by Calculated Risk on 11/29/2009 09:23:00 AM

From Alejandro Lazo at the LA Times: Falling rents aid homeowners in mortgage trouble

Southern California rents peaked at $1,501 in the third quarter of 2008 ... Since then, rents have fallen 4.9%, to an average of $1,427 in the third quarter of this year, according to a survey of larger apartment complexes by property research firm RealFacts. The drop came as the occupancy rate of the buildings ticked down 0.8% to 93.7%. The data don't include homes converted into rental units or smaller apartment buildings.
...
Job losses and competition from foreclosed homes have made concessions by large landlords common. Thomas Shelton, president of Western National Property Management in Irvine, said he was offering about a month of free rent for every 12-month lease signed.

Although falling rents and significant concessions are good news for renters, this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

And falling rents are already pushing down owners' equivalent rent (OER). Since OER is the largest component of CPI, this will apply downward pressure on CPI for some time. And lower rents will also put pressure on house prices, since renting is a competing product.

But renting is a relief to some:

Thomas DeLong walked away from the mortgage on his final home in September and began renting a house for about $1,400 a month, with utilities, in the high-desert area of Perris.

DeLong ... said renting was a relief after years of worry and a financial juggling act that came crashing down all around him.

by Calculated Risk on 11/28/2009 10:55:00 PM

From The Times: Abu Dhabi rides in to rescue Dubai from debt crisis

And from the Telegraph: Abu Dhabi will not race to Dubai's rescue

Actually both stories are pretty much the same. From The Times article:

An Abu Dhabi official said yesterday it would “pick and choose” how to assist its neighbour, a hint that the restructuring of Dubai’s debts may not be straightforward. “We will look at Dubai’s commitments and approach them on a case-by-case basis,” the official said. “It does not mean that Abu Dhabi will underwrite all their debts.”

Clearly Abu Dhabi will ride, but not race, to the rescue.

by Calculated Risk on 11/28/2009 06:52:00 PM

By request here is a graph of the number of banks on the unofficial problem bank list.

We started posting the Unofficial Problem Bank list in early August (credit: surferdude808). The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public (just the number of banks and assets every quarter). Note: Bank CAMELS ratings are not made public.

CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.

As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest. Some of this data is released with a lag (the FDIC announced the October enforcement actions yesterday).

Click on graph for larger image in new window.

This graph shows the number of banks on the unofficial list. The number has grown by almost 40% since early August.

The two red dots are the number of banks on the official problem bank list as announced in the FDIC quarterly banking profile for Q2 and Q3. The dots are lagged one month because of the delay in announcing formal actions.

The unofficial count is close, but is slightly lower than the official count - probably mostly due to timing issues.

by Calculated Risk on 11/28/2009 03:42:00 PM

It sounds like the permanent mod numbers will be grim ...

From Peter Goodman at the NY Times: U.S. to Pressure Mortgage Firms for Loan Relief

The Obama administration on Monday plans to announce a campaign to pressure mortgage companies to reduce payments for many more troubled homeowners, as evidence mounts that a $75 billion taxpayer-financed effort aimed at stemming foreclosures is foundering.

“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday.
...
“I’ve been very frustrated by the pace of the program,” said Senator Jeff Merkley, an Oregon Democrat who sits on the Senate Banking Committee. “Very few people have emerged from the trial period.”
...
Capitol Hill aides in regular contact with senior Treasury officials say a consensus has emerged inside the department that the program has proved inadequate, necessitating a new approach. ...

"[A]t senior levels, where people are looking at this and thinking ‘Good God,’ there’s a sense that we need to think about doing something more.” said a Senate Democratic aide, who spoke on the condition he not be named for fear of angering the administration.
emphasis added

There is much more in the article. We will see the numbers in a couple of weeks.

by Calculated Risk on 11/28/2009 11:55:00 AM

CR Note: This is a guest post from albrt.

Thanksgiving Weekend Mortgage Litigation Roundup

CR forwarded me a couple of links recently, so I told him I’d write up a summary for your holiday weekend entertainment. I’m also including a little ubernerd bonus at the end.

Mortgage Cancelled Due to Unconscionable, Vexatious and Opprobrious Conduct

One case has been mentioned in the comments a few times, but for hat tip purposes I believe it was first sent in by Art Vandalay. The link is to a summary at Law.Com, which has a link to the decision. Note that this is a local trial court decision – the county trial courts in New York are called the Supreme Court, while the highest court is called the Court of Appeals.

