Financial Headlines 4/15/2010

Some Tax Day Must-Reads:

• Calculated Risk has a great post on second mortgages from housing economist Tom Lawler. The largest mortgage loan servicers provided some statistics meant to dispute the claim that second mortgages have "virtually no value" because borrowers with seconds have total mortgage balances that exceed the value of the home collateralizing the mortgages. For example, although 50% of Chase's second lien portfolio is underwater, 95% is performing. Even more shocking, 30% of its second lien mortgages have combined loan-to-value ratios over 125% and 94% of this portfolio is still performing. People are just incredibly optimistic about future home values or they just like paying their bills. Much more in the post, I urge you to read the whole thing here.
• The administration released its March HAMP report. As of March 2010, the program has performed just over 1 million in total modifications, with 227,922 of those permanent so far. Clearly, alot of folks still in mod limbo. Interestingly, debt-to-income ratios for those who received permanent mods were 45% on the front-end (this includes principal, taxes, insurance and homeowners associate fees) and 78% on the back-end (includes other stuff like payments on installment debt, junior liens, alimony, car lease payments and investment property payments,) before the modification. Clearly, people got overextended in every which way, not just on their mortgages. Why we're helping people service all of this other debt by reducing their mortgage payments is kind of a mystery to me. I mean really, if you're making payments on investment property, you should be forced to sell it before taxpayers pick up the tab on your mortgage. I'll cut you some slack on the child support. I'm not totally heartless. Just something to ponder as you walk to the mailbox with your tax returns.

Piles of domestic economic data released today including:

• Jobless claims rose to 484,000, much higher than estimated. Bad news for employment.
• But both industrial production (up 0.1%) and capacity utilization (up 0.2% to 73.2) showed gains in manufacturing. Good news for manufacturing.
• Meanwhile, foreclosure filings were up 7% in the first quarter, according to RealtyTrac. Obviously, housing numbers still weak.

A few choice international headlines:

• Everyone in a panic about Greece again as there was "no strong interest in the US for Greek debt." Don't worry, this will likely change tomorrow as the Greek rally/Greek sell-off/Greek rally/Greek sell-off ping-pong match will continue until the entire European Union experiment collapses in a heap (maybe George Soros is exaggerating, but he's been known to be right before.)
• China GDP is exploding at a 11.9% annual rate. Don't worry, I'm sure that kind of growth is entirely sustainable without creating a bubble in something.

Dueling Fed interest rate policy speculation:

• From the FT we get"Fed Funds Rate Rise Points to Policy Shift"
• From Bloomberg, there is "Fed May Keep Low-Rate Vow as Bernanke Sees Recovery Restraints."

Don't forget to pay your taxes.

Foreclosures of the Rich and Famous

While the financial woes of Nicholas Cage have been highly publicized (he lost yet another house earlier this week,) the loss of high-end properties by the wealthy have so far appeared to be one-off events. A Madoff foreclosure here. A Marc Dreier Hampton's waterfront mansion there. A Wells Fargo employee throwing parties in another Madoff investor's seized property elsewhere. But really, it's seemed relatively contained compared to the mauling in the subprime market.

As it turns out, high-end real estate is just a lagging indicator. Rich people tend to have more financial resources to fall back on, and it just takes longer for them to exhaust every penny. Take for example, Richard Fuscone, the former head of Merrill Lynch's Latin American investment banking division featured in a WSJ front page article. According to the WSJ's account, Mr. Fuscone retired in 2000 after 21 years at Merrill Lynch in order to pursue personal interests. Such as the pursuit of personal bankruptcy, which took him about ten years to accomplish. Mr. Fuscone declared personal bankruptcy this week in order to forestal foreclosure proceedings on his 18,471 square foot mansion with two pools, 11 bathrooms and a seven car garage. Included in the long list of Mr. Fuscone's creditors is the local pet store along with the tony Greenwich Country Day School. So while we're not sure how much on-the-job money management training Mr. Fuscone acquired while at Merrill Lynch, at least he had his priorities straight. Kids and pets were taken care of until the very end.

