by Calculated Risk on 7/25/2008 01:49:00 AM

From CNN: 2.2 million vacant homes for sale

The percentage of vacant homes available for sale remained relatively flat in the second quarter, but still hovered in record territory.

Some 2.8% of homes, excluding rental properties, were empty and on the market from April through June, according to Census Bureau figures released Thursday. The vacancy rate hit a record high of 2.9% in the first quarter of 2008. It was 2.6% a year ago.

I'll have much more on vacancies this weekend after I return home.

Here is the Census Bureau release. The rental vacancy rate is at 10.0%, essentially unchanged from last quarter.

by Calculated Risk on 7/24/2008 07:00:00 PM

From HousingWire: Fitch Updates Ratings Model; Projects Steep Housing Price Declines

Fitch Ratings said Thursday that it had enhanced its U.S. residential mortgage loss mode ... Fitch’s revisions suggest ... a very bearish take on housing prices over the next five years: Fitch said in its report that it is expecting home prices to decline by an average of 25 percent in real terms at the national level over the next five years, starting from the second quarter of 2008.

And that’s the base case scenario.
...
Fitch will also roll out new 25 MSA-level risk factors influencing frequency of foreclosure and loss severity estimates, the agency said; the 25 MSAs chosen are those that have exhibited strong non-conforming mortgage lending activity in the past.

“Some MSAs such as San Diego and San Francisco, CA are expected to experience home price declines by as much as 47 percent and 33 percent over the next five years, while home prices in MSAs such as San Antonio, TX are expected to appreciate by 7 percent,” [Huxley Somerville, group managing director and head of Fitch’s U.S. RMBS group said].

It's important to note these are real prices - adjusted for inflation. A 7% increase in 5 years, with 3% inflation per year, is a nominal price decline of about 8%.

[sarcasm]That is strange about San Francisco - a number of people at the Inman conference told me San Francisco is special - and immune - and prices won't decline here. [/sarcasm]

by Calculated Risk on 7/24/2008 05:39:00 PM

From MarketWatch: National City swings to loss, but shares rise

[T]he company reported a second-quarter loss of $1.76 billion ... "Credit quality deteriorated, but there are some signs of stabilization in the nonprime mortgage book," wrote BMO Capital Markets analyst Lana Chan

From the NY Times: Stocks Drop Sharply; Banks Lead Decline

Financial shares ... plunged after the regional bank National City and Washington Mutual, the nation’s biggest savings and loan, were besieged by gloomy analyst reports.

WaMu was forced to take the unusual step of issuing a public statement about its financial strength, for the second time in a week.

National City shares ... reported a $1.8 billion loss for the second quarter.

Sorry - a little late, I'm somewhat out of touch while at the real estate conference in San Francisco. Having a great time ... I've met several people that comment frequently, including having lunch today with Nemo!

by Calculated Risk on 7/24/2008 02:37:00 PM

From Bloomberg: WaMu Slumps as Gimme Credit Cites Liquidity Concern

... Gimme Credit LLC said unsecured creditors were ``pulling funds'' from the biggest U.S. savings and loan.
...
``We won't use the phrase `run on the bank,' but we would be remiss if we did not observe that many creditors have quietly been pulling funds,'' wrote [Gimme Credit analyst Kathleen Shanley], based in Chicago. Their actions are ``presenting an increasing funding challenge,'' she wrote.

by Calculated Risk on 7/24/2008 02:21:00 PM

From PIMCO's Gross: Mooooooo!

PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble. The problem with writing off 1 trillion dollars from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth, creating what Mohamed El-Erian fears as a “negative feedback loop.”

I still think $1 trillion in mortgage losses is pretty much the worst case. But we have definitely come a long way since last December when I first projected $1 trillion in possible losses.

Last December from the WSJ:

... recent prediction from Barclays Capital that losses from the subprime-mortgage meltdown could hit $700 billion. That would top Merrill Lynch’s recent estimate of $500 billion. The Australian newspaper notes that a $700 billion “bloodbath” — potentially leading the U.S. economy into “the blackest year since the Great Depression” — would top the GDPs of all but 15 nations.

