by Calculated Risk on 9/09/2009 04:08:00 PM

Since I haven't posted this in some time ...

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.

And on StuyTown from the NY Times: Buyers of Huge Manhattan Complex Face Default Risk (ht Ann)

[T]he buyers [of Stuyvesant Town and Peter Cooper Village in Manhattan] are running out of time and money. Jerry and Rob Speyer and their partner, BlackRock Realty, who together paid $5.4 billion ... have nearly exhausted an additional $890 million set aside for apartment renovations, landscaping and interest payments. Rents are down 25 percent from their peak.

Real estate analysts say that the partnership’s money will run out as soon as December and that the owners are at “high risk” of default on $4.4 billion in loans.
...
A recent report from Realpoint, a credit rating agency, estimates that the property has a value today of only $2.13 billion.
...
At Stuyvesant Town, there is a $3 billion first mortgage, or commercial mortgage-backed security, and a $1.4 billion second loan, known as “mezzanine debt” held by SL Green, the government of Singapore and others.

Finally, there is $1.9 billion in equity put up by Tishman Speyer, BlackRock and their investors.

At that valuation - about two-thirds off the total $6.3 billion price - the equity is wiped out, the mezzanine debt is wiped out, and the first mortgage will take a significant haircut.

by Calculated Risk on 9/09/2009 02:00:00 PM

From the Fed: Beige Book

Reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilize in July and August. Relative to the last report, Dallas indicated that economic activity had firmed, while Boston, Cleveland, Philadelphia, Richmond, and San Francisco mentioned signs of improvement. Atlanta, Chicago, Kansas City, Minneapolis, and New York generally described economic activity as stable or showing signs of stabilization; St. Louis remarked that the pace of decline appeared to be moderating. Most Districts noted that the outlook for economic activity among their business contacts remained cautiously positive.

The majority of Districts reported flat retail sales.
emphasis added

And on real estate:

Residential real estate markets remained weak, but signs of improvement continued to be noted. Chicago, Richmond, Boston, and San Francisco observed an uptick in sales over the last six weeks, while sales in the Philadelphia District were described as steady. ... Most Districts noted that demand remained stronger at the low-end of the housing market. Boston, Cleveland, Dallas, Kansas City, Richmond, and New York indicated that the first-time home buyer tax incentive was spurring sales. However, Philadelphia did note an upturn in sales at the high-end of the market. Reports on house prices generally indicated ongoing downward pressures ...

Reports on commercial real estate markets indicated that demand for space remained weak and that construction continued to decline in all Districts. Atlanta, Philadelphia, Richmond, and San Francisco reported that vacancy rates increased, while rates held steady in the Boston and Kansas City Districts and were mixed in New York. ... Commercial rents declined according to Boston, Chicago, New York, Philadelphia, and Richmond. Rent concessions were reported in the Richmond and San Francisco markets, and Richmond noted that some landlords had postponed property improvements in an effort to conserve cash. Construction remained at very low levels, with modest improvements noted in public construction in the Chicago, Cleveland, and Minneapolis Districts.

Stabilization is not new growth. Just more beige shoots ...

by Calculated Risk on 9/09/2009 12:10:00 PM

From Ryan Grim at the HuffPost: Cramdown Is Back: Banks Against Homeowners, Round 2 (ht Atrios)

House Financial Services Committee Chairman Barney Frank (D-Mass.) tells the Huffington Post he plans to revive the effort to give bankruptcy judges the authority to renegotiate home mortgages -- by making it part of this fall's much-anticipated financial regulatory reform bill.
...
On Tuesday, Frank was asked by HuffPost if he had plans to readdress cramdown. "Yes, as I will announce tomorrow, and I told this to bankers, given the slow pace of modifications, for whatever reason: they're not putting enough people on it, they're not taking it seriously, there are legal obstacles. As of now my intention would be to include the bankruptcy on primary residences in the reg reform."

For a history of mortgage Cram Downs, and why they are needed, see Tanta's Just Say Yes To Cram Downs . Some excerpts:

The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978; between 1978 and 1993 most bankruptcy courts interpreted the law to mean that while interest-rate reduction or term-extension modifications were not allowed, home mortgages could still be crammed down.

