Housing Bubble Bursting?

[Randolph Kinney]

Credit crunch at low-end of mortgage market

http://www.marketwatch.com/news/story/big-banks-deciding-fates-trouble/story.aspx?guid=%7B08BF0083%2D33AD%2D47C7%2D9EDC%2D3AB1085BBE43%7D

Big banks control fate of subprime lenders

Merrill, J.P. Morgan pull back in credit crunch at low-end of mortgage market

SAN FRANCISCO (MarketWatch) -- A credit crunch in the market for low-end mortgages has left companies specializing in these subprime loans at the mercy of big banks like Merrill Lynch & Co. and J.P. Morgan Chase.

Several private subprime lenders, such as Ownit Mortgage Solutions, Mortgage Lenders Network USA and ResMAE Mortgage Corp., have already filed for bankruptcy protection after having financial lifelines cut by Merrill and other big banks.

The fate of other publicly traded subprime specialists, such as New Century, Novastar Financial and Fieldstone Investment, may also rest in the hands of big banks that have helped finance their recent rapid expansion, analysts said.

Subprime mortgages are offered to home buyers who fail to meet the strictest lending standards. While these loans remain a small part of the home lending industry, they've helped more people buy homes who previously couldn't afford it, helping to fuel a surge in housing prices in 2004 and 2005.

That's why the credit crunch in the subprime market is being so closely watched by investors, economists and policymakers. By cutting off access to credit for these extra buyers, demand for homes may fall further, depressing prices and fueling a broader slowdown in the U.S. housing market.

"This distress in the subprime area is a significant concern," Ben Bernanke said on Wednesday. While noting that the contraction has yet to reach a point where it will affect overall economic expansion, the Federal Reserve chairman said he's monitoring developments.

The warehouse banks, such as Merrill. J.P. Morgan Chase, Citigroup and Bank of America, are crucial to this process because they keep subprime lenders supplied with enough cash to help them make more loans immediately.

In recent weeks, warnings from banking giant HSBC Holdings and New Century have shaken subprime confidence further, sparking speculation that a major bank is aggressively making margin calls.

Accredited Home Lenders has had to come up with more cash after getting margin calls from some of its warehouse lenders, Stuart Marvin, executive vice president at the subprime specialist told analysts during a conference call on Wednesday.

ResMAE Mortgage Corp., which had quickly become the 20th largest subprime specialist in the U.S., filed for bankruptcy this week and said it plans to sell most of its assets to Credit Suisse.

Industry publication National Mortgage News said this week that Merrill Lynch has been making margins calls. A Merrill spokesman declined to comment.

In late January, J.P. Morgan Chief Executive Jamie Dimon noted rising defaults in some of its riskiest home loans and said the bank had largely exited the subprime business.

After the warnings from New Century and HSBC, warehouse lenders are probably now deciding which subprime originators to continue backing and which ones to drop, CFRA's Gast said.

"In the current liquidity environment, CFRA does not believe any lender is at low risk," he wrote. "All lenders are showing signs of credit quality deterioration."

"The long-awaited meltdown in subprime mortgage lending is now underway, and it likely has further to go," Richard Berner, chief U.S. economist at Morgan Stanley, wrote in a note to clients this week.

 

[moh malekpour]

NAR cannot hide the reality anymore but still is sugar coating the market

http://money.cnn.com/2007/02/15/real_estate/home_prices/index.htm?postversion=2007021514

Record home price slump
Fourth-quarter report from National Association of Realtors shows largest price drop on record as markets with price declines now outpace those with gains.
By Chris Isidore, CNNMoney.com senior writer
February 15 2007: 6:46 PM EST


NEW YORK (CNNMoney.com) -- The slump in home prices was both deeper and more widespread than ever in the fourth quarter, according to a trade group report Thursday.

Prices slumped 2.7 percent in the fourth quarter compared to the fourth quarter a year earlier, according to the report from the National Association of Realtors (NAR). That's the biggest year-over-year drop on record and follows a 1.0 percent year-over-year decline in the third quarter.

In addition, 73 metropolitan areas reported a decline in the fourth quarter, compared to a year earlier. That outpaced the 71 that saw a gain. It was both a record number and percentage of markets showing a decline in the group's quarterly report. Five markets saw prices unchanged.

Latest prices in your hometown
That decline was a far more widespread than the third quarter, when only 45 markets reported drops and 102 saw gains, or the second quarter when only 26 saw a year-over-year slump in prices. The national median price was still showing a year-over-year gain in the second quarter.

