by Calculated Risk on 4/02/2008 07:34:00 PM

Since Chairman Bernanke allowed for the possibility of a recession in his testimony today - see NYTimes: Bernanke Nods at Possibility of a Recession - it might be fun to look back at a few Fed quotes from prior periods:

For the recession that started in April 1960:

“By and large, however, the economy seems quite solid.”
Federal Open Market Committee, May 1960

“[Chairman Martin] was by no means convinced that the situation was serious.”
Federal Open Market Committee, July 1960

“The Chairman reiterated his views ... There was a declining picture, ... but the economy was not going over a precipice by any means.”
Federal Open Market Committee, October 1960

For the recession that began in July 1990:

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].”
Chairman Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.”
Greenspan, August 1990

“... the economy has not yet slipped into recession.”
Greenspan, October 1990

Source: "Booms, Busts, and the Role of the Federal Reserve" by David Altig

by Tanta on 4/02/2008 04:38:00 PM

Someone we know is fond of remarking that it isn't really a credit crunch until a mortgage insurer goes down.

Ahem

Share price closed down 35% today.

(thanks, bub!)

by Tanta on 4/02/2008 03:23:00 PM

I was slumming again this afternoon . . . here's your daily dose of amusement.

And yes, the comment thread to that post makes me realize how lucky I am. Most of the time.

by Calculated Risk on 4/02/2008 02:25:00 PM

Via CNNMoney: U.K., Spain housing markets face major corrections - S&P

Standard & Poor's Ratings Services said Europe's housing markets are finally, and overwhelmingly, turning down.

'And in those countries where the housing bubbles have been expanding for longer, Standard & Poor's believes the corrections could be severe and painful,' the agency added.

The article notes that the price-to-income level is at a record high, and household debt is at "unprecedented" levels compared to GDP. Sounds familiar.

by Calculated Risk on 4/02/2008 12:17:00 PM

Yesterday Bloomberg provided a table of the $232 billion in credit losses and write-downs taken so far by the world's biggest banks and securities firms.

Today Bloomberg has published a table of the capital raised by those banks: Banks Get $136 Billion From Governments, Private Sources: Table (hat tip Brian)

The following table shows banks and securities firms that have sold stakes or announced plans to do so, raising $136 billion of capital amid losses on subprime- related securities.

The financial institutions have turned to their own governments, sovereign wealth funds of other countries' governments and public investors.

See article for table. Citigroup leads the list with $30.4 billion in new capital, followed by UBS at $27.7 billion.

by Calculated Risk on 4/02/2008 09:46:00 AM

From Chairman Bernanke's testimony before the Joint Economic Committee:

Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. ... However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.

Nothing really new in Bernanke's economic outlook, but historically when the Fed Chairman starts talking about the possibility of a recession, the economy is already in a recession.

And on Bear Stearns:

On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available. This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company’s failure could also have cast doubt on the financial positions of some of Bear Stearns’ thousands of counterparties and perhaps of companies with similar businesses. Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability. To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy, the Federal Reserve, in close consultation with the Treasury Department, agreed to provide funding to Bear Stearns through JPMorgan Chase. Over the following weekend, JPMorgan Chase agreed to purchase Bear Stearns and assumed Bear’s financial obligations.

JPMorgan didn't assume all of Bear's financial obligations. The U.S. taxpayers are also at risk.

And Bernanke concludes:

Clearly, the U.S. economy is going through a very difficult period.

by Tanta on 4/02/2008 08:33:00 AM

I struggled over two possible titles for this post: "Fannie Mae: We're All Expanded Approval Now," and "Fannie Mae to Walk-Aways: Don't Walk Back To Us." This is all about Announcement 08-08, which I suspect may get some curious play in the press. (The WSJ has already picked up the story.) It will be curious because there really is a mix here of apparent "loosening" as well as "tightening" of some guidelines, particularly Expanded Approval. My reading is that it's really all tightening, if you know how to read these things.

First, "Expanded Approval" is Fannie-Speak for "near-prime" loans that are run through its AUS, Desktop Underwriter (DU). DU buckets EA loans into one of three categories based on comparative credit quality and risk characteristics of the loan, and each level is subject to a worsening price adjustment. This Announcement seems to suggest some loosening of eligibility requirements on EA, such as allowing loan types or products that were never before eligible for EA, like interest-only FRMs and 5/1 ARMs, 3 and 4 unit properties, and cash-outs on second homes.

Does this mean that Fannie is signalling a willingness to take on more risk in the EA program? I don't really think that's the way to look at it. My guess is that the "standard eligibility" engine in DU has just been programmed to kick a lot of those IOs, multi-units, and second-home cash-outs into EA, where they are identified as high-risk and priced for it. In other words, a lot of loans that once would have gotten the label "prime" are now getting the label "near-prime." (EA isn't really "subprime," although the bottom of the EA pile is probably quite close to the top of the non-agency subprime pile. You can call EA "subprime," if you like, but that does tend to erase the fact that conventional non-agency subprime gets a lot worse than EA.) So, in other words, we're all--or a lot more of us are--Expanded Approval now.

