by Calculated Risk on 4/21/2008 12:39:00 PM

From Dow Jones (no link): Most Home-Equity Line Delinquencies Keep Rising

Standard & Poor's said delinquencies on home-equity lines of credit issued in 2005 and 2006 shot up in March, underscoring continued trouble in the U.S. economy.
...
S&P said that 9.19% of lines issued in 2005 and 11.45% of loans issued in 2006 are delinquent, up 6.49% and 6.51% from February.

This fits with the comments from BofA today:

"Credit quality in our consumer real estate business mainly home equity deterioriated sharply in the first quarter as a result of the weaker housing market."

by Calculated Risk on 4/21/2008 11:18:00 AM

Here are a few excerpts from the BofA conference call:

CEO Kenneth D. Lewis on outlook:

"As you realize by now, first quarter was much worse than our expectations three months ago with the most notable duration in the latter part of the quarter. The issues we faced in capital markets in the fourth quarter continued into the fourth quarter with March being particularly difficult. Consumer credit quality deteriorated substantially from fourth quarter, particularly in home equity. ... Credit quality will continue to be an issue with charge-offs at least at first quarter levels but probably higher for the rest of the year."
emphasis added

Here is another CEO saying that March was really bad.

CFO on Home Equity Book:

"Credit quality in our consumer real estate business mainly home equity deterioriated sharply in the first quarter as a result of the weaker housing market. The problems to date have been centered in higher LTV home equity loans particularly in states that have experienced significant decreases in home prices. Almost all of these states have been growth markets in the past several years. Our largest concentrations are in California and Florida [40% of portfolio]. Home equity net charge-offs increased to 496 million or 1.71% up from 63 basis points in the prior quarter. 30-day performing delinquencies are up 7 basis points to 1.33%. Nonperforming loans in home equity rose to 1.51% of the portfolio from 1.17% in the prior quarter. 82% of the net charge offs related to loans where the borrower was delinquent and had little or no equity in the home. Loans with the greater than 90% CLTV on a refreshed basis currently represent 26% of loans versus 21% in the fourth quarter. This change reflects the continued decline in home prices most acutely in the states I noted earlier. ... We believe net charge offices in home equity will continue to rise given softness in the real estate values and seasoning in the portfolio. We increased reserves for this portfolio to 215 basis points reflecting the continued elevated level of delinquency roles, loss occurrences and loss severities. As a result, we would expect to see losses cross the 200 basis points market by the middle of this year as we work through these issues. We instituted a number of initiatives to mitigate risk and new originations as well as existing exposure including lower maximum CLTV across geography and borrower. Two issues that is playing home equity and could drive losses are a prolonged deterioration in home values and further deterioration in the economy."

And a question from analyst Meredith Whitney on how far along BofA is in the write down process:

Question, Meredith Whitney: So my final wrap up is when you see CEOs mainly CEOs from brokerage firms saying that we're beyond the worst of things, can you comment in terms of the regulators involvement with the housing situation and make any similar type of comment?

Answer: Well, in a broad sense, and just talk about regulators or the government, I think first it would be too early to strike up the band and sing happy days are here again, but from the investment banking standpoint, that is the right [view], I do think we're in the last innings or last quarter whatever sports a analogy you wanted to use, and then the other credit issues is so housing dependent and related and economic and economy related I think we're not in the last inning or the last few innings, and we have at least the rest of this year to go.

Once again, March was very weak, and there is much more to come.

by Calculated Risk on 4/21/2008 09:54:00 AM

From the WSJ: National City to Raise $7 Billion; Bank Cuts Dividend, Posts a Loss

National City Corp. will raise $7 billion in capital, slashed its dividend to 1 cent a share and reported a first-quarter net loss.
...
The latest quarter included $1.4 billion in loan-loss provisions, partially offset by $772 million in gains related to Visa Inc.'s initial public offering. ...

Net charge-offs, loans it doesn't think are collectable, tripled to 1.88% of total average loans, while nonperforming assets surged to 1.95% from 0.8%.

The new capital was raised at $5 per share, only 40% off the closing price on Friday.

by Calculated Risk on 4/21/2008 09:35:00 AM

From the WSJ: Bank of America's Net Drops 77%

Bank of America Corp. ... provisions for credit losses quintupled to $6 billion and investment banking write-downs cost at least another $1.91 billion.

The big increase in credit costs was driven by weakness in home equity loans and credit extended to small businesses and home builders ..

Net charge-offs for loans the bank doesn't think are collectable jumped to 1.25% from 0.81% of total average loans and leases, reflecting deterioration in the housing market and a slowing economy. Nonperforming assets surged to 0.90% from 0.29%.
...
"We remain concerned about the health of the consumer given the prolonged housing slump, subprime issues, employment levels and higher fuel and food prices," Chief Executive Kenneth D. Lewis said ...

