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.
…
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.
…
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.
…
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.
…
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.
…
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?

“It’s a blood bath”

Posted on June 20, 2007 by grim

From Bloomberg:

Mortgage Rate Rise Pushes U.S. Housing, Economy to `Blood Bath’

The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.

“It’s a blood bath,” said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. “We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.”

Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005’s peak to the end of this year, according to the Realtors’ group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.
…
“It’s not just a housing recession anymore, it looks more and more like an economic recession,” said Nouriel Roubini, a Clinton administration Treasury Department director and economic adviser who now runs Roubini Global Economics in New York.
…
“I continue to believe that we haven’t seen the bottom in the subprime market,” Viniar said on a June 14 conference call with reporters. “There will be more pain felt by people as that works through the system.”
…
“There isn’t a recovery about to happen,” said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., the Red Bank, New Jersey-based homebuilder. The company’s stock tumbled 42 percent this year through yesterday.
…
“When all these people see their mortgage payment and it’s up 40 or 50 percent, they’re going to say, `We can’t stay in this house,”’ Pimco’s Kiesel said. “And there are millions of people in this situation.”
…
Roubini predicts the decline in U.S. home sales will last at least another 12 months, reducing the median house price by 5 percent this year and next. That would take home prices back to 2004, when the national median was $195,200.

The primary cause of the 1990 to 1991 recession was a real estate boom and bust similar to the past seven years, Roubini said. A real estate “bubble” in the mid-1980s led to speculative buying and lower credit standards that resulted in widespread foreclosures, he said. The defaults triggered a credit crunch that turned into an economic recession in the spring of 1990, said Roubini, who is an economics professor at New York University’s Stern School of Business.
…
Some owners are selling their homes at “fire sale” prices to avoid foreclosure after seeing their adjustable mortgage rates spike, said Lawrence White, an economics professor at the Stern School of Business.

“Prices will continue to soften for as long as we have distressed sellers,” White said. Some regions of the U.S. could see price declines of 10 percent in the next six to 12 months, he said. The slump probably won’t cause a recession, he said.
…
The biggest problem is volatile home prices, said Gary Shilling, head of A. Gary Shilling & Co., an economic forecasting company in Springfield, New Jersey. Shilling put the chance of a recession this year at 75 percent.

“A lot of people went out on a limb to pay the record high prices for homes, and they’re in trouble now,” he said.

Posted in Housing Bubble, National Real Estate | 272 Comments

Downturn “has turned ugly”

Posted on June 20, 2007 by grim

From Kiplingers:

Voices from the Home-Loan Bust

It wasn’t long ago that homeowners across the country were gloating over soaring home values in their neighborhoods. Now there’s blood in the streets.

What at first looked like an inevitable downturn in the real estate cycle has turned ugly. Wall Street firms that once eagerly packaged mortgages into securities and encouraged lax lending standards and 100% financing are pressing lenders to tighten up. In response, lenders now require larger down payments or more equity, higher credit scores and closer scrutiny of appraisals.

Although the vast majority of borrowers still make their payments on time, mortgage bankers report record rates of delinquency and foreclosure. A few high-profile subprime lenders — firms that granted loans to people with blemished credit or undocumented income — have declared bankruptcy. The National Association of Realtors predicts that the subprime sector’s distress will prolong the housing slump and that the median home price nationwide will decline in 2007 for the first time since the Great Depression.

Even homeowners with the best credit feel the squeeze from falling home prices and rising rates. Toward the end of the boom, the number of adjustable-rate mortgages with cheap initial rates surged as home buyers struggled to get a foot in the door of houses selling for bloated prices. Now ARM payments are ratcheting upward even as home values slide.

True, some homeowners cashed in their equity on goodies such as BMWs and expensive vacations. But many well-intentioned, overstretched homeowners are in payment shock and are unable to refinance because their equity has evaporated. Nor can they find buyers when selling is the only sensible way out.

Posted in Housing Bubble, National Real Estate, Risky Lending | 32 Comments

Reval triggers tax spike in Haddon Heights

Posted on June 20, 2007 by grim

From the Courier Post:

Haddon Heights tax hikes spark ire

Hundreds of angry residents on Tuesday night protested sharp increases in property taxes here after a revaluation.

“It’s absolutely absurd,” shouted Ron DiMedio, who said the annual property taxes for his Kings Highway home had jumped from $16,500 to about $24,000.

“You’re telling me to get out of town,” DiMedio said.

