by Calculated Risk on 11/11/2009 08:47:00 AM

Matt Padilla at the O.C. Register writes: Foreclosure notices hit record 8,800

Click on graph for larger image in new window.

Graph from O.C. Register.

ForeclosureRadar.com reports that outstanding foreclosure auction notices in Orange County rose to 8,895 at the end of September, the highest in this housing downturn and probably the highest ever.

September’s total was up 5% from August and 90% from a year ago.

Padilla provides a second graph (see his article) of 90 day delinquencies, foreclosures and REOs. He writes:

[The second] chart shows that the ratio of borrowers having missed at least three monthly payments is at nearly 7% and has risen every month for more than three years.

It’s incredible that while so many mortgages are delinquent, banks are only holding 0.26% of first mortgages as REOs.

Loans in the trial modification period are still considered delinquent, so that might explain some of the increase in 90+ day delinquencies. But that doesn't explain the continuing surge in foreclosure notices.

by Calculated Risk on 11/10/2009 10:23:00 PM

Buried in the California Controller's November analysis is a guest article: Overview of the Commercial Property and Capital Markets with Implications for the State of California by Dr. Randall Zisler. (ht picosec)

Here are some excerpts:

Whereas excessive and imprudent leverage fed the bubble, deleveraging not only popped the bubble, but, in the process, destroyed record amounts of equity and debt. Most deals financed with high leverage from 2005 to the present are under water. The equity is gone and the debt, if it trades at all, trades at a deep discount to face value. Most leveraged equity invested in real estate has evaporated since property prices, if marked to market, have fallen 30% to 50%.

Click on graph for larger image in new window.

The chart [right] shows overall U.S. property total returns, quarterly (at annual rates) and lagging four quarters. This appraisal-based, lagging index shows sharp negative returns exceeding the deterioration of the RTC (Resolution Trust Corp.)
period of the early 1990s. (See Chart 1.) Second quarter 2009 returns indicate the possibility that total returns, while still negative, may have hit a point of inflection. We expect that property values in many sectors, especially office, retail, and industrial, will likely deteriorate further in 2010 with improvement beginning sometime in 2011.
...
A crisis of unprecedented proportions is approaching. Of the $3 trillion of outstanding mortgage debt, $1.4 trillion is scheduled to mature in four years. We estimate another $500 billion to $750 billion of unscheduled maturities (i.e., defaults). Unfortunately, traditional lenders of consequence are practically out of the market and massive amounts of maturing debt will not easily find refinancing. Marking-to-market outstanding debt will render many banks, especially regional and community banks, insolvent, especially as much of the debt is likely worth about 50% of par, or less.

The inability of many banks and other capital sources to lend not just to real estate firms but to other businesses in the State as well presents a real challenge to the private sector and state and local governments.

The author points out that many local and regional banks will fail because of CRE loans.

FDIC Chairwoman Sheila Bair said today: "We do obviously have a lot more banks that will close this year and next," Bair said, adding the failures "will peak next year and then subside."

These bad loans are also limiting lending to small businesses. Atlanta Fed President Dennis Lockhart made the same argument this morning:

I am concerned about the potential impact of CRE on the broader economy ... 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.
...
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.

by Calculated Risk on 11/10/2009 07:39:00 PM

"[L]ooking into 2010 and perhaps to 2011, the most likely outcome is for growth to be suboptimal, unemployment to remain a vexing problem and inflation to remain subdued."
Dallas Fed President Richard Fisher

And a little more Fed Speak ... (note: Fisher's speeches are always colorful).

From Dallas Fed President Richard Fisher: The Current State of the Economy and a Look to the Future

Now, I’ve often thought that economic forecasters seem to be cursed—or maybe blessed, I suppose, dependent upon your point-of-view—with a short-term memory: They tend to extrapolate only the most recent trends into the future. As if goosed by the more optimistic tone of the latest GDP release, many now believe that solid output growth will extend into the first half of next year. The latest Blue Chip survey, for example, shows that professional forecasters expect GDP growth averaging 2.8 percent in the first half of 2010.

I am wary of the consensus view. For a good while now, I’ve suggested that we are more likely to see a more uneven recovery—not a “V”-shaped recovery but something more akin to a check mark, where the elongated arm of that check mark inclines at a slope that is less than desirable and might possibly be repressed by an occasional pause or several quarters of weak growth.

Why a check mark?

Several recent sources of strength are likely to wane as we head into next year. Cash-for-clunkers and the first-time-homebuyer tax credit have both shifted demand forward, increasing sales today at the expense of sales tomorrow. Neither of these programs can be repeated with any real hope of achieving anywhere near the same effect: The more demand you steal from the future, the less future demand there is for you to steal. The general tax cuts and government spending increases included in this year’s fiscal stimulus package won’t have their peak impact on the level of GDP until sometime in 2010, but their peak impact on the growth of GDP has come and gone; the fiscal stimulus continues to drive GDP upward, compared with what it would otherwise have been, but the increments to GDP are beginning to shrink. And, as we all know, the shot in the arm that our economy is receiving from inventory adjustments is, while welcome, inherently transitory.

What about growth in the longer term—the second half of 2010 and beyond? American households have finally come to realize that they’ve been playing the part of the grasshopper in Aesop’s fable: They see that our previous spending boom was financed by somewhat reckless disregard for tomorrow by over-eager creditors feeding their desire for unsustainable leveraging of their income and balance sheets and, for the nation as a whole, by increases in overseas borrowing. That reality has been largely absorbed, and consumer spending is growing again—albeit from a lower base and at a slower pace. I doubt it will recover its previous vigor for some time to come. I expect that the strong bounce-back in consumer demand that we’ve come to expect in recoveries past will be absent this time around as Americans recalibrate the proportion of their income and wealth that they need to save versus what they need to consume. We need not become a nation as parsimonious as William Miles, but we are going to have to be more ant- than grasshopper-like in our behavior.[4]
...
It may be some time before significant job growth occurs and even longer before we see meaningful declines in the unemployment rate.
emphasis added

And Fisher is usually one of the more optimistic Fed presidents.

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 ...