Wednesday, December 19, 2007

Building Permits, Construction Drops

A report by the Commerce Department says that construction of new homes dropped 5.5% in November to the lowest level in 16 years. Applications for building permits fell 1.5% to the lowest level since 1993. Meanwhile, construction of multi-family homes increased 4.4%. The builder sentiment index remained at 19 in December for a third straight month, the lowest reading in more than two decades. And now the question is, can it really get any worse? Naturally, builders are worried: after all the Real Estate speculation, those who got burned no longer have the finances or credit rating to buy a new home. As an interesting aside, a survey by Countrywide Bank showed that getting financially fit is the top New Year’s resolution this year. Physical fitness comes second - households consider sound finances more important than healthy bodies.

Tuesday, December 18, 2007

Al Greenspan’s version of “helicopters”

Suggesting to “drop money from helicopters” to prevent a financial crisis was what initially earned current Fed Chairman Ben Bernanke his nickname “helicopters”. However, his predecessor Alan Greenspan has just suggested and equally radical idea. He said the government should provide “direct financial assistance” to strapped homeowners, essentially depositing free money into their bank accounts. Another solution Mr. Greenspan suggested was temporarily lowering taxes. In his opinion, although this would create a “short-term fiscal problem”, it would save the economy. Hm… this sounds pretty risky, and did anyone mention moral hazard? Or have we retired the term already? And finally, the ex-Fed chairman doesn’t even know “if it would work”, but he firmly believes it will be good for the people. So much for common sense.

Monday, December 17, 2007

Job Cuts At LendingTree

Mortgage lender LendingTree couldn’t think of a better holiday gift for its employees: job cuts. Unlike Freddie Mac, which took its employees to a party at Ritz-Carlton, LendingTree will be eliminating 220 jobs, which leaves it with some 1,000 employees. This is the third time this year that the company conducts mass layoffs. According to a spokeswoman for the lender, the layoffs were prompted by pessimistic forecasts for the industry. LendingTree posted a third-quarter loss of $5.6 million, compared to profits of $15.2 million a year earlier. The company saw its loan sales plunge due to lower demand by the secondary market, lower revenue per loan and the closing of fewer loans. Since the beginning of the credit crunch in the summer, profits have plunged for mortgage lenders as they tightened their lending standards to prevent future delinquencies and foreclosures. A report by the Labor Department showed that the Consumer Price Index rose 0.8% in October, the biggest jump since September 2005, which will negatively affect the consumers’ ability to make timely mortgage payments, meaning more trouble for lenders. I guess Christmas won’t be very jolly for some companies.

Friday, December 14, 2007

Countrywide’s Loan Production Plunges

Countrywide’s home loan production dropped 40% year-over-year in November, the lender announced Thursday. Loan fundigs were up 5% compared to October’s results, quite a feat amid all the trouble the mortgage lending sector is experiencing currently. Countrywide almost eliminated origination of subprime home loans and significantly reduced adjustable-rate mortgages. Delinquencies rose from 4.57% in November 2006 to 6.34% last month. In October, 5.89% of Countrywide loans were delinquent.

Mortgage interest rates climbed up from record lows after the Fed’s rate cut, and this week 30-year mortgage rates averaged 6.11% - still some of the lowest rates for this year, but above 6% nevertheless. The rate dropped below 6% briefly last week. 15-year fixed-rate loans were at 5.78%, up from 5.65% a week ago. 5-year ARMs averaged 5.78%, compared to 5.75% last week. Interest on one-year adjustable home loans increased from 5.46% last week to 5.50%. Which way rates go from here will depend on a number of factors, including the market for Treasuries and the job market.

Thursday, December 13, 2007

Fannie, Freddie: More Gloom Ahead

The CEOs of Fannie Mae and Freddie Mac, the two government-chartered financiers of mortgage loans, recently voiced concerns about the housing market’s future. Freddie Mac’s Richard Syron said his company will likely suffer another quarterly loss of about $2 billion, with credit losses totaling $10-12 billion. The worst is not over yet, however: he expects home prices to drop further before the market stabilizes. The company is in “hiring freeze” in order to control costs while it struggles with losses. Fannie Mae’s CEO Daniel Mudd expects 2008 to be “very tough”, with a gradual recovery in late 2009. He expects home prices to fall 12% by next year and hopes Fannie’s recent efforts to raise capital will be enough to help the company deal with the situation. As the housing slump unfolds, it turns out even the two GSEs are not immune to trouble. Both have slashed their dividends in recent weeks and issued stock to raise capital.

Wednesday, December 12, 2007

Another Fed Rate Cut

The Fed cut its benchmark interest rate again, by 0.25% to 4.25%. The discount rate was lowered accordingly to 4.75%. Economists who had expected a half-point cut in the Fed Funds Rate were disappointed, as recent bad news was expected to prompt more aggressive action by the Federal Open Market Committee (FOMC). The Dow Industrials dropped nearly 300 points after the cut. Stocks of mortgage lenders and large banks suffered, including those of Countrywide Financial, Wells Fargo, Fannie Mae, Freddie Mac, Morgan Stanley, Merrill Lynch, Goldman Sachs and others. Shares of home builders Pulte Homes, Toll Brothers, Lennar and Beazer took a hit as well. The Fed’s statement suggested that they’re worried about the economic slowdown and lower consumer spending, while “some inflation risks remain” too. Meanwhile, holiday shopping has slowed down, and the holiday season’s start wasn’t that impressive after all. Analysts believe the Fed may cut again in January if holiday shopping data is weak and the financial markets remain in freeze mode.

Tuesday, December 11, 2007

As The Year Ends

2007 is drawing to its end, and between holiday shopping and baking cookies, some are trying to analyze the housing market trends and forecast its future behavior. While predictions range from mildly gloomy to disastrous, the NAR produced an amusingly optimistic home sales forecast for 2008. After reducing their home sales forecasts for 9 straight months, they now revised their 2007 forecast upwards, to 5.67 million from 5.66 million. Chief economist Lawrence Yun said an optimistic job market report and the government’s help for troubled homeowners influenced the improved outlook. The group believes home sales will rise to 5.7 million in 2008. A Global Insight economist forecasts 4.7 million home sales in 2008.

Merrill Lynch predicts a gloomy 2008 for the U.S. economy with high energy prices, weak employment, tight credit and falling home prices. And by the way, Fannie Mae and Freddie Mac are introducing tougher requirements for mortgages they securitize.

Monday, December 10, 2007

Analyst Downgrades Lennar

Deutsche Bank Securities Inc. analyst Nishu Sood cut his rating on Lennar Corp. from “Buy” to “Hold”, citing concern over the home builder’s joint-venture agreements. Tighter credit and a glut of homes on the market have resulted in declining demand and a high rate of cancellations, which eat into home builders’ bottom lines. Sood cut his target price for Lennar stock from $36 to $17. The stock traded at $18.72 on Thursday.

Home builders and sellers, desperate to sell homes, are offering ever bigger incentives, ranging from trips and car leases to exotic pets. Sellers are willing to make deep discounts because they fear that home prices may fall further as forecast. However, the market is so bad right now that the chances to sell a home at all are really slim. And while most owners can afford to sit and wait for better times to sell their houses, home builders are suffering losses every day a new home sits empty.

Friday, December 7, 2007

Mortgage Bankers Association: Record Foreclosures In Q3

Home foreclosures hit an all-time high in the third quarter, according to a report released by the Mortgage Bankers Association. 0.78% of all mortgages nationwide were in foreclosure, up from 0.65% the previous quarter. Delinquency rates increased from 5.12% to 5.59%, the highest level in more than 20 years. 4.72% of subprime ARMs entered the foreclosure process, compared to 3.84% in the second quarter. The association’s chief economist, Doug Duncan, said that the situation is likely to get even worse, an opinion shared by analysts at Moody’s. Moody’s predicts that housing prices will drop 30% before the crisis is over. They believe the recession will last until early 2009 (!), with home prices falling 13%, maybe more if we factor in homebuilder incentives. The hardest-hit markets will see prices drop more than 30%, in the “most severe housing recession since the post-World War II Period”, according to Mark Zandi, chief economist at Moody’s Home sales are expected to hit bottom in early 2008, which makes me wonder what is going to spur sales – maybe buyers will finally get bored of waiting on the sidelines?

Thursday, December 6, 2007

Mozilo On Housing Reform

It seems the idea of “freezing” interest rates will be implemented after all, despite its flaws and the fact that it will only help a small number of borrowers. Perhaps top economists are spooked, but why do something that is certain to fail? Even Countrywide’s Mozilo noticed how bad the idea is. He said the better solution would be to raise the conforming loan limits and to allow Fannie Mae and Freddie Mac to keep more loans on their books – an idea rejected by the Bush administration recently. There may be some conflict of interest on Mozilo’s part, but his arguments are reasonable. Freezing interest rates will help some homeowners, but it will hurt lenders and investors, and leave the rest of the borrowers to struggle with increasing mortgage payments. He also noted that the industry needs clear lending standards that will create a sense of certainty and lure investors back into the housing sector, pumping liquidity and spurring mortgage lending (Bingo! But maybe we should leave the conforming loan limits alone, cos they’re pretty high right now anyway).

