Wednesday, September 30, 2009

Summary: Today and Tomorrow

by Calculated Risk on 9/30/2009 09:40:00 PM

A quick summary and a look ahead ...

  • The OCC and OTS Q2 Mortgage Metrics Report showed rising mortgage delinquencies and foreclosures. There is also a huge backlog of foreclosures in process. Also see: Modification Re-Default Rates

  • The Chicago PMI report showed declining business activity in the Chicago region.

  • ADP reported nonfarm private employment decreased 254,000. The BLS report for September will be released on Friday.

  • From the WSJ: CIT Draws Up Bankruptcy Option
    CIT Group Inc. upped the ante with its creditors by drawing up a prepackaged bankruptcy plan, two people familiar with the matter said Wednesday. ... Another person familiar with the matter said CIT likely wouldn't roll out the debt-exchange offer and prepackaged bankruptcy solicitation until late Thursday night.
    CIT would be the fifth largest bankruptcy in U.S. history behind Lehman Brothers, Washington Mutual, WorldCom and General Motors.


  • More employment reports: Challenger & Gray corporate layoffs, and weekly initial jobless claims.

  • Personal income and Outlays for August.

  • Auto Sales for September

  • ISM Manufacturing Index

  • Construction Spending

  • Pending Home Sales Index

    And Bernanke testifies on financial reform.

    So I apologize in advance for all the posts.

  • BofA CEO Ken Lewis to Retire

    by Calculated Risk on 9/30/2009 05:48:00 PM

    From Bloomberg: Bank of America’s Chief Executive Ken Lewis to Retire Dec. 31

    No successor named.

    Not sure what to make of this.

    BofA Press Release: Ken Lewis Announces His Retirement

    "Bank of America is well positioned to meet the continuing challenges of the economy and markets," said Lewis. "I am particularly heartened by the results that are emerging from the decisions and initiatives of the difficult past year-and-a-half."

    "The Merrill Lynch and Countrywide integrations are on track and returning value already," Lewis noted. "Our board of directors and our senior management include more talent, and more diversity of talent, than at any time in this company's history. We are in position to begin to repay the federal government's TARP investments. For these reasons, I decided now is the time to begin to transition to the next generation of leadership at Bank of America."

    OCC and OTS: Modification Re-Default Rates

    by Calculated Risk on 9/30/2009 04:02:00 PM

    Here is some more data from the Office of the Comptroller of the Currency and the Office of Thrift Supervision: OCC and OTS Release Mortgage Metrics Report for Second Quarter 2009

    Modified Loan Performance ... [T]he percentage of loans that were 60 or more days delinquent or in the process of foreclosure rose steadily in the months subsequent to modification for all vintages for which data were available. Modifications made in third quarter 2008 showed the highest percentage of modifications that were 60 or more days past due following the modification. Modifications made during fourth quarter 2008 and first quarter 2009 performed better in the first three to six months after the modification than those made in the third quarter 2008.
    Note: This doesn't include HAMP yet because all of those modifications are still in the "trial period". That raises a question: If a borrower re-defaults during the trial, will they still be considered a "re-default"? Something to watch for if the re-default rate drops sharply next quarter - they might be excluding the trial period re-defaulters.

    Re-Default Rates Click on graph for larger image.

    This graph shows the cumulative re-default rate by quarter of modifications. About 25% to 30% of modifications fail in the first three months.

    For Q1 and Q2 2008, about 55% of borrowers have re-defaulted. Q3 2008 will probably be worse, and Q4 2008 and Q1 2009 about the same.

    Over time, I expect a very high re-default rate since many of these modifications are just "extend and pretend" (the missed payments and fees are added to the principal, and the rate is reduced for a few years), although about 10% of borrowers received a principal reduction in Q2 (more than double as in Q1).

    Restaurants: 24th Consecutive Month of Contraction

    by Calculated Risk on 9/30/2009 02:11:00 PM

    Note: Any reading below 100 shows contraction for this index.

    From the National Restaurant Association (NRA): Restaurant Performance Index Declined in August as Same-Store Sales and Customer Traffic Slipped

    Restaurant industry performance softened in August, as the National Restaurant Association’s comprehensive index of restaurant activity posted a modest decline. 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 97.9 in August, down 0.2 percent from July and its third decline in the last four months.
    The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 96.0 in August – down 0.9 percent from July and its sharpest decline in nearly a year. In addition, August represented the 24th consecutive month below 100, which signifies contraction in the current situation indicators.

    The sharp decline in Current Situation Index was the result of deteriorating sales and traffic levels in August.

    emphasis added
    Restaurant Performance Index Click on graph for larger image in new window.

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

    The restaurant business is still contracting ...

    No Green Shoots for you!

    OCC and OTS: Foreclosures, Delinquencies increase in Q2

    by Calculated Risk on 9/30/2009 11:32:00 AM

    From the Office of the Comptroller of the Currency and the Office of Thrift Supervision: OCC and OTS Release Mortgage Metrics Report for Second Quarter 2009

    This OCC and OTS Mortgage Metrics Report for the second quarter of 2009 provides performance data on first lien residential mortgages serviced by national banks and federally regulated thrifts. The report covers all types of first lien mortgages serviced by most of the industry’s largest mortgage servicers, whose loans make up approximately 64 percent of all mortgages outstanding in the United States. The report covers nearly 34 million loans totaling almost $6 trillion in principal balances and provides information on their performance through the end of the second quarter of 2009 (June 30, 2009).

    The mortgage data reported for the second quarter of 2009 continued to reflect negative trends influenced by weakness in economic conditions including high unemployment and declining home prices in weak housing markets. As a result, the number of seriously delinquent mortgages and foreclosures in process continued to increase. However, a lull in newly initiated foreclosures occurred as servicers worked to implement the “Making Home Affordable” program during the second quarter.
    The percentage of current and performing mortgages in the portfolio decreased by 1.4 percent from the previous quarter to 88.6 percent of all mortgages in the portfolio. All categories of delinquencies increased from the previous quarter, with serious delinquencies—loans 60 or more days past due and loans to delinquent bankrupt borrowers—reaching 5.3 percent of all mortgages in the portfolio, an increase of 11.5 percent from the previous quarter. Foreclosures in process reached 2.9 percent of all mortgages, a 16.2 percent increase.
    In the second quarter, 15.2 percent of Payment Option ARMs were seriously delinquent, compared with 5.3 percent of all mortgages, and 10 percent were in the process of foreclosure, more than triple the 2.9 percent rate for all mortgages.
    Mortgages guaranteed by the U.S. government, primarily through the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), also showed higher delinquencies than the overall servicing portfolio. Serious delinquencies increased to 7.5 percent of all government guaranteed mortgages, up from 6.8 percent in the previous quarter.
    emphasis added
    Much of the report focuses on modifications and recidivism, but this report also shows far more seriously delinquent prime loans than subprime loans (by number, not percentage).

    Seriously Delinquent Loans Click on graph for larger image.

    We're all subprime now!

    Note: "Approximately 13 percent of loans in the data were not accompanied by credit scores and are classified as “other.” This group includes a mix of prime, Alt-A, and subprime. In large part, the loans were result of acquisitions of loan portfolios from third parties where borrower credit scores at the origination of the loans were not available."

