In the midst of “the greatest real estate slump in history”?

Posted on July 23, 2007 by grim

From Inman News:

The housing market: How bad will it get?

Speculation, rampant building, risky loans, overborrowing and escalating prices propelled the housing market to an unprecedented peak — and are now counted among its greatest failings.

The “soft landing” that so many analysts and economists had predicted has given way to a record number of foreclosures, an implosion in the subprime lending market, an oversupply of housing, and home-price declines in many market areas. The dreamy days of the housing boom have received a cold slap of reality.

Real estate markets are historically cyclical — that’s nothing new. But in this case, the nation is in the midst of a downturn following a long-lasting and massive real estate run-up, and it remains to be seen whether this period will become known as one of the greatest real estate slumps in history.

How bad will the real estate market get before it gets better? Many experts have said they don’t expect a quick return from these doldrums, and this outlook could turn dire if the overall U.S. economy hits a snag. While there is not a nationwide epidemic of job loss, there are worries about rising inflation and energy prices, and declining consumer spending.

David Shulman, of the Anderson Forecast at the University of California, Los Angeles, said in his latest report that he expects a 10 percent peak-to-trough home-price decline that could extend into 2009, with the swell of foreclosures growing “well into 2008.” His forecast report bears a one-word title: “Turbulence.”

Real estate industry consultant John Burns said during a housing conference in May that the buyer’s market will continue for at least two more years, and “we’re heading into a year with more price declines,” with builders dropping prices by about 20 percent in some markets.

The National Association of Home Builders expects a 21 percent drop in total housing starts and an 18 percent drop in new-home sales this year compared to last year, and the National Association of Realtors expects a 4.6 percent drop in existing-home sales, a 1.3 percent drop in median existing-home prices and a 2.3 percent drop in new-home prices this year compared to 2006.
…
The sensational rise of the housing boom may be a key factor in its demise.

“This was sort of a market-fed downturn,” said Jay Q. Butler, director of Realty Studies at Arizona State University’s Morrison School of Management and Agribusiness. The rapid upswing in home sales and pricing was not sustainable, he said.

“A lot of the system was being stretched, both legally and illegally to some degree, with the idea that this was going to continue. So people got in over their heads. It really sort of turned in on itself. You usually find a (real estate) downturn associated with a downturn in the economy — we really haven’t seen the downturn in the economy.”

Likewise, the latest annual housing market report by Harvard University’s Joint Center for Housing Studies stated that the housing downturn “has been driven largely by the market’s own excesses,” including an oversupply of new homes that was artificially inflated by activity among investors and speculators.

Some familiarities exist now from past cycles, Butler said. For example, in a real estate boom there are always people who overextend themselves financially to purchase homes during a real estate boom, perhaps thinking that they will be able to sell the home for a profit based on the appreciation trends.

“I don’t think we really ever learn. The lenders and real estate agents and everybody else is more than willing to help people achieve this goal (of home ownership) because they make a commission for you to achieve this goal,” Butler said.
…
The lesson to be learned from this market cycle is that there was “way too much flexibility” in the loan products offered to consumers, which ultimately led some consumers to buy homes that they couldn’t afford, Jacobson said. “Sometimes that’s not the right house … they may not like what they hear but that’s the right answer.”
…
He said he would support a giant banner with a statement to consumers: “Stop going out and shopping like it’s a bottle of catsup.” He added, “There are a lot of people who are encouraging people not to do the right thing. During those boom years there were a lot of people getting into programs that were risky for them as well as the lender (and) were putting people really on the margin,” he said.

Posted in Housing Bubble, National Real Estate | 294 Comments

Lenders of last resort

Posted on July 23, 2007 by grim

From the Wall Street Journal:

States Aim to Stem Tide
Of Home Foreclosures
With Funds for Refinancing
By THADDEUS HERRICK
July 23, 2007; Page A2

Hoping to slow the quickening pace of home foreclosures, about a half-dozen states are setting up funds to help homeowners with high-risk subprime mortgages refinance to more-affordable loans.

