by Calculated Risk on 10/16/2009 09:15:00 AM

From MarketWatch: U.S. Sept. industrial production up 0.7%

U.S. industrial production increased at an annual rate of 5.2% in the third quarter ... Capacity utilization rose to 70.5% in September from a revised 69.9% in August.

Auto production was up significantly.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series has increased for three straight months, and is up from the record low set in June (the series starts in 1967). Capacity Utilization had decreased in 17 of the previous 18 months.

Note: y-axis doesn't start at zero to better show the change.

An increase in capacity utilization is usually an indicator that the official recession is over.

by Calculated Risk on 10/16/2009 08:42:00 AM

From Reuters: BofA Posts Loss Amid Consumer Credit Woes

The nation's largest bank reported a net loss of $1 billion... The bank set aside $11.7 billion during the quarter for credit losses, $1.7 billion less than in the second quarter but $5.3 billion more than in the 2008 third quarter.

And from the WSJ:

Credit-loss provisions swelled 81%, while the net charge-off rate was up at 4.13% from 1.84% a year earlier and 3.64% in the second quarter. Total nonperforming assets rose to 3.72% from 1.45% in the prior year and 3.31% last quarter.

The confessional is still open.

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

This includes lawyers, mortgage brokers, and loan officers ...

From the NY Times: 41 Charged With Widespread Mortgage Fraud

Federal prosecutors announced charges on Thursday against 41 lenders, lawyers and others in the real estate industry who they said used fraud to obtain more than $64 million in loans connected to more than 100 residential properties in New York State.
....
[One case involved] a Bronx real estate company called MTC, 10 people were accused of participating in a $5.6 million “foreclosure rescue” scheme in which they sought out troubled mortgage holders facing foreclosure, running radio ads in which they presented themselves as saviors.

An indictment said that the defendants in that case ... duped troubled homeowners into selling their properties at low prices or persuaded them to transfer the deeds to their homes, promising to help solve their financial problems and then return the properties.

Instead, prosecutors said, Ms. Bills and other defendants flipped those properties to straw buyers at inflated prices subsidized by unaffordable loans that the defendants persuaded lenders to issue based on false documentation.

It is hard to believe how callous and greedy some people are (assuming the charges are true).

by Calculated Risk on 10/15/2009 04:53:00 PM

The housing outlook has probably never been more uncertain ... and the details are masked by many distortions.

"[T]he HAMP program right now ... really makes it difficult for anyone from the outside [of Citi] to actually have a good view as to the inherent credit profile in our [mortgage] delinquency buckets."
Citi CFO John Gerspach, Oct 15, 2009

So, as confusing as it is, here is a rough overview ...

Supply: the supply of distressed homes has been severely restricted by a combination of foreclosure delays and trial modifications.

Demand: demand has been distorted by the first-time homebuyer tax credit, by extraordinary levels of lending using government-insured FHA loans, and the Fed buying GSE MBS pushing down mortgage rates.

This has led to a buying frenzy in many low end areas, and has pushed up prices.

Look at the California Bay Area report today from DataQuick:

Home sales in the Bay Area edged up in September as buyers scrambled to take advantage of low mortgage interest rates as well as a tax credit due to expire at the end of November. ... The month-to-month gain was atypical: sales normally decline around 11 percent from August to September. ... The use of government-insured FHA loans – a common choice among first- time buyers – represented 29.3 percent of all Bay Area purchase loans in September.

This is a very large percentage of government-insured FHA loans - and many of these buyers are probably using the tax-credit as their downpayment (which will probably lead to higher defaults).

“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
Barney Frank, chairman of the House Financial Services Committee on recent FHA lending.

So what does this mean for the housing market? In the short term:

Existing home sales will probably be strong in September based on regional reports.

With restricted supply and increased demand, prices (Case-Shiller) will probably be strong through at least September (reported with a delay).

Reported inventories will move lower.

But the longer term (2010 or maybe later) will really depend on the success of the modification programs. And according to Citi today, we won't have a feel for the success rate of HAMP until probably Q1.

Amherst Securities isn't optimistic: Timing is Everything, Oct 14, 2009 (no link)

Implementation of the HAMP modification plan is making it even more difficult to predict cash flows. The trial modification period essentially holds the loan in a suspended state ... making it difficult to assess what is happening with modifications. In the end, we expect relatively few of these modifications to be successful.

I also expect most HAMP modifications to fail, although many borrowers might make their payments for a few years, and then finally default.

Even excluding the HAMP, because of slowdowns in the foreclosure process, the lenders are sitting on a backlog of foreclosures in the pipeline (not REOs, but properties in the process). So there should be an increase in foreclosures soon - how soon, and how many, is a guess.

