S&P/Case-Shiller: April Home Prices Fall 2.1%

Posted on June 26, 2007 by grim

From MarketWatch:

Home prices fall at fastest rate in 16 years

Home prices in 10 major U.S. cities dropped at the fastest pace in 16 years in the 12 months ending in April, according to Standard & Poor’s Case-Shiller home price index released Tuesday.

Home prices in 10 cities fell 2.7% year-over-year, the largest decline since September 1991. Meanwhile prices in 20 cities dropped a record 2.1% year-over-year. The 20 city index is more comprehensive, but its history only goes back to 2001.

Price appreciation has slowed for 17 consecutive months.

From Reuters:

US April existing home prices fell-S&P/Case Shiller

Prices of existing U.S. single-family homes dropped in April, extending a string of negative annual returns that started in January, according to the Standard & Poor’s/Case Shiller national home price index released on Tuesday.

“A review of the decline in home price returns on a regional level shows no region is immune to the weakening price returns,” Robert J. Shiller, chief economist at MacroMarkets LLC, said in the S&P release.

The composite month-over-month index of 20 metropolitan areas fell 0.2 percent to 200.45 in April from March, bringing the measure down 2.1 percent from April 2006.

S&P said its composite month-over-month index of 10 metropolitan areas declined 0.3 percent in April to 218.93, for a 2.7 percent year-over-year drop. This index has not fallen as much since late 1991, S&P said in a release.

From Bloomberg:

S&P/Case-Shiller Home Prices Fell 2.1% in April, Index Shows

Home values in 20 U.S. metropolitan areas fell the most in at least six years, weakened by a record supply of properties for sale.

Home values declined 2.1 percent in April from the same month a year earlier, according to a report today by S&P/Case- Shiller. It was the fourth straight drop in the group’s index, which started in 2001.

The housing market continues to restrain the economy even as other areas, such as business spending and manufacturing, accelerate. Elevated inventories of unsold homes, reduced demand and stricter loan requirements will probably keep prices low the rest of this year, economists said.

“No region is immune to the weakening price returns,” said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University in New Haven, Connecticut, said in a statement.

Home prices fell 0.2 percent in April from a month earlier, following a 0.3 percent drop in March, according to the index. The figures aren’t adjusted for seasonal effects, so economists prefer to focus on year-over-year changes.

From Standard and Poor’s:

Hodgepodge of Declining Growth Returns in Home Prices According to the S&P/Case-Shiller® Home Price Indices (PDF)

Data through April 2007 released today by Standard & Poor’s for its S&P/Case-Shiller® Home Price Indices, the leading measure of U.S. home prices, shows the annual growth rate in prices of existing single family homes across the United States declined again, the 17th consecutive slowdown since December 2005.

Posted in Economics, National Real Estate | Comments Off on S&P/Case-Shiller: April Home Prices Fall 2.1%

Jersey struggles to keep up

Posted on June 26, 2007 by grim

From the AP:

Poll says NJ cost of living rising beyond incomes

Most New Jersey families struggle to keep up with the state’s rising cost of living, according to a poll released today.

The Monmouth University/New Jersey Monthly Poll, found many of the state’s households require more than one income to keep afloat and fewer than half saved enough money to cover their expenses in an emergency.

Sixty percent said their family’s income is falling behind the cost of living, with only 30 percent saying they’re able to keep pace and just 6 percent reporting incomes increasing faster than the cost of living.

Poll officials noted how a national poll conducted by the Pew Research Center last fall found 40 percent of Americans felt they were falling behind, with 44 percent keeping pace and 12 percent getting ahead.

“The rising cost of living in New Jersey is a major problem for families at every income level,” said Patrick Murray, the Monmouth University Polling Institute director. “In fact, the large number of upper income families in the Garden State who feel they can’t make ends meet is something you just don’t see in the country as a whole.”

The poll found 72 percent of New Jersey households earning below $50,000 a year and 64 percent of those earning between $50,000 and $100,000 said their incomes cannot keep pace with the cost of living. So did 44 percent of those earning more than $100,000.

Most households earning more than $100,000 require a second income to reach that level, the survey found.

Overall, 46 percent of New Jersey households have two or more incomes, including 29 percent of those earning below $50,000 a year, 48 percent of those earning $50,000 to $100,000 and 72 percent of those earning more than $100,000.

Asked why they have more than one earner, two-thirds said they need money to meet monthly living expenses, a tally far surpassing other needs, such as putting money into savings, paying for education, paying for child care or obtaining health care coverage.

