Housing Bubble and Real Estate Market Tracker

Housing Bubble and Real Estate Market Tracker

Posted on Mar 28th, 2007

The Forecast for Foreclosures: Business Week

Editor's note: I am moving to post at the secondary blog(also see new articles below).
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Real Estate March 26, 2007, 12:00AM EST te

Don't be fooled by falling foreclosure rates and rising home sales—many parts of the U.S. are still hurting from the housing slowdown

Michele Johnson is no stranger to desperate phone calls, but lately they've become an even more regular occurrence. Johnson, who is chief executive of the Consumer Credit Counseling Service of Southern Nevada & Utah, says that these days, homeowners facing foreclosure are seeking out the agency's help in droves.

"There was just so much creative financing that was going for the last few years with consumers not understanding fully the potential ramifications," she explains. "Our goal here now is to mitigate their losses."

For the second month in a row, Nevada had the highest foreclosure rate of any U.S. state, with one filing for every 278 households—more than three times the national average, according to research firm RealtyTrac.

Colorado registered the second-highest rate in February, with one foreclosure for every 345 households, while Florida took third place, with one filing for every 382 homes. Others ranking among the country's top 10 states for foreclosures were Georgia, Michigan, Tennessee, Ohio, Texas, Arizona, and Indiana.

Temporary Relief?

The U.S. fared much better as a whole: RealtyTrac measured a total of 130,786 filings nationwide in February, down 4% from January's level.

February's decline, however, may prove fleeting. "A 4% decrease, for all intents and purposes, is flat," says Rick Sharga, RealtyTrac's vice-president of marketing. Foreclosures were still up 12% year-over-year, and February's total marked the first time there have ever been two back-to-back months with U.S. foreclosure numbers over 130,000, Sharga notes. January's total foreclosure figure—136,113—was the highest monthly number ever recorded by RealtyTrac.

February's drop in filings could have something to do with the 3.9% rise in existing-home sales for the month reported Mar. 23 by the National Association of Realtors.

Improving fundamentals, historically low mortgage rates, and mild weather that brought out home shoppers in December contributed to the sales increase, NAR said in a statement.

Foreclosure Jump Still Expected

Selling can be an escape route for homeowners in danger of foreclosure, and if the demand exists, the process becomes much easier. "A continued improvement on the sales side of real estate could be the quickest cure for high foreclosure rates," says Sharga.

NAR predicts that freezing temperatures in February will lead to a decline in home sales in March before a rebound later in the spring.

RealtyTrac still expects 2007 foreclosure activity to be 33% higher than in 2006 based on trends in the first two months of this year. "It appears that as subprime and FHA loans default at higher-than-anticipated rates, and lenders tighten their underwriting standards, we're going to continue to see a spike in the number of homeowners facing foreclosure," said President Jim Saccacio in a statement.

Many borrowers with adjustable-rate mortgages are simply not prepared when the rates on those loans shoot up. Low-income borrowers and those with weak credit have felt the sting of the market slowdown the most, and now tighter lending standards brought about by increased defaults are ruling out refinancing for many who may have qualified for a better loan a year ago.

Silver Lining

This is happening in states like Florida and Nevada, where speculation ran rampant during the years of double-digit home-price appreciation. "It isn't adjusting $75 or $100—payments are doubling," says Johnson of Nevada's CCCS.

When price growth abated and rates rose, many buyers that stretched to purchase a home with the intention of flipping it have been forced to foreclose. Other states, like Indiana, Michigan, and Ohio, have seen a spike in foreclosures over the last year because of crumbling industry and rising unemployment rates.

A record number of people could face the emotional trauma of losing a home in 2007, but some good may come of it. Long term, tighter lending standards will weed out possible foreclosure candidates.

"Assuming they don't reverse their progress, I'd give the market a year or two to clear out most risky loans," says Sharga. "Three years from now, we will likely see a significant foreclosure decrease."

Click here to see the states with the highest foreclosure rates in the U.S.

Roney is Real Estate writer for BusinessWeek.com.

