Thursday, January 31, 2008

And Another Rate Cut

Yes, he did it again. Bernanke cut the Fed Funds Rate by fifty basis points, bringing the benchmark rate to 3%. Now that the price of credit is officially below inflation, could the economy finally recover? I don’t think so. Although I’ve read some analyst opinions that some – very, very slim – chances exist that the Fed’s policy will succeed, the reality is that too many problems in the financial and housing sectors need to be solved. Home prices are more than 30% higher than they should be by historic standards, with California median prices 60% above the reasonable level. Until those come down, and that will be a slow, painful process for many a household, bank, lender, and investor, the Real Estate market will not begin to operate properly. With all the mortgages that are about to fail will come huge writedowns and losses at banks all over the world, slowing U.S. economy, higher rates of inflation and unemployment, and all the doom and gloom that those bring along. I don’t really see how changing the interest rate can warp the reality and all the inevitable processes that are slowly unwinding, but the Fed has a job to do, and they’re doing their best. Who knows, it might just work. And by the way, I’m not really keeping score but isn’t it funny how for three meetings in a row, there’s always one – and only one – member of the Fed that votes against a decision. It’s always a different person but I’m beginning to feel there’s a reason why they appoint someone to disagree with the majority. Perhaps it would “scare the markets” if everyone voted for the rate cut? Well… I think they’re quite spooked already; could it really get any worse?

Wednesday, January 30, 2008

Countrywide Didn’t Keep Its Promise

Countrywide Financial, the nation’s biggest mortgage lender reported its 4th quarter financial results yesterday. After a $1.2 billion loss in Q3, the company said it expected a profit in Q4, but failed to achieve that, as expected. Countrywide posted a loss of $422 million, much better than the previous quarter, but well, still a loss. However, Bank of America affirmed investors that it is still eager to acquire the mortgage lender, so shares of both businesses went up. Overall, the 4th quarter results were pretty bad in every sense: loan fundings were almost cut in half compared to a year earlier, and loan-loss provisions increased more than 12 times from $73 million to $924 million for the same period. The delinquency rate on subprime mortgages was 33% in Q4, up from 29.6% the previous quarter. And finally, it currently holds $395 million in foreclosed real estate – now that one’s gonna be hard to get rid of.

Tuesday, January 29, 2008

New Home Sales As Bad As Existing Homes

New home sales tumbled 26.4% last year, the largest yearly drop on record. Sales were down 4.7% in December, with median home prices dropping 10.4% year-over-year, the biggest 12-month decline in 37 years. These numbers don’t account for cancellations, so actual sales were probably even lower. Furthermore, I guess most sales featured additional incentives, so the prices are inflated, too. The median price of a new home increased a mere 0.2% to $246,900 in 2007 – if incentives were taken into consideration, new home prices would drop as well. The inventory of unsold homes is at 9.7 months’ worth, which is close to a record high, so there’s no light at the end of the tunnel for home builders. An economic stimulus package? Financial innovation, anyone?

Monday, January 28, 2008

NYC Expands Countrywide Suit

New York City Comptroller William Thompson is suing Countrywide Financial, accusing the company of misleading its investors by “falsely representing that Countrywide has strict and selective underwriting and loan origination policies”. It was announced on Friday that the suit is being expanded, with additional company officers, directors, underwriters and accounting firms. Now that names like Grant Thornton and Citigroup are involved, this is getting serious, and even uglier than before.

It’s funny how every time anyone mentions Countrywide in an online article, there’s a burst of attention and a flurry of comments ranging from “I’m a former employee, they deserve whatever comes their way” to “I work at Countrywide, we’re all ethical agents”. I’m more inclined to believe the former, until that is proved untrue. And some of the latest news on Countrywide’s Mozilo: it seems he’s so fed up with the press commenting on his stock sales and retirement benefits, that he’s decided to forfeit $37.5 million in severance pay, but still keep the rest of the money he’s about to receive upon leaving Countrywide. Does this mean that he doesn’t think he deserves the money?

