by Calculated Risk on 3/10/2010 07:25:00 AM

The MBA reports: Purchase Applications Increase in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume, increased 0.5 percent on a seasonally adjusted basis from one week earlier. ...

The Refinance Index decreased 1.5 percent the previous week and the seasonally adjusted Purchase Index increased 5.7 percent from one week earlier. ...

The refinance share of mortgage activity decreased to 67.2 percent of total applications from 69.1 percent the previous week. The refinance share is at its lowest level since it was 66.1 percent in October 2009. ...

The average contract interest rate for 30-year fixed-rate mortgages increased to 5.01 percent from 4.95 percent, with points decreasing to 0.82 from 0.99 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Even with the increase in purchase applications this week, the 4 week average is still at the levels of 1997.

Also, with mortgage rates slightly above 5% again, refinance activity decreased last week.

by Calculated Risk on 3/09/2010 10:39:00 PM

From Shahien Nasiripour at the Huffington Post: Obama Foreclosure-Prevention Plan Lagging, New Data Shows

Only about a third of the homeowners who have successfully completed the trial period of the Obama administration's mortgage modification program have been offered permanent relief, according to new federal data obtained by the Huffington Post.

The conversion rate -- about 33 percent -- is woefully short of what the Treasury Department had forecast. ...

The new data was contained in a series of answers by Treasury Secretary Timothy Geithner to questions posed by Neiman and his colleagues on COP, including Harvard Law professor and bailout watchdog Elizabeth Warren.

"As of the end of January there were over 116,000 permanent modifications and over 67,000 permanent modifications pending final approval," Geithner wrote in his letter, which the panel received last week. "This group of approximately 180,000 permanent and pending permanent modifications represents about a third of the population of total modifications who have completed the trial modification and are at a point in the process where they are able to convert to permanent."

No real surprise - there is much more in the article including some interesting comments about a possible principal reduction program.

The HAMP report for February will probably be released late next week, and the numbers will be closely scrutinized.

by Calculated Risk on 3/09/2010 06:49:00 PM

A couple of articles about vacant or near vacant high rise condo towers in Florida ...

From the News-Press: Sole occupant of 32-story Fort Myers condo wants out (ht several)

Victor Vangelakos is the only buyer to take possession of his unit in the 32-story Tower 1 of the Oasis high-rise project in downtown Fort Myers.

Apparently the original plan was to build 5 towers with a total of 1,079 units. That is about 216 units per tower, and all but one unit are vacant in Tower 1. Tower 2 appears to have few lights on too.

And from the WSJ on the 850-unit Everglades project in Miami: BofA Lawyers Rebuked in Cabi Case

Only 109 or about 13% of the Everglades' 850 units have sold, according to CondoVultures.com. However, as of last month, the developer has rented about 260, or about 30%, of the units, in what it calls a "deferred purchase program."

That sounds like another 480 vacant units.

Many of these high rise condo towers are part of the "shadow inventory" because the units do not show up on either the new home sales or existing home sales reports (unless they are listed in the MLS). For some areas - like South Florida and Las Vegas - this is a significant part of the inventory.

by Calculated Risk on 3/09/2010 03:28:00 PM

One of the important points NY Fed VP Brian Sack made in his speech yesterday was the need for clear communication:

[T]his tightening cycle, when it arrives, will be more complicated than past cycles, as there will be more decision points facing policymakers. With more decision points come more opportunities for the markets to be confused by our actions. The recent changes to the discount rate and the Treasury's Supplementary Financing Program balances highlight this concern, as the amount of attention that those actions received was outsized relative to their significance for the economy or for the path of short-term interest rates.

The burden is on the Fed to mitigate this risk by communicating clearly about its policy intentions and the purpose of any operational moves it might take. In this regard, the forward-looking policy language that the FOMC is currently using in its statement is important. I would argue that this language contains much more direct and valuable information about the likely path of the short-term interest rate target than does any decision about draining reserves.

Sack singled out two recent releases that he believes were misunderstood.

The first was the change to the Discount Rate on February 18th. I think that release was very clear and it was released after the market closed. The increase in the discount rate had been expected, but the timing was a little surprising since the FOMC has trained participants that inter-meeting announcements are special.

