Friday, November 30, 2007

Mortgage Rates Lowest In 2 Years

Interest on 30-year fixed-rate mortgages fell to 6.10% this week, the lowest level in 2007, and the lowest since the week of October 13, 2005, said Freddie Mac. 15-year fixed-rate mortgages averaged 5.73%, down from 5.83% last week, which is the lowest since January 2006. I guess now is the perfect time to refinance a mortgage if you can find a lender, but that could be hard, unless you have a perfect credit record. 5-year adjustable-rate mortgages slid to 5.86% from 5.88% last week, not that spectacular but still lower. One-year adjustable mortgages were at 5.43%, up from 5.42% a week ago. Speaking about the housing sector, Freddie Mac’s chief economist Frank Nothaft noted that the “overall picture” looks “glum with no immediate relief in sight”. So it is indeed.

Thursday, November 29, 2007

Conforming Loan Limit Unchanged In 2008

The conforming loan limit, currently $417,000, will remain unchanged in 2008, announced OFHEO director James B. Lockhart. OFHEO is the entity that regulates Fannie Mae and Freddie Mac, the government-chartered guarantors of home mortgages. Any loans above the $417,000 limit are considered “jumbo” and cannot be guaranteed by Fannie Mae and Freddie Mac, so lenders usually charge higher interest on them. This limit only applies to one-unit properties; multiple-unit properties have higher limits. Alaska, Hawaii, Guam and the U.S. Virgin Islands have higher upper limits than other states. The maximum conforming loan limit is determined by analyzing October-to-October change in the average house price, which has declined more than 3% this year. The maximum limit hasn’t changed for the last 2 years, and it probably won’t get revised upwards anytime soon. The latest NAR report says the inventory of single-family homes on the market is at the highest level in 22 years (10.8 months’ supply), which can only drive home prices down.

Wednesday, November 28, 2007

Home Prices Dropped 4.5% In 3Q

According to the S&P/Case-Shiller index, housing prices dropped 4.5% year-over-year in 3Q, the sharpest drop since 1987 when S&P started tracking the data. The index also scored another record – the largest quarter-to-quarter decline, with a drop of 1.7% from Q2. Falling home prices will cause more borrowers to become “upside down” in their homes, meaning they owe more on their mortgages than their houses are worth. After tremendous writedowns on mortgage-backed securities, investors and financial institutions have lost their appetite for risky assets and, according to some publications, credit availability is so low that another crunch similar to the one observed back in August is possible. Opinions, however, vary, and some Fed members even believe a rate hike would be good for the economy, while Wall Street is almost certain that there will be a rate cut in December. I tend to believe that, in this chaotic situation, the Fed is very much likely to reluctantly cut rates another 0.25% to prevent further tightening of credit. They don’t like to be pressured but they will have to take expert opinions into consideration.

Tuesday, November 27, 2007

Charles Schumer Concerned Over FHLB Lending To Countrywide

After a news story in the Wall Street Journal detailing Countrywide’s increased borrowing from FHLB, Senator Charles Schumer urged the Federal Housing Finance Board to probe the funding. The Federal Home Loan Bank of Atlanta [FHLB] has extended more than $50 billion to Countrywide Financial, and Schumer is concerned that the collateral the loan is secured against is somewhat shaky. The advances made to Countrywide make up 37% of the bank’s total outstanding loans, which makes Countrywide its largest borrower. Schumer considers FHLB’s exposure to Countrywide “an unreasonable risk”, because of the lender’s current weakness. However, FHLB said in a September SEC filing that its exposure to subprime is “minimal”. According to the Wall Street Journal, Countrywide has secured the $51 billion in advances with $62 billion in collateral. Shares of Countrywide dropped more than 10% to $8.64 on Monday.

Monday, November 26, 2007

Freddie Mac Seeks To Raise Capital

Freddie Mac was all over the headlines this morning, as recent news revealed the mortgage giant’s weaknesses. It is believed that the company may have insufficient capital to cover potential home-loan losses and there’s talk that both GSEs may be insolvent at some point in the near future, should more mortgages go bad. Moody’s and Standard & Poor’s downgraded Freddie’s outlook to “negative” from “stable”, though its debt is still rated AAA. Fannie and Freddie are required to hold 30% more capital than the minimum for other companies, and Freddie Mac found itself short of money, so it is now issuing securities to raise capital. Currently the company has $600 million above the minimum reserve level, much less than its $1-2 billion comfort level. It revealed plans to sell $5 billion of preferred stock in the very near term, probably this week. If losses in the fourth quarter are comparable to those in the previous three months, the mortgage giant will need to raise even more capital. James Lockhart, the director of Fannie Mae and Freddie Mac’s regulator, OFHEO (Office of Federal Housing Enterprise Oversight), refused to suspend the extra capital requirement when asked to.

