Paper Economy - A US Real Estate Bubble Blog

Monday, April 30, 2007

Crash and Burn!


Oh for Kripes sake!

My server has bit the dust!

No BNN… No Bubble Times… No S&P/Case-Shiller/Futures Charting Tool… No Inventory Tracking Tool… Not even a stinking OFHEO Chart… Nothin’…

But, not to worry.

I’m working diligently to get all the issues resolved and should have the system restored in a couple of days.

For now though, let me spotlight some of my favorite blogs that offer similar services to the ones now absent from my blog.

First, for BNN-style video-blogging there is both the Real Estate Video Blog and the New York City Housing Blog with daily video posts of all things bubbly.

For S&P/Case-Shiller and OFHEO charts as well as a host of other really impressive charts check out Housing Bubble Bust.

For Bubble Times-esc and Digg-styled Housing Bubble news you can turn to Housing Bubble News Central and Speculative Bubble.

Of course, Ill still be blogging throughout these trying times and Ill certainly be sure to yell from the highest rooftop when everything is all back up and running.

Wish me luck!



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Saturday, April 28, 2007

Adding a Little Color to Countrywide

On Thursday, the executives at Countrywide Financial (NYSE:CFC) held their conference call to discuss the results for the first quarter of 2007 showing net earnings dropping 37% as a result of swelling delinquencies and growing impairment charges.

To combat the slide, Countrywide is taking measures to tighten credit standards as well as increasing its pricing to account for additional future risks.

David Sambol, President and COO stated:

“In terms of the adjustments that Countrywide has made in response to market conditions, I mentioned that industry guidelines had been tightened. Well we have also significantly tightened our own credit guidelines and programs. For example, ‘materially restricting’ 100% loan-to-value financing. Carving back, materially, reduced documentation programs… particularly on the high LTVs. Eliminating subprime second mortgages which have particularly been impacted by liquidity and loss of value in the market.”

It’s interesting to note that although Countrywide is not completely eliminating the 100% LTV subprime loans, they are restricting activity to a very small percentage as well as limiting other similarly risky products.

The following lists the changes to subprime lending standards implemented recently at Countrywide:

  • 100% LTV will be limited to a just 3% of the subprime production compared to 24% in 2006.
  • ARM 100% LTV will be limited to less than 2% of the subprime production compared to 90% in 2006.
  • Subprime Second Liens will be eliminated entirely.
  • No-Low Documentation loans will be limited to less than 2% of the subprime production compared to 35% in 2006.
  • Average LTV for the subprime production will be brought to less than 80% from 85% in 2006.
  • Subprime loans to first time homebuyers will be reduced to 5% from 22% in 2006.
  • Subprime loans, as a percentage of total purchase, will be brought to less than 20% compared to 60% in 2006.
A particularly interesting outcome of these changes lies in the elimination of the Subprime second liens as these were typically used for the 20% “piggyback” of the 80/20 100% LTV products.

As Sambol puts it:

“As I mentioned, we are no longer doing subprime seconds, in part because of the lesser investor demand for that product. And most of those seconds represented the 20% piece of a 100% financing loan, the 80/20 that you might be familiar with that were very popular in the subprime market. And again, if you recall, we have materially curtailed our program such that we expect to do very few subprime 100% financing going forward.”

As for pricing, Sambol adds that the latest rate sheets more accurately value risk as well as simply reflect the less competitive market environment that exists now after many industry players have gone bankrupt.

“And then pricing of new loans that we are originating have also been adjusted to provide for a more conservative loss assumptions, higher yields on our retained interest from future originations and greater origination margins as well.”
“We’ve seen credit occurring in the industry and we have tightened our guidelines somewhat as well on the Alt-A side. And I would point out that our rate sheets and our pricing fully reflects all the widening seen in the markets.”

“We are now pricing our rate sheets to provide for profitability in each of our channels. Where I will tell you that in 2006, for much of 06 and 2005, competitive conditions were such that in certain of our segments we were pricing to break even, it was that tight. But with the exit of the market of so many players, we and the rest of the industry have materially increased rates and starting as early as the first quarter we expect to see each of our production divisions, our retail subprime operations, wholesale and the little bit we still do on the correspondents side generating positive margins.”

In fact, the pricing for subprime loans seems to have increased substantially as seen by comparing this Countrywide rate sheet for Massachusetts dated March 12 to the following one dated April 16.

When discussing the impairment charges accounted for in Q1, Sambol states:

“The impact both of write downs to our subprime investment and to our production profitability in the first quarter stemming from the turmoil in the subprime market. We have quantified that the quarter-over-quarter impact was approximately $400 million.”

On page 7 of the supplemental presentation associated to the conference call there is an interesting footnote on the “Impairment of retained interests” item that reads “Change in impairment of retained interests includes $53 million from other 1st lien residuals with loan features that are similar to subprime” seemingly indicating that a significant percentage of the impairment charges came from prime loans.

Diging into the Q1 results it appears that the actual impairment numbers were a little heavier than in Sambol’s presentation, particularly the prime loan charges.

“Loan Servicing sector pre-tax earnings were adversely impacted by $429 million in impairment charges against retained interests. Impairment charges of $231 million were related to subprime and similar retained interests, while $135 million was related to retained interests on home equity lines of credit extended to prime borrowers. These impairment charges were driven by increased estimates for future losses on loans underlying the related securities as well as increased market yield requirements. In addition, the Company incurred $63 million in impairment on other retained interests where Countrywide does not retain credit risk. This impairment related to increased market yield requirements.”

All in all, the $429 million impairment charge has swelled 256% as compared to Q1 2006 $120 million charge.

