The Deepening Housing Crisis
January 15, 2008
The housing crisis received yet another blow: the number of homes in the U.S. that headed into foreclosure more than doubled in the third quarter. According to Raphael Bostic, Associate Director of the University of Southern California’s Lusk Center for Real Estate believes that foreclosures will contribute to further weakening in pricing. While this is good news for potential buyers, it’s bad news for home builders and homeowners wanting to sell.
From July to September, 2007, foreclosures nearly doubled. According to RealtyTrac Inc. (Irvine, CA) foreclosures for the same time frame last year were 223,233. This year, it was up to 446,726 nationwide. What this translates to: there’s a foreclosure for every 196 households in the U.S. This is a 33.9% increase from the second quarter of last year, where 333,731 properties foreclosed.
California leads the U.S. in amount of foreclosure filings - about one filing for 88 households. There were 148,147 filings on 94,772 properties. (Total filings are greater because sometimes a property can receive more than one default notice in three months). This is an increase of 36% from the previous quarter, and almost quadruple what it was a year ago.
Most states - except for Kentucky, New Mexico, Oklahoma, South Dakota, and Utah - reported an increase in foreclosure filings. These filings include notices of default, auction sale notices, or bank repossessions. Nationwide, the number of filings nearly doubled the year-ago quarter and was up 30% from the second quarter of last year.
RealtyTrac started releasing reports of foreclosure filings in January, 2005. CEO James J. Saccacio said August and September, 2007, were the highest monthly totals since the reporting began. He expects the amount of foreclosures to remain high and perhaps increase in 2008 because many of the loans are due to reset. Also add that to the growing weakening of home sales. These resets are due, in large part, to adjustable rate mortgages initiated in 2005 and 2006. Mortgage lenders are wary that an increase in defaults will occur when the loans readjust.
California, Nevada, and Florida had the highest foreclosure rates for the third quarter. Florida’s foreclosures amounted to one foreclosure per 95 houses, with 86,465 foreclosures on 60,992 households. All three states saw an increase in speculator fueled construction of condos and houses. Most of these homes were sold to subprime borrowers who had poor credit histories. In other states, such as Ohio, Michigan, and Indiana, foreclosures came about because of economic forces - such as unemployment and a general depressed economy.
Housing Crunch Getting Worse
January 15, 2008
The signs keep continuing for the worsening of the housing crunch. It may be the worst in decades and seems to be widening. American Home Mortgage Investment Corp., once the 10th largest mortgage lender, recently filed for Chapter 11 bankruptcy protection. Two other mortgage lenders, Aegis Mortgage Corp. (Houston, TX) and National City Corp. (Cleveland, OH) declared they aren’t accepting any more applications due to financial concerns.
American Home Mortgage, based in Melville, NY, said a number of events brought about their downturn. Their funding was cut off to make new loans. This was mostly due to falling home prices and an increase in payment defaults. This scared investors away from the housing industry Investors had been the lifeblood of the mortgage industry. Now, “value is a fleeting concept. The market today has just basically shut down,” says JMP Securities analyst Steven C. DeLaney.
Because of this, people who want to purchase homes or who want to refinance are facing tougher hurdles. They’re facing a reverse of a couple months ago when buyers with bad credit were being offered mortgages. Now people are much more likely to be turned down.
American Home Mortgage’s biggest creditors include a who’s who of Wall Street, such as Deutsche Bank AG and JPMorgan Chase & Co. Both banks declined to comment. American Home stated it’s receiving $50 million in debtor-in possession financing from WL Ross & Co. LLC, which is led by billionaire Wilbur L. Ross, Jr. Mr. Ross’ company has helped failing companies in the steel, coal, and textile industries.
A 20% Plummet in U.S. Home Sales
January 15, 2008
Housing sales have plummeted 20% in one year, measured from November, 2006 to November, 2007. There was a bit of a silver lining in that sales were up slightly - 0.4% - from October to November, according to the National Assn. of Realtors. This may indicate the housing market may have hit bottom and that it’s starting to stabilize. The sale price of homes is 3.3% lower than it was in November, 2006.
