by Calculated Risk on 10/23/2008 06:10:00 PM

I've received numerous emails concerning Greenspan's testimony today. Greenspan has been criticized for keeping rates too low (see CNN: Culprits of the Collapse), however his far larger mistake was opposing oversight when many people were pointing out the extremely lax lending standards.

So I was happy today that the Q&A focused on this issue ... from the WSJ: Greenspan Admits Some Mistakes Amid Grilling by House Lawmakers

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief," according to Mr. Greenspan.

The panel chairman, Henry Waxman (D., Calif.) criticized Mr. Greenspan's approach to mortgage regulation while he was Fed chairman. The Fed "had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market," Waxman said, but Mr. Greenspan "rejected pleas that he intervene."
...
[W]hen Mr. Waxman pressed "were you wrong" about the benefits of deregulation, Mr. Greenspan responded, "partially." The "flaw" in the assumptions he had over four decades, Mr. Greenspan said, was that lending institutions themselves were best able to protect the interest of their shareholders.

Greenspan's comments on the economy are also interesting:

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Mr. Greenspan said in the text of prepared testimony to the U.S. House Government Oversight and Reform Committee.

That, in turn, "implies a marked retrenchment of consumer spending as households try to divert an increasing part of their incomes to replenish depleted assets, not only in their 401Ks but in the value of their homes as well," Mr. Greenspan said.

While Mr. Greenspan assured lawmakers that "this crisis will pass" and that the U.S. will end up with a "far sounder financial system," he warned that it won't come quickly.

Mr. Greenspan said a "necessary condition for this crisis to end is a stabilization of home prices in the U.S."

"At a minimum, stabilization of home prices is still many months in the future," he said.

Greenspan is now saying what many of us were warning about several years ago.

by Calculated Risk on 10/23/2008 05:10:00 PM

DataQuick reports that the new California law that took effect in early September significantly reduced the number of NODs in September. The new law requires lenders to make contact with borrowers at least 30 days before filing a Notice of Default, and the reduction in NODs is probably temporary. Note: according to RealtyTrac, California accounts for about one-third of the nation’s foreclosure activity.

Click on map for larger image.

This graphs shows the NODs by year in California according to DataQuick. NODs for 2008 were estimated with Q4 at the same pace as Q3.

In the early to mid-'90s there was a huge surge in foreclosure activity in California (California had a significant housing correction and recession in the early '90s). That mid-'90s spike in NODs looks almost insignificant now!

Here is the DataQuick report: California mortgage default filings drop amid procedural change

The number of mortgage default notices filed against California homeowners fell last quarter for the first time in three years as a change in the state's formal foreclosure process took effect. If that procedural change hadn't kicked in during early September, indications are that third-quarter default filings would have been about the same as the record number filed in this year's second quarter ...

Mortgage servicers recorded 94,240 "notices of default" on homes during the July-through-September period. That was down 22.5 percent from a revised record of 121,673 in this year's second quarter, and up 29.9 percent from 72,571 in third-quarter 2007, according to MDA DataQuick. The San Diego-based firm's default statistics begin in 1992.

In September the number dropped to 14,995 filings as a new state law took effect early that month. It requires that in many instances lenders must try to contact homeowners delinquent on their mortgage payments, then wait 30 days before filing a default notice.
...
During the first week of September, before the law took effect, roughly 2,000 default notices were filed each business day in California. In the week after the law kicked in, average daily filings plunged to less than 100, then went back up to around 500 daily the final week of September.

"It's unclear just how much foreclosure activity will be time-shifted into future months. We'll know more when we have fourth-quarter numbers. What's interesting is that the surge in activity certainly did level off during the second and third quarters. A lot of the market's distress is working its way through the system and the spectacular jumps in activity may be behind us. Or it may be that those processing the default paperwork are just maxed out," said John Walsh, DataQuick president.

by Calculated Risk on 10/23/2008 02:56:00 PM

From MarketWatch: European credit spreads jump to record highs

Gauges that track the risk of European and Asian corporate defaults spiked to record levels Thursday as the outlook for the global economy dimmed and emerging markets came under increased strain.
Credit-default swap indexes compiled by data provider Markit surged through previous record wide levels "amid pessimism over the economic outlook," said Markit vice president Gavan Nolan in a report.

The yield on 3 month treasuries: 0.94%, down slightly from 1.01% (slightly worse)

A good sign would be if the daily volatility subsides, and the yield moves up closer to the Fed funds rate, or about 1.25%. Of course the Fed is expected to lower rates next week by anywhere from 25 bps to even 75 bps - so this might be as good as it gets for the 3 month treasury.

