by Calculated Risk on 10/16/2009 08:42:00 AM

From Reuters: BofA Posts Loss Amid Consumer Credit Woes

The nation's largest bank reported a net loss of $1 billion... The bank set aside $11.7 billion during the quarter for credit losses, $1.7 billion less than in the second quarter but $5.3 billion more than in the 2008 third quarter.

And from the WSJ:

Credit-loss provisions swelled 81%, while the net charge-off rate was up at 4.13% from 1.84% a year earlier and 3.64% in the second quarter. Total nonperforming assets rose to 3.72% from 1.45% in the prior year and 3.31% last quarter.

The confessional is still open.

by Calculated Risk on 10/15/2009 10:13:00 PM

This includes lawyers, mortgage brokers, and loan officers ...

From the NY Times: 41 Charged With Widespread Mortgage Fraud

Federal prosecutors announced charges on Thursday against 41 lenders, lawyers and others in the real estate industry who they said used fraud to obtain more than $64 million in loans connected to more than 100 residential properties in New York State.
....
[One case involved] a Bronx real estate company called MTC, 10 people were accused of participating in a $5.6 million “foreclosure rescue” scheme in which they sought out troubled mortgage holders facing foreclosure, running radio ads in which they presented themselves as saviors.

An indictment said that the defendants in that case ... duped troubled homeowners into selling their properties at low prices or persuaded them to transfer the deeds to their homes, promising to help solve their financial problems and then return the properties.

Instead, prosecutors said, Ms. Bills and other defendants flipped those properties to straw buyers at inflated prices subsidized by unaffordable loans that the defendants persuaded lenders to issue based on false documentation.

It is hard to believe how callous and greedy some people are (assuming the charges are true).

by Calculated Risk on 10/15/2009 04:53:00 PM

The housing outlook has probably never been more uncertain ... and the details are masked by many distortions.

"[T]he HAMP program right now ... really makes it difficult for anyone from the outside [of Citi] to actually have a good view as to the inherent credit profile in our [mortgage] delinquency buckets."
Citi CFO John Gerspach, Oct 15, 2009

So, as confusing as it is, here is a rough overview ...

Supply: the supply of distressed homes has been severely restricted by a combination of foreclosure delays and trial modifications.

Demand: demand has been distorted by the first-time homebuyer tax credit, by extraordinary levels of lending using government-insured FHA loans, and the Fed buying GSE MBS pushing down mortgage rates.

This has led to a buying frenzy in many low end areas, and has pushed up prices.

Look at the California Bay Area report today from DataQuick:

Home sales in the Bay Area edged up in September as buyers scrambled to take advantage of low mortgage interest rates as well as a tax credit due to expire at the end of November. ... The month-to-month gain was atypical: sales normally decline around 11 percent from August to September. ... The use of government-insured FHA loans – a common choice among first- time buyers – represented 29.3 percent of all Bay Area purchase loans in September.

This is a very large percentage of government-insured FHA loans - and many of these buyers are probably using the tax-credit as their downpayment (which will probably lead to higher defaults).

“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.

So what does this mean for the housing market? In the short term:

Existing home sales will probably be strong in September based on regional reports.

With restricted supply and increased demand, prices (Case-Shiller) will probably be strong through at least September (reported with a delay).

Reported inventories will move lower.

But the longer term (2010 or maybe later) will really depend on the success of the modification programs. And according to Citi today, we won't have a feel for the success rate of HAMP until probably Q1.

Amherst Securities isn't optimistic: Timing is Everything, Oct 14, 2009 (no link)

Implementation of the HAMP modification plan is making it even more difficult to predict cash flows. The trial modification period essentially holds the loan in a suspended state ... making it difficult to assess what is happening with modifications. In the end, we expect relatively few of these modifications to be successful.

I also expect most HAMP modifications to fail, although many borrowers might make their payments for a few years, and then finally default.

Even excluding the HAMP, because of slowdowns in the foreclosure process, the lenders are sitting on a backlog of foreclosures in the pipeline (not REOs, but properties in the process). So there should be an increase in foreclosures soon - how soon, and how many, is a guess.

