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Archive for March, 2008

[Contrarian Media] ARM Reset Crisis Not Y2K Deja Vu All Over Again

March 31, 2008 | 10:01 am | |

With consumer confidence dropping, the consumer’s swagger is gone. Reports of foreclosure speculators profiting from other’s misfortunes and hedge funds picking through the carnage of non-performing residential mortgages are the stories of the day.

In other words, it’s a perfect to time to begin delivering contrarian optimism. After all, 8 months have passed since the summer credit meltdown and we are ready for a change. Aside from the NAR and other trade groups who are always on the glass is half full side, we are starting to see more contrarian coverage emerge.

During the Y2K panic of 1999, there was tremendous anxiety built up over the collapse of the world economy because more zeroes were needed in the proverbial electronic date field of most software applictions. Will the credit crunch coverage follow the same path (an overhyped media consipiracy enabled by slow news days)?

Evidence may be seen in the John Berry column on Bloomberg who said the ARM reset crisis won’t be as big of a deal as everyone feared.

I cam across this column last week and was going to write about my doubts in the logic given the short window of data that was looked at but was pleasantly surprised when I came across Andrew Leonard’s column (a regular read of mine) “How the World Works” called: Whatever happened to the great ARM reset crisis?

Emphasizing that the data Berry based his conclusions on came from just one month of mortgage-backed securities issued by just one mortgage lender, Smith took the time to look at a database containing information on 38 million mortgages issued between 2004 and 2006. That database shows that out of 8.4 million ARMS originating during that time period, only 9.1 percent had initial interest rates of 8.5 percent or higher. A whopping 1.1 million were 2 percent or lower. (Contrast that to Berry’s assertion that “most of the initial rates were 8.5 percent or more.”)

Deja Vu: The NAR press release last week.

[Liquid Mortgages] For Just 5 Minutes …Underwater

March 31, 2008 | 9:28 am | |

There’s an old joke that goes like this:

Man1 Seems like I’ve been married for five minutes.
Man2 Really? only 5 minutes?
Man1 Yeah, 5 minutes…

Judging by the booing the president got at opening day for the Nationals yesterday while throwing out the first pitch, the administration is starting to think it needs to do something about the stability of the financial markets, specifically credit/mortgages. We are starting to see some stirring (about a year too late , I suspect).

HUD has plans to specifically help borrowers whose home values are less than their outstanding mortgages.

The Department of Housing and Urban Development plan would enable homeowners who are “underwater” on their mortgages to qualify for a partial backstop through HUD’s Federal Housing Administration, these people said. HUD Secretary Alphonso Jackson “is examining the potential for FHA to be a solution for these borrowers,” Treasury Secretary Henry Paulson said Wednesday.

The FHA is central to multiple plans to revitalize the housing market and prevent foreclosures.

Meanwhile, Democrats are trying to pass legislation that would allow the FHA to insure up to an additional $400 billion in mortgages by requiring lenders to take partial losses on loans and refinance borrowers into more affordable products. HUD’s proposal is likely to be much smaller in scale and is expected to offer partial insurance for certain borrowers, leaving lenders on the hook for some losses.

The way of Washington (40 square miles surrounded by reality): HUD Secretary Alphonso Jackson announced program on a Friday, expected resignation on Monday

Housing and Urban Development Secretary Alphonso Jackson is expected to announce his resignation Monday, according to people familiar with the matter, a decision that will deal a blow to the Bush administration’s efforts to tackle the housing and mortgage mess.

The exact reasons for Mr. Jackson’s decision couldn’t be learned. The secretary has been beset recently by allegations of cronyism and favoritism.

That’s more like 10 minutes underwater.

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[List-o-links] 3-31-08 Credit Crunch Update

March 31, 2008 | 12:01 am | |

The Crunch bar has always been one of my favorites but it never seemed to last as long as I wanted it to and no matter how hard I tried, I always ended up with some of it on my hands.

This candy bar has a taste we can’t seem to get rid of.

[Hope’s Number] 800…88…888-995-Hope

March 29, 2008 | 3:07 pm | |

Foreclosure counseling is becoming a growing industry in the post-housing boom world.

Well, the federal government was the last to the party, but now seems to be trying a full court press to show compassion to those who are in danger of losing their homes.

On a visit to a New Jersey counseling agency Friday, Mr. Bush stood with homeowners who have benefited from the administration’s programs, including its Hope Now referral service. “We will help responsible homeowners weather a difficult period. And in so doing, we will strengthen the dream of homeownership.

The irony in his actions is that the White House and republicans are trying to stop the Foreclosure Prevention Act being pushed by democrats.

