by Calculated Risk on 1/23/2008 10:36:00 AM

Click on graph for larger image.

According to the Cleveland Fed, the market expectations are centered on an additional 50 bps cut in the Fed Funds rate on January 30th 31st to 3.0%.

by Calculated Risk on 1/23/2008 09:22:00 AM

The regional banks are getting hit too.

From the WSJ: Write-Downs Hit SunTrust Earnings

SunTrust Banks Inc.'s fourth-quarter net income fell 98% as the company recorded a higher-than-expected $555 million in write-downs and reported soaring credit costs.
...
The latest quarter's results included a $510 million write-down on the purchase of structured investment vehicle-issued securities from two of its money-market funds ...

Also from Reuters: Profit at U.S. regional banks tumble, evaporate

Cleveland-based National City Corp lost $333 million in the fourth quarter ... The bank's loan loss provision in the quarter was $691 million and $1.3 billion for the full year because of continued problems with risky subprime mortgages.

by Calculated Risk on 1/22/2008 11:24:00 PM

From MarketWatch: Merrill Lynch says U.S. nationwide home prices may fall 30%

Merrill Lynch forecasts nationwide U.S. home prices could decline 25% to 30% over the next three years ...

And Bloomberg quotes Rosenberg: U.S. 2008 Growth Forecast Cut in Half by Merrill

``Rising unemployment, $6 trillion in lost housing wealth combined with slumping equity valuations, and the lack of participation from the baby boomers for the first time in three decades likely will result in the worst consumer recession since 1980,''

From the Fed's Flow of Funds report, household real estate assets totaled $20.99 trillion at the end of Q3 2007. So a 30% decline in prices would reduce "housing wealth" by about $6 trillion (Merrill's number).

by Calculated Risk on 1/22/2008 07:17:00 PM

Update: For additional details see Housing Wire: MGIC: Q4 Paid Losses Pegged at $1.3 Billion

Private mortgage insurer MGIC Investment Corporation provided an investor update today:

MGIC Investment Corporation announced today that year-end 2007 delinquency inventory was 107,120 loans, an increase of approximately 16,000 loans from the end of the third quarter. Cure rates have continued to deteriorate, resulting in a higher percentage of delinquent loans that become claims, and average claim size has also continued to increase. As a result, the Company expects incurred losses for the fourth quarter of 2007 to approximate $1.3 billion. The Company said its insurance in force at year-end 2007 was $211.7 billion.

The Company also said it is increasing its paid loss forecast for 2008 to $1.8 - $2.0 billion.

During the fourth quarter, the Company made a decision to stop writing the portion of its bulk business that insures loans which are included in Wall Street securitizations.
emphasis added

For a discussion on private mortgage insurance, see Tanta's UberNerd posts:

Private Mortgage Insurance I

Private Mortgage Insurance II

by Calculated Risk on 1/22/2008 01:38:00 PM

From DataQuick: California Foreclosure Activity Still Rising

Click on graph for larger image. This graph shows the NODs (Notice of Default) filed in California since 1992. For 2007, a record 254,824 NODs were filed in California. By quarter, the number is 46,670 in Q1, 53,943 in Q2, 72,571 in Q3 and 81,550 in Q4.
The second graph shows the NODs normalized by the approximate number of owner occupied units in California. Normalized, 2007 foreclosure activity is 37% higher than '96 (the previous record year), as opposed to 57% higher in nominal numbers.

The number of mortgage default notices filed against California homeowners jumped last quarter to its highest level in more than fifteen years, a real estate information service reported.

Lending institutions sent homeowners 81,550 default notices during the October-to-December period. That was up by 12.4 percent from 72,571 the previous quarter, and up 114.6 percent from 37,994 for fourth-quarter 2006, according to DataQuick Information Systems.

Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992.

"Foreclosure activity is closely tied to a decline in home values. With today's depreciation, an increasing number of homeowners find themselves owing more on a property than it's market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move," said Marshall Prentice, DataQuick's president.
...
Last quarter's default numbers were a record in 42 of the state's 58 counties. In Los Angeles County it was 63.5 percent of the first-quarter 1996 peak.
...
Of the homeowners in default, an estimated 41 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 71 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes 'work-outs' difficult.

