Consumer sentiment is a coincident indicator - it tells you what you pretty much already know.

TO BE NOTED: From Calculated Risk:

"University of Michigan Consumer Sentiment

by CalculatedRisk on 6/12/2009 10:10:00 AM

From MarketWatch: Consumer sentiment rises to 69 in June

U.S. consumer sentiment rose in June, but remained at relatively low levels, according to media reports of a survey released Friday by the University of Michigan and Reuters. The consumer sentiment index rose to 69 in mid-June from 68.7 in May.

Click on graph for larger image in new window.

Consumer sentiment is a coincident indicator - it tells you what you pretty much already know.

But it does give me an excuse for a graph ...

Right now consumer sentiment is still very weak.

Posted by CalculatedRisk "

The gap was filled largely by a rise in demand for Treasuries from US households.

TO BE NOTED: From Calculated Risk:

"Setser: Who bought all the recently issued Treasuries?

by CalculatedRisk on 6/12/2009 03:03:00 PM

From Brad Setser at Follow the Money: Just who bought all the Treasuries the issued in late 2008 and early 2009?

... the Fed’s flow of funds data leaves little doubt that — at least during the first quarter — the rise in public borrowing was fully offset by a fall in private borrowing.

Who bought all the Treasuries the US government has issued in the last four quarters of data (q2 2008 to q1 2009)? Foreign demand for Treasuries — as we have discussed extensively — hasn’t disappeared, unlike foreign demand for other kinds of US debt. But foreign demand hasn’t increased at the same pace as the Treasury’s need to place debt. The gap was filled largely by a rise in demand for Treasuries from US households.

Before the crisis, foreign purchases formerly accounted for almost all new Treasury issuance. Over the last 12 months, foreign demand accounted for more like half of total issuance even as foreigners bought a record sum of Treasuries. And from what we know about the second quarter, I don’t think the basic story has changed.

And for a great series of charts comparing the current recession to prior recessions (from Paul Swartz): The Recession in Historical Context

Posted by CalculatedRisk "

So this isn't a record as a percent of covered employment.

TO BE NOTED: From Calculated Risk:

"Unemployment Claims: 621 Thousand

by CalculatedRisk on 6/04/2009 08:35:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending May 30, the advance figure for seasonally adjusted initial claims was 621,000, a decrease of 4,000 from the previous week's revised figure of 625,000. The 4-week moving average was 631,250, an increase of 4,000 from the previous week's revised average of 627,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending May 23 was 6,735,000, a decrease of 15,000 from the preceding week's revised level of 6,750,000.

Click on graph for larger image in new window.

This graph shows weekly claims and continued claims since 1971.

Continued claims declined slightly to 6.73 million after increasing for 19 consecutive weeks. This is 5.0% of covered employment.

Note: continued claims peaked at 5.4% of covered employment in 1982 and 7.0% in 1975. So this isn't a record as a percent of covered employment.

The four-week average of weekly unemployment claims increased this week by 4,000, and is now 27,500 below the peak of 7 weeks ago. There is a reasonable chance that claims have peaked for this cycle, but it is still too early to be sure, and if so, continued claims should peak soon.

The level of initial claims (over 621 thousand) is still very high, indicating significant weakness in the job market.

In other employment news, the Monster Employment Index declined slightly in May:

The Monster Employment Index edged two points lower in May, as U.S. online recruitment activity eased slightly following a seasonal rise in April. Year-over-year, the Index was down 29 percent, a slight improvement from the previous month, indicating the rate of slowdown in the labor market may have stabilized.

Posted by CalculatedRisk "

thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income

TO BE NOTED: From Bloomberg:

"JPMorgan’s WaMu Windfall Turns Bad Loans Into Income (Update2)

By Ari Levy and Elizabeth Hester

May 26 (Bloomberg) -- JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.

Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.

Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders are seizing on a four- year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost value during the worst financial crisis since the Great Depression, the banks will wring revenue from the wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and accounting consulting firm in New York.

“It will benefit these guys dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”

JPMorgan rose $2.13, or 6.2 percent, to $36.54 at 4 p.m. in New York Stock Exchange composite trading. Wells Fargo gained 1.3 percent to $25.65 and PNC Financial climbed 5 percent to $43.25. Bank of America fell 9 cents to $10.98.

Purchase Accounting

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in income before taxes and expenses.

The purchase-accounting rule, known as Statement of Position 03-3, provides banks with an incentive to mark down loans they acquire as aggressively as possible, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine.

“One of the beauties of purchase accounting is after you mark down your assets, you accrete them back in,” Cassidy said. “Those transactions should be favorable over the long run.”

JPMorgan bought WaMu’s deposits and loans after regulators seized the Seattle-based thrift in the biggest bank failure in U.S. history. JPMorgan took a $29.4 billion writedown on WaMu’s holdings, mostly for option adjustable-rate mortgages and home- equity loans.

‘Price Judgment’

“We marked the portfolio based on a number of factors, including housing-price judgment at the time,” said JPMorgan spokesman Thomas Kelly. “The accretion is driven by prevailing interest rates.”

