by Calculated Risk on 4/11/2009 08:59:00 AM

From Bloomberg: China Loans, Money Supply Jump to Records on Stimulus

China’s new lending surged more than sixfold from a year earlier to a record 1.89 trillion yuan ($277 billion) in March ...

President Hu Jintao said April 1 that China’s 4 trillion yuan stimulus plan was taking effect, after urban fixed-asset investment surged 26.5 percent in the first two months. ...

The explosion in credit since the central bank dropped lending restrictions in November prompted the nation’s banking regulator to warn this month that lenders face a “severe” challenge in managing their risks.
...
A concentration of loans in infrastructure projects is a potential hazard for banks, China Banking Regulatory Commission Vice Chairman Jiang Dingzhi wrote in the April 1 edition of China Finance, a magazine affiliated with the central bank....

“The biggest dangers to China’s economy and financial system come from within, not from outside,” Jiang Zhenghua, former vice chairman of China’s parliamentary standing committee, said at a financial conference in Beijing today. “The biggest of these hidden dangers is the degree of bad loans in China.”

Doesn't China already have too much capacity?

by Calculated Risk on 4/10/2009 09:32:00 PM

From the FDIC: FDIC Creates a Deposit Insurance National Bank to Facilitate the Resolution of New Frontier Bank, Greeley, Colorado

New Frontier Bank, Greeley, Colorado, was closed today by the State Bank Commissioner, by Order of the Banking Board of the Colorado Division of Banking, which then appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC created the Deposit Insurance National Bank of Greeley (DINB), which will remain open for approximately 30 days to allow depositors time to open accounts at other insured institutions. ...

All insured depositors of New Frontier are encouraged to transfer their insured funds to other banks. ...

As of March 24, 2009, New Frontier had total assets of $2.0 billion and total deposits of about $1.5 billion. At the time of closing, there were approximately $150 million in insured deposits and $4 million in deposits that potentially exceeded the insurance limits. ...

The cost to the FDIC's Deposit Insurance Fund is estimated to be $670 million. New Frontier is the twenty-third bank to fail this year and the second in Colorado. The last bank to be closed in the state was Colorado National Bank, Colorado Springs, on March 20, 2009.

Ouch. No one wanted this one!

by Calculated Risk on 4/10/2009 08:16:00 PM

This is an interesting paper by Christopher Foote, Kristopher Gerardi, Lorenz Goette, and Paul Willen: Reducing Foreclosures

The authors make two key points:

DTI (debt to income) at origination is not a strong predictor of default.

What really matters in the default decision is the mortgage payment relative to the borrower’s income in the present and future, not the borrower’s income in the past. Consequently, the high degree of volatility in individual incomes means that mortgages that start out with low DTIs can end in default if housing prices are falling.

Evidence suggests loan servicers are unwilling to turn high-DTI mortgages into low-DTI mortgages.

The evidence that a foreclosure loses money for the lender seems compelling. The servicer typically resells a foreclosed house for much less than the outstanding balance on the mortgage ... This would seem to imply that the ultimate owners of a securitized mortgage, the investors, lose money when a foreclosure occurs. Estimates of the total gains to investors from modifying rather than foreclosing can run to $180 billion, more than 1 percent of GDP. It is natural to wonder why investors are leaving so many $500 bills on the sidewalk. While contract frictions are one possible explanation, another is that the gains from loan modifications are in reality much smaller or even nonexistent from the investor’s point of view.

We provide evidence in favor of the latter explanation. First, the typical calculation purporting to show that an investor loses money when a foreclosure occurs does not capture all relevant aspects of the problem. Investors also lose money when they modify mortgages for borrowers who would have repaid anyway, especially if modifications are done en masse, as proponents insist they should be. Moreover, the calculation ignores the possibility that borrowers with modified loans will default again later, usually for the same reason they defaulted in the first place. These two problems are empirically meaningful and can easily explain why servicers eschew modification in favor of foreclosure.
emphasis added

This analysis suggests mortgage modifications - without principal reduction - will have limited success. The authors suggest that loan or grants to homeowners with lost income might be more effective than mortgage modifications.

