by Calculated Risk on 9/07/2008 01:40:00 PM

From the FDIC: The Federal Banking Agencies React to Takeover of Fannie Mae and Freddie Mac

The federal banking agencies have been assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two government-sponsored enterprises, a limited number of smaller institutions have holdings that are significant compared to their capital.

The Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision are prepared to work with these institutions to develop capital-restoration plans pursuant to the capital regulations and the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act.

All institutions are reminded that investments in preferred stock and common stock with readily determinable fair value should be reported as available-for-sale equity security holdings, and that any net unrealized losses on these securities are deducted from regulatory capital.
emphasis added

Expect more bank failures ...

by Calculated Risk on 9/07/2008 11:08:00 AM

From Treasury: Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers

Conservatorship

Preferred Stock Purchase Agreements

Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth.
...
With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.
emphasis added

Important for some FDIC insured institutions:

[C]onservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

Secured Lending Facility.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Treasury to buy GSE MBS

Treasury is initiating a temporary program to purchase GSE MBS.

Fact Sheets from Treasury:

FHFA Director Lockhart Remarks on Housing GSE Actions
Fact Sheet: FHFA Conservatorship
Fact Sheet: Treasury Preferred Stock Purchase Agreement
Fact Sheet: Treasury MBS Purchase Program
Fact Sheet: Treasury GSE Credit Facility

by Calculated Risk on 9/07/2008 10:38:00 AM

From WSJ: Treasury to Outline Fan-Fred Plan

U.S. Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart are expected to release details of the planned conservatorship of Fannie Mae and Freddie Mac at an 11 a.m. press conference in downtown Washington.

by Calculated Risk on 9/07/2008 09:52:00 AM

While we wait for more on Hurricanes Fannie and Freddie, here is an update on Hurricane Ike.

Ike is now a category 4 hurricane on the Saffir-Simpson Scale and has already caused extensive damage in the Turks and Caicos islands.

Right now Ike appears to be headed towards Cuba and then into the GOM (although south Florida isn't in the clear yet).



Here are some excellent sites to track hurricanes:
National Hurricane Center
Weather Underground Note: See Jeff Master's blog.

by Calculated Risk on 9/06/2008 06:35:00 PM

First, several people sent me this article from the NY Times. I'm skeptical of the accusation of accounting issues causing the deal to be rushed. Notice the phrase "not necessarily in violation of accounting rules" - I doubt Freddie violated any accounting rules this time:

From the NY Times: Loan Giant Overstated the Size of Its Capital Base (hat tip Sam & Devang)

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.
...
The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies’s capital resources and financial stability.

And another update from the WSJ: Treasury to Outline Fan-Fred Plan

The U.S. Treasury is expected to announce early Sunday afternoon details of a plan under which regulators will effectively take temporary control over government-sponsored mortgage investors Fannie Mae and Freddie Mac.

The Treasury won't necessarily make a large injection of capital immediately into the ailing companies ...

Dividends on the companies' preferred stock are likely to be suspended, people familiar with the plan say, and those on common shares to be eliminated. Any injection of capital by the Treasury would likely greatly reduce or wipe out the value of common shares currently outstanding.

by Calculated Risk on 9/06/2008 03:01:00 PM

From the WSJ: Frank Confirms Treasury Intervention To Shore Up Fannie Mae, Freddie Mac

Rep. Barney Frank (D., Mass.) [chairman of the House Financial Services Committee] said in a statement Saturday that Mr. Paulson "intends to use the powers that Congress provided it" in a law passed in July to keep Fannie Mae and Freddie Mac stable and functioning. But Mr. Frank said he didn't "know the details of the proposed interventions,"

With all this publicity, the plan will have to be announced Sunday.

by Calculated Risk on 9/06/2008 09:08:00 AM

More details will leak out today, but the plan will probably be announced Sunday afternoon a few hours before the Asian markets open. (like with Bear Stearns). I wonder if the Fed will make some sort of announcement too ...

Stories (some contradictory on the Preferred shares):

Bloomberg: Paulson Plans to Bring Fannie, Freddie Under Government Control

WSJ: U.S. Near Deal on Fannie, Freddie

WaPo: U.S. Nears Rescue Plan For Fannie And Freddie

NY Times: U.S. Rescue Seen at Hand for 2 Mortgage Giants

LA Times: Fannie, Freddie takeover possible

by Calculated Risk on 9/05/2008 09:20:00 PM

Update2: WaPo says preferred protected: Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say

Under the plan, the federal government would place the firms in a legal state known as conservatorship, the sources said. The value of the company's common stock would be diluted but not wiped out while the holdings of other securities, including company debt and preferred shares, would be protected by the government.

That makes more sense than the NY Times article.

