Countrywide Foreclosures: December 2007

Today, Countrywide Financial (NYSE:CFC) released their December Operational Results showing again that delinquencies and foreclosures are continuing to remain at troubling levels with delinquencies climbing 20.72% and foreclosures soaring over 105% since December of 2006.

Prior to January 2007, Countrywide reported foreclosure data as a percentage of the total number of loans serviced which obviously lacked complete clarity.

Below, are charts of both measures; delinquencies and foreclosures by total number of loans serviced and foreclosures by percentage of unpaid loan principle (Click for larger versions).

Either way you slice it, Countrywide is looking at some significant increases in foreclosure activity but notice that for the “unpaid loan principle” method, things are really looking dire.

Be sure to check out the Countrywide Financial Foreclosures (REO) Blog’s Inventory Tracker for some more startling evidence that foreclosures are skyrocketing over at Countrywide Financial as well as some excellent REO tracking features.

Reading Rates: MBA Application Survey – January 09 2008

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage decreased since last week to 5.73% while the purchase volume increased 14.7% and the refinance volume increased a whopping 53.9% compared to last week’s results.

Again, as I had noted in prior MBA posts, seasonally adjusting a weekly data series becomes problematic surrounding the holiday weeks so today’s results should be viewed with some caution as the erratic movements since December should even out a bit over the next few weeks.

Also note that the average interest rates for 80% LTV fixed rate mortgages has now dropped firmly below the mean for the prior year and that the interest rate for an 80% LTV 1 year ARM continues to be elevated with a 27 basis point spread above the 30 year fixed rate.

It’s important to note that the data is reported (and charted) weekly and that the rate data represents average interest rates, and the index data represents mortgage loan application volume for home purchases, home refinances and a composite of all loans.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since January 2007.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since January 2007 (click for larger versions).

Countrywide Tapped Out!

Bloomberg today reports that in order for Countrywide Financial (NYSE:CFC) to continue its loan operations it has had to tap $11.5 billion of what it states is a $185 billion (CORRECTION: apparently at some point today it was reported that the $11.5 billion was Countrywide's ENTIRE credit line... so the $185 figure is false) in available credit lines.

To put the company’s current predicament into perspective a bit, for the month of July Countrywide reported that it had an average daily loan activity of $2.7 billion, so they have effectively bought themselves 4.25 days of operations at that level.

To be fair, this would assume that the company is completely stalled and that the $11.5 billion would be used to fund 100% of their daily loan production which is likely not the case.

In any event, it seems paltry to me and given that it was reported that they used 40 different banks for the sources of the funds, it’s quite possible the $11.5 billion was all they could get at the moment.

As the Bloomberg article points out… look for Countrywide to ask the Fed for a handout in the near future… although that relationship may possibly have been damaged by the company’s recent conversion to a savings and loan in order to get out from under the Federal Reserve’s regulation.

Countrywide Fiasco!

I just hate to gloat about today’s stock plunge…

Well maybe not seeing that Countrywide Financial (NYSE:CFC) worked so tirelessly for so many years to either get people hooked on toxic loans or to consolidate their current and future traditional short term debt into their homes imaginary equity.

During the run-up years, Countrywide offered every product imaginable; subprime ARMS, no-doc, 80/20 zero down, interest only, 1 year out of bankruptcy, the list goes on and on.

All this done simply to bloat, some would say artificially, the bottom line.

Now, the chickens have come home to roost and Countrywide is due for an exuberant pecking.

Send in the impairment charges! Stock up for the loan losses!

In their latest quarterly earnings release for Q2 2007, Countrywide reported impairment charges of $417 million with $388 million coming from residual securities collateralized by PRIME home loans.

These losses were attributable to “accelerated increases in delinquency levels and increases in the estimates of future defaults and loss severities on the underlying loans.”

Additionally, Countrywide had to set aside $293 million for “held for investment” loan losses with $181 million of that related to PRIME loan losses.

The mania is over and now Countrywide will spend many years digging out from under the burdensome losses.

OFHEO’s Absurd Sleight of Hand

This week the Office of Federal Housing Enterprise Oversight (OFHEO) published a request for public comment regarding its proposed policy changes to the procedures used to determine the conforming loan limit for 2008 and beyond.

The conforming loan limit is the maximum loan size that the Government Sponsored Enterprises (GSE), namely Fannie Mae and Freddie Mac, can purchase and today stands at $417,000.

The importance of this value should not be overlooked as it is the key determining factor that distinguishes GSE purchased loans, which generally come with a lower interest rate due to a presumed (yet not necessarily factual) government guarantee, from “Jumbo” loans which are available unfettered from private lending institutions.

In fact, OFHEO considers loans purchased by a GSE in excess of its conforming loan limit to be “unsafe and unsound practice, running contrary to statute”.

That said, the proposed changes relate to the method of determining the limit in the face of declining home prices.

First, it’s important to note that the method for determining the limit when prices are climbing is relatively simple.

The Federal Housing Finance Board (FHFB) confidentially delivers the results of their October Monthly Interest Rate Survey (MIRS) to OFHEO which intern applies a calculation to the average home price to determine the new maximum lending limit.

OFHEO then announces publicly the new limit for loans made during the following year.

Simple enough… October average home price + some calculation = new maximum limit.

So what is the issue you say?

It seems that OFHEO is struggling with the idea of applying that same simple methodology when prices are on the decline.

Reading the proposed procedures, it’s clear that the government has a bias toward inflating home values and is doing just about everything it can to maintain the current limit under the guise of not negatively impacting the market.

