Friday, June 29, 2007

No changes in the Fed Funds Rate

As expected, the Federal Open Market Committee decided to keep interest rates at 5.25% where they’ve been for a year now. The Fed’s announcement suggested that inflation is still a concern but the situation is improving somewhat. The next Fed meeting is scheduled for August 7th.

Last week’s interest rates, not surprisingly, showed modest declines, with the 30-year home loan at 6.67%, down from 6.69%, and 15-year fixed mortgages slipping to 6.34% from 6.37 a week earlier. 5-year adjustable-rate mortgages carried an average interest rate of 6.30, slightly lower than the previous week’s 6.31, and one-year adjustable-rate mortgages averaged 5.65%, down from 5.66.

Commenting on this week’s housing-related news, Freddie Mac’s chief economist Frank Nothaft said, “This week we saw further effects of the current housing recession”. A slightly unusual choice of wording, but “recession” is a word everyone uses today anyway. What is worrying economists is the fact that it might grow bigger than a “mere” “housing recession”. Unfortunately saying that the economy at large won’t be affected by the housing slump does little to improve the situation, but it’s hard to tell how to prevent trouble. Perhaps the Fed knows.

Thursday, June 28, 2007

Mortgage applications drop

This week’s MBA mortgage application index provided yet more proof that troubles in the housing market are far from over. Applications fell 3.9% to a four-month low, as higher interest rates and increased inventories scared off buyers. The purchase index dropped 4.9%, and the refinancing index was down 2.5% at its lowest level for this year.

It’s now mid-2007 and no signs of improvement are to be seen. The housing slump seems to be getting much more serious than expected, and economists believe it may well extend until the end of the year and beyond. Furthermore, sales and prices are dropping, but yet inventories aren’t moving. Lennar Corp., the largest U.S. homebuilder, reported financial losses for the quarter ended May 31, and observed a drop of 31% in new orders. As long as inventories stay on the market, home builders will continue to suffer losses, but buyer activity is still relatively low, and things may get worse when the “active” summer season ends.

…We’ll be anticipating the Fed’s statement…

Wednesday, June 27, 2007

New Home Sales dipped in May

A report issued by the U.S. Census Bureau and the Department of Housing and Urban Development demonstrated that sales of new single-family homes declined 1.6% month-over-month in May. Given the record jump in sales in April, this decline is no big news and hardly indicative of market trends. Sales of new homes have fallen in every month except for April, erasing hopes for a rebound in housing. Interestingly, the margin of error for new-home sales is 10.8%, essentially higher than monthly fluctuations, which means that most of these numbers could turn out to be very, very inaccurate. The median price dropped to $223, 700, down 2.1% from last year.

Freddie Mac’s Treasurer Timothy Bitsberger said the housing slump is “contained”, which is probably the equivalent of “all is well”. The Real Estate market, however, is already threatening the economy at large, after two Bear Sterns hedge funds that had invested in mortgages collapsed. This may or may not cause a revaluation of similar structures and whole classes of securities, but already indicates trouble among large Wall Street investors. The housing slump is more severe than what the public is led to believe, and covering up problems is getting harder and harder.

Tuesday, June 26, 2007

Existing home sales steady in May

According to the NAR, existing home sales slipped a mere 0.3% in May, compared to April figures. Year-over-year, however, this is a 10.3% drop. Inventory moved up to the highest level in 15 years, but Quicken Loans’ Bob Walters believes that “we’re still in the early stages of a slow developing market stabilization”. What I heard is that the situation will at the very least remain as bad for several months. I wonder what David Lereah would say at this point if he still worked at the NAR.

And if low sales sound “surprising” to Bob Walters, it doesn’t take a scientist to realize that waiting on the sidelines is quite a wise thing for buyers to do. No one wants to spend their last savings on a house and watch its price drop as the “housing slump” gets worse. Why not wait for a month or two and spend less on the very same purchase, knowing that you won’t lose the equity in your home to market fluctuations?

