Tuesday, April 22, 2008

The Mortgage Mess - FHA's Risky Business

Joshua Zumbrun and Maurna Desmond

In the wake of the subprime mortgage debacle, who on Earth would loan to "first-time home buyers whose high rents left them strapped for cash" or borrowers "with strong current incomes but not a lot of savings"? Wells Fargo says it will--with a little help from the federal government.
Touted as a savior in the housing crisis by Congress and the White House, the Federal Housing Administration is being turned into a bank's best friend. Major U.S. lenders are again aggressively enticing risky borrowers, offering FHA-backed mortgages with attractive terms and as little as 3% down. Meanwhile, the agency watches as its liabilities balloon.
As a result, the nation's mortgage market is quietly undergoing a radical and potentially risky transformation that shifts liability for hundreds of billions of dollars on to the government's books.

"FHA delinquencies tend to be quite high," says Alex Pollock, a fellow at the American Enterprise Institute and former president of the Federal Home Loan Bank of Chicago. "They are substantially higher than the prime market--not as high as the subprime market, but nonetheless quite high. You're in a sector of the market that is by definition risky."

Bill Glavin, special assistant to FHA Commissioner Brian Montgomery, says the FHA has been "inundated" with requests by business-strapped banks to become FHA-certified lenders. He expects the FHA to increase loan volume by 168.2% in fiscal year 2008 (ended September 30), insuring 1.14 million loans, up from 425,000 in 2007. The agency expects to guarantee $224 billion worth of loans in 2008.

On Thursday, Ginnie Mae--a government-owned company with more than two-thirds of its securities portfolio comprised of FHA-backed loans--announced a 114% surge in volume. They issued $39.1 billion in the first quarter of 2008, up from $18.3 billion during the same period last year. The company also expects its total portfolio of outstanding securities to grow to more than $600 billion by the end of the year, reflecting a 35.2% increase from the $443.8 held by Ginnie in 2007.

From Wells Fargo (nyse: WFC - news - people ) to Countrywide (nyse: CFC - news - people ), lenders see opportunity, driving the numbers. Bank of America (nyse: BAC - news - people ) Government Lending Executive Allen Jones says his company is "actively promoting" FHA-insured loans through "all of its sales channels." Jones expects the percentage of BofA mortgages insured by the FHA to be 30% to 35% by the end of the year, up from just 2% in 2006.

The FHA's growing role in the mortgage market "will clearly fill the void of subprime financing," says Vicki Wagner, an analyst at Standard & Poor's. Wagner said an FHA loan "by definition, looks and acts like a subprime loan."

The FHA's admirable, longstanding aim, of course, is to help home buyers snag keys to their American Dreams. Throughout the housing boom, more than 80% of FHA-insured loans went to buyers with less than 5% equity in their homes. In the early years of the boom, this was a safe bet. A $200,000 home might be purchased with a $190,000 loan--a 95% loan. In a few years, the home price might rise to $250,000, meaning the borrower has a 25% equity stake in the home. That's about the same portion of a loan that a private mortgage insurer would vouch for, even though FHA backs its loans 100%.

Unlike private mortgage insurers, the FHA requires an up-front premium, providing an extra cushion to cover its costs. Another difference from the worst of the online click-and-borrow hucksters: FHA's government-backed mortgages require income and asset documentation and have real underwriting rules. The FHA Secure program, through which subprime loans can be refinanced into FHA-insured loans, is only open to owner-occupied housing; properties purchased by speculators hoping to flip a home quickly amid rising prices are unable to benefit.

In July, the FHA celebrated these prudish lending practices, which had resulted in half the foreclosure rate of commercial subprime lenders. (See "Mortgage Lending's Benevolent Bureaucracy.")

But as the housing market melted, politicians looking to soften the blow turned to the agency for help. In August, President Bush announced a program expanding the FHA so an additional 240,000 risky borrowers could benefit from its mortgage insurance program this year alone. The program also altered the code to help borrowers refinance their loans with FHA insurance. (See "This Is Not A Bailout.") Then, in February, a congressional stimulus package allowed the FHA to increase its loan maximum to 125% of a market's median value, up to $729,750 from $362,790 for single-family homes.

Now legislators have proposed allowing borrowers unable to pay off the full value of their loans to reduce their debt to fit their home's diminished market value, backed by FHA insurance. If a lender were to foreclose, it could not recover more than this value anyway. With FHA insurance, the argument goes, everyone gets an incentive to refinance. (See "Third Way For FHA.")

