by Calculated Risk on 11/18/2007 01:47:00 AM

A flashback to July 2006: Husing: Soft Landing for Inland Empire Housing

There's just too strong an economy and too much job growth for much other than the "soft landing'' Husing and other economists have been predicting for the end of the five-year housing boom.

"We are right on the cusp of a very powerful period in job growth,'' Husing said. "Local [Inland Empire, San Bernardino/Riverside area] unemployment in May was 4.2 percent, and that's the lowest I have seen for May in 42 years of studying the local economy.
...
Senior economist Christopher Thornberg of UCLA's Anderson School of Management had called the soft-landing theory "nonsense'' on Tuesday and said we are in a "classic bubble.''

"If we are lucky, prices will go flat,'' he said, suggesting that we could see five years without price appreciation.

That may be true elsewhere, Husing said, but it won't happen here.

"Is the housing market vulnerable?'' he asked. "Yes, it is. But is a bubble likely to happen? No, it is not. The underlying strength of our economy is too great.''

Of course I disagreed with Dr. Husing.

Fast forward to today, from DataQuick: California October 2007 Home Sales

Price declines are severe in areas that absorbed spillover activity during the frenzy like the Central Valley and Riverside County [part of Inland Empire]. Prices in core metro areas are are off by a few percent.
emphasis added

Prices in Riverside are off 15% year over year according to DataQuick. Ouch! So much for low unemployment and a strong underlying economy saving the Inland Empire from a housing bust.

I can't tell you how many times I've heard "It won't happen here."

by Tanta on 11/17/2007 11:47:00 AM

This is going to be a long post. It is going to attempt to answer the question stated in the post title. It is also going to function as further proof of the old axiom that you can create quite a ruckus in 150 badly-chosen words, but it takes ten times that many words (at least) to return some sanity to the discussion. “Gotcha” reporters of course know this, which is why they do what they do. Most people don’t have the time or desire to wade through the high-attention span Nerd part to evaluate the reporter’s claim. That it’s a deadly serious business for anyone who owns shares in a publicly-traded company being compared to a criminal conspiracy on the basis of a misunderstanding of accounting rules doesn’t seem to bother writers who just want a “scoop.”

The ruckus started last week. On November 9, Fannie Mae released its 10-Q for the third quarter. This is the first time in years that Fannie has gotten a timely Q out; its 10-K for 2006 was released just in August, it never filed Qs for 2006, and the Qs for the first two quarters of 2007 were also just released in November. That little detail is important to this story. I assume everyone knows the long wretched saga of why Fannie Mae has been so far behind with its SEC filings. The point is that, in catching up, they have released a flurry of reports in a short period of time, which don’t have the same numbers on them (they shouldn’t; they are for different periods), and since they never reported quarterly numbers for 2006, we don’t have the by-quarter breakout that would provide details for some of the whole-year numbers reported in the 2006 K.

On November 15, Peter Eavis of Fortune Magazine published a breathless essay accusing Fannie Mae of having changed the method it uses to calculate its credit loss ratio in the Q3 filing. It is quite obvious that the presentation of this information has changed; the Q says so (page 54-55). Eavis, moving from a change in presentation to a change in calculation with intent to mislead at the speed of light, says “Uh oh. It’s Enron all over again.” Throughout the original article, he keeps referring to “bad loans” in such a way as to give the misleading impression that the metric in question, the credit loss ratio, is about reporting on delinquent loans, not on realized losses on defaulted loans in the current period. This allows him to accuse Fannie Mae of being “misleading” by not including fair-value write-downs on delinquent but not yet defaulted (not yet realized-loss producing) loans in the credit loss ratio.

Fannie Mae stock started to tank badly, and Fannie scheduled an analyst conference call for Friday morning to address this one very specific issue in one table in the Q. Fannie Mae explained, among other things, that the item excluded from the credit loss ratio calculation is, actually, included in net charge-offs on the consolidated financial statements. However, for the purpose of this specific metric, the credit loss ratio, fair value write-downs that have not yet produced an actual loss are excluded.

