by Calculated Risk on 2/23/2010 05:27:00 PM

First American CoreLogic released the Q4 negative equity report today.

First American CoreLogic reported today that more than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near‐negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.

From the report:

Negative equity continues to be concentrated in five states: Nevada, which had the highest percentage negative equity with 70 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (48 percent), Michigan (39 percent) and California (35 percent). Among the top five states, the average negative equity share was 42 percent, compared to 15 percent for the remaining 45 states. In numerical terms, California (2.4 million) and Florida (2.2 million) had the largest number of negative equity mortgages accounting for 4.6million, or 41 percent, of all negative equity loans.

Click on image for larger graph in new window.

This graph shows the negative equity and near negative equity by state.

Although the five states mentioned above have the largest percentgage of homeowners underwater, 10 percent or more of homeowners have negative equity in 33 states, and over 20% have negative equity or near negative equity in 23 states. This is a widespread problem.

Note: Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming are NA in the graph above.

The second graph shows homeowners with severe negative equity for five states.

These homeowners are far more likely to default.

The rise in negative equity is closely tied to increases in pre‐foreclosure activity and is a major factor in changing homeowners’ default behavior. Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, owners begin to default with the same propensity as investors.

Here is figure 4 from the report.

The default rate increases sharply for homeowners with more than 20% negative equity.

This graph fits with figure 2 above and suggests a large number of future defaults in Nevada, Arizona, Florida and California.

The aggregate dollar value of negative equity was $801 billion, up $55 billion from $746 billion in Q3 2009. The average negative equity for an underwater borrower in Q4 was ‐$70,700, up from ‐$69,700 in Q3 2009. The segment of borrowers that are 25 percent or more in negative equity account for over $660 billion in aggregate negative equity.

Most homeowners with negative equity will probably not default, but this does suggest there are many more foreclosures coming - and more losses.

by Calculated Risk on 2/23/2010 02:42:00 PM

Finally. The S&P website has been down all morning.

S&P/Case-Shiller released the monthly Home Price Indices for December (actually a 3 month average).

The monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted monthly data - some sites report the NSA data.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 30.3% from the peak, and up about 0.3% in December.

The Composite 20 index is off 29.4% from the peak, and up 0.3% in December.

The impact of the massive government effort to support house prices is obvious on the Composite graph. The question is what happens to prices as these programs end over the next few months?

The second graph shows the Year over year change in both indices.

The Composite 10 is off 2.4% from December 2008.

The Composite 20 is off 3.1% from December 2008.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices decreased (SA) in 6 of the 20 Case-Shiller cities in December.

In Las Vegas, house prices have declined 55.9% from the peak. At the other end of the spectrum, prices in Dallas are only off about 3.1% from the peak. Several cities are showing price increases in 2009 - San Diego, San Francisco, Boston, Washington D.C., Denver and Dallas.

by Calculated Risk on 2/23/2010 12:57:00 PM

Here is an audio interview from Jon Lansner: Scott Monroe of South Coast Apartment Association visits Jon Lansner of the OC Register

"Rents are down and vacancies are up. Demand is off, and we attribute really to to the fact that here has been a pretty significant erosion of jobs in the Orange County markets. And it is having a trickle down effect. In addition to that, our members are saying that they are competing quite a bit with what historically has not been a competitor for us - that's the gray market or the shadow market - which are condominium rentals and single family home rentals and things of that nature. There is just a lot of product on the market."
Scott Monroe, Pres. of South Coast Apartment Association

Monroe says they are seeing much more multi-generational housing, and he expects "doubling up" to last for another 12 months or so.

And this brings up a key point - the supply of rental units has been surging:

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. (Source: Census Bureau).

The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been over 4.7 million units added to the rental inventory.

Note: please see caution on using this data - this number might be a little too high, but the concepts are the same even with a lower increase.

This increase in units has more than offset the recent strong migration from ownership to renting, so the rental vacancy rate is now at 10.7% and the apartment vacancy rate is at a record high.

Where did these approximately 4.7 million rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 1.1 million units completed as 'built for rent' since Q2 2004. This means that another 3.6 million or so rental units came mostly from conversions from ownership to rentals.

These could be investors buying REOs for cash flow, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes instead of selling.

