by Calculated Risk on 7/15/2008 08:38:00 AM

From the WSJ: Loss Provisions Hit U.S. Bancorp

The bank tripled its credit-loss provision from $191 million a year earlier to $596 million, citing "continuing stress in the residential real estate markets, including homebuilding and related supplier industries, driven by declining home prices in most geographic regions," as well as "current economic conditions and the corresponding impact on the commercial and consumer loan portfolios."
...
Net charge-offs increased to 0.98% of average loans outstanding from 0.76% in the first quarter and 0.59% in the prior year.

The beat goes on ...

by Calculated Risk on 7/14/2008 08:48:00 PM

From Deborah Solomon and Sudeep Reddy at the WSJ: Paulson Drove Plan to Shore Up Fannie, Freddie

The WSJ reports that about two weeks ago Paulson ordered his staff to draw up contingency plans in case Freddie or Fannie faltered. When that planning was leaked in a WSJ article last Thursday, equity investors realized that any bailout plan would seriously dilute their holdings, and this led to more selling of Fannie and Freddie. Apparently Paulson believed this selling forced his hand.

There really are no specifics to the plan. The increase in the Fannie and Freddie lines of credit with the Treasury will be "increased to an unspecified level to be determined by the government later".

And any possible equity investment is unclear. The WSJ quotes Brian Bethune, Chief U.S. Financial Economist for research firm Global Insight as saying the equity investment could be as high as $20 billion. That would seriously dilute existing shareholders.

And on the Fed:

Once Treasury made it clear there was a plan, the Fed decided it could offer Fannie Mae and Freddie Mac access to its lending facility, known as the discount window, but purely as a backstop. It was a move that could happen right away without congressional approval.

The Fed views this as a bridge line of credit just until Congress approves the Paulson plan.

It seems the plan is bad for equity holders, but good for debt holders ... and potentially bad for taxpayers (like the Bear Stearns bailout). However Professor Hamilton thinks there will be a limit set on the losses by taxpayers, and the remaining losses will fall on creditors:

... such action by Congress would take the form of a dollar limit-- here's how much we're willing to stake, and no more-- with residual losses presumably laid on the GSE creditors.

Maybe, but I don't see that in the plan.

The WSJ article shows how quickly this rescue plan came together; basically another ad hoc move by the government. Let's hope this plan work out better than the Super SIV / MLEC.

by Calculated Risk on 7/14/2008 05:53:00 PM

Reuters reports that the FDIC has temporarily halted foreclosures on the $15 billion in IndyMac owned mortgages. (hat tip Nemo, Steve)

by Calculated Risk on 7/14/2008 04:47:00 PM

Press Release: GM CEO Wagoner To Announce Company Actions to Align Business to Current Market Conditions. (hat tip Geoff)

The announcement to employees starts at 8:30AM ET; the media call starts at 9:00 AM ET.

by Anonymous on 7/14/2008 03:57:00 PM

Sez Bloomberg (thank you, Brian!):

July 14 (Bloomberg) -- More than two of every five subprime borrowers whose mortgages were reworked in the first half of 2007 are defaulting anyway, Moody's Investors Service said.

Among subprime adjustable-rate mortgages modified in the first half of last year, 42 percent were at least 90 days late on March 31, the ratings firm said in a report today.

Modifying loans granted to consumers with poor credit records has gained favor as record numbers fail to keep up with payments and home prices tumble. Loans reworked more recently may perform better than ones modified in early 2007 because lenders are increasingly lowering interest rates and offering changes to consumers with fewer missed payments, Moody's said. That's different from 2007, when lenders focused on enforcing repayment plans.

I have not yet gotten my hands on the detailed Moody's report on this subject. However, I did look at Moody's press release, and it doesn't exactly attribute the issue for the early 2007 modifications to repayment plans. Per the press release (no free link), the majority of modifications done in the first half of 2007 involved simple deferral of principal/capitalization of past-due interest (that is, the borrower got "brought current" by having past-due interest added to the loan balance) without other changes in the loan terms. Modifications like that result in the same or even a slightly higher monthly payment than under the original loan terms.