The authors also makes several other important points:

On "walking away" or "ruthless default" (when the borrower walks away because they refuse to make payments on an underwater house).

If there is no hope that the price of the house will ever recover to exceed the outstanding balance on the mortgage, the borrower may engage in “ruthless default” and simply walk away from the home. Kau, Keenan, and Kim (1994) show that optimal ruthless default takes place at a negative-equity threshold that is well below zero, due to the option value of waiting to see whether the house price recovers.

But the authors conclude that ruthless defaults are only a small part of the current foreclosure problem:

To sum up, falling house prices are no doubt causing some people to ruthlessly default. But the data indicate that ruthless defaults are not the biggest part of the foreclosure problem. For the nation as a whole, less than 40 percent of homeowners who had their first 90-day delinquency in 2008 stopped making payments abruptly. Because this figure is an upper bound on the fraction of ruthless defaults, it suggests ruthless default is not the main reason why falling house prices have caused so many foreclosures.

Negative equity is key to defaults (Falling house prices!)

The empirical evidence on the role of negative equity in causing foreclosures is overwhelming and incontrovertible. Household-level studies show that the foreclosure hazard for homeowners with positive equity is extremely small but rises rapidly as equity approaches and falls below zero.

Faced with loss of income, homeowners with enough positive equity sell. Homeowners with negative equity default.

Resets are of only limited importance.

Many commentators have put the resets at the heart of the crisis, but the simulations illustrate that it is difficult to support this claim. The payment escalation story is relevant if we assume that there is no income risk and that the initial DTI is also the threshold for ex post DTI. Then loans with resets become unaffordable 100 percent of the time and loans without resets never become unaffordable. But adding income risk essentially ruins this story. If the initial DTI is also the threshold for ex post DTI, then, with income risk, about 70 percent of the loans will become unaffordable even without the reset. The reset only raises that figure to about 80 percent. If, on the other hand, we set the ex post affordability threshold well above the initial DTI, then the resets are not large enough to cause ex post affordability problems.

These are all key points.

I think it is important to understand that loans with high DTI were an enabler for speculation during the housing bubble, and this speculation pushed up house prices. So, although the authors argue high initial DTI loans are not a good predictor of defaults, the prevalence of high DTI loans was evidence of a bubble - and a good predictor of a housing bust.

by Calculated Risk on 4/10/2009 05:17:00 PM

Update:

Dark clouds on Easter
Hope falls short for Cape Fear Bank
Not a Good Friday?
from Soylent Green is People

From the FDIC: First Federal Savings and Loan Association of Charleston, Charleston, South Carolina, Acquires All of the Deposits of Cape Fear Bank, Wilmington, North Carolina

Cape Fear Bank, Wilmington, North Carolina, was closed today by the North Carolina Office of Commissioner of Banks, which then appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First Federal Savings and Loan Association of Charleston (First Federal), Charleston, South Carolina, to assume all of the deposits of Cape Fear Bank.
...
As of March 31, 2009, Cape Fear Bank had total assets of approximately $492 million and total deposits of $403 million. In addition to assuming all of the deposits of the failed bank, First Federal agreed to purchase approximately $468 million in assets. The FDIC will retain the remaining assets for later disposition.

The FDIC and First Federal entered into a loss-share transaction on approximately $395 million of Cape Fear Bank's assets. First Federal will share with the FDIC in the losses on the asset pools covered under the loss-share agreement. ...

The FDIC estimates that the cost to the Deposit Insurance Fund will be $131 million. First Federal's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Cape Fear Bank is the twenty-second bank to fail in the nation this year. The last bank to fail in North Carolina was Crown National Bank, Charlotte, on May 20, 1993.

