Tuesday, July 31, 2007

Update on American Home Mortgage

It was announced Monday that NYSE has halted trading in shares of American Home Mortgage. The lender is expected to produce an announcement disclosing some significant news that will affect its stocks, which last traded at around $6, down more than 30% from Friday and down 70% so far this year. In 2005, shares of American Home Mortgage were priced at $40 and above.

Analysts from Lehman Brothers, RBC Capital Markets and JMP Securities LLC downgraded American Home Mortgage Investment.

In other news, a report on foreclosures issued yesterday showed a 58% increase in the first half of this year. RealtyTrac Inc. said that 573,397 properties have reported some sort of foreclosure activity in the first six months of 2007, compared to last year’s 363,672. Foreclosures are up 32% from the second half of 2006, when the number of properties affected was 433,504. RealtyTrac used a new method of counting foreclosures that eliminates double reporting of the same property if it gets several foreclosure filings. According to RealtyTrac CEO James J. Saccacio, foreclosure filings could surpass 2 million this year.

Monday, July 30, 2007

American Home Mortgage: another troubled lender?

American Home Mortgage Investment Corp. had to write down the value of its loan and security portfolios due to “unprecedented” disruption in the credit markets, leading to margin calls from its investors. As a result, it is delaying payment of dividends on its common stock, and its preferred shares as well. Keeping cash on hand will allow American Home Mortgage to act quickly when it fully understands “the impact of market conditions on its balance sheet and liquidity”. At this point, it seems, understanding the effect of market disruptions is not as hard as deciding what to do right now and what to do if things get worse. The problem is that economists are having a hard time predicting what will happen next and what happens after that. It is hard to tell whether we’re experiencing a financial “correction” or standing on the verge of a global credit crunch unprecedented in history. So, the “wait and see” strategy no longer works, because credit problems are already affecting investments, retirement accounts and other financial instruments that affect a number of consumers that spans well beyond the circle of Wall Street professionals.

American Home Mortgage, which has little exposure to subprime lending, but worked mostly with prime and Alt-A borrowers, is yet another example of the “subprime contagion” – something corporate executives seemed to deem impossible until recently. If the lender is unable to meet the margin calls, it may have to file for bankruptcy, because it depends on short-term loans from banks to fund the mortgages it issues. It is expected to post a second-quarter loss and possibly “contained” losses for 2007. Stocks closed at $10, 47 on Friday, the lowest since April 2003.

Friday, July 27, 2007

More job cuts at mortgage lenders

It’s not just subprime, mortgage woes are affecting Alt-A and prime borrowers, so lenders are taking losses and shutting down branches. Wells Fargo announced on Thursday it will close its nonprime wholesale lending operations in Bator Rouge, Louisiana, and in Des Moines, Iowa, resulting in 200+ job cuts. Impac Mortgage Holdings also cut 190 jobs this week, or roughly 20% of its workforce.

Moody’s Economy.com predicts that lending troubles will persist through the remaining part of 2007, with a peak in delinquencies in mid-2008. Foreclosure rates on “2006-vintage” home loans are expected to reach nearly 20% in late 2011, 3 times higher than the forecast foreclosure rate on mortgages originated in 2004. We don’t get forecasts quite like this one very often.

Interest rates dropped last week on weak lending application and sales data. 30-year fixed-rate mortgages averaged 6.69%, down from 6.73% a week ago, 15-year fixed-rate loans edged down to 6.37% from 6.38%. Five-year ARMs were at 6.30%, compared to last week’s 6.35%, and one year adjustable home loans declined to 5.69%, from 5.73% a week earlier.

Wednesday, July 25, 2007

Countrywide reports quarterly results

The slowdown in the housing sector is hitting Countrywide hard: income fell 33% in the second quarter, and the market is expected to remain “challenging” for the rest of the year. Shares dropped 8.7% on the news, reaching $31.11, the lowest level since November 2005.

Countrywide’s full-year earnings forecast was cut to a range of $2.70-$3.30 per share from April’s $3.50-$4.30 and January’s $3.80-$4.80. Revenue dropped to $2.5 billion from last year’s $3 billion.

Countrywide has recently tightened its credit guidelines and eliminated some especially risky mortgage products, but losses associated with mortgages issued in recent years are expected to climb in the coming months. The company has set aside $292 million for credit losses, more than four times last year’s provision of $61.9 million. According to Countrywide’s CEO Angelo Mozilo, losses were related to “prime” loans given to borrowers with good credit, not subprime mortgages as one would expect. What happened to “contained” subprime losses?

