by Calculated Risk on 12/13/2007 09:05:00 AM

From MarketWatch: Retail sales rise across the board in November

U.S. retail sales rose sharply in November, pushed higher by rising gasoline prices, the Commerce Department reported Thursday.

The early Thanksgiving holiday, which allowed for more Christmas shopping, may have played a role in the strong showing.

Auto sales were the only area of weakness in November.

Retail sales rose 1.2% in November after rising 0.2% in October. This is the strongest sales pace since May. Retail sales are up 6.3% in the past 12 months.
...
In a separate report, the Labor Department said producer prices jumped 3.2% in October, the largest since 1973 and the core rate rose 0.4%. See full story.

by Calculated Risk on 12/12/2007 07:55:00 PM

Here are the Kennedy-Greenspan estimates (NSA - not seasonally adjusted) of home equity extraction for Q3 2007, provided by Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

Click on graph for larger image.
For Q3 2007, Dr. Kennedy has calculated Net Equity Extraction as $133.0 billion, or 5.2% of Disposable Personal Income (DPI). Note that net equity extraction for Q2 2007 has been revised upwards to $159.2 billion.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, both in billions of dollars quarterly (not annual rate), and as a percent of personal disposable income. MEW was still strong in Q3 2007, even with tighter lending standards.

As homeowner equity declines sharply in the coming quarters - household real estate equity declined $128 Billion in Q3 - combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

by Calculated Risk on 12/12/2007 05:22:00 PM

From Bloomberg: Security Capital's AAA Rating May Be Cut by Fitch (hat tip Brian)

Security Capital Assurance Ltd. may lose its AAA credit rating at Fitch Ratings ...

The company's capital is at least $2 billion below what it needs to retain the AAA, Fitch said. SCA has four to six weeks to come up with ``firm capital commitments'' to meet the guidelines, or the rating will fall two levels to AA, Fitch said.
...
Security Capital is among seven AAA rated bond insurers that have been probed by Moody's Investors Service, Standard & Poor's and Fitch Ratings for the past month after declines in the credit quality of the securities they guarantee.

by Calculated Risk on 12/12/2007 02:55:00 PM

This morning, Tanta mentioned that the House was considering Cram Downs.

Now from the AP: House Panel Approves Bankruptcy Bill (hat tip Branden)

... House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.

The bill ... was passed by the House Judiciary Committee 17 to 15 ...

House leaders appeared unlikely to bring the bill up for a vote before year-end. ...

Mortgage-industry leaders argue that giving judges this power, which they term a "cramdown," would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.

by Calculated Risk on 12/12/2007 02:36:00 PM

Back in June, Tanta celebrated some good news (with obvious sarcasm): The Drag Stops Here:

The worst U.S. housing slump in 16 years will begin to ease in the next month or two, and job growth will lift home prices and spur construction early next year, Bank of America Corp. Chief Executive Officer Kenneth Lewis said.

``The drag stops in the next few months,'' Lewis said in an interview yesterday in New York. ``It's just about to be over. We're seeing the worst of it.''

Now from Bloomberg: Bank of America's Lewis Muffs Housing Market Forecast

Six months after saying the slowdown in U.S. housing sales was ``just about to be over,'' Lewis said today at an industry conference in New York that fourth-quarter profit will be ``quite disappointing'' and predicted a `challenging'' 2008 with higher writedowns for securities tied to the mortgage market.

Oops. Re-cork the Champagne!

Lewis did get something right in May: Bank of America's Lewis Calls for Lending `Sanity'

``We are close to a time when we'll look back and say we did some stupid things,'' Lewis said, speaking at a lunch at the Swiss-American Chamber of Commerce in Zurich. ``We need a little more sanity in a period in which everyone feels invincible and thinks this is different.''

And he wasn't talking about "stupid things" in housing:

The chief executive said that while the bank has turned down some corporate customers as too risky, ``the deals we've turned down have been taken up quickly by others.''
...
Lewis, 60, said ``We need a deal to go bad, as long as we're not in it.''