Only 11 percent said the extra income or job is to pay for luxuries and 8 percent reported career interest as the driving force behind having two income earners in their household.

Only 43 percent of New Jerseyans report that they have saved enough money to pay their household expenses for six months in case they lost their job. This finding is the same whether a household has multiple income earners or not.

The telephone poll was conducted by the Monmouth University Polling Institute with 804 New Jersey adults April 12 to 16. It has a sampling error margin of plus or minus 3.5 percentage points.

Posted in Economics | 10 Comments

May Existing Home Sales

Posted on June 25, 2007 by grim

From the AP:

Home Sales Hit Slowest Pace in 4 Years

Reflecting further housing troubles, sales of existing homes fell in May to the lowest level in four years while the median home price dropped for a record 10th consecutive month.

The National Association of Realtors reported Monday that sales of existing single-family homes and condominiums dropped by 0.3 percent to 5.99 million units in May, the slowest sales pace since June of 2003.

The median price of a home sold last month dropped to $223,700, down 2.1 percent from a year ago. It marked the 10th straight price decline compared with a year ago, the longest stretch of weakness on record.
…
In a troubling sign for the future, the inventory of unsold homes rose by 5 percent to 4.43 million units in May, a level that would take 8.9 months to clear out at the May sales pace. That is the highest inventory level since the last deep slump in housing in 1992.

From MarketWatch:

Existing-home inventories rise to 15-year high

The inventory of previously owned homes for sale in May rose to the highest level in relation to sales in 15 years, a real estate trade group said Monday. Sales of existing homes fell 0.3% in May to a seasonally adjusted annual rate of 5.99 million from 6.01 million in April, the National Association of Realtors reported. Sales were stronger than the 5.90 million pace expected by economists surveyed by MarketWatch. nventories of homes on the market rose by 5% to a record 4.43 million, representing an 8.9-month supply at the May sales pace. That’s the biggest overhang of inventory since June 1992, at the tail end of the last housing bust. The median price of a home sold in May was $223,700, down 2.1% compared with May 2006.

From Bloomberg:

U.S. Existing Home Sales Fell 0.3% in May to 5.99 Mln Rate

Sales of previously owned homes in the U.S. fell in May to the lowest in almost four years, reinforcing concerns about a protracted housing slump.

Purchases last month declined 0.3 percent to an annual rate of 5.99 million, the lowest since June 2003, from a revised 6.01 million in April, the National Association of Realtors said today in Washington. The supply of unsold homes jumped to the highest in almost 15 years.

Weakening demand for existing homes, along with a decline in construction starts on new homes reported last week, make the housing market the biggest threat to economic growth, economists said. An increase in mortgage rates this month will further discourage buyers, leaving a glut of properties on the market.

“I don’t think we’ve seen the bottom yet for existing home sales,” Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. “Mortgage rates jumped and are heading higher. Lending standards have tightened not only for the subprime borrowers but also a little bit overall.”

Resales were forecast to fall 0.3 percent to a 5.97 million annual rate from a previously reported 5.99 million in April according to the median forecast of 61 economists in a Bloomberg News survey. Estimates ranged from 5.75 million to 6.15 million.

Existing home sales averaged 6.51 million last year, lower than the 7.07 million average for 2005. Sales last month were down 10.3 percent compared with a year earlier.
…
The supply of homes for sale increased 5 percent to 4.43 million. At the current sales pace, that represented 8.9 months’ worth, the highest since June 1992 and up from 8.4 months’ worth at the end of the prior month.

The median price of an existing home fell 2.1 percent last month from a year ago to $223,700, the 10th consecutive month of year-over-year declines, the Realtors group said.

Resales of single-family homes fell 0.8 percent to an annual rate of 5.2 million. Sales of condos and co-ops rose 2.6 percent to a 790,000 rate.

Purchases fell 3.4 percent in the South and 0.8 percent in the West. They rose 5.8 percent in the Northeast and 0.7 percent in the Midwest.

(This post will be updated as information becomes available)

Posted in Housing Bubble, National Real Estate | 190 Comments

Tax Gimmicks

Posted on June 25, 2007 by grim

From NorthJersey.com:

Rebates not a cure for property tax burden

Come Election Day, state lawmakers are counting on you to remember how good it feels to tear open an envelope from the state with a check inside, with your name on it.

Legislators are touting the $2.2 billion property tax rebate this year as a record amount of property tax relief. Last year’s rebate program cost $900 million.

