by Anonymous on 8/17/2008 07:15:00 AM

I have had occasion before now to compliment Michelle Singletary's personal finance column, The Color of Money, in the Washington Post. I don't read a lot of "personal finance" stuff because, frankly, most of it is drivel. But even in a better field of competition, I think Singletary's work would stand out as a combination of no-nonsense advice and original reporting.

Today she takes on the subject of the new $7,500 tax credit for first-time homebuyers. What started out as an attempt to explain the tax credit to potential homebuyers ends up being an interesting report on the extent to which the IRS has no particular plan at this point for managing this thing.

Since this is a loan from the IRS, will the IRS be sending an annual loan statement to taxpayers?

The details of how the IRS will collect this money or inform people have not been worked out. Smith said a line would probably be added to the standard 1040 tax form to indicate that the credit should be paid as part of your tax liability.

Can I pay off the loan early?

The IRS hasn't yet come up with a system to accommodate an early payoff. . . .

Will this be a debt that has to be settled at closing if you sell the house?

This debt isn't tied to your home but rather to you as a taxpayer. The outstanding loan will probably not be required to be paid at the closing table, Smith said. . . .

If there is not a lien on the property, how will a settlement company know the debt is due when a homeowner sells?

It probably will be up to the homeowners to inform the IRS that a sale has occurred and that they need to pay off the loan balance, Smith said.

It's this last answer that I see as an oversight nightmare for the IRS.

Let's say a homeowner sells and realizes a $7,000 profit. However, he or she still has $6,000 left on the first-time home buyer loan. This means the homeowner will have to set aside the bulk of that gain -- $6,000 -- from the sale to satisfy the tax debt, which would be due in the tax year of the sale.

If the person isn't financially disciplined and spends the money, he or she could end up with a hefty tax liability.

"We have to look at all the issues involved with this credit and figure out the best controls," Smith said.

No kidding.

I don't exactly expect any elaborate bureaucracy like the IRS to have all its operational and procedural ducks in a row within a couple of days of the passage of this kind of "stimulus" legislation, which by definition can't exactly wait for all the details to be ironed out before passage (or it is too late to "stimulate" the market). On the other hand, the work eventually has to get done, unless the IRS is willing to promise to not penalize people who don't handle this correctly. You can't exactly make it difficult for people to know when and how much to pay you and then turn around and slap them with penalties and fines if they don't follow the rules. The IRS can tell itself it's got years to figure this out, since the first installments won't be due until the 2010 tax year for people buying this year. But that inability to handle prepayments on sale of the property is going to mess that plan up.

If we had a dime, of course, for every story we've read lately that tells us that your average first-time homebuyer either doesn't read mortgage documents or manages to understand approximately every tenth word of them, including "the" and "and," we would be rich enough to fund a study comparing the relative comprehension on the part of the public of mortgage documents versus the tax code. If we had another dime for every story we've read about mortgage servicers making it difficult for people to prepay loans, refusing to provide clear payoff statements, fouling up servicing transfers and proofs of claim and generally making it an insurmountable challenge for people to know what they actually owe and where to send the damned payment, we would also be rich enough to buy the IRS a loan servicing platform it could manage not to use correctly, just like everyone else.

But no one is handing out dimes, so we will just have to send the IRS a cheap homemade housewarming present: a little note welcoming it to the neighborhood, Love, The Mortgage Industry.

by Anonymous on 8/16/2008 09:15:00 AM

I am very pleased to offer you this post, which is actually a "Guest Nerd" offering by our regular commenter and expert mort_fin, who works on undisclosed mortgage matters in an undisclosed location and often straightens us out in the comment threads when the conversation gets to technical matters of statistical analysis of mortgages. I helped a little bit with this post (any errors in the tables are mine), but the bulk of this is mort_fin's.

Some important context for the genesis of this: it came about after dear mort_fin, and a number of our other regulars, spent most of a frustrating Saturday afternoon arguing with another commenter about this post on the FHA "DAP" program (the infamous seller-money-laundered-downpayment-assistance-program). We basically came to the conclusion that a lot of people who defend the DAPs are not arguing in good faith about the performance of these loans--they pick out statistics they don't ever define clearly and wield them in misleading ways.

