by Calculated Risk on 7/23/2008 09:07:00 AM

From Bloomberg: Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders

Fannie Mae acquired twice as many homes through foreclosure in the first quarter as it sold, regulatory filings show. ... Late payments on the company's home loans, a harbinger of foreclosures, almost doubled in the past year.

Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans.

A large percentage of existing home sales are previously foreclosed properties (41.9% of sales in California in June were previously foreclosed), and yet, REOs are still piling up at Fannie Mae and elsewhere. The problem is clearly getting worse ...

by Calculated Risk on 7/23/2008 08:40:00 AM

The MBA released their weekly survey of mortgage applications and interest rates this morning: Mortgage Applications Decrease In Latest MBA Weekly Survey

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.59 percent from 6.22 percent ...

The average contract interest rate for one-year ARMs remained unchanged at 7.16 percent ...

Note: this data is for the week ending July 18. Based on the WSJ and NYTimes reports last night, rates for 30 year fixed mortgages have increased more over the last few days.

Also note that purchase loan applications were off sharply.

by Calculated Risk on 7/23/2008 02:01:00 AM

Jon Stewart interviews Richard Bitner:

by Calculated Risk on 7/22/2008 11:44:00 PM

Bloomberg: U.S. Lawmakers Reach Deal on Fannie, Freddie Bill

WSJ: Lawmakers Reach Deal On Big Housing Package

Here is an interesting detail:

The Treasury would be barred from providing aid that would cause a breach in the federal debt ceiling under the agreement, a constraint aimed at limiting any taxpayer losses. The debt limit would be raised to $10.6 trillion from the current $9.815 trillion.

My guess of $10 trillion in U.S. debt by the end of Bush's 2nd term is looking better. That is one forecast I wish I had been wrong about.

by Calculated Risk on 7/22/2008 10:03:00 PM

UPDATE: from Vikas Bajaj at the NY Times: Woes Afflicting Mortgage Giants Raise Loan Rates

Ruth Simon and James Hagerty at the WSJ report: Mortgage Rates Near a Year High. According to the Journal - reporting data from HSH Associates - 30 year rates rose to an average of 6.71% last week, and jumbo rates have risen to an average 7.84%.

I usually track mortgage rates using Freddie Mac's weekly survey, and the MBA. The MBA reported for the week ending July 11th:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.22 percent from 6.43 percent

And Freddie Mac reported 30 year rates were at 6.26% for the week ending July 17th. So rates must have really surged last week ...

This will have a negative impact on home sales, and on homeowners trying to refinance.

by Calculated Risk on 7/22/2008 07:38:00 PM

From Yahoo Tech Ticker: Roubini: More Than $1 Trillion Needed to Solve Housing Crisis

by Calculated Risk on 7/22/2008 06:55:00 PM

On Sunday I posted about some high end areas finally seeing sharp price declines: Housing: Cracks in the High End (check out the cartoon!)

Here are some more cracks ...

From AZCentral.com: Phoenix's mortgage problem spreading

Metropolitan Phoenix's foreclosure problem has spread. Many Valley neighborhoods closer in, particularly in south, west and central Phoenix, now have the highest foreclosure rates ...

Foreclosures across metro Phoenix number 16,647 for the first half of the year compared with 9,966 during all of 2007 and 1,070 in 2006.
...
"Foreclosures are a problem for almost every neighborhood of the Valley now," said Margie O'Campo de Castillo of Arizona Dream Realty.

by Calculated Risk on 7/22/2008 05:23:00 PM

Also on regional banks see the WSJ: Regional Banks Battered Amid Turmoil in Markets

Here are some comments from the Regions Financial conference call (hat tip Brian):

“Given the continuing deterioration in residential property values, especially in Florida , and a generally uncertain economic back drop, we expect credit costs to remain elevated. While we're not predicting the duration of this economic downturn, we think it is prudent to plan for no real improvements until 2010.”

