New York City Real Estate Blog

Losses at subprime lenders are spreading to higher-rated credits

“American Home Mortgage Investment Corp. shares fell as much as 19 percent after the company's loans attracted few bids from investors, fueling concern that losses at subprime lenders are spreading to higher-rated credits.

First-quarter profit will come in at 40 cents to 60 cents a share, the Melville, New York-based company said in a statement on April 6. It was expected to earn $1.06, the average estimate of eight analysts compiled by Bloomberg. The quarterly dividend was cut to 70 cents from $1.12. Earnings for 2007 will probably be $3.75 to $4.25 a share, the company said, instead of the $5 analysts predicted in the Bloomberg survey.

American Home reported few bids and lower-than-expected prices for its Alt-A mortgages, granted to people with strong credit ratings who don't meet all the criteria for conventional loans. A week earlier, M&T Bank Corp., partly owned by Warren Buffett's Berkshire Hathaway Inc., cut its forecast because of weak demand and higher defaults on Alt-A mortgages. M&T said investor concern about the increase in bad subprime loans is hurting prices for less-risky mortgages.

``There's no question the credit problems we've seen in subprime are blending into Alt-A,'' said Fox-Pitt Kelton Inc. analyst Matthew Howlett in an interview. ``It's reflective of the poor underwriting that has gone on in this sector.''

American Home's stock declined $4.29, or 17 percent, to $21.55 at 12:33 p.m. in New York Stock Exchange composite trading. The shares had dropped 26 percent this year before today. American Home is a real estate investment trust or REIT that originates home loans and invests in mortgage securities. ”

American Home Mortgage Shares Fall on Profit Forecast(Bloomberg)

 

Downward pressures on home prices

“A sharp increase in homes offered for sale last month suggests that home shoppers will find plenty of choices this spring.

The number of homes listed for sale in 18 major U.S. metropolitan areas at the end of March increased 6.5% from a month earlier, according to data compiled by ZipRealty Inc., a national real-estate brokerage firm in Emeryville, Calif. The data cover listings of single-family homes, condominiums and town houses on local multiple-listing services.

Over the past 22 years, home inventories nationwide have increased an average of 1.7% in March from February, according to Credit Suisse Group. Supplies typically rise modestly in March as sellers pursue the many families with children who seek new homes in the spring, so they can move during summer vacations.

 The big rise in the latest month may reflect sellers' expectations that it will take much longer to find buyers than it did during the housing boom of the first half of this decade, said Patrick Lashinsky, president of ZipRealty. Rather than waiting for April or May, he said, many people planning to move this summer put their homes up for sale in March. He added that many sellers are being cautious, waiting to sell their old homes before committing to buy new ones.”

Housing Inventory SurgesIn March Across the U.S.(REJ)

Housing market in the US has slowed

“The increase in house prices in many countries since the late 1990s has exceeded what would have been expected on the basis of changes in underlying fundamentals, such as household income and interest rates. This suggests that house prices in these countries are overvalued, increasing the possibility of a price correction.

In the United States, house price appreciation during the current cycle has been strong by historical standards.There has, however, been considerable differentiation across regions, with house price appreciation being most rapid in the west and northeast of the country, whereas prices in the south and midwest have lagged.

With the housing market cooling—most indicators of housing activity are weakening—the key question is how U.S. growth will be affected, given that consumption and residential investment, both affected by rising housing prices, have been key drivers of the strong economy in recent years.Previous housing market cycles in the United States have been associated with vastly different economic outcomes. In the 1979 cycle, real house prices fell, and consumption, residential investment, and GDP growth all slumped. Of course, economic conditions then were very different from those today: real interest rates were very high, as was the unemployment rate. The 1987 housing cycle was associated with a limited growth impact, and the IMF forecasts that the current housing cycle will do the same for 2007 growth. But there are downside risks. First, the slowing in house price appreciation could be more pronounced than expected—a drop in prices cannot be ruled out. Second, the wealth effects of slower house price growth on consumption may now be larger than in the past because of the greater exposure of households to asset price movements.

The Slowdown in Global Housing Markets(IMF)

 

"Stabilization in the housing market"

“Home-builder stocks traded higher Tuesday after a realtors group said pending sales of U.S. homes rose 0.7% in February. Toll Brothers Inc. (TOL :

Toll Brothers, Inc

Last: 27.87+0.69+2.54%
TOL27.87, +0.69, +2.5% ) gained 2.5% at $27.85, Ryland Group Inc. (RYL :

The Ryland Group, Inc

RYL42.39, +1.09, +2.6% ) added 2.5% to $42.34 and D.R. Horton Inc. (DHI :

D.R. Horton, Inc

DHI22.12, +0.45, +2.1% ) was up 1.8% at $22.06, while the broad Dow Jones U.S. Home Construction Index (DJ_3728 :

DJ_3728603.99, +15.20, +2.6% ) rose 2.3%. The National Association of Realtors said February pending home sales were hit by unusually bad weather and some fallout from the subprime loan sector.”