Because things like the FHA DAP are such important public policy questions, it seemed to mort_fin that there was much to be gained by helping non-specialists get a better grip on the various default statistics that are available and what they do (and do not) actually tell you. This is UberNerditude at its finest, and I thank mort_fin for taking the time and effort to help us move the intellectual ball a few yards in the never-ending battle with the DAP shills.

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

Mort_fin says:

A recent flap in the comments surrounding default rates in FHA, especially with respect to down payment assistance programs, showed how easy it is to misunderstand and abuse mortgage default rates. So I thought I’d take a shot at writing The Fairly Intelligent Person’s Guide to Default Statistics.

The first issue to note is just the words. Default, as Tanta has noted in a previous excellent UberNerd, has a fairly precise legal definition, and a fairly vague usage in the popular and financial press. To a lawyer, if you move and rent out your abode you are probably in default, even if you keep making your mortgage payment every month, since you have violated the clause in the note that says you will occupy the premises. When reading the trade press, delinquency usually means not paying the mortgage, and default might mean that foreclosure proceedings have started, have finished, are being negotiated, etc. You can’t understand the analysis if you don’t read the fine print in the definitions. I’m going to stick with default meaning “foreclosure has happened” for the following examples.

To keep everything clear, and countable on fingers without resorting to toes, let’s say 10 people all get mortgages in a year (a group all getting mortgages at the same time is a “vintage” or a “cohort”). All the initial examples will relate to these 10 people. They are color coded based on their mortgage status. The first thing to notice is that life is complicated, and there are a lot of possible outcomes. Some loans end in foreclosure (default), some are refinanced into another mortgage (which can then end in a variety of ways), some people sell the house and pay off the mortgage, and some people just sit there paying the monthly nut for 10 years or more. And you don’t follow people forever—who knows what happened to any of these folks after 10 years?


In our sample pool of ten loans, each originated in 2000, we have the following outcomes:

• Fred: Purchase mortgage for 1 year, 1 year foreclosure process, foreclosed, becomes renter
• Matilda: Purchase mortgage for 1 year, refinanced mortgage for 2 years, 1 year foreclosure process, foreclosed, becomes renter
• Jose: Purchase mortgage for 3 years, refinanced mortgage for 5 years, sells home, becomes renter
• Rashid: Purchase mortgage for 4 years, foreclosure for 1 year, foreclosed, becomes renter
• Seamus: Purchase mortgage for 4 years, foreclosure process for 2 years (stayed because of a bankruptcy filing), foreclosed, becomes renter
• LuAnne: Purchase mortgage for 4 years, refinanced mortgage for 1 year, refinanced mortgage again for 1 year, foreclosure process for 1 year, foreclosed, becomes renter
• Saty: Purchase mortgage for 2 years, purchases new home
• Mitko: Purchase mortgage for 5 years, refinanced mortgage for 5 years
• Bob: Purchase mortgage for 10 years

This may or may not be a “typical” set of outcomes for any given pool of ten mortgages. But these are all very possible outcomes, and the point of this little exercise is to see clearly just how these possible outcomes are—or are not—reflected in the default statistics we have come to rely on for measuring mortgage performance.

A vintage of loans something like this would get sliced and diced in various ways by analysts. You might see a “lifetime projected default rate” or a “cumulative to date default rate” or a “conditional default rate” or a “foreclosure initiated rate" (also sometimes call the “foreclosure inventory”). None of them is right or wrong, but any of them can be misunderstood or abused.

Start with the “cumulative to date default rate.” (Remember that this counts foreclosures completed, not started.) If these are loans originated in December of 2000, you might ask in 2000 or 2001 “what percent have gone bad?” and the answer would be zero. For most borrowers, it is rare to miss payments in the first year (the fact that it wasn't rare starting about 2 years ago should have been an enormous alarm bell for people), and it takes very roughly a year between the time people stop missing payments and the time they finish foreclosure (timeline varies widely by state). But at the end of the 2002, you have one default, Fred, for a cumulative to date default rate of 10% (1 in 10). At the end of 2003 it’s still 10%, but by the end of 2004 it’s risen to 20% because Matilda has also gone bad. But, wait a minute, Matilda refinanced in 2001, so she never defaulted on a 2000 originated mortgage. I guess it stays at 10%. The “to date” cumulative rate eventually rises to 30% as first Rashid, and then Seamus, go to default.