And on home equity in Florida:

“Home equity credits caused over half the increase [in net charge offs] rising to an annualized 1.94% of outstanding lines and loans, up from 57 basis points last quarter. We are clearly experiencing greater deterioration in this portfolio than originally expected. Mostly due to Florida based credits which account for approximately $5.4 billion or one third of our total home equity portfolio. Of that balance, approximately 1.9 billion represents first liens. Second liens which total $3.5 billion or 22% of our home equity portfolio are the main sources of loss. In fact, the second quarter annualized loss rate on Florida 's second liens was 3.5 times the rate of first lien home equity loans and lines - 4.74% for second liens versus 1.37% for first liens in Florida. So to emphasize this point, 22% of our total home equity portfolio or $3.5 billion had a 4.7% net charge off rate. The remaining 78% had about a 1.1% net charge off rate. The problems in this portfolio are very concentrated.

... Customers who did not live in the properties but purchased them to be used as an investment home or second home were more prevalent in Florida than our other markets and have been especially problematic. As property values have dropped, so has the equity supporting these loans, exacerbating home equity write-offs. Significant income losses are also negatively affecting a growing number of borrowers’ ability to repay home equity loans.”

A comment from reader Brian: "Those second liens in Florida are starting to resemble credit cards with respect to their charge off rates, unfortunately the interest rates on the loans are not 18%!"

by Calculated Risk on 7/22/2008 04:14:00 PM

From WaMu: WaMu Reports Significant Build-Up of Reserves Contributing to Second Quarter Net Loss of $3.3 Billion

WaMu today announced a second quarter 2008 net loss of $3.33 billion as it significantly increased its loan loss reserves by $3.74 billion to $8.46 billion.
...
The increase in provision for loan losses reflected the further decline in house prices which increased expected loss severities, increased delinquencies, reduced availability of credit, and the weakening economy. Total net charge-offs in the loan portfolio rose to $2.17 billion from $1.37 billion in the prior quarter. Nonperforming assets grew to 3.62 percent of total assets at June 30 from 2.87 percent at the end of the first quarter.

by Calculated Risk on 7/22/2008 02:47:00 PM

Click on graph for larger image in new window.

This graph shows the number of Notice of Defaults (NODs) filed in California by year since 1992. The 2008 estimate is twice the first half rate.

From DataQuick: Another Increase in California Foreclosure Activity

Lenders started foreclosure proceedings on a record number of California homeowners last quarter, the result of declining home values and the rampant spoilage of a batch of especially risky home loans made in late 2005 and 2006, a real estate information service reported.

Mortgage servicers recorded 121,341 "notices of default" during the April-through-June period. That was up 6.6 percent from a revised 113,809 for this year's first quarter, and up 124.9 percent from 53,943 in second-quarter 2007, according to DataQuick Information Systems.

Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992.
...
"The small increase in defaults from the first to the second quarter may indicate that we're nearing a plateau. We won't know until the end of the year, but it may be that some lenders are starting to prioritize workouts with homeowners instead of grinding things through the foreclosure process. Of course, they may just be swamped and can't handle processing any more paperwork," said [John Walsh, DataQuick president].
...
Of the homeowners in default, an estimated 22 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 52 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes 'work- outs' difficult.
...
Foreclosure resales have emerged as a significant market factor, accounting for 40.0 percent of all California resale activity last quarter. A year ago it was 5.4 percent.

There are several key points:

This is a new record for NODs.

A very large percentage of NODs go through foreclosure. Only 22% "emerge from the foreclosure process". That is a historic low.

40% of all sales activity in California are foreclosure resales.

Instead of filing NODs, some lenders appear to be delaying while trying for a workout. "[I]t may be that some lenders are starting to prioritize workouts with homeowners instead of grinding things through the foreclosure process. Of course, they may just be swamped and can't handle processing any more paperwork." I've heard both reasons from other sources.

by Calculated Risk on 7/22/2008 12:11:00 PM

Here is the letter from the CBO.

[M]any analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets, and such continuing problems would increase the probability that this new authority would have to be used. Taking into account the probability of various possible outcomes, CBO estimates that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010. That estimate accounts for both the possibility that federal funds would not have to be expended under the new authority and the possibility that the government would have to use that authority to provide assistance to the GSEs.

It's important to note the the CBO analysis is a probability-weighted average method; the cost could be zero, the cost could dwarf $25 billion.

by Calculated Risk on 7/22/2008 11:49:00 AM

Can you say "credit crunch"? From Wachovia:

On page 26 we talk about some other aspects with regard to $20 billion reduction of loans and securities. We are focused on the reinvestment of securities and lean toward very little reinvestment of maturing securities. We will also have enhanced discipline with regard to commercial lending to be sure we are focused on our very most important strategic relationships. New return targets [have been established] for renewals and new commitments to insure we are using our capital in the most judicious fashion. Active programs to further enhance the mix of our consumer loan portfolios by reducing mortgage concentration through tightening standards, discontinuing negative am option loan originations, eliminating the general bank wholesale channel and eliminating the focus on pick a pay mortgage retention..we have additional measures of enhanced pricing in the auto portfolio and continuing to review noncore assets.