Combined with a credit-starved mortgage market, the moves resulted in 87.8% growth in government loan applications from Aug. 3 to April 4. Conventional loans averaged just 12.6% growth during the same time.

The FHA estimates that, ultimately, 500,000 borrowers will avail themselves of the refinancing program announced in August and expanded earlier this month. Thus far, the average refinancing has been $190,000. If this average remains constant, the FHA portfolio would increase by $95 billion. In fact, this estimate may be low: The average loan price is likely to rise, as the ceiling on these loans was raised by the Economic Stimulus Act, making even more expensive loans eligible.

The FHA's default and delinquency rates fall between subprime and prime rates. In the Mortgage Bankers Association's most recent National Delinquency Survey, FHA foreclosure starts stood at 0.91%, much higher than the 0.22% rate for prime fixed-rate loans, but much lower than subprime fixed-rate loans at 1.52% and subprime adjustable-rate mortgages at 5.29%.

In 2007, the FHA's liability for loan guarantees amounted to $7 billion, an increase from $3 billion in 2006. With its portfolio continuing to increase, this liability will rise, but so will income from its initial premiums. In the FHA's report to the Office of Management and Budget, the FHA projected its premiums would continue to cover its liabilities in 2009, but only narrowly.

FHA only provides "guidelines" for who can benefit from an FHA loan. Glavin said the agency allows individual lenders to independently define what a "first-time home buyer" means, and also to decide whether a borrower is creditworthy.

FHA loans have no minimum credit score and no income cap. The only rock solid requirement is a 3% down payment; some politicians are also proposing to lower this to 1.5%, and others advocate zero payment.

Regardless of credit risk or how much equity a homeowner has, FHA borrowers pay a flat initial premium of 1.5%. On a $200,000 loan, the premium works out to $3,000. The borrower then pays an annual premium of 0.5%, in this case, $1,000 a year.

But while 0.5 % is also a fairly standard insurance rate in the private mortgage insurance market, the FHA does not have an average portfolio of borrowers. Once home prices stopped rising, FHA continued insuring homes with less than 95% equity. In 2006 and 2007, the insuring of homes with minimal equity continued--75% and 78% of the loans it insured were in this high-risk group.

The FHA is pressing Congress for permission to adjust insurance premiums to reflect risk. Glavin said that with increased volume, the inability to factor in the likelihood of default could create real solvency problems for the FHA down the road.

Nonetheless, the Department of Housing and Urban Development defends the FHA's practices.

"It's reasonable risk and it's compassionate, given the circumstances that we find ourselves in," says HUD spokesman Brian Sullivan.

Taxpayers had better hope he's right. As FHA's Glavin points out: "Now that subprime financing has dried up, you will see more of those borrowers in FHA loans--because we are virtually the only game in town."

Existing-Home Sales Decline


WASHINGTON -- Existing-home sales fell during March after making a surprising climb in February.

Home resales fell to a 4.93 million annual rate, a 2.0% decrease from February's unrevised 5.03 million annual pace, the National Association of Realtors said Tuesday. Resales fell 19% from March 2007's 6.11 million rate.

The median home price was $200,700 in March, down 7.7% from $217,400 in March 2007. The median price in February this year was $195,600. Falling prices have kept would-be buyers from signing off on property as they wait for still-lower price tags.

NAR economist Lawrence Yun said the market is performing unevenly. "Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets," Mr. Yun said. "At the same time, many buyers continue to bide their time with a larger number of homes to choose from, while other potential buyers remain on the sidelines."

Lenders have tightened their standards on home loans, contributing to the credit crunch that is restraining the U.S. economy. Those tighter standards have priced marginal buyers out of the market and made purchasing more difficult and costly for prime borrowers.

The March resales level was right in line with Wall Street expectations of 4.93 million sales rate for previously owned homes. The average 30-year mortgage rate was 5.97% in March, up from 5.92% in February, according to Freddie Mac.

Inventories of homes increased 1.0% at the end of March to 4.06 million available for sale, which represented a 9.9-month supply at the current sales pace. There was a 9.6-month supply at the end of February.

Regionally, existing-home sales in March were mixed.

Sales fell 6.5% in the Midwest, rose 2.2% in the Northeast, rose 2.2% in the West, and fell 3.5% in the South.

Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com

What's Analyst Worth? Not Even Penny a Share as Estimates Miss

By Peter Robison

April 22 (Bloomberg) -- This earnings season may expose how much Wall Street analysts rely on guidance in making estimates, as the credit crunch and weakening economy make it harder for companies to meet or beat the numbers.

At least 27 companies have matched or topped Wall Street estimates in every quarter since 2000, including Coach Inc. and Starbucks Corp., according to data compiled by Bloomberg. General Electric Co. ended a 32-period winning streak on April 11. Goldman Sachs Group Inc. called GE and other early misses ``a sign of things to come,'' saying it expects more companies to fall short of first-quarter estimates.

In good times, companies often use the flexibility of accounting rules to choose when they book revenue and costs, creating an impression of predictable earnings, said Thomas Russo, a partner at Gardner Russo & Gardner. The economy's decline and the freeze in credit markets are making that harder.

``Companies are smooth and steady and growing, right up until the point they collapse,'' said Russo, who manages about $3.5 billion. His largest holding is Warren Buffett's Berkshire Hathaway Inc., famous for not providing quarterly forecasts.

The real puzzle is why GE hadn't missed estimates since at least 2000, said Shiva Rajgopal, an accounting professor at the University of Washington in Seattle. If analysts made their own judgments independent of company forecasts, the probability of compiling a record like GE's by sheer chance would be about 1 in 100 billion, based on a standard statistical equation, similar to a coin flip, he said.

`Silly' Game

``The whole game is silly,'' said former U.S. Securities and Exchange Commission Chairman William Donaldson, who led a group that recommended abolishing quarterly forecasts and reducing the amount of executive compensation tied to quarterly earnings per share. ``Earnings themselves are subject to interpretation.''

The so-called earnings game each quarter makes stock prices more volatile, wastes corporate resources and may encourage managers to use aggressive accounting or delay investments, according to a report Donaldson helped produce in June for the Committee for Economic Development, a Washington nonprofit policy group formed in 1942 to promote ``sustained economic growth.''

The earnings game costs anyone who invests in a mutual fund, by obscuring real corporate performance and through commissions from short-term, speculative trades, according to the report. Those extra fees may have cost $70 billion in 2005 alone, it found.

`Buy' Ratings

Most analysts missed the earnings shortfall for Fairfield, Connecticut-based GE, the world's biggest supplier of power- plant turbines, locomotives and medical imaging machines.

Sixteen of nineteen had ``buy'' ratings on the shares before the company said April 11 that profit from continuing operations fell 12 percent to $4.36 billion, or 44 cents a share, 7 cents less than the average Wall Street estimate. Its shares have fallen 12 percent since then to $32.46 yesterday. General Electric, which also sells financial services, said the seize-up in credit markets prevented it from closing some transactions.

``We're doing the best job forecasting that we know how,'' Chief Financial Officer Keith Sherin said the day General Electric reported earnings. ``I guess we could have forecast much lower earnings and just left an open category called unknown volatility, but that's not the way we do business.''

A 2000 SEC rule, the 2002 Sarbanes Oxley Act and a 2003 SEC settlement with securities firms all contained provisions intended to make Wall Street research more independent. By some measures, research has become less accurate.

Moving Target

In the fourth quarter, the almost 1,800 equity analysts overestimated final results by 33.5 percentage points, the biggest miss ever, based on data compiled by Bloomberg. Yet 62 percent of companies in the Standard & Poor's 500 Index beat average estimates -- because analysts lowered their forecasts as the quarter progressed. First-quarter numbers show a similar trend, with 55 percent of the 111 companies reporting so far exceeding the average estimate.

Until the recent quarter, GE and 27 other companies in the S&P 500 always met or exceeded Wall Street's average estimates dating back to 2000, Bloomberg data show.

While those companies' shares outperformed the S&P 500 during that span, seven of them -- including GE, Seattle-based Starbucks, the world's largest coffee retailer, and Atlanta- based Coca-Cola Co., the world's largest soft-drink maker -- lagged behind the benchmark index during the past five years.

GE, for instance, rose 36 percent from April 4, 2003, through April 4, 2008, compared with a 56 percent gain for the index. During the 32 quarters when its earnings met or beat estimates, GE's share price dropped 39 percent, while the S&P 500 was unchanged.

`Wrong Reasons'

``Quarterly earnings per share are at best a finger in the wind,'' said Nicholas Heymann, an analyst at Sterne, Agee & Leach Inc. who started his career as a General Electric auditor in 1977.

