by Calculated Risk on 10/05/2007 03:18:00 PM

From MarketWatch: U.S. consumer credit rises in August

Outstanding U.S. consumer debt rose at an annual rate of 5.9% in August, pushed higher mostly by a hefty gain in credit-card debt, the Federal Reserve reported Friday.
...
Revolving debt such as credit cards was the biggest driver behind the overall rise in August, the data show. That debt climbed by 8.1% in August, or by $6.1 billion. In July, credit-card debt rose by a revised 7.4%

by Calculated Risk on 10/05/2007 01:29:00 PM

From Fed Vice Chairman Donald L. Kohn: Economic Outlook. A few excerpts (video of speech at bottom of post).

... Our policy action will not be able to avert all of the weakness in the economy that may be in train for the next several months. Monetary policy works with a lag, and the effects of our easing action will have their maximum effect only after several quarters. In particular, housing markets are likely to remain depressed in coming months as housing demand is restrained by the difficulty in obtaining mortgages and perhaps also by spreading expectations on the part of buyers that house prices will fall, as they already have in a number of markets. And, although builders have reduced housing starts sharply, they have made very little progress in reducing the number of unsold new homes on the market. As a result, even absent a further deterioration in sales, residential construction would probably decline further in the months ahead, imparting a significant drag on overall growth in real gross domestic product.

Beyond housing, it is too early to tell what effect financial market turmoil is having on household and business spending, though very preliminary and partial information suggest that thus far the effects seem to be limited. Moreover, the available data indicate that the economy entered this period still expanding at a moderate pace. For example, consumption held up well this summer supported by solid growth in real incomes. And, the recent data on orders and shipments of capital goods and on nonresidential construction indicated further growth in capital outlays in August. That said, credit availability is likely to be tighter than before, consumer confidence is down, and businesses will probably be a little more cautious for a while, suggesting that these components of aggregate demand could become more subdued in coming months.

... To be sure, households are likely to start to save more out of their current incomes as they come to realize that they cannot count on a rise in the value of their real estate to build their retirement nest eggs. However, households have been surprisingly resilient to recent economic shocks, and any rise in the saving rate probably would be gradual. More generally, consumer spending should continue to be supported by ongoing growth in employment and income. In the business sector, balance sheets are in good shape, and most firms are not likely to face an appreciable tightening of credit availability. As a result, I anticipate that they will expand their investment spending to keep pace with rising household demands and with strength in export markets. In sum, once we get through the near-term weakness caused by the extra downleg from the housing contraction and any spillover from tighter credit conditions, I am looking for moderate growth with high levels of employment.

But you should view these forecasts even more skeptically than usual. The FOMC emphasized the considerable uncertainty in the outlook.

... Of course, we would not have eased policy if the outlook for inflation had not been favorable. The recent data on consumer price inflation have been encouraging. ... And, it will be critical for inflation expectations to remain well contained.

That said, I do not want to minimize the upside risks to inflation either. Rates of resource utilization are still relatively high, and the slower rates of productivity growth over the past two years, coupled with a pickup in compensation growth, have led to a noticeable acceleration in unit labor costs. Moreover, the decline in the exchange value of the dollar has put upward pressure on prices of imported goods, which have both direct and indirect effects on overall consumer prices.

Click image for video.

Kohn Says Fed Must Be `Nimble' in Setting Interest Rates: Video October 5 (Bloomberg) -- Federal Reserve Board Vice Chairman Donald Kohn speaks at the Greater Philadelphia Chamber of Commerce Annual Meeting in Philadelphia about the Fed's half-point reduction in the benchmark lending rate to 4.75 percent last month, the outlook for the U.S. economy and the need for policy makers to be "nimble" in setting interest rates. (Source: Bloomberg)

by Calculated Risk on 10/05/2007 12:37:00 PM

From Bloomberg: Homebuilders Liquidate Assets as Threat to Survival Spurs Sales (hat tip Jim)

``It's desperation time and some companies may not make it,'' said Alex Barron, an industry analyst at Agency Trading Group Inc. in Wayzata, Minnesota. ``At this point in the housing cycle, if you have too much debt, it's hard to get out from under it.''
...
``They are all losing money,'' [John Burns, president of John Burns Real Estate Consulting] said.
...
The 15 largest homebuilders are saddled with $7.75 billion in debt due to be repaid through 2009 and the companies' bonds trade as if they were junk ...

