A matter of Principal: Here comes the Tsunami - Paul Descloux

[FRED]

A matter of Principal - Here comes the Tsunami

by Paul Descloux - theMAX - August 26, 2008

Editor's Note: I met iTulip member Paul Descloux a year ago and since then I've enjoyed his detailed weekly analysis of the mortgage market issued by his company Mortgage MAXX LLC, in operation since 1992. He has agree to let us publish this theMAX report for our readers.

Today's housing report shows a rise in home sales in July. FIRE Economy bulls are taking this as evidence of a bottom in real estate. But this theMAX report is consistent with our analysis that the next phase of regional downturns in real estate, driven by rising unemployment and falling income, is just beginning (see Housing Bubble Correction Update: Here comes the jobs crash ).

TheMAX is a proprietary mortgage application index that tracks residential mortgage application activity in key regions of the United States in real time, providing mortgage investors, economists, and financial analysts a highly accurate and predictive measure of current mortgage application levels and future mortgage pay-offs. As you will see, the report reveals a lot more than government and industry mortgage application data do about the state of the housing industry and economy. Hope you find the report illuminating.
- Eric Janszen

Mortgage Application Index

• The MAX falls 6.4 percent to 109.8 the week ending August 22 from 117.3 the prior week ending August 15. The MAXcal tracking California application activity falls 7.5 percent to 126.7 from 137.0 the prior week
• In nominal and real terms the MAX has averaged 116.3 the past four weeks, 3.8 points below last week’s four-week moving average of 120.1
• Since inception in April 2006, the MAX has averaged 168.6

the MAX

From earlier this summer: New non-seasonal lows in the MAX not to be unexpected.

Comments for the week ending August 22: As we enter the last week before the unofficial close to summer, this week’s MAX can only confirms a disastrous housing market. With housing turnover now to seasonally decelerate, and a large fraction of home sales coming from REO, the slow pace for non-distressed residential real estate is extreme. From this vantage point as the credit crunch begins to slam into Main Street both psychologically and in actual funding, mortgage originations may set new historical lows for the balance of the year.

GSE overall problems and widening credit spreads are keeping mortgages relatively unattractive. The Bankrate.com survey of 30-year loans stands at 6.36 percent as no-pay-option, fixed rate originations become the new paradigm. As the chart below Cancellations implies, a resurrection of tougher credit since July may be in evidence, bad news for housing sales and withered refis.

California Cancellations Spike Again

The factors in place to keep the MAX at currently depressed levels remain. The Fed’s alpha remains AWOL for the soldiering consumer this rate cycle. By year end, the MAX will approach fifty on a non-holiday-adjusted basis. See Holiday Effect chart below.

Previously stated: For those who wish to believe the worst is yet to come, an analysis of the Countrywide 10-Q (page 81) provides data on the poor health of their retained option ARM portfolio. Fully 12 percent of mortgagors are delinquent while the CLTV has ballooned from 76 to 95 based on April 2008 home price data, and 72 percent are paying at a negative amortization pace. Just a little more depreciation in home values with the current payment pace, and these loans may have some real trouble. The jury is still out on what cornered homeowners do en masse when pushed to the limit on a mortgage for an underwater asset.

ABX asset performance report to be released later today.

Existing Home and Condo Sales: California 4-Week Moving Average of
Completed Transactions

Existing home and condo sales continue to match California’s year-ago pace as foreclosure inventory gets grudgingly sold. According to published reports, one third or more of these sales are coming from bank-owned REO, the ‘shadow inventory.’ But REO inventory is also being replenished with abandon. Strip out California home sales from the MAX sample and a more organic sales pace emerges. Safe to say that REO sale prices are highly depressed and depressing their pre-NOD guesstimate.

The net continues to tighten on consumer credit. This will prove the toxic spill-over from the mortgage crisis. Ford follows Chrysler, GM, and others to sever auto leases, the second biggest consumer purchase and largely determined on monthly affordability. This historical data point ratchets up the psychological pressure on a vulnerable consumer. The coming months will see if demand is paralyzed as asset price discovery discovers the new rules of financing.

Here comes the Tsunami. With ten to fifteen million ‘owners’ perhaps underwater, potential walk aways could further disrupt fragile markets and investor confidence. Alt-A’s with negative equity the next concern as are all those 2nds. Note that in some states, only purchase money mortgages allow the borrower to walk away unscathed (relatively). On the other hand, some are saying that this is an urban myth.

Coming to a Town Near You? A relatively strong suburb next to previously white hot NYC, Westchester County sales down 27 percent year over year in the just reported 2nd quarter with prices moving modestly lower. Dismal 1st quarter drop of 31 percent was weakest year over year performance in 29 years of data.

See Westchester housing $sales $stats, (www.wcrb.net).

MAX States Existing Home Sales Cal, Fla, Az, Wash, major mid-west MSAs

MAX States minus Cal Housing Sales

About theMAX:

What does the MAX provide? The MAX measures residential mortgage application activity on a weekly basis on existing home and condo sales in key markets around the United States.

Who would want to use the MAX? Any finance professional who needs time critical information on trends in the mortgage industry. If you’re an investor, trader, economist, or analyst, you’ll want to get the MAX.

How did the MAX start? MAX evolved from the regional AFS Title Search Index (AFSTSX) as national mortgage application data became available.

Holiday Effect and Real Mortgage Activity

Data is not holiday-adjusted; *average of non-holiday-adjusted MAXcal from 2001-06

Is MAX seasonally adjusted?

The index is adjusted for holidays by multiplying the raw data received by a standardized holiday adjustment factor. No seasonal assumptions are made in the index. Below is the MAX unadjusted for the holidays compared with activity from prior years. The MAX is an unweighted index

MAXcal History

How good an indicator is the data behind MAX? The methodology behind MAX has tracked every change in mortgage application behavior since 1990. This data is also used to predict mortgage prepayments with a consistent accuracy of over ninety percent.

How timely is the MAX? Data collected electronically at the conclusion of each week is published hours later on Monday morning.

Does MAX have information on refinancings and home sales? MAX does report on actual closings of refinancings and home sales as a percentage of overall new mortgage originations.

What key states are included in the MAX? California, Arizona, Florida, Washington, Illinois, Indiana, Michigan, and Ohio are represented in the sample.

Incorporation of additional bellwether areas of the country is planned.

When is the MAX available?

MAX will be available every Monday morning or first business day of the week before 9 AM EST.

What kind of mortgages applications are included in the index?

Any mortgage used to refinance or purchase an existing home or condo in the sample areas is included in the index.

Are loan size distributions available?

Loan size distributions for existing mortgages likely to be paid off are a planned addition to the index.

Is this information available from other sources?

Max data is proprietary. Data is gathered and processed exclusively by Mortgage Maxx from leading industry sources.

If I have questions about the MAX, whom can I contact? If you have any questions or comments, please contact Paul Descloux at Mortgage Maxx, the publisher of the index.

To subscribe to receive alerts when theMAX is available, please click here

COPYRIGHT 2008
MORTGAGE MAXX LLC
914-762-6017

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