by Calculated Risk on 6/12/2008 12:07:00 PM

The Office of the Comptroller of the Currency (OCC) released their annual survey of underwriting standards today. Here is the Survey of Credit Underwriting Practices 2008

This is similar to the Federal Reserve Senior Financial Officer Survey except this survey is annual and is based on examiner assessments of the institutions underwriting practices, as opposed to the opinions of financial officers:

The 2008 survey included examiner assessments of credit underwriting standards at the 62 largest national banks. This population covers loans totaling $3.7 trillion as of December 2007, approximately 83 percent of total loans in the national banking system.

As expected, the survey showed significantly tightening in most areas (except agricultural loans).

The Office of the Comptroller of the Currency released today its 14th annual Survey of Credit Underwriting Practices and reported that commercial and retail underwriting standards tightened after four consecutive years of eased underwriting standards.
...
Examiner assessments found that risk in both the commercial and retail portfolios increased over the past year and they expect portfolio risk to continue to increase over the coming year.

A key area of concern for 2008 is Commercial Real Estate:

The most prevalent tightening occurred in CRE loans, leveraged loans, and counterparty credit exposure to hedge funds.
...
CRE products include commercial construction, residential construction, and other CRE loans. These products are offered by virtually all of the surveyed banks. Net tightening, which measures the difference between the percentage of banks tightening and those easing, was greatest in residential construction, followed by commercial construction. The following [graph] provide the breakdown by each real estate type.

Click on graph for larger image in new window.

This graph is from the OCC. The blue bar shows the percent of banks tightening lending standards for each category by year.

Note that residential construction has been tightening for two years, but commercial construction just saw a significant jump in tightening.

Examiners most often cited the following as reasons for strengthening of CRE underwriting standards:

weakening economy, specifically the downturn in residential real estate markets.

Declines in market values/prices as a result of oversupply or slow-moving inventory.

Existing credit concentrations, both by type of product and by location.

Use of non-traditional terms and excessive investor speculation.

CRE remains a primary concern among examiners given the rapid growth of these exposures and banks’ significant concentrations relative to their capital. These concerns are compounded by elevated concerns over market conditions in select areas.

Although CRE concentrations are a concern at these larger national banks (with assets greater than $3 billion), most of the bank failures will probably be at smaller banks with even higher CRE concentrations. Update: The highest concentration of CRE loans are for institutions in the $1 billion to $10 billion range (so there is some overlap).

by Anonymous on 6/12/2008 11:30:00 AM

Reports Bloomberg:

June 12 (Bloomberg) -- The U.S. Federal Bureau of Investigation, confronting a surge in mortgage fraud, has ordered more than two dozen of its field offices to stop probing some financial crimes so agents can focus on the subprime crisis. . . .

The 26 field offices were told to temporarily suspend opening new cases dealing with price fixing, mass marketing, wire fraud, mail fraud and environmental crimes, Carter said. Current cases aren't being dropped, he said. The FBI has 56 field offices and about 12,000 agents.

If I weren't afraid of sounding cynical, I'd say there's a new career in mass marketing and environmental crimes for all those out-of-work mortgage bottom-feeders. So I'll just think it instead.

by Calculated Risk on 6/12/2008 10:11:00 AM

Retail sales in April (ex-auto) were strong. From the WSJ: Stimulus Checks Bolster Retail Sales

Retail sales increased by 1.0%, the Commerce Department said Thursday. ... Sales in the previous two months were revised strongly upward. Sales in April increased 0.4%; originally, Commerce said April sales dropped 0.2%. March sales increased 0.5%; earlier, Commerce said March sales rose 0.2%.

The healthy increase in May sales suggested consumers were putting to work some money the government kicked back to them in a plan to stimulate the foundering economy. ... $48 billion in payments were cut in May, Treasury Department numbers indicate.

U.S. retail and food services sales for May were $385.4 billion, up from $381.6 billion in April. That is an increase of $3.8 billion - a small amount compared to the $48 billion in stimulus checks.

This graph shows the year-over-year change in nominal and real retail sales since 1993.

Click on graph for larger image in new window.

To calculate the real change, the monthly PCE price index from the BEA was used (May PCE prices were estimated based on the increases for the last 3 months).

Although the Census Bureau reported that nominal retail sales increased 2.1% year-over-year (retail and food services increased 2.5%), real retail sales declined 0.8% (on a YoY basis).

So despite the strong sales in May, the YoY change in real retail sales is still negative.

by Calculated Risk on 6/12/2008 09:33:00 AM

From Bloomberg: Lehman's Callan, Gregory Step Down, Lowitt Named Finance Chief

Lehman Brothers Holdings Inc. replaced Chief Financial Officer Erin Callan and President Joseph Gregory ...

by Calculated Risk on 6/12/2008 01:40:00 AM

Remember when the Shanghai stock market declined 9% on Feb 27, 2007? That caused shock waves around the world, including a 400 points decline in the DOW index the following day. After falling to 2772 in Feb 2007, the SSE composite index more than doubled!

