Friday, March 09, 2007

New Century Financial - Empty Pockets

New Century, the 3rd largest sub-prime lender in the US, is in a world of hurt. First, the rejected loan pass-throughs, then the federal investigation of fraud, and then the resulting dot-com-like crash of their stock price (see graphic). Now, with no one else's money to lend, they've finally come to the conclusion that they can no longer lend any money at all.

From Alistair Barr at Marketwatch.

'SAN FRANCISCO (MarketWatch) -- New Century Financial Corp. said late Thursday that it has stopped accepting loan applications because some of the subprime-mortgage specialist's financial backers are refusing to provide access to financing.

New Century also said that it has received $150 million worth of margin calls from its so-called warehouse lenders. It has satisfied about $80 million of those calls, but $70 million remains, according to the company.

"As a result of the current constrained funding capacity, the company has elected to cease accepting loan applications from prospective borrowers effective immediately, while the company seeks to obtain additional funding capacity," New Century said in a statement. '

Wow - got no money, got no car, got no women, so there you are. (credit Young MC for that genius line). Maybe they could get some crap-ass financing from a pay-day lender to keep them afloat.

'"The company expects to resume accepting applications as soon as practicable; however, there can be no assurance that the company will be able to resume accepting applications," it added. '

Translation: "Put a fork in us - we're done. We'll start accepting loan applications as soon as we get bought by another company. But then agian, who would want to assume our horrific portfolio?"

'Lenders specializing in such loans, like New Century, rely in part on big banks known as warehouse lenders to finance their operations. These backers require that subprime lenders meet certain minimum financial targets; otherwise, they have the right to end the business relationship.

On Friday, New Century said it had breached one of those requirements, or covenants, and also disclosed that it's the subject of a federal criminal investigation. See full story.

New Century said on Thursday that it has yet to get waivers on this covenant from five of its warehouse lenders, having made no progress on this point since Friday.

"Once you get hit with one of these crunches, warehouse lenders don't want to lend to you, so you're really done," said Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business and a visiting scholar at the Federal Deposit Insurance Corp.

Mason, who recently published a study on the subprime mortgage market, said he's expecting more bankruptcies in the sector. '

The lending implosion continues. With less money avaible for mortgage borrowing, it can only hasten the demise of our giant, cancerous bubble. Bad medicine for sure, but the cure is on the way.

Wednesday, March 07, 2007

County Clerks Office, Now "Foreclosures R Us"

Hey, this housing implosion in Florida has created a new job opportunity - processing foreclosures. It's a dirty job, but some one's gotta do it. Maybe Mike Rowe could be called in to do an episode.

From Sarah Prohaska @ the Palm Beach Post.

'FORT PIERCE — For months, a ceaseless routine has gripped the St. Lucie clerk of court's civil office: New mortgage foreclosure lawsuits arrive in unprecedented numbers - huge stacks, some a foot or 2 tall. But as soon as one stack is processed and emptied from the in-box, another dozen or more foreclosures show up the next day.

On really busy mornings, process servers drop off banks' boxes filled with these documents, which set into motion a process that often means homeowners who haven't paid their mortgages will lose their homes.'

Wow - this is the first, honest-to-goodness picture of the true state of housing in our state. Of course, and RealtyTrac have also been talking about it, but this really illuminates. And the comparisons to very recent history (when the REIC was blathering on and on that there was no bubble and the sky-high valuations were supported by "solid fundamentals") are spot on.

'The clerks who process the cases shake their heads when they think back to the days when maybe two or three mortgage foreclosure lawsuits arrived each day. They don't have to stretch their memories much: That was only about a year and a half ago.

But now, it's a different scene inside the clerk's circuit civil division across the street from the St. Lucie County Courthouse. As 2006 unfolded, the number of new St. Lucie mortgage foreclosure filings surged upward, culminating in a yearly total of 1,329 cases. That's a more than a 170 percent increase from 2005's total of 485 cases, according to the clerk's office.

Take this snapshot: On Wednesday, the last day of February, the St. Lucie clerk's office received 30 new foreclosure cases. That single day accounted for more cases than the office received in the entire month of October in 2004, according to the office's records.

The trend is playing out across the nation, but some analysts say markets such as St. Lucie County, which enticed a lot of speculative buyers during the sizzling real estate boom a few years ago, are experiencing the biggest increases in delinquencies and foreclosures.'

