MBA: Q3 mortgage performance deteriorates ... again

The Mortgage Bankers Association's figures on home loan performance just keep getting worse and worse. Here is what things looked like in Q3 2009:

* The overall mortgage delinquency rate surged to 9.64% in Q3 2009 from 9.24% in Q2 2009 and 6.99% a year earlier. Once again, this is a fresh record high for the data series, which goes back 37 years. For some historical perspective, the recent low for the delinquency rate was 4.31% in Q1 2005.

* Breaking it down by loan type, the subprime DQ rate rose to 26.42% from 25.35% a quarter earlier and 20.03% a year earlier. The prime-only DQ rate climbed to 6.84% from 6.41% in Q2 2009 and 4.34% a year earlier.

* And how about the "new subprime" behemoth -- the Federal Housing Administration? Delinquency rates there continue to march higher, rising to 13.9% from 13.62% a quarter earlier and 12.27% a year earlier. That's the worst FHA credit performance in U.S. history. The increase occurred despite a large increase in the overall number of FHA loans, which should lower the delinquency rate, all else being equal.

Like I said last quarter, the FHA program has become the "go to" place for borrowers who previously might have taken out subprime or Alt-A loans. By keeping lending standards incredibly lax (3.5% down payments anyone?) FHA is playing with fire. Grab your wallets taxpayers!

* The percentage of mortgages entering the foreclosure process resumed its climb, rising to a record high of 1.42% from 1.36% a quarter earlier. The overall percentage of mortgages in any stage of foreclosure climbed to 4.47% from 4.3%. Just over 14 out of every 100 loans in the U.S. are now distressed in one form or another, the most ever.

* Regionally, delinquency rates were still the worst in Mississippi at 14.4%. Nevada was a close second at 14%, followed by Georgia at 12.93% and Michigan at 12.64%. Florida had the highest percentage of loans in foreclosure at 12.74%, followed by Nevada at 9.44%.

Lousy mortgage performance continued into the third quarter. Both delinquency and foreclosure rates rose to new all-time records, with deterioration virtually across the board. The FHA loan program is now joining the Alt-A and prime markets in the woodshed, which just goes to show how silly it is to maintain lax lending standards in the midst of the worst housing downturn on record. Even the CEO of home builder Toll Brothers, Robert Toll, yesterday called FHA "a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money."

Going forward, aggressive modification programs and a nascent stabilization in the housing market will eventually lead to a turn in performance ratios. But this process will play out with a lag. And it goes without saying that nothing can change the fact we binged on real estate as a country ... and now we're paying a heavy price.

October housing starts, permits tank

We just got the latest data on housing construction activity. Here's a recap:

* Overall housing starts plunged 10.6% to a seasonally adjusted annual rate of 529,000 in October from 592,000 in September. That was much worse than the 600,000 units that economists were expecting. Building permit activity was also weak. Permitting activity dropped 4% to 552,000 from 575,000. Economists were expecting a reading of 580,000.

* By property type, single family starts more than reversed the strong gain in September, falling 6.9%. Multifamily starts tanked 34.6%, though it's worth pointing out how volatile MF figures can be. Single family permits dropped 0.2%, while multifamily permits fell 17.9%.

* What about the regional breakdown? Negative across the board for starts. They fell 8.5% in the West, 9.6% in the South, 10.6% in the Midwest and 18.8% in the Northeast. Building permit activity was marginally better, with declines of 5.8% in the South and 6.7% in the West. Permits were flat in the Northeast and up 2% in the Midwest.

Here's the housing mantra I want to keep repeating: "Three steps forward, two steps back." That is how I have said the housing recovery would play out, and that is, in fact, how it's progressing. The latest starts figures are no exception. Perhaps out of fear of the expiration of the home buyer tax credit, builders pulled back on both starts and permits in October. The hit was particularly severe in the volatile multifamily sector. But even the single family market fell in a ditch.

As bad as the monthly report was, however, starts are still above the absolute low for this cycle (479,000 in April for overall starts, 357,000 for single-family). Builders also have just 251,000 new homes for sale. That's the lowest level since November 1982, which tells me a pick up in construction is inevitable.

On the demand front, the tax credit has been extended and expanded. The Federal Reserve's manipulation of the mortgage market is keeping financing costs down. And improving affordability in many markets -- thanks to plunging prices -- is slowly bringing buyers out of the woodwork.

So yes, the bubble days are long gone. They won't be coming back for several years. But I still believe we will see a slow, steady recovery in sales ... a gradual decline in the number of homes on the market ... a tepid rebound in home construction ... and broad-based stabilization in home prices as we head later into 2010. Yesterday's NAHB report, and this morning's construction data, makes sense when viewed in that context.

NAHB index flat in November

The National Association of Home Builders just released its latest builder sentiment index. The reading came in at 17. That was unchanged from a downwardly revised 17 in October and slightly below the 19 number economists were expecting.

