The Times: Housing bubble is finally at bursting point

[Marai]

http://www.bloomberg.com/apps/news?pid=20601087&sid=adbsVAhN68TM&refer=home
Housing Slump in U.S. Poised to Worsen, Derivatives Trades Show

By Darrell Hassler and Hamish Risk

Oct. 23 (Bloomberg) -- The slumping U.S. housing market is about to get a lot worse, according to traders of mortgage-backed securities and the so-called derivatives on which they are based.

The ABX index, which measures the risk of owning bonds backed by home-loans to people with poor credit, rose 30 percent since Aug. 9 to the highest since January. There are more than $500 billion of such notes outstanding.

The increase in the index shows traders expect mortgage delinquencies and foreclosures to increase at a time when the number of homes for sale as measured by the National Association of Realtors is at a 13-year high. The percentage of home-loan payments more than 60 days delinquent rose to 7.23 percent in July from 5.9 percent a year earlier, the fastest rate of increase since 1998, Moody's Investors Service said Oct. 17.

``Delinquency trends and home prices'' show a weakening real estate market, said Scott Eichel, head of credit trading for New York-based Bear Stearns & Co., the biggest underwriter of bonds backed by mortgages. ``A lot of investors that have concerns about the housing market'' are using the ABX index to speculate on a continued drop, he said.

Sales of new and existing homes probably will drop 9.4 percent to 6.76 million in 2006 from a record last year, McLean, Virginia-based mortgage buyer Freddie Mac said Oct. 10. Home sales have risen the past five years.

ABX Index

The ABX index, created by London-based Markit Group Ltd., measures prices of credit-default swaps based on the $565 billion of bonds secured by so-called subprime mortgages and home-equity loans. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on the ability of borrowers to repay debt. An increase in price indicates deterioration in the perception of credit quality; a decline suggests improvement.

The index tracks 20 asset-backed securities that contain loans rated BBB-, the lowest level of investment grade debt. Based on the index, it costs an investor $267,000 to protect $10 million of bonds against default for five years, up from $205,000 in August. The investor would get face value for the bonds in exchange for the securities should a borrower fail to adhere to the debt agreements.

`Unequivocally Bad'

``The unequivocally bad housing data we've seen'' is prompting investors to seek to profit from potential declines in mortgage-backed securities, said Greg Lippmann, the head of asset-backed trading at Deutsche Bank AG in New York who helped create the ABX indexes in January.

Contracts covering $5 billion of home-loan debt change hands daily, he said. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.

The housing boom spawned new types of mortgages that allowed consumers to buy homes they may not have been able to afford otherwise.

About 18 percent of all mortgages issued in the first half of the year were to borrowers considered most likely to default, such as those with high credit-card balances, up from 2.4 percent in 1998, based on data from the Mortgage Bankers Association. The Washington-based trade group's 2,700 members represent 70 percent of the home-loan business.

The amount of bonds backed by subprime loans more than doubled since 2001, according to the Bond Market Association, a New York-based trade group of more than 200 securities firms.

Worst Month

A Merrill Lynch & Co. index of debt securities derived from home-equity loans rated AA to BBB is having its worst month this year, falling 0.01 percent. Banks and lenders such as Countrywide Financial Corp. in Calabasas, California, and Washington Mutual Inc. of Seattle typically take mortgages and package them into bonds for sale to investors. The bonds are then divided into pieces of varying risk.

More borrowers are finding it harder to meet interest payments amowing 17 interest-rate increases by the Federal Reserve since mid-2004.

The default rate for subprime loans rose to 7.35 percent in July from 5.51 percent a year earlier, according to investment bank Friedman Billings Ramsey Group Inc. in Arlington Virginia.

Nine percent of all subprime loans made in 2006 may default within five years, the worst performance since at least 1998, Glenn Schultz, head of asset-backed securities at Charlotte, North Carolina-based Wachovia Corp., said in an Oct. 17 report.

`More Visibility'

``People have a little more visibility on the slowdown than they did two or three months ago,'' said Andrew Chow, who manages $5.5 billion of asset-backed securities and credit-default swaps at Seneca Capital Management in San Francisco.

