by Calculated Risk on 7/05/2009 07:03:00 PM

From ABC's This Week, George Stephanopoulos interviews Vice President Joe Biden:

STEPHANOPOULOS: While we've been here, some pretty grim job numbers back at home -- 9.5 percent unemployment in June, the worst numbers in 26 years.

How do you explain that? Because when the president and you all were selling the stimulus package, you predicted at the beginning that, to get this package in place, unemployment will peak at about 8 percent. So, either you misread the economy, or the stimulus package is too slow and to small.

BIDEN: The truth is, we and everyone else misread the economy. The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.
...
BIDEN: ... So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we're in? And we believe it is the right package given the circumstances we're in.

We misread how bad the economy was, but we are now only about 120 days into the recovery package. The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money.

STEPHANOPOULOS: No, but a lot of people were saying that you needed to do something bigger and bolder then, including the economist Paul Krugman. He's saying -- right now he's saying the same thing again -- don't wait. You need a second stimulus, you need it now.

BIDEN: Look, what we have to do now is we have to properly, adequately, transparently and effectively spend out the $787 billion.
...
The question is, how do you now -- do we -- what we have to do, George, is we have to, as this rolls out, put more pace on the ball. The second hundred days you're going to see a lot more jobs created.

And the reason you are is now all of these contracts for the over several thousand highway projects that have approved.
...
STEPHANOPOULOS: ? today are going to run out of unemployment in September. That means for a lot of those people, if there is not a second stimulus, they're going to be out in the cold.

BIDEN: Well, look, we have increased the amount of money unemployed -- those on unemployment rolls have gotten, 12 million are getting more money because of the stimulus package.

We've increased the number of people eligible by 2 million people. We've given a tax cut to 95 percent of the people who get a pay stub. They have somewhere -- $60 bucks a month out there that's going into the economy.

There is a lot going on, George. And I think it's premature to make the judgment?

STEPHANOPOULOS: So no second stimulus?

BIDEN: No, I didn't say that. I think it's premature to make that judgment. This was set up to spend out over 18 months. ... And so this is just starting, the pace of the ball is now going to increase.

Here is the January forecast with the BLS reported data ...

Click on graph for larger image in new window.

This graph compares the BLS reported monthly unemployment rate (in red) with the Obama economic forecast from January 10th: The Job Impact of the American Recovery and Reinvestment Plan

The Obama administration underestimated the rise in unemployment (so did I last year), so the question is: does this mean a 2nd stimulus plan?

Krugman says don't wait:

But never mind the hoocoodanodes and ayatollahyaseaux. What’s important now is that we don’t compound the understimulus mistake by adopting what Biden seems to be proposing — namely, a wait and see approach. Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond.

Update: as of June, almost 4.4 million people were unemployed and had exhausted their regular unemployment benefits. Most are now receiving extended benefits, but - at the least - it might be prudent to have additional extended benefits ready to go later this year.

by Calculated Risk on 7/05/2009 05:08:00 PM

The following article suggests that the large number of part time workers will slow any labor recovery:

‘I don’t need to hire anybody new. I need to work my existing workers more.’

That seems to make sense, but I wondered if it has been true in previous recessions (that a large number of part time workers - for economic reasons - became fully employed before the unemployment rate started to decline).

Here is the article from The Boston Globe: Grappling with part-time work

According to the Bureau of Labor Statistics, there are 9.1 million Americans working part time for economic reasons, more than double the 4.5 million in 2007. That compares with a 50 percent rise in the recession of 1981-82 and a 25 percent increase in the recession of 1990.
...
For the economy as a whole, the glut of part-time workers could slow any recovery.

“At no time have we ever seen an increase of that magnitude, which is why labor markets are far weaker than the unemployment rate is telling us,’’ says Andrew Sum, director of Northeastern University’s Center for Labor Market Studies.

“When the economy turns around if you have so many people that are in slack work, you’ll say, ‘I don’t need to hire anybody new. I need to work my existing workers more.’ It’s going to be a lot harder to bring the unemployment rate down.’’

The following graph shows the unemployment rate and the percent of the civilian labor force that is working part time for economic reasons.

Click on graph for larger image in new window.

Looking back at previous recessions, it doesn't appear that there was a decline in part time workers (for economic reasons) prior to a decline in the unemployment rate.

That doesn't mean part time workers aren't hurting - many are (as noted in the article), but it appears the the number of part time workers, and the unemployment rate, usually peak at about the same time. This time might be different, but I wouldn't count on it.

by Calculated Risk on 7/05/2009 01:27:00 PM

Rising vacancies. Falling rents. Negative absorption. The trend continues ...

From the Baltimore Business Journal: D.C. area office vacancies reach 12.3%

The Washington, D.C., area’s commercial real estate market saw a net absorption of negative 726,100 square feet in the second quarter, the third straight quarter of negative absorption ... the Washington region’s office vacancy rate has now reached 12.3 percent.

... "we are entering into a period of steady rent declines" [said Kevin Thorpe, director of market research for Cassidy & Pinkard Colliers]
emphasis added

From Reuters: Manhattan office vacancy hits 15-year high-report

The vacancy rate for top quality Midtown Manhattan office buildings reached its highest level in 15 years and asking rents fell nearly 11 percent in the second quarter, a Jones Lang LaSalle (JLL.N) report said.

Click on graph for larger image in new window.

For Q1, REIS reported the office vacancy rate nationwide rose to 15.2% from 14.5% in Q4 2008.

This graph shows the office vacancy rate starting 1991.

The Q2 data should be released this week.

by Calculated Risk on 7/05/2009 09:43:00 AM

From Lauren Beale at the Los Angeles Times: Vacancies give renters room to negotiate

The first quarter saw the largest rent decline in a decade for Los Angeles County, Reis' [Victor Calanog, director of research] said. Effective rents, those that take concessions into account, fell 1.7% in the first quarter of this year from the fourth quarter of 2008, while asking rents dropped 1%.

And vacancy rates are rising:

The rate climbed to 5.3% in the first quarter from 3.8% in the first quarter of 2008, said [Reis' Calanog] ... In contrast, vacancies had been hovering between 2% and 3% for the last decade.
...
The last time vacancy rates were this high in Los Angeles County was in the early 1990s, when they hit 5%.

Declining rents puts more pressure on house prices ... and rents could continue to fall through 2010.

Here are some comments from BRE (a REIT) in February:

We believe we are looking at a negative rent curve for the next two years.

We believe on a composite basis, market rents in 2009 could fall between 3 and 6% from peak levels in 2008. And the rent cuts in 2010 could be deeper ...

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.