Existing homes sales report "was very disappointing"

USA Today's piece on March, 2007 sales of existing homes being down 8.4% from February was described by the chief economist for the National Association of Realtors, David Lereah, as being "very disappointing." Lereah revised his previous estimate that the housing market had bottomed out last September--he now thinks that the market won't recover until the third quarter of 2007.

But the paper also points out that others are "less optimistic," including Patrick Newport, chief U.S. economist for Global Insight, who thinks it will be the first half of 2008 before the housing market "recovers."

Of course, you have to put some thought into what "recovers" actually means. Not to mention the need to be very precise about what it is that is recovering. Are we talking about prices? Units? Both? Would you consider it a recovery if sales picked back up a bit, but the backlog of homes for sale remained high?

The ultimate reality is that the many measures of health in the housing market pretty much all look bad right now. And that's without taking into account the fiasco in the subprime mortgage industry where, by the way, the extent of the losses incurred by investors is still unknown. The company's that bought mortgage-backed securities simply don't have to write down the face value of the investment as long as they keep the investment on the books.

All pretty bad news for an economy that most economists recognize has been propped up for some time by rising housing values.

If you think I'm pessimistic about the mortgage crisis....

I can't hold a candle to Jim Rogers, George Soros's former partner, who now manages commodities funds. According to a Reuters report datelined tomorrow from Moscow:

“You can’t believe how bad it’s going to get before it gets any better,” the prominent U.S. fund manager told Reuters by telephone from New York.

“It’s going to be a disaster for many people who don’t have a clue about what happens when a real estate bubble pops.

“It is going to be a huge mess,” said Rogers, who has put his $15 million belle epoque mansion on Manhattan’s Upper West Side on the market and is planning to move to Asia.
...
Some investors fear the problems of lenders who make subprime loans to people with weak credit histories are spreading to mainstream financial firms and will worsen the U.S. housing slowdown.

“Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it’ll be worse because we haven’t had this kind of speculative buying in U.S. history,” Rogers said.

“When markets turn from bubble to reality, a lot of people get burned.”

The fund manager, who co-founded the Quantum Fund with billionaire investor George Soros in the 1970s and has focused on commodities since 1998, said the crisis would spread to emerging markets which he said now faced a prolonged bear run.

“When you have a financial crisis, it reverberates in other financial markets, especially in those with speculative excess,” he said.

“Right now, there is huge speculative excess in emerging markets around the world. There will be a lot of money coming out of emerging markets.

“I’ve sold out of emerging markets except for China,” said Rogers, long a prominent China bull.
...
“This is the end of the liquidity party,” said Rogers. “Some emerging markets will go down 80 percent, some will go down 50 percent. Some will most probably collapse.”

Your guess is as good as mine whether things will come to that dire an end. But it ain't looking good.

That mortgage default story is looking a whole lot like a snowball

The mortgage default story (see here and here for past D4D stories) gets bigger by the hour. The way the stories keep coming, and spreading from one issue to another, looks a lot like the early part of a snowball rolling quickly down a steep hill.

This afternoon's news included the most recent quarterly survey from the Mortgage Bankers Association which shows:

A record number of homeowners entered foreclosure at the end of last year and more are making late mortgage payments, especially those with high-risk, sub-prime and government-financed loans...

...4.95% of average mortgage loans had late payments, compared to 4.67% the previous quarter and 4.7% a year before. It was the worst showing since spring 2003.

The fraction of mortgages entering foreclosure during the fourth quarter of 2006 climbed to 0.54%, the highest since the association started reporting in 1972. The previous high of 0.50% occurred in the second quarter of 2002 as the country was recovering from a recession....
...Late payments for FHA loans reached a historical high of 13.46% during the fourth quarter last year, up from 12.8% the previous quarter and 13.18% a year before.

And things continue to unravel in the "sub prime" market. In one report:

A board member at battered subprime lender New Century Financial Corp. (NEWC.PK: Quote, Profile , Research) last month sold $2.75 million worth of stock amid a 36 percent plunge in the company's share price, U.S. regulatory filings show.

The director, Michael Sachs, said he was not aware the shares were being sold until after the Feb. 8 transaction was completed, according to a filing with the Securities and Exchange Commission. Since then, lenders have stopped providing funding to New Century, pushing the company toward bankruptcy.

The Feb. 8 sale of 140,000 New Century shares on Sachs' behalf happened on the day after the subprime lender said it found accounting problems and would restate financial results....
The New York Stock Exchange on Monday suspended trading in New Century shares.

Another mortgage lender also publicly announced its troubles, . Accredited Home Lenders, "once considered by analysts as one of the strongest of the sub-prime lenders," now needs to raise serious cash to satisfy

its Wall Street partners [who] have required it to supply $190 million in new capital this year in return for continuing to provide funds for it to lend.

