“Our goal is to stay in the game.”

Posted on August 15, 2007 by grim

From the WSJ:

Credit Crisis Hits Small Lenders
Mortgage-Loan Backlash Spurs Halt in Operations; Bigger Rivals Swoop In
By JAMES R. HAGERTY, RUTH SIMON and JONATHAN KARP
August 15, 2007; Page A3

The mortgage credit crunch is tightening its grip on thousands of small to midsize lenders and brokers, allowing giant lenders to grab a bigger share of the market.

In the latest outbreak of anxiety, shares of Thornburg Mortgage Inc., a Santa Fe, N.M., specialist in large prime home loans, dropped 47%, or $6.67, to $7.61 as of 4 p.m. in New York Stock Exchange composite trading. Thornburg said it will delay its second-quarter dividend payment and has been getting margin calls from creditors, requiring the lender to make payments to make up for the declining value of mortgages used as collateral for those borrowings.

GMAC LLC, which provides short-term loans to many smaller lenders to let them fund mortgages until they can be sold to investors, severely tightened its terms yesterday, according to a memo sent to those lenders.

Many small mortgage banks that specialize in loans that are out of favor with investors — anything other than those that can be sold to government-sponsored investors Fannie Mae and Freddie Mac — are “desperate,” said Doug Duncan, chief economist at the Mortgage Bankers Association, a trade group. He added that the credit crunch will cause a larger rise in defaults than previously expected. Borrowers will find it harder to refinance to avoid rising payments on adjustable-rate mortgages, and the difficulty of lining up loans will hurt house prices.

Brokers are suffering too as lenders rapidly change their guidelines and rely more on their own employees to originate loans. “We’re seeing record numbers of people going out of business right now simply because there’s a lack of programs and products to offer,” said George Hanzimanolis, a mortgage broker and banker in Tannersville, Pa., and president of the National Association of Mortgage Brokers. “I’ve never seen this many people going out of the business or telling me, ‘I can’t do this anymore. What we used to specialize in is no longer available.'”

Even before the latest turmoil, research firm Wholesale Access projected that the number of mortgage brokerages in the U.S. would drop to 35,000 by the end of 2008 from 53,000 in 2006.
…
Thornburg said that it has had to delay funding of some mortgages and that there have been “disruptions” in its ability to raise money through issues of commercial paper and asset-backed securities. The company completed $3.5 billion of home loans in the first half, putting the company outside the top 40 lenders. But Thornburg is known in the industry as a provider of prime jumbo loans — those over the $417,000 limit on mortgages that can be sold to Fannie or Freddie.
…
GMAC’s Residential Funding Co. said that as of today it won’t provide so-called warehouse funding for subprime loans and mortgages for borrowers who don’t verify their income or assets. It also ruled out mortgages for investment properties and home-equity loans to borrowers with credit scores lower than 720.

GMAC’s changes reinforce a broader move toward fully documented loans, but even there, new restrictions apply that could affect business in expensive markets such as California. For instance, GMAC said that for loans above $417,000 that exceed 80% of a home’s purchase price, it will advance only 93.5% of the loan’s value, meaning that mortgage bankers will have to carry 6.5% of the loan’s cost until it can be sold to an investor. Until now, it had advanced 99% of the loan’s value. To direct more business its way, GMAC also lowered the amount of warehouse funding for loans that would be sold to other investors.
…
Another provider of warehouse loans to mortgage banks, National City Corp., “has temporarily suspended funding” from one of its two warehouse-lending operations of most types of mortgages that can’t be sold to Fannie and Freddie, a National City spokesman said.
…
Steven Walsh, a mortgage broker in Scottsdale, Ariz., said that 50% to 60% of the loan applications he takes now turn into completed loans, down from 90% a year ago. Tighter guidelines aren’t the only problem. In the past three months, Mr. Walsh has seen 100 deals fall through because the appraisal came in too low to support the transaction. “Our goal is to stay in the game,” he said.

Posted in Housing Bubble, National Real Estate, Risky Lending | 1 Comment

“The bill is now due, and a painful correction is in place.”

Posted on August 14, 2007 by grim

From James W. Hughes and Joseph J. Seneca at the NJ Voices Blog:

The second housing bust

The current global liquidity crisis has ended an unprecedented American housing bubble. New Jersey was one of the key epicenters of the housing boom, and thus now confronts a housing correction that could be very painful, both in depth and duration.

