by Calculated Risk on 10/29/2008 10:08:00 AM

According to the Census Bureau, 17% of new homes sold in Q3 2008 were financed with FHA loans. This is up from an average of 4% in the 2005 through 2007 period.

This huge percentage increase in FHA loans was partially driven by Downpayment Assistance Programs (DAPs). These programs allowed the seller to provide the buyer with the downpayment by funneling the money through a charity.

DAPs have been eliminated (finally!) as of Oct 1st.

Eliminating DAPs is a positive for the economy and housing. FHA loans using DAPs had significantly higher default rates than when the buyers actually made a down-payment, and DAPs encouraged appraisal fraud.

Although good for housing and the economy in the long term, eliminating DAPs might impact new home sales in the fourth quarter of 2008.

Click on graph for larger image in new window.

This graph shows new home sales by percent financing type. The percent of FHA loans increased dramatically in 2008, and this was probably driven by DAPs.

The second graph shows the same information but by the number of units sold.

Of the 118,000 homes sold in Q3 2008, 20,000 were bought using FHA financing.

This compares to 7,000 FHA financed homes in Q3 2007 out of 181,000 new homes sold.

The number and percent of FHA loans will probably decline in Q4 2008, and this will probably impact about 10% of potential home buyers.

by Calculated Risk on 10/29/2008 09:08:00 AM

From Bloomberg: Libor Declines on Central Bank Cash Funding, Fed Rate Outlook

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 5 basis points today to 3.42 percent, its 13th straight decline, according to the British Bankers' Association.
...
"The strains in money markets are beginning to ease, but only at a glacial pace," said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets.

But the TED spread has increased slightly because the 3 month treasury yield has declined - perhaps because traders think the Fed might cut the Fed Funds rate by 75 bps today.

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.