Saturday, January 31, 2009

The Bailout Rap

by Calculated Risk on 1/31/2009 11:48:00 PM

For this video, hat tips to Gregg, and also Brad at the Charleston Market Report. Brad has a selection of housing related videos here.

Note: For some reason this video had me thinking of Vanilla Ice ... Oh well, enjoy ...

NYC: Rents "Falling Fast"

by Calculated Risk on 1/31/2009 07:06:00 PM

From the NY Times: A Month Free? Rents Are Falling Fast (hat tip Brian)

IN this painful economic climate of layoffs and shrinking investments, there is a sliver of positive news: it’s a good time to be a renter in New York City. Prices are falling, primarily in Manhattan, and concessions like a month of free rent are widespread.
...
The steepest drop was in one-bedrooms, down 5.7 percent in buildings with doormen and 6.53 percent in buildings without. The only category that rose: rents for two-bedroom apartments in doorman buildings, up just a bit, by 0.61 percent. But these numbers, like most available data, represent asking rents rather than the final price. Anecdotal evidence suggests that some people are negotiating rents as much as 20 percent lower than the original prices asked by landlords. These figures also leave out incentives, like a month of free rent or a landlord’s paying the broker fee, which can add up to real savings.
I live in a California beach community and there are usually very few rental units available. I went for a walk this morning, and I was amazed at all the "For Rent" and "For Lease" signs. The market is changing rapidly here too.

On the rental market: Earlier this month I wrote about some of the supply and demand issues, see The Residential Rental Market

And not included in my summary post of January economic activity was this apartment data from the National Multi Housing Council (NMHC):
The stunning job losses and economic deterioration recorded over the past four months have eroded demand for apartments, putting the sector—like other real estate sectors and the economy itself—in a clearly "down" phase of the cycle, according to the National Multi Housing Council's (NMHC) latest Quarterly Survey of Apartment Market Conditions.
Apartment Tightness Index
Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

"The Market Tightness Index, which measures changes in occupancy rates and/or rents, declined sharply this quarter to 11 from 24. This is the third-lowest result on record, and the sixth straight quarter in which the index has been below 50."

It's a good time to be a renter.

Ramsey Su: Allow Foreclosures to Happen

by Calculated Risk on 1/31/2009 04:45:00 PM

My friend Ramsey Su writes in the WSJ: Why Be a Nation of Mortgage Slaves?

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit ...

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.
...
What is the market telling us? Dataquick recently released December sales data for Southern California, once the hotbed of speculative excesses supported by nontraditional financing. Foreclosures now dominate sales. Prices are down. Sales volume is up. New home construction is down. These are beautiful textbook illustrations of supply and demand driving price and market equilibrium.
...
The media should interview those who had been foreclosed upon. Do they feel sorry or relieved? Are they rebuilding their credit, not to mention their lives? Do they miss the pressure of having to make payments they cannot afford on a McMansion that belongs to the lender?
Ramsey makes some very valid points:
  • If a loan modification leaves the homeowner hopelessly underwater, what is the point? That just delays the inevitable and creates what Ramsey calls a "mortgage slave".

  • MEDIA: I'd like to see some interviews with homeowners who went through foreclosure a year ago or more. Usually we see interviews with people in the foreclosure process or who just lost their homes. Ramsey asks some interesting questions: Are they better off today? Do they feel depressed or relieved?

  • CNBC: "Bad Bank" Possible by Next Week

    by Calculated Risk on 1/31/2009 01:44:00 PM

    From CNBC: 'Bad Bank' Run By FDIC Possible By Next Week: Source

    The talks are said to have yielded agreement that the FDIC would run the bad bank, according to an source. ... Thursday could be the announcement day.
    There is more in the article, but not really anything new.

    Meanwhile the WSJ is reporting: ECB Drawing Up ‘Bad Bank’ Guidelines
    The European Central Bank is drawing up guidelines for European governments that are considering so-called “bad banks” to house banks’ toxic assets. The ECB is also working on guidelines for European governments that plan to guarantee toxic assets remaining on banks’ books, another form of bank bailout.

    Both sets of guidelines are being drawn up with the European Commission. The ECB hopes the guidelines can help avoid competitive one-upmanship across the 27-nation European Union as nations seek to shore up struggling banks.

    The ECB, which makes monetary policy for the 16 countries that share the euro currency, has no power to enforce any guidelines it develops.
    It looks like the Bad Bank idea is moving forward ...

    January Economic Summary in Graphs

    by Calculated Risk on 1/31/2009 01:44:00 AM

    Here is a collection of 20 real estate and economic graphs from January ...

    New Home Sales Monthly Not Seasonally Adjusted New Home Sales in December

    Click on graph for larger image in new window.

    The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

    Notice the Red columns for 2008. This is the lowest sales for December since 1966. (NSA, 23 thousand new homes were sold in December 2008, 23 thousand were sold in December 1966). As the graph indicates, sales in 2008 are substantially worse than the previous years. From: Record Low New Homes Sales in December

    Total Housing Starts and Single Family Housing Starts Housing Starts in December

    Total housing starts were at 550 thousand (SAAR) in December, by far the lowest level since the Census Bureau began tracking housing starts in 1959.

    Single-family starts were at 398 thousand in December; also the lowest level ever recorded (since 1959). Single-family permits were at 363 thousand in December, suggesting single family starts may fall even further next month. From: Housing Starts at All Time Low

    Construction Spending Construction Spending in November

    This graph shows private residential and nonresidential construction spending since 1993.

    Nonresidential spending held up as builders completed projects. This showed up in the Q4 GDP report too (non-residential investment in structures was off only slightly in Q4). From: Construction Spending Declines in November

    Strip Mall Vacancy Rate Strip Mall Vacancy Rate

    REIS reported: "At neighborhood and community shopping centers, the vacancy rate rose to 8.9 percent from 8.4 percent in the third quarter, the highest since Reis began publishing quarterly data in 1999."

    This graph shows the strip mall vacancy rate since Q2 2007. Note that the graph doesn't start at zero to better show the change. Strip mall vacancy rates are headed for double digits this year. From: Mall Vacancies Reach 10-Year High

    Employment Measures and Recessions December Employment Report

    This graph shows the unemployment rate and the year over year change in employment vs. recessions. The unemployment rate rose to 7.2 percent; the highest level since January 1993.

