Mortgage Bond Market In A ‘Vulnerable Position’
Some housing bubble reports from Wall Street. “William Lyon Homes announced today preliminary new home orders, closings and backlog information for the three and six months ended June 30, 2006. New home orders for the three months ended June 30, 2006 were a decrease of 52% as compared to the three months ended June 30, 2005. New home orders for the six months ended June 30, 2006 a decrease of 41% as compared to the six months ended June 30, 2005.”
“The Company’s number of new home orders per average sales location decreased to 11.2 for the three months ended June 30, 2006 as compared to 27.5 for the three months ended June 30, 2005. The Company’s cancellation rate for the three months ended June 30, 2006 was 32%, compared to 13% for the three months ended June 30, 2005.”
“The Company’s backlog of homes sold but not closed was a decrease of 46%. William Lyon Homes is primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada.”
From Reuters. “The U.S. mortgage-backed securities market languished on Tuesday, with yield spreads versus comparable Treasuries ending mostly unchanged from the previous session as scant demand offset moderate supply from originators.”
“With the summer doldrums in full force, the mortgage bond market is in a particularly vulnerable position right now since many of the market’s main participants are sidelined awaiting a clearer picture on where the U.S. Federal Reserve is headed.”
“Investors out of Asia have been quiet for several months and Wall Street dealers hold hefty inventories. On top of that, demand from banks, large holders of mortgage bonds, appears to be fading.”
“Barclays Capital recently downgraded its recommendation for mortgage bonds to neutral from a tactical overweight. The overweight stance was driven by expectations of real-money buying after June’s Federal Open Market Committee meeting and expectations that greater clarity about the Fed would help the sector.”
“‘Neither factor seems valid anymore,’ the company said in recent research.”
“The Mortgage Bankers Association released its Weekly Mortgage Applications Survey for the week ending July 7. The Market Composite Index was an increase of 1.0 percent on a seasonally adjusted basis from 561.0 one week earlier. On an unadjusted basis, the Index decreased 29.1 percent compared with the previous week and was down 36.3 percent compared with the same week one year earlier.”
From Inman News. “In a conference call with reporters Tuesday, Freddie Mac’s chief economist Frank Nothaft offered some insight into when and why people refinance their mortgages.”
“Not only are fewer families refinancing, but they are doing so for different reasons. Freddie Mac’s surveys reveal that back in 2003, just 20 percent of families refinanced to cash out some of the equity in their homes. The rest were moving to lock in low interest rates or shorten the terms of their mortgages.”
“‘That’s very different today,’ Nothaft said. ‘In the first half of this year, close to 90 percent of those who refinanced also engaged in cash out.’”
“Interest rates on some $500 billion in first-lien ARMs, or approximately 6 percent of all mortgage debt, will reset in 2006, Nothaft said. Factor in variable-rate home equity and second-lien loans, and the total amount subject to repricing this year is nearly $1.2 trillion, or about 15 percent of outstanding loans.”
“New home orders for the three months ended June 30, 2006 were a decrease of 52% as compared to the three months ended June 30, 2005.”
Thank goodness for the spring selling season. Those incentives really are paying off for Lyon and the other HB’s.
Willliam Lyon’s stock was up $15/share today. Just think if they got skunked and didn’t sell a home!
Lennar’s troubles grow:
http://globaleconomicanalysis.blogspot.com/
Looking for a good candidate to sell short?
“Interest rates on some $500 billion in first-lien ARMs, or approximately 6 percent of all mortgage debt, will reset in 2006, Nothaft said. Factor in variable-rate home equity and second-lien loans, and the total amount subject to repricing this year is nearly $1.2 trillion, or about 15 percent of outstanding loans.”
I believe this is the first time we have seen HELOC and second liens factored into this statistic. Previously I saw 600 billon as the reset amount for this year, 1.2 TRILLION is mind boggling for a single year…
Also mind boggling is that 15% of “home borrowers” will have their payments adjust up this year (whether for 1sts or 2nds). One in every seven people will be feeling the crunch a little more each month.
And the resets in 2007 will be the same story or worse, based on % of ARMs used in 2004 and later.
By end of 2007, the % of households whose ARMs will reset could be 1 of every 3. Very significant.
I have seen the 600 bil number for 2006 too. And it will increase to over 1.2 tril in 2007. So if we include the 2nd tier loans, it will be over 2 tril in 2007.
