by Calculated Risk on 7/15/2008 09:28:00 PM

From the Financial Times: Martinsa asks for creditor protection (hat tip ratefink)

One of Spain's largest property companies yesterday filed for creditor protection owing €5bn ($7.9bn), spurring a Madrid stock market sell-off and forcing banks to admit to an initial €550m in related bad loan provisions.

And from the WSJ: Global Economic Decline Appears to Be Spreading

The rising risk of recession in Europe shows that despite the strength of emerging-market economies such as Russia and China, the economic downturn that began in the U.S. last year is spreading to other regions, battering hopes that the global economy might have "decoupled" just enough that the rest of the world could coast through a U.S. downturn relatively unscathed.

More containment.

by Calculated Risk on 7/15/2008 05:42:00 PM

The download for the July U.S. Economic Outlook from Northern Trust's Paul Kasriel doesn't seem to work. Here is the outlook: Base Case vs. Checkmate

Here are my comments earlier today.

by Calculated Risk on 7/15/2008 04:47:00 PM

Video: Roubini on Bloomberg TV

Roubini provides a summary of his views "that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades ..."

Here are a few of Roubini's points:

This is by far the worst financial crisis since the Great Depression

Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust

Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust

I agree this is the worst financial crisis since WWII, but I think this crisis pales in comparison to the Great Depression.

As far as the number of small banks that will fail, my guess is on the order of 100 to 200 over the next few of years, but Roubini's "hundreds" is possible. Clearly many small institutions are very exposed to Construction & Development (C&D) and Commercial Real Estate (CRE) loans. BTW, bank failures are a trailing indicator of financial problems.

Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.

This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices. This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.

Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.

I disagree that this recession will be worse than the '73 to '75 and early '80s recessions - although a more severe recession is possible, especially if oil prices stay elevated, or there is a further collapse of the dollar, or a global recession. I agree with Roubini that there will be no quick recovery (no V-shaped recession).

I need more details on the Paulson plan.

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.