by Calculated Risk on 5/31/2008 03:36:00 PM

On Friday, the FDIC announced the 4th bank failure of 2008, and the 2nd failure in May. The FDIC estimates that the failure of First Integrity of Staples, Minnesota will only cost the FDIC Insurance Fund $2.3 million. This is a small amount compared to the estimated cost to the fund of $214 million - announced earlier in May - associated with ANB Financial in Bentonville, Arkansas.

It appears bank failures are starting to become more frequent, and some analysts are estimating between 150 and 300 banks will fail over the next couple of years.

Click on graph for larger image in new window.

To put these failures into perspective, here is a graph of bank failures since the FDIC was created in 1934. There were 3 bank failures in 2007, and 4 already in 2008. This hardly shows up on the graph.

The huge spike in the '80s was due to the S&L crisis.

Note: thousands of banks failed during the Depression, and bank failures were very common even before the Depression, with about 600 banks failing every year during the Roaring '20s.

I suspect bank failures will become much more common (although nothing like the late '80s), and we will be on Bank Failure watch every Friday afternoon.

by Anonymous on 5/31/2008 07:46:00 AM

Our colleague P.J. at Housing Wire is being a shill for Countrywide again. I intend to pile on before Gretchen Morgenson gets on the case.

***************

Says Housing Wire:

Last week’s Investor’s Business Daily painted a pretty rough picture of everyone’s favorite industry whipping post Countrywide Financial Corp., after getting wind of a servicing policy that requires some delinquent borrowers to pay 30 percent of arrearages before the lender will begin discussing loan modification options — fees that the reporter, Kathleen Doler, called “a steep entrance fee.” . . .

It’s not a blanket policy, as Doler notes, but some borrowers are seeing this policy while others are not. And, of course, Doler finds a few consumer advocates more than willing to demonize the policy, and Countrywide as well. Not hard to do these days.

For its part, Countrywide told IBD that the policy was intended to be a good-faith demonstration, and suggested that the 30 percent policy is only applicable to borrowers staring down a scheduled foreclosure auction. . . .

Allow us to paraphrase what we think the nicely-worded press statement really says: look, if we’ve tried and wasted our resources trying to contact a borrower anywhere from the past 8 to 12 months and they don’t bother to return any of our calls, read any of their mail, or answer the door when we send countless loss mit specialists out there in person, you’ll have to forgive us for calling bullshit when they decide to call asking for a loan mod the day before the foreclosure sale.

I'm pretty sure Angelo was in favor of using "bullshit" in the statement but his PR people told him he's already in enough trouble over "disgusting."

As far as the policy itself, of dealing with eleventh-hour workout requests from borrowers who have been blowing you off until the week before the trustee's sale? I have two words to respond to that: Laura Richardson. You will recall that the good Congresswoman let three homes go into the foreclosure process--and she has admitted that she made no attempts to work with the servicer until all three foreclosures were well advanced and the legal fees had started piling up--and then got all righteous with WaMu because her request for a modification the week before the scheduled sale didn't magically make everything go away. I am not suggesting that Richardson is a "typical American borrower," but she suggested that, so there. Would I make her put cash down on the table before bothering to start a last-minute workout with her? You bet your sweet eclair I would.

What really frustrates me about the criticisms of this specific policy is the complaint that it's "inconsistent": it is exactly a policy that is applied only in certain circumstances. On a case-by-case basis. When appropriate. (I am not affirming excessive faith in Countrywide's ability to determine what is and is not "appropriate" in all situations. But saying they need to do better at that is not to say the policy is wrong.) But as I have argued since the "Hope Now" thing first emerged last year, one-size-fits-all paint-by-numbers workout strategies are doomed to fail.

The fact of the matter is that not all borrowers are the same, and not all circumstances are the same. I am reminded of this article from the Washington Post we looked at several weeks ago, which contained some pretty level-headed advice from Diane Cipollone, of the Sustainable Homeownership Project:

Then, said Cipollone, contact a nonprofit housing counseling agency or an attorney. Avoid any unsolicited offers from people who say they can save your house. Do not avoid mail or phone calls from your lender. And if your lender stops accepting payments because it is moving toward foreclosure, save that money for a contribution toward the loan workout. "If you've missed eight mortgage payments and have spent all that money because the lender stopped accepting payments, that is not a good outcome [nor] a good way to start negotiations," said Cipollone.

