by Calculated Risk on 5/21/2008 06:41:00 PM

Added: quote from Goldman Sachs at bottom.

The Federal Reserve reports that delinquency rates rose sharply in Q1 in all categories - except agricultural loans (higher food prices helps).

Click on graph for larger image.

This graph shows the delinquency rates at the commercial banks for three key categories: residential real estate, commercial real estate, and consumer credit cards.

Credit card delinquency rates are at 4.86%, about the same level as the peak of '01 recession. Credit card delinquencies peaked at 5.45% in the '91 recession.

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since '95 (as delinquency rates declined following the S&L crisis). From the Fed: "Commercial real estate loans include construction and land development loans, loans secured by multifamily residences, and loans secured by nonfarm, nonresidential real estate."

Residential real estate delinquencies are at the highest level since the Fed started tracking the data (since Q1 '91).

Update: From Goldman Sachs chief economist Jan Hatzius: Mortgage Credit Deterioration: Broadening and Picking Up Speed (excerpted with premission):

"The Fed’s first-quarter report on loan performance at commercial banks shows mortgage credit quality deteriorating at an accelerating pace. ...

The rapid pace of deterioration is particularly significant because the mortgage holdings of commercial banks appear to be tilted toward higher-quality loans, with more prime and less subprime. ...

The Fed data suggest that mortgage credit performance outside the subprime sector is deteriorating rapidly. This reinforces our long-standing view that the surge in mortgage defaults is much broader than simply a reflection of poor underwriting standards in specific subprime vintages. We don’t doubt that lax underwriting standards were an important issue. But the main driver of the defaults is the decline in home prices, the increase in negative equity positions, and the resulting inability of borrowers who encounter financial stress to sell or refinance their way out of trouble. Although subprime borrowers are more likely to encounter financial stress than prime borrowers—and the share of negative-equity borrowers who will end up defaulting is therefore much higher in the subprime sector—the qualitative outlook for the trajectory of credit losses in the much larger prime market is not all that different."

by Calculated Risk on 5/21/2008 06:09:00 PM

From Capitol Weekly: Foreclosure tale shows that nobody is immune from crisis (hat tip too many to mention - thanks all!)

by Calculated Risk on 5/21/2008 05:36:00 PM

The Mortgage Bankers Association releases a Weekly Mortgage Application Survey. I used to follow the MBA index closely, because the index was a reasonable early indicator of house sales.

All that changed in early 2007 as the MBA index and house sales diverged. There were two reasons for this change: 1) many homebuyers were applying multiple times for loans (the MBA just counts applications), and 2) many lenders were going out of business - and most of these smaller lenders were not in the MBA sample. For more, see this post from May 2007: Is the MBA Index Currently Useless?

Click on graph for larger image.

This graph shows the MBA index since January 2002.

We still can't compare to earlier periods because of the changes in the industry. As an example, existing home sales were at the 6 million annual rate in Jan 2002 and the MBA purchase index averaged 356. Over the last 4 weeks, the MBA index has average 363, but existing home sales are below the 5 million annual rate.

And it's still too early to tell if the index is useful again. But perhaps we can start looking at the index for clues as to the direction of home sales again - and check back later to see if the index was correct. Right now the MBA index is suggesting sales will fall over the next couple of months. We will see.

by Calculated Risk on 5/21/2008 02:29:00 PM

From the WSJ: Fed Signals Rate Cuts Are Done, Lowers Growth Forecast for 2008

The Federal Reserve on Wednesday appeared to shut the door to the possibility of further interest rate cuts, saying in April meeting minutes that the last rate cut was a "close call," and that many officials think future reductions are unlikely even if the economy contracts.
...
The Fed also released updated quarterly economic forecasts with the April minutes. The central tendency of officials' forecasts is for gross domestic product to rise between just 0.3% and 1.2% this year, down from the last forecast of growth between 1.3% to 2%. Officials also raised their forecasts for the unemployment rate and both headline and core inflation as measured by the price index for personal consumption expenditures.

Here are the minutes.

Slower growth, more inflation, no rate cuts ...

by Calculated Risk on 5/21/2008 01:08:00 PM

From the American Institute of Architects: Architecture Billings Index Remains Weak

Click on graph for larger image.

