by Calculated Risk on 3/19/2010 05:12:00 PM

An Oxymoron?
Century Security
Or a Paradox?

Utah's Advanta
A mirage in the desert
Phantom worth now gone.
by Soylent Green is People
From the FDIC: Bank of Upson, Thomaston, Georgia, Assumes All of the Deposits of Century Security Bank, Duluth, Georgia

Century Security Bank, Duluth, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 31, 2009, Century Security Bank had approximately $96.5 million in total assets and $94.0 million in total deposits....

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $29.9 million. ... Century Security Bank is the 32nd FDIC-insured institution to fail in the nation this year, and the third in Georgia. The last FDIC-insured institution closed in the state was Community Bank and Trust, Cornelia, on January 29, 2010.

From the FDIC: FDIC Approves the Payout of the Insured Deposits of Advanta Bank Corp., Draper, Utah

The Federal Deposit Insurance Corp. (FDIC) approved the payout of the insured deposits of Advanta Bank Corp., Draper, Utah....

As of December 31, 2009, Advanta Bank Corp. had approximately $1.6 billion in total assets and $1.5 billion in total deposits. ...

Advanta Bank Corp. is the 33rd FDIC-insured institution to fail this year and the third in Utah since Centennial Bank, Ogden, was closed on March 5, 2010. The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $635.6 million.

That makes three today - and another payout (no buyer) in Utah.

by Calculated Risk on 3/19/2010 04:32:00 PM

Spring is in the air
What's this other thing I smell?
Fail, from Ohio
by Soylent Green is People
From the FDIC: The National Bank and Trust Company, Wilmington, Ohio, Assumes All of the Deposits of American National Bank, Parma, Ohio

American National Bank, Parma, Ohio, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 31, 2009, American National Bank had approximately $70.3 million in total assets and $66.8 million in total deposits....

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $17.1 million. ... American National Bank is the 31st FDIC-insured institution to fail in the nation this year, and the first in Ohio. The last FDIC-insured institution closed in the state was AmTrust Bank, Cleveland, on December 4, 2009.

Ohio is on the map. I'm thinking Puerto Rico and Illinois ...

by Calculated Risk on 3/19/2010 03:01:00 PM

Given the low inflation reports, I was curious if Social Security benefits would increase in 2011 ... it might be close, but any increase will probably be small. However the contribution base might increase by a larger percentage. Here is an update:

This year (starting in December 2009) was the first time since the automatic cost of living adjustments (COLA) were adopted in 1975 that Social Security benefits did not increase.

This was also the first year the contribution base (currently $106,800) did not increase.

There is a reasonable chance that there will be little or no increase in benefits in 2011 (starting in December 2010).

The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W¹ for the three months in Q3 (July, August, September) and compares to the average for the proceeding year Q3 months. Note: this is not the headline CPI-U.

In 2007, the average of CPI-W was 203.596. In 2008, the average was 215.495. That gave an increase of 5.8%.

In 2009, the Q3 average of CPI-W was 211.013. That was a decline of -2.1% from 2008, however, by law, the adjustment is never negative - so the benefits remained the same this year.

For 2011, the calculation is not based on Q3 2010 over Q3 2009, but Q3 2010 over the highest preceding Q3 average - the 215.495 in Q3 2008. This means CPI-W in Q3 2010 has to average above 215.495 or there will be no increase in Social Security benefits in 2011.

Last month (February 2010) CPI-W was at 212.544, so CPI-W will have to increase by more than 1.4% over the next 7 months for benefits to increase - this is possible since this number is not seasonally adjusted, and gas prices usually rise in the summer. However any increase in benefits will probably be very small.

Contribution and Benefit Base

The law - as currently written - prohibits an increase in the contribution and benefit base if COLA is not greater than zero. However if the there is even a small increase in CPI-W, the contribution base will be adjusted using the National Average Wage Index.

From Social Security: Cost-of-Living Adjustment Must Be Greater Than Zero

... ... any amount that is directly dependent for its value on the COLA would not increase. For example, the maximum Supplemental Security Income (SSI) payment amounts would not increase if there were no COLA.

... if there were no COLA, section 230(a) of the Social Security Act prohibits an increase in the contribution and benefit base (Social Security's maximum taxable earnings), which normally increases with increases in the national average wage index. Similarly, the retirement test exempt amounts would not increase ...