by Maya Roney

Victim of Real Estate Bust: Your Pension

Friday, 23 March 2007 Written by Garrett Johnson Part 1

It's the dirty little secret of Wall Street. "U.S. lenders will make about $2.8 trillion in home-mortgage loans this year, according to the Mortgage Bankers Association. The MBA estimates that about 80% of these loans will end up in mortgage-backed securities. Mortgage-backed securities outstanding at the end of the first quarter totaled $4.61 trillion, up 61% since the end of 2000. In the same period, total Treasury securities outstanding grew 35% to $4.54 trillion. Who buys those mortgage-backed securities? Pension funds have been one of the largest buyers for many years now. What is a Mortgage-Backed Security? A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. These are usually packed and sold in bulk, and then are often resold. Quite often the person buying them has no real idea just how safe these mortgage loans are. Are they a bunch of subprime, house-flippers with no downpayments? There is usually no way to tell by the time the MBS has been sold and resold. The banks that originally made the mortgage loans don't care about the quality of the mortgage because they have already made their profit and off-loaded the risk to the pension fund, or insurance company, or foreign investor that bought the MBS. How did we end up in this condition. Jim Jubak explained that the coming Baby Boomer retirement is a prime culprit. State and local government budgets are stretched thin. So do they raise taxes to pay for the coming flood of retirees? That's poltiically unpopular. So they change their investment strategy to get better returns, and that requires more risk. However, with so much cash moving towards higher yielding investments, that pushes down the returns for those riskier investments. Pension funds that should be investing in low-risk treasuries are investing in agency bonds. When agency bond yields are too low then they invest in MBS. And so it goes until pension funds are investing in MBS from subprime lenders. The spread between the yield on high-yield bonds -- known as junk bonds -- and relatively safe U.S. Treasury bonds has averaged 5.24 percentage points since 1986...The spread is now a paltry 2.88 percentage points. The trend toward less yield for higher risk has been in place pretty much without interruption since the third quarter of 2001, when spreads maxed out at better than 10 percentage points. It's well known that loan standards have been beyond loose in recent years. What isn't always known is that this has been true for more than just the sub-prime market. The next step up from subprime, known as Alt-A, has been the epicenter of this risky financing. In 2006, according to UBS, interest- only loans, 40-year mortgages and option-adjustable-rate mortgages comprised more than 75 percent of Alt-A issuance. These loans often have little documentation of a borrower's income and rack up higher mortgage debt against the value of the underlying collateral (i.e., the house). UBS said that 76 percent of adjustable-rate interest- only loans written in 2006 had low documentation, while 57 percent had loan-to-value ratios greater than 80 percent. No surprise, then, that 3.16 percent of these loans are already delinquent by two months or more. If you think we've already seen the worst of the RE Bust, think again. The resetting of subprime loans (i.e. when the "teaser" rates expire and they readjust to standard market rates) won't peak for another 10 months. Alt-A's peak for resetting is nearly two years off. Even the IMF has noticed that America's real estate market is out of control and a danger to the overall economy. I think Bill Fleckenstein said it best. As the credit bubble in real estate dies a dramatic, not-pretty death, a very simple truth has resurfaced: It's not a viable business when you lend money to people you know can't pay it back. Of course the damage will be spread far and wide, and some of it will require a federal government bailout. How big of a bailout? No one knows because no one is counting. The city of Charlotte does not count foreclosures. Neither does Mecklenburg County. Nor the state of North Carolina. Nor the federal government. Even the Federal Housing Administration, which insured many of the failed loans, didn't track the concentrations. The Observer on Sunday profiled Southern Chase, a neighborhood of 406 houses in Concord built by Beazer Homes USA. Seventy-seven buyers lost their homes to foreclosure. Forty-five of the failed loans were insured by the FHA. [...] None of the government agencies contacted by the Observer plans to start tracking foreclosures. Part two to follow. Garrett Johnson, gjohnsit@nospam.yahoo.com Permalink | 0 Comments | Post A Comment

Subprime spiral poses biggest investor risk: Lehman (See this one)

Related
Mortgage lenders get a lifeline, troubles linger
Sub-prime mortgage crisis could torpedo 2007 economy
Top investor sees U.S. property crash
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Fri Mar 16, 2:51 AM ET

A Wall Street fixed income strategist warned on Thursday that the greatest risk investors face is for the troubled U.S. subprime lending sector to trigger a spiral of falling home prices and mortgage defaults.

There is not enough evidence to indicate such a scenario is taking place, but the risk of a broader market impact is "very real," Adam Topalian, fixed income strategist at Lehman Brothers, said at a dinner for investment professionals.

The test will be whether lenders tighten up when $900 billion in adjustable rate mortgages -- including $650 billion from high-risk borrowers -- reset in the next two years, Topalian said at the CFA Society of Seattle's annual forecast dinner.

"Any kind of sharp pullback in lending could lead to a vicious spiral of continued housing price depreciation and defaults," said Topalian. "This does have the potential to feed on itself and it's a real concern."

Topalian believed, however, it was unlikely that defaults in subprime loans would derail the U.S. economy.

At least 20 companies in subprime mortgage lending have gone out of business in recent months as defaults and foreclosures have risen in the wake of rising interest rates and falling U.S. house prices in the past year.

The strategist dismissed the notion that high-risk home loans were limited to only certain areas and neighborhoods and cited data that 60 percent of U.S. zip codes have between 25 percent and 75 percent subprime home borrowers.

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[OMyGAWD]

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"Suburbia is not being protected; it is being saved for dessert.

It is this sector with its fragile, technological, disembodied living standard that will now come under attack. In the short term, that is already happening through financial manipulation and the further disappearance of living-wage jobs. The tremendous personal debt burden that is mounting in the American “middle class,” fueled by past low interest rates and cash-out equity loans, was the latest maneuver to prop up this sector’s role as global consumer—a time bomb that will explode directly under Suburbia’s feet.

Meanwhile, the liquidation of the commons—from Medicare to Social Security to public services—constitutes a massive transfer of wealth saved by these working people directly into the speculative money pit that is Wall Street. Suburbanites are workers in the truest sense, even though they seldom stand on the factory floor now. They don’t know it, but they are weak, dependent, high-maintenance workers in a consumer mill.

The bill for the United States from Treasury loans to other nations—already impossible to pay—grows exponentially to support the cost of the military now conducting the war, those we see as the guardians of civilization. Our children are inheriting this impasse. We have witnessed what happens when the suburbanites are fleeced; with the taxpayer bailout of the savings and loan criminals, the Long Term Capital Management hedge fund, these burdens will invoke the “too big to fail” principle. From Chrysler to Enron, the so-called middle class will pick up the tab.

The real threat will not appear as an Arab with a bomb or a 16-year-old with brown skin and a Glock. It is already present. It has appeared as pension funds disappearing in strategic bankruptcies. It has appeared as sub-prime lending and subsequent foreclosures.

