Economic Despair

I loved the quotes in this article about the death of the subprime market - "Anything that smacks of no-income and no-documentation is history."

(CNNMoney.com) -- The subprime mortgage meltdown has been a shock to industry insiders, but now they say it's hitting harder and faster than expected - even to those who predicted the crisis in the first place.

That was the message Monday from a panel of leading industry executives on the state of the mortgage lending industry at the Mortgage Bankers Association's National Secondary Market Conference & Expo in New York.

Michael Marriott, a panelist and managing director for Credit Suisse, said, "Last October, I predicted the subprime market would collapse and many issuers would go out of business. But the violence and speed of the market sell-off surprised people."

David Lowman, a panelist and chief executive of JPMorgan Chase & Co.'s global mortgage business, said, "35 percent of what once could be done, can no longer be done," referring to mortgage loan products that have effectively been taken off the shelves.

And speaking separately from his Atlanta office, Duane LeGate, president of House Buyer Network, a specialist in short sales and foreclosure prevention, said one of the real estate agents he works with had six deals blow up within four days because, "The loan originator told him, 'We're not offering [these products] anymore.'"

According to LeGate, this kind of thing just started to happen in the past month or so. Allen Hardester, director of business development for mortgage broker Guaranteed Rate, said many once-common subprime loans products are now almost impossible to find.

"Anything that smacks of no-income and no-documentation is history," he said. "Anything above 85 percent to 90 percent loan-to-value, anything non-owner occupied, anything ludicrous as to value - like someone stepping up from a $1,000 a month payment to a $6,000 a month - is history."

Lenders are also scrutinizing applications much more carefully, and many don't like what they find. Lowman said he had recently looked at a low-document ion application for a UPS driver who earned a quarter of a million dollars last year - or so the application stated. Fictional claims, often involving outside income, are far from unusual. "If you took into account every person with a lawn care service on the side, there wouldn't be a blade of grass left in the United States," he said.

In the midst of all this terrible news about the housing market, there is the occasional happy story of bidding wars and sellers getting more than their asking price. However, such stories should be greeted with enormous skepticism. Local newspapers have strong vested interests in the real estate market. Advertising revenues has meant that many local news outlets are so deep in the Realtors pockets that they can't see daylight.

The Washington Post is a particularly bad offender. The local housing market is deeply distressed. Yet the Post produces rubbish like the article below.

(Washington Post, May 19, 2007) He and his wife, Rebecca, wanted to sell their three-bedroom townhouse in the Del Ray neighborhood of Alexandria. They paid $430,000 in 2004. They were asking $499,000. Jim and Shane Fagan of Alexandria, shown with 19-month-old daughter Tate, recently got $16,100 more than they asked for their Del Ray townhouse. (By Katherine Frey -- The Washington Post) We were pretty apprehensive," he said. "All through the fall, we had friends in Springfield who couldn't sell their house. We watched the market. We read everything. We were hoping just to break even."

However, after just three days on the market in late March, they had five offers, one for $515,000. "This completely shocked us," he said. In a soft market portrayed so often in bleak terms for home sellers, the Casons are in a minority: sellers who get the asking price or more. Some real estate agents say that, despite key statistics that show the slowest housing market in years, they are seeing cases of multiple bids and rising prices. These seem to be concentrated in close-in neighborhoods including Del Ray, Bethesda and Chevy Chase (both sides of the Maryland-District line) and American University Park in the District.

Real estate agent Jane Fairweather of Coldwell Banker in Bethesda, who said she has had some multiple-bid sales in recent months, said sellers are adjusting prices to reflect a more reasonable market rather than the upward price spiral of previous years.

"I think the market is soft if you don't price it right," she said. "You're now seeing probably 10 to 15 percent of the sellers out there who are going to see multiple contracts.”Two years ago, it was probably 40 to 50 percent of the market that got multiple contracts. And the year before that and the year before that, 60 percent of the market got multiple contracts."

Economists in the Washington area have differing views of what this could mean. Peter Morici, an economist and business professor at the University of Maryland, sees a sign of a healthier market. "It indicates while we don't have a high-volume market, we have a market that has some stability. Fundamentally, [prices] are not a lot lower than they were at the peak," he said.

There is one certain thing about economic forecasting; economists will be the last people to realise that there is a recession. Typically, most economists are expecting growth at around 2.5-3.0 percent this year, with some rebound next year.

However, first quarter data is at 1.3 percent, and things aren't getting better during the second quarter. If these forecasters are going to be correct, things are going to have to be very lively in the second half of this year.

WASHINGTON (Reuters) - Troubles in the U.S. housing market will weigh on economic growth this year even more than earlier estimated, according to a forecast of economists released on Monday.

Real gross domestic product, the government's broadest measure of economic output, is expected to advance 2.3 percent in 2007. That is down from an earlier estimate in February for 2.8 percent growth, a survey conducted by the National Association for Business Economics found.

The lower forecast came after the government reported anemic 1.3 percent GDP growth during the first three months of this year. "Results for the first portion of the year indicate that the expansion has descended from its cruising altitude," said Carl Tannenbaum, NABE president and chief economist at LaSalle Bank/ABN AMRO in Chicago.

