by Calculated Risk on 3/24/2008 10:44:00 PM

From San Francisco Business Times: Wells Fargo CEO says he's open to conducting a Fed-assisted acquisition

Wells Fargo CEO John Stumpf said the financial crisis is presenting the bank with more acquisition opportunities.

"I would not be averse to a Fed-assisted transaction," Stumpf said in a recent interview with the San Francisco Business Times. "Fixer-uppers don't bother us."

The article mentions National City Bank as a possible acquisition.

Note: for some reason I picture Tanta's Mortgage Pig feeding at the public trough.

by Calculated Risk on 3/24/2008 04:59:00 PM

The Chicago Fed's national activity index isn't followed very closely. However it is interesting that the Chicago Fed argued that there is "an increasing likelihood that a recession has begun" and that their national activity index has been at recessionary levels for three months (December, January and February).

Click on graph for larger image.

From the Chicago Fed: National Activity Index

The three-month moving average index was below the –0.70 threshold in February. Such an occurrence following a period of economic expansion indicates an increasing likelihood that a recession has begun. In addition, downward revisions to previously published data, particularly employment-related indicators, lowered the index for the previous two months below the –0.70 threshold. Thus, February marked the third consecutive month the three-month moving average remained below this threshold.
emphasis added

December is my guess as the beginning of the current recession (of course I'm assuming that NBER calls a recession).

by Calculated Risk on 3/24/2008 03:20:00 PM

The TED Spread from Bloomberg:

The TED spread has declined to 1.52% (from over 2% last week).

Note: the TED spread is the difference between the three month T-bill and the LIBOR interest rate. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

The third wave of the liquidity crisis appears to have peaked.

If you want a cliff diving chart, see the Shanghai market. (hat tip James)

by Calculated Risk on 3/24/2008 12:43:00 PM

For more, see my earlier post: February Existing Home Sales

Click on graph for larger image.

The first graph shows the inventory by month since 2002.

There are two key points: During the boom years (2002 through mid-way 2005), inventory levels stayed fairly steady. During the bust years, the inventory level has increased to a new record level for each month.

February 2008 was no exception. Even though inventories decreased slightly from January, inventory is at an all time record high for February.

With the coming Spring selling season, the question is: Will inventory levels keep setting new records, or will inventories hold steady (or even decline)?

The second graph shows the normalized seasonal inventory pattern for the last few years. The data is normalized to the ending level of the previous year = 100.

Note: the NAR doesn't seasonally adjust inventory.

This shows that the inventory level usually increases through July, with some noise. The next few months will tell us if inventory is stabilizing, or if the decline in February was just noise.

And finally, here is a repeat from earlier this morning. This is a graph of Not Seasonally Adjusted existing home sales for 2005 through 2008.

I'm repeating this graph so emphasize that February is typically one of the least important months of the year for existing home sales. Small changes in actual Not Seasonally Adjusted sales (due to weather, leap year, or other factors) can have a significant impact on the headline Seasonally Adjusted numbers.

The data for March will be much more important since that is the beginning of the Spring selling season.

by Calculated Risk on 3/24/2008 11:05:00 AM

From AP: JPMorgan raises Bear purchase price

by Calculated Risk on 3/24/2008 10:00:00 AM

The NAR reports that Existing Home sales were at 5.03 million (SAAR) unit rate in February.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.9 percent to a seasonally adjusted annual rate of 5.03 million units in February from a pace of 4.89 million in January, but remain 23.8 percent below the 6.60 million-unit level in February 2007.

Click on graph for larger image.

The first graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in February 2008 (5.03 million SAAR) were the weakest February since 1998 (4.77 million SAAR).

Here is a graph of Not Seasonally Adjusted existing home sales for 2005 through 2008.

This graph shows that sales have plunged in February 2008 compared to the previous three years. This also shows that February is typically one of the least important months of the year for existing home sales. The data for March will be much more important since that is the beginning of the Spring selling season.

The third graph shows nationwide inventory for existing homes. According to NAR, inventory decreased to 4.03 million homes for sale in February.

Total Total housing inventory fell 3.0 percent at the end of February to 4.03 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, down from a 10.2-month supply in January.

The typical pattern is for inventory to decline in December, and then to slowly rebound in January and February, and really start to increase in March.

I'd expect record levels of existing home inventory later this spring and summer.


The third graph shows the 'months of supply' metric for the last six years.

Months of supply decreased to 9.6 months.

NOTE: NAR reported months correctly (my mistake)

This follows the highest year end months of supply since 1982 (the all time record of 11.5 months of supply). Even if inventory levels stabilize, the months of supply could continue to rise - and possibly rise significantly - if sales continue to decline. I'll have more on inventory later.

by Calculated Risk on 3/24/2008 12:41:00 AM

From the NY Times: JPMorgan in Negotiations to Raise Bear Stearns Bid

JPMorgan Chase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations.
...
Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share ... The renegotiation, which would set a sale price of more than $1 billion ...