“Thank you for buying all these houses,” the banks are already saying. “Now we can take them back and rent them to you.”"

New Century Gets Default Claims, Says It Lacks Cash; Fed warns of more subprime problems

Related
Fed warns of more subprime problems
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(Update8)

By Bradley Keoun and Yalman Onaran

March 12 (Bloomberg) -- New Century Financial Corp., the nation's second-biggest subprime mortgage lender, said it doesn't have the cash to pay creditors who are demanding their money, increasing speculation that the company will go bankrupt.

The New York Stock Exchange, citing the credit crisis, halted trading of New Century this morning until it decides whether to keep listing the company's securities. Shares of the Irvine, California-based company, already down 90 percent in 2007, lost half their remaining value in pre-market trading, and rivals fell as much as 25 percent today.

``They're one step closer to bankruptcy,'' said Bose George, an analyst at Keefe Bruyette & Woods in New York who rates the shares ``market perform.'' ``The only possibility for survival now is for someone, potentially an investment bank, to step in.''

New Century may be insolvent because too many of its own customers -- most of whom have poor credit histories or heavy debt burdens -- aren't repaying their loans. Bad U.S. subprime mortgages are at a seven-year high, forcing more than two dozen lenders to close or sell operations. Their woes may contribute to more than 1.5 million Americans losing their homes and 100,000 people losing their jobs, according to real estate executives, economists, analysts and a Federal Reserve governor.

New Century said in a federal filing it doesn't have funds to repay lenders including Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. The creditors want New Century to repurchase all outstanding mortgage loans they financed.

Shares Plunge

The company's shares traded for as little as $1.36 in pre- market trading, compared with $3.21 on Friday, a day when the stock hit an eight-year low. The company said March 2 that U.S. prosecutors in Los Angeles are investigating trading in New Century's securities before a Feb. 7 announcement that it planned to restate earnings. Investigators also are examining New Century's failure to properly account for the cost of bad loans.

``It's kind of the perfect storm,'' said Vince Arscott, an analyst in the financial institutions group at Fitch Ratings. ``You throw in accounting issues and delayed filings, you throw in a criminal inquiry, and then the whole secondary market is really sour on subprime.''

Rival lenders including Fremont General Corp., Accredited Home Lenders Holding Co., and NovaStar Financial Inc. have shed more than half their value this year, and Countrywide Financial Corp., the nation's biggest mortgage company, has tumbled 17 percent.

Ripple Effects

Accredited, which fell 28 percent today, was ``considered a better player in the space,'' said Matt Howlett, an analyst at Fox-Pitt Kelton in New York. ``But they're not immune to the deplorable conditions in the subprime space. You can't create any value in this market, and the likelihood of a sale, which we thought was really the only exit, just seems more unlikely every day.''

Fremont, which shut its subprime lending operations last week under pressure from U.S. regulators, lost 16 percent today. NovaStar shed 19 percent and Countrywide declined 2.7 percent.

Analysts including Merrill Lynch & Co.'s Kenneth Bruce predicted last week New Century will go bankrupt. New Century has used up cash as rising default rates forced it to buy back loans it sold to investors when borrowers didn't make their payments. The company said last week it's in talks with lenders and potential partners about refinancing or ``other alternatives.''

`No Assurance'

New Century's financing agreements have so-called cross- default provisions that trigger accelerated payments. Should all of its creditors force it to repurchase their loans, the total obligation would be about $8.4 billion, New Century said today.

``Medium, small-size players who were addicted to Wall Street financing are at most risk,'' said David Hendler, an analyst at CreditSights Inc. in New York.

Talks with lenders are continuing, and New Century can give ``no assurance'' that efforts to refinance the debt will succeed, the company said.

Standard & Poor's cut New Century's counterparty credit rating today to D, for companies that are in payment default, from CC.

New Century has received about $975 million of financing from Morgan Stanley. Part of the money from the New York-based securities firm was used to pay Citigroup Inc. about $717 million on March 8, after Citigroup demanded repurchase of its loans, New Century said in today's filing.

Subprime Loans

Subprime loans, a term applied to some of the riskiest home mortgages, are made to borrowers unable to qualify under traditional, more stringent criteria. The loans often carry interest rates 2 to 3 percentage points higher than regular mortgages and sometimes have low initial ``teaser'' rates that adjust higher in later years. Some lenders also lowered their standards last year to bolster revenue because slumping home sales had hurt demand.

The combination made the loans more prone to default, with delinquencies at more than 12 percent in the third quarter, according to the Mortgage Bankers Association. The Washington- based trade group is scheduled to release updated numbers for the fourth quarter tomorrow. Investors are increasingly shunning bonds backed by subprime loans.

``It's like a hot potato with these loans, no one wants them,'' Fitch's Arscott said.

OceanFirst Financial Corp., the holding company for OceanFirst Bank, said today it will revise 2006 earnings because buyers of some of its subprime loans are forcing the company to take them back. Borrowers of the loans -- which the bank offered starting last year through the Columbia Home Loans unit -- are already defaulting, the Toms River, New Jersey-based lender said. The loans offered to cover 100 percent of a home's value.

Countrywide's Report

Countrywide said late payments on home loans that it manages for others held steady last month. Loans at least 30 days past due remained at 4.71 percent of total loans serviced, the same as in January, the Calabasas, California-based company disclosed in monthly data released on its Web site. A year earlier, 4.29 percent of those loans were late.

