by Calculated Risk on 10/09/2009 10:11:00 AM

“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
Barney Frank, chairman of the House Financial Services Committee on recent FHA lending.

The quote is from David Streitfeld and Louise Story's article in the NY Times: U.S. Mortgage Backer May Need Bailout, Experts Say

The article covers the problems at the FHA, and includes this anecdote:

Like many Americans, Ms. [Bernadine Shimon] has recently been through some rough times. She lost a house to foreclosure, declared bankruptcy, got divorced and is now a single mother, teaching high school English in a Denver suburb.

She wanted a house but no lender would touch her. The Federal Housing Administration was more obliging. With the F.H.A. insuring her mortgage, Ms. Shimon was able to buy a $134,000 fixer-upper in August.
...
Any more than [3.5% down] and Ms. Shimon, 45, would still be a renter. As it was, she cashed in her retirement savings account to come up with the necessary funds. She did not have enough to spare for closing costs, so her mortgage broker arranged a deal where the charges were wrapped into the loan at the cost of a higher interest rate. She cried when the deal was done.

The house was empty and trashed. Slowly, she is trying to bring it back to life. She spent the first few weeks picking up garbage in the backyard.

Is Ms. Shimon a good bet? Even she has no easy answer. Her mortgage payment, $1,100, is half of what she takes home every month. It is not easy to make ends meet. Teachers can get laid off like everyone else.
emphasis added

Maybe Ms. Shimon will make it (I hope so). But according to the article she has no savings, and is spending half her take home income on just the mortgage payment. update

Maybe she can qualify for a loan modification! The HAMP guidelines are for loans not to exceed 31 percent of gross income. Update: It is not clear from the story the percentage of her gross income (the half is take home income). The FHA guidelines are that the payment-to-income ratio not exceed 31%, however, with all of the "compensating factors", it is possible that the FHA is insuring loans that the Obama Administration (through HAMP) has called "unaffordable". (ht TL)

And the NAR thinks Ms. Shimon will spend $10 of thousands of dollars fixing up her home over the next year? That is their argument for extending the "first-time" homebuyer tax credit (for anyone who hasn't owned for three years).

As Frank said, this is "a policy". But is it a good policy?

by Calculated Risk on 10/09/2009 08:37:00 AM

The Census Bureau reports:

The ... total August exports of $128.2 billion and imports of $158.9 billion resulted in a goods and services deficit of $30.7 billion, down from $31.9 billion in July, revised. August exports were $0.2 billion more than July exports of $128.0 billion. August imports were $0.9 billion less than July imports of $159.8 billion.

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through August 2009.

Imports were down in August, and exports increased slightly. On a year-over-year basis, exports are off 21% and imports are off 29%.

The second graph shows the U.S. trade deficit, with and without petroleum, through August.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Import oil prices increased to $64.75 in August - up more than 50% from the prices in February (at $39.22) - and the sixth monthly increase in a row. Import oil prices will probably rise further in September.

It appears the cliff diving for U.S. trade is over. The weaker dollar is probably helping exports - and hurting imports.

by Calculated Risk on 10/08/2009 09:05:00 PM

From the Edmund Andrews at the NY Times: Rift Emerges in Fed Over When to Tighten Money

Fissures are developing among policy makers at the Federal Reserve as they debate how and when to start raising the benchmark interest rate from its current level just above zero.
...
One hint of the discord came Tuesday, in a speech by Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City.

Though he stopped short of calling for immediate rate increases, Mr. Hoenig made it clear that he was getting impatient.

“My experience tells me that we will need to remove our very accommodative policy sooner rather than later,” he told an audience of business executives. ...

And he is not alone.

Richard Fisher, president of the Federal Reserve Bank of Dallas, sent a similar message in a speech on Sept. 29. “That wind-down process needs to begin as soon as there are convincing signs that economic growth is gaining traction,” he told a business group.

Other Fed officials [have] similar views ...

And on the other side:

“The turnaround is certainly welcome, but it shouldn’t be overstated,” Daniel K. Tarullo, a Fed governor ...

“Some observers are concerned that this expansion will ultimately prove to be inflationary,” William C. Dudley, president of the New York Fed told an audience at the Fordham University’s Corporate Law Center. “This concern is not well founded.”

As I noted last month, it is unlikely that the Fed will increase the Fed's Fund rate until sometime after the unemployment rate peaks.

Click on graph for larger image in new window.

This graph shows the effective Fed Funds rate (Source: Federal Reserve) and the unemployment rate (source: BLS)

In the early '90s, the Fed waited more than a 1 1/2 years after the unemployment rate peaked before raising rates. The unemployment rate had fallen from 7.8% to 6.6% before the Fed raised rates.

Following the peak unemployment rate in 2003 of 6.3%, the Fed waited a year to raise rates. The unemployment rate had fallen to 5.6% in June 2004 before the Fed raised rates.