    Nonfarm payrolls decreased by 524,00 in December, and November payrolls were revised down to a loss of 584,000 jobs. The economy lost over 1.5 million jobs in Q4 alone! From: Employment Declines Sharply, Unemployment Rises to 7.2 Percent

    Year-over-year change in Retail Sales December Retail Sales

    This graph shows the year-over-year change in nominal and real retail sales since 1993.

    Although the Census Bureau reported that nominal retail sales decreased 10.2% year-over-year (retail and food services decreased 9.8%), real retail sales declined by 11.3% (on a YoY basis). This is the largest YoY decline since the Census Bureau started keeping data. From: Retail Sales Collapse in December

    West Coast Port Traffic LA Port Traffic in December

    This graph shows the combined loaded inbound and outbound traffic at the ports of Long Beach and Los Angeles in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).

    Inbound traffic was 19% below last December. For the LA area ports, outbound traffic continued to decline in December, and was 30% below the level of December 2007. From: LA Area Port Traffic Collapses in December

    Capacity Utilization December Capacity Utilization

    Capacity utilization fell to 73.6% from 75.2%. This is the lowest level since December 2001.

    The significant decline in capacity utilization suggests less investment in non-residential structures for some time. From: Capacity Utilization and Industrial Production Cliff Diving

    U.S. Vehicle Sales Vehicle Sales

    This graph shows monthly vehicle sales (autos and trucks) as reported by the BEA at a Seasonally Adjusted Annual Rate (SAAR).

    This shows that sales have plunged to just over a 10 million annual rate - the lowest rate since the early '80s recession. From: Vehicle Sales

    Residential NAHB Housing Market Index NAHB Builder Confidence Index in January

    This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

    The builder confidence index was at 8 in January, a new record low. From: NAHB Housing Market Index Falls to New Record Low

    AIA Architecture Billing Index Architecture Billings Index for December

    The American Institute of Architects (AIA) reported the December ABI rating was 36.4, up from the 34.7 mark in November (any score above 50 indicates an increase in billings).

    From: Architecture Billings Index Near Record Low

    Vehicle Miles Driven Vehicle Miles driven in November

    This graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

    By this measure, vehicle miles driven are off a record 3.7% Year-over-year (YoY); the decline in miles driven is worse than during the early '70s and 1979-1980 oil crisis. As the DOT noted, miles driven in November 2008 were 5.4% less than November 2007, so the YoY change in the rolling average may get worse. From: DOT: U.S. Vehicle Miles Driven Declines Sharply

    Existing Home Sales Existing Home Sales in December

    This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

    Sales in December 2008 (4.74 million SAAR) were 6.5% higher than last month, and were 3.5% lower than December 2007 (4.91 million SAAR). From: Existing Home Sales Increase in December

    Existing Home Inventory NSA Existing Home Inventory

    This graph shows inventory by month starting in 2002. Inventory levels were flat for years (during the bubble), but started increasing at the end of 2005.

    Inventory levels increased sharply in 2006 and 2007, but have been close to 2007 levels for most of 2008. In fact inventory for the last five months was below the levels of last year. This might indicate that inventory levels are close to the peak for this cycle. From: Existing Home Sales (NSA)

    Case-Shiller House Prices Indices Case Shiller House Prices for November

    This graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

    The Composite 10 index is off 26.6% from the peak. The Composite 20 index is off 25.1% from the peak. From: Case-Shiller: House Prices Fall Sharply in November

    DataQuick NODs California Notices of Default

    This graph shows the Notices of Default (NOD) by year in California from DataQuick.

    There were a record 423,962 NODs filed in 2008, breaking the old record of 254,824 NODs in 2007.

    The previous record had been in 1996 with 162,678 NODs filed. That was during the previous California housing bust in the early to mid-90s. From: DataQuick: Temporary Drop in California Foreclosure Activity

    ABI and Non-Residential Construction Spending ATA Truck Tonnage Index

    "The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index plunged 11.1 percent in December 2008, marking the largest month-to-month reduction since April 1994, when the unionized less-than-truckload industry was in the midst of a strike. December’s drop was the third-largest single-month drop since ATA began collecting the data in 1973." From: Truck Tonnage Index: Cliff Diving

    Weekly Unemployment Claims Unemployment Claims

    This graph shows weekly claims and continued claims since 1971.

    The four week moving average is at 542,500; still below the recent peak of 558,750
    in December.

    Continued claims are now at 4.78 million - a new record (not adjusted for population) - just above the previous all time peak of 4.71 million in 1982. From: Continued Unemployment Claims at Record High

    Restaurant Performance Index Restaurant Performance Index for December

    "The Association's Restaurant Performance Index (RPI) - a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry - stood at 96.4 in December, down 0.2 percent from November and its 14th consecutive month below 100."

    From: Restaurant Performance Index at New Low

    New Home Sales and Recessions New Home Sales

    This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

    From: Record Low New Homes Sales in December

    How I Learned to Stop Worrying and Love the TARP

    by Calculated Risk on 1/31/2009 12:41:00 AM

    Remember Dr. Evil and Mini-Me? Here is another one ... (hat tip bentway, Chancels)

    Dr. Stranglove

    Click on photo for larger image in new window.


    Does Treasury Secretary Tim Geithner look like Peter Sellers in Dr. Strangelove?

    Maybe ...

    Friday, January 30, 2009

    Four Bad Bears: January Update

    by Calculated Risk on 1/30/2009 08:47:00 PM

    After the excellent stock market returns in January (just kidding - actually the worst January ever), it is probably time to check in on the Four Bad Bear markets ... first, from MarketWatch: U.S. stocks end worst January on record with more losses

    The S&P 500 index fell 19 points, or 2.3%, to 825. For the month, the broad index fell 8.6%, its worst performance on record.
    Stock Market Crashes Click on graph for updated image in new window.

    This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". There is much more at the site.

    Doug has added the market recoveries (light red and green) for the 1970s and early 2000s bear markets.

    Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

    Frontline: Inside the Meltdown

    by Calculated Risk on 1/30/2009 08:05:00 PM

    This might be interesting. It is on PBS on February 17th (this is a 1 min 22 sec preview):

    2009 Bank Failures 5 and 6

    by Calculated Risk on 1/30/2009 06:30:00 PM

    From the FDIC: Bank of Essex, Tappahannock, Virginia, Acquires All the Deposits of Suburban Federal Savings Bank, Crofton, Maryland

    Suburban Federal Savings Bank, Crofton, Maryland, was closed today by the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Essex, Tappahannock, Virginia, to assume all of the deposits of Suburban Federal.
    ...
    As of September 30, 2008, Suburban Federal had total assets of approximately $360 million and total deposits of $302 million. In addition to assuming all of the failed bank's deposits, Bank of Essex agreed to purchase approximately $348 million in assets at a discount of $45 million. The FDIC will retain the remaining assets for later disposition.
    ...
    The FDIC estimates that the cost to the Deposit Insurance Fund will be $126 million. Bank of Essex's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Suburban Federal is the fifth bank to fail in the nation this year. The last bank to be closed in Maryland was Second National Federal Savings Bank, Salisbury, on December 4, 1992.
    And #6 from the FDIC: CenterState Bank Acquires All the Deposits of Ocala National Bank, Ocala, Florida
    Ocala National Bank, Ocala, Florida, was closed today by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with CenterState Bank of Florida, Winter Haven, Florida, to assume all of the deposits of the Ocala National Bank.
    ...
    As of December 31, 2008, Ocala National Bank had total assets of $223.5 million and total deposits of $205.2 million. In addition to assuming all of the failed bank's deposits for a premium of 1.7 percent, CenterState agreed to purchase approximately $23.5 million in assets. The FDIC will retain the remaining assets for later disposition.
    ...
    The transaction is the least costly resolution option, and the FDIC estimates the cost to its Deposit Insurance Fund will be $99.6 million. Ocala National is the sixth FDIC-insured institution to be closed this year. Ocala National Bank is the first bank to fail in Florida since Freedom Bank, Bradenton, on October 31, 2008.
    Three down today, more to come?

    Update: Friday Failure Haiku
    Sub Fed Sunk
    TodayBank of Essex saves the day
    Are there more to come?

    Florida bank toast
    Ocala, rhymes like Orange?
    Asset base has burnt

    by Soylent Green is People.

    2009 Bank Failure #4: MagnetBank, Salt Lake City, Utah

    by Calculated Risk on 1/30/2009 05:13:00 PM

    Note: DCRogers points out in the comments that this is mostly an Atlanta area bank. From the Atlanta Business Chronicle in Nov 2008: Troubled Magnet Bank looking to raise capital

    ... a cease-and-desist order jointly issued Oct. 1 by the Federal Deposit Insurance Corp. ... The Salt Lake City-based bank was founded by an Atlanta investor group and retains much of its operations in Atlanta and Raleigh, N.C., offices. ... Magnet opened in 2005 and grew as home construction lending exploded.
    From the FDIC: FDIC Approves the Payout of the Insured Deposits of MagnetBank, Salt Lake City, Utah
    The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of MagnetBank, Salt Lake City, Utah. The bank was closed today by the Utah Department of Financial Institutions and the FDIC was named receiver.

    After an extensive marketing process, the FDIC was unable to find another financial institution to take over the banking operations of MagnetBank. ...

    MagnetBank, as of December 2, 2008, had total assets of $292.9 million and total deposits of $282.8 million. It is estimated that the bank did not have any uninsured funds.
    ...
    MagnetBank is the fourth FDIC-insured institution to fail this year and the first in Utah since Bank of Ephraim, was closed on June 25, 2004.
    It is Friday. Probably more to come ...

    Update: Friday Failure Haiku

    Magnet Bank, Utah
    Failure on Friday is here
    Their loss is ours now.

    by Soylent Green is People.

    Restaurant Performance Index at New Low

    by Calculated Risk on 1/30/2009 02:55:00 PM

    Note: This is a new "record low", but the index has only been compiled since 2002, so this is the first recession for the index.

    From the National Restaurant Association (NRA): Restaurant Industry Outlook Softens as the Restaurant Performance Index Fell to a Record Low in December

    The outlook for the restaurant industry continued to weaken in December, as the National Restaurant Association's comprehensive index of restaurant activity fell to another record low. The Association's Restaurant Performance Index (RPI) - a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry - stood at 96.4 in December, down 0.2 percent from November and its 14th consecutive month below 100.

    The December decline in the Restaurant Performance Index was the result of a drop in the current situation component. Same-store sales results were the softest in the history of the Restaurant Performance Index, with nearly two-thirds of restaurant operators reporting lower sales in December.
    ...
    Capital spending activity in the restaurant industry deteriorated along with sales and traffic in recent months. Thirty-four percent of operators said they made a capital expenditure for equipment, expansion or remodeling during the last three months, the lowest level on record.
    Restaurant Performance Index Click on graph for larger image in new window.

    Unfortunately the data for this index only goes back to 2002.

    The index values above 100 indicate a period of expansion; index values below 100 indicate a period of contraction.

    Based on this indicator, the restaurant industry has been contracting since November 2007.

    Simon: New Mall Construction "Dead for a decade"

    by Calculated Risk on 1/30/2009 02:04:00 PM

    From Bloomberg: Simon Falls on Plan to Pay Part of Dividend in Stock (hat tip Sam)

    David Simon [Chief Executive Officer, Simon Property Group Inc., the biggest U.S. shopping mall owner] ... said the company doesn’t plan to begin construction on new projects or major redevelopments in 2009 and there will be little new U.S. retail construction for years to come.

    “The new development business is dead for a decade,” Simon said on today’s call. “Maybe it’s eight years. Maybe it’s not completely dead. Maybe I’m over-dramatizing it for effect.”
    In Q3, investment in U.S. malls was at a $33 billion annual pace, but that includes renovations (there are always renovations). Still I'd expect mall investment to decline in half or more by the end of 2009. I'll have more on mall investment in a few days (when the supplemental GDP data is released).

    The Rebalancing Continues ...

    by Calculated Risk on 1/30/2009 01:22:00 PM

    The rebalancing of the U.S. economy is ongoing. The savings rate is rising, consumption is falling, and the trade deficit is declining ...

    PCE as Percent of GDP Click on graph for larger image in new window.

    The first graph shows Personal Consumption Expenditures (PCE) as a percent of GDP. Note: the graph doesn't start at zero to better show the change.

    PCE as a percent of GDP declined to 69.6% in Q4, the lowest level since Q2 2001.

    Some analysts think the U.S. will return to the days of Ozzie and Harriet with PCE as a percent of GDP in the low 60s, but I think a decline to around 68% is more likely.

    PCE as Percent of GDP Net exports as a percent of GDP has declined sharply to 3.7% of GDP. This is the smallest deficit since the end of the '01 recession.

    Since GDP = C + I + G + (X − M), the decline in C is being offset by the improvement in net trade (X - M).

