Mortgage Bankers Association: Record Foreclosures In Q3

Home foreclosures hit an all-time high in the third quarter, according to a report released by the Mortgage Bankers Association. 0.78% of all mortgages nationwide were in foreclosure, up from 0.65% the previous quarter. Delinquency rates increased from 5.12% to 5.59%, the highest level in more than 20 years. 4.72% of subprime ARMs entered the foreclosure process, compared to 3.84% in the second quarter. The association’s chief economist, Doug Duncan, said that the situation is likely to get even worse, an opinion shared by analysts at Moody’s. Moody’s predicts that housing prices will drop 30% before the crisis is over. They believe the recession will last until early 2009 (!), with home prices falling 13%, maybe more if we factor in homebuilder incentives. The hardest-hit markets will see prices drop more than 30%, in the “most severe housing recession since the post-World War II Period”, according to Mark Zandi, chief economist at Moody’s Economy.com. Home sales are expected to hit bottom in early 2008, which makes me wonder what is going to spur sales – maybe buyers will finally get bored of waiting on the sidelines?

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.

Mortgage availability drops drastically

As credit markets panic, lenders go out of business and hedge funds collapse, whole classes of loans seem to be evaporating. Lenders are no longer willing to fund “Jumbo” mortgages, or loans for sums above the Fannie Mae limit of $417,000, because there’s no one to sell them to. Those who still offer the product charge a fee of 7% and above – and that is for prime borrowers with good credit and a down payment of more than 5%. No-down payment and 5% down payment loans have virtually disappeared from the market, and so have no-doc, interest-only and some other super-risky loans. Subprime and Alt-A borrowers were the first to feel the squeeze; now even consumers with perfect credit are hard put to find financing at a reasonable price.

A Fed survey discovered that 56.3% of banks have tightened credit standards for loans to borrowers with weak credit. 14.3% of the participants in the survey said they had tightened lending standards to prime borrowers, too. Quite bad for anyone wishing to buy a house or refinance their mortgage. It’s only natural that we’re seeing record levels of delinquencies and foreclosure activity. Consequently, anyone wishing to escape adjusting monthly payments has no real alternative to foreclosure. I wonder home many troubled borrowers actually considered the ‘worst-case scenario’ before they signed their mortgage papers a couple of years ago. Or was it the NAR & Co.’s influence? Housing prices could only go up, right?

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.

A Better Outlook for "New Century"

Chris Brendler, an analyst with Stifel Nicolaus upgraded New Century from “Sell” to “Hold”, saying the company still has enough cash to handle its current tough situation. He called liquidity concerns, which led to last week’s 43% drop in stock prices, “premature”. Before last week’s disaster, Stiefel Nicolaus’ opinion of New Century was quite negative, which means they foresaw trouble ahead.

According to Brendler, New Century has $360 million in cash and $17 billion in borrowing arrangements, 50% of which aren’t utilized and it seems that the company will be able to manage. It is still unclear how badly the adjustments to mortgage value will affect New Century, but analysts believe it will be able to wriggle out of its financial fix.

New Century shares rose 2.9% to $17.70 in pre-market activity, as other subprime lenders’ stocks climbed an average of 0.5%. These include Countrywide Financial, IndyMac Bancorp and Novastar Financial.

Nevertheless, the outlook for subprime mortgage lenders remains challenging, as delinquency rates on high-risk loans rise.