New homes might sell better than the existing ones because builders are generally more desperate to unload houses and willing to cut prices or offer free additions to buyers. We’ll find out how those are doing soon enough.

Monday, June 25, 2007

The week ahead: a Fed meeting, and so much more

The Fed will be discussing financial matters on Wednesday and Thursday, and, although a change in interest rates is unlikely, economists will be paying much attention to the Federal Reserve’s statement, to be issued at the end of the meeting. With inflation at an annual rate of 2.2, chances for a rate cut seem to be non-existent, as the Fed aims to contain inflation in the 1 to 2% range. The official statement, however, will have a considerable impact on the market’s performance.

Other statistics to be reported this week include existing home sales, new home sales, a survey of consumer sentiment, and a revision of the Gross Domestic Product. All this should provide a clearer picture of the current economic situation, and some insight into the housing market’s near future. Most publications indicate serious pessimism in regard to Real Estate and predict that more bad news is on the way.

Home builders Lennar Corp. and KB Home will be reporting quarterly results this week. Home builders are generally suffering losses in the current market, as both sales and prices decline and homes stay on the market for months, so their reports will provide valuable information on housing as well.

Friday, June 22, 2007

NovaStar pays $5.1 million to settle class-action law suit

NovaStar, one of the subprime borrowers hardest hit by the current Real Estate market slowdown, has agreed to pay $5.1 million to settle a lawsuit accusing it of charging excessive interest rates to cover broker fees. The sum includes $3.3 million in payments to 1,600 class members and $1.8 million for legal fees.

As problems in the subprime sector started emerging, borrowers and investors began filing class-action lawsuits against subprime lenders, accusing them of various wrongdoings. Some law suits are already getting settled, and I guess this comes as a relief to many. NovaStar said it does not admit any liability, and decided to settle the case because it was an obstacle to a possible sale. Officials claim that the company has followed “standard practices in the mortgage industry that comply with the law and applicable regulations” – which doesn’t say much, since regulation has been quite loose on lending practices and many procedures that became standard within the industry were not in borrowers’ best interest.

Meanwhile, mortgage rates eased somewhat this week, but are still higher than earlier in the year. Interest on 30-year fixed rate mortgages averaged 6.69 this week, down from 6.74% a week ago. 15-year fixed-rate loans dropped to 6.37% from 6.43% last week, 5-year hybrid adjustable-rate mortgages were at 6.31%, down from 6.37%, while 1-year adjustable loans averaged 5.66%, compared to 5.75% a week earlier.

Thursday, June 21, 2007

Mortgage applications fall

After last week’s sharp increase in interest rates, mortgage applications fell by 3.4% this week. This sounds logical to me, but industry officials seem to be surprised that activity hasn’t increased now that interest rates have stopped rising. And all the talk about “near-historic lows” in interest rates sounds all too familiar and unrealistic, given recent activity. Economists keep repeating that all is good like a broken record, in the face of all evidence to the contrary.

Now that the spring season obviously failed to bring around the “rebound” everyone had been expecting, there’s talk about a coming improvement in the remaining summer months, as owners and builders keep cutting prices, etc., etc. Face it: the Real Estate market will not all of a sudden “rise and shine” because someone says it will be so. It will be several months before any improvement takes place.

Wednesday, June 20, 2007

Construction declined in May

New construction dropped 2.1% in May from a month earlier, and was 24.2% lower than last year. Permits were up 3%, but that came after a 7.1% drop in April, so the rebound is not that significant

David Seiders, chief economist for the National Association of Home Builders, predicted that new construction will decline by 22% this year. “Improvements in housing starts”, he said, will come no earlier than next year.

Housing starts dipped 3.4%, and were 26% lower than in May 2006. All regions reported year-over-year declines, but monthly data varied. In the Northeast, starts increased by 0.9% month-over month, but were down 20.6% compared to May 2006. In the West, starts were down 12.1% from April and 33.3% from a year earlier. In the Midwest, starts increased by 9.1% month-over-month, but were nevertheless down 23.2% year-over-year. In the South, single family starts declined 3.4% on a monthly basis and 24.2% from May 2006.

