by Calculated Risk on 6/29/2009 09:24:00 PM

There will be a flood of data released over the next three days, including the June employment numbers on Thursday. Other highlights include Case-Shiller house prices tomorrow and auto sales on Wednesday.

Several analysts expect an increase in auto sales in June, compared to May, on a seasonally adjusted annual rate (SAAR) basis. From the WSJ: Car-Sales Rebound Seen for June

[A]nnualized U.S. sales could hit 10 million this month for the first time in 2009, Ford Motor Co. analyst George Pipas said on Monday. The deep discounts that General Motors Corp. and Chrysler Group LLC have offered to boost sales are also likely to bolster June sales.
...
A GM spokesman also said an annualized 10 million sales rate is possible for June.

J.D. Power and Associates predicts annualized June sales of 10.3 million new cars and trucks, up from 9.9 million in May, while Edmunds.com expects the sales rate to top 10 million, though overall sales will still be 25% lower than a year ago.

But before everyone gets all Green Shootie ...

This graph shows light vehicle sales since the BEA started keeping data in 1967.

Breaking 10 million (SAAR) in June might put sales 10% off the bottom in February, but is is still more than 25% off from June 2008 (13.7 million light vehicle SAAR) and still near the bottom of the cliff.

by Calculated Risk on 6/29/2009 06:39:00 PM

In a 8-K regulatory filing today, Guaranty Financial stated the only "only remaining means by which the Company might possibly raise sufficient capital" is with the help of the FDIC. The Company expects current shareholders to be wiped out.

According to the Houston Business Journal (ht Tim), Guaranty has $14.4 billion in assets, and would be the largest bank to fail this year.

From the SEC filing:

Based on the current status of discussions involving its principal stockholders, other sources of financing, and certain regulatory authorities, the Board of Directors and management of the Company believe that the only remaining means by which the Company might possibly raise sufficient capital for it and its wholly-owned subsidiary, Guaranty Bank (the “Bank”), to comply with the Orders to Cease and Desist issued by the Office of Thrift Supervision (“OTS”) described in the Company’s Current Report on Form 8-K filed on April 8, 2009, is through a plan for open bank assistance (“Open Assistance”). The Open Assistance plan, which the Company is discussing with the Federal Deposit Insurance Corporation (“FDIC”) and the OTS, would involve a significant equity capital infusion from private investors, including the Company’s current principal stockholders, and an agreement under which the FDIC would absorb a portion of any losses associated with a pool of certain of the Company’s assets.

An Open Assistance plan must be approved by the FDIC. Before the FDIC can provide Open Assistance to the Bank, it must establish that the assistance is the least costly to the deposit insurance fund of all possible methods for resolving the financial condition of the Bank. The FDIC may deviate from the least cost requirement only in limited circumstances to avoid “serious adverse effects on economic conditions or financial stability” or “systemic risk” to the banking system. An additional condition to Open Assistance is that the OTS and FDIC must also determine that the Bank’s management is competent, has complied with all applicable laws, rules, and supervisory directives and orders, and has not engaged in any insider dealings, speculative practices, or other abusive activity. The FDIC may not approve an Open Assistance plan if it would benefit any stockholder or affiliate of the Company. As a result, the Company expects that the implementation of any Open Assistance plan would essentially eliminate the value of any of the Company’s currently outstanding equity interests, including shares of the Company’s common stock.

Open Assistance has historically been used extremely rarely by the FDIC, and there is no assurance that it would be available to the Company or the Bank in this case. In addition, while the Company has received expressions of interest from private investors with respect to the necessary capital infusion from private investors, it has not received capital commitments from any of these investors. Accordingly, the Company has not yet formally submitted to the FDIC its plan for Open Assistance, and it may ultimately not be able to do so. If a plan is formally submitted, the FDIC may choose not to approve it.

If the FDIC does not approve a plan for Open Assistance, the Company will no longer have the intent and ability to hold its mortgage-backed securities portfolio to recovery of unrealized losses, and, consequently, there would be substantial doubt that the Company would be able to continue as a going concern. In such case, the Company would be required to take material charges relating to the impairment of assets, in which case the preliminary financial information provided by the Company in previous Forms 12b-25 for the periods ended December 31, 2008 and March 31, 2009 should not be relied upon.

by Calculated Risk on 6/29/2009 06:22:00 PM

From the Boston Globe: Patrick signs state budget (ht energyecon)

Governor Deval Patrick today signed a budget for next year that cuts aid to cities and towns, pares back programs throughout state government, and imposes $1 billion in additional taxes on Massachusetts residents, shoppers, and visitors.
...
“This is without question an austere – and in some respects, painful – budget,” Patrick told reporters. “It contains many unavoidable spending cuts, and many of them will have a painful impact.”