National trends were consistent with California trends. The California Assn. of Realtors agreed with research firm DataQuick that home sales and prices dropped during the past year. There was a 36% drop in sales, statewide, from November, 2006, coinciding with a 12% price drop.
Southern California was hit harder in sales - dropping 43% from the previous year, although prices dropped just 10%. DataQuick saw a slight pick up in sales for Southern California from October to November. While some may see that as an optimistic sign, DataQuick President Marshall Prentice advised caution. A one month increase may not be significant enough. In 1994, something similar occurred, but then the downturn continued.
Despite the optimism from the National Assn. of Realtors, other economists believe further declines are on the way. UCLA Anderson Forecast Director Edward Leamer said the October-November upturn doesn’t mean blue skies are on the way. He advised watching the trends for a few months in order to make a more educated assessment. He was hopeful that the sales volume of Southern California houses may be bottoming out, but he predicts prices will continue to drop for another year.
The Times of London interviewed Robert Shiller, Yale economist and co-founder of the Case-Shiller index of housing prices. Shiller thinks it’s likely that the housing recession could go on for many years. He believes that California and Florida housing prices could fall 35%. According to Case-Shiller, housing has fallen 7% in 20 U.S. metro areas, since their peak in 2006. Since September, 2006, Los Angeles and Orange County prices have dropped 9%.
Christopher Thornberg, Los Angeles economist and principal of Beacon Economics, predicts a 30% drop in Southern California home prices from their 2006 peak. He also has a chilling thought about the downward trend: “How many of those are foreclosures? That’s not stabilization; that’s the market getting worse.”
Record Setting Defaults on Insured Mortgages
January 15, 2008
The U.S. housing market got another blow in November when it was reported there was a 35% increase in defaults on privately insured U.S. mortgages. According to Mortgage Insurance Companies of America, people who fell more than 60 days behind on payments increased from 45,325 in November, 2006, to 61,033. This translates to a 2.9% increase from October. Generally, missed payments are seen as a precursor to a foreclosure.
This latest news is just another indication that mortgage insurers are in for a rocky road for 2008. David Havens, a credit analyst at UBS in Stamford, Connecticut believes that if the trend continues, it’ll spur high claims. This may lead to some companies needing to raise money.
To add insult to injury, according to S&P/Case-Shiller, in October, home prices fell 6.1% in 20 U.S. metro areas. Since it’s becoming harder for borrowers to refinance, lenders are being compensated for bad loans through mortgage insurance.
The two top U.S. mortgage insurers, MGIC Investment Corp. and PMI Group Inc., both reported third quarter losses, their first since becoming public companies. MGIC doesn’t foresee turning a profit until 2009. It was the ninth worst performing company on the Standard and Poor’s 500 Index, when it lost 64% of its market value in 2007. PMI Group was down 72%. Additionally, the third largest mortgage insurer, Radian Group Inc., was down 78% in 2007.
Ratings companies, such as Standard & Poors, Moody’s Investors Service, and Fitch Ratings have lowered their formula for mortgage insurer ratings. If they didn’t, these companies would possibly be downgraded. If that occurred, many insurers may have to add to reserves for claims.
James Brender, analyst for S&P in New York, doesn’t have much optimism for most of 2008. He stated: “It will be at least 18 months until there’s a chance of stabilized ratings on [Radian, PMI and Republic].”
Bond insurers MBIA Inc. and Ambac Financial Group Inc. have a few short weeks to raise $1 billion each. If they don’t, they will likely loose their AAA ratings. These two companies are struggling after receiving losses on mortgage-backed bonds. MBIA says it will get its $1 billion from Warburg Pincus, a private equity firm. Ambac raised its $1 billion after reinsuring $29 billion of the securities it guarantees.
The Corporate Code, Only $995