JPMorgan said first-quarter gains from the WaMu loans resulted in $1.26 billion in interest income and left the bank with an accretable-yield balance that could result in additional income of $29.1 billion.

The difference in accretable yield from bank to bank is due to the amount of impaired loans, the credit quality of the acquired assets and the state of the economy when the deals were completed. Rising and falling interest rates also affect accretable yield for portfolios with adjustable-rate loans.

It’s difficult to gauge how much the yield will add to total revenue because banks don’t disclose the expenses that chisel away at the figure. The income is also booked over the life of the loans, rather than in a lump sum, and banks don’t spell out how long that is, Willens said.

Wachovia ARMs

Wells Fargo arranged the $12.7 billion purchase of Wachovia in October, as the Charlotte, North Carolina-based bank was sinking from $122 billion in option ARMs. As of March 31, San Francisco-based Wells Fargo had marked down $93 billion of impaired Wachovia loans by 37 percent. The expected cash flow was $70.3 billion.

The Wachovia loans added $561 million to the bank’s first- quarter interest income, leaving Wells Fargo with a remaining accretable yield of almost $10 billion.

Government efforts to reduce mortgage rates and stabilize the housing market may make it easier for borrowers to repay loans and for banks to realize the accretable yield on their books. With mortgage rates below 5 percent, originations surged 71 percent in the first quarter from the fourth, a pace that may accelerate during 2009, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland.

Recapturing Writedowns

Wells Fargo, the biggest U.S. mortgage originator, doubled home loans in the first quarter from the previous three months, in part through refinancing Wachovia loans.

“To the extent that the customers’ experience is better or we can modify the loans, and the loans become more current, that could help recapture some of the writedown,” Wells Fargo Chief Financial Officer Howard Atkins said in an April 22 interview.

Banks still face the risk that defaults may exceed expectations and lead to further writedowns on their purchased loans. Foreclosure filings in the U.S. rose to a record for the second straight month in April, climbing 32 percent from a year earlier to more than 342,000, data compiled by Irvine, California-based RealtyTrac Inc. show.

The companies bought by Wells Fargo, JPMorgan, PNC and Bank of America were among the biggest lenders in states with the highest foreclosure rates, including California, Florida and Ohio. Housing prices tumbled the most on record in the first quarter, leaving an increasing number of borrowers owing more in mortgage payments than their homes are worth, according to Zillow.com, an online property data company.

Accretable Yield

“We’ve still got a lot of downside to work through this year and probably through at least part of next,” said William Schwartz, a credit analyst at DBRS Inc. in New York. “If I were them, I wouldn’t be claiming any victory yet.”

PNC closed its $3.9 billion acquisition of National City on Dec. 31, after the Cleveland-based bank racked up more than $4 billion in losses tied to subprime loans. PNC, based in Pittsburgh, marked down $19.3 billion of impaired loans by 38 percent, or $7.4 billion, and said it expected to recoup half of the writedown. After gaining $213 million in interest income in the first quarter and making some adjustments, the company has an accretable-yield balance of $2.9 billion.

“We’re just being prudent,” PNC Chief Financial Officer Richard Johnson said in a May 19 interview.

‘Huge Cushion’

Johnson said he expects the entire accretable yield to result in earnings. The company has taken into “consideration everything that can go wrong with the economy,” he said.

Bank of America, the biggest U.S. bank by assets, has potential purchase-accounting income of $14.1 billion, including $627 million of gains from Merrill Lynch & Co. and the rest from Countrywide. Bank of America bought subprime lender Countrywide in July, two months before the financial crisis forced Lehman Brothers into bankruptcy and WaMu into receivership.

As market losses deepened, Bank of America had to reduce the returns it expected the impaired loans to produce from an original estimate of $19.6 billion.

“The Countrywide marks in hindsight weren’t nearly as aggressive,” said Jason Goldberg, an analyst at Barclays Capital in New York, who has “equal weight” investment ratings on Bank of America and PNC and “overweight” recommendations for Wells Fargo and JPMorgan.

Bank of America spokesman Jerry Dubrowski declined to comment.

The discounted assets purchased by JPMorgan and Wells Fargo make the stocks more attractive because they will spur an acceleration in profit growth, said Chris Armbruster, an analyst at Al Frank Asset Management Inc. in Laguna Beach, California.

“There’s definitely going to be some marks that were taken that were too extreme,” said Armbruster, whose firm oversees about $375 million. “It gives them a huge cushion or buffer to smooth out earnings.”

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net."

From Calculated Risk:

"Revisiting the JPMorgan / WaMu Acquisition

by CalculatedRisk on 5/26/2009 03:01:00 PM

From Bloomberg: JPMorgan’s WaMu Windfall Turns Bad Loans Into Income (ht Mike in Long Island)

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.
...
JPMorgan took a $29.4-billion writedown on WaMu’s holdings, mostly for option adjustable-rate mortgages (ARMs) and home- equity loans.

“We marked the portfolio based on a number of factors, including housing-price judgment at the time,” said JPMorgan spokesman Thomas Kelly. “The accretion is driven by prevailing interest rates.”

