by Calculated Risk on 8/24/2008 02:18:00 PM

From Joe Rauch at the Atlanta Business Chronicle: Bank flu spreads to rural areas (hat tip Edward)

The housing market’s collapse is reaching banks beyond the [Atlanta] metro area, through a process largely hidden from public view.

Banks in more rural areas of Georgia reported rising levels of loan losses for the second quarter of 2008.

Industry experts attribute many of those problems to the purchase and sale of loans between banks, a practice called “loan participations.”

The loan pieces are for projects often geographically distant from the home markets and familiar territory of the purchasing banks ...

The process was dubbed by one local banker as “a poor man’s securitization” ...

While parceling out portions of the loans distributes risk through the financial system, critics argue bankers relaxed their credit analysis on the loans during the building boom, enticed by the prospect of rapid growth by buying into others’ deals.

... “The same sloppiness that crept into regular lending crept into participations,” said bank analyst Chris Marinac of FIG Partners LLC. “It was a convenient means to an end. It was really easy to get lazy with these things.”

Just more containment.

by Calculated Risk on 8/23/2008 06:49:00 PM

David Streitfeld at the NY Times writes about Merced, CA: In the Ruins of the Housing Bust

On a recent Sunday evening, an extended family of a dozen children, teenagers and adults is unloading a U-Haul into a house in a two-year-old subdivision called Summer Creek. The patriarch takes a break from wrestling with a refrigerator to explain he has abandoned his house a few miles away and is now renting this nearly-new five-bedroom.

The result, he says happily, is a drop in his monthly housing bill to $1,200 from $3,400. Somewhere a lender is recording yet another foreclosure.

"Somewhere a lender is recording yet another foreclosure."

In Merced, it is "Right here, right now!"

by Calculated Risk on 8/23/2008 05:24:00 PM

From The Times: Recession: boom years are over as economy slows to halt

After 16 years, or 63 consecutive quarters, of continuous growth it is likely that Britain is already in recession, City analysts say. Another downgrade in a month’s time could confirm that the economy has shrunk.

The latest data, from the Office for National Statistics, showed a slump in every part of the economy as the credit crunch and the rising cost of living took their toll.

And from Peter Goodman at the NY Times: U.S. and Global Economies Slipping in Unison

Only a few months ago, some economists still offered hope that robust expansion could continue in much of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Overseas demand for American goods and services was supposed to continue compensating for waning demand in the States.

Now, high energy prices, financial systems crippled by fear, and the decline of trading partners have combined to choke growth in many major economies.

Decoupling never made much sense, although Professor Krugman has a small issue with the NY Times article concerning international linkages: Synchronized sinking

There should be a post title contest - I think Krugman and Tanta (I'm biased) would be the winners!

by Calculated Risk on 8/23/2008 03:42:00 PM

The FDIC announced the ninth bank failure of 2008 last night; Columbian Bank and Trust Company, of Topeka, KS. To put that into context, here is a graph of bank and thrift failures since the FDIC was created in 1934:

Click on graph for larger image in new window.

The huge spike in the '80s was due to the S&L crisis. The nine bank failures so far in 2008 barely show up.

It's interesting to note that even with the failure of almost 3,000 banks and thrifts during the S&L crisis, the overall economy stayed fairly healthy with only a mild-to-moderate recession starting in July 1990.

During the Roaring '20s, 500 bank failures per year was common with depositors typically losing 30% to 40% of their bank deposits in the failed institutions. The number of bank failures soared to 4000 (estimated) in 1933.

It's important to note that the housing bust hasn't hurt most small banks and institutions, because the banks didn't hold many of the residential mortgages they originated. Instead the small to mid-sized institutions focused on commercial real estate (CRE), and construction and development (C&D) loans.

And it appears that bad C&D loans took down Columbian Bank and Trust Company. From iStockAnalyst on August 2nd: Columbian Bank Aims to Boost Capital, Overcome Loan Troubles

[Jim Helvey, former CEO] said many of the bank's loans financed real-estate developers' purchases of land. He said Columbian's loans typically were paid off as developers sought and gained construction lending from other banks.

"The problem started creeping in when commercial real-estate loans fell out of favor and there was no 'Bank B' to take us out of our acquisition loan," Helvey said.

The crunch in real-estate lending has left Columbian with $92 million in problem loans, which includes some construction and residential loans.

Although Columbian is small, and the losses to the FDIC will pale in comparison to IndyMac, Columbian is probably more representative than IndyMac of the type of institutions that will fail in this cycle.

by Calculated Risk on 8/23/2008 10:13:00 AM

A quote from Bloomberg: Freddie, Fannie Failure Could Be World `Catastrophe,' Yu Says

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' [Yu Yongding, a former adviser to China's central bank] said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.'

And from the WaPo: Treasury's Vigil On Fannie, Freddie

A top concern of Treasury Secretary Henry M. Paulson Jr. as he ponders whether to pull the trigger on a rescue plan for mortgage financiers Fannie Mae and Freddie Mac is the fate of its "preferred" shareholders, which include regional and community banks across the nation and central banks around the world, according to private analysts who closely follow the department.
...
Treasury officials are worried that a sell-off of these [preferred] shares poses serious risks to the broader financial system, the analysts said.

