by Calculated Risk on 3/12/2010 04:16:00 PM

Earlier I linked to this podcast from Planet Money: We Bought A Toxic Asset! And the story is here: We Bought A Toxic Asset; You Can Watch It Die.

And here is a PDF with the details of the bond (ht daddyo, based on details in story). There are many details in the PDF - a brief excerpt:

At a 1-10 ½ price (bond notation, 1 plus 10.5/32), which is what they apparently paid, and at current 1-month prepayment speeds and severities, this bond will be gone in September. Total cashflows of $957, for an annualized yield of -41%.
...
The bond is very sensitive to your assumptions (not all bonds are like this). At 3m, 6m, and 12m historical speeds, the bond has positive yield. So the question is, do you think things are getting better, or worse? Remember, this is an Option ARM pool with recasts ramping in the summer. When will the default wave occur on the troubled borrowers? If you think it doesn’t happen until after the summer, you’ll be a-ok in this bond.

Also, remember in article, prices on this stuff are all over the place. If it was bought at a 1.8 price, it’s a loss in any scenario, and if it’s bought at a sub-dollar price, it’s a win.

And here is a tracking graphic from Planet Money.

by Calculated Risk on 3/12/2010 02:07:00 PM

From Treasury: Administration Releases February Loan Modification Report

Click on graph for larger image in new window.

Over 168,000 modifications are now permanent. 88,663 trial modificatons have been cancelled (and another 1,499 permanent mods cancelled).

Here is the report. See here for a list of reports.

Lets see: there were 553,051 cumulative HAMP trial modifications in September. There are 168,708 permanent mods - and about 90,000 cancelled. What happened to the 300 thousand or so other trial mods? Sure another 91,800 have been "approved" for a permanent modification, but that still leaves a huge number missing.

There is a note in the report that says "32% of trials started at least three month ago have been approved for converstion to permanent". But what about the over two-thirds?

The second graph shows the cumulative HAMP trial programs started.

Notice that the pace of new trial modifications has slowed sharply from over 150,000 in Septmenber to just over 70,000 in February 2010. This is slowest pace since May 2009 and is probably because of two factors: 1) servicers are now pre-qualifying borrowers, and 2) servicers are running out of eligible borrowers.

by Calculated Risk on 3/12/2010 11:30:00 AM

From Planet Money: Podcast: We Bought A Toxic Asset!

And the story is here: We Bought A Toxic Asset; You Can Watch It Die. An excerpt:

Finally, we find a beautiful, totally toxic asset at what [Wit Solberg, a former Wall Street trader] thinks is a good price: $36,000. Back in the bubble, somebody paid $2.7 million for this thing. We buy a piece from Solberg for $1,000. It's going to be our encyclopedia of the financial crisis.

What Our Toxic Asset Looks Like

Our toxic asset has 2,000 mortgages, many of them in hard-hit states like California, Arizona and Florida. A lot of the people in our bond are really struggling. Almost half are behind on their mortgage payments, and 15 percent of the homes are already in foreclosure.

At some point those homes will be taken over and sold for a loss. Every time that happens, the bond shrinks. Eventually, our part of the bond will disappear entirely.

Until then, we get a little money every month from people paying off their mortgages. We just got a check for $141. If it goes to Thanksgiving, we could double our money.

By the way, we bought the asset with our own money. Any proceeds will go to charity. If we lose money, we take the loss.

Listen to the podcast - it is pretty funny!

by Calculated Risk on 3/12/2010 10:00:00 AM

The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed that the inventory-to-sales ratio was mostly back to normal in January.

Manufacturers' and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,310.2 billion, virtually unchanged (±0.1%)* from December 2009 and down 8.6 percent (±0.3%) from January 2009.

Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of January was 1.25. The January 2009 ratio was 1.46.

Click on graph for larger image in new window.

