by Calculated Risk on 8/29/2007 12:05:00 PM

For about two weeks this month, the Fed allowed the effective Fed Funds rate to drift below the target rate. The effective rate is now back to the target rate.

Click on graph for larger image.

These two graphs compare the effective Fed Funds rate vs. the target rate for the recent liquidity crisis, and for 9/11/2001.

The scales are the same on both graphs (2 months and 0% to 6% on the y-axis).

Although the effective rate was allowed to stay below the target rate for almost two weeks during the liquidity crisis, the difference between the effective and target rates was small when compared to 9/11.

Some people have suggested this has been a "stealth" rate cut by the Fed. If it was, it is over.

Note: According to Fed President Poole, the Fed will only cut rates in September if there is clear evidence that the economy is slowing (looking at employment, retail sales and industrial production). Right now the market expectations for a Fed rate cut in September are pretty high (see Cleveland Fed: Fed Funds Rate Predictions).

This does raise the question: Is the worst of the liquidity crisis over? Note: it is important to distinguish between the ongoing credit crunch and the recent liquidity crisis. The credit crunch is far from over.

by Anonymous on 8/29/2007 11:02:00 AM

Bloomberg's Jonathan Weil is a menace to society.

Last time I bothered to read any of his hysterical Emily Latella-style ravings on the subject, he was completely missing the point about the accounting rules involved in the "modification problem," but making up for his ignorance in inflammatory rhetoric.

He's at it again.

Aug. 29 (Bloomberg) -- It's bad enough when a company's outside auditor is a pushover for management. Equally galling would be for the auditor to try telling management how to run the company. Yet that's what U.S. Senator Charles Schumer has asked the Big Four accounting firms to do at the subprime lenders they audit, pronto.

``One of the most promising solutions to the anticipated foreclosure crisis is the voluntary modification by lenders of existing unsustainable subprime loans,'' Schumer, a New York Democrat, said in an Aug. 23 letter to the firms' top executives.

The chairman of Congress's Joint Economic Committee then called on the firms to ``assist this country's mortgage crisis'' and ``urge your clients to do their part to keep our housing markets afloat, by modifying subprime loans that are at risk of default.''

In so doing, Subprime Chuck made a blithering fool of himself, though he probably doesn't realize why.

Schumer, just like the SEC, is telling auditors that they should stop telling their clients that accounting rules forbid modifications of defaulting and soon-to-default loans in securitizations, because the SEC and FASB have determined that this does not violate accounting rules.

Weil then spends much ink assuming that we're talking about lenders' balance sheet loans, and waxing horrified over the idea that an accounting firm might give advice about accounting rules. It all ends up involving apple pie, somehow.

I have no idea why Weil is so spastic on the subject of accounting rules. Maybe he had a mean accounting teacher in the fourth grade who scarred him for life. But of all the criticisms of Schumer I've heard recently, I must say this is the most clearly lunatic.

by Anonymous on 8/29/2007 10:00:00 AM

From Bloomberg via NYT:

One mortgage lender announced that it was hiring yesterday as it tried to take advantage of the turmoil in the market, while another said it was cutting jobs.

IndyMac Bancorp said it had hired more than 600 former employees of the American Home Mortgage Investment Corporation and might hire 250 more.

IndyMac will also assume the leases on more than 90 offices where the employees worked.

Last month, IndyMac eliminated 400 back-office processing jobs, about 4 percent of the work force.

Why is this interesting? Well, I have no idea whether Indy's approach is going to work here. My own experience is that changing the corporate culture of "acquired" origination offices is always harder than people think it's going to be. And there seem to be some questions about some of the culture at some American Home Mortgage offices.

That said, my own argument for years uncounted has been that wholesale origination models--loans originated by brokers who have no capital in the game and are not under the control of the lenders--are a large part of the problem we have been experiencing. Wholesale lending always looks cheap, since you don't have to pay loan officers and assume brick and mortar overhead in down cycles of the business. But it always ends up expensive, what with fraud, sloppiness, price-gouging, lack of warranties, and so on.