Exactly. Along with Arizona and California, the state of Florida is the third member of what I like to call the housing bubble-bust triumvirate. All three states had the greatest appreciation over the past 5 years, and as a result all three created the greatest disparity between median incomes and median prices. It takes no rocket scientist to forecast that the triumvirate are also going to experience the greatest shock as the supply and demand curves snap back together.

Back to St. Lucie. Some causes and effects of the fallout.

'St. Lucie officials offer several reasons why the real estate boom has given way to a foreclosure boom:

• The slowing housing market, where owners are realizing their homes are not worth what they thought they were or the homes were over-appraised;

• Adjustable-rate mortgages, which drew in buyers with initial low interest rates that recently have increased substantially;

• Rising insurance rates and property taxes.

Those are the catalysts, many say, for the record number of lawsuits banks have filed to recover their money - and the fallout in St. Lucie, and many other Florida counties, has landed squarely on the clerk office's doorstep.

"In all the years I've done this, I've never seen this many foreclosures," said Nancy Bennett, supervisor of St. Lucie's circuit civil clerks division, who has worked in the office for more than 20 years. "It has never been like this."'

And seriously, with record #s of empty houses and sales dropping like a rock all over the Sunshine State, does anyone believe this is going to get any better in 2007? In 2008?

Tuesday, March 06, 2007

Freddie Mac - The Empire Strikes Back

In my diatribe about the sub-prime industry (how it created the bubble and is now suffering for it's sins), Freddie Mac, a major purchaser of Mortgage Backed Securities on the secondary market, has seen the light and is now clamping down. Hard.

From Dina ElBoghdady @ the Washington Post.

'Freddie Mac, one of the biggest investors in U.S. mortgages, plans to toughen its standards and stop buying certain types of risky loans that have been linked to a high number of delinquencies and defaults.

The decision, announced yesterday, is the latest sign of the deep problems roiling the subprime mortgage market, which caters to borrowers who could not qualify to buy a house with a conventional loan, including people with blemished credit records.

During the recent housing boom, subprime lenders eager to cash in on the home-buying frenzy relaxed their standards. They allowed borrowers to take out mortgages with low teaser rates that ballooned after the first few years. Now that the higher rates are kicking in, many borrowers are struggling to make their monthly payments, and dozens of small lenders are losing money, shutting down or filing for bankruptcy protection.'

Well put. One thing I didn't mention is yet another source of agony on the market - existing homeowners who discovered their new-found "paper wealth" due to the bubble evaluations on their homes. Many turned around and refinanced their once inexpensive residence. Sure, it seemed like a good idea, but many of these folks were guided into toxic loans that are now biting them in the a$$.

Back to the article - some discussion on the importance of Freddie Mac's announcement. How serious is the situation?

'Freddie Mac's decision to clamp down on these types of mortgages signals heightened alarm about the course of events. If the damage is not contained, a crippled mortgage industry could destabilize the economy, several economists said.

"This is one of the biggest voices in the mortgage market saying in a very public way that the mortgage and housing markets are very troubled," said Mark Zandi, chief economist at Moody's

The trouble is most apparent in the fourth-quarter mortgage delinquency rate, which climbed to its highest level in four years, the Federal Reserve said yesterday. The portion of loan payments at commercial banks that were at least 30 days overdue rose to 2.11 percent in the quarter, up from 1.72 percent in the previous three months. Other measures of mortgage delinquencies have also increased recently.

All indications are that delinquencies are rising faster in 2007. Typically, if there's a surge in delinquencies, defaults follow. Many blame the surge on subprime mortgages, which, according to the Mortgage Bankers Association, made up about one-fifth of all new mortgages last year.

That's why Freddie Mac plans to apply stricter standards to subprime mortgages written on or after Sept. 1, 2007, that have "a high likelihood of excessive payment shock and possible foreclosure."'

So, you see - Freddie Mac will continue to purchase low quality loans for another 6 months. I think this is waiting a little too long, but at least they're giving the market time to adjust.

By the way, I beg to differ on that 1/5 number being quoted by the MBA - the number is much higher, but should we be suprised that they are quoting flawed statistics? Like the NAR, the MBA's employment of denial, cooked numbers, and outright lies to the public are the last defense in keeping their gravy boat from sinking.