Later in the Q&A portion of the conference call, CEO Angelo Mozilo was asked to elaborate on Countrywide’s recent switch over to an OTS regulated thrift which was a change that Mozilo to strongly denied had anything to do with sidestepping new Federal Reserve regulations.

“That decision was made because of, I think, two primary reasons. One is that the OTS has a historical housing mission and that matched up with our mission much better than the OCC and the Fed. We had no particular complaints about the Fed at all, nor the OCC. We believe we enjoyed a solid relationship with them but the practical matter was that when we began to examine where this company was going over the next decade and beyond, we did not see ourselves in any business that would require an OCC charter and Fed supervision. We are not going to be a lender in commercial loans in Japan or any of those kinds of things so the businesses that we planned to be in matched up perfectly with the authorities of the OTS. The second reason which was tied to that is that it is much more difficult for, at least for us, to manage and deal with two regulatory bodies that from time to time went in two different directions, than it was to deal with a single regulator that examined the bank and supervised the parent.”

When asked about his outlook for the market and home prices as it relates to Countrywides business, Mozilo replied:

“I think, bottom line, it’s very difficult to determine where [home] prices are going. It would certainly, based upon our view of where the world is today, increased foreclosures, as that comes on to the market we’ve got to work through that. During that period of time, in certain areas of the country values will go down. Certain unique areas of the country, values will stabilize and others, although few, where values will continue to climb but not at the rate they did before so it’s sort of a mixed bag.”

The entire conference call can be listened to here.


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Friday, April 27, 2007

GDP Report: Q1 2007 Advance

Today, the Bureau of Economic Analysis (BEA) released their first installment of the Q1 2007 GDP Report showing truly anemic growth weighed down by continued weakening to fixed residential investment.

Residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, continued its historic fall-off registering a decline of 17.0% since last quarter while shaving .97% from overall GDP resulting in the slowest quarterly growth since Q1 2003.

Additionally, non-residential investment continues at a slower pace registering the second smallest quarterly growth since Q1 2004.

Housing continues to be, by far, the most substantial drag on GDP subtracting an amount roughly equivalent to the contributions made by ALL durable and non-durable goods including food, clothing, gasoline, fuel oil, motor vehicles, furniture, and household equipment, all the way to aircraft during the same period.

Keep in mind that the initial GDP reports are highly revised so it seems likely that the coming reports (Q1 preliminary and Q1 final) will further capture the historic housing market weakness seen in the first three months of 2007.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).


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Wednesday, April 25, 2007

New Home Sales: March 2007

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for March showing both significant downward revisions to the results for every month since November 2006 as well as continued weakness for the March results.

Hopes for a bottom to the new home market are now surely dashed as March showed that sales were down across virtually every region, most notably the West, as well as a 27.9% increase to the months supply as compared to March of 2006.

Easily the most notable aspect of the report was the enormous downward revisions to November and December of 2006 and January and February 2007 helping to push their respective year-over-year declines further into the double-digits.

It’s important to keep in mind that these declines are coming on the back of the significant declines seen in 2006.

This should not be understated as it is clearly showing continued and even accelerating weakness to new home sales.

The following charts show the extent of sales declines seen since 2006 as well as illustrating the further declines 2007 is showing on top of the 2006 results (click for larger versions)

Note that the last chart essentially combines the year-over-year changes seen in 2005 and 2006 and shows sales trending down precipitously as compared to the peak period.




Look at the following summary of today’s report:

National

  • The median price for a new home was up 6.36% as compared to March 2006.
  • New home sales were down 23.5% as compared to March 2006.
  • The inventory of new homes for sale declined 1.4% as compared to March 2006.
  • The number of months’ supply of the new homes has increased 27.9% as compared to March 2006.
Regional

  • In the Northeast, new home sales were up 18.0% as compared to March 2006.
  • In the West, new home sales were down 29.6% as compared to March 2006.
  • In the South, new home sales were down 25.7% as compared to March 2006.
  • In the Midwest, new home sales were down 19.3% as compared to March 2006.



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Tuesday, April 24, 2007

Existing Home Sales Report: March 2007

Not so fast Real Estate-Wall Street Bulls.

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for March showing the LARGEST MONTHLY DROP IN HOME SALES SINCE JANUARY 1989.

Of course, NAR Chief Economist David Lereah continues to attempt to blame winter weather conditions as well as fallout from the subprime meltdown for the current drop in sales.

“For the last couple months we’ve been expecting a weather ‘hit’ on home sales finalized in March, … We also may be seeing some losses as a result of the subprime fallout. … It’s too early to measure a significant impact from tighter lending standards, which should moderately dampen activity, but we’re still looking for existing-home sales to gradually improve during the last half of 2007”

Additionally, NAR President Pat Vredevoogd Combs continues to attempt to goad unknowing home buyers into making their purchase at the top of a dramatically deflating market.

“It’s a good time to buy, in part, because home buyers are not pressured to make quick decisions,” Combs said. “We’re in a window of low interest rates with a plentiful supply homes on the market and flat prices in most areas. First-time buyers now have more power to negotiate with sellers for help on downpayment or closing costs.”

Looking at March’s Existing Home Sales report should only result in additional confirmation that the nation’s housing markets are continuing to experience weakness with virtually all regions showing considerable declines to median price and sales as well as significant increases to inventory and monthly supply.

Keep in mind that we are now seeing existing home sales declines on the back of last years fairly dramatic declines further indicating that the housing markets are not bottoming as many had suggested last fall.

Below is a chart consolidating all the year-over-year changes reported by NAR in their March 2007 report.

Particularly notable are the following:

  • Majority of median prices are down.
  • Majority of sales are down.
  • Inventory and Months Supply show double digit increases on a year-over-year basis.