However, growth in 2008 is expected to pick up to 3.1 percent after the housing market bottoms out.The survey of 48 economists taken between April 19 and May 8, found that housing market troubles, particularly those in the risky subprime mortgage lending market, will drag out through this year.

....they first make mad.

If there is one market that should not be hiring anyone at the moment, then it is the mortgage market. However, as some firms are firing, some are hiring. Wells Fargo and Countrywide are offering jobs. Why? Because they think they can clean up as other weaker firms go under.

Perhaps someone should gently call their human resource departments and ask them to take a look at the housing sector.

(MSNBC) Subprime mortgage lending's deep freeze has sent a chill over the rest of the mortgage industry as layoffs spread to those who lend to the more creditworthy. But even as smaller players shed staff, the industry's largest players such as Wells Fargo and Countrywide Financial are stepping up their hiring as they seek to grab marketshare amid the carnage.

Wells has two dozen mortgage-related openings in the Bay Area alone. And Countrywide said it will hire 2,000 sales people this year as part of a plan to open 100 branches around the country.

But others are quietly cutting staff to cope with the slowdown as fewer mortgages are made due to tighter lending standards and fewer home sales and refinancings.

GreenPoint Mortgage, a unit of Richmond, Va.-based Capital One, laid off 70 employees, including nine at the company's Novato headquarters. About 20 percent of GreenPoint's 2,800 employees works in Marin County. The company makes so-called "Alt A" mortgages, which go to borrowers that fall between prime and subprime. A big part of GreenPoint's business is making jumbo loans, those that exceed Freddie Mac and Fannie Mae's loan limit of $417,000. Coastal California is a big market for jumbo mortgages.

Another broker hard hit by the downturn is Lending Tree, which funnels loan applications to lenders across the nation. The Charlotte, N.C., company said this month it will lay off 440 workers, or 20 percent of its staff.

Just one more sign that the rest of the world is losing faith in the dollar......

(Financial Times) Kuwait yesterday removed its currency peg to the US dollar, throwing plans for Gulf currency union by 2010 into doubt and raising the prospect that other oil-producing states might abandon long-held dollar pegs.

Sheikh Salem Abdelaziz Al Sabah, governor of the Central Bank of Kuwait, told the official Kuwait news agency the decision had been made owing to the "detrimental effects of the pegging system to the national economy".

Since late last year, Kuwaiti officials have hinted that the country would revert to a basket of currencies to prevent the sliding dollar increasing the cost of imports, which has stoked inflation to more than 4 per cent, double the historic average. This has encouraged speculators to plough billions of dollars into the dinar over the past few months, betting that the central bank would allow the dinar to appreciate.

Yesterday the dinar traded up 0.4 per cent as the central bank replaced the peg with a basket of undisclosed currencies. The central bank had allowed the currency to vary up to 3.5 per cent from the peg, but the dinar had been at the top end of the approved trading band for a year owing to the continuing weakness of the dollar and the strength of Kuwait's oil-driven economy.

The dollar is expected to make up about 75-80 per cent of the new basket, reducing the third largest Arab oil exporter's exposure to the weakening dollar.

Lax lending standards, that is why there is a subprime crisis. Lenders ignored risks, and concentrated on increasing volumes.

(THE ORANGE COUNTY REGISTER )Just five years ago he was selling cars. Then, in January 2002, he anted up $250 for a state lender license and started selling home loans through his company, Quick Loan Funding. Over the next five years, Quick Loan wrote $3.8 billion in mortgages, lending money fast – and often on onerous terms – to people with shaky credit.

Boosted by high fees and interest rates – high even for the subprime industry – Quick Loan's after-tax profits averaged 29 percent of revenue. In 2005, Quick Loan's biggest year, profit topped $37 million. Sadek used the earnings to live the high life, buying a fleet of Ferraris, Lamborghinis and Porsches, dating a soap opera starlet and producing movies. He flew private jets to Las Vegas, where he gambled with high rollers at the Bellagio Resort.

He cultivated a rebel image, wearing a beard and hair to his shoulders, dressing in T-shirts and flip-flops, eschewing the typical mortgage banker's pinstripes. "How many thieves are wearing a suit?" he asks, sitting in the kitchen of his $4 million Newport Coast mansion.

Quick Loan Funding's name still crowns a Costa Mesa office tower. But Sadek, like the subprime lending industry, is holding a bad hand. His staff, once 700 strong, has shriveled to about 125. Monthly loan volume plunged to $30 million from a record $218 million in December 2005.

"I've sold all my cars to keep the company going," says Sadek, 38. "Every property I own is mortgaged to the max." Sadek is more than a poster child for the riches produced in the Orange County-centered subprime industry. His career arc shows how:

In California, almost anyone could open a lending business. It's harder to get a barber's license. Subprime lenders reaped billions in profits by charging high fees and interest rates. For the most part, these practices are legal. Borrowers often either misunderstood, were misinformed or simply paid no attention to the loan terms. Thousands would lose their homes.
State oversight is almost non-existent, with 58 examiners to oversee 5,000 lenders, some doing billions in business. Quick Loan has been accused of predatory lending, deceptive underwriting and fraud in at least eight lawsuits. In addition, Department of Corporations records show 33 complaints against Quick Loan, most alleging unfair business practices. Most of the lawsuits were settled out of court. And state regulators have never disciplined Quick Loan.

