Interest Rate Roundup

Wednesday, October 31, 2007

The Fed: Hawks? Or Chickens?

The suspense is over -- the Federal Reserve opted to cut the federal funds rate by 25 basis points and to cut the discount rate by 25 points. That brings fed funds to 4.5% and the discount rate to 5%. Here is the text of the statement:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco."

My analysis ...

Maybe the Fed "hawks" aren't dead and buried after all. While the Fed cut rates, said "the pace of economic expansion will likely slow in the near term," and highlighted the "intensification of the housing correction," policymakers also acknowledged the fact that oil, gold, and all kinds of other commodities have gone ballistic. The comment that policymakers will "monitor inflation developments carefully" seems particularly hawkish. Moreover, Kansas City Fed President Thomas Hoenig dissented on the rate cut vote, preferring to keep rates unchanged.

But actions speak louder than words -- and the Fed did choose to cut rates. As a result, the market may interpret the inflation warnings as "chicken" talk, not hawk talk. Put simply, the Fed has chosen to combat short-term economic weakness at the expense of fueling long-term inflation. Yes, that's an oil price pun.

In early, post-Fed trading, the dollar is plumbing new depths ... long bonds are getting pummeled ... and stocks are all over the map.

Data deluge wrap-up

I'm off to my oldest daughter's Halloween parade momentarily. But I couldn't help but note the strength shown in this morning's economic data. A quick recap ...

* The economy surged ahead at a 3.9% rate in the third quarter. That was well ahead of the 3.1% growth forecast. Investing in housing tanked at a 20.1% annualized rate. But consumer spending held up nonetheless -- expanding by 3% -- and business investment on things like equipment and software came in at a healthy 5.9%. Export growth surged 16.2%, the biggest rise since 2003.

* ADP says October job growth came in at 106,000, up from September's 61,000. ADP's report covers only private-sector employment -- if it's accurate and if there's decent government hiring, we could get an upside surprise on Friday when the official Bureau of Labor Statistics jobs report for October comes out.

Of course, the Fed meeting is still on tap this afternoon. These figures make a 25 basis point cut more likely than a 50. I'll be back with more later ... heading out the door now!

Monday, October 29, 2007

Playing catchup...

Sorry for the lack of posts here -- I've been very busy at my "day job" the past couple of days. But don't worry, gentle reader. I won't leave both ... er ... all of you fans with nothing to mull over! Here are some of the juicier headlines of late:

* Housing starts may need to drop 40% more to get supply back in line with demand, according to Morgan Stanley's chief economist Richard Berner. And home prices? They'll have to drop 10% to make homes affordable again. So says this Wall Street Journal posting.

My personal take is that the new home market is oversupplied to the tune of 150,000 to 200,000 units. The existing home market is even worse, with about 2 million more homes for sale now than is customary. That overhang will indeed take some time to chew through -- with a combination of lower home prices, less construction activity, and lower interest rates doing the dirty work.

* The Collateralized Debt Obligation downgrade parade is still marching on. Fitch Ratings now says it might slash ratings on $36.8 billion of CDOs that contain subprime mortgage bonds. You can blame the performance of the now infamous 2005, 2006, and 2007 crop of subprime loans. Many will go down in history as some of the stupidest mortgages even written on this planet -- or any other (though in the interest of full disclosure, I haven't personally traveled outside of our solar system to verify this).

* Louisiana-Pacific keeps on sliding, thanks to its housing exposure. The company makes oriented strand board (OSB) used in home construction; it's going for about $170 per 1,000 sq ft. now versus $522 at its April 2004 peak, according to Bloomberg data. It lost $67.8 million in the third quarter, versus net income of $9.5 million a year earlier.

* Another 300 employees at Bear Stearns are reportedly being shown the door amid a downturn in debt trading. Bank of America recently said it would cut 700 jobs as part of a plan to stop making wholesale mortgages -- loans through brokers rather than retail loans made in its own bank branches. And title insurer Fidelity National Financial, for its part, recently eliminated 1,700 positions.

Lastly, as you may know, there's a Federal Reserve meeting this week -- a two-day affair that starts tomorrow and culminates with the usual 2:15-ish policy announcement on Wednesday. Expectations are for a 25 basis point cut to the federal funds rate.

I think there's a decent chance these guys go 50 -- or cut 25 and signal more cuts are coming. They've demonstrated for some time that they care little about the plunging U.S. dollar, $93+ crude, $790 gold, and so on and so forth. That's not "real" inflation (because food and oil prices don't count). Besides, there's a housing crisis on and the politicians are on a warpath. It's a heck of a lot easier to cut rates now in order to ease the housing crunch, even if that path boosts longer-term inflation risks. At least, that's how I suspect policymakers will see things.

