by Calculated Risk on 6/07/2009 12:24:00 AM

Note: The following is an article that Tanta wrote for our April 2008 newsletter. This has not appeared on the blog before (ht Jillayne for reminding me of this).

As CR mentions in his essay on housing supply in this issue, plenty of markets are seeing very large segments of for-sale inventory coming in the form of short sale listings. Yet completed short sales remain a small segment of actual “distressed sales” or final dispositions of “worked out” loans. It is difficult to get reliable current data on short sales completed; the MBA reported in its first major analysis of workout data back in Q3 2007 that in that quarter, there were around 384,000 foreclosure starts and about 9,000 short sales completed. Certainly we have a lot of anecdotal evidence in the mainstream news media and from real estate agent reports suggesting that while short sales were never especially easy to accomplish, they are getting less so as time goes on.

Because so many observers of the scene express endless frustration that short sales have not been embraced by lenders as a “solution” to the foreclosure crisis—and no doubt because many potential real estate investors may be thinking that buying in a short sale is a good way to find a bargain—I thought it would be worthwhile to examine some of the reasons why they just don’t happen as often as one might expect. Part of the problem is overwhelmed servicers dealing with securitization documents that give them limited negotiating room, but that isn’t all of it. There is, I think, a certain psychological issue with two of the important participants in a short sale scenario other than the servicer, namely the current owner and the potential buyer, and this issue is causing short sale proposals that just don’t pass muster with servicers.

We should start by reviewing why it is that a servicer might be inclined to accept a short sale: the idea is that the loss incurred is less than the loss that would be incurred in a foreclosure. To start, then, the servicer must have some model it can use to project likely losses in foreclosure. A good deal of the data going into that model involves not just a projection of the likely sales price of the eventual REO, but also the servicer’s estimates of the costs and expenses of foreclosure, which the short sale is supposed to be minimizing or eliminating. This modeling is dynamic: as a local RE market changes (prices fall, inventory mounts, timelines for foreclosure extend), the model has to keep updating its loss projections.

There is no particular “rule of thumb” for what loss severity in a foreclosure is in any market, but one can start with a fairly simple example of where the losses come from by looking at some aggregated national data prepared by two Freddie Mac economists, Amy Crews Cutts and William A. Merrill, in a recent paper entitled “Interventions in Mortgage Default: Policies and Practices to Prevent Home Loss and Lower Costs” (available for download at www. freddiemac.com). The authors estimate the “breakout” of foreclosure losses on Freddie Mac (conforming dollar, prime or near-prime credit quality mortgages) in the period up to the third quarter of 2007 as follows:

• 20% Principal loss (the difference between the unpaid principal balance or UPB of the loan and the REO sales price, or the amount of the borrower’s “negative equity”)

• 37% Pre-Foreclosure Expenses (24% interest expense, 4% legal fees, 8% property costs such as taxes, insurance, assessments and utilities)

• 43% Post-Foreclosure Expenses (21% sales commission/concessions, 2% legal fees, 20% property costs and maintenance/repair

To take a simple example, then, in a market which is currently experiencing a “loss severity” of 40% (of the unpaid principal balance or UPB of the loan), the breakout would look something like this on average (using a smaller than “average” loan balance just to simplify the math):

Loan Amount	100,000
REO Sales Price	92,000
UPB Loss	8,000
Pre-FC Expense	14,800
Post-FC Expense	17,200
Total Loss	40,000
Loss Severity	40%

A short sale, then, would be of interest to the servicer only if it could result in a loss severity less than 40%. Of course, we do not necessarily expect the buyer in a short sale scenario to be offering $92,000 in this example, because that is not, in the buyer’s mind, a “discount” from the price the property would fetch as REO. The idea is that the servicer can be brought to accept a lower price for the property today than it could (potentially) get for the REO, because the short sale saves on the “foreclosure expenses.” Much frustration is being expressed by certain market participants or buyers who are nonplussed by servicers who apparently don’t want to “save” this money by accepting low-ball offers.