JPMorgan said first-quarter gains from the WaMu loans resulted in $1.26 billion in interest income and left the bank with an accretable-yield balance that could result in additional income of $29.1 billion.
emphasis added

Let's review the JPMorgan's "judgment at the time" of the acquisition. First, here is the presentation material from last September.

Click on graph for larger image in new window.

Here are the bad asset details. Also see page 16 for assumptions.

This shows the $50 billion in Option ARMs, $59 billion in home equity loans, and $15 billion in subprime loans on WaMu's books at the time of the acquisition. Plus another $15 billion in other mortgage loans.

And the second excerpt shows JPMorgan's economic judgment at the time of the acquisition.

JPMorgan's marks assumed that the unemployment rate would peak at 7.0% and house prices would decline about 25% peak-to-trough.

Note that the projected losses at the bottom of the table are from Dec 2007. As the article noted, in September 2008, JPMorgan took a writedown of close to $30 billion mostly for Option ARMs and home equity loans.

This graphic shows the unemployment rate when the deal was announced (in purple), the three scenarios JPMorgan presented (the writedowns were based on unemployment peaking at 7%) and the current unemployment rate (8.9%).

Clearly JPMorgan underestimated the rise in unemployment, and this suggests the $29.4 billion writedown was too small.

And the last graph compares JPMorgan's forecast for additional house price declines and the actual declines using the Case-Shiller national home price index and the Case-Shiller composite 20 index.

House prices have declined about 32.2% peak-to-trough according to Case-Shiller - nearing JPMorgan's 37% projection for a severe recession.

This shows JPMorgan underestimated additional house price declines when they acquired WaMu. Instead of $36 billion in additional losses since December 31, 2007 (and the $29.4 billion writedown), this suggests JPMorgan expects losses will be $54 billion or more.

Posted by CalculatedRisk on 5/26/2009 03:01:00 PM "

One thing is pretty certain - as long as inventory levels are elevated, prices will continue to decline

TO BE NOTED: From Calculated Risk:

"House Prices: Real Prices, Price-to-Rent, and Price-to-Income

by CalculatedRisk on 5/26/2009 11:00:00 AM

Note earlier house price posts: Case-Shiller: Prices Fall Sharply in March and Case-Shiller: House Prices Tracking More Adverse Scenario

Here are three key measures of house prices: Price-to-Rent, Price-to-Income and real prices based on the Case-Shiller quarterly national home price index.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through Q1 2009 using the Case-Shiller National Home Price Index:

Click on image for larger graph in new window.

This graph shows the price to rent ratio (Q1 1997 = 1.0) for the Case-Shiller national Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is maybe 85% complete as of Q1 2009 on a national basis. This ratio will probably continue to decline.

It is important to note that it appears rents are now falling (this is not showing up in the OER measure yet) and rents will probably continue to decline. Goldman Sachs notes that declining rents for REITS typically lead declines in Owners' equivalent rent of primary residence (OER) - so OER will probably be falling later this year and in 2010.

And declining rents will impact the price-to-rent ratio.

Price-to-Income:

The second graph shows the price-to-income ratio:

This graph is based off the Case-Shiller national index, and the Census Bureau's median income Historical Income Tables - Households (and an estimate of 2% increase in household median income for 2008 and flat for 2009).

Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 10% or so. A further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes.

In Q2 2008 this index was over 1.25. In Q4, the index was just over 1.1. Now the index is at 1.04. At this pace the index will hit 1.0 in mid-2009. However, during a recession, nominal household median incomes are usually stagnate - so it might take a little longer. And the index might overshoot too.

Real Prices

This graph shows the real and nominal house prices based on the Case-Shiller national index. (Q1 2000 = 100 for nominal index)

Nominal prices are adjusted using CPI less Shelter.

The Case-Shiller real prices are still significantly above prices in the '90s and perhaps real prices will decline another 10% to 20%.

Summary

These measures are useful, but somewhat flawed. These measures give a general idea about house prices, but there are other important factors like inventory levels and credit issues. All of this data is on a national basis and it would be better to use local area price-to-rent, price-to-income and real prices.

One thing is pretty certain - as long as inventory levels are elevated, prices will continue to decline. And right now inventory levels of existing homes (especially distressed properties) are still very high.

Posted by CalculatedRisk "

Note: there are approximately 8,300 FDIC insured banks currently.

TO BE NOTED: From Calculated Risk:

"FDIC Bank Failures: By the Numbers

by CalculatedRisk on 5/22/2009 10:40:00 PM

Three banks were closed by the FDIC this week, for a total of 36 banks so far in 2009. The largest was BankUnited in Florida with $12.8 billion in assets.

To put those failures into perspective, here are three graphs: the first shows the number of bank failures by year since the FDIC was founded, and the second graph includes bank failures during the Depression. The third graph shows the size of the assets and deposits (in current dollars).

Click on graph for larger image in new window.

Back in the '80s, there was some minor multiple counting ... as an example, when First City of Texas failed on Oct 30, 1992 there were 18 different banks closed by the FDIC. This multiple counting was minor, and there were far more bank failures in the late '80s and early '90s than this year.