Thursday, October 25, 2007

MBI, AIG in FF ... and how about those oil prices

Shares of MBIA and AIG are in Free Fall right now. MBIA is a bond insurer, like the company Ambac that I discussed yesterday. AIG is a diversified insurance and financial guaranty firm. Here's why they're getting hit ...

* MBIA says a $1.8 billion SIV it manages is having trouble raising money. It also reported a quarterly net loss for the first time in history because of losses on mortgage securities. Writedowns totalled $342 million before tax.

* AIG is taking a beating on rumors and speculation that it could face large write downs as well. These are just rumors -- no way to confirm. But the company's shares are getting whacked, and its credit default swaps are widening out (a sign the credit markets are more worried about credit quality).

UPDATE: CNBC reports AIG denying major write-down rumor.

Both of these firms -- and many other financials that have run into trouble recently -- have heavy dealings in credit insurance, Collateralized Debt Obligations (CDOs), Structure Investment Vehicles (SIVs) and all kinds of other fun stuff no one on Main Street understands. The surprise is that Wall Street doesn't seem to know what a lot of this junk is worth, either. A ton of paper was apparently valued at "mark to model/malarkey" levels -- levels that have little basis in reality. The write-downs were seeing throughout the financial industry now are the result of attempts to hammer some approximate values out.

And on a completely unrelated note, crude oil prices just hit a record $90.48 a barrel. Yowzer. Then again, is it really completely unrelated? My suspicion is that some of the gain is a pure side effect of easy money. In other words, investors are buying crude on the assumption that "financial market turbulence = Fed panics = 50 basis point cut = more dollar weakness = oil producers demand a higher dollar price of crude to compensate for lost purchasing power." Just a theory, but it's as good as any.

September new home sales

Yesterday was existing home sales day. Today, it's new home sales for September. Here's what the just-released figures show:

* Sales rose 4.8% to a seasonally adjusted annual rate of 770,000 from a revised 735,000 SAAR in August (previously reported as 795,000). On a year-over-year basis, sales were down 23.3% from 1.004 million in September 2006.

Now here's where it gets tricky: The month-over-month change in home sales was"better" than the economists' forecasts for a 3.1% decline. But the actual number of home sales was right in line with the forecast. Moreover, the last three months' worth of home sales figures were revised dramatically lower. June went from 835,000 to 797,000 ... July went from 867,000 to 798,000 ... and August went from 795,000 to 735,000.

* For-sale inventory came in at 523,000 new homes. That was down 1.5% from 531,000 in August (previously reported as 529,000) and down 6.6% from 560,000 in September 2006. On a months supply at current sales pace basis, inventory was 8.3 months, down from 9 in August (previously reported as 8.2), but up from 6.8 a year earlier.

* Median prices rose 2.5% to $238,000 in September from $232,100 in August (previously reported as $225,700). Prices were up 5% from $226,700 in September 2006.

Mark Twain popularized the saying that there are three kinds of lies: lies, damned lies, and statistics. He probably wasn't referring to the Census Bureau's new home sales figures. But boy, are this month's figures convoluted.

For starters, sales "rose" 4.8% vs. forecasts for a 3.1% decline. But that's only because the government statisticians vaporized 60,000 of August's sales. Had August's sales rate remained the same, the decline would have been ... drum roll please ... 3.1%!

According to the statisticians, it was a big month for median home prices, too. They rose 5% from a year ago! That's the strongest rate of appreciation since March, when prices rose 10% year-over-year. Of course, this is all news to the major home builders, who have been announcing price cuts and throwing everything but the kitchen sink at buyers.

In short, color me skeptical about these volatile sales and price figures. IF they're right, then maybe the new home market is finding a floor here. But I'll need to see a few more months of data to believe that.

There is one genuine area of improvement that I can see -- inventories. Unlike the existing home market, where sellers are proving to be stubborn and holding out for unrealistic prices, the new home market has now seen a steady decline in the absolute number of homes for sale. That's because builders are cutting back on home construction and enticing buyers with aggressive price cuts on standing inventory -- even if that's not showing up in the "official" pricing data.

Some perspective is important, though. Yes, for-sale supply is down 8.7% from its July 2006 peak of 573,000. But it's still way, way above normal. Throughout the 1990s and early 2000s, monthly readings mostly ranged from 280,000 to 350,000 units. In other words, we still have about 150,000-200,000 more new homes on the market than is customary.

Long story short, the new home market is ahead of the existing home market in trying to find a floor. But with inventory still extremely high, lending markets tight, and prices still elevated, the recovery process will take some time.

Lots of housing news, coverage

Housing and mortgage stories are all over the place this morning, so let me see if I can touch on a few of them:

* The New York Times, in a piece titled "Reports Suggest Broader Losses From Mortgages," leads off with this zinger: "Every time economists and Wall Street executives think they have acknowledged the full extent of the losses from the meltdown in real estate mortgages, more bad news turns up." It then goes on to note some statistics about the extent and cost of the housing crisis:

- The cost to financial firms and investors could run up to $400 billion, well above the $240 cost (adjusted for inflation) of the Savings and Loan bailout/crisis fueled by souring commercial loans and interest rate gyrations in the late 1980s and early 1990s.

