by Calculated Risk on 7/06/2008 10:20:00 AM

From Mathew Padilla at the O.C. Register: Banks narrow home equity withdrawals A few excerpts:

Several lenders have reduced HELOCs en masse in areas of declining home prices, including Orange County, experts say. ...

[W]idespread HELOC reductions have caught the attention of federal regulators. The Federal Deposit Insurance Corporation on June 26 issued a statement warning lenders that under Regulation Z of the Truth in Lending Act credit reductions must be tied to significant property value declines or if a borrower is unlikely to pay because of a material change in his or her financial situation.
...
Washington Mutual, IndyMac Bancorp, and Countrywide Financial – which was just acquired by Bank of America – have led the industry in cutting HELOCs, according to an April 14 report by investment bank Keefe, Bruyette & Woods (KBW).
...
The report by KBW said there were about $1 trillion worth of unused HELOCs earlier in the year, and $1.2 trillion of used lines and other home equity loans.
...
Frederick Cannon and Brian Kleinhanzl, the report's authors, argue such reductions could backfire on lenders, leading to more loan delinquencies if borrowers needed their credit lines to stay financially afloat.

They said the cuts could worsen a recession ...

[Kerry Vandell, professor of finance, and director of the Center for Real Estate at UCI] disputes those assertions. He says the more equity borrowers have in their home, the more likely they are to keep paying their mortgages. Therefore, reducing HELOCs could help lower foreclosures, because it will prevent home owners from adding more debt against their properties. That's good for the economy, he said.

If homeowners were using their HELOCs to pay their first and second mortgages - or some similar strategy of going deeper and deeper into debt - then cutting the HELOC is good for the bank and the economy. But if the homeowners actually have substantial equity in their homes (like some of the examples Matt gives in the article), then cutting the HELOCs contributes to the credit crunch and is bad for the economy. This is why the FDIC does not want lenders to reduce HELOCs en masse:

The FDIC ... warned banks that ... 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).

The FDIC said the Federal Reserve has defined a “significant decline” to mean situations where the unencumbered equity in a property is reduced by 50 percent or more, the FDIC said.

by Calculated Risk on 7/05/2008 09:38:00 PM

I like it when CNBC drags out the bears ... hey, more Fleckenstein and Roubini please! ... but they only do it when the market is going down. (7 min 43 sec)



Peter Schiff was in one of my favorite videos from Dec 31, 2006 (several people making housing predictions - very funny):

by Calculated Risk on 7/05/2008 01:28:00 PM

I found this story puzzling ...

From MarketWatch: S&P says energy spending has fallen to 1971 pace

[A] Standard & Poor's report said Wednesday it expects Americans to spend the same portion of their household income on energy as they did the year the Ed Sullivan Show went off the air.

S&P Chief Economist David Wyss said the ratings agency expects an average U.S. household to spend 6.7% of its income on energy this year - the same portion spent on average in 1971, before the creation of the Organization of the Petroleum Exporting Countries oil cartel. In the early 1980s, in contrast, energy costs accounted for 7.9% of U.S. household income.

These numbers don't make sense to me, so instead I looked at U.S. energy consumption as a percent of GDP. The EIA provides this percentage from 1970 through 2005 (most recent estimate).

The EIA estimate shows that energy consumption as a percent of GDP was 8.4% in 2005, slightly higher than the 8.0% in 1971. However, in case no one noticed, energy prices have increased since 2005.

In 2005, petroleum prices were in the $50 per barrel range, now spot prices are over $140 per barrel. In 2005, the average well head price for natural gas prices spiked to over $7.00 per million Btu because of the hurricanes in the gulf, and then declined slightly in 2006. However wellhead prices have spiked again to over $10.00 per MMBtu.

Even coal prices, after years of comparatively minor price changes, have risen significantly in 2008.

Using the EIA price data, and making a few assumptions (no increase in energy consumption in 2008, and an energy mix of 40% petroleum, 23% coal, 23% natural gas, and 14% nuclear and renewables), we can estimate that energy consumption as a percent of U.S. GDP will set a record in 2008 of over 14%.

This estimate could be too high. Prices might fall, and the energy mix in 2008 might change, but clearly energy as percent of GDP will be close to the record high this year.

Click on image for larger graph in new window.

This graph shows the EIA estimates of energy consumption as a percent of GDP (blue), and my estimates for 2006 through 2008 (red).

In 2006, Wyss was quoted in The Christian Science Monitor: Oil spike: a surmountable challenge?

However, back in 1981, energy was a much larger part of the US economy, representing 14 percent of the gross domestic product, Wyss says. Because energy was so crucial back then, the Federal Reserve pushed interest rates sharply higher to curtail inflation.

Today, energy represents 7 percent of GDP.

In 2006, Wyss apparently was using the most recent data (energy consumption was 7.0% and 6.9% in 2000 and 2001 respectively - the data available in 2006). However, as this graph shows, energy consumption was probably already approaching 10% of GDP in 2006.

by Calculated Risk on 7/04/2008 09:33:00 PM

Not a forecast ... just for fun! (30 second promo)

by Calculated Risk on 7/04/2008 05:47:00 PM

The Economist has an interesting discussion on changes in real house prices vs. changes in real consumer spending, see: Collateral damage

Note: the following graph is from the Economist article and is for the UK.

For many years it was taken for granted that there was a strong relationship between house prices and consumer spending (see chart). More recently the Bank of England has cast doubt on the link.

