by Calculated Risk on 9/18/2009 02:09:00 PM

Professor Hamilton, at Econbrowser, excerpts from the WSJ on curbing bankers' pay, and adds some important comments: Regulating compensation in the banking sector

One of the key questions for understanding the causes of our current problems is the following. Suppose that in 2005, the individuals who were putting together securities derived from subprime and alt-A mortgage loans could have known, with perfect foresight, events that were going to unfold in 2008. Would they have still done the same things they did in 2005? My concern is that, for many individuals, the answer might be "yes", insofar as they were richly rewarded personally in 2005 for making exactly the decisions they did. It was other parties (namely you and me) who later down the road were forced to absorb the downside of their gambles. Capitalism functions well when individuals are rewarded for making socially productive decisions. It is a disaster when individuals are rewarded for making socially destructive decisions. For this reason, I am quite supportive of the broad idea of the above proposal.

For some people I don't think there is any question the answer would have been "yes". For many others, they would have ignored the "perfect foresight", and rationalized away the risks. The result is the same, but the second group can feel better about themselves while living large.

Hamilton also adds some comments on regulatory capture - another important issue.

by Calculated Risk on 9/18/2009 11:26:00 AM

From the BLS: Regional and State Employment and Unemployment Summary

Twenty-seven states and the District of Columbia reported over-the-month unemployment rate increases, 16 states registered rate decreases, and 7 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia.
...
Fourteen states and the District of Columbia reported jobless rates of at least 10.0 percent in August. Michigan continued to have the highest unemployment rate among the states, 15.2 percent. Nevada recorded the next highest rate, 13.2 percent, followed by Rhode Island, 12.8 percent, and California and Oregon, 12.2 percent each. The rates in California, Nevada, and Rhode Island set new series highs.
emphasis added

Click on graph for larger image in new window.

This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).

Fourteen states and D.C. now have double digit unemployment rates.

Illinois, Indiana, and Georgia are all close.

Four states are at record unemployment rates: Rhode Island, Oregon, Nevada, and California. Several others - like Florida and Georgia - are close.

by Calculated Risk on 9/18/2009 10:26:00 AM

From the WSJ: FDIC Considers Borrowing From Treasury to Shore Up Deposit Insurance

Federal Deposit Insurance Corp. Chairman Sheila Bair said her agency is considering borrowing from the U.S. Treasury to replenish its deposit insurance fund.

"We are carefully considering all options" including borrowing from the Treasury, Ms. Bair said Friday after a speech in Washington.

UPDATE: Bair is responding to comments by Barney Frank (see this speech at 25 mins, ht Kevin)

Here is a reference to a recent letter from Sen Levin, via Dow Jones: FDIC Should Borrow From Tsy, Not Charge Banks Fee

Sen. Carl Levin, D-Mich. ... said in a letter to FDIC Chair Sheila Bair that he was concerned about the possibility of the agency charging banks a second special assessment this year. ... Such fees could hurt smaller banks, Levin wrote.

"Adding yet another major financial obligation during this crisis could further deplete the capital of these small financial institutions, making it difficult for them to extend the credit needed to turn our economy around," Levin said in the letter.

The Deposit Insurance Fund (DIF) had $10.4 billion in assets at the end of Q2, but the total reserves were $42 billion. Note that accounting for the DIF includes reserves against estimate future losses, so that is the difference between the total reserves and the reported assets. Total reserves of the Deposit Insurance Fund (DIF) stood at $42 billion. From the FDIC:

Just as insured institutions reserve for loan losses, the FDIC has to provide for a contingent loss reserve for future failures. To the extent that the FDIC has already reserved for an anticipated closing, the failure of an institution does not reduce the DIF balance. The contingent loss reserve, which totaled $28.5 billion on March 31, rose to $32.0 billion as of June 30, reflecting higher actual and anticipated losses from failed institutions. Additions to the contingent loss reserve during the second quarter caused the fund balance to decline from $13.0 billion to $10.4 billion. Combined, the total reserves of the DIF equaled $42.4 billion at the end of the quarter.

Of course the FDIC cut a check to MB Financial Bank last week for approximately $4 billion as part of the Corus Bank seizure. For the Corus deal, MB Financial Bank assumed all of the deposits of Corus Bank (approximately $7 billion) and agreed to purchase approximately $3 billion of the assets (mostly cash and marketable securities). The FDIC wrote a check for the difference. The FDIC retained the remaining $4 billion in assets for later disposal, and estimated the losses would be $1.7 billion. But writing a $4 billion check was a significant hit to the cash reserves of the DIF.

by Calculated Risk on 9/18/2009 08:38:00 AM

From the WaPo: Housing Agency's Cash Reserves Will Drop Below Requirement

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said.

The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.