- Real estate wealth could fall anywhere from $2 trillion to $4 trillion, less than the $7 trillion lost in the tech stock implosion. But since changes in real estate wealth tend to impact spending more than changes in stock market wealth, the economic impact of the housing bust could be broader than the dot-com bust.

* Meanwhile, the Wall Street Journal didn't bother to mince words. Its piece called "With Buyers Sidelined, Home Prices Slide" says it all ...

"So many houses. So few buyers.

"Home builders are slashing prices, often by more than 10%. Some people who list their homes on admit they are "desperate" to sell. Inventories of unsold homes are at the highest level in nearly two decades, providing plenty of choices.

"Yet a severe tightening of credit by mortgage lenders is keeping many buyers out of the market, while the huge supplies of homes for sale have persuaded others that they can wait for further price cuts."

* The news isn't getting any better on the profit front for the nation's home builders. Another pair of 'em -- Pulte Homes and Ryland Group -- reported their latest quarterly results since yesterday.

Pulte lost $788 million in the September quarter, a big swing from profit of $190 million in the year-earlier period. The third-largest builder took $1.18 billion in charges to write down the value of land and goodwill. Third-quarter net new orders tanked 37.2% (measured in units) and 47.1% (measured in dollars).

Ryland lost $54.7 million, vs. year-ago profit of $87.9 million. Writedowns and writeoffs came to $128 million. Net orders dropped 20.9% in units and 27% in dollars. These reports indicate that builders are cutting prices to entice buyers, something the national statistics point to as well.

* Here in Florida, things were particularly brutal in September. Statewide, single-family home sales plunged 38% from a year ago, with every single market registering a decline. Median prices fell 9%, with 18 out of 20 registering a drop. Things weren’t much better in the condo market – with sales declines in 16 out of 20 metros and price declines in 11 out of 20. You can read more coverage on the Florida market in the Orlando Sentinel and Tampa Tribune, among others.

Next up is the Census Bureau's report on new home sales, due out in about an hour.

Wednesday, October 24, 2007

House hearing on mortgage practices underway

Just in case you weren't aware, the House Committee on Financial Services is holding a hearing today dealing with legislative proposals to reform mortgage practices. You can find more details here, and access prepared testimony from several regulators, community groups, and industry representatives.

September existing home sales tank

The National Association of Realtors just released its September existing home sales data. These figures reflect the fallout from the credit turmoil we've seen in the mortgage market. The full details:

* Sales tanked 8% to a seasonally adjusted annual rate of 5.04 million from 5.48 million in August (previously reported as 5.5 million). That was much worse than economists' forecasts for a 4.5% decline to 5.25 million. The September sales rate was down 19.1% from 6.23 million in September 2006 and the lowest level since the Realtors' group started tracking sales of all property types combined (single-family homes, condos and co-ops) in the late 1990s.

We have a longer data series on single-family only sales. Those sales came in at 4.38 million, the lowest since January 1998 (4.18 million), as shown in the chart above.

* For sale inventory came in at 4.399 million single-family homes, condos, and co-ops. That was up slightly from 4.383 million in August (previously reported as 4.581 million units), and up 16.3% from 3.783 million in September 2006.

Single-family only inventory is running at 3.708 million. That's about 1.5 million to 2 million more units than was common in the 1990s and early 2000s, and almost 700,000 more units than we had listed at the previous peak in the 1980s (3.04 million in April 1986).

* On a months supply at current sales pace basis, inventory was 10.5 months, up from 9.6 months in August (previously reported as 10), up from 7.3 a year earlier, and the worst on record. Using single-family only data, we have 10.2 months of supply, the most since February 1988 (10.3 months).

* Median prices fell a sharp 5.7% to $211,700 in September from $224,400 in August (August's figure was previously reported as $224,500). On a year-over-year basis, prices were off 4.2% from $220,900 in September 2006. That is the worst YOY drop since October 2006 (-4.3%).

My take:

We didn't have to wait until Halloween to get ghoulish housing numbers. September's sales, inventory, and pricing data were enough to spook even the most ardent housing bull. Sales fell much more than expected, prices dropped sharply, and inventory remained extremely high.

The forces driving the housing market lower are clear: Buyer confidence is falling, lending standards are tightening and housing prices are still out of line with underlying incomes in many U.S. markets. The credit markets have stabilized somewhat since this summer, and the Federal Reserve has clearly shifted into easing mode. That could ameliorate the pain somewhat in coming months. But I don't expect to see a real, lasting rebound in housing until late 2008 or sometime in 2009.

