by Calculated Risk on 8/15/2010 08:54:00 AM

Last month, on July 15th, HUD filed a public notice in the Federal Register of tighter FHA lending requirements. The 30 day comment period is over.

Jennifer Waters at the WSJ writes: FHA Gets Tougher on Mortgages

Consumers looking for home loans backed by the Federal Housing Administration will face tougher hurdles and higher costs under new legislation and new rules that could take effect as soon as this month.

The changes could happen this week.

As a review, the changes included (from HUD):

1. Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.

2. Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to three percent will bring FHA into conformity with industry standards.

3. Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.

by Calculated Risk on 8/14/2010 10:54:00 PM

Since I didn't post an inflation graph when CPI was released, here is one for a Saturday night:

Click on graph for larger image in new window.

This graph shows three measure of inflation, Core CPI, Median CPI (from the Cleveland Fed), and 16% trimmed CPI (also from Cleveland Fed).

They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year. Core CPI, median CPI, and the 16% trimmed mean CPI were all up 0.1% in July.

Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation

by Calculated Risk on 8/14/2010 05:21:00 PM

This morning, in the "Negative News Flow" post, I noted that the unemployment rate will probably start ticking up again soon.

Here are a few reasons why I think the unemployment rate will increase (some overlap):

1) The main reason is the general slowing economy. There is a general relationship between GDP and the unemployment rate (see Okun's Law), and since I expect a 2nd half slowdown (from a sluggish 1st half), I also expect few payroll jobs to be added in the 2nd half - and that suggests the unemployment rate will rise.

2) With the end of the housing tax credit, I expect residential construction employment to decline further over the next few months.

3) The 4-week average for initial weekly unemployment claims has increased recently. This is the highest level since February.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since January 2000.

The four-week average of weekly unemployment claims increased this week by 14,250 to 473,500.

The dashed line on the graph is the current 4-week average. This is the highest level since February and suggests weakness in the labor market.

4) Few teens joined the labor force this summer. Perversely this low level of teen participation appeared to push down the seasonally adjusted unemployment rate. If this did impact the unemployment rate (it isn't clear), the impact will be unwound over the next couple of months.

5) The Labor Force Participation Rate decreased from 65.0% in May to 64.6% in July. This was a key reason the unemployment rate decline to 9.5% in June from 9.7% in May.

Some of this decline in the participation rate might be related to the expiration of the Federal unemployment benefits - some people whose benefits expired, and were unable to move on to the next tier, might have just given up. Note: this isn't an argument against unemployment benefits!

Just over a week ago the qualification dates for the various tiers of Federal unemployment benefits have been extended through November 30th. This extension was also made retroactive to June 2nd. Some people who have given up might rejoin the labor force to collect additional benefits. If this happens, the participation rate might increase in August - and that will probably push up the unemployment rate.

by Calculated Risk on 8/14/2010 01:25:00 PM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for August 13, 2010.

Changes and comments from surferdude808:

The Unofficial Problem Bank List finishes the week at 813 institutions with aggregate assets of $417.8 billion.

The sole removal is the failed Palos Bank and Trust Company ($496 million).

There are four additions this week -- The Brand Banking Company, Lawrenceville, GA ($1.2 billion); Broadway Federal Bank, f.s.b, Los Angeles, CA ($530 million Ticker: BYFC); Liberty Savings Bank, FSB, Whiting, IN ($82 million); and Home Savings Bank, Jefferson, MO ($31 million).

The other change to report is a Prompt Corrective Action Order issued by the Federal Reserve against Paramount Bank ($283 million).

We anticipate the OCC will release its enforcement actions for July 2010 next Friday.

Note: The FDIC Q2 2010 Quarterly Banking Profile will be released the week of August 22nd.

by Calculated Risk on 8/14/2010 08:55:00 AM

Although not unexpected, the news flow is about to take a more negative tone starting with the existing home sales report on August 23rd. We've been discussing this for some time ... and I'd like to highlight just a few pieces of forthcoming data:

The existing home sales report will show that sales collapsed in July (this is showing up in all the regional reports).

The existing home months-of-supply will jump to double digits.

