by Calculated Risk on 9/03/2008 01:32:00 PM

"We expect the second half of 2008 will be more challenging than the first half, as weak economic conditions and the consumer credit crunch continues."
Jim Farley, Ford group vice president of marketing and communications.

From the WSJ: Ford Posts 27% Drop In August Sales

U.S. auto sales continued their slide in August despite stepped-up incentives to buyers, with Ford Motor Co. posting a 27% drop from a year earlier as sport-utility-vehicle sales plunged 53%.

Ford also lowered its second-half North American production forecast and revised its overall industry forecast to the low end of its range.

BTW, Boston Fed President Rosengren spoke today on the "Implications of a Credit Crunch”. An excerpt:

It was hoped that banks with a more national footprint would be less susceptible to regional shocks and thus more able to lend during regional downturns. Unfortunately, many of the largest commercial and investment banks had a significant concentration of their assets in complex securities that have declined in value, had significant exposures to subprime mortgages or so-called “Alt A” mortgages that have declined in value, and also had exposure to construction and residential loans that have suffered from national rather than just regional declines in value.

In terms of securitization, the loss of confidence in complex financial instruments and their ratings has dried up the demand for all but the simplest and least-risky securitizations. So rather than serving as a shock absorber for banking problems, it seems that securitization has actually exacerbated the problem. Indeed, a wide variety of loans that were once widely securitized are now not available (e.g., subprime mortgages) or are only available from financial institutions at much higher costs (e.g., jumbo loans).

The auto industry has been hit hard by both the change in credit conditions and higher oil prices.

by Calculated Risk on 9/03/2008 12:51:00 PM

"Conditions in the mortgage and credit markets have not abated and, therefore, we need to respond aggressively by further reducing both operating costs and business risk."
ResCap Chairman and Chief Executive Officer Tom Marano

Press Release: GMAC Financial Services and ResCap Announce Further Streamlining of Mortgage Operation (hat tip Brian and Alain)

On Sept. 2, 2008, a plan was approved that included closing all 200 GMAC Mortgage retail offices, ceasing originations through the Homecomings wholesale broker channel, further curtailing business lending and international business activities, and right-sizing functional staff support. In addition, the company is evaluating strategic alternatives for the GMAC Home Services business and the non-core servicing business. These collective actions will reduce the ResCap workforce by approximately 5,000 employees, or 60 percent.
emphasis added

And the beat goes on ...

by Calculated Risk on 9/03/2008 11:46:00 AM

Related to the WaPo article this morning on BB&T, here are three key graphs concerning C&D loans (construction and development) based on the FDIC Q2 Quarterly Banking Profile:

Click on graph for larger image in new window.

The first graph shows the number of FDIC insured institutions with construction loans exceeding total capital.

Not all of these institutions will fail (most estimates of number of bank failures are in the 100 to 200 range over the next couple of years), and not all failures will be because of C&D loans, but this gives an idea of the number of institutions with excessive exposure to C&D loans.

The second graph shows the concentration of C&D loans by institution asset size.

This suggests that many of the bank failures from C&D losses will be in the $1 to $10 billion range. Integrity Bank of Alpharetta, Georgia (failed last week) was at the low end of this range. First National Bank of Nevada (failed a few weeks ago) had $3.4 billion in assets.

The third graph shows the noncurrent rate for C&D loans. The rate is rising quickly, although still below the level of the early '90s (related to overbuilding of CRE and the S&L crisis).

Put together, these graphs suggest many more bank failures as the C&D noncurrent rate continues to rise. Other banks will fail because of bad residential loans (like IndyMac), and some institutions from bad CRE loans, but most bank failures will probably be C&D related.

by Calculated Risk on 9/03/2008 09:01:00 AM

From the WaPo: BB& T Deal Eases Comstock's Debt (hat tip Don)

Comstock Homebuilding of Reston said yesterday it has reached a deal with lender BB&T to wipe $32.7 million worth of troubled development loans from its books as it struggles to rebound in an ailing housing market.

