by Calculated Risk on 5/31/2008 10:32:00 PM

From The Times: Bradford & Bingley to issue profit warning

BRITAIN’s biggest lender of buy-to-let mortgages, Bradford & Bingley ... will stun the City this week with a profit warning and the departure of its embattled chief executive, Steven Crawshaw.

The announcement will trigger widespread concern that British banks are sitting on a time-bomb of rising mortgage arrears and mounting bad debt. It will also reignite fears about the viability of some of our top financial institutions.
...
Profits for this financial year will be significantly lower than analysts’ forecasts. The bank has been hit hard by mounting arrears from borrowers and squeezed margins.

"Buy-to-let" is lending to investors for the purpose of renting the property. Some of these investors were really speculators buying for appreciation.

In some areas - like London - investors accounted for a majority of new home purchases in recent years (from a 2007 article):

According to London Development Research, two-thirds of all new homes built in the capital are being bought by investors.

Now, with house prices falling in the U.K., the speculators (and their lenders) will be hit hard just like in the U.S.

by Calculated Risk on 5/31/2008 03:36:00 PM

On Friday, the FDIC announced the 4th bank failure of 2008, and the 2nd failure in May. The FDIC estimates that the failure of First Integrity of Staples, Minnesota will only cost the FDIC Insurance Fund $2.3 million. This is a small amount compared to the estimated cost to the fund of $214 million - announced earlier in May - associated with ANB Financial in Bentonville, Arkansas.

It appears bank failures are starting to become more frequent, and some analysts are estimating between 150 and 300 banks will fail over the next couple of years.

Click on graph for larger image in new window.

To put these failures into perspective, here is a graph of bank failures since the FDIC was created in 1934. There were 3 bank failures in 2007, and 4 already in 2008. This hardly shows up on the graph.

The huge spike in the '80s was due to the S&L crisis.

Note: thousands of banks failed during the Depression, and bank failures were very common even before the Depression, with about 600 banks failing every year during the Roaring '20s.

I suspect bank failures will become much more common (although nothing like the late '80s), and we will be on Bank Failure watch every Friday afternoon.

by Tanta on 5/31/2008 07:46:00 AM

Our colleague P.J. at Housing Wire is being a shill for Countrywide again. I intend to pile on before Gretchen Morgenson gets on the case.

***************

Says Housing Wire:

Last week’s Investor’s Business Daily painted a pretty rough picture of everyone’s favorite industry whipping post Countrywide Financial Corp., after getting wind of a servicing policy that requires some delinquent borrowers to pay 30 percent of arrearages before the lender will begin discussing loan modification options — fees that the reporter, Kathleen Doler, called “a steep entrance fee.” . . .

It’s not a blanket policy, as Doler notes, but some borrowers are seeing this policy while others are not. And, of course, Doler finds a few consumer advocates more than willing to demonize the policy, and Countrywide as well. Not hard to do these days.

For its part, Countrywide told IBD that the policy was intended to be a good-faith demonstration, and suggested that the 30 percent policy is only applicable to borrowers staring down a scheduled foreclosure auction. . . .

Allow us to paraphrase what we think the nicely-worded press statement really says: look, if we’ve tried and wasted our resources trying to contact a borrower anywhere from the past 8 to 12 months and they don’t bother to return any of our calls, read any of their mail, or answer the door when we send countless loss mit specialists out there in person, you’ll have to forgive us for calling bullshit when they decide to call asking for a loan mod the day before the foreclosure sale.

I'm pretty sure Angelo was in favor of using "bullshit" in the statement but his PR people told him he's already in enough trouble over "disgusting."

As far as the policy itself, of dealing with eleventh-hour workout requests from borrowers who have been blowing you off until the week before the trustee's sale? I have two words to respond to that: Laura Richardson. You will recall that the good Congresswoman let three homes go into the foreclosure process--and she has admitted that she made no attempts to work with the servicer until all three foreclosures were well advanced and the legal fees had started piling up--and then got all righteous with WaMu because her request for a modification the week before the scheduled sale didn't magically make everything go away. I am not suggesting that Richardson is a "typical American borrower," but she suggested that, so there. Would I make her put cash down on the table before bothering to start a last-minute workout with her? You bet your sweet eclair I would.

What really frustrates me about the criticisms of this specific policy is the complaint that it's "inconsistent": it is exactly a policy that is applied only in certain circumstances. On a case-by-case basis. When appropriate. (I am not affirming excessive faith in Countrywide's ability to determine what is and is not "appropriate" in all situations. But saying they need to do better at that is not to say the policy is wrong.) But as I have argued since the "Hope Now" thing first emerged last year, one-size-fits-all paint-by-numbers workout strategies are doomed to fail.

The fact of the matter is that not all borrowers are the same, and not all circumstances are the same. I am reminded of this article from the Washington Post we looked at several weeks ago, which contained some pretty level-headed advice from Diane Cipollone, of the Sustainable Homeownership Project:

Then, said Cipollone, contact a nonprofit housing counseling agency or an attorney. Avoid any unsolicited offers from people who say they can save your house. Do not avoid mail or phone calls from your lender. And if your lender stops accepting payments because it is moving toward foreclosure, save that money for a contribution toward the loan workout. "If you've missed eight mortgage payments and have spent all that money because the lender stopped accepting payments, that is not a good outcome [nor] a good way to start negotiations," said Cipollone.

The article then describes the successful modification workout that a couple named Ramsey received, after having made a $3000 "down payment" to the servicer.

The fact of the matter is that no one is going to modify your mortgage payments down to zero in any scenario. If you have made no payments for months on end, and have made no attempt to contact your servicer to request a repayment plan or anything else during those months, and at the last minute before foreclosure you do not have any money in savings--the equivalent of several months' worth of a reasonably modified payment--why should the lender bother with you? You can try telling the lender that for the last six months or more your other expenses were so high that you could not set aside even two or three hundred dollars a month that would otherwise have gone toward the mortgage payment, but in that case, how will you afford the modified payments? If you can document a "temporary" financial hardship, why haven't you contacted the servicer until now?

I am personally willing to bet that if Countrywide asked you for 30% of back payments, late fees, and legal charges, and you were only able to scrape up 20%, they'd probably play ball with you, assuming you have a good story about why there is reason to believe that you can and will make the modified payments. Workouts are a process of negotiation; that's the point. And I'll eat my blog if it turns out that Countrywide is the only servicer with a policy similar to this for late-stage modification requests. My sense is that the animus here is against Countrywide, not any coherent objection to a policy of asking borrowers to put down some "earnest money" before being given a deal that may be in everyone's financial best interest, but which is inevitably beset by moral hazard.

I Want To Know How CFC Is Screwing Borrowers This Time.

by Calculated Risk on 5/30/2008 10:47:00 PM

OK, really just one city - but three different house price ranges.

Click on graph for larger image in new window.

This graph show the real Case-Shiller prices for homes in Los Angeles.

The low price range is less than $417,721 (current dollars). Prices in this range have fallen 34.9% from the peak in real terms.

The mid-range is $417,721 to $627,381. Prices have fallen 30.7% in real terms.

The high price range is above $627,381. Prices have fallen 22.8% in real terms.

In the recent bubble, the areas that saw the most appreciation are seeing the fastest price declines.

This seems to fit with some new research from David Stiff, Chief Economist, Fiserv Lending Solutions: Housing Bubbles Collapse Inward

During the housing bubble, as home prices appreciated at record rates in many metro areas, housing market activity was pushed outward to distant suburbs and ex-urban areas. Many homebuyers, who could no longer afford to purchase homes close to urban centers, were forced to “drive until you qualify” – trading longer commutes for lower mortgage payments.
...
Because of the reversal in trends that boosted demand for housing in outlying suburbs, since they peaked in 2005 and 2006, home prices have generally fallen more in towns and neighborhoods located farther away from urban centers.