The worst may not be over yet for the mortgage industry: Banc of America and Fannie Mae both predicted significant home price drops in 2008. Fixing the interest rate on a small portion of mortgages will not prevent foreclosures, especially with borrowers willing to walk away from their “upside down” mortgages.

Wednesday, December 5, 2007

Fannie Mae Will Cut Dividend, Too

Fannie Mae announced that it will cut its quarterly dividend by 30% from 50 cents to 35 cents a share, beginning the first quarter of 2008. In an attempt to raise capital, the company is planning to issue $7 billion of non-convertible preferred stock this month. The announcement comes after similar moves by sister company Freddie Mac, which issued $6 billion in preferred shares last month. Demand for Freddie stock was 5 times greater than the total amount of stock issued, according to the mortgage giant. Freddie Mac posted a loss of $1,5 billion, and Fannie took a $2 billion hit in the third quarter.

Fannie Mae said its 2008 financial results will probably be disappointing, due to turmoil in the housing markets. Shares dropped 3% on the news. Analysts believe the two GSEs may face significant losses related to subprime and Alt-A securities in the months to come. Unlike many banks, Fannie and Freddie have so far avoided large writedowns, but they are not immune to losses.

Tuesday, December 4, 2007

Citigroup’s Chief Economist Forecasts Large Rate Cuts

Lewis Alexander, Citigroup’s chief economist, said he expects the Fed Funds rate to drop 1 percentage point by mid-2008. He believes the Fed will not be concerned about the dollar’s stability because the currency’s value doesn’t affect consumer prices. Alexander, who’s worked at the Fed before joining Citi, is also optimistic about oil prices and the housing market, and believes the U.S. will not go into recession.

All of this is highly debatable, given all the evidence to the contrary we’ve seen so far. Recession is probably around the corner, or already beginning in some local markets, and the dollar’s weakness does affect the prices of imported goods. While a weak dollar benefits the GDP and the job market, its advantages do not offset all the trouble it causes. While a 3.5% Fed Funds rate is not impossible, a great many companies and financial structures will need go under before the Fed cuts this deep. They’ve seen what happened the last time they cut interest rates too low, and they’ll probably look for other ways to prop up the economy. Alexander said energy prices are unlikely to rise from now on, but should the Fed cut, as it is expected to, on Dec.11, oil may well skyrocket beyond $100/barrel, despite the recent drop in prices. Perhaps Alexander is being optimistic, or perhaps he knows something most of us don’t. However, we’ve already seen too many top economists denying the obvious to believe in things the just seem illogical.

Monday, December 3, 2007

Consumer Spending Slowed In October

Growth in consumer spending slowed to the lowest level in 4 months in October, the Commerce Department reported Friday. Spending increased a mere 0.2%, the smallest increase since June. This is slightly below the expected increase of 0.3%. Individual incomes grew by 0.2% as well, which is the slowest pace in 6 months and slower than expected. Gross domestic product increased by 3.9% in Q3, but economists believe the current quarter will not be as robust, with growth possibly slowing to 1% annual rate.

Construction dropped 0.8%, in the 20th consecutive month of declines for the industry and the biggest decline since July. The slowdown in the housing industry may lead to more layoffs, and even weaker consumer spending. Rising inflation is scaring off consumers and, despite a relatively strong beginning, retailers are bracing for a tough holiday season this year.

Friday, November 30, 2007

Mortgage Rates Lowest In 2 Years

Interest on 30-year fixed-rate mortgages fell to 6.10% this week, the lowest level in 2007, and the lowest since the week of October 13, 2005, said Freddie Mac. 15-year fixed-rate mortgages averaged 5.73%, down from 5.83% last week, which is the lowest since January 2006. I guess now is the perfect time to refinance a mortgage if you can find a lender, but that could be hard, unless you have a perfect credit record. 5-year adjustable-rate mortgages slid to 5.86% from 5.88% last week, not that spectacular but still lower. One-year adjustable mortgages were at 5.43%, up from 5.42% a week ago. Speaking about the housing sector, Freddie Mac’s chief economist Frank Nothaft noted that the “overall picture” looks “glum with no immediate relief in sight”. So it is indeed.

Thursday, November 29, 2007

Conforming Loan Limit Unchanged In 2008

The conforming loan limit, currently $417,000, will remain unchanged in 2008, announced OFHEO director James B. Lockhart. OFHEO is the entity that regulates Fannie Mae and Freddie Mac, the government-chartered guarantors of home mortgages. Any loans above the $417,000 limit are considered “jumbo” and cannot be guaranteed by Fannie Mae and Freddie Mac, so lenders usually charge higher interest on them. This limit only applies to one-unit properties; multiple-unit properties have higher limits. Alaska, Hawaii, Guam and the U.S. Virgin Islands have higher upper limits than other states. The maximum conforming loan limit is determined by analyzing October-to-October change in the average house price, which has declined more than 3% this year. The maximum limit hasn’t changed for the last 2 years, and it probably won’t get revised upwards anytime soon. The latest NAR report says the inventory of single-family homes on the market is at the highest level in 22 years (10.8 months’ supply), which can only drive home prices down.

Wednesday, November 28, 2007

Home Prices Dropped 4.5% In 3Q

According to the S&P/Case-Shiller index, housing prices dropped 4.5% year-over-year in 3Q, the sharpest drop since 1987 when S&P started tracking the data. The index also scored another record – the largest quarter-to-quarter decline, with a drop of 1.7% from Q2. Falling home prices will cause more borrowers to become “upside down” in their homes, meaning they owe more on their mortgages than their houses are worth. After tremendous writedowns on mortgage-backed securities, investors and financial institutions have lost their appetite for risky assets and, according to some publications, credit availability is so low that another crunch similar to the one observed back in August is possible. Opinions, however, vary, and some Fed members even believe a rate hike would be good for the economy, while Wall Street is almost certain that there will be a rate cut in December. I tend to believe that, in this chaotic situation, the Fed is very much likely to reluctantly cut rates another 0.25% to prevent further tightening of credit. They don’t like to be pressured but they will have to take expert opinions into consideration.

Tuesday, November 27, 2007

Charles Schumer Concerned Over FHLB Lending To Countrywide

After a news story in the Wall Street Journal detailing Countrywide’s increased borrowing from FHLB, Senator Charles Schumer urged the Federal Housing Finance Board to probe the funding. The Federal Home Loan Bank of Atlanta [FHLB] has extended more than $50 billion to Countrywide Financial, and Schumer is concerned that the collateral the loan is secured against is somewhat shaky. The advances made to Countrywide make up 37% of the bank’s total outstanding loans, which makes Countrywide its largest borrower. Schumer considers FHLB’s exposure to Countrywide “an unreasonable risk”, because of the lender’s current weakness. However, FHLB said in a September SEC filing that its exposure to subprime is “minimal”. According to the Wall Street Journal, Countrywide has secured the $51 billion in advances with $62 billion in collateral. Shares of Countrywide dropped more than 10% to $8.64 on Monday.

Monday, November 26, 2007

Freddie Mac Seeks To Raise Capital

Freddie Mac was all over the headlines this morning, as recent news revealed the mortgage giant’s weaknesses. It is believed that the company may have insufficient capital to cover potential home-loan losses and there’s talk that both GSEs may be insolvent at some point in the near future, should more mortgages go bad. Moody’s and Standard & Poor’s downgraded Freddie’s outlook to “negative” from “stable”, though its debt is still rated AAA. Fannie and Freddie are required to hold 30% more capital than the minimum for other companies, and Freddie Mac found itself short of money, so it is now issuing securities to raise capital. Currently the company has $600 million above the minimum reserve level, much less than its $1-2 billion comfort level. It revealed plans to sell $5 billion of preferred stock in the very near term, probably this week. If losses in the fourth quarter are comparable to those in the previous three months, the mortgage giant will need to raise even more capital. James Lockhart, the director of Fannie Mae and Freddie Mac’s regulator, OFHEO (Office of Federal Housing Enterprise Oversight), refused to suspend the extra capital requirement when asked to.