You can listen to the webcast here. Several analysts pointed out, quite nonconfrontationally, that they though Fannie could have provided more information to put this matter in context. Fannie agreed, and indicated that future disclosures would include more information. What’s amusing is that in two instances, analysts ended up asking whether in fact Fannie Mae wasn’t over-reserving for certain delinquent loans! Fannie Mae’s response was that they don’t think they’re under-reserving or over-reserving; they are simply applying GAAP rules for how fair-value write downs are taken. At no time in the conference call did anyone challenge this as a misapplication of GAAP rules.

So what did Eavis do, after the conference call and some delving into the credit loss ratio suggested that perhaps he merely misunderstood the math? He wrote a follow-up article on Friday, in which he continues to insist, even after Fannie Mae’s explanation of the issue, that the amount of exclusions from the credit loss ratio (that is, the amount of the fair-value write-downs on repurchased loans that are delinquent but not yet defaulted) is inexplicably large, and that these are forced repurchases, and that this is somehow sinister. This is after a conference call in which Fannie Mae explained, for those who have been living under a rock since last summer, why it is that write-downs on repurchased loans in Q3 can be many, many times the write-downs on loans repurchased earlier in the year, even if the total number of repurchased loans hasn’t grown all that much. There was this mere matter of a giant freeze in the mortgage secondary market, and spooked investors offering mere pennies on the dollar for delinquent mortgage paper, whether it was prime or subprime or something else. Eavis has to pretend to not remember that, I suspect, because his claim of “Enron all over again” is crumbling around his ears and he needs to keep kicking sand.

It is amazing to me that in light of all the real problems we have right now, we still want to go down expensive rabbit holes over “accounting tricks.” Nobody, least of all Fannie Mae, is trying to deny that there are severe problems in the housing and mortgage market, that large losses are being taken, and that this will hurt all over the place. I am not suggesting that Fannie’s Q is as clear as it could be, and I’m glad they indicated a willingness to report more color in future disclosures to make these numbers easier to evaluate. But writing a not completely helpful Q based on GAAP isn’t a crime in this country. I know a lot of people will argue that GAAP isn’t very helpful to the non-specialist. You get no argument from me about that, either. That still doesn’t make Fannie Mae Enron, and I for one would be livid if I were a Fannie Mae shareholder, and watched my money get flushed down the toilet for two days because, frankly, some reporter can neither read nor report. (I may well be a Fannie shareholder via indexed stock funds in one of my retirement accounts. But for disclosure purposes, I own no shares of FNM that I know about.)

Eavis could have gotten the same explanation from Fannie Mae that the analysts got in the call if he had asked for it, I am sure. No one forced him to write an article that makes accusations of willful dishonesty and implications of criminal behavior based on his inability to understand Table 26. He gave himself that assignment. And instead of apologizing for it, he continues to insist that the numbers don’t make sense.

Let me cut through the accounting archana (we can discuss that in the comments if we need to) to what I think is the real issue here. Fannie Mae has always had the option to repurchase seriously delinquent loans out of its MBS at par (100% of the unpaid principal balance) plus accrued interest to the payoff date. This returns principal to the investors, so they are made whole. If Fannie Mae can work with the servicer to cure these loans, they become performing loans in Fannie Mae’s portfolio. If they cannot be cured, they are foreclosed, and Fannie Mae shows the charge-off and foreclosure expense on its portfolio’s books (these are no longer on the MBS’s books, since the loan was bought out of the MBS pool).

Now, Fannie also sometimes has the obligation to buy loans out of an MBS pool. But we are—Fannie Mae made this clear both in the footnote to Table 26 of the Q and in the conference call—talking about optional repurchases. Why would Fannie Mae buy nonperforming loans it doesn’t have to buy? Because it has agreed to workout efforts on these loans, including but not necessarily limited to pursuing a modification. Under Fannie Mae MBS rules, worked out loans have to be removed from the pools (and the MBS has to receive par for them, even if their market value is much less than that).