Now, as to the particulars of the new restrictions....

'The company will buy securities backed by the 2/28 and 3/27 loans only if the borrowers qualify for the highest rate the loan can have. For instance, if the teaser rate is 2 percent but eventually kicks up to 8 percent, the borrower must qualify for the 8 percent loan.

To protect future borrowers from "payment shock," Freddie Mac will no longer buy securities backed by subprime loans that lack documentation of the borrower's income and the value of the property being financed.

The company also is developing a standard to limit the purchase of securities backed by loans in which the income was stated but not documented.

Freddie Mac also wants lenders to consider the cost of taxes and insurance when they write mortgages.'

This is a very good start. We will all benefit in the long run when credit is extended on the ability to re-pay, not on the perceived inflation of the underlying asset.

Unfortunately, the previously mentioned jagoffs who've been making a boatload of money from this scam are now sounding the alarm, all in the name of "helping" first-time buyers. Complete and utter bull$hit.

'The Mortgage Bankers Association questioned Freddie Mac's decision, saying the people who will be hardest hit will be first-time, underserved or minority homebuyers who will suddenly find themselves without access to credit.

"We worry that people who could buy a home today won't be able to qualify for credit in the future if these kinds of subprime loans are driven from the market," said Kurt Pfotenhauer, one of the association's senior vice presidents.

Hogwash. We're now heading towards a record number of foreclosures and people losing their homes, yet Kurt wants to make it easier for more people to fall into the same trap?

More realistically, it sounds like he owns some overpriced bubble real estate that'll become even more difficult to unload with the implementation of better lending practices. Also, less scam mortgages means less scam money in Kurt's (and his brethren's) bank account. Poor guy - he needs a hug!

Time for yet another reality update: when prices drop to realistic valuation levels, then people WILL be able to qualify for homes. Until then, it's just a sucker's market, with a continually decreasing supply of IBs (idiot buyers).

Full Article

Monday, March 05, 2007

Central Florida - Toxic Financing Results in Home Turmoil

Before we move on to Freddy Mac and Fannie Mae's take on the toxic loan market, here now a local story on the effects of these "buy now, pay later" mortgags. From Rene Stutzman at the Orlando Sentinel.

'Three years after Central Florida's housing market turned red hot -- prompting families and investors to buy, buy, buy -- thousands of people are in danger of losing their homes because they can't make their monthly payments.

The number of mortgage foreclosures is soaring this year. Foreclosures had been increasing -- first steadily, then sharply -- for months during the past year.

But in January, lenders filed 1,787 foreclosure suits in Central Florida, more than twice the number compared with a year earlier, according to research by the Orlando Sentinel.

And early results for February are even worse: In the first two weeks of the month, the number of suits climbed 63 percent compared with all of February 2006.

"Clearly, we are in a cooling of what once was a red-hot housing market," said Sean Snaith, a professor of economics and director of the Institute for Economic Competitiveness at the University of Central Florida.'

"Cooling?" Yes, I suppose you could call it that. But "cooling" in this state sounds way too nice, like "I was so happy to be cooling down, after walking across the Florida Mall parking lot." Sorry, it just doesn't fit the circumstances.

How about a more accurate phrase, such as "beginning of a free-fall", "first stages of a total melt-down", or "start of a long ride to normalcy in supply and demand"?

'The pace of foreclosures is what sets Central Florida apart -- although the same thing is happening across the state and, more modestly, across the nation.

And the worst may be yet to come, according to some experts.

That's because there are so many adjustable-rate mortgages on the verge of pushing up monthly payments.

What's going on?

Many homeowners simply took on more debt than they could manage.'

That, my fellow Romans, is the key to our situation. Too much easy credit created a house of cards in this state. Far too many overpriced homes owned by people who simply cannot make the payments.

Like a spoiled rich kid who finds out that he's no longer in the will, the culture shock of our return to actual house valuations is going to be a long, painful, and traumatic process. The denial is real and entrenched - one doesn't recover from these things easily.

'Until recently, homeowners could often sell their way out of problems. Home prices were rising, and the market was full of buyers, especially speculators.

But prices have stagnated. Homes in Orange and Seminole counties now sit unsold an average of 90 days -- three times what it took to sell a residence a year and a half ago. And many speculators who helped buoy the market have disappeared.