Giving out a wrong number…twice

President Bush gave the wrong number for the administration’s “Hope Now Hotline” as 800-995-Hope (it’s 888) for foreclosure counseling back in December 2007.

On Friday, the president gave the wrong number again at his press conference in New Jersey. He gave it as 88-995-HOPE (it’s 888).

Who says there is no disconnect between the housing market and the federal government?

[Pictures Actually Tell 4 Words] Prices, Rents, Income, Appreciation

March 28, 2008 | 1:13 am |

Comstock Partners, Inc. issued a special report that lays out the disconnect between economic fundamentals as they relate to housing quite clearly:

Median New Home Prices vs Median Household Disposable Income [open chart]

Home Price Appreciation vs CPI – Rent [open chart]

Very cool!

[OFHEO Guidance] Stuck With Mudd On $417,000

March 28, 2008 | 12:57 am |

The Office of Federal Housing Enterprise Oversight, which has actually had to engage in a lot of oversight as of late, has been in the unenviable position of deciding whether to expand the conforming loan limit. It has been stuck at $417,000 for the past three years. OFHEO Director James B. Lockhart, who was nominated by President Bush and approved by Congress back in 2006, just as things began to get interesting. OFHEO used to be a sleepy oversight agency, responsible for the two GSEs: Fannie Mae and Freddie Mac that appear to rubber stamp everthing the GSE requested. No more.

Here’s the official guidance.

President and Chief Executive Officer of Fannie Mae, Daniel Mudd agrees with Lockhart on expanding the conforming loan limits to ease the credit crunch.

OFHEO is now on the hotseat because the GSEs have become a key ingredient to restoring investor confidence in the secondary mortgage market, which is a key ingredient to returning liquidity to the credit markets. I have been fairly critical of the agency of the years, but I have to say that Lockhart’s timely and tireless actions seem to be what the doctor ordered.

In theory, the conforming loan limit should float with the housing market but as the market has been declining, the conforming mortgage ceiling has remained unchanged. OFHEO decided that the rate should not be dropped because of the existing complexity of implementing the temporary increase of the conforming loan limit beginning on Setember 1st as a step to help the credit markets.

The conforming loan limit is adjusted annually through a calculation of year-over-year October changes to the level of home prices based on data from the Federal Housing Finance Board’s (FHFB) Monthly Interest Rate Survey (MIRS). As many commenters suggested, the small and voluntary MIRS price survey is volatile, which is another reason for this guidance to emphasize stability. Pending GSE reform legislation would allow the selection of a broader and more comprehensive price index.

It sounds like there will be more transparency in selecting the way the mortgage cap will be adjusted in the future. While I think that the rate should be adjusted up and down, not just up, it’s a catch-22 really. Lowering the rate will reduce financing availability for markets on the fringe, and that in turn, will weaken certain housing markets causing more defaults. Of course, it has the potential to make investors more skittish about conventional mortgages because the risk/value relationship is being expanded (market values drop, mortgage cap remain the same, risk spread widens).

And why do we borrow until it hurts?

No offense to Daniel or Roger intended, but what’s mud spelled backwards?

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[Curbed] Three Cents Worth: Double Down Entry, Up Luxury

March 27, 2008 | 12:20 pm | | Charts |

It’s finally time to give my Three Cents Worth as a post on Curbed. This week I presented market volume and show that prices moved up across the board.

Click to view: Three Cents Worth: Double Down Entry, Up Luxury

Check out previous Three Cents Worth posts.

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[OTS] Foreclosures: From Malaise To Disarray

March 27, 2008 | 12:15 am | |

One of the things I have found particularly aggravating during the past two years has been all the coverage on foreclosure stats. I don’t think consumers (or the media) have much perspective on the stats being produced, mainly by RealtyTrac and their competitor It’s been a groundbreaking effort on their part to collect this data but here’s a sample representing my issue with all this. I actually posted about the foreclosure data perspective problem back in September2006 (I just re-read it and it is relatively coherent) but the communication problem remains.

We see huge percentage increases every single month and yet the typical reader doesn’t really know what these stats mean in the context of all mortgages outstanding other than…it’s getting worse. I don’t think I am alone in getting the feeling that 87.4% of all houses are under foreclosure (left-handed people only, while it’s 92.3% if you include right-handed people).

Here are some examples…

From the New York Times

Statistics on foreclosure are snapshots of a moving phenomenon, and data from the state labor department show 174 foreclosures in Belair-Edison last year, while the Community Law Center, a nonprofit public service group, counted 181; both figures are well below the more than 275 foreclosures in 2001 and in 2002.

From Forbes

In February, Florida trailed only Nevada and California in the percentage of homes in foreclosure. RealtyTrac Inc. said 32,447 homes were in foreclosure statewide in February, up more than 69 percent from February of last year and up more than 7 percent from January.

