by Calculated Risk on 8/20/2008 05:12:00 PM

When IndyMac failed, a frequent question was: Why is the FDIC paying 50% to uninsured depositors when the taxpayers are going to lose billions?

From the FDIC on IndyMac:

Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion.

and yet (from the same release):

The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

The answer (hat tip Rick) is that the FDIC and the uninsured depositors are sort of partners after the bank fails.

From the FDIC:

When an insured institution fails, creditors of the institution have a set priority of claims, similar to priority in bankruptcies. There are two classes of claimants, secured and unsecured. Secured claims are paid in full up to the value of the pledged collateral (principal and interest to date of closure) but no post-closing investment losses are paid. Unsecured claimants are paid in the following order: administrative claims, deposit liabilities, general creditors, subordinated obligations and finally, shareholders. In a typical failure the FDIC is appointed receiver of the bank and provides coverage for insured depositors. After paying or covering insured depositors, the FDIC as insurer is subrogated for the depositors' claims and receives dividends from the proceeds of the sale of assets along with uninsured depositors. Over the closing weekend the FDIC either sells the whole bank, parts of the bank or decides to pay off the insured depositors and liquidate the assets of the bank.
emphasis added

Although there are complications, especially if money is owed the Federal Home Loan Bank (FHLB), are is a simple example of how I think it works:

Say a bank has $18 billion in insured deposits and $2 billion in uninsured deposits. When the bank fails, the FDIC pays off the insured depositors and starts to liquidate the assets of the bank. At this point, I'd think of the FDIC and the uninsured depositors as partners in the liquidation. The FDIC put up 90%, the depositors 10%.

For every billion collected from the liquidation of assets, the FDIC would receive $900 million in dividends, and the uninsured depositors $100 million. If the FDIC was confident that the assets would bring in at least $10 billion, they could pay an advance dividend to the uninsured depositors of 50%.

There are many complications, but I think this is generally how this process works.

by Calculated Risk on 8/20/2008 03:59:00 PM

Fannie and Freddie were the story of the day. Here are the most recent quotes:

FNM 4.47 off 1.54 (25.62%)

FRE 3.23 off 0.94 (22.54%)

From Bloomberg: Fannie, Freddie Slump on Concern Bailout Is Likely

Fannie Mae and Freddie Mac tumbled in New York trading to the lowest levels since at least 1990 as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders.
...
Freddie paid its highest yields over U.S. Treasuries on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.

Fannie and Freddie have $223 billion of bonds due by the end of the quarter and their success in rolling over that debt may determine whether they can avoid a federal bailout. Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion ...

It seems like market participants are trying to force Paulson's hand.

by Calculated Risk on 8/20/2008 02:31:00 PM

From the American Institute of Architects: Architecture Billings Index Continues in Negative Territory

Click on graph for larger image in new window.

Despite having its highest score since January, the Architecture Billings Index (ABI) continues to point to difficult conditions for the nonresidential construction market. There have been six consecutive months with negative scores, indicating that business levels at U.S architecture firms continue to worsen. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the July ABI rating was 46.8, up slightly from the 46.1 mark in June (any score above 50 indicates an increase in billings). The inquiries for new projects score was 54.6.

“Financing for new projects continues to be a problem,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Many projects are being reconsidered due to construction cost increases. And while there are a good number of projects still in the queue, owners are taking longer to proceed to the next phase of the design process.”
emphasis added

The key here is that the index fell off a cliff in early 2008, and that there is "an approximate nine to twelve month lag time between architecture billings and construction spending". We should expect weaker non-residential structure investment in the second half of 2008 and throughout 2009.

by Calculated Risk on 8/20/2008 02:03:00 PM

From the FDIC: Loan Modification Program for Distressed Indymac Mortgage Loans. A couple of excerpts:

What loans are eligible?
The streamlined loan modifications will be available for most borrowers who have a first mortgage owned or securitized and serviced by IndyMac Federal where the borrower is seriously delinquent or in default. IndyMac Federal also will seek to work with others who are unable to pay their mortgages due to payment resets or changes in the borrowers’ repayment capacities. This streamlined approach applies only to mortgages for the borrower’s primary residence. As with all modifications, borrowers will have to demonstrate their financial hardship by documenting their income.
...
What modification options will be available to borrowers?
Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance.

This seems to provide an incentive for IndyMac borrowers to stop making their mortgage payments until they are "seriously delinquent or in default". Then the borrower - especially Alt-A borrowers who stated their income originally - would apply for a loan modification based on their actual income. The borrower could then receive an interest rate reduction and principal forbearance.

Note: I didn't see any restriction on borrowers that overstated their income originally.

by Calculated Risk on 8/20/2008 12:55:00 PM

From CEP News: U.S. Commercial Real Estate Prices Down for Fourth Straight Month, Moody's Says (hat tip Michael)

Commercial real estate prices continued falling in June, according to the Moody's/REAL Commercial Property Price Indices (CPPI), which recorded a 3.3% monthly decline ... The CPPI now stands 11.8% below its peak in October 2007.
...
The CPPI is based on the repeat sales of the same properties across the U.S. ...

Next up, a decline in new CRE investment.

by Calculated Risk on 8/20/2008 10:41:00 AM

The MBA Purchase Index wasn't useful during 2007 when so many lenders were going out of business. The primary reason was the MBA surveyed lenders that accounted for about half the volume of applications, and most of the failed lenders were not included in the survey. So, even though the housing market was in free fall, the surviving lenders actually saw an uptick in applications - distorting the Purchase Index.

