by Calculated Risk on 3/18/2008 08:39:00 AM

The Census Bureau reports on housing Permits, Starts and Completions.

Some key points on permits:

Housing permits in February were below 1 million Seasonally adjusted annual rate (SAAR). This is the lowest since 1991.

Single family housing permits were at 639 thousand SAAR. This is also the lowest since 1991.

Click on graph for larger image.

Here is a long term graph of starts and completions. Completions follow starts by about 6 to 7 months.

Privately-owned housing starts in February were at a seasonally adjusted annual rate of 1,065,000. This is 0.6 percent below the revised January estimate of 1,071,000 and is 28.4 percent below the revised February 2007 rate of 1,487,000.

Single-family housing starts in February were at a rate of 707,000; this is 6.7 percent below the January figure of 758,000.

The second graph shows Single family housing starts vs. New Home sales. Single family starts also include homes built directly by owners, in addition to homes built for sale (and some other minor differences).

This graph indicates the difference between single family starts and new home sales has narrowed recently, possibly indicating: 1) that fewer homes are being built by owners, and 2) that single family starts are now low enough to begin to reduce the inventory of new homes for sales.

by Calculated Risk on 3/17/2008 11:42:00 PM

From Bloomberg: Bernanke May Run Low on `Ammunition' for Loans, Rates (hat tip jsdg)

The Fed has committed as much as 60 percent of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more with yesterday's decision to become a lender of last resort for the biggest Wall Street dealers. The central bank has cut short-term rates by 2.25 percentage points since September and will probably reduce them again tomorrow.

These are two separate issues. The Fed isn't constrained by their balance sheet; they can just keep on lending. My understanding is their balance sheet limits the amount of sterilized lending (non-inflationary); further lending would increase the money supply and be inflationary.

On interest rates, the Fed is clearly running out of ammunition, and the street is expecting another rate cut tomorrow of between 50 bps and 100 bps. This raises the question of a liquidity trap (see Krugman: How close are we to a liquidity trap?). For those that want to understand the Japanese experience, I recommend a series of articles written by Professor Krugman in the '90s (those with asterisks are technical for all you Econ UberNerds!)

OK, some people might be asking what is sterilization? Sterilization means intervention that does not increase the money supply, like exchanging treasuries for mortgage backed securities (MBS). Say a bank needs cash, it puts up MBS as collateral (the Fed doesn't actually swap ownership), and the Fed loans the bank treasuries (that they are holding on their balance sheet). The bank can sell the treasuries, and raise cash, but the money supply doesn't increase.

by Calculated Risk on 3/17/2008 05:31:00 PM

From the FDIC: Federal Deposit Insurance Corporation Stresses Importance of Managing Commercial Real Estate Concentrations

The Federal Deposit Insurance Corporation (FDIC) has issued a letter re-emphasizing the importance of strong capital and loan loss allowance levels, and robust credit risk-management practices for state nonmember institutions with significant concentrations of commercial real estate (CRE) loans, and construction and development loans. The Financial Institution Letter, Managing Commercial Real Estate Concentrations in a Challenging Environment, complements the principles articulated in the December 6, 2006, interagency statement titled Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.

FDIC Chairman Sheila C. Bair said, "Although commercial real estate lending can be a profitable business line for banks, it is a good time to re-emphasize the 2006 guidance because a number of banks have significant CRE concentrations, and the weakness in housing across the country may have an adverse effect on those institutions. Banks with CRE concentrations should take steps to strengthen their overall risk-management framework and maintain strong capital and loan loss allowances. We encourage institutions to continue making commercial real estate and construction and development loans available in their communities using prudent, time-tested lending standards that rely on strong underwriting and loan administration practices."

The Letter recommends that state nonmember banks with significant CRE loan concentrations increase or maintain strong capital levels, ensure that loan loss allowances are appropriately strong, manage portfolios closely, maintain updated financial and analytical information, and bolster loan workout infrastructures.

My prediction is that most of the coming bank failures will be related to high concentrations of CRE and C&D (construction and development) loans.

by Calculated Risk on 3/17/2008 02:14:00 PM

Henry Blodget (yes ... Blodget!) provides an excerpt from Deutsche Bank's Mike Mayo on Lehman: Lehman: We're Not Bear, and We're Not Screwed (hat tip Interesting Times)

Deutsche Bank's Mike Mayo writes:

"Lehman is Not Bear. 1) It has more liquidity, 2) It has support among its major counterparties, evidenced by an extension on Friday of a $2B working capital line with 40 banks (one issue w/Bear Stearns [BSC] seems to be that counterparties pulled in lines). 3) Its franchise is more diversified given almost half outside the US and an asset management business that is more than twice as large relative to its size (BSC was more plain vanilla). 4) It has a seasoned and experienced CEO (Bear's CEO was new). We maintain our Buy rating given a belief that LEH will weather this storm and our estimate of a price to adj. book value ratio of 83%.

"The industry issue seems more liquidity than solvency, and LEH protected itself more fully after it's problems similar to BSC in 1998. At year-end, it had $35B of excess liquidity combined with $63B of free collateral, implying $98B available for liquidity, or $70B more than needed for $28B of unsecured short-term debt (which includes the current portion of long-term debt). While it also has $180B of repo lines, we take comfort that 40 banks extended credit on Friday and believe that some of the repos are likely to be termed at least to some degree."