It's hard to imagine, but this year will probably be worse.

by Calculated Risk on 1/22/2008 12:24:00 PM

From the Wachovia conference call:

“Part of one of the challenges is, and we've mentioned this before, a lot of this current losses have been coming out of California and it's -- they've been from people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties, and so in a way, we may have -- it's hard to know right now, but we may have seen somewhat of an acceleration problem loans as people have reached that conclusion and we're just going to have to see how the patterns unfold here.”
emphasis added

This echoes the comments of BofA CEO Kenneth Lewis last month:

"There's been a change in social attitudes toward default," Mr. Lewis says. ... "We're seeing people who are current on their credit cards but are defaulting on their mortgages," Mr. Lewis says. "I'm astonished that people would walk away from their homes."

In a previous post, I calculated that somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes will be worth, over the next couple of years. (See Homeowners With Negative Equity)

As I've noted before, one of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes. These are homeowners with the "capacity to pay, but have basically just decided not to".

Wachovia is seeing that happen now. Imagine what will happen as house prices fall this year and next.

by Tanta on 1/22/2008 11:13:00 AM

by Calculated Risk on 1/22/2008 10:33:00 AM

On CDOs:

“From a valuation and management standpoint, we've evolved towards a view that for many if not most of these structures will see terminations and therefore have looked through the securities to the net asset value support by the underlying securities. In these cases we utilized external pricing services consistent with our normal valuation processes. We priced over 70% of the exposure in this manner”

Via MarketWatch:

CFO Joe Price also told listeners on a conference call Tuesday morning that the company marked down its value for CDOs and subprime loans to less than half their original value. "The combined subprime CDO sales and trading positions at 12/31 are carried at 600 million or about 30 cents on the dollar," Price said.

Credit Cards:

“We have seen an increase in delinquency in our card portfolio in those states most affected by housing problems. So give you a little insight, the quarter-over-quarter rate of increase in 30-day plus delinquencies in the combined states of California , Florida , Arizona , and Nevada increased over five times the pace of the rest of the portfolio. That group makes up a little more than a quarter of our domestic consumer card book. We have mentioned before that we expect to be in the 5 to 5.5% range for overall consumer card losses for the full year of '08. That compares to the 4.75% we experienced in the fourth quarter”

Home Equity:

“Home equity reported an increase in net charge-offs of 179 million or 63 basis points, up from 20 basis points at the end of September. 30-day plus performing delinquencies are up 25 basis points to 1.26%. Nonperformers in home equity rose to 1.25% of the portfolio from 82 basis points in the prior quarter. Even though our averaged refreshed FICO score remains strong at 721 and the combined loan to value is at 70%, we have seen a rise in the percentage of loan that is have a CLTV above 90% driven by the more recent vintaging. 90% plus CLTV currently represents 21% of the loans versus 17% in the third quarter. We believe net charge-offs in home equity will continue to rise given seasoning in the portfolio and softness in the real estate values. We increased reserves for this portfolio to 84 basis points but wouldn't be surprise to do see losses cross the 100 basis point mark by the middle of this year as we work through higher CLTV vintages. And relative to the industry's performance, we believe that our results will continue to benefit from our relationship base direct-to-consumer strategy. Again, continued economic deterioration could drive losses higher. Our residential mortgage portfolio continues to say perform well with losses at only 4 basis points in the fourth quarter. While we've seen some deterioration in subsegments, namely our community reinvestment act portfolio under our low to moderate income programs to total some 8% of the book, nothing really stands out to us at this point”

On Countrywide (from MarketWatch): Bank of America sees Countrywide deal done in second half

Bank of America CEO Ken Lewis said Tuesday that the company expects to close its previously announced acquisition of mortgage giant Countrywide Financial in the second half of 2008.

by Calculated Risk on 1/22/2008 08:25:00 AM

From the Federal Reserve: Emergency Rate Cut

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.

by Calculated Risk on 1/22/2008 08:10:00 AM

Reuters reports: Wachovia 4th-quarter profit sinks 98 percent

Results reflected $1.7 billion of net market-related losses, virtually all of which related to structured products including collateralized debt obligations. This included losses of $1 billion related tied to subprime mortgages, $600 million for commercial mortgages, and $123 million for other consumer mortgages, Wachovia said.

Wachovia said it also set aside $1.5 billion for credit losses.

The problems aren't contained to residential mortgages, from the WSJ: Wachovia's Net Plummets As Loan-Loss Provision Rises

Commercial loans 90 days past due grew to 0.89% of loans from 0.23%, while consumer loans 90 days past due rose 1.39% of loans from 0.59%. Nonperforming assets, those loans near default, grew to 1.08% of loans from 0.32%.

Delinquencies are rising across the board.