Foreclosures: More Expected In 2008

A study showed that 139 of California's ZIP codes fell within the top 500 for total foreclosure filings in the United States. The next highest count for any state is less than half that at 72 and is in another sun-belt state Florida.

The number one ZIP code in the nation for foreclosures is still, however, in the Rust Belt. It's Cleveland, 44105, with a total of 784 filings during the three months ended June 15. The hardest hit ZIP in California was Sacramento, 95823, where there were 634 default notices, repossessions and auction notices. It had the sixth most foreclosure filings for any zip code in the nation.

California boasts a vibrant economy and a fast growing population. High number of foreclosures occur due to serious underlying economic problems such as job layoffs or plant closings. But the California foreclosure spike, as well as those in Florida, Arizona and Nevada, was set up by a huge appreciation in house prices that put the market beyond affordability. In last few years the house prices have appreciated in double digits making it an attractive proposition for real estate investors. Developers bid up land prices to get product to market. When markets cooled, speculators added to downward price pressure by unloading their properties onto already lengthening inventories. In many of these markets, prices fell below what investors paid. Many of them havent been able to pay up for the mortgage, leading to foreclosure.

Many Sun-Belt buyers bought their high-priced houses using 2/28 adjustable rate mortgages (ARMs) which featured very low initial, or teaser rates that reset much higher after the first two years of fixed payments. ARMs are set up for borrowers to show they can keep up mortgage payments and then refinance out into affordable fixed-rate loans after two years. Many buyers used ARMs to get into a house with little regard for whether they could afford the payments, betting that rising prices could build enough home equity they could tap for cash. When prices stabilized or fell, that safety valve disappeared. Owners couldn't pay monthly bills, and they had no equity to draw on.

In the Rust Belt, it was the ripple effects of a dying industrial economy instead of speculation that crushed the finances of many borrowers in states like Michigan, Ohio and Indiana. People in these area have lower than average income, higher than average unemployment and a large stock of older, single-family homes. Many of them sell for less than $100,000, some for under $30,000.

In Sacramento, 95823, by contrast, residents depend more on government jobs and service industries for employment, although wages are still below average for the state. Homes there are more modern and more valuable than in 44105; even modest three-bed/two bath houses go for several hundred thousand dollars.

Neither the Rust Belt nor Sun Belt are likely to see easier conditions any time soon. In the Sun Belt, the subprime mortgage mess will take many months to work through as the many borrowers who took out 2/28 and 3/27 ARMs during 2005 and 2006 will hit their reset points this year and next.

It is expected that delinquencies will peak by the end of the year and so will foreclosures in 2008.

(Source: CNN Money)

Feds To Help Out On Subprime Lending

The Federal Reserve recently decided to use a public hearing to gain more knowledge about the current state of mortgage lending business. The aim is to cut down on lending abuses. Fed Governor Randall Kroszner said their main purpose is to gather information on how to make rules in future to stop fraud and abusive practices, ensuring that it does not create more problems for qualified consumers who deserve home loans.

Currently subprime mortgages are extended to borrowers with poor credit histories at high interest rates. Default rates in the subprime segment of the U.S. mortgage market have jumped as the housing industry has slowed and prices have fallen and the spread of its woes to other areas of the economy has been widely feared.

At least 20 lenders in the subprime mortgage sector have gone out of business as a result. Some large lenders have been badly hit as well, such as Bank of America (BAC) and Countrywide Financials (CFC)

Some U.S. lawmakers have criticized the Fed for failing to take steps it could have taken to avoid unfair or abusive lending practices.

The subprime crisis has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy. It also has led to a debate over whether legislation will be required to address this issue.

Fed enforcement under the act would apply to both bank lenders as well as non-bank institutions that do not answer to federal banking regulators but who have been supplying a growing share of mortgage loans.

In other news home foreclosures in May jumped 90% from a year earlier, reflecting a poor spring housing market. The May foreclosures totaled 176,137, up 19% from April.

Mortgage Applications Take A Dip

U.S. mortgage applications declined recently due to reduced demand for home refinancing. Refinancing took a hit due to higher long-term interest rates.

The Mortgage Bankers Association's mortgage application index slipped 1.7%. A rise in applications to buy homes was overshadowed by the drop in refinancing applications. The Mortgage Bankers Association's purchase index rose 1.5%, but home refinancing fell 6.1%.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, rose 0.03% point to average 6.35%. Refinancing represented 38% of total mortgage applications, down from 39.7% the prior week.

On a four-week moving average, which smoothes out volatility, all three of the Mortgage Bankers Association's seasonally adjusted indexes have fallen. The mortgage applications index, also called the market index, is down 2.1%; the purchase index is off 0.3% and refinance index is down 4.3%.

White House's Economic Forecasts

The White House recently lowered its forecast for economic growth this year even as it slightly upgraded its outlook for unemployment. The administration expects the GDP to grow by 2.3%, down from a previous projection of 2.9%. The main reason for the downgrade was due to extremely weak start in Q1 2007. The economic growth was merely 0.6% in this period, its worst showing in more than 4 years. The economy did much better in 2006 growing by 3.1%. The administration expects the economy will regain speed and grow by 3.1% in 2008 and 2009.

Federal Reserve Chairman Ben Bernanke, the administration and private economists expect the economy will rebound in the months ahead. The housing sector will play an important role in deciding whether the economy will improve or get worse. As of now no one is quite clear whether the housing market has bottomed out or there is more in store.