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Monday, April 23, 2007

Crashachusetts Existing Home Sales: March 2007

Today, the Massachusetts Association of Realtors (MAR) released their 1st quarter 2007 and March 2007 results for existing home sales, median prices and inventory along with a fresh dose of spin from President Doug Azarian and MAR President-Elect, Susan Renfrew.

Before we delve into the numbers, let me point out the truly awful quality of data reported by MAR, particularly on Azarian’s watch.

For a few months now I have noticed some strange “revisions” to the single family sales numbers for past months and after considering all the possible rational reasons for these irregularities, I can only conclude that it is sloppy reporting on the part of MAR.

I should mention, that I don’t necessarily think that there is any foul play in MAR’s reporting, instead it appears that MAR has simply fumbled and, unfortunately for us, has tainted the sales and median price results.

There are several many that exhibit questionable revisions but Ill highlight February and March of 2006 as examples.

It February 2006, MAR’s Existing Home Sales Report (EHS) reported that single family sales were 2254 units with a media sale price of $339,450.

MAR than revised this number in their March 2006 EHS report to show February 2006 single family home sales of 2265 units with a median sale price of $339,000.

Then in the February 2007 EHS, MAR reports that in February 2006 single family home sales were 2380 units with a median sale price of $339,000 while ALSO citing the 2265 unit sales number at the bottom of the very same report (first and second pages versus very last page).

Which is it … 2380 or 2254? Both numbers are used in the same report.

Furthermore, in the March 2006 EHS report, MAR reported that single family home sales were 3440 units with a median sale price of $344,000.

MAR then reaffirmed both their single family sales and median price numbers in their April 2006 EHS report.

Then in the March 2007 EHS, MAR reports that in March 2006 single family sales were 3550 units with a median selling price of $343,500.

That’s a 3.2% upward revision to single family sales yet there seems to be no evidence that the number is accurate.

Keep in mind, I looked back over MAR’s past releases to see any patterns to revisions and there are some but there are many examples where months are simply randomly altered showing totally different numbers in-between months that have numbers consistent to what was past reported.

Also, these revisions have all been made WITHOUT the customary press release providing any explanation for the changes as well as for the procedure used for revisions.

Wouldn’t it be great if “crack” reporter Kimberly Blanton of the Boston Globe could focus some attention on issues like MAR’s unusual numbers revisions rather than reporting puff pieces on the strength of the bottoming housing market?

Well good numbers or bad we are stuck with what we have and with that lets take a look at March 2007’s findings.

With the today’s release of the existing home sales, MAR president Doug Azarian suggests, “The housing market in Massachusetts is gaining momentum and we can continue to feel good about where it is headed. With prices remaining stable and supplies decreasing, we can expect the spring home buying season to be active.”

As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current market trend.

March’s Key Statistics:

  • Single family sales increased 43.2% from February and declined 2.8% as compared to March 2006
  • Single family median price increased 5.8% from February and declined 0.1% as compared to March 2006
  • Condo sales increased 39.6% from February and declined 1.4% as compared to March 2006
  • Condo Median Price increased 3.3% from February and declined 3.0% as compared to March 2006
  • The number of months supply of residential properties stands at 9.0 months.
  • The “days on market” for single family homes stands at 158 days.

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Friday, April 20, 2007

Pork and Circus!

The House Committee on Financial Services, chaired by Massachusetts Congressman Barney Frank [D-MA], yesterday held a hearing to discuss the current FHA modernization effort.

Although a bill with the same objective passed the House by an overwhelming majority last year, a new bill (H.R. 1852) has now been introduced that would essentially expand the modifications to FHA including those of the last bill plus provisions to establish a new Mutual Mortgage Insurance Fund.

To date, the FHA operates out of a National Housing Acts “General Insurance Fund” which was established in 1965 to serve as a “as a revolving fund for carrying out all the insurance provisions”.

It appears that this new fund is creating some contention as its full purpose seems unclear and has been interpreted by some Republicans as an attempt by Democratic lawmakers to funnel surplus money out of FHA for use elsewhere.

“Now it looks like we are going down the road of another extortion of an organization for money for purposes other than for what that organization is proposed and chartered to do… creating other funds and taking money out of FHA when we’re embarking down a road of a new program I think is a very dangerous precedent.” said Representative Randy Neugebaue [R-TX].

To that, Representative Frank quickly followed up “I’ve worked with my friend from Texas on a lot of issues and there are a lot of areas where this committee can cooperate across party lines but nowhere have the difference between the parties been made more clear then in his last statement when he described as an effort by the gentle woman from California and myself as an effort to provide more funding for affordable housing as quote extortion unquote.”

There is, in fact, an additional provision found in the bill entitled “Use of FHA Savings for Affordable Housing Grant Fund” that would allow for “only for grants to provide affordable rental housing and affordable homeownership opportunities for low-income families.”

Later in the hearing, Brian D. Montgomery, Assistant Secretary for Housing, addressed the committee to share his outlook on the proposed changes which include the elimination of the a down payment as a qualification for an FHA insured mortgage.

“This year, as we all know, we have two bills pending before this committee. Both bills would raise loan limits in high cost areas. They would eliminate FHA’s antiquated down payment requirements. And they would allow, to varying degrees, risk-based pricing to occur and eliminate the burdensome cap on reverse mortgages.”

When asked about his take on the new housing insurance fund, Montgomery added “I, speaking for FHA, have IT system requirements, as the worlds largest mortgage insurance company, I would like to be able to have the ability to get staff, professional staff that would allow us to carry out our mission, especially in a reformed FHA. To be able to pay them similar to how other government agencies are. So speaking selfishly for FHA I could use those funds to help do some of what I just articulated.”