Mozilo said that problems are likely to persist for the rest of 2007 and well into 2008, possibly 2009. No wonder we’re seeing such robust insider selling at Countrywide.

Tuesday, July 24, 2007

Wells Fargo says goodbye to 2/28 ARMs

Wells Fargo, the fifth-largest bank in the U.S., has stopped offering 2/28 adjustable-rate mortgages effective Monday. The so-called 2/28 ARMs are in fact a hybrid product featuring a fixed interest rate for the first 2 years of the loan which then begins to adjust. This move is prompted by massive downgrades of subprime bonds by rating agencies in the past 2 weeks. Countrywide Financial Corp., Washington Mutual Inc., First Franklin and Option One Mortgage have already stopped offering the product.

Meanwhile Standard & Poor’s announced that it’s placing $1.76 billion in asset-backed securities on CreditWatch with negative implications. S & P said it is continuing its review of CDO ratings, so more downgrades are possible in the near future.

Monday, July 23, 2007

More layoffs in the lending industry

Late last week both WaMu and Indymac announced they’ll be laying off hundreds of employees in an effort to cut costs and down-size to match current market conditions. Indymac will fire some 400 staff members, or “roughly 4%” of its workforce in the coming weeks, according to an e-mail from the lender’s CEO, Mike Perry, which was distributed to all Indimac employees. Of course it contained many good words about how the company tries to avoid layoffs whenever possible, and how hard it was to fire these people; it also doesn’t fail to mention how Indimac is better than its competitors. For example here:

Most companies in the mortgage industry employ layoffs as standard operating practice, staffing up in good times and letting people go as soon as loan volume falls off. I have never been a fan of this practice

And here:

while most other companies in our industry pay very little, if any, severance, Indymac has a generous severance package for laid off employees

Or here: “many of our competitors are cutting much more deeply”.

I’m afraid I don’t understand why a CEO would employ such marketing means in a letter to employees, but he probably has some reason for it. Certainly the mail was distributed to all staff members, including those who get to stay with the company. Maybe he was feeling just a little bit guilty and trying to convince himself that others are no better? Or perhaps Indimac fears that their employees may decide to leave and join the competition? It doesn’t sound realistic, given that nearly all lenders are cutting workforce in today’s market. Take Washington Mutual: 210 employees will be gone by August because their jobs at subprime loan fulfillment centers are being eliminated. Subprime lending is shrinking, and dragging home sales with it. Even more disturbing, some states are already admitting that they’re either on the verge of, or experiencing a recession.

Friday, July 20, 2007

Bernanke concerned over housing

In his testimony to congress, Federal Reserve Chairman Ben Bernanke said that the subprime mortgage sector has “deteriorated significantly”, causing “increased concerns” among investors in some other types of financial instruments. It seems that top figures in the industry are finally admitting that the problems in subprime lending are a serious issue, with Freddie Mac’s CEO Richard Syron saying he doesn’t believe that housing has “hit bottom”, and that “things are going to get worse”. What we’ve seen so far may only be the beginning of a huge collapse, not the “rebound” in housing that some had hoped for.

The Fed has trimmed its forecast for growth in 2007 and 2008, but inflation forecasts remain unchanged. Unemployment is expected to rise slightly.

Amid a flood of economy-related news this week, mortgage interest rates remained mostly unchanged from last week’s readings, probably because the general outlook changed little. The 30-year fixed-rate mortgage remained close to the highs for this year at 6.73%, and the 5-year adjustable-rate mortgage averaged 6.35%, the same as a week ago. 15-year fixed-rate mortgages edged down to 6.38% from last week’s 6.39%, and one-year adjustable loans were up slightly at 5.72% from 5.71% a week ago.

Thursday, July 19, 2007

“No value left” in Bear Stearns funds

Bear Stearns estimates that its two troubled hedge funds that invested in securities backed by subprime mortgages are nearly worthless today, after “unprecedented declines” in the value of underlying collateral. The smaller, “enhanced leverage” fund has “effectively no value left” in it while the older High-Grade Structured Credit Strategies Fund has lost 91% of its value. Shares of Bear Stearns dropped $2.47, or 1.8% to $137.44.

As markets watch everything that has “subprime” on it collapse, fears are spreading among consumers who don’t know exactly what their retirement savings are invested in. Now that securities backed by Alt-A loans are getting downgraded, many are beginning to realize how problems in the lending sector could affect nearly everyone. Moody’s, the rating agency which recently started downgrading the securities, says it is not being hired by issuers of commercial mortgage-backed securities. Underwriters are “rating shopping” and the agencies that get hired are the ones most likely to give higher ratings.