The states — which include Maryland, Massachusetts, New Jersey, New York, Ohio and Pennsylvania — are expected to invest a total of more than $500 million in the effort. That isn’t much, given the size of the problem, but state officials hope it will be enough to keep some vulnerable low- and moderate-income neighborhoods from sliding into decline.

Some of the programs will be similar to existing government-lending programs, in which the state extends mortgages to homeowners and then sells those home loans, in some cases to companies such as government-sponsored mortgage-finance giants Fannie Mae and Freddie Mac. The state then recycles the proceeds from the sales to make additional loans.
…
More than one million American homes are expected to enter foreclosure this year; the total represents about 2.3% of the nation’s 44 million home loans, according to Freddie Mac, which bases its estimate on data provided by Mortgage Bankers Association, a Washington-based trade group. Freddie Mac says about 60% of those homes carry subprime mortgages. Subprime mortgages are home loans made to borrowers with shaky credit records.

The projected foreclosure rate — higher than during the oil bust of 1987 but not as high as in the 2002 recession — poses a significant threat to the housing sector, and possibly to the nation’s economy if it spurs consumers to maintain a tight grip on their wallets. “Falling home prices hurt consumer spending,” says Patrick Newport, an economist at consulting firm Global Insight.
…
For example, a borrower who took out a $300,000 ARM at 7.32% in mid-2005 would have had an initial monthly payment of $2,060.79. A typical adjustment would have pushed that payment to $2,692.63 this year, says Keith Gumbinger, vice president of HSH Associates, a New Jersey publisher of mortgage-rate data. Unable to cover the higher payments, a number of homeowners have fallen behind.

The trend can put neighborhoods at risk. Houses left vacant as the result of foreclosures tend to push property values down and cause neighbors that can afford to do so to sell out and move away, creating a snowball effect.
…
“No one is saying this will solve the problem,” says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University. “But it could make a difference.”

Posted in National Real Estate, Risky Lending | 2 Comments

“When you sell on your own, you need to be as creative as possible”

Posted on July 23, 2007 by grim

From the NY Daily News:

Advertising a house special

In a city obsessed with real estate, wearing your floor plan on your chest is a sure attention-grabber.

So Linda Longo dons a sandwich board and parades around Park Slope most recent Sundays.

The Brooklynite is trying to sell her co-op in nearby Prospect Heights – without hiring a broker.

“We want to save the money,” she said.

Hence the sandwich board, which features color photos of her place and a map, in addition to the floor plan.

In pedestrian-friendly Park Slope, couples smile when they see her coming. Tots lean out of strollers to watch her walk by. Cranky old ladies demand, “What’s that?”

“It is quite odd,” acknowledged Longo, a 43-year-old who grew up in Milwaukee and works for the U.S. Environmental Protection Agency in Manhattan.
…
The back of the sandwich board promotes the time and place of the open house, which will continue most Sunday afternoons at 225 Park Place, Apartment 1-D, until their place is sold. Inch-high black letters on orange paper note the $745,000 asking price for the 1,200 square-foot, two-bedroom apartment, as well as its $682 monthly maintenance.

Linda started the sandwich board ad campaign late last month. Her mom came up with the idea during a visit.

Longo had been putting open house ads on lamposts on Park Slope streets, but when she’d return at day’s end to take them down, many were already gone.

If she wore a giant ad on a sandwich board, nobody could throw it away. And if people were interested, she could hand them flyers.

“When you sell on your own, you need to be as creative as possible,” she explained to a couple waiting outside her building. They were the first of nine couples who came to the open house on a recent Sunday.

Posted in National Real Estate | Comments Off on “When you sell on your own, you need to be as creative as possible”

NJ thrifts suffer as housing turns soft

Posted on July 23, 2007 by grim

From the Record:

Mortgage woes hurt thrifts

Northern New Jersey thrifts, which rode the home-buying and refinancing booms to record profits in the early 2000s, are now proving the adage that what goes up comes down.