The most recent median prices are down even more: 3.4 percent since hitting record highs in the second quarter. Almost three-quarters of the markets, reported on by the group, saw declines in median prices over the past six months, with eight reporting double-digit declines.

Vacation markets, where investor-buyers had driven up prices during the building boom of 2005, were particularly hard-hit.

The Sarasota-Bradenton-Venice, Fla., market saw the biggest year-over-year decline in the fourth quarter, with prices plunging 18 percent.

When looking at the change between the fourth quarter and the second-quarter peak, the Palm Bay-Melbourne-Titusville, Fla., market saw the biggest drop, with median prices plunging 19.5 percent.

Top 10 foreclosure markets
But the weakness in prices wasn't restricted to those kinds of markets. Springfield, Illinois, reported a 16.2 percent drop in the fourth quarter compared to the third quarter, the biggest decline during that time frame, along with a 10.4 percent decline compared to a year earlier.

Still, the trade group statement said it believed that the worst was over for the drop in prices.

"Examination of data within the quarter shows home prices stabilizing toward the end," said a statement from David Lereah, the NAR's chief economist. "When we get the figures for this spring, I expect to see a discernable improvement in both sales and prices."

Part of the decline in prices was attributable to the drop in sales pace. Total existing home sales, including single-family and condo, were at a seasonally adjusted annual rate of 6.24 million units in the fourth quarter, down 10.1 percent from a 6.94 million-unit level in the fourth quarter of 2005.

And the slower pace of sales, coupled with investor-buyers from 2005 trying to sell homes and condos they had bought, created a glut of homes on the market, according to other real estate readings, which also fed into the decline in home prices.

NAR President Pat Vredevoogd Combs, a Grand Rapids, Mich., realtor, admitted the group doesn't expect to see a big gain in 2007 statistics.

Unlock your home's value
"Right now, buyers are responding to seller pricing and incentives, and there's a bit of a pent-up demand as a result of buyer hesitation during the second half of 2006," she said in the group's statement. "We're not looking for big changes, but a gradual rise in sales and home prices is projected - that will be good for the overall housing market and related industries."

She said that since most homeowners stay in a home six years on average, a look at five-year price gains shows most homeowners are doing OK despite the recent weakness. The median five-year price gain is 41.8 percent, according to the group's figures.

The nation's leading homebuilders have all reported declining prices for new homes, which are not captured in this report. KB Home (Charts) reported a net loss of $49.6 million, or 64 cents per share, for the fiscal fourth quarter ended Nov. 30, earlier this week. Other leading builders reporting weakness in prices include Lennar (Charts), Pulte Home (Charts), Centex (Charts), D.R. Horton (Charts) and Toll Brothers (Charts).

The most expensive market in the latest report was San Jose-Sunnyvale-Santa Clara, Calif., where the median home price $760,000. That was up $20,000, or 2.7 percent, from a year earlier but down $19,000, or 2.4 percent, from the third quarter and off $35,000, or 4.4 percent, from the second-quarter peak.

The cheapest market was Elmira, N.Y., where the median price was $78,400. That was off 0.5 percent from a year earlier and down 16.2 percent from the third quarter, which is when prices there peaked.

Despite the record weakness, there were some markets that showed strong price gains. The best was Atlantic City, N.J., where the median price was $339,800, up 25.9 percent compared to a year earlier

 

[Randolph Kinney]

2. Wall St.- saying that sub-prime and adjustables will kill this market- essentially the opposite of what the brokers and bankers are saying. Do they have motivations too? You bet. Just look at what they are doing on buying the mortgage paper- forcing down the prices based upon their gloomy forecasts. OK- they have their ax to grind as well. Are they right? Again time will tell.

Brad, just to call your attention to a recent article concerning the credit crunch developing in the sub-prime market (a contagion), entities that originate sub-prime mortgages are being denied further credit by their warehouse lenders. That has caused them to file for bankruptcy.

3. The Press- saying that all these anecdotal stories arre clear signs of a bust. Are they right? In this case I have never known them to be collectively right when dealing with any sort of sensational issue. Their job is to sell papers and increase viwership- and America's housing is near and dear to all of us so any perceived problem is ripe for exploitation.

THAT is why I have always looked at the data itself- I do not trust any of these groups in aggregate (although I'll admit that I DO listen to Greenspan and to Doug Duncan since they have been right far more often than the otehrs- Bernanke's rating still out as he is too new).

The sub-prime mortgage defaults has the federal reserve and Bernanke's attention. The federal reserve system is the lender of last resorts. The 1987 stock market crash was stopped short thanks to Greenspan opening the windows to the FED and flushing money directly to brokers, bypassing banks.