    As we all know, I (investment) is declining and some components of investment (like non-residential investment in structures) will decline sharply in 2009. G (government) will increase with the Obama stimulus package, and the goal is to increase G until Investment bottoms out. We will see, but the rebalancing of the U.S. economy that we discussed several years ago is now happening.

    Note:
    C = Personal Consumption expenditures.
    I = Gross private domestic investment.
    G = Government consumption expenditures and gross investment.
    X = exports
    M = imports.

    Fannie Mae Extends Eviction Suspension Another Month

    by Calculated Risk on 1/30/2009 12:11:00 PM

    From Fannie Mae: Fannie Mae Extends Eviction Suspension Another Month (hat tip Bradley)

    Fannie Mae (FNM/NYSE) today announced that it will extend its suspension of evictions from Fannie Mae-owned single-family properties through February 28, 2009. The suspension applies to all single-family properties including owner-occupied properties that have been foreclosed upon as well as foreclosed properties occupied by renters.

    The company this month began implementing its National Real Estate Owned (REO) Rental Policy that allows qualified renters in Fannie Mae-owned foreclosed properties to stay in their homes. The new policy applies to renters occupying any type of single-family foreclosed properties at the time Fannie Mae acquires the property. Eligible renters will be offered a new month-to-month lease with Fannie Mae or financial assistance for their transition to new housing should they choose to vacate the property. The properties must meet state laws and local code requirements for a rental property. On behalf of the company, property managers are contacting renters in Fannie Mae-owned foreclosed properties to notify them of their options.
    It is usually easier to sell a vacant home, but with the glut of homes on the market, and because the foreclosure is not the fault of the renter, this policy seems to make sense.

    Investment as a Percent of GDP

    by Calculated Risk on 1/30/2009 09:09:00 AM

    Here are a couple of graphs on the investment slump. Residential real residential fixed investment decreased at an a 23.6% annualized rate in Q4.

    Residential Investment as Percent of GDP Click on graph for larger image in new window.

    This graph shows residential investment (RI) as a percent of GDP since 1947. Residential investment has fallen to 3.07% of GDP. This is the lowest residential investment, as a percent of GDP, since WW II.

    I'll post more on the components of RI in a few days when the supplemental data is released.

    Residential Investment as Percent of GDPThe second graph shows non-residential investment as a percent of GDP.

    Investment in software and equipment declined at a 27.8% annualized rate in Q4. Cliff diving! This investment is at the lowest rate since the '70s.

    However investment in non-residential structures only declined at a 1.8% annualized rate. As a percent of GDP, non-residential structure investment actually increased slightly in Q4. This story will change in 2009, and non-residential structure investment will be a significant drag on GDP.

    I'll have much more on non-residential structures in a few days ...

    This investment slump is a huge part of the recession story. Residential led the economy into recession (as is typical) and now non-residential investment is falling off a cliff - or, as in the case of non-residential structures, will fall off a cliff in 2009.

    GDP Declines 3.8% in Q4

    by Calculated Risk on 1/30/2009 08:31:00 AM

    I'll have more a little later ...

    From the BEA: GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2008 (ADVANCE)

    From MarketWatch:

    U.S. Q4 GDP down 3.8%, inventories limit downturn The U.S. economy contracted at a 3.8% annualized rate in the fourth quarter but the decline would have been worse except that the government counts an unwanted buildup of goods on store shelves as growth.

    A clearer picture of the scope of the weakness in the fourth quarter, which excludes the inventory buildup, contracted at a 5.1% pace, the weakest in 28 years.
    ...
    Consumer spending fell 3.5%, including a 7.1% drop in spending on services, a 3.5% drop in spending on durable goods and a 22.4% decline in spending on nondurable goods, the weakest in 21 years.

    Business investment fell 20.1% in the fourth quarter, subtracting 2.3 percentage points from growth. ...

    Investments in equipment and software dropped 27.8%, the weakest in 50 years.

    Investments in structures fell 19.1%, the largest decline since the first quarter of 1975.

    Exports fell 19.7% in the fourth quarter, while imports, which are a subtraction from the calculation of GDP, fell 15.7%. As a result, the narrowing trade deficit added 0.09 percentage points to growth.

    Government spending increased 1.9% after rising 5.8% in the third quarter. ...

    Businesses added $6.2 billion to their inventories after cutting them by $29.6 billion in the third quarter. The change in inventories added 1.32 percentage points to growth.

    Residential investment fell 23.6% in the fourth quarter ...

    Thursday, January 29, 2009

    Q4 GDP Forecasts: Consensus 5.4% Decline

    by Calculated Risk on 1/29/2009 11:44:00 PM

    As a late night thread, here are some forecasts for Q4 GDP.

    From the LA Times: Economy is going from bad to worse, reports show

    Many economists think the economic output declined in the fourth quarter at an annual rate of 5% or more -- which would make it the worst quarter for the U.S. economy since 1982.

    "It will be bad," said Nigel Gault, chief U.S. economist at IHS Global Insight, a forecasting firm in Lexington, Mass. He estimated that the economy shrank at a 5.3% annual rate in the three months that ended Dec. 31.
    ...
    "It's going to confirm what we already know, and that is that we're in a severe recession," said Ben Herzon, senior economist with forecasting firm Macroeconomic Advisers in St. Louis, who expects the report to show a decline of 5.5%.
    From CNNMoney:
    The gross domestic product is expected to have declined by an annual rate of 5.4% in the fourth quarter, according to a consensus of economist expectations from Briefing.com.
    Goldman Sachs most recent estimate is for real GDP to decline by 5.9%.

    Northern Trust is forecasting a decline of 4.7%.

    Looks like tomorrow will be interesting.

    WSJ: Option ARM Defaults Rising

    by Calculated Risk on 1/29/2009 09:17:00 PM

    From Ruth Simon at the WSJ: Option ARMs See Rising Defaults (hat tip ShortCourage)

    Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance ... Rising delinquencies are creating fresh challenges for companies such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. that acquired troubled option-ARM lenders.
    ...
    As of December, 28% of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics ... An additional 7% involve properties that have already been taken back by the lenders. ... Just over half of subprime loans were delinquent, in foreclosure, or related to bank-owned properties as of December. The nearly $750 billion of option ARMs issued from 2004 to 2007 compares with roughly $1.9 trillion each of subprime and jumbo mortgages in that period.

    Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs ...
    If 61% of the $750 billion in Option ARMs default, and with a 50% loss severity, the losses to lenders will be about $225 billion - far less than for subprime, but still a huge problem.