[Figure] shows the change in single-family home prices from their peak until the second half of 2007 ... for the Los Angeles and Oxnard, CA metro areas ... for 330 zip codes. Between September 2006 and the second half of 2007, single-family home prices in the Los Angeles metro area dropped by 8.9%, according to the S&P/Case-Shiller index. ... the decline in home prices from their peak has had a very distinct geographic pattern. In Los Angeles, this pattern is more complex because instead of having a single “downtown”, the metro area has more than one large concentration of workplaces. Home prices have fallen less in neighborhoods near Los Angeles’ two largest employment centers – West Los Angeles and downtown. ... During market downturns, home prices fall the least in the most desirable areas of a metropolitan region.

But look at the first graph - all three price ranges saw similar appreciation and price declines during the previous bubble. This suggests this bubble was different than the earlier bubble - this time the extremely loose underwriting for subprime loans, boosted appreciation more in the least desirable areas than in the more desirable areas.

So Stiff's conclusion: "During market downturns, home prices fall the least in the most desirable areas of a metropolitan region." will be true in this housing bust, but was probably not true in previous busts. Also looking at the first graph, it appears all three price ranges are close to the same level, and they will probably now start to decline at about the same pace.

by Tanta on 5/30/2008 06:38:00 PM

The fourth this year:

First Integrity, National Association, Staples, Minnesota, with $54.7 million in total assets and $50.3 million in total deposits as of March 31, 2008, was closed today by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation was named receiver.

The FDIC Board of Directors today approved the assumption of all the deposits of First Integrity by First International Bank and Trust, Watford City, North Dakota. . . .

In addition to assuming all of the deposits of the failed bank, First International will purchase approximately $35.8 million of First Integrity's assets for a total premium of $2.03 million. The FDIC will retain approximately $18.9 million in assets for later disposition. . . .

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund is approximately $2.3 million. First Integrity is the fourth FDIC-insured bank to fail this year, and the first in Minnesota since Town & Country Bank of Almelund, on July 14, 2000. Last year, three FDIC-insured institutions failed.

(hat tip, cd)

by Tanta on 5/30/2008 04:13:00 PM

My day started with my inability to understand a series of statistics reported in Bloomberg this morning.

Housing Wire follows up on the "methodology change" that purportedly caused the new defaults and cured loan reporting for April to surge and plummet, respectively, in the Mortgage Insurance Companies of America's most recent report. I share HW's sources' skepticism about the explanation given for this change. It simply sounds like a very large lender has been allowed--heretofore--to report fewer delinquencies and more cures than everyone else does, by using different definitions. As that is not something that sounds very good, I would suggest that MICA needs to come up with a better explanation.

Meanwhile, the Hope Now folks released a pathetic set of data charts on mortgage loss mitigation through April 2008. For heaven's sake, we're the financial industry, people. We're supposed to be able to use Excel properly.

There are some really puzzling features of this data, like why the total loan counts have not changed since October (see the first page). Since those loan counts are used to calculate the 60+ day delinquency percentage, the failure to update the total count makes those numbers rather dubious. On page two, I found myself unable to make sense of the completed FC sales/FC starts calculation using any possible definition of "five months" I can think of. Perhaps I am misreading the footnote. In any event, I gave up on my ambition to put this data into a more sensible format for you, after I lost confidence in the data integrity.

So here's from the press release, instead:

The April report from HOPE NOW estimates that on an industry-wide basis:
• Mortgage servicers provided loan workouts for approximately 183,000 at-risk borrowers in April. This is an increase of 23,000 from the number of workouts in March 2008 and is the largest number of workouts completed in any month since HOPE NOW’s inception.
• The total number of loan workouts provided by mortgage servicers since July 2007 has risen to 1,558,854.
• Approximately 106,000 of the prime and subprime loan workouts conducted by mortgage servicers in April were repayment plans, while approximately 77,000 were loan modifications.

Maybe next month the report will be cleaned up a little and we can look in more detail at these numbers. If we can shame Hope Now into issuing something readable.

Harrumph. Is it Happy Hour yet?

by Calculated Risk on 5/30/2008 03:23:00 PM

"I don't know if it's going to be a majority or not but I think a large number of the [Alt-A] senior classes are facing downgrade pressure."
Grant Bailey, a senior director at Fitch, May 30, 2008

From Bloomberg: Fitch Changes Method of Rating Alt-A Mortgage Bond

Fitch Ratings modified how it assesses outstanding securities backed by Alt-A U.S. mortgages by starting to update projections for losses from non-delinquent loans instead of keeping estimates static from the time of issuance.

A record jump in delinquencies and defaults prompted the change ... Borrowers are at least 60 days late on 11 percent of adjustable-rate Alt-A loans backing bonds created in 2006 and rated by the firm, compared with a historical average of 1 percent to 2 percent.
...
The firm hasn't yet decided whether to use its new surveillance approach on prime-jumbo mortgage securities, Barberio said....

The Fitch analysts weren't able to immediately say how many Alt-A securities from the past three years have been downgraded. Most of the non-AAA bonds were lowered and others remain under review, they said.

Top-rated securities accounted for about 90 percent of the debt created in Alt-A deals. The company will downgrade many over the next few months, [Grant Bailey, a senior director at Fitch] said.

``I don't know if it's going to be a majority or not but I think a large number of the senior classes are facing downgrade pressure,'' he said.

More downgrades coming ...

by Calculated Risk on 5/30/2008 01:17:00 PM

From Boston Fed President Eric S. Rosengren: Current Challenges in Housing and Home Loans: Complicating Factors and the Implications for Policymakers .

Here is an excerpt from the section: Length and Duration of Housing Downturns, and Other Recent Research from the Boston Fed

New England is no stranger to falling asset values. As you no doubt know, during the early 1990s, New England experienced a steep decline in housing prices. We at the Boston Fed think it may be useful to compare that experience to what we have experienced to date with falling housing prices, and we are pursuing a number of research avenues to do that. ...

As you can see in Figures 4 and 5, Massachusetts moved quite rapidly from a situation of relatively limited foreclosures in 1990 to a period of very high foreclosures in 1992. The timing is interesting. By late 1989, Massachusetts house prices had begun to fall, but delinquencies and foreclosures did not really accelerate until there was also a significant weakening of the economy. In fact, the unemployment rate in Massachusetts, which had declined to 3.1 percent in late 1987, peaked at 9.1 percent in the second half of 1991. Declining housing prices alone did not cause very elevated foreclosures; it was significantly compounded by an economic shock such as the loss of a job which disrupted the ability of many borrowers to make payments. As house prices fell, many homeowners who lost their jobs in the early-1990s recession could not sell their homes to pay off their mortgages because they owed more than their homes were worth. For unemployed homeowners with “negative equity,” foreclosure was often the only option.

The more recent period also points to the importance of falling house prices and negative equity in foreclosures. In the more recent period (shown in Figures 6 and 7), the foreclosure rate – which was not particularly elevated in 2005 – had become quite elevated by 2007 as house prices softened. This increase in foreclosures occurred even though the Massachusetts unemployment rate averaged 4.5 percent for the year.

