by Calculated Risk on 4/14/2008 06:36:00 PM

Here are some comments from the Wachovia conference call (hat tip Brian).

On "walking away":

Q: Kevin Fitzsimmons, Sandler O'Neill: Could you give a little more detail on -- you cited dramatic change in customer behavior or consumer behavior and that led to the decision to cut the dividend, increase capital and so just wondering if you could be particular by -- I'm assuming it's California, but are you talking about people walking away from houses and if you can give any specific examples, thanks.

Ken Thompson, Wachovia Corporation - CEO: I'll let Don talk specifically but I would just say that what we are seeing is that when equity in the home approaches zero, behavior changes. And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses. Don?

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer Ken, that's exactly right. And Kevin, it's just this pattern almost that somewhere -- I don't know where the tipping point is, but somewhere when a borrower crosses the 100% loan to value, somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that have created past dues before, their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.

It's difficult on the walk-away part of the question, that is going on, clearly and there's lots of evidence of that in the market. It's hard to quantify though, from the standpoint of how many of our defaults are just walk-away and the reason is people, they don't tell you. And so we do our best to try to gauge but that portion of the defaults is just kind of hard to quantify. But that behavior is going on. We're seeing in our portfolio the most significant declines and defaults activity in California and of course it's the largest concentration for us in the pick a payment portfolio by far. What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California. But in essence, it built our correlations in the model to assume that they do.

Ken Thompson, Wachovia Corporation - CEO: I might just add that you also see evidence of what Don is talking about if you look across our industry and look at credit statistics on equity loans and equity lines. Because there, at many banks, you're seeing those loans going obviously above 100% loan to value and you're seeing dramatically increasing default rates and losses.”

On REOs and outlook for the housing market:

Truslow (Risk Officer): “[W]e are focused in our efforts to quickly move foreclosed properties related to the pick a pay portfolio as we've talked about before and during the quarter, we took in about 1100 homes and the team did a great job of getting over 800 sold during the quarter in a tough time of the year and in a tough market. So we ended the quarter with just over 900 homes in inventory originated through the pick a payment channel and part of this aggressive action basically served to provide the severity that we recognized on average in the first quarter up to about 32% from about 24% in the fourth quarter and I would just also remind people that included in those severities, we have accounted for basically the disposition cost such as the brokerage fees and even costs that are normally accounted for in period costs such as mowing the grass and fixing up the homes.”

“... the overarching assumption here is that we're about halfway through the decline in housing prices with the trough expected to occur sometime around the middle of 2009.”

On the dramatic change in outlook and "shadow" inventory:

Q: Jonathan Adams, Oppenheimer Capital - Analyst: [I]f I look on page 19 of your presentation, it strikes me that there's nothing in the 90 day past due trends that would justify the kind of change that you have made in your outlook. You can pick a different -- a number of different metrics, whether it's the dividend in suggesting that over a broad range of scenarios it wouldn't need to be cut and then five or six weeks later coming to a different conclusion, or it's some other metrics as well. But it just strikes me as difficult to understand how management's view of the environment has changed so dramatically.

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer: Well, I guess -- this is Don. One thing that doesn't show on the chart is the level of cures between 90 days and further severities and defaults have been dropping. The severities in the market place when we take a house back, it takes a lower price to get homes sold and our outlook is -- and as I think everybody has been reading, there is an expectation that there's a broad accumulation of foreclosed properties that haven't hit the market yet and perhaps even some shadow foreclosures that haven't emerged as yet. So our concern, looking forward is that -- and again, what we're beginning to see more evidence of and sense more of in the first quarter is that conditions are going to continue to get tougher and there's an overhang of inventory out there that is going to be costly for the industry to work through.

So on the default rates at 90 days, not a dramatic change in pace but it's more the role rates, the propensity to go all the way to foreclosure, the higher severities taken on disposing of properties and then the, just further understanding and recognition that there is an inventory of foreclosed properties building out there that are eventually going to have to get dealt with.