Shares in Hudson City Bancorp Inc., which increased as much as eightfold from their initial price from 1999 to the end of 2004, have slipped 17 percent this year at the largest New Jersey-based thrift. The stock hit a 52-week-low of $11.58 on Friday as demand for loans has fallen and high short-term interest rates have translated to high deposit costs and slim profit margins.

Shares in other local thrifts, including Provident Financial Services Inc., Kearny Financial Corp., Clifton Savings Bancorp Inc. and Oritani Financial Corp., have all seen double-digit declines this year.

“The weakness in the thrift sector is driven by the slowdown in the mortgage market,” said Collyn Gilbert, an analyst at Stifel Nicolaus & Co.’s Florham Park office on Friday.

The mortgage market is expected to continue to be weak at least through the rest of this year.

“It’s tough,” she said. “Some [thrifts] are hunkering down and reining in growth, but there are not a lot of levers they can push.”

Thrifts traditionally rely more on residential mortgage lending than commercial banks, so their financial performance tends to suffer more when the housing market turns soft.

The SNL Thrift Index, which includes 167 thrifts around the country, was down 12 percent for the year as of Friday. The KBW Bank Index, comprised of large commercial banks, has fallen 5 percent in 2007.
…
Among the few bright spots for thrifts is that the interest-rate environment has begun to improve and they’re feeling less competition from the finance companies caught up in the sub-prime mortgage shakeout, said Gerard Cassidy, analyst at RBC Capital Markets in Portland, Maine.

“There is a bunch of capacity coming out of the business,” he said

Posted in New Jersey Real Estate, Risky Lending | Comments Off on NJ thrifts suffer as housing turns soft

Weekend Open Discussion

Posted on July 22, 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 | 468 Comments

Risky loans fall out of favor

Posted on July 22, 2007 by grim

From the Record:

Refinancing replaces ARM loans

Faced with rising monthly payments, many homeowners who took out adjustable-rate mortgages a couple of years ago now want to refinance into fixed-rate loans.

“People are moving toward safe and secure fixed-rate mortgages,” said Susan M. Wachter, a real estate professor at the Wharton School of Business at the University of Pennsylvania. “There’s an increasing recognition out there of the potential for mortgage payment shocks with adjustable-rate mortgages.”

But some who want to refinance now may find that tighter lending standards, combined with flat or lower house values, have closed off that option.

A buyer who took out a no-down-payment loan, for example, may not have any equity because house values have flattened or even declined in the last couple of years. And lenders are no longer making loans where the homeowner has no skin in the game.

“A lot of those products have gone away,” said Robert Wilderotter of the Real Estate Mortgage Network in River Edge.

He predicted that some of these homeowners — in a house they can’t afford, with no way to get a cheaper mortgage or sell their house at a profit — will end up in foreclosure.

Many recent homeowners bought their houses using mortgages that kept payments artificially low in the first three to five years. The loans had adjustable interest rates or allowed homeowners to start with “interest-only” payments. And with some “option” loans, homeowners could even pay less than the full monthly interest, adding that amount to the loan balance.

But you’ve got to pay sometime, and for lots of people, “sometime” is approaching fast.

“Borrowers have a new understanding of some of the pitfalls of these exotic instruments,” Wachter said.
…
Alex Grinewicz, chief lending officer for Columbia Bank in Fair Lawn, expects the refinance rush to pick up even more next year. “That’s when a lot of adjustables are coming due,” he said.

He said homeowners should consider refinancing now because interest rates are still at relatively low rates, and banks are aggressively courting business.

But lenders are undeniably more conservative than they were a few years ago. The mortgage industry has tightened loose lending standards, under pressure from regulators. They’re also reacting to the fact that many subprime borrowers are having trouble making their monthly payments.

Some who were subprime borrowers a few years ago may be able to move into the regular mortgage market, if they have improved their credit scores in the meantime, said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains company that tracks the market. Those borrowers can now refinance to a loan with an interest rate below 7 percent, he said.