Part of the difficulty here is coming to terms with what the components of a servicer’s expenses are, and also what a difference it makes whether the current owner is delinquent (and cash-strapped) or not. It simply isn’t clear to me that everyone who is listing a property as a short sale these days is, actually, delinquent yet. That certainly makes a difference to a servicer’s willingness to negotiate, but it also makes a big difference in terms of what the cost comparisons are.

We also need to consider questions of timing. We looked in last month’s newsletter at some comparative foreclosure timeline numbers, making the point that they are dependent on the state’s laws as much if not more so that the servicer’s capacity or efficiency, although the latter is certainly significant. A short sale, more or less by definition, needs to be a “quick sale.” Delinquent borrowers do not have time to “expose” the property to “typically motivated” buyers for long enough to get the “optimum” price for the property; that’s why they’re facing foreclosure. Non-delinquent borrowers, presumably, can. However, they don’t want to deal with the extraordinarily extended “exposure” time required in a thorough-going RE bust, which moves from a matter of months to, apparently, a matter of years. Short sales offered by non-delinquent sellers fall into this odd sort of time-continuum: not as “quick” as a distressed borrower, but much “quicker” than a borrower seeking at least his loan amount. This no doubt accounts for a lot of the “failure to communicate” between non-delinquent borrower and servicer that we’re hearing about these days.

Let’s look at a theoretical set of alternative transactions based on the average numbers I laid out above. Please note that what I’m trying to capture here is the “mathematics of psychology,” not precisely the mathematics of “reality.” That will, I hope, be clearer after we look at some numbers:

	Foreclosure With 40% Loss Severity	Short Sale with Delinquent Owner		Short Sale with Non-Delinquent Owner
		Deal Fails	Deal Passes	"Typical" Exposure	"Quick Sale"
Loan Amount	100,000	100,000	100,000	100,000	100,000
"Gross" Sales Price	92,000	80,000	84,000	80,000	80,000
Sales Expense to Buyer	-	8,400	8,400	-	21,200
"Net" Sales Price	92,000	71,600	75,600	80,000	58,800
UPB Loss	8,000	28,400	24,400	20,000	41,200
Pre-FC Legal & Property	5,200	5,200	5,200	2,000	2,000
Pre-FC Interest Expense	9,600	9,600	9,600	-	-
Post FC Legal & Property	8,800	-	-	-	-
Post-FC Sales Expense	8,400	-	-	-	-
Total Loss:	40,000	43,200	39,200	22,000	43,200
"Discount" From REO Price	-	22%	18%	13%	36%
Post-FC Sales Expense to Owner	-	-	-	8,400	-
Pre-FC Interest Expense to Owner	-	-	-	9,600	-
Pre-FC Property Expense to Owner	-	-	-	3,200	-

In the foreclosure scenario, all costs to maintain the property, as well as cover interest payments on the outstanding loan balance due to the investor, are carried by the servicer and reimbursed from liquidation proceeds. This includes the “post-FC” costs of sales commissions and typical sales concessions (such as paying all or part of a buyer’s closing costs).

In our first example of a short sale with a delinquent owner, the buyer offers $80,000 for the property. However, we are going to assume a cash-strapped seller who is unable to cover the $8,400 in commissions/ concessions that would, in the foreclosure, have been paid by the servicer, and so we will assume that these costs are “passed on” to the buyer of the home, resulting in a net sales price of $71,600, or a 22% “discount” from the assumed REO price of $92,000. I don’t think it’s unreasonable to believe there might be buyers out there telling themselves that surely a servicer would rather lose 22% than 40%.

As we can see, however, it is really only the “post-FC” expenses that the servicer is “saving” in this deal, because the property seller has not, we assume, been making mortgage payments in a time-frame we will, for example purposes, consider to be equivalent to an “average” pre-FC period. You can, of course, and you would reduce the servicer’s expenses if the short sale were very fast, fast enough to make a meaningful difference in the servicer’s property expenses and interest costs. We’re just trying to keep the math constant to show, exactly, that you do have to sell not just “short” but “quick” to “pass” the servicer’s test here.