Jim Shanahan, a senior analyst at Wachovia Capital Markets, cut his rating today on Countrywide to ``underperform'' from ``market perform.''

``While the origination and sale of subprime mortgages represents only a small part of the Countrywide story, we are more concerned that the weakness has spread to other sectors of the residential mortgage market,'' Shanahan wrote.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net ; Bradley Keoun in New York at bkeoun@bloomberg.net .

Last Updated: March 12, 2007 17:28 EDT

Is it payback time for world's borrowed prosperity?

Related
Man Group, Winton Hedge Funds Bruised by Market Rout
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From the Baltimore Sun
By Rolfe Winkler

March 8, 2007

Lots of people are asking what's happening to the stock market lately. Are we in for a crash or a protracted bear market? No one, of course, can say for sure. But an understanding of some of the key factors that have driven stock prices up the last few years suggests stocks are headed down from here.

An interesting graphic in The Wall Street Journal two weeks ago, right before stocks fell so hard, showed that all of the world's top 20 stock markets were at yearly or all-time highs. Everybody was buying stocks. And it's not just stocks. Prices on many types of bonds are sky-high. Despite some areas of falling prices, real estate values are also still near all-time highs across the nation.

What could explain this? The biggest reason is that there is a record amount of cash around the world looking for a home. Investors have money to invest and so they're putting it anywhere and everywhere, bidding up the value of the assets mentioned above and many more.

That should be good, right? A record amount of cash means people are doing well, doesn't it?

Not so fast. It's crucial to understand where so much of this cash is coming from: It's borrowed. At some point, it has to be paid back.

For the last few years, investors worldwide have capitalized on rock-bottom interest rates to finance purchases of stocks, bonds, real estate, commodities and so on. When you buy things, their price goes up. But now it's payback time - literally.

Look at real estate. Over the last few years, it was very easy to borrow money to buy a house or a condo. In many cases, lenders stopped asking borrowers to provide proof of income before financing up to 100 percent of the purchase price of a home. But now, borrowers are discovering it's not so easy to pay a mortgage you can't afford.

A similar dynamic is playing out with stocks and bonds: The borrowing phase is ending and the paying-back phase is beginning.

Just as in real estate, investors have been borrowing record amounts of money to buy stocks and bonds the last few years. In late February, for instance, the New York Stock Exchange reported that money borrowed to buy stock (on "margin") reached an all-time high. With interest rates on yen near zero, hedge funds have been borrowing yen for virtually nothing to buy stocks. With junk-bond yields near all-time lows, leveraged-buyout firms have been borrowing billions to finance the purchase of huge public companies such as hospital owner HCA, commercial real estate company Equity Office Properties Trust, and, just last week, the utility TXU.

What's bringing on the payback period in stocks and bonds? One reason is that the Bank of Japan said last week it will raise interest rates on loans made in yen, forcing many hedge fund investors to sell the stocks they bought with borrowed yen. On the housing front, the implosion of subprime lending can only exacerbate the fall in real estate prices as borrowing to buy homes becomes more difficult. The bottom line is that easy credit to buy stocks, bonds and real estate may be a thing of the past.

When markets are driven up with too much borrowed money, it can set them up for a big fall. One of the key factors that led to the dramatic rise of stocks in 1929 was the explosion of broker loans to buy stock. It got pretty ugly when everyone was forced to pay back those loans over a short period.

The next Great Depression is likely not around the corner. The worldwide economy is probably too strong for that to happen. But we should never forget this lesson of 1929:

Markets that fly high with borrowed money can crash hard.

Rolfe Winkler, Chartered Financial Analyst, is an analyst at a hedge fund. His e-mail is rolfewinkler@yahoo.com.

Copyright © 2007, The Baltimore Sun

Mortgage Crisis Spirals, and Casualties Mount

March 5, 2007

Even in affluent Orange County, Calif., the growing wealth of executives and brokers in the booming mortgage industry was hard to miss.

For Kal Elsayed, a former executive at New Century Financial, a large lender based in Irvine, driving a red convertible Ferrari to work at a company that provided home loans to people with low incomes and weak credit might have appeared ostentatious, he now acknowledges. But, he says, that was nothing compared with the private jets that executives at other companies had.

“You just lost touch with reality after a while because that’s just how people were living,” said Mr. Elsayed, 42, who spent nine years at New Century before leaving to start his own mortgage firm in 2005. “We made so much money you couldn’t believe it. And you didn’t have to do anything. You just had to show up.”

Just as the technology boom of the late 1990s turned twenty-something programmers into dot-com billionaires, and leveraged buyouts a decade earlier turned Wall Street bankers into Masters of the Universe, the explosive growth in subprime lending turned mortgage bankers and brokers into multimillionaires seemingly overnight.

Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.

By JULIE CRESWELL and VIKAS BAJAJ

--MORE--

New-Home Sales Plunge 16.6%

Wednesday, February 28, 2007

Sales of new homes plunged 16.6% in January to a seasonally adjusted annual rate of 937,000, according to the Commerce Department. It is the the biggest percentage decline in 13 years.

The median price of a new home was down 2.1% year-over-year, at $239,800.

New-home sales are down more than 50% year-on-year in the West, the largest percentage drop in the region since 1981. In the South, sales are down 11% in the past year. Sales are down 2% in the Northeast and are up 1% in the Midwest

Fed's says high potential for housing correction

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Are the good times over for property prices?
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Fed's Bies says high potential for housing correction

Tue Feb 20, 2007 11:11AM EST

DURHAM, N.C., Feb 20 (Reuters) - Federal Reserve Board Governor Susan Bies said on Tuesday that there still was a high potential for a correction to occur in the housing market and said that made it hard for the Fed to assess conditions.