This graph shows the 3 month change (annualized) in manufacturers’ and trade inventories. The inventory correction was slow to start in the 2007 recession, but it now appears the inventory adjustment is over. Growth in inventories will depend on increases in underlying demand.

The second graph shows the inventory to sales ratio. This has declined sharply to 1.25 (SA) from the peak of 1.46 back in Dec 2008. This could decline further - the trend is definitely down over time - but clearly most of the inventory adjustment is over.

This is important because the change in inventory added significantly to Q4 GDP growth. (See BEA line 13: the contribution to GDP in Q4 from 'Change in private inventories' was 3.88 of the 5.9 percent annualized increase in GDP.)

Any boost to Q1 GDP from inventory changes will be minor in comparison to Q4.

by Calculated Risk on 3/12/2010 08:30:00 AM

On a monthly basis, retail sales increased 0.3% from January to February (seasonally adjusted, after revisions), and sales were up 4.5% from February 2009 (easy comparison).

UPDATE: January was revised down sharply. Jan was originally reported at $355.8 billion, an increase of 0.5% from December.

February was reported at $355.5 billion - a decline without the revision to January.

January has been revised down to $354.3 or an increase of 0.1% from December.

Click on graph for larger image in new window.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

The red line shows retail sales ex-gasoline and shows the increase in final demand ex-gasoline has been sluggish.

Retail sales are up 6.0% from the bottom, but still off 6.4% from the peak. Retail ex-gasoline are up 3.6% from the bottom and still off 5.4% from the peak.

The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 2.1% on a YoY basis (4.5% for all retail sales). The year-over-year comparisons are easy now since retail sales collapsed in late 2008. Retail sales bottomed in December 2008.

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for February, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $355.5 billion, an increase of 0.3 percent (±0.5%)* from the previous month and 3.9 percent (±0.5%) above February 2009.
...
Gasoline stations sales were up 24.0 percent (±1.5%) from February 2009 and nonstore retailers sales were up 11.8 percent (±1.7%) from last year.

by Calculated Risk on 3/12/2010 12:09:00 AM

From Bloomberg: Yellen Said to Be Obama’s Pick for Fed Vice Chairman

I suggested Dr. Yellen as a possible candidate for Fed Chairman last year, so obviously I think this is a good choice. She was way ahead of most other Fed members in recognizing the housing bubble, and she is apparently well respected by other Fed members. She is also very focused on unemployment (something we need right now).

Yellen served on the Federal Open Market Committee (FOMC) last year - and this would put her back on the Committee (the Fed Presidents rotate each year).

by Calculated Risk on 3/11/2010 08:21:00 PM

The NY Times Deal Book has posted the Lehman's examiners report online: Court-Appointed Lehman Examiner Unveils Report

There is an interesting excerpt on the apparent use of repo transactions to bolster Lehman's balance sheet:

... former Global Financial Controller Martin ... Kelly believed “that the only purpose or motive for the transactions was reduction in balance sheet”; felt that “there was no substance to the transactions”; ... In addition to its material omissions, Lehman affirmatively misrepresented in its financial statements that the firm treated all repo transactions as financing transactions – i.e., not sales – for financial reporting purposes.

From Reuters: Examiner sees accounting gimmicks in Lehman demise

And from the WSJ: Examiner: Lehman Torpedoed Lehman and How Lehman Allegedly Manipulated Its Balance Sheet

by Calculated Risk on 3/11/2010 07:04:00 PM

Daylight Savings Time
"Spring Forward" .... taken too far
What day is today?
by Soylent Green is People
From the FDIC: Valley National Bank, Wayne, New Jersey, Assumes All of the Deposits of LibertyPointe Bank, New York, New York

LibertyPointe Bank, New York, New York, was closed today by the New York State Banking Department, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver....

As of December 31, 2009, LibertyPointe Bank had approximately $209.7 million in total assets and $209.5 million in total deposits. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $24.8 million. ... LibertyPointe Bank is the 27th FDIC-insured institution to fail in the nation this year, and the first in New York. The last FDIC-insured institution closed in the state was Waterford Village Bank, Williamsville, July 24, 2009.