Friday, November 23, 2007

Mortgage Interest Rates At 6-month Low

Freddie Mac’s weekly survey of interest rates shows the 30-year mortgage dropped from 6.24% to 6.20% for this week, the lowest since mid-May. The low for this year was 6.14% in early March, and rates kept climbing pretty steadily for a while, reaching 6.73% back in July. This made many analysts think that interest on 30-year fixed home loans is about to go through the roof topping 7% by the end of the year. Turns out they didn’t foresee the August credit crunch and well, no one counted in the Fed rate cuts. I assume now it’s safe to say interest rates won’t be nearing 7% until the end of the year in any case. With all the mess in the housing market and the two GSEs in trouble as well, the Fed may yet cut again at its meeting on December 11th – they’ve thrown the dollar stability out the window anyway, so why not prop up the Real Estate sector for a while. Furthermore, oil will most likely hit $100/barrel by the end of 2007, rate cut or not (it’s at $97-$98 right now and forecasters say it will keep growing) due mostly to the dollar’s weakness: China plans to “diversify” its reserves, and OPEC is considering pricing oil in another currency. It may all look like doom & gloom but this is reality. Financial innovation, anyone?

Thursday, November 22, 2007

Home Sales Dropped in 3Q

Sales of existing homes declined in 46 states in the third quarter of 2007, according to an NAR [National Association of Realtors] report issued Wednesday. Sales dropped 13.7% on average year-over-year, while Nevada, Florida, Arizona and California were hit hardest, with declines of 35%, 32%, 30.9% and 27.8% respectively. Sales increased in Vermont and North Dakota – the only two states to report positive data. Sales were up 0.8% in Vermont and 2.9% in North Dakota, and no sales figures were available for Idaho and New Hampshire.

As for metropolitan areas, 93 out of 150 surveyed saw price increases. However, median prices in Florida and California dropped more than 10% compared to last year. In his statement, NAR’s chief economist Lawrence Yun emphasized the positive news: “Some metro areas are hot while others are experiencing localized problems”. So all Real Estate is local, and the problems are “localized”. And there’s more of the “all is well” rhetoric: “Home prices … are affordable and, perhaps, even undervalued” – I guess foreclosure properties are indeed undervalued.

Wednesday, November 21, 2007

Will The Fed Cut Rates Again?

They may want the Wall Street to believe a rate cut is not imminent, but investors are already counting on a 0.25% cut. The central bank released its economic outlook, in which it projected slower growth in 2008, and, quite surprisingly, declining unemployment. The economic growth forecast was revised downwards from 2.5-2.75% to 1.8-2.5%. Meanwhile, turmoil in financial markets is in full swing, with the two largest mortgage financiers Freddie Mac and Fannie Mae reporting higher-than expected quarterly losses.

Shares of Freddie Mac dropped more than 28% after the mortgage giant announced quarterly loss of $2 billion and said it has trouble meeting its capital minimum, which may prompt it to cut its dividend. The company also warned that deeper losses may be coming in the future. Consequently, Countrywide got downgraded by Fox-Pitt, Kelton analyst Howard Shapiro on fears that Freddie’s trouble may mean less financing for the mortgage lender. Countrywide promptly released a statement saying it has “ample liquidity”, but analysts have trouble believing this. So, the Fed may have to cut rates on December 11th, especially if something big happens as a result of the current chaos. Inflation and the price of oil, however, are still pretty troublesome and if the latter hits $100, the chances for a rate cut are minimal. Time will show.

Friday, November 16, 2007

S&P Cuts Bear Stearns Rating

S&P cut Bear Stearns’ credit rating after the company announced plans to write down $1.2 billion in subprime assets, which will likely result in its first quarterly loss since 1985 when the company went public. After the rating was revised from A+ to A, the stock price actually rose because the writedown was smaller than other securities firms’. Citigroup got its ratings lowered after writedowns of $9 billion and Merrill Lynch & Co was downgraded on writedowns of $8 billion.

Meanwhile, Wells Fargo’s CEO John Stumpf, speaking at an investment conference, predicted that the worst is yet to come for the housing market. He said that this is the worst Real Estate market he’s seen in his 30-year career, and 2008 will probably be even worse. Wow he actually said that.

Thursday, November 15, 2007

Lennar Waiting For Better Times

According to an article in the RealEstateJournal, Lennar Corp. has decided not to sell new homes that are currently under construction. They realize that, should they decide to sell, they will be selling at a loss, and are unwilling “to go below a certain floor”, said Chief Executive Stuart Miller. Hovnanian Enterprises Inc. and Standard Pacific Corp. are still trying to sell, offering discounts and other incentives.

While it is easy to understand the builders’ anxiety over price cuts, I keep wondering whether this will work. Perhaps if they keep cutting prices on homes that are still for sale they could get the inventories moving, but having completed homes sitting vacant means constant expenses. True, they can’t just leave the homes unfinished, but completing them and then waiting for the market to improve doesn’t sound like the best idea ever to me. Luxury builder Toll Brothers is doing something quite different: it refuses to cut prices, even though this may mean few, if any, sales. Something like the “best of both worlds”, - fine, if they can afford it.

Wednesday, November 14, 2007

Home Depot Feels The Heat

Home Depot, the home improvement store chain, had to cut its full-year outlook for 2007 after financial results came in somewhat weaker than expected in Q3. The company posted a 27% drop in quarterly profit, citing “tough environment” as the main reason. Net earnings dropped to $0.60 per diluted share, compared to $0.73 a year ago. Sales dropped 3.5% compared to the third quarter of 2006, “reflecting negative comparable store sales of 6.2%, offset in part by sales from new stores”, according to the retailer’s press release. Earnings per share are expected to decline by 11% in fiscal 2007, adjusted downwards from September’s forecast for a 9% decline.

“We started the year with a more pessimistic view of the housing and home improvement markets than many. It turns out we were not pessimistic enough”, said Chairman and CEO Frank Blake. Well, Home Depot is not the only company that wasn’t “pessimistic enough”.

Friday, November 9, 2007

Fannie And Freddie Under Fire

It was announced earlier this week that New York State Attorney General Andrew Cuomo is investigating Fannie Mae and Freddie Mac in relation to accusations that the two mortgage giants had purchased loans based on inflated appraisals from Washington Mutual. According to Cuomo, WaMu pressured eAppraiseIT, an appraisal company, to inflate home values on thousands of loans which were later sold to Fannie and Freddie. Freddie Mac replied immediately saying it will cooperate with investigators. WaMu and eAppraseIT said they did not breach regulations. WaMu’s stock price dropped 17% on the news, to the lowest level in 20 years.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), the GSEs’ regulator, however, expressed disappointment with the subpoenas. In a letter to Cuomo, he said that Fannie and Freddie “have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals”, and “you and your staff may not fully understand the differences between the mortgage-backed securities issued by the GSEs and those issued by other entities”. I can feel the rage.

Fannie and Freddie have operating rules in place, which say that if the loans they purchase are linked to inflated appraisals, the lender has to buy them back. Too bad for WaMu, it’s already suffering losses from failed subprime loans, so if it has to repurchase all the mortgages it sold to Fannie Mae and Freddie Mac, its financial situation could deteriorate further. For the time being, both companies are continuing to purchase WaMu mortgages.

Thursday, November 8, 2007

Dollar In Freefall

The dollar hit yet another record low against the Canadian dollar, which traded at $1.1040. This is the lowest rate since 1950. The Greenback fell against other currencies as well, and quite significantly. It hit a 26-year low against the pound at $2.1052, and a 23-year low against the Australian dollar, which was priced at nearly $0.94. The Euro traded at $1.47 yesterday, the highest since the inception of the 13-nation currency.

China announced that it will diversify its foreign exchange reserves, which may further weaken the dollar. Chinese officials no longer regard the dollar a “world currency”, according to Xu Jian, a central bank director. Analysts believe that further weakening of the dollar is likely, although some indices would suggest a bottoming out of the dollar’s freefall.

The dollar’s weakness pushed crude oil prices higher to a new record of $98/barrel, while gold reached a 27-year high. Good news for anyone trading in those commodities and for export companies. Add to this the facts that the economy isn’t exactly booming and troubles in the Real Estate market are far from over. And one of these days someone may officially call a recession. The world is changing…

Wednesday, November 7, 2007

Former Freddie Mac CEO Settles Dispute With OFHEO

The Government reached a settlement with Leland Brendsel, former CEO of Freddie Mac, who was involved in the mortgage giant’s accounting scandal back in 2003. Brendsel will have to pay a total of $16.5 million in fines and other costs, including giving back some of his salary and bonuses. The money will be used to assist homeowners facing foreclosure. Brendsel was ousted in 2003, when he was accused of creating a corporate culture that allowed earnings misstatements of $5 billion between 2000 and 2002. Four other former Freddie Mac executives settled charges by paying civil fines and restitution. In the future, Freddie Mac cannot hire Brendsel again without the permission of the Office of Federal Housing Enterprise Oversight (OFHEO). According to Kevin Downey, the former CEO’s attorney, Brendsel and OFHEO “disagree strongly about what happened in the past at Freddie Mac”.