"There's a lot of vacant housing out there right now,' Bies said during an address at the Duke University Fuqua School of Business.

"The potential for inventory correction is still very high," she added.

While supply is hard to judge, Bies said that a downturn in demand for housing may be nearly over.

"We may be near the floor in terms of demand," Bies said.

U.S. January Housing Starts Plunge to Lowest Level Since 1997

By Joe Richter

Feb. 16 (Bloomberg) -- Builders in the U.S. started work last month on the fewest number of new homes since August 1997 as a glut of unsold houses and the onset of colder weather discouraged new projects.

Housing starts slumped 14.3 percent to an annual pace of 1.408 million, less than forecast and down from December's 1.643 million rate, the Commerce Department said today in Washington. Building permits declined 2.8 percent to a 1.568 million pace.

The figures show that even as sales have rebounded, residential construction will remain a drag on the economy until the inventory of unsold homes declines. Federal Reserve Chairman Ben S. Bernanke told lawmakers this week that the process may extend through much of the year.

``Housing inventories are still beyond bloated, and starts aren't going to recover in any meaningful way until those inventories come down,'' Chris Low, chief economist at FTN Financial, said before the report. ``I would be cautious about calling an end to the housing slump just yet.''

Economists surveyed by Bloomberg News had forecast starts to fall to a 1.60 million unit pace from an originally reported 1.642 million pace the prior month, according to the median of 75 estimates. Forecasts of starts ranged from 1.50 million to 1.72 million. Permits were expected to drop to 1.59 million, according to the median estimate.

Construction of single-family homes dropped 11.2 percent last month to a 1.108 million rate, also the weakest since August 1997, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, declined 24.1 percent to an annual rate of 300,000.

Construction in the West fell 28.5 percent to an annual rate of 301,000 last month, the slowest since December 1996. The decline in the West from December was the biggest since January 1979.

By Region

Starts also dropped 15.2 percent in the Midwest to a 195,000 pace, the weakest since January 1991, and decreased 11.8 percent in the South to 716,000. Beginning construction in the Northeast rose 8.9 percent.

The number of homes under construction fell 2.4 percent in January to a 1.218 million pace, today's report showed. Housing completions declined 1.2 percent to an annual rate of 1.88 million.

The number of housing units authorized, but not yet started, increased 2.9 percent to 194,400.

Home construction fell at an annual rate of 19.2 percent last quarter, the most since 1991, after contracting at an 18.7 percent pace in the previous three months, according to a government report Jan. 31. The decline subtracted 1.2 percentage points from fourth-quarter growth.

Biggest Drop Since October

Last month's decrease in housing starts, the biggest since October, followed a 5 percent increase in December that economists including Michael Moran of Daiwa Securities America Inc. may have been caused in part by builders taking advantage unusually warm weather.

The final month of last year was the warmest December since 1957, according to the National Climatic Data Center in Asheville, North Carolina.

Higher mortgage costs and surging prices the past few years put buying a home out of reach for many Americans. The 30-year fixed mortgage rate averaged 6.40 percent during the second half of last year, up from 5.87 percent for all of 2005, according to Freddie Mac, the No. 2 purchaser of home loans.

Slower sales and cancellations of existing orders have caused the number of unsold homes to pile up. The supply of homes at last year's sales rate averaged 6.4 months' worth, up from 4.4 months' worth in 2005 and 4 months in 2004.

Fourth Quarter 2007

Sales of new houses in the U.S. will slow until the fourth quarter of 2007, the National Association of Realtors forecast on Feb. 7.

Horsham, Pennsylvania-based Toll Brothers Inc., the largest U.S. luxury home builder, reported a 33 percent plunge in orders during the quarter ended Jan. 31.

Bernanke said in congressional testimony this week that ``weakness in residential investment is likely to continue to weigh on economic growth over the next few quarters.''

Still, mortgage rates this year have eased and homebuilders have offered discounts and other incentives, helping lure some buyers back into the market.

The ``pace of cancellations is starting to abate,'' Toll Brothers Chief Executive Officer Robert Toll said in a statement Feb. 8. ``However, we are still well above the company's historical average.''

Builder Confidence

Confidence among U.S. homebuilders unexpectedly rose this month to the highest since June, according to a survey yesterday from National Association of Home Builders/Wells Fargo.

The improved outlook is reflected in the performance of homebuilding stocks, which have regained some ground after plunging last year. The Standard and Poor's Supercomposite Homebuilding Index, made up of 16 homebuilder stocks, has risen more than 4 percent since early January, surpassing the gain in the broader S&P 500.

``The U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes,'' Bernanke said during congressional testimony Feb. 14.

To contact the reporter on this story: Joe Richter in Washington at Jrichter1@bloomberg.net

Last Updated: February 16, 2007 08:30 EST

HSBC warns over US mortgage bad debt

From The Times

February 08, 2007

Nick Hasell

HSBC, Europe’s biggest bank, last night gave warning that bad debts in its troubled US mortgage lending business would be 20 per cent higher than forecast.

The bank blamed the impact of slowing house price growth, which it said is being reflected in accelerated delinquency trends across the US sub-prime mortgage market. It said that the level of loan impairment provisions for 2006 for its mortgage services operations will be higher than is reflected in current market estimates. Analysts had previously expected HSBC to report a bad debt charge of $8.8 billion (£4.5 billion).