In an odd line of questioning, Representative Emanuel Cleaver, Democrat from Missouri seems to confuse the business of Fannie/Freddie GSE’s to that of FHA, “In your testimony, when you talked about the drop in the FHA share of the market in Chairwoman Waters district, that just is mind-boggling. What I would like to ask.. find out from you, is Freddie Mac has said that hey are going to buy up to $20 billion dollars in subprime mortgages, you can’t compete with the giants, but is that a way… a possibility for you to beef up your portfolio? Is it possible for FHA to buy any of the subprime mortgages?”

To that Montgomery responds “Thank you sir and as I have mentioned here on Tuesday in the subprime hearing, we are helping subprime borrowers today … with a reformed, modernized FHA, there’s no doubt in my mind we can assist many more. That’s not to say we are going to throw open the barn door so to speak, we have to protect the solvency of the Mutual Mortgage Insurance Fund so many of these families would still have to go through our eligibility and underwriting criteria.”

Cleaver further adds “There’s a lot of discussion going on about Freddie Mac and Fannie Mae and the size of their portfolio. And it seems to me that the best way to reduce that portfolio, to bring it in to some kind of normality, would be for FHA increase in its share of the market.”

Later, Representative Al Green [D-TX] asks Montgomery “Do you consider yourself, in terms of positioning, are you positioned somewhere between prim and subprime... is that a fair statement?”

To be fair, it seems many of the representatives appeared to have confused FHA’s role as an agency that works in concert with private lenders, originators and brokers, to insure loans while generating income only from mortgage insurance premiums paid by FHA borrowers, with that of the GSEs by whom loans are purchased, held or sold to the secondary market.

Later a panel of real estate industry “experts” from organizations such as the National Association of Realtors, the Mortgage Bankers Association, and the National association of Home Builders convened to add their take on the FHA changes.

The hearing can be viewed in its entirety now on BNN!




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Thursday, April 19, 2007

Bursting Back to Back: New Homes

In an effort to gain a better perspective on the new home market, I whipped up a few charts that visually demonstrate the extent of the decline to date.

Since 2007 represents the second year into the down-cycle of residential real estate, I thought it might be helpful to illustrate how far we have come since the end of the up-cycle by charting how the current double digit year-over-year declines to permits, starts and sales are aggregating.

For each of the following charts, the columns show year-over-year changes, on a monthly basis, while the line shows the current month compared to the same month in 2004.

The key here is that year-over-year changes to permits, starts, and sales have remained in high double digits and although it’s too early to say whether the declines will grow even larger in the coming months, the fact that they remain in the high double digits for the second year running is significant.

Remember, we are well into the period where these various measures began to register steep declines last year, so all further year-over-year declines from here on out indicate extensive weakness.

The following charts show “new home permits” nationally, in the northeast and west, “new home starts” nationally and “new home sales” nationally.

Notice that on each chart the line is essentially combining the year-over-year changes seen in 2005 and 2006 and shows virtually every measure trending down precipitously.

Although year-over-year declines to permits, for example, have not accelerated measurably from September 2006, the fact that they continue to decline roughly 30% should provide a solid indication that they are by no means stabilizing.

They are, in fact, trending down rather sharply.

Click on the following charts for larger versions:






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Tuesday, April 17, 2007

New Residential Construction Report: March 2007

Popularly reported as an “unexpected rise” in housing starts, today’s New Residential Construction Report continues to indicate significant weakness in the nations housing markets and for residential construction.

In particular, housing permits, the report most leading of indicators, again indicates substantial weakness in future construction activity both nationally and across every reported region.

As predicted, housing completions are now declining significantly on a year-over-year basis indicating that the contraction in construction activity may soon be reflected by a substantial drop-off in construction related jobs as older projects reach completion and newer projects start at a far slower pace.

Now, we are well within the period in which permits and starts began to show significant weakness last year so the current double-digit year-over-year declines to those measures unequivocally indicate that the housing market has not yet stabilized.

Here are the statistics outlined in today’s report:

Housing Permits

Nationally

  • Single family housing permits up 1.4% from February, down 28.4% as compared to March 2006
Regionally

  • For the Northeast, single family housing up 1.3% from February, down 35.7% as compared to March 2006.
  • For the West, single family housing permits up 2.1% from February, down 22.7% as compared to March 2006.
  • For the Midwest, single family housing permits up 19.5% from February, down 29.1% as compared to March 2006.
  • For the South, single family housing permits down 3.6% from February, down 29.6% compared to March 2006.
Housing Starts

Nationally

  • Single family housing starts up 2.0% from February, down 24.6% as compared to March 2006.
Regionally

  • For the Northeast, single family housing starts down 7.8% from February, down 35.2% as compared to March 2006.
  • For the West, single family housing starts down 5.9% from February, down 26.7% as compared to March 2006.
  • For the Midwest, single family housing starts up 35.9% from February, down 17.2% as compared to March 2006.
  • For the South, single family housing starts down 0.5% from February, down 24.1% as compared to March 2006.
Housing Completions

Nationally

  • Single family housing completions up 1.5% from February, down 28.9% as compared to March 2006.
Regionally

  • For the Northeast, single family housing completions down 16.2% from February, down 35.8% as compared to March 2006.
  • For the West, single family housing completions up 17.8% from February, down 28.3% as compared to March 2006.
  • For the Midwest, single family housing completions up 7.6% from February, down 36.0% as compared to March 2006.
  • For the South, single family housing completions down 3.8% from February, down 25.9% as compared to March 2006.
Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

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Monday, April 16, 2007

FHA In The 21st Century

In 2006, Congress attempted to revamp the Federal Housing Administration (FHA) in an effort to modernize its service.