The article then describes the successful modification workout that a couple named Ramsey received, after having made a $3000 "down payment" to the servicer.

The fact of the matter is that no one is going to modify your mortgage payments down to zero in any scenario. If you have made no payments for months on end, and have made no attempt to contact your servicer to request a repayment plan or anything else during those months, and at the last minute before foreclosure you do not have any money in savings--the equivalent of several months' worth of a reasonably modified payment--why should the lender bother with you? You can try telling the lender that for the last six months or more your other expenses were so high that you could not set aside even two or three hundred dollars a month that would otherwise have gone toward the mortgage payment, but in that case, how will you afford the modified payments? If you can document a "temporary" financial hardship, why haven't you contacted the servicer until now?

I am personally willing to bet that if Countrywide asked you for 30% of back payments, late fees, and legal charges, and you were only able to scrape up 20%, they'd probably play ball with you, assuming you have a good story about why there is reason to believe that you can and will make the modified payments. Workouts are a process of negotiation; that's the point. And I'll eat my blog if it turns out that Countrywide is the only servicer with a policy similar to this for late-stage modification requests. My sense is that the animus here is against Countrywide, not any coherent objection to a policy of asking borrowers to put down some "earnest money" before being given a deal that may be in everyone's financial best interest, but which is inevitably beset by moral hazard.

I Want To Know How CFC Is Screwing Borrowers This Time.

by Calculated Risk on 5/30/2008 10:47:00 PM

OK, really just one city - but three different house price ranges.

Click on graph for larger image in new window.

This graph show the real Case-Shiller prices for homes in Los Angeles.

The low price range is less than $417,721 (current dollars). Prices in this range have fallen 34.9% from the peak in real terms.

The mid-range is $417,721 to $627,381. Prices have fallen 30.7% in real terms.

The high price range is above $627,381. Prices have fallen 22.8% in real terms.

In the recent bubble, the areas that saw the most appreciation are seeing the fastest price declines.

This seems to fit with some new research from David Stiff, Chief Economist, Fiserv Lending Solutions: Housing Bubbles Collapse Inward

During the housing bubble, as home prices appreciated at record rates in many metro areas, housing market activity was pushed outward to distant suburbs and ex-urban areas. Many homebuyers, who could no longer afford to purchase homes close to urban centers, were forced to “drive until you qualify” – trading longer commutes for lower mortgage payments.
...
Because of the reversal in trends that boosted demand for housing in outlying suburbs, since they peaked in 2005 and 2006, home prices have generally fallen more in towns and neighborhoods located farther away from urban centers.

[Figure] shows the change in single-family home prices from their peak until the second half of 2007 ... for the Los Angeles and Oxnard, CA metro areas ... for 330 zip codes. Between September 2006 and the second half of 2007, single-family home prices in the Los Angeles metro area dropped by 8.9%, according to the S&P/Case-Shiller index. ... the decline in home prices from their peak has had a very distinct geographic pattern. In Los Angeles, this pattern is more complex because instead of having a single “downtown”, the metro area has more than one large concentration of workplaces. Home prices have fallen less in neighborhoods near Los Angeles’ two largest employment centers – West Los Angeles and downtown. ... During market downturns, home prices fall the least in the most desirable areas of a metropolitan region.

But look at the first graph - all three price ranges saw similar appreciation and price declines during the previous bubble. This suggests this bubble was different than the earlier bubble - this time the extremely loose underwriting for subprime loans, boosted appreciation more in the least desirable areas than in the more desirable areas.