Mr. Fuscone finds himself in good company these days, as he is not the only former high-flyer having trouble paying the bills on his enormous mortgage. According to First American CoreLogic's database, which accounts for 80% of the entire mortgage market, 14.8% of the 1,700 mortgages with balances over $4 million are 90 days or more overdue at the end of January. You can expect more high end foreclosures coming to an auction house near you.

Default Notices Jump to Record Highs in California

Dataquick released the latest notice of default statistics in California and while the results are certainly not pretty, the report is filled with many interesting tidbits. A total of 135,431 defaults notices were sent out during the January to March period in California, an increase of 80% from the prior quarter and 19% year over year. According to John Walsh, Dataquick President: “The nastiest bunch of home loans appears to have been made in mid-to-late 2006 and the foreclosure process is working its way through those.”

According to Dataquick, the median origination month for last quarter’s defaulted loans was July 2006. That’s only four months later than the median origination month for defaulted loans a year ago in the first quarter of 2008. Default rates for loans originated before 2004 have a default rate of 1%, compared to 4.9% for loans originated in 2005, 8.5% for loans originated in 2006, and 4.7% for 2007. While the 2007 vintage is just getting warmed up, many of the subprime lenders had the decency to go bust in the first quarter, so perhaps 2006 will wind up being the peak when all is said and done. Dataquick has isolated the period between August 2006 and November 2006 as particularly toxic, with a 9% default rate on all loans issued in that period so far. Particularly jarring is the rates of default for many of the now-defunct sub-prime lenders during this period; ResMae (69.9%), Master Financial (64.6%), and Ownit Mortgage Solutions (63.6%). Of the major lenders, IndyMac wins with an 18.9% default rate, followed by World Savings (8%), Countrywide (7.7%), Washington Mutual (6.3%), and Wells (3.4.%.) Both Bank of America and Citi had default rates of less than 1% for loans originated in late 2006.

The good news is that defaults turn into foreclosures which then get auctioned off to new buyers who can actually afford the properties. According to the WSJ, bidding wars are emerging at foreclosure auctions as potential homeowners and investors duke it out for properties that are trading at enormous discounts relative to the bubble years. Housing is actually becoming affordable for those willing to jump into the foreclosure fray and the glut of homes on the market is shrinking with some areas running into shortages of moderately priced homes in middle-class neighborhoods. What appears to be happening in some of the hardest-hit areas is a two-tiered pricing system. Most of the sales occurring are foreclosed properties while the non-foreclosed listings sit on the market at higher prices gathering dust. In Sacramento, for example, about two-thirds of all March sales were foreclosures. The supply of foreclosed homes currently listed for sale is about enough to last about a month at the recent sales pace. But the rest of the homes constitute an 8 months supply. Home prices will most likely decline further as sellers of non-foreclosed homes are forced to cut their asking prices to do a deal, but the trend towards affordability is encouraging. A family earning the median pretax income of $52,800 a year needs to spend 25% of that income to buy a median-priced home, down from 44% in mid-2006. For the Los Angeles metro area that ratio has dropped to 45% from 105%and in Phoenix it is down to 19% from 46%, according to John Burns, a real-estate consultant in Irvine.

Foreclosure Moratorium Over

In response to government pressure, some large mortgage companies had issued moratoriums on foreclosures while awaiting details of the administration’s housing-rescue plan. As a result of these self-imposed moratoriums, as well as legislation introduced last year in states like California that limited foreclosure activity, foreclosure sales had dropped in the second half of 2008. JP Morgan, Wells Fargo, Fannie Mae and Freddie Mac have all increased foreclosure activity in recent weeks as those moratoriums have expired. According to RealtyTrac, foreclosure-related filings increased by nearly 6% in February, up from a month earlier, and were up almost 30% year-over-year. In California, notices of trustee sales, a prelude to foreclosure, climbed by more than 80% to 33,178 in March from February, according to ForeclosureRadar.com and the Field Check Group.

