by Calculated Risk on 1/27/2011 01:05:00 PM

Here is the Financial Crisis Inquiry Commission report

Here are the conclusions.

• We conclude this financial crisis was avoidable. ...

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. ... Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.

This is absolutely correct. In 2005 I was calling regulators and I was told they were very concerned - and several people told me confidentially that the political appointees were blocking all efforts to tighten standards - and one person told me "Greenspan is throwing his body in front of all efforts to tighten standards".

The dissenting views that discount this willful lack of regulation are absurd and an embarrassment for the authors.

• We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the selfcorrecting nature of the markets and the ability of financial institutions to effectively police themselves. ...

Yet we do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it. To give just three examples: the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not. The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup’s excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not. In case after case after case, regulators continued to rate the institutions they oversaw as safe and sound even in the face of mounting troubles, often downgrading them just before their collapse. And where regulators lacked authority, they could have sought it. Too often, they lacked the political will—in a political and ideological environment that constrained it—as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.

This is a key finding and absolutely correct.

• We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. ...

• We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis. ...

• We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets. ...

• We conclude there was a systemic breakdown in accountability and ethics. ... For example, our examination found, according to one measure, that the percentage of borrowers who defaulted on their mortgages within just a matter of months after taking a loan nearly doubled from the summer of 2006 to late 2007. This data indicates they likely took out mortgages that they never had the capacity or intention to pay. You will read about mortgage brokers who were paid “yield spread premiums” by lenders to put borrowers into higher-cost loans so they would get bigger fees, often never disclosed to borrowers. The report catalogues the rising incidence of mortgage fraud, which flourished in an environment of collapsing lending standards and lax regulation. ...

• We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis. ... Many mortgage lenders set the bar so low that lenders simply took eager borrowers’ qualifications on faith, often with a willful disregard for a borrower’s ability to pay. ... These trends were not secret. As irresponsible lending, including predatory and fraudulent practices, became more prevalent, the Federal Reserve and other regulators and authorities heard warnings from many quarters. Yet the Federal Reserve neglected its mission “to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.” ...

• We conclude over-the-counter derivatives contributed significantly to this crisis. ...

• We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies.

My view is the keys to the crisis are 1) the willful lack of regulators to do their jobs, combined with 2) the rapid "innovation" in the mortgage market, especially the agency problems associated with the originate-to-distribute model. I'm just starting to read the report, but just based on the conclusions, this report deserves praise.

by Calculated Risk on 1/27/2011 11:24:00 AM

• From the Kansas City Fed: Survey of Tenth District Manufacturing

Growth in Tenth District manufacturing activity moderated somewhat in January, but activity was stronger than a year ago and optimism
remained fairly high. Price indexes in the survey were still elevated, particularly for raw materials.

The month-over-month composite index was 7 in January, down from 14 in December and 11 in November ... The employment index edged down from 11 to 8.

Note: I've been using the production index from the Kansas City Fed, and they have now introduced a composite index. The last of the regional Fed surveys for January will be released on Monday (Dallas Fed).

The ISM manufacturing index will released on Tueday, Feb 1st, and the regional Fed surveys suggest the index will be in the mid to high 50s (same range as December).

• From RealtyTrac: 2010 Foreclosure Activity Down in Hardest Hit Markets But Increases in 72 Percent of Major Metros

“Foreclosure floodwaters receded somewhat in 2010 in the nation’s hardest-hit housing markets,” said James J. Saccacio, chief executive officer of RealtyTrac. “Even so, foreclosure levels remained five to 10 times higher than historic norms in most of those hard-hit markets, where deep faultlines of risk remain and could potentially trigger more waves of foreclosure activity in 2011 and beyond. Meanwhile foreclosures became more widespread in 2010 as high unemployment drove activity up in 72 percent of the nation’s metro areas — many of which were relatively insulated from the initial foreclosure tsunami.”

• From the NY Times: S.&P. Downgrades Japan as Debt Concerns Spread

• From Bloomberg: Mortgage Rates on 30-Year U.S. Loans Increase for the Second Straight Week

The average rate for 30-year fixed loans climbed to 4.80 percent for the week ended today from 4.74 percent, according to Freddie Mac.

by Calculated Risk on 1/27/2011 10:00:00 AM

UPDATE:
• On February 23rd, the National Association of Realtors (NAR) will release revisions for the past three years (2008 through 2010) along with the January existing home sales report. This is the ordinary annual revision, and the revisions will probably be minor.

• The NAR is working on benchmarking existing home sales for previous years with other industry data. There is no planned release date for these possible revisions - if any are announced. The process is expected to be completed sometime after mid-year, and I expect this effort will lead to significant downward revisions to previously reported sales.

Original post:

Special Note: I've been discussing the National Association of Realtors (NAR) existing home sales data with several analysts. As an example, Keith Jurow has been sending me data from local areas, and also calculations based on data from Inside Mortgage Finance suggesting that the NAR existing home sales data is overstating sales. I've also looked at other sources, and I think the NAR started over estimating sales in 2006 or 2007 (perhaps by 5% or so in 2007), and the errors have increased since then (perhaps 10% or 15% or more in 2009 and 2010). I expect the NAR will revise down sales for these years in the not too distant future (I'm hearing whispers of coming revisions - but I haven't been able to confirm this with the NAR).

From the NAR: Pending Home Sales Continue Uptrend

The Pending Home Sales Index,* a forward-looking indicator, increased 2.0 percent to 93.7 based on contracts signed in December from a downwardly revised 91.9 in November [revised down from 92.2]. The index is 4.2 percent below the 97.8 mark in December 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

This suggests existing home sales in January and February will be somewhat higher than in December, although - based on mortgage applications - I think we might see a slight decline in sales.

by Calculated Risk on 1/27/2011 08:42:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Jan. 22, the advance figure for seasonally adjusted initial claims was 454,000, an increase of 51,000 from the previous week's revised figure of 403,000. The 4-week moving average was 428,750, an increase of 15,750 from the previous week's revised average of 413,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims for the last 10 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 15,750 to 428,750.

This was much higher than consensus expectations. The recent decline in the four week average has been good news - and this large increase (just one week) is concerning. Blame it on the snow ...

by Calculated Risk on 1/26/2011 08:57:00 PM

A ditty from Merle on Italy (short to fit the time slot on Paul Solman's Making $ense (Solman is discussing Europe this week).

by Calculated Risk on 1/26/2011 05:16:00 PM

The Census Bureau reported that new home inventory declined to 190,000 new houses for sale at the end of December. A common questions is: What inventory is included?

According to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

Click on graph for larger image in graph gallery.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale fell to 80,000 units in December. And the combined total of completed and under construction is at the lowest level since this series started.

In most areas the 'completed' and 'under construction' inventory of new homes is fairly lean. (Tom Lawler sent me a note just as I was finishing this post, he wrote: Currently new SF home inventories are “pretty lean,” which is good since new home sales are still “pretty soft.” )

Here are the New and Existing December home sales posts:
• New Home Sales increase in December
• December Existing Home Sales: 5.28 million SAAR, 8.1 months of supply
• Existing Home Inventory increases 8.4% Year-over-Year in December
• Home Sales: Distressing Gap
• Graph galleries for New Home and Existing Home sales