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, forecasts the housing slump will cause the economy to slow and force the Fed to lower interest rates to 4.5 percent next year. The central bank's target for overnight loans between banks is 5.25 percent. Pimco is a unit of Munich-based Allianz SE.

The National Association of Home Builders/Wells Fargo said on Oct. 17 that its index of builder confidence this month rose to 31 from 30 in September, the first increase in a year.

Housing starts in September rose to an annual rate of 1.772 million from a 1.674 million pace in August, the Commerce Department in Washington said Oct. 18. The median estimate of 61 economists surveyed by Bloomberg News was for a decline to an annual rate of 1.64 million.

Falling Prices

Even with the gains, the National Association of Realtors this month predicted prices of new homes may fall for the first time in 15 years. The trade group on Oct. 11 estimates that the median price of a new U.S. home probably will drop 0.2 percent to $240,500. The inventory of homes on the market rose to a record 3.92 million, the group said Sept. 25.

Most credit-default swap trading is in securities rated BBB or BBB- because they are the most volatile and have the greatest chance to be profitable, said Jack McCleary, head of asset-backed trading for UBS AG in New York.

Subprime mortgages with those credit ratings historically have had losses of about 5 percent of the loan value, McCleary said. Some investors are betting that losses may increase to 12 to 14 percent in the next three years, which could exponentially increase value of credit-default swaps, he said.

``In effect, it's a lottery ticket,'' he said.

To contact the reporter on this story: Darrell Hassler in Chicago at dhassler@bloomberg.net ; Hamish Risk in London hrisk@bloomberg.net

Last Updated: October 23, 2006 00:10 EDT

 

[jorge]

Los 10 errores del codicioso pepito norteamericano escrutados en el USA TODAY del domingo. http://www.usatoday.com/money/economy/housing/2006-10-22-young-flipper-usat_x.htm

Mistake No. 1
Using 'liar loans'

Mistake No. 2
Overpaying

Mistake No. 3
Lacking cash

Mistake No. 4
Quitting your day job

Mistake No. 5
Hiring an unlicensed contractor

Mistake No. 6
Buying sight-unseen

Mistake No. 7
Buying out of state

Mistake No. 8
Buying too many properties too fast

Mistake No. 9
Underestimating remodeling costs

Mistake No. 10
Having a poor exit strategy: He's considering bankruptcy, restructuring the loans and trying to get another Web-design job.​

Tengo que reconocer que eres una MÁQUINA!
Felicidades y muchas gracias.

 

[TAKA]

47, no estoy muy seguro, pero diría que, a pesar de no haber entrado en el euro, los británicos están igualmente metidos en el asunto de la libre circulación de trabajadores dentro de la UE, así que supongo que les afectará igualmente la incorporación de otros países a la UE.

 

[Miss Marple]

UK fue uno de sólo 3 países (no recuerdo ahora los otros dos) que no pusieron restricciones a los trabajadores de los 10 países que se incorporaron en 2004. El gobierno estimaba que en los 2 primeros años llegarían unos 13.000 trabajadores de Polonia y demás; la realidad es que llegó un número entre 300.000 y 600.000. De momento se han absorbido más o menos bien, pero están temiendo que con bulgaros y rumanos se salga la cosa de madre, de ahí las restricciones.
Dado el historial del gobierno cumpliendo las políticas de inmi gración, no creo que haya la menor diferencia.

 

[Marai]

CAPITOL REPORT
Has housing bottomed? Most economists say no
By Rex Nutting, MarketWatch
Last Update: 5:02 PM ET Oct 26, 2006