His heated comments drew loud applause from an audience of about 600 people in St. Rose of Lima Church.
…
Mayor Beth Ann Haven said the borough government would contact Camden County and state tax officials in an effort to undo the tax change.

“This is a county-ordered reval and it’s approved by the state,” she said.

“Ultimately, we want to find out if we can void this reassessment and have another,” she said after listening to residents’ complaints after about three hours.

“There’s a lot of confusion,” said the mayor, who suggested homeowners may have calculated their taxes incorrectly.

“We did not,” several audience members shouted back.

Several speakers questioned the accuracy of the revaluation, contending properties were assessed at too high a level in a real estate market that his since weakened. “The estimates on these homes are wrong,” said Glenn Davis, a Lake Street resident.

Haven said the revaluation was the first in the borough in 10 years. She said it was conducted so the tax value of properties would reflect market values.
…
Mike and Kim Carfolite said taxes are rising 40 percent to about $10,000 on their Crest Avenue home.

“Nobody’s getting a 40 percent increase in income,” said Kim Carfolite.

Posted in New Jersey Real Estate, Property Taxes | 10 Comments

Housing Starts fall 2.1% in May

Posted on June 20, 2007 by grim

From the Wall Street Journal:

Home Builders Cut Output,
Lending Support to Prices
By KELLY EVANS
June 20, 2007; Page A2

The nation’s home builders continued to cut production last month as they struggled to pare bloated inventories.

Housing starts fell 2.1% in May to a seasonally adjusted annual rate of 1.474 million from 1.506 million in April, the Commerce Department said. Starts were down 24.2% from a year earlier and 35.7% from their peak rate in January 2006.

Building permits, which are required in most localities before construction can begin, rose last month. But much of the gain was a result of permits for apartment buildings. Demand for apartments has been growing as rising interest rates and tighter lending standards have encouraged more families to rent a home instead of purchase one.

Building permits overall increased 3% in May, but single-family home permits fell 1.8%, while permits for apartments gained 17%.

The slowdown in building activity, coupled with reports of rising foreclosures and declining confidence among builders, could mean the tumbling housing market has yet to hit a trough.

“Things aren’t going to get better anytime soon,” said Drew Matus, senior U.S. economist at Lehman Brothers. Mr. Matus said that yesterday’s report suggests that builders are trying to rebalance the market by cutting supply instead of prices — a decision, he said, that is better for builders and for the economy as a whole. “We economists prefer to see a volume adjustment rather than a price adjustment,” he said.

Posted in Economics, National Real Estate, New Development | Comments Off on Housing Starts fall 2.1% in May

“There is not a recovery that is about to happen.”

Posted on June 19, 2007 by grim

From MarketWatch:

Housing starts fall 2.1% to 1.47 million pace

Starts of new homes in the United States fell by 2.1% to a seasonally adjusted annual pace of 1.47 million in May, as building permits for new construction rose 3% to 1.50 million on a jump in multifamily dwellings, the Commerce Department estimated Tuesday. The figures were slightly stronger than expected by economists surveyed by MarketWatch. Both starts and permits were forecast to fall to 1.46 million. Completions of housing units fell 0.5% to a seasonally adjusted annual rate of 1.534 million, the lowest total in six years. Construction of single-family homes weakened further in May, while building of multifamily buildings strengthened.

From Bloomberg:

Housing Starts in U.S. Probably Fell in May, Prolonging Slump

Housing starts in the U.S. probably fell in May, signaling the slump in home construction will continue to depress growth, economists said before a government report today.

Builders broke ground on new houses at an annual rate of 1.473 million in May, down 3.6 percent from 1.528 million the prior month, according to the median forecast of 68 economists surveyed by Bloomberg News. Building permits probably rose to 1.47 million from a nine-year low 1.457 million in April.

Lower prices and more incentives have failed to spur interest as buyers wait for even bigger bargains, leaving builders with a glut of unsold properties. A jump in mortgage rates and stricter rules to qualify for a loan will probably reduce demand even more in coming months, economists said.

“Builders are unlikely to increase construction until excess inventory is cleared and sales start to pick up in earnest,” said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. “We look for starts to drift lower until the beginning of next year.”

Economists’ estimates for starts ranged from a 1.43 million pace to 1.59 million. The Commerce Department’s report is due in Washington at 8:30 a.m.

