by Calculated Risk on 3/15/2010 11:20:00 PM

Paul Jackson has a great post at HousingWire: Housing Recovery is Spelled R-E-O

[U]sing LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.

Ahhh ... the "Squatter Stimulus Plan" - live mortgage free (but not worry free).

But Paul thinks foreclosures (REOs) will be the answer, not short sales:

For some, short sales will be an important solution—but don’t kid yourself: the hype currently surrounding short sales and the HAFA program will prove to be short-lived ...

He gives two main reasons for foreclosures over short sales: 1) 2nd liens, and 2) that HAFA has the same qualifications as HAMP. I agree that 2nd liens pose a serious problem, but on the qualifications, Paul writes:

The HAFA program, going into effect on April 5, is getting plenty of attention—and the program’s heart is in the right place. But most are forgetting that it’s an extension of HAMP, the government’s loan modification program that has seen tepid success at best thus far. A loan must first be HAMP-eligible in order for anyone (borrower, servicer, or investor) to qualify for the program’s various incentive payments for short sale or deed-in-lieu.

Which means any of the guidelines applicable to the HAMP program—loan in default or default imminent, within UPB [CR: unpaid principal balance] guidelines, owner-occupied, and originated prior to 2009—still apply.

But lets review the qualifications for HAFA:

The property is the borrower’s principal residence;

The mortgage loan is a first lien mortgage originated on or before January 1, 2009;

The mortgage is delinquent or default is reasonably foreseeable;

The current unpaid principal balance is equal to or less than $729,7501; and

The borrower’s total monthly mortgage payment (as defined in Supplemental Directive
09-01) exceeds 31 percent of the borrower’s gross income.

If we look at the HAMP program stats (see page 6), the median front end DTI (debt to income) for permanent mods was 45%, and the back end DTI was an astounding 76.4%! And these are the borrowers who made it to permanent status!

Many borrowers who meet the HAMP qualifications never even get a trial program because their DTI ratios are so high there is just no way they will make it to a permanent mod. The servicers turn them down on the spot. These are the borrowers eligible for the HAFA program right away - and looking at the HAMP DTI stats I suspect this is a much larger group of borrowers than will ever get a permanent mod. So, although I think REOs will play a key role, I think short sales will also be very important.

More on Short Sales at HousingWire:

from Jacob Gaffney: LPS Starts New Short Sale Service

As 2010 gears up to be the ‘Year of the Short Sale,’ Lenders Processing Service (LPS), the integrated technology provider, is jumping on opportunities such a situation offers by launching its own short sale service to clients.

from Jon Prior: Equator Oversees 125,000 Automated Short Sales in Four Months

In a report that may be considered numerical ammunition to the argument that short sales are heating up faster than modifications, Equator announced that it ushered along more than 125,000 short sale transactions, from November to February, since launching an automated short sale platform.

Note: Yes, I predicted that 2010 would be the year of the short sale, although I think economist Tom Lawler was first.

by Calculated Risk on 3/15/2010 08:15:00 PM

For those interested, here is the text of the proposed bill.

It is only 1,336 pages long ...

Some overviews:
From Sewell Chan at the NY Times:

Mr. Dodd said he believed there was substantial bipartisan agreement on 9 of the bill’s 11 provisions, the exceptions being consumer protection and corporate governance.
...
The major flashpoints will include, among other things, the scope of authority for a new Consumer Financial Protection bureau to be established within the Fed; the scope of exemptions under new rules governing the trade of derivatives; and the mechanism by which the government could seize and dismantle a large company on the verge of failure.

The bill includes a provision intended to curb Wall Street’s influence over the Federal Reserve Bank of New York. Its president would be appointed by the president of the United States, not by a board that includes representatives of member banks.

From the WSJ: Finance Overhaul Sets Up Winners, Losers

Among the winners, community banks and small credit unions would be financially able to compete, for perhaps the first time, against large competitors reined in by new restrictions on capital, complexity and size. The Federal Reserve and the Federal Deposit Insurance Corp. would see their powers redefined, and in many ways expanded.

On the other side of the ledger, large financial companies overseen by the Fed would have to pay into a $50 billion fund to pay for the collapse of failed financial firms.