    This report covers about two-thirds of all mortgages. There are far more prime loans than subprime loans - and the percentage of delinquent prime loans is much lower than for subprime loans. However, there are now significantly more prime loans than subprime loans seriously delinquent. And prime loans tend to be larger than subprime loans, so the losses from each prime loan will probably be higher.

    Seriously Foreclosure Activity
    The second graph shows foreclosure activity.

    Notice that foreclosure in process are increasing sharply, but completed foreclosures were only up slightly.

    The only reason initiated foreclosures declined slightly was because Q1 was revised up significantly. Short sales remain mostly irrelevant.

    The next wave of completed foreclosures is about to break, but the size of the wave depends on the modification programs.

    Chicago Purchasing Managers Index Declines in September

    by Calculated Risk on 9/30/2009 09:54:00 AM

    From MarketWatch: Business activity declines in Chicago area

    The Chicago purchasing managers index fell to 46.1% in September from 50.0% in August ... The new orders index backtracked to 46.3% from 52.5% in August. The employment index was essentially unchanged at 38.8% ...
    Readings below 50% indicate contraction.

    This index is for both manufacturing and service activity in the Chicago region. In general the Chicago area is considered representative of the mix of manufacturing and non-manufacturing business activity in the nation, so a decline in the Chicago PMI is significant.

    The national ISM manufacturing index will be released tomorrow, and the ISM non-manufacturing index on Monday.

    MBA: 30 Year Mortgage Rate Falls to 4.94 Percent

    by Calculated Risk on 9/30/2009 08:42:00 AM

    The MBA reports: Mortgage Applications Decrease

    The Market Composite Index, a measure of mortgage loan application volume, decreased 2.8 percent on a seasonally adjusted basis from one week earlier. ...

    The Refinance Index decreased 0.8 percent from the previous week and the seasonally adjusted Purchase Index decreased 6.2 percent from one week earlier.
    The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.94 percent from 4.97 percent ...
    MBA Purchase Index Click on graph for larger image in new window.

    This graph shows the MBA Purchase Index and four week moving average since 2002.

    The Purchase index declined to 270.4, and the 4-week moving average declined to 283.9.

    Note: The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007, even though activity was actually declining.

    Tuesday, September 29, 2009

    Survey: Home Purchase Market by Homebuyer Category

    by Calculated Risk on 9/29/2009 11:20:00 PM

    Here is some national data on the types of homebuyers in August. This is from a survey by Campbell Communications (excerpted with permission).

    Source: Tracking Real Estate Market Conditions, a whitepaper regarding the Campbell/Inside Mortgage Finance Monthly Survey on Real Estate Market Conditions.

    Sales by Buyer Type Click on graph for larger image in new window.

    The Campbell survey breaks out sales by buyer type.

    According to the Campbell survey about 64% of sales in August were to first-time buyers and investors.

    Survey results show that first-time homebuyers, motivated by first-time homebuyer tax credit, made up the largest component of demand in August 2009. In the summer months, current homeowners also make up a significant component of demand. (Note: rounding on graph figures precludes totaling to 100%.)
    Sales by Buyer Type For comparison, here is the same breakdown for Q2.

    According to the Campbell survey over 70% of sales in Q2 were to first-time buyers and investors.

    Whenever the tax credit expires (whether or not is extended), the percent of first time buyers will decline.

    Report: CIT Preparing Plan to Hand Control to Bondholders

    by Calculated Risk on 9/29/2009 07:46:00 PM

    From the WSJ: CIT in Last-Ditch Rescue Bid

    CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in outstanding debt ... The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company. ... If not enough bondholders agreed to the plan, the company could seek to execute the restructuring in bankruptcy court, the person said. The result could potentially be one of the largest Chapter 11 bankruptcy-court filings in U.S. history.
    The writing was on the wall in July when CIT obtained a $3 billion emergency loan secured by all of their assets. As I noted in July, the emergency loan just kicked the can down the road.

    Now it appears CIT is at the end of the road ...

    Citi Still Using FDIC TLGP

    by Calculated Risk on 9/29/2009 07:26:00 PM

    From Dow Jones: Citi Prices $5B Four-Part FDIC-Backed Deal-Source

    Citigroup Inc. priced a $5 billion government-backed bond Tuesday, its second benchmark-sized bond offering this month under the U.S. Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program ... Since November of last year, when the FDIC program was launched, Citi has issued $49.6 billion of these deals ...
    If the TLGP is extended, Citi might be the only user.

    Also, the FDIC earlier today announced a plan to "require insured institutions to prepay their estimated quarterly risk-based assessments" for the next three years. This plan would raise approximately $45 billion.

    Bloomberg has a story on the costs: Bank of America, 3 Other Banks’ FDIC Fees May Top $10 Billion
    Bank of America, the biggest U.S. lender by deposits, may owe $3.5 billion under the FDIC proposal for banks to prepay three years of premiums, based on the lowest assessment rate multiplied by the bank’s $900 billion in second-quarter U.S. deposits.
    U.S. bank premiums range from 12 cents per $100 in deposits for the safest lenders to 45 cents for banks the U.S. considers risky, said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America.
    Based on the current assessment and each bank’s deposits, Wells Fargo & Co.’s fee may be $3.2 billion based on its $814 billion in deposits, JPMorgan Chase & Co. may pay $2.4 billion and Citigroup Inc. $1.2 billion.

    Market Update

    by Calculated Risk on 9/29/2009 04:12:00 PM

    Note: Looking ahead, Thursday and Friday will be heavy economic news days with vehicle sales (how bad will the post-clunker slump be?), construction spending, personal income and outlays for August, the employment report on Friday and more.

    A couple of market graphs ... the S&P 500 was first at this level in March 1998; about 11 1/2 years ago.

    S&P 500 Click on graph for larger image in new window.

    The first graph shows the S&P 500 since 1990.

    The dashed line is the closing price today.

    The S&P 500 is up 57% from the bottom (384 points), and still off 32% from the peak (505 points below the max).

    Stock Market Crashes The second graph is from Doug Short - Instead of comparing the markets from the peak (See: the Four Bad Bears), Doug Short matched up the market bottoms for four crashes (with an interim bottom for the Great Depression).

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

    House Prices: Stress Test and Price-to-Rent

    by Calculated Risk on 9/29/2009 12:56:00 PM

    This following graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

    Case-Shiller Stress Test Comparison The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

    Case-Shiller Composite 10 Index (SA), July: 154.69

    Stress Test Baseline Scenario, July: 147.23

    Stress Test More Adverse Scenario, July: 138.14

    Unlike with the unemployment rate (worse than both scenarios), house prices are performing better than the the stress test scenarios.


    In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

    Here is a similar graph through July 2009 using the Case-Shiller Composite Indices (SA):

    Price-to-Rent Ratio Click on image for larger graph in new window.

    This graph shows the price to rent ratio (January 2000 = 1.0) for the Case-Shiller composite indices. For rents, the national Owners' Equivalent Rent from the BLS is used.

