Calculated Risk

White House Pleads for more Mortgage Mods

2009-07-10T00:21:00.005-04:00

In a two-page letter [to the country's largest banks], Treasury Secretary Timothy F. Geithner and Shaun Donovan, secretary of the Department of Housing and Urban Development, acknowledge that the government program, known as Making Home Affordable, has yet to gain traction since being launched in March.

"We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share," the letter said.
...
The banks were also told to designate a senior liaison for the program and to prepare for a July 28 meeting with senior Treasury and HUD officials ...

"We are asking that all servicers expand servicing capacity and improve the execution quality of loan modifications in order to help the sizable number of homeowners at risk of foreclosure and eligible for the program," the letter said.

The administration will begin issuing monthly reports by Aug. 4 detailing lenders' performance ...

The results have been disappointing so far, with few modifications and a high re-default rate. Also most of the modifications so far have been the "extend and pretend" type, with a capitalization of missed payments and fees, lower interest rates, and longer terms - leaving many borrowers with significant negative equity and high likelihood of a future default.

Missing the Point on Stated Income Loans

2009-07-09T21:43:00.004-04:00

This article quotes a couple of mortgage brokers who somehow think the loss of stated income loans is a bad thing - and one who thinks they will "re-emerge over the next six months" ...

From James Temple at the San Francisco Chronicle: Undocumented income makes it hard to get a loan

With more than $300,000 in combined annual income, tens of thousands of dollars in the bank and credit scores that top 800, Jennifer France and her partner would seem like ideal candidates for a mortgage refinance.

But when they applied to swap an interest-only loan on their nearly $1 million San Carlos home for a 30-year fixed that locked in today's low rates, they were summarily denied. The reason: effectively, because both operate their own businesses.
...
A few years ago, theirs would have been the ideal scenario for a stated-income or no-documentation loan, which allowed individuals with ample but unconventional sources of income to secure home loans. But after untold numbers of borrowers lied about their financial wherewithal to buy homes they couldn't afford, often with a wink and nod from mortgage brokers, nearly all lenders stopped offering what became known derisively as "liar loans." Now even the well-qualified borrowers for whom the products were first intended can't get them.

This misses the point. It wasn't that stated income loans were "liar loans", although that is a fun name. The problem is: Stated income loans were borrower underwritten loans, not lender unwritten loans.

The borrowers above weren't denied because they "operate their own business". They were denied because they didn't meet the underwriting standards of the lender.

And a couple of posts from Tanta on the subject in 2007:

Just Say No To Stated Income. Excerpt:

Every lender can make an exception to the two-year average rule-of-thumb for determining "qualifying income." If you just stopped being Nurse Sue and became Assistant Professor of Nursing Sue, and you spent the last two years renting while you were building up your credentials for that career move, waiting to buy until it made more financial sense for you, and you can give me the W-2s, rental history, and employment agreement with Nursing U to prove it, I won't just make you a loan, I'll cut your cake and give you a big warm hug because you're my kind of borrower.

If you've been behind the counter at Taco Bell for the last two years, but just recently got put on the payroll at your brother-in-law's new vitamin supplement marketing startup company, and now you'd like to do a cash-out refi to make a little investment with? You will be "qualified" on your average Taco Bell income for the last two years. I'm the underwriter. I make the rules. You do not get to "underwrite yourself" by deciding that my rule on qualifying income is "unfair" to you and therefore you can get around them by "going stated."

And What's Really Wrong With Stated Income .

And from the article:

Chris George, president of CMG Mortgage in San Ramon, predicts that no-doc loans and other nontraditional mortgages will begin to re-emerge over the next six months, as creditors gain confidence.

Geesh - I hope not. Paging all regulators: Read Tanta's posts. Borrower underwritten loans should be permanently banned. Enough said.

Report: FDIC Unwilling to Back CIT Debt

2009-07-09T19:42:00.002-04:00

From Bloomberg: FDIC Said to be Unwilling to Back CIT Debt on Risk (ht Bob_in_MA)

The [FDIC] is unwilling to give CIT Group Inc. access to its Temporary Liquidity Guarantee Program because the commercial lender’s credit quality is deteriorating [unidentified sources say] ... The FDIC, which has backed $274 billion in bond sales under the TLGP since Nov. 25, is concerned that guaranteeing CIT debt would put taxpayer money at risk ...

CIT ... became a bank in December to qualify for a government bailout and received $2.33 billion in funds from the U.S. Treasury. ... Without access to TLGP, CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.

The federal agency is in discussions with CIT about how the lender can strengthen its financial position to get approval, such as by raising capital, said one of the people. ...