Sadek denies that Quick Loan ever broke the law or engaged in unfair business practices.

"I work very hard to do the best I can, to keep the mortgage company as clean as possible," he says. "Simple as that. I can't say it to you any better."

At the height of the housing bubble, there was one thing I could not understand; "how could people convince themselves that they could afford the mortgage payments that seemed to be at least as large as their monthly incomes". It was this, more than anything, that prevented me from buying a house. I just couldn't make sense of the numbers. I would look at my paycheck and then look at the estimated mortgage costs and local taxes. It didn't add up. However, it seems that other people weren't using much arithmetic.

(SGV Tribune) Now that some of the dire fears about adjustable-rate mortgages and subprime loans are proving true, lenders and nonprofit groups are rushing to come up with ways to slow down the defaults and foreclosures. Institutions behind these assistance programs say that a lot of homebuyers were duped or deceived into signing bad loans. The main goal, they say, should be to keep people in their homes.

But there's also a growing call from mortgage brokers and other market watchers for struggling buyers to take some personal responsibility for their decisions. After all, they say, nobody forced them to sign these loans. "We're going to give somebody a crutch all because they couldn't spend a day in a seminar to find out about the loan products, and now they're saying, `Nobody told me there was education,"' said Richard Pittman, director of housing and counseling at ByDesign Financial Solutions, a credit counseling nonprofit based in Commerce.

"Come on, get your paycheck out and look at it next to your loan statement. You didn't realize the $4,000-a-month payment was going to take 92 percent of your paycheck? ... There's a point to tough love, when you say this is a learning experience."

Here is a shocking story; in Argentina, the head of the statistical service is accused of manipulating consumer price index data. It appears that the service over-estimated inflation data, thus creating higher returns for inflation-indexed government bonds.

BUENOS AIRES (Dow Jones)--An Argentine federal prosecutor has identified evidence of a violation of secrecy rules and a manipulation of consumer price data at the national statistics agency, INDEC. In a report on his findings released late Wednesday, Manuel Garrido, a prosecutor in charge of administrative investigations, said he detected the use of "devices" and "artificial elements" to create "false public information."

The report was delivered to another prosecutor, Carlos Stornelli, who is handling a case brought by opposition leaders against Commerce Secretary Guillermo Moreno for his involvement in the alleged distortions within INDEC's consumer price index measurement.

In its designated role in monitoring and maintaining a system of price accords aimed at containing an inflationary trend, Moreno has become a controversial figure in Argentina. Rumors of his resignation earlier this week prompted a brief rally in the country's bonds before these were proven to be untrue.

The former CPI director, Graciela Bevacqua, was insistent on CPI measurement methodology that would have resulted in a significantly higher January inflation reading than eventually released. Suspicions over the reliability of the monthly inflation reports have risen, causing sharp losses in Argentina's CPI-linked bonds.

The government has periodically turned the blame onto INDEC staff, accusing unnamed personnel of falsely inflating CPI data in a pact with holders of inflation-linked bonds.


How deep is the housing crash? Data for new building permist gives us some idea. Since September 2005, permits are down 31 percent. Since new permits are a leading indicator for future housing sector developments, the short term prospects for the industry are bleak.

However, some might look at this chart and see some hope. The most recent data suggests that permits have stabilised at around 1.6 million. Time will tell whether this is the case or not, but even if permits have stablised, the industry has lost an enormous amount of activity.

Bernanke doesn't see much hope for housing. The subprime crisis is likely to weigh down the housing market right the way through 2007 until 2008. However, he doesn't think that the housing sector will have any "significant spillovers" into the real economy.

A simple re-examination of the last few years suggests that he might be wrong on that one. When the housing market was booming, it pulled the US economy up with it. Now that the housing market is sliding into a hole, there is every reason that it will take the rest of the economy with it.

May 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said a tightening in sub-prime mortgage standards will hurt the U.S. housing market and foreclosures will rise through 2008.

"Curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters," Bernanke said at a conference in Chicago today. "We are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets."

The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy. "We do not expect significant spillovers from the subprime market to the rest of the economy or financial system," Bernanke said.

Fed officials this year have cited the housing recession as a main risk to growth, which was the weakest in four years last quarter. Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending. Former Fed chief Alan Greenspan also said that subprime problems aren't spreading to lower-risk loans.

Blaming the Fed

Lawmakers and consumer advocates have blamed the Fed and other regulators for lax enforcement during the record $2.8 trillion mortgage boom between 2004 and 2006. The Fed didn't publicly rebuke any bank for failing to follow up on guidance on lending practices in the period. Regulators could have "done more sooner," Roger Cole, the Fed's chief bank supervisor told legislators in March.