However the unemployment rate, which averaged 4.6% last year is expected to dip to 4.5% this year. That is slightly better than its old forecast that the unemployment rate would hold steady at 4.6%. Next year, the administration predicts the unemployment rate will edge up to 4.7%. Surprisingly the employment rate has remained strong even though the economy is showing signs of weakness. Analysts believe the reason has been that only housing and auto sectors were affected and did not affect other types of sectors.

Inflation directly affects the consumer prices. Inflation has been increasing this year due to higher prices for gas and other energy products. The administration expects consumer prices to rise by 3.2% this year. That's higher than the 2.6% increase previously projected. However the administration also expects consumer prices to rise by 2.5% in 2008 and edge down to 2.4% in 2009.

The White House's economic forecasts are issued twice a year. The administration's projections are in line with those offered by private analysts.

(Source: Yahoo Finance)

Federal Reserve Chairman Ben Benanke Speaks Up

According to Ben Bernanke

Elevated levels of inflation excluding food and energy may not recede as weakness in the housing sector is likely to restrain economic growth for longer than expected. Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside. The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected. The rate of increase in housing costs, which had contributed to a rise in core inflation, seems likely to slow, although the timing of that deceleration is uncertain, However, the tight labor market has the potential to contribute to price pressures

The dollar fell, U.S. stock market futures lost ground, and Treasury bond prices got some help due to Bernanke's comments about the housing sector's drag on the economy, suggesting the Federal Reserve is likely to hold interest rates steady at 5.25%.

Slowest Rate: House Prices In 2007

Freddie Mac, the second-largest U.S. home funding company said house prices rose in the Q1 of 2007 at the slowest annual rate in 14 years. Home prices did not keep pace with inflation during the quarter. As the housing market settles near the bottom of its cycle during the second half of this year, national home price growth will probably slow further, with price declines in many parts of the country. Existing home sales rose in Q1 2007 compared to Q4 2006, but were down more than 9% from a year ago. Home prices rose 1.3% in Q1 on an annualized basis and 2.8% year over year, which was its slowest annual rate of growth since the Q1 1993, when prices increased by 1.6%.

Pending sales of existing U.S. homes in April unexpectedly fell to its lowest since February 2003. The April Pending Home Sales Index fell 3.2% to 101.4 from an upwardly revised level of 104.8 in March. The index registered 99.3 in February 2003. Analysts were expecting the April index to be 105. Higher foreclosures and bad subprime lending industry lead to dampen home sales market.

Company Earnings: Centex Corp, Circuit City, MedImmune

Homebuilder Centex Swings to Q4 Loss
U.S. homebuilder Centex Corp (CTX) reported a Q4 loss as the housing downturn continues to hit revenue. The company posted a loss from continuing operations of $22.3 million versus its earlier forecast of break-even. Last year the company earned $369 million in Q4. The results do not reflect earnings from discontinued operations of $221.1 million related to the company's construction services business, sold off in March, and some home equity operations. Including those profits, the company posted net income of $198.9 million, down from $391.8 million a year earlier. Revenue dropped 11% in the quarter to $3.67 billion against analyst expectations of $3.34 billion. Shares dropped 2.7% yesterday and were down another 1% in AH trading to $44.77.

Circuit City Shares Fall
Circuit City (CC) restated earnings for the past 2 quarters and revised its guidance for 2008. Restatement of earnings along with poor sales of large flat panel and projection TV, will result in a loss from continuing operations before taxes of $80 million - $90m for Q1'08. Circuit City said if business trends improve and restructuring efforts are effective, then it expects 2008 earnings at the low end of its prior forecast of 1.4% to 1.8%. Shares of Circuit City lost 2.7% to $17.45 in normal trading and dropped 8% to $16.05 in the after-hours on volume of almost 1.07 million.


MedImmune Inc Beat Quarter
MedImmune Inc. (MEDI) reported that its 1Q 07 profit more than tripled on increased sales of its respiratory drug. MedImmune posted a net profit of $160 million. Sales were up $574.8 million, from $498 million last year. Analysts were looking for revenue of $553.5 million. Worldwide sales of their drug grew 9% to $507 million, up from $463 million last year. MedImmune agreed last month to be bought by AstraZeneca (AZN) for more than $15 billion. Shares climbed $0.82 to $57.50 after hours.

(Source: Seeking Alpha, MarketWatch, Reuters)

Biggest Drop in 18 Years

The dollar fell and treasury yields declined on news that existing-home sales sank 8.4% in March, their steepest drop since January 1989, on poor demand hampered by bad weather. The National Association of Realtors reported that March sales came in at 6.12 million, shy of economists' expectations of 6.5 million. The decline follows a 3.7% rise in February. March sales were down 11.3% from the year-ago period. The median home price in March dropped 0.3% from a year ago to $217,000, while inventories rose to 7.3 months of supply from 6.8 months in February. The Conference Board's consumer confidence index declined to to 104, its lowest level in eight months, from 108.2. "The housing downturn is now weighing increasingly heavily on the U.S. economy," said Mark Zandi, chief economist at Moody's Economy.com. It is "starting to have an impact on consumers' psyche and also their spending. The second quarter is going to be no better than the first.'' The yield on the 10-year Treasury note fell to 4.61% from 4.64% yesterday, while the dollar fell 0.3% against the euro to $1.3621.

(Source: Seeking Alpha)