At the time, it was argued that certain limits defined for FHA operations by the National Housing Act were outdated and thereby causing the prevalence of FHA insured loans to decline dramatically nationally, with an especially striking fall-off in high cost areas.

In the House of Representatives, a bill sponsored by Representative Patrick Tiberi [R-OH] entitled “FHA Manufactured Housing Loan Modernization Act of 2006” (H.R. 4804) was passed by an overwhelming margin with 412 Ayes to 4 Nays (16 Present/Not Voting) on July 25 2006.

In the Senate, an identical bill sponsored by James Talent [R-MO], Sen. George Allen [R-VA], Sen. Lincoln Chafee [R-RI] titled “Expanding American Homeownership Act of 2006” (S. 3535) was introduced on June 19 2006 but was not proceeded with in all likeliness due to changing priorities preceding the election that would inevitably see all of its primary sponsors defeated.

It’s important to note that ALL of the above mentioned Congressmen, House and Senate, were supported in their respective 2006 races by the National Association of Realtors Political Action Committee (RPAC), the nations largest PAC.

So, it appeared that at the end of 2006 the Senate bill was dead in the water and likely to stay that way as the Democrat-laden 110th congress focused on other objectives.

Then, toward the end of March 2007, coming on the heels of the subprime meltdown, Senator Hillary Clinton picked up the baton and began to run.

Revitalized and reintroduced as the “21st Century Housing Act” (S. 947), FHA “modernization” is back on the table and this time seems likely to be swiftly passed.

In a press release Senator Clinton stated the following:

"With the meltdown in the subprime housing market, it is clear that there needs to be a real alternative for more working families who want to achieve the dream of home ownership without having to jeopardize their financial futures with a risky mortgage product, … Modernizing the FHA will be an effective way of providing that alternative and I will press in the Senate to take this long overdue step for our families,"

Additionally, Clinton included the following statement from National Association of Realtors President Pat Vredevoogd Combs: “This legislation will strengthen FHA and make it a viable alternative to some of the riskier products that have been marketed to homebuyers,"

It’s important to keep in mind that FHA insures loans through a traditional insurance fund approach collecting both an upfront and annual premiums from the homebuyers.

By lowering current qualifying standards, Congress would allow more loans to meet the criteria needed to be federally insured.

The homebuyer has to pay an additional premium, but because the loan is insured, it will come with a better rate and be more available especially for buyers who would have otherwise been unable to get a loan.

It’s also important to note that throughout the funds history it has vacillated between being self-sustaining and costless to running deficits and costing taxpayers.

The changes now proposed include allowing for 50 amortizing loans, allowing zero down payment, allowing loans that are 100% either the areas median home price or 100% the current conforming limit, and changing the premium fees.

Additionally, although the maximum premium fees have increased, there is inserted text that appears to suggest that the Secretary (of HUD) is able to create new initiatives at any time and even possibly waive premiums for some borrowers.

Given the unprecedented boom seen in the nations housing markets and now the equally impressive bust, it seems imprudent to be endorsing any program that may serve to assist “homebuyers” in stretching to afford dramatically overvalued homes.

It seems now more than ever there should be a moratorium on Congressional tinkering allowing home prices to come back into line with the fundamentals (income, rents, etc.) that traditionally underpin them.

The only reason FHA currently appears to be defunct is that home values swelled well far beyond the range of FHA’s mandate but as we all now know, the bubble swelling is over.

It was only a little over 5 years ago that the FHA program was being heralded for it’s financial soundness and surpluses so much so that administrators slashed premiums and fee schedules.

The primary changes to the existing National Housing Act are as follows:

  • Increases the maximum limit for mortgage maturity term from 35 years to 50 years of amortization.
  • Decreases the minimum down payment on a home from 3% to 0%.
  • For single family homes, increases the eligibility limit to 100% (from 95%) median home price or 100% (from 87%) of the current conforming loan limit
  • Allows for more flexibility in determining the up-front insurance premium based on a percentage of the loan principle and the discretion of the program as well as increasing the maximum premium to 3% from of loan principle from the prior 2.25%.
  • Increases the annual premium maximum from .5% to 1% of the remaining insured principle balance.
  • Increases the eligibility limit for multi-family home purchases.
  • Increases the capital ratio of the insurance fund from 2% to 3%.
As usual, let Senator Clinton know what your take is on this topic by emailing her office or if you agree with the sentiment, simply email a link to this post.




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Friday, April 13, 2007

Bailin’ out the Bubble?

On Wednesday, the Senate Joint Economic Committee (JEC), chaired by New York Democrat Senator Charles Schumer, released a report entitled “Sheltering Neighborhoods from the Subprime Foreclosure Storm” that both presents a dire outlook for millions of homeowners nationwide as well as attempts to set the stage for possible federal legislative action.

Although the report presents a fairly accurate account of the issues surrounding both the subprime situation as well as various aspects of predatory lending, it clearly falls short of fully recognizing the true depth and breadth of the coming wave of foreclosures and wrongly places the burden of helping to mitigate that torrent on the shoulders of taxpayers.

Essentially taking a “where all in it together” position by linking the interests of the lender, homeowner, neighbors and local government which it calls the “stakeholders”, the report attempts to define both the actual dollar cost of a foreclosure as well as the cost of preventing one.

This isn’t an altogether a bad concept in that it is certainly true that the “stakeholders” mentioned are all effected, and in fact, recent studies by the Federal Reserve bank of Chicago suggest that there is even a strong correlation between foreclosures and increased rates of violent crime.

But what this really highlights is that foreclosures are local events, effecting local economies, and as such are probably best handled, at least initially, by the state and local governments in which they occur.