The second delinquent-owner column shows that the proposed deal doesn’t “pass” the servicer’s less-loss test until the sales price gets up to $84,000. That is still a “discount” from $92,000, if you choose to think of it that way, but not anywhere near a “lowball” offer.

The last two columns show how “psychological math” changes when we have a non-delinquent seller. In the first column, we assume a “rational” seller who understands that he needs to keep paying his mortgage until the sale takes place, meaning that he carries that “interest cost” and “pre-FC property expense” that the servicer would carry in the foreclosure scenario. Also, he will have to pony up at settlement for commission and typical concessions. If he is not particularly pressed for time here—he isn’t, after all, facing imminent foreclosure—then we’ll call his situation something like a “typical” marketing time for the property, which we are for simplicity’s sake making the equivalent of the foreclosure timeline. That scenario results in what should surely be an attractive deal to the servicer: a loss of only $22,000. With the property seller “paying” most of the costs that would otherwise have been the servicer’s. (I assume for example purposes that the legal costs of pre-foreclosure ($2,000) are equivalent to the legal/administrative costs to the servicer of processing a short sale.)

The only problem with that scenario, besides the fundamental question of the servicer’s motivation to accept loss when there is no delinquency to signal probable eventual foreclosure, is that this seller is displaying a set of behaviors I suggest might not be very common: wanting to sell quickly (compared to the years you might have to wait out a bust) but not too quickly (willing to pay out of pocket for sales commissions and market-driven concessions in order to get the best possible price in listing time comparable to the average 6-9 months of a foreclosure timeline). All while considering the monthly mortgage interest, taxes, and insurance as simply an inevitable expense that he needs to carry until he is approved by the servicer and relieved of ownership of the property.

My sense is that what we are actually seeing on the ground with non-delinquent short sale offers is probably closer to the second column: the one in which the seller in essence “decides” to “pass on” the sales costs and interest expense to the new buyer, to “get out without a loss.” (Again, I’m talking a certain kind of psychology here, not what you might call realistic math.) In this case, the seller presents the servicer with a “quick” low-ball price which will, he hopes, get him out before he incurs any more expense—expense here including the mortgage payment. The result of that? A loss to the servicer that is basically identical to the loss in the “failed” delinquent owner short sale.

In reality, of course, these costs that a “buyer” is taking are really costs that the servicer/investor is taking: it’s really the investor who ends up covering the transaction costs in most of these scenarios (because of the reduced sales price). Yet I don’t think enough prospective short-sellers have that in mind. Many, many people weren’t very good negotiators—or rational cost analysts—when they first bought these homes or took out these mortgages. It’s rather bizarre to think they’ll suddenly take a different view of things now, isn’t it? Our examples suggest that the deal most attractive to the servicer—the non-delinquent “typical” exposure or adequately-marketed property—is the one least likely to be offered. The “math of reality” works on these deals, but the “math of psychology” doesn’t.

My view is that, realistically, only the short sales with delinquent owners stand much of a chance of getting “passed” by servicers, and those few are being overtaken by events, namely, such a rapidly falling price environment that it’s hard to get that $84,000 bid and make it stick long enough to close the deal. This part is where servicer inability in so many cases to “just pull the trigger and close the deal” is hampering things, that being mostly a result of securitization rules requiring servicers to get investor/trustee approval, plus the endlessly updating numbers on those “models” that the servicers are using to find the “trigger point” where a short sale makes sense.

There are no doubt some bargains to be had for real estate investors looking into short sales, but for nearly anyone except an expert in certain markets, I think I’d suggest not wasting your time. Unless, that is, the listed “short” price has already been “pre-approved” by the owner’s servicer. That does sometimes happen; the seller will in that case have a letter from the servicer indicating the minimum allowable sales price/maximum concessions. It will also help to be working with a real estate agent who knows more than a little about doing short sales. Otherwise I suspect you’ll end up waiting for Godot. I hate to spoil the plot, if you’ve never seen that play, but in the end he never arrives.

