by Calculated Risk on 12/12/2007 10:19:00 AM

From MarketWatch: Bank of America, Wachovia, PNC see tough fourth quarter, more credit losses

Bank of America Chief Executive Ken Lewis said the firm would have to write down a larger amount of its investment in some debt securities than previously planned.

"Based on conditions today, we expect those write-downs will be larger than have already been reported -- although obviously we won't know our final numbers until we close the fourth quarter," Lewis said in remarks prepared for delivery at a Goldman Sachs conference.
...
Lewis said the problems continue to grow, based on a slowing economy, but he stopped short of predicting a recession. "We're getting closer to 50-50 though, "Lewis said, referring to the likelihood of a recession.
...
Also Wednesday, Wachovia ... in a Securities and Exchange Commission filing, said it now estimates its loan-loss provision for the fourth quarter will be about $1 billion in excess of charge-offs.

Its previous forecast was between $500 million and $600 million due to slowing loan growth and ongoing deterioration in its loan portfolio.
...
PNC said it expects to report fourth-quarter earnings in the range of 60 cents to 75 cents a share, and adjusted earnings between $1 and $1.15 a share. Analysts polled by Thomson Financial are looking for profit of $1.39 a share, on average.

The revised expectation is due to write-downs on its $1.5 billion of commercial mortgage loans held for sale and lower trading revenue as a result of "unprecedented market price volatility," PNC said in the filing.

by Tanta on 12/12/2007 09:30:00 AM

The Wall Street Journal is troubled by Fannie Mae's recent imposition of a 25 bps "adverse market fee" for new mortgage production. "Mortgage Pain Hits Prudent Borrowers":

Fannie Mae, the giant government-sponsored mortgage investor, last week raised costs for many borrowers by quietly adding a 0.25% up-front charge on all new mortgages that it buys or guarantees. On a $400,000 mortgage, that would mean an extra $1,000 in fees, almost certain to be passed on to the consumer. Freddie Mac, the other big government-sponsored mortgage investor, is expected to impose a similar fee soon, according to a person familiar with the situation.
...
In a statement, Fannie said the new fee is needed "to ensure that what we charge aligns with the risk we bear." The National Association of Home Builders labeled the fee "a broad tax on homeownership." More than 40% of all mortgages outstanding are owned or guaranteed by Fannie or Freddie.

The fee is the latest in a series of moves by Fannie and Freddie that raise the cost of credit for some borrowers. Late last month, they imposed surcharges that affect mortgage borrowers who have credit scores below 680, on a standard scale of 300 to 850, and who are borrowing more than 70% of a property's value. For example, someone with a credit score of 650 would pay a surcharge of 1.25% of the loan amount for a mortgage to be sold to Fannie. On a $300,000 loan, that would mean extra fees of $3,750. The fee could be paid in cash or in the form of a higher interest rate than
would normally apply.

Fannie also is raising down-payment requirements for loans it purchases or guarantees in places where house prices are falling, which by some measures is most of the country. In these declining markets, lenders will need to cut by five percentage points the maximum percentage of the home's estimated value that can be financed. For instance, for types of loans that Fannie normally would allow to cover up to 100% of the estimated value, the ceiling now is 95% in declining markets.

"A tax on homeownership." I swear, if the National Association of Builders didn't exist, I'd have to invent them. For comic relief. Ditto with "a higher interest rate than would normally apply."

Here's the deal: if you are taking out a mortgage--any mortgage--in a period of time in which home prices are rapidly falling, the financial future of lenders and builders is uncertain, and bailouts are already on the table, you may wish to call yourself "prudent" because you're getting a conforming fixed and your FICO score is better than those subprime people's. You may, therefore, feel sorry for yourself because you'll pay that extra quarter.

Or, you can wonder if maybe you should wait that extra half-hour after lunch before entering the swimming pool. Whatever. I'd like to hear the case for the GSEs backing off on fees right now.

In the interests of maximum nerdage, I'd also like to point out that the "no maximum financing in a declining market" rule that is mentioned here is not "new." It has always been the rule. Fannie and Freddie are taking the opportunity presented to them by current events to remind everyone that it is still on the books. Some people may think it's new, but some people think a "declining market" is, well, new. Unheard of. Not normal, you might say.

