by Calculated Risk on 12/08/2009 09:48:00 AM

From CNBC: Government 'Out of Bullets,' Consumers in Trouble: Whitney

Primary among her concerns is the lack of credit access for consumers who she said are "getting kicked out of the financial system." She said that will be the prevailing trend in 2010.
...
"You're going to get a situation where you revert from a consumer standpoint," she added, "where those that had bank accounts for the first time, credit cards for the first time, homes for the first time get kicked out of the system and then fall prey to real predatory lenders."
...
"I have 100 percent conviction that the consumer is not getting any better and there's not more liquidity," Whitney said. ... "For a 2010 prediction, which is so disturbing on so many levels to have so many Americans be kicked out of the financial system and the consequences both political and economic of that, it's a real issue. You can't get around it. This has never happened before in this country."

Ms. Whitney makes me look like an optimist!

by Calculated Risk on 12/08/2009 08:39:00 AM

From Jeff Zeleny at the NY Times: Obama Announces New Jobs Programs

President Obama on Tuesday will announce three proposals intended to turn around the nation’s beleaguered job market ...

The speech, according to a senior administration official, will outline a series of steps to help small businesses grow and hire new staff. The president also will call for increasing the investment in infrastructure through building and modernizing highways, railways, bridges and tunnels. He also will propose a new program that provides rebates for consumers who retrofit their homes to become more energy efficient.
...
The president also will call for using some of the $200 billion in Troubled Asset Relief Program to help pay down the $1.4 trillion budget deficit.

So there are three parts: 1) apparentaly a tax credit for businesses to hire new employees, 2) more infrastructure investment, 3) and a cash-for-caulkers program.

by Calculated Risk on 12/07/2009 09:26:00 PM

From Thomas Corfman at Crain's Chicago Business: Zombie fears stalk Tishman in the Loop (ht David)

Corfman describes properties where the owners owe far more than the buildings are worth, and can't refinance, as "zombie buildings". The owners "can't compete for new tenants because they lack the money to cover brokers' commissions and interior office reconstruction."

"Virtually all the assets bought between '05 and '07 cannot be refinanced today without a significant capital infusion," says Shawn Mobley, executive vice-president at real estate firm Grubb & Ellis Co. "These buildings need to be recapitalized to get back in the business of being active real estate."
...
The number of zombie buildings in the Chicago area is likely to grow in 2010 ... For landlords, the trend means even top-quality office properties are likely to divide themselves into "haves" and "have-nots," with the latter seeing their vacancy rates worsen because of the lack of financing.
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Many tenants won't consider zombie buildings because they need landlords' cash [for tenant improvements].

An "extend and pretend" loan modification will just let the zombie building live longer with deferred maintenance and few tenant improvements.

Although Corfman is discussing commercial office buildings, the same idea applies to residential real estate and loan modifications. Homeowners with significant negative equity own zombie houses - the "owners" are really renters and will defer maintenance as long as possible.

by Calculated Risk on 12/07/2009 06:35:00 PM

From NY Fed President William Dudley: Still More Lessons from the Crisis

The entire speech is worth reading. Dudley discusses a number of topics including his economic outlook, how the Fed should respond to bubbles, and why he believes the Fed should retain supervisory authority.

Dudley offers a mea culpa for the Fed:

With the benefit of hindsight, it is clear that the Fed and other regulators, both here and abroad, did not sufficiently understand some of the critical vulnerabilities in the financial system, including the consequences of inappropriate incentives, and the opacity and the large number of self-amplifying mechanisms that were embedded within the system. Likewise, we did not appreciate all the ramifications of the growth of the shadow banking system and its linkage back to regulated financial institutions until after the crisis began.

It didn't take "hindsight" to see that the Fed was failing to properly regulate the financial system - many people were pointing out the problems in real time, and the Fed simply chose to ignore the warnings.

On bubbles:

[I]dentifying asset bubbles in real time is difficult. However, identifying variables that often are associated with asset bubbles—especially credit asset bubbles—may be less daunting. To take one recent example, there was a tremendous increase in financial leverage in the U.S. financial system over the period from 2003 to 2007, particularly in the nonbank financial sector. This sharp rise in leverage was observable. Presumably, this rise in leverage also raised the risks of a financial asset bubble and the impact of this bubble on housing certainly raised the stakes for the real economy if such a bubble were to burst. This suggests that limiting the overall increase in leverage throughout the system could have reduced the risk of a bubble and the consequences if the bubble were to burst.

Turning to ... how to limit and/or deflate bubbles in an orderly fashion, the fact that increases in leverage are often associated with financial asset bubbles suggests that limiting increases in leverage may help to prevent bubbles from being created in the first place. This again suggests that there is a role for supervision and regulation in the bubble prevention process. ...

Whether there is a role for monetary policy to limit asset bubbles is a more difficult question. On the one hand, monetary policy is a blunt tool for use in preventing bubbles because monetary policy actions also have important consequences for real economic activity, employment and inflation. On the other hand, however, there is evidence that monetary policy does have an impact on desired leverage through its impact on the shape of the yield curve. A tighter monetary policy, by flattening the yield curve, may limit the buildup in leverage.
emphasis added

We are making progress on bubbles.

And on the economic outlook:

My views about the outlook have not changed much recently and do not differ much from the consensus. The situation is slowly improving. We are having a recovery in terms of output and the pace of job losses has slowed substantially. In the second half of this year, real GDP growth will likely fall in a 3 percent to 3.5 percent annualized range. 2010 will probably be slightly weaker than that, mostly because some of the current sources of strength are temporary. The inventory cycle is providing lots of support right now and the fiscal stimulus—which is very powerful right now — will abate as we go through 2010.

2010 is also likely to be a more moderate growth period because we still face quite a few headwinds generated by the hangover of the financial crisis. ...

If growth is subdued, this implies that the unemployment rate will stay high and inflation will stay low. If this outlook is broadly correct, this suggests that it will be appropriate to keep the federal funds rate target exceptionally low for an extended period.

It is very unlikely that the Fed will raise the Fed funds rate in 2010.

by Calculated Risk on 12/07/2009 05:02:00 PM

From Diana Olick at CNBC: Bank of America: 2/3 of Borrowers May Lose Mods (ht montas ankle)

[Jack Schakett, credit loss mitigation strategies executive at B of A.] told me that of the 65 thousand trial modifications set to expire Dec. 31st with B of A, a full two thirds of the borrowers, while current on their payments, have not submitted the full documentation required to turn a trial mod permanent under the HAMP guidelines.

"We don't really know the major reason why the customers are not returning the documentation," Schakett claims.

Borrowers are complaining that the banks are losing documentation and that they have to submit it multiple times. Ms. Olick also suggests the possibility that some borrowers can't document their income.

BofA's Mr. Schakett said it was too soon to know why the documentation is incomplete, but this suggests that the number of permanent modifications announced this week will be very low (in the 10s of thousands).