Note: there are approximately 8,300 FDIC insured banks currently.

The second graph includes the 1920s and shows that failures during the S&L crisis were far less than during the '20s and early '30s (before the FDIC was enacted).

Note how small the S&L crisis appears on this graph! The number of bank failures soared to 4000 (estimated) in 1933.

During the Roaring '20s, 500 bank failures per year was common - even with a booming economy - with depositors typically losing 30% to 40% of their bank deposits in the failed institutions. No wonder even the rumor of a problem caused a run on the bank!

The third graph shows the bank failures by total assets and deposits per year in current dollars adjusted with CPI. This data is from the FDIC (1) and starts in 1934.

WaMu accounted for a vast majority of the assets and deposits of failed banks in 2008, and it is important to remember that WaMu was closed by the FDIC, and sold to JPMorgan Chase Bank, at no cost to the Deposit Insurance Fund (DIF).

There are many more bank failures to come over the next couple of years, mostly because of losses related to Construction & Development (C&D) and Commercial Real Estate (CRE) loans, but so far, especially excluding WaMu, the total assets and deposits of failed FDIC insured banks is much smaller than in the '80s and early '90s.

Of course this is FDIC insured bank failures only. An investment bank like Lehman isn't included. Nor is the support for AIG, Citigroup and all the other "too big to fail" institutions ...

(1) The FDIC assets and deposit data is here. Click on Failures & Assistance Transactions.

Posted by CalculatedRisk "

Overall it appears the credit crisis has eased significantly.

TO BE NOTED: From Calculated Risk:

"Credit Crisis Indicators

by CalculatedRisk on 5/22/2009 09:50:00 AM

From the British Bankers' Association reported that the three-month dollar Libor rates were fixed at 0.66%. The LIBOR peaked at 4.81875% on Oct 10, 2008.

Click on graph for larger image in new window.

There has been improvement in the A2P2 spread. This has declined to 0.48. This is far below the record (for this cycle) of 5.86 after Thanksgiving, but still above the normal spread of around 20 bps.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

Meanwhile the TED spread has decreased further and is now at 48.45. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 463 on Oct 10th and a normal spread is around 50 bps.

The third graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The spread has decreased sharply over the last few months. The spreads are still high, especially for lower rated paper.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

This graph shows the at the Merrill Lynch Corporate Master Index OAS (Option adjusted spread) for the last 2 years.

This is a broad index of investment grade corporate debt:

The Merrill Lynch US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

Back in early March, Warren Buffett mentioned that credit conditions were tightening again - and this was probably one of the indexes he was looking at. Since March, the index has declined - but is still above normal levels.

Overall it appears the credit crisis has eased significantly.

Posted by CalculatedRisk "

Resets are not a huge problem as long as interest rates stay low, but recasts could be significant.

TO BE NOTED: From Calculated Risk:

"New Mortgage Loan Reset / Recast Chart

by CalculatedRisk on 5/20/2009 09:44:00 AM

Matt Padilla at the O.C. Register presents a new reset / recast chart from Credit Suisse: Loan reset threat looms till 2012

Credit Suisse is using recast dates for Option ARMs and reset dates for all other loans.

As Tanta noted: "Reset" refers to a rate change. "Recast" refers to a payment change.

Resets are not a huge problem as long as interest rates stay low, but recasts could be significant.

Note that Wells Fargo expects only a small percentage of their $115 billion "pick-a-pay" Option ARM portfolio they acquired via Wachovia (originally from World Savings / Golden West) to recast by 2012 (because Golden West had very generous NegAM terms). I'm not sure how that fits with this chart.

Posted by CalculatedRisk on 5/20/2009 09:44:00 AM "

"Reset Vs. Recast, Or Why Charts Don't Match

by Tanta on 8/13/2008 07:52:00 AM

My post yesterday featuring some rate reset charts from Clayton prompted a good deal of concern in the comments regarding the issue of Option ARMs and the differences between the Clayton chart and some others that have been published lately. Reader Greg kindly emailed me copies of two charts on Option ARMs that have been published in the WSJ and Business Week recently, with a request that I comment on the apparent differences between and among these charts in terms of the timing of "reset" problems.

As far as I'm concerned, a large part of the confusion here is that our friends in the media are not very careful about using the terms "reset" and "recast" consistently, like us UberNerds do. Take this chart from Business Week:



The chart title says "Reset Schedule," but the legends make it clear that what you have here is actually a "Recast Schedule." No wonder people are encouraged to use these terms interchangeably.

This chart from the Wall Street Journal doesn't use the term "reset" at all, which is good since it clearly explains that it is talking about "recast":



Do note, though, that the WSJ chart uses only "scheduled recast dates." The Business Week chart above contrasts "scheduled" recast with projected actual recast based on the rate of growth in actual negative amortization balances as of the chart date.