It is entirely possible that it could take until the middle of the next decade for the state to match the home price peak of 2006! The old adage that economic wild parties are often followed by prolonged economic hangovers may be borne out again.

What caused the wild housing party? Well, after all is said and done, it turned out that it was greed (surprise!) that did it!
…
Given the party is now over, what can New Jersey now expect? The collapse of the state’s home price boom of the 1980s (Boom-Bubble I) provides a glimpse of one possible future. According to the Office of Federal Housing Enterprise Oversight (OFHEO)between 1980 and 1988, home prices in New Jersey increased by 141.2 percent – nearly two and one-half times in just eight years.

It turned out then (as now) that such rates of increase were simply not sustainable. Home prices peaked in New Jersey in 1988, and then started to retreat, bottoming out in 1991. During the three-year 1988-1991 period, prices declined by 6.2 percent.

Home prices finally began to recover slowly in 1992 as the economy gradually emerged from recession. But housing had to traverse a long road back. It took until mid-1998 to finally match the price peak of 1988, and this ignores inflation!

In the slow 1991-1998 recovery-period, prices increased by a total of 6.6 percent in New Jersey, or by only about 1 percent per year.

But then Boom-Bubble II emerged. Between 1998 and 2006, another eight-year period, New Jersey’s home prices jumped by 129.1 percent. While this rate of increase was somewhat less than that of 1980 to 1988 (141.2 percent), the 1998-2006 house price run took place on a much higher base, leading to much higher absolute price gains.

Again, such rates of increase were not sustainable. In retrospect, they were achieved only because of excess demand stimulated by aggressive and risky subprime lending practices.

But that era is past. The bill is now due, and a painful correction is in place.

The future, if predicted by New Jersey’s experience in Boom-Bubble I, is that home prices will slip in the region through 2009, and then begin to slowly recover. It could then take until 2016 to match the nominal (i.e., not inflation-adjusted) home price peak of 2006!

We’re not saying this will actually happen, but it certainly stands as a likely possibility.

Posted in Housing Bubble, New Jersey Real Estate | 303 Comments

“Buyers could lose their deposits”

Posted on August 14, 2007 by grim

From the Asbury Park Press:

Judge allows auction of Kara project

Amboy National Bank, which started foreclosing on Horizons at Birch Hill in Old Bridge, instead can try to sell the development at an auction scheduled for Sept. 5, a bankruptcy judge ruled Monday.

The decision could jump-start development at the Kara Homes project, but it also could cause dozens of buyers to lose their deposits.

Nonetheless, “we prefer this route” to foreclosure, said Damon M. Kress, a New Brunswick-based lawyer who represents the Birch Hill Home Owners Association. “It’s the quicker route to getting the same result.”

The decision by U.S. Bankruptcy Judge Michael B. Kaplan was part of a flurry of activity in the Kara bankruptcy case. The East Brunswick-based home builder filed for Chapter 11 protection last October after the housing market began to tumble. The builder reported $350 million in assets and $227 million in liabilities.

Kaplan is awaiting creditors’ approval of a reorganization plan in which Kara would emerge with an infusion of capital from Plainfield Specialty Holdings II Inc., a Greenwich, Conn.-based hedge fund, and Glen Fishman, a Lakewood developer.

Much of the focus Monday, however, was on Birch Hill, a 228-unit development with villas, townhouses and a high-rise building. Of those, only 74 units have been completed and occupied.

Amboy is owed $26 million for the project. It began foreclosing in June, starting a process that could have taken as long as two years. Instead, the bank paid Kara $100,000 to hold an auction. Bids would be submitted by Sept. 4, an auction would take place Sept. 5 and the court could approve the results Sept. 10.

Attorneys involved in the case said they don’t expect anyone to bid more than what Amboy is owed, which would leave Amboy with the property and free to find a builder to complete it.

“The economics (of Birch Hill) are so upside down,” said Warren Usatine, an attorney representing the official committee of unsecured creditors.

The decision drew a protest from Barry Frost, an attorney who represents 11 Birch Hill buyers. In all, his clients deposited as much as $700,000. If the property went through foreclosure, they could argue their case in state Superior Court.

A buyer at an auction — in this case, Amboy — could walk away with the property and no obligation to honor customers’ contracts. Birch Hill buyers could only recoup their deposits if they were insured by a bond, Frost said.

