Housing Bubble Bursting?

[Dee Dee]

Home foreclosures hit record high

http://biz.yahoo.com/ap/071206/home_foreclosures.html

California and Florida -- the two largest states in terms of outstanding mortgages -- were key drivers in the increase in the national foreclosure rates, the association said. The two states together accounted for 33.7 percent of the subprime adjustable-rate loans that entered the foreclosure process in the third quarter. The two states combined also accounted for 42.4 percent of creditworthy "prime" adjustable-rate mortgages that started the foreclosure process.

 

[Randolph Kinney]

Indymac struggles to sell loans

Secondary mortgage market still in crisis after four months

Mike Perry, chief executive of Indymac Bancorp , said on Thursday that the private secondary mortgage market is "virtually closed."

"Mortgage markets are very tough right now, and no one is able to forecast when things will get better," he wrote in a regulatory filing. "Indymac Bank's business model is in the eye of this storm."

Indymac, the eighth-largest mortgage originator in the U.S. during the first half of 2007, sells most of its home loans to investors in the secondary market through securitizations. But surging delinquencies and foreclosures this year have made investors wary of buying securities backed by mortgages.

That's a big problem for mortgage originators, because they partly rely on the securitization process to replenish the cash they need to keep making new loans.

Mortgage originators can instead hold onto the loans. But that requires lots of cash or so-called warehouse financing from big investment banks. Such financing has been harder to come by in recent months as these banks struggle with their own mortgage-related losses.

"You can only do best quality loans, and even then only the senior classes," Karen Weaver, global head of securitization research at Deutsche Bank, wrote in an e-mail on Thursday.

Throughout the summer, the market for so-called confirming mortgages, sold and guaranteed by government sponsored enterprises like Fannie Mae and Freddie Mac continued to operate well.

But even this market is showing signs of stress now, Perry said on Thursday.

"Not only is the private secondary market virtually closed...now the GSEs have their own issues and are raising rates and cutting product guidelines," Perry explained.

It's difficult to predict when Indymac will return to profitability, but it could be sometime in the second half of 2008 "if all goes well," the executive said.

The company is now considering ways to raise capital and could cut its dividend to preserve cash, he added.

This explains why IndyMac stock price is lower than Countrywide and is dropping. They need fresh capital and someone to buy their loans. Looks like a forced merger coming to me.

 

[Randolph Kinney]

The big R word - recession appears all but certain

The Ratings Game: Merrill says sell credit cards as recession appears more likely

NEW YORK (MarketWatch) -- Shares of three major credit card firms fell on Friday after Merrill Lynch analysts downgraded the companies to sell, saying they expect consumer spending to deteriorate and lead to a recession next year.

"We are taking a more cautious view on the consumer finance stocks as the serial negative economic news suggests that the risk of a consumer recession is all but certain, in our view," the analysts wrote in their report.

They said that while a consumer slowdown is widely expected, they believe it will be more severe than the broader consensus, aggravated by a housing price drops.

"Housing is problematic and it has broader implications than currently discounted," the report concluded.

 

[Karl]

The Ratings Game: Merrill says sell credit cards as recession appears more likely

No SHIIIIIIIIIIII???

 

[Randolph Kinney]

The real mortgage meltdown has yet to happen

Straight Talk on the Mortgage Mess from an Insider

Even before this mortgage mess started, one person who kept emailing me over and over saying that this is going to get real bad. He kept saying this was beyond sub-prime, beyond low FICO scores, beyond Alt-A and beyond the imagination of most pundits, politicians and the press. When I asked him why somebody from inside the industry would be so emphatically sounding the siren, he said, “Someobody’s got to warn people.”


Since then, I’ve kept up an active dialog with Mark Hanson, a 20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena — primarily on the West Coast. He lives in the Bay Area. So far he has been pretty much on target as the situation has unfolded. I should point out that, based on his knowledge of the industry, he has been short a number of mortgage-related stocks.


His current thoughts, which I urge you to read:

The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away.
​

Much, much more to read

Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure.

Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment.

Second mortgages are defaulting at an amazing pace and it is picking up every month.

The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. The resets first began with the 3/1 last year. The 5/1 was the most popular by far, so those start to reset heavily in 2008.

 

[Dee Dee]

Randolph,
That's one of the spookier editorial summary opinions I've read lately.
I'll be interested in seeing if anyone can come up with a solid argument to counter it.

 

[MARK JOLLIFF]

Straight Talk on the Mortgage Mess from an Insider

Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure.

Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment.

Second mortgages are defaulting at an amazing pace and it is picking up every month.

The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. The resets first began with the 3/1 last year. The 5/1 was the most popular by far, so those start to reset heavily in 2008.

One thing I will say is that I did World appraisals for 4 years and they at least insisted on the truth. If they do end up with large losses it won't be from inflated appraisals. I'm willing to bet that their losses are less than the others. Hopefully if this proves to be true people in the industry will see this as an example of how important honest good quality appraisals are. Knowing this industry though it will probably go unnoticed.

