by Calculated Risk on 9/23/2011 11:37:00 PM

Earlier this week, in reaction to the Fed lowering long term rates, I asked: Will there be another Refinance Boom?. And reader Soylent Green is People (mortgage broker) commented:

"Refinance boom will be much larger than 2009 when the Feds remove the 125% LTV cap on HARP loans. There are so many whispers about it I can hardly hear myself think."

From Nick Timiraos at the WSJ: Rate Drop Spurs Home Refinancing

The 30-year fixed-rate mortgage dipped below 4%, possibly triggering a refinancing boom for many of the same borrowers who already have taken advantage of rock-bottom interest rates.

According to a survey by Credit Suisse on Thursday, lenders were offering an average rate of 3.91% on 30-year fixed-rate mortgages [with 1 point].
...
Obama administration officials and U.S. regulators are in talks with lenders about ways to revamp an existing White House refinancing initiative designed to help borrowers with little or no equity. The program is open to borrowers whose loans are backed by Fannie and Freddie, which guarantee about half of all outstanding home loans.

There are a few key points: 1) rates are now below 4% with 1 point, 2) but only certain borrowers can refinance at this rate - most borrowers can't because of tighter underwriting standards and lack of equity in their homes, and 3) there might be a large refinancing boom if HARP is expanded - although only for borrowers with loans guaranteed by Fannie or Freddie.

by Calculated Risk on 9/23/2011 09:22:00 PM

From the FDIC: Tri Counties Bank, Chico, California, Assumes All of the Deposits of Citizens Bank of Northern California, Nevada City, California

As of June 30, 2011, Citizens Bank of Northern California had approximately $288.8 million in total assets and $253.1 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $37.2 million. ... Citizens Bank of Northern California is the 73rd FDIC-insured institution to fail in the nation this year, and the fourth in California. The last FDIC-insured institution closed in the state was San Luis Trust Bank, FSB, San Luis Obispo, on February 18, 2011.

That was a long time between failures in California!

by Calculated Risk on 9/23/2011 06:25:00 PM

Common bank guidelines
Common sense says follow them
Commonwealth should of.
by Soylent Green is People
From the FDIC: Southern Bank and Trust Company, Mount Olive, North Carolina, Assumes All of the Deposits of Bank of the Commonwealth, Norfolk, Virginia

As of June 30, 2011, Bank of the Commonwealth had approximately $985.1 million in total assets and $901.8 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $268.3 million. ... Bank of the Commonwealth is the 72nd FDIC-insured institution to fail in the nation this year, and the second in Virginia.

It feels like Friday.

by Calculated Risk on 9/23/2011 05:15:00 PM

The Department of Transportation (DOT) reported today:

Travel on all roads and streets changed by -2.5% (-6.7 billion vehicle miles) for July 2011 as compared with July 2010. Travel for the month is estimated to be 261.8 billion vehicle miles.

Cumulative Travel for 2011 changed by -1.2% (-21.5 billion vehicle miles).

The following graph shows the rolling 12 month total vehicle miles driven.

Click on graph for larger image in graph gallery.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 44 months - so this is a new record for longest period below the previous peak - and still counting!

The second graph shows the year-over-year change from the same month in the previous year. The current decline is not as a severe as in 2008, but this is significant.

With the slowdown at the end of July and in August, miles driven will probably decline further in August.

by Calculated Risk on 9/23/2011 03:25:00 PM

First on Europe ... it would really help to have a consistent message, or maybe Merkel and Schaeuble are just playing good cop, bad cop!

From the WSJ: New Doubts on Greece's Ability to Secure More Aid

New doubts about Greece's ability to secure further aid and avoid default emerged Friday ... German Finance Minister Wolfgang Schaeuble led the chorus, saying that Greece's creditors may need to revise the July 21 agreement on additional aid for the country, because conditions may have changed since the deal was reached.

... The week also saw increasing speculation that Greece may need to default or at least seek much more debt relief than was foreseen in July as a result of its repeated failures to meet targets for economic growth and deficit reduction.

"It would surprise me if the conditions for a disbursement of the next tranche of aid in September had changed, but not if the conditions for an additional program had changed," Mr. Schaeuble said at a news briefing on the sidelines of a series of international meetings in Washington. "However, I want to wait and see first."

From Bloomberg: Europe May Speed Permanent Fund Enactment

European governments are exploring speeding the setup of a permanent rescue fund ... Drawing on paid-in capital, the fund will wield a 500 billion-euro ($677 billion) war chest that could help shield countries like Italy. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.

Senior finance officials next week will examine the cost advantages of creating the fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule, according to a staff paper prepared for the meetings and obtained by Bloomberg News.

And on auto sales ...