The TED spread: 2.58 up slightly from 2.50 yesterday (slightly worse)

The two year swap spread from Bloomberg: 117.00 up from 107.25 (slightly worse)

Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. No new announcements today, but this will take some time. No Progress.

The A2P2 spread is 4.6 Wednesday, up from 4.45 for Tuesday. Worse.

During a recession, this spread usually increases because the risk of default for lower quality paper increases. However the recent values (over 400 bps) are far in excess of normal. If the credit crisis eases, I'd expect a significant decline in this spread.

Industry contacts. I spoke with an industry contact this morning, and they still cannot obtain a loan for an acquisition. No improvement yet.

Another disappointing day with no progress. Most indicators are slightly worse.

by Calculated Risk on 10/23/2008 02:20:00 PM

Here is the Philadelphia Fed state coincident index release for September.

The indexes increased in 15 states for the month, decreased in 28, and were unchanged in the remaining seven (a one-month diffusion index of -26).

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Most states are in recession, although a portion of the central U.S. is still growing (from Texas up to Montana).

This is what a recession looks like based on the Philly Fed states indexes.

This is a graph of the monthly Philly Fed data of the number of states with one month increasing activity.

Note: the Philly Fed calls some states unchanged with minor changes.

Most of the U.S. was has been in recession since late last year based on this indicator.

by Anonymous on 10/23/2008 01:30:00 PM

I wrote a snotty post at the end of August after Sheila Bair's plan for "affordability modifications" of the former IndyMac loans was announced, the burden of snot wisdom of which was my prediction that Bair was going to discover that it's a lot harder than she thinks to get successful mortgage modifications done on a wide scale in a very short period of time. However, I did express the hope that the Bair plan would prove remarkably successful and indicated my willingness to eat my words should it prove necessary.

Looks like I'll have to stick to my usual dry toast and bananas after all. As Housing Wire reports:

In testimony Thursday on Capitol Hill, Federal Deposit Insurance Corp. chairman Sheila Bair provided the first public update on the FDIC’s loan modification program put into place at IndyMac Federal Bank since it was introduced roughly two months ago. The agency took over IndyMac in July, and announced the loan modification program on Aug. 20; Bair has said that FDIC analysts estimated that 40,000 or so of the 60,000 mortgages more than 60 days in arrears at IndyMac would qualify for a loan modification under the program. . . .

“Through this week, IndyMac Federal has mailed more than 15,000 loan modification proposals to borrowers, and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures,” she said. “While it is still early in our implementation of the program, over 3,500 borrowers have accepted the offers and many more are being processed.”

Accepting the FDIC’s offer involves signing a modification agreement and mailing in a check for the new payment amount, along with information needed to verify income. It’s unclear how many of the 3,500 that have accepted the offer will ultimately see their loans modified based on verification of their income. Bair did not comment further on the specifics of the modification program in her remarks to the Senate on Thursday.

So, in two months, just under 40% of borrowers estimated to be eligible have received written mod offers, and of those, just over 20% have responded. We still don't know how many actual modifications that will be, since income verification is still pending on the accepted offers. Nor do we know how many more borrowers have become "eligible" (i.e., 60 days delinquent) since the August estimate.

Certainly 3,500 modifications successfully completed in two months is better than nothing. Then again, I don't think IndyMac's modification rate prior to the FDIC takeover was exactly "nothing," either. Bair doesn't address that, so we still don't know if the FDIC's "expedited" approach has really been measurably better than what IndyMac was already doing. At best, it's probably only marginally better, which wouldn't be so much of a problem if Bair hadn't spent so much time earlier in the year scoring cheap rhetorical points about uncooperative servicers not doing enough to help. In any event, the Bair Plan doesn't seem likely to bring the mortgage crisis to a screeching halt by year-end.

And do note that Bair herself, in her testimony, does not trot out the fashionable line that the delays are all due to securitization rules and red tape:

“Initially, the program was applied only to mortgages either owned by IndyMac Federal or serviced under IndyMac Federal’s pre-existing securitization agreements, which provided sufficient flexibility,” she said in prepared remarks to the Senate Committee on Banking, Housing and Urban Affairs. “However, with their agreement, we are now applying the program to many delinquent loans owned by Freddie Mac, Fannie Mae, and other investors.”

That suggests to me it isn't the fact that the loans are securitized that is the major problem. It also suggests that the program is moving out of subprime and well into prime territory in order to find borrowers who can and want to arrive at a 38% mortgage-payment-to-income ratio. I guess that's progress; if you apply the program to borrowers who are, as a class, more likely to be able to afford their mortgages anyway, you do get more successful modifications. But something tells me that's not quite what we all had in mind.

