by Calculated Risk on 2/13/2007 11:34:00 AM

From Bloomberg: ResMae Files for Bankruptcy, Will Sell Assets to Credit Suisse

ResMae Mortgage Corp., a U.S. home lender to people with bad credit, said it filed for bankruptcy protection and agreed to sell some of its assets to Switzerland's Credit Suisse Group.
...
Subprime loans in the U.S. mortgage industry fell 3.8 percent last year to $640 billion, according to Inside B&C Lending. ResMae made $7.7 billion in loans last year, up 11 percent from 2005, placing it 21st among U.S. subprime lenders, the newsletter reported.

by Calculated Risk on 2/12/2007 02:30:00 PM

An email from Fremont Investment & Loan:

Sent: Monday, February 12, 2007 1:54 PM
Subject: PLEASE READ - IMPORTANT PROGRAM CHANGES at FREMONT
Importance: High

Due to general negative Industry sentiment, due to recent articles in the media, and the ripple effect to the secondary market, Fremont has made the difficult decision to speed up some changes that were set to take place later in the year. PLS READ BELOW.

2nd MORTGAGES ELIMINATED effective TODAY!!!!!

Any Prequals out there that are 80/20 or combo loans, pls contact me by email asap for new pricing, with an outside second if available from IBC or other lender, or as a 100% or straight one loan

AA CUT BACKS AND HUGE CHANGES – any files that have been priced on the AA program need to be looked at ASAP, pls email me and attach a copy of the prequal with 1003 and Credit

Note: Fremont is typically at the forefront when making changes to programs, I would urge you to expect our competitors to be making similar changes in the next few weeks. Fremont ’s goal is to be here for the long term, thankfully we are self funded with tons of capital and reserves….We will be here to close your loans.

Thank you for your patience and understanding in these tough times in the industry.

More Details will be communicated later today ... I apologize for the barrage of emails, but I wanted to make sure that everyone is aware of what is going on ...

Thank you.

Fremont Investment & Loan

by Calculated Risk on 2/12/2007 12:33:00 PM

"It's very difficult to make money or make a lot of money."
Provident Bankshares chairman and chief executive Gary N. Geisel

From the WaPo: Interest On Deposits Pressures Area Banks

Higher interest rates for bank depositors are stressing local and regional banks.

Caught in a squeeze, the banks generally are reporting declining profits. Some are considering cutting staff or closing branches. Others have been propping up earnings per share by buying back their own stock.
...
To compete, some banks "have been loosening up their credit standards and offering lower rates to borrowers," even lower than the prime rates they traditionally charged their best business customers, said Avi Barak, who analyzes banks in the Mid-Atlantic region for the investment firm Sandler O'Neill & Partners.

Meanwhile, there are signs that the ability of borrowers to repay existing loans has been weakening, Barak said.

In a survey of 17 regional banks by Sandler O'Neill, nonperforming assets -- foreclosed property and loans on which borrowers have failed to make payments -- increased 23.2 percent in 2006.

by Calculated Risk on 2/10/2007 12:33:00 PM

Fleckenstein on Jan 30, 2007:

Turning to the subprime industry, once again I heard from my friend ... He continues to feel that things are about to really get worse. In an email to me, he wrote: "Scratch and dent loans are killing everybody. ... NO ONE is making any money in the market right now. We are at a point of no return for many. The next two weeks will be wild."

... Remember, we are just now witnessing a change in lending standards, and these will ripple all through the lending food chain, though thus far only small changes have occurred.
emphasis added

Wild indeed.

For a discussion on mortgage terms, see Tanta on "Scratch and Dent" Loans

by Calculated Risk on 2/10/2007 01:11:00 AM

From MarketWatch: Shepherdson watches weather, wins contest

Shepherdson has the most bearish forecast for first-quarter growth among the 41 economists we survey; while the median forecast is for 2.3% growth, Shepherdson is predicting no growth at all.

And people thought I was bearish!

He sees consumer spending rising at about half the pace as in the fourth quarter, with capital spending falling. Trade will be a modest positive, balancing out the drag from inventories. And housing investment will fall another 20%.

"Add it all up and you get not very much," Shepherdson said.

Of course the big drag is housing, but

...there's a second trend that most people aren't talking about yet, he said: A slowdown in manufacturing.

Capital spending fell in the fourth quarter and the year-over-year trend is the slowest in more than three years. Shepherdson figures that the slump in capital spending has barely begun.

And as we all know, non-residential investment typically trails residential investment by 3 to 5 quarters. So looking for a capital spending slump this quarter makes sense from an historical perspective.

by Calculated Risk on 2/09/2007 09:52:00 PM

From the St. Petersburg Times: Tax shortfalls crimp budget

State taxes and fees collected were $108-million short of projections for January. That’s on top of a revenue snapshot in November that was $466-million below the expected figure.

For state officials, that is ample evidence of a tamped-down economy that could mean fewer new programs and services. It’s still too soon to tell.
...
Most of the projected revenue shortfall is in sales taxes, the largest source of state revenue. Another area of sluggishness is in taxes on real estate transactions, known as documentary stamps — further evidence of a slowdown in the once-sizzling Florida real estate market.
...
“It’s all related to housing,” said Randy Miller, executive vice president of the Florida Retail Federation. “But after years of double-digit increases in tax collections, we’re not that concerned.”

by Calculated Risk on 2/09/2007 01:25:00 PM

Cleveland Fed President Sandra Pianalto spoke today: A Policymaker's Perspective on Monetary Policy and the Economy

First, an excerpt on the long view:

"Let's consider the long-term growth factors first. Generally speaking, two main factors - labor force growth and productivity - determine our nation's long-term potential for economic growth. When the workforce grows, so too does our economic output. Likewise, when our workforce is more productive, we can generate more goods and services."