The bottom line in this case is that the trial judge spent several months trying to encourage IndyMac to modify a mortgage that was in foreclosure. The borrowers made a number of different offers, including offering to have other family members cosign on the modified loan. IndyMac refused, and also submitted some questionable information to the court. The judge finally had enough and decided that the note and the mortgage should be “vacated, cancelled, released and discharged of record.”

This is a very unusual result in a foreclosure case. Not only did the judge refuse to enforce the mortgage by foreclosure, he actually wiped out the debt completely. The decision is entertaining, but it doesn’t highlight any legal principles that are likely to affect other mortgages other than the most fundamental of all legal maxims: “try not to piss off the judge.” It’s very hard to guess whether a decision like this will be upheld on appeal.

More Trouble with Paperwork in Massachusetts

The other case is from Massachusetts, which as you may recall has strict standards for recording mortgage documents. This link is also a Law.Com summary with a link to the recent decision in the case of MERS v. Agin. Hat tip Dogbert.

The first thing to notice about this case is that Mr. Agin is a bankruptcy trustee, not a borrower. The borrower declared Chapter 7 bankruptcy, which essentially means there is no workout plan, and everything will be liquidated except certain property that is exempt by law. A house (or a certain amount of equity in a house) can be exempt, but this is unlikely if there is a significant mortgage.

A Chapter 7 trustee has two major responsibilities: to make sure the debtor is not withholding assets, and to serve as a referee among the different creditors. Mr. Agin, perhaps with prompting from some of the other creditors, filed a motion asking the bankruptcy court to determine whether the mortgage was valid. The bankruptcy court decided the mortgage was not valid because the borrower’s name was not filled in on the notary acknowledgement. The federal district court upheld the decision.

As a result, the mortgage was eliminated but the debt was not. The mortgage lender became an unsecured creditor, just like a credit card lender. The house will be sold, but the proceeds will be split between all the creditors on a pro-rata basis instead of going to the mortgage lender first. I don’t see any obvious reason to expect this decision to be overturned on appeal.

For Ubernerds: A Note on Bona Fide Purchasers

Footnote 2 of the Agin case contains a mysterious reference to a legal doctrine that may be of interest to the ubernerds amongst us:

Section 544 allows the trustee to avoid a transfer of an interest in real property of the debtor to the extent a bona fide purchaser of the property may avoid the transfer “without regard to the knowledge of the trustee or of any creditor.”

The footnote doesn’t make much sense unless you understand the significance of being a bona fide purchaser without knowledge. This site has a pretty good definition:

bona fide purchaser n. commonly called BFP in legal and banking circles; one who has purchased an asset (including a promissory note, bond or other negotiable instrument) for stated value, innocent of any fact which would cast doubt on the right of the seller to have sold it in good faith. This is vital if the true owner shows up to claim title, since the BFP will be able to keep the asset, and the real owner will have to look to the fraudulent seller for recompense.

A “purchaser” includes anyone who has given value, which means it generally includes a secured lender as well as a buyer. A “holder in due course” is similar to a BFP, except that the term is generally limited to a purchaser of a negotiable financial instrument. Purchasers of debt instruments are not just worried about whether the person who sold the instrument was the “real owner” – they are also worried about whether the borrower will try to avoid repaying the loan by accusing the original lender of fraud or something similar. BFP status protects against both of these things.

Like most everything in the law, the BFP concept is hedged with all sorts of qualifications, mostly having to do with reasonableness – a bona fide purchaser should not be able to ignore things that a reasonable person should have known. The most obvious example is that a BFP cannot ordinarily ignore a document that was properly recorded in the local land records.

In Agin, the issue was whether the missing name on the acknowledgement was enough to make the mortgage void. An ordinary person who purchased the debtor’s house might not have been able to avoid the mortgage if the purchaser should reasonably have known from the records that the mortgage existed. But the bankruptcy statute allowed the trustee to be treated as a BFP of the debtor’s house regardless of what he knew or should have known, so all he had to do is show that the mortgage document had a material defect.

So an ordinary BFP doesn’t get quite as much protection as the bankruptcy trustee in Agin, but lenders and investors do consider BFP status important. There are many things to be said for and against giving special treatment to BFPs, but the point I’d like to make today is that the bona fide purchaser concept creates decidedly mixed incentives for due diligence. A buyer or lender wants to discover everything that a reasonable person should discover, but does not particularly want to discover any problems that could be avoided by a BFP without knowledge.