``People are obsessed for the wrong reasons.''

Other companies performed well for a time, only to stumble. KB Home exceeded profit estimates for 29 straight quarters, until the real estate market collapsed and the Los Angeles homebuilder lost $1.93 a share in the second quarter of 2007.

After rising fivefold from April 2003 to April 2007, New York-based Coach, the largest U.S. luxury-goods maker, fell 40 percent in the past year, compared with a 9 percent drop for the S&P 500. In one stretch from 2003 to 2005, Coach beat the average estimate by exactly 1 cent for 10 consecutive quarters.

Revenue growth and productivity gains are fueling the earnings streak, said Andrea Resnick, a Coach spokeswoman. The company is scheduled to report today.
Earnings Priority

Rajgopal, the University of Washington professor who has studied the earnings game, said pressure to meet quarterly targets can hurt investors. He helped survey 400 executives about management choices in 2005, and said he was surprised to find that 78 percent would sacrifice long-term investments for smoother earnings.

``Guidance serves a purpose,'' he said. ``It helps managers communicate a summary number that captures all the changes in the business. On the other hand, it can easily be abused.''

A 2006 paper by researchers at the University of Southern California in Los Angeles and New York's Columbia University, ``Earnings Management and Managerial Myopia,'' sought to document the costs of the earnings game.

The paper labeled 989 public U.S. companies as either dedicated guiders or occasional guiders, based on how often they gave quarterly direction. The study found that the value of dedicated guiders' assets declined 2.7 percent from 2000 to 2003, while occasional guiders achieved a 7.8 percent gain.

Less R&D

Frequent guiders spent about 25 percent less on research and development. The authors theorized that some companies scale back on R&D to meet earnings goals.

``Everyone is so focused on one number, forgetting that the much more important thing is the long-term growth of the company,'' said Yuan Zhang, who co-wrote the paper and teaches accounting at Columbia's Graduate School of Business.

Quarterly forecasts are an unintended consequence of the 1995 Private Securities Litigation Reform Act, which exempted companies from legal liability for making forward-looking statements. Investors had pressed for the law as a way to increase the information available.

Instead, it became a way for analysts to avoid doing their own legwork, said former Tupperware Corp. CEO Warren Batts, who said he was irritated by frequent requests for guidance in the 1990s.

`Hero to Bum'

``We went from hero to bum every three months,'' Batts said. ``It's such a ridiculous game.''

The SEC began regulating how companies communicate with analysts in 2000, when it passed Regulation FD, for fair disclosure. The rule barred officers from slipping market-moving news to favored investors before general dissemination.

Accounting scandals at Enron Corp. and WorldCom Inc. led to the 2002 Sarbanes Oxley Act, the most sweeping reform of U.S. financial laws since the 1930s. In addition to stiffening criminal penalties for financial fraud, the law forced analysts to disclose conflicts of interest and barred employers from retaliating against analysts who wrote negative reports.

In 2003, Citigroup Inc., Merrill Lynch & Co. and eight other securities firms paid a $1.4 billion fine to settle allegations of biased research and agreed to stop compensating analysts based on how much investment-banking business they helped generate.

Guidance in Statements

While Regulation FD prevented companies from making selective disclosures, they still can guide analysts to an estimate they know they can beat by forecasting in a public statement. Analysts still have incentives to avoid writing negative reports, because it might hurt their relationship with the company or their employer's goal of encouraging customers to buy shares.

Investors view analysts as ``a necessary evil,'' said Bryan Armstrong, who surveyed 30 portfolio managers in 2005 on how they use estimates. Many said they like to learn what others are saying about a company and compare with their own models, said Armstrong, a partner at Ashton Partners, a corporate advisory firm in Chicago.

Criticisms of analysts are overstated, said Paul Nisbet, an analyst with JSA Research Inc. in Newport, Rhode Island. Analysts stand to lose clients if their reports are inaccurate, he said.

``All of a sudden, the people you're selling the stock to try to find another analyst who didn't get caught,'' Nisbet said.

Analyst Uneasiness

In the months leading up to General Electric's results, analysts hinted at concern that the company was straining to meet its own growth forecasts. Credit Suisse analyst Nicole Parent wrote that she wanted GE to stop setting quarterly targets and focus instead on ``lower, higher-quality'' earnings.