Friday, November 23, 2007

Mortgage Interest Rates At 6-month Low

Freddie Mac’s weekly survey of interest rates shows the 30-year mortgage dropped from 6.24% to 6.20% for this week, the lowest since mid-May. The low for this year was 6.14% in early March, and rates kept climbing pretty steadily for a while, reaching 6.73% back in July. This made many analysts think that interest on 30-year fixed home loans is about to go through the roof topping 7% by the end of the year. Turns out they didn’t foresee the August credit crunch and well, no one counted in the Fed rate cuts. I assume now it’s safe to say interest rates won’t be nearing 7% until the end of the year in any case. With all the mess in the housing market and the two GSEs in trouble as well, the Fed may yet cut again at its meeting on December 11th – they’ve thrown the dollar stability out the window anyway, so why not prop up the Real Estate sector for a while. Furthermore, oil will most likely hit $100/barrel by the end of 2007, rate cut or not (it’s at $97-$98 right now and forecasters say it will keep growing) due mostly to the dollar’s weakness: China plans to “diversify” its reserves, and OPEC is considering pricing oil in another currency. It may all look like doom & gloom but this is reality. Financial innovation, anyone?

Thursday, November 22, 2007

Home Sales Dropped in 3Q

Sales of existing homes declined in 46 states in the third quarter of 2007, according to an NAR [National Association of Realtors] report issued Wednesday. Sales dropped 13.7% on average year-over-year, while Nevada, Florida, Arizona and California were hit hardest, with declines of 35%, 32%, 30.9% and 27.8% respectively. Sales increased in Vermont and North Dakota – the only two states to report positive data. Sales were up 0.8% in Vermont and 2.9% in North Dakota, and no sales figures were available for Idaho and New Hampshire.

As for metropolitan areas, 93 out of 150 surveyed saw price increases. However, median prices in Florida and California dropped more than 10% compared to last year. In his statement, NAR’s chief economist Lawrence Yun emphasized the positive news: “Some metro areas are hot while others are experiencing localized problems”. So all Real Estate is local, and the problems are “localized”. And there’s more of the “all is well” rhetoric: “Home prices … are affordable and, perhaps, even undervalued” – I guess foreclosure properties are indeed undervalued.

Wednesday, November 21, 2007

Will The Fed Cut Rates Again?

They may want the Wall Street to believe a rate cut is not imminent, but investors are already counting on a 0.25% cut. The central bank released its economic outlook, in which it projected slower growth in 2008, and, quite surprisingly, declining unemployment. The economic growth forecast was revised downwards from 2.5-2.75% to 1.8-2.5%. Meanwhile, turmoil in financial markets is in full swing, with the two largest mortgage financiers Freddie Mac and Fannie Mae reporting higher-than expected quarterly losses.

Shares of Freddie Mac dropped more than 28% after the mortgage giant announced quarterly loss of $2 billion and said it has trouble meeting its capital minimum, which may prompt it to cut its dividend. The company also warned that deeper losses may be coming in the future. Consequently, Countrywide got downgraded by Fox-Pitt, Kelton analyst Howard Shapiro on fears that Freddie’s trouble may mean less financing for the mortgage lender. Countrywide promptly released a statement saying it has “ample liquidity”, but analysts have trouble believing this. So, the Fed may have to cut rates on December 11th, especially if something big happens as a result of the current chaos. Inflation and the price of oil, however, are still pretty troublesome and if the latter hits $100, the chances for a rate cut are minimal. Time will show.

Friday, November 16, 2007

S&P Cuts Bear Stearns Rating

S&P cut Bear Stearns’ credit rating after the company announced plans to write down $1.2 billion in subprime assets, which will likely result in its first quarterly loss since 1985 when the company went public. After the rating was revised from A+ to A, the stock price actually rose because the writedown was smaller than other securities firms’. Citigroup got its ratings lowered after writedowns of $9 billion and Merrill Lynch & Co was downgraded on writedowns of $8 billion.

Meanwhile, Wells Fargo’s CEO John Stumpf, speaking at an investment conference, predicted that the worst is yet to come for the housing market. He said that this is the worst Real Estate market he’s seen in his 30-year career, and 2008 will probably be even worse. Wow he actually said that.

