by Calculated Risk on 7/21/2008 10:26:00 AM

Here are some interesting comments on the deterioration in the HELOC portfolio, on falling house prices and Countrywide losses and debt ...

From BofA on HELOCs:

Now credit in our consumer real estate business primarily home equity continued to deteriorate as a result of the weaker housing market. The problems to date have been centered in higher CLTV loans particularly in states that have experienced significant decreases in home prices. Almost all of these states have been growth markets for the past several years. Our largest concentrations are in California and Florida which represented 41% of the portfolio but 63% of the losses. Home equity net losses increased to 923 million or 3.08% up from 1.71% in the prior quarter. 30 day delinquencies [improved 6 basis points] which is definitely positive but as we know one quarter doesn't signify a sustainable outlook. Consistent with the prior quarter 82% of net charge offs related to loans where the borrower was delinquent. Greater than 90% CLTV on refreshed basis represent 35% of loans versus 26% in the first quarter. This change reflects the continued decline in home prices most acutely in the states I noted earlier. Like others in the industry a large piece of the deterioration is centered in acquired portfolio not originated through the franchise a practice we discontinued in 2007. These purchased loans represent only 3% of the portfolio but 21% of the net losses.
emphasis added

And on Countrywide:

“Let me give you some preliminary purchase accounting estimates around some of the largest exposures realizing they may change somewhat as they are finalized. Our estimate at this time on the loan portfolio would be a loss exposure of approximately 15.6% or $14.3 billion for the held for investment portfolio as of the end of June. Factoring in charge offs already taken in 1.7 billion this is a loss estimate of just over 17%. Obviously the [marks were highest] subprime, option arms and home equity and lowest for prime first mortgages. The percentages range from a preliminary high in the mid-20s to a low in the single digits. All but about $1 billion of this will be [reflected] in purchase accounting. After considering the existing $5.1 billion allowance for loan losses at Countrywide and excluding the $1billion I just mentioned, is estimated to be $8.1 billion. In determining these preliminary markets we assume peak to trough of 25 to 30% including estimated depreciation in Florida and California in the high 30s to just over 40%.”

But that may be optimistic since they can't sell any loans:

“While we originally envisioned selling a large block of [Countrywide] loans shortly after transaction closed, the markets are not currently conducive, and we have tabled that plan for now.“

And on the Countrywide debt:

“We have received a lot of questions about Countrywide's public debt. All I can say at this point is we don't intend to guarantee the public debt but we understand the ramification of not paying. We will keep you informed as we continue to integrate the country wide transaction.”

by Calculated Risk on 7/21/2008 09:46:00 AM

Bloomberg reports that Freddie Mac May Slow Purchases of Mortgages, Bonds

Freddie Mac ... may cut purchases of home loans from banks and bonds backed by housing debt to shore up its capital amid record delinquencies.

The government-sponsored company is also considering selling securities and reducing its dividend ...

Less buying by Freddie Mac would probably mean less mortgage lending, and higher mortgage rates.

by Calculated Risk on 7/21/2008 09:35:00 AM

From the WSJ: Bank of America's Net Slides, But Results Beat Expectations

Bank of America reported write-downs of $1.22 billion related to market disruptions, down from $2.81 billion in the first quarter.

Credit-loss provisions more than tripled to $5.83 billion from $1.81 billion a year ago amid rising costs in the home-equity, small-business and home-builder portfolios.
...
Net charge-offs, loans it doesn't think are collectable, jumped to 1.67% from 0.81% of total average loans and leases a year ago and 1.25% in the first quarter, reflecting housing market deterioration and slowing economic conditions. Nonperforming assets surged to 1.13% from 0.32% a year ago and 0.9% in the first quarter.

This does not include Countrywide's results.

by Calculated Risk on 7/21/2008 01:25:00 AM

From the WSJ: Mervyn's Fights to Keep Its Store Doors Open

Mervyn's ... is fighting for survival as some of its vendors have halted shipments to the company and key lenders have pulled financing ... the company could be forced to file for bankruptcy protection as soon as this month and shut down, according to these people. Mervyn's operates 177 stores in seven states, mostly in California.

A Mervyn's liquidation would deliver another blow to the nation's mall owners ...

The hits just keep coming for mall owners ...

by Anonymous on 7/20/2008 02:44:00 PM

Gretchen Morgenson has another wowser in today's New York Times. This one comes with not just a lengthy narrative packed with details about her "exemplary" borrower, but a video in which we hear the borrower's own version of events, as well as seeing her in her "natural habitat."

