by Calculated Risk on 1/03/2010 05:19:00 PM

Note: Here is weekly summary and a look ahead.

From Fed Chairman Ben Bernanke: Monetary Policy and the Housing Bubble

And reports on the speech:
From the WSJ: Bernanke Says Rate Increases Must Be an Option
From the NY Times: Bernanke Blames Weak Regulation for Financial Crisis

Dr. Bernanke said that monetary policy (a low Fed Funds rate) was probably not to blame for the housing bubble, and he used data from other countries to make this argument: "the relationship between the stance of monetary policy and house price appreciation across countries is quite weak".

He suggested the primary cause was the lack of effective regulation associated with non-traditional mortgage products.

I noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. Moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.
emphasis added

Here are his two slides about exotic mortgages:

Click on graph for larger image in new window.

Slide 7 also shows initial monthly payments for some alternative types of variable-rate mortgages, including interest-only ARMs, long-amortization ARMs, negative amortization ARMs (in which the initial payment does not even cover interest costs), and pay-option ARMs (which give the borrower considerable flexibility regarding the size of monthly payments in the early stages of the contract). These more exotic mortgages show much more significant reductions in the initial monthly payment than could be obtained through a standard ARM. Clearly, for lenders and borrowers focused on minimizing the initial payment, the choice of mortgage type was far more important than the level of short-term interest rates.

The availability of these alternative mortgage products proved to be quite important and, as many have recognized, is likely a key explanation of the housing bubble. Slide 8 shows the percentage of variable-rate mortgages originated with various exotic features, beginning in 2000. As you can see, the use of these nonstandard features increased rapidly from early in the decade through 2005 or 2006. Because such features are presumably not appropriate for many borrowers, Slide 8 is evidence of a protracted deterioration in mortgage underwriting standards, which was further exacerbated by practices such as the use of no-documentation loans. The picture that emerges is consistent with many accounts of the period: At some point, both lenders and borrowers became convinced that house prices would only go up. Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages.

But it seems Bernanke left out a couple key points.

Bernanke used data from other countries to suggest monetary policy was not a huge contributor to the bubble ... however, Bernanke didn't discuss if non-traditional mortgage products contributed to housing bubbles in other countries. This would seem like a key missing part of the speech.

Bernanke didn't discuss how the current regulatory structure missed this "protracted deterioration in mortgage underwriting standards" (even though many people were pointing it out in real time). And Bernanke didn't discuss specifically how the new regulatory structure would catch this deterioration in standards. How about some specific example of how the previous regulatory structure missed underwriting problems, and how the new structure would have caught the problem?

I'm more interested in what Dr. Bernanke didn't say.

by Calculated Risk on 1/03/2010 01:58:00 PM

The first week of the new year will be chock-full of economic data, culminating with the December employment report on Friday. Expectations are for the BLS to report somewhere between 50,000 jobs lost or gained, with a consensus of no change in net jobs and the unemployment rate to remain steady.

On Monday, the ISM manufacturing index and construction spending will be released. The highlight for Tuesday will be auto sales and on Wednesday the ISM non-manufacturing index will be released.

Other economic releases include the number of personal bankruptcy filings for December, the apartment vacancy rate for Q4, factory orders, and various employment reports.

And a summary of last week ...

Case-Shiller house price index increased slightly in October

S&P/Case-Shiller released their monthly Home Price Indices for October. The following graph shows the Seasonally Adjusted data - some sites report the NSA data.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 30.5% from the peak, and up about 0.4% in October.

The Composite 20 index is off 29.5% from the peak, and up 0.4% in October.

NOTE: S&P reported this as "flat", but they were using the NSA data.

Case-Shiller house prices by City

The seconrd graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices decreased (SA) in 9 of the 20 Case-Shiller cities in October.

In Las Vegas, house prices have declined 56.3% from the peak. At the other end of the spectrum, prices in Dallas are only off about 5.4% from the peak - and up slightly in 2009. Prices have declined by double digits from the peak in 18 of the 20 Case-Shiller cities.

Fannie Mae reported delinquencies increased sharply in October



Fannie Mae reported that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.98% in October, up from 4.72% in September - and up from 1.89% in October 2008.

Other Economic Stories ...

From Fed Chairman Ben Bernanke today: Monetary Policy and the Housing Bubble

House Prices: Stress Test, Price-to-Rent, and More

From the WSJ: Treasury Ends TARP Bank Investments

From Dow Jones: Revisions Show Chicago PMI At 58.7 In December. Note: the Chicago Institute for Supply Management revised down the Chicago PMI to 58.7 on Thursday from the announced reading of 60.0 on Wednesday. The most significant change was to the employment index that now shows contraction at 47.6 compared to the announced 51.2.

From the American Trucking Association: ATA Truck Tonnage Index Jumped 2.7 Percent In November

Restaurant Index Shows Contraction in November

Unofficial Problem Bank List Increases to 575

Best wishes and Happy New Year to all.

by Calculated Risk on 1/03/2010 10:31:00 AM

The FDIC is on bank failure holiday until Jan 8th, but surferdude808 is still working!

