by Calculated Risk on 2/16/2011 09:44:00 PM

• From Nick Timiraos, Victoria McGrane and Ruth Simon at the WSJ: Big Banks Face Fines on Role of Servicers

The penalties ... could include fines and changes in how the companies operate ... some banks could be notified within days of the enforcement action being taken against them ...

The OCC conducted a separate investigation of the Mortgage Electronic Registration Systems ... and it isn't clear when it will be finished ...

• From Diana Olick at CNBC: Enforcement Action Coming Against Loan Servicers

Earlier today:
• Housing Starts increase in January (graphs)
• Industrial Production, Capacity Utilization decrease slightly in January (graphs)
• MBA: Mortgage Purchase Application activity decreases (graph)
• Multi-family Housing Starts and Completions (graphs)
• Lawler: Early Read on January Existing Home Sales

by Calculated Risk on 2/16/2011 06:20:00 PM

From Cheyenne Hopkins at American Banker: Regulators to Hit Largest Mortgage Servicers with Enforcement Orders; Fines Likely

Alarmed by significant deficiencies uncovered as part of a regulatory review of mortgage servicer practices, the federal banking agencies are preparing formal enforcement actions against the largest servicing firms ...

The enforcement orders are expected to hit most, and possibly all, of the 14 mortgage servicers reviewed by regulators after foreclosure problems surfaced in the press last year, but the largest firms — including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., and Ally Financial Inc. — are likely to face the toughest requirements ...

The orders are expected to be coupled with a global settlement with other government entities investigating the servicing industry, which is almost certain to include civil money penalties.
...
Several banks had initially expected the enforcement orders to come as early as this week, but that timeline appears to be slipping. Sources indicated regulators are shooting to issue the orders, along with the global settlement, sometime in March.

This is the result of the review that Fed Governor Sarah Bloom Raskin discussed last Friday:

Late last year, the federal banking agencies began a targeted review of loan servicing practices at large financial institutions that had significant market concentrations in mortgage servicing. The preliminary results from this review indicate that widespread weaknesses exist in the servicing industry. The agencies intend to report more specific findings to the public soon, but I can tell you that these deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners.

I'm sure this has been said, but I'll say it again because I have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007

I hope the fines are commensurate with the size of the "deficiencies".

by Calculated Risk on 2/16/2011 04:15:00 PM

From economist Tom Lawler:

Based on my regional tracking so far, I estimate that existing home sales (using the NAR’s methodology) ran at a seasonally adjusted annual rate of about 5.17 million in January, down 2.1% from December’s pace. While such an estimate seems low given the previous few month’s gains in the pending home sales index, that’s what I get with the data released so far by local MLS/realtors.

On the inventory front, I’m still bummed that my previous source of state listings (realtor.com) no longer updates that data, so I’ve been looking around at other data sources, as well as listings reported by local MLS. For some reason I’ve noted that the data of many of the widely followed public “trackers” of listings in select metro areas do not “foot” with local MLS reports, so that’s been a pain. Looking at everything I could, however, including data on listings in local MLS/realtor association monthly reports, I estimate that existing home inventories in January were down by about 0.8 to 0.9% from December.

CR notes:
• This would put the months-of-supply in the low 8 months range, probably up slightly from the 8.1 months reported in December. However the decline in inventory is seasonal, and inventory should increase again in February. The months-of-supply metric uses seasonally adjusted (SA) sales, and not seasonally adjusted (NSA) inventory - and I expect the months-of-supply metric to increase in the coming months (impacting house prices).

• Along with the release of January existing home sales on February 23rd, the National Association of Realtors (NAR) will release revisions for the past three years (2008 through 2010). This is the ordinary annual revision, and the revisions will probably be minor.

• I believe the NAR is working on benchmarking existing home sales for previous years with other industry data. There is no planned release date for these possible revisions - if any are announced. I expect this to be completed sometime after mid-year, and I expect this effort will lead to significant downward revisions to previously reported sales (and probably inventory).

by Calculated Risk on 2/16/2011 02:20:00 PM

Here are the minutes for the January FOMC meeting.