Former GE auditor Heymann rated the stock ``hold'' when he began coverage Nov. 13 for Sterne Agee. He joined the Birmingham, Alabama, firm last year after 25 years as a Wall Street analyst. Now he looks at longer-term measures: research spending, internal growth, sales from emerging markets.

``Most guys, they're still carving wooden figurines: `Hey, this quarter's going to be 37, not 36, and the tax base is going to be low, so buy the stock,''' Heymann said, mimicking an analyst report. ``That stuff is so yesteryear.''

To contact the reporter on this story: Peter Robison in Seattle at Robison@bloomberg.net.

Monday, April 21, 2008

Mortgage Crisis Just Beginning

Courtesy of MoneyNews.com

The subprime mortgage crisis is far from over and may still only be in its early stages, says money fund guru John Hussman, who manages the $3.18 billion Hussman Strategic Growth Fund.

Hussman reckons the U.S. economy is just starting the game of mortgage defaults and has many more innings to go. He points to the number of adjustable mortgages yet to reset to higher rates — so high that many more foreclosures are inevitable.

"We appear to be quite early in the mortgage crisis, with only about a quarter of the cumulative resets having occurred. That places us near the start of the third inning, where we can expect each of the ‘nine innings’ to be about three months in duration.”

The next three quarters, he writes, are when the "the cumulative amount of resets will surge. With that surge, loan losses and foreclosures will also predictably spike higher,” Hussman notes.
Story continues below . . .

Other analysts tell MoneyNews they agree with Hussman’s forecast.

"We’re hearing a cavalcade of talking heads telling us the housing market could right itself later this year,” says Robert Sheridan, a housing developer with Robert Sheridan & Partners.

"Let me be clear. It won’t. Some markets may not recover until 2010, and, in cases like Florida, a turnaround could take as long as three to five years. There is lots of grim news to come.”

Experts reckon that many homeowners with high interest rate subprime loans are staving off foreclosure by taking second, or even third, jobs, to make the money to meet the payments.

Eventually, these folks will have to give up, out of sheer exhaustion.

"These families are not going to be able to make it out of the ‘seventh inning stretch’ if their interest rates don’t stop increasing at a faster rate than their home values are decreasing,” Dr. Gary Lacefield, president of financial risk management consultancy Risk Mitigation Group, tells MoneyNews.

The refusal of many economic elites and of the financial media to recognize these issues is part of the reason policymakers haven’t responded properly to the mortgage crisis, Hussman charges.

"One of the fascinating aspects of Wall Street is the ability of analysts to provide opinions without the faintest backing from evidence,” notes Hussman.

"Among the latest topics of opinion is how far the mortgage crisis has to go. Evidently, the idea is that the recession that these analysts didn't forecast is already over, so it is time to look across the valley on the belief that most of the write-downs are behind us.”

Wednesday, April 16, 2008

U.S. Housing Starts Slide to Lowest Level in 17 years

U.S. Housing Starts Slide to Lowest Level in 17 Years (Update3)
By Bob Willis

April 16 (Bloomberg) -- Housing starts in the U.S. dropped more than twice as much as forecast in March to a 17-year low, signaling that declining construction will keep eroding economic growth this year.

Work began on 947,000 homes at an annual rate, down 11.9 percent from February and the fewest since March 1991, the Commerce Department said today in Washington. Building permits, a gauge of future construction, fell to a 927,000 rate from 984,000 the prior month.

Foreclosures are pushing down property values by adding to the glut of unsold homes, prompting buyers to hold out for better bargains and undermining new construction. The Federal Reserve will probably lower the benchmark rate again at its meeting this month to cushion the economy against the housing- led slowdown.

"Home construction is probably going to continue to fall right through this year,'' Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview. ``While we see a bottoming in sales in 2008, we really don't see an improvement until later 2009, early 2010.''

A separate report today showed that consumer prices rose 0.3 percent in March from the previous month, matching economists' forecasts. Excluding food and energy costs, prices increased 0.2 percent, the Labor Department said.

Economists' Forecasts

Starts were projected to fall 5.2 percent to a 1.01 million pace from an originally reported 1.065 million rate in February, according to the median forecast in a Bloomberg survey of 72 economists. Estimates ranged from 950,000 to 1.1 million.