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

I confess that I find this video utterly fascinating. The story it tells is all too common; the "analysis" is trite; the implied but never explicitly suggested "solution"--that people like Diane shouldn't be "allowed" to borrow more than they can "afford"--undoubtedly stays unarticulated because the reporter has no intention of being forced to unpack or defend her assumptions about borrower agency, lender paternalism, or the economics of consumer spending.

Indeed, what is fascinating about this video is precisely the near-total contradiction between what the interviewee, Diane, has to say about herself, and what the voiceover and commentary by Morgenson has to say about Diane. That and the loving camera focus on class cues--the repeated panning on the tchochkes, the six! perfectly unnecessary shots of chubby Diane smoking, the capture of the chain-link fence--which tries but never quite succeeds in erasing the impact of Diane's articulate, polite, rather engaging self-presentation. It is as if the camera must keep reassuring itself--the reporter, us--that Diane is "really" an unsophisticated dupe of the lenders, a perpetual victim of circumstances and missteps, by making sure we (the Times reader) see her as "tacky." All the while the camera also records Diane's voice, telling a candid, crisp story that utterly contradicts the reporter's.

The very first thing we hear and see in the video is Diane saying, "I'm not good with money." Immediately, in an apparently unscripted moment, she then deals with the interruption of a collection call from a credit card lender by dropping her phone into the dishwasher and shutting the door on it. "Better?" Diane says, ruefully, quite clearly suggesting to us that she is highly self-aware. Her playful little over-the-top dramatization of her pattern of dealing with mounting debt (hiding the phone in the dishwasher rather than simply hanging up or turning off the ringer), combined with her forthright claim that she is "not good with money," establish from the very beginning that Diane sees her situation as mostly about her own choices, her own habits, and her own willingness to deny certain realities.

Yet the very first voiceover, immediately following this scene, says "Diane McLeod's debt is the result of financial missteps, unfortunate circumstances, and a lending industry willing to extend her more credit than she could possibly repay." Here we have the classic conceit of journalism: there is the interviewee, telling her story in her own words and gestures, a "little picture" story that focuses unswervingly on her necessarily parochial view of her own behavior--her impulsive spending, her inability to avoid traps even when she recognizes that they are traps, her ability to make denial of reality look and feel like a rather charming insouciance. And there is the reporter, "adding context" by moving the story into the "big picture," forging the connections to the "larger issues" about the finance industry and the economy that the interviewee never makes, "limited" as she is to her own subjective experiences.

However, it's a journalistic technique that works better, in my view, when the journalist's narrative doesn't outright contradict the interviewee's narrative. If it does, we have the right to expect some explanation: why is the journalist's narrative more plausible than the interviewee's? How is it that the journalist both relies on the facts provided by the interviewee to build a story, but also concludes that the interviewee's version of events is dubious? Without having these questions answered, we begin to fear that the journalist simply is unable to see the contradiction.

Morgenson, breaking into Diane's narrative, tells us that "more and more Americans like Diane McLeod are facing financial ruin. For years, they've spent more than they earned, and they've used credit cards and other debt to do so, and now they're really under a mountain of borrowings. It leaves them in a position where only one incident, whether it's a job loss, a divorce, an illness, can push them right over the edge."

This claim is followed immediately by a gratuitous scene of Diane heading into the backyard for a smoke with the dogs. (In America in 2008, nothing labels you "underclass" more than being a smoker.) The voiceover says, "Diane's financial troubles began back in 1996. Her husband's business was failing, and ultimately her marriage failed as well. Diane . . . grew depressed."

Diane herself then picks up the narrative: "I paid gas, electric, and telephone on the credit cards because there was no income. If we had a fight sometimes I would go out and shop and buy something to make me feel good."

The reporter doesn't seem to notice that Diane actually reverses the sequence here: in her telling, the job loss/marital troubles predated the debts, and in fact caused them, in two ways. She used the cards as "emergency money" to pay utilities during an income gap, but she also gets depressed and starts buying stuff to "feel good." In Morgenson's version, the overspending and debt happens first, and then the job loss/marital troubles force it to stop.

In the very next segment, Morgenson takes us "big picture" again to talk about credit card company practices that exacerbate debt. "These companies would levy late fees and overlimit fees on her," Morgenson says, "because they allowed her to spend more than her limit." The implication is that if the credit card lenders had taken control of the situation and cut Diane off, she wouldn't have spent so much. (Somehow I can imagine the credit card lender calling Diane to tell her she was over her limit, and the phone ending up in the dishwasher.)