But others will not be so lucky. And it’s not as if they can solve their problems by simply selling. The housing market has softened, and sellers who bought in the last couple of years may get less than they paid. Buyers are hanging back, hoping to get a better deal if house prices fall further, said Alex Giassa, a mortgage consultant with First Interstate Financial in Paramus.

“The buyers are very tentative,” Giassa said.

Homeowners in such a bind are advised to call their lenders as soon as they realize they’re going to have problems paying. They may be able to work out payment plans that give them a break.

“You don’t want to wait till you haven’t made payments for several months,” Gumbinger said. “That makes it that much more adversarial.”

Posted in New Jersey Real Estate, Risky Lending | 5 Comments

South Jersey housing slump continues

Posted on July 21, 2007 by grim

From the AP via ABC:

Phila. area home sales fall, housing remains in slump

A report from a real estate brokerage says home sales in the Philadelphia area fell by nine-point-five percent in the first half of the year.

The southern New Jersey suburbs showed the biggest decline, down 13 percent. Northern Delaware is down 11-point-seven percent.

Southeastern Pennsylvania fell by seven-point-five percent. That’s according to all multiple listing service data of existing single-family homes and condominiums compiled by Prudential Fox and Roach in Devon.

Homes in the region also stayed on the market an average of 66 days. That’s up from 52 during the same period last year.

Posted in Housing Bubble, New Jersey Real Estate | Comments Off on South Jersey housing slump continues

Too little too late?

Posted on July 20, 2007 by grim

From the Herald News:

N.J. may home in on broker rules

A consortium of 26 states took steps earlier this week to protect future homeowners from getting saddled with the risky mortgages that have left thousands of New Jersey residents on the brink of losing their properties.

But some housing experts say the guidelines provide too little, too late. That, and New Jersey wasn’t among the states who initially signed on.
…
State banking authorities say it’s just a matter of time before New Jersey signs on. Regardless, housing advocates argue that no single set of recommendations can erase the damage done by loose lending standards to homeowners, pension holders and the economy.

On Tuesday, a group of banking regulators agreed to extend new guidelines for federal mortgage brokers to ones charted on the state level — where many experts say the riskiest loans come from.

The guidelines would require brokers ensure that borrowers can afford a loan at its maximum monthly rate, not just an artificially low “teaser” amount. Brokers would also face new restrictions in issuing loans without income verification, which became a commonly abused practice in recent years.

“Hopefully, this will get more of the unscrupulous players out of the industry,” said John Allison, a member of the Conference of State Bank Supervisors from Mississippi.

Unscrupulous brokers have already done extensive damage. On Wednesday, Federal Reserve Board Chairman Ben Bernanke devoted half of his assessment of the American economy to the negative impact of the mortgage and housing markets.
…
Homeowners struggling to hang on are in the eye of the storm. New Jersey ranked ninth in the nation for the number of loans in jeopardy of default in May, according to Bargain Network, a company that tracks the industry. In the past three months, more than 12,000 loans went into default in New Jersey, a 25 percent increase from the beginning of this year.

Not all loan defaults turn into foreclosures. But those have been on the rise as well.

In Passaic County, foreclosures are projected to rise by 22 percent this year, an analysis of county Sheriff’s Department statistics shows.

Tighter standards for who can receive a loan would have prevented much of the hardship, according to Melissa Totaro, a West Orange lawyer who previously worked for the Passaic County Legal Aid Society.

“It’s just a matter of common sense,” Totaro said. “Any guidelines are better than just trusting the market.”

Last year, risky loans like these constituted 20 percent of the mortgage market. Most went to low-income borrowers, people with bad credit or those who had personal debt to refinance.

Jacqueline McCormack, spokeswoman for the New York State Banking Department, said that signing onto the guidelines was a no-brainer because they mirror federal ones. “This needs immediate attention,” McCormack said.

But New Jersey regulators opted to ruminate longer on the standards. “We wanted to make sure we understand them before we sign on,” said Marshall McKnight, a spokesman for the state Division of Banking and Insurance.

McKnight said he couldn’t estimate exactly when the state would make a decision, but it should be soon.

