by Calculated Risk on 3/17/2010 10:02:00 AM

From Alana Semuels at the LA Times: More homeowners are opting for 'strategic defaults'

Joseph Shull, a 68-year-old marketing professor, said he's planning to walk away from the town house he bought in Moorpark in June 2006.

"I'm angry, and there are a lot of people like me who are angry," he said.

He purchased the home for $410,000 and spent $30,000 renovating. Now the house is worth around $225,000.

Shull admits he overpaid for his property. But he said it fell in value in part because of "regulatory mismanagement."

"The bank stabbed me, but at least I got in a pinprick back," he said. "This is the new economy. The old rules don't apply any more."

This article is similar to David Streitfeld's article in the NY Times last month: No Aid or Rebound in Sight, More Homeowners Just Walk Away

I'm not sure if walking away is becoming more common or if there is a bubble in walking away articles. However there are consequences to walking away - possible tax consequences and some loans are recourse (people walk away from the house, but not the debt!). Perhaps the HAFA short sale program would be a better alternative for many homeowners ...

by Calculated Risk on 3/17/2010 08:03:00 AM

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume, decreased 1.9 percent on a seasonally adjusted basis from one week earlier. ...

The Refinance Index decreased 1.7 percent from the previous week and the seasonally adjusted Purchase Index decreased 2.3 percent from one week earlier. ...

The refinance share of mortgage activity increased to 67.3 percent of total applications from 67.2 percent the previous week. ...

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.91 percent from 5.01 percent, with points increasing to 1.30 from 0.82 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the lowest 30-year fixed-rate observed in the survey since mid-December of 2009, yet the effective rate was unchanged from last week due to the significant increase in points.

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 mortgage rates below 5%, the 4 week average of the purchase index is still at the levels of 1997.

by Calculated Risk on 3/17/2010 12:43:00 AM

From Treasury Secretary Timothy Geithner, White House budget director Peter Orszag and Christina Romer, chairman of the Council of Economic Advisers: Joint Statement. A few excerpts:

GDP growth. For GDP, the forecast projects moderate growth of 3.0 percent (on a fourth-quarter-to-fourth-quarter basis) in 2010, followed by somewhat higher growth of 4.3 percent in both 2011 and 2012. Compared with the recoveries from other severe recessions, the projected growth is relatively modest, particularly in 2010. This reflects a combination of factors, including the limitations on monetary policy coming from the fact that interest rates cannot go below zero; the weakened state of households' and firms' balance sheets; the continuing caution of households and firms following the searing events of the past two years; and the weak condition of State and local government budgets.

Employment and unemployment. In terms of the labor market, the forecast projects average job growth of about 100,000 per month in 2010, about 200,000 per month in 2011, and about 250,000 per month in 2012. Typically following a recession, we see increases in productivity, temporary employment, and the length of the workweek before employment begins to recover. For the most part, developments in recent months have been following this pattern. Productivity growth has surged; temporary help employment has risen for 5 consecutive months; and the workweek has been generally rising. We expect to begin seeing job gains by sometime this spring.

Because of normal growth in the population and the fact that some workers are likely to reenter the labor force as the economy improves, it typically takes employment growth of somewhat over 100,000 per month to bring the unemployment rate down. Because we do not expect job growth substantially over 100,000 per month over the remainder of the year, we do not expect substantial further declines in unemployment this year. Indeed, the rate may rise slightly over the next few months as some workers return to the labor force, before beginning a steady downward trend. ...

As the pace of job creation picks up in 2011 and 2012, there is likely to be greater progress in reducing unemployment. Nonetheless, because of the severe toll the recession has taken on the labor market, the unemployment rate is likely to remain elevated for an extended period. The forecast projects that in the fourth quarter of 2011, the unemployment rate will be 8.9 percent, and that by the fourth quarter of 2012, it will be 7.9 percent.

Inflation. Because of the high levels of slack in the economy, we expect inflation to remain low and see little risk of substantial increases in inflation. At the same time, inflation expectations appear to be well anchored, and so we do not expect inflation to fall substantially further or turn into outright deflation. We project inflation (on a fourth-quarter-to-fourth-quarter basis, as measured by the GDP price index) of 1.0 percent in 2010, 1.4 percent in 2011, and 1.7 percent in 2012.

The unemployment rate at 8.9% in Q4 2011? And 7.9% in Q4 2012? Ouch ...

by Calculated Risk on 3/16/2010 09:32:00 PM

This is just a reminder to take FOMC forecasts with a grain of salt.

First, the NBER determined that the great recession started in December 2007, and the FOMC met that same month - so we can see what they were thinking. The participant were aware that the incoming data was weakening, but their outlook was still for growth in 2008 and beyond ...