The five biggest homebuilders by revenue -- Lennar, D.R. Horton, Pulte, Centex and KB Home -- wrote off a combined $3.3 billion in the third quarter on land they own and will not build on or options to buy land they are choosing not to exercise.

We could make fun of the analysts that claimed the homebuilders would have strong cash flow during a downturn (due to less investment in land and improvements) and that the homebuilders were "land banks". Those investment ideas were Dumb and Dumber!

But the more important point is that the homebuilders struggle to survive shows why the builders are still overbuilding. Building homes, and selling at a deep discount, is the only way they can liquidate land to raise cash and pay down their debts in the current environment. This is why housing starts are still too high and will likely fall further over the next few quarters.

by Calculated Risk on 10/05/2007 09:08:00 AM

From Bloomberg: Washington Mutual Says Third-Quarter Profit Fell 75%

Washington Mutual Inc., the biggest U.S. savings and loan, said third-quarter net income fell about 75 percent because of "a weakening housing market and disruptions in the secondary market."

Loan loss provisions total about $975 million and losses and writedowns on mortgage loans and securities amount to $410 million, the Seattle-based company said in a statement today.

Added: Merrill Lynch Says Credit Market Conditions to Adversely Impact Third Quarter 2007 Results

Merrill Lynch & Co., Inc. today announced that challenging credit market conditions will have an adverse impact on its net earnings for the third quarter. The company expects to report a net loss per diluted share ... resulting from significant negative mark-to-market adjustments to its positions in two specific asset classes: collateralized debt obligations (CDOs) and sub-prime mortgages; and leveraged finance commitments.
...
The primary drivers of the FICC net losses in the third quarter were as follows:

* Write-downs of an estimated $4.5 billion, net of hedges, related to incremental third quarter market impact on the value of CDOs and sub-prime mortgages. These valuation adjustments reflect in part significant dislocations in the highest-rated tranches of these securities which were affected by an unprecedented move in credit spreads and a lack of market liquidity in these securities, which intensified during the third quarter. During the quarter, the company significantly reduced its overall exposure to these asset classes.

* Write-downs of an estimated $967 million on a gross basis, and $463 million net of related underwriting fees, related to all corporate and financial sponsor, non-investment grade lending commitments, regardless of the expected timing of funding or closing. These commitments totaled $31 billion at the end of the third quarter of 2007, a net reduction of 42% from $53 billion at the end of the second quarter. The net losses related to these commitments were limited through aggressive and effective risk management, including disciplined and selective underwriting and exposure reductions through syndication, sales and transaction restructurings.

There appears to be a line at the confessional, also from Bloomberg: JPMorgan, Bank of America May Write Down Buyout Loans

JPMorgan Chase & Co. and Bank of America Corp., the biggest arrangers of U.S. leveraged loans, may have combined markdowns of $3 billion in the third quarter ...

These possible writedowns are because of LBO related pier loans.

by Calculated Risk on 10/05/2007 08:46:00 AM

From MarketWatch: Job growth rebounds to 110,000 in September

Nonfarm payrolls rose by 110,000 in September, including 73,000 in the private sector, very close to expectations of 113,000 total payrolls.

Payroll growth in July and August was revised higher by 118,000, the government said. Instead of falling by 4,000 in August, payrolls rose 89,000 after revisions. The unemployment rate ticked up to 4.7%, the highest in a year. ...