All this comes to say that monthly fluctuations of 1-2%, whether up of down, do not change the bigger picture. Currently demand for housing is exceptionally low, due to a number of reasons, and naturally this is dragging construction down. As long as inventories – and home prices – remain high, construction will not show any improvement.

Tuesday, June 19, 2007

Homebuilder confidence is dropping

The homebuilder sentiment index, which tracks how builders evaluate the market situation, reached the lowest reading in 16 years in June. The index dropped to 28 from 30 in May, a sign that even more builders are pessimistic about market prospects.

According to the National Association of Home Builders (NAHB), home prices will continue to decline until the end of the year, and housing will be “a drag on economic growth” in 2007. Troubles in mortgage lending are affecting home builders, who “continue to trim prices and offer a variety of non-price incentives” to prospective buyers. Since February, when the index reached 39, builder confidence has been falling steadily, to rates dramatically lower than a year ago. In June 2006, builder sentiment was at 42.

Monday, June 18, 2007

Fair Isaac to put a stop on “credit score borrowing”

A credit score scheme that emerged recently allowed consumers to boost their credit scores in as little as several weeks by being added – for a pay – as an authorized user on someone else’s credit card with a long history of perfect payments. Parents often add their children as authorized users on their credit cards, in order to help them establish credit and improve their scores. Adding strangers as authorized users, however, is considered a scheme, even though no regulation currently defines who can be added and the maximum number of authorized users on a credit card.

Businesses that offer the service actually help borrowers manipulate the credit scoring system and get better terms on any loans they apply for. Some borrowers wouldn’t be able to get loans if they didn’t get a “credit boost”, which is why banks are increasingly concerned about the practice. Fair Isaac, the company which created the FICO scoring system is working to modify the score. As of September, the cardholder’s credit will not be transferred to authorized users, which will essentially stop the scheme, but will also harm law-abiding borrowers who wish to help their children establish good credit.

Friday, June 15, 2007

Mortgage rates moved up again

Reading mortgage-related news has been quite boring lately. Another story on low price appreciation, another story about a family of immigrants who were driven into a mortgage they couldn’t afford, some politician inventing new ways to preserve home ownership, some gloomy stats from the MBA … I’m almost getting used to all this. And then – shock horror – mortgage rates keep rising steadily for weeks and weeks. We were talking about 6.15% on a 30-year fixed-rate mortgage a month ago, and now the rate is 6.74%, up from 6.53 last week. Another bite out of affordability.

According to data released by Freddie Mac, 15-year fixed-rate mortgages carried an interest of 6.43, up sharply from 6.22% last week, and the five-year adjustable-rate home loans were at 6.37%, compared to 6.24% a week ago. One-year adjustable-rate mortgages averaged 5.75%, an increase from last week’s 5.65.

Another report issued by Freddie Mac on Thursday is drawing analysts’ attention – its first quarterly financial results in several years. Freddie Mac announced a loss of $211 million, or $0.46 per share, way lower than the expected $1.01 gain. Last year, Freddie Mac reported profit of $2 billion, $2.80 a share. Richard Syron, Freddie Mac’s CEO, however, believes that the company is on the path to stabilization and its “credit position has remained strong”. We’ll be looking forward to second-quarter results.

Thursday, June 14, 2007

Foreclosures jumped 90% in May

Home foreclosures increased 90% from a year earlier in May, according to RealtyTrac data. The total of 176,137 foreclosures was 19% higher than the April number. Economists fear that the rate of foreclosures will accelerate in the coming months, which will pour additional homes on the already glutted market, all this amidst what turned out to be a not-so-robust-at-all spring/summer buying season. Such a scenario spells serious trouble for home builders, many of which are experiencing financial difficulties and even closing doors.

