by Calculated Risk on 7/22/2009 01:17:00 PM

From Bloomberg: Bernanke Says Commercial Property May Pose Risk for Economy

Federal Reserve Chairman Ben S. Bernanke said a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy, without committing to additional steps to aid the market.
...
It “may be appropriate” for the government and Congress to consider “fiscal” steps to support the industry, Bernanke said today. Ideas for fresh support for the market could include government guarantees for commercial mortgages, Bernanke also said today ...

“As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices -- and so, more pressure on commercial real estate,” Bernanke said yesterday. “We are somewhat concerned about that sector and are paying very close attention to it. We’re taking the steps that we can through the banking system and through the securitization markets to try to address it.”

A few key CRE stories this month:

From Dow Jones: Moody's: Commercial Real-Estate Prices Fall 7.6% In May

Commercial real-estate prices fell 7.6% in May ... The indexes are down 29% from a year ago and 35% from their October 2007 peak.

From Reuters: U.S. architecture billings index down in June - AIA

"It appears as though we may have not yet reached the bottom of this construction downturn," AIA Chief Economist Kermit Baker said. "Architecture firms are struggling and concerned that construction market conditions will not even improve ... next year."

From Bloomberg: U.S. Commercial Construction to Drop 16% This Year, Report Says

Construction spending on offices, retail centers and hotels is likely to fall 16 percent this year and 12 percent in 2010, more than previously forecast, the American Institute of Architects said.
...
Hotel construction is likely to decline 26 percent this year and 17 percent in 2010, the institute said. Industrial spending is forecast to dip 0.8 percent this year and 28 percent in 2010, according to the report.

Strip Mall Vacancy Rate Hits 10%, Highest Since 1992

"[W]e do not foresee a recovery in the retail sector until late 2012 at the earliest."
Victor Calanog, director of research for Reis on Retail CRE

Apartment Vacancy Rate at 22 Year High

Hotel Recession Reaches 20 Months

U.S. Office Vacancy Rate Hits 15.9% in Q2

"It's bad. It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning."
Victor Calanog, Reis director of research on the Office Market.

And a comment from the USG (building materials supplier) conference call this morning:

"Nonresidential construction does appear to be headed further south, perhaps significantly so."

No kidding.

by Calculated Risk on 7/22/2009 11:45:00 AM

From the Pension Benefit Guaranty Corporation (PBGC): PBGC To Assume Delphi Pension Plans

The Pension Benefit Guaranty Corporation today announced it will assume responsibility for the pension plans of 70,000 workers and retirees of Delphi Corp., the nation’s largest producer of automotive parts.

The PBGC is a federal corporation that insures pension plans. It is funded by insurance premiums that all insured plans pay. When a plan fails, the PBGC takes over all the assets and liabilities - although the pensions are limited, and retirees may get much less from the PBGC.

Since the assets are acquired immediately, but the liabilities are paid out over time, the PBGC has plenty of assets to pay current claims - but faces a long term deficit.

From the PBGC in May: PBGC Deficit Climbs to $33.5 Billion at Mid-Year, Snowbarger to Tell Senate Panel

The Pension Benefit Guaranty Corporation posted a $33.5 billion deficit for the first half of fiscal year 2009, PBGC Acting Director Vince Snowbarger will tell the Senate Special Committee on Aging at a hearing today. Based on unaudited financial numbers as of March 31, the deficit represents an increase over FY 2008’s $11 billion shortfall, and is the largest in the agency’s 35-year history.

“The increase in the PBGC’s deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses,” Snowbarger states in his written testimony. “The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed.”

The $22.5 billion deficit increase was due primarily to about $11 billion in completed and probable pension plan terminations; about $7 billion resulting from a decrease in the interest factor used to value liabilities; about $3 billion in investment losses; and about $2 billion in actuarial charges.

This is a bailout in the making. And as Atrios commented this morning: "It wouldn't surprise me if the PBGC starts getting as hungry as the FDIC."

by Calculated Risk on 7/22/2009 10:24:00 AM

From the Herald Tribune series on mortgage fraud in Florida: Flipping fraud ignored by police and prosecutors

In November 2005, when the real estate market in Florida had just begun to slow, the state’s top law enforcement agency issued a warning that mortgage fraud was about to wreak financial havoc.

In sober language, a 36-page Florida Department of Law Enforcement report explained that banks would collapse and losses would be counted in “hundreds of billions of dollars.”
...
The report, which was not released to the public but was sent to prosecutors and law enforcement officials across the state, laid out a series of responses to help prevent or lessen the disaster.