Friday, January 25, 2008

Real Estate: Still Gloomy

Housing has been a source of concern for regulators, bankers and consumers for more than a year now, and signs of improvement are nowhere to be seen. According to the latest NAR report, existing home sales dropped 2.2% in December to a seasonally adjusted annual rate of 4.89 million units, compared to 5.00 million in November, down 22% year-over-year. Total existing home sales for 2007 came in at 5,652,000, down 12.8% when compared to 2006 results but still the fifth highest level on record. The inventory of unsold homes currently on the market is more than twice the normal supply. The December level was the highest in history for that month. The median price for a single-family home dropped 1.8% in 2007, the first decline since the NAR started tracking prices in 1968. Looks like it can only get better from now on but who knows, so many problems need to be solved first.

By the way, the latest Fed rate cut has helped bring down mortgage interest rates: on average, the 30-year fixed home loan carried an interest of 5.48% this week, the lowest level in almost 4 years. It stood at 5.69% last week. 15-year fixed-rate mortgages dropped to 4.95%, from 5.21% last week, 5-year adjustable-rate home loans averaged 5.13%, compared to 5.40% a week ago, and one-year ARMs stood at 4.99% this week, compared to 5.26% last week. Lenders are expecting a refinancing boom.

Thursday, January 24, 2008

Merrill: Housing Prices To Drop 15% This Year

Analysts at Merrill Lynch predict that Real Estate prices will fall 15% in 2008, and continue to slide in 2009. The NAR disagrees: in their rosy outlook, prices will be flat this year, with a 5.3% drop in the first quarter and a rebound in the second half of the year. According to Merrill Lynch, housing starts will drop 30% by the end of the year – a likely scenario that doesn’t bode well for home builders. “The reduction in housing starts is not stabilizing the economy, but it will stabilize the market”, said the NAR’s Lawrence Yun – at least he got this one right. The Fed’s rate cut will probably help sales, but it is unlikely to change the situation dramatically. Rather, 2008 will be just as bad for homebuilders as 2007. There’s little hope for a successful spring buying season, although lower interest rates and dropping prices could lure buyers to the market. Much will depend on consumer confidence and commodity prices in coming months. If the slowdown is more severe than expected and unemployment keeps growing at the same pace, many potential buyers may choose to delay a home purchase.

Wednesday, January 23, 2008

The Fed Panicked

A 0.75% rate cut - both the discount rate and the Fed Funds rate. 1 week before a scheduled Fed meeting. This is huge. A cut like this would be remarkable even at a normal meeting, but Bernanke chose to slash rates at an emergency meeting. He must have been really scared about the stock market and the economic prospects if he couldn't wait for another week. This feels disappointing. The last time the Fed slashed rates at an unscheduled meeting was after the terrorist attacks of Sept. 11, 2001. It's just plain wrong to go this far, Bernanke is sending the wrong signals and tinkering with economic fundamentals that will greatly impact businesses and the lives of individual consumers. Well, at least those who wanted a 1% cut will be happy - the Fed will meet on Jan. 30 and it might cut some more then. For the time being, happy 3.5% Fed Funds Rate.

Tuesday, January 22, 2008

Bush Administration Proposes Fiscal Stimulus

On Friday, Bernanke and the Bush administration proposed a “fiscal stimulus package” of $150 billion to help prop up the economy by encouraging consumer spending. No details were available, because the Congress has yet to approve it, but the administration is considering one-time tax rebates of approx. $800 for all consumers. An agreement will probably be reached in 30 to 45 days, just in time for tax-filing season. The plan is costly, and there’s some doubt that it won’t help the economy in the long term. Although it actually provides consumers with free cash, no one knows how they may react: in the current crisis, people are unlikely to start spending more. They may have to pay down credit card debt, buy insurance, or choose to invest the money. It may offer some relief, but it will not solve all the problems in the U.S. economy. Stock markets were closed on Monday, but Dow Jones and S&P 500 futures prices dropped more than 4% in a day. Markets all over Europe, South America, and Asia plunged on worries over bank losses, the U.S. Real Estate market and an imminent recession. Now this is getting scary.