At the end of 2009 the “to date” is 30%, and assuming that these are 30 year mortgages, we still do not know the “lifetime projected default rate” since Bob is still out there with an active loan. You know that the lifetime cumulative rate will be at least 30% since it can’t go down (well, actually in states with rights of redemption, it theoretically could go down, but those are pretty rare events) and it can’t be more than 40%. If Bob stays good it’s 30% and if he goes bad it’s 40%. Since few people go bad after 10 good years you would probably project a 30% lifetime cumulative default rate for these loans. Matilda and LuAnne don’t count, since they refinanced and are a “success” as far as the original lender is concerned (although they might be failures from the perspective of a policy to promote homeownership). And if you’ve taken comfort in the fact that the “to date” cumulative default rate is zero at the end of 2002 you’re in for an uncomfortable surprise next year.

Note that if you want to assess what these things will cost you from a credit cost perspective, the relevant figure is lifetime cumulative defaults. When you originate the loans (which is the date that matters, since you can’t retroactively up the interest rate or the insurance premium, the horse is out of the barn at that point) all you have are projections. You don’t know what anyone has done, since they just started. After 5 or 6 years you can make a pretty good projection, but it’s far too late at that point. In this business you have two and only two options: highly uncertain knowledge when it’s useful, or very precise knowledge long after it’s useful. That’s why this business is so much fun. And the projections are sensitive not only to the quality of the underwriting (how did Fred manage to get a loan in the first place???) but also to future house prices and unemployment rates, and refinancing opportunities (a rolling loan gathers no loss).

But cumulative defaults aren’t the only, or even the most commonly presented, statistics. The commenter in the aforementioned Haloscan thread was led astray by the Foreclosures Initiated (or Foreclosure Inventory) statistic. This counts how many foreclosures are “in process.” Foreclosure is a process, not an event. The details vary by state, but a common method of judicial foreclosure is the filing of a “notice of default” in which the servicer tells the seriously delinquent borrowers that they are headed to court. This may start the foreclosure clock. Motions and countermotions are filed, court dates are scheduled and postponed, and a date for the sale of the property is set. This is the process that can take, in very rough terms, a year to play out.

In 2001 the foreclosure initiation rate in our example pool would be zero, but in 2002 it would be 11%. Why 11% you ask? Well, one loan (Fred) is in process, and there are 9 loans still active (Matilda refinanced, remember). So 1 out of 9 is 11% (with a little rounding). In 2005 the foreclosure initiation rate is 40%. Only 5 loans are still active, and two of them are in the process of being foreclosed upon.

Note that the foreclosure initiation rate tells you very little about how much of an insurance premium you needed to charge to cover the credit risk, or even whether you had a bunch of good loans or bad loans. This rate depends on the denominator as well as the numerator, and the denominator can change for all sorts of reasons, like borrowers moving and borrowers refinancing, that don’t have any direct bearing on whether these were good loans or bad loans. The inventory rate has its uses, but summarizing credit quality or expected costs isn’t one of them. It is a pretty sensitive number for summarizing current conditions – it tends to rise rapidly when things get bad, and fall back to earth when things get good.

The other commonly cited statistic is the CDR, the Conditional Default Rate. It is “conditional” because it is “conditioned by survival.” The denominator consists of all the loans that have survived until today, neither prepaying in the past nor defaulting in the past. Again, for the first two years, the CDR is zero. In 2002 it is 13% since 8 loans are still alive, and 1 is defaulting. In 2003 and 2004 it is back to zero, and then in 2005 it skyrockets up to 33%, as only 3 loans still survive, and one of them has gone bad. The CDR is useful as an input to complicated cash flow models, but by itself it doesn’t tell you much about credit quality, since, again, it depends on the denominator as much as it does on the numerator, and for older pools of loans the denominator can be pretty small.