The annual benchmark revision will lower the level of employment by an estimated 297,000 as of March 2007. ... The actual revision occurs in February, but a preliminary estimate is given in October.

Here is the BLS report. Note that the decline in employment in August has been revised away. The unemployment rate increased slightly again and is now at 4.7%.

Click on graph for larger image.

This graph shows the year-over-year change in nonfarm employment. This shows the weak - but not recessionary - job growth over the last year.



Residential construction employment declined 20,000 in September, and including downward revisions to previous months, is down 191.5 thousand, or about 5.6%, from the peak in March 2006. (compare to housing starts off 30%+).

Note the scale doesn't start from zero: this is to better show the change in employment.

The initial benchmark revision shows the loss of an additional 8,000 construction jobs, but the initial report doesn't breakout residential construction.

Overall this is a stronger than expected report. Even the projected downward revision (that will be included in the January report) is smaller than expected.

by Anonymous on 10/05/2007 08:45:00 AM

Because we really needed to know that 47% of you think a professional opinion about cycling vs. jogging or miniblinds vs. drapes or mary janes vs. t-straps is of more value to you than a professional opinion about stocks vs. bonds.

According to the Securities Industry and Financial Markets Association:

Washington, D.C., October 3, 2007 – A majority of adults (53%) would choose to receive financial advice over that of a personal trainer, interior designer or fashion consultant if given the opportunity, according to the findings of a recent survey conducted on behalf of the Securities Industry and Financial Markets Association (SIFMA).

Should you for some reason really care, the question was "If you could have a free consultation session with an expert, which would you choose?" The responses were:

Financial Advisor: 53%
Personal Trainer: 23%
Interior Designer: 9%
Fashion/Style Consultant: 6%
Don't Know: 8%

We have certainly managed successfully to redefine the term "expert." I for one see great opportunities for financial advisors who also offer personal training services. If you could discuss portfolio allocation while teaching yoga--good morning, CR!--you could make a fortune. (I, whose interior design has been described as "presence of the usual items of furniture" and whose fashion has been described as "clothed and shod" and whose major form of aerobic exercise is typing, am angling for the "don't know" crowd.)

by Calculated Risk on 10/05/2007 12:00:00 AM

From the Chicago Tribune: Here's a new one: Being too broke to sell

A survey of mortgage brokers suggests that one in three consumers who recently signed purchase contracts canceled in August -- up from just 4 percent three years ago, according to the research firm that conducted the survey for Inside Mortgage Finance, a trade journal.

The cancellation rate undoubtedly was fed by two scenarios playing out: Many buyers couldn't get mortgage approval because lending suddenly tightened; or, financially strained lenders yanked funding from their borrowers at the last minute.

But another factor was at work: Sellers -- not buyers -- were in trouble as their closing dates neared.

"Our office had four sales in one week that failed to close because the seller didn't have the cash," said the real estate agent, who declined to be identified because she feared office repercussions.

Actually this isn't "new"; if the seller is making the payments - and can afford the payments - the lender won't do a short sale. The only way out is for the seller to bring cash to the closing. I wrote about this in March: Escrow to Seller: "Bring Money". Tanta called this "making your downpayment after the fact."

by Anonymous on 10/04/2007 05:50:00 PM

As a follow-up to CR's post below, here's a chart from the Moody's report, "Subprime Mortgage Market Update: September 2007," released yesterday.

Note that this chart calculates delinquencies as a percent of the original security balance, so these numbers may not match other delinquency measures you have seen reported that are based on current security balances.

And what seems to be driving 2006 and 2007 delinquencies?