What does Diane herself say? Apparently, she became depressed again early this year and just stopped paying bills. Her credit card lenders cut her off. "Old habits still weren't dead. I didn't have credit cards, but when I got paid, I would be buying things . . . shoes, clothes, handbags. . . ." Throughout the video, we find Diane repeatedly attributing her spending not so much to her too-high credit card limits, but to the entertainment value of QVC and eBay and her use of buying as therapy, to the point that when there is no more credit limit she simply spends her paycheck. A detail that isn't in the video but is in the accompanying article is of interest here:

Almost immediately after she refinanced, in late 2005, the department store where she worked her second job, as a jewelry saleswoman at night and on weekends, cut back her hours. She quit altogether. . . .

The implication, again, is that the loss of the second job was one of those "unfortunate circumstances" that "sent her over the edge." But several paragraphs above that, we discover that Diane is paying 27% on a $1,500 account "at a local jewelry store." Diane certainly wouldn't be the first person in the world to discover that a part-time job in retail is simply more exposure to seductive consumer goods that she ends up purchasing, spending as much or more than she makes, and that losing a job like that is probably good news for the household finances.

What are we to make, ultimately, of these duelling narratives? Morgenson glances off the issue only once, in the article (not the video):

Ms. McLeod, who is 47, readily admits her money problems are largely of her own making. But as surely as it takes two to tango, she had partners in her financial demise.

What does this mean, exactly, beyond the truism that there has to be a creditor for every debtor? My sense is that Morgenson's biggest concern is simply to make sure we don't mistakenly feel sorry for these creditors; she goes to some length to show that they made profits on Diane (although whether those profits will survive the coming charge-offs when she declares bankruptcy is hardly certain). I guess if any of you were in danger of feeling sorry for lenders, this is a useful corrective. As far as I can tell, Diane never lied to a lender or induced anyone to extend credit by fraudulent means; anyone who can read a credit report could have seen that she has been a serial debt pyramider since the mid-90s and she never tried to hide that. It frankly never occurred to me for a moment to feel sorry for her creditors.

The contradiction that continues to concern me, though--which remains unresolved--is the total mismatch between the consumer's own explanation of her behavior, which is a psychological one of the "shopping addiction" variety, and which implies that her experience has involved a lot of miserable life events that can only be relieved by compensatory spending, and the reporter's "economic" explanation which focuses on what lenders do to Diane, and that implies that her "bad times" only threaten her continued spending rather than inspiring it. In one narrative, debt-funded consumer spending is "sustainable" until you lose your job or get sick or get divorced. In the other narrative, unsustainable debt-funded consumer spending is the response to losing your job or getting sick or getting divorced.

I think getting a handle on this problem matters. We are continually being treated to this kind of schizoid message in the media as a whole. Morgenson herself wrote an angry article just a few months ago on frozen HELOCs that didn't simply grossly overstate the cost of unused credit lines. It explicitly chastised lenders for lowering credit limits:

Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure. . . .

[B]orrowers who have contacted Mr. Kratzer say they are in the middle of home improvement projects that they can no longer finance, or have college tuition bills that they were going to pay using the credit lines. Now they can’t.

Medical expenses, another reason that borrowers tap their equity lines, are also posing problems for some homeowners.

And small-business owners who use home equity lines to bridge cash-flow gaps throughout the year are also being stricken by these curbs, Mr. Kratzer said. He has also heard from people who paid down some of their home equity lines, expecting to be able to draw on them again. Now they are out of luck.

Diane McLeod once had "good credit," according to the Times. She once used credit to "bridge cash-flow gaps" of her self-employed husband's. She once felt entitled to continue to spend as she expected to when the account was opened, even down the road after she had spent too much, because the credit company "allowed her" to. She once believed that the appraised value of her home had nowhere to go but up. Isn't it possible to conclude that these mean lenders who are lowering people's credit lines are actually doing folks a favor, by preventing another crop of Dianes? Why is it that in one case we have irresponsible (and highly profitable) lenders who should have taken the responsibility to cut off the credit but didn't, and in the other case credit tightening is "unfair"?

I can't help but think part of the problem here is a class issue. The video goes out of its way to portray Diane as a working-class woman who simply cannot be trusted with credit. (And she certainly helps with that.) The "real" middle class, who have "pristine credit" and are going to be sending their kids to college, not adding their kids to the mortgage so that money can be spent on knick-knacks and $70 handbags, have the right to be outraged when the lender forces them back to spending only what they earn or have saved. I really think the "class cues" in the video are just too heavy-handed to miss.

