by Anonymous on 6/15/2007 02:48:00 PM

This is a drag:

June 15 (Bloomberg) -- Ronco Corp., maker of the Veg-O-Matic vegetable slicer and the Pocket Fisherman, filed for bankruptcy two years after founder and television pitchman Ron Popeil sold the iconic company.

Ronco, which marketed products as perfect for ``grads and dads,'' sought protection from creditors owed more than $32.7 million. It listed $13.9 million in assets yesterday in U.S. Bankruptcy Court in Woodland Hills, California.

by Calculated Risk on 6/15/2007 12:29:00 PM

This is really just an excuse to graph a long running series (see second graph). Industrial production data is available since 1919!

MarketWatch reports: U.S. industrial output flat in May

Output at the nation's mines, factories, and utilities was flat in May, the Federal Reserve said. In addition, production was weaker in April that initially estimated ...

Analysts said the report had a soft tone, but said they still expected production to pick up in the next few months.

"With the inventory correction having run its course, the manufacturing sector should be poised for faster growth ahead," said Michelle Girard, an economist at RBS Greenwich Capital in a research note.

Click on graph for larger image.

This is just more of the mixed data that we have seen recently. This graph shows the year-over-year change in Industrial Production.

The numbers are weak, but not recessionary weak - like many economic numbers, excluding housing (housing is in a depression).

And here is the same graph since 1919.

The huge swings in industrial production are no longer a feature of the U.S. economy.

NOTE: Several readers have asked about Tanta. She is a little exhausted, but "nothing frightening". I'm sure she will return soon.

by Calculated Risk on 6/15/2007 12:24:00 AM

From the WSJ: New Reality For Real Estate. This article is about Commercial Real Estate (CRE) (hat tip Sam).

[There is a] growing concern in the commercial real-estate world that higher interest rates are killing deals or causing prices to be renegotiated lower. ...

"Lenders are becoming a lot more careful about the borrower," says Phil Feder, a real-estate attorney at New York law firm Paul, Hastings, Janofsky & Walker LLP. "... I have seen approval for new loans slowing and it's generally becoming more difficult for real-estate funds and other investors to get financing for their projects."

The change in borrowing costs was triggered April 11, when Moody's Investors Service fired a warning flare about Commercial Mortgage Backed Securities, or pools of real-estate loans that are sold to investors as bonds. Moody's said lenders' underwriting standards had become too lax during the real-estate frenzy. That warning scared investors and forced bankers to raise yields on CMBS offerings to attract investors, sending shock waves through the real-estate lending world.

The situation got worse last week when Treasury bond yields, on which the loans are based, shot up.

"It's going to bring the price of real estate down," says Gary Mozer, principal with George Smith Partners, a Los Angeles-based commercial real-estate finance firm. The "meltdown" in the CMBS market, as Mr. Mozer calls it, has caused a "sea change" in the amount that real-estate investors can borrow.

An incipient CRE credit crunch?

by Calculated Risk on 6/14/2007 06:24:00 PM

From DataQuick: Bay Area home sales drop, prices up

Bay Area homes continued to sell at their slowest pace in 12 years last month, as the median sales price edged up to a new peak, a real estate information service reported.
...
Sales have decreased on a year-over-year basis the last 28 months. Last month's sales count was the lowest for any May since 6,615 homes were sold in 1995.
...
The median has increased the last four months, in part because sales of lower-cost homes have dropped more than sales in other categories.

This final point is important on prices. Since DataQuick reports the median price, and sales are apparently dropping faster at the low end, compared to the high end, this change in mix pushes up the median price - even if actual prices are stable or even falling slightly.

by Calculated Risk on 6/14/2007 10:35:00 AM

From AP: Foreclosures Up on Subprime Mortgages (hat tip Dirk)

Late payments and new foreclosures on adjustable-rate home mortgages made to people with spotty credit histories spiked to all-time highs in the first three months of this year.

The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released Thursday, reported that the percentage of payments that were 30 or more days past due for "subprime" adjustable-rate home mortgages jumped to 15.75 percent in the January-to-March quarter.

That was a sizable increase from the prior quarter's delinquency rate of 14.44 percent and was the highest on record ...

