by Calculated Risk on 7/02/2008 04:09:00 PM

DOW off 20.8% from the peak of Oct 9, 2007.

S&P 500 off 19.4% from the peak of Oct 9, 2007.

Nasdaq off 21.3% from the peak of Oct 30, 2007.

I think investors realize that the 2nd half recovery has been cancelled, and that the economic problems will linger for "some time" (In Fed Governor's Mishkin's words).

by Calculated Risk on 7/02/2008 01:14:00 PM

UPDATE2: Haloscan returns ...

The comment system is down again. Hopefully it will be working again soon. Sorry for any inconvenience.

Best to all.

by Calculated Risk on 7/02/2008 12:13:00 PM

"The ... slow recovery of financial markets that I think is likely suggests that the U.S. economy will be subject to substantial headwinds for some time."

From Fed Governor Frederic Mishkin: Global Financial Turmoil and the World Economy. Here are some excerpts on housing:

Different measures tell somewhat different stories, but it seems clear that U.S. home prices began decelerating a while back and have been posting outright declines in recent quarters. Mortgage defaults and foreclosures are at record highs and delinquency rates are at their highest level in 29 years, which could keep downward pressure on prices for some time to come.

An adverse feedback loop has emerged in the housing sector, as severe difficulties in the mortgage markets have significantly limited the availability of mortgage finance for many borrowers. The lack of mortgage credit, in turn, appears to have further driven down home sales and contributed to the decline in house prices. However, some of the slowdown in mortgage lending has been warranted.
emphasis added

by Calculated Risk on 7/02/2008 11:05:00 AM

From Bloomberg: Overdue Home-Equity Credit Lines Rise Most Since 1987, ABA Says

Home-equity lines of credit at least 30 days past due rose 14 basis points to 1.1 percent of accounts for the quarter, the Washington-based group said today in a statement. Delinquent credit-card accounts increased 13 basis points to 4.51 percent, the highest level since 2006.

``People are looking for any source of funds to pay their daily expenses,'' Carol Kaplan, spokeswoman for the bankers' group, said yesterday in an interview. ``It's a sign of the overall condition of the economy that people are having trouble making their payments.''

The headline is referring to the rate of increase in the delinquency rate, and this was the biggest quarterly increase the ABA has ever measured (starting in 1987).

The HELOC delinquency rate is the highest in 11 years. The loss severity for HELOCs is very high - frequently lenders take a 100% loss when a borrower defaults on a HELOC because they are behind other liens on the property.

by Calculated Risk on 7/02/2008 09:39:00 AM

From Bloomberg: Merrill Second-Quarter Estimate Cut by Oppenheimer's Whitney

Meredith Whitney expects Merrill to write down $5.8B, the deepest write down estimate so far for MER. Here come another round of write downs ...

by Calculated Risk on 7/02/2008 09:12:00 AM

From Bloomberg: Taylor Wimpey Plunges After Failing to Agree New Investor Funds (hat tip Jonathan)

Taylor Wimpey Plc, the U.K.'s largest homebuilder ... will drop plans to pay a first-half dividend and cut 900 jobs, London-based Taylor Wimpey said today in a statement.
...
Taylor Wimpey, reeling from the worst housing slump in 30 years, risks breaching loan covenants next year if it doesn't win investor support.
...
The company is the first homebuilder to announce details of any U.K. land write downs and capital raising efforts since the start of the most widespread U.K. housing slump in 30 years. Taylor Wimpey has also been hurt by collapsing margins and sales at its Spanish and U.S. operations.

The builders in the U.K. are just starting the land write down process. It didn't help that Taylow Wimpey was building in several bubble markets (U.S., U.K. and Spain).

by Calculated Risk on 7/02/2008 03:33:00 AM

HousingWire has the story: FDIC Warns Banks on HELOC Freezes, REO Management. On the HELOC story:

[B]anks are moving to freeze HELOCs globally, and then evaluating available credit later on a case-by-case, property-by-property basis ... The FDIC letter warned banks that such a shotgun-style approach to freezing HELOCs might violate Truth-in-Lending regulations; under Regulation Z, lenders can reduce an applicable credit limit only in the event of “significant decline” to the value of an individual property (a “material change” in the borrower’s financial condition — such as the loss of a job — qualifies as well).