WASHINGTON (MarketWatch) -- Encouraging data on the housing market in the past few weeks have some observers insisting that the worst is over. But others say the small improvements are merely statistical blips and that the market still has much further to fall.
Depending on who's right, the economy could either bounce back from the current soft patch and reaccelerate next year, or it could continue to weaken, forcing the Federal Reserve to cut interest rates to stave off an abrupt economic chill or an outright recession.
Arguing that real-estate woes have hit bottom, we have former Fed Chairman Alan Greenspan, who told an audience in Canada that "I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out."
"I don't know, but I think the worst of this may well be over," Greenspan said. See full story.
Greenspan's old sidekick, Fed Vice President Donald Kohn, concurred, saying, "starts may be much closer to their trough than to their peak." See full story.
On the other side, we have current San Francisco Fed President Janet Yellen, who told an audience in California that "a significant buildup of home inventory implies that permits and starts may continue to fall, and the market may not recover for several years." See full story.
The great debate
The two former rivals and colleagues on the Fed board are joined by dozens of private-sector economists and academics, all arguing vociferously about where housing is heading and what it means for the economy.
The recent housing data have been surprisingly good, bolstering the optimists' view that the market is at least beginning to flatten out.
Just this week, the Realtors reported a decline in inventories of unsold homes, even as sales fell to a three-year low. See full story. The Commerce Department said sales of new homes rose for the second month in a row, sparked by huge price discounting by the builders. See full story.
As reported earlier in the month, the home builders' confidence index rose slightly in October after plunging for eight straight months to a 15-year low in September. See full story. Housing optimists were also encouraged by the 6% increase in housing starts in September after they fell to a three-year low in August. See full story.
Largely unnoticed in their glee was the 6% decrease in the less-volatile building permits data, the fastest pace of decline in seven years. And median home prices are falling at the fastest pace in decades.
The monthly data are interesting but ultimately volatile and unreliable. What we want to know is where's the bottom?
Is it true, as David Seiders, chief economist for the National Association of Home Builders, suggested, that the market "may be stabilizing"? Or as David Lereah, chief economist for the National Association of Realtors, put it a month ago: "We think the housing market has now hit bottom."
The housing optimists are led by economists for two industry groups, so their views may be self-serving to some extent. But their ranks also include some of the more respected economists on Wall Street as well.
"The housing market shows signs of stabilizing, said Dean Maki and Julia Coronado, economists for Barclays Capital, who, like Greenspan, point to the flattened out of mortgage applications as a key indicator.
David Greenlaw, an economist for Morgan Stanley, is another optimist, relatively speaking. . "While we certainly do not think the housing market recession is over, a variety of incoming data increasingly suggest that the worst of it occurred in the third quarter -- and with little meaningful spillover into other sectors of the economy," Greenlaw said.
While some economists saw a bottoming in last week's data, the far-more-common reaction was like this from MFR economist Joshua Shapiro: "It is clear there remains a deep-seated pessimism on the part of home builders."
Or this from Ian Shepherdson, chief economist for High Frequency Economics: "It isn't over. It has barely begun.'
Or this from Bart Malek of BMO Nesbitt Burns: "We have not yet seen the full fallout from the housing correction."
Mortgage applications
The rebound in mortgage application due to lower rates is a key element in the optimists' case.
The increase in purchase applications and the small one-point rise in the home builders' index "is encouraging," said Mike Englund, chief economist for Action Economics.
After falling about 20% from the peaks, applications for purchase loans have been roughly flat for the past three months, the Mortgage Bankers Association reports, even as average rates on a 30-year fixed loan fell a half of a percentage point from about 6.80% to 6.30%. See full story.
At the same time, home prices have also fallen. The combination of lower interest rates and lower prices makes houses much more affordable.
The tiny positive response to a huge drop in interest rates was laughable, the pessimists said.
"That all we could muster was a mere one-point increase [(in the home builders' survey] should actually be a source of concern to the 'soft-landing' advocates," said David Rosenberg, chief North American economist for Merrill Lynch,
"This is a vivid sign that lower interest rates alone will not revive the housing market," Rosenberg said. It'll take a severe drop in new construction before the excess inventory can be worked off.
"We are barely into the fifth-inning of this down cycle," Rosenberg said.
Anyone who thinks a little drop in interest rates will bring back the good old days is delusional, said Paul McCulley, managing director of fixed-income giant Pacific Investment Management Co., recalling that the housing bubble seemed "impervious" to rate hikes in 2004 and 2005
"Housing is going to be very inelastic to falling interest rates on the way down, just as it was very inelastic to rising rates on the way up," McCulley said. "To think otherwise after a bubble is to not understand bubbles. Risk appetite in property markets will not be restored by modest declines in market-determined interest rates."
Real estate is "the ultimate momentum market," McCulley said. "Can't get enough on the way up and can't run away fast enough on the way down."
Real rates
The decline in mortgage rates is deceptive, said High Frequency Economics' Shepherdson, who argues that what really matters to buyers is the real rate, not the nominal one.
The "real rate" means the rate adjusted for inflation. You could adjust it for the increase in the consumer price index, but it makes more sense to adjust it for the change in housing prices.
If housing prices are rising at 10% a year, then a 10% mortgage rate is effectively costless even before tax savings, he says.
Shepherdson figures that real mortgage rates were sharply negative a year ago. When lending rates were at 6% and prices were rising 16% year-over-year, the real rate was negative 10%. Now that prices of existing homes have fallen by more than 2% year-over-year, the real mortgage rate is more than 8%. The turnaround of 18% in real rates dwarfs the half point drop in nominal rates.
"The link between real mortgage rates and home sales is very strong," Shepherdson said. "It screams that home sales will fall much further."
The real mortgage rate is likely to continue to climb as prices fall.
Jan Hatzius, chief economist for Goldman Sachs, figures that selling prices will fall about 3% in 2007 in both the realtors' index of median sales prices and in the more comprehensive price index published by the Office of Federal Housing Enterprise Oversight. The OFHEO index has never fallen in any calendar year.
Such declines "would likely put significant financial pressure on households," Hatzius said.
Pimco's McCulley figures that, based on historic relationships, if house price appreciation is zero in 2007, home sales will fall about 2.5 million from the peak to 6 million by January 2008. By that reckoning, we aren't even half way into the correction.
As in any rapidly rising or falling market, there are plenty of people who swear they've seen the turning point and just as many who swear the end is nowhere in sight. History teaches us to be humble about predicting markets, particularly exuberant ones.
Remember the Dow 36,000 predictions in made in late 1999? Or how about this gem from President Hoover in May 1930: "While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover."
Rex Nutting is Washington bureau chief of MarketWatch.

