by Calculated Risk on 10/05/2010 06:28:00 PM

CR Note: This is from housing economist Tom Lawler.

Since the GMAC “robo-signer” issue first “broke” last month, the “issue” has catapulted from what some (but not all) industry folks characterized as a “technical” issue in judicial foreclosure states to what the media (who predictably jumped on this story like a ... well, I can’t print that!) now characterizes as a “gigantic mess.” Not too long after the GMAC story came out, both Chase and Bank of America announced that they too were suspending foreclosures in the 23 “judicial” foreclosure states, and while some other big servicers (Wells and Citi) weren’t planning to suspend foreclosures, news reports surfaced suggesting that both companies had some “robo-signers” as well. The media, of course, then searched for individual cases of “foreclosures gone wild,” and found a number of instances where there were some real mistakes made by lenders/servicers that went well beyond “robo-signing.”

Predictably, of course, politicians in many states jumped on this issue, calling for an across the board moratoria on foreclosures “until homeowners can be assured they are treated fairly.” Even California, a non-judicial state, jumped on this bandwagon, with Attorney General Brown arguing that GMAC and Chase should “stop foreclosing” on homes until they can “prove” that they are complying with a state law requiring lenders to “contact” borrowers facing foreclosure to assess their “situation” and discuss “options" before foreclosing on a home. The OCC ordered other large servicers to “review” their foreclosure processes and procedures, and Fannie and Freddie told its servicers to undertake a review of their processes and procedures on foreclosures, and reminded them of their basic duties and responsibilities (including the consequences of “non-compliance”).

Meanwhile, Old Republic National Title stopped writing title insurance on foreclosure sales by GMAC and Chase until “objectionable issues had been resolved,” creating concerns in some camps about the ability of firms to sell foreclosed properties.

I have been inundated with media (and other calls) calls asking what this “all means,” but quite frankly I don’t have enough information to give folks a credible answer – save, of course, is that foreclosure timelines in many states will lengthen yet some more.

However, the whole issue is yet another glaring indictment of the mortgage servicing industry, and its continued attempts to keep costs down during this housing/mortgage market “crisis” in fashions that have been penny-wise/pound foolish. Mega-mortgage servicers, of course, got to be really large by charging little to service loans because of the incredible economies of scale of processing mortgage payments. There are not, of course, similar economies of scales in dealing with problem loans, but servicers as a whole were incredibly slow to increase staff to deal with the surge in delinquent loans, and didn’t actually do so in a meaningful fashion until last year – with the “ramp” goosed in part by “HAMP.” Clearly, however, servicers did not ramp up their staffing sufficiently to deal with the surge in actual foreclosures, despite its predictability, to a large extent because such actions increased expenses without generating revenues!

Amazingly, before the housing bubble burst, there was immense pressure on Fannie and Freddie from large mortgage servicers to reduce their “minimum” servicing fee below 25 basis points, as these servicers didn’t like having to “manage” the “IO-like” value of their mortgage servicing fee. Countrywide even argued that it could profitably service its mortgage servicing portfolio with a ZERO servicing fee, saying that it made enough money just from float, ancillary, and other fees – AND, of course, that they were incredibly efficient mortgage servicers!!!

Below, by the way, are the largest residential mortgage servicers as of Q2/2010, according to National Mortgage News. BoA, of course, acquired Countrywide. These totals include first and second mortgages.

	Servicing	Servicing	% past due
	($ mm)	(# of loans)
Bank of America	$2,197,662	14,204,957	14.10%
Wells Fargo & Company	$1,811,969	12,004,659	8.20%
Chase	$1,353,566	9,434,133	11.60%
CitiMortgage, Inc.	$677,815	4,859,304	9.30%
Ally Bank/Residential Capital, LLC (GMAC)	$398,355	2,618,872
U.S. Bank Home Mortgage	$199,575	1,338,154
SunTrust Bank	$175,970	994,025	11.40%
PHH Mortgage	$155,967	968,669	6.30%
PNC Mortgage/National City	$149,945	989,228	9.90%
OneWest Bank/IndyMac	$110,000	517,504

The current mess, of course, suggests that (1) either loans should be priced differently based on a state’s foreclosure law; or (2) the government should push states to accept a national foreclosure law, with crystal clear rules and adequate borrower and lender safeguards. It also suggests that the “timeline” to reduce the government’s role in the US mortgage market has now been extended even further into the future!