Under the deal, BB&T foreclosed on four of Comstock's properties in the Atlanta area yesterday. Two properties in Northern Virginia -- a condominium project in Manassas and a single-family home project in western Loudoun County -- are scheduled to go into foreclosure by Sept. 30, according to Comstock.

Delinquency rates are rising quickly on C&D (construction and development) loans, and many mid-size institutions (assets in the $1 billion to $10 billion range) have excessively high concentration of C&D loans. This is a serious problem and these C&D loan defaults will probably lead to many of the bank failures of the next couple of years.

BB&T will probably have significant losses on these loans as they try to dispose of these properties. I'll post some FDIC graphs on this issue later today.

by Calculated Risk on 9/03/2008 02:23:00 AM

Note: I'm back. I had to cut my hiking trip short due to a minor injury. I'm fine, no worries. My thanks to Paul Jackson and Lama for their guest posts. Best to all. CR

Construction spending declined in June for both residential and non-residential private construction.

From the Census Bureau: July 2008 Construction at $1,084.4 Billion Annual Rate

Residential construction was at a seasonally adjusted annual rate of $357.8 billion in July, 2.3 percent below the revised June estimate of $366.1 billion.

Nonresidential construction was at a seasonally adjusted annual rate of $416.8 billion in July, 0.7 percent below the revised June estimate of $419.8 billion.

Click on graph for larger image in new window.

This graph shows private residential and nonresidential construction spending since 1993.

It's still too early to call the peak for nonresidential construction spending, but there is substantial evidence of a looming slowdown - less lending for new projects, less work for architects - so June 2008 might have been the peak for this nonresidential construction spending cycle.

by Calculated Risk on 9/02/2008 11:00:00 PM

Here is a cartoon on housing from Eric G. Lewis, a freelance cartoonist living in Orange County, CA. This is from 2008:


Click on cartoon for larger image in new window.

by PJ on 9/02/2008 08:34:00 PM

Looks like the good insurer/bad insurer model is pushing ahead, per Bloomberg:

Ambac Financial Group Inc., the world's second-biggest bond insurer, received approval from Wisconsin regulators to begin offering municipal bond insurance through a newly created insurer called Connie Lee.

Ambac rose as much as 15 percent in late trading as Wisconsin regulators, which have jurisdiction over the New York- based company, approved a plan to move $850 million out of Ambac Assurance Corp. into the new business, according to a statement today. Ambac is seeking to obtain an AAA credit rating from Moody's Investors Service and Standard & Poor's for Connie Lee.

Essentially, as I understand it, Ambac will move all of its municipal business and employees to Connie Lee, and create Ambac v2.0. The toxic RMBS/CDO stuff will stay back with Ambac; what isn't being discussed by the company (or by regulators) is whether it intends to force counterparties into commutation of its CDS contracts on RMBS/CDO issues once the cloning process is complete.

The gutted Ambac will be in an interesting position should this go through; will it be well capitalized enough to pay on its claims? Will it focus on putting contracts back for fraud and misrepresentation? Or will it simply tell policyholders they'll get a reduced commutation or get nothing on the guarantee? That'd be a cram-down of an entirely different sort.

by PJ on 9/02/2008 03:20:00 PM

From Fitch Ratings:

Fitch Ratings' prime and subprime U.S. auto asset-backed security (ABS) performance indexes produced higher delinquency and annualized net losses (ANL) in July...

In July, ANL on prime auto ABS hit the highest level for the year at 1.42%, increasing 15% over June's level. ANL in July were 94% higher than in July 2007. The last time ANL were at this level was in late 2003/early 2004 ...

In the subprime sector, ANL were at 6.56% in July, a 16.5% increase over June, and 45% above a year earlier. Subprime delinquencies rose 11% in July to 3.63%. Delinquencies were 30% higher in July versus the same period in 2007.

While the wholesale vehicle market did show signs of stabilization in July, Fitch remains unconvinced that the market will improve structurally in the short term. The wholesale vehicle market remains soft with considerable weakness in the truck and sports utility segments, along with lower recovery rates in the luxury vehicle space ....

