by Calculated Risk on 2/19/2010 11:17:00 AM

On the MBA conference call concerning the "Q4 2009 National Delinquency Survey", MBA Chief Economist Jay Brinkmann said this morning:

A decline in 30 day delinquencies. "Solid indications of fewer new problems coming into the system".

Long term delinquencies are a serious problem. 90+ delinquency and foreclosure inventory are both at records.

Long term delinquencies are heavily a prime fixed rate loan problem (since prime fixed rate loans are about 2/3 of all mortgages). These are difficult loans to modify, because it is not a payment change issue, but more related to unemployment and loss of income.

Brinkmann says foreclosures will stay elevated for some time (several years). Brinkmann says we might see a gradual decline starting in the 2nd half of 2010.

In an answer to a question on house prices, Brinkmann noted that 4.5 million homes seriously delinquent or in foreclosure will impact house prices in the short term.

Does not think Option ARMs will be a "tidal wave" of defaults. (This is my view too)

Brinkmann expects a steady increase in mortgage rates beginning in April after the Fed's MBS program ends.

A few graphs ...

Click on graph for larger image in new window.

The first graph shows the delinquency and foreclosure rates for all prime loans.

This is a record rate of prime loans in delinquency and foreclosure (tied with Q3 2009).

Prime loans account for over 75% of all loans.

"We're all subprime now!"

NOTE: Tanta first wrote this saying in 2007 in response to the 'contained to subprime' statements.

The second graph shows just fixed rate prime loans (about 66% of all loans).

This is a new record for prime fixed rate loans.

Note that even in the best of times (with rapidly rising home prices in 2005), just over 2% of prime FRMs were delinquent or in foreclosure. However the cure rate was much higher back then since a delinquent homeowner could just sell their home.

The third graph shows the delinquency and in foreclosure process rates for subprime loans.

Although the total has declined, about 40% of subprime loans are still delinquent or in foreclosure.

Much was made about the decline in 30 day delinquencies, and this is potentially "good" news. But 1) the level is still very high (3.31%), and 2) a decline happened in Q4 2007 too - and then the rate started rising again, and 3) this is probably related to the slight increase in house prices in many areas.

by Calculated Risk on 2/19/2010 10:00:00 AM

The MBA reports 14.05 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q4 2009. This is a slight decrease from 14.11% (edit) in Q3 2009, and an increase from 13.5% in Q2 2009 (note: older data was revised).

From the MBA: Delinquencies, Foreclosure Starts Fall in Latest MBA National Delinquency Survey

The delinquency rate for mortgage loans on one-to-four unit residential properties fell to a seasonally adjusted rate of 9.47 percent of all loans outstanding as of the end of the fourth quarter of 2009, down 17 basis points from the third quarter of 2009, and up 159 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 50 basis points from 9.94 percent in the third quarter of 2009 to 10.44 percent this quarter.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 4.58 percent, an increase of 11 basis points from the third quarter of 2009 and 128 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 15.02 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

The percentage of loans on which foreclosure actions were started during the third quarter was 1.20 percent, down 22 basis points from last quarter and up 12 basis points from one year ago. The percentages of loans 90 days or more past due and loans in foreclosure set new record highs. The percentage of loans 30 days past due is still below the record set in the second quarter of 1985.

“We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007, continued with the meltdown of the California and Florida housing markets due to overbuilding and the weak loan underwriting that supported that overbuilding, and culminated with a recession that saw 8.5 million people lose their jobs,” said Jay Brinkmann, MBA’s chief economist.

I'll have notes from the conference call and graphs soon.

by Calculated Risk on 2/19/2010 08:30:00 AM

From the BLS report on the Consumer Price Index this morning:

On On a seasonally adjusted basis, the January Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent ...

The index for all items less food and energy fell 0.1 percent in January. This decline was largely the result of decreases in the indexes for shelter, new vehicles, and airline fares.

Owners' equivalent rent (OER) declined 0.1% in January, and is declining at about a 1% annualized rate. OER has declined for five consecutive months (a record) and is important because it is the largest component of CPI.

