by Anonymous on 8/05/2008 01:45:00 PM

And I give Freddie extra points for not writing the kind of puling corporate-robot-speak PR most companies do in this situation. This is what we call "frank":

Charles Duhigg's story ("At Freddie Mac, Chief Discarded Warning Signs," August 5) fell far short of the standards New York Times readers have every right to expect from the paper. Given the consequence of the subject, readers deserved more than a superficial tale spun on the purported comments of a collection of anonymous former employees and unspecified "others" – likely including the well-worn band of ideologues and self-interested detractors who have opposed the GSE model for years.

Readers deserve more. The story is apparently based on the word of David Andrukonis, a former employee who was involuntarily terminated in 2005. It describes a memorandum – one we can't confirm the existence of, one we don't believe Mr. Syron ever saw, and one that Mr. Duhigg never produced for us. Although the reporter was aware of these facts, he cited the individual's account without mentioning them, instead portraying the former employee as having left amicably to become a schoolteacher.

Readers also deserve more than a highly selective cherry-picking of quotes from extensive interviews and information the reporter received over several hours and weeks, including interviews with Mr. Syron. . . .

There is much more.

(Hat tip to bacon dreamz, Lord of the Commenters Who Never Gets Enough Credit)

by Anonymous on 8/05/2008 12:52:00 PM

Now this ought to be a really interesting suit to follow. From the Boston Globe:

In their lawsuit, the Pestanas are seeking damages for their tarnished credit and are trying to reverse their eviction and foreclosure. Their Boston lawyer, Gary Klein, said their eviction has been delayed until late August.

The suit, filed one week ago, indicates the Pestanas would not have gone into foreclosure if they had reached someone at WaMu with authority to resolve their problem.

After the couple missed their August 2007 payment, Mark Pestana, a human resources specialist, and Lori Pestana, a business consultant whose work had slowed, still felt they could get current on their loan. One option might have been dipping into retirement savings, they said.

After reading on WaMu's website that it would assist distressed borrowers with loan modifications, Lori Pestana called and was told they could not qualify until their payments were 50 days late. To become eligible, they stopped paying and applied for help on Oct. 9, 2007.

It kind of sounds like these folks had the ability to make payments, but decided not to do so in order to induce WaMu to modify their loan. This ought to be interesting.

As it happens, the new FHA program authorized by the Foreclosure Prevention Act of 2008 requires borrowers to "provide certification to the Secretary that the mortgagor has not intentionally defaulted on the mortgage or any other debt." It looks like a court may be ruling on what exactly that might mean sooner than we thought.

(Hat tip to A.F.)

by Calculated Risk on 8/05/2008 11:26:00 AM

D.R. Horton reported this morning: D.R. Horton, Inc. Reports Fiscal 2008 Third Quarter Results. All the numbers are grim:

The quarterly results included $330.4 million in pre-tax charges to cost of sales for inventory impairments and write-offs of deposits and pre-acquisition costs related to land option contracts that the Company does not intend to pursue ... Homes closed in the current quarter totaled 6,167, compared to 9,643 homes closed in the year ago quarter.

Horton also reported that their cancellation rate increased to 39% in fiscal Q3 (calendar Q2 as shown on graph).

Click on graph for larger image in new window.

Declining cancellation rates was one of the few pieces of good news for homebuilders recently.

This graph shows that cancellation rates had started to decline from the peak in Q3 2007 (the start of the credit crunch). Cancellations rates vary between builders because of different requirements when the contract is signed (some builders put more effort into qualifying borrowers and require larger downpayments than others).

For Horton, their normal cancellation rate is 16% to 20%. An increase to 39% is bad news.

by Calculated Risk on 8/05/2008 10:37:00 AM

The Bureau of Economic Analysis released the underlying detail tables to the Q2 GDP report this morning. These estimates suggest that home improvement investment is still holding up pretty well.

Click on graph for larger image in new window.

The first graph shows home improvement investment in real 2000 dollars.

Unlike during the housing slumps of the early '80s and early '90s, home improvement has not declined significantly during this housing bust.

This suggests there could be more downside for home improvement, especially with homeowners less able to borrow against their homes.

The second graph shows investment in single family structures and home improvement as a percent of GDP.

Historically, the booms and busts in single family structure investment have been more pronounced than for home improvement. Note the different scales for single family structures and home improvement.

Still, home improvement investment is well above the normal range, as a percent of GDP, and investment could easily fall to 1.0% or less of GDP.

by Anonymous on 8/05/2008 08:23:00 AM

This has to be read to be believed.

More than two dozen current and former high-ranking executives at Freddie Mac, analysts, shareholders and regulators said in interviews that Mr. Syron had ignored recommendations that could have helped avoid the current crisis.