Housing construction is in its worst recession since 1990- 1991, cutting 0.9 percentage point from growth in the first quarter after detracting 1.2 percentage points in the second half of 2006.
…
Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, last month reported its third consecutive quarterly loss as it cut prices and wrote off land options while sales continued to plummet.

“Without a doubt, things have slowed since about March,” said Ara Hovnanian, the builder’s chief executive officer in an interview yesterday. “There is not a recovery that is about to happen.”

Housing starts data due out at 8:30am. Will be updated as information becomes available.

Posted in Economics, Housing Bubble, National Real Estate | 262 Comments

NJ “economic engines” slow

Posted on June 19, 2007 by grim

From NJBIZ:

A Tale of Two Key Industries

Throughout the last century, the pharmaceutical and telecommunications sectors were strong economic engines for New Jersey. While both industries have since downsized, Big Pharma has held up much better.

Reporting on the economic impact of drugmakers last week, the HealthCare Institute of New Jersey (HINJ) said its members’ employment rose a modest 2.3 percent last year, to nearly 62,000 jobs in the state. That’s sharply down from the more than 69,000 people that HINJ members employed in 2002, but still marks a move in the right direction.

What’s happened in telecommunications has been less encouraging. From about 49,000 jobs here in 2002, the sector dwindled to just under 39,000 last year. The picture would have been bleaker but for Verizon Communications, which moved into its operating headquarters in Basking Ridge last year.
…
Meanwhile, the nature of pharmaceutical jobs is shifting, with less research and development being done here and more sales and marketing. R&D dropped from 27 percent of HINJ members’ employment in 2005 to 23 percent last year, while sales and marketing rose from 16 percent to 18 percent.

This suggests that more cutting-edge research is going elsewhere. So even as the drug industry continues a turnaround that shines by comparison with the telecom situation, New Jersey can hardly afford to become complacent.

Posted in Economics | 1 Comment

Tremors down Wall Street

Posted on June 19, 2007 by grim

From the New York Times:

Mortgages Give Wall St. New Worries

After the first cracks in the subprime mortgage business appeared late last year, several large lenders were forced into bankruptcy.

Now, the stress is sending tremors down Wall Street, as investment funds that bought a stake in those loans are starting to wobble.

Industry officials say they expect this second act to be longer and slower, unwinding over the next 12 to 18 months. The fallout could further constrict consumers with weak, or subprime, credit while helping to prolong the housing downturn.

On Wall Street, the impact could be far more significant: It could force banks, hedge funds and pension funds to acknowledge substantial losses, which had been tucked away in complex investment vehicles that are hard to evaluate. In turn, that could limit the money available for mortgage lending.

Yesterday, two hedge funds operated by a division of Bear Stearns, an investment bank that is a dominant player in mortgage bonds, fought for their survival as three lenders — Merrill Lynch, Citigroup and JPMorgan Chase — asked Bear Stearns to put up more capital.
…
Bad bets on risky subprime securities and the direction of an index that tracks subprime bonds caused the High-Grade Structured Credit Strategies Enhanced Leverage fund of Bear Stearns to tumble 23 percent in the year through the end of April. A related fund has fallen less.

The leveraged fund, which had raised $600 million in investments when it was started 10 months ago, leveraged itself, or borrowed, about $6 billion from numerous Wall Street banks and brokerage houses. When losses began mounting this spring, some investors stepped forward to redeem their money. In May, the fund stopped allowing redemptions.

So far, the distress has been muted, which has surprised some investors and analysts who believed that rising defaults by homeowners would have left investors with sizable losses by now.
…
“We don’t really know the ripple effects,” said one industry official who spoke on the condition of anonymity because of the sensitivity and gravity of the situation. “It is causing a revaluation of the securities, some of which may lead to additional liquidations. That’s possible, but it’s not set in stone.”

Posted in National Real Estate, Risky Lending | Comments Off on Tremors down Wall Street

Homebuilder confidence at 16 year low

Posted on June 19, 2007 by grim

From the Wall Street Journal:

Home Builders’ Confidence Drops
By JEFF BATER
June 19, 2007; Page D3

The confidence of the nation’s home builders sank in June to its lowest level in 16 years, battered by rising mortgage rates and worries about problems in the market for subprime loans.

The National Association of Home Builders said its housing-market index for sales of new, single-family homes declined to 28, down from 30 in May and the lowest reading since February 1991.

“It’s clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates,” the trade group’s chief economist, David Seiders, said in a prepared statement.