As Scott Monroe noted, this huge surge in rental supply - what he calls the "gray or shadow market" - has pushed down rents, and pushed the rental vacancy rate to record levels. Yes, people are doubling up with friends and family during the recession, and some renters are now buying again, but the main reason for the record vacancy rate is the surge in supply. Eventually many of these "gray market" rentals will be sold as homes again - keeping the existing home supply elevated for years.

by Calculated Risk on 2/23/2010 10:48:00 AM

The FDIC released the Q4 Quarterly Banking Profile today. The FDIC listed 702 banks with $403 billion in assets as “problem” banks in Q4, up from 552 banks with $346 billion in assets in Q3, and 252 and $159.4 billion in assets in Q4 2008.

Note: Not all problem banks will fail - and not all failures will be from the problem bank list - but this shows the problem is significant and still growing.

The Unofficial Problem Bank List shows 617 problem banks - and will continue to increase as more formal actions (or hints of pending actions) are released.

Click on graph for larger image in new window.

This graph shows the number of FDIC insured "problem" banks since 1990.

The 702 problem banks reported at the end of Q4 is the highest since 1992.

The second graph shows the assets of "problem" banks since 1990.

The assets of problem banks are the highest since 1992.

On the Deposit Insurance Fund:

The Deposit Insurance Fund (DIF) decreased by $12.6 billion during the fourth quarter to a negative $20.9 billion (unaudited) primarily because of $17.8 billion in additional provisions for bank failures. ... For the year, the fund balance shrank by $38.1 billion, compared to a $35.1 billion decrease in 2008.

The DIF’s reserve ratio was negative 0.39 percent on December 31, 2009, down from negative 0.16 percent on September 30, 2009, and 0.36 percent a year ago. The December 31, 2009, reserve ratio is the lowest reserve ratio for a combined bank and thrift insurance fund on record.

Forty-five insured institutions with combined assets of $65.0 billion failed during the fourth quarter of 2009, at an estimated cost of $10.2 billion. For all of 2009, 140 FDIC-insured institutions with assets of $169.7 billion failed, at an estimated cost of $37.4 billion. This was the largest number of failures since 1990 when 168 institutions with combined assets of $16.9 billion failed (excluding thrifts resolved by the RTC).

Note: This doesn't mean the FDIC DIF is out of money or bankrupt. The FDIC reserves against future losses, and they don't include the prepay of assessments in the DIF (although they have the cash). The FDIC has plenty of cash right now - although there will probably be hundreds of bank failures over the next couple of years, and the FDIC might have to borrow from the Treasury in the future.

by Calculated Risk on 2/23/2010 09:37:00 AM

Note: as usual, the S&P website crashes when they release the monthly house price data. I'll post some graphs when the data is available.

The WSJ reports:

[The composite 10 and 20] indexes dropped 0.2% from the previous month, although adjusted for seasonal factors, they increased 0.3%.
...
Month-to-month gainers were led by Los Angeles, which rose 1%. Chicago again fared worst, falling 1.6%.

More from Reuters: Home Prices Fall 2.5% as Market Recovery Still Weak (note: Reuters is reporting the NSA data).

by Calculated Risk on 2/23/2010 08:10:00 AM

From the Rockefeller Institute: States Reported Fifth Consecutive Drop in Tax Collections in the Fourth Quarter of 2009 (ht Ann)

State tax revenues declined by 4.1 percent nationwide during the final quarter of calendar 2009, the fifth consecutive quarter of reduced collections, according to a report issued today by the Rockefeller Institute of Government.

The five straight quarters of year-over-year decline in overall tax collections represent a record length of such decreases, the Institute said.
...
“Calendar 2009 will be remembered as bringing historically sharp declines in tax revenue to states,” the report says. “Revenue gains toward the end of calendar 2009 were often driven by legislated tax increases rather than growth in the economy and tax base.”

Despite revenue gains in some states during the fourth quarter, the report concludes, “another negative quarter for the nation as a whole would not be unexpected. The troubling fiscal picture for states remains clearly in place.”

Here is the report: Final Quarter of 2009 Brought Still
More Declines in State Tax Revenue

Tax revenues are still weak, and most states are still running large deficits. As a recent CNNMoney article notes:

States are looking at a total budget gap of $180 billion for fiscal 2011, which for most of them begins July 1. These cuts could lead to a loss of 900,000 jobs, according to Mark Zandi, chief economist of Moody's Economy.com.