There is, however, a little matter of accounting rules for booking these loans. Under GAAP, known internally to Fannie Mae as its SOP 03-3, the loan is taken onto the books at the lower of cost (par, in this case) or the fair market value of the loan at the time of repurchase. When the FV is lower than par, Fannie Mae has to charge-off the difference, at the time. This is not a true realized loss: it is a reflection of a mark to a real market value of a delinquent loan. You take the FV write-down at the time, even if you think that no loss, or a very much smaller loss, will actually end up occurring. That’s the rule. Anything else would be “mark to model” or “mark to myth.”

Now, anyone who hasn’t been living under a rock knows that bids for delinquent loans were either nonexistent or atrocious in July-September of this year. Certainly Fannie Mae knew that if it exercised its option to buy loans out of MBS in order to modify them, it, not the MBS, would have to take a nasty FV write-down. I don’t know about you, but I happen to think that a lot of private investors/servicers are refusing to do modifications of securitized loans precisely because they don’t want to have to buy them out of the pools and show that nasty write-down on their own books. They claim that it’s because securitization rules won’t let them modify loans, but I’ve never really bought that argument, nor have many regulators or the SEC.

The problem is that the market right now does not distinguish between a scratch & dent loan—one with a problem that could be cured with a modification—and defaulted nuclear waste that is facing 50% or more loss severity on imminent foreclosure. Whether it should be making that distinction or not—whether this is partly irrational panic or not—is not the point here. The point is that it just isn’t doing so, and so anyone who takes a loan to portfolio right now and uses a true market value instead of a fantasy is going to show the same huge write-down for the scratch & dent as for the nuclear waste. This will continue to be true until the market decides that everything isn’t nuclear waste any more.

So nobody wants outfits like Fannie Mae to mark to model; we want them to mark to market. We also want them to work out loans that can and should be worked out. Remember, we aren’t talking about horror subprime exploding ARMs here, we’re talking about troubled loans in typical Fannie Mae MBS. We’re talking about the kind of loans that would have taken a $60 million write-down in a past quarter, but that are taking a $600 million write-down in this quarter, solely because the market price of those loans has deteriorated so badly.

We also need to remember that Fannie has no intention of ever reselling these loans. If they can be cured, they will stay in Fannie’s portfolio. So establishing a market price is not about determining a loss Fannie would take if it cured the loan and then resold it. Establishing a market price is just a requirement of the accounting rules for a situation in which the price you must pay for a loan (par) is more than the market value of the loan. After all, what Fannie is doing here is making the MBS investor whole and taking the deteriorated asset onto its own books. The FV write-down means exactly that it is not hiding a loss this way.

Fannie Mae could avoid these write-downs by failing to exercise its option to buy the loans from the MBS. That would mean Fannie Mae refusing to work out loans with borrowers. Or, to put it another way, the price of Fannie agreeing to work with troubled borrowers is an out-sized hole in the current quarter’s charge-offs, not just because of the loan quality, but because of the total melt-down in the secondary market for nonperforming loans.

Fannie says that it does not expect most of these loans to default and produce large realized losses. You may or may not find that convincing. But Fannie does, because that’s why they bought them out of the pools. If they thought the stuff would go straight to the FC department, they’d have let the servicer take the loan out of the pool and foreclose, and let the losses hit the MBS guarantee fee income.

Fannie’s story is that in normal times, these FV write-downs of repurchased loans are included in total charge-offs, and therefore are reported in the credit loss ratio. In Q3 07, because of the enormous size of the FV write down, Fannie Mae backed out of the charge-offs the ones due to an up-front write down of delinquent but not defaulted loans. It added back any part of that write down that did, actually, become a realized loss, so that readers of the Q could get a true picture of how much the total charge-offs in Q3 were affected by repurchased loans.

