by Calculated Risk on 10/16/2009 03:26:00 PM

First Federal Bank of California put out a press release claiming better modification performance than the national average:

Compared to the national average, far fewer loans modified by the Bank have defaulted as of August 31, the latest date for which there is comparative data. Just 28.3% of the loans modified by First Federal Bank of California in the first quarter of 2008 had become at least 30 days delinquent 12 months after they were modified. By contrast, that figure is 65.9% for national banks and federally regulated thrifts, according to a September report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Wow. Maybe other banks can learn something from First Fed on loan modifications!

But wait:

Over 90% of the loans that the Bank has modified since the program started were current at the time they were modified. The Bank converted many adjustable-rate loans into fixed-rate mortgages for up to 10 years and eliminated negative-amortization provisions for modified loans. These steps have reduced the risk of foreclosure and potential loan losses.

Not so impressive. Most loans that are modified by national banks are delinquent, and redefault rates are much higher than initial default rates.

Amherst Securities noted that this week (no link):

[R]e-performing loans are defined as those that were once more than 60 days delinquent, and are now less than 60 days delinquent. This can occur either through natural curing or modifications. However, these re-performing loans do not perform in the same manner as loans that have never been delinquent.

In particular, the default rates on the re-performing bucket is huge. Most of these loans will eventually fail. The question is just – when?

Of course First Fed is targeting loans that will probably default (a good strategy), but the solution of modifying to a low fixed rate for up to ten years (without principal reduction), sounds like "extend and pretend".

by Calculated Risk on 10/16/2009 02:31:00 PM

From the California Employment Development Department

EDD’s report on payroll employment (wage and salary jobs) in the nonfarm industries of California totaled 14,200,400 in September, a net loss of 39,300 jobs since the August survey. This followed a loss of 7,200 jobs (as revised) in August.

The goods news is the unemployment rate declined slightly after an upwards revision to the August report:

California’s unemployment rate was 12.2 percent in September ... In August, the state’s unemployment rate was a revised 12.3 percent

The revision makes the 12.3% California unemployment rate for August a new series high (state series began in 1976).

The BLS will release the data for all States on Oct 21st.

by Calculated Risk on 10/16/2009 12:10:00 PM

From MarketWatch: Summers: 'Time has come' for deep change for banks

White House senior economic adviser Lawrence Summers challenged U.S. financial institutions Friday to think about what they can do for their country by stepping up and accepting the regulations imposed upon them in the wake of the largest financial crisis since the Great Depression.

"Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country -- by accepting the necessary regulation to protect the American people," Summers said in remarks prepared for delivery at the Economist's Buttonwood Gathering in New York. "There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system."
...
"The time has come for fundamental change in the financial sector of our economy -- both in how financial institutions conduct their business and how they are regulated," Summers said.
...
"[We have] one crisis every three years," Summers said. "Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform."

Clearly this means much more than consumer protection and aligning compensation with the goals of the corporation (not on taking short term risks). Those are good first steps - as is regulating derivatives - but the key is that no bank should be “systemically important” or "too big to fail".

by Calculated Risk on 10/16/2009 09:15:00 AM

From MarketWatch: U.S. Sept. industrial production up 0.7%

U.S. industrial production increased at an annual rate of 5.2% in the third quarter ... Capacity utilization rose to 70.5% in September from a revised 69.9% in August.

Auto production was up significantly.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series has increased for three straight months, and is up from the record low set in June (the series starts in 1967). Capacity Utilization had decreased in 17 of the previous 18 months.

Note: y-axis doesn't start at zero to better show the change.

An increase in capacity utilization is usually an indicator that the official recession is over.

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.