by Calculated Risk on 3/12/2008 06:41:00 PM

From CNNMoney: Wachovia: housing downturn far from over

Speaking to analysts on a Deutsche Bank ... conference call, [chief risk officer] Don Truslow said, 'It feels like we have a ways to go.'

Using a baseball analogy, Truslow said he didn't know if the downturn was in the third, fourth or fifth inning. He added 'we're still before the seventh inning stretch.'

And if the economy gets worse, 'we could find ourselves right now in very early innings of the credit cycle,' Truslow said.

by Calculated Risk on 3/12/2008 03:34:00 PM

Talk about tighter lending standards! From The Canadian Press: Borrowing requirements tightening and changing regularly in U.S.

Tom Kelly, a spokesman for JPMorgan Chase & Co. said within the past eight months, Chase has focused on combined loan-to-value ratio (CLTV), documentation and credit scores to improve loan quality, and raised minimum requirements for each. Chase also no longer offers 100 per cent CLTV loans anywhere, with restrictions as tight as a maximum 65 per cent CLTV in Nevada because of rising delinquencies.

Hmmm. Why not just sell the loans to Freddie and Fannie? Both are still accepting higher CLTV loans.

See Tanta's post this morning: Freddie Mac Jumbo-Conforming Guidelines

by Calculated Risk on 3/12/2008 02:34:00 PM

Several years ago I predicted that the National Debt would reach $10 trillion by the time President Bush left office. For a short period (thanks to the housing bubble), it looked like the deficit would be less than I projected.

Now that the housing bust is hitting government revenues, it looks like the $10 trillion projection will be close.

From MarketWatch: Budget deficit widens to [February] record $175.6 billion

The federal government deficit widened to a record $175.6 billion in February, in part because of the economic slowdown and in part because of the extra day in February this year that allowed the government to send out more tax refunds and more benefit checks, the Treasury Department reported Wednesday.

The current National debt is $9.397 trillion (see TreasuryDirect) as of March 10, 2008. That leaves the debt about $603 billion short of my projection with only 10.5 months to go. It will be close!

It is important to understand that the White House and CBO project the "unified budget deficit", not the General Fund deficit. Bush is responsible for the General Fund, and it's the General Fund deficit with some adjustments that will hit the National Debt. From MarketWatch:

For the entire year, the White House expects a budget deficit of $410 billion. The CBO expects a deficit of $396 billion.

Add about $200 billion to get the Bush General Fund deficit.

by Calculated Risk on 3/12/2008 12:23:00 PM

Here are two rough methods to estimate the impact of declining house prices on personal consumption expenditures (PCE). The first uses Mortgage Equity Withdrawal (MEW) and estimates the portion of the "Home ATM" that is consumed. The second is an estimate based solely on the changes in house prices (See: Carroll, Otsuka, and Slacalek, How Large Is the Housing Wealth Effect? A New Approach October 18, 2006).

The following graph shows MEW (provided by the Fed's 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.
According to Dr. Kennedy's analysis, MEW in 2006 was $680 billion, and declined to $464 billion in 2007. Greenspan estimated that approximately 50% of MEW is consumed, and it is probably consumed over several quarters. We can estimate that perhaps half of the $216 billion decline in MEW (or $100 billion) is the drag on PCE in 2007 and early 2008 from declining MEW.

With tighter lending standards, and falling house prices, MEW will probably decline sharply in 2008. Imagine if MEW falls to $100 billion; a decline of $364 billion from 2007. That would be a drag of $180 billion or so on PCE.

Carroll, et. al, estimated:

"In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final longrun effect around 9 cents."

Imagine house price declines of 10% in a given year. With total household real estate assets of approximately $20 Trillion (Fed's Flow of Funds report, Table B.100, line 4), a 10% decline in house prices would reduce household wealth by $2 trillion. Using Carroll's long run estimate of 9 cents per $1 change in the marginal propensity to consume, gives a drag on PCE of about $180 billion.

Let's use the $180 billion as the drag on PCE in 2008. This is a large number, but we have to put that number into perspective. From 2006 to 2007, nominal PCE increased by $508 billion (See BEA GDP report line 2).

So perhaps declining house prices will reduce the increase in PCE from $500 billion to closer to $300 billion in 2008 (in nominal terms), and perhaps PCE will decline in real terms (adjusted for inflation), but the impact probably isn't large enough to reduce nominal PCE.

Although the impact on PCE from declining house prices will probably be significant, the size of the impact is not huge when compared to the overall U.S. economy. This is one of the reasons I think the recession will not be severe (unemployment will not rise to 8%), although I do expect the slowdown to linger, and the recovery to be sluggish (because housing will not be an engine of recovery this time).

by Calculated Risk on 3/12/2008 11:57:00 AM

From Reuters: UPS says Feb volumes down, could hurt earnings

Citing worsening economic conditions package delivery company United Parcel Service ... said on Wednesday its U.S. volumes were down in February ...

Atlanta-based UPS said that while U.S. volumes declined virtually across its "entire customer base" in February, its international volumes, including U.S. export volumes, continued to show strong growth.

A couple of comments: The shippers (like UPS and FedEx) are usually pretty decent coincident indicators of economic activity. That is the bad news. The good news is international shipping and export volumes (because of the weak dollar) are strong.

by Anonymous on 3/12/2008 11:45:00 AM

Well, this is interesting. The GSEs have decided to compete with each other.

I summarized Fannie Mae's conforming jumbo guidelines here. The Freddie guidelines just published have some substantial differences:

1. Freddie is accepting 40-year fixed as well as 30-year fixed with a 10-year IO (Interest Only) term. Fannie is 30-year only and no fixed-rate IO.