Accredited said it no longer meets the net income requirement its lenders have demanded and can offer no assurance that they will continue to support it. The firm has been struggling to digest its purchase last year of Los Angeles-based sub-prime lender Aames Investment Corp. and has said it may need to record some unexpected expenses as a result of that deal.

Yesterday, Bloomberg reported that:

Mortgage defaults may climb to $225 billion over the next two years compared with about $40 billion annually in 2005 and 2006, according to debt strategists at Lehman Brothers Holdings Inc.

Another Bloomberg report offered up the troubling possibility that:

As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.
...
Subprime lenders Ameriquest Mortgage Co. in Irvine, California; Ownit Mortgage Solutions LLC and WMC Mortgage Corp., a subsidiary of General Electric Co., in Woodland Hills, California; Mortgage Lenders Network USA Inc. in Middletown, Connecticut and Fremont General Corp. together have fired more than 5,600 workers in the past year.
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New Century Financial Corp., the second-largest subprime lender, said today it ran out of cash to pay back creditors who are demanding their money now. The Irvine, California-based company has lost 90 percent of its market value this year and stopped making new subprime loans, prompting speculation it will seek bankruptcy protection. New Century already has cut 300 jobs and its 7,000 remaining employees are waiting to see if the company will survive.
...
Doug Duncan, chief economist of the Washington-based Mortgage Bankers Association, predicted in January that more than 100 home lenders may fail this year.
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Job Cuts

By the end of this year, job cuts at companies including Benton Harbor, Michigan-based Whirlpool Corp., Masco Corp. of Taylor, Michigan, and St. Louis-based Emerson Electric Co. may exceed the fallout from the 1991 housing slump, said Paul Puryear, managing director at St. Petersburg, Florida-based Raymond James & Associates. The Bureau of Labor Statistics doesn't give data for housing-related job losses.
...
Fraud `Pervasive and Growing'

The Federal Bureau of Investigation says mortgage fraud is "pervasive and growing" and the incidence of such fraud has almost doubled in the past three years.

Last in this parade of actual and potential miseries, three days ago the NY Times reported in a large headline that "Troubles Hit Real Estate at High End." The NYT story includes the info that:

Until now, deep-pocketed Wall Street tycoons and foreign investors benefiting from a weak dollar seemed to be holding up the luxury real estate market even as the low-end fractured. But there are signs that some high-end real estate developers are also being hit by the slowdown.

How's that for bad, worse, and worst news?

Mortgage and consumer debt totals; the numbers boggle the brain

Just so you know, here are some figures from the Feb., 2007 Statistical Supplement to the Federal Reserve Bulletin:

1. Total U.S. Mortgage Debt Outstanding (Table 1.54), in millions of dollars

2002-------8,367,310
2003-------9,374,889
2004------10,680,490
2005------12,148,740
2006**----13,033,520
**--Third Quarter

Now remember, those figures are in millions. So the 2006 figure is 13.033 trillion dollars. And the 2006 figure is a full 55.77% higher than the 2002 figure.

2. Total Outstanding Consumer Credit (Table 1.55)

2003-----2,087,784,000,000
2004-----2,202,425,000,000
2005-----2,295,558,000,000
2006**---2,380,924,000,000
**End of October

That's an increase of almost $300 billion from 2003 to Oct. of 2006. And the total in Oct. of 2006, $2.382 trillion, works out to $7,936 for every single one of the U.S.'s estimated 300,000,000 citizens.

Mortgage defaults again (and again, and...)

The economic fallout from the wave of mortgage defaults continues to settle over the financial markets.

As the AP reported today:

Banks, Sub-Prime Mortgage Firms Hurt After Disclosure Of Probe At New Century
March 6, 2007

By JOE BEL BRUNO, Associated Press NEW YORK -- Mounting concerns on Wall Street that mortgage lenders might be hurt by increasing defaults and delinquencies sent investors fleeing Monday from some of the biggest names in the industry.

The meltdown among lenders that specialize in home loans to people with weak credit, known in the industry as sub-prime lenders, again ravaged stock prices. Financial institutions ranging from Britain's HSBC Holdings PLC to sub-prime leader Countrywide Financial Corp. sank amid reports of strained portfolios as loans went bad.

The latest to rattle the markets was New Century Financial Corp., the nation's second-largest sub-prime lender. The Irvine, Calif.-based company disclosed a criminal probe into the trading of its securities, and into the lender's accounting procedures.

Already beleaguered investors were swift to react. New Century's shares lost 60 percent on Monday - wiping $532 million from its market value. Wall Street, still wobbly after last week's huge plunge, also punished the rest of an industry blamed for loosening lending standards amid an eroding housing market.

In Connecticut, Middletown-based Mortgage Lenders Network filed for bankruptcy protection last month when its sources of funding disappeared.

"We see increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals, including origination volume, pricing, credit, and most importantly, funding," Stifel Nicolaus analyst Christopher Brendler said.