In 1993, with Nobleman v. American Savings Bank, the Supreme Court held that the prohibition on modifications of principal-residence mortgage loans also included cram downs. The result is that borrowers who are upside down and who have toxic, high-rate mortgages are simply, in practical terms, unable to maintain their homes in Chapter 13.
...
I am fully in favor of removing restrictions on modifications of mortgage loans in Chapter 13, but not necessarily because that helps current borrowers out of a jam. I'm in favor of it because I think it will be part of a range of regulatory and legal changes that will help prevent future borrowers from getting into a lot of jams, which is to say that it will, contra MBA, actually help "stabilize" the residential mortgage market in the long term. Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under BK law.

There is much more in Tanta's post.

Cram downs are in important step: as Ryan Grim notes in the HuffPost article, the mortgage modification programs are all "carrot" and the cram downs will provide a "stick", and more importantly, as Tanta noted, the cram downs will bring discipline to the mortgage industry.

by Calculated Risk on 9/09/2009 10:58:00 AM

From Teasury: Assistant Secretary for Financial Institutions Michael S. Barr Written Testimony on Stabilizing the Housing Market before the House Financial Services Committee, Subcommittee on Housing and Community Opportunity

... I want to highlight some key points of success:

We have signed contracts with over 45 servicers, including the five largest. Between loans covered by these servicers and loans owned or guaranteed by the GSEs, more than 85 percent of all mortgage loans in the country are now covered by the program.

Over 570,000 trial modifications have been offered under the program. Over 360,000 trial modifications are underway.
...
[W]e recognize that any modification program seeking to avoid preventable foreclosures has limits, HAMP included. Even before the current crisis, when home prices were climbing, there were still many hundreds of thousands of foreclosures. Therefore, even if HAMP is a total success, we should still expect millions of foreclosures, as President Obama noted when he launched the program in February.

Some of these foreclosures will result from borrowers who, as investors, do not qualify for the program. Others will occur because borrowers do not respond to our outreach. Still others will be the product of borrowers who bought homes well beyond what they could afford and so would be unable to make the monthly payment even on a modified loan.
emphasis added

It is that third category that is key - that is all the homeowners far underwater who bought homes they could never really afford.

by Calculated Risk on 9/09/2009 09:04:00 AM

From Bloomberg: Wealthy Families Succumb to Bankruptcy as Real Estate Crashes

Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.

More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Chicago bankruptcy attorney Joseph Baldi.

... Wealthier people filing for bankruptcy typically have large homes, two car payments and children in private schools, said Leslie Linfield, executive director of the Institute for Financial Literacy in Portland, Maine ...

“There are a lot of people with real estate, and they can’t afford it,” said Baldi ... “They can’t make the payments, and they can’t sell the house.”
emphasis added

Overall personal bankruptcies were up 36% in Q2 2009 compared to Q2 2008 - so high end bankruptcies are increasing twice as fast as the average.

This fits with the articles yesterday on Option ARMs and Interest Only loans that were used predominantly in mid-to-high end areas.

by Calculated Risk on 9/08/2009 11:12:00 PM

From David Streitfeld at the NY Times: The House Trap

An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

There are a several fascinating anecdotes in the article, including a professor who teaches real estate finance. Here is one:

“I understand I took a risk,” said [Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004] “But I did not anticipate that the real estate market would go down 30 percent.” He talked with Wells Fargo about his options, and the lender said he had none.

IOs. Another wonderful affordability product.

by Calculated Risk on 9/08/2009 10:22:00 PM

HUD has a great tool to track FHA lender performance: Neighborhood Watch Early Warning System (ht TL)

Although the overall FHA default rate is 4.63%, the following lenders had 2 year default rates of 15% or more (only lenders with 100+ originations included). (Added: these are the two year default rates).

There are ten lenders with "perfect" records (100% default), but they only have one or two originations each.

And the winner is Mortgage Depot Inc. with a 48.65% default rate!

Note that Countrywide Home Loans Inc. is not Countrywide Bank FSB.

