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.