Remember, the delinquency rate doesn't include homes in foreclosure. Last quarter, the total for adjustable subprime loans was 14.4% delinquent plus 4.5% in foreclosure, for a total of 18.9% either delinquent or in foreclosure.

by Calculated Risk on 6/14/2007 10:19:00 AM

From the Department of Labor:

In the week ending June 9, the advance figure for seasonally adjusted initial claims was 311,000, unchanged from the previous week's revised figure of 311,000. The 4-week moving average was 311,250, an increase of 3,750 from the previous week's revised average of 307,500.

Click on graph for larger image.

This graph shows the four moving average weekly unemployment claims since 1968. The four week moving average has been trending sideways, and the level is low and not much of a concern.

by Calculated Risk on 6/14/2007 02:24:00 AM

I've confirmed with a reliable source that Managing Director and homebuilding Equity Research Analyst Ivy Zelman has left Credit Suisse. (hat tip Cal)

Ms. Zelman gained fame among housing bloggers when she confronted Toll Brothers CEO Bob Toll during an analyst conference call in 2006 by asking: "Which Kool-aid are you drinking?"

Beyond the conference call quips, Zelman is a serious and award winning analyst. Zelman was honored as the highest rated housing analyst in the nation by both the Institutional Investors All American Research Team and the Greenwich Associates Institutional Research Services Poll.

Zelman's research was thoughtful and thorough. She always called it straight, and she never drank the Kool-Aid.

I wish her all the best in her future endeavors.

by Calculated Risk on 6/13/2007 11:33:00 PM

From the WSJ: Bear's Fund Is Facing Mortgage Losses

A hedge fund managed by Bear Stearns Cos. is scrambling to sell large amounts of mortgage securities, a setback for a Wall Street firm known for its savvy debt-market trading.

The fund makes bets on bonds backed by mortgages, many of which are subprime, meaning they go to especially risky borrowers.

Faced with losses on its investments, the fund, called High-Grade Structured Credit Strategies Enhanced Leverage Fund, together with a sister fund, is trying to sell about $4 billion in mortgage-backed bonds to raise cash, according to people close to the fund and traders who have been solicited to buy the bonds.

It appears the fund is selling it's best assets first:

Bids for the sale of bonds are due at 10 a.m. EDT today -- shortly after Bear announces its results.

... On the list were roughly 150 of the funds' most easily traded, investment-grade bonds, which are backed by subprime mortgages. The estimated value of the bonds ranges from $1 million to nearly $110 million apiece.

by Calculated Risk on 6/13/2007 08:09:00 PM

From the WSJ: Bleak Mood Drags Down Support for Bush, Congress

"... just 19% of Americans now say the nation is head in the right direction. More than three times that proportion, 68%, say things in the U.S. are "off on the wrong track." That's approaching the most pessimistic mood in the history of the WSJ/NBC poll.

At the same time, Mr. Bush's job approval rating has fallen to his lowest-ever level of 29% ..."

Of course some of this pessimism is due to the continuous negative news concerning Iraq, but from an economic perspective, this might also fit with this sentence in the Fed's Beige Book:

Consumer spending and retail sales were generally up in late April and May, with a number of Districts reporting that luxury items were selling better than lower-end merchandise.
emphasis added

This might explain the slight decline in Household Debt Service to Disposable Personal Income (DPI). DPI is an aggregate number, and perhaps the top few percent are doing very well (and so are luxury items), but the majority of Americans could be struggling.

by Calculated Risk on 6/13/2007 05:29:00 PM

From the Fed's Beige Book:

The real estate and construction industries were marked by continued weakness in the residential sector and increasing strength in the commercial sector.

The surprise here is the increasing strength in the commercial sector. IMO, continued strong investment in commercial real estate (CRE) is one of the keys to avoiding a recession later this year.

There was widespread improvement in commercial real estate markets in recent months. More than half the Districts reported that leasing activity was picking up in most of their major markets and vacancy rates were falling. Boston, New York, Philadelphia, and San Francisco also mentioned increases in office rents. Four Districts (Philadelphia, Richmond, Minneapolis, and Dallas) reported strong demand for industrial space, especially warehouse space. Chicago, on the other hand, reported that industrial development was sluggish. All the Districts that mentioned commercial construction activity gave positive reports.