Many of those interviewed were given anonymity for fear of damaging their careers by speaking publicly.

Actually, all but two of the "more than two dozen" were given anonymity to damage Richard Syron's career while protecting their own, by my reading of this. One former Freddie Mac executive and one industry consultant are named. Nobody else is. And we are given no idea how many of the "more than two dozen" are shareholders. (Who need to protect their careers?) Or how many of them were found on Yahoo! message boards. (Hey! We don't know that they weren't!)

The Times reporter, Charles Duhigg, can't even bring himself to include Syron's full bio:

Mr. Syron joined Freddie Mac as chief executive and chairman in 2003, after the company revealed it had manipulated earnings by almost $5 billion. He came to Freddie Mac after serving as chairman of the Thermo Electron Corporation, a scientific instruments firm, and of the American Stock Exchange. An economist with a Ph.D. and the first in his family to graduate from high school, Mr. Syron was welcomed as an unpretentious but politically astute leader.

I have to wonder why the Times leaves off the part about how Syron is a former deputy assistant Treasury Secretary, asssistant to Federal Reserve chairman Paul Volker, and president of the Federal Reserve Bank of Boston in the late 80s and 90s, which included being a member of the Open Market Committee. None of that makes him perfect or infallible or anything else, of course. But why does the Times leave it out? If Syron is as clueless as the Times wants us to believe, isn't it relevant that Syron had a very influential role in restructuring failed banks and the FSLIC during the last major banking crisis? I remember all that being quite relevant when Freddie hired him in 2003 after the accounting scandal.

No, but a former employee wrote a memo in 2004 that apparently didn't impress Syron all that much. A lot of us wrote memos in 2004 that didn't impress a lot of people all that much. I can relate to the urge to say "I tolja so." I'm not sure I can relate to the claim that if this one memo had been taken seriously, all this "crisis" could have been averted.

But the Times story just isn't interested in plausibility:

By the time both men [Syron and Fannie Mae's Mudd] took over, the firms had perfected the art of making money by capitalizing on the perception they were implicitly backed by the government. That belief allowed Fannie and Freddie to borrow at relatively low rates and use those funds to buy mortgages as investments. The companies also collected fees in exchange for guaranteeing that borrowers would repay other home loans.

By the end of 2007, the firms held mortgages worth more than $1.4 trillion combined, and guaranteed payments on loans worth $3.5 trillion more.

Both firms had sophisticated systems to hedge against risks. But they remained exposed to one unlikely, but potentially catastrophic possibility: a wide-scale decline in national home prices.

"By the time both men took over." As far as I know the market has believed in the implicit guarantee of the GSEs since the day the GSEs were chartered. To say they "made money by capitalizing" on that fact is to say they operated as GSEs--government/private hybrids--since they were chartered as GSEs.

Also, what's with this exposure to the "unlikely, but potentially catastrophic possibility" of home price declines? What are we saying here? The article seems to want us to believe that all the probabilities had in fact been laid out for Syron (by his trusty memo-writer) and he ignored them. But it was also "unlikely"?

I suggest that the Times reporter and his anonymous sources (whose self-interest, of course, we cannot measure) are in a bind here: as they all, including the Times, spent so many years denying the reality of the housing bubble, they have to stick to the hoocoodanode line. But the currently popular narrative is about the GSEs being front and center of goofball lending--as hard to swallow as most of that is--so we have to shade this into "the GSEs coodanode, but not the rest of us."

There will be analysts, shareholders, industry experts, and professionals in financial services and housing--not to mention a couple of economists--who will, anonymously, comment on this blog that this reporter is a clueless hit-man. Starting with me. I wonder if that will make it true for the NYT.

by Calculated Risk on 8/04/2008 10:30:00 PM

From the WSJ: Credit-Card Bonds Fight A Tougher Debt Market

Investors are growing wary of bonds backed by credit-card payments, jamming up another debt market ... Rising defaults on credit-card payments, coupled with a bleaker economic outlook, are spooking investors ... with risk premiums on ... deals widening by as much as 0.10 to 0.25 percentage point in the past month.

Banks had already started tightening lending standards (see figure 4 panel 1 of May Fed Loan Officer Survey) on credit cards during the first half of 2008, but this probably means higher rates and even tighter lending standards.

The July survey of loan officers will be released soon (usually a few days after the Fed meeting). It will be interesting to see if more banks are tightening standards on credit cards.

by Calculated Risk on 8/04/2008 05:27:00 PM

From Reuters: Delinquent US property loans rise in June-Moody's

Delinquent U.S. commercial real estate loans rose in June ... according to a report from Moody's Investors Service released on Monday.