This suggests that more state and local government job cuts are coming.

by Calculated Risk on 2/22/2010 11:36:00 PM

Louise Story at the NY Times writes: Judge Accepts S.E.C.’s Deal With Bank of America

[A] federal judge wrote on Monday that he had reluctantly approved a $150 million settlement with the Securities and Exchange Commission.

And from the Judge:

"In short, the proposed settlement, while considerably improved over the vacuous proposal made last August in connection with the Undisclosed Bonuses case, is far from ideal. Its greatest virtue is that it is premised on a much better developed statement of the underlying facts and inferences drawn therefrom, which, while disputed by the Attorney General in another forum, have been carefully scrutinized by the Court here and found not to be irrational. Its greatest defect it that it advocates very modest punitive, compensatory, and remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a very modest impact on corporate practices or victim compensation. While better than nothing, this is half-baked justice at best."
Judge Jed S. Rakoff, Feb 22, 2010

I always enjoy some judicial snark.

by Calculated Risk on 2/22/2010 08:32:00 PM

Floyd Norris writes at the NY Times: Horrid Job Number Coming

It snowed this month in much of the United States. ... Both the household survey (which produces the unemployment rate) and the employer survey (which produces the job count) ask about workers in the week during which the 12th of the month fell [the week of the blizzards].
...
That means that a lot of people who had jobs may report they did not work during the week, and companies may say they had fewer people on the payroll than they would have cited a week earlier or later. If so, we may get a truly horrid job number.

Apparently the weather negatively impacted the jobs report in January 1996, and net employment turned negative for one month in the middle of a huge job boom.

Maybe the snow storms will impact the BLS report in February. Maybe not. ADP also uses payroll employment on the 12th of the month, so they should also be impacted.

Perhaps we will be able to tell if the weather had an impact by looking at weekly initial unemployment claims and the ISM reports (monthly surveys). Just something to remember next week ...

by Calculated Risk on 2/22/2010 05:07:00 PM

From James Hagerty at the WSJ: U.S. Weighs Changes to Mortgage-Relief Program

The U.S. Treasury is considering new ... proposals ... to give borrowers 30 days to respond after being denied a modification of their loan terms under the ... HAMP. During that period, which would allow borrowers to appeal against the decision, the servicer couldn't put the home up for sale at a foreclosure auction.
...
A Treasury spokeswoman said the proposals are among "many ideas under consideration in the administration's ongoing housing stabilization efforts." She added: "This proposal has not been approved and there are no immediate planned announcements on the issue."

Servicers also would be required to provide a "written certification" that a borrower isn't eligible for HAMP before a foreclosure sale can be held.
...
These measures would likely further slow down the foreclosure process.

Probably the main impact of HAMP has been to keep the supply of distressed properties down by delaying the inevitable. In most cases, this would just be another delay ...

by Calculated Risk on 2/22/2010 02:56:00 PM

From Campbell Surveys: Short Sales See Big Jump in Activity During January

According to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, short sales accounted for a substantial 15.9% of home purchase transactions in January. This was well above the share of other distressed property activity – damaged real estate owned or REO (13.4%) and move-in ready REO (13.8%) – and represented a big jump for short sales.
...
“Short sales activity took a temporary dip in November around the expected expiration of the first-time homebuyer tax credit,” reported Thomas Popik, research director for the Campbell/Inside Mortgage Finance survey. “Few first-time homebuyers wanted to take the chance that their short sale transaction wouldn’t be approved by the November 30 deadline. But now that the tax credit has been extended, we see first-time homebuyers once again snapping up attractively priced short sales.”

Survey results showed that short sales typically sell for only 91% of listing price. In contrast, move-in ready REO sells for 99% of listing price, on average.

Click on graph for larger image in new window.

Source: Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, Campbell Communications, Jan 2010

This graph, based on data from Campbell Communications, shows the break down of distressed sales of all transactions by three categories: 1) move in ready REOs, 2) damaged REOs (sold mostly to investors), and 3) short sales.

I expect 2010 will be the year of the "short sale" and the percentage of short sales will increase further after the servicers implement the Treasury's HAFA program .