He said the budget “reflects the stark economic realities of the time.”

Higher taxes and less spending at the state level - what Krugman called the Fifty Herbert Hoovers

Meanwhile - no progress in California on a budget.

by Calculated Risk on 6/29/2009 03:11:00 PM

Here is an interesting article on FirstFed in the Los Angeles Business Journal: Last One Standing (ht Will)

Since souring option ARMs have taken down a number of big lenders, the big question looms: Will FirstFed, a savings and loan founded in Santa Monica on the eve of the Great Depression, be next?
...
In January, regulators placed the thrift under a cease-and-desist order over concerns that its capital supply was rapidly depleting. Even its auditor expressed doubt about its ability to survive.

Yet the institution is still around ...

Basically FirstFed is the last of the Option ARM lenders (Wachovia, Countrywide, WaMu, IndyMac are all gone). And on their business:

FirstFed had been making option ARM loans without incident for more than 20 years. The loans held up well largely because option ARMs tended to be given to borrowers with good credit and proof of income.
...
[By 2005 a] growing number of borrowers began opting for the minimum monthly payment, which sometimes did not even cover the interest rate. ...

[CR Note: by 2005, Option ARMs were being used for "affordability" instead of for cash management]

FirstFed readily admits it made the mistake of dropping its own standards in a misguided attempt to remain competitive. It did that mostly in 2005, a year in which the thrift originated $4.4 billion in single-family loans – primarily option ARMs and most without full verification of income or assets.

But the thrift was also one of the first to pull back. By late 2005 and into 2006, managers made the decision to stop underwriting the riskiest loans and begin requiring proof of income. Within two weeks, their business dropped in half.

[CR Note: Notice the risk layering. Not only were these Option ARMs, they were stated income (liar loan) Option ARMs and even no asset verification!]
...
In late 2007, with a $4.4 billion portfolio of option ARM loans set to recast, FirstFed began working aggressively to modify its at-risk loans.
...
In the past year and a half, FirstFed has modified some 2,000 loans, which constitute $2.8 billion of its option ARM portfolio ... a new effort currently under way could modify all but $400 million of the remaining loans.

The average loan balance seems very high. From the Q1 10-Q SEC filing:

At March 31, 2009, 1,511 loans with principal balances totaling $718.5 million had been modified.

That is an average loan balance of $475 thousand and far short of the $2.8 in loan mods the article mentions - although FirstFed has probably modified a number of loans in Q2.

FirstFed is a candidate for BFF (or Thursday this week).

by Calculated Risk on 6/29/2009 01:27:00 PM

Given all the recent attacks, I'd be remiss if I didn't write something about Bernanke, but first ...

I've been a regular critic of Ben Bernanke. I thought he missed the housing and credit bubble when he was a member of the Fed Board of Governors from 2002 to 2005. And I frequently ridiculed his comments when he was Chairman of the President Bush's Council of Economic Advisers from June 2005 to January 2006.

In 2005, I posted these comments from Bernanke and disagreed strongly:

"While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom," ...

Those fundamentals, Bernanke said, include low mortgage rates, rising employment and incomes, a growing population and a limited supply of homes or land in some areas.

"For example, states exhibiting higher rates of job growth also tend to have experienced greater appreciation in house prices,"

And after Bernanke wrote a commentary in the WSJ: The Goldilocks Economy, I called it "bunkum" and I argued Bernanke was channeling Calvin Coolidge:

The entire commentary is bunkum. But instead of correcting each of Bernanke's false assertions, I've found the template for his talking points:

No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquillity and contentment, harmonious relations between management and wage earner, freedom from industrial strife, and the highest record of years of prosperity.
Calvin Coolidge, State of the Union Address, December 4, 1928

Bernanke is now channeling Coolidge's monument to economic shortsightedness.

And I disagreed again in July 2005 when Bernanke said:

Top White House economic adviser Ben Bernanke said on Friday strong U.S. housing prices reflect a healthy economy and he doubts there will be a national decline in prices.

"House prices have gone up a lot," Bernanke said in an interview on CNBC television. "It seems pretty clear, though, that there are a lot of strong fundamentals underlying that.

