by Calculated Risk on 5/09/2008 08:00:00 PM

The FDIC closed ANB Financial today with an estimated $214 million hit to the FDIC insurance pool (see previous post). Here are some details from an article earlier this week.

From ArkansasBusiness.com: ANB Past Dues Up 58 Percent (hat tip Steve)

... ANB Financial's loans that are 30 days or more past due were valued at $614.6 million as of March 31, up 58.3 percent from Dec. 31.

The Bentonville bank's total loan portfolio is about $1.57 billion, so 51 percent of its loans are considered delinquent on one level or another. The majority of those loans - $589.3 million - have been moved all the way into nonaccrual status. A year ago, the bank had $57.9 million in loans that were not accruing interest.

Most of the bank's loans, 77.4 percent, were considered construction and development loans, and 94 percent of the loans are tied to real estate.

These small to mid-size institutions mostly missed the residential boom and bust because most residential loans they originated were sold to Wall Street. Instead they focused on construction and development (C&D) and commercial real estate (CRE) loans.

C&D loans are especially dangerous. A developer will usually borrow enough to complete the project and make the interest payments, so during development they stay current. However when the developer completes the project - and they can't sell the units - they suddenly stop paying the loan. Notice how the nonaccrual loans increase ten fold over the last year!

Note: for some reason the FDIC hasn't released an "emerging risks" report since late 2006.

So, from 2006: Look at the concentration of C&D loans in late 2006 (from the FDIC Semiannual Report: Economic Conditions and Emerging Risks in Banking):

Small and mid-size institutions have been increasing their concentrations in riskier assets, such as CRE loans and construction and development (C&D) loans. This suggests that, although small and mid-size institutions have been more successful in limiting the erosion of their nominal NIMs, they have achieved this success in part by assuming higher levels of credit risk.

... continued increases in concentrations and reports of loosened underwriting standards at FDIC-insured institutions signal the potential for future credit quality deterioration. In addition, regulators have noted increasing C&D and overall CRE loan
concentrations, especially at institutions with total assets between $1 billion and $10 billion. Four of six Regional Risk Committees expressed some level of concern about CRE lending, in part due to continuing increases in concentrations.

And that was in late 2006; C&D and CRE lending really went crazy in 2007.

Here come the C&D failures.

by Calculated Risk on 5/09/2008 06:19:00 PM

Did someone say "bank failure" this morning?

From the FDIC: Bank Closing Information for ANB Financial, NA, Bentonville, AR

ANB Financial, National Association, Bentonville, Arkansas, was closed today by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect depositors, the FDIC's Board of Directors approved the assumption of the insured deposits of ANB Financial by Pulaski Bank and Trust Company, Little Rock, Arkansas.

The failed bank's nine offices will reopen Monday as branches of Pulaski Bank and Trust Company. Depositors of ANB Financial will automatically become depositors of the assuming bank.

As of January 31, 2008, ANB Financial had approximately $2.1 billion in assets and $1.8 billion in total deposits. Pulaski Bank and Trust Company will assume $212.9 million of the failed bank's insured non-brokered deposits for a premium of 1.011% and will purchase $235.9 million of assets.

At the time of closing, ANB Financial had approximately $39.2 million in 647 deposit accounts that exceeded the federal deposit insurance limit. These customers will have immediate access to their insured deposits, and they will become creditors of the receivership for the amount of their uninsured funds.

ANB Financial also had approximately $1.6 billion in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds.

Over the weekend, all deposit customers can access their insured money by writing checks, or by using their debit or ATM cards. Checks drawn on the bank that did not clear before today will be honored up to the insured limit.
...
In addition to assuming the failed bank's insured deposits, Pulaski Bank and Trust Company will purchase approximately $235.9 million of the failed bank's assets. The assets are comprised mainly of cash, cash equivalents and securities. The FDIC will retain the remaining assets for later disposition.

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund is approximately $214 million.

by Calculated Risk on 5/09/2008 04:13:00 PM

From FedEx:

FedEx Corp. today announced that earnings for the fourth quarter ending May 31, 2008 are expected to be in the range of $1.45 to $1.50 per diluted share, compared to the previous forecast of $1.60 to $1.80.

