by Calculated Risk on 8/09/2011 10:59:00 AM

Yesterday I posted a graph for REO inventory through Q2. (REO: Real Estate Owned by lenders)

And on Sunday, I noted that REO is only a part of the problem. A bigger part of the problem is the large number of seriously delinquent and in-foreclosure loans. See: Mortgage Delinquencies and REOs

Although delinquencies and foreclosure activity is higher than normal in all states, a few states stand out. The following data is from the Q2 Freddie Mac SEC filing:

Freddie Mac Single Family Portfolio, Serious Delinquencies and REO
	California	Florida	Illinois	Arizona	Nevada	All States
Portfolio UPB (billions)1	$285	$109	$91	$45	$20	$1,805
Seriously Delinquent (billions)	$13.388	$15.099	$5.071	$2.673	$2.770	$77.840
Serious Delinquency Rate	3.8%	10.6%	4.5%	4.6%	10.6%	3.5%
REO Inventory (billions)2	$2.163	$0.751	$0.772	$0.610	$0.338	$10.830
REO compared to Portfolio	0.8%	0.7%	0.8%	1.4%	1.7%	0.6%
Negative Equity3	30.9%	46.1%	21.7%	49.6%	62.6%	22.7%
Foreclosure	Non-Judicial	Judicial	Judicial	Non-Judicial	Non-Judicial

¹ UPB: Unpaid Principal Balance.
² Based on UPB at time of REO acquisition.
³ Negative Equity source: CoreLogic.

I marked a few numbers in red. Although Freddie Mac has the most REO in California, the percent of REO in California is only slightly above the national average compared to the portfolio size. Nevada and Arizona have the most Freddie Mac REOs compared to the portfolio (Nevada is almost triple the national rate).

Look at the serious delinquency rate. Now Florida and Nevada stand out. In general judicial foreclosure states have more loans in process, but Nevada is a non-judicial state!

I've also added negative equity data from CoreLogic (percent of properties with a mortgage that owe more than their home is worth). Nevada, Arizona and Florida really stand out.

Although Florida doesn't have an especially high number of Freddie Mac REO, there are many more coming. Nevada has both a high number of REO and a high delinquency rate. The timing of the eventual recovery in housing depends on clearing out this backlog of REO and seriously delinquent loans - so I think California will recover long before areas like Florida and Nevada.

Also: I noted this yesterday, but this is important. Freddie Mac had been expecting REO acquisitions to increase in the 2nd half of 2011, now they are expecting the delays to continue all year. From their SEC filing: "The pace of REO acquisitions slowed in Q2 2011 due to delays in the foreclosure process. We expect these delays will likely continue through the remainder of 2011."

by Calculated Risk on 8/09/2011 07:30:00 AM

From the National Federation of Independent Business (NFIB): Small Business Optimism Index Continues Downward Trajectory

For the fifth consecutive month, NFIB’s monthly Small-Business Optimism Index fell, dropping 0.9 points in July—a larger decline than in each of the previous three months—and bringing the Index down to a disappointing 89.9. This is below the average Index reading of 90.2 for the last two-year recovery period.
...
The percent of owners citing poor sales as their top problem—the long-time primary complaint of firms—has faded a few points, and reports of sales trends are much better than a few months ago. However, the July survey anticipates slow growth for the remainder of the year, high unemployment rates, inflation rates that are too high and little progress on job creation.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy.

Click on graph for larger image in graph gallery.

The first graph shows the small business optimism index since 1986. The index decreased to 89.9 in July from 90.8 in June.

Optimism has declined for five consecutive months now.

The second graph shows the net hiring plans for the next three months.

Hiring plans were slightly positive in July.

According to NFIB: “While the national unemployment rate dipped marginally, for the nation’s small businesses, the employment story is not a positive one. Twelve percent (seasonally adjusted) reported unfilled job openings, down 3 points. Over the next three months, 10 percent plan to increase employment (down 1 point), and 11 percent plan to reduce their workforce (up 4 points), yielding a seasonally adjusted 2 percent of owners planning to create new jobs, 1 point lower than June, leaving the prospect for job creation bleak."

