Sales of new homes fell to their lowest level in more than 12 years in November, as the nation’s housing crisis continued unabated. Purchase volume fell 9 percent on a revised monthly basis in November to 647,000, the Commerce Department said in a report released Friday; that number is 34.4 percent below year-ago levels.
October’s new home sales numbers were adjusted downward from a 728,000 rate to 711,000; it’s likely that November’s sales numbers will also see a similar revision.
It’s worth noting here that last month’s report seemed to suggest a ‘phantom gain’ in new home sales during October due to the effect of prior period adjustments; with the current downward revision to October’s new sales numbers, that ‘phantom gain’ is now strongly erased.
Bloomberg reports that even the initial, unadjusted November outcome for new homes sales was worse than expected:
A Bloomberg survey of 68 economists forecast sales would fall to an annual pace of 717,000 from a previously reported 728,000 rate in October, according to the median estimate. Economists’ forecasts ranged from a low of 685,000 to a high of 750,000.
The drop in sales volume was accompanied by an apparent drop in inventory, with builders reporting 505,000 new homes for sale at the end of November, compared to 516,000 units in October — a number that many economists have argued is likely understated significantly due to a record volume of cancellations.
Nonetheless, a declining inventory number wasn’t enough to offset an even sharper decline in demand, with months of supply in November increasing to 9.3 months as a result. Months of supply stood at 8.5 months in October.
Prices also declined 0.4 percent on a median basis year-over-year, according to the report, although heavy revisions and a lack of insight into builder incentives make the pricing numbers here unreliable at best.
Calculated Risk provides strong analysis of the new homes data, and notes that this is the fourth report to emerge since the start of widespread credit turmoil. From a mortgage industry perspective, this is strong proof that origination volumes are likely to fall off of a cliff heading into 2008; further, as builders sit holding new-home inventory, pricing pressure on existing homes will continue to increase.
Both Fannie Mae and Freddie Mac have been classified as adequately capitalized through the third quarter of 2007, according to a statement released late Thursday by the Office of Federal Housing Enterprise Oversight.
Fannie Mae had a 5.9 percent surplus above the OFHEO-directed requirement, the regulator said, 30 percent above the required minimum capital for Q3– down from an 8.3 percent surplus in the second quarter. Freddie Mac’s surplus above the OFHEO-directed requirement was significantly lower, at just 1.7 percent.
Capital adequacy suffered during the third quarter as each GSE felt pressure from what OFHEO called “credit and market-related stresses on income.”
Fannie Mae reported a third quarter loss of $1.39 billion in November, and said in early December that it would cut its fourth quarter dividend by 30 percent while raising $6 billion through a preferred stock offering.
Freddie Mac reported a larger quarterly loss of $2.02 billion as it absorbed write-offs of $3.6 billion in its mortgage portfolio and set aside $1.2 billion for loan losses. The GSE cut its fourth quarter dividend in half and also generated an additional $6 billion in capital via a preferred stock placement.
Both GSEs face a mandatory statutory minimum capital requirement, as well as an OFHEO-mandated capital surcharge requiring that each GSE maintain capital in excess of 30 percent beyond statutory minimums. The OFHEO mandate came as the result of accounting scandals at both mortgage giants during 2004.
American Banker reports that the OFHEO-imposed capital requirements are one of the larger sticking points in current GSE reform efforts (subscription req’d):
Fannie and Freddie want OFHEO to remove the extra capital requirements as soon as the companies are current on their financial statements, which is expected in February. But OFHEO Director James Lockhart indicated in an interview two weeks ago that the GSEs would likely have to wait a little longer.
“They haven’t resolved all their operational problems, and until they do that, especially in this market, I don’t think it would be a very safe and sound thing to do,” he said.
The issue has spilled over into the legislative arena, where Fannie and Freddie are wary of signing off on a regulator with even greater power to raise minimum capital than OFHEO currently enjoys.
“We remain concerned about how certain provisions of this bill could be implemented in the current turbulent market — especially the possibility of capital requirements not tied to the actual risks of our assets, and business activity regulation that constrains our ability to respond quickly to a changing marketplace,” a Freddie spokesman said in an e-mail last week.
