by Calculated Risk on 1/28/2009 08:55:00 AM

From Bloomberg: FDIC May Run ‘Bad Bank’ in Plan to Purge Toxic Assets

The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up ...

FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets ... President Barack Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said.
...
The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin banks’ bad debt, in the hopes of stemming a crisis that has stripped more than 1.3 million Americans of their homes. Some lenders may be taken over by regulators and some management teams could be ousted as the government seeks to provide a shield to taxpayers.

There is much more in the article.

by Calculated Risk on 1/27/2009 11:26:00 PM

Obviously the Fed will not cut the federal funds rate this month, however the Fed mentioned last month that they would evaluate buying longer-term Treasuries.

From the December Fed statement:

As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
emphasis added

So I'd expect some sort of discussion or announcement about the evaluation. When the Fed issued the statement in December, the Ten Year was yielding 2.5% or so. Following the announcement, the yield declined to almost 2.0%, but is now back to 2.5% again.

Just something to look for in additional to the bleak outlook.

by Calculated Risk on 1/27/2009 07:08:00 PM

From the WSJ: U.S. House Panel Approves Mortgage Measure (hat tip Ken)

A measure to allow judges to reduce the principal amounts of mortgages for troubled borrowers in bankruptcy cleared a key hurdle Tuesday when it was approved by a U.S. House panel.
...
Under the legislation, borrowers would be eligible to have a bankruptcy judge reduce the principal balance on their home loan -- a move known as a "cram down."
...
In key concessions to the banking industry, Mr. Conyers agreed to alter the legislation to allow court-ordered modifications only for existing mortgages and to require that borrowers contact their lender at least 15 days before filing bankruptcy.
...
In another change, the legislation will now require recipients of cram downs who resell their home within five years to share the proceeds with their lender.

Tanta argued that cram downs would help discipline lenders in the future. So I think she'd consider the concession to make the legislation applicable to only existing mortgages significant. Excerpting from Tanta's Just Say Yes To Cram Downs

I am fully in favor of removing restrictions on modifications of mortgage loans in Chapter 13, but not necessarily because that helps current borrowers out of a jam. I'm in favor of it because I think it will be part of a range of regulatory and legal changes that will help prevent future borrowers from getting into a lot of jams, which is to say that it will, contra MBA, actually help "stabilize" the residential mortgage market in the long term. Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under BK law.

by Calculated Risk on 1/27/2009 05:38:00 PM

From Steve Liesman at CNBC: Plan for Banks' Toxic Debt May Be Unveiled Next Week

The Obama administration is close to deciding on a plan to purchase bad—or non-performing and illiquid—assets from banks ... The plan could be announced early next week.

The so-called "bad bank" plan, would address the key problem of how to price the assets by using a model-pricing mechanism.

The model would take account of the government's ability to hold onto assets, even to maturity, and pay for the them with cheap funding. Result: the government might end up paying more than current market prices for the securities.

On the other hand, if the government paid less than the value at which the asset is carried on the bank's books, the bank would issue common equity to the government.
...
A Treasury official said nothing will be announced this week and would not comment "on specific policy decisions that have yet to be made."

I'm skeptical of a "model-pricing mechanism" that adjusts the price of non-performing assets higher because the government has a lower borrowing cost. What then happens to the government's borrowing costs in the future?

by Calculated Risk on 1/27/2009 05:23:00 PM

From Bloomberg: New York Office Vacancies Rising to 12% by 2011, SL Green Says

Manhattan office vacancies may rise to 12 percent within 24 months, SL Green Realty Corp. Chief Executive Officer Marc Holliday said today on a conference call.

SL Green, New York’s biggest office landlord with 23.2 million square feet ...

From the SL Green conference call (hat tip Brian):

“Clearly this is a market where we are relooking at the ways we lease and do business with tenants. We are more cautious today. We have increased our security deposit requirements for tenants that are less than obviously credit worthy and this is something that we have done in other bad markets. It's paid off for us. It's kept our credit losses to a minimum in good and bad market. We are also doing more net effective deals where we put out less capital and pay less commission on slightly lower rents but rents that still provide for uptick relative to prior escalated rents.

The market however is certainly feeling the pressure of job losses, Financial Services contraction, sublet space and a limited but growing number of business failures. We can't help but expect that vacancy rate in midtown is going to rise beyond where we had originally forecasted those vacancy rates to be at around ten to 12%. At the moment those rates seem to be at around eight to 9% vacant currently, maybe even 10% if you take into account whatever space we think will be coming available directly or indirectly online in 2009. And we think that that vacancy rate could easily now hit 12% or more over the next 24 months.
emphasis added

Mayor Bloomberg released a report on the NY City economy in early November. Here is a graph of their projected vacancy rate and rents (close to the SL Green projections):

Click on graph for larger image in new window.

This graph shows the actual and projected (by the NYC OMB) rents and office vacancy rate for NYC Class A buildings.

The vacancy rate is expected to rise from about 7.5% to 13%, and rents are expect to decline by 20% or more from the peak.