You know, as if the media weren't treasonously losing the war in Iraq with their constant focus on the one or two car bombings and half a dozen American, make that, Coalition troops killed every day, now they are destroying the housing market. Why do we have a free press, if its only purpose is to serve a left-wing, radical minority who hate our country?
"While some markets are performing better than others, the typically stronger spring selling season has not yet materialized," President and Chief Executive Stuart Miller said in a statement. "These soft market conditions have been exacerbated by the well-publicized problems in the subprime lending market."
The California legislature has taken up the issue of sub-prime lending. Judging from reports in today's SF Chronicle the issue is predictably getting politicized. No one is willing to state the obvious: home prices are much too high.
Yeah, well, look on the bright side. It's hard for a servicer to flood your market with REO when it's so far down the tubes it can't foreclose fast enough to end up with enough REO to make a decent-sized flood. Perhaps we'll be saved by the "trickles" of REO.
Organizations are inevitably permeated by the mores and styles of the people at the top. When they are take-the-money-and-run buncombe artists, you're unlikely to find many* honest and competent people down below. It's a safe bet that the servicing operations of the rogue lenders will be found to be as bad -- or worse -- than their lending operations.
*There will be some poor souls doing their best to keep things together.
Tanta - any insight/general comment on the potential for an MSR re-valuation blow-up/meltdown.
Will companies be required to re-value their MSRs given the rising number of defaults and general mayhem in the servicing side of the business?
This is not an academic issue. HRB helped juice their 2006 earnings by using 'fair value' accounting to re-value their MSR assets. They cited efficiency improvements in their servicing operations which resulted in (I think) harvesting $50M in NPV gains - which was timely because they were booking losses elsewhere.
This 'fair value' accounting sure comes in handy on the upside, but I wonder how 'fairly' it will be implemented on the downside.
desperate spin attempts on cnbc plus "shocked" former bulls like David Seiders, Chief Economist of the National Association begging for a rate cut etc.
Yep, I just saw the same cnbc segment. Again, NO ONE is pointing out the fact that home prices are just too high. That architect who lost the buyer for his home needs to lower his price to attract a buyer who can qualify.
While I appreciate how difficult it is for a lot of people, the economic disquilibrium is not that difficult to understand. Either incomes need to rise so people can once again afford to buy homes at these prices, or prices need to return to levels that people can afford.
This 'fair value' accounting sure comes in handy on the upside, but I wonder how 'fairly' it will be implemented on the downside.
I'm not an expert on servicing valuations--I'd probably be richer than I am if I were--but I think you've hit the nail on the head. It's like how everybody (Enron?) wanted to get into mark-to-market accounting. That's fun on the upside, too.
You can, if you want, read this Fitch thing and think, well, there it is. The rating agencies know what the issues are, they know how to do the operational as well as financial reviews, and they have the access to do it. So what, besides sacrificing a big cash cow, could possibly stop them from doing it? A couple of good hard servicer downgrades would make it harder for anyone to play games with the MSR valuations. Even the greenest regulator or auditor might have a hard time reconciling the servicer rating and the servicer's sunny assumptions in its books.
Of course, much of this won't come as news to regular readers of this blog (or Doug Noland). But it also has a number of insights into the broader implications of the sub-prime mess.
Every time I hear that silly phrase I have to resist a violent urge to throw up. The chronic dumbing down and outright refusal to acknowledge that bad news is bad news is an epidemic.
Nobody said that goldilocks economy must be long. If you define it as a period of good times before last rate increase and resession - than it's correct, there is always a Goldilocks economy. Sometimes it lasts for just few months...
C'mon, Haps, the Fitch report makes your list for you.
Who do we know who has most of (if not all of) the following:
1) large subprime exposure in the servicing portfolio (I'd add Alt-A, as well)
2) "captivity"--that is, the servicer's book is mostly retained rights from its own originations--or a third-party book which depends on a limited number of large originators
4) faces increased borrowing costs from warehouse lenders as a direct result of declining profitability hitting the covenant triggers?
Plus everything that is hitting everyone else: rising expenses, declining RE markets, increased regulatory scrutiny, past down-sizing leading to current (veteran) staff shortages.
Can anyone spell GMAC? We've already seen NEW get all its servicing contracts yanked, which should be causing a fair amount of grief and heartache and pant-wetting right about now for some security holders who are having to make sure that NEW sticks around long enough to get those transfers done and done correctly.
The next big "margin call," that is, will be the servicing agreements. And then we'll see whether all those "efficiencies" that got to goose the value of the MSR are really gonna work when it comes to transferring huge books of heavily delinquent loans in short time frames with no advance notice and no opportunity to staff up for it.
Why, if I had any expertise with servicing transfers (and I have more of that than I do servicing valuations), I might be inclined to throw out some bids. As long as I got paid in cash up front.
Yep, I just saw the same cnbc segment. Again, NO ONE is pointing out the fact that home prices are just too high
since the majority of Americans (69% own owner occupied SFH) are now owners then it is in their best interest to keep prices higher. The hope is that these prices are not fools gold, most of not all the CNBC staff are part of the ownership society, probably not much talk about affordability from that group.
ron,
The editors who control the content of CNBC, I would say, rather than "staff". But I agree: so much depends on maintaining those house prices at current levels and tremendous efforts are made to conceal that RE is currently an investment loser...and will be for years, unless that adjustment is made now.
Which puts a light on BB's choices for me: extend the Greenspan postponement strategy of lower interest rates (and possibly even more unaffordable housing) or taking the medicine now by increasing the interest rates and pushing those speculative commodity prices back down (Volcker --Roach's last missive from MS.)
Tanta you have been in the mortgage biz. for a long time and there is a lot of things to be learned from you. My question to you is this: How come that 6-7 years ago (when I was involved in a lot of residential transactions of all kinds) I never heard of these subprime lenders? I dislike them as much as you do ( main reason being the collateral demage) but I think these creatures are the result of a very, very dangerous policy.