I can’t help but wonder if there will be a significant difference between ratings done by Moody’s and other companies. After all, ratings agencies need a good reputation so giving false ratings doesn’t make much sense. It seems that more downgrades are inevitable, so this “rating shopping” trend shouldn’t really last for long. But who knows…

Wednesday, July 18, 2007

Home builder confidence drops again

The National Association of Home Builders’ July survey of builder confidence showed that less than a fourth of home builders see market prospects as “favorable”. The index dropped to 24 this month, the lowest reading in more than 16 years and the third lowest in the history of the survey. The decline was more dramatic than expected, compared to predictions for a reading of 27.

Patrick McPherron, economist at Moody’s Economy.com, commented that “the bottom of the housing market appears nowhere in sight”. Indeed, we see no reduction in inventories, slumping prices and low buyer activity. With mortgage lenders tightening their credit standards, affordability is becoming even more of an issue. After last week’s downgrades of securities backed by subprime loans, Moody’s is now placing under review deals issued by Bear Stearns and IndyMac, backed primarily by first-lien Alt-A mortgages.

Tuesday, July 17, 2007

2/28 Subprime ARMs no longer profitable

In a recent announcement issued by Option One, the lender informs its clients that it will eliminate all 2/28 ARMs effective Monday, July 16th. Anyone holding a 2/28 ARM that hasn’t adjusted yet gets a 3/27 product at no cost, thus receiving another year of fixed mortgage payments.

2/28 ARMs are 30-year hybrid mortgages that have fixed monthly payments for the first 2 years of the loan and begin to adjust afterwards. 3/27 loans have a fixed-rate period of 3 years.

In its statement, Option One says that news received on Friday suggested that rating agencies “have made significant changes to their loss coverage assumptions on subprime 2/28 ARM loans”. As a result, 2/28 ARMs “lost a great deal of their economic value”, and Option One decided to eliminate the product altogether. Option One will honor the approved rate on 2/28 mortgages that will be replaced with 3/27 loans.

It is possible that many other lenders will follow suit, because issuing loans that can’t be resold makes no sense to anyone. A sensible move amid the subprime mess at last. Apparently the ARM market in general is going to contract significantly in the coming months. So perhaps the market is, after all, regulating itself.

Monday, July 16, 2007

Fannie and Freddie to tighten policies

The two GSEs announced that new lending policies will be effective as of September 13. These come as a response to a directive issued by the federal agency overseeing the mortgages giants. Fannie Mae and Freddie Mac will require that borrowers’ ability to repay loans be evaluated more carefully. Lenders will also have to improve their risk-management practices to keep pace with the increasing risk associated with the industry.

The Office of Federal Housing Enterprise Oversight (OFHEO) which regulates the two companies, called the new rules “a significant step”. Because Fannie and Freddie buy mortgages from both banks and other financial institutions that do not fall under federal regulation, the new policies will, “create market pressure for improved standards among non-banks” according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC).

All nontraditional mortgages issued on or after September 13 will be subject to the new rules.

Friday, July 13, 2007

Mortgage rates at the second-highest level this year

30-year fixed-mortgage rates averaged 6.73% the week ending Thursday, a notch lower than this year’s high of 6.74% and up sharply from last week’s 6.63%. Analysts say that this is due to strong economic and employment data, but some publications suggest that employment data may be skewed by tricky calculations and adjustments. 15-year fixed-rate mortgages carried an average interest rate of 6.39% this week, up from 6.30 a week ago. Five-year adjustable-rate mortgages also increased, from last week’s 6.29% to 6.35 this week. One-year adjustable mortgages stood at 5.71, unchanged from last week.

A year ago, 30-year fixed-rate mortgages carried an interest of 6.74%, 15-year fixed home loans were at 6.37%, five-year adjustable-rate mortgages were at 6.33% and one-year adjustable mortgages averaged 5.75%.

Rates are expected to remain close to the current levels throughout the rest of the year, and the Fed is unlikely to cut the Fed Fund rate. Higher rates will have an adverse effect on the slumping housing market, which seems to already be affecting the financial markets at large and, according to this publication, newspapers and various types of smaller businesses as well.

