by Calculated Risk on 1/23/2008 05:48:00 PM

Quote of the day from Capital One CEO Richard Fairbank:

"Simply put, we're acting divisively and aggressively to manage the company for the benefit of shareholders in the face of cyclical economic head winds. We're pulling back on loan growth, focusing on our most resilient businesses and closely manage credit with the insight and experience we have garnered in prior economic downturns. ... We are managing the company as if a recession was already here.”

Here are some excerpt from the conference call. Note that according to Capital One, in the 1991 recession, the credit quality statistics for credit cards led the unemployment rate by 6 months.

"By intuition -- I certainly believe that some of what we're seeing is early read on economy worsening that may be preceding [economic] metrics. I really do believe that that is going on. I do think, though, we're also seeing a -- a really consumer-led worsening, which in some ways is certainly very different than the kind of sequential dynamics of what happened in the '91 recession."

Capital One is tightening lending standards for auto loans (sounds like the auto industry is in for a really tough year):

"Charge-offs and delinquencies in auto finance have followed expected seasonal patterns in 2007, and continued to worsen from 2006 levels. The combination of rising charge-offs and allowance has driven overall 2007 auto finance results that are clearly unacceptable. We took decisive action to refocus and reposition the auto business through improved performance and a return to better profitability and financial returns. Our actions result in a significant growth pullback and a focus on loans with better credit characteristics across the risk spectrum. We have scaled back our dealer prime business to those with better credit and profitability performance. We focused on originating loans with better credit characteristics by tightening underwriting and steering our originations up market within both the subprime and prime parts of the market. We stopped originating loans to the riskiest subsegments. We're exiting the riskiest 25% of subprime originations from the third quarter and earlier time periods. We have -- this resulted in dramatic improvement in average FICO scores in our prime originations. Today the average FICO scores are 30 points better than prime originations from the fourth quarter of 2006 and 70 points better than prime originations from the fourth quarter of 2005. We were also able to increase pricing on fourth quarter originations as competitive supply decreased. Thus, while originations continued to grow in October and November, the loans we originated had both better credit profiles and higher pricing. As we continued to pull back in December, originations declined by about 25% from run rates in the first two months of the quarter. Despite our confidence in the improved credit characteristics, profitability and resilience of the loans we're now originating and despite the reduction, prudence leads us to scale back our auto business even more given the cyclical credit challenges in 2008. Ramp down origination volumes with origination run rates down significantly by the second quarter of the year. This should result in a decline in auto loan balances in 2008, with further migration to higher quality loans within both prime and subprime."
emphasis added

An answer to a question on the auto business (and the impact of the housing bust):

"If I were to comment in general, there has been some industry risk expansion in the auto space, and one of the worries that we have always one of the bad things that can happen is an overly good credit environment, such as we had in 2006. And in some sense, all of the industry is paying the consequences of, you know, in a sense of overconfidence in what we saw, and I think we mentioned several times over the last -- course of the last year. There has been some risk expansion pretty much across the boards in the auto space, and it becomes a little bit -- the table stakes for playing. It's hard to say if people structure products that way, we weren't going to offer them that way. That doesn't mean you just go out and does what everybody else does. The good thing that is happening now is that practices and pricing are becoming -- and product structures are becoming more sensible, and this is basically positioning this industry to be healthy on the other side of this. The other big insight in the auto space is the house market correction markets, which is basically 25% of the country -- and 25% of our portfolio has certainly taken it on the chin the most.

More Q&A:

Analyst

Okay. And the follow-up, Rich, I know there has been a lot of discussion about credit trends, particularly in auto, and specifically within the high HPA markets. Can you talk a little bit about how the credit card experience looks in those markets?

