by Calculated Risk on 5/23/2011 05:01:00 PM

Last night we discussed the NY Times article: Banks Amass Glut of Homes, Chilling Sales

I pointed out that the RealtyTrac estimate of 872,000 REO (lender Real Estate Owned) was probably too high, and I also noted that there are approximately 2.25 million homes currently in the foreclosure process. There are another 1.8 million homes with the borrower more than 90 days delinquent - so there is more to come.

I'd like to add these two table to hopefully clarify the situation. The first table shows REO inventory in Q1 2011 by Fannie, Freddie, FHA, PLS (Private Label Securities). Tom Lawler sent me the FHA data (released today) and the PLS data (an estimate from Barclays Capital).

Single Family REO Inventory: Number of Properties
	Q1 2011	Peak Quarter	Peak
Fannie Mae	153,224	Q3 2010	166,787
Freddie Mac	65,159	Q3 2010	74,897
FHA	68,997	Current quarter	68,997
PLS	171,566	Q3 2008	436,270
Subtotal	458,946	Q3 2008	570,634
Banks & Thrifts	???

Note: The banks and thrifts will be added when the Q1 Quarterly Banking Profile is released this week. Last quarter the total of all REO was close to 600 thousand, and this quarter will probably be a little lower.

The peak for PLS was in Q3 2008, and their REO inventory has been declining steadily. It now appears both Fannie and Freddie are selling more REO than they are acquiring.

However it is important to note that foreclosing isn't the only solution. Some loans are cured by the borrower, other loans are modified (with various methods), and some homes are "short sales" with the lender agreeing to sell for less than the amount owed.

Single Family Activity in Q1 2011
	Freddie	Fannie	FHA	Total
REOs Acquired	24,709	53,549	23,739	101,997
REOs Sold	31,628	62,814	15,581	110,023
Mods and Short Sales1	62,641	78,079	60,0002	200,720

¹Includes a few deed-in-lieu of foreclosure that become REO.
²Estimated based on last 6 months.

First, the F's (Fannie, Freddie and the FHA) will probably foreclose on close to 500 thousand homes this year since they are picking up the pace. So they will also sell 500+ thousand homes this year - they sold 110,000 in Q1 alone.

But notice that modifications and short sales are twice the number of foreclosures. So if the F's foreclose and sell 500 thousand homes, they might modify/short sell another 1,000,000 (this is mostly modifications, and of course short sales are distressed sales too, but they usually sell for more than REO).

If we add in the PLS and banks and thrifts, the lenders will probably make significant progress on delinquencies this year (and again in 2012). Of course some of the modifications will redefault and end up as REO too, but I just wanted to make sure everyone knows that all of these properties won't end up as REO.

by Calculated Risk on 5/23/2011 01:23:00 PM

By request, the following graphs show the percent of loans delinquent by loan type: Prime, Subprime, FHA and VA. First a table comparing the number of loans in Q2 2007 and Q1 2011 so readers can understand the shift in loan types:

MBA National Delinquency Survey Loan Count
	Q2 2007	Q1 2011	Change	Seriously Delinquent
Prime	33,916,830	31,897,319	-2,019,511	1,859,614
Subprime	6,204,535	4,180,219	-2,024,316	1,109,848
FHA	3,030,214	6,285,254	3,255,040	511,620
VA	1,096,450	1,366,455	270,005	62,720
Survey Total	44,248,029	43,729,247	-518,782	3,572,679

Both the number of prime and subprime loans have declined over the last four years; the number of suprime loans is down by about one-third. Meanwhile the number of FHA loans has increased sharply.

Note: There are about 50 million total first-lien loans - the MBA survey is about 88% of the total.

Click on graph for larger image in graph gallery.

The first graph is for all prime loans. This is the key category now ("We are all subprime!").

Since there are far more prime loans than any other category (see table above), over half the loans seriously delinquent now are prime loans - even though the overall delinquency rate is lower than other loan types.

The second graph is for subprime. This category gets all the attention - mostly because of all the terrible loans made through the Wall Street "originate-to-distribute" model and sold as Private Label Securities (PLS). Not all PLS was subprime, but the worst of the worst loans were packaged in PLS.

Although the delinquency rate is still very high, the number of subprime loans had declined sharply.

The third graph is for FHA loans. The delinquency rate is declining, however this is primarily because most of the FHA loans were made in the last couple of years.