Brian Sack suggests the FOMC should communicate "clearly about its policy intentions and the purpose of any operational moves it might take". Clearly the Fed could have done better, if, as Sack suggests, they had included a few sentences in the FOMC statement released a few weeks earlier and mentioned the possibility of this move.

Still any "outsized" attention was probably from people who didn't read the release (I'm not sure how to fix that problem).

The other announcement that Sack highlighted was from Treasury on the Supplementary Financing Program:

The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program (SFP):

"Treasury anticipates that the balance in the Treasury's Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.

This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted."

That was it.

Although I got that one right, is it any wonder that some people were confused by this statement? Why not expand and explain why this action was being taken?

It was a considered a positive step when the Treasury started to unwind the SFP, and here they are expanding it again without explanation.

Brian Sack argued the burden is on the Fed to communicate clearly and explain the reasons behind each action. I agree. And I'd suggest the burden is also on Treasury.

by Calculated Risk on 3/09/2010 12:50:00 PM

A few factoids from Michael Fletcher and Dana Hedgpeth at the WaPo: Are unemployment benefits no longer temporary?

About 11.4 million out-of-work people now collect unemployment compensation, at a cost of $10 billion a month. Half of them have been receiving payments for more than six months ...

States determine the amount of the benefits, but they average 36 percent of the average weekly wage, according to the National Employment Law Center.

Nearly two-thirds of the jobless collect unemployment benefits, which go only to those who have earned a certain amount of money in the previous year, and who lost their jobs through no fault of their own.

Note: The suggestion mentioned in the article that the unemployment rate is high because of unemployment benefits is off point: See Krugman's Supply, Demand, and Unemployment

Another important benefit of unemployment insurance is that the benefits have helped keep many households in place. If there were no extended benefits, many of the 5+ million people now receiving extended benefits would be moving out of their homes or apartments, and doubling up with friends and relatives, or living in their cars or worse. Fewer households would increase the number of excess vacant housing units in the U.S. and exacerbate the housing crisis.

by Calculated Risk on 3/09/2010 10:00:00 AM

From the BLS: Job Openings and Labor Turnover Summary

There were 2.7 million job openings on the last business day of January 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate rose over the month to 2.1 percent, the highest the rate has been since February 2009. The hires rate (3.1 percent) and the separations rate (3.2 percent) were unchanged in January.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. The CES (Current Employment Statistics, payroll survey) is for positions, the CPS (Current Population Survey, commonly called the household survey) is for people.

The following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.

Unfortunately this is a new series and only started in December 2000.

Click on graph for larger image in new window.

Notice that hires (purple line) and separations (red and light blue stacked together) are pretty close each month. This is the level of turnover each month. When the purple line is above total separations, the economy is adding net jobs, when the purple line is below total separations, the economy is losing net jobs.

According to the JOLTS report, there were 4.08 million hires in January (SA), and 4.122 million total separations, or 42 thousand net jobs lost. The comparable CES report showed a loss of 26 thousand jobs in January (after revision).

Separations have declined sharply from early 2009, but hiring has barely picked up. Quits (light blue on graph) are at near the low too. Usually "quits" are employees who have already found a new job (as opposed to layoffs and other discharges).

The low turnover rate is another indicator of a weak labor market.

by Calculated Risk on 3/09/2010 08:57:00 AM

From Rex Nutting at MarketWatch: Small business optimism falls in Feb., NFIB says

An index measuring small-business optimism fell 1.3 points to 88.0 in February, erasing January's gain, according to a monthly survey released Tuesday by the National Association of Independent businesses.

And a few excerpts from the report:

The National Federation of Independent Business Index of Small Business Optimism lost 1.3 points in February, falling back to the December reading of 88.0 (1986=100), only seven points higher than the survey’s second lowest reading reached in March 2009 (the lowest reading was 80.1 in 1980:2). The persistence of Index readings below 90 is unprecedented in survey history.
...
Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit. A net 12 percent reported loans harder to get than in their last attempt, a two point improvement from January. Thirty-four (34) percent reported regular borrowing, up two points from January but still historically very low. Weak plans to make capital expenditures, to add to inventory and expand operations also make it clear that many potentially good borrowers are simply on the sidelines.