Capital One

"The credit card experience is very similar to what we're seeing in auto…this is very much across all of our consumer lending businesses, we see this sort of -- if you will, the kind of HPA effect that is commonly seen. But I do want to say also that this is not -- this is not an issue where our customers with mortgages are having unique problems, because actually we find renters and home owners tend to be following very similar patterns. It's just that renters and home owners, in all of our consumer lending businesses -- renters and home owners together in the -- in the challenged housing price markets are degrading in parallel and together. "

The Fed talks frequently with various CEOs to gauge the economy. If Bernanke (or someone at the Fed) is hearing this from other CEOs, no wonder there was an emergency rate cut.

by Calculated Risk on 1/23/2008 05:38:00 PM

From the Financial Times: Banks pressed to bail out bond insurers

Eric Dinallo, New York insurance superintendent, has met executives at the banks and has strongly urged them to provide $5bn in immediate capital to support the bond insurers, the largest of which are MBIA and Ambac, and to ultimately commit up to $15bn.

... Mr Dinallo’s plan has not met with uniform support among banks ... One industry source said some banks would prefer to see the federal government coordinate some kind of rescue plan for the monolines.

This was the good news today?

Here is a later story from the FT: Regulator offers hope for bond insurers

by Calculated Risk on 1/23/2008 05:10:00 PM

From the Philadelphia Fed:

The Federal Reserve Bank of Philadelphia produces a monthly coincident index for each of the 50 states. The indexes are released a few days after the Bureau of Labor Statistics (BLS) releases the employment data for the states.

Here is the release for December:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for each of the 50 states for December 2007. The indexes increased in 20 states for the month, decreased in 23, and were unchanged in seven.

Click on graph for larger image.

This is a graph of the monthly Philly Fed data of the number of states with increasing activity.

I've added the current probably recession. At least half of the U.S. was in recession in December based on this indicator (and probably the entire U.S. economy).

Note: the Philly Fed calls some states unchanged with minor changes. The press release says 20 there were states with increasing activity, but including small changes, there were 23 (as graphed).


This map is from the Philly Fed report for December, and shows the Three Month change for all 50 states. If the economy is in recession, this map should turn very red over the next few months.

by Calculated Risk on 1/23/2008 04:25:00 PM

Mathew Padilla at the O.C. Register notes: Mortgage rates near ‘historic lows’

Al Hensling, president of brokerage United American Mortgage in Irvine, said lenders were offering rates as low as 5% on Tuesday for a 30-year fixed mortgage with a one-point fee. That’s for a conforming loan, which is up to $417,000.

“We are nearing historic lows on these rates,” Hensling said.

He said a 30-year fixed jumbo, which is greater than $417,000, with a one-point fee was available Tuesday as low as 6.125%. Lenders are more comfortable with jumbos fixed for shorter periods, he said. Thus, the lowest rate on a jumbo fixed for just five years was 4.875% and for seven years 5.125%. Both are quoted with a one-point fee.

And from the MBA: Refinancing Drives Increase In Mortgage Applications In Latest MBA Weekly Survey

“Refinance applications are up 92% since the beginning of November and purchase applications are up 7%. With tighter credit conditions we do not know how many of these applications will become loans, but it is clear that borrowers are responding to the 40-80 basis point drop in rates we have seen since November 2 across products," said Jay Brinkmann, Vice President of Research and Economics at the Mortgage Bankers Association.

First, note the rate disparity between 30 year loans for less than the conforming limit, and jumbos (5% vs. 6.125% according to one mortgage broker). For many, Freddie and Fannie are the only game in town.

And on the MBA data, this is just for applications, not loans. Still, lower rates has to help some homeowners lower their monthly payments (probably homeowners with low LTV and excellent credit). But lower rates won't stop the slide in house prices; the coming house price declines are inevitable.

by Calculated Risk on 1/23/2008 02:40:00 PM

From MarketWatch: Bond insurer counterparties meet with regulators in New York

Big banks and brokers that are counterparties to struggling bond insurers met with regulators in New York on Wednesday ... The counterparties to Ambac Financial and other bond insurers such as ACA Capital met with the New York Insurance Department, spokesman David Neustadt said in a statement. He declined to say what options were specifically discussed ...

Darn, I want to know the options.

by Calculated Risk on 1/23/2008 10:36:00 AM

Click on graph for larger image.