Now if someone is cooking the books as many of you have assumed that NAR is doing and as Randolph suspects Dataquick may be doing (and I still fail to see where they really benefit from doing that- Dataquick), then OK. But I have not seen that ahappen. Perhaps that is what Austin is suggesting but I do not know.

Brad, generating and interpreting the raw data is necessary. Changing the methodology of the data generation and how a median price is calculated is something anyone should suspect. DataQuick has been using whatever methodologies for how long? Trouble in the market now appears and there is a change with out showing the difference with the old versus the new method.

The California Association of Realtors had been publishing the housing affordability index for California markets using the same methodology as all other entities publishing their HAI across the nation. They quit publishing that index and have substituted a new index called First Time Buyer Affordability Index (FTB-HAI). What's the difference? For comparison, CAR quit publishing at the end of 4Q05 the HAI, which was at 9%. At the same time, CAR substituted the new index, FTB-HAI, which showed affordability at 22% for 4Q05. Now when anyone looks at the affordability number, it does not look that bad anymore. And the new method does not have the same sensitivity as the old index so when house prices rise or fall 5%, the affordability number remains constant. So does one compare the national HAI to the CAR FTB-HAI?

I don't know of or understand what could be the reason for DataQuick's change in methodology for transactions or calculating the median prices. I always thought the median is the median. Transactions may now include whatever raw data they excluded. All I know now is that DQ stated they changed. Going forward, I won't trust what they publish or the interpretation of it.

 

[Randolph Kinney]

DataQuick: Change in Statistics Methodology

http://www.dqnews.com/RRStatChg0207.shtm

Sales counts:Changes in our methodology to determine the number of sales transactions have resulted in a roughly 10 percent increase, on average, in our historical monthly sales totals. In most cases this has little if any impact on the year-over-year increase or decline in sales.

Median sale prices:The main change here is a switch from a so-called weighted median price to a straight median for our "all homes" category, which combines resale houses, resale condos and all new homes. On average, this change results in a roughly 1 percent difference in the all-home median sale price historically.

To count as an "arm's-length" sale for our sales counts, the logic we've used insisted that there be a seller, a buyer, and that money changed hands. We've now expanded this to include transactions where there was a purchase loan if no price was apparent.

We're also now including multiple sales transactions. If three homes were bought in the same transaction, we now count them as three home sales, not one sale. These changes increase monthly sales counts by an average of 10 percent. Intra-family transfers are not included, nor are foreclosures until a home is re-sold to a new buyer.

We have decided to switch to a straight median sale price instead of a weighted median when combining home categories (resale detached houses, resale condos and new homes), and when combining counties into regions. The result: our monthly "all-home" median prices have changed by about one percent on average. Why the switch? We use the straight median most often, including in work sold to the real estate industry, and we decided it's time to adhere to a single form of the median in all of our work. The difference between the two medians is usually slight, and the straight median - the point where half of the homes sold for more and half for less - is more easily explained and understood.

 

[moh malekpour]

Subprime Mortgage Derivatives Tumble for a Fourth Straight Week

http://www.bloomberg.com/apps/news?pid=20601087&sid=aO2GJdf9n4ZQ&refer=home

By Jody Shenn

Feb. 16 (Bloomberg) -- A derivatives index used to bet on the riskiest U.S. mortgage bonds headed for its fourth straight weekly decline as more lenders said they were losing money.

Prices for credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and created in the second half of 2006 have fallen 2.6 percent to 83 this week, and are down 15 percent since Jan. 18, traders say. The decline, which indicates a deterioration in the perception of credit quality, means an investor this week would have paid more than $950,000 a year to protect $10 million of bonds against default.

The tumble is being exacerbated by hedge funds using the index to make bearish bets and a dearth of investors willing to use it to make bullish bets, said investors such as Dean Smith of New York-based Highland Financial Holdings Group LLC, which manages $2 billion including mortgage bonds. The cost to protect against default using the index is more than two-and-a-half times that to insure individual securities, Bear Stearns Cos. says.

``We've yet to see the floor on where these things can go,'' said Paul Colonna, a fixed-income manager for Stamford, Connecticut-based GE Asset Management, which oversees $199 billion. ``And it's not based on housing data or performance data'' on mortgages in the bonds.

The decline in the ABX-HE-BBB-07-1 accelerated last week, pushing it down from 92.01 on Feb. 2 as the two biggest subprime mortgage lenders, HSBC Holdings PLC and New Century Financial Corp., said more of their loans were going bad than they expected. Subprime home loans are made to borrowers with low credit scores or high debt burdens. New subprime mortgages are experiencing more delinquencies than in at least six years.