So Stiff's conclusion: "During market downturns, home prices fall the least in the most desirable areas of a metropolitan region." will be true in this housing bust, but was probably not true in previous busts. Also looking at the first graph, it appears all three price ranges are close to the same level, and they will probably now start to decline at about the same pace.

by Anonymous on 5/30/2008 06:38:00 PM

The fourth this year:

First Integrity, National Association, Staples, Minnesota, with $54.7 million in total assets and $50.3 million in total deposits as of March 31, 2008, was closed today by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation was named receiver.

The FDIC Board of Directors today approved the assumption of all the deposits of First Integrity by First International Bank and Trust, Watford City, North Dakota. . . .

In addition to assuming all of the deposits of the failed bank, First International will purchase approximately $35.8 million of First Integrity's assets for a total premium of $2.03 million. The FDIC will retain approximately $18.9 million in 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 $2.3 million. First Integrity is the fourth FDIC-insured bank to fail this year, and the first in Minnesota since Town & Country Bank of Almelund, on July 14, 2000. Last year, three FDIC-insured institutions failed.

(hat tip, cd)

by Anonymous on 5/30/2008 04:13:00 PM

My day started with my inability to understand a series of statistics reported in Bloomberg this morning.

Housing Wire follows up on the "methodology change" that purportedly caused the new defaults and cured loan reporting for April to surge and plummet, respectively, in the Mortgage Insurance Companies of America's most recent report. I share HW's sources' skepticism about the explanation given for this change. It simply sounds like a very large lender has been allowed--heretofore--to report fewer delinquencies and more cures than everyone else does, by using different definitions. As that is not something that sounds very good, I would suggest that MICA needs to come up with a better explanation.

Meanwhile, the Hope Now folks released a pathetic set of data charts on mortgage loss mitigation through April 2008. For heaven's sake, we're the financial industry, people. We're supposed to be able to use Excel properly.

There are some really puzzling features of this data, like why the total loan counts have not changed since October (see the first page). Since those loan counts are used to calculate the 60+ day delinquency percentage, the failure to update the total count makes those numbers rather dubious. On page two, I found myself unable to make sense of the completed FC sales/FC starts calculation using any possible definition of "five months" I can think of. Perhaps I am misreading the footnote. In any event, I gave up on my ambition to put this data into a more sensible format for you, after I lost confidence in the data integrity.

So here's from the press release, instead:

The April report from HOPE NOW estimates that on an industry-wide basis:
• Mortgage servicers provided loan workouts for approximately 183,000 at-risk borrowers in April. This is an increase of 23,000 from the number of workouts in March 2008 and is the largest number of workouts completed in any month since HOPE NOW’s inception.
• The total number of loan workouts provided by mortgage servicers since July 2007 has risen to 1,558,854.
• Approximately 106,000 of the prime and subprime loan workouts conducted by mortgage servicers in April were repayment plans, while approximately 77,000 were loan modifications.

Maybe next month the report will be cleaned up a little and we can look in more detail at these numbers. If we can shame Hope Now into issuing something readable.

Harrumph. Is it Happy Hour yet?

by Calculated Risk on 5/30/2008 03:23:00 PM

"I don't know if it's going to be a majority or not but I think a large number of the [Alt-A] senior classes are facing downgrade pressure."
Grant Bailey, a senior director at Fitch, May 30, 2008

From Bloomberg: Fitch Changes Method of Rating Alt-A Mortgage Bond

Fitch Ratings modified how it assesses outstanding securities backed by Alt-A U.S. mortgages by starting to update projections for losses from non-delinquent loans instead of keeping estimates static from the time of issuance.

A record jump in delinquencies and defaults prompted the change ... Borrowers are at least 60 days late on 11 percent of adjustable-rate Alt-A loans backing bonds created in 2006 and rated by the firm, compared with a historical average of 1 percent to 2 percent.
...
The firm hasn't yet decided whether to use its new surveillance approach on prime-jumbo mortgage securities, Barberio said....

The Fitch analysts weren't able to immediately say how many Alt-A securities from the past three years have been downgraded. Most of the non-AAA bonds were lowered and others remain under review, they said.

Top-rated securities accounted for about 90 percent of the debt created in Alt-A deals. The company will downgrade many over the next few months, [Grant Bailey, a senior director at Fitch] said.