The data show that, as we have noted in previous communications, loan performance for the 2006 subprime vintage seems to be driven primarily by the proportions of stated documentation loans and high CLTV loans backing the transactions as well as the proportion of loans that combine (or "layer") these risk characteristics. (Stated documentation loans are those loans for which the borrower's income and assets are not verified by documentation during the loan approval process and therefore are more likely to be overstated.) Interestingly, FICO scores and LTV ratios do not vary significantly between the strongest and weakest performing transactions and on average transaction performance does not appear to have been influenced by these characteristics.

by Calculated Risk on 10/04/2007 04:34:00 PM

From Bloomberg: Subprime Borrowers' Payments Should Be Fixed, FDIC's Bair Says (hat tip Brian)

Federal Deposit Insurance Corp. Chairman Sheila Bair called for payments on most subprime mortgages to be fixed at current levels.

Lenders should extend "teaser" rates on all subprime adjustable-rate mortgages if the borrowers haven't missed any payments and they live in the homes, Bair said today in New York. Modifying loans on a case-by-case basis and fixing rates for limited periods won't avert enough foreclosures, she said.

And from Congress: (hat tip NYT junkie)

House: "Miller and Rep. Linda Sánchez Introduce Legislation to Protect Consumers in Financial Distress from Losing Their Homes"

Senate: Durbin Introduces Bill to Help Hundreds of Thousands of Homeowners Avoid Foreclosure

To help families save their homes, the Durbin bill would:

* Eliminate a provision of the bankruptcy law that prohibits modifications to mortgage loans on the debtor’s primary residence, so that primary mortgages are treated the same as vacation homes and family farms.

* Extend the time frame debtors are allowed for repayment, to support long-term mortgage restructuring.

* Waive the bankruptcy counseling requirement for families whose houses are already scheduled for foreclosure sale, so that precious time is not lost as families fight to save their homes.

To further help families get back on their feet financially as they go through bankruptcy, the bill would also:

* Combat excessive fees that are sometimes charged to debtors in bankruptcy.

* Maintain debtors’ legal claims against predatory lenders while in bankruptcy.

* Reinforce that bankruptcy judges can rule on core issues rather than deferring to arbitration.

* Enact a higher homestead floor for homeowners over the age of 55, to help older homeowners who are fighting to keep their homes as they go through bankruptcy but live in states with low homestead floors.

* Reinforce that consumer protection claims are still available in bankruptcy.

And from Sentor Specter: Specter Introduces Bill To Combat Home Mortgage Crisis

And there is a growing backlash against the bailout proposals, from CNNMoney Subprime: Bailout backlash

But judging from the hundreds of reader responses CNNMoney.com has received in recent weeks, "foreclosure prevention" sounds a lot like "bailout" to many Americans, and they don't like it one bit.
...
Joseph Mason, an associate professor of finance at Drexel University and a senior fellow at Wharton, argues in a research paper released Wednesday that proposed remedies could actually make things worse and even that troubled borrowers have gotten some benefit from their loans.
...
One proposal seems to be garnering support from everyone: exempting homeowners who foreclose or otherwise have some of their mortgage debt forgiven from having to pay income tax on the forgiven amount.

Who is this "everyone"? I support no income taxes on debt forgiveness on the purchase debt (or equal amount if the homeowner refi'd), but for homeowners that borrowed money on their home - tax free using their home as an ATM - shouldn't they be liable for the taxes on that forgiven debt? What a mess.

Note: Say someone bought a house with a $200K first, and then loses the house in foreclosure. I don't think there should be any tax consequences. But if they borrowed an additional $50K tax free (now owe $250K) and then lose their home in foreclosure, I think they should be liable for taxes on the additional $50K.

by Calculated Risk on 10/04/2007 03:58:00 PM

From MarketWatch: Citizens Banking Co. takes on Miami Valley deposits (hat tip REBear)

The Citizens Banking Company of Sandusky, Ohio, got federal approval to take over the insured deposits of the failed Miami Valley Bank on Thursday, a U.S. banking regulator announced.

The Ohio Superintendent of Financial Institutions' closure of Miami Valley, which had $86.7 million in total assets and $76 million in total deposits, marks the third FDIC-insured bank to fail this year.

FDIC link is here.