Just a few more billion ...

by Calculated Risk on 4/20/2008 10:45:00 PM

On Friday I posted a video of an interview of Professor Roubini on Canadian TV. It is well worth watching.

On Saturday, I posted a few comments on why I thought Professor Roubini might be a little too pessimistic. I gave three reasons: 1) I believe starts of single family homes built for sale has finally fallen below the current level of new home sales (note: I'll have more on the housing starts vs. new home sales issue soon.) 2) I think we may be a little further along in the write down process than Roubini, and 3) I felt Roubini might be overestimating the number of homeowners that "walk away'.

Clearly we agree on more points than we disagree, and I hold Professor Roubini in the highest regard (for those that don't know, Roubini is very well respected among his peers).

Today Roubini wrote: The worst is ahead of us rather than behind us in terms of the housing recession and its economic and financial implications. Here is an excerpt on the write downs:

[M]y most recent estimates have been that credit losses on mortgages could be as high as $1 trillion and total credit losses for the financial system could be as high as $1.7 including all the other losses (commercial real estate loans, credit cards, auto loans, student loans, leveraged loans, industrial and commercial loans, corporate bonds, muni bonds, losses on credit default swaps). How many of these losses are borne by banks (I meant both commercial and investment banks in my use of the term “banks”) depends on the allocation of these impaired assets among banks and non-banks.

The argument for a trillion dollar of losses on mortgages alone is based on the following three parameters (two of which an undisputed while a third is more subject to uncertainty. First, let’s conservatively assume that home prices fall about 20% rather than 30% so that only 16 million households are underwater; this assumption is not very controversial as most now would agree that a cumulative fall in home prices of 20% is a floor, not a ceiling to such price deflation. Second, lets assume – as Goldman Sachs does – that a foreclosed unit causes a loss of 50 cents on a dollar of mortgage for the lender as, in addition to the fall in the home price one has to add the large legal and other foreclosure costs including loss of rent on empty properties, risk of the property being vandalized and cost of maintaining an empty property before resale. Third, lets assume – and this is more controversial – that 50% percent of households who are underwater eventually walk away or are foreclosed. Then, since the average US mortgage is $250k total losses from borrowers walking away from their homes are $1 trillion. Goldman Sachs agrees with me on two parameters (20% fall in home prices and 50% loss on a mortgages) but more conservatively assumes that only 20-25% of underwater home owners will walk away. In this case mortgage losses would be “only” $500 billion. But home prices may likely fall more than 20% and with a 30% fall in home prices 21 million households (40% of the 51 million with a mortgage) would be underwater. So, there is certainly uncertainty on how many underwater households will walk away but given the recent evidence of subprime but also near prime and prime borrowers walking away even before they are foreclosed one can be pessimistic on this.

This uncertainty is why Tanta and I have been begging for better data on how many homeowners are actually resorting to ruthless default. Tanta wrote a great primer for the media: Let's Talk about Walking Away (hint to the media!!!)

I certainly agree Roubini's scenario is possible. Last December, I wrote:

If every upside down homeowner resorted to "jingle mail" (mailing the keys to the lender), the losses for the lenders could be staggering. Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion.

Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion.

Although possible, I felt this was somewhat the worst case.

On recourse loans and 'walking away', Roubini argues:

I have for a while argued that in the US mortgages are de-facto, if not always de-jure, non recourse. Indeed, even in states where mortgages (or refinanced ones) are de jure recourse loans these mortgages become de facto non-recourse as the legal cost for lenders to pursue such legal action against jingle mail borrowers can be massive.

Tanta commented on this, and generally agreed with Roubini:

Back in my day working for a servicer, we never went after a borrower unless we thought the borrower defrauded us, willfully junked the property, or something like that. If it was just a nasty RE downturn, it rarely even made economic sense to do judicial FCs just to get a judgment the borrower was unlikely to able to pay. You could save so much time and money doing a non-judicial FC (if the state allowed it) that it was worth skipping the deficiency.

But notice the "willfully junked the property" phrase - aren't these the homeowners that we are talking about when we say someone will "walk away"? Aren't these the solvent homeowners who can make the payment, but decide not to simply because they are underwater? This is one of the great uncertainties, or as I wrote last year:

One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.

This is a critical issue, and hopefully someone will provide some research on the number of homeowners actually walking away.

by Calculated Risk on 4/20/2008 09:23:00 PM

The WSJ reports: NatCity Close To $6 Billion Cash Infusion

National City Corp was closing in Sunday night on a capital infusion of more than $6 billion from a private-equity firm and a number of large shareholders ...

The plan calls for the investors to pay about $5 a share ... In 4 p.m. New York Stock Exchange composite trading Friday, National City shares fell 16 cents to $8.33.

