by Calculated Risk on 4/10/2008 02:20:00 PM

From AP:

The $10 Trillion man contest is on!

by Calculated Risk on 4/10/2008 01:28:00 PM

From Reuters: Senate backs tax break-focused housing rescue bill

At a cost of $15 billion over 10 years, the Senate bill would give a $6 billion tax break to home builders by temporarily extending a rule that lets businesses count current losses against taxes from prior profitable years.

Home builders such as Pulte Homes and KB Home would benefit from this proposed two-year extension of the net operating loss carry-back rule, according to analysts.

But the House's bill excludes the extension. ...

The Senate bill would also raise the limit on the size of mortgages the Federal Housing Administration may insure, to $550,000, while setting up a $7,000 tax credit, spread over two years, for buyers of homes in or near foreclosure.

Daniel Gross at Slate wrote about this proposed builder tax break: A Tax Break for Bubble Heads

"The proposed tax break is hard to justify for several reasons. It does nothing for slow and steady companies that keep their heads and simply rack up profits year after year — and pay their taxes accordingly. Rather, it rewards the most reckless participants in the bubble. If you borrowed a ton of money to build spec houses in Miami and reported $2 billion in profits between 2002 and 2007 but gave up all those profits by notching a $2 billion loss this year, the extended carryback has a great deal of value. If you've been building affordable housing in Wichita, Kan., and booked $300 million in profits in those years, and then, through careful management of costs, managed to eke out a $5 million profit this year, it has no value. The big public homebuilders, whose shares rallied on the news of this potential tax break, didn't pay any windfall taxes on the bubble-era earnings. Why should they get an extraordinary post-bubble windfall?"
...
"The proposal to give new tax breaks to homebuilders and banks is yet another example of the pernicious trend of privatizing profit and socializing losses, which is gnawing away at faith in the system. Dilute the shareholders, not the taxpayers."

I'd go a step further: The U.S. has too much home building capacity, and delaying the bankruptcy of some "bubble head" builders will delay the eventual recovery for housing and the economy. Hopefully this provision will be removed from the bill by the House.

by Calculated Risk on 4/10/2008 10:15:00 AM

The Census Bureau reported a goods and services deficit of $62.3 billion for February 2008. Exports, in February, increased almost $3 billion to $151.3 billion, but imports increased by over $6 billion to $213.7 billion - despite petroleum imports being off slightly in February.

Export growth was still strong, but the rise in imports is very disappointing - especially if the increase in imports was due to rising prices (export and import prices will be released tomorrow). Note: we have to be careful to not read too much into one month's data.

This also suggests Q1 GDP will be weaker than currently expected.

Click on graph for larger image.

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit). The current probably recession is marked on the graph.

The ex-petroleum deficit has been falling fairly rapidly, almost entirely because of weak imports. Hopefully the increase in February was just monthly noise.

by Anonymous on 4/10/2008 08:34:00 AM

It does upset them so much.

This is a rather startling NPR piece about NACA, a non-profit housing assistance outfit, recruiting former subprime brokers (on the "it takes a thief" model, apparently). I was struck by the phrasing here (I see this a lot):

Barbosa says she was pretty fair to her clients and got them the best deal she could in the marketplace. But she says there was plenty of incentive not to put the customer first: Lenders would offer her 1 percent or 2 percent of the price of the loan as a kickback if she persuaded her client to take a higher interest rate. That was legal and commonplace.

Then there were the negative-amortization or "pick-a-payment" loans. Those offered low payment options to begin with but often exploded on the homeowner. As interest rates reset, often at much higher levels, homeowners faced larger payments. That's because the minimum payment required at the introductory rate didn't even cover the interest on the loan, let alone the principal.

"The bottom line is that the lender offered an incentive of 3 percent to the broker if they put [a client] into that particular loan," Barbosa says.

I truly wonder how people who have never been a wholesale lender or a mortgage broker think this works. Read it with naive eyes: it rather sounds the lender is doing a real sales job on the broker, doesn't it? As if the lender called up and said something like, "I see you have here a 7.00% loan. You know, I could pay you a couple of points if you can change this to 8.00%. Or, you know, three points if you can go with the "Pick A Payment." What do you think? Want to be rich today?"