Tuesday, November 6, 2007

PIMCO’s Bill Gross expects more rate cuts

Bill Gross, the chief investment officer of the world’s largest bond fund, said the Fed “cannot afford to let homes go down by 10 to 15 percent”, so it will inevitably cut rates. Gross expects the Fed Funds rate to fall to 3.5%. He estimates the total cost “of subprimes and Alt-As and basically garbage loans” at $1 trillion. Gross has been calling on the Fed to act to save housing for months, but apparently his bailout scenario doesn’t even incorporate such economic indicators as the dollar exchange rates and inflation. He warns that $250 billion in non-prime loans are about to default and those could hurt banking giants like Merrill Lynch and Citigroup. Hey, in fact that’s already happening.

According to Gross, reducing the Fed Funds rate to 3.5% will result in 30-year fixed mortgage rates dropping to 5.0-5.5%, which will magically solve all the problems in financial markets. A simple solution, isn’t it? What’s the Fed waiting for? His monthly market commentary gives a nice analysis of the economic situation at the moment, but I don’t think a drastic rate cut is a solution. When the Fed cut rates in September, mortgage interest actually increased instead of dropping. Perhaps a drastic cut will actually lower the 30-year mortgage rates, but it may also wreak havoc in other sectors of the financial market and it will most probably result in monster inflation. Gas at $5/gallon, anyone? Blame financial innovation, not interest rates.

Monday, November 5, 2007

Another Subprime Casualty

Last week everyone was talking about the departure of Merrill Lynch’s CEO, and this weekend it was Citigroup’s Charles Prince. He stepped down as Chairman and CEO after Citi announced losses in the billions of dollars, due to asset price writedowns and credit-related losses. Win Bischoff was appointed interim CEO, until the company finds someone to replace Prince. Robert Rubin, Former Treasury Secretary, was named Chairman of the board. Prince’s tenure was one marked with management experiments, shareholder dissatisfaction and risky strategy – a mixture that didn’t work out well in the end. Citi’s stock trades now at a price 17% lower than where it stood when Prince took over in 2003. Risky bets on subprime mortgage securities may result in $8 to $11 billion in writedowns for the bank, in addition to a $6.5 billion hit it took in Q3.

Friday, November 2, 2007

Interest Rates Fall Sharply

Interest on 30-year fixed mortgages averaged 6.26% this week, down from 6.33% a week ago, according to Freddie Mac. This is the lowest reading in five months and fairly close to the lows for this year. A year ago, 30-year fixed home loans stood at 6.31%. 15-year adjustable-rate loans carried an interest of 5.91%, down from 5.99% last week. Last year this time, 15-year ARMs were at 6.02%. 5-year ARMs averaged 5.98%, compared to 6.03% last week and 6.05% a year ago. 1-year adjustable home loans fell to 5.57% from 5.66% last week.

A RealtyTrac report showed that foreclosures have almost doubled in the third quarter, compared to Q3 2006. Although RealtyTrac numbers tend to be somewhat higher than other agencies’, you get the idea. Foreclosures were up 30% from the previous 3 months and according to RealtyTrac’s CEO James Saccacio, foreclosure activity is likely to “increase over the next year in many markets”. He also mentioned that August and September “were the two highest monthly foreclosure filing totals” since January 2005 when RealtyTrac began issuing the report.

Thursday, November 1, 2007

Fed Announces 0.25% Rate Cut

The Fed cut the Fed Funds Rate yesterday by 0.25% to 4.5%, no surprises here. It also announced that further cuts are unlikely, which sounds logical in the market environment we see. Easing the interest rate some more would prompt [even] higher inflation, so the Open Market Committee is probably done cutting for now.

The dollar dropped to a new low against the Euro yesterday, briefly breaking the psychological barrier of $1.45 per Euro. The currency showed some weakness even before the Fed started cutting rates, but since the September meeting it has been trading at record-low rates against the European currency. According to analysts, $1.50 against the Euro is possible in the near term.

… Which may be bad for the prices of imported goods and oil, but has positive effects on domestic product: the Commerce Department said that economic growth was at 3.9% in the third quarter, the highest level in more than a year. The next Fed meeting will be on December 11th.

Wednesday, October 31, 2007

Consumer Confidence Falls

The consumer confidence index dropped to 95.6, its lowest reading since October 2005. The decline was much steeper than forecast: analysts expected consumer confidence to drop to 99 from 99.8 in September. With all the scary headlines, high inflation, and foreclosures in nearly every neighborhood, who wouldn’t be worried? Another report shows home prices dropped 4.4% year-over-year in August, the biggest monthly decline since 2001 when the index was established. Homeownership declined further in the third quarter, to 68.1% from 68.3% the previous quarter, compared to a peak of 69.3% in 2004. And even more foreclosures may be coming as adjustable mortgages reset. In short, the housing market is not doing well at all, and this to a backdrop of rising oil and food prices, a weak dollar and increasing job market instability, which results in low consumer confidence. Low confidence often means low consumption which may trigger further job losses, and so on. This looks a lot like a vicious circle, and those are pretty hard to deal with. Let’s see what the Fed comes up with today.

Tuesday, October 30, 2007

Countrywide and KB Home: the worst not over yet

During a panel discussion hosted by the Milken Institute, Countrywide’s CEO Angelo Mozilo and KB Home’s President Jeffrey Mezger talked about the housing market, the Fed’s policy and surplus inventories. The worst is not over yet, according to Mozilo, and Mezger believes “things are going to stay tough for quite some time” for KB Home. Both agreed that lifting loan limits for “conforming” mortgages would help the industry, because the current limit is below median prices in many areas. Non-conforming loans that cannot be purchased by Fannie Mae and Freddie Mac come at a higher price, which further diminishes affordability and exacerbates problems in the housing sector.

So if they see more trouble ahead, how come Countrywide promised to post profit in Q4?

Monday, October 29, 2007

Countrywide’s quarterly results and promises

The mortgage lender we all love to watch and criticize reported its financial results on Friday. Losses were big, but not as bad as expected, so the stock price went up immediately. A loss of $1.2 billion, which equals $2,85 per share, for the 3rd quarter, down from $647.6 million on the positive a year ago, and shares still went up 30%. Origination volume shrank, probably due to better lending standards, which should result in higher-quality loans, and loan-loss reserves were increased significantly, to $934 million, from $38 million a year earlier. So what we can see is a better long-term outlook, if the company survives the current turmoil. This is the first time Countrywide reports a quarterly loss in 25 years, and the market isn’t showing signs of improvement, so there’s a chance the next one will be just as bad.

What helped stock prices was Countrywide’s forecast for future performance. David Sambol, the mortgage lender’s President, said the 3rd quarter was an “earnings trough” and things can only get better from now on. The management believes Countrywide will turn a profit of 25 to 75 cents per share in the fourth quarter and, according to Angelo Mozilo, continues “to be bullish about the longterm prospects of both Countrywide and our industry”. 3 months to go.

Friday, October 26, 2007

BofA to lay off 3,000 employees

Bank of America is exiting the wholesale mortgage business, and scaling back its investment banking unit, eliminating 3,000 jobs. It will stop offering home mortgages through brokers, and focus on lending directly to consumers through its banking centers and loan officers. Analysts believe more layoffs may be on the way.

BofA’s third quarter financial results were quite disappointing, with net income dropping 32% compared to the same period a year earlier. Several top executives left shortly after financial results were announced, including the head of global structured products, and the co-head of equities. Other banks saw earnings plummet, too. Wachovia Corp. reported a 10% drop in profits in Q3 and said it will eliminate 200 jobs by year end. Citigroup’s profit fell 57%.

Thursday, October 25, 2007

Home Sales slide in September

Now that the data is in, we can say that September sales did indeed drop dramatically. Total existing home sales fell 8% to a seasonally adjusted rate of 5.04 million units, compared to 5.48 million (revised downwards from 5.5 million) in August. That is more than 19% less than a year ago, when 6.23 million units were sold. Third-quarter numbers, however, were better than expected, with an annual sales rate of 5.42 million, somewhat higher than the NAR’s forecast of 5.38 million (unless numbers get revised again).

We now have a 10-month supply of homes on the market and it seems unlikely that this surplus inventory will be sold before the end of the year. As usual, Lawrence Yun, NAR’s senior economist, provided some comment, which I will not quote, because it is more of the same “all is good talk”, as usually wrapped in shiny complicated terminology that failed to conceal the underlying emptiness. Here’s a link to the press release for anyone interested.

Wednesday, October 24, 2007

An Unlikely Alliance

Not so long ago a nonprofit group called NACA organized a piquet in front of Countrywide’s offices, and now the two organizations are teaming up to help keep borrowers in their homes. Nice for Countrywide’s public image, good for NACA as well. Refinancing options will be offered to borrowers facing loan resets, totaling approximately 52,000 consumers holding $10 billion in loans. Consumers with good payment histories will be offered prime or FHA loans instead of their current mortgages. Loan modifications will also be offered to 20,000 prime and subprime borrowers who can’t afford to refinance. NACA will provide individual counseling and help borrowers develop an “Affordability Budget” to deal with their mortgage payments. Plans developed by the group will be submitted to Countrywide for approval and implementation. So the NACA’s efforts did pay off after all.

