by Calculated Risk on 7/13/2009 12:36:00 PM

From the WSJ: Pick-a-Pay Loans: Worse Than Subprime

For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages ...

As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure, the figures show.

We knew this day was coming.

By the way, the Healdsburg Housing Bubble has a nice analysis of the Credit Suisse Reset chart, and makes a strong argument that many of the recasts will be later than the chart indicates: Reset Chart from Credit Suisse has a Major Error

Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:

Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012... In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.

In short, Wells expects $56 million in Option ARMs to recast due to the loan balance reaching 125% of the value of the original loan and another $269 million to recast based on the terms of the loan. Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.

Both assumptions seemed suspect, yet, they are in fact true. Looking at page 55 of the Golden West 10-K from 2005 we read:

...most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance reaches 125% of the original amount. We term this reamortization a “recast.” Historically, most loans in our portfolio have paid off before the loan’s payment is recast.

History doesn’t look like it will be a good guide going forward but this at least clearly spells out what we are facing. If recasts don’t happen contractually for 10 years this means that the $49 billion of Golden West Option ARMs originated in 2004 will recast in 2014, and the $51 billion originated in 2005 will recast in 2015.

There is much more in HBB's post, but this suggests that the problem will presist for some time (much longer than shown by the Credit Suisse chart).

by Calculated Risk on 7/13/2009 10:19:00 AM

"One thing is true about housing, it is a very inefficient market - and it shows momentum. And in fact, when the rate of decline slows that is evidence that the rate of decline will continue to slow because there has been a second derivative effect that is actually in the data historically."
Robert Shiller, July 13, 2009

UPDATE: Ignore the Tech Ticker story title - Shiller said he felt an echo bubble was unlikely.

An interview with Robert Shiller at Tech Ticker: “Another Bubble” In Housing? It Could Happen, Says Yale’s Robert Shiller (ht Dirk van Dijk)

The slowing rate of decline in home prices is likely to continue but the housing market is "still in an abysmal situation," says Robert Shiller, a professor of economics at Yale. ... [Shiller] says the housing market could "languish for many years," due to the "huge inventory" of unsold holds, "shadow inventory" of homes kept off the market by banks and other potential sellers, and "a lot of financial problems."

[Shiller] believes "there could be another bubble" in housing, once the excess inventory is worked off. "This is not my more probable scenario [but] people have gotten very speculative in their attitudes toward housing," he says.

Housing markets are very inefficient - and that is why it takes several years for prices to fall to a market clearing price. Even if the rate of price declines has slowed, there will probably be a long tail of real price declines in many areas.

"My more probable scenario is languishing of the housing market for years."
Robert Shiller

by Calculated Risk on 7/13/2009 09:09:00 AM

From the Telegraph: UK Government has lost £10.9bn on stakes in RBS and Lloyds

UK Financial Investments (UKFI) said in its annual report that its loss on the two stakes - 70pc of RBS and 43pc of Lloyds Banking Group - had reached £10.9bn at the end of June.
...
Analysts at UBS have speculated that Lloyds could be forced to write off as much as £13bn on mortgage and commercial property lending, and lending to businesses, when it posts its results for the first half of the year on August 5.

UKFI is the entity set up to manage the UK Government’s ownership in banks. And there are more losses coming ...

by Calculated Risk on 7/13/2009 12:46:00 AM

First, yesterday I posted a funny article about Wells Fargo NA suing Wells Fargo NA (and other defendants). See: Wells Fargo Sues Wells Fargo, Wells Fargo Denies Allegations (ht Rama)

Also gasoline prices fell: U.S. gasoline prices fall to $2.56/gallon

According to the nationwide Lundberg survey of gas stations, Americans are paying about $1.55 less per gallon than they were on July 11, 2008, when the price-per-gallon of gas touched a high of $4.11.
...
Two weeks ago, the national average for self-serve, regular unleaded gas was $2.6613 per gallon.

Futures are off slightly ...

Futures from barchart.com

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

And the Asian markets are off close to 2%.

Best to all.

by Calculated Risk on 7/12/2009 09:04:00 PM

From Treasury Secretary Geithner (via Tom Petruno at the LA Times):

"I think all economists believe, and this was inherent in the design of the program, that the biggest thrust or force would start to take effect in the second half of this year. And we’re going to start to see that happen. But I don’t think that’s a judgment we need to make now, can’t really make it now prudently, responsibly."

From Brad Delong: Fiscal Policy: The Obama Administration Is Not Making Much Sense These Days

Last December the Obama administration ... decided on a fiscal stimulus package which they believed would have minor effects on the economy in the first two quarters of 2009 and major effects--would push unemployment down below what it would other wise have been by more than half a percentage point--starting in the third quarter of 2009. They believed that the economy was not that weak, and that with the fiscal stimulus package taking effect unemployment would be peaking now at a rate of 7.9%.
...
The financial crisis of last fall hit the economy's levels of production, spending, and employment much harder than people thought at the time. If we had known then what we know now, it would have been prudent then to propose twice as large a fiscal stimulus program as the Obama administration in fact did propose.
...
If I were running the government, I would be trying to make up that GDP shortfall right now: I would be rushing a clean $170 billion--$500 per citizen--aid-to-states-that-maintain-effort package through the congress this week.

Click on graph for larger image in new window.

This graph (similar to Brad's) compares the BLS reported monthly unemployment rate (in red) with the Obama economic forecast from January 10th: The Job Impact of the American Recovery and Reinvestment Plan

Geithner is correct about the stimulus kicking in during the 2nd half of 2009, and Delong agrees. But Delong is pointing out that the economy is in much worse shape than originally expected, and he argues if the Obama Administration knew in January what we know today, the package would have been much larger. Maybe. But thinking back - there was a huge political problem with the word "trillion" - so a much larger package would have been very difficult (although the composition could have been different).

From Paul Krugman: Vegematic policy advocacy

Like Brad, I’m not too happy with the policy justifications we’re getting from the administration. It’s perfectly clear that the stimulus was too small; I think they know that too. But they’ve made a political judgment that (a) they can’t push another round through and (b) the thing to do right now is defend the policy they already have.

Maybe they’re right.

My guess is another stimulus package is coming - but the Obama Administration is in a political bind and they will have to wait a few more months. The second package will probably be introduced after the third quarter - or once the unemployment rate reaches 10% - and my guess is it will be about half the size of the package proposed by Dr. Delong.