That's right, a new Dodge pickup for only $11,777thats almost 50% haircut
Not only are homeowners going to be up-side-down on their houses but also on their cars
My Dad had a used car business and always said that car sales ran opposite of housingwhen people couldn't buy a new house they would opt for a new car. This time everything was bought at the same time. I'm not sure how far behind the builders are to the car manufactures but I personally think we are getting close.
Meanwhile back at the office....husband told me his big S&P500 Co. which NEVER plays the 'chasing salary' game and always only gives 3% +/- .5% raises across the board, just handed out 5% and some even got 12% raises!
stagflation anyone?
and as far as Goldilocks, didn't she get eaten by the bears?
Products and markets have life cycles but I have seen no discussion about the American RE market in that regard. I am sure someone will get around to discussing the RE market in lifecycle terms which may provide some insight into its investment future.
Question: Headlines about subprime meltdowns, housing demand meltdowns, etc. etc. When are we going to start hearing about credit card acct. meltdowns? Why am I not hearing anything in the news about massive c.c. defaults? I'd pay my floundering mortgage before I'd pay my c.c. Am I missing something?
Question: Headlines about subprime meltdowns, housing demand meltdowns, etc. etc. When are we going to start hearing about credit card acct. meltdowns? Why am I not hearing anything in the news about massive c.c. defaults? I'd pay my floundering mortgage before I'd pay my c.c. Am I missing something?
Good question.
This is why I'd like to see a breakdown of defaults by investors and homeowners who are actually living in their homes. I get the feeling that the raw number of delinquencies and defaults overstates the numbers of actual homeowners that are in distress. For example.
desperate spin attempts on cnbc plus "shocked" former bulls like David Seiders, Chief Economist of the National Association begging for a rate cut etc
David Seiders was one the first economists I saw being openly bearish about the housing market on cable television. It really surpised me at the time given that this was the chief economist of the NAHB. This was in June 2006 or so...
In today's consumer confidence report the headline number was down, but that was pretty much entirely due to a fall in the expectations component. The present conditions component actually increased and remains near the cyclical highs. This is at odds with the notion that a significant number of homeowners are in distress. Comments?
Steve - 30% default rates provide a good answer to the credit card payments. Consumers have been rolling credit card debt into home loans, but with the drop in refis in the second half of 2006 credit card delinquencies started to rise again. From 4thQ 2005 to 4thQ 2006 credit card delinquencies rates went from 3.66 to 4.05.
There is a high, high incentive to keep those current with 30% default interest rates having become the industry standard.
For first time in over a decade, the Case Shiller Housing Composite flipped negative; I'm sure this is utterly meaningless, and is nothing to worry about whatsoever:
"January data released today by Standard & Poors for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices in the United States, shows home price composites plummeting into negative terrain.
The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market, says Robert J. Shiller, Chief Economist at MacroMarkets LLC. The 10-City and 20-city Composites are both showing negative annual returns, a striking difference from the 15.1% and 14.7% returns they reported this time last year. The dismal growth in the 10-City composite is now at rates not seen since January 1994.</i>
Steve. "I get the feeling that the raw number of delinquencies and defaults overstates the numbers "
You're almost certainly right when it comes to NoD numbers. From what I understand, the same notices go out for all RE secured delinquent loans, so 1st, 2nd... HELOC may all issue notices on the same residence, skewing numbers. What may make the current readings difficult to compare historically is the increase in additional RE secured debt. Piggington has recent a post concerning this issue.
Tanta, I'm not sure about your prediction of a trickle of REO. I saw a report last night on CBS news (I think) about how forclosure rates in Beazer starter-home developments in N.C. are running around 20%. A trickle can still be devastating if concentrated.
Anyways, here's part of the Charlotte Observer's article on it.
"When foreclosures are concentrated in one area, entire neighborhoods can suffer. Clusters of foreclosures drop the value of surrounding properties, causing additional foreclosures. Renters move in; crime sometimes rises.
In Mecklenburg, a record 2,500 owners lost homes last year. Foreclosures this year are up 8 percent over the same time last year.
The problems are concentrating in starter-home developments of low-priced homes built in the last decade. The Observer found at least 35 such developments in Mecklenburg with a foreclosure rate above 20 percent.
Beazer built nine of those starter-home developments, with average property values below $150,000, and one more with slightly higher values. No other single company has built so many Mecklenburg developments with such high foreclosure rates, the Observer reported last week."
Steve-
The reports may overstate the actual numbers of homeowners in distress, but their properties, once on the market, will only add to the growing inventory glut. This will drive down prices for other homeowners who are occupying their homes but are in trouble and need to sell for $X, causing yet more delinquencies. So even though all the foreclosed properties might not have one owner per home, the impact may be widespread.
Andrew, I was pretty much kidding about the "trickle" of REO.
However . . . I still think we need to be concerned about this businessness of foreclosing on the foreclosers (that's what Morgan Stanley just did to NEW).
As I said in my UberNerd post on servicing: you pay the servicer first. It is in your best interest to pay the servicer first. I know few bondholders who are prepared to roll up their sleeves and start filing foreclosure notices or submitting auction bids or inspecting deliquent properties or getting down on their hands and knees and begging the MIs for a full reimbursement . . .
I'm not disputing that. A foreclosed home is a foreclosed home and that's bad for housing inventory and thus prices.
I'm just questioning the notion that a significant number of (resident) homeowners are distressed. This is important because many are expecting a consumer-led recession.
The argument for the consumer led recession is simple. Negative savings rates. Falling asset values. Tighter credit markets. Rampant outsourcing of good jobs. Connect the dots...
Steady unemployment appears to be buoying the performance of core prime ABS sectors. "Despite a slight increase in December, the unemployment picture remains generally positive, with inflationary pressures moderating," said Director Kevin D'Albert. "This bodes well for U.S. term ABS in the short term as performance should remain in line with expectations for this year." However, should the credit environment become less favorable, delinquencies and chargeoffs may begin to creep up, especially in the subprime auto and credit card sectors.
