by Calculated Risk on 1/06/2010 06:30:00 PM

A few related stories ...

From Jon Prior at HousingWire: CMBS Delinquencies Reach New All-Time High

For the first time since the industry began forming commercial mortgage-backed securities (CMBS), delinquencies reached above 6%, according to a report from Trepp, which studies commercial real estate trends.

For the month of December, 6.07% of CMBS loans fell behind by 30 days or more, up from 5.65% in November and a far climb from 1.21% in December 2008.

And from the MBA: Commercial/Multifamily Real Estate Market Continues to Feel Effects of Economic Downturn

Commercial real estate markets show the strains of the downturn.

Vacancy rates rose in the third quarter for all major property types. For apartment properties, vacancy rates rose from 6.5 percent in the third quarter of 2008 to 8.4 percent in the third quarter of 2009. Industrial properties saw vacancy rates rise from 9.8 percent to 13.0 percent; office properties saw a rise from 16.0 percent to 19.4 percent and retail vacancies rose from 12.9 percent to 18.6 percent.

And asking rents have been falling – by 6 percent for apartments, 9 percent for industrial properties, 9 percent for office properties and 8 percent for retail properties. Even with lease terms muting some of the impact, the combination of falling rents and rising vacancies has placed greater pressure on properties’ bottom-lines.

More on the MBA Quarterly report with graphs from Diana Golobay at HousingWire: Commercial, Multifamily Lags With Vacancy, Delinquency, MBA Says

And from early this morning: Reis: Strip Mall Vacancy Rate Hits 10.6%, Highest on Record

by Calculated Risk on 1/06/2010 03:54:00 PM

I've excerpted below from a paper by New York Fed Researchers Andrew Haughwout, Ebiere Okah, and Joseph Tracy: Second Chances: Subprime Mortgage Modification and Re-Default

Although the paper uses subprime data, the general results are applicable to all mortgages. The researchers point out that principal reductions lead to much lower redefault rates (that is obvious, but still worth noting). They also note that principal reductions help mitigate the mobility problem - as I've noted before, the lack of worker mobility slows the potential growth of the economy, leads to lower home maintenance, and possibly "diminished support for local public goods"¹.

But the authors don't suggest who should pay for the reductions in principal. If this was a government program, it would be very expensive and unpopular. Diana Olick wrote today at CNBC: Are Principal Writedowns the Answer to Housing Crisis?

I would honestly rather see my home's value go down than see the guy next door ... who made a poor/negligent financial decision get a mulligan at my expense.

I think that would be the overwhelming public reaction.

Some people point to Lewis Ranieri's apparent success with principal reductions, from Fortune: Lewie Ranieri wants to fix the mortgage mess

Now Ranieri is championing an inventive solution for fixing the mess he's accused of enabling in the first place. Ranieri has raised $825 million from 31 foundations and corporate and public pension funds, including the South Carolina Retirement Systems, to form the Selene Residential Mortgage Opportunity Fund.

Selene's mission is simple: to buy delinquent mortgages at a deep discount, work with homeowners to get them paying again, and resell the now stable loans for profit. To get homeowners to do their part, Ranieri is taking the radical step of substantially lowering their mortgage balances.

This only works because Ranieri bought the distressed mortgages at a deep discount, and his company has no reputation risk. Ranieri wants his borrowers to know that he will reduce their principal.

Imagine what would happen to Wells Fargo or Bank of America if their borrowers found out that the banks would substantially reduce their principal if they were 1) underwater (negative equity), and 2) stopped making their payments. The delinquency rate and losses would skyrocket!

So there is no easy solution. Government supported principal reductions will probably not happen, and private principal reductions - although happening - will not become widespread. This means more foreclosures and short sales (or as I always joke, build a time machine and stop the bubble early - that might be easier!)

And here are some excerpts from the paper:

Our analysis of those modifications in which payments were meaningfully reduced indicates that re-default rates – around 57% in the first year – are distressingly high. Yet the magnitude and form of modifications make a difference. Mortgages that receive larger payment reductions are significantly less likely to redefault, as are those that are modified in such a way as to restore the borrower’s equity position. Of course, these kinds of modifications are not mutually exclusive, since reductions in mortgage balances offer both increased equity and reduced payments.

