by Calculated Risk on 7/22/2008 10:03:00 PM

UPDATE: from Vikas Bajaj at the NY Times: Woes Afflicting Mortgage Giants Raise Loan Rates

Ruth Simon and James Hagerty at the WSJ report: Mortgage Rates Near a Year High. According to the Journal - reporting data from HSH Associates - 30 year rates rose to an average of 6.71% last week, and jumbo rates have risen to an average 7.84%.

I usually track mortgage rates using Freddie Mac's weekly survey, and the MBA. The MBA reported for the week ending July 11th:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.22 percent from 6.43 percent

And Freddie Mac reported 30 year rates were at 6.26% for the week ending July 17th. So rates must have really surged last week ...

This will have a negative impact on home sales, and on homeowners trying to refinance.

by Calculated Risk on 7/22/2008 07:38:00 PM

From Yahoo Tech Ticker: Roubini: More Than $1 Trillion Needed to Solve Housing Crisis

by Calculated Risk on 7/22/2008 06:55:00 PM

On Sunday I posted about some high end areas finally seeing sharp price declines: Housing: Cracks in the High End (check out the cartoon!)

Here are some more cracks ...

From AZCentral.com: Phoenix's mortgage problem spreading

Metropolitan Phoenix's foreclosure problem has spread. Many Valley neighborhoods closer in, particularly in south, west and central Phoenix, now have the highest foreclosure rates ...

Foreclosures across metro Phoenix number 16,647 for the first half of the year compared with 9,966 during all of 2007 and 1,070 in 2006.
...
"Foreclosures are a problem for almost every neighborhood of the Valley now," said Margie O'Campo de Castillo of Arizona Dream Realty.

by Calculated Risk on 7/22/2008 05:23:00 PM

Also on regional banks see the WSJ: Regional Banks Battered Amid Turmoil in Markets

Here are some comments from the Regions Financial conference call (hat tip Brian):

“Given the continuing deterioration in residential property values, especially in Florida , and a generally uncertain economic back drop, we expect credit costs to remain elevated. While we're not predicting the duration of this economic downturn, we think it is prudent to plan for no real improvements until 2010.”

And on home equity in Florida:

“Home equity credits caused over half the increase [in net charge offs] rising to an annualized 1.94% of outstanding lines and loans, up from 57 basis points last quarter. We are clearly experiencing greater deterioration in this portfolio than originally expected. Mostly due to Florida based credits which account for approximately $5.4 billion or one third of our total home equity portfolio. Of that balance, approximately 1.9 billion represents first liens. Second liens which total $3.5 billion or 22% of our home equity portfolio are the main sources of loss. In fact, the second quarter annualized loss rate on Florida 's second liens was 3.5 times the rate of first lien home equity loans and lines - 4.74% for second liens versus 1.37% for first liens in Florida. So to emphasize this point, 22% of our total home equity portfolio or $3.5 billion had a 4.7% net charge off rate. The remaining 78% had about a 1.1% net charge off rate. The problems in this portfolio are very concentrated.

... Customers who did not live in the properties but purchased them to be used as an investment home or second home were more prevalent in Florida than our other markets and have been especially problematic. As property values have dropped, so has the equity supporting these loans, exacerbating home equity write-offs. Significant income losses are also negatively affecting a growing number of borrowers’ ability to repay home equity loans.”

A comment from reader Brian: "Those second liens in Florida are starting to resemble credit cards with respect to their charge off rates, unfortunately the interest rates on the loans are not 18%!"

by Calculated Risk on 7/22/2008 04:14:00 PM

From WaMu: WaMu Reports Significant Build-Up of Reserves Contributing to Second Quarter Net Loss of $3.3 Billion

WaMu today announced a second quarter 2008 net loss of $3.33 billion as it significantly increased its loan loss reserves by $3.74 billion to $8.46 billion.
...
The increase in provision for loan losses reflected the further decline in house prices which increased expected loss severities, increased delinquencies, reduced availability of credit, and the weakening economy. Total net charge-offs in the loan portfolio rose to $2.17 billion from $1.37 billion in the prior quarter. Nonperforming assets grew to 3.62 percent of total assets at June 30 from 2.87 percent at the end of the first quarter.

by Calculated Risk on 7/22/2008 02:47:00 PM

Click on graph for larger image in new window.

This graph shows the number of Notice of Defaults (NODs) filed in California by year since 1992. The 2008 estimate is twice the first half rate.

From DataQuick: Another Increase in California Foreclosure Activity

Lenders started foreclosure proceedings on a record number of California homeowners last quarter, the result of declining home values and the rampant spoilage of a batch of especially risky home loans made in late 2005 and 2006, a real estate information service reported.

Mortgage servicers recorded 121,341 "notices of default" during the April-through-June period. That was up 6.6 percent from a revised 113,809 for this year's first quarter, and up 124.9 percent from 53,943 in second-quarter 2007, according to DataQuick Information Systems.

Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992.
...
"The small increase in defaults from the first to the second quarter may indicate that we're nearing a plateau. We won't know until the end of the year, but it may be that some lenders are starting to prioritize workouts with homeowners instead of grinding things through the foreclosure process. Of course, they may just be swamped and can't handle processing any more paperwork," said [John Walsh, DataQuick president].
...
Of the homeowners in default, an estimated 22 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 52 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes 'work- outs' difficult.
...
Foreclosure resales have emerged as a significant market factor, accounting for 40.0 percent of all California resale activity last quarter. A year ago it was 5.4 percent.

There are several key points:

This is a new record for NODs.

A very large percentage of NODs go through foreclosure. Only 22% "emerge from the foreclosure process". That is a historic low.

40% of all sales activity in California are foreclosure resales.

Instead of filing NODs, some lenders appear to be delaying while trying for a workout. "[I]t may be that some lenders are starting to prioritize workouts with homeowners instead of grinding things through the foreclosure process. Of course, they may just be swamped and can't handle processing any more paperwork." I've heard both reasons from other sources.

by Calculated Risk on 7/22/2008 12:11:00 PM

Here is the letter from the CBO.

[M]any analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets, and such continuing problems would increase the probability that this new authority would have to be used. Taking into account the probability of various possible outcomes, CBO estimates that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010. That estimate accounts for both the possibility that federal funds would not have to be expended under the new authority and the possibility that the government would have to use that authority to provide assistance to the GSEs.

It's important to note the the CBO analysis is a probability-weighted average method; the cost could be zero, the cost could dwarf $25 billion.

by Calculated Risk on 7/22/2008 11:49:00 AM

Can you say "credit crunch"? From Wachovia:

On page 26 we talk about some other aspects with regard to $20 billion reduction of loans and securities. We are focused on the reinvestment of securities and lean toward very little reinvestment of maturing securities. We will also have enhanced discipline with regard to commercial lending to be sure we are focused on our very most important strategic relationships. New return targets [have been established] for renewals and new commitments to insure we are using our capital in the most judicious fashion. Active programs to further enhance the mix of our consumer loan portfolios by reducing mortgage concentration through tightening standards, discontinuing negative am option loan originations, eliminating the general bank wholesale channel and eliminating the focus on pick a pay mortgage retention..we have additional measures of enhanced pricing in the auto portfolio and continuing to review noncore assets.

Also see the Pick-a-Pay analysis on page 15. Wachovia is now projecting house prices will bottom in mid-2010.

Reader Brian suggested the post title. thanks!

by Calculated Risk on 7/22/2008 10:45:00 AM

UPDATE: From scav (Thanks!), here are the two maps side by side with the same ranges ... click on map for larger image. (note: I didn't check these maps).



Here is the Philadelphia Fed state coincident index release for June.

Compare these two maps.

Click on graph for larger image in new window. This first map is the three month change for June 2008. The U.S. is turning red.

For comparisons, the second map is the three month change for December 2007.

The indexes increased in 13 states for the month, decreased in 27, and were unchanged in the remaining 10 (a one-month diffusion index of -28). For the past three months, the indexes have increased in 12 states, decreased in 36, and were unchanged in the other two (a three-month diffusion index of -48).

This is a graph of the monthly Philly Fed data of the number of states with one month increasing activity.

I've added the current probable recession. Most of the U.S. was in recession in June based on this indicator.

Note: the Philly Fed calls some states unchanged with minor changes.

This is what a recession looks like based on the Philly Fed State coincident indexes.

by Calculated Risk on 7/22/2008 09:50:00 AM

[I]f monetary policymakers wait until they see the evidence of a wage-price spiral, they will be too late — the public will have lost confidence in the Fed’s ability to keep inflation under control, and this will make the job of bringing inflation down much more costly and difficult. Moreover, we could end up with a period of both low economic growth and high inflation.
Charles Plosser, July 22, 2008

From Philadelphia Fed President Charles Plosser: Perspectives on the Economy, Inflation, and Monetary Policy. A few excerpts on inflation:

The consequence of our easing of monetary policy is that the inflation-adjusted — or real — interest rate on federal funds is now negative — between minus 1 percent and minus 2 percent. The last time we saw such a negative real fed funds rate was in 2003-2004. But the environment then was much different than it is now. Back then, the Fed was concerned about the threat of deflation. Today, as we all know, this is not the case. Many of us are concerned about rising inflation rates.

Keeping policy too accommodative for too long worsens our inflation problem. Inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. We will need to reverse course — the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around.
emphasis added

Plosser is a voting member of the FOMC and voted against the most recent rate cut in April.

Plosser also discusses headline vs. core inflation measures and concludes:

Since energy price increases have been so persistent in recent years, I do believe more attention should now be paid to measures of headline inflation in setting monetary policy. I don’t believe we can be sanguine that the behavior of core inflation will keep the public’s inflation expectations well-anchored in the face of persistently high headline inflation. To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action.