But instead of heeding the warning, most law enforcement officials ... did nothing.

Even the most basic recommendation in the FDLE assessment — posting a notice at the county courthouse warning that mortgage fraud is a criminal offense — was ignored in Sarasota County.

Today ... the scope of fraud has overwhelmed state and federal law enforcement agencies to the point that only the most egregious cases are likely to be prosecuted.

In addition to the FBI’s 2,500 cases, state agencies, including the Attorney General and FDLE, have pursued a few hundred more dating back to 2000.

But the amount of fraud dwarfs the number of cases being pursued, the Herald-Tribune found. The Herald-Tribune analyzed nearly 19 million property transactions looking for one type of housing fraud — illegal property flipping. The newspaper found more than 50,000 transactions in which prices increased so much, so quickly, that fraud experts interviewed by the newspaper deemed them highly suspicious.

Here are the first three in the series:

'Flip that house' fraud cost billions

Flippers' toll: On Gulf Coast, half a billion in defaults

The king of the Sarasota flip

Note: And from Tanta in 2007 (my former co-blogger): Unwinding the Fraud for Bubbles

by Calculated Risk on 7/22/2009 08:37:00 AM

The MBA reports:

he Market Composite Index, a measure of mortgage loan application volume, was 528.9, an increase of 2.8 percent on a seasonally adjusted basis from 514.4 one week earlier.
...
The Refinance Index increased 4.0 percent to 2089.7 from 2009.4 the previous week and the seasonally adjusted Purchase Index increased 1.3 percent to 262.1 from 258.8 one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 5.31 percent from 5.05 percent ...
emphasis added

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 2002.

Note: The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007, even though activity was actually declining.

Mortgage rates increased last week, but will decline again with the Ten Year yield falling this week.

by Calculated Risk on 7/22/2009 01:44:00 AM

From Reuters: U.S. architecture billings index down in June - AIA

... The Architecture Billings Index fell more than 5 points last month to a reading of 37.7, after a slight increase in the prior month, according to the American Institute of Architects.

The index has remained below 50, indicating contraction in demand for design services, since January 2008. ...

"It appears as though we may have not yet reached the bottom of this construction downturn," AIA Chief Economist Kermit Baker said. "Architecture firms are struggling and concerned that construction market conditions will not even improve ... next year."
...
Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions. The AIA's Billings Index, which began in 1995, is considered a measure of construction spending nine to 12 months in the future.
emphasis added

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index is still below 50 indicating falling demand.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on commercial real estate (CRE). This suggests further dramatic declines in CRE investment later this year and next.

Earlier this month, the AIA lowered their forecast for commercial construction, from Bloomberg: U.S. Commercial Construction to Drop 16% This Year, Report Says

Construction spending on offices, retail centers and hotels is likely to fall 16 percent this year and 12 percent in 2010, more than previously forecast, the American Institute of Architects said.
...
Hotel construction is likely to decline 26 percent this year and 17 percent in 2010, the institute said. Industrial spending is forecast to dip 0.8 percent this year and 28 percent in 2010, according to the report.

by Calculated Risk on 7/22/2009 12:41:00 AM

“We’re dumbfounded. We’ve been working on this deal for four-and-a-half years. I don’t know how, all of a sudden, the numbers don’t work.”
JMW Development Principal Mark Johnson

From the Minneapolis / St. Paul Business Journal: SuperTarget planned for Woodbury now on hold (ht Arnold)

Target recently informed JMW that it would not proceed with the project unless it receives “a pretty significant discount” from its previously negotiated deal, JMW Principal Mark Johnson said.

“We’re dumbfounded,” Johnson said, noting that Target officials had told him as recently as June 24 that the project was on track.

Maybe Target has lowered their retail sales estimates for the store? Just saying ...

by Calculated Risk on 7/21/2009 10:11:00 PM

The Herald Tribune has a series of article on mortgage fraud in Florida (ht Ed)

Here are the first three in the series:

'Flip that house' fraud cost billions

Fraudulent property flipping ran rampant during this decade's housing boom, with $10 billion in suspicious deals in Florida alone, a Herald-Tribune investigation has found.

The deals -- many of them inflated sales among friends, family and business associates -- drove up property values and tax bills during the boom, fed bank bailouts and failures after the boom, and fueled the foreclosure wave that has gutted property values.