Another reason for the improvement was eliminating Downpayment Assistance Programs (DAPs). These were programs that allowed the seller to give the buyer the downpayment through a 3rd party "charity" (for a fee of course). The buyer had no money in the house and the default rates were horrible.

The last graph is for VA loans.

There are still quite a few subprime loans that are in distress, but the real keys going forward are prime loans and FHA loans.

by Calculated Risk on 5/23/2011 09:29:00 AM

Not a good few days for Europe. S&P warned on Italy, Fitch downgraded Greece and said an extension of maturities would be considered a default. There were large protests in Spain and Iceland's Eyjafjallajökull volcano erupted.

From Bloomberg: Greece Readies Crisis-Fighting Steps

The cost to insure Greek debt against default rose to a record and the yield on its 10-year bonds increased to a euro- era high after Standard & Poor’s said May 20 it may cut Italy’s credit rating. That warning came hours after Fitch Ratings cut Greece three grades ... and said it would consider an extension of maturities as a default.

“Greece risks a sovereign default and finance ministers have expressed strong doubts about the sluggish progress,” French Finance Minister Christine Lagarde said in a May 20 interview with Austria’s Der Standard.

Naturally bond yields are rising for some countries - and falling in Germany and in the U.S. (flight to quality). Here is a table for some European bond yields via Bloomberg (ht Nemo for the links). The Greece 10-year bond yield is now over 17% (another new record).

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

Weekend:
• Summary for Week Ending May 20th
• Schedule for Week of May 22nd

by Calculated Risk on 5/23/2011 08:30:00 AM

From the Chicago Fed: Index shows economic activity weakened in April

Led by declines in production-related indicators, the Chicago Fed National Activity Index fell to –0.45 in April from +0.32 in March. April marked the lowest reading of the index since August 2010.
...
The index’s three-month moving average, CFNAI-MA3, declined to –0.12 in April from +0.08 in March, turning negative for the first time since December 2010. April’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. With regard to inflation, the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of –0.16 to the index in April, down sharply from +0.31 in March. Manufacturing production decreased 0.4 percent in April after rising for nine consecutive months, and manufacturing capacity utilization declined to 74.4 percent in April from 74.8 percent in March. Parts shortages that resulted from the earthquakes in Japan contributed to a decline in motor vehicle and parts production.

Click on graph for larger image in graph gallery.

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed:

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

This index suggests the economy was still growing in April, but below trend.

by Calculated Risk on 5/22/2011 11:52:00 PM

From Eric Dash at the NY Times: Banks Amass Glut of Homes, Chilling Sales

The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

The lenders definitely hold a large number of REOs (Real Estate Owned), however the RealtyTrac estimate looks a little high.

Click on graph for larger image in graph gallery.

This graph from, economist Tom Lawler, shows an estimate of all the REO inventory at the end of Q4. Fannie, Freddie release their REO inventory quarterly, and FHA releases their data monthly. Lawler estimated the REOs for FDIC insured Banks & Thrifts using the FDIC Quarterly Banking Profile (QBP) - and the Private Label Securities (PLS) data is from Barclays.

We know the combined REO inventory for Fannie, Freddie and the FHA¹ decreased to 287,184 at the end of Q1 2011, from a record 295,307 units at the end of Q4 as shown in the second graph (FHA¹ data through February).

The pace of foreclosures is picking up, but so is the pace of REO sales. Freddie Mac noted REO sales were at record levels in Q1:

We expect the pace of our REO acquisitions to increase in the remainder of 2011, in part due to the resumption of foreclosure activity by servicers, as well as the transition of many seriously delinquent loans to REO.

REO disposition reached record levels in 1Q 2011 with over 30,000 homes sold ...

Fannie Mae also sold a record 62,814 REO in Q1, up from 38,095 in Q1 2010 and 185,744 for all of 2010. So Fannie and Freddie sold over 90,000 REO in Q1, and their combined inventory only declined by 16,185. They are foreclosing at record levels, but they are finally selling REOs faster than they acquire them.

Hopefully I'll have an estimate for total Q1 REO from Lawler soon - the Q1 FDIC QBP will probably be released this week - but it appears the RealtyTrac estimate is a little high and that REO inventory is starting to decline since the lenders are selling again.

