by Calculated Risk on 12/02/2009 08:59:00 PM

James Pethokoukis at Reuters provides excerpts from the most recent Goldman Sachs forecast and writes about the political implications, but the economic implications are also significant. From Goldman:

The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011.

You read that right. 2011.

by Calculated Risk on 12/02/2009 05:55:00 PM

Update: Press Release from BofA: Bank of America to Repay Entire $45 Billion in TARP to U.S. Taxpayers

From CNBC: Bank of America Out of TARP, Says Gasparino (ht Mr. Mortgage)

CNBC’s Charlie Gasparino tells the desk that Bank of America is going to repay $45 billion and get out of the TARP program.

And they will raise capital over the next few days, he adds.

From the WSJ: Bank of America to Repay $45 Billion in TARP

The bank plans to raise about $20 billion in new capital ... a move required by federal regulators to ensure the bank has sufficient capital reserves and won't need to come back to the government for additional aid.

by Calculated Risk on 12/02/2009 04:01:00 PM

Here is Secretary Donovan's testimony (pdf). The following are the Next Steps for the FHA. Key points:

Focus on enforcement and lender accountability

Reduce the maximum seller concession from 6% to 3%.

Raise the minimum FICO score.

Increase the up-front cash for borrower (it isn't clear if this is an increase in the downpayment, currently a minimum of 3.5%, or requiring the borrower to pay more fees).

Increase FHA insurance premiums.

The proposed changes will be announced by the end of January.

[T]he first set of policy changes we are proposing will focus on enforcement and lender accountability. We will step up efforts to ensure lenders assume responsibility for any losses associated with loans not underwritten to FHA standards.

We will hold lenders accountable for their origination quality and compliance with FHA policies, increasing our review of mortgagee compliance with FHA program requirements.

And we intend to expand enforcement for new loans as well. That includes requiring lenders to indemnify the FHA fund for their own failures to meet FHA requirements, and holding lenders accountable nationally for any improper activities, as we are presently limited to sanctioning individual branches.

We will also develop a Lender Scorecard that will summarize the performance of lenders who do business with the FHA. This scorecard will be posted on our website to ensure transparency and accountability for lenders, borrowers and the market.

Of course, all these steps are designed to hold lenders accountable for their origination quality and compliance with FHA policies. And as always, Ginnie Mae securities that are backed by FHA-guaranteed loans will continue to be fully covered by the full faith and credit of the U.S. government.

In addition to stepping up enforcement and accountability, which will improve the performance of both the existing and future books of business, we are committed to a series of additional steps to increase the quality of our business going forward.

An initial measure is to reduce the maximum permissible seller concession from its current 6 percent level to 3 percent, which is in line with industry norms, and we will continue to consider additional reductions. The current level exposes the FHA to excess risk by creating incentives to inflate appraised value.

Secondly, to protect the fund from the riskiest borrowers, we will for the time being also raise the minimum FICO score for new FHA borrowers.

We are currently analyzing what this floor should be, including the relationship between FICO scores and downpayments to determine whether we should increase FICO minimums in combination with changes to other underwriting criteria for lower downpayment loans.

Third, we have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan – to make sure that FHA borrowers have more “skin in the game” and a stronger equity position in their loans. There are several ways to accomplish this, and so we are currently analyzing various options to determine which is the most effective and consistent with our mission.

Finally, we are examining our mortgage insurance premium structure to determine whether an increase is needed and, if so, whether it should be the up-front premium, the annual premium or both. Our current up-front premium of 1.75 percent is below the statutory cap of 3 percent, while the annual premium is currently at the statutory maximum. To protect against future uncertainty in market conditions, we are requesting authority from Congress to raise annual premiums, as this is one of the most effective means of raising capital for the fund with the least impact per borrower.

Indeed, while most of these changes I’ve just described we can make on our own with no additional authority—and we expect to provide detail and public guidance for these changes by the end of January—in some cases, we will need Congress’ help. In addition to asking Congress to increase the current cap on the annual mortgage insurance premium for new borrowers, we are asking for additional authority for our proposals to hold all FHA lenders responsible for their fraud or misrepresentations by indemnifying the FHA fund. We will also be asking Congress to expand FHA’s ability to hold lenders accountable nationally for their performance as I mentioned earlier.

by Calculated Risk on 12/02/2009 02:00:00 PM

From the Fed: Beige Book

Reports from the twelve Federal Reserve Districts indicate that economic conditions have generally improved modestly since the last report. Eight Districts indicated some pickup in activity or improvement in conditions, while the remaining four--Philadelphia, Cleveland, Richmond, and Atlanta--reported that conditions were little changed and/or mixed.