Hey, that is only 40% below market. Ouch.

by Calculated Risk on 4/20/2008 04:17:00 PM

From Financial Week: Big rise seen in unoccupied office space

According to the real estate services firm Grubb & Ellis, first-quarter office vacancies rose to an average 13.6% nationally, up from 13% in the previous three quarters.

“With demand turning negative at the same time that the construction pipeline will deliver the 94 million square feet still underway, vacancy is expected to peak at 18% by the end of 2009,” Grubb & Ellis economist Robert Bach wrote in a research note ...

The recession’s impact on employee levels “is just getting started, so the office market is reacting pretty quickly and I would suspect that it will rise to a vacancy rate of 15% to 16% by year end.”

As I mentioned earlier, this week I was driving along the 405 freeway in Orange County at sunset - the sun was shinning at the perfect angle through the buildings - and I was amazed at how many of the new office buildings have no tenants; See-through buildings - reminiscent of the '80s.

The CRE slump has arrived.

by Calculated Risk on 4/20/2008 03:06:00 PM

From the Star Tribune, start with this 1+ minute audio slide show: Development dreams dashed (hat tip dryfly)

Here is the article: Minnesota's new ghost towns

The roots of that financial crisis can be found in places like Wright County, where the combination of affordable land, cheap money and boundless optimism lured builders and families chasing big homes in the kind of brand-new subdivisions they thought were beyond their reach.
...
But the boom has unraveled as quickly as it began. While many established Wright County neighborhoods have avoided the worst of the housing market collapse, the county ranks as one of the state's worst areas hit by foreclosures. Pockets of this county, about 30 miles northwest of the Twin Cities, have seen home prices fall 30 percent or more in the past year.

See-through homes. Kind of like the see-through office buildings in the '80s.

And speaking of office buildings: I was driving along the 405 freeway in Orange County at sunset this week - the sun was shinning at the perfect angle through the buildings - and I was amazed at how many of the new office buildings have no tenants; See-through Buildings, The Sequel.

by Calculated Risk on 4/20/2008 11:37:00 AM

From the WSJ: Bank of England Will Unveil Bailout Plan for U.K. Banks Monday

The Bank of England will announce Monday a scheme which will see it lend money to banks in return for collateral in a bid to help the troubled U.K. mortgage market, U.K. Chancellor of the Exchequer Alistair Darling said Sunday.

"The Bank of England will be making an announcement tomorrow in which what it will do is effectively lend banks money to unfreeze the [mortgage market] situation we've got at the moment," Mr. Darling said in a television interview on the British Broadcasting Corporation.
...
The Chancellor said ... "The idea ... is that it will open up the market and it will begin the process of opening up the mortgage market which of course will help house owners...if that doesn't happen, then I think there is every chance that the situation will get worse."

There was an article in The Times last Wednesday that suggested this program from the BofE would allow lenders to use mortgage-backed assets as collateral to borrow government bonds - so the "scheme" will probably be similar to the programs the Fed has implemented.

by Anonymous on 4/20/2008 08:31:00 AM

Like anyone else with even a modest dash of common sense, I am not sure I really want to wade into the issues Yves raises in this post. But having been personally wished on the inoffensive British--who have as far as I know done me and mine no particular harm since at least 1812, if you don't count LIBOR and Diana--as a final rhetorical fillip, I feel as if I were already in one of the pitfalls, so there's limited upside to trying too hard to avoid them.

Yves is, of course, talking about Wall Street. Even now, after the last several years of more than usually unholy more than usual alliance between the mortgage industry and the investment banks, it is still true that only ever a small slice of mortgage industry people have any direct contact with the Street and its culture. Some of those who do take to it immediately, rather like those suddenly exuberant freshmen at a large and urban campus, who shake off the persona of small-town straight-A valedictorian and throw themselves into the libertine ways of the university--beer! everywhere you look!--without looking either backwards or forwards all that carefully. Others cringe in horror and are only too grateful to return to their quieter Main Street offices, where the unglamorous but reassuring touch of the files and hum of the worker-bees steadies a mind reeling from too many bright young aggressive deal-makers flicking their laser pointers at too many garish hockey-stick-laden PowerPoint slides.

The other 90% of the industry never left Main Street to begin with, and hears these snippets of gossip and bullet-point about how we're now writing loans to "Wall Street standards" with bemusement and amusement in roughly equal measure. Depending on the sense and sensibility of local management, by and large most of the rank and file roundly ignore such things and get on with their days. Except for the very young, all corporate workers have lived through enough management fads and buzz-word fashions to know that this, too, shall pass.

"They're not going to re-engineer us, are they?" asks my administrative assistant, leafing through the pile of stuff I've tipped out of my briefcase on return from the latest secondary marketing conference.

