by Calculated Risk on 7/04/2009 10:52:00 PM

From Gretchen Morgenson at the NY Times: So Many Foreclosures, So Little Logic

Alan M. White, an assistant professor at the Valparaiso University law school in Indiana analyzed data on 3.5 million subprime and alt-A mortgages in securitization pools overseen by Wells Fargo.
...
In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.

Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. ...

Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.

Well, it is an article by poor Gretchen, so we need to highlight a funny...

Loan modifications occur when a lender agrees to change terms of a troubled borrower’s mortgage; the most common approach is to reduce the loan’s interest rate. ... Lenders and their representatives, however, don’t like to modify loans through interest rate cuts ...

I guess they don't like doing the most common approach!

Note: the database analyzed by Professor White is for subprime and Alt-A only, whereas the OCC data includes prime loans - so it is hard to compare. Here is the OCC report for Q1: OCC and OTS: Prime Delinquencies Surge in Q1
And a couple of earlier posts on the OCC report:

OCC and OTS: Prime Delinquencies Surge in Q1

Modifications and Re-Default

by Calculated Risk on 7/04/2009 08:32:00 PM

This piece "Mortgages Made Simpler" by Richard Thaler, is a discussion of the proposed Obama Administration regulatory requirement that lenders offer consumers "plain vanilla" mortgages. From the Treasury regulatory reform proposals (page 66):

We propose that the regulator be authorized to define standards for “plain vanilla” products that are simpler and have straightforward pricing. The CFPA should be authorized to require all providers and intermediaries to offer these products prominently, alongside whatever other lawful products they choose to offer.

I found the following description amusing:

Traditional economics is based on imaginary creatures sometimes referred to as “Homo economicus.” I call them Econs for short. Econs are amazingly smart and are free of emotion, distraction or self-control problems. Think Mr. Spock from “Star Trek.”

Real people are not Econs. Real people have trouble balancing their checkbooks, much less calculating how much they need to save for retirement; they sometimes binge on food, drink or high-definition televisions. They are more like Homer Simpson than Mr. Spock. Call them Homer economicus if you like, or just Humans. Behavioral economics is the study of Humans in markets.

Designing policies for Econs is pretty straightforward. Because they are smart consumers and make good choices, the best policies give them as many choices as possible and simply assure that they have access to all the relevant information.

Humans, however, can use a bit more help, especially when the options are hard to understand.

I like the idea that all consumers be offered a "plain vanilla" mortgage option, and also that many of the non-traditional mortgage products come with warning labels.

Of course most CR readers are probably "Homo economicus" and are free to opt out.

by Calculated Risk on 7/04/2009 04:34:00 PM

Matt Padilla at the O.C. Registers interviews the CEO of a bank that recently acquired a failed bank: Profiting from an Irvine bank failure

Note: This regards the failure of MetroPacific Bank in Irvine, California on June 26th (just over a week ago).

Q. How did you learn a bank was going to fail and its assets be sold?

A. [Glenn Gray CEO of SunWest]: It first starts with us, or any bank, that wants to be a bidder letting the FDIC know that. ... We did that several months ago, when we anticipated that, unfortunately, bank failures were going to be an ongoing occurrence.

Then we turn the clock back to about four weeks ago. The FDIC notified us of a potential failed bank situation. They spoke in very general terms, describing a business bank with about $80 million in assets in Orange County with a single branch. They asked, ‘Are you interested?. Well, yes, that fits our profile: community banks in Orange County or North San Diego.

Next they say here’s your password, go to a secure Web site and find more information. Once we visit the site we understand which bank it is ... The data are macro level. But there is enough information for you to start to form an opinion, and you don’t have to put in bid yet.

Next they told us we would have two days of due diligence. We came on site, visiting the bank in an area segregated from the rest of the employees. Most employees didn’t know we were on site. There was an FDIC representative there. Now we start to get into more micro level detail. ... We met some people, but couldn’t get into their background or interview them.

Once the on-site review was done, we got a couple of days to form a bid. We finished up on a Thursday and had to provide a bid the following Tuesday. The next day (Wednesday June 24) they asked for some clarification and a little negotiation. Thursday (June 25) they notified us that our bid was accepted. Friday morning (June 26) we met with a larger group of FDIC employees and they did a walk through of what was going to happen. Then it happened that Friday at 4 p.m. They went in and took over the bank and we followed them.

