by Calculated Risk on 10/12/2009 06:42:00 PM

From CB Richard Ellis: U.S. Retail Cap Rates

Ending at 8.71%, cap rates were up again. The 59 basis point gain is the largest quarterly increase we have ever measured, even trumping last quarter's previous record.
emphasis added

Click on graph for larger image in new window.

This graph from CBRE shows the retail cap rate since 2003. Note that 2009 is an average of Q1 through Q3, and the cap rate in Q3 was at 8.71% - above the 2003 annual level.

Sharply higher vacancy rates, lower rents, reduced leverage and much higher cap rates - this is what Brian calls the "neutron bomb for RE equity"; destroys CRE investors (and lenders), but leaves the buildings still standing.

Cap Rate: the net operating income divided by the current value (or purchase price). Net operating income excludes depreciation and interest expenses. Say an investor paid $100 thousand in cash for a retail property, the investor would expect to clear $8,710 in cash per year after expenses with an 8.71% cap rate (the $8,710 is before paying income taxes that depend on financing and depreciation).

by Calculated Risk on 10/12/2009 04:45:00 PM

From Larry Gonick's The Cartoon History of the Modern World, Part 2, on page 248 ... (ht TDM)

Click on cartoon for larger image in new window.

Posted with permission from Larry Gonick. Thanks!

For more on Tanta, see the menu bar above ...

by Calculated Risk on 10/12/2009 02:10:00 PM

Renae Merle at the WaPo writes about Bank of America's struggles to ramp-up their mortgage modification department: Racing the Clock to Avoid Foreclosures

The following section probably requires more explanation:

The company was also slow out of the box because it initially took a more conservative approach than some other banks, requiring that borrowers document their income and complete other paperwork before granting preliminary approval for a modification. In August, Bank of America softened the requirement and began authorizing some modifications without getting all the documents first.

Read mort_fin notes:

"What the article doesn't make clear is that what was changed was the timing of the income documentation, not the level. It used to be the case that bofa required full documentation of income before they would even run the numbers to tell a borrower that they qualified. Now they will give an answer over the phone and start a trial mod, giving the borrower a month or 2 to provide the docs. No docs, no permanent mod. A borrower who can't document their claims gets a month or two of reduced payments before getting kicked out."

This is why it will be important to watch the number of permanent modifications over the next few months. The Treasury announced last week that 500,000 modifications have been started, but the Obama plan had produced only 1,711 permanent loan modifications as of Sept. 1. That number should increase sharply soon.

by Calculated Risk on 10/12/2009 12:17:00 PM

From HotelNewsNow.com: Hotel Industry Pulse stalls

Economic research firm e-forecasting.com in conjunction with Smith Travel Research announced the HIP hit a snag in its recovery. After going up two months in a row, HIP declined 2.1 percent in September. HIP, the Hotel Industry's Pulse index, is a composite indicator that gauges business activity in the U.S. hotel industry in real-time. The latest decline brought the index to a reading of 79.7. The index was set to equal 100 in 2000.
...
“The HIP had shown improvements over the previous two months, but we’ve tried to approach those gains with cautious optimism,” said Chad Church, industry research manager at STR. “Over the past months, we saw leisure demand continue to make strides in recovery while business travel maintained its downward trend. Now that the summer travel season has come to an end, we’re waiting to see any signs of life from the business segment.”

Click on graph for larger image in new window.

This index is now at the lowest point since 1992.

Over the last couple of years the hotel industry has been crushed. RevPAR (Revenue per available room) is off about 14% compared to the same period in 2008. And at the current occupancy and room rate levels, many hotels are losing money.

HIP historical data provided by HotelNewsNow.com and e-forecasting.com.

More from Chad Church at STR: STR's October forecast holds steady

As we come to conference season again, our outlook for 2010 and 2011 will depend heavily on the performance data we see during the next two months. ... As of now, we stand at a RevPAR projection of -4.2 percent in 2010.

Chad provides this graph comparing weekend (leisure) vs. business travel:

"[D]emand in the weekend segment (which we use as a gauge for leisure travel) has stabilized, while demand in the weekday segment has yet to hit a definitive bottom. If the unemployment rate remains close to 10 percent throughout 2010, sustained demand growth in the leisure segment will be difficult. The corporate travel segment will then be the barometer for recovery, and as of August, there have been no discernable trends in our monthly data to indicate a turning point."