House prices are probably falling again, although this might not show up in the repeat sales indexes until September or October (this data is released with a lag).

On August 27th, the second estimate of Q2 GDP will be released. This will probably show a significant downward revision from the preliminary estimate of 2.4% annualized growth. The downward revision is due to lower construction spending than the BEA initially estimated, less contribution from inventory adjustments, and the June surge in exports.

The unemployment rate will probably start ticking up again soon (or the participation rate will fall further).

Just something to be aware of ...

by Calculated Risk on 8/13/2010 09:53:00 PM

This is a followup to my earlier post today on LA port traffic in July ...

From Ronald White at the LA Times: Ports wary of stunted holiday rush

The bad news for the ports of Los Angeles and Long Beach — part of a supply-chain infrastructure that employs dockworkers, truck drivers, railroad employees, warehouse and distribution center staffs and logistics experts — the big bump in holiday-season cargo jobs may not come this year.

Consumers remain very cautious about the safety of their own jobs, and retailers are paying attention to those signals, experts said.

"Retailers are monitoring demand very closely and hoping to see increases in employment and other areas that will boost consumer confidence," said Jonathan Gold, vice president for supply chain and customs policy for the National Retail Federation.

This is something to watch over the next few months. Exports have already slowed, and it is possible that import growth will slow too.

by Calculated Risk on 8/13/2010 08:10:00 PM

Palos Bank and Trust
Friday the thirteenth has come
Unlucky indeed!
by Soylent Green is People
From the FDIC: First Midwest Bank, Itasca, Illinois, Assumes All of the Deposits of Palos Bank and Trust Company, Palos Heights, Illinois

As of June 30, 2010, Palos Bank and Trust Company had approximately $493.4 million in total assets and $467.8 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $72.0 million. Compared to other alternatives, First Midwest Bank's acquisition was the least costly resolution for the FDIC's DIF. Palos Bank and Trust Company is the 110th FDIC-insured institution to fail in the nation this year, and the fourteenth in Illinois. The last FDIC-insured institution closed in the state was Ravenswood Bank, Chicago, on August 6, 2010.

It is Friday!

by Calculated Risk on 8/13/2010 05:21:00 PM

This data last month gave the first hint of the sharp increase in the U.S. trade deficit in June.

Notes: this data is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports. LA area ports handle about 40% of the nation's container port traffic.

The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Click on graph for larger image in new window.

Loaded inbound traffic was up 26% compared to July 2009. Inbound traffic is now up 4% vs. two years ago (July '08).

Loaded outbound traffic was up 10% from July 2009. Exports were off almost 4% from May 2010. Unlike imports, exports are still off from 2 years ago (off 17%).

For imports there is usually a significant dip in either February or March, depending on the timing of the Chinese New Year, and then usually imports increase until late summer or early fall as retailers build inventory for the holiday season. So part of this increase in July imports is just the normal seasonal pattern.

Based on this data, it appears the trade deficit with Asia increased again in July. Not only have the pre-crisis global imbalances returned, but the flat line in exports, after declining in June, is concerning (there is no clear seasonal pattern for exports).

by Calculated Risk on 8/13/2010 03:40:00 PM

From CNBC: US 'Virtually Certain' to Fall Into A New Recession: Rosenberg

The risks of a double-dip recession—if we ever got out of the first one—are actually a lot higher than people are talking about right now," [David Rosenberg, chief economist at Gluskin Sheff] said. "I think that it's almost a foregone conclusion, a virtual certainty."

And here is an interview today of Rosenberg at the WSJ: The Big Interview with David Rosenberg

In an interview with WSJ's Kelly Evans, Gluskin Sheff's Chief Economist David Rosenberg warned that the chances of a double-dip recession are greater than 50-50 and that the recession may not have ended last year at all.

And Neil Irwin at the WaPo has a summary of a Goldman Sachs research note by Ed McKelvey: Goldman Sachs economists: No double dip (probably)

"We think a double dip [recession] has a meaningful probability--25 to 30% in our estimation--but it is not in our base case. A big reason for this judgment is that several key components of private-sector activity have already fallen to levels that are quite low relative to historical averages or underlying fundamentals."

