Wednesday, December 31, 2008

Mortgage applications reach multi-year high

Here's an interesting article from bloomberg.

U.S. MBA’s Mortgage Applications Index Rose to Five-Year High

By Shobhana Chandra

Dec. 31 (Bloomberg) -- Mortgage applications in the U.S. last week reached a five-year high as borrowing costs slid.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan rose to 1,245.7, the highest level since 2003, from the prior week’s 1,245.4. The group’s purchase gauge climbed 1.4 percent and the refinancing measure fell 0.4 percent.

The drop in borrowing costs, sparked in part by the Federal Reserve’s plan to buy mortgage-backed securities, is the lone bright spot in a market plagued by record foreclosures and plunging home values. While lower rates will help owners reduce monthly payments, they have yet to stimulated sales, indicating the housing slump will persist for a fourth year.

“We’ve seen a bit of recovery in mortgage applications as borrowing costs are easing,” John Herrmann, president of Herrmann Forecasting LLC in Summit, New Jersey, said before the report. “The housing market has not yet reached a bottom. Sales and prices will continue to grind lower into next year.”

The Fed in November announced a program to reduce the cost and increase the availability of credit for homebuyers. Yesterday, the central bank selected four firms to manage a $500 billion purchase of mortgage-backed securities, to be completed by June. Only fixed-rate agency mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae are eligible assets for the program, the Fed said.

The mortgage bankers’ purchase index increased to 320.9 last week, from 316.5 the prior week. The measure reached an eight- year low of 248.5 in mid November and peaked at a record 529.3 in June 2005.


The refinancing gauge decreased to 6,733.8 from the prior week’s five-year high of 6,758.6.

The average rate on a 30-year fixed-rate loan dropped to 5.03 percent, the second-lowest level since records began in 1990, from 5.04 percent the prior week. At the current rate, monthly borrowing costs for each $100,000 of a loan would be about $539, or $91 less than the end of October, when the rate was 6.47 percent.

The share of applicants seeking to refinance loans slid to 82.9 percent of total applications, from a record 83.2 percent the prior week.

Today’s report also showed the average rate on a 15-year fixed mortgage decreased to 4.79 percent, the lowest level since March 2004, from 4.91 percent the prior week. The rate on a one- year adjustable mortgage dropped to 6.15 percent from 6.36 percent.

Mounting foreclosures and slumping sales are accelerating the drop in property values. Home prices in 20 major U.S. cities declined 18 percent in October from the same month last year, the most on record, the S&P/Case-Shiller index showed yesterday.

The Washington-based Mortgage Bankers Association’s loan survey, compiled every week since 1990, covers about half of all U.S. retail residential mortgage originations.

To contact the reporter on this story: Shobhana Chandra in Washington at

Fannie Mae's Delinquency Rate Continues to Climb

According to Forbes, Fannie Mae saw its delinquency rates climb from 1.72% in in September 2008 to 1.89% in October 2008.

Tuesday, December 30, 2008

169 Mortgage companies closed last year

Story from bloomberg

Fed Study Finds 169 Mortgage Finance Companies Failed Last Year

By Craig Torres

Dec. 29 (Bloomberg) -- Federal Reserve researchers found that 169 independent mortgage companies ceased operations in 2007, crimping credit to consumers as the economy plunged into a recession.

The data signal the waning of lightly regulated mortgage lenders that thrived with funding from Wall Street firms and investors hungry for yield. Non-bank lenders’ share of the high- priced loan market, which includes subprime loans, fell to 20.5 percent in 2007 from 50.6 percent in 2004, the Fed study said.

Most of the non-bank lenders sold their home loans to investment banks which repackaged them into bonds. As the mortgages deteriorated in quality last year, buyers disappeared, leaving the finance companies holding souring loans. One of the largest non-bank lenders, New Century Financial Corp., based in Irvine, California, filed for bankruptcy last year.

“It underscores the whole vulnerability of a system that doesn’t have checks and balances in place at the beginning of loan origination,” said Kevin Petrasic, an attorney at Paul, Hastings, Janofsky & Walker in Washington and a former special counsel at the Office of Thrift Supervision.