On average, there was 1 foreclosure for every 656 U.S. households in May, the highest total filings being in California, Florida, Ohio, Texas, Michigan and Georgia. Home prices, however, have not yet seen sharp drops. They have declined somewhat, but not enough to lure large numbers of buyers to the market. With less cash in their homes and less credit available, consumers hesitate to purchase Real Estate now.

Wednesday, June 13, 2007

Lenders are adopting federal guidelines

General Electric’s WMC Mortgage and Merrill Lynch’s First Franklin Financial are adopting the federal underwriting guidelines proposed in March. Lenders will have to determine the borrowers’ ability to make fully-indexed monthly payments instead of the initial, smaller payments at “teaser” interest rates. For many subprime borrowers, this will mean cutting off or limiting credit, but it’s probably better than putting them into a mortgage they cannot afford to repay. A large part of those who took adjustable-rate loans in recent years wouldn’t have qualified had the lenders taken into account the full monthly payments, scheduled to kick in two or three years down the road. No wonder we see a spike in delinquencies and foreclosures. The bad news is, economists say even more foreclosures are to be expected as ARMs begin adjusting later this year and in 2008.

The Fed is still considering steps to prevent “predator” lending and encourage “responsible” loan providers, but a number of economists are skeptical. “Bailing out” troubled borrowers would mean paying with taxpayers’ money for other people’s foolish and irresponsible financial decisions, instead of letting them bear the consequences of assuming too much risk. Plus, the market is already casting out lenders who were all too willing to provide junk loans, and the rest are tightening underwriting standards. In the months and years to come, fewer loans will be originated, so there will probably be fewer buyers house-hunting out there. Sounds like a nasty housing slump to me.

Tuesday, June 12, 2007

Freddie Mac to return to regular reporting

Freddie Mac will resume making regular quarterly reports this Thursday, June 14. The mortgage giant has only stated annual results since 2002, when it was involved in an accounting scandal. In 2003, the company said it had overestimated earnings for 2000 through 2002 by approx. $5 billion.

Analysts expect Freddie Mac to report first-quarter earnings of a little more than $1 a share, down from $2.80 a year ago. The financial results will be released before the opening bell on Thursday, and a conference call will be held at 10:00 a.m. The call will be webcast live on the company’s website,

In April, Freddie Mac announced it will purchase $20 billion in subprime loans and is currently developing new mortgage products designed for subprime borrowers. Legislation for stricter oversight of the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, is currently being developed.

Monday, June 11, 2007

Mortgage debt keeps growing

The Fed’s first quarter Flow of Funds release, published last week, showed that mortgage debt keeps rising, even as home prices decline and financing is getting harder to find. Mortgage debt increased at a 5.4% annual rate in the first quarter, nearly three times as fast as house appreciation for the same period. Equity is declining, and at the end of Q1 2007, the ratio of equity to home value was at the record low of 52.7%. In today’s market, you don’t have to take a “cash-out” refinance to reduce the equity in your house. As prices drop, you essentially owe a larger percentage of your home’s value – without increasing your loan amount. In 2000, the equity-to-home-value ratio was 57.9, and has been steadily declining ever since. Economists predict that this ratio may drop below 50 for the first time ever in the coming months.

The drop in home equity is a logical consequence of loose lending standards during the boom years, when anyone could “buy” a house with little to no money down and hope that it would appreciate as home prices kept rising. Now that prices are flat or dropping nearly everywhere, and borrowers face monthly payments adjusting upwards, they’re being left with less and less equity in their homes. Excessive greed made owners refinance repeatedly during the boom years, draining cash out of their houses. Today, consumer confidence and spending are falling, raising concerns that the “housing slump” will affect the broader economy quite badly. Keep your fingers crossed.

