by Calculated Risk on 4/06/2009 11:55:00 AM

Roger Altman, former deputy Treasury secretary, writes in the Financial Times: Why this will not be a normal cyclical recovery (ht Jonathan)

The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out ...

What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years.

... To see why recovery will be slow, we can look at the balance sheet damage. For households, net worth peaked in mid-2007 at $64,400bn (€47,750, £43,449bn) but fell to $51,500bn at the end of 2008, a swift 20 per cent fall. ... household debt reached 130 per cent of income in 2008.

This debt derived from Americans spending more than their income, reflecting the positive wealth effect. Households felt wealthier ... Now that wealth effect has reversed with a vengeance. ... household balance sheets will not be rebuilt soon. Home values will keep falling through mid-2010 and there is no precedent for equity markets, still down 45 per cent from their peak, to make those losses up in just two years. It is illogical, therefore, to expect a full snap-back in the consumer sector in 2010 or 2011. This alone mandates a drawn-out, weak recovery.

The second key sector is the financial one. ... losses are eating into banks’ capital and shrinking their capacity to add assets. Funds from the Troubled Asset Relief Program are only replacing lost capital, not increasing it. When might they end? With key categories of toxic assets still losing value, the answer is: not soon. The scale of lending needed to support a normal cyclical recovery will not materialise.

A third constraint on recovery may involve the federal balance sheet. The fiscal and monetary engines are currently on full throttle. But, within two years, concerns over budget deficits and inflation may revive, compelling the Federal Reserve to raise interest rates and Congress to adopt deficit reduction steps. These actions, contractionary by definition, could occur before a full recovery has asserted itself. On that basis, the federal balance sheet would also limit a full recovery.

Also, in a typical cycle, residential investment (mostly new home construction and home improvement) leads the economy out of a recession. This time there is still too much excess inventory - especially distressed inventory - for any meaningful recovery in residential investment.

So even if the economy bottoms later this year, the recovery will probably be very sluggish for some time.

by Calculated Risk on 4/06/2009 10:29:00 AM

From Bloomberg: Mayo Says Loan Losses Will Exceed Depression Levels

Mike Mayo ... assigned an “underweight” rating to banks on expectations that loan losses will exceed levels from the Great Depression.

“While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” Mayo wrote in a report today. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

Note: Mayo will hold a conference call at 11 AM ET. There will also be a discussion of mark-to-market accounting. See the comments for details ...

by Calculated Risk on 4/06/2009 09:04:00 AM

From The Obersver: US watchdog calls for bank executives to be sacked (ht several!)

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions ...

"The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

by Calculated Risk on 4/06/2009 01:53:00 AM

Here is an open thread for discussion. The futures are slightly positive ...

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets. The Asian markets are up 1% to 2%.

And a graph of the Asian markets.

Best to all.

by Calculated Risk on 4/05/2009 07:48:00 PM

I've switched the comments over to Ken's Hoocoodanode system. This should work well with an iPhone, Blackberry and other handheld devices. Also "comments" provides a link for those who want to open the comments in a new tab.

Currently the "comments" indicator on the blog doesn't indicate the number of comments. This should be added soon.

Also Ken will be adding the number of visitors online and an indicator that new comments are pending - plus much much more!

There is a nice preview, and you can also edit your comments. Please try it out. If you see any glitches, please post a comment. Enjoy. CR

by Calculated Risk on 4/05/2009 05:02:00 PM

UPDATE: A reader notes:

One more point worth making - Results of the stress tests, especially if they show potential capital shortage, surely constitute a reportable material event and therefore must be publicly disclosed to the SEC to protect the shareholders, who are likely to be diluted.

It is not just the matter of public trust and fairness, it is the SEC law.

The WSJ has an update: Bank Stress Test Meeting Planned. A few points:

Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country's 19 largest banks ... The Federal Reserve is overseeing the stress-test analysis process. People familiar with the matter said the final analysis isn't likely to be completed until at least the end of the month.

The end of April was the original schedule, FAQ:

Q10: When will the process be completed?

A: The Federal supervisory agencies will conclude their work as soon as possible, but no later than the end of April.

A suggestion for regulators: Ignore the "baseline case" - it is inoperative.