Weak sales is still the top business problem with 23 percent of the owners reporting that weak sales continued to be their top business problem in July.

In good times, owners usually report taxes and regulation as their biggest problems.

From NFIB: "The percent of owners citing poor sales as their top problem—the long-time primary complaint of firms—has faded a few points, and reports of sales trends are much better than a few months ago."

The index continues to struggle, probably a combination of the recent economic weakness, and also the high concentration of real estate related companies in the index.

by Calculated Risk on 8/08/2011 11:06:00 PM

The Asian markets are red tonight with the Nikkei down 4%. The Shanghai is down almost 7%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 is down about 27 points, and Dow futures are down about 250 points.

Oil: WTI futures are down to $76 and Brent is under $100.

Earlier:
• Dow Down 600+, S&P 500 down 6.66%
• Q2 REO Inventory Estimate
• FOMC Preview

by Calculated Risk on 8/08/2011 07:14:00 PM

Important: REO inventories have declined over the last couple of quarters. This is a combination of more sales and fewer acquisitions due to the slowdown in the foreclosure process. There are many more foreclosures coming - see my post this weekend on Mortgage Delinquencies and REOs.

This is an important change from Freddie Mac: In Q1, Freddie Mac wrote: "We expect the pace of our REO acquisitions to increase in the remainder of 2011". Today Freddie Mac said the pace will remain low all year "The pace of REO acquisitions slowed in Q2 2011 due to delays in the foreclosure process. We expect these delays will likely continue through the remainder of 2011."

Freddie Mac reported today that REO dispositions (sales) were at a near record 29,000 units in Q2 and REO acquisitions were down to 24,799 units.

The combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA decreased to 250,982 at the end of Q2 from a record 288,341 units at the end of Q1. The "F's" REO inventory increased 6% compared to Q2 2010 (year-over-year comparison).

Click on graph for larger image in new window.

This graph shows the REO inventory for Fannie, Freddie and FHA through Q2 2011.

The REO inventory for the "Fs" increased sharply in 2010, but may have peaked in Q4 2010. However there may be a new peak when the foreclosure dam breaks.

The second graph shows REO inventory for Fannie, Freddie, FHA, Private Label Securities (PLS), and FDIC insured institutions. (economist Tom Lawler has provided some of this data).

Total REO decreased to 495,000 in Q2 from almost 550,000 in Q1.

As Tom Lawler has noted before, the FDIC does not collect data on the NUMBER of REO properties held, and there are different estimates of the average carrying value of 1-4-family REO properties at FDIC-insured institutions. This graph uses an an average carrying value of about $150,000 (Q2 2011 is estimated since the FDIC hasn't released the quarterly profile yet).

As Tom Lawler noted: "This is NOT an estimate of total residential REO, as it excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other lender categories." However this is the bulk of the REO - probably 90% or more. Rounding up the estimate (using 90%) suggests total REO is around 550,000 in Q2.

by Calculated Risk on 8/08/2011 04:03:00 PM

From CNBC: Dow Skids 600, Worst Day Since Credit Crisis

The S&P 500 and the tech-heavy Nasdaq were down 6 percent. August is already on track to be the worst month for both indexes since Oct. 2008.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, spiked above 40 to touch its highest level since Mar. 2009.

All 10 S&P sectors were lower, led by banks, energy and materials. Financials have plunged more than 20 percent this year.

Graph from Doug Short.

Click on graph for larger image.

Here is a table of the largest one day declines (in percentage terms) for the S&P 500 since January 1950. There were quite a few large down days in 2008 and early 2009 ... and now two in the last week (both in red).