All emphasis added.

by Calculated Risk on 4/14/2008 03:02:00 PM

From a Moody's Credit Card Credit Indices (via Dow Jones): Credit Card Charge-Off, Delinquency Rates Up In Feb (no link)

The charge-off rate climbed to 5.59% in February - the highest rate since December 2005 - from 4.51% a year earlier. That was the fifth consecutive monthly increase from the previous month and the 14th month in a row that the rate was higher than the year-earlier period.

The February delinquency rate was 4.53%, the highest since March 2004. The delinquency rate, which was 3.89% a year earlier, measures the proportion of account balances for which a monthly payment is more than 30 days late as a percent of total balances.
...
The percentage of credit card balances being paid fell to 17.3% in February from 17.7% a year earlier. That was the sixth month in a row that the rate fell from the year-earlier period.

This is more evidence of consumer stress.

by Calculated Risk on 4/14/2008 09:56:00 AM

Retail sales were slightly higher in March due to increases in gasoline prices. Excluding gasoline stations, nominal sales were flat in March compared to February.

More importantly, in real terms - inflation adjusted - retail sales are now below the year ago level.

This graph shows the year-over-year change in nominal and real (inflation adjusted) retail sales since 1993.

Click on graph for larger image.

To calculate the real change, the monthly PCE price index from the BEA was used (March PCE prices were estimated).

Although the Census Bureau reported that nominal retail sales increased 2.1% year-over-year, real retail sales declined almost 1.1% (on a YoY basis).

This is a recessionary level for retail sales.

UPDATE: From the National Retail Federation: Tough Economy, Cooler Weather Blamed for March Retail Sales Decline

While consumers continue to battle high gas, energy and food prices, retailers reported a dip in March retail sales. According to the National Retail Federation, retail industry sales for March (which exclude automobiles, gas stations, and restaurants) dipped 0.9 percent unadjusted over last year and were down 0.3 percent from the prior month.

March retail sales released today by the U.S. Commerce Department show total retail sales (which include non-general merchandise categories such as autos, gasoline stations and restaurants) increased 0.2 percent seasonally adjusted from the previous month and increased 0.1 percent unadjusted year-over-year.

“Unseasonably cooler weather created a challenging sales environment for many apparel retailers last month,” said NRF Chief Economist Rosalind Wells. “With the earliest Easter in 95 years, the calendar shift will likely impact April sales as well. In order to get a true picture of retail performance, we will need to look at both March and April sales combined.”

Many retailers felt the brunt of the troubled economy as well. Clothing and clothing accessories stores sales decreased 0.5 percent seasonally adjusted from last month and 2.0 percent unadjusted year-over-year. Sales at electronics and appliance stores decreased 0.4 percent seasonally adjusted month-to-month and 1.0 percent unadjusted year-over-year.

Note that March sales were boosted by an early Easter, and that the NRF expects April sales to be negatively impacted by the calendar shift.

by Calculated Risk on 4/14/2008 09:15:00 AM

From the WSJ: Cash-Strapped Fremont to Sell Its Investment and Loan Bank

Cash-strapped mortgage lender Fremont General Corp., acceding to regulators' demands, has reached a deal to sell it investment and loan bank to a California industrial bank to be formed by CapitalSource Inc.

This is no surprise since the FDIC ordered Fremont in March to recapitalize or sell the division.

Fremont's troubles come as regulators over the past several weeks have started demanding that banks, especially small and midsize ones, get more aggressive at marking down the value of loans they are holding and that they correspondingly beef up their reserves. That is likely to force an increasing number of banks to raise fresh capital ... At the same time, as mounting defaults take a toll on banks, the FDIC and other regulators say they are bracing for more lenders to fail.

I spoke with a regional banker last week, and she told me the FDIC is definitely getting more aggressive - especially with regards to write-downs for their construction & development (C&D) and commercial real estate (CRE) loans. The coming wave of bank failures - some estimates are for 100 or more failures over the next two years - will probably be related to these C&D and CRE loans.

by Calculated Risk on 4/14/2008 09:03:00 AM

From the WSJ: Wachovia Swings to Loss, Plans to Raise Capital

Wachovia Corp. said it will raise $7 billion in capital through stock sales and cut its dividend by 41% ...