Returning to our little pool of ten loans, these are the values we get for these three measures over ten years. (Click on the table to enlarge.) You can see how confused a conversation at any given point in time would be that tossed these numbers around without context:


The big analytical mistake you do not want to make here, of course, is the one Tanta likes to complain about in the work of various apologists for high-risk lending: assuming that if 30% of the loans in a given vintage fail, then 70% of the borrowers were “successful.” Here’s another way of looking at our example pool that contrasts the results of a standard vintage analysis (what happened to the loans that were originated in 2000?) with an actual borrower analysis (what was the mortgage performance of these ten borrowers over ten years?). You get very different numbers:


Now try a more complicated graphic, which looks a lot more like an active portfolio of loans than a static vintage. Imagine that 10 people a year are flowing into your sights as an analyst, and the world looks boringly the same from year to year—each new vintage performs just like the previous one.


Here's the tabular result:


In the first year, foreclosures (cumulative to date, inventory, and CDR) are all zero again. In year 2 the foreclosure rate, cumulative and CDR, are still zero, but the inventory is now 1/19. There are 9 loans still active from the first cohort, and 10 new loans have come into the picture. Of course, new loans are almost never in foreclosure, so letting new loans flow into the picture lowers the foreclosure inventory rate substantially. It is still the case that 30% of loans in each vintage and 50% of borrowers will ultimately go bad, but now the foreclosure inventory is a little over 5%, and the cumulative default rate and CDR are still zero. Go out one more year, and 10 new loans have flowed into the picture. 30 loans have come in, 3 have left via prepayment, and 1 of the remaining 27 is a foreclosure that has happened in that year. So the CDR is now a little under 4% (1 out of 28), and the cumulative claim rate is a little over 3% (1 out of 30). Interpreting the numbers from a dynamic pool of mortgages (loans constantly flowing into the system) is harder than interpreting a static pool (always looking at the same set of loans).

A great real-life example of cumulative (to-date and projected) default rates and CDRs can be found in FHA’s Actuarial studies. Go down to Appendix, and click on Econometric Results in Excel. There are tabs for All_Orig_CumC (All Originations Cumulative Claims – to FHA, a foreclosure is a claim, since they are an insurer, not a mortgage investor) and tabs for All_Orig_ConC for the Conditional Claim Rates. In the cumulative tab, note that FHA projects 15.89% of 2007 originations will ultimately go bad, and this is entirely a projection. For 2000, they project 7.61% will go bad – as these loans are now 7 years old, this is based on actuals of 6.73% having gone bad, and a projection that there will only be a few more foreclosures left to go. On the Conditional Claims rate tab, note that the expectation over the next year is that 0.5% out to 3% of loans are expected to go bad in the next year, depending on how old the loans are (which cohort they are in). It is these annual rates, properly accumulative (you have to adjust the figures so your denominator is always originated loans, not surviving loans), that get you anywhere from 6% to 22% lifetime foreclosure rates, for the good years vs. the bad years. You may want to revisit the HUD site next year to see how projections get revised. These are based on an August 2007 house price forecast. I suspect that has now been rendered inoperative.

The lesson to learn here is to ask questions. 1) What are the definitions in use? 2) Are you looking at a static or a dynamic population? 3) What are you trying to measure? 4) What is happening to the denominator in your ratio?

If you’re trying to ascertain credit costs, failures to date or failures over the past year won’t get you where you want to go. And if you’re trying to ascertain homeownership success, mortgage failures alone won’t give you an answer. Matilda and LuAnne “succeeded” on their first mortgages, but still had a sheriff evict them eventually. Jose and Tania didn’t get foreclosed—the statistics would simply count them as a “voluntary prepayment”—but it’s hard to say that homeownership was a success for them since they ultimately found the cost of owning impossible to maintain and were simply “lucky” enough to sell before they were foreclosed. And even if you’re trying to do an apples to apples comparison—like “Did the CDR for this pool exceed the CDR for that pool?”—it’s important to keep in mind that numerators and denominators can shift because of prepayments, not just defaults. We really don’t know what was motivating the refinances in our pool—lowering interest rates? Taking cash out? We don’t really know whether the refinances improved or worsened the borrower’s actual financial position, but we do know that higher or lower prepayments in a pool can certainly make statistics like CDR “look” more or less frightening.

