by Calculated Risk on 5/15/2009 12:33:00 PM

Click on puzzle for larger image in new window.

I've linked to a few pieces of the puzzle below.

But this adds up to more supply (in the mid-to-high end) because of rising foreclosures - and limited demand because sellers at the low end are mostly banks or short sales (so there are no move up buyers), and tight financing.

To me, this suggests prices will fall much further in many mid-to-high end areas.

Surging prime delinquencies.

See: OCC: More Seriously Delinquent Prime Loans than Subprime

and Fannie, Freddie Report Surge in Prime Delinquencies

and S&P: Delinquencies Surge for HELOCs and Jumbo Prime Loans

Option ARM Loan Recasts are coming.

See: Loan Reset / Recast Schedule

Limited Jumbo Financing

See: More Jumbo Financing Coming

Few Move up buyers

See: Home Sales: One and Done

And even more shadow supply, see: High Percentage of Homeowners Waiting for a Market Turnaround

by Calculated Risk on 5/15/2009 11:51:00 AM

2nd Update: From FDIC: FDIC Statement Clarifying Bloomberg Article

Statement from the FDIC Office of Public Affairs, "The Bloomberg story referencing Chairman Bair's discussion of management and board changes is misleading and does not provide the proper context of her comments. Chairman Bair said that management changes could happen based on the capital plans that an institution must submit to the government. She did not refer to CEOs specifically and the comment was in the context of capital plans submitted by the institutions. Chairman Bair also did not suggest the federal government will remove the bank CEOs."

Transcript of the exchange from Bloomberg follows:

MR. HUNT: But in the same situation, or similar situation, the government already replaced CEOs at Fannie and Freddie and General Motors -

MS. BAIR: Yes, that's right.

MR. HUNT: And some people say, well, why is the head of Bank of America still there? Or why are some of these other banks' CEO's still there?

MS. BAIR: Right, well, obviously I don't comment on open and operating institutions. I think the review needs to go with both the management and the boards as well, absolutely. And management needs to be evaluated and is this the right skill set, have they been doing a good job, are there people who can do a better job, those kinds of questions.

MR. HUNT: Do you think some will be replaced in the next couple of months without getting into the particulars?

MS. BAIR: Yeah, I think there will be an evaluation process. We're requesting it as part of the capital plan and yes.

Update: From Bloomberg: Bair Says Some Bank Chiefs Will Be Replaced in Next Few Months

From FDIC's Sheila Bair on Political Capital with Al Hunt this weekend (Bloomberg TV):

Some Bank CEOs will be replaced in next few months

'No one accountable' for entire U.S. banking system

U.S. needs to fill 'hole' on oversight of holding companies

U.S. to have management 'evaluation' process at banks

'Need is still there' to remove toxic assets from banks

Liquidity crisis is over

by Calculated Risk on 5/15/2009 09:15:00 AM

The Federal Reserve reported:

Industrial production decreased 0.5 percent in April after having fallen 1.7 percent in March. Production in manufacturing declined 0.3 percent in April and was 16.0 percent below its recent peak in December 2007. The decreases in manufacturing in April remained broadly based across industries. Outside of manufacturing, the output of mines fell 3.2 percent, as oil and gas field drilling and support activities continued to drop. The output of utilities moved up 0.4 percent. At 97.1 percent of its 2002 average, industrial output in April was 12.5 percent below its year-earlier level. The capacity utilization rate for total industry fell further in April, to 69.1 percent, a low over the history of this series, which begins in 1967.
emphasis added

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is at another record low (the series starts in 1967).

In addition to the weakness in industrial production, there is little reason for investment in new production facilities until capacity utilization recovers.

by Calculated Risk on 5/15/2009 08:36:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers worsened only modestly in May. Although negative, the general business conditions index rose 10 points to -4.6, its highest level since August of last year. The new orders index fell several points and remained below zero, while the shipments index inched into positive territory. The inventories index remained negative, but rose from last month’s record low. Price indexes also continued to be negative, with the prices received index falling 10 points to a record low. Employment indexes indicated further contraction in employment levels and in the average workweek.

Here is the general business conditions index. Note that the data only goes back to July 2001 (chart to Jan 2002). Any reading below zero is contraction, so this index shows manufacturing is contracting - but "only modestly" in May.

by Calculated Risk on 5/15/2009 12:21:00 AM

From Floyd Norris at the NY Times: A Bank Is Survived by Its Loans

World Savings ... did not sell its loans into securitizations, so it knew it stood to lose if a loan went bad. Virtually all of the pick-a-pay loans were for less than 80 percent of the appraised value of the home, and the average was just 71 percent. World said it made loans only to those who could afford the stepped-up monthly payment after the reset, and said it did not lend to subprime borrowers.
...
Most banks forced the borrower to start making much larger monthly payments if the amount owed ... rose to 110 percent of the appraised value of the home when the loan was made. World ... did not force the payments up until the amount owed was 25 percent greater than the original value.

World Savings appeared to make safe loans, but they were very generous on the cap for when the loans recast. World also used the original appraised value, and there was no reappraisal provision.

So even though the borrowers originally had substantial "skin in the game", many of the borrowers are deep underwater - and are now really renters.

Note: World was part of Golden West which was bought by Wachovia, and is now owned by Wells Fargo.

