by Calculated Risk on 6/13/2009 01:25:00 PM

From The Telegraph: US cities may have to be bulldozed in order to survive (ht Chad, Brian)

The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.

Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.

The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.

Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.

Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.

In Detroit ... there are already plans to split it into a collection of small urban centres separated from each other by countryside.

"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."

by Calculated Risk on 6/13/2009 08:44:00 AM

Fitch expects "home prices will fall an additional 12.5% nationally and 36% in California" from Q1 2009.

And, oh, you remember subprime?

From HousingWire: Subprime Bloodletting Continues at Fitch

Fitch Ratings today made massive downgrades on various vintage ‘05 through ‘08 subprime residential mortgage-backed securities (RMBS), indicating the extent of the fallout related to subprime defaults has yet to subside.

The rating agency slashed hundreds of RMBS ratings further into junk territory.

Here is the Fitch statement: Fitch Takes Various Actions on 543 2005-2008 U.S. Subprime RMBS Deals

On home prices:

The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010. To date, national home prices have declined by 27%. Fitch Rating's revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today's levels.

In explaining the downgrades, Fitch said the actions reflect updated loss expectations and further economic deterioration:

“The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%.”

by Calculated Risk on 6/12/2009 10:54:00 PM

"The conventional view is that housing appreciation is good because it reduces (default) risk. Not according to my theory, which is housing appreciation is bad. It encourages junior-lien borrowing. When appreciation stops, somebody is going to be left in a bad position."
Michael LaCour-Little, finance professor at Cal State Fullerton (emphasis added)

From Matt Padilla at the O.C. Register: Second mortgages: Lines of danger?

Record foreclosures hitting Orange County involve more than just newbie buyers who got in over their heads.

Some housing watchers say evidence is mounting that even veteran homeowners got caught up in housing euphoria and now are paying for it.

The latest argument comes from Michael LaCour-Little, a finance professor at Cal State Fullerton. He is lead author of a new study, which found that during the housing boom some long-time owners borrowed against all their property's equity gain, or paper profits. They treated their houses like cash machines.
...
It's long been assumed that homebuyers who purchased at housing's peak with little money down are among the most likely to face foreclosure. They owed more than their property was worth once prices tanked.

But the study concludes 'cashing-out' is about as predictive of foreclosure for the same reason: negative equity.

And look at these numbers:

Professor LaCour-Little tracked all houses and condos set for foreclosure auctions, known as trustee's sales, in the first two weeks of November 2006, 2007 and 2008 in Orange, Los Angeles, Riverside, San Bernardino and San Diego counties. ...

For the early November 2008 data sample, he tracked 2,358 properties and found 79 percent of borrowers had at least a second mortgage. Some also had third and fourth liens. ...

The 2008 foreclosures were purchased in "median" year 2004, meaning half the purchases were before and half after. That suggests more than half the purchases were before housing's peak in 2005 and 2006.

There will be many foreclosures of homes bought before the bubble (or in the early stages of the bubble), because the homeowners extracted too much equity from the home. This is not surprising, but probably means more foreclosures than policymakers expect.

by Calculated Risk on 6/12/2009 09:36:00 PM

Since the FDIC cancelled Friday ... here is Senator Voinovich showing us his charting skills.

by Calculated Risk on 6/12/2009 06:27:00 PM

From Forbes: Bair Cautions Banking Crisis Is Not Over (ht jb)

Sheila Bair ... said Friday that while the crisis that swept through the financial world last year has subsided somewhat, it was far from over and there would be "many more bank failures" ahead.

"I think there's still some challenges, I think we need to be realistic. There are still some troubled assets on the books and we still have an economy that's under significant stress," said Bair in a 90-minute interview with Forbes reporters and editors on Friday.

We still don't know how deep the recession is going to be," she said, adding, "we'll still be well below what we were in the S&L days."
...
"Hopefully there are no more events that create liquidity stresses on the banks," Bair said, knocking on a wooden conference room table, "and now we're having more good old-fashioned capital insolvencies."

... she worried aloud about the current trend toward making the Federal Reserve banking's regulator-in-chief. ... "No other developed country gives their central bank the kind of power we give our central bank," Bair said.

"[The Fed] had authority to prescribe across-the-board lending standards for mortgages, and a lot of people said they should do that and they just didn't," Bair says as an example of where too many roles led to lapses. "Where does the consumer role go on your priority list? At some point it just doesn't get done. It just doesn't get the focus it should."

by Calculated Risk on 6/12/2009 04:00:00 PM

Some stats: There have been 37 FDIC bank failures in 2009 (about 1.6 per week).