CIT has about $75 billion in assets.

Condo Association Files Bankruptcy

2009-07-09T16:25:00.003-04:00

This might be the start of a number of condo / homeowner associations filing bankruptcy because of the housing bust ...

From the Daily Business Review: Bankruptcy: $1 million debt sends condo association into Chapter 11 (ht Soylent Green is People)

Facing almost $1 million in claims by unsecured creditors, a troublesome recreational lease, and at least 100 unit owners delinquent on payments of their fees, the association filed a Chapter 11 petition last month in U.S. Bankruptcy Court in Miami.

As one of the first condo association bankruptcies of the current economic crisis ... With residential foreclosures and personal bankruptcies soaring in South Florida, Maison Grande’s decision is expected to become more commonplace, said attorney Aleida Martinez Molina of Becker & Poliakoff in Coral Gables.
...
The significant drop in property values is a key factor pushing associations toward bankruptcy filings, said attorney Robert Kaye of Kaye & Bender in Fort Lauderdale. ... “In prior times, there was enough equity in all the properties [in an association] so that assets would likely exceed liabilities,” he said. “Now, since a large percentage of associations are upside down, that’s changing their view about bankruptcy. Their debts have overtaken their assets.”

Treasury Working on 'Plan C'

2009-07-09T15:06:00.004-04:00

From the WaPo: Treasury Works on 'Plan C' To Fend Off Lingering Threats

... the Treasury Department has assembled a team to examine what could yet bring it down and has identified several trouble spots ... Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.
...
The team is also responsible for considering potential government responses, but top officials within the Obama administration are wary of rolling out initiatives that would commit massive amounts of federal resources ...

The officials in charge of Plan C -- named to allude to a last line of defense -- face a particular challenge in addressing the breakdown of commercial real estate lending. ... these groups face a tidal wave of commercial real estate debt -- some estimates peg the total at more than $3 trillion -- that they will need to refinance. ...

Thousands of these institutions wrote billions of dollars in mortgages on strip malls, doctors offices and drive-through restaurants. These commercial loans required a lot of scrutiny and a leap of faith, and, for much of the decade, the smaller banks that leapt were rewarded with outsize profits.

In doing so, many took on bigger and bigger risks. By the beginning of the recession in December 2007, the median midsize bank held commercial real estate loans worth 3.55 times its capital cushion -- its reserve against unexpected losses -- according to the Federal Deposit Insurance Corp.

... Another issue identified by the Plan C team is homeowner delinquencies, which continue to rise as large numbers of people lose their jobs and miss monthly payments.

"A lot of scrutiny and a leap of faith"? More of the later, not enough of the former. It didn't take much "scrutiny" to understand there was substantial overbuilding in CRE, especially for retail space and for hotels. And yet banks kept making loans in 2006, 2007 and even in 2008 ...

Charity: Mortgage Pig Wear Closeout

2009-07-09T13:28:00.004-04:00

CR note: This is from Tanta's sister Cathy. For new readers, to find out about Tanta, please see Tanta: In Memoriam. Also see The Compleat UberNerd for some of her incredible articles. I really enjoy my Mortgage Pig sweatshirt! Thanks to everyone for your support, CR

The Last of the Mortgage Pig Wear

Thank you all for your orders – we raised $3,700 and hopefully you have something unique to help you remember Tanta.

We ended up with some extra completed items and we still have a few “Slap It” and “Holidays” transfers left for T-shirts (“Convexity” is sold out). I’m offering these outside of EBay – no additional charge for shipping in the continental US. Simply send an EMAIL to stickelc@live.com with your request and I’ll send back a confirmation. Then mail a check or money order along with shipping instructions and we’ll get the item out to you. The proceeds will be donated to the Ovarian Cancer Research Fund.

Again – thanks for your support and all of the kind words.

Cathy Stickelmaier

Completed Items:
Black Full-Zip, Hooded Sweatshirt w/Tanta Vive in Pink & White – Size XL - $40
Men’s White Polo Shirt – Size L - $32
White Long Sleeved T-Shirt with Slap-It Transfer – size L - $18
White Hooded Sweatshirt with Holidays Transfer – Size 2X - $30
White Hooded Sweatshirt with Holidays Transfer – Size XL - $30
(2) Short Sleeved T-Shirt with Holidays Transfer – size S - $15 each
(2) White Hooded Sweatshirt with Slap It Transfer – size L - $30 each

Transfer Items – made to order while transfers last:
White Long Sleeved T-Shirt with Slap It Transfer – Sizes S to 2XL - $18
White Short Sleeved T-Shirt with Slap It Transfer – Sizes S to 2XL - $15
White Long Sleeved T-Shirt with Holidays Transfer – Sizes S to 2XL - $18
White Short Sleeved T-Shirt with Holidays Transfer – Sizes S to 2XL - $15

Hotel RevPAR off 13%

2009-07-09T12:45:00.003-04:00

Note: This report included a holiday weekend. Since vacation travel is holding up better than business travel I'd expect year-over-year RevPAR (and occupancy rate) to be off less than earlier this year for the summer months and especially for holiday weekends.