The BFP concept played a significant role in the Wall Street securitization process. As Judge Long noted in footnote 29 of the Ibanez ruling:

The Ibanez Private Placement Memorandum is quite explicit regarding the separateness of “Originators” and “Servicers” and the reasons for that separateness. See Private Placement Memorandum at 84 (explaining the “information barrier policies” intended to protect the trust’s status as a holder in due course of the notes and insulate it from claims of fraud, misrepresentation, etc. in the making of the loans).

In other words, as many of you suspected all along, “hoocoodanode?” was officially part of the plan for creating mortgage backed securities. Systematic and willful ignorance was incentivized. If Wall Street created a system where each bogus mortgage passed through the hands of a couple of intermediaries who had no ability to do any due diligence on the quality of the loan, then the end buyer of the loan would, legally speaking, be in a better position to collect than the original lender by virtue of BFP status. Did the mortgage broker tell the borrower the loan was fixed rate when it really wasn’t? Oh well, no way the mortgage pool trustee could have known about that after the loan passed through the hands of an originating lender, an unrelated depositor and a legally separate issuer.

Whether for better or for worse, this system is pretty clearly not playing out as intended. BFP status does nothing to protect lenders from broke borrowers and half price houses, both of which were foreseen by knowledgeable people who were not willfully ignorant of details about loan origination. And even the limited protection of BFP status may not be available in cases that are actively litigated, since it won’t be hard to prove that everyone in the industry knew brokers were filling in the blanks on stated income loans with whatever numbers were needed to make the applications go through.

So I guess this is just one more reason why all the Fed’s ponies and all the Treasury’s men are not going to be able to put Humpty Dumpty back together again.


CR Note: This is a guest post from albrt.

by Calculated Risk on 11/28/2009 08:02:00 AM

A collection of articles ...

From The Times: Dubai debt fears threaten credit crunch 2 — and RBS is exposed

From Bloomberg: India Studying Effect of Dubai’s Debt Delay Plan on Its Economy

India, the world’s top recipient of migrant remittances, is examining the effect Dubai’s attempt to delay debt repayments may have on Asia’s third-largest economy, central bank Governor Duvvuri Subbarao said.

About 4.5 million Indians live and work in the Gulf region and remit more than $10 billion annually, according to government data. The turmoil may affect remittances, said Thomas Issac, finance minister of the southern state of Kerala, which accounted for about a quarter India’s migrant labor in 2005.

From the NY Times: Dubai Debt Woes Raise Fear of Wider Problem

[O]ne concern is that some British banks with large credit exposure to the United Arab Emirates are already troubled. Royal Bank of Scotland, majority-controlled by the British government, was one of the largest lenders to Dubai World, having secured $2.3 billion worth of loans to it since early 2007, according to a report by J.P. Morgan. Standard Chartered and Barclays were also large lenders to the region, with more than $10 billion between them, analysts said. HSBC has $17 billion exposure to the United Arab Emirates.

But while a Dubai default may not provoke a banking crisis, it could well spur a broader crisis of investor confidence in overly leveraged economies.

From the WSJ: Dubai Jitters Infect Debt of Sovereign Spendthrifts

[S]tress lines were felt in the sovereign-bond market, where the cost of insuring against defaults in places like Hungary, Turkey, Bulgaria, Brazil, Mexico and Russia rose, fueled by concerns that emerging-market nations may have trouble honoring their debts even as the economy heals. The worry is that sovereign debt may now represent another aftershock of the global financial crisis.

by Calculated Risk on 11/27/2009 09:13:00 PM

A flipper bought this one in September for $330,000, and has reduced the asking price to $379,000. Still no takers.

Jim the Realtor is watching for "flips turning to flops" and this might be one. For more - and a couple of interviews with Adam (a flipper who had made money) - see Jim's site.

by Calculated Risk on 11/27/2009 06:29:00 PM

James Pressler at Northern Trust provides an overview of the Dubai situation: Dubai’s Latest Mega-project – A Massive Default? (pdf) A few excerpts:

The complexities of the UAE’s governmental structure make the situation difficult to grasp at first glance, but the problem can be captured by a few basic points. First, Dubai is the second-largest emirate in the UAE next to Abu Dhabi, but Abu Dhabi is also the power of the national government and has been challenged by Dubai’s meteoric rise. Next, the UAE has a sovereign wealth fund estimated at one half-trillion dollars in case of emergency, so money is clearly available at the national level to bail out Dubai if that route is chosen. Lastly, the national government wants to emerge from this situation with international markets assured that a state-run entity has the backing of the government and will be subsequently subject to reform and accountability. Taken together, these points plus an appreciation of the politicial undercurrents suggest a scenario that avoids outright default.