Also see the Pick-a-Pay analysis on page 15. Wachovia is now projecting house prices will bottom in mid-2010.

Reader Brian suggested the post title. thanks!

by Calculated Risk on 7/22/2008 10:45:00 AM

UPDATE: From scav (Thanks!), here are the two maps side by side with the same ranges ... click on map for larger image. (note: I didn't check these maps).



Here is the Philadelphia Fed state coincident index release for June.

Compare these two maps.

Click on graph for larger image in new window. This first map is the three month change for June 2008. The U.S. is turning red.

For comparisons, the second map is the three month change for December 2007.

The indexes increased in 13 states for the month, decreased in 27, and were unchanged in the remaining 10 (a one-month diffusion index of -28). For the past three months, the indexes have increased in 12 states, decreased in 36, and were unchanged in the other two (a three-month diffusion index of -48).

This is a graph of the monthly Philly Fed data of the number of states with one month increasing activity.

I've added the current probable recession. Most of the U.S. was in recession in June based on this indicator.

Note: the Philly Fed calls some states unchanged with minor changes.

This is what a recession looks like based on the Philly Fed State coincident indexes.

by Calculated Risk on 7/22/2008 09:50:00 AM

[I]f monetary policymakers wait until they see the evidence of a wage-price spiral, they will be too late — the public will have lost confidence in the Fed’s ability to keep inflation under control, and this will make the job of bringing inflation down much more costly and difficult. Moreover, we could end up with a period of both low economic growth and high inflation.
Charles Plosser, July 22, 2008

From Philadelphia Fed President Charles Plosser: Perspectives on the Economy, Inflation, and Monetary Policy. A few excerpts on inflation:

The consequence of our easing of monetary policy is that the inflation-adjusted — or real — interest rate on federal funds is now negative — between minus 1 percent and minus 2 percent. The last time we saw such a negative real fed funds rate was in 2003-2004. But the environment then was much different than it is now. Back then, the Fed was concerned about the threat of deflation. Today, as we all know, this is not the case. Many of us are concerned about rising inflation rates.

Keeping policy too accommodative for too long worsens our inflation problem. Inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. We will need to reverse course — the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around.
emphasis added

Plosser is a voting member of the FOMC and voted against the most recent rate cut in April.

Plosser also discusses headline vs. core inflation measures and concludes:

Since energy price increases have been so persistent in recent years, I do believe more attention should now be paid to measures of headline inflation in setting monetary policy. I don’t believe we can be sanguine that the behavior of core inflation will keep the public’s inflation expectations well-anchored in the face of persistently high headline inflation. To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action.

by Anonymous on 7/22/2008 09:26:00 AM

Yes, boys and girls, I wish to say something complimentary about a media outlet. The WSJ, no less. Dog bites man.

Housing Wire directed my attention to this very interesting article about the FDIC and the crappy, fraudulent, and occasionally predatory loans it allowed Sterling Superior Bank [Duh! --ed.] to continue to originate and sell on the secondary market even after the FDIC took control of the institution and had FDIC staff at the bank supposedly providing grown-up supervision. It's an important story.

But look! On the online version of the story, there's this little box several paragraphs down, titled "From the Case Filings." And it in are links to the various court filings and internal FDIC documents on which the story is based. You can click on one of those links, if you feel the urge, and read the same primary written sources that the reporter used to write the story! If all you want is the short version, you can just read the article. But for once, we see the online media using the powers granted by the Internet to create a situation in which we're not forced to settle for just the short, breathless, over-simplified version! Not that I think this particular article is an offender in that regard. But I have spent a lot of blogging time on breathless, over-simplified articles--Hi, Gretchen!--based on great long complicated court filings that I had to go look up myself to get a clearer picture, if they were even available online.