GSE reform will likely — yet again — be at the top of the mortgage legislation agenda as 2008 begins. If past experience is any indicator of future performance, it’s also likely to remain on the legislative agenda for 2009 as well.
Jay Hancock over at the Baltimore Sun provides a look behind the curtain within Maryland’s mortgage regulatory framework, and what he finds isn’t pretty.
Hancock obtained access to a mortgage audit by the Maryland Department of Legislative Services, which found that state regulators were as much as two years late in performing required examinations of brokers/lenders — in addition to finding that the state’s Office of the Commissioner of Financial Regulation was “overwhelmed” by more than 15,000 mortgage broker applications earlier this year, when the state enacted licensing requirements.
As a result, auditors said broker licenses “were not reviewed and approved by supervisory personnel to ensure that they were issued only to qualified applicants. Consequently, licenses could be issued to unqualified applicants without detection.”
From the column:
Maryland’s mortgage mayhem - 16,000 foreclosures in the last year - probably wouldn’t have been prevented by more effective regulation. But it might have been ameliorated. State regulators are at least supposed to conduct basic background checks to keep out criminals and amateurs.
The bigger question is this: If the state can’t enforce the lightweight laws it has, how will it deal with tougher mortgage screening that is almost certainly on the way?
Bingo. And its a question that should extend well beyond Maryland, which is why I’m bringing attention to this story.
Federal mortgage regulation is already coming down the pike at breakneck speed; and there will likely be more to follow. That’s on top of most state legislators loading up the books with new regulations that are, at least in theory, designed to prevent abuses of the mortgage lending system.
To say that the regulatory environment surrounding mortgage banking is increasing in complexity, as a result, is pretty much an understatement. And if a state like Maryland can’t keep up with its own bare-bones regulations, I have to wonder how states like California plan to cope. Or Florida. Or Colorado.
I’ve written here before that implementing the programs and legislation now being pushed through at the state and Federal levels will require servicers to ramp up staff (loan modifications don’t just — poof! — appear out of nowhere), but it’s also clear that the new regulatory landscape now emerging for mortgage banking is already straining those tasked with actually doing the regulating.
Wachovia CEO Ken Thompson made the PR rounds earlier today, granting a wide-ranging interview to the Associated Press in which the chief executive of the fourth largest bank in the U.S. affirmed his company’s earlier mortgage-realted loss estimates.
Saying he does not expect a recession to result from the housing correction, Thompson was liberal with blame for the problems now facing the mortgage banking industry:
“There’s plenty of blame to go around,” Thompson said. “I think lenders made loans to people who should have not received loans. I think that brokers were scrambling to put business on the books that should not have been done.”
And in the capital markets, where many of the mortgages were packaged and sold as investments, “I think the rating agencies did a very poor job in rating those mortgage-backed securities,” Thompson said.
Of course, none of that really addresses why lenders were busy making loans to people who shouldn’t have received them in the first place, regardless of what brokers and rating agencies were or weren’t doing.
Thompson told the AP that Wachovia has limited exposure to the CDO market at roughly $700 million, compared to $43 billion at New York-based Citigroup Inc. — not that losses haven’t been a problem. The bank said in mid-December it would double its loss reserves to $1 billion, a number the Wachovia chief characterized as “close to right.”
Nonetheless, Thompson comes off in many ways sounding similar to Countrywide chief Angelo Mozilo:
Thompson admitted Thursday that the timing of the $24 billion Golden West deal “was not the best, because the mortgage market has been more troubled I think that anyone could have projected at the time we did the deal.” …
But those problems, Thompson said, will shift more of the mortgage industry toward large banks with healthy balance sheets, positioning Wachovia to gain market share and post earnings increases in the business late in 2008 and into 2009.
“We believe that 2008 will be a much better year for us than 2007, and we think the market will recognize that as we go more and more through the year,” he said.
Countrywide’s Mozilo hasn’t gone as cheery as predicting a “much better year” in 2008 — in fact, his predictions for the coming year have been far more dour — but Thompson’s survivors-win-market-share mantra hits a familiar note.
Disclosure: The author owns no positions in Wachovia; various option contracts on CFC are held.