by Calculated Risk on 10/13/2009 03:15:00 PM

From an article by Jody Shenn and Dawn Kopecki on Bloomberg: JPMorgan Pitches Interest-Only Mortgages to Boost Obama Plan

Banks will push the Obama administration to expand its mortgage-modification program to allow interest-only periods on reworked loans ... while recognizing concern that it may only postpone defaults, according to JPMorgan Chase & Co.

“We’re working with our peers to develop a proposal to present,” Douglas Potolsky, a senior vice president at JPMorgan’s Chase home-loan unit, said yesterday at a Mortgage Bankers Association conference in San Diego.

This is simply more extend and pretend, and only postpones defaults.

The article also has some comments from Laurie Anne Maggiano, director of the Treasury’s policy office for homeownership preservation. Maggiano acknowleges that only "a couple thousand" modification are now permanent, and she notes that the trial period has been extended an extra two months (I guess a disappointing number of trial modifications are becoming permanent).

The key numbers to track going forward will be the number of permanent modificatons, and the redefault rate for permanent modifications. So far it is "a couple thousand" and too early to say.

The article also quotes Maggiano on the short sale initiative that should be announced next week. Housing Wire has more: Treasury to Announce New Program to Avoid Foreclosure

The Chief of the Homeowner Preservation Office at the Treasury, Laurie Maggiano, released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so.
...
Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.

by Calculated Risk on 10/13/2009 01:23:00 PM

From DataQuick: Southern California home sales inch up; median price steady

Last month 21,539 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. That was up 0.2 percent from 21,502 in August and up 5.1 percent from 20,497 a year earlier, according to MDA DataQuick of San Diego.

September marked the 15th month in a row with a year-over-year sales gain, although last month’s was the smallest of those increases. ... The small uptick in September sales from August was atypical. On average, sales have fallen 9.5 percent between those two months.
...
“There were more than just normal, seasonal forces at work in these September sales numbers. More attempts at short sales, which typically take longer, and new appraisal rules no doubt delayed some deals this summer, causing them to close in September rather than August. September probably also got a boost from people opting to buy sooner rather than later to take advantage of the federal tax credit for first-time buyers, which is set to expire next month,” said John Walsh, MDA DataQuick president.
...
Foreclosure resales – houses and condos sold in September that had been foreclosed on at some point in the prior 12 months – made up 40.4 percent of all Southland homes resold last month. That was down slightly from a revised 41.7 percent foreclosure resales in August and down from a high of 56.7 percent in February this year.
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A common form of financing used by first-time buyers in more affordable neighborhoods remained near record levels. Government-insured FHA mortgages made up 36.4 percent of all home purchase loans last month ...

Foreclosure activity remains high by historical standards.
emphasis added

Although DataQuick doesn't track short sales, we can estimate from the Sacramento data that another 15% or so of sales in SoCal were short sales - so probably over half the sales are distressed.

This report suggests sales were strong in September - similar to other regional reports.

We will probably see a decrease in year-over-year sales soon, as the first-time homebuyer tax credit buying frenzy subsides later this year.

by Calculated Risk on 10/13/2009 11:18:00 AM

Voit released Q3 quarterly reports today for CRE in Las Vegas, San Diego and Orange County.

The reports show the vacancy rates are up and lease rates falling. It also shows new construction has slowed sharply. Here are a couple of graphs for Orange County and San Diego. We are seeing a similar pattern nationwide ...


Click on graph for larger image in new window.

This graph shows the annual Orange County office vacancy rate and new construction since 1988. See Voit report for more.

Note that in the previous slumps, office construction didn't pick up until the vacancy rate dropped below 10%.

