by Calculated Risk on 2/28/2009 08:27:00 AM

Here is Buffett's Letter to Shareholders

There are several interesting sections, but for housing I think the section on Clayton Homes (Buffett's manufactured home division) is especially interesting. Here is a brief excerpt (starts on page 10). First Buffett describes the lending debacle in the manufactured home industry in the 1997 to 2000 period:

Clayton is the largest company in the manufactured home industry, delivering 27,499 units last year. This came to about 34% of the industry’s 81,889 total. Our share will likely grow in 2009, partly because much of the rest of the industry is in acute distress.
...
[In 1998] much of the industry employed sales practices that were atrocious. Writing about the period somewhat later, I described it as involving “borrowers who shouldn’t have borrowed being financed by lenders who shouldn’t have lent.”

To begin with, the need for meaningful down payments was frequently ignored. Sometimes fakery was involved. ... Moreover, impossible-to-meet monthly payments were being agreed to by borrowers who signed up because they had nothing to lose. The resulting mortgages were usually packaged (“securitized”) and sold by Wall Street firms to unsuspecting investors. This chain of folly had to end badly, and it did.

... industry losses were staggering. And the hangover continues to this day. This 1997-2000 fiasco should have served as a canary-in-the-coal-mine warning for the far-larger conventional housing market. But investors, government and rating agencies learned exactly nothing from the manufactured-home debacle.

And now Buffett draws a parallel to the national housing bubble:

[I]n an eerie rerun of that disaster, the same mistakes were repeated with conventional homes in the 2004-07 period: Lenders happily made loans that borrowers couldn’t repay out of their incomes, and borrowers just as happily signed up to meet those payments. Both parties counted on “house-price appreciation” to make this otherwise impossible arrangement work. ... The consequences of this behavior are now reverberating through every corner of our economy.

Clayton’s 198,888 borrowers, however, have continued to pay normally throughout the housing crash ... This is not because these borrowers are unusually creditworthy ... Why are our borrowers – characteristically people with modest incomes and far-from-great credit scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention of paying it off, whatever the course of home prices.

Just as important is what our borrowers did not do. They did not count on making their loan payments by means of refinancing. They did not sign up for “teaser” rates that upon reset were outsized relative to their income. And they did not assume that they could always sell their home at a profit if their mortgage payments became onerous. Jimmy Stewart would have loved these folks.
...
Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments.
...
The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income
should be carefully verified.

Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.

by Calculated Risk on 2/28/2009 01:07:00 AM

From The Times: Lloyds counts cost of HBOS takeover and property slump as 500,000 customers slip into negative equity

HBOS, Britain’s biggest mortgage lender, revealed that 381,669 customers, about 16.8 per cent of its mortgage book, owed more than the value of their homes. At Lloyds TSB, 162,000 homeowners, 15 per cent of its mortgage book, were in the same position.

These figures compare with only 0.1 per cent of customers of each bank – a total of less than 4,000 households – being in negative equity at the end of 2007.
...
Michael Saunders, chief economist at Citigroup, said last month that the bank estimated homeowners with negative equity was up to about 1.2 million, from 100,000 a year ago, out of a total of between 11 million and 12 million mortgages. “There is no sign that the decline in house prices – and hence the surge in negative equity – is yet close to ending,” he said.

He said in December that about one owner in four could be in negative equity if prices fell by a total of 30 per cent by 2010, as many analysts expect.

Also on comments: Haloscan crashed hard, so I switched to JS-Kit. I'll try to improve the JS-Kit interface, and hopefully Ken (CR Companion) will be able to provide some help. Thanks to everyone for your patience.

by Calculated Risk on 2/27/2009 09:31:00 PM

Tomorrow morning at 8AM ET, the Buffett letter to investors will be released, and later I'll post a February Economic Summary in Graphs.

The AIG deal might be announced Sunday evening or Monday morning.

Today real GDP growth was revised down to minus 6.2% (annualized), the Citi deal was announced, two banks failed (Heritage Community Bank, Glenwood, Illinois and Security Savings Bank, Henderson, Nevada), and the S&P 500 is back to 1996 prices.

Also, the Restaurant Performance Index for January was released, and here is a look at Investment Contributions to GDP.

