The bailout process gathers steam

You've probably seen a lot of coverage today about what Treasury Secretary Henry Paulson is pushing -- systematic extension of teaser rates for borrowers facing rate and payment resets on their ARMs. This Wall Street Journal story has more details. The following is the key section dealing with the question of "why" this bailout program is happening now and "who" would potentially qualify:

"Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help.

"The creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.

"Mr. Paulson, who is philosophically opposed to federal meddling in markets, at first rejected a sweeping approach to loan modifications when the idea was floated by Federal Deposit Insurance Corp. Chairwoman Sheila Bair. But he shifted his position recently. He told The Wall Street Journal last week that it would be impossible to "process the number of workouts and modifications that are going to be necessary doing it just sort of one-off."

"As a drumbeat of bad news about housing has continued -- including news of fewer home sales, falling prices and higher foreclosures -- the Bush administration has come under pressure to be seen as actively addressing the problem."

Now, let's talk about it in more detail. I have long believed that a government-organized bailout of mortgage borrowers and lenders was all but inevitable. Indeed, whether you think it's right or not, the political reality is such that Congress, the President, and just about everyone else who depends on getting votes can't afford to sit around and do nothing while the housing market -- and the home equity of millions of voters -- continues to go up in smoke.

So is it "right?" Well, here's one particularly solid analysis from Minyanville of how we are essentially going the way of Japan -- taking the "crony capitalism" approach to lending risk, something that will come back to haunt us in the end. Here's another take from the Motley Fool on why a bailout is borderline ridiculous. On the flip side, here's a speech from Michael H. Krimminger, Special Advisor for Policy at the FDIC, addressing some of the suggested government efforts to keep people in their homes.

Personally, I understand the urge to "do something." But any solution has to be carefully tailored to direct relief to those who actually deserve it -- not speculators and not people who just made a dumb decision to buy more house than they could afford. And there's no way to get around the arguments that a bailout 1) will encourage future bubbles and 2) punish/stick it to those who acted prudently and didn't take on too much mortgage debt to buy overvalued homes.

The Fed can pooh-pooh the moral hazard argument all it wants, as Vice Chair Donald Kohn did earlier this week. But when you essentially ignore a massive future problem as it builds up (which is precisely what hands-off, monetary policymakers and regulatory officials did when all these stupid mortgages were being made in the first place) ... then turn around and try to protect borrowers and lenders from the consequences of their foolishness after the problems come home to roost ... you are sending out a powerful message. That message: Go ahead and speculate. We'll be there to bail you out when the going gets tough.

Construction spending weak across the board

We just got a peak at construction spending in the month of October. Here's what the data showed:

* The overall decline in construction spending -- 0.8% -- was much worse than the 0.3% decline that economists polled by Bloomberg had expected. It compared to a rise of 0.2% in September.

* Residential spending tanked 2%, the sharpest drop since a similar 2% fall in July. Spending is off a hefty 15.8% from a year earlier. You don't need me to tell you this is the result of the housing market slowdown. With inventory levels high, builders are cutting back on the construction of residential property.

* Nonresidential spending is also decelerating. It rose just 0.1%, down sharply from September's 1.4% rise. That was the weakest reading since September 2006, when spending fell 0.6%. The deceleration was fairly widespread, with spending decelerating in the lodging, office, and health care sectors. I believe you're going to see more evidence of a commercial real estate industry slowdown as we go forward.

Quick thoughts on Bernanke's comments tonight

Federal Reserve Chairman Ben Bernanke gave a speech tonight in North Carolina. The 100 words or less version/translation of the econo-speak: We're probably going to cut rates on December 11 because the credit markets stink, housing stinks, and consumer spending is starting to stink. The only thing that could stop us is a decent/strong November employment report (which comes out Dec. 7). Have a good evening.

Some stories to ponder on this busy day

I apologize for not keeping up with some of the latest developments here, but I have been busy, busy, busy today. So I'm going to keep this short ...

* Foreclosures are continuing to rise sharply from year-ago levels, according to RealtyTrac. As this story notes, they were almost double the level of October 2006 last month. Part of the problem is ARM resets. Part of the problem is that people just bought more house than they could afford.