Mother of a charge at Merrill; Ambac takes its lumps

Merrill Lynch just reported its third-quarter results, and they were ugly. The firm took a whopping $7.9 billion writedown on the value of subprime mortgage positions, leveraged finance-related positions, and Collateralized Debt Obligations. That led to a loss of $2.82 per share, almost six times the 50-cent per share maximum estimated loss Merrill had projected on October 5.

Merrill is getting whacked because, like other Wall Street firms, it plowed headlong into the market for complex fixed-income securities. When push came to shove and investors actually wanted to start selling these things, accurate prices couldn't be identified. The market had disappeared. Now, firms are struggling to get their arms around what these things are really worth -- and the answer is "a whole lot less than par."

Merrill also made what can only be considered a disastrous, poorly timed acquisition of subprime lender First Franklin late in 2006 for $1.3 billion. At the time, this is what the firm had to say about it:

"These leading mortgage origination and servicing franchises will add scale to our platform and create meaningful synergies with our securitization and trading operations," said Dow Kim, president of Merrill Lynch's Global Markets & Investment Banking Group. "This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services."

Er ... not so much.

Then there's Ambac Financial Group, one of the bond insurers who wrap default protection policies around municipal bonds, CDOs and other fixed income securities. It just reported a net loss of $361 million thanks to $743 million in writedowns to the value of credit derivatives

Tuesday, October 23, 2007

Mortgage insurer mayhem

Of all the things catching my attention right now, one thing worth commenting on is the absolute meltdown in the share prices of the leading mortgage insurers. Just look at this long-term chart of PMI Group. It's down 61% year-to-date ... and about $18 in just the past couple of weeks. The stock hasn't traded down here since early 2000.
What's going on? Losses are piling up like cordwood. PMI says it lost $1.05 per share in Q3 thanks to costs that have risen fivefold in a year. Another firm, MGIC Investment, just reported its first quarterly loss since going public 16 years ago. The cost of buying credit default swaps on mortgage insurer debt is also rising, a sign that bondholders are getting more nervous about the possibility of default.
It's not much of a surprise that more lenders are filing mortgage insurance claims. And it's not much of a surprise that mortgage insurers are seeing losses rise. But the magnitude and swiftness of the declines is alarming and noteworthy.

Monday, October 22, 2007

The real reason the housing market took off ...

Don't miss this Business Week story. It's titled "A Troubled 'Ownership Society'" and it focuses on figures from Goldman Sachs and a study from the Federal Reserve Bank of Atlanta. Both parties tried to identify the primary reason for the surge in the homeownership rate since 1995. Their conclusions (with my emphasis added)?

"Surprising new research published by the Federal Reserve Bank of Atlanta concludes that the bulk of the increase was caused by innovations in the mortgage market, in particular the explosion of 'piggyback' or 'combo' loans that made it possible for people to make small or zero down payments. Young families with little savings flocked to those loans to buy first homes."

I especially like this excerpt:

"Many analysts have fingered easy lending as a contributor to the housing boom, but the Atlanta Fed paper may be the first to quantify its effect in a rigorous way. Using math-heavy econometric analysis, the authors conclude that the availability of new kinds of mortgages, mainly ones with low down payments, accounted for 56% to 70% of the decade-long increase in the U.S. homeownership rate, while demographic changes accounted for only 16% to 31% of the effect."

My take? I believe the boom STARTED OUT healthy, with reasonable, late-1990s gains in home sales, home prices, and homeownership rates fueled by rising incomes and a REASONABLE loosening in lending standards. But then the economy slumped in the wake of the dot-com bust.

Rather than allow a normal, healthy, cyclical economic and housing market slowdown to play out, the Fed panicked. It slashed interest rates to the bone and kept them there for far too long. Lenders decided to get more "creative" with their mortgage offerings because they could offload the risk to any Tom, Dick, and Harry hedge fund looking to squeeze a few more basis points out of his portfolio. Regulators completely abandoned any pretense of active supervision/regulation. All heck broke loose, speculation exploded, and we experienced the biggest U.S. housing bubble in modern history.

In other words, the primary forces driving the boom weren't immigration, Baby Boomer demand for second homes, and all those other forces that real estate industry players kept citing during the bubble. It was plain and simple easy money and excess credit, in all their many forms. Now, we're all stuck trying to mop up the mess.

The wrong week to stop ...

"Looks like I picked the wrong week to quit sniffing glue" -- Lloyd Bridges, as Steve McCroskey, "Airplane!" 1980

Okay, first let me stipulate for the Internet record that I do not, in fact, sniff glue. But that quote definitely comes to mind as I think about my vacation last week. It seems like while I was out and away from the blog, the markets went haywire. In other words, I picked the wrong week to go on a cruise! A quick recap of what's been going on ...

