Thursday, May 31, 2007

Pulte Homes cuts workforce

Homebuilders have been struggling with financial difficulties since the beginning of 2007, and layoffs in the industry are not uncommon. Ethan Harris, chief economist at Lehman Brothers, says there have been cuts already, but there’s more to come.

However, a large part of the layoffs and the resulting unemployment are not reflected in official statistics, because many of the construction workers are illegal immigrants. When the market slows down, contractors and illegals are the first to be fired.

Pulte Homes, one of the largest homebuilders in the U.S., announced it is going to cut workforce by 16%, or about 1,900 jobs. CEO Richard J. Dugas Jr. says that, despite laying off 25% of its employees, the company still isn’t small enough for the present market conditions. Pulte recorded a loss of $85.7 million in the first quarter of 2007.

In spite of it all, unemployment is currently at 4.5%, the lowest level in several years. Perhaps that is about to change…

Wednesday, May 30, 2007

David Seiders: Home construction may take until 2011 to recover

David Seiders, chief economist for the National Association of Home Builders (NAHB), said the current bust in home construction may last until 2011. Until then, construction will probably stay below last year’s levels.

Latest economic data on home prices and home construction has been more than gloomy, suggesting that the housing “slump” is far from over. Construction starts were 1.53 million in April according to the Commerce Department, compared to 2.29 million in January 2006. According to Seiders, “We’ve fallen way below trend”, because activity was especially strong during boom times. Unsold inventory is at the highest levels since 1999 when the National Association of Realtors started keeping track of it.

New-home sales increased in April, driven up by sharp declines in home prices. In addition to offering various incentives to home buyers, developers are now slashing prices by 10-20 percent and even more. The median price of a new home fell 11 percent year-over-year in April, to $229,100. Sales of previously owned homes fell to the lowest level in nearly four years, bad news for anyone hoping to sell their home at a reasonable price.

Bad time for home builders so far, but with inventory this high, it seems that things are going to get even worse. Staying in the business and avoiding losses is hard enough already, and making any profit in 2007 seems out of the question.

Tuesday, May 29, 2007

Ex FBI Special Agent joins Fannie Mae Board

Fannie Mae announced last week that Louis Freeh, former FBI director, was elected to join the mortgage giant’s Board of Directors. He is going to serve on the compliance and compensation committees, becoming the eight new director elected since 2004.

This move will improve Fannie’s connections to Congress and the White House at a time when tightening federal oversight over the two Government-Sponsored Enterprises is being discussed.

Freeh has served as an FBI Special Agent from 1975 to 1981; in 1993, he was appointed director of the FBI, where he stayed until 2001. He has received much criticism for his especially radical statements and demands in connection with law enforcement, public organizations and intelligence. A controversial, but powerful figure, he will certainly have a serious influence on Fannie Mae. “Louie’s impressive legal background and experience working in the financial services sector and on corporate boards will be important assets for the company and our shareholders”, said Stephen B. Ashley, Chairman of the Board.

Freeh is currently a lawyer in the private sector; he participates in the board of directors of credit card issuer MBNA, Bristol-Myers Squibb and Gavel Consulting Group.

Friday, May 25, 2007

“Creative financing” – the new way

Not so long ago Bank of America launched its “no fee” loan, which virtually waived mortgage insurance and fees for application, appraisal, loan origination, flood determination and several others. Borrowers are still required to pay some of the costs, and the interest rate is slightly higher than the average, but nevertheless Bank of Americas' terms are very, very competitive and officials claim that theirs is the best deal available.

Competitors, it seems, will follow the example. Washington Mutual now offers a flexible mortgage that allows borrowers to switch between fixed or adjustable rates without refinancing – at little or no cost. Credit unions are joining with a “home loan payment relief” loan, or HLPR. Like an adjustable-rate mortgage, it offers a reduced interest rate for the first two or three years, and then adjusts to a higher rate. Unlike an ARM, however, an HLPR is predictable, because the new rate is determined at the closing of the loan. The new rate equals the national average at the time of the initial loan, so borrowers know exactly what their payments will be long before their rate adjusts.