I'll have more on Thursday, but the hotel industry is still searching for a bottom for the occupancy rate, and at the current low occupancy rates, the Average Daily Rate and RevPAR will continue to decline in 2010.

by Calculated Risk on 10/12/2009 10:12:00 AM

Note: The Sacramento Association of REALTORS® is now breaking out monthly resales by equity sales (conventional resales), and distressed sales (Short sales and REO sales). I'm following this series (as an example) to see changes in the mix.

Click on graph for larger image in new window.

Here is the September data.

They started breaking out REO sales last year, but this is only the fourth monthly report with short sales. About 63 percent of all resales (single family homes and condos) were distressed sales in September.

The second graph shows the mix for the last four months. Conventional and short sales have held steady, but foreclosure resales were lower in August and September. There are many reports of more foreclosures coming, and the number of foreclosure resales should pick up later this year.

Total sales in September were off 18% compared to September 2008; the fourth month in a row with declining YoY sales.

On financing, over half the sales were either all cash (25.2%) or FHA loans (27.6%), suggesting most of the activity in distressed bubble areas like Sacramento is first-time home buyers using government-insured FHA loans (and taking advantage of the tax credits), and investors paying cash.

by Calculated Risk on 10/12/2009 08:43:00 AM

We are starting to exhaust the keyboard for the shape of the recovery ... and reuse letters!

Two different views:

From Bloomberg: Rosenberg Sees Low-To-No-Growth as Kantor Vows Vigorous Economy (ht jb)

“Right now the economy is being held together by very strong tape and glue provided by the Fed, Treasury and Congress,” [said David Rosenberg, Gluskin Sheff + Associates Inc.] ... The current economy won’t resemble previous V-shaped recoveries, he says. “It’s going to look like this whole string of lowercase Ws for the next five years,” with periods of growth followed by periods of contraction.

And from Larry Kantor, head of research at Barclays Capital Inc. and former Fed economist:

“We think the recovery will be sustained,” ... “People talk about double-dips, the economy’s on life support and once it’s withdrawn everything is going to fall apart again. Business cycles typically don’t work that way.” ... Kantor ... says the parallel is closer to 1992, when the economy expanded 3.4 percent coming out of recession, or 1983, when it grew 4.5 percent.

Of course Rosenberg tends to be bearish, and I can't remember when Kantor wasn't bullish. He was worried about inflation in 2005 and bullish in June 2008.

But this does show the range of forecasts. My view is the recovery will be sluggish for some time.

by Calculated Risk on 10/11/2009 10:37:00 PM

Kind of a weird juxtaposition ...

From the WSJ: Foreclosures Grow in Housing Market's Top Tiers

About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com.

Meanwhile Jim the Realtor rides the Euphoria Express (mostly at the high end):

by Calculated Risk on 10/11/2009 04:45:00 PM

From Paul Krugman: When should the Fed raise rates? (even more wonkish)

Let me start with a rounded version of the Rudebusch version of the Taylor rule:

Fed funds target = 2 + 1.5 x inflation - 2 x excess unemployment

where inflation is measured by the change in the core PCE deflator over the past four quarters (currently 1.6), and excess unemployment is the different between the CBO estimate of the NAIRU (currently 4.8) and the actual unemployment rate (currently 9.8).

Right now, this rule says that the Fed funds rate should be -5.6%. So we’re hard up against the zero bound.

Suppose that core inflation stays at 1.6% (although in fact it’s almost sure to go lower.) Then we can back out the unemployment rate at which the target would cross zero, suggesting that tightening should begin: it’s an excess unemployment rate of 2.2, implying an actual rate of 7 percent. That’s a long way from here. ...

This is all back-of-the-envelope stuff - and maybe NAIRU or core inflation will be a little higher (although I think core inflation might be lower next year because of declining owners' equivalent rent).

If we use Krugman's analysis, and the recent CBO projections for the average annual unemployment rate (10.2% in 2010, 9.1% in 2011, and 7.2% in 2012), the Fed would not raise rates until some time in 2012.

Last month I wrote:

Click on graph for larger image in new window.