“This is probably in the history of the state the most generous property tax relief program,” said Sen. Paul Sarlo, D-Wood-Ridge. “This is a landmark amount of money being returned to property taxpayers.”

Most homeowners can expect to receive checks this fall for up to 20 percent of the first $10,000 of their property tax bill. In North Jersey, homeowners earning less than $100,000 a year can expect checks averaging $1,080. Those earning up to $250,000 would receive checks for up to 15 percent.

Seniors will receive checks for 20 percent or $1,200, whichever is greater. Renters will also receive higher credits than before.

But New Jersey taxpayers shouldn’t kid themselves. The state will pay for this year’s rebates with last year’s 1-cent sales tax hike, which means taxpayers are essentially getting back money they have already paid the state in sales taxes. To repeat the rebate next year, lawmakers would need to find a new source of funding.

“The property tax relief provided in this budget is a one-shot deal,” said Sen. Diane Allen, R-Burlington. “It cannot be repeated in the following fiscal year without either higher taxes, serious budget cuts, or some scheme like selling the turnpike.”

Sen. Gerald Cardinale, R-Cresskill, sees the rebates as a political gimmick.

“What it does is frankly give the party in control an opportunity to send people a check so that they think they’re getting something… before the election,” Cardinale said.

Posted in New Jersey Real Estate, Property Taxes | 1 Comment

“The crisis will continue to loom large”

Posted on June 25, 2007 by grim

From the Wall Street Journal:

Subprime Crisis Is Likely To Continue Its Sting
By DEBORAH LYNN BLUMBERG and ANUSHA SHRIVASTAVA
June 25, 2007; Page C4

Bond investors will keep one eye on the Federal Reserve and the other on the mortgage market this week, as they wait for the next installment of the drama surrounding two troubled Bear Stearns Cos. hedge funds that bet heavily on the subprime-mortgage market.

Though Bear stepped in to bail out one hedge fund with a loan of as much as $3.2 billion and pledged to reduce leverage in the other, market participants reckon the subprime-mortgage woes will continue to rattle capital markets.

“The crisis will continue to loom large,” said T.J. Marta, fixed-income strategist at RBC Capital Markets in New York. While the situation seems to be under control for now, “that could turn on a dime.”

Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey City, N.J., said the Bear funds were most probably not alone in the bets they made on the subprime-mortgage market. “A lot of people have got that trade on,” he said. “I would be shocked if they were the only one…and the story ends here. It’s not over.”

A catalyst for another round of jitters, which Friday sent Treasury prices higher as investors sought a safe harbor, could be mortgage-loan performance reports due today that investors will parse for signs that the situation among borrowers with shaky credit has worsened.

Late Friday the riskiest, triple-B-minus, tranche of the benchmark derivative index based on subprime mortgages hit a new low of 58 cents on the dollar, according to Alex Pritchartt, a trader at UBS. The index, designed to allow investors to take a broad position on the housing market’s most vulnerable segment, has been closely watched by market participants.

The latest version of the ABX, which is renewed every six months, references loans originated in the second half of 2006, a year noteworthy for its loose lending standards. Mr. Pritchartt said trading volume picked up Friday afternoon as market participants braced for the subprime loan performance reports published today.

Posted in National Real Estate, Risky Lending | 2 Comments

Weekend Open Discussion

Posted on June 23, 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 | 325 Comments

Lowball! May 23 – June 23, 2007

Posted on June 23, 2007 by grim

Welcome to another edition of Lowball!

Lowball! takes a look at home sales from a different perspective. For those new to Lowball!, a lowball offer is when a buyer offers a significantly lower bid than asking in hopes that the seller accepts the offer. We take a list of home sales from the past month and pick out the sales that have the highest percentage difference between original list price and selling price.

The purpose of Lowball! is to show buyers that the market has changed and buyers now have considerably more leverage than sellers. Just a short time ago, Lowball! offers would have been laughed at and discarded, however, not any more. The fact that so many under-asking offers are being accepted is clear proof that the market is changing.

