Good Credit Client's Defaulting.

Now that sub-prime is heading toward the light, the focus shifts to the ominous Alt-A loans. You know, the grey matter between prime and sub-prime. Take a look at this chart.

As you can see defaults are rising sharply partly because rates are resetting and housing prices have become stagnate. Countrywide and WaMu are some heavy hitters in this group but all eyes will be on IndyMac to see whether they follow the path of big brother sub-prime. This free flowing money again is because of loose monetary policy that encouraged credit creation and the populations incessant fascination with all things real estate. Just look at the sharp rise of 30 day lates; this will parabolically explode because we are resetting at approximately $100 billion per month and housing is going the opposite way. Otherwise we are in a perfect time bomb with no remedy. All the adjustable rates are resetting at least 2% higher than their current rate and people can't make the payments. They need to refinance before their rates reset. If they make a late payment they become subprime for the next three years and the lowest rates in subprime for fixed mortgages is about .50-75% higher than prime. That is several hundred dollars a month more for most home owners.

It's spreading:Target and GM Site Mortgage Meltdown for Decreased Sales.

April 23 2007: 4:28 PM EDT
LOUISVILLE, Ky. (Reuters) -- The crisis in the U.S. mortgage market has hurt U.S. auto sales this month, General Motors Corp. Vice Chairman Bob Lutz said Monday.
Lutz, who was in Louisville, Kentucky to attend an automotive industry conference, said he did not know how GM's (Charts, Fortune 500) own sales had performed in April to date, but said he expected the whole sector would feel the impact of the stress on the housing finance market.

"The market as a whole has been a little weakish. That has come as a result of the housing market problems and the mortgage industry meltdown," Lutz told Reuters. "A lot of people are finding themselves in a position of reduced affordability and that has had an impact, not just on us, but across the industry."
GM and other automakers will report April U.S. sales results on May 1.

Regarding Target from CNNFN.com:
"It's pretty surprising," Morningstar analyst Joseph Beaulieu said of Target's lowered forecast. "I don't think anyone really understands what's going on."
Beaulieu speculated that colder weather or high gas prices might have kept customer away from the stores in recent weeks.
Earlier this month, Target said it expected April same-store sales to fall 2 percent to 4 percent due to the earlier timing of Easter. Target's March same-store sales - a period that included pre-Easter shopping - rose 12 percent.
ThinkEquity analyst Ed Weller wrote in a research report the lowered forecast "appears to suggest an April (same-store sales) decline in the range of 8 to 9 percent."

Builder Cites Subprime as Slowing Sales

From National Mortgage News:
The crisis in the subprime mortgage sector is shaking the very foundation of the housing market, according to one of the nation's largest homebuilders. Ara Hovnanian of Hovnanian Enterprises said the subprime debacle is causing problems up and down the housing food chain. For one thing, fewer people can qualify for starter homes, Mr. Hovnanian said at the National Association of Home Builders' Multifamily Pillars of the Industry conference in Hollywood, Fla. For another, repeat buyers are finding fewer prospects for their houses, which they must sell before they can move, he said. But perhaps most important, the situation is having a dampening effect on the market in general. "The biggest impact is psychological," Mr. Hovnanian told the meeting. "Homebuyers were just beginning to feel good about getting back into the market" when the subprime meltdown became fodder for the media, he said. "Now they have lost their confidence." Hovnanian Enterprises is the parent company of K. Hovnanian Homes, the nation's sixth-largest builder based upon revenues and deliveries. Mr. Hovnanian said 15% of his buyers had to use subprime financing last year in order to qualify. But he said he expects that percentage to dwindle to 9% at most because of tightening loan standards.

It's only in subprime it won't impact us!

Really? Rewind to basic Econ 101. Remember supply and demand. We know that when supply overwhelms demand that prices fall. With all this supple on the market where is the demand going to magically come from to prevent prices from dropping. One hundred percent financing for most credit levels is gone entirely. Average credit level buyers are being required to put at least 5-10% down with most lenders. Six months ago if you had a pulse you could get 100% financing. Millions of potential home buyers(greater fools in some markets) are completely out of the game. My honest take is that we will see prices in some hot markets drop 20-30% from their peak over the next 2-3 years. Realise it is a slow inefficient market that takes time to adjust back to reality. With all this gloom and doom comes a ray of hope for the future buyers that can finally get a home at a reasonable price again. Just wait till 2010 to buy that condo in Vegas, OK?

Ticking Time Bombs?

As you can see the last part of the real estate boom was fueled by the riskiest credits. They were late to the party and many of these folks are already upside down on their houses. It won't take much to make them think about turning in the keys. Their payments are adjusting higher, their income is stagnant and their dream of homeownership is becoming a nightmare. Many will walk away.

Heat Map of the Mortgage Meltdown

This is an interesting map. You can see the once hot real estate markets that are facing large increase in late payments. The exception would be La. which is a mess following Katrina and the lack of flood insurance which has caused people to abandon properties. Notice the huge increase in the Inland Empire and Las Vegas. These were the hottest markets in 04-06. These markets have a huge percentage of subprime mortgages that are adjusting.