CR Note: This is from housing economist Tom Lawler.

by Calculated Risk on 10/05/2010 03:21:00 PM

From Eric Wolff at the North County Times: Lender woes unlikely to halt California foreclosures

The pace of foreclosures in California will continue unabated, despite paperwork improprieties that drove three of the nation's biggest mortgage lenders to suspend foreclosures in 23 states last week, real estate attorneys said Monday.
...
Last week, GMAC Mortgage LLC, JPMorgan Chase & Co. and Bank of America said they needed to review thousands of crucial legal documents that they may have signed without reading. But the documents only matter in states that require a judge's order for a foreclosure. The three lenders suspended foreclosures in these states, but announced no changes to their activities in California.

Most foreclosures in California are non-judicial, so there will probably be little impact on the pace of foreclosures.

And - all else being equal - the housing market in states that require judicial foreclosures will probably be under pressure for a longer period than states with non-judicial foreclosures. Just more bad news for Florida and other judicial states.

And another point - there is a national mortgage market, but each state has their own foreclosure laws. Mortgages should probably be priced based on the local foreclosure laws (higher rates for judicial states), and on whether the mortgage is recourse or non-recourse. Different mortgage rates would probably push the states to more uniform foreclosure laws.

by Calculated Risk on 10/05/2010 12:59:00 PM

From a WSJ interview with Chicago Fed President Charles Evans, Jon Hilsenrath writes: Fed Official Calls for Aggressive Action

"In the last several months I've stared at our unemployment forecast and come to the conclusion that it's just not coming down nearly as quickly as it should," [Chicago Fed President Charles] Evans said in an interview with The Wall Street Journal Monday. "This is a far grimmer forecast than we ought to have," he added. As result, he said, he favors "much more [monetary] accommodation than we've put in place."
...
[Evans] has grown frustrated with a lack of progress in bringing down unemployment and is now forecasting inflation of 1% in 2012 and below 1.5% in 2013, well below his own 2% goal.

Although Evans is not a voting member of the FOMC this year, he will be next year.

According to the article, Evans is forecasting inflation to be below target for the next three years - and for the unemployment rate to remain very high. This month the Fed Presidents will present their revised forecasts, and I think the tone will be generally grim.

by Calculated Risk on 10/05/2010 10:00:00 AM

The September ISM Non-manufacturing index was at 53.2%, up from 51.5% in August - and above expectations of 52.0%. The employment index showed slight expansion in September at 50.2%, up from 48.2% in August. Note: Above 50 indicates expansion, below 50 contraction.

Click on graph for larger image in new window.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

From the Institute for Supply Management: September 2010 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in September for the ninth consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Worldwide. "The NMI (Non-Manufacturing Index) registered 53.2 percent in September, 1.7 percentage points higher than the 51.5 percent registered in August, indicating continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index decreased 1.6 percentage points to 52.8 percent, reflecting growth for the 10th consecutive month, but at a slower rate than in August. The New Orders Index increased 2.5 percentage points to 54.9 percent, and the Employment Index increased 2 percentage points to 50.2 percent, indicating growth in employment for the third time in the last five months. The Prices Index decreased 0.2 percentage point to 60.1 percent, indicating that prices increased in September at a slightly slower rate. According to the NMI, 11 non-manufacturing industries reported growth in September. Respondents' comments continue to be mixed about business conditions, with a slight majority reflecting optimism."
emphasis added

by Calculated Risk on 10/05/2010 09:02:00 AM

From the WSJ: Bank of Japan Cuts Key Rate

The Bank of Japan [announced] a 35 trillion yen ($418 billion) monetary easing program ... while cutting interest rates to virtually zero. It also launched a 5 trillion yen program to buy private- and public-sector assets.

... the BOJ said the new program was designed to "encourage the decline in longer-term interest rates and various risk premiums to further enhance monetary easing."

The central bank acknowledged its move was "an extraordinary measure for a central bank." Bank of Japan Gov. Masaaki Shirakawa said Tuesday that the central bank's [decision] was based on a worse-than-expected outlook for the domestic economy.

