by Calculated Risk on 6/12/2012 04:08:00 PM

Some interesting articles ...

From Brad DeLong and Barry Eichengreen: New preface to Charles Kindleberger, The World in Depression 1929-1939. A brief excerpt:

The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.

Both the existence of these parallels and their tragic nature would not have escaped Charles Kindleberger, whose World in Depression, 1929-1939 was published exactly 40 years ago, in 1973. Where Kindleberger’s canvas was the world, his focus was Europe. While much of the earlier literature, often authored by Americans, focused on the Great Depression in the US, Kindleberger emphasised that the Depression had a prominent international and, in particular, European dimension. It was in Europe where many of the Depression’s worst effects, political as well as economic, played out. And it was in Europe where the absence of a public policy authority at the level of the continent and the inability of any individual national government or central bank to exercise adequate leadership had the most calamitous economic and financial effects.

From Mark Blyth and Matthias Matthijs at Foreign Affairs: The World Waits For Germany. An excerpt:

So Germany has shifted, but not enough to make any real difference to the outcome. Germany is both devoutly anti-reflationary and leadership averse, which is the worst possible combination at the worst possible moment. It would be nice, to use an American expression, for Germany to step up to the plate and put its full economic weight behind a fiscal and a banking union, including euro-denominated sovereign debt. But for reasons of history and ideology, as well as political and economic context, Europe may well be about to re-run Kindleberger's 1930s ...

And from Sebastian Mallaby at Foreign Affairs: The Fate of the Monetary Union Lies in Germany’s Hands

And from the WSJ: ECB Says Euro Zone Needs Banking Union

The European Central Bank repeated its call for a common banking union to shore up the euro zone's financial system, even as Germany's central bank warned such proposals are "premature" and risky.

The ECB's No. 2 official, Vitor Constancio of Portugal, also said the central bank should have the power to supervise large European banks, saying it has the institutional resources and knowledge to perform such a task.
...
"There is a need to…conceive a banking union as an integral counterpart of monetary union," the ECB said in its semiannual financial stability review. Such a union would include euro-zone-wide bank supervision, deposit guarantees and a funding mechanism from banks.

by Calculated Risk on 6/12/2012 02:28:00 PM

CR Note: Yesterday I posted some distressed sales data for Sacramento. I'm following the Sacramento market to see the change in mix over time (short sales, foreclosure, conventional). Economist Tom Lawler has been digging up similar data, and he sent me the table below for several more distressed areas. For all of these areas, except Las Vegas, the share of distressed sales is down from May 2011 - and for the areas that break out short sales, the share of short sales has increased (except Minneapolis) and the share of foreclosure sales are down - and down significantly in some areas.

From Lawler:

Note that the distressed sales shares in the below table are based on MLS data, and often based on certain “fields” or comments in the MLS files, and some have questioned the accuracy of the data. Some MLS/associations only report on overall “distressed” sales, while others (e.g., Birmingham) only report on the foreclosure share of sales.

I’m not quite sure why the short-sales share (based on MLS reports) in the Minneapolis area is so low relative to other MLS-based reports for areas with “high” distressed-sales shares.

The most striking shift from a year ago, of course, is the sharp drop in the foreclosure share of home sales – with the drop in Phoenix being nothing short of amazing. Most, but not all, areas also saw a significant increase from a year ago in the short-sales share of resales. And finally, most areas have seen a YOY drop in the overall “distressed” sales share, and saw a significant YOY increase in non-distressed sales.

	Short Sales Share		Foreclosure Sales Share		Total "Distressed" Share
	12-May	11-May	12-May	11-May	12-May	11-May
Las Vegas	32.6%	23.0%	34.7%	43.8%	67.3%	66.8%
Reno	39.0%	29.0%	22.0%	40.0%	61.0%	69.0%
Phoenix	26.6%	21.4%	16.9%	43.8%	43.5%	65.2%
Sacramento	30.1%	23.2%	28.1%	42.4%	58.2%	65.6%
Minneapolis	10.5%	11.2%	28.9%	40.1%	39.4%	51.3%
Mid-Atlantic (MRIS)	11.8%	11.3%	10.2%	18.6%	22.1%	29.8%
Hampton Roads VA					26.3%	31.0%
Birmingham AL			27.3%	29.8%

by Calculated Risk on 6/12/2012 11:43:00 AM

From Kathleen Pender at the San Francisco Chronicle: Harp 2 starts to help the severely underwater

On June 1, the Federal Housing Finance Agency reported that total Harp refinances had jumped to 180,185 in the first quarter of this year - almost double the number done in the previous quarter.
...
The vast majority of Harp refis in the first quarter were loans with LTV ratios in the 80 to 105 percent range. Guy Cecala, publisher of Inside Mortgage Finance, calls these loans the "low-hanging fruit lenders have been willing" to refinance.

