by Calculated Risk on 7/15/2008 04:29:00 PM

A quote via Dow Jones (no link):

"[A]lthough the majority" [of credit deterioration] "was driven by residential real estate, home building and related industries, the economic slowdown and rising commodity prices have had an impact on some of our commercial customers. Given these conditions, we anticipate that our nonperforming assets will continue to rise."
U.S. Bancorp Chief Executive Richard Davis on conference call, July 15, 2008

This is obviously not a bank specific problem. M&T Bank's CEO made similar comments yesterday.

Which brings us to Bernanke's testimony today. From the WSJ Real Time Economics blog: Bernanke: About That Housing Crisis Being Contained ...

Fed Chairman Ben Bernanke may never be allowed to forget his onetime expectation about how the subprime housing mess would affect the broader economy.

Sen. Robert Menendez (D., N.J.), asking about the housing crisis during a Senate hearing Tuesday, cited Mr. Bernanke’s March 2007 comment that “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”

Replied Mr. Bernanke wryly, invoking Capitol Hill terminology: “Of course, I would like to revise and extend my remarks.”

by Calculated Risk on 7/15/2008 02:15:00 PM

Note: the Northern Trust link doesn't seem to work. Here is the Kasriel July Outlook.

Northern Trust chief economist Paul Kasriel writes for July: Base Case vs. Checkmate

Our base case economic scenario is that the U.S. economy entered a recession in early 2008, will remain in a mild recession throughout 2008 and will begin to experience an anemic recovery in the first half of 2009. The base case includes a sharp deceleration in inflation in the not-too-distant future as energy prices stabilize and then retreat due to a slowdown in the growth of global demand for energy. The Federal Reserve will maintain the federal funds rate at 2% through the first half of 2009. In the second half of 2009, when economic growth picks up enough to stop the upward trend in the unemployment rate, the Fed will start raising the funds rate.

Our risk case scenario is that the U.S. dollar begins to fall precipitously coinciding with a rise in Treasury bond yields. U.S. inflation does not moderate because of the depreciation in the dollar. As a result, the Federal Reserve is forced to raise the funds rate even in the face of a rising U.S. unemployment rate. This would be “checkmate” for the U.S. economy, turning a relatively mild recession into a severe one.

Kasriel's "base case" is very close to my view; a mild to moderate recession that lingers for some time with a prolonged period of elevated unemployment. However I don't expect unemployment to reach 8%.

One of the keys to the base case is that oil prices decline in the 2nd half of 2008 (something I've been predicting for some time). This prediction is based on demand destruction, lower subsidies in certain Asian countries, weaker demand growth in China, and a few other reasons. The fundamentals of supply and demand for oil suggests a small decrease in demand could led to a fairly large decrease in price. If this happens, then that will hopefully lead to Kasriel's "sharp deceleration in inflation".

However, if oil prices increase or stay elevated, then the Checkmate case becomes somewhat more likely (although I still think it is highly unlikely). See Kasriel's piece for much more.

by Calculated Risk on 7/15/2008 11:40:00 AM

From MarketWatch: Paulson: Fannie, Freddie don't plan to use U.S. backstop

Troubled mortgage-finance giants Fannie Mae aren't planning to use a U.S. government backstop now, Treasury Secretary Henry Paulson told members of a Senate panel Tuesday.

"Now" is the key word. How about tomorrow, or maybe next week?

In the very short term, before congressional approval of the Paulson Plan, the only portion of the rescue plan that is operative is that Fannie and Freddie can borrow from the NY Fed. And this probably isn't needed because the Fannie and Freddie problems don't appear to be a short term liquidity issue.

by Anonymous on 7/15/2008 10:22:00 AM

Those of you who think that the rest of us rely on the comment threads on this blog to track interday volatility of the Dow now have your own little spot for it.

by Anonymous on 7/15/2008 10:05:00 AM

CR Update: In the title, Tanta used the term "infomercial" to suggest that the article read like an infomercial to her. In no way did Tanta mean to imply that the author was paid to write the article by any of the companies or individuals mentioned.

