by Calculated Risk on 1/27/2009 05:38:00 PM

From Steve Liesman at CNBC: Plan for Banks' Toxic Debt May Be Unveiled Next Week

The Obama administration is close to deciding on a plan to purchase bad—or non-performing and illiquid—assets from banks ... The plan could be announced early next week.

The so-called "bad bank" plan, would address the key problem of how to price the assets by using a model-pricing mechanism.

The model would take account of the government's ability to hold onto assets, even to maturity, and pay for the them with cheap funding. Result: the government might end up paying more than current market prices for the securities.

On the other hand, if the government paid less than the value at which the asset is carried on the bank's books, the bank would issue common equity to the government.
...
A Treasury official said nothing will be announced this week and would not comment "on specific policy decisions that have yet to be made."

I'm skeptical of a "model-pricing mechanism" that adjusts the price of non-performing assets higher because the government has a lower borrowing cost. What then happens to the government's borrowing costs in the future?

by Calculated Risk on 1/27/2009 05:23:00 PM

From Bloomberg: New York Office Vacancies Rising to 12% by 2011, SL Green Says

Manhattan office vacancies may rise to 12 percent within 24 months, SL Green Realty Corp. Chief Executive Officer Marc Holliday said today on a conference call.

SL Green, New York’s biggest office landlord with 23.2 million square feet ...

From the SL Green conference call (hat tip Brian):

“Clearly this is a market where we are relooking at the ways we lease and do business with tenants. We are more cautious today. We have increased our security deposit requirements for tenants that are less than obviously credit worthy and this is something that we have done in other bad markets. It's paid off for us. It's kept our credit losses to a minimum in good and bad market. We are also doing more net effective deals where we put out less capital and pay less commission on slightly lower rents but rents that still provide for uptick relative to prior escalated rents.

The market however is certainly feeling the pressure of job losses, Financial Services contraction, sublet space and a limited but growing number of business failures. We can't help but expect that vacancy rate in midtown is going to rise beyond where we had originally forecasted those vacancy rates to be at around ten to 12%. At the moment those rates seem to be at around eight to 9% vacant currently, maybe even 10% if you take into account whatever space we think will be coming available directly or indirectly online in 2009. And we think that that vacancy rate could easily now hit 12% or more over the next 24 months.
emphasis added

Mayor Bloomberg released a report on the NY City economy in early November. Here is a graph of their projected vacancy rate and rents (close to the SL Green projections):

Click on graph for larger image in new window.

This graph shows the actual and projected (by the NYC OMB) rents and office vacancy rate for NYC Class A buildings.

The vacancy rate is expected to rise from about 7.5% to 13%, and rents are expect to decline by 20% or more from the peak.

by Calculated Risk on 1/27/2009 02:24:00 PM

All this fiscal stimulus is necessary, cause the alternative is a depression.

Roubini, Jan 27, 2009

Note: Listening to the Roubini interview (see video below), I think he is forecasting less than 6 million in net job losses in the U.S. this year because of the stimulus plan. Here is a quick transcript:

"At this rate we will could lose another 6 million jobs in 2009 on top of the 2.5 [million] lost the last year. The Obama plan wants to create 2 to 3 million jobs. By the means, even if you implement it, the job losses are going to be smaller. We are not going to create on net, we are going to have job losses falling to 200 to 250 [thousand] losses per month as opposed to 500 thousand. That is the best we can expect for this year. And I think the unemployment rate will keep on increasing even next year because it is a lagging indicator. The unemployment rate is going to peak above 9% sometime in 2010. It is pretty bleak."

From Bloomberg: Roubini Sees ‘Nowhere to Hide’ From Global Slowdown

Global stock market declines are increasingly correlated and emerging economies will follow developed nations into a “severe recession,” according to New York University Professor Nouriel Roubini.

Roubini said economic growth in China will slow to less than 5 percent and the U.S. will lose 6 million jobs. The American economy will expand 1 percent at most in 2010 as private spending falls and unemployment climbs to at least 9 percent, he added.
...
Roubini said the U.S. government should nationalize the biggest banks because losses will exceed assets, threatening to push them into bankruptcy. The banks could be privatized again in two or three years, Roubini said. The professor reiterated his prediction that U.S. financial losses will more than triple to $3.6 trillion and that global equities will fall 20 percent this year from current levels.

by Calculated Risk on 1/27/2009 01:40:00 PM

Click on graph for larger image in new window.