From the Voit report:

Net absorption for the county posted a negative 438,803 square feet for the third quarter of 2009, giving the office market a total of 1.92 million square feet of negative absorption for the year.
...
The average asking Full Service Gross (FSG) lease rate per month per foot in Orange County is currently $2.24, which is a 16.73% decrease over last year’s rate of $2.69 and five cents lower than last quarter’s rate.
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Total space under construction checked in at 166,455 square feet at the end of the third quarter, which is less than half the amount that was under construction this same time last year.
emphasis added

The second graph is for San Diego. The dynamics are similar, but absorption is slighly positive in San Diego. From Voit:

Net absorption for the county posted a positive 346,030 square feet for the third quarter of 2009, giving the office market a total of 653,537 square feet of positive absorption for the year.
...
The average asking Full Service Gross (FSG) lease rate per month per foot in San Diego County is currently $2.39, which is a 12.8% decrease over last year’s rate of $2.74 and eight cents lower than last quarter’s rate. The record high rate of $2.76 was established in the first and second quarter of 2008.

Once again, investment in new office space will probably not increase until the vacancy rate is below 10%.

Although Voit didn't provide a similar graph for Las Vegas, the situation is clearly worse:

The amount of occupied space valley-wide fell to 38.2 million, a level not witnessed since the second quarter of 2007. The average vacancy rate reached 22.7 percent, which represented a 0.7-point increase from the preceding quarter (Q2 2009). Compared to the prior year (Q3 2008), vacancies were up 5.7 points from 17.0 percent.
...
On an annualized basis, new supply has dwindled and less than one million square feet of new supply is expected to enter the market during 2009, a figure not seen since 2003. We expect even less development in 2010 with a plug on the development pipe until the supply-demand imbalance corrects itself.

New office construction has slowed significantly in these markets, and will not pick up until vacancy rates drop sharply.

by Calculated Risk on 10/13/2009 08:23:00 AM

From Reuters: CIT debt swap struggles, bankruptcy looms. Reuters is reporting that "sources familiar with the matter" say bondholders are showing little interest in the debt exchange offer and a bankruptcy is now more likely.

Also this morning CIT announced that CEO Jeffrey Peek is resigning effective Dec 31st.

The possible bankruptcy of CIT is a major concern because CIT provides financing for about one million small businesses. And small businesses are already having trouble obtaining credit.

From Peter Goodman in the NY Times: Credit Tightens for Small Businesses

Many small and midsize American businesses are still struggling to secure bank loans, impeding their expansion plans and constraining overall economic growth ...

Most banks expect their lending standards to remain tighter than the levels of the last decade until at least the middle of 2010, according to a survey of senior loan officers conducted by the Federal Reserve Board. ... Bankers worry about the extent of losses on credit card businesses ...[and] are also reckoning with anticipated failures in commercial real estate. Until the scope of these losses is known, many lenders are inclined to hang on to their dollars rather than risk them on loans to businesses in a weak economy ...

Also see: Small Business and Employment

A CIT bankruptcy will probably lead to even tighter credit for many small businesses exacerbating the current credit situation.

by Calculated Risk on 10/12/2009 10:07:00 PM

Usually this would be a "duh", but with some of the Fed talk recently, this is worth noting ...

From Bloomberg: Bullard Says Lower Unemployment Condition to Tighten

...“You want some jobs growth and unemployment coming down. That is a prerequisite” for an increase in interest rates, Bullard said. “It doesn’t mean you need unemployment all the way down to more normal levels.”
...
Bullard, referring to a prior jobless rate of 10.8 percent, said “I don’t think we will quite hit the peak we hit in 1982, but things have surprised us before.”
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“I’m the north pole of inflation hawks,” Bullard said. “But we are trying to describe optimal policy, some optimal outcomes in an environment where inflation is below target -- we have an implicit target of 1.5 to 2 percent -- and you have the specter of a Japanese-style outcome, which I have worried about and some other members of the FOMC have worried about.”
...
“It is a little disappointing that private-sector economists are thinking so much about when we are going to move our fed funds rate up,” he said. “We are at zero. We are going to be there awhile. The focus should be more on” the Fed’s asset purchase program.

As Paul Krugman noted this weekend, we are a long way from when the Fed will raise rates.