by Calculated Risk on 6/15/2009 10:59:00 PM

From David Streitfeld at the NY Times: Credit Bailout: Issuers Slashing Card Balances

... Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.

It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

... many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.
...
An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.

He was paying fitfully on his card, which was canceled for delinquency. In April, HSBC offered him full settlement at 20 percent off. He declined. A few weeks later, it agreed to let him pay half.

...a line has been crossed, credit experts say.

“Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.

The story notes that these settlements still damage the borrowers credit. But this appears to be a significant shift.

As an aside: My personal view is that in a financially literate world, almost all borrowers would pay off their credit card balances monthly (there are exceptions).

by Calculated Risk on 6/15/2009 09:29:00 PM

A few more details on the Extended Stay Bankruptcy (ht Brian):

Purchase Price in April 2007: $8 billion. Source WSJ: "Wachovia, Bear Stearns and others lent Lightstone founder David Lichtenstein $7.4 billion so he could buy the 684-hotel chain from Blackstone Group for $8 billion in April 2007."

Current Value: $3.3 Billion. Source WSJ: "The hotel chain is now valued at $3.3 billion, according to its filing. That figure isn't even 60% of the buyout price and even lower than the amount of the first mortgage, $4.1 billion."

Capital structure: Source WSJ: "The hotel chain has $4.1 billion in a senior first mortgage that was mostly sold to investors as CMBS. Behind those secured creditors is the $3.3 billion of mezzanine debt divided into 10 classes ranked one through 10 in seniority."

Federal Reserve has Bear Stearns share. Source WSJ: "U.S. taxpayers also have had an interest in the talks because another lender in the buyout was Bear Stearns Cos., whose stake was taken over by the Federal Reserve after Bear collapsed in March 2008."

Federal Reserve Losses: If the Bear Stearns held only the senior debt, the Federal Reserve appears to have taken a 20% haircut. If the Fed owns any of the Junior debt - that is probably worthless.

And from the NY Times Dealbook (April 2008)

Under questioning from Robert Casey Jr., a Democratic Senator from Pennsylvania, Mr. Bernanke said Wednesday that the assets making up the Fed’s collateral were “entirely investment grade, entirely current and performing.” He said BlackRock, which the Fed has hired to manage the collateral, is “confident, or at least reasonably confident, that we would be able to recover the full amount.”

But, he was asked, what if BlackRock concludes that the collateral is worth far less than $30 billion? Can the Fed go back and ask for more?

Mr. Bernanke’s answer was brief: No, we cannot.

by Calculated Risk on 6/15/2009 07:48:00 PM

From the WSJ: Banks Challenge N.Y. Insurance Regulator Over MBIA Split

A group of large banks stepped up their fight against MBIA Inc.'s decision to split its businesses, filing a petition claiming the New York State Insurance Department had no right to approve the move.

The banks contend the move benefited some policyholders at the expense of others.

The 18 financial institutions, which include Barclays PLC., Bank of America Corp. and J.P. Morgan Chase & Co ...

The New York State Insurance Department earlier approved MBIA's restructuring plan to split its municipal-bond insurance business from its mortgage-backed securities insurance business. Many banks and hedge funds bought MBIA insurance on their structured product portfolios, and they are concerned about the financial strength of the MBS insurance business (and whether they will be paid or suffer further losses).

by Calculated Risk on 6/15/2009 06:38:00 PM

"Green Shoots" by Slick Dog's twenty month old daughter Piglet. Click on painting for larger image in new window.

by Calculated Risk on 6/15/2009 05:16:00 PM

Note: this is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports.

Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Click on graph for larger image in new window.

Inbound traffic was 19.7% below May 2008.

Outbound traffic was 15.3% below May 2008.

There has been some recovery in exports over the last few months (the year-over-year comparison was off 30% from December through February). But this is the 3nd worst YoY comparison for imports - only February and April were worse. So imports from Asia appear especially weak.

This suggests a little more improvement in the trade balance with Asia in the May trade report. Of course the overall trade deficit will probably be worse because of rising oil prices.

by Calculated Risk on 6/15/2009 03:52:00 PM

From CNBC: Credit Card Default Rate Hits Record High

U.S. credit card defaults rose to record highs in May, with a steep deterioration of Bank of America's lending portfolio ...

Bank of America—the largest U.S. bank—said its default rate, those loans the company does not expect to be paid back, soared to 12.50 percent in May from 10.47 percent in April.

In addition, American Express ... said its default rate rose to 10.4 percent from 9.90 ...

Capital One said its credit card default rate rose to 9.41 percent from 8.56 percent, while Discover said its charge-off rate increased to 8.91 percent from 8.26 percent.