2. Freddie is allowing cash-out refis on principal residences only, with a maximum LTV of 75%, a minimum FICO of 720, and a maximum disbursed cash limit of $100,000. All cash-outs get a 1.00% fee hit.

3. Freddie is allowing a maximum LTV/CLTV for purchases of 90% on an ARM; Fannie allows 90% only on FRMs. Freddie's FICO requirements are slightly tighter.

4. Freddie will allow loans to be approved through Loan Prospector (its automated underwriting system), and will therefore allow "Accept Plus" documentation. (If the loan is underwritten without LP, it requires standard full doc.) "Accept Plus" allows partially-verified income for salaried borrowers and stated income for self-employed borrowers. Loans receive "Accept Plus" eligibility based on LP's internal evaluation of the entire loan file; it cannot be used with non-LP loans. Fannie is not allowing AUS and requiring full doc on all loans (so far).

5. Freddie's base fee adjustments are like Fannie's, .25 for a fixed and .75 for an ARM. Besides the cash-out adjustments, Freddie is also charging an additional .50 for no-cash-out refinances.

6. Otherwise the guidelines are essentially similar.

I know I promised to make some estimates of origination volume of the LFKAJ, but every damned time I think I've got all the data, it just gets more interesting.

by Calculated Risk on 3/12/2008 10:34:00 AM

From MarketWatch: Freddie Mac CEO sees U.S. home prices falling further

Speaking to analysts on a conference call, CEO Richard Syron estimated that housing prices, from peak to trough, have dropped only a third as far as he thinks they're going to. The McLean, Va.-based company's expecting a peak-to-trough decline of 15% in all.

This implies Syron believes house prices have fallen 5% so far. This is one of the problems: it's hard to tell exactly how far prices have fallen.

The Case-Shiller National House Price index suggests prices are off 8.9% over the last year, and 10.1% from the peak (as of the end of Q4). The OFHEO Purchase Only index shows prices are essentially flat year-over-year, and off 2.5% from the peak.

Syron is using the OFHEO index. I lean toward the Case-Shiller index, especially for individual cities.

by Calculated Risk on 3/11/2008 08:56:00 PM

This is a followup to the Housing Wire story yesterday on HELOCs.

From Robin Sidel at the WSJ: Latest Trouble Spot for Banks: Souring Home-Equity Loans

Here comes another headache for banks suffering from the mortgage downturn: Losses on home-equity loans are soaring ...

"These losses are well beyond what we would have modeled...and continue to get worse," said Charles Scharf, head of J.P. Morgan's retail business.

by Anonymous on 3/11/2008 06:02:00 PM

UPDATED BELOW

Or whatever it is you guys are. The sort who become fascinated by weird housing-related data. The sort with good researching abilities. The sort with a surprising amount of time to kill given your apparent educational background and skill levels. You know, UberNerds.

I was spending some time today with the official list of counties that are subject to the new higher jumbo-conforming loan limits. All the usual suspects are on there, plus a few surprises. Like, Athens County, Ohio.

What is Athens County, Ohio doing on this list? It's the only county in Ohio to make the list, which given Ohio's hideous RE market conditions, isn't that surprising. But why did this county--which is not even a metropolitan area (it's a "micro area")--become the highest-cost county in Ohio, loan-limit-wise? The new conforming loan limit for Athens County is $432,500. I'm having a hard time finding data on median home prices in Athens County--since it isn't even an MSA--but I do see that, according to the Ohio Association of Realtors, the average price of homes sold in December of 2007 was $111,891. The highest average current listing price I found on a real estate site was $158,000. I could only find a handful of listings over $400,000. Because the new jumbo-conforming limits are supposed to be 125% of area median prices, that implies a median price for Athens County, Ohio of $346,000.

I hasten to add I have nothing against Athens County, Ohio. I'm sure it's a very nice place. But can anyone tell me what they're smoking at HUD? Does somebody with some important political connections live in Athens County? Was the median price calculated on more than two home sales? Help me out here, Nerds.

UPDATE: Ponder this (source):

(Thanks, JKB!)

by Calculated Risk on 3/11/2008 05:38:00 PM

Professor Krugman writes Sterilized intervention, big time

[B]asically the Fed is going to be swapping Treasuries for dubious securities, in an attempt to give the market a REALLY BIG slap in the face. I understand what they’re doing, and might have done the same in their place. Still, all I can say is Wheeeee!

Also Krugman suggests Bernanke is following the paper he co-authored in 2004: see Non-standard Ben:

[A]nyone trying to understand what the Fed’s up to should look at the 2004 paper Ben Bernanke co-authored on “Monetary Policy Alternatives at the Zero Bound”. One alternative was “quantitative easing” — basically forcing extra reserves on banks, whether they want them or not, which is what the Fed did in the first wave of panic. Another is “changing the composition of the central bank’s balance sheet”, that is, buying assets other than the usual T-bills.

Steve Waldman at interfluidity writes: The Fed's Balance Sheet Constraint

After the FAF expansion, repo program, and TSLF, the Fed will have between $300B and $400B in remaining sterilization capacity, unless it issues bonds directly.

In the simplest terms, there are two related problems: a liquidity crisis (now in the 3rd wave), and a solvency crisis. With the TSLF, the Fed is trying to keep credit available for the most credit worthy borrowers in the short term, while they wait for fiscal and monetary policy to hopefully stimulate the economy later this year.

As Waldman notes, the Fed has used up a significant portion of their available resources already. So, this "slap in the face" better work. If we start talking about a 4th wave of the liquidity crisis, watch out!

The solvency crisis will persist until housing prices near their nadir. Since the solvency crisis will remain a threat to spillover into another liquidity crisis, it might be difficult for the Fed to unwind these "temporary" actions any time soon.