Largest S&P 500 One Day Percentage Declines since 1950
	Date	Percent Decline	Close	Previous Close	Six Months Later
1	10/19/1987	-20.5%	224.84	282.70	15.3%
2	10/15/2008	-9.0%	907.84	998.01	-4.7%
3	12/1/2008	-8.9%	816.21	896.24	15.7%
4	9/29/2008	-8.8%	1106.42	1213.27	-28.8%
5	10/26/1987	-8.3%	227.67	248.22	15.3%
6	10/9/2008	-7.6%	909.92	984.94	-5.9%
7	10/27/1997	-6.9%	876.99	941.64	23.7%
8	8/31/1998	-6.8%	957.28	1027.14	28.0%
9	1/8/1988	-6.8%	243.40	261.07	11.7%
10	11/20/2008	-6.7%	752.44	806.58	17.9%
11	5/28/1962	-6.7%	55.50	59.47	10.6%
12	8/8/2011	-6.7%	1,119.47	1199.38	---
13	9/26/1955	-6.6%	42.61	45.63	14.1%
14	10/13/1989	-6.1%	333.65	355.39	3.2%
15	11/19/2008	-6.1%	806.58	859.12	10.1%
16	10/22/2008	-6.1%	896.78	955.05	-5.0%
17	4/14/2000	-5.8%	1356.56	1440.51	-2.0%
18	10/7/2008	-5.7%	996.23	1056.89	-18.1%
19	6/26/1950	-5.4%	18.11	19.14	10.0%
20	1/20/2009	-5.3%	805.22	850.12	18.1%
21	11/5/2008	-5.3%	952.77	1005.75	-4.8%
22	11/12/2008	-5.2%	852.30	898.95	4.8%
23	10/16/1987	-5.2%	282.70	298.08	-8.1%
24	11/6/2008	-5.0%	904.88	952.77	2.7%
25	9/17/2001	-4.9%	1038.77	1092.54	12.2%
26	2/10/2009	-4.9%	827.16	869.89	21.8%
27	9/11/1986	-4.8%	235.18	247.06	23.4%
28	8/4/2011	-4.8%	1200.07	1260.34	---
29	9/17/2008	-4.7%	1156.39	1213.60	-31.3%
30	9/15/2008	-4.7%	1192.70	1251.70	-36.8%
31	3/2/2009	-4.7%	700.82	735.09	47.1%
32	2/17/2009	-4.6%	789.17	826.84	27.2%
33	4/14/1988	-4.4%	259.75	271.58	7.0%
34	3/12/2001	-4.3%	1180.16	1233.42	-8.0%
35	4/20/2009	-4.3%	832.39	869.60	31.7%
36	3/5/2009	-4.3%	682.55	712.87	46.2%
37	11/30/1987	-4.2%	230.30	240.34	10.0%
38	11/14/2008	-4.2%	873.29	911.29	4.2%
39	9/3/2002	-4.2%	878.02	916.07	-6.4%
40	10/2/2008	-4.0%	1114.28	1161.06	-25.1%
41	10/25/1982	-4.0%	133.32	138.83	20.3%

by Calculated Risk on 8/08/2011 02:01:00 PM

There is a one day meeting of the FOMC tomorrow and no press briefing. In light of recent developments, the FOMC statement to be released around 2:15 PM ET Tuesday might be interesting.

In July, during his Congressional testimony, Fed Chairman Ben Bernanke made it clear that another round of monetary accommodation (aka QE3) would depend on both a further deteriorating in the economic outlook and the renewed threat of deflation.

Clearly the economy is weaker than the Fed's forecast in June, and there have been some initial signs of disinflation (Core PCE increased 0.1% in June or 1.3% annualized). However, based on Bernanke's comments, I think the Fed will wait for further evidence on inflation, and I think a major announcement at the meeting tomorrow is unlikely.

However the FOMC statement will change. Here are a few key sentences from the June statement:

... the economic recovery is continuing at a moderate pace ... The slower pace of the recovery reflects in part factors that are likely to be temporary ... Inflation has picked up in recent months ...

The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline ... Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. ...

