by Calculated Risk on 7/13/2009 12:46:00 AM

First, yesterday I posted a funny article about Wells Fargo NA suing Wells Fargo NA (and other defendants). See: Wells Fargo Sues Wells Fargo, Wells Fargo Denies Allegations (ht Rama)

Also gasoline prices fell: U.S. gasoline prices fall to $2.56/gallon

According to the nationwide Lundberg survey of gas stations, Americans are paying about $1.55 less per gallon than they were on July 11, 2008, when the price-per-gallon of gas touched a high of $4.11.
...
Two weeks ago, the national average for self-serve, regular unleaded gas was $2.6613 per gallon.

Futures are off slightly ...

Futures from barchart.com

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

And the Asian markets are off close to 2%.

Best to all.

by Calculated Risk on 7/12/2009 09:04:00 PM

From Treasury Secretary Geithner (via Tom Petruno at the LA Times):

"I think all economists believe, and this was inherent in the design of the program, that the biggest thrust or force would start to take effect in the second half of this year. And we’re going to start to see that happen. But I don’t think that’s a judgment we need to make now, can’t really make it now prudently, responsibly."

From Brad Delong: Fiscal Policy: The Obama Administration Is Not Making Much Sense These Days

Last December the Obama administration ... decided on a fiscal stimulus package which they believed would have minor effects on the economy in the first two quarters of 2009 and major effects--would push unemployment down below what it would other wise have been by more than half a percentage point--starting in the third quarter of 2009. They believed that the economy was not that weak, and that with the fiscal stimulus package taking effect unemployment would be peaking now at a rate of 7.9%.
...
The financial crisis of last fall hit the economy's levels of production, spending, and employment much harder than people thought at the time. If we had known then what we know now, it would have been prudent then to propose twice as large a fiscal stimulus program as the Obama administration in fact did propose.
...
If I were running the government, I would be trying to make up that GDP shortfall right now: I would be rushing a clean $170 billion--$500 per citizen--aid-to-states-that-maintain-effort package through the congress this week.

Click on graph for larger image in new window.

This graph (similar to Brad's) 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

Geithner is correct about the stimulus kicking in during the 2nd half of 2009, and Delong agrees. But Delong is pointing out that the economy is in much worse shape than originally expected, and he argues if the Obama Administration knew in January what we know today, the package would have been much larger. Maybe. But thinking back - there was a huge political problem with the word "trillion" - so a much larger package would have been very difficult (although the composition could have been different).

From Paul Krugman: Vegematic policy advocacy

Like Brad, I’m not too happy with the policy justifications we’re getting from the administration. It’s perfectly clear that the stimulus was too small; I think they know that too. But they’ve made a political judgment that (a) they can’t push another round through and (b) the thing to do right now is defend the policy they already have.

Maybe they’re right.

My guess is another stimulus package is coming - but the Obama Administration is in a political bind and they will have to wait a few more months. The second package will probably be introduced after the third quarter - or once the unemployment rate reaches 10% - and my guess is it will be about half the size of the package proposed by Dr. Delong.

by Calculated Risk on 7/12/2009 06:02:00 PM

From the Milwaukee Journal Sentinel: Lenders abandoning foreclosed properties (ht Michael)

Rodney Lass figured his days as a homeowner were over when he was hit with a foreclosure judgment more than a year ago.

He stopped rehabbing his two-story Bay View home and moved on.

But what Lass didn't realize until recently is that the house remains in his name today.

He's still responsible for the taxes, upkeep of the property and the mortgage, leaving Lass perplexed.

"Why would I pay for something that I don't own anymore?" Lass said.

The foreclosure, however, failed to go through after the California-based lender decided it didn't want the gutted house. Lass said he found out for certain that he still owned it from the Journal Sentinel.

Today, the house at 703 E. Lincoln Ave. sits condemned ...

The home represents a growing phenomenon known as walkaways - properties for which lenders sue for foreclosure but never take the title.

