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Saturday, October 20, 2007


Jay update: He left the hospital Wednesday and did not collapse. He's still very weak, but is making progress. He sent this message to everyone "Laugh loudly, and share your Lord's passions as he's shared them with you."

John Mauldin posted a newsletter about the great SIV caper. I think it's pretty good, and it is definitely understandable.

There's a decent AAR on Bloomberg for the week. The note of surpise is sort of funny.
``Today was a market explosion,'' said Frederic Dickson, chief market strategist at D.A. Davidson & Co., which manages $23 billion in Lake Oswego, Oregon. ``There's going to be a lot of pain and suffering.''
The S&P 500 fell 3.9 percent this week and the Dow average lost 4.1 percent. The Nasdaq declined 2.9 percent.

All 10 industry groups in the S&P 500 decreased today, with 481 of the index's members posting declines. Energy shares posted the steepest decline after crude oil retreated from a record. More than 17 stocks dropped for every one that gained on the New York Stock Exchange. A gauge of stock-market volatility rose the most since March 13.
Apparently some investors were buying the subprime containment story. That's the only possible explanation of why lower profits across a wide range of companies should have come as a surprise. It's the surprise that's unnerving me, because it indicates that there is a lot of adjustment to come.

This is the weekend that Fannie rolls out the next version of DU. EA II and EA III are limited to LTVs of 97 and 95%, respectively. Beginning December 1st, all EA's will receive another LLP surcharge of .5%, but LLPs added this summer related to risk will remain in effect. Another change is to the qualifying rate for short-term adjustables (defined as three years or less). This change mandates that qualifying be done on the basis of the fully indexed rate rather than any introductory rate. The announcements are at this page. Fannie had suspended Condo Acceptances, and on Friday it issued a Lender Letter saying that the new procedures will be published by November 15th. Without Fannie, no one's financing condo projects.

Fannie is expanding its universe somewhat though. In this version of DU, Fannie will use the higher of either the 2006 or 2007 Area Median Income to determine eligibility for its MyCommunity program. It is also retaining the conforming loan limit of $417,000 for a THIRD YEAR. Last year it announced that it wouldn't drop it for 2007, but would adjust for 2008. This year that was quietly finessed.

In fairness to Fannie, it has been offering some remarkably flexible mortgages in recent years. IO, hybrids, 100%, etc. If those mortgages are refied, cutting eligibility could put some of those borrowers in a very diffiicult position. If those mortgages aren't refied, there's a much worse situation. The problem with writing IOs which reset to a fully amortized payment for the remaining term is that the amortized payment will be considerably higher than a 30 year traditional, causing wicked payment shock. When you combine that with an ARM feature which involves an adjustment to a higher interest rate, the effect is magnified. Therefore, Fannie is pretty much forced to these strategies due to the loans it was writing earlier in the cycle, or it will be tipping its own borrowers into default. Believe me, Countrywide did not invent risk-layered Alt-A. Fannie will probably not reduce the conforming loan limit for several more years, even if regs have to be rewritten every year to allow it to keep the higher amount.

(Note: In fairness to mortgage brokers and other parties, you can't blame them for selling products that Fannie was offering. And Fannie only began requiring qualification at the fully amortized rate this last summer! A lot of the recriminations being hurled around are misplaced. My opinion is that these products should never have been offered by Fannie Mae. The only true purpose of offering these on a wide basis is to get borrowers into homes that they can't really afford, which is absolutely no benefit to the borrower in my book. A consortium of companies with which I work actually refused to accommodate these products in our platform, which caused some of our customers who originate Fannie to leave or threaten to leave. But money is of no use if you can't sleep at night. What we are seeing now is the result of the entire industry and Alt-A lending, not just some fly-by-night operations and subprime. Needless to say, you aren't going to read reality in the NY Times.)

Still, the most significant limitation (other than pricing) this year was Fannie's July instruction about declining market appraisals, which mandated reviewing list prices in declining markets. A lot is left to the lender's discretion, but the upshot is that lenders can get sanctioned for a pattern and practice of ignoring these guidelines if the result is losses. And believe me, losses there will be.

Housing Tracker
will give you an insight on declining list prices. Salt Lake City's 6 month drop of over 12% deserves star billing currently. Six month comps are quite out of date in some of these markets. Orange County is battling for supremacy, though. The six month drop is only 7.8%, that is true. But Orange County has actually been declining for quite a while, and it may well eventually challenge Miami and Cape Coral for the all-star slump sweepstakes. Orange County has staying power in this race.

In the state races, Florida has already won. California and New Jersey will battle it out for some years to come for a close second. At this point, my money is on New Jersey. It's a little state with a chip on its shoulder and a competitive yen for spectacular suicide that has managed to line up a winning coalition of bad demographics, bad state government and bad local government supported by a population that is either delusional or desperate to escape. In the end, the fundamentals always win. Other than NJ, no state offers its luckless middle-class inhabitants such an array of high property taxes, high general taxes, anti-business elitist thinking, towering public debt, and sheer idiotic, institutionalized corruption. The next time New Jersey holds a competition for state motto, the winner will be "New Jersey, the next Michigan" or perhaps "New Jersey and you, going bankrupt together".


Just wanted to say you have really been on a roll with your posts lately. Thanks for a great blog.
MoM,I am very pleases to hear that Jay is out of immediate danger unless he crosses the street without looking both ways.I am not surprised to hear that NJ is likely to be #1.
Thanks, David.

Tom, it is true that we cause most of our own trouble.
I am so happy to hear that Jay is recovering and getting stronger. It will take a while for life to get back to "normal" again. But he sounds like he has spirit and will find the strength to do just that. Thank you Mama for updating us on him.
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