    Back in 2004 or 2005, it was obvious that prices were out of line with fundamentals. This was clear in the price-to-income and price-to-rent ratios - and there was also widespread speculation (the definition of a bubble).

    Now, looking at the price-to-rent ratio based on the Case-Shiller indices, the adjustment in the price-to-rent ratio is mostly behind us. Although the ratio is still a little high. Note: some would argue the ratio being a little too high is reasonable based on mortgage rates and "affordability".

    With rents now falling almost everywhere, a further downward adjustment in house prices seems likely.

    FDIC Seeks $45 Billion in Prepayments from Banks

    by Calculated Risk on 9/29/2009 11:03:00 AM

    From the FDIC:

    The Board of Directors of the Federal Deposit Insurance Corporation today adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid assessments collected would be approximately $45 billion.
    MarketWatch has more details: Fund to protect deposits has shrunk to low levels
    Absent the prepaid premiums, the FDIC said that the agency's Deposit Insurance Fund ... would face a liquidity crunch early next year, and that it will be operating in the red by the end of this month.

    The FDIC said that the prepayments would raise $45 billion for the fund. The board said it estimates that total bank failure losses could reach $100 billion by 2013.
    emphasis added

    Fannie Mae Serious Delinquency Rate increases Sharply

    by Calculated Risk on 9/29/2009 10:33:00 AM

    Here is a hockey stick graph ...

    Fannie Mae Seriously Delinquent Rate Click on graph for larger image in new window.

    Fannie Mae reported that the serious delinquency rate for conventional loans in its single-family guarantee business increased to 4.17 percent in July, up from 3.94 percent in June - and up from 1.45% in July 2008.

    "Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans. These rates are based on conventional single-family mortgage loans and exclude reverse mortgages and non-Fannie Mae mortgage securities held in our portfolio."

    Just more evidence of some shadow inventory and the next wave of foreclosures.

    Update: These stats include Home Affordable Modification Program (HAMP) loans in trial modifications.

    Case-Shiller House Prices increase in July

    by Calculated Risk on 9/29/2009 09:00:00 AM

    S&P/Case-Shiller released their monthly Home Price Indices for July this morning.

    This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted data - others report the NSA data.

    Case-Shiller House Prices Indices Click on graph for larger image in new window.

    The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

    The Composite 10 index is off 31.6% from the peak, and up about 1.3% in July.

    The Composite 20 index is off 30.6% from the peak, and up 1.2% in July.

    Case-Shiller House Prices Indices The second graph shows the Year over year change in both indices.

    The Composite 10 is off 12.8% from July 2008.
    The Composite 20 is off 11.5% from last year.

    This is still a very strong YoY decline.

    The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

    Case-Shiller Price Declines Prices increased (SA) in 17 of the 20 Case-Shiller cities in July.

    In Las Vegas, house prices have declined 55.2% from the peak. At the other end of the spectrum, prices in Dallas are only off about 4.9% from the peak - and up in 2009. Prices have declined by double digits almost everywhere.

    The debate continues - is the price increase because of the seasonal mix (distressed sales vs. non-distressed sales), the impact of the first-time home buyer frenzy on prices, and the slowdown in the foreclosure process (with a huge shadow inventory), or have prices actually bottomed? I think we will see further house price declines in many areas.

    I'll compare house prices to the stress test scenarios soon.

    Monday, September 28, 2009

    The Housing Tax Credit and the Consumer Price Index

    by Calculated Risk on 9/28/2009 11:14:00 PM

    Here are some unintended consequences ...

    According to the NAR, the "first-time" homebuyer tax credit will lead to an additional 350 thousand homes sold in 2009. As I've mentioned before, this tax credit is inefficient and poorly targeted, costing taxpayers about $43,000 for each additional home sold.

    And where are those 350 thousand buyers coming from? My guess is most were probably renters (a few might have been living in their parent's basements!).

    Rental Vacancy Rate Click on graph for larger image in new window.

    And what will be the impact on the rental vacancy rate?

    The rental vacancy rate was already at a record 10.6% in Q2 2009. Some quick math suggests the tax credit will push the national vacancy rate above 11% soon.

    And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

    And falling rents are already pushing down owners' equivalent rent (OER), and my guess is OER will probably turn negative soon. Since OER is the largest component of CPI (and almost 40% of core CPI), this will push down CPI for some time.

    Extend the tax credit and we might be looking at the core CPI showing deflation. Welcome to the Fed's nightmare.

    MBIA Cut to Junk

    by Calculated Risk on 9/28/2009 08:38:00 PM

    From Reuters: S&P cuts MBIA, MBIA Insurance as losses continue

    Standard & Poor's on Monday cut its ratings on MBIA Inc and its structured finance insurance arm, MBIA Insurance Corp, citing an expectation the company will continue to take significant losses from insuring risky loans. ... The outlook for both companies is negative ...
    From S&P:
    We downgraded MBIA and the holding company because macroeconomic conditions continue to contribute to losses on the group's structured finance products. Losses on MBIA's 2005-2007 vintage direct RMBS and CDO of ABS could be higher than we had expected. However, the downgrade also reflects potentially increased losses in other asset classes, including but not limited to CMBS and--for other years prior to 2005--within RMBS.
    The negative outlook on MBIA and the holding company reflects our view that adverse loss development on the structured finance book could continue. In the next few years, liquidity will likely be adequate to meet debt-service and holding-company obligations (including operating expenses). However, increased losses and earnings volatility could still occur. ... Considering the runoff nature of the franchise, it is unlikely that we would raise the rating. Alternatively, if there were increased losses within the investment portfolio, potential reserve charges, or diminished liquidity, we could take a negative rating action.
    emphasis added
    There is still significant counterparty risk for the banks from both MBIA and Ambac.

    FDIC Considers Having Banks Prepay Assessments

    by Calculated Risk on 9/28/2009 04:25:00 PM

    From the Financial Times: FDIC considers calling for bank advances

    The FDIC’s board, which meets on Tuesday to discuss options, is currently leaning towards asking banks to pay several years’ worth of its fees in advance ...
    excerpted with permission
    The other alternatives are 1) borrowing from the Treasury, 2) borrowing from healthy banks, or 3) assessing banks another special fee.

    The options of borrowing from the Treasury, or from healthy banks, are apparently off the table for now. On Friday, FDIC Chairwoman Sheila Bair said about borrowing from banks: "It's a possibility, I assume. I don't see that as a preferred option, but it is something in the statute."

    So it appears the FDIC will ask for three years of assessments in advance, or about $36 billion according to Reuters.

    The advantage to the banks of prepaying assessments (as opposed to another special assessment) is the banks don't have to record the expense immediately.

    PIMCO: Personal Saving Rate to Exceed 8 Percent

    by Calculated Risk on 9/28/2009 01:08:00 PM

    From Bloomberg: Pimco’s Clarida Says U.S. Savings Rate May Exceed 8%

    Pacific Investment Management Co. strategic adviser Richard Clarida said the U.S. savings rate may exceed 8 percent, hurting consumer spending and weighing on the economic recovery.