Friday, January 18, 2008

The Perfect Storm

Housing starts dropped 14% in December to an annual rate of 1.006 million, the lowest pace since 1991. Construction fell 25% in 2007, its biggest drop since 1980. Permits dropped to 8.1% in December, and 25% for the entire 2007, the biggest decline since 1974. Construction of single-family homes dropped 2.9%, and multifamily homes dropped 40%. Homebuilders are scaling down construction while they wait for the surplus inventory on the market to sell. Well at least there’s some hope that that will happen. Mortgage rates continued to drop this week, 30-year fixed-rate mortgages averaging 5.69%, the lowest in more than 2 years. 15-year fixed-rate mortgages averaged 5.21%, down from 5.43% last week. 5-year hybrid ARMs carried an interest of 5.40%, compared to 5.63% last week. 1-year adjustable home loans fell from 5.37% to 5.26%. Unfortunately, banks are reluctant to lend money to borrowers. Weak retail sales in December, which dropped 0.4% from the previous month, would suggest that consumers are feeling strapped and unlikely to start house-hunting just yet. This looks like a perfect storm for the economy, and we’ve run out of ideas – and financial innovation.

Thursday, January 17, 2008

Banks Tighten Credit

The Fed’s efforts to add liquidity to the markets are being offset by banks such as Citi, which announced that it will be raising interest rates and reducing consumer lending. Mortgage lending and credit cards will also be trimmed. Lending, to anyone, in any form, is too risky right now, and while the market is trying to deal with the mortgage and mortgage-derivatives mess, there’s fear that other areas of the financial system may fail as well: credit card lending, commercial Real Estate loans, and the list goes on. To help revive the economy, the Fed will probably cut rates again at the end of January (or, as some like to believe, perhaps sooner), but maybe a serious crunch is what the economy really needs after all. Short term, tighter credit will only extend the crisis in housing, because home buyers won’t be able to secure financing. No wonder the immense inventory of unsold homes (currently above 10 months’ worth) is not moving and home builders are struggling. With or without the Fed’s help, housing will take years to get back to normal, as consumers learn to save, budget and prioritize expenses.

Wednesday, January 16, 2008

Speculation Grows Ahead Of Fed Meeting

The next Federal Reserve meeting is scheduled for January 30, but with all the dismal economic data in recent weeks and the expected disastrous earnings results at top banks (Citi has just reported an $18 billion writedown in mortgage investments), plans may change. Although the date for the next meeting is only 2 weeks away, there’s belief that Bernanke may summon an inter-meeting to discuss a quarter-, or even half-percentage point rate cut. According to analysts, he may cut some more at the actual meeting. The market is suggesting a 0.75% rate cut, a rare event in the Fed’s practice, with some economists demanding a whole percentage point cut – an unlikely scenario, given the Fed’s concerns over inflation, oil prices, and the dollar’s weakness. Chairman Bernanke signaled that the Fed is ready to take radical action to save the economy, but after all, there’s a chance that it won’t be necessary. I guess the Fed will rather wait for a couple of weeks than summon an emergency meeting.

Tuesday, January 15, 2008

Citigroup To Layoff Up To 24,000

Citigroup may layoff between 14,000 and 24,000 employees in 2008, according to a CNBC article. The job cuts are related to losses due to subprime and credit-related losses, and part of Vikram Pandit’s, the bank’s new CEO, plan to cut costs. Citigroup is also expected to cut its dividend. Merrill Lynch has also begun laying off people, although on a smaller scale. Mass layoffs, inflation, and credit-related problems are undermining consumer spending, with consumer confidence at a 15-year low. Stores and credit card companies are reporting a slowdown in spending since December, even among wealthier consumers. High-end stores, until recently considered immune to economic slowdowns, are reporting lower sales, and late payments on credit cards are surging. This is not officially a recession, but it could be a prelude.

Monday, January 14, 2008

Mozilo After Countrywide

Now that it has been officially announced that Bank of America is acquiring Countrywide, the spotlight is on Mr. Angelo Mozilo again. Mozilo, Countrywide’s founder and CEO, is famous for his massive sales of company stock. He’s earned hundreds of millions of dollars since he became CEO in 1999 and is expected to get another hundred million in severance after the closing of the BofA deal sometime in Q3. Some sources value his severance package in tens of millions of dollars, which, while substantially smaller than the number above, definitely ensures Mr. Mozilo a happy retirement. One source said he was planning to retire in 2009, but with this new development he might be leaving the workforce a little earlier. I don’t think that makes much difference to him. Mozilo’s generous compensation, which includes use of the corporate jet, county-club membership and other perks, has often been criticized in the media. Executives at mortgage lenders like Countrywide are believed to have caused the current mortgage crisis by allowing predatory lending, fraud, and other unfair business practices. Well the man founded the company after all…

Friday, January 11, 2008

BofA Might Acquire Countrywide After All

Countrywide stock surged more than 50% on rumors Bank of America may be acquiring the lender. We’ve heard this before, but right now there’s talk that the two companies are “in advanced talks”, although there’s still some possibility that the deal will fall through. Neither company has officially commented on the rumors.

