The Housing Bubble

Some housing bubble news from Wall Street and Washington. Reuters, “Countrywide Financial Corp, the largest U.S. mortgage lender, said on Wednesday that foreclosures and late payments rose in December to the highest on record. In its monthly operating report, Countrywide said the foreclosure rate among the 9.03 million mortgages for which it collects and processes payments doubled to 1.44 percent from 0.70 percent a year earlier, and rose from November’s 1.28 percent.”

“The delinquency rate rose to 7.20 percent of unpaid balances from 4.60 percent a year earlier. December’s rates were the highest since 2002, the earliest period for which data are available.”

“In December…average daily mortgage loan applications fell 17 percent to $1.54 billion. Total lending fell 44 percent from $41.7 billion a year earlier, as subprime volume sank to $6 million from $3.74 billion.”

“The company is offering yields above 5 percent on some certificates of deposit and savings accounts to attract cash after credit markets seized up last year.”

The Orange County Register. “Folks shopping for a home loan are likely to face higher fees this year, especially if they have even a minor ding on their credit record.”

“Lenders already have raised their consumer prices to reflect fee increases they must pay to Fannie Mae, the largest U.S. funder of home loans, and Freddie Mac, beginning in March.”

“And for the first time Fannie and Freddie are charging higher fees on loans to borrowers with low to mid-range credit scores, known as FICO. Beginning March 1, the new fees will apply to anyone with a FICO under 680, if the loan is greater than 70 percent of the value of the home. That’s on top of the 0.25 percent fee.”

“Aaron Kopelson, in the Laguna Hills office of Loan Link Financial Services, which funds and brokers loans, said Fannie and Freddie have moved to ‘risk-based pricing’ for the first time. They are acting on rising delinquencies, he said.”

“UBS, a global financial company, said in a Jan. 2 report that roughly 40 percent of Alt-A loans made in 2006 and early 2007 could have qualified for sale to an agency like Fannie, while 26 percent of subprime loans could have qualified.”

“Now all such loans need to qualify or they won’t find funding, UBS said. To be sure, some lenders are making and holding a few riskier loans, experts say.”

“Raphael Bostic, associate director of USC’s Lusk Center for Real Estate, said fees hitting folks borrowing more than 70 percent of the value of a home seem rather ’strict’ and he would have expected the value to be set at 90 percent or more.”

“In an email, he wrote that the new rule suggests that Fannie and Freddie anticipate ’significant price declines’ for homes.”

The Connecticut Post. “In advance of its fourth-quarter earnings release, Webster Financial Corp. disclosed plans to cut costs and announced it will take a pre-tax provision of up to $62.4 million related to credit losses and discontinued businesses.”

“Of the funding, $40 million will increase the allowance for credit losses in ‘discontinued indirect residential construction and home equity loan portfolios,’ according to the news release.”

“‘We did some construction lending in Florida’ and had a national wholesale mortgage business, buying mortgages originated by others as a way to grow that part of the business, said spokesman Arthur House. ‘None of this is subprime’ lending, he said.”

“In the release, James C. Smith, Webster’s CEO, said the company has ‘identified, segregated and reserved against estimated losses,’ at a rate that reflects its view default and loss rates will ’significantly worsen from current levels.’”

From The Star. “Canadian credit-rating company DBRS Ltd. is swinging the axe, blaming the global credit crunch as it closes offices in Europe and cuts just over one-third of its workforce. The firm also cut support staff positions in Chicago, New York and its Toronto head office.”

“DBRS has been at the eye of the storm in Canada, where it was the only company to give its approval to asset-backed commercial paper issued by non-bank dealers. The $33 billion commercial paper market came to a halt in August as investors worried about possible links to risky U.S. subprime mortgages.”

The Vancouver Sun. “The U.S. housing crisis coupled with a Canadian dollar at par has taken a quarter-billion-dollar bite out of the value of Canada’s second-largest lumber company.”

“Vancouver-based Canfor Corp. announced that it can’t recover the carrying value of its mills and other assets, listed at $4.7 billion, from expected cash flows. It’s therefore writing down the value of those assets by $256 million.”

“‘Where the carrying value of assets is not expected to be recovered from future cash flows, they are written down to fair value,’ Canfor stated in a news release.”

“Canfor’s move in writing down the value of its mills is unusual for a lumber company but shows the depth of the financial crisis facing the industry, said Kevin Mason, analyst with Equity Research Associates.”

“The housing collapse has reduced the American appetite for lumber and prices have fallen to below break-even levels for Canadian producers. ‘The value of Canfor’s assets, especially if you look at it from the income they can produce, has definitely been impaired,’ Mason said. ‘This is not a surprise.’”

