by Tanta on 4/11/2007 09:06:00 AM

Yesterday’s foray into bond market vigilantism was so fun, I’m tempted to try it again. This morning’s news item, via CNN (hat tip, Wayne!), “Risky loans - alive and well”:

NEW YORK (Money) -- Option ARMs remain an option. Despite problems in the mortgage market, brokers say lenders are still willing to make risky loans - including those that allow borrowers to make monthly payments that don't even cover the interest (so-called "option ARMs").

Also still widely available are "no-doc" loans, which require no income verification, and mortgages with no downpayment. . . .

In early March, rising delinquencies caused a dramatic sell off in the bonds backed by mortgages to the borrowers with poor credit quality. Analysts predicted that the investor distaste for those mortgages would spread into the Alt-A market as well. Indeed, in the past week two New York lenders American Home Mortgage and M&T Bank said they would pull back from making loans to the Alt-A market because investors were willing to pay less for those securities.

But mortgage bond traders say investors, who seemed nervous about the bonds a month ago, in the past few weeks have been coming back to the market. "We are seeing demand for these bonds picking up again," said a bond trader at one of the largest mortgage lenders in the country. He said yields, which rise with investor concerns, on most Alt-A bonds are up less than one tenth of a percent.

Does anyone else remember M&T and AHM announcing that they couldn’t get a bid for an Alt-A security? If so, could you direct me to the relevant press release? The ones I read seem to suggest that whole loan bids went away.

Of course there is a relationship between a whole loan bid—that’s the investment bank buying loans—and a security price—that’s the bond the investment bank created out of the whole loans it may have purchased, or just originated.

But we had some serious confusion in the comments to an earlier post about who knows what when—and whose rules are in effect—when whole loans are purchased from a loan originator, so it’s really best to be clear about this. The investment banks set their own whole-loan guidelines, which include product type, credit underwriting, documentation levels, maximum LTV, and so on. They put out rate sheets when they buy those loans on a flow basis (one by one, as some originator originates them). When they buy in bulk, from someone like M&T or American Home, they may or may not price each loan off of a rate sheet, although however bid price is calculated by the buyer, it uses the same math as the rate sheet. That bid price will include a spread somewhere (between the bid and the ask). A whole-loan market can start getting ugly if the bids are too low, or if the bids just aren’t there. My reading of what M&T and AHM reported recently was that both of those things happened: there were too few bids at too low a price. In this context, “too low a price” is relative to what M&T and AHM needed or wanted or expected.

It is in any case true that the guidelines of acceptability for this stuff are set by the investment banks, as is the bid price. Since the investment banks buy tons of whole loans on a flow basis—or from their wholly-owned origination outfit—they don’t actually have to buy whole loans from M&T or American Home or anyone else to keep a pipeline going. Two of the largest originators of Alt-A are EMC—owned by Bear Stearns—and Aurora Loan Services—owned by Lehman.

I also noted in the comments to an earlier thread that FED, a California thrift specializing in Option ARMs, just hired itself a new Wholesale Lending Manager. These loans do not have to be purchased by someone who intends to securitize them; there are portfolio lenders out there buying from correspondents and funding for brokers. It is not clear to me, at least, that the market for Option ARMs is exhausted by the appetite of securitizers for whole loans to securitize.

This has been a public service announcement on behalf of vigilant nerds everywhere.

by Calculated Risk on 4/11/2007 09:05:00 AM

The Mortgage Bankers Association (MBA) reports: Purchase Applications Rise, Refinance Applications Decline in Latest MBA Survey

The Market Composite Index, a measure of mortgage loan application volume, was 646.6, a decrease of 0.4 percent on a seasonally adjusted basis from 649.5 one week earlier. On an unadjusted basis, the Index decreased 0.1 percent compared with the previous week and was up 10.8 percent compared with the same week one year earlier.

The Refinance Index decreased 4 percent to 2015 from 2098.3 the previous week and the seasonally adjusted Purchase Index increased 2.7 percent to 413.8 from 402.9 one week earlier.

Mortgage rates increased:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.16 percent from 6.13 percent ...

The average contract interest rate for one-year ARMs increased to 5.88 from 5.87 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 decreased slightly to 409.6 from 409.7 for the Purchase Index.

The refinance share of mortgage activity decreased to 42.8 percent of total applications from 44.5 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 18.7 from 19.2 percent of total applications from the previous week.

by Calculated Risk on 4/11/2007 12:07:00 AM

David Leonhart at the NY Times writes: A Word of Advice During a Housing Slump: Rent

... in a stark reversal, it’s now clear that people who chose renting over buying in the last two years made the right move. In much of the country ... recent home buyers have faced higher monthly costs than renters and have lost money on their investment in the meantime. It’s almost as if they have thrown money away, an insult once reserved for renters.

Most striking, perhaps, is the fact that prices may not yet have fallen far enough for buying to look better than renting today, except for people who plan to stay in a home for many years.

