by Calculated Risk on 10/19/2005 11:47:00 AM

Federal Deposit Insurance Corp. (FDIC) Chairman Donald Powell spoke at the America's Community Bankers conference in Orlando today and cautioned on housing. Here is the press release of his comments:

Time of Transition to Follow Record-Setting Housing Boom, Powell Cautions
'Non-traditional' mortgages may elevate risks for some banks and homeowners

Residential mortgage lenders and borrowers need to be prepared for more challenging conditions ahead as U.S. housing markets enter a time of transition, said Federal Deposit Insurance Corporation (FDIC) Chairman Don Powell today in remarks at the America's Community Bankers Annual Convention in Orlando, Florida.

"The U.S. has experienced a 5-year housing boom capped by record home-price growth since 2004," said Powell. "As housing costs escalate, it is not surprising to see the rapid rise in so-called 'non-traditional' mortgages – such as 'piggyback' mortgages, low- and no-doc loans, interest-only loans, and loans with optional payment terms allowing for considerable negative amortization – all of which grew quickly in prominence over the last year.

"We know that housing booms don't last forever, and that rising interest rates will push debt service higher for borrowers relying on some of these emerging mortgage products. Credit losses are very low now, but mortgage lenders need to be prepared for higher losses. Homeowners taking on these types of mortgage product need to understand how their obligation may grow when their low introductory interest rates expire."

Powell said that the bank regulatory agencies are evaluating the importance of these and other risks to lenders. Bank regulators are looking at the lending programs of banks and will issue guidance where appropriate. Powell added that mortgage lending guidance should not prohibit innovation, but should seek to define and uphold the principles of sound banking. "We of course want to ensure that banks can continue to serve as engines of growth for our economy."

Home prices – adjusted for inflation – grew in 2004 at the fastest rate (8.1 percent after correcting for inflation) since the Office of Federal Housing Enterprise Oversight (OFHEO) began tracking the data in 1975, Powell noted. So far in 2005, home price growth has topped 2004 records.

Powell added that the housing boom is also breaking records in geographic scope: As far back as the early 1980s, the FDIC has not seen this number of metro housing markets booming simultaneously across the country, and no previous experience comes close to today's trend. (The FDIC defines a metro area boom as one in which home prices rose more than 30 percent after inflation during a three-year period.) The FDIC found the boom markets increased from 33 cities at year-end 2003 to 55 cities at year-end 2004. The FDIC estimates that these boom cities include about 40 percent of the value of all U.S. residential real estate.

by Calculated Risk on 10/19/2005 11:18:00 AM

The FEI.org provides a summary of the proposed FASB staff position:

On Oct. 13, 2005, the Financial Accounting Standards Board (FASB) released Proposed FASB Staff Position (FSP) No. SOP 94-6-a, "Nontraditional Loan Products." The proposed FSP is in response to inquiries from constituents and discussions with the SEC staff and regulators of financial institutions.

Nontraditional loan products are defined in the proposed FSP as those that "expose the originator, holder, investor, guarantor, or servicer to higher risk than traditional products…[and] include, but are not limited to" the following:

a. Loans with the contractual ability to negatively amortize
b. Loans with a high loan-to-value ratio
c. Home equity lines of credit, second mortgages, or other products that result in a high loan-to- value ratio when combined with other mortgages on the same collateral
d. Option ARMs or similar products that may expose the borrower to future increases in repayments in excess of changes that result solely from increases in the market interest rate (for example, once negative amortization results in the loan reaching a maximum principal accrual limit)
e. Loans with below market or teaser interest rates
f. Interest-only loans.

The proposed FSP states that nontraditional loan products such as those described above represent concentrations of credit risk as that term is defined in FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments," and accordingly certain disclosures under FAS 107 would be required. Additionally, certain disclosures under AICPA Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties" (SOP 94-6) would be required.

In addition to referencing the above-named standards requiring disclosure, the proposed FSP also notes numerous other existing FASB, Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA) and bank regulatory rules requiring certain disclosures that must be considered with respect to these nontraditional loan products. Regarding the effective date of the FSP (when finalized), the proposed FSP notes, "This FSP references only existing effective literature; therefore, no effective date or transition guidance is required." As such, in considering commenting on the proposed FSP, companies may want to consider the potential implications of a lack of a delayed effective date or transition guidance.