From HotelNewsNow.com: STR reports U.S. hotel performance for week ending 27 June 2009

In year-over-year measurements, the industry’s occupancy fell 6.0 percent to end the week at 57.7 percent. Average daily rate dropped 7.4 percent to finish the week at US$95.16. Revenue per available room for the week decreased 13.0 percent to finish at US$54.94.

Click on graph for larger image in new window.

This graph shows the YoY change in the occupancy rate (3 week trailing average).

The three week average is off 8.8% from the same period in 2008.

The average daily rate is down 7.4%, and RevPAR is off 13.0% from the same week last year.

Note: the occupancy rate will rebound in the next report - this is the normal pattern. The hotel occupancy rate is usually the highest during the peak vacation months of June, July and August and declines on weeks with holiday weekends.

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

Lawmaker: "The CRE time bomb is ticking"

2009-07-09T11:44:00.003-04:00

From Dow Jones: US Lawmakers Sound Alarm About Commercial Real Estate Market

"The commercial real estate time bomb is ticking," Joint Economic Committee Chairman Rep. Carolyn Maloney, D-N.Y., said in opening remarks to a hearing before her panel Thursday.

U.S. Sen. Sam Brownback, R-Kansas, said he was distressed about the situation the industry is facing.

Banks have yanked back on lending to developers of shopping malls, apartment complexes, hotels and office parks. ... The U.S. commercial real estate market is roughly $6.7 trillion in size and is underpinned by about $3.5 trillion of debt.

The article mentions the Fed's legacy CMBS TALF as helping the CRE market. The first auction is July 16th.

A few CRE stories this week:

Strip Mall Vacancy Rate Hits 10%, Highest Since 1992

"[W]e do not foresee a recovery in the retail sector until late 2012 at the earliest."
Victor Calanog, director of research for Reis on Retail CRE

Apartment Vacancy Rate at 22 Year High

Hotel Recession Reaches 20 Months

U.S. Office Vacancy Rate Hits 15.9% in Q2

"It's bad. It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning."
Victor Calanog, Reis director of research on the Office Market.

CRE: Another Half Off Sale

Property Taxes Fall in California

2009-07-09T10:24:00.002-04:00

Even with plummeting house prices, it is hard for overall property taxes to decline in California. This is because the assessed value of properties held by long term homeowners is frequently far below market value - even after the recent steep decline in prices - so the assessed value for those homeowners continues to increase at 2% per year.

From the SacBee: California counties see property revenue fall

For the first time since the taxpayers' revolt of the 1970s, the total assessed value of properties is dropping in Sacramento and across California.

The property tax roll in Sacramento County is down 6.4 percent from last year – to $131.6 billion; in Contra Costa County it's down 7 percent; and in Merced County it's down almost 13 percent.
...
While Sacramento County is dropping the assessed value on more than 170,000 properties, most of the remaining 230,000 residential properties won't see a reduction. Those owners can expect their normal 2 percent annual increase, county Assessor Ken Stieger said.
...
Also, the current assessment on many homes is still well below their actual market value, meaning they don't qualify for a reduction.

This is often the case for people who have owned their home for many years. The Proposition 13-mandated 2 percent annual increase has likely not kept pace with the double-digit annual percentage increases in market value.

For communities with many long term property owners, the property taxes are still increasing - because the assessed values are still below current market values.

Jon Lansner at the O.C. Register has a breakdown by cities in Orange County: Steepest property tax-value dips hit Santa Ana

Orange County’s first drop in taxable property values in 14 years was by no means an across-the-board drop.

The Assessor’s recap of the new taxable values for homes and other properties — remember, that’s different that actual values — show that 25 of Orange County’s 34 cities saw their taxable values driven down by falling home prices, with an average decline of 2.4%. And 9 had increases, with an average gain of 1.2%.

The increases are mostly for cities with long term homeowners.

Weekly Unemployment Claims Decline, Record Continuing Claims

2009-07-09T08:42:00.003-04:00

Note: The numbers are adjusted for the holiday, but this might still be an aberration.