JP Morgan Chase has delayed foreclosures on more than $22 billion of Chase-owned mortgages involving 80,000 homeowners. A spokesman says “We had stopped putting additional loans into the foreclosure process so we could be sure that delinquent borrowers would have every opportunity to take advantage of new initiatives that we were putting in place.” Those who are now receiving notices “own vacant properties, have not been in contact with us and/or do not qualify for the modification programs.” Citigroup and Wells Fargo also indicated that they were working on loan mods for those who qualified, but were moving forward with foreclosures on borrowers that did not qualify.

Since this whole mess began, evidence has shown up time and time again that large scale mortgage mods don’t work particularly well. Operation Hope for Homeowners has helped 700 homeowners since its October inception, instead of the advertised 400,000, and the re-default rate on mortgage modifications is pretty discouraging. According to the OCC, for mortgage mods that reduced the borrower’s monthly payments by over 10%, 20% of borrowers were in default again after nine months. If the monthly payment was reduced by less than 10%, the default rate jumped to over 40%. While the evidence points to some relief for those borrowers who received reduced monthly payments, it has not been a resounding success.

I have maintained all along that cleaning up the large inventory of foreclosures and empty houses is the quickest road to recovery. The longer we wait by imposing moratoriums, etc, the more painful the recovery process will be as housing prices decline further due to bloated inventories of empty houses. As it stands, we’ll be having large scale RTC-style auctions of properties at some point as the FDIC seizes more banks and winds up with a large inventory of properties. I’d rather have them in 2009 than 2012.

Foreclosure Filings Surge 71% in Third Quarter

According to RealtyTrac, a total of 765,558 properties received a default notice, were warned of pending auction or were foreclosed on in the quarter, up 71% from the third quarter of last year.  Filings rose 3% from the second quarter and actually fell 12% in September from August as state laws to keep people in homes slowed the pace of defaults.

Six states accounted for more than 60% of defaults, led by California.  California had six of the 10 metropolitan areas with the highest foreclosure rates in the quarter.  According to the September 2008 homes sales report released by Dataquick yesterday, 51.1% of all sales in California were foreclosure resales, indicating they have been foreclosed on at some point in the prior 12 months.  The number of homes and condos sold statewide was up 6.1% in September from August and an astonishing 64.8% from September of last year.  The median price paid for a home last month was $283,000 down 6% from $301,000 the month before and 34.2% from $430,000 in September a year ago.  According to the Dataquick report, around half of the drop in the median is due to depreciation, with the other half due to shifts in the types of homes selling, and how those homes are financed.  The typical mortgage payment that home buyers committed themselves to paying last month was $1,337, down from $1.428 in August and $2,046 in September a year ago.

The silver lining in all of this disheartening news for homeowners is the return of affordability.  Lawmakers around the country are taking drastic measures to "keep people in their homes" by launching programs such as the $300 billion FHA-backed Operation Hope for Homewoners.  The FDIC's Sheila Bair has been the most vocal about helping beleaguered homeowners.  Today's Wall Street Journal reports that Ms. Bair is suggesting that the government allocate $40 billion to purchasing mortgages, renegotiating terms with the lenders and sharing in potential future losses.  Frankly, with the government throwing billions around like chicken feed, might as well try to help those borrowers who really were victims of predatory lending, as well as those who were just flat-out foolish enough to borrow more than they could afford and assume that 20% appreciation per year was a given.  $40 billion is nothing compared to the $1.7 trillion in loans to dealers, banks, money market funds, AIG, and foreign central banks currently sitting on the Fed's balance sheet.  If the government is going to bailout everybody, make sure to pass the hat around. 

I think the California housing market hints at the eventual resolution to the nation's housing crisis.  In many parts of the country, particularly in places where housing values skyrocketed to levels not supported by median incomes, cheap and ridiculous financing options drove up the prices of homes.  Now that values are crashing, we see affordability returning to the California housing market.  Although this obviously hurts many people who bought into the market in the past few years, it makes houses more affordable for the average family.  The strong level of sales activity that we are seeing in California indicates that a bottom in prices is being set in some of the hardest hit areas.  In the same way that I don't believe that a true bottom in prices on CDOs will be reached when the government buys them, I also don't believe that a bottom in housing prices can be reached by artificial measures designed to prop up prices.  When houses are affordable again, people will buy them.  The government only needs to make sure that financing is available to those with appropriate credit.          