"The economy is strong. Jobs have been strong, incomes have been strong, mortgage rates have been very low," the chairman of the White House Council of Economic Advisers said.

The pace of housing prices may slow at some point, Bernanke said, but they are unlikely to drop on a national basis.

"We've never had a decline in housing prices on a nationwide basis," he said, "What I think is more likely is that house prices will slow, maybe stabilize ... I don't think it's going to drive the economy too far from its full-employment path, though."

And we can't forget Bernanke's "contained" to subprime comments in March 2007?

Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

That became a running joke.

With that lengthy prelude, I've felt once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed's role to provide appropriate liquidity (we can disagree on what is appropriate). I don't think it is the Fed's role to run an insurance company - but I think that is as much the failure of Paulson's Treasury as overreach by the Fed.

And given all the recent attacks on Bernanke - many of them very personal - I'd like to reprint some of Jim Hamilton's comments: On grilling the Fed Chair

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.

I agree with Professor Hamilton.

by Calculated Risk on 6/29/2009 12:28:00 PM

Boston Fed President Eric Rosengren spoke this morning on The Roles and Responsibilities of a Systemic Regulator

One of my complaints five years ago was that lending standards were too lax (or non-existent), leverage was increasing rapidly, and lenders were clearly making loans that would probably not be repaid.

Rosengren addresses this issue:

Frequently, examiners spend significant time analyzing the adequacy of reserves, given asset quality. Reserve levels are calculated based on accounting standards that focus on incurred losses at the bank, rather than expected or unexpected losses. The incurred-loss model can sometimes be at odds with a more risk-based view that is more forward looking. By focusing on reserves in the manner defined by accounting rules, examiners are looking at history rather than focusing on whether banks have adequately provided for future losses. During periods when asset prices are rising rapidly and when nonperforming loans tend to be low, this construct can result in lower estimates for incurred losses and thus lower reserves – while at the same time, earnings and capital will likely be growing.

Periods when earnings are strong and nonperforming loans are low are likely the times that a macroprudential supervisor would need to be particularly vigilant. Rising asset prices are often accompanied by increases in leverage, as financial institutions provide financing for sectors of the economy that are growing rapidly. This growth frequently occurs with lessened attention to underwriting standards, a greater willingness to finance long-run positions with short-term liabilities, and a greater concentration of loans in areas that have grown rapidly. So – unlike the focus on incurred losses and accounting reserves of traditional safety and soundness supervision – a systemic regulator would need to be focused on forward-looking estimates of potential losses that could cause contagious failures of financial institutions.
bold emphasis added

UPDATE: Lama notes that Rosengren is incorrect about accounting just looking at "history", and reminds me of the guest piece he wrote in 2008: The Pig and The Balance Sheet

And Rosengren concludes:

A systemic regulator or macroprudential supervisor would need not only the ability to monitor systemically important institutions, but also the ability to change behavior if firms are financing a boom by increasing leverage and liquidity risk. It follows that legislation that aims to design an effective systemic regulator needs to provide the regulator with the authority to make such changes. Understanding the activities of systemically important firms would require a clear picture of their leverage, their liquidity, and their risk management. Furthermore, to be truly effective in “leaning against the wind,” such a regulator would need the ability to prevent the build-up of excessive leverage or liquidity risk.

However Rosengren doesn't address how the macroprudential supervisor would identify excessive leverage or liquidity risk. During every bubble there are always people in position of authority arguing everything is fine. As an example, here is what then Treasury Secretary Snow said on June 28, 2005 (has it really been 4 years?):

Snow tried to alleviate concerns that climbing nationwide housing prices could ultimately lead to an asset bubble that will burst at some point.

"I think in some markets housing prices have risen out of alignment with underlying earnings," Snow said. But also answering the question whether there was a housing bubble in the United States his answer was a flat-out "no."

He was flat-out wrong. And that was almost at the peak of the bubble (in activity).

I think we need to clearly understand how we identify - in real time - these macroeconomic and systemic risks.

by Calculated Risk on 6/29/2009 10:20:00 AM

From the Financial Times: Romer upbeat on US economy

Ms Romer, chairman of the US president’s council of economic advisers, told the Financial Times in an interview she was “more optimistic” that the economy was close to stabilisation.
...
Ms Romer said stimulus spending was “going to ramp up strongly through the summer and the fall”.

“We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards,” she said.

