by Calculated Risk on 4/22/2009 01:38:00 PM

From DataQuick: Golden State Mortgage Defaults Jump to Record High

Lenders filed a record number of mortgage default notices against California homeowners during the first three months of this year, the result of the recession and of lenders playing catch-up after a temporary lull in foreclosure activity ...

A total of 135,431 default notices were sent out during the January- to-March period. That was up 80.0 percent from 75,230 for the prior quarter and up 19.0 percent from 113,809 in first quarter 2008, according to MDA DataQuick.

Last quarter's total was an all-time high for any quarter in DataQuick's statistics, which for defaults go back to 1992. There were 121,673 default notices filed in second quarter 2008 and 94,240 in third quarter 2008, during which a new state law took effect requiring lenders to take added steps aimed at keeping troubled borrowers in their homes.

"The nastiest batch of California home loans appears to have been made in mid to late 2006 and the foreclosure process is working its way through those. Back then different risk factors were getting piled on top of each other. Adjustable-rate mortgages can be good loans. So can low- down-payment loans, interest-only loans, stated-income loans, etcetera. But if you combine these elements into one loan, it's toxic," said John Walsh, DataQuick president.

The median origination month for last quarter's defaulted loans was July 2006. That's only four months later than the median origination month for defaulted loans a year ago, in first quarter 2008. That suggests a period where underwriting criteria were particularly lax.

Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3 million in 2006, 8.5 percent have so far resulted in default. A particularly toxic period appears to have been August through November 2006 which had more than a 9 percent default rate. Of the 2.1 million loans made in 2007, it's 4.6 percent - a percentage that's likely to rise significantly during the rest of this year.

The lending institutions with the highest default rates for loans originated in August to November 2006 include ResMAE Mortgage (69.9 percent of loans resulting in a default notice), Master Financial (64.6 percent) and Ownit Mortgage Solutions (63.6 percent). Of the major lenders, IndyMac has a default rate on those loans of 18.9 percent, World Savings 8.0 percent, Countrywide 7.7 percent, Washington Mutual 6.3 percent and Wells Fargo 3.4 percent. Less than 1 percent of the home loans originated in late 2006 by Citibank and Bank of America have since gone into default.
...
While most first quarter 2009 foreclosure activity was still concentrated in affordable inland communities, there are signs that the problem is slowly migrating into other areas. The affordable sub-markets, which represent 25 percent of the state's housing stock, accounted for more than 52.0 percent of all default activity in 2008. Last quarter it fell to 47.5 percent.
emphasis added

There is a lot of interesting data in this report. A few key points:

2009 will probably be another record year for NODs (although the lenders were playing catch-up in Q1)

2006 was a toxic year (probably because that was when house prices peaked or were starting to fall).

Defaults are movin' on up into the mid and high priced areas.

About two-thirds of the loans that ResMAE and Ownit made in 2006 are in default.

Click on graph for larger image in new window.

This graph shows the Notices of Default (NOD) by year through 2008 in California from DataQuick.

With 135,431 default notices filed in Q1 2009 (even with the lenders playing catch-up), 2009 is clearly on pace to break the 2008 record of 424 thousand NODs.

by Calculated Risk on 4/22/2009 12:37:00 PM

From the IMF report: Global Prospects and Policies

The global economy is in a severe recession inflicted by a massive financial crisis and an acute loss of confidence. Wide-ranging and often unorthodox policy responses have made some progress in stabilizing financial markets but have not yet restored confidence nor arrested negative feedback between weakening activity and intense financial strains. While the rate of contraction is expected to moderate from the second quarter onward, global activity is projected to decline by 1.3 percent in 2009 as a whole before rising modestly during the course of 2010.

These graphs from the IMF report show the synchronized global cliff diving.

Click on graph for larger image in new window.

On page 11 is a note about Global Business Cycles:

In 2009, almost all the advanced economies are expected to be in recession. The degree of synchronicity of the current recession is the highest to date over the past 50 years. Although it
is clearly driven by declines in activity in the advanced economies, recessions in
a number of emerging and developing economies are contributing to its depth and synchronicity.

