by Anonymous on 8/27/2007 07:50:00 AM

From the Washington Post, we learn that the credit crunch is impacting local construction and lending employment, as builders struggle to sell homes to extremely unqualified buyers, in the absence of merely unqualified buyers, and lenders hire the "top dogs" from cratering subprime and Alt-A outfits who no longer have money to lend, because there's a lot of money to lend.

Kilby, a member of the fourth generation in his family to work in the building industry, has cut prices on his homes in subdivisions of Prince George's and Charles counties. The new homes are built with luxury finishes like granite countertops, crown molding and large spa tubs -- the kinds of bells and whistles people were demanding when credit was easy to come by and his sales offices were full of prospective buyers. Now that it's become harder for home buyers to obtain loans, he's stuck with expensive houses on expensive lots that he is struggling to sell.

"We're doing just about anything we can do to get people into a house, said Kilby, a 50-year veteran of the home-building business. "And these are people we would have told to take a hike last year or the year before last."

Slower sales and lower prices have translated into smaller budgets for salaries. From a staff of 17, Kilby has cut a carpenter, a project superintendent, a building laborer and a punch-out clerk.

While construction jobs have been the most visibly affected, workers in related industries are dusting off their resumes as the global credit crunch scrambles the employment picture.

Capital One said it would close its mortgage banking unit, GreenPoint, which has 31 locations in 19 states, including one in Silver Spring that employs about 28 people and another in Baltimore with 29 workers.

Those losses have created opportunities for others.

Bank of America's mortgage lending office in Annandale is trying to hire more lending agents, targeting seasoned veterans laid off from troubled competitors.

"There's still a lot of money out there to lend and people who want those loans so my phone has been ringing off the hook since the other shops closed down," said Rick Eul, assistant vice president of the Annandale office. "We're picking the top dogs out of those offices."

by Calculated Risk on 8/26/2007 08:35:00 PM

Update: For those without access to the WSJ, the NY Times has the details: Home Depot Unit Sold for Far Less in Tight Market. And this great anonymous quote:

“Study what just happened here. You’ll see this movie again soon.”

The WSJ is reporting that Home Depot has agreed to a $1.8 Billion haircut on the sale of their supply unit. See the WSJ: Buyout Firms Reduce Price For Home Depot Unit to $8.5 Billion. The initial price was $10.3 Billion!

The buyout firms that agreed to buy Home Depot's supply unit a few months ago have slashed the price of the deal to $8.5 billion ...

... the Atlanta-based retailer is guaranteeing $1 billion of the debt and will take an equity stake. By guaranteeing part of the debt, Home Depot will enable the banks to avoid marking down the entire value of the debt on their own balance sheets ...

With a deluge of even-bigger upcoming deals, worth upwards of $400 billion, the stakes for both sides were too great ... the banks were so desperate to avoid taking a hit on the debt that they offered to pay the private-equity firms' $300 million "walkaway" fee to Home Depot if the deal was scuttled.

Just a few days ago, the Home Depot's haircut was reported to be $1.2 Billion. This shows just how desperate Home Depot was to sell the unit.

I believe these pier loans (failed bridge loans), getting stuck on the balance sheets of the IBs, is a significant part of the current liquidity crisis. And it appears this is just the beginning ...

by Calculated Risk on 8/26/2007 07:22:00 PM

Most of my focus on employment has been related to potential residential construction job losses. Unfortunately the BLS only started breaking out residential specialty trade contractors starting in 2001, so there is no data available to analyze residential construction employment during prior downturns in the housing market.

However we can look at trends in total private construction employment.

From Reuters: Construction job losses could top 1 million (hat tip Houston)

Job losses in the construction sector could top 1 million if a housing downturn tips the economy into recession and tighter access to credit dampens business investment.
...
"The ability of nonresidential to continue absorbing additional workers is going to be limited, and that's going to put downward pressure on construction employment overall," [Bernard Markstein, director of forecasting at the National Association of Home Builders] said, adding that cuts may be deeper than in the 1990s.

Click on graph for larger image.

This graph shows total construction employment since 1970 according to the BLS. As noted in the article, total private construction employment fell about 18% in the mid-'70s recession, and about 15% in both the early '80 and '90s recessions.

Construction employment only fell 3% in the '01 recession, as residential construction employment offset most of the declines in commercial construction employment. In the current construction slowdown, total employment has only fallen 1% (residential construction employment is off about 4%) according to the BLS.

Note: there are several reasons why the BLS is potentially understating the residential construction job losses (see here). One of the possible reasons - and relevant to this article - is that some workers have probably moved from residential construction to non-residential construction, but these employees are still being reported as residential construction employees.

A 15% decline in construction employment, from the peak last year, would be about 1.1 million total construction jobs lost.

"We may be in a period where there may be larger losses because growth was so steep," said John Challenger, chief executive of Chicago-based outplacement consulting firm Challenger Gray & Christmas. "(Compared with) that 15 percent that we saw then, this may be a steeper, more volatile cycle."

When the BLS releases their annual revision later this year, there will probably be a significant downward revision in construction jobs for the last 4 quarters. The Business Employment Dynamics (BED) report showed there were about 100K more construction jobs lost in the 2nd half of '06 than the BLS reported. The BLS has probably understated job losses in the 1st half of '07 too, as housing completions have fallen off a cliff, but BLS reported residential construction jobs has remained steady.

Still, if non-residential investment spending slows (especially CRE), than there will probably be many more construction jobs lost in the coming year.

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.