by Calculated Risk on 10/08/2009 11:34:00 AM

From Bloomberg: FHA Shortfall Seen at $54 Billion May Lead to Bailout (ht Mike in Long Island, Ron at WallStreetPit)

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae ...

Pinto makes several points, including:

"FHA is making much larger loans than in the past. Its top dollar limit is $729,500 versus its old top of $362,000 in 2008." This exposes the FHA more to high risk states like California.

"FHA allows up to a 6% seller concessions before requiring an appraisal adjustment." Pinto notes that Fannie Mae found that allowing concessions above 2% before adjustments led to much higher defaults.

High LTV lending is a higher percentage of loans today (23%) than in 2006 (17%). This is due to the large increase in FHA insured loans.

The first-time homebuyer tax credit is being used as a downpayment, and Pinto draws a comparison to the horrible default performance of the DAPs (downpayment assistance program) loans.

"FHA's early warning database indicates loan performance is deteriorating." See pages 6 and 7 of testimony for details. Note: I posted some data before, see FHA Lenders with High Default Rates

There is more in his testimony.

by Calculated Risk on 10/08/2009 09:05:00 AM

Click on graph for larger image in new window.

Reis reports the strip mall vacancy rate hit 10.3% in Q3 2009; the highest vacancy rate since 1992. And rents are cliff diving ...

From Reuters: Shopping center vacancy rate hits 17-year high: report

"Our outlook for retail properties as a whole is bleak," Victor Calanog, Reis director of research, said. "Until we see stabilization and recovery take root in both consumer spending and business spending and hiring, we do not foresee a recovery in the retail sector until late 2012 at the earliest."
...
The third-quarter vacancy rate at U.S. strip malls, which include local shopping and big-box centers, rose 0.3 percentage points from the second quarter to 10.3 percent, the highest since 1992, Reis said.
...
Factoring in months of free rent and other perks, effective rent fell 0.8 percent from the second quarter to $16.89 per square foot or down 3.8 percent from the third quarter 2008. Rents were the lowest since mid-2007
...
"Since asking and effective rent growth only turned negative about one year ago, it is daunting to observe this acceleration in decline in what has traditionally been regarded as a stable property type," Calanog said.

A grim outlook: no recovery seen in the retail CRE sector "until late 2012 at the earliest".

Malls. Offices. Apartments. The story is the same: rising vacancies and falling rents. Here are the earlier reports this week on offices and apartments:
U.S. Office Vacancy Rate Hits 16.5% in Q3

Apartment Vacancy Rate at 23 Year High

by Calculated Risk on 10/08/2009 08:34:00 AM

The DOL reports weekly unemployment insurance claims decreased to 521,000:

In the week ending Oct. 3, the advance figure for seasonally adjusted initial claims was 521,000, a decrease of 33,000 from the previous week's revised figure of 554,000. The 4-week moving average was 539,750, a decrease of 9,000 from the previous week's revised average of 548,750.
...
The advance number for seasonally adjusted insured unemployment during the week ending Sept. 26 was 6,040,000, a decrease of 72,000 from the preceding week's revised level of 6,112,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 9,000 to 539,750, and is now 119,000 below the peak in April.

Initial weekly claims have peaked for this cycle, however the level of weekly claims indicates continuing weakness in the job market. The four-week average of initial weekly claims will probably have to fall below 400,000 before total employment stops falling.

by Calculated Risk on 10/07/2009 09:50:00 PM

From Dow Jones: Pimco Has Quit CIT Bondholder Steering Committee

The future of CIT Group Inc. (CIT) grew murkier Wednesday after the disclosure that bond fund giant Pacific Investment Management Co. had quit a steering committee that's trying to prevent the commercial lender from collapse. ... Boston-based Baupost Group LLC [had quit earlier].
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The company has an estimated $75 billion in assets, and provides critical short-term financing to about one million small companies.
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Investors have until 11:59 p.m. Eastern time on Oct. 29 to tender their bonds under the restructuring plan.

Small firms have already been hit hard in this recession, accounting for about 45% of the job losses (see Melinda Pitts at Macroblog: Prospects for a small business-fueled employment recovery):

In a speech [Monday], William Dudley, the president of the Federal Reserve Bank of New York, identified financial constraints for small businesses as a restraint on the pace of economic recovery.
...
Looking ahead, it's not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.

As the article mentioned, CIT provides financing for about one million small business. If CIT files bankruptcy, the company will continue to operate, but they may not write any new business. Their competitors will pick up the best of the business, but many small firms will struggle to find new financing.

The clock is ticking.

by Calculated Risk on 10/07/2009 05:50:00 PM

Jim says the "market is hot, real hot." This is worth watching to get a feel for what is happening at the lower end of the housing market (in San Diego at least).