Tuesday, October 23, 2007

A Rate Cut Seems Likely

As the next Fed meeting approaches, the likelihood of another rate cut seems pretty high, although some doubts remain. The Government is manifestly not concerned about the dollar, as Treasury Secretary H. Paulson vetoed proposals to use the G7 final statement to warn of problems affecting European economies due to a weak dollar. This may mean that the currency will be allowed to fall further, should the Fed decide to cut rates to boost economic fundamentals.

However, another rate cut could accelerate inflation, and with oil hitting the psychological barrier of $90 a barrel, this could be a serious concern weighing on the Fed’s decision. Housing data for September coming later this week will be important for the Fed’s decision, too. There is no doubt that existing-home sales and new-home sales will fall, the question is whether the drop will exceed expectations, and how the Fed will interpret the data.

Monday, October 22, 2007

Countrywide asked to oust Mozilo

A pension fund advisory group called CtW Investment Group, has sent a letter to the board of mortgage lender Countrywide Financial, asking for Countrywide CEO Angelo Mozilo’s resignation. The American Federation of State, County and Municipal Employees said Mozilo should be replaced with two independent directors, and changes should be made to Countrywide’s executive compensation committee. While the criticism seems reasonable, they seem to be waking up to the facts a little too late. Mozilo’s stock sales caught media attention more than half a year ago and have been discussed in the blogosphere ever since but hey, better late than never.

In other news, the $350 million penalty Fannie Mae paid after accounting errors were exposed is now being distributed to investors who were harmed as a result of the fraud. Glad to know that.

Wednesday, October 17, 2007

D.R. Horton reports losses in fiscal fourth quarter

The second-largest homebuilder said orders dropped 39% year-over-year to the lowest level in nearly 6 years in its fiscal fourth quarter. Order cancellations were at 48%, up from 38% in the previous quarter. Chairman Donald Horton attributed the poor results to low mortgage loan availability, which hurts sales. Shares dropped 5.3%.

Market conditions are expected to remain challenging for months to come, according to industry officials. Federal Reserve Chairman Ben Bernanke said that housing will have a negative impact on the economy for the remaining part of the year and at least for some time in 2008. Builder sentiment is at its lowest level since the index was established in 1985. The index fell to 18 from a reading of 20 in September, which means that only 18% of respondents in the survey view market conditions as beneficial.

Tuesday, October 16, 2007

Banks suffer amid housing woes

Japan’s largest securities company Nomura Holdings Inc. will post a pretax loss of $620 million, its first quarterly loss in four years, caused by troubled residential mortgage-backed securities. It was also announced that Nomura will cut 400 jobs in the U.S. and shut down its residential mortgage-backed securities business. According to CEO Nobuyuki Koga, “the pace of the collapse” was quicker than expected. Japanese banks Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. also reported losses on investments in securities backed by subprime mortgages.

In the U.S., Merrill Lynch and UBS expect to report substantial losses with their third-quarter results, related to home-loan investments. Citigroup revealed a 57% drop in third-quarter profit, including higher-than-expected losses of $1.56 billion on mortgage-backed securities. No wonder that no one wants to originate subprime anymore.

Monday, October 15, 2007

Beazer Homes In Trouble

Here we go again. Beazer Homes Inc., one of the top U.S. homebuilders, announced that cancellations nearly doubled in its fiscal fourth quarter to 68% from the previous quarter. Whoa, this is what I call troubled business. With prices dropping absolutely everywhere and record high inventory of unsold homes on the market, it’s only natural that buyers will cancel their orders, even if it means losing a deposit of tens of thousands of dollars. Brace yourself, this company is headed for more turmoil, if not insolvency. This is sad, and Beazer is not the only homebuilder in trouble. In fact, they’re all in trouble, and the situation is unlikely to improve in the near future.

Furthermore, an internal investigation at Beazer found violations of federal housing regulations and accounting errors, which means that the homebuilder will be restating financial results dating back to 2004, no good for its reputation and stock price. Fines and penalties from the government are highly likely as well. Fitch Ratings downgraded Beazer to BB-minus from BB, which is junk-bond area and essentially means the company’s creditworthiness is, well, somewhat shaky. Fitch also said further downgrades are possible.

And by the way, Lone Star completed the acquisition of Accredited Home Lenders Holding Co. Happy end to the soap opera.

Friday, October 12, 2007

Countrywide boycotted

A community advocacy organization called NACA (Neighborhood Assistance Corporation of America) announced a nationwide boycott of Countrywide Financial, beginning Thursday October 11. The campaign aims to “get Countrywide to change its practices or be shut down”, according to NACA’s website. This is a new one. I generally dislike anything this radical and “activist”, but at least it’s a vivid illustration of the public opinion. But this is not the only piece of exciting news surrounding the mortgage lender.

Countrywide’s total mortgage fundings fell 44% in September compared to the same month a year ago, according to its monthly operating report. Subprime originations totaled $255 million last month, down from $3.1 billion in September 2006. The lender also cut nearly 5,000 jobs in September, leaving it with 55,932 employees.

It was also announced that North Carolina’s state treasurer Richard Moore has asked the Securities and Exchange Commission (SEC) to investigate changes Countrywide CEO Angelo Mozilo has made to his stock-selling plan earlier this year. Mozilo made changes to his 10b5-1 plan and unloaded stocks shortly before bad news sent shares tumbling down, thus selling stock when it was priced highest.

Now that Countrywide’s “Protect Our House” PR Campaign has officially kicked off, there’s significant demand for those green wristbands from collectors and members of the mortgage industry, so at least one Countrywide employee is selling his on eBay. The most interesting part of this is, the employee in question says he only wanted to generate cash, not make fun of his company. Fine, what the public liked most is the fact that it says “made in China” on the inside.

Thursday, October 11, 2007

Countrywide joins HOPE NOW

HOPE NOW is Treasury Secretary Henry Paulson’s initiative to help homeowners facing foreclosure. The coalition includes some of the largest mortgage service companies, counseling agencies, government officials, non-profit groups and trade organizations. The initiative aims to help borrowers stay in their homes, by restructuring their loans. Actions being taken include setting up special toll-free numbers for borrowers and providing information on mortgage options. Consumers are encouraged to contact their lenders as early as possible before they miss several monthly payments in a row. For more information, log on to

Countrywide Financial Corporation announced Wednesday that it is joining the alliance, too. “We have 2,700 trained professionals on our homeownership preservation team”, said Countrywide CEO Angelo Mozilo. The interesting part is, news about Countrywide joining the party comes along with the story on ACORN (Association of Community Organizations for Reform Now) picketing in front of Countrywide offices demanding loan modifications and cooperation from the lender. Protestors went so far as to call Countrywide a “predatory lender” during their demonstration at a branch in San Bruno, CA.

Wednesday, October 10, 2007

S & P believes housing crisis not over yet

Standard and Poor’s says losses from the housing turmoil will probably peak in 2009, with total defaults reaching $150 billion, although the global economic growth is expected to remain strong for the next two years. The U.S. economy will probably grow at a lower pace due to higher unemployment. S & P’s chief economist David Wyss also mentioned that he expects another rate cut before the end of this year and that the stock market is strong, so financial markets are probably “heading for expansion”.

This estimate, however, may be somewhat optimistic, given the uncertainty reining in financial markets right now and the strongly “bearish” forecasts of some economists. Losses at mortgage lenders are still all over the news, so the mortgage industry is not likely to rebound in the coming months. Jumbo Loan lender Thornburg Mortgage announced yesterday that third-quarter losses on loan sales would be greater than expected, which resulted in an 11% drop in its stock price. Thornburg had expected a loss of $863 million, compared to the actual number it will probably report - $1.1 billion. The estimated loss of the lender’s mortgage securities portfolio was also revised upwards, to $268 million from $262 million. The company believes that it will be able to continue to fund new loans “provided market conditions do not deteriorate further”.

Tuesday, October 9, 2007

Subprime mortgage bonds losing value

According to Moody’s Investors Service, bonds securitized in 2007 may be the worst vintage ever, exceeding the delinquency rates of 2006 securities. Moody’s, S & P and Fitch Ratings are downgrading 2006 and 2007 subprime securities, as loan delinquencies and defaults reach record highs. We had a wave of downgrades shortly after the two Bear Stearns hedge funds collapsed, but the “party” is not over yet: a lot of this paper is still being reviewed by ratings agencies and more downgrades are on the way.

In this situation, the ones who get to win are hedge funds and investors who made bets on bad loan performance and high foreclosure rates, all the while lenders and funds that invested in subprime, or any mortgage-backed securities, suffered losses or went out of business altogether.