Psychology of a Short Pig

by Calculated Risk on 6/06/2009 06:36:00 PM

Earlier I posted a graph on unemployment by education level (and a table from the BLS on compensation by education level), see: Unemployment Rate and Level of Education

Education clearly matters, but does it pay? I think it does, but it depends on the cost of education and opportunity costs. Eric sent me this cartoon that captures the reaction of many graduates ...

From cartoonist Eric G. Lewis. Click on cartoon for larger image in new window.

by Calculated Risk on 6/06/2009 04:10:00 PM

From Matt Padilla at the O.C. Register: Do these homeowners deserve help?

Homeowners who treated their houses like cash machines, tapping the equity as home values rose, are among the most likely to end in foreclosure, even more than those who bought at housing’s peak, a new study finds.

Often homeowners have had second, third and even fourth mortgages at time of foreclosure — a trend not adequately addressed by any of the federal or state foreclosure avoidance progams, said Michael LaCour-Little, a finance professor at Cal State Fullerton who authored the study.
...
I plan a bigger story on his findings, but wanted to share a few results now.
...
For example, for the early November 2008 data sample, he tracked 2,358 properties. Here’s what he found:

•They were purchased at an average price of $354,000 and average year of 2002 (long before the housing peak of 2005).
•Total debt on the properties averaged $551,000 at time of foreclosure. That’s 56% more than the properties were worth when purchased, meaning at least that much was cashed out!
•An automatic valuation model estimated average value at time of foreclosure was $317,000, which suggests a combined loan-to-value at foreclosure of more than 170% ($551,000/$317,000). And that is a conservative estimate. Properties that banks later sold had an average resale price of $271,000!

During the housing bubble, many bought homes they could not afford using "affordability products" like Option ARMs. But there was another group of speculators that lived beyond their means, using their homes like ATM cash machines. I think this an important issues and I'm looking forward to Padilla's article.

by Calculated Risk on 6/06/2009 11:19:00 AM

By request ...

Click on graph for larger image in new window.

This graph shows the unemployment rate by four level of education.

And here is a graphic from the BLS based on 2008 data: Education pays ...

Note that the unemployment rate has risen sharply for all categories in 2009. For "less than a high school diploma" the rate has increased from 9% in 2009 to almost 16% in May.

Education matters!

by Calculated Risk on 6/06/2009 08:26:00 AM

From the American Bankruptcy Institute: Consumer Bankruptcy Filings up 37 Percent in May

U.S. consumer bankruptcy filings rose 37 percent nationwide in May from the same period a year ago, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). The overall May consumer filing total of 124,838 was roughly level from the April total of 125,618. Chapter 13 filings constituted 27 percent of all consumer cases in May, slightly above the April rate.

“As consumers continue to face increasing levels of unemployment and rising foreclosure rates, bankruptcy filings will continue to accelerate as families seek financial relief from the tough economic climate,” said ABI Executive Director Samuel J. Gerdano. “We predict more than 1.4 million new bankruptcies by year end.”

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter.

Note: Quarterly data from Administrative Office of the U.S. Courts, Q1 data and Q2 estimate (based on April and May) from American Bankruptcy Institute.

The quarterly rate is close to the levels prior to when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. There were over 2 million bankruptcies filed in Calendar 2005 ahead of the law change.

Click on cartoon for larger image in new window. Another great cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

The American Bankruptcy Institute is predicting over 1.4 million new bankruptcies by year end - I'll definitely take the over!

by Calculated Risk on 6/06/2009 12:14:00 AM

From the WaPo: Bank Repayments May Exceed Estimate

The Obama administration is set to announce next week that a larger-than-expected number of big financial firms can repay their bailout funds ... The size of the repayments may double the initial estimate of $25 billion by the Treasury Department, the sources said. That would mean that many, perhaps nearly all, of the nine firms that regulators found to have sufficient reserves in a recent "stress test" would be allowed to return federal aid.