And, finally, we have our Clayton chart I posted yesterday that avoids the whole lingo problem by opting for the title "Loans With Rate Changes." Maybe the Clayton analysts got tired of the "reset vs. recast" confusion and just decided to go long-form. In any case, the Clayton chart, unlike the two above, includes but is not limited to Option ARMs; it is looking at the whole "Alt-A" pile which includes amortizing hybrid ARMs and lots of interest-only ARMs as well as OAs.

There obviously isn't perfect consensus here on terminology. All I can really do is make clear how I am using these two terms. I think my usage conforms to the way industry wonks talk, but I can't promise you that anyone outside the wonkosphere will be as careful with these distinctions. Caveat lector.

"Reset" refers to a rate change. "Recast" refers to a payment change.

On a normal fully-amortizing ARM, the interest rate resets on what is called the "Change Date" (five years out for a 5/1 ARM, three years out for a 3/27 ARM, each year thereafter for the 5/1 and every six months thereafter for the 3/27, etc.). The payment recasts exactly one month after the rate resets. Mortgage interest is paid in arrears, so first you reset the rate, then the following month you recast the payment. "Recast" is really just a shorter word for "reamortize": you take the new interest rate, the current balance, and the remaining term of the loan, and recalculate a new payment that will fully amortize the loan over the remaining term.

On an interest-only ARM with a rate change that happens during the interest-only period, the rate resets on the Change Date and then the interest payment is recalculated on the next payment date. I wouldn't tend to use the term "recast" here since with an IO, you aren't actually amortizing or "casting" a new payment, just adjusting the interest due given current balance and new rate. The big issue with IOs is the end of the IO period, when the payment has to be amortized over the remaining term. This date is what I would call the "recast" date of an IO. It may or may not coincide with the first interest rate reset date. Some 5/1 IOs, for example, reset and recast both at the end of five years. Some have a 10-year IO period, meaning they reset annually between years 5-10 but do not recast until year 10. If the rate resets to a higher rate in that period, the required IO payment increases, but not as much as it will when the recast hits and principal must also be repaid on a 20-year schedule.

On a typical Option ARM, the rate resets monthly beginning as early as the first month of the loan. The payment is adjusted, but not recast, annually; usually the payment increases by no more than 7.5% each year. It is that mismatch between rate reset and payment change that actually creates the potential for negative amortization; the "minimum payment" gets outstripped by the actual interest due because it increases much more slowly than the rate does.

Option ARMs do not "recast" until the sooner of 1) the loan reaching its balance cap or 2) the first "scheduled" recast date, which is usually 60 months from origination. What you see in the Business Week chart is the difference between the two: the recast projections come a lot earlier if you look at how close loans are actually getting to their balance caps, rather than just assuming they'll all recast on their five-year anniversary.

By and large, the biggest danger for Option ARMs and IO ARMs is the recast date, not the first or subsequent rate reset dates. However, for any ARM borrower who qualified at the highest possible debt-to-income ratio they could manage, any payment change, even one not quite as shocking as the recast on an OA or an IO, can tip the balance. As we are talking in this specific context about Alt-A, I for one believe that most of these loans did stretch too far in the beginning, and so even first rate resets on IOs or fully-amortizing ARMs will cause a marked increase in delinquencies in the absence of the borrower's ability to refinance at reset into a new discounted ARM, which will be the case for some time.

I hope that clears it up a bit, at least for the next week or two.

Posted by Tanta "

This is unusual in that the bidders are picking over the carcass in public (usually the FDIC is more secretive about bank seizures)

TO BE NOTED: From Calculated Risk:

"FDIC Receives Bids for BankUnited

by CalculatedRisk on 5/19/2009 10:31:00 AM

Form Bloomberg: WL Ross, Carlyle Group Said to Make Bid for BankUnited Assets

WL Ross & Co. and private-equity firms including Carlyle Group made a bid to buy BankUnited Financial Corp. assets out of receivership from the government, a person familiar with the matter said.

The firms, which also include Blackstone Group LP and Centerbridge Capital Partners LLC, submitted their offer to the Federal Deposit Insurance Corp. this morning ...
emphasis added

"Out of receivership" says it all. This is unusual in that the bidders are picking over the carcass in public (usually the FDIC is more secretive about bank seizures).

Posted by CalculatedRisk "

Total housing starts were at 458 thousand (SAAR) in April, the all time record low

TO BE NOTED: From Calculated Risk:

"Housing Starts at Record Low in April

by CalculatedRisk on 5/19/2009 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 458 thousand (SAAR) in April, the all time record low. The previous record low was 488 thousand in January (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 368 thousand (SAAR) in April; just above the revised record low in January (357 thousand).

Permits for single-family units were 373 thousand in April, suggesting single-family starts will remain at about the same level in May.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Note that single-family completions of 549 thousand are still significantly higher than single-family starts (368 thousand). This is important because residential construction employment tends to follow completions, and completions will probably decline further.

It is still too early to call the bottom for single family starts in January, however I do expect housing starts to bottom sometime in 2009.

Posted by CalculatedRisk "

Just more evidence of severe credit problems at the commercial banks

TO BE NOTED: From Calculated Risk:

Fed: Delinquency Rates Surged in Q1 2009

by CalculatedRisk on 5/18/2009 05:07:00 PM

The Federal Reserve reports that delinquency rates rose sharply in Q1 in all categories.