Recent reports have indicated that vacancy rates were rising, so, if vacancy rates are falling again, this is a significant positive for continued investment in CRE.

by Calculated Risk on 6/13/2007 03:17:00 PM

From DataQuick: Continued slow for Southland home sales

Last month was the slowest May for Southern California home sales in 12 years, mainly because of sharp declines in lower-cost markets. The Southland's median sales price was unchanged, a real estate information service reported.

A total of 19,874 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 3.1 percent from 19,269 for the month before, and down 34.4 percent from 30,303 for May last year, according to DataQuick Information Systems.

Last month's sales were the lowest for any May since 1995, when 17,712 homes sold. The May 1995 total was the lowest for any May in DataQuick's statistics, which go back to 1988. The strongest May was in 2005, when 35,557 homes sold. May has averaged 27,123 sales.

And DataQuick has changed their comments on foreclosures. Last month, they wrote:

Foreclosure activity is rising but is still within the normal range in most areas.

But now they note:

Foreclosure activity is high, although foreclosure properties are not yet a drag home on home values in most markets.

Rising inventories, high foreclosure activity, and falling sales ... it's not hard to connect the dots on what will happen to prices.

by Calculated Risk on 6/13/2007 02:56:00 PM

From the Census Bureau: Advance Monthly Sales for Retail Trade and Food Services

"The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $377.9 billion, an increase of 1.4 percent (±0.7%) from the previous month and 5.0 percent (±0.7%) above May 2006."

Click on graph for larger image.

This graph shows the nominal and real YoY changes in retail sales (excluding food service). Note: real prices are adjusted using the PCE deflator, and are estimated for May.

This is a series with significant volatility month-to-month, and May was an up month, but the trend still apprears down. I'd need a few more up months to change my view of the trend for retail sales.

The reporting for May is misleading. Like this article from the AP: Retail Sales Surge 1.4 Percent in May

Consumers brushed off rising gasoline prices and slumping home sales to storm the malls in May, pushing retail sales up by the largest amount in 16 months.

Yes, the advance sales estimate was up strongly in May, but does anyone care that the month-to-month volatility was the greatest, on the upside, in "16 months"? YoY real retail sales are up just over 2%, and that is still weak. As I've noted before, I expect Q2 GDP to be stronger than Q1, but I'm not so sanguine for the 2nd half of the year.

by Calculated Risk on 6/13/2007 12:02:00 PM

The Federal Reserve reports that household debt service, as a percent of personal disposable income (DPI), declined slightly in Q1 to 14.33% from 14.49% in Q4 2006. The homeowner mortgage Financial Obligation Ratio (FOR) also declined slightly.

Click on graph for larger image.

This graph shows the homeowner mortgage FOR since Q1 1980. The ratio is near an all time high, even though interest rates are still fairly low.

Note: The Fed cautions that it is useful to look at changes in the ratio, not the absolute number:

... the calculated series is only a rough approximation of the current debt service ratio faced by households. Nonetheless, this rough approximation may be useful if, by using the same method and data series over time, it generates a time series that captures the important changes in household debt service payments.

This shows that households are dedicating a near record percentage of their DPI to debt service, but also that the situation is improving slightly. Of course with rising interest rates, we might see record levels again in Q2.

by Calculated Risk on 6/13/2007 10:56:00 AM

From Reuters: Fed mulling ban on some mortgage lending

The Federal Reserve Board is weighing whether it should ban some mortgage lending practices that fueled the recent housing market boom, Fed governor Randall Kroszner told a panel of lawmakers Wednesday.

"We will also seriously consider whether there are mortgage lending practices that should be prohibited," Kroszner said in prepared remarks at a U.S. House of Representatives Financial Services Committee discussion on consumer protection.

Kroszner said the Fed was specifically eyeing 'stated-income' loan applications and prepayment penalties, as well as considering whether lenders should require monthly payments of annual fees like taxes.

by Calculated Risk on 6/13/2007 12:57:00 AM

From Professor Hamilton: Reconciling the BED, CES, and birth/death employment data

A great analysis, with some important corrections.

by Calculated Risk on 6/12/2007 04:24:00 PM

Bloomberg reports: Treasury Yields Rise to Highest in Five Years on Growth Concern

Yields on benchmark 10-year Treasuries rose to the highest in five years ... The yield on the benchmark 10-year note rose to 5.25 percent, an increase of 9 basis points, or 0.09 percentage point, at 3:24 p.m. in New York ...