Eavis is saying that this is inexplicable. Of course it’s explicable. You can and some analysts did on Friday ask Fannie Mae why it didn’t supply more information about what it was doing with those loans, and what its expected cure rate would be for these workouts. Fannie Mae acknowledged that such information would have helped and promised to provide more in future disclosures. But nobody on that conference call, as far as I remember, questioned the size of the Q3 07 FV adjustments. People who have been following the credit markets all year are not surprised here. Eavis is.

For the love of all that is holy, what does anyone think Fannie Mae (and Freddie Mac) are up to these days? The enormous pressure they are under by Congress and the public to modify as many loans as can possibly be saved has been so well-documented in the press that I’m sure they heard about it on Mars. It’s possible that Fannie is too optimistic about the cure rate of these loans. It’s possible that deep inside, they realize they are going to eat huge losses on all this stuff. But they were told in no uncertain terms to buy it out of the pools, take the FV write-down like a big kid, and start working out loans. Does anyone actually expect them to write a quarterly report that says “We think all this stuff will result in 100% losses in the next 90 days, but our regulators made us buy it anyway, so we’re reporting the worst possible credit loss ratio we can calculate, just to spite them”? On no planet, at no point in time, will that ever happen. You have to be willfully ignorant to think it would.

So there is, actually, a compelling story to be teased out of a couple of footnotes to a little table on page 55 of a 107-page quarterly report. It’s a story about political and market pressures and reactions; about the bottom-line impacts of workouts to investors like Fannie Mae; about the real-world effects on profitability numbers of things we see in fairly abstract forms, like those cliff-dives on the ABX and CDS charts or the dramatic ratings downgrades we post on regularly. There is a story that ties all of this together and shows how realized losses can be small compared to market losses, and how this ties into the debates over “mark to model” and other bad industry practices. There’s even possibly a story about how in certain unusual times, the old-fashioned GAAP rules fail to really tell investors what they need to know. These are fascinating and important subjects.

Eavis blew through all of those real issues to make a big deal about how Fannie projected losses in the 4-6 bps range for the year and might, actually, be at 7.5 bps as of Q3 if you calculate the number the way Eavis thinks you should. Think about this: he’s saying that it’s possible that credit losses on mortgage paper as of Q3 07 are worse than what was predicted at the end of 2006. OMG!!! No!! Really??? NEWS FLASH!! CALL THE POLICE!!!!! THE OBVIOUS!! IT IS BLINDING ME!!!

Sorry I let myself get out of control there, but come on. Anyone who has been reading USA Today on alternate weekends since February knows that losses are getting worse, and Fannie Mae did in fact explicitly report that losses were getting worse, even with the FV write-downs that were not realized losses backed out. What we are seeing is the whole problem with the “Another Enron” mentality: confusing the meaning of numbers with “accounting tricks,” and substituting some kind of gotcha for an honest attempt to understand the market mechanisms and economic reality that is creating those numbers. This mentality claims to be keeping companies honest, but it actually has the opposite effect, in my view, of inhibiting companies from presenting more detailed numbers, since the more you give people like Eavis the more they have to play gotcha with. And Eavis himself takes credit for his original article having lead to a 17% drop in Fannie Mae’s share price. I guess he’s proud of that. The other side of the Enron myth is the Famous Reporter Who Brought Down the Corporate Giant. It is worth not allowing oneself to get sucked into that sort of grandiose mythologizing.

