by Calculated Risk on 2/18/2009 12:07:00 PM

There are three parts to the plan. For each part, I'll provide the Obama administration overview (from the WSJ) and then add some comments ... my objections are to part #2.

1. Affordability: Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices

Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80 percent of the value of their homes have a difficult time refinancing. Yet millions of responsible homeowners who put money down and made their mortgage payments on time have – through no fault of their own – seen the value of their homes drop low enough to make them unable to access these lower rates. As a result, the Obama Administration is announcing a new program that will help as many as 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.

Reducing Monthly Payments: For many families, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year:

Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.

This is fine, although it is kind of like winning the lottery. If a loan was sold to Fannie or Freddie (or guaranteed by them), then the homeowner has the ability to refinance with a higher LTV - but if the lender decided to keep the loan (not guaranteed by Fannie or Freddie) or sold the loan to Wall Street to be securitized (not by Fannie/Freddie), then the homeowner is not included.

This program is fine for Fannie and Freddie - they are lowering their default risk. And this is obvious good for the borrower. The new maximum LTV will be 105%, so this will help some homeowners who are "underwater". This is for refinancing only.

2. Stability: Create A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

Helping Hard-Pressed Homeowners Stay in their Homes: This initiative is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income – particularly those who received subprime and exotic loans with exploding terms and hidden fees. The Homeowner Stability Initiative helps those who commit to make reasonable monthly mortgage payments to stay in their homes – providing families with security and neighborhoods with stability.

No Aid for Speculators: This initiative will go solely to helping homeowners who commit to make payments to stay in their home – it will not aid speculators or house flippers.

Protecting Neighborhoods: This plan will also help to stabilize home prices for all homeowners in a neighborhood. When a home goes into foreclosure, the entire neighborhood is hurt. The average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 relative to what it would otherwise be absent the Homeowner Stability Initiative.

Providing Support for Responsible Homeowners: Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.

Providing Loan Modifications to Bring Monthly Payments to Sustainable Levels: The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels. Using money allocated under the Financial Stability Plan and the full strength of Fannie Mae and Freddie Mac, this program has several key components:

§ A Shared Effort to Reduce Monthly Payments: For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.

§ “Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.

§ Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

§ Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.

§ Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration — together with the FDIC — has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.

Institute Clear and Consistent Guidelines for Loan Modifications: Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC’s pioneering work. The Guidelines will be used for the Administration’s new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury Guidance. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, Veterans’ Affairs and the Department of Agriculture.

Other Comprehensive Measures to Reduce Foreclosure and Strengthen Communities

§ Require Strong Oversight, Reporting and Quarterly Meetings with Treasury, the FDIC, the Federal Reserve and HUD to Monitor Performance

§ Allow Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options

§ Provide $1.5 Billion in Relocation and Other Forms of Assistance to Renters Displaced by Foreclosure and $2 Billion in Neighborhood Stabilization Funds

§ Improve the Flexibility of Hope for Homeowners and Other FHA Programs to Modify and Refinance At-Risk Borrowers

For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.

This is not so good. The Obama administration doesn't understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: Housing: Speculation is the Key

[S]omething akin to speculation is more widespread – homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.

This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.

Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure - prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

3. Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac:

Ensuring Strength and Security of the Mortgage Market: Today, using funds already authorized in 2008 by Congress for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability.

Provide Forward-Looking Confidence: The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market.

Treasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion each.

Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.

Increasing The Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.

Support State Housing Finance Agencies: The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers.

No EESA or Financial Stability Plan Money: The $200 billion in funding commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or Emergency Economic Stabilization Act/TARP.

There are problems with Fannie and Freddie, but this expansion is not a huge problem.

by Calculated Risk on 2/18/2009 10:21:00 AM

The American Institute of Architects reports: Another Historic Low for Architecture Billings Index

Click on graph for larger image in new window.

On the heels of a modest uptick in December, the Architecture Billings Index (ABI) dropped to a historic low level in January. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the January ABI rating was 33.3, down from the 34.1 mark in December (any score above 50 indicates an increase in billings). The inquiries for new projects score was 43.5.