This is why I'm very positive for the longer term, especially because I believe innovation (productivity gains) will almost certainly continue.

On the short term:

"... we also know that unexpected events can temporarily push the economy off its longer-term path...

By far, the most pronounced economic shock of the past year was a contraction in the nation's housing market. The downturn in this sector has clearly pulled economic growth below its long-term potential.

Some observers think that the worst of the national housing contraction is behind us. That view may be premature, but the recent data are encouraging. Home sales no longer seem to be falling, and inventories of unsold homes have dropped a bit. And even though new homes under construction fell sharply last year following several years of strong growth, most economists expect further declines to become less steep. Some industries, such as construction and home building supplies, have clearly felt the brunt of the housing market contraction, but by and large, we have seen little spillover to other sectors of the economy."

This view is probably "premature" and any spillover is ahead of us, not behind us.

For those hoping for a rate cut, Pianalto argues the Fed will not cut rates to support the housing market:

"Unfortunately, the FOMC can do very little to directly soften the housing contraction. The supply and demand for housing must eventually come into balance on its own."

In fact, Pianalto believes "some additional policy firming may be needed":

"The national inflation picture has been clouded in the past few years by large swings in energy, commodity, and housing prices. As these markets normalize, and as we gain a clearer picture of the underlying inflation trend, we may see that some inflation risks remain. In that case, some additional policy firming may be needed - depending, of course, on the outlook for both inflation and economic growth."

by Calculated Risk on 2/09/2007 12:55:00 AM

From the NY Times: Calm Before and During a Storm.

High on Mr. Geithner’s to-do list is understanding and monitoring the $26 trillion credit derivatives market ... the fastest-growing financial market there is. Its explosive growth has greased the wheels of the global economy, increasing liquidity, spreading risk and minting money for Wall Street along the way. But it has surged at a time when volatility has been low, debt has been historically cheap and defaults have been virtually absent. When this market gets tested, no one knows for certain how it may react.

Brad Setser worked for Geithner at both the IMF and the Treasury. Setser wrote last year: Things that keep the President of the New York Fed up at night. Setser quoted Geithner:

And when innovation, such as we are now seeing in credit derivatives, takes place in a period of generally favorable economic and financial conditions, we are necessarily left with more uncertainty about how exposures will evolve and markets will function in less favorable circumstances. The past several years of exceptionally rapid growth in credit derivatives and the larger role played by nonbank financial institutions, including hedge funds, has occurred in a context of very low realized credit losses, low expectations of future default risk, a high degree of confidence in the financial strength of the major banks and investment banks, relatively strong and significantly more stable economic growth, less concern about the level and volatility in future inflation, and low expected volatility in many asset prices. Even if a substantial part of these changes prove durable, we know less about how these markets will function in conditions of stress, and the most sophisticated tools available for measuring potential losses have less to offer than they will with the benefit of experience with adversity.

Reading the NY Times article it appears Geithner is diligently addressing these concerns.

by Calculated Risk on 2/09/2007 12:01:00 AM

From MarketWatch: Winter's arrival warmed up sales

Same-store receipts at 55 of the nation's top chain-store retailers climbed 3.9% last month, according to Thomson Financial. That's above the 3.1% forecast. Same-store sales, considered the best measure of retail growth, are gleaned from the receipts rung up at stores open longer than a year.

At the International Council of Shopping Centers, which calculates same-store sales in a slightly different manner, the results were 3.7% higher, exceeding the 3% projection.

"Overall, the tone was pretty good," said Michael Niemira, ICSC's chief economist. "It was certainly a nice finish to the fiscal year -- and a nice start to the calendar year."

So I was asked today:

"Where is the consumer bust?"

Last month I wrote:

Professor Leamer identified two key missing ingredients for a recession: enough job losses, and a credit crunch. These are the two issues I wrestled with over the holidays, and I couldn't come to a definitive conclusion.

At the core, recessions are about jobs, and it is easy to imagine scenarios with job growth slowing to 100K per month, maybe even 50K per month. But that isn't a recession.
...
So how can the U.S. economy slide into recession in '07?

Some possible sources: a credit crunch based on bad loans in the RE sector (and possibly in CRE and C&D too), less consumer spending based on falling MEW, and another downturn in the housing market. If all of these can be avoided, a recession is unlikely.

We are now seeing a sector-specific credit crunch. However we are still waiting for a significant decline in MEW, and another downturn in the housing market.

This is just Act II. The future is uncertain, and the odds of a 2007 recession are still about a coin-flip ... but if the play unfolds as I suspect it might, Hamlet dies in Act V.

by Calculated Risk on 2/08/2007 10:47:00 AM

From the AP: Toll Brothers 1st-Quarter Building Revenue to Fall 19 Percent

Toll Brothers ... said Thursday that it expected its first-quarter home building revenue to fall by 19 percent, signaling that the housing market is likely to remain feeble early in 2007.
...
The company also expects first-quarter writedowns to "significantly exceed" previous estimates and could range from $60 million to as high as $160 million or more.
...
the first-quarter's cancellation rate fell to 29.8 percent, however, from 36.9 percent in the prior quarter. The pace of cancellations still far exceeded the builder's historical average of about 7 percent.