So it's encouraging, on one hand, to see IndyMac beefing up its retail origination capacity at the expense of its wholesale and correspondent capacity. On the other hand, I'd be looking for some real serious discipline from Indy were I a regulator, and I'd be rather cautious about valuing these "acquisitions" were I an investor. I'd further be mildly concerned about laying off the back office indiscriminately. It doesn't seem like a good time to short the risk-management side and beef up the sales side to me, so I'd want to know just what back office jobs got eliminated.

by Anonymous on 8/29/2007 08:42:00 AM

It appears that Barack Obama has had the gall to suggest funding homeowner bailouts with fines from predatory lenders instead of the taxpayer's dime. You know what that means:

The proposal is among the most radical yet from a leading Democrat and comes as Washington tries to respond to a growing wave of foreclosures and a crisis in credit markets.

Yeah, too crazy. Just like that tobacco settlement thing . . . totally radical. Next thing you know they'll be playing the Internationale on the Senate floor.

Fear not, lovers of that which is not radical: the Maestro has blown in/been blown in/benefitted from the blow in/blown it/whatever:

The ill winds blowing out of Wall Street could have one well-known beneficiary: Alan Greenspan. The credit crunch of the last few weeks has put the former Fed chairman back in the news. Some pundits have suggested that Greenspan would have responded more energetically than Ben Bernanke has, while others have charged that Greenspan bears much of the blame for the market troubles because of the cheap-money policies implemented during his tenure. Just in time to take advantage of this buzz comes Greenspan's book, The Age of Turbulence: Adventures in a New World, which hits the stores on Sept. 17.

If you need me on September 17, I'll be at Barnes and Noble buying a copy of Zen and the Art of Motorcycle Maintenance.

by Anonymous on 8/28/2007 07:32:00 PM

One of the things we've noticed--not to say beaten like a dead horse from time to time--is that in the last several years a lot of people who aren't very good money managers got much bigger loans that they could reasonably be expected to carry. A lot of people are out for the blood of these borrowers, demanding that they be "punished" for having done something powerfully dumb.

I am often reminded of this little gem, "Unskilled and Unaware of It: How Difficulties in Recognizing One's Own Incompetence Lead to Inflated Self-Assessments," by Justin Kruger and David Dunning. They argue:

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.

I remain convinced that there's something wrong with blaming the financially inept for not realizing that they are financially inept, when those who are supposed to be financially ept--loan officers, brokers, financial counselors, advice columnists in business publications--spent the last several years refusing to tell them that they were financially inept.

Of course people who are in over their heads are surprised. They lacked the skills necessary to understand what "over their heads" might mean.

by Calculated Risk on 8/28/2007 05:39:00 PM

From Newsday: Ex-American Home Mortgage manager going to prison

A U.S. District Court in Alaska Monday sentenced a former American Home Mortgage branch manager to serve more than 2 years in prison ... in connection with wire fraud charges after he falsified documentation to secure "stated income" mortgage loans from American Home and Countrywide Financial.
...
In the American Home case, Partow, 41, helped a client refinance his home in 2006. Despite the client having provided accurate information about his income, Partow listed the income as $20,000 per month -- "an amount that significantly overstated [the client's] true income," according to Partow's plea agreement.

In the Countrywide case, he admitted to knowingly overstating an applicant's income to qualify the client for a loan in April 2004.
...
By misstating applicants' financial statuses, Partow enabled them to qualify for loans they might not otherwise have gotten.

Back in March, Tanta pointed out that there are two types of mortgage fraud: “Fraud for Housing” and “Fraud for Profit.”