And on the demand side, the Fed's purchases of GSE MBS will end in Q1, the interest in the first-time homebuyer tax credit will wane just like the cash-for-clunkers program (even if it is extended), and the FHA will probably be forced to tighten standards (or at least cut loose poor performing lenders).

So my guess is another down turn in the housing market in 2010 (existing home sales and prices), although prices have probably already bottomed in many low end areas.

But the outlook is very uncertain.

by Calculated Risk on 10/15/2009 02:27:00 PM

These comments show how important HAMP is to the housing market. The key points are 1) Loans in trial modifications are included in the delinquency rates (as we've discussed), and 2) we are completely in the dark on how the trial mods are performing!

Meredith Whitney:

Since so much of your numbers today are influenced by the trial mod [HAMP] results, I wanted to ask a couple of questions. Number one, is the early experience consistent with the report that came out in October with the Congressional oversight result, which talked to the difficulty of finding documentation on the modifications? Can you provide more color there? And also a question that I have been asking management is when do you think an appropriate report card will be accessible in terms of the success of these? Is it fourth quarter, first quarter and then I have a follow-up after that please?

Citi CFO John Gerspach:

The earliest modifications that we entered into were in May. And so we are just finishing up the five-month period right now. And I would say that the documentation process, both in the way that the request is given to the consumer, as well as the assistance that we are giving consumers, has improved over time. So the early stages, we are seeing some difficulty in the customers fulfilling the documentation request as either you noted or we noted. That is one of the reasons behind the extension of the trial period from three months to five months. So let's kind of wait until we at least get the October and perhaps November results in to see whether or not the documentation collection or submission process has improved. As far as an overall scorecard on HAMP, my sense, especially given the fact that you have got five months -- five-month trial for all modifications entered into prior to September 1 and then a three-month period is at best it will be towards the end of the fourth quarter, but it is probably more of a first quarter next year type of answer.
emphasis added

Click on graph for larger image in new window.

This is slide 18 from the Citi Presentation. This slide shows the increase in mortgage delinquencies and Gerspach discusses the impact of HAMP below.

Apparently the increase in the 90 to 179 day bucket is due to HAMP, and so is half of the increase in the greater than 180 day bucket. The remaining increase in the greater than 180 day bucket is due to delays in foreclosures.

Earlier from CFO John Gerspach:

Turning to first mortgages on slide 18, we take a closer look at the delinquency data. Last quarter, we discussed a trend that showed a decline in the 90 to 179 day bucket and an increase in the 180 day plus bucket. The trend in the 90 to 179 day bucket has reversed this quarter, but can be largely explained by the loan modification program known as Home Affordable Modification or HAMP. We have approximately $6 billion of on-balance sheet mortgages in this program. Under HAMP, borrowers make reduced mortgage payments for a trial period, during which they continue to age through our delinquency buckets even if they are current under the new payment terms. This serves to increase our delinquencies. Virtually all of the increase in the 90 to 179 bucket and half of the increase in the 180 plus day bucket are loans in HAMP trial modifications. The rest of the increase in the 180 plus day bucket is attributable to a backlog of foreclosure inventory driven by a slowdown in the foreclosure process in many states. HAMP also reduces net credit losses as loans in the trial period do not get charged off at 180 days past-due as long as they have made at least one payment. Nearly half the sequential decline in net credit losses on first mortgages this quarter was attributable to HAMP. We have provided additional loan loss provisions to offset this impact.

Analyst:

And of all of the metrics that we see, for example, the 90 day delinquencies and the like, which do you think that we should pay the most attention to in terms of evaluating the choices that you made in terms of building reserves other than the 13 months?

John Gerspach:

Well, you certainly have to take a look at the combination of the 90 day plus delinquencies. Let's talk about cards. I think cards and mortgages are somewhat different. From a cards point of view, as I mentioned, when we look at things, we are looking at both the early buckets, as well as the later buckets. And admittedly, we don't give you much information on the early buckets. But in the retail partner cards portfolio, as we mentioned, we are seeing improvements in the 90 day plus buckets and we are also seeing some stabilization in the early buckets. And that is what gives us, again, some deal of comfort when looking at that portfolio. Branded cards, I think I mentioned that we have seen reductions in the 90 plus day delinquencies, but as I noted, the net credit losses continued to grow slightly this quarter and so we are somewhat more cautious in that portfolio. And finally, when it comes to mortgages, as I mentioned on the call, or just before, the HAMP program right now has got a rather significant impact on our delinquency statistics and really makes it difficult for anyone from the outside to actually have a good view as to the inherent credit profile in our delinquency buckets.