Thursday, November 15, 2007

Lennar Waiting For Better Times

According to an article in the RealEstateJournal, Lennar Corp. has decided not to sell new homes that are currently under construction. They realize that, should they decide to sell, they will be selling at a loss, and are unwilling “to go below a certain floor”, said Chief Executive Stuart Miller. Hovnanian Enterprises Inc. and Standard Pacific Corp. are still trying to sell, offering discounts and other incentives.

While it is easy to understand the builders’ anxiety over price cuts, I keep wondering whether this will work. Perhaps if they keep cutting prices on homes that are still for sale they could get the inventories moving, but having completed homes sitting vacant means constant expenses. True, they can’t just leave the homes unfinished, but completing them and then waiting for the market to improve doesn’t sound like the best idea ever to me. Luxury builder Toll Brothers is doing something quite different: it refuses to cut prices, even though this may mean few, if any, sales. Something like the “best of both worlds”, - fine, if they can afford it.

Wednesday, November 14, 2007

Home Depot Feels The Heat

Home Depot, the home improvement store chain, had to cut its full-year outlook for 2007 after financial results came in somewhat weaker than expected in Q3. The company posted a 27% drop in quarterly profit, citing “tough environment” as the main reason. Net earnings dropped to $0.60 per diluted share, compared to $0.73 a year ago. Sales dropped 3.5% compared to the third quarter of 2006, “reflecting negative comparable store sales of 6.2%, offset in part by sales from new stores”, according to the retailer’s press release. Earnings per share are expected to decline by 11% in fiscal 2007, adjusted downwards from September’s forecast for a 9% decline.

“We started the year with a more pessimistic view of the housing and home improvement markets than many. It turns out we were not pessimistic enough”, said Chairman and CEO Frank Blake. Well, Home Depot is not the only company that wasn’t “pessimistic enough”.

Friday, November 9, 2007

Fannie And Freddie Under Fire

It was announced earlier this week that New York State Attorney General Andrew Cuomo is investigating Fannie Mae and Freddie Mac in relation to accusations that the two mortgage giants had purchased loans based on inflated appraisals from Washington Mutual. According to Cuomo, WaMu pressured eAppraiseIT, an appraisal company, to inflate home values on thousands of loans which were later sold to Fannie and Freddie. Freddie Mac replied immediately saying it will cooperate with investigators. WaMu and eAppraseIT said they did not breach regulations. WaMu’s stock price dropped 17% on the news, to the lowest level in 20 years.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), the GSEs’ regulator, however, expressed disappointment with the subpoenas. In a letter to Cuomo, he said that Fannie and Freddie “have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals”, and “you and your staff may not fully understand the differences between the mortgage-backed securities issued by the GSEs and those issued by other entities”. I can feel the rage.

Fannie and Freddie have operating rules in place, which say that if the loans they purchase are linked to inflated appraisals, the lender has to buy them back. Too bad for WaMu, it’s already suffering losses from failed subprime loans, so if it has to repurchase all the mortgages it sold to Fannie Mae and Freddie Mac, its financial situation could deteriorate further. For the time being, both companies are continuing to purchase WaMu mortgages.

Thursday, November 8, 2007

Dollar In Freefall

The dollar hit yet another record low against the Canadian dollar, which traded at $1.1040. This is the lowest rate since 1950. The Greenback fell against other currencies as well, and quite significantly. It hit a 26-year low against the pound at $2.1052, and a 23-year low against the Australian dollar, which was priced at nearly $0.94. The Euro traded at $1.47 yesterday, the highest since the inception of the 13-nation currency.

China announced that it will diversify its foreign exchange reserves, which may further weaken the dollar. Chinese officials no longer regard the dollar a “world currency”, according to Xu Jian, a central bank director. Analysts believe that further weakening of the dollar is likely, although some indices would suggest a bottoming out of the dollar’s freefall.

The dollar’s weakness pushed crude oil prices higher to a new record of $98/barrel, while gold reached a 27-year high. Good news for anyone trading in those commodities and for export companies. Add to this the facts that the economy isn’t exactly booming and troubles in the Real Estate market are far from over. And one of these days someone may officially call a recession. The world is changing…

Wednesday, November 7, 2007

Former Freddie Mac CEO Settles Dispute With OFHEO

The Government reached a settlement with Leland Brendsel, former CEO of Freddie Mac, who was involved in the mortgage giant’s accounting scandal back in 2003. Brendsel will have to pay a total of $16.5 million in fines and other costs, including giving back some of his salary and bonuses. The money will be used to assist homeowners facing foreclosure. Brendsel was ousted in 2003, when he was accused of creating a corporate culture that allowed earnings misstatements of $5 billion between 2000 and 2002. Four other former Freddie Mac executives settled charges by paying civil fines and restitution. In the future, Freddie Mac cannot hire Brendsel again without the permission of the Office of Federal Housing Enterprise Oversight (OFHEO). According to Kevin Downey, the former CEO’s attorney, Brendsel and OFHEO “disagree strongly about what happened in the past at Freddie Mac”.