In this case, it appears the mortgage broker overstated the borrower's income without the borrower's knowledge. So this would be a fraud for profit scheme, and I expect to see many more prosecutions of this type soon. If the borrower had overstated their own income, the borrower would probably not be prosecuted. Prosecuting fraud for housing usually isn't worth the effort, and it is difficult to distinguish between whether the borrower was committing "fraud for housing", or if the borrower was just overly optimistic (i.e. delusional) about the potential income from that side job cutting lawns.

I recommend reading Tanta's piece on mortgage fraud: Unwinding the Fraud for Bubbles

by Calculated Risk on 8/28/2007 05:30:00 PM

Here is the Countrywide 8-K filing regarding the BofA investment.

The Convertible Preferred Securities are convertible at the option of the holders, at any time or from time to time, into a number of shares of common stock equal to the Liquidation Preference of the Convertible Preferred Securities being converted, divided by the Conversion Price (as defined below), plus cash in an amount equal to any accumulated and unpaid dividends on such securities. The "Conversion Price" of the Convertible Preferred Securities is $18.00 per share, subject to customary adjustments.

Note: this is NOT a floorless convertible.

by Anonymous on 8/28/2007 04:39:00 PM

Here's another little bit of data to fit into the big picture on refinances. It doesn't solve any problems or prove anything conclusively. It's from a Countrywide Capital Markets newsletter that I get (not on the web, I'm afraid.)

What this means is that, of the refinances into a 30-year fixed-rate conforming loan that Countrywide did in the six months prior to December 2005, 3.2% were borrowers refinancing out of an Option ARM. By June 2007, the number had increased to 11.4%.

At the same time, the percent of new FRM refis that were originally subprime seems to be slowing down.

This suggests that the number of subprime borrowers who can refinance into a conforming fixed is decreasing as we get toward a "residual" pool of subprime loans that either do not qualify for a 30-year fixed or whose monthly payment cannot be lowered with one.

by Calculated Risk on 8/28/2007 01:22:00 PM

From David Streitfeld at the LA Times: Blight moves in after foreclosures

Houses abandoned to foreclosure are beginning to breed trouble, adding neighbors to the growing ranks of victims.

Stagnant swimming pools spawn mosquitoes ... Empty rooms lure squatters and vandals. And brown lawns and dead vegetation are creating eyesores in well-tended neighborhoods.

We tend to think of REOs as "inventory", but to the neighbors they are a nuisance.

by Calculated Risk on 8/28/2007 12:59:00 PM

For reference, here are a couple of ARM reset charts.

Here is a chart from BofA analyst Robert Lacoursiere via Mathew Padilla at the O.C. Register. Please see Mathew's discussion from June 29th: BofA Analyst: Mortgage correction just 'tip of the iceberg'.

This fits with Tanta's post this morning on Subprime Borrower Refi Options.



Another chart, from March, is from Ivy Zelman at Credit Suisse (Zelman has since left CS). The March Credit Suisse report, Mortgage Liquidity du Jour: Underestimated No More is available at Bill Cara's site (see page 47 for reset chart).

by Calculated Risk on 8/28/2007 10:51:00 AM

From AP: Home Prices: Steepest Drop in 20 Years

U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said Tuesday.

The decline in home prices around the nation shows no evidence of a market recovery anytime soon, one of the architects of the index said.

MacroMarkets LLC Chief Economist Robert Shiller said the declining residential real estate market "shows no signs of slowing down."

by Anonymous on 8/28/2007 09:50:00 AM

Bank of America's RMBS Desk has a research note out (not publically available) that attempts to estimate the realistic refinance options, if any, for outstanding subprime ARMs that are facing reset in the immediate future.

The analysis looks at both credit standards and current interest rates on alternative loans, and concludes that refinancing into a new subprime loan or, for those borrowers whose credit profile has improved since loan origination, a new Alt-A loan, is essentially not an option. The interest rates on new subprime and Alt-A, given the current environment, are simply too high to offer any improvement in the monthly payment.