Most of the financial institutions weren’t considered banks or banking subsidiaries so they were regulated by state banking supervisors rather than by federal agencies.

The 169 defunct lenders “accounted for nearly 15 percent of the higher-priced conventional first-line loans for site- built properties in 2006,” according to the final draft of the study published in the December Federal Reserve Bulletin. “They accounted for about 8 percent of all conventional first-lien loans for such properties.”

Market Shrank

Banks’ share of the high-priced loan market rose to 46 percent last year from 26 percent in 2004, the data show. The banks’ market-share growth came as other firms disappeared and the overall market shrank. High-priced loan volumes fell 18 percent last year.

“If the subprime market continues to exist at all going forward, it will have to be done almost exclusively by federally insured depositary institutions in the near term, and perhaps eventually by non-depository lenders subject to rigorous state oversight,” Petrasic said.

Fed economists Robert Avery, Kenneth Brevoort, and Glenn Canner of the Board’s Research and Statistics Division also found that 74 percent of blacks who obtained mortgages from the 169 financial institutions received high-priced loans. Among Hispanics, 63 percent received high-priced loans, while among non-Hispanic whites the figure was 46 percent.

Unsuitable Loans

Consumer advocates have long said that lightly supervised lenders were giving unsuitable loans to minority borrowers. Regulators have cracked down on so-called predatory lending over the last year. The Fed, after goading by Congress, prohibited lenders from granting high-priced loans without verifying a borrower’s income and assets.

Global financial institutions have reported $1 trillion in credit losses and writedowns since the mortgage crisis began 16 months ago. Delinquencies on subprime mortgages, or home loans to borrowers with limited or poor credit histories, rose to 20 percent in the third quarter, according to Mortgage Bankers Association data.

The U.S. mortgage meltdown has led to a recession, as foreclosures blighted neighborhoods and reduced home values, further constraining credit.

Employers cut payrolls by 533,000 last month for a total loss this year of 1.9 million jobs. The decline more than erases the gain last year of 1.1 million.

The economy will decline at a 4.3 percent annual pace this quarter and at a 2.4 percent rate in the first three months of next year, according to the median estimate in a Bloomberg News survey of economists earlier this month.

New York City office space vacancy rates are increasing

Commercial vacancy rate hits 2-year high

Story from Crains---Click here

Struggling financial and law firms are vacating space faster than other tenants can absorb it, as the availability rate hits 10.9% for the fourth quarter of 2008

The amount of available commercial space for rent in Manhattan rose to its highest level in two years during the fourth quarter as struggling financial and law firms disappeared or contracted and other companies avoided signing leases altogether.

Manhattan’s overall availability rate ended 2008 at 10.9%, more than three percentage points higher than a year ago, according to a report by FirstService Williams. The increased availability and lack of tenants pushed average Manhattan rents to $74.49 a square foot, down nearly 3% from the year-ago period and 4% from the third quarter.

A host of financial service firms, including Citigroup Inc., UBS, Credit Suisse First Boston and the now-gone Bear Stearns, placed a total of almost 1.2 million square feet of sublease space on the market. Meanwhile law firms vacated almost 700,000 square feet of space. The amount of sublease space available hit 2.8%, the highest it has been in three years.

There were fewer tenants to fill all of that space. Leasing activity during the fourth quarter fell 18.4% to 24.7 million square feet from last year.

“With the economy expected to remain sluggish at best during 2009, it is inevitable that the availability rate will rise further, and rents will continue to decline throughout the next several quarters,” said Robert Freedman, FirstService Williams’ executive chairman, in a statement.

Availability increased the most in midtown, home to many of the financial and law firms, where it rose to 11.9%, climbing 4 percentage points from the year-ago period. At $88.81 a square foot, asking rents in that neighborhood were essentially flat with last year’s level but down 4% from the third quarter.

Rents in midtown south took the biggest dive, dropping nearly 10% from last year’s level to $55.00 a square foot. Leasing activity in that area fell a whopping 39% for the year to 13.6 million square feet from 2007.

Monday, December 29, 2008

December 2008 mortgage rates hit new lows.