MarketWatch has a list : JP Morgan, Goldman among banks set to repay TARP

J.P. Morgan Chase ($25 billion), Goldman Sachs ($10 billion) and some other large U.S. banks ... include Morgan Stanley ($10 billion), American Express ($3.4 billion), Bank of New York Mellon ($3 billion), State Street ($2 billion), US Bancorp ($6.6 billion) and BB&T Corp. ($3.1 billion)

That totals $63.1 billion.

Bailout amounts from Pro Publica : Eye on the Bailout

by Calculated Risk on 6/05/2009 09:20:00 PM

This weekend's 'This American Life' is about the rating agencies.

Here is preview (with a 7 min audio): Economy Got You Down? Many Blame Rating Firms. (ht Bob) A few excerpts:

"We hired a specialist firm that used a methodology called maximum entropy to generate this equation," says Frank Raiter, who until 2005 was in charge of rating mortgages at Standard and Poors. "It looked like a lot of Greek letters."
...
Managing director Tom Warrack was in the room when Standard and Poor's gave those mortgage-backed securities AAA ratings. He stands by that decision.

"I wouldn't say anything was missed," he says. "Never before in the history of the country, dating back to the Great Depression, have we had the type of nationwide market value declines, declines in home prices, and the associated default levels."

Warrack says that his agency required riskier loans to have more protections built in to receive the highest grade. He says the agency knew plenty about the mortgages inside those bonds. "We had lots of data," he says. "We had years' worth of data as to how borrowers perform over time."

by Calculated Risk on 6/05/2009 06:58:00 PM

From the WSJ: Court Affirms Chrysler Sale but Puts Deal on Hold Until Monday

From attorney Steve Jakubowski at the Bankrutpcy Litigation Blog: Chrysler's Bankruptcy Sale Opinion - Part I: Proving "What Goes Around, Comes Around" Well it's official, and really no surprise:

Judge Gonzalez in this opinion (WL) approved the sale of Chrysler's assets in the Fiat Transaction "free and clear of liens, claims, interests and encumbrances."
...

Was it a sub rosa plan? The Court said no. And I actually agree. ...

Was the absolute priority rule violated? The Court danced around this issue pretty well, taking the position, well stated in this Credit Slips blog post, that "the allocation of ownership interests in the new enterprise is irrelevant to the estates' economic interests" and that "in addition, the UAW, VEBA, and the Treasury are not receiving distributions on account of their prepetition claims ... [but] under separately-negotiated agreements with New Chrysler ... [that are] not value which would otherwise inure to the benefit of the Debtors' estates."
...

Has the "Rule of Law" Been Withered (as questioned here)? Maybe, as I'll discuss later in Part II, but not for the reasons the Indiana Pension Funds are arguing on appeal. In fact, if anything, the following well-worn rules have been affirmed in this case:

1. You can't circumvent chapter 11's plan process when you can't even fund next week's payroll.

2. You can't violate the absolute priority rule if junior creditors necessary to the new enterprise get something out of the deal.

3. Lenders of last resort owe no duty to anyone but themselves and can dictate the terms of a plan or sale so long as the terms aren't unconscionable, which they aren't here.

by Calculated Risk on 6/05/2009 06:38:00 PM

Green shoots turn orange.
Tangelo will soon perp walk
Lincolnwood as well?
by Soylent Green is People
From the FDIC: Republic Bank of Chicago, Oak Brook, Illinois, Assumes All of the Deposits of Bank of Lincolnwood, Lincolnwood, Illinois

As of May 26, 2009, Bank of Lincolnwood had total assets of approximately $214 million and total deposits of $202 million. Republic Bank of Chicago agreed to purchase approximately $162 million in assets. The FDIC will retain the remaining assets for later disposition.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $83 million. Republic Bank of Chicago's acquisition of all the deposits was the "least costly" resolution for the DIF compared to alternatives. Bank of Lincolnwood is the 37th FDIC-insured institution to fail in the nation this year and the sixth in Illinois. The last bank to fail in the state was Citizens National Bank, Macomb, on May 22, 2009.

by Calculated Risk on 6/05/2009 04:02:00 PM

First the market graph from Doug:

Click on graph for larger image in new window. The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears". Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

And since it is BFF (bank failure friday), here is an update from Bloomberg: FDIC Closes Seized Silverton Bank After Failing to Sell Assets (ht lncolnpk, mark, ron and others)

The Federal Deposit Insurance Corp. will shut Georgia’s Silverton Bank, seized by regulators in May, after failing to find a buyer for the assets.