Any yield curve experts around? What happens to the yield curve once the recession begins? Mark Hulbert on MarketWatch is making a big deal about the yield on the 2 year T-Note now being less than that on the 10 year...
Since we have a high number of homeowner households (69%) the foreclosure problems in total is not large. The issue becomes how many foreclosures are happening in your neighbor and also the effect this is having on credit availability in the general credit markets . The other factor is that tighter lending standards affects HB which has a significant impact on a range of consumer spending related to home buying food chain. Home Depot, Pottery Barn are examples of this slowdown effect which impacts employment, etc.
So I don't think you can measure the impact of the current foreclosure rate as a % of the total owner occuplied SFH and declare that its a small or significant problem just from the current numbers but rather see it as a credit availability reduction that is affecting a wide range of consumer buying activities.
Outsider, would recommend you go see"Maxed Out" - it's a new film about consumer debt - mortgages and credit. Wraps the whole thing up nicely.
The answer to your question, that this film documents superbly, is that cc defaults are happening all over the place --but as it turns out the defaulters make the best customers for the cc companies because they are addicted to debt. So folks getting the most credit card offers are the ones with the worst credit.
However, this enron style of running things can only be tenable for so long (as we have seen in the housing mkt), so soon you will see even bigger waves of default-of a more permanent kind.
P.S. Firstgerald to call it: We are now in a recession.
"Because of the rapid expansion of subprime lending in recent years, lenders, investors, and ratings agencies had limited data with which to model credit risk posed by new borrowers or novel mortgage types, and so may have underestimated the risk involved."
That is a novel definition of increased transparency.
"Any yield curve experts around? What happens to the yield curve once the recession begins?"
Good question - it depends as usual. Either case mostly the same results
Fed Eases - unlikely they'll do so fast enough, meanwhile lots of money will pile on the long end of the curve inverting it further, then the Fed will end up chasing it down. If they go to an eventual 1% rate again, then we'll likely have a modest hocky stick again, with the short end back at 1%, and long up around 3%-3.5% say.
Fed doesn't ease - well, I guess this isn't an option really. The curve would invert further.
Afterwards, depending on the depth of the recession, the curve would be modestly positive to mostly flat.
Tanta - couldn't find any companies mentioned in the Fitch note, but...
As I said in my UberNerd post on servicing: you pay the servicer first. It is in your best interest to pay the servicer first. I know few bondholders who are prepared to roll up their sleeves and start filing foreclosure notices or submitting auction bids or inspecting deliquent properties or getting down on their hands and knees and begging the MIs for a full reimbursement . . .
Could it be that after figuring out the additional work neded to chase down these deadbeat-homeowner payments, the servicer wants out? Maybe this MSR fair (NPV) valued beast isn't such a cash cow after all.
Last Braunstein comment, but her testimony really deserves its own post...Tanta.
She says,
"Safety and soundness examinations include a review of credit risk-management practices such as underwriting, portfolio risk management, and quality control processes concerning third-party originations.
In addition, examiners review stress testing, economic capital methods, and other quantitative risk-management techniques to ensure that banks are assessing the level and nature of these risks appropriately; asset securitization activity to ensure appropriate risk management and capital treatment; residential lending appraisal practices to ensure appropriate collateral valuation processes; and new product review processes to ensure that disciplined approaches are being brought to new lending products and programs."
To me, that is one of the most detailed, simple, easily understood mea culpa's I have ever read.
She is saying that if there are any problems in sub-prime, or the mortgage business generally, including securitization, one must look no further than the Federal Reserve to find the responsible party.
Wow. Double wow.
I suppose she has to say that. But, just the same, what a statement!
Andrew, I was pretty much kidding about the "trickle" of REO.
Trickle probably wasn't the best term... think of it more as REO constipation. Its there, its uncomfortable, its really going stink... but its just not coming out. Not yet anyway.
Arbogast - but many lenders and originators are not under federal regulatory supervision. They may be regulated by the states, but state regulation is spotty to say the least.
The huge change in the last 5 years is the shift from GSE/Bank/Broker to non-regulated entities controlling the process.
That was one of the issues often brought up in the comment process leading up to the federal interagency guidances. Whatever was done would simply further advantage non-bank players but would not necessarily protect the consumer.
Steve asked "Do you disagree that there seem to be a disconnect between mortgage delinquencies and other consumer debt?"
Yes. To me everything, including commercial credit, seems to be moving in tandem as I would expect. There is always a lag time between trouble and severe delinquency and we are in early days yet. What's staggering is how high delinquencies and defaults are when placed against average mortgage age, low mortgage rates and the employment rate.
MEW apparently really was carrying the whole consumer side of the economy, and MEW done gave up and went home to sulk. The worst of it is that extremely low mortgage rates still don't seem to be bailing us out of the mess. I would guess that those left in the adjustables are those who really are underwater in terms of total debt.
Mind you, the My Community program is still approving loans with over 55% DTIs, so I expect the FNMA originations to be performing quite badly in 2008!!!
I'm not kidding about FNMA being the biggest subprime lender in some states. They are definitely writing some loans that shouldn't be written. Quote from Broker Outpost: I closed a full-doc, 62% DTI 100%, single loan, 610 middle score, My Community loan yesterday. 7% paying 1.6. I've heard of as high as 69 DTI getting approved - if you can, try it.
Well, dryfly, I guess your metaphor gets us off that flatulence thing from the last few threads . . . capitalist pig is turning out to be rather more odiferous than old Doomster's polite little "pfft!". Nonetheless, I wouldn't mind if we shifted from the gastrointestinal imagery entirely . . .