Click on graph for larger image in new window.

This graph shows the bank failures per week through the first 23 weeks of 2009.

There have been six weeks with no failures, and two weeks with four failures.

Note: Corus Bankshares Inc. faces a June 18th deadline imposed by bank regulators to raise capital or find a buyer. I wouldn't be surprised if Corus is seized next week.

The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 6/12/2009 03:03:00 PM

From Brad Setser at Follow the Money: Just who bought all the Treasuries the issued in late 2008 and early 2009?

... the Fed’s flow of funds data leaves little doubt that — at least during the first quarter — the rise in public borrowing was fully offset by a fall in private borrowing.

Who bought all the Treasuries the US government has issued in the last four quarters of data (q2 2008 to q1 2009)? Foreign demand for Treasuries — as we have discussed extensively — hasn’t disappeared, unlike foreign demand for other kinds of US debt. But foreign demand hasn’t increased at the same pace as the Treasury’s need to place debt. The gap was filled largely by a rise in demand for Treasuries from US households.

Before the crisis, foreign purchases formerly accounted for almost all new Treasury issuance. Over the last 12 months, foreign demand accounted for more like half of total issuance even as foreigners bought a record sum of Treasuries. And from what we know about the second quarter, I don’t think the basic story has changed.

And for a great series of charts comparing the current recession to prior recessions (from Paul Swartz): The Recession in Historical Context

by Calculated Risk on 6/12/2009 12:28:00 PM

Here is another look at a few credit indicators:

From Dow Jones: Key US Dollar Libor Rate Falls To Record Low

The cost of borrowing longer-term U.S. dollars in the London interbank market fell Friday, with the three-month rate reaching its lowest level since the advent of British Bankers Association Libor fixings back in 1986 as funding pressures continued to ease.

Data from the BBA showed three-month dollar Libor, seen as a key gauge of the effectiveness of the Federal Reserve's monetary policy, dropped to 0.62438% from Thursday's 0.62938%.

The three-month rate peaked at 4.81875% on Oct. 10.

Click on graph for larger image in new window.

There has been improvement in the A2P2 spread. This has declined to 0.55. This is far below the record (for this cycle) of 5.86 after Thanksgiving, but still above the normal spread.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

Meanwhile the TED spread is now down to the normal range of 46.21. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 463 on Oct 10th and a normal spread is around 50 bps.

The third graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The spread has decreased sharply, but the spreads are still high, especially for lower rated paper.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

This graph shows the at the Merrill Lynch Corporate Master Index OAS (Option adjusted spread) for the last 2 years.

This is a broad index of investment grade corporate debt:

The Merrill Lynch US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

Back in early March, Warren Buffett mentioned that credit conditions were tightening again - and this was probably one of the indexes he was looking at. Since March, the index has declined steadily.

by Calculated Risk on 6/12/2009 10:10:00 AM

From MarketWatch: Consumer sentiment rises to 69 in June

U.S. consumer sentiment rose in June, but remained at relatively low levels, according to media reports of a survey released Friday by the University of Michigan and Reuters. The consumer sentiment index rose to 69 in mid-June from 68.7 in May.

Click on graph for larger image in new window.

Consumer sentiment is a coincident indicator - it tells you what you pretty much already know.

But it does give me an excuse for a graph ...

Right now consumer sentiment is still very weak.

by Calculated Risk on 6/12/2009 08:49:00 AM

From The Times: One in ten homeowners fall into negative equity

One in ten homeowners fell into negative equity during the first three months of the year, the highest proportion for 15 years, the Bank of England said today.

The Bank estimated that between 7 and 11 per cent of homeowners with a mortgage owed more to their lender than their property was worth, the equivalent of 700,000 to 1.1 million householders.
...
Around 200,000 buy-to-let investors were also estimated to owe more on their mortgage than their property was worth ...

The research said that the overall number of those in negative equity during the first quarter of 2009 was comparable with those who suffered the problem in the mid-1990s, during the last housing market correction.

The Bank said house prices had fallen by around 20 per cent between the autumn of 2007 and the spring of 2009, the largest nominal fall in property values on record. In contrast, it took six years for house prices to fall by 15 per cent between 1989 and 1995.

The UK has about 10 million homeowners with mortgages; the U.S. has about 51.6 million.

Moody's has estimated there 14.8 million homeowners with negative equity in the U.S. (just under 30% of homeowners with mortgages) so the problem seems more severe in the U.S.