The apparent breakdown in the relationship in the early years of this decade, when consumers did not respond to a surge in house prices by spending more, seemed to support the central bank’s view. This year too, shoppers appear unfazed by falling property wealth. Household spending rose by 1.1% in the first quarter of 2008 compared with the last three months of 2007. Official figures for retail-sales growth in May were so buoyant that they aroused incredulity in the City.
...
According to Ray Barrell of the National Institute of Economic and Social Research, a 15% decline in house prices over the next two years would reduce the increase in consumer spending by one percentage point a year.

Click on image for larger graph in new window.

The second graph compares the Year-over-year (YoY) change in real personal consumption expenditures (PCE) vs the YoY change in house prices in the U.S. (only since 1987). Note that this graph is plotted using the same vertical scales as the U.K. graph.

Although there appears to be some relationship between the YoY change in real consumer spending (as measured by PCE) and the YoY change in real house prices - the relationship hasn't been as tight as for the U.K. There are other factors that impact consumer spending, like changes in real income and changes in other asset values (like the stock market boom and bust).

Still - it is very likely that PCE will be negative later this year in the U.S. after the impact of the stimulus package is over.

by Calculated Risk on 7/04/2008 12:36:00 PM

From the Financial Times: TPG walks away from UK bank rescue (hat tip Terry)

Bradford & Bingley shares tumbled on Friday after its largest shareholders were forced to step in and rescue the ailing mortgage lender after TPG Capital, the private equity group, pulled out of a £400m capital increase.

The emergency rescue was triggered after Moody’s, the credit rating agency, late on Thursday night informed B&B it was planning to cut the bank’s credit rating.

The move gave TPG the legal right to abandon the deal ...

Meanwhile, according to Bloomberg: European Banks May Need EU90 Billion, Goldman Says

European banks may need to raise as much as 90 billion euros ($141 billion) to restore their capital after the U.S. subprime mortgage collapse caused credit markets to seize up, according to Goldman Sachs Group Inc.
...
Anshu Jain, head of global markets at Deutsche Bank AG, said this week that that contagion is ``by no means over,'' and Europe's banks have lagged behind the U.S. in raising money from investors.

by Calculated Risk on 7/04/2008 09:37:00 AM

From the Financial Times: UBS confirms facing further write-downs

UBS on Friday confirmed it faced further heavy write-downs on exposures to troubled US credits, meaning earnings for the second quarter would be “at or slightly below” break even.

Europe’s biggest casualty of the US subprime crisis did not quantify its latest write-downs, which analysts have estimated at up to $7.5bn.
...
UBS said its latest write-downs had stemmed from the effect of “further market deterioration” on previously disclosed positions, particularly adjustments to the value of its exposures to monoline insurers.

Although UBS warned again, the good news is the write downs will probably not be as large as feared, and UBS also said it has no need to raise additional capital.

Note the exposure to monoline insurers. Counterparty risk will be a theme at the big banks this quarter.

by Calculated Risk on 7/03/2008 10:25:00 PM

Note: this video is from the WaPo - this is the first time I've tried to embed one of their videos, and I hope it works OK.

Here is Dana Milbank's article: The Economy? Words Fail Me.

Think you're worried about the economy? Phillip Swagel is a wreck.

Here is the video. I think Swagel did fine given what he had to sell (a bad jobs report) ... more Milbank:

For a brief, joyous moment for the economist, it appeared he had exhausted all the questions, but as soon as Swagel got out "I hope everyone has a good holiday," another hand went up.

The reporter asked if he saw any hope for economic revival in the new employment report. Swagel exhaled loudly. "No," he said, then sniffed and exhaled again. "You know, the data today, right, we had, wage gains were decent, but of course we know that overall inflation, uh, is going to fully offset and more those, uh, you know, those wage gains," he said. The unemployment rate remained at 5.5 percent, but "I don't . . . take any comfort from that."

by Calculated Risk on 7/03/2008 05:51:00 PM

From Bloomberg: Fed Cuts Bear Stearns Asset Estimate to $28.9 Billion

The Federal Reserve said the portfolio of Bear Stearns Cos. assets it accepted as part of the firm's takeover by JPMorgan Chase & Co. is now worth $28.9 billion, down from the $30 billion estimated in March.

The central bank cut the ``fair value'' of the assets by 3.7 percent as of June 26, the Fed said today in Washington. ... The central bank will provide quarterly updates on the portfolio's value.
...
JPMorgan is absorbing the first $1.15 billion of any losses realized on the holdings.
...
The Fed is valuing the portfolio in accordance with accounting guidelines that call for an estimate based on sales in an ``orderly market,'' rather than a hypothetical forced liquidation.

That is a loss of $1.1 billion for JPMorgan, and there are probably more losses to come - to paid by the Federal Reserve. The market value of these assets was reported as $30 billion on March 14, 2008 by the New York Fed.

by Calculated Risk on 7/03/2008 04:43:00 PM

Regional bank Marshall & Ilsley expects a $900 million loss provision:

M&I expects to take a 2008 second quarter provision of up to $900 million ... This provision is expected to be approximately $485 million in excess of expected 2008 second quarter charge- offs of up to $415 million.
...
"The continuing deterioration in the housing market, particularly in Arizona, on Florida's west coast and in selected relationships in our correspondent business, makes this the prudent action to take at this time. While we cannot predict whether or not we have reached the bottom of the current housing cycle, we do believe the actions we have announced adequately address the current exposure embedded in our housing-related construction and development portfolio," said Mark F. Furlong, president and CEO, Marshall & Ilsley Corporation.
emphasis added

A regional bank with C&D (construction & development) loan problems. This will be a common theme.

Maybe they should have just stayed in the Midwest!