by Anonymous on 1/09/2008 09:45:00 AM

Elizabeth Warren at Credit Slips has an interesting post up inviting reader comments. I thought our readers might have some ideas about this.

Because subprime lending was not evenly spread around the country (or even around a state or city), individual neighborhoods are bearing the brunt of the meltdown. When several homes in one community go into foreclosure, a neighborhood can rapidly shift from a safe, comfortable area with well-tended lawns to a place where no one wants to live. Mayors are on the front lines in dealing with the fallout.

Like most academics, we at Credit Slips tend to talk about what the federal government could do to deal with the subprime crisis. The feds have the power, if not the will, to make some big changes. But what about mayors? Can anything be done at the city level? This isn't an academic question, so put on your thinking caps and volunteer some ideas. Here's mine:

A mayor could appoint a Foreclosure Investigator. Announce that any person anywhere in the city who has received a notice of foreclosure or similar document should immediately call the city officer who will investigate all the paperwork to make certain that every aspect of the mortgage and the mortgage foreclosure comply with the law--at no expense to the homeowner.

This would be a powerful tool for three reasons: 1) Many of the worst mortgages have bad documentation, illegal provisions, etc. But if homeowners don't know that, and if they don't go to very good lawyers, the mortgage companies will foreclose and the homeowner's rights will be lost. 2) Even if the mortgage paperwork is in order, any push back from a homeowner makes is more likely that a deal can be negotiated to keep the homeowner in the house (if the homeowner really can afford it). A Foreclosure Investigator can inform the homeowner about a range of options. 3) If one city has the reputation as a lousy place to bring a foreclosure action, mortgage companies have lots to do right now, and they may put that city's foreclosures lower on their to-do lists. I realize the last point simply externalizes the problem, but for a mayor working hard to save neighborhoods in his or her city, that may be an issue for another day.

What are your ideas? What other tools are available? If a highly motivated mayor asked you what to do, what would you suggest?

I confess to wondering why homeowners would have to contact this Foreclosure Investigator in the first place. The first step of any foreclosure is to file a Notice of Default or Lis Pendens (or whatever the jurisdiction/foreclosure type requires) in the land records of the county (or city or town, depending). Homeowners can actually miss these things if they no longer occupy or for some other reason don't get served. The recorder's office doesn't miss them.

The legal issue, I assume, is giving the Foreclosure Investigator the right to demand documents or information from the lender/servicer/investor, either on behalf of the homeowner or in its own right. I have no idea how that would work technically.

I'm not sure I'd push for having a Foreclosure Investigator being charged with things like "informing the borrower about options." If these municipalities need legal aid services or homeowner counseling services, models for such things already exist and should be funded. It seems to me the point of the proposal is to have a party who represents the interests, first of all, of the city (or whatever jurisdiction this is), not the lender or the homeowner. In other words, it is precisely formalizing the "externalized" interest.

After all, while it's obvious to me (at least) that cities might have interests that don't exactly align with big national servicers and mortgage investors, it also seems obvious that they might have interests that don't always align with individual homeowners, either. At some level this proposal may well be a recognition of the socially crucial function of judicial foreclosures, which are rarer and rarer in many states as lenders elect "power of sale" or trustee sale foreclosures (because they're faster and cheaper to the lender). The judicial foreclosure is slow and expensive, but it gives the borrower "a day in court" and it tries, at least, to make sure that the state's interest in the process is protected.

Even in states where judicial foreclosures are still the only way to foreclose--like Ohio--we're seeing huge court backlogs. We've all heard about the uproar the Federal District judges have been creating with their attempts to make sure the lenders' paperwork is straight. Warren's proposal for a Foreclosure Investigator sounds a bit to me like a kind of officer of those foreclosure courts. In states where lenders can elect non-judicial foreclosure, it would insert the level of scrutiny of the loan paperwork back into the process.