MLS Town OLP LP SP % off OLP $ off OLP
 2363053   East Orange City  $169,900    $67,900    $63,000    62.9%   $106,900  
 2343436   Branchburg Twp.  $25,000    $17,000    $13,500    46.0%   $11,500  
 2335411   White Twp.  $99,900    $69,000    $55,500    44.4%   $44,400  
 2388027   Montague Twp.*  $262,500    $159,900    $159,900    39.1%   $102,600  
 2359771   Phillipsburg Town*  $120,000    $95,000    $75,000    37.5%   $45,000  
 2358403   Elizabeth City*  $419,900    $299,900    $265,000    36.9%   $154,900  
 2323942   City Of Orange Twp.*  $239,900    $158,999    $153,000    36.2%   $86,900  
 2311072   West Milford Twp.  $318,501    $225,000    $210,000    34.1%   $108,501  
 2040082   Montville Twp.  $799,000    $649,000    $537,000    32.8%   $262,000  
 2342858   Jersey City*  $235,500    $177,500    $161,000    31.6%   $74,500  
 2367803   Paterson City*  $362,500    $259,900    $250,000    31.0%   $112,500  
 2278330   Millburn Twp.  $3,195,000    $2,540,000    $2,215,000    30.7%   $980,000  
 2354260   East Orange City  $230,000    $210,000    $160,000    30.4%   $70,000  
 2310008   Newark City  $230,000    $170,000    $160,000    30.4%   $70,000  
 2338764   Vernon Twp.  $236,500    $175,000    $165,000    30.2%   $71,500  
 2381569   Summit City  $669,000    $469,000    $469,000    29.9%   $200,000  
 2291434   Lambertville City*  $323,400    $254,000    $230,000    28.9%   $93,400  
 2384074   Bedminster Twp.  $354,900    $254,900    $253,000    28.7%   $101,900  
 2261925   Edison Twp.  $419,900    $319,900    $300,000    28.6%   $119,900  
 2327519   West Milford Twp.*  $424,900    $319,900    $305,000    28.2%   $119,900  
 2333550   Caldwell Boro Twp.  $535,000    $415,900    $385,000    28.0%   $150,000  
 2326900   Springfield Twp.  $485,000    $379,900    $350,000    27.8%   $135,000  
 2381653   Woodbridge Twp.*  $414,000    $314,000    $300,000    27.5%   $114,000  
 2336362   Glen Ridge Boro Twp.  $999,000    $790,000    $727,000    27.2%   $272,000  
 2329811   Roselle Boro*  $409,900    $300,000    $300,000    26.8%   $109,900  
 2303748   Rocky Hill Boro*  $439,900    $339,999    $322,000    26.8%   $117,900  
 2248078   West Orange Twp.  $599,900    $455,900    $440,000    26.7%   $159,900  
 2304099   Morris Twp.  $1,495,000    $1,149,000    $1,100,000    26.4%   $395,000  
 2351070   Lopatcong Twp.  $209,900    $164,900    $154,500    26.4%   $55,400  
 2393638   Roselle Boro  $275,000    $250,000    $202,500    26.4%   $72,500  
 2318656   South Orange Village  $1,351,080    $999,999    $999,999    26.0%   $351,081  
 2353613   Millburn Twp.  $2,695,000    $2,125,000    $2,000,000    25.8%   $695,000  
 2320749   Ogdensburg Boro  $333,000    $259,000    $247,200    25.8%   $85,800  
 2385843   South Bound Brook  $254,900    $254,900    $190,000    25.5%   $64,900  
 2336039   Jefferson Twp.*  $435,000    $425,000    $325,000    25.3%   $110,000  
 2379470   Paterson City*  $179,900    $150,000    $135,000    25.0%   $44,900  
 2387981   Piscataway Twp.*  $472,500    $339,900    $355,000    24.9%   $117,500  
 2287822   Mendham Boro  $585,000    $460,000    $440,000    24.8%   $145,000  
 2270294   Madison Boro*  $525,000    $399,999    $395,000    24.8%   $130,000  
 2288631   Ogdensburg Boro  $339,900    $299,000    $256,500    24.5%   $83,400  
 2388493   Elizabeth City  $204,900    $204,900    $155,000    24.4%   $49,900  
 2353189   Vernon Twp.*  $349,000    $265,000    $265,000    24.1%   $84,000  
 2333985   Old Bridge Twp.  $207,000    $189,000    $157,500    23.9%   $49,500  
 2322258   Pequannock Twp.  $499,000    $439,000    $380,000    23.8%   $119,000  
 2372169   East Orange City  $112,875    $95,545    $86,000    23.8%   $26,875  
 2346078   Franklin Twp.*  $195,999    $179,900    $150,000    23.5%   $45,999  
 2285801   Franklin Lakes Boro  $1,995,000    $1,699,000    $1,530,000    23.3%   $465,000  
 2259194   Millburn Twp.  $1,595,000    $1,349,000    $1,225,000    23.2%   $370,000  
 2326177   Passaic City  $395,000    $335,000    $305,000    22.8%   $90,000  
 2365258   Maplewood Twp.  $549,900    $495,900    $425,000    22.7%   $124,900  
 2284548   Mendham Boro  $565,000    $449,950    $440,000    22.1%   $125,000  
 2347438   Franklin Boro  $79,500    $65,000    $62,000    22.0%   $17,500  
 2314194   Hillsborough Twp.  $525,000    $460,000    $410,000    21.9%   $115,000  
 2298241   East Orange City  $199,900    $150,000    $156,200    21.9%   $43,700  
 2351110   West Milford Twp.  $248,900    $224,900    $195,000    21.7%   $53,900  
 2339321   Clifton City  $389,000    $329,900    $305,000    21.6%   $84,000  
 2289139   Paterson City  $184,900    $149,900    $145,000    21.6%   $39,900  
 2359926   Paterson City  $148,900    $129,000    $117,000    21.4%   $31,900  
 2280286   Hardyston Twp.  $349,900    $279,900    $275,000    21.4%   $74,900  
 2361272   Fairfield Twp.  $449,900    $370,800    $355,000    21.1%   $94,900  
 2280124   Edison Twp.*  $658,000    $529,000    $520,000    21.0%   $138,000  
 2385914   Bridgewater Twp.*  $309,900    $299,900    $245,000    20.9%   $64,900  
 2290258   Newark City*  $360,000    $319,900    $285,000    20.8%   $75,000  
 2380205   Ringwood Boro  $239,900    $239,900    $190,000    20.8%   $49,900  
 2331386   Linden City  $265,000    $210,100    $210,100    20.7%   $54,900  
 2325085   Springfield Twp.*  $614,500    $519,000    $487,500    20.7%   $127,000  
 2405957   Bridgewater Twp.*  $189,000    $189,000    $150,000    20.6%   $39,000  
 2319474   Nutley Twp.*  $849,900    $689,000    $675,000    20.6%   $174,900  
 2370225   Bloomfield Twp.  $339,900    $275,000    $270,000    20.6%   $69,900  
 2283696   Allamuchy Twp.  $439,900    $380,000    $350,000    20.4%   $89,900  
 2267873   Franklin Lakes Boro  $1,200,000    $1,099,000    $957,000    20.3%   $243,000  
 2364336   Pohatcong Twp.  $699,000    $569,000    $558,000    20.2%   $141,000  
 2270570   Mendham Twp.  $749,900    $599,900    $599,900    20.0%   $150,000  
 2390298   Parsippany-Troy Hills  $299,900    $299,900    $240,000    20.0%   $59,900  
Posted in Lowball | 42 Comments

