by Calculated Risk on 4/13/2009 11:24:00 AM

Kelly Bennett and Will Carless at the VoiceofSanDiego investigate: Rented Identities, Extravagant Prices and Foreclosure: A Post-Boom Real Estate Scam

Over the course of several months last year, [James D. McConville] picked up at least 81 condo conversions from distressed developers and orchestrated their sale to more than 20 buyers who'd rented him their identities ...

By arranging purchase prices well above market value, McConville was able to pay off the developers and capture what the developers' records state as more than $12.5 million. Now, 74 of the 81 homes involved in the deals in Sommerset Villas and Sommerset Woods in Escondido and Westlake Ranch in San Marcos are in the first stage of foreclosure.

McConville bought distressed condos from developers in bulk, and then sold them to straw buyers (individuals with solid credit records who agreed to sign for the loans for a fee). McConville pocketed the difference between the straw buyer price and the bulk price - approximately $12.5 million.

McConville promised to rent the properties, and pay the mortgages from the rental income.

The individuals had pristine credit, and one mortgage lender said:

"Everything was just absolutely perfect -- some of the cleanest loans we'd seen."

Of course the relationship with McConville was apparently never disclosed.

This was happening in 2008. Lenders were supposed to be back to the three C's: creditworthiness, capacity, and collateral. These straw buyers - who apparently were willing to falsely sign that they were the actual buyers - satisfied the creditworthiness and capacity criteria. But this raises serious questions about the appraisals.

Also McConville timed the multiple applications perfectly so the lender wouldn't see the other loans apps when they performed a credit check - that is pretty amazing.

Part II will be out today tonight ...

by Calculated Risk on 4/13/2009 09:08:00 AM

Professor Roubini writes: Stress Testing the Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded

[I]f you look at the actual data today macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in FDIC baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.

I've noted before that the baseline case is no longer useful, and that the more adverse case is the new baseline. Roubini is taking this a step further and saying the more adverse case is also meaningless. I think this is premature - although I agree with Roubini that there is no real stress test.

First, Roubini is working from the annual stress test forecasts. The following table shows the quarterly data being used by the banks.

Click on graph for larger image in new window.

This table shows the quarterly GDP growth rate (annualized), unemployment rate, and house prices being used for the stress test scenarios.

House prices are based on the Case-Shiller Composite 10 Index with Dec 2008 = 100.

Unemployment

For the unemployment rate, Roubini is correct. The unemployment rate was 8.1% in Q1 - above both the baseline (7.8%) and more adverse (7.9%) scenario rates.

[B]ased on current and likely trends the unemployment rate will be – at best over 10% by year end – and more likely closer to 11% by year end (and average 9.8% for the year) 2009 data are already worse than the adverse scenario and will for sure be worse than the adverse scenario. But more importantly by year end 2009 the actual unemployment rate – even with a growth recovery in H2 – will be higher at 10.5% - than the average unemployment rate assumed by the FDIC in the adverse scenario for 2010, not 2009!

In a recent note, S&P mentioned their stress test "assumes that an economic recovery does not begin until at least late 2010" and that "the unemployment rate rises to the mid-teens". That is a real stress test!

From Bloomberg: Wall Street in Wells Fargo Moment as Euphoria Meets Stress Test

“The bottom line is if the unemployment rate peaks at 10 percent these banks can make it through,” [Paul Miller, an analyst at FBR Capital Markets] said. “But if it peaks closer to 12 percent, nobody makes it. Or very few people make it.”

So far the baseline case is meaningless, and for unemployment, the economy is tracking worse than the more adverse scenario.

GDP Growth Rate

Roubini writes:

A similar analysis suggests that the FDIC assumptions for GDP growth and home prices are already worse than the adverse scenario – let alone the baseline scenario – for Q1 of 2009. A first estimate of Q1 2009 GDP growth will be out only at the end of April 2009 but the current consensus is that the figure will be around -5% for the SAAR figure in Q1. ... the current consensus forecast for 2009 GDP growth is – at 3.2% - practically identical to the adverse scenario GDP growth for 2009; and most reputable research institutions are forecasting for 2009 a figure that is actually worse than the consensus scenario. Also, while the current consensus forecast for 2010 growth (2.0%) is practically identical to the baseline scenario for 20010 GDP growth (2.1%) a number of more accurate than consensus source are predicting a much weaker scenario for 2010: for example Goldman Sachs has a current forecast of 1.2% for 2010 GDP growth as opposed to the baseline scenario figure of 2.0%. So, in all likelihood even the current consensus forecasts is close – or worse – than the more adverse scenario while the baseline scenario is already out of the window both for Q1 and the year overall.

Once again, Roubini is working off the annual stress test forecasts. The above table shows that a 5% annualized decline in real GDP is the baseline case.

Earlier I compared the quarterly stress test forecasts with forecasts from Paul Kasriel at Northern Trust, and from Goldman Sachs (no link). See: Stress Test, Quarterly Forecasts for Unemployment and GDP

This graph compares the stress test forecasts for changes in real GDP with recent forecasts. Note: Kasriel has announced he is revising his Q1 GDP forecast upwards.

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%.

These bearish private forecasts are tracking slightly better than the more adverse scenario.

House Prices

Roubini:

[H]ome prices have been falling in recent months at a rate that is much higher than the 14% assumed in the FDIC baseline for 2009. They are also running currently at an annual rate that is higher than the 22% in the more adverse scenario of the FDIC; and even considering actual figures for the last few months – that show an accelerated rate of fall in homes prices between the spring of 2008 and the most recent data – home prices have been falling in the last few months at rates – average of y-o-y and m-o-m figures – of about 20% with an upward trend in the data. So the actual and trend figures are well above the baseline figure of 14% and closer to the 22% of more adverse scenario.

As Roubini notes, we only have one month of data since the stress tests scenarios were released. The Case-Shiller index is released with almost a two month lag (January data was released near the end of March). Also, we have to be careful because there is a strong seasonal component to house prices.

This graph compares the Case-Shiller Composite 10 index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

This is the first month and it is difficult to see the track on the graph. Here are the numbers:

Case-Shiller Composite 10 Index, January: 158.04

Stress Test Baseline Scenario, January: 159.69

Stress Test More Adverse Scenario, January: 158.07

It is only one month, but prices tracked the more adverse scenario in January.

Roubini concludes in bold:

Conclusion: Actual macro data for 2009 are already worse than the more adverse scenario in the stress tests. These are not stress tests but rather fudge tests

I agree there is no real stress test, and the more adverse scenario is the real baseline. But I think it is premature to say that the more adverse scenario is meaningless.

by Calculated Risk on 4/13/2009 12:39:00 AM

From the NY Times: ‘Surgical’ Bankruptcy Possible for G.M.

The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline... The goal is to prepare for a fast “surgical” bankruptcy, the people who had been briefed on the plans said.
...
One plan under consideration would create a new company that would buy the “good” assets of G.M. almost immediately after the carmaker files for bankruptcy.
...
Treasury officials are examining one potential outcome in which the “good G.M.” enters and exits bankruptcy protection in as little as two weeks ...

For discussion:

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

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.