Why are foreclosures so high today, given that the economic situation is so much better than it was during the early 1990s? Even in expansions, many homeowners undergo adverse life events – like a job loss, a divorce, a spike in medical expenses, or the like – that disrupt their ability to make mortgage payments. Of course, with regard to unemployment, such household-level disruptions are not as prevalent in expansions as they are in recessions. But when such a life event does occur, it can still precipitate a foreclosure if the homeowner has negative equity because of a fall in house prices.

Another reason for elevated foreclosures today concerns changes in the susceptibility of mortgages to economic shocks. In the late 1980s, many borrowers had made significant down payments and had good credit histories. But the recent ability of borrowers with weak credit histories and little or no down payments to purchase homes, often with subprime loans (and sometimes with minimal income verification), means that a greater share of today’s mortgages are a good bit more susceptible to the types of disruptive life events that precipitate foreclosure. These borrowers were fine when housing prices were rising because if needed, they had the ability to refinance or sell their homes and pay off (or more than pay off) their mortgages. In contrast, in the current environment of falling housing prices, borrowers who made small down-payments or have otherwise risky mortgages are now more likely to end up in foreclosure if they experience an adverse event that interrupts their ability to make mortgage payments.

So, in short, we have seen similar foreclosure numbers this time around without a technical recession, and with a more modest fall in home prices. Boston Fed researchers attribute that to the prevalence of riskier loans and higher combined loan-to-value ratios in general.
...
Several lessons from the historical comparison can be highlighted. First, should the economy worsen and suffer a period of significant job losses, the housing problem could become much more severe. Second, past episodes of elevated foreclosures lingered well after the peak in foreclosures had passed, indicating that the duration of today’s situation may be longer than some are anticipating. ...
emphasis added

Read on ... this is a long excerpt.

by Calculated Risk on 5/30/2008 11:21:00 AM

Barry Ritholtz discusses the impact of revisions and cancellations with regards to the New Home sales report: April New Home Sales - Revisited. I'll have more on revisions, but I'll try to clear up cancellations first. Barry writes:

Cancellations: Of course, none of the new home sales data includes cancellations, which were running north of 30% -- and with the recently tightened credit, it may be even worse.

Yes. New home sales data doesn't include cancellations, and cancellations were probably just over 30% in Q1 2008 (based on my survey of public builder reports), but ...

Cancellations are not getting worse. In fact they are getting better. For most builders, cancellation rates peaked in Q3 2007 (with the credit crunch) and have improved significantly since then. And it's the change in cancellation rates that matter when analyzing the New Home data.

This is a key point: right now the Census Bureau is probably underestimating sales!

Here is how the Census Bureau handles cancellations:

The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. The Survey of Construction (SOC) is the instrument used to collect all data on housing starts, completions, and sales. This survey usually begins by sampling a building permit authorization, which is then tracked to find out when the housing unit starts, completes, and sells. When the owner or builder of a housing unit authorized by a permit is interviewed, one of the questions asked is whether the house is being built for sale. If it is, we then ask if the house has been sold (contract signed or earnest money exchanged). If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. The house is removed from the "for sale" inventory and counted as sold for that month. If the house it is not yet started or under construction, it will be followed up until completion and then it will be dropped from the survey. Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold. Therefore, the eventual purchase by a subsequent buyer is not counted in the survey; the same housing unit cannot be sold twice. As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey. In the long run, cancellations do not cause the survey to overestimate or underestimate sales.
emphasis added

The housing outlook is grim, but there is no need to borrow trouble. We are now in a period of improving cancellation rates, and this means the Census Bureau is likely underestimating actual sales.

by Calculated Risk on 5/30/2008 09:04:00 AM

The BEA reports: Personal Income and Outlays

Real disposable personal income decreased less than 0.1 percent in April, in contrast to an increase of less than 0.1 percent in March. Real PCE decreased less than 0.1 percent, in contrast to an increase of 0.1 percent.

Basically real PCE spending has been flat for the first four months of 2008. Personal Consumption Expenditures (PCE) accounts for almost 71% of GDP, and it appears there has been no growth in real PCE.

Note: After the May release, we will have a reasonable estimate of Q2 PCE spending (using the "Two Month Method").

by Tanta on 5/30/2008 07:18:00 AM

Forgive me for once again falling into despair over the media's inability to report sensibly and critically on foreclosure and delinquency numbers. I should be immune by now. If you are wiser than I, just skip to the next post. If you still cradle to your wounded heart the battered but indomitable belief that even media outlets like Bloomberg can learn to spot the flaws in a reported statistic, and that there is a point to doing this, click the link below.

***********

The headline: "New Overdue Home Loans Swamp Effort to Fix Mortgages in Default." We will take this as a promise that the article is going to demonstrate something about the relationship between newly delinquent loans and workout efforts.

The lede:

May 30 (Bloomberg) -- Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month, a sign that nationwide efforts to help homeowners avoid default may be failing.

In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Companies of America said.

The last of eighteen paragraphs:

Last month's 54 percent "cure ratio" among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March. The comparison may not be valid because one lender changed the way it calculated defaults and cures reported to the insurers.

So we start with an eye-popping number, and then only at the very end do we note that this number may mean much less than meets the eye. This is, in fact, what MICA said in its data release:

WASHINGTON, D.C. May 30, 2008 – Mortgage Insurance Companies of America (MICA) today released its monthly statistical report for April which includes a one-time adjustment to the number of defaults and cures and also notes an 11.7% increase in new insurance written year-over-year.

As a result of a major lender’s change to its methodology for recording delinquencies, and to how it reports them to MICA’s members, there was a sharp increase, to 73,880, in reported defaults in April. The increase includes both newly reported defaults for the month, as well as previously unreported defaults by this lender.

MICA’s members reported 39,584 cures in April. This statistic also reflects the above noted change in reporting defaults.

I assumed when I read this that somebody--a large somebody, since it significantly impacts the data--switched over from the OTS method to the MBA method of delinquency reporting. I do not know if this is the case or not. Before I published this article, however, I might have called MICA for a comment. In any case I might have been more cautious with headlining a number that is described as a "one-time adjustment" to the data collection. Burying that in the last paragraph is . . . disingenuous.

I'm also a touch troubled by the statement that "Last month's 54 percent 'cure ratio' among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March." That is literally true. However, the cure rate in December of 2007 was 54.1% and in January of 2008 was 51.4%. Could there be some seasonality in these numbers? Another confounding factor besides new delinquencies?

So what about the second half of the claim?

"Modifications are not occurring nearly at the numbers necessary to stem the foreclosure crisis," Allen Fishbein, housing director for the Consumer Federation of America in Washington, said in a May 19 interview. "People are still going into foreclosure when, with a writedown on existing principal, they could still stay in their homes."

In the first two months of 2008, lenders modified loans for 114,000 borrowers while starting 346,000 foreclosures, according to a study by the Durham, North Carolina-based Center for Responsible Lending. In April, 22 percent of the homes in the foreclosure process had been taken over by lending banks; a year earlier, that figure was 15 percent, according to Irvine, California-based data provider RealtyTrac.

Did you assume, when you read that second paragraph, that the 114,000 modifications were exclusive of (not the same loans as) the 346,000 foreclosure starts? It seems you were supposed to assume that. But is is true? "Foreclosure start" simply means that a legally-required preliminary filing (a Notice of Default, Notice of Intent, or Lis Pendens, depending on the state and the type (judicial or non-judicial) of foreclosure) has been made. That is a "start" because in most jurisdictions it will be another 90 to 180 days, or even more in some states, until the auction can be scheduled, the home sold, and the foreclosure "completed." My own view is that the "best practice" is to work hard to negotiate a modification, if possible, in the early days of delinquency before starting the foreclosure process. However, that is not always possible, and it is also "best practice" to continue to attempt reasonable workouts during the foreclosure process all the way up the day before sale, if necessary. There are certainly cases in which a borrower simply cannot be brought to talk to the servicer until the initial FC filing galvanizes him into it. All of this means that it is impossible to look simply at modifications completed in a period compared to foreclosures started in a period and conclude that the starts will never get a mod or that the mods were not effected after the FC start.