    The key problem with Option ARMs is that they were used as affordability products, mostly in California and Florida, because buyers couldn't qualify for fixed rate mortgages or even regular ARMs. It should have been no surprise that most borrowers chose the negatively amortizing option; it was the only one they could afford!

    Credit Crisis Indicators

    by Calculated Risk on 1/29/2009 08:19:00 PM

    It's been awhile, and by popular demand ...

    Treasuries have rebounded somewhat since the beginning of the year, and there was tepid demand today for Five Year Treasuries, from Bloomberg: Treasuries Drop as Record Sale Draws Higher-Than-Forecast Yield

    Treasuries plunged as the government sold a record $30 billion of five-year notes at a higher yield than forecast, indicating weak demand.

    The auction, which caps a week when the Treasury raised $78 billion in notes and bonds, may signal investors will have trouble absorbing the as-much-as $2.5 trillion in debt the U.S. is likely to issue this year ...

    “We’re seeing a bit of indigestion,” said Larry Dyer, a U.S. interest-rate strategist with HSBC Securities (USA)
    Ten Year yield Click on graph for larger image in new window.

    The 10-year yield is at 2.82% today, well above the record low of 2.07% set on Dec 18th.

    This graph shows the 10 year yield since 1962. The smaller graph shows the ten year yield since the start of 2008. In the bigger scheme, this has been a fairly small rebound in yield.

    The yield on 3 month treasuries has risen to 0.22%. I guess that means less fear than a yield of zero!

  • The three month LIBOR has decreased to 1.17%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (improved) Imagine all those adjusted rate mortgage loans tied to treasuries or even the 3 month LIBOR? Those rates are looking pretty good.

    TED Spread
  • The TED spread is at 0.94, still moving lower. (improved)

    The TED spread was stuck above 2.0 for some time. The peak was 4.63 on Oct 10th. The TED spread has finally moved below 1.0, although a normal spread is around 0.5.


  • A2P2 Spread
  • The A2P2 spread as at 2.10. The spread has moved up slightly in recent days, but this spread has seen a huge decline in 2009. This is far lower than the record (for this cycle) of 5.86 after Thanksgiving, but still way too high. (improved).

    This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now quality 30 day nonfinancial paper is yielding close to zero. If the credit crisis eases, I'd expect a significant further decline in this spread - although this is good progress.

  • Federal Reserve Assets

    Federal Reserve AssetsThe Federal Reserve assets decreased to $1.93 trillion this week from a high of over $2.3 trillion in December.

    Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

    This is interesting too, from Bloomberg: U.S. Commercial Paper Falls Most on Record as Fed Buying Drops
    Corporate borrowing in the commercial paper market shrank the most on record as companies sold less 90- day debt to the Federal Reserve.

    U.S. commercial paper outstanding fell $98.8 billion, or 5.9 percent, to a seasonally adjusted $1.59 trillion during the week ended Jan. 28, the Fed said today in Washington. Financial issuance accounted for almost all of the drop, falling $93.5 billion, or 12.7 percent, to $641.8 billion.

    The decline in the commercial paper market signals improved conditions as financial companies find other funding sources such as government-backed corporate bonds, Tony Crescenzi, chief bond- market strategist at Miller Tabak & Co. in New York, said in a note to clients today.
    By these indicators, the Fed is making progress.

  • $4 Trillion Bank Bailout?

    by Calculated Risk on 1/29/2009 05:36:00 PM

    From CNBC: Bank Bailout Could Cost Up to $4 Trillion: Economists

    Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.
    ...
    The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter.
    ...
    The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.
    We need more details ...

    "Unprecedented and shocking" Decline in Air Cargo

    by Calculated Risk on 1/29/2009 02:48:00 PM

    More cliff diving ...

    From the International Air Transport Association: Cargo Plummets 22.6% in December (hat tip Bob_in_MA)

    In the month of December global international cargo traffic plummeted by 22.6% compared to December 2007. The same comparison for international passenger traffic showed a 4.6% drop. The international load factor stood at 73.8%.

    For the full-year 2008, international cargo traffic was down 4.0%, passenger traffic showed a modest increase of 1.6%, and the international load factor stood at 75.9%.

    The 22.6% free fall in global cargo is unprecedented and shocking. There is no clearer description of the slowdown in world trade. Even in September 2001, when much of the global fleet was grounded, the decline was only 13.9%,” said Giovanni Bisignani, IATA’s Director General and CEO.” Air cargo carries 35% of the value of goods traded internationally.
    ...
    “2009 is shaping up to be one of the toughest years ever for international aviation. The 22.6% drop in international cargo traffic in December puts us in un-charted territory and the bottom is nowhere in sight. Keep your seatbelts fastened and prepare for a bumpy ride and a hard landing,” said Bisignani.
    emphasis added

    Regulator to Bank: Find Buyer or Else

    by Calculated Risk on 1/29/2009 01:56:00 PM

    We rarely get advance notice for Bank Failure Friday, but this might be one ...

    From the Baltimore Sun: Suburban Federal Savings Bank told to sell

    Federal banking regulators have told Crofton-based Suburban Federal Savings Bank that it must be sold by Friday or face a possible government takeover.

    The 53-year-old thrift has been trying to recover from losses on soured real-estate loans. In documents filed last week, the Office of Thrift Supervision ordered Suburban to merge with another institution or accept "appointment of a conservator or receiver."

    If Suburban were to be seized, it would be the first bank to fail in Maryland since 1992, the tail end of the savings and loan crisis.

    Suburban, which has seven branches and about $354 million in assets, was supposed to submit a binding merger agreement to the OTS by last Friday, but neither the regulator nor Suburban officials would say yesterday whether a plan was submitted.

    Philly Fed: Activity Declined in Every State in December

    by Calculated Risk on 1/29/2009 12:04:00 PM

    Here is a new record that will never be broken! The Philly Fed index shows - for the first time ever - declining activity in all states in December (see bottom graph).

    Here is the Philadelphia Fed state coincident index release for December.

    The Federal Reserve Bank of Philadelphia has released the coincident indexes for all 50 states for December 2008. The indexes decreased in all 50 states for the month (a one-month diffusion index of -100). For the past three months, the indexes increased in three states, Louisiana, North Dakota, and Wyoming, and remained unchanged in one state, Alaska.
    Philly Fed State Conincident Map Click on map for larger image.

    Here is a map of the three month change in the Philly Fed state coincident indicators. Almost all states are showing declining activity over the last three months.

    This is what a widespread recession looks like based on the Philly Fed states indexes.