From Elizabeth Warren, via Firedoglake:

“Since bringing our economy to the brink of collapse, Wall Street has spent more than a year and hundreds of millions of dollars in an all-out effort to block financial reform. Despite the banks’ ferocious lobbying for business as usual, Chairman Dodd took an important step today by advancing new laws to prevent the next crisis. We’re now heading toward a series of votes in which the choice will be clear: families or banks.”

by Calculated Risk on 3/15/2010 05:02:00 PM

Carolyn Said at the San Francisco Chronicle writes: Short sale tax shortchanges ex-homeowners (ht picosec)

California legislators last week passed a bill that ... mirrors a federal law that excludes "forgiven debt" on a principal residence from being considered taxable income. It covers short sales, foreclosures, deeds in lieu of foreclosure and loan modifications that reduce the principal due.

However, Gov. Arnold Schwarzenegger, who has until March 23 to sign the bill, indicated that he is likely to veto it based on an unrelated provision regarding tax fraud.
...
When the foreclosure crisis started, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 so foreclosed homeowners would not be liable for their canceled debt. It is in force through 2012. California had a similar law, but it expired at the end of 2008, leaving Californians who lost their homes in 2009 potentially liable for big state tax bills.
...
Tax experts advise people who lost their homes in 2009 to file for an extension in hopes that California will rectify matters.

It is important to remember the Federal exemption only applies to "money used to purchase, build or fix up a home". That exemption makes sense - and California will probably fix the current tax law.

However the exemption doesn't apply to those who used the Home ATM for toys or trips ... that debt forgiveness is taxable by both the federal government and the state.

From Diana Olick at CNBC: Loans Going Bad Faster Than the Fixes

Lender Processing Services put out its Mortgage Monitor report today, and the numbers are really staggering.

Loans delinquent/in foreclosure process: 7.5 million
REO/Post-sale foreclosure: 1 million
Loans that were current 1/1/09 and 60+ days delinquent 1/1/10: 2.5 million

That last one is interesting, because it shows how much faster loans are going bad than are being modified.
...
Tomorrow on CNBC we're going to devote a full day to the current state of the housing market, from what has failed to what is promising on the horizon.

From Reuters: Ex-NY bank president first accused of TARP fraud

The former president of New York's privately held Park Avenue Bank was arrested and charged on Monday ... A 10-count criminal complaint accused Charles Antonucci of devising "an elaborate round-trip loan transaction" that he told others was his own $6.5 million investment in the bank, misleading state bank regulators and the U.S. Federal Deposit Insurance Corporation (FDIC).
...
"Antonucci is the first person ever to be charged with attempting to defraud the TARP and we expect he will not be the last," Manhattan U.S. Attorney Preet Bharara said at a news conference.

by Calculated Risk on 3/15/2010 03:16:00 PM

Last year, included in the "Worker, Homeownership and Business Assistance Act of 2009" that extended the popular unemployment benefits were two unpopular and ineffective tax credits: the home buyer tax credit, and a net operating loss carryback extension to allow businesses to write off current losses against profits up to 5 years ago - the profitable years for home builders.

Zach Fox at SNL Financial has an update on the carryback: Builders record $2.30B in tax benefits

In all, homebuilders recorded $2.30 billion in income tax benefits during their most recent quarters, according to SNL Financial. ... The tax benefit was so large that it might have been the only reason two builders did not go under, Vicki Bryan, a senior high-yield analyst at Gimme Credit, told SNL.

"This is so important that it might have saved the weakest ones, Hovnanian [Enterprises Inc.], Beazer [Homes USA Inc.] They looked like they were headed to bankruptcy," she said.
excerpts with permission

Zach has much more on the home builders, and here are some comments from Chris Thornberg on the effectiveness of the tax credit:

[Christopher Thornberg] said the net operating loss carryback extension and expansion will do nothing to mend the housing market.

"Of course not. They're not building any homes; there's still too many of them kicking around," Christopher Thornberg, a principal at Beacon Economics in Los Angeles, told SNL. "Permits, starts are still flat; they're still at a bottom. It's a bailout. It's a bailout for builders. It's a bailout for Robert Toll. They're bailing out Robert Toll. Repeat after me, they are bailing out Robert Toll. What's wrong with this picture?"

When asked whether there were any positives to come out of the net operating loss carryback extension and expansion, Thornberg said, "No, no, no, no, no, no, no. No. Nothing. There's nothing to build; there's an oversupply. If anything, they're making it worse because they're encouraging construction when we need to burn off our existing supply first."