This suggests that Abu Dhabi will bailout Dubai, but that isn't certain:

The first sign of things to come could be as early as the first week in December, when Gulf markets re-open from the Eid al-Adha holiday (Dubai World announcing its debt postponement plans just before Eid celebrations was in all likelihood not a coincidence). This will mark the first chance for officials to state positions and make confidence-building claims, with the further interest of calming international markets. Between that time and the December 14 due date for Dubai World’s next debt payment, we expect to see a concrete plan laid out for bailing out the conglomerate and some pressure taken off the credit markets. However, if no settlement can be reached, it would not surprise us if another major entity started talking about restructuring or a debt freeze before year-end – and not necessarily a company in the UAE.

And from the Financial Times: Abu Dhabi expected to prop up smaller brother

[W]ith Dubai raising the possibility that one of its flagship entities may default, attention is now focusing on just how far Abu Dhabi is willing to go to bail out its smaller brother. Underlying the uncertainty, it is thought that Abu Dhabi officials were caught unaware by Dubai World’s dramatic statement ... Ultimately, though, there is consensus that Abu Dhabi will not see it fail.
excerpted with permission

Should be an interesting couple of weeks.

by Calculated Risk on 11/27/2009 03:07:00 PM

This is an unofficial list of Problem Banks compiled only from public sources.

Changes and comments from surferdude808:

The FDIC finally released its enforcement actions for October today, which led to a large increase in the number of institutions on the Unofficial Problem Bank List.

This week the list changed by a net 30 institutions to 543 from 513 while aggregate assets increased by $10 billion to $312 billion.

For the 33 institutions added, their average asset size is $321 million. The largest include Hillcrest Bank, Overland Park, Kansas ($1.9 billion); Charter Bank, Santa Fe, New Mexico ($1.3 billion), and Severn Savings Bank, Annapolis, Maryland ($990 million). Geographic highlights include the addition of five Illinois-based institutions and four each in Georgia and Texas.

The FDIC issued a Prompt Corrective Action Order against Rockbridge Commercial Bank, Atlanta, Georgia ($294 million), and LibertyPointe Bank, New York, New York ($212 million); LibertyPointe has been operating under a Cease & Desist Order since July 2009.

The deletions this week include Commerce Bank of Southwest Florida, which failed last Friday, and First Independent Bank, where the FDIC terminated the enforcement action during October 2009.

The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808.

Note: The FDIC announced there were 552 bank on the official Problem Bank list at the end of Q3. The difference is a mostly a matter of timing - some enforcement actions haven't been announced yet, and others may be pending.

See description below table for Class and Cert (and a link to FDIC ID system).

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.)





Class: from FDIC

The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:

N National chartered commercial bank supervised by the Office of the Comptroller of the Currency

SM State charter Fed member commercial bank supervised by the Federal Reserve

NM State charter Fed nonmember commercial bank supervised by the FDIC

SA State or federal charter savings association supervised by the Office of Thrift Supervision

SB State charter savings bank supervised by the FDIC

Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. Click on the number and the Institution Directory (ID) system "will provide the last demographic and financial data filed by the selected institution".

by Calculated Risk on 11/27/2009 01:00:00 PM

Click on graph for larger image in new window.

First, since the markets closed early ...

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

Krugman suggests there are three views on the Dubai situation: 1) the beginning of a wave of sovereign defaults, 2) an extension of the CRE bust, and 3) Dubai as sui generis. Krugman believes it is some combination of two and three.

I agree. Dubai seems like an extreme example of the CRE bust. "Vegas on steroids" as Nanoo-Nanoo wrote in the comments to an earlier post.

It is the state-controlled Dubai World that might delay payments - and both Moody's and Standard & Poor’s have said they may consider delaying payments a default - and it is unclear if oil rich Abu Dhabi will help out Dubai. So the situation is confusing ... but it does seem that Dubai is the most overbuilt city in the world.

Here is a repeat of a video on the Dubai real estate crash I posted in February:

Some photos of Dubai from the Boston Globe last year.

Also from February, an article on "skips" - expatriates fleeing home rather than risk jail for defaulting on loans: Driven down by debt, Dubai expats give new meaning to long-stay car park

And from the NY Times in February: Laid-Off Foreigners Flee as Dubai Spirals Down