussions with lenders and other third parties regarding a refinancing and other alternatives to obtain additional liquidity. No assurance can be given that any of these discussions will be successful.

The Company has not yet obtained waivers of the net income covenant from its remaining five financing arrangements since filing the Form 12b-25 on March 2, 2007. In addition, the Company has received an aggregate of approximately $150 million of margin calls, approximately $80 million of which has been satisfied. The Company has approximately $70 million in outstanding margin calls from five lenders.

The Company has only been able to fund a portion of its loans this week. In addition, its capacity to fund new originations is substantially limited due to its lenders’ restrictions or refusals to allow the Company to access their financing arrangements. The Company has been in frequent discussions with its lenders to identify ways to address their concerns in order to allow a greater funding volume in the near term. However, there can be no assurance that these efforts will succeed.

As a result of the Company’s current constrained funding capacity, the Company has elected to cease accepting loan applications from prospective borrowers effective immediately while the Company seeks to obtain additional funding capacity. The Company expects to resume accepting applications as soon as practicable, however, there can be no assurance that the Company will be able to resume accepting applications.

by Calculated Risk on 3/08/2007 03:50:00 PM

From Reuters: New Century shares sink on bankruptcy speculation

New Century Financial Corp.'s shares fell by more than one-third on Thursday amid market speculation it would seek bankruptcy protection, a day after activist hedge fund manager David Einhorn quit the subprime lender's board.

New Century spokeswoman Laura Oberhelman said the real estate investment trust does not comment on market rumors.

A BK is definitely likely, and I wouldn't be surprised if a BK is announced at any time.

by Calculated Risk on 3/08/2007 03:02:00 PM

The Federal Reserve released the Flow of Funds report today for Q4 2006. The report shows that homeowner mortgage debt increase $148.6 Billion in Q4, 2006, or at an annualized rate of 6.4% (NSA).

This is the slowest percentage increase in homeowner mortgage debt since Q1 2000, and in dollar terms, this is the slowest increase since Q1 2002.

Click on graph for larger image.

This graph shows the annualized percentage increase in homeowner mortgage debt, not seasonally adjusted.

Note from Fed: "Includes loans made under home equity lines of credit and home equity loans secured by junior liens".

The slower increase in mortgage debt is probably caused by both the housing slowdown, and less equity extraction from homes. I'll try to estimate the Mortgage Equity Withdrawal (MEW) for Q4 while we wait for the Fed's calculation.

by Calculated Risk on 3/08/2007 08:56:00 AM

From MarketWatch: Wal-Mart Feb. sales miss Street view

Wal-Mart Stores Inc. said Thursday that February same-store sales rose moderately, missing Wall Street's expectations, hurt by weakness in clothing, home merchandise and hardlines.

For March, the world's largest retailer expects sales at stores open at least one year to rise 1% to 2%, and it expects the softness in clothing and home goods to remain through spring.

Bentonville, Ark.-based Wal-Mart the world's largest retailer, said February total U.S. same-store sales rose 0.9%.

And from AP: Retailers Post Disappointing Feb. Sales

The nation's retailers had a slow start to the spring season as unseasonably cold weather in February chilled demand for lightweight apparel and left merchants with disappointing sales. The slowing economy, particularly the weakening housing market, could challenge shoppers in the months ahead.
...
"Cooler weather clearly dampened spring apparel sales," said Ken Perkins, president of RetailMetrics LLC ... But Perkins also said major concerns for consumer spending in the months ahead are the defaults and delinquencies in the mortgage industry. That, coupled with the decline of mortgage equity withdrawls that give consumers extra cash, could curtail spending.

According to Thomson Financial, of 35 merchants that reported February same-store sales results so far, 10 beat estimates, while 24 missed and one met expectations. Same-store sales are sales at stores open at least a year and are considered the best measure of a retailer's health.

Was it the weather? Or is this a sign of spillover from the housing slump? It is way too early to tell.

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.