And from the NY Times: Uncertainty Over Fannie and Freddie

“We’re in a Catch 22,” said an executive with one of the mortgage firms who was not authorized to speak to the media. “As long as there is uncertainty over Treasury’s plan, we can’t raise money, and as long as we can’t raise money, there’s going to be more and more speculation about Treasury’s plan.”
...
“You would have to be insane to invest in these companies right now, and we’ve basically told them that,” said an investment professional with one firm that was approached by Freddie Mac, but who is not authorized to speak to the media. “When Treasury comes in, they are guaranteed to get a better deal than us, which would push down the value of our investment. So why would we ever invest before we know what Treasury is going to do?”

It seems like just a matter of when - not if - Paulson's hand will be forced and the Treasury will rescue Fannie and Freddie.

by Calculated Risk on 8/22/2008 08:27:00 PM

The Federal Reserve reports that delinquency rates rose in Q2 in all categories. (hat tip Rick)

Click on graph for larger image in new window.

This graph shows the delinquency rates at the commercial banks for three key categories: residential real estate, commercial real estate, and consumer credit cards.

Credit card delinquency rates are at 4.9%, about the same level as the peak of the '01 recession. Credit card delinquencies peaked at 5.45% during the '91 recession.

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since Q1 '95 (as delinquency rates declined following the S&L crisis).

Residential real estate delinquencies are at the highest level since the Fed started tracking the data (since Q1 '91).

Although there is credit deterioration everywhere, the rise in CRE delinquencies is especially significant. The Fed defines commercial as "construction and land development loans, loans secured by multifamily residences, and loans secured by nonfarm, nonresidential real estate", and many of the problems are probably in the C&D loans.

My guess is commercial real estate delinquencies will be higher than residential in Q3, even though residential delinquencies are still increasing rapidly.

by Calculated Risk on 8/22/2008 07:12:00 PM

From the FDIC: Citizens Bank and Trust, Chillicothe, MO, Acquires the Insured Deposits of the Columbian Bank and Trust Company, Topeka, KS

The Columbian Bank and Trust Company, Topeka, Kansas, was closed today by the Kansas Bank Commissioner J. Thomas Thull, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank and Trust, Chillicothe, Missouri, to assume the insured deposits of The Columbian Bank and Trust Company.

The nine branches of The Columbian Bank and Trust Company will reopen on Monday as branches of Citizens Bank and Trust. Depositors of the failed bank will automatically become depositors of Citizens Bank and Trust. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Over the weekend, customers of The Columbian Bank and Trust Company Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of June 30, 2008, The Columbian Bank and Trust Company had total assets of $752 million and total deposits of $622 million, of which there were approximately $46 million in uninsured deposits held in approximately 610 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

The Columbian Bank and Trust Company also had approximately $268 million in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds.
...
Citizens Bank and Trust agreed to assume the insured deposits for a 1.125% premium. It will also purchase $85.5 million of the failed bank's assets. The assets are comprised mainly of cash, cash equivalents and securities. The FDIC will retain the remaining assets for later disposition.

The cost to the FDIC's Deposit Insurance Fund is estimated to be $60 million. The Columbian Bank and Trust Company is the first bank to fail in Kansas since Midland Bank of Kansas, Mission, Kansas, on April 2, 1993. This year, a total of nine FDIC-insured institutions have been closed.

by Calculated Risk on 8/22/2008 04:46:00 PM

It's Friday afternoon. Time to check with the FDIC.

Here is the FDIC Failed Bank List.

It's been three weeks since the last failure.

by Calculated Risk on 8/22/2008 02:56:00 PM

Fed Chairman Bernanke's urged changes in the financial structure in his speech this morning.

First, Bernanke pointed out the moral hazard in bailing out Bear Stearns:

As you know, in March the Federal Reserve acted to prevent the default of the investment bank Bear Stearns. ... [T]hose events also have consequences that must be addressed. In particular, if no countervailing actions are taken, what would be perceived as an implicit expansion of the safety net could exacerbate the problem of "too big to fail," possibly resulting in excessive risk-taking and yet greater systemic risk in the future. Mitigating that problem is one of the design challenges that we face as we consider the future evolution of our system.

Bernanke suggested that regulatory and statutory changes need to be made so that the Fed can wipe out the equity holders and give haircuts to some creditors when critical nonbanks fail:

A statutory resolution regime for nonbanks, besides reducing uncertainty, would also limit moral hazard by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders and haircuts some creditors, analogous to what happens when a commercial bank fails.
emphasis added

by Tanta on 8/22/2008 01:05:00 PM

Long-time readers will remember the MMI, or Muddled Metaphor Index, which was basically a long-running gag at the media's expense. Now I've been provoked again, and so I introduce the MTI, or Mortgage Telephone Index. I'm sort of hoping this will be the only entrant into the series, but you never know. The MTI features reporters and editors who apparently spend all their day on bad cell phone connections and do not actually read much about mortgages. This produces an effect like the old game of "Telephone," with equally hilarious results.

Today's Washington Post brings us "Bad Begets Worse," which is actually the title of this article and did I not make that up.

Freddie Mac, for instance, no longer finances no-money-down mortgages, nor does it continue to buy or guarantee mortgages given to people who have failed to document their finances. Fannie Mae has withdrawn from the market for all-day loans, which are considered risky because they require less documentation than traditional prime loans.

No, Fannie Mae has not suddenly decided that mortgage loans need to have terms of more than 24 hours to be eligible for purchase. It appears that someone said "Alt-A" and someone else heard "all-day."

Presumably we will be able to tell if we have any readers at the Washington Post by how long it takes for that to go away . . . .

(Hat tip, Michael!)