by Calculated Risk on 11/19/2007 10:58:00 PM

UPDATE: WaPo leads with a similar headline: Fallout From Credit Crunch Creates Another One

From the Telegraph: Libor soars as credit crunch returns (ha tip Viv)

The credit crunch is returning in a virulent form ... after City banks raised their wholesale lending rates to the highest level in two months.

Morgan Stanley said that the recent jump in the benchmark London Interbank Offered Rate, which yesterday rose to just under 6.45pc, was ... a major warning sign of pain ahead ... it was Libor's increase in August that signalled the initial impact of the credit crunch.

The UK is still struggling with the Northern Rock situation, but this is not a good sign.

by Calculated Risk on 11/19/2007 08:17:00 PM

From the WSJ Deal Journal, Dana Cimilluca reports: Chrysler Loan Sale Likely Postponed

The $4 billion sale of loans connected to Cerberus Capital’s August purchase of Chrysler that was to take place this week will likely be postponed, a person briefed on the matter tells Deal Journal. Orders for the paper were due today, and so far, demand has been sluggish.

by Calculated Risk on 11/19/2007 02:20:00 PM

We believe ... the industry will suffer $148 Billion total losses related to CDOs, to date we've accounted for roughly about $40 billion of those, so we're estimating another $108 billion in writedowns over the next several quarters.
Goldman Sachs, Nov 19, 2007

Most of this call is company specific (like Citi), however the bearish comments on the credit crunch, housing and states currently in or near recession are worth noting.

House prices have 13% to 14% to fall from current level.
Goldman Sachs, Nov 19, 2007

GS Conference Call
US Financial Services: Mortgage Fall Out Has More To Go
Monday, November 19th, 2007
11:00am EDT

Hosted by:
Lori Appelbaum and others
Replay: 800-332-6854 (Domestic)
973-528-0005 (Int'l)
Replay Code: 707854

UPDATE:

Eight states ... for which there is greater than 30% house price depreciation forecast would be California, Florida, Arizona, Nevada, Virginia, New Jersey, Maryland, and Washington D.C. ... 13% to 14% nationally masks some states that we have accute concerns.
Goldman Sachs, Nov 19, 2007

by Tanta on 11/19/2007 02:03:00 PM

The OC Register has an interesting story out on the problems with the foreclosure numbers that RealtyTrac reports (and that the media tend to pick up and run with). I suggest you read the whole thing. I got fascinated by this little part:

For example, last year, RealtyTrac's data showed Colorado had the nation's highest foreclosure rate. That didn't sit well with state officials, who decided to do their own count of foreclosures and came up with a figure much smaller than RealtyTrac's. . . .

RealtyTrac counted 54,747 "foreclosure actions" in Colorado last year.

That number wasn't useful because it didn't reflect how many homeowners were actually in danger of losing their homes, said Ryan McMaken, spokesman for the Colorado Division of Housing. "We couldn't really use those numbers for having serious discussions," he said.

So McMaken put an intern to work calling all of the state's 64 counties to get a count of how many homes entered the foreclosure process last year. The number he came up with: 28,435.

This summer, partly in response to criticism, RealtyTrac began sorting its numbers to compile a separate count of properties in foreclosure, in addition to total foreclosure actions. RealtyTrac's "unique property" count, published quarterly, found 19,411 properties in foreclosure in Colorado in the first half of this year. That's within a few dozen of the 19,460 counted by McMaken.

"I think they're getting a lot closer now," McMaken said, adding that "we might not have to collect our own numbers" anymore.

So Colorado had no state-wide numbers for foreclosures. It didn't feel the need to have any until RealtyTrac made it look bad. So it got an intern to get on the telephone and call up counties and make a running list (with a spreadsheet? Or a ruled legal pad?). It then demonstrated that RealtyTrac's numbers were exaggerated. And so . . . now it can quit tallying its own numbers and go back to relying on the Associated Press to tell it what's going on in its own state? Um.

by Calculated Risk on 11/19/2007 01:00:00 PM

Click on graph for larger image. The NAHB reports that builder confidence was at 19 in November, the same as October (revised).

NAHB: Builder Confidence Remains Unchanged In November

Builder confidence in the market for new single-family homes remained unchanged in November due to continuing mortgage market problems, a substantial inventory overhang and ongoing concerns about the effects of negative media coverage, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The November HMI held even with October’s upwardly revised 19 reading, its lowest point since the series began in January of 1985.
...
“The message from today’s report is that builders do not see any significant change in housing market conditions as compared to last month,” said NAHB Chief Economist David Seiders. “While they continue to work down inventories of unsold homes and reposition themselves for the market’s eventual recovery, they realize it will be some time before market conditions support an upswing in building activity – most likely by the second half of 2008.”