The warning comes less than four weeks before HSBC’s full-year results, and follows its caution at its pre-close trading update in December that bad debt trends among US mortgage borrowers were deteriorating at a faster than expected rate.

City analysts had expressed alarm at the time that customers were defaulting less than six months after taking out their loans, a situation viewed as virtually unprecedented.

Last night’s alert will deepen concerns over the ability of HSBC’s US mortgage operations to model accurately default trends. When HSBC bought the operation, then called Household International, for $15 billion in 2003, it placed much emphasis on the strength of its computerintensive techniques to model consumer behaviour. Before the acquisition, HSBC had no experience of lending in the US sub-prime market.

In its statement, HSBC also cited the effect of higher payment obligations on borrowers as adjustable mortgage rates reset to higher interest rates from the level at which the loans were taken out.

HSBC said last night that Michael Geoghegan, group chief executive, is continuing to co-ordinate the necessary actions to manage the bank’s response. It also said that, apart from the mortgage services operations, the performance of the rest of its businesses was in line with its expectations.

Worst performing loans - ever

Sunday, January 28, 2007

Subprime's grip slips

O.C. lenders pay a price as more homeowners miss payments on risky loans.

By MATHEW PADILLA

The Orange County Register

Many of Orange County's boldest lenders are struggling to stay in the black – and in some cases to stay in business – as their customers miss mortgage payments in record numbers.

These lenders, experts say, exercised poor judgment in a bid to maintain loan volume last year. They lent money to borrowers with spotty credit, known as the subprime market, without proper regard to their ability to repay, experts say.

"What's become clear is a whole bunch of people signed up for loans or were sold a loan they really couldn't afford," said Richard Eckert, an analyst with Roth Capital Partners in Newport Beach.

Sluggish home prices, rising interest rates and lax underwriting spurred defaults on subprime loans made just last year to the highest level in six years.

Perhaps most troubling, loans made by Orange County companies in 2006 were among the quickest to see defaults, data show.

And many of those subprime companies – which tend to cluster here in Orange County – are in trouble.

H&R Block's Option One in Irvine is up for sale. So is Ameriquest Mortgage in Orange. ECC Capital of Irvine is selling its loan-making operations to New York's Bear Stearns Cos., although the sale has been delayed.

UBS Investment Bank, the London-based unit of Switzerland's largest bank, UBS AG, analyzed subprime mortgages made in 2006 and found that borrowers were missing payments on loans made that same year at the highest rate since 2000.

In fact, UBS found subprime loans made in 2006 are on track to be the worst-performing loans ever issued.

Brea-based Fremont Investment & Loan, a unit of Santa Monica's Fremont General Corp.,topped UBS' list of poor performing loans. By late last year, 7.26 percent of Fremont's subprime loans made that same year were 60 days or more delinquent.

Argent, a unit of ACC Capital in Orange, which also owns Ameriquest, scored high on the list with a delinquency rate of 5.86 percent.

Option One landed closer to the middle with a 4.54 percent delinquency rate, and Irvine's New Century Financial Corp. had a 4.33 percent default rate.

So what went wrong, exactly?

Lenders made two mistakes, according to UBS and other analysts.

They didn't scrutinize borrowers' incomes, and they allowed subprime borrowers, who by definition have had past problems with their credit, to take on lots of risk.

Borrowers took advantage of "stated income" loan programs, where they simply tell lenders what they earn, said David Liu, director of UBS' mortgage strategy group.

And many first-time homebuyers made a small down payment or none at all. Often they took out simultaneous second mortgages to avoid paying mortgage insurance.

Borrowers gambled on rising home prices to bail them out of trouble, analysts said. Consumers thought home prices would keep climbing, which would enable them to sell or refinance if they got into a jam, analysts said.

But stalling or falling home prices last year changed all that, UBS' Liu said. Borrowers quickly began to miss payments.

"They lost the motivation or incentive to send in the checks," Liu said.

Because of the way loans are ultimately funded, it's very costly for lenders when a borrower misses one of the first payments on a loan.

Lenders package loans in big pools and sell them as bonds to investors. If a borrower misses the first payment, an investment bank putting the whole deal together can compel the lender to buy back the loan.

Lenders typically lose a lot of money when they must buy back delinquent loans. They lose transaction costs and may sell the loan again at a loss. Often when a borrower has defaulted, there is little or no equity in the home, so a foreclosure sale will not cover costs.

And there's another issue for subprime lenders who make newer, more exotic loan types.

Government pressure is building against the widespread use of loans in which a borrower pays only interest for a time or has the option of making a minimum payment that results in added debt.

Five federal agencies proposed guidelines on such loans in September, saying lenders need to better consider a borrower's ability to repay. The agencies said lenders are layering too much risk onto borrowers, especially consumers getting subprime loans.

And perhaps worst of all for lenders, investors and bond-rating agencies are closely watching loan performance. If loans start going bad, rating agencies will downgrade bonds and, thus, investors will pay less for them.

Fremont, whose loan delinquencies have spiked, recently adopted stricter guidelines for the second time in a year, according to Bloomberg News, which obtained a company memo on the topic.

Trude Tsujimoto, general counsel for Fremont, declined to comment on the memo or the Bloomberg story, which said the company will stop loaning to consumers who can't prove their income when buying a home with no money down.

