by Calculated Risk on 8/28/2008 12:49:00 AM

From Bloomberg: Pakistan Sets Floor on Stock Prices to Stop Plunge

Pakistan set a floor for stock prices on the benchmark exchange, moving to halt a plunge that has wiped out $36.9 billion of market value since April.

Securities can trade within their daily limit of 5 percent ``but not below the floor-price level'' of yesterday's close ...

Ahhh ... stock prices that can only go up. That is a real PPT (Plunge Protection Team).

This is funny, but doomed.

by Calculated Risk on 8/27/2008 05:13:00 PM

From Freddie Mac: National Home-Value Drop Moderates in Second Quarter

Freddie Mac (NYSE: FRE) announced today that its Conventional Mortgage Home Price Index (CMHPI) Purchase-Only Series registered a modest 0.4 percent annualized decline in U.S. home values during the second quarter of 2008, following a downward revised 10.8 percent annualized drop in the first quarter. Over the four quarters ending with the second quarter of 2008, home sales prices fell an average of 6.0 percent in the CMHPI Purchase-Only Series – the largest annual fall in values over the 39-year history of the series.

"While U.S. home value indexes continued to decline, an encouraging sign has been the significant moderation in the rate of decline of the Purchase-Only series," said Frank Nothaft, Freddie Mac vice president and chief economist. "After falling sharply over the prior two quarters – more than a 10 percent annualized drop – home value depreciation slowed substantially to only a 0.4 percent annualized rate. While we expect to see further declines in average U.S. home values throughout this year and into 2009, we will be watching for signs of stabilization in indicators of real housing activity, such as a leveling off in home sales and for-sale inventories.

Click on graph for larger image in new window.

This graph shows the year-over-year change in the Conventional Mortgage Home Price Index (CMHPI) Purchase-Only Series vs. the quarterly change (annualized).

Guess what? There is a strong seasonal component to the series, and I see nothing encouraging about this "moderation" when seasonal factors are considered.

The headline could have read:

"Worst Second Quarter Ever for Freddie Mac CMHPI Purchase-Only House Price Series"

by Calculated Risk on 8/27/2008 03:56:00 PM

From the WSJ: Delinquencies, Losses Continue to Rise On Loans Backing Residential MBS

Delinquencies and losses on pools of loans backing U.S. residential mortgage-backed securities issued in 2006 and 2007 continued to weaken through the first half of the year, according to Moody's Investors Service. ... Deals backed by subprime, Alt-A and jumbo loans have all weakened compared with prior years. ... The agency is now reviewing for potential downgrade all jumbo transactions originated in 2006 and 2007.

Alt-A and Jumbo; the new subprime. Also the article describes the outlook for HELOC pools as "daunting".

by Calculated Risk on 8/27/2008 01:52:00 PM

Terry Pristin at the NY Times has an interesting article on apartment buildings in New York: Fear of Defaults After a Flurry of Apartment House Sales (hat tip Brian)

As we've discussed before, the CRE version of stated income loans involved lending on overly optimistic pro forma income projections (aka wishful thinking):

Most investors, like most lenders, thought that values would keep escalating, said the broker, who did not want his name published in order to protect his business relationships. But, he added, underwriting standards were very casual. “Back then, you could write down anything, and people would believe you,” he said.

And just like for residential, some CRE lenders made some bad choices:

“As the financiers got farther and farther away from New York, everything looked like Manhattan below 96th Street to them,” [Harold M. Shultz, a senior fellow at the Citizens Housing and Planning Council] said. “They all got caught up in the bubble mentality.”

Sounds like more defaults to me.

by Calculated Risk on 8/27/2008 12:50:00 PM

"People are saying the reason prices are falling are because of all of the foreclosures, but the foreclosures are happening because the prices are falling. They've got it backwards. The prices are falling because they're too freakin' high."
Chris Thornberg, Beacon Economics, Aug 27, 2008

The above quote is from a Voice of San Diego article by Kelly Bennett: Local Prices Down 30 Percent from Peak

The article notes that there has been an increase in sales recently, but this is probably a "false dawn":

The 10.5 percent [sales] increase in July compared to July 2007 was the first year-over-year increase in more than four years, according to DataQuick Information Systems.
...
Usually, an increase in sales means a market is recovering, and the bump up in sales has been touted as a potential turnaround for the local market.
...
But foreclosure sales counted for a large portion of that increase, leaving analysts expecting continued price declines.
...
"When you see sales begin to increase, that's often an indicator of a market turning," said Chris Thornberg, founding partner at Beacon Economics and former economics professor at the University of California, Los Angeles. "But this is a bit of a false dawn."

And prices are now falling for luxury homes too:

[E]ven luxury homes are now showing weakness. ... That "prestige homes" index found that in the second quarter this year, values on many such houses in San Diego dropped 2 percent from the first quarter and 7.8 percent from second quarter 2007. The average price among those homes has fallen to $2.02 million, from a peak of $2.19 million in the second quarter 2007.