 

[Marai]

Merryl Lynch se apunta a la teoría de que la caída inmobiliaria en EEUU producirá una recesión. Ellos prevén que el efecto se notará a finales de 2007 pero otros economistas creen que será antes.

http://www.billcara.com/ML Oct 26 2006 D Word.pdf

Desperate times require desperate measures and median new home prices were cut 9.3% on the month and are now down 9.7% year-on-year –the steepest deflation since December 1970 (when, if memory serves us correctly, we were in recession).

Se refieren a los datos de septiembre.

 

[Marai]

Paul Krugman: Bursting Bubble Blues
Paul Krugman on the economic and political consequences of the slumping housing market:
http://economistsview.typepad.com/economistsview/2006/10/paul_krugman_bu.html

Bursting Bubble Blues, by Paul Krugman, Housing Bust, Commentary, NY Times: Here are the five stages of housing grief:

1. Housing bubble? What housing bubble? “A national severe price distortion [in housing] seems most unlikely in the United States.” (Alan Greenspan, October 2004)

2. “There’s a little froth in this market,” but “we don’t perceive that there is a national bubble.” (Alan Greenspan, May 2005)

3. Housing is slumping, but “despite what you hear from some of the Eeyores in the analytical community, a recession is not visible on the horizon.” (Richard Fisher, president of the Federal Reserve Bank of Dallas, August 2006)

4. Well, that was a lousy quarter, but “I feel good about the U.S. economy, I really do.” (Henry Paulson, the Treasury secretary, last Friday)

5. Insert expletive here.

We’ve now reached stage 4. Will we move on to stage 5?

Over the last few years, ... the housing boom became a bubble, fueled by a surge of irresponsible bank lending, which continues even now. ... The question now is how much pain the bursting bubble will inflict.

Last week’s report on G.D.P. showed the first signs of serious economic damage. According to the “advance” estimates (which are often subject to major revisions), growth in the third quarter of 2006 slowed to its worst level since early 2003. A plunge in spending on residential construction, which fell at an annual rate of 17 percent, was the main culprit. ...