The following graph covers a longer time period (since April 1971) as compared to the graph presented this morning (since January 1999).

Click on graph for larger image.

Here is a scatter graph showing the 30 year fixed rate mortgage (Freddie Mac average monthly rate) vs. the monthly average Ten Year treasury yield for every month since April 1971.

The Green line shows the approximate current 10 year yield. This shows rates are still low compared to the last 35 years. Mortgage rates in the '50s and '60s were on the low end of the scale, but Freddie Mac doesn't provide any data for those periods.

It now appears the 30 year fixed rate will move up to 6.75% to 7% this week. As an aside, I'm always amused when the article tries to explain why rates are moving.

by Calculated Risk on 6/12/2007 02:46:00 PM

From Bloomberg: U.S. Mortgage Foreclosure Filings Rise 90% in May (hat tip Brian)

U.S. foreclosure filings surged 90 percent in May from a year earlier as more homeowners fell behind on their monthly mortgage payments, RealtyTrac Inc. said.

There were 176,137 notices of default, scheduled auctions and bank repossessions last month, led by California, Florida and Ohio, the Irvine ...

"Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year," [James Saccacio, chief executive officer of RealtyTrac] said in the report. That will add "to the downward pressure on home prices in many areas."

by Anonymous on 6/12/2007 11:00:00 AM

I thought we might look at some details in this piece in the New York Times by our dependable Vikas Bajaj, "Effort to Advise on Risky Loans Runs Into Snag." As usual, Bajaj pulls together enough information to allow us to get past the spin, without actually crossing the line into editorializing. But hey! I'm a blogger. About editorializing I have no scruples.

I strongly encourage you to read the whole thing. A few choice bits:

Now, the state is retooling the program to include all of Cook County, which encompasses Chicago and many of its suburbs. Under the proposal, first-time home buyers and borrowers who are refinancing would be referred to counseling only if they selected certain loans like adjustable-rate mortgages that reset in five years or less, or loans that initially require only interest payments. A state agency is drafting the rules, which must be approved by a committee of lawmakers.

Even as that process plays out, the Illinois General Assembly is considering legislation that would enshrine the new counseling rules in law. In addition, the bill would require mortgage brokers to act in their clients’ best interest and bar state-regulated lenders from making loans without verifying borrowers’ income with tax returns, paycheck stubs or other documents.

Interesting, is it not? Illinois is taking the position that certain kinds of mortgage transactions are so risky--so, shall we say, likely to be "non-economic" for the borrower--that the fact that the borrower elected to apply for such a loan is a presumption that counseling is appropriate. Someone needs to alert the hedge funds.

Furthermore, Illinois is connecting the dots between the fiduciary duty of the broker and the terms of the loan. The implication is that a stated income loan is simply not sufficiently in any borrower's best interest such that it is presumptively a failure of fiduciary duty to originate one. I haven't seen the text of the Illinois statute and I'm prepared to be as disappointed as I usually am once this stuff gets out of committee, but let me say good on Illinois for having advanced the ball this far. I'm rather hoping ISDA is taking notes.

And while we're on the subject of brokers earning their fees by providing services to borrowers:

A report compiled by an advocacy group, Housing Action Illinois, shows that the majority of borrowers who were about take on adjustable-rate mortgages believed that they had fixed-rate loans. More than two-thirds of the borrowers were spending more than 60 percent of their take-home pay on housing expenses. And 75 percent of the borrowers were refinancing existing debts; the rest were buying a home.

If I'm reading this correctly, these folks have already talked to a mortgage broker and they're still this confused. Do I believe this data? With all my heart and all my soul and all the decades I've spent trying to explain how ARMs work to people with bachelor's degrees in financial fields. Of course an advocacy group might have an interest in portraying these borrowers as more ignorant than they are. Did anyone else see this little survey that Lending Tree published recently?

81% of on-line consumers who are paying a mortgage or are planning on buying a home in the next 12 months say they understand how an ARM works. (See q31.)
−Young Singles are the least likely to understand how an ARM works.

On-line consumers are not as informed about their ARM as they first indicated. When asked what they know about their ARM, the majority did not know the interest rate cap, the adjustment schedule, the index their ARM was tied to, or the interest rate ceiling. (See q46.)

