by Tanta on 3/31/2007 04:07:00 PM

Because you all need something else to talk about.

Yes, I remember what I was doing when this song came out.

Yes, I used to have a bat-winged blouse that tied at the hip just like that.

You wanna make something of it?

by Tanta on 3/31/2007 10:53:00 AM

From "Housing Crisis Knocks Loudly in Michigan":

For most of the past year, Michigan has ranked among the three states with the highest percentage of late mortgage payments and foreclosures, surveys by the Mortgage Bankers Association show. In the fourth quarter, it came in third, behind Ohio and Indiana, with 2.39 percent of its loans in foreclosure.

Many economists say, and union officers agree, that those hardest hit are not auto workers who lost jobs. Many received buyouts that should keep them afloat for a while. And because they tend to be older, some have paid off their mortgages.

Those feeling the worst squeeze, rather, are workers at the auto supply companies, such as Max, 44, an engineer who spoke on condition that his last name not be used because he is embarrassed by his situation.

Max bought a condominium in the Detroit suburb of Plymouth using a traditional fixed-rate mortgage more than five years ago. But three years later, his firm took away company cars from its workers, hiked insurance premiums and cut raises and bonuses -- raising Max's monthly living expenses and reducing his pay.

Max responded by refinancing his condo twice. Though he did not realize it then, the second loan was adjustable. Over time, his monthly payments rose from $1,500 to $1,800 to $1,950.

"I wasn't even reading the paperwork," said Max, who makes $106,000 a year.

Weeks ago, Max turned in his keys to his lender. The bank paid him $500 and took possession of the condo earlier than it otherwise could under Michigan law.

by Tanta on 3/31/2007 08:46:00 AM

Hat tip to jmf!

Fulton Financial reports on repurchases of loans originated through its Resource Bank subsidiary:

In recent months, Resource has experienced an increase in the rate of EPD and corresponding requests to repurchase such loans, primarily related to one specific product sold to one investor. This product, referred to as the 80/20 Program, involves financing of up to 80% of the lesser of the purchase price or appraised value for a first lien mortgage loan and up to an additional 20% of the lesser of the purchase price or appraised value for a second lien home equity loan. Investor underwriting requirements for the 80/20 Program do not require independent verification of the borrower's income. To be eligible for loans under the 80/20 Program, borrowers are generally required to have a credit score of 620 or greater.

Fun facts:

• Loans originated for sale under the 80/20 Program in 2006: $247MM
• Pending repurchases of 2006-originated 80/20 Program loans: $22MM
• Remaining 2006 80/20 loans still subject to potential repurchase: $72MM
• Average FICO on requested repurchase loans: 653
• Percent of repurchase requests due to Early Payment Delinquency: 80%
• Date Resource quit offering this loan program: February 2007

These are fairly small absolute numbers for a lender of this size. The point is that this is under any definition Alt-A, not subprime.

by Calculated Risk on 3/30/2007 07:16:00 PM

From Reuters: M&T Bank says Alt-A loan woes will hurt earnings

M&T Bank Corp. said on Friday that problems with mortgages that have limited income documentation will hurt first quarter profit.

The bank, based in Buffalo, New York, said the carrying value of its Alt-A loan portfolio that had been held for sale was reduced by $12 million in the first quarter.
...
Meanwhile, the bank also said it would have to repurchase problem loans sold to investors.

Added: Just to make this clear, the problem loans that M&T will repurchase are Alt-A. From the M&T Bank press release:

In addition, M&T is contractually obligated to repurchase previously sold Alt-A loans that do not ultimately meet investor sale criteria, including instances when mortgagors fail to make timely payments during the first 90 days subsequent to the sale date. Requests from investors for M&T to repurchase Alt-A loans have recently increased. As a result, during the first quarter of 2007, M&T accrued $6 million to provide for declines in market value of previously sold Alt-A mortgage loans that are expected to be repurchased.

by Calculated Risk on 3/30/2007 02:17:00 PM

OCC Reports Record Bank Trading Revenues of $18.8 Billion for 2006

Insured U.S. commercial banks posted a record $18.8 billion in trading revenues in 2006, up 31 percent from the previous annual record of $14.4 billion set in 2005, the Office of the Comptroller of the Currency reported today in the OCC Quarterly Report on Bank Derivatives Activities. In the fourth quarter, commercial banks generated revenues of $3.9 billion from trading cash instruments and derivative products, off slightly from the $4.5 billion in trading revenues for the third quarter of 2006.

“Bank trading revenues have been strong the past few years due in large part to robust client demand, especially from large institutional investors such as hedge funds,” said Deputy Comptroller for Credit and Market Risk Kathryn E. Dick.

The OCC also reported that the notional amount of derivatives held by insured U.S. commercial banks increased $5.3 trillion, or 4 percent, to a record $131 trillion in the fourth quarter, 30 percent higher than year-end 2005.

The report noted that a fast-growing area has been credit derivatives, which increased to $9.0 trillion at year-end 2006, representing a 55 percent increase from the $5.8 trillion reported at year-end 2005. ...

