US Homes and Mortgages

Housing Hollowed Out
By Alan Hall

The housing market is beginning to resemble a watermelon I once floated in a pond overnight to cool. The next day a small hole was in one end and the red interior was completely gone, hollowed out to the sour green rind, sculpted by little teeth. Some muskrat had a feast.
That memory returned when I saw a chart in this month’s Elliott Wave Financial Forecast titled, “A Historic Hollowing of the Housing Stock.” It shows a recent near-vertical rise to a half-century record high in the percentage of unoccupied U.S. homes. No stealthy muskrats at work in this case; it’s a bear market in plain sight.
During the housing mania, the risky, sub-prime segment of the mortgage industry grew 520% between 2001 and 2005. Lenders ceased demanding full documentation of income and assets. They offered “piggyback” loans financed at 90% to 100% of the home price, and didn’t require private mortgage insurance on profitable, high-risk, “sub-prime” mortgages. Loan officers and mortgage brokers coached borrowers to inflate their incomes, and many couldn’t even make their first payment. After short-term rates began rising, lenders kept “teaser” rates low, meaning that the first payment adjustment would be big. Then, in further arcane chicanery, many of these loans were packaged and sold to investors in collateralized debt obligations (CDO’s), glazing another pane in the glass house of derivatives.
Newspaper articles today describe an accelerating wave of mortgage defaults. As bankers, asset managers and the credit-poor awake from easy-credit dreamland, they find the sub-prime ship submerging. “We are a bit surprised at how fast this has unraveled,” said the head of asset-backed securities research at U.B.S.
Sleepyheads are still soothed by the lullabies of economists… the pseudo-savvy seers don’t “expect any significant harm to the nation’s economy or financial systems.” That said, the news articles continue like a Klaxon alarm in the Nautilus:
H&R Block is considering the sale of its sub-prime lending company that lost $39 million in the second quarter.
KeyCorp “changing strategic priorities,” and selling its sub-prime Champion Mortgage for 40% below what they expected.
The National Association of Realtor’s index for pending home sales fell 1.7% from September to October and was down 13.2% from a year earlier.
Delinquency rates rose steadily in the last half of 2005 and spiked in 2006. The figures don’t include quickly defaulted loans that lenders were forced to repurchase.
In October, borrowers were 60 days or more behind on payments on nearly 4% of the sub-prime loans packaged in mortgage securities.
Toll Brothers, the largest builder of luxury homes in the US has seen its stock price slide 45 % over the last 18 months, and said fourth-quarter net income plunged 44%.
Believing that the real estate decline will be confined to certain regions and sectors -- like the new ghost towns near Phoenix -- and that effects of it won’t spread through our financial house of cards… may be like trusting a muskrat with a watermelon.