Update: Here is the NY Times story: U.S. Plans Takeover of Fannie and Freddie

Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage-finance giants, that the government is preparing a plan to seize the two companies and place them in a conservatorship ...

Under a conservatorship, most if not all of the remaining value of the common and preferred shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers.

A little thread music:



The WSJ has update their story: U.S. Near Deal on Fannie, Freddie

The Treasury Department is putting the finishing touches to a plan designed to shore up Fannie Mae and Freddie Mac ... a move that would essentially result in a government takeover of the mortgage giants.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency ...

It is also expected to involve the government injecting capital into Fannie and Freddie. ... Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts eventually.

This weekend will be interesting.

by Calculated Risk on 9/05/2008 09:15:00 PM

From the FDIC: Nevada State Bank Acquires the Insured Deposits of Silver State Bank, Henderson, Nevada

Silver State Bank, Henderson, Nevada, was closed today by the Nevada Financial Institutions Division, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. To protect the depositors, the FDIC entered into a Purchase and Assumption Agreement with Nevada State Bank, Las Vegas, Nevada, to assume the Insured Deposits of Silver State Bank.
...
As of June 30, 2008, Silver State Bank had total assets of $2.0 billion and total deposits of $1.7 billion. Nevada State Bank agreed to purchase the insured deposits for a premium of 1.3 percent. At the time of closing, there were approximately $20 million in uninsured deposits held in approximately 500 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

Silver State Bank also had approximately $700 million in brokered deposits that are not part of today's transaction.
...
The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund is between $450 and $550 million. Silver State Bank is the second bank to fail in Nevada in 2008. First National Bank of Nevada, Reno failed on July 25, 2008. This year, a total of eleven FDIC-insured institutions have been closed.

Another one bites the dust.

by Calculated Risk on 9/05/2008 06:33:00 PM

Yes, Fannie and Freddie is the big story today (and this weekend). And DSL and BKUNA are interesting too.

But Housing Wire has more on the MBA Foreclosure and Delinquency data released today: MBA: Prime ARMs Set Tone for Troubled Mortgages in Q2

Jay Brinkmann, the MBA’s newly-named chief economist, managed to irk more than a few servicing managers we spoke with by suggesting that the woes in the two most troubled U.S. states throughout the housing mess were masking improvements elsewhere — and then using two states that have seen foreclosures artificially lowered by recent legislation to make his point.

“Massachusetts showed a very large drop in foreclosure starts, perhaps signaling a bottom,” Brinkmann said in the group’s press statement.
...
There’s one big problem with his logic: during Q2, both Massachusetts and Maryland in particular saw highly-publicized changes in notice requirements that significantly extended the borrower default notice period from 30 to 90 days in each state. ...

“Of course foreclosure starts have slowed since [the two states] extended demand letters,” said one servicing manager, who asked not to be identified by name. ...

A senior vice president at a large subprime servicer, who asked not to be named, said that the suggestion of a market bottom in Massachusetts was “just plain ludicrous.”

“We’re already starting to see a sharp increase within the state as the effect of the new notice period wears off,” he said.

Of course the bigger MBA story was the shift towards Prime ARM foreclosures.

by Calculated Risk on 9/05/2008 05:12:00 PM

Press Release: BankUnited FSB Receives Notification from the Office of Thrift Supervision

BankUnited Financial Corporation (NASDAQ:BKUNA - News), parent company of BankUnited FSB, announced that it received notification today that the Office of Thrift Supervision has reclassified the Bank’s regulatory capital status from well-capitalized to adequately capitalized although the Bank’s capital ratios exceed the statutory threshold for well-capitalized institutions. As a result, the Bank is subject to restrictions on accepting brokered deposits.

Just last week, in a SEC 10-Q filing, BankUnited expressed concern that the OTS might impose additional restrictions on BankUnited, and that these restrictions might have "a material adverse effect on BankUnited’s financial position and operations".

by Calculated Risk on 9/05/2008 05:06:00 PM

From the WSJ: Regulators Tell Downey Financial To Raise Capital, Hire CEO

The Office of Thrift Supervision ... has issued a cease-and-desist order that formally requires the [Downey] to raise capital, name a new chief executive, and take other actions aimed at shoring up its operations, these people said.
...
The bank has $13.4 billion of assets, with 169 branches in California and five in Arizona. It is the nation's 10th-largest thrift as measured by assets.

Looks grim for Downey.

by Calculated Risk on 9/05/2008 04:55:00 PM

From the WSJ: Treasury Is Close to Finalizing Plan to Backstop Fannie, Freddie

Precise details of Treasury's plan couldn't be learned. The plan is expected to involve a creative use of Treasury's new authority to make a capital injection into the beleaguered giants.
...
An announcement could come as early as this weekend.