Most on-line consumers (91%) with an ARM are aware that their rate will adjust. (See q41.)

In what was quite possibly a sample of savvier-than-usual borrowers, you could still find 9% who are not aware that their ARM will adjust. You can also get a bunch of people to say "yes" to the question "Do you understand ARMs?" But if you ask them any trick questions involving, you know, how ARMs work, the majority has no idea. The usual justification of collecting an origination fee from a borrower involves at least some implicit claim that part of the effort of originating a loan is explaining it to the borrower.

Back to the Times:

The president of the Illinois Association of Mortgage Brokers, Bill McNamee, said the nonprofit agencies’ analysis could not be trusted because they have an incentive to play up problems — they receive $300 for each counseling session, which is paid for by brokers and lenders. “They are going to want to justify their existence so they can continue to collect their fees,” he said.

Delicious. Irony, with a touch of vermouth. My favorite cocktail.

But don't think those brokers are just anti-education:

John West, a mortgage broker, said the government should emphasize first-time home buyer classes and a more rigorous financial education curriculum in public schools. “People want government to safeguard them,” Mr. West said. “But I don’t want to be turning my head and seeing the government saying, ‘We think you should make another decision.’ ”

You know, one of these days, someone is going to explain to Mr. West the connection between public schools and the government. It won't be me, though; I can see a losing battle coming.

Not that the local regulator comes off sounding that much brighter:

Dean Martinez, secretary of the state’s Department of Financial and Professional Regulation, says that the uproar is missing the point and suggests that the term “counseling” may be the problem. He views the sessions as akin to state driving tests. They are there to make sure borrowers fully comprehend what they are doing, not to watch over their every action.

“Mario Andretti has to take a driver’s license test,” Mr. Martinez said, “even though he is one of the best drivers in the world. No one disputes that.”

Well, forgive me for having thought that the point of a driver's license test was to make sure you know how to drive, not to make sure you understand why the hell anyone would want to drive in the first place. What a terrible analogy. The issue is not that Mario Andretti has to have a driver's license; the issue is that not even Mario is allowed to drive an Indy 500 race car on the suburban streets at 150 mph, whether he is considered "capable" or not.

Mr. Martinez is letting himself fall into the trap here. The state of Illinois appears to be on the verge of declaring certain loan types to be so dangerous that anyone offering to get one is going to have to prove to the party who is going to have to pay the eventual bar tab--and that'll be the states, the counties, and the townships, not the NAMB--that it is "informed consent." And the very fact that we don't seem to be able to find many people who can pass the quiz at the end of class ought to be telling us that there's something markedly wrong with these loan products. Any good teacher will tell you that it isn't always the students' fault or the teachers' fault; sometimes it's the material.

Possibly you do not understand your mortgage loan because you keep trying to tell yourself that it benefits you somewhere. Free yourself of that a priori problem, and the pieces might fall into place for you.

by Calculated Risk on 6/12/2007 09:40:00 AM

Click on graph for larger image.

Here is scatter graph showing the 30 year fixed rate mortgage (Freddie Mac average monthly rate) vs. the monthly average Ten Year treasury yield for every month since January 1999.

The parallel lines show the 30 year rate 150 bps and 200 bps above the Ten Year yield. Although there are other factors in determining the 30 year rate, the Ten Year yield (and adding 150 to 200 bps) gives a pretty quick approximation.

Currently (this morning) the Ten Year yield is at 5.2% implying a 30 year rate of 6.7%+.

by Calculated Risk on 6/12/2007 09:27:00 AM

From the WSJ: For Troubled Firms, A Flood of Big Loans

In a world awash in investable funds, even many of the most troubled companies are finding lenders willing to offer them big money. This rescue financing, as it's sometimes called, can give companies time to clean up their balance sheets and avoid a trip to bankruptcy court. U.S. filings for bankruptcy reorganization ... are at a 10-year low. Also at historic lows are U.S. corporations' debt defaults.
..
It ... can be risky to have so much debt sloshing around the economy's shakier regions. When rescue lending fails, the extra debt can make a bust just more spectacular. Among lenders that risk taking it on the chin are some hedge funds, which have largely replaced banks as lenders in this kind of finance.

See the story for some nice graphs of the rapid increase in speculative grade loans.