Mr. Seiders predicted home sales will erode in the months ahead and that improvements in housing starts probably won’t show up until early next year. “As a result, we expect housing to exert a drag on economic growth during the balance of 2007,” he said.

Among the housing-market index’s components, the index for present sales of single-family homes fell to 29 in June from 31 in May. Expectations for sales in the next six months dropped to 39 from 41 in May. The traffic of prospective buyers slipped to 21 from 22.

Posted in Economics, National Real Estate | Comments Off on Homebuilder confidence at 16 year low

Home prices “will be weak – and possibly falling – for some time to come”

Posted on June 18, 2007 by grim

From the Christian Science Monitor:

Forecasters predict further housing market slump

Usually, home prices are an exception to the old rule that what goes up must come down.

But in the aftermath of a historic housing boom, it now looks possible that property values in much of the nation will be weak – and possibly falling – for some time to come.

This is the case, many economists say, even though the overall economy remains on solid footing. They cite several reasons:

•Potential buyers face a new hurdle, with the cost of borrowing up sharply in recent weeks. The average interest rate on a 30-year fixed loan hit 6.74 percent last week, up from 6.21 a month earlier.

•Although the real estate market has cooled considerably from the peak sales year of 2005, inventories suggest that supply and demand haven’t yet come into balance. In April, the number of homes on the market was 23 percent higher than the previous April.

•The run-up in home prices was built partly on an unprecedented surge in risky lending: To borrowers with poor credit history or no down payments. Those excesses take time to work off. Foreclosure rates have recently reached record levels and may continue to rise over the next year as adjustable-rate mortgages reset for more borrowers.

The biggest worry is that high interest rates will persist, curbing buying activity.

“What we’ve been building into our forecast is that sales are close to a bottom,” says James O’Sullivan, an economist at UBS Securities in Stamford, Conn. “The risk now is that we’re actually going to get another leg of weakness in home sales.”

The housing downturn is hammering a few states particularly hard. The toll is greatest where prices surged the most – California, Florida, Nevada – or where industrial jobs are disappearing, such as Michigan and Ohio.

If today’s higher interest rates persist, the housing slump could endure in much of the nation.

“The housing downturn is pretty much national,” says Patrick Newport, an economist who tracks the housing sector for Global Insight in Lexington, Mass.
…
It’s not unusual for housing slowdowns to unfold over several years, as home builders and sellers gradually adjust to changing conditions in the marketplace.

An eventual recovery in housing hinges on homes becoming more affordable for buyers. If interest rates keep rising, “that would be really bad,” Newport says.
…
Until recently, stagnant housing prices were helping to improve affordability in much of the country. One new analysis, by Global Insight and National City Corp., finds that homes in 54 of 317 metro areas were significantly overvalued as of early 2007. That’s down from 62 metro areas in the third quarter of 2006.

Another challenge for potential home buyers: Banks have been tightening their lending standards, pulling back after a period of easy credit.

In a hearing last week, the Federal Reserve came under pressure to draw a tougher line with banks on certain lending practices, such as failing to check whether borrowers will be able to pay off their loans once low “teaser” interest rates reset.

Posted in Housing Bubble, National Real Estate | 272 Comments

No quick end to the subprime shakeout

Posted on June 18, 2007 by grim

From the Wall Street Journal:

Ills Deepen in Subprime-Bond Arena
More Downgrades Seen
As Foreclosures Ripple
By SERENA NG and KATE KELLY
June 18, 2007; Page C1

few weeks ago, the market for bonds backed by risky home loans looked like it was calming down. Now, problems are quickly mounting.

At Bear Stearns Cos., a group of hedge-fund managers at the Wall Street firm spent the weekend scrambling to line up new investors or lenders to keep afloat their fund, called High Grade Structured Credit Strategies Enhanced Leverage fund. The fund, which invests in many securities that are backed by subprime mortgages, suffered heavy losses in recent months.

On Friday, credit-rating firm Moody’s Investors Service slashed ratings on 131 bonds backed by pools of speculative subprime loans because of unusually high rates of defaults and delinquencies among the underlying mortgages. The ratings company also said it is reviewing 247 bonds for downgrades, including 111 whose ratings it had just lowered. All the bonds were issued as recently as last year.

