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.