Although REO inventory might be overstated in the story, the number of loans in the foreclosure process is much higher than 1 million. The MBA reported last week that 4.52% of homes with first-lien mortgages were in the foreclosure process. There are approximately 50,000,000 homes with first-lien mortgages, and 4.52% would be 2.25 million. There are another 1.8 million homes were the borrower is more than 90 days delinquent.

Although the numbers in the story may be a little off - one thing is clear - there is still a huge of glut of distressed homes in the pipeline.

by Calculated Risk on 5/22/2011 07:00:00 PM

According to an AP report, the Lundberg Survey shows gasoline prices have fallen 9 cents per gallon over the last 2 weeks.

GasBuddy.com is showing a 16 cent per gallon decline in my area from the recent peak, and a decline of about 13 cents nationally. If WTI oil futures stay under $100 per barrel, I expect prices to fall 30 cents or more from the peak over the next few weeks.

It might be too early to see an increase in the Reuter's/University of Michigan's Consumer sentiment survey due to falling gasoline prices. Right now analysts are expecting a slight increase for May to 72.5 from the preliminary reading of 72.4. But if this trend of falling prices continues, I'd expect some improvement in June. (Note: Usually the two main drivers of sentiment are the unemployment rate and gasoline prices).

Orange County Historical Gas Price Charts Provided by GasBuddy.com

Note: GasBuddy code has a bug and the size of chart increases if you change the location or time period. Sorry.

by Calculated Risk on 5/22/2011 11:45:00 AM

J.D. Power and Associates: High Gas Prices and Lower Incentive Levels Contributing to Dismal Start for May New-Vehicle Retail Sales (ht Tim waiting for 2012)

"Retail sales in May are being hit by several negative variables—specifically, high gas prices, lower incentive levels and some inventory shortages," said Jeff Schuster, executive director of global forecasting at J.D. Power and Associates. "As a result, the industry will likely be dealing with a lower sales pace at least through the summer selling season, putting pressure on the 2011 outlook."

J.D. Power is projecting total light vehicle sales of 11.9 million in May (SAAR: seasonally adjusted annual rate). This would be down from 13.2 million in April, and only up slightly from 11.6 million in May 2010.

The projected decline in sales is mostly due to the tragedy in Japan and related supply chain issues:

The earthquake, tsunami and resulting nuclear power plant crisis in Japan have caused numerous production disruptions thus far due to parts shortages for the Japanese manufacturers. This is expected to continue throughout the second quarter of 2011, with more than 400,000 units of production expected to be lost in the short term.

However most of the decline in production will be in Japan:

The North American production forecast in 2011 has been reduced slightly, with volume now rounding down to 12.8 million units (from 12.9 million units).

So auto production in the U.S. is forecast to decline slightly although retail sales will be off sharply over the next six months.

There are already articles suggesting smart buyers wait until the automakers start offering incentives again. From Jerry Hirsch at the LA Times: Best option for car shoppers: Postpone buying

"If people were paying attention they would have bought in March and April. Now, if they have the latitude, it is probably best to wait," said Jeremy Anwyl, chief executive of Edmunds.com

Click on graph for larger image in graph gallery.

This graph shows light vehicle sales since the BEA started keeping data in 1967.

The dashed line is April estimated sales rate of 13.2 million SAAR.

The sales rate will probably drop back to the level of last summer for the next 6 months or so, and then rebound later this year. This auto slowdown has already shown up in the regional manufacturing surveys - and also in the initial weekly unemployment claims.

The key is this decline is being driven mostly by events in Japan, and is not a sign of overall weakness in the economy. Although this will be drag on GDP growth in Q2 and Q3, I don't think the drag will be huge.

Yesterday ...
• Summary for Week Ending May 20th
• Schedule for Week of May 22nd

by Calculated Risk on 5/22/2011 08:11:00 AM

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

Here is the unofficial problem bank list for May 20, 2011.

Changes and comments from surferdude808:

There were many changes to Unofficial Problem Bank List because of failure and the OCC releasing its actions through mid-April 2011. In all, there were 12 additions and seven removals, which leaves the list at 988 institutions with assets of $423.9 billion. Last week, the list had 983 institutions with assets of $425.4 billion.