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

Changes and comments from surferdude808:

The Unofficial Problem Bank List increased this week by 30 institutions to 575 primarily because the FDIC released its actions for November 2009.

Aggregate assets increased by $7.6 billion. There were no removals this week from closure, action termination, or unassisted merger.

Among the additions are Torrey Pines Bank, San Diego, CA ($1.1 billion); United Bank & Trust Company, Versailles, KY ($761 million); Peninsula Bank, Englewood, FL ($646 million); Viking Bank, Seattle, WA ($632 million); and Northwest Georgia Bank, Ringgold, GA ($586 million).

Also, the FDIC issued a Cease & Desist Order against Legacy Bank, Scottsdale, AZ ($194 million), which is a subsidiary of Peotone Bancorp, Inc. Legacy Bank and its sister bank, Peotone Bank and Trust Company, which also is operating under a formal enforcement action, are controlled by an ownership group that had seven banks closed on July 2, 2009 that cost the FDIC $314 million.

In 1989, the FDIC received authority to assess affiliates for resolution costs under what is commonly referred to as cross-guaranty. The FDIC used cross guaranty to close still solvent banks controlled by FBOP Corp. on October 30, 2009. It is interesting that the FDIC has not applied cross guaranty to the remaining banking subsidiaries of Peotone Bancorp.

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.

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 1/03/2010 09:16:00 AM

From Peter Goodman at the NY Times: Real Estate in Cape Coral, Fla., Is Far From a Recovery (ht Craig)

As we navigate this speculator’s paradise turned financial wasteland, Mr. Joseph stands at the front of the bus in a green polo shirt, highlighting specimens like this one: a white stucco house fronted by palm trees and topped by a Spanish tile roof on a canal emptying into the Gulf of Mexico. It last sold in 2005 for $850,000. Yours today for $273,000.

Goodman takes us along on a foreclosure tour and provides a few anecdotes about the MESS.

by Calculated Risk on 1/02/2010 11:01:00 PM

From Dina ElBoghdady at the WaPo: Cash-rich real estate investors trigger bidding wars, frustrate other buyers

Investors have reemerged with brute force in the Washington region's real estate market over the past few months, triggering bidding wars in some neighborhoods teeming with foreclosed properties and hindering traditional home buyers ...

"What's happening in this area reflects what's happening in other parts of the country," said Sam Khater, senior economist at First American CoreLogic, which plans to release a report soon on all-cash deals. "In markets where price declines have been steep, we've seen quite a bit of competition between the low-end, first-time home buyers and investors."
...
"There are bidding wars out there. It's like the 2005 market but at discount prices," said Stella Barbour, a real estate agent at Jobin Realty in Northern Virginia.

We've been seeing a competition all year between cash flow investors and first time home buyers in California. This has pushed up prices in many low end distressed areas (but not all).

Back in early 2005, I drew a couple of rough supply-demand diagrams viewing the bubble era speculative buying as storage. This pushed up prices during the bubble (removing properties from supply), and pushed down prices during the bust (forced selling added to the supply). Unlike those speculators, many of the current cash flow investors are probably happy with the return and won't be forced sellers. But they could become sellers in the future, limiting future appreciation.

And it is important to remember that the numbers don't work for investors in the mid-to-high end areas (the rent to price ratio is lower), so this competition is mostly in the low end areas - the same areas that attract first time home buyers.

These bidding wars should be setting off some alarm bells with regulators - not because of the cash flow investors, but because of the loose lending standards for FHA loans.

by Calculated Risk on 1/02/2010 08:18:00 PM

Here is Professor Krugman's presentation to the Allied Social Science Associations this coming Monday: CRISES

Krugman discusses several currency crises and compares them to the current U.S. deleveraging cycle. Here is an excerpt (picking up near the conclusion):

Plunging prices of houses and CDOs ... don’t produce any corresponding macroeconomic silver lining. ... This suggests that we’re unlikely to see a phoenix-like recovery from the current slump. How long should recovery be expected to take?

Well, there aren’t many useful historical models. But the example that comes closest to the situation facing the United States today is that of Japan after its late-80s bubble burst, leaving serious debt problems behind. And a maximum-likelihood estimate of how long it will take to recover, based on the Japanese example, is ... forever. OK, strictly speaking it’s 18 years, since that’s how long it has been since the Japanese bubble burst, and Japan has never really escaped from its deflationary trap.

This line of thought explains why I’m skeptical about the optimism that’s widespread right now about recovery prospects. The main argument behind this optimism seems to be that in the past, big downturns in the world’s major economies have been followed by fast recoveries. But past downturns had very different causes, and there’s no good reason to regard them as good precedents.

Living in a crisis-ridden world

Looking back at U.S. commentary on past currency crises, what’s striking is the combination of moralizing and complacency. Other countries had crises because they did it wrong; we weren’t going to have one because we do it right.

As I’ve stressed, however, crises often – perhaps usually – happen to countries with great press. They’re only reclassified as sinners and deadbeats after things go wrong. And so it has proved for us, too.