- Housing starts collapsed ... again. Builders began construction at an annual rate of just 1.191 million units in September. That was a whopping 10.2% monthly decline and it left starts at the lowest level in 14 years.

- Another two points were lopped off the National Association of Home Builders' monthly survey measuring buyer traffic, present sales, and expectations for future sales. It fell to 18 in October from 20 in September, leaving it at the lowest level in history.

- The dollar continued to slide, setting a fresh low of 77.41 on the Dollar Index on Friday. Meanwhile, the bonds rallied sharply, with long bond futures up more than a point in price on Wednesday and another point on Friday. Stocks fell out of bed, with the Dow down every day of the week, culminating in Friday's 366 point rout. But in commodity-land, crude oil flirted with $90 a barrel and spot gold rose to around $770.

And don't even get me started on the debate over the so-called "Super SIV" (or more formally, Master-Liquidity Enhancement Conduit). From everything I've seen and read, this is nothing more than a bailout fund in disguise for top banks and Wall Street firms that bet big-time on investor demand for asset-backed commercial paper ... and lost. This column from Ben Stein in yesterday's New York Times has some good stuff on what's going on there. So does this Economist piece.

So what's next? Well, this week we get a peek at existing and new home sales activity in September. Let's just say I'm not very optimistic about what the numbers will show. As for the longer-term outlook, check out this Bloomberg story that extensively quotes Ivy Zelman, one of the best housing analysts in the business.

We also have to keep a close eye on the bonds and stocks here. The key question is whether this was just a correction lower in stock prices/short-term move higher in bond prices -- or whether it's the start of something more. Place your bets ...

Friday, October 12, 2007

PPI thoughts ... a billion here, a billion there ... and more

I'm going on a cruise next week -- nothing big, just a few days in the Bahamas and Key West. But when you have two kids ... the grandparents are willing to babysit ... and you haven't been completely away from your screens for a long time ... you just have to jump on the opportunity! And that's exactly what my wife and I are doing.

Why mention this? Because I'm trying to wrap up a million things before I leave and I don't have much time to blog. But I can't leave you, gentle reader, completely empty handed, so here are some quick hits ...

* The Producer Price Index surged last month, rising 1.1% in September. That was more than double the 0.5% gain that was expected and it leaves the year-over-year rate of wholesale inflation at 4.4%, up from 2.2% a month earlier. Of course, if you're like me and you neither eat nor drive, then things look much better. "Core" inflation, which excludes those pesky things like food and energy, rose 0.1%, below the 0.2% forecast.

* In the other major economic release of the morning, retail sales jumped 0.6% in September, triple the 0.2% gain that was forecast. Retail sales rose 0.4% if you exclude autos, also a better reading than expected (0.3%).

* A billion here, a billion there, and pretty soon you're talking about real money. That's how the famous quote goes. And that's what came to mind when I read the latest news out of the home builder Centex Corp. It just announced almost $1 billion in charges to write down the value of land, property held by joint ventures and other assorted things. Net orders fell 13% year-over-year in the fiscal second quarter that ended Sept. 30.

* If you're a technical type, keep a close eye on the bonds here. Long bond futures are testing their recent uptrend and the 200-day moving average. Moreover, this 110-and-change level has served as support many times in the past couple of years. If these support levels give way, the bonds could fall hard.

Thursday, October 11, 2007

Import prices jump 1%, ex-oil prices fall 0.2%

Every month, we get three inflation reports -- import/export prices, the Producer Price Index and the Consumer Price Index. The first report showed ...

* Overall import prices jumped 1% in September, in line with expectations but a big swing from -0.3% in August. The gain pushed the year-over-year rate of import price inflation to 5.2% from 1.9% a month earlier.

* What caused the rise? You guessed it -- oil prices. They were up 5.4% between August and September, and 20.1% from September 2006. If you exclude petroleum products, you see import prices fell 0.2%. And if you exclude all fuels, you get a 0.1% drop.

* A couple of warning signs: Food prices have joined oil prices as an inflation threat. Food import costs jumped 1.2% last month. Also, those cheap Chinese goods we've grown to know and love are getting more expensive. Chinese import prices rose 0.2%, the fifth month in a row of gains.

Foreclosures still going strong

I'm working from home today so I don't have access to all my data and charts. But let me try to cover the latest RealtyTrac foreclosure figures anyway ...

* Filings came in at 223,538 in September. That's essentially double the 112,210 filings a year ago. However, filings were down 8.4% from August's 243,947.

* Leading the way among the states were California, with just over 51,000 filings, and Florida, with more than 33,000.

* Measured against total households in each state, Nevada ranked the worst, with 1 foreclosure for every 185 households. Florida was next at 1 for every 248 households, with California close behind at 1 per 253.