Our findings have potentially important implications for the design of modification programs going forward. The Administration’s HAMP program is focused on increasing borrowers’ ability to make their monthly payments, as measured by the DTI. Under HAMP, reductions in payments are primarily achieved by subsidizing lenders to reduce interest rates and extend mortgage term. While such interventions can reduce re-default rates, an alternative scheme would simultaneously enhance the borrower’s ability and willingness to pay the debt, by writing down principal in order to restore the borrower’s equity position. We estimate that restoring the borrower’s incentive to pay in this way can double the reduction in re-default rates achieved by payment reductions alone.

Another distinction between modifications that reduce the monthly payment by cutting the interest rate as compared to reducing the principal is the likely impact on household mobility. Ferreira et al (2010) using over two decades of data from the American Housing Survey estimate that each $1,000 in subsidized interest to a borrower reduces the two-year mobility rate by 1.4 percentage points. Modifying the interest rate to a below market rate creates an in-place subsidy to the borrower leading to a lock-in effect. .... modification creates an annual subsidy of over $3,000. The results in Ferreira et al (2010) imply that this will lead to on average a reduction in the household two-year mobility rate of over 4.4 percentage points – more than a forty percent reduction in the overall rate. In contrast, reducing the monthly payment through reducing the principal on the mortgage does not create an in-place subsidy and would not lead to a lock-in effect.
emphasis added

¹ Housing Busts and Household Mobility by Fernando Ferreira, Joseph Gyourko (both from Wharton) and Joseph Tracy (New York Fed).

by Calculated Risk on 1/06/2010 02:00:00 PM

Here are the December FOMC minutes. Economic outlook:

In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts suggested that economic growth was strengthening in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further. Although some of the recent data had been better than anticipated, most participants saw the incoming information as broadly in line with the projections for moderate growth and subdued inflation in 2010 that they had submitted just before the Committee's November 3-4 meeting; accordingly, their views on the economic outlook had not changed appreciably. Participants expected the economic recovery to continue, but, consistent with experience following previous financial crises, most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion would imply slow improvement in the labor market next year, with unemployment declining only gradually. Participants agreed that underlying inflation currently was subdued and was likely to remain so for some time. Some noted the risk that, over the next couple of years, inflation could edge further below the rates they judged most consistent with the Federal Reserve's dual mandate for maximum employment and price stability; others saw inflation risks as tilted toward the upside in the medium term.

A number of factors were expected to support near-term expansion in economic activity. Consumer spending appeared to be on a moderately rising trend, reflecting gains in after-tax income and wealth this year. Recent upward revisions to official estimates of the level of household income in recent quarters gave participants somewhat greater confidence that consumer spending would continue to expand. The housing sector showed continuing signs of improvement, though housing starts had leveled out after increasing earlier in the year and activity remained quite low. Businesses seemed to be reducing the pace of inventory reductions. The outlook for growth abroad had improved since earlier in the year, auguring well for U.S. exports. In addition, financial market conditions generally had become more supportive of economic growth. While these developments were positive, participants noted several factors that likely would continue to restrain the expansion in economic activity. Business contacts again emphasized they would be cautious in adding to payrolls and capital spending, even as demand for their products increases. Conditions in the commercial real estate (CRE) sector were still deteriorating. Bank credit had contracted further, and with many banks facing continuing loan losses, tight bank credit could continue to weigh on the spending of some households and businesses. Some participants remained concerned about the economy's ability to generate a self-sustaining recovery without government support. In particular, they noted the risk that improvements in the housing sector might be undercut next year as the Federal Reserve's purchases of MBS wind down, the homebuyer tax credits expire, and foreclosures and distress sales continue. Though the near-term outlook remains uncertain, participants generally thought the most likely outcome was that economic growth would gradually strengthen over the next two years as financial conditions improved further, leading to more-substantial increases in resource utilization.
emphasis added

And on real estate:

CRE activity continued to fall markedly in most parts of the country as a result of deteriorating fundamentals, including declining occupancy and rental rates, and very tight credit conditions. Prospects for nonresidential construction remained weak.