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as either “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

In November, the index gauging current sales conditions for single-family homes remained flat at 18, while the index gauging sales expectations for the next six months declined a single point to 25. The index gauging traffic of prospective buyers rose two points to 17.

Regionally, the HMI results were mixed, with two regions reporting modest HMI gains and two reporting slight declines. The HMI for the Northeast gained one point to 27 and the HMI for the West gained three points to 18. Meanwhile, the HMI for the Midwest declined one point to 13 and the HMI for the South declined two points to 19.

by Tanta on 11/19/2007 10:10:00 AM

From the New York Times (thanks, jm!):

The House on Thursday passed a broad mortgage act that includes protections for renters. The House act, which the lending industry has opposed, would require new owners to continue the leases of tenants for up to six months after foreclosure.

There are few bigger indictments of the lending practices of the last few years than the apparent fact that people mortgaged investment properties, found a creditworthy renter who never failed to make the monthly rental payment, and still ended up in foreclosure.

As the Times notes, it is hard to say how many renters and properties are affected here; we have seen quite a bit of reporting suggesting that many if not most of these foreclosed "investment" properties are vacant. The real impact of this legislation should be on lender guidelines and practices (and pricing) for making investment property loans in the residential mortgage portfolio (instead of the commercial or small business loan portfolio, where some of us think they belong).

If you know that you face an automatic six months between foreclosure and REO marketing (assuming you don't list and market the house until it is vacant), you just might get serious about operating income analysis and evaluating the seriousness and plausibility of a first-time landlord's ability to manage a property. You might also get more diligent about catching implausible claims of owner-occpancy before you close loans.

On the other hand, I suspect this will put a screeching halt to "workout" arrangements that allow an owner some time to find a tenant for a property that isn't cash-flowing. Any servicer who knows that there isn't a lease today would obviously elect to file the FC before one materializes. Since my sympathy for amateur "investors" who basically already get a better deal (the rate on a residential mortgage loan instead of a commercial loan) than they deserve is limited, I'm not sure this problem should concern anyone unduly.

I do hope it opens up some discussion of the whole issue of the GSEs and FHA and depository lenders, specifically, being allowed to buy/insure/originate investment loans in the single-family residential programs. Insofar as there are always some kind of taxpayer subsidies involved here--either in the insurance of these loans or the tax breaks for the investor or both--you have programs supposed to stimulate or provide capital for homeownership being used to goose the profits of RE investors. If there is some social or economic benefit to doing that, then I think those loans should run through something like the Small Business Administration or another kind of program explicitly designed to support entrepreneurship. Including them in programs that are supposed to be about owner-occupied housing distorts incentives and creates the kind of servicing problems we see here: it is, after all, true that residential mortgage servicers aren't exactly set up to be emergency substitute landlords. A specialized rental property lender/servicer might be. And might charge the true cost of that in the interest rate. Which might make speculation in single-family housing less attractive. Which doesn't strike me at least as a big bummer.

by Calculated Risk on 11/19/2007 09:41:00 AM

From the WSJ: Swiss Re to take $1.1 bln loss after insuring swaps

Swiss Re on Monday said it was taking a $1.1 billion (1.2 billion Swiss franc) loss after insuring a client's portfolio exposed to the U.S. subprime mortgage meltdown and related credit-market turmoil.

Swiss Re's credit solutions division had put together protection to insure an unnamed company against a "remote risk of loss" -- a loss that materialized as Standard & Poor's and Moody's Investors Services slashed the ratings of a variety of debt instruments last month and as liquidity dried up in more exotic asset classes.
...
The loss is one of the first major subprime-related hits reported by a reinsurance company.

It can't be Monday without a visit to the confessional.

by Calculated Risk on 11/19/2007 12:26:00 AM

From the WSJ: Commercial Property Now Under Pressure

The value of commercial real estate ... is now starting to decline due ... according to a report set to be released today by Moody's Investors Service.

The report found that the value of commercial property declined 1.2% in September from the previous month.

The CRE market saw loose lending too:

Even a slight decline in values could make it difficult for property owners to refinance their mortgages, especially if they have been paying only interest on their existing debt and not paying down principal. Such interest-only mortgages have become increasingly popular.

And there is more space available:

Already there are signs of slowing in some markets. Available sublease space swelled to 77 million square feet in the third quarter from 73 million square feet nationwide in the second quarter, the first national increase in five years, according to Grubb & Ellis Co.

Historically the CRE market trails the residential real estate market by about a year and half. So it appears the CRE slump is right on schedule.

by Calculated Risk on 11/18/2007 12:37:00 PM

JW sent me this Washington Post commentary: Bits of Bad News Obscure A Big Truth About Wealth

Despite declining prices in many markets, homeowners still control near-record equity holdings, just under $11 trillion.

