by Calculated Risk on 2/11/2010 03:06:00 PM

A few stories of interest ...

Press Release: Citi to Pilot Foreclosure Alternatives Program to Help Distressed Borrowers

In exchange for the deed on their property, CitiMortgage will allow borrowers to stay in their homes for a period of up to six months. At the end of the six months, the borrower will turn over the property deed to CitiMortgage, and CitiMortgage will provide a minimum of $1,000 in relocation assistance to the borrowers. Citi will also provide relocation counseling by trained professionals and will cover certain monthly property expenses if Citi determines that the borrower can no longer afford them. Payment of utilities costs will be the responsibility of the borrower. Other costs incurred by the borrower, such as homeowner's association and escrow fees, will be determined on a case-by-case basis considering the borrower's specific financial circumstances. As part of the agreement, borrowers must maintain the property in its current condition and agree to bi-monthly meetings during which trained relocation professionals will help the borrower prepare for the next chapter of their lives.

This is a pilot program, but this is part of the short sale / deed-in-lieu movement that will be a huge story this year. This is being driven by the Treasury's HAFA program - and this is why I think foreclosures will be down in 2010, but total distressed sales up. Although Citi doesn't mention it, HAFA requires a full release of the debt and waiver of all claims against the borrower.

The TARP Congressional Oversight Panel put out a report today on Commercial Real Estate (CRE): Commercial Real Estate Losses and the Risk to Financial Stability. This isn't anything new, but it provides a good overview of the CRE issues.

On Greece. As expected there was a political announcement of support today, but few details. From the NY Times: Europe Commits to Action on Greek Debt

European leaders ... promised “determined and coordinated action” to safeguard the euro as they sought to persuade jittery bond market investors that Greece would not be allowed to default on its government debt.
...
Further work by finance ministers on assistance for Greece, and the conditions that would be attached to any aid, will take place early next week.

by Calculated Risk on 2/11/2010 12:38:00 PM

From HotelNewsNow.com: Super Bowl XLIV boosts Miami weekly performance

Overall, the U.S. industry’s occupancy ended the week virtually flat with a 0.8-percent decrease to 48.4 percent, ADR [average daily rate] dropped 4.8 percent to US$95.34, and RevPAR [revenue per available room] fell 5.6 percent to US$46.14.

The numbers are a comparison to the same week in 2009.

The following graph shows the occupancy rate by week since 2000, and the rolling 52 week average occupancy rate. It is possible the occupancy rate has bottomed, but at a very low level.

Click on graph for larger image in new window.

Note: the scale doesn't start at zero to better show the change.

The graph shows the distinct seasonal pattern for the occupancy rate; higher in the summer because of leisure/vacation travel, and lower on certain holidays.

Starting this week (data released next week), we should expect the occupancy rate to increase sharply as business travel increases. Over the same 12 week period last year, the occupancy rate averaged 56% - well below the normal level of around 63%, but significantly above the current rate.

So next week will be a real test for business travel (although weather will probably be an issue).

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 2/11/2010 11:03:00 AM

Here is the Economic Forecast from the Economic Report of the President. The last column is average payroll jobs per month per year.

Click on table for larger image in new window.

The forecast is for an average of 95,000 non-farm payroll jobs to be added per month in 2010, with the unemployment rate averaging 10.0% and real GDP growth of 3.0%.

Although there is no way to directly calculate the unemployment rate based on payroll jobs growth - because the data is from different surveys and depends on the number of people in the work force and other factors - there is a fairly strong relationship between payroll jobs and the unemployment rate.

Based on my estimates, it would seem that 3.0% real GDP growth in 2010 would lead to about 160,000 payroll jobs per month and a slight decline in the unemployment rate.

Conversely, 95,000 jobs per month is probably consistent with real GDP growth at just over 2%, and an increase in the unemployment rate to over 10%. Based on their forecast for real GDP growth of 3%, it appears they are being conservative on their jobs forecast.

by Calculated Risk on 2/11/2010 08:35:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Feb. 6, the advance figure for seasonally adjusted initial claims was 440,000, a decrease of 43,000 from the previous week's revised figure of 483,000 [revised from 480,000]. The 4-week moving average was 468,500, a decrease of 1,000 from the previous week's revised average of 469,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Jan. 30 was 4,538,000, a decrease of 79,000 from the preceding week's revised level of 4,617,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 1,000 to 468,500.