Besides that, where is the data to back up the idea that a 30% ratio of modifications to foreclosure starts is poor performance? I am personally not sure that much more than 30% of recent vintage loans can be saved. Back out fraud, flippers and speculators, and borrowers whose loan balances would have to be reduced by half in order to get a workable payment--which would most likely exceed the cost to the investor of a foreclosure--and 30% doesn't sound so shabby.

As far as the second claim--the increase from 15% to 22% of homes in foreclosure "taken over by lending banks," I'm prepared to read that literally. There is no jurisdiction in which a foreclosed home must be purchased by the lender at the foreclosure sale; all jurisdictions require public auctions in which third parties can bid. An increase in REO (lenders "winning" the auction) does not necessarily mean an increase in completed foreclosures; it can mean that fewer third parties care to bid on foreclosed homes. All the data I have seen recently suggests that this is the case: buyers are still wary of further price declines, and lenders are still bidding higher than potential RE investors. One therefore expects the FC-to-REO numbers to increase. But they can do that even in the absence of an increase in total foreclosures. In order for this statistic to mean much, we have to know how much of the increase is due to more foreclosures, and how much due to fewer third-party bidders.

So put these dubious statistics together--the rest of the Bloomberg article is basically filler--and you get anomalous data on new delinquencies, ambiguous data on modification-to-foreclosure-starts, and a claim about REO rates substituting for a claim about foreclosure completion rates. How about taking back that headline, Bloomberg?

You know, last year I might have had some more sympathy for these reporters. We were just newly into the whole problem and a lot of concepts--delinquency reporting methodology, foreclosure processes, various ways of reporting "cures" and "starts"--were all new to everybody except industry insiders and a handful of totally Nerdly blog readers. But surely by now we can have moved the ball forward a couple of yards? I am here to affirm that if you have been reporting on "the foreclosure crisis" for a year or more and you still can't ask basic questions about the press releases you read, you aren't doing your job.

I, Too, Need To Know Why These Numbers Are So Squirrelly

by Calculated Risk on 5/29/2008 06:30:00 PM

In an effort to attract better advertising, we've been asked to survey our readers. If you'd like to participate - thank you - it's short, anonymous, and hopefully painless.

Reader Survey

Thanks to all,
CR and Tanta
All: I'll probably bump this a couple of times - in the morning and on the weekend. Also, I'll post a link to the results this weekend.

by Calculated Risk on 5/29/2008 05:24:00 PM

Here is an economic letter from Stephen P. A. Brown, Raghav Virmani and Richard Alm at the Dallas Fed: Crude Awakening: Behind the Surge in Oil Prices

A good starting point is strong demand, which has pushed world oil markets close to capacity. New supplies haven’t kept up with this demand, fueling expectations that oil markets will remain tight for the foreseeable future. A weakening dollar has put upward pressure on the price of a commodity that trades in the U.S. currency. And because a large share of oil production takes place in politically unstable regions, fears of supply disruptions loom over markets.

These factors have fed the steady, sometimes swift rise of oil prices in recent years. Their persistence suggests the days of relatively cheap oil are over and the global economy faces a future of high energy prices.

See the charts in the economic letter on each of these points. And their conclusion:

At first blush, crude oil demand doesn’t offer much hope for lower prices. It is likely to grow with an expanding world economy. Higher oil prices will prompt some conservation and take some of the edge off prices—but not much.
...
Geopolitics and exchange rates aside, long-term oil prices will largely be set by supply and demand, which will affect prices directly and influence the expectations that shape futures markets. The key lies in how much new oil reaches markets. Four scenarios for conventional oil resources show a range of outcomes and impacts for the trajectory of prices:

Oil production reaches a plateau or peak—prices likely to rise further.

Oil nationalism continues to slow the development of new resources—prices likely to remain relatively high.

In a shift of strategy, OPEC increases its output sharply—prices likely to fall.

Aggressive exploration activities pay off with the quick development of significant new resources—prices likely to fall.

... International Strategy and Investment, an energy consulting business, has documented a substantial number of projects under way that would boost world oil supplies. The development of these resources could undermine the expectations underlying the higher oil price scenarios—even those of oil nationalism.

Supplies could be bolstered by nonconventional oil sources—tar sands, oil shale, coal-to-liquids. ... The substantial development of these nonconventional oil resources could mean downward pressure on crude oil prices in future years....

What’s the bottom line? Absent supply disruptions, it will be difficult to sustain oil prices above $100 (in 2008 dollars) over the next 10 years.

After reading the letter, their conclusion was a bit of a surprise!

by Calculated Risk on 5/29/2008 04:07:00 PM

From the Economist.com: House Prices: Through the Floor (hat tip Ryan)

Earlier this week, the S&P Case-Shiller National Home Price index was released showing a 14.1% decline over the last four quarters. The Economist has a chart (from Professor Shiller) putting this decline into historical perspective by showing the YoY change in U.S. house prices since 1920. The Economist notes:

Now Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back over a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression.

During the Depression, the rapid decline in house prices was primarily due to the extremely weak economy and high unemployment. This time prices are falling rapidly because of the excesses of the housing bubble - especially excessive speculation and loose lending standards.

This doesn't mean the economy will fall into a depression (very unlikely in my view); instead the current rapid price decline shows how ridiculous house prices and lending standards were during the bubble.

by Calculated Risk on 5/29/2008 01:45:00 PM

From The Canadian Press: CIBC loses $1.11 billion in quarter on massive credit-market hit

Canadian Imperial Bank of Commerce (TSX:CM) posted a net loss of $1.11 billion in the second quarter as it booked a massive hit tied to the credit market.
...
The results in the second quarter of the bank's financial year included a loss of $2.48 billion, or $1.67 billion after tax, on writedowns of structured credit, added to $3.46 billion in first-quarter writedowns.
...
The CIBC World Markets investment banking division ... warned that "market and economic conditions relating to the financial guarantors may change in the future, which could result in significant future losses."
...
The bank said it expects Canadian economic growth "to remain very sluggish in the coming quarter, held back by weak exports as the U.S. appears to be entering a mild recession."

Just a couple billion (and change) more ...

by Calculated Risk on 5/29/2008 11:20:00 AM

"This is a worrisome trend. It's the kind of thing that gives regulators heartburn."
FDIC Chairman Sheila C. Bair, May 29, 2008 on the eroding coverage ratio.

From the FDIC: Insured Banks and Thrifts Earned $19.3 Billion in the First Quarter

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported net income of $19.3 billion in the first quarter of 2008, a decline of $16.3 billion (45.7 percent) from the $35.6 billion that the industry earned in the first quarter of 2007.
...
Noncurrent loans are still rising sharply. Loans that were noncurrent (90 days or more past due or in nonaccrual status) increased by $26 billion (or 24 percent) to $136 billion during the first quarter. That followed a $27 billion increase in the fourth quarter of 2007. Almost 90 percent of the increase in noncurrent loans in the first quarter consisted of real estate loans, but noncurrent levels increased in all major loan categories. At the end of the first quarter, 1.7 percent of the industry's loans and leases were noncurrent.