Back in the U.S., the Calculated Risk blog sidestepped the colorful language and went straight for the big number: “The losses for the lenders and investors might well be over $1 trillion.”

by Calculated Risk on 7/24/2008 12:59:00 PM

From the Atlanta Journal-Constitution: Industrial, commercial development planned for Buford (hat tip Justin)

Just 198,450 square feet of industrial space is currently under construction in the northeast Atlanta market, which includes Gwinnett, according to CoStar Group, a real estate tracking firm.

That area hasn't seen anything less than 2 million square feet under construction at any one time in the last two years, said Richard Poland, a CoStar analyst.

"It's just a screeching halt on construction," he said.

The CRE bust is here.

by Calculated Risk on 7/24/2008 11:26:00 AM

From MarketWatch: Freddie Mac: 30-yr fixed-rate mortgage up on inflation woes The 30-year fixed-rate mortgage average was up to 6.63% from 6.26% last week.

"Market concerns about rising inflation, further weakness in the housing market and greater probability that the Federal Reserve will raise short-term rates this year all combined to push mortgage rates higher this week."
Frank Nothaft, Freddie Mac's chief economist

The ten year treasury yield has been rising, plus investors are concerned about MBS.

BTW, the housing bill now goes to the Senate and will probably be signed into law pretty quickly: House Approves Sweeping Effort to Help Housing

The White House, citing an urgent need to restore market confidence in the two mortgage giants, Fannie Mae and Freddie Mac, said President Bush would sign the measure despite his opposition to the inclusion of nearly $4 billion in grants for local governments to buy and refurbish foreclosed properties.

Mr. Bush’s support assures that the bill will become law after final passage by the Senate, possibly on Saturday.

It will be interesting to see if the spread between the 30 year fixed rate mortgage and the ten year treasury declines after passage of the housing bill.

by Calculated Risk on 7/24/2008 10:00:00 AM

Note: graphs will be posted on Saturday (when I return home).

From NAR: Existing-Home Sales Down In June

Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 2.6 percent to a seasonally adjusted annual rate1 of 4.86 million units in June from a pace of 4.99 million in May, and are 15.5 percent lower than the 5.75 million-unit rate in June 2007.
...
Total housing inventory at the end of June rose 0.2 percent to 4.49 million existing homes available for sale, which represents an 11.1.-month supply2 at the current sales pace, up from a 10.8-month supply in May.

Still not a one year (12 months) of inventory, but just wait ... sales will probably decline further.

According to Lawrene Yun, "short sales and foreclosures [account] for approximately one-third of transactions". That is not exactly a healthy market. More this weekend ...

by Anonymous on 7/24/2008 09:37:00 AM

Well, yesterday was quite the odd day. I was having a late afternoon nap when I suddenly awoke, heart pounding and skin crawling, with that horrible spooky sense of being watched. I decided it was a bad dream, made a cup of tea, and wandered over to the computer, only to discover that my co-blogger had just a few minutes earlier put up a post letting us all know that the FDIC is going to be keeping its eyes on bloggers.

There's only one thing for it, then. If the FDIC is going to be worrying about the bloggers, the bloggers are going to have to be worrying about the insured depositories. I don't know that that's an ideal setup, exactly, but someone has to worry about the banks and thrifts, not just about bad PR for the FDIC, and if Sheila Bair is going to ruin my naps I'm going to have time on my hands.

Which brings us to Downey Financial, who visited the confessional this morning. It was pretty ugly. What we got, for the first time as far as I can remember (I nap a lot these days, you know, or at least I used to), is some post-modification performance information on the infamous "retention modifications."

If you remember, Downey got everybody a little fired up back in January when it announced that its auditor was making it restate its Non-Performing Asset (NPA) numbers for the second half of 2007. Downey had put in place a program to offer "market rate" modifications to performing borrowers in its loan portfolio. These were, apparently, mostly Option ARM borrowers whose rates had adjusted to pretty high levels. Downey modified them into amortizing ARM loans at the same interest rate that a new ARM borrower would have gotten. Because there was not a below-market rate given to these borrowers, and because they were current at the time of modification, Downey decided it did not need to count these loans as "troubled debt restructurings," which would mean including them in the NPA category. However, KPMG told Downey that the loans did indeed need to be considered "troubled debt restructurings," for a very specific reason: Downey did not re-underwrite these loans at the time of modification to verify and document that the "market rate" given to the borrowers was truly the rate that a new borrower of the same credit quality would have gotten. Downey agreed to count all of these "retention mods" as NPA until each borrower had made six consecutive payments under the new loan terms. Ever since then, Downey has been reporting separate numbers for total NPA including the retention mods, plus NPA without the retention mods. They clearly believe that having to include the retention mods in NPAs makes their NPA number look worse than it "really" is. Whatever that means.

