by Calculated Risk on 4/12/2012 11:42:00 AM

In FHFA acting director Ed DeMarco's speech on Tuesday, he discussed the risk of "strategic modifiers". Felix Salmon and I have been discussing this via email. Here is Salmon's post this morning: Ed DeMarco and the spectre of strategic modifiers

A couple of definitions: A "strategic defaulter" is a borrower who is underwater on their home mortgage (they owe more than the house is worth), and who is willing to walk away from their home, even though they have the capacity to make the payments. Strategic defaulters intend to go to foreclosure - and probably will - even if offered a modification.

A "strategic modifier" is a borrower who intends to stay in their home, but is willing to miss some payments to qualify for a loan modification.

Salmon writes:

I don’t believe that the problem of strategic modifiers (over and above the problem of strategic defaulters) is likely to be huge. One reason is that I’ve been writing about the upside of strategic default for a long time, and it really hasn’t caught on, outside a few second homes and the like. Strategic default is not something that Americans like to do, and one of the main reasons is that they really care about their credit rating. Even if a strategic modifier keeps her house, she’ll suffer the same hit to her credit rating as a strategic defaulter would. And people don’t like that at all.

I disagree somewhat. First, someone who goes to foreclosure will take a much larger hit to their credit than someone who misses a few payments. So there is a difference - "strategic modifiers" will not take the same credit hit as "strategic defaulters".

Second, I think most people feel an obligation to pay their mortgage, if they can, even if they owe more than their home is worth. But some of those same people will be willing to stand in the "free money" line (principal reduction), even if that means missing a few payments.

So, depending on the guidelines, I think there will be a higher percentage of "strategic modifiers" than "strategic defaulters".

Salmon concludes:

[L]et’s try principal reductions in the real world, and see what happens. If they turn out to be incredibly expensive, then we can revisit the issue. But my guess for the most likely outcome is not a wave of strategic modifiers. Rather, it’s that the program turns out to be much like all other government attempts to deal with underwater borrowers: a damp squib where very little happens at all.

I think some sort of principal reduction program will be announced, with tight guidelines, but I agree with Salmon, I expect the program will have little impact.

by Calculated Risk on 4/12/2012 09:09:00 AM

The Department of Commerce reported:

[T]otal February exports of $181.2 billion and imports of $227.2 billion resulted in a goods and services deficit of $46.0 billion, down from $52.5 billion in January, revised. February exports were $0.2 billion more than January exports of $180.9 billion. February imports were $6.3 billion less than January imports of $233.4 billion

The trade deficit was well below the consensus forecast of $51.7 billion.

The first graph shows the monthly U.S. exports and imports in dollars through January 2012.

Click on graph for larger image.

Exports increased slightly in February, while imports decreased sharply. Exports are well above the pre-recession peak and up 9% compared to February 2011; imports are near the pre-recession high and imports are up about 8% compared to February 2011.

The second graph shows the U.S. trade deficit, with and without petroleum, through February.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil averaged $103.63 per barrel in February, down slightly from January. The decline in imports was a combination of less petroleum imports and less imports from China.

Exports to the European Union were $22.5 billion in February, up from $20.0 billion in February 2011.

by Calculated Risk on 4/12/2012 08:30:00 AM

The DOL reports:

In the week ending April 7, the advance figure for seasonally adjusted initial claims was 380,000, an increase of 13,000 from the previous week's revised figure of 367,000. The 4-week moving average was 368,500, an increase of 4,250 from the previous week's revised average of 364,250.

The previous week was revised up to 367,000 from 357,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 368,500.

The 4-week moving average has been moving sideways at this level for about two months.

And here is a long term graph of weekly claims:



This is the highest level for weekly claims since January.

All current Employment Graphs

by Calculated Risk on 4/12/2012 12:01:00 AM

From RealtyTrac: Q1 2012 Foreclosure Activity Lowest Since Q4 2007

RealtyTrac ... today released its U.S. Foreclosure Market Report™ for the first quarter of 2012, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 572,928 properties during the quarter, down 2 percent from the previous quarter and down 16 percent from the first quarter of 2011.

The first quarter total was the lowest quarterly total since the fourth quarter of 2007, when 527,740 properties with foreclosure filings were reported.

Foreclosure filings were reported on 198,853 U.S. properties in March, a 4 percent decrease from February and a 17 percent decrease from March 2011. March’s total was the lowest monthly total since July 2007, and also the first monthly total below 200,000 since July 2007.