I have to say I hate “blog triumphalism,” too. That’s the mindset too many internet writers have that us citizen journalists in our jammies are going to single-handedly bring down the Big Corrupt Media. I firmly believe in beating the press up a little when they do egregiously bad reporting, but that’s largely because I care about understanding what the real story is. And I hate being distracted by red herrings in my personal quest for understanding. Yesterday I spent over two hours rooting through SEC disclosures and listening to a 57-minute conference call trying to independently verify Eavis’s point; today I’ve spent a couple of hours writing this post. I am willing to believe that very few people have the time and the expertise to do what I just did. I therefore feel compelled to share my point of view with the rest of the world, in the interest of a worthwhile public discussion of financial and economic matters, which is the purpose of this blog. So I didn’t start out with the goal of catching Eavis being a lousy reporter; I started out with the goal of reading about Fannie Mae in a CNN Money article. But I believe that I did discover hyped, misleading, and ignorant reporting, and I believe it is fair to say so in public.

by Calculated Risk on 11/16/2007 03:22:00 PM

Note: Danielle DiMartino was warning about a housing bubble a couple of years ago when she worked for the Dallas Morning News. She now works for the Federal Reserve Bank of Dallas.

Here is DiMartino's current Economic Letter (with John V. Duca): The Rise and Fall of Subprime Mortgages (hat tip Kett82)

Here is the Dallas Fed reset chart. This shows most of the reset problems for subprime are still ahead of us.

Note that this chart doesn't include the second wave of resets for Option Arms coming around 2010. See here for a longer term chart.

Here is their conclusion:

The rise and fall of nonprime mortgages has taken us into largely uncharted territory. Past behavior, however, suggests that housing markets' adjustment to more realistic lending standards is likely to be prolonged.

One manifestation of the slow downward adjustment of home prices and construction activity is the mounting level of unsold homes. The muted outlook for home-price appreciation, coupled with the resetting of many nonprime interest rates, suggests foreclosures will increase for some time.

The sharp reversal of trends in home-price appreciation will also dampen consumer spending growth, an effect that may worsen if the pullback in mortgage availability limits people's ability to borrow against their homes.

Although recent financial market turmoil will likely add to the housing slowdown, there are mitigating factors.

First, the effect of slower home-price gains on consumer spending is likely to be drawn out, giving monetary policy time to adjust if necessary.

Second, the Federal Reserve has been successful in slowing core inflation while maintaining economic growth. This gives policymakers inflation-fighting credibility, which enables them to coax down market interest rates should the economy need stimulus.

Third, even if the tightening of mortgage credit standards undesirably slows aggregate demand, monetary policy could still, if need be, help offset the overall effect by stimulating the economy via lower interest rates. This would bolster net exports and business investment and help cushion the impact of higher risk premiums on the costs of financing for firms and households.

by Calculated Risk on 11/16/2007 11:15:00 AM

From Fed Governor Randall S. Kroszner: Risk Management and the Economic Outlook. First, on monetary policy:

... one feature of monetary policy to keep in mind is that, all else equal, each successive action in the same direction tends to lower the incremental benefits and to raise the incremental costs of additional actions. ...

... in September and again in October ... the FOMC [lowered rates] ... With those actions, however, the downside risks to economic growth now appear to be roughly balanced by the upside risks to inflation.

That is the clearest statement yet that the Fed (at least Kroszner) does not expect a rate cut any time soon.

After saying that the risks are balanced, Kroszner then says the economy is heading for a "rough patch":

In the near term, the economy will probably go through a rough patch during which a number of economic data releases may be downbeat. Home sales seem likely to weaken further ... a further weakening of demand is likely to prompt additional cutbacks in construction.

... conditions for subprime borrowers will get worse before they get better. First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house.

The likely consequences of these two factors--imminent interest rate resets and the difficulty of refinancing--will be yet higher rates of delinquencies and foreclosures over the next several quarters and, in turn, additional downward pressure on house prices. The overhang of unsold homes also will weigh heavily on the prices of newly built and existing homes. ...

Elsewhere in the economy, increases in consumer spending can be expected to be limited for a while by the effects of sluggish home prices on household balance sheets. Consumer spending will also be constrained, although probably to a lesser extent, by the drain on aggregate purchasing power caused by mortgage resets; that drain will likely be exacerbated by the current run-up in energy prices. Meanwhile, heightened uncertainty in the business sector could lead to reductions in capital spending plans.