Try out this interactive tool too: Is it Better to Rent of Buy?

by Calculated Risk on 4/10/2007 05:13:00 PM

From CNBC: Mortgage delinquency rates hit an all-time high

Mortgage delinquency rates hit an all-time high in the first quarter of 2007, according to data compiled by Equifax and analyzed by Moody’s Economy.com.

The percentage of mortgages in default rose to 2.87%, surpassing the worst levels following the 2001 recession.

by Calculated Risk on 4/10/2007 04:54:00 PM

Citigroup has been the poster child for Wall Street being bullish (i.e. wrong) on housing. Finally, in a research note yesterday and using excerpts from Thayer's "Casey at the Bat", Citigroup has at least admitted that the mighty Casey (aka the Spring Selling Season) is facing an 0 and 2 count in the bottom of the ninth. And we all know what happens to Casey:

Oh, somewhere in this favored land the sun is shining bright;
The band is playing somewhere, and somewhere hearts are light,
And somewhere men are laughing, and somewhere children shout;
But there is no joy in Mudville—mighty Casey has struck out.

But don't think the last bull has thrown in the towel, Citigroup still remains bullish on housing longer term.

by Tanta on 4/10/2007 12:03:00 PM

This gem from Bloomberg has popped up in the comments and my inbox. According to “Mortgage Bondholders May Bear Subprime Loan Risk” (yes, that’s what that says):

April 10 (Bloomberg) -- The top Democrat and Republican on the House Financial Services Committee said investors in mortgage bonds should be liable for deceptive loans made by banks.

Democratic Chairman Barney Frank of Massachusetts and Spencer Bachus of Alabama, the committee's highest-ranking Republican, said such legislation would discourage lenders from extending loans to people with poor credit histories by making it more difficult and expensive for the banks to sell the mortgages.

``More money was being lent than should have been lent,'' Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds ``provided liquidity without responsibility.''

An agreement by the two lawmakers may increase the likelihood legislation will be passed this year. The cost of borrowing would rise and curb financing for some lenders and subprime homebuyers, said David Brownlee, who oversees $14 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. It would also reduce opportunities for the Wall Street firms that pool the home loans as securities. . .

``There is no doubt that securitization has had an impact on looser underwriting standards we have seen by lenders,'' Federal Deposit Insurance Corp. Chairman Sheila Bair told the House Financial Services subcommittee on March 27.

Investors in bonds backed by subprime mortgages currently face sufficient liability, [David] Brownlee said. The investment banks underwriting the bonds ``aren't idiots, they're already laying off the risk of subprime loans on investors.'' . . .

Bachus said he favors legislation similar to a law enacted in New Jersey in 2003 enabling homeowners whose loans are the result of predatory lending to gain compensation from lenders and investors who purchased the mortgages. The indemnity includes attorneys' fees, the borrower's total loan payments and the cost of terminating the borrower's remaining liability. . . .

Lenders this decade have increasingly relied on mortgage- backed securities to fund new loans rather than tap capital from federally insured bank deposits. Frank called the process flawed, saying that as a subprime financing mechanism, banks' exposure to the risk of default is excessively diluted.

By dispersing risk, the bonds fueled reckless and unscrupulous lending and compromised underwriting standards, he said. ``There should be a decrease'' in the money available for subprime mortgages, he said. . . .

Bachus said there is a danger lawmakers could overreact and cut off financing for too many subprime borrowers.

``It's very important to preserve the liquidity in the subprime lending market,'' he said. ``If you get too aggressive with assignee liability, you dry up the ability of low and middle income families to own homes.''

Reckless investors shouldn't receive any sympathy, Frank said.

``Our job is to continue to have money available for people to continue to buy homes with minimal chance of these kind of disasters,'' Frank said. ``The effect this has on the ability of people in the bond market to make money is simply not a factor.''

You go, Barney. You too, Spence. "No Liquidity Without Responsibility!" I'd put that on my license plates.

Tanta fails to see why bondholders should be allowed to earn all the reward—those fat juicy yields on predatory and reckless subprime loans—while being allowed to shove the risk back down the chain to the originator in the event that someone sues for deceptive or predatory lending practices. Tanta also fails to see exactly why raising the cost of subprime credit has so many undies in a bunch. (OK, well, I see that. I just don’t care.)

The fact of the matter, it seems to me, is that as long as there is almost no real barrier to entry at the bottom of the mortgage food chain—any idiot can get a broker license, and probably every third idiot can get a mortgage banker license and a warehouse line from someone with more money than sense—there is no way to stop predatory and deceptive lending by writing fancy disclosures for consumers or forcing back enough loans to bankrupt the originators. We’ve noticed that the loans just get originated elsewhere.

