by Calculated Risk on 3/13/2009 10:14:00 AM

"Before we do the credit cards, we are actually not done with the mortgage [crisis] - the worst of that is yet to come in fact. The thing about mortgages is you can predict when they are going to reset and you can sort of see what is coming. We easily have another 12 to 18 months of pretty ugly times in terms of mortgage resetting. ... Credit cards are next."
FICO (formerly Fair Isaac) CEO and Michael Porter, CNBC

Porter also defends FICO scores as useful (no surprise), and I think he is mostly correct. Unfortunately during the housing bubble, many lenders used creditworthiness (and FICO scores) as the only measure to allow a loan. Historically lenders used the "Three C's": creditworthiness, capacity, and collateral.

On capacity, during the bubble, lenders qualified borrowers at teaser rates - or the Neg Am rate for Option ARMs. They didn't consider if the borrower could meet the fully amortized rate. On collateral, lenders just assumed housing prices would increase and 100%+ LTV loans were common. All three C's still matter.

by Calculated Risk on 3/13/2009 08:30:00 AM

The sharp decline in both imports and exports continues to be an important story.

The Census Bureau reports:

[T]otal January exports of $124.9 billion and imports of $160.9 billion resulted in a goods and services deficit of $36.0 billion, down from $39.9 billion in December, revised. January exports were $7.6 billion less than December exports of $132.5 billion. January imports were $11.5 billion less than December imports of $172.4 billion..

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through January 2009. The recent rapid decline in foreign trade continued in January. Note that a large portion of the decline in imports is related to the fall in oil prices - but not all.

The graph includes both goods and services. The import and export of services has held up pretty well; most of the collapse in trade has been in goods. Imports of goods has declined by one third from the peak of last July!

The second graph shows the U.S. trade deficit, with and without petroleum, through January.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Import oil prices fell to $39.81 in January, and import quantities decreased too - so the petroleum deficit declined by $4 billion.

The trade deficit is now mostly China ($20.6 billion NSA in January) and oil.

by Calculated Risk on 3/12/2009 09:15:00 PM

The market rallied back to 1997 and ...

The Fed reported that household wealth plunged, from MarketWatch:

U.S. households saw their net worth fall by $11.2 trillion, or 18%, to $51.5 trillion at the end of 2008, wiping out five years of gains

Here are several graphs on household wealth and household equity (record low) based on the Fed's Flow of Funds report.

Meanwhile, the employment outlook is still grim. See: Unemployment Claims: Continued Claims at Record 5.3 Million

But retail sales should some signs of stabilization - at a much lower level - off almost 10% from a year ago. There are reasons to be skeptical of the data, but this is a small positive.

Also, the counterparty risk issue with mortgage insurers is heating up again.

Another interesting day ... best to all.

by Calculated Risk on 3/12/2009 06:41:00 PM

Tell me if you've heard this somewhere before ...

Earlier today from MarketWatch: Lewis warns against U.S. seizures, says bank doesn't need more U.S. aid

Lewis stressed that he thinks Bank of America won't need more public support.

"I'm confident we'll pass the stress test," he said

And from CNBC: Citigroup Does Not Need Further US Capital Injections: Chairman

by Calculated Risk on 3/12/2009 05:20:00 PM

A couple of mortgage insurer stories ...

From the WSJ: MBIA's Split of Businesses Raises Ire of Banks, Hedge Funds

Representatives of about 15 financial institutions will meet Thursday with New York State Insurance Superintendent Eric Dinallo to complain about MBIA Inc.'s decision to split its bond-insurance unit into two companies...

The group includes many banks that feel disadvantaged by MBIA's move last month to separate its municipal-bond insurance business from its commitments to insure mortgage-backed bonds and other structured securities. The banks are counterparties to MBIA on derivatives called credit-default swaps that were written on securities they own ... These institutions were left holding contracts with a financially weaker insurer when MBIA transferred about $5 billion in capital from its main unit to another company that guarantees only U.S. municipal bonds.

And from Dow Jones (no link): MGIC Dn 35% As Payment-Deferral Points To Liquidity Issues

MGIC Investment Corp. ... said in a late-Wednesday regulatory filing it deferred its interest payment on some debentures by 10 years.

The filing, which revealed MGIC is likely having liquidity issues ...

... Fitch Ratings put its credit ratings on MGIC and two of its units on watch for possible downgrade Thursday. ... Mortgage insurers such as MGIC cover potential lender losses on loans to borrowers who can't come up with a 20% down payment. The sector continues to struggle with soaring claims and declining new business ...

Actually the mortgage insurers were lucky - they were cut out of the worst deals because Wall Street happily securitized 100% financing with 2nds and no MI. But the losses are still piling up. And so are the counterparty risks ...