This reminds me of a teeter totter; it can be balanced with a few pounds at each end, or with hundreds of pounds at each end. If the risks are balanced, the concerns about inflation must be significant.

Consider these two stories from FedEx and UPS. From the WSJ: FedEx Cuts Earnings Outlook

FedEx Corp. lowered its earnings outlook Friday, citing high fuel costs and weakness in its less-than-truckload freight business.

The Memphis, Tenn., company had already cut its earnings forecast in September and said it would reduce capital spending ...

And from Reuters: UPS to hike delivery charges by 4.9 percent

Package delivery company United Parcel Service Inc said on Friday it was raising its prices for 2008 by about 4.9 percent, matching a planned hike by rival FedEx Corp ...

Economic weakness and rising prices. A teeter totter balanced with significant weight on both ends.

by Calculated Risk on 11/16/2007 10:40:00 AM

From Bloomberg: Goldman Sees Subprime Cutting $2 Trillion in Lending

The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a ``substantial recession'' in the U.S. ...

``The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized,'' [Jan Hatzius, chief U.S. economist at Goldman] wrote. ``It is easy to see how such a shock could produce a substantial recession'' or ``a long period of very sluggish growth,'' he wrote.

Hatzius also wrote (not in article) that Goldman Sachs' working assumption is home prices will "fall 15% peak to trough ... if the economy stays out of a full-blown recession".

by Tanta on 11/16/2007 10:05:00 AM

From National Mortgage News, via Clyde:

Nearly one in three buyers between June 2006 and June 2007 had no skin in their deals, according to new research that represents further evidence of the poor quality of loans that helped fuel the rising tide of delinquencies and foreclosures. Though the study of nearly 10,000 transactions by the National Association of Realtors did not note whether the loans were prime or subprime, it found that 29% of all buyers -- and 45% of all first-timers -- financed the entire purchase price. Somewhat surprisingly, considering that they usually have money from the sale of their previous residence to put into the transaction, 18% of repeat buyers also put up none of their own money.

The NAR press release is here.

I note that in the Greenspan-Kennedy method of calculating MEW, those transactions where a repeat buyer receives sales proceeds for an existing home in excess of the existing mortgage amount, but does not use those proceeds to reduce the mortgage amount on the next home purchase, will end up counting as MEW. It is, after all, equity extraction: the equity from the previous home is "extracted" in the sale, but does not become equity in the new home. This means that the loss of 100% financing for purchases will lower net MEW, just as the loss of some cash-out refinancing options will.

by Tanta on 11/16/2007 08:35:00 AM

Floyd Norris sums it all up:

We should have known something was strange.

by Tanta on 11/16/2007 08:16:00 AM

Bloomberg reports (hat tip to Bob_in_MA) that the GSEs are adding additional Loan Level Pricing Adjustments (in Fannie-speak) and Postsettlement Delivery Fees (in Freddie-speak) for loans delivered on or after March 1, 2008. What's new and different about these new fees is that they apply to "standard" loans; there are already pretty serious fees being charged for the ones made under the special A Minus/Expanded Approval/"Flexible" programs.

Specifically, they apply to any mortgage with an LTV greater than 70% and FICO less than 680. They range from 75 bps for loans in the 660-679 FICO bucket to 200 bps for loans with FICOs less than 620. These new fees are also cumulative, so they apply on top of the existing fees the GSEs charge for things like high-LTV cash-outs (50 bps for LTVs between 70% and 80% and 75 bps between 80% and 90%). So today, a borrower with a low-average FICO of 675 can get a cash-out up to 90% LTV with a 75 bps fee; that will turn into a 150 bps fee next March.