The guidelines will give regulators more ammunition to crack down on mortgage brokers that bilk homeowners into a loan they can’t afford. But they don’t outlaw the practice cold.

“One would hope (the guidelines) will be followed. But they don’t have teeth,” said Henry Wolfe of Legal Services of New Jersey.

Totaro, the lawyer, said that any measure helps.

“It’s too late for people who are in foreclosure,” she said. “It’s not too late to stop this craziness and help people in the future.”

Posted in New Jersey Real Estate, Risky Lending | 15 Comments

Newark “land grab” halted

Posted on July 20, 2007 by grim

From the New York Times:

Judge Stops Newark Redevelopment Project

A New Jersey judge effectively killed an ambitious downtown redevelopment project in Newark yesterday, ruling that the city’s decision to condemn 14 acres of property on behalf of a private developer was ill-conceived and wrong. The project, the Mulberry Street Redevelopment Project, a proposed collection of 2,000 market-rate apartments and stores in the shadow of the city’s new hockey arena, would have been the largest development initiative here in decades.

In her decision, Judge Marie P. Simonelli of Superior Court said the administration of Mayor Sharpe James misused the state’s rules on condemnation when it declared 62 parcels “an area in need of redevelopment.” She said the row houses, mechanics’ shops and parking lots, while somewhat tattered, were not “blighted” and suggested that the decision to condemn the property was politically motivated.

In her decision, Judge Simonelli mentioned the close links between the developers and the James administration, adding that large contributions had been made to the former mayor and the Municipal Council, whose approval was needed for the area’s condemnation.

The decision comes after a landmark State Supreme Court ruling last month that restricted the ability of towns and cities to use eminent domain as a way to seize property they deem could be put to better use. “It clearly shows that the teaching of the Supreme Court is having an effect,” said Ronald Chen, the New Jersey public advocate. “If they want to declare land blighted, municipalities are just going to have to work a little bit harder to make their case.”

In her decision, Judge Simonelli cited documents from 2002 in which the developers essentially dictated the terms and scope of the project, including tax incentives. She observed that there was evidence that the project was “a done deal, a fait accompli, before the required statutory redevelopment process began.”

John H. Buonocore, a lawyer for the residents and business owners facing eviction, said he was pleased with the judge’s decision, which contradicted the city’s contention that the neighborhood was beyond repair. “The court, to the contrary, found that the Mulberry Street area is structurally sound, fully occupied, tax generating and well-maintained,” he said. “We’re delighted that the court saw through this prearranged land grab on behalf of politically favored developers.”

Posted in New Development, New Jersey Real Estate | 15 Comments

“It’s a very, very serious issue.”

Posted on July 19, 2007 by grim

From Bloomberg:

Syron, Chanos, Faber Say More Losses Coming in Subprime Bonds

The worst is yet to come for mortgage bonds as more holders are forced to sell the securities in a falling market, Freddie Mac Chief Executive Officer Richard Syron and investors James Chanos and Marc Faber said.

“Unfortunately I don’t think we have hit bottom,” Syron, whose company is the second-largest source of money for home loans behind Fannie Mae, said in an interview yesterday from McLean, Virginia. “Things are going to get worse.”

The extent of the declines in bonds backed by home loans to borrowers with limited or poor credit histories is being masked by investors’ reluctance to buy or sell the securities, said Chanos, president of New York-based Kynikos Associates. When Bear Stearns Cos. was forced to bail out two hedge funds in the past month after bad bets on subprime mortgage bonds, “the banks went out of their way so they didn’t have to liquidate” the bonds and establish a price, and instead refinanced them, Chanos said.

Moody’s Investors Service cut credit ratings on $5 billion of subprime mortgage bonds in the past two weeks, while Standard & Poor’s cut $6.4 billion. Fitch analyst Robert Curran said July 12 the decline in housing prices is “as intense, if not more severe” than it was earlier this year.

“The issue here is passing the hot potato,” Chanos said. “No one wants to give these pieces of paper up for cash because that is an actual transaction that people could point to as opposed to a refinancing or trying to finesse your way out.”