I would guess that the loudest and first complaint will be about "spending taxpayer money" on cleaning up the mortgage mess. That's why I'd be inclined to think that any such Foreclosure Investigator needs to represent the city, not the individual or the lender, and that it needs to be quite explicit whose interests are being protected and why. It's probably easy enough for foreclosure-ridden cities to cost-justify the expense versus the gain to the taxpayers of preventing neighborhood foreclosure crises.

But it isn't going to be just subprime, and it isn't going to be just old core neighborhoods teetering on the brink for long. It's going to be fancy new half-built half-sold suburban developments full of "prime" mortgages and half-built schools and streets too far from core-city employment centers and the lovely politics of development. I envision the Foreclosure Investigator running up against not just "business environment" types who don't want Our Fair City to see "lender flight," but against those back-room deals with the developers and builders for tax abatements and permits and what have you, and suddenly the Foreclosure Investigator is drawn into the muck of whether some of these new neighborhoods are worth finishing, not "saving." That could be ugly.

Not that that's an argument against doing it, mind you. Ugly is going to arrive whether we fund an Investigator or not.

by Calculated Risk on 1/08/2008 07:53:00 PM

The first video is from Bakersfield (2 minutes):



Remember the guy who predicted house prices would be up 10% this year? Here he is explaining his view today (1 minute 16 seconds):

by Calculated Risk on 1/08/2008 04:49:00 PM

Here is the January Newsletter (858KB PDF) for everyone as a sample.

Enjoy.

For current subscribers, your 12 month period starts with the February issue (first week in February). If you didn't receive an earlier email - and signed up before last Friday - please send me an email to verify your email address - please specify how you paid (letter or PayPal). I think I have everything sorted out.

If you'd like to subscribe, here is the sign up page ($60 annual fee).

Just to be clear: the blog will stay the same, and much of the newsletter material is from the blog. Best Wishes to All.

by Calculated Risk on 1/08/2008 03:55:00 PM

Click on picture for larger image.

Headlines via Brian.

"Hoping we can manage through this downcycle"

'softness' in consumer business.

Not feeling economic effect in corporate sales.

UPDATE: AP story: AT&T CEO Sees Slowdown in Consumer Side

by Calculated Risk on 1/08/2008 01:44:00 PM

The WSJ had an interesting article this morning on the margin squeeze at many banks. From the WSJ: Banks' Narrowing Margins

Many banks ... are likely to report narrowing in net interest margins -- a key measure of industry profitability -- already at the lowest level since 1991.

Much of the pinch is being attributed to a scramble for deposits. Even though the Federal Reserve has been cutting interest rates, many banks are still offering attractive rates for deposits. A quarterly survey released last week by Citigroup Inc. found that "the competition to raise new deposits" via certificates of deposit and money-market funds "remains intense."
...
While banks are now collecting less interest on loans because of the Fed's rate reductions, they are still making the same interest payments to depositors.

Check out the CD rates at CountryWide and IndyMac.

CountryWide is offering a 6 month CD with an APY of 5.45%.

IndyMac is offering a 3 months CD with an APY of 5.4%.

Click on graph for larger image.

Here is a graph from the FDIC (through 2006) of Net Interest Margins (NIMs) by bank size. Even though the larger banks have seen more of a NIM squeeze, the smaller banks make more of their income from NIMs.

Another concern is that banks have been growing their asset portfolios to lessen the impact of falling NIMs. From the FDIC last year:

To offset the effects of lower margins, institutions have been growing their asset portfolios. ... Small and mid-size institutions have been increasing their concentrations in riskier assets, such as CRE loans and construction and development (C&D) loans. This suggests that, although small and mid-size institutions have been more successful in limiting the erosion of their nominal NIMs, they have achieved this success in part by assuming higher levels of credit risk.

I eagerly await the next Emerging Risks report from the FDIC.

by Calculated Risk on 1/08/2008 01:33:00 PM

From Bloomberg: Countrywide Loses Most Since 1987 on Bankruptcy Bets

Countrywide Financial Corp. dropped the most in two decades on the New York Stock Exchange amid speculation the largest U.S. mortgage lender will file for bankruptcy.
...
``There's some sort of rumor that they would go under, but it's purely a rumor,'' said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees about $50 billion in Santa Fe, New Mexico.