``I don't know if it's going to be a majority or not but I think a large number of the senior classes are facing downgrade pressure,'' he said.

More downgrades coming ...

by Calculated Risk on 5/30/2008 01:17:00 PM

From Boston Fed President Eric S. Rosengren: Current Challenges in Housing and Home Loans: Complicating Factors and the Implications for Policymakers .

Here is an excerpt from the section: Length and Duration of Housing Downturns, and Other Recent Research from the Boston Fed

New England is no stranger to falling asset values. As you no doubt know, during the early 1990s, New England experienced a steep decline in housing prices. We at the Boston Fed think it may be useful to compare that experience to what we have experienced to date with falling housing prices, and we are pursuing a number of research avenues to do that. ...

As you can see in Figures 4 and 5, Massachusetts moved quite rapidly from a situation of relatively limited foreclosures in 1990 to a period of very high foreclosures in 1992. The timing is interesting. By late 1989, Massachusetts house prices had begun to fall, but delinquencies and foreclosures did not really accelerate until there was also a significant weakening of the economy. In fact, the unemployment rate in Massachusetts, which had declined to 3.1 percent in late 1987, peaked at 9.1 percent in the second half of 1991. Declining housing prices alone did not cause very elevated foreclosures; it was significantly compounded by an economic shock such as the loss of a job which disrupted the ability of many borrowers to make payments. As house prices fell, many homeowners who lost their jobs in the early-1990s recession could not sell their homes to pay off their mortgages because they owed more than their homes were worth. For unemployed homeowners with “negative equity,” foreclosure was often the only option.

The more recent period also points to the importance of falling house prices and negative equity in foreclosures. In the more recent period (shown in Figures 6 and 7), the foreclosure rate – which was not particularly elevated in 2005 – had become quite elevated by 2007 as house prices softened. This increase in foreclosures occurred even though the Massachusetts unemployment rate averaged 4.5 percent for the year.

Why are foreclosures so high today, given that the economic situation is so much better than it was during the early 1990s? Even in expansions, many homeowners undergo adverse life events – like a job loss, a divorce, a spike in medical expenses, or the like – that disrupt their ability to make mortgage payments. Of course, with regard to unemployment, such household-level disruptions are not as prevalent in expansions as they are in recessions. But when such a life event does occur, it can still precipitate a foreclosure if the homeowner has negative equity because of a fall in house prices.

Another reason for elevated foreclosures today concerns changes in the susceptibility of mortgages to economic shocks. In the late 1980s, many borrowers had made significant down payments and had good credit histories. But the recent ability of borrowers with weak credit histories and little or no down payments to purchase homes, often with subprime loans (and sometimes with minimal income verification), means that a greater share of today’s mortgages are a good bit more susceptible to the types of disruptive life events that precipitate foreclosure. These borrowers were fine when housing prices were rising because if needed, they had the ability to refinance or sell their homes and pay off (or more than pay off) their mortgages. In contrast, in the current environment of falling housing prices, borrowers who made small down-payments or have otherwise risky mortgages are now more likely to end up in foreclosure if they experience an adverse event that interrupts their ability to make mortgage payments.

So, in short, we have seen similar foreclosure numbers this time around without a technical recession, and with a more modest fall in home prices. Boston Fed researchers attribute that to the prevalence of riskier loans and higher combined loan-to-value ratios in general.
...
Several lessons from the historical comparison can be highlighted. First, should the economy worsen and suffer a period of significant job losses, the housing problem could become much more severe. Second, past episodes of elevated foreclosures lingered well after the peak in foreclosures had passed, indicating that the duration of today’s situation may be longer than some are anticipating. ...
emphasis added

Read on ... this is a long excerpt.

by Calculated Risk on 5/30/2008 11:21:00 AM

Barry Ritholtz discusses the impact of revisions and cancellations with regards to the New Home sales report: April New Home Sales - Revisited. I'll have more on revisions, but I'll try to clear up cancellations first. Barry writes:

Cancellations: Of course, none of the new home sales data includes cancellations, which were running north of 30% -- and with the recently tightened credit, it may be even worse.