From the December 2007 FOMC Minutes:

In their discussion of the economic situation and outlook, participants generally noted that incoming information pointed to a somewhat weaker outlook for spending than at the time of the October meeting. The decline in housing had steepened, and consumer outlays appeared to be softening more than anticipated, perhaps indicating some spillover from the housing correction to other components of spending. These developments, together with renewed strains in financial markets, suggested that growth in late 2007 and during 2008 was likely to be somewhat more sluggish than participants had indicated in their October projections. Still, looking further ahead, participants continued to expect that, aided by an easing in the stance of monetary policy, economic growth would gradually recover as weakness in the housing sector abated and financial conditions improved, allowing the economy to expand at about its trend rate in 2009.

And here are the October projections mentioned in the December minutes:

Click on graph for larger image in new window.

In October 2007, FOMC participants were forecasting GDP in the 2% range in 2008 with a return to trend growth in 2009, and the unemployment rate rising to perhaps 5%. How did that work out?

Of course this is nothing new. Here are a few quotes from Fed Chairman Alan Greenspan back in 1990 (bear in mind that the recession started in July, 1990):

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.” Greenspan, August 1990

“... the economy has not yet slipped into recession.” Greenspan, October 1990

Of course I started marking my graphs with recession blue bars in January 2008 (I had luckily predicted the December start to the recession). Although my current view is for sluggish and choppy growth in 2010, there are still some downside risks - especially in the 2nd half of the year. Right now I think Q1 GDP growth will be sluggish, and the impact from the stimulus will fade over the year.

by Calculated Risk on 3/16/2010 06:49:00 PM

The Sacramento Association of REALTORS® is breaking out monthly resales by equity sales (conventional resales), and distressed sales (Short sales and REO sales), and I'm following this series as an example to see mix changes in a distressed area. It will be especially interesting to track this after the Home Affordable Foreclosure Alternatives (HAFA) starts on April 5th.

Click on graph for larger image in new window.

Here is the February data.

The Sacramento Association started breaking out REO sales in 2008, but they have only broken out short sales since June 2009. Almost 68% of all resales (single family homes and condos) were distressed sales in February.

Note: This data is not seasonally adjusted, and the decline in sales from the end of last year is about normal.

The second graph shows the percent of REO, short sales and conventional sales. The percent of REOs has been increasing again, and the percent of short sales has declined slightly over the last couple of months. The percent of conventional sales peaked last November, and has declined to 32% in February.

Now that many HAMP trial modifications have been cancelled, I expect REO sales to increase. Also, I expect the percentage of short sales to be higher in 2010 than in 2009 - but probably not as high as foreclosures (it will be interesting to watch).

Also total sales in February were off 24.3% compared to February 2009; the ninth month in a row with declining YoY sales.

On financing, over 60 percent were either all cash (30.7%) or FHA loans (30.2%), suggesting most of the activity in distressed former bubble areas like Sacramento is first time home buyers using government-insured FHA loans, and investors paying cash.

by Calculated Risk on 3/16/2010 03:58:00 PM

From DataQuick: Southern California median price and sales volume up

Note: Ignore the median price. The repeat sales indexes from Case-Shiller and LoanPerformance are better measures. The median is impacted by the mix.

Southern California home sales in February were above year-ago levels for the 20th month in a row as buyers continued to snap up bargain properties with government-backed mortgages and tax incentives. ....

A total of 15,359 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was virtually unchanged from 15,361 in January, and up 0.8 percent from 15,231 in February 2009, according to MDA DataQuick of San Diego.

[CR Note: this is the second month in a row the YoY increase was razor thin.]

The February sales average is 17,983 going back to 1988, when DataQuick’s statistics begin. The sales distribution remains tilted toward lower-cost distressed homes, although not as steeply as most of last year.
...
Foreclosure resales accounted for 42.3 percent of the resale market last month, up from 42.1 percent in January, and down from 56.7 percent a year ago, which was the all-time high.

Government-insured FHA loans, a popular choice among first-time buyers, accounted for 38.5 percent of all home purchase loans in February.

Absentee buyers – mostly investors and some second-home purchasers – bought 18.9 percent of the homes sold in February. Buyers who appeared to have paid all cash – meaning there was no indication that a corresponding purchase loan was recorded – accounted for 29.3 percent of February sales. In January it was a revised 29.7 percent – an all-time high. The 22-year monthly average for Southland homes purchased with cash is 13.8 percent.

DataQuick doesn't list the percentage of short sales, but the total distressed sales is probably over 50%. Also the 38.5% of buyers using FHA insured loans is way above normal levels.

When the first time homebuyer tax credit ends, I expect the percent of FHA insured loans to decline sharply - and probably for total sales to decline. The tax credit associated buying will end in April, but the sales are counted when escrow closes - and that could be in May or June.

by Calculated Risk on 3/16/2010 02:15:00 PM

From the Fed:

Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

The key language about rates stayed the same: "The Committee ... continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Another key point was that the FOMC reiterated the ending dates for the MBS purchases. The Fed is giving advance warning that these purchases will expire as previously announced.