Defaults by subprime borrowers are at the highest in a decade, dragging down the value of homes and bonds. Those declines have helped increase borrowing costs and have become a “drag on the economy,” Syron said.
…
Moody’s, Standard & Poor’s and Fitch Ratings all warned in the past two weeks that the housing slump is broadening.

“There’s a lot more to come,” Chanos, who oversees $4 billion and specializes in short sales, said in New York. “What we’re seeing already is a spreading of the contagion.”
…
Freddie Mac’s Syron said he was concerned enough to talk to Federal Reserve Chairman Ben Bernanke about declines in the subprime market.

“Ben is a friend of mine and I have talked to him about this,” Syron said. “It’s a very, very serious issue.”

Posted in Economics, National Real Estate | 371 Comments

NJ job growth trails nation

Posted on July 19, 2007 by grim

From the Asbury Park Press:

Job growth lackluster in state

New Jersey added 9,600 jobs during the first half of the year, evidence that the state’s job market is growing slower than both the nation and previous economic expansions, experts said Wednesday.

A state Department of Labor and Workforce Development report showed the job market is uneven: Professional services firms are hiring fast while residential real estate companies are cutting back.

“If you look at some of these higher-wage, value-added jobs . . . we’re actually doing very well,” said David J. Socolow, Labor Department commissioner. “But if you look at the overall job market, it is growing slower than 2006, and that’s lower than we would prefer.”

The assessment came after the state said it added 1,900 jobs in June and its unemployment rate remained stable at 4.3 percent.

Following the pattern, the state in June lagged the rest of the nation. The United States added 132,000 jobs last month. Since New Jersey represents 3 percent of the nation’s work force, the state should have added twice as many jobs as it did.

Meanwhile, the state is on pace to add 19,200 jobs this year, less than the 33,900 jobs added in 2006 and the 70,000 jobs that historically have been added during an average year in an economic expansion, Rutgers University economist James W. Hughes said.

“We’re stuck in a very, very slow growth trajectory,” said Hughes, who also is dean of the Edward J. Bloustein School of Planning and Public Policy.

Why? Employers faced with the high cost of doing business in New Jersey may be expanding in other states or even other countries. And with the unemployment rate still considered historically low, some employers may be having trouble finding enough skilled labor to fill jobs, Hughes said.

Adding to the critique of the economy is the fact that 1,200 jobs — 63 percent of June’s total job growth — were in the public sector, the state said.
…
Sectors with ties to the residential real estate market took a hit, too. Financial activities lost 700 jobs, and construction and retail trade lost 600 jobs apiece, according to the state.

Posted in Economics, New Jersey Real Estate | 6 Comments

Good Riddance 2/28

Posted on July 19, 2007 by grim

From MarketWatch:

Washington Mutual to stop offering certain subprime loans

Washington Mutual Inc. , the largest U.S. savings and loan, has become the latest home lender to eliminate some of the riskiest mortgages to borrowers with scuffed credit or heavy debts.

Effective immediately, the Seattle company will no longer offer subprime mortgages that carry fixed rates for the first two or three years and then reset to higher market rates. Those loans, also known as 2/28 and 3/27 subprime loans, pose higher default risk as the housing slump makes it harder for financially stretched homeowners to refinance or sell their homes.

WaMu will also require subprime borrowers to provide full documentation. Over the past two years, heightened competition has led home lenders to peddle so-called stated-income loans – under which borrowers have to disclose their income but aren’t required to provide verification. The skipped paperwork, however, has contributed to higher default rates as some borrowers overstated their financial strength in order to get loans to buy houses they really can’t afford.

“I want to emphasize that we remain committed to providing subprime loans to creditworthy borrowers,” WaMu Chief Executive Kerry Killinger said in remarks prepared for its earnings conference call after the market close Wednesday.

From Reuters:

Fitch boosts default estimate on subprime ARMs

Fitch Ratings on Wednesday said that it will sharply increase its assumed level of U.S. adjustable rate subprime mortgage defaults, possibly more than doubling estimates, amid expectations that credit quality will worsen further.

