by Calculated Risk on 5/05/2008 09:13:00 PM

From Fed Chairman Ben Bernanke: Mortgage Delinquencies and Foreclosures

[C]onditions in mortgage markets remain quite difficult, and mortgage delinquencies have climbed steeply. The sharpest increases have been among subprime mortgages, particularly those with adjustable interest rates: About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure. Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector. As a consequence of rising delinquencies, foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008.

The rate of foreclosures looks to be higher in 2008? That is an understatement!

Bernanke presented these graphs (note that the price graph is based on OFHEO and not Case-Shiller):








Bernanke presented a couple of other graphs, but it appears that the delinquency rate is related to declines in house prices (other research supports this). From Bernanke:

What are the implications of these relationships, particularly the linkage of mortgage payment problems and falling house prices? ... [W]hen the source of the problem is a decline of the value of the home well below the mortgage's principal balance, the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender. To be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure, as measured, for example, by debt-to-income ratio or by the extent to which the mortgage is "underwater."

Once again Bernanke is calling for mortgage servicers to reduce the principal amount of underwater loans.

by Calculated Risk on 5/05/2008 08:49:00 PM

This morning I posted a graph of three key components of non-residential structure investment - office buildings, multimerchandise shopping, and lodging - as a percent of GDP.

Click on graph for larger image.

This graph shows the same information, except this graph is in nominal dollars (as opposed to a percent of GDP).

Note: data from the BEA. The BEA started breaking out office and multimerchandise shopping in 1997.

The possible investment bottoms, discussed in the earlier post, are marked in red, green and blue and labeled "possible bottom".

Note that the Fed Loan survey released earlier today supports this CRE investment bust forecast.

by Calculated Risk on 5/05/2008 04:31:00 PM

From the WSJ: Casino Operator Tropicana To File for Bankruptcy Protection

Struggling casino operator Tropicana Entertainment LLC is expected to file for bankruptcy protection as soon as today ... It would be the largest corporate bankruptcy of the year, and the latest blow to Las Vegas, which has seen gambling revenues decline and major building projects canceled or delayed in the last few months.
...
"Gaming operators overall are facing headwinds from the broader economy. And unlike some past recessions, casinos are not proving to be recession proof this time around," [Peggy Holloway, Moody's vice president and senior credit officer] said.

by Calculated Risk on 5/05/2008 04:24:00 PM

The TED Spread from Bloomberg:

The TED spread has declined to 1.17%. Still high, but falling.

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).

by Calculated Risk on 5/05/2008 03:37:00 PM

From the Fed: The April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices

In the April survey, domestic and foreign institutions reported having further tightened their lending standards and terms on a broad range of loan categories over the previous three months. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey. Compared with the January survey, the net fractions of banks that tightened lending standards increased significantly for consumer and commercial and industrial (C&I) loans. Demand for bank loans from both businesses and households reportedly weakened further, on net, over the past three months, although by less than had been the case over the previous survey period.
emphasis added

Click on graph for larger image.

Of particular interest is the increase in tighter lending standards for Commercial Real Estate (CRE) loans. This graph compares investment in non-residential structure with the Fed's loan survey results for lending standards (inverted) and CRE loan demand.

Note that any reading below zero for loan demand means less demand than the previous quarter, but the good news is demand in April wasn't falling quite as fast as in January!

This is strong evidence of an imminent slump in CRE investment.

More charts here for residential mortgage, consumer loans and C&I.

by Calculated Risk on 5/05/2008 12:38:00 PM

If the imminent slowdown in non-residential structure investment is similar to the percentage declines during the '90/'91 and '01 recessions, then non-residential investment could decline as much as 15% to 20% over the next four quarters, from the $501 billion seasonally adjusted annual rate (SAAR) in Q4 2007, to about $400 billion to $425 billion in Q4 2008. (see: CRE Bust: How Deep, How Fast?)

Most of that possible decline will probably come from three key categories: office buildings, multimerchandise shopping, and lodging.

Click on graph for larger image.

This graph shows the investment in these three categories over the last ten years (as a percent of GDP). Note: data from the BEA. The BEA started breaking out office and multimerchandise shopping in 1997.

Lodging and multimerchandise shopping saw the largest booms, while office space was less than the office boom in the late '90s. If all three categories decline to the recent cycle lows (as a percent of GDP), this will be a decline of about $60 billion in non-residential investment (SAAR). This breaks down to a $22 billion decline for office investment, $13 billion for multimerchandise shopping, and $25 billion for lodging.

Multimerchandise shopping tends to be closely associated with residential investment (developers add strip malls and shopping centers as new communities are built), so the bust in shopping center and strip mall investment is the most predictable (strip mall vacancy rates have risen sharply). Also, a sharp decline in lodging investment also seems very likely given the significantly tighter lending standards for hotels. And office investment will probably slump too based on the recent Grubb & Ellis forecast: Big rise seen in unoccupied office space

Other areas of non-residential structure investment might hold up: such as hospitals, manufacturing (because of exports), and power and mining investment. But overall the decline in non-residential structure investment will probably be significant.

by Calculated Risk on 5/05/2008 11:32:00 AM

From Bloomberg: ResCap Says It May Not Be Able to Meet Debt Obligations in June

Residential Capital LLC, the mortgage- finance company owned by GMAC LLC, said it will still need to come up with $600 million by the end of June to meet its debt requirements even if its bond exchange offer is successful.
...
``There is a significant risk that we will not be able to meet our debt service obligations, be unable to meet certain financial covenants in our credit facilities, and be in a negative liquidity position in June 2008,'' ResCap said in a filing to the Securities and Exchange Commission today.

by Calculated Risk on 5/05/2008 09:03:00 AM

From Reuters: BofA may renegotiate Countrywide deal price: Friedman

Bank of America Corp is likely to renegotiate its deal to buy Countrywide Financial Corp down to the $0 to $2 level or completely walk away from it, said Friedman, Billings, Ramsey, [analyst Paul Miller] ...