"No, I don't think so this time," I mutter, staring at 283 unread email messages. "But if they do, I've still got all the stuff from last time in the lower left drawer of my credenza. If it's not worth doing, it's certainly not worth not plagiarizing."

I shall posit that it has simply been a different trajectory for women in the mortgage business, and retail banking generally, than it has been for our sisters on Wall Street. Not only have there been more of us on Main Street; we did not, by and large, enter this business to "pursue careers." Most of us of a certain age simply "got jobs" in an industry that has always needed a lot of pink collars. Generalizations are of course rightfully fearful things, but I am inclined to think there's a reason why so many laid-off mortgage middle managers are heading for nursing and teaching, and it has nothing to do with especially "nurturing" personalities or gender identities. We have always been of that pink-collar sisterhood, even as some of us broke a bit past the top of its salary band and even found our well-coiffed hair flattened against the glass ceiling.

That is, indeed, why so many of us have been held in such contempt--open or camouflaged--by the senior managerial class and those wannabees who adopt its favored postures. I have never entered a mortgage operation--a bank or a mortgage banking firm--as employee, client, or consultant, without encountering manifestations of that "taint" carried by those who know, fully and in detail, how the sausage is actually made. Precisely because, whatever their current job is, the tainted ones used to make sausage.

I am, in fact, one of the very few women I know in this industry who was hired directly into a "professional" position (writer of policies and procedures) based almost solely on academic credentials. At that first job of mine, the underwriting manager was a woman--who had started years and years ago as an underwriter trainee. The production manager was a woman--curiously enough, also one with a humanities degree--who had begun as a lowly FHA loan originator twenty years before. The female loan sale and pricing manager had started on the teller line, as had the female servicing manager.

They were--I became--the accidental managers of the business. Having one as a production manager was rare then and is still rare now: if you took all the women managers in the mortgage business and separated out the ones in processing, underwriting, closing, post-closing review, and servicing, you wouldn't have many left. Some women have certainly risen to the heights of senior management, but nearly all of them did so with responsibility for the "back office" functions out of which they arose. Back office functions that are, crucially, cost centers, not profit centers.

In an industry that has always--to its own detriment--most empowered those who "bring in the bacon," this has generally functioned to severely curtail the power these women can exercise in the corporate culture. They know how to do things; they get things done; their orientation is nearly always "conservative": they limit the risks, double-check the entries, enforce the rules. They often have the largest staffs, while also having the largest number of low-paid, less-educated people who are first in line for any layoffs going. They are "costs"; they get "cut."

To a mind trained to a certain traditional gender stereotype--and we have our share of those, alas--female mortgage managers are the gatherers and domesticators, and males are the hunters and risk-takers. It is no wonder that a culture that does not value such things as raising reasonably well-behaved children as an accomplishment does not value the risk-limiters much. It is the rhythm of these meetings, and has been for a long time:

He: My branch generated $45MM in gross revenues this quarter!

She: Well, my underwriters tried to stop you.

To return to Yves' suggestion, there's certainly a lot to be said for regulators recruiting from this pool of women mortgage managers. We know where the bodies are buried. We know how they got to be buried. We know how they died. We've got the reports in our lower-left desk drawer.

The thing is, I see two sides of this. Certainly a passel of middle-aged women who earned their stripes managing mortgage back-offices would be more effective, probably by an order of magnitude, than the pool of examiners the regulatory agencies mostly currently have. Quite possibly they might feel sufficiently vindicated at this point--we did, you know, tell you where this was heading while you were busy not listening--to exercise their new regulatory empowerment with sufficient hard-headedness to overcome both senior management and political-appointee resistance. But that's the other side of this: senior management at the banks and political appointees at the agencies aren't known for hanging their heads, admitting their faults, and going along meekly with the house-cleaning.

I don't know that women are going to be able to fix that; men are going to have to demand more of--and give less to--the hunters and risk-takers. My own personal experience suggests that while there's a certain passing pleasure in being able to say "I told you so," no one is less welcome in the meetings than those of us who told you so--and who took the damned minutes to prove it, too.

It does leave me with a lingering sense that now that the party is over, we are casting about for house-cleaners in the usual place that domestic help is found. That is not, of course, what Yves is saying at all; it is merely the context in which the other edge of the sword cuts. For it is surely not young women just entering the business we want here--of course we want them for other things, but we're not just looking for women, we're looking for women veterans. I profoundly doubt that the few on Main Street who have achieved senior management status will want to leave for a job as a bank regulator if they can hang on to the job they have. You're talking about middle-aged women just below the executive ranks, here. Should there be some real effort to recruit us to the ranks of regulators, how do we prevent regulatory work from becoming yet another pink-collar cost-center?