Permits were forecast to drop to a 970,000 pace, according to the survey median.
The yield on the benchmark 10-year note dropped to 3.58 percent at 9:47 a.m. in New York following the reports, from 3.60 percent late yesterday. The Standard & Poor's homebuilder index rose 1.5 percent to 397.2.

Work on single-family homes decreased 5.7 percent to a 680,000 pace, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, fell 25 percent to an annual rate of 267,000 in March.

Starts dropped in all four regions, led by a 21 percent slump in the Midwest.

Residential building has subtracted from economic growth since the first three months of 2006, culminating in a 25 percent decline last year that was the biggest since 1980.
Annual Forecast

The National Association of Home Builders yesterday forecast housing starts would fall 30 percent this year, compared with a previously estimated 27 percent drop, as the credit crisis persists.

"It's now clear that we have entered what we anticipate will be a mild recession,'' David Seiders, chief economist for the homebuilders' group, said in a statement.

As property values tumble and adjustable-rate mortgages reset, more Americans are walking away from their homes. Foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier, Irvine, California-based RealtyTrac Inc., a seller of default data, said April 14 in a statement.

JPMorgan Chase & Co., the third-biggest U.S. bank, said today that profit fell 50 percent in the first quarter after $5.1 billion of writedowns and provisions linked to subprime mortgages, bad home-equity loans and financing for leveraged buyouts. The company set aside $1.1 billion for future home- equity loan defaults, almost three times as much as in the fourth quarter.

Job Losses

The construction slump is causing job losses to mount and sales of building materials and appliances to drop. Falling home prices undermine consumer confidence and spending, which accounts for two-thirds of the economy.

Homebuilders are also pessimistic. The National Association of Homebuilders said yesterday its confidence index held near a record low this month.

KB Home, the fifth-largest U.S. homebuilder, last month reported a wider loss than analysts projected as the housing recession cut sales and led to land writedowns.

``Many potential buyers either cannot or will not make a purchase commitment today,'' Chief Executive Officer Jeffrey Mezger said on a conference call March 28. ``Many are simply unable to qualify for financing given the more restrictive lending environment.''

Economists surveyed by Bloomberg this month forecast the economy will not grow at all in the first half of the year, the weakest performance since the 2001 downturn.

Fed Stance

Fed policy makers are more focused on the threat of recession than inflation, believing that the economic slowdown already under way will help tame prices.

``Many participants thought some contraction in economic activity in the first half of 2008 now appeared likely,'' according to the minutes of Fed's March 18 meeting released last week. While

``uncertainties about the outlook for inflation had risen,'' the minutes said, ``the Committee expected inflation to moderate in coming quarters.''

Investors project the central bank will lower the benchmark rate by at least a quarter point later this month.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net Last Updated: April 16, 2008 09:53 EDT

Tuesday, April 15, 2008

Foreclosures jump 52 percent in last 12 months

By Lynn Adler Tue Apr 15, 5:26 AM ET

NEW YORK (Reuters) - Home foreclosure filings surged 57 percent in the 12 month-period ended in March and bank repossessions soared 129 percent from a year ago, as homeowners struggled to make mortgage payments, real estate data firm RealtyTrac said on Tuesday.

For the month of March, foreclosure filings, default notices, auction sale notices and bank repossessions rose 5 percent, led by Nevada, California and Florida, RealtyTrac said.

The rise in March to filings on a total of 234,685 properties followed a 4 percent decline in February, RealtyTrac reported.

RealtyTrac said the peak has yet to be reached.

"What we're really looking at is ongoing fallout from people overextending themselves to buy homes they couldn't afford and using highly toxic loan products to get into the houses in the first place," Rick Sharga, vice president of marketing at RealtyTrac, based in Irvine, California, said in an interview.

"We're going to see quite possibly a record amount of foreclosure activity in the third or fourth quarter," reflecting sharp payment increases on adjustable-rate subprime mortgages in May and June, Sharga said.

One in every 538 U.S. households living in single-family dwellings received a foreclosure filing in March. The single-family dwellings can include condominiums.

There are three phases of the foreclosure process in most states -- an initial default notice, notice of a scheduled auction, and an "REO" filing if the property is not sold at auction but instead repossessed by the bank, Sharga said.

REO refers to real estate-owned property.

All of the households in the report received at least one of these filings last month.


While default notices and repossessions soared in March, auction notices rose a relatively small 32 percent, James J. Saccacio, chief executive officer of RealtyTrac, said in a statement.