Countrywide's loan portfolio has deteriorated so rapidly that it currently has negative equity ...

"We estimate that if fair-value adjustments to the loan portfolio could exceed approximately $22 billion, this would increase the odds of Bank of America renegotiating the transaction or walking away," Miller said.

Oh no, not negative equity! Hoocoodanode?

by Anonymous on 5/05/2008 09:02:00 AM

My attention was arrested by this story in today's Washington Post, which is not, actually, about "walk aways" at all. It's about borrowers getting mortgage modifications--that is, borrowers who are in fact making a real effort to stay in their homes. But one borrower's story here actually has more insight about the "walk away" meme, it seems to me, than any story I've read purportedly on that subject.

[The Ramseys] bought their Burtonsville home for $310,000 in June 2005 with two loans. The first, and larger, mortgage had a 6.4 percent interest rate due to increase after three years to as high as 12 percent. The second had a 10.2 percent rate. Their monthly payment was originally $2,000, not including homeowners association fees and taxes.

The rate jumped last summer. Eventually they were paying $3,050 a month. Her salary as a social worker and his as an insurance salesman wouldn't cover it. In July, they stopped paying.

Ramsey called her lender, Houston-based Litton Loan Servicing, but had trouble getting hold of anyone with decision-making authority. The company then scheduled foreclosure proceedings for Dec. 18. She called again to propose a short sale.

"I was willing to do whatever it took so that we didn't lose the house," she said.

Absorb that statement for a minute: in a short sale, you do "lose" your house. Whatever we're talking about here is psychological, not literal.

Litton turned down the short sale bid--it was only $200,000. Eventually the Ramseys got Litton to agree to a modification:

It took several weeks, but Cipollone got both mortgages down to 7 percent, fixed for 30 years. Litton also dropped the balance to $302,000 after the Ramseys contributed $3,000 for a down payment.

"I'm terribly excited," Ramsey said. "I wanted to pack up and leave my house because I want to, not because I'm going to go through a foreclosure situation, but because it's planned."

She doesn't plan on leaving anytime soon, but if she ever does, she said, it will be on her terms.

In a sense, Mrs. Ramsey understands what a foreclosure is much more clearly than people who talk about "walking away" do: a foreclosure is not "giving the house back to the bank." It is being forced to sell your property at public auction in order to satisfy a debt. To the Ramseys, it isn't actually "losing the house" that seems to be the real fear--they were willing, after all, to sell short. It's simply that a short sale "felt" voluntary; it felt like "a plan."

One of the reasons why nobody is really quantifying the "walk away" problem is that, in reality, there is no legal or logical distinction between a "walk away" and a "foreclosure," because they're both foreclosures. The only difference is that the former can be interpreted, psychologically, to mean that the borrower is "leaving my house because I want to," while the latter acknowledges that the sale of the home has been forced.

I'm guessing that we'll have a least a few commenters to this thread asserting that the Ramseys "should have just walked away." Their mortgage payment is back to its original level--around $2000 a month before taxes and insurance--but their mortgage is still seriously underwater and I for one wouldn't bet on how long it will take for its value to climb over the loan amount. Even in that part of Maryland, the Ramseys could probably cut their monthly housing expense in half by renting.

Such calculating advice, however, ignores the fact that to the Ramseys, foreclosure equals defeat, and they're realistic enough to realize that dressing it up in the euphemism of "walking away" doesn't change that. They are, in their own way, just as "ruthless" as the so-called walkers-away: they would, apparently, have been happy to see their lender take a $100,000-plus loss on a short sale to salve their pride. Human nature is like that; I have no real interest in heaping coals on the heads of the Ramseys. I am more interested in the way this story helpfully scrambles some confident assumptions about what motivates borrowers, and what really stigmatizes foreclosure in our current culture.

Servicers keep going on about a "sea change" in borrower attitudes about foreclosure. I just don't see that. I see borrowers whose actions suggest that foreclosure still carries a very powerful stigma, so much so that they are able to convince themselves that "walking away" is actually an "alternative" to foreclosure rather than a synonym for it. The Ramseys rather usefully remind us that "walking away" is not a financial strategy, it's a defense mechanism. If you can tell yourself that you are the one making the plan and executing the options, you avoid having to admit to being forced.

by Calculated Risk on 5/04/2008 11:06:00 PM

For those that missed it: In 2005, when the median house price in Orange County reached $603 thousand, the O.C. Register featured a house on the front page that had recently sold for $600 thousand. That house is now listed as a short sale for $439 thousand.

See: From Front Page to Short Sale

Note: the graph was made when the asking price was $559K, but the price was dropped to $439K on Saturday!). The graph shows how much further prices will probably decline in Orange County, CA.

Here is the July 2005 front page of the O.C. Register.

Here is the Redfin listing (see the 405 Freeway sign in the background).