And on the demand side, the Fed's purchases of GSE MBS will end in Q1, the interest in the first-time homebuyer tax credit will wane just like the cash-for-clunkers program (even if it is extended), and the FHA will probably be forced to tighten standards (or at least cut loose poor performing lenders).

So my guess is another down turn in the housing market in 2010 (existing home sales and prices), although prices have probably already bottomed in many low end areas.

But the outlook is very uncertain.

by Calculated Risk on 10/15/2009 02:27:00 PM

These comments show how important HAMP is to the housing market. The key points are 1) Loans in trial modifications are included in the delinquency rates (as we've discussed), and 2) we are completely in the dark on how the trial mods are performing!

Meredith Whitney:

Since so much of your numbers today are influenced by the trial mod [HAMP] results, I wanted to ask a couple of questions. Number one, is the early experience consistent with the report that came out in October with the Congressional oversight result, which talked to the difficulty of finding documentation on the modifications? Can you provide more color there? And also a question that I have been asking management is when do you think an appropriate report card will be accessible in terms of the success of these? Is it fourth quarter, first quarter and then I have a follow-up after that please?

Citi CFO John Gerspach:

The earliest modifications that we entered into were in May. And so we are just finishing up the five-month period right now. And I would say that the documentation process, both in the way that the request is given to the consumer, as well as the assistance that we are giving consumers, has improved over time. So the early stages, we are seeing some difficulty in the customers fulfilling the documentation request as either you noted or we noted. That is one of the reasons behind the extension of the trial period from three months to five months. So let's kind of wait until we at least get the October and perhaps November results in to see whether or not the documentation collection or submission process has improved. As far as an overall scorecard on HAMP, my sense, especially given the fact that you have got five months -- five-month trial for all modifications entered into prior to September 1 and then a three-month period is at best it will be towards the end of the fourth quarter, but it is probably more of a first quarter next year type of answer.
emphasis added

Click on graph for larger image in new window.

This is slide 18 from the Citi Presentation. This slide shows the increase in mortgage delinquencies and Gerspach discusses the impact of HAMP below.

Apparently the increase in the 90 to 179 day bucket is due to HAMP, and so is half of the increase in the greater than 180 day bucket. The remaining increase in the greater than 180 day bucket is due to delays in foreclosures.

Earlier from CFO John Gerspach:

Turning to first mortgages on slide 18, we take a closer look at the delinquency data. Last quarter, we discussed a trend that showed a decline in the 90 to 179 day bucket and an increase in the 180 day plus bucket. The trend in the 90 to 179 day bucket has reversed this quarter, but can be largely explained by the loan modification program known as Home Affordable Modification or HAMP. We have approximately $6 billion of on-balance sheet mortgages in this program. Under HAMP, borrowers make reduced mortgage payments for a trial period, during which they continue to age through our delinquency buckets even if they are current under the new payment terms. This serves to increase our delinquencies. Virtually all of the increase in the 90 to 179 bucket and half of the increase in the 180 plus day bucket are loans in HAMP trial modifications. The rest of the increase in the 180 plus day bucket is attributable to a backlog of foreclosure inventory driven by a slowdown in the foreclosure process in many states. HAMP also reduces net credit losses as loans in the trial period do not get charged off at 180 days past-due as long as they have made at least one payment. Nearly half the sequential decline in net credit losses on first mortgages this quarter was attributable to HAMP. We have provided additional loan loss provisions to offset this impact.

Analyst:

And of all of the metrics that we see, for example, the 90 day delinquencies and the like, which do you think that we should pay the most attention to in terms of evaluating the choices that you made in terms of building reserves other than the 13 months?