Here is the report: OCC’s Quarterly Report on Bank Derivatives Activities: Fourth Quarter 2006

by Calculated Risk on 3/30/2007 11:42:00 AM

From the Census Bureau: February 2007 Construction Spending at $1,170.8 Billion Annual Rate

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during February 2007 was estimated at a seasonally adjusted annual rate of $1,170.8 billion, 0.3 percent above the revised January estimate of $1,167.7 billion. The February figure is 2.4 percent (±2.2%) below the February 2006 estimate of $1,199.9 billion.

During the first 2 months of this year, construction spending amounted to $159.9 billion, 2.4 percent (±2.2%) below the $163.8 billion for the same period in 2006.

Click on graph for larger image.

This graph shows the YoY change for the three major components of construction spending: Private Residential, Private Non-Residential, and Public.

While private residential spending has declined significantly, spending for both private non-residential and public construction have been strong. This will probably be one of the keys for the economy going forward: Will nonresidential construction spending follow residential "off the cliff" (the normal historical pattern)? Or will nonresidential spending stay strong. I'll revisit this discussion soon.

by Tanta on 3/30/2007 09:31:00 AM

I have described borrower-initiated fraud-for-housing loans as “self-underwritten.” The idea is that the borrower knows what the lender’s qualification standards are, knows he doesn’t meet those standards, and knows he cannot negotiate those standards away. His choices are, then, to accept the denial of credit, buy a cheaper house, or to lie or misrepresent the facts of his income, assets, employment, occupancy, and so on such that he appears to meet the standards. I call this “self-underwritten” because it rests on the borrower’s belief that he is a better judge of his prospects for carrying the loan successfully than the lender is; this belief allows him to justify his behavior as something other than criminal.

The fact that there have been so many “self-underwritten” loans in an environment of exceptionally lax standards for lender-underwritten loans is the key to puncturing this self-justification. It isn’t like we’ve had a credit crunch for years perpetuated by extremely risk-averse lenders, so that only perfect borrowers—or those who misrepresent themselves as perfect—can get a mortgage loan. Another way of putting this is that given how ugly so many of the lender-underwritten loans have been lately, there’s reason to think the self-underwritten ones are mostly butt-ugly. I take data on EPD rates for stated-income and zero-down loans, for instance, as some confirmation of this view.

Such a simple-minded perspective on things does, however, beg for additional complexity, and where else would you go for such additional analytic firepower than the New York Times? I offer you a third option: economist-underwritten loans.

Dr. Austan Goolsbee, a Real Economist™, presents the third way of understanding the issue in “’Irresponsible’ Mortgages Have Opened Doors to Many of the Excluded":

A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, "Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market" (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.

These economists followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.

And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, “Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.”

The first time I read this I was, actually, so speechless that I could only respond with a quotation from our wise commenter mp: toad bones. Also, dog balls.

After thinking about it overnight, I have come to the conclusion that that’s still the wisest response, but you don’t get a good blog post out of simple incantations. In the “permanent income hypothesis” on which the economist-underwritten loan is based, the borrower’s belief that he will always be able to earn more money in the future, which justifies over-consumption of housing in the present into which he will grow, renders mortgage market “efficient” to the extent that it does away with such artificial constraints as down payment and DTI requirements—which are based on “the amount of money they have right now,” and adopts innovative standards depending on an individual borrower’s confidence in the amount of money he might have in a couple of years.

The evidence for this view is that economist-underwritten loans in the period 1970-2000 didn’t do so badly. Sure, a few of them went down, but it’s important to understand why:

Of course, basing loans on future earnings expectations is riskier than lending money to prime borrowers at 30-year fixed interest rates. That is why interest rates are higher for subprime borrowers and for big mortgages that require little money down. Sometimes the risks flop. Sometimes people even have to sell their properties because they cannot make the numbers work.

The traditional causes of foreclosure, even before there was subprime lending, were job loss, divorce and major medical expenses. And the national foreclosure data seem to suggest that these issues remain paramount. The latest numbers show that foreclosures have been concentrated not in places where real estate bubbles have supposedly been popping, but rather in places whose economies have stagnated — the hurricane-torn communities on the Gulf of Mexico and the industrial Midwest states like Ohio, Michigan and Indiana, where the domestic auto industry has suffered. These do not automatically point to subprime lending as the leading cause of foreclosure problems.

So in this period of happily performing economist-underwritten loans, there were some losers. Apparently the causes, job loss, divorce, and major medical expenses, which could be understood to mean situations in which current expenses are substantially greater than current income—have nothing to say about the idea that it is wise to take a loan that ignores one’s current income and expenses. Lenders, it appears, may consider future income; servicers, it appears, still keep refusing to accept aspirations rather than negotiable instruments to apply to a past-due balance.

Of course it’s not surprising that Goolsbee ignores the evidence of a house-price bubble, since there can apparently be no bubbles in perfect markets. Theories do that to you. But I don’t think theory can really explain the revolting disingenuousness at the end of his op-ed:

The Center for Responsible Lending estimated that in 2005, a majority of home loans to African-Americans and 40 percent of home loans to Hispanics were subprime loans. The existence and spread of subprime lending helps explain the drastic growth of homeownership for these same groups.

