by Calculated Risk on 10/05/2010 03:21:00 PM

From Eric Wolff at the North County Times: Lender woes unlikely to halt California foreclosures

The pace of foreclosures in California will continue unabated, despite paperwork improprieties that drove three of the nation's biggest mortgage lenders to suspend foreclosures in 23 states last week, real estate attorneys said Monday.
...
Last week, GMAC Mortgage LLC, JPMorgan Chase & Co. and Bank of America said they needed to review thousands of crucial legal documents that they may have signed without reading. But the documents only matter in states that require a judge's order for a foreclosure. The three lenders suspended foreclosures in these states, but announced no changes to their activities in California.

Most foreclosures in California are non-judicial, so there will probably be little impact on the pace of foreclosures.

And - all else being equal - the housing market in states that require judicial foreclosures will probably be under pressure for a longer period than states with non-judicial foreclosures. Just more bad news for Florida and other judicial states.

And another point - there is a national mortgage market, but each state has their own foreclosure laws. Mortgages should probably be priced based on the local foreclosure laws (higher rates for judicial states), and on whether the mortgage is recourse or non-recourse. Different mortgage rates would probably push the states to more uniform foreclosure laws.

by Calculated Risk on 10/05/2010 12:59:00 PM

From a WSJ interview with Chicago Fed President Charles Evans, Jon Hilsenrath writes: Fed Official Calls for Aggressive Action

"In the last several months I've stared at our unemployment forecast and come to the conclusion that it's just not coming down nearly as quickly as it should," [Chicago Fed President Charles] Evans said in an interview with The Wall Street Journal Monday. "This is a far grimmer forecast than we ought to have," he added. As result, he said, he favors "much more [monetary] accommodation than we've put in place."
...
[Evans] has grown frustrated with a lack of progress in bringing down unemployment and is now forecasting inflation of 1% in 2012 and below 1.5% in 2013, well below his own 2% goal.

Although Evans is not a voting member of the FOMC this year, he will be next year.

According to the article, Evans is forecasting inflation to be below target for the next three years - and for the unemployment rate to remain very high. This month the Fed Presidents will present their revised forecasts, and I think the tone will be generally grim.

by Calculated Risk on 10/05/2010 10:00:00 AM

The September ISM Non-manufacturing index was at 53.2%, up from 51.5% in August - and above expectations of 52.0%. The employment index showed slight expansion in September at 50.2%, up from 48.2% in August. Note: Above 50 indicates expansion, below 50 contraction.

Click on graph for larger image in new window.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

From the Institute for Supply Management: September 2010 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in September for the ninth consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Worldwide. "The NMI (Non-Manufacturing Index) registered 53.2 percent in September, 1.7 percentage points higher than the 51.5 percent registered in August, indicating continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index decreased 1.6 percentage points to 52.8 percent, reflecting growth for the 10th consecutive month, but at a slower rate than in August. The New Orders Index increased 2.5 percentage points to 54.9 percent, and the Employment Index increased 2 percentage points to 50.2 percent, indicating growth in employment for the third time in the last five months. The Prices Index decreased 0.2 percentage point to 60.1 percent, indicating that prices increased in September at a slightly slower rate. According to the NMI, 11 non-manufacturing industries reported growth in September. Respondents' comments continue to be mixed about business conditions, with a slight majority reflecting optimism."
emphasis added

by Calculated Risk on 10/05/2010 09:02:00 AM

From the WSJ: Bank of Japan Cuts Key Rate

The Bank of Japan [announced] a 35 trillion yen ($418 billion) monetary easing program ... while cutting interest rates to virtually zero. It also launched a 5 trillion yen program to buy private- and public-sector assets.

... the BOJ said the new program was designed to "encourage the decline in longer-term interest rates and various risk premiums to further enhance monetary easing."

The central bank acknowledged its move was "an extraordinary measure for a central bank." Bank of Japan Gov. Masaaki Shirakawa said Tuesday that the central bank's [decision] was based on a worse-than-expected outlook for the domestic economy.

The Japan central bank will be buying corporate debt in addition to government debt.

by Calculated Risk on 10/04/2010 11:59:00 PM

Click on graph for larger image in new window.

This graph shows the office vacancy rate starting in 1991.