The amount owed on such loans at the end of March was $115 billion, which Wells estimates is 107 percent of the current value of the properties underlying the mortgages.
...
Only $325 million of the loans — less than a third of 1 percent — will reset by the end of 2012.
...
Wells Fargo has written the value of the pick-a-pay portfolio down by about 20 percent, and is offering to restructure some of the loans. But many of the owners may have no reason to seek such a restructuring. ... The result may be perverse: a prolonged foreclosure crisis ...

At least we don't have to worry about many of these loans blowing up over the next few years!

Note: I think Norris means recast, not reset, "Reset" refers to a rate change. "Recast" refers to a payment change.

by Calculated Risk on 5/14/2009 09:17:00 PM

After the insurers comes ...

From the WSJ: YRC to Apply for Bailout Funds

YRC Worldwide Inc., one of the nation's largest trucking companies, will seek $1 billion in federal bailout money to help relieve pension obligations, the chief executive said Thursday.
...
Chief Executive William Zollars said the company will seek the money to help cover the cost of its estimated $2 billion pension obligation over the next four years.
...
By applying to the U.S. Treasury for money under the Troubled Asset Relief Program, Mr. Zollars said he hopes to "get the conversation started" with federal authorities about reducing the company's pension obligations. He said YRC will submit an application to the Treasury Department as early as Friday.

Is YRC a bank holding company?

by Calculated Risk on 5/14/2009 07:34:00 PM

Update:from the WaPo: Insurance Companies Approved for TARP Money

The Treasury today granted preliminary approval for some of the nation's largest insurance companies to receive capital infusions under the government's Troubled Assets Relief Program, Treasury spokesman Andrew Williams said.

Recipients are Hartford, Prudential, Allstate, Ameriprise, Lincoln National and Principal Financial Group, Williams said.

From Hartford: The Hartford Receives Preliminary Approval For $3.4 Billion Participation In Treasury's Capital Purchase Program (ht jb)

The Hartford Financial Services Group, Inc. (NYSE: HIG - News) announced today that the United States Treasury Department has provided preliminary approval for the company to participate in Treasury’s Capital Purchase Program (CPP) in the amount of $3.4 billion.

by Calculated Risk on 5/14/2009 05:44:00 PM

From Edmund Andrews at the NY Times: My Personal Credit Crisis

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

Both Tanta and I linked to articles by Andrews over the years, and I'm amazed by this story ...

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds.
...
Patty [his new wife] discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, Md. We sent in an offer of $460,000 and one day later got our answer: the sellers accepted.
...
The only problem was money. Having separated from my wife of 21 years, who had physical custody of our sons, I was handing over $4,000 a month in alimony and child-support payments. That left me with take-home pay of $2,777, barely enough to make ends meet in a one-bedroom rental apartment. Patty had yet to even look for a job. At any other time in history, the idea of someone like me borrowing more than $400,000 would have seemed insane.

But this was unlike any other time in history.

I won't spoil the story, but it should be obvious the number don't work...

by Calculated Risk on 5/14/2009 03:53:00 PM

Stanford Law Professor Joseph Grundfest interviews Charlie Munger, vice chairman of Berkshire Hathaway: Legal Matters

Munger makes a number of interesting comments (I believe many of you will find the interview interesting). Here are a few excerpts ...

On accounting:

Grundfest: As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?

Munger: I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They’ve sold out, and they do not even realize that they’ve sold out.

Grundfest: Would you give an example of a particular accounting practice you find problematic?

Munger: Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

Grundfest: And they can’t both be right. But both of them are following the rules.

Munger: Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense.

And on derivatives:

Grundfest: You and your partner, Warren Buffett, have for years warned about the dangers of the modern derivatives markets, particularly credit derivatives, and about interest rate swaps, currency swaps, and equity swaps.

Munger: Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the ’20s we had the “bucket shop.” The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn’t buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system.

Grundfest: Until the house lost its money and suddenly disappeared. Or the house made its money and suddenly disappeared.

Munger: That is right. Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance — including Alan Greenspan — argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There’s another word for this: bonkers. It is not a credit to academic economics that Greenspan’s view was so common.

There is much more.

by Calculated Risk on 5/14/2009 02:23:00 PM

Press Release: Homeowner Confidence Shrinks; Most Americans Now Believe Their Home's Value Has Declined (ht broward, Jonathan)

The following table gives an idea of the number of homeowners waiting for a market turnaround to sell. Since about 6% of owner occupied properties turnover per year, this is a substantial shadow inventory.

Click on table for larger image in new window.

On shadow inventory:

As for selling activity, it's clear a significant number of potential sellers are holding back due to the current market. When asked about future plans to sell, 31 percent of homeowners said they would be at least "somewhat likely" to put their homes on the market in the next 12 months if they saw signs of a real estate market turnaround.
...
"Also interesting is the information we have for the first time this quarter on the levels of 'shadow inventory' - homes that people would like to sell but that aren't currently on the market, and thus aren't captured in the official number of homes on the market. With almost a third of homeowners poised to jump into the market at the first sign of stabilization, this could create a steady stream of new inventory adding to already record-high inventory levels, thus keeping downward pressure on home prices." [said Dr. Stan Humphries, Zillow's vice president of data and analytics].

Here is the full report: Q1 2009 Homeowner Confidence Survey Results