by Calculated Risk on 9/10/2007 11:44:00 AM

UPDATE: On Bloomberg Video: Yellen Sees `Significant Downward Pressure' on Economy. (hat tip Anne)

Click image for video.

Federal Reserve Bank of San Francisco President Janet Yellen speaks about the U.S. credit and housing markets, and their impact on the overall economy and Fed monetary policy. Yellen speaks at the National Association for Business Economics annual meeting in San Francisco. (Source: Bloomberg)

From San Francisco Fed President Janet Yellen: Recent Financial Developments and the U.S. Economic Outlook. As usual, Dr. Yellen's speech is worth reading. Here are a few excerpts (emphasis added):

Even with corrections to credit underwriting standards, it still may turn out that these innovations don’t actually spread risk as transparently or effectively as once thought, and this would mean—to some extent—a more or less permanent reduction of credit flowing to risky borrowers and long-lasting shifts in patterns of financial intermediation. It also could mean an increase in risk premiums throughout the economy that persists even after this turbulent period has passed.

On housing and consumption:

Beyond the housing sector’s direct impact on GDP growth, a significant issue is its impact on personal consumption expenditures, which have been the main engine of growth in recent years. The nature and extent of the linkages between housing and consumer spending, however, are a topic of debate among economists. Some believe that these linkages run mainly through total wealth, of which housing wealth is a part. Others argue that house prices affect consumer spending by changing the value of mortgage equity. Less equity, for example, reduces the quantity of funds available for credit-constrained consumers to borrow through home equity loans or to withdraw through refinancing. The key point is that, according to both theories, a drop in house prices is likely to restrain consumer spending to some extent, and this view is backed up by empirical research on the U.S. economy.

And the risks to the economy could be 'significant':

To sum up the story on the outlook for aggregate demand, I see significant downward pressure based on recent data indicating further weakening in the housing sector and the tightening of financial markets. As I have indicated, a big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices. Should the decline in house prices occur in the context of rising unemployment, the risks could be significant.

by Calculated Risk on 9/10/2007 10:49:00 AM

From the LA Times: Credit woes hit commercial real estate market

The global credit crunch ... is finally reaching the vast commercial real estate investment and development industry.

... bidders who have been borrowing heavily to leverage property acquisitions are falling away as lenders shut out marginal players, [John Cushman, chairman of real estate brokerage Cushman & Wakefield] said. So far, though, the long-robust market has cooled but not collapsed.
...
"There has been a spike in the last 30 days of deals falling out of contract," [Robert White, president of real estate data provider Real Capital Analytics] said. "People planning to close deals last month got hesitant."

The following quotes sound like residential real estate about 18 months ago:

"There aren't a lot of pressured sellers out there. ... " White said. "If they can't get their prices now, they can afford to wait. Probably a lot of assets just won't trade."
...
Another difference from the residential market is that "the delinquencies in commercial mortgages are virtually zero," White said. "We're seeing virtually no delays or defaults."
...
"The frenzy is all gone," [Craig Silvers of Bricks & Mortar Capital] said, "but the commercial market is not in decline."

by Calculated Risk on 9/10/2007 10:28:00 AM

From Bloomberg: Washington Mutual Says Housing Market in `Near-Perfect Storm' (hat tip Brian)

Washington Mutual Inc. ... said today that conditions in the housing market are creating a `near-perfect storm' ...

``The combination of rising delinquencies, higher foreclosures, more housing inventories, increasing interest rates on many mortgages and greatly reduced availability of mortgages due to limited liquidity is creating what we call a near-perfect storm for housing,'' [Chief Executive Officer Kerry Killinger] said.

by Anonymous on 9/10/2007 09:38:00 AM

Not only is it impossible to write about Las Vegas's real estate problems without engaging in casino-talk, it also appears irresistible to talk about real estate speculation as if it were only a form of slot-machine playing but with bigger tokens. The former might merely be annoying, but I wonder if the latter mightn't be causing a certain conceptual problem. For one thing, it erases the complicity of those who asserted that real estate price appreciation is a matter of "fundamentals" and the land that they don't make any more of and demographics and so on (Hi, NAR!), leaving the impression that speculators thought it was all just a matter of probabilities and chance, like throwing dice. However good an idea it was to listen to NAR, the fact is that they and a lot of their stenographers in the press were claiming that RE appreciation was not random or chance. Treating those failed speculators as mere crap-shooters now, it seems, is kind of convenient for the "House" experts.

This reflection arises from this Chicago Tribune article on Las Vegas's RE woes, which also informs us that:

Gamblers willing to bet on a property or two were rewarded with almost immediate payoffs. The guy who sold Karen Lewis her house for $435,000 in June 2006 raked in a $200,000 profit after holding it less than two years, she figures.

"Houses were really cheap. Loans were really easy," said Lewis, who moved from California. "These were investors who didn't ever live here. Now, they're totally walking away." . . .