In the residential real estate sector, home sales and construction had risen relative to the very low levels reported in the spring; moreover, house prices appeared to be stabilizing and in some areas had reportedly moved higher. Generally, the outlook was for gains in housing activity to continue. However, some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness, including the termination next year of the temporary tax credits for homebuyers and the downward pressure that further increases in foreclosures could put on house prices. Moreover, mortgage markets could come under pressure as the Federal Reserve's agency MBS purchases wind down.

That last paragraph is important. It appears residential investment will disappoint in Q1, and prices might already be falling again - and that is before the massive government support programs will be wound down over the next 6 months. Of course CRE is getting crushed, but residential investment is usually a key to a recovery - and residential investment will remain sluggish.

by Calculated Risk on 1/06/2010 12:16:00 PM

From Jennifer Steinhauer at the NY Times: New Year but No Relief for Strapped States

[A]t least 36 states struggle to close budget shortfalls and also begin confronting the next fiscal year’s woes.

For many of the states, the new year spells the end to accounting maneuvers, one-off solutions, tax increases and service cuts that were as deep as lawmakers thought they could bear. ...

“A budget gap of 5 percent or 10 percent in any given year is a tough problem,” said Corina Eckl, fiscal director at the National Conference of State Legislatures. “But we’re talking about gaps in excess of 20 percent over multiple years. The size of these gaps is staggering.”

... states averted deeper cuts than anticipated last year because of the federal stimulus package. But those dollars will shrink over the next fiscal year, and unless jobs return and tax revenues rise, or Congress sends them more aid, states will most likely continue to be overextended.

These "staggering" gaps mean more budget cuts, or more tax increases, or another stimulus package ... unless the state economies improve quickly, and that seems unlikely.

by Calculated Risk on 1/06/2010 10:00:00 AM

This is another weak service report. According to this survey, the service sector barely expanded in December, and employment also contracted "for the 23rd time in the last 24 months".

From the Institute for Supply Management: December 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in December after one month of contraction, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Worldwide. "The NMI (Non-Manufacturing Index) registered 50.1 percent in December, 1.4 percentage points higher than the 48.7 percent registered in November, indicating growth in the non-manufacturing sector for three out of the last four months. The Non-Manufacturing Business Activity Index increased 4.1 percentage points to 53.7 percent, reflecting growth after contracting for one month. The New Orders Index decreased 3 percentage points to 52.1 percent, and the Employment Index increased 2.4 percentage points to 44 percent. The Prices Index increased 0.9 percentage point to 58.7 percent in December, indicating a slight increase in prices paid from November. According to the NMI, seven non-manufacturing industries reported growth in December. Respondents' comments vary by industry and, for the most part, are either neutral or slightly more optimistic about business conditions."
...
Employment activity in the non-manufacturing sector contracted in December for the 23rd time in the last 24 months. ISM's Non-Manufacturing Employment Index for December registered 44 percent. This reflects an increase of 2.4 percentage points when compared to the 41.6 percent registered in November. Four industries reported increased employment, 12 industries reported decreased employment, and two industries reported unchanged employment compared to November.
emphasis added

by Calculated Risk on 1/06/2010 08:56:00 AM

The MBA reports: Mortgage Applications Drop the Week of Christmas and Remain Flat the Week After

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the weeks ending December 25, 2009 and January 1, 2010. For the week ending December 25, 2009, the Market Composite Index, a measure of mortgage loan application volume, decreased 22.8 percent on a seasonally adjusted basis from the prior week. For the week ending January 1, 2010, this index increased 0.5 percent on a seasonally adjusted basis. ...

For the week ending December 25, 2009, the Refinance Index decreased 30.5 percent from the previous week and the seasonally adjusted Purchase Index decreased 4.0 percent from one week earlier. The following week, the Refinance Index decreased 1.6 percent and the seasonally adjusted Purchase Index increased 3.6 percent.
...
For the week ending January 1, 2010, the average contract interest rate for 30-year fixed-rate mortgages increased to 5.18 percent with points decreasing to 1.28.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Note: In the past the MBA index was somewhat predictive of future sales - and was a favorite indicator of Alan Greenspan, but it has been questionable for some time. The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007 even though activity was actually declining. Recently there has been a substantial number of cash buyers, so the MBA index missed the strength of the recent existing home sales increase.