That suggests "more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender," he said. "This deed-in-lieu-of-foreclosure process allows the lender to take possession of a property without putting it up for public foreclosure auction."

The states with the highest foreclosure filing rates -- Nevada, California and Florida -- also are among those that had the biggest price appreciation in the five-year boom before the housing meltdown that began in 2006.

These states tend to also be plagued by defaults on unoccupied homes bought by speculative investors. In many cases, home prices have now fallen below the size of the mortgages and some owners are walking away.

In Nevada, one in every 139 households received a foreclosure filing in March, keeping the state at the top of the ranks for the 15th straight month.

The 7,659 Nevada properties receiving foreclosure filings last month represented a 24 percent jump from February and a nearly 62 percent spike from March 2007.

California had the second highest rate of foreclosure filings, one for every 204 households, followed by Florida with one of every 282 households.

Arizona's filings fell about 5 percent, but it retained its standing as with the fourth highest pace of foreclosure activity for the third month straight.

Foreclosure activity in Colorado dropped 8 percent in March from February and 1 percent from a year ago, but it ranked No. 5, with one filing for each 339 households.

Georgia, Ohio, Michigan, Massachusetts and Maryland were the other states with the highest foreclosure rates in March.

The states with highest total number of foreclosure filings were California, Florida and Ohio.

Foreclosure filings were reported on 64,711 California properties in March, the most of any state for the 15th consecutive month, up nearly 21 percent from February and up almost 106 percent from March 2007.

Florida posted the second highest total, with foreclosure filings reported on 30,254 properties in March. While down about 7 percent from February, filings were about 112 percent higher than last March.

Georgia, Texas, Michigan, Arizona, Illinois, Nevada and Colorado were the other states with the highest foreclosure totals in March.

(Editing by Leslie Adler)

Saturday, April 05, 2008

Minding the Gap: Home-Price Downside

By Scott Patterson and Mark Gongloff
From The Wall Street Journal Online

The economic balance hangs in large part on how much further home prices will fall. A look at one important measure -- the relationship between home prices and household income -- suggests we might not even be halfway there.

Over the long run, home prices and income should march along the same path. As households earn more, they can afford to pay for more expensive homes.

But the two can get out of whack. During much of the 1990s, incomes grew faster than home prices. The landscape shifted around 2000. From the start of the decade through the mid-2006 peak, home prices nearly doubled, thanks in part to falling interest rates. Over the same period, income per household rose just 26%, according to Moody's Economy.com.

In certain states, the disparity was extreme. Seven states, including California, Florida and Arizona, saw annualized growth in home prices outpace income growth by 10 percentage points from 2002 through 2006, according to housing expert Thomas Lawler.

The difference between income growth and home prices has started to narrow. Home prices were down 10% through the fourth quarter from their peak in mid-2006, according to the S&P/Case-Shiller national home-price index. But to bring prices in line with incomes, they will need to fall further. If incomes continue to grow in the next year as they have in the past decade -- probably an optimistic assumption -- it would take a 9% to 12% drop in home prices to bring the two measures in line with each other.

In states that saw bigger housing bubbles, the correction will be more severe, says Mr. Lawler.

It is also possible that home prices will overshoot on the downside, just as they did on the upside. Goldman Sachs economists say prices could fall another 15%. Merrill Lynch economists say they could drop another 20% to 30%. Both banks have been more bearish than others on the economy -- and so far look correct to have been so pessimistic.

Retailing Likely Checks In With More Glum Numbers

Consumer spending is one potential casualty of falling home prices. When home values fall, households have less home equity to tap when they want to buy a new flat-screen television.

Today's February retail-sales report from the Commerce Department could provide evidence of that. Sales were up 3.9% in January from a year earlier. That paled in comparison with year-over-year gains of more than 6% that prevailed from 2004 to 2006. It was also less than the 4.3% increase in consumer-price inflation registered in January from a year earlier.

Economists don't expect strong numbers for February. On average, they see an increase of 0.1% from the month before. Auto makers and retailers reported a slow February -- with the exception of Wal-Mart Stores and other discounters, which benefited as shoppers tightened their purse strings. The Federal Reserve's latest "beige book" compilation of economic anecdotes described retail sales as "below plan, downbeat, weak, or having softened" in most of the country since mid-January.

Tax rebates might temporarily boost spending again later this year. But consumers are walking into pretty stiff headwinds.

Email your comments to rjeditor@dowjones.com.