by Calculated Risk on 11/10/2009 03:17:00 PM

From Reuters: Treasury says 650,000 in trial home loan workouts

[The Treasury Department] said there were 650,994 active trial modifications through October under President Barack Obama's plan to help the housing market. That was up from 487,081 ... participating through September.

The Treasury did not release figures for trial modifications that have been made permanent.

The key number - permanent modifications - was not released. As of Sept 1st, the Obama plan had produced only 1,711 permanent loan modifications.

Why doesn't Treasury release the number of trial modifications started, the redefault rates for trial modifications (by month started) and the number of permanent modifications?

Diani Olick at CNBC has more: Shadow Inventory Dwarfs Loan Mods

[W]e have no idea how successful those mods are now five months after the program really got cooking.

It's coming, that's what the folks at Treasury say.

They also say that a lot of borrowers got extensions on the trial period in order to get paperwork together to move on to permanent modifications. Insiders however tell me that a lot of that paperwork has to do with those so-called "stated-income" loans, where you just had to tell the lender what you make for a living, not actually prove it. In order to move to a permanent mod, you have to prove it, so now we get to find out how many of those "liar loans" were just that.
emphasis added

The size of the next wave of foreclosures depends on the success of the modification programs. And right now Treasury is leaving us in the dark ...

by Calculated Risk on 11/10/2009 01:35:00 PM

From the Ambac 10-Q:

While management believes that Ambac will have sufficient liquidity to satisfy its needs through the second quarter of 2011, no guarantee can be given that it will be able to pay all of its operating expenses and debt service obligations thereafter, including maturing principal in the amount of $143,000 in August 2011. In addition, it is possible its liquidity may run out prior to the second quarter of 2011. Ambac is developing strategies to address its liquidity needs; such strategies may include a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding. No assurances can be given that Ambac will be successful in executing any or all of its strategies. If Ambac is unable to execute these strategies, it will consider seeking bankruptcy protection without agreement concerning a plan of reorganization with major creditor groups.
emphasis added

Apparently the Wisconsin Commissioner of Insurance will rule on Ambac’s statutory capital by November 16th. (ht JA)

And from Freddie Mac's 10-Q:

We have institutional credit risk relating to the potential insolvency or non-performance of mortgage insurers that insure single-family mortgages we purchase or guarantee. As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its obligations to reimburse us for claims. If any of our mortgage insurers that provides credit enhancement fails to fulfill its obligation, we could experience increased credit-related costs and a possible reduction in the fair values associated with our PCs or Structured Securities.
...
Based upon currently available information, we expect that all of our mortgage insurance counterparties will continue to pay all claims as due in the normal course for the near term except for claims obligations of Triad that are partially deferred after June 1, 2009, under order of Triad’s state regulator. We believe that several of our mortgage insurance counterparties are at risk of falling out of compliance with regulatory capital requirements, which may result in regulatory actions that could threaten our ability to receive future claims payments, and negatively impact our access to mortgage insurance for high LTV loans. Further, one or more of these mortgage insurers, over the remainder of 2009 or in the first half of 2010, could lack sufficient capital to pay claims and face suspension under Freddie Mac’s eligibility requirements for mortgage insurers.

More from MarketWatch: MBIA loses $728 million as slowdown hits bond insurer

The zombie watch continues ...

by Calculated Risk on 11/10/2009 10:53:00 AM

Lately I’ve been leaning against the view of a “V shaped” recovery. I think that growth will be decent in the second half of 2009, but growth will be sluggish in 2010.

San Francisco Fed President Dr. Yellen has a similar view – from her speech this morning: The Outlook for the Economy and Real Estate

The big issue is how strong the upturn will be. With such enormous reservoirs of slack in the form of high unemployment and idle productive capacity, we need a strong rebound to put unemployed people back to work and get underutilized factories, offices, and stores humming again. Unfortunately, my own forecast envisions a less-than-robust recovery for several reasons. As the impetus from government programs and inventories diminishes in the quarters ahead, private final demand will have to fill the breach. The danger is that demand may grow at too anemic a pace to support vigorous expansion.

First, it may take quite a while for financial institutions to heal to the point that normal credit flows are restored. The credit crunch hasn’t entirely gone away. In the face of massive loan losses, banks have clamped down on underwriting and credit terms for both businesses and consumers. Smaller businesses without direct access to capital markets are particularly feeling the pinch. Lenders have had to run hard just to stay in place: Rising unemployment, business failures, and delinquencies in real estate markets have fed additional credit losses and made it more difficult for financial institutions to get their balance sheets in good order.

Second, households have been pummeled and prospects for consumer spending are cloudy. Consumers have surprised us in the past with their free-spending ways and it’s not out of the question that they will do so again. But I wouldn’t count on them leading a strong recovery. They face high and rising unemployment, stagnant wages, and heavy debt burdens. Their nest eggs have shrunk dramatically as house and stock prices have fallen, and their access to credit has been squeezed.

It may be that we are witnessing the start of a new era for consumers following the harsh financial blows they have endured. ...