And on REOs:

Our sources suggest that some banks are choosing not to pay taxes on certain low-value REO properties in hard-hit neighborhoods, in the hopes that local municipalities will take the property to a tax sale rather than force the lender to carry the property on its books.

The FDIC reminded banks that doing so would violate existing bank safety and soundness guidelines ...

Here is the FDIC Guideline on REOs. And some of the instructions:

Maintenance. ORE should be maintained in a manner that complies with local property and fire codes. Other requirements, such as homeowner association covenants, may also require careful attention. Efforts to ensure an ORE property is maintained in a marketable condition not only improve an institution's ability to obtain the best price for the property, but also minimize liability and reputation risk.

Real Estate Taxes. Taxes on ORE should be paid in a timely manner to avoid unnecessary penalties and interest.

Insurance. A review of an institution's umbrella insurance policies should be performed to determine if adequate hazard and liability coverage for ORE exists. If not, management should consider obtaining policies on each parcel of ORE. If an institution decides to self-insure, this decision should be documented in the ORE file.

Other Expenses. Management should implement reasonable procedures for managing any other miscellaneous expenses the institution may incur during the ORE holding period. These expenses could include, but are not limited to, sewer and water fees, utility charges, property management fees, and interest on prior liens.

In other words, pay the bills!

by Calculated Risk on 7/01/2008 11:53:00 PM

From the WSJ: Small Banks' Reckoning Day Is Coming

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay.
...
That will put additional pressure on an already stressed financial system. ... Some analysts even see a wave of bank failures as a possibility.

See the charts in the article - the one graph shows delinquency rates on construction loans for single family homes and condos have reached 10% and 12.5%, respectively. Delinquency rates for commercial and apartment construction are lower, but rising rapidly.

The WSJ also provides a sortable list of banks with notable delinquency rates (at the end of Q1) and a couple of companion articles: Commercial Loans: Behind the Next Hit (a primer on commercial loans) and BofA, LaSalle Pact Boosts Problem-Loan Load (a discussion of all the problem construction loans BofA inherited when they acquired LaSalle.

The long awaited CRE slump is here, and the bank failures will surely follow.

by Calculated Risk on 7/01/2008 10:38:00 PM

Indymac Responds to Report from the Center for Responsible Lending

The Center for Responsible Lending (CRL) issued a report yesterday titled, “Indymac: What Went Wrong?” in which they allege that Indymac “fueled its growth with unsound and abusive mortgage lending”. The report relies entirely on unsubstantiated anecdotal evidence the CRL has obtained largely from (1) unsubstantiated claims contained in lawsuits that are pending against Indymac (in one of which the CRL is itself a plaintiff), where no liability has been established and where Indymac is vigorously disputing the claims asserted; (2) 19 disgruntled former employees, many of whom have been recruited as witnesses by plaintiffs’ trial attorneys in the same lawsuits; and (3) a handful of Indymac customers, many of whom are also plaintiffs or class members in the same lawsuits. The report relies most heavily on one lawsuit in particular, Tripp v. Indymac, which has already been dismissed twice by the court as lacking in merit.

Since I linked to the CRL report yesterday, it is only fair to link to the Indymac response. Here is a little music for Indymac.

by Calculated Risk on 7/01/2008 06:14:00 PM

From Atlanta Fed President Dennis Lockhart: Remarks on Economic Slowdown, Market Fallout, and the Path to Financial Recovery. Here is his conclusion:

My base case forecast for the economy involves a stronger-than-expected first half of 2008 with growth of 1 to 2 percent but not much pickup in the second half. The drag of high energy costs, continuing financial market stress, and a still-declining housing sector may continue for a while with gradual improvement of growth in 2009.

There is much uncertainty surrounding this outlook. More adverse alternative scenarios are entirely possible. Self-reinforcing progressive deterioration could continue in the housing market, in turn affecting the financial markets. And neither the financial markets nor the overall domestic economy is protected from surprise events around the world.

Like many, I believe stabilization of the housing sector is required for recovery to proceed. There are early and tentative signs that a bottom may be forming in some housing markets. Having said that, a sober approach to calling the future must allow for an additional period of house price decline, a slow housing sector recovery, and, as a result, a quite choppy progression to better markets and economy.

That seems overly optimistic to me. It appears non-residential investment will be declining in the 2nd half of '08 (and well into '09), and consumer spending will probably decline too as the boost from the stimulus checks fades. That should lead to declining GDP in the 2nd half of '08.