by Calculated Risk on 5/11/2008 10:13:00 AM

From the Observer: HSBC to reveal $5bn of fresh write-offs

HSBC is expected to announce tomorrow that it is writing off a further $4.6bn (£2.3bn) against mortgages, credit cards and other loans to stricken US consumers, bringing the total over the last 15 months to almost $17bn.

The confessional is still busy.

by Calculated Risk on 5/11/2008 01:27:00 AM

Yes, this is Calculated Risk.

Best to all.

by Calculated Risk on 5/11/2008 01:21:00 AM

Here is a story of a city in Northern California devastated by the housing bust, from the San Francisco Chronicle: Brentwood the poster child for housing bust (hat tip rainyday)

This farming community on the eastern edge of the Bay Area absorbed an outsize portion of the region's growth during the prolonged housing and development boom, adding 40,000 residents in the past 16 years as subdivisions and strip malls overtook agricultural land. ... Now, Brentwood is suffering disproportionately from the bust.

Hundreds of families have lost their homes to foreclosure since the beginning of last year, and in a sign of more to come, at least 1 out of every 16 households has received default notices.
...
"Brentwood is kind of the poster child for what's going on in the housing market," said Howard Sword, the former community development director. "We were so active in the years where the subprime finance creative tools got rolled out, we were issuing like 1,400 to 1,600 building permits a year."

This year, the city has issued nine permits for single-family homes. It expects to collect $21.3 million less in permit and impact fees than it did two years ago, said Pamela Ehler, director of the finance and information systems. Brentwood's total general budget is about $40 million.

"This was a complete meltdown," she said.

by Calculated Risk on 5/10/2008 08:09:00 PM

From The Times: Home repossessions to double this year for mortgage defaulters

The number of people who are losing their homes because they cannot meet rising mortgage bills is set to double this year, experts said yesterday.
...
The number of repossession orders granted in England and Wales in the first three months of the year climbed to levels not seen since the early 1990s, reaching 27,530.
...
Experts also urged a sense of perspective, pointing out that the present level of repossessions remains considerably below the peak of 75,540 homes seized during 1991, at the peak of the last recession. About 142,900 repossession orders were made that year.

Hmmm ... 27 thousand foreclosure orders in the first quarter is a 108 thousand annual pace. And the problem seems to be getting worse each quarter. I'm not sure the present level of foreclosure activity is that far below 1991 in the UK.

by Calculated Risk on 5/10/2008 02:23:00 PM

A follow up to Tanta's post this morning, from Michael Hiltzik at the LA Times: In mortgage meltdown, ‘walkaway’ homeowners may be suburban myth (hat tip Dagny)

Bankers and housing market analysts are warning of a chilling new trend in the mortgage world: Homeowners voluntarily defaulting on their loans even though they can actually afford to make the payments.
...
At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, Senior Vice President Marianne Sullivan conceded that there was growing "folklore" about residential walkaways but said that the phenomenon was more likely connected to investors than people who live in their homes, or "owner-occupants."
...
Bruce Marks, CEO of Neighborhood Assistance Corp., a Boston-based nonprofit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an "urban myth" that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.

I nominate Michael Hiltzik honorary UberNerd!

P.S. and kudos to Tanta: Let's Talk about Walking Away

by Anonymous on 5/10/2008 10:53:00 AM

In the New York Times, too! I think we're going to have to make Vikas Bajaj an honorary UberNerd.

Millions of Americans are “upside down” on their mortgages — they owe more on their homes than their homes are worth. So far, however, there is little evidence that people who have the means to pay are walking away from their homes as values sink.

The blogosphere is full of tales of homeowners who supposedly are choosing to mail the house keys to their lenders rather than keep their depreciating homes. And yet “jingle mail,” the term for those tinkling packages of keys, appears to be far rarer than many seem to think.

I think this is my favorite part:

Jon Madux, a founder of the site YouWalkAway.com, which helps borrowers leave their homes, said a majority of the site’s clients default because of financial hardships. But in the Southwest and Florida, more of its customers are investors who bought multiple condos or houses and are now not able to find renters or sell for more than they owe.

Speculators always cave in quickly in a declining market, especially when they weren't required to make a down payment and the rents were never realistic. This, we always knew. It does not constitute a "sea change" in borrower behavior, whatever the hoocoodanode crowd wants you to believe.

The interesting question is why this insistence that walk-aways are widespread is being, apparently, pushed by real estate brokers (they and some mortgage brokers seem to be the sources for most of the claims I've read in this regard).

“These markets are driven by psychology,” Mr. Barry [the real estate agent] said. “If people see that the market will continue to decline and they are already in the hole by 50 to 100 grand” they will leave.

Is it just the salesperson's preference for "psychology" as the all-purpose explanation? Classic projection? An attempt to spook the banks into negotiating with borrowers who wouldn't, typically, qualify for a workout? I'd really like to know.

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