Weakness in the labor market is another factor that may keep the recovery sluggish for quite some time. Payroll employment has been plummeting for more than a year and a half, and, even though the pace of the decline has slowed, unemployment now stands at its highest level since 1983. In addition, many workers have seen their hours cut or are experiencing involuntary furloughs. ... my business contacts say they will be reluctant to hire again until they see clear evidence of a sustained recovery. High unemployment, weak job growth, and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery.

... the outlook for housing has turned up in response to favorable mortgage rates, lower house prices, and a lower overhang of unsold houses. And growth in this sector should contribute to the overall economic recovery. These developments represent real gains, but it’s important not to get carried away. Some of the advance reflects temporary government support in the form of tax credits for first-time home buyers, and the impact of loan modification programs and foreclosure moratoriums that reduced the pace of distressed sales. Moreover, foreclosure notices surged earlier this year and distressed property sales may rise once again in the months ahead. If so, we could see renewed pressure on house prices. Of course, continuing high unemployment will also fuel additional foreclosures. And the supply of credit for nonconforming mortgages remains extremely tight. Financial institutions are reluctant to place them on their books when they are trying to reduce leverage and we have yet to see any revival of the market for private mortgage-backed securities.

When we turn to commercial real estate, the prospects are worrisome. ...

When the weakness of the commercial property market is combined with the muted outlook for housing and consumer spending, you can see why I believe that the overall economic recovery is likely to be gradual and remain vulnerable to shocks. It’s popular to pick a letter of the alphabet to describe the likely course of the economy. The letter I would choose doesn’t exist in our alphabet, but if I were to describe it, it would look something like an “L” with a gradual upward tilt of the base. With such a slow rebound, unemployment could well stay high for several years to come. In other words, our recovery is likely to feel like something well short of good times.
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by Calculated Risk on 11/10/2009 09:23:00 AM

From Atlanta Fed President Dennis Lockhart: Economic Recovery, Small Business, and the Challenge of Commercial Real Estate

[H]ow serious is the CRE problem for the financial system and the broad economy?

First, let me provide some overview comments: While the CRE problem is serious for parts of the banking industry, I don't believe it poses a broad risk to the financial system. Compared with residential real estate, the size of the CRE debt market is smaller, and the exposure is more concentrated in smaller banks.

However, I am concerned about the potential impact of CRE on the broader economy. Unlike residential real estate, there is not the same direct linkage from CRE to household wealth—and therefore consumption—caused by erosion of home equity. However, there could be an impact resulting from small banks' impaired ability to support the small business sector—a sector I expect will be critically important to job creation.

To add some detail: At the end of June 2009 there was approximately $3.5 trillion of outstanding debt associated with CRE. This figure compares with about $11 trillion of residential debt outstanding.

About 40 percent of the CRE debt is held on commercial bank balance sheets in the form of whole loans. A lot of the CRE exposure is concentrated at smaller institutions (banks with total assets under $10 billion). These smaller banks account for only 20 percent of total commercial banking assets in the United States but carry almost half of total CRE loans (based on Bank Call Report data).

Many small businesses rely on these smaller banks for credit. Small banks account for almost half of all small business loans (loans under $1 million). Moreover, small firms' reliance on banks with heavy CRE exposure is substantial. Banks with the highest CRE exposure (CRE loan books that are more than three times their tier 1 capital) account for almost 40 percent of all small business loans.

To repeat my current assessment, while the CRE problem is very worrisome for parts of the banking industry, I don't see it posing a broad risk to the financial system. Nonetheless, CRE could be a factor that suppresses the pace of recovery. As the recovery develops, the CRE problem will be a headwind, but not a show stopper, in my view.

It's appropriate to be a bit tentative in the assessment of CRE risk to the financial system, however. In 2007, many underestimated the scale and contagion potential of the subprime residential mortgage-backed securities problem. With this experience in mind, my assessment should continue to be refined.

As Lockhart noted earlier in the speech, small business employment has been especially hard hit during the current employment recession. (Note: this is probably one of the key reasons that the BLS birth/death model has overestimated new job creation).

Many of the banks in trouble because of CRE lending are also key lenders to small businesses. Therefore this might limit small business financing, and further inhibit small business job creation.

by Calculated Risk on 11/10/2009 08:43:00 AM

According to an article in the LA Times, it appears the 2009 holiday season will be worse than 2008 for the travel industry: Airlines, hotels face bleak holidays

According to the Auto Club, 46% of those surveyed said they planned to spend the same amount on holiday travel as they did last year, while 36% planned to spend less. Only 18% planned to spend more.

The article also mentions a forecast for air travel: ATA Expects 4 Percent Decline in Air Travel Over 12-Day Thanksgiving Holiday Period

The Air Transport Association of America (ATA), the industry trade association for the leading U.S. airlines, today said that it expects a 4 percent year-over-year decrease in the number of passengers traveling on U.S. airlines during the 2009 Thanksgiving holiday season, despite deep discounting over the past several months.

“It is increasingly apparent that the economic head winds facing the airlines and their customers are anything but behind us. ...” said ATA President and CEO James C. May.

... Carriers have cut back their schedules in response to economic pressures, with 2009 capacity reductions the deepest since 1942. In addition, recently released government data show that average domestic airfares in the second quarter of 2009 fell to their lowest level since 1998, dropping 13 percent from the second quarter of 2008 – the largest year-to-year decline on record.
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And of course this will be a very difficult holiday season for hotels.