According to MarketWatch some of recent increase was due to administrative backlogs in several states:

With today's report, the official said the backlogs had been "washed out".

The current level of 440,000 (and 4-week average of 468,500) are still high and suggest continuing job losses.

by Calculated Risk on 2/11/2010 12:01:00 AM

Press Release: U.S. Foreclosure Activity Decreases 10 Percent in January

RealtyTrac® ... today released its January 2010 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 315,716 U.S. properties during the month, a decrease of nearly 10 percent from the previous month but still 15 percent above the level reported in January 2009. The report also shows one in every 409 U.S. housing units received a foreclosure filing in January.

REO activity nationwide was down 5 percent from the previous month but still up 31 percent from January 2009; default notices were down 12 percent from the previous month but still up 4 percent from January 2009; and scheduled foreclosure auctions were down 11 percent from the previous month but still up 15 percent from January 2009.

“January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity followed by a 10 percent drop in January,” said James J. Saccacio, chief executive officer of RealtyTrac “If history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works.”
emphasis added

There probably was an increase in foreclosure activity in February, since many of the trial modifications have now ended. However I also think a key theme in 2010 will be short sales, and that might mean fewer foreclosures in 2010 than in 2009 - but still more distressed sales (just a different mix).

by Calculated Risk on 2/10/2010 08:46:00 PM

The Federal Government office in D.C. will be closed again Thursday, from the WaPo: Federal government shutdown extends to Thursday

Federal agencies across the nation's capital will close Thursday for a fourth straight day -- taking the week-long shutdown of the government into uncharted territory.

The Retail Sales (January) and Manufacturing and Trade Inventories and Sales (December) reports are still expected to be released Friday morning.

And a little good budget news from California:

State Controller John Chiang today released his monthly report covering California’s cash balance, receipts and disbursements in January. The month’s receipts rose above the Governor’s 2010-11 budget estimates by $1.28 billion, or 18.6%.

“The positive receipts are welcome news, but the State cannot be lulled into a false sense of security,” said Chiang. “Our cash position falls below safe levels this Spring, and goes into the red this Summer. Our chronic budget shortfalls require credible and sustainable fixes in order to protect taxpayers, local governments, and state funded programs.”
...
Year-to-date receipts are ahead of budget estimates by $459 million, or 1%, but state payments also went out faster than expected. Disbursements through January 31 were $586 million ahead of projections.

At least the situation is not getting worse.

by Calculated Risk on 2/10/2010 04:55:00 PM

From the Financial Times: Berlin and Paris urge backing for Greece

President Nicolas Sarkozy and Chancellor Angela Merkel are expected to give a show of political support to Athens at a summit of EU leaders in Brussels [on Thursday] ... The details of a bail-out plan were “still the subject of discussion and we are not even in a position to deliver it [on Thursday]”, an official said.
excerpted with permission

And from Stephen Castle and Nicholas Kulish at the NY Times: Europe Closing In on Plan to Avert Greek Debt Crisis

It is “no longer considered an option not to act,” one official in Paris said.

But officials also worried that any solution for the situation in Greece risked encouraging the markets to attack other euro zone countries that are regarded as weak links in the chain, starting with Portugal.

So there will probably be some sort of statement of support for Greece tomorrow, but no firm details. Any direct bailout of Greece would be very unpopular, and it appears that some sort of loan guarantees - contingent on budget discipline in Greece - is the most likely outcome.

by Calculated Risk on 2/10/2010 01:48:00 PM

The UCLA Anderson Forecast, Ceridian Corporation and Charles River Associates have introduced a new index using real-time diesel fuel consumption data: Pulse of Commerce Index^TM

Press Release: New Ceridian-UCLA Pulse of Commerce Index(TM) Reveals Need for Economic Reality Check as January Number Declines

Results from a major new econometric report – the Ceridian-UCLA Pulse of Commerce Index™ by UCLA Anderson School of Management – show the U.S. economy fell in January after a significant increase in December, with the index falling at an annualized rate of 36.8 percent. The more reliable three-month moving average for January managed to show a 3.3 percent gain at an annualized rate following the exceptional annualized rate of 14.6 percent in the previous month.

The index is based on an analysis of real-time diesel fuel consumption data from over the road trucking tracked by Ceridian Corporation. ... It mirrors closely the Federal Reserve's Industrial Production Index but is issued days before that index is released.