This graph shows the effective Fed Funds rate (Source: Federal Reserve) and the unemployment rate (source: BLS)

In the early '90s, the Fed waited more than a 1 1/2 years after the unemployment rate peaked before raising rates. The unemployment rate had fallen from 7.8% to 6.6% before the Fed raised rates.

Following the peak unemployment rate in 2003 of 6.3%, the Fed waited a year to raise rates. The unemployment rate had fallen to 5.6% in June 2004 before the Fed raised rates.

Although there are other considerations, since the unemployment rate will probably continue to increase into 2010, I don't expect the Fed to raise rates until late in 2010 at the earliest - and more likely sometime in 2011.

Maybe 2011. Or maybe 2012. But talk of a rate hike in early 2010 seems crazy ...

by Calculated Risk on 10/11/2009 12:41:00 PM

Edward Robinson wrote a recent article for Bloomberg on the rise of independent research: ‘Sell’ for Research Renegades Becomes Business Off Wall Street (ht Eyal)

One of the analysts featured in the article is Ivy Zelman, formerly at Credit Suisse, and now at Zelman & Associates. Ms. Zelman became an internet favorite when she asked Toll Brothers CEO Bob Toll "Which Kool-aid are you drinking?" on the Q4 2006 Toll Brothers conference call.

On Zelman's current view:

Many of her clients are clamoring to know whether the market has hit bottom. In terms of prices, she says probably not: One out of three owners has a mortgage worth more than the value of the home, and mounting foreclosures and distressed properties are slated to account for 53 percent of home sales in 2010 compared with 40 percent in 2008, according to Moody’s.

“When that inventory hits the market, it’s going to undermine prices,” she says.

Although I think prices might have bottomed in some low end bubble areas at the end of 2008, or early 2009 - because of the flood of foreclosures at that time - some of these areas have seen prices increase 10% to 15% since then (according to local reports). This is because of a combination of a buying frenzy associated with the first time home buyer tax credit, and the lack of inventory because of foreclosure delays associated with the trial modifications. It is not unusual for homes in these areas to receive 20, 30 or 50 bids.

Even if the first time home buyer tax credit is extended, I think the interest will wane. Meanwhile the banks are preparing to start foreclosing again. The WSJ recently quoted a Bank of America Corp. spokeswoman: "We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running" [for a loan modification].

So I expect prices in the low end areas to decline again (even if the bottom is in). I also expect further price declines in the mid-to-high end bubble areas. Note: this isn't like in 2005 when I thought large price declines were inevitable. House prices are much closer to the bottom now, and the U.S. government is trying to support house prices, or at least slow the rate of price declines.

by Calculated Risk on 10/11/2009 09:45:00 AM

“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
Barney Frank, chairman of the House Financial Services Committee on recent FHA lending, quoted Oct 9th, 2009 in the NY Times.

"I believe the intent of the FTHB [first time home buyer] credit (and any extensions) is to raise the floor on home prices to delay (and sometimes prevent) defaults, reducing the shock to the financial system."
reader picosec in email, Oct 2nd, 2009

And a couple more quotes from an article by Alan Heavens in Philadelphia Inquirer: Skeptics question housing recovery :

"Government intervention to date has been extremely helpful in preventing an even more dramatic decline in home prices."
John Burns, real estate industry consultant

The housing market "is showing improvement only because it is on government life support."
Mark Zandi, Economy.com

As Representative Frank notes, the policy of the U.S. appears to be to support asset prices at almost any cost. This includes:

The FHA insuring "bad loans" for buyers with a high probability of default.

The first-time home buyer tax credit (the FTHB makes no sense from any other economic perspective).

Delaying foreclosures, first with moratoriums and then with "trial modifications".

We could probably include the Fed buying GSE MBS to lower mortgage rates, and other policies like increasing the "conforming loan" limit to $729,750 in high cost states.

Intentionally encouraging loans with high default rates (insured at taxpayer expense), and the FTHB tax credit (especially allowing buyers to use the credit as a down payment) have stimulated demand. And delaying foreclosures has restricted supply.

This has had the desired effect of pushing up asset prices, especially at the low end.

It is "a policy", but is it a good policy?

by Calculated Risk on 10/10/2009 10:35:00 PM

From David Cho at the WaPo: Steep Losses Pose Crisis for Pensions

The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.
...
Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade.