This graph shows the Notices of Default (NOD) by year in California from DataQuick.

There were a record 423,962 NODs filed in 2008, breaking the old record of 254,824 NODs in 2007.

The previous record had been in 1996 with 162,678 NODs filed. That was during the previous California housing bust in the early to mid-90s.

From DataQuick: Temporary Drop in California Foreclosure Activity

The number of mortgage default notices filed against California homeowners fell last quarter to its lowest level in more than a year, the temporary result of a procedural change that took effect in September, a real estate information service reported.

Lending institutions sent homeowners 75,230 default notices during the October-through-December period. That was down 20.2 percent from 94,240 for the prior three months, and down 7.7 percent from 81,550 for fourth-quarter 2007, according to MDA DataQuick.

Recorded default notices peaked in second-quarter 2008 at 121,673.
...
While recordings were back up to 39,993 in December it's unclear whether lenders were mainly playing catch-up, or whether a new wave of foreclosure activity was building.

"No one expected defaults to stay at the much lower levels we saw immediately after the new law took effect last fall. The bigger question is whether or not the housing market has hit a low and is dragging along bottom, or if the markets that so far have remained unaffected by the foreclosure problem are due for a fall. With today's atypical market trends, it's impossible to predict," said John Walsh, DataQuick president.

Most foreclosure activity was still concentrated in affordable inland areas where the availability of so-called subprime financing fueled a buying and refinancing frenzy in 2005/2006. Those sub-markets, which represent about 25 percent of the state's housing stock, account for more than 50 percent of the default activity. That ratio is the same now as a year ago, indicating that the problem has not yet migrated into more established, expensive markets.

Most of the loans that went into default last quarter were originated between October 2005 and January 2007. The median age was 29 months, up from 21 months a year earlier. More than three million home loans were originated in 2006. That dropped to two million in 2007, and 1.1 million last year.

by Calculated Risk on 1/27/2009 11:59:00 AM

UPDATE: Several people has written to me saying this is nothing new. Maybe it should be the 4 D's Death, Disease, Divorce, Debt ... or more D's too (I've received several suggestions). Best to all!

Historically the Three D's of housing that forced homeowners to sell, or into foreclosure, were Death, Divorce, or Disease.

I've seen this revision a few times recently ...

“If you sell in this market, it’s usually one of the three D’s: death, divorce or debt.”

Paul Brennan, regional director for the Hamptons at Elliman, Bloomberg, Jan 7, 2009 (hat tip Rick)

Really there are four D's right now.

by Calculated Risk on 1/27/2009 11:14:00 AM

From the FDIC: FDIC to Tighten and Clarify Interest Rate Restrictions on Institutions That are Less Than Well-Capitalized

The Board of Directors of the Federal Deposit Insurance Corporation today proposed for comment a regulatory change in the way the FDIC administers its statutory restrictions on the deposit interest rates paid by banks that are less than Well Capitalized.

Prompt Corrective Action requires the FDIC to prevent banks that are less than Well Capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates.

This is an attempt to address the moral hazard issue related to deposit insurance. The FDIC is well aware of this problem:

Concerns about Moral Hazard. In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk–adjusted return. A truly risk–based assessment discourages such risky behavior. The moral hazard problem is particularly acute for insured depository institutions that are at or near insolvency but are allowed to operate freely because any losses are passed on to the insurer, whereas profits accrue to the owners. Thus problem institutions have an incentive to take excessive risks with insured deposits in the hope of returning to profitability.
emphasis added

There are now 154 banks on the "less than Well Capitalized" list:

The proposed rule applies only to the small minority of banks that are less than well capitalized. As of third quarter 2008, there were 154 banks that reported being less than Well Capitalized, out of more than 8,300 banks nationwide.

Bank Failure Fridays will be busy this year.

by Calculated Risk on 1/27/2009 09:15:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for November this morning. This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: This is not the quarterly national house price index.

Click on graph for larger image in new window.

The first graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 26.6% from the peak.

The Composite 20 index is off 25.1% from the peak.