Therefore, the report concludes that FHA and Fannie Mae's "Expanded Approval" program (EA, its existing program for "near prime") are the only realistic options, given pricing structures. BoA estimates that approximately 18% of outstanding subprime ARM borrowers could qualify for an FHA refi (on both credit guidelines and rate reduction), and approximately 36% could qualify for Fannie Mae's EA. (That's best understood as 36% qualifying for either FHA or EA, not a total of 54%.) The larger bucket of loans qualifying for EA is mostly a matter of the larger GSE maximum loan amount compared to the FHA maximum, as well as a slice of the highest-credit class for which EA, at least in theory, offers 100% financing in contrast to FHA's 97% maximum.

Still, BoA's analysis is assuming an effective interest rate (including FHA or private mortgage insurance premiums) of around 8.50% for FHA and 8.50%-9.50% for the EA loans. In other words, the refi rate for these borrowers, at best, is enough to keep them at pre-reset payment levels. It isn't enough to bail out anyone who cannot carry the pre-reset payment.

It is always possible to change the eligibility and qualifying rules on either FHA or EA so that more borrowers can be accommodated, and there are certainly demands out there, especially for FHA, to do this. How, exactly, we will price the risk so that these borrowers are in the money is, as far as I can tell, the unmentioned part that probably matters.

by Anonymous on 8/28/2007 08:01:00 AM

The official story on Bank of America and Countrywide is, apparently, still in flux. That's always the trouble with mythologizing in real time; events often catch up with one in troublesome ways. Mythic narrative, of course, is only comprehensible in "ageless" terms. A story with a shelf life of a couple of weeks may invoke grand narrative structures and heroic motifs, but that, as we say in literary land, is short-term financing.

David Weidner at Marketwatch struggles with conflicting stories about BoA and its CEO:

NEW YORK (MarketWatch) -- Sentiment is growing that Bank of America Corp.'s Kenneth Lewis may have won a place in the pantheon of great Wall Street titans by using his financial clout to help the country avoid economic ruin.

If you found yourself at this point wondering who the hell else was in that pantheon of great Wall Street titans who saved the country from economic ruin, you'll probably have noticed that we had to go back to 1907 to find one. I'd say, if you're not familiar with the story of J.P. Morgan and the Panic of 1907, you might want to brush up on the details. This may well become mythological motif du jour for some while, so you'd best be prepared.

Me, I just skip to the last paragraph:

Maybe there's a modern-day Morgan out there. We can all pitch in and buy him a railroad.

I suspect we're going to get so worried about pitching in to buy Joe Spendthrift an affordable mortgage that we'll allow ourselves to get suckered into buying some Morgan a railroad, but I undoubtedly read too much.

by Calculated Risk on 8/27/2007 06:12:00 PM

From the Financial Times: Credit-card defaults on rise in US

US consumers are defaulting on credit-card payments at a significantly higher rate than last year ...

Credit-card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate ... fell for the first time in more than four years.
...
But Moody’s said the rate of losses remained well below the 6.29 per cent average seen in 2004 ...

Recent increases in credit card losses can in part be ascribed to a steady rise in personal bankruptcy filings since 2005. According to the Administrative Office of the US Courts, quarterly non-business bankruptcy filings have been rising since the first quarter of 2006.

As an aside, business bankruptcy filings are rising too, from Barron's Business-Bankruptcy Blues (hat tip Viv)

For the second quarter, such bankruptcies rose 38% from the same quarter in 2006, and first-half bankruptcies were up a full 45% from the 2006 half, to 12,985. That's according to ... data from the U.S. Bankruptcy Courts.

The new bankruptcy law in October 2005 caused some distortions in the data, but it appears the trend is negative.

Update: Just a few months ago we saw this Bloomberg story: Subprime Borrowers More Apt to Pay Card Debt, Ignore Mortgages (hat tip BR)

"The number of people with subprime credit ratings whose home payments were overdue by 30 days or more rose 13.2 percent in the past four years, while bank-card delinquencies among the group dropped 25.4 percent."