As most borrowers, especially refinancing borrowers, don't pay points in cash, these fees will either end up as points that are rolled into the loan balance or as higher interest rates. Assuming a rough price:rate ratio of 3:1, that means a note rate 0.25% higher for our hypothetical "average" cash-out borrower.

The Bloomberg article also indicates that Freddie is lowering its maximum LTV for properties in a declining-value market. Actually, the rule in question (reduce maximum LTV by five points in declining markets) has been around since Hector was a pup for Fannie and Freddie and lots of other investors; Freddie is dusting it off and reminding everyone that it exists. For those of you who have become appraisal-issue addicts, here's what Freddie's Bulletin says:

We use http://www.ofheo.gov/hpi_download.aspx to help identify declining markets. This is an example of a tool you may use to help in determining whether a Mortgage is subject to our maximum financing limits.

Underwriting expectations – maximum financing in declining markets

With respect to underwriting requirements, when the property securing a Mortgage is located in a declining market, Sellers must:

􀂄 Determine whether any contributions are interested-party contributions as described in Section 25.3, if any contributions are offered.

􀂄 Determine the maximum interested-party contribution limits based on the lower of the appraised value or the sale price, if applicable

􀂄 Adjust the sale price of the property by deducting the total dollar amount of any sales concessions from the sale price of the property. Sales concessions are defined in Section 25.3.

􀂄 Calculate the LTV/TLTV ratio based on the lower of the appraised value or the adjusted sale price.

􀂄 Restrict the maximum LTV ratio to at least five percent less than the maximum ratio allowed for the transaction. If there is layering of risk, the Seller should consider higher restrictions to the maximum allowable ratio to address market conditions and the risk in the transaction.

That's not new; old underwriting hands can recite these rules at cocktail parties if you are silly enough to encourage them. This bit, though, is new:

Interested party contributions in the form of financing and sales concessions are becoming more common due to market conditions. Currently, we require that maximum financing concessions be determined based on the LTV ratio of a Mortgage. Because maximum financing concessions and lower Borrower contributions are particularly prevalent in transactions with secondary financing, we are changing our guidelines to require that maximum financing concessions be based on TLTV ratio when secondary financing is present, and LTV ratio when there is no secondary financing.

Translation: no more getting around financing concession rules by structuring the loan with a low LTV and a high CLTV (TLTV in Freddie-speak). Whether this will be a big deal or not depends on how many subordinate-financing lenders are still standing in March 2008, of course.

It is fairly typical for the GSEs to make major changes to their rules with a fair amount of lead time: they try not to reprice loans that were already approved or committed to a customer or in the lender's MBS pipeline. Still, these March deadlines are for loans delivered to the GSEs on that date, not loans made on that date. Therefore, these pricing adjustments will be made to lender rate sheets signficantly before March. Merry Christmas.

by Calculated Risk on 11/15/2007 11:54:00 PM

The cover story in The Economist: America's vulnerable economy

IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort. Our latest assessment (see article) suggests that the United States may well be heading for recession.

Does the cover curse apply to The Economist? In this case, I think a U.S. recession is likely (I agree with The Economist), but I'm not so sure about the decoupling theory.

From the Financial Times: China fears impact of US slowdown

China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.

A global economic slowdown ... “will be the biggest challenge to China’s economy next year”, a report from the ministry’s policy research department said.

The report is Beijing’s first public comment on what repercussions it expects from the global credit crisis and a sign that the government does not support the view that Asian growth has “decoupled” from the US. “If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders,” the report said.

That doesn't sound like decoupling to me.

by Calculated Risk on 11/15/2007 06:29:00 PM

From the Downey Financial 8-K released today. (hat tip Greg and others)

Click on graph for larger image.

This would be a nice looking chart, except those are the percent non-performing assets by month.

Yes, by month!



Note: So much news today ... Starbucks, J.C. Penny, Alltel Banks Cut Loan Sale Size a Second Time and much more. Clearly the economy is slowing sharply.