Thursday, July 12, 2007

“Days on the market” stats removed from Southern California listings

The Southern California Multiple Listing Service has announced a decision to remove the number of days a home stays on the market from listings. Real Estate agents will still have access to the data, but it will not be publicly available. Good for agents, not so good for buyers who might be able to get a better deal if they know the seller is desperate to offload a property. Brokers get a percentage of the home price as fees, so they will have an incentive to make buyers pay more.

On the other hand, this decision may help end “re-listing” schemes, where brokers remove a home from the market for a while and then list it again, thus distorting the stats. Re-listing practices are not prohibited by law, but they certainly do not benefit buyers. However, this doesn’t sound like a very good justification to me – after all, everyone is aware of the “slump” in the housing market, I don’t really believe re-listing is that much of a problem. Attracting any buyers at all is hard enough, let alone getting a higher price. Hiding the “days on the market” number will help mask the slowdown in home sales and generally benefits realtors, but it will not help improve the market. Hm…

Wednesday, July 11, 2007

Mortgage-backed securities get downgraded

As troubles in the subprime lending sector are beginning to cause major problems to hedge funds that invested in mortgage-backed securities, rating agencies are now downgrading these papers.

Moody’s announced negative rating actions on 431 securities originated in 2006 with an original face value of $5.2 billion. 399 of these were downgraded and another 32 were placed on review. The rating actions were caused by loan performance deterioration which was due to a slowing home price appreciation and aggressive underwriting practices.

Standard & Poor’s (S&P) announced that it will change the way it evaluates the securities. The full impact of this will be seen in a few months, probably resulting in an increase in interest rates to subprime borrowers and losses for investors. S&P said that 612 classes of mortgage-backed securities, totaling more than $12 billion in debt, have been put on CreditWatch and most of these will be downgraded in the next few days. Ratings of Collateralized Debt Obligations, or CDOs, are also being reviewed.

According to the agency, losses on the mortgages backing these securities exceed anything that’s happened before. I guess we should assume that no one knows what a situation like this will lead to, and, most importantly, how to deal with the problem. It could result in a really big bust for the financial markets, and the dollar is already falling.

Tuesday, July 10, 2007

Freddie Mac: home sales will keep falling

Freddie Mac, the second-largest mortgage buyer, paints a bleak picture of the current situation in the housing sector, and makes a rather gloomy forecast for the months ahead.

Just when economists hoped for a rebound in home-buying activity, mortgage rates jumped from 6.15-6.25% to 6.50% and higher, cutting into affordability. According to the mortgage giant, home sales in 2007 will probably drop to their lowest level since 2001, totaling 6.28 million, 7.1% lower than last year. In 2001, home sales totaled 6.20 million. The interest rate on a 30-year fixed mortgage will probably be 6.7% this quarter, up from 6.2% in Q1. Inventory reached a record of 4.43 million in May, while sales dropped to a 5.99 million annualized rate, the lowest figure in four years. According to analysts, the bottom in home sales will probably be reached in 2007, but price declines will continue into 2008.

Freddie Mac is also revising downwards its forecast for gains in the home price index. Last month’s forecast of 1.5% is being revised to an increase of 1% for this year. Housing starts are expected to decline 18% in 2007, to a total of 1.48 million. The percentage of mortgages entering foreclosure is at an all-time high of 0.58%, subprime foreclosures are at 2.43%, the highest level in 5 years, and foreclosures on prime loans reached a record 0.25%. So, don’t expect good news from this part of the economy till the end of the year.

Monday, July 9, 2007

Mortgage cost disclosures “confuse” borrowers

A Federal Trade Commission survey found that current mortgage cost disclosures are unclear and confusing to most consumers. More than 80% of the borrowers surveyed could not identify the upfront costs associated with a loan. Four out of five borrowers could not understand why the APR (annual percentage rate) was different from the stated interest rate on the loan, and more than 60% of the participants did not notice that their terms included a pre-payment penalty. More than 20% of those surveyed could not identify the total amount of settlement costs.

Researchers also found that many borrowers could not properly understand their mortgage disclosures, and were not fully aware of the costs associated with their loans. Many were not aware of restrictions, such as prepayment penalties, included in their own loan terms. FTC researchers concluded that disclosure forms were to blame and developed a simplified disclosure form which clearly specified the type of loan, any restrictions, and loan charges, as well as the APR, monthly payments and other information.

When consumers were shown this new form, they were able to understand loan terms much better and give correct answers to questions about their mortgages. This study is likely to trigger a change in mortgage disclosure forms, which will help consumers make better financial decisions and avoid risky loans.

