Loss severities on distressed U.S. residential mortgage loans are likely to rise this year as several key government support programs expire, according to Fitch Ratings.
Low mortgage rates, homebuyer tax credits and government directed loan-modification programs have led to an improvement in home prices and loss severities since second quarter-2009. But the expiration in the coming months of both the homebuyer tax credit and the Federal Reserve’s $1.25 trillion MBS purchase program will increase negative pressure on home prices and loss severities, according to Senior Director Grant Bailey.
Additionally, an increase in the liquidation of loans with unsuccessful loan modifications is expected to add to the supply of distressed inventory in the housing market. ‘Servicers are further along in identifying borrowers ineligible for modifications and will likely be more aggressive in liquidating those loans this year compared to last,’ said Bailey. ‘Less costly alternatives to foreclosure, such as short-sales, should help stem rising loss severities due to the lower costs and speed of the resolution.’
Loss severities on loans resolved through short-sales are approximately 10% lower than loss severities on loans in which the servicer takes possession of the property. Additionally, the seasonal increase in housing activity through the summer may delay the full impact of the withdrawal of the government support programs until later this year.
In the two years prior to the recent improvement, national home prices dropped approximately 30% while loss severities on loans which incurred losses doubled to record highs of 43% for private-label Prime loans, 58% for Alt-A loans and 72% for Subprime loans.
For details, see RMBS Performance Metrics (Premium)
Technorati Tags: delinquencies, housing, residential mortgage-backed securities, RMBS, structured-finance
Moody’s has issued details of its methodology for its recent increase in loss projections for US subprime and Alt-A residential mortgage backed securities (RMBS) issued between 2005 and 2007.
Moody’s last month revised lifetime loss projections for US subprime RMBS issued between 2005 and 2007. On average, Moody’s now project cumulative losses of 19% of the original balance for 2005 securitizations, 38% for 2006 securitizations, and 48% for 2007 securitizations. For Alt-A Moody’s projects cumulative losses of 14% for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations.
A few tidbits from the reports:
As a result of dropping house-prices, over 56% of subprime loans and over 58% of Alt-A loans in Moody’s rated securities are currently under-water.
- After increasing starkly in 2008 (from the mid-40s to the mid-60s), loss severities on subprime pools stabilized in 2009. As of December 31, 2009, severities across all vintages were approximately 70%. We expect severities on subprime pools to rise slightly as we reach the home price trough, but improve thereafter. As a result, we expect lifetime severities to average around 70%.
- After increasing through the first half of 2009, loss severities on Alt-A pools have since stabilized. As of December 31, 2009, the three month averages for 2005, 2006, and 2007 severities were approximately 53%, 59%, and 59%, respectively, an increase, in absolute terms, of 8-13% from a year ago. We expect severities on Alt-A pools to remain largely stable at the higher levels.
- Recent government efforts to curb defaults and foreclosures through loan modification have thus far failed to gain the previously expected traction. The updated loss estimates incorporate approximately 5% for subrime and 2% for Alt-A relative benefit to projected losses across vintages to reflect the limited anticipated success of the program.
For details, see Subprime RMBS Loss Projection Update: February 2010 and Alt-A RMBS Loss Projection Update: February 2010 (Premium)
Technorati Tags: Alt-A, housing, mortgage defaults, mortgage modification, residential mortgage-backed securities, RMBS, structured-finance, subprime
The S&P Case-Shiller Home Price Indices for December present a confusing picture of the US housing market.
The U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 2.5% decline in the fourth quarter of 2009 versus the fourth quarter of 2008. This is a significant improvement over the annual rates reported in the first, second and third quarters of the year, at -19.0%, -14.7% and -8.7%, respectively. In December, the 10-City and 20- City Composites recorded annual declines of 2.4% and 3.1%, respectively. These two indices, which are reported at a monthly frequency, have seen improvements in their annual rates of return every month since the beginning of the year.
“As measured by prices, the housing market is definitely in better shape than it was this time last year, as the pace of deterioration has stabilized for now. However, the rate of improvement seen during the summer of 2009 has not been sustained,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.
“In the most recent months we are seeing fewer and fewer MSAs reporting monthly gains in prices. Only four cities saw month to month improvements in December over November, when you look at the raw data. We are in a seasonally slow period for home prices, however, so it is not surprising to see better statistics in the seasonally-adjusted data, where 14 of the markets and the two monthly composites all rose in December. Similarly, the National Composite fell by 1.1% in the fourth quarter, but rose by 1.6% on a seasonally-adjusted basis.”