It is Friday.

by Calculated Risk on 4/10/2009 04:37:00 PM

The FDIC received 210 comments on the Legacy Loans Program. You can read them all here. (ht David)

Not all comments are, uh, supportive!

by Calculated Risk on 4/10/2009 02:46:00 PM

From Rex Nutting at MarketWatch: Budget deficit triples to $957 billion for year

The U.S. federal budget deficit rose to a record $956.8 billion in the first six months of the fiscal year ... the Treasury Department reported Friday.
...
In March, the deficit widened to $192.3 billion from $48.2 billion in March 2008. Outlays rose 41% to $321.2 billion from $227 billion, while receipts dropped 28% to $129 billion from $178.8 billion.

Click on graph for larger image in new window.

This graph shows the year-over-year change in total Federal tax receipts.

For March 2009, receipts were off 27.9% compared to March 2008.

For individual income taxes, receipts were off 27.3%.

For corporate income taxes, receipts were off 89.6% (from $32.6 billion in March 2008 to $3.4 billion in March 2009).

For Social Security payroll taxes - Employment and General Retirement (off-budget) - receipts were flat.

The year-over-year decline in receipts is similar to the previous recession, but that decline was a combination of a weak economy and tax changes. This decline is all about the economy - especially the sharp decline in corporate tax receipts.

by Calculated Risk on 4/10/2009 01:32:00 PM

From MarketWatch: Obama sees 'glimmers of hope' in the economy

"We're starting to see progress," Obama said ... However he added that the economy has a long way to go. "The economy is still under severe stress." Job losses are still creating lots of uncertainty and hardship, he said.

The WSJ has his remarks.

Q Sir, are you saying the recession is abating?

THE PRESIDENT: I’m saying we’re seeing progress.

Q You’re saying what?

THE PRESIDENT: I’ve said that we’re seeing progress.

by Calculated Risk on 4/10/2009 10:08:00 AM

Bando: Someone who lives in an abandoned home.

From the NY Times: More Squatters Are Calling Foreclosures Home

When the woman who calls herself Queen Omega moved into a three-bedroom house here last December, she introduced herself to the neighbors, signed contracts for electricity and water and ordered an Internet connection.

What she did not tell anyone was that she had no legal right to be in the home.
...
Michael Stoops, executive director of the National Coalition for the Homeless, said about a dozen advocacy groups around the country were actively moving homeless people into vacant homes ...

So now we have organized bandos! And it sounds like the competition is fierce:

“At 10 o’clock in the morning, I went over to the house just to make sure everything was O.K., and squatters took over our squat. Then we went to another place nearby, and squatters were in that place also.”

by Calculated Risk on 4/10/2009 02:02:00 AM

From Bloomberg: Fed Said to Order Banks to Stay Mum on ‘Stress Test’ Results (ht Justin)

The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession ...

The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. ...

“If you allow banks to talk about it, people are just going to assume that the ones that don’t comment about it failed,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

What ever happened to transparency? This suggests the results are very ugly for some banks.

It's amusing that the article mentions Citi - I doubt Citi wants the results released!

by Calculated Risk on 4/09/2009 10:55:00 PM

The markets are closed on Friday.

CR will be open.

The following article is mostly about workers' pay, but there are some interesting stats on the New York hotel market.

From the NY Times: With More Rooms Empty, Hotels Seek to Cut Worker Pay

With the city’s hotels in the midst of a sudden slowdown in business, operators are seeking wage cuts and other concessions from the unions representing 27,500 bellhops, housekeepers and waiters.
...
The average occupancy rate at New York City hotels in the first two months of this year was 61.8 percent, down from 73.5 during the same period last year, according to Smith Travel Research, a national hotel research firm. At the same time, the average daily room rate dropped to $196.30, from $232.25.
...
The industry’s problems are compounded by the prospect of 10,000 new hotel rooms in 2009 and 2010.

“We’re in this classic economic model where we’ve got declining demand because of the economy and added supply,” said John Fox, a hotel consultant with PKF Consulting.