Housing: Inside the eye of the storm.

I present for your viewing pleasure an insiders view of a presentation I attended. Home values in the middle class segment of the market deflate, foreclosures increase monthly, consumer spending slows down and the economy faces stagflation. That's just my take. But your smart, you do the math.

Notice the amount of subprime loans that are adjusting over the next two years. The first adjustment is 2% above their current rate. And up to 2% every 6 months until the cap of 9.95% is reached.

The riskiest borrowers became a bigger portion of the purchase market.

Having trouble driving volume and qualifying people. The industry pushes and the client demands very aggressive mortgages that could well be a ticking time bomb for millions of families.

Here you can see the hot areas of the country were fueled by the most dangerous loan products. How else would people be able to chase inflated home values and take on enormous mortgages if not for creative financing? Afterall, average middle class income is rising around 3% a year. Yet housing rose 20%+ in most of these areas over the last five years.

Interesting Graph

New Home Slump May Last Till 2011

The new home market may not return to normal until 2011, a top housing economist has told a meeting of multifamily builders and developers in Hollywood, Fla. David Seiders, chief economist of the National Association of Home Builders, said it will be three or four years before the oversupply of finished but unsold houses is worked off and housing starts move back up to the 1.8-1.9 million-units-a-year trend line. The unsold inventory will be a "pretty heavy drag" on production, he said at the NAHB's Multifamily Pillars of the Industry Conference. As a result, he added, prices will continue to fall. "There's no question there is an oversupply of housing and that homebuyers know it," Mr. Seiders said. "So they are just waiting, and builders have no choice but to cut prices on a cumulative basis." Mr. Seiders told the conference that while the most recent data indicate that the inventory of existing condominiums has fallen, the situation is going to get worse. That sentiment was also voiced by Ron Whitten of Whitten Advisors, Dallas, who predicted that because multifamily structures have a long construction cycle, the excess in the condo sector won't start to burn off until 2009 at the earliest. Mr. Whitten described the condo outlook as "painful." The NAHB can be found online at http://www.nahb.com.

Real estate short sale: More tips to stop foreclosure

There are some helpful tips today in the Orange County Register for homeowners who are searching for ways to catch up on their mortgage payments and to avoid foreclosure.
Here’s the quick list:
Talk to your lender as soon as possible
Get financial counseling
Consider selling before foreclosure is final
The overriding theme of the article, which was written with the help of industry experts, is to act fast.
We couldn’t agree more — the quicker a distressed homeowner reaches out for assistance, the more options he or she will have from which to choose.
And, if for some reason a resolution cannot be agreed upon to save the home, at least these homeowners will have more time to put their properties on the market with the hopes that buyers come along to bail them out.
Filing for bankruptcy is the absolute last option, as well as one of the worst.
Consider this:
“Filing for bankruptcy isn’t a good option. Bankruptcy will not only ruin your credit but, depending on whether you file Chapter 7 or Chapter 11, the lender may still be able to foreclose or the court may order the sale of your home.”
The article also touches on a non-conventional strategy called the short sale. Essentially, this means that the house is sold for less than the actual loan amount.
However, the lender must agree to the terms of the price beforehand and be willing to accept the discounted offer.
Lenders sometimes do this to keep foreclosures off their books and to ensure that more money is not lost while the home is wasting away on the market.
In short, when it comes to foreclosure there’s no silver bullet solution that cures all situations. Fortunately, there are programs, services and options available that help distressed homeowners keep the keys to their front doors.
Therefore, alwayss remember that it is often a race against the clock — give yourself the time you need to arrive at the resolution that best fits your needs.

Consumer Slow Down?