Only 20 percent had LTVs between 105 and 125 percent and only 2 percent had LTVs greater than 125 percent.
...
Starting last week, loans with LTVs greater than 125 percent can be bundled into securities sold to investors, although they still must be segregated from other loans, Cecala says. That should give Harp 2 a big boost.

One obstacle for borrowers is that most big banks, including Bank of America and Chase, won't refinance a loan under Harp 2 unless they already service it.

HARP 2 doesn't always lead to lower payments - one of the goals of the program was to get borrowers to pay down principal faster with a shorter amortization period. This will help borrowers get out of a negative equity situation sooner. Here is an example from the article:

Oliver and his wife owed $372,000 on their home, now worth about $230,000. With a loan-to-value ratio of 161 percent, Oliver had little hope of refinancing his 5.875-percent mortgage ...

The Olivers had only 21 years remaining on their original mortgage, so rather than refinance into a new 30-year loan, they took out a 15-year loan at 3.5 percent with no closing costs.

"We will be paying roughly $300 more per month, but we are saving $171,000 over the course of the loan," says Oliver, who closed a few weeks ago.

A quick calculation: if the house value stays at $230,000, the borrowers would be out of negative equity around June 2023 with the current loan. With the new loan they will be out of negative equity at the end of 2018 (still a long time, but they have quite a bit of negative equity).

by Calculated Risk on 6/12/2012 08:19:00 AM

From the National Federation of Independent Business (NFIB): Small-Business Optimism Index Stagnates: No Progress Made for Small-Business Sector in May

Dropping just a tenth-of-a-point in the month of May, the Nation Federation of Independent Business (NFIB) Index of Small Business Optimism came in at 94.4. A reading of 94.4 is historically low and consistent with the sub-par performance of GDP and employment growth. The individual indicators were mixed, with expected sales in a three month decline. However, some employment components improved and profit trends remained relatively stable after its sharp gain in April.
...
It appears that sales are improving modestly in the small-business sector. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months dropped 2 points, falling to two percent, the second highest reading in 60 months (the highest was April’s reading of 4 percent).
...
Twenty (20) percent reported that “poor sales” are their top business problem, up 1 point from April.

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

Click on graph for larger image.

This graph shows the small business optimism index since 1986. The index decreased slightly to 94.4 in May from 94.5 in April.

For the second consecutive month, the "single most important problem" was not "poor sales". In the best of times, small business owners complain about taxes and regulations, and that is starting to happen again.

The second graphs shows an index of hiring plans over the next six months.

Seasonally adjusted, the net percent of owners planning to create new jobs rose 1 point to six percent, confirming the 5 point jump recorded in April.

Hiring plans increased slightly in May, and has been trending up slowly.

This optimism index remains low, but as housing continues to recover, I expect this index to increase (there is a high concentration of real estate related companies in this index).

by Calculated Risk on 6/11/2012 10:22:00 PM

First on Spain:

From Joseph Cotterill at FT Alphaville:

A day of confusion over the terms of the Spanish bank bailout ended with a market sell-off. Spanish bond yields closed higher on Monday than on Friday, with the ten-year yield at 6.54 per cent (Wall Street Journal). Spain said it would continue with auctions of its debt as normal, but investors pointed to the possibly seniority of ESM loans over private bondholders as a risk to buying more bonds (Financial Times). In addition to fears over Spain, it emerged that eurozone planners discussed border and capital controls as a contingency if Greece leaves the euro (Reuters).

And a summary from Ben Walsh at Reuters: Parsing the Spanish bailout

• At 7:30 AM ET, the NFIB Small Business Optimism Index for May will be released. The index increased to 94.5 in April from 92.5 in March. This tied February 2011 as the highest level since December 2007. The consensus is for a slight decrease to 94.2 in May.

• At 8:30 AM, U.S. Import and Export Price Indexes for May will be released. The consensus is a for a 1.1% decrease in import prices due primarily to the decline in oil prices.