Based on reports of falling rents - and a near record high apartment vacancy rate, OER will probably decline for some time, keeping core CPI low and possibly negative this year. Also - falling rents will push up the price-to-rent ratio, and put additional pressure on house prices.

by Calculated Risk on 2/19/2010 05:01:00 AM

We started discussing the coming Commercial Real Estate (CRE) bust in 2006, and the FDIC was well aware of the potential CRE problems back then. See the last graph in this post from 2006 from an FDIC report concerning "emerging risks": Economic Conditions and Emerging Risks in Banking

During the bubble, the small and regional banks were locked out of the residential market (lucky for them!), but many of these banks became overexposed to Construction & Development (C&D) and CRE loans. Now that the CRE bust is here - and is about to get much worse - many small and regional banks will fail over next couple of years.

From V. Dion Haynes at the WaPo: In D.C., more evidence that commercial real estate headed for foreclosure crisis

"There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. "There will be significant bankruptcies among developers and significant failures among community banks."
...
Nearly 3,000 community banks -- 40 percent of the banking system -- have a high proportion of commercial real estate loans relative to their capital, said Warren, whose committee issued a report on commercial real estate last week.

There is much more in the article.

Here is the TARP Congressional Oversight Panel released last week on Commercial Real Estate (CRE): Commercial Real Estate Losses and the Risk to Financial Stability.

by Calculated Risk on 2/18/2010 10:22:00 PM

The countdown continues ...

The following graph is from the Atlanta Fed Financial Highlights, and shows the cumulative Fed MBS purchases by week:

Click on graph for larger image.

From the Atlanta Fed:

The Fed purchased a net total of $11 billion¹ of agency-backed MBS through the week of February 10. This purchase brings its total up to $1.188 trillion, and by the end of the first quarter of 2010, the Fed will have purchased $1.25 trillion (thus it is 95% complete).

[¹CR note: Atlanta Fed had typo of only $1 billion]

This total was the lowest weekly total of MBS purchases since the first week of the program, excluding the week during the December holidays, when $9.3 billion was purchased.

The Fed purchased an another $11 billion net in MBS through the week of Feb 17th, bringing the total to $1.199 trillion or almost 96% complete.

Mortgage rates declined slightly, from Freddie Mac: Mortgage Rates Hover Near Record Lows

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.93 percent with an average 0.7 point for the week ending February 18, 2010, down from last week when it averaged 4.97 percent. Last year at this time, the 30-year FRM averaged 5.04 percent.

Six weeks and about $50 billion to go.

by Calculated Risk on 2/18/2010 07:20:00 PM

First, Alanta Fed President Dennis Lockhart commented on the increase in the discount rate:

How should today's announcement be interpreted? I would not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent. Rather, this action should be viewed as a normalization step.
...
[T]he public and markets should not misinterpret today's move. Monetary policy—as evidenced by the fed funds rate target—remains accommodative. This stance is necessary to support a recovery that is in an early stage and, in my view, still fragile.
emphasis added

See his speech for more explanation and details.

And on the economic outlook:

I see two competing narratives about how this recovery will play out. Growth in the fourth quarter of 2009 was quite strong and raises hope for a robust recovery. In this, the first narrative—that of a traditional sharp bounce-back following a deep recession—growth exceeds the underlying long-term potential of the economy and unemployment declines at an accelerating pace.

In this narrative, businesses rebuild inventory levels and resume capital expenditures in anticipation of growing sales. Consumers regain confidence, and retail spending grows briskly. You can add positive export growth as the economies of our major trading partners—especially in Asia—also show better growth.

Finally, in this narrative the banking system successfully navigates a weak commercial real estate sector and starts expanding credit to both business and consumers.

The alternative narrative entails some fundamental changes in business practices and consumer habits. In this scenario, businesses have learned from the recession that they can operate permanently at leaner inventory levels and flat or lower employee head counts. And the impressive worker productivity gains measured in recent data continue to accumulate.

Consumers, in this narrative, have assumed a quite different mind-set compared to the precrisis, prerecession "normal." Chastened by the recession and high unemployment—consumers are simply more frugal and more inclined to save. And even if consumers wanted to resume prerecession spending habits, the consumer finance industry, in this narrative, will not accommodate previous levels of consumption.

In this narrative, growth continues, but at a very modest pace, and unemployment is very slow to recede. The first narrative is a return to something resembling normal as we knew it; the second narrative describes a somewhat new and different world.
...
My team of Atlanta Fed economists and I are forecasting the second narrative.

There is probably a third narrative too with the economy sliding back into recession.