Frequency of large income declines increases

Posted on June 22, 2007 by grim

From the Wall Street Journal:

Incomes Suffer More Volatility
Amid Heightening Risks, Families Find Ways to Cushion Blows
By GREG IP
June 22, 2007; Page A4

Weighing in on an intensifying debate on income insecurity, three economists — including two from the Federal Reserve — have found that American families today are more likely to experience big drops in their income than three decades ago.

Their analysis, however, finds far less volatility in family income than some recent studies.

The authors of the new study, Douglas Elmendorf of the Brookings Institution and senior Fed economists Karen Dynan and Daniel Sichel, caution against interpreting their findings as evidence that families face more risk of hardship than before. They note that financial innovation has given Americans more ways to maintain their spending when their incomes fall.

The study found that the volatility of household income rose 23% between the early 1970s and early 2000s. While small changes in family income are no more frequent, large changes in income — more than 50% — are.

The probability that a family will experience a decline in annual income of 50% or more, compared with their average income in the previous three years, rose to 1.8% in 1995 from 0.6% in 1973. After 1995, the probability dipped, and has risen back to 1.7%.
…
Yet research into the assumption that income volatility has increased has reached differing conclusions. Yale University political scientist and author Jacob Hacker, in a 2006 book titled “The Great Risk Shift,” documents a fivefold increase in household-income volatility between the early 1970s and early 1990s. Mr. Hacker, who described himself as “thunderstruck” by the result, has written widely and testified to Congress on the subject. He couldn’t be reached for comment.
…
It isn’t clear why the new study found a far smaller increase in income volatility than Mr. Hacker’s despite using the same data. It employs a slightly different yardstick for volatility. Mr. Elmendorf and his colleagues believe that changes in the way the PSID collected and tabulated data in the early 1990s resulted in an artificial increase in the number of people reporting a temporary spell of zero earnings; their calculations exclude households whose head reported zero labor income. In his book, Mr. Hacker says he excludes zero earners, as well.