The unfortunate truth is that mortgage analysts simply do not in any normal circumstances have access to a dataset like the one we have made up for this post. Whether you are looking at a static pool with a single vintage or a dynamic portfolio with multiple vintages, you are tracking loans, not borrowers or properties, and you are tracking “prepayments” of those loans. You simply do not know whether that prepayment was a refinance or a sale of the home; you don’t know what that borrower did after the prepayment. This information simply isn’t in the standard databases. The bottom line about making claims regarding borrower “success” by reference to mortgage default statistics is “you can’t necessarily get there from here.”

Click here for Guest Nerd Special!

by PJ on 8/16/2008 07:45:00 AM

Via the Wall Street Journal, we learn this morning that the FBI is looking into sellers' use of incentives to prop up home prices during the early days of the RE crash. The idea here is that giving away a boat if a buyer spends half a million on a $400K house sort of puts the lender at a severe disadavantage, esp. if that sort of incentive wasn't disclosed ....

The FBI ... confirmed that it is looking at cases where the disclosures of incentives "haven't made it all the way to the ultimate lender," says William Stern, financial crimes supervisor for the FBI in Palm Beach County, Fla., and the bureau's former national mortgage-fraud coordinator.

Interviews with real-estate agents, home buyers and former employees at home builders describe an industry where competitive pressures fueled unusually creative giveaways in a last-ditch attempt to prevent price cuts....

"You weren't buying a house. You were buying a package," says Dana Ellis, who worked as an escrow manager for Centex from 2004 to 2006. To qualify, Centex required the buyer to use the company's in-house mortgage unit to originate the loan, and the loan application included an incentive "addendum" that listed the incentives but wasn't always sent to the lender. "They weren't disclosing any of this. That was on separate paper that was pulled," she says.

Centex says that the program was confined to about 50 sales and was shut down in June 2006, about six months after it began. Centex averaged 63 home sales a month for the year beginning April 2006. "These incentives did not reflect standard corporate practice and, once discovered, the practice was immediately halted," Centex spokesman David Webster says. Centex says only one of the loans was government-backed, through the Veterans Administration home-loan program, and the builder has promised to stand behind all of those loans.

Elsewhere, developers offered "sweat equity," or payments for buyers to receive home improvements such as landscaping. "You're basically getting banks to give you a cash advance," says Chip Hickman, the general manager of Easy Street Realty in Las Vegas. He said such programs weren't heavily advertised and were offered by many area builders, although he declined to name them. "It was more sales agents in the model home saying, 'Look, tell me what you need and I got a lot of money to play with.' "

There aren't any strict limits on incentives, but they could run afoul of federal regulations if they cause the mortgage to increase by more than the cost of the incentive. "It's a phantom incentive to mask it in an excessive loan," says Brian Sullivan, a Department of Housing and Urban Development spokesman.

Of course, banks could and should have caught much of this sort of deception. What about the appraisal, you ask? Let's muddy the waters a little bit here:

Stronger due diligence by banks might have caught some of these problems. Banks, however, say they relied on professional appraisal companies to insure property pricing. Mortgage-fraud experts say appraisers sometimes cooperated with builders because it was the only way to get business. Appraisers say that determining the value of new homes is more difficult because comparable sales figures are provided by builders...

Some builders continue to make generous offers. Wagner Homes Inc., a local home builder, advertises in big capital letters at the top of a flyer "$130,000 commission any way you like it!" for homes in developments like "Dawn Day Fusion," a northwest Las Vegas subdivision that offers homes with Asian-inspired architectural flourishes. New homes listed there in mid-July for $530,000 even though similar model homes in that development sold for $400,000 two years ago.

And so we pull the thread a little further on fraud. Cue The Sweater Song (for any Weezer fans out there).

by PJ on 8/15/2008 07:00:00 PM

As opposed to death by. Bad joke, I know. But Friday marked the latest in a growing list of retail casualties, and one I relied on for my chocolate fix at the mall, too:

Cookie retailer Mrs. Fields Famous Brands LLC said on Friday it plans to file for Chapter 11 bankruptcy protection to help restructure its business, according to a U.S. Securities and Exchange Commission filing.

