by Calculated Risk on 3/08/2011 01:15:00 PM

Bloomberg reports that Moritz Kraemer, S&P managing director of European sovereign ratings said more downgrades are possible and that a Greek default is "a possibility.” No surprise. (no story yet)

From Reuters on the March 11th summit: EU summit to take only minor steps on debt crisis

The top item on the agenda for the 17 heads of state and government is to agree a "competitiveness pact", a deal Germany and France are pushing the rest of the euro zone to adopt to show their commitment to overhauling their economies.

From the WSJ: Expectations Low for EU Talks

"There will be an agreement because one has to be reached. But I fear that it will not stand up to market expectations, and this could intensify debt problems in the euro zone in the future," said a senior euro-zone government official who is party to the talks.

"Germany will likely get less than expected in the competitiveness pact so, it will give less as far as the EFSF is concerned. And this is where the problem lies."

The next meeting of all 27 EU leaders will be in Brussels on March 24th and 25th.

The EFSF end in mid-2013, but the two year yields are already showing significant stress. The Irish 2 year yield hit a record 8.1% this morning, and the Greek 2 year yield is at 16.4%.

More records for ten year yields too. The Greek ten year yield is at 12.8% (up sharply today). The Irish ten year yield is 9.6%. And the Portuguese 10 year yield is 7.6%. All new records.

Here are the Ten Year yields for Spain, and Belgium (record 4.35%).

by Calculated Risk on 3/08/2011 10:11:00 AM

CoreLogic released the Q4 2010 negative equity report today.

CoreLogic ... today released negative equity data showing that 11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The small increase reflects the price declines that occurred during the fourth quarter and led to lower values. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.9 percent of all residential properties with a mortgage nationwide....

The consensus is that home prices will fall another 5 percent to 10 percent in 2011. If so, the most that negative equity will rise is another 10 percentage points, all else equal. What’s important is not just the share of at-risk loans (i.e., loans with less than 10 percent equity) but current price movements.
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The aggregate level of negative equity increased to $751 billion in Q4, up from $744 billion last quarter but still below $800 billion a year ago. Over $450 billion of the aggregate negative equity dollars include borrowers who are upside down by more than 50 percent.
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"Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties. Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish," said Mark Fleming, chief economist with CoreLogic.

Here are a couple of graphs from the report:

Click on graph for larger image in graph gallery.

This graph shows the distribution of negative equity (and near negative equity). The more negative equity, the more at risk the homeowner is to losing their home.

About 10% of homeowners with mortgages have more than 25% negative equity.

The second graph from CoreLogic shows the aggregate dollar volume by percent of negative equity. Of the $751 billion in negative equity in Q4, over $450 billion of the aggregate negative equity dollars are for borrowers who are upside down by more than 50%. Just under $200 billion more is for borrowers who have 25% to 50% negative equity.

All of these borrowers are at high risk for foreclosure.

The third graph shows the break down of equity by state. Note: Data not available for Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming.

In Nevada, over 65% of homeowners with mortgages owe more than their homes are worth. Arizona and Florida are around 50%. Michigan, Georgia and California are all over 30%.

by Calculated Risk on 3/08/2011 08:10:00 AM

From National Federation of Independent Business (NFIB): NFIB Small Business Optimism Index -- Slow and Steady: Continues Gradual Rise in February

The Index of Small Business Optimism gained 0.4 points in February, rising to 94.5, not the hoped-for surge that would signal a shift into “second gear” for economic growth.
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“Weak sales” still get the most votes by owners as their top business problem.
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Most notably, hiring and future plans to hire were solid and hopefully presage a string of steady job creation months this year. While historically weak, these relative gains signal good news for a sector still deeply encumbered by weak sales.
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“This is not a reading that characterizes a strongly rebounding economy,” said NFIB chief economist Bill Dunkelberg.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy.

Click on graph for larger image in new window.

The first graph shows the small business optimism index since 1986. The index increased to 94.5 in February from 94.1 in January.

Although still fairly low, this is the highest level for the index since December 2007.

This graph shows the net hiring plans for the next three months.

Hiring plans increased slightly in February. According to NFIB: “The percent of owners reporting hard-to-fill job openings rose two points to 15 percent, indicating that a reduction in the unemployment rate is likely within the next few months. Plans to create jobs strengthened; up two points to a net 5 percent of all firms. While this is still low, it is 15 points better than the recession low reading of negative 10 percent, reached in March 2009."

Weak sales is still the top business problem with 28 percent of the owners reporting that weak sales continued to be their top business problem in February. In good times, owners usually report taxes and regulation as their biggest problems.

The recovery is sluggish for this index (probably because of the high concentration of real estate related companies), but this is the highest level for the optimism index since December 2007.

by Calculated Risk on 3/07/2011 08:44:00 PM

I appreciate the mention from Time: The 25 Best Financial Blogs. Professor Hamilton's introduction to my blog was much too kind. Thanks!

The editors at Time.com asked if I'd write a review of one of the other blogs on their list, although they wouldn't tell me who was on the list. They asked me to send them a short list of blogs I'd like to write a review for, and then they'd pick one.

The top two blogs on my short list were Hamilton's Econbrowser (with Menzie Chinn), and Mark Thoma's EconomistsView(with Tim Duy who writes FedWatch) - two of my favorite economic blogs. I'm shocked that EconomistsView is not on the Time.com list.

I wish I'd written a better review of Econbrowser - I was under the weather last week, and they edited my piece extensively (it needed editing).

From my unedited review: "In a recent research paper, “Historical Oil Shocks”, Dr. Hamilton reviewed several oil shocks and the impact on oil prices and the economy – a timely topic. He has discussed the paper in several blog posts, including a discussion of the possible impact of the events in Libya on oil prices and the U.S. economy (see “Libya, oil prices, and the economic outlook”). Hamilton’s analysis shows the events so far “are not in the same ballpark as the major historical oil supply disruptions”, but he cautions that geopolitical changes might continue to spread."

Great analysis. Best wishes to all.

by Calculated Risk on 3/07/2011 06:00:00 PM

American Banker has posted the 27 page draft servicer settlement agreement that the state attorneys general sent to the servicers last week.

Settlement Terms (27 page PDF)

And from Cheyenne Hopkins at American Banker: Cheat Sheet: How the State AGs Want to Revamp Mortgage Servicing

The 27-page term sheet handed to the five largest mortgage servicers last week is a detailed, dense list of requirements that, if implemented as proposed, would fundamentally change the relationship between servicers, investors and borrowers.

The term sheet, obtained by American Banker and available here, is just the opening bid in an ongoing negotiating process between the servicers and various state and federal agencies attempting to punish them for significant issues uncovered in the foreclosure process. While some of the details of the term sheet have been made public already, the sheer breadth and depth of the proposed requirements were not clear until now.

The article has a nice summary of the document.