by Calculated Risk on 3/23/2009 12:14:00 AM

Treasury secretary Timothy Geithner writes in the WSJ: My Plan for Bad Bank Assets

... [T]he financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

The details will be released Monday at 8:45AM ET.

by Calculated Risk on 3/22/2009 10:02:00 PM

From MarketWatch: Geithner to hold briefing Monday on toxic assets plan

The Treasury Department said in a press release that it will hold the briefing at 8:45 a.m. EDT on Monday.

Just wanted to get the time right ...

by Calculated Risk on 3/22/2009 07:54:00 PM

From Kevin Hall at McClatchy Newspapers: Treasury to deliver details of "toxic asset" treatment plan

Treasury Secretary Timothy Geithner will meet with reporters shortly before the 9:30 a.m. opening bell for trading on the New York Stock Exchange. ...

Geithner is expected to announce a plan in which Treasury will use $75-100 billion from last year's $700 billion Wall Street bailout. ...

Mark Zandi supports the plan, although I'm not sure what he means by "fair price" since the price will be above market prices (because of the low interest rate, non-recourse loans):

"This plan has a good chance of success; certainly much better than the plan Treasury put forward six weeks ago," said Mark Zandi, chief economist at Moody's Economy.com, a forecaster in West Chester, Pa. "This plan relies much less on private investors and much more on direct government purchases of banks' troubled assets. Only a handful or so of private investors need to participate in this plan to establish workable auctions for the assets and thus determine a fair price for the assets."
...
"The government can then come in and buy these assets on a large scale at these prices. (Roughly) $1 trillion is not enough; it probably needs to be twice that," said Zandi. "But if the plan works well enough, I think Congress will provide more money to solve the problem once and for all. This plan makes me more optimistic about the financial prospects for the financial system and the economy".

Brad DeLong also supports the plan, but thinks much more is needed:

Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets ...

Krugman and Atrios disagree with DeLong.

It is pretty clear the administration opposes nationalizing insolvent large banks, and is instead willing to have taxpayers subsidize shareholders of the banks. So the question isn't "Is this the optimal solution?" (it isn't) but "Will it work?" Maybe, but at what cost?

Oh well, what's a few trillion between friends?

by Calculated Risk on 3/22/2009 12:10:00 PM

From Kenneth Harney at the LA Times: New supply of 'jumbo' financing in pipeline

Bank of America, the country's largest mortgage lender, is rolling out a large program to finance loans between about $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5% range.
...
The minimum down payment for an ING Direct jumbo is 25%; Bank of America quotes a minimum of 20%.
...
Bank of America's new program requires hefty liquid resources -- six months of principal, interest, property tax and insurance payments in reserve -- plus fully documented income, solid credit scores and a full appraisal.

The lenders are paying attention to the "Three C's": creditworthiness, capacity, and collateral, and requiring a serious downpayment that will keep the homeowners committed.

Currently jumbo rates are in the 6.5% range, and rates for these new programs are in the "upper 5% range" - still way above rates on conforming loans, but this will probably help in some markets. Here is an excerpt from DataQuick's report on the California Bay Area:

[U]se of so-called jumbo loans to finance high-end property remained at abnormally low levels. Before the credit crunch hit in August 2007, jumbo loans, then defined as over $417,000, represented 62 percent of Bay Area purchase loans, compared with just 17.5 percent last month.

The difficulties potential high-end buyers have had in obtaining jumbo loans helps explain why sales of existing single-family houses fell to record-low or near-record-low levels for a February in some higher-end communities. They included Orinda, Walnut Creek, San Rafael, San Francisco, Burlingame, San Mateo, Los Gatos, and Los Altos.

“A lot of Bay Area activity is basically on hold, waiting for the jumbo mortgage spigot to reopen.” said John Walsh, MDA DataQuick president.

I'm not sure this will "open the spigot", but it will probably help a little.

by Calculated Risk on 3/22/2009 11:12:00 AM

From Zach Fox at the North County Times: From half a million to under $100K

This two-bedroom, two-bath house was built in 1979 and has 1,230 square feet of living space.

Click on photo for larger image in new window.

Photo by Jamie Scott Lytle, North County Times Staff photographer


September 2005: $469,000

December 2008: $91,000 (foreclosure)

Why did someone pay $469,000 for this house in 2005? Amazing.

by Calculated Risk on 3/21/2009 10:24:00 PM

If you missed this, Zach Fox at the North County Times had an incredible story: HOUSING: Banks selling properties in bulk for cheap

For example, a unit of Citigroup, the troubled financial giant, sold a foreclosure in Temecula to an Arizona investment firm for $139,000 when comparable homes in the area were selling for $240,000 to $260,000.

The firm listed the home for $249,000, received multiple offers and the property has entered escrow, said Amber Schlieder, the real estate agent who handled the listing.

Citi just left $100,000 on the table.

I hear stories like this all the time.