The story is the same this month as the past several months: With tens of billions of dollars in adjustable rate loans re-setting each month, home prices falling, and home sales taking much longer than they did in the past, borrowers are behind the eight ball. We're seeing more borrowers fall into delinquency. And of those troubled borrowers, more are tumbling into foreclosure because they can't sell their homes to pay off their debts. The minor blip from August is encouraging, but may ultimately prove to be just a fleeting respite.

By the way, if you're looking for a fantastic analysis of just how much subprime lending was done -- and where -- in the past few years, check out this Wall Street Journal story. The gist is that subprime loans were doled out all over the country, with large increases even in wealthier areas (as opposed to just inner cities and other areas traditionally assumed to be the ... er ... "beneficiaries" of increased subprime mortgage availability).

Wednesday, October 10, 2007

HOPE NOW just hype ... or substance?

In a bit of media fanfare today, Treasury Secretary Henry Paulson announced that he has convened a group of mortgage companies, counselors and investors to figure out ways to ease the pain of the housing bust. The coalition, dubbed (yes, I'm serious) HOPE NOW, will reportedly "seek to get information to more imperiled homeowners, improve communication between mortgage servicers and non-profit counselors and find a way to pay for counseling as part of mortgage-servicing contracts," per Bloomberg. Here's another story from AP with some more detail.

I hate to sound cynical, but my sense is there's nothing "new" here. Regulators, members of Congress, trade groups, lenders and consumer groups are already trying to help troubled borrowers and minimize foreclosures. Wrapping those efforts up in a warm and fuzzy package -- and slapping a cheesy name on them -- may get you some coverage on the evening news, but it doesn't really change anything. Indeed, just a few days ago, FDIC Chairman Sheila Bair essentially spelled out what regulators have already been doing to push and prod mortgage lenders and servicers to do the right thing.

Now, if I were the petty type, I'd point out these guys were all asleep at the switch when this whole ridiculous housing/lending bubble was inflating in the first place. But lucky for you, I'm not.

What do you know? Another lowered sales forecast

Guess what: The National Association of Realtors has released another lowered home sales forecast. Shocker! The group is now forecasting sales of 5.79 million units this year. The group's 2007 forecast peaked at 6.44 million units in February. It then dropped to 6.42 million in March, 6.34 million in April, 6.29 million in May, 6.18 million in June, 6.11 million in July, 6.04 million in August, and 5.92 million in September.

What about 2008? That forecast was cut ... again ... to 6.12 million from 6.27 million last month and 6.38 million the month before that.

Tuesday, October 09, 2007

Fed Minutes: Party on Dudes!

I just did a quick and dirty read through of the minutes from the Federal Reserve's September 18 meeting. This was the meeting at which policymakers decided to slash both the federal funds rate and the discount rate by 50 basis points.

The general sentiment expressed in those minutes: Foreign economic growth is great ... but we're worried more about growth than inflation here in the U.S. ... housing stinks (I mean, really, really stinks) ... the credit turmoil is really bad ... and even if the worst of the crisis passes soon, credit standards will likely remain tighter than they were in the pre-crisis days.

How I think financial markets participants will interpret them: The Fed will probably continue to throw easy money our way ... will continue to intervene whenever asset markets suffer, moral hazard be darned ... and will continue to essentially ignore $80 oil, $9 wheat, $740 gold, etc., etc. So go buy some more Chinese small caps. Or in the immortal words of Abraham Lincoln (as played by Robert Barron in Bill and Ted's Excellent Adventure) -- "Party on Dudes!"

UPDATE: Looks like I was right. It was a raucous day on Wall Street with the Dow closing up 120 points at the close. Long bond futures gave up pre-minutes gains to finish roughly flat on the day, while the dollar index slid a bit further.

Monday, October 08, 2007

The OCC takes a shot at the "originate-to-dump" lending model

There are some interesting comments coming out of the Office of the Comptroller of the Currency today. John Dugan, the agency's top official, took some shots at the "originate to dump" (that's my name for it) model of bank lending that's so popular these days. In a speech to the American Bankers Association, he pointed out ...

"When a bank makes a loan that it plans to hold, the fundamental standard it uses to underwrite the loan is that most basic of credit standards that I’ve already talked about: the underwriting must be strong enough to create a reasonable expectation that the loan will be repaid" ... "But when a bank makes a loan that it plans to sell, then the credit evaluation shifts in an important way: the underwriting must be strong enough to create a reasonable expectation that the loan can be sold -- or put another way, the bank will underwrite to whatever standard the market will bear."


"I am here to say that bank underwriting standards for these products, in many cases, moved too far away from what they would have been if the bank had held those loans on its own books."