Whether derived from certain assumptions about class or not, though, these contradictions floating around--Morgenson is just the one who is best at distilling "conventional wisdom," not the sole source of it--are at the heart of our inability to decide how to regulate the lending industry, and have been for a long time. Arguments over fiduciary responsibilities and lender obligations to offer only "sustainable" or "affordable" credit always crash on our unwillingness to accept lender paternalism, our belief that at least some of us have the "right" to borrow and spend as much as we want to as long as the bills are "paid on time" (but the balances aren't necessarily "paid down"). They also, of course, tend to fall on the competing responses to the threat of recession: as we approach the possibility that a lot of us might suffer job loss, illness, and divorce, as it were, is it time to "stimulate" things by continuing to offer easy credit for the purchase of $70 handbags, or time to cut off the credit spigot so that the debt load doesn't get any worse?

The metaphor of "Two Americas" is getting a touch cliched, but I am nonetheless tempted by it. It's as if there's an America in which spending is "healthy" and is only interrupted by "misfortune," and another America in which spending is always "unhealthy," a dysfunctional attempt to compensate for the rather frequent experience of lost jobs, failed businesses, divorces, illness. One America should be allowed to decide for itself how much it wants to borrow and spend; the other needs to be cut off or turned down by "responsible" lenders because they cannot control themselves.

Where I part company with Morgenson, I suspect, is really that I don't think this distinction is as easy to make as she does. My suggestion first made some time ago that "we are all subprime now" was an attempt to resist the division of the world into "prime" and "subprime," the "pristine" HELOC borrowers of Morgenson's earlier piece with the irresponsible bankrupts typified by Diane McLeod. The irony is that I actually largely agree with Morgenson that lenders should take much more responsibility for denying applications that don't make sense or cutting off credit limits on existing accounts that have clearly become unsustainable. I just think that this sort of behavior will inevitably disappoint some of the "pristine" borrowers as much as it does the shopaholics. It has to; if the point is to cut off borrowing before it ends in disaster, then you have to cut off more than a few borrowers who don't happen to think they're anywhere near disaster yet, thank you very much. Or who think of themselves as engaging in "good spending" (home improvements, tuition, small businesses), not "bad spending" (anything from QVC), the assumption being that only "bad spending" should be cut off, even though debt is debt. I cannot see how asking lenders to exercise the discipline that consumers don't (or won't) can possibly be "painless." Prevention is indeed generally worth a pound of cure, except that you have to listen to a lot of whining from those being "prevented." Nobody much likes seeing the punch bowl go away when the party is still going strong. Nobody much likes seeing the punch bowl stay on the table until everyone has passed out and thrown up on each other, either.

That, ultimately, is what makes me feel like this video is "cheap." It's just too easy to get readers of the Times to agree that the Dianes of the world should have their credit cut off before they buy more junk. What is difficult is getting the New York Times demographic to agree that its own credit should be cut off. The fact that even so set up, Diane manages to come across as a real, complex, rather appealing person in spite of it all, rather than a self-pitying passive "victim of predators," is to me the video's real redeeming quality. After too much exposure to people like this, courtesy of the media, I found myself ready to take Diane, warts and all, on her own terms and actually wish her well, even while I hope it's a long, long time before she buys another house. Good luck, Diane.

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by Calculated Risk on 7/20/2008 02:00:00 PM

From the San Francisco Chronicle: Bay Area home prices plunge 27% in last year (hat tip Vijay)

Affluent areas such as Marin County and San Francisco, which until now had resisted most price erosion, saw existing single-family home median prices fall by about 11 percent.
...
"This is pretty grim; double digits across the board," said Christopher Thornberg, principal at Los Angeles' Beacon Economics. "It was eminently predictable if you had a realistic view of the world. I heard a lot of people say the Bay Area was never going to see prices fall, San Francisco was untouchable; in San Mateo, it was impossible; San Jose, not with all the tech money, blah, blah, blah. But prices at the peak relative to people's incomes never made any sense."

This seems to be common misperception: "Prices won't fall in our neighborhood."

Click on graph for larger image in new window.

Here is another cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA (used with permission).

Eric drew this cartoon in 2007, when many people in south Orange County, CA were stunned that prices could fall in their areas.

A few months ago, Luke Mullins at the U.S. News and World Report quoted Ryan Tomazin, the director and chief financial officer of Integrated Asset Services on prices in Denver: Some Home Prices Are Actually Rising in Denver

In Denver specifically, what we're seeing is there are some neighborhoods that are very valuable—old historic neighborhoods. Their values have historically held up just because there is a limited supply. They are located very centrally, and they are in fairly affluent areas.