On real estate:

Home sales and construction activity improved across much of the nation, though prices were generally said to be flat or still declining somewhat. A majority of Districts reported that the lower-priced segment of the housing market has outperformed the high end. .... Multifamily housing markets deteriorated further in the New York and Chicago Districts. More broadly, a number of eastern Districts reported continued declines in home prices--specifically, Boston, New York, Philadelphia, and Richmond. In contrast, prices were said to have firmed somewhat in the Dallas and San Francisco Districts and stabilized in the Chicago and Kansas City Districts. Most reports maintained that the lower end of the market has outperformed the higher end: New York, Philadelphia, Richmond, Atlanta, Minneapolis, and Kansas City all noted relative weakness at the high end of the market, with relative strength at the lower end; in most cases, this strength was largely attributed to the homebuyer tax credit (which was recently reinstated and expanded to include existing owners).

Despite the firming in sales, the level of new residential construction activity was generally characterized as weak, though recent trends have been mixed--Atlanta, Kansas City, and Dallas noted some pickup in home construction, whereas the Chicago and St. Louis Districts reported declines. Residential construction was described as flat or stabilizing by Cleveland, Minneapolis, and San Francisco.

Commercial real estate conditions were widely characterized as weak and, in many cases, deteriorating further. Market conditions were reported to have weakened in virtually all Districts, with rising vacancy rates, downward pressure on rents, and little, if any, new development. Expectations for 2010 were also quite low. Boston characterized the commercial real estate outlook as "bleak," Dallas noted that construction was at "historically low levels," and Kansas City described the sector as "distressed." Still, some Districts noted scattered signs of encouragement: Cleveland and Chicago referenced public-works projects as a source of increased business, Richmond noted signs of increased leasing activity from the health and education sectors, Atlanta indicated a modest pickup in new development projects, Minneapolis noted some recently started hotel and retail development, and San Francisco cited slight improvement in availability of financing for new development.

by Calculated Risk on 12/02/2009 12:31:00 PM

In a somewhat unusual move, a bank holding company filed for bankruptcy yesterday while the insured subsidiary (AmTrust Bank) continued to operate. Here was the news from Bloomberg: AmTrust Financial Files for Bankruptcy in Cleveland (ht Brian)

AmTrust Financial Corp., owner of the Cleveland-based AmTrust Bank that expanded rapidly into Florida and Arizona, filed for bankruptcy, blaming investments in home loans that lost value in the recession.

SNL has more: AmTrust bankruptcy may do little to save its bank

SNL cites Lawrence White, a former Federal Home Loan Bank Board member and now an economist at New York University's Stern School of Business, suggesting that the bank may have posed a risk to the other business lines of the holding company.

"This sounds to me like a pre-emptive move by the holding company," White said. He added that FDIC action at the bank level could come soon.

And SNL quotes economist Ken Thomas of independent bank consultancy K.H. Thomas Associates:

"My guess is that (regulators) shopped this around with no takers."
...
"You can't have a bank out there with a bankrupt parent, especially when it appears that the finances of the bank had a lot to do with the need for the filing. [FDIC Chairman Sheila Bair] is going to have to do something about this soon, whether she wants to or not."

CIT would be another example of the bank holding company filing for bankruptcy while the bank continues to operate. However, in the case of CIT, it was the other business lines that caused most of the problems, although the bank is operating under a Cease&Desist order.

AmTrust Bank recently reported $11.4 billion in assets, so this is a large bank and a strong candidate for BFF.

by Calculated Risk on 12/02/2009 11:06:00 AM

Note: The monthly data is noisy and is not adjusted for days in the month.

From the American Bankruptcy Institute: November Consumer Bankruptcy Filings Drop 18 Percent from Previous Month

The 112,152 consumer filings in November represented a decrease of 18 percent from the 135,913 filings registered in October, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). Despite the drop from the previous month, the November filings represented a 12 percent increase over the 99,925 consumer filings in November 2008. ...

"While bankruptcy filings cooled in November, consumers are still feeling the effects of rising unemployment rates and housing debt," said ABI Executive Director Samuel J. Gerdano. "Bankruptcies are set to top 1.4 million filings for 2009 as consumers and businesses continue to seek shelter from economic distress."
emphasis added

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter.

Note: Quarterly data from Administrative Office of the U.S. Courts, Q4 2009 is estimated using monthly data from the American Bankruptcy Institute.

The quarterly rate is at about the same level as prior to when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. There were over 2 million bankruptcies filed in Calendar 2005 ahead of the law change.

There have been over 1.3 million personal bankruptcy filings through Nov 2009, and there will probably be over 1.4 million filings in all of 2009.

by Calculated Risk on 12/02/2009 09:31:00 AM

The FHA is expected to announce steps today to raise reserves, tighten standards and crack down on poor performing lenders. For Lend America (aka Ideal Mortgage Bankers), there were allegations of submitting false documents, but I expect further approval cancellations just for poor performance.