Posted in Housing Bubble, New Jersey Real Estate | Comments Off on “Buyers could lose their deposits”

“A good credit record doesn’t count for anything now”

Posted on August 14, 2007 by grim

From the Wall Street Journal:

How the Mortgage Bar Keeps Moving Higher
Home Buyers With Good Credit Confront Increased Scrutiny And Fewer Choices as Lenders React to Subprime Debacle
By JONATHAN KARP
August 14, 2007; Page D1

Frankie Van Cleave says she has paid all her bills on time for more than three decades, save one car payment that got delayed in Christmas mail. But neither solid credit nor her track record running a number of businesses is sparing the 70-year-old from the turmoil in the home-mortgage market.

Several mortgage brokers had courted her to refinance a $1 million adjustable-rate mortgage she currently carries on her home, on two acres of prime riverfront property in Marietta, Ga. But most of them “dropped me like a hot potato” last week after two appraisals came in below $900,000, she says. Her bank of three decades won’t help her after her monthly mortgage payments recently ballooned to nearly $8,200, so Ms. Van Cleave is working 80 hours a week as a technical writer to make ends meet.

“A good credit record doesn’t count for anything now,” Ms. Van Cleave says of her futile refinancing effort. “If you don’t have assets, forget it. If you’re self-employed, you have real problems in this market.”

The impact of the subprime-mortgage crisis is spreading through most segments of the home-lending business, ensnaring more and more people who just months ago might have coasted through a refinancing or home purchase. In addition to raising interest rates on so-called prime mortgages, lenders are tightening requirements for everything from borrowers’ income verification and credit scores to home-appraisal reports, and yanking products that had allowed low-risk borrowers to avoid putting any money down.

The consumer market is changing at a dizzying pace, with loan applicants — even those with strong credit records — being placed under more scrutiny and given fewer choices than they were just weeks ago. Whereas lenders used to change guidelines a few times a year and would give mortgage brokers advance warning, they are issuing revisions almost daily now and dropping products overnight, industry officials say.

“We thought the dust was going to settle, but instead, it just blew up,” says Mitchell Reiner, president of Mortgage Associates, a Los Angeles-based lender that does business in 48 states. “Everyone is being affected.”

Yesterday, for example, IndyMac Bancorp Inc. imposed tougher rules on a big product, Alt-A mortgages, a category between prime and subprime that often involves borrowers who don’t fully document their income or assets, or those buying investment properties. It is the latest lender to shun 100% financing for borrowers who want merely to state their income. For Alt-A loans that don’t have third-party mortgage insurance, IndyMac is insisting on at least a 5% down payment for “all loan sizes and property types,” according to guidelines sent to mortgage brokers.

“Banks want to see that you have a vested interest in the property,” says mortgage broker Mark Cohen of the Cohen Financial Group in Beverly Hills, Calif. “Everybody thought the damage would be contained to the subprime market but it has spread to A-paper [products]. The impact is that there are fewer choices” for borrowers.

Posted in Housing Bubble, National Real Estate, Risky Lending | 6 Comments

“Let’s hope, then, that this crisis blows over as quickly as that of 1998.”

Posted on August 13, 2007 by grim

From Paul Krugman:

Paul Krugman: Financial meltdown looks like the one in ’98, but worse

In September 1998, the collapse of Long Term Capital Management, a giant hedge fund, led to a meltdown in the financial markets similar, in some ways, to what’s happening now. During the crisis in ’98, I attended a closed-door briefing given by a senior Federal Reserve official, who laid out the grim state of the markets. “What can we do about it?” asked one participant. “Pray,” replied the Fed official.

Our prayers were answered. The Fed coordinated a rescue for LTCM, while Robert Rubin, the Treasury secretary at the time, and Alan Greenspan, who was the Fed chairman, assured investors that everything would be all right. And the panic subsided.

On Wednesday, President Bush, showing off his MBA vocabulary, similarly tried to reassure the markets. But Bush is, let’s say, a bit lacking in credibility. On the other hand, it’s not clear that anyone could do the trick: Right now we’re suffering from a serious shortage of saviors. And that’s too bad, because we might need one.

What’s been happening in financial markets over the past few days is something that truly scares monetary economists: Liquidity has dried up. That is, markets in stuff that is normally traded all the time – in particular, financial instruments backed by home mortgages – have shut down because there are no buyers.