Some say the worst is already over. Mr. Greenspan, who’s been an optimist all the way, now argues that the latest data on new-home sales and mortgage applications suggest that housing has already bottomed out. Business investment is still growing briskly, and so far consumers haven’t cut their spending. So maybe this is as bad as it gets.

But I think the pessimists have a stronger case. There’s a lot of evidence that home prices, although they’ve started to decline, are still way out of line. Spending on home construction remains abnormally high as a percentage of G.D.P., because banks are still lending freely in spite of rapidly rising foreclosure rates.

This means that home sales probably still have a long way to fall. ... Moreover, much of the good news in the latest economic report is unsustainable at best, suspect at worst. Almost half of last quarter’s estimated growth was the result of a reported surge in automobile output, which some observers think was a statistical illusion... So this is probably just the beginning. ...

In case you’re wondering, I don’t blame the Bush administration for the latest bad economic numbers. If anyone is to blame for the current situation, it’s Mr. Greenspan, who pooh-poohed warnings about an emerging bubble and did nothing to crack down on irresponsible lending.

Still, the bad news will have political consequences. The Bush administration has been trying to shift attention away from the disaster in Iraq to an allegedly booming economy. That strategy wasn’t working too well even when the headline numbers were good, because it never felt like a boom to most Americans. But now even the headline numbers have turned lousy.

And if that hurts the G.O.P. in next week’s election, well, there’s a certain poetic justice involved. The administration tried to claim undeserved credit for the positive effects of the housing boom, so why shouldn’t it receive some blame for the negative effects of the housing bust?

 

[burbujasplot]

tu eres busterbuble de nuevos vecinos.

 

[danii]

¿A que se refiere con lo de que las empresas españolas tienen que pagar pocos impuestos por las compras en el extranjero?

 

[Eddy]

Cut and paste

A qué beneficios fiscales pueden acogerse las exportaciones en el Impuesto sobre Sociedades?
Deducción del 25% sobre las siguientes inversiones:

Creación de sucursales o establecimientos permanentes en el extranjero que estén directamente relacionados con la actividad exportadora.

Adquisición de participaciones en sociedades extranjeras o constitución de filiales en el extranjero directamente relacionadas con la actividad exportadora o con la contratación de servicios turísticos en España. (Mínimo: 25% de participación en la filial).

Gastos de propaganda y publicidad de proyección plurianual para el lanzamiento internacional de productos.

Gastos de apertura y prospección de mercados en el extranjero.

Gastos de concurrencia a ferias, exposiciones y otras exposiciones en el extranjero o en España si tienen carácter internacional.

¿Qué condiciones ha de reunir la actividad desarrollada para obtener beneficios fiscales?
Básicamente son dos los bloques de incentivos que contempla la deducción del 25% prevista por la Ley del Impuesto sobre Sociedades:

a) Incentivo a la inversión en activos inmovilizados materiales o inmateriales (sucursales o establecimientos permanentes) o financieros (participaciones en filiales) siempre que la sucursal, filial, etc.. tenga una dedicación directa a la exportación de los productos o servicios de la sociedad española.

b) Incentivos a los gastos de proyección plurianual con fines publicitarios y de prospección de mercado, si bien debe tratarse de gastos de proyección, de lanzamiento, no así la denominada publicidad de mantenimiento de cuota de mercado, salvo el caso de gastos por concurrencia a ferias o apertura y prospección de mercados que podrán ser gastos corrientes del ejercicio


A lo que habría que añadir la deducción del fondo de comercio por adquisición de empresas en el extranjero.

 

[danii]

25%!!
La re-milk!!!

 

[Marai]

Un estudio prevé 2,2 millones de insolvencias en EEUU

Se llevarán la peor parte las hipotecas "B" o "subprime" que se conceden a personas cuyos ingresos no les permiten acceder a las hipotecas normales y que constituyen el 25% de las hipotecas concedidas en los últimos años.

http://www.nytimes.com/2006/12/20/business/20home.html?_r=1&ref=business&oref=slogin

December 20, 2006
Study Predicts Foreclosure for 1 in 5 Subprime Loans
By RON NIXON
About one in five subprime mortgages made in the last two years are likely to go into foreclosure, according to a report released yesterday, ending the dream of homeownership for millions of Americans.