Click on graph for larger image in new window.

This graph shows the delinquency rates at the commercial banks for residential real estate, commercial real estate and consumer credit cards.

Commercial real estate delinquencies (6.4%) are rising rapidly, and are at the highest rate since the early '90s (as delinquency rates declined following the S&L crisis).

Residential real estate (7.91%) and consumer credit card (6.5%) delinquencies are at the highest levels since the Fed started tracking the data (since Q1 '91).

Although there is credit deterioration everywhere, the rise in these three categories is especially significant. There was also a significant increase in C&I delinquencies (commerical & industrial).

Note: The Fed defines commercial as "construction and land development loans, loans secured by multifamily residences, and loans secured by nonfarm, nonresidential real estate", and many of the problems are probably in the C&D loans. These are the loans that will probably lead to the closure of many regional banks.

Also check out the charge-off rates. The charge-off rate for residential real estate increased from 1.58% to 1.8, and for consumer credit cards from 6.33% to 7.49%.

Just more evidence of severe credit problems at the commercial banks.

Posted by CalculatedRisk "

This shows that retail sales fell off a cliff in late 2008, and are still declining - but at a slower pace.

TO BE NOTED: From Calculated Risk:

"Retail Sales Decline in April

by CalculatedRisk on 5/13/2009 02:07:00 AM

On a monthly basis, retail sales decreased 0.4% from March to April (seasonally adjusted), and sales are off 11.4% from April 2008 (retail and food services decreased 10.1%).

The following graph shows the year-over-year change in nominal and real retail sales since 1993.

Click on graph for larger image in new window.

To calculate the real change, the monthly PCE price index from the BEA was used (April PCE prices were estimated as the average increase over the previous 3 months).

Although the Census Bureau reported that nominal retail sales decreased 11.4% year-over-year (retail and food services decreased 10.1%), real retail sales declined by 11.9% (on a YoY basis).

The second graph shows real retail sales (adjusted with PCE) since 1992. This is monthly retail sales, seasonally adjusted.

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

This shows that retail sales fell off a cliff in late 2008, and are still declining - but at a slower pace.

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $337.7 billion, a decrease of 0.4 percent (±0.5%)* from the previous month and 10.1 percent (±0.7%) below April 2008. Total sales for the February through April 2009 period were down 9.2 percent (±0.5%) from the same period a year ago. The February to March 2009 percent change was revised from -1.2 percent (±0.5%) to -1.3 percent (±0.3%).

Retail trade sales were down 0.4 percent (±0.7%)* from March 2009 and 11.4 percent (±0.7%) below last year. Gasoline stations sales were down 36.4 percent (±1.5%) from April 2008 and motor vehicle and parts dealers sales were down 20.7 percent (±2.3%) from last year.

No green shoots here.

Posted by CalculatedRisk "

There has been a race between declining sales and declining inventory.

TO BE NOTED: From Calculated Risk:

"Update on Inventory Correction

by CalculatedRisk on 5/13/2009 11:05:00 AM

The Q1 GDP report showed a strong inventory correction is under way, with the BEA reporting inventories declined -136.8 billion (SAAR) in Q1. The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed more evidence of declining inventories.

Click on graph for larger image in new window.

The Census Bureau reported:

Manufacturers' and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,404.1 billion, down 1.0 percent (±0.1%) from February 2009 and down 4.8 percent (±0.3%) from March 2008.

The above graph shows the 3 month change (annualized) in manufacturers’ and trade inventories. The inventory correction was slow to start in this recession, but inventories are now declining sharply.

However, even with the sharp decline in inventories, the inventory to sales ratio was flat in March at 1.44.

There has been a race between declining sales and declining inventory. And even if sales start to stabilize, inventory levels are still too high, and further inventory reductions are coming.

Posted by CalculatedRisk "

This research suggests that MEW played a significant role in suppressing the saving rate too

TO BE NOTED: From Calculated Risk:

"MEW, Consumption and Personal Saving Rate

by CalculatedRisk on 5/13/2009 09:29:00 PM

Here is a new paper on Mortgage Equity Withdrawal (MEW): House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis by Atif Mian and Amir Sufi (both University of Chicago Booth School of Business and NBER) (ht Jan Hatzius)

From the authors abstract (the entire paper is available at the link):

Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity. Money extracted from increased home equity is not used to purchase new real estate or pay down high credit card debt, which suggests that consumption is a likely use of borrowed funds. Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates. Homeowners in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008. Our estimates suggest that home equity based borrowing is equal to 2.3% of GDP every year from 2002 to 2006, and accounts for over 20% of new defaults in the last two years.
emphasis added

A couple of key points:

"[W]e estimate that the average homeowner extracts 25 to 30 cents for every dollar increase in home equity."

"[T]hese findings lend support to the view that home equity-based borrowing is used for consumption."

And this brings us to the personal saving rate.