This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.
…
of the current crunch lie in the financial follies of the last few years, which in retrospect were as irrational as the dot-com mania. The housing bubble was only part of it; across the board, people began acting as if risk had disappeared.
Everyone knows now about the explosion in subprime loans, which allowed people without the usual financial qualifications to buy houses, and the eagerness with which investors bought securities backed by these loans. But investors also snapped up high-yield corporate debt, a.k.a. junk bonds, driving the spread between junk bond yields and U.S. Treasuries down to record lows.

Then reality hit – not all at once, but in a series of blows. First, the housing bubble popped. Then subprime melted down. Then there was a surge in investor nervousness about junk bonds: two months ago the yield on corporate bonds rated B was only 2.45 percentage points higher than that on government bonds; now the spread is well over 4 percentage points.

Investors were rattled recently when the subprime meltdown caused the collapse of two hedge funds operated by Bear Stearns, the investment bank. Since then, markets have been manic-depressive, with triple-digit gains or losses in the Dow Jones industrial average the rule rather than the exception for the past two weeks.
…
When liquidity dries up, as I said, it can produce a chain reaction of defaults. Financial institution A can’t sell its mortgage-backed securities, so it can’t raise enough cash to make the payment it owes to institution B, which then doesn’t have the cash to pay institution C – and those who do have cash sit on it, because they don’t trust anyone else to repay a loan, which makes things even worse.

And here’s the truly scary thing about liquidity crises: It’s very hard for policy-makers to do anything about them.
…
Let’s hope, then, that this crisis blows over as quickly as that of 1998. But I wouldn’t count on it.

Posted in Economics, Housing Bubble, National Real Estate | 185 Comments

“Eventually the knockwurst and bratwurst started to make people sick.”

Posted on August 13, 2007 by grim

From Bloomberg:

Wall Street Mill Churns Out Bad Wurst: Caroline Baum

A homeowner in Irvine, California, defaults on her mortgage; two Bear Stearns hedge funds implode.

French banking giant BNP Paribas halts withdrawals from three of its investment funds; the world’s central banks have to inject hundreds of billions of dollars into the money markets over a two-day period to keep interbank lending rates from soaring.

Unrelated events? Hardly. What was once touted as a problem with a niche product (subprime loans) in a small sector of the U.S. economy (residential real estate) is somehow strewing its detritus across the globe.

How did it come to this? How is it that home loans to Main Street became a crisis for Wall Street? The answer owes as much to human nature as to the nature and complexity of structured finance.

Our story begins with an extended period of low worldwide interest rates designed to ease the pain of the burst bubble in Internet and technology stock.

Housing is an interest-rate sensitive industry. In the U.S., residential real estate weathered the 2001 recession with flying colors, courtesy of the Federal Reserve, which cut its benchmark rate to a level not seen in almost half a century.

Potential homeowners responded to the incentive of low rates to buy the house of their dreams. Sometimes they bought two: one to live in, one to rent and/or eventually flip for a profit.
…
The ability to meet timely payment of principal and interest wasn’t an issue for homebuyers when prices were appreciating at rates of 10 to 15 percent a year, which was standard from 2002 through early 2006. It clearly wasn’t an issue for lenders either, who helped would-be buyers secure the financing — no money down, no questions asked. The more exotic the mortgage, the juicier the commission.

There were plenty of signs along the way that a bubble was developing. The appearance of Web site condoflip.com, for example, with its pitch of facilitating the purchase and sale of preconstruction condos, epitomized the froth that was building in the housing market.

And why not? The Fed, worried about deflation even in 2003, didn’t start to raise its overnight rate from a low of 1 percent until May 2004, with the economy taking off.

Enter Wall Street, which is essentially in the sausage- making business. It takes meat and meat by-products and processes them into wurst, which it hawks to investors both sophisticated and naive.

In the case of subprime loans, which were packaged into mortgage bonds and sliced and diced into collateralized mortgage obligations, there was just enough real meat for the securities to be certified as kosher (AAA) by the rating companies.
…
Eventually the knockwurst and bratwurst started to make people sick. Upon testing, the sausage was found to contain too little meat and too much by-product. It wasn’t kosher after all.

On further examination, the entire sausage production and distribution chain — from homebuyers to mortgage lenders, from mortgage brokers to securitizers — was found to be operating under unsanitary conditions and pretty much shut down until further notice.

And it wasn’t just the wurst that was declared unfit for human consumption. Anything suspected of containing meat by- products was shunned by investors in favor of food with a federal government guarantee.