The actual price to JPMorgan is the cost of integration and any write-downs of Bear Stearns assets plus the share cost.

JPMorgan estimated the transaction-related costs of approximately $6 billion pretax. This included litigation, cost of de-leveraging, conforming accounting and consolidation. The $2 per share price was almost irrelevant compared to the other costs - the $2 per share was approximately $236 million.

Changing the deal to $10 per share increases the purchase cost from about $6.25 billion to about $7.25 billion, and will probably help obtain shareholder approval (a serious problem at $2 per share). This isn't a huge difference for JPMorgan, but it makes a significant difference to Bear shareholders.

by Calculated Risk on 3/23/2008 07:38:00 PM

From the Financial Times: US can learn from Japan’s crisis

The US should inject public funds into its financial system, which is undergoing a worse crisis than that experienced by Japan during its non-performing loan crisis, according to Japan’s financial services minister.

“It is essential [for the US] to understand that given Japan’s lesson, public fund injection [into the financial sector] is unavoidable,” Yoshimi Watanabe told the Financial Times.
...
The remarks are the first public expression of concern by a Japanese cabinet minister that the impact of the current financial market turmoil could be much more serious than Japan’s experience during its “lost decade” of abnormally slow economic growth in the 1990s.

All through the '90s U.S. policy makers offered unsolicited advice to Japan, so turnaround is probably fair play. Still, given Japan's "lost decade", it isn't very comforting receiving advice from Japan.

Note: I'm not an expert on Japan, but I believe that the Japanese real estate bubble was much larger (relative to their economy) than the U.S. bubble. Here are some numbers I found (If anyone has better data, please let me know):

At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion ...

Japan's GDP (in dollars) was about $3.5 trillion in '91, so the value of all real estate was about 5 times GDP.

Using the Fed's Flow of Funds report, the value of U.S. real estate at the end of 2007 was:
Households and Nonprofit Organizations, $22.5 trillion
Nonfinancial Corporate Business, $8.8 trillion
Noncorporate Business, $7.3 trillion

For a total of $38.6 trillion. GDP in 2007 was $13.8 trillion, so value of U.S. real estate was about 2.8 times GDP (maybe slightly higher at the peak).

There are many other differences between Japan's asset bubble of the early '90s, and the current U.S. asset bubble - but it does appear that Japan's bubble was significantly larger (relative to their economy).

by Anonymous on 3/23/2008 10:07:00 AM

Since it's Easter Sunday, and you don't have anything better to do than munch on Peeps and read about relitter perfidy, another in our continuing series on real estate fraud.

Via Mish, this story of renters in a bind:

When the Hays found their rental home last June they were pleased. Not only could they move in right away, the landlord asked them what they could afford for a deposit. There was even the chance to buy the home at some point in the future.

But that would all change in less than seven months. There's no forgetting the day Jennifer and Travis learned something wasn't right with their rental home. Their landlord called January 15, a memorable day. It was the same day Jennifer was headed into surgery.

"She called to tell me I should start looking for another place, that she could sell me a house," Jennifer explains. "And that's when I figured out that not only am I going through a miscarriage, but I was also going to lose my house."

You really want to read the whole thing, including the unbelievable text messages the relitter-landlord sent to the renters, trying to get them to pay February rent (after the bank took the house at the foreclosure sale in the end of January).

What I don't think is necessarily clear in the story as reported is the timeline. A "perfect" foreclosure in Nevada--that is, one without unusual delays, that uses basically standard servicer approaches for when to start FC proceedings--takes around 270 days from the last payment made. Nevada has a 90-day reinstatement period in the statutes, meaning that once the initial Notice of Default is filed, the borrower has the next 90 days to bring the loan current and avoid FC. After the 90 days, if the loan isn't reinstated, the notice of sale must be published three times over three consecutive weeks. Including time for processing the original FC referral (before the NOD is filed), it takes about 120 days to get through the process to the sale of the property. If the servicer does not initiate the FC process until the 120th day of delinquency (the 150th day since a payment was made), the whole thing is 270 days.

In our case at hand, that means that the owner of the property probably made her last mortgage payment on May 1, or possibly June 1 if the servicer started FC after the 90th day of delinquency. (This is assuming she ever made a payment; the article doesn't tell us when she bought the property.) She rented the place to the Hays in June. In other words, we don't have a case here of a landlord who gets into financial difficulties at some point in time after renting the place to tenants. We have someone who appears to have intended from the start to "skim off" rents without paying the mortgage.