Just remember he wasn't worried about housing - although he should have been - his concern was for corporate loans. Hmmm ... Chrysler?

by Calculated Risk on 12/12/2007 11:50:00 AM

From Greg Ip at the WSJ: Fed Joins Other Banks in Measures To Inject More Funds Into Markets

The Federal Reserve has joined with four other major central banks to announce a series of measures designed to inject added cash into global money markets in hopes of thawing a credit freeze that threatens their economies.

The Fed said today it would create a new "term auction facility" under which it would lend at least $40 billion and potentially far more, in four separate auctions starting this week. The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called "discount window." But the new loans can still be secured by the same, broad variety of collateral available that banks pledge for discount window loans.
...
The Fed also said it had created reciprocal "swap" lines with the European Central Bank, for $20 billion, and the Swiss National Bank, for $4 billion. These will enable the ECB and SNB to make dollar loans to banks in their jurisdiction, in hopes of putting downward pressure on interbank dollar rates in the offshore markets, principally the London Interbank Offered Rate, or Libor, market. The inability of foreign central banks to inject funds in anything other than their own currency has been a factor creating the squeeze on bank funding in those markets.
...
The new "term auction facility" overcomes the principal obstacles the Fed has faced using its two main tools for injecting liquidity. Open market operations can be used to inject cash at the federal funds rate, which is relatively cheap, but only against a limited range of collateral. The discount rate, on the other hand, is half a point higher than the federal funds rate and banks are reluctant to access it for fear of the stigma of being seen to be desperate for funds.

The new loans will be auctioned off with a minimum rate linked to the expected actual federal funds rate over the duration of the loan. Since the federal funds rate is expected to decline over the next two months, when the loans will be outstanding, the loan rate could end up being close to or even below the current federal funds rate.

So much for discouraging future risk taking. Here is what the BofE's Mervyn King said in September:

The path ahead is uncertain. There are strong private incentives to market players to recognise early and transparently their exposures to off-balance sheet entities and to accelerate the re-pricing of asset-backed securities. Policy actions must be supportive of this process. Injections of liquidity in normal money market operations against high quality collateral are unlikely by themselves to bring down the LIBOR spreads that reflect a need for banks collectively to finance the expansion of their balance sheets. To do that, general injections of liquidity against a wider range of collateral would be necessary. But unless they were made available at an appropriate penalty rate, they would encourage in future the very risk-taking that has led us to where we are. All central banks are aware that there are circumstances in which action might be necessary to prevent a major shock to the system as a whole. Balancing these considerations will pose considerable challenges, and in present circumstances judging that balance is something we do almost daily.

The key objectives remain, first, the continuous pursuit of the inflation target to maintain economic stability and, second, ensuring that the financial system continues to function effectively, including the proper pricing of risk. If risk continues to be under-priced, the next period of turmoil will be on an even bigger scale. The current turmoil, which has at its heart the earlier under-pricing of risk, has disturbed the unusual serenity of recent years, but, managed properly, it should not threaten our long-run economic stability.
emphasis added

The idea of lending “quickly, freely and readily” during a crisis, but at a penalty rate, and only on good collateral, comes from Walter Bagehot's 1873 “Lombard Street”.

UPDATE: Floyd Norris smells Fear at the Fed

by Calculated Risk on 12/12/2007 11:19:00 AM

The Census Bureau reported today for October 2007:

"a goods and services deficit of $57.8 billion, $0.7 billion more than the $57.1 billion in September"

Click on graph for larger image.

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit).

The ex-petroleum deficit is falling fairly rapidly, almost entirely because of weak imports (export growth is still strong). The ex-petroleum deficit is now almost all China! From Greg Robb at MarketWatch: Trade gap widens in October on high oil prices

The U.S. trade deficit with China widened to a record $25.9 billion in October from $24.4 billion in the same month last year and $23.8 billion in September. The trade gap with China rose to $213.5 billion in the first 10 months of the year, up from $190.7 billion in the same period last year.