That means local homeowners are stuck.

Feeling trapped.

"You feel so trapped," said Jennifer McCall, 30, who bought a $220,000 house near Winter Park in May, then quickly fell behind on her payments and was sued by her mortgage company in January. "It's frightening," she said. "You have a family you're trying to take care of and a mortgage that's eating you alive."

She and her husband, Jason, had never owned a home before and didn't have much in savings, but they found a mortgage company willing to use creative financing, McCall said.

"That's a huge mistake," she said.

They wound up with a first and second mortgage and monthly house payments of $1,986, she said.'

$2K a month for a $220K house? My gosh, that is really, truly a sad statement on the state of our state. And you know what? This is just one example. Multiple this couple's situaton by the tens of thousands, and then you'll get the big picture of our impending crisis.

And, I'd like to point out that I lost all respect for that guy from UCF when he made the following statement. (note, I am a graduate from that fine institution, BSEE '91)

'Although foreclosures are on the rise in Central Florida, they are not at unprecedented levels, and the local real-estate market is not about to collapse, said Snaith, the UCF economist.

Home prices remain far higher than before the run-up, he pointed out.'

Wow - no $hit, Sherlock. The key is the trends - take a look at these, and you'll be likely to see that prices are heading towards those that existed before the run-up.

Full Article

Friday, March 02, 2007

A Lesson on Exotic Mortgage Lending

Today, I am going to discuss a key cause of the bubble here in Florida and throughout the country - the easy availability of loans that people truly couldn't afford in the long run (or never had intention of paying back).

In the supposedly altruistic notion of converting more people into homeowners (regardless of creditworthiness), all sorts of exotic instruments were employed over the past 5 years. They are collectively known as "sub-prime", and they include:

ARMs (adjustable rate mortgages) - Typically start at a low introductory rate, and then 1 to 3 years later the rate resets to LIBOR (London Interbank Offered Rate) + a small %.

Balloon Mortgages - A mortgage that must be paid in full within a set time, typically 5 years. Often used in cases where refinancing or sale of the property is expected before the balloon is due.

IOs (interest only loans) - Used in conjunction with ARMs and/or balloons, the homeowner only pays interest, and does not build equity during an initial trial period. This makes the initial payments even lower.

Negative IOs - Similar to IOs, but to further drop the initial payments, the homeowner pays less than the actual interest for the trial period. Thus, when the balloon and/or ARM resets, the total amount owed on the property has actually increased. As in all the other above-mentioned instruments, this is not a problem if the property has increased in value faster than the principal.

And the worst of all,

No-Doc (No Documentation required, aka, "Liar Loans") - once used in rare cases where documentation of pay history is difficult (self employed persons), the loan is granted without a credit check or verification of ability to repay. In exchange, this type of loan carries higher interest rates. For obvious reasons, this route is the easiest way to commit fraud, and that's exactly what happened.

It should also be noted that all of the above types of loans carry high fees, which go directly to the mortgage brokers who sold them. Finally, the vast majority of these mortgages are bundled up by the thousands and sold on Wall Street as MBS (mortgage-backed securities), thus freeing the brokers to sell even more mortgages and perpetuate the fee-generating machine.

Two of the largest purchasers of these MBS are Freddie Mac (FMC) and Fannie Mae (FNMA), both quasi-gov’t entities whose purpose is to increase American homeownership (and to make a profit along the way).

Back in the "olden days" (pre 2001), such exotic loans comprised a very small % of overall home-loan volume (5-6%). However, by 2005, it is estimated that 40% of all mortgages were underwritten with sub-prime/exotic riders in them.

All of this combined to generate a proliferation of mortgage companies, all pushing exotic mortgages to get the high fees and then passing on the "hot potato" loans into MBSs on the financial market.

It all worked great, especially as house prices skyrocketed, and valuations generated ever-increasing "paper equity". With so much credit available, people who had no intention of ever living in a house ("flippers" and outright criminals) were also bidding on houses, condos, and pre-build properties, pushing prices even higher.

But there was an issue. Every purchaser of an MBS bundle from these front-line mortgage companies puts various stipulations on the purchase - the most important of which is % of defaults (non-payment in the first 90 days). If this % of defaults (non-payment in the first 90 days) is exceeded, the front-line mortgage company is required to buy the defaulted mortgages back.

