by Anonymous on 8/26/2007 01:30:00 PM

Yves at naked capitalism and P. Jackson at Housing Wire both go after Bill Gross of PIMCO and his recent arguments for a homeowner bailout. I recommend both of these fine examples of clock-cleaning.

by Calculated Risk on 8/25/2007 09:05:00 PM

Here are a few stories to discuss with your dates tonight:

Fortune: Fed bends rules to help two big banks (hat tip John, Bob, and others!)

In a clear sign that the credit crunch is still affecting the nation's largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup and Bank of America, according to documents posted Friday on the Fed's web site.

MarketWatch: Muni bond funds hit by 'perfect storm' (hat tip Mike and others!)

... muni bond prices have fallen in recent weeks, pushing yields higher, as investors moved money into the safest securities, such as short-term Treasury bonds.

And from Barron's, a story on 'pier loans': For Banks, a $300 Billion Hangover

Investment and commercial banks, ranging from Citigroup and JP Morgan to Goldman Sachs and Merrill Lynch , agreed to finance deals that might not close for six months, and at very low interest rates -- and without any escape clauses to protect them if market conditions deteriorated. Why? Because bankers were in hot pursuit of the next underwriting or merger-and-acquisition advisory fee. The private-equity shops knew it and they pushed through some of the most aggressive financing terms ever seen.

Haver: Borrowings at the Federal Reserve Largest in 6 Years; Big Drops in Commercial Paper Outstanding. The second chart on the left shows the sharp drop in commercial paper outstanding - after an incredible increase over the last few years.

AP: Mortgage Mess Hurts Main Street, Beyond


Telegraph: Brace yourself for the insolvency crunch (hat tip Kendall)

Your date will find you fascinating tonight!

UPDATE: From Gretchen Morgenson at the NY Times: Inside the Countrywide Lending Spree

Next week should be interesting, from existing home sales on Monday (inventory is the most interesting number) to Bernanke's speech on Friday: "Housing and Monetary Policy".

by Calculated Risk on 8/25/2007 02:25:00 PM

ALSO: see this great interactive graphic from the NY Times: Home Prices Across the Nation, and a video with David Leonhardt.

From the NY Times: Drop Foreseen in Median Price of U.S. Homes

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

In the video (at the graphic link above), Leonhardt explains that the "official" price hasn't declined - in nominal terms - since the federal agencies started keeping statistics, but prices have declined in real terms - and in nominal terms according to the Standard & Poor's/Case-Shiller index.

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. ...

The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

There is much more in this article by Leonhardt and Vikas Bajaj. Check it out.

The OFHEO House Price Index will be released on Thursday, Aug 30th.

by Anonymous on 8/25/2007 12:22:00 PM

Certain persons have expressed some curiosity about the Real Identities® of CR and Tanta.

I can see why you'd wonder about that. I regularly wonder about you all.

Anyway, here's some home movies.

This is CR:



This is Tanta:



This is our merry band of regular commenters:

by Anonymous on 8/25/2007 08:04:00 AM

The Washington Post reports that some lenders still have sufficient operating cash to run deceptive mortgage advertising. I guess it can't be as bad as we thought.

My favorite part:

LendGo.com, another Internet company that sends information to lenders, declared: "Bad Credit OK!" in an ad on Time magazine's Web site. "Refinance Rates at 5.8% Fixed!" the ad said earlier this week.

But in an interview, Cyrus Zahabian, a manager at the California company, said, "We don't necessarily target those types of people. We look for more of the prime and Alt-A type credit here." Alt-A borrowers are in between prime and subprime.

He also acknowledged that it would be a challenge for a person with bad credit to get a rate as low as 5.8 percent. "Yeah, I don't have anybody that would offer a good rate for those types of people," he said.

Remember that every time we bring up fiduciary requirements for brokers, we are told that consumers have the responsibility to assure they are getting a "market" interest rate.

A consumer reading this advertisement would possibly get the impression that someone with bad credit could get a rate of 5.80%. So that consumer goes to a broker who can't get that rate for him or her, but can get 8.50%.

Why should the consumer believe he is not getting ripped off by the broker? Why do brokers think consumers have realistic ideas about what a current "market rate" is? If the borrower who thought 5.80% was reasonable will accept 8.50%, will he also accept 9.50% if someone just wants to pick up some spiff? Once it's a matter of the broker saying "trust me, this is the rate you get," then, well, it's a matter of "trust me."

"Bait and switch" advertising is already illegal, and if the FTC had a few spare minutes, busting this LendGo.com outfit would be a no-brainer. My point is that lenders are flouting those advertising regulations right out in front of everyone's nose, and then they're turning around and claiming that increased regulation of brokers would ruin the business.