And despite the praise being handed out to those who helped us avoid the worst, we are not handling the crisis well: fiscal stimulus has been inadequate, financial support has contained the damage but not restored a healthy banking system. All indications are that we’re going to have seriously depressed output for years to come. It’s what I feared/predicted in that 2001 paper: “[I]ntellectually consistent solutions to a domestic financial crisis of this type, like solutions to a third-generation currency crisis, are likely to seem too radical to be implemented in practice. And partial measures are likely to fail.”

Maybe policymakers will become wiser in the future. Maybe financial reform will reduce the occurrence of crises: major financial crises were much rarer between the end of World War II and the rise of financial deregulation after 1980 than they were before or since. Meanwhile, however, the fact is that the economic world is a surprisingly dangerous place.

by Calculated Risk on 1/02/2010 04:53:00 PM

Lauren Beale asks at the LA Times Money & Company blog: 2010: The year of the real estate auction?

Auctions gained traction in last year's down housing market as a way to sell real estate -- in all price ranges. It's a trend I expect to see more of in 2010, and not just for bank-owned homes.
...
Why I'm expecting to see more auctions in the mainstream: It gives the seller a defined time frame; if the house doesn't meet the "reserved price" the seller had in mind, then it can be always listed later; and the idea is still novel enough that the marketing is an attention-grabber for the house.

Ms. Beale features a high end home in her post (a very high end home!)

I think short sales will be a huge story in 2010 with the recent push by the Obama Administration. And I also expect short sale fraud be to be huge story (related party sales, under the table payments to sellers, and more)

by Calculated Risk on 1/02/2010 11:59:00 AM

From Roger Vincent at the LA Times: Retail space opens up as big chains shrink

Amid a still-tepid economic recovery, big retail chains are expected to continue closing their less productive stores and retrenching on expansion plans. But at the same time, others will be hurtling into the breach to take advantage of falling rents and vacancies in neighborhoods they couldn't get into a few years ago.

"The prediction for next year is more re-sizing and relocating of retailers," said real estate broker Richard Rizika of CB Richard Ellis.

There are almost 100 empty big-box retail stores in Los Angeles County, according to a study by Rizika. They have a combined total of 4.5 million square feet, or about 78 football fields' worth of vacant space for rent or sale. Most of that came from liquidated businesses Circuit City Inc., Mervyns and home furnishings chain Linens 'n Things Inc.

The vacancy rate is expected to rise further in 2010, and this will continue to push down rents - leading to more distressed retail properties - and also less investment in Multimerchandise shopping structures.

Reis is expected to report the U.S. mall vacancy rate for Q4 next week. Reis reported in October that the strip mall vacancy rate hit 10.3% in Q3 2009; the highest vacancy rate since 1992.

"Our outlook for retail properties as a whole is bleak," Victor Calanog, Reis director of research, said. "Until we see stabilization and recovery take root in both consumer spending and business spending and hiring, we do not foresee a recovery in the retail sector until late 2012 at the earliest."

by Calculated Risk on 1/02/2010 08:43:00 AM

Another "Lost Decade" story, this time in the WaPo by Neil Irwin: Aughts were a lost decade for U.S. economy, workers

It was, according to a wide range of data, a lost decade for American workers. ...

There has been zero net job creation since December 1999. ... Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 ... And the net worth of American households ... has also declined when adjusted for inflation ...

Click on graph for WaPo page in new window.

This graphic from the WaPo shows job growth by decade, change in GDP, and percent change in household wealth for every decade since 1940.

Hopefully the '10s will be much better.

by Calculated Risk on 1/01/2010 09:15:00 PM

From Peter Goodman at the NY Times: U.S. Loan Effort Is Seen as Adding to Housing Woes

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

... desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

The article covers a number of topics, but I think these are key:

For the people that qualify - and aren't deep underwater on their homes - HAMP is a fine modification program. However there is no way this program will "reach up to 3 to 4 million at-risk homeowners". I noted HAMP would probably be a disappointment when it was announced early last year:

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.

Treasury is terrified of a flood of new foreclosures. I believe that is why the Treasury issued a directive last week extending the trial modification period to at least the end of January.

There are several possible options:

More short sales. Short sale activity is already increasing, and the Treasury introduced the Foreclosure Alternatives Program to help with short sales and Deed-in-Lieu of Foreclosure transactions. However servicers are very afraid of short sale fraud (non-arm length transactions), and short sales are also distressed properties - pushing down prices - something Treasury is desperately trying to avoid.

Encouraging servicers to write down principal. This would be very expensive, and if paid for by taxpayers - it would be very unpopular because it would appear to favor speculators over the prudent. This is what Mark Zandi, chief economist at Moody's economy.com is supporting:

Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.
...
Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. ... “We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”

Converting homeowners to renters. This is something Dean Baker suggested, and is kind of a Single Family Public Housing program. This would avoid the flood of foreclosures, and the banks could sell the homes over several years.

None of these programs is especially attractive, so I expect more delays and "can kicking" that will keep foreclosures elevated for years.