I therefore drop a deep and graceful curtsy to the WSJ's online editor and the reporter, Mark Maremont. You probably don't want to get used to this yet, but it is still quite sincere.

by Calculated Risk on 7/22/2008 09:21:00 AM

From the WSJ: Wachovia Posts $8.66 Billion Loss, Slashes Dividend, Will Sell Assets

Wachovia ... posted a net loss of $8.66 billion ... Net charge-offs -- loans the company doesn't think are collectible -- soared to 1.10% of total loans from 0.14% a year earlier and 0.66% in the first quarter. Nonperforming loans -- those near default -- rose to 2.41% from 0.49% and 1.70%, respectively.

The confessional business is booming.

by Anonymous on 7/22/2008 09:07:00 AM

UPDATE: Please see the end of the post for a marvelous blast from the Brooks past.

I have never actually gone out of my way to read a David Brooks column; this one was directed to my attention by a reader (thanks, Pat!).

It takes on the same Morgenson article I went after on Sunday. In the process of doing so it makes a series of claims that are, I think, way more preposterous than Morgenson's tendency to see borrowers as primarily hapless, passive victims of predatory lenders:

[W]hat happened to McLeod, and the nation’s financial system, is part of a larger social story. America once had a culture of thrift. But over the past decades, that unspoken code has been silently eroded.

This nostalgia for the lost "culture of thrift" always gets on my nerves. America has always had both a "culture of thrift" and a "culture of conspicuous consumption." We have had our Gilded Ages before the year 1992. The "BankAmericard" (which became the Visa) was invented back in the "thrifty fifties," about ten years after economist James Duesenberry first popularized the phrase "keeping up with the Joneses." Collapsing the history of America into a lost golden age of thrift contrasted to a degenerate present of consumption excess is a reliable sign you're in the presence of ideology. Like this:

Some of the toxins were economic. Rising house prices gave people the impression that they could take on more risk. Some were cultural. We entered a period of mass luxury, in which people down the income scale expect to own designer goods. Some were moral. Schools and other institutions used to talk the language of sin and temptation to alert people to the seductions that could ruin their lives. They no longer do.

Norms changed and people began making jokes to make illicit things seem normal. Instead of condemning hyper-consumerism, they made quips about “retail therapy,” or repeated the line that Morgenson noted in her article: When the going gets tough, the tough go shopping.

McLeod and the lenders were not only shaped by deteriorating norms, they helped degrade them.

Reactionaries and moral scolds have been carping about working people aspiring to "mass luxury" since at least the time of Adam Smith. Anyone who has ever read a nineteenth century novel has encountered the ubiquitous scenes of upper-class women bemoaning the increasing availability of inexpensive machine-made ready-to-wear clothing, which--horrors!--allowed the servant class to wear dresses and suits that were increasingly hard to distinguish from the clothing of their middle-class betters. Or the apocalyptic brooding over the sudden availability of affordable washing machines and gas ranges, which would lead to nothing but demands for female suffrage and public schools for the servant class. (Yep. They were right about that.)

And just when did the schools used to talk about the "sin and temptation" of shopping, and just when did they stop? Diane McLeod, the woman featured in Morgenson's story, is 47. She would have been only an impressionable teenager when Tammy Faye Bakker was all over the TV, preaching about sin and temptation and also appearing every week in a different outfit and shoes, not to mention the make-up and hair. If Tammy Faye was mostly concerned with keeping young women out of the perdition of spending Saturdays at the mall, I don't remember that part. I do remember first hearing that stupid line about the tough going shopping during the great moral awakening of the Reagan years.

Of course, "McLeod and the lenders" and those dratted secular schools weren't exactly the only parties involved in the rather complex dynamic of establishing the social respectability of recreational or "therapeutic" consumption. Brooks, writing in that influential arbiter of taste the New York Times, somehow fails to notice the role of the media in constructing popular standards for "risk" and "normal" consumption patterns. In Brooks' weird little world, Americans responded to "rising home prices" that they apparently directly perceived, without media intervention. It was those house prices that "gave people the impression that they could take on more risk," not the reporting on house prices or the columnists who solemnly opined that these prices meant that people weren't taking on more risk by buying or refinancing. How incredibly convenient that line is.