Despite the problems, it is hard to ignore the sharp decline in purchase applications since mid-October. The four week moving average is now at the lowest level since November 1997.

by Calculated Risk on 1/06/2010 08:22:00 AM

ADP reports:

Nonfarm private employment decreased 84,000 from November to December 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from October to November was revised by 24,000, from a decline of 169,000 to a decline of 145,000.

The decline in December was the smallest since March of 2008.

Note: ADP is private nonfarm employment only (no government jobs).
The BLS reported a 18,000 decrease in nonfarm private employment in November (11,000 total nonfarm), and ADP originally estimated November private nonfarm employment losses at 169,000; so ADP wasn't close at all to the BLS number last month - although the trend is the same.

On the Challenger job-cut report from MatketWatch: Layoffs drop 10% to 45,094 in December, Challenger says

Big U.S. companies announced 45,094 job reductions in December, the fewest since the recession began two years ago. December's total was down 10% from November's 50,349 and down 73% from December 2008.

In the fourth quarter, companies announced just 151,121 job reductions, the fewest since early 2000 and down 67% from the fourth quarter of 2008, Challenger said Wednesday.

For all of 2009, big companies announced 1.288 million job cuts, up about 5% from 2008's total and the most since 2002. About 70% of the year's total occurred in the first six months of the year.

The BLS reports Friday, and the consensus is for no change in net jobs, and a 10.0% unemployment rate for December.

by Calculated Risk on 1/06/2010 12:04:00 AM

Click on graph for larger image in new window.

From Reuters: US shopping center vacancies hit records - report

Strip malls ... had a vacancy rate of 10.6 percent in the fourth quarter, surpassing the high set in 1991, Reis economist Ryan Severino said in a report released on Wednesday.

This is up from 10.3% in Q3 2009 and 8.9% in Q4 2008.

The vacancy rate at large regional malls rose to 8.8 percent from 8.6 percent the third quarter.

The 8.8% is the highest since Reis began tracking regional malls in 2000.

"Our outlook for retail properties as a whole is bleak," Severino said in a statement. "... we do not foresee a recovery in the retail sector until late 2012 at the earliest."

"Late 2012 at the earliest" ... ouch!

by Calculated Risk on 1/05/2010 09:39:00 PM

From David Leonhardt at the NY Times: If Fed Missed That Bubble, How Will It See a New One? (ht Ann)

So why did Mr. Greenspan and Mr. Bernanke get it wrong?

The answer seems to be more psychological than economic. They got trapped in an echo chamber of conventional wisdom. Real estate agents, home builders, Wall Street executives, many economists and millions of homeowners were all saying that home prices would not drop, and the typically sober-minded officials at the Fed persuaded themselves that it was true. “We’ve never had a decline in house prices on a nationwide basis,” Mr. Bernanke said on CNBC in 2005.

He and his colleagues fell victim to the same weakness that bedeviled the engineers of the Challenger space shuttle, the planners of the Vietnam and Iraq Wars, and the airline pilots who have made tragic cockpit errors. They didn’t adequately question their own assumptions. It’s an entirely human mistake.

Which is why it is likely to happen again.

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along. A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail. If he doesn’t volunteer such an accounting, Congress could request one.

Bernanke continues to dodge the key questions: what went wrong with regulation, and how will the new regulatory structure catch a bubble the next time?

Suggesting “better and smarter" execution just doesn't cut it.

by Calculated Risk on 1/05/2010 06:49:00 PM

From an interview in Time: Pimco's Bill Gross Sees 2010 as Year of Reckoning. Excerpts on MBS:

Gross: I think the Fed's statements suggest that they really want to exit in some fashion from the buying program. The first step in that direction, logically, would be to stop buying and our sense is that they're at least going to try that. But based on our forecasts for the second half of the year they may have to re-initiate it, and that will be difficult to do once they stop because it then becomes a political hot potato.

All that said, I think they'll stop buying mortgage agency securities, and the trillion-and-a-half dollar check that's been written over the past 9 to 12 months basically disappears. ...

TIME: Because they might have to restart the buying program later?

Yes, I think the Fed wonders about this as well. ... They won't sell — it's a near impossibility to unload what they've purchased over past 12 months. But they'll at least stop buying.

TIME: Won't that put upward pressure on interest rates?