We've heard this story before - the lender starts foreclosure, and then discovers the house is worthless (or in this case has a negative value because the house is condemned). In this case, the foreclosure went through, but the lender never recorded the deed with the court leaving the property in the previous owner's name.

No one wants the property now, and the city will probably bear the costs of demolition. Meanwhile the abandoned house is a nuisance for the neighbors - even the bandos won't live there.

by Calculated Risk on 7/12/2009 01:59:00 PM

Professor Roubini thinks the economy will be in recession through the end of 2009, and that the recovery will be "shallow". More from Christian Menegatti at RGE Monitor:

The general consensus is that this recession will end sometime in the second half of 2009. While RGE Monitor expects more quarters of negative real GDP growth in 2009, we also expect the pace of contraction of economic activity to slow significantly. We forecast negative real GDP growth in Q2 2009 and Q3 2009, and for real GDP to remain flat in Q4. After the sharp contraction in economic activity in 2009, growth will reenter positive territory only in 2010, and then at a very sluggish rate, well below potential.

Paul Kasriel at Northern Trust is a little more optimistic: When We Get “There”, Will We Know It?

Back in April, our forecast update commentary was entitled, “Are We There Yet?” The “there” referred to a resumption of real growth in the overall economy. Our answer in April was “no,” which also happens to be our answer in July. When will we get there? Our answer in April was the fourth quarter of this year, which also happens to be our answer now. Assuming we get there in the fourth quarter, would most households and businesses in America know it if they were not so informed by the media? Probably not. We anticipate another “jobless recovery,” which implies a relatively feeble one. We would not be surprised to hear terms early in 2010 such as “double dip.”

I think Kasriel might be a little too optimistic about 2010.

Jan Hatzius at Goldman Sachs sees a little positive GDP growth starting in Q3, and a sluggish recovery (no link).

Here are the quarter by quarter real GDP (annualized) forecasts from Northern Trust and Goldman:

Quarter	Northern Trust	Goldman Sachs
Q2 2009	-2.2%	-1.0%
Q3 2009	-2.1%	1.0%
Q4 2009	2.3%	1.0%
Q1 2010	1.2%	1.5%
Q2 2010	2.4%	1.5%
Q3 2010	2.4%	2.0%
Q4 2010	3.3%	2.0%

I think the real GDP growth will turn slightly positive sometime in the 2nd half of this year, but my guess is 2010 will be barely positive, with the unemployment rate rising for most of 2010.

by Calculated Risk on 7/12/2009 09:42:00 AM

The confessional is still open ...

From The Times: Lloyds braced for £13bn writeoff (about $21 billon)

LLOYDS BANKING GROUP is poised to write off as much as £13 billion on its loans to commercial property, businesses and mortgage holders ...

First-half results due to be posted in three weeks will show that its losses are accelerating ...

UBS analysts expect Lloyds to announce a bottom line half-year loss of £6.3 billion as a result of the soaring provisions.

Remember when a multi-billion dollar writeoff was shocking?

by Calculated Risk on 7/11/2009 10:52:00 PM

For a little Saturday night amusement ...

From FoxBusiness: Wells Fargo Bank Sues Itself (ht Rama)

... I could not resist asking Wells Fargo Bank NA why it filed a civil complaint against itself in a mortgage foreclosure case in Hillsborough County, Fla.
...
In this particular case, Wells Fargo holds the first and second mortgages on a condominium, according to Sarasota, Fla., attorney Dan McKillop, who represents the condo owner.

As holder of the first, Wells Fargo is suing all other lien holders, including the holder of the second, which is itself.

... court documents clearly label "Wells Fargo Bank NA" as the plaintiff and "Wells Fargo Bank NA" as a defendant.

Wells Fargo hired Florida Default Law Group., P.L., of Tampa, Fla., to file the lawsuit against itself.

And then Wells Fargo hired another Tampa law firm -- Kass, Shuler, Solomon, Spector, Foyle & Singer P.A. -- to defend itself against its own lawsuit, according to court documents.