To summarize, the 2009 forecasts of economic activity, if realized, would qualify this year as the most severe global recession during the postwar period. Most indicators are expected to register sharper declines than in previous episodes of global recession. In addition to its severity, this global recession also qualifies as the most synchronized, as virtually all the advanced economies and many emerging and developing economies are in recession.
emphasis added

On page 10 are the IMF economic forecasts. For the U.S., the IMF is forecasting -2.8% real change for GDP in 2009, and 0.0% (no change) in 2010.

That is basically the same as the "more adverse" stress test scenario:


Click on table for larger image in new window.

by Calculated Risk on 4/22/2009 10:24:00 AM

The Dept of Transportation reports on U.S. Traffic Volume Trends:

[T]ravel during February 2009 on all roads and streets in the nation changed by -0.9 percent (-1.9 billion vehicle miles) resulting in estimated travel for the month at 215.8 billion vehicle-miles.
...
NOTE: The Average Daily Travel changed by +2.7% for February 2009 as compared to February 2008

Update: added the leap year adjustment.

Click on graph for larger image in new window.

The first graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.6% Year-over-year (YoY); the decline in miles driven is worse than during the early '70s and 1979-1980 oil crisis.

The second graph shows the comparison of month to the same month in the previous year as reported by the DOT.

This comparison has been improving. As the DOT noted, miles driven in February 2009 were 0.9% less than in February 2008.

Year-over-year miles driven started to decline in December 2007, and really fell off a cliff in March 2008. So the March 2009 report, to be released next month, will be very interesting.

by Calculated Risk on 4/22/2009 09:08:00 AM

From Reuters: Architecture billings index jumps in March: AIA

Update: From AIA: Architecture Billings Index Shows Early Signs of Improving Business Conditions

After a series of historic lows, the Architecture Billings Index (ABI) was up more than eight points in March. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI rating was 43.7, up from the 35.3 mark in February. This was the first time since September 2008 that the index was above 40, but the score still indicates an overall decline in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry score was 56.6.

“This news should be viewed with cautious optimism,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “The fact that inquiries for new projects increased is encouraging, but it will likely be a few months before we see an improvement in overall billings. Architects continue to report a diversity of business conditions, but the majority is still seeing weak activity levels.”

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index is still below 50 indicating falling demand.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on commercial real estate (CRE). So there will probably be further dramatic declines in CRE investment later this year.

by Calculated Risk on 4/22/2009 08:41:00 AM

Form the Financial Times: Bank tests we should get stressed about (ht MrM)

[T]he tests suggested a concrete way to differentiate between the solid institutions that can raise private capital, and those that will (and must) feel a heavy government hand.
...
First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity ...

Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled.

There is more, but I think these are the two key points: Transparency is key. And the results should be announced as part of a comprehensive plan.

by Calculated Risk on 4/22/2009 01:23:00 AM

By popular request, an open thread and a few sources for futures and the foreign markets.

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets.

And a graph of the Asian markets.

And a little music ...

Best to all.

by Calculated Risk on 4/21/2009 10:09:00 PM

From David Leonhardt at the NY Times: For Housing Crisis, the End Probably Isn’t Near

Note: See article for graphic on house prices to median income by city.

... I decided to go to an auction at a hotel ballroom in Washington — and to study the results of several others elsewhere — with an eye to figuring out whether prices may now be close to bottoming out.
...
The winning bid on the first home auctioned off, a two-bedroom townhouse in Virginia Beach, was $115,000. Just last July, it sold for $182,000, according to property records. A four-bedroom brick house with a two-car garage in Upper Marlboro, Md., went for $375,000. Last year, it sold for $563,000.

Leonhardt provides other auction examples, and concludes prices are still falling sharply:

[T]he great real estate crash is not over, either. So if you are part of the 30 percent of American households who rent and you’re trying to decide when to buy, relax.

