“Springtime usually means good times in the housing industry, but this year it’s threatening to become a grim season of reckoning. Signs of a sobering slowdown emerged throughout March, ranging from gloomy forecasts among home builders to a growing number of high-risk borrowers struggling to make payments on exotic mortgages they probably couldn’t afford in the first place. The bleak news threatens to weigh on already drooping home prices, a factor that could undermine potential sales: Prospective sellers may hold off on selling in hopes of a turnaround, while prospective buyers may procrastinate in hopes of getting an even better deal later in the year. The additional dent in home sales could further undermine the overall economy, eroding demand for home furnishings and materials for renovations. Reflecting the worries about the growing threat, economist Steven Cochrane says the risk of a recession beginning later this year is increasing. He estimates there is a 25 percent chance of a recession within six months, up from 20 percent in February. ‘Things seem to be snowballing,” said Cochrane, a senior economist with Moody’s Economy.com. ‘It’s going to be a weak spring’. “
“The largest block of office space in the Austin market is being sold–again. Thomas Properties Group Inc. of Los Angeles is leading a joint venture to buy 3.5 million square feet of Class A offices in the Austin market for $1.15 billion in what may be the largest real estate transaction in Texas history. The deal expected to close within two months would also make Thomas Properties the largest office landlord in town. The Blackstone Group, which picked up the Austin assets as part of its wholesale purchase of Equity Office Properties Trust earlier this year, is flipping portfolios in key markets across the country. Cities where Blackstone has sold or plans to sell former Equity properties include Seattle, Miami, Sacramento, Miami, New York and Orlando, among possible others.”
“Sales of new homes fell for a second consecutive month in February, dimming hopes for a rebound soon in the troubled housing market and raising fears about the health of the overall economy. The Commerce Department reported Monday that sales of single-family homes dropped 3.9 percent last month to a seasonally adjusted annual rate of 848,000 units, the slowest pace in nearly seven years. The decline followed a 15.8 percent plunge in January, the biggest one-month decline in 13 years. The weakness in sales was accompanied by a drop in prices with the median price of a new home falling to $250,000 in February, down 0.3 percent from a year ago. The report was far weaker than Wall Street had been expecting and raised concerns that rising mortgage delinquencies and foreclosures, especially in the subprime market, would further depress housing activity in the months ahead as nervous lenders tighten their standards.”
“Fremont General Corp. said Monday that it has notified all 2,400 employees in its sub-prime lending unit that they may lose their jobs by May 18. The Santa Monica-based lender did not specify how many of the 2,400 jobs would be eliminated, saying only that “many†employees have been put on paid leave. The embattled lender has been shopping the troubled unit but said it plans to exit the business whether it finds a buyer or not. ‘The company continues to aggressively pursue its options with respect to its business,’ Fremont said Monday in a statement. ‘Given the uncertainty of this situation and its impact on employment, the company has given notice of termination to these employees on leave’. “
“San Diego-based Accredited Home Lenders Holding Co., which has been battered lately along with the entire subprime mortgage industry, said March 19 that its stock is subject to delisting from the Nasdaq exchange after it failed to file its 10K annual report with the Securities and Exchange Commission on time. The company said it is appealing the delisting, which will stay the action, and is working on filing its report as soon as possible. In addition, Accredited said it is in discussions regarding a possible financing arrangement with a third party that would provide additional liquidity. Accredited said it has retained an unnamed financial adviser for this deal. On March 16, Accredited said it was selling $2.7 billion in home loans to satisfy margin calls from lenders. The company said it was selling the loans at a discount and would likely record a $150 million charge against earnings.”
According to Nouriel Roubini the answer is Unregulated Free Market Fundamentalism Zealotry. The Blog “Mish’s Global Economic Trend Analysis” however, disagrees. Though he complimented Roubini for “one hell of a rant” he critiqued Roubini’s position arguing that it is government interference in these markets that is causing the problem: “perhaps the real solution is to get rid of government sponsored ownership societies designed to make renters look and feel like second class citizens, and let the free markets work as they are supposed to. Blaming the free market for this mess is certainly starting in the wrong place. It was a lack of a free market that both started then escalated this mess”. Both blogs are worth a read.
“U.S. financial markets are likely to experience some fall-out from the subprime mortgage lending woes but they are likely to be limited, the chief investment officer at the biggest U.S. pension told Reuters on Monday. The subprime sector ‘is an important weakness in the economy and it is likely that there will be a measured impact in other sectors. And there is likely to be some contagion,” said Russell Read of Calpers, which invests about $232 billion for California state workers… Some of the other sectors that could be impacted were the high-yield bond markets where defaults are likely to creep up, Read said in an interview on the sidelines of a Council of Institutional Investors meeting. He added, ‘we are concerned but not worried.’…Calpers has little direct exposure to the subprime sector, Read said.”