Earnings remain burdened by high provisions for loan losses. Rising levels of troubled loans, particularly in real estate portfolios, led many institutions to increase their provisions for loan losses in the quarter. Loss provisions totaled $37.1 billion, more than four times the $9.2 billion the industry set aside in the first quarter of 2007. Almost a quarter of the industry's net operating revenue (net interest income plus total noninterest income) went to building up loan-loss reserves.

Click on graph for larger image.

The industry's "coverage" ratio -- its loss reserves as a percentage of nonperforming loans -- continued to erode. Loan-loss reserves increased by $18.5 billion (18.1 percent), the largest quarterly increase in more than 20 years, but the larger increase in noncurrent loans meant that the coverage ratio fell from 93 cents in reserves for every $1.00 of noncurrent loans to 89 cents, the lowest level since 1993. "This is a worrisome trend," [FDIC Chairman Sheila C. Bair] said. "It's the kind of thing that gives regulators heartburn."

She added, "The banks and thrifts we're keeping an eye on most are those with high levels of exposure to subprime and nontraditional mortgages, with concentrations of construction loans in overbuilt markets, and institutions that get a large share of their revenues from market-related activities, such as from securities trading."

Here is the quarterly report.

by Calculated Risk on 5/29/2008 10:08:00 AM

Earlier this month, continued unemployment claims exceeded 3 million for the first time in four years. Now the continued claims have passed 3.1 million (see first graph).

Here is the data from the Department of Labor for the week ending May 24th.

Click on graph for larger image.

The first graph shows the continued claims since 1989.

Clearly people losing their jobs are having difficulty finding new jobs.

Notice that following the previous two recessions, continued claims stayed elevated for a couple of years after the official recession ended - suggesting the weakness in the labor market lingered. The same will probably be true for the current recession (probable).

The second graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989. The four week moving average has been trending upwards for the last few months, and the level is now solidly above the possible recession level (approximately 350K).

Labor related gauges are at best coincident indicators, and this indicator suggests the economy is in recession.

by Tanta on 5/29/2008 07:10:00 AM

This is a big deal, and will no doubt strike real fear in the hearts of stated-income lenders everywhere. Our own Uncle Festus sent me this decision, in which Judge Leslie Tchaikovsky ruled that a National City HELOC that had been "foreclosed out" would be discharged in the debtors' Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied when it made the loan. The court agreed that the debtors had in fact lied to the bank, but it held that the bank did not "reasonably rely" on the misrepresentations.

I argued some time ago that the whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan--knowing perfectly well that it is doing so--while shifting responsibility onto the borrower, who is the one "stating" the income and--in theory, at least--therefore liable for the misrepresentation. This is precisely where Judge Tchaikovsky has stepped in and said "no dice." This is not one of those cases where the broker or lender seems to have done the lying without the borrower's knowledge; these are not sympathetic victims of predatory lending. In fact, the very egregiousness of the borrowers' misrepresentations and chronic debt-binging behavior is what seems to have sent the Judge over the edge here, leading her to ask the profoundly important question of how a bank like National City could have "reasonably relied" on these borrowers' unverified statements of income to make this loan.

And as I argued the other day on the subject of due diligence, it isn't so much that individual loans are fraudulent than that the published guidelines by which the loans were made and evaluated encouraged fraudulent behavior, or at least made it "fast and easy" for fraud to occur. Judge Tchaikovsky directly addresses the issue of the bank's reliance on "guidelines" that should, in essence, never have been relied upon in the first place.

*************

Here follow some lengthy quotes from the decision, which was docketed yesterday and is not, as far as I know, yet published. From In re Hill (City National Bank v. Hill), United States Bankruptcy Court, Northern District of California, Case No. A.P. 07-4106 (May 28, 2008):

This adversary proceeding is a poster child for some of the practices that have led to the current crisis in our housing market.

Indeed. The debtors, the Hills, bought their home in El Sobrante, California, twenty years ago for $220,000. After at least five refinances, their total debt on the home at the time they filed for Chapter 7 in April of 2007 was $683,000. Mr. Hill worked for an automobile parts wholesaler; Mrs. Hill had a business distributing free periodicals. According to the court, their combined annual income never exceeded $65,000.

In April 2006, the Hills refinanced their existing $100,000 second lien through a mortgage broker with National City. Their new loan was an equity line of $200,000; after paying off the old lien and other consumer debt, the Hills received $60,000 in cash. On this application the Hills stated their annual income as $145,716. The property appraised for $785,000.

By October 2006 the Hills were short of money again, and applied directly to National City to have their HELOC limit increased to $250,000 to obtain an additional $50,000 in cash. On this application, six months later, the Hills' annual income was stated as $190,800, and the appraised value was $856,000.

At the foreclosure sale in April 2007, the first lien lender bought the house at auction for $450,000, apparently the amount of its first lien.

The Hills claimed that they did not misrepresent their income on the April loan, and that they had signed the application without reading it. The broker testified rather convincingly that the Hills had indeed read the documents before signing them--Mrs. Hill noticed an error on one document and initialed a correction to it. No doubt because the October loan, the request for increase of an existing HELOC, did not go through a broker, the Hills admitted to having misrepresented their income on that application. The Court found that:

Moreover, the Hills, while not highly educated, were not unsophisticated. They had obtained numerous home and car loans and were familiar with the loan application process. They knew they were responsible for supplying accurate information to a lender concerning their financial condition when obtaining a loan. Even if the Court were persuaded that they had signed and submitted the October Loan Application without verifying its accuracy, their reckless disregard would have been sufficient to satisfy the third and fourth elements of the Bank’s claim.

This is not an excessively soft-hearted judge who fell for some self-serving sob story from the debtors. "Reckless disregard" is rather strong language.

Unfortunately for National City, Her Honor was just as unsympathetic to its claims:

However, the Bank’s suit fails due to its failure to prove the sixth element of its claim: i.e., the reasonableness of its reliance.6 As stated above, the reasonableness of a creditor’s reliance is judged by an objective standard. In general, a lender’s reliance is reasonable if it followed its normal business practices. However, this may not be enough if those practices deviate from industry standards or if the creditor ignored a “red flag.” See Cohn, 54 F.3d at 1117. Here, it is highly questionable whether the industry standards–-as those standards are reflected by the Guidelines–-were objectively reasonable. However, even if they were, the Bank clearly deviated to some extent from those standards. In addition, the Bank ignored a “red flag” that should have called for more investigation concerning the accuracy of the income figures. . . .

Based on the foregoing, the Court concludes that either the Bank did not rely on the Debtors representations concerning their income or that its reliance was not reasonable based on an objective standard. In fact, the minimal verification required by an “income stated” loan, as established by the Guidelines, suggests that this type of loan is essentially an “asset based” loan. In other words, the Court surmises that the Bank made the loan principally in reliance on the value of the collateral: i.e., the House. If so, the Bank obtained the appraisal upon which it principally relied in making the loan. Subsequent events strongly suggest that the appraisal was inflated. However, under these circumstances, the Debtors cannot be blamed for the Bank’s loss, and the Bank’s claim should be discharged.

In short, while the Court found that the Hills knowingly made false representations to the lender, the lender's claim that it "reasonably relied" on these representations doesn't hold water, because "stated income guidelines" are not reasonable things to rely on. In essence, the Court found, such lending guidelines boil down to what the regulators call "collateral dependent" loans, where the lender is relying on nothing, at the end of the day, except the value of the collateral, not the borrower's ability or willingness to repay. If you make a "liar loan," the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that's your lookout, not the borrower's.