From her front door, Lewis stares across Arcata Point Avenue at the for-sale signs on two abandoned houses in foreclosure. The house next door stood empty for months as well, until a couple of out-of-town cops started using it for an occasional vacation getaway.

Between 15 percent and 25 percent of the homes in her 3-year-old gated community are for sale, she estimates, many behind on loan payments and an alarming number deserted, their lawns burnt out and trash untended.

Does anyone else want to know what "a couple of out-of-town cops started using it for an occasional vacation getaway" means? You know, I'm not sure I do.

by Calculated Risk on 9/09/2007 11:19:00 PM

DataQuick will report SoCal home sales in about a week (NAR reports U.S. August existing home sales on Sept 25th), but the following story in the LA Business Journal suggests sales fell off a cliff: August Home Sales Take a Major Plunge

The expanding mortgage crisis and credit crunch slammed the Los Angeles housing market in August, with home sales plunging 50 percent from the same month last year and 25 percent from July.

Sales of new and existing homes in Los Angeles County slid to 4,107 units in August, just under half the 8,246 units that sold in August 2006 and well below July’s 5,458 units, according to figures compiled for the Business Journal by Melville, N.Y.-based HomeData Corp.

Usually existing home sales increase from July to August, so this is even worse than it sounds.

by Anonymous on 9/09/2007 11:37:00 AM

This isn't going to work out well:

Joe Waltuch, the new head of the Nevada Mortgage Lending Division, defended the subprime mortgage industry and downplayed the foreclosure crisis in his first interview.

Although he acknowledged a problem, he said, "You're missing the positive side of all this."

Subprime loans - high interest loans given to people with spotty credit histories - represent just 15 percent of the market, he said. Only 1.5 percent of all mortgages, he said, will end up in foreclosure: "Everybody seems to think we need to protect the 1,500 at the expense of the 98,500 good loans."

"We put a lot of people in homes who wouldn't otherwise be in homes," he said.

The comments were counterintuitive. . . .

It should come as no surprise, though, that Waltuch would defend the subprime lending industry.

He spent seven years as an in-house lawyer for a large subprime lender, with his last position as vice president and senior counsel for regulatory and legislative affairs at New Century Financial Corp., an Irvine, Calif., based subprime lender, once the second largest in the country but now defunct and the target of a criminal investigation.

His appointment, made by Mendy Elliott, who is Gov. Jim Gibbons' director of the Business and Industry Department, has been widely panned by Republicans and Democrats alike.

They're baffled that Gibbons and Elliott would turn to a failed subprime mortgage company official to regulate Nevada's troubled home loan industry.

"It's a terrible appointment. It's mind-boggling," said a prominent Republican in the mortgage industry who asked not to be named , fearing retribution. Republicans are especially bothered, as the appointment follows several flops during Gibbons' young tenure.

Yeah, well, it's "counterintuitive" now. There was a time, oh, a few months ago, when not everybody's intuitions were saying the same thing.

After all we had one Austan Goolsbee, respected academic economist and, I understand, advisor to Barack Obama's campaign, saying this back in March:

[T]he mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, “Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.” . . .

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

It was bipartisan Kool Aid then, and it's bipartisan Kool Aid now. I truly wonder how many business reporters found Goolsbee's op-ed "counterintuitive" back before "the subprime crisis" became everybody's headline.

by Anonymous on 9/09/2007 07:33:00 AM

Having complained rather bitterly lately about the quality of a lot this stuff that passes for "financial advice columns" recently, I'm happy to have the opportunity to draw your attention to Michelle Singletary's column, "The Color of Money," in my hometown rag the Washington Post. Singletary's stuff is almost always useful, informed, and no-nonsense in attitude.

The opportunity involves a follow-up to my great sprawling post the other day on mortgage "orgination channels." Singletary writes about the dreadful "net branching" practice:

In a relatively new arrangement, some skirt the law by paying to become part of a "net branch" operation. Net-branching is similar to franchising. It allows individuals to operate their own mortgage loan origination branch using the mortgage-lending or broker license of the branching company. Individuals get assistance in running their businesses and gain access to a network of lenders. . . .

The authorities have stepped up their enforcement actions against operations that do business with unlicensed mortgage brokers, loan officers or loan originators. Most recently, 10 states took action against Apex Financial Group, also called Apex Mortgage. Apex was doing business with multiple unlicensed entities, leaving consumers unprotected, the states allege.

One person who worked with Apex was Frederick C. Lee Jr., founder of Financial Independence Group and other mortgage companies, whom I wrote about in an earlier column. Former insiders, with knowledge of the inner workings of Lee's multi-state mortgage operation, said he has assembled a network of people who arrange mortgages, sometimes through net-branching, even though the officers are not properly trained or in some cases licensed as required by the states.

In an interview, Lee denied that he or his company was involved in facilitating mortgage loans. "I'm not a mortgage guy," he said.

