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Freddie Sees House Prices Down Slightly in Q110

Home prices declined 1.1% in Q110 compared to the same quarter one year ago, according to purchase-only edition of Freddie Mac’s Conventional Mortgage Home Price Index(CMHPI). Compared to Q409, prices are down 2.1%. The purchase-only CMHPI includes property values based on home purchases with a conventional mortgage purchased by Freddie Mac or Fannie Mae by April 30, 2010. The 2.1% decline compares to the 3.2% price decline in the Standard & Poor's (S&P)/Case-Shiller HPI and the 3% decline in the Federal Housing Finance Agency (FHFA) HPI. “House price measures tend to show a lot of seasonality, with values lower during the slow home-selling months of autumn and winter and higher during the greater-activity months of spring and summer,” said Freddie Mac vice president and chief economist Frank Nothaft. Freddie Mac also produces a CMHPI that includes data from both home purchase transactions and mortgage refinancings basing refinancing values on appraisals. In that index, prices declined 1.5% in Q110 compared to Q109 and were also down 6.7% in Q110 compared to Q409. In three of the nine divisions, prices were up in Q110 compared to the same quarter of 2005. Prices are higher now in the West South Central (16.6%), Middle Atlantic (10.1%) and East South Central (8.7%) divisions than five years ago.

Growth Slower Than Thought as Business Spending Slows

The U.S. economy grew at a slower pace than previously estimated in the first quarter as businesses investment slackened, while hard-hit state and local governments curbed spending at the steepest rate since 1981, a government report showed on Thursday. Gross domestic product expanded at a 3.0 percent annual rate, the Commerce Department said, instead of the 3.2 percent pace it reported last month. Economists are monitoring the U.S. recovery closely to see how well the economy can endure the debt troubles that threaten to slow Europe's growth. Output in the first three months of the year was revised down as business spending rose at only a 3.1 percent rate instead of the 4.1 percent initially reported last month. Spending grew at a 5.3 percent pace in the fourth quarter. Business spending on software and equipment increased at a 12.7 percent rather than the 13.4 percent rate reported last month. State and local government spending contracted at a 3.9 percent rate, the largest decline since the second quarter of 1981. Consumer spending, which normally accounts for 70 percent of U.S. economic activity, added 2.42 percentage points to GDP last quarter, the largest contribution since the first quarter of 2007.

Diana Olick - Are Home Builders on a Cliff?

“The New Home Sales report today was nothing short of exceptional.The number beat all expectations and beat them by a lot. The home buyer tax credit clearly favored the builders over existing home sellers, as the jump in new construction sales seem far higher. So are the builders back? Not so fast. Before everyone goes calling me a big bad bear, barely 7 minutes after the report was released, the analyst reaction came flooding in. "As seen with the purchase component of the weekly MBA data, the May data will show a sharp decline," writes Peter Boockvar of Miller Tabak. "We know a hangover is coming, but we don't know what happens after." In fact, mortgage purchase applications are at a thirteen year low, falling off precisely post tax credit. Purchase applications are now barely 27 percent of all mortgage applications, with refis surging on low interest rates. Anecdotally, we're hearing that buyer traffic in new models also slowed dramatically. And even lumber is proving a leading indicator. "We have seen spot lumber prices drop 25 percent since the end of April," notes Buck Horne of Raymond James. Lumber saw a big run-up in price, 46 percent from January through April, according to Random Lengths data. And at the Chicago Mercantile Exchange, lumber futures have trended sharply lower since late April "on worries that expiration of the tax credit would slow home sales," according to Reuters.

On the other hand, Toll Brothers reported strong order growth of 41 percent year over year. Toll's high end homes wouldn't be affected much by the tax credit, so perhaps that's real organic demand.”

Money runs out for small business loan breaks

It is the Federal Government's National Small Business Week, but there is little money left for Small Business Administration programs -- again. The SBA warned lenders Wednesday that it is opening up its Recovery Loan Queue for the fourth time. For more than a year, the SBA has used money first allocated in last year's Recovery Act to temporarily reduce fees for borrowers and increase the guarantees banks receive on loans made through the agency's lending programs. But the funding for them ran out in November. Since then, the agency lives on temporary extensions to keep the loan sweeteners in place.  Every time the money runs out, the SBA opens up its Recovery Loan Queue to track applicants hoping to collect the last few remaining dollars. The latest authorization for the loan incentives expires at the end of this month, and the money for them is likely to be exhausted even sooner. When the funding pool starts to go dry, lenders scramble. Seacoast Commerce Bank, a community bank in Chula Vista, Calif., had pushed five SBA-backed loans through by midday Wednesday. "It certainly puts a lot of strain on the whole process," said David Bartram, an executive vice president in the bank's SBA division. Losing the SBA's fee waiver can make a loan thousands of dollars more expensive for the borrower -- and there are some loans banks are only willing to make if they can get the higher SBA guarantee. Without it, those loans become too risky. "Nothing gets through Congress easily these days, even bipartisan legislation," said Lynn Ozer, executive vice president of government lending at Susquehanna Bank. SBA lending is one of the few bright spots in an otherwise barren credit landscape, but it's still a small part. A recent government report estimated that SBA programs account for just 4% of all small business lending.