The company, which licenses and franchises about 1,200 Mrs. Fields Cookies and TCBY frozen yogurt locations worldwide, has begun soliciting votes from creditors for a "prepackaged" bankruptcy reorganization plan.

Under a prepackaged plan, creditors vote on certain aspects of the plan prior to the bankruptcy filing in court.

More than two-thirds of its bondholders have agreed to vote in favor of the prepackaged plan, though their support is contingent upon the company submitting its bankruptcy filing to the court by August 25, according to the regulatory filing.

It's Friday, and the FDIC is quiet .... (and hat tip for the story to just about everyone in the comments!)

by PJ on 8/15/2008 03:28:00 PM

While we're talking about high profile foreclosures, via the LA Times, Ed McMahon's ship has arrived:

... Donald Trump has agreed to buy Ed McMahon's Beverly Hills house for an undisclosed amount and allow McMahon to continue living in it.

"I don't know the man, but I grew up watching him on TV," Trump said in an exclusive interview with The Times....

Trump said he stepped in because helping McMahon "would be an honor." His plan is to buy the home from the lender and lease it back to McMahon.

"When I was at the Wharton School of Business," Trump said, "I'd watch him every night. How could this happen?"

Same way it happens to many other, less famous borrowers, I'd guess.

by Anonymous on 8/15/2008 01:15:00 PM

I guess it's just Freaky Friday on the real estate front.

Y'all remember Rep. Laura Richardson (D-Deadbeat)? How those meanies at WaMu foreclosed on her poor innocent self, and how she threw her weight around and got the foreclosure rescinded and a loan modification done?

So far this noble effort to prevent foreclosure and keep the dream of ownership alive is workin' out great. From the LA Times:

This week, in the latest chapter in the housing saga, the Code Enforcement Department in Sacramento declared her home a "public nuisance."

The city has threatened to fine her as much as $5,000 a month if she doesn't fix it up.

Neighbors in the upper-middle-class neighborhood complain that the sprinklers are never turned on and the grass and plants are dead or dying. The gate is broken, and windows are covered with brown paper.

"I would call it an eyesore," said Peter Thomsen, a retired bank executive who lives nearby.

Thanks, Brian!

by Anonymous on 8/15/2008 11:39:00 AM

I'm beginning to think this kind of thing could be a regular feature: gullible (or just lazy) reporter writes some article on some housing-bust related topic which ends up being mostly free publicity for some hustler, who is treated reverently as an "expert." Earlier examples of the genre are here and here.

Today's embarrassment comes via reader Alan, who sent me this link to the San Francisco Chronicle:

Homeowners are flooding City Hall with so many requests to reduce their property values that the tax assessor said Wednesday his office may not be able to meet the demands.

So far, Assessor-Recorder Phil Ting's office has received about 1,000 requests for informal re-evaluations - three times the number filed last year. Friday is the deadline to request an informal property re-evaluation from the assessor.

"I'm worried that because we have such a huge influx we'll not be able to get back to everyone," Ting said. So far, San Francisco assessors have responded to informal requests from 285 property owners.

After having noted that the assessor's office is so deluged with requests it probably won't get to any more of them--and after noting that many people won't get a reduction because while home prices are dropping, they are still higher than the assessed values--we get to the obligatory "expert":

Due to the growing number of these requests, some people have started businesses to help property owners appeal for a lower valuation.

Joshua Carnes, vice president of operations for the Sacramento-based Prop8.org, said anyone who bought a home in the past few years should expect the assessed value of the property to decrease. The company is named after Proposition 8, the 1978 voter initiative that allowed home values to be reduced when there is a dip in market values.

"If you're a homeowner in California, you lost value on your property this year," Carnes said. "Unless you don't mind overpaying property taxes, there is no reason you should not file for a reduction."

My, but that dot-org name seems to imply that this is some kind of nonprofit organization, doesn't it?