As Thornberg notes, the only reason for a tax provision like this is to spur construction - something we don't need right now. It would be better if there was less capacity in the home building sector.

One thing is certain, the Return on Lobbying (ROL) for the home builders was awesome, as Gretchen Morgenson noted in the NY Times last year: Home Builders (You Heard That Right) Get a Gift

The Center for Responsive Politics reports that through Oct. 26 of this year, home builders paid $6 million to their lobbyists. ... Much of this year’s lobbying expenditures were focused on arguing for the tax loss carry-forward, documents show.

Among individual companies, Lennar spent $240,000 lobbying while companies affiliated with Hovnanian Enterprises spent $222,000. Pulte Homes spent $210,000 this year.

That’s some return on investment. After spending its $210,000, Pulte will receive $450 million in refunds. And Hovnanian, after spending its $222,000, will get as much as $275 million.

by Calculated Risk on 3/15/2010 01:00:00 PM

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

Click on graph for larger image in new window.

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) was at 15 in March. This is a decrease from 17 in February.

The record low was 8 set in January 2009. This is very low - and this is what I've expected - a long period of builder depression. The HMI has been in the 15 to 19 range since May 2009.

This second graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the January data for starts (February starts will be released tomorrow, Tuesday March 16th).

This shows that the HMI and single family starts mostly move generally in the same direction - although there is plenty of noise month-to-month.

And right now they are moving sideways - at best.

I was looking back through some old posts - and it seems like yesterday - but it was last summer that I wrote about how starts would probably move sideways for some time because of the large overhang of existing housing units (both owner occupied homes and rental units). I added some emphasis later in the year:

"To be blunt: Those expecting a sharp rebound in starts from the bottom are wrong. And remember - residential investment is usually the best leading indicator for the economy."

That still seems correct today.

Press release from the NAHB: (added) Foreclosures Weigh on Builder Confidence in March

Builder confidence in the market for newly built, single-family homes fell back two points to 15 in March as poor weather conditions and distressed property sales posed increasing challenges to both builders and buyers, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

“Unusually poor weather conditions certainly had a negative effect on builders’ business in February,” said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. “At the same time, the continual flow of distressed properties priced below the cost of production is having an adverse effect on new-home appraisals and also making it tough for builders’ customers to sell their existing homes.”

Not much snow in March ...

by Calculated Risk on 3/15/2010 10:56:00 AM

From Reuters: Capital One Credit Card Defaults Fall, but BofA's Rise

Capital One said the annualized net charge-off rate — debts the company believes it will never collect — for U.S. credit cards fell to 10.19 percent in February from 10.41 percent in January. ...

However, Bank of America said its defaults rate rose in February, up from 13.25 percent in January to 13.51 percent.

Click on graph for larger image in new window.

This graph shows the COF annualized credit card charge-off rate since January 2005.

Notice the spike in 2005 - to 9.75% - associated with a surge in bankruptcy filings ahead of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

Capital One's credit card annualized net charge-off rate is now at 10.19% - down slightly from January, but still above that spike in 2005!

As Reuters notes, Capital One is usually the first to report monthly credit card charge-offs - so this is the one I track. The other major credit card issuers will report later today.

by Calculated Risk on 3/15/2010 09:15:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production edged up 0.1 percent in February following a gain of 0.9 percent in January. Production was likely held down somewhat by winter storms in the Northeast. Manufacturing decreased 0.2 percent in February, with mixed results among its major industries. The output of mines rose 2.0 percent, while the index for utilities rose 0.5 percent. At 101.0 percent of its 2002 average, industrial output in February was 1.7 percent above its year-earlier level. Capacity utilization for total industry moved up 0.2 percentage point to 72.7 percent, a rate 7.9 percentage points below its average from 1972 to 2009.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is up 6.5% from the record low set in June (the series starts in 1967).

Capacity utilization at 72.7% is still far below normal - and far below the the pre-recession levels of 80.5% in November 2007.

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

Also - this is the highest level for industrial production since Dec 2008, but production is still 10.1% below the pre-recession levels at the end of 2007. Snow is being blamed for industrial production and capacity utilization only increasing slightly.

by Calculated Risk on 3/15/2010 12:32:00 AM

From Paul Krugman in the NY Times: Taking On China

Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.
...
Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The law’s intent is clear ... In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious.