Monday, October 8, 2007

FDIC says, cancel interest-rate adjustments

It sounds a little off to me, but that’s the next brilliant bailout idea: modify loans that are about to adjust and “freeze” the interest rates. This is exactly what FDIC’s (Federal Deposit Insurance Corp) Chairman Sheila Bair asked lenders to do. Naturally, the changes should only affect “good” borrowers who occupy their homes, are current on their payments and own adjustable mortgages that haven’t reset yet.

However, surveys show that only a fraction of the ARMs scheduled to adjust in the coming months get modified, partly because of restrictions in the servicing agreements that limit the number of loans that can be modified. Investors who own the loans are unwilling to allow modifications because this will cause mortgages and the securities backed by them to lose value.

OK, ARMs were designed to adjust at some point, that’s their essence. Converting them to fixed home loans is against the rules – after all, they were marketed as a bet against economic fundamentals and market conditions that affect interest rates. And if a large number of ARMs do somehow get modified, who knows what may happen next? More troubled hedge funds? More credit rating downgrades? Elimination of all types of ARMs? I don’t think this is the solution yet.

Friday, October 5, 2007

Mortgage rates this week

Mortgage interest rates dropped this week after two consecutive increases, according to Freddie Mac data. 30-year fixed-rate mortgages carried an interest rate of 6.37%, down from 6.42% a week ago. 15-year fixed-rate mortgages averaged 6.03%, down from 6.09%. 5-year adjustable rate mortgages were at 6.11% compared to 6.15% last week. One-year adjustable home loans carried an interest of 5.58%, down from 5.60%.

A year ago, 30-year mortgages had an interest rate of 6.30%, 15-year fixed loans were at 5.98%, 5-year ARMs averaged 6.00% and 1-year ARMs carried an interest of 5.46%. Back then, however, the Fed Funds rate was higher. Well, this is supply and demand, and there ain’t much of the former in mortgage lending right now, so rate cuts can’t help borrowers. I’m reading a lot of grim forecasts for the months ahead, does the Fed (or anyone for that matter) have other fresh ideas?

Thursday, October 4, 2007

Countrywide launches “PR Blitz”

Countrywide officials must have noticed all the negative publicity that emerged lately, so now they’re starting a PR campaign in hopes to improve the company’s public image. Maybe I’m being cynical, but asking your employees to wear green wristbands (why green?) saying “Protect Our House” (!) is a little desperate.

It is hard to obtain reliable information on Countrywide’s lending practices and compensation structure, but the drop in share prices, Angelo Mozilo’s shameless unloading of company stock and a number of other events that grabbed public attention in recent months are pretty obvious and straightforward indicators of problems within the company and its financial standing. Maybe some of the bad publicity is false, maybe it’s exaggerated, but there’s hardly any doubt that this PR campaign is a response to disruptions within Countrywide that can’t be fixed by saying “Don’t worry, everything’s OK”, “we won’t take it!” (the bad publicity, that is), or by wearing a wristband. Waiting for more news on this.

Wednesday, October 3, 2007

Pending Home Sales Dropped Again

Pending sales dropped 6.5% to a record low in August, according to the National Association of Realtors. The drop was larger than forecast, and reflects stricter lending practices, higher borrowing costs, and low mortgage availability, especially for the so-called jumbo loans or loans for more than $417,000 which are not guaranteed by Government-chartered enterprises Fannie Mae and Freddie Mac. Pending home sales were down 22% year-over-year.

Pending sales are an indicator of future activity, so the August results could mean that September and October home sales will be lower as well. Although banks are seeing signs of improvement in credit markets, problems in the housing sector are far from over, which may prompt the Fed to cut interest rates again before the end of this year. The next Fed meeting is at the end of October.

Tuesday, October 2, 2007

Better Mortgage Disclosure At WaMu

Some good news for mortgage borrowers: better disclosure and fair lending are back. Oh well, we heard about new lending guidelines earlier this year, and many lenders have tightened their standards, but here comes the latest about Washington Mutual. Its brokers will have to adhere to a new set of standards, largely focusing on better disclosure and working in the clients’ interest.

The brokers will be asked to supply evidence that they provide disclosures and ensure that borrowers fully understand the terms of the loan and the compensation they will pay the broker. This pretty much reflects consumer complaints about unexpected and unnecessary fees as well as being driven into complex loans they did not understand. We’ve also heard about mortgage papers including terms that hadn’t been discussed previously and were unfavorable to borrowers. If WaMu has found a way to control mortgage disclosure, borrowers will probably have one thing less to worry about.

WaMu Chairman and CEO Kerry Killinger said, “We believe our mortgage broker standard and direct call program should become the new industry benchmark for brokers and lenders across the nation”. They seem to believe that a lot may change for the better when these new standards go into effect on October 9th. At the very least, this announcement will probably do a lot for their public image.

Monday, October 1, 2007

FHA To Prohibit Seller Financing

The FHA is about to publish new rules that prohibit seller financed down payment assistance programs. With such programs, sellers can give money to charities, which, in turn, help buyers with their down payments, for a certain fee. The IRS has found that many of these deals are abusive to borrowers, because the fees are often included in the higher price charged. Studies have shown that borrowers using the assistance programs are twice as likely to default on their loans as those who don’t receive assistance. Because seller financing is involved in 30 to 50% of FHA loans, there’s some fear that the new rule will keep some of the borrowers out of the market. Officials at the Mortgage Bankers Association and the AmeriDream charity are against the ruling. The new rule will go into effect 30 days after publication.

Friday, September 28, 2007

Rates On Fixed Mortgages move up

According to Freddie Mac’s weekly survey, 30-year fixed-rate mortgages averaged 6.42% in the week ended September 27. 15-year fixed-rate mortgages carried an average interest of 6.09%, up from 5.98% a week ago. Adjustable-rate mortgages declined this week, with the 5-year ARM dropping to 6.15% from 6.21% a week ago and the 1-year adjustable home loans at 5.60%, down from 5.65%. The demand for ARMs has dropped dramatically recently, as consumers try to escape adjusting loan payments and look for the safety of fixed-rate loans. Home loans are mostly used for refinancing, rather than home purchases, and the result is a 7-year low in new home sales in August. According to the U.S. Census Bureau and the Department of Housing and Urban Development, sales of new, single-family homes dropped 8.3% on a monthly basis in August to a seasonally-adjusted annual rate of 795,000.

Financial data for August doesn’t fully reflect the impact of the crisis that occurred mid-month, so we can expect even gloomier results when the business and economic stats for September are released.

Thursday, September 27, 2007

Mortgage Applications Decline

Mortgage applications dropped 2.8% last week, according to the Mortgage Bankers’ Association. Refinance applications increased 3.3% and the purchase index declined 8.3%. Apparently consumers are waiting for better news from the lending industry, and they’re probably disappointed with the latest interest rates. U.S. subprime problems are affecting banks worldwide, and it’s not just the hedge funds and BNP Paribas. In latest news, Switzerland’s second-largest bank, Credit Suisse Group, is cutting staff in its mortgage-backed securities unit. No units are being closed yet, but staff is reduced drastically. Subprime securities, until recently the bankers’ favorite toy, are not attractive anymore. The credit crunch and the ongoing financial turmoil have revealed mechanisms and interlinks in international finance that caught many by surprise. Economists are saying there’s more trouble ahead, but I guess many have already learned the important lessons. Perhaps the world is changing.

Wednesday, September 26, 2007

Home Sales Dropped In August

Home sales fell for the sixth month in a row in August, with a remarkable 12.8% year-over year drop. The seasonally adjusted annual sales rate was 5.5 million, the lowest figure since August 2002. Economists believe that August sales data does not fully reflect the consequences of the credit crunch experienced by financial markets, so September figures could be even worse. In this context, NAR’s Lawrence Yun did his best to lighten up the mood: “Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize”. Thanks, that was funny, you’ll find more on There’s a record 10-month supply of unsold homes on the market, and that is not going away before the end of the year. Analysts are saying that sales will not stabilize until mid-2008, and some believe even that is optimistic.

Amid the turmoil, home builders are feeling the pain, too. Home builder Lennar Corp. reported the biggest quarterly loss in its history, $513.9 million, or $3.25 a share. This was unexpected, because the lowest estimation predicted a loss of $1.21 a share.

Tuesday, September 25, 2007

Dollar record low vs. Euro

This is yet another of the “Fed-rate-cut-related” news, the U.S. dollar hit a record low vs. Euro on Monday with Euro trading at $1.4130. Counter-intuitive as it may sound, some analysts seem to be of the opinion that a weaker dollar is good for the economy, because it will make U.S. goods more easily affordable for other countries, which will allow higher exports. This, in turn, creates more work load for U.S. manufacturers, thus strengthening the job market. The Fed is expected to cut rates again before the end of this year, which may result in further weakening of the greenback. This may boost exports, but prices on imported goods will probably rise, reducing affordability. Economists believe hardships are far from over for consumers, but some of the largest banks are already saying they’ve seen the bottom and things are going to get better from now. cites officials at Lehman Brothers and Bear Stearns saying that the worst is “behind us”, and Goldman Sachs said the market is beginning to improve. Is this the beginning of an upward slope?