From Reuters: Countrywide Financial denies bankruptcy rumors

"There is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company," Countrywide said in a statement.

Just another false CFC bankruptcy rumor.

by Calculated Risk on 1/08/2008 12:16:00 PM

From Dow Jones (no link yet): Moody's Cuts Ratings On 46 Tranches Of Bear Deals (hat tip BR)

Moody's Investors Service downgraded the ratings of 46 tranches and placed under review for possible downgrade the ratings of 11 tranches from eight Alt-A deals issued by Bear Stearns Cos. (BSC) in 2007. ...

The collateral backing these tranches consists of primarily first lien, fixed and adjustable-rate, Alt-A mortgage loans. ...

More junk.

by Calculated Risk on 1/08/2008 11:34:00 AM

From Philly Fed President Charles I. Plosser (voting member of FOMC in 2008): Economic Outlook

The fourth quarter of 2007 and the first quarter of 2008 are going to be quite weak; that has been clear for a number of months. My forecast already incorporates the prospect that we will get some bad economic numbers from various sectors of the economy in the coming months. Since monetary policy’s effects on the economy occur with a lag, there is little monetary policy can do today to change economic activity in the first half of 2008.

The below-trend growth of the economy in the first half of 2008 will likely mean slower payroll employment growth for the first two to three quarters of the year. With slower job growth for a time, the unemployment rate may rise somewhat above 5 percent during the course of the year.

I am still optimistic that the economy will improve appreciably by the third and fourth quarters of 2008, and that is when any monetary policy action today will begin to have noticeable effects. Overall real GDP growth will be faster in the second half of 2008 as the economy begins to return to its longer-run trend growth of about 2-3/4 percent. On a fourth-quarter to fourth-quarter basis, I expect that the economy will grow about 2.5 percent in 2008, close to its pace in 2007, and that it will be growing more consistently near its longer-term trend in 2009.

So Plosser suggests there is no reason for more rate cuts. Monetary policy works with a lag, and even though Plosser sees a couple of weak quarters, he is forecasting a recovery in the 2nd half of 2008.

I am concerned that developments on the inflation front will make the Fed’s policy decisions more difficult in 2008. Recent data suggest that inflation is becoming more broad-based. Recent increases do not appear to be solely related to the rise in energy prices. Consequently I see more worrisome signs of underlying price pressures. Although I am expecting slow economic growth for several quarters, we should not rely on slow growth to reduce inflation. Indeed, the 1970s should be a sufficient reminder that slow growth and falling inflation do not necessarily go hand in hand. Moreover, the 1990s should remind us that we can have sustained economic growth without generating inflation.

Although inflationary expectations have crept up only slightly since early September based on inflation-indexed Treasury securities, my sense is that these inflation expectations are more fragile now than they were six months ago. If inflation expectations continue to rise, it will be difficult and costly to the economy to deliver on our goal of price stability and puts at risk the Fed’s credibility for maintaining low and stable inflation.

And Plosser is "hawkish" on inflation. Clearly Plosser opposes further rate cuts.

by Calculated Risk on 1/08/2008 10:13:00 AM

KB Home CEO Jeffrey Mezger sums up the housing market:

“Several factors weighed on the entire housing industry this year, including a persistent oversupply of new and resale homes available for sale, increased foreclosure activity, heightened competition for home sales, reduced home affordability, turmoil in the mortgage and credit markets, and decreased consumer confidence in purchasing homes.”

by Calculated Risk on 1/08/2008 10:03:00 AM

From MarketWatch: Pending home sales sink 2.6% in November

Sales contracts on previously owned U.S. homes fell by 2.6% in November, a sign that home sales will continue to decline. The pending home sales index, based on contracts signed but not closed in November, fell 2.6% in November and was down 19.2% in the past year, the National Association of Realtors reported Tuesday.