On the differences between assets with the same characteristics:

"[All loan portfolios, even with the same surface characteristics, don't perform the same at all." [said Eugene Ludwig, chief executive of Promontory Financial Group, which advises financial firms]

This is an understatement. Last April, Ambac discussed a Bear Stearns deal:

"Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral ..."

This is part of the problem in valuing assets - assets with identical characteristics may have significantly different losses. If it was securitized by Bear Stearns, or the loans were originated by New Century (and others), I'd be especially careful.

And on transparency:

"I think serious efforts will be made to respect the confidential nature of the test and its results," [Ludwig] said, but added that "there is a real danger that the results of the stress test are uncovered and this roils the markets."

The results of the stress test should be made public - at least for any bank taking TARP money. This would build confidence in the process, otherwise serious doubts will remain.

by Calculated Risk on 4/05/2009 12:15:00 PM

Here is a CQ Transcript: Treasury Secretary Geithner on CBS’s ‘Face the Nation’. Here is a brief excerpt:

SCHIEFFER: Let me ask you about this plan you have put together to create these public-private partnerships to buy these toxic assets that these banks owned to get them off these bank books so they -- the idea is that, if they can do that, then they can start lending again.

But last week the government did change the accounting rules. So the banks can, in essence, put a different value on those assets. Some people are now saying that, with this in place, the banks may no longer want to sell those toxic assets.

So I guess the question is, can you get the banks to participate in this program?

And do you feel you have the power to force them to sell those toxic assets?

GEITHNER: Bob, banks have a large incentive, now, to clean up their balance sheets, to make it easier for them to go raise equity from the markets, from private investors. So they’re going to have significant incentives to clean up their balance sheets. This gives them a way to do that that did not exist before that.

Just as an example, you know, if you had to sell your home tomorrow, in a world where nobody could get a mortgage to buy your home, you’d have to sell at an enormously low price.

You’d reluctant to sell. You might end up keeping your home longer than you want, not moving to some -- to take a new job, where you can earn more money, going forward.

That’s part of what’s happening to our financial system today.

GEITHNER: So what we try to do is lay out a proposal for how to create a market for these loans, bring in private investors to help protect the government from not overpaying for these assets.

This is just part, though, of a broad set of programs to help address the housing crisis, make sure banks have enough capital to lend even in a deeper recession, make sure we’re providing direct lending to help get small business lending going again. It’s an important part of this -- part of this (inaudible) program.

Three comments (addressing text in bold):

The government did not change (Mark-to-market) Update: Mort_fin notes: FASB did change the rules on Other Than Temporary Impairments (OTTI) which is a big part of the story. FASB provided some clarifications to mark-to-market.

Geithner seems to be arguing that the toxic asset legacy asset issue is primarily a liquidity problem, and not a solvency problem. I think this is backwards - it is primary a solvency problem with some liquidity issues.

Geithner says one goal is to "make sure banks have enough capital to lend even in a deeper recession". The problem is the "more adverse" scenario is really not a "deeper recession" - it is the new baseline.

by Calculated Risk on 4/05/2009 10:26:00 AM

From the LA Times: Bill would fundamentally reform home mortgage industry.

The Mortgage Reform and Anti-Predatory Lending Act of 2009 (H.R. 1728) was introduced March 26 by coauthors Rep. Brad Miller (D-N.C.), Rep. Melvin Watt (D-N.C.) and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee ...

Here's what the legislation would do:

* Ban all fees paid to loan officers that are tied to the interest rate of the mortgage or the type of the loan. ...

* Create mandatory minimum national quality standards for all mortgages. The rules would encourage lenders to make fully documented 30-year, fixed-rate loans with prevailing market rates, as opposed to loans with higher-risk features such as adjustable payments and negative amortization. The bill would also impose a federal "duty of care" standard requiring loan officers to offer applicants terms and rates that are "appropriate" to their income and ability to repay. ...

* Allow borrowers who are put into mortgages that violate the new law to seek legal redress through cancellation of the loan contract, refund of all payments and fees and compensation for legal costs.

Borrowers who lied or committed fraud on their loan applications would have no such recourse. The bill would also extend liability for rule violations to third-party securitizers who buy loans for repackaging into mortgage bonds. Originators of all but fully documented 30-year, fixed-rate loans would be required to retain at least a 5% stake in the loan until it's finally paid off. If the loan goes into default, they would retain some economic stake in the losses.