“Since we provided earnings guidance for the fourth quarter in March when the crude oil price was slightly above $100 per barrel, our estimated fuel costs for the quarter have increased more than 7 percent, or $100 million from our previous estimate, and the weak economy has restrained demand for U.S. domestic express package and LTL freight services,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “While we have dynamic fuel surcharges in place, they cannot keep pace in the short-term with rapidly rising fuel prices. This revised outlook assumes no additional increases to the current fuel price environment and no further weakening of the economy.”

Mostly an oil related warning.

by Calculated Risk on 5/09/2008 01:53:00 PM

The Economist has a great overview on housing: Map of misery. There is a good discussion on the differences between the OFHEO index (used by Fed Chairman Bernanke) and the Case-Shiller Home Price indices. The story also discusses the huge overhang of inventory (see story for discussion).

At the bottom of the story (hat tip Eyal) is this graph of rents as % of house prices:

[This] chart shows ... the relationship between house prices and rents. This is a sort of price/earnings ratio for the housing market ...

A recent analysis by Morris Davis of the University of Wisconsin-Madison, and Andreas Lehnert and Robert Martin of the Fed, shows that the rent/price yield in America ranged between 5% and 5.5% from 1960 to 1995, but fell rapidly thereafter to reach a historic low of 3.5% at the height of the boom. Given the typical pace of rental growth, Mr Feroli reckons house prices (as measured by the Case-Shiller index) need to fall by 10-15% over the next year and a half for the rent/price yield to return to its historical average.

Note that the shaded area is the forecast. I think it will take longer for prices to return to the normal ratio.

Note: I covered this paper in January with some graphs. Here is the paper from Morris A. Davis (Department of Real Estate and Urban Land Economics, University of Wisconsin-Madison), Andreas Lehnert, and Robert F. Martin (both Federal Reserve Board of Governors economists): The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing

by Calculated Risk on 5/09/2008 11:30:00 AM

The Census Bureau reported a goods and services deficit of $58.2 billion for March 2008. Exports, in March, decreased $2.6 billion to $148.5 billion, but are up almost 16% year-over-year. Imports decreased by over $6 billion to $206.7 billion, and excluding petroleum, are up only 4% year-over-year.

So ignoring monthly fluctuations, the story remains the same: exports are surging and imports (ex-petroleum) have slowed. A few years ago the story was how the ports could increase import capacity. Now the problem is finding enough containers for exports - see from the WSJ: Container Shortage Frustrates U.S. Exporters

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 probable recession is marked on the graph.

Unfortunately the dollar amount of petroleum imports is surging, and this increase in petroleum imports (because of price, not quantity) is mostly offsetting the improvement in the non-petroleum trade deficit.

And the petroleum deficit will worsen in April and May.

The second graph compares petroleum import prices with the EIA World Spot Price. This shows that import prices in April and May will be significantly higher than for March. Note that the May prices are for last week - and oil prices are setting new records again every day every hour!

by Calculated Risk on 5/09/2008 09:37:00 AM

From Reuters: Fremont General says may file for bankruptcy

Fremont General ... on Friday said it may file for bankruptcy protection.

The company ... said that absent another "viable transaction" for remaining assets, it expects to file for Chapter 11 protection from creditors.

Fremont was the recipient of an ugly Cease and Desist Order issued by the FDIC last year:

In taking this action, the FDIC found that the bank was operating without effective risk management policies and procedures in place in relation to its subprime mortgage and commercial real estate lending operations. The FDIC determined, among other things, that the bank had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default or other loss to the bank.

So much for Fremont. I'd expect some more bank failures soon.

by Anonymous on 5/09/2008 07:38:00 AM

Exhibit 1, Floyd Norris, NYT:

Now the mortgage company is warning that it may not be able to pay its bills, and has set out to force those who lent money to it to agree to accept only a fraction of what they are owed. It appears that its lenders have little real choice. If they insist on being paid all that they are owed, they will go to the back of the payment line, with the risk they will get nothing.

The mortgage industry has bitterly opposed legislative proposals that bankrupt homeowners be able to ask judges to reduce the amount they owe. But that is what this company hopes to accomplish through the threat of a bankruptcy filing. The lender in trouble is known as ResCap, short for Residential Capital. It is a subsidiary of GMAC, which was formerly owned by G.M. . . .

Owners of some notes issued by ResCap are being asked to trade them in for new bonds with face values of as little as 80 cents on the dollar. Other holders are being offered the chance to sell back bonds to the company, for as little as 65 cents on the dollar. GMAC has bought back some ResCap bonds in the public market, paying around 50 cents on the dollar. . . .