To be fair, the report never explicitly suggests that there should be a wholesale bailout of bad loans and furthermore only proposes federal assistance to existing local community-based non-profit organization that have proven track records in foreclosure prevention.

The foreclosure mitigation suggested by the report is limited to assisting with the costs associated to refinancing to fixed rate loans as well as funding counseling and possible legal services for borrowers that experienced more egregious predatory circumstances.

Never the less, by going over the head of state and local governments, there is a clear risk of circumventing the responsibility and value that government entities at the state and local level can have as well as immediately burdening the federal taxpayer with the cost.

For example, in early 2006, amidst growing numbers of foreclosures and even larger numbers of delinquencies clearly originating from questionable lending practices, a series of state Attorneys General successfully strong-armed Ameriquest Mortgage into providing $295 million in compensation, $30 million in state restitution and a commitment to strengthen lending standards in exchange for dropping inquiries into its questionable business practices.

Using the dollar estimate for foreclosure mitigation as outlined in the JEC report, these awards alone could have provided the proposed assistance for 98,484 individual homeowners.

Keep in mind, these were awards from only one lender.

If state governments, who are in many ways particularly well suited to bring legal action to corporate entities operating within their borders, were to target ALL the players involved in the food chain of loose lending, from mortgage brokers and lenders to the Wall Street financial institutions who effectively encouraged the majority of questionable lending practices, it would leave the financial burden squarely on the shoulders of those who caused it.

This could easily be achieved by examining the data collected by local and national mortgage banking associations as it relates to foreclosure events to see the clear patterns of questionable, predatory and fraudulent activities on the part of mortgage brokers and lenders.

The report also fails to recognize the true scale of the coming wave of foreclosures limiting its analysis to the subprime market which is likely to be only the tip of a vastly larger iceberg providing yet another reason why it would be unfair to burden the taxpayer alone with the cost of the repairs.

On a more dangerous note, the report supports the revamping of FHA, apparently as has been specified by the yet to be fully passed FHA Modernization Act, as well as funding and tasking FHA with the responsibility of overseeing a “rescue fund” allocated for purchase of failed mortgage loan portfolios.

This may be the worst recommendation of all as it effectively makes the federal government, i.e. you, the next great subprime lender by dramatically lower the qualifying standards for FHA loans as well as wrongly tasking HUD with the role of lender of last resort for failed lending institutions.

Keep in mind that the Federal Reserve has, as one of its principle mandates, the role of lender of last resort and is, in fact, prepared for possible systemic failures.

The report then concludes with a series of fairly sound proposals including actions to strengthening lending standards, create a federal anti-predatory lending law, establish a standard for determining a borrower’s ability to pay, and plain language disclosures on mortgage products.

If you agree the sentiment in this post, let Senator Schumer know by either emailing his office with your take on the subject or simply email a link to this post.




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Thursday, April 12, 2007

Lereah’s Fat Balloons

I’m really starting to worry about this guy.

Imagine what it must feel like to have risen to such heights of success, both professionally and on a more personal metaphorical level, having achieved almost unparalleled success, save possibly for that of Greenspan, in the apparent pursuit of grotesquely inflating the nations housing markets only to stand by helplessly and watch the whole thing go shebang!

It’s obviously having an effect on the poor mans psyche.

Witness this video clip of him sitting in a Lakeland Florida hotel lobby, obviously trying to keep a stiff upper lip while rambling on about his new DNA theory of housing, the great “buyers” markets of Boston and Providence and the “hot” markets in the Smoky Mountains.

The piece sadly ends with Lereah attempting to educate CNBC’s Carl Quintanilla on the ins and outs of the nations “Fat Balloons”.

Oh! how the mighty have fallen!

I half expected him to sign-off that segment by making one of those old-time cartoon cuckoo gestures while singing “Hello my baby, hello my honey, hello my ragtime gal!”

Then yesterday came possibly the hardest blow to date.

In a press release entitled “Tighter Lending Standards Good for Housing, But Will Dampen Sales” Lereah had to admit that things are getting considerably worse for the nations housing market.

“Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections.”

More importantly, Lereah now expects the national median existing-home price to decline by 0.7% this year while existing-home sales will total only 6.34 million as compared to the 6.48 million home sales in 2006.

If this prediction were to come true, it would be the FIRST ANNUAL DECLINE to the national median existing-home price ever recorded by the National Association of Realtors.

To put this in better perspective, the smallest annual increase to the national median existing-home price ever recorded to date was in 2006 at 2.0%.

Additionally, Lereah is expecting new home sales to plummet to 904,000 from the 1.05 million sales in 2006.

So what’s next for Lereah?

Possibly a new edition of his book entitled “Why All Real Estate Keeps Following ME!: - And How I Just Can’t Get Away From It… Dammit! Stay Back! You Filthy Fat Balloons!”

For an always up-to-date take on the life and times of this truly unusual character read the ever popular David Lereah Watch Blog!



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Wednesday, April 11, 2007

S&P/Case-Shiller/Futures Tool Tutorial


I’ve been watching the use of the S&P/Case-Shiller/Futures Tool for about a week now and I thought that putting together a short tutorial might help others in getting the most use out of it.

First, I’m no expert on housing futures or any futures for that matter.

If you want to know more about how to trade housing derivatives or just want to follow the goings on of housing derivatives market, check out the Housing Derivatives Blog.

It’s important to keep in mind that the tool displays BOTH the "actual" reported values of the S&P/Case-Shiller Indices (CSI) as well as the "expected" future values given by the daily trading of housing futures at the Chicago Mercantile Exchange (CME).

The CME housing futures are based on the CSI so the futures contracts essentially predict where the indices will be at set points off in the future.