Back in August, Bank of America bought $2 billion’ worth of Countrywide shares, an investment which has by now lost a significant part of its value. Before the stock rally, Countrywide was valued below $3 billion, which makes it an attractive target for BofA. By buying Countrywide, the leading U.S. lender, BofA can expand its client base. The bank currently holds 9.88% of the country’s deposits, just below the 10% federal limit. However, this limit does not apply to federally chartered thrifts, and Countrywide happens to be one, which means that Bank of America could use the loophole and circumvent the growth limitation. Countrywide’s loan portfolio could pose a problem, however, because it contains a lot of “toxic” mortgages which are fast losing value. There is a lot of speculation surrounding the deal. Some say it was encouraged by Washington, the primary reason being that Countrywide, contrary to its own allegations, is indeed close to bankruptcy. It is believed that authorities wouldn’t let Countrywide fail, because, due to its sheer volume, the lender could put the economy at risk.

Thursday, January 10, 2008

And now, KB Home

Big Wall Street banks will report 4th quarter results in the coming weeks, and those are expected to be very, very bleak. But until then, home builders’ financial troubles will be in the spotlight. Shares of KB home lost 9% after the company reported a $773 million loss in Q4, 7 times the expected number. And they didn’t sweeten the pill either: Chief Executive Jeffrey Mezger said he expects the market to remain bad for a while, due to oversupply, low affordability and declining consumer confidence. Although revenue fell, the company increased its cash reserve, which, according to analysts, should help it survive the downturn. The surprising part was that KB Home placed a special emphasis on its “strategic partnership” with Countrywide. Amid fears that the lender might go under, it’s hard to see why this partnership is so important, but I guess they can always find another lender to work with if they have to. As for Countrywide, delinquency and foreclosure rates on its loans hit record highs in December, and loan origination dropped almost 50% year-over-year. It will report its financial results for Q4 later this month, too.

Wednesday, January 9, 2008

Countrywide Bankruptcy Rumors Float Again

Countrywide managed to produce a bunch of bad news in a day – again. Its stock plunged more than 20%, its biggest decline since October 1987, on bankruptcy rumors and speculation. In a fresh hit to Countrywide’s reputation, it was revealed that the lender has fabricated documents related to a bankruptcy case. The papers were presented to the court as evidence of Countrywide’s actions, but they had apparently never been sent to the borrower. Although it tried to explain that this was not fabrication per se, Countrywide has finally ruined its reputation. Rumors about credit rating agencies considering downgrading Countrywide and a possible bankruptcy were dismissed by the lender. At this point, if you think you’re having a déjà vu, relax: this has indeed happened before. In fact, rumors about Countrywide considering filing for bankruptcy protection sent the company’s stock falling several times in 2007, most recently a couple of months ago. The lender will report its 2007 fourth quarter and year-end earnings, and host a live webcast on January 29. Currently, Countrywide shares trade at a little below $6.

Tuesday, January 8, 2008

Borrowers Desperate For Help

Thousands of homeowners facing foreclosure are turning to the Bush Administration’s foreclosure relief plan for help. HOPE NOW Alliance, a coalition of lenders and nonprofits which plays a central role in the plan, has noticed a significant increase in calls since the campaign was officially announced in the media. In each of the past two quarters, the number of calls has doubled and these days staffers have to deal with up to 3,000 calls a day, up from 100 calls per day in June 2006. The demand is so high that the foundation has tripled its staff, but hiring more counselors is hard, because HOPE NOW cannot offer competitive remuneration. Despite all the blasting the plan received in the media, desperate borrowers are calling by the thousands, and why shouldn’t they: if they get some mortgage relief – perfect, if not – they have nothing to lose by asking for help.