You raise a good point: one would expect a large number of distressed homeowners to drive down consumer confidence numbers. But I'm not terribly surprised we haven't seen it yet, since I think the biggest impacts are going to ultimately derive from decreased MEW. So many consumers wont realize there's a problem until next time they try to refinance, and find their house does not assess as high as theyd hoped. My anecdotal experience is that most people still feel things are fine in their house/neighborhood/town.
MaxedOut,
The really horrible problem is that if Fanny Mae is dirty, it won't be discovered until sometime in 2010, at the earliest: Bush fixer in place.
I would guess that the yield on the 2 year T-Note decreased recently, and that is one reason for the yield curve reversion. Lenders are unwilling to lock in rates at the Federal Funds Target Rate (5.25%) for 2 years.
Is it common for the 6 month rate to be greater than the 2 year rate? What does say about the current state of the economy?
Bloomberg has a different take, saying that greater fears of inflation are behind a rise in the 10 year yield...
"My anecdotal experience is that most people still feel things are fine in their house/neighborhood/town." ~AJH
AJH, Greetings from Ground Zero. My neighborhood is a mess. The house next door was foreclosed upon and is vacant (the water supply connection has leaking from under their lawn onto the sidewalk for the past couple months). Numerous homes in one of the nicest neighborhoods in Detroit are vacant. Today, I saw a sign in the front window of one house that said something like "Beware, this home is REO and is being watched". One month ago, I wouldn't have known what this meant, but thanks to the good folks here and Wikipedia I have some clue...
Remember to add in our share of national debt. $9 trillion divided by 300 million people = $30,000 per person. Oh well, at least the rate won't reset until we refinance it.
A trickle may be enough to have huge effects on prices.
One interesting feature of the housing market is that prices are determined by the 6% of homes that change hands every year, but the other 94% of homeowners can cashout equity to take advantage of these prices. This is despite the fact that there was never a market for 100%(or anything more than 6%) of homes at today's prices, yet a far greater number of homeowners were able to effectively sell (through HELOCs) at these prices. Of course, if the rent/buy numbers were in equilibrium, a sufficiently large investor (China?) might be willing to buy the entire housing stock at market prices (and rent the homes back at a small profit). Contrast the housing situation to the stock market, where prices are also set by the small portion of shares changing hands, but hedge funds/LBO firms/private equity are often willing to buy all of the outstanding shares at these prices based upon fundamentals.
Loose subprime lending did not need to be "large" relative to the entire housing stock, it only needed to be (and was) a large demand factor relative to the 6% of homes changing hands. Similarly, a trickle of foreclosures/REOs does not need to be a "large" percentage of all homes, just a "large" number relative to the 6% of homes changing hands to cause prices to plummet.
Sorry about that Tanta, I didn't mean to niggle there. I was just pointing out that even if the REO pipeline gets constipated (as dryfly puts it) there's probably going to be concentrated effects in the riskier areas. These concentrated effects may in turn cause contagion effects larger than their actual size, particularly when the media/popular psychology gets the idea of how much REO/forclosure is in the pipeline (even though it may be "worked out" and never become REO).
I find your point on foreclosing the foreclosers particularly disturbing though. That's cannibalistic behaviour and, as you aptly pointed out, the MBS holders shooting themselves in the foot. I can think of three possibilities for this: 1) incompetence, in that the MBS holders are still under the illusion they were sold on of simplicity and transferability and are about to painfully find out otherwise (i.e., they are used to thinking in terms of conventional corporate bonds). 2) Unlike traditional lending organizations, they don't have any extra $ (or cash in that particular pot) to give to the servicer. And 3), they have the short term financial market mentality and are brutally liquidating to cut their losses and take the write off. With any of those reasons, it will be ugly.
re: flatulence - i think "fartin through silk, baby" should be the name of my new blog.
that line still has me laughing.
all good all the time baby!! really gives you the mentality of the other side (permabullsh*tters), no?
Today, I saw a sign in the front window of one house that said something like "Beware, this home is REO and is being watched".
Interesting I wonder whether the term "REO" actually was used. Doesn't sound like they were addressing folks with the usual homeless squatter profile or is REO that much a general topic in Detroit?8[
Today, I saw a sign in the front window of one house that said something like "Beware, this home is REO and is being watched".
Interesting I wonder whether the term "REO" actually was used. Doesn't sound like they were addressing folks with the usual homeless squatter profile or is REO that much a general topic in Detroit?8[
I do foreclosure work all over NYS, mostly for subprime lenders. We've been seeing lots of the fraudulent loans being referred out for foreclosure (both buyer and lender variety) so far, but very little if any caused by interest rate adjustments. We've actually seen a slow down the past two months in referrals as servicing gets transferred to other divisions, or sold or service released, repurchased or referrals held off to see if the portfolios are sold along with the servicing. My feeling is, the bad loans are just starting to melt like winter snow up in the mountains and we haven't even begun yet to see the coming flood.
Firstgerald
You know, as if the media weren't treasonously losing the war in Iraq with their constant focus on the one or two car bombings and half a dozen American, make that, Coalition troops killed every day, now they are destroying the housing market. Why do we have a free press, if its only purpose is to serve a left-wing, radical minority who hate our country?
"While some markets are performing better than others, the typically stronger spring selling season has not yet materialized," President and Chief Executive Stuart Miller said in a statement. "These soft market conditions have been exacerbated by the well-publicized problems in the subprime lending market."
The California legislature has taken up the issue of sub-prime lending. Judging from reports in today's SF Chronicle the issue is predictably getting politicized. No one is willing to state the obvious: home prices are much too high.
It really is a Goldilocks economy
She had a subprime loan, couldn't afford the reset, got foreclosed, and had to find a new place to sleep!
Yeah, well, look on the bright side. It's hard for a servicer to flood your market with REO when it's so far down the tubes it can't foreclose fast enough to end up with enough REO to make a decent-sized flood. Perhaps we'll be saved by the "trickles" of REO.