At that rate, about 1.1 million homeowners who took out subprime loans in the last two years will lose their houses in the next few years, the report said. The foreclosures will cost those homeowners an estimated $74.6 billion, primarily in equity.

The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody’s Economy.com. Researchers examined more than six million mortgages made from 1998 until the third quarter of 2006; the report is the first nationwide study on the performance of subprime mortgages. It includes projected foreclosure data for all major metropolitan statistical areas. The highest default rates are expected to be in cities in California, Nevada, Michigan and New Jersey as well as Washington, D.C.

The report offers a somber assessment of loans that had helped millions of Americans with blemished credit attain homeownership. About 2.2 million borrowers who took subprime loans from 1998 to 2006 are likely to lose their homes.

Subprime loans are made to borrowers with unfavorable credit.

Mortgage companies, banks and investors began aggressively marketing and trading the loans in the early part of the decade because their higher interest rates make them more profitable. As a result, subprime loans now make up more than a quarter of the mortgage market, more than $600 billion in 2005. “This is no longer a niche part of the market that can be dismissed,” said Keith Ernst, senior housing counsel at the research center and one of the authors of the report. “It’s a major component of the mortgage market and the growing rates of foreclosures should be a cause for alarm.”

The report cited several factors for the increase in subprime mortgage foreclosures — including adjustable rate mortgages with steep built-in rate and payment increases, prepayment penalties, limited income documentation and no escrow for taxes and insurance. The report said the antiestéticatures caused a higher risk of default regardless of the borrower’s credit score. “This means that people are not going into foreclosure just because they have low incomes,” Mr. Ernst said. “The foreclosures are higher than they need to be because a number of loan antiestéticatures in the subprime market place borrowers at unnecessary risk.”

Minority homeowners take out a disproportionate share of subprime loans. The most recent Home Mortgage Disclosure Act data from lending institutions show that over half of African-Americans and 40 percent of Hispanics received subprime loans. The report projects that 10 percent of the African-American borrowers and 8 percent of Hispanic borrowers will be affected by foreclosure. In contrast, only 4 percent of recent white borrowers are expected to be affected.

The center suggests that risky lending practices could lead to the worst foreclosure crisis in the modern mortgage market. Douglas Duncan, chief economist for the Mortgage Bankers Association, called the center’s study overly pessimistic. “Every forecast models makes assumptions, but it seems they picked the worst case scenario,” Mr. Duncan said. Mr. Duncan said the banker’s association’s numbers did show an increase in foreclosures but that was because there were more borrowers. The center’s report comes as more attention is paid to subprime lending. State regulators have cracked down on what they see as predatory practices by many lenders. Federal regulators have issued new guidelines that will tighten lending standards, aiming chiefly at adjustable-rate mortgages. And the federal government, through the Federal Housing Administration, has attempted to reform its lending programs to better compete in the mortgage market.

The House has approved a proposal by the F.H.A. to eliminate the minimum down payment and raise the loan limits, allowing it to offer loans that would enable borrowers to avoid the risk of subprime mortgages. Wade Henderson, president and chief executive of the Leadership Conference on Civil Rights in Washington, praised the proposed changes but said other efforts were needed. “We need rules to curb predatory lenders, but we also need prime lenders to step up for this expanding market of borrowers,” Henderson said. “The lending community needs to step forward and take responsibility. It should not let itself be defined by its worst actors.”

 

[Marai]

Peligro en las hipotecas creativas en el RU

Aviso para banqueros. En el RU 1 de cada 5 pepitos que tienen hipotecas con periodo de carencia no sabe muy bien como pagará cuando tengan que empezar a devolver el principal:

http://news.bbc.co.uk/2/hi/business/6176009.stm
Interest-only mortgages warning

Be careful with interest only mortgages says the FSA
A significant minority of people with interest-only mortgages do not have "robust plans" to repay them, warns the Financial Services Authority (FSA). Its report scrutinised the plans of 857 people who had taken out these mortgages and found that 15% had weak or non-existent repayment strategies. About 24% of all new mortgages are lent on an interest-only basis.