We should note that this rule does not simply change a 100% maximum to a 95% maximum. There are many maximum LTVs, depending on occupancy, purpose, FICO, property type, loan type (fixed versus ARM), and so on. So there are those 90% cash-outs that will be 85% cash-outs, and those 80% multi-unit loans that will be 75%. Cue more howling from the "prudent."

by Tanta on 12/12/2007 08:47:00 AM

Thanks to Buzz for the link:

(Washington, DC)- The House Judiciary Committee will consider a substitute version of the Miller-Sánchez “Emergency Homeownership and Mortgage Equity Protection Act of 2007″ during a markup TOMORROW, December 12, at 10:15 a.m. in room 2141 of the Rayburn House Office Building. The substitute reflects a compromise made with Rep. Steve Chabot (R-OH) that will help hundreds of thousands of homeowners save their homes from foreclosure while seeking bankruptcy to reorganize their debts. . . .

The key features of the compromise, to be offered by House Judiciary Committee Chairman John Conyers and Rep. Chabot are as follows:

· It targets existing nontraditional (e.g., interest-only) and subprime mortgages originated after January 1, 2000 up through the legislation’s date of enactment.
· It applies to debtors who file for chapter 13 bankruptcy relief (a form of bankruptcy relief by which individuals restructure their debts) who lack sufficient income after payment of specified expenses pursuant to IRS guidelines to remain current on their mortgages and cure arrears, as required by current law. Debtors who so qualify may:

· reduce exorbitant mortgage interest rates and avoid onerous prepayment penalties;
· set aside excessive and often secret fees charged by unscrupulous mortgage lenders ;
· modify the principal amount of the mortgage to reflect the home’s actual value.

I'm strongly in favor of changing Chapter 13 to allow cram downs on owner occupied mortgages; I waxed crisply on that subject a while ago.

I think putting in these restrictions to try to limit this only to "predatory" mortgages is futile, and eventually we'll get the possibility of cram down for everyone. It's hardly a free-for-all; you do have to declare Chapter 13, live on the payment plan, and get the judge to agree to the adjusted loan terms, all that being a great deal more onerous a process than getting any workout from any mortgage servicer has ever been. I figure that once Congress does manage to realize that we're all sublime subprime now, there will be an amendment to let folks with a good old 30-year fixed have the same treatment in BK that anyone else can have.

What really annoys me is that this doesn't apply to future mortgages, only to those made between 2000 and the enactment of the law. To me, cram downs are important not just as a relief measure for debtors but as a disincentive for lenders relaxing credit standards too far. If you know a judge can rewrite your mortgage, you may well write it more carefully up front.

I conclude that two things are operating here: "bipartisanship," or your basic committee product that will make nobody happy all the time; and a desire to believe that this is "contained" to a certain class of borrowers and can be "worked out of the system" without impacting the prime world.

by Calculated Risk on 12/12/2007 02:14:00 AM

Former Fed Chairman writes in the WSJ: The Roots of the Mortgage Crisis. Greenspan concludes:

The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

I'll let others comment on Greenspan's historical narrative, but I'd like to point out that the inventory overhang includes more than "inventories of newly built homes". The overhang also includes excess rental units and vacant existing homes. See: Housing Inventory and Rental Units.

And to Greenspan's final sentence:

"Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."
J. Maynard Keynes, A Tract on Monetary Reform

by Calculated Risk on 12/11/2007 11:19:00 PM

Reuters: SuperSIV fund now seen only $30 bln in size-CNBC

A banking industry fund to bail out structured investment vehicles reeling from the subprime mortgage crisis may only total $30 billion ... CNBC reported on Tuesday.

Bankers working on the fund said "if they're lucky," they may get $30 billion in SIV assets in the fund ...

On Nov 23rd, it was $75 billion to $100 billion.

Last week, it was $50 billion.

Now the SuperSIV will be "lucky" to be $30 billion. It's melting away.

I wouldn't be surprised if Citi's new CEO Vikram Pandit decides to pull out of the SuperSIV and move what remains of the Citi SIVs to their balance sheet.

A new broom sweeps clean.

by Calculated Risk on 12/11/2007 05:43:00 PM

From Bloomberg: Genworth Predicts Lower-Than-Expected 2008 Profit (hat tip Brian)

Genworth Financial ... said profit will miss analysts' estimates next year because of the U.S. housing slump. ...

Genworth's mortgage-insurance unit, which contributed about 15 percent of operating profit this year through Sept. 30, will lose as much as 25 cents a share in 2008, the Richmond, Virginia- based company said today in a presentation on its Web site.