Story from the WSJ

Home-Mortgage Rate Hits Fresh Low, 5.14%

Fixed-rate home mortgage rates fell again this week, with the 30-year fixed-rate mortgage setting another record low, at least since Freddie Mac began doing its weekly survey in the early 1970s.

[Mortgage Rates]

The 30-year averaged 5.14% for the week ended Dec. 24, down from last week's 5.19% average, according to the Freddie Mac survey released Wednesday. It was more than a full percentage point below its 6.17% average a year ago, and hasn't been lower since Freddie started doing its rate survey in 1971.

Fifteen-year fixed-rate mortgages averaged 4.91% this week, down from 4.92% last week and 5.79% a year ago. The mortgage hasn't been lower since April 1, 2004, when it averaged 4.84%.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.49% this week, down from 5.6% last week and 5.9% a year ago. One-year Treasury-indexed ARMs averaged 4.95%, up slightly from 4.94% last week yet still down from 5.53% a year ago.

"Interest rates on 30-year fixed-rate mortgages eased for the eighth straight week" and set a record low since Freddie Mac's survey began in 1971, said Frank Nothaft, Freddie Mac chief economist, in a statement.

"Real GDP growth fell 0.5% in the third quarter of the year, pulled down by the largest drop in consumer spending since the second quarter of 1980. The market consensus calls for an even larger decline in the last three months of the year," he said.

And the housing market continues to contract, Mr. Nothaft added.

To obtain the rates in the weekly survey, the 30-year fixed-rate mortgage required payment of an average 0.8 point, the 15-year fixed-rate mortgage required an average 0.7 point and the ARMs required an average 0.6 point. A point is 1% of the mortgage amount, charged as prepaid interest.

In a separate survey Wednesday by the Mortgage Bankers Association, mortgage applications were up a seasonally adjusted 48% last week, compared with the week before.

Sunday, December 28, 2008

Wells Fargo / Wachovia Option Arms

The December-2008 Wells Fargo Investor Presentation had an interesting table on page #19

The key content was:
WB - Pick-a-Pay ARMs
  • $122bn outstanding:
  • 58% secured by California real estate
  • Weighted average LTV at origination 76%
  • 80%+ stated income with average 675 FICO
  • Recast at 125% loan balance or 10 years minimizes contractual payment shock
  • Remaining losses after purchase accounting to peak in 2010
  • Loss mitigation program appears to have significant potential. Life of loan loss projections do not incorporate any loss mitigation program impacts
  • Life of loan loss estimated at $36bn = 29% of outstanding
Note: WB = Wachovia Bank & "Pick-a-Pay ARMs" = "Option ARM"

Now considering that according to California has had 6 consecutive quarters of declines in housing values with Q3-2008 dropping ~21% in the last year. That means there are plenty of Californians with Option-ARMs that have zero (or negative) equity in there homes, and for the loans that Wells Fargo acquired via Wachovia, their losses "should" crest in 2010.

Now only time will tell if the loan loss estimates ($36 billion / 29% of WB's outstanding Option-ARMs) is conservative enough)

Option ARM resets 2009, 2010, 2011, 2012

The trickle of Option-ARM's that have been resetting is going to become a flood in late 2009 to 2011. The amount of the payment increase could be 40% to 80% higher for many borrowers.

Again, the "Option" in "Option-Arm", allows a borrower to pay a minimum-payment for several years, which actually causes a negative-amortization of the loan (aka, the outstanding loan balance increases--even though monthly payments are being made)--And once the reset is cast, the monthly payments that a borrower has to pay increases drastically.

Unfortunately, as the price of housing continues to decline, the chances of people who obtained option-ARMs in the later years of the housing bubble (2006 & 2007) will likely have lost significant equity and will find refinancing to be most difficult.

To see how an Option ARM works--click here.

Q3-2008 vs Q3-2007 Alt-A Mortgage Originators

Q3-2008 (vs. Q3-2007) saw an even bigger decline in Alt-A mortgage originations than the Q2-08 vs. Q2-07 data point. The Top-10 Alt-A companies underwrote $1.55 Billion in Alt-A mortgages in Q3-2008, which is an 88% decline from the $13.2Billion of business done in Q3-2007.