This is going to give a lot of stated income lenders--and investors in "stated income" securities--a really bad rotten no good day. As it should. They have managed to give the rest of us a really bad rotten no good couple of years, with no end in sight.

Read on . . .

by Calculated Risk on 5/28/2008 11:50:00 PM

Housing Wire has more on the S&P Alt-A downgrades: S&P Lowers the Boom on 1,326 Alt-A RMBS Classes

The downgrades affect an $33.95 billion in issuance value and affect Alt-A loan pools securitized in the first half of 2007 — roughly 14 percent of S&P’s entire Alt-A universe in that timeframe.

Perhaps more telling were an additional 567 other Alt-A classes put on negative credit watch by the ratings agency.

A review of affected securities by Housing Wire found that all of the classes put on watch for a pending downgrade are currently rated AAA, suggesting that S&P’s confidence in thin overcollateralization typical of most Alt-A deals is quickly waning. The total dollar of potential downgrades to the AAA classes in question would dwarf Wednesday’s downgrades, which affected only mezzanine and equity tranches.

by Calculated Risk on 5/28/2008 07:52:00 PM

From AP: Sales of Spam rise as consumers trim food costs

And from Monty Python: Spam

by Calculated Risk on 5/28/2008 04:54:00 PM

From Bloomberg: S&P Downgrades $34 Billion of Bonds Backed by Alt-A Mortgages (hat tip ken and SC)

Standard & Poor's lowered its ratings on $34 billion of securities backed by Alternative-A mortgages, the firm's largest downgrade for the type of debt ...

Ratings on 1,326 classes of the bonds created in the first half of 2007 were downgraded, or 14 percent of the total ...

by Calculated Risk on 5/28/2008 04:35:00 PM

From Jon Lansner at the O.C. Register: O.C.’s commercial construction down in ‘08

The Construction Industry Research Board reports ... that the estimated value of permits for non-residential construction fell nearly 40% this year so far from the same period in 2007. Permit values fell to just under $527 million so far this year. Last year, developers received permits for projects valued at $873 million from January through April.

Just more evidence of the CRE bust.

by Calculated Risk on 5/28/2008 01:04:00 PM

From Bloomberg: KeyCorp Slide Foretells Losses at `Delusional' Banks

KeyCorp ... doubl[ed] its forecast for loans that won't be repaid, prompting concern that regional banks have underestimated the cost of bad mortgages.

KeyCorp [said] debts may be as much as 1.3 percent of average total loans this year. The figure may rise even more, KeyCorp said, as the Cleveland-based company cuts holdings tied to homebuilders.

The revision by the Ohio bank, which last month quadrupled its provision for loan losses to $187 million, may foretell similar increases at U.S. commercial banks as home prices keep sliding, analysts said.

And they are also having problem with home improvement loans. Here is the KeyCorp release from the 8-K SEC filing:

KeyCorp (the "Corporation") is updating its previous outlook for net loan charge-offs for 2008. The previous estimated range for net loan charge-offs was .65% to .90% of average loans. The Corporation now anticipates that net loan charge-offs will be in the range of 1.00% to 1.30% for 2008, with second quarter and potentially third quarter net charge-offs running above this range as the Corporation deals aggressively with reducing exposures in the residential homebuilder portfolio and anticipates elevated net loan charge-offs in its education and home improvement loan portfolios. The Corporation announced in the fourth quarter of 2007 that it had: (i) decided to cease conducting business with “out of footprint” nonrelationship homebuilders, (ii) recorded additional reserves to address continued weakness in the housing market, and (iii) decided to exit dealer-originated home improvement lending activities, which involve prime loans but are largely out-of-footprint.

by Calculated Risk on 5/28/2008 11:22:00 AM

From the Cleveland Plain Dealer: Banks freeze home equity lines as home values fall

While the practice started a few months ago in other parts of the country, it's just now hitting Northeast Ohio as banks from Fifth Third to Chase to AmTrust reduce their exposure to over-leveraged consumers. Most banks that haven't yet frozen home equity lines are looking at doing so.
...
AmTrust spokeswoman Donna Winfield said the bank's move to freeze equity lines here "was across the board" in areas where property values have declined and among customers who had less equity left.

We are about to see mounting losses for lenders from HELOCs, and less consumer spending - especially for autos and home improvement - as lenders restrict HELOC borrowing.

by Calculated Risk on 5/28/2008 10:47:00 AM

First, the NY Times reports on the Realtors antitrust settlement: Realtors Agree to Stop Blocking Web Listings

The Justice Department and the National Association of Realtors reached a major antitrust settlement Tuesday that government officials said should spur competition among brokers and ultimately bring down hefty sales commissions.

The deal frees Internet brokers and other real-estate agents offering heavily discounted commissions to operate on a level playing field with traditional brokers by using the multiple listing services that are the lifeblood of the industry, government officials said.
...
Norman Hawker, a business professor at Western Michigan University who ... predicted that the settlement would ultimately mean a drop in sales commissions of 25 percent to 50 percent as a result of increased competition.

Innovation will probably put pressure on commissions. This gives us an excuse to look at a long term graph of Broker's Commissions:

Click on graph for larger image.

This graph shows broker's commissions as a percent of GDP.

Not surprisingly - giving the housing bubble - broker's commissions soared in recent years, rising from $56 billion in 2000, to $109 billion in 2005 (see 2nd graph for commissions in dollars). Commissions have declined to an annual rate of $72 billion in Q1 2008. (All data from the BEA).

Here is a simple formula: Commissions = transactions X price X commission percent.

Broker's commissions increased because of both soaring prices and soaring activity. A double bubble.

Only the percent commission held down total commissions a little. This might surprise some readers, but at the peak of the bubble, many agents were discounting commissions below 6%. Listings were like printing money, and it was common for agents in California (and probably elsewhere) to offer to list a property for 4 1/2% or 5%, with the selling agents receiving 3%, and the listing agent taking less.

The following graph compares broker's commissions with an index created by multiplying sales transactions times the Case-Shiller National Home Price Index:

UPDATE: Reader 'get sum' notes in the comments that per his discussions with the BEA, their estimate of commissions assumes a 6% rate.

Note that broker's commissions didn't completely keep up with the double bubble. Sales times prices actually rose faster than commissions, suggesting: 1) that the percent commission declined somewhat, or 2) that Case-Shiller overstated the price increase in recent years. Or some combination of both (likely).

Now, with prices falling, transactions falling, and more competition, it is likely that total commissions will fall further over the next few years. Tough times for many real estate agents.

by Tanta on 5/28/2008 08:18:00 AM

As a general rule I do not recommend reading "Realty Times" at 6:00 a.m., but I'm blaming twist.

It's not that people don't want homes, it's that they can't buy them under the stricter lending standards. . . .

Lenders are turning the clock back to 1975, requiring larger downpayments and higher credit scores to qualify for low interest rates. That's only prudent, but what they're also doing is tightening appraisals on properties that are being sold or refinanced.

In 1975, it was not unknown--it was in fact only made illegal that year by the Equal Credit Opportunity Act--to inquire about a married woman's future childbearing plans, her use of contraception, and her religion before deciding whether to "count" any income she might produce for purposes of qualifying for a loan. (If she said "Catholic," forget it.) If you think we are experiencing 1975 mortgage loan underwriting, you were born yesterday.

So why is it "prudent" to require larger downpayments and higher credit scores, but another thing entirely to tighten up on appraisals? And how is this nefarious appraisal tightening preventing people from buying homes?

*****************

There must be an anecdote, and we actually get a twofer:

Dallas Realtor Mary O'Keefe was hit with the new lending realities in a double whammy just this week.