“Drastic”?

This is actually what CRL has to say on this topic:

According to the Fed report, even after adjusting for differences in the borrower characteristics contained in the HMDA data, African-American and Latino borrowers were more likely to receive higher-rate loans. Furthermore, a recent study released by CRL shows that disparities tend to persist even after additional adjustments were made for differences in credit scores, equity, and other risk factors not available in HMDA data. The Fed authors also adjust for originating lender. Though this adjustment reduces the disparities substantially, significant differences remain. . . .

The CRL study found that, even after controlling for legitimate risk factors, African-American and Latino borrowers were still more likely to receive higher-rate subprime loans than similarly-situated non-Latino white borrowers. With raw disparities in higher-rate loans between groups basically unchanged from 2004 to 2005, there is little reason to believe that legitimate risk factors would account for all of the disparity evident in the 2005 data.

In other words, CRL is suggesting that a pattern of finding subprime loans given to minority borrowers with similar credit, income, and equity profiles to non-Latino whites who get prime loans may imply a certain “inefficiency” in the mortgage market somewhere. For Goolsbee to use this data to buttress an unregulated free-for-all by claiming that it helps out the traditionally disadvantaged is, well, dishonest.

If you look hard at the data compiled by folks like CRL, you do have to face the problems inherent in the lender-underwritten mortgage market: when lenders are allowed to apply standards without public review, they certainly can end up applying those standards in a discriminatory fashion. When “reputable lenders” are allowed to exit entirely certain minority markets, leaving them to the tender embrace of the loan sharks, the “innovative” subprime market can quickly become mere predation. I have no beef with anyone who wants to see regulation of lenders to prevent these social evils.

However, if I had to choose between lender-underwritten and economist-underwritten loans? No contest.

by Calculated Risk on 3/29/2007 05:00:00 PM

Evan Koenig at the Dallas Fed writes: Vive la Différence (hat tip Mark Thoma)

"There are several disturbing similarities between the U.S. economy's recent behavior and its behavior in 2000–01, but also some reassuring differences."

See the above links for the details.

I'd like to expand the periods for Koenig's chart 4 and 5.

Click on graph for larger image.

The first graph (compare to Koenig's chart 4) shows Koenig's method for projecting changes in residential investment is reasonable. There is no question that residential investment will fall much further, and will decline in every quarter in 2007.


The second graph (compare to Koenig's graph 5) compares changes in new orders for durable goods with changes in manufacturing employment. Once again, Koenig's approach is reasonable.

Based on this analysis, Koenig is expecting the net loss of 53K manufacturing jobs per month over the next 6 months. This is in addition to the residential construction job losses that I'm projecting will be in 75K+ per month range.

No wonder Koenig concludes:

"The big question is whether the drags from housing and manufacturing will let up before weakness there begins spilling over to the rest of the economy."

by Calculated Risk on 3/29/2007 03:01:00 PM

From Indymac: Additional Credit Loss Analysis on Alt-A and Subprime Lending

“Based on an objective analysis of the facts, talk of the ‘subprime contagion’ spreading to the Alt-A sector of the mortgage market is, in our view, overblown. Cumulative mortgage industry Alt-A loan losses over the last five years are 1/17th the loan losses for subprime loans based on the FALP data. In addition, as of Dec. 31, 2006, the 30+day delinquency percentage for Alt-A loans in the mortgage industry was 5.0 percent as compared to 21.7 percent for subprime loans, suggesting that the differential in loan loss performance for Alt-A versus subprime will continue into the future.”
Michael W. Perry, Indymac’s Chairman and CEO, March 29, 2007

I don't think anyone was suggesting that Alt-A delinquency rates would be as high as subprime. So Mr. Perry is creating a strawman here.

The suggestion is that Alt-A would see a substantial increase in delinquency rates, and, as a result, the sector specific credit crunch (with tighter lending standards) would also impact Alt-A. This is already happening. Yesterday I posted the analysis from ResCap of their new lending standards on 2006 originations. ResCap estimated that their new guidelines would have eliminated 20% of Alt-A loans in 2006.

The subprime contagion is already here.

by Tanta on 3/29/2007 01:15:00 PM

The AP reports on delinquencies for consumer credit:

The American Bankers Association, in its quarterly survey of consumer loans, reported Thursday that late payments on home equity loans rose to 1.92 percent in the October-December period. That was up sharply from 1.79 percent in the prior quarter and the highest since the first quarter of 2006. . . .

A separate survey released earlier this month by the Mortgage Bankers Association showed a big jump in late mortgage payments in the final quarter of last year, news that caused stocks on Wall Street to swoon.

The American Bankers Association's survey, meanwhile, also showed that the delinquency rate on “indirect” auto loans, which are arranged through dealerships, shot up to 2.57 percent in the fourth quarter, the highest since the second quarter of 2001, when the economy was in a recession. Late payments on other auto loans, however, dipped slightly.

The survey also showed that the percentage of credit card payments past due was 4.56 percent in the fourth quarter, down slightly from 4.57 percent in the third quarter.

Late payments on boat loans rose, while delinquent payment on mobile homes went down.