The FSA warned lenders to be very careful when deciding which customers should be granted these mortgages. "There is nothing wrong with interest-only mortgages," said Clive Briault of the FSA. "However, consumers must be very clear about how they are going to repay the loans they take out." One in five people questioned by the FSA said they would struggle with other financial commitments if interest rates rose by just 1% above the current level of 5%.

No idea

One in 10 of the customers questioned by the financial regulator said they had either no idea at all how they were going to repay the loan they had taken out, or had only a rough idea.

A further 5% claimed to have a definite repayment plan in mind which, in the FSA's view, was weak. When they were probed further by the FSA's researchers some were found to be relying on changing to a repayment mortgage when they were close to retirement, or planning to sell their home to pay off the debt. The FSA pointed out that poorer customers were more likely to have no plans for eventual repayment. "Consumers' repayment plans need to be realistic and robust," said Mr Briault. "Consumers should not, for example, assume that house prices will continue to rise at the rate seen in recent years."

One reason for the popularity of interest-only deals is that they are the only way some people have been able to get on the housing ladder at a time of rapidly rising house prices. They work by allowing the borrowers to pay off just the interest on the loan - but leave it up to them to come up with a way of repaying the loan sometime in the future.

 

[Fleximux]

Mortgage lending.Subprime subsidence. The economist.

Quiza ya haya sido posteado pero no lo he visto. Ahi lo pongo por si acaso.

Mortgage lending

Subprime subsidence
Dec 13th 2006 | NEW YORK
From The Economist print edition


Parts of America's mortgage market are in turmoil. Some on Wall Street see this as an opportunity. Others are biting their nails

MORTGAGE lending is hardly the raciest business, but it has its moments. “It's a bit like the definition of combat: 59 minutes of boredom amowed by a minute of sheer terror,” says Michael Youngblood, an analyst at Friedman, Billings, Ramsey, an investment bank. “And we seem to be going through another one of those minutes now.”

What has set pulses racing is subprime lending—mortgages extended at higher than normal rates to those with weak credit histories. In America, where it is most advanced, this market is under a lot of strain, and so, by extension, is the giant asset-backed securities market that is linked to it. The market for prime mortgages (those extended to higher-quality borrowers) is faring better, though it, too, is showing signs of weakness, exacerbated by cooling house prices. Might these troubles, some wonder, be the canary in the mine, warning of a looming credit crunch as investors, for years free with their money, recoil from risk?

Once a backwater, subprime is now very much in the mainstream. Annual loan originations grew fivefold between 2001 and 2005, to $625 billion, according to Inside Mortgage Finance, a newsletter.

But with rapid growth has come fragility. According to UBS, the rate of subprime-loan delinquencies of 60 days or more stood at around 8% in October, nearly double the rate of a year before. Foreclosures are also around twice as high as they were. Worse, loans are decaying remarkably quickly: the number of borrowers falling behind on payments in the first few months has leapt, to around 4% of the total. This has taken some analysts by surprise. But Anthony Sanders, finance professor at Ohio State University's Fisher College of Business, thinks they should have seen it coming: “With the traditional mortgage market flat, the growth has been in the one area nobody wanted to go into.”

This is already producing casualties. A number of mid-sized mortgage firms have failed in recent weeks. The latest, on December 7th, was Ownit Mortgage Solutions, the 17th-largest subprime lender. Others—such as H&R Block's Option One Mortgage—are for sale, their owners keen to leave the business. Earlier this month, in another bad sign, KeyCorp sold its subprime arm, Champion, for an undisclosed sum thought to be well below the $200m-250m tag analysts had put on it.

These troubles did not come out of the blue. Their origins lie in 2004, when some of the big subprime lenders began to compete hard for market share. By late 2005, this battle had pushed rates for ropy borrowers down to a little over 7%. This led to a boom in new business as thousands scrambled onto the housing ladder.

But the Federal Reserve had already started raising short-term interest rates, flattening the yield curve, the difference between short and long rates. (Since banks borrow short and lend long, their margins are higher when the curve is steep.) When this began eating into lenders' profits, they reacted by pushing subprime rates back up. This time, though, they could not attract the same quality of borrower as before: with the housing market looking vulnerable, only the desperate were willing to borrow at interest rates of over 8%.