Although there are other considerations, since the unemployment rate will probably continue to increase into 2010, I don't expect the Fed to raise rates until late in 2010 at the earliest - and more likely sometime in 2011.

And from Chairman Bernanke tonight:

When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration.

Some people are taking that as tough talk, see: Dollar Rises After Bernanke Says Fed Ready to ‘Tighten’ Policy, but I disagree - I think "improved sufficiently" means Bernanke will wait for a meaningful decline in the unemployment rate.

by Calculated Risk on 10/08/2009 05:40:00 PM

From Fed Governor Daniel Tarullo: In the Wake of the Crisis

Turning first to the economic outlook, let me begin by stating the obvious: After a period in which there seemed to be only two plausible scenarios--very bad and even worse--financial and economic conditions have steadied. ... As we closed out the third quarter last week, it was apparent that economic growth was back in positive territory. ...

This turnaround is certainly welcome, but it should not be overstated. Although we can expect positive growth to continue beyond the third quarter, economic activity remains relatively weak. The upturns in industrial production and residential investment, for example, follow startling declines in the first half of the year. Improvement is gradual and beginning from very low levels.

The employment situation continues to be dismal. While the pace of job losses has slowed from the extraordinary levels of early 2009, the economy has recently still been losing on average about a quarter of a million jobs each month. Hopes for a steady reduction in the pace of job losses were once again confounded last Friday with release of the September employment report, which showed net job declines well above the consensus expectation of economic forecasters. The unemployment rate has risen to 9.8 percent. ...

Indicators apart from the unemployment rate underscore the weakness of labor markets. The percentage of working-age people with jobs has fallen to a point not seen in a quarter century. Average hours worked have not increased through the spring and summer from what were, by historic standards, unusually low levels.The number of part-time workers who want full-time jobs jumped nearly 50 percent last fall and winter and has remained elevated since. The a>verage duration of unemployment has risen almost 10 weeks since the recession began, to more than six months.

The labor market conditions I have just described reflect the low level of resource utilization in the economy as a whole. In this context, with inflation expected to remain subdued for some time, the Federal Open Market Committee indicated after our meeting two weeks ago that exceptionally low interest rates are likely to be warranted for an extended period. Indeed, with the effects of the February stimulus package diminishing next year, bank lending that is still declining, and continued dysfunction in some parts of capital markets, there is considerable uncertainty as to how robust growth will be in 2010. At the same time, the unconventional policies pursued by the Federal Reserve in order to halt the crisis have produced levels and types of reserves that will eventually require use of the unconventional exit tools discussed on numerous occasions by Chairman Bernanke and Vice Chairman Kohn.

The coincidence of a weak economy and an unusually large balance sheet at the Federal Reserve will require some judgments by the Federal Open Market Committee of a sort for which there are not many historical precedents. Still, just as with conventional monetary policy, decisions on the timing and pace for removing accommodation should and will depend on our ongoing analysis and forecasts of all relevant economic factors.
emphasis added

by Calculated Risk on 10/08/2009 03:47:00 PM

Note: Market graph at bottom.

From HotelNewsNow.com: NorfolkLuxury occupancy holds steady in STR weekly numbers

Overall, in year-over-year measurements, the industry’s occupancy fell 5.8 percent to end the week at 55.8 percent. Average daily rate dropped 8.3 percent to finish the week at US$95.51. Revenue per available room for the week decreased 13.7 percent to finish at US$53.30.

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 7.3% from the same period in 2008.

The average daily rate is down 8.3%, and RevPAR is off 13.7% from the same week last year.

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

As I noted last week, the comparisons are now easier soon since business travel fell off a cliff last October. Comparing to the same week two years ago, occupancy rates are off 16.4%.

Occupancy rates for October in 2006 and 2007 were close to 68%.

Market update:

The second 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 10/08/2009 02:20:00 PM

From MarketWatch: Obama plan claims 500,000 mortgage modifications started

U.S. loan servicers have begun modifying more than 487,081 loans for troubled homeowners on the verge of foreclosure as of the end Sept. 30, according to the report. The program met its 500,000 goal in early October. More than 757,955 modification offers have been extended by loan servicers as part of the program known as the Home Affordable Modification Program, or HAMP.

And from Scott Reckard at LA Land (LA Times):

Stand by ... for answers to the big question: whether these modified loans will hold up or whether “underwater” homeowners will stumble back into default after hitting new bumps along their financial roads.
...
The trial modifications “are simply offers,” [Mark Zandi of Moody's Economy.com notes]. “Many won't turn into actual mods, and those mods that occur will have a high redefault rate.”

