by Calculated Risk on 11/22/2009 09:34:00 AM

From Carolyn Said at the San Francisco Chronicle: S.F. commercial properties seek tax relief

Landmark skyscrapers, signature hotels and upscale retailers glitter in the San Francisco skyline and enhance its cachet. But with commercial real estate slumping, they soon may subtract badly needed cash from the city's coffers.
...
Collectively, those office towers, hotels, shopping centers and apartment buildings have an assessed value of $21.25 billion - but their owners say they're worth about half that amount. If those claims stand, that could wipe $115.78 million off the property taxes the city collects.
...
The potential property tax reductions come at the worst possible time for a city already grappling with budget cuts and deficits. San Francisco's controller warned last week that the city faces a potential half-billion-dollar deficit in its next fiscal year.

This is another impact of the CRE bust. I would think the city would have had a large budget surplus when property values - and property taxes - were soaring.

by Calculated Risk on 11/21/2009 09:22:00 PM

From Lew Sichelman at the LA Times: Owners' willingness to 'strategically default' on loans depends largely on how far underwater they are (ht Ann)

Most of the LA Times article is based on the paper by Guiso, Sapienza and Zingales that I covered in June: Moral and Social Constraints to Strategic Default on Mortgages (pdf)

Sichelman adds some comments from real estate agents on the ethics of strategic defaults:

Nellie Arrington of Long & Foster Real Estate in Columbia, Md., says it is "morally wrong, legally wrong and just plain wrong" for an owner to walk away from a mortgage he can afford simply because the balance exceeds the value of the underlying property.

And on the other side:

Bob Hunt of Keller Williams O.C. Coastal Realty in San Clemente says the moral duty to protect your family outweighs the moral duty to repay the loan.

"Promise keeping is not the highest moral value," said Hunt, who before his real estate career taught ethics and logic at the University of Redlands. "If I promised to lend you my gun and you are now in a clearly dangerous psychotic stage, breaking my promise would be the right thing to do, not the wrong thing."

by Calculated Risk on 11/21/2009 07:40:00 PM

Here is a link if the embed doesn't work.

by Calculated Risk on 11/21/2009 03:20:00 PM

Meredith Whitney expressed concern about what will happen when the Fed stops buying GSE MBS by the end of the first quarter 2010. From Bloomberg: Meredith Whitney Says Bank Stocks Are ‘Grossly’ Overvalued

The Federal Reserve has begun slowing purchases in the $5 trillion market for so-called agency mortgage-backed securities after announcing in September that it would extend the timeline for its $1.25 trillion program to March 31 from year-end. Whitney said that banks are only originating home loans that they can sell to Fannie Mae and Freddie Mac.

“If Fannie and Freddie can’t sell to an end buyer, i.e. the U.S. government steps back, the mortgage market at minimum contracts, rates go higher, and banks are poised with more writedowns,” said Whitney, founder of Meredith Whitney Advisory Group. “This is probably the issue that scares me most across the board.”

This raises an interesting question: What is the impact from Fed MBS buying on mortgage rates? I looked at this a couple of months ago: The Impact on Mortgage Rates of the Fed buying MBS and here is an update:

Earlier this year, Political Calculations introduced a tool to estimate mortgage rates based on the Ten Year Treasury yield (based on an earlier post of mine): Predicting Mortgage Rates and Treasury Yields. Using their tool, with the Ten Year yield at 3.356%, this suggests a 30 year mortgage rates of 5.33% based on the historical relationship between the Ten Year yield and mortgage rates.

Freddie Mac released their weekly survey Thursday:

Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.83 percent with an average 0.7 point for the week ending November 19, 2009, down from last week when it averaged 4.91 percent. Last year at this time, the 30-year FRM averaged 6.04 percent.

This suggests morgage rates are about 50 bps below the expect level ...

Here is an update to the previous graph. Sure enough mortgage rates have been below expectations for about seven months (recent months in yellow with blue outline at lower left).

Although this is a limited amount of data - and the yellow triangles are within the normal spread - this suggests the Fed's buying of MBS is reducing mortgage rates by about 35 to 50 bps relative to the Ten Year treasury.

It isn't that Fannie and Freddie "can’t sell to an end buyer", it is that the GSEs will be selling for a lower price (higher yield) when the Fed completes the MBS purchase program. At that time mortgage rates will probably rise by about 35 bps to 50 bps (relative to the Ten Year) in order to attract other buyers. Alone that isn't all that "scary".

But combined with the growing problems at the FHA, the distortions in the housing market caused by the first-time home buyer tax credit, rising delinquencies, the uncertainty of the modification programs, and likely further house price declines in many bubble states - there are serious problems ahead for the housing market.

by Calculated Risk on 11/21/2009 11:01:00 AM

Note: The FDIC will probably release the Q3 Quarterly Banking Profile next week. The report will show the number of banks on the problem bank list, and the status of the Deposit Insurance Fund (DIF).

The FDIC closed another bank on Friday, and that brings the total FDIC bank failures to 124 in 2009. The following graph shows bank failures by week in 2009.

Click on graph for larger image in new window.

Note: Week 1 on graph ends Jan 9th.

The bank failures seem to come in bunches, and with 6 weeks to go it seems 140 to 150 or so bank failures is likely this year.

The 2nd graph covers the entire FDIC period (annually since 1934).

This is the most failures per year since 1992 (181 failures).

As far as failures per week - there were 28 weeks during the S&L crisis when regulators closed 10 or more banks, and the peak was April 20, 1989 with 60 bank closures (there were 7 separate weeks with more than 30 closures in the late '80s and early '90s).

For a graph that includes the 1920s and early '30s (before the FDIC was enacted) see the 3rd graph here.

Of course the number of banks isn't the only measure. Many banks today have more branches, and far more assets and deposits. Also the cumulative estimated losses for the DIF, since early 2007, is now close to $50 billion.

The FDIC era source data is here - including by assets (in most cases) - under Failures and Assistance Transactions

The pre-FDIC data is here.