Monday, September 24, 2007

GSEs may have their caps lifted early next year

OFHEO (the Office of Federal Housing Enterprise Oversight), the regulator of Fannie Mae and Freddie Mac, said that the investment caps may be removed altogether for the two GSEs if they establish timely and audited financial reporting. This news comes shortly after the caps were placed 2% higher for both companies, which translates into additional $20 billion or so in investments for each company.

Whether or not this move will be made depends on what and how the two mortgage giants report when they file their annual financial statements for 2007. “Current financials with no material weaknesses is a key test”, according to OFHEO director James Lockhart. He also said that, “there’s a reasonable chance” that the caps will be “changed significantly” if not lifted. The investment caps were initially placed after accounting scandals rocked both companies’ reputations and credibility.

After all the recent activity and the disappointing results of the Fed rate cut, I smell panic.

Friday, September 21, 2007

In spite of rate cut, mortgage rates edge up

After the Fed cut the Fed Funds Rate on Tuesday, one would expect mortgage interest rates to ease. What they did, however, was climb higher. One possible explanation Freddie Mac’s chief economist Frank Nothaft gave is the increased number of mortgage applications after last week’s 4-month low in interest rates. One way or another, analysts are saying Ben Bernanke’s decision missed the mark. Oil, gold, and stocks moved higher, and those were doing quite well even before the rate cut. The Canadian dollar traded at $1.0001 for a while, something that hadn’t happened in more than 30 years, and is currently priced at $0.99 and above. The U.S. dollar fell against the Euro, too, and all this against a backdrop of a weak job market and high personal debt.

Furthermore, Ben Bernanke himself said we’ll see more foreclosures soon, and borrowers will keep defaulting on their mortgages in spite of the recent moves. He added that the Fed is monitoring the situation and is ready to step in if needed, but that doesn’t really sound like a good long-term plan. President Bush said the financial indicators are good and he is confident the economy will remain strong. Tell this to all the pessimists out there.

Interest rates on 30-year fixed-rate mortgages averaged 6.34%, up from last week’s 6.31%. 15-year fixed home loans were at 5.98%, compared to 5.97% a week ago. 5-year adjustable-rate mortgages increased from 6.21% to 6.17%, and 1-year ARMs carried an interest of 5.65%, somewhat lower than last week’s 5.66%.

Thursday, September 20, 2007

Regulators lift caps on Fannie and Freddie

Not so long ago, the Bush administration rejected a proposal to raise the limit on how much the two government-chartered enterprises can hold in their portfolios, but a new move by the OFHEO does exactly that. As of October 1, Freddie and Fannie can increase their mortgage portfolios by up to 2% annually, and the caps on both are now at $735 billion, compared to $727 billion for Fannie Mae and $724 billion for Freddie Mac until recently. This is much less than the 10% Fannie asked for, and the company didn’t fail to mention this in its statement: “the more effective response, given the extent of the market disruption, would be to raise our portfolio cap by at least 10 percent so that we can more fully address the ongoing turmoil”.

Christopher Dodd, Chairman of Senate Banking Committee, also criticized the move as “timid and inadequate”, but some analysts fear that lifting the caps on the two GSEs in unwise. Indeed, the Fed already did a lot by cutting the Fed Funds Rate by half a percent, essentially flooding the market with money, so allowing Fannie Mae and Freddie Mac to purchase more loans would trigger another short-lived iteration of the housing bubble. Pulling at levers to find out what happens could be very costly right now, so why not leave the market to fix itself? The rate cut is quite a dangerous experiment already, watch how the economy behaves until the end of the year and then decide what to do next. Now that Fannie and Freddie got their caps lifted a little, I guess it’s best to leave them as they are for a while, because it may take months to see the results of this week’s actions.

Wednesday, September 19, 2007

The Fed cuts rates

We had some doubts, but finally the Fed did cut rates – by half a percentage point, to 4.75%. And what we have now is plenty of opinions on what’s next. According to economists, the Federal Open Market Committee (FOMC) is likely to cut rates again before the end of this year, at least by .25%. The next cut could happen as early as October, at the next Fed meeting. Analysts seem to believe that the rate cut will be only a temporary relief to mortgage lenders. For borrowers, interest rates may change little, or not at all, depending on their loan terms and the index their interest rate is pegged to.

For some, however, the new rate may bring a big improvement for their monthly payments. Bank of America, for example, reacted immediately on the news, cutting its prime lending rate. Rates on credit cards are expected to drop, too.

Investors fear that the rate cut will have a negative impact on the dollar and the bond market, potentially driving the economy into a recession. Gold and stocks rose significantly after the cut was announced.

In other news, Accredited Home Lenders and Lone Star have amended their merger agreement. The new price for Accredited stock is $11.75, well above its market value at the moment.

Tuesday, September 18, 2007

NovaStar no longer a REIT

NovaStar has decided not to distribute a $157 million dividend related to its 2006 income. As a REIT (Real Estate Investment Trust), NovaStar would have to distribute at least 90% of its income to shareholders, but the company is dropping its REIT status, thus losing some tax exemptions. The company is also in danger of suspension or delisting from the NYSE due to the change in its status, but officials said the company is “in continuing discussions with the NYSE”.

Back in February, NovaStar said it was considering dropping its REIT status, but this summer it announced plans to distribute dividends to satisfy REIT distribution requirements. The new decision suggests that those plans are no longer relevant. The termination of NovaStar’s status is retroactive, effective January 1, 2006.

Monday, September 17, 2007

Greenspan “didn’t really get” how dangerous the housing boom was

Former Fed Chairman Alan Greenspan’s statement sounds totally out of place, given his role in the Real Estate bubble we saw in recent years. This irresponsible attitude has received a lot of criticism already, but I think there should be more to come. We don’t usually expect words like that from someone who’s supposed to understand the economy and make sure that it’s doing well. Oh, in fact all was good indeed – for a while. This raises a number of questions, ranging from “What was he thinking when he said this in an interview?” – because he should have predicted the reaction – to “Is he lying?” – because it’s hard to believe he really didn’t understand what was going on. But I don’t have the answers.

As eyes turn toward Greenspan’s successor, current Chairman Ben Bernanke and the Fed, which will be making its decision on interest rates this week, there’s little doubt that a rate cut will be announced. Analysts are instead speculating on whether it will be a half-point or a quarter of a point cut. Whatever the Fed chooses to do will have a serious impact on the economy, even leaving the rate as it is will send important signals to the financial markets. I can feel the tension…

Friday, September 7, 2007

More job cuts in housing-related businesses

Forget about steady job growth, several mortgage lenders have announced further staff cuts, and this is no small news. Weaker employment might further curb consumer spending, resulting in a weaker economy altogether.

Lehman Brothers has eliminated 850 positions, as it downsizes in response to tough market conditions. It is closing its Korean mortgage business and renaming all its residential mortgage origination and servicing businesses “Lehman Mortgage Capital”. Countrywide is taking another round of lay offs, eliminating some 900 employees. The last time Countrywide announced job cuts was less than a month ago. Cleveland-based National City said it will lay off 1,300 employees and stop issuing non-conforming loans that can’t be sold to Fannie Mae and Freddie Mac.

A study by Challenger, Gray & Christmas concluded that the 85% surge in layoffs last month was primarily caused by lenders scaling back. Not a very encouraging statistic. In this relation, MarketWatch published a very interesting article about the Fed’s opinion on the current economic conditions. And I thought the guys at the NAR were too optimistic.

Wednesday, September 5, 2007

NovaStar makes the news

NovaStar was one of the first lenders to get hit by the subprime meltdown, but it hasn’t stopped making the headlines ever since stock prices started freefalling in February. The big news this time is that its auditor, Deloitte & Touche, warns the lender may be unable to continue operating as a going concern – i.e., it may have to close down, soon, joining the ranks of more than 100 mortgage lenders that imploded this year, no big surprise. In fact, NovaStar has done really well surviving this far.

NovaStar canceled a $101 million stock offering, because it figured that, given the current market conditions and its stock price, the offering wouldn’t be in the shareholders’ best interest. Christopher Brendler, an analyst at Stifel Nicolaus said NovaStar is “having trouble with cash flows”. Another analyst - Friedman, Billings, Ramsey‘s Scott Valentin - said NovaStar will probably have to liquidate with the proceeds “being used to pay creditors”, leaving nothing to common equity holders. The lender announced that it will be cutting 275 jobs and closing 12 retail lending offices, leaving it with a staff of 600 or so. At the end of last year, NovaStar employed more than 2,000 people. The company announced that it will be modifying its business model and focusing on managing its portfolio of securitized loans. NovaStar shares dropped 16% to $7.16 on the news.

Tuesday, September 4, 2007

FHA Secure – a kind of bailout plan for prime borrowers?

