The Housing Bubble

Some housing bubble news from Wall Street. “MFA Mortgage Investments today reported a net loss available to common stockholders of $32.6 million. Stewart Zimmerman, MFA’s Chairman said, ‘As previously indicated, increases in the target federal funds rate continue to increase the cost of MFA’s liabilities at a more rapid pace than the yield on its assets, negatively impacting spreads.”

“As a result of the Federal Reserve’s efforts to tighten monetary policy and the fact that, in general, the yields on MFA’s assets reset annually, but only after an initial fixed rate period, we anticipate that MFA will experience a period of reduced earnings over the next several quarters.’”

“Freddie Mac, still recovering from an accounting scandal, on Friday said it would delay by two months the release of its quarterly and full-year 2005 financial results to implement an accounting change. The company recently decided to make greater use of third-party market information in its method for valuing those assets.”

Speaking of third parties. “The current environment of deeply teased short-term U.S. subprime hybrid adjustable-rate mortgages (ARMs), combined with an interest-only (IO) affordability feature, can lead to substantial payment shock at the ARM reset, according to a newly released criteria report by Fitch Ratings. As a result, Fitch is adjusting its treatment of IOs on two- and three-year subprime hybrid ARMs to reflect the higher odds of default.”

“Fitch analyzed the payment shock potential for 2005 subprime IO and non-IO ARM products and found that the payment increase for an IO at the rate reset is significantly larger than the increase from principal amortization and is high even if rates do not rise due to the high margins and low initial rates.”

“Subprime IO credit performance has been strong due to the favorable economic climate of the past few years. ‘However, newer vintages may not exhibit the same strong performance because more borrowers could face a payment increase as home price appreciation slows,’ said Grant Bailey, Director, Fitch Ratings.”

“Fitch believes that the 2004 borrowers who are rate resetting for the first time in 2006 are less likely to face this obstacle since home values rose between 2004 and 2006. Fitch believes that loans resetting in 2007 and later may be more susceptible to the payment shock risk.”

From the LA Times. “Japan’s audacious five-year experiment of force-feeding cash into an ailing economy began to wind down Thursday, chased into history by central bankers convinced that Japanese industry and consumers have risen from their sickbed and no longer need easy credit.”

“Some economists also worry that higher rates could have global repercussions by encouraging Japanese investors to repatriate some of their vast U.S. investment holdings. That could force the Federal Reserve to push up rates more steeply than they are already climbing, leading to higher U.S. mortgage costs and depressed housing prices.”