“The low foreclosure numbers in the first quarter are not an indication that the massive reservoir of distressed properties built up over the past few years has somehow miraculously evaporated,” said Brandon Moore, chief executive officer of RealtyTrac. “There are hairline cracks in the dam, evident in the sizable foreclosure activity increases in judicial foreclosure states over the past several months, along with an increase in foreclosure starts in many judicial and non-judicial states in March. The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen — both in terms of new foreclosure activity and new short sale activity.”
...
The nationwide decrease in foreclosure activity was caused primarily by decreasing activity in states that use the non-judicial foreclosure process. These 24 states combined, along with the District of Columbia, had 329,854 properties with foreclosure filings during the quarter, more than half the national total — but a decrease of 8 percent from the previous quarter and a decrease of 28 percent from the first quarter of 2011.
...
Meanwhile foreclosure activity increased in states that primarily use the judicial foreclosure process. These 26 states combined accounted for 243,074 properties with foreclosure filings during the quarter, an increase of 8 percent from the previous quarter and an increase of 10 percent from the first quarter of 2011.

Judicial states posting some of the biggest year-over-year increases in foreclosure activity in the first quarter included Indiana (up 45 percent), Connecticut (up 38 percent), Massachusetts (up 26 percent), Florida (up 26 percent), South Carolina (up 26 percent), and Pennsylvania (up 23 percent).

The mortgage settlement was just signed off last week, so we really have to wait until April or May to see the impact of the settlement. Obviously RealtyTrac thinks the dam is about to burst and the market will be flooded again with foreclosures. My feeling is this will have more of an impact on the judicial states because of the huge backlog in those states.

by Calculated Risk on 4/11/2012 07:15:00 PM

Fed Vice Chair Janet Yellen argues that the Fed is falling "far short" of the "maximum employment objective", and that inflation will be "at or below the FOMC's longer-run goal of 2 percent". She discusses reasons for considering keeping the Fed funds rate close to zero "until late 2015" as opposed to the current 2014.

On QE3, she discussed additional stimulus "if the recovery faltered or inflation drifted down", but then added "doing so involves costs and risks."

From Fed Vice Chair Janet Yellen: The Economic Outlook and Monetary Policy. Excerpt:

I see no good reason to doubt that our nation's high unemployment rate indicates a substantial degree of slack in the labor market. Moreover, while I recognize the significant uncertainty surrounding such forecasts, I anticipate that growth in real gross domestic product (GDP) will be sufficient to lower unemployment only gradually from this point forward, in part because substantial headwinds continue to restrain the recovery.

One headwind comes from the housing sector, which has typically been a driver of business cycle recoveries. We have seen some improvement recently, but demand for housing is likely to pick up only gradually given still-elevated unemployment, uncertainties over the direction of house prices, and mortgage credit availability that seems likely to remain very restricted for all but the most creditworthy buyers. When housing demand does pick up more noticeably, the huge overhang of both unoccupied dwellings and homes in the foreclosure pipeline will likely allow demand to be met for a time without a sizable expansion in homebuilding.

A second headwind comes from fiscal policy. State and local governments continue to face extremely tight budget situations in light of the weak economy, depressed home prices, and the phasing out of federal stimulus grants, though overall tax revenues have been improving and that should continue as the economy expands further. At the federal level, stimulus-related policies are scheduled to wind down, while both real defense and nondefense purchases are expected to decline over the next several years under the spending caps put in place last year.

A third factor weighing on the outlook is the sluggish pace of economic growth abroad. Strains in global financial markets have eased somewhat since late last year, an improvement that reflects in part policy actions taken by European authorities. Nonetheless, risk premiums on sovereign debt and other securities are still elevated in many European countries, while European banks continue to face pressure to shrink their balance sheets, and concerns about the outlook for the region remain. A further slowdown in economic activity in Europe and in other foreign economies would inhibit U.S. export growth.

For these reasons, I anticipate that the U.S. economy will continue to recover only gradually and that labor market slack will remain substantial for a number of years to come.

And on inflation:

Let me now turn to inflation. Overall consumer price inflation has fluctuated quite a bit in recent years, largely reflecting movements in prices for oil and other commodities. ...

In my view, the subdued inflation environment largely reflects two factors. First, the substantial slack in the labor market has restrained inflation by holding down labor costs. Second, and of critical importance, longer-term inflation expectations have been remarkably stable.

Conclusion:

In summary, I expect the economic recovery to continue--indeed, to strengthen somewhat over time. Even so, over the next several years, I anticipate that we will fall far short in achieving our maximum employment objective, and I expect inflation to remain at or below the FOMC's longer-run goal of 2 percent.