In today's press release, we got some additional information about the performance of these loans:

To the extent borrowers whose loans were modified pursuant to the borrower retention program are current with their loan payments and included in non- performing assets, it is relevant to distinguish those from total non- performing assets because, unlike other loans classified as non-performing assets, these loans are paying interest at interest rates no less than those afforded new borrowers. At June 30, 2008, $548 million or 82% of such borrowers had made all loan payments due. Accordingly, the 15.50% ratio of non-performing assets to total assets includes 4.34% related to performing troubled debt restructurings, resulting in an adjusted ratio of 11.16%.

Through June 30, 2008, $347 million of loans modified pursuant to our borrower retention program have been removed from non-performing status because they met the six-month payment performance threshold. Of all loans modified pursuant to the borrower retention program, including both those classified as non-performing as well as those removed from non-performing status, 87% have made all payments due.

So. The "retention program" has been in place for one year now. If I am reading this correctly, a total of $1.015 billion in loans have been modified under this program. $347 million have made at least six consecutive on-time payments and are no longer included in NPA. Of the $668 million still in NPA, $548 million have made all payments due so far (that might be less than six, since some of these mods will be less than six months old).

This means that of a group of modified loans that are no more than one year old, 87% are performing. If you remove the oldest performing loans from that group--the ones that have had six payments actually due and have made those payments--you get 82% performing loans. A delinquency rate of 13-18% in the first year would probably be something to be proud of if these were "classic" troubled debt restructurings--namely, workouts of delinquent loans that required below-market interest rates to result in payments the borrower could afford.

But Downey tells us these "retention" mods were done for borrowers who were current on their loans at the time of modification, and who were given rates no better or worse than market. The very idea of a "retention" program, of course, is that (in theory at least) these are borrowers whom you don't want to refinance away from you with another lender, because they're good borrowers. You "retain" them by offering them a less expensive alternative to refinance, namely a modification that keeps the loan with the same lender and servicer.

And 13-18% of these "keepers" went bad within a year or less of a modification that supposedly improved their risk profile? Perhaps people are getting used to seeing such high delinquency rates on subprime and "worked out" loans that figures like this seem normal. But these are supposed to be prime loans, and that level of early delinquency or default in a book of "retention" mods is just awful. Downey says these borrowers got the same modified rate and terms that a new refinance borrower would have gotten. Were they expecting that 13-18% of their newly-originated refinance transactions would be delinquent in the first year?

If nothing else, I'd say this demonstrates a good call by KPMG. Downey called these "retention" mods--implying that they were the kind of high-quality borrowers you don't want to lose to the competition--and failed to re-underwrite the loans to verify that claim. The results of this program suggest to me that it was less a classic "retention" program than a pre-emptive strike: Downey made a big effort to modify as many of its then-current Option ARMs as it could into better loan terms, not because they were the kind of borrowers you necessarily want to "retain" but because they were probably not going to get a decent refi anywhere else and if they'd stayed in the Option ARM program the delinquency rate would likely have been worse than 13-18% a year later.

I don't actually think that a "proactive" modification program is necessarily a bad thing. But I think calling it a "retention" program is disingenuous at best, and I think that Downey's experience is proving the point that it really does matter whether you re-underwrite those loans before you modify them. But then, forcing outfits like Downey to call these programs "pre-delinquency workouts because letting them ride is too dangerous" programs rather than "retention" programs would probably spook people, and we know the FDIC doesn't want that.

by Calculated Risk on 7/24/2008 09:22:00 AM

From the WSJ: Ford Swings to Loss On Write-Downs

Ford Motor Co. swung to an $8.67 billion second-quarter loss as the company recorded $5.3 billion in write-downs at the auto business and $2.1 billion on leases at its credit arm.

Rising costs and falling demand were blamed for the loss.

(note: I'm still posting on my wireless)