No area is immune. The housing bust is now moving up the price chain.

by Calculated Risk on 8/27/2008 12:18:00 PM

From Bloomberg: Thrifts Posted $5.4 Billion Loss in Second Quarter

U.S. savings and loans posted a $5.4 billion loss in the second quarter as lenders set aside record reserves for loan losses amid the slump in the housing market, the [Treasury's Office of Thrift Supervision] said.

Provisions for bad loans reached $14 billion ...

The OTS list of ``problem thrifts'' increased to 17 from 12 at the end of the first quarter and accounted for 2.1 percent of all the OTS-supervised thrifts ...

The S&Ls have problems too.

by Calculated Risk on 8/27/2008 09:40:00 AM

From Reuters: FDIC says IndyMac failure costlier than expected

The Federal Deposit Insurance Corp said on Tuesday it now expects IndyMac's failure in July to cost its insurance fund $8.9 billion, compared with the previous expected range of $4 billion to $8 billion.
...
Diane Ellis, the FDIC's associate director of financial-risk management, said IndyMac's expected hit to the fund blossomed because analysts have had more time to value IndyMac's assets and have assigned some higher loss rates.

Also, some deposits that the FDIC originally thought were uninsured are actually insured, Ellis said.

This is quite an increase in the expected loss.

by Anonymous on 8/27/2008 08:29:00 AM

Dean Baker is highly annoyed by this line from Sheila Bair, as paraphrased by the New York Times:

The swelling tide of toxic home loans is proving to be even more worrisome than initially feared, Ms. Bair said.

I think I've become more or less impervious to the hoocoodanode line, given too much exposure to it. I'm actually rather more blown away by the following quote:

She is struggling to clean up the mess and forestall home foreclosures with a plan to ease loan terms for hard-pressed homeowners.

“It is going to be slog to work though this, but there is no easy way to do it,” Ms. Bair said about her plan during an interview in her office here. “We haven’t seen the trough of the credit cycle yet.”

People ask me all the time something like this: "So, well, you think you're so smart, what's your solution for this problem?" And I tell people all the time, "There is no 'solution' to this problem. That's why it sucks so bad. That's why you don't let problems like this develop in the first place."

I might even be willing to grant Bair an occasional indulgence in hoocoodanode if she'd just quit trying to pretend that she--or anyone else--can "work through this" in any meaningful way, "this" being the deflation of the housing bubble. I mean, one does what one can. I don't object to anyone making lemonade where the opportunity presents itself, nor do I fault anyone for taking whatever limited measures are possible to ease the pain for individual homeowners. But anyone who continues to pretend that "preventing foreclosure" is a "solution" to the problem here is lying to the public. Trying to "prevent" the results of a home-mortgage credit bubble isn't "solving" anything, it's keeping your finger in the dike and waiting for a miracle.

Besides the fact that Sheila Bair is still, as far as I know, the head of the FDIC, not the National Homeowners Association. Her concern for homeowners is nice and everything, but she's supposed to be regulating banks and thrifts. The FDIC needs to be worrying about "foreclosing" on some troubled banks, not pretending that troubled banks can avoid the consequences of a bubble by refusing to let mortgage loans fail.

by Anonymous on 8/27/2008 07:21:00 AM

It used to be, whenever I had no inspiration for a blog post at all, I could just go slumming over at one of the broker boards and find something for edification of my readers or just comic relief. These days, it seems, I just have to check my email.

Yesterday I was being asked to help write a hardship letter, which was certainly an understandable request since I have offered advice on that subject in the past and so, you might say, I asked for it. Today I am being asked to do somebody else's homework. I publish the following in its entirety with the exception of the name:

hi

i saw in your blog that you are a risk expert.

for university purpose i am supposed to calculate a value at risk of an option.

the optoin is a call option on 1000 shares for one year with strike price at 10$. the delta of this option is 1.5, meaning that if the share price goes up by 1bp the option by 1.5bp

daily volatilty is 12cents, the value at risk for 95% is supposed to be 419. how do i get this? oh it is delta normal

thank you

A____

Since I have examined my conscience and discovered that I have no scruples about subjecting people who ask me to do their story problems for them to a high degree of risk, I hereby invite the Calculated Risk commenting community to assist. Please explain to "A" here how to derive a VaR of 419. You may of course assume as many can openers--or as much convexity--as you need to. Remember that your answer could be going into A's frat house files, so please approach this with the appropriate degree of seriousness.

by Calculated Risk on 8/26/2008 08:27:00 PM

Another casual dining chain feels the pinch ...

From the WSJ: Olive Garden's Parent Warns on Profit

A surprise warning on earnings by Darden Restaurants Inc. suggests that sit-down restaurants will continue struggling through the fall after a dismal summer.
...
"The environment was weaker this quarter than it's been for a while," Darden Chief Executive Clarence Otis said in an interview. Asked how the overall industry will perform during the next few months, he said "We're not counting on it getting a whole lot better."

In coming months, restaurants are expected to close more locations, build fewer new ones, offer more low-priced promotions and tighten worker scheduling to contain labor costs ...
emphasis added

Just more evidence that the 2nd half recovery has been cancelled.