Pending home sales data lift home-builder stocks(MarketWatch)

 

“Pending home sales rose in February, bolstering speculation a housing market swoon won't curb economic growth. Crude oil dropped the most in three weeks, reducing inflation, which the Federal Reserve has cited as its main concern

``We're seeing some stabilization in the housing market,'' said Neil Wolfson, who oversees about $32 billion as president of Wilmington Trust Investment Management in New York. Lower oil prices are also aiding stocks, he added. ``It allows consumers to spend more, which helps retailers and those who produce goods for retailers. If we see strength in the economy, that is certainly good for stocks.''

U.S. Stocks Climb as Home Sales Rise, Oil Declines; Home Depot Shares Gain(Bloomberg)

More of the same:

Pending home sales in surprise rise(CNN)

A Threat to the American Dream?(Fox)

David Lereah predicts that"tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally"

“Current market problems and reforms in the underwriting and pricing of subprime loans, including the tightening of underwriting standards by regulators, will have a short- term impact on housing markets.  That will be lessened if Congress enacts legislation to expand the roles of Fannie Mae, Freddie Mac and the Federal Housing Administration to provide more housing opportunities to lower-income homeowners and those living in high cost metropolitan areas, the National Association of Realtors® said today.

NAR Senior Vice President and Chief Economist David Lereah predicted that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than 3 percent a year over the next two years.  Many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so by saving for a down payment or growing their income.

“Foreclosures are increasing inventories in certain local markets.  The projected flood of foreclosures are problematic and will add to the already loose housing supply in some local markets, but these local markets are exhibiting healthy economic activity, enabling them to be able to absorb increases in foreclosures,” Lereah said.”

NAR Forsees Short-Term Impact on Housing Market From Subprime Reforms(Realtor)

New Century seek funding while it reorganizes

“New Century Financial Corp. said Monday it will immediately cut 3,200 jobs, or 54 percent of its work force, as part of its Chapter 11 bankruptcy reorganization.

The Irvine, California-based company also said it agreed to sell its servicing assets and platform to Carrington Capital Management LLC for $139 million, subject to bankruptcy approval.

Separately, New Century said CIT Group Inc (up $0.41 to $53.33, Charts). and Greenwich Capital Financial Products have agreed to provide up to $150 million of debtor-in-possession financing to keep the company in business as it reorganizes.

New Century (Charts) had been the largest U.S. independent provider of home loans to people with poor credit histories before collapsing amid rising subprime delinquencies and defaults

But after defaults started rising last year, the subprime mortgage market imploded in February, contributing to a sell off in the stock market and fueling fears that more weakness in housing, and tighter credit in general, would hurt the economy, and possibly even spark a recession.”

New Century files for Chapter 11(CNN)

New Century Financial Files for Bankruptcy in Wake of Subprime Loan Crisis(Bloomberg)

Subprime Lender New Century Files for Bankruptcy Protection(FoxNews)

For mortgage market, it's prime's time(CNN)

Low crime, reasonable commute, and good schools—who says you can't find a nice house in a suburb without paying a fortune?

“Buying your first house? Fleeing the city for a life within your means?

Here's a novel idea: Move to a suburb where you won't break the bank or get your car broken into. A community with reasonable home prices and decent schools. A suburb close to your city job, with a lively downtown of its own.

For hedge-fund managers, plastic surgeons, corporate lawyers, and other people who earn millions a year, choosing a suburb is not about affordability but convenience and, frankly, prestige. These folks don't balk at high prices or look for fixer-uppers. They can pay for prime real estate on the most exclusive streets in the fanciest towns with the best schools. If they want to live in Greenwich or Brookline or Lake Forest or Malibu, they can. Unfortunately, most people aren't so lucky.

Although they vary in price and quality, all of our affordable suburbs are located within an hour's drive of a major U.S. city, and many have a vibrant downtown scene, with fine restaurants, sophisticated shopping, and seasonal festivals.

"There are so many resources in a metro area," says Bert Sperling, founder and president of Sperling's Best Places and co-author of Best Places to Raise your Family: The Top 100 Affordable Communities in the U.S. He looks for places that suit the typical professional American family, making $50,000 or $60,000 a year. "People don't want to live in the middle of nowhere," he says.

Hudson Valley Haven

Take West Nyack, N.Y., this year's best affordable New York City suburb. About a 30-minute drive from Manhattan, West Nyack is one of five villages and hamlets that make up an area on the western bank of the Hudson River known as "The Nyacks." The neighborhood, which has a median home price of $605,700 (vs. New York City's $963,700), is perhaps known best as the location of Palisades Center, the largest shopping mall in the New York metropolitan area. ”

The 25 Best Affordable Suburbs in the U.S.(BusinessWeek)

Borrowers are taking much longer to get the right deal

“AS homeowners across the country have dealt with the declining values of their houses and their ballooning mortgage payments, most New Yorkers seem to believe that the market here doesn’t play by the same rules.