From Ellen Yan at Newsday.com: Mass layoff at LI home lender amid federal probe (ht Mike in Long Island)

Melville-based Lend America closed its loan-making operation Tuesday and laid off most of its 600 workers, a day after federal officials revoked its license to make loans insured by the Federal Housing Administration.

FHA-backed loans made up at least 90 percent of the company's business.
...
Last year, Lend America closed 6,986 loans, or $1.36 billion in loans, Lovallo said, and for this year it projected 12,500 loans closed, for about $2.5 billion. The company serviced about $1.8 billion in loans, he said, and it is not clear whether it will continue to provide that service.

According to the FHA Neighborhood Watch, Lend America (listed as Ideal Mortgage Bankers) originated 11,559 loans over the last 24 months (November 01, 2007 and October 31, 2009) and 11.47% are already in default. The national average for FHA insured loans during that period is 5.02%.

There are 302 FHA lenders on the FHA list with default rates already over 10%, accounting for 163,590 loan originations over the last two years. The FHA could probably start with that list.

by Calculated Risk on 12/02/2009 08:15:00 AM

ADP reports:

Nonfarm private employment decreased 169,000 from October to November 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from September to October was revised by 8,000, from a decline of 203,000 to a decline of 195,000.

Note: ADP is private nonfarm employment only (no government jobs).
The BLS reported a 190,000 decrease in nonfarm private employment in October (also -190,000 total nonfarm), and ADP originally estimated October private nonfarm employment losses at 203,000; so ADP was pretty close to the BLS number last month.

On the Challenger job-cut report from Bloomberg: U.S. November Job Cuts Fall 72% From Year Ago, Challenger Says

Planned firings fell 72 percent in November to 50,349 from 181,671 during the same month last year, Chicago-based placement firm Challenger, Gray & Christmas Inc. said today. Announcements were down 9.6 percent from October. ... The level of announced job cuts was the lowest since December 2007, Challenger said.

The BLS reports Friday, and the consensus is for 100,000 net jobs lost, and a 10.2% unemployment rate for November.

by Calculated Risk on 12/02/2009 12:44:00 AM

From Diani Olick at CNBC: FHA to Toughen Mortgage Rules in Lenders Crackdown (ht Brad)

... the Federal Housing Administration is proposing new rules to crack down on lenders and asking Congress for the authority to raise certain borrower requirements ... Those steps will include raising minimum borrower FICO scores, requiring larger down payments, and reducing the maximum permissible seller concession from six percent currently to three percent.

It could also include raising up-front and/or annual insurance premiums, which would require Congressional authority. This is according to the testimony HUD Secretary Shaun Donovan is scheduled to present to the House Financial Services Committee on Wednesday afternoon, obtained by CNBC.

These proposals are similar to what Kenneth Harney outlined in the San Francisco Chronicle ten days ago: FHA looking for ways to pump up its reserves. Harney suggested the FHA was looking at four possibilities:

Higher down payments. The current downpayment requirement is 3.5%, and Harney mentions proposals for an increase to 5% or more. This will probably not be changed.

Higher mortgage insurance premiums.

Currently, FHA charges an "up-front" mortgage insurance premium of 1.75 percent of the loan amount. Most borrowers roll that into their loan and finance it. FHA also charges an annual premium, paid in monthly installments, of either 0.5 percent or 0.55 percent, depending on the down payment. To rebuild reserves, FHA could ... raise the up-front premium to 2 percent or as high as the current statutory maximum of 2.25 percent. It could also raise the annual fee...

Cutting home-seller "concessions" to borrowers' loan costs. Currently the FHA will allow the seller to pay many of the buyers closing costs (up to 6% of the purchase price). Many people think this is excessive - especially with a 3.5% downpayment.

Toughening credit standards. Harney writes:

FHA is by far the most lenient and flexible player when it comes to evaluating applicants' creditworthiness.

by Calculated Risk on 12/01/2009 10:04:00 PM

From David Leonhardt at the NY Times Economix: Stocks Start Looking Dear Again

Over the last few years, I’ve come to know and trust a version of the price-earnings ratio preferred by the economists Robert Shiller and John Campbell. It is based on an average of the past 10 years’ worth of corporate earnings, rather than just the past year (or a forecast of the next year’s earnings).
...
What does the ratio say today? That perhaps the recent rally has gone a bit too far.
...
You can read more about the history of this ratio, including the role played by the well-known Benjamin Graham and David Dodd, in this column from 2007, back when the bull market was still raging.

And from the earlier piece:

Benjamin Graham and David L. Dodd ... argued that P/E ratios should not be based on only one year’s worth of earnings. It is much better, they wrote in “Security Analysis,” to look at profits for “not less than five years, preferably seven or ten years.”

Just some ideas for discussion ...