Wednesday, April 23, 2008

Mortgage Applications Plummet/Ambac's Stunning Losses

Well spring is in the air as the weather starts to warm bringing everyone outside to watch outdoor events like the Kentucky Derby. Others are preparing to celebrate Mothers Day with their loved ones.

The one thing missing from this spring is the millions of families moving into their new homes as the spring selling season is supposed to be peaking. We all know this has been a bust. Mortgage applications confirmed this today. In fact, the mortgage applications index for the week fell to their lowest level in four months dropping 14% from the previous week. From Bloomberg:

"April 23 (Bloomberg) -- Mortgage applications in the U.S. last week dropped to the lowest level in almost four months, hurt by fewer purchases and less refinancing.
The Mortgage Bankers Association's index of applications to buy a home or refinance a loan declined 14.2 percent to 637.6, the lowest since the week ended Dec. 28, from 743.4 the prior week. The group's purchase index fell 6.4 percent last week and its refinancing gauge decreased 20.2 percent.

Home buyers are waiting for prices to drop further and banks have made it harder to qualify for financing after a surge in subprime mortgage defaults and foreclosures. Bloated inventories signal a housing slump in its third year will remain a drag on the economy, reinforcing concern about a recession.

Today's report showed the average rate on a 30-year fixed loan jumped to 6.04 percent last week, the highest in six weeks, from 5.74 percent the previous week."

My take:

Think about this for a second. There were more weekly mortgage applications on average during the dead of winter then there were last week. This is at a time when housing activity is supposed to be peaking as the weather warms up.

One thing you might start to conclude from this is many people may have given up trying to get a mortgage because they can't afford housing at these prices and cannot qualify for a loan. Ummm....Maybe this is because housing has doubled in some markets instead of going up the historical average of 3% a year? Just a guess.

The other thing to take notice of here was the quarter point increase in interest rates from 5.74% up to over 6%. This is killing the refinancing business which reported a 20% drop in applications. IMO this is due to the fallout from the Libor scandal last week where banks were lying about interest rates that they paid to lend between each other.

If the Fed only cuts .25 next week and interest rates continue to rise due to fear and lack of trust then its going to accelerate the housing crash which is already falling apart at an alarming rate.

Ambac showed you how fast the housing market is deteriorating this morning when it reported earnings.

Ambac is one of the famous monolines that insured a good chunk of the mortgage AAA CDO's that are now worthless. The company reported stunning losses and a huge drop in new business.


The world's second-largest bond insurer tumbled as much as 31 percent in New York Stock Exchange trading after reporting a first-quarter net loss of $1.66 billion, or $11.69 a share. The company's operating loss of $6.93 a share was more than three times the $1.82 estimated by six analysts surveyed by Bloomberg.

Ambac, larger competitor MBIA Inc. and the rest of the industry have posted record losses after expanding from their business of guaranteeing municipal bonds that rarely default to securities linked to mortgages that are going delinquent at the highest rate since 1985. Ambac's new business slumped 87 percent last quarter, and the company increased its estimate of the claims it will need to pay on home-loan debt by $2 billion.

This ``could send a negative ripple effect through the market,'' said Wayne Schmidt, senior portfolio manager at AXA Investment Management in Minneapolis, which has about $14 billion in assets under management. ``It sends a message that we're not out of the woods yet.''

My Take:

I don't see how this company makes it going forward. Losses were three times worse than expected and expectations already called for a disastrous quarter. Companies don't last long when they lose $11 dollars a share.

If I owned Ambac I would be more concerned about the 87% drop in revenues. How does a company survive when your sales are down almost 90%? This tells you that the whole housing ponzi scheme is over. This housing game has virtually vanished in the span of a year. Its quite remarkable when you think about it.

If these bond insurers go under its been said that this could cause an additional $70 billion in writedowns for the banks because their CDO's will no longer be insured by Ambac and they will be forced to lower the value of these CDO's.

Bottom line is the news in housing continues to be bad and expect housing prices to continue to deteriorate. The housing game has ended. It will be a long time before we recover.


Minton Mckarkquey said...

I'm almost scared to get out of bed in the morning since every day drops another bombshell on the economy.

Basically, the Fed's interest rate policy has almost no upside to the average American:

1. Mortgage and loan rates - and especially credit card rates - have actually increased as the Fed rate collapses.

2. The tanking of the dollar, most directly caused by this policy IMO, has had a disastrous effect on the price of oil, which is hurting everyone.

3. There has been nothing substantial to intermediate the foreclosure crisis from either the Fed or the government.

All of this makes sense in the context of your piece, which intelligently joins the dots and shows we're nowhere near the bottom of this mess.

I couldn't agree more than the ponzi gravy train is completely derailed, and the whole process of home loans needs to be redesigned from the ground up before you can even expect the number of loan applications to return to a normal state.

Jeff said...


I totally agree.

The game is over and housing has to be regulated.

People will simply not lend money if they don't trust the system. And right now the system is broken.

Lets hope the government puts a stop to this fraud and cleans up Wall St.


There is going to be a big protest on April 25th in front of Bear Stearns HQ protesting a taxpayer bailout of this mess. People are expected to fly in from all over the country for it.

That should be interesting to watch. I hope thousands show up. People are getting very angry about this housing scam and the fact that we the taxpayers might have to pay for it.

Avl said...

IMO “Applications for Mortgages” are another one of those problematic indicators (there are so many these days). The credit crunch causes serious buyers to submit applications to multiple lenders in an attempt to secure a mortgage they can work with. This behavior lacks statistically history (because this credit crunch is unprecedented) and therefore there's little historical data for proper statistical adjustments.
When applications went up, did that mean more people were ready to buy? No. When it goes down, does that really mean a reduction in buyers..or is it that buyers are doing a better job of targeting their applications to lenders more likely to provide the needed mortgage? I think it’s the latter.
Sales contracts are becoming equally bogus…only actual closings count.
But this need for “leading indicators” in a clearly downward market, and the ego bragging rights for claiming being the first to “call a bottom or recovery”, drives the spread of misleading indicators. So does the need for spin by Talking Heads.

Jeff said...


Good points. I think the higher interest rates stopped a lot of the refi business.

Some of the mortgage brokers I know said the only way the brokers were staying afloat was the drop in interest rates they got temporarily over the winter as the Fed kept slashing rates.

Rates should only go higher going forward as inflation soars and the Fed needs to slowdown.

On top of that you have the ECB talking about raising rates which is putting even more pressure on the Fed to stop cutting.

I wouldn't want to be Ben Bernanke right now would you?