Just the other day an email message from a reader on the subject of short sales put me in the mind of this post from back in March, wherein we saw a New York Times reporter using an operator I politely called a "bucket of scum" as a source on state anti-deficiency statutes--when a quick perusal of the guy's website verified that he knows about as much about anti-deficiency law as I do about football (that's the one with the kind of pointy ball, right?). Even worse, the guy's website contained all kinds of tips for doing "creative" RE transactions that smelled to high heaven. At the time I was a bit amazed that a so-called legitimate news outlet could have spent more than 30 consecutive seconds with that dude's website and failed to conclude that he wasn't the kind of expert you quote in the Times.

So this morning I run across this John Wasik column from Bloomberg yesterday, which simply goes to show that no one ever learns anything.

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

July 14 (Bloomberg) -- Where politicians and bankers see vexing liabilities in defaulted mortgages and foreclosures, Robert Lee sees opportunities as he picks up the pieces of the housing bust.

His company, Foreclosure Trackers Inc., which he co-founded with President David Phelps, is based in Huntington Beach, California, in a bank office building where some of the first subprime loans were created.

Buying defaulted mortgages at a discount, Lee encourages and enables owners to stay in their properties and avoid foreclosure. His company buys the loans, not the homes, then employs a ``work- out, not kick-out'' approach in working with homeowners.

Unless a comprehensive federal bailout reduces foreclosures, areas with the highest defaults will continue to show dramatic price declines as more properties fall into the hands of lenders and courts. The idea of discounting notes to reflect realistic market values may be the key to getting the market on its feet.

Please note that this column is not just some report on some entrepreneur who (claims to be) profiting big time from the bust. Wasik is trying to get us to believe that this is some signficant and important process for clearing the RE market.

Fortunately we get an example of how this deal works:

Say he finds a property with a $750,000 mortgage, but his broker opinion determines that the property is worth only $510,000 in the current market. He offers $255,000 for the note.

Conditions Attached

If his bid is accepted, Lee becomes the owner of the mortgage. He then contacts the homeowner and offers to cut the principal owed to $408,000 ``on the condition the homeowner is able to refinance with another lender within 60 days.''

If the borrower can refinance, the new lender pays off Lee's outstanding mortgage lien, netting him a profit of $153,000.

What if refinancing isn't an option? Lee may offer a loan modification, reducing the principal and interest payments.

He also provides services to improve credit scores so that borrowers can eventually refinance. Through his efforts in working directly with homeowners, he says less than 15 percent of defaulted first mortgages end up in foreclosure.

And we know that this example is realistic--that there are all of these lenders out there happy to take 30 cents on the dollar for a mortgage loan rather than just writing it down to 54 cents themselves and letting the borrower refi into an FHA program--because, um, this Lee character implies as much.

John Wasik, were you born yesterday? You see the term "credit repair" in the same sentence with "investing in defaulted mortgages," and you don't realize what kind of company you're keeping? How, exactly, are we going to get the RE market back on its feet if the elementary social compact among lenders--that you report accurately and fully on the repayment history of a loan you make, so that anyone asked to refinance it can know what it's getting into--is tossed away? This is what Mr. Lee's website says about "credit repair":

At Foreclosure Trackers, Inc. ("FTI"), we know the importance of a legitimate repair service to people who want to improve their credit scores. If you have had your credit damaged by foreclosures, bankruptcies, collection agencies, or inaccuracies on your report, you know how difficult it can be to remove these items and get back on your feet.

That is why FTI has gone to great lengths to affiliate ourselves with the best credit repair service. Both FTI and our members have tested the service, and everyone has come to the same conclusion: the service works with amazement to improve your credit score by removing disputed items, such as foreclosures. [Effusiveness in original]

"Inaccuracies"? "Disputed items"? If someone is willing to sell you a mortgage loan for 30 cents on the dollar, just how much "dispute" do you think there might be about its foreclosure status? What this is implying to me is that Lee's strategy is to 1) convince the original noteholder to remove the prior derogatory history from its credit bureau reporting and 2) fail to report derogs during the time Lee owns the loan so that 3) the borrower can get a refi with an artifically inflated FICO that doesn't give the new lender a true sense of the borrower's past performance. So, Mr. Wasik, who do you think ought to be the lucky take-out lender in this little scheme? FHA? Your tax dollars at work?