“NovaStar Financial Inc (NFI.NYS) Friday announced its plans to cut 17% of its workforce in response to the lackluster sub-prime mortgage market. The residential mortgage lender said it would lay off 350 employees. Most of the job cuts would take place in NovaStar Financial’s wholesale loans origination unit. The company said it would reduce 50 positions at its headquarters in Kansas City and approximately 300 positions at operation centres in California and Ohio.”
“Stocks plunged Tuesday as Wall Street woke up to growing problems in the mortgage market and investors became concerned that those troubles might spread to other parts of the economy. The number of borrowers who fell behind on payments hit a 3 1/2-year high, driven by an increase in delinquencies among high-risk, or subprime, borrowers, according to a report from the Mortgage Bankers Association trade group. ‘For a long time, people have been saying that the problems in the housing market aren’t big enough to have an impact on the U.S. economy, and that’s bull,’ said Christopher Thornberg, an economist at the consulting firm Beacon Economics. ‘There are a lot of secondary effects on the economy and it’s not a pretty picture’. “
Excerpt from a Bloomberg report by Bob Ivry entitled: “Foreclosures May Hit 1.5 Million in U.S. Housing Bust”:
Hold on to your assets. The deepest housing decline in 16 years is about to get worse. As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.
The spring buying season, when more than half of all U.S. home sales are made, has been so disappointing that the National Association of Home Builders in Washington now expects purchases to fall for the sixth consecutive quarter after it predicted a gain just last month.
“The correction will last another year,” said Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pennsylvania. “Fewer people qualifying for mortgages means there will be less borrowers, and that will weigh on demand.”
A five-year housing boom that ended in 2006 expanded home- ownership to a record number of U.S. households. Now it has given way to mounting defaults, failing subprime mortgage companies and an increasing number of unsold homes.
Last Housing Slump. If this slump follows the same pattern as the last one, in 1991, it will persist for at least another year and may fuel a recession. New-home sales declined 45 percent from July 1989 to January 1991 and about 1 percent of all U.S. jobs, or 1.1 million, were lost in that recession, said Robert Kleinhenz, deputy chief economist of the California Association of Realtors.
“New Century Financial Corp. said today all of its lenders have cut funding or announced their intent to halt financing after the subprime mortgage lender failed to make payments, pushing the company further toward bankruptcy. ‘The company and its subsidiaries do not have sufficient liquidity to satisfy their outstanding repurchase obligations under the company’s existing financing arrangements,’ New Century said in a filing with the Securities and Exchange Commission.”
“Central Pacific Mortgage in Folsom closed suddenly last week. The company, which at one time had 100 retail and wholesale origination offices, was likely another victim of the rapid deterioration of the local and national markets for recent mortgage loans. No one answered the phones at the company Monday. The closure was brought to the attention of the state’s Department of Corporations by a Central Pacific employee who had suddenly been put out of a job”
The Los Angeles Times reports: “The meltdown in the business of high-cost mortgages to high-risk borrowers accelerated Friday as one major lender revealed that it was under federal criminal investigation and a second said it would quit the business after regulators accused it of making too many loans likely to end in foreclosure… The criminal investigation disclosed Friday focuses on how New Century Financial Corp. of Irvine accounted for losses when it was forced to buy back soured loans last year, and whether its executives profited by selling stock while misleading other shareholders… New Century, the largest independent sub-prime lender, shocked Wall Street last month when it said that it would restate results for the last year, erasing $268 million in profit it had reported. Shareholder lawsuits accuse the company’s officers and directors of selling stock for more than $26 million at falsely inflated levels.
Federal regulators already have leveled civil accusations against the No. 2 independent sub-prime lender, Fremont General Corp. of Santa Monica. Fremont disclosed Friday in an SEC filing that the Federal Deposit Insurance Corp. would sanction its bank subsidiary, Brea-based Fremont Investment & Loan, for failing to control the risks inherent in sub-prime lending and in its second major business, commercial real estate construction loans. The company said it had decided to quit sub-prime lending entirely and was “engaged in discussions with various parties regarding the sale of the business.”