And from the Chicago Tribune: As home loan market tightens, mounting credit card debt could spur new crisis (hat tip Gort)

by Calculated Risk on 8/27/2007 11:50:00 AM

For more existing home sales graphs, please see the previous post: July Existing Home Sales

---

Contest on Inventory and Months of Supply:

For fun (winner will be announced in a January post), predict:
1) The maximum existing home inventory number for 2007 (NAR report).
2) The maximum "months of supply" for 2007 (NAR report).

The months of supply metric is calculated by dividing the total inventory by the seasonally adjusted annual sales rate, then multiply by 12 months. As an example, the current existing home inventory is 4.592 million units, and the SAAR of sales is 5.750 million units.

The formula is: Months of Supply = (4.592 / 5.750) * 12 = 9.6 months.

Please enter your prediction in the comments to this post. Good luck!

---

To help with the contest, here are a few more graphs on inventory and months of supply.

Click on graph for larger image.

The first graph shows the monthly inventory levels for the last four years. There is somewhat of a seasonal pattern, with inventory peaking in the summer months.

This wasn't true in 2005 - as inventory continued to increase throughout the year - and that was one of the indicators that the housing boom had ended.

For 2007, I expect that inventory levels are close to the peak level.



The second graph shows the monthly 'months of supply' metric for the last four years.

Even if inventory levels stabilize, the months of supply could continue to rise - and possibly rise significantly - if sales continue to decline.


To put the NAR numbers into perspective, here are the year-end sales, inventory and months of supply numbers, since 1969.

This graph shows the actual annual sales, year end inventory and months of supply, since 1982 (sales since 1969). For 2007, the July inventory and Seasonally Adjusted Annual Rate (SAAR) for sales were used.

The current inventory of 4.592 million is the all time record. The "months of supply" metric is 9.6 months. The "months of supply" is now above the level of the previous housing slump in the early '90s, but still below the levels of the housing bust in the early '80s.

Both the numerator and the denominator are moving in the wrong direction. Not only is inventory at record levels, but sales - though falling - are still significantly above the normal range as a percent of owner occupied units.

Forecasts

The following graph shows the actual cumulative existing home sales (through July) vs. three annual forecasts for 2007 made at the beginning of the year (NAR's Lereah, Fannie Mae's Berson, and me).

My forecast was for sales to be between 5.6 and 5.8 million units (shown as 5.7 million).

NSA sales are 3.498 million units through July. In a typical year, sales through July are about 59% of the sales for the year. So at the current pace, sales will be around 5.9 million. It appears that sales will slow, perhaps significantly, in the second half of 2007, so the risk to my forecast is most likely on the downside.

To reach the NAR forecast, revised downward again on Aug 8th to 6.04 million units, sales would have to be significantly above the 2006 levels for the remainder of the year. Given tighter lending standards, we can probably already say that even the August NAR forecast was too optimistic.

by Calculated Risk on 8/27/2007 10:00:00 AM

Update: for more on existing home sales (and a fun contest), please see July Existing Home Sales and Contest

The National Association of Realtors (NAR) reports Existing-Homes Sales Stable In July

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – slipped 0.2 percent to a seasonally adjusted annual rate1 of 5.75 million units in July from an upwardly revised pace of 5.76 million in June, and are 9.0 percent below the 6.32 million-unit level in July 2006.
...
The national median existing-home price for all housing types was $228,900 in July, down 0.6 percent from July 2006 when the median was $230,200, the highest monthly price on record. The median is a typical market price where half of the homes sold for more and half sold for less.

Click on graph for larger image.

The first graph shows the NSA sales per month for the last 3 years.

The pattern of YoY declines in sales is continuing. For New home sales, March is usually the strongest sales month of the year. For existing homes, the Summer months are more critical.


The second graph shows the months of supply. With the months of supply now well over 8 months, we should expect falling prices nationwide.