Still another contributing factor: Declining collateral values. Price declines are both deeper and more widespread now than they've been in a long time. That means more borrowers who fall behind on payments are also finding themselves upside down -- owing more than their homes are worth. Sometimes the best of bad options is just to walk away, and more delinquent borrowers appear to be doing so now.

* The stock market is saying "All is well." The bond market is shouting "Fire" in a crowded theatre. So-called TED spreads are blowing out, LIBOR rates are soaring, and so on and so forth. If you wouldn't know a TED spread from a Bill & Ted's Excellent Adventure DVD, then read this piece. It'll catch you up on why this matters.

* And don't forget about the economy. The overall U.S. economy had been chugging along earlier this year despite the housing sector's "private recession." But times they may be a-changing. The Beige Book I discussed yesterday was chock full of crummy news. Then today, we learned that jobless claims are starting to break out to the upside.

Something to ponder: If foreclosures were already surging in an economy growing at 4.9% and unemployment low, what's going to happen now that growth is slowing and layoffs are on the rise?

October new home sales: Outlook not so good

Yesterday's existing home sales report was nasty, just nasty. But did the new home market fare any better? Let's get to the numbers ...

* Sales rose 1.7% to a seasonally adjusted annual rate of 728,000 from a revised 716,000 SAAR in September (previously reported as 770,000). On a year-over-year basis, sales were down 23.5% from 952,000 in October 2006. It's worth pointing out that the sales figures keep on getting revised lower. For instance, August's sales rate was originally reported at 795,000. That was then cut to 735,000 in last month's report and now, 717,000.

* For-sale inventory came in at 516,000 new homes. That was down 2.3% from 528,000 in September (previously reported as 523,000) and down 6.7% from 553,000 in October 2006. On a months supply at current sales pace basis, inventory was 8.5 months, down from 9 in September (previously reported as 8.3), but up from 7.1 a year earlier.

* Median prices off 8.6% to $217,800 in October from $238,400 in September (previously reported as $238,000). Prices were down 13% from $250,400 in October 2006, the sharpest drop since 1970.

The existing home sales data yesterday was unequivocally bad. The new home sales figures are a bit more mixed. The bad news? Sales are running around the lowest level in more than a decade. Moreover, prices are falling at the fastest rate since Richard Nixon was president and the Vietnam War was raging. The good news? Deep cutbacks in home construction are making a dent in for-sale inventory. We're still oversupplied, but a little less so.

Unfortunately, there are signs the broader economy is starting to follow the housing market south. Jobless claims are at a nine-month high, retail sales growth is nothing to write home about, and banks are getting stingier with loans. Those forces should conspire with high inventory levels to keep the housing market on the rocks until later in 2008 or 2009.

The latest from the Fed; Plus, how commercial real estate is starting to teeter

This morning's speech by Federal Reserve Vice Chairman Donald Kohn has the market all lathered up. Kohn basically opened the door to a rate cut at the FOMC's December 11 meeting by saying "we are going to have to take a look" at the credit market "turbulence."

Why is this such a big deal? Beats me. If you asked a room full of 100 Wall Street bond traders how many actually thought the Fed would stand up to the market and NOT cut rates, you'd probably see one, or maybe two, raise their hands. In other words, a cut was pretty much a given.

But stocks had gotten extremely oversold ... it's that time of year when we tend to get rallies ... and all it took was a spark. So there you go. The question is whether this rally is just like many of those '80s bands -- in other words, a "one hit wonder." After all, we sure saw a heck of a lot of this stuff (big sell-offs, followed by big short-term, short-covering rallies, followed by even bigger sell-offs) in the 2000-2002 bear market. I suppose time will tell.

Meanwhile, in the real world, the Fed just released its latest "Beige Book" report on the economy. It confirmed what I've been saying in a number of venues -- the credit markets are tightening, the housing market (still) stinks, and the overall economy is starting to soften.

Notably, this beige book also references the fact commercial real estate conditions are starting to deteriorate. I haven't talked as much lately about the bubble in commercial mortgage financing, or the ridiculous deals that were done in that part of the R.E. market over the past few years. But I was very vocal about it many months ago. Now, it looks like that part of the real estate market is heading south, too. This Bloomberg story has some interesting facts if you have the time to review.

