It seems that nary a week can pass without a subprime disaster
of some type. This week is no exception although there was at least a bit of variety
due to bad news coming from other parts of the housing industry.
Here is the rundown.
On Tuesday Moody's Investors Service announced it was downgrading
its ratings on 399 bonds backed by subprime mortgages because of higher than
expected delinquencies in the loans. These residential mortgage-backed securities
(RMBS) were largely underwritten by loans issued in 2006 and over 60 percent
of the underlying loans were sold by GE, Washington Mutual (now known as WaMu),
Fremont General Corporation, and New Century Mortgage which filed for bankruptcy
several months ago. Moody's said it may add another 32 bonds to the list.
At about the same time Standard & Poors (S&P) said it would probably
follow suit before the end of the week, downgrading about $12 billion of subprime
RMBS. Most of the S&P targets are also tied to the four lenders downgraded
by Moody's although S&P is also looking at other players such as Merrill
Lynch & Company.
Several analysts said that they expected the big rating services would soon
start looking at those lenders that deal in so-called Alt-A
mortgages which are tailored to borrowers who lack the documentation to
obtain conventional or prime mortgages or may have slightly damaged credit.
As we reported earlier, American Home Mortgage (AHM) one of the larger Alt-A
lenders announced it was withdrawing earlier estimates of second quarter
performance because of a contractual necessity to redeem many of the mortgages
it had sold to investors because of elevated delinquencies. The price of stocks
of Alt-A lenders such as AHM and IMPAC Mortgage Holdings fell on Wednesday and
Thursday with AHM reaching the mid-$14 range from recent highs in the mid-$30s.
Rex Nutting, in a strongly worded commentary for MarketWatch
accused S&P of having been among the enablers of the wildly active subprime
market but said that "S&P isn't going along with the charade anymore."
Nutting predicted that a lot of subprime debt will be downgraded to junk status.
"A lot of that debt will have to be sold at fire-sale prices. A lot of
pension funds and hedge funds that once thrived on the high returns they could
get from investing in subprime junk will now lose a lot of money." He
predicted that the S&P notice that they were re-evaluating the bonds "is
a death warrant for the subprime industry. No longer will mortgage brokers be
able to help buyers lie their way into a home" and fewer homeowners will
be able to refinance themselves out of trouble, thus extending and exacerbating
In related news, two major builders announced that they expected
to post quarterly losses. Ryland Group and D.H. Horton both announced that heavy
cancellations of home-building contracts and the necessity of opting out of
agreements to buy land would cause their most recent quarterly figures to slip
into the red zone. Ryland expects to book charges of $145 to $155 million and
Horton said quarterly orders for new homes fell 40% from a year earlier
A smaller Ohio based builder, M/I Homes, also backed off of earlier earnings
projections saying its orders for new homes and deliveries both fell in the
second quarter; new contracts by 10 percent year-over-year and deliveries 24
percent to a total of 755 homes.
Another sector beginning to feel the pinch from the declining
housing market is home improvement stores. Home Depot said that it is lowering
its year-long profit forecast because the weakening housing market is dampening
earnings more than anticipated.
HD executives said they expect adjusted earnings per share to drop 15 to 18
percent to a range of $2.30 to 2.36. Two months ago the corporation said it
anticipated a drop in income of 15% but that things would pick up in the second
half of the year.
The monthly forecast by the National Association of Realtors' issued on
Wednesday was among the more pessimistic we have seen. It projected
that new home sales will total 865,000 this year and 878,000 next year compared
to 1.05 million in 2006. In more bad news for builders, the forecast projected
housing starts at 1.43 million units this year and 1.44 million next. This is
a substantial drop from the 1.80 million starts last year.
Lawrence Yun, NAR senior economist projected that existing home sales will
pick up late this year and will total 6.11 million in 2007 and 6.37 million
in 2008. If the projections hold this would bring the 2008 figures back close
to the 6.48 million sales recorded in 2006.
Existing home prices are also expected to recover, rising 1.8 percent to a
median price of $222,700 next year, offsetting the 1.4 percent decline expected
this year. The median new-home price should rise 2.2 percent to $245,400 in
2008 following a 2.6 percent drop this year.
Finally, Thursday the NAACP filed a class action suit against
14 of the nation's largest subprime lenders to stop these lenders from engaging
in systematic, institutionalized racism in making home mortgage loans. We will
have more information on this suit in the next few days.