To summarize (assuming no new legislation):

In 2011, for benefits, the increase will be zero or small because the calculation is based on CPI-W in Q3 2008.

For the contribution base in 2011, if the COLA is even slightly positive, the increase will be based on changes in the national average wage index (not COLA).

⁽¹⁾ CPI-W usually tracks CPI-U (headline number) pretty well. From the BLS:

The Bureau of Labor Statistics publishes CPIs for two population groups: (1)the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 32 percent of the total population and (2) the CPI for All Urban Consumers (CPI-U) ... which cover approximately 87 percent of the total population and include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self- employed, short-term workers, the unemployed, and retirees and others not in the labor force.

by Calculated Risk on 3/19/2010 01:05:00 PM

Just an update ....

From Bloomberg: Federal Reserve Must Disclose Bank Bailout Records (ht jb)

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program ... The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.
...
The opinion may not be the final word in the bid for the documents, which was launched by Bloomberg LP, the parent of Bloomberg News, with a November 2008 lawsuit. The Fed may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court.

It will be interesting to see these documents, but it might not be for a few more years.

by Calculated Risk on 3/19/2010 10:15:00 AM

Here is an update on the price-to-rent ratio using the First Amercican CoreLogic price index released yesterday for house prices through January.

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

The following graph uses the First American data ...

Click on graph for larger image in new window.

This graph shows the price to rent ratio (January 2000 = 1.0).

This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.

Also, OER declined slightly again in February. The price index has declined 6 of the last 8 months, although most of the declines have been very small. With rents still falling, the OER index will probably continue to decline - pushing up the price-to-rent ratio.

by Calculated Risk on 3/19/2010 08:28:00 AM

From Vanessa Ho at Seattlepi.com: Renters, rejoice: Apartments are cheap and the iPod is free (ht Patrick)

"We've done holiday specials -- a one-night stay in a downtown hotel - or an iPod nano," said [Craig Dwyer, vice-president of Seattle-based Pinnacle Family of Companies] residential division. "We've done a microwave. We even did a 32-inch flat panel TV."

After peaking in 2006 and 2007, rents in King, Snohomish and Pierce counties tanked over the course of last year by nearly 4 percent, according to [Mike Scott, whose firm, Dupre + Scott, researches the Puget Sound apartment market]. He expects rents will continue to plummet this year by 5 percent, and again in 2011, but less dramatically.

In Seattle, property managers say that trend has been more pronounced, with some rents dropping as much as 15 to 20 percent last year. ... Bart Flora, co-owner of Cornell & Associates, which manages 6,500 properties in the city, said some, in-city, one-bedroom apartment now rent for $800 to $850, instead of roughly $1,000 two years ago.

"It's the steepest drop I've ever encountered in 25 years, certainly in my career," said Flora. He added that he believed the market - at least in Seattle - appears to have hit bottom and is stabilizing.

I'm starting to hear stories about vacancy rates stabilizing in some markets, although rents are probably still falling in most areas. This will keep pressure on CPI and house prices.

by Calculated Risk on 3/18/2010 10:32:00 PM

From James Hagerty at the WSJ writes about a Barclays Capital report: Supply of Foreclosed Homes on the Rise Again

Hagerty notes that the analysts at Barclays Capital estimate that various lenders held 645,800 REO (Real Estate Owned) in January, up 4.6% from 617,286 in December.

Also Barclays estimated the peak supply was in November 2008 at 845,000, and then declined through 2009. Barclays is projecting the supply will increase to 733,000 in April 2010, and then gradually decline.

The current supply is similar to the analysis from Tom Lawler that I posted yesterday. These number from Barclays are a little higher (Lawler noted he wasn't including everything, but the pattern is the same).

As an aside, here is a video from Steven Russolillo at Dow Jones (posted at the WSJ): Financial Blogs Grow Up

Thanks!

by Calculated Risk on 3/18/2010 07:59:00 PM

In a recent email to agents on March 16th, the California Association of Realtors (C.A.R.) points out that making undisclosed 2nd lien payments in a short sale transaction could be a crime and punishable by up to 30 years in prison.

The email points out that undisclosed payments might violate HUD's RESPA (Real Estate Settlement Procedures Act) and laws against loan fraud.

In addition any agent participating in the scheme might be subject to disciplinary action and could have their license revoked.

Apparently the requests by 2nd lien holders are common. The C.A.R. reported: "Short sale agents have increasingly reported to C.A.R. about requests for agents and their clients to pay junior lienholders and others, often times outside of escrow."