Back in October 2007, the OTS released the first Monthly Market Monitor (creatively called MMM). It referred to the mortgage problem as the “Mortgage Malaise” (2 M’s if you were wondering) The most recent issue was released on wednesday referring to the mortgage markets in “disarray”. The MMM charts are really useful because they show the pace of foreclosures in an historical context and the amount of foreclosures relative to the amount of mortgages outstanding. The info on these charts are what we need to see more of.

Here’s a housing summary from the March 2008 report:

The slump in the housing market has not only impacted residential construction, but lending and loan performance have deteriorated in concert. Non‐conforming loan originations fell 49 percent in the fourth quarter, as the secondary market for bonds backed by the collateral is still shuttered. According to data collected by Inside Mortgage Finance, approximately $84.5 billion of non‐conforming loans were originated in the quarter ending in December 2007, comprising just 19.9 percent of total loan production. This is the lowest volume of originations ever, and is a far cry from the peak origination period of 2005, when the total reached $1.58 trillion, or 50.4 percent of all production.6 By loan type, jumbo production fell 47 percent in the fourth quarter, plummeting to $44 billion, or less than 10% of all originations. The downturn in Alt‐A and subprime loan production persist, with fourth quarter volume at $27 billion and $13.5 billion, respectively.

In contrast to non‐conforming product, FHA/VA loan production rose steadily in 2007, from a low of $19.0 billion in the first quarter to $31.0 billion at the end of the year. Activity in government‐insured lending was twice that of subprime.

Even Treasury Secretary Paulson is giving us better perspective of foreclosure stats in his speech to the US Chamber of Commerce on Wednesday:

Home foreclosures are also a significant issue today. Foreclosures are painful and costly to homeowners and, neighborhoods. They also prolong the housing correction by adding to the inventory of unsold homes. Before quickly reviewing our initiatives to prevent avoidable foreclosures, let me observe that some current headlines make it difficult to put foreclosure rates in perspective. So let me try to do so.

First, 92 percent of all homeowners with mortgages pay that mortgage every month right on time. Roughly 2 percent of mortgages are in foreclosure. Even from 2001 to 2005, a time of solid U.S. economic growth and high home price appreciation, foreclosure starts averaged more than 650,000 per year.

Last year there were about 1.5 million foreclosures started and estimates are that foreclosure starts might be as high as 2 million in 2008. These foreclosures are highly concentrated – subprime mortgages account for 50 percent of foreclosure starts, even though they are only 13 percent of all mortgages outstanding. Adjustable rate subprime mortgages account for only 6 percent of all mortgages but 40 percent of the foreclosures. So we are right to focus many of our policies on subprime borrowers.

There are approximately 7 million outstanding subprime mortgage loans. Available data suggests that 10 percent of subprime borrowers were investors or speculators. This figure is likely higher, as some investors misrepresented themselves to take advantage of a cheaper rate, and others speculated on a primary residence, expecting prices to continue going up.

And if you can’t keep track of foreclosures because it’s too confusing, try something simple like converting your phone number into words.

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[Non-Dramatic Shingles] 35 Consecutive Months Of Foreclosures In Sand Diego

March 27, 2008 | 12:12 am |

I hate sour candy. So here something sweet to chew on…and it’s in San Diego.

I don’t think this is the candy that gives you shingles.

The rate of mortgage failures in San Diego County didn’t rise dramatically from January to February, but analysts said it was too soon to draw any firm conclusions about when the pattern of failing home loans would end.

February was the 35th consecutive month of year-over-year increases for both home foreclosures and notices of default. There were 1,316 residential foreclosures countywide, a 0.8 percent increase over January but a rise of nearly 244 percent over February 2007, DataQuick Information Systems reported yesterday.

In other words, after 35 consecutive months, the foreclosure rate between January and February did not increase dramatically. Chew on that.

Confidence Has Left The Building

March 26, 2008 | 1:14 pm | |

Guess what? People don’t feel as good with their lot in life when the value of their house falls. What a concept. Professor Shiller wrote a position paper on the Wealth Effect which tied the power of consumer spending more closely to housing than stocks.

The Conference Board released their index and it has reached the level seen only during recessions. It is at its lowest level since 1973. Incidentally, I remember walking to school in 1973 (I wasn’t old enough to drive or shave) seeing long lines at the pump and the conventional wisdom said there was only 20 years remaining for oil.

The S&P/Case Shiller Index has only one market area showing positive price growth yoy (New Yorkers: remember that CSI excludes condos from it’s metro price calcs) – Charlotte, NC and the declines across their other 19 markets are growing and some are approaching 20%. My former firm Radar Logic will be releasing their monthly report next week and I expect it to say show something similar.