The DOL reports on weekly unemployment insurance claims:

In the week ending July 4, the advance figure for seasonally adjusted initial claims was 565,000, a decrease of 52,000 from the previous week's revised figure of 617,000. The 4-week moving average was 606,000, a decrease of 10,000 from the previous week's revised average of 616,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending June 27 was 6,883,000, an increase of 159,000 from the preceding week's revised level of 6,724,000.

Click on graph for larger image in new window.

This graph shows weekly claims and continued claims since 1971.

Continued claims increased to a record 6.88 million.

The four-week average of weekly unemployment claims decreased this week by 10,000, and is now 52,750 below the peak of 13 weeks ago. It appears that initial weekly claims have peaked for this cycle.

However the level of initial claims (over 600 thousand 4-week average) is still very high, indicating significant weakness in the job market.

As a reminder, when looking at this report, I'd focus on the 4-week moving average of initial claims, not continued claims.

Depression Era Unemployment Rate

2009-07-09T00:14:00.009-04:00

Just for information purposes, the following graph is from Northern Trust.

What was the high of the unemployment rate in the Great Depression?

The civilian unemployment rate was around 25% during several months of 1932-1933

Click on graph for larger image in new window.

This graph shows the unemployment rate from 1929 through 1947.

The surge in unemployment in 1937 was related to an attempt to unwind the monetary and fiscal stimulus policies, with disastrous results for employment. Just something to remember when the Fed and Treasury start to unwind the current stimulus programs.

Several people have commented on 1937 lately ...

Alan Blinder wrote in the New York Times in May:

From its bottom in 1933 to 1936, the G.D.P. climbed spectacularly (albeit from a very low base), averaging gains of almost 11 percent a year. But then, both the Fed and the administration of Franklin D. Roosevelt reversed course.

In the summer of 1936, the Fed looked at the large volume of excess reserves piled up in the banking system, concluded that this mountain of liquidity could be fodder for future inflation, and began to withdraw it. ...

About the same time, President Roosevelt looked at what seemed to be enormous federal budget deficits, concluded that it was time to put the nation’s fiscal house in order and started raising taxes and reducing spending. ...

Thus, both monetary and fiscal policies did an abrupt about-face in 1936 and 1937, and the consequences were as predictable as they were tragic. The United States economy, which had been rapidly climbing out of the cellar from 1933 to 1936, was kicked rudely down the stairs again ...

And from Paul Krugman in the NY Times in June:

The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.

Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

Reis: Strip Mall Vacancy Rate Hits 10%, Highest Since 1992

2009-07-08T20:38:00.004-04:00

Click on graph for larger image in new window.

Reis reports the strip mall vacancy rate hit 10% in Q2 2009, the vacancy rate since highest since 1992. And rents are cliff diving ...

From Reuters: U.S. mall vacancy rate soars, rent dives - report

During the second quarter, the vacancy rate at U.S. strip malls reached 10 percent, the highest level since 1992, [Reis] said. ... asking rent fell 1.7 percent from a year ago to $19.28 per square foot. Asking rent fell 0.7 percent from the prior quarter. It was the largest single-quarter decline since Reis began tracking quarterly figures in 1999. ... effective rent declined 3.2 percent year-over-year to $17.01 per square foot. Effective rent fell 1.1 percent from the prior quarter.

About 7.9 million square feet of space was returned to the market during the quarter. The amount was second only to the 8.1 million square feet in the first quarter. ... U.S. regional malls ... vacancy rate rose to 8.4 percent, the highest vacancy level since Reis began tracking regional malls in 2000. Asking rents for regional malls continued to deteriorate but at a faster rate, falling 1.4 percent in the second quarter, compared with 1.2 percent in the first. ...

"Right now it looks like all signs are pointing to rents and vacancies, big components of income, getting shot down," [Victor Calanog, director of research for Reis] Inc 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."

A record decline in rents. Record regional mall vacancies. And no recovery seen in the retail CRE sector "until 2012 at the earliest". Grim.

More Mortgage Fraud

2009-07-08T19:18:00.002-04:00

This is definitely "brazen" ...

From CNN: 25 charged in $100 million mortgage fraud

The D.A.'s office said the following banks were ripped off over a four-year period, ending in April: Countrywide, New Century Bank, Saxon Bank, Greenpoint Bank, ABC Bank, Bank of America, Wells Fargo and SunTrust. Some of the defendants were bank employees, according to the D.A.

"The conspirators caused the banks to front millions of dollars to finance purchases of the properties," read a statement from the D.A.'s office. "They then walked away with most of the cash, leaving behind over-valued properties and worthless mortgage papers."