However. Unless things changed markedly in this business in the few years since I worked in it, it doesn't really play out that way. Brokers get rate sheets faxed to them by wholesale lenders. Those "premium" rates with the 102-103 pricing are simply printed on the rate sheet along with the "par" rates. Certainly you can conclude that if wholesalers didn't want brokers to use those premium rates, they wouldn't have published them on the rate sheet. On the other hand, I'm a touch doubtful about the implication that these rate sheets did such a high-pressure sales job on these brokers. After all, you can conclude that if the wholesalers didn't want brokers to use the par or discounted rates, they wouldn't have published them on the rate sheet either.

It is a bit tendentious of NPR to use the term "kickback" here for what is, currently, a perfectly legal practice. I suggest that this is a measure of how disgusted the public has become with mortgage brokers: the public, unlike the regulators and the industry, fails to see any meaningful difference between an illegal unearned "referral fee" (the classic definition of the "kickback") and "Yield Spread Premiums" or "normal" broker compensation. I suspect, however, that a lot of brokers will want to shoot the messenger.

(Thanks, Ziggurat!)

by Anonymous on 4/10/2008 06:37:00 AM

Lately all the best blog uproars happen after I've gone to bed. I guess I need to stay up later.

Anyway, it is National Poetry Month. So I say read Moore.

by Calculated Risk on 4/09/2008 08:54:00 PM

UPDATE: I'm going to hold off on the change to "read more" for now. There is a new layout coming soon.

Best to all, CR
P.S. for the few that care, CBS cancelled "Secret Talents".

by Calculated Risk on 4/09/2008 04:35:00 PM

From Dow Jones: Goldman sells $500 mln of Chrysler debt at very deep discount (hat tip barely)

Goldman Sachs placed $500 million of Chrysler Automotive's loans at a price of 63 cents Wednesday to an investor group that included hedge funds ... At such a price, the yield on the debt is more than 20%.

More write-downs coming.

by Calculated Risk on 4/09/2008 04:13:00 PM

Luke Mullins at the U.S. News & World Report interviews FDIC chairwoman Sheila Bair today: FDIC Chief Calls for a Housing Rescue

Bair believes the Bush / Paulson voluntary approach to loan modifications is insufficient, and that government intervention is needed. Here is her justification:

Q: Why does the foreclosure problem warrant government intervention?

Bair: I am increasingly concerned about the foreclosure rate and the potential for a downward spiral, where we have too much inventory, additional foreclosures adding to inventory, which forces home prices down, meaning fewer people can refinance—leading to more foreclosures and more downward pressure on home prices. If this downward spiral takes hold, there could be much broader ramifications for the economy as a whole. So I think we need to come to grips with the need for government intervention. It's not politically popular. We just need to be honest with people that we have a significant problem here and that additional measures are going to have to be taken. And yes, it may cost money.

by Calculated Risk on 4/09/2008 02:20:00 PM

Last month I reported on a home builder selling improved land for 15 cents on the dollar (of builder's total costs). What made the deal work was a tax provision that allowed the home builder to apply the losses to earlier profits (up to two years ago) and receive a nice tax refund.

Many home builders were already in trouble two years ago, and the Senate has proposed legislation to extend the loss carry-back period to four years, as opposed to the current two year period. This would mean the home builders could apply losses this year - like from a land sale - to the huge profits made up to four years ago, at the peak of the bubble, and get a large tax refund.

Now Dow Jones reports that that tax provision is in jeopardy: Builders Fearful As US House Shuns Beneficial Tax Provision

The possibility the U.S. House of Representatives' housing stimulus plan might not include a tax provision that would benefit home builders sent shudders across that industry Tuesday.
...
For the sector, the most significant part of the Senate package would allow companies to apply current losses to taxes paid four years ago, instead of the current two-year carry-back. Builders could apply losses against profits from the boom, and some could receive significant tax refunds.
...
John Burns, a California-based housing consultant, [said]: "This could be the difference between bankruptcy or not."
...
Added Fitch Ratings' Robert Curran: "This would help keep, potentially, some builders afloat."

by Calculated Risk on 4/09/2008 01:38:00 PM

From CNBC: Merrill Expected to Write Down Up to $6.5 Billion

[T]he latest round of write downs are not solely tied to subprime loans, but instead are linked to commercial real-estate debt exposure and other types of loans.

Merrill is scheduled to report its first-quarter results on April 17.

Add this to the projections for Citi (up to $17 billion), Bank of America (up to $10 billion) and J.P. Morgan (about $7.5 billion) and the confessional will be very busy.

Note the shift from mortgage related write-downs to other credit issues, like LBO debt, consumer debt, and commercial real estate (CRE).