Below are the forecasts. GDP was revised up, the unemployment rate revised down (this was before the January unemployment rate was announced), inflation is still forecast to be below target.

A few excerpts:

While participants viewed the downside risks to their forecasts of economic activity over the projection period as having diminished, their assessment of the most likely outcomes for economic activity and inflation over the projection period was not greatly changed. Most participants raised their forecast of real GDP growth in 2011 somewhat and continued to anticipate stronger growth this year than in 2010, with a further gradual acceleration during 2012 and 2013. The unemployment rate was still projected to decline gradually over the forecast period but to remain elevated. Total inflation was still expected to remain subdued, and core inflation was projected to trend up slowly over the next few years as economic activity picks up but inflation expectations remain well anchored.

And on the risks:

Participants generally saw the risks to their outlook for economic growth and employment as having become broadly balanced, but they continued to see significant risks to both sides of the outlook. On the downside, participants remained worried about the possible effects of spillovers from the banking and fiscal strains in peripheral Europe, the ongoing fiscal adjustments by U.S. state and local governments, and the continued weakness in the housing market. On the upside, the recent strength in household spending raised the possibility that domestic final demand could snap back more rapidly than anticipated. If so, a considerably stronger recovery could take hold, more in line with the sorts of recoveries seen following deep economic recessions in the past.

And on the pace of QE2:

A few members noted that additional data pointing to a sufficiently strong recovery could make it appropriate to consider reducing the pace or overall size of the purchase program. However, others pointed out that it was unlikely that the outlook would change by enough to substantiate any adjustments to the program before its completion.

Just a little more positive overall.

January 2011 Economic projections of Federal Reserve Governors and Reserve Bank presidents
	2011	2012	2013
Change in Real GDP	3.4 to 3.9	3.5 to 4.4	3.7 to 4.6
Previous Projection (Nov 2010)	3.0 to 3.6	3.6 to 4.5	3.5 to 4.6
Unemployment Rate	8.8 to 9.0	7.6 to 8.1	6.8 to 7.2
Previous Projection (Nov 2010)	8.9 to 9.1	7.7 to 8.2	6.9 to 7.4
PCE Inflaton	1.3 to 1.7	1.0 to 1.9	1.2 to 2.0
Previous Projection (Nov 2010)	1.1 to 1.7	1.1 to 1.8	1.2 to 2.0
Core PCE Inflation	1.0 to 1.3	1.0 to 1.5	1.2 to 2.0
Previous Projection (Nov 2010)	0.9 to 1.6	1.0 to 1.6	1.1 to 2.0

FOMC definitions:
¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

by Calculated Risk on 2/16/2011 12:11:00 PM

The Housing Starts report this morning showed an increase in multi-family starts in January. Although the number of multi-family starts can vary significantly month to month, some increase this year is expected since it takes over a year on a average to complete a multi-family unit. Apartment owners are seeing falling vacancy rates, and some have started to plan for 2012 and will be breaking ground this year. We can see this in reports from architects and from comments at the NMHC apartment conference:

The expectations are for a record low supply completed this year (2011). Some pickup in completions next year (2012), and then plenty of completions in 2013. ... The pickup in starts will help both GDP and employment growth this year.

The following graph shows the lag between multi-family starts and completions.

Click on graph for larger image in graph gallery.

The blue line is for multifamily starts and the red line is for multifamily completions. Since multifamily starts collapsed in 2009, completions collapsed in 2010.

For 2011, we should expect multi-family completions to be at or near a record low, and an increase in multi-family starts.

Also today, the Census Bureau released the "Quarterly Starts and Completions by Purpose and Design" report for Q4 2010. Although this data is Not Seasonally Adjusted (NSA), it shows the trends for several key housing categories.

This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

There was a seasonal decline in all categories, but the only category up year-over-year from Q4 2009 was 'units built for rent'. With the rental vacancy rate falling - and no more ill-conceived home buyer tax credits on the horizon - rental unit construction will increase in 2011.