Another Sunday announcement (like for Bear Stearns)?

by Calculated Risk on 9/05/2008 01:45:00 PM

“Subprime ARM loans accounted for 36 percent of all foreclosures started and prime ARMs, which include option ARMs, represented 23 percent. However, the increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans. Thus the foreclosure start numbers will likely be increasingly dominated increasingly by prime ARM loans."
Jay Brinkmann, MBA’s Chief Economist, Sept 5, 2008

Here is the MBA press release: Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey

Click on graph for larger image.

This graphs shows the seasonally adjusted rate of all loans entering the foreclosure process each quarter.

This includes all loans, and the graph masks the underlying shift from foreclosures being dominated by subprime loans to foreclosures being dominated by Prime ARMs. See Tanta's: Subprime and Alt-A: The End of One Crisis and the Beginning of Another

This is one of the key housing themes for the next year or more.

by Calculated Risk on 9/05/2008 10:17:00 AM

From MarketWatch: Homes in foreclosure process set another record

The rate of mortgages entering foreclosure hit another record high in the second quarter, as did the percentage of loans somewhere in the foreclosure process, the Mortgage Bankers Association reported on Friday.

The delinquency rate, which measures mortgages that aren't in foreclosure but have at least one overdue payment, also was the highest ever recorded in the MBA's quarterly survey.
...
The percentage of loans that entered the foreclosure process in the second quarter was 1.08%, up from 1.01% in the first quarter and 0.59% a year ago. Meanwhile, 2.75% of loans in the survey were somewhere in the foreclosure process, up from 2.47% last quarter and 1.4% in the second quarter of 2007.

The delinquency rate was 6.41% of all loans outstanding, according to the survey. The rate was 6.35% in the first quarter, and 5.12% a year ago.

Update: There are problems everywhere (as I've pointed out numerous times), but there are several states that stand out (California and Florida top the list). A key question is subprime vs. Alt-A and Prime delinquencies - I don't have an answer yet.

by Calculated Risk on 9/05/2008 08:40:00 AM

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 84,000 in August.

The unemployment rate has risen to 6.1 percent.

Year over year employment is now negative (fewer American were employed in Aug 2008 than in Aug 2007). This is a very weak report - more to come.

by Anonymous on 9/05/2008 08:24:00 AM

Well, actually, it appears we've all been fraudulently induced for a long time but just didn't catch on until recently. Dear reader East Northport Slob sent me the link to this Village Voice article, which you think when you start reading it is just another one of those "lenders hose up foreclosure paperwork" things we've been reading for a long time, but then suddenly gives you this:

Catherine Austin Fitts, former Assistant Secretary of Housing and Urban Development, adds a new twist: She believes that borrowers can fight foreclosure because "most mortgages issued in this country from 1996 on were fraudulently induced."

Fitts said in cases of fraudulently induced loans lenders "knew they were issuing mortgages that were not affordable to the borrower," and the borrower "may not owe the money back because they essentially failed to disclose something about [the borrowers]' financial situation that they knew and the borrower didn't."

I'm sure we all have the same questions here: Who the hell is Catherine Austin Fitts? Why 1996? And how do you fraudulently induce people to sign a mortgage by failing to disclose to people some fact about their own financial situation?

I don't think I can help you with the last two, but I did some checking with Dr. Google on the first one. Let's let Ms. Fitts introduce herself:

In 1989, I was serving as Assistant Secretary of Housing. The housing bubble of the 1990’s had burst, and foreclosures were rising.

The "housing bubble of the 1990's" burst in 1989? Is there a wrinkle in the time-space continuum? Is The Truth Out There?

The mortgage insurance funds of the Federal Housing Administration (FHA) were experiencing dramatic losses. We were losing $11 mm a year in the single-family fund. All funds had lost $2 billion in the southwest region the year before.

My staff and I did an analysis of what had caused the losses. What were the actions that we could take?

Fraud aside, the single biggest cause of losses in the FHA portfolio was a falling Popsicle Index – an index that we coined as a rule of thumb to express the health of the living equity within a place.

The Popsicle Index is the percent of people who believe that a child can leave their home, go to the nearest place to buy a popsicle, and come home alone safely. It’s an expression of the sense of intimacy and well being in a place.

Not surprisingly, there is a correlation between the financial equity or wealth in a place and the living equity or human and natural wealth. Where the people, living things and land are happy, businesses thrive, and the value of real estate is good.

This seems to imply that if we could just cheer up our shrubberies, real estate values would improve substantially. I confess to wondering what could cause a "bubble" under this conception of things, but this may be because I'm still stuck in the wrong paradigm:

The Popsicle Index is the % of people who believe a child can leave their home, go to the nearest place to buy a popsicle or snack, and come home alone safely. For example, if you feel that 50% of your neighbors believe a child in your neighborhood would be safe, then your Popsicle Index is 50%. The Popsicle Index is based on gut level feelings of the people who have intimate knowledge of a place, rather than facts and figures.