As I noted back in July when this goal was announced:

Counting the number of mods might make for useful PR, but some mods are more effective than others. A capitalization of missed payments and fees, along with a rate reduction and/or extended term, are the most common modifications. But for homeowners with significant negative equity that is just "extend and pretend" and leads to a high redefault rate and just postpones foreclosure.

The September industry data is not available yet on the HopeNow website.

by Calculated Risk on 10/08/2009 11:34:00 AM

From Bloomberg: FHA Shortfall Seen at $54 Billion May Lead to Bailout (ht Mike in Long Island, Ron at WallStreetPit)

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae ...

Pinto makes several points, including:

"FHA is making much larger loans than in the past. Its top dollar limit is $729,500 versus its old top of $362,000 in 2008." This exposes the FHA more to high risk states like California.

"FHA allows up to a 6% seller concessions before requiring an appraisal adjustment." Pinto notes that Fannie Mae found that allowing concessions above 2% before adjustments led to much higher defaults.

High LTV lending is a higher percentage of loans today (23%) than in 2006 (17%). This is due to the large increase in FHA insured loans.

The first-time homebuyer tax credit is being used as a downpayment, and Pinto draws a comparison to the horrible default performance of the DAPs (downpayment assistance program) loans.

"FHA's early warning database indicates loan performance is deteriorating." See pages 6 and 7 of testimony for details. Note: I posted some data before, see FHA Lenders with High Default Rates

There is more in his testimony.

by Calculated Risk on 10/08/2009 09:05:00 AM

Click on graph for larger image in new window.

Reis reports the strip mall vacancy rate hit 10.3% in Q3 2009; the highest vacancy rate since 1992. And rents are cliff diving ...

From Reuters: Shopping center vacancy rate hits 17-year high: report

"Our outlook for retail properties as a whole is bleak," Victor Calanog, Reis director of research, said. "Until we see stabilization and recovery take root in both consumer spending and business spending and hiring, we do not foresee a recovery in the retail sector until late 2012 at the earliest."
...
The third-quarter vacancy rate at U.S. strip malls, which include local shopping and big-box centers, rose 0.3 percentage points from the second quarter to 10.3 percent, the highest since 1992, Reis said.
...
Factoring in months of free rent and other perks, effective rent fell 0.8 percent from the second quarter to $16.89 per square foot or down 3.8 percent from the third quarter 2008. Rents were the lowest since mid-2007
...
"Since asking and effective rent growth only turned negative about one year ago, it is daunting to observe this acceleration in decline in what has traditionally been regarded as a stable property type," Calanog said.

A grim outlook: no recovery seen in the retail CRE sector "until late 2012 at the earliest".

Malls. Offices. Apartments. The story is the same: rising vacancies and falling rents. Here are the earlier reports this week on offices and apartments:
U.S. Office Vacancy Rate Hits 16.5% in Q3

Apartment Vacancy Rate at 23 Year High

by Calculated Risk on 10/08/2009 08:34:00 AM

The DOL reports weekly unemployment insurance claims decreased to 521,000:

In the week ending Oct. 3, the advance figure for seasonally adjusted initial claims was 521,000, a decrease of 33,000 from the previous week's revised figure of 554,000. The 4-week moving average was 539,750, a decrease of 9,000 from the previous week's revised average of 548,750.
...
The advance number for seasonally adjusted insured unemployment during the week ending Sept. 26 was 6,040,000, a decrease of 72,000 from the preceding week's revised level of 6,112,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 9,000 to 539,750, and is now 119,000 below the peak in April.

Initial weekly claims have peaked for this cycle, however the level of weekly claims indicates continuing weakness in the job market. The four-week average of initial weekly claims will probably have to fall below 400,000 before total employment stops falling.

by Calculated Risk on 10/07/2009 09:50:00 PM

From Dow Jones: Pimco Has Quit CIT Bondholder Steering Committee

The future of CIT Group Inc. (CIT) grew murkier Wednesday after the disclosure that bond fund giant Pacific Investment Management Co. had quit a steering committee that's trying to prevent the commercial lender from collapse. ... Boston-based Baupost Group LLC [had quit earlier].
...
The company has an estimated $75 billion in assets, and provides critical short-term financing to about one million small companies.
...
Investors have until 11:59 p.m. Eastern time on Oct. 29 to tender their bonds under the restructuring plan.

Small firms have already been hit hard in this recession, accounting for about 45% of the job losses (see Melinda Pitts at Macroblog: Prospects for a small business-fueled employment recovery):

In a speech [Monday], William Dudley, the president of the Federal Reserve Bank of New York, identified financial constraints for small businesses as a restraint on the pace of economic recovery.
...
Looking ahead, it's not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.

As the article mentioned, CIT provides financing for about one million small business. If CIT files bankruptcy, the company will continue to operate, but they may not write any new business. Their competitors will pick up the best of the business, but many small firms will struggle to find new financing.

The clock is ticking.