`Pure Sentiment'

ABX indexes plunged even as typical yield premiums on BBB- bonds remained at about 3 percentage points over the one month London interbank offered rate, according to RBS Greenwich Capital Markets. Typical swap premiums on a single bond rose by $50,000 per $10 million to $400,000, versus a $235,000 rise for ABX premiums to $918,000, according to Barclays Capital.

In the ABX market, ``almost the entire price movement can be blamed on nothing other than pure sentiment-driven selling,'' Bear Stearns analysts led by Gyan Sinha in New York wrote in a Feb. 12 research report. Last year, the New York-based firm was the fifth-largest underwriter of securities backed by subprime or home-equity loans, according to newsletter Inside MBS & ABS.

Sinha says some of the contracts are too cheap. ``Maybe, I'm naive and really I should stop thinking about fundamental valuation in all these markets,'' he said on a conference call.

San Diego, California-based Accredited Home Lenders Holding Co. said Feb. 14 that it lost money last quarter and that the outlook was too uncertain to give guidance for this year.

New Indexes

New ABX indexes are created every six months by a group of securities firms including Bear Stearns, Deutsche Bank AG, and Goldman Sachs Group Inc., and London-based Markit Group Ltd. Each series is divided to track swaps on bonds with different ratings.

The indexes indicate prices for credit-default swaps linked to 20 bonds, not prices for swaps on each. Credit-default swaps provide monthly payments to sellers of protection and payments to buyers when the bonds aren't repaid as expected.

Last year, ``a lot of dealers bought protection in the single-name market to feed the CDOs and subsequently bought the index as a hedge,'' said Roy Cantu, director for trading of asset-backed bonds and related derivatives at Barclays Capital. ``I think the dealer community may have learned that this hedge did not quite work.''

Managers of collateralized debt obligations and other funds with experience in bonds usually use so-called single-name swaps and actual securities to make bullish bets, said Andy Chow, who manages $6 billion in asset-backed bonds and their derivatives at SCM Advisors LLC in San Francisco.

Hedge Funds

Hedge funds that make bets based on views of the economy's direction have made the ABX market their `` vehicle of choice'' to bet against housing and mortgage markets, said Scott Kupchinsky, a portfolio manager and lead subprime analyst at pension fund manager TIAA-CREF in New York.

Stock investors using ABX indexes to hedge positions or those that might sell short shares of subprime lenders add another ``unusual burden of selling pressure,'' said Michael D. Youngblood, an analyst at Friedman Billings Ramsey Group.

A short sale entails selling borrowed securities in the hopes of profiting by acquiring them at a lower price later.

More lenders may be using ABX contracts to protect against falling values for loans they plan to sell, according to RBS Greenwich. Securities firms also appear to be using more to hedge against drops in the value of CDO they create, said Greg Lippman, head of asset-backed trading at Deutsche Bank.

 

[Randolph Kinney]

Home-building contraction has resumed

So the contraction in home-building has resumed, and what we thought a month ago might have been a stabilizing tendency was only a pause in the broader decline. Mortgage interest rates are modestly higher in February than they were in December and January, and as Tom Moeller noted in these commentaries Wednesday, mortgage application volume has a clear negative relationship with interest rates; extrapolating that to building activity, current financial market conditions seem unlikely to support a turnaround in the housing sector.

 

[Brad Ellis]

Moh,

Your article contains this quote:

"`Pure Sentiment'

ABX indexes plunged even as typical yield premiums on BBB- bonds remained at about 3 percentage points over the one month London interbank offered rate, according to RBS Greenwich Capital Markets. Typical swap premiums on a single bond rose by $50,000 per $10 million to $400,000, versus a $235,000 rise for ABX premiums to $918,000, according to Barclays Capital.

In the ABX market, ``almost the entire price movement can be blamed on nothing other than pure sentiment-driven selling,'' Bear Stearns analysts led by Gyan Sinha in New York wrote in a Feb. 12 research report. Last year, the New York-based firm was the fifth-largest underwriter of securities backed by subprime or home-equity loans, according to newsletter Inside MBS & ABS.

Sinha says some of the contracts are too cheap. ``Maybe, I'm naive and really I should stop thinking about fundamental valuation in all these markets,'' he said on a conference call. "


Amen.