If there's any good news in the Beige Book, it's that pass-through inflation, outside of food and energy, isn't all that big a deal. Now let's get to some excerpts (with key passages highlighted by me):

ON RETAIL/CONSUMER SPENDING:

"District reports indicated relatively soft retail spending; most retailers said that they were expecting a slow holiday season, with only small gains in sales volumes compared with last year."

and

"Reports on retail spending were downbeat in general, with several significant exceptions. Most Districts characterized sales as weak or indicated that they had softened, with a few reporting that the volume of sales had fallen relative to the preceding survey period or a year earlier."

and

"Among product categories, several Districts noted continued solid growth in sales of consumer electronics, while a few also noted that demand for luxury goods continued to rise at a healthy pace. By contrast, sales of automobiles and light trucks were flat to down, with contacts from several Districts expecting declines going forward."

ON HOUSING:

"Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amidst the ongoing slowdown. Most Districts pointed to further increases in the inventory of available homes, with the earlier tightening of credit conditions for mortgage lending continuing to create barriers for some buyers. Consequently, prices on new and existing homes sold were reported to be down on a short-term or year-earlier basis in most Districts. The pace of homebuilding remained very low in general, and builders continued to shelve projects and lay off workers in many areas; contacts generally do not expect a significant pickup in homebuilding until well into next year at the earliest."

ON COMMERCIAL REAL ESTATE:

"A few Districts reported emerging signs of declining demand for commercial space: this included assorted indicators of weaker demand in the major metro areas in the Boston District, reduced leasing activity in Philadelphia, commercial construction activity that was described as "flat to down slightly compared with a year ago" in Atlanta, and reduced transactions and rising vacancy rates in some parts of the San Francisco District. Construction of commercial and public buildings and infrastructure projects remained high in most Districts, however, partly offsetting low residential building activity and helping to limit losses in overall construction employment."

ON LENDING ACTIVITY:

"The glut of available homes continued, keeping downward pressure on prices and construction activity. The demand for commercial real estate remained strong in most areas but showed signs of leveling off in some. Reports from banks and other financial institutions suggested slower growth in overall loan demand, with some Districts noting a reduction in the volume of commercial and industrial lending. "

"Lending standards for construction projects and commercial real estate transactions tightened further in the New York and St. Louis Districts, and they remained tight more generally and reportedly held down the volume of lending for these categories in the Boston District. The reports indicated slight increases in delinquencies on commercial and industrial loans and slightly larger increases for commercial mortgages in many areas."

"Consumer lending was little changed on net, while residential mortgage lending continued its downward slide. More stringent credit conditions remained a constraint for residential mortgage lending in general, with additional tightening during the survey period reported by Chicago, Kansas City, and Dallas; scattered reports suggested slightly stricter standards on consumer loans as well. Mortgage delinquencies increased significantly in many areas, and some Districts pointed to slight deterioration in credit quality for consumer loans."

ON INFLATION:

"Upward pressures on the prices of final goods and services remained modest overall but were significant for products and services that rely heavily on food and energy inputs. Increases in the costs of energy and selected raw materials pushed up production and transportation costs for firms in various manufacturing and services sectors, although this was offset in part by price declines for lumber and transportation equipment. Food prices remained on an upward trajectory. Outside of products and services that rely heavily on energy and food inputs, final prices were reported to be largely stable or down a bit. Wage increases were moderate in general; upward wage pressures eased in a few areas where labor markets loosened slightly, although they remained strong for assorted groups of skilled workers."

October existing home sales -- Ugh.

We just got our latest look at conditions in the existing home market, courtesy of the National Association of Realtors:

* Sales fell 1.2% to a seasonally adjusted annual rate of 4.97 million from 5.03 million in September (previously reported as 5.04 million). That was slightly worse than economists' forecasts for a 0.8% decline to 5 million. The October sales rate was down 20.7% from 6.27 million in October 2006.

Combined sales are now running at the lowest level since the late 1990s, when the NAR began to report sales of single-family homes, condos, and co-ops all together. The "single-family home only" data goes back further. Sales there were 4.37 million, the same as September and the lowest since January 1998 (4.18 million).

* For sale inventory came in at 4.45 million single-family homes, condos, and co-ops. That was up 1.9% from 4.37 million in September (previously reported as 4.399 million units), and up 16.9% from 3.86 million in October 2006.