Posted in Economics | 2 Comments

Subprime Horror Stories

Posted on June 22, 2007 by grim

From the Philadelphia Inquirer:

The Subprime Implosion

Horror stories concerning so-called subprime mortgage loans have become common as more and more financially unsophisticated borrowers find themselves unable to pay their house notes.

Adjustable interest rates have risen and balloon payments become due even as housing prices have dropped. So long as housing values were going up, people could pre-empt a balloon payment by refinancing at lower rates. But as the housing market collapsed in many areas, borrowers couldn’t refinance.

Nationally, the proportion of delinquent payments by subprime borrowers with adjustable-rate loans is at its highest in five years, according to a Mortgage Bankers Association survey. Pennsylvania hit a five-year high in delinquencies at the end of 2006, but has seen a dip in the first three months of this year. New Jersey remains close to its five-year high.
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Some of Bair’s proposed national standards are no-brainers:

One requires that loan underwriters assess borrowers’ ability to make monthly payments not on the basis of the low introductory rates but the subsequent higher rate.

Another would require the presumption that a loan is unaffordable if the debt (including taxes and insurance) exceeds 50 percent of the borrower’s income.

A third would require initial teaser interest rates to be advertised only alongside the full adjustable interest rate on that loan and the 30-year fixed rate offered by that lender.

Bair is also trying to get Wall Street firms that deal in mortgage-backed securities to make loan restructurings easier to avoid foreclosures. After all, too many foreclosures hurt investors as well.
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In the meantime, defaults are expected to get worse as subprime loans with teaser rates made in the last two years – a particularly prolific period for them – are “re-set” at higher interest rates. The FDIC, Federal Reserve Board and other federal and state regulators need to act quickly on the new rules and trade practices necessary to forestall a calamity.

Posted in National Real Estate, Risky Lending | 1 Comment

Consumers simply do not understand their own mortgages

Posted on June 22, 2007 by grim

From the Baltimore Sun:

FTC finds many borrowers don’t grasp mortgage terms

With mortgage delinquencies and foreclosures soaring, federal researchers have identified a key contributing factor: Large numbers of consumers simply do not understand their own mortgages – especially subprime loans that come with complex features and costly penalties.

As a result, too many people are ill prepared to handle jolting payment increases and rate reset deadlines.
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In a study involving 819 recent prime and subprime mortgage customers in 12 locations around the country, the Federal Trade Commission found that using current “truth-in-lending” and “good faith estimate” disclosures:
• Nearly nine out of 10 borrowers could not identify the correct amount of up-front charges connected with a loan.
• Four out of five had trouble understanding why the stated interest rate on the loan note was different from the “annual percentage rate” (APR) highlighted in the truth-in-lending disclosure.
• Two-thirds did not spot a potentially dangerous snare lurking in the loan – a substantial penalty if they refinanced within the first two years.
• Nearly a quarter could not correctly identify the total amount of settlement costs.
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Equally troubling, borrowers often said they had no idea of their own loan costs or terms until they went to closing, “and some appeared to learn for the first time during the interview,” according to the FTC researchers.

Some of those borrowers said they had spent considerable time shopping and comparing rates before choosing their mortgage. But they still had problems understanding the disclosures they were provided.
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Bottom line: “Current mortgage disclosures fail to convey key mortgage costs and terms to many consumers, leaving them susceptible” to bad deals, overcharges, loan payments that explode on them, and “deceptive lending practices,” according to the authors.
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In the meantime, take this message to the application desk: Home loans are inherently complicated financial instruments. Demand that the loan officer walk you through every feature. And don’t sign up for a debt obligation tied to your house until you understand all its mechanics, payment scenarios, downside risks and costs.

Posted in National Real Estate, Risky Lending | 1 Comment

Wave of foreclosures hits LI

Posted on June 22, 2007 by grim

From Newsday:

Forestall foreclosure

A wave of mortgage defaults and foreclosures has arrived on Long Island in the wake of the collapse of the subprime mortgage market. Hit by ballooning mortgage payments, many Long Islanders – especially first-time homeowners and minority borrowers – find themselves unable to make their monthly mortgage payments and risk losing their homes.

It’s become a crisis in Nassau and Suffolk, where 12.2 percent of subprime borrowers were at least 60 days late with their mortgage payments in February, compared with 6.9 percent a year earlier. Last year, 14,284 homes were foreclosed in the two counties, ranking the region 37th among more than 200 metropolitan areas.