The revision applies to adjustable-rate mortgages after the current two-year or three-year year fixed interest rate expires. Rates on $335 billion of such loans are slated to reset in the next 12 months, according to Fitch and Loan Performance data.
…
Interest rates on many subprime loans can surge by 6 percentage points or more after the fixed period ends, creating a “payment shock” that many analysts expect to worsen already high delinquency rates.

“We will be increasing our post-reset default rates by as much as 150 percent” in making judgments on ratings, he said.

Delinquencies on subprime ARMs originated just last year by June have already risen above 10 percent, according to Credit Suisse data. Older subprime ARMs are going bad at a rate of 15 percent or higher.

So-called “2/28” and “3/27” loans that have fixed rates for two or three years and are adjustable thereafter are the bulk of subprime mortgages.

Lenders no longer offering 2/28:
Washington Mutual (WaMu)
Countrywide
Wells Fargo
Argent
CSFB
Long Beach
Equifirst
Option One

Posted in National Real Estate, Risky Lending | Comments Off on Good Riddance 2/28

Subprime funds “practically wiped out”

Posted on July 18, 2007 by grim

From the Wall Street Journal:

Subprime Uncertainty Fans Out
Bear’s Hedge Funds
Are Basically Worthless;
More Bond Fire Sales
By KATE KELLY , SERENA NG and MICHAEL HUDSON
July 18, 2007; Page C1

Investors in two troubled Bear Stearns Cos. hedge funds that made big bets on subprime mortgages have been practically wiped out, the Wall Street firm said yesterday, in more evidence of the turmoil in this corner of the bond market.

Bear said one of its funds was worth nothing and another worth less than a 10th of its value from a few months ago after its subprime trades went bad, according to a letter Bear circulated and to people briefed by the firm. The Wall Street investment bank — known for its bond-trading savvy — has had to put up $1.6 billion in rescue financing.
…
The revelations marked another anxious day for subprime investors. As a market index that tracks the performance of subprime bonds hit new lows, signs emerged that the pain experienced by Bear’s hedge-fund investors is being felt by investors around the world.

Wall Street firms yesterday circulated at least a dozen lists of subprime-related bonds they planned to hastily sell to investors. Some of the assets were from a fund managed by Basis Capital, a large hedge-fund manager based in Australia, and were put on the block by Citigroup Inc. and J.P. Morgan Chase & Co., according to people familiar with the matter.

Basis Yield Alpha Fund last week informed its investors it had lost around 14% in June. Another fund, called Basis Pac-Rim Fund, was down 9.2% that month. Basis said the declines came after bond dealers abruptly marked down the value of the securities, which it said were “otherwise fundamentally sound.”

Investors are struggling to place values on assets tied to subprime home loans. Because some of these instruments aren’t actively traded, investors worry that they are holding securities on their books at values that are no longer accurate.

“The Funds’ reported performance, in part, reflects the unprecedented declines in the valuations of a number of highly rated” securities, Bear brokers wrote in a letter disseminated to clients yesterday.

Last week, Moody’s Investors Service and Standard and Poor’s, the two big credit-rating services, knocked down their assessments on hundreds of mostly lower-rated subprime-backed bonds.

Delinquencies and defaults have been rising on subprime mortgages — which are taken out by borrowers with shaky credit backgrounds. Some of these mortgages were subject to fraudulent loan documentation when they were written.
…
The net value of assets in Bear’s highly indebted fund, High-Grade Structured Credit Strategies Enhanced Leverage Fund, is wiped out, according to people familiar with the matter, who were briefed on the contents of a late-afternoon call with brokers. The net value of assets in its other, larger, less-leveraged fund is roughly 9% of the value at the end of March, these people said. The net-asset value represents the value of an investor’s holdings after debts have been paid.
…
The ABX index, which tracks the performance of various classes of subprime-related bonds, hit new lows yesterday. In the past few months, the portions of the index that tracked especially risky mortgage bonds with junk-grade ratings had been falling. But now, the portions of the index that track safer mortgage bonds, with ratings of triple-A or double-A, are also falling sharply.