But in recent weeks, a growing number of New Yorkers, often with six-figure salaries and reasonably good credit, have begun to find that mortgages are harder to get as lenders try to stem losses from loans to the weakest, or subprime, borrowers.

 

While mortgage brokers insist that most buyers in New York can still close deals, they also warn that people with any red flags on their mortgage applications will face delays and will pay higher fees. Potential problems include low credit scores or high credit-card balances or listing a suspiciously high salary for a given job.

“You’re going to pay the piper for any little mistake,” said Melissa Cohn, the president of Manhattan Mortgage Inc. She said her brokers — who last year arranged more than $3 billion in mortgages, mainly in New York City — were spending twice as much time on each application as they did a month ago because of new lending requirements, and she expects the situation only to get worse. ”

`Correlation Crisis'

“U.S. homebuilders may trigger a ``correlation crisis'' similar to the credit sell off in 2005 when Ford Motor Co. and General Motors Corp. lost their investment-grade credit ratings, according to Bank of America Corp.

The ratings cuts to the automakers triggered losses for banks and hedge funds holding the riskiest parts of collateralized debt obligations, securities that package bonds, loans and credit-default swaps and use the income to pay investors.

An increase in the perceived risk of default by homebuilders such as Dallas-based Centex Corp. and Lennar Corp. in Miami could cause similar losses this year, Bank of America analysts Glen Taksler and Jeffrey Rosenberg wrote in a report today. Construction company profits have plunged since the five- year U.S. housing boom ended a year ago. Rising inventories of unsold homes and reluctance by potential buyers wary of falling prices has stifled sales.

``We see increasing risk signals that remind us of the run- up to the 2005 correlation meltdown,'' the analysts wrote in the report titled ``The Correlation Crisis of 2007?''

Bank of America Says U.S. Homebuilders May Trigger `Correlation Crisis'(Bloomberg)

“The recent wave of defaults in the subprime mortgage sector that sent shocks through Wall Street has caught the attention of Congress.

More than 2 million people with subprime loans are facing foreclosure this year and nearly 20 percent of subprime mortgages issued between 2005 and 2006 are projected to fail, according to a December 2006 study by the Center for Responsible Lending, a nonpartisan research and policy organization.

Foreclosures in the subprime mortgage market are expected to cost American households as much as $164 billion in lost equity from 1998 through 2006, the center reported.

Meanwhile, at least four subprime lenders have filed for bankruptcy since late December and many others closed last year.

Observers of the credit industry place the blame on predatory lenders and borrowers ignorant of the loans' terms and conditions.”

Looking for ways out of the subprime mortgage crisis(CNN)

 

Consumer spending last quarter proved resilient to declines in housing

“Consumers spent more in February while construction spending rose by the largest amount in 11 months, the government said Friday, in reports that should dispel some of the concerns about the health of the economy.

The Commerce Department reported that consumer spending, bolstered by strong income gains, was up 0.6 percent last month, the best showing since December. Personal income also rose by 0.6 percent. Both figures were double what analysts had expected.

In a separate report, the department said that construction spending rose by 0.3 percent last month, the best showing since a 1 percent jump in March 2006. Until the February increase, construction had either fallen or had been flat since the big rise last March.”

Consumer, Construction Spending Rise(NYPost)

“Meanwhile, inflation remains too high for the comfort of some Fed officials. From a year ago, policy makers' preferred price gauge climbed 2.4 percent, compared with 2.3 percent the prior month. The last time the year-over-year rise exceeded 2.4 percent was in April 1995.

Fed policy makers, including Bernanke, have said they'd be comfortable with inflation in a 1 percent to 2 percent range. The central bank on March 21 kept the benchmark overnight lending rate at 5.25 percent for a sixth straight meeting.

Forecasts

Economists had forecast a 0.3 percent rise in spending, which accounts for two-thirds of the economy, according to the median of 74 estimates in a Bloomberg News survey. Estimates ranged from no gain to a 0.5 percent rise.

Disposable income, or the money left over after taxes, rose 0.5 percent after rising 0.8 percent the previous month. Adjusted for inflation, disposable income rose 0.1 percent after a 0.6 percent increase. ”

Consumer Spending, Incomes in U.S. Rise, Reducing Chance of Fed Rate Cut(Bloomberg)

More of the same:

Consumer Spending, Incomes Gain; Savings Still Negative(FoxNews)

Economy Grows Only 2.5%, Hobbled by Housing Slump(NYSun)