    “I’m in the glass is half empty camp,” Clarida said during an interview in New York on Bloomberg radio. “Traditionally the consumer comes to the rescue of economic recoveries. We’ll see a more subdued consumer.”
    “Economic growth will be choppy,” Clarida said. “We see the economy recovering. There will be some quarters above two percent, and others below.”
    “At some point as unemployment declines, the Fed will need to renormalize rates,” Clarida said. “It’s too soon to tell the pace at which they will renormalize. I don’t think there will be a Fed hike until late 2010 or 2011.”
    The article mentions that future data suggests traders believe there is a 72 percent change that the Fed will raise the Fed Funds rate by April. I agree with Clarida that the Fed will not hike rates until late 2010 - at the earliest.

    And here is a graph of the annual saving rate back to 1929(1). Note: 2009 is through Q2.

    Personal Saving Rate Click on graph for large image.

    Notice that the saving rate went negative during the Depression as household used savings to supplement income. And the saving rate rose to over 25% during WWII.

    There is a long period of a rising saving rate (from after WWII to 1974) and a long period of a declining saving rate (from 1975 to 2008).

    Some of the change in saving rate was related to demographics. As the large baby boom cohort entered the work force in the mid '70s, the saving rate declined (younger families usually save less), however I expected the saving rate to start to rise as the boomers reached their mid-40s (in the late '90s). This didn't happen.

    Perhaps the twin bubbles - stock market and housing - deluded the boomers into thinking they had saved more than they actually had. It definitely appears many families treated mortgage equity extraction as part of their income during the bubble years - and the Home ATM is now closed.

    Whatever the reason, I expect the saving rate to continue to rise over the next year or two. And that raises a question: what will be the impact on PCE of a rising saving rate?

    I created the following scatter graph for the period from 1955 through early 2009. This compares the annual change in PCE with the annual change in the saving rate.

    Personal Saving Rate vs. PCE Note that R-squared is only .125, so there are other factors impacting PCE (like changes in income!).

    But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010 (as PIMCO expects), this suggests that real PCE growth will be about 1% below trend per year.

    So with wages barely rising, and a rising saving rate suppressing PCE, I'd expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), I expect the recovery to be very sluggish too (what Clarida calls "choppy").

    (1)Note: much of this analysis is from MEW, Consumption and Personal Saving Rate in May.

    Credit Indicators

    by Calculated Risk on 9/28/2009 11:18:00 AM

    I haven't posted this in some time. During the crisis these indicators showed the stress in the credit markets - now the LIBOR and TED spread just show that the Fed has been effective in lowering these rates. These might be interesting to watch as the Fed unwinds their various policy initiatives.

    From Dow Jones: Key US Dollar Libor Downward Trend Stabilizes Monday

    The cost of borrowing longer-term U.S. dollars in the London interbank market stabilized Monday, while the equivalent euro and sterling rates fell to record lows.

    Data from the BBA showed three-month dollar Libor ... remained unchanged from Friday at 0.2825%.

    The three-month rate has fallen steeply since reaching 4.81875% on Oct. 10 2008, when interbank market tensions peaked.
    That is good news for anyone with an ARM tied to the LIBOR.

    A2P2 Spread Click on graph for larger image in new window.

    There has been improvement in the A2P2 spread. This has declined to 0.13. This is far below the record (for this cycle) of 5.86 after Thanksgiving, and is about the normal spread.

    This is the spread between high and low quality 30 day nonfinancial commercial paper.

    TED Spread The TED spread is now at the low end of the normal range of 19.22.

    This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 463 on Oct 10th and a normal spread is below 50 bps.

    Spread Corporate and Treasury The third graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

    The spread has decreased sharply, but the spreads are still high, especially for lower rated paper.

    The Moody's data is from the St. Louis Fed:
    Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

    Chicago Fed Index: Economic activity lower in August

    by Calculated Risk on 9/28/2009 08:42:00 AM

    From the Chicago Fed: Index shows economic activity lower in August

    The Chicago Fed National Activity Index was –0.90 in August, down from –0.56 in July. Three of the four broad categories of indicators made negative contributions to the CFNAI in August; the production and income category made a positive contribution to the index for the second consecutive month.
    Chicago Fed National Activity Index Click on table for larger image in new window.

    This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed:

    "[T]he Chicago Fed National Activity Index (CFNAI), is a weighted average of 85 existing, monthly indicators of national economic activity. The CFNAI provides a single, summary measure of a common factor in these national economic data ...

    [T]he CFNAI-MA3 appears to be a useful guide for identifying whether the economy has slipped into and out of a recession. This is useful because the definitive recognition of business cycle turning points usually occurs many months after the event. For example, even though the 1990-91 recession ended in March 1991, the NBER business cycle dating committee did not officially announce the recession’s end until 21 months later in December 1992. ...

    When the economy is coming out of a recession, the CFNAI-MA3 moves significantly into positive territory a few months after the official NBER date of the trough. Specifically, after the onset of a recession, when the index first crosses +0.20, the recession has ended according to the NBER business cycle measures."

    Note: this is based on only a few recessions, but this is one of the indicators to watch to determine when the recession ends - although it will go positive a "few months after the official NBER date of the trough".

    Sunday, September 27, 2009

    Report: New Short-term Borrowing Rules being considered for Banks

    by Calculated Risk on 9/27/2009 09:52:00 PM

    The Financial Times reports that U.S. financial regulators are considering new ratios for banks to determine the dependence on short-term borrowing: US banks face short-term borrowing rules

    ... “Capital is critical, but liquidity enhancement is a necessary piece of the puzzle,” said Kevin Bailey, deputy comptroller [OCC] ...

    One ratio would compare a bank’s assets to its stable sources of funding, such as deposits or longer-term unsecured debt.
    excerpted with permission
    These measures are intended to gauge the liquidity of banks - and prevent future banks runs like with what happened at Bear Stearns and Lehman Brothers.

    The Wall Street banks relied heavily on commercial paper, and when that market froze, the banks experienced a severe liquidity crisis.

    Some smaller regional and local have relied on brokered deposits to fund their short term needs. The NY Times had a article on brokered deposits back in July: For Banks, Wads of Cash and Loads of Trouble
    To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. ...

    Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down. But in one of the hidden lobbying battles in Washington this year, the banks are pushing hard to keep the money flowing.

    So far the banks are winning, and the hot money continues to fuel bank growth.
    It sounds like the regulators are pushing back.

    Mortgages: New Rules for High-Cost Loans take effect on Oct 1st

    by Calculated Risk on 9/27/2009 05:12:00 PM

    From the NY Times: New Rules Coming Soon

    On Oct. 1, new rules adopted by the Federal Reserve will go into effect, requiring greater diligence on the part of mortgage lenders and brokers who make so-called high cost loans for borrowers with weak credit. The interest rates on these loans are at least 1.5 percentage points higher than the average prime mortgage rate.
    The regulations — finalized in July 2008 but only now being put into effect — bar lenders from making a high-cost mortgage without verifying that a borrower could repay the loan in the conventional way, and not simply through a foreclosure sale.
    During the home lending boom from 2003 to 2006, subprime lenders would often offer loans without requiring borrowers to prove that they could make the monthly payments. With stated-income loans — or as some called them, “liar loans” — borrowers could easily fabricate annual income figures and even buy a home without a down payment.
    According to Uriah King, a senior policy associate for the Center for Responsible Lending, a consumer advocacy group based in Durham, N.C., the new federal rules are “important, and they are good.”