As part of the package, GMAC would put another $3.5 billion into ResCap. The company says that any current bondholders who reject the exchange offer would have their debt subordinated to the new loan from the GMAC parent, as well as to the new bonds being issued.

Exhibit 2, Ruth Simon, Wall Street Journal:

A major provision of the housing-market legislation passed by the House Thursday is getting a lukewarm reception from the mortgage industry. . . .

[T]rade groups that represent mortgage companies and investors say the provision might not help as many borrowers as some expect. They view the write-down provision as one of several options they might use to assist troubled homeowners. "I don't believe this would be a tool that would be used significantly," said Tom Deutsch, deputy executive director of the American Securitization Forum . . .

David Kittle, chairman-elect of the Mortgage Bankers Association, said at a conference earlier this week that he sees no rush by mortgage bankers to write down loans.

Mortgage companies that choose to participate in the proposed plan would be required to write down the value of a delinquent loan by 15% from the home's current appraised value. Borrowers would have to be at least 60 days late on their mortgage payments to qualify for the program. The bill excludes investors and those who lied about their income on their loan applications.

Mr. Deutsch says that in most cases, investors who hold mortgage-backed securities would be better off with other alternatives, such as temporarily reducing the borrower's interest rate or extending the term of the loan, in part because those leave open the chance that investors will get a larger return if the borrower gets back on track and home prices rebound. Mortgage companies are more likely to participate in the write-down program if they expect home prices to continue to decline steeply, he notes, increasing the chances of larger losses.

Thanks for the tip, NYT Junkie!

by Anonymous on 5/09/2008 06:39:00 AM

Thinking about trading in that Tahoe for a Civic? Sit down.

High fuel prices are causing the value of used SUVs to plummet, often below what's listed in the buying guides many shoppers use to negotiate with dealers.

As a result, some new-car buyers think they're getting cheated by dealers who are offering them little for their SUV trade-ins.

"The dealer is going to offer a price, and the customer is going to be ticked off," says Tom Webb, chief economist for Manheim, operators of auctions where car dealers buy their used-vehicle inventories. "The guidebooks have not caught up to the market," he says.

I'm waiting for Gretchen Morgenson to get all over this anti-consumer behavior. Meanwhile,

Webb's figures show wholesale prices on big SUVs such as Chevrolet Tahoes, Ford Expeditions and Toyota Sequoias are down 17% from a year ago. Full-size pickups have fallen as much as 15%, Webb says.

"It's a challenge," says Adam Lee, president of the Lee Auto Malls dealerships in Maine. "How do you tell a good customer, 'You paid $32,000 and now it's only worth $17,000?' "

Why, you should just hire some newly-under-employed Realtors®. They've had some practice at that kind of thing lately.

AutoNation's Jackson says he thinks affluent buyers may be hanging on to their SUVs even after they buy newer, more fuel-efficient vehicles, banking on gasoline prices falling so they can sell their big SUVs later for a better price.

Better hope you can hang on to that house with the three-car garage, then, because your HOA won't let you put it up on blocks in the yard, I'm afraid.

by Calculated Risk on 5/08/2008 11:00:00 PM

Peter Viles at LA Times brings us another gallery of foreclosed properties in LA.

Peter features one on his blog L.A. Land: A foreclosure bargain: The tires are free!. Check it out.

Here is another example - yeah, bars on the windows is a "family neighborhood"! Someone paid $485,000 for this home?

734 Aragon Ave., Los Angeles 90065

Agent's description: "Bank owned. This is a charming little home in a famly neighborhood. Garage was converted. SUBMIT ALL REASONABLE OFFERS."

• Sales history (from Redfin.com): Sold for $485,000 in February 2007.

• Current listing price: $294,900

• Discount from sales price: 39.2%

by Calculated Risk on 5/08/2008 08:15:00 PM

Asha Bangalore at Northern Trust presented a great chart today on continuing unemployment claims.

Click on graph for larger image.

This morning I noted that continuing claims had reached the 3 million level for the first time in four years.

This graph shows the increase in both initial claims and continuing claims.

Bangalore also presents a graph on the relationship between the Fed's Senior Loan Survey and GDP. This is similar to the research paper I excerpted from yesterday (see: The Impact of Tighter Credit Standards on Lending and Output), and suggests that the economy will slow over the next few quarters.