Here is an OCC news release with some key points -- and here is Dugan's complete speech (in PDF format). Suffice it to say, I agree that the explosion of "originate to dump" lending was a key cause of the mortgage market boom and bust. Quite simply, lenders realized they could originate almost any loan -- no matter how crappy -- and unload the credit risk of said loan because end investors wanted higher-yielding paper, and were willing to pay up for it. If lenders were forced to hold those loans on their books, they undoubtedly would have been more prudent in the first place. For more context and detail on this issue, check out the white paper available here.

Monday morning quick hits

I am sore as heck after spending several hours working the yard this weekend. But mentally, I'm thoroughly refreshed this Monday morning. So what "quick hits" are worth highlighting?

* Subprime mortgages that were bundled and sold as bonds in the first half of this year are performing worse than any other "vintage" in U.S. history, according to Moody's Investors Service. About 6.3% of the loans bundled together in the first half of 2007 were seriously delinquent (at least 60 days late or caught up in foreclosure) just four months after they were securitized. That's up from 4.2% in 2006 and above the 4.5% SD rate of 2001, a time when the U.S. economy was in recession.

* New home builders have moved from throwing "cash on the hood" to cutting base prices on homes, according to the Washington Post. Here's an excerpt from the piece:

"Craftstar Homes recently had a "Luxury Home Clearance Sale!" where customers could win a vacation and up to $110,000 off an already-built house. Buy a Ryan Home and get "employee pricing," or 10 percent off the purchase price up to $35,000. At the Sterling at the Metro, a condominium community in North Bethesda, buyers got $50,000 off the price or toward closing costs last weekend."

I've talked about this dynamic before. The fact is, inventory is through the roof and prices are still way out of whack with median incomes even after the declines we've seen to date. So I think we'll see plenty more wheeling and dealing in the months ahead.

* The stock market has had one heck of a run from its August low, thanks to a hyper-injection of easy money and excess liquidity from global central banks. But it seems options traders aren't convinced the worst is behind us.

In fact, Morgan Stanley notes that investors are paying the most ever, relatively speaking, to insure themselves against the possibility of a stock market crash. Put options (which you buy to protect yourself from a market decline -- or profit from it) cost about 8 percentage points more, on average, than call options (a bet on rising stock prices). Downside protection is more costly now than it was during July 2001, when the economy was slumping sharply and the dot-com bubble had burst. Interesting reading.

* Lastly, the restructuring continues at St. Joe, a major developer in my state of Florida ... and analysts at Stifel, Nicolaus & Co. say that the downturn in housing and consumer credit quality is still in its early stages. Their conclusion: Home prices should fall at least another 10%.

Friday, October 05, 2007

More firms enter the confessional

Meanwhile, on the mortgage and credit front, another pair of financial firms have entered the earnings confessional booth ...

Washington Mutual said its third-quarter profit plunged 75% from a year earlier. The culprits: Its loan loss provision will come in at $975 million due to poor credit performance on its subprime mortgages and home equity loans. The firm will also take a $150 million writedown on the value of mortgage loans that it's holding on to, rather than selling, because secondary market conditions have deteriorated ... a $150 million loss on the value of its trading securities ... and yet another $110 million hit on mortgage backed securities held for sale.

Meanwhile, Merrill Lynch took its own bath in the quarter. It said it will lose as much as 50 cents per share thanks to souring conditions in the Collateralized Debt Obligation (CDO), subprime mortgage, and leveraged finance markets. It took a whopping $4.5 billion write-down for its exposure to the CDO and subprime mortgage market. It also took a $463 million hit on risky corporate lending commitments.

Now THAT was a surprise ...

Whoa -- that September jobs report was a big surprise. Some details:

* Nonfarm payroll growth came in at +110,000 (vs. expectations for a 100,000-job gain). That may not sound like much. But there was a HUGE revision to last month’s number – the 4,000-job loss that had been reported was revised to a 89,000 job gain. July payrolls were also revised up to 93,000 from 68,000.

* By category, manufacturing lost 18,000 jobs (vs. -45,000 a month earlier), while service employment rose by 143,000 (vs. +153,000 a month earlier). By sector, construction lost 14,000 jobs (-22,000 in August), retail lost 5,000 (+9,000 in August), and the financial sector shed 14,000 jobs (-14,000 in August). Notable gains were in government at 37,000 (+57,000 in August), leisure and hospitality at 35,000 (+11,000 in August), and health care at 45,000 (+46,000 in August).

* There's also a separate household survey conducted every month. It showed a 463,000-job gain, the biggest rise since April 2005 (+630,000). The only two marginal negatives: The unemployment rate ticked up to 4.7% from 4.6% and the diffusion index weakened again -- to 52.5% from 53.2%. This index measures what percentage of 278 industries are adding jobs vs. what percentage are shedding them. A number of 50% means the split between "adders" and "subtracters" is even.

* Average hourly earnings rose by 0.4%, above the 0.3% forecast. Moreover, the year-over-year gain in average hourly earnings was 4.1, above the 3.9% forecast.

