by Calculated Risk on 4/04/2007 03:50:00 PM

Dallas Fed President Fisher: Risk Is a Many Splendored Thing: Lessons Learned. Excerpt on subprime and Alt-A:

Thus far, the damage from the subprime market has been largely contained, as many of my Federal Reserve counterparts have been saying. Why do we say so? To begin with, quality problems have risen primarily for adjustable-rate subprime loans, which are only about 8.5 percent of home mortgage debt outstanding. Also, much of this debt was packaged into private-label mortgage-backed securities with the downside risk spread out over a diverse group of investors. Nevertheless, because 40 percent of homebuyers last year were nonprime (subprime and Alt-A) borrowers, housing markets may feel some short-term pain, making it less clear whether housing construction has bottomed and how long the housing downturn may last. Fortunately, the financial system and the economy are strong enough to weather this storm.

While the subprime damage is largely contained, I do not mean that the market will or should refrain from punishing those who neglected time-proven rules of prudence. Nor am I suggesting that the neglect of prudent practices has not bled into other types of credit—such as the Alt-A market. Indeed, it would be atypical for lax lending standards in one area of credit not to lead to laxity in others. Nor am I placing excessive faith in models that have yet to be tested by real developments.

The subprime situation may well be a blessing in disguise. It reminds us that history does have the capacity to repeat itself. The old financial axioms—levelheaded notions such as “know your customer” (or your counterparty) and “there is a difference between price and value”—remain valid. I expect market discipline to reassert itself, swiftly punishing those who pressed the limits of imprudence or suffered selective amnesia, hopefully doing so in a way that staves off the impulse for lawmakers and regulators to interfere disproportionately.

by Calculated Risk on 4/04/2007 09:41:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Applications Decrease in Latest MBA Survey

The Market Composite Index, a measure of mortgage loan application volume, was 649.5, a decrease of 3.2 percent on a seasonally adjusted basis from 671 one week earlier. On an unadjusted basis, the Index decreased 3.2 percent compared with the previous week and was up 5.3 percent compared with the same week one year earlier.

The Refinance Index decreased 4.5 percent to 2098.3 from 2197.7 the previous week and the seasonally adjusted Purchase Index decreased 2 percent to 402.9 from 411.1 one week earlier.

Mortgage rates increased:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.13 percent from 6.04 percent ...

The average contract interest rate for one-year ARMs increased to 5.87 from 5.84 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 0.1 percent to 409.7 from 410.3 for the Purchase Index.

The refinance share of mortgage activity decreased to 44.5 percent of total applications from 45.1 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 19.2 from 20.2 percent of total applications from the previous week.

by Calculated Risk on 4/04/2007 09:06:00 AM

According to ADP:

Private nonfarm employment grew 106,000 from February to March of 2007 on a seasonally adjusted basis

After changing their methodology, ADP was very close to the BLS last month (57K vs 56K for the BLS). Remember ADP reports private sector jobs only, so this report doesn't include government jobs.

by Calculated Risk on 4/04/2007 02:42:00 AM

From the WSJ: Payment Woes Worsen On Riskiest Mortgages (hat tip Jim R). A short excerpt:

For Alt-A loans -- a category between prime and subprime that includes many loans that don't require full documentation of the borrower's income or assets -- the late-payment figure rose to 2.6% in January from 2.3% in December and 1.3% in January 2006.

It's not just a subprime problem.

by Calculated Risk on 4/03/2007 04:49:00 PM

EDIT: I am unable to respond to questions in the comments. Hopefully I'll change the layout tonight. Best to all.

All: I'm about to make some changes to the layout. This will include a wider main area, a new archive, some site feeds, and a few other changes.

Blog Rolls: I've ignored the blog roll for some time. I've decided to have two blog rolls: one for housing sites, and one for economics sites. If you want to be included, please send me an email and specify which blog roll you'd like to be listed under. All I ask is that your site be relevant (housing or economics) and that you link to my blog.

Also, I'll also be switching from Haloscan to the Blogger comments. Unfortunately I've had far too many problems with Haloscan and I'm willing to give blogger a try.

And finally, since I can't access the comments: the most useless release is the NAR pending home sales. IMO that news wasn't "bullish", and it wasn't bearish either - it was worthless.

Best to all.

by Calculated Risk on 4/03/2007 03:39:00 PM

From MarketWatch: Ford March U.S. sales drop 9%, GM, DaimlerChrysler post 4% declines as Toyota gains ground

Nothing new here. The auto industry is in a recession. Housing is in a depression. Capital spending is soft. But the U.S. consumer continues to borrow (more and more on their credit cards) and spend.

No wonder Tim Duy writes: Fed Still Looking Through the Slowdown – Should You?

Much of the recent data are weak, no doubt about it. Growth has slowed, plain and simple. And any optimism I see in the yield curve could be dissipated with Friday’s labor report. Or, as another Fed watcher once put it, it could be a case of Stockholm Syndrome, in which following the Fed forces you to think like them. But in any event, Bernanke & Co. are sticking to their guns, still looking through the downturn and downplaying the risk of recession. With so many ready to call the Fed wrong, it is worth thinking about the possibility that they are right.

by Tanta on 4/03/2007 08:28:00 AM

Regular readers have gotten the impression that I have spent a fair amount of time in the mortgage business. And that I have developed what one might fairly describe as some cynicism about it. One or two of you have asserted or implied that I possess sufficient written communication skills (as we call it in the corporate world) to be able to earn my keep doing something else. This makes some people wonder why I didn’t spend those years doing something else. Join what used to be the Tanta Single-Member Club.