After losing about $1 trillion in the markets, state and local governments are facing a devil's choice: Either slash retirement benefits or pursue high-return investments that come with high risk.
...
Some pension experts say the funding gap has become so great that no investment strategy can close it and that taxpayers will have to cover the massive bill.

The problem isn't limited to public pension funds; many corporate pension funds have lost so much ground that they are also pursuing riskier investments. And they, too, could end up a taxpayer burden if they cannot meet their obligations and are taken over by the federal Pension Benefit Guarantee Corp.
...
In Ohio, for instance, the teachers pension system reported that it would take 41 years for its investments to catch up with the costs of meeting its obligations to retirees. That was before the worst of the financial crisis.

During the last fiscal year, Ohio's fund lost 31 percent. Its most recent annual report detailed how long it would now take for its investments to put the fund back on track. Officials simply said: "Infinity."

Infinity!

Also check out the Time magazine cover story: Why It's Time to Retire the 401(k).

... at the end of 2007, the average 401(k) of a near retiree [55-to-64-year-old] held just $78,000 — and that was before the market meltdown.

by Calculated Risk on 10/10/2009 05:45:00 PM

From Eric Dash at the NY Times: Small Banks Failure Rate Grows, Straining F.D.I.C.

A few numbers from the article:

... About $870 billion, or roughly half of the industry’s $1.8 trillion of commercial real estate loans, now sit on the balance sheets of small and medium-size banks like these, according to an analysis by Foresight Analytics, a research firm. ... And as a group, small banks have written off only a tiny percentage of the losses that analysts expect them to incur.

In fact, applying only the commercial real estate loss assumptions that federal regulators used during the stress tests for the big banks last spring, Foresight analysts estimated that as many as 581 small banks were at risk of collapse by 2011.

By contrast, commercial real estate losses put none of the nation’s 19 biggest banks, and only about 5 of the next 100 largest lenders, in jeopardy.
....
[Gerard Cassidy, a veteran banking analyst] projects that as many as 1,000 small banks will close over the next few years and that their losses will be more severe. “It’s a repeat [of savings and loan crisis] on steroids,” he said.

This gives us a ballpark feel for the coming CRE losses. Local and regional banks are exposed to about $870 billion in CRE loans. Not all of the loans will go bad, and the loss severity will be far less than 100%. So the losses may be in the $100 to $200 billion range; small compared to the residential mortgage losses, but still very significant.

by Calculated Risk on 10/10/2009 12:56:00 PM

From Rex Nutting at MarketWatch: Banks cutting back on loans to businesses

U.S. banks are reducing their lending at the fastest rate on record ... According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.
...
The question is whether the decline in lending will be reversed soon.

... if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks' balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans.

There is more on small businesses including excerpts from NY Fed President William Dudley's speech: A Bit Better, But Very Far From Best, and from Atlanta Fed research economist Melinda Pitts: Prospects for a small business-fueled employment recovery

Click on graph for larger image in new window.

Graph Credit: Melinda Pitts, Atlanta Fed research economist and associate policy adviser

This graph breaks down net job gains and losses by firm size since 1992. During the current employment recession, small firms have accounted for about 45% of the job losses - much higher than during the 2001 recession.

Dr. Pitts cautions:

Looking ahead, it's not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.

by Calculated Risk on 10/10/2009 08:48:00 AM

From Peter Goodman at the NY Times: Panel Says Obama Plan Won’t Slow Foreclosures

In a report mild in language but pointed in substance, the Congressional Oversight Panel — a watchdog created last year to keep tabs on taxpayer bailout funds — said the administration’s program would, “in the best case,” prevent “fewer than half of the predicted foreclosures.”
...
When the Obama administration began its $75 billion Making Home Affordable program in March, it said the plan would spare as many as four million households from foreclosure. On Thursday, Treasury announced that 500,000 homeowners had since had their payments lowered on a trial basis, celebrating this as a milestone.

But the report from the oversight panel directly challenged the administration’s characterizations.

Most prominently, the panel had grave uncertainty about whether large numbers of the trial loan modifications — which typically run for three months — would successfully be converted to permanent terms.