    Philly Fed Number of States with Increasing ActivityThe second graph is of the monthly Philly Fed data of the number of states with one month increasing activity. For the first time ever, the Philly Fed index showed no states with increasing activity.
    The indexes decreased in all 50 states for the month (a one-month diffusion index of -100).
    Most of the U.S. was has been in recession since December 2007 based on this indicator - and now ALL states are see declining activity.

    Record Low New Homes Sales in December

    by Calculated Risk on 1/29/2009 10:00:00 AM

    The Census Bureau reports, New Home Sales in December were at a seasonally adjusted annual rate of 331 thousand. This is the lowest sales rate the Census Bureau has ever recorded (starting in 1963).

    New Home Sales Monthly Not Seasonally Adjusted Click on graph for larger image in new window.

    The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

    Notice the Red columns for 2008. This is the lowest sales for December since 1966. (NSA, 23 thousand new homes were sold in December 2008, 23 thousand were sold in December 1966).

    As the graph indicates, sales in 2008 are substantially worse than the previous years.

    New Home Sales and Recessions The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

    Sales of new one-family houses in December 2008 were at a seasonally adjusted annual rate of 331,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

    This is 14.7 percent (±13.9%)* below the revised November of 388,000 and is 44.8 percent (±10.8%) below the December 2007 estimate of 600,000.
    And one more long term graph - this one for New Home Months of Supply.

    New Home Months of Supply and RecessionsThe months of supply is at an ALL TIME RECORD 12.9 months in December (this is seasonally adjusted)!
    The seasonally adjusted estimate of new houses for sale at the end of December was 357,000. This represents a supply of 12.9 months at the current sales rate.
    New Home Sales InventoryThe final graph shows new home inventory. For new homes, both sales and inventory are falling quickly since starts have fallen off a cliff.

    Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels.

    This is a another very weak report. Record low sales. Record high months of supply. Ouch. I'll have more on new home sales later today ...

    Continued Unemployment Claims at Record High

    by Calculated Risk on 1/29/2009 09:13:00 AM

    The DOL reports on weekly unemployment insurance claims:

    In the week ending Jan. 24, the advance figure for seasonally adjusted initial claims was 588,000, an increase of 3,000 from the previous week's revised figure of 585,000. The 4-week moving average was 542,500, an increase of 24,250 from the previous week's revised average of 518,250.
    ...
    The advance number for seasonally adjusted insured unemployment during the week ending Jan. 17 was 4,776,000, an increase of 159,000 from the preceding week's revised level of 4,617,000. The 4-week moving average was 4,630,000, an increase of 66,500 from the preceding week's revised average of 4,563,500.
    Weekly Unemployment Claims Click on graph for larger image in new window.

    The first graph shows weekly claims and continued claims since 1971.

    The four week moving average is at 542,500; still below the recent peak of 558,750
    in December.

    Continued claims are now at 4.78 million - a new record - just above the previous all time peak of 4.71 million in 1982.

    Weekly Unemployment Claims The second graph shows the 4-week average of initial weekly unemployment claims (blue, right scale), and total insured unemployed (red, left scale), both as a percent of covered employment.

    This normalizes the data for changes in insured employment.

    By these measures the current recession is already about the same severity as the '90/'91 recession.

    Ford $5.9 Billion Loss

    by Calculated Risk on 1/29/2009 09:04:00 AM

    From MarketWatch: Ford loses nearly $6 billion as revenue beats target

    Ford Motor Co. reported Thursday a fourth-quarter loss of $5.9 billion ... Revenue dropped 34% to $29.2 billion as car sales dried up in the U.S. market.
    And Ford is the healthiest of the U.S. automakers ...

    Late Night: Credit Union Bailout, Ford Job Cuts, Citi Oversight

    by Calculated Risk on 1/29/2009 12:39:00 AM

    Just a few more stories to discuss ...

    From the WaPo: U.S. Aid Goes to Credit Unions

    The federal government yesterday expanded its bailout to another vulnerable sector, saying it will inject $1 billion into a nonprofit company that provides banking services to the credit union industry.

    The government also will guarantee tens of billions of dollars in previously uninsured deposits in a move that aims to forestall a crisis of confidence in a system once considered unshakable because of its conservative business practices.

    The National Credit Union Administration ... said it was acting to protect the nearly 90 million Americans who use a retail credit union.
    The story is interesting. Many Credit Unions send funds to U.S. Central Corporate Federal Credit Union to invest, and Central invested in ... what else ... mortgage-related securities!

    From Bloomberg: Ford Credit Will Cut 1,200 Workers as U.S. Auto Sales Slide
    Ford Motor Co.’s finance unit will eliminate 20 percent of its workforce, or about 1,200 workers, as part of a cost-cutting move as U.S. auto sales rate falls to the lowest since 1982.
    Expect a huge loss tomorrow too!

    From the WSJ: Agreement Boosts Citi Oversight
    Citigroup Inc. has recently started operating under a regulatory agreement that could subject the company to greater restrictions on its operations.
    ...
    In a contract spelling out terms of the government bailout package, Treasury required Citigroup to disclose whether it or any of its subsidiaries are subject to any cease-and-desist orders, memorandums of understanding, consent orders, or other enforcement actions or regulatory agreements.

    In a document attached to the contract, Citigroup didn't check a box indicating that it isn't operating under any such directives. Instead, the document states: "Certain items previously disclosed to the company's appropriate federal banking agency."
    That is a little vague ... but clearly there is a cease-desist-order, MOU, or some other directive.

    Wednesday, January 28, 2009

    Genworth Tightens Mortgage Insurance Guidelines

    by Calculated Risk on 1/28/2009 10:13:00 PM

    Genworth sent out a notice of tighter guidelines for mortgage insurance today effective Monday February 2nd. Some of the changes are pretty significant.

    As an example, loans over $417K in California are ineligible for MI. Period. The same with attached housing in Florida - ineligible.