FDIC's Sheila Blair Vows to Keep Delinquent Borrowers in Their Homes

Yesterday, the FDIC unveiled a plan to keep thousands of currently delinquent IndyMac borrowers from losing their homes to foreclosure.  IndyMac, a formerly top ten mortgage lender that specialized in Alt-A loans during the boom, was seized by the FDIC on July 11th in one of the largest bank failures in US history.  The plan involves modifying thousands of loans through a combination of interest-rate reductions, longer repayment periods and principal forbearance.  The modifications will result in the reduction of homeowners' debt to no more than 38% of income.  Borrowers will need to provide documents verifying their incomes to have their loans modified.  Borrowers will be eligible for the program if they have a first mortgage serviced by IndyMac and are "seriously delinquent" or in default.  

According to Ms. Blair "Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes."  I am thoroughly in agreement with Ms. Blair about getting the greatest recovery possible on the loans to keep the costs of this messy bailout at a minimum.  However, I don't think that helping delinquent Alt-A borrowers keep their homes should be a priority for the US taxpayer.  In most cases, Alt-A loans were granted to borrowers with good credit scores who stated their own incomes without providing documentation.  What happens if the loan modification documents are returned by the delinquent borrower to the FDIC with proof of income that shows that the borrower clearly overstated his income in order to obtain a loan to buy a house that he otherwise couldn't afford?  Is the FDIC still going to modify that mortgage, grant that person forbearance, so that he gets to keep his house?  What about the guy who lives next door to the delinquent borrower, who pays his mortgage every month on time and never lied about his income to purchase his house?  If the FDIC is so concerned about keeping liars in their houses, they should foreclose on the property, sell it to an investor, and allow the delinquent borrower first dibs on renting the house from the investor.

CPI and Foreclosure Filings Higher

CPI rose 0.8 percent in July, following a 1.1 percent jump in June.  Core CPI (ex-food and energy) was up 0.3 percent.  The headline year-over-year CPI was 5.6 percent, a particularly difficult number for the market and economists to swallow.  However, with commodity prices declining significantly in the past month, the consensus among economists is that this is the peak in CPI.  Unless, of course, commodity prices head back up...

Meanwhile in deflationary news, US foreclosure filings were up 55% from the previous year.  Total foreclosure filings rose 8 percent from the previous month to 272,171 while bank seizures rose 184 percent to 77,295.  Through July 775,244 properties were owned by banks, compared with 445,000 for all of 2007.  Nevada had the highest foreclosure rate, followed by California and Florida.  Stockton, California no longer topped the list of the metropolitan areas with the highest foreclosure rates.  That honor now goes to Cape Coral Fort Myers, Florida.  Merced, Stockton, Modesto and Las Vegas round out the top five.  With prices of all goods heading higher, at least you can still buy a house for a song in a few key parts of the country.  

Durable Goods Rise Unexpectedly, Foreclosure Filings Triple

In the ever-confusing world of conflicting US economic reports, today proved to be no exception.  New orders for US-made capital goods rose an unexpectedly healthy .8% in June, the Commerce Department reported.  Economists' forecasts were fairly wide of the mark as they were expecting a decline of .3%.  Excluding the volatile transportation component, orders were up 2.0% in June.  We can confidently put this report in the "good news" column for the US economy and the timing of its release could not have been better.  It should help to buffer the sting from the always-dreaded release of RealtyTrac's quarterly report on foreclosure filings which was flat-out terrible.  A total of 739,714 foreclosure filings were recorded during the second quarter, an increase of 14% from the first quarter and 121% from the same period in 2007.  Furthermore, bank repossessions were up as a proportion of total filings, representing 30% of the notices issued during the quarter.  California's Central Valley had the highest rate of foreclosure filings, one out of every 25 homes.  Riverside/San Bernardino had one filing for every 32 households.  Las Vegas, Bakersfield and Sacramento rounded out the top five.  The new home sales release is due out in a half an hour.  I'm no economist, but I'm guessing the number will not be pretty.  