Perhaps the most that can said with confidence about the latest set of figures is that the recovery in housing prices has flattened out.
Technorati Tags: house prices, housing, S&P Case-Shiller Home Price Index
Unexpectedly strong quarterly results from Home Depot (HD) and Lowe’s, (LOW) along with improved profits at Sears, Target and Macy’s give cause for optimism that the US economy continues to dig its way out of the recession.
“We think what you are seeing in the numbers from Home Depot and Lowe’s is spend by those people in their homes feeling more confident from when median home values troughed in January 2009,” said Brian Sozzi, an analyst at Wall Street Securities (Financial Times).
“We are not off to the races where people are tearing down the walls in their kitchen again, but at the margin people are starting to invest in their homes again,” Chris Horvers , an analyst at JPMorgan Chase & Co in New York, said today in a Bloomberg Television interview.
Morningstar says Home Depot’s solid fourth-quarter results “affirm our view that the home-improvement market is poised for a recovery.”
Deutsche Bank analyst Mike Baker said Lowe’s CEO Robert Niblock’s comments that the worst is behind are supported by better trends in higher-priced items, improving special-project sales and by the fact that Lowe’s will buy back stock for the first time since 2007 (Canadian Press).
Moody’s said the stock buyback would have no immediate impact on the company’s credit rating or outlook. “Lowe’s A1 rating continues to balance its credit metrics, which remain solid despite recent weakening, its best-in-class supply chain, and its superior shopping experience, against a continued challenging macroeconomic environment.”
On Jan 12, prior to the fourth quarter results announcement, Scot Ciccarelli of RBC Capital Markets wrote that he was expecting Lowe’s comparable store sales to turn positive sometime in mid-2010. He raised his price Target to $28 from $24 and named the company “One of Our Favorite Plays for 2010.”
He also raised his target on Home Depot to $32 from $28 but prefers Lowe’s over Home Depot.
Meanwhile, Morgan Stanley’s Gregory Melich, added Home Depot as a “Best Idea” on Feb 8, with a target price of $35. “HD or LOW? We say both. Our upgrade of HD is effectively a “double down” on home improvement. The macro trends are improving and both HD and LOW can succeed in 2010, in our view ….. HD has a better dividend yield and exposure to the “bubble markets” that could enable it to outcomp in 2010. LOW has 200-300 more stores it could build, which should provide some growth premium in the multiple.”
One final thought: both companies are likely to get at least a further temporary boost from home repairs following the unusually severe winter weather in heavily populated areas up and down the East Coast and elsewhere.
Home Depot’s Conference Call Transcript.
Lowe’s Conference Call Transcript.
See Alacra Pulse for for free latest analyst comment on Home Depot and Lowe’s.
(Disclosure: long Lowe’s)
Technorati Tags: (LOW), HD, Home-Depot, housing, Lowe's, retailers
Amid growing concern over the stability of sovereign debt in Southern Europe we are pleased to offer a complimentary download of Oxford Economics’ latest Country Economic Forecast for Spain.
Selected Highlights:
- According to preliminary estimates, GDP contracted again, by 0.1% in 2009Q4. Other indicators suggest that the economy may be close to bottoming out. In Q4, industrial production increased for the first time since early 2008, by 0.5%, helped by the effect of car scrappage programmes. However, the recovery will be held back by the persistent weakness of domestic demand. In Q4 retail sales fell 1.3% on the quarter in volume terms, having been flat in Q3.
- Meanwhile, unemployment continues to rise. The harmonised rate reached 19.5% in December and, according to surveys of employment expectations, a fall in the jobless total is unlikely in the near-term. To try to head off further job losses, an agreement has been reached to cap wage increases at 2.5% per annum over the next three years. High unemployment and subdued income growth will lead to consumption contracting again this year, by 0.3%. Shrinking domestic demand is the main factor behind the 0.3% fall in GDP we forecast for 2010.
- Concerns about fiscal sustainability have led to a marked increase in bond yields relative to those in Germany, with the spread between the two peaking at over 100 basis points. The government has announced a series of measures aimed at achieving medium-term fiscal sustainability, most importantly a rise in the minimum retirement age to 67 years. The government’s deficit is expected to remain around 11% of GDP this year.
The Spanish banking system is absorbing the fallout from the property market collapse. At the beginning of February the Bank of Spain told the industry to devalue its housing assets by 20%, reflecting the large fall in house prices. However, such a devaluation would put further strain on bank balance sheets and might trigger a reduction in loans, adding another obstacle to the recovery in domestic demand.