"I had a closing that was delayed because the lender wanted a second appraisal," says Mary O'Keefe, a Dallas broker. "I told my clients absolutely no way would they pay for a second appraisal."

That deal finally closed, but O'Keefe lost another. A client wanted to take out some equity on her townhome, buy another property to live in, and save the townhome for mailbox money. The client had an 800-plus credit score, was approved by a lender, but went to her personal banker for the HELOC. She had an appraisal from the year before for $467,000 giving her about $155,000 in equity.

Because banks want to use appraisals no less than six months old, the personal banker called for a drive-by appraisal, which came in at $400,000, more than $20,000 below the lowest priced home in the community, and $75,000 below a home that sold a year ago three doors down.

So the purchase transaction actually did close, although it was--gasp!--"delayed," but this poor lady who wanted to cash out the "equity" in a townhome she was not going to occupy was stymied by some evil bank who--get this--wouldn't use a year-old appraisal. Turn on the disco ball and haul out your lava lamps! It's the seventies!

I confess to being somewhat alarmed, by the way, about a Realtor who tells a buyer that "no way" are they going to pay for a second appraisal. You would not, in the current environment, even consider paying another $350-$400 to assure yourself that you are not overpaying for your property by thousands of dollars?

The real problem here is that Realty Times wants to continue to perpetrate the view that establishing reliable appraised values is not in a homebuyer's best interest as well as a lender's. For some reason this reminded me of a story we posted just a year ago, in which the Wall Street Journal waxed outraged about some poor rich doctor who was having trouble getting his loan approved to buy a property for $1.05 million when the lender had gotten a broker price opinion stating that it was only worth $750,000. I did a bit of looking in the county real estate records, and it appears that our man did indeed buy the home on April 17, 2007 for $1.05 million. On April 27, 2007, the county assessed the property for tax purposes at $793,400. Per the WSJ he borrowed $885,000. I wonder if he still feels ripped off by the lender who told him he was overpaying for that home.

OK, I'm game. How?

by Calculated Risk on 5/27/2008 10:44:00 PM

From David Leonhardt at the NY Times: As Home Prices Drop Low Enough, a Committed Renter Decides to Buy

The case for renting has been simple enough. House prices rose so high in the first half of this decade that you could often get more for your money by renting. You could also avoid having a large part of your net worth tied up in a speculative bubble.

All this time, I have been a renter myself, ... [but] the housing market has, obviously, changed quite a bit since our last move, in 2005.
...
This month, we found a house that we really liked, and we made an offer. It was accepted.

I’m still not sure how good our timing was. Based on the backlog of houses on the market, I fully expect that our new house will be worth less in six months than it is today. ...

In fact, if you’re now renting — almost anywhere — and do not need to move, I’d probably recommend that you wait to buy. The market is still coming your way.

But it’s O.K. with me if our timing wasn’t perfect.

Leonhardt isn't buying for appreciation, and he realizes the price will probably still decline further. He is buying because prices have fallen enough that the intangibles of homeownership (as he and his wife value them) outweigh the extra costs of owning a home compared to renting.

The article also has an interactive rent vs. buy tool with a number of options.

by Calculated Risk on 5/27/2008 08:25:00 PM

From Ruth Simon at the WSJ: Investors Press Lenders on Bad Loans

Unhappy buyers of subprime mortgages, home-equity loans and other real-estate loans are trying to force banks and mortgage companies to repurchase a growing pile of troubled loans. The pressure is the result of provisions in many loan sales that require lenders to take back loans that default unusually fast or contained mistakes or fraud.
...
The potential liability from the growing number of disputed loans could reach billions of dollars ...

Tanta and I were discussing who the eventual bagholders would be way back in 2005 - while the bubble was still inflating - and although the picture is much clearer today, some bagholders still don't want to be, uh, bagholders! And who could blame them?

by Tanta on 5/27/2008 04:49:00 PM

This is a sobering, if rather overstated, segment on mortgage loan sale due diligence and the pressures to accept even the most dubious of loans.

Tracy Warren is not surprised by the foreclosure crisis. She saw the roots of it firsthand every day. She worked for a quality control contractor that reviewed subprime loans for investment banks before they were sold off on Wall Street. . . .

Warren thinks her supervisors didn't want her to do her job. She says that when she would reject, or kick out, a loan, they usually would overrule her and approve it.

"The QC reviewer who reviewed our kicks would say, 'Well, I thought it had merit.' And it was like 'What?' Their credit score was below 580. And if it was an income verification, a lot of times they weren't making the income. And it was like, 'What kind of merit could you have determined?' And they were like, 'Oh, it's fine. Don't worry about it.' "

After a while, Warren says, her supervisors stopped telling her when she had been overruled.

I have no particular reason to question Ms. Warren's abilities or her take on the situation; I have no doubt that for any number of reasons marginal loans were pushed back into pools over the objections of perfectly competent auditors. I have also had experience with staff whose supervisors stopped telling them when they had been overruled, because . . . life is too short. I suspect I am not the only one who has had this experience. Whatever the merits of this story may be, this I think is an overstatement:

"This is a smoking gun," says Christopher Peterson, a law professor at the University of Utah who has been studying the subprime mess and meeting with regulators. "It suggests that auditors working for Wall Street investment bankers knew how preposterous these loans were, and that could mean Wall Street liability for aiding and abetting fraud."

Forgive me for being a shill for Wall Street, but this strikes me as silly. The investment banks, including Bear Stearns, published loan underwriting guidelines detailing what they would accept in mortgage pools, and everybody in the industry had a copy at the time. The things came right out and said that things like stated income for a wage earner were acceptable. Was Mr. Peterson calling that "preposterous" at the time? I was. And I never had to look at a single loan file.

What I suspect Ms. Warren is overlooking is, precisely, that the due diligence on those Bear Stearns pools--like every other pool for every other investor--was based on evaluating the individual loans' compliance with the specific guidelines agreed to for the pool. If the guidelines allowed utter stupidity, it isn't likely that the project supervisors would kick out a loan for displaying that particular kind of stupid. If there's something preposterous here, it was in plain sight in the prospectuses to every one of these loan deals. I am having a hard time with the idea that "the smoking gun" didn't show up until this week.

And then there is this part, which has made it all over the web today:

A bankruptcy examiner in the case of the collapsed subprime lender New Century recently released a 500-page report, and buried inside it is a pretty interesting detail. According to the report, some investment banks agreed to reject only 2.5 percent of the loans that New Century sent them to package up and sell to investors.

If that's true, it would be like saying no matter how many bad apples are in the barrel, only a tiny fraction of them will be rejected.

"It's amazing if any investment bank agreed to a maximum number of loans they would kick back for defects. That means that they were willing to accept junk. There's no other way to put it," says Kurt Eggert, a law professor at Chapman University.

Now, I actually plowed my way through that New Century report, and I have to say that there's a reason this claim was, um, "buried" therein. From page 135 of the report (Warning! Big Honkin' pdf that will take forever to download!):

[K]ickout data may not be a true indication of loan quality trends because New Century was able, particularly when the subprime market was strong and housing prices were rising, to negotiate understandings with certain loan purchasers to limit kickouts to a maximum rate, such as 2.5%. Flanagan [NEW's former head of loan sales] was explicit in stating to the Examiner that such understandings were reached. The Examiner was unable to establish corroboration for this statement. Nevertheless, such understandings may have limited kickouts, masking loan quality problems that existed but were not reported.

