by Calculated Risk on 10/29/2008 01:59:00 AM

I frequently link to Mathew Padilla's outstanding writing at the Orange County Register.

Matt co-authored a book on the mortgage crisis: "Chain of Blame".

His blog, "Mortgage Insider" is available at: www.ocregister.com/mortgage

This is 45 minute talk. Matt knows his stuff, but he was a little nervous at the beginning of this talk ...

by Calculated Risk on 10/28/2008 10:42:00 PM

From Eric Dash at the NY Times: As Economy Slows, Lenders Begin to Curb Credit Cards

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” Gary L. Crittenden, Citigroup’s chief financial officer, said.

Click on graph for larger image.

This graph shows the consumer credit card charge-off rate by quarter starting with 1985.

Note the spike in 2005 was because of the change to the bankruptcy law (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005).

The record charge-off rate was 7.85% in Q1 2002 according to the Fed and a new record will probably set during this recession.

To add to the story, here is a comment from the Capital One conference call two weeks ago:

We have tightened underwriting standards across the boar. In our US card business we have gotten more conservative. We have begun to reduce credit lines. We have continued to tweak our underwriting models and to the recalibrate models this may be unstable. We have adapted our models and approaches as the economic environment has changed and we are intervening judgmentally even more than our models would indicate.

No Home ATM. No credit cards. What is a debt addicted U.S. consumer to do?

by Calculated Risk on 10/28/2008 07:10:00 PM

Earlier today I posted the following graph showing the price declines from the peak for each city included in S&P/Case-Shiller indices.

Click on graph for larger image in new window.

In Phoenix and Las Vegas home prices have declined about 36% from the peak. At the other end of the spectrum, prices in Charlotte and Dallas are only off about 3% from the peak.

For the most part, the size in the percentage price decline is related to the size of the price bubble for each area. The second graph shows real prices for cities at the extremes - Las Vegas and Charlotte, and Chicago in the middle.

This shows real prices (adjusted with CPI less Shelter) for three cities. Las Vegas had a huge price increase in the early '00s, and now prices are falling rapidly.

Charlotte had a small price bubble, and prices have only declined a few percent. It appears prices in the bubbly areas (like Las Vegas) are still too high, but prices are already close to normal for Charlotte.

by Calculated Risk on 10/28/2008 06:02:00 PM

From the WSJ: Treasury May Expand Financial Rescue to Non-Publicly Traded Banks

Treasury Department officials ... met with representatives from the banking industry Tuesday to discuss expanding the Troubled Asset Relief Program to make mutually held, family-owned and other private banks eligible for federal funds.
...
Non-public banks are typically more conservatively run and may be more ready to lend money back into the financial system ... The banking industry's trade group estimates that as many as 6,500 closely held financial institutions aren't eligible for the capital program under the current rules ... because their structure doesn't permit them to issue preferred shares that the Treasury would buy.

The line is getting longer ...

by Calculated Risk on 10/28/2008 03:59:00 PM

Can you say volatility?

Market up 11%!

by Calculated Risk on 10/28/2008 03:54:00 PM

From Bloomberg: Fed Spurs Record Surge in Longer-Term Commercial Paper Issuance (hat tip Scott)

Companies yesterday sold more than 1,500 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to data published by the Fed. Most of the difference was probably absorbed by the Fed ... The Fed began buying commercial paper from companies yesterday to reduce rates, lure back investors and unlock the market ...

by Calculated Risk on 10/28/2008 03:09:00 PM

From the SL Green conference call today (SL Green is a REIT focusing on commercial office and retail properties):

Analyst: Based on your estimation, when should we expect some of the [distressed property] to potentially start to enter the market?

SL Green: I think you'll certainly see more in 2009 than we did in 2008 as interest reserves run short. And then the real forced selling to the extent that there's not a replacement debt market and to the extent, depending on where cap rates shake out will be in '10, '11 as you start getting floating rate maturities. There are unlikely to be a lot of final maturities next year without extension options. But we'll see the stress where people burn their interest reserves and don't come up with cash.