"Our process is we are always looking at market conditions," Tsujimoto said in a telephone interview. "We are always tweaking our underwriting guidelines. This is another round of changes that we make periodically."

Tsujimoto, however, acknowledged the industrywide spike in defaults. Given the market environment today, it's prudent to have more restrictive guidelines, she said.

New Century Financial has been more public about changing its underwriting and ensuring that consumers know the risks of certain loan types.

In October, the company said it would look at a borrower's ability to repay after the end of low initial terms on adjustable-rate mortgages.

It stopped shy of saying it would consider a borrower's ability to repay the loan at its fully indexed rate, which is the maximum rate a borrower is likely to pay based on a moving index. The company said it would look at the fully indexed rate minus 1 percent.

Like Fremont, New Century has taken further steps to make its underwriting more restrictive, according to the company.

Several of the new rules affect first-time buyers. New Century won't lend them money if they don't plan to live in the property they're buying.

And if first-time buyers are putting less than 10 percent down with a "stated income" loan, they need to have savings equal to six months worth of mortgage payments.

Tony Meola, executive vice president with loan production at New Century, said the company is acting more from a sense of prudent lending than from pressure by government agencies or investors in its mortgages.

"We have no interest in putting people in homes that they can't afford," Meola said. "We have the responsibility to lend appropriately."

Contact the writer: 714-796-6726 or mapadilla@ocregister.com

Thousands face loss of homes

Last Updated: 2:45 pm | Monday, January 22, 2007

Rash of foreclosures stirs debate on blame

BY JAMES MCNAIR | JMCNAIR@ENQUIRER.COM

EAST PRICE HILL - Diane Swain's house serves as a sanctuary in a life filled with challenges.

Her husband died young in 1990. A car wreck left her with an injured leg, a bad back and a daily regimen of expensive drugs. Her 31-year-old son hangs around the house, too severely autistic to work.

To pay for food, medical care, utilities and the mortgage on her century-old house on West Eighth Street, Swain squeezes every last penny from a $1,400-a-month Social Security check.

But her difficulties don't end there. Now a mortgage company in Southern California is foreclosing on her house.

Ameriquest Funding says Swain fell behind on a $91,000 loan. Her lawyers at the Legal Aid Society of Greater Cincinnati counter that predatory lenders and mortgage brokers duped her into a series of six loans saddled with high closing costs, suspiciously high appraisals and escalating monthly payments.

Swain, 56, wants to keep the house for her son, Jimmy, whose autism requires familiar surroundings.

"I'm going to fight for the house till the day I die," Swain said. "If I lose it, where are Jimmy and I going to live?"

While Swain's circumstances are especially dire, similar foreclosure notices were tacked to the front doors of more than 10,000 homeowners in almost every neighborhood of Greater Cincinnati and Northern Kentucky last year.

For the seventh straight year, foreclosure filings hit record highs not only here but in all of Ohio and Kentucky.

Record foreclosures were also a national phenomenon, and Ohio, Indiana and Kentucky were at the front. Through Sept. 30, Ohio led the nation with 3.32 percent of its home loans in foreclosure, according to the Mortgage Bankers Association.

Indiana was second at 2.9 percent; Kentucky, fifth at 1.76 percent. The national average was 1.05 percent.

Economists, lenders and consumer advocates blame the upswing on a stew of culprits: an unemployment bubble in the Midwest, an unquenching thirst for consumer debt, and mortgage scams on low-income homebuyers.

The unemployment rate stood at 5.1 percent in Ohio and 5.2 percent in Kentucky at the end of November, compared with a national rate of 4.3 percent. In the Cincinnati-Middletown market, the rate was 4.8 percent.

"What's going on in the job market is the most important factor in foreclosure and (loan) delinquency rates," said Mike Fratantoni, a senior economist with the Mortgage Bankers Association. "In the Midwest, unemployment rates have been higher in the rest of the country, in the automotive industry in particular. If a homeowner loses his job in a market that were strong, he could quickly sell his home" instead of losing it to foreclosure.

Jim Russell, managing director of core strategies and assets management at Fifth Third Bank, said Ohioans are vulnerable to the vagaries of the auto industry.

"Ohio has the second-largest exposure to automobile manufacturing in the United States," he said. As the Big Three close plants and cut jobs, "this creates job loss pressure, especially in the northern part of the state," Russell said.

Foreclosures rose disproportionately across Greater Cincinnati in 2006. The number of new filings rose an estimated 27 percent in Butler County and 22.8 percent in Clermont County, but less than 9 percent in Warren County.

Butler County bore the brunt of AK Steel's lockout of 1,800 workers in Middletown last February. The county's unemployment rate averaged more than 6 percent from March to September, when the steelworkers' joblessness benefits ran out. Unemployment stood at 4.8 percent in November.

Jim Tyler, a spokesman for Local 1943 of the International Association of Machinists and Aerospace Workers at AK, said he knows of "quite a few" foreclosures among the rank and file.

"A lot of them have gone from not having a paycheck to losing their homes and having their cars repossessed," Tyler said.

Banks can lose, too

Homeowners aren't the only losers when foreclosures happen. Banks themselves stand to lose a bundle on loans that go bad and collateralized homes worth barely more than the ground they stand on, said Kirk Sampson, a Cincinnati lawyer who has filed foreclosure cases for lenders for 32 years.

"Lenders are getting killed by this stuff," Sampson said. "There's no lender out there that wants a foreclosure. Lenders lose a lot of money on foreclosures. By the time they complete the foreclosure process in Ohio, they take a huge bath - 50 cents on the dollar sometimes."