At that same time many borrowers started filing multiple applications too, also distorting the survey results.

However it now appears the MBA Purchase Index might be useful again.

The MBA reports that the Purchase Index decreased slightly to 314 this week. The four week moving average (removes the weekly noise) declined to 314, and is now at the lowest level since 2002. Because of the changes to the index, we can't compare directly to 2002, but clearly the index is weak.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average.

Although we can't compare directly to earlier periods because of the changes in the index, this does suggest that sales of homes are continuing to decline.

by Calculated Risk on 8/20/2008 09:30:00 AM

This WSJ article has some interesting stats and comments: Wachovia Unloads Troubled Loans

Over the next five years, U.S. banks could write off as bad debt between $65 billion and $165 billion loans tied to residential construction and land assets, according to research firm Zelman & Associates.

The article also has data on delinquency rates:

Foresight Analytics estimates that land- and construction-loan delinquencies reached 8% in the second quarter for commercial banks, up from 7.1% in the first quarter and 2.3% in the year-earlier period.

The confessional will be busy.

by Calculated Risk on 8/19/2008 08:41:00 PM

Here are a couple of articles on apartments (hat tip Les):

From Tammy Joyner at the The Atlanta Journal-Constitution: As more share space, apartments take a hit

In these tough economic times, some metro Atlantans are bunking with family and friends, doubling up in rental apartments, homes or condos.
...
The anemic housing market should be a boost to Atlanta’s apartment market. But the emerging shift in living arrangements is creating an unusual set of challenges for the industry.

Leasing agents are having to contend more with the “shadow market,” an industry term that refers to the glut of unsold homes, condos and townhomes that have become rental property.

And from Kerry Fehr-Snyder at The Arizona Republic: Apartments offering freebies, other deals

Renters can thank the struggling real-estate market and its deflated housing prices, increased foreclosure rates and depressed rents on single-family homes, condominiums and apartments. Add to that the condominium-conversion flop, which has led to condos reverting to rental apartments.
...
With a glut of cheap rental homes on the market, apartments are facing more competition than ever and many are sitting with empty units as vacancy rates soar.

That has prompted 68 percent of apartment landlords to offer concessions worth several months of rent, [Pete TeKampke, vice president of investments for Marcus & Millichap] said.
...
During the Valleywide condo craze, 30,616 apartment units were converted or sold to investors who planned to convert them to condos, TeKampke said. By the middle of last year, 18,000 units had reverted to apartment rental units and many investors had scrapped their conversion projects.

Even though the homeownership rate has fallen sharply, the rental vacancy rate is still at 10.0%, just below the all time record of 10.4% in 2004.

A combination of people doubling up (happens in every recession), condo reversions, more apartment construction (the lone bright spot for housing starts), and some homeowners renting their homes instead of selling, has kept the rental vacancy rate high even while the homeownership rate has fallen.

by Calculated Risk on 8/19/2008 04:25:00 PM

From DataQuick: Bay Area home sales climb above last year; median price falls hard

Bay Area home sales eked out their first year-over- year gain since early 2005 last month as buyers responded to price cuts and snapped up more inland foreclosures. The median sales price dove to a 53- month low, a real estate information service reported.

A total of 7,586 new and resale houses and condos sold across the nine- county Bay Area in July. That was up 5.7 percent from 7,178 in June and up 2.2 percent from 7,423 in July 2007, according to San Diego-based MDA DataQuick.

July sales were the highest for any month since June 2007 and marked the first annual sales gain for any month since January 2005. However, last month's sales still fell 22 percent short of the average July sales total since 1988, when MDA DataQuick's statistics begin, and were the second- lowest for a July since 1995.

Sales of distressed properties played a major role in most areas logging annual sales gains last month.

Foreclosure resales -- homes sold in July that had been foreclosed on in the prior 12 months -- made up 33 percent of all resales. That was up from 29.9 percent in June and 4.2 percent in July 2007. Foreclosure resales ranged from 4.6 percent of the resale market in San Francisco to 65.9 percent in Solano County.
...
"So much of today's market is driven by distress. Unless interpreted in that context, the stats give a rather distorted view of the overall market. We know one-third of the Bay Area's resales in July were homes fresh off foreclosure. Who knows how many more involved a desperate seller and a lender who accepted a short sale," said John Walsh, MDA DataQuick president.
...
[T]he Bay Area's median sales price down to $470,000 in July. That was 3.1 percent lower than $485,000 in June this year and 29.3 percent lower than the peak $665,000 median reached in July and June of 2007.

The median has not been lower than July's since March 2005, when it was $469,500.
emphasis added

The median price is being distorted by the mix of homes being sold. Since most of the foreclosures have been at the low end, and the foreclosure resale market makes up 33% of all sales, the median price has fallen sharply. A better measure of price is a repeat sales index like Case-Shiller.

by Calculated Risk on 8/19/2008 04:09:00 PM

Click on graph for larger image in new window.

The CMBX is a CMBS (Commercial Mortgage-Backed Securities) credit default index just like the ABX - except up is down for the CMBX indices. The CMBX is quoted as spreads, whereas ABX is quoted as bond prices. When the spreads increase - chart going up - the bond prices are going down.

Most of the CMBX indices are setting new record lows again.

This graph is the CMBX-NA-BB-4 close today.