... The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

"Moderate", "temporary", and "picked up" will all probably change. Growth has been worse than "moderate", and inflation has subsided - but probably not enough for QE3. Still the Fed might make some changes as suggested by Jon Hilsenrath at the WSJ: Fed Has Some Tricks Left, but None Are Magic

Since 2008, the Fed has assured the public that it wouldn't raise short-term interest rates for an "extended period," that is, at least several more months. It has been vague about plans for its vast portfolio of securities. The Fed now has a strategy—which it has disclosed—for gradually dumping the securities someday. The Fed can use its end-of-meeting statement to define "someday," perhaps saying it will hold on to those securities for an extended period, too.

So the Fed might change the "extended period" language to include maintaining the current level of security holdings for an extended period. Not a huge change. QE3 is unlikely, but not impossible - although I think the Fed will wait for further evidence of renewed deflation fears, and also try to communicate any plans in advance.

by Calculated Risk on 8/08/2011 11:21:00 AM

• Another down day for the stock market. Of course there is a flight to quality with the U.S. 10 year yield down to 2.38%.

• On Friday, S&P said they would announce thousands of downgrades based on lowering their view of the U.S. credit rating. From Reuters: S&P cuts Freddie Mac, Fannie Mae after U.S. downgrade. Any credible rating agency would have done it all at once.

• From USA Today: Obama to speak at 1 p.m. on downgrade.

Weekend:
• A long Summary for Week ending August 5th
• Mortgage Delinquencies and REOs
• Schedule for Week of August 7th

by Calculated Risk on 8/08/2011 08:34:00 AM

Here is a graph of the 10 year spread (Italy to Germany) from Bloomberg. And for Spain to Germany.

The Italian spread is at 299, down from 371, and the Spanish spread is at 289 down from 387.

The European markets are in the red with the DAX down 2.3% and the FTSE down 1.6%.

From the Financial Times: ECB buys up Italian and Spanish debt

Borrowing costs for Spain and Italy tumbled on Monday as the European Central Bank intervened to buy the countries’ respective bonds ... Dealers reported that the ECB had started buying the debt as soon as European bond markets opened.
Except with permission

Weekend:
• A long Summary for Week ending August 5th
• Mortgage Delinquencies and REOs
• Schedule for Week of August 7th

by Calculated Risk on 8/07/2011 11:21:00 PM

Sunday is the new Monday ... once again!

Earlier the ECB announced a bond buying program. And the G7 put out a statement.

From the NY Times: Global Finance Leaders Take Steps to Try to Calm Markets

From the WSJ: ECB Moves to Prop Up Italy, Spain

The Asian markets are red tonight with the Nikkei down 1.3%. The Hang Seng is down over 4%, and the Shanghai down close to 5%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 is down about 25 points, and Dow futures are down about 230 points.

Oil: WTI futures are down sharply to $84 and Brent is down to $106.

Yesterday:
• A long Summary for Week ending August 5th
• Schedule for Week of August 7th

by Calculated Risk on 8/07/2011 08:16:00 PM

Earlier the ECB announced a bond buying program. Although there are no details, Professor Krugman argues it is worth a try since the Italian problem is different than Greece, Ireland and Portugal.

And from the G7 via the WSJ:

Statement of G7 Finance Ministers and Central Bank Governors

August 8, 2011

In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.

We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe. The US has adopted reforms that will deliver substantial deficit reduction over the medium term. In Europe, the Euro area Summit decided on July 21 a comprehensive package to tackle the situation in Greece and other countries facing financial tensions, notably through the flexibilisation of the EFSF. We are now focused on the quick and full implementation of the agreements achieved. We welcome the statement of France and Germany to that effect. We also welcome the statement of the Governing Council of the ECB.

We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.

These actions, together with continuing fiscal discipline efforts will enable long-term fiscal sustainability. No change in fundamentals warrants the recent financial tensions faced by Spain and Italy. We welcome the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation. The Euro Area Leaders have stated clearly that the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area.

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.

We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure stability and liquidity in financial markets.

Yesterday:
• A long Summary for Week ending August 5th
• Schedule for Week of August 7th