I'm in the "second narrative" group, and I think growth will be sluggish in 2010 primarily because of the overhang of excess housing inventory (slowing any recovery in residential investment), and because consumers will increase their saving rate to repair their household balance sheets.

by Calculated Risk on 2/18/2010 04:58:00 PM

Note: Just to be clear, this is the discount rate (this is the rate the Fed charges banks that borrow reserves) and not the Fed Funds rate. This move was being discussed for some time although the timing is a surprise.

From the Fed:

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.
...
The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.

by Calculated Risk on 2/18/2010 03:59:00 PM

From Alejandro Lazo at the LA Times: Short sales grow as a cheaper alternative to foreclosure

In a short sale the lender lets a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn't worth what the owner paid for it after more than two years of falling real estate values.

Such deals are appealing to struggling homeowners because they escape weighty house debts -- but they don't get away unscathed. Their credit scores will be damaged, perhaps less severely than in foreclosure, but still badly enough to limit for years their ability to borrow money. There may be tax consequences. And any money invested through down payments and renovations will be lost.

Lenders, which can withhold approval of a short sale if they don't like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure.

Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation's largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.

Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.

There is much more in the article. As Lazo notes, many servicers haven't had adequate staff to handle all the short sale requests. And another reason lenders have been hesitant to approve short sales is because of potential fraud.

The Treasury's HAFA program will probably increase short sale activity significantly.

Under HAFA, the lender settles on an approved price in advance. From the directive a lender must provide "Either a list price approved by the servicer or the acceptable sale proceeds, expressed as a net amount after subtracting allowable costs that the servicer will accept from the transaction." This will help speed up the transaction and minimize short sale fraud.

Also under HAFA, the servicer must "allow a portion of gross sale proceeds to be paid to subordinate lien holders in exchange for release and full satisfaction of their liens." That helps with the 2nd lien problem and is great for the homeowner because there will be no deficiency judgment (also, upon closing, the first mortgage holder has to agree to release the borrower "from all liability for repayment of the first mortgage debt"). This is much better than "walking away"!

HAFA starts on or before April 5, 2010. This is an excellent program, but like HAMP, is limited to homeowners with an unpaid principal balance less than or equal to $729,750.

by Calculated Risk on 2/18/2010 01:53:00 PM

From HotelNewsNow.com: DC leads ADR, RevPAR decreases in weekly numbers

Overall, the U.S. hotel industry’s occupancy ended the week with a 2.3-percent decrease to 53.7 percent, ADR dropped 4.7 percent to US$97.12, and RevPAR fell 6.9 percent to US$52.19.

The following graph shows the occupancy rate by week since 2000, and the rolling 52 week average occupancy rate. It is possible the occupancy rate is near the bottom, but at a very low level.

Click on graph for larger image in new window.

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

The graph shows the distinct seasonal pattern for the occupancy rate; higher in the summer because of leisure/vacation travel, and lower on certain holidays.

Based on the normal seasonal pattern, the occupancy rate should have increased sharply last week since business travel usually increases in February. Smith Travel reports that the occupancy rate increased to 53.7% from 48.4% the previous week, but that the increase was less than normal. Occupancy was off 2.3% compared to the same week last year.

Perhaps weather was a factor last week, but business travel appears slightly softer this year than in the same period of 2009.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 2/18/2010 11:43:00 AM

The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance ...

From LoanPerformance: Home Prices Exhibit “Improving Declines”

On a month-over-month basis the national average of home prices declined moderately, falling by 1.0 percent in December 2009 compared to November 2009, indicating seasonal slowing in a fledging housing recovery.
...
Including distressed transactions, the peak-to-current change in the national HPI (from April 2006 to December 2009) is -28.2 percent. Excluding distressed properties, the peak-to-current change in the HPI is -21.5 percent.
...
"The housing market, after experiencing stabilization in many, but not all, markets in the spring and summer of 2009 is going through the typical seasonal winter malaise," said Mark Fleming, chief economist for First American CoreLogic. "The big unknown for the 2010 spring selling season continues to be the future of the federal home buyer tax credit."
...
First American CoreLogic’s forecast continues to project declining house prices into the spring months. The national HPI is projected to fall an average of 4.4 percent through April 2010, as high levels of unemployment, housing inventories and foreclosures continue to exert downward pressure on prices.

Click on graph for larger image in new window.

This graph shows the national LoanPerformance data since 1976. January 2000 = 100.

The index is off 3.7% over the last year, and off 28.2% from the peak.

The index has declined for four consecutive months.