There is some concern about what will happen when the Fed stops buying agency MBS. The important thing to remember is that there will be buyers; it is just a matter of price. My guess is that mortgage rates will rise about 35 bps relative to the Ten Year treasury over several months after the Fed stops buying MBS. The Fed's Brian Sack and others have argued for 10 bps or less.

Another important point in the Fed statement was the recognition that the housing sector is not as strong as it appeared at the end of last year. Here is the language on housing over the last few statements:

Nov, 2009: "Activity in the housing sector has increased over recent months"

Dec, 2009: "The housing sector has shown some signs of improvement over recent months."

Jan, 2010: No comment.

March, 2010: housing starts have been flat at a depressed level

This was the first one day Fed meeting since September 16, 2008 - and that probably says something too.

by Calculated Risk on 3/16/2010 11:59:00 AM

From Dow Jones: FDIC Seeks Buyers for Three Puerto Rican Banks

According to two people familiar with the matter, the agency has hired an investment bank to try to find capital or outright purchasers for W Holding Co. Inc., R&G Financial Corp. and Eurobancshares Inc., three banks located in Puerto Rico with almost $21 billion in combined assets.

The three banks hold almost 30% of Puerto Rico's $62 billion of deposits, and their bank subsidiaries are operating under enhanced FDIC scrutiny.

This is a follow up to the report last month from José Carmona and John Marino at caribbeanbusinesspr.com: Feds expected to take action against island banks next month

Federal regulators are likely to begin taking action against troubled island banks sometime [in March], government and industry sources told CARIBBEAN BUSINESS.

Since the beginning of the year, the Federal Deposit Insurance Corp. (FDIC) has been beefing up its local ranks, recruiting accountants and auditors, leading to speculation about imminent action during this year’s first quarter.
...
There are three local banks operating under FDIC cease & desist orders—R-G Premier Bank, Eurobank and Westernbank.

Westernbank is a subsidiary of W Holding Company mentioned in the Dow Jones article.

by Calculated Risk on 3/16/2010 11:10:00 AM

Last night I mentioned the astounding DTI (Debt-to-income) of HAMP modification borrowers who were converted to a permanent modification: 2010: REOs or Short Sales?

Click on chart for larger image in new window.

If we look at the HAMP program stats (see page 6), the median front end DTI (debt to income) before modification was 45%, and the back end DTI was an astounding 76.4%!

Just imagine the characteristics of the borrowers who can't be converted!

Here is a table putting the numbers in dollars:

Median Characteristics of HAMP Permanent Modification
	Before Modification	After Modification
Monthly Income	$2,702.77	$2,702.77
Front End (PITI & HOA)	$1,216.25	$837.86
Back End (total)	$2,064.92	$1,616.26
After Debt Income	$637.85	$1,086.52

Front end DTI includes Principal, Interest, Taxes and Insurance (PITI) plus any homeowners association fees.

The back end DTI includes PITI and HOA, plus installment debt, alimony, 2nd liens, and other fixed payments.

That left the median borrower before modification with only $637.85 not including payroll taxes ($206.76), income taxes, utilities, food, and other monthly expenses. No wonder the borrowers were delinquent.

Now these median borrowers have $1,086.52 to pay all those expenses after the to 59.8% DTI bank end ratio. Remember this is gross, and is before the $206,76 in payroll taxes and an income taxes). Although this is an improvement, I expect many of these borrowers to redefault.

by Calculated Risk on 3/16/2010 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 575 thousand (SAAR) in February, down 5.9% from the revised January rate, and up 20% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have moved mostly sideways for nine months.

Single-family starts were at 499 thousand (SAAR) in February, down 0.6% from the revised January rate, and 40% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for nine months.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Housing Starts:
Privately-owned housing starts in February were at a seasonally adjusted annual rate of 575,000. This is 5.9 percent (±10.0%)* below the revised January estimate of 611,000, but is 0.2 percent (±9.8%)* above the February 2009 rate of 574,000.

Single-family housing starts in February were at a rate of 499,000; this is 0.6 percent (±10.6%)* below the revised January figure of 502,000. The February rate for units in buildings with five units or more was 58,000.

Housing Completions:
Privately-owned housing completions in February were at a seasonally adjusted annual rate of 700,000. This is 5.4 percent (±20.2%)* above the revised January estimate of 664,000, but is 15.5 percent (±13.6%) below the February 2009 rate of 828,000.

Single-family housing completions in February were at a rate of 458,000; this is 4.3 percent (±13.7%)* above the revised January rate of 439,000. The February rate for units in buildings with five units or more was 236,000.

This level of starts is both good news and bad news. The good news is the excess housing inventory is being absorbed - a necessary step for housing (and the economy) to recover.

The bad news is economic growth will probably be sluggish - and unemployment elevated - until residential investment picks up.

Note: on the February snow storms, starts were up in the West and Midwest, and down in the Northeast and South (includes D.C. and Virginia), so the snow probably did impact starts. Of course some builders started spec homes to beat the tax credit expiration - and that boosted starts temporarily.