The largest category - starts of single family units, built for sale - was down compared to Q4 2009 (when there was a small tax credit boost), and up slightly compared to Q4 2008. Basically single family starts are moving sideways, and will remain weak until more of the excess vacant housing units are absorbed.

by Calculated Risk on 2/16/2011 09:15:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production decreased 0.1 percent in January 2011 after having risen 1.2 percent in December. In the manufacturing sector, output increased 0.3 percent in January after an upwardly revised gain of 0.9 percent in December. Excluding motor vehicles and parts, factory production rose 0.1 percent in January. The output of utilities fell 1.6 percent in January, as temperatures moved closer to normal after unseasonably cold weather boosted the demand for heating in December; the output of utilities advanced 4.1 percent in that month. In January, the output of mines declined 0.7 percent. At 95.1 percent of its 2007 average, total industrial production in January was 5.2 percent above its level of a year earlier. The capacity utilization rate for total industry edged down to 76.1 percent, a rate 4.4 percentage points below its average from 1972 to 2010.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is up 7.9 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 76.1% is still far below normal - and well below the pre-recession levels of 81.2% in November 2007.

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

The second graph shows industrial production since 1967.

Industrial production decreased in January due to a decline in utilities. Production is still 5.6% below the pre-recession levels at the end of 2007.

The decline was a combination of an upward revision to December and less demand for heating in January.

by Calculated Risk on 2/16/2011 08:30:00 AM

Click on graph for larger image in graph gallery.

Total housing starts were at 596 thousand (SAAR) in January, up 14.6% from the revised December rate of 520 thousand, and up 25% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).

The increase in starts in January was entirely because of multi-family starts.

Single-family starts decreased 1.0% to 413 thousand in January - the lowest level since early 2009.

The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over two years - with slight ups and downs due to the home buyer tax credit.

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

Housing Starts:
Privately-owned housing starts in January were at a seasonally adjusted annual rate of 596,000. This is 14.6 percent (±15.7%)* above the revised December estimate of 520,000, but is 2.6 percent (±9.8%)* below the January 2010 rate of 612,000.

Single-family housing starts in January were at a rate of 413,000; this is 1.0 percent (±8.6%)* below the revised December figure of 417,000. The January rate for units in buildings with five units or more was 171,000.

Building Permits:
Privately-owned housing units authorized by building permits in January were at a seasonally adjusted annual rate of 562,000. This is 10.4 percent (±1.8%) below the revised December rate of 627,000 and is 10.7 percent(±1.2%) below the January 2010 estimate of 629,000.

Single-family authorizations in January were at a rate of 421,000; this is 4.8 percent (±2.3%) below the revised December figure of 442,000. Authorizations of units in buildings with five units or more were at a rate of 125,000 in January.

This was above expectations of 540 thousand starts, but still very low. The low level of starts is good news for housing, and I expect starts to stay low until more of the excess inventory of existing homes is absorbed.

Multi-family starts will rebound in 2011, but completions will probably be at or near record lows since it takes over a year to complete most multi-family projects.

by Calculated Risk on 2/16/2011 07:00:00 AM

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

The Refinance Index decreased 11.4 percent from the previous week and is the lowest Refinance Index recorded in the survey since the week ending July 3, 2009. The seasonally adjusted Purchase Index decreased 5.9 percent from one week earlier.
...
"Mortgage rates remained above 5 percent last week, up almost a full percentage point from their October lows, and refinance volume continued to drop," said Michael Fratantoni, MBA's Vice President of Research and Economics. "Applications for home purchases also declined on a seasonally adjusted basis. Buyers have not returned to the market as rising rates have reduced affordability, to some extent."
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.12 percent from 5.13 percent, with points increasing to 0.85 from 0.84 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in graph gallery.

This graph shows the MBA Purchase Index and four week moving average since 1990.