The 9.6 months of supply is the highest since 1982 - when mortgage rates averaged 16% (see Freddie Mac)!


The third graph shows nationwide inventory for existing homes. According to NAR, inventory increased to an all time record 4,592,000 in July.

Total housing inventory rose 5.1 percent at the end of June to 4.59 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, up from an upwardly revised 9.1-month supply in June.

More on existing home sales later today.

Note: For existing homes, the sales data is compiled at the close of escrow. So this report is mostly for homes were the sales agreements were signed in June or even May. This is all pre-turmoil, and even the August existing home report will be mostly pre-turmoil.

by Anonymous on 8/27/2007 09:17:00 AM

Being a mortgage and bond weenie, I have never claimed to fully understand equity analyst ratings. However, I must say I understand them less lately than I used to not understand them.

"Market underperform" means "maybe not quite worthless"?

NEW YORK (AP) -- A JMP Securities analyst upgraded Luminent Mortgage Capital Inc. late Friday, saying the deal the mortgage investment fund cut to rescue itself shrinks the chances the stock will end up worthless.

Analyst Steven C. DeLaney upgraded Luminent Mortgage Capital to "Market Underperform" from "Sell."

Whether the San Francisco-based real estate investment trust's shares have value is open to debate. A number of analysts -- including DeLaney himself -- have predicted the company will go bankrupt.

With $8.61 billion in assets at the beginning of the year, Luminent Mortgage Capital borrows money to invest in home loans and other types of mortgage debt. Luminent earns profit when the yields on the mortgage debt outpace how much the company pays to borrow money.

With the mortgage market in distress and investors fleeing from risky loans, Luminent has had to pay more to borrow and the mortgage debt the company invests in is worth less.

The company's stock has fallen from more than $10.80 late last year to as low as 36 cents this month.

Earlier this month, Luminent announced a deal with Arco Capital Corp. Luminent is granting Arco Capital the option to buy a 51 percent stake in the company at 18 cents per share, a discount even for a stock that had lost more than 90 percent of its value this year.

In exchange for this option, Arco Capital is lending Luminent $60 million and agreed to buy $65 million of the company's mortgage debt.

"This lifeline financing provided by Arco improves the possibility that some value may be preserved for Luminent's shareholders," DeLaney said.

DeLaney's price target on Luminent is $1. The stock closed Friday at $1.34.

by Anonymous on 8/27/2007 07:50:00 AM

From the Washington Post, we learn that the credit crunch is impacting local construction and lending employment, as builders struggle to sell homes to extremely unqualified buyers, in the absence of merely unqualified buyers, and lenders hire the "top dogs" from cratering subprime and Alt-A outfits who no longer have money to lend, because there's a lot of money to lend.

Kilby, a member of the fourth generation in his family to work in the building industry, has cut prices on his homes in subdivisions of Prince George's and Charles counties. The new homes are built with luxury finishes like granite countertops, crown molding and large spa tubs -- the kinds of bells and whistles people were demanding when credit was easy to come by and his sales offices were full of prospective buyers. Now that it's become harder for home buyers to obtain loans, he's stuck with expensive houses on expensive lots that he is struggling to sell.

"We're doing just about anything we can do to get people into a house, said Kilby, a 50-year veteran of the home-building business. "And these are people we would have told to take a hike last year or the year before last."

Slower sales and lower prices have translated into smaller budgets for salaries. From a staff of 17, Kilby has cut a carpenter, a project superintendent, a building laborer and a punch-out clerk.

While construction jobs have been the most visibly affected, workers in related industries are dusting off their resumes as the global credit crunch scrambles the employment picture.

Capital One said it would close its mortgage banking unit, GreenPoint, which has 31 locations in 19 states, including one in Silver Spring that employs about 28 people and another in Baltimore with 29 workers.

Those losses have created opportunities for others.

Bank of America's mortgage lending office in Annandale is trying to hire more lending agents, targeting seasoned veterans laid off from troubled competitors.

