by Calculated Risk on 9/29/2008 07:09:00 PM

The following analysis is based on data from the Census Bureau (for 2007) and First American CoreLogic at the end of 2006. Although some of this data is a little old, it provides us with an estimate of the number of Americans household underwater (with negative equity).

According to the Census Bureau's 2007 American Community Survey there were 51,615,003 households with a mortgage in the U.S. at the end of 2007.

Click on chart for larger image in new window.

For prices, using Case-Shiller, by the end of 2006 U.S. home prices had fallen just over 1% from the peak, but a number of homeowners were already underwater because they bought their homes with more than 100% LTV financing.

By the end of 2007, prices had fallen 10% from the peak, and 8.2 million homeowners owed more on their mortgages than their homes were worth.

As of Q2 2008, prices had fallen almost 18% from the peak, and for the graph, I estimated that prices will decline about 22.5% from the peak by the end of 2008. (this seems conservative). This means about 15.4 million households will be underwater or already foreclosed on by the end of 2008.

The last two categories are based on various estimates for the price bottom (peak-to-trough). The 30% decline was suggested by Paul Krugman in December 2007: What it takes). The 35% decline is close to the "severe recession" case presented by JPMorgan last week.

Not every homeowner with negative equity will default, in fact many of these homeowners will only be underwater by a few percent. But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders.

I think this is probably high (probably fewer than 50% will default), but this does give a general idea of the potential losses. If we use one third of homeowners, the mortgage losses with a 35% peak-to-trough price decline would be about $840 billion.

by Calculated Risk on 9/29/2008 05:52:00 PM

From Bloomberg: Paulson to Work Quickly With Congress to Revive Plan (hat tip Ministry of Truth)

U.S. Treasury Secretary Henry Paulson said he will work with Congress to salvage a $700 billion rescue plan ...

``We need to work as quickly as possible; we need to get something done,'' Paulson told reporters at the White House after meeting with President George W. Bush. ``We believe that our plan, and the plan that we developed with congressional leaders and worked so hard, is a plan that works. And we need a plan that works.''
...
House Majority Leader Steny Hoyer said the House may take up the measure again as early as this week, possibly after Senate action.

I've heard that there are enough votes in the Senate to pass the bill (probably on Wednesday night), and Paulson is probably hoping that passage in the Senate will put additional pressure on the House.

by Calculated Risk on 9/29/2008 05:27:00 PM

Several years ago I predicted that the National Debt would reach $10 trillion by the time President Bush left office. For a short period (thanks to the housing bubble), it looked like the deficit would be less than I projected.

Back in March, with the housing bust starting to hit government revenues, it started looking like the $10 trillion projection had a chance.

Click on graph for larger image in new window.

This graph shows the daily National Debt from TreasuryDirect). Note that the y-axis doesn't start at zero to better show the change.

Here is an update: The National debt is $9.889 trillion as of Sept 26, 2008. That leaves the debt just over $110 billion short of my projection with almost 4 months to go.

Over the last month, from August 26th to Sept 26th, the National Debt has increased $254 billion as the recession has started to significantly impact government revenues. It looks like $10 trillion will be passed very soon.

Also, the National Debt has increased a stunning $895 billion over the last 12 months (from Sept 26, 2007 to Sept 26, 2008). Shocking.

by Calculated Risk on 9/29/2008 03:40:00 PM

Dow off 6%.

S&P 500 off 7%.

NASDAQ off 7%.

With the failure of the bailout in the House, the question is now what?

There is the possibility of some arm twisting and another vote tomorrow. Another possibility is that the bill will be revised in some way to garner a few more votes.

In the short run, the government is back to acting on a case by case basis.

by Calculated Risk on 9/29/2008 01:38:00 PM

Yes 205 No 228 ...
Dow off 500 points

The vote failed.

by Calculated Risk on 9/29/2008 01:01:00 PM

Here is the debate on C-SPAN.

Voting now ... will take about 15 minutes (so about 1:45 PM ET)

by Calculated Risk on 9/29/2008 10:11:00 AM

From the Fed:

In response to continued strains in short-term funding markets, central banks today are announcing further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity. Central banks will continue to work together closely and are prepared to take appropriate steps as needed to address funding pressures.

Meanwhile the TED Spread from Bloomberg is at a record 3.48! Ouch.

by Calculated Risk on 9/29/2008 09:46:00 AM

From MarketWatch: Mitsubishi UFJ buys 21% of Morgan Stanley for $9 billion

Mitsubishi UFJ Financial Group said Monday that they had reached a deal for the Japanese bank to buy a 21% stake in Morgan Stanley for $9 billion.

At least this is private capital ...

by Calculated Risk on 9/29/2008 08:36:00 AM

From the BEA: Personal Income and Outlays

Real DPI -- DPI adjusted to remove price changes -- decreased 0.9 percent in August, compared with a decrease of 1.5 percent in July.

Real PCE -- PCE adjusted to remove price changes -- increased less than 0.1 percent in August, in contrast to a decrease of 0.5 percent in July.

This report is strong evidence that the U.S. economy is in recession and that the change in Personal Consumption Expenditures (PCE) will be negative for Q3.

Although these numbers may be revised, or perhaps September was surprisingly strong (unlikely), based on the two month method, the change in real PCE in Q3 will be about minus 2.4%.

With PCE accounting for almost 71% of GDP, and real PCE declining in Q3, along with declining investment, the change in GDP for Q3 should be negative.

by Calculated Risk on 9/29/2008 08:13:00 AM

From the FDIC: Citigroup Inc. to Acquire Banking Operations of Wachovia

Citigroup Inc. will acquire the banking operations of Wachovia Corporation; Charlotte, North Carolina, in a transaction facilitated by the Federal Deposit Insurance Corporation and concurred with by the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.

"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits." said FDIC Chairman Sheila C. Bair. "There will be no interruption in services and bank customers should expect business as usual."

Citigroup Inc. will acquire the bulk of Wachovia's assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

In consultation with the President, the Secretary of the Treasury on the recommendation of the Federal Reserve and FDIC determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability.

"On the whole, the commercial banking system in the United States remains well capitalized. This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury," Bair said. "This action was necessary to maintain confidence in the banking industry given current financial market conditions."
emphasis added