Eligibility for the new products is usually restricted to low- and moderate-income households and first-time homebuyers. Nevertheless, these products might at last offer the solution to subprime-lending troubles and a sensible way to finance home purchases. No more double-digit profits for lenders, but sound, smart loans that don’t take advantage of borrowers. More than 50 loan providers are out of business already, the rest are learning what it takes to survive a housing downturn.

Wednesday, May 23, 2007

Oversight of Fannie Mae and Freddie Mac approved

On Tuesday, May 22, the House of Representatives passed a bill that tightens federal oversight over mortgage giants Fannie Mae and Freddie Mac. The bill would create a new regulator to oversee the Government-Sponsored Enterprises.

In House action last Thursday, the bill was amended and the regulator’s authority was trimmed. The Bush administration, which insisted that the regulator have control over the companies’ mortgage portfolios, may not support the amended legislation. This influences the bill’s chances for congressional passage.

For the first five years, the companies will have to set aside some $500 million of profits annually into an affordable-housing fund. The fund will be used to provide housing for victims of Hurricanes Katrina and Rita in the first year, and for affordable housing construction later. Republicans, who opposed the bill, say that the housing fund will actually be paid for by middle-class homeowners, because it will require a “mortgage tax” to be paid on every loan Fannie Mae or Freddie Mac finances.

Earlier attempts to enact such legislation have failed.

Tuesday, May 22, 2007

A gloomy outlook from the NAR

The National Association of Realtors is adjusting its forecast for the housing market activity in 2007. Due to problems in the subprime lending sector, expectations for existing home sales in 2007 are lowered to 6.29 million, from an earlier forecast of 6.34 million. In 2006, sales reached 6.48 million. A month ago, the NAR predicted the median existing home price to drop by 0.7% this year. Realtors are now adjusting that number to 1%, which will result in a median price of $219,800. An increase of 1.4% is expected in 2008.

The median price of a new home will probably be reduced by $100 to $246,400, as opposed to earlier estimates of a 0.4% increase. New home sales are expected to reach 864,000 in 2007 and 936 in 2008. NAR expects the median new home price to gain 2.2% next year.

NAR believes the slowdown will be moderate, because unemployment is low, and household incomes are up. This “soft landing” will probably be followed by a gradual increase in home sales in the second half of the year, according to the NAR.

Bank of America’s new mortgage product

Bank of America now offers a no-fee mortgage to home buyers. The lender will not charge for loan applications, title insurance, appraisals and flood certifications. Private mortgage insurance, usually required when a borrower makes a down payment of less than 20%, will not be compulsory either.

Some costs, however, will still be paid by the borrower, including property insurance and taxes, recording taxes, and other services, such as home inspections.

Bank of America officials believe that mortgage borrowers are likely to take advantage of the bank's other services and less prone to switch lenders. Refinance loans and loans taken through mortgage brokers do not qualify for the program. To take out a no-fee loan, borrowers must have at least one account with Bank of America and obtain their loan trhough the bank's retail channels. The bank claims it has already issued $1 billion in no fee loans.

Meanwhile, the Fed Funds Rate, to which mortgage rates are tied, remains at 5.25%. The Fed decided to keep rates unchanged for the seventh consecutive time.

Monday, May 21, 2007

NovaStar accused of discrimination

On May 9, the National Community Reinvestment Coalition filed a lawsuit against NovaStar Mortgage, a subsidiary of NovaStar Financial, accusing the lender of repeatedly violating the Fair Housing Act. NovaStar is said to have repeatedly refused to provide financing for row houses, homes in Indian reservations and on houses that may be used to care for disabled adults.

Such practices are considered a discrimination against ethnic minorities and people with disabilities, because row houses tend to be occupied by African Americans and Latinos, and homes in reservations by Native Americans.