Posted in National Real Estate, Risky Lending | 1 Comment

No skin in the game? Nothing to lose.

Posted on June 21, 2007 by grim

From BusinessWeek:

Time to Give Up the House?

For generations, homebuyers have had one simple rule drilled into their heads: Whatever happens, keep paying the mortgage. If you don’t, you risk losing your house and all the equity you’ve built up in it.

But for many subprime borrowers, that doesn’t seem to be the rule of thumb anymore. They are now more likely to be late on their mortgage than on their credit card, according to a new study from Experian Group, the Ireland-based company that maintains a huge database of consumer credit histories.
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The significance? One explanation could be that many recent subprime homebuyers simply aren’t that worried about losing their homes because they don’t have much to lose. Most put down small or zero down payments. If prices have fallen since they bought, they may actually owe more than the house is worth, making it an easy choice to walk away.

At the same time, keeping access to their credit cards has become more important than ever, says Stan Oliai, vice-president of decision sciences for Experian Decision Analytics. “People are using credit cards for everyday items like gasoline and groceries, and to tide themselves over from paycheck to paycheck,” says Oliai.

Experian’s study, released June 20, says that the share of subprime borrowers who were 30 days or more late on their mortgages went up from about 32% at the beginning of 2003 to around 36% at the end of 2006—a sign of increasing financial distress.
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Many subprime mortgage borrowers “don’t have much skin in the game,” says Douglas Duncan, chief economist of the Mortgage Bankers Assn. Subprime loans that originated in 2004 and 2005—which account for a big share of those now entering delinquency—involved extremely small down payments, Duncan says. “Some people said, ‘Let’s roll the dice and see if we can get a house. And if it doesn’t stick, we’ve still got to have the credit card to keep going and we’ve got to have the car to get to work.'”

Posted in Housing Bubble, Risky Lending | 220 Comments

Home [sellers] are still in for a tough year

Posted on June 21, 2007 by grim

From CNN/Money:

When bad loans get worse

More than $1 trillion worth of adjustable rate mortgages (ARMs) will be hit with higher reset rates this year, and that could add up to big trouble for many homeowners.

Already, the rate of serious delinquencies among subprime hybrid ARM borrowers was up to 15.75 percent during the first quarter, from 14.44 percent in the fourth quarter of 2006, according to the Mortgage Bankers Association (MBA).

The end of the housing boom changed the math when it comes to ARMs. Not only are mortgage rates higher, but lower home prices in many markets means borrowers have fewer options than they had before home prices dropped.
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According to Peter Schiff, founder of Euro Pacific Capital (and a market “bear” of such notoriety, he’s been dubbed “Doctor Doom,”) many of those home buyers based their decisions solely on the affordability of teaser rates – and some even bought knowing they couldn’t afford the teasers.

They figured, “All [home prices] had to do was go up 20 percent a year, and I’ll be all right,” Schiff said. If, six months into the loan, they found themselves strapped for cash, they could do a cash-out refinance to make their mortgage payments.

But before these borrowers reach their ARM reset points this year, a whole lot of things have gone wrong.

With the decline in home values over the past year and a half, many borrowers with resetting ARMs will have little or no equity in their homes.
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The result: increased foreclosures and forced sales, flooding the market with homes and depressing prices even more.

“There will be a huge glut of houses that will be coming on to the market,” said Schiff.
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Schiff, though, takes a characteristically apocalyptic stance on the future. Without the safety valve of home equity to tap, he says, an economy addicted to consumer spending will tank far more severely than anyone else expects. Home prices, he said, will plummet by half or more in some markets.

But even if much milder declines occur, some home owners are still in for a tough year.

Posted in Housing Bubble, Risky Lending | 14 Comments

“What would collapse of hedge funds mean?”

Posted on June 21, 2007 by grim

From the NY Post:

BEAR MART SALE

Merrill Lynch yesterday followed through with its plan to auction off assets belonging to a collapsing Bear Stearns hedge fund, providing more drama to a bond market that’s already licking its wounds from a fresh batch of subprime woes.

The move came after Merrill, which appears to have lent about $80 million to Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund, shocked Wall Street late Tuesday by bailing out of discussions to rescue the fund, refusing to participate in a highly conditional plan crafted by Bear Stearns and Blackstone Group to pump $2 billion into the fund.

The initial reports on Merrill’s $857 million auction were mixed.