A sale is “no longer feasible” and Silverton will be sold in parts, spokesman Andrew Gray said today in an e-mailed statement. The FDIC unsuccessfully sought a buyer before the bank was taken over by regulators May 1, he said.

Silverton was seized by regulators in early May.

by Calculated Risk on 6/05/2009 03:11:00 PM

From MarketWatch: U.S. consumer debt falls by $15.7 billion

Consumer credit fell by $15.7 billion, or 7.4% at an annual rate, to $2.52 trillion. It was the second largest decline in outstanding debt on record, exceeded by March's $16.6 billion drop.

Click on graph for larger image in new window.

This graph shows the year-over-year change in consumer credit. Consumer credit is off 1.4% over the last 12 months - however, consumer credit has declined at a 6.6% rate over the last 6 months - a record pace.

Note: Consumer credit does not include real estate debt.

by Calculated Risk on 6/05/2009 01:39:00 PM

A couple more graphs based on the (un)employment report ...

Click on graph for larger image in new window.

This graph show the employment-population ratio; this is the ratio of employed Americans to the adult population.

Note: the graph doesn't start at zero to better show the change.

The general upward trend from the early '60s was mostly due to women entering the workforce. As an example, in 1964 women were about 32% of the workforce, today the percentage is close to 50%.

This measure is at the lowest level since the early '80s and shows the weak recovery following the 2001 recession - and the current cliff diving!

From the BLS report:

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in May at 9.1 million. The number of such workers has risen by 4.4 million during the recession.

Note: "This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs."

Not only has the unemployment rate risen sharply to 9.4%, but the number of workers only able to find part time jobs (or have had their hours cut for economic reasons) is now at a record 9.1 million.

Of course the U.S. population is significantly larger today (about 305 million) than in the early '80s (about 228 million) when the number of part time workers almost reached 7 million. That is the equivalent of about 9.3 million today, so population adjusted this isn't quite a record.

Earlier employment posts today:

Employment Report: 345K Jobs Lost, 9.4% Unemployment Rate for graphs of unemployment rate and a comparison to previous recessions.

Unemployment Compared to Stress Test Scenarios, and Diffusion Index

by Calculated Risk on 6/05/2009 12:04:00 PM

First from Reuters: Fed's Lockhart: Can't wait too long to tighten (ht Alan)

The Federal Reserve needs to be "anticipatory" and not wait too long to tighten monetary policy, Atlanta Fed President Dennis Lockhart said in an interview published on Friday. ... Lockhart is a voter on the Fed's policy-setting Federal Open Market Committee, which meets June 23-24.

This is similar to the comments of Kansas Fed President Thomas Hoenig on Wednesday.

Yields are rising across the board, with the Ten Year yield at 3.84%.

This will push mortgage rates higher ... here is a scatter graph I posted last month showing the relationship between the Ten Year yield and 30 year mortgage rates.

Click on graph for larger image in new window.

This graph shows the relationship between the Ten Year yield (x-axis) and the 30 year mortgage rate (y-axis, monthly from Freddie Mac) since 1971. The relationship isn't perfect, but the correlation is very high.

Based on this historical data, a Ten Year yield at 3.84% suggests a 30 year mortgage rate of around 5.75%.

Freddie Mac reported that 30 year mortgage rates were at 5.29% for the week ending June 4th, and the MBA reported rates at 5.25% for the week ending May 29th. These rates should jump again next week putting pressure on the Fed.

by Calculated Risk on 6/05/2009 09:30:00 AM

Note: earlier Employment post: Employment Report: 345K Jobs Lost, 9.4% Unemployment Rate.

Click on graph for larger image in new window.

This graph shows the unemployment rate compared to the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks (no link).