I don't even really see from my (admittedly rather dazed) perusal of this outfit's website where they really are the ones investing money in buying these defaulted loans. I see a lot about how they want to sell you, the gullible public, the secrets of how to do this yourself. Even if you don't, um, have any money to invest.

"How To Earn HUGE PROFITS In Defaulted Mortgages"

That would be font size, text color, and quotation marks used for emphasis in the original. It continues:

You can have success in this business, even if:

You've Never Heard of Defaulted Mortgages
You Have No Money To Invest
You Have No Experience Investing

Sounds like the kind of thing highly likely to save the economy: ignorant broke inexperienced people leaping into another Git Rich Kwik scheme. Who, you have to ask, are these people selling this dream?

The website helps us with that:

Robert Lee, CEO: Born in Los Angeles and raised in Orange County, Lee's invitation to the world of real estate can only be described as a happy accident. While visiting a friend in Seattle, Lee happened across a for sale sign listing a house for $33,000. Lee couldn't believe the asking price—at first, he thought it was the down payment. Knowing a good deal when he saw one, Lee purchased the house on a simple owner finance and was required to put 10% down, with no credit or income verification. Lee sold the property two years later for a $27,000 profit at the age of 24. He couldn't believe how easy it was. . . .

David Phelps, President: A lifelong resident of Orange County, Phelps began working in the financial sector in 2000. In spite of a rewarding career as a licensed acupuncturist and herbalist, Phelps decided to pursue his interest in real estate by plunging into the industry head first. Phelps almost immediately discovered a new set of talents as a loan officer and licensed real estate agent.

The website doesn't tell us how long, exactly, it has been since Mr. Lee was 24 years old, but judging by the second video on this page, it doesn't seem that long ago.

So does Wasik display any sense of skepticism at all in this column? Not exactly. There is this mention at the very end of "some pitfalls":

Many homes have never been occupied by owners or have been boarded up or damaged. Some mortgages were obtained fraudulently.

It can be even more complicated to locate, acquire and discount the notes, since only properties are typically advertised for sale. It's also essential to obtain the true market value of a home. Lee relies upon appraisals that give him a down-to-earth ``quick sale'' price, something you may not get from the average real-estate agent. There's a lot of complex paperwork involved.

Once courts get involved, it becomes even more difficult. Lee avoids buying notes in states such as Indiana, Ohio, Michigan and Pennsylvania, where, unlike California, foreclosures quickly enter the judicial system.

Oh. So Mr. Lee makes sure to buy notes only in states where FC is fast and cheap and doesn't get bogged down in the courts. Right. The states where current noteholders would be most motivated to accept 30 cents on the dollar. Sure.

Memo to the media: a great deal of the problem we have right now is the result of people who didn't know nuthin' about nuthin' deciding to make a killing flipping real estate. We will not solve that problem with an small army of people who don't know nuthin' about nuthin' deciding to make a killing flipping defaulted mortgage loans.

Oh yeah, and will you all just try to spend a little bit of time looking into these people before you decide to give them more free publicity? You can click on these links and read these websites for free!

All Bloomberg just did was give these dudes another press clipping to add to their "testimonials" page. I do indeed call that "journalistic malpractice."

OK, I put my drink down. I want to read more.

by Calculated Risk on 7/15/2008 10:02:00 AM

Bernanke testimony to Congress.

At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy makers. The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher. Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth. In light of the increase in upside inflation risk, we must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage- and price-setting process.

by Calculated Risk on 7/15/2008 08:56:00 AM

From Reuters: GM to cut jobs, raise liquidity by $15 billion

General Motors said ... it would cut white-collar employment costs by 20 percent, sell up to $4 billion of assets, and borrow at least $2 billion in a bid to bolster its liquidity by $15 billion through 2009.

GM also said it would suspend its common stock dividend in a restructuring driven by high fuel prices, a shift away from trucks and SUVs, and the lowest U.S. industrywide auto sales in a decade.

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)