I really don't know how the Hays could have spotted this up front; there are no public records that will tell you if your landlord is delinquent the day you sign your lease, or is going to be delinquent thereafter. Tenants can check public records to see if a landlord is in foreclosure--if that Notice of Default or whatever it is in a specific state has been filed--but there's nothing to see until that document is filed. In the case at hand, it appears that nasty letters from the servicer were actually coming to the property address, but these tenants were apparently unwilling to open mail not addressed to them, and fell for the landlord's "explanation" of what that flurry of certified mail was all about. I'm sure it never occurred to the Hays that while some legitimate landlords will have servicer mail directed to the property address, that can also be a good indication that the property was obtained under occupancy fraud (that is, that the landlord claimed to the lender that the property would be the landlord's principal residence). Sadly, there's no sure-fire way for people who rent single-family homes from an individual to really verify whether or not they're getting caught up in a rent-skimming scam.

There is also no sure-fire way for servicers to know that this is going on, although there are steps that can be taken. A while ago we were confronted with a rant from our favorite Gretchen Morgenson, railing about servicers hitting delinquent borrowers with "unnecessary" property inspection fees. I have no way of knowing if the servicer in the Hays' case did inspections at all, if the inspector saw signs of occupancy and assumed the occupants were the owners, or if the inspector did catch on and the FC was actually accelerated because the servicer feared that rent-skimming was, indeed, transpiring. I do always fear, when the delinquent owner is a member of the local RE establishment, that the "inspector" might have eyes wide shut. I do actually claim to know that this is why delinquent borrowers find themselves with a bill for periodic inspections.

I make no claims that scams like the one perpetrated against the Hays--and it is a scam to enter a rental agreement with someone while not disclosing that you're about to lose the property to FC, that's kind of a material fact--are common or usual or an "epidemic." I am, however, convinced that a lot of "speculators" are suddenly trying to convert themselves into "landlords," and that the results aren't going to be good for anyone--not for the tenants, and not for the lenders. There's a problem with market-comparable rents not being high enough to satisfy the mortgage payment, and then there's the problem that it may not be anyone's intention to satisfy the mortgage payment anyway.

Nonetheless, I've seen some people lately encouraging renters to "take advantage" of the ability to rent nice big houses on the cheap from an amateur landlord these days, given the distress in the RE market. I'm merely observing that there is some room for caution, yet again, when the deal sounds "too good to be true." I am also observing that folks who have no experience with being landlords, and who are tempted to buy properties "on the cheap" in a foreclosure or short sale and rent them out, might want to stop and consider that they might have to "compete" with "distressed" landlords who can offer prospective tenants a "better deal"--no or minimal deposit, short-term or flexible lease terms, low rent--since they have no intention of making mortgage payments. In the current environment, you had better make sure you can carry the PITI and maintenance on a rental property you buy with a very high "vacancy factor." Any "RE guru" who is telling you different may well have, shall we say, ulterior motives.

by Calculated Risk on 3/22/2008 04:33:00 PM

From Professor Delong: Sounding the Alarm on the Financial Crisis

"Stage III of a financial crisis is when a central bank runs out of ammunition--when pushing interest rates too the floor and swapping out all of its assets does not restore the good equilibrium. Then you face a threefold choice: depression, inflation, or public intervention. Depression is to be avoided. Inflation--resolving the financial crisis by printing enough money to boost the price level far enough that all of a sudden everyone's incomes and real asset values are high enough to pay off their nominal debts--is generally best avoided too. As John Maynard Keynes wrote more than eighty years ago: "The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient--perhaps cannot survive--without one."

So if Depression is unthinkable, and inflation is best avoided, this leaves public action. If the good equilibrium has vanished - as it looks like it has - because the supply of risky assets is too large for financial intermediaries to want to hold them given their capital, then the central government has to take action: to boost or to make financial intermediaries boost their capital so that they will demand more risky assets at high prices, and to diminish the supply of risky assets offered on the financial markets by either a) guaranteeing some of them or b) by buying up some of them itself.

It's time to start thinking. If we don't want to wind up in a deep depression or a big inflation, it is time to recognize might well run out of ammunition in dealing with this financial crisis, and figure out what kind of government action we want to see, and how we can set in in motion quickly if it becomes necessary."

I do not believe we've reached what Professor DeLong calls Stage III of a financial crisis - and I don't think the Fed is out of ammunition - but I think DeLong is correct that we should be planning ahead. The Fed can only do so much, and DeLong is arguing we should be prepared if it becomes clear the Fed is ineffective.

Along those lines, Professor Krugman writes: Weird Interest Rates.

Treasury rates have plunged close to zero, even though Fed funds is still 2.25%. Since open-market operations take place in Treasuries, I take this to mean that the Fed may not actually be able to reduce short-term rates much from current levels — which means, in turn, that conventional monetary policy has been taken off the table.