Late last week, President Bush unveiled a new FHA program, called FHA Secure – a plan that is supposed to help troubled borrowers. The proposal, however, received much criticism immediately, because of its narrow scope and stringent requirements for borrowers. The program will secure loans for borrowers who own adjustable-rate mortgages and want to refinance into a loan with better terms. To qualify, borrowers will have to prove they’ve made their monthly payments regularly until the interest rate reset, (or if it hasn’t reset yet, that they’re current with their payments) and have at least 3% of equity in their homes. The maximum loan amount the FHA will guarantee is $202,000, or $362,000 in high-cost states, which makes the program quite useless for many consumers. The number of loans in the program is limited, too, so the entire thing will only help a fraction of the homeowners facing foreclosure on their homes. According to analysts, up to 3 million households might lose their homes in 2007-2008 due to rising mortgage interest rates.

Monday, September 3, 2007

More on Accredited & Lone Star

The details on Accredited Home Lenders and Lone Star’s merger negotiations are being discussed like a soap opera plot these days, with some writers calling Accredited the “love interest” of Lone Star. Unfortunately, Lone Star seems to find the lender less attractive these days, but Accredited refuses to sell itself at a lower price. On Friday, the mortgage company rejected Lone Star’s proposal and said it “will continue to pursue its lawsuit”. In an unexpected turn of events, this resulted in Accredited shares moving up 43% on Friday, to $9.05. And Lone Star wanted to buy this stock at $8.50? No way… Honestly, I still think Accredited should have accepted the new bid, or perhaps Lone Star should have given up, but obviously, the story line wasn’t written by me.

Friday, August 31, 2007

It’s official: Lone Star wants to amend tender offer

Yesterday, Lone Star delivered a letter to Accredited Home Lenders Holding Co.’s Board of Directors, which essentially asked for a substantial price cut on the company. It is clear to anyone that Accredited is worth well below $15.10 a share, and its price is declining with each passing day. Therefore, the new price Loan Star is offering is $8.50, “a premium of 35% over the closing price of the Company Common Shares on August 30, 2007”, according to the letter. Still a good price I would say, especially knowing that Lone Star could simply walk away from the deal – leaving the $12 million break up fee behind and after lengthy court proceedings, that is.

And as I read reports on home prices, I can’t help wondering what’s going on. Not that a decline of 0.1% vs. an increase of 0.1% makes much difference, but the way they present data is quite confusing. OFHEO (the Office of Federal Housing Enterprise Oversight, the regulator of Fannie Mae and Freddie Mac) came up with a 0.1% increase in home prices in Q2, and growth of 3.2% year-over-year, the slowest in a decade. Naturally, OFHEO Director James Lockhart didn’t fail to mention that “significant price declines appear localized in areas with weak economies”, but I would say these numbers are too vague because of the way they’re calculated. An index compiled by Standard & Poor’s Corp. showed that home prices declined 3.2% from last year, how’s that for slow house appreciation. Naturally these indices are calculated in different ways and based on different sets of data, so it’s hard to compare, but they both paint similar pictures of the housing market: no more “easy money” and “rapid appreciation”, this is the bursting of the housing bubble (or so say the pessimists).

Thursday, August 30, 2007

Bernanke comments on the mortgage crisis

On Aug. 27th, Fed Chairman Ben Bernanke sent a letter to Senator Charles Schumer, in which he said there’s no need to lift the caps on Fannie Mae’s and Freddie Mac’s portfolios. A similar opinion was expressed by OFHEO (Office of Federal Housing Enterprise Oversight), the federal regulator of the two GSEs’, and President George Bush a couple of weeks ago when a suggestion to lift the portfolio limitations on Fannie and Freddie was rejected. Bernanke said that policy makers may encourage Fannie and Freddie to package more loans into securities and sell them to investors, as these actions are not constrained by the portfolio caps. Bernanke also said that the Fed is closely monitoring the financial markets and “is prepared to act as needed” to prevent bigger problems.

Bernanke suggested developing new mortgage products for low- and moderate-income borrowers that would not cause unexpected spikes in mortgage payments. Clearer explanation of loan terms would also be beneficial to potential borrowers. He also noted that reforming the FHA (Federal Housing Agency) might be helpful.

Analysts believe that these comments spell a high likelihood of a Fed rate cut on the next meeting Sept. 18. Another speech by Bernanke is scheduled for this Friday, and it may well shed some more light on what the Fed is about to do.

Wednesday, August 29, 2007

IndyMac hiring former American Home employees

IndyMac has hired 600 loan officers who lost their jobs when American Home Mortgage filed for Chapter 11 bankruptcy protection a few weeks ago. American Home fired 6,000 employees when its lenders refused to provide further financing after the lender failed to meet margin calls.

Such a move by a mortgage lender is quite unusual in the current circumstances, as most mortgage companies are downsizing amid shrinking credit availability and financial turmoil. According to this website, more than 100 mortgage providers have gone out of business so far this year, but the problems are not contained to subprime lending alone or even to mortgage lenders in general. According to a CNNMoney article, credit card delinquencies have risen significantly from last year. Until recently, credit card payments could be financed by tapping home equity, but now that a large percentage of all homes have virtually no equity left in them, credit card delinquencies are likely to rise further.

Tuesday, August 28, 2007

Subprime crisis scarier than terrorism

A survey performed by the National Association of Business Economics found that experts believe loan defaults and the ensuing financial crisis are the biggest short-term threat to the U.S. economy. Until recently, terrorism was considered the #1 threat. 32% of the participants of the survey named the subprime crisis as the biggest threat to the economy. Terrorism came at #2 with 20%. Other issues on the list included inflation, government spending and the account deficit. The cost of health care was also mentioned as a major concern.

And now that everyone admits that subprime is indeed a problem and that it is already contaminating the entire economy, we don’t really see a solution coming from any of the usual suspects. What we’re seeing is more panic, because the current situation is unprecedented, so analysts don’t know what to expect. Nothing good in any case, I guess.

Monday, August 27, 2007

Credit panic and foreclosure bailouts

Brilliant “bright” ideas on how to prevent a looming financial crisis are raining from everywhere. Just in the past few days, the following proposals have been all over the news.

PIMCO’s Bill Gross urged the White House to bail out troubled home owners: “If we can bail out Chrysler, why can’t we support the American homeowner?” I would say that the Chrysler bailout wasn’t a very good idea either, but then the government had its own reasons for it. In my opinion, it would be totally unfair to pay for borrowers’ unsound financial decisions with other taxpayers’ money. According to this blog entry, it turns out Mr. Gross himself is heavily invested in mortgages and further foreclosures would sting him quite badly. So that’s why we need to bail out borrowers.

Another brilliant plan comes from presidential candidate Senator Christopher Dodd (D-Conn). What he suggests is, to allow the Federal Housing Administration (a.k.a. FHA) to refinance troubled loans. He believes that the FHA does not serve its purpose well and needs to be reformed is order to be able to help homeowners-to-be. Dodd suddenly appeared among those “concerned” about housing several months ago, and started criticizing the government and the existing system, proposing some rather dubious solutions. Dodd also supported the idea to lift the investment caps on Fannie Mae and Freddie Mac’s portfolio, a move that would allow an inflow of financing on the market. The idea was rejected.

I really wish all these activists were this creative a couple of years ago and invented an economically sound way of “saving the economy”. Unfortunately, right now we are indeed facing serious problems that need to be solved, and every solution seems to have “unwanted side effects” for the economy, the dollar, or the average consumer. Every foreclosure is a particular family’s tragedy, but many of the loans defaulting now should have never been made, and those who were involved in the process only have themselves to blame. It is true that the entire business was infested with fraudulent activity, but in the end everyone had a choice. Sadly, greed often prevailed.

Meanwhile, the Fed has some “bright” ideas of its own. According to CNN, the central bank has temporarily exempted Citigroup and Bank of America from limitations on the amount of money they can lend. So this is more of the same – a move to artificially boost cash flow in a market that is essentially stagnant. Sounds good for a short-term solution, but in the end market forces should be allowed to play their part in the whole thing.

Friday, August 24, 2007

Banks won’t borrow at the discount window

The Fed’s offer to lend at 5.75% to banks wasn’t exactly embraced this week, as only a total of $2 billion was borrowed. Most interestingly, the borrowers were four major banks – Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., and Wachovia Corp., each borrowing $500 million, to show solidarity with the Fed’s attempt to help the financial market. The problem is, the ones in need of financing are smaller companies, such as mortgage originators, hedge funds and their like, who generally borrow from some of the above mentioned, because they can’t borrow directly from the Fed. Banks, however, do not wish to have anything to do with mortgage companies at the moment, because the latter are very much likely to default on any loans extended to them. Therefore, the Fed’s move didn’t help anyone much.

According to an article on, all four banks had access to cheaper credit, so it’s definitely not urgent need for liquidity that made them borrow from the Fed.