    But Mr. King says the new regulations are “five years too late.”
    It is hard to believe it has taken this long. I think Uriah King meant "eight years (or more) too late"!

    Here is the 2008 Press Release from the Fed:
    The final rule adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling. For loans in this category, these protections will:

    • Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."
    • Require creditors to verify the income and assets they rely upon to determine repayment ability.
    • Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
    • Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

    The Condo Glut

    by Calculated Risk on 9/27/2009 12:46:00 PM

    In Delaware from The News Journal: Justison Landing developer to auction condos

    In a risky strategy to move condominiums, the developers of the much-ballyhooed Justison Landing complex on Wilmington's Riverfront plan to auction off a third of the units in the waterfront community next month.
    Robert Buccini, a partner in Buccini/Pollin Group Inc. in Wilmington, said the auction of 38 condominiums and two town houses in a 120-condo building on the Christina River is designed to stimulate sales ... So far, about 25 condos have been sold in the building -- about two sales a month since the building was completed a year ago.

    "We're basically selling at discount so we can move on to our next project," Buccini said.
    From the Jacksonville Business Journal: Summer House condos to be auctioned
    Twenty-three condominiums in the Summer House in Old Ponte Vedra will go up for auction.
    From KUOW News in Seattle: Condo Glut
    This weekend, 40 units are up for auction and the minimum bids are typically less than half the listed price. ... there is a veritable glut of brand new condominiums on the market. A few years ago, it seemed, every parking lot in downtown Seattle was being turned into condos. Many of those projects are coming on line now, during the worst real estate market in decades.

    At Brix, which completed construction late last year, two thirds of the building's units are still unsold.
    And a twist in New Jersey, from the NY Times: In Jersey City, Jump-Starting Condo Sales
    At the Saffron, a nearly complete 76-unit condominium complex in the thick of this city’s downtown, the Fields Development Group is trying something new ... The first units — a minimum of 9, a maximum of 15 — will be auctioned off before the grand opening and the start of conventional marketing.
    Ending sales with an auction — after fair-market values for a building have already been well established — is a tried-and true-technique, of course. But the auctioneers for the Saffron, at Sheldon Good & Company, say they have never conducted a “jump-start” auction before.
    "Stimulate"? "Jump-start"? Why not just call it "dump" or "liquidate"?

    But this is a reminder that new high rise condos are not included in the new home inventory report from the Census Bureau, and are also not included in the existing home sales report from the NAR (unless they are listed). These uncounted units are concentrated in Miami, Las Vegas, San Diego and other large cities - but as these articles show, there are new condos almost everywhere.

    The Fed and Subprime Lending: The Watchdog that Didn't Bark

    by Calculated Risk on 9/27/2009 09:21:00 AM

    From the WaPo: As Subprime Lending Crisis Unfolded, Watchdog Fed Didn't Bother Barking

    ... Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

    The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

    "In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

    ... since its creation, the Fed has held a second job as a banking regulator, one of four federal agencies responsible for keeping banks healthy and protecting their customers. ... During the boom, however, the Fed left those powers largely unused. ... The Fed's performance was undercut by ... the doubts of senior officials about the value of regulation ...
    The failure of oversight was a serious and unfortunately common problem during the boom. For more examples see: Inspector General: FDIC saw risks at IndyMac in 2002 and Federal Reserve Oversight and the Failure of Riverside Bank of the Gulf Coast.

    The WaPo title reminds us of the conversation between Colonel Ross and Sherlock Holmes in Sir Arthur Conan Doyle's "Silver Blaze":
    "Is there any point to which you would wish to draw my attention?"
    "To the curious incident of the dog in the night-time."
    "The dog did nothing in the night-time."
    "That was the curious incident," remarked Sherlock Holmes.

    Saturday, September 26, 2009

    Banks: Troubled Asset Ratio

    by Calculated Risk on 9/26/2009 09:25:00 PM

    The American University School and MSNBC have created a tool for tracking the "troubled asset ratio" for banks. This tool allows you to search for individual banks.

    Here is the description:

    [The] “troubled asset ratio” ... compares the sum of troubled assets with the sum of Tier 1 Capital plus Loan Loss Reserves. Generally speaking, higher values in this ratio indicate that a bank is under more stress caused by loans that are not paying as scheduled.

    Wendell Cochran, senior editor of the Investigative Reporting Workshop, and a former business reporter for the Kansas City Star, the Des Moines Register and Gannett News Service, was likely the first journalist to create this measure of bank health. He did that while covering banking for the Des Moines Register in the early 1980s. Later, at Gannett News Service, he was involved in projects published at USA TODAY and elsewhere that calculated this ratio for every bank and savings and loan in the nation.

    Others do similar calculations. The most widely used is the so-called Texas Ratio, created during the 1980s by a banking consultant. You can find various formulas for calculating this ratio, but they generally are in line with the method used by the Investigative Reporting Workshop. There is no attempt here to value the non-loan assets that may also be causing bank problems, such as mortgage-backed securities, collateralized debt obligations, etc.
    According to BankTracker, the national median troubled-asset ratio is 13 (a percentage of Tier 1 Capital plus Loan Loss Reserves). The most recent bank failure, Georgian Bank in Altanta Georgia had a ratio of 198.3.

    I looked up a few banks from the Unofficial Problem Bank List with Prompt Corrective Actions:

    NameCityStatePCATroubled Asset Ratio
    Peoples First Community BankPanama CityFL6/11/2009362.8
    Warren BankWarrenMI8/3/2009351.1
    Home Federal Savings Bank DetroitMI3/5/2009193.2
    Bank of ElmwoodRacineWI7/23/2009182.5
    American United BankLawrencevilleGA8/13/2009155.3
    Heritage BankTopekaKS3/31/2009149.1
    Bank 1stAlbuquerqueNM8/31/2009146.1

    WaPo: An Interview with Barney Frank

    by Calculated Risk on 9/26/2009 04:06:00 PM

    From the WaPo: Barney Frank Talks Back A couple of excerpts:

    Klein: What's the most important part of financial regulation?

    Frank: Limiting securitization. I believe the single biggest issue here is that people invented ways to lend money without worrying if they got paid back or not by securitizing the loan. When I was younger, the theory was if you had a high risk tolerance, you went into stocks. If you were safe and stodgy, you bought debt. But debt became the volatile aspect here.
    Klein: One theory of the crisis is that the problem wasn't traders and their high tolerance for risk. It was people fooling themselves into thinking this stuff was safe by slapping a triple-A rating on everything.

    Frank: I agree; the theory has always been that people bought debt because it was safer. The basic problem was that 30 years ago when people lent other people money, they expected to be paid back by the people they lent money to. So they were very careful. Two years ago, most loans were being made by people who were going to sell those loans to other people and didn't expect to be paid back.
    This is an interesting answer. About two years ago, I was asked to sum up the causes of the crisis in a few words, and I responded "Securitization and the lack of regulatory oversight". I then explained how rapid innovation in lending resulted in a disconnect between the borrower and the eventual debt holder.

