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Saturday, August 02, 2008

Barrons: Roubini interview

by Calculated Risk on 8/02/2008 06:00:00 PM

From Barron's: Yes, That's $2 Trillion of Debt-Related Losses A few excerpts:

Barron's: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?

Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up.
...
The taxpayer's bill is going to be huge. I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion. When I made this analysis in February everybody thought I was a lunatic. But a few weeks later the International Monetary Fund came out with an estimate of $945 billion, Goldman Sachs (GS) estimated $1.1 trillion and UBS (UBS) $1 trillion. Hedge-fund manager John Paulson recently estimated the losses would be $1.3 trillion, and late last month Bridgewater Associates came up with an estimate of $1.6 trillion. So, at this point $1 trillion isn't a ceiling, it's a floor. And the banks, as I've said, have written down only about $300 billion of subprime debt.
I think $2 trillion is too high, but the number will definitely be huge.
from 2007:
"Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems."
Chairman Bernanke, July 19, 2007
Of course that was only subprime losses, and the problem was "contained".

FHA Personal Accounts

by Anonymous on 8/02/2008 09:01:00 AM

It took approximately twelve minutes for some of the bigger economic illiterates in Congress to sponsor a bill to reauthorize FHA DAPs--a form of money-laundering in which property sellers can inflate their sales prices by funneling money to a "non profit" which then "gifts" the funds to the buyer of the property.

Not content merely to pander to the most naive of their constituents by lining first-time homebuyers up to face foreclosure at three times the rate of those who don't get these generous "gifts," the sponsors of this bill, Representatives Al Green (TX-09), Gary Miller (CA-42), Maxine Waters (CA-35), and Christopher Shays (CT-4), would also like to redefine the very nature of the FHA mortgage insurance program, so that insurance premiums paid by those borrowers who do not default are not used to cover the losses on those who do default. Presumably, the funds to cover the losses on those borrowers who do not make their payments would come from the premiums that people who do not make their payments are not paying. Here's the draft bill:

Section 2133 of the FHA Modernization Act of 2008 is amended by adding at the end the following new subsection:

(c) AUTHORIZATION FOR RISK-BASED PRICING.—
(1) AUTHORITY. —Notwithstanding subsections (a) and (b), the Secretary of Housing and Urban Development may implement a risk-based premium product for borrowers with lower credit or FICO scores, to facilitate the availability of insurance for mortgages for such borrowers, through the establishment and collection of adequate premiums to cover the risks of such loans.

(2) REFUND OF PREMIUMS. —The Secretary shall provide for a refund of a portion or all of the higher premiums paid at the time of insurance by borrowers with lower credit or FICO scores as a result of risk-based pricing pursuant to this subsection, except that such refund shall be limited to only borrowers with a history of at least a specified number of years of on-time mortgage payments. Such refund shall be made upon payment in full of the obligation of the mortgage.
Apparently, it's not good enough for Congress that any borrower who makes two years or so worth of on-time mortgage payments (and, um, isn't upside down) can qualify for a streamlined standard FHA refinance that would lower the monthly insurance premium to the level of a "good credit" borrower. Now we have to reimburse those borrowers for the higher premiums they paid during the term of the original loan.

This is certainly a curious view of what "insurance" is. Apparently the sponsors of this bill think of mortgage insurance premiums as a kind of escrow: what you pay in is "dedicated" to covering only your own potential default, and if you don't default you get it back. Of course, there's no provision here for requiring deficiency judgments against borrowers who do default, in the highly likely event that the premiums those borrowers paid from inception to default isn't enough to cover FHA's loss. So you know who's going to pay for that.

But don't let me give you the impression the bill proposes no safeguards against risk: the bill requires that these DAP programs offer optional "homebuyer counseling" to all borrowers prior to closing, and it requires that if the borrower opts for counseling, the DAP must provide that counseling. If the borrower blows you off, you just close the loan. I suppose it is obvious to Congress that a borrower who declines counseling knows what he or she is doing. Now that I think about it, though, a borrower who scorns being counseled by the seller's money launderer is probably smarter than a box of rocks.

Perhaps the FDIC could ignore bloggers for a while and just keep its eyes on Congress.

(Thanks, Chad!)

Friday, August 01, 2008

Goldman: "Second Half Slowdown Ahead"

by Calculated Risk on 8/01/2008 10:38:00 PM

Goldman Sachs put out a research note late today lowering their projections for the second half.

"[W]e are on the cusp of a renewed deceleration in growth."
I think others will follow and the 2nd half recovery will be cancelled.

There is always next year!

Your Friday Bank Failure

by Anonymous on 8/01/2008 06:22:00 PM

FDIC:

First Priority Bank, Bradenton, Florida, was closed today by the Commissioner of the Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with SunTrust Bank, Atlanta, Georgia, to assume the insured deposits of First Priority.

The six branches of First Priority will reopen on Monday as branches of SunTrust Bank. Depositors of the failed bank will automatically become depositors of SunTrust. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. For the time being, however, customers of both banks should use their existing branches until SunTrust can fully integrate the deposit records of First Priority.