Unlike the previous decline in the trade deficit (during the '01 recession), the value of petroleum imports - in dollar terms - are still strong. In barrels, imports appear to be flat or declining slightly year over year.

Note also that not only oil import prices are surging. From Rex Nutting at MarketWatch: Import prices rise 2.7%, the most in 17 years

Driven by a weaker dollar and much higher prices for petroleum and natural gas, import prices surged 2.7% in November, the largest monthly increase in 17 years, the Labor Department reported Wednesday.

Even excluding fuels, import prices rose 0.5%.

Import prices have now risen 11.4% in the past year, the largest gain in the 25-year history of the import price index.

by Calculated Risk on 12/12/2007 10:19:00 AM

From MarketWatch: Bank of America, Wachovia, PNC see tough fourth quarter, more credit losses

Bank of America Chief Executive Ken Lewis said the firm would have to write down a larger amount of its investment in some debt securities than previously planned.

"Based on conditions today, we expect those write-downs will be larger than have already been reported -- although obviously we won't know our final numbers until we close the fourth quarter," Lewis said in remarks prepared for delivery at a Goldman Sachs conference.
...
Lewis said the problems continue to grow, based on a slowing economy, but he stopped short of predicting a recession. "We're getting closer to 50-50 though, "Lewis said, referring to the likelihood of a recession.
...
Also Wednesday, Wachovia ... in a Securities and Exchange Commission filing, said it now estimates its loan-loss provision for the fourth quarter will be about $1 billion in excess of charge-offs.

Its previous forecast was between $500 million and $600 million due to slowing loan growth and ongoing deterioration in its loan portfolio.
...
PNC said it expects to report fourth-quarter earnings in the range of 60 cents to 75 cents a share, and adjusted earnings between $1 and $1.15 a share. Analysts polled by Thomson Financial are looking for profit of $1.39 a share, on average.

The revised expectation is due to write-downs on its $1.5 billion of commercial mortgage loans held for sale and lower trading revenue as a result of "unprecedented market price volatility," PNC said in the filing.

by Anonymous on 12/12/2007 09:30:00 AM

The Wall Street Journal is troubled by Fannie Mae's recent imposition of a 25 bps "adverse market fee" for new mortgage production. "Mortgage Pain Hits Prudent Borrowers":

Fannie Mae, the giant government-sponsored mortgage investor, last week raised costs for many borrowers by quietly adding a 0.25% up-front charge on all new mortgages that it buys or guarantees. On a $400,000 mortgage, that would mean an extra $1,000 in fees, almost certain to be passed on to the consumer. Freddie Mac, the other big government-sponsored mortgage investor, is expected to impose a similar fee soon, according to a person familiar with the situation.
...
In a statement, Fannie said the new fee is needed "to ensure that what we charge aligns with the risk we bear." The National Association of Home Builders labeled the fee "a broad tax on homeownership." More than 40% of all mortgages outstanding are owned or guaranteed by Fannie or Freddie.

The fee is the latest in a series of moves by Fannie and Freddie that raise the cost of credit for some borrowers. Late last month, they imposed surcharges that affect mortgage borrowers who have credit scores below 680, on a standard scale of 300 to 850, and who are borrowing more than 70% of a property's value. For example, someone with a credit score of 650 would pay a surcharge of 1.25% of the loan amount for a mortgage to be sold to Fannie. On a $300,000 loan, that would mean extra fees of $3,750. The fee could be paid in cash or in the form of a higher interest rate than
would normally apply.

Fannie also is raising down-payment requirements for loans it purchases or guarantees in places where house prices are falling, which by some measures is most of the country. In these declining markets, lenders will need to cut by five percentage points the maximum percentage of the home's estimated value that can be financed. For instance, for types of loans that Fannie normally would allow to cover up to 100% of the estimated value, the ceiling now is 95% in declining markets.