As of the beginning of September, only 1.26 percent of trial modifications that had made it through the three-month trial period had become permanent, the report found. Of course, very few of those trial loans had reached their three-month expiration because the program only recently began processing large numbers of applications. As of Sept. 1, the Obama plan had produced 1,711 permanent loan modifications.
emphasis added

The numbers that matter are the permanent loan modifications and the redefault rate. With the report next month we should know much more ...

by Calculated Risk on 10/09/2009 11:15:00 PM

Since this was a busy week for commercial real estate data. Here is a summary:

From Bloomberg: U.S. Office Vacancies Reach Five-Year High of 16.5%, Reis Says

Click on graph for larger image in new window.

This graph shows the office vacancy rate starting in 1991.

Reis is reporting the vacancy rate rose to 16.5% in Q3 from 15.9% in Q2. The peak following the previous recession was 17%.

From Reuters: US apartment vacancy rate hits 23-year high-report

Note: the Reis numbers are for cities. The overall vacancy rate from the Census Bureau was at a record 10.6% in Q2 2009.

From Reuters: Shopping center vacancy rate hits 17-year high: report

Reis reports the strip mall vacancy rate hit 10.3% in Q3 2009; the highest vacancy rate since 1992.

And rents are cliff diving ...

"[W]e do not foresee a recovery in the retail sector until late 2012 at the earliest."
Victor Calanog, Reis director of research

Hotel Occupancy: Two Year Slump

And a couple of articles:

From the LA Times: Hotel defaults, foreclosures rise in California

From the WSJ: Fed Frets About Commercial Real Estate

by Calculated Risk on 10/09/2009 08:11:00 PM

This is an unofficial list of Problem Banks.

Changes and comments from surferdude808:

Since last week, the Unofficial Problem Bank List shrank by a net three institutions to 460. Aggregate assets decreased slightly to $297.8 billion from $298.6 billion.

New additions include two Cease & Desist orders issued by the OTS against Lincoln FSB of Nebraska, Lincoln ($371.3m) and Waterfield Bank, Germantown, MD ($217.3m). Also, the Federal Reserve issued a Prompt Corrective Action order against San Joaquin Bank, Bakersfield, CA ($832.8m) on October 5th, which was has been operating under a Cease & Desist order since April 9, 2009.

The removals include the failures last Friday – Warren Bank, Jennings State Bank, and Southern Colorado National Bank. The OCC terminated a Formal Agreement against Pacific National Bank, Miami, FL on September 29th.

The other deletion was Venture Bank which was misidentified with the bank of the same name based out of Washington that failed on September 11th. We were notified of the error by a reader and greatly appreciate the assistance in maintaining the accuracy of this list.

The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808.

See description below table for Class and Cert (and a link to FDIC ID system).

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.)





Class: from FDIC

The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:

N National chartered commercial bank supervised by the Office of the Comptroller of the Currency

SM State charter Fed member commercial bank supervised by the Federal Reserve

NM State charter Fed nonmember commercial bank supervised by the FDIC

SA State or federal charter savings association supervised by the Office of Thrift Supervision

SB State charter savings bank supervised by the FDIC

Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. Click on the number and the Institution Directory (ID) system "will provide the last demographic and financial data filed by the selected institution".

by Calculated Risk on 10/09/2009 05:23:00 PM

From California State Controller John Chiang: Controller Releases September 2009 Cash Report

State Controller John Chiang today released his monthly report covering California’s cash balance, receipts and disbursements in September. For the first three months of the fiscal year, total General Fund revenue was nearly $1.1 billion below the recently amended 2009-10 Budget Act estimates.

“Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old,” said Controller Chiang. “While there are encouraging signs that California’s economy is preparing for a comeback, the recession continues to drag State revenues down. I urge lawmakers and the Governor to prepare for more difficult decisions ahead.”
emphasis added

Here are the September 2009 financial statement and summary analysis.

Just add this to the pile of state budgets falling short ...