The four-week moving average of the purchase index has fallen to the levels of last September - suggesting weak home sales through the first few months of 2011.

by Calculated Risk on 2/15/2011 08:56:00 PM

By request, a few excerpts from Fed Chairman Ben Bernanke's testimony to the Financial Crisis Inquiry Commission (ht Brian)

Note: "Hoocoodanode?" means "who could have known?" a running joke on CR (and the name of the comment site).

COMMISSIONER THOMPSON: So no calamity of this magnitude occurs without there being some early signals that something’s going wrong. In the case of this calamity, what were the signals?

Why did we -- and had we acted on them, might we have averted the disaster?

MR. BERNANKE: Well, I don’t know, I have to think about that.

I think there were people -- there were people saying -- including people at the Fed but others as well -- saying, in the year before the crisis, that risk was being underpriced, that spreads were very narrow, that markets seemed ebullient, that liquidity was, in some sense, excessive.

The "year before the crisis"? Come on! How about in 2005 and all through 2006 (there were many many many posts to choose from).

Bernanke: There were -- you know, the way I would put it is, I think there were people -- not necessarily the same people -- identifying various parts of the problems. You know, there were people who were concerned about derivatives, there were people that were concerned about subprime mortgages, there were people concerned about the overall credit environment, there were people who were concerned about off-balance-sheet vehicles.

True. No one identified all the interconnected risks, but I did point out the financial losses could be over $1 trillion (Roubini used my data in a presentation to Congress). It didn't take much from there to realize a large portion of the financial system might be insolvent.

Bernanke: But I think notwithstanding the claims of one or two people out there who are now sort of living on the fact that they, quote, anticipated in the crisis, I would still say that the interaction of these things, the “perfect storm” aspect was so complicated and large, that I was certainly not aware, for what it’s worth -- and it could be just my deficiency -- but I was not aware of anybody who had any kind of comprehensive warning.

I don't know of anyone who got all the specifics correct. And hopefully I'm not "living on the fact" that I called the housing bubble (I think I've done OK over the last few years too).

But looking back ... in early 2005, Professor Jim Hamilton of Econbrowser asked me, if the loans are so bad, why are lenders making the loans? It was obvious that the lenders were just passing them on to Wall Street - and we discussed MBS and CDOs - and Wall Street was selling the pieces to investors. But why were investors buying the loans? It took me some time to piece together that the rating agencies were using historical performance from a completely different lending model (based on direct lender to borrow experience and the 3 Cs: Credit, Capacity, and Collateral) and then applying it to the originate-to-distribute model (with all the inherent agency problems). Perhaps if I had realized that sooner, I could have convinced more people that the ratings were wrong and there was a serious problem. But probably not - some random blogger saying the ratings are wrong? No one would have believed me.

Still it was pretty easy to see that house prices were out of line with fundamentals, and that lending standards were extremely loose (NINJA loans - No job, no income, no assets, mortgage brokers joking "fog a mirror get a loan", etc.). And that should have been enough of a red flag.

Bernanke: There are people identified -- and the trouble is -- and particularly in this blogosphere we live in now -- at any given moment, there are people identifying 19 different problems, crises.

I agree completely with this - there are more imaginary crisis every week than real crisis in a lifetime. But I think people could have known in 2005 and I wish I had done a better job of explaining why.

Best to all

by Calculated Risk on 2/15/2011 08:43:00 PM

From Mitra Kalita at the WSJ: Banks Push Home Buyers to Put Down More Cash

The median down payment hovered around 20% in the late 1990s and began to creep downward in 2001 in the nine cities Zillow analyzed: Chicago; Stockton, Calif.; Las Vegas; Los Angeles; Miami-Fort Lauderdale; Phoenix; San Diego; San Francisco; and Tampa, Fla.

It fell as low as 4% in the fourth quarter of 2006, and in some markets came close to zero.

Little or no skin in the game matters for home buyers too. I think 20% down (10% with mortgage insurance) is not unreasonable. If someone cannot save 10%, are they really ready for home ownership? I think that question was answered a few years ago.