"It's very serious," FHA Commissioner David H. Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."
...
[Stevens] said he is planning to announce Friday several measures that should help the reserves rebound quickly.
...
An independent audit due out this fall will show that the agency's reserves will drop below the 2 percent level as of Oct. 1, the start of the new fiscal year, Stevens said.
...
For one, he will propose that banks and other lenders that do business with the FHA have at least $1 million in capital they can use to repay the agency for losses if they were involved in fraud. Now, they are required only to hold $250,000. Second, he will propose that lenders also take responsibility for any losses due to fraud committed by the mortgage brokers with whom they work.
emphasis added

Here is a table of FHA lenders with 2 year default rates of 15% or more (only lenders with 100+ originations included). There are ten lenders with "perfect" records (100% default), but they only have one or two originations each. Many of these lenders will probably go away with the new rules.

The FHA is banking on a "recovery in the housing market":

The new audit shows that even without any new measures, the reserves will rebound to the required level within two or three years largely as the result of the recovery in the housing market, Stevens said. This calculation is based on projections of future home prices, interest rates and the volume and credit quality of FHA's business.

Yeah, if house prices increase, everything will be OK!

Note: here is a post from a couple of weeks ago: FHA: The Next Bailout?

by Calculated Risk on 9/17/2009 10:25:00 PM

From Reuters: "Option" mortgages to explode, officials warn

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.
...
In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

"It's the other shoe," he said. "I can't say it's waiting to drop. It's dropping now."

This was a meeting of state AGs discussing mortgage scams with the Obama Administration, and based on the comments, there was an emphasis on Option ARMs.

I guess that deserves a Hoocoodanode?

by Calculated Risk on 9/17/2009 07:41:00 PM

About time ... (and a BFF preview below)

From Jillayne Schlicke at RainCityGuide: FTC Considers Total Ban on Upfront Loan Modification Fees. FTC Chairman Jon Leibowitz made the suggestion today. Jillayne adds:

Third party loan mod salesmen should only be allowed to collect a fee once the loan modification is not only performed but also after the homeowner has made a specific number of on time payments. This will rid the system of the Devil’s Rejects subprime LOs who act like they just walked off the set of a Rob Zombie movie and can only smell money.

Exactly! Jillayne has been arguing for this ban for some time.

And to get ready for Bank Failure Friday (BFF), from an SEC 8-K filing today: (ht Michael)

On September 15, 2009, Irwin Financial Corporation (the “Corporation”) and its principal depository institution subsidiary, Irwin Union Bank and Trust Company (“IUBT”), entered into a Cease and Desist Order (the “Order”) with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Indiana Department of Financial Institutions (the “DFI”). The Order includes requirements that the Corporation and IUBT achieve certain designated capital levels and reduce reliance on certain types of deposits by September 30, 2009. The Corporation and IUBT believe that there is no realistic prospect of achieving the required capital levels by the date required in the Order and, in the absence of certain loan sales, which the Corporation and IUBT believe would not be approved by appropriate regulatory bodies, they cannot achieve the requisite reduction in reliance on the designated deposits by the required date.
emphasis added

"No realistic prospect" is pretty clear.

by Calculated Risk on 9/17/2009 06:20:00 PM

The Federal Reserve released the Factors Affecting Reserve Balances today. Total assets were basically flat at $2.14 trillion. This graph from the Atlanta Fed shows the breakdown in the assets (from earlier this month):

Click on graph for larger image in new window.

This raises an interesting question: What is the impact from Fed MBS buying on mortgage rates?

Earlier this year, Political Calculations introduced a tool to estimate mortgage rates based on the Ten Year Treasury yield (based on an earlier post of mine): Predicting Mortgage Rates and Treasury Yields. Using their tool, with the Ten Year yield at 3.39%, this suggests a 30 year mortgage rates of 5.36% based on the historical relationship between the Ten Year yield and mortgage rates.

Freddie Mac released their weekly survey today:

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.04 percent with an average 0.7 point for the week ending September 17, 2009, down from last week when it averaged 5.07 percent.

This made me wonder if mortgage rates have been running below projections while the Fed has buying MBS ...

So I updated the previous graph. Sure enough mortgage rates have been below expectations for a number of months (the last 5 months in blue triangles).

Although this is a limited amount of data - and the blue triangles are within the normal spread - this suggests the Fed's buying of MBS is reducing mortgage rates by about 35 bps.

Of course the Fed is also buying Treasuries - reducing the yield on the Ten Year Treasury - and that is another factor reducing mortgage rates (although Treasury buying is a much smaller amount and for different durations).

The third graph shows a breakdown of Fed Treasury purchases by maturity. From the Atlanta Fed:

Decomposing the Fed’s purchases of Treasury securities by maturity shows a heavy focus in the four-to-seven-year and seven-to-10-year sectors, together making up half of all purchases so far.

But the last four Treasury purchases have been focused elsewhere, with the biggest purchases in the shorter end of the yield curve.

