by Calculated Risk on 1/03/2010 05:19:00 PM

Note: Here is weekly summary and a look ahead.

From Fed Chairman Ben Bernanke: Monetary Policy and the Housing Bubble

And reports on the speech:
From the WSJ: Bernanke Says Rate Increases Must Be an Option
From the NY Times: Bernanke Blames Weak Regulation for Financial Crisis

Dr. Bernanke said that monetary policy (a low Fed Funds rate) was probably not to blame for the housing bubble, and he used data from other countries to make this argument: "the relationship between the stance of monetary policy and house price appreciation across countries is quite weak".

He suggested the primary cause was the lack of effective regulation associated with non-traditional mortgage products.

I noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. Moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.
emphasis added

Here are his two slides about exotic mortgages:

Click on graph for larger image in new window.

Slide 7 also shows initial monthly payments for some alternative types of variable-rate mortgages, including interest-only ARMs, long-amortization ARMs, negative amortization ARMs (in which the initial payment does not even cover interest costs), and pay-option ARMs (which give the borrower considerable flexibility regarding the size of monthly payments in the early stages of the contract). These more exotic mortgages show much more significant reductions in the initial monthly payment than could be obtained through a standard ARM. Clearly, for lenders and borrowers focused on minimizing the initial payment, the choice of mortgage type was far more important than the level of short-term interest rates.

The availability of these alternative mortgage products proved to be quite important and, as many have recognized, is likely a key explanation of the housing bubble. Slide 8 shows the percentage of variable-rate mortgages originated with various exotic features, beginning in 2000. As you can see, the use of these nonstandard features increased rapidly from early in the decade through 2005 or 2006. Because such features are presumably not appropriate for many borrowers, Slide 8 is evidence of a protracted deterioration in mortgage underwriting standards, which was further exacerbated by practices such as the use of no-documentation loans. The picture that emerges is consistent with many accounts of the period: At some point, both lenders and borrowers became convinced that house prices would only go up. Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages.

But it seems Bernanke left out a couple key points.

Bernanke used data from other countries to suggest monetary policy was not a huge contributor to the bubble ... however, Bernanke didn't discuss if non-traditional mortgage products contributed to housing bubbles in other countries. This would seem like a key missing part of the speech.

Bernanke didn't discuss how the current regulatory structure missed this "protracted deterioration in mortgage underwriting standards" (even though many people were pointing it out in real time). And Bernanke didn't discuss specifically how the new regulatory structure would catch this deterioration in standards. How about some specific example of how the previous regulatory structure missed underwriting problems, and how the new structure would have caught the problem?

I'm more interested in what Dr. Bernanke didn't say.

by Calculated Risk on 1/03/2010 01:58:00 PM

The first week of the new year will be chock-full of economic data, culminating with the December employment report on Friday. Expectations are for the BLS to report somewhere between 50,000 jobs lost or gained, with a consensus of no change in net jobs and the unemployment rate to remain steady.

On Monday, the ISM manufacturing index and construction spending will be released. The highlight for Tuesday will be auto sales and on Wednesday the ISM non-manufacturing index will be released.

Other economic releases include the number of personal bankruptcy filings for December, the apartment vacancy rate for Q4, factory orders, and various employment reports.

And a summary of last week ...

Case-Shiller house price index increased slightly in October

S&P/Case-Shiller released their monthly Home Price Indices for October. The following graph shows the Seasonally Adjusted data - some sites report the NSA data.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 30.5% from the peak, and up about 0.4% in October.

The Composite 20 index is off 29.5% from the peak, and up 0.4% in October.

NOTE: S&P reported this as "flat", but they were using the NSA data.

Case-Shiller house prices by City

The seconrd graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices decreased (SA) in 9 of the 20 Case-Shiller cities in October.

In Las Vegas, house prices have declined 56.3% from the peak. At the other end of the spectrum, prices in Dallas are only off about 5.4% from the peak - and up slightly in 2009. Prices have declined by double digits from the peak in 18 of the 20 Case-Shiller cities.

Fannie Mae reported delinquencies increased sharply in October



Fannie Mae reported that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.98% in October, up from 4.72% in September - and up from 1.89% in October 2008.

Other Economic Stories ...

From Fed Chairman Ben Bernanke today: Monetary Policy and the Housing Bubble

House Prices: Stress Test, Price-to-Rent, and More

From the WSJ: Treasury Ends TARP Bank Investments

From Dow Jones: Revisions Show Chicago PMI At 58.7 In December. Note: the Chicago Institute for Supply Management revised down the Chicago PMI to 58.7 on Thursday from the announced reading of 60.0 on Wednesday. The most significant change was to the employment index that now shows contraction at 47.6 compared to the announced 51.2.