In an earlier post I argued that the saving rate declined into the early '90s because of demographic changes, however I expected the saving rate to start to rise as the boomers reached their mid-40s (in the late 1990s). Obviously this didn't happen.

I posited that the wealth effect from the twin bubbles - stock market and housing - had led the boomers into believing they had saved more than they actually had.

This research suggests that MEW played a significant role in suppressing the saving rate too. And since the Home ATM is now closed, this is more evidence that the saving rate will increase (probably back to 8% or so) - and keep pressure on the growth of personal consumption expenditures (PCE).


For background, here are couple of graphs:

Click on graph for large image.

The first graph shows the annual saving rate back to 1929.

Notice that the saving rate went negative during the Depression as household used savings to supplement income. And the saving rate rose to over 25% during WWII.

There is a long period of a rising saving rate (from after WWII to 1974) and a long period of a declining saving rate (from 1975 to 2008).

Some of the change in saving rate was related to demographics. As the large baby boom cohort entered the work force in the mid '70s, the saving rate declined (younger families usually save less). But, as I noted above, I expected the saving rate to start to increase in the last '90s.

And here are the Kennedy-Greenspan estimates (NSA - not seasonally adjusted) of home equity extraction through Q4 2008, provided by Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

NOTE: Anyone who wants the Equity Extraction data, please see this post for a spreadsheet and how to credit Dr. Kennedy's work.

This graph shows what Dr. Kennedy calls "active MEW" (Mortgage Equity Withdrawal). This is defined as "Gross cash out" plus the change in the balance of "Home equity loans".

This measure is near zero ($7.2 billion for the quarter) and is an estimate of the impact of MEW on consumption. When people refinance with cash out or draw down HELOCs, they usually spend the money.

Posted by CalculatedRisk "

All of these indicators are still too high, but there has been progress.

TO BE NOTED: From Calculated Risk:

"Credit Crisis Indicators

by CalculatedRisk on 5/03/2009 03:53:00 PM

It has been some time, so here is a look at few credit indicators:

First, the British Bankers' Association reported Friday that the three-month dollar Libor rates were fixed at 1.007%. The LIBOR was at 1.30% a few weeks ago, and peaked at 4.81875% on Oct 10, 2008. The dollar LIBOR might break below 1.0% this week.

Click on graph for larger image in new window.

There has been improvement in the A2P2 spread. This has declined to 0.56. This is far below the record (for this cycle) of 5.86 after Thanksgiving, but still above the normal spread.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

Meanwhile the TED spread has decreased further over the last week, and is now at 86.39. This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 463 on Oct 10th and a normal spread is around 50 bps.

The third graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

The spread has decreased sharply over the last couple of weeks. The spreads are still very high, especially for lower rated paper.

The Moody's data is from the St. Louis Fed:

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

This graph shows the at the Merrill Lynch Corporate Master Index OAS (Option adjusted spread) for the last 2 years.

This is a broad index of investment grade corporate debt:

The Merrill Lynch US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

Back in early March, Warren Buffett mentioned that credit conditions were tightening again - and this was probably one of the indexes he was looking at. Since March, the index has declined.

All of these indicators are still too high, but there has been progress.

Posted by CalculatedRisk "

Continued claims are now at 6.27 million - the all time record.

TO BE NOTED: From Calculated Risk:

April Economic Summary in Graphs

by CalculatedRisk on 4/30/2009 04:00:00 PM

Here is a collection of real estate and economic graphs for data released in April ...

Click on graphs for larger image in new window.
********************
New Home Sales in March

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Note the Red columns for 2009. This is the lowest sales for March since the Census Bureau started tracking sales in 1963. (NSA, 34 thousand new homes were sold in March 2009; the previous low was 36 thousand in March 1982).

From: New Home Sales: 356 Thousand SAAR in March

********************
Housing Starts in March

Total housing starts were at 510 thousand (SAAR) in March, just above the revised record low of 488 thousand in January (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 358 thousand in March; just above the revised record low in January (356 thousand).

From: Housing Starts: Near Record Low

********************
Construction Spending in February

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

"Residential construction was at a seasonally adjusted annual rate of $275.1 billion in February, 4.3 percent below the revised January estimate of $287.4 billion. Nonresidential construction was at a seasonally adjusted annual rate of $390.7 billion in February, 0.3 percent above the revised January estimate of $389.5 billion."

From: Construction Spending Declines in February

********************
March Employment Report

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

Nonfarm payrolls decreased by 663,000 in March. January job losses were revised to
741,000. The economy has lost almost 3.3 million jobs over the last 5 months, and over 5 million jobs during the 15 consecutive months of job losses.

The unemployment rate rose to 8.5 percent; the highest level since 1983.

From: Employment Report: 663K Jobs Lost, 8.5% Unemployment Rate

********************
March Retail Sales

This graph shows the year-over-year change in nominal and real retail sales since 1993.

On a monthly basis, retail sales decreased 1.1% from February to March (seasonally adjusted), but sales are off 10.7% from March 2008 (retail and food services decreased 9.4%). Automobile and parts sales declined 2.3% in March (compared to February), but excluding autos, all other sales declined -0.9%.