I’m ready to entertain the notion that if bondholders had to actually hold the bag, there might come some changes to this hideous misallocation of investment dollars. Among other things. I eagerly await being told that there’s something downright commie about making sure the risk is held by the party reaping the reward.

by Calculated Risk on 4/10/2007 10:14:00 AM

From MarketWatch: No spring in home sales, D.R. Horton says

D.R. Horton Inc. said Tuesday its cancellation rate remains elevated and that it hasn't seen a rebound in market activity that's typically associated with the spring home-selling season
....
Donald Horton, chief executive at the nation's largest builder of residential homes, ... said the spring sales period "has not gotten off to its usual strong start." ... "Market conditions for new home sales continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high," the CEO said.

by Tanta on 4/10/2007 07:05:00 AM

Our Geoff e-mailed this to me, and I hereby claim to have read it. Only once, and at 6:30 a.m., I concede. But still, one ought to be able to read the newspaper once, in the morning, and still get something out of the experience other than a good gobsmacking.

I have suspicions that there is a reason why the example homeowner here is an anesthesiologist. This might make more sense to someone with his own DEA number.

In any event, we file this one under "columnist-underwritten loans," I think. I give you Buying a House in California May Not Be So Crazy:

For people with ordinary incomes, homeownership in the super cities is virtually impossible. Well, it may be virtually impossible, but it can still be beneficial.

If you take economists' consumption-smoothing approach – in which you focus on maximizing a smooth level of consumption over your lifetime rather than your net worth – a future of flat prices can be fine. A future of declining home prices can be better.

Remember: it's always a good time to buy. Especially when it's a good time to sell. It's not a house. It's not even a home. It's a consumption-maximization utility. Get with the program!

by Tanta on 4/09/2007 02:45:00 PM

From the Washington Post: Condos Feel the Mortgage Crunch:

In a sign that the turmoil in the subprime mortgage industry is affecting entire communities and not just individual homeowners, condominium association officers, property managers and real estate lawyers throughout the region say they are noticing more delinquencies in monthly fees.

"If someone is not paying their mortgage, they're not paying their condo fee, and the condos need money to pay bills," said Jeffrey van Grack, a community association lawyer with Lerch, Early & Brewer in Bethesda.

About one in six Americans live in a community run by a condo or homeowners association. Fees pay for such services as water, garbage removal, cleaning and repairs. . . .

Delinquencies are also increasing on investor-owned units, lawyers and property managers said. At the height of the real estate boom, investors bought properties with the intention of selling for a quick profit. When the market turned, they couldn't sell. Now, they are renting the units out, sometimes for less than the monthly mortgage. To make up for the shortfall, some choose not to pay condo fees.

"We're starting to see delinquencies where they're not owner-occupied. It's not just a matter of a subprime borrower," said Thomas Schild of Thomas Schild Law Group in Rockville, which represents many community associations. "They were counting on increased equity. That equity is not happening."

I will observe that, on the whole, lenders and servicers do not like to escrow (impound) for condo and HOA fees—it’s pretty “inefficient” when you’re dealing with hundreds or thousands of little associations with big assessments or big associations with little assessments. By comparison, taxes and homeowner’s insurance are easy.

I will also observe that the article mentions a condo that needs, but apparently can’t afford, maintenance on its elevator. Liability insurance for a building with an elevator is kinda pricey sometimes. Even when the elevator is well-maintained. Were I the mortgage-holder on a unit in a project too strapped to fix its elevator, I’d probably have a hard time sleeping at night.

by Calculated Risk on 4/09/2007 01:07:00 PM

Richard Berner and David Greenlaw at Morgan Stanley write: The Employment Conundrum

Once again, we’ve marked down our forecast for growth, reflecting still-higher energy prices, a deeper housing recession, and additional weakness in capital spending. Over the first three quarters of 2007, we now see growth at a 1.8% annual rate compared with 2.6% in our March update; that’s a full percentage point below our prognosis of two months ago. With growth below trend and operating leverage fading, margins are flattening and earnings growth will be weaker. And once again, reflecting higher prices for energy, food, imports, and medical care, we’ve marked up our outlook for headline and to some extent core inflation.
...
We don’t pretend to have all the answers, but here are our guesses: Job gains have already slowed, and payrolls will continue to decelerate, but not fast enough to undermine consumer wherewithal. The housing recession is far from over, but strong global growth likely will sustain both output and employment. The productivity slowdown is cyclical, but the trend may also have slipped. We still think core inflation has peaked, but inflation risks are rising again. And margin compression implies that profits likely will stall in 2007. That combination will likely leave the Fed on hold and steepen the yield curve. Importantly, however, neither those conclusions nor the weaker baseline presented here imply serious trouble for the economy.

See the above link for a more detailed analysis.

Here come the downward revisions, but Morgan Stanley still doesn't see a recession in 2007.

UPDATE: The online post shows a forecast of real GDP at 2.0% in 2007, and 3.9% in 2008. The 3.9% is a typo, their actual forecast is for 2.9% in 2008.