* On a months supply at current sales pace basis, inventory was 10.8 months, up from 10.4 months in September (previously reported as 10.5) and up from 7.4 months in October 2006. That's the highest reading on record for this indicator of the supply/demand imbalance. The single-family home only data goes back farther. There were 10.5 months of supply there, the worst going all the way back to July 1985 -- or more than 22 years ago (see above chart).

* Median prices dropped 1.2% to $207,800 in October from $210,400 in September (September's figure was previously reported as $211,700). On a year-over-year basis, prices were off 5.1% from $218,900 in October 2006, the biggest decline yet for this down cycle. In fact, home prices are now at their lowest level since March 2005.

My analysis: The march of dismal housing data continues. In October, overall home sales fell to the lowest level on record, single-family home sales fell to the lowest in almost 10 years, a key gauge of for-sale inventory hit the highest level in more than 22 years, and prices dropped by the most on record. Did I miss anything?

Seriously, though, this report provides even more clear evidence that the housing market is suffering. Tightening lending standards, reduced buyer confidence, and excess inventories are putting immense pressure on home builders and home sellers.

The Federal Reserve is trying to counter those pressures by cutting interest rates, and I suspect they'll do so again before the end of the year. But with the value of mortgage collateral declining and the overall economy weakening, it's going to be an uphill battle. I still am not looking for a lasting recovery until the back half of 2008 or sometime in 2009.

Wells announces a $1.4 Bln hit ... and Freddie's ready to ask for $6 Bln

Two late-breaking news developments are worth highlighting in mortgage-land ...

* First, Wells Fargo is announcing a hefty $1.4 billion charge to account for losses on home equity loans (what used to be called second mortgages before everything went politically correct). It also plans to stop originating certain loans through indirect channels -- meaning, through brokers and through correspondent arrangements, rather than its own retail branches.

Specifically, it won't make home equity loans to borrowers with CLTV (combined loan-to-value) ratios of 90% or greater, or to borrowers where Wells isn't also the first mortgage lender. Wells is also going to out its $11.9 billion bundle of 90%+ CLTV, wholesale-channel-originated home equity loans, its correspondent channel home equity loans, and all of the second loans where Wells isn't also the first mortgage holder into a "special liquidating portfolio." Wells estimates it will lose $1 billion in 2008 and 2009 on the portfolio.

* Second, Freddie Mac is going to sell $6 billion in preferred shares -- and slash its dividend by half -- to shore up its capital position. Freddie Mac didn't release any pricing details other than to say its offering is "expected to price in the near term."

Those wild and wacky bonds...

Who says stock traders have all the fun? Have you seen the craziness in the bond market these past couple of days? Yesterday's gigantic bond market rally is being followed up by a nasty sell-off today. The long bond futures were recently DOWN 1 18/32 in price (after finishing yesterday UP 1 29/32). Two-year yields, for their part, are soaring 18 basis points to 3.07% after dropping 19 basis points to 2.89% yesterday. Oh, and the dollar? After sinking to a new closing low yesterday, it's reversing to the upside today. Not a big move, but about 37 bps in the Dollar Index.

The catalyst for all these gyrations: The $7.5 billion capital injection into Citigroup from the state-owned Abu Dhabi Investment Authority. That has temporarily restored some confidence in the financial sector.

Case-Shiller HPI down 4.9%

The September S&P/Case-Shiller data was weak, as anticipated. Some details:

* The 20-city index fell 4.9% year-over-year in September. That's the largest drop on record and worse than the 4.3% decline in August. Between August and September, the decline was 0.85%.

* The 10-city index, which has a longer history, declined 5.5%. The biggest decline on record, for perspective sake, was 6.3% in April 1991.

* The decline for entire third quarter was 4.5% YOY, the most since Case-Shiller began tracking in 1988 and up from 3.3% in Q2.

* 15 of 20 metropolitan areas showed YOY price declines. Tampa was the worst off at -11.1%, with Miami (-9.96%) and San Diego (-9.64%) close behind. The biggest gains were recorded in Charlotte, N.C. (+4.72%) and Seattle (+4.69%).

You can read more about the report and the data here.

Meanwhile, November consumer confidence fell more than expected -- to 87.3 vs. 95.2 in October and expectations for a reading of 91. The percentage of Conference Board survey respondents who said they planned to buy a home in the next six months slumped further, to 2.5% from 2.7% in October. That's the lowest since June 1994.

housing data on deck ...