I think it will. I mean the mortgage market would be your first place to look in terms of something that's overvalued that would become normalized. Nobody knows what the Fed's buying is worth — we think about half a percentage point on rates, but we don't know.

But secondly, there's a ripple affect. ... They're buying a trillion dollars of them, or have over the past 9-12 months, and so we sold them a lot of ours. Now, what did we do with the money? We bought Treasuries, we bought corporate bonds, and so the bond markets in general have benefited, as have stocks because this available money effectively flows through the capital markets. ... How that affects the markets, I just don't know. I'm not eagerly anticipating the answer, but I think it holds some surprises in 2010, not just in mortgage securities but stocks as well. We could miss the money, put it that way.
emphasis added

So Bill Gross is thinking we will see about a 50 bps increase in mortgage rates when the Fed stops buying MBS, but admits he really doesn't know. He also thinks the Fed will stop buying - probably on the current schedule - but he thinks they may want to re-initiate the program in the 2nd half of 2010.

by Calculated Risk on 1/05/2010 03:48:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for December (red, light vehicle sales of 11.25 million SAAR from AutoData Corp).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Obviously sales were boosted significantly by the "Cash-for-clunkers" program in August and some in July.

Excluding August, December was the strongest month since September 2008 (12.5 million SAAR) before sales fell off the final cliff.

The current level of sales are still very low, and are still below the lowest point for the '90/'91 recession (even with a larger population). On an annual basis, 2009 sales were probably just above the level of 1982 (10.357 million light vehicles).

by Calculated Risk on 1/05/2010 02:23:00 PM

From the Guardian: Iceland president vetoes collapsed Icesave Bank's bill to UK

Iceland was plunged back into crisis after its president refused to sign a bill promising to repay more than €3.8bn (£3.4bn) to Britain and the Netherlands after the collapse of the country's Icesave bank in 2008.

Olafur Grimsson said he would force a referendum on the deeply unpopular legislation, causing a schism within the Icelandic government, with prime minister Johanna Sigurdardottir maintaining that the money would be repaid.

The escalating row threatens to further destablise the Icelandic economy, which went into meltdown after the failure of its three big banks, cutting off further aid from the International Monetary Fund and jeopardising efforts to join the European Union. The credit rating agency Fitch immediately downgraded Iceland, describing the latest political row as a "significant setback".

And from The Times: Iceland blocks repayment of £2.3bn to Britain

The British Government's already stretched finances came under further pressure today when Iceland's President vetoed the repayment of a £2.3 billion loan from the British taxpayer.

The cash was paid out by Britain in 2008 to compensate UK investors in Icesave, whose parent bank Landsbanki had collapsed.

Alistair Darling, the Chancellor, handed over the money because he had promised that UK savers would not lose a penny to Landsbanki's bankruptcy.

Here is the actual Declaration: DECLARATION BY THE PRESIDENT OF ICELAND

... I have decided, according to Article 26 of the Constitution, to refer this new Act to the people. As stated in the Constitution, the new Act will nevertheless become law and the referendum will take place “as soon as possible.”

If the Act is approved in the referendum then naturally it will remain in force. If the referendum goes the other way, then the Act No. 96/2009, which the Althingi passed on 28 August, on the basis of the agreement with the Governments of the United Kingdom and the Netherlands, will continue to be law, recognizing that the people of Iceland acknowledge their obligations. That Act was passed by the Althingi with theinvolvement of four of the parliamentary parties, as stated in the President’s declaration of 2 September.

Now the people have the power and the responsibility in their hands.

by Calculated Risk on 1/05/2010 12:01:00 PM

From MarketWatch: Ford December U.S. sales up 32.8% to 184,655 units

From CNBC: Ford December Sales Jump 23.3%

Ford Press Release.

We need to see the details to see why the two reports are different, but this is based on an easy comparison; in December 2008 U.S. light vehicle sales fell sharply to 10.3 million (SAAR) following the financial crisis.

I'll add the other major reports as updates to this post.

UPDATE: From MarketWatch: Chrysler Dec. U.S. sales fall 3.7% to 86,523

UPDATE2: GM posts 6.1% decline in December U.S. sales

UPDATE3: Toyota Dec. U.S. auto sales up 32% to 187,860

Once all the reports are released, I'll post a graph of the estimated total December sales (SAAR: seasonally adjusted annual rate) - usually around 4 PM ET.

by Calculated Risk on 1/05/2010 09:49:00 AM

From the NAR:

The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in November, fell 16.0 percent to 96.0 from an upwardly revised a 114.3 in October, but is 15.5 percent higher than November 2008 when it was 83.1.