Posted in Housing Bubble, National Real Estate, Risky Lending | 2 Comments

A “victim of the rapid and utter deterioration in the market.”

Posted on August 13, 2007 by grim

From the Wall Street Journal:

Mortgage Woes Take Toll on Lender With Roots in Faith
HomeBanc Built Network With Church Connections; Firings After Chapter 11
By VALERIE BAUERLEIN
August 13, 2007; Page A1

While many mortgage brokers screamed through the real-estate boom with blaring television ads and exotic loan structures, HomeBanc Corp. positioned itself as the good guy.

Inside the company, executives opened companywide gatherings and internal meetings with Christian prayers. Every branch office kept a chaplain on call. The company’s $365,000-a-year human-resources chief, Dwight “Ike” Reighard, was the founder of a mega-church in an Atlanta suburb. He says he encouraged employees to pray, put others first and become better workers — and also performed weddings and funerals for employees. “People who never attended church would tell me, you’re my pastor,” Dr. Reighard said in an interview on Saturday.

But over the past few weeks, as investors fled securities tied to mortgages, HomeBanc’s sources of loan funds dried up. Unable to continue originating loans, the company staggered under the burden of its expensive sales infrastructure.

On Thursday, HomeBanc filed for bankruptcy-court protection. It fired most of its 1,100 employees on Friday and is shuttering its 22 branches and 139 kiosks in real-estate and builders’ offices, exiting the mortgage-loan origination business and processing no new loans, including ones in its pipeline. Countrywide Financial Corp., of Calabasas, Calif. — struggling with troubles of its own — said it was buying at least five HomeBanc branches.

HomeBanc wasn’t unique in its faith-focused business model. As the credit business boomed over the past decade and finance companies scrambled to differentiate themselves, church and religiously oriented lending became a hot niche, particularly in the Southeast. Big banks such as Wachovia Corp. of Charlotte, N.C., and Atlanta-based SunTrust Banks Inc. have operations devoted to serving faith-based organizations. Several Georgia community banks have faith-based philosophies, including Integrity Bank, a five-office community bank in Alpharetta, Ga., with the motto “In God We Trust.”

Most of HomeBanc’s 450 loan officers had no prior experience in the business. Many were local church leaders or family members and friends referred by HomeBanc staff. Former employees say HomeBanc also sought out former college and professional athletes and military veterans, who brought with them extensive networks of personal contacts and enjoyed the company’s high-volume sales strategy. HomeBanc required all potential loan officers to list 150 contacts as proof of an existing network.

New loan officers went through an intense, nine-week “boot camp” to learn sales skills and become indoctrinated in the company culture. Participants said suits were required everyday; classes began at 7 a.m., when the doors were locked; and trainees said they were told that if they arrived late, they would have to pack their bags and go home. HomeBanc human-resources executives said no one was kicked out but the company frowned on tardiness. New hires agreed to reimburse HomeBanc up to $60,000 for the cost of the course if they didn’t stay at the company past a certain period — typically three years.

“I don’t think they saw God as a magic genie that was going to insulate them from the marketplace,” said the Rev. Victor D. Pentz, the senior pastor of Peachtree Presbyterian Church, an 8,500 member congregation whose leadership includes several HomeBanc executives. Instead, he said HomeBanc was “a place where the deeper expressions of their values are welcomed as a part of the mix. People want to relate at a deeper level than ‘I stand next to you at the copy machine.’ ”

Barbara Aiken, a human-relations executive who’d been with HomeBanc for 14 years, says, “Everybody said we were a cult, they said, ‘You drink the Kool-Aid.’ But I really believe the uprightness with which the company held itself really bothered people.”

Posted in National Real Estate, Risky Lending | 1 Comment

Lender satisfaction falls

Posted on August 13, 2007 by grim

From the Record:

Lenders in damage-control mode

new study by J.D. Power and Associates indicated that the subprime mortgage meltdown and rising defaults may be having an impact on relationships between consumers and the companies that collect their mortgage-loan payments.

The study, released Aug. 1, showed mortgage companies were more flexible than in the past when it comes to scheduling makeup payments, when they were 30 or more days late.

This is likely a result of the recent volatility in the mortgage market, which has many lenders in a damage-control mode, said Tim Ryan, a senior research director for J.D. Power.

“Lenders don’t want to take the properties back,” Ryan said. “Nobody wins in that situation.”