Things aren't looking good for stocks at the moment -- while the bonds are absolutely on fire. Mortgage and housing market weakness is clearly weighing on traders' minds and the underlying economy. Speaking of which, we'll get our next major batch of housing data this week, starting tomorrow with the S&P/Case-Shiller home price figures for September. I'll be on Bloomberg TV at 9 a.m. EST to discuss them if you happen to be by a television. Next up after that -- October existing home sales on Wednesday and October new home sales on Thursday.

T-bonds, money markets getting flaky again

Is stability in store for us? Is the mortgage mess "contained?" That's not what the bond and money markets are saying -- screaming, really. Long bond futures were recently up a full point in price. Meanwhile, the yield on the 10-year Treasury Note has dropped another 7 basis points to 3.93%.

LIBOR rates also continue to rise despite the general easing path the Federal Reserve has been on. Three-month, U.S.-dollar LIBOR rose to 5.05% this morning vs. a recent low of 4.87% on November 2. The Fed is reacting by arranging some long-term repurchase agreements -- $8 billion worth.

UPDATE: This latest move up in bond prices/drop in Treasury yields roughly coincided with sharp intraday spikes down in shares of Fannie Mae and Freddie Mac . No reason that I can find for the move so far.

UPDATE2: Bonds are flying ... and I mean flying. Long bond futures are now up a whopping 2 8/32 points.

Shiller on housing, mortgage fixes

I hope everyone had a great Thanksgiving holiday weekend. It's hard to believe we're almost done with 2007 -- a year that will surely go down as one of the most interesting for the credit markets in a long, long time.

Anyway, there was an interesting piece in the New York Times from Robert Shiller yesterday. If you missed it, he discusses some of the possible "fixes" for the housing and mortgage mess. It's worth noting that he is implying the downturn now could be one of the most severe for the housing market since the Great Depression.

On a different note, I had the pleasure of contributing to a documentary on the housing bubble a couple of weeks ago. The show, "Despres de la bombolla" (forgive my lack of accent marks -- I can't type them on Blogspot), was produced by a TV network in Spain "Televisio de Catalunya," somewhat similar to PBS here in the States. Anyway, if you know the Catalan language, and would like to watch, it's now available online at this link.

A little gallows humor for the holidays

This made me laugh ...

Q3 home price data just out from the NAR

The National Association of Realtors compiles data on the change in home prices for metropolitan areas around the country. It comes out once per quarter. So what did the just-released Q3 report show:

* Nationwide, median prices were down 2% from a year earlier. That's a larger decrease than the 1.6% drop in Q2 and the most since Q4 2006 (when the decline was 3.8% YOY). The West fared the worst (-3.8%), followed by the South (-3.6%). The Midwest showed a small gain (+0.5%), while the Northeast was up 3.2%.

* Out of 150 metropolitan areas surveyed, 93 (62%) showed an increase in median prices from a year ago. Prices fell in 54 metros (36%), while prices were unchanged in the remaining 3. That's slightly worse than Q2, when there were gains in 97 of 149 metros (65%) and declines in 50 metros (34%), plus 2 unchanged markets.

* The markets with the biggest gains were Bismarck, North Dakota (+15.1%), Salt Lake City, Utah (+14.1%) and Yakima, WA (+13.6%). Other markets showing notable gains were sprinkled throughout the country, with concentrations in Texas and the Pacific Northwest.

* Many of the worst markets were concentrated in Florida and California (with Nevada and parts of the Midwest also faring poorly). Prices were down 12.4% in Palm Bay-Melbourne, FL, down 10.5% in Sacramento-Roseville, CA, and down 10.4% in Sarasota-Bradenton-Venice, FL.

The latest Realtors' figures confirm that the housing market has taken a turn for the worse. Price declines were both a bit deeper and a bit more widespread in the third quarter. In this kind of market, selling is no longer as much about "location, location, location." It's about "price, price, price." Buyers are looking for bargains and sellers are being forced to reduce prices to get deals done. As long as mortgage market conditions continue to tighten up, and inventory levels remain extremely high, home prices should continue to slump gradually.

Some morning headlines to ponder

Not all of us are on the road for the Thanksgiving holiday! Some working stiffs, myself included, must toil on in obscurity. Sigh. Okay, self-pity over. Let's look at some morning headlines ...