The removals include the three failures this week -- Atlantic Southern Bank, Macon, GA ($781 million Ticker: ASFNE); First Georgia Banking Company, Franklin, GA ($780 million); and Summit Bank, Burlington, WA ($147 million). Actions were terminated against Central Pacific Bank, Honolulu, HI ($3.9 billion Ticker: CPF); CenTrust Bank, National Association, Northbrook, IL ($103 million); and The First National Bank of Farragut, Shenandoah, IA ($35 million). The other removal is Union National Community Bank, Lancaster, PA ($446 million), which merged on an unassisted basis with Union Community Bank FSB, Lancaster, PA.

Among the 12 additions are Old Second National Bank, Aurora, IL ($2.1 billion Ticker: OSBC); Great Lakes Bank, National Association, Blue Island, IL ($642 million Ticker: GLFL); and SCB Bank, Shelbyville, IN ($256 million Ticker: BRBI). Also, the OCC issues a Consent Order against Southwestern National Bank, Houston, TX ($319 million), which was removed prematurely two weeks ago when the OCC terminated the Formal Agreement against the bank.

Next week, the FDIC should release its actions through April 2011. Given that the list stands at 988 institutions, there is an outside chance the could go over 1,000 institutions next week.

Yesterday ...
• Summary for Week Ending May 20th
• Schedule for Week of May 22nd

by Calculated Risk on 5/21/2011 09:54:00 PM

From Mary Ellen Podmolik at the Chicago Tribune: Sinking values prompting homeowners to consider strategic default as best business decision (ht Ann)

Marty Likier ... put almost 20 percent down to purchase a $312,000 townhouse in Westmont in 2006 and lived there until two years ago, when he remarried and bought a home in Chicago Ridge. For a year he rented the townhouse. When a change in rules at the community meant Likier's days as a landlord would end, he called his lender and asked if he could rework the loan, but he didn't have enough equity left to refinance the $240,000 mortgage.
...
Likier ... decided last fall that the struggle wasn't worth it.

He listed the townhouse ... [and has dropped the price to] $179,000, which is lower than the unit sold for when it was built in 1999. He stopped paying the mortgage in January and recently was served with foreclosure papers.

Despite the fact that he and his wife are employed and have an annual household income near $150,000, he's comfortable with his decision.

A few comments:
• These properties with large negative equity positions are like ticking time bombs for the banks. Eventually these owners will grew tired of the monthly loss, and try to take action. Corelogic reported there were 11.1 million properties with negative equity at the end of last year, and close to 5 million properties with more than 25% negative equity.

• It sounds like this owner could afford the payment as long as he had the unit rented. If the homeowner association changed the rules, he might have legal recourse.

• And talking about recourse ... Illinois is a judicial foreclosure state and a deficiency judgment is pretty automatic. With his household income, Mr. Likier will probably be hearing from the bill collectors soon (Ann notes that it would help if his new wife makes most of the income since she probably wasn't on the condo loan).

Earlier ...
• Summary for Week Ending May 20th
• Schedule for Week of May 22nd

by Calculated Risk on 5/21/2011 07:07:00 PM

Since the world didn't end ...
• Summary for Week Ending May 20th
• Schedule for Week of May 22nd

From the WSJ: France Signals a Shift on Greece

French Finance Minister Christine Lagarde signaled Paris might support a rescheduling of Greek debt, warning that Greece is at risk of default if it doesn't do more to bring its public finances into order.
...
"What we certainly don't want is a state bankruptcy, a default, in Europe," Ms. Lagarde said in an interview published Friday in Austria's Der Standard newspaper. "You can use a lot of words—reprofiling, restructuring, re-this, re-that—but what there won't be is a restructuring of Greek debt." At the same time, she said: "We would accept anything that is based on a voluntary accommodation by banks."

"If the banks decided unilaterally after contacting the Greek authorities to offer a lengthening of the repayment time frame, she wouldn't be against it," Ms. Lagarde's spokesman said

Lagarde's comments carry significant weight, and she is the leading candidate to become the new IMF managing director, from the Irish Times: EU leaders set to nominate Lagarde for IMF post

And from Bloomberg: Italy Outlook Revised to Negative by S&P, Prompting Vow of Faster Reforms

Italy’s “current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering,” S&P said. “Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy’s prospects for reducing its general government debt have diminished.”

The yield on Greece ten year bonds increased to a record 16.6% and the two year yield was up slightly to 25.5%.

Here are the ten year yields for Ireland at 10.5%, Portugal at 9.4%, Italy at 4.8%, and Spain at 5.5%.