"Though the January 2010 number is disappointing, the index is 3.6 percent above its January 2009 level and is similar to year-over-year pre-recession values," said Edward Leamer, director of the UCLA Anderson Forecast and chief economist for the Ceridian-UCLA Pulse of Commerce Index. "Also, the three-month moving average is 2.3 percent above the previous year's value, which is the first time that there has been a year-over-year increase since April 2008, 21 very difficult months ago."

The latest PCI numbers suggest caution about celebrating the recently announced 5.7 percent GDP growth number. Although the 7.3 percent growth rate in the fourth quarter of 2009 for the PCI was strong, at that rate the index won't exceed the 2007 second quarter peak until the third quarter of 2011. "Things are going to have to look a lot better in February and March to turn this worry into optimism about the power of the recovery," Leamer said. "Stay tuned. We expect this showing in January indicated by the PCI will also be seen in the Industrial Production number when it is released later this month."

Click on graph for larger image in new window.

This graph shows the index since January 1999 (monthly and 3 month average). There is significant variability month to month.

Note: As Professor Leamer noted, this index appears to lead Industrial Production (IP), but there is a significant amount of monthly noise. So the one month decline in this index does not mean IP will decline in January (to be released next week), but the three month average suggests IP growth might have slowed.

This will be an interesting index to follow along with the Trucking and Railroad data.

by Calculated Risk on 2/10/2010 12:26:00 PM

Press Release: Freddie Mac To Purchase Substantial Number of Seriously Delinquent Loans From PC Securities

Freddie Mac (NYSE: FRE) announced today that it will purchase substantially all 120 days or more delinquent mortgage loans from the company's related fixed-rate and adjustable-rate (ARM) mortgage Participation Certificate (PC) securities.

The company's purchases of these loans from related PCs should be reflected in the PC factor report published after the close of business on March 4, 2010, and the corresponding principal payments would be passed through to fixed-rate and ARM PC holders on March 15 and April 15, respectively. The decision to effect these purchases stems from the fact that the cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in the company's mortgage-related investments portfolio as a result of the required adoption of new accounting standards and changing economics. In addition, the delinquent loan purchases will help Freddie Mac preserve capital and reduce the amount of any additional draws from the U.S. Department of the Treasury. The purchases would not affect Freddie Mac's activities under the Making Home Affordable Program.

This makes sense (since the costs are lower to buy the nonperforming loans back), and this has been in the works since Treasury increased the GSE portfolio limits in December. Back in December, Credit Suisse analysts argued this would happen (from Bloomberg):

“This announcement increases the prospect of large-scale voluntary buyouts by removing the portfolio cap hurdle and helping funding by potentially increasing debt-investor confidence,”

by Calculated Risk on 2/10/2010 10:01:00 AM

Fed Chairman Ben Bernanke's prepared statement: Federal Reserve's exit strategy. In this testimony, Bernanke outlines the steps to unwind monetary stimulus. An excerpt:

I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. The Federal Reserve is currently rolling over all maturing Treasury securities, but in the future it may choose not to do so in all cases. In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities. Although passively redeeming agency debt and MBS as they mature or are prepaid will move us in that direction, the Federal Reserve may also choose to sell securities in the future when the economic recovery is sufficiently advanced and the FOMC has determined that the associated financial tightening is warranted. Any such sales would be at a gradual pace, would be clearly communicated to market participants, and would entail appropriate consideration of economic conditions.

As a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets. Accordingly, the Federal Reserve is considering the utility, during the transition to a more normal policy configuration, of communicating the stance of policy in terms of another operating target, such as an alternative short-term interest rate. In particular, it is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance, while simultaneously monitoring a range of market rates. No decision has been made on this issue; we will be guided in part by the evolution of the federal funds market as policy accommodation is withdrawn. The Federal Reserve anticipates that it will eventually return to an operating framework with much lower reserve balances than at present and with the federal funds rate as the operating target for policy.

A few points:

It is unlikely that the Fed will raise the Fed Funds rate any time soon (very unlikely this year, and maybe not in 2011).

However the Fed might use an alternative short term interest rate - such as interest rate paid on reserves - to communicate policy.

The Fed will not sell MBS "in the near term", but is allowing agency debt and MBS to run off.