Friday, July 6, 2007

Mortgage interest rates edge down as worries over inflation ease

According to mortgage giant Freddie Mac, rates on 30-year fixed-rate mortgages dropped to 6.63%, down from last week’s reading of 6.67. Frank Nothaft, Freddie Mac’s chief economist, said the drop in interest is in part due to “a moderation in core inflation”. 15-year fixed rate mortgages averaged 6.30%, down from 6.34 last week, while five-year adjustable home loans stood at 6.29, compared to 6.30 a week earlier. One-year adjustable mortgages rose to 5.71%, up from 5.65 a week ago.

Mortgage applications showed a slight increase last week, according to the Mortgage Bankers Association. The mortgage application index was up 0.1%, as refinancing dropped 2.6% while purchase applications increased 2.0%. Not really a great summer home-buying season.

Thursday, July 5, 2007

Low bids for Bear Stearns Hedge Funds

Investors in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund, one of the two troubled hedge funds that have been making the news lately, are trying to sell their holdings at fire-sale prices. Unfortunately, the best bid so far is 5 cents on the dollar, much less than the 11 cents investors hoped to get.

The other, “less geared” fund, called High-Grade Structured Credit Strategies Fund is attracting bidders at 30 cents, compared to the asking price of 70 cents on the dollar. Both these funds are backed by subprime mortgages and highly leveraged, meaning that their market price was probably much lower than their estimated value. The low bids are indicative of the risk associated with the subprime business and all securities backed by mortgages. Looks like troubles in subprime are spilling over to other sectors after all.

And now, something economists feared is already happening. Another hedge fund seems to be heading the same way as the two Bear Stearns funds. United Capital Asset Management is suspending redemptions from its Horizon funds, without liquidating them – for the time being. The funds’ manager, John Devaney, predicted the current turmoil in the sector, but couldn’t avoid running into trouble.

Wednesday, July 4, 2007

Pending home sales dropped in May

Data released by the National Association of Realtors (NAR) points that pending sales of existing homes dropped to the lowest level in 6 years in May. The index declined 3.5% to a reading of 97.7, following declines in the previous two months. A year ago, it stood at 112.7. A reading of 100 represents the average contract activity in 2001.

Pending sales are purchases in which the contract has been signed, but the deal has not been closed yet. Thus, the index is considered a near-term indicator of future market activity, and consecutive monthly declines could only mean that home buying isn’t picking up any time soon. The index declined in the South and Midwest, and grew in the West and Northeast.

NAR’s senior economist Lawrence Yun said that “some transactions are being postponed” due to market disruptions. He didn’t mention, however, how long he expects buyers to keep “postponing” purchases.

Tuesday, July 3, 2007

Builders: focusing on affordability

As the housing slump keeps getting more severe, builders are looking for new ways to attract clients. Price discounts and free upgrades didn’t do much to reduce inventories, so now builders are concentrating on more affordable, smaller housing units.

During the housing boom, the average size of a home increased – along with its price – as many buyers attempted to purchase as much house as possible. In recent years many have come to realize that the house they live in doesn’t have to be a huge and expensive one to provide comfort and a sense of homeliness. While demand for housing grew, builders would construct larger houses and sell them at higher prices, but now that affordability has really become an issue, 1,000 – 1,600 sq. feet homes are back in fashion.

KB Home, one of the largest home builders which suffered a second-quarter loss of $148.7 million, is trying to revive the market by offering a line of smaller homes. D.R. Horton is also downsizing, providing more affordable options for buyers. Builders are generally better motivated to unload homes than other sellers on the market, because unsold homes incur significant losses as they stay unoccupied.

Well, apparently it takes a housing slump as severe as the current one to make buyers, builders, agents, lenders and investors apply some common sense when making financial decisions. Better late than never, after all.

Monday, July 2, 2007

Wells Fargo Correspondent Alternative Lending closed

We’re all used to small and medium-sized “sub-prime” lenders going out of business, because there’ve been so many sales, acquisitions and “crises” lately. Although Wells Fargo works on a much larger scale than most loan providers, it seems that the subprime “meltdown” has affected them too.

Wells Fargo’s non-prime lending division will no longer be accepting new registrations or locks, effective Friday, June 29 at 5 p.m. The company named “volatile times” for the mortgage industry and “slowing housing appreciation” as the reasons for their business difficulties. The lender’s clients will be contacted by Wells Fargo representatives to discuss options. Loans registered but not received by 5 p.m. on Friday will not be accepted, but loans currently in the pipeline will be processed by Wells’ Baton Rouge Team.