If you need a laugh after reading that news, Jim the Realtor showcases an investment opportunity in San Diego - enjoy!

by Calculated Risk on 2/27/2009 07:45:00 PM

From the FDIC: Bank of Nevada, Las Vegas, Nevada Assumes All of the Deposits of Security Savings Bank, Henderson, Nevada

Security Savings Bank, Henderson, Nevada was closed today by the Nevada Financial Institutions Division, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 31, 2008, Security Savings Bank had total assets of approximately $238.3 million and total deposits of $175.2 million. Bank of Nevada did not pay a premium to acquire the deposits of Security Savings Bank.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $59.1 million. The Bank of Nevada's acquisition of all the deposits of Security Saving Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Security Savings Bank is the sixteenth bank to fail in the nation this year.

That makes two today! Update ... by Soylent Green Is People

Heritage is gone
Security is toast as well
Yes, Friday is here.

by Calculated Risk on 2/27/2009 07:27:00 PM

From the FDIC: MB Financial Bank, N.A., Chicago, Illinois, Assumes All of the Deposits of Heritage Community Bank, Glenwood, Illinois

Heritage Community Bank, Glenwood, Illinois, was closed today by the Illinois Department of Financial Professional Regulation, Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 5, 2008, Heritage Community Bank had total assets of $232.9 million and total deposits of $218.6 million. ...

The FDIC and MB Financial Bank entered into a loss-share transaction. MB Financial Bank will share in the losses on approximately $181 million in assets covered under the agreement. ...

The FDIC estimates that the cost to the Deposit Insurance Fund will be $41.6 million. MB Financial Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Heritage Community Bank is the fifteenth FDIC-insured institution to fail in the nation this year and the third in the state.

It is Friday ... oh wait, there is another one too!

by Calculated Risk on 2/27/2009 06:09:00 PM

The old comment system went down today. I switched over to the JS-Kit system and this is probably a permanent switch. The Haloscan system was no longer being improved, and JS-Kit has a number of new features in development.

There is a control feature at the bottom for threaded or flat comments. I'm still trying to figure everything out! Suggestions welcome ...

Now back to waiting for the FDIC.

by Calculated Risk on 2/27/2009 03:59:00 PM

The S&P 500 closed at 735 or so. The low in 1997 was 737.01.

Note: the S&P 500 was at 744 when Greenspan spoke of "irrational exuberance"!

Click on graph for larger image in new window.

DOW off 1.6%

S&P 500 off 2.3%

NASDAQ off 1.0%

The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". (Doug should update soon)



Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 2/27/2009 03:17:00 PM

From the LA Times: California unemployment rate reaches 10.1%

More than 1 in 10 California workers were unemployed in January ...

The 10.1% jobless rate is the highest since June 1983 and not far below the 11% record set in November 1982 at the worst point of a severe recession ... Job losses escalated in January, with the state's unemployment rate jumping by 1.4 percentage points from a revised 8.7% for December.

Ouch.

by Calculated Risk on 2/27/2009 02:00:00 PM

The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures. The graph shows the rolling 4 quarters for each investment category.

This is important to follow because residential tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

Click on graph for larger image in new window.

Residential investment (red) has been a huge drag on the economy for the last couple of years. The good news is the drag is getting smaller, and the drag on GDP will be significantly less in 2009, than in 2007 and 2008.

Even if there is no rebound in residential investment later this year, the drag will be less because there isn't much residential investment left! The bad news is any rebound in residential investment will probably be small because of the huge overhang of existing inventory.

The REALLY bad news is nonresidential investment (blue) is about to fall off a cliff. Nonresidential investment subtracted -0.24% (SAAR) from GDP in Q4, and will decline sharply in 2009 based on the Fed's Senior Loan Officer Survey, the Architecture Billings Index, and many many other reports and stories. In previous downturns the economy recovered long before nonresidential investment - and that will probably be true again this time.

As always, residential investment is the investment area to follow - it is the best predictor of future economic activity.

by Calculated Risk on 2/27/2009 01:49:00 PM

This is a big story because it shows how quickly the economy has changed. Just last November, GE once again promised not to cut the dividend through the end of 2009.

From MarketWatch: GE to cut dividend to 10 cents from 31 cents: WSJ

General Electric will cut its quarterly dividend to 10 cents from 31 cents, the Wall Street Journal reported on its Web site Friday.

And from GE last November: An update on the GE dividend

On Sept. 25, GE stated that its Board of Directors had approved management’s plan to maintain GE’s quarterly dividend of $0.31 per share, totaling $1.24 per share annually, through the end of 2009. That plan is unchanged.

This dividend cut was inevitable. But hoocoodanode? Apparently not GE management.