Ms Romer said that stimulus money was being disbursed at almost exactly the rate forecast by the Office of Management and Budget. “It should make a material contribution to growth in the third quarter.”

But she acknowledged that cutbacks by states facing budget crises would push in the opposite direction.

Ms Romer said the latest economic data were encouraging, following a weaker patch a month ago. “I am more optimistic that we are getting close to the bottom,” she said.
...
But she added: “I still hold out hope it will be a V-shaped recovery. It might not be the most likely scenario but it is not as unlikely as many people think.

“We are going to get some serious oomph from the stimulus, there is the inventory cycle and I believe there is some pent-up demand by consumers.”

I think a normal V-shaped recovery is very unlikely since the two usual drivers of economic recovery - residential investment and personal consumption expenditure - will both be crippled for some time.

by Calculated Risk on 6/29/2009 08:48:00 AM

Here are a few graphs from the Freddie Mac June Investor Presentation.

Click on graph for large image.

The first graph shows the average LTV of the Freddie Portfolio (graph doesn't start at zero).

The second graph shows the current breakdown by LTV and credit score.

According to Freddie Mac's estimate, 17% of the mortgages in their portfolio have negative equity.

Another 11% of the loans have less than 10% equity.

According to the Census Bureau, 51.6 million U.S. owner occupied homes had mortgages (end of 2007, see data here)

This would suggest that 8.8 million households have negative equity (51.6 million times 17%), and another 5.7 have 10% or less equity. However, the loans from Freddie Mac were better than most, and this is probably the lower bound for homeowners with negative equity.

The third graphs show how the LTV breakdown has shifted over time as house prices have fallen.

I'm surprised that any loans had negative equity in 2004, but just over 10% of the portfolio appeared to have LTV portfolio risk in 2004. Falling house prices has changed the mix!

Note: I'd consider the Zillow estimate of 20.4 million homeowners with negative equity as the upper bound (and I think their estimate is too high).

About 20.4 million of the 93 million houses, condos and co- ops in the U.S. were worth less than their loans as of March 31, according to Seattle-based real estate data service Zillow.com.

There is much more in the Freddie Mac presentation.

by Calculated Risk on 6/28/2009 09:52:00 PM

The Bank of International Settlements (BIS) will release their annual report tomorrow. The Guardian has a preview: Recovery threatened by toxic assets still hidden in key banks

... Despite months of co-ordinated action around the globe to stabilise the banking system, hidden perils still lurk in the world's financial institutions according to the Basle-based Bank of International Settlements.

"Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks," the BIS says in its annual report. "At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses."

... As one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis, the BIS's assessment will carry weight with governments. It says: "The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy."

It also expresses concern about the dilemma facing policymakers on when to start reining in the recovery. "Tightening too early could thwart the recovery, whereas tightening too late may result in inflationary pressures from the stimulus in place, or contribute to yet another cycle of increasing leverage and bubbling asset prices. Identifying when to tighten is difficult even at the best of times, but even more so at the current stage," it says.

Also, the WSJ has an article on the incredibly shrinking PPIP: Wary Banks Hobble Toxic-Asset Plan

I think the stress tests showed that the U.S. should have pre-privatized BofA, Citigroup and GMAC. Oh well ...

by Calculated Risk on 6/28/2009 07:26:00 PM

TJ & The Bear asks: "ocrenter had an interesting question over at JtR's BubbleInfo. Specifically, what percentage of homeowners that sold during the height of the bubble (04 to 06) went to cash and rented?" ocrenter is obviously curious about "cash on the housing sidelines".

We don't have the data to answer that question, but using the Census Bureau Residential Vacancies and Homeownership report, we can see that the number of occupied rental units bottomed in Q2 2004.

Click on graph for larger image in new window.

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

The number of occupied rental units bottomed in Q2 2004, and has increased by 3.8 millions units since then.

The homeownership rate also peaked in 2004, although it didn't start declining sharply until 2007.

Note: graph starts at 60% to better show the change.

There are probably several reasons why the number of renters started increasing in the 2nd half of 2004 (even though the housing bubble didn't peak in activity until the summer of 2005, and in prices until the summer of 2006.) More and more renters probably thought housing prices were too high by 2004 and put off buying, and some homeowners probably sold and became renters ...

To answer ocrenters question (somewhat), the number of renters increased by about 1.6million in the 2004 to 2006 period. A large number of those renters could have been homeowners who decided to sell and rent. We just don't have the data ...