From the American Trucking Association: ATA Truck Tonnage Index Jumped 2.7 Percent In November

Restaurant Index Shows Contraction in November

Unofficial Problem Bank List Increases to 575

Best wishes and Happy New Year to all.

by Calculated Risk on 1/03/2010 10:31:00 AM

The FDIC is on bank failure holiday until Jan 8th, but surferdude808 is still working!

This is an unofficial list of Problem Banks compiled only from public sources.

Changes and comments from surferdude808:

The Unofficial Problem Bank List increased this week by 30 institutions to 575 primarily because the FDIC released its actions for November 2009.

Aggregate assets increased by $7.6 billion. There were no removals this week from closure, action termination, or unassisted merger.

Among the additions are Torrey Pines Bank, San Diego, CA ($1.1 billion); United Bank & Trust Company, Versailles, KY ($761 million); Peninsula Bank, Englewood, FL ($646 million); Viking Bank, Seattle, WA ($632 million); and Northwest Georgia Bank, Ringgold, GA ($586 million).

Also, the FDIC issued a Cease & Desist Order against Legacy Bank, Scottsdale, AZ ($194 million), which is a subsidiary of Peotone Bancorp, Inc. Legacy Bank and its sister bank, Peotone Bank and Trust Company, which also is operating under a formal enforcement action, are controlled by an ownership group that had seven banks closed on July 2, 2009 that cost the FDIC $314 million.

In 1989, the FDIC received authority to assess affiliates for resolution costs under what is commonly referred to as cross-guaranty. The FDIC used cross guaranty to close still solvent banks controlled by FBOP Corp. on October 30, 2009. It is interesting that the FDIC has not applied cross guaranty to the remaining banking subsidiaries of Peotone Bancorp.

The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808.

See description below table for Class and Cert (and a link to FDIC ID system).

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.)



Class: from FDIC

The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:

N National chartered commercial bank supervised by the Office of the Comptroller of the Currency

SM State charter Fed member commercial bank supervised by the Federal Reserve

NM State charter Fed nonmember commercial bank supervised by the FDIC

SA State or federal charter savings association supervised by the Office of Thrift Supervision

SB State charter savings bank supervised by the FDIC

Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. Click on the number and the Institution Directory (ID) system "will provide the last demographic and financial data filed by the selected institution".

by Calculated Risk on 1/03/2010 09:16:00 AM

From Peter Goodman at the NY Times: Real Estate in Cape Coral, Fla., Is Far From a Recovery (ht Craig)

As we navigate this speculator’s paradise turned financial wasteland, Mr. Joseph stands at the front of the bus in a green polo shirt, highlighting specimens like this one: a white stucco house fronted by palm trees and topped by a Spanish tile roof on a canal emptying into the Gulf of Mexico. It last sold in 2005 for $850,000. Yours today for $273,000.

Goodman takes us along on a foreclosure tour and provides a few anecdotes about the MESS.

by Calculated Risk on 1/02/2010 11:01:00 PM

From Dina ElBoghdady at the WaPo: Cash-rich real estate investors trigger bidding wars, frustrate other buyers

Investors have reemerged with brute force in the Washington region's real estate market over the past few months, triggering bidding wars in some neighborhoods teeming with foreclosed properties and hindering traditional home buyers ...

"What's happening in this area reflects what's happening in other parts of the country," said Sam Khater, senior economist at First American CoreLogic, which plans to release a report soon on all-cash deals. "In markets where price declines have been steep, we've seen quite a bit of competition between the low-end, first-time home buyers and investors."
...
"There are bidding wars out there. It's like the 2005 market but at discount prices," said Stella Barbour, a real estate agent at Jobin Realty in Northern Virginia.

We've been seeing a competition all year between cash flow investors and first time home buyers in California. This has pushed up prices in many low end distressed areas (but not all).

Back in early 2005, I drew a couple of rough supply-demand diagrams viewing the bubble era speculative buying as storage. This pushed up prices during the bubble (removing properties from supply), and pushed down prices during the bust (forced selling added to the supply). Unlike those speculators, many of the current cash flow investors are probably happy with the return and won't be forced sellers. But they could become sellers in the future, limiting future appreciation.

And it is important to remember that the numbers don't work for investors in the mid-to-high end areas (the rent to price ratio is lower), so this competition is mostly in the low end areas - the same areas that attract first time home buyers.

These bidding wars should be setting off some alarm bells with regulators - not because of the cash flow investors, but because of the loose lending standards for FHA loans.