... there's no question that equity holdings have declined recently and may well be lower when the Fed issues its next quarterly report, in mid-December. But in an $11 trillion marketplace, a $6 billion giveback in a cyclical correction is not a cause for panic.

This is similar to the argument that John Berry of Bloomberg suggested a few days ago: Bloomberg's Berry: No Recession. Although the WaPo's Kenneth Harney didn't focus on equity extraction - just wealth - it is declining wealth and less equity extraction that will impact the U.S. economy in the coming quarters. After reading the Bloomberg article, I tried to show, using the Fed's numbers that the Home ATM is running out of cash.

But Harney raises another interesting question: Why does the Fed Flow of Funds report show a decline in household real estate equity of only $6 Billion in Q2? Here is the relevant table (B.100 Balance Sheet of Households and Nonprofit Organizations).

The Fed shows household real estate assets (line 4) increased from $20.808 Trillion in Q1 to $20.997 Trillion in Q2. An increase of $189 Billion in assets. Wait - aren't prices falling? I'll get back to that ...

The Fed also shows household mortgages (line 32) increased from 9.951 Trillion in Q1 to $10.146 Trillion in Q2. An increase in mortgages of $195 Billion. The Home ATM was very active in Q2!

So that is the $6 Billion decline in equity mentioned by Harney: An increase in assets of $189 Billion eclipsed slightly by an increase in mortgage debt of $195 Billion.

Why did assets increase $189 Billion in Q2? All the data isn't publicly available, and the calculation is very complicated, but here is a simple formula:

Assets (Q2) = Assets (Q1) * PriceChange (Q2) + Assets Added (New Homes, Home improvement) - Assets Subtracted (demolished, damaged, etc.)

I believe the key is the price change in Q2. Look at these price indices:

Click on graph for larger image.

These are all nominal prices, and the OFHEO index is Purchase Only, seasonally adjusted, and set to 100 in Q1 2000. Note: The Case-Shiller composite indices are monthly, and the graph is plotted quarterly.

All of the Case-Shiller indices show house prices have peaked, and have been declining for over a year. Meanwhile the OFHEO purchase only seasonally adjusted index shows prices increased in Q2 by 0.5% (a 2.1% annual rate).

There are significant differences between the OFHEO HPI and the Case-Shiller National index. This is an excellent summary by OFHEO economist Andrew Leventis: A Note on the Differences between the OFHEO and S&P/Case-Shiller House Price Indexes

OFHEO’s House Price Indexes (the “HPI”) and home price indexes produced by S&P/Case-Shiller are constructed using the same basic methodology. Both use the repeat-valuations framework initially proposed in the 1960s and later enhanced by Karl Case and Robert Shiller. Important differences between the indexes remain, however. The two models use different data sources and implement the mechanics of the basic algorithm in distinct ways.
...
Based on a review of the methodology documentation that is available, it appears that OFHEO’s national index has broader geographic coverage than the S&P/Case-Shiller National Home Price Index. According to the methodology materials, the S&P/Case-Shiller index does not include house price data from thirteen states.
...
The S&P/Case-Shiller index also apparently has incomplete coverage in another 29 states. ... To the extent that the missing areas tend to be more rural counties, given that rural areas appear to be exhibiting stronger market conditions in recent periods, the missing data might partially explain why the OFHEO and S&P/Case-Shiller national indexes diverge.
...
OFHEO’s sales price data include only homes that have conforming mortgages, while the S&P/Case-Shiller sales prices are not restricted to houses with certain types of financing. Because many of the homes not covered in the OFHEO index may be relatively expensive (i.e., may have required non-conforming, “jumbo” mortgages), the OFHEO restriction to conforming mortgages may produce appreciation rate estimates that are less reflective of price trends for the most expensive homes.

The OFHEO note suggests that the primary reason for the difference between Case-Shiller and OFHEO price indices is geographical coverage (not the loan limitations for OFHEO).

This is important because it appears the Fed uses the OFHEO index (or something similar) to calculate changes in household real estate asset value. If the Case-Shiller index is more representative of recent price changes, then the Fed actually underestimated the recent increase in household real estate assets!

But looking forward, prices will probably be falling for the OFHEO index in Q3 (to be released Thursday, November 29) and the Fed would then also show declining prices in the Q3 Flow of Funds report. Based on some rough estimates, it appears that over $100 Billion of the $189 Billion in household real estate asset increases in Q2 was from the estimated price increase. With declining prices in Q3, household equity will probably fall significantly - putting a big dent in Harney's argument.

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."