"A tax on homeownership." I swear, if the National Association of Builders didn't exist, I'd have to invent them. For comic relief. Ditto with "a higher interest rate than would normally apply."

Here's the deal: if you are taking out a mortgage--any mortgage--in a period of time in which home prices are rapidly falling, the financial future of lenders and builders is uncertain, and bailouts are already on the table, you may wish to call yourself "prudent" because you're getting a conforming fixed and your FICO score is better than those subprime people's. You may, therefore, feel sorry for yourself because you'll pay that extra quarter.

Or, you can wonder if maybe you should wait that extra half-hour after lunch before entering the swimming pool. Whatever. I'd like to hear the case for the GSEs backing off on fees right now.

In the interests of maximum nerdage, I'd also like to point out that the "no maximum financing in a declining market" rule that is mentioned here is not "new." It has always been the rule. Fannie and Freddie are taking the opportunity presented to them by current events to remind everyone that it is still on the books. Some people may think it's new, but some people think a "declining market" is, well, new. Unheard of. Not normal, you might say.

We should note that this rule does not simply change a 100% maximum to a 95% maximum. There are many maximum LTVs, depending on occupancy, purpose, FICO, property type, loan type (fixed versus ARM), and so on. So there are those 90% cash-outs that will be 85% cash-outs, and those 80% multi-unit loans that will be 75%. Cue more howling from the "prudent."

by Anonymous on 12/12/2007 08:47:00 AM

Thanks to Buzz for the link:

(Washington, DC)- The House Judiciary Committee will consider a substitute version of the Miller-Sánchez “Emergency Homeownership and Mortgage Equity Protection Act of 2007″ during a markup TOMORROW, December 12, at 10:15 a.m. in room 2141 of the Rayburn House Office Building. The substitute reflects a compromise made with Rep. Steve Chabot (R-OH) that will help hundreds of thousands of homeowners save their homes from foreclosure while seeking bankruptcy to reorganize their debts. . . .

The key features of the compromise, to be offered by House Judiciary Committee Chairman John Conyers and Rep. Chabot are as follows:

· It targets existing nontraditional (e.g., interest-only) and subprime mortgages originated after January 1, 2000 up through the legislation’s date of enactment.
· It applies to debtors who file for chapter 13 bankruptcy relief (a form of bankruptcy relief by which individuals restructure their debts) who lack sufficient income after payment of specified expenses pursuant to IRS guidelines to remain current on their mortgages and cure arrears, as required by current law. Debtors who so qualify may:

· reduce exorbitant mortgage interest rates and avoid onerous prepayment penalties;
· set aside excessive and often secret fees charged by unscrupulous mortgage lenders ;
· modify the principal amount of the mortgage to reflect the home’s actual value.

I'm strongly in favor of changing Chapter 13 to allow cram downs on owner occupied mortgages; I waxed crisply on that subject a while ago.

I think putting in these restrictions to try to limit this only to "predatory" mortgages is futile, and eventually we'll get the possibility of cram down for everyone. It's hardly a free-for-all; you do have to declare Chapter 13, live on the payment plan, and get the judge to agree to the adjusted loan terms, all that being a great deal more onerous a process than getting any workout from any mortgage servicer has ever been. I figure that once Congress does manage to realize that we're all sublime subprime now, there will be an amendment to let folks with a good old 30-year fixed have the same treatment in BK that anyone else can have.

What really annoys me is that this doesn't apply to future mortgages, only to those made between 2000 and the enactment of the law. To me, cram downs are important not just as a relief measure for debtors but as a disincentive for lenders relaxing credit standards too far. If you know a judge can rewrite your mortgage, you may well write it more carefully up front.

I conclude that two things are operating here: "bipartisanship," or your basic committee product that will make nobody happy all the time; and a desire to believe that this is "contained" to a certain class of borrowers and can be "worked out of the system" without impacting the prime world.