    The mortgage lenders and Wall Street firms were disconnected from the performance of the actual loan (the "Originate-to-sell" model). At the same time, the rating agencies were evaluating the debt based on the historical performance of the old style lender-borrower relationship. The eventual debt holders relied on the rating agencies, without realizing the entire model had changed.

    Meanwhile the regulators were not following this advice:

    “Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.”
    William Seidman, "Full Faith and Credit", 1993.

    There is nothing inherently wrong with securitization or financial innovation. But the regulators should always be on the lookout for "a new way to make a loan that will not be repaid".

    IMF Managing Director: "Too early to claim victory"

    by Calculated Risk on 9/26/2009 01:28:00 PM

    A quote from Bloomberg: Strauss-Kahn Says Crisis Consequences Will Last Long Time

    “We will still have rising unemployment at least for a year,” [International Monetary Fund Managing Director Dominique] Strauss-Kahn said via videolink in an address to the Yalta European Strategy Conference from Washington. “From this point of view, the crisis isn’t over. It is too early to claim victory, even that we have avoided the worst situation. The consequences will be there for a long time.”
    Strauss-Kahn makes several key points:

  • Unemployment will continue to rise for some time.

  • The consequences of the crisis will "be there for a long time".

  • It is too early for a victory lap.

    Earlier this week, Strauss-Kahn expressed concern about the social consquences of the crisis (via Reuters):
    "In many areas of the world, what is at stake is not only higher unemployment or lower purchasing power, but life and death itself," Strauss-Kahn said.

    "We don't just care about growth for growth's sake, we also want to safeguard peace and prevent war," he said, adding: "Indeed, when low-income countries were doing well over the past decade or so, the incidence of war declined significantly. The great fear is that this trend could be reversed."

  • L.A. Times: A House is a Home

    by Calculated Risk on 9/26/2009 08:33:00 AM

    From Peter Hong at the LA Times: Don't bank on your home as an ATM (ht Ann). A few excerpts:

    For generations of Americans, a home was seen not simply as a dwelling, but as an engine of personal wealth. That view was promoted by the home-building and real estate sales industries as well as the U.S. government, which subsidized home loans and provided tax deductions for mortgage interest.
    Now, however, the worst housing crash since the Great Depression may mean that a home purchase ought to be considered with the same warning issued to investors in securities: Past performance is not indicative of future results.
    Leslie Appleton-Young, chief economist for the California Assn. of Realtors, said that the state's median home price used to rise and fall roughly in line with the national median. ... "It didn't really get out of whack until about four or five years ago," she said. "It was tied into financing."

    With lax mortgage standards a thing of the past, at least for now, Appleton-Young said, home price increases will be more moderate in the future, which should lead people to "a much more realistic assessment of why they're buying a home. They'll do so more for the consumption value; it's a place to raise your family, not your nest egg."
    "In the period post-World War II, you bought a home, gave your family a great place to live relative to the alternatives, and if all went well, in 20 years you didn't have a mortgage," said [Thomas Lawler, influential housing consultant and a former Fannie Mae official]. "That's what people ought to go back to."
    It makes sense for people to buy houses as a place to live, not as an investment.

    Perhaps Leslie Appleton-Young has lost track of time, but four years ago was 2005 - the peak of the housing insanity. She probably meant four or five years before 2006 (when prices peaked) as to when house prices in California started to detach from fundamentals.

    G-20 Agreements

    by Calculated Risk on 9/26/2009 01:47:00 AM

    From the NY Times: Group of 20 Agrees on Far-Reaching Economic Plan

    The leaders pledged to rethink their economic policies in a coordinated effort to reduce the immense imbalances between export-dominated countries like China and Japan and debt-laden countries like the United States, which has long been the world’s most willing consumer.

    The United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.

    ... for the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the International Monetary Fund.
    Imagine an export led recovery in the U.S. (as opposed to the typical recovery with consumer spending and housing leading the way). I'll believe it when I see it.

    Friday, September 25, 2009

    Problem Bank List (Unofficial) Sept 25, 2009

    by Calculated Risk on 9/25/2009 07:36:00 PM

    This is an unofficial list of Problem Banks.

    Changes and comments from surferdude808:

    Another week with significant changes to the Unofficial Problem Bank List as the FDIC released its enforcement actions for August. We will not get another release from the FDIC until the end of October.

    The Unofficial Problem Bank List grew by 23 institutions to 459 and aggregate assets total $297.2 billion, up from $294 billion last week. During the week, we added 25 institutions to the list while we removed 2 because of failure. The failures were Irwin Union Bank and Trust Company ($2.8 billion) and Irwin Union Bank, F.S.B. ($518 million).

    The largest asset additions include First Mariner Bank ($1.3 billion), Baltimore, MD; Anchor Mutual Savings Bank ($657 million), Aberdeen, WA; and NexBank ($560 million), Dallas, TX.

    For the other 23 additions, the average asset size is $178 million. The additions are concentrated in handful of states including Minnesota (5), California (4), Washington (4), and Georgia (3), which all continue to see banks with large CRE or C&D lending concentrations come under enforcement action.

    The list includes 2 new Prompt Corrective Action orders the FDIC issued against American United Bank ($112 million), Lawrenceville, GA; and Bank 1st ($109 million), Albuquerque, NM. It is long overdue for the agencies to start issuing more PCA orders.

    One other interesting item this week is that the FDIC issued a Cease & Desist order on August 31st against Georgian Bank ($2.2 billion), Atlanta, GA, which was closed today. We typically remove failures from the subsequent week’s list but, in this case, we did not add Georgian Bank otherwise aggregate assets would have been $299.4 billion.
    The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808.

    See description below table for Class and Cert (and a link to FDIC ID system).

    For a full screen version of the table click here.

    The table is wide - use scroll bars to see all information!

    NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.)

    Class: from FDIC
    The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:
  • N National chartered commercial bank supervised by the Office of the Comptroller of the Currency
  • SM State charter Fed member commercial bank supervised by the Federal Reserve
  • NM State charter Fed nonmember commercial bank supervised by the FDIC
  • SA State or federal charter savings association supervised by the Office of Thrift Supervision
  • SB State charter savings bank supervised by the FDIC
  • Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. Click on the number and the Institution Directory (ID) system "will provide the last demographic and financial data filed by the selected institution".

    Bank Failure #95: Georgian Bank, Atlanta, GA

    by Calculated Risk on 9/25/2009 04:36:00 PM

    Atlanta Georgia
    Just five simple syllables
    Foreclosure central

    by Rob Dawg (SGIP out today)

    From the FDIC: First Citizens Bank and Trust Company, Incorporated, Columbia, South Carolina, Assumes All of the Deposits of Georgian Bank, Atlanta, Georgia
    Georgian Bank, Atlanta, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

    As of July 24, 2009, Georgian Bank had total assets of $2 billion and total deposits of approximately $2 billion. In addition to assuming all of the deposits of the failed bank, First Citizens Bank agreed to purchase essentially all of the assets.

    The FDIC and First Citizens Bank entered into a loss-share transaction on approximately $2 billion of Georgian Bank's assets. ...

