Calculated Risk

Bank Failures #125 & 126: Two more in Georgia

2009-12-04T17:11:00.003-05:00

New white elephants
Gifts to US from Sheila Bair
No return receipt.
by Soylent Green is People
From the FDIC: State Bank and Trust Company, Macon, Georgia, Assumes All of the Deposits of the Buckhead Community Bank, Atlanta, Georgia

The Buckhead Community Bank, Atlanta, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of November 6, 2009, The Buckhead Community Bank had total assets of approximately $874.0 million and total deposits of approximately $838.0 million. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $241.4 million. ... The Buckhead Community Bank is the 125th FDIC-insured institution to fail in the nation this year, and the 22nd in Georgia. The last FDIC-insured institution closed in the state was United Security Bank, Sparta, on November 6, 2009.

From the FDIC: State Bank and Trust Company, Macon, Georgia, Assumes All of the Deposits of First Security National Bank, Norcross, Georgia

First Security National Bank, Norcross, Georgia, was closed today by the Office of the Comptroller of the Currency (OCC), which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver....

As of September 30, 2009, First Security National Bank had total assets of approximately $128.0 million and total deposits of approximately $123.0 million. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $30.1 million. ... First Security National Bank is the 126th FDIC-insured institution to fail in the nation this year, and the 23rd in Georgia. The last FDIC-insured institution closed in the state was The Buckhead Community Bank, Atlanta, earlier today.

Market Update

2009-12-04T16:00:00.005-05:00

While we wait for the FDIC ... a couple of market graphs:

Click on graph for larger image in new window.

The first graph shows the S&P 500 since 1990.

The dashed line is the closing price today. The S&P 500 was first at this level in April 1998; about 11 1/2 years ago.

The S&P 500 is up 63% from the bottom (429 points), and still off 29% from the peak (459 points below the max).

The second 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.

If the Economy lost Jobs, why did the Unemployment Rate decline?

2009-12-04T12:02:00.008-05:00

In August, when it was reported that the July unemployment rate dipped slightly to 9.4% from 9.5% in June, I pointed out that the dip in unemployment was just monthly noise: Jobs and the Unemployment Rate

FAQ: How can the unemployment rate fall if the economy is losing net jobs, especially since the population is growing?

This data comes from two separate surveys. The unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.

The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 400,000 business establishments nationwide.

These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).
...
[T]he jobs and unemployment rate come from two different surveys and are different measurements (one for positions, the other for people). Some months the numbers may not seem to make sense (lost jobs and falling unemployment rate), but over time the numbers will work out.

Here are a couple of scatter graphs to illustrate this point ...

The first graph shows the monthly change in net jobs (on the x-axis) as a percentage of the payroll employment, and the change in the unemployment rate on the y-axis.

The data is for the last 40 years: 1969 through July 2009.

Click on graph for large image.

Although these surveys are different measures of employment - there is still a correlation - in general, the more payroll jobs added (further right on the x-axis), the more the unemployment rate declines (y-axis). And generally the more jobs lost, the more the unemployment rate increases.

But the graph sure is noisy on a monthly basis.

Look at the two red triangles - those are the data points for the last two months.

Notice that the increase in the October unemployment rate was much higher than expected based on the number of payroll jobs lost. And the opposite was true for November (the unemployment rate fell even though payroll employment declined slightly).

The second graph covers the same period but uses a two month rolling average:

Now we see a much sharper correlation.

The red triangles are the for the last two data points, and the Sept-Oct point is above the curve, whereas the Oct-Nov point is on the curve. All this means is the jump in the unemployment rate in October was higher than expected, and the decline in November balanced it out.

This also suggests the economy needs to be adding about 0.13 percent of payroll employment per month to keep the unemployment rate from rising. That is about 170 thousand net jobs per month - this accounts for both population growth and an expected increase in the employment-population ratio.

Note that the trend line is a 3rd order polynomial (equation on graph). When the economy starts to add jobs, more people start looking for work - and the relationship between net jobs and the unemployment rate is not linear. (see next graph).

If we use a six month rolling average for the above graphs, R-squared rises to 0.8.

This graph show the employment-population ratio; this is the ratio of employed Americans to the adult population.

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

This measure was flat in November at 58.5%, the lowest level since the early '80s. However once the economy starts adding jobs, more people will be looking for work, and the employment-population ratio will start to increase. This means the stronger the economy, the more net jobs required each quarter to lower the unemployment rate by the same amount.

The bottom line is the decline in the unemployment rate this month was noise, and the unemployment rate will probably increase further. If the economy adds about 2 million payroll jobs next year, we'd expect the unemployment rate to still be at about 10% at the end of the year.

Unemployment: Record number Unemployed over 26 Weeks, Diffusion Index

2009-12-04T11:09:00.003-05:00

Two more graphs ...