Yet loan documents I obtained suggest that Lee is acting as a mortgage broker. In one case, a $504,000 residential loan in Maryland lists North American Real Estate Services as the broker. Lee's cellphone number is listed as the originator's contact number. Lee is not licensed as a mortgage broker in Maryland.

by Calculated Risk on 9/09/2007 12:18:00 AM

The previous header used a portion of this photo of a hiking trail just outside of Jasper, Alberta. See Layout Changes, UberNerds and Dudes for an update on the new look.

Click on photo for larger image.

Photo Credit: CR, August, 2001

I strongly recommend visiting the Canadian Rockies. Take the drive from Lake Louise to Jasper, and you will not be disappointed. There are many places to stop and take short hikes (or long hikes if you prefer). The scenery is spectacular and there is an abundance of wild life, especially near Jasper.

Also - a little secret place - if you get the chance, stay at (or at least visit) Lake O'Hara.

by Calculated Risk on 9/08/2007 08:38:00 PM

"I believe disruptions in financial markets can be addressed using the tools available to the Federal Reserve without necessarily having to make a shift in the overall direction of monetary policy."
Charles I. Plosser. Philly Fed President, Sept 8, 2007

Here is Plosser's speech in Hawaii: Two Pillars of Central Banking: Monetary Policy and Financial Stability (hat tip Ministry of Truth)

On financial stability:

When financial shocks threaten financial stability, a central bank must be prepared to act promptly to forestall any subsequent large adverse effects to the economy or financial system.

However, the term “stability” in this context can be a bit misleading. While an effectively functioning financial system is usually associated with financial stability, it is not appropriate for the Fed to ensure against financial volatility per se, or against individuals or firms taking losses or failing. Policymakers must be careful to allow the marketplace to make necessary corrections in asset prices. To do otherwise would risk misallocating resources and risk-bearing, as well as raise moral hazard problems. This could ultimately increase, rather than reduce, risks to the financial system.

Thus, the Fed does not seek to remove volatility from the financial markets or to determine the price of any particular asset; our goal is to help the financial markets function in an orderly manner. I agree with Chairman Bernanke that we should not seek to protect financial market participants, either individuals or firms, from the consequences of their financial choices. The success of free markets in generating wealth and an efficient allocation of resources depends on individuals and firms having the freedom to be successful and reap the rewards of their efforts. But just as important, those same individuals must also have the freedom to fail. ...

So in the face of a sharp decline in housing and severe problems in the subprime market, the central bank must let markets reassess and re-price risk, which will ultimately lead to the establishment of new levels of prices of housing-related financial assets.

On providing liquidity:

To provide liquidity to facilitate the orderly functioning of financial markets, the Federal Reserve can make temporary adjustments to day-to-day open market operations or to discount window lending. As you know, discount window lending is collateralized lending the Fed provides to depository institutions. Providing liquidity does not necessarily require a more fundamental change in the direction of monetary policy as implemented by a change in the fed funds rate target, although that is also an option if financial sector problems spill over to significantly harm the outlook for the broader economy.

For instance, when liquidity strains appeared in the financial system in mid-August, the Fed injected a larger-than-usual amount of funds into the U.S. banking system through open market operations on several days — $24 billion on Thursday, August 9, and $38 billion on Friday, August 10. ... Operations on August 9 and 10 were larger injections of funds than is typical.

However, these operations were consistent with the objective of the Fed’s Open Market Desk in New York to provide reserves as needed to promote trading in the fed funds market at rates as close as possible to the FOMC’s fed funds rate target of 5.25 percent.

... Most of that liquidity was returned to the Fed on Monday, August 13. With markets calmer, the Fed injected just $2 billion that day — an amount consistent with many typical daily open market operations. ...

Some news stories in August reported the totals for these daily Fed operations by adding them all together, which overstated the total amount of liquidity the Fed was injecting into the financial system at any one time. Actually, many of these repo operations were overnight transactions that reversed the next business day.

All emphasis added.

UPDATE: Mark Thoma notes that the html version of the speech is followed by the usual disclaimer: "The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC." Earlier I noted the absence of this typical disclaimer in the PDF version of Plosser's speech.

It is rare for a Fed President to comment so directly on monetary policy. I'd take Plosser's comments as that it is his view that market expectations for a Fed funds rate cut in September are probably too high.

by Calculated Risk on 9/08/2007 07:13:00 PM

We've made a few changes to the layout including moving some of the navigation to the header: see About, Email addresses, Google search and most importantly "The Compleat UberNerd".

We've also added labels to the posts. Click on a label and it will take you to all the posts with that label (we just started using labels, so you will still have to use search if you want to find older posts).

For the newer readers: Tanta's UberNerd series explains everything you want to know about the mortgage industry. If you missed Tanta's newest UberNerd post on Friday, it explains everything you'd want to know about mortgage origination channels (and the various terms used to describe the channels): Mortgage Origination Channels for UberNerds

Meanwhile, I've been wondering: Dude, Where's My Recession?