On the extended and expanded tax credit:

[Lawrence Yun, NAR chief economist] projects an additional 900,000 first-time buyers will qualify for the extended tax credit in addition to about 2 million who have already purchased; 1.5 million repeat buyers also are expected to benefit from the credit.

The extended and expanded tax credit was estimated to cost taxpayers $10.8 billion, but based on Mr. Yun's numbers, the tax credit will cost close to $17 billion (way over the initial estimate and just like the first tax credit, most buyers who receive the tax credit would have bought anyway).

by Calculated Risk on 1/05/2010 08:40:00 AM

The WSJ reports: Personal Bankruptcy Filings Rising Fast

Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center ...

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by year.

Note: Data from Administrative Office of the U.S. Courts, 2009 is estimated using media reports of data from the National Bankruptcy Research Center.

The annual rate is at about the same level as prior to when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. There were over 2 million bankruptcies filed in Calendar 2005 ahead of the law change.

"I can't see over the top of the files on my desk," said Cathleen Moran, a bankruptcy attorney at Moran Law Group in Mountain View, Calif., likening it to the rush of clients before the revised law went into effect.

Click on cartoon for larger image in new window. And a repeat: Cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

by Calculated Risk on 1/04/2010 11:55:00 PM

From Bloomberg: Krugman Sees 30-40% Chance of U.S. Recession in 2010 (ht many thanks!)

“[A recession] is not a low probability event, 30 to 40 percent chance,” [Paul] Krugman said today in an interview in Atlanta, where he was attending an economics conference. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.”

On the recession probabilities, I think Professor Krugman is warning policy makers about complacency, similar to his Monday column: That 1937 Feeling.

My guess is the U.S. will see sluggish growth in 2010, but will avoid a recession. However I do think the unemployment rate ticking up from the current 10% is a high probability event.

by Calculated Risk on 1/04/2010 08:42:00 PM

Commentary from surferdude808:

Since August 7, 2009, each week an Unofficial Problem Bank List has been posted to Calculated Risk. The Unofficial Problem Bank List is an attempt to mirror the number of problem banks the FDIC reports each quarter.

The FDIC does not disclose the institutions on its Problem Bank List and CAMELS ratings are confidential. For the most part, institutions on the FDIC Problem Bank List have a CAMELS rating of 4 or 5. Normally, problem institutions or those with a CAMELS rating of 4 or 5 are subject to a safety & soundness formal enforcement action by their respective primary federal supervisor (Federal Reserve, FDIC, OCC, or OTS).

Since the last crisis, much to the consternation of the federal supervisory agencies, they are required to make all formal enforcement actions public. Historically, there is a high positive correlation between a safety & soundness formal enforcement action and a CAMELS rating of 4 or 5. This relationship is the basis for the Unofficial Problem Bank List, which is comprised of institutions operating under a safety & soundness formal enforcement action, and some institutions that have made public announcements that lead us to believe a formal enforcement action is likely.

With the passage of the year, we thought it would be of interest to analyze how the Unofficial Problem Bank List has changed since it was first published. The list had 389 institutions on August 7, 2009 and it finished the year at 575. During the past five months, there have been 277 additions and 91 deletions.

There are four ways to be removed from the list – failure, voluntary dissolution, merger with another institution (without FDIC assistance), or improvement in condition whereby the action is terminated. Of the 91 deletions, 74 are from failure, 9 are from termination of the enforcement action, and 8 are from an unassisted merger.

Of the 389 institutions on the August 7, 2009 list, 325 are still on the January 1, 2010 list as 64 were removed because of failure (48), action termination (9), and unassisted merger (7). Interestingly, 26 institutions that were added after August 7, 2009 failed before January 1, 2010.

So far, only 74 or 11.1 percent of the 666 institutions that have been on the list have failed. However, failure is the cause for 81.3 percent of all deletions. While failures only represent 11.1 percent of institutions that have appeared on the list, failed bank assets (quarter before failure) of $135.8 billion represent 30 percent of the $450.2 billion of assets that have been on the list. Moreover, failure is responsible for 98 percent of the $138.6 billion of assets of institutions deleted from the list. Thus, for the second half of 2009, failure was the primary way institutions and assets were removed from the list.