Organizations are inevitably permeated by the mores and styles of the people at the top. When they are take-the-money-and-run buncombe artists, you're unlikely to find many* honest and competent people down below. It's a safe bet that the servicing operations of the rogue lenders will be found to be as bad -- or worse -- than their lending operations.
*There will be some poor souls doing their best to keep things together.
Tanta - any insight/general comment on the potential for an MSR re-valuation blow-up/meltdown.
Will companies be required to re-value their MSRs given the rising number of defaults and general mayhem in the servicing side of the business?
This is not an academic issue. HRB helped juice their 2006 earnings by using 'fair value' accounting to re-value their MSR assets. They cited efficiency improvements in their servicing operations which resulted in (I think) harvesting $50M in NPV gains - which was timely because they were booking losses elsewhere.
This 'fair value' accounting sure comes in handy on the upside, but I wonder how 'fairly' it will be implemented on the downside.
this is somewhat ot but
paper money hits is once again
BNN - MUST SEE TV!
desperate spin attempts on cnbc plus "shocked" former bulls like David Seiders, Chief Economist of the National Association begging for a rate cut etc.
Paper Economy - A US Real Estate Bubble Blog: BNN - MUST SEE TV!
Yep, I just saw the same cnbc segment. Again, NO ONE is pointing out the fact that home prices are just too high. That architect who lost the buyer for his home needs to lower his price to attract a buyer who can qualify.
While I appreciate how difficult it is for a lot of people, the economic disquilibrium is not that difficult to understand. Either incomes need to rise so people can once again afford to buy homes at these prices, or prices need to return to levels that people can afford.
Why won't anyone on CNBC point this out?
This 'fair value' accounting sure comes in handy on the upside, but I wonder how 'fairly' it will be implemented on the downside.
I'm not an expert on servicing valuations--I'd probably be richer than I am if I were--but I think you've hit the nail on the head. It's like how everybody (Enron?) wanted to get into mark-to-market accounting. That's fun on the upside, too.
You can, if you want, read this Fitch thing and think, well, there it is. The rating agencies know what the issues are, they know how to do the operational as well as financial reviews, and they have the access to do it. So what, besides sacrificing a big cash cow, could possibly stop them from doing it? A couple of good hard servicer downgrades would make it harder for anyone to play games with the MSR valuations. Even the greenest regulator or auditor might have a hard time reconciling the servicer rating and the servicer's sunny assumptions in its books.
You're such a tease. So throw out the list of likely suspects.
At least give ys a little push to get going.
As a supplement to the Fitch report, see this excellent article:
Asia Times Online :: Asian news and current affairs - Subprime: Allocation and understanding
Of course, much of this won't come as news to regular readers of this blog (or Doug Noland). But it also has a number of insights into the broader implications of the sub-prime mess.
"It really is a Goldilocks economy"
Every time I hear that silly phrase I have to resist a violent urge to throw up. The chronic dumbing down and outright refusal to acknowledge that bad news is bad news is an epidemic.
"So what, besides sacrificing a big cash cow..."
That's a big besides where I come from.
Efficient markets?
The bad news on new home sales came yesterday. Home builders are dropping today.
It took the market 24 hours to connect the dots. What a bunch of idiots!
"It really is a Goldilocks economy"
Nobody said that goldilocks economy must be long. If you define it as a period of good times before last rate increase and resession - than it's correct, there is always a Goldilocks economy. Sometimes it lasts for just few months...
C'mon, Haps, the Fitch report makes your list for you.
Who do we know who has most of (if not all of) the following:
1) large subprime exposure in the servicing portfolio (I'd add Alt-A, as well)
2) "captivity"--that is, the servicer's book is mostly retained rights from its own originations--or a third-party book which depends on a limited number of large originators
3) faces liquidity, overcapacity, margin pressures?
4) faces increased borrowing costs from warehouse lenders as a direct result of declining profitability hitting the covenant triggers?
Plus everything that is hitting everyone else: rising expenses, declining RE markets, increased regulatory scrutiny, past down-sizing leading to current (veteran) staff shortages.
Can anyone spell GMAC? We've already seen NEW get all its servicing contracts yanked, which should be causing a fair amount of grief and heartache and pant-wetting right about now for some security holders who are having to make sure that NEW sticks around long enough to get those transfers done and done correctly.
The next big "margin call," that is, will be the servicing agreements. And then we'll see whether all those "efficiencies" that got to goose the value of the MSR are really gonna work when it comes to transferring huge books of heavily delinquent loans in short time frames with no advance notice and no opportunity to staff up for it.
Why, if I had any expertise with servicing transfers (and I have more of that than I do servicing valuations), I might be inclined to throw out some bids. As long as I got paid in cash up front.
Yep, I just saw the same cnbc segment. Again, NO ONE is pointing out the fact that home prices are just too high
since the majority of Americans (69% own owner occupied SFH) are now owners then it is in their best interest to keep prices higher. The hope is that these prices are not fools gold, most of not all the CNBC staff are part of the ownership society, probably not much talk about affordability from that group.
ron,
The editors who control the content of CNBC, I would say, rather than "staff". But I agree: so much depends on maintaining those house prices at current levels and tremendous efforts are made to conceal that RE is currently an investment loser...and will be for years, unless that adjustment is made now.
Which puts a light on BB's choices for me: extend the Greenspan postponement strategy of lower interest rates (and possibly even more unaffordable housing) or taking the medicine now by increasing the interest rates and pushing those speculative commodity prices back down (Volcker --Roach's last missive from MS.)
arbogast, I really hope you are kidding. Jesus.
Tanta: Thanks for the education on how complex this RE/Mortgage business is.