Although the email doesn't address possible criminal activity of 2nd lienholders, it would appear the junior lienholders are soliciting a crime if they ask for a payments and suggest that the payment not be disclosed on the settlement documents. Properly disclosed payments to junior lienholders are perfectly fine and legal.

I doubt law enforcement will pursue individual homeowners, so probably the best way to end this practice is to report the requests for payments outside of escrow by 2nd lien holders (name of person and company holding the junior lien) to either HUD or the FBI.

This possible fraud was first reported by Eric Wolff at the North County Times: Wrinkle raises questions in home short sales, and by Diana Olick at CNBC: Big Banks Accused of Short Sale Fraud

Perhaps this version of short sale fraud is finally getting the attention it deserves ...

by Calculated Risk on 3/18/2010 05:34:00 PM

Almost finished ...

For a discussion on how trades settle, and the coming associated expansion of the Fed's balance sheet over the next few months, please see my post last week.

From the Atlanta Fed weekly Financial Highlights released today (as of last week):

Click on graph for larger image in new window.

Graph Source: Altanta Fed.

This graph shows the cumulative MBS purchases by week. From the Atlanta Fed:

The Fed purchased a net total of $10 billion of agency-backed MBS through the week of March 10. This purchase brings its total purchases up to $1.23 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 98% complete).

The NY Fed purchased an additional net $10 billion in MBS for the week ending March 17th. This puts the total purchases at $1.240 trillion or 99.2% complete. Just $10 billion and two more weeks to go - and I don't expect any fireworks ...

Note: The Fed's balance sheet released today shows "only" $1.066 trillion in MBS on March 17th. As mentioned above, the difference is the NY Fed announces the purchases when they contract to buy; the Federal Reserve places the MBS on the balance sheet when the contract settles.

by Calculated Risk on 3/18/2010 03:28:00 PM

Note: since the mix is changing, the median price is not useful. The repeat sales indexes - like FirstAmerican CoreLogic and Case-Shiller - have problems too, but they probably are better for actual price changes.

From DataQuick: Bay Area home sales down slightly from last year, median sale price rises

Bay Area home sales were subpar again in February, dipping below the year-ago level for the second straight month as some potential buyers worried about job security, some couldn’t get financing and others found a thin inventory of homes for sale. ...

Last month’s sales fell 22.2 percent short of the February average of 6,413 sales since 1988, when DataQuick’s statistics begin.

February’s sales were the second-lowest for that month since 1995, behind the record-low 3,989 homes sold in February 2008. January and February this year are the only two months since August 2008 in which sales have fallen year-over-year.

“The sales and price data remain choppy, with more ups and downs and inconsistencies than we’d typically see. It’s partly the season – January and February are often atypical and don’t serve as good barometers. But it’s more than that. The market remains fundamentally off kilter. There’s still relatively little lending going on in the upper price ranges, and little adjustable-rate financing, which had been vital to the Bay Area. Investor and cash-only deals remain well above normal, as does the level of sales involving distressed property,” said John Walsh, MDA DataQuick president.

“Despite the widening stability seen in the housing market in recent months, the outlook remains murky,” he said. “Whether prices will firm, or remain firm, will depend largely on three factors: The market’s response as the government reduces its housing stimulus, the economy’s ability to gain traction, and the decisions that lenders and borrowers will make in countless distress cases. The key question is how much more distressed inventory is coming, and when.”

Foreclosure resales – homes that had been foreclosed on in the prior 12 months – rose to 36.6 percent of all homes resold last month, marking the fourth consecutive month in which foreclosure resales edged higher. Foreclosure resales peaked at 52 percent of resales in February 2009, then gradually fell and, in the fall, leveled off near 32 percent before starting to rise modestly.

... Federally-insured, low-down-payment FHA loans, a popular choice among first-time buyers, made up 26.9 percent of Bay Area purchase loans last month. That was up from 23.3 percent a year ago and 1.4 percent two years ago.

Last month absentee buyers – mostly investors – purchased 19.4 percent of all Bay Area homes sold, the same as in January and up from 18.4 percent a year ago. The monthly absentee buyer average over the past decade is 13.0 percent. Buyers who appeared to have paid all cash – meaning there was no corresponding purchase loan found in the public record – accounted for a record 27.1 percent of sales in February, up from 25.7 percent in January and 24.4 percent a year ago.