The infusion represents Wachovia's second dip into the capital trough this year. ... The second round is a sign that banks' fortunes have continued to deteriorate over the past month. ... many observers believe that this is the beginning of the troubles for regional banks ...

Credit-loss provision were increased to $2.83 billion from $177 million as net charge-offs soared to 0.66% of average net loans from 0.15%. Nonperforming assets, those loans near default, ballooned to 1.70% of loans from 0.42%.

The regional banks are now lining up at the confessional.

by Calculated Risk on 4/14/2008 01:03:00 AM

From the NY Times: Housing Woes in U.S. Spread Around Globe

In Ireland, Spain, Britain and elsewhere, housing markets that soared over the last decade are falling back to earth. Property analysts predict that some countries ... will face an even more wrenching adjustment than that of the United States ...

Once-sizzling housing markets in Eastern Europe and the Baltic states are cooling rapidly, as nervous Western Europeans stop buying investment properties in Warsaw, Tallinn, Estonia and other real estate Klondikes.

Further east, in India and southern China, prices are no longer surging. With stock markets down sharply after reaching heady levels, people do not have as much cash to buy property. Sales of apartments in Hong Kong, a normally hyperactive market, have slowed recently, with prices for mass-market flats starting to drop.

In New Delhi and other parts of northern India, prices have fallen 20 percent over the last year. ...

For countries like Ireland, where prices were even more inflated than in the United States, it has been a painful education, as homeowners learn the American vocabulary of misery.

“We know we’re already in negative equity,” said Emma Linnane, a 31-year-old university administrator.

"Negative equity" will be a strong candidate for the phrase of 2008.

by Calculated Risk on 4/13/2008 10:06:00 PM

From the WSJ: Wachovia to Receive Big Infusion of Capital

Wachovia Corp. ... could announce as soon as Monday that it is getting a capital infusion of several billion dollars from outside investors ...

Final terms of the deal were being hammered out Sunday night, but it appeared likely the fifth-largest U.S. bank in stock-market value would receive $6 billion to $7 billion. In return, the investor group would get shares priced roughly $23 to $24 apiece -- a 15% discount to Wachovia's share price Friday.

... Wachovia said in a news release Sunday night that it plans to announce quarterly results Monday morning.

This probably means a large write down will be announced tomorrow morning. Must be tough working on a Sunday ...

by Anonymous on 4/13/2008 10:21:00 AM

Wow. Yesterday I disagreed with PJ over at Housing Wire. This morning I find myself taking issue with Barry Ritholtz at The Big Picture. If this keeps up, tomorrow I'll be arguing with God.

Yes, children, it's time for another installment of Picking on Poor Gretchen. And what a doozy it is this time, "You Thought You Had an Equity Line":

IT was the nation’s lending institutions and mortgage originators that got us into this credit mess, but it is consumers, taxpayers and those companies’ shareholders who will end up shouldering most of the costs.

The latest example of this is in the mass freezing of home equity lines of credit going on across the country. Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure.

I see. The inability to make a withdrawal from the home ATM is . . . "shouldering most of the costs" for the credit crash. Yeah, right.

In the last 30 days, lenders have sent several hundred thousand letters advising borrowers that their home equity lines of credit are frozen, estimated Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on home loans.

You'll want to pay attention to Mr. Kratzer, since he's The Sole Source for most of the real nonsense in this article. I'd suggest pausing for a moment to read what Mr. Kratzer has to say about himself on his own website. You may also ask yourself how FeeDisclosure.com makes its money, since "intending to help consumers" does not, as far as I can see, mean that this is a non-profit. You could also ask why the website is identified as "beta." Don't worry, I'll wait here for ya to come back.

Well, then.

Banks have the right, of course, to rescind these credit lines at any time under the terms of the contracts they struck with borrowers. And as home prices have tumbled in many parts of the country, banks are undoubtedly trying to protect themselves from exposure to additional losses.