Unemployed over 26 Weeks

Back in September, David Leonhardt wrote on the job churn rate in the NY Times:

Try thinking of it this way: All of the unemployed people in the country are gathered in a huge gymnasium that’s been turned into a job search center. The fact that this recession is the worst in a generation means that there are many, many people in the gym. The fact that the economy is churning so slowly means that there is not much traffic into and out of the gym.

If you’re inside, you will have a hard time getting out. Yet if you’re lucky enough to be outside the gym, you will probably be able to stay there.

Millions of workers are still stuck in that gymnasium, and a record number of workers have been unemployed for more than 26 weeks.

The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.

According to the BLS, there are a record 5.887 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 3.8% of the civilian workforce. (note: records started in 1948)

Diffusion Index

The second graph shows the BLS diffusion indexes for total private employment and manufacturing employment.

Think of this as a measure of how widespread the job losses are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

Both the "all industries" and "manufacturing" employment diffusion indices had been trending up - meaning job losses are becoming less widespread.

Back in March, I pointed out the increase in the diffusion index was "a sliver of good news" in a very grim employment report. The diffusion index in March suggested that the situation was no longer getting worse.

Now the index shows job losses are less widespread. However this still shows a minority of industries are hiring, and the index will probably be above 50 when the employment recovery begins. (For more on how this is constructed, see the BLS Handbook)

Earlier employment posts today:

Employment Report: 11K Jobs Lost, 10% Unemployment Rate for graphs of unemployment rate and a comparison to previous recessions.

Seasonal Retail Hiring, Employment-Population Ratio, Part Time Workers

2009-12-04T09:24:00.012-05:00

Here are a few more graphs based on the employment report ...

Seasonal Retail Hiring

Retailers are hiring seasonal workers at slightly above the pace of last year ...

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year.

This really shows the collapse in retail hiring in 2008.

Retailers only hired 54.2 thousand workers (NSA) net in October. This is essentially the same as in 2008 (59.1 thousand NSA). However retailers hired 321.3 thousand workers in November (NSA), an increase from the 233.7 thousand last year. This suggests retailers are a little more optimistic than last year.

Employment-Population Ratio

Click on graph for larger image in new window.

This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population.

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

The general upward trend from the early '60s was mostly due to women entering the workforce.

This measure was flat at 58.5% in November; this is the lowest level since the early '80s.

The Labor Force Participation Rate fell to 65.0% (the percentage of the working age population in the labor force). This is the lowest since the mid-80s.

When the job market starts to recover, many of these people will reenter the workforce and look for employment - and that will keep the unemployment rate elevated for some time.

Part Time for Economic Reasons

From the BLS report:

The number of people working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in November at 9.2 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) declined slightly to 9.246 million.

The all time record was set last month.

Earlier employment post today:

Employment Report: 11K Jobs Lost, 10% Unemployment Rate for graphs of unemployment rate and a comparison to previous recessions.

Employment Report: 11K Jobs Lost, 10% Unemployment Rate

2009-12-04T08:30:00.007-05:00

From the BLS:

The unemployment rate edged down to 10.0 percent in November, and nonfarm payroll employment was essentially unchanged (-11,000), the U.S. Bureau of Labor Statistics reported today.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 11,000 in November. The economy has lost almost 4.8 million jobs over the last year, and 7.2 million jobs¹ during the 23 consecutive months of job losses.

The unemployment rate decreased to 10.0 percent. Year over year employment is strongly negative.

The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

For the current recession, employment peaked in December 2007, and this recession is the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early '80s recession with a peak of 10.8 percent was worse).

The 11,000 jobs lost was surprising and was much better than other indicators (like ADP, weekly initial claims, ISM reports) would have indicated. The decrease in the unemployment rate was expected because of the large increase last month (and the unemployment rate is noisy). More to come ...

¹Note: The total jobs lost does not include the preliminary benchmark payroll revision of minus 824,000 jobs. (This is the preliminary estimate of the annual revision that will be announced early in 2010).

Employment Report Forecasts

2009-12-04T00:16:00.004-05:00

Just a few forecasts ...

From CNBC: Look Ahead: Jobs Report Has Markets on Edge

Economists expect November's decline in non farm payrolls to come in at about 125,000, and unemployment is expected to hold steady at 10.2 percent. ... Bill Stone, chief investment strategist at PNC Wealth Management ... said PNC expects job losses of 150,000 for November.

From MarketWatch: Another 100,000 jobs lost, economists predict

Another 100,000 jobs were destroyed during November, according to the median forecast of economists surveyed by MarketWatch. It would be the 23rd consecutive month of job losses, the longest losing streak since the 1930s.

The official unemployment rate is expected to remain at 10.2%, the highest since 1983.

Goldman is forecasting the report will show 100,000 net jobs lost in November.