Foreclosures Rise 48% in May, Bank Repossessions Double

According to RealtyTrac, foreclosure filings rose 48% from a year ago and bank repossessions more than doubled in May.  The number of national foreclosure filings grew 7% from April, while the nationwide rate of default warnings increased 1% from April.  The rate of foreclosures is clearly still increasing, offering no respite for the housing market or investors in mortgages.

Nevada, California and Arizona posted the highest foreclosure rates in the US and New Jersey entered the top 10.  California and Florida accounted for nine out of the top 10 metro foreclosure rates for the second month in a row, with Stockton in the lead.  The deluge of unwanted foreclosed properties continues for beleaguered mortgage lenders as they repossessed 73,794 houses in May, pushing total REO's to 700,000.  

A quick back of the envelope calculation, (using $200,000 as a median price) would suggest that lenders repossessed $14.8 billion in defaulted properties in May, and $140 billion in total thus far, using RealtyTrac's numbers.  These totals may actually be conservative due to the high concentration of foreclosed properties in California, where medians are much higher than the rest of the US.  Assuming that the rate of repossessions per month stays constant for the next year, lenders are looking at repossessing an additional $177 billion in properties.  Since lenders never planned on being in the property management business and are burdened with properties they can't offload in the current environment, they will look to sell properties in bulk auctions and continue to slash prices to move inventory.  That implies that home prices will continue to decline, default rates will march higher, and recovery rates on defaulted mortgages will decline.  Recent action in bank stocks is evidence that investors are finally awaking to the dismal fact that the worst may not be behind us.  

Mortgages in Foreclosure, Delinquency Rates Rise in First Quarter

The percentage of loans in the foreclosure process at the end of the first quarter rose to 2.47% of all mortgages outstanding on one-to-four-unit properties, up from 2.04% in the fourth quarter, according to the MBA's National Delinquency Survey.  Loans entering the foreclosure process rose to .99% from .83% in the fourth quarter.  6.35% of all loans were at least one payment past due in the first quarter, up from 5.82% in the fourth quarter.  According to the report, California, Florida, Arizona and Nevada drove the increases representing 62% of the foreclosures started on prime ARM loans in the first quarter and 49% of the foreclosure starts on subprime ARMs.  About 20 states experienced drops in the number of foreclosures starts.  Michigan, Ohio and Indiana who led the charge in foreclosure filings recently saw an encouraging drop in foreclosure starts in the first quarter.  This may be an indication that a bottom has been reached in some of these states.  In Detroit, for example, you can literally buy a house for $1, or, if you are a professional flipper and you're still in business, some banks will pay you thousands of dollars to take foreclosed properties off their hands.  So, yes, I'd call that a bottom.  In California, on the other hand, where median home prices are still significantly higher than overall US medians, and inventories of unsold homes continue to rise, prices should continue to fall until buyers begin to view them as cheap.  They may be more affordable than they were a year ago, but they aren't cheap yet.  In Florida, Arizona, and Nevada, the inventory of unsold condos will take many years to work off, signaling a continuing rise in foreclosure activity.  When I can buy a condo in Miami for $1, we can start talking about a bottom.      

Hovnanian and Toll Post Steep Losses, Plead For Help From Congress

Hovnanian lost $5.49 a share, or $340.7 million in the second quarter. Hovnanian's losses included $250 million in land-related pretax charges. This means the company only lost around $90 million selling houses. The earnings report was littered with a bevy of minuses including a 30% drop in revenue, a decline in the average price of homes sold of 16.50%, and a 39% decline in net completed contracts. This is the seventh consecutive quarter in which Hovnanian has posted a loss.
Meanwhile, in luxury homebuilder land, Toll reported a loss of $97 million or 59 cents a share. Although the bulk of Toll's losses were related to charges against its inventory of land (they actually made $81 million selling houses), net contracts dropped by 58% from a year ago.  Frankly, I could care less if these numbers met or exceeded analysts estimates.  They are still losing gobs of money, writing down inventory, and seeing steep declines in contracts signed.  When that stabilizes, call me.  Otherwise, I remain a bear on the homebuilders.