We need to see the details. If lenders are required to take a 5% stake in all but 30-year fixed-rate loans, many of the non-traditional loans will go away (especially from smaller lenders).

I also hope Mr. Frank will not try to bring back DAPs again. The data is conclusive - DAPs are bad for housing, the economy and America.

Update: Here is the text of the bill.

by Calculated Risk on 4/04/2009 09:59:00 PM

From The Times: Bankrupt Britain: 340 people go bust every day

Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.

Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day.
...
In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005.

The Q1 bankruptcy stats for the U.S. will be very ugly. There was a spike in bankruptcy filings in the U.S. in 2005 prior to the new bankruptcy law taking effect - the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Over 2 million bankruptcies were filed in 2005 - and that is a tough record to beat, but I wouldn't be surprised if 2009 is the 2nd worst year ever in the U.S.

Click on cartoon for larger image in new window. Repeat of a great cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

by Calculated Risk on 4/04/2009 07:36:00 PM

“I never imagined that these days I'd get to the epicenter, the place, the heart of the problem, by a commuter train on New Jersey Transit. But here it is. It's the crisis of our lifetime.”
Paul Krugman, April 3, 2009

From the Desert Sun: Nobel Prize winner Krugman shares harsh view on economic woes (ht Jonathan)

... "This is terrifying,” [Paul Krugman] said. “I did not imagine in my worst expectations that this would be this hard. I thought that we could sit down and sketch out the kinds of things, in principle, you could do to offset this type of global slump. But I never thought it would be this hard, in practice, to implement.”
...
Krugman said, the lesson from Japan is that countries facing a similar fate should be “very aggressive and cut interest rates early.”

And though the United States did - “unfortunately, it didn't turn out to be enough,” he said.

“Once you're in a world where there's just not enough demand out there and you're cutting interest rates down to zero, then you're in a world where the rules of economics go into reverse - much like ‘Alice in Wonderland,'” he said.

Jon Lansner at the O.C. Register has more: Krugman: ‘Maybe we need a new bubble to invest in!’ (excerpts from a Twitter transcript)

How did this happen? We forgot the Great Depression! We exposed ourselves 2 a repeat. May not be a repeat BUT close.

Debt levels before this crash approached pre-Depression levels. And we had “the mother of all housing bubbles.”

By one professor’s math interest rates should be at minus-8% based on the economy’s plight

Big banks are in trouble. Some insolvent. “Socialist” bank seizures in US every week. But giant holding companies?

Are we doing enough? If you think this ends soon, then “Yes!” But if this runs on then “No!” This looks inadequate.

Stock rally on good news? Not good news just things not getting much worse!

We are not clueless. We have not done enough. I am terrified. Hope we find the audacity to fix it.

by Calculated Risk on 4/04/2009 04:47:00 PM

Note: Working on comments today - sorry for any inconvenience.

For years I've complained about FHA related seller-funded Down payment Assistance Programs (DAPs). These programs circumvented the FHA down payment requirements by having the seller funnel the "down payment" to the buyer through a "charity" (for a small fee of course). In 2008, low end buyers with no money for a down payment, flocked to these programs with predictable results ...

From Zach Fox at the NC Times: Delinquencies for FHA surpassed those of subprime loans last year

Once considered among the safest loans available, government-insured mortgages issued last year have performed worse than the subprime loans that kicked off the collapse of the nation's housing market, according to data from a research firm.
...
huge level of defaults on loans insured by the Federal Housing Administration, which analysts called "stunning," raise the specter of further market turmoil and more taxpayer funds sent toward fixing the mortgage crisis.

"Frankly, I wouldn't be surprised if you called me up in a year from now and asked, 'What do you think about the FHA bailout?' " said Norm Miller, a professor at University of San Diego's Burnham-Moores Center for Real Estate.

First American CoreLogic ... reported this week that 20.7 percent of all FHA loans issued in 2008 were at least 60 days late by 10 months after the origination date. By the same metric, 14.1 percent of subprime loans issued in 2007 were 60 days delinquent.