The portion of the index that tracks triple-A subprime debt issued last year has fallen about 5% in the past week. The portion of the index that tracks low-rated triple-B bonds is down more than 50% this year.

Investors have been buzzing for days, trying to explain the latest losses in the ABX index, which signaled a deepening panic in the mortgage market. Several factors have been at play, including the ratings downgrades.

It also could have been related to mortgage-backed-securities holders’ hedging of positions by making bets against the index. Or it could have been because speculators are betting the subprime woes will worsen.

The index isn’t a perfect indicator of the health of these securities, because it represents only a narrow slice of the subprime-bond market, and it isn’t widely traded. Nevertheless, investors are watching it closely.

“The decline in the ABX indexes has been significant, and certainly some people are panicking and shorting it further because many assets they own are going down in value,” says Alan Fournier of hedge fund Pennant Capital, which has been betting against the subprime market.

Link to the letter sent to Bear clients can be found here.

Posted in National Real Estate, Risky Lending | 243 Comments

Fed widens scope of regulation

Posted on July 18, 2007 by grim

From the AP:

Federal Reserve, states to probe subprime lenders

Federal and state banking regulators on Tuesday said they would step up their scrutiny of lenders that make home loans to people with shaky credit, focusing on companies that operate outside federal banking oversight.

The pilot program announced by the Federal Reserve, two other federal agencies and state banking officials is scheduled to start in the fourth quarter and affect about 12 lenders. It will be designed to examine firms that account for the majority of subprime loans, a high-rate, high-risk category that has experienced a surge of defaults in recent months.
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Numerous subprime lenders have since gone bankrupt or have been sold. Foreclosures were up 87 percent last month from year-ago levels, real estate information company RealtyTrac said last week.

Last month, Rep. Barney Frank, chairman of the House Financial Services Committee, threatened to strip the Federal Reserve of its authority to write rules against mortgage abuses if the central bank did not act quickly. And Sen. Christopher Dodd, D-Conn., a presidential candidate who heads the Senate Banking Committee, said in May that a ”chronology of regulatory neglect” allowed the problems in the subprime market to go unchecked.

Only about a quarter of subprime loans in 2005, the most recent year available, were made by federally regulated banks, according to the Fed. Instead, they were made by state-licensed lenders and subsidiaries of federally regulated banks that operate with limited federal regulation.

The agencies said they would coordinate reviews of lenders and mortgage brokers to make sure they comply with consumer protection laws, and evaluate the lenders’ underwriting standards.

In a joint statement, the agencies said they would ”initiate appropriate corrective or enforcement action as warranted by the findings of the reviews or investigations.”

Posted in National Real Estate, Risky Lending | Comments Off on Fed widens scope of regulation

Builder sentiment sinks to new lows

Posted on July 18, 2007 by grim

From Reuters:

Builders’ confidence drops to 16-year low

US home builder sentiment slid in July to its lowest since January 1991 as fallout from the housing slump and subprime mortgage crisis caused a glut of new homes, the National Association of Home Builders said yesterday .

The NAHB/Wells Fargo Housing Market index fell to 24 from 28 in June, the group said. Economists polled by Reuters had thought it would slip to 27. Readings below 50 mean more builders view market conditions as poor than favorable.

“The bottom line is that the single-family housing market is still in a correction process following the historic and unsustainable highs of the 2003-2005 period,” NAHB chief economist David Seiders said in the statement.

Home builders are struggling to unload excess inventories left to them as speculators abandon contracts and buyers find it harder to obtain mortgages. Soaring delinquencies on the riskiest loans have forced lenders to boost requirements for many borrowers, locking out customers who might previously have qualified, analysts said.

Affordability problems are persisting even as builders cut prices and offer buyer incentives, Seiders said.
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Declines were seen in all four regions of the United States, with the Northeast and South registering the largest drops.

Posted in National Real Estate, New Development | 23 Comments