Still, overall, when customers had a reason to call, e-mail or send a letter to their mortgage company, they were less satisfied with the outcome than they were in last year’s survey.
…
Also, mortgage companies that originated the loans and retained the servicing rights tended to do well in the survey, Ryan said.

“Once a loan gets transferred, customer satisfaction goes down,” he said.
…
Top 10
BB&T (Branch Banking & Trust) 860
M&T Mortgage 828
Citizens Bank 825
Countrywide Home Loans 824
SunTrust Mortgage 822
First Horizon Home Loans 818
Wells Fargo 817
GMAC Mortgage 816
Regions Mortgage 807
CitiMortgage 805

Bottom 10
Ameriquest Mortgage 738
CitiFinancial Mortgage 738
Homecomings Financial 733
Midland Mortgage 706
Greentree Mortgage 692
Litton Loan Servicing 688
EMC Mortgage 683
Vanderbilt Mortgage and Finance 672
Option One Mortgage 669
Ocwen Financial 627

Source: J.D. Power and Associates

Posted in National Real Estate, Risky Lending | Comments Off on Lender satisfaction falls

Weekend Open Discussion

Posted on August 12, 2007 by grim

This is the time and place to post observations about your local areas, comments on news stories or the New Jersey housing market, open house reports, etc. If you have any questions you wanted to ask earlier in the week but never posted them up, let’s have them. Also a good place to post suggestions, requests for information, criticism, and praise.

For readers that have never commented, there is a link at the top of each message that is typically labelled “[#] Comments“. Go ahead and give that a click, you might be missing out on a world of information you didn’t know about. While you are there, introduce yourselves to everyone.

For new readers that have only read the messages displayed on the main page, take a look through the archives, a substantial amount of information has been put online in the past year. The archives can be accessed by using the links found in the menus on the right hand side of the page.

Posted in General | 239 Comments

“You find surprising linkages that you never would have expected”

Posted on August 12, 2007 by grim

From the NY Times:

In a Credit Crisis, Large Mortgages Grow Costly

When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.

“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.

“There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”

The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.

For months after problems appeared in the subprime mortgage market — loans to customers with less-than-sterling credit — government officials and others voiced confidence that the problem could be contained to such loans. But now it has spread to other kinds of mortgages, and credit markets and stock markets around the world are showing the effects.

Those with poor credit, whether companies or individuals, are finding it much harder to borrow, if they can at all. It appears that many homeowners who want to refinance their mortgages — often because their old mortgages are about to require sharply higher monthly payments — will be unable to do so.

Some economists are trimming their growth outlook for the this year, fearing that businesses and consumers will curtail spending.

“In the last 60 days, we’ve seen a substantial reduction in mortgage availability,” said Robert Barbera, the chief economist of ITG, a brokerage firm. “That in turn suggests that home purchases will fall further. Rising home prices were the oil that greased the wheel of this engine of growth, and falling home prices are the sand in the gears that are causing it to grind to a halt.”

At the heart of the contagion problem is the combination of complexity and leverage. The securities that financed the rapid expansion of mortgage lending were hard to understand, and some of those who owned them had borrowed so much that even a small drop in value put pressure on them to raise cash.

“You find surprising linkages that you never would have expected,” said Richard Bookstaber, a former hedge fund manager and author of a new book, “A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation.”

Posted in National Real Estate, Risky Lending | Comments Off on “You find surprising linkages that you never would have expected”

“It turns out that the turmoil was contagious.”

Posted on August 10, 2007 by grim

From Bloomberg:

Bernanke, Paulson Were Wrong: Subprime Contagion Is Spreading

Federal Reserve Chairman Ben S. Bernanke was wrong.

So were U.S. Treasury Secretary Henry Paulson and Merrill Lynch & Co. Chief Executive Officer Stanley O’Neal.

The subprime mortgage industry’s problems were contained, they all said. It turns out that the turmoil was contagious.

The $2 trillion market for mortgages not backed by government-sponsored agencies is at a standstill. That’s just the beginning. Other types of mortgages are suffering. So are firms and banks that package the debt for investors. The ripples were felt in Europe and Asia, where central banks offered cash to banks amid a credit crunch. And some corporations, from countertop makers to railroads, are blaming the mortgage meltdown and housing slump for earnings shortfalls.
…
“Housing created a lot of ancillary economic activity and jobs, and now we are in the reverse process,” says Paul Kasriel, chief economist at Northern Trust Corp. in Chicago and a former Fed economist.
…
The European Central Bank yesterday loaned 94.8 billion euros ($130.2 billion) to banks to alleviate a money shortage sparked by concerns over investments in U.S. mortgages.