Since the CSI is derived from actual home sales information, the indices are an analogue of changes to actual home prices.

If the future expectations, given by the futures contracts, are for a decline of 5% to a particular CSI, then the prediction is essentially that home prices will decline 5% in the associated housing market.

Keep in mind that the CSI are now regarded by economists, traders and financial institutions as the most accurate home price indices available.

Tool Overview

By default, the tool displays the complete Composite CSI series which ranges from 1987 to the present day (see the view directly below .. click for actual chart).


Additionally, it shows the year-over-year changes to the series on a monthly basis, i.e. the percent change to index values when comparing a given months result against the same month the prior year.

The left y-axis is labeled with the year-over-year percentage change value and the right y-axis is labeled with the index value.

That is the reason for the “empty” columns for the first year of each series as there is not a prior year of data to compare against.

As it stands, this “default” view is useful for seeing how the overall index has changed throughout its existence and for gauging how abnormal the latest run-up of home prices have been given a fairly lengthy historical context but for viewing the future predictions we need to narrow the view down to just the last year or so and add the futures contracts we wish to see.

The following instructions will provide a step-by-step guide for manipulating the “default” view of the chart into the view you see below (click for the actual chart).


To narrow the view, simply scroll down to the section titled “Date Range” and select a starting year of 2006.

Now click the “Update Chart” button (found just under the chart) and you will see that the chart now only includes monthly results from 2006 and 2007.

If you don’t like the columns of year-over-year data (they may seem a bit noisy), you can simply turn them off by un-checking the “Compare year-over-year” checkbox under the “Comparison” section and then click the “Update Chart” button again.

Personally, I like the year-over-year data so I leave that feature turned on.

Now, to add the futures predictions to this chart, scroll down to the “Futures Contracts” section and check the checkboxes next to the contract expirations you wish to see and then click the “Update Chart” button again.

What you now see is a long line running vertically through the chart separating the portion of “actual” reported CSI values on the left and “expected” future values on the right.

Keep in mind that each tradable futures contract has a specific expiration date for which the future predictions are essentially being made.

So, if you check the 02/25/2008 checkbox, you are essentially asking the question “What do the futures traders expect this index’s value to be on 02/25/2008.”

Since the index reflects actual home price data, this prediction should match actual changes to home prices in that particular market.

Now, if you select multiple contract expirations, you can see both the long term and short term predictions simultaneously.

Additionally, if you have selected the year-over-year option you are actually going to see percentage change columns that reflect the “expected” future results against the “actual” results of 2006.

Note, to connect the points between the last “actual” CSI value as well as each “expected” future contract value, I simply extrapolated the linear function for each given set of points so the chart values “in between” each set of points are merely functional estimates and should not be interpreted too literally.

You can also display multiple metro indices on the same chart view but keep in mind that only Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, Washington DC, and the Composite indices have associated futures trading so if you are looking at futures, the other indices will not display results.

That’s it!

Ill be updating the tool periodically to add more functionality and to fix bugs but as usual, please feel free to ask questions or report bugs by either commenting on this post or emailing me directly.

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Monday, April 09, 2007

Mozilo’s Island

Given the relative strength shown by Countrywide Financial (NYSY:CFC) throughout some of the worst initial tumult of the subprime meltdown, one wonders whether CEO Angelo Mozilo can continue to maintain his island paradise or whether it will buckle under the strain leaving him looking more like Herve Villechaize stamping angrily from the shores of Lilliput.

This month may mark a bit of a turning point for Countrywide as it faces two significant challenges to its buoyancy.

First, on Thursday afternoon, it was reported that a lawyer representing The Louisiana Municipal Police Employees Retirement System, a Countrywide Financial shareholder, successfully argued for the right to move forward on an options backdating probe that will see an additional trial for the Countrywide “books and records” on April 18.

To be fair, it appears that the The Louisiana Municipal Police Employees Retirement System is a fairly active shareholder, suing a whole host of other public companies for various indiscretions including options backdating.

Furthermore, on April 26, Countrywide will release its first quarter 2007 earnings and host a conference call to review the results.

The results are particularly important as it will shed some additional light on the extent to which Countrywide has been impacted by the subprime meltdown as well as the even more important spillover effects on their “pseudo-prime” business.

As a possible harbinger of things to come for Countrywide, competitor American Home Mortgage reduced their expectations for first quarter results in a pre-announcement last Friday citing significant pressure coming from their Alt-A loans.

“A disproportionate share of the Company's non-performing loans are repurchased Alternate "A" loans. The Company has ceased offering those types of Alternate "A" loans that have resulted in a high proportion of its repurchases, and consequently believes the portion of delinquency related charge resulting from repurchases will diminish toward year-end.”


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Saturday, April 07, 2007

The Trouble with Lereah

Well, David Lereah’s new book is officially out… slightly modified subtitle from what fellow BubbleMeter blogger reported last fall but likely the same overall concept, namely how to profit from residential real estate.

In fact, that theme seems so essential to Lereah that it has, in one form or another, worked its way onto the front cover of every real estate book he has ever written.

First, there was his 2005 release titled “Are You Missing the Real Estate BOOM? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade-And How You Can Profit From Them.”

Then quickly came the 2006 revision, “Why The Real Estate BOOM Will Not BUST – and How You Can Profit From It.”

Finally, now his newest installment “All Real Estate Is Local: What You Need to Know to Profit in Real Estate - in a Buyer's and a Seller's Market.”

Having not read any of his books, I’m certainly not qualified to make any real criticism of them, but what I do know is that Lereah has worked vigorously to promote the idea of profiting from residential real estate.

What’s wrong with that you say? This is America isn’t it?