This is definitely a market "off kilter". Almost 27% of the buyers used FHA insured loans, and another 27% paid cash (mostly investors). This is a long way from normal ...

by Calculated Risk on 3/18/2010 12:51:00 PM

From HotelNewsNow.com: STR: New Orleans tops weekly numbers

Overall the industry’s occupancy ended the week with a 4.6-percent increase to 57.7 percent, ADR dropped 1.9 percent to US$97.80, and RevPAR was up 2.6 percent to US$56.44.

The following graph shows the occupancy rate by week since 2000, and the rolling 52 week average occupancy rate.

Click on graph for larger image in new window.

Note: the scale doesn't start at zero to better show the change.

The graph shows the distinct seasonal pattern for the occupancy rate; higher in the summer because of leisure/vacation travel, and lower on certain holidays.

It appears that occupancy rates have bottomed and even started to increase, but the level is still well below normal - the average occupancy rate for this week is close to 62%, well above the current 57.7%. This low occupancy rate is still pushing down room rates (on a YoY basis) although revenue per available room (RevPAR) increased.

As mentioned last week, the other good news for the industry (although bad news for construction employment) is that the pipeline of new hotel projects has slowed sharply, see: STR: US pipeline for February 2010

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 3/18/2010 10:46:00 AM

The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance ...

From LoanPerformance: January Home Price Index Shows Narrowing Annual Decline

National home prices, including distressed sales, declined by 0.7 percent in January 2010 compared to January 2009, according to First American CoreLogic and its LoanPerformance Home Price Index (HPI). This was a significant improvement over December’s year-over-year price decline of 3.4 percent. Excluding distressed sales, year-over-year prices declined in January by 0.4 percent; while in December the non-distressed HPI fell by 3.3 percent year-over-year. Compared to a year ago, the month-to-month rate of decline is lessening – in January 2009, the HPI showed the largest one month decline in its more than 30-year history. On a month-over-month basis, the national average home price index decline accelerated, falling by 1.9 percent in January 2010 compared to 0.8 percent in December 2009, indicating the housing market still remains weak.

Click on graph for larger image in new window.

This graph shows the national LoanPerformance data since 1976. January 2000 = 100.

The index is off 0.7% over the last year, and off 29% from the peak.

The index has declined for five consecutive months.

by Calculated Risk on 3/18/2010 09:24:00 AM

From Binyamin Appelbaum and David Cho at the WaPo: Small banks lag in repaying Treasury for bailout funds

[H]undreds of community banks have yet to return their bailouts. More than 10 percent of the 700 banks that got federal bailouts and are still holding the money even failed to pay the government a quarterly dividend in February. The list of 82 delinquent banks is significantly longer than the 55 banks that failed to make payments in November, according to an analysis by Linus Wilson, a finance professor at the University of Louisiana at Lafayette.

Wilson calculated that the missed payments totaled $78.1 million in February and that banks now have missed a total of $205 million in dividend payments to the government.

Many of the community banks still holding aid from the Troubled Assets Relief Program are struggling with losses on real estate development loans.

Here is the report from the Treasury.

And in excel format under Dividend and Interest Reports.

There are three permanent deadbeats on the list: CIT Group (filed bankruptcy and wiped out its $2.3 billion in TARP debt), UCBH Holdings Inc. was seized by the FDIC (TARP lost $298.7 million), and Pacific Coast National Bank was also seized by the FDIC (TARP lost $4.1 million).

by Calculated Risk on 3/18/2010 08:26:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending March 13, the advance figure for seasonally adjusted initial claims was 457,000, a decrease of 5,000 from the previous week's unrevised figure of 462,000. The 4-week moving average was 471,250, a decrease of 4,250 from the previous week's unrevised average of 475,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending March 6 was 4,579,000, an increase of 12,000 from the preceding week's revised level of 4,567,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 4,250 to 471,250.

The dashed line on the graph is the current 4-week average. The current level of 457,000 (and 4-week average of 471,250) is still very high, and suggests continuing job losses through the middle of March. Note: There is no way to compare directly between weekly claims, and net payrolls jobs.

by Calculated Risk on 3/17/2010 11:59:00 PM

We've seen all the statistics from the aughts - declining employment, declining stock prices, and weak income.