There is much more in the interview including some comments on commercial real estate lending.

by Calculated Risk on 7/04/2009 01:39:00 PM

Here are some green shoots ... property tax appeals are growing like weeds!

From Jack Healy at the NY Times: Tax Bill Appeals Take Rising Toll on Governments

Homeowners across the country are challenging their property tax bills in droves as the value of their homes drop, threatening local governments with another big drain on their budgets.

The requests are coming in record numbers, from owners of $10 million estates and one-bedroom bungalows, from residents of the high-tax enclaves surrounding New York City, and from taxpayers in the Rust Belt and states like Arizona, Florida and California, where whole towns have been devastated by the housing bust.

“It’s worthy of a Dickens story,” said Gus Kramer, the assessor in Contra Costa County, Calif., outside San Francisco.

And a few quotes ...

“We’ve been absolutely getting killed,” said Robert W. Singer, the mayor of Lakewood Township, N.J. ...

“We’re hearing from people like this every day,” [Jeff Furst, the appraiser in St. Lucie County, Fla] said. In St. Lucie ... property tax revenue is expected to fall 20 percent, and tax appeals are 10 times as high as they are normally. “Most people are going to see a significant decline in their tax bill.”

Mr. Kramer, the assessor in Contra Costa County, said homeowners started swamping his office with requests for new assessments in December. As many as 500 people would call in one day. His voice mail message now begins: “If you’re calling to request an informal review of your property value due to the declining real estate market.”

The article has several stories from around the country.

New Jersey has really high property taxes - the article provides an example of a house assessed at $1.8 million with a $53,000 per year property tax bill (almost 3 times higher than a house with a similar appraised value in California). When that house in New Jersey sells (currently listed at $1.3 million) or is reappraised, the local tax revenues will take a hit. And that same story is being repeated over and over ...

by Calculated Risk on 7/04/2009 09:08:00 AM

From Don Lee at the LA Times: Another wave of foreclosures is poised to strike

Just as the nation's housing market has begun showing signs of stabilizing, another wave of foreclosures is poised to strike, possibly as early as this summer, inflicting new punishment on families, communities and the still-troubled national economy.
...
Just how big the foreclosure wave will be is unclear. But loan defaults are up sharply. ... rising foreclosures will depress home values, pushing more homeowners underwater. Mark Zandi of Moody's Economy.com estimates that 15.4 million homeowners -- or about 1 in 5 of those with first mortgages -- owe more on their homes than they are worth.
...
"Absolutely," Chase Bank spokesman Tom Kelly said when asked about an impending surge in foreclosures. ... Bank of America spokesman Dan Frahm said the company was projecting a "slow increase" in the number of monthly foreclosures, potentially reaching 30% above previous normal levels.
...
But anecdotal reports indicate that foreclosure sales have started to climb again in the second quarter. And the pipeline is clearly getting fuller.

... just recently, said [Jerry Abbott, a broker and co-owner of Grupe Real Estate in Stockton], there's been a surge of requests for so-called broker price opinions, or appraisals that lenders often ask brokers to provide just before they put a foreclosed property on the market.

"I think it's going to be a very big wave," he said. "Just like what we saw through 2008."

Hoocoodanode? And just wait for the Option ARM recast wave ...

by Calculated Risk on 7/04/2009 01:02:00 AM

This article provides a history of brokered deposits, and discusses the potential dangers, and the inability of regulators to limit the practice.

From Eric Lipton and Andrew Martin at the NY Times: For Banks, Wads of Cash and Loads of Trouble

[B]rokered deposits ... is one of the primary factors in the accelerating wave of failures among small and regional banks nationwide. The estimated cost to the Federal Deposit Insurance Corporation over the last 18 months is $7.7 billion, and growing.
...
The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm ... And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate — often a disastrous recipe for banks.
...
The 371 still-operating banks on Foresight’s “watch list” as of March held brokered deposits that, on average, were twice the norm.