NovaStar called the charges “baseless”, and explained that row houses are associated with appraisal fraud, while homes located in reservations are governed by “different sets of laws”. The Coalition also intends to file lawsuits against other lenders involved in similar practices.

Tuesday, May 15, 2007

30-year mortgage rates edge down

Rates on 30-year fixed-rate mortgages averaged 6.15% for the week ending Thursday, May 10, according to Freddie Mac. A slight decline from last week’s 6.16% and even closer to this year’s lowest rate of 6.14%, reached in early March. At this time last year, 30-year fixed-rate mortgages were at 6.58%.

The decline was attributed to a weak employment report for April, which showed that a mere 88,000 jobs were created, the lowest level of growth since November 2004. Employment reports for the two previous months were revised downwards. Weak economic data, however, helped ease fears of climbing inflation, which drove interest rates down.

15-year fixed-rate mortgages carried the same interest as last week, 5.87%, while the five-year and one-year adjustable-rate mortgages edged higher, to 5.89% and 5.48% respectively.

Countrywide to hire staff

Countrywide intends to hire an additional 2,000 employees this year, the company announced on Monday. These additions will allow the lender to open 100 new branch offices, according to company CEO Angelo Mozilo.

What’s going on here? Countrywide is not doing that well financially, plus we officially have a slump in the mortgage market, plus most lenders are cutting staff and closing branch offices. Why is Countrywide suddenly hiring more people and opening new offices? Mr. Mozilo announced at the UBS Financial Services Conference on Monday that Countrywide intends to increase its market share and additional staff is needed to achieve this goal. And while it is true that Countrywide has managed to stay afloat so far, I don’t yet see how this is going to work.

Thursday, May 10, 2007

Interest Rates Going Down

Average mortgage rates declined in the week ending Thursday, April 26, according to Freddie Mac. 30-year fixed-rate mortgages carried an interest of 6.16%, a slight drop from last week’s 6.17%. Current rates are approaching the lowest level for the year so far, 6.14%, recorded in early March. 15-year fixed-rate mortgages also decreased to 5.87%, down from 5.89 a week earlier. 1-year adjustable-rate loans had an interest rate of 5.43%, slightly lower than last week’s 5.45%. The 5-year hybrid ARM dropped to 5.88% from 5.92. Freddie Mac’s chief economist Frank Nothaft attributed the decline to weaker existing home sales in March and lower consumer confidence in April.

Rates are way below year-ago levels, when 30-year fixed-rate mortgages carried an average interest of 6.58%, 15-year mortgages were at 6.21%, 1-year adjustable-rate mortgages had a rate of 5.68% and 5-year hybrid ARMs averaged 6.21%.

Housing Lump Not Over Yet

And now, a sober look at the housing market from Freddie Mac’s CEO Richard F. Syron. Rising interest rates on high-cost mortgages could cause a spike in foreclosures in the next few years, he said in an interview with The Associated Press. He sees the mortgages issued in 2006 as “the most troublesome”, because of the loose lending standards that spread throughout the industry. Payments on these loans will only begin to adjust in the next few years, potentially causing yet another wave of delinquencies and foreclosures.

Freddie Mac and Fannie Mae, the two government-sponsored loan financiers and largest buyers of home mortgages, are currently developing programs to help keep troubled lenders in their homes. These will include new types of hybrid adjustable-rate loans with longer fixed-rate terms and mortgages with longer repayment terms. Freddie Mac also announced that it will purchase $20 billion in mortgages to help consumers avoid foreclosure. According to Syron, these measures will not suffice to save everyone. They’re rather aimed to help “individual people”. Reversing the market dynamics, however, will take a lot of time.

He also spoke at the “Housing Boston 2012” conference. He said zoning restrictions are standing in the way of providing affordable housing and that residents of established neighborhoods need to rethink their reasoning behind such restrictions. In cities like Boston, lack of supply makes Real Estate harder to afford.