Andrew Flowers, economic research analyst at the Atlanta Fed, points out that decades are arbitrary, and that the previous decade started with a recession and ended with the great recession. He suggests looking at periods as trough-to-trough: Bad by any measure

Flowers provides graphs of GDP, personal income and consumption, and payrolls for each trough-to-trough period. As an example, on income and consumption:

Click on graph for larger image in new window.

Flowers writes:

[F]or real consumption and income growth, the 2002–09 period is also bleak. Average annual consumption and income growth had averaged 3.81 percent and 3.79 percent, respectively, going into 2002. But during this recent trough-to-trough period, income growth was very weak at 1 percent, with only the 1946–49 period doing worse (–1.09 percent). But consumption growth in 2002–09 was the lowest on record, averaging only 2.12 percent growth annually.

Another interesting observation is the spread between average annual consumption and income growth. The 1946–49 and 2002–09 periods are where it's the largest, at 5.9 percent and 1.1 percent, respectively. These large imbalances could possibly reflect growth in household debt and/or lower saving rates, as consumption growth far outstrips income growth. Indeed, debt grew and savings declined notably during 2002–09.

The 1946-49 period isn't surprising since there was a flood of workers from the military (keeping income down), but people had significant savings from WWII when income far outpaced consumption. Of course, in the recent period, consumption was higher than income primarily because of mortgage equity extraction (The Home ATM).

The previous business cycle was "bad by any measure".

by Calculated Risk on 3/17/2010 09:29:00 PM

Click on graph for larger image in new window.

A frequently asked question is how do new home sales compare to single family housing starts (both series from the Census Bureau). This graph shows the two series - although they track each other, the two series cannot be directly compared.

For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. From the Census Bureau: Comparing New Home Sales and New Residential Construction

We are often asked why the numbers of new single-family housing units started and completed each month are larger than the number of new homes sold. This is because all new single-family houses are measured as part of the New Residential Construction series (starts and completions), but only those that are built for sale are included in the New Residential Sales series. We categorize new residential construction into four intents, or purposes:

Built for sale (or speculatively built): the builder is offering the house and the developed lot for sale as one transaction this includes houses where ownership of the entire property including the land is acquired ("fee simple") as well as houses sold for cooperative or condominium ownership. These are the units measured in the New Residential Sales series.

Contractor-built (or custom-built): the house is built for the landowner by a general contractor, or the land and the house are purchased in separate transactions.

Owner-built: the house is built entirely by the landowner or by the landowner acting as his/her own general contractor.

Built for rent: the house is built with the intent that it be placed on the rental market when it is completed.

However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The Q4 quarterly report showed that there were 71,000 single family starts, built for sale, in Q4 2009, and that is less than the 82,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA).

Q4 was the 9th consecutive quarter with homebuilders selling more homes than they start.

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions). This is not perfect because homebuilders do build spec homes and many builders were stuck with some “unintentional spec homes” because of cancellations during the bust.

This graph provides a quarterly comparison of housing starts and new home sales. In 2005, and most of 2006, starts (blue) were higher than sales (red), and inventories of new homes increased. For the last 9 quarters, starts have been below sales – and new home inventories have been falling.

It is possible that the streak will be broken in Q1, and that the builders started more single family homes, built for sale, than they sold. This is because a number of builders started some extra spec homes in anticipation of a "buying rush" in April before the tax credit expires. To qualify for the tax credit, the homes have to be finished before June 30th - and it takes close to 6 months to build a home - so some builders started a few extra homes in January that they hope will sold in Q2.

by Calculated Risk on 3/17/2010 06:15:00 PM

CR Note: the following is from housing economist Tom Lawler (posted with permission):

Last month I showed data on trends in the REO inventories of Fannie, Freddie, and FHA, highlighting how while total REO inventory estimates appear to have fallen, REO at “the F’s” has increased notably over the last year. A few folks questioned how there could be reports of sharply lower REO inventories in many parts of the country if the F’s REO’s were up so much.

Click on graph for larger image in new window.

Well, the answer mainly in REO inventories in the “non-agency” space, and especially REO inventories held by trusts for private-label mortgage-backed securities. Here is a chart (courtesy of Amherst) showing REO inventories for private-label securities tracked by LoanPerformance, which folks estimate accounts for about 85-90% of the private-label market.