Analyst: In the last few leases that you've actually signed, if you were to do those deals or look at those same deals a year ago, how far off are the economics on the deals you just signed versus what they would have been say at the peak on a percentage basis.

SL Green: They are probably down 10% on nominal rent with slightly bigger concession packages than we would have offered a year ago. So I think squarely within the ten to 15 that we've been referencing in the past. Some less, not many more. Not many more on a net [effective] basis ... we do costs dozens and dozens of leases per quarter it's hard to generalize but I think we've been taking most of those rents down by 10% what have we would have gotten earlier in the year.

The CRE version of stated income loans involved lending on overly optimistic pro forma income projections (aka wishful thinking), and the NegAM feature was called "interest reserves".

Just last month, chief economist at REIS, Sam Chandan noted:

"Even a modest slowdown, as we have already observed in the New York market, confutes the underwriting assumptions that prevailed in the period leading up to the last year's investment peak."

And Michael Slocum, executive vice president at Capital One Bank, added:

"The key issue is what happens to the overleveraged properties purchased and financed in the past three years. In many cases, the financial projects were based on rising rents and debt markets remaining stable. Many of the loans required the borrowers to provide interest reserves, but they will likely exhaust over the 2009-2010 time frame." ... "It always comes back to cash flow on commercial real estate. Properties financed on true cash flow should be fine."

At least everyone sees the problem coming!

by Calculated Risk on 10/28/2008 02:09:00 PM

Here is a look at the real (inflation adjusted) Case-Shiller Composite 10 and 20 city indices. Nominal prices are adjusted using CPI less shelter, and Jan 2000 is set to 100.

Click on graph for larger image in new window.

In real terms, prices have fallen close to 30% from the peak, and have fallen by about 2/3 of the way back to January 2000 real prices.

Of course there is nothing magical about 2000 prices, and prices could fall more or less than to 100 on the graph. I don't have much to add, but I think real prices are a better gauge than nominal prices as to how far prices will probably fall. I expect these real indices to decline for some time.

by Calculated Risk on 10/28/2008 12:15:00 PM

The yield on 3 month treasuries: 0.77%, down slightly from 0.82% (unchanged)

The 3 month yield was close to zero for a few days, so this is a significant improvement from the worst of the credit crisis. With the pending Fed Funds rate cut it is hard to guess just how high the 3 month should rise. Usually the 3 month trades below the Fed Funds rate by around 25 bps, so the current yield might be reasonable.

The TED spread: 2.69 down slightly from 2.76 (slightly better) This is still way too high, but significantly below the peak of 4.63 on Oct 10th.

I'd like to see the spread move back down to 1.0 or lower - at least below 2.0.

The two year swap spread from Bloomberg: 123.25 up from 117.75 (slightly worse). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this under 100.

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 announcement today. no progress.

The A2P2 spread is 4.35, up slightly from 4.32. unchanged.

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. The high for the A2P2 spread was around 4.6 (I don't have the exact number)

I spoke with a senior manager at a public company yesterday, and his company has just received loan commitments from two major lenders for an acquisition (this is a good acquisition for all parties). Both lenders are on the list of banks receiving capital from the Treasury. This is a marginal credit risk deal, so I consider this a positive sign. The deal isn't done, but this is definite progress. (Note: the company is publicly traded so I can't reveal any details).

This is another day with little progress.

by Calculated Risk on 10/28/2008 10:32:00 AM

From MarketWatch: U.S. consumer confidence plunges to record low

U.S. consumer confidence plunged in October, reaching an all-time low in the series' 41-year existence, the Conference Board reported Tuesday. ... Despite falling gasoline prices, the October consumer confidence index fell to 38 from an upwardly revised September reading of 61.4.

I usually don't post consumer confidence numbers because they are mostly coincident indicators - they tell you pretty much what you already know - but a new record low is hard to overlook.