The main problem with the delinquent FHA loans was low down-payment requirements, said Sam Khater, senior economist for First American CoreLogic.
...
By definition, FHA loans carry little equity. But the risk of failure was increased by the implementation of "down payment assistance" programs implemented by home builders, said Ramsey Su, a San Diego housing analyst.
...
The government has since discontinued the programs.

For more on DAPs, see Tanta's DAP for UberNerds

Journalists: A story that follows the history of DAPs, profiles the "charities" involved, shows the rising defaults associated with DAPs, examines the efforts of the FHA, HUD and the IRS to eliminate DAPs, and investigates the rent seeking activities of the "charities" (contribution to politicians, etc.) would be very interesting. Follow the money - as they say.

by Calculated Risk on 4/04/2009 01:52:00 PM

Something I should have mentioned earlier this week ...

From the Washington Independent: Fannie, Freddie Quietly Lift Moratorium on Foreclosures (ht many!)

A ban on foreclosure sales and evictions from houses owned by mortgage giants Fannie Mae and Freddie Mac ... is over.

Spokesmen for Fannie Mae and Freddie Mac confirmed the ban ended March 31 ...

This was just the scheduled end of the moratorium - and this will probably lead to an increase in foreclosures for April.

by Calculated Risk on 4/04/2009 08:52:00 AM

From the WaPo: Administration Seeks an Out On Bailout Rules for Firms

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed ...

by Calculated Risk on 4/03/2009 11:04:00 PM

Note: We are testing a new comment system from Ken (CR Companion). You can try it here http://www.Hoocoodanode.org/welcome

Today was mostly about the (Un)Employment report. Here are three posts:

Employment Report: 663K Jobs Lost, 8.5% Unemployment Rate Includes a graph of unemployment rate and year-over-year employment.

Part Time for Economic Reasons Hits 9 Million

Employment: Comparing Recessions and Diffusion Index This has a comparison of job losses in the current recession with previous recessions.

Best to all.

by Calculated Risk on 4/03/2009 09:43:00 PM

It looks like the FDIC cancelled Friday ...

From Simon Johnson and James Kwak of Baseline Scenario writing in the WaPo: The Radicalization of Ben Bernanke

... Shortly after joining the Fed in 2002, Bernanke gave a speech describing how the Fed could prevent deflation, i.e., a general decline in prices. The key theme was that, in a pinch, the Fed could simply print more dollars -- for example, by buying long-term bonds on the market -- which reduces the value of each dollar in circulation and therefore raises the dollar price of goods and services. "Under a paper-money system," Bernanke explained, "a determined government can always generate higher spending and hence positive inflation." In a time of economic overconfidence, the discussion seemed largely academic. But it is now clear that Bernanke intends to follow through on it.

Tim Duy at Economist's View responds: Johnson and Kwak vs. Bernanke

The implicit assumption is that the Fed is expanding the money supply via a policy of quantitative easing with the explicit goal of raising inflation expectations. First off, as Bernanke said once again today, he does not describe policy as quantitative easing:

In pursuing our strategy, which I have called "credit easing," we have also taken care to design our programs so that they can be unwound as markets and the economy revive. In particular, these activities must not constrain the exercise of monetary policy as needed to meet our congressional mandate to foster maximum sustainable employment and stable prices.

Pay close attention to Bernanke's insistence that the Fed's liquidity programs are intended to be unwound. If policymakers truly intend a policy of quantitative easing to boost inflation expectations, these are exactly the wrong words to say. Any successful policy of quantitative easing would depend upon a credible commitment to a permanent increase in the money supply. Bernanke is making the opposite commitment - a commitment to contract the money supply in the future. Is this any way to boost inflation expectations? See also Paul Krugman:

In that case monetary policy can’t get you there: once the interest rate hits zero, people will just hoard any additional cash – we’re in the liquidity trap. The only way to make monetary policy effective once you’re in such a trap, at least in this framework, is to credibly commit to raising future as well as current money supplies.

If Bernanke really intends to raise inflation expectations, he is making an elementary error by reiterating his intention to shrink the Fed's balance sheet in the future. The current increase in money supply is thus transitory and should not affect future expectations of inflation. I can't see him making such an elementary error, which suggests that Bernanke's word should be taken at face value; he intends policy to be "credit easing," not the oft-cited "quantitative easing."