The unprecedented move followed the freezing of three funds managed by BNP Paribas, France’s largest bank, because the bank couldn’t calculate how much the funds’ holdings were worth due to a lack of buyers.

Today, the Bank of Japan made similar moves to supply cash.
…
“The subprime mess is now spreading to banks,” says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. “A lot of international banks, especially those in Europe, did invest a lot in the collateralized debt markets, especially the subprime situation here in the U.S., so they’re suffering.”

Peter Lynch, chairman of private equity fund Prime Active Capital Plc in Dublin, said the ECB was “treating this like an emergency.”

Bernanke told Congress on March 28 that subprime defaults were “likely to be contained.” The Fed chief, who declined to comment for this story, changed his assessment last month.
…
Within the week, he was contradicted by a team of Bank of America analysts, who called losses in the mortgage market the “tip of the iceberg” and predicted “broader fallout” from adjustable-rate loans resetting at higher interest rates.

David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland, is blunt about his current outlook. He says a third of the U.S. home-loan industry will disappear.
…
.S. housing prices will fall this year, the first annual decline since the Great Depression of the 1930s, according to the National Association of Realtors, based in Chicago.

The inventory of unsold U.S. homes in May was the largest since the realtors group started counting them in 1999. Defaults and foreclosures may increase because about $1 trillion of payments on adjustable-rate mortgages are scheduled to rise this year, hitting a peak in October, according to Credit Suisse.

Housing and related industries generate almost a quarter of U.S. gross domestic product, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.

The mortgage fallout “ensures the economy will grow well below its potential through the remainder of the year and next,” says Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pennsylvania, who predicts GDP growth of 2.5 percent this quarter and next. Second-quarter growth was 3.4 percent.
…
As for the faulty initial predictions by Bernanke and others, go easy on them, says Josh Rosner, managing director at the New York investment research firm Graham Fisher & Co.

“There’s no model for what’s happening now in the housing and mortgage industries,” Rosner says. “We have to give Bernanke a chance. He is a reasoned and traditional central banker. He knows how to manage crazies.”

Posted in Economics, Housing Bubble, National Real Estate | 357 Comments

Saying goodbye to easy money

Posted on August 10, 2007 by grim

From the Hartford Courant:

Death Of Zero-Down

In the latest sign that the nationwide credit crunch is worsening, lenders are saying no to borrowers who want no-money-down mortgages.

The popular financing option – which required no down payments and financed 100 percent of a home loan – is being eliminated or strictly curtailed by lenders across the country and in Connecticut.

That means buyers will once again have to come up with cash for a down payment, at a minimum 3 percent of the purchase price but as much as 10 percent, to avoid costly mortgage insurance premiums that can add hundreds of dollars to a monthly payment.

The change is expected to hit first-time buyers hardest. That, in turn, would sap buyers from an already weakened market where the supply of houses and condominiums far outpaces demand.

Mortgage lending standards have already tightened for many borrowers in 2007, particularly those with spotty credit histories, the so-called subprime market. But a wide-ranging elimination of the zero-down-payment mortgages is a signal that the crunch is spreading more broadly, to those with a solid record of paying bills but who don’t have a lot saved for a down payment.

“If someone walks in today with an A-plus credit history and a $200,000 salary but no money for a down payment, I can’t help them anymore,” said Michael Menatian, president of Sanborn Mortgage Corp. in West Hartford.

The company was notified by its lender this week that the lender will no longer cover no-money-down loans.
…
So far, Sheahan said, the squeeze hasn’t crossed into traditional mortgage products that include a down payment. However, in the last week, borrowing rates for large, “jumbo” mortgages have soared by one percentage point, rising above 8 percent, which had a chilling effect on that part of the market as well, Sheahan said.

The move by lenders away from the zero-down mortgages will not just affect people of modest means. It will also squeeze young professionals, such as doctors or lawyers, who have high salaries but little money for a down payment because of costly student loans.

“It’s going to have a big impact on the market,” said Menatian. “It’s tough enough to buy in this area, where prices are high and the cost of living is high. But now, in order to get a good loan, you are going to have to come up with 5 to 10 percent in cash.”

And that’s something that not every buyer wants to do.
…
With a strong housing market where prices were climbing, lenders were willing to look the other way on these deals, the mortgage brokers said.