The D.A.'s office described a "particularly brazen sham transaction" where one of the suspects, Stephen Martini, allegedly wrote up a bogus appraisal of $500,000 for a two-family home, but "in reality, the location was a vacant lot."

For more mortgage fraud, here is the Mortgage Fraud blog.

PPIP Update

2009-07-08T16:50:00.002-04:00

Press Release: Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair

Today, the Treasury Department, the Federal Reserve, and the FDIC are pleased to describe the continued progress on implementing these programs including Treasury's launch of the Legacy Securities Public-Private Investment Program.

Financial market conditions have improved since the early part of this year, and many financial institutions have raised substantial amounts of capital as a buffer against weaker than expected economic conditions. While utilization of legacy asset programs will depend on how actual economic and financial market conditions evolve, the programs are capable of being quickly expanded if these conditions deteriorate. Thus, while the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs.

Legacy Securities Program

The Legacy Securities program is designed to support market functioning and facilitate price discovery in the asset-backed securities markets, allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses. Improved market function and increased price discovery should serve to reinforce the progress made by U.S. financial institutions in raising private capital in the wake of the Supervisory Capital Assessment Program (SCAP) completed in May 2009.

The Legacy Securities Program consists of two related parts, each of which is designed to draw private capital into these markets.

Legacy Securities Public-Private Investment Program ("PPIP")

Under this program, Treasury will invest up to $30 billion of equity and debt in PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy securities. Thus, Legacy Securities PPIP allows the Treasury to partner with leading investment management firms in a way that increases the flow of private capital into these markets while maintaining equity "upside" for US taxpayers.

Initially, the Legacy Securities PPIP will participate in the market for commercial mortgage-backed securities and non-agency residential mortgage-backed securities. To qualify, for purchase by a Legacy Securities PPIP, these securities must have been issued prior to 2009 and have originally been rated AAA -- or an equivalent rating by two or more nationally recognized statistical rating organizations -- without ratings enhancement and must be secured directly by the actual mortgage loans, leases, or other assets ("Eligible Assets").
...
Legacy Loan Program (this is the second program, and is essentially on hold)

There is a list of approved PPIP firms (no PIMCO!)

And some more info:
To view the Letter of Intent and Term Sheets, please visit link
To view the Conflict of Interest Rules, please visit link
To view the Legacy Securities FAQs, please visit link

AmEx CEO: Some Stabilization, Hopes for Recovery in 2nd Half of 2010

2009-07-08T16:00:00.003-04:00

First, a stick save for the market today (end of day rally) ...

Click on graph for larger image in new window.

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.

From CNBC: AmEx CEO: Way Too Early To Call A Recovery

American Express Chief Executive Kenneth Chenault says he has seen signs of stabilization in the economy, but there have not been any signs of improvement yet.

He adds, he is hopeful for a recovery by the second half of 2010, but that is not how he is planning the company's business.

"I think it is way too early to say that we're in an economic recovery," Chenault says, in an interview with CNBC. "I think what is important is that at least what we are seeing is some stabilization. If we think about where things were last fall with the credit markets seizing up, it was a frightening situation. So stability, I think is important, and I think that's been very helpful."

Consumer Credit Declines in May

2009-07-08T15:00:00.003-04:00

From MarketWatch: May consumer credit down in fourth straight month

U.S. consumers reduced their debt in May for the fourth consecutive month, the Federal Reserve reported Wednesday. Total seasonally adjusted consumer debt fell $3.22 billion ... Consumer credit fell in eight of the past ten months. ... This is the longest string of declines in credit since 1991. Credit-card debt had the biggest drop in May, falling $2.86 billion, or 3.7% to $928 billion.

Click on graph for larger image in new window.

This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 1.8% over the last 12 months. The record YoY decline was 1.9% in 1991 - and that record will be broken over the next couple of months.

Note: Consumer credit does not include real estate debt.

Chicago Fed's Evans: Recession to end in 2nd Half

2009-07-08T12:55:00.007-04:00

Update: Bob_in_MA points to Evans' forecast in Oct 2007: recovery in 2008 and concerned about inflation.

From Chicago Fed President Charles Evans: Nontraditional Monetary Policy and the Economic Outlook

Here is an excerpt of the economic outlook:

... there have been some favorable developments of late, and the possibility that the economy is closer to a turning point is stronger now than just three months ago. Although the data have been uneven, our reading of the recent indicators is that the pace of contraction is slowing and that activity is bottoming out. We expect modest increases in output in the second half of this year followed by somewhat stronger growth in 2010.

So what are these signs of improvement that underlie this forecast? First, financial market conditions have improved, with credit spreads and other measures of market stress much lower than they were in late 2008 and early 2009.