Friday, June 8, 2007

Mortgage rates highest in 10 months

Mortgage rates rose again the week ending June 7th, says a report by Freddie Mac. The 30-year fixed-rate mortgage is at 6.53, the highest reading for this year, and the highest since August 2006. Rising rates reflect strong job growth, but they certainly won’t be luring new buyers to the Real Estate market. Which, in turn, means that sellers will have to cut prices further and “the housing slump” will last for quite some time. Until the end of 2007 at the least, according to most forecasts.

The situation is exacerbated by record-high inventories of unsold homes, so it’s clearly going to take a while for the market to get back to normal. In fact, it seems that no one has a reliable estimation of the unsold homes on the market, but all analysts point out that there are too many homes for too few buyers. The Fed, however, is concerned about inflation, so rate cuts are unlikely. The Mortgage Bankers Association (MBA) believes mortgage rates will reach 7% by the end of the year. No wonder mortgage applications are dropping.

This is how the rest of the mortgage loans performed this week: 15-year fixed-rate mortgages averaged 6.22%, the 5-year adjustable-rate mortgage was at 6.24 and one-year ARMs carried an interest rate of 5.65. All interest rates were up 0.05% to 0.10%.

Thursday, June 7, 2007

Mortgage loan applications slip

Mortgage loan applications declined 1.7% last week. The Mortgage Bankers Association reported a 6.1% drop in the Refinance Index from the previous week, and a 1.5% increase in the Purchase Index. This is somewhat surprising, as analysts believe that more and more homeowners who took out adjustable-rate mortgages in recent years should be refinancing.

Meanwhile, the National Association of Realtors (NAR) released an interesting statement. “Home sales are projected to move in a relatively narrow range with a gradual upturn” toward the end of the year, nothing new here. According to senior economist Lawrence Yun, “Overall housing levels are historically strong”, whatever that is supposed to mean, “but sales remain sluggish”. To me, this sounds like trying to make bad news seem good. Nothing new… He goes on to say that, because fewer high-cost homes are being purchased, the median existing-home price is being distorted, meaning that home prices are actually moving upwards, contrary to statistical data. He cites Freddie Mac’s price index as a more reliable source of information, showing that prices are actually rising, not dropping. Indeed, prices have increased somewhat in the first quarter of 2007 compared to the final 3 months of 2006, but the growth rate is only a fraction of what it was a year ago. “House price appreciation did not keep pace with the overall level of inflation during the quarter”, says Freddie Mac’s Frank Nothaft. He also added that national home price growth will probably slow down even more and price declines are expected “in many parts of the U.S.”.

Yun believes that “buyers today need to have a traditional view that housing as a long-term investment is an added benefit”. Nothing new here either, but it seems most buyers are still waiting on the sidelines for better prices and interest rates. Will a public statement from a trade group official make them change their minds?

NAR’s “U.S. Economic Outlook” forecasts price declines for both existing and new homes for the rest of the year, and predicts a 6.6% 30-year mortgage rate for Q3 and Q4. All this sounds a little saner than Lawrence Yun’s allegations, but who knows, the forecast might be amended anytime.

Wednesday, June 6, 2007

Bernanke: lending standards will “restrain” housing

Ben S. Bernanke, Federal Reserve Chairman, said that tightening lending standards will impact the demand for housing for longer than expected. Let’s say the initial forecasts most authorities issued were a little too optimistic to begin with. Bernanke believes “additional measures” will be required to combat fraud and abusive lending, but the Fed should be careful “not to suppress responsible lending or eliminate financing opportunities for subprime borrowers”. Fine, now we’d like to see them actually do it. Some economists have warned against additional regulation, because the market will “correct itself” anyway. Indeed the Fed is often being blamed for causing the current situation by keeping rates low for too long, so could they exacerbate the situation by intervening now?

Although Bernanke believes trouble in the housing sector has not spilled over to the larger economy, he forecasts “moderate” growth for the coming months. Job growth, manufacturing and personal spending are doing well, but some economists fear this may not last for much longer.