“He expects other companies may soon follow suit. ‘This does beg the question: How much more is out there? This could be a precursor to other lumber producers doing the same thing.”

“The $25-million corporate writedown includes $10.6 million clipped from value of Canfor’s cash investments in asset-backed commercial paper (ABCP). Canfor invested $85 million in ABCP which was exposed to the subprime mortgage fiasco in the U.S. created when high-risk buyers defaulted on their loans.”

“It is the second time Canfor has written down its investments in ABCP. It wrote the investment down by $6 million in the third quarter for a total writedown of $17 million, or 20 per cent.”

“Mason said it was foolish for a lumber company that is 100-per-cent exposed to the vagaries of the U.S. housing market to put its cash investments in the same market and invest with financial firms that could be hit by the subprime loan crisis.”

The Associated Press. “Residential homebuilder Brookfield Homes Corp. said Tuesday it will record a hefty charge in its fourth quarter due to impairments and write downs on its housing and land inventory.”

“Brookfield said due to ‘challenging market conditions,’ it had to lower its expectations for future revenue on its projects. Brookfield also said net new home orders for the fourth quarter dropped 50 percent due to the continued weakness in the housing market.”

From Trading Markets. “Based on the average of 33 active selling communities, the company’s sales rate during 2007 was about 0.4 sales per week per community, below the one sale a week which is considered a stable housing market, Brookfield said.”

“New home orders increased in Northern California while the Southern California market saw sharp declines. Orders in the San Diego, Riverside, Calif., and Washington, D.C., areas were also down.”

The Morning News. “As 2007 closed its doors so did several more Northwest Arkansas builders who sought debt relief by filing bankruptcy in recent weeks, leaving a dozen local banks to sort out $16.5 million in residential lots, finished and unfinished homes in Benton and Washington counties.”

“More than 70 building industry-related bankruptcies were filed in the Western District of Arkansas in 2007, according to court records. The builders recently filing bankruptcy had one thing in common — unsold residential property they could no longer afford to carry.”

“‘We are now seeing a second wave of bankruptcies, not unlike what happened a year ago when the market started its decline in July of 2006,’ said Kathy Deck, director for the Center for Business and Economic Research at the University of Arkansas’ Sam M. Walton School of Business.”

“Tim McMahon, was named ‘Northwest Arkansas’ Home Builder of the Year’ by CitiScapes Magazine in December. It was the same month he filed bankruptcy.”

“The federal bankruptcy schedule filings indicate McMahon owned 157 residential lots and 28 homes in Benton and Washington counties valued at $11.95 million. The outstanding loans on these properties total about $12.1 million.”

“Larry Pinkley, a Benton County builder for more than three decades, said tightened lending standards and too many unsold homes are pushing good builders out the business. ‘I hate to see quality builders close up shop, but it’s happening. When they can’t pay up and they can’t sell the property there really is no other solution,’ Pinkley said.”

“Pinkley said some builders are deeding back unsold properties to the lending banks in lieu of foreclosure. But because there is no public court filing in these cases, identifying the actual number of properties involved in this type of title reassignment is difficult at best.”

“A couple of large homes and a lot or two with little or no other income could bankrupt a builder in a matter of a few months, experts say.”

“While carrying costs vary from deal to deal, local banking experts said the standard benchmark for construction loans is roughly prime rate, give or take a percent. A $1 million construction loan made at last year’s prime rate of 8.25 percent could have monthly carrying costs of about $6,900 when fully funded.”

The LA Times. “Shares of KB Home plunged on Tuesday to a six-year low after the Los Angeles home builder reported a bigger-than-expected fiscal fourth-quarter loss of $773 million.”

“In a conference call with analysts Tuesday, KB Home CEO Jeffrey Mezger discounted any hope of a quick turnaround in the housing market, citing ‘oversupply, foreclosures, reduced affordability and declining consumer confidence.’”

“‘Current conditions are not improving enough to clear inventories,’ which stand at nine months for new homes nationwide, he said.”

“Mezger said the company’s customer mix was shifting. ‘We are definitely seeing a buyer viewing the home for lifestyle, intending to live in it for a while. The days of the flipper are gone,’ he said.”

The Boston Herald. “The residential real estate market is going through its worst investment period in 50 years - and it could get even rougher if the U.S. economy slows significantly in the coming year, Boston Federal Reserve president Eric Rosengren warned yesterday.”

“‘Let me be clear - this is an unusual economic situation and we cannot predict exactly what is going to happen,’ said Rosengren, an economist who studied the New England real estate crash in the early 1990s.”

“‘Since prices have declined substantially even in a relatively benign economic environment, one cannot discount the possibility that they could fall more rapidly should economic performance not remain strong in 2008,’ Rosengren said.”