Unofficial Problem Bank List Change Summary
		Number of Institutions	Assets ($Thousands)
Start	(8/7/2009)	389	276,313,429
Additions		277	173,919,123
Subtractions
	Action Terminated	9	1,605,652
	Unassisted Merger	8	1,141,008
	Failures	74	135,814,823
	Asset Change		8,453,550
End	(1/01/2010)	575	303,217,519

by Calculated Risk on 1/04/2010 05:51:00 PM

From the NY Times: Oil Surges Above $81, Driven by Several Factors

A combination of frigid weather, expectations of an improving economy and new tensions between Russia and Belarus catapulted crude oil prices above $81 a barrel on Monday.

Higher prices could impact the U.S. economic recovery (it is probably time to start watching U.S. vehicle miles driven again). Here is a graph of nominal oil prices ...

Click on graph for larger image in new window.

These are spot prices for Cushing WTI from the EIA (source).

Back in the Spring of 2008, we started seeing many signs of potential demand destruction - including fewer U.S miles driven, Asian countries reducing gasoline subsidies, and China stock piling oil for the Olympics.

And maybe we are seeing the first signs of demand destruction again, since the Dept of Transportation reports that U.S. vehicle miles declined in October: Traffic Volume Trends

Travel on all roads and streets changed by -0.5% (-1.4 billion vehicle miles) for October 2009 as compared with October 2008. ...

Cumulative Travel for 2009 changed by +0.2% (4.8 billion vehicle miles).

The second graph shows the comparison of month to the same month in the previous year as reported by the DOT.

Miles driven in October 2009 were 0.5% less than in October 2008, the first year-over-year decline since May 2009.

Still - I haven't seen any stories like the following from the NY Times on June 28, 2008: Cruise Night, Without the Car

For car-loving American teenagers, this is turning out to be the summer the cruising died.
...
From coast to coast, American teenagers appear to be driving less this summer. Police officers who keep watch on weekend cruising zones say fewer youths are spending their time driving around in circles...

There couldn't have been a clearer sign of a top in oil!

by Calculated Risk on 1/04/2010 03:38:00 PM

This will be busy week for employment related reports culminating with the BLS report on Friday. Here is some info on the impact of Census 2010 on employment, and the relationship between the ISM manufacturing report and BLS reported manufacturing payroll jobs.

Click on photo for hi-res image in new window.

The Census Bureau kicked off the Census 2010 road tour today.

During the next four months, the tour will be part of the largest civic outreach and awareness campaign in U.S. history -- stopping and exhibiting at more than 800 events nationwide.

Of course most of the Census will be conducted by mail in March, with followup visits for non-respondents. As we discussed on Friday, the Census Bureau will hire temporary census takers for most of the followup work (See: Impact of Census on Employment and Unemployment Rate).

The key point is that Census 2010 will boost employment in March, April and especially in May. And this boost will mostly be unwound over the period June through September. The Census gives, and the Census takes.

To track the impact on employment, the BLS provides a monthly report of Census hiring. This graph is from the BLS report and shows the historical impact of the Census on Federal Government employment.

There was a small spike in employment in April 2009, and currently the decennial census has little impact on employment. This will be something to check every month - especially from March through September.

And from the ISM Manufacturing report this morning on employment:

ISM's Employment Index registered 52 percent in December, which is 1.2 percentage points higher than the 50.8 percent reported in November. This is the third month of growth in manufacturing employment, following 14 consecutive months of decline. An Employment Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
emphasis added

The following graph shows the ISM Manufacturing Employment Index vs. the BLS reported monthly change in manufacturing employment (as a percent of manufacturing employment).

The graph includes data from 1948 through 2009. The earlier period (1948 - 1988) is in red, and the last 20 years is in blue.

This shows that the ISM employment index is related to changes in BLS employment.