Fannie Mae said that it will reimburse mortgage servicing companies which refer delinquent borrowers to the HOPE counseling hotline, adding to demand for the service. The HOPE NOW toll-free number is 1-888-995-HOPE. It is available 24 hours a day and provides counseling in multiple languages. Now we’ll all sit and watch how all this unwinds, because it’s the best most of us can do – apart from, probably, writing angry comments about irresponsible borrowers/lenders and about using taxpayers’ money to bail out speculators. Oh, in fact Paulson repeatedly denied the possibility of the latter. However, he did say something about the economy and the housing market, but he wasn’t really optimistic: “there is no single or simple solution that will undo the excesses of the last few years”. Sad but true.

Monday, January 7, 2008

Unemployment Rises

Unemployment rose to 5% in December, according to the Bureau of Labor Statistics, up from 4.7% a month earlier. Unemployment was expected to grow a modest 0.1% to 4.8%. A significant jump in unemployment like this one may indicate that a recession is coming. A year earlier, the jobless rate was 4.4%. The losses were mainly in construction, retail trade, financial activities and manufacturing, while health care, mining, management and technical consulting services added jobs. It is widely believed that actual unemployment is significantly higher than official statistics would suggest, because the data may be distorted by various adjustments. Unemployment rates for some months in 2007 were revised upwards.

It is believed that weak employment data may pressure the Fed to cut rates at its next meeting on January 30. According to analysts, a half-point rate cut could help the economy avoid a recession, but concerns about the high price of oil and surging inflation remain.

Friday, January 4, 2008

Mortgage Rates In The First Week of 2008

Mortgage interest rates began the year at a 4-week low, according to Freddie Mac’s weekly survey of mortgage lenders. 30-year fixed-rate home loans averaged 6.07%, down from 6.17% last week. 15-year fixed-rate mortgages carried an interest rate of 5.68%, compared to 5.79% a week ago. 5-year adjustable mortgages dropped from 5.90% to 5.78%, and one-year ARMs were at 5.47%.

Analysts attribute the drop in interest rates to a series of bad news about the economy and pessimistic expectations about the new year. However, the consumer confidence report picked up in December for the first time in 5 months. I wonder if it’s all holiday cheer or a long-term trend. Either way, mortgage interest rates got even better, for those who can qualify for a loan.

Thursday, January 3, 2008

Single-Family Home Building Declines

Spending on private residential construction dropped 2.5% in November, its biggest decline in 5 years. This was the 21st consecutive drop in home construction, which illustrates a slowing trend for private home building. Non-residential building, however, showed an increase of 2.1%, which offset the drop in residential construction. Total construction spending increased by 0.1% in November. Meanwhile, the Institute of Supply Management’s manufacturing index dropped from 50.8 to 47.7. Any number below 50 indicates contraction in manufacturing. Stalling home building and manufacturing will most likely lead to slower economic growth and affect the overall GDP. These results are closely related to the higher cost of credit and the problems in the housing sector, both of which result in lower consumer spending. What we get next is either (or maybe even both) of the following: another rate cut or recession.

Wednesday, January 2, 2008

Little Optimism For 2008

This is the first post for this year. 2007 was tough, and a lot has changed since last January. Many believe the housing and capital markets may never be the same again. There’s hope for improvement later this year, and yet there’s some fear that things may get worse before they get better. November housing data, released at the end of December, gives little reason for optimism. New-home sales dropped 34.4% on year-over-year basis, the largest drop since 1991. The median price was down 0.4% on a yearly basis to $239,100. This number doesn’t account for builder incentives, which means that the actual prices have dropped even more. Sales of existing homes were up 0.4% compared to the month before for the first time since February – this sounds like a piece of good news but it’s hard to classify it as a turnaround point. Fewer homes were sold in November than the previous month: 46,000 homes sold compared to 55,000 in October. The supply of unsold homes currently on the market would take 10 months to sell at the current pace.

Mortgage interest rates ended the year nearly where they started, with the 30-year fixed-rate mortgage averaging a little above 6.1%. This, however, happened after interest rates topped 6.7% in the summer and the Fed lowered its benchmark interest rate by 1% with three consecutive rate cuts. Forecasts for 2008 range from extremely bearish to modestly bullish, but most are pretty cautious and somewhat vague. Happy New Year and let’s hope it’s a good year.