Consumer spending, which had dropped sharply since the second half of last year, has been roughly flat so far in 2009. Housing markets, after more than three years of decline, have also shown some signs of stabilizing. Sales of both new and existing homes have appeared to flatten out in recent months, though both remain at very low levels. Meanwhile, homebuilders have reduced their backlog of unsold new homes—a precondition for any recovery in homebuilding. But the backlog of unsold existing homes remains high, and delinquency and foreclosure rates continue to be a substantial risk to the housing market recovery.

Labor markets remain weak, but there has been a (somewhat uneven) decline in the pace of job losses. The May and June average of monthly declines in employment was about half the rate of contraction as the beginning of this year, and newly filed jobless claims seem to have peaked in late March. However, firms are still reluctant to hire, and the unemployment rate reached 9-1/2 percent in June and will likely further increase through the remainder of the year before it flattens out in 2010.

The industrial side of the economy has been especially hard hit this year, but there are signs that the worst of the decline in the sector is in the past. Business fixed investment remains weak, but the decline is getting shallower. Steep inventory liquidations made significant negative contributions to output growth in late 2008 and early 2009. But this means that inventories are in better alignment with sales, so we expect to see less dramatic liquidation in the months ahead. In turn, the smaller declines translate into a net positive for GDP growth. Finally, in the coming months, the fiscal stimulus will continue to have positive influences on the economy.
emphasis added

I'm not sure why some people keep repeating that existing home sales are at "very low levels". Actually existing home sales are at normal levels, although there is a very high level of distressed sales.

Once again Evans discussed unwinding the Fed's balance sheet and he is somewhat concerned about inflation (Evans is a voting member of the FOMC):

Currently, core inflation is near 2 percent, a level I generally find acceptable. In the near term, I think the downward forces on inflation will be greater than the upward forces, and we could see some declines in core inflation. But over the medium term I see the risks to the inflation forecast as being more balanced.

FBI: U.S. Mortgage Fraud "Rampant" and "Escalating"

2009-07-08T10:27:00.003-04:00

The FBI released their 2008 Mortgage Fraud Report today. (ht Bob_in_MA)

Mortgage fraud trends in 2008 reflected the overall downturn in the US economy ... the mortgage loan industry reported a spike in foreclosures and defaults; and financial markets continued to contract, diminishing credit to financial institutions, businesses, and homeowners. These combined factors uncovered and fueled a rampant mortgage fraud climate fraught with opportunistic participants desperate to maintain or increase their current standard of living. Industry employees sought to maintain the high standard of living they enjoyed during the boom years of the real estate market and overextended mortgage holders were often desperate to reduce or eliminate their bloated mortgage payments.

Mortgage fraud continues to be an escalating problem in the United States and a contributing factor to the billions of dollars in losses in the mortgage industry.
emphasis added

Committing fraud to "maintain their high standard of living" ... hopefully these guys will enjoy some free state accomodations for a few years.

There is some state specific data and some discussion of some common schemes. Here are a few (there is much more detail in the report):

Builder-Bailout Schemes: Builders are employing builder-bailout schemes to offset losses, and circumvent excessive debt and potential bankruptcy, as home sales suffer from escalating foreclosures, rising inventory, and declining demand. Builder-bailout schemes are common in any distressed real estate market and typically consist of builders offering excessive incentives to buyers, which are not disclosed on the mortgage loan documents. Builder-bailout schemes often occur when a builder or developer experiences difficulty selling their inventory and uses fraudulent means to unload it. In a common scenario, the builder has difficulty selling property and offers an incentive of a mortgage with no down payment. For example, a builder wishes to sell a property for $200,000. He inflates the value of the property to $240,000 and finds a buyer. The lender funds a mortgage loan of $200,000 believing that $40,000 was paid to the builder, thus creating home equity. However, the lender is actually funding 100 percent of the home’s value. The builder acquires $200,000 from the sale of the home, pays off his building costs, forgives the buyer’s $40,000 down payment, and keeps any profits. If the home forecloses, the lender has no equity in the home and must pay foreclosure expenses.

Short-Sale Schemes: Short-sale schemes are desirable to mortgage fraud perpetrators because they do not have to competitively bid on the properties they purchase, as they do for foreclosure sales. Perpetrators also use short sales to recycle properties for future mortgage fraud schemes. Short-sale fraud schemes are difficult to detect since the lender agrees to the transaction, and the incident is not reported to internal bank investigators or the authorities. As such, the extent of short sale fraud nationwide is unknown. A real estate short sale is a type of pre-foreclosure sale in which the lender agrees to sell a property for less than the mortgage owed. In a typical short sale scheme, the perpetrator uses a straw buyer to purchase a home for the purpose of defaulting on the mortgage. The mortgage is secured with fraudulent documentation and information regarding the straw buyer. Payments are not made on the property loan causing the mortgage to default. Prior to the foreclosure sale, the perpetrator offers to purchase the property from the lender in a short-sale agreement. The lender agrees without knowing that the short sale was premeditated. The mortgage owed on the property often equals or exceeds 100 percent of the property’s equity.