“In another indication of trouble in the subprime mortgage market, Countrywide Financial Corp. said Thursday that payments were late on almost 20 percent of the subprime loans the mortgage giant manages for other lenders. The Calabasas-based lender said that delinquencies of 30 days or more on subprimes grew to 19 percent at the end of 2006. Countrywide, the nation’s largest mortgage lender, services more than $1 trillion in loans. A surge in bad mortgages has forced more than 20 lenders to close or seek buyers in the past year, the company said in a filing. “
“The unsold inventory index for existing, single-family detached homes jumped to 9.1 months in January after hovering around the long-run average of 7 months since mid-2006, the California Association of Realtors said Tuesday. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate… The median number of days it took to sell a single-family home was 75 days in January, compared with 48 days (revised) for the same period a year ago. Home sales decreased 12.6 percent in January in California compared with the same period a year ago, while the median price of an existing home increased 1.9 percent. The median price of an existing, single-family detached home in California during January was $559,640″
“Los Angeles is the least-affordable housing market in the United States and 18 of the 20 least affordable housing markets are in California, according to a California Building Industry Association report released Thursday. Los Angeles County has the nation’s lowest rate of housing affordability with only 2 percent of homes sold during the fourth quarter considered affordable to the county’s median-income family. Nationally, 41.6 percent of homes are considered affordable and in 98 of the metro areas more than half of the homes are considered affordable… ‘Despite all of the doom and gloom about housing prices dropping, affordability has improved only slightly and only in some parts of the state,’ said CBIA chairman Wes Keusder, owner of Keusder Homes in Costa Mesa, in a release. ‘A one or two percent drop in price has little effect on affordability.’
“Wells Fargo & Co. is cutting 70 jobs in its Concord subprime mortgage office… ‘There are 70 positions that have been affected specifically in non-prime mortgage operations that have been impacted as a result of Wells Fargo making a decision to tighten some credit standards,’ said Chris Hammond, a bank spokesman. Wells Fargo Home Mortgage is the largest subprime home mortgage originator in the country; it generated almost $44 billion in subprime mortgages in the first half of 2006.”
“The Blackstone Group, the private equity firm that bought Equity Office Properties Trust in the biggest leveraged buyout ever, agreed to sell 23 Southern California buildings it acquired in the purchase to Maguire Properties Inc. for about $3 billion, it was learned. Maguire, the biggest office landlord in downtown Los Angeles, will gain more than 6.8 million square feet in Orange County and downtown Los Angeles”.
“Is a blowout taking shape in the impaired-credit mortgage market? Could lax underwriting standards during the boom years — no verification of applicants’ incomes or assets, low or no down payments, and big mortgages to people already saddled with heavy debts — finally be coming home to roost? The omens are unmistakable: Delinquencies — failure to make a mortgage payment when due — in the $1.3-trillion impaired-credit mortgage market hit 12.6% in the latest quarter, up from 11.7%. Delinquencies exceeded 13% among borrowers with so-called subprime adjustable-rate loans.
Growing numbers of the companies that make or invest in subprime mortgages are themselves facing financial distress, and some have shut their doors or filed for bankruptcy protection. HSBC Holdings PLC, Europe’s largest bank and a major subprime lender in this country, shocked Wall Street recently by announcing that home loan delinquencies have gotten so bad that it has set aside $10.6 billion to cover potential losses. New Century Financial Corp., a California-based subprime lender, saw its stock plunge 36% in a single day when it announced that “buybacks” of delinquent loans had been more numerous and more costly than anticipated… Ownit Mortgage Solutions, another California subprime mortgage lender, abruptly went out of business when buyback demands reached a reported $100 million. Ownit’s chief executive, William D. Dallas, acknowledged problems in underwriting, but also blamed bond investors’ demands for high-yielding no-income verification loans.
Angelo R. Mozilo, chief executive of Countrywide Financial, was quoted as saying ‘there’s probably 40 or 50 [subprime loan originators] a day throughout the country going down in one form or another. And I expect that to continue throughout the year.’ What’s going on here? At a recent Senate hearing, a leading consumer-protection advocate, Martin Eakes, chief executive of the Center for Responsible Lending, called the subprime market ‘a quiet but devastating disaster’. “
Los Angeles Times
“Washington Mutual Inc. is cutting 100 jobs at its administrative center in Stockton. Half of the employees who will lose their jobs work for Long Beach Mortgage Inc., a WaMu subsidiary based in Anaheim that specializes in subprime mortgages. The other 50 work in Seattle-based WaMu’s custodial operations department. The move reflects Seattle-based WaMu’s ongoing effort to streamline operations, and to pare down subprime-mortgage specialist Long Beach Mortgage as the market for those mortgages cools, according to WaMu spokeswoman Darcy Donahoe-Wilmot.”