Consumers Clench Their Wallets
Worries over mortgages and higher gas prices are starting to show up in their spending. And from Tiffany's to Wal-Mart, retailers are feeling the pinch
by Pallavi Gogoi
BW Exclusives
At first blush, it's easy to overlook the lackluster results posted by luxury jeweler Tiffany & Co. (TIF)—flat income and 15% sales growth, the stuff of a tepid quarter at a retailer known for its affluent and loyal clientele. Yet a closer examination of Tiffany's performance offers an interesting peek into how the folks who shop there—a broader demographic than many people realize—are starting to behave amid new economic uncertainties.
In fact, recent earnings and sales numbers released by Tiffany and other stores, such as J.C. Penney (JCP) and Macy's parent Federated Department Stores (FD), offer signs that the middle class is starting to show spending restraint. Climbing gasoline prices are already hurting lower-income consumers, who have responded by curtailing their shopping at retailers like Wal-Mart Stores (WMT). Even such inexpensive stores as Dollar General (DG) are feeling the pinch.
But the current slump in the housing market seems to be sapping some wind from the credit-card sails of middle-income shoppers. "People are worried about housing and the mortgage situation," says David Wyss, chief economist of Standard & Poor's, which, like BusinessWeek, is a unit of the McGraw-Hill Cos. (MHP). "And home mortgages are more of a middle-class issue—the rich usually don't have mortgages, and the poor rent."
No Slowdown for the Rich
And if the middle class is looking for some comfort, it hasn't come yet. The U.S. Commerce Dept. reported on Mar. 26 that sales of new single-family homes fell by 3.9% in February, to a seasonally adjusted annual rate of 848,000, the slowest sales pace in nearly seven years (see BusinessWeek.com, 3/26/07, "A Nasty Surprise on New Home Sales").
All regions of the country except the West experienced weakness last month. The February decline followed an even larger 15.8% sales drop the previous month. "When people have jumbo mortgage loans to pay off and also higher costs of health care, child care, and other services, you just can't afford any overheads," says Richard Hastings, vice-president and senior retail analyst at Bernard Sands. "I call it the trickle-up effect."
At Tiffany, the super-rich continued to spend at a prodigious pace—the average price per item sold in the U.S. rose to $91,000 from $81,000 in 2005, a 12% increase. However, those slightly lower on the income scale appear to be holding off on new Tiffany treats in the face of uncertainty.
General Restraint
It showed in the sales data: At the lower end, the average price per unit sold of Tiffany's silver jewelry in the U.S. rose just 2%, to $191 last year, vs. $187 in 2005. "We've noted a greater than expected shift in sales mix towards higher-end jewelry," Mike Kowalski, chairman and CEO of Tiffany, said in a Mar. 26 conference call discussing the results. The New York company's net income for its fiscal fourth quarter ended Jan. 31 barely budged, to $140.5 million, from $140.3 million last year on sales of $986.4 million, a 15% increase over last year's $858.4 million in the same period. Tiffany executives say higher cost of precious metals and diamonds ate into margins in the quarter.
Besides Tiffany, sales at other stores also seem to point to emerging signs of consumer restraint. J.C. Penney, the Plano (Tex.) department store chain favored by middle-income shoppers, reported a 0.2% decline in February sales at stores open at least one year, a key retail metric known as same-store sales. And Macy's parent Federated's sales rose a mere 1.2% in the same month, below the company's own guidance for a same-store sales increase of 2% to 3%.
Overall, shoppers generally shied from spending. The Commerce Dept. reported that in February, sales fell 0.3% at electronic stores, 1.2% at restaurants, 1.8% at clothing stores, and 1.7% at furniture retailers (see BusinessWeek.com, 3/15/07, "Consumers Feel a Chill").
Crunched Credit Scores
Analyst Michelle Tan of UBS (UBS) Investment Research believed that the mess in subprime loans would have a negative effect on housing-related retailers and reiterated her "reduce" ratings on home-improvement stores Home Depot (HD) and Lowe's (LOW). "We expect broader implications of the subprime fallout to remain limited to housing-related categories," Tan wrote in a Mar. 26 report.
On the lower end, the pressure is already showing. Wal-Mart, the world's biggest retailer, saw same-store sales rise an anemic 0.9%, missing its prediction for a 1% to 2% increase in February. And on Mar. 26, discount retailer Dollar General said its fourth-quarter profit fell 66%, to $50 million, on the costs of store closings and reduced prices.
Dollar General earlier this month agreed to be purchased by private equity firm Kohlberg Kravis Roberts. Clearly, people are hunting for deals at the lower end too. And even though short-term interest rates are falling, low-income consumers may not be benefiting. "Even if stores give 0% financing, many lower-income folks might not have credit scores that are good enough for them," says Hastings. "People are stretched."
Gogoi is a contributing writer for BusinessWeek.com.

Foreclosures Continue to Climb

The number of national foreclosure filings was up 4% in February as Nevada reported the highest state foreclosure rate for the second month in a row with a 24% monthly increase from January, according to RealtyTrac.A total of 130,786 foreclosure filings were reported during the month, down 4% from January’s revised total but still up 12% from February 2006. The national foreclosure rate stood at one foreclosure filing for every 884 U.S. households in February, according to the foreclosure tracking company.RealtyTrac considers default notices, auction sale notices and bank repossessions as foreclosure filings."Based on our numbers for the first two months of 2007, foreclosure activity is running at a rate that would project to a 33 percent increase over 2006," said RealtyTrac CEO James J. Saccacio."It appears that as subprime and FHA loans default at higher than anticipated rates, and lenders tighten their underwriting standards, we're going to continue to see a spike in the number of homeowners facing foreclosure."A 24% increase in monthly foreclosure activity kept Nevada in place as the nation's highest state foreclosure rate with for the second month in a row with foreclosure rate of one foreclosure filing for every 278 households In February, Nevada reported 3,124 foreclosure filings, up 77% from February 2006..Colorado followed with one foreclosure filing for every 345 households in February, a 9% month-to-month increase with 5,310 total foreclosure filings.Florida foreclosures skyrocketed more than 63% with 19,144 foreclosure filings – the most of any state - reporting one foreclosure filing for every 382 households.
The Top Ten Foreclosure Rates:

1. Nevada
2. Colorado
3. Florida
4. Georgia
5. Michigan
6. Tennessee
7. Ohio
8. Texas
9. Arizona
10. Indiana.