The market is still coming your way.

As I've noted before, most housing busts have two bottoms; the first bottom will be for residential investment (RI), and the second will be for existing home prices. The second bottom will come later, possibly much later. We haven't even seen the bottom for RI yet!

Given the huge excess supply, especially of distressed properties, I think Leonhardt is correct that prices will continue to fall.

by Calculated Risk on 4/21/2009 06:45:00 PM

Conference call notes (ht Brian):

Economic deterioration continued at a rapid pace during the first quarter driving increasing delinquency and charge off rates across most of our lending businesses. U.S. card charge off rate increased to 8.4% for the first quarter, above the 8.1% charge off rate expectation we articulated a quarter ago. Expected seasonal increases in bankruptcies and declining loan balances resulted in higher charge off rates compared to the fourth quarter of 2008. The increase in charge off rates beyond our expectations resulted from several factors related to the pace of economic deterioration in the quarter. Bankruptcies were higher than expected, increasing charge-offs directly without impacting delinquency rates. Recoveries on already charged off debt were lower than expected. We also observed an acceleration of later stage delinquency balances slowing to charge off in the quarter. For context recall that when we articulated our expectations last January the unemployment rate was 7.2% and we assumed it would increase to about 8.7% by the ends of 2009. The unemployment rate has already deteriorated to 8.5% and is expected to move beyond 8.7% well before year end. Even though our U.S. card charge off rate was higher than the expectation we had last quarter delinquencies and charge-offs were a bit better than we would have expected given the actual economic worsening we've seen in the quarter. ...

Credit Loss outlook

We expect further increases in U.S. card charge off rate through 2009 as the economy continues to weaken. It is likely that will our U.S. card charge off rate will increase at a faster pace than the broader economy as a result of the denominator effect and our implementation of OCC minimum payment requirements ... We expect monthly U.S. card charge off rates to cross 10% in the next couple of months.

Economic Outlook

I'll update our economic outlook. Unemployment and home prices have been and continue to be the economic variables with the greatest impact on our credit results. We now expect unemployment rate to increase to around 9.6% by the ends of 2009. Our prior assumption for home prices was for the Case Shiller 20 city index to fall by around 37% peak to trough. We now expect a modestly worse peak to trough decline of around 39%. ...

The expected 'greater than 10% charge-off rate' is probably worse than the expected credit card loss rates for the "more adverse" scenario. I'll be curious if the Federal Reserve white paper, to be released on Friday, will mention the expected loss rates by category.

by Calculated Risk on 4/21/2009 05:16:00 PM

Here is a letter from the FHFA to Chairman Dodd that was released today (ht James, Tim, Brian)

Update: here is the news release from FHFA: FHFA Expands Reporting on Homeowner Assistance

The tables show that the number of prime 60 days+ delinquent rose to 743,686 in January, from 497,131 in December. This is an increase from 1.93% in December to 2.89% in January.

The number of non-prime 60 day+ delinquent loans increased too; from 428,705 in December to 485,365 in January. But the foreclosure problem is now mostly a prime problem!

Or as Tanta used to say: "We're all subprime now!"

by Calculated Risk on 4/21/2009 04:13:00 PM

Pier loans: Bridge loans that couldn't be sold.

From the WSJ: Bankers Rebuff U.S. on Chrysler Debt

Chrysler owes ... lenders, which include banks such as Citigroup Inc. and J.P. Morgan Chase & Co., about $6.9 billion. But President Barack Obama and his auto team had demanded that the banks cut that to $1 billion, while gaining no equity stake in a restructured Chrysler.

In their five-page counteroffer, the lenders said they are prepared to cut Chrysler's first-lien debt by $2.4 billion, or down to about $4.5 billion, in exchange for a minority equity stake, likely to be 35% to 40% ...

The lenders have told Treasury ... they could recover at least 65% of their loans to the company if it is liquidated in bankruptcy.

Chrysler is probably worth more dead than alive - at least to these debt holders. That complicates the negotiations.

Nine days to go ...