"We note the following five sources of protection against a renewed downturn in economic activity--areas where we think the scope for further downside to US real GDP is limited."

I've made a number of the same arguments as McKelvey ... I noted that "usually a recession (or double-dip) is preceded by a sharp decline in Residential Investment (housing is the best leading indicator for the business cycle), and it [is] hard for RI to fall much further" and on the personal saving rate, I noted "most of the drag from a rising saving rate appears to be behind us".

I think we will avoid a technical double dip recession (or a continuation of the "great recession", see Recession Dating for the difference), but the odds are uncomfortably high - and it will probably feel like a recession to millions of Americans. It will be especially discouraging when the unemployment rate starts increasing again (I think that is likely) and when reported house prices start falling (very likely).

by Calculated Risk on 8/13/2010 12:17:00 PM

The BLS reported this morning that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was at 213.898 in July. This means it is very likely there will no change to Social Security Benefits and the Maximum Contribution Base again this year.

Here is an explanation ...

The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W¹ for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U.

In 2007, the average of CPI-W was 203.596. In 2008, the average was 215.495. That gave an increase of 5.8%.

In 2009, the Q3 average of CPI-W was 211.013. That was a decline of -2.1% from 2008, however, by law, the adjustment is never negative - so the benefits remained the same this year.

Click on graph for larger image in new window.

This graph shows CPI-W over the last ten years. The red lines are the Q3 average of CPI-W for each year.

The COLA adjustment is based on the increase from Q3 of one year from the highest previous Q3 average. So a 2.3% increase was announced in 2007 for 2008, and a 5.8% increase was announced in 2008 for 2009.

In Q3 2009, CPI-W was lower than in Q3 2008, so there was no change in benefits for 2010.

Even though there was no increase last year, and there will probably be no increase this year, those receiving benefits are still ahead because of the huge increase in Q3 2008.

For 2011, the calculation is not based on Q3 2010 over Q3 2009, but Q3 2010 over the highest preceding Q3 average ... the 215.495 in Q3 2008. This means CPI-W in Q3 2010 has to average above 215.495 or there will be no increase in Social Security benefits in 2011.

In July 2010, CPI-W was at 213.898, so CPI-W will have to average above 216.294 in August and September for the Q3 average to be at or above Q3 2008. That suggests an increase in COLA is very unlikely right now.

Contribution and Benefit Base

The law - as currently written - prohibits an increase in the contribution and benefit base if COLA is not greater than zero. However if the there is even a small increase in CPI-W, the contribution base will be adjusted using the National Average Wage Index.

From Social Security: Cost-of-Living Adjustment Must Be Greater Than Zero

... ... any amount that is directly dependent for its value on the COLA would not increase. For example, the maximum Supplemental Security Income (SSI) payment amounts would not increase if there were no COLA.

... if there were no COLA, section 230(a) of the Social Security Act prohibits an increase in the contribution and benefit base (Social Security's maximum taxable earnings), which normally increases with increases in the national average wage index. Similarly, the retirement test exempt amounts would not increase ...

This is based on a lag. If there had been an increase in COLA last year, the contribution and benefit base would have increased by about 2.3% based on the increase in wages from 2007 to 2008. The National Average Wage Index is not available for 2009 yet, but wages probably declined - but it probably won't matter for the maximum contribution base since COLA will probably be zero.

To summarize (assuming no new legislation):

In 2011, for benefits, there will probably be no increase (although we need to see CPI-W for August and September to know for sure).

For the contribution base in 2011 there will probably be no change too. However, if the COLA is even slightly positive, the increase will be based on changes in the national average wage index (not COLA).

⁽¹⁾ CPI-W usually tracks CPI-U (headline number) pretty well. From the BLS:

The Bureau of Labor Statistics publishes CPIs for two population groups: (1)the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 32 percent of the total population and (2) the CPI for All Urban Consumers (CPI-U) ... which cover approximately 87 percent of the total population and include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self- employed, short-term workers, the unemployed, and retirees and others not in the labor force.