On a personal note: I was in the hospital earlier this week, and I'll be in and out for treatment on an out-patient basis tomorrow and early next week. It's chemo again, unfortunately. Even though I did leave the hospital with better pain pills than I had (yay!), I have no idea when I'll be able to post again. I suspect that if you keep your expectations at or below zero for the next week or so, you're unlikely to be disappointed. And now it's nap time . . .

by Calculated Risk on 10/23/2008 11:56:00 AM

Click image for video. Roubini Sees Crisis Worsening, Hurting Emerging Markets (Source: Bloomberg) This is a 47 minute talk (for those with the time). Note: if clicking on the photo doesn't work, check out the Bloomberg site.

From Bloomberg: Roubini Says `Panic' May Force Market Shutdown

Hundreds of hedge funds will fail and policy makers may need to shut financial markets for a week or more as the crisis forces investors to dump assets, New York University Professor Nouriel Roubini said.

``We've reached a situation of sheer panic,'' Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. ``There will be massive dumping of assets'' and ``hundreds of hedge funds are going to go bust,'' he said.
...
``Systemic risk has become bigger and bigger,'' Roubini said at the Hedge 2008 conference. ``We're seeing the beginning of a run on a big chunk of the hedge funds,'' and ``don't be surprised if policy makers need to close down markets for a week or two in coming days,'' he said.

by Calculated Risk on 10/23/2008 09:50:00 AM

Update: HousingWire has much more: Foreclosures Stalled by Local Legislation in September

“Much of the 12 percent decrease in September can be attributed to changes in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures,” said James J. Saccacio, chief executive officer of RealtyTrac.

“Most significantly, SB 1137 in California took effect in early September and requires lenders to make contact with borrowers at least 30 days before filing a Notice of Default. In September we saw California NODs drop 51 percent from the previous month, and that drop had a significant impact on the national numbers given that California accounts for close to one-third of the nation’s foreclosure activity each month.”

From Bloomberg: Foreclosure Filings Rose 71% in Third Quarter as Prices Fell

A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on in the quarter, the most since records began in January 2005, [RealtyTrac] said in a statement today. Filings rose 3 percent from the second quarter and fell 12 percent in September from August as state laws created to keep people in homes slowed the pace of defaults.

This is a record - but RealtyTrac has only been tracking foreclosure data since 2005. I prefer to use the California numbers from DataQuick to follow foreclosure activity because they have a longer data series. DataQuick will probably release data for Q3 any day now.

by Calculated Risk on 10/23/2008 09:34:00 AM

From the Dept of Labor:

In the week ending Oct. 18, the advance figure for seasonally adjusted initial claims was 478,000, an increase of 15,000 from the previous week's revised figure of 463,000. It is estimated that the effects of Hurricane Ike in Texas added approximately 12,000 claims to the total. The 4-week moving average was 480,250, a decrease of 4,500 from the previous week's revised average of 484,750.

Click on graph for larger image in new window.

This graph shows weekly claims and the four week moving average. The four week moving average is at 480,250.

Some of the recent increase in unemployment claims is a result of Hurricane Ike and should be temporary, but the four week moving average of weekly unemployment claims is at a recession level and continues to indicate significant weakness in the labor market.

by Calculated Risk on 10/22/2008 11:14:00 PM

For those interested, here are a few pictures from our trip to Bryce National Park.

Click on photo for larger image in new window.

Photo credit: Pattie A.

The first photo is from the Fairlyland trail in Bryce National Park. This is about an easy 8 mile loop walk through the hoodoos with incredible formations and colors. It is like being at Thunder Mountain in Disneyland!

The above photo shows more hoodoos at Bryce.

The photo on the right is of an ancient blogger enjoying the hoodoos on the Fairyland trail.

We arrived at Bryce around mid-morning and hiked until late in the day. For those traveling to Bryce and hoping for the best lighting, I suggest trying to arrive before sunrise and driving to Bryce point; the Silent City will probably be awesome in the early morning light.

by Calculated Risk on 10/22/2008 09:03:00 PM

From Reuters: Pulte loss narrows, says housing market worsened

Pulte said it would not forecast fourth-quarter results because of poor visibility in its industry and the wider economy.

"The homebuilding operating environment significantly worsened during the third quarter of 2008," Chief Executive Richard Dugas said in a statement. "Uncertainty and volatility in the capital markets, higher unemployment, and a weaker economy provided further downward pressure."
emphasis added

If Q3 was "significantly worse", how will they describe Q4? (with higher mortgage rates and the impact from the credit crisis).