Here is a short video from KCET with a couple more examples (these are short sales):



Clearly the banks are overwhelmed and the process is broken. Maybe there is an opportunity here for added transparency ...

by Calculated Risk on 3/21/2009 08:06:00 PM

Randyl Drummer at CoStar writes: Rising Cap Rates Add to Real Estate Investors' Worries. Here are some stats:

In fourth-quarter 2007, 180 closed transactions of Class A office sales of more than $5 million were recorded, trading at an average actual cap rate of 6.1% nationally. By the last three months of 2008, the average cap rate spiked to 7.6% on just 80 transactions, including a jump of more than 100 basis points between the third and fourth quarters. With sales results for the quarter still being collected, CoStar had recorded 42 closed transactions at an average actual cap rate of 7.9% as of March 18.

Investors closed 279 sales of Class A and B warehouse and distribution property in the fourth quarter of 2007 at an average cap rate of 7.1%. The number of transactions dropped sharply in fourth-quarter 2008, with the cap rate rising 100 bp. First-quarter 2009 is continuing to trend toward a sharp drop in transactions, with the cap rate edging up another 50 bp to a preliminary 8.6% as of March 18.

In the apartment sector, a look at sales totaling $5 million or more shows that 629 Class A properties exchanged hands in fourth-quarter 2007 at an average actual cap rate of 5.9%. For the same period a year later, 355 transactions sold and the average cap rate rose 90 basis point to 6.8%, thanks to a 50-bp jump between the third and fourth quarters. Though deal volume appears to be again dropping sharply in the first quarter, the cap rate for closed transactions was holding steady at 6.8% in the quarter to date -- the only major property category to hold the line on cap rate expansion.

So for Class A office space, average actual cap rates have risen from 6.1% in Q4 2007 to 7.9% currently.

For Class A and B warehouse and distribution properties, cap rates have risen from 7.1% to 8.6% over the same period.

And for Class A apartments, cap rates have risen from 5.9% to 6.8%.

This is just another way of saying prices have fallen sharply. Most small investors buy Class B or C apartments, and I'd be curious about those cap rates.

by Calculated Risk on 3/21/2009 01:59:00 PM

Earlier I posted the publicly released economic scenarios from the Supervisory Capital Assessment Program (bank stress tests).

The following graphs shows the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks as part of the FAQs (no link). I've also added the most recent forecasts from Paul Kasriel at Northern Trust, and from Goldman Sachs (no link) for comparison.

The first graph is for the unemployment rate through 2010. This is a quarterly forecast - the January unemployment rate was 7.6% and February 8.1%.

Click on graph for larger image in new window.

Although the two private forecasts don't include all of 2010, it appears that both the Kasriel and Goldman forecasts are near the "more adverse" scenario for 2009.

The second graph makes the same comparison for changes in real GDP.

An interesting note: the stress test scenario is using the advanced GDP release estimate for Q4 2008 of -3.8%, as opposed to the revised estimate of -6.2%.

Once again the private forecasts are tracking much closer to the the more adverse scenario than the baseline scenario.

And please don't think Kasriel and Goldman are UberBears. From Paul Kasriel: Light at the End of the Tunnel or an Oncoming Freight Train?

With regard to the economy, we believe there are faint signs of light at the end of the tunnel. Real consumer spending increased by 0.4% in January (and is likely to be revised up) and the decline in February nominal retail sales of 0.1% suggests that the decline in real consumer spending that month will not be severe. For the first quarter as a whole, we now expect a contraction in consumer spending much less severe than last year’s fourth-quarter contraction of 4.3%. Although we do not expect to see outright growth in real consumer spending until the fourth quarter of this year, we believe the deepest quarterly contraction is behind us. With light motor vehicle sales idling just above 9 million units at an annual rate, it appears that for the first time since 1945 there are more used cars and trucks being scrapped than there are new ones getting out on the highways. At some point in the not-too-distant future, the purchases and production of cars and trucks will be stepped up.

These are the points I've been making and I also think there is a good chance (better than a coin flip) that GDP will turn slightly positive later this year. However I also think any recovery will be very sluggish.

Even with these "faint signs of light at the end of the tunnel", it appears the "more adverse" scenario is now the real baseline.

by Calculated Risk on 3/21/2009 05:30:00 AM

The NY Times has some details ...

From Edmund L. Andrews, Eric Dash and Graham Bowley: Toxic Asset Plan Foresees Big Subsidies for Investors

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.

More approaches doesn't make a better plan.

The FDIC plan involves almost no money down. The FDIC will provide a low interest non-recourse loan up to 85% of the value of the assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money ... Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.

Oh well, I'm sure Geithner will provide details this time ...

by Calculated Risk on 3/21/2009 12:14:00 AM

"And for those of you wondering about yours truly — I’m temperamentally unsuited, have never had any desire for the job, and probably have more influence as an outside gadfly than I ever could in DC."
Paul Krugman on the possibility of being appointed Treasury Secretary, Nov 26, 2008