Even if Lereah were to use every available means at his disposal to promote half-truths in an effort to create viral hype in the nations home buying population, isn’t that his right?

Buyer beware ... There’s a sucker born every minute and the like.

Well, I’d argue that Lereah and the National Association of Realtors have actually crossed significant ethical boundaries in an endeavor that I see as essentially analogous to the less-than-principled process of home sales itself, but on a grand scale.

We are all keenly aware of the extent to which many real estate agents will go to “make the deal happen” regardless of the fallout to the parties involved.

But in this case, what’s at stake is not a quick commission on the part of the agent or a reasonable deal for the buyer or seller; it’s the stability of the American economy and the future for many millions of its residents.

By narrating the events of the nations housing market in an “always and excessively favorable” light, the NAR and Lereah, through a lazy and willing traditional media, have played an important role in driving the “flipper nation” to the stratospheric heights that peaked in 2005.

Remember, the NAR is not a new organization.

It’s nearly 100 years old and as such has been collecting and analyzing housing data for many decades.

All the NAR leadership, including Lereah, are well aware of the fact that, in general, residential real estate appreciates roughly in line with inflation and incomes providing a reasonably stable, long term, “investment” but far from the “profit-laden” thrill ride they have made it out to be in recent years.

As Lereah himself stated last year, “Keep in mind that over time, home prices rise at the rate of inflation plus one-to-two percentage points -- buyers in most of the country who plan to stay in their home for a normal period of homeownership can pretty well bank on those historic averages, but people who purchased last year with the intent of flipping are likely to get burned.”



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Thursday, April 05, 2007

In a Twinkle of a Financial Cycle’s Eye

Richard W. Fisher, President of the Federal Reserve Bank of Dallas, yesterday addressed the Austin Mortgage Bankers Association and spoke candidly and quite colorfully about the role of risk in the economy and his outlook on subprime meltdown.

Fisher initially sets up his discussion by recounting some of the truly astounding events that surrounded the Texas real estate collapse of the early 80’s when, prompted by the decline of the Texas oil market, both the residential and commercial real estate markets reverted to the mean.

“Bank and thrift failures reached a frightful magnitude. More than 800 Texas financial institutions went out of business. … The energy bust reverberated throughout the state and it was keenly felt in both commercial and residential and real estate markets.”

“Troubles in the residential sector go so bad, the city of Garland, which is a Dallas suburb, authorized a condo development project that was interrupted by the collapsed market, be set on fire. Burning it to the ground seemed to be the best choice for the 240 unfinished condos that had become eyesores and safety hazards in the twinkle of a financial cycle’s eye.”

“I think I’ve got your attention… this is pretty bracing stuff.”

Fisher then goes on to outline some the recent and largely untested innovations used to mitigate risk in the financial markets.

“It is now possible to mitigate risk through securitization, as you know, and the use of derivative products to a degree that was unimaginable; they just hadn’t been invented, in the 1980’s”

“All these advances has increased liquidity, diversified portfolios, and allocated risk to those more willing to bare it.“

“The fastest growth has been in credit derivatives which, by some measures, increased by 55% last year and by tenfold for the last three years. By any account, the growth in structured credit products has been enormous.”

“Slightly more than 40% of all collateralized debt obligations, or what are know known as CDO’s, last year were set up by first time issuers that have never managed through a downturn in the credit cycle… so the memory cells begin to tingle.”

At this point you get the idea of where Fisher is heading.

The economy (and all of it’s participants), although more educated and in turn sophisticated, by having come through past eras of risk and failure, becomes increasingly more enigmatic, not necessarily more certain or stable, as new innovations are introduced. Not to mention the basic tendency to repeat past mistakes.

Fisher goes on:

“The danger lies in placing too much faith in historical value at risk estimates, especially when they are based on limited experience with new products. Wrong probabilities … can lead very costly mistakes.”

“The real world has a very nasty habit of reminding us every so often, like Texas in the 1980’s or Long Term Capital Management of the 1990’s, and the subprime mortgage market today.”

“It takes extraordinary discipline for financial institutions and investors and agents to exercise sound judgment when the fish are schooling, swimming in pools of mass-liquidity, unencumbered by memory.”

In an effort to outline the issues with some of the new innovations, particularly credit default swaps, Fisher quotes Charles Dickens:

“A person who cannot pay gets another person who cannot pay to say he can pay.”

Fisher continues:

“So, more that 150 years ago, Charles Dickens foreshadowed one of today’s most vexing problems with structured products … knowing just where the risk is and who is ultimately holding it. Who ultimately pays when things go wrong?”

“If your looking for a financial segment where these issues have come home to roost, you need only look no further than the subprime mortgage market.”

“Only recently have we seen widespread use of a number of innovative mortgage products, such as interest only loans and option ARMs. And these innovations are now common even in the subprime sector, which itself has grown tremendously.”

“The most innovative mortgage products have tended to be used more in markets with the greatest appreciation, which suggests that some homebuyers stretched themselves financially to purchase increasingly expensive homes.”

“In many cases homebuyers may have had no other choice if they wished to purchase a home. By easing the qualifying process, these instruments have made home mortgage credit available to broader segments of society.”

“… these innovations have left homebuyers exposed to a decline in the housing market and rising interest rates or both.”

“We must not forget that these new products have yet to be tested in a downturn in the credit cycle.”

Later, in the Q&A portion of the appearance Fisher was asked what the Federal Reserve can do to help clear any significant meltdown in the subprime mortgage market.

Fisher responds:

“My view is, and this is only me speaking personally, I don’t think we should be in the business of focusing on any one asset class. I don’t think we should be in the business of making markets happy.”

The entire speech can be viewed now at BNN!




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