It would seem the bigger concern in the short term is deflation, and I've been assuming the Fed was trying to raise inflation expectations - and I've been calling the Fed's policy "quantitative easing".

Dr. Duy writes:

Bottom line: I reiterate my concerns that the media and market participants are using the term "quantitative easing" too loosely. I understand that this complaint falls on largely deaf ears. If Bernanke is using quantitative easing to boost inflation expectations, then I think we need to seriously address the likely ineffectiveness of any such policy when Fed officials repeatedly promise to shrink the balance sheet in the future.

Mark Thoma at Economist's View has more: Inflation and the Fed

This is, in essence, a question about whether inflation expectations are anchored or not, and that is also the key question is this discussion of the odds of deflation by John Williams of the SF Fed. He argues that the previous decades can be broken into a recent time period in which expectations appear to be well-anchored, the time period 1993 through 2008 is cited in the linked discussion, and a time period in the late 1960s and the 1970s when inflation expectations do not appear to be anchored (based upon Orphanides and Williams 2005). The paper also notes that recent surveys of professional forecasters are consistent with anchored expectations.

But past history shows us that expectations can move from one state to the other, from untethered to tethered, and there's no reason that cannot happen again, but in the other direction. So here I agree with Martin Wolf, it's dependent upon the credibility of policymakers. So long as people believe that the Fed is committed to preventing an outburst of inflation, and that they are capable of carrying through on that commitment, expectations will remain well-anchored. But if people believe that that Fed's hands are tied because of the harm reducing inflation would bring to the real economy, an out of control deficit, or due to political considerations that force them to accept inflation they could and would battle otherwise, then we have a different situation and long-run inflation expectations will change accordingly.

I recommend the paper Professor Thoma linked to: The Risk of Deflation by John C. Williams, San Francisco Fed Director of Research

The evidence indicates that a substantial increase in slack can lead to deflation, but the depth and duration of the deflation depends on how well anchored inflation expectations are. Two policy implications can be drawn from this and other research on deflation. First, a central bank should take appropriate actions to stem the emergence of substantial slack in the economy and thereby reduce the risk of deflation. Second, it should clearly communicate its commitment to low positive rates of inflation. An example of such communication is the Federal Open Market Committee's recently released long-run inflation forecasts. Such words, backed by appropriate actions, reinforce the anchoring of inflation expectations and reduce the chances of a deflationary spiral.

I need to think about this.

by Calculated Risk on 4/03/2009 06:54:00 PM

Ken (CR Companion) has developed a comment system tailored for the CR community.

The system has a dedicated server and is now available for beta testing.

The site is up and running and has been tested against IE 6, Firefox, Safari, and iPhone.

Ken wants to make it clear that we’re in test mode.

Here’s a welcome link to try out the comments (and a description from Ken): http://www.hoocoodanode.org/welcome.

Please feel free to go to the site, and provide Ken feedback.

If all goes well, and once any bugs get fixed, we will integrate the system in Calculated Risk - perhaps sometime next week.

A special thanks to Ken and everyone involved. CR

by Calculated Risk on 4/03/2009 05:20:00 PM

If you missed this, here is a story about the FDIC takeover of Bank of Clark County: Anatomy Of A Bank Takeover in January.

Here is the audio from NPR.

Click on graph for larger image in new window.

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

The rally has taken the S&P up almost 25% from the low - but the market is still off 46% from the high.

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

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500.

See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

The second graph is Updated! about a week old<, but it still tells the tale.

Now back to waiting for the FDIC ...

by Calculated Risk on 4/03/2009 03:51:00 PM

UPDATE: From the WSJ: Banks Balk at Obama Demand to Cut Chrysler Debt

Banks that loaned Chrysler LLC $6.8 billion are resisting government pressure to swap $5 billion of that for stock to slash the car maker's debt, according to several people familiar with the matter ...

The lenders, which include J.P. Morgan Chase & Co., Goldman Sachs, Citigroup and Morgan Stanley ... own the rights to take control of Chrysler plants and assets, which were pledged as collateral for the loans, if the company files for bankruptcy protection.

...the Obama administration is demanding that these lenders cut their debt by $5 billion of its face value, or about 75%, said people familiar with the talks.