Will the next report, due April 15, continue this tradition? Stay tuned.

... Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

This is one of the key imbalances that needs to be resolved.

by Calculated Risk on 3/14/2010 09:33:00 PM

As mentioned in the Weekly Summary and a Look Ahead post, the NAHB Housing Market Index for March, and Housing Starts for February, will both be released early this week.

Here is a graph showing the relationship between the two series:

Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the February release for the HMI and the January data for single family starts.

This shows that the HMI and single family starts mostly move in the same direction - although there is plenty of noise month-to-month. Since the NAHB index increased slightly in February (it is released a month ahead of starts), we might expect some increase in February single family housing starts.

Of course the snow might be a factor, although few new homes are built in the northeast compared to the rest of the country. Of course D.C. is in the South region (as is Virginia), so it might be hard to tell. Here is a map of states in each region for the Census Bureau report.

There might also be an increase in speculative starts in some regions (single family) in February since many builders started a few extra homes in anticipation of the expiration of the first time home buyer tax credit. February was probably the last chance to start a spec home to take advantage of the expected buying rush in April - since the builders have to close by the end of June. It usually takes about 6 months to build a home, but 5 months is doable for smaller homes and with so many sub contractors hungry for work.

We will need to look at the details by region this time, but the general trend is sideways ...

by Calculated Risk on 3/14/2010 05:09:00 PM

My general outlook for 2010 is for sluggish and choppy growth. Usually the deeper the recession, the steeper the recovery - however recoveries following economic crisis tend to be sluggish (see: "The Aftermath of Financial Crises", Reinhart and Rogoff, 2009):

An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. ... Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.

Also the two usual engines of recovery, consumer spending and residential investment, both remain constrained as households rebuild their balance sheets (constraining consumption), and serious problems remain in the housing market including significant excess inventory and high levels of distressed properties.

Last November I listed a few possible upside surprises and downside risks to the above forecast. Here is an update on the possible upside surprises:

On consumer spending, I wrote:

Consumer spending. One of the key reasons I think growth will be sluggish in 2010 is because I expect the personal saving rate to increase as households rebuild their balance sheets and reduce their debt burden. But you never know. As San Francisco Fed President Dr. Yellen said yesterday: "Consumers have surprised us in the past with their free-spending ways and it’s not out of the question that they will do so again." Still, it is hard to imagine much of a spending boom with high unemployment (putting pressure on wages), and limited credit (so some people can spend beyond their income).

My expectation has been that the saving rate would rise to around 8% over the next couple of years. The saving rate rose sharply in 2009, however the most recent report from the BEA: Personal Income and Outlays, January 2010 showed the saving rate fell to 3.3% in January.

Click on graph for large image.

This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the January Personal Income report.

Although I still expect the saving rate to rise, it is possible that it will not rise as far - or as fast - as I expected. That would mean consumption could grow closer to income growth in 2010.

My comments last year on exports:

Exports. Perhaps we are seeing a shift from a U.S. consumption driven world economy, to a more balanced global economy. An increase in consumption in other countries, combined with the weaker dollar should lead to more U.S. exports. And if China revalued that might lead to a boom in U.S. exports. ... Please don't hold your breath waiting for China!

Based on the comments of Chinese Premier Wen last night, "don't hold your breath" was probably good advice (although I do expect China to revalue this year). U.S. exports have increased over the last year, but it appears the growth of exports has slowed.

On Residential Investment:

Residential Investment. Those expecting a "V-shaped" or immaculate recovery - with unemployment falling sharply in 2010 - are expecting single family housing starts to rebound quickly to a rate significantly above 1 million units per year. That won't happen. But it is possible for single family starts to rebound to 700 thousand SAAR, even with the large overhang of existing housing inventory.

This has been as weak as expected ...

And on another stimulus:

With unemployment above 10%, there will be significant political pressure for another stimulus package - especially if the economy starts to slow in the first half of 2010. This next package could be several hundred billion (maybe $500 billion) and could increase GDP growth in 2010 above my forecast.

It now appears the additional stimulus will be in the $100 billion range, mostly for additional unemployment benefits.

The most likely upside surprise appears to be coming from consumer spending and the lack of an increase in the saving rate. I still think the saving rate will continue to rise - although maybe not as fast as I originally expected.

Also - I still think the recovery will be choppy and sluggish. I'll review the downside risks soon ...