Note that historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending". The ABI fell off a cliff in early 2008 and we are just starting to see that decline show up in non-residential construction spending.

The ABI fell off a 2nd cliff in late 2008, and that will show up later in 2009.

This is just more evidence that non-residential investment in structures will decline sharply this year.

by Calculated Risk on 2/18/2009 10:02:00 AM

Here is a Q&A from Whitehouse.gov: Help for homeowners

From MarketWatch: Obama sets aside $75 billion to slow foreclosures

The plan contains two separate programs. One program is aimed at 4 to 5 million struggling homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac to help them refinance their mortgages through the two institutions.

A separate program would potentially help 3 to 4 million homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participarting lender. Under this plan, the lender would voluntarily lower the interest rate and the government would provide subsidies to the lender.
...
Under the modification program which would involve government subsidies to lenders, lenders will be responsible for bringing down interest rates so that a borrower's monthly mortgage payment is no more than 38% of their pre-tax income. After that the government program would match the amount reduced by the lender to bring a homeowner's payments down to 31% of their pre-tax income.

by Calculated Risk on 2/18/2009 09:25:00 AM

Click on graph for larger image in new window.

The Federal Reserve reported that industrial production fell 1.8 percent in January, and output in January was 10.0% below January 2008. The capacity utilization rate for total industry fell to 72.0%, the lowest level since 1983.

This is a very sharp decline in industrial output. Industrial production is a key to the depth of the economic slowdown. Up until late last Summer, export growth had been strong, and the decline in industrial production had been mild. Now, with the global economy slowing sharply, industrial production and capacity utilization are falling off a cliff.

Also the significant decline in capacity utilization suggests less investment in non-residential structures for some time.

by Calculated Risk on 2/18/2009 08:32:00 AM

Click on graph for larger image in new window.

Total housing starts were at 464 thousand (SAAR) in January, by far the lowest level since the Census Bureau began tracking housing starts in 1959.

Single-family starts were at 347 thousand in January; also the lowest level ever recorded (since 1959).

Single-family permits were at 335 thousand in January, suggesting single family starts may fall further next month - although total permits were greater than starts, suggesting total starts might increase next month.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Building permits decreased:

Privately-owned housing units authorized by building permits in January were at a seasonally adjusted annual rate of 521,000. This is 4.8 percent (±3.5%) below the revised December rate of 547,000 and is 50.5 percent (±2.2%) below the revised January 2008 estimate of 1,052,000.

Single-family authorizations in January were at a rate of 335,000; this is 8.0 percent (±1.8%) below the December figure of 364,000.

On housing starts:

Privately-owned housing starts in January were at a seasonally adjusted annual rate of 466,000. This is 16.8 percent (±11.0%) below the revised December estimate of 560,000 and is 56.2 percent (±4.4%) below the revised January2008 rate of 1,064,000.

Single-family housing starts in January were at a rate of 347,000; this is 12.2 percent (±13.0%)* below the December figure of 395,000.

And on completions:

Privately-owned housing completions in January were at a seasonally adjusted annual rate of 776,000. This is 24.2 percent (±5.9%) below the revised December estimate of 1,024,000 and is 41.7 percent (±6.9%) below the revised January 2008 rate of 1,331,000.

Single-family housing completions in January were at a rate of 566,000; this is 17.5 percent (±7.2%) below the December figure of 686,000.

Note that single-family completions are still significantly higher than single-family starts. This is important because residential construction employment tends to follow completions, and completions will probably decline further.

Another extremely weak report ...

by Calculated Risk on 2/18/2009 01:49:00 AM

From Daivd Leonhardt at the NY Times: A Bailout Aimed at the Most Afflicted Homeowners

The long-awaited housing bailout will finally be announced on Wednesday.

[T]he key to understanding that plan will be remembering that there are two different groups of homeowners who are at risk of foreclosure.

The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments.
...
The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater.
...
The administration is betting that few of those 10 million underwater homeowners will walk away. ... If they begin to abandon their homes in large numbers, however, they will aggravate the housing bust ...

