by Calculated Risk on 7/02/2008 03:33:00 AM

HousingWire has the story: FDIC Warns Banks on HELOC Freezes, REO Management. On the HELOC story:

[B]anks are moving to freeze HELOCs globally, and then evaluating available credit later on a case-by-case, property-by-property basis ... The FDIC letter warned banks that such a shotgun-style approach to freezing HELOCs might violate Truth-in-Lending regulations; under Regulation Z, lenders can reduce an applicable credit limit only in the event of “significant decline” to the value of an individual property (a “material change” in the borrower’s financial condition — such as the loss of a job — qualifies as well).

And on REOs:

Our sources suggest that some banks are choosing not to pay taxes on certain low-value REO properties in hard-hit neighborhoods, in the hopes that local municipalities will take the property to a tax sale rather than force the lender to carry the property on its books.

The FDIC reminded banks that doing so would violate existing bank safety and soundness guidelines ...

Here is the FDIC Guideline on REOs. And some of the instructions:

Maintenance. ORE should be maintained in a manner that complies with local property and fire codes. Other requirements, such as homeowner association covenants, may also require careful attention. Efforts to ensure an ORE property is maintained in a marketable condition not only improve an institution's ability to obtain the best price for the property, but also minimize liability and reputation risk.

Real Estate Taxes. Taxes on ORE should be paid in a timely manner to avoid unnecessary penalties and interest.

Insurance. A review of an institution's umbrella insurance policies should be performed to determine if adequate hazard and liability coverage for ORE exists. If not, management should consider obtaining policies on each parcel of ORE. If an institution decides to self-insure, this decision should be documented in the ORE file.

Other Expenses. Management should implement reasonable procedures for managing any other miscellaneous expenses the institution may incur during the ORE holding period. These expenses could include, but are not limited to, sewer and water fees, utility charges, property management fees, and interest on prior liens.

In other words, pay the bills!

by Calculated Risk on 7/01/2008 11:53:00 PM

From the WSJ: Small Banks' Reckoning Day Is Coming

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay.
...
That will put additional pressure on an already stressed financial system. ... Some analysts even see a wave of bank failures as a possibility.

See the charts in the article - the one graph shows delinquency rates on construction loans for single family homes and condos have reached 10% and 12.5%, respectively. Delinquency rates for commercial and apartment construction are lower, but rising rapidly.

The WSJ also provides a sortable list of banks with notable delinquency rates (at the end of Q1) and a couple of companion articles: Commercial Loans: Behind the Next Hit (a primer on commercial loans) and BofA, LaSalle Pact Boosts Problem-Loan Load (a discussion of all the problem construction loans BofA inherited when they acquired LaSalle.

The long awaited CRE slump is here, and the bank failures will surely follow.

by Calculated Risk on 7/01/2008 10:38:00 PM

Indymac Responds to Report from the Center for Responsible Lending

The Center for Responsible Lending (CRL) issued a report yesterday titled, “Indymac: What Went Wrong?” in which they allege that Indymac “fueled its growth with unsound and abusive mortgage lending”. The report relies entirely on unsubstantiated anecdotal evidence the CRL has obtained largely from (1) unsubstantiated claims contained in lawsuits that are pending against Indymac (in one of which the CRL is itself a plaintiff), where no liability has been established and where Indymac is vigorously disputing the claims asserted; (2) 19 disgruntled former employees, many of whom have been recruited as witnesses by plaintiffs’ trial attorneys in the same lawsuits; and (3) a handful of Indymac customers, many of whom are also plaintiffs or class members in the same lawsuits. The report relies most heavily on one lawsuit in particular, Tripp v. Indymac, which has already been dismissed twice by the court as lacking in merit.

Since I linked to the CRL report yesterday, it is only fair to link to the Indymac response. Here is a little music for Indymac.

by Calculated Risk on 7/01/2008 06:14:00 PM

From Atlanta Fed President Dennis Lockhart: Remarks on Economic Slowdown, Market Fallout, and the Path to Financial Recovery. Here is his conclusion:

My base case forecast for the economy involves a stronger-than-expected first half of 2008 with growth of 1 to 2 percent but not much pickup in the second half. The drag of high energy costs, continuing financial market stress, and a still-declining housing sector may continue for a while with gradual improvement of growth in 2009.

There is much uncertainty surrounding this outlook. More adverse alternative scenarios are entirely possible. Self-reinforcing progressive deterioration could continue in the housing market, in turn affecting the financial markets. And neither the financial markets nor the overall domestic economy is protected from surprise events around the world.

Like many, I believe stabilization of the housing sector is required for recovery to proceed. There are early and tentative signs that a bottom may be forming in some housing markets. Having said that, a sober approach to calling the future must allow for an additional period of house price decline, a slow housing sector recovery, and, as a result, a quite choppy progression to better markets and economy.

That seems overly optimistic to me. It appears non-residential investment will be declining in the 2nd half of '08 (and well into '09), and consumer spending will probably decline too as the boost from the stimulus checks fades. That should lead to declining GDP in the 2nd half of '08.

by Calculated Risk on 7/01/2008 04:57:00 PM

Press Release: Starbucks Increases Number of U.S. Company-Operated Store Closures as Part of Transformation Strategy

Starbucks has announced ... a decision to close approximately 600 underperforming company-operated stores in the U.S. market.
...
Starbucks now expects to open fewer than 200 new U.S. company-operated stores in fiscal 2009.

In April Starbucks had announced plans to expand by about 400 net stores per year through 2011. This is a substantial cut from that plan.

This is more bad news for strip mall owners ...

UPDATE: more details from Reuters: Starbucks to cut up to 12,000 jobs, close 600 stores and Bloomberg (hat tip Argento, Cooking ramen in my percolator)

by Calculated Risk on 7/01/2008 03:50:00 PM

From the WSJ: Auto Makers Report Slump in June U.S. Sales

36% [Sales] plunge at Chrysler ...

Chrysler's sales slumped to 117,457 from 183,347, with car sales tumbling 49% to 29,858 and truck sales decreasing 30% to 87,599.

Honda outsold Chrysler by far:

Honda Motor ... was the lone bright spot last month with sales up 1.1% to 142,539, a record June for the auto maker.

by Calculated Risk on 7/01/2008 02:29:00 PM

From Bloomberg: Manhattan Office Vacancy Rates Climb to Two-Year High

Manhattan's office vacancy rate rose to its highest level since 2006 in the second quarter as financial firms, beset by losses, fired workers and reduced their office space, real estate brokerage Cushman & Wakefield Inc. said.

Vacancies in the most expensive U.S. office market rose to 7.1 percent from 5.3 percent a year earlier ...

Layoffs do matter. During the last downturn, many companies started subleasing space - and that really hit the office market hard in Manhattan. From what I've heard that isn't happening yet this time.

by Calculated Risk on 7/01/2008 02:08:00 PM

From MarketWatch: GM June U.S. sales fall 18.2% to 262,329 vehicles

Ford, Toyota and GM sales were all bad, but I suspect Chrysler's numbers will be really really ugly.

by Calculated Risk on 7/01/2008 01:26:00 PM

From MarketWatch: Toyota June U.S. sales down 21.4% to 193,234 vehicles

A little worse than the 12% expected decline.

by Calculated Risk on 7/01/2008 12:16:00 PM

From CNNMoney: Ford sales plunge

Ford Motor reported that its U.S. sales tumbled 28% in June, kicking off what could turn out to be the weakest month for auto sales in 16 years.

Ford ... saw sales of its SUVs plunge by more than half and pickups and other trucks fell more than a third.