Foreclosure Rescue Schemes: Foreclosure rescue schemes are often used in association with advance fee/loan modification program schemes. The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. This “foreclosure rescue” often involves a manipulated deed process that results in the preparation of forged deeds. In extreme instances, perpetrators may sell the home or secure a second loan without the homeowners’ knowledge, stripping the property’s equity for personal enrichment.

MBA: Mortgage Refinance Activity Up from Recent Lows

2009-07-08T08:51:00.004-04:00

The MBA reports:

This week’s results include an adjustment to account for the holiday. The Market Composite Index, a measure of mortgage loan application volume, was 493.1, an increase of 10.9 percent on a seasonally adjusted basis from 444.8 one week earlier.
...
The Refinance Index increased 15.2 percent to 1707.7 from 1482.2 the previous week and the seasonally adjusted Purchase Index increased 6.7 percent to 285.6 from 267.7 one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages remained unchanged at 5.34 percent ...

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 2002.

Note: The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007, even though activity was actually declining.

The Purchase index has moved some above the recent lows, but the big story is the Refinance index - the index had declined sharply in recent weeks as mortgage rates increased, but the index was up this week.

Apartment Vacancy Rate at 22 Year High

2009-07-08T00:56:00.006-04:00

From Reuters: U.S. apartment vacancies near historic high: report

The vacancy rate for U.S. apartments reached its highest level in more than 20 years...

The national vacancy rate rose to 7.5 percent ... The record high was 7.8 percent in 1986.

"We are reaching that historic high very quickly," said Victor Calanog, Reis director of research.

... effective rent was down 1.9 percent from the prior year and 0.9 percent from the first quarter to $975, Reis said.

... "With general expectations of an economic recovery pushed back to early 2010 at the earliest, it seems likely that apartments will have to endure a few more quarters of distress, lower rents and higher vacancies," Calanog said.

Note: the Reis numbers are for cities. The overall vacancy rate from the Census Bureau was at 10.1% in Q1 2009. This fits with the NMHC apartment market survey.

Rising vacancies. Falling Rents. This time for apartments ...

More Evidence of the "Foreclosure Backlog"

2009-07-07T21:00:00.002-04:00

From Peter Hong at the LA Times: L.A. County's May default rate double last year

May's 9.5% [seriously] delinquency rate [more than 90 days] for L.A. County was up from 5% of mortgages ... in May 2008 [First American CoreLogic reported today].

... the final foreclosure stage -- has shrunk. In May, the L.A. County repossession rate was down to 1% of mortgages, from 1.1% a year ago. This discrepancy is the "foreclosure backlog" now looming over the housing market. ...

Nationally, First American reported 6.5% of mortgages were in default in May, up from 4% in May 2008. The national repossession rate was 0.7% in May, up from 0.6% in May 2007.

Ramsey Su (REO broker in San Diego) sent me some data today. He wrote:

[Pent Up Foreclosures - a stat Ramsey follows] measures the difference between foreclosures completed versus defaults. This gap is widening as a result of government intervention. ... If they do not ACCELERATE the foreclosure process and release some of the pressure now, the consequences will be disastrous.

The foreclosures are coming. The foreclosures are coming!

CNBC Interview with Bryan Marsal, CEO of Lehman Brothers Holdings

2009-07-07T18:32:00.003-04:00

This is an interesting interview from early this morning with Bryan Marsal, CEO of Lehman Brothers Holdings, who is unwinding Lehman Brothers ... especially at the 18 minute mark:

One of my partners said yesterday that we are going to call this phase the "extend and pretend" phase in our economy. Which is you extend someone's maturity - because they are going to default - and you pretend that business will come back or that leverage factor is going to come back.

Then we'll enter phase two, which he said is the request to extend or "amend".

Then "send". In other words send the keys.

That is the phases we are in right now. Everyone is trying to buy time, as opposed to dealing with the leverage, they are trying to buy time. Whether you are a banker or a company, they are all trying to buy time. I don't see the leverage coming back, and I don't see the consumption of good and services coming back.
Bryan Marsal, CEO of Lehman Brothers Holdings.