And the number one problem continues to be poor sales.

by Calculated Risk on 3/09/2010 01:10:00 AM

On the debate as to where to put the Consumer Financial Protection agency, Andrew Ross Sorkin brings us this quote in the NY Times:

[Edward L. Yingling, president of the American Bankers Association] says, “We don’t care where you put it,” adding that their position has always been “we’re totally against it.”

That sure makes it clear.

Sorkin discusses the debate in So Where’s Consumer Protection?, but this one is simple - if it is not independent, don't bother. Anything else is failure.

by Calculated Risk on 3/08/2010 11:03:00 PM

In the previous post I praised the Fed's short-term liquidity facilities. Another program that I supported was the Treasury's Stress Tests (conducted by the Fed). Here is what I wrote in early 2008:

One of the key elements of the Financial Stability Plan is to build "Financial Stability Trust" by conducting "A Comprehensive Stress Test for Major Banks" and providing investors and the public "Increased Balance Sheet Transparency and Disclosure".

Although lacking in details, this is a very good idea.

and

The real answer is to stress test the banks, and put them in three categories: 1) no additional capital needed, 2) some additional capital needed, and 3) preprivatization.

Although no banks were placed in the "preprivatize" category (I probably would have preprivatized a couple), these tests were an important step in providing metrics for the banks.

The following graphs compare the actual performance of the U.S. economy versus the two stress test scenarios - baseline and more severe - for GDP, house prices and unemployment.

Click on graph for larger image in new window.

The first graph shows real GDP (in red) and the two stress test scenarios (baseline and more severe). For this graph I lined up real Q4 GDP.

So far GDP is performing slightly better than the baseline scenario.

It is important to remember that GDP was revised down substantially for 2008 after the stress test scenarios were released.

The second graph is quarterly for the unemployment rate.

For most of the last year the unemployment rate has been higher than the more severe scenario. Now, in Q1 with the unemployment rate at 9.7%, the rate is slightly better than the more severe scenario.

And the third graph is for house prices using the Case-Shiller Composite 10 Index.

The heavy government support for house prices has kept prices well above the baseline scenario. This has obviously been very beneficial for the banks.

So far the economy is somewhat tracking the baseline scenario (slightly better for GDP, much better for house prices, and worse for unemployment). The key to the stress tests was to establish these metrics and have the banks raise adequate capital to survive the more severe scenario.

One of the problems with the stress tests was that the scenarios ended in 2010. And one of the policies has been to extend and hope (commonly called "extend and pretend") and this has pushed many problems out beyond the horizon of the stress tests.

Also I wouldn't judge the success of the stress tests by these graphs. Just establishing metrics was the key. The criteria for success be if any of the 19 banks get into trouble over the next couple of years and require additional support.

by Calculated Risk on 3/08/2010 07:14:00 PM

I think the Fed deserves praise for the successful completion of the short-term liquidity facilities. As NY Fed Executive VP Brian Sack noted today:

With the wind-down of these short-term liquidity facilities, it is a good time to look back and assess their performance. The bottom line here is simple: These programs were an unquestionable success. We have witnessed a remarkable improvement in the functioning of short-term credit markets and an impressive recovery in the stability of large financial firms. While a whole range of government actions contributed to this recovery, giving financial institutions greater confidence about their access to funding, and that of their counterparties, was most likely a crucial step toward achieving stability.

Moreover, the exit from these facilities has been quite smooth. At their peak, these facilities provided more than $1.5 trillion of credit to the economy. Today, the remaining balance across them is around $20 billion. It is impressive that the Fed was able to remove itself from such a large amount of credit extension without creating any significant problems for financial markets or institutions. That success largely reflects the effective design of those programs, as most were structured to provide credit under terms that would be less and less appealing as markets renormalized. This design worked incredibly well, as activity in most of the facilities gradually declined to near zero, allowing the Fed to simply turn them off with no market disruption.
emphasis added

I've praised Chairman Bernanke several times (and thereby indirectly the entire Fed staff) about the liquidity facilities, while lambasting him on other aspects of his performance (like regulatory oversight). Every now and then I think we should pause and recognize a job well done.

I agree with Sack's assessment. These short-term liquidity facilities were creative, well designed, and very effective. Nice work and thanks!

Make sure to read his entire speech. It is the best explanation of the exit strategy I've read.