According to the Cleveland Fed, the market expectations are centered on an additional 50 bps cut in the Fed Funds rate on January 30th 31st to 3.0%.

by Calculated Risk on 1/23/2008 09:22:00 AM

The regional banks are getting hit too.

From the WSJ: Write-Downs Hit SunTrust Earnings

SunTrust Banks Inc.'s fourth-quarter net income fell 98% as the company recorded a higher-than-expected $555 million in write-downs and reported soaring credit costs.
...
The latest quarter's results included a $510 million write-down on the purchase of structured investment vehicle-issued securities from two of its money-market funds ...

Also from Reuters: Profit at U.S. regional banks tumble, evaporate

Cleveland-based National City Corp lost $333 million in the fourth quarter ... The bank's loan loss provision in the quarter was $691 million and $1.3 billion for the full year because of continued problems with risky subprime mortgages.

by Calculated Risk on 1/22/2008 11:24:00 PM

From MarketWatch: Merrill Lynch says U.S. nationwide home prices may fall 30%

Merrill Lynch forecasts nationwide U.S. home prices could decline 25% to 30% over the next three years ...

And Bloomberg quotes Rosenberg: U.S. 2008 Growth Forecast Cut in Half by Merrill

``Rising unemployment, $6 trillion in lost housing wealth combined with slumping equity valuations, and the lack of participation from the baby boomers for the first time in three decades likely will result in the worst consumer recession since 1980,''

From the Fed's Flow of Funds report, household real estate assets totaled $20.99 trillion at the end of Q3 2007. So a 30% decline in prices would reduce "housing wealth" by about $6 trillion (Merrill's number).

by Calculated Risk on 1/22/2008 07:17:00 PM

Update: For additional details see Housing Wire: MGIC: Q4 Paid Losses Pegged at $1.3 Billion

Private mortgage insurer MGIC Investment Corporation provided an investor update today:

MGIC Investment Corporation announced today that year-end 2007 delinquency inventory was 107,120 loans, an increase of approximately 16,000 loans from the end of the third quarter. Cure rates have continued to deteriorate, resulting in a higher percentage of delinquent loans that become claims, and average claim size has also continued to increase. As a result, the Company expects incurred losses for the fourth quarter of 2007 to approximate $1.3 billion. The Company said its insurance in force at year-end 2007 was $211.7 billion.

The Company also said it is increasing its paid loss forecast for 2008 to $1.8 - $2.0 billion.

During the fourth quarter, the Company made a decision to stop writing the portion of its bulk business that insures loans which are included in Wall Street securitizations.
emphasis added

For a discussion on private mortgage insurance, see Tanta's UberNerd posts:

Private Mortgage Insurance I

Private Mortgage Insurance II

by Calculated Risk on 1/22/2008 01:38:00 PM

From DataQuick: California Foreclosure Activity Still Rising

Click on graph for larger image. This graph shows the NODs (Notice of Default) filed in California since 1992. For 2007, a record 254,824 NODs were filed in California. By quarter, the number is 46,670 in Q1, 53,943 in Q2, 72,571 in Q3 and 81,550 in Q4.
The second graph shows the NODs normalized by the approximate number of owner occupied units in California. Normalized, 2007 foreclosure activity is 37% higher than '96 (the previous record year), as opposed to 57% higher in nominal numbers.

The number of mortgage default notices filed against California homeowners jumped last quarter to its highest level in more than fifteen years, a real estate information service reported.

Lending institutions sent homeowners 81,550 default notices during the October-to-December period. That was up by 12.4 percent from 72,571 the previous quarter, and up 114.6 percent from 37,994 for fourth-quarter 2006, according to DataQuick Information Systems.

Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992.

"Foreclosure activity is closely tied to a decline in home values. With today's depreciation, an increasing number of homeowners find themselves owing more on a property than it's market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move," said Marshall Prentice, DataQuick's president.
...
Last quarter's default numbers were a record in 42 of the state's 58 counties. In Los Angeles County it was 63.5 percent of the first-quarter 1996 peak.
...
Of the homeowners in default, an estimated 41 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 71 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes 'work-outs' difficult.

It's hard to imagine, but this year will probably be worse.