Again, ResCap (GMAC) and Chase were the biggest drivers of the decline--Down $4.7Billion and $2.4Billion respectively.

Top-10 Alt-A Mortgage Originators Q2-2008 vs Q2-2007

The Top-10 Alt-A mortgage originators in Q2-2008 did 81% fewer Alt-A mortgages in Q2-2008 vs. Q2-2007, as Alt-A mortgages in Q2-2008 amounted to $2.6 billion vs $13.6 billion from those same companies in the prior year; with the biggest cut-backs coming from Chase and ResCap (GMAC) Mortgage.

Monday, December 22, 2008

A Decade of Mortgage Delinquency Rates and Default Rates

According to data released by the Federal Reserve Board, the levels for Delinquency Rates and Charge-off Rates for mortgages related to single family homes and commercial properties have reached decade-level highs.In Q3-2008, Delinquency rates for mortgages on single family homes and Commercial Real Estate both were ~5%, and the charge-off rate for these loans were 1.1% for Commercial loans and 1.45% for single family home mortgages.

Commercial Loan defaults could Triple

Commercial Loan Defaults May Triple as Rental Income Declines

By Hui-yong Yu

Dec. 22 (Bloomberg) -- U.S. commercial properties at risk of default could triple if rental income from office, retail and apartment buildings drops by even 5 percent, a likely possibility given the recession, according to research by New York-based real estate analysts at Reis Inc.

Lenders that used optimistic rent estimates to grant mortgages beginning in 2005 stand to lose as much as $23.1 billion, or 7.02 percent, of total unpaid balances if landlords lose 5 percent of net operating income, according to Reis. Analysts examined data on 22,890 properties that together may account for unpaid loans of about $329 billion in 2009, said Victor Calanog, director of research.

Banks are at risk as office vacancies are forecast to rise to 15.6 percent next year from an estimated 14.6 percent at the end of 2008. Lenders who sold commercial mortgage-backed securities to pension funds, investment banks and foreign governments have been hit by more than $1 trillion in losses and asset writedowns connected to bad residential loans.

Read the rest of the Bloomberg story here

Q3 2008 Top 10 Mortgage Originators

The Top-10 mortgage originators in Q3-2008 originated $230 billion of mortgages in Q3-2008, which is 29% less than the $323 billion of business that they did in Q3-2007.

It's also interesting to note that Bank of America's increase in business was driven by their acquisition of Countrywide Mortgage. In the quarter, Washington Mutual (WaMu) had the distinction of having the largest drop in business--on both dollar terms ($24 billion less) and percentage decrease (down 71%).

Sunday, December 21, 2008

How do Option ARMs work?

Many people wonder how Option ARM's (Adjustable Rate Mortgages) actually work.
Well the situation is that the Mortgage holder actually has 4 different Options on what their monthly payments will be.
  1. A 30 Year Amortizing Payment option (which reduces outstanding principal)
  2. A 15 Year Amortizing Payment option (which reduces outstanding principal)
  3. An Interest Only (IO) payment option.
  4. A minimum payment (which increases the outstanding principal).
The attached video shows a good example of what could be in store for tens-of-thousands of borrowers that chose to pay the "minimum payment" option.

Top 10 Mortgage Providers Originate much fewer loans in Q2-2008 vs Q2-2007

Comparing Q2-2008 Mortgage origination figures with Q2-2007, you can see that there was a significant decrease in mortgages underwritten.The top-10 Mortgage originators did $320 billion in originations in Q2-2008 compared to $507 billion, from those same companies in Q2-2007. In dollar terms Countrywide shrunk from $130 billion to $59 billion; While Washington Mutual (WaMu) saw the biggest percent decline--Down 74%.

Alt A and Option ARM resets to trigger next wave of foreclosures

Last night 60 Minutes had a very interesting story about how a second wave of defaults will hit the housing market. The first wave of course, has been the sub-prime loans that have gone bad. The second wave will consist of Alt-A loans and Option-ARM loans.

This potential wave of future resets in Alt-A and Option ARMs, according to Credit Suisse really begins in 2009, ramps up in 2010, and ramps up again in 2011.

These resets, coupled with increasing unemployment rates, in my opinion will continue to hold-down real estate values for the next several years.

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