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header to sore

by Calculated Risk on 9/08/2009 05:58:00 PM

From Fitch: $134B of U.S. Option ARM RMBS To Recast by 2011

Of the $189 billion securitized Option ARM loans outstanding, 88% have yet to experience a recast event ... Of these loans that have not yet recast, 94% have utilized the minimum monthly payment to allow their loans to negatively amortize.
...
Further evidence of option ARM underperformance in the last year lies in the number of outstanding securitized Option ARMs either 90 days or more delinquent, in foreclosure or real estate-owned proceedings, which has increased from 16% to 37%. Total 30+ day delinquencies are now 46%, despite the fact that only 12% have recast and experienced an associated payment shock. Instead, negative and declining equity has presented a larger problem: due to high concentrations in California, Florida, and other states with rapidly declining home prices, average loan-to-value ratios have increased from 79% at origination to 126% today. 'Negative equity and payment shocks will continue as Option ARM loans recast in large numbers in the coming years,' said Somerville.

Fitch is just looking at securitized Option ARMs, not loans in bank portfolios like Wells Fargo with all the 10 year Pick-a-Pay recast periods.

The second paragraph is key - many of these borrowers are defaulting before the loans recast! From Bloomberg on a Barclays report in July: Option ARM Defaults Shrink Recast Wave, Barclays Says

The wave of “option” adjustable- rate mortgages recasting to higher payments, projected by some economists to represent a looming source of foreclosures that will hurt housing markets over the next few years, will be smaller “than feared” because many borrowers will default before their bills change, Barclays Capital analysts said.
...
About 40 percent of borrowers with option ARMs are already delinquent, and “many” of the others will start missing payments before their obligations change, the Barclays mortgage- bond analysts wrote in a July 24 report. ...

“The additional risk really will only be for borrowers who manage to stay current over the next couple of years and might default due to a payment shock,” the New York-based analysts including Sandeep Bordian and Jasraj Vaidya wrote.
...
More than $750 billion of option ARMs were originated between 2004 and 2008 ...

The real problem for Option ARMs is negative equity, and the surge in defaults is happening before the loans recast. As Fitch notes, modifications haven't been helpful for Option ARM borrowers because many are too far underwater:

To date, 3.5% of the approximately one million 2004-2007 vintage securitized Option ARM loans have been modified, in an attempt to mitigate effects from the payment shock. Modification types have included term extension, conversion to interest only loans, interest rate cuts, and others. These modifications have been somewhat successful, with 24% of modified Option ARM loans being 90+ days delinquent, compared with 37% of the overall Option ARM universe. However ... Fitch expects a high default percentage for modified Option ARM loans.

This is a somewhat confusing press release. The recasts will probably lead to higher defaults, but negative equity is the real problem.

by Calculated Risk on 9/08/2009 03:10:00 PM

From MarketWatch: U.S. consumer credit down record amount in July

UU.S. consumers reduced their credit burden by a record amount in July, the Federal Reserve reported Tuesday. Total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July to $2.47 trillion. This is the sixth straight monthly drop in consumer credit. ... This is the record 11th straight monthly drop in credit card debt.

Click on graph for larger image in new window.

This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 4.2% over the last 12 months. The previous record YoY decline was 1.9% in 1991.

Here is the Fed report: Consumer Credit

Consumer credit declined from $2,493.6 billion in June to $2,472.1 in July. Note: The Fed reports a simple annual rate (multiplies change in month by 12) as opposed to a compounded annual rate.

Note: Consumer credit does not include real estate debt.

by Calculated Risk on 9/08/2009 02:33:00 PM

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year.

Click on graph for larger image in new window.

This really shows the collapse in retail hiring in 2008. This also shows how the season has changed over time - back in the '80s, retailers hired mostly in December. Now the peak month is November, and many retailers start hiring seasonal workers in October.

Here is a story from Bloomberg: Retail Hiring Shift May Show Growing Confidence in Recovery (ht Brian, Mike)

U.S. discount, grocery and restaurant chains are hiring a larger percentage of job applicants than seven months ago, signaling confidence the economy may be improving, software maker Kronos Inc. said.

Kronos analyzed the 8.9 million job applications received by 68 retailers in the first seven months of the year. In July, 2.99 of every 100 applications resulted in a hire, compared with 2.75 in January, a three-year low, the Chelmsford, Massachusetts-based company said today in a statement.

“We are seeing a turnaround that reflects an increase in confidence by individual managers,” Robert Yerex, Kronos’s chief economist ... “It may take quite a bit longer to come back than it did to drop off.” This is the first time Kronos has publicly issued a monthly retail labor index.

Unfortunately this data is new and the season hasn't started yet. This hiring will be watched closely, and I suspect seasonal hiring will be stronger than in 2008, but not as strong as the 700+ thousand jobs in 2004 through 2007.