The relationship is noisy, and the equation is for just the last 20 years. This suggest the ISM employment index of about 51.3 is consistent with an increase in BLS reported manufacturing employment. This is higher than the ISM estimate that appears to be based more on older data.

by Calculated Risk on 1/04/2010 01:09:00 PM

From Fed Governor Elizabeth Duke: The Economic Outlook

In my view, the outlook for economic activity depends importantly on our ability to build on the progress to date in improving the operation of financial markets and restoring the flow of credit to households and businesses.

Although household wealth has received a boost from the gains in the stock market over the last nine months and from the stabilization in house prices, household balance sheets remain weak. In 2009, household income received some temporary support from the tax cuts and transfer payments enacted with the fiscal stimulus package and from the extensions of unemployment insurance. Over the coming year, households should begin to see gains in income associated with an improvement in the labor market, and the drag on spending from past declines in real net worth should ease. As their income and balance sheets improve, consumers should have better access to credit. Favorable trends in income and employment should also bolster consumer confidence, although one risk I see to the outlook for household spending is the possibility of a rise in the personal saving rate as consumers choose to shore up their balance sheets rather than spend. While good in the long run, increased saving means consumers are providing less of a short-run boost to the economy.

The outlook for homebuilding will depend critically on the continuation of the uptrend in the demand for housing that began in early 2009. I anticipate that low mortgage rates and house prices that are still very low compared with the recent past will continue to provide important support for demand. And a shift in expectations from falling house prices to modest appreciation should encourage buyers to invest in houses. That said, the headwinds in housing and mortgage markets remain relatively strong and are likely to restrain the pace at which the residential construction sector recovers. Many of the existing homeowners who face payment problems are having trouble restructuring their loans, and the large backlog of foreclosed properties will likely take several years to resolve. Tighter standards for government-backed loans and still-restrictive credit conditions in private loan markets are also likely to slow the housing recovery. Nevertheless, with the inventory of new homes having been worked down to a relatively low level, even a gradual strengthening of demand should lead to an upturn in homebuilding.

Prospects for a recovery in business investment are getting better as we move into 2010. Typically, business confidence builds as firms see a sustained increase in sales and output. Various indicators of business sentiment rebounded over the second half of 2009 as economic activity accelerated, and the latest surveys of capital spending plans have been more positive. That said, the amount of unused capacity in the business sector is substantial, which implies that the recovery in spending on equipment and software will likely be more gradual than typically occurs during a cyclical recovery.
...
Unfortunately, the outlook for commercial real estate is much less favorable. Hit hard by the loss of businesses and employment, a good deal of retail, office, and industrial space is standing vacant. In addition, many businesses have cut expenses by renegotiating existing leases. The combination of reduced cash flows and higher rates of return required by investors leads to lower valuations, and many existing buildings are selling at a loss. As a result, credit conditions in this market are particularly strained. Commercial mortgage delinquency rates have soared. ...

In this environment, a turnaround in CRE is likely to lag the improvement in overall economic activity. However, compared with the situation in the early 1990s, the problems in this sector now appear to be due largely to poor business fundamentals rather than widespread overbuilding, suggesting that the performance of the CRE sector will gradually begin to improve as the economy continues to strengthen.

An important element of a sustained economic recovery will be an improvement in labor market conditions. Employment gains typically lag the recovery in sales and production in the early months of an economic upturn. In many cycles, the lag occurs because businesses need to restore productivity and are reluctant to hire until they are more confident that any pickup in sales will be maintained. In this cycle, the reductions in jobs and hours of work have been so deep, and the pressure to cut costs has been so strong, that businesses in the aggregate have already realized solid gains in productivity. As a result, I expect that businesses will begin to add jobs this year, but I anticipate that they will do so cautiously in order to hang on to their cost savings and efficiency gains.

Even as the unemployment rate begins to decline later this year, it likely will remain high by historical standards. Based on the experience of the last two economic recoveries, net gains of roughly 100,000 payroll jobs each month are needed to reduce the jobless rate by 0.1 percentage point. ...
emphasis added

I think Ms. Duke is somewhat too optimistic on housing and employment. It might take more payroll jobs to lower the unemployment rate this time because the Labor Force Participation Rate has declined so sharply; the BLS reported the participation rate as 65.0% in November (the percentage of the working age population in the labor force). This is the lowest level since the mid-80s, and I expect a number of people will rejoin the labor force at the first sign of an employment recovery, putting upward pressure on the unemployment rate.