Pending Home Sales Hit Record Low, Again

Pending home sales hit a record low for the second consecutive month in March. March's reading was down 20.1% year-over-year and 35% from the index's peak in April 2005. With the recent resilience in homebuilder stocks, powered by those who must believe that the housing market is bottoming, these numbers should be a disappointment. In my universe of understanding, a bottom should be followed by some sort of uptick, not continuing declines. The nagging persistence of weakness in the housing market is perplexing to those who subscribe to the theory that loose monetary policy always juices the market. The Fed has done its part, now where are all the buyers? Or was a large portion of demand in the housing market merely the result of lenders handing money to anyone with a pulse who claimed to have assets and income?
A close look at Fannie Mae's earnings yesterday reveals that the company has a problem with its Alt-A portfolio. Apparently, $946 million of the $2.2 billion in losses incurred during the first quarter involved Alt-A loans. The company went on to state that it had $344.6 billion in Alt-A exposure and a limited strategy for stemming future losses. For those unfamiliar with Alt-A mortgages, they are backed by loans to borrowers with higher credit ratings than subprime but have little to no documentation of a borrower's assets or income. Fannie's Chief Daniel Mudd said the vintages performing the worst in a four-year average book were late '05, '06, or early '07. This should not come as a surprise as housing prices peaked in 2005, and mortgage lenders dropped like flies in early 2007, causing what is the biggest problem for current mortgage borrowers: the lack of ability to refinance. The inability of overextended borrowers to refinance into a more favorable loan is the root of surging delinquencies leading to foreclosures. It is such a big problem that I don't believe any government plan will be able to adequately address it.
Here is the link to a fantastic post on a UK blog which follows the path of one single mortgage pool of $500 million in Alt-A loans securitized by Washington Mutual in May 2007. The average credit score of the pool was 705, 92.6% was originally rated AAA, even though only 11% provided full documentation of assets. Less than one year later, in April 2008, 29.07% of the pool was 60 days delinquent or more, 13.87% was in foreclosure and 6.21% was an REO (the property had reverted to the lender after foreclosure.) These numbers grow worse and worse every month. When I hear the pundits talking about the prices of MBS being grossly understated due to unrealistic default rates priced in, I wonder if they've looked at some of these stats. This particular pool, which was not even subprime, is looking at potential default rates of over 50% and it isn't even a year old. Then I look at FNM's statement that it has $344.6 billion in Alt-A exposure. I scratch my head at why everyone rushed out to buy FNM's stock yesterday. Then I go to Costco and buy my alloted bag of rice for the day.