And that ain't all, folks. The sub-prime market re-contracts its obligations to major commercial lending entities, so if the sub-prime market really goes sour, look forward to a domino effect...which appears to have already begun as the story linked above reports:

Concerns about a meltdown at New Century include the possibility it will not be able to meet covenants with major financial backers, the company said. Sub-prime lenders enter into agreements with big banks to finance their operations. These backers require sub-prime lenders to meet minimum financial targets or face breaching loan agreements that would force banks to pull out of the deals.

This dragged down shares of some of the top U.S. banks and investment banks.

Morgan Stanley Inc., which had a 5.5 percent stake in New Century as of Dec. 31, dropped $1.33, or 2 percent, to $72.03. State Street Corp., with a 3.8 percent stake, shed 12 cents, to $64.96. Citigroup Inc., with 3.5 percent stake, traded as low as $49.56 before recovering to post a 27-cent gain, at $50.24.

Other sub-prime lenders also tumbled. Countrywide Financial fell $1.03, or 2.8 percent, to $35.99, and it is down about 14 percent since January. Novastar Financial Inc. shares plunged $2.17, or 30 percent, to $5.07, and are down about 40 percent this year.

Higher U.S. interest rates and a stagnant housing market began to take their toll on borrowers who had been relying on the rising value of real estate markets to help them refinance mortgages.

Last year, 13.5 percent of mortgages originated in the U.S. were sub-prime, according to the Mortgage Bankers Association. This is up from 2.6 percent in 2000. The subprime market accounted for about 20 percent, or $600 billion, of the $3 trillion mortgage market.

The stock market drop last week may or may not turn out to be the beginning of a huge slide--it's hard to tell in an arena that is so cyclical and in which so many factors can produce a given downturn. But the mortgage default phenomenon and its consequences, that's pretty much sure to be a problem. With a capital P.

Those great business ethics on display again

Wall Street Journal and CNBC types love to pretend that private sector ethics are far better than government ethics. If you've been alive and conscious over the last decade, you know that isn't true (they're equally corrupt, and generally run by the same kinds of folks).

Two more examples just hit the fan:

1. Huge insider trading ring broken up:

It started in 2001 with two old friends meeting at the Oyster Bar in the basement of Grand Central Terminal in Manhattan, discussing a $25,000 debt.

It ended yesterday with federal authorities saying that they had exposed one of the most far-reaching insider trading schemes on Wall Street in decades, involving four investment banks and a web of hedge funds, day traders, lawyers and even a few supervisors, who upon discovering evidence of insider trading, blackmailed the traders to keep quiet about it.

Thirteen people were accused yesterday of taking part in the trading ring, including a former Morgan Stanley compliance official, a senior UBS research executive, three employees from Bear Stearns and a Bank of America employee.

Linda C. Thomsen, chief of enforcement at the Securities and Exchange Commission, described the scheme as one of the most “pervasive Wall Street insider trading rings since the days of Ivan Boesky and Dennis Levine.”

Nine of the defendants have been arrested, and four have pleaded guilty to charges ranging from securities fraud, conspiracy to commit securities fraud and bribery. The investigation, conducted by the S.E.C., the Federal Bureau of Investigation, and the office of the United States attorney in Manhattan, has been under way for more than a year and is continuing.

The schemes described by federal authorities were unusual for their breadth and the seniority of the executives involved.

The tactics, however, were all too familiar: Wall Street executives tipping hedge fund traders about potential upgrades or downgrades of stocks, information sure to move a stock’s price; leaking information about pending mergers and acquisitions, and taking kickbacks to get access to hot deals. In the middle, authorities say, was a hedge fund manager looking for an edge.

2. Largest subprime mortgage lender under fed investigation:

Federal prosecutors and securities regulators are investigating stock sales and accounting errors at the New Century Financial Corporation, the biggest mortgage company that specializes in lending to people with weak, or subprime, credit, the company disclosed in a corporate filing yesterday.

The company also warned that a delay in filing its financials may put vital financing into jeopardy.

The troubles at New Century are the latest sign of the deterioration in subprime lending — until recently the fastest-growing segment of the mortgage business. The market has been struggling to contain the fallout from rising default rates and weakening home prices. Late last year, some smaller lenders started going out of business and last month several bigger companies, including New Century, started reporting problems.

Another large lender, the Fremont General Corporation, said yesterday that it planned to sell its subprime mortgage business after reaching an agreement with the Federal Deposit Insurance Corporation to restrict its activities in that area. As part of the agreement, Fremont will be able to continue taking deposits.

The investigations into New Century, which is based in Irvine, Calif., and wrote $33.9 billion in mortgages last year, started after the company said on Feb. 7 that it would restate earnings for three quarters, which sparked a huge sell-off in its shares. Yesterday, it said its problems had prevented it from filing its annual report, which was to be released Thursday. The board is conducting an investigation of the accounting problems.

Neither one rises to the level of Enron or Global Crossing fraud, but, come on, business ethics in America in the 21st century? An absolute oxymoron.