    Here are some of the rules:

    Underwriting Guideline Changes – Effective February 2, 2009
    • Minimum Credit Score = 680
    • Maximum Debt to Income (DTI) = 41% regardless of AUS or Submission Channel
    • High Cost Loans (> $417,000) Minimum Credit Score = 740
    o Loan amounts > $417,000 in CA – Ineligible
    • Cash Out Refinance – Ineligible
    • Second Homes – Ineligible
    • Manufactured Homes – Ineligible
    • Construction to Permanent – Ineligible
    Declining/Distressed Markets Changes – Effective February 2, 2009
    • Minimum Credit Score = 700
    o AZ, CA, FL, NV = 720 (as per existing guidelines)
    • Maximum Debt-to-Income = 41% regardless of AUS or submission channel
    • Additions to our Declining/Distressed Markets List
    o 17 states added in their entirety
    o 69 MSA/CBSA added
    o Please see Attachment A for a complete list of new markets
    You can see the old rules and guidelines here. You can type in your zip code and "discover if the property is in a Declining/Distressed Market". (I think this is the old rules and will change on Monday)

    Here is the current list of distressed markets. This included the following entire states: Arizona, California, Connecticut, Delaware, Florida, Michigan, Nevada, and New Jersey.

    The mailing today added many more MSAs and the following additional entire states: Colorado, Maine, New Hampshire, Rhode Island, Wisconsin, Hawaii, Maryland, New Mexico, Utah, Idaho, Massachusetts, Ohio, Vermont, Kansas, Minnesota, Oregon, Washington.

    Just more tightening ...

    House Passes Stimulus Plan

    by Calculated Risk on 1/28/2009 07:13:00 PM

    From the NY Times: House Passes Obama’s Stimulus Package

    Without a single Republican vote, President Obama won House approval on Thursday for an $819 billion economic recovery plan as Congressional Democrats sought to hold down their own difference over the enormous package of tax cuts and spending.
    ...
    As Senate Democrats prepare to bring their version to the floor on Monday, Democrats from the House and the administration indicated they would ultimately accept a provision in the emerging Senate package that would adjust the alternative minimum tax to hold down many middle-class Americans’ income taxes for 2009.

    The provision, which would drive the overall cost of the package to nearly $900 billion, was not in the legislation passed by the House.
    It sounds like the stimulus package will pass the Senate and be signed into law by mid-Feb. The WSJ has some state by state stats and graphics (for those with access).

    Architecture Billings Index as a Leading Indicator of Construction Spending

    by Calculated Risk on 1/28/2009 05:59:00 PM

    Back in 2005, Kermit Baker and Diego Saltes of the American Institute of
    Architects wrote a white paper: Architecture Billings as a Leading Indicator of Construction

    Here is a graph from their paper:

    ABI and Non-Residential Construction Spending Click on graph for larger image in new window.

    This graph from 2005 compares the Architecture Billings Index from the American Institute of Architects and year-over-year change in non-residential construction spending from the Census Bureau. The correlation is pretty strong (see the paper for more).

    ABI and Non-Residential Construction Spending The second graph is an update through Dec 2008 for the ABI, and Nov 2008 for construction spending.

    I've had to change the scale to fit the collapse in the ABI on the graph.

    The ABI typically leads construction spending by about 9 to 12 months according to AIA chief economist Kermit Baker. This graph also suggests the collapse will be very sharp, and although there isn't enough data to know if this is predictive of the percentage decline in spending, it does suggest a possible year-over-year decline of perhaps 30% in non-residential construction spending.

    In November, private non-residential construction spending was at $428.2 billion annual rate. A 30% decline would be to an annual rate of $300 billion or so. Ouch.

    Truck Tonnage Index: Cliff Diving

    by Calculated Risk on 1/28/2009 05:19:00 PM

    From the American Trucking Association: ATA Truck Tonnage Index Plummeted 11.1 Percent in December (hat tip Dave of SV)

    ABI and Non-Residential Construction Spending Click on graph for larger image in new window.

    The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index plunged 11.1 percent in December 2008, marking the largest month-to-month reduction since April 1994, when the unionized less-than-truckload industry was in the midst of a strike. December’s drop was the third-largest single-month drop since ATA began collecting the data in 1973. In December, the seasonally adjusted tonnage index equaled just 98.3 (2000 = 100), its lowest level since December 2000. The not seasonally adjusted index edged 0.6 percent higher in December.

    Compared with December 2007, the index declined 14.1 percent, the biggest year-over-year decrease since February 1996. During the fourth quarter, tonnage was down 6.0 percent from the same quarter in 2007.

    ATA Chief Economist Bob Costello said the December reading confirms that the United States is in the thick of a recession. “Motor carrier freight is a reflection of the tangible-goods economy, and December’s numbers leave no doubt that the United States is in the worst recession in decades,” Costello said. “It is likely truck tonnage will not improve much before the third quarter of this year. The economy is expected to contract through the first half of 2009 and then only grow slightly through the end of the year.”

    Starbucks to close another 300 stores, Cut 7,000 Jobs

    by Calculated Risk on 1/28/2009 04:22:00 PM

    More bad employment news. And more bad news for mall owners ...

    From MarketWatch: Starbucks plans to close 300 more shops as profit drops

    FOMC: Prepared to Purchase Longer-Term Treasuries

    by Calculated Risk on 1/28/2009 02:15:00 PM

    Fed Statement:

    The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

    Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

    In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

    The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

    Report: FBI saw Mortgage Fraud, Lacked Resources

    by Calculated Risk on 1/28/2009 12:43:00 PM

    From Paul Shukovsky at the Seattle Post-Intelligencer: FBI saw mortgage fraud early (hat tip John)

    It is clear that we had good intelligence on the mortgage-fraud schemes, the corrupt attorneys, the corrupt appraisers, the insider schemes," said a recently retired, high FBI official. Another retired top FBI official confirmed that such intelligence went back to 2002.

    The problem, according to the two FBI retirees and several other current and former bureau colleagues, is that the bureau was stretched so thin that no one noticed when those lenders began packaging bad mortgages into bad securities.

    "We knew that the mortgage-brokerage industry was corrupt," the first of the retired FBI officials told the Seattle P-I. "Where we would have gotten a sense of what was really going on was the point where the mortgage was sold knowing that it was a piece of dung and it would be turned into a security. But the agents with the expertise had been diverted to counterterrorism."
    So apparently the FBI missed the point where the "piece of dung" became a marketable "security".

    Boeing to Cut 10,000 Jobs

    by Calculated Risk on 1/28/2009 11:30:00 AM

    From MarketWatch: Boeing plans to slash 10,000 jobs as the economy weakens

    Boeing Co. said Wednesday it plans to slash about 10,000 jobs across its businesses, compared to a prior announcement of 4,500 job cuts from its commercial airplane unit.
    I'm not going to list all the layoffs, but 10,000 is a big number.

    WSJ on Jumbo Loans

    by Calculated Risk on 1/28/2009 10:53:00 AM

    This article has a couple of scary charts on delinquent jumbo loans. The situation is especially grim in Florida with close to 17% of jumbo loans delinquent.