Prices are still falling, and will probably continue to fall for some time.

The second graph shows the Year over year change in both indices.

The Composite 10 is off 19.1% over the last year.

The Composite 20 is off 18.2% over the last year.

These are the worst year-over-year price declines for the Composite indices since the housing bubble burst.

The following graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

In Phoenix, house prices have declined more than 40% from the peak. At the other end of the spectrum, prices in Charlotte and Dallas are only off about 6% to 8% from the peak.

Prices fell at least 1% in all Case-Shiller cities in November.

by Calculated Risk on 1/26/2009 11:31:00 PM

From the WSJ: Fed Program That Calmed Debt Market Faces a Test (hat tip Bond Girl)

About $230 billion of three-month debt that the Fed owns, in the form of commercial paper, is set to mature by Friday.

The questions are: Will companies like General Electric or GMAC, which issue this short-term debt to pay their bills and meet other near-term obligations, return to the open market rather than roll over their debt with the central bank, which costs a lot more? Can the still-fragile market absorb so much three-month debt in a single week without sending interest rates much higher? And is the Fed winding down this key program?
...
As of this past Thursday, the Fed held $350 billion of paper in the facility. That is close to 21% of the $1.7 trillion market.

This will be an interesting test to see if the Fed can shrink their balance sheet a little more.

by Calculated Risk on 1/26/2009 07:20:00 PM

From First Fed: FirstFed Financial Corp. Announces Workforce Reductions and Issuance of Cease and Desist Orders by the Office of Thrift Supervision

FirstFed Financial Corp. announced today a reduction in the staff of its wholly-owned banking subsidiary, First Federal Bank of California ... by 62 persons, or approximately 10% of the Bank's current workforce. ...

The Company also announced today that the Company and the Bank have each consented to the issuance of an Order to Cease and Desist (the "Company Order" and the "Bank Order," respectively, and together, the "Orders") by the Office of Thrift Supervision (the "OTS"). The Company Order requires that the Company notify, or in certain cases receive the permission of, the OTS prior to, among other things, declaring, making or paying any dividends or other capital distributions on its capital stock; incurring, issuing, renewing, repurchasing or rolling over any debt; increasing any current lines of credit or guaranteeing the debt of any entity; or making payments of any kind on any existing debt, including interest payments. The Company Order also requires that the Company submit to the OTS within fifteen days a detailed capital plan to address how the Bank will remain "well capitalized" at each quarter-end through December 31, 2011.

First Fed also announced they were closing their wholesale lending today via this email:

Click on graph for larger image in new window.

Email addresses removed.

NOTE the subject line ... they obviously rushed this email out today.

by Calculated Risk on 1/26/2009 06:31:00 PM

From the Fannie Mae 8-K SEC filing today:

Fannie Mae (formally, the Federal National Mortgage Association) is in the process of preparing its financial statements for the fourth quarter of 2008 and the year ended December 31, 2008. Based on preliminary unaudited information concerning its results for these periods, management currently expects that the Federal Housing Finance Agency, acting in its capacity as conservator of Fannie Mae (the "Conservator"), will submit a request to the U.S. Department of the Treasury ("Treasury") to draw funds on behalf of Fannie Mae under the $100 billion Senior Preferred Stock Purchase Agreement entered into between Treasury and the Conservator, acting on behalf of Fannie Mae, on September 7, 2008, and subsequently amended and restated on September 26, 2008 (the "Purchase Agreement"). Although management currently estimates that the amount of this initial draw will be approximately $11 billion to $16 billion, the actual amount of the draw may differ materially from this estimate because Fannie Mae is still working through the process of preparing and finalizing its financial statements for the fourth quarter of 2008 and the year ended December 31, 2008.

Under the terms of the Purchase Agreement, Treasury committed, upon the request of the Conservator, to provide funds to Fannie Mae after any quarter in which Fannie Mae has a negative net worth (that is, the company’s total liabilities exceed its total assets, as reflected on the company’s balance sheet prepared in accordance with generally accepted accounting principles).
emphasis added

This follows the SEC filing from Freddie Mac outlining the request of up to $35 billion from the Treasury. These are the first requests to use the $200 billion emergency fund set up by Treasury in September.

No word if we all get Free Ice Cream!