Unscrupulous property flippers would buy houses or condos, then drive up the price in a few days or weeks by selling it to someone they knew. Buyers used the inflated price to get bank loans for more than the property was worth, leaving money for flippers to split as profit.

Flippers' toll: On Gulf Coast, half a billion in defaults

More than 100 properties from Palmetto to North Port doubled in price in a single day during the recent real estate boom. Proposed condos -- no more than ideas on paper -- flipped two or three times before anyone moved in.

The king of the Sarasota flip

Instead of selling properties to outside buyers, [Craig Adams] created a real estate market where his hand-picked buyers and sellers could set the price they wanted, and repeated flips made Adams hundreds of thousands of dollars in real estate sales commissions.

In some cases, Adams and his associates bought a house, marked up the price and quickly sold it to another associate ... Using the inflated sale price, they qualified for a mortgage that more than covered the actual purchase, then divided the remaining cash among themselves, according to seven people familiar with the deals.
...
"They had a joke," said Melone, who did property deals with one of Adams' associates. "They said: 'We're getting low on money. Let's go buy a property.'"

The Herald Tribune has a graphic on hot spots for flipping fraud in Florida, and some supporting documents.

by Calculated Risk on 7/21/2009 06:06:00 PM

Just a couple of comments ... (ht Brian)

Analyst: ... on the commodities [components]. I'm just curious as to which ones you expect to be sort of challenging going forward?

AAPL: In terms of going forward, the market for DRAM and the market for large sized displays has shifted to a constrained environment and the pricing has moved accordingly. The NAND market has now begun to stabilize and we expect it to move towards a supply/demand balance. Hard drives and optical drives are recovering from a constrained supply environment and pricing is declining at less than historical rates as a result.

Interesting that any component is constrained - probably because of inventory cuts by suppliers in Q4 and Q1.

Analyst: When you look at consumer spending and you look at K12 and state and local government, is there any detail you can give on the education or the pro segment?

AAPL: Relative to the market, the consumer market performed relatively better for us. The US K12 institutional business is weak, as you might expect. It is getting hit by budgets short falls. And last quarter we saw very negligible amounts, if any, of the stimulus funds flow all the way to the state and district levels. And so that may or may not occur this quarter. In the pro business, the pro business has also been affected more by the economy than the consumer businesses. And you can see that somewhat in our ASPs as people that were buying those that were in commercial accounts and small business accounts are delaying purchases.

Once again consumer spending is relatively better off than business spending. Business spending on software and equipment was probably off some more in Q2 (after declining 28.1% SAAR in Q4 and 33.7% SAAR in Q1).

by Calculated Risk on 7/21/2009 04:05:00 PM

Update: "We'll probably ban naked credit default swaps."
House Agriculture Committee Chairman Collin Peterson, from Reuters: US House bill to require clearing of OTC derivatives

Orginal Post: I've heard that Agriculture chairman Collin Peterson and Financial Services Committee chairman Barney Frank (share oversight of of futures markets) are in agreement to have derivatives go through clearinghouses and to ban naked credit default swaps as part of the omnibus financial reform bill. More soon ...

Since several stories have the details wrong, here is the vig on the CIT loan:

"The Credit Facility has a two and a half year maturity and bears interest at LIBOR plus 10%, with a 3% LIBOR floor, payable monthly. It provides for (i) a commitment fee of 5% of the total advances made thereunder, payable upon the funding of each advance, (ii) an unused line fee with respect to undrawn commitments at the rate of 1% per annum and (iii) a 2% exit fee on amounts prepaid or repaid and the unused portion of any commitment."

That is a minimum 13% after paying back 5% immediately as a commitment fee. Tony Soprano would be proud.

Click on graph for larger image in new window.

This 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 7/21/2009 03:16:00 PM

Baseline Scenario has a guest piece by Elizabeth Warren, chair of the Congressional Oversight Panel and the Leo Gottlieb Professor of Law at Harvard University: Three Myths about the Consumer Financial Product Agency. Professor Warren outlines three myths, and the concludes:

"At the end of the day, industry lobbyists try hard to invent myths and make things sound confusing to intimidate the public and to keep policymakers from acting. But this issue is simple: keeping safety and soundness and consumer protection together has not ensured safety and soundness, has not protected consumers, has not fostered choice and innovation, and has not minimized regulatory burden. In fact, the current regulatory structure that combines consumer protection with other bank oversight responsibilities has led to the kind of bad regulatory oversight that has led us to this crisis. The CFPA would put someone in Washington—someone with real power—who cares about customers. That’s good for families, good for market competition, and good for our economy."