    From the WSJ: Banks and Investors Face 'Jumbo' Threat (hat tip ShortCourage)

    About 6.9% of prime "jumbo" loans were at least 90 days delinquent in December, according to LPS Applied Analytics, a mortgage-data research firm. The rate was up sharply from 2.6% a year earlier. In comparison, delinquencies of non-jumbo prime loans that qualify for backing by government agencies climbed to 2.1% from 0.8% in December 2007.
    ...
    Conforming-loan limits top out at $625,000 in the highest-cost housing markets. To buy a more expensive home, buyers must put up larger down payments -- between 30% and 40% -- and pay higher mortgage rates. Rates on 30-year fixed jumbo mortgages stood at 6.87% last week, compared to 5.34% for conforming mortgages, a difference of 1.53 percentage points, according to HSH Associates, a financial publisher.
    I'm sure I'll receive a number of emails from mortgage brokers telling me they have a better deal (please no!), but it's no wonder sales of expensive homes have slowed significantly.

    Report: FDIC May Run "Bad Bank"

    by Calculated Risk on 1/28/2009 08:55:00 AM

    From Bloomberg: FDIC May Run ‘Bad Bank’ in Plan to Purge Toxic Assets

    The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up ...

    FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets ... President Barack Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said.
    ...
    The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin banks’ bad debt, in the hopes of stemming a crisis that has stripped more than 1.3 million Americans of their homes. Some lenders may be taken over by regulators and some management teams could be ousted as the government seeks to provide a shield to taxpayers.
    There is much more in the article.

    Tuesday, January 27, 2009

    FOMC Statement: Will the Fed buy longer-term Treasuries?

    by Calculated Risk on 1/27/2009 11:26:00 PM

    Obviously the Fed will not cut the federal funds rate this month, however the Fed mentioned last month that they would evaluate buying longer-term Treasuries.

    From the December Fed statement:

    As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
    emphasis added
    So I'd expect some sort of discussion or announcement about the evaluation. When the Fed issued the statement in December, the Ten Year was yielding 2.5% or so. Following the announcement, the yield declined to almost 2.0%, but is now back to 2.5% again.

    Just something to look for in additional to the bleak outlook.

    House Panel Approves Cram Downs

    by Calculated Risk on 1/27/2009 07:08:00 PM

    From the WSJ: U.S. House Panel Approves Mortgage Measure (hat tip Ken)

    A measure to allow judges to reduce the principal amounts of mortgages for troubled borrowers in bankruptcy cleared a key hurdle Tuesday when it was approved by a U.S. House panel.
    ...
    Under the legislation, borrowers would be eligible to have a bankruptcy judge reduce the principal balance on their home loan -- a move known as a "cram down."
    ...
    In key concessions to the banking industry, Mr. Conyers agreed to alter the legislation to allow court-ordered modifications only for existing mortgages and to require that borrowers contact their lender at least 15 days before filing bankruptcy.
    ...
    In another change, the legislation will now require recipients of cram downs who resell their home within five years to share the proceeds with their lender.
    Tanta argued that cram downs would help discipline lenders in the future. So I think she'd consider the concession to make the legislation applicable to only existing mortgages significant. Excerpting from Tanta's Just Say Yes To Cram Downs
    I am fully in favor of removing restrictions on modifications of mortgage loans in Chapter 13, but not necessarily because that helps current borrowers out of a jam. I'm in favor of it because I think it will be part of a range of regulatory and legal changes that will help prevent future borrowers from getting into a lot of jams, which is to say that it will, contra MBA, actually help "stabilize" the residential mortgage market in the long term. Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under BK law.

    CNBC: "Bad bank" plan "gaining momentum"

    by Calculated Risk on 1/27/2009 05:38:00 PM

    From Steve Liesman at CNBC: Plan for Banks' Toxic Debt May Be Unveiled Next Week

    The Obama administration is close to deciding on a plan to purchase bad—or non-performing and illiquid—assets from banks ... The plan could be announced early next week.

    The so-called "bad bank" plan, would address the key problem of how to price the assets by using a model-pricing mechanism.

    The model would take account of the government's ability to hold onto assets, even to maturity, and pay for the them with cheap funding. Result: the government might end up paying more than current market prices for the securities.

    On the other hand, if the government paid less than the value at which the asset is carried on the bank's books, the bank would issue common equity to the government.
    ...
    A Treasury official said nothing will be announced this week and would not comment "on specific policy decisions that have yet to be made."
    I'm skeptical of a "model-pricing mechanism" that adjusts the price of non-performing assets higher because the government has a lower borrowing cost. What then happens to the government's borrowing costs in the future?

    SL Green: Manhattan Office Vacancy Rate to Hit 12%

    by Calculated Risk on 1/27/2009 05:23:00 PM

    From Bloomberg: New York Office Vacancies Rising to 12% by 2011, SL Green Says

    Manhattan office vacancies may rise to 12 percent within 24 months, SL Green Realty Corp. Chief Executive Officer Marc Holliday said today on a conference call.

    SL Green, New York’s biggest office landlord with 23.2 million square feet ...
    From the SL Green conference call (hat tip Brian):
    “Clearly this is a market where we are relooking at the ways we lease and do business with tenants. We are more cautious today. We have increased our security deposit requirements for tenants that are less than obviously credit worthy and this is something that we have done in other bad markets. It's paid off for us. It's kept our credit losses to a minimum in good and bad market. We are also doing more net effective deals where we put out less capital and pay less commission on slightly lower rents but rents that still provide for uptick relative to prior escalated rents.

    The market however is certainly feeling the pressure of job losses, Financial Services contraction, sublet space and a limited but growing number of business failures. We can't help but expect that vacancy rate in midtown is going to rise beyond where we had originally forecasted those vacancy rates to be at around ten to 12%. At the moment those rates seem to be at around eight to 9% vacant currently, maybe even 10% if you take into account whatever space we think will be coming available directly or indirectly online in 2009. And we think that that vacancy rate could easily now hit 12% or more over the next 24 months.
    emphasis added
    Mayor Bloomberg released a report on the NY City economy in early November. Here is a graph of their projected vacancy rate and rents (close to the SL Green projections):

    NYC Office Rents and Vacancy Rate Click on graph for larger image in new window.

    This graph shows the actual and projected (by the NYC OMB) rents and office vacancy rate for NYC Class A buildings.

    The vacancy rate is expected to rise from about 7.5% to 13%, and rents are expect to decline by 20% or more from the peak.