The Truth-in-Lending Act, which dates from the seventies, requires lenders to quote an "APR" as well as the simple contract interest rate. The APR is an effective or "construct" rate that takes into account the total cost of financing over the stated loan term, including fees and points. The idea, originally, was that a consistent APR calculation allowed a consumer to compare Lender A's offer of 5.80% note rate with 2.00 points and $375 in fees with Lender B's 6.00% note rate with 1.00 point and $800 in fees. Or Lender A's 5.80% fixed rate with Lender B's 4.80% 3/1 ARM. The APR for each of these loans gives you the "total cost of credit" of each of those loans (over the stated term), so that you are comparing apples to apples.

That regulation was, obviously, written long before the internet and current competitive practices in the industry involving rate quotes. I'd personally like to see the APR requirement supplemented with a requirement that a lender also disclose some industry-standard market comparison rate (such as Freddie Mac's or FHFB's national average actual, not "advertised," contract rate) for a fixed or ARM loan. It would be fine with me if the regulators forced OFHEO or HUD or someone else to start collecting a national average actual jumbo and subprime rate, too, instead of just the conforming conventional rate.

This doesn't make for a perfect comparison, and disclosures should have conspicuous language saying that. But it would give consumers at least some kind of reality check on an interest rate that is substantially higher (and possibly predatory) or lower (and possibly a deceptive teaser) than a rough approximation of "market." If the reason the borrower's rate differed so widely from the national average is the borrower's specific credit profile or down payment or selected property, this would be an excellent "teachable moment" for making sure that borrower understands that he or she is taking on more than average risk. No?

As someone who has been involved rather intimately with the nuts and bolts of meeting regulatory requirements like this from the lender's side, I'll be the first to admit it sounds like a thorough-going pain in the butt from the lender's operational perspective. I weigh that against the social and economic costs to the whole world of crazy lending, and I suspect that lenders could take some Advil for the butt pain. Certainly there may be more operationally efficient alternatives, like, say, forcing lenders to make their rate sheets available on demand, but I'm guessing that won't be popular with the industry either.

It's worth going to these lenders' 10-Ks sometimes, and looking at what they claim to have invested in software and hardware and administrative staff, and then asking why they can't manage to accomplish something like what I'm proposing. From the Washington Post article, here's a Countrywide flack commenting on the advertising issue:

Asked about the ad, a spokeswoman e-mailed a statement saying: "Countrywide operates a highly-sophisticated marketing system for both on- and off-line advertising with a wide variety of marketing messages available to the broad array of customers that the company's products and services are designed to assist. The company monitors and adjusts advertisements to help ensure that the leads generated are likely to be within our underwriting parameters."

Wow. And I can remember the days when loan officers had to dig out the paper copy of Statistical Release H-19, fire up the Monroe, and pencil in that APR on a hand-written Good Faith Estimate. If CFC can do all that mind-blowing sophistication with the "marketing system," I'm guessing they could print an "average contract rate" on a TILA disclosure. It's funny sometimes how inconsistently those computers work.

This is the point where the put-upon small business-owner brokers who can't even afford to buy a 10-key solar calculator at OfficeMax can pipe up in the comment section about how hard it is to make a living in this country. You get bonus points if you argue that consumers are obligated to have a better internet connection than you are.

by Calculated Risk on 8/24/2007 08:06:00 PM

From the WSJ: Condo Troubles Further Squeeze Property Lenders

For the nation's real-estate lenders, the other shoe may be about to drop: condominiums.

So many shoes are dropping, the turmoil will be named Imelda!

Already plagued by rising home-loan defaults and foreclosures among overstretched consumers, major markets across the country -- including parts of Florida, California and Washington, D.C. -- are seeing rising foreclosures and bankruptcies of entire condo projects.
...
Typically, condo developers are required to pay off construction loans shortly after construction is completed. But with sales stalled, more developers are defaulting, creating headaches for banks and real-estate funds that financed the projects.

Delinquencies on condo-construction loans have already jumped to 4% from 1% over the past year. ...

Underlying the defaults was a loosening of lending standards.

Kudos to WSJ journalist Alex Frangos for not blaming the problems on subprime loans. These "loose" lending standards were pervasive in C&D (construction and development) and CRE (commercial real estate) lending, in addition to residential real estate.

by Calculated Risk on 8/24/2007 03:16:00 PM

From the WSJ: New York Fed Takes Step To Bolster Credit Market

... the Federal Reserve Bank of New York clarified its discount window rules with the effect of enabling banks to pledge a broader range of commercial paper as collateral.
...
"We are comfortable taking investment-quality asset-backed commercial paper for which the pledging bank is the liquidity provider. This is a clarification of something that has become, over time, accepted practice at the Federal Reserve Bank of New York," said New York Fed spokesman Calvin Mitchell.
...
Several market sources however interpreted the action more as a change in, than a clarification of, policy. "Previously banks could not post such ABCP as collateral, that is ABCP for which the bank is a liquidity backstop," said Michael Feroli, economist at J.P. Morgan Chase, in a note to clients.

by Calculated Risk on 8/24/2007 01:58:00 PM

Please see my earlier posts on New Home sales too: July New Home Sales and More on July New Home Sales.