But these actions are being taken even in areas where property prices are rising, Mr. Kratzer said. What’s worse, the letters provide no explanation for how the lenders determined that the property values underlying the equity lines had fallen.

This Kratzer--unless he's lying about his credentials on that website--has to have heard of this thing called an "AVM," or automated valuation model that a HELOC servicer can run on a specific property, to determine current value. What's with kicking up sand here? In fact, if he wasn't born yesterday he has to know that most HELOCs were originated with an AVM used to establish value, not an old-fashioned formal appraisal (unless they were originated at the same time as a first lien, and the appraisal for that loan--paid for in that loan's closing costs--was re-used for the HELOC).

One especially exasperating aspect of now-you-see-them, now-you-don’t equity lines is that borrowers are not receiving refunds for fees they paid to secure the credit in the first place.

These fees can be significant, Mr. Kratzer said: on a $50,000 line, for example, fees of $1,500 are common. If the line is being frozen at, say, $25,000, why shouldn’t the borrower be entitled to receive a refund of $750?

Where, when, in what dimension of physical space was it "common" to pay THREE HUNDRED BASIS POINTS to get a HELOC? Gretchen printed that claim in the Times?

Consumer Reports, from last August:

HELOCs generally have few if any fees because the market is so competitive. According to HSH Associates, a publisher of financial information, the average closing fee charged for HELOCs is about $60. Some lenders make you pay a maintenance fee, typically about $50 per year, if you don’t keep an outstanding balance.

The Mortgage Professor:

Upfront costs are also relatively low. On a $150,000 standard loan, settlement costs may range from $ 2-5,000, unless the borrower pays an interest rate high enough for the lender to pay some or all of it. On a $150,000 HELOC, costs seldom exceed $1,000 and in many cases are paid by the lender without a rate adjustment.

Go ask Mr. Google for more, if you want. But I'm still convinced that most people with a recently-originated HELOC didn't pay ANY closing costs on the HELOC itself over about $100. That's not even pointing out that the "LOC" part of the name, meaning "Line of Credit," implies that these lines revolve. Somebody with a "current balance" of $25,000 may have borrowed $25,000 six times. You know, like your credit cards. Whatever.

Borrowers who have an excellent credit score may also find that status hurt when a home equity line is frozen. That is because when a lender suddenly caps a $50,000 line at $25,000, the borrower will appear to have tapped the entire amount of the loan, a factor that can reduce a person’s credit score. Never mind that, based on the original amount of the credit line, the borrower is using only half of it.

First of all, if you have this "pristine credit" thing here, the hit to your FICO for having a high "balance to limit ratio" on your HELOC all of a sudden might take you from 800 to 780. That's from "infinitesimal probability of default" to "infinitesimal probability of default." Only if you just assume that lenders' calculation of the value of the property is flat-out wrong--that there really is this "equity" there--is that somehow "unfair." You went from owing a smaller percent of the value of your home to owing a larger one, because the value of your home changed. This is called "marking to market," and I thought Gretchen liked that idea. I guess only when it's banks. When it's middle-class people with their "pristine credit," fantasy should be allowed.

Mr. Kratzer said he had heard from frozen-out borrowers in 11 metropolitan areas where the median home price actually increased in the last quarter of 2007, the most recent figures available from the National Association of Realtors. They include Yakima, Wash.; Appleton, Wis.; Raleigh-Cary, N.C.; and Champaign-Urbana, Ill. Borrowers in areas where prices remained flat have also contacted him.

Oh, well, sure, if the median price in a region is going up, that must mean that the value of all homes is going up. What, you say? It might be a function of no sales at the low end and a few sales at the highest end, pushing up that median? What is that, some kinda statistical wankery you're trying to confuse us homeowners with?

The whole article, besides depending on Kratzer's unsourced assertion of "common fees" and his innuendoes about lender valuations, merely begs the question: this is "unfair" because the equity is there, even though the lenders say the equity isn't there. There isn't one homeowner quoted who actually got an appraisal or AVM that shows something other than the bank's valuation. Kratzer seems to think the bank is obligated to pay for a new appraisal and send you a copy when they lower your line limit. For him, I got bad news: that would, indeed, bring average closing costs on HELOCs up to 300 bps.