"There's still a lot of money out there to lend and people who want those loans so my phone has been ringing off the hook since the other shops closed down," said Rick Eul, assistant vice president of the Annandale office. "We're picking the top dogs out of those offices."

by Calculated Risk on 8/26/2007 08:35:00 PM

Update: For those without access to the WSJ, the NY Times has the details: Home Depot Unit Sold for Far Less in Tight Market. And this great anonymous quote:

“Study what just happened here. You’ll see this movie again soon.”

The WSJ is reporting that Home Depot has agreed to a $1.8 Billion haircut on the sale of their supply unit. See the WSJ: Buyout Firms Reduce Price For Home Depot Unit to $8.5 Billion. The initial price was $10.3 Billion!

The buyout firms that agreed to buy Home Depot's supply unit a few months ago have slashed the price of the deal to $8.5 billion ...

... the Atlanta-based retailer is guaranteeing $1 billion of the debt and will take an equity stake. By guaranteeing part of the debt, Home Depot will enable the banks to avoid marking down the entire value of the debt on their own balance sheets ...

With a deluge of even-bigger upcoming deals, worth upwards of $400 billion, the stakes for both sides were too great ... the banks were so desperate to avoid taking a hit on the debt that they offered to pay the private-equity firms' $300 million "walkaway" fee to Home Depot if the deal was scuttled.

Just a few days ago, the Home Depot's haircut was reported to be $1.2 Billion. This shows just how desperate Home Depot was to sell the unit.

I believe these pier loans (failed bridge loans), getting stuck on the balance sheets of the IBs, is a significant part of the current liquidity crisis. And it appears this is just the beginning ...

by Calculated Risk on 8/26/2007 07:22:00 PM

Most of my focus on employment has been related to potential residential construction job losses. Unfortunately the BLS only started breaking out residential specialty trade contractors starting in 2001, so there is no data available to analyze residential construction employment during prior downturns in the housing market.

However we can look at trends in total private construction employment.

From Reuters: Construction job losses could top 1 million (hat tip Houston)

Job losses in the construction sector could top 1 million if a housing downturn tips the economy into recession and tighter access to credit dampens business investment.
...
"The ability of nonresidential to continue absorbing additional workers is going to be limited, and that's going to put downward pressure on construction employment overall," [Bernard Markstein, director of forecasting at the National Association of Home Builders] said, adding that cuts may be deeper than in the 1990s.

Click on graph for larger image.

This graph shows total construction employment since 1970 according to the BLS. As noted in the article, total private construction employment fell about 18% in the mid-'70s recession, and about 15% in both the early '80 and '90s recessions.

Construction employment only fell 3% in the '01 recession, as residential construction employment offset most of the declines in commercial construction employment. In the current construction slowdown, total employment has only fallen 1% (residential construction employment is off about 4%) according to the BLS.

Note: there are several reasons why the BLS is potentially understating the residential construction job losses (see here). One of the possible reasons - and relevant to this article - is that some workers have probably moved from residential construction to non-residential construction, but these employees are still being reported as residential construction employees.

A 15% decline in construction employment, from the peak last year, would be about 1.1 million total construction jobs lost.

"We may be in a period where there may be larger losses because growth was so steep," said John Challenger, chief executive of Chicago-based outplacement consulting firm Challenger Gray & Christmas. "(Compared with) that 15 percent that we saw then, this may be a steeper, more volatile cycle."

When the BLS releases their annual revision later this year, there will probably be a significant downward revision in construction jobs for the last 4 quarters. The Business Employment Dynamics (BED) report showed there were about 100K more construction jobs lost in the 2nd half of '06 than the BLS reported. The BLS has probably understated job losses in the 1st half of '07 too, as housing completions have fallen off a cliff, but BLS reported residential construction jobs has remained steady.

Still, if non-residential investment spending slows (especially CRE), than there will probably be many more construction jobs lost in the coming year.