Yes. New home sales data doesn't include cancellations, and cancellations were probably just over 30% in Q1 2008 (based on my survey of public builder reports), but ...

Cancellations are not getting worse. In fact they are getting better. For most builders, cancellation rates peaked in Q3 2007 (with the credit crunch) and have improved significantly since then. And it's the change in cancellation rates that matter when analyzing the New Home data.

This is a key point: right now the Census Bureau is probably underestimating sales!

Here is how the Census Bureau handles cancellations:

The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. The Survey of Construction (SOC) is the instrument used to collect all data on housing starts, completions, and sales. This survey usually begins by sampling a building permit authorization, which is then tracked to find out when the housing unit starts, completes, and sells. When the owner or builder of a housing unit authorized by a permit is interviewed, one of the questions asked is whether the house is being built for sale. If it is, we then ask if the house has been sold (contract signed or earnest money exchanged). If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. The house is removed from the "for sale" inventory and counted as sold for that month. If the house it is not yet started or under construction, it will be followed up until completion and then it will be dropped from the survey. Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold. Therefore, the eventual purchase by a subsequent buyer is not counted in the survey; the same housing unit cannot be sold twice. As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey. In the long run, cancellations do not cause the survey to overestimate or underestimate sales.
emphasis added

The housing outlook is grim, but there is no need to borrow trouble. We are now in a period of improving cancellation rates, and this means the Census Bureau is likely underestimating actual sales.

by Calculated Risk on 5/30/2008 09:04:00 AM

The BEA reports: Personal Income and Outlays

Real disposable personal income decreased less than 0.1 percent in April, in contrast to an increase of less than 0.1 percent in March. Real PCE decreased less than 0.1 percent, in contrast to an increase of 0.1 percent.

Basically real PCE spending has been flat for the first four months of 2008. Personal Consumption Expenditures (PCE) accounts for almost 71% of GDP, and it appears there has been no growth in real PCE.

Note: After the May release, we will have a reasonable estimate of Q2 PCE spending (using the "Two Month Method").

by Anonymous on 5/30/2008 07:18:00 AM

Forgive me for once again falling into despair over the media's inability to report sensibly and critically on foreclosure and delinquency numbers. I should be immune by now. If you are wiser than I, just skip to the next post. If you still cradle to your wounded heart the battered but indomitable belief that even media outlets like Bloomberg can learn to spot the flaws in a reported statistic, and that there is a point to doing this, click the link below.

***********

The headline: "New Overdue Home Loans Swamp Effort to Fix Mortgages in Default." We will take this as a promise that the article is going to demonstrate something about the relationship between newly delinquent loans and workout efforts.

The lede:

May 30 (Bloomberg) -- Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month, a sign that nationwide efforts to help homeowners avoid default may be failing.

In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Companies of America said.

The last of eighteen paragraphs:

Last month's 54 percent "cure ratio" among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March. The comparison may not be valid because one lender changed the way it calculated defaults and cures reported to the insurers.

So we start with an eye-popping number, and then only at the very end do we note that this number may mean much less than meets the eye. This is, in fact, what MICA said in its data release:

WASHINGTON, D.C. May 30, 2008 – Mortgage Insurance Companies of America (MICA) today released its monthly statistical report for April which includes a one-time adjustment to the number of defaults and cures and also notes an 11.7% increase in new insurance written year-over-year.

As a result of a major lender’s change to its methodology for recording delinquencies, and to how it reports them to MICA’s members, there was a sharp increase, to 73,880, in reported defaults in April. The increase includes both newly reported defaults for the month, as well as previously unreported defaults by this lender.

MICA’s members reported 39,584 cures in April. This statistic also reflects the above noted change in reporting defaults.

I assumed when I read this that somebody--a large somebody, since it significantly impacts the data--switched over from the OTS method to the MBA method of delinquency reporting. I do not know if this is the case or not. Before I published this article, however, I might have called MICA for a comment. In any case I might have been more cautious with headlining a number that is described as a "one-time adjustment" to the data collection. Burying that in the last paragraph is . . . disingenuous.