Mike Mayo has been ahead of his peers on the mortgage related losses.

by Calculated Risk on 3/17/2008 01:50:00 PM

I don't know the source to give credit.


A second photo (hat tip BR)

by Calculated Risk on 3/17/2008 01:14:00 PM

Fortune has a Q&A piece with Professor Krugman: How bad is the mortgage crisis going to get?

Fortune: By year-end, 15 million Americans could have mortgages worth more than the value of their homes. What happens then?

Krugman: Actually, I think home prices will fall enough for us to produce about 20 million people with negative equity. ... if you have negative equity, you can end up being foreclosed on, and then some people will just find it to their advantage to walk away. We're probably heading for $6 trillion or $7 trillion in capital losses in housing. Some fraction of that will fall on owners of mortgages. I still think the estimates people are putting out there - $400 billion or $500 billion in losses - are too low. I think there'll be $1 trillion of losses on mortgage-backed securities showing up somewhere.

Much more in the Q&A.

by Calculated Risk on 3/17/2008 01:01:00 PM

Click on graph for larger image. The NAHB reports that builder confidence was at 20 in March, unchanged from 20 in February.

Here are the individual components.

From NAHB: Builder Confidence Remains Unchanged In March

Builder confidence in the market for new single-family homes remained unchanged in March, according to the latest NAHB/Wells Fargo Housing Market Index (HMI), released today. The HMI held firm at 20, which is near its historic low of 18 set in December of 2007 (the series began in January of 1985).
...
Two out of three of the HMI’s component indexes were unchanged in March from the previous month. The index gauging current sales conditions for newly built single-family homes held firm at 20 while the index gauging traffic of prospective buyers stayed at 19 following a significant gain in February. The index gauging sales expectations for the next six months edged downward by a single point to 26.

Regionally, the HMI was mixed, with the Northeast posting a two-point decline to 21, the Midwest holding even at 16, the South reporting a two-point gain to 26 and the West showing a one-point decline to 15.

by Anonymous on 3/17/2008 11:03:00 AM

If you can spare a few minutes from contemplating the Great Bear Stearns Two-Buck Upchuck, an amusing tale from the San Francisco Chronicle, via Atrios.

First, the title: "More in foreclosure choose to walk away."

Second, the examples. There are two. The first one is one Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. For some reason, that name sounded familiar, so I asked Mr. Google about it. It came up with an article I posted on a couple of weeks ago from the Wall Street Journal, published February 29, which also makes the claim that "walkaways" are an increasing trend. The WSJ piece gives exactly one example: Sgt. Skaggs.

Note to reporters: one borrower does not constitute a "trend." Also, the same borrower counted twice does not constitute a "growing trend."

Oh well, the Chronicle also has this guy, who won't use his name for obvious reasons:

A Discovery Bay man who asked not to be identified said he is "upside down" on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.

"I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool," he said. "Now I've got this fabulous pool and fabulous house, but it's not worth anything. Why shouldn't I be building equity over the next four to five years instead of playing catch-up?"

The man said he has not made a mortgage payment for five months.

"I'm playing the bank game," he said. "I'm playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I'm really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I'd love (to have it) lopped down to a $450,000 basis rather than $710,000."

If the bank won't negotiate, he'll walk away, the man said.

If ever there were a case for which a lender would go to the considerable trouble of pursuing a deficiency judgment, Mr. Discovery Bay would be it. Playing this kind of "chicken" on a recourse loan? That's some chutzpah.

by Calculated Risk on 3/17/2008 10:42:00 AM

Last night we discussed the conference call real time in the comments.

For those that missed the call, the WSJ has the transcript this morning. Here is the presentation material.

There is some good detail.

Guy Moszkowski - Merrill Lynch - Analyst
Okay, so then just to cap it off, it certainly doesn't sound as if when you went in there you found a massive problem with respect to risk management or hedging. It sounds like given that you're saying that it's very similar to your own, it sounds like you found something that you're fundamentally comfortable with. Is that fair?

Bill Winters - JPMorgan Chase - Co-CEO, JPMorgan Investment Bank
That's right. In fact what we've -- we were very pleasantly surprised to see that it was a very well run, tight operation with good risk controls and a risk discipline that was very similar to our own.

And on the $30 billion from the Fed:

[W]e have put in place with the Federal Reserve a special lending facility. It's a non-recourse facility to JPMorgan Chase for up to $30b or so of illiquid assets, largely mortgage-related. So that is in doing our due diligence an area that we needed to get comfort upon, was some of the more illiquid assets on the balance sheet. So obviously couldn't be in stronger hands than to be -- arrange for financing through the Federal Reserve and again with no recourse to JPMorgan Chase.

by Calculated Risk on 3/17/2008 09:22:00 AM

From the WSJ: PMI Posts $1.01 Billion Loss Amid Housing, Credit Woes

PMI Group Inc. swung to a fourth-quarter loss as the company recorded huge losses due to its stake in Financial Guaranty Insurance Co., as well as losses at its U.S. mortgage insurance operations amid turmoil in the housing and credit markets.

The confessional will be busy again this week.