You want to know the truth? I bought it. The American Dream. A place to call your own. Out of the cramped, noisy, expensive apartment, the shabby trailer, mom’s basement; into your own space. A room for the kids. A yard for the dog. Walls you could paint purple, if you felt like it, and hell with the landlord. A 1200 square foot elderly bungalow with a porch. You could start from there. Exposed power lines, cracked sidewalks, closer to the Krogers than the Dorothy Lane? One bathroom for three people? Old double-hung windows in need of a little paint and a little more sweat equity? No garage for the old beater? You could start from there. You could start. There was a beginning. Beginnings imply middles and ends. We were going places someday. It had to start somewhere. The first day of so many people’s futures was in my bank.

The horseshit level of life in a large bank holding company is just like anywhere else in the corporate world. We were there to maximize profit, unsurprisingly. We had no idea quite often how to maximize people other than putting them in cubicles, paying them in quintiles based on ranges of market comparables adjusted for performance reviews which could answer the questions asked but could not question the answers given. There were donuts; there were HR MEMOS on casual day policy violations. There were salaried people who would stay all weekend to help you out of the soup; there were people who would lie like a rug and throw their own grandmothers under the bus for an extra tick on some trade that was occurring for no other reason than to avoid corporate income taxes. There were days when it was so bland and boring and “professional” that one craved the odd sleazeball, in a perverse sort of way. I can remember doing business with Drexel. They were never boring.

So you could go home, some days, feeling the need for a spiritual as well as physical shower. Why would I—or anyone else with a conscience beyond vestigial levels required to support basic sapient functionality in prior evolutionary periods—have anything to do with this?

I put first-time homebuyers in starter homes.

I filled out 9-2900s and looked at DD-214s. Reviewed VC sheets. Priced quarter-coupons for Ginnie IIs. Tracked MICs. Learned the math for UFMIP-netting. You civilians don’t need to know what all this means—it’s as tedious and mind-numbing as it sounds. It’s the administrative and bureaucratic and desperately important risk-management part of doing FHA and VA loans to put first-time homebuyers into starter homes. It’s the nuts and bolts of the American Dream.

I was there, I had the dream, I drank the Kool Aid, I drafted the Letters of Intent to Participate in Pissant County’s latest bond program. I trained loan officers to understand how ARMs work, because I believed that I could get them to want to inform their customers—because it is the right thing to do. I could make it fun to be on the side of the angels, and still make a fair profit for the depositors and the shareholders and the employees.

It was some fine Kool Aid. My cup runneth over with it. I surely believed that goodness and mercy would follow me all the days of my life, and all those young dreamers I enabled would dwell in the house forever.

Perhaps I sound a bit angry from time to time. Broken-hearted people can be that way.

That’s all I have to say today.

by Calculated Risk on 4/03/2007 01:47:00 AM

From the WSJ: Office Rents Increase As Demand Stays Cool

Demand for office space in the U.S. remained sluggish in the first quarter ...

And guess what? Even as demand slows, supply is projected to increase as

... developers will open 76 million square feet of new office space by the end of this year.

The current office space absorption rate is about 8 to 10 million square feet per quarter - and will probably slow as the economy slows. But even though demand is slowing, the supply is already in the pipeline, so vacancy rates will most likely rise. That is why I am concerned about the exposure of U.S. banks to commercial real estate.

by Calculated Risk on 4/02/2007 11:29:00 PM

In the typical business cycle, non-residential investment follows residential investment. In a previous post, I presented the typical lag times for the two components of non-residential investment: 1) equipment and software, and 2) non-residential structures.

Click on graph for larger image.

The highest correlation for equipment and software is a lag of 2 to 3 quarters, and for structures a lag of 4 to 5 quarters. There is a positive correlation for other periods also.

The YoY change in residential investment turned negative in Q2 2006 (quarterly residential investment turned negative in Q4 2005).

For equipment and software, investment declined in two of the last three quarters. With a lag of 3 quarters, the YoY change would turn negative in Q1 2007. Of course the lag might be longer, or YoY investment might not turn negative this time. But it would be reasonable to expect the YoY change to turn negative soon.

So the only real surprise, in the following BusinessWeek article, is that BusinessWeek is, well, surprised!

From BusinessWeek: The Real Economic Threat: Weak Capital Spending

What's the biggest threat to the economy? The housing slump, right? After all, therein lies the greatest potential to derail consumer spending. Well, think again. Amid all the headlines about builders' woes, sagging home prices, and shaky subprime mortgages, there's some trouble brewing in another sector, perhaps more crucial to the outlook: capital spending.

And also from BusinessWeek is an article about consumers turning to credit card debt to partially offset less mortgage equity withdrawal: Borrowing Like There's No Tomorrow

Consumers are piling up credit-card debt at the fastest pace in years, and the housing downturn may be the reason. ...

The timing of the acceleration in revolving credit suggests consumers are turning to their credit cards as a partial replacement for reduced mortgage equity withdrawal ...

Kudos to dryfly for predicting this in the comments over a year ago.

by Calculated Risk on 4/02/2007 01:54:00 PM

From the WSJ: Subprime Pullback May Crimp Consumer Spending

Will it ... get harder for these consumers to buy cars, shop at the mall and dine out?

... many American families, [especially] subprime borrowers ... have been able to use the combination of rising home prices and easy credit to live beyond their means in recent years as wages have stagnated. That spending has helped to fuel the U.S. economy's growth.

... might force consumers to rein in spending, particularly lower-income Americans, who have piled up debt at a faster clip than their wealthier counterparts in the past decade. That could be a headache for the retailers, restaurateurs and others who depend on their business.

The article suggests that it will be lower-income Americans who cut back on their consumption, and the impact on the economy will be minor. However I think that a majority of MEW (Mortgage Equity Withdrawal) in recent years has been by middle income Americans, and flat or falling housing prices will also impact those borrowers. And middle income Americans will likely cut back on consumption too, even if they have no problem making their house payments.