Does the story justify the lede?
Here’s the lede in the front page NYT article: “Countrywide Financial, the nation’s largest mortgage lender, said yesterday that more borrowers with good credit were falling behind on their loans and that the housing market might not begin recovering until 2009…” Here’s a bit of the story:
Countrywide said about 5.4 percent of the home equity loans to customers with good credit that it held an interest in were past due at the end of June, up from 2.2 percent at the end of June 2006. By comparison, more than a fifth of subprime loans were past due at the end of June, up from 13.4 percent a year ago.
“Where you will see prime borrowers have trouble is where they took the riskiest of adjustable-rate mortgages and put nothing down with a first and second combined,” Thomas Lawler, a housing economist, said.
Many of Countrywide’s home equity loans were second mortgages made to people who were financing the full or nearly full cost of their homes. These loans are particularly risky because when house prices are falling and a home is foreclosed and resold, the holder of the first lien is paid off and often there is little left to apply to the second mortgage.
“Countrywide is highlighting what is an industrywide problem,” said Christopher C. Brendler, an analyst with Stifel Nicolaus, an investment firm in St. Louis. A second mortgage “is really an unsecured loan like a credit card.”
Countrywide said its customers who are falling behind on payments appear to have lost jobs, had a divorce or fallen ill. Many are living in homes that are no longer worth what they were when the loan was made and cannot refinance because lenders have become stricter.
The company reported second-quarter earnings fell 33 percent, to $485 million, largely because it had to write down the value of loans and other assets by $923 million.
So the issue apparently centers on individuals who used a second mortgage as a down payment, and subsequently got sick or lost a job. These account for a 3% rise in the delinquency rate. Such borrowers — those who are financing on the edge — look more like an accident waiting to happen than “borrowers with good credit.”
And Countrywide still made half a billion dollars after a billion dollar write-off? (This after its dire warnings three months ago about a “liquidity crisis” and throwing the “baby out with the bathwater” — quick, check the dates of options grants!). We are not saying that this industry is all cloudless blue skies, but the threat of thunder and lightning seems a bit overblown, does it not, based on the data provided in the piece?
UPDATE
We note that Real Money’s Tony Crescenzi sees a mixed picture with some positive signs going forward:
Existing home sales were weaker than expected in June, running at a pace of 5.75 million, compared to forecasts for a pace of 5.86 million. While weaker than expected, the sales pace and the underlying data within the report are probably no worse than what was feared.
It is notable, for example, that the inventory of unsold homes fell for the first time in six months, falling 182,000 to 4.196 million. No metric is more important on the housing front than the inventory figure, given then supply and demand imbalance. Sales prices increased during the month…
inventories must fall. The amount of unsold existing homes is currently running about 2 million above normal, at 4.196 million. For new homes, the figure is about 200,000 above normal. Hence, the biggest problem lies in the market for existing homes…The inventory-to-sales ratio remained high at 8.8 months, the same as in May (revised downward from 8.9 months) and a 15-year high…
Sales seem likely to be relatively stable in the months ahead, given what is known about mortgage applications, which have been in the midst of a meaningful uptrend over the past fourteen weeks. It would be extraordinary if sales were to weaken much more in the face of rising mortgage applications. Keep in mind that existing home sales reflect mortgage applications two to three months prior, given that sales are reported at the closing of a home sale. Hence, today’s data reflect mortgage applications filed as far back as March, before the latest uptick in mortgage applications.
We are not endorsing any particular view of the housing market, but we think it is fair to note the backwards-looking orientation of the NYT piece, and the doom and gloom that has been characteristic of certain public statements by Countrywide over the past few months. The NYT quotes no opposing sources in its story, which it arguably ought to, since this was positioned as a front page news story on the Times’ website, not as a business piece on a company in the business section.
To be fair, the Times does mention Countrywide’s stock buyback program that is proceeding during this period of negative pronouncements by the company, as well as the founder’s automatic (and highly profitable) sales of stock after option conversions.