Not hardly. Prop8.org is a for-profit little firm that wants to charge you to handle your re-evaluation requests for you. And you must not, under any circumstances, miss the picture of Joshua Carnes on this page (is that a zoot suit? A wedding tux? Do you Californians actually dress like that to leave the house on a normal day? Just askin'.) Nor do you want to miss the officer bios. Nor do you want to fail to ask yourself why a reporter thought a buncha guys who also run outfits called "Cashout Options" and "Equity Flips" and "Bailout Help" are really just kind of objective consumer advocates who have no self-interest in knowing what your property might currently appraise for.

Reporters and editors: I'm going to keep this up until it stops. So I really suggest you make it stop. If you don't bother to evaluate your sources before you publish, I will do it after you publish.

*Old farts who need help with "pwn3d" go here.

by PJ on 8/15/2008 10:20:00 AM

A WSJ survey found that a bunch of those faceless, nameless types known as economists think the Treasury will use one or both of its new-found abilities to prop up Fannie Mae and Freddie Mac:

On average, the 53 economists polled in the survey put the probability at 59% that the Treasury Department will have to step in to bail out Fannie or Freddie.

"Blank checks almost always get filled in and cashed," said Stuart Hoffman of PNC Financial Services Group.

The majority of respondents hope that it doesn't come to that. When asked how the government should handle the situation with Fannie Mae and Freddie Mac, 68% said the lenders should be pushed to raise capital privately and hope a recovering housing market will keep them from needing government money.

However, nearly one in three said the companies should be nationalized now, and then split into smaller companies when the housing market recovers.

Which makes me think that 16 of the 53 economists surveyed had the last name of Greenspan. Call it a hunch.

by PJ on 8/15/2008 09:32:00 AM

The Fed's industrial production numbers for July are out. I'm pretty much a housing guy, myself, but I'm told these numbers are important by a few economists I know (CR being one of them!). From Bloomberg:

Output at factories, mines and utilities rose 0.2 percent last month after a 0.4 percent gain in June ... Capacity utilization, which measures the proportion of plants in use, increased to 79.9 percent from 79.8 percent.

Demand for autos increased for a third month, reflecting a continued rebound from a strike at an auto-parts supplier. Gains elsewhere signal demand from overseas continued to boost orders even as U.S. consumer and business spending weaken...

Output was forecast to be unchanged according to the median estimate of 79 economists surveyed by Bloomberg News after a previously reported gain of 0.5 percent in June. Projections ranged from a decline of 0.5 percent to a gain of 0.4 percent.

I'll let you guys sort out why we're seeing overseas demand boost orders (ahem, dollar, anyone?). Also, this morning was the Empire State Manufacturing Survey, which found manufacturing gains during August for the first time in four months.

Stocks appear to be headed for a higher open today, but I think that's mostly due to falling oil prices (below $114 this morning) and growing concern that the rest of the world is finally catching our (the U.S.') cold. Which probably brings us right back to the dollar, doesn't it?

by PJ on 8/15/2008 09:04:00 AM

Downey Financial's latest monthly stats are out, and some interesting trends pop out. Deposit outflows, for one, and the company's decision to advertise to get deposits, for another:

Although, as previously reported, Downey experienced elevated levels of deposit withdrawals in July, deposit flows so far in August have stabilized. In fact, deposit balances have increased, recovering about 45% of the net deposit outflow that occurred in July. The bulk of the inflow is in certificates of deposit with 6 to 18 months duration. This increase was due, in part, to management's decision to reinstitute deposit advertising following a long period of not doing so.

Deposits declined by $507 million in July to $9.4 billion at month end, with the majority of the decline related to uninsured deposit amounts. Management believes this occurred as a result of depositor concern over deposit insurance coverage following the failure of a large California financial institution as well as publicity and speculation regarding Downey and the performance of its loan portfolio. [emphasis added]

Also, the first drop in NPAs relative to assets in at least a year:

Non-performing assets increased 3% during July, the lowest monthly increase this year. Due to an increase in total assets during July, the ratio of non-performing assets to assets declined from 15.50% at June 30, 2008, to 15.08%.

My own feeling here is that the July results are better than expected. Not that Downey's out of the woods, by any stretch...