Regulators have tried to limit brokered accounts. Recently the FDIC suggested higher insurance premiums for fast growing banks that depend on brokered deposits. However, just as the FDIC tightened the rules slightly, the banks are finding new ways to attract hot money:

[B]anks — even those considered unsound — [are turning] to a “listing service,” a source of hot money by another name. Instead of paying a broker, banks pay to subscribe to an electronic bulletin board of credit unions with money to park.

One listing service, QwickRate, based in Marietta, Ga., has just 18 employees crammed into a tiny second-floor office. But it delivered $1.6 billion in hot money to banks in May, up from $450 million last May. The growth is coming partly because banks on the edge of failure are coming to the service for a lifeline.
emphasis added

This is a well known problem - George Hanc at the FDIC wrote in 1999: Deposit Insurance Reform: State of the Debate.

Owners of insolvent or barely solvent banks have strong incentives to favor risky behavior because losses are passed on to the insurer, whereas profits accrue to the owners.

by Calculated Risk on 7/03/2009 09:00:00 PM

Loudon Wainwright III performs at Madison Square Park in NYC (June 17, 2009)

"Fear Itself"

Repeat: "The Krugman Blues"



*No, I don't think the economy is in a depression ...

by Calculated Risk on 7/03/2009 05:13:00 PM

Click on graph for larger image in new window.

These are spot prices for Cushing WTI from the EIA (source).

It is fun to look back ... I started speculating in March '08 about a sharp decline in oil prices in the 2nd half of 2008.

And I posted many times in the late spring about demand destruction (like fewer U.S miles driven), Asian countries reducing gasoline subsidies, China stock piling oil for the Olympics, etc.

But this story was probably the key clue that oil prices were peaking (from June 28, 2008). From the NY Times: Cruise Night, Without the Car

For car-loving American teenagers, this is turning out to be the summer the cruising died.
...
From coast to coast, American teenagers appear to be driving less this summer. Police officers who keep watch on weekend cruising zones say fewer youths are spending their time driving around in circles...

We knew it was almost over when teenagers stopped cruising!

by Calculated Risk on 7/03/2009 01:38:00 PM

From the Telegraph: UK homeowners pay back a record £8.1bn of mortgage debt

Britons injected £8.1bn to pay off their mortgage debt in the first three months of 2009, the Bank of England said on Friday ... The figure compares with a £7.7bn injection in the final three months of 2008 ...

"Sharply falling house prices have made housing equity withdrawal increasingly unattractive, while very tight credit conditions have made it more difficult to carry out the process as well as to take out new mortgages," said Howard Archer, chief UK economist at IHS Global Insight.

"In addition, ever lower savings rates have made it increasingly more attractive for many people to use any spare funds that they have to reduce their mortgages," he added.

This is the fourth consecutive quarter with homeowners reducing their mortgage debt in the U.K..

The following is from the Bank of England: Housing Equity Withdrawal (HEW) Q1 2009

HEW occurs when lending secured on housing increases by more than investment in the housing stocks. Investment comprises new houses, home improvements, transfers of houses between sectors, and house moving costs, such as stamp duty and legal fees (although these fees do not add to the value of the housing stock, they are measured as investment, so reduce the funds available for consumption). So HEW measures mortgage lending that is available for consumption or for investment in financial assets (or to pay off debt).

by Calculated Risk on 7/03/2009 10:39:00 AM

By popular request ...

The FDIC closed seven more banks yesterday, and the following graph shows bank failures by week for 2009.

Click on graph for larger image in new window.

So far there have been 52 FDIC bank failures in 2009.

It appears the pace has picked up lately (12 bank closings over the last two weeks).

Note: Week 1 ends Jan 9th.

This is nothing compared to the S&L crisis. There were 28 weeks during the S&L crisis when regulators closed 10 or more banks, and the peak was April 20, 1998 with 60 bank closures (there were 7 separate weeks with more than 30 closures in the late '80s and early '90s).

The second graph covers the entire FDIC period (since 1934).

Back in the '80s, there was some minor multiple counting ... as an example, when First City of Texas failed on Oct 30, 1992 there were 18 different banks closed by the FDIC. This multiple counting was minor, and there were far more bank failures in the late '80s and early '90s than this year.

Of course the number of banks isn't the only measure. Many banks today have more branches, and far more assets and deposits. For a summary by size, see: FDIC Bank Failures: By the Numbers