The monthly report Spain: Country Economic Forecast is available for free download by Research Recap users for 30 days by special arrangement with Oxford Economics, an Alacra content partner. After 30 days the report will revert to its regular Alacra Store price of $250.00. Oxford Economics Greece: Country Economic Forecast is also available at the regular Store price of $250.00.
For additional free research reports from the Alacra Store click here.
Technorati Tags: complimentary research, housing, Oxford Economics, Spain, unemployment
Oxford Analytica provides a review of the history of Fannie Mae and Freddie Mac and looks at the options for their future in this complimentary download from the Alacra Store.
Selected excerpts:
Despite widespread expectations to the contrary, President Barack Obama’s recently presented budget proposal for fiscal year 2011 provided no indication of what the government plans to do with Fannie Mae and Freddie Mac once they eventually emerge from ‘conservatorship’ (a period of direct government support). The implication is that the two will remain instruments of government policy, regardless of the cost to the Treasury.
Since the establishment of the conservatorship, Fannie Mae realised losses of 111 billion dollars and Freddie losses of 63 billion dollars. These losses have exhausted the value of each company’s shareholder equity and have resulted in considerable draws from the US Treasury under the SPSAs. To date, Fannie has drawn 60 billion dollars and Freddie has drawn 50 billion. On December 24, 2009, the administration announced that it would allow Fannie and Freddie to have unlimited losses until end-2012. It also announced that it was scrapping plans for these two agencies to reduce the size of their portfolios.
As long as they continue to make major losses, Fannie and Freddie are unlikely to emerge from government conservatorship. Instead, the administration will continue using these enterprises to support its efforts to stabilise the housing market, until there has been sufficient healing in private sector financial institutions — perhaps in 2011.
The full report has been made available free of charge to ResearchRecap users for 30 days by special arrangement with Oxford Analytica, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $150.
For additional free research reports from the Alacra Store click here
Technorati Tags: complimentary research, Fannie-Mae, Freddie-Mac, GSE, housing, Oxford-Analytica, residential mortgage-backed securities, RMBS, structured-finance
Moody’s has raised its house price outlook slightly but still does not expect much benefit from loan modification programs.
Excerpts from Moody’s ResiLandscape (Premium)
We’ve shaded our house price forecasts slightly higher in the last month because we’ve considered the recent house price data and uncertainties surrounding foreclosures and the timing that foreclosure sales will hit the market. Although the basic contours of the outlook remain the same, it is looking likely that foreclosures will hit the market more slowly than we had anticipated, mitigating but prolonging the price decline.
Prices will decline an additional 8% from the fourth quarter of last year to the bottom in the fourth quarter of this year, for a peak-to-trough drop of 34%. Last month, we had expected a total peak-to-trough decline of 37%, with a bottom in the third quarter.
House prices rose in the second and third quarters of last year, according to the Case-Shiller U.S. house price index, rising by an annualized 7% in each quarter. Fourth quarter is also shaping up to be a positive growth quarter, with the Case-Shiller 20-city index suggesting another quarter-to-quarter gain at the end of last year. A similar improvement is evident in other commonly cited measures of house prices, such as the National Association of Realtors’ median existing house price and the FHFA’s repeat purchase house price index.
As has been discussed before in Resi Landscape, we believe that the recent improvement in house prices is a temporary reprieve. A decline in distress sales—including foreclosure, deed in lieu, and short sales—as a share of total home sales is a driving contributor to the gain in house prices. The decline in the share of distress sales was particularly notable at the end of last year when the first-time homebuyer tax credit helped the total number of homes sold soar on an annualized basis to 6.4 million units, the strongest pace in more than two years. Concurrently, the HAMP program as well as other servicer-initiated mortgage modification programs, have kept hundreds of thousands homes out of foreclosure and off the market—for now.
Thus far, the HAMP program has successfully modified only a small number of the troubled loans. The assumption that the program’s success will remain underwhelming underpins our unchanged expectations that house prices will further decline. Many of the loans in the program will fail to convert to a permanent modification and will eventually end up on the market as heavily discounted distress sales.
Technorati Tags: foreclosures, HAMP, home prices, housing, loan modification
Oxford Analytica critiques the OECD’s second China survey, which comes five years after the publication of its first and largely does not reflect on China’s handling of the global recession.
The OECD acknowledges major achievements. At the same time, it recognises weaknesses, many that have long been known but which come in the evolving context of China’s development into a major global economic power. These include imbalances, for example, between savings and investment; China also has capacity issues; environmental problems have come with rapid industrialisation.