Reis is reporting the vacancy rate rose to 17.5% in Q3 2010, up from 17.4% in Q2 2010, and up from 16.6% in Q3 2009. The peak following the previous recession was 16.9%.

From the WSJ Signs of Recovery For Office Market

[O]ffice buildings in 79 metropolitan areas tracked by Reis lost 1.9 million square feet of occupied space in the third quarter, pushing the national office vacancy rate to 17.5%, the highest level since 1993.
...
Average effective rents ... fell by just a penny in the last three months, the smallest quarterly decline since 2008.

It appears the rate of increase in the vacancy rate has slowed - and rents may be stabilizing.

Reis should release the Mall and Apartment vacancy rates over the next few days, and those will probably be at record levels.

by Calculated Risk on 10/04/2010 09:34:00 PM

From Mary Williams Walsh at the NY Times: Cities in Debt Turn to States, Adding Strain

Across the country, a growing number of towns, cities and other local governments are seeking refuge in [distressed-cities programs] that many states provide as alternatives to federal bankruptcy court. Pennsylvania will have 20 cities in its distressed-cities program if Harrisburg receives approval. Michigan has 37 in its program; New Jersey has seven; Illinois, Rhode Island and California each have at least one. ...

The programs, which vary by state, generally allow troubled communities to tap emergency credit lines while restructuring their finances with some form of state oversight.

The concern with the distressed-cities programs is that the cities become almost permanent wards of the state - and the states already have their own budget problems. And the list of distressed-cities keeps growing ...

by Calculated Risk on 10/04/2010 08:01:00 PM

This speech isn't worth reading for substance (Ben Bernanke is clueless on budget issues), but it reveals something about Bernanke.

From Fed Chairman Ben Bernanke speaking at the Rhode Island Public Expenditure Council meeting tonight: Fiscal Sustainability and Fiscal Rules

Bernanke never mentioned "PAYGO" when he was head of the Council of Economic Advisors in 2005. In fact Bernanke barely mentioned the deficit in 2005 - except in postive terms - even though the structural deficit was in place and the cyclical deficit was coming (because of the housing bubble). I wonder why? Well, he missed the housing bubble completely - but what about the structural deficit?

Today he said:

Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs.

Weren't the baby boomers going to get older in 2005? Oh my ...

This is an issue that 1) is outside of Bernanke's area of responsibility, 2) he has promised not to discuss, and 3) he has zero credibility on. Enough said.

by Calculated Risk on 10/04/2010 03:59:00 PM

From Bloomberg: Yellen Sworn in as Vice Chairman of Federal Reserve, Raskin as Governor. Dr. Yellen was the San Francisco Fed President, and was currently not on the FOMC. She has been supportive of more easing - and both appointees are expected to support QE2.

From the WSJ: Goldman Sees Peak in Treasury Rally

Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London, said that the benchmark 10-year note's yield has seen its bottom in the 2.45%-to-2.50% area, breaking ranks with other bulls. ... Mr. Garzarelli said some of the quantitative easing measures have been priced into the Treasury market.

Note that this forecast is not from the Goldman Sachs economics group in New York (that correctly forecast the bond market rally this year).

And repeating, here is NY Fed EVP Brian Sack's speech: Managing the Federal Reserve's Balance Sheet. Sack outlined what the Fed expects additional QE to accomplish, and how it would probably be implemented. He said the FOMC would probably announce the amount of balance sheet expansion incrementally at each meeting, that the FOMC would be "persistent", but that they would also be flexible if the incoming data changed.

by Calculated Risk on 10/04/2010 01:13:00 PM

Via MarketWatch: Consumer bankruptcy filings climb 11%

The American Bankruptcy Institute reported that there were 130,329 consumer bankruptcies filings in September, up 3.3% from August. Filings were up 11% over the first 9 months of the year compared to the first 9 months of 2009.

"We expect that there will be nearly 1.6 million new bankruptcy filings by year end," ABI Executive Director Samuel Gerdano said.

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from USCourts.gov.

In 2005 the so-called "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" was enacted. Since then the number of bankruptcy filings has increased steadily.

by Calculated Risk on 10/04/2010 11:30:00 AM

This speech suggests to me that the Fed is prepared to embark on QE2 (subject to incoming data), and the program will be incremental - and persistent - and the amount of QE announced at each FOMC meeting. This is a long excerpt, but the speech has a number of key points.

