Several television financial correspondents were announcing at the beginning of this week that Monday was the first anniversary of the credit squeeze. It is unclear whether any one day can claim that dubious distinction, but August 2007 was certainly a cruel month.
During the first full week in August American Home Mortgage shut its doors after an incredibly precipitous decline in its stock over the previous week or two. On Friday, August 1 the stock was trading at $10.47 when trading was halted because of rampaging rumors, and by the time trading resumed on Tuesday, August 5 it was trading at 1.04, taking much of the market, particularly mortgage related stocks with it. AHM filed bankruptcy a few days later.
Countrywide Mortgage admitted to its own problems in the middle of the month but going back through the Mortgage News Daily archives we found articles about rising foreclosure rates, large write downs and losses on the part of hedge funds and other investors in mortgage-related securities and warnings about what was to come dating back to late spring.
We have lost track of the number of mortgage lenders, in addition to American Home Mortgage which have closed or at least left the mortgage lending field to concentrate on retail banking or mortgage servicers while some of the biggest mortgage companies such as WaMu have futures still very much in doubt.
According to RealtyTrac, there were 739,714 foreclosure filings in the second quarter, a 14 percent increase from the previous quarter and 121 percent more filings than in the second quarter of 2007. HopeNow, one of the many programs established by state and federal agencies ' and in this case the Treasury Department in cooperation with some of the nation's largest mortgage lenders - has assisted 1.9 million more people facing foreclosure to negotiate to save their homes. We are waiting for ACORN and other community based housing programs to dispute this number as they undoubtedly will, but for now we will let it stand.
The Treasury Department and the Federal Reserve have been busy trying to pull investment banks, commercial banks, Freddie Mac, and Fannie Mae away from the brink of failure and have presided over several controversial transactions including the fire sale of Bear Stearns to JP Morgan Stanley. Other troubled institutions are waiting for white knights to complete due diligence before acquiring them outright or pumping cash into their coffers. Ironically, some of these white knights are themselves walking a slack tightrope and hope by buying more trouble they can save their own companies. Bank of America which is buying Countrywide Mortgage is in this category.
As this point in the game it probably doesn't matter when the whole mess growing out of profligate lending began. The relevant questions are when and how it will end and just where we are now.
That the eighth bank was closed last Friday (making four banks in three weeks fading into FDIC history) hardly rated a mention in the national press is probably a harbinger of things to come as some experts are predicting 150 to 300 bank failures over the next few years. The American attention span is short indeed.
Here is a brief look at what some experts think the future might hold.
Most of the reports on home sales, foreclosures, prices, etc., that we cover from such researchers as Case-Shiller, the National Association of Realtors (NAR), the Office of Federal Housing Enterprise Oversight (OFHEO) are lagging indicators and only indicate the trends from two to four months earlier. For predictive purposes they are virtually useless. Some of those collecting and releasing data have their own agenda and skew their interpretation accordingly. In the larger scheme of things the announcement of the unexpected 5.3 percent increase in pending home sales released by NAR on Thursday, while encouraging, reflects transactions posted at least 35 days ago. Most economists agree that home price trends are meaningless on a month-to-month basis and that it only makes sense to measure prices on a year-over-year basis.
But, there is ample evidence that the larger economy is in danger of slipping into a full-fledged recession and, with news about job creation, unemployment claims, and retail sales all going in the wrong direction, it will be hard for the housing sector to get a grip on recovery.
Economist Paul Krugman calls it a "Slow-Mo Meltdown," and said, in a New York Times column, that such a meltdown may lack dramatic occasions such as the 1929 stock market crash, but can do "a lot of damage if it goes on for a year and counting."
And, he thinks that the fixer's options are narrowing. The tax rebates have done whatever good they can do and it is hard to see how consumers can continue to spend even at the reduced current rates. The Fed has used up its ammunition; additional rate cuts won't do to much more, and nothing much can or should be done to support home prices.
Krugman says that he titled a column about the early stages of the financial crisis "Very Scary Things." A year later "it's clear that I was right to be afraid."
In an interview with the Wall Street Journal's Stacy DeLeo, real estate economist Ken Rosen took an equally dim view of the future. Commenting on Tuesday's announcement that Freddie Mac lost $821 million in the second quarter of 2008, Rosen said that there is a 50 percent chance that actual losses will be much larger than that and that the federal government will have to step in and backstop the company.
Losses, he said, are really accelerating, but Freddie and Fannie are showing much lower losses than the market as a whole. If they match the market Freddie could lose $40 to $50 billion. He said that peak losses for the mortgage giant will not come until 2009.
He said that the two government sponsored enterprises (Freddie and Fannie) are the only entities providing movement in the credit markets. While they increased their market share over the last two decades, largely because of the belief that the government would guarantee any debt, and crowded out many competitors, 10 years from how they may represent only 20 percent of the mortgage market.
Rosen said that a total decline in home prices of 19.6 percent was widely expected and we are 2/3 of the way there so that prices may soon stabilize. Credit losses, however, will take much longer to show up and losses will be much worse, longer, and deeper than the financial markets expect. There is a lot more pain to come and the bottom won't be reached until the end of next year.