Over the weekend, customers of First Priority can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of June 30 2008, First Priority had total assets of $259 million and total deposits of $227 million.

Report: NY to Sue Citigroup regarding Auction Rate Securities

by Calculated Risk on 8/01/2008 04:20:00 PM

From MarketWatch: New York Attorney General Cuomo to sue Citi units: reports (hat tip crispy&cole)

Apparently the NY State AG plans to sue Citigroup alleging material misrepresentations regarding Auction Rate Securities (ARS) "including assuring customers that these securities were as liquid as cash".

I know people that claim they were told the same thing about ARS - "liquid as cash" - by other institutions. I've also been told that at least one institution is offering interest free loans to people with their money locked up in ARS.

Your Ownership Society In Action

by Anonymous on 8/01/2008 04:17:00 PM

OK, it's Friday afternoon. Snark away over this:

A landlord who was apparently upset at his tenants because they were behind on their rent crashed his Hummer into their home – his property – and then attempted to kick the door down, according to police.

Lenders Change Tactics, Now Discounting at Foreclosure Sale

by Calculated Risk on 8/01/2008 03:32:00 PM

For the last few years lenders have been bidding the amount they were owed at foreclosure sales on the court house steps. Since the lenders were usually owed far in excess of the current property value, almost all foreclosure sales went to the lender. This is a typical court house steps sale (just 37 seconds):



However, recently, some lenders have changed tactics and are now bidding less than what they are owed. Realtor Jim Klinge presents these recent examples:

2629 Wilson St., Carlsbad $647,785 owed, $394,273 opening bid (39% off) HSBC

2916 Rancho Brasado CSB $868,112 owed, $690,914 opening bid (20% off) U.S. Bank

7071 Cordgrass, Carlsbad $1,541,249 owed, $880,000 opening bid (43% off) WaMu

3570 CallePalmito, CSB $1,756,702 owed,$1,425,500 opening bid (19% off) Wachovia
Unfortunately the lenders aren't publishing these lower bids in advance, but this will definitely attract more investors to the court house steps! Jim writes:
[If] banks publicized their opening bids weeks in advance, they could build some momentum at the court house and blow out their inventory with very little in closing costs, and no liability.
This is definitely bringing out some investors (flippers). In the following video, Jim's client purchased this house for $444,125 and sold it for $525,000 in about one month. The lender was owed $631,523.
This property was purchased at the steps of the county court house on 6/19/08, put back on the market for sale the next day, and closed on 7/29/08 for $525,000.


This is a significant change in lender tactics.

Auto Sales Decline in July, 2nd Half Expected to be Worse

by Calculated Risk on 8/01/2008 02:11:00 PM

Headline from the WSJ:

General Motors reports 26% decline in light-vehicle sales in the U.S. for July.
From the WSJ: Ford, Toyota Sales Slide
U.S. auto sales tumbled in July, kicking off the second half of a dismal year, with Ford Motor Co. posting a 15% drop and Toyota Motor Corp. recording an 12% decline.

"We expect the second half of 2008 will be more challenging than the first half as economic and credit conditions weaken," said Ford marketing executive Jim Farley.
Sales will probably be dismal in the 2nd half of 2008 as the recession deepens, and credit markets tighten. It won't help sales that all three U.S. automakers are cutting back or eliminating their lease programs.

Construction Spending in June

by Calculated Risk on 8/01/2008 10:15:00 AM

Construction spending declined in June for residential, but increased slightly for non-residential private construction.

From the Census Bureau: June 2008 Construction at $1,081.9 Billion Annual Rate

Spending on private construction was at a seasonally adjusted annual rate of $780.6 billion, 0.4 percent below the revised May estimate of $783.9 billion.

Residential construction was at a seasonally adjusted annual rate of $372.5 billion in June, 1.8 percent (±1.3%) below the revised May estimate of $379.1 billion.

Nonresidential construction was at a seasonally adjusted annual rate of $408.1 billion in June, 0.8 percent above the revised May estimate of $404.8 billion.
Construction Spending Click on graph for larger image in new window.

The graph shows private residential and nonresidential construction spending since 1993. Private non-residential construction spending has now passed residential construction spending for the first time (since the Census Bureau started tracking spending).

Nonresidential spending has been strong as builders complete projects, but there is substantial evidence of a looming slowdown - less lending for new projects, less work for architects - and the expected slowdown in non-residential spending will happen in the 2nd half of 2008.

Unemployment Rate Rises to 5.7%

by Calculated Risk on 8/01/2008 09:24:00 AM

The BLS reported:

The unemployment rate rose to 5.7 percent, and nonfarm payroll employment continued to trend down in July (-51,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and several service-providing industries, while health care and mining continued to add jobs.
Employment Measures and Recessions Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

The unemployment rate has risen to 5.7 percent.

Year over year employment is now negative (fewer American employed in July 2008 than July 2007).