John Gerspach:

Well, you certainly have to take a look at the combination of the 90 day plus delinquencies. Let's talk about cards. I think cards and mortgages are somewhat different. From a cards point of view, as I mentioned, when we look at things, we are looking at both the early buckets, as well as the later buckets. And admittedly, we don't give you much information on the early buckets. But in the retail partner cards portfolio, as we mentioned, we are seeing improvements in the 90 day plus buckets and we are also seeing some stabilization in the early buckets. And that is what gives us, again, some deal of comfort when looking at that portfolio. Branded cards, I think I mentioned that we have seen reductions in the 90 plus day delinquencies, but as I noted, the net credit losses continued to grow slightly this quarter and so we are somewhat more cautious in that portfolio. And finally, when it comes to mortgages, as I mentioned on the call, or just before, the HAMP program right now has got a rather significant impact on our delinquency statistics and really makes it difficult for anyone from the outside to actually have a good view as to the inherent credit profile in our delinquency buckets.

by Calculated Risk on 10/15/2009 01:21:00 PM

From HotelNewsNow.com: New Orleans leads increases in STR weekly numbers

Overall, in year-over-year measurements, the industry’s occupancy fell 5.4 percent to end the week at 59.8 percent. ADR dropped 7.0 percent to finish the week at US$99.21. RevPAR for the week decreased 12.0 percent to finish at US$59.28.

Click on graph for larger image in new window.

This graph shows the occupancy rate by week for each of the last four year (2006 through 2009 labeled by start of month).

This shows the distinct seasonal pattern, with occupancy higher in the summer (because of leisure travel), and lower on certain holidays. This also shows that hotels are in two year occupancy slump. The year-over-year comparisons are easier now since business travel fell off a cliff last October. Comparing to the same week two years ago, occupancy rates are off over 12%.

Notes: the scale doesn't start at zero to better show the change. Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com. Thanksgiving was late in 2008, so the dip doesn't line up with the previous years.

And more on business travel:

First, from MarketWatch on business travel: Southwest Airlines CEO: the worst is not behind us

Chief Executive Gary Kelly said Thursday that the worst was not yet behind the low-cost carrier because of higher energy prices and the lack of business travel.

“We have significant demand at our discounted pricing levels. We have very weak demand at our full-fare levels.”
Southwest Airlines CEO Gary Kelly, Oct 15, 2009

by Calculated Risk on 10/15/2009 11:25:00 AM

Both the Philly Fed Index and NY Fed index were positive today on manufacturing conditions in those regions ...

Here is the Philadelphia Fed Index released today: Business Outlook Survey.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, fell from a reading of 14.1 in September to 11.5 this month. The index has now remained positive for three consecutive months following a nearly continuous string of negative readings since the beginning of the recession in December 2007.
...
Labor market conditions remain weak, although there are signs that widespread declines have moderated considerably. The current employment index, although still negative, increased eight points, from ‐14.3 to ‐6.8, its highest reading since September 2008.

Click on graph for larger image in new window.

This graph shows the Philly index for the last 40 years.

The index has been positive for three months now, after being negative for 19 of the previous 20 months. Employment is still weak.

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved significantly in October. The general business conditions index climbed 16 points to 34.6, its highest level in five years. The new orders index rose 11 points, and the shipments index shot up 30 points, to 35.1. Both employment indexes were positive for the first time in more than a year.

And a two miscellaneous stories:

From Reuters: Capital One credit card defaults rise in September

... Capital One said the annualized net charge-off rate ... for U.S. credit cards had risen to 9.77 percent in September from 9.32 percent in August.

From the Sacramento Bee: California Senate approves $10,000 tax credit for new-home buyers (ht Brad)

The Senate voted 35-1 to reauthorize the use of $30 million in credits ... That should allow the state to give tax credits to about 4,300 more buyers of new unoccupied homes ... Eligible buyers would get a maximum of $3,333 in credits for each of the next three years.

by Calculated Risk on 10/15/2009 09:20:00 AM

From RealtyTrac: U.S. Foreclosure Activity Increases 5 Percent in Q3

RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for Q3 2009, which shows that foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 937,840 properties in the third quarter, a 5 percent increase from the previous quarter and an increase of nearly 23 percent from Q3 2008. One in every 136 U.S. housing units received a foreclosure filing during the quarter — the highest quarterly foreclosure rate since RealtyTrac began issuing its report in the first quarter of 2005.