This is really an outrageous matter when one considers that the ever increasing limit, that was even a surprise to mortgage brokers and lenders during the boom years, had without a doubt contributed to fueling the housing mania.

With the proposed changes, a downward revision to the limit, even in the face of falling home prices, may be deferred for as long as 2-3 years or more.

I would strongly urge that you let OFHEO know what you think of their proposed changes as well as making your own recommendations by emailing OFHEO at the following email address ofheoguidancecomments@ofheo.gov.

Below are the proposed procedures for setting the limit when home values are declining:

1. In a year in which the October house price level is lower than the level of the previous October, OFHEO will defer the impact of that decline on the conforming loan limit for one full year. The effect of the price level decline of 0.16% from October 2005 to October 2006 was deferred in this manner.


2. After deferring the impact of a decline in the average price level for one year
   
   (A) if the price level falls in the following year, the latter decline will be deferred one year, and the maximum loan limit will be adjusted by the decline of the former year. However, the decrease will be deferred to the next year unless it exceeds one percent (1%); or
   (B) if the price level increases the following year, then the prior year’s (or years’) decline(s) will be subtracted from such increase, unless such subtraction(s) result(s) in a decrease of less than 1%, in which case such decrease will be carried forward to the next year.
   


3. All loans that were within the conforming loan limit at the time of origination will continue to be deemed within the conforming loan limit during the remaining lives of such loans, regardless of whether the loan limit for any subsequent year declines to a level below the limit at the time of origination.

And here is an example of the actual implementation of these procedures:

In November 2007,

(a) if the average house purchase price has gone up during the year, for example by 2 percent, the deferred decline of 0.16 percent would be subtracted, and the new loan limit beginning January 2008 would show an increase of 1.84 percent.

(b) if the average house purchase price has gone up during the year, for example by 0.10 percent, then the deferred decline would offset that 0.10 percent increase and a 0.06 decline would be carried forward. The conforming loan limit would remain the same at $417,000.

(c) if the average house purchase price has gone down, the conforming loan limit will remain at $417,000 for 2008.

The deferred decline will be added to the 0.16 percent and carried forward until the next calculation in November 2008, as follows:

(i) if the average house purchase price goes up during 2008, the conforming loan limit will be calculated per (a) or (b) above with the offset being the cumulative deferred decline of 0.16% and the November 2007 decline;

(ii) if the average house purchase price goes down during 2008 and the cumulative deferred decline of 0.16 percent from 2006 and the decline from 2007 coupled with the 2008 decline still total less than 1 percent, the conforming loan limit would remain at $417,000 in 2009; or,

(iii) if the average house purchase price goes down during 2008 and the cumulative deferred decline of 0.16 percent from 2006 and the decline from 2007 and 2008 totals 1.0 percent or greater, then the conforming loan limit for 2009 will be adjusted downward by that cumulative deferred decline.

Rates and the Rule of Thumb

With lending standards now tightening and interest rates on the rise, it’s possible that home sales, especially in the nation’s most rate sensitive and bubbly areas, could be poised for another leg down.

During the historic run-up, a combination of historically low interest rates and ultra-loose lending standards worked together to allow many more borrowers to qualify for home loans and all borrowers to qualify for larger loans.

With all the interest rates jitters lately, I thought it might be interesting to see how changes to the average 30 year fixed mortgage rate effects the income required for home loans using both the 29% of gross income “Rule of Thumb” and the ultra-loose 50% of gross income rule of the bubble.

The “29% rule” was one of those basic lending standards that went out the window with the boom and simply stated that a borrower (or borrowers) should be limited to a maximum loan “cost” of roughly 29% of their gross income.

Also, the “cost” was not merely the principle and interest payment (P&I) but was to include the property taxes and homeowners insurance (PITI) as well.

Keep in mind, in order to formulate the PITI value for the following charts I simply calculated the monthly P&I for a given loan amount at the prevailing rate and then added a $500 for property taxes and another $100 for homeowners insurance.

First, look at the average 30 year fixed rate as tracked by the Mortgage Bankers Association (click for larger version).

One interesting thing to note is that between 1999 and mid-2000, the rate significantly surpassed 8% and that between 1998 and January 2002 the rate hovered roughly around 7%.

Also note that from January 2002 to mid-2003, the rate declined to a record low of 4.99% and then proceeded to slowly trend up ever since.

Now, in order to get a sense of how affordable typical loans were at past rates and are now, review the following chart that shows the income required to qualify for a $200,000, $400,000 and $600,000 loan using the average 30 year fixed rate and the old standard “29% rule of thumb” (click for larger version).

Notice that during the bubbliest years of 2003 through 2005, a $200,000 loan could be financed conservatively with an annual income of roughly $70,000 (even less at the lowest point) and a $600,000 loan with a little as $160,000 annual income.

Remember, with dual incomes being fairly common these days, two incomes of $80,000 are not that unusual and these couples would have very conservatively been able to afford a $600,000 home loan.

Finally, look how the loose lending standard of 50% of gross income effected loan qualification (click for larger version).

Notice that during the bubbliest years of 2003 through 2005, a $600,000 loan could be financed with an income of just over $90,000.

Again, it’s entirely conceivable that a couple with good credit and a combined income of just over $90,000 (two incomes of $45,000) could be qualified for a $600,000 loan.

Remember, I only used the average 30 fixed rate to build up these charts and if considered, affordability loans such as ARMs with interest only options would make things even more dramatic.