JPMorgan Chase ... said its default rate rose to 8.36 percent in May from 8.07 percent in April

For the stress tests, the indicative two year loss rate for the more adverse scenario was 18% to 20% for credit cards (around 9% per year). That test might have been too lenient.

by Calculated Risk on 6/15/2009 01:00:00 PM

Click on graph for larger image in new window.

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) decreased to 15 in June from 16 in May. The record low was 8 set in January.

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

Press release from the NAHB (added): Builder Caution Reflects Fragile Housing Market In June

Indicating that single-family home builders remain cautious and concerned about the fragile state of today’s economy and housing market, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) declined one point to 15 in June.
...
“As expected, the housing market continues to bump along trying to find a bottom,” said NAHB Chief Economist David Crowe. “Meanwhile, builders are taking their cue from consumers, who remain uncertain about the economy and their own situation. Builders are also finding it difficult to complete a sale because customers cannot sell their existing homes.”
...
Two out of three of the HMI’s component indexes were unchanged in June, including the index gauging current home sales, which held at 14, and the index gauging traffic of prospective buyers, which held at 13. Meanwhile, the index gauging expectations for the next six months declined a single point, to 26.

Regionally, the decline was entirely focused in the South, which is the nation’s largest housing market. There, the HMI declined 3 points to 15, while the rest of the regions posted gains. The Northeast had a one-point gain to 20, the Midwest, a one-point gain to 15, and the West, a two-point gain to 14.

by Calculated Risk on 6/15/2009 11:56:00 AM

Fitch: Multifamily & Retail Defaults Drive U.S. CMBS Delinquencies Past 2%

Large loan defaults coupled with declining performance on multifamily and retail properties resulted in a 29 basis point (bp) climb to 2.07% for U.S. CMBS delinquencies in May, according to the latest Fitch Ratings Loan Delinquency Index. This marks the highest percentage of delinquencies since Fitch began its Index in 2001.

"Defaults on larger loans continue to drive delinquency increases because later vintage transactions have larger loans, many underwritten with now unrealized proforma income, as well as now-depleted debt service reserves and high leverage," said Managing Director and U.S. CMBS group head Susan Merrick.
emphasis added

Some CRE loans were based on overly optimistic proforma income (aka wishful thinking like stated income), and the loans included reserves to pay interest until rents increased (like a negatively amortizing option ARM). When the reserves run dry, and the proforma income is "unrealized", the borrower defaults.

And by sector:

Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed the multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn.

The 60 days or more delinquency rate for retail properties is slightly higher than the index at 2.24%.
...
Loans backed by hotels have thus far withstood economic pressures and continue to slightly outperform the Index with a 1.91% delinquency rate.

by Calculated Risk on 6/15/2009 10:56:00 AM

From Bloomberg: Extended Stay Hotels Chain Declares Bankruptcy in New York

Extended Stay Hotels ... which has more than 680 properties, said it had $7.1 billion in assets and $7.6 billion in debts at the end of last year. The company employs approximately 10,000 ...

Hotel occupancy is off more than 10% compared to last year - and revenue per available room off more than 20% - a very difficult operating environment, especially for hotel chains laden with debt.

Added: Some background from the WSJ :

Wachovia, Bear Stearns and others lent Lightstone founder David Lichtenstein $7.4 billion so he could buy the 684-hotel chain from Blackstone Group for $8 billion in April 2007. Mr. Lichtenstein, with help from Arbor Realty Trust, put in about $600 million. He estimated earnings were around $575 million, meaning the deal was levered at nearly 13 times -- high even for that era.

Much of the debt in the 2007 buyout of Extended Stay was converted into commercial mortgage-backed securities, or CMBS ...

The hotel chain has $4.1 billion in a senior first mortgage that was mostly sold to investors as CMBS. Behind those secured creditors is the $3.3 billion of mezzanine debt divided into 10 classes ranked one through 10 in seniority. Most of the holders of junior mezzanine debt bought at a discount, some around 60 cents on the dollar, but others as low as 10-15 cents, say debt holders. Both the senior and mezzanine loans mature June 12, with extension options.

by Calculated Risk on 6/15/2009 08:38:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to deteriorate in June, at a moderately faster pace than in May. The general business conditions index fell 5 points, to -9.4. The new orders index remained negative and near last month’s level, while the shipments index fell 6 points to -4.8.
...
In a series of supplementary questions, manufacturers were asked about their capital spending plans for 2009 relative to their actual spending for 2008, both overall and for a few broad categories of capital (see Supplemental Report tab). Similar questions had been asked in June 2008 and June 2007. In the current survey, 56 percent of respondents reported reductions in overall capital spending in 2009, while just 20 percent reported increases. These results contrast fairly markedly with those of the June 2008 survey, which showed nearly as many respondents reporting increases (32 percent) as decreases (36 percent).

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 in June.