After sinking to its lowest level ever in March, indicating a rapid slowdown in billings at U.S. architecture firms, the Architecture Billings Index (ABI) rose slightly in April. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the April ABI rating was 45.5, up from the historic low mark of 39.7 in March (any score above 50 indicates an increase in billings). The inquiries for new projects score was 53.9.

The key here is that the index fell off a cliff in early 2008, and that there is "an approximate nine to twelve month lag time between architecture billings and construction spending". We should expect weaker non-residential structure investment throughout 2008.

by Calculated Risk on 5/21/2008 11:57:00 AM

Last night I posted a video from Jim the Realtor showing an area of Oceanside, CA with numerous REOs. Jim has an REO listing in the area and he sent me the details.

260 Securidad, Oceanside, California
2 Bedroom 1 Bath, 820 sq ft
The house sold for $318,000 in July 2004, and the owner refinanced a year later for a total of $375,000 in loans.

The house is now listed (REO) at $127,900, and there are several bidders (investors and owner-occupant buyers) and Jim believes the property will sell for between $140,000 and $150,000. Note: the house is in good condition (for what it is) and appears to be move-in ready.

This is about 55% off the previous sales price and even more off the apparent appraised value when the homeowner refinanced.

This brings up a key point: house price changes vary widely by area, not just by state, but even within cities.

***********

Click on graph for larger image.

This graph shows the Case-Shiller Home Price Index for San Diego. Prices are off by about 24% from the peak in 2005 according to the Case-Shiller index, but the Oceanside REO is off by about 55%.

Obviously areas with numerous foreclosures have seen larger price declines than areas with fewer foreclosures.

The following map of Denver, from an article by Luke Mullins at U.S. News and World Report, illustrates this point. Some areas of Denver are being devastated by foreclosures, others are mostly untouched.

From the USA Today: Mortgage defaults force Denver exodus

Foreclosures are ripping through the rows of new homes in the flatlands where Denver turns to prairie. Every week, 10 more families here need to find someplace else to live.
...
On some blocks, as many as one-third of the residents have lost their homes, making this one of the worst hotspots in a city that was among the first to feel the pinch of the foreclosure crisis. Many houses here remain empty, bank lockboxes on the front doors.

But prices in the areas untouched by foreclosures are actually flat, or in some cases have even increased slightly.

What does this mean for future prices? First, some areas are probably close to a price bottom. Looking back at the REO in Oceanside, we can see that this property is now attractive to investors. According to Jim, this property will rent for between $1000 to $1200 per month. Here is a simple cap rate calculation:

Cost: $140,000
Rent: $12,000 to $14,400 per year
Expenses:
Taxes (1% in California): $1,400 (note: no Mello Roos or HOA fees)
Vacancy: 5% or $600 to $720 depending on rent.
Maintenance and Insurance: $1,400 per year.

This yields a cap rate of between 6.1% and 7.8% depending on the rent. Investors provide a floor for house prices, and these are attractive cap rates for some small investors.

But what about prices for areas with fewer foreclosures? These prices are still sticky, but will continue to decline. From Peter Hong at the LA Times yesterday: At the luxury end, home prices are falling

"You can't have one market hugely cheaper than another forever," said UC Berkeley professor Thomas Davidoff, who specializes in real estate.

Davidoff and others say the time lag stems from the fact that affluent homeowners generally don't have to sell under duress, unlike struggling borrowers facing escalating mortgage payments. But wealthy homeowners are increasingly finding out that if they want to sell their homes, they will need to discount the prices.

In the end, the housing market is linked as shown by this graphic.

Not all chain reactions start with a first time buyer using a subprime loan, but the loss of a large number of first time buyers will eventually impact the entire chain.

Over time the equilibrium between different price ranges will return, but the price dynamics will be different. Areas with a large number of REOs have seen much faster price declines - and are probably closer to the price bottom. Areas with fewer REOs will exhibit "sticky prices" and the prices will probably decline for some time.Read on ... there is much more.

by Anonymous on 5/21/2008 11:56:00 AM

Channel 5 in San Francisco got its hands on some "training videos" used by World Savings--now owned by Wachovia--to teach brokers and loan officers how to originate their "Pick-A-Payment" negative amortization ARM. It's pretty disgusting:

But what concerns [housing advocate Maeve Elise] Brown even more was the way World Savings employees were instructed to answer questions about the minimum payment on those option ARM's.