Click on graph for larger image in new window.

Now the index has fallen back below 3,000 - still above the close after the one day sell off - but 50% below the peak.

This is some serious cliff diving.

This sell off could be in anticipation of a slowing Chinese economy, and I wouldn't be surprised to finally see a slowdown in China after the Olympics this summer. And a Chinese slowdown might lead to lower oil prices - something else to watch later this year.

by Calculated Risk on 6/11/2008 09:24:00 PM

Press Release: MBIA Issues Letter to Owners.

Most of the news stories today focused on MBIA's announcement that it won't make a planned $900 million capital contribution to MBIA Insurance Corporation. But I also found this comment in the letter interesting:

[B]ased on our discussions with the rating agencies and in trying to think about their challenges, what I believe has really changed in the past three months is that both Moody’s and S&P have far less comfort in forecasting a worst case housing-related stress case loss scenario ...

I'm not surprised that Moody's and S&P feel less comfortable forecasting a worst case for housing - every time they've made a forecast, the housing market has surprised to the downside.

by Anonymous on 6/11/2008 06:40:00 PM

The OCC has inaugurated a new report, which will be issued quarterly, on mortgage delinquency, loss mitigation, and foreclosure activity drawn from the servicing databases of nine large banks:

The report analyzes data submitted on each of the more than 23 million loans held or serviced by these nine banks from October 2007 through March 2008. The $3.8 trillion portfolio represents 90 percent of mortgages held by national banks and about 40 percent of mortgages overall. The participating national banks are Bank of America, Citibank, First Horizon, HSBC, JPMorgan Chase, National City, USBank, Wachovia, and Wells Fargo.

Of this aggregated servicing portfolio, about 90% of loans are securitized either through the GSEs or private label issuers. The mix is 62% prime, 9% Alt-A, and 9% subprime, with the remaining 20% "other" being largely loans with insufficient or missing data that does not allow assignment into one of the three categories. The OCC indicates that data scrubbing will continue, and hopefully future reports will have a smaller "other" bucket.

It's a big database, and the OCC has made a real effort to standardize its own definitions, based on reported data elements rather than servicer descriptions, so that the credit and loss mitigation categories are consistent across all nine servicers.

The full report is available here. From the summary:

• The proportion of mortgages in the total portfolio that was current and performing remained relatively constant during the reporting period at approximately 94 percent.
• Serious delinquencies, defined as bankrupt borrowers who are 30 days delinquent and all delinquencies greater than 60 days, increased just one-tenth of a percentage point during the period, from 2.1 percent to about 2.2 percent.
• As in other studies, the report confirms that foreclosures in process are plainly on the rise, with the total number increasing steadily and significantly through the reporting period from 0.9 percent of the portfolio to 1.23 percent. Interestingly, the number of new foreclosures has been quite variable. While one month does not make a trend, new foreclosures in March declined to 45,696, down 21 percent from January’s high and down about 4.5 percent from the start of the reporting period last October.
• The majority of serious delinquencies was concentrated in the highest risk segment – subprime mortgages. Though these mortgages constituted less than 9 percent of the total portfolio, they sustained twice as many delinquencies as either prime or Alt-A
mortgages.
• Consistent with other reports, payment plans predominated, outnumbering loan modifications in March by more than four to one. But loan modifications increased at a much faster rate during the period.
• Although subprime mortgages constituted less than 9 percent of the total portfolio, subprime loss mitigation actions constituted 43 percent of all loss mitigation actions in March.
• The emphasis on loss mitigation for subprime mortgages corresponds to the nationwide focus on this higher risk sector. Total loss mitigation actions exceeded newly initiated foreclosure proceedings by a margin of nearly 2 to 1.

by Calculated Risk on 6/11/2008 05:37:00 PM

From the WSJ: Foreclosures Make Up Majority of Sales in Sacramento

The Sacramento Association of Realtors says that a whopping 65.5% of 1,654 homes sold by Realtors in May were bank-owned, foreclosed, homes.
...
In Las Vegas, for example, about half of recent sales have been lender sales.

Is it any wonder pending home sales clicked up a little?

by Calculated Risk on 6/11/2008 04:21:00 PM

You know it's bad when ... (hat tip Brian)

From WaMu: WaMu Statement Regarding Rumors of Regulatory Action

While it is the policy of Washington Mutual not to comment on speculation and market rumors, the company released the following statement to address recurring speculation about regulatory activity:

"Neither our primary federal regulator, the OTS, nor any other bank regulatory agency has taken any enforcement action against WaMu that we have not previously disclosed. Further, the company is not currently in such discussions with any regulatory agency."

We are in denial season.

by Calculated Risk on 6/11/2008 03:07:00 PM

A few headlines via Dow Jones with comments from Merrill CEO Thain (hat tip Brian):

Click on image for larger headlines in new window.

Hmmm ... 'hasn't decided to raise more capital'? I think we've heard that one before.

The last headline is funny: "Merrill could be coming down with Mono exposure".