Wells Fargo's defense lawyers even filed an answer to their client's own complaint.

"Defendant admits that it is the owner and holder of a mortgage encumbering the subject real property," the answer reads. "All other allegations of the complaint are denied."

Your TARP money hard at work ...

by Calculated Risk on 7/11/2009 07:24:00 PM

From Manuel Adelino, Kristopher Gerardi, and Paul S. Willen writing at the Boston Fed: Why Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization

(ht Holden Lewis, Mortgage Matters at Bankrate.com)

One of the key questions these researchers ask is: Why don't lenders renegotiate¹ with delinquent borrowers more often?

If a lender makes a concession to a borrower by, for example, reducing the principal balance on the loan, it can prevent a foreclosure. This is clearly a good outcome for the borrower, and possibly good for society as well. But the key to the appeal of renegotiation is the belief that it can also benefit the lender, as the lender loses money only if the reduction in the value of the loan exceeds the loss the lender would sustain in a foreclosure.
all emphasis added

Just last week, Gretchen Morgenson at the NY Times made this argument: So Many Foreclosures, So Little Logic

[T]he most fascinating, and frightening, figures in the [subprime loan] data detail how much money is lost when foreclosed homes are sold. 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. ...

Given losses like these, [Alan M. White, an assistant professor at the Valparaiso University law school in Indiana] said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.

And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”

If banks have written down the value of these loans to the 40 cents on the dollar that they are fetching on foreclosures — the only true value for these homes right now — then why don’t they bite the bullet and reduce the loan amount outstanding for the troubled borrowers?

And the Fed economists respond:

We argue for a very mundane explanation: lenders expect to recover more from foreclosure than from a modified loan. This may seem surprising, given the large losses lenders typically incur in foreclosure, which include both the difference between the value of the loan and the collateral, and the substantial legal expenses associated with the conveyance. The problem is that renegotiation exposes lenders to two types of risks that can dramatically increase its cost. The first is what we will call “self-cure” risk. As we mentioned above, more than 30 percent of seriously delinquent borrowers “cure” without receiving a modification; if taken at face value, this means that, in expectation, 30 percent of the money spent on a given modification is wasted. The second cost comes from borrowers who redefault [30 and 45 percent]; our results show that a large fraction of borrowers who receive modifications end up back in serious delinquency within six months. For them, the lender has simply postponed foreclosure; in a world with rapidly falling house prices, the lender will now recover even less in foreclosure. In addition, a borrower who faces a high likelihood of eventually losing the home will do little or nothing to maintain the house or may even contribute to its deterioration, again reducing the expected recovery by the lender.

I'd argue for a third reason: If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.

These economists would argue that the lenders are behaving rationally and that foreclosure - when all costs are considered - is frequently the least costly alternative.

¹ The economists define “renegotiation” as "concessionary modifications that serve to reduce a borrower’s monthly payment. These may be reductions in the principal balance or interest rate, extensions of the term, or combinations of all three." Under this definition, they do not include the most common modification: capitalization of late payments and fees.

by Calculated Risk on 7/11/2009 05:50:00 PM

The WSJ Real Time Economics blog mentioned Okun's law yesterday (a relationship between changes in GDP and unemployment): Job Losses Outpace GDP Decline (ht Bob_in_MA)

In a research note, [Alliance Bernstein economist Joseph] Carson says job losses in prior downturns have been roughly proportional to the decline in gross domestic product. But in the current recession, the proportion of jobs lost is running about a third greater than the drop in real GDP.

The correlation between GDP growth and unemployment is called Okun’s Law, after the late economist Arthur Okun who documented it in the 1960s. But the numerical relationship that Okun estimated – and other economists have since refined – has broken down. His original estimate suggested about a 3% decline in GDP for every 1% increase in unemployment. Before joining the Fed, Ben Bernanke, working with Andrew Abel, figured more recent suggested about a 2% decrease in output for every 1% increase in unemployment.