Some of us can have grave concerns about consumerist culture and excessive household debt without telling ourselves that "capitalism" is about to erase a couple hundred years of history and bring back Puritanism. We can also object to the way in which writers like Morgenson seem to want to erase the extent to which real people like McLeod are active participants in their own lives--in favor of seeing them as mere passive victims of lenders--without having to drag Calvinist notions of "sin and temptation" out of the cultural closet. But at least Morgenson's little secular morality plays do try to ground themselves in a set of empirical facts about lender practices as they exist today. Brooks' reductive fantasies about American history and the equation of spending and sin leave the world of empirical fact far, far behind.

Credit crunches and economic crises are bad enough, without having to put up with the endless cheap moralizing that always seems to accompany them. Unfortunately, we're going to have to put up with a lot of cheap moralizing from the media. At least this time around we've got the Internet and the blogs to make fun of it.

UPDATE: our 12th Percentile leaves us this jewel in the comments:

I would like to present David Brooks from 2004 arguing against David Brooks in 2008. From his NY Times article on suburbia, which has to be read to be believed:

These criticisms don't get suburbia right. They don't get America right. The criticisms tend to come enshrouded in predictions of decline or cultural catastrophe. Yet somehow imperial decline never comes, and the social catastrophe never materializes. American standards of living surpassed those in Europe around 1740. For more than 260 years, in other words, Americans have been rich, money-mad, vulgar, materialistic and complacent people. And yet somehow America became and continues to be the most powerful nation on earth and the most productive. Religion flourishes. Universities flourish. Crime rates drop, teen pregnancy declines, teen-suicide rates fall, along with divorce rates. Despite all the problems that plague this country, social healing takes place. If we're so great, can we really be that shallow?

The internet really does make it easy to show what idiots these people are.

by Calculated Risk on 7/21/2008 08:11:00 PM

A few comments from the American Express conference call: (hat tip Brian)

“Over the past month or so, we have seen clear signs that the US economy is weakening. Unemployment rates, as we know, took the largest jump in over 20 years. Home prices declined at the fastest rate in decades, and consumer confidence is at one of its all-time low points. Card member spending particularly among consumers slowed sharply during the latter part of the quarter. Credit indicators as we signaled a few weeks ago deteriorated beyond our expectations, and by almost any measure the US economy and business environment are much weaker than the assumptions we first spoke to you about back in January and the conditions that existed in early June. Now this fallout was evident across all consumer segments, even our longer-term super prime card members.”

We are all subprime now!

Here are the AmEx slides. Several are interesting and show the credit deterioration.

Click on graph for larger image in new window.

“Affluent customers in some situations are cutting back on discretionary spending…we’re seeing a slowdown in spend across the board”

U.S. Card Services billing only increased 2% year-over-year in June - less than inflation.

And AmEx expects the economy to worsen:

“The severe decline in home prices and the marked rise in oil prices have had a fundamental impact on consumer budgets and behavior. Not just as it relates to mortgages and home-related spending, but also across the full spectrum of the consumer economy. We saw the first signs of weakness in our credit indicators at the end of last year and communicated this to you in January when we reported our fourth-quarter results. At that time we took a credit-related charge in order to recognize the deterioration by strengthening our lending and charge card reserves, coverage ratios and levels. In the first quarter, US lending write-off rates rose further, and at that time we indicated that the second-quarter loan-loss rate would be higher than the first quarter, which has proven to be the case. In April and May US lending write-off rates were generally consistent with the 4% to 6% EPS growth plan that we discussed with you in early June. However, as I showed you on the slide package, we saw our credit deteriorate in June beyond our expectations as the write-off rates rose and roll rates within the portfolio deteriorated versus prior months. In other words, more and more consumers who are falling behind in their payments are remaining delinquent. This causes us to assume that a greater percentage of past-due loans will not be repaid. In light of the magnitude of the negative economic trends and our experience, we now believe the economic weakness in the US will likely worsen throughout the remainder of the year and negatively impact credit and business trend ... we now expect that our lending write-off rate in the third and fourth quarter will be higher than June levels.”

by Calculated Risk on 7/21/2008 06:20:00 PM

Several companies visited the confessional today, but the quote of the day goes to Texas Instruments:

"If demand strengthens as quickly as it slowed, we are well-positioned to meet it."

Tell that to the homebuilders ...

by Calculated Risk on 7/21/2008 05:27:00 PM

From Reuters: Wachovia mortgage unit halting loans via brokers (hat tip crispy&cole)

Wachovia Corp ... said its main mortgage unit will stop offering home loans through brokers this week ...