This is a quarterly forecast: in Q1 the unemployment rate was higher than the "more adverse" scenario. The Unemployment Rate in Q2 (only two months) is already higher than the "more adverse" scenario, and will probably rise further in June.

Note also that the unemployment rate has already exceeded the peak of the "baseline scenario".

Here is a look at how "widespread" the job losses are using the employment diffusion index from the BLS.

In May, job losses continued to be widespread across major industry sectors. Steep job losses continued in manufacturing, while the rate of decline moderated in several industries, including construction, professional and business services, and retail trade.
BLS, April Employment Report

The BLS diffusion index is a measure of how widespread changes in employment are. Some people think it measures the percent of industries increasing employment, but that isn't quite correct.

From the BLS handbook:

The diffusion indexes for private nonfarm payroll employment are based on estimates for 278 industries, while the manufacturing indexes are based on estimates for 84 industries. Each component series is assigned a value of 0, 50, or 100 percent, depending on whether its employment showed a decrease, no change, or an increase over a given period. The average (mean) value is then calculated, and this percent is the diffusion index number.

Think of this as a measure of how widespread the job losses are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

Before September, the all industries employment diffusion index was close to 40, suggesting that job losses were limited to a few industries. However starting in September the diffusion index plummeted. In December, the index hit 20.5, suggesting job losses were very widespread. The index has recovered since then (32.7 in May), suggesting job losses are less widespread.

The manufacturing diffusion index has fallen even further, from 40 in May 2008 to just 6 in January 2009. The manufacturing index is still very low at 12, and manufacturing employment is still getting hit hard:

Steep job losses continued in manufacturing, while declines moderated in construction and several service-providing industries.

by Calculated Risk on 6/05/2009 08:30:00 AM

From the BLS:

Nonfarm payroll employment fell by 345,000 in May, about half the average monthly decline for the prior 6 months, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent.

Steep job losses continued in manufacturing, while declines moderated in construction and several service-providing industries.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 345,000 in May. The economy has lost almost 3.6 million jobs over the last 6 months, and over 6 million jobs during the 17 consecutive months of job losses.

The unemployment rate rose to 9.4 percent; the highest level since 1983.

Year over year employment is strongly negative (there were 5.4 million fewer Americans employed in May 2009 than in May 2008).

The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

For the current recession, employment peaked in December 2007, and this recession was a slow starter (in terms of job losses and declines in GDP).

However job losses have really picked up over the last 8 months (4.6 million jobs lost, red line cliff diving on the graph), and the current recession is now one of the worst recessions since WWII in percentage terms - although not in terms of the unemployment rate.

This is another weak employment report ... more soon.

by Calculated Risk on 6/04/2009 10:17:00 PM

Here is a video of Mish from Global Economic Analysis giving a talk at Google (most Q&A). Yes, I helped him get started ...

Update: To be clear, I disagree with Mish on many points. I didn't want to turn this into a debate ...

by Calculated Risk on 6/04/2009 07:26:00 PM

S&P put out a report this afternoon: The Potential Rating Impact Of Proposed Methodology Changes On U.S. CMBS. A few excerpts:

In our preliminary review of outstanding transactions, there were a number of recent-vintage transactions that required 'AAA' credit enhancement of more than 30% using our 'AAA' stress, which implies that super-senior classes within those deals would be downgraded.
...

Transactions from the 2007 vintage are likely to experience the greatest impact if the criteria are adopted, as most tranches currently rated 'AAA' with 30% credit enhancement ("super dupers") would likely be downgraded. The downgraded classes would have a weighted average rating (WAR) of 'A'.
...

Shorter weighted-average life 'AAA' classes benefit from structural protection and would likely perform better than longer-weighted average life 'AAA' classes. Of the A-2 (five-year) classes from 2005-2007, 25% of the 2005 deals (12 classes, 12 transactions), 10% of the 2006 deals (five classes, four transactions), and 25% of the 2007 deals (15 classes, 13 transactions) are potentially at risk for downgrade based on our analysis.
...
Ten-year super-duper (30% credit-enhanced) classes have a higher potential for downgrades than the shorter weighted-average life classes: 50% (2005), 85% (2006), and 95% (2007) of the super-duper 'AAA' tranches would likely be at risk.