If modifications processed in the second half of 2007 and later mostly involve 1) significantly lowered payments and 2) significantly less delinquent loans, then certainly theory predicts they will have a better re-default rate. On the other hand, it's early to be confident that the 40% redefault rate on the earlier mods will hold; generally speaking you need at least two years of "seasoning" on a group of modifications before you get useful numbers on re-default. That said, Moody's servicer survey from last year predicted a redefault rate of around 35% based on past experience of the servicers. It will be curious to see how high that redefault rate can go before the "least loss" models tip back toward foreclosure. So far Moody's is simply saying that the impact on cumulative losses of the early modifications has been "modest." That suggests to me that it may not take a much higher redefault rate for this "modest" lowering of cumulative losses to disappear.

I know that I for one am looking forward to Hope Now and the OCC to start reporting on re-defaults in their metrics (although I'm not going to hold my breath). Moody's is reporting strictly on subprime ARMs; while these have been the focus of modification efforts, we still need to know what's happening in the prime and Alt-A segments.

Otherwise, Moody's reports that as of March 2008, nearly ten percent of subprime ARMs with a reset date in the preceding 15 months had been modified.

by Calculated Risk on 7/14/2008 03:07:00 PM

There have been rumors of a possible bank run at WaMu. I just drove over to the local branch, and there was no unusual activity. I counted a total of four customers at the teller windows.

Yawn ... hopefully others will post their observations in the comments.

UPDATE: Talking about lines, this is a great juxtaposition from Peter Viles: Waiting in line: That was then... This is now.

by Calculated Risk on 7/14/2008 02:11:00 PM

From CNBC: A look at the IndyMac failure and whether more banks will follow, with CNBC's Jane Wells.

Update: From Mary Ann Milbourn at the O.C. Register: Hundreds wait in lines as IndyMac reopens. There are several photos from Register photographer Eugene Garcia. Here is one (used with permisssion):

by Anonymous on 7/14/2008 01:59:00 PM

I would be remiss if in the excitement today of the banking system apparently going to hell in a handbasket, I neglected to take notice of this:

July 14 (Bloomberg) -- The Federal Reserve tightened its mortgage rules by requiring lenders to determine a borrower's ability to repay and barring other practices that led to the collapse of the U.S. housing market.

The Fed Board of Governors voted in Washington today to require that lenders verify a homebuyer's income or assets, and create an escrow account for property taxes and homeowners' insurance. The rules curb penalties for repaying a loan early.

Just because they've waited until the children's 21st birthday to finally ground them doesn't mean they're not responsible parents.

They also left alone the practice of broker "yield spread premiums":

Bernanke questioned a staff recommendation not to ban a practice that lets lenders pay brokers based on the interest rates they charge a consumer, which he said sets an incentive for brokers to steer people into more expensive loans.

"Staff considered a rule that would ban that type of payment, but we ran into some serious, practical problems," Ryan said. She said it would be difficult to distinguish between the practice and legitimate payments to brokers.

Heaven forbid the regulators should have to make "difficult" distinctions. Far better to let consumers try to tell the difference, I guess.

by Calculated Risk on 7/14/2008 01:24:00 PM

From the WSJ: Regional Bank Shares Crater (hat tip Dwight)

Shares of regional banks dropped sharply following ... a warning from Goldman Sachs about the huge unrealized losses facing banks due to risks in preferred securities issued by Fannie Mae and Freddie Mac.

Comments from Lehman Brothers that beleaguered thrift Washington Mutual Inc. could see $26 billion in total losses from items on its balance sheet and struggling National City Corp. being forced to assert it is still creditworthy only added to the angst.

The losses to banks from Fannie and Freddie preferred securities will probably be significant.

This shift in write downs - from the investment banks to the regional banks - has been heavily advertised. Oh well. I guess people are stunned, but not surprised. (a hat tip to Tanta)

by Calculated Risk on 7/14/2008 12:19:00 PM

From Tom Petruno at the LA Times Money & Co. Blog: Feds to freeze IndyMac's home-equity credit lines. (hat tip Peter Viles)

Petruno outlines several key points from the FDIC news conference today on the FDIC freezing HELOCs, interest on CDs, and more (relayed by Times staff writer Kathy M. Kristof) .

For builders:

Lines of credit to commercial construction contractors also will be frozen pending a review, but construction loans made to individual consumers won’t be affected.

I predict these reviews will find mostly bad news.