The percentage of outstanding property loans, including those that are in arrears at least 60 days and in foreclosure, was 0.45 percent, up 0.01 percentage point from May and up 0.21 point from a year ago, the bond rating service said.
...
The historical average delinquency rate on loans that support commercial real estate securities is 0.61 percent over the past 10 years, Moody's said.

There are two parts to the CRE bust: 1) less investment in non-residential structures, especially hotels, offices, and malls, and 2) rising delinquency rates for existing CRE. The first leads to less employment, the second to more write downs for lenders (and more bank failures since many small to mid-sized institutions are overexposed to CRE).

Added: Falling prices for CRE is part of #2. The impact on the economy from falling prices and rising delinquencies comes from write downs, tighter lending standards, and bank failures.

The delinquency rate is rising, but still pretty low.

At least no one will say "Hoocoodanode?" when rising CRE defaults lead to a number of bank failures:

Concentrations of commercial real estate exposures are currently quite high at some smaller banks. This has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market.
Fed Vice Chairman Donald Kohn, April 17, 2008

[A] number of banks have significant CRE concentrations, and the weakness in housing across the country may have an adverse effect on those institutions. Banks with CRE concentrations should take steps to strengthen their overall risk-management framework and maintain strong capital and loan loss allowances.
FDIC Chairman Sheila C. Bair, March 17, 2008

by Calculated Risk on 8/04/2008 02:11:00 PM

From Jon Birger at Fortune: The woman who called Wall Street's meltdown A few excerpts:

Whereas her peers keep searching for some sort of light at the end of the tunnel, Whitney thinks the tunnel is about to collapse.
...
"What's ahead is much more severe than what we've seen so far," she warns a standing-room-only crowd of money managers at a May lunch meeting. Once she gets rolling, Whitney morphs into a kind of dark sage ... When one shell-shocked lunchgoer presses Whitney for a glimmer of hope, she has none to offer. Asked by another money manager whether she has any doubts, Whitney concedes only one: "While my loss estimates are much more severe than those of my peers, my biggest concern is that they're way too low." That was May. By mid-July, bank stocks were down another 20%.
...
Her bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be "unprecedented credit losses" for subprime lenders. The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate to 69% from the more natural level of 64%.

A lot of the new homeowners were in over their heads. They'd put little or no money down and thus had little incentive - and often little ability - to keep making their monthly payments when home prices started to fall and their teaser rates got bumped up. "Low equity positions in their homes, high revolving-debt balances, and high commodity prices make for the ingredients of a credit implosion, particularly at this point in the consumer cycle," Whitney wrote. That report didn't turn her into a star - though it should have - but it did land her an invitation to present her findings to the FDIC.

Whitney may have been the first Wall Street analyst to "sound the alarm loudly about subprime mortgages", but there were others that had it right long before October 2005. Dean Baker comes to mind. Tanta of course. And many others.

And on the homeownership rate: According to the Census Bureau, the homeownership rate is now back to the levels of the summer of 2001. (see graph).

A research paper last year from Matthew Chambers, Carlos Garriga, and Don E. Schlagenhauf (Sep 2007), "Accounting for Changes in the Homeownership Rate", Federal Reserve Bank of Atlanta - suggests that there were two main factors for the recent increase in homeownership rate: 1) mortgage innovation, and 2) demographic factors (a larger percentage of older people own homes, and America is aging).

Click on graph for larger image in new window.

Note: graph starts at 60% to better show the change.

The authors found that mortgage innovation accounted for between 56 and 70 percent of the recent increase in homeownership rate, and that demographic factors accounted for 16 to 31 percent. Not all innovation is going away (securitization and some smaller downpayment programs will stay), and the population is still aging, so the homeownership rate will probably only decline to 66% or 67% - not all the way to 64%.

I think she may be too bearish, but overall I think Ms. Whitney has done an excellent job.

by Calculated Risk on 8/04/2008 01:21:00 PM

The following chart shows just how far oil prices have risen:

Click on graph for larger image in new window.

This graph shows the monthly nearest futures price ranges for Brent Crude Oil since 1998. (sorry the image is blurred)

The recent pullback is pretty minor compared to the huge run up in oil prices since 2007.

If demand destruction is outweighing other supply and demand issues, I'd expect prices to fall much further.

by Calculated Risk on 8/04/2008 10:31:00 AM

From Bloomberg: Boscov's Department Stores Seek Bankruptcy Protection (hat tip Chris & Sean)

Boscov's Inc., the 9,500-employee department-store chain founded in 1911 in Reading, Pennsylvania, filed for Chapter 11 bankruptcy protection in Wilmington, Delaware, today, citing decreased consumer spending.

Boscov's, the biggest family-owned full-service department store chain in the U.S., said in court papers it will immediately close 10 of its 49 stores.

The two keys are "decreased consumer spending" and closing 10 stores (not many, but the number is adding up).