Note: This appears to be a change from the request for comments issued May 26th, but it really isn't. In the request for comment S&P stated: “approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded.” However that included both shorter and longer weighted-average life classes. It is the Ten-year super dupers that will be hit the hardest.

by Calculated Risk on 6/04/2009 05:47:00 PM

From Bloomberg: Dudley’s TALF Comments Add Signs of a PPIP Stall (ht Brian, Bob_in_MA)

The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated.

“We’re still in the process of assessing whether a legacy RMBS program is feasible, and if it were feasible, whether it would be significant enough to make a major impact,” Dudley said at a conference today ... His comments add to signs that Treasury Secretary Timothy Geithner’s Public-Private Investment Program to boost debt prices and rid banks of devalued assets to expand lending is stalling

From the Financial Times: Fed damps hopes on mortgage-backed securities

The US Federal Reserve on Thursday damped expectations that it was preparing to prop up the market for distressed bubble-era securities backed by mortgages.

Hopes that the Fed would in the coming months start providing financing to investors seeking to buy residential mortgage-backed securities (RMBS) – many of which have lost their triple A credit ratings – have pushed prices on these assets higher in recent months.

William Dudley, president of the Federal Reserve Bank of New York, said on Thursday that a decision had not been made. “We have not made a final decision on whether it is doable and, if it is doable, whether it is worth the cost,” he said.

by Calculated Risk on 6/04/2009 03:23:00 PM

The difference in yields between Treasury two- and 10-year notes widened to a record again today ... The so-called yield curve steepened to 2.79 percentage points, surpassing the previous record of 2.75 percentage points set last week. The previous record was 2.74 on Aug. 13, 2003.

Click on graph for larger image in new window.

This graph shows the difference between the ten- and two-year yields.

Usually a steep yield curve precedes a period of decent growth, but several analysts suggest the current ten year sell-off is due to concerns about increased Treasury issuance to finance the deficit. Whatever the reason, mortgage rates higher are moving higher, from Freddie Mac: Mortgage Rates Climb in Response to Recent Rise in Bond Yields

Freddie Mac (today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.29 percent with an average 0.7 point for the week ending June 4, 2009, up from last week when it averaged 4.91 percent. Last year at this time, the 30-year FRM averaged 6.09 percent.
...
"30-year fixed-rate mortgage rates caught up to the recent rise in long-term bond yields this week to reach a 25-week high," said Frank Nothaft, Freddie Mac vice president and chief economist."

Update: From Bloomberg: Treasuries Fall as Claims Drop Suggests Worst of Slump Ending (ht speed)

Yields on 10-year notes approached a six-month high ... The difference between two- and 10-year notes steepened to a record 2.793 percentage points as the U.S. announced it would auction $30 billion in 10- and 30-year securities next week.
...
The increase in Treasury yields have also driven rates on mortgage-backed bonds higher, leading holders of the securities to sell U.S. debt used as a hedge to protect portfolios against rising interest rates. The same trade helped drive 10-year Treasury yields to 3.75 percent last week, the highest since November.

“There is mortgage selling going on,” Mizuho’s Combias said. “The volatility is causing all the big mortgage portfolios to have to hedge.”

Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds rose 19 basis points to 4.72 percent, up from 3.94 percent on May 20.

by Calculated Risk on 6/04/2009 03:09:00 PM

Headline from the WSJ: The SEC is expected to approve civil fraud charges against former Countrywide executives as soon as today.

From CNBC: SEC to Charge Ex-Countrywide CEO: Sources

The SEC will charge Angelo Mozilo, former chairman and CEO of Countrywide Financial, with insider trading, according to people familiar with the situation.

The SEC will also charge the company's former chief operating officer, David Sambol, and former financial chief, Eric Sieracki, with securities fraud for failing to disclose the firm's relaxed lending standards in its 2006 annual report.

The charges, which are expected to be announced by the SEC later today, will not be accompanied by any criminal indictments.