The latest moves by Moody’s affected around $3 billion worth of bonds, which represent less than 1% of the over $400 billion in subprime mortgage-backed bonds that were issued in 2006. Still, it was the most aggressive action taken yet by any of the ratings companies — which some critics say have been slow to address the housing downturn — and could weigh on the already fragile subprime bond market. Some investors may be forced to sell bonds whose ratings were cut to “junk” from “investment-grade,” and some may have to write down the values of the downgraded bonds in their portfolios.
…
“The wave of downgrades will continue” among subprime bonds issued in 2006, says Jay Guo, director of asset-backed research at Credit Suisse in New York. The Moody’s downgrades are so far concentrated among bonds backed by “second-lien” loans, which are taken out on homes that have already been pledged as collateral on another mortgage. Second-lien lenders stand at the back of the line; when borrowers default, it is highly unlikely the loans will recover any money.

The housing market continues to deteriorate, and many economists see little hope that it will start to recover before 2008. Home prices are falling in much of the country, particularly in parts of California, Arizona, Nevada and Florida. Lower home prices will lead to more and costlier foreclosures. Meanwhile, lenders are tightening their lending policies, which will make it difficult, if not impossible, for some people to refinance loans when their interest rates reset to higher levels. That would lead to more foreclosures.

Moody’s said second-lien mortgage loans that were bundled into bonds in 2006 “are defaulting at a rate materially higher than original expectations.” It said such loans were originated when underwriting standards were very aggressive, and have deteriorated significantly as the pace of home-price appreciation has slowed. That is what is causing most of the bond downgrades.

Posted in National Real Estate, Risky Lending | 2 Comments

A “situation similar to what happened in the late 1980s”

Posted on June 18, 2007 by grim

From the Pocono Record:

Monroe home sales drop 35 percent

Sales of homes in Monroe County took a sharp dip last month, falling 35 percent from May 2006.

Home sales fell from 291 to 190 for May 2006 and 2007, respectively, according to the Pocono Mountains Association of Realtors. The drop was about the same for both foreclosure and non-foreclosure homes sold.

Sales volume fell from $61 million to $41.6 million, a 35 percent decline.

The average home was on the market 32 percent longer before selling, from 82 days in May 2006 to 100 in 2007.

Inventory of unsold homes increased by 27 percent, from 2,464 in May 2006 to 3,123 in May 2007.

The largest dip in home sales occurred in Jackson Township, where sales fell almost twice as much as the rest of the county. Eldred was followed by Paradise, Stroud, Tunkhannock and Pocono townships.

The greatest rise in number of unsold homes was in Eldred Township, followed by the borough of East Stroudsburg, and Jackson, Price and Paradise townships.

“We are experiencing a situation similar to what happened in the late 1980s, but less severe at this time”, according to Eileen Chaladoff, vice president of the Realtors’ association and an agent with Prudential Associates. In the early ’80s, Monroe County experienced a real estate boom, characterized by rising prices and sales. Late in the decade, prices started slowing and sales along with them. At that time, sellers who bought at higher prices had to bring money to closing because they owed more than what they sold their house for.

Posted in Housing Bubble, National Real Estate | 3 Comments

Subprime foreclosures hit NYC

Posted on June 18, 2007 by grim

From the New York Post:

NYC ‘DEBT’ RECKONING

A silent crisis is ripping through many city neighborhoods as more and more homeowners are unable to pay down their subprime mortgage loans.

In Brooklyn’s Bedford-Stuyvesant, one-fifth of subprime mortgages were more than 60 days in arrears as of April – and 10 percent of all subprime loans were in foreclosure, according to data provided to The Post by First Data LoanPerformance, a mortgage-tracking firm.

Other neighborhoods taking big subprime-foreclosure hits are East New York in Brooklyn; the Arverne section of the Rockaways and parts of Jamaica, Queens; Tottenville on Staten Island; and the Olinville and Bronxdale sections of The Bronx.

And the number of subprime loans in arrears and foreclosed has risen steadily all across the city over the last year, the data shows.

In one part of Bed-Stuy, the percentage of subprime loans 60 days or more in arrears rose from 15 percent in June 2006 to 23 percent in April of this year.

Thousands of New Yorkers’ homes are endangered by subprime loans, which can carry variable interest charges of more than 10 percent.
…
Nobody is sure how the subprime crisis will affect the city’s homeownership rate, which, at 33.1 percent in 2005, was about half the national rate, according to New York University’s Furman Center for Real Estate and Urban Policy.

“New York’s real-estate market is fairly hot, and buildings are unlikely to sit vacant. There’s some skepticism as to whether the city is going to take a hit, or whether it’s going to be localized,” said the center’s Jenny Schuetz.

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