``We did not expect the speed or degree of the unprecedented turn of the housing market,'' Chief Executive Officer Michael Fraizer said ... Fraizer has said Genworth covered too many mortgages in Florida...

Another CEO surprised by the "speed and degree" of the housing downturn. Also, I hate it when a CEO comments on his stock price:

``I am not satisfied with our stock price,'' Fraizer said.

Memo to Fraizer: Take care of business, the stock price will follow.

by Calculated Risk on 12/11/2007 05:29:00 PM

From Forbes: Weak Construction Blasts NCI (hat tip Michael)

NCI [Building Systems] which is headquartered in Houston, makes metal building materials used in non-residential construction. Its products include roofs and roll-up doors.

A slowdown in non-residential construction pressured NCI's fourth-quarter results. According to McGraw Hill, low-rise nonresidential construction fell by 4.4% during NCI's fiscal 2007.
...
NCI's fourth-quarter earnings miss shows trouble brewing in the non-residential construction market.

NCI Building Systems is the largest maker of metal building components in North America. They are focused on Commercial Real Estate (CRE) construction, and this is another sign of an impending slowdown in nonresidential structure investment.

by Calculated Risk on 12/11/2007 03:47:00 PM

Renting is a substitute for owning, and to understand the current excess housing inventory, we also need to consider rental units.

Click on graph for larger image.

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

In an earlier post, Home Builders and Homeownership Rates, I discussed the decade long decline in the total number of rental units - from 1995 to 2004 - and how that related to the rising homeownership rate.

The builders didn't stop building apartment units in 1995, instead the decline in the total units came from rental to owner conversions, and units being demolished (a fairly large number of housing units are demolished every year).

And even though the total number of rental units was declining, this didn't completely offset the number of renters moving to homeownership, so the rental vacancy rate started moving up - from about 8% in 1995 to over 10% in 2004.

The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been 2.6 million units added to the rental inventory. This increase in units almost offset the recent strong migration from ownership to renting, so the rental vacancy rate has only declined slightly (from a peak of 10.4% in 2004 to 9.8% in the most recent quarter).

Where did these 2.6 rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 773K units completed as 'built for rent' since Q2 2004. This means that another 1.8+ million rental units came from conversions from ownership to rental.

These could be older out-of-service units being brought back to the rental market, condo "reconversions", flippers becoming landlords, or homeowners renting their previous homes instead of selling. But this shows the substantial excess inventory in 2004 and 2005 that didn't show up in the new home or existing home inventory numbers at the time.

Back in 2006, I estimated the excess housing inventory at 1.1 million to 1.4 million units. The number is higher now since the home builders have continued to build too many homes. Note: of course price is a factor. With the rental vacancy still above the normal range, there are probably 700 thousand excess rental units in the U.S. (assuming the vacancy rate falls back to 8%).

Here is a rough estimate of the excess inventory:

Source	Units
Rental Units	700,000(1)
Vacant Homeowner Units	750,000(2)
Excess Builder Inventory	250,000(3)
Total	1,700,000

(1) calculated based a decline in the rental vacancy rate from 9.8% to 8%.

(2) based on the homeowner vacancy rate declining from 2.7% to 1.7% on 75 million units.

(3) Based on a return to 5 months of hard inventory (completed or in process). This includes an extra 100,000 units based on rising cancellation rates.

Note: this is another step towards my housing forecast for 2008.

by Calculated Risk on 12/11/2007 02:03:00 PM

Statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

by Calculated Risk on 12/11/2007 12:35:00 PM

From Bloomberg: Freddie Expects 4th-Quarter Loss, Record Default Rate

Freddie Mac ... said default rates on mortgages it owns or guarantees are rising to a record, likely leading to a fourth-quarter loss similar to its largest-ever loss last quarter.

``Our fourth-quarter results are not going to be effectively better than they were in the third quarter,'' Chief Executive Officer Richard Syron told investors today at a conference in New York sponsored by Goldman Sachs Group Inc. ``We are not promising a silver bullet, a short-term quick fix.''

Freddie Mac expects a 3 percent to 3.5 percent default rate, exceeding the record 2.4 percent rate on its books in 1991, the company said, according to a slide presentation. Credit losses on the current book of business will be $10 billion to $12 billion, Syron reiterated today. Almost half the impairments were reflected in third-quarter results reported on Nov. 20, the company said.

The decline in housing ``will get tougher before it gets better,'' Syron said.