Tuesday, November 6, 2007

PIMCO’s Bill Gross expects more rate cuts

Bill Gross, the chief investment officer of the world’s largest bond fund, said the Fed “cannot afford to let homes go down by 10 to 15 percent”, so it will inevitably cut rates. Gross expects the Fed Funds rate to fall to 3.5%. He estimates the total cost “of subprimes and Alt-As and basically garbage loans” at $1 trillion. Gross has been calling on the Fed to act to save housing for months, but apparently his bailout scenario doesn’t even incorporate such economic indicators as the dollar exchange rates and inflation. He warns that $250 billion in non-prime loans are about to default and those could hurt banking giants like Merrill Lynch and Citigroup. Hey, in fact that’s already happening.

According to Gross, reducing the Fed Funds rate to 3.5% will result in 30-year fixed mortgage rates dropping to 5.0-5.5%, which will magically solve all the problems in financial markets. A simple solution, isn’t it? What’s the Fed waiting for? His monthly market commentary gives a nice analysis of the economic situation at the moment, but I don’t think a drastic rate cut is a solution. When the Fed cut rates in September, mortgage interest actually increased instead of dropping. Perhaps a drastic cut will actually lower the 30-year mortgage rates, but it may also wreak havoc in other sectors of the financial market and it will most probably result in monster inflation. Gas at $5/gallon, anyone? Blame financial innovation, not interest rates.

Monday, November 5, 2007

Another Subprime Casualty

Last week everyone was talking about the departure of Merrill Lynch’s CEO, and this weekend it was Citigroup’s Charles Prince. He stepped down as Chairman and CEO after Citi announced losses in the billions of dollars, due to asset price writedowns and credit-related losses. Win Bischoff was appointed interim CEO, until the company finds someone to replace Prince. Robert Rubin, Former Treasury Secretary, was named Chairman of the board. Prince’s tenure was one marked with management experiments, shareholder dissatisfaction and risky strategy – a mixture that didn’t work out well in the end. Citi’s stock trades now at a price 17% lower than where it stood when Prince took over in 2003. Risky bets on subprime mortgage securities may result in $8 to $11 billion in writedowns for the bank, in addition to a $6.5 billion hit it took in Q3.

Friday, November 2, 2007

Interest Rates Fall Sharply

Interest on 30-year fixed mortgages averaged 6.26% this week, down from 6.33% a week ago, according to Freddie Mac. This is the lowest reading in five months and fairly close to the lows for this year. A year ago, 30-year fixed home loans stood at 6.31%. 15-year adjustable-rate loans carried an interest of 5.91%, down from 5.99% last week. Last year this time, 15-year ARMs were at 6.02%. 5-year ARMs averaged 5.98%, compared to 6.03% last week and 6.05% a year ago. 1-year adjustable home loans fell to 5.57% from 5.66% last week.

A RealtyTrac report showed that foreclosures have almost doubled in the third quarter, compared to Q3 2006. Although RealtyTrac numbers tend to be somewhat higher than other agencies’, you get the idea. Foreclosures were up 30% from the previous 3 months and according to RealtyTrac’s CEO James Saccacio, foreclosure activity is likely to “increase over the next year in many markets”. He also mentioned that August and September “were the two highest monthly foreclosure filing totals” since January 2005 when RealtyTrac began issuing the report.

Thursday, November 1, 2007

Fed Announces 0.25% Rate Cut

The Fed cut the Fed Funds Rate yesterday by 0.25% to 4.5%, no surprises here. It also announced that further cuts are unlikely, which sounds logical in the market environment we see. Easing the interest rate some more would prompt [even] higher inflation, so the Open Market Committee is probably done cutting for now.

The dollar dropped to a new low against the Euro yesterday, briefly breaking the psychological barrier of $1.45 per Euro. The currency showed some weakness even before the Fed started cutting rates, but since the September meeting it has been trading at record-low rates against the European currency. According to analysts, $1.50 against the Euro is possible in the near term.

… Which may be bad for the prices of imported goods and oil, but has positive effects on domestic product: the Commerce Department said that economic growth was at 3.9% in the third quarter, the highest level in more than a year. The next Fed meeting will be on December 11th.