One partner at a $4 billion mortgage hedge fund said, “We bid [but] the question is on what,” referring to the dubious value of the super-complex, subprime bond laden securities called collateralized debt obligations.

But late afternoon reports from Wall Street’s mortgage bond-trading desks cast doubt on whether Merrill was able to get bids that met its so-called reserve levels.

Deutsche Bank also conducted a $300 million auction of the Bear fund’s assets, but pulled it slightly before the appointed 1 p.m. close. Sources familiar with Deutsche said the firm is trying to broker a series of private trades to unload the CDOs.

J.P. Morgan’s $400 million auction was pulled near its 2 p.m. close. A J.P. Morgan executive told The Post that the firm is “trying to negotiate directly with [Bear Stearns]” to get its capital back.

Q&A from the AP:

What would collapse of hedge funds mean?

Q: So do the funds own individual mortgages? Could it own my mortgage?

A: No. The fund invests in things like bonds that are backed by individual mortgages. Banks and other mortgage originators make the loans to consumers, package groups of similar mortgages together, and sell them to investors in a process called securitization.

Q: What went wrong with the Enhanced Leverage fund?

: The fund reportedly lost 23 percent of its value in the first four months of the year. The reasons are not clear, but starting earlier this year, there was a sharp increase in the number of delinquencies and defaults on loans made to borrowers with spotty credit histories. Bonds backed by these subprime mortgages lost much of their value, before stabilizing somewhat in April and May.

The decline led one big investor, Wall Street bank Merrill Lynch, to ask for its money back. When Bear Stearns balked, Merrill Lynch requested its collateral for the loan — in this case at least $800 million in bonds backed by subprime loans.

Q: What would the fund’s collapse mean for the broader market?

A: It could a shift in how the market values risk.

During the recent bull run, lenders have charged a historically low premium to borrow money to make risky investments. As more of these securities falter, lenders will start asking for more in return.

That would lead to higher volatility, or more ups and downs in the prices of securities. As securities get more volatile, investors typically reduce their exposure to risk.

Q: What does all this mean to potential homebuyers?

A: The bottom line is that big losses in subprime investments are likely to make investors more reluctant to risk their money on these instruments in the future.

That will make it harder for mortgage originators like banks to sell these types of loans in bundles to the bond markets, which will, in turn, reduce the availability of funds for subprime loans and make it much harder for subprime borrowers to obtain financing.

Posted in Risky Lending | 1 Comment

What the heck is the ABX?

Posted on June 21, 2007 by grim

From the Wall Street Journal:

Index With Odd Name Has Wall Street Glued;
Morning ABX.HE Dose
By CARRICK MOLLENKAMP
June 21, 2007; Page C1

When an upstart company called Markit Group Ltd. started indexes of the subprime-mortgage market last year, there was no fanfare.

They were called the ABX.HE indexes, and for many months, most investors had no idea of the market measures with the wonky name.

Now, the indexes are some of the most closely watched barometers on Wall Street. They are a focal point for trading in the U.S. subprime-debt markets — which lately have come to dominate attention on Wall Street because of problems at two big Bear Stearns Cos. hedge funds.

Founded and run by a former bank credit-trading executive, 45-year-old Lance Uggla, the Markit firm — with the backing of 13 of the world’s biggest banks — is helping turn the opaque world of credit trading into a high-volume and more transparent business. The ABX.HE indexes that it runs are acting as a barometer of the subprime market and also allow investors to trade credit protection against that market.
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The ABX.HE name is derived from asset-backed index and home equity. The indexes track credit-default swaps — essentially insurance policies against default — tied to mortgage loans granted to Americans with poor credit histories.
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An unexpected increase in ABX prices this spring, after a plunge tied to increasing loan delinquencies by subprime borrowers, helped contribute to losses at the two hedge funds managed by Bear Stearns, which led the firm to scramble for a rescue plan in recent days. Because of the Bear situation and subprime-market concerns, the riskiest portion of the ABX index hit record-low territory this week.

Lehman Brothers Holdings Inc. used the index to help hedge against losses. And Deutsche Bank AG told investors last month that it benefited from using the index in the first quarter.

The bank bet on a decline in the subprime market and sold short “the ABX index because our traders felt that the U.S. mortgage market was probably overheating and was potentially going to soften,” Chief Financial Officer Anthony Di lorio told investors on a conference call. He declined to specify how much the bank made on the trade.

Posted in Risky Lending | Comments Off on What the heck is the ABX?