From the AP:
Spring looks bleak for housing
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 homebuilders 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 latest flare came last week as Lennar Corp., one of the nation’s largest homebuilders, reported a 73 percent drop in its first-quarter profit and warned that its results for the remainder of the year won’t live up to previous expectations.
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 to the overall economy, economist Steven Cochrane says the risk of 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 very quickly,” said Cochrane, a senior economist with Moody’s Economy.com. “It’s going to be a weak spring.”
Investors on the Chicago Mercantile Exchange are turning more pessimistic, too. A housing futures index tracking 10 major U.S. cities now is projecting January 2008 prices in those markets will be down 5.1 percent from early 2007. At the end of February, the same futures index put together by Tradition Financial Services had forecast a 3.7 percent drop.
“This isn’t going to be over in a year,” predicted Yale University economics professor Robert Shiller, who helped create the housing index. “Housing prices could be declining for years and years.”
Bank hit by mortgage defaults
OceanFirst subsidiary made subprime loans
Posted by the Asbury Park Press on 03/27/07
BY MICHAEL L. DIAMOND
BUSINESS WRITER
OceanFirst Financial Corp. said Monday it could be forced to buy back as much as $47 million in delinquent subprime real estate loans made last year by a mortgage subsidiary.
Problems at the subsidiary, Columbia Home Loans LLC of Valhalla, N.Y., have already caused OceanFirst, which operates the largest bank based in Ocean County, to restate its fourth-quarter earnings. Instead of a $4.6 million profit, the bank said late Friday it lost $1.6 million.
The problems at Columbia will cause the bank to report lower earnings through the second quarter of this year and force executives to consider closing the mortgage company, analysts said.
OceanFirst’s stock closed Monday at $19.07, down 86 cents, or 4.3 percent. Since the beginning of the year, the stock has fallen 16.8 percent.
Toms River-based OceanFirst, which operates 20 branches in Ocean, Monmouth and Middlesex counties, is one of a number of banks nationwide to run into trouble by making so-called subprime loans. Those loans are made to consumers with spotty credit histories and carry above-average interest rates.
When home values are soaring, lenders face little risk. But when the real estate market slumps, lenders face a different scenario: Home values stop appreciating, mortgage rates rise, and consumers’ income may not be enough to cover their monthly payments.
OceanFirst and Columbia “got burned on the real estate shift; values went south on them,” said Drew Anlas, sales manager of Select Mortgage Corp. in Brick and a 24-year veteran in the industry. “If (homeowners) get even a little bit behind, where is the incentive to make payments?”
Executives said Columbia, which OceanFirst bought in 2000, originated $728 million in loans last year, about 40 percent of them in the subprime market.
At issue is a subprime loan product launched by Columbia in April 2006 that offered 100 percent financing to help consumers with credit problems buy homes. Those loans were sold to investors with the caveat that Columbia would buy them back if the homeowners defaulted on the first payment following the sale of the loan.
Bank CEO’s explanation
In an interview with the Asbury Park Press, John R. Garbarino, OceanFirst’s chairman, president and chief executive officer, said the defaults came in faster than expected, but OceanFirst executives didn’t learn about the looming problem until late February. Had they known sooner, they would have discontinued those loans, he said.
Garbarino said the company investigated what went wrong and found no evidence of fraud. But he said the underwriters didn’t tell their managers as soon as they learned the loans were in default.
Garbarino said some of those underwriters were fired and others were placed on administrative leave.
“The problem wasn’t in making the loan,” Garbarino said. “No one ever consciously makes a bad loan. But when repurchase requests were being made, that wasn’t passed along to proper levels of management. It was withheld, and that’s where there was issue in terms of controls.”
OceanFirst set aside $9.6 million to cover the bad loans, but the financial hit to OceanFirst is likely to linger. As of March 21, the company had repurchased 37 loans worth $11.2 million, and company executives told investors that figure could grow to as much as $47 million for loans made in 2006.
Once the bank repurchases the mortgages, it has several options to recoup its money. It can work with homeowners to help them catch up with their payments, or it can foreclose on the homes and sell them.
Analysts’ viewpoints
Still, Albert Savastano, an analyst with Janney Montgomery Scott, said he expects OceanFirst will need to set aside another $1.8 million in the first quarter to cover more defaults. He lowered his rating on the company’s stock to “neutral” from “buy.”
Another analyst, Matthew Kelley of Sterne, Agee & Leach in New York, said OceanFirst should be able to weather the storm.
“It is a concern from the standpoint of how quickly things went sour,” Kelley said. “But relative to the overall size of the holding company ($2.1 billion in assets) this situation is manageable.”
Analysts said OceanFirst executives will need to decide whether to keep Columbia operating. In the wake of the defaults, Columbia has stopped making subprime loans, and analysts said the mortgage company always has been more expensive to operate than the community bank. Kelley said he thought OceanFirst should simply close it.
“It will be difficult in the short run for Columbia to be profitable,” said Frank Schiraldi, an analyst with Sandler O’Neill & Partners in New York.
Garbarino said the bank will consider its options in deciding Columbia’s future.