What is unambiguously a tightening comes in for the requirements for loans with a past foreclosure:

The presence of a prior foreclosure action in the borrower’s credit history is evidence of significant derogatory credit and increases the likelihood of future default. The lender should consider the presence of a foreclosure as an added risk element that represents a significantly higher level of default risk. The greater the number of such incidences and the more recently they occurred, the higher the credit risk.

We currently require four years to elapse after a foreclosure before we will consider the borrower to have a re-established credit history. With this Announcement, we are increasing that time period to five years. We will continue to allow a lesser time period to elapse (three years in lieu of the current two-year requirement) for borrowers who can demonstrate documented extenuating circumstances that resulted in the foreclosure action.

These policy changes apply to all mortgage loans delivered in accordance with the Selling Guide, loan casefiles underwritten with DU Version 7.0, or pursuant to any variance contained in the lender’s Master Agreement.

Manually Underwritten Mortgage Loans

• Elapsed time is measured by comparing the application date of the new mortgage to the completion of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower.

• After the requisite five year elapsed time period

-The borrower may obtain a new mortgage to purchase a principal residence with a minimum 10 percent down payment and a minimum credit score of 680.

-The borrower may obtain a limited cash-out refinance mortgage pursuant to our eligibility requirements in effect at that time.

-The borrower may not obtain a cash-out refinance or obtain a mortgage secured by a second home or investment property for seven years after the foreclosure action.

• If the foreclosure was the result of documented extenuating circumstances (as defined in the Selling Guide) and the requisite three year elapsed time period has passed

-The same requirements apply as outlined above, with the exception that the minimum credit score of 680 is not required.

If you can actually afford to pay your mortgage payment, you made no attempt to work with your servicer or accept any kind of repayment plan, and your basic reason for walking away from the property was that you just didn't want to be upside down, you will be unable to meet the "documented extenuating circumstances" requirements. Plus, if you are "dragging out" the FC in order to live rent-free as long as possible, you are only extending the time period in which you are not eligible for a Fannie Mae loan again, since this is measured from "completion" of the FC process. In other words, this is aimed at "walk aways."

Furthermore,

Loans with excessive prior mortgage delinquencies will not be eligible for delivery to Fannie Mae. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more 60-, 90-, 120-, or 150-day delinquency reported within the 12 months prior to the credit report date.

It has never been any kind of easy to get a loan with recent serious mortgage lates through Fannie Mae, but they've never quite stated it this categorically.

There are a few other changes in FICOs and maximum financing that aren't exactly dramatic, but that are all heading in the direction of increased tightening. I read the whole Announcement as more of a certain message both GSEs have been putting out, of late: "Don't expect us to clean up all these messes for you, guys."

by Calculated Risk on 4/01/2008 10:11:00 PM

Just some more detail from the WSJ: Mortgage Securities Back Fed Loan to Bear Stearns

The securities backing a $29 billion Federal Reserve loan to Bear Stearns Cos. consist primarily of "mortgage-backed securities and related hedge investments," the Treasury Department said.
...
The Fed has declined to provide any underlying detail so far.

JPMorgan will take the first $1 billion in losses on the $30 billion portfolio, and the U.S. taxpayers will pay for the remaining losses (if any).

by Calculated Risk on 4/01/2008 05:24:00 PM

From Bloomberg: Subprime Losses Reach $232 Billion With UBS, Deutsche: Table (hat tip Brian)

The following table shows the $232 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 45 of the world's biggest banks and securities firms.

See article for table.

Since Chairman Bernanke is testifying before the Senate Banking Committee tomorrow, here is a quote from last year:

"Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems."
Chairman Bernanke, July 19, 2007

by Calculated Risk on 4/01/2008 04:36:00 PM

From the WSJ: Auto Makers Report Slump in March Sales

... General Motors Corp. report[ed] a 19% skid in U.S. sales of cars and light trucks.

Toyota Motor Corp. ... reported a 10% decline, while Ford Motor Co. had a 14% drop. Chrysler LLC's sales tumbled 19% last month.

A quote from MarketWatch: Double-digit declines rattle top automakers

"This is a very challenging external environment, reflecting a seismic shift in consumer preferences. I'd like to be able to tell you that the worst is behind us, but I really can't give you that assurance."
Jim Farley, chief of Ford's marketing division.

Falling construction spending and employment means fewer people are buying light trucks (a highly profitable segment). With record gasoline prices, car buyers are shifting to smaller, higher gas mileage - and lower profitability - cars. And the credit crunch is making it more difficult for some to obtain a car loan. And for many homeowners, the "home ATM" is closed as a borrowing source for cars.

Mix in a generally weaker economy and more unemployment, and you have a perfect storm for the auto makers in 2008.