The Census Bureau revises the New Home sales number three times (plus annual revisions). During a housing down turn, most of the revisions from the Census Bureau are down. This is important to keep in mind when looking at a new monthly report.

Click on graph for larger image.

This chart shows the cumulative revisions for each month since sales activity peaked in July 2005 (annual revisions are not shown). The last time there was a positive cumulative revision (red column) was in September 2005.

The median change for the first revision is a decline of 1.6% (average decline of 1.8%) over the last two years.

The cumulative median change for the second revision is a decline of 3.6%.

The cumulative median change for the third revision is a decline of 4.8%. Since the last upward cumulative revision (Sept 2005), the range has been from a small decline of 0.2% in Dec '05, to a decline of almost 11% for May '06.

The new homes sales number today will probably be revised down too. Applying the median cumulative revision (4.8%) suggests a final revised Seasonally Adjusted Annual Rate (SAAR) sales number of 828 thousand for July (was reported as 870 thousand SAAR by the Census Bureau). Just something to remember when looking at the data.

by Calculated Risk on 8/24/2007 11:41:00 AM

Steven Pearlstein writes in the WaPo: Commercial Real Estate, Come On Down

Here's the next shoe to drop as a result of the bursting of the credit bubble: commercial real estate.
...
In markets like Washington, New York, Boston and San Francisco, the last four years have been among the best the industry has ever seen -- falling vacancy rates, rising rents, soaring values and a ton of new development. Now, that's all about to come to a grinding halt as financing becomes more expensive and more restrictive, the economy slows and a big slug of new inventory hits the market.

As a reminder, in a typical business cycle, investment in non-residential structures follows investment in residential structures with a lag of about 5 quarters.

Click on graph for larger image.

This graph shows the YoY change in Residential Investment (shifted 5 quarters into the future) and investment in Non-residential Structures. In a typical cycle, non-residential investment follows residential investment, with a lag of about 5 quarters. Residential investment has fallen significantly for five straight quarters. So, if this cycle follows the typical pattern, non-residential investment will start declining later this year.

Right now it appears the lag between RI and non-RI will be longer than 5 quarters in this cycle. Although the typical lag is about 5 quarters, the lag can range from 3 to about 8 quarters.

... in markets like Washington, the pace at which buildings have been leasing has slowed even as a large number of new buildings are about to come on line.

According to the latest data from CoStar Group, for example, office vacancy rates along the I-270 corridor have risen to 11.6 percent from a low of 9.7 percent a year ago. Buildings under construction will add another 5 percent to supply over the next two years, with roughly a third of it pre-leased.

The market in the Dulles corridor is also beginning to weaken. There, the vacancy rate is up to 14.2 percent from 13 percent in the past year, with nearly 4 million square feet of space under construction, equal to about 8 percent of current supply. After four years of steady growth, rents are beginning to flatten out.

Pearlstein also discusses tighter lending impacting commercial real estate (CRE). This fits with the recent survey from the Fed: The July 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices

Commercial Real Estate Lending

Lending standards for commercial real estate loans were reportedly tightened further over the past three months: About one-fourth of domestic institutions—a slightly smaller net fraction than in the previous survey—and about 40 percent of foreign institutions indicated that they had tightened lending standards on commercial real estate loans in the July survey. Regarding demand, approximately one-fourth of domestic and foreign institutions reported that demand for commercial real estate loans had weakened over the past three months.

And that survey was pre-turmoil. I also suspect Pearlstein is correct and that CRE is the 'next shoe to drop'.

by Calculated Risk on 8/24/2007 10:32:00 AM

For more graphs, please see my earlier post: July New Home Sales

Click on graph for larger image.

The first graph shows New Home Sales vs. Recession for the last 35 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001. This should raise concerns about a possible consumer led recession in the months ahead.



The second graph compares annual New Home Sales vs. Not Seasonally Adjusted (NSA) New Home Sales through July.

Typically, for an average year, about 61% of all new home sales happen before the end of July. Therefore the scale on the right is set to 61% of the left scale.

At the current pace, new home sales for 2007 will probably be in the mid 800 thousands - about the same level as in 1998 through 2000. This is significantly below the forecasts of even many bearish forecasters.

If sales slow in the coming months - as I expect - New Home sales might be in the low 800s - the lowest level since 1997. My forecast is for 830 to 850 thousand units in 2007.