by Calculated Risk on 4/12/2009 09:36:00 PM

A couple of photos from the "A New Way Forward" protest at the San Francisco Fed yesterday. Photo credit: Darin Greyerbiehl, 4/11/2009. More photos here.

Click on photo for larger image in new window.

by Calculated Risk on 4/12/2009 06:55:00 PM

Zach Fox at the North County Times brings us another house "Deal of the Week": Sans stability in San Marcos

San Marcos is in north county San Diego.

Here is the price history for the featured 3 bedroom, 2 bath, 2 car garage home:

May 1992: $115,500

April 2003: $275,000

April 2006: $440,000

March 2009: $135,000 (REO)

The March 2009 price was a distressed sale, and is half off the 2003 price. Once again, I wonder what buyers (and lenders) were thinking in 2006?

by Calculated Risk on 4/12/2009 10:19:00 AM

"Everybody is building these big buildings, and they're empty. It is sad. I live in a ghost town."
Robert Siegel, an advisory neighborhood commissioner

From the WaPo article on the stalled commercial construction projects at the Capitol Riverfront Business Improvement District: At Nationals Park, District of Dreams Hits a Slump (ht mort_fin)

A few excerpts:

At [Nationals owner Theodore N. Lerner]'s 10-story office building at 20 M St., the lobby doors are sometimes locked much of the afternoon. The only tenant is a bank.

A few blocks away, at 2nd and M streets SE, sits a parking lot where developer Chris Smith had planned to build a 10-story office building without a tenant signed in advance. Now he says he needs to have the building about 70 percent leased to even try for financing.

Closer to the Anacostia River, Florida Rock owns land where a cement plant still operates. It hopes to begin construction on office, retail, hotel and residential buildings in the fall of 2010 -- if it can get financing and find a major office tenant.

Nearby, Cleveland-based Forest City stopped construction on a loft building at its project, the Yards, because it couldn't get a loan. It is trying to get financing through a city housing program to restart construction. In the meantime, brown paper and plywood cover the windows.

At developer JPI's apartment project, called Capitol Yards, about half of the nearly 700 apartments are leased. For the past four months, the developer offered two to three months of free rent on the units, which start at roughly $1,600 for a one-bedroom.

Here is a map of the D.C. neighborhood. And a Google map of the area:


View Larger Map

And I had heard that D.C. was immune ...

by Calculated Risk on 4/12/2009 12:34:00 AM

These photos are of a CRE project in San Diego.

Click on photo for larger image in new window.

Photo credit: Michael C.

Michael writes:

Who knew that i-beams create a perfect home for cottontails!

... this was suppose to be 12 buildings and three parking garages.

Now it is one building and a field of steel.



Michael estimates the delivered steel takes up a football field!

At least the rabbits have found a place to hide.

by Calculated Risk on 4/11/2009 10:00:00 PM

Here is an interview with Paul Krugman earlier this week ...

"We have some real real problems. They are not going to go away through self-fulfilling optimism. One of the little things that has been reported is that the IMF now - International Monetary Fund - has upped its estimate of losses on bad loans to $4 trillion. Not so long ago $1 trillion was considered an exorbitant estimate."
Paul Krugman, April 7, 2009

On delaying the release of the stress test results (actually the original release date was the end of April):

I think we can say pretty clearly that if the stress tests were saying that every thing was fine, they probably wouldn't be eager to postpone the release of that. This is a problem. One of the versions that we're hearing is that they'll release some generic information, but not information on particular banks. Boy would that be a downer. What everyone is worried about is what we talk about Japan in the '90s - keeping the zombie banks still shambling forward. There is a lot of feeling that American zombie banks now on the march. This news was not good. It made that scenario look a little bit more likely.

by Calculated Risk on 4/11/2009 06:56:00 PM

From The Oregonian: Construction of downtown Portland high-rise is halted by tight credit (ht Shawn, Justin, Neil)

Tom Moyer, one of Portland's most successful real estate developers, will halt work Monday on his 32-floor tower now under construction in downtown Portland.

Moyer's decision to pull 350 workers off the Park Avenue West is a stunning sign that no city, no person and no block is spared from this recession.

... The building, originally scheduled to open in 2011, already was more than half leased by a law firm and a Nike store.
...
At the job site Friday, the concrete, mechanical and iron workers left the site about 3 p.m. with the building 15 percent finished. It remains just a parking garage, frozen for now about three floors below ground.
...
[Vanessa Sturgeon, president of TMT Development] said she expects construction to remain stopped until they can find financing in early 2010. They'll use the time to redesign the building and lop off the top 10 stories that were to be "ultra-luxury" condos.
...
Carpenter Steve Callopy said he has no safety net beyond unemployment compensation and doesn't see any fresh work on the horizon. Commercial construction, in particular, seems to have fallen apart.

"Do you see any commercial stuff going on?" he said. "I see a lot of commercial 'For Lease' signs."

This article makes several key points:

Even the best financed CRE developers are halting work. This building was already half leased!

The most financing the developer could find was 45% LTV.

Even when construction restarts, the developer is "lopping off" the top 10 stories of luxury condos. That condo market will dead for years.

There will be many more construction jobs lost this year as CRE projects are completed or halted.

by Calculated Risk on 4/11/2009 01:56:00 PM

National Credit Union Administration (NCUA) released an update on the two corporate credit unions seized three weeks ago. (ht August)

First, on the size of the two seized corporate credit unions:

U.S. Central has approximately $34 billion in assets and 26 retail corporate credit union members. WesCorp has $23 billion in assets and approximately 1,100 retail credit union members.

These "corporate credit unions" don't serve the general public, and all "natural person" credit union money held at these corporate credit unions was guaranteed earlier this year.

From NCUA Chairman Fryzel in yesterday's Media Advisory:

The outline released today of the portfolios of WesCorp and U.S. Central, and NCUA’s associated summary analysis, provides a concise synopsis of the respective portfolios and enables informed parties to appreciate the scope and severity of the stress on these investments. Though virtually all of the securities purchased by these two corporate credit unions were AAA or AA rated at the time of purchase, the summary clearly demonstrates how the nature of the securities and the deterioration in the economy have resulted in significant expected credit losses.

Here is the corporate stabilization program.

And the following is from the analysis of the portfolios held at WesCorp and U.S. United.

The securities purchased by corporate credit unions ... were all permissible under NCUA’s Rules and Regulations. Almost all had very high ratings (AAA and AA) as assigned by the nationally recognized statistical rating organizations (NRSROs). NRSRO ratings were the norm in the financial markets for determining the quality of a security. However, NRSROs relied primarily on historical data of the performance of a security’s underlying assets in making rating determinations. No reliable historical data existed relating to the performance of the sub-prime and other types of loans that were originated in a period of rapid home price increases and relaxed underwriting criteria. As such, NRSRO ratings did not prove to be a reliable means of determining the quality of these securities. Since late-2007, analysis of these securities has been based on actual performance of the underlying assets and projected future performance. This has led to very significant downgrades in the NRSRO ratings of many of the securities held by corporate credit unions. The downgrades had the most severe impact on the portfolios of WesCorp and U.S. Central.
emphasis added

And the following table shows the ratings at the time of purchase and the most recent ratings.

Click on graph for larger image in new window.

There is much more in the document on these portfolios. As an example, WesCorp bought a significant amount of AAA rated mezzanine securities back by Alt-A and Option ARMs - and those securities have taken substantial losses since they absorb losses before more senior securities.

Sadly most of the problem securities were bought in 2006 and 2007 - after the housing bust had already started.

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.