 

[Tim The Enchanter]

One thing I will say is that I did World appraisals for 4 years and they at least insisted on the truth. If they do end up with large losses it won't be from inflated appraisals. I'm willing to bet that their losses are less than the others. Hopefully if this proves to be true people in the industry will see this as an example of how important honest good quality appraisals are. Knowing this industry though it will probably go unnoticed.

Plus one, except for the last sentence. The REO wave seems to be hitting the less expensive areas around me and prices falling like a stone. North Hills, Pacoima, Van Nuys and "regular" areas, from the $600's and $500's, dropping into the $400's.

In other areas like Studio City, they're still moving new $1.5 - 2 Mil new homes in the flats, after buying a $700 or $800 teardown.

Still crazy after all these years.

 

[Austin]

I read above article and it nails the problem as far as it goes but I look farther in depth into some of the things he said. For example, he stated that the vast majority of these loans were refi’s to get cash out to live on. I know this to be true because I have been doing home equity loans for many years and appraising the same houses about every 3 years. Not just houses but commercial refi’s too most recently this week.
Where did all of that cash out go? According to the article it went to purchase cars, TV’s, Computers, and living expenses. All of this showed up in the GDP numbers. What is going to happen to the GDP numbers when this huge influx of cash ceases? Remember the multiplier effect. Each dollar in adds about 2.5 times that dollar to the GDP or the converse. The end result can only be a much lower growth rate in GDP growth at best.
What do you call two consecutive quarters of declining GDP? A recession. What do you call a prolonged period of declining GDP? A depression. Those two words scare people but what they are in reality is the market correcting itself from these bad loan programs in an attempt to return to normalcy but between here and there is a very long and painful journey. There are many perils along the way in the form of political intervention. What we look like at the end of the journey is the great concern.

 

[sunnycal]

[COLOR=#333333 ! important]A UCLA report predicts the nation and state will be saved, saying some of the economy's worst bumps are past.[/COLOR]
[COLOR=#999999 ! important]By Peter Y. Hong, Los Angeles Times Staff Writer
December 6, 2007 [/COLOR]
California and the nation will escape a recession in 2008 despite rising oil prices, sinking housing prices and a turbulent stock market, a UCLA study released today predicts.

"Be calm my friends. Be calm," wrote UCLA Anderson Forecast director Edward Leamer in the latest quarterly report from the group.

Graphic




Graphic
The economy hits home
click to enlarge




A recession -- negative economic growth for two consecutive quarters -- probably will be averted next year, the forecast says, noting that the economy has already taken some of its hardest hits.

Nationwide, unemployment would have to climb to 6% from the current 4.6% to cause a recession, the forecast said. Such an increase would require the loss of 2 million more jobs. Cuts on that scale won't be possible, the Anderson report said, because job growth was weak throughout the current economic expansion.

"How can we lose jobs that we never found?" the report said.

Though the economic outlook was largely cloudy, it did include some silver linings:

* The loss of 3 million manufacturing jobs early this decade means there is little room to cut more positions.

* Most of the damage to the economy from the housing slump will be over by the end of next year.

* The weak dollar will help U.S. exports, aiding manufacturers in Southern California.

* Consumer spending will drop, but much of the effect will be shouldered by other countries as U.S. imports of their products decline.

The Federal Reserve will meet Tuesday and is widely expected to cut its benchmark interest rate for a third time to help avoid a recession. That reduction -- and more next year -- will be needed to ward off a recession, the forecast said.

"Should the Fed fail to ease significantly, we believe our 'no recession' forecast would be at significant risk," the study said.

UCLA economists also predicted that stock prices would rise 10% to 12% next year amid calming credit markets and modest economic growth.

In California, the economy will be hit hard by the weak real estate market, falling government revenue and the Hollywood writers' strike. But like the nation, the Anderson Forecast projected that recession would be averted.

"It gets pretty ugly, but still no recession," the report said. State government will face a budget shortfall of $8 billion over the next two fiscal years because of weaker than previously expected income, sales and corporate tax collections, the study said. That shortfall would be greater than the state's spending on the University of California and California State University systems combined, the report said.

Job losses in California will be numerous in the construction and financial sectors but total unemployment will peak by the end of next year at a 6.1% rate, the study reported. Meanwhile, real personal income will rise 1% to 2%.

If the Writers Guild of America strike lasts as long as the 153-day action of 1988, it would lower personal income growth in Los Angeles by 0.25%, the forecast said. So the strike's effect on the overall economy will be slight but "can be very substantial and difficult for the people involved," the study said.

Ryan Ratcliff, a coauthor of the California portion of the forecast, said areas such as white-collar businesses, education, healthcare and tourism remain healthy, softening the blow of the real estate downturn.

"It's not so much that there is one sector doing so well it is offsetting the fact real estate is doing so badly," Ratcliff said, "but we are seeing slow growth everywhere outside of real estate."

peter.hong@latimes.com