I'm also a touch troubled by the statement that "Last month's 54 percent 'cure ratio' among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March." That is literally true. However, the cure rate in December of 2007 was 54.1% and in January of 2008 was 51.4%. Could there be some seasonality in these numbers? Another confounding factor besides new delinquencies?

So what about the second half of the claim?

"Modifications are not occurring nearly at the numbers necessary to stem the foreclosure crisis," Allen Fishbein, housing director for the Consumer Federation of America in Washington, said in a May 19 interview. "People are still going into foreclosure when, with a writedown on existing principal, they could still stay in their homes."

In the first two months of 2008, lenders modified loans for 114,000 borrowers while starting 346,000 foreclosures, according to a study by the Durham, North Carolina-based Center for Responsible Lending. In April, 22 percent of the homes in the foreclosure process had been taken over by lending banks; a year earlier, that figure was 15 percent, according to Irvine, California-based data provider RealtyTrac.

Did you assume, when you read that second paragraph, that the 114,000 modifications were exclusive of (not the same loans as) the 346,000 foreclosure starts? It seems you were supposed to assume that. But is is true? "Foreclosure start" simply means that a legally-required preliminary filing (a Notice of Default, Notice of Intent, or Lis Pendens, depending on the state and the type (judicial or non-judicial) of foreclosure) has been made. That is a "start" because in most jurisdictions it will be another 90 to 180 days, or even more in some states, until the auction can be scheduled, the home sold, and the foreclosure "completed." My own view is that the "best practice" is to work hard to negotiate a modification, if possible, in the early days of delinquency before starting the foreclosure process. However, that is not always possible, and it is also "best practice" to continue to attempt reasonable workouts during the foreclosure process all the way up the day before sale, if necessary. There are certainly cases in which a borrower simply cannot be brought to talk to the servicer until the initial FC filing galvanizes him into it. All of this means that it is impossible to look simply at modifications completed in a period compared to foreclosures started in a period and conclude that the starts will never get a mod or that the mods were not effected after the FC start.

Besides that, where is the data to back up the idea that a 30% ratio of modifications to foreclosure starts is poor performance? I am personally not sure that much more than 30% of recent vintage loans can be saved. Back out fraud, flippers and speculators, and borrowers whose loan balances would have to be reduced by half in order to get a workable payment--which would most likely exceed the cost to the investor of a foreclosure--and 30% doesn't sound so shabby.

As far as the second claim--the increase from 15% to 22% of homes in foreclosure "taken over by lending banks," I'm prepared to read that literally. There is no jurisdiction in which a foreclosed home must be purchased by the lender at the foreclosure sale; all jurisdictions require public auctions in which third parties can bid. An increase in REO (lenders "winning" the auction) does not necessarily mean an increase in completed foreclosures; it can mean that fewer third parties care to bid on foreclosed homes. All the data I have seen recently suggests that this is the case: buyers are still wary of further price declines, and lenders are still bidding higher than potential RE investors. One therefore expects the FC-to-REO numbers to increase. But they can do that even in the absence of an increase in total foreclosures. In order for this statistic to mean much, we have to know how much of the increase is due to more foreclosures, and how much due to fewer third-party bidders.

So put these dubious statistics together--the rest of the Bloomberg article is basically filler--and you get anomalous data on new delinquencies, ambiguous data on modification-to-foreclosure-starts, and a claim about REO rates substituting for a claim about foreclosure completion rates. How about taking back that headline, Bloomberg?

You know, last year I might have had some more sympathy for these reporters. We were just newly into the whole problem and a lot of concepts--delinquency reporting methodology, foreclosure processes, various ways of reporting "cures" and "starts"--were all new to everybody except industry insiders and a handful of totally Nerdly blog readers. But surely by now we can have moved the ball forward a couple of yards? I am here to affirm that if you have been reporting on "the foreclosure crisis" for a year or more and you still can't ask basic questions about the press releases you read, you aren't doing your job.

I, Too, Need To Know Why These Numbers Are So Squirrelly