I think the impact on mortgage rates from the Treasury purchases is minor. This suggests to me that mortgage rates will rise by about 35 bps, relative to the Ten Year yield, when the Fed stops buying MBS.

by Calculated Risk on 9/17/2009 03:20:00 PM

From DataQuick: Bay Area August home sales and median price fall

Bay Area home sales bucked the seasonal norm and fell last month from July, though they remained higher than a year ago for the 12th consecutive month. The region’s overall median sale price also declined as a greater portion of sales occurred in more affordable areas ...

A total of 7,518 new and resale houses and condos closed escrow in the nine-county Bay Area last month. That was down 14.3 percent from 8,771 in July and up 4.0 percent from 7,232 in August 2008, according to MDA DataQuick of San Diego.
...
“Part of the mid-summer pause in the market could have been caused by home shoppers becoming frustrated by market conditions they didn’t anticipate. In many areas there were fewer homes, especially cheap foreclosures, to choose from, and lots of talk about multiple offers and all-cash deals. It might have driven some back to the sidelines,” said John Walsh, MDA DataQuick president.

“At the same time, people are still concerned about job security, and about how many foreclosures might yet hit the market,” he said. “There are ongoing reports of mortgage delinquencies rising, yet the number of homes being foreclosed on has trended down lately. It’s bred a lot of uncertainty among the pundits and the public about how many more foreclosures are coming, when they’ll hit, and what impact they’ll have on prices.”

The 14.3 percent drop in sales between July and August was atypical, given the average change between those two months is a gain of 3.4 percent. ...

The median’s $35,000 drop between July and August was mainly the result of a shift toward a higher percentage of sales occurring in lower-cost inland areas. Although sales fell across the region and home price spectrum, some costlier areas saw the biggest declines. Sales fell the most – 21.1 percent – between July and August in Santa Clara County. Its share of total Bay Area sales fell to 23.1 percent in August, down from 25.1 percent in July.
...
Foreclosure resales made up 32.5 percent of total August resales, up from 31.2 percent in July but down from 36.0 percent a year ago. The August percentage was higher than July’s, despite fewer foreclosed homes selling last month, because of the sharp drop in non-foreclosure resales in August.
...
Foreclosures are off their recent peak but remain high historically ... and non-owner occupied buying is above-average in some markets, MDA DataQuick reported.

This sales decline in August is being reported in many areas.

And the shift back to more low end homes - even with the lower foreclosure inventory in the low end areas - is a bad sign for the mid-to-high end of the housing market. This suggest prices will fall further in those areas.

It appears the first-time homebuyer frenzy is started to fade, although investors are still buying in the low end areas.

by Calculated Risk on 9/17/2009 01:38:00 PM

This is a crushing comparison, but the numbers might be distorted by the late Labor Day this year (Sept 7th). That made the comparison easier last week (with more leisure travel), but perhaps business travel hasn't started yet (important for hotels after Labor Day). Next week will be key ...

From HotelNewsNow.com: New Orleans leads declines in STR weekly results

In year-over-year measurements, the U.S. industry’s occupancy fell 14.6 percent [for the week ending 12 September] at 52.8 percent. ADR dropped 12.8 percent to finish the week at US$94.49. RevPAR for the week decreased 25.5 percent to finish at US$49.92.

Click on graph for larger image in new window.

This graph shows the YoY change in the occupancy rate (3 week trailing average).

The three week average is off 9.6% from the same period in 2008.

The average daily rate is down 12.8%, and RevPAR is off 25.5% from the same week last year.

Note that this is a multi-year slump. Although occupancy was off 14.6% compared to the same week in 2008, occupancy is off about 23% from the same week in 2006.

Also, earlier this year business travel was off much more than leisure travel. So it was no suprise that occupancy rates didn't decline as far during the Summer as earlier in the year. However, after Labor Day, business travel becomes far more important for the hotel industry than leisure, and next week will be very important to see if business travel is recovering.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 9/17/2009 11:59:00 AM

The Fed released the Q2 2009 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth is now off $12.2 Trillion from the peak in 2007.

Click on graph for larger image in new window.

This is the Households and Nonprofit net worth as a percent of GDP.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

According to the Fed, household net worth increased in Q2 mostly from increases in stock holdings - although the value of household real estate increased slightly too.

Note that this ratio was relatively stable for almost 50 years, and then ... bubbles!

This graph shows homeowner percent equity since 1952.

Household percent equity (of household real estate) was up to 43% from the all time low last quarter of 41.9%. The increase was due to a slight increase in the value of household real estate and a decline in mortgage debt - and also a decline in overall GDP (so the ratio increases).

When prices were increasing dramatically, the percent homeowner equity was stable or declining because homeowners were extracting equity from their homes. Now, with prices falling, the percent homeowner equity has been cliff diving.

Note: approximately 31% of households do not have a mortgage. So the 50+ million households with mortgages have far less than 43% equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP increased slightly in Q2 - because of a slight increase in real estate values, and a decline in GDP.

Mortgage debt declined, but was flat as a percent of GDP in Q2 - since GDP declined too.

After a bubble, the value of assets decline, but most of the debt remains.