From Bloomberg: New York Income Tax Revenue Falls 36% in Year, Paterson Says

From Reuters: Massachusetts government to announce emergency budget cuts

by Calculated Risk on 10/09/2009 04:02:00 PM

While we wait for the FDIC, from Rolfe Winkler at Reuters: TARP deadbeats

Thirty-three TARP recipients missed a scheduled dividend payment to taxpayers last month, according to the Treasury Department, including 18 banks that missed a payment for the first time.
...
The 33 banks that missed dividend payments in August have received $4.5 billion of TARP money. The biggest is CIT. Previously it paid $44 million of dividends, but with a bankruptcy filing looking likely, Treasury’s $2.3 billion investment seems headed toward zero.

Market update:

The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 10/09/2009 12:30:00 PM

From the BLS: Job Openings and Labor Turnover Summary

On the last business day of August, the number of job openings in the U.S. was little changed at a series low level of 2.4 million, the U.S. Bureau of Labor Statistics reported today. The hires rate was little changed and remained low at 3.1 percent in August. The total separations rate was little changed and remained low at 3.3 percent.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. Remember the CES (Current Employment Statistics, payroll survey) is for positions, the CPS (Current Population Survey, commonly called the household survey) is for people. See Jobs and the Unemployment Rate for a comparison of the two surveys.

The following graph shows job openings (yellow line), hires (blue Line), Quits (green bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and green added together equals total separations.

Unfortunately this is a new series and only started in December 2000.

Click on graph for larger image in new window.

Notice that hires (blue line) and separations (red and green together) are pretty close each month. When the blue line is above total separations, the economy is adding net jobs, when the blue line is below total separations, the economy is losing net jobs.

According to the JOLTS report, there were 4.029 million hires in August, and 4.265 million separations, or 236 thousand net jobs lost.

I'm not sure if openings is predictive of future hires (the data set is limited), but openings at a series low can't be a positive. Separations have declined sharply, with fewer quits and layoffs, but hiring has not picked up.

As David Leonhardt noted in the NY Times last month: Wages Grow for Those With Jobs, New Figures Show

Try thinking of it this way: All of the unemployed people in the country are gathered in a huge gymnasium that’s been turned into a job search center. The fact that this recession is the worst in a generation means that there are many, many people in the gym. The fact that the economy is churning so slowly means that there is not much traffic into and out of the gym.

If you’re inside, you will have a hard time getting out.

by Calculated Risk on 10/09/2009 10:11:00 AM

“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
Barney Frank, chairman of the House Financial Services Committee on recent FHA lending.

The quote is from David Streitfeld and Louise Story's article in the NY Times: U.S. Mortgage Backer May Need Bailout, Experts Say

The article covers the problems at the FHA, and includes this anecdote:

Like many Americans, Ms. [Bernadine Shimon] has recently been through some rough times. She lost a house to foreclosure, declared bankruptcy, got divorced and is now a single mother, teaching high school English in a Denver suburb.

She wanted a house but no lender would touch her. The Federal Housing Administration was more obliging. With the F.H.A. insuring her mortgage, Ms. Shimon was able to buy a $134,000 fixer-upper in August.
...
Any more than [3.5% down] and Ms. Shimon, 45, would still be a renter. As it was, she cashed in her retirement savings account to come up with the necessary funds. She did not have enough to spare for closing costs, so her mortgage broker arranged a deal where the charges were wrapped into the loan at the cost of a higher interest rate. She cried when the deal was done.

The house was empty and trashed. Slowly, she is trying to bring it back to life. She spent the first few weeks picking up garbage in the backyard.

Is Ms. Shimon a good bet? Even she has no easy answer. Her mortgage payment, $1,100, is half of what she takes home every month. It is not easy to make ends meet. Teachers can get laid off like everyone else.
emphasis added

Maybe Ms. Shimon will make it (I hope so). But according to the article she has no savings, and is spending half her take home income on just the mortgage payment. update

Maybe she can qualify for a loan modification! The HAMP guidelines are for loans not to exceed 31 percent of gross income. Update: It is not clear from the story the percentage of her gross income (the half is take home income). The FHA guidelines are that the payment-to-income ratio not exceed 31%, however, with all of the "compensating factors", it is possible that the FHA is insuring loans that the Obama Administration (through HAMP) has called "unaffordable". (ht TL)

And the NAR thinks Ms. Shimon will spend $10 of thousands of dollars fixing up her home over the next year? That is their argument for extending the "first-time" homebuyer tax credit (for anyone who hasn't owned for three years).

As Frank said, this is "a policy". But is it a good policy?