Rising delinquencies and foreclosures on subprime mortgages contribute to rising inventories of unsold houses, which results in declines in home prices and new construction. According to Bernanke, “the slowdown in residential construction” will likely “remain a drag on economic growth”, but it is “difficult to quantify” the impact. Knowing that housing accounts for nearly a quarter of annual economic growth, I believe no one would like to have to “quantify” the worst-case scenario.

The word “recession” is being pronounced more and more often, and with the housing slump extending for longer than expected, it seems only a question of time before the consequences of problems in the Real Estate industry are felt in the larger economy. A recession seems unlikely, but so does significant economic growth in 2007. Perhaps the Fed will deal with the problem?

Tuesday, June 5, 2007

Accredited acquired by private equity fund

Accredited Home Lenders Holding Co. will be sold to Lone Star Fund V PL for $400 million. The fund will buy all of Accredited’s shares for $15.10 a piece, 10% higher than the stock’s price on Friday, June 1st. On Monday, Accredited’s stock traded for $15.12.

The offer will probably close in the third quarter of this year, which will mark the end of companies specializing solely in subprime lending as a field of business. Accredited is one of the last lenders operating exclusively in the subprime sector. NovaStar
Financial is looking for a buyer, too, and Delta Financial will probably remain in business because it did not originate adjustable-rate subprime loans.

Accredited has been “exploring strategic options” for a while now, as troubles in the subprime sector undermined its financial standing. It reduced its workforce of 4,200 by 1,300 in the first quarter, as delinquencies on its loans spiked. It had to sell most of its inventory at a substantial discount in order to raise cash, and received a $230 million term loan from Farallon Capital Management LLC. It also managed to renew an existing $600 million credit line, thus somewhat improving its situation. It was threatened by delisting from the Nasdaq Stock Exchange because it failed to file its annual report for 2006 on time, due to the resignation of its auditor, Grant Thornton LLP.

Monday, June 4, 2007

Pending Home Sales Index drops

The National Association of Realtors (NAR) announced that its Pending Home Sales Index dropped 3.2% in April from a month earlier. The index measures home purchases in which the contract has been signed but the transaction is not yet closed. It is considered a forward-looking indicator of market activity. In both March and April, the pending home index was approximately 10% lower than last year’s readings.

This drop is somewhat unexpected, because forecasts predicted a 0.4% increase. Lawrence Yun, a senior economist with the NAR, said sales of existing homes “might ease but should be fairly stable in the months ahead”. Hm… The index was in fact much lower than expected, is that a sign of improvement? Not in the real world, I think. According to some predictions, it may take several years for the housing market to stabilize, so expecting a “quick rebound” in the coming months is somewhat unrealistic. A rosy picture from the NAR again? Perhaps…

Friday, June 1, 2007

Spike in mortgage rates

Rates on 30-year fixed mortgages rose again in the week ending May 31, 2007. The 30-year fixed-rate mortgage averaged 6.42%, up from 6.37% a week ago. 15-year fixed-rate mortgages climbed up as well, to 6.12% from 6.06% last week. 5-year hybrid adjustable-rate mortgages were at 6.19%, up from 6.02%. The 1-year adjustable-rate loan was the only type of mortgage to decline, with an average of 5.57%, down from 5.64%. Last year this time, the 30-year mortgage rate was 6.67%. 15-year fixed-rate mortgages and 5-year adjustable-rate loans carried an interest of 6.26%, and 1-year adjustable-rate loans were at 5.68.

Freddie Mac attributed the rise in interest rates to improving business and consumer spending, which are signs of a strong economy – outside of the housing market. Rates are currently at the highest level in 8 months.

Whatever the reasons, rising interest rates bode nothing good for the housing market. With higher mortgage rates come bigger monthly payments, which means that fewer buyers will be able to afford new homes. Considering the already existing glut on the market, a recovery in the near term seems impossible. The National Association of Realtors and the MBA pushed back their forecasts for a rebound in the Real Estate industry from mid-2007 to early 2008.