Best to all

BofA Raises $19.3 Billion

2009-12-03T20:30:00.002-05:00

From Bloomberg: Bank of America Raises $19.3 Billion in Share Sale at $15 Each

Bank of America Corp., which plans to repay $45 billion of U.S. government bailout money, raised $19.3 billion in a sale of securities at $15 apiece, a 4.8 percent discount to its common stock.

This means BofA should repay the $45 Billion in TARP money tomorrow or early next week.

I expect other banks - possibly Wells Fargo and Citigroup - to raise capital too. (ht jb)

Fed Chairmen Never Learn

2009-12-03T16:55:00.009-05:00

In his 2001 testimony, Fed Chairman Alan Greenspan testified before the House Committee on the Budget, and while offering his usual cautions and caveats, Greenspan talked of surpluses for the foreseeable future.

Greenspan spoke of "an on-budget surplus of almost $500 billion ... in fiscal year 2010". The National Debt would soon be retired and the Boomer's retirements secure. Greenspan offered a projection of "an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs."

How did that work out?

The key point is that for the Fed to remain independent, the Fed Chairman - as a rule - should avoid all discussions of fiscal policy.

Now comes Fed Chairman Bernanke today on the deficit. From Ryan Grim at Huffington Post:

"Well, Senator, I was about to address entitlements," Bernanke replied [to Senator Bennett]. "I think you can't tackle the problem in the medium term without doing something about getting entitlements under control and reducing the costs, particularly of health care."

Bernanke reminded Congress that it has the power to repeal Social Security and Medicare.

"It's only mandatory until Congress says it's not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation," said Bernanke.
...
"Willie Sutton robbed banks because that's where the money is, as he put it," Bernanke said. "The money in this case is in entitlements."

No matter if people agree or disagree with Bernanke, to maintain independence the Fed Chairman should not be commenting on the deficit and entitlements.

And from Silla Brush at The Hill: Bernanke: 'Little bit early' to make case for second stimulus

Federal Reserve Chairman Ben Bernanke ... Bernanke emphasized that the government has spent less than half of the money in the $787-billion package passed earlier this year and that analysts are still determining its impact.

"Only about 30 percent of the funds have been disbursed," Bernanke said. "It's a little bit early to make a strong judgment, a little bit early to decide whether or not to do additional fiscal actions."

Once again - it doesn't matter whether you agree or disagree with Bernanke - he should not be talking about these issues.

A very poor performance today from the Fed Chairman.

AmTrust Lawyers Discuss Bank Seizure

2009-12-03T14:44:00.005-05:00

From the Plain Dealer: AmTrust sale appears inevitable, according to attorneys

Peter Goldberg doesn't expect to be the CEO of AmTrust Bank much longer, but his expertise will be needed to help the AmTrust and its employees once the bank is taken over by regulators and sold to another bank.

That revelation was among many made Thursday during the initial hearing of AmTrust Bank's parent company, AmTrust Financial Corp., in U.S. Bankruptcy Court in Cleveland.

... attorneys for AmTrust Financial and its major creditors ... talked candidly about AmTrust's dismal condition and made it clear they've already started planning for what happens after AmTrust is sold.

This is probably forcing the FDIC's hand to take action soon (like tomorrow).

Here is another article from the Plain Dealer on the bankruptcy filing of the bank hold company: AmTrust's bankruptcy filing may be a lesson learned from WaMu

Hotel RevPAR off 8.4 Percent

2009-12-03T11:57:00.004-05:00

From HotelNewsNow.com: Luxury leads occupancy increases in STR weekly numbers

Overall, in year-over-year measurements, the industry’s occupancy fell 1.7 percent to end the week at 40.7 percent. Average daily rate dropped 6.7 percent to finish the week at US$84.81. Revenue per available room for the week decreased 8.4 percent to finish at US$34.54.

Click on graph for larger image in new window.

This graph shows the occupancy rate by week for each of the last four years (2006 through 2009 labeled by start of month).

Notes: the scale doesn't start at zero to better show the change. Thanksgiving was later in 2008 and 2009, so the dip doesn't line up with the previous years.

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

This is a two year slump for the hotel industry. Although occupancy is off 1.7% compared to 2008, occupancy is off about 14% compared to Thansgiving week in 2006 and 2007.

The good news is the occupancy rate is at about the same level as 2008 (off just 1.7 percent). The bad news is this is a very low occupancy rate - 2009 will be the lowest since the Great Depression - and this is still pushing down room rates.