In a conference call with analysts, Toll stated that Congress should offer would-be homebuyers a tax incentive to buy a new home, claiming that this should be a much larger priority than bailing out mortgage lenders and homeowners currently facing foreclosure. It you set aside the the fact that it is an obvious self-interested plea for help from Congress, it is an interesting idea, although I would present a different twist. It is true that home prices will never hit bottom until the enormous inventory build-up is reduced, particularly in areas where a significant number of homes on the market are foreclosed properties. What I would suggest to Congress is that they offer a tax incentive for purchases of foreclosed properties. This would give potential homebuyers as well as investors an incentive to clean up the backlog of foreclosed properties. The incentives would be skewed to more credit-worthy homebuyers and liquid investors (presumably because you can no longer get a loan otherwise), thus rewarding prudence, rather than the foolhardy spending of the bubble years. Maybe then, when the cheaper alternatives disappear, people will return to the new home market to buy a home from the homebuilders. That is, of course, assuming they're still around...

Fiscal Stimulus Package Fails to Stem Rising Foreclosure Filings

According to RealtyTrac, 243,353 foreclosure filings were recorded for the month of April. This was a 65% increase year-over-year and a 4% rise from March. The areas with the highest number of foreclosure filings continue to be the usual suspects. California recorded 64,683, the highest among all the states with Florida, Ohio, Arizona and Texas following behind. Nevada still had the highest rate of foreclosures with one in every 146 households receiving a filing.
Our clever Government officials, despite their attempts to boost the economy by sending everyone a check for $600, have yet again failed to address the real problem in this country. As long as foreclosures are rising, borrowers are defaulting, and homeowners face declining equity, the glut of housing inventories can only rise. A one-time check of $600 does nothing to reverse this situation. What the government should have done was send everyone in America a foreclosed property. All of that "pride of ownership" that was trumpeted by the administration for so many years can now become a reality for every household. I, for one, wouldn't even mind if my free foreclosed property was a condo in Ft. Lauderdale. I would certainly stimulate the economy by flying across the country to see my new digs. As long as the HOA dues weren't too high. And it was on the beach.

Economic Headlines 4/15/2008

If you weren't depressed enough writing out checks to the IRS today, these economic headlines should do the trick. In inflation news, US PPI rose by 1.1%, twice as much as expected. Core PPI, excluding food and energy, was up by a more modest .2, as expected. Luckily, I don't know anybody that actually buys food or consumes energy, so this was actually very good news. US foreclosure filings jumped 57% in March. According to Realty Trac, one in every 538 households was in some stage of foreclosure. Furthermore, about $460 billion of adjustable-rate loans are scheduled to reset this year. The Fed's interest rate cuts should help alleviate some of the pain, however, it is unclear how many of the adjustable loans had very low teaser rates that must adjust higher regardless of the Fed's cuts. On the corporate side, US corporate bankruptcies are accelerating as borrowers are having difficulty refinancing. The amount of distressed corporate bonds (those yielding more than 10%) jumped to $206 billion on April 11, 2008 from $4.4 billion in March of 2007. Remember March 2007? My nine month old could've crawled into a branch of Countrywide and received a $2 million, no money down, interest only loan. My baby knows those days are over. I'm pretty sure that's why she was crying yesterday.

In a rare bit of good news, J&J reported strong earnings. Revenues were up 8% and earnings increased 40% from a year ago. Also, the NY Fed Factory Index unexpectedly rose in April. Of course, futures are higher because everyone knows inflation and bankruptcies don't matter, but an incredibly volatile measure of manufacturing in NY does.