Among lenders, the biggest losers are those that lend to the riskiest customers, so-called "subprime" borrowers with the worst credit. As of Sept. 30, 12.56 percent of all subprime mortgage loans were delinquent, compared with 2.44 percent of loans made at prime interest rates to people with good credit, according to the Mortgage Bankers Association.

"Banks are choking on what is know as real estate owned," Sampson said. "It's generally junk property that needs a lot of work."

If foreclosed homes aren't sold at public auction, they end up in the listings of real estate brokers such as Butch Magner of Huff Realty in Fort Mitchell. He sells foreclosure homes in "as is" condition for about 10 lenders. Most properties, he said, fetch less than their previous selling price. Most bring down the value of homes around them.

"For the most part, they're in fair to poor condition," Magner said.

"Over 2½ years, foreclosures have tripled or quadrupled," he said. "They're everywhere, from the inner city of Covington and Newport up to Edgewood and Burlington and Fort Mitchell."

Sampson said lenders work with defaulting customers by putting them on a repayment plan. But for now, the combination of easy credit and free spending is fuel on the foreclosure fire. "It's a social epidemic, but one that will eventually run its course because lenders will realize that their rate of return on these loans is not what they expected and they'll stop making these types of high-risk loans," Sampson said.

The mill grinds steadily

Nick DiNardo gags at the notion of out-of-town lenders working to keep struggling homebuyers out of foreclosure. A lawyer with the Legal Aid Society, he blames home-flipping, deceptive lending and mortgage fraud for the rash of foreclosures. The victims are typically unsophisticated working-class people buying their first house, responding to home-equity loan pitches or rent-to-own schemes.

Trying to negotiate a modified repayment plan with a lender is futile most of the time, he said. "It's almost impossible to get a person to talk to you."

"There've been times when the client had the money, but we couldn't get ahold of the attorney to see how much was needed to resolve the case," he said. "The way these things work in court, it's almost like a mill. There's almost nothing that can slow the process down."

In Swain's case, Legal Aid couldn't find the mortgage broker who handled four of her six loans. But it was able to help in the case against her in Hamilton County Common Pleas Court.

The nonprofit organization filed a counterclaim against eight lenders, brokers, salespeople and an appraiser. It alleges fraud, negligence, conspiracy, unjust enrichment and violations of various state laws.

The appraiser valued Swain's house at $90,000 in 2003, almost four times its current appraisal of $25,000. Most of the $91,800 that Swain borrowed went toward the payback of her original mortgage, medical expenses and home improvements required by the city of Cincinnati's building department. But $23,300 of it was paid out in loan closing costs and prepayment penalties.

"It' never crossed my mind that I could lose the house," Swain said.

Facing foreclosure: Casey Serin not in jail (yet), just hiding out as his life unravels

Thursday, December 21, 2006
UPDATE

Poor kid, it's all falling apart now. Maybe jail would be an improvement? But where are the Feds? Just too busy to care about mortgage fraud I guess..

Anyone want to guess the over/under for when Casey does get the big knock on the door? My guess: April 2007. I guess the banks have to file a complaint first?

My advice for Casey: file bankruptcy, turn yourself in, go States Evidence, write your bestseller book, and live the American Dream - Ring Up Massive Debt and Don't Pay It Back!

Here's his update:Avoiding Stress = More StressI’ve been a little out of it last couple of days.After coming back home to Sacramento on Monday I was feeling very overwhelmed by the “reality” that was/is waiting for me:…* still facing foreclosure on 4 houses…* well over $150K of unsecured debt…* decision to file bankruptcy or not to file bankruptcy…* uncertain job situation… utah mortgage issues…* lack of discipline and lack of progress on December goals…* being too distracted to do any more real estate deals…* serious marriage issues…* oh and on top of all that my laptop died!So I kind of hid from the world for a couple of days. No cell phone, no email, no blogging, no comments.

posted by keith at 7:55 AM

---

From Casey:

December 20th, 2006
Avoiding Stress = More Stress

I’ve been a little out of it last couple of days.

After coming back home to Sacramento on Monday I was feeling very overwhelmed by the “reality” that was/is waiting for me:… still facing foreclosure on 4 houses… well over $150K of unsecured debt… decision to file bankruptcy or not to file bankruptcy… uncertain job situation… utah mortgage issues… lack of discipline and lack of progress on December goals… being too distracted to do any more real estate deals… serious marriage issues… oh and on top of all that my laptop died!

So I kind of hid from the world for a couple of days. No cell phone, no email, no blogging, no comments.

The problem is that I can’t take a guilt-free break. The fires are are ranging all around me. I can’t just pretend everything is OK and hide from my responsibilities.

Now I have over 250 email to answer, over 200 comments to moderate, 25 voice mails to return and a huge pile of mail to sort. I hope there are no emergencies that I ignored by staying unplugged. The unknown dangers eat at me every minute and sabotage any hope for any down time.

Avoiding the stress of dealing with problems causes even more stress and more problems.
(It’s time to face reality…)

19 Interesting CommentsFiled under other


Casey Serin: I'm a 24 yr old real estate investor from Sacramento CA. After going to a few seminars I bought 8 houses in 8 months in 4 states with no money down looking to fix 'n flip. I made some mistakes and fell flat on my face with millions in debt and facing foreclosure. Trying to avoid foreclosure, sell quickly, repay everyone, and blog my lessons to help others in trouble. Comments welcome!

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