Federal Reserve plans to handle the issue by finding other sources of finance to keep subprime borrowers in their homes:
http://www.federalreserve.gov/boarddocs/testimony/2007/20070327/default.htm
Tanta you have been in the mortgage biz. for a long time and there is a lot of things to be learned from you. My question to you is this: How come that 6-7 years ago (when I was involved in a lot of residential transactions of all kinds) I never heard of these subprime lenders? I dislike them as much as you do ( main reason being the collateral demage) but I think these creatures are the result of a very, very dangerous policy.
anecdotal evidence:
Car commercials advertising 10K off MSRP
That's right, a new Dodge pickup for only $11,777thats almost 50% haircut
Not only are homeowners going to be up-side-down on their houses but also on their cars
My Dad had a used car business and always said that car sales ran opposite of housingwhen people couldn't buy a new house they would opt for a new car. This time everything was bought at the same time. I'm not sure how far behind the builders are to the car manufactures but I personally think we are getting close.
Meanwhile back at the office....husband told me his big S&P500 Co. which NEVER plays the 'chasing salary' game and always only gives 3% +/- .5% raises across the board, just handed out 5% and some even got 12% raises!
stagflation anyone?
and as far as Goldilocks, didn't she get eaten by the bears?
calmo:
Products and markets have life cycles but I have seen no discussion about the American RE market in that regard. I am sure someone will get around to discussing the RE market in lifecycle terms which may provide some insight into its investment future.
OT Warning
Question: Headlines about subprime meltdowns, housing demand meltdowns, etc. etc. When are we going to start hearing about credit card acct. meltdowns? Why am I not hearing anything in the news about massive c.c. defaults? I'd pay my floundering mortgage before I'd pay my c.c. Am I missing something?
Question: Headlines about subprime meltdowns, housing demand meltdowns, etc. etc. When are we going to start hearing about credit card acct. meltdowns? Why am I not hearing anything in the news about massive c.c. defaults? I'd pay my floundering mortgage before I'd pay my c.c. Am I missing something?
Good question.
This is why I'd like to see a breakdown of defaults by investors and homeowners who are actually living in their homes. I get the feeling that the raw number of delinquencies and defaults overstates the numbers of actual homeowners that are in distress. For example
.
desperate spin attempts on cnbc plus "shocked" former bulls like David Seiders, Chief Economist of the National Association begging for a rate cut etc
David Seiders was one the first economists I saw being openly bearish about the housing market on cable television. It really surpised me at the time given that this was the chief economist of the NAHB. This was in June 2006 or so...
Tanta, sorry, "there is" should be "there are".
To add...
In today's consumer confidence report the headline number was down, but that was pretty much entirely due to a fall in the expectations component. The present conditions component actually increased and remains near the cyclical highs. This is at odds with the notion that a significant number of homeowners are in distress. Comments?
Steve - 30% default rates provide a good answer to the credit card payments. Consumers have been rolling credit card debt into home loans, but with the drop in refis in the second half of 2006 credit card delinquencies started to rise again. From 4thQ 2005 to 4thQ 2006 credit card delinquencies rates went from 3.66 to 4.05.
There is a high, high incentive to keep those current with 30% default interest rates having become the industry standard.
MOM
That still doesn't seem that high. Do you disagree that there seem to be a disconnect between mortgage delinquencies and other consumer debt?
Case Shiller Housing Composite Flips Negative
From the good folks over at Big Picture
For first time in over a decade, the Case Shiller Housing Composite flipped negative; I'm sure this is utterly meaningless, and is nothing to worry about whatsoever:
"January data released today by Standard & Poors for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices in the United States, shows home price composites plummeting into negative terrain.
The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market, says Robert J. Shiller, Chief Economist at MacroMarkets LLC. The 10-City and 20-city Composites are both showing negative annual returns, a striking difference from the 15.1% and 14.7% returns they reported this time last year. The dismal growth in the 10-City composite is now at rates not seen since January 1994.</i>
link
Steve. "I get the feeling that the raw number of delinquencies and defaults overstates the numbers "
You're almost certainly right when it comes to NoD numbers. From what I understand, the same notices go out for all RE secured delinquent loans, so 1st, 2nd... HELOC may all issue notices on the same residence, skewing numbers. What may make the current readings difficult to compare historically is the increase in additional RE secured debt. Piggington has recent a post concerning this issue.
Tanta, I'm not sure about your prediction of a trickle of REO. I saw a report last night on CBS news (I think) about how forclosure rates in Beazer starter-home developments in N.C. are running around 20%. A trickle can still be devastating if concentrated.
Anyways, here's part of the Charlotte Observer's article on it.
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"When foreclosures are concentrated in one area, entire neighborhoods can suffer. Clusters of foreclosures drop the value of surrounding properties, causing additional foreclosures. Renters move in; crime sometimes rises.
In Mecklenburg, a record 2,500 owners lost homes last year. Foreclosures this year are up 8 percent over the same time last year.
The problems are concentrating in starter-home developments of low-priced homes built in the last decade. The Observer found at least 35 such developments in Mecklenburg with a foreclosure rate above 20 percent.
Beazer built nine of those starter-home developments, with average property values below $150,000, and one more with slightly higher values. No other single company has built so many Mecklenburg developments with such high foreclosure rates, the Observer reported last week."
Steve-
The reports may overstate the actual numbers of homeowners in distress, but their properties, once on the market, will only add to the growing inventory glut. This will drive down prices for other homeowners who are occupying their homes but are in trouble and need to sell for $X, causing yet more delinquencies. So even though all the foreclosed properties might not have one owner per home, the impact may be widespread.
Andrew, I was pretty much kidding about the "trickle" of REO.
However . . . I still think we need to be concerned about this businessness of foreclosing on the foreclosers (that's what Morgan Stanley just did to NEW).
As I said in my UberNerd post on servicing: you pay the servicer first. It is in your best interest to pay the servicer first. I know few bondholders who are prepared to roll up their sleeves and start filing foreclosure notices or submitting auction bids or inspecting deliquent properties or getting down on their hands and knees and begging the MIs for a full reimbursement . . .
Nikki,
I'm not disputing that. A foreclosed home is a foreclosed home and that's bad for housing inventory and thus prices.
I'm just questioning the notion that a significant number of (resident) homeowners are distressed. This is important because many are expecting a consumer-led recession.