Among the sub-indices, the one measuring present single family sales was unchanged at 17. The prospective buyer traffic sub-index held at 13, while the sub-index measuring expectations about future sales rose to 28 from 26. Regionally speaking, it was a mixed bag. The Northeast index dropped sharply to 19 from 25, but the West index jumped to 19 from 14. The Midwest index fell to 14 from 17, while the South index was unchanged at 17.

The"three steps forward, two steps back" housing market recovery remains on track. But as I've noted numerous times, it won't be a robust rebound. The home buyer tax credit is helping bolster demand, as is the Federal Reserve's manipulation of the mortgage market. Improving affordability in many markets -- thanks to plunging prices -- is also bringing buyers out of the woodwork.

But the bubble days are long gone, and won't be coming back for several years. Instead, we'll see a slow, steady recovery in sales ... a gradual decline in the number of homes on the market ... a tepid rebound in home construction ... and broad-based stabilization in home prices as we head later into 2010. The latest NAHB report makes sense when viewed in that context.

THAT's all the bang Bernanke got for his ... er ... buck?

Holy cow! That didn't last long. Look at this intraday chart of the Dollar Index. If that's all the bang Bernanke can get for his ... er ... buck, the dollar is sicker than even I thought (and that's saying something)!

The surprise of the day: Bernanke actually acknowledges the dollar decline

The text from Fed Chairman Ben Bernanke's speech in New York was just released. For a change, he actually mentioned the dollar and suggested that its movements could factor into policy decisions. That has led to a bounce in the Dollar Index from its daily low. The operative text is below:

"The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability."

At the same time, Bernanke essentially promised to keep the same policies in place that are leading to a dollar decline. Specifically, he added:

"The Federal Open Market Committee continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. Of course, significant changes in economic conditions or the economic outlook would change the outlook for policy as well. We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability."

So the question now becomes, "Is talk enough for more than a bounce in the buck?"

More dollar drama -- and the core reason for the carry trade

There's a lot of chatter on the dollar front today. Treasury Secretary Tim Geithner told a group of Japanese reporters that he "believe[s] deeply that it's very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar."

The Asia-Pacific Economic Cooperation forum is also up in arms about the falling greenback, according to the Wall Street Journal. Policymakers are reportedly prepared to give President Barack Obama an earful when he travels to Asia later this week. In the words of one delegate:

"Nobody in Asia, and only some in Europe, will speak publicly about their worries, but they are worried ... The world -- not only APEC, but the world -- needs direction and the only country that can provide this direction is the United States. This can only be achieved through a stable U.S. currency."

But in a candid moment, the Thai Finance Minister Korn Chatikavanij admitted that his country has wasted $15 billion trying to keep the baht from appreciating against the buck. And he verbalized what currency investors all know about the sorry state of the U.S. economy:

"But there is not much you could do to correct what is reality. The fact is when you've got that much debt ... the only effective way of repaying that debt is basically devaluing your currency."

In other words, all this is talk. The U.S. likely won't do anything about the dollar decline as long as it remains orderly ... which virtually guarantees at some point that the decline will NOT remain orderly.

By the way, if you're wondering why the dollar is being sold in so many carry trades, the answer is quite simple. It's the cheapest currency on the block to borrow! Three-month dollar LIBOR rates were recently 0.27%. That’s less than the 0.32% cost of borrowing Japanese yen ... the 0.61% rate to borrow money in pounds sterling ... and the 0.68% rate for euro-based loans. In other words, as long as the Fed continues to keep the taps wide open, leveraged global investors are going to get drunk off of the cheap money.

Mishkin is an idiot

I'm sorry, I can't make it any more plain than that. To argue that financial bubbles aren't dangerous, and that the Fed shouldn't try to combat them -- which is what ex-Fed governor Frederic Mishkin just did in the Financial Times -- is monumentally stupid. Can this guy be serious? Haven't we seen what a huge disaster the Fed's "Don't fight bubbles when they're inflating -- just 'mop up' when they pop" approach has been? I seriously hope sitting members of the Fed don't believe this claptrap.

Dollar getting rear end kicked again after IMF, Geithner comments

The G-20 gathering in Scotland over the weekend contained no dollar-supportive talk. If anything, Treasury Secretary Tim Geithner kicked the stool out from under the buck, declaring that "it's too early to lean against the recovery." That's code-speak for "We'll continue our easy money policies in place." Meanwhile, an IMF report (PDF link) that was released in conjunction with the gathering suggests the dollar carry trade will likely continue as the buck is still overvalued. The Dollar Index just hit a new cycle low of 74.94, while gold is up another $14 to $1,109 in the spot market.

Incidentally, I explained why the carry trade was happening and why it should continue almost two months ago. For a refresher, click here.