From: Retail Sales Decline in March

********************
LA Port Traffic in March

This graph shows the loaded inbound and outbound traffic at the port of Los Angeles in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Inbound traffic was 6% below last March and 35% above last month.

Outbound traffic was 9.8% below March 2008, and 25% above February.

From: LA Port Import Traffic Rebounds

********************
U.S. Imports and Exports Through February

The first graph shows the monthly U.S. exports and imports in dollars through February 2009. The recent rapid decline in foreign trade continued in February. Note that a large portion of the recent decline in imports was related to the fall in oil prices, however the decline in February was mostly non-oil related.

From: U.S. Trade Deficit: Lowest Since 1999

********************
March Capacity Utilization

This is some serious cliff diving. Also - since capacity utilization is at a record low (the series starts in 1967), there is little reason for investment in new production facitilies.

The Federal Reserve reported that "industrial production fell 1.5 percent in March after a similar decrease in February. For the first quarter as a whole, output dropped at an annual rate of 20.0 percent, the largest quarterly decrease of the current contraction. At 97.4 percent of its 2002 average, output in March fell to its lowest level since December 1998 and was nearly 13 percent below its year-earlier level.

From: Industrial Production Declines Sharply in March

********************
NAHB Builder Confidence Index in April

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) increased to 14 in April from 9 in March. The record low was 8 set in January.

The increase in April follows five consecutive months at either 8 or 9.

From: NAHB: Builder Confidence Increases in April

********************
Architecture Billings Index for March

"After a series of historic lows, the Architecture Billings Index (ABI) was up more than eight points in March. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI rating was 43.7, up from the 35.3 mark in February. This was the first time since September 2008 that the index was above 40..."

From: Architecture Billings Index Increases in March

********************
Vehicle Miles driven in February

This graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.6% Year-over-year (YoY); the decline in miles driven is worse than during the early '70s and 1979-1980 oil crisis.

From: DOT: U.S. Vehicle Miles Off 0.9% in February

********************
Existing Home Sales in March

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in March 2009 (4.57 million SAAR) were 3.0% lower than last month, and were 7.1% lower than March 2008 (4.92 million SAAR).

It's important to note that about 45% of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is under 3 million units SAAR.

From: Existing Home Sales Decline in March

********************
Existing Home Inventory March

This graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.74 million in March. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory increases slightly in March, and then really increases over the next few months of the year until peaking in the summer. This decrease in inventory was small, and the next few months will be key for inventory.

Also, most REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently there have been stories about a substantial number of unlisted REOs - this is possible, but not confirmed.

From: Existing Home Sales Decline in March

********************
Case Shiller House Prices for February

This graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.6% from the peak, and off 2.1% in February.

The Composite 20 index is off 30.7% from the peak, and off 2.2% in February.

From: Case-Shiller: House Prices Fall Sharply in February

********************
Homeownership Rate for Q1

The homeownership rate decreased to 67.3% and is now back to the levels of Q2 2000.

Note: graph starts at 60% to better show the change.

The homeownership rate increased because of demographics and changes in mortgage lending. The increase due to demographics (older population) will probably stick, so I expect the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%.

From: Q1 2009: Homeownership Rate at 2000 Levels

********************
Homeownership Vacancy Rate Q1

The homeowner vacancy rate was 2.7% in Q1 2009.

A normal rate for recent years appears to be about 1.7%. There is some noise in the series, quarter to quarter, so perhaps the vacancy rate has stabilized in the 2.7% to 2.9% range.

This leaves the homeowner vacancy rate about 1.0% above normal ...

From: Q1 2009: Homeownership Rate at 2000 Levels

********************
Rental Vacancy Rate for Q1

The rental vacancy rate was steady at 10.1% in Q1 2009.

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%.

From: Q1 2009: Homeownership Rate at 2000 Levels

********************
Unemployment Claims

This graph shows weekly claims and continued claims since 1971.

The four week moving average is at 637,250, off 21,500 from the peak 3 weeks ago.

Continued claims are now at 6.27 million - the all time record.

From: Unemployment Claims: Record Continued Claims

********************
Restaurant Performance Index for March

"The outlook for the restaurant industry improved in March, as the National Restaurant Association’s comprehensive index of restaurant activity rose for the third consecutive month. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 97.7 in March, up 0.2 percent from February and 1.3 percent during the last three months."

From: Restaurant Performance Index Increases Slightly

********************
New Home Sales: March

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

Sales of new one-family houses in March 2009 were at a seasonally adjusted annual rate of 356,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 0.6 percent (±19.0%)* below the revised February rate of 358,000 and is 30.6 percent (±10.7%) below the March 2008 estimate of 513,000.

From: New Home Sales: 356 Thousand SAAR in March

********************
New Home Months of Supply: March

There were 10.7 months of supply in March - significantly below the all time record of 12.5 months of supply set in January.

"The seasonally adjusted estimate of new houses for sale at the end of March was 311,000. This represents a supply of 10.7 months at the current sales rate."

From: New Home Sales: 356 Thousand SAAR in March

********************

Posted by CalculatedRisk "