"So if I'm paying that minimum payment, I'm not actually putting a dent in my principal though right? My principal and interest they're just going to keep climbing up right?" the borrower asks in the video tape. "It's optional," the broker in the video replied.

"What kind of answer is that?" said Brown after watching the video. "The answer would really be 'Yes.' That's the right answer, that to me would be the true clear straightforward truthful simple answer."

And in still another scenario, the video instructs brokers to explain those loans. "Why would I offer a loan that has a negative amortization?" the broker asked. The World Savings representative replied: "Most brokers refer to them as negative amortization, but we try to use the words a little more user friendly, 'deferred interest.'"

Unfortunately, I don't think very many borrowers probably asked that minimum-payment question. To think that those few who did would be fobbed off with the comment "it's optional" is nausea-inducing. It also strongly suggests, of course, that borrowers who didn't ask that question didn't find the brokers volunteering the information that making the minimum payment would increase the balance.

(Hat tip to checker!)

by Anonymous on 5/21/2008 10:14:00 AM

Periodically I wonder how my life would have been different if, instead of becoming a heartless banker whose only concern is the bottom line, not human lives, I had devoted my career to something socially redeeming, like education of the young. Then I read the WSJ:

Some school districts, hoping to control costs and prevent overcrowding, are intensifying efforts to make sure students actually live where they are registered.

Districts from Florida to California are hiring private investigators, creating anonymous tip lines and imposing penalties when they believe people have registered at false addresses. The measures often are spurred by parents who feel they pay a premium in property taxes to get their children into good schools.

One reason for the crackdown is the rise in home foreclosures, which may prod parents into faking addresses to keep their children at their current schools, some in the field say.

"Foreclosure rates are up. Displacement is up. People are becoming homeless," says William Beitler, a private investigator specializing in address verification for school districts in the Chicago area. Mr. Beitler says he has contracts with 32 districts, up from 23 last year, and his caseload has increased to 7,000 from 3,000. He claims he will save districts a total of $12.2 million next year through removing students.

I take it those parents who are spurring the school districts to hire PIs and open up snitch tip lines aren't also grieving.

by Anonymous on 5/21/2008 08:10:00 AM

Via naked capitalism, there is this ugly report in the Financial Times:

Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, a Financial Times investigation has discovered.

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

That's bad. That's really bad. But then there are these two paragraphs at the end of the article:

The world’s other major credit agency, Standard and Poor’s, was the first to award triple A status to CPDOs but many investors require ratings from two agencies before they invest so the Moody’s involvement supplied that crucial second rating.

S&P stood by its ratings, saying: “Our model for rating CPDOs was developed independently and, like our other ratings models, was made widely available to the market. We continue to closely monitor the performance of these securities in light of the extreme volatility in CDS prices and may make further adjustments to our assumptions and rating opinions if we think that is appropriate.”

The implication here, that Moody's jiggered its model to arrive at the same ratings S&P had already arrived at--presumably to keep the "second opinion" business--is ugly. However, the implication that Moody's had to fudge the numbers in order to come up with AAA on these deals but S&P came up with AAA with a "correct" model is something I for one am having a hard time with.

by Calculated Risk on 5/20/2008 10:36:00 PM

This is another followup to CRE: Bought at the top?. Basically NY developer Harry Macklowe bought seven New York office buildings at the price peak, with little down, and a personal guarantee for a portion of the loan. He was unable to refinance the short term debt, and he is now in default. Macklowe is trying to sell his other holdings - including the GM building - to satisfy the personal debt.

From the WSJ: Goldman, Boston Properties, Others In Talks to Buy Macklowe's GM Building

An investment group that includes Boston Properties Inc., Goldman Sachs Group Inc. and two Middle Eastern investors are in negotiations to buy the General Motors building along with up to three other properties from New York developer Harry Macklowe for $3.6 billion to $3.9 billion ...

... The deal would value the GM building at about $2.8 billion, $200 million less than what had been his minimum price.

The deal is designed to rescue Mr. Macklowe from financial ruin, but it isn't clear that this transaction would resolve his debts.