From New York Fed EVP Brian Sack: Managing the Federal Reserve’s Balance Sheet

The sluggish outlook for the economy and the risks that surround that outlook have raised the possibility of further monetary policy accommodation.
...
The FOMC has several policy tools that it could use to achieve more accommodative financial conditions, as Chairman Bernanke discussed in his speech at the Jackson Hole symposium in August. My remarks today will focus on one of those options—changing the size of the Federal Reserve's holdings of securities. In particular, I will review the FOMC’s recent decision to keep the size of those security holdings at their current level, and I will discuss some of the issues to be considered in any decision on whether to expand them further.
...
In terms of the benefits, balance sheet expansion appears to push financial conditions in the right direction, in that it puts downward pressure on longer-term real interest rates and makes broader financial conditions more accommodative. One can reach that judgment based on the empirical evidence from the earlier round of asset purchases, as mentioned before. In addition, the market responses to more recent news about the balance sheet also lean in this direction. The market response to the reinvestment decision at the August FOMC meeting seemed largely in line with the estimated effects from the earlier round of asset purchases, once we account for the size of the surprise and the anticipatory pricing that occurred ahead of its announcement. And the increased expectations for balance sheet expansion in response to the September FOMC statement also generated a sizable market response.

To be sure, I think it is fair to say that this is an imperfect policy tool. Even under the estimates noted earlier, the Federal Reserve had to increase its securities holdings considerably to induce the estimated 50 basis point response of longer-term rates. In addition, there is a large degree of uncertainty surrounding the estimates of these effects, given our limited experience with this instrument. Lastly, it is reasonable to assume that the effects of balance sheet expansion would diminish at some point, especially if yields were to move to extremely low levels. Nevertheless, the tool appears to be working, and it is not clear that we have yet reached a point of diminishing effects.

Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken. This point is overstated in my view. It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be. It seems highly unlikely that the economy is completely insensitive to borrowing costs and wealth, or to other changes in broad financial conditions.
...
Designing a Purchase Program
...
First, should the balance sheet be adjusted in relatively continuous but smaller steps, or in infrequent but large increments? The earlier round of asset purchases involved the latter approach, which caused the market response to be concentrated in several days on which significant announcements were made. That might have been appropriate in circumstances when substantial and front-loaded policy surprises had benefits, but different approaches may be warranted in other circumstances. Indeed, it contrasts with the manner in which the FOMC has historically adjusted the federal funds rate, which has typically involved incremental changes to the policy instrument.

Second, how responsive should the balance sheet be to economic conditions? Historically, the FOMC has determined the federal funds target rate based on the Committee’s assessment of the outlook for economic growth and inflation. If changes in the balance sheet are now acting as a substitute for changes in the federal funds rate, then one might expect balance sheet decisions to also be governed to a large extent by the evolution of the FOMC’s economic forecasts. The earlier purchase program, in contrast, did not demonstrate much responsiveness to changes in economic or financial conditions. Indeed, the execution of the program largely involved confirming the expectations that were put in place by the two early announcements.

Third, how persistent should movements in the balance sheet be? An important feature of traditional monetary policy is that movements in the federal funds rate are not quickly reversed, which makes them more influential on broader financial conditions. A change that was expected to be transitory would instead move conditions very little. For similar reasons, one could argue that movements in the balance sheet should have some persistence in order to be more effective.

Fourth, to what extent should the FOMC communicate about the likely path of the balance sheet? The FOMC often communicates about the path of the federal funds rate or provides other forward-looking information that allows market participants to anticipate that path. This anticipation of policy actions is beneficial, as it brings forward their effects and thus helps to stabilize the economy. For the same reason, providing information about the likely course of the balance sheet could be desirable. In fact, such communication might be particularly important in the current circumstances, because financial market participants have no history from which to judge the FOMC’s approach and anticipate its actions.

Fifth, how much flexibility should the FOMC retain to change its policy approach? The original asset purchase programs specified the amount and distribution of purchases well in advance. However, the FOMC would be learning about the costs and benefits of its balance sheet changes as it implemented a new program. This might call for some flexibility to be incorporated into the program, providing some discretion to change course as market conditions evolve and as more is learned about the instrument.