by Calculated Risk on 2/27/2007 09:52:00 PM

Press Release: Fremont General Corporation to Postpone Release of Results for 2006

Fremont General Corporation ... a nationwide residential and commercial real estate lender doing business primarily through its wholly-owned industrial bank, Fremont Investment & Loan, today announced that it will postpone the release of its fourth quarter and full-year 2006 results of operations, as well as the conference call to discuss such results, each previously scheduled for February 28, 2007. The Company also announced that it will not file its Annual Report on Form 10-K for the fiscal year ended December 31, 2006 by March 1, 2007 and that it intends to file a Form 12b-25 with the Securities and Exchange Commission explaining the reasons therefor.

by Calculated Risk on 2/27/2007 09:34:00 PM

From the NY Times: For Manufacturing, a Recession Has Arrived

The nation’s manufacturing sector managed to slip into a recession with almost nobody seeming to notice. Well, until yesterday.

And it's not just manufacturing. See Menzie Chinn's charts at Econbrowser: The Fundamentals Are...

by Calculated Risk on 2/27/2007 06:24:00 PM

From the FDIC: FDIC Reports that Housing Slowdown Poses Challenge to Bank Loan Growth

The recent slowdown in residential construction could reduce the demand for mortgages and commercial real estate and construction loans -- activities that have been important factors in loan growth for banks and thrift institutions in recent years. That's according to the Winter 2006 edition of FDIC Outlook released today, which analyzes economic and banking conditions in each of the eight FDIC regions.

"While employment and income trends are positive in almost every region, the effects of the slowdown in residential construction activity are clearly visible," said FDIC Chairman Sheila C. Bair. "Going forward, insured banking institutions should pay careful attention to risk-management processes in this slower-growth environment."

Here is the conclusion from the San Francisco Region report:

Despite current strong economic and banking conditions in the West, increased reliance on historically volatile construction activity may stress local economies and the banking sector should the housing sector continue to weaken. An extended or sharp slowdown in construction activity could ripple through local economies and bank balance sheets and income statements. Although strength in other sectors—particularly the services sector—has emerged recently and could mitigate some of the negative effects of a slowing construction sector, elevated CRE and construction lending concentrations at FDIC-insured institutions will continue to be monitored closely for any signs of weakening in credit quality.

This is an understated warning. Especially concerning is the "elevated construction lending concentrations at FDIC-insured institutions". A CRE and C&D slump could exacerbate the economic problems caused by the housing sector slowdown.

Unfortunately nonresidential investment typically trails residential investment by three to five quarters. So it would not by unusual to see a CRE and C&D investment slump later this year with rising delinquency rates (See Investment Lags for an analysis of the lag times, as compared to residential investment, for equipment and software, and non-residential structures).

And here are the Commercial Bank Delinquency Rates released today by the Federal Reserve (through Q4 2006).

Click on graph for larger image.
Although commercial real estate delinquency rates are still historically low, they have started to move up. With the heavy concentration of CRE and C&D loans at FDIC institutions, a significant slump (like the early '90s) could pose a serious risk to these financial institutions.


As a review: this graph shows the YoY change in residential investment vs. nonresidential investment through Q4 2007. In general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong - but it is reasonable, from a historical perspective, to expect a nonresidential investment slump in 2007.

by Calculated Risk on 2/27/2007 11:24:00 AM

"Some of these products that worked in the past don't work going forward," Chairman and Chief Executive Richard F. Syron, Freddie Mac 2/17/2007

From Freddie Mac: Freddie Mac Announces Tougher Subprime Lending Standards to Help Reduce the Risk of Future Borrower Default

Freddie Mac (NYSE: FRE) today announced that it will cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure. First, Freddie Mac will only buy subprime adjustable-rate mortgages (ARMs) – and mortgage-related securities backed by these subprime loans – that qualify borrowers at the fully-indexed and fully-amortizing rate. The goal is to protect future borrowers from the payment shock that could occur when their adjustable rate mortgages increase.

Second, the company will limit the use of low-documentation underwriting for these types of mortgages to help ensure that future borrowers have the income necessary to afford their homes. In addition, Freddie Mac will strongly recommend that mortgage lenders collect escrow accounts for borrowers’ taxes and insurance payments.

In keeping with its statutory responsibility to provide stability to the mortgage market, Freddie Mac will implement the new investment requirements for mortgages originated on or after September 1, 2007, to avoid market disruptions.
...
Freddie Mac’s new requirements cover what are commonly referred to as 2/28 and 3/27 hybrid ARMs, which currently comprise roughly three-quarters of the subprime market. Specifically, the company is requiring that borrowers applying for these products be underwritten at the fully- indexed and amortizing rate, as opposed to the initial "teaser" rate. The company also will limit the use of low-documentation products in combination with these loans. For example, the company will no longer purchase "No Income, No Asset" documentation loans and will limit "Stated Income, Stated Assets" products to borrowers whose incomes derive from hard-to-verify sources, such as the self-employed and those in the "cash economy." There will be a reasonableness standard for stated incomes.

In addition, Freddie Mac will require that loans be underwritten to include taxes and insurance and will strongly recommend that the subprime industry collect escrows for taxes and insurance, as is the norm in the prime sector. Because the maintenance of escrow accounts requires significant infrastructure and is not widely used in the subprime sector, Freddie Mac does not believe it is practical to unilaterally mandate it as a purchase requirement at this time.

by Calculated Risk on 2/27/2007 10:18:00 AM

The National Association of Realtors (NAR) reports: Existing-Home Sales Improve in January

Click on graph for larger image.

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – increased 3.0 percent to a seasonally adjusted annual rate1 of 6.46 million units in January from an upwardly revised pace of 6.27 million in December. Sales were 4.3 percent below the 6.75 million-unit level in January 2006.

The above graph shows NSA monthly sales for 2005, 2006 and 2007. On an NSA basis, sales were 2.7% below January 2006.

Total housing inventory levels rose 2.9 percent at the end of January to 3.55 million existing homes available for sale, which represents a 6.6-month supply at the current sales pace – unchanged from the revised December level. Supplies peaked at 7.4 months in October.

Usually 6 to 8 months of inventory starts causing pricing problems, and over 8 months a significant problem. With current inventory levels at 6.6 months of supply, inventories are now well into the danger zone.