The report goes on to document that NEW's typical kickout rate was north of 5.00% and in many months much higher than that; except in securitization (not whole loan) deals where NEW retained residual credit risk, the kickout rate of 2.5% was, to quote the report, "probably more aspirational than real." The fact that no one could produce a contract or set of deal stips or e-mail or sticky note "corroborating" this claim suggests to me that it may have existed only in Mr. Flanagan's mind.

There are, of course, situations in the whole loan sale world in which people have perfectly respectable reasons to agree to limit "kickouts" up front. Occasionally pools are offered for bid with the stipulation of no kickouts: these are "as is" pools and it is expected that the price offered will reflect that. I have myself both offered and bid on no-exclusion loan pools. This is mostly an issue in the "scratch and dent" loan market, where one might have a mixed pool of pretty good and pretty botched up loans to sell. Allowing a buyer to "cherry pick" the deal just leaves you with all the botched up loans to sell separately, which is never anyone's preferred approach. Of course any buyer of loans can decline to bid on a no- or limited-kickout basis. Those who do bid on these deals tend to lower the bid price accordingly. The NEW report also documents the steady deterioration in NEW's profit margin on its whole-loan sales, and trying to get investors to take packages of loans with limited or no kickouts might explain some of that. My guess, from reading the report, is that while NEW might have thought it wanted a 2.5% kickout rate, it ended up accepting a much higher one because the price discount was more than it could face.

I am not trying to suggest that anyone is particularly innocent here. This all just has a sort of Captain Renault quality to it: we are shocked, shocked! that gambling went on in these casinos. The published underwriting guidelines that were available to everyone involved made explicit what was going on with these loans, and those guidelines were published with the deal prospectuses. Now we have a bunch of investors--including institutional ones with absolutely no excuse--wanting to grab hold of stories like Ms. Warren's about cruddy individual loans, as if the pool guidelines weren't themselves a big flaming hint that the loans were absurd.

by Calculated Risk on 5/27/2008 03:59:00 PM

There was no spring this year.

Click on graph for larger image.

This graph shows the Not Seasonally Adjusted (NSA) new home sales for the last 45 years.

Usually sales increase in the spring - but not this year. The pervious worst spring on record was 1982 - in the midst of a severe recession, with 30 year fixed mortgage rates at 17%, and close to double digit unemployment.

In 1982, sales picked up late in the year as interest rates declined sharply (30 year fixed rates fell from 17% to about 13% at the end of the year).

The second graph shows monthly new home sales NSA for the last few years (repeated from this morning).

The Red columns are for 2008. This is the lowest sales for April since the recession of '91.

Once again, the 2008 spring selling season has never really started.

by Calculated Risk on 5/27/2008 12:34:00 PM

Here are three key graphs ...

The first graph compares real and nominal Case-Shiller Home Prices (real is current index adjusted using CPI less Shelter).

Click on graph for larger image.

In real terms, the Case-Shiller National Home price index is off 21% from the peak. Real prices are now back to the Q3 2003 level (nominal prices are back to Q3 2004).

With existing home inventory at record levels, prices will probably continue to decline over the next few years - perhaps another 20% in real terms on a national basis.

Here is an update to the scatter graph comparing existing homes Months of Supply and the quarterly change in the Case-Shiller National index (hat tip Langley Financial Planning blog for the idea):

Note: this graphs uses data since Q1 1994. In prior periods, Months of Supply appeared to be higher with less negative impact on prices, see 2nd graph of Existing Homes: Months of Supply vs. Real Prices

This graph compares the Months of Supply and the quarterly change in the nominal Case-Shiller National Home Price index. The best linear fit has been added to the graph (plus the formula with an R² of 0.665).

This is a limited amount of data (since Q1 1994), but this does suggest a relationship between price changes and Months of Supply (something we would normally expect). This suggests when there are more than 7 months of supply, nominal prices will decline (with some variability).

In April, the existing homes Months of Supply hit 11.2 months, and will probably be over 12 months this summer. This suggests nominal price declines of around 5% in Q2.

The third graph shows the price changes for several selected cities. Prices are falling faster in the 'bubble' cities, like San Diego, Miami, and Las Vegas.

Year over year prices are also falling in areas that saw less price appreciation, like Denver and Cleveland. It's important to note that different areas - even different parts of the same city - are seeing different price changes. See: House Price Mosaic for some analysis.

Eighteen of the twenty cities in the Case-Shiller composite saw declining prices in February (prices in Dallas were up 1% and Charlotte prices were flat), led by a 4.5% one month decline in Miami, 4.4% in Las Vegas, and over 3% in Los Angeles, San Francisco, Phoenix and Tampa.

by Tanta on 5/27/2008 11:09:00 AM

Bloomberg reports:

Foreclosure filings in 10 towns and cities within 10 miles of military facilities, including Norfolk, Virginia, home of the Navy's largest base, rose by an average 217 percent from January through April from a year earlier. Nationally, the rate was 59 percent in the same period, according to RealtyTrac, which tallies bank seizures, auctions and default notices.

The biggest surge was in Columbia, South Carolina, home to Fort Jackson, where the Army trains recruits for combat in Afghanistan and Iraq. Properties in some stage of foreclosure rose 492 percent from a year earlier, RealtyTrac said. The second-biggest increase was 414 percent in Woodbridge, Virginia, next to the Marine Corps Base Quantico.

Foreclosure filings tripled in the cities surrounding Norfolk Naval Base and the Camp Pendleton Marine Corps Base near Oceanside, California, RealtyTrac said. Havelock, North Carolina, site of Marine Corps Air Station Cherry Point, saw foreclosures more than double.

Military families were of course favored targets of the subprime industry.

by Calculated Risk on 5/27/2008 10:00:00 AM

According to the Census Bureau report, New Home Sales in April were at a seasonally adjusted annual rate of 526 thousand. Sales for March were revised down to 509 thousand.

Click on graph for larger image.

Sales of new one-family houses in April 2008 were at a seasonally adjusted annual rate of 526,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 3.3 percent above the revised March rate of 509,000, but is 42.0 percent below the April 2007 estimate of 907,000.

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001.

New home sales in April were the lowest April since 1991. This is what we call Cliff Diving!

The second graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red columns for 2008. This is the lowest sales for April since the recession of '91.

As the graph indicates, the spring selling season has never really started.

And one more long term graph - this one for New Home Months of Supply.

"Months of supply" is at 10.6 months; the highest level since 1981. Note that this doesn't include cancellations, but that was true for the earlier periods too.

The all time high for Months of Supply was 11.6 months in April 1980.

Once again, the current recession is "probable" and hasn't been declared by NBER.

And on inventory:

The seasonally adjusted estimate of new houses for sale at the end of April was 456,000. This represents a supply of 10.6 months at the current sales rate.

Inventory numbers from the Census Bureau do not include cancellations - and cancellations are near record levels. Actual New Home inventories are probably much higher than reported - my estimate is just under 100K higher.

Still, the 456,000 units of inventory is below the levels of the last year, and it appears that even including cancellations, inventory is now falling.

This is another very weak report for New Home sales.

by Calculated Risk on 5/27/2008 09:05:00 AM

S&P Case-Shiller reported that house prices fell sharply in Q1 2008.

Click on graph for larger image.

The first graph shows the Case-Shiller index since 1987. The index fell to 159.18 in Q1 2008, from 170.62 in Q4. A decline of 6.7%, or almost 30% at an annual rate.

This is the lowest level for the index since Q3 2004.

The second graph shows the year-over-year change in the Case-Shiller index.

Prices fell 14.1% over the last four quarters according to Case-Shiller.

The index is off 16.2% from the peak.