Foreclosure filings were reported on 343,638 properties in September, a 4 percent decrease from the previous month but a 29 percent increase from September 2008. Despite the monthly decrease, September’s total was still the third highest monthly total since the RealtyTrac report began in January 2005, behind only July and August of this year.

“Bank repossessions, or REOs, jumped 21 percent from the second quarter to the third quarter, corresponding to jumps in defaults and scheduled auctions in the previous two quarters,” said James J. Saccacio, chief executive officer of RealtyTrac. “REO activity increased from the previous quarter in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties.”

by Calculated Risk on 10/15/2009 09:01:00 AM

From the BLS: Consumer Price Index Summary

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in September, the Bureau of Labor Statistics reported today. The increase was less than the 0.4 percent rise in August. The index has decreased 1.3 percent over the last 12 months on a not seasonally adjusted basis.

And on rents:

The increase occurred despite declines in the indexes for rent and owners' equivalent rent, the first decreases in those indexes since 1992.

The decrease in OER was at an annual rate of 1.7%. And rents will continue to fall for some time.

Also, it is now official, there will be no increase in Social Security benefits next year (see: Social Security: No Increase to 2010 Benefits or Maximum Contribution Base)

by Calculated Risk on 10/15/2009 08:30:00 AM

The DOL reports weekly unemployment insurance claims decreased to 514,000:

In the week ending Oct. 10, the advance figure for seasonally adjusted initial claims was 514,000, a decrease of 10,000 from the previous week's revised figure of 524,000. The 4-week moving average was 531,500, a decrease of 9,000 from the previous week's revised average of 540,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Oct. 3 was 5,992,000, a decrease of 75,000 from the preceding week's revised level of 6,067,000.

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 531,500, and is now 127,250 below the peak in April.

Initial weekly claims have peaked for this cycle. The key question is: Will claims continue to decline sharply, like following the recessions in the '70s and '80s, or will claims plateau for some time at an elevated level, as happened during the jobless recoveries in the early '90s and '00s?

The level is still high - indicating continuing job losses - and 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 10/14/2009 09:54:00 PM

From Austin Kilgore at Housing Wire: Chances Are, Most HAMP Mods Won’t Work: Amherst

The Making Home Affordable Modification Program (HAMP) adds another layer of uncertainty for private label securitization investors, making it more difficult to predict cash flows, according to a report by analysts at Amherst Securities Group, who added they expect relatively few HAMP workouts to be successful.

Additionally, it’s taking longer for bad mortgages to move from last payment to liquidation, and the pace varies by servicer: “The trial modification period essentially holds the loan in a suspended state for 90 days, making it difficult to assess what is happening with modifications,” the report said ...

While HAMP workouts are keeping the pools of real estate owned (REO) property relatively small, Amherst predicts a low percentage of eventual success of HAMP modifications is inevitable.
emphasis added

A few comments:

The trial period has been extended for an additional 60 days - so make it suspended animation for 150 days! See One Company Responsible For Nearly Half Of All Permanent Mortgage Modifications

Treasury and COP note that many of those temporary modifications may be in process of getting paperwork submitted in order for them to achieve permanent status. Treasury granted a two-month extension -- on top of the three-month trial -- for borrowers and servicers to get their documentation ready.

Much depends on the success of HAMP. If many of these modifications don't become permanent there will be another flood of foreclosures on the market. BofA has already promised a "spike" in foreclosure at the end of this year, see: Delayed Foreclosures Stalk Market

We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running" for a loan modification or other alternatives, says a Bank of America Corp. spokeswoman.

In many areas the "the pools of real estate owned (REO) property" has all but dried up. The HAMP program is restricting supply.

Note: On the demand side, the first-time homebuyer tax credit combined with loose FHA underwriting, is boosting demand. Restricted supply and more demand has created a buying frenzy and pushed up prices in some low end areas.