The knee-jerk reaction in the markets: The U.S. dollar has popped in value, bonds have fallen in value, and stock futures have increased in value.

Wednesday, October 03, 2007

No joy in TOUSA-ville

Looks like rose-colored glasses are in short supply in the housing industry these days. Get a load of what TOUSA Inc., a regional builder with operations in Florida, Texas and a couple other markets, had to say about the state of the housing market this afternoon ...

"Conditions in all of our markets weakened more than we anticipated due to a number of factors including: recent severe liquidity challenges in the credit and mortgage markets, diminished consumer confidence, increased home inventories and foreclosures, and downward pressure on home prices. All of these factors have contributed to lower gross sales and higher cancellation rates,'' said Antonio B. Mon, President and Chief Executive Officer of TOUSA. "We remain focused on executing our asset management initiatives, generating cash, paying down debt, and evaluating all opportunities to de-lever the balance sheet to correctly position TOUSA for the current challenging housing market."


Jobs market remained muted in September

On Friday, the Labor Department releases its "official" report on state of the job market in September. But two private organizations have announced their own takes on things this morning. What do the numbers show? A muted job market, but one that was in slightly better shape than it was in August.

* The outplacement firm Challenger, Gray & Christmas tallies monthly job cut announcements in the U.S. economy. It counted 71,739 layoffs in September, down from 79,459 in August. On a year-over-year basis, cuts dropped 28.5%.

* Financial firms continue to lead the layoff announcement parade, with almost 8,600 cuts in September. Makers of consumer goods and food were next in line among industry groups. Challenger said auto industry layoffs were easing up, however.

* The payroll processing firm ADP also announced its latest jobs data. The company says private nonfarm jobs rose by 58,000 in September, up from a gain of 27,000 in August. Goods-producing firms shed 39,000 jobs, while service providers boosted hiring by 97,000.

Again, these figures are no reason to jump for joy. The chart above shows the net monthly gain in jobs, as reported by ADP, and you can see that the trend clearly been weakening. But September was a marginally better month than August.

The bond market isn't reacting much, with 10-year yields essentially unchanged and long bond futures off a "whopping" 1/32.

Tuesday, October 02, 2007

Pending home sales tank

The National Association of Realtors just released data on pending existing home sales for August. This data series tracks contract signing activity vs. contract closings (which is what the regular monthly sales data tallies). That makes it a leading indicator for future closed sales. Not surprisingly, given what we know about the mortgage market in August, the pending sales data stunk up the joint ...

* Pending sales fell 6.5% between July and August, a much bigger drop than the 2.1% decline forecast by economists.

* The decline left the pending home sales index at 85.5. That was down 21.5% from a year ago and the lowest on record. The NAR has pending sales data going back to 2001.

* Pendings fell in all four regions of the country -- down 8.3% in the Northeast, down 2.9% in the Midwest, down 9.5% in the South and down 2.7% in the West.

The latest figures show the existing home market wilted under the August heat. Some potential buyers found they couldn't qualify for mortgage financing because of tighter lending standards. Others probably got cold feet after seeing their neighbors have so much trouble selling their homes. That kept the pressure on sales.

So what about the future? Well, we won't know for a while whether the Fed's recent rate cut has helped get the housing market 'unstuck.' The mortgage market is showing tentative signs of stabilizing. But the days of super high risk mortgage financing are gone for a long, long while -- and the inventory of homes for sale is still off the chart. So even if sales activity stabilizes or bounces a bit this fall, a lasting rebound in housing isn't likely until late 2008 or 2009.

Monday, October 01, 2007

Details on the cost of the credit crisis emerging

Slowly but surely, financial firms are 'fessing up about the cost of the credit crisis. In fact, two major global banks -- UBS AG and Citigroup -- just weighed in with details on their exposure ...

* UBS said it will lose anywhere from 600 million Swiss francs to 800 million Swiss francs ($514 million to $685 million) in the third quarter thanks to the well-publicized mortgage credit problems. It took almost 4 billion francs ($3.43 billion) in writedowns on the value of securities. The head of UBS' investment bank unit is stepping down, while its CFO is retiring. The largest bank in Europe also plans to cut 1,500 jobs.

* Citigroup said Q3 profit will plunge by 60% thanks to widespread write-downs and credit losses. Specifically, Citigroup is taking a $1.4 billion pre-tax write down on commitments to lend money for leveraged buyouts. It also lost about $1.3 billion on subprime loans and leveraged loans it was planning to eventually package into CDOs and CLOs. And it lost $600 million on fixed income trades that went bad. Lastly, ongoing deterioration in consumer credit quality and portfolio growth drove credit losses higher and forced Citigroup to boost its loan loss reserves. The total increase in credit costs: $2.6 billion.

How many more skeletons are waiting to be discovered on Wall Street this earnings season? Only time will tell ...

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