Just wait for that soft landing;-}
Incidentally– What portion of the 15% are even aware how much their payments will increase?
My perception is that, although lenders are required to outline the ARM terms, % caps, etc, when signing, they are not required to state the potential payment amounts in dollars. Instead, the dollar amount increase is only communicated 30 days prior to the reset itself. Much too late for the borrower to do much to make arrangements to mitigate the increase (second job, etc).
Yes, the borrower should do their homework to find this out before signing the contract. But, of course, many sheeple won’t. With the result being very fast inventory growth (and eventually foreclosures).
Does that sound familiar?
Mind numming also.
The Dark Side of the Housing Market
Because of this, the competition in the credit business is intense. And like any good business, lenders have adapted their programs to meet the needs of borrowers everywhere. This has led to some potentially dreadful results.
Let me explain.
In their zeal to loan money to everybody and anybody, literally everybody and anybody can now qualify for the loan of their dreams. In fact it has now gotten so bad that practically any loan officer would tell you that they could qualify a ham sandwich if they had to.
I’m not kidding. As long as the ham sandwich had a social security number, it could be done.
Take for instance one such ham sandwich named Johnny Moon Sr. At the time of his death he left behind a watch, a flashlight, and wallet containing the grand sum of $1.00. In short, he was dirt poor and homeless.
But despite his untenable financial situation and his lifelong mire of poverty and drug addiction, Mr. Moon died with a startling secret: He had qualified for and received a total of six loans to purchase Florida real estate at a cost of over a half a million dollars.
Now how Mr. Moon was able to pull off this feat is murky at best. He certainly may have been an unwitting pawn in a flipping scheme, but the truth is he may have indeed been a legitimate real estate investor.
The records that exist, however, do make two things abundantly clear: Mr. Moon was able to attend all of his closings and he somehow managed to qualify for the loans. But regardless, how did he manage to pull it off? I mean, Mr. Moon clearly had no business borrowing money and buying homes. He was homeless!!!
But borrow money and buy homes he did. And as startling as his accomplishments were, Mr. Moon simply could not have pulled off this feat without the help of a lender with an insanely liberal loan program that was desperate to do some loans.
It is here where the competitive excesses in the lending business have created a slippery slope for borrowers everywhere, creating the speculative bubble in housing we find ourselves.
I read this story somewhere on the internet.
Does somebody knows a guy like that. I would like to pull such a stunt. You see what drugs make can make you do. Is this story real?
The MBS market is going to topple like a house of cards. Fannie and Freddie cooking the books, hedge funds playing roulette with OPM, Asian central banks playing games with their currencies to keep their own house-of-cards economies afloat, crooked appraisers borrowers and mortgage brokers misrepresenting property values and incomes… there’s so much systemic risk coiled up in this spring, that when it comes unwound it will be sudden and painful.
So true, John, so true. When you look at all the crap going on, it has no other way to go eventually.
As Dr. Hibbert says, looks like we are being kept healthy by Three Stooges Syndrome. So many thing going wrong, they’ve all jammed in the doorway and none of them can get through.
LOL, more 3 stooges humor!
Just talked to my office neighbours this morning construction company, some new buildings but mostly add ons and and recon kitchens etc. Well for the last 3 months there order board which I can see on their wall everytime I pass is getting more bare as the weeks go by. Talked to them today and asked how was business, plain look in face “dead” was the reply the girls in the office were calling old quotes from upto 9 months ago to see if they could drum up business. No go there, they even told me that they have been using a construction referal agency and that they called them this morning asking why there had been no referals, and the girl the other end reply was might have something to do with no phone calls.
Sorry but had to laugh, anyhow this is just one mid-sized contract company times this by many more and note to that the referal agency who I bet was bagging some bucks on the referals is being hit hard and no doubt in a panick to. So see how the domino effect is/has kicked in.
I heard on the radio (KFWB 980 AM I think) early
this morning an ad for a construction company
offering to remodel kitchens.. The pitch was
something to the effect “you can’t add more
value to your house than by remodeling your kitchen.
If you do so it will sell faster”
Can’t remember the name of the company, apologize.
Can’t recall hearing radio ads from remodel/construction companies
for many years…
Yet my neighbor who owns a construction firm still cannot get workers… Its not over yet. Builders are *scrambling* to finish project ASAP. They’re outbidding everyone else for people and materials to beat “chasing the market down.” (Smart in my opinion.)