ISM Non-Manufacturing Shows Contraction in November

2009-12-03T10:04:00.004-05:00

From the Institute for Supply Management: November 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector contracted in November after two consecutive months of expansion, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Worldwide. "The NMI (Non-Manufacturing Index) registered 48.7 percent in November, 1.9 percentage points lower than the 50.6 percent registered in October, indicating contraction in the non-manufacturing sector after two consecutive months of expansion. The Non-Manufacturing Business Activity Index decreased 5.6 percentage points to 49.6 percent, reflecting contraction after three consecutive months of growth. The New Orders Index decreased 0.5 percentage point to 55.1 percent, and the Employment Index increased 0.5 percentage point to 41.6 percent. The Prices Index increased 4.8 percentage points to 57.8 percent in November, indicating an increase in prices paid from October. According to the NMI, six non-manufacturing industries reported growth in November. Respondents' comments remain cautious about business conditions and reflect concern over the length of time for economic recovery."
...
Employment activity in the non-manufacturing sector contracted in November for the 22nd time in the last 23 months. ... Three industries reported increased employment, 11 industries reported decreased employment, and four industries reported unchanged employment compared to October. Comments from respondents include: "Permanent and seasonal layoffs" and "Some reduction in workforce due to slow second- and third-quarter sales."
emphasis added

This is a grim report. According to this survey, the service sector contracted in November, and employment also contracted at about the same rate as in October.

Bernanke Confirmation Hearing

2009-12-03T10:01:00.003-05:00

Fed Chairman Ben Bernanke's confirmation hearing before the Senate Banking Committee.

Here is the CNBC feed.

And a live feed from C-SPAN.

Prepared Testimony: Confirmation hearing

Weekly Initial Unemployment Claims: 457,000

2009-12-03T08:36:00.004-05:00

The DOL reports on weekly unemployment insurance claims:

In the week ending Nov. 28, the advance figure for seasonally adjusted initial claims was 457,000, a decrease of 5,000 from the previous week's revised figure of 462,000 [revised from 466,000]. The 4-week moving average was 481,250, a decrease of 14,250 from the previous week's revised average of 495,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 21 was 5,465,000, an increase of 28,000 from the preceding week's revised level of 5,437,000. The 4-week moving average was 5,541,500, a decrease of 75,750 from the preceding week's revised average of 5,617,250.

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 14,350 to 481,250. This is the lowest level since last November.

Although falling, the level is still high suggesting continuing job losses.

Fed's Sack: MBS Purchases Lowered Mortgage Rates by 100 bps

2009-12-03T00:00:00.004-05:00

From the WSJ Real Time Economics: The Fed’s Market’s Guy Eyes Asset Sales and Rate Increases (ht Paul)

Brian Sack, who runs the markets group of the Federal Reserve Bank of New York, spoke to the Money Marketeers of New York University ...

Mr. Sack’s group estimates that the Fed’s purchases of $300 billion in long-term Treasury securities earlier this year helped to push yields on 10-year Treasury notes down by about half a percentage point. ... Purchases of mortgage backed securities, he says, pushed those rates down by a full percentage point.

This is significantly higher than my estimate of 35 to 50 bps and suggest mortgage rates might rise sharply next spring (the MBS purchase program is scheduled to conclude by the end of the first quarter of 2010).

Update: Apparently Sack's might have been referring to the decline from the peak of the panic (not clear from the brief excerpt). Of course the purchases started in January - months after the peak of the panic - and that isn't what people are interested in.

Goldman Forecast: Unemployment to Peak in 2011

2009-12-02T20:59:00.005-05:00

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

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

You read that right. 2011.

BofA to Repay $45 Billion in TARP

2009-12-02T17:55:00.003-05:00

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

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

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

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

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

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

HUD's Donovan: "Next Steps" for FHA

2009-12-02T16:01:00.001-05:00

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

Focus on enforcement and lender accountability

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

Raise the minimum FICO score.

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

Increase FHA insurance premiums.

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

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

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

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

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

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

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

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

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

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

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

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

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

Fed's Beige Book: Economy "improved modestly"

2009-12-02T14:00:00.003-05:00

From the Fed: Beige Book

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

On real estate:

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

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

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

Bank Holding Company files for Bankruptcy, Bank Still Operates

2009-12-02T12:31:00.002-05:00

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

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

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

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

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

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

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

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

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

ABI: Pesonal Bankruptcy Filings Decline in November

2009-12-02T11:06:00.000-05:00

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

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

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

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

Click on graph for larger image in new window.

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

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

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

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

Lend America Closes Down After FHA Cancels Approval

2009-12-02T09:31:00.004-05:00

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

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

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

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

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

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

ADP: Private Employment Decreased 169,000 in November

2009-12-02T08:15:00.004-05:00

ADP reports:

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

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

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

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

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

FHA to Ask Congress for Changes

2009-12-02T00:44:00.005-05:00

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

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

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

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

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

Higher mortgage insurance premiums.

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

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

Toughening credit standards. Harney writes:

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

Leonhardt on Long Term PEs

2009-12-01T22:04:00.002-05:00

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

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

And from the earlier piece:

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

Just some ideas for discussion ...