I'm pretty sure that I feel that at least 50% of my neighbors believe that granite countertops are like a retirement account you can put hot pans on, but certain ugly facts and figures keep intruding on the conversation. Or, well, maybe not, given that since 1996 most of us weren't told the facts and figures about our financial situation in order to fraudulently induce us to buy homes with borrowed money. Or something like that.

Frankly, the Village Voice reporter should have hung up the phone here and gone out for a Popsicle. In fact, I suggest we all go out for a Popsicle. I for one feel safer out on the streets than indoors reading the news some days.

by Calculated Risk on 9/05/2008 12:06:00 AM

Some people asked for photos of my hike along a portion of the John Muir Trail. This photo is of Cathedral Lake, about 18 miles from Yosemite Valley. It is quite a climb to this point - about 5,700' of elevation gain from Yosemite Valley over Cathedral Pass.

Click on photo for larger image in new window.

Unfortunately one of my friends had to drop out at Tuolumne Meadows, and I wasn't able to continue (minor foot injury) after reaching Red's Meadow near Mammoth the second day.

It was still great fun. Hopefully I'll have more photos of my next trip.

For those wanting more, here are some photos I posted from my Yellowstone trip in 2005.

by Calculated Risk on 9/04/2008 07:47:00 PM

This is an update to an earlier post in April.

Click on graph for larger image in new window.

This graph shows the loaded containers per month - inbound and outbound - for the ports of Los Angeles and Long Beach combined.

Note: container traffic doesn't tell us about value, but it gives us a general idea on import and export volumes. We have to wait for the monthly trade deficit report for dollar values.

Imports have been surging for years, but import traffic started to decrease last year. For the last two month, import traffic averaged a decrease of 12.1% year-over-year.

Recently exports have picked up, and for the last two months export traffic has increased an average of 17.8% year-over-year.

Although this is just two Los Angeles area ports, this fits with the declining trade deficit (see 2nd graph). For export businesses in the U.S., these have been good times. However, as San Francisco Fed President Dr. Yellen noted this morning, the global slowdown might start to impact exports:

"[E]xport growth alone contributed one-half of the total real GDP growth registered in the second quarter. This element has been an important source of strength in our economy for over a year, being buoyed by strong growth abroad and by the weakening of the dollar. However ... in recent months the dollar has risen somewhat and economic growth in many of our industrialized trading partners has slowed or even turned negative, suggesting that we can no longer count on exports as an important source of strength."

Here is a graph of the trade deficit (June is the most recent data).

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit). The oil deficits in July and probably August will be ugly, but it now looks like the oil deficit will decline sharply later this year. Note: import oil prices are calculated when oil is delivered, so there is a lag between future prices and import prices.

The ex-petroleum deficit is already falling fairly rapidly with weak imports and strong exports.

Back in April I asked what would be the impact of slowing imports on China and on oil prices? I noted the dramatic decline in the Shanghai index:

The Shanghai SSE composite index is now below 2,277, the lowest since the amazing run up started in 2006. The index is off over 61% from the peak. This suggests a slowdown in the Chinese economy, and probably less business investment in China.

And the SSE index will probably fall further tonight after the 344 decline in the DOW today.

And as far as oil prices, the decline has been sharp, with prices now down by about one third from the peak. This could have serious implications for OPEC, see the NY Times: As Oil Prices Fall, OPEC Faces a Balancing Act and my speculation back in March: Petroleum Prices and GCC Spending

There is no longer any discussion of decoupling of the U.S. and world economies (something that never made sense to me). Now the questions are: Will U.S. exports continue to grow as economic growth slows or turns negative for U.S. trading partners? And will a combination of some U.S. export growth and lower oil prices provide enough of a cushion to keep the U.S. out of a severe recession? I think so, but the next several quarters will be especially ugly in the U.S. with rising unemployment, less business investment, and probably negative Personal Consumption Expenditures (PCE), or in Dr. Yellen's words "decidedly subpar" (and she wasn't discussing golf).

by Calculated Risk on 9/04/2008 05:56:00 PM

Tropical Storm Hanna is threatening the Carolinas (and the eastern seaboard), but Hurricane Ike might be a more serious concern for Miami and South Florida. It's still early, and Ike could stay at sea - but this reminds me that the 1920s Florida housing bust had just begun when the Great Miami Hurricane of 1926 struck ... from Wikipedia:

The 1926 Miami Hurricane (or Great Miami Hurricane) was an intense hurricane that devastated Miami, Florida in September 1926. The storm also caused significant damage in the Florida Panhandle, the U.S. state of Alabama, and the Bahamas. The storm's enormous regional economic impact helped end the Florida land boom of the 1920s ...