by Calculated Risk on 6/06/2008 12:16:00 AM

From the WSJ: National City Is Under U.S. Scrutiny

National City Corp.'s banking unit, which has been buffeted by rising bad loans, has recently entered into a "memorandum of understanding" with federal regulators, effectively putting the bank on probation.

The confidential agreement with the Office of the Comptroller of the Currency was entered into over the past month or so. ... Such MOUs are agreements between regulators and bank management. They are considered serious and are fairly rare ...

The bank division of National City had $153 billion of assets at the end of March, up from $132 billion one year earlier ...

It is possible that National City will resolve these issues, but I can't help but think of FDIC Chairman Sheila Bair's comments today: "There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past."

by Calculated Risk on 6/05/2008 08:00:00 PM

From MarketWatch: Fitch downgrades MGIC Investment, PMI ratings

Fitch Ratings on Thursday downgraded MGIC Investment Corp., noting it has become much more pessimistic on its outlook for the mortgage insurance sector. ... Fitch also cut PMI Mortgage Insurance's rating ...

Didn't Tanta once say it won't feel like a real housing bust until at least one mortgage insurer goes bankrupt?

by Calculated Risk on 6/05/2008 04:45:00 PM

PJ at Housing Wire has more on the rise in delinquencies for prime loans: Primed for Trouble: Pace of Mortgage Distress Shifts to Prime Borrowers

[A]n alarming shift of the mortgage mess towards prime borrowers appears to be taking place ... signaling that the credit crunch that began among those with less-than-perfect credit is now marching onward towards borrowers usually deemed better credit risks.

... the Q4 to Q1 change in severe delinquencies strongly favors prime borrowers, for example, with severe DQs increasing by 19.2 percent for prime and 13.7 percent for subprime borrowers.

See the entire article - the problems are accelerating rapidly for prime loans.

by Calculated Risk on 6/05/2008 04:39:00 PM

RSS Readers. Sorry for the inconvenience of a short feed, but I'm trying to discourage sites like this one from using our material without credit. Any suggestions?

by Calculated Risk on 6/05/2008 02:23:00 PM

From S&P: Ambac, MBIA Financial Strength Ratings Lowered

Standard & Poor's Rating Services today lowered its financial strength ratings on Ambac Assurance Corp. and MBIA Insurance Corp. to 'AA' from 'AAA' and placed the ratings on CreditWatch with negative implications.

The ratings on the holding companies, Ambac Financial Group and MBIA Inc., have also been lowered to 'A' and 'A-' from 'AA' and 'AA-', respectively, and placed on CreditWatch with negative implications.

The rating actions on the companies reflect our belief that these entities will face diminished public finance and structured finance new business flow and declining financial flexibility. In addition, we believe continuing deterioration in key areas of the U.S. residential mortgage sector and related CDO structures will place increasing pressure on capital adequacy.

by Calculated Risk on 6/05/2008 02:11:00 PM

Wachovia economists Mark Vitner and Anika R. Khan: Commercial Real Estate Chartbook: June 2008

The faltering housing market and generally sluggish pace of the overall economy are finally taking a toll on the commercial real estate market. Demand for office, industrial and retail space is waning, sending vacancy rates higher and property prices lower.

Click on graph for larger image in new window.

This graph shows the Wachovia forecast for real non-residential investment (green columns, and the Year-over-year forecast in red).

Real private nonresidential construction is expected to moderate in the second quarter and continue to slide under the weight of tightening underwriting standards and slower economic growth.

Here is my fairly long Non-Residential Investment Overview with similar conclusions.

Also - this coming slump in CRE is one of the reasons the FDIC and the Fed are so concerned with bank failures later this year.

by Calculated Risk on 6/05/2008 12:53:00 PM

From Reuters: Bigger U.S. bank failures may be coming - FDIC (hat tip Ed)

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, [Federal Deposit Insurance Corp Chairman Sheila Bair] told a Senate Banking Committee hearing on the state of the banking industry.

"There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."

The coming bank failures are no secret:

Feb 25, 2008: FDIC Bracing for Bank Failures

March 17, 2008: Federal Deposit Insurance Corporation Stresses Importance of Managing Commercial Real Estate Concentrations

April 17, 2008: Fed Vice Chairman Kohn Warns on CRE Concentrations at Small banks

Note: The largest bank to fail this year was ANB Financial with $2.1 billion in assets.

by Calculated Risk on 6/05/2008 11:25:00 AM

The Fed released the Q1 2008 Flow of Funds report today: Flow of Funds.

The Fed report shows that household real estate assets decreased from $20.046 trillion in Q4 to $19.717 trillion in Q1 2008. That is a decline of $328.9 billion.

When we subtract out new single family structure investment and residential improvement, the value of existing household real estate assets declined by $431 Billion.

Household percent equity was at an all time low of 46.2%.

Click on graph for larger image in new window.

This graph shows homeowner percent equity since 1952. Even though prices have risen dramatically in recent years, the percent homeowner equity has fallen significantly (because of mortgage equity extraction 'MEW'). With prices now falling - and expected to continue to fall - the percent homeowner equity will probably decline rapidly in the coming quarters.

Note: approximately 31% of household have no mortgage. So the 50+ milllion households with mortgage have far less equity than 46.2%.

The second graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP is now declining, although mortgage debt as a percent of GDP only decreased slightly in Q1.

More later ...

by Calculated Risk on 6/05/2008 11:05:00 AM

From the MBA: Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey (hat tip Ed)

The percent of loans on which foreclosure actions were started during the quarter was 0.99 percent on a seasonally adjusted basis, 16 basis points higher than the previous quarter and up 41 basis points from one year ago.

The seasonally adjusted total delinquency rate is the highest recorded in the MBA survey since 1979 ...

Once again this quarter, the rate of foreclosure starts and the percent of loans in the process of foreclosure are the highest recorded since [the survey started in] 1979.

ARMs are a key problem, both subprime and prime:

“[W]hile subprime ARMs represent 6 percent of the loans outstanding, they represented 39 percent of the foreclosures started during the first quarter. Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started. Out of the approximately 516,000 foreclosures started during the first quarter, subprime ARM loans accounted for about 195,000 and prime ARM loans 117,000, but the increase in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.” [said] Jay Brinkmann, MBA’s Vice President for Research and Economics.

That last comment is important - even though there were still more subprime than prime ARM foreclosures in Q1, the problems are really accelerating in the prime ARM segment.

by Calculated Risk on 6/05/2008 10:54:00 AM

Fed Vice Chairman Donald L. Kohn testified today: Condition of the banking system. A short excerpt:

Consistent with trends in commercial banks overall, conditions at state member banks have weakened over the past year. Problems in residential mortgage, home equity, and loans to home builders have pushed the nonperforming assets ratio at these banks to 1.57 percent, more than twice the level of one year ago and the highest rate since 1993. Loan loss provisions have also accelerated, rising to a high of 1.14 percent of average loans during the first quarter of 2008 in large part reflecting the deterioration in residential real estate-related loan portfolios.
...
Over the coming months, we expect banking institutions to continue to face deteriorating loan quality. House prices are still declining sharply in many localities and losses related to residential real estate--including loans to builders and developers--are bound to increase further. In addition, weak economic conditions could well extend problems to other segments of lending portfolios including consumer installment or credit card loans, as well as corporate loan portfolios. Moreover, banking organizations must be prepared for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly. Accordingly, we anticipate that the number of banks with less than satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years and we are monitoring developments at all supervised institutions closely.
emphasis added

This is why the FDIC is gearing up for many more bank failures.