…the immediate problem is how to maintain real growth in the economy while damping down the problem of asset price inflation and risk of bubbles in the property and stock markets.
- If China is to get its long-run finances in order, and balance better the way in which it funds long-term investment and growth, it needs a well functioning stock market.
- Housing policy may have scope to influence the evolution of a functioning market through planning laws, land release and the mortgage finance system.
Both these issues are extremely difficult to manage, even with the type of direct monetary controls still available in China, where the credit ‘tap’ can be adjusted relatively precisely to generate economic growth. In the short-term, in the absence of other rapid solutions, this mechanism will have to be used — and currently is being turned down to withdraw excess liquidity from the economy.
The global recovery might create enough external growth for Beijing safely to cool its asset prices. If not, instability in China will risk derailing not only its own plans, but also those of many other emerging economies that look to it as both a market for exports and an example of how to achieve sustainable high growth.
For details, see: CHINA: OECD downplays short-term drivers (Premium)
Technorati Tags: china, housing, OECD, stock market
In contrast to December’s record drop in existing home sales, Standard & Poor’s sees signs of recovery in the new homes sector. But the ratings agency notes that existing home inventory could weigh on new home prices.
The credit quality of many U.S. homebuilders is beginning to firm now that that the worst of an historic housing correction appears to have passed, according to Standard & Poor’s Ratings Services.
“We believe housing starts bottomed in 2009, when the number of new homes under construction totaled approximately 560,000, 73% below the 2.1 million units at the cyclical peak in 2005,” said credit analyst James Fielding. “Despite the difficult operating conditions, most rated companies have been able to survive by cutting off land purchases, trimming overhead, and stockpiling cash.”
The weak job market and looming foreclosures may contribute to an uneven recovery. Specifically, a continued rise in foreclosures could increase the competitive supply of existing homes for sale and weigh on new home prices more than we currently anticipate. Additionally, we expect speculative housing starts will accelerate over the next couple months before the scheduled June 2010 expiration of federal tax credits for homebuyers.
Even though the homebuilding sector will face headwinds for the foreseeable future, some rated companies are much better positioned than they were less than six months ago.
For example, several public companies have substantialcash holdings that gives them a competitive advantage over capital-constrained private competitors. The improving profiles of several companies has also had a positive impact on ratings and outlooks, as we have we have upgraded three homebuilders and revised our outlooks on four others in a positive direction since the end of last year’s third quarter.
S&P’s highest rated homebuilders are NVR, (NVR) Toll Brothers (TOL) and MDC Holdings (MDC).
[Via Alacra Pulse: Carl Reichardt, an analyst with Wells Fargo said in December the reason for NVR's massive outperformance of the sector over the past two years is, for one, the fact that the homebuilder doesn't own land, but only options on land, so when the downturn came NVR was not forced to writedown a substantial portion of assets....Toll Brothers was downgraded to equal weight by analysts at Barclays Capital on Jan 14.... MDC was upgraded to Neutral by Credit Suisse on Dec 2.]
For details, see Industry Report Card: Liquidity And Improving Order Trends Bolster U.S. Homebuilders At Cyclical Trough and Issuer Ranking: U.S. Homebuilders, Strongest To Weakest (Premium).
Technorati Tags: (MDC), (TOL), existing home sales, homebuilding, housing, MDC Holdings, NVR, Toll Brothers
More U.S. prime jumbo borrowers are falling and staying behind on their monthly mortgage payments, according to Fitch Ratings.
Overall, prime RMBS 60+ days delinquencies rose to 9.2% for December 2009, up almost three times compared to the same period last year (3.2% in December 2008). The 2006/2007 vintages combined rose to 12.7% from 4.3%.
The five states with the highest volume of prime jumbo loans outstanding (California, New York, Florida, Virginia, and New Jersey) comprise approximately two-thirds of the loans in question. Prime jumbo RMBS 60+ days delinquencies for these states at December 2009 compared to December 2008, and their approximate share of the $388 billion market, are as follows:
Prime jumbo borrowers that were current on their mortgage the previous month but missed a payment the following month (roll rates) averaged about 1% a month for the last 12 months, reaching a seasonal high of 1.3% in December 2009.
Despite some improvement in home prices and a slowdown in employment loss, roll rates have not improved primarily due to the number of prime jumbo borrowers who owe more on their mortgages than their home is worth. Over one-third of prime jumbo borrowers that are current on their mortgages also are ‘underwater’ on their mortgages, Fitch said.
For details, see Fitch RMBS Performance Metrics (Premium)
Technorati Tags: housing, jumbo mortgages, mortgage delinquencies, RMBS