    The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $892 million. ... Georgian Bank is the 95th FDIC-insured institution to fail in the nation this year, and the nineteenth in Georgia. The last FDIC-insured institution closed in the state was First Coweta, Newnan, on August 21, 2009.
    Friday starts early ...

    Freddie Exec Compensation, Bandos, Market and more

    by Calculated Risk on 9/25/2009 04:00:00 PM

    Michelle at digs up the employment contract for Freddie Mac's new CFO: Taxpayer funded signing bonus at Freddie Mac?

    • annual compensation of $3.5 million (this includes $675K in salary, $1.6 million in something called “additional annual salary” and $1.1 million in a target incentive
    • a $1.95 million signing bonus
    • immediate buyout of Kari’s house
    Why is Freddie paying more than the private sector? And I bet Geithner is jealous about the house deal!

    Stock Market Crashes Click on graph for larger image in new window.

    This graph is from Doug Short of (financial planner): "Four Bad Bears".

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

    And the Bandos are moving on up in Miami! From After Miami's Ritzy Bubble Bursts, Squatters Move on Up
    Miami's squatter problem has garnered national media attention over the past year and a half, as the foreclosure crisis threatened to transform the Magic City into something resembling a lawless, "Mad Max"-esque landscape.

    The squatters mostly kept a low profile, moving in ... to neighborhoods where they could take over unnoticed.

    But now come reports that squatters are seeking out more ritzy neighborhoods, including the pricey, tree-lined streets of Coral Gables.
    A check of county records found that the home went into foreclosure over a year ago, just about the time residents said the alleged squatters showed up.

    The bank which owns the property hired a realtor to sell it last month ...
    Maybe the lenders should sell the foreclosed homes?

    And from the LA Times: Calls to renew home buyer tax credit get louder in Washington. Yeah, an expensive, poorly targeted tax credit for those not suffering during the recession. This isn't as dumb as allowing the FHA DAP to continue (Downpayment Assistance Program - the poster child for bad housing policy), but close. Why not a "first-time renters" tax credit for anyone who hasn't rented for 3 years? That makes as much economic sense.

    Truck Tonnage Index Increased in August

    by Calculated Risk on 9/25/2009 02:23:00 PM

    From the American Trucking Association: ATA Truck Tonnage Index Rose 2.1 Percent in August

    Truck Tonnage Click on graph for slightly larger image in new window.

    The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.1 percent in August, matching July’s increase of the same magnitude. The latest gain raised the SA index to 104.1 (2000=100), which was the best reading since February 2009. ... Compared with August 2008, SA tonnage fell 7.5 percent, which was the best year-over-year showing since November 2008. ...

    “The gains in tonnage during July and August reflect a growing economy and less of an overhang in inventories,” [ATA Chief Economist Bob Costello] noted. “While I am optimistic that the worst is behind us, most economic indicators, including industrial output and household spending, suggest freight tonnage will exhibit moderate, and probably inconsistent, growth in the months ahead."
    The Rail Freight Traffic shows some recent pickup too, but the level is still way below 2008 and 2007. (ht Bob_in_MA) Note: Trucking accounts for about 70% of tonnage carried by all modes of domestic freight transportation, and about 83% of total revenue.

    It appears the economy has reset to a new lower level, and growth will probably be sluggish. Trucking is probably benefiting from inventory restocking, and exports - the key positive areas for the economy.

    Existing Home Turnover Ratio, and Distressing Gap

    by Calculated Risk on 9/25/2009 12:16:00 PM

    For graphs based on the new home sales report this morning, please see: New Home Sales Flat in August

    The following graph is a turnover ratio for existing home sales. This is annual sales and year end inventory divided by the total number of owner occupied units. For 2009, sales were estimated at 4.8 million units, and inventory at the August level.

    Existing Home Sales Turnover Click on graph for larger image in new window.

    Although the turnover ratio has fallen from the bubble years, the level is still above the median for the last 40 years. This suggests 2009 is about a normal year for existing home turnover.

    That might seem shocking based on all the reports of weak existing home sales. But the problem isn't the number of sales (except as compared to the bubble years), but the type and price of sales.

    The reason turnover hasn't fallen further is because of all the distressed sales (foreclosures and short sales) primarily in the low priced areas. Distressed sales declined in August, and this is a major reason existing home sales declined.

    There is another wave of foreclosures coming, so existing home sales might stay elevated for some time. Plus, the "first-time" homebuyers tax credit might be extended (a poorly targeted an inefficient credit).

    Note: there is a substantial shadow inventory too.

    All this distressed sales activity has created a gap between new and existing sales as shown in the following graph that I've jokingly labeled the "Distressing" gap.

    Distressing Gap This graph shows existing home sales (left axis) and new home sales (right axis) through August.

    As I've noted before, I believe this gap was caused primarily by distressed sales. Even with the recent rebound in new and existing home sales, the gap is still very wide.

    The third graph shows the same information, but as a ratio for existing home sales divided by new home sales.

    Ratio: Existing home sale to new home salesAlthough distressed sales will stay elevated for some time, eventually I expect this ratio to decline back to the previous ratio.

    The ratio could decline because of a further increase in new home sales, or a decrease in existing home sales - or a combination of both. I expect the ratio will decline mostly from a decline in existing home sales as the first-time home buyer frenzy subsides, and as the foreclosure crisis moves into mid-to-high priced areas (with fewer cash flow investors).

    New Home Sales Flat in August

    by Calculated Risk on 9/25/2009 10:00:00 AM

    The Census Bureau reports New Home Sales in August were at a seasonally adjusted annual rate (SAAR) of 429 thousand. This is a slight increase from the revised rate of 426 thousand in July (revised from 433 thousand).

    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).

    Note the Red columns for 2009. Sales in August 2009 were the same as August 2008. This is the 4th lowest sales for August since the Census Bureau started tracking sales in 1963.

    In August 2009, 38 thousand new homes were sold (NSA); the record low was 34 thousand in August 1981; the record high for August was 110 thousand in 2005.

    New Home Sales and Recessions The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales fell off a cliff, but are now 30% above the low in January.

    Sales of new one-family houses in August 2009 were at a seasonally adjusted annual rate of 429,000 ...

    This is 0.7 percent (±16.2%)* above the revised July rate of 426,000, but is 3.4 percent (±13.3%) below the August 2008 estimate of 444,000.
    And another long term graph - this one for New Home Months of Supply.

    New Home Months of Supply and RecessionsThere were 7.3 months of supply in August - significantly below the all time record of 12.4 months of supply set in January.
    The seasonally adjusted estimate of new houses for sale at the end of August was 262,000. This represents a supply of 7.3 months at the current sales rate.
    New Home Sales Inventory The final graph shows new home inventory.

    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.

    Months-of-supply and inventory have both peaked for this cycle, and new homes sales has probably also bottomed for this cycle. However any further recovery in sales will likely be modest because of the huge overhang of existing homes for sale.

    I'll have more later ...

    Durable Goods Orders off 2.4% in August

    by Calculated Risk on 9/25/2009 08:33:00 AM

    From the Census Bureau:

    New orders for manufactured durable goods in August decreased $4.0 billion or 2.4 percent to $164.4 billion, the U.S. Census Bureau announced today. This was the second decrease in the last three months. This followed a 4.8 percent July increase. Excluding transportation, new orders were down slightly.