The details of the housing bailout should be available tomorrow (who qualifies, etc.). I'm not sure why the government is bailing speculators (aka homeowners) who bought homes they really couldn't afford during the housing bubble.

by Calculated Risk on 2/17/2009 10:59:00 PM

Since last night was so much fun, here is a late night (on the east coast) open thread:

Here are the Bloomberg Futures.

CBOT mini-sized Dow

And the Asian markets.

Enjoy ...

by Calculated Risk on 2/17/2009 09:04:00 PM

From the WaPo: Economy Strains Under Weight of Unsold Items

The unsold cars and trucks piling up at dealerships and assembly lines as consumers cut back and auto companies scramble for federal aid are just one sign of a major problem hurting the economy and only likely to get worse.

The world is suddenly awash in almost everything: flat-panel televisions, bulldozers, Barbie dolls, strip malls, Burberry stores. ... Business everywhere are scrambling to bring supply in line with demand.

And a quote from my friend blogger Mish:

Some analysts say over-capacity is so rampant that it will stymie government efforts to unfreeze credit markets. Banks have little reason to lend not only because they still have bad debt on their books but also because businesses don't have a pressing need to expand, said Mike Shedlock, an investment analyst with Seattle-based Sitka Pacific who writes the popular blog Mish's Global Economic Trend Analysis.

"What is it that we need more of?" Shedlock said. "Do we need more Wal-Marts, more Pizza Huts, more nail salons?"

Is Mish an expert on nail salons? (just kidding of course)

And on the oversupply in housing:

Harvard economist Edward Glaeser estimates that from 2002 to 2007, the country's housing stock increased by 8.65 million units, outpacing the number of new households, which increased only by 6.7 million over the same period. Taking into account a rise in the number of vacation homes, Glaeser estimates an overhang of about 1.3 million vacant units. Absorbing that excess, he said, could take an additional two years.

I think that number is a little low, and I'd put the excess housing units in the 1.5 to 2.0 million range.

Note: Housing starts for January will be released tomorrow (Feb 18th).

by Calculated Risk on 2/17/2009 07:02:00 PM

Here is the GM Restructuring Plan.

And the Chrysler Plan.

The following chart shows the GM baseline U.S. auto sales forecast and a comparison with J.D. Power and Global Insight forecasts.

Click on graph for larger image in new window.

I believe this forecast is conservative. GM is estimating replacement demand is 12.5 million units per year, and that sales will be below replacement demand for the next 6 quarters or so.

I've noted before that the current level of auto sales is unsustainable, and that sales had to increase.

An increase in auto sales is one of the few economic "rays of sunshine" that I expect in 2009, see: Looking for the Sun

I believe the GM plan is a starting point for negotiations with Bloom, Summers, Geithner and the rest of the Obama auto team. I expect some concessions from the unions and the bondholders, but this plan is a start.

However, I think the Chrysler plan is a joke and my guess is a bankruptcy is imminent.

by Calculated Risk on 2/17/2009 06:08:00 PM

UPDATE2: Here is the GM Restructuring Plan (ht fallonPDX)

Update: The title was based on a WSJ headline. Here are some stories:

From CNBC: GM Needs Up to $30 Billion in Aid to Avoid Failure

General Motors said on Tuesday it could need a total of up to $30 billion in U.S. government aid—more than doubling its original aid—and would run out of cash as soon as March without new federal funding.
...
The GM restructuring plan of more than 100 pages was posted on the U.S. Treasury Web site.

From the WSJ: GM, Chrysler Release Viability Plans

General Motors Corp. on Tuesday said it will need as much as $16.6 billion in additional aid from the U.S. government and could run out of money as soon as next month if it doesn't receive at least some of that funding.

[GM] ... laid out a plan to close more factories, eliminate thousands of dealerships and slash 47,000 jobs this year around the world.

GM, however, said it failed to strike critical deals with the United Auto Workers union and bondholders to reduce labor costs and shrink its $47 billion debt load. Negotiations with both parties are expected to continue.