And now, KB Home

Big Wall Street banks will report 4^th 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.

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.

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.

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?

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.

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 http://www.hopenow.com.

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.

Bernanke comments on the mortgage crisis

On Aug. 27^th, Fed Chairman Ben Bernanke sent a letter to Senator Charles Schumer, in which he said there’s no need to lift the caps on Fannie Mae’s and Freddie Mac’s portfolios. A similar opinion was expressed by OFHEO (Office of Federal Housing Enterprise Oversight), the federal regulator of the two GSEs’, and President George Bush a couple of weeks ago when a suggestion to lift the portfolio limitations on Fannie and Freddie was rejected. Bernanke said that policy makers may encourage Fannie and Freddie to package more loans into securities and sell them to investors, as these actions are not constrained by the portfolio caps. Bernanke also said that the Fed is closely monitoring the financial markets and “is prepared to act as needed” to prevent bigger problems.

Bernanke suggested developing new mortgage products for low- and moderate-income borrowers that would not cause unexpected spikes in mortgage payments. Clearer explanation of loan terms would also be beneficial to potential borrowers. He also noted that reforming the FHA (Federal Housing Agency) might be helpful.

Analysts believe that these comments spell a high likelihood of a Fed rate cut on the next meeting Sept. 18. Another speech by Bernanke is scheduled for this Friday, and it may well shed some more light on what the Fed is about to do.

S&P to downgrade Alt-A

Standard and Poor’s said it has put 207 classes of securities backed by Alt-A mortgages on CreditWatch negative. The original total balance of the securities was $913.9 million. After the collapse of subprime lending, Alt-A loans are the next problem group which is causing significant losses to lenders and investors in mortgage-backed securities.

The situation on the mortgage market right now was aptly described as ‘panic’ in one publication, as virtually all types of non-conforming loans – from subprime to jumbo, are either no longer available or prohibitively expensive. Borrowers looking to refinance meet limited to no supply from lenders. Mortgage companies are making daily, and sometimes hourly decisions about the availability and pricing of products, making financing hard to come by.

In other news, the Fed Fund rate remains the same at 5.25%, as expected.

American Home Mortgage, Accredited in trouble

American Home Mortgage is firing more than 6000 out of 7,000+ employees, effective today. It has ceased taking mortgage applications and will maintain its thrift and servicing businesses. Shares traded below $1 in after-hours trading yesterday.

Accredited Home Lenders, another troubled mortgage lender, filed its annual report yesterday. The company’s public accountant Squar, Milner, Peterson, Miranda & Williamson LLP said that, if the previously announced merger with Lone Star does not close, Accredited may not be able to operate as a “going concern”. If the situation in the mortgage industry does not improve, Accredited may have to file for bankruptcy and exit the business.

The acquisition agreement with Lone Star priced Accredited at $15.10 per share, compared to the stock’s current price of a little more than $5. Accredited said that it is “proceeding as planned” toward closing the merger, but analysts believe that terms will have to be renegotiated if the transaction is to take place at all.

Update on American Home Mortgage

It was announced Monday that NYSE has halted trading in shares of American Home Mortgage. The lender is expected to produce an announcement disclosing some significant news that will affect its stocks, which last traded at around $6, down more than 30% from Friday and down 70% so far this year. In 2005, shares of American Home Mortgage were priced at $40 and above.

Analysts from Lehman Brothers, RBC Capital Markets and JMP Securities LLC downgraded American Home Mortgage Investment.

In other news, a report on foreclosures issued yesterday showed a 58% increase in the first half of this year. RealtyTrac Inc. said that 573,397 properties have reported some sort of foreclosure activity in the first six months of 2007, compared to last year’s 363,672. Foreclosures are up 32% from the second half of 2006, when the number of properties affected was 433,504. RealtyTrac used a new method of counting foreclosures that eliminates double reporting of the same property if it gets several foreclosure filings. According to RealtyTrac CEO James J. Saccacio, foreclosure filings could surpass 2 million this year.