Here is the proposed FSP from FASB.

by Calculated Risk on 10/18/2005 03:09:00 PM

UPDATE: Dr. Thoma reviews the rest of Dr. Yellen's speech.

UPDATE2: Federal Reserve Vice Chairman Roger W. Ferguson, Jr. also spoke yesterday: Economic Outlook for the United States. Here are his comments on housing:

"... clearly one concern ... was the ongoing rise in home prices and the possibility that this phenomenon is unsustainable. House prices have risen to levels that, in some areas of the country, seem high relative to the economic fundamentals. The market for second homes seems especially strong, raising the fear that some homeowners are speculating on further increases in home prices. The greater use of innovative forms of mortgage finance adds to the concern that the residential real estate market may well be vulnerable to a flattening of home prices, and in certain markets, perhaps a decline. I do not think that a significant and widespread drop in home prices is the most likely outcome, but the situation will require careful monitoring in the months ahead."

ORIGINAL POST:

San Francisco Fed President Janet Yellen spoke in Salt Lake City today. Although generally optimistic, Dr. Yellen made a few cautionary comments:

"My medium-term outlook, before Katrina, was for growth averaging a pace sufficient to keep the economy operating in the vicinity of full employment, albeit with notable risks, particularly relating to energy prices and housing..."

Yellen talked about energy and inflation, but one of her main concerns was housing:

" ...there are downside risks to economic growth relating to the housing market. This sector has been a key source of strength in the current expansion, and the concern is that, if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending. Certainly, analyses do indicate that house prices are abnormally high—that there is a "bubble" element, even accounting for factors that would support high house prices, such as low mortgage interest rates. So a reversal is certainly a possibility. Moreover, even the portion of house prices that is explained by low mortgage rates is at risk. There is a controversy about just why the rates have stayed so low. Over the past year, the Fed has raised the federal funds rate significantly. Normally, long-term interest rates also rise with increases in the expected path for the federal funds rate. But, long-term rates—such as those on 30-year fixed rate mortgages—have actually fallen over the period. This is what Chairman Greenspan has labelled a conundrum because there seems to be no convincing explanation for it. So, we can't rule out the possibility that they would rise to a more normal relationship with short-term rates. This obviously might take some of the "oomph" out of the housing market. My bottom line is that while I'm certainly not predicting anything about future house price movements, I think it's obvious that a substantial cooling off of the housing sector represents a downside risk to the outlook for growth."

by Calculated Risk on 10/18/2005 02:40:00 PM

The National Association of Homebuilders reports: Builder Confidence Returns To Pre-Katrina Level In October

Builder confidence in the market for newly built single-family homes rebounded by a couple of points in October to the same level at which it was gauged prior to hurricanes Katrina and Rita, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

"This is a reassuring sign that builder attitudes are bouncing back from the initial shock of the hurricanes’ devastation and the economic uncertainties immediately following those storms, even in the midst of higher mortgage interest rates," said NAHB President Dave Wilson, a custom home builder from Ketchum, Idaho.

"At the same time, the fact that the confidence level remains below the mid-year high may indicate that builders see the market finally beginning to plateau at a slightly slower, but quite healthy, pace," noted NAHB’s chief economist, David Seiders.

The HMI rose two points to 67 in October, returning to the same level it hit in August but still off the year’s cyclical high of 72, set this June. The gain marks an end to a three-month trend of downward movements.

Here are the components.

by Calculated Risk on 10/18/2005 12:14:00 PM

The Ports of Long Beach and Los Angeles combined reported record import traffic for September.

Import traffic at the Port of Long Beach increased 2.4% compared to August, setting a new import traffic record. A total of 313.5 thousand loaded cargo containers came into the Port of Long Beach, compared to 306 thousand in August.

The Port of Los Angeles import traffic increased 2.2% in September. Imports were 350.8 thousand containers, just below the all time high for the Port of Los Angeles.

For Long Beach, outbound traffic was off 12% to 97 thousand containers. At Los Angeles, outbound traffic was down 2% to 93 thousand containers.

The quantity of containers says nothing about the content value, but provides a rough guide on imports from China and the rest of Asia. With these numbers, I expect record imports from China for September.

Imports up, exports down.