OFHEO, which is scrambling to remain relevant, has converted to monthly releases to compete with the CSI index. OFHEO shows prices for January were off 3% from a year earlier. OFHEO uses a similar methodology to CSI but only tracks conforming mortgages. The current threshold is $417,000, which severely underrepresents certain higher priced housing markets on the east and west coasts. I’ll have to look into how OFHEO is going to track housing stats after September 1 when the temporary conforming mortgage loan limits increases to a max of $729K. Also, it is important to only look at their purchase index since they, for some unexplainable reason, include refinance market value estimates in their data as well. We now know that appraised values during the housing boom were systemically inflated.

Of course this negative news is offset by the NAR press release (which is patently misleading) covering existing home sales:

One bright spot is that falling home prices may be beginning to spark buyers’ interest. The National Association of Realtors said earlier this week that sales of existing homes rose in February.


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Housing Political Aspirations Has No Ceiling (Or Dome)

March 26, 2008 | 12:55 pm | | Public |

I have always had what I considered a jaded view of the electorate. Overall I think citizens tend to vote with their wallets.

So I continue to be amazed at the delayed response and awareness over the last year on a federal level to the housing market problem as it related to the economy. The Federal Reserve began to react in late summer, but it was at minimum, a year late. Here we are well into the presidential campaign, and only now, does housing begin to take a bigger role in policy declarations by the candidates.

A few weeks ago, the WSJ published an article and a series of charts that seemed to suggest the current administration, through laissez-faire, had enabled the current housing market downturn.

John McCain has only provided very general recommendations for housing but lacks specific solutions nor does he intend to provide them:

“I will not play election-year politics with the housing crisis,” he said, adding he would evaluate all proposals. ”I will not allow dogma to override commonsense.”

Of course that doesn’t address election-politics to applied to all other issues being discussed. Again, a disconnect on the federal level continues to apply to housing.

”I will consider any and all proposals based on their cost and benefits,” the certain GOP presidential nominee, who has acknowledged the economy is not his strong suit, told local business leaders south of Los Angeles.

Hillary Clinton addressed her approach to the problems only this week.

On Monday, Democratic presidential candidate Sen. Hillary Rodham Clinton proposed several remedies to the home mortgage problems, including aggressive federal intervention to ease the strain on homeowners.

Among her ideas is to create an Emergency Working Group on Foreclosures to deal with the growing foreclosure crisis. These would include Paul Volcker (former Fed Chair), Robert Rubin (former Treasury Secretary) and Alan Greenspan (former Fed Chair). All are distinguished individuals and sharp financial minds. I can’t help but note the irony of having Greenspan on the panel since he was at the helm during the housing market build up and argued that housing was not a problem.

Barack Obama has also proposed more involvement at the federal level with creation of a foreclosure prevention fund, although it is smaller than Clinton’s proposal.

Senator Obama’s proposed $10 billion foreclosure fund is a mere one-third the size of Senator Clinton’s, yet another failure on his part to acknowledge the size and scope of this crisis. When Senator Obama says that Senator Clinton’s plan will “reward people who are wealthy and don’t need it” he shows himself to be out of touch with average Americans. Senator Clinton’s plan only helps subprime borrowers, a population that is disproportionately low-income.”

The problem is, the credit markets won’t likely recover before the fall election and with the economy continuing to erode, housing will likely continue to erode.

So where are we?

In banking jargon, the analogy that housing would be “too big to fail” but I think in political jargon, it’s more appropriate to say the housing/credit market problems are “too big to see.

In other words, let’s not be pigs

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[PMI Report] Nice Spreads Cloud Credit

March 25, 2008 | 12:19 am |

David Berson, the highly respected former Chief Economist at Fannie Mae, moved over to PMI to become its Chief Economist and Strategist. PMI just released their publication The Housing Mortgage Market Review, a timely publication given the swirl of information being released.

The U.S. economy, housing activity, and financial markets all deteriorated over the past month, increasing the likelihood that the economy is in recession. While we expect the downturn to be relatively short and mild, the odds of a more serious slump are rising.

I struggled in Econ 101 class.

In other words, things are going to be weaker in the near term for a short period, but the odds are rising that it will remain worse for a longer period of time. Other interesting topics were that lower priced houses have been hit harder than higher priced houses.

The Fed easing will soften the downturn, but the financial market turmoil could unravel the benefits.

Credit spreads continue to widen.

This is also evidenced in the rise in mortgage rates despite the Fed’s aggressive actions to ease credit.

Fixed rates are dominating lending now.

The pace of foreclosures is rising.