The banks still holding Chrysler pier loans are facing even more write-downs. (Pier loans are bridge loans that couldn't be sold and have been stuck on the bank's balance sheet). This was obvious before the Cerberus deal even closed: Chrysler's Bankers: Long Walk, Short Pier?

I'm sure Goldman is happy to have sold some of their loans at 80 cents on the dollar in early 2008.

by Calculated Risk on 4/03/2009 12:37:00 PM

From the Office of the Comptroller of the Currency and the Office of Thrift Supervision: OCC and OTS Release Mortgage Metrics Report for Fourth Quarter 2008

The Office of the Comptroller of the Currency and the Office of Thrift Supervision today jointly released their quarterly report on first lien mortgage performance for the fourth quarter of 2008. The report covers mortgages serviced by nine large banks and four thrifts, constituting approximately two-thirds of all outstanding mortgages in the United States.

The report showed that credit quality continued to decline in the fourth quarter of 2008. At the end of the year, just under 90 percent of mortgages were performing, compared with 93 percent at the end of September 2008. This decline in credit quality was evident in all loan risk categories, with subprime mortgages showing the highest level of serious delinquencies. However, the biggest percentage jump was in prime mortgages, the lowest loan risk category and one that accounts for nearly two-thirds of all mortgages serviced by the reporting institutions. At the end of the fourth quarter, 2.4 percent of prime mortgages were seriously delinquent, more than double the 1.1 percent recorded at the end of March 2008.
emphasis added

Much of the report focuses on modifications and recidivism (see Housing Wire). But this report also shows - for the first time - more seriously delinquent prime loans than subprime loans (by number, not percentage).

Click on graph for larger image.

Note: "Approximately 14 percent of loans in the data were not accompanied by credit scores and are classified as “other.” This group includes a mix of prime, Alt-A, and subprime. In large part, the loans were result of acquisitions of loan portfolios from third parties where borrower credit scores at the origination of the loans were not available."

This report covers about two-thirds of all mortgages. There are far more prime loans than subprime loans - and the percentage of delinquent prime loans is much lower than for subprime loans. However, there are now more prime loans than subprime loans seriously delinquent. And prime loans tend to be larger than subprime loans, so the losses from each prime loan will probably be higher.

We're all subprime now!

by Calculated Risk on 4/03/2009 12:08:00 PM

From Federal Reserve Chairman Ben Bernanke: The Federal Reserve's Balance Sheet. In this speech Bernanke discusses the recent Fed initiatives in terms of the impact on the balance sheet.

One key question is how all of this will be unwound. Here are some excerpts from Bernanke's speech:

In pursuing our strategy, which I have called "credit easing," we have also taken care to design our programs so that they can be unwound as markets and the economy revive. In particular, these activities must not constrain the exercise of monetary policy as needed to meet our congressional mandate to foster maximum sustainable employment and stable prices.
...
The large volume of reserve balances outstanding must be monitored carefully, as--if not carefully managed--they could complicate the Fed's task of raising short-term interest rates when the economy begins to recover or if inflation expectations were to begin to move higher. We have a number of tools we can use to reduce bank reserves or increase short-term interest rates when that becomes necessary. First, many of our lending programs extend credit primarily on a short-term basis and thus could be wound down relatively quickly. In addition, since the lending rates in these programs are typically set above the rates that prevail in normal market conditions, borrower demand for these facilities should wane as conditions improve. Second, the Federal Reserve can conduct reverse repurchase agreements against its long-term securities holdings to drain bank reserves or, if necessary, it could choose to sell some of its securities. Of course, for any given level of the federal funds rate, an unwinding of lending facilities or a sale of securities would constitute a de facto tightening of policy, and so would have to be carefully considered in that light by the FOMC. Third, some reserves can be soaked up by the Treasury's Supplementary Financing Program. Fourth, in October of last year, the Federal Reserve received long-sought authority to pay interest on the reserve balances of depository institutions. Raising the interest rate paid on reserves will encourage depository institutions to hold reserves with the Fed, rather than lending them into the federal funds market at a rate below the rate paid on reserves. Thus, the interest rate paid on reserves will tend to set a floor on the federal funds rate.

Not that we have to worry about unwinding any time soon.