Also, my hairdresser noted how her sister was buying *two* properties to flip… Gasp! At least I have convinced one coworker over the last few months not to flip in San Diego… Oh, I told the hairdresser a little on how to convince her sister not to “invest” in spec homes… Alas, I think my simplified discussion escaped her (inventory, jobs, and interest rates combined was probably too much… but she cuts hair well and I like her for that! Aldus Huxley et. al)
“Freddie Mac’s surveys reveal that back in 2003, just 20 percent of families refinanced to cash out some of the equity in their homes. The rest were moving to lock in low interest rates or shorten the terms of their mortgages.” vs. ‘In the first half of this year, close to 90 percent of those who refinanced also engaged in cash out.’
Good god! It sounds like 2003 was the end of the sanity. 90%… I”m in shock…. Ok, I’m over it and now anticipating on bidding on their foreclosure in 2008.
Neil
I can’t remember EVER hearing a construction company advertising on the radio but I heard one today. I noticed it as odd. It was a rock and roll station too. Just didn’t fit. Funny I heard it and noticed it before reading this thread.
My Bro in law works as a salesman for an home security alarm system company. The owner’s bitch wife was getting up my bro in laws ass about sales and how he needs to work harder etc… Hey, there just ain’t no business bitch. Tough.
other than bk lawyers and fed gov workers- who will thrive?
mortgage servicers, bankruptcy and credit counselors, asset protection firms, credit salvage companies, reo outsource firms, homestagers, private money lenders, foreclosure cleaners, reo inspection firms, repo car and boat firms, property tax appeals, secured creditcard companies, do i need to go on?
Phoenix is doing great. At one of their Queen Creek communities, Richmond American cut prices in the last month just by a measly 22%. From $194,900 to $159,900. Boy someone who bought last July at the peak and had to sell now, with realtors commissions and closing costs would be down 30%. Yikes.
Read about CAI, THE ELEPHANT IN THE MIDDILE OF THE CONDO .
“With the decline of the real estate market more unhappy homeowners will become trapped unable to sell. If the downturn of the real estate market is anything like what happened in the nineties, condos will be the hardest hit. Some reports are already pointing in that direction now for the condo market. In addition, during the last low point in the market, homeowners in associations were not strapped with the hefty special assessments that many associations are being hit with these days. This along with those increasingly exorbitant monthly dues piggybacked onto mortgages that many can barely afford now will force record numbers into foreclosure. Is it any wonder that CAI attorneys have now put forth the notion that non-judicial foreclosure is no longer the way to go and should now consider mostly judicial foreclosure? All those advocates shouting about those CAI attorneys and their non-judicial foreclosures have tarnished the reputation of CAI, as it should have.
Unfortunately for homeowners what perfect and exquisite timing this has become for those attorneys who specialize in foreclosures to benefit from this change. As usual it is only to the homeowner’s detriment. CAI specializes in the detriment of owners, under the guise that they are protecting your property. There will be no challenge in the amount of judicial foreclosures taking place in CIDs within the next few years. Why else would the HOA attorneys you pay to retain specialize in foreclosure? They profit from your demise. There are some CAI law firms in Southern California that individually represent anywhere from around 300 to 1,500 associations a piece. The number of homeowner associations each CAI law firm represents can vary widely from firm to firm.”
” Factor in variable-rate home equity and second-lien loans, and the total amount subject to repricing this year is nearly $1.2 trillion, or about 15 percent of outstanding loans”
That’s a lot of debt service $$$$$. Where will it come from?
Whump, whump, whump, whump - here comes bubbly Ben and his minions in their fleet of Chinooks loaded down with dollars.
That’s only for the lenders, once the loans have been defaulted on & written down and all the member banks are in big trouble. There will be a lot of pain in between now & then. In fact, BB may be out of a job by then.
Not if they don’t want interest rates to shoot to the moon.
That’s why there is going to be another little war. It’s a real good distraction when nothing good is happening at home. What will it be ? North Korea, Iran or Venezueala?
As I wrote before:
1. Borrow 100K, it is the borrower’s problem.
2. Borrow a few million, it is the bank manager’s problem.
3. Borrow a few billion, it is the bank’s problem.
4. Borrow a few trillion, it is the taxpayers’ problem.
We’re all doomed, regardless of our nationality, citizenship, etc. There’s going to be pain spread around the world, if this turns into tens and hundreds of trillion dollars in problem debt….