As the above chart indicates, REO inventory from private-label MBS (where mortgage credit performance started to deteriorate sharply well before the ‘prime” market began to deteriorate in a big way) increased at a rapid clip from end of 2007 through the fall of 2008, peaking in October. It then began to decline as servicers accelerated the pace of REO sales last winter and early Spring, often by slashing prices – thus resulting in the “de-stickification” of home prices observed this cycle relative to past cycles.

Contrast that with REO inventories at Fannie, Freddie, and FHA.

Most areas where one hears that REO inventories have plunged over the last year are in areas that had a high share of “risky” mortgages and a disproportionately high share of loans that were packaged into private-label securities.

On the depository institution front, data on the book value of FDIC-insured institutions’ holdings of 1-4 family REO – in $’s, but not units – is shown below.

Before discussing the chart, it should be noted that when a financial institution acquires the title to a property through foreclosure, the REO is supposed to be accounted for at fair value less costs to sell. This amount, of course, is often a boatload less than the mortgage balance at the time of foreclosure. Unfortunately, I don’t yet have any hard data on the average carrying cost of REO.

Second, over the last few years the % of mortgages held by banks and thrifts that are FDIC insured has increased. E.g., according to Fed data vs. FDIC data, the ratio of 1-4 family mortgages held by FDIC-insured institutions to 1-4 family mortgages held by all bank and savings institutions went from 89.3% at the end of 2007 to 92.9% at the end of 2009 – implying that the above chart for REO trends overstates a tad the increase in all banks and thrifts.

Having said that, it’s pretty clear that REO inventories at depositories grew at a decent clip (though much slower than REO at PLS) from the end of 2007 to the end of 2008, went down a “scooch” in the first half of 2009 (mainly, I believe, reflecting certain foreclosure moratoria), and then increased a bit in the second half of last year – though less rapidly than at the GSEs.

Putting the Fannie, Freddie, FHA, and private-label data (with the latter “grossed up” assuming LP covers 85% of the market) together; making a crude assumption of units of REO at banks and thrifts (and grossing the total up to reflect non-FDIC institutions), here is a crude look at the path of REO inventories by quarter from the end of 2007 through the end of 2009. These estimates would NOT be the full market, of course, but the general pattern would probably reflect the overall market.

Note that this is still a “work in progress, and some of the assumptions I’ve made on depositories could be wrong. However, for those who wondered “how could REO have fallen so much if REO at ‘the F’s’ had gone up so much,” here is your answer. Once you factor in the private label market, it is not so “F’ing” hard to understand.

CR Note: The post was from economist Tom Lawler.

by Calculated Risk on 3/17/2010 02:52:00 PM

Fed Chairman Ben Bernanke: The Federal Reserve's role in bank supervision

Professor Hamilton supports Bernanke's view: Bank supervision and the Federal Reserve

The Fed employs hundreds of extremely bright and very well-informed economists. On my visits to the Federal Reserve, I've been amazed at how well the staff work together to assimilate information and perspectives. In my experience, you can ask any one of them a question about pretty much anything, and although the person you're talking with may not know the answer, he or she will know the name of the person within the Fed who does know. I've interacted with lots of different institutions over the years, and have never seen another one that functions so effectively as a single, cohesive neural processor. Certainly the objective record of Federal Reserve forecasts is pretty impressive; see for example the assessments by Christina and David Romer and Faust and Wright.

Doubtless others will be skeptical, trotting out the Fed's spectacular underestimation of financial problems during 2005-2007. That criticism is of course well taken, and both the Fed and the economics profession as a whole have much more work to do in terms of recognizing exactly what should have been done differently. But let's be practical. What other institution did a better job? Where in Washington today do you see an agency with the intellectual resources to get this right?

From CR: The Fed has a number of roles and they are all somewhat related: monetary policy, lender of last resort, bank supervision and consumer financial protection.

Clearly something went wrong with bank supervision during the recent bubble and bust. And here are the improvements Bernanke outlined today:

To improve both our consolidated supervision and our ability to identify potential risks to the financial system, we have made substantial changes to our supervisory framework. So that we can better understand linkages among firms and markets that have the potential to undermine the stability of the financial system, we have adopted a more explicitly multidisciplinary approach, making use of the Federal Reserve's broad expertise in economics, financial markets, payment systems, and bank supervision to which I alluded earlier. We are also augmenting our traditional supervisory approach that focuses on firm-by-firm examinations with greater use of horizontal reviews that look across a group of firms to identify common sources of risks and best practices for managing those risks. To supplement information from examiners in the field, we are developing an off-site, enhanced quantitative surveillance program for large bank holding companies that will use data analysis and formal modeling to help identify vulnerabilities at both the firm level and for the financial sector as a whole. This analysis will be supported by the collection of more timely, detailed, and consistent data from regulated firms.