Is it Friday?

by Calculated Risk on 3/11/2010 05:10:00 PM

Some key points:

The Fed MBS purchases are scheduled to end on March 31st.

It will take a couple of months for some of these purchases to settle on the Fed's balance sheet (see: the discussion from SIFMA: "To-Be-Announced" Trading of Agency Passthrough Securities)

The coming increase in the Fed's balance sheet (and the expansion of the Supplementary Financing Program (SFP) over the same period) are related to the MBS settling on the Fed's balance sheet. Now that the short term liquidity facilities are finished - the balance sheet will increase by about $200 billion over the next couple of months as the remaining MBS settle. This expansion would result in an increase in excess reserves, and the almost $200 billion ramp-up in the SFP will counterbalance this increase. The Treasury apparently waited to announce this until the statutory debt ceiling was increased.

I expect the spread between mortgage rates and the 10 year Treasury yield to rise slowly over a few months by 35 to 50 bps after the Fed stops buying. Others - like the Fed's Brian Sack - thinks any increase will be much smaller until the Fed starts selling MBS. Those worried about an immediate 100 to 200 bps jump in mortgage rates can probably already relax! We will know in a few weeks ...

A key short term question (for April) is: Will any increase in mortgage rates be enough to seriously impact refinance activity? According to Freddie Mac Primary Mortgage Market Survey® (PMMS®) of lenders, qualifying "30-year fixed-rate mortgage (FRM) averaged 4.95 percent" last week. It seems refinance activity is fairly strong with mortgage rates at or below 5%.

Here is the Federal Reserve balance sheet break down from the Atlanta Fed weekly Financial Highlights released today (as of last week):

Click on graph for larger image in new window.

Graph Source: Altanta Fed.

From the Atlanta Fed:

The balance sheet contracted $6.9 billion for the week ended March 3.

Holdings of agency debt and mortgage backed securities shrank $4.7 billion, and other assets declined by $2.2 billion.

The balance sheet is expected to peak during the first half of this year after the MBS purchase program is completed and purchases settle on the balance sheet.

The second graph shows the MBS purchases by week. From the Atlanta Fed:

The Fed purchased a net total of $10 billion of agency-backed MBS through the week of March 3. This purchase brings its total purchases up to $1.22 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 98% complete).

The NY Fed purchased an additional net $10 billion in MBS for the week ending ending March 10th. This puts the total purchases at $1.230 trillion or almost 98.4% complete. Just $20 billion more and three weeks to go ...

The Fed's balance sheet released today shows "only" $1.029 trillion in MBS on March 10th. As mentioned above, the difference is the NY Fed announces the purchases when they contract to buy; the Federal Reserve places the MBS on the balance sheet when the contract settles.

The countdown ends in 3 weeks, and I don't expect any fireworks ...

by Calculated Risk on 3/11/2010 02:32:00 PM

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008. My thanks to Jim Kennedy and the other Fed contributors for the previous MEW updates. For those interested in the last Kennedy data, here is a post, and the spreadsheet from the Fed is available here.

The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity (hence the name "MEW", but there is very little MEW right now!), normal principal payments and debt cancellation.

Click on graph for larger image in new window.

For Q4 2009, the Net Equity Extraction was minus $75 billion, or negative 2.7% of Disposable Personal Income (DPI). This is not seasonally adjusted.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined in Q4, and this was partially because of debt cancellation per foreclosure sales, and some from modifications, and partially due to homeowners paying down their mortgages as opposed to borrowing more. Note: most homeowners pay down their principal a little each month unless they have an IO or Neg AM loan, so with no new borrowing, equity extraction would always be negative.

Equity extraction was very important in increasing consumer spending during the housing bubble and I don't expect the Home ATM to be reopened any time soon. So any significant increase in consumer spending will come from income growth or a lower saving rate, not borrowing.