Oui, Si, Da, Yes, Ya, exact. Because the real estate bubble in the US has infected all markets. “Monkey see monkey do.” Like the NASDAQ bubble. On a worldwide scale, it’s about 20 times bigger. They call it imitation instinct or animal mimetism. It’s part our humanoid genes.
There’s nothing genetic about central banks. Power to the elite!
“Slowdown? What slowdown?” So says Freddie and David:
http://tinyurl.com/f9aov
“Halfway Point: Home Sales Will Still Reach Near Record Levels
Jul 12, 2006, 12:00 pm PDT
Despite rising mortgage interest rates and many economists and pundits predicting a turndown in the economy, two leading organizations say housing sales are still on track to end the year near previous records.
It’s the halfway point, and outlooks are positive say the National Association of Realtors and Freddie Mac…
…The NAR predicts home prices to rise 5.3 percent nationally to $231,300 in 2006.
Mortgage finance company Freddie Mac says its concurs that 2006 will be the third strongest year housing sales.”
cme futures say they’re wrong
every RE maket is down
Polishing the crystal stemware to the music played by the band in the ballroom as the Titanic sank. These chumps should be seated in front of a lie detector when they are being quoted.
I am willing to bet, A LOT, that they are shameless liars. However, I could be wrong. They might actually be dumb enough to believe their own rhetoric…or… perhaps they know something we don’t. They may know that lenders are ready to keep the sales numbers high by agreeing in advance to a massive number of short sales.
That would be an interesting angle.
Journalists that lurk here take note.
Stop doing pattycake pieces and kick some ass. Let your inner journalist out!
‘In the first half of this year, close to 90 percent of those who refinanced also engaged in cash out.’
When in a hole, first stop digging.
They have no choice. They need the cash out to continue mortgage payment… Of course this is the last time they are able to do this. The next time they attempt to refinance, the property value is lower than today.
This describes my in-laws. They have a big place in a nice part of the BA. They retired early, and by their own admission have little savings. Everything they have is in their place, which they bought just pre-boom in a stroke of impeccable timing. Which they have mortgaged to the hilt–made a huge mortage equity withdrawal a few years back, which, yes, they use to make their monthly mortgage payments! They “have” to sell I believe it’s next year (ARM readjusts) and they “have” to get a price that one of them disclosed (through a conversation on another property for sale in the area) must be at least $4 million (and inferred that that seemed well below their expectations). They bought the place for a little over $1 million. Just a little window into what some of the seemingly well-off are up to, MEW-wise.
A retirement filled with catfood for dinner. Yumm!
Its probably healthier than their current diet.
Now I’m beginning to understand why Buffet said high end real estate would be hard hit…
Off topic: Market Stats for Northern Virginia have been “adjusted” again by Realtors. How can you report the average and median sale price for 2005 in 2 different places and provide different numbers? More proof that when realtors don’t like what the stats show they just change the numbers. Simple as that.
My latest example comes from today’s release of Jun 2006 market reports by NVAR.
http://www.nvar.com/market/marketstats/jun06/
vs.
http://www.nvar.com/market/marketstats/jun05/
The FFX co single family median shows a puny little drop comparing Jun06 v. Jun05 -Median of 533k to 530k and Mean- 607k to 610k. A sane person would look and say hmm the market has been flat the last year.
Then I go to the market report for Jun2005 and there they have the Jun 2005 prices as 550k median and 616k mean. Using the originally reported June 2005 numbers the median has dropped 20k instead of only 3k. The Average dropped 6k instead of increasing 3k.
There is no explanation given as to why Jun 05 numbers are different than they were when they reported them last year. The YOY nominal depreciation in median FFx co prices is around 3.5% the real rate of depreciation is likely 7.5%.
I also found inconsistancy between the 2005 and 2006 data on the Loudoun county market report.
Is this a deliberate attempt to misreport data or is this an honest mistake from a sloppy statistician?
Very strange. It looks like all the past data in the 2006 report has been revised downward. They have a disclaimer about the current year data being provisional, but that doesn’t explain the 2003 discrepancy.
How do you spell manipulation? R-E-A-L-T-O-R.
June 2005 Report (pdf)
June 2006 Report (pdf)
US needs to grow some teeth and put some oversight on this RE monopoly/beast.
Very insightful.
Do not expect to see NAR/CAR/etc report any significant price declines, then.
When they occur, the prior year/quarter comparison numbers will instead be restated to soften the blow.
Doesn’t stop the real decline from happening. But it does prevent the mass media from panicing the masses.