by Calculated Risk on 10/25/2009 08:33:00 AM

From Drew DeSilver at the Seattle Times: Reckless strategies doomed WaMu

This is the first of two parts. Here is a section on loose lending:

"The big saying was 'A skinny file is a good file,' " said Nancy Erken, a WaMu loan consultant in Seattle. She recalled helping credit-challenged borrowers collect canceled checks, explanatory letters and other documentation that they could afford their loans.

"I'd take the files over to the processing center in Bellevue and they'd tell me 'Nancy, why do you have all this stuff in here? We're just going to take this stuff and throw it out,' " she said.

In time, WaMu even began allowing low- or no-documentation option ARMs, piling risk on risk. The loose standards spread through the company like a flu virus.

And on risk management:

In an internal newsletter dated Oct. 31, 2005, and obtained by The Seattle Times, risk managers were told they needed to "shift (their) ways of thinking" away from acting as a "regulatory burden" on the company's lending operations and toward being a "customer service" that supported WaMu's five-year growth plan.

Risk managers were to rely less on examining borrowers' documentation individually and more on automated processes, Melissa Martinez, WaMu's chief compliance and risk oversight officer, wrote in the memo.
...
"The whole tone it set was that 'Maybe the next file I review I should pull back, hold off on downgrading (a loan), not take a sharp pencil to what production was doing,' " [Dale George, a former senior credit-risk officer in Irvine, Calif.] said.

"They weren't going to have risk management get in the way of what they wanted to do, which was basically lend the customers more money."

Ouch. There is much more in the article - on Option ARMs, switching to originate-to-sell and more ... WaMu was definitely "doomed".

by Calculated Risk on 10/24/2009 11:55:00 PM

From Will Hutton at the Observer: Mervyn King is right – the time has come to break up the megabanks (ht Jonathan)

Will Hutton reviews the competing proposals to reform the banking system and suggests a combination of the two ...

The first proposal, championed by BofE Governor Mervyn King and former Fed Chairman Paul Volcker is to break up the banks and separate the commercial parts from the "casino banking":

If the status quo is untenable and unfair because it leaves us with banks so big they have to be bailed out in a crisis, and if the proposed increases in bank capital advanced by the government are unlikely to act as a restraint, then there is only one course of action left: we have to break up the megabanks. The speculative, risky parts of banks must be separated from the commercial parts which lend to business, consumers and home buyers.

This, after all, is what the Americans did after the 1929-33 crash. Under the famous Glass-Steagall Act, commercial banks were forbidden to offer any form of collateral, underwriting or loan that financed stocks and shares. The same could be done today. The banking the economy needs – so-called narrow banking – could be closely regulated and casino banking could be left to its separate, freewheeling devices.

The second proposal, championed by Lord Turner in the U.K., and I believe favored by the Obama Administration in the U.S., is to have capital requirements based on the riskiness of the business:

The way forward, [Lord Turner] repeated, is more capital, especially more capital for the casino parts of any bank's business. On top, banks should make "living wills", setting out how they would wind themselves up without any cost to the taxpayer.

Either way - I think the time has for action.

by Calculated Risk on 10/24/2009 08:23:00 PM

From the Mercury News: Silicon Valley office vacancies near 20 percent

Nearly one-fifth of Silicon Valley office space stood empty last quarter, while landlords lowered rents to try to retain tenants and attract new ones, according to a [report from commercial real estate firm Grubb & Ellis] released Friday.
...
The rising vacancy rate is "re-emphasizing that this is the slowest commercial real estate market the valley has seen since the dot-com bust in 2001," the report stated.

Empty space for research and development, the one- to three-story buildings where so many smaller tech companies reside, is also beginning to pile up, said Dick Scott, Grubb & Ellis' managing director in Silicon Valley. ...

"There was a temporary period of time where we all were naively optimistic that R&D would hold up. But it's taking a hit now," he said.
...
Said the Grubb & Ellis report: "Expect asking rents to decrease as companies put unoccupied space onto the market."

Some of the increase in the vacancy rate was because of new office space coming online, but it sounds like Grubb & Ellis expects a significant amount of sublease space to come on the market too. That is usually a bad sign for rents - and also suggests companies don't expect much growth.

by Calculated Risk on 10/24/2009 02:41:00 PM

This has been coming for some time ...

From the NY Times Dealbook: Capmark, Big Commercial Lender, May File for Bankruptcy

The Capmark Financial Group, the big commercial real estate finance company cobbled together from pieces of GMAC, may file for bankruptcy as soon as this weekend ... The company is only the latest to fall victim to continued trouble in the commercial real estate market ... Capmark has about $10 billion in assets, with another $10 billion in a Utah bank the company owns that would not be subject to a bankruptcy filing.

Capmark bank in Utah is in trouble too, and is the fifth largest bank (in assets) on the unofficial problem bank list.

From a Capmark press release in September:

The FDIC has notified Capmark Bank that it intends to issue an administrative order, which will impose certain requirements and restrictions on Capmark Bank, including requiring submission of capital and liquidity plans, restrictions on affiliated party transactions and other activities.

by Calculated Risk on 10/24/2009 11:45:00 AM

From James Hagerty at the WSJ: Uncle Sam Adds 5% to Prices of Homes, Goldman Says

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.
...
But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

In the research note, Phillips discussed how policies have reduced foreclosures, and stimulated demand with both the first-time home buyer tax credit and "abnormally low mortgage rates". Phillips wrote (no link):

"In 2010, we expect some of these supports to fade. Fed and Treasury purchases of mortgage-backed securities will taper off, and the pause in foreclosures created by federal mortgage modification programs may end.

The federal tax credit for first-time homebuyers appears likely to be extended for at least a few months, but probably no longer than through the first half of 2010."

Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.

The report isn't all negative. Goldman believes "the brunt of the price decline is behind us" and the outlook is uncertain: "the cloudy policy outlook adds to our already considerable uncertainty of where house prices will ultimately bottom".

This is very close to my view, see: The Uncertain Housing Outlook