The lenders compounded their problems greatly by loosening their underwriting standards in a further attempt to keep business chugging along. Sometimes these were waived altogether. Adding insult to imprudence, they lured borrowers with “alternative” mortgage products, such as “negative amortisation” deals (where payments are so low that the overall debt gets bigger, not smaller) and adjustable-rate products (where teaser rates jump after a couple of years). Mark DiRienz of Moody's, a rating agency, says the “payment shock” was made worse by rules that allowed lenders to go from a low introductory rate straight to one much higher than the prevailing rate.

New subprime lending has tailed off this year as mortgage firms have, belatedly, become fussier about whom they will serve. They say they will plough more resources into vetting applications but, as Mr Youngblood points out, this would raise their costs. There is no easy way out.

Moody's and other debt-raters have cast a worried eye over the market, placing subprime deals on watch for a possible downgrade. Regulators are also twitchy. They have stepped up warnings about slack lending standards.

Nerves are also jangling in the capital markets. These days large numbers of housing loans are moved off banks' books, bundled together as so-called mortgage-backed securities (MBSs) and sold to investors. In theory, this helps the banks to reduce risk, makes money for intermediaries who trade the securities, and allows the investors to pick tranches of debt that match their risk appetite. Thanks to financial alchemy, an MBS made up of low-quality loans can still enjoy a good credit rating.

If too many of the home loans backing the security are toxic, however, investors will feel pain. That is happening now. The ABX Home Equity 06-2 index, whose price reflects the market's view of bonds rated BBB-minus backed by subprime loans made earlier this year, has fallen sharply since mid-November (see chart). Hedge funds and others have been using derivatives to short bonds backed by subprime mortgages.

Dubious mortgages are now a growing share of the mortgage-backed market, so there is scope for more trouble. Of the $1.02 trillion of MBSs issued in the first half of this year, over 40% was linked to subprime loans, up from 6-8% in 2000-03, says CreditSights, a research boutique.

In a sign of how important the MBS market has become to Wall Street's big securities firms, they are playing a lead role in consolidating the subprime business. Since the summer, Morgan Stanley, Merrill Lynch and Bear Stearns have all bought mortgage lenders; Lehman Brothers has acquired several in the past three years.

The point of this “vertical integration” is to feed the banks' securitisation desks, which are hungry for assets that can be profitably turned into fancy instruments: not only MBSs but also so-called collateralised debt obligations, pools of derivatives much loved by hedge funds. Owning your own mortgage originator also means not having to bid against other broker-dealers when housing loans come to market, thus saving money, says Art Frank, a mortgage strategist at Barclays Capital.

Although Wall Street has been taking some subprime lenders under its wing, it has been helping to push others towards bankruptcy. As the market has turned in the past year, the big banks have started scrutinising loans offered up for securitisation far more closely—and are throwing far more than they used to back at the subprime lenders. Moreover, they can force the lenders to repurchase securitised loans if they turn sour in their first few months of life. Merrill Lynch has been on both sides of this tussle: it had a 15% stake in Ownit, the firm that went bust last week.

Subprime's woes do not—yet—amount to a financial crisis. However, there could be more pain ahead, for instance when some $475 billion-worth of adjustable-rate mortgages switch to higher rates next year. And the better-quality bits of the market are also running out of steam. HSBC, the world's third-largest bank, has seen a deterioration across its American mortgage operations. Combined third-quarter profits for the country's nine largest mortgage lenders were $991m, less than half the level for the same period last year.

After years of loose money in financial markets, some observers think the mortgage morass could cause investors to rethink their attitude to other forms of credit risk, such as high-yield bonds. Housing loans are not the only area that has seen a weakening of underwriting standards. Where subprime goes, other businesses may amow.

 

[KastleRock]

In 2006 more than a million people lost their homes in US.

In a special edition of Open House, Gerri Willis looks at what went wrong and how to make sure it never happens to you.

Tune in to a special edition of House Call, Saturday 6th at 2 p.m. ET and Sunday 7th at 4 p.m.

Diosss!!!! mas de un millon de personas!!!! : : : :
jorobar, y solo en el 2006........