Interest Rate Roundup

Tuesday, August 05, 2008

Some tidbits to ponder as we await the Fed

Today is Federal Open Market Committee meeting day. No one is expecting the Fed to actually raise or lower interest rates; it's more a question of how they frame the interest rate debate in their post-meeting statement. In the meantime, here are some things to ponder ...

* D.R. Horton became latest home builder to report large losses, driven by falling revenues and large write-downs. The company lost $399 million, or $1.26 a share, in the fiscal third quarter. That was down from $823.8 million, or $2.62 a share, in the year-earlier. The largest home builder in the U.S. said revenue fell 44% to $1.43 billion; net orders in the quarter dropped 36%. The firm's cancellation rate came in at 39%, up from 33% in the fiscal second quarter.

* Of course, in some housing markets that have fallen the fastest and the hardest -- and that are swamped by the most distressed inventory -- are seeing some bargain hunters/vulture buyers step in. USA Today has a story about Las Vegas is seeing some movement after months and months of deterioration:

"There's a glimmer of hope in the neon city of Nevada, where home sales are starting to heat up after two dismal years. In fact, sales in Las Vegas have risen over the past six months.

"Bank-owned foreclosed properties are setting the pace. With prices falling, the homes are grabbing attention. The median home price was $225,000 in June, down from a peak of $315,000 in June 2006.

"About 60% of everything that is selling is foreclosed properties," says Patty Kelley, president of the Greater Las Vegas Association of Realtors. "A feeding frenzy of buyers is coming in and picking up property at the 50 cents to 60 cents on the dollar that owners had paid for it."

"Las Vegas was one of the first areas hit by the subprime mortgage collapse. In a city where many gamblers have lost their shirts in casinos, many investors and other home buyers lost their luck in the mortgage market. After the housing bubble burst, foreclosures rose quickly.

"Last year, Nevada posted the nation's highest state foreclosure rate, according to RealtyTrac.
It's unclear if the housing market has hit a true bottom and begun to reverse course for good. "We're not looking for things to rally vastly until the end of 2009," Kelley says."

* The New York Times has a story this morning talking about how Freddie Mac's CEO ignored internal warnings from underlings. They reportedly pertained to the risk the firm was taking on in the mortgage market and the relatively thin capital cushion the firm was operating on. Here's an excerpt:

"In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”

"Mr. Syron received a memo stating that the firm’s underwriting standards were becoming shoddier and that the company was becoming exposed to losses, according to Mr. Andrukonis and two others familiar with the document.

"But as they sat in a conference room, Mr. Syron refused to consider possibilities for reducing Freddie Mac’s risks, said Mr. Andrukonis, who left in 2005 to become a teacher.
“He said we couldn’t afford to say no to anyone,” Mr. Andrukonis said. Over the next three years, Freddie Mac continued buying riskier loans.

"Mr. Syron contends his options were limited.

“If I had better foresight, maybe I could have improved things a little bit,” he said. “But frankly, if I had perfect foresight, I would never have taken this job in the first place.”

"Mr. Andrukonis was not the only cautionary voice at Freddie Mac at the time. According to many executives, Mr. Syron was also warned that the firm needed to expand its capital cushion, but instead that safety net shrank. Mr. Syron was told to slow the firm’s mortgage purchases. Instead, they accelerated."

Meanwhile, there's some very interesting market activity heading into the Fed. In the early morning hours, we have seen stock futures rally sharply, the euro fall, the dollar index rally, and crude oil and gold prices fall. It'll be very interesting to see if this action sticks.

2 Comments:

  • I've been reading Larouche for 8 years-- I'm 51 years old-- I studied history and economics at McMaster U. in Hamilton Ontario. I would ask that you join me in examining Larouche's solution for the current systemic crash... you obviously understand something about the FED-- but Laoruche is calling for a 4% rate BECAUSE the City of London has a higher central bank rate than the US FED and therefore it is destroying the USD-- Please consider this. I think I'm on a mission-- to save America and the world. Will you at least look? Here's the link to larouche. [+]

    By Blogger PhilOssifur, at August 5, 2008 at 9:47 AM  

  • Mr. Syron wouldn't slow purchases because his bonus is calculated on loan volume, not loan quality. The same holds true for the originating lenders, they get paid for volume not quality. Some of the lenders use automated underwriting to "game" the underwriting at FNMA, their automated lending programs are programed to subvert good lending practices because the originating lenders, again I'll say it, THEY GET PAID FOR VOLUME NOT QUALITY!

    By Blogger Cosmic Justice, at August 5, 2008 at 2:18 PM  

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