Click on graph for larger image.

This graph shows the quarterly change in real GDP (annualized) vs. the change in unemployment rate. The red markers are for 2008 and Q1 2009.

Usually the trend line is drawn as linear, but I made it a 2nd order polynomial here.

The red markers are above the trend line, but within the normal scatter.

For Q2 the unemployment rate increased 1.2% (from Q1, quarterly average), and the annualized real GDP change will probably be in the -1% to -2% range - so that is also above the trend (a larger than expected change in unemployment based on the change in real GDP).

Okun's law is just a general relationship, and the relationship appears to have changed over time (as mentioned in the WSJ).

Note: the graph shows the quarterly change in real GDP annualized (the way it is reported by the BEA each quarter). In the WSJ post, they mentioned "a 2% [or 3%] decrease in output for every 1% increase in unemployment". A 2% decrease in quarterly output would be reported by the BEA as over 8% annualized for the quarter.

by Calculated Risk on 7/11/2009 01:41:00 PM

From the SF Gate: State leaders talking again - budget woes go on

California's fiscal crisis continued unabated Friday with most major banks refusing to cash the state's IOUs starting today, the state controller delaying $4 billion in payments to public schools ...

State Controller John Chiang and state Superintendent of Instruction Jack O'Connell said $4 billion in payments to local school districts that were supposed to go out on Friday will be delayed until July 30. The move will conserve cash for the state, which has been issuing IOUs since July 2. ...

As of Friday morning, the state controller had mailed 101,930 IOUs covering more than $389 million in payments, said Hallye Jordan, a spokeswoman for Chiang.

And despite a plea from state Treasurer Bill Lockyer that banks extend their Friday deadline to accept the IOUs, most refused to do so.

Citibank agreed to a one-week extension, while Bank of the West said it will accept IOUs until further notice. The banks that rejected extension requests include Bank of America, Wells Fargo, JPMorgan Chase and Union Bank ...

And Felix Salmon has a nice chart on who gets paid cash, and who gets IOUs: California: The haves and have-nots

And from Controller John Chiang yesterday: Controller Releases Year-End Cash Figures

“California continues to pay for its history of unbalanced budgets. The State spent $10.4 billion more than it collected last year alone, and is now without enough cash to cover all of its payment obligations,” said Chiang.

“Our major sources of revenue have continued their trend downward, leaving no viable option but to craft a new budget that recognizes California’s recovery has yet to begin.”

Personal income taxes in June were $987 million below (-18.0%) estimates in the May Revision, and sales taxes were short by $154 million (-5.8%). Corporate taxes were $1.31 billion above estimates (41.2%). Corporate taxes in May and June were boosted by a surge of payments from corporate taxpayers hoping to avoid a new State penalty.

The State started the fiscal year with a $1.45 billion cash deficit, which grew to $11.9 billion on June 30, 2009. Borrowed money from special funds provided enough cash to fund State operations through June 30. The Controller faced a large cash shortfall at the end of July, forcing his office to begin issuing registered warrants or “IOUs” to any General Fund payment that was not protected by the State Constitution, federal law, or court decision. Without IOUs, the State would have run out of cash and begun missing those protected payments at the end of July.

While updated cash projections show that IOUs will preserve enough cash to make those protected payments through September, the cash shortfall in October will endanger the State’s ability to make those payments.

Many other states have serious budget problems too.

by Calculated Risk on 7/11/2009 09:03:00 AM

A little Saturday morning video ... offered without comment.

Bloomberg - Roubini Says U.S. Recession Will Last Six More Months (Click here for full video)

00:00 Outlook for the U.S. economy, recession
07:07 Reasons for current economic condition
11:50 Unemployment rate; fiscal consolidation
18:29 Case-Shiller Index; green shoots in housing
30:05 Second stimulus package; consumer spending
34:43 Roubini, Shiller respond to questions.

Here is a short preview ...