by Calculated Risk on 10/18/2011 08:48:00 AM

From Bloomberg: Home Short Sales Rise in ‘Dramatic Shift’ That May Boost U.S. House Prices (ht Mike in Long Island)

There has been a “dramatic shift” in banks’ willingness sell a property for less than the mortgage balance to avoid foreclosing ... short sales, typically change hands at a discount of about 20 percent to homes not in financial distress, compared with a 40 percent price cut for bank-owned homes, according to RealtyTrac Inc. Short sales jumped 19 percent in the second quarter from the prior three months while foreclosure sales were flat, the data seller said.

... Banks are starting to “get their act together” with short sales, said Cameron Novak, a broker with The Homefinding Center in Corona, California. The company handles about 15 of the transactions a month, he said.

“There’s been improvement in the last few months, and response times are getting to be a little quicker,” Cameron said in a telephone interview. “It’s about time.”

The main concern for the lenders about short sales is short sale fraud (under-the-table payments, sales to related parties, etc). In general a short sales is much better than foreclosure for all parties - especially if the seller can clear all deficiencies.

by Calculated Risk on 10/18/2011 12:04:00 AM

The following report suggests that a refinance plan for borrowers with negative equity might be part of any mortgage settlement. This would only apply to mortgages owned by the banks - and for borrowers who are current.

From the WSJ: New Mortgage Plan Floated

The plan under consideration would make refinancing available to some borrowers whose houses are worth less than their loans, so long as they are current on mortgage payments ... Such borrowers typically aren't able to refinance because they lack equity in their homes. The plan would apply only to mortgages owned by the banks. ... Around 20% of all U.S. mortgages are owned by U.S.-chartered commercial banks ...

by Calculated Risk on 10/17/2011 08:38:00 PM

From Chicago Fed President Charles Evans: The Fed’s Dual Mandate Responsibilities: Maintaining Credibility during a Time of Immense Economic Challenges. In his speech, Evans notes two significant Fed policy errors - one in the 1970s that led to inflation, and one in the 1930s that led to deflation. He argues the current situation is more like the 1930s. Here is an excerpt on a proposed policy, from Charles Evans:

I believe that we can substantially ease the public’s concern that monetary policy will become restrictive in the near to medium term and, hence, reduce the restraint in expanding economic activity. This can be done by clearly spelling out in our policy statements the conditionality of our dual mandate responsibilities. What should such a statement look like? I think we should consider committing to keep short-term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent. Such policies should enable us to make progress toward our mandated goals. But if this progress is too slow, then we should move forward with increased purchases of longer-term securities. We might even consider a regime in which we reevaluate our progress toward our policy goals and the rate of purchase of such assets at every FOMC meeting.

Let me note several aspects to this policy conditionality. As I just said, I subscribe to a 2 percent target for inflation over the long run. However, given how badly we are doing on our employment mandate, we need to be willing to take a risk on inflation going modestly higher in the short run if that is a consequence of polices aimed at lowering unemployment. With regard to the inflation marker, we have already experienced unduly low inflation of 1 percent; so against an objective of 2 percent, 3 percent inflation would be an equivalent policy loss to what we have already experienced. On the unemployment marker, a decline to 7 percent would be quite helpful. However, weighed against a conservative estimate for the natural rate of unemployment of 6 percent, it still represents a substantial policy loss. Indeed, weighed against a less conservative long-run estimate of the natural rate, it is a larger policy loss than that from 3 percent inflation. Accordingly, these triggers remain quite conservatively tilted in favor of disciplined inflation performance over enhanced growth and employment, and it would not be unreasonable to consider an even lower unemployment threshold before starting policy tightening.

I would also highlight that while I believe that optimal policy would be consistent with inflation running above our 2 percent target for some time, this policy does not abandon the 2 percent target for long-run inflation. Indeed, I would support combining this policy with a formal statement of 2 percent as our longer-run inflation target in conjunction with reaffirming our commitment to flexible inflation-targeting. Furthermore, I see a 3 percent inflation threshold as a safeguard against inflation running too high for too long and thus unhinging longer-run inflation expectations. It also is a safeguard against the kinds of policy errors we made in the 1970s. If potential output is indeed lower and the natural rate of unemployment higher than I currently think, then resource pressures would emerge and actual inflation and the outlook for inflation over the medium term would rise faster than expected. If this outlook for inflation hit 3 percent before the unemployment rate falls to 7 percent, then we would begin to tighten policy.

I understand that some may find such a policy proposal to be hard to understand, or even risky. But these are not ordinary times — we are in the aftermath of a financial crisis with massive output gaps, with stubborn debt overhangs and high degrees of household and business caution that are weighing on economic activity. As Ken Rogoff wrote in a recent piece in the Financial Times, “Any inflation above 2 percent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures.”9 The Fed has done a good deal of thinking out of the box over the past four years. I think it is time to do some more.

Bernanke suggested something similar back in 1999 with regards to Japan: Japanese Monetary Policy: A Case of Self-Induced Paralysis?* "[A] target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime ..."

by Calculated Risk on 10/17/2011 05:37:00 PM

From Roger Vincent at the LA Times: Southland office rents, occupancy rates stay low

Overall, Los Angeles County office vacancy rose slightly to 19% from 18.5% in the third quarter last year, according to brokerage Cushman & Wakefield. The average rent landlords asked for was $2.47 a square foot per month, down from $2.56.

This was the first quarter with positive absorption since 2007 in LA. (More tenants moved in than moved out).

This is similar to the Reis report for Q3 that showed the office vacancy rate is mostly moving sideways at a very high level. New office construction has slowed sharply, but the vacancy rate will not decline significantly until employment pick ups.

Earlier:
• The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to deteriorate in October.
• Industrial Production increased 0.2% in September, Capacity Utilization increased slightly
• Residential Remodeling Index at new high in August

by Calculated Risk on 10/17/2011 02:38:00 PM

From the WSJ: Merkel, Schäuble Temper Expectations for Summit

German Chancellor Angela Merkel expects a package of measures towards solving the euro-zone debt crisis to be agreed on Oct. 23, but warned against hoping that all of Europe's debt woes would be resolved ...

Spokesman Steffen Seibert said a "package" of measures would be agreed upon at the European Union summit in Brussels this coming Sunday, but "the chancellor reminds [everyone] that the dreams that are emerging again, that on Monday everything will be resolved and everything will be over, will again not be fulfilled," Mr. Seibert said.

From Bloomberg: Germany Shoots Down ‘Dreams’ of Swift Fix

On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, [Steffen Seibert, Merkel’s chief spokesman] said.

Officials have been trying to lower expectations for a few days. There are several stumbling blocks - especially the size of the Greek debt "haircuts" and how to recapitalize the banks.