Brad

 

[Randolph Kinney]

Piggyback loans cut on more defaults - credit crunch worsens

http://www.realestatejournal.com/buysell/mortgages/20070215-hagerty.html?rejpartner=mktw


More defaults prompt lenders to cut back on piggyback loans


A rise in defaults is prompting some lenders to clamp down on the use of "piggyback" mortgages, a risky type of loan that helped prolong the housing boom by allowing borrowers to finance up to 100% of the purchase price.

Fremont General Corp., a major lender to people with weak credit records, has stopped providing these second mortgages, which are frequently used by financially stretched "subprime" borrowers who can't scrape together a down payment. A spokeswoman for Fremont, based in Santa Monica, Calif., confirmed the decision, which was first announced in emails to mortgage brokers earlier this week, but she declined to comment further.

Fremont's move comes amid a rapid tightening of credit standards by subprime lenders as they find investors no longer are eager to buy types of loans deemed particularly prone to default. The pullback by subprime lenders could put a further dent in demand for housing by preventing some potential buyers from getting loans at a reasonable cost.

Other lenders are likely at least to cut back on piggybacks this year because of the difficulty in selling them to investors, said Thomas Lawler, a housing economist in Vienna, VA., who refers to such loans as "oinkers" in light of their poor recent performance. This and other steps to tighten credit probably will prevent some people from buying homes this year, creating another "head wind" as the housing industry struggles to emerge from a sales slump, Mr. Lawler added.

Lenders also are tightening up in other ways, such as insisting borrowers provide pay stubs and other proof of their income or by making them put down at least a small down payment. "Across the board, everybody is ratcheting up" the minimum credit score at which they will make particular loans, said A.W. Pickel, a mortgage broker in Overland Park, Kan.

The subprime mortgage market has mushroomed in recent years as lenders found that investors both in the U.S. and abroad were eager to buy securities backed by such loans. Mr. Lawler, the economist, estimates that 17% to 18% of mortgage-financed home purchases in the U.S. last year involved subprime loans. About half of the subprime home-purchase loans included in mortgage securities last year were piggybacks, according to a recent report by Credit Suisse Group in New York. And about 43% of subprime loans packaged in securities in 2006 didn't require the borrowers to fully document their income or assets, a type of mortgage sometimes derided as a "liar's loan" because it can encourage borrowers to exaggerate their means to get a loan.

At a conference Monday, Goldman Sachs Group Inc. fixed-income strategist Michael Marschoun said 20% of the loans "cause more than half the losses" in the subprime market. "These are loans that have absolutely horrendous loss performance, and my prediction is these loans will simply not be originated going forward." These are "risk-layered" loans that have some combination of a low credit score, low down payment, low documentation and investment property.

Explaining the decision to stop providing such seconds, the Fremont email received by brokers said: "This is due to investors having no interest in second mortgage loans."

Most subprime loans are sold to Wall Street firms and others institutions that package them into securities for sale to investors world-wide. The lower-rated portions of these securities -- those that absorb the first losses from defaults -- typically are sold to hedge funds and a variety of other investors in the U.S. and abroad.

 

[Terrel L. Shields]

Hedge funds that make bets based on views of the economy's direction

Look for some hedge funds to get pasted this quarter and its investors go into the tank...which might even be your own pension plan or State Teacher Retirement System...TRS's are one of the most aggressive investors as a group to be found..After all they are playing with someone else's money and who's gonna listen to a bunch of retired school teachers?

 

[Randolph Kinney]

Contagion spreads as banks unload high-risk loans

http://www.realestatejournal.com/buysell/mortgages/20070216-simon.html

Mortgage Hot Potatoes: Banks Try to Unload High-Risk Loans

Efforts by major banks and Wall Street firms to unload bad U.S. housing loans are speeding up a shakeout in the subprime mortgage industry.

As more Americans fall behind on mortgage payments, Merrill Lynch & Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006.

As more subprime lenders face losses or bankruptcy, big banks also face another problem: Many lent money to small firms like ResMae so that those firms could make more mortgage loans to borrowers. It isn't clear how much of these loans will be paid back to the banks. Wall Street firms also are increasing their own internal generation of subprime loans by acquiring smaller mortgage loan originators or processing companies.

Investment-banking firms and investment firms that bought mortgage-backed securities are hiring firms to scrutinize subprime portfolios for loans that violate contracts.

Clayton Holdings Inc. is working with a half-dozen investment-banking firms to identify loans that should be repurchased. Clayton has also been hired by two hedge funds to review mortgage bonds they own for potential repurchases.

In a push to recoup losses, HSBC, which last week added $1.76 billion to its bad-debt costs for 2006 to cover ailing mortgages, has sued several small lenders in federal court in Illinois after they refused HSBC's repurchase requests.