Something that's been discussed in a few closed circles, but not really brought to light, is how little the ABS market is moving these days. A look at the publicly-available stats from Asset-Backed Alert gives a great indication of where the market is headed.

And with prime ABS losses mounting for autos, that sound you hear is likely a few more economists jumping off the fence on their recession calls.

by PJ on 9/02/2008 01:53:00 PM

Ever since the FHASecure program was first rolled out last year, it's been a moving target political hot potato, with Administration types changing the definition of the program to tout "success," and still others questioning why the goalposts had to be moved in order for the kicker to hit a field goal. (I'm not going to spend this week linking gratuitously to HW, but for those needing a background, you might want to read this.)

Today, we get an update on the heels of a Friday press statement from U.S. Housing and Urban Development Secretary Steve Preston, who touted that FHASecure had helped 325,000 American families refinance into affordable mortgages.

Only problem is that most weren't troubled, and nearly none were severely delinquent -- which, you'll recall, was the stated purpose of the program when it was first announced. Via Forbes:

Since late September of last year, just 1.2%, or 3,911, of the loans refinanced by the FHA, which is part of Housing and Urban Development (HUD), were made to borrowers in default, FHA data shows. This is far below what the government had forecast. The reason: Despite the hoopla about FHA helping borrowers in default, in reality, they only opened the window a crack.

So while the FHA refinanced 324,184 loans so far this year, that doesn’t necessarily mean that the program stopped a wave of would-be foreclosures.

IMF's Guy Cecala pretty much echoes what we've been saying for months now: that FHASecure was nothing but a PR stunt.

“The deal is that true FHASecure delinquent loan refinance activity has been so low that HUD decided to call all of its refinance business FHASecure,” says Cecala. “In theory, the program could be expanded to accommodate more delinquent borrowers without loosening underwriting or taking on any more risk, but HUD and the Bush Administration has been reluctant to do so."

“FHASecure was a PR-driven program created to show that the Bush Administration wasn’t ignoring the mortgage crisis," says Cecala.

by PJ on 9/02/2008 11:39:00 AM

(Note: Don't miss Tanta's post on Frannie, well worth your time to read)

The OC Register's Andrew Galvin has an interesting look at a retail concept that is a stunning failure now, but seemed like a good idea at the time:

The vast sea of empty parking spaces at the South Coast Home Furnishings Centre tells a story about our local economy better than any graph or chart.

The Costa Mesa retail center, envisioned as a Mecca for people looking to upgrade home interiors, was conceived and built during the historic run-up in housing prices a few years back. It opened in 2007, just as the housing market was dropping into freefall.

Today, the center has the feel of a ghost town. Stores sit empty, while shoppers are few and far between. The food court has a single tenant. The center's owner is in foreclosure after defaulting on an $84 million mortgage.

Yet some merchants are sticking it out, convinced that better days are ahead.

"We'll get through it," said Chris Mulhall, whose store, Visions in Contemporary Living, sells what he calls "high-end contemporary" furniture. "It's just going to take time and perseverance."

By time and perseverance, Mulhall means you've got to have lots of cash to burn, with no guarantee you'll see any of it come back; such high-end retail might have a shot in Newport Beach, but Costa Mesa? I can think of much more fun ways to lose money, personally, and most involve a trip to Las Vegas.

It's a little early to pull out a quote of the week, but here's a candidate:

"When you think about all those mortgage guys driving around in their Lamborghinis and spending money hand over fist, driving up the local economy – what everybody's got to understand is that the weirdness was when those guys were making that kind of money, not what's happening now," said economist Chris Thornberg of Beacon Economics.

I interviewed Thornberg when he was with the UCLA Andersen forecast, and he was always among the most bearish of the group. He's also been among the most correct, even if he's also the most blunt.

And, for those yearning for a little rock-blogging, this story conjures up a great little rock-and-roll song from the band OK GO, called A Good Idea at the Time. Rock on.