The Japan central bank will be buying corporate debt in addition to government debt.

by Calculated Risk on 10/04/2010 11:59:00 PM

Click on graph for larger image in new window.

This graph shows the office vacancy rate starting in 1991.

Reis is reporting the vacancy rate rose to 17.5% in Q3 2010, up from 17.4% in Q2 2010, and up from 16.6% in Q3 2009. The peak following the previous recession was 16.9%.

From the WSJ Signs of Recovery For Office Market

[O]ffice buildings in 79 metropolitan areas tracked by Reis lost 1.9 million square feet of occupied space in the third quarter, pushing the national office vacancy rate to 17.5%, the highest level since 1993.
...
Average effective rents ... fell by just a penny in the last three months, the smallest quarterly decline since 2008.

It appears the rate of increase in the vacancy rate has slowed - and rents may be stabilizing.

Reis should release the Mall and Apartment vacancy rates over the next few days, and those will probably be at record levels.

by Calculated Risk on 10/04/2010 09:34:00 PM

From Mary Williams Walsh at the NY Times: Cities in Debt Turn to States, Adding Strain

Across the country, a growing number of towns, cities and other local governments are seeking refuge in [distressed-cities programs] that many states provide as alternatives to federal bankruptcy court. Pennsylvania will have 20 cities in its distressed-cities program if Harrisburg receives approval. Michigan has 37 in its program; New Jersey has seven; Illinois, Rhode Island and California each have at least one. ...

The programs, which vary by state, generally allow troubled communities to tap emergency credit lines while restructuring their finances with some form of state oversight.

The concern with the distressed-cities programs is that the cities become almost permanent wards of the state - and the states already have their own budget problems. And the list of distressed-cities keeps growing ...

by Calculated Risk on 10/04/2010 08:01:00 PM

This speech isn't worth reading for substance (Ben Bernanke is clueless on budget issues), but it reveals something about Bernanke.

From Fed Chairman Ben Bernanke speaking at the Rhode Island Public Expenditure Council meeting tonight: Fiscal Sustainability and Fiscal Rules

Bernanke never mentioned "PAYGO" when he was head of the Council of Economic Advisors in 2005. In fact Bernanke barely mentioned the deficit in 2005 - except in postive terms - even though the structural deficit was in place and the cyclical deficit was coming (because of the housing bubble). I wonder why? Well, he missed the housing bubble completely - but what about the structural deficit?

Today he said:

Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs.

Weren't the baby boomers going to get older in 2005? Oh my ...

This is an issue that 1) is outside of Bernanke's area of responsibility, 2) he has promised not to discuss, and 3) he has zero credibility on. Enough said.

by Calculated Risk on 10/04/2010 03:59:00 PM

From Bloomberg: Yellen Sworn in as Vice Chairman of Federal Reserve, Raskin as Governor. Dr. Yellen was the San Francisco Fed President, and was currently not on the FOMC. She has been supportive of more easing - and both appointees are expected to support QE2.

From the WSJ: Goldman Sees Peak in Treasury Rally

Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London, said that the benchmark 10-year note's yield has seen its bottom in the 2.45%-to-2.50% area, breaking ranks with other bulls. ... Mr. Garzarelli said some of the quantitative easing measures have been priced into the Treasury market.

Note that this forecast is not from the Goldman Sachs economics group in New York (that correctly forecast the bond market rally this year).

And repeating, here is NY Fed EVP Brian Sack's speech: Managing the Federal Reserve's Balance Sheet. Sack outlined what the Fed expects additional QE to accomplish, and how it would probably be implemented. He said the FOMC would probably announce the amount of balance sheet expansion incrementally at each meeting, that the FOMC would be "persistent", but that they would also be flexible if the incoming data changed.

by Calculated Risk on 10/04/2010 01:13:00 PM

Via MarketWatch: Consumer bankruptcy filings climb 11%

The American Bankruptcy Institute reported that there were 130,329 consumer bankruptcies filings in September, up 3.3% from August. Filings were up 11% over the first 9 months of the year compared to the first 9 months of 2009.

"We expect that there will be nearly 1.6 million new bankruptcy filings by year end," ABI Executive Director Samuel Gerdano said.

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from USCourts.gov.

In 2005 the so-called "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" was enacted. Since then the number of bankruptcy filings has increased steadily.