You'll know the politicization has run amok when we are 'keeping people in their homes' who never bought them in the first place.
Moderately interesting:
IBM launches Charlotte mortgage unit
Steve,
The argument for the consumer led recession is simple. Negative savings rates. Falling asset values. Tighter credit markets. Rampant outsourcing of good jobs. Connect the dots...
Outsider: Why am I not hearing anything in the news about massive c.c. defaults?
This from a month ago ...
"Fitch: U.S. Term ABS Resistant to Mortgage Woes... So Far", BusinessWire - source: Fitch, February 27, 2007.
This from yesterday sounds more ominous.
"Some worry mortgage defaults may hit car loans", by Mark Pittman, Bloomberg / Denver Post, March 26, 2007.
Braunstein's testimony is must read. CR, in all humility, you should devote a post to it.
As an example, she says,
"For capital market investors, securitization has reduced transaction costs, increased transparency, and increased liquidity.
Now, either a chicken bone got caught in her throat, or this is a misprint.
"increased transparency"?
Huh? How does she get from securitization to there?
Any yield curve experts around? What happens to the yield curve once the recession begins? Mark Hulbert on MarketWatch is making a big deal about the yield on the 2 year T-Note now being less than that on the 10 year...
And now, the not-inverted yield curve Mark Hulbert - MarketWatch
Steve:
Since we have a high number of homeowner households (69%) the foreclosure problems in total is not large. The issue becomes how many foreclosures are happening in your neighbor and also the effect this is having on credit availability in the general credit markets . The other factor is that tighter lending standards affects HB which has a significant impact on a range of consumer spending related to home buying food chain. Home Depot, Pottery Barn are examples of this slowdown effect which impacts employment, etc.
So I don't think you can measure the impact of the current foreclosure rate as a % of the total owner occuplied SFH and declare that its a small or significant problem just from the current numbers but rather see it as a credit availability reduction that is affecting a wide range of consumer buying activities.
Outsider, would recommend you go see"Maxed Out" - it's a new film about consumer debt - mortgages and credit. Wraps the whole thing up nicely.
The answer to your question, that this film documents superbly, is that cc defaults are happening all over the place --but as it turns out the defaulters make the best customers for the cc companies because they are addicted to debt. So folks getting the most credit card offers are the ones with the worst credit.
However, this enron style of running things can only be tenable for so long (as we have seen in the housing mkt), so soon you will see even bigger waves of default-of a more permanent kind.
P.S. Firstgerald to call it: We are now in a recession.
Braunstein goes on to say:
"Because of the rapid expansion of subprime lending in recent years, lenders, investors, and ratings agencies had limited data with which to model credit risk posed by new borrowers or novel mortgage types, and so may have underestimated the risk involved."
That is a novel definition of increased transparency.
"Any yield curve experts around? What happens to the yield curve once the recession begins?"
Good question - it depends as usual. Either case mostly the same results
Fed Eases - unlikely they'll do so fast enough, meanwhile lots of money will pile on the long end of the curve inverting it further, then the Fed will end up chasing it down. If they go to an eventual 1% rate again, then we'll likely have a modest hocky stick again, with the short end back at 1%, and long up around 3%-3.5% say.
Fed doesn't ease - well, I guess this isn't an option really. The curve would invert further.
Afterwards, depending on the depth of the recession, the curve would be modestly positive to mostly flat.
Tanta - couldn't find any companies mentioned in the Fitch note, but...
As I said in my UberNerd post on servicing: you pay the servicer first. It is in your best interest to pay the servicer first. I know few bondholders who are prepared to roll up their sleeves and start filing foreclosure notices or submitting auction bids or inspecting deliquent properties or getting down on their hands and knees and begging the MIs for a full reimbursement . . .
Could it be that after figuring out the additional work neded to chase down these deadbeat-homeowner payments, the servicer wants out? Maybe this MSR fair (NPV) valued beast isn't such a cash cow after all.
Please, just the usual suspects Ma'm.
Last Braunstein comment, but her testimony really deserves its own post...Tanta.
She says,
"Safety and soundness examinations include a review of credit risk-management practices such as underwriting, portfolio risk management, and quality control processes concerning third-party originations.
In addition, examiners review stress testing, economic capital methods, and other quantitative risk-management techniques to ensure that banks are assessing the level and nature of these risks appropriately; asset securitization activity to ensure appropriate risk management and capital treatment; residential lending appraisal practices to ensure appropriate collateral valuation processes; and new product review processes to ensure that disciplined approaches are being brought to new lending products and programs."
To me, that is one of the most detailed, simple, easily understood mea culpa's I have ever read.
She is saying that if there are any problems in sub-prime, or the mortgage business generally, including securitization, one must look no further than the Federal Reserve to find the responsible party.
Wow. Double wow.
I suppose she has to say that. But, just the same, what a statement!
Andrew, I was pretty much kidding about the "trickle" of REO.
Trickle probably wasn't the best term... think of it more as REO constipation. Its there, its uncomfortable, its really going stink... but its just not coming out. Not yet anyway.
To me, that is one of the most detailed, simple, easily understood mea culpa's I have ever read.
MSM translation: Mistakes were made.
Arbogast - but many lenders and originators are not under federal regulatory supervision. They may be regulated by the states, but state regulation is spotty to say the least.
The huge change in the last 5 years is the shift from GSE/Bank/Broker to non-regulated entities controlling the process.
That was one of the issues often brought up in the comment process leading up to the federal interagency guidances. Whatever was done would simply further advantage non-bank players but would not necessarily protect the consumer.
Steve asked "Do you disagree that there seem to be a disconnect between mortgage delinquencies and other consumer debt?"
Yes. To me everything, including commercial credit, seems to be moving in tandem as I would expect. There is always a lag time between trouble and severe delinquency and we are in early days yet. What's staggering is how high delinquencies and defaults are when placed against average mortgage age, low mortgage rates and the employment rate.