From the LA Times: Car sales strengthen in September

The retail sales rate for new vehicles in the U.S. this month looks “much stronger than in August,” according to J.D. Power & Associates, which gathers sales data from about 8,900 dealers. That's about half of all the dealers selling cars nationally.

“Coming off a solid Labor Day sale, retail sales exhibited unexpected strength in the second week of September, as the recovering inventory levels have helped to bring buyers back into the market,” said Jeff Schuster, executive director of global forecasting at J.D. Power.

The annual sales rate for all vehicles, including the retail segment of the market and what rental car companies, commercial customers and government agencies purchase, will hit 12.9 million this month ...

From the WSJ: Ford Analyst Sees Strong Sales for Sector

The annualized rate of sales in September is tracking at about 12.5 million cars and light trucks on a seasonally adjusted rate, the highest since April.

Another sign of sluggish growth.

by Calculated Risk on 9/23/2011 01:54:00 PM

"[W]hen [bubbles] are underway, [they] are typically enjoyable. As a result, regulatory interventions that temper booms normally are going to be unpopular."

From NY Fed President William Dudley: Financial Stability and Economic Growth. Dudley makes several interesting comments. I've long argued that the primary causes of the housing bubble were rapid innovation in the mortgage market combined with a lack of regulatory oversight.

Here are a few excerpts:

Turning first to the issue of financial booms and busts, empirical observation makes it clear that financial markets are inherently unstable. Throughout history we have seen numerous sizable booms and damaging busts. The notion that financial markets are dynamically unstable is also supported by controlled experiments conducted by behavioral economists.
...
Although it is impossible to attribute the instability of financial markets to any one single driving force, recent experience suggests that in many cases innovation plays an important role. ... innovations that initially create real value generate feedback mechanisms that often fuel the development of excessive expectations—a boom that eventually reverses when the basic belief system that sustained it is contradicted by events.

Such innovations can occur in the real economy—consider the Internet—or in the financial sector—think of subprime lending and structured finance products. Although the role of innovation has differed across various booms and busts, some important common elements are evident in many of these episodes.

Early on in the cycle, an innovation can lead to changes in fundamental valuations or the creation of new markets and financial products. Examples of this might include the technology boom that followed the creation of the Internet or the subprime lending and the associated structured finance innovations that supported the housing boom.
...
As market participants respond to the innovation, this may cause a surge in business activity. ... This surge in activity drives up profits and prices, which in turn sustains the boom. As part of this process, feedback mechanisms work to reinforce beliefs in the importance and sustainability of the innovation. ... In the case of the subprime lending boom, the provision of credit led to increased demand, which pushed up prices, and rising prices, in turn, held down credit losses. These feedback mechanisms reinforce belief in the sustainability of the boom, often extending the boom far beyond activity levels or valuations justified by how the innovation has changed the “fundamentals.”

The process often comes to an abrupt end, and generally does so when the basic belief system that underpinned the boom is contradicted by events. ... the U.S. housing boom was unsustainable because it was not possible to indefinitely keep relaxing credit underwriting standards to qualify new buyers to stoke demand. It was also unsustainable because the rise in prices often led to a supply response that limited the prospect of further price increases.
...
When sudden reversals occur, large costs are imposed on the real economy and the financial system, costs that are not fully internalized by the market participants that may have benefited from the boom.
...
[A] critical objective of prudential oversight and regulation should be to enhance the system so that financial transactions of all forms reflect an assessment of risk and return by both the borrower and the lender that is as accurate as possible, recognizing that we live in an inherently uncertain world. This means that our reform efforts should be aimed at strengthening the quality of information and the system of incentives governing risk-taking by both institutions and individuals. And on those occasions when regulators judge that a systematic understatement and mispricing of risk may be occurring, we need to find better and more effective ways to actively lean against those dynamics. This includes using the bully pulpit to point out why a particular boom is likely to prove unsustainable.
...
[R]egulation needs to be oriented to establishing standards that will be appropriate throughout the cycle—for both the boom period and the bust. For example, in terms of subprime mortgage underwriting, this would have included enforcing standards with respect to loan valuation, loan-to-value ratios, household income verification, and the quality of loan documentation.
...
[N]o matter how effectively we reform the financial system, it seems unlikely that we will ever be able to completely eliminate booms and busts. There will be problems in identifying the boom—distinguishing between what is sustainable and what is unsustainable. There also will be broader and even more subtle obstacles—booms, when they are underway, are typically enjoyable. As a result, regulatory interventions that temper booms normally are going to be unpopular. So in practice even activist regulators may struggle to act early enough and with sufficient force to arrest a boom before it becomes a bubble. This suggests that to make the financial system secure, we are going to have to do much more than just act to temper booms and busts.