“No value left” in Bear Stearns funds

Bear Stearns estimates that its two troubled hedge funds that invested in securities backed by subprime mortgages are nearly worthless today, after “unprecedented declines” in the value of underlying collateral. The smaller, “enhanced leverage” fund has “effectively no value left” in it while the older High-Grade Structured Credit Strategies Fund has lost 91% of its value. Shares of Bear Stearns dropped $2.47, or 1.8% to $137.44.

As markets watch everything that has “subprime” on it collapse, fears are spreading among consumers who don’t know exactly what their retirement savings are invested in. Now that securities backed by Alt-A loans are getting downgraded, many are beginning to realize how problems in the lending sector could affect nearly everyone. Moody’s, the rating agency which recently started downgrading the securities, says it is not being hired by issuers of commercial mortgage-backed securities. Underwriters are “rating shopping” and the agencies that get hired are the ones most likely to give higher ratings.

I can’t help but wonder if there will be a significant difference between ratings done by Moody’s and other companies. After all, ratings agencies need a good reputation so giving false ratings doesn’t make much sense. It seems that more downgrades are inevitable, so this “rating shopping” trend shouldn’t really last for long. But who knows…

Home builder confidence drops again

The National Association of Home Builders’ July survey of builder confidence showed that less than a fourth of home builders see market prospects as “favorable”. The index dropped to 24 this month, the lowest reading in more than 16 years and the third lowest in the history of the survey. The decline was more dramatic than expected, compared to predictions for a reading of 27.

Patrick McPherron, economist at Moody’s Economy.com, commented that “the bottom of the housing market appears nowhere in sight”. Indeed, we see no reduction in inventories, slumping prices and low buyer activity. With mortgage lenders tightening their credit standards, affordability is becoming even more of an issue. After last week’s downgrades of securities backed by subprime loans, Moody’s is now placing under review deals issued by Bear Stearns and IndyMac, backed primarily by first-lien Alt-A mortgages.

Mortgage debt keeps growing

The Fed’s first quarter Flow of Funds release, published last week, showed that mortgage debt keeps rising, even as home prices decline and financing is getting harder to find. Mortgage debt increased at a 5.4% annual rate in the first quarter, nearly three times as fast as house appreciation for the same period. Equity is declining, and at the end of Q1 2007, the ratio of equity to home value was at the record low of 52.7%. In today’s market, you don’t have to take a “cash-out” refinance to reduce the equity in your house. As prices drop, you essentially owe a larger percentage of your home’s value – without increasing your loan amount. In 2000, the equity-to-home-value ratio was 57.9, and has been steadily declining ever since. Economists predict that this ratio may drop below 50 for the first time ever in the coming months.

The drop in home equity is a logical consequence of loose lending standards during the boom years, when anyone could “buy” a house with little to no money down and hope that it would appreciate as home prices kept rising. Now that prices are flat or dropping nearly everywhere, and borrowers face monthly payments adjusting upwards, they’re being left with less and less equity in their homes. Excessive greed made owners refinance repeatedly during the boom years, draining cash out of their houses. Today, consumer confidence and spending are falling, raising concerns that the “housing slump” will affect the broader economy quite badly. Keep your fingers crossed.

Freddie Mac to cut down on subprime lending

Freddie Mac, one of the biggest buyers of home mortgages in the U.S., announced that, as of September 1^st, 2007, it will no longer purchase subprime loans and loans that carry potential risk of payment shock. It will also stop buying loans that require little to no documentation.

Now this I call sound business practice. It was high time someone recommended better standards and a company as big as Freddie Mac can actually influence the market. Since the changes will take effect as far in the future as September, the impact of this news will not be immediate and yet, I guess many lenders who depend on the company will take notice.

Freddie Mac said it is developing new fixed-rate and hybrid adjustable-rate mortgage products to provide more choices for borrowers. An estimated 50% of the mortgage-backed securities currently owned by Freddie Mac won’t comply with the new standards, so are we in for brand-new types of loans? It seems that more exciting news is on the way, but I wonder what portion of those who took out subprime mortgages in the past will qualify for the new products.

The company also recommends that banks and lenders hold money from borrowers in escrow for paying taxes and insurance, a common practice in prime lending that could help improve subprime lending standards.

Fannie Mae, the mortgage giant’s sister-company, said it would wait for guidance from federal regulators before acting, as its exposure to the subprime segment is “low”.