“Now, with values dropping, if someone got into trouble, they might just walk away” from the house, Menatian said, because they’ve got no money of their own tied up in it.

That would leave lenders stuck with a loss. And that prospect is spooking lenders already rocked by turmoil after the collapse this year of the subprime mortgage market. That industry swelled to $1.3 trillion over the past few years, fueled by Wall Street’s easy money. But as home prices sagged and more borrowers missed payments on loans, the industry buckled.

Posted in National Real Estate, Risky Lending | Comments Off on Saying goodbye to easy money

Where o’ where will we find $7b?

Posted on August 10, 2007 by grim

From the Record:

Cost to fix N.J. bridges: $7B

It will cost up to $7 billion to fix hundreds of deteriorating bridges throughout New Jersey, Governor Corzine said Thursday.

Findings from an interim report by the state Department of Transportation indicate that 34 percent of the state’s 6,434 bridges are considered “structurally deficient” or “functionally obsolete.”

Still, officials said all of New Jersey’s bridges are safe.

Speaking in a parking lot at Exit 15E on the New Jersey Turnpike, officials said eight bridges are high priorities, including the 75-year-old Pulaski Skyway, which could be replaced, Corzine said.

“While we find [the Skyway] to be safe, it is of course one of many of concern as we try to move forward and try to prepare for the infrastructure of tomorrow,” added Sen. Bob Menendez, D-N.J.

Corzine last week called on the DOT to prepare a safety status report of bridges in the wake of the Minneapolis bridge collapse. Seven people have been confirmed dead following the Interstate 35W bridge disaster and six others missing are presumed dead. More than a hundred were injured, many seriously.

The DOT’s Office of the Inspector General has been conducting unscheduled audits and investigations around the state, including seven bridges that have a structure similar to the Minneapolis truss-deck bridge. Among these is the Route 3 overpass in Passaic/Bergen, Corzine said.
…
“The problem of replacing the bridge is definitely a complex one, but the solution is not,” Kolluri said. “We need money and lots of it. We need a billion dollars to do it.”

Officials said there needs to be aid from Washington.

“We need to be a partner with the federal government, and their resources need to flow,” Corzine said. “I don’t want to get into how the state will come up with these resources, but we will come up with those resources.”

Posted in Politics, Property Taxes | 3 Comments

North Jersey July Residential Sales

Posted on August 9, 2007 by grim

Preliminary July sales and inventory data for Northern New Jersey is in..

The first graph plots the unadjusted sales data (closed sales) for the counties listed. Please note the lower bound of the graph, it is set to 1000, not to zero. I do this to emphasize the seasonal nature of the Northern NJ market.


(click to enlarge)

The second graph is another view at the sales data for the full year. Please note that this graph does cross at zero.


(click to enlarge)

The third graph displays only July sales, 2000 to 2007 YOY.


(click to enlarge)

The fourth graph displays an overlay of Sales and Inventory from 2003 to 2007.


(click to enlarge)

The last graph, new this month, displays the year over year change in inventory on a monthly basis.


(click to enlarge)

Posted in New Jersey Real Estate | 325 Comments

Bergen, Passaic see pop. growth decline, Hudson drops

Posted on August 9, 2007 by grim

From the Record:

Census: Bergen, Passaic trail N.J.

Bergen and Passaic counties trail the rest of the state in population growth, according to census figures that will be released today.

Bergen’s population grew only 2 percent, to 904,000, and Passaic’s rose just 1.2 percent, to 497,000, from 2000 to 2006.

In contrast, New Jersey grew 3.4 percent to more than 8.7 million, while the nation saw a 6.1 percent increase in that time. Hudson County’s population has decreased by more than 8,000 residents, or 1.4 percent of its population. Morris has increased by 4.6 percent to more than 493,000.
…
Housing impact: The sluggish growth in Bergen and Passaic may have an effect on the housing market.

The amount of high-density housing has skyrocketed this decade. Apartments and condominiums totaling more than 16,000 units have either been proposed, are before local boards, or have recently been approved in North Jersey.

Last year Farouk Ahmad, Bergen County’s top planner, warned that the county could have the largest housing surplus since the late 1980s and early 1990s, when the real estate market collapsed.

But on Wednesday he said that many of the developments already approved by planning boards would likely not be built until the market recovers and demand is up.

Posted in Economics, New Jersey Real Estate | 3 Comments