And from the Rocky Mountain News last week on Denver: Foreclosures go high-end

The foreclosure tsunami is starting to sweep over some of Denver's most exclusive neighborhoods.

Homes priced at $1 million or more in places like Cherry Hills, Cherry Creek Country Club and LoDo are popping up more frequently on foreclosure rolls.

The price dynamics will vary by area (more foreclosures will lead to faster price declines), but no area is immune.

by Calculated Risk on 7/20/2008 11:25:00 AM

Brad Setser, at Follow the Money, presents a couple of graphs on changes in oil export revenue: The Oil Shock of 2008.

The following graph shows the Year-over-year change in oil exports as a percent of world GDP (and in billions of dollars).

This calculation assumes that the oil exporters will export about 45 million barrels a day of oil.

Each $5 increase in the average price of oil increases the oil exporters’ revenues by about $80 billion, so if oil ends up averaging $125 a barrel this year rather than $120 a barrel, the increase in the oil exporters revenues would be close to a trillion dollars.

Assuming oil prices average $120 per barrel for 2008, the increase in 2008 will be similar to the oil shocks of the '70s.

by Calculated Risk on 7/19/2008 09:47:00 PM

This NY Times article, Landlords, if Only by Accident, is somewhat of an advice column for novice landlords. But what is interesting is the two accidental landlords mentioned in the article.

Mr. Vallance ... bought [a] house about six years ago for $270,000 but has since decided he prefers the city to the suburbs. Selling it now isn’t the best option. “Maybe I could get $340,000, but four years ago I would have gotten $400,000,” he said.

And so he waits, leasing a one-bedroom in Midtown Manhattan while he rents out his house.

Why not sell it now for $340 thousand? He would still make a profit on the property, and if house prices continue to decline - as seems likely - he might get 20% less in a couple more years.

Three years ago, [Dr. Lorena Siqueira] bought as an investment a two-bedroom condominium on Brickell Key, a gated island in downtown Miami. She is concerned that the recently completed condo will not sell quickly for the price she wants — above the $1 million or so she paid at preconstruction prices. Stuck now with two homes that are near each other, she will rent out the new unit.

“I would rather take a loss on the rental and wait for the market to stabilize,” Dr. Siqueira said.

The market will stabilize eventually, probably at prices far below what Dr. Siqueira paid.

Both of these accidental landlords are looking at prices from a few years ago, and deciding to wait to sell. In general this is a mistake. Owners should analyze the rent or sell decision based on current prices - and consider the probability that nominal prices will move lower or at best stay flat for several years.

This is part of the shadow inventory that will eventually be sold and will help keep inventory levels high for years.

by Calculated Risk on 7/19/2008 06:54:00 PM

Jon Stewart's take on the economy.

by Calculated Risk on 7/19/2008 05:49:00 PM

A few stories from across the pond ...

From The Times: UK economy heads for ‘horror movie’

BRITAIN is facing an “economic horror movie” because of a “toxic mixture” of a moribund credit market and volatile oil prices, according to a leading forecasting group.
...
Peter Spencer, chief economist at the Item club, said: “Both on the high street and in the housing market it is going to get a great deal worse before it gets better. We have already seen a housing crisis that has morphed from a credit crunch to a general collapse in confidence as prices have tumbled.
...
“The sharp fall in overall business optimism is very worrying and points towards a recession,” said [Graeme Leach, chief economist at the Institute of Directors.

Also from The Times: House prices tipped to fall 20% in two years

Howard Archer, of Global Insight ... said prices would plummet by a further 20 per cent, or £40,000 on average, before the market begins to recover.
...
Vicky Redwood, of Capital Economics, presented an even bleaker outlook, forecasting that the housing market would not recover until well into 2011.

Morgan Stanley, the investment bank, said that if prices fall by 25 per cent in the next two years, more than two million - or one in six borrowers - would be in negative equity.

And from the Telegraph: Alistair Darling may face £100bn budget deficit

Alistair Darling may see his budget deficit balloon to a record £100bn in the coming year as a potential recession bites, experts have warned.

The alert was sounded as the public finances lurched deep into the red ... Revenues from income tax, National Insurance, corporation tax, VAT and stamp duty have suddenly dried up as the credit crisis and downturn in the housing market hit the economy ...

The usual responses to an economic slowdown are for the Central Bank to cut interest rates (monetary policy) and deficit spending from the government (fiscal policy). Because of inflation fears and a ballooning budget deficit, it is difficult for the central bank and government to respond.