Commercial Real Estate Vacancies to Peak Early 2011

Vacancy rates continue to rise in most commercial sectors and are not expected to level out in most markets until the end of this year or early 2011, according to the National Association of Realtors®.Lawrence Yun, NAR chief economist, said there is one bright spot in commercial real estate. “The multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year,” he said. “However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession. These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011.” The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, an attitudinal survey of nearly 700 local market experts, confirms that significant fallout from the recession remains. Looking at the overall market, commercial vacancy rates appear to be approaching a plateau, according to NAR’s latest Commercial Real Estate Outlook. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

US Democrats Try Scaled Dow

n Tax Bill Congressional Democrats cut the cost of a package of spending and tax hikes by nearly a third on Wednesday and delayed action for one more day as they raced to ensure passage before safety-net programs expire next week. With some centrist lawmakers balking at the cost of the original package, House Democratic leaders scaled back unemployment benefits and doctor payments, according to a summary released late Wednesday. A flaw in Medicare's payment system pays doctors at outdated rates, which would amount to a 21 percent pay cut unless Congress patches it with a periodic payment update. If the legislation stalls, unemployment aid and health benefits will run out for hundreds of thousands of Americans starting next week. The revised bill would postpone pending cuts to doctors in the Medicare program for 1-1/2 years, down from 3-1/2 years in the original bill. That would push the bill's total cost down to a level less likely to alarm centrist lawmakers like Democratic Senator Kent Conrad who are reluctant to add to a budget deficit expected to approach last year's record $1.4 trillion figure. One of the most controversial aspects of the bill would increase taxes on fund managers in private equity and other firms to at least 35 percent from the current 15 percent. The legislation also tightens tax rules for multinational companies and oil companies in particular. Senate Republican leader Mitch McConnell said the cost wiped out savings estimated from the healthcare overhaul that passed earlier this year. "This is fiscal recklessness," McConnell said. "And that's why even some Democrats are starting to revolt." Lobbyists on both sides fanned out across the Capitol on Wednesday and warned that jobs would be at stake if the legislation went through -- or did not.  

Industry Risk Management Practices That Contributed to Housing Crisis:

MBA Survey

Multiple factors including poor data, incomplete performance metrics, and, short-term focus and unrealistic optimism among senior business managers contributed to the collapse in the US housing and mortgage markets, according to a study released today by the Mortgage Bankers Association (MBA). The study entitled, "Anatomy of Risk Management Practices in the Mortgage Industry" which was conducted by Professor Cliff Rossi,a Tyser Teaching Fellow and Managing Director of the Center for Financial Policy at the University of Maryland. of the University of Maryland, and sponsored by MBA's Research Institute for Housing America (RIHA). "As home prices increased, lenders were pressured to offer innovative products that could help borrowers afford a home. The resulting increase and expansion of risk layering and change in borrower behavior, left risk managers unable to offer reliable risk estimates," said Professor Rossi. "According to some empirical analysis, when market conditions changed, mortgage performance models proved unstable, with loans originated in 2006 defaulting at four times the rate of what a model prior to 2004 would have predicted. Moving forward, it will be essential for the industry to develop early warning measures of the level of risk in new originations and less reliance on imprecise historical performance of new loan products." Key findings from the study talks about, increase in risk layering created a gap in understanding the long-term risk profile of new product combinations, in the wake of changes in subprime loan underwriting criteria. were challenged by limited and changing information and could not build a case for concentration risk limits. With little information in borrower and counterparty behaviour, models using macroeconomic conditions as key inputs to explain mortgage default and prepayment were biased toward lower loss estimates.

Lehman's Bankruptcy Estate Sues J.P. Morgan

Lehman Brothers Holdings Inc.'s estate sued J.P. Morgan Chase & Co., alleging J.P. Morgan illegally siphoned billions of dollars from Lehman in the days before the troubled investment bank filed for the largest bankruptcy in U.S. history. The lawsuit alleges that J.P. Morgan Chief Executive James Dimon and other top executives used inside knowledge to take advantage of Lehman as its financial state worsened. J.P. Morgan, the suit alleged, coerced Lehman to turn over $8.6 billion in collateral in September 2008, triggering a liquidity squeeze that contributed to Lehman's collapse. The estate is hoping to recoup billions in collateral the bank demanded, and billions in other damages. The lawsuit, long expected, contains among the most-significant allegations to date about the interplay between Lehman and its onetime Wall Street brethren. J.P. Morgan served as Lehman's main "clearing bank," meaning it acted as a middleman between Lehman and its lenders and investors. In this capacity, it knew more than most market players about Lehman's financial condition, which was growing more dire in the summer and fall of 2008. A bankruptcy-court examiner found in a recent report that Lehman could pursue a legal claim against J.P. Morgan for making "excessive collateral requests," though he labeled it "not a strong claim." The examiner said Lehman could have a legal claim to claw back $6.9 billion of the $8.6 billion pledged to J.P. Morgan.