Many of these changes draw on the successful experience of the Supervisory Capital Assessment Program (SCAP), also known as the banking stress test, which the Federal Reserve led last year. As in the SCAP, representatives of primary and functional supervisors will be fully integrated in the process, participating in the planning and execution of horizontal exams and consolidated supervisory activities.

Improvements in the supervisory framework will lead to better outcomes only if day-to-day supervision is well executed, with risks identified early and promptly remediated. Our internal reviews have identified a number of directions for improvement. In the future, to facilitate swifter, more-effective supervisory responses, the oversight and control of our supervisory function will be more centralized, with shared accountability by senior Board and Reserve Bank supervisory staff and active oversight by the Board of Governors. Supervisory concerns will be communicated to firms promptly and at a high level, with more-frequent involvement of senior bank managers and boards of directors and senior Federal Reserve officials. Greater involvement of senior Federal Reserve officials and strong, systematic follow-through will facilitate more vigorous remediation by firms. Where necessary, we will increase the use of formal and informal enforcement actions to ensure prompt and effective remediation of serious issues.

I think the key question is: How much sooner would these changes have caught the lending problems? I think the answer might be 2007 - and that was already too late.

Hamilton asks who did a better job? Unfortunately all the regulators missed the problems.

by Calculated Risk on 3/17/2010 12:33:00 PM

Note: I didn't mean "Squatter Stimulus" as a put down. Many of these people are in limbo and facing serious uncertainty. This is a term that is being bandied about ... and I didn't mean to make fun of the plight of some homeowners.

The Irvine Housing Blog has an example of the squatter stimulus (homeowners living in their homes and not paying the mortgage): One Defaulting Owner’s Free Ride: Three Years and Counting (ht ghostfaceinvestah)

Freeloaders enjoying the entitled life are not confined to subprime areas. Today's featured property may be the worst case of housing entitlement in the country, and it is right here in Irvine.
...
The owner of today's featured property paid $465,000 on 10/23/2003. She used a $372,000 first mortgage, a $93,000 second mortgage, and a $0 down payment.

On 12/30/2004 she refinanced into an Option ARM for $486,500.

Two months later on 2/3/2005 she opened a HELOC for $67,000.

Total property debt is $553,500 plus 3 years of missed payments, negative amortization, and fees.

Total mortgage equity withdrawal is $88,500.

Consider what this woman accomplished:

She put no money into the transaction. None.

She extracted $88,500 in just over one year. That is nearly the median income in Irvine, and that money came to her without tax withholding.

She has lived in the property since 2003, and in the full term of ownership, she has not made payments totaling what she pulled from the property.

...
The owner of this property stopped making payments sometime in late 2006. It has been over [three years] since this owner stopped paying, and she is still listed as the property owner, so one can assume she still occupies the property.

I've heard a number of stories of people living in their homes for a year or more without paying their mortgage - and without the bank foreclosing. It is difficult to get a handle on the actual number of long term delinquencies (say longer than 6 months without the bank foreclosing). Is this widespread or are these isolated incidents?

by Calculated Risk on 3/17/2010 10:02:00 AM

From Alana Semuels at the LA Times: More homeowners are opting for 'strategic defaults'

Joseph Shull, a 68-year-old marketing professor, said he's planning to walk away from the town house he bought in Moorpark in June 2006.

"I'm angry, and there are a lot of people like me who are angry," he said.

He purchased the home for $410,000 and spent $30,000 renovating. Now the house is worth around $225,000.

Shull admits he overpaid for his property. But he said it fell in value in part because of "regulatory mismanagement."

"The bank stabbed me, but at least I got in a pinprick back," he said. "This is the new economy. The old rules don't apply any more."

This article is similar to David Streitfeld's article in the NY Times last month: No Aid or Rebound in Sight, More Homeowners Just Walk Away

I'm not sure if walking away is becoming more common or if there is a bubble in walking away articles. However there are consequences to walking away - possible tax consequences and some loans are recourse (people walk away from the house, but not the debt!). Perhaps the HAFA short sale program would be a better alternative for many homeowners ...