This issue transformed into a certified problem when it turned out that many of the flippers and fraudulent loan applicants never had any intention of making payments on their loans. Defaults, defaults, and more defaults.

Furthermore, as time wore on, the ARMs and balloons started to trigger, greatly inflating the payments that honest homeowners had to pay to keep current on their mortgage. Often, this increase in mortgage payment far exceeded the homeowner’s ability to pay.

This resulted in the default triggers being exceeded everywhere, particularly in the exploding-bubble states (Florida, Arizona, Colorado, California). Instead of being able to pass them onto other banks and securities, mortgage companies were increasingly getting "return to sender" on their crap-o-la loan portfolios.

The certified problem then metastasized into an outright disaster. As foreclosures started mounting (the foreclosure rate is still increasing as you read this), the smaller lenders began to implode, and the larger lenders have begun charging off huge losses.

And the worst part of the tragedy: people who thought they were living the American Dream are now experiencing a nightmare as their house payments suck their finances dry. Finally, they "throw in the towel" and get foreclosed on. Their credit ruined, they are pretty much denied the opportunity of owning another home for the next 7 years.

Okay, so we have a serious mess on our hands. You can almost here it on the PA system, "We need cleanup on aisle 3!". Our next post will deal with Freddy Mac's proposals to deal with the situation.

I just wonder if they are a "day late and a dollar short" on their response.

Thursday, March 01, 2007

Game On

Of course, we've been preaching to the choir here - either prices have to come down in Florida, or median incomes have to go up (way up). And we all know the likelihood of option #2 coming to fruition. Ergo, the laws of supply and demand are finally coming to life, like an old rusty train that's been overhauled and lubricated and finally leaving the station for the first time in 5 years. From Shannon Behnken at the Tampa Tribune.

'TAMPA - The Tampa Bay area experienced its steepest home price slump in recent memory in January, while the number of home sales continued to drop. Sales activity in the area stands in stark contrast to national data that showed sales of existing homes rose by the largest number in two years.

"The housing market in Tampa doesn't look good at all," said Per Gunnar Berglund, senior economist for Moody's "This is the sharpest drop in pricing since the early 1990s."'

And as goes Tampa, goes the rest of the state. Maybe in the far north interior things haven't changed, but for the majority of the population, consider this to be the starting gun to our multi-year race to the bottom.

And lest we forget, it's always good to hear the cooked numbers from FAR (Florida Ass. of Realtors) as well as "we're just around the corner from recovery" droning from the NAR. The fairy tale just wouldn't be complete without involvement of our evil (yet charmingly simple) giant. First, FAR.

'The median sales price of existing single-family homes in the Tampa-St. Petersburg-Clearwater area was $214,000 in January, down 7 percent from December and significantly below the real estate market's $239,900 peak in June, according to data released Tuesday by the Florida Association of Realtors.

The association said the area's median sales price in January was 1 percent below the same month a year ago. In December, the median sales price was $230,800.'

Wrongo-bongo. I've been tracking median prices for over a year in the bay area, and currently it is still around $270K. So, unless the median home is selling for $55K less than the listing price, these numbers are cooked, baked, and diced. Onto the NAR - cheerleading time from economist Lawrence Yun!

'Yun said he does not think the Florida housing market will suffer too much. The job market remains strong, and many people continue to move to Florida from the Northeast, which should continue to drive demand for real estate, he said.

"This is a short-term correction," Yun said. "The local fundamentals are good."'

WHAT THE F is this guy talking about?!!! More people are leaving the state than are moving in, sales are way down, prices are way down (crooked accounting by FAR notwithstanding) and median incomes are still far below median prices. Mr. Yun, tear down this wall! (of lies and deceipt!) The local fundamentals are not good - the laws of supply and demand say they are very, very bad.

And hey, while we're at it, let's hear the same drivel from our local liars-club.

'Carlos Fuentes, president of the Greater Tampa Association of Realtors, said that despite the drop experienced by the larger metropolitan area, local data on prices in Hillsborough County are trending upward.'

Trending upward in his mind, maybe. Trending upward in one or two super-wealthy neighborhoods, maybe. Trending upwards if you're standing on your head, maybe.

Full Article