    Transportation equipment, also down two of the last three months, had the largest decrease, $4.0 billion or 9.3 percent to $39.5 billion. This was led by nondefense aircraft and parts, which decreased $3.7 billion.
    So excluding civilian aircraft, durable goods orders were only down slightly.

    The manufacturers continue to work down their unfilled orders and inventory:
    Unfilled Orders
    Unfilled orders for manufactured durable goods in August, down eleven consecutive months, decreased $2.8 billion or 0.4 percent to $737.1 billion. This was the longest streak of consecutive monthly decreases since the series was first published on a NAICS basis in 1992 ...

    Inventories of manufactured durable goods in August, down eight consecutive months, decreased $4.2 billion or 1.3 percent to $308.9 billion. This followed a 1.1 percent July decrease.
    emphasis added

    Thursday, September 24, 2009

    CNBC: Lawler on Housing

    by Calculated Risk on 9/24/2009 09:59:00 PM

    Housing economist Thomas Lawler on CNBC this morning.

    "It is virtual certainty that [foreclosure] sales will pick up. Various moratoria has actually diminished the pace of sales, but as people try to see who can qualify for the modification program. But the backlog of loans in foreclosure are rising, and foreclosure sales will 100% pickup, we just don't know when."

    On tax credit: "It has been very very expensive, if you look at the number of people who have claimed the credit versus estimates of the incremental number of sales that wouldn't have occurred otherwise, looks it is costing the government about $40 thousand for every home sale generated."

    FDIC: "Credit quality declined sharply" for Shared National Credits

    by Calculated Risk on 9/24/2009 05:53:00 PM

    From the FDIC: Credit Quality Declines in Annual Shared National Credits Review

    Notes from the Fed:

    A SNC is any loan and/or formal loan commitment, and any asset such as other real estate, stocks, notes, bonds and debentures taken as debts previously contracted, extended to borrowers by a supervised institution, its subsidiaries and affiliates. Further, a SNC must have an original amount that aggregates $20 million or more and either 1) is shared by three or more unaffiliated supervised institutions under a formal lending agreement or 2) a portion is sold to two or more unaffiliated supervised institutions with the purchasing institutions assuming their pro rata share of the credit risk.
    Some key findings:
    • Criticized assets, which included SNCs classified as special mention, substandard, doubtful, or loss, reached $642 billion, up from $373 billion last year, and represented 22.3 percent of the SNC portfolio compared with 13.4 percent in 2008.
    • Classified assets, which included SNCs classified as substandard, doubtful, or loss, rose to $447 billion from $163 billion and represented 15.5 percent of the SNC portfolio, compared with 5.8 percent in 2008. Classified dollar volume increased 174 percent from a year ago.

    • Special mention assets, which exhibited potential weakness and could result in further deterioration if uncorrected, declined to $195 billion from $210 billion and represented 6.8 percent of the SNC portfolio, compared with 7.5 percent in 2008.

    • The severity of criticism increased with the volume of SNCs classified as doubtful and loss rising to $110 billion, up from $8 billion in 2008. Loans in nonaccrual status also increased nearly eight times to $172 billion from $22 billion. Nonaccrual loans included $32 billion in credits classified as loss and $56 billion classified doubtful.
    • Criticized volume was led by the Media and Telecom industry group with $112 billion, Finance and Insurance with $76 billion, and Real Estate and Construction with $72 billion. These three groups also represented the highest shares of criticized credits with 17.3 percent, 11.7 percent, and 11.2 percent of criticized credits in the SNC portfolio, respectively.
    Shared National Credits Click on graph for larger image in new window.

    A record $447 billion in assets were classified as substandard, doubtful, or a loss, almost triple the peak following the 2001 recession. As a percent of commitments, the current 15.5% of loans "classified" far exceeds the previous peak in 1991 of just under 10% of loans.

    Also, according to the FDIC, nonbanks held 47 percent of classified assets despite owning only 21.2 percent of the SNC portfolio. American Banker has an excellent quote: Syndicated Loan Losses Skyrocket
    "Anyone could get credit from banks because banks knew they would have ready and willing buyers of syndicated loans even if red lights were blinking when the loans were booked." ... said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc.

    Fed: Homeowner Mortgage Obligations Still Historically High

    by Calculated Risk on 9/24/2009 03:35:00 PM

    The Federal Reserve released the Household Debt Service and Financial Obligations Ratios for Q2 today.

    NOTE from Fed: "The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only a rough approximation of the current debt service ratio faced by households. Nonetheless, this rough approximation may be useful if, by using the same method and data series over time, it generates a time series that captures the important changes in household debt service payments."

    Because of these limitations, the Financial Obligations Ratio (FOR) should be used to look at changes over time, not the absolute value of the ratio.

    Financial Obligations Ratio Click on graph for larger image in new window.

    This graph shows the homeowner financial obligations for consumer and mortgage debt as a percent of disposable personal income (DPI) since 1980.

    "The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases."

    Consumer financial obligations are still a little high historically, but mortgage obligations are very high (especially considering the level of interest rates). Just like after the housing bubble of the late '80s/ early '90s, it will probably take some time for the mortgage FOR to decline to more normal levels.

    Hotel RevPAR off 18.3 Percent

    by Calculated Risk on 9/24/2009 12:43:00 PM

    We are now into the business travel season, and as expected, RevPAR is off sharply from 2008.

    From Oahu Island occupancy increases in STR weekly numbers

    Overall the U.S. industry’s occupancy fell 8.6 percent to end the week at 59.6 percent. Average daily rate dropped 10.5 percent to finish the week at US$98.34. Revenue per available room for the week decreased 18.3 percent to finish at US$58.57.
    Hotel Occupancy Rate Click on graph for larger image in new window.

    This graph shows the YoY change in the occupancy rate (3 week trailing average).

    The three week average is off 8.4% from the same period in 2008.

    The average daily rate is down 1.5%, and RevPAR is off 18.3% from the same week last year.

    Data Source: Smith Travel Research, Courtesy of

    After Labor Day business travel becomes far more important for the hotel industry than leisure travel, and so far there is no evidence that business travel is recovering significantly - especially at the high end - from Bloomberg: Luxury Hotels in U.S. Risk Default as $850 Rooms Remain Empty
    Loans secured by more than 1,500 hotels with a total outstanding balance of $24.5 billion may be in danger of default, according to Realpoint LLC, ... “All segments are showing signs of distress but the luxury segment carries much higher loan balances and is more clearly affected,” [said] Frank Innaurato [of] Realpoint ...

    Occupancy among chains with the costliest rooms fell to 60 percent in the first half from 70 percent a year earlier, according to Smith Travel Research. The decline was the industry’s largest for that period. ...

    The U.S. hotel loan-delinquency rate may climb to 8.2 percent by year-end, Morgan Stanley analysts led by Andy Day said in a June 23 report. That would match the peak from the last recession in 2001.

    Upscale hotels are suffering from “a heightened focus on prudent corporate travel expenditures,” as well as the pullback in vacation travel, Day said.
    emphasis added