This applies to all kinds of debt - extend and pretend - that sounds like most of the residential loan modifications! But eventually many of those same loans will reach the "send" phase.

CRE: Another Half Off Sale and Market

2009-07-07T15:54:00.003-04:00

First, the market was off about 2% today ...

Click on graph for larger image in new window.

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.

And from Bloomberg: Deutsche Bank to Sell New York Tower for $605 Million (ht Brad, Brian)

Deutsche Bank AG, Germany’s largest bank, plans to sell Manhattan’s Worldwide Plaza to ... RCG Longview and George Comfort & Sons ... for about $605 million ...

Deutsche Bank is selling the last of seven buildings it seized from developer Harry Macklowe. He paid $1.74 billion for the 1.75 million square-foot property in February 2007, according to Real Capital Analytics Inc. data. Manhattan office building prices have dropped 30 percent to 50 percent since the peak in 2007, according to Woody Heller, head of the capital transactions group at Studley, a New York-based brokerage. Heller wasn’t involved in the transaction.

...The 47-story building will have more than 700,000 square- feet of vacant space with the expected departure of advertising and public relations firm Ogilvy & Mather.

More like 65% off, but all that vacant space was probably a huge factor.

Office Vacancy Rate and Unemployment

2009-07-07T14:33:00.000-04:00

Last night Reis reported that the U.S. office vacancy rate hits 15.9 percent in Q2. (See Reis: U.S. Office Vacancy Rate Hits 15.9% in Q2 for a graph).

Click on graph for larger image in new window.

This graph shows the office vacancy rate vs. the quarterly unemployment rate and recessions.

The unemployment rate and the office vacancy rate tend to move in the same direction - and the peaks and troughs mostly line up.

As the unemployment rate continues to rise over the next year or more, the office vacancy rate will probably rise too. Reis' forecast is for the office vacancy rate to peak at 18.2 percent in 2010, and for rents to continue to decline through 2011.

One of the questions is why - given 9.5% unemployment - the office vacancy rate isn't even higher? This is probably a combination of less overbuilding as compared to the S&L related overbuilding in the '80s, and the tech bubble overbuilding a few years ago. And possibly because a higher percentage of construction, manufacturing and retail workers (non-office workers) have lost their jobs in the recession (I'll have to check that).

Note: Hotel and retail structure investment were off the charts during the recent boom, but office investment was somewhat muted in comparison ...

The second graph shows office investment as a percent of GDP since 1972 through Q1 2009. Office investment peaked in Q3 2008, and with the office vacancy rate rising sharply, office investment will probably decline at least through 2010.

Note: In 1997, the Bureau of Economic Analysis changed the office category. In the earlier years, offices included medical offices. After '97, medical offices were not included (The BEA presented the data both ways in '97).

There is still too much space coming online. From Reuters:

During the second quarter, office space coming on the market topped rented space by about 20 million square feet, slightly less than the 25.2 million square feet in the first quarter.

Year-to-date, 45.2 million more square feet came onto the market than was rented, in line with Reis' projection of about 67.6 million square feet for all of 2009.

If the projection holds true, 2009 will be the worst year for net absorption of office space since Reis began tracking it in 1980.

Hotel Recession Reaches 20 Months

2009-07-07T12:21:00.003-04:00

From HotelNewsNow: Industry enters 20th month of recession

Economic research firm e-forecasting.com, in conjunction with Smith Travel Research, announced HIP edged down 0.7 percent in June, following a decline of 1.2 percent in May. HIP, the Hotel Industry’s Pulse index, is a composite indicator that gauges business activity in the U.S. hotel industry in real-time. The latest decrease brought the index to a reading of 82.5. The index was set to equal 100 in 2000.
...
“This recession continues to drag out, just one month shy of matching the longest one the industry felt back in May ’81 to January ’83, which lasted 21 months,” said Maria Simos, CEO of e-forecasting.com

Click on graph for larger image in new window.

And a quote from The Arizona Republic: Resorts suffer financial strains (ht Jonathan)

Richard Warnick of Warnick & Co. said he'd be surprised if nearly all hotels and resorts, here and across the country, weren't in technical default on their loans, falling below required minimums on debt service coverage, for example, given the sad state of travel. That is often a precursor to more serious financial problems that prompt lenders to foreclose.
...
He and others say hotels have committed economic suicide by slashing rates to levels not seen even in the aftermath of 9/11, and many are concerned it will take years to get back to "normal," or at least the new normal.

Actually the hotel industry has "committed economic suicide" by overbuilding and taking on too much debt.

Smith Travel Research is now forecasting RevPAR (revenue per available room) off 17.1% this year and declining another 3.7% next year.