MEW apparently really was carrying the whole consumer side of the economy, and MEW done gave up and went home to sulk. The worst of it is that extremely low mortgage rates still don't seem to be bailing us out of the mess. I would guess that those left in the adjustables are those who really are underwater in terms of total debt.
Mind you, the My Community program is still approving loans with over 55% DTIs, so I expect the FNMA originations to be performing quite badly in 2008!!!
I'm not kidding about FNMA being the biggest subprime lender in some states. They are definitely writing some loans that shouldn't be written. Quote from Broker Outpost:
I closed a full-doc, 62% DTI 100%, single loan, 610 middle score, My Community loan yesterday. 7% paying 1.6. I've heard of as high as 69 DTI getting approved - if you can, try it.
Well, dryfly, I guess your metaphor gets us off that flatulence thing from the last few threads . . . capitalist pig is turning out to be rather more odiferous than old Doomster's polite little "pfft!". Nonetheless, I wouldn't mind if we shifted from the gastrointestinal imagery entirely . . .
Steve,
You raise a good point: one would expect a large number of distressed homeowners to drive down consumer confidence numbers. But I'm not terribly surprised we haven't seen it yet, since I think the biggest impacts are going to ultimately derive from decreased MEW. So many consumers wont realize there's a problem until next time they try to refinance, and find their house does not assess as high as theyd hoped. My anecdotal experience is that most people still feel things are fine in their house/neighborhood/town.
MaxedOut,
The really horrible problem is that if Fanny Mae is dirty, it won't be discovered until sometime in 2010, at the earliest: Bush fixer in place.
Dr. Deflation,
I would guess that the yield on the 2 year T-Note decreased recently, and that is one reason for the yield curve reversion. Lenders are unwilling to lock in rates at the Federal Funds Target Rate (5.25%) for 2 years.
Is it common for the 6 month rate to be greater than the 2 year rate? What does say about the current state of the economy?
Bloomberg has a different take, saying that greater fears of inflation are behind a rise in the 10 year yield...
Treasury Yield Curve Steepens on Rising Inflation Expectations - Bloomberg.com
"My anecdotal experience is that most people still feel things are fine in their house/neighborhood/town." ~AJH
AJH, Greetings from Ground Zero. My neighborhood is a mess. The house next door was foreclosed upon and is vacant (the water supply connection has leaking from under their lawn onto the sidewalk for the past couple months). Numerous homes in one of the nicest neighborhoods in Detroit are vacant. Today, I saw a sign in the front window of one house that said something like "Beware, this home is REO and is being watched". One month ago, I wouldn't have known what this meant, but thanks to the good folks here and Wikipedia I have some clue...
Remember to add in our share of national debt. $9 trillion divided by 300 million people = $30,000 per person. Oh well, at least the rate won't reset until we refinance it.
A trickle may be enough to have huge effects on prices.
One interesting feature of the housing market is that prices are determined by the 6% of homes that change hands every year, but the other 94% of homeowners can cashout equity to take advantage of these prices. This is despite the fact that there was never a market for 100%(or anything more than 6%) of homes at today's prices, yet a far greater number of homeowners were able to effectively sell (through HELOCs) at these prices. Of course, if the rent/buy numbers were in equilibrium, a sufficiently large investor (China?) might be willing to buy the entire housing stock at market prices (and rent the homes back at a small profit). Contrast the housing situation to the stock market, where prices are also set by the small portion of shares changing hands, but hedge funds/LBO firms/private equity are often willing to buy all of the outstanding shares at these prices based upon fundamentals.
Loose subprime lending did not need to be "large" relative to the entire housing stock, it only needed to be (and was) a large demand factor relative to the 6% of homes changing hands. Similarly, a trickle of foreclosures/REOs does not need to be a "large" percentage of all homes, just a "large" number relative to the 6% of homes changing hands to cause prices to plummet.
Sorry about that Tanta, I didn't mean to niggle there. I was just pointing out that even if the REO pipeline gets constipated (as dryfly puts it) there's probably going to be concentrated effects in the riskier areas. These concentrated effects may in turn cause contagion effects larger than their actual size, particularly when the media/popular psychology gets the idea of how much REO/forclosure is in the pipeline (even though it may be "worked out" and never become REO).
I find your point on foreclosing the foreclosers particularly disturbing though. That's cannibalistic behaviour and, as you aptly pointed out, the MBS holders shooting themselves in the foot. I can think of three possibilities for this: 1) incompetence, in that the MBS holders are still under the illusion they were sold on of simplicity and transferability and are about to painfully find out otherwise (i.e., they are used to thinking in terms of conventional corporate bonds). 2) Unlike traditional lending organizations, they don't have any extra $ (or cash in that particular pot) to give to the servicer. And 3), they have the short term financial market mentality and are brutally liquidating to cut their losses and take the write off. With any of those reasons, it will be ugly.
re: flatulence - i think "fartin through silk, baby" should be the name of my new blog.
that line still has me laughing.
all good all the time baby!! really gives you the mentality of the other side (permabullsh*tters), no?
Interesting I wonder whether the term "REO" actually was used. Doesn't sound like they were addressing folks with the usual homeless squatter profile or is REO that much a general topic in Detroit?8[
Interesting I wonder whether the term "REO" actually was used. Doesn't sound like they were addressing folks with the usual homeless squatter profile or is REO that much a general topic in Detroit?8[
I do foreclosure work all over NYS, mostly for subprime lenders. We've been seeing lots of the fraudulent loans being referred out for foreclosure (both buyer and lender variety) so far, but very little if any caused by interest rate adjustments. We've actually seen a slow down the past two months in referrals as servicing gets transferred to other divisions, or sold or service released, repurchased or referrals held off to see if the portfolios are sold along with the servicing. My feeling is, the bad loans are just starting to melt like winter snow up in the mountains and we haven't even begun yet to see the coming flood.