Maybe it will help everyone who is all up in arms about this to ponder the fact that since 2005 the federal regulators have required banks to engage in exactly the behavior Gretchen thinks is so unfair. We will stare into the pitiless gaze of the Board of Governors of the Federal Reserve's "Credit Risk Management Guidance For Home Equity Lending":

Effective account management practices for large portfolios or portfolios with high-risk characteristics include:

· Periodically refreshing credit risk scores on all customers;
· Using behavioral scoring and analysis of individual borrower characteristics to identify potential problem accounts;
· Periodically assessing utilization rates;
· Periodically assessing payment patterns, including borrowers who make only minimum payments over a period of time or those who rely on the line to keep payments current;
· Monitoring home values by geographic area; and
· Obtaining updated information on the collateral’s value when significant market factors indicate a potential decline in home values, or when the borrower’s payment performance deteriorates and greater reliance is placed on the collateral.

The frequency of these actions should be commensurate with the risk in the portfolio. Financial institutions should conduct annual credit reviews of HELOC accounts to determine whether the line of credit should be continued, based on the borrower’s current financial condition. 10 Where appropriate, financial institutions should refuse to extend additional credit or reduce the credit limit of a HELOC, bearing in mind that under Regulation Z such steps can be taken only in limited circumstances. These include, for example, when the value of the collateral declines significantly below the appraised value for purposes of the HELOC, default of a material obligation under the loan agreement, or deterioration in the borrower’s financial circumstances.

Claiming or implying that the only reason a lender can or should reduce or freeze a HELOC is when the borrower's ability to repay has changed is not just a total misunderstanding of federal banking regulations, it's dumb. The "HE" in "HELOC" stands for Home Equity. This is not just any old revolving line of credit, it's secured credit.

If you have problems with paying a grand or two for a line of credit you may never use, I suggest not doing it. If you wish to consider that you paid an option fee and your option expired, well, you can feel like one of the professional hedgers. If you think any closing costs you paid should be refunded to you because you're now "out of the money," I posit that you do not understand finances enough to get quoted in a newspaper.

by Anonymous on 4/13/2008 08:50:00 AM

A long piece from the Washington Post, which I recommend reading in its entirety.

In late 2006, as economists warned of an imminent housing market collapse, housing Secretary Alphonso Jackson repeatedly insisted that the mounting wave of mortgage failures was a short-term "correction."

He pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down. He issued a rule that was criticized by law enforcement authorities because it could increase the difficulty of detecting and proving mortgage fraud.

As Jackson leaves office this week, much of the attention on his tenure has been focused on investigations into whether his agency directed housing contracts to his friends and political allies. But critics say an equally significant legacy of his four years as the nation's top housing officer was gross inattention to the looming housing crisis. . . .

In speeches, he urged loosening some rules to spur more home buying and borrowing. "I'm convinced this spring we will see the market again begin to soar," Jackson said in a June 2007 speech at the National Press Club to kick off what HUD dubbed "National Homeownership Month." He also told the audience that he had no specific laws to recommend to prevent a repeat of the lending abuses that caused the mortgage crisis.

"When Congress calls up and asks us, we'll give them advice," he said. "You have 534 massive egos up there, so unless they ask you, you don't volunteer anything."

HUD spokesperson D.J. Nordquist defended Jackson's record in pushing for more flexibility in government-backed loans. "Secretary Jackson is a big believer in the U.S. housing market and won't apologize for saying so," Nordquist said. . . .

I once opined that it would take Armageddon to get Jackson's attention. It turns out I was wrong; all it took was a shrimp buffet.

by Calculated Risk on 4/12/2008 03:39:00 PM

Professor Stiglitz discusses the current economic situation: recession ("worst since Great Depression", "long and deep"), house prices (probably fall another 10% to 20%), stimulus package ("not well designed"), exports will help, and more.