* The Japanese yen is surging anew, taking out the 109 level and technical resistance that dates back to September 2005 and May 2006. If this move can hold and/or gather steam, it'll be a sign of increasing risk-aversion and increasing unwinding of the "yen carry trade." You can read more about what that is and how it works here.

* Treasury Secretary Henry Paulson is acknowledging what I have been saying for a long time -- namely that the mortgage problems are NOT contained to subprime and that the surge in defaults is NOT over. In fact, it's going to get worse in 2008. You can read more of his interview with the Wall Street Journal here.

* Paulson is aggressively lobbying mortgage servicers to rework borrower loans. One idea: Freeze interest rates on ARMs, rather than let them adjust, for borrowers who are current on their loans and can afford payments at the teaser rate. Meanwhile, in California, Governor Arnold Schwarzenegger announced a deal with major servicers like Countrywide and GMAC to initiate freezes for some borrowers in his state. I haven't seen many details on the scope of the modifications.

* The credit markets remain extremely unsettled. The cost of buying credit default swaps, or insurance, on bank debt has surged to the highest on record. U.S. LIBOR rates have started ticking up again as well. The cost of interest rate swaps has soared as well.

* Oh and here's a just-in-time update from our illustrious former Fed Chairman Alan Greenspan, courtesy of Bloomberg:

"Former Federal Reserve Chairman Alan Greenspan said recent signs that a collapse in credit tied to subprime-mortgage lending was ending have proven wrong.

"'The progress has come to a halt' in recent weeks, Greenspan said at a business forum in Toronto today. 'The reason is increasing recognition that it's going to take a long while to get rid of those excess inventories of homes in theU.S.'"

To which I say, in very businesslike terms: "Duh." Greenspan has been so out to lunch on the housing and mortgage markets for the past few years -- both as a policymaker and a pundit -- that he should just come out and admit he has no idea what he's talking about. I still can't forget this gem of a forecast just over a year ago, where Greenspan said the "worst may well be over." And the utter lack of regulatory oversight during the housing and mortgage bubble is simply unforgivable.

Market massacre; Fed update

Just some bullets ...

* Freddie Mac shares are now down 33% on the day, the worst one-day plunge since the company went public in 1988, per Bloomberg.

* The spread between yields on agency (FNM and FRE) mortgage-backed securities and Treasuries has widened to about 171 basis points. That's the worst since the depths of the last bear market in October 2002.

* An S&P index that tracks the home building sector was recently suffering its worst single-day plunge since 2001.

Is this the mother of all plunges unfolding? Or are we set up for the mother of all reversals? It's worth pointing out that rumors of an emergency Fed rate cut made the market rounds overnight. That helped knock another leg out from under the dollar, with the euro breaching the $1.48 level earlier today. Meanwhile, around 2 p.m., we'll get the minutes from the Fed's October 30-31 meeting -- and the Fed's first set of expanded economic forecasts and discussions.

UPDATE: Meeting minutes (PDF link) suggest Fed members believed the economy was improving, but that weakness could redevelop if financial market turmoil returned. In case you haven't noticed, it has. Meanwhile, the Fed's forecasts for 2008 growth and core inflation were lowered slightly.

October housing starts

October housing starts and building permits data just hit the tape. The details?

* Starts rose 3% to 1.229 million units at a seasonally adjusted annual rate from a 1.193 million rate in September. September's rate had previously been reported as 1.191 million units. On a year-over-year basis, starts were down 16.4% from 1.47 million in October 2006.

* Building permit issuance fell for the fifth month in a row -- by 6.6% to 1.178 million from 1.261 million. The September figure was revised from 1.226 million units. On a year-over-year basis, permits were off 24.5% from 1.56 million in October 2006. The October 2007 reading was the lowest since July 1993 (1.174 million).

* Regionally, starts rose in three of four areas (the Northeast, by 8.5%, the West, by 5.8%, and the Midwest, by 21.1%). They dropped 4.6% in the South. Permit issuance was split, with gains in two regions (Northeast, +2.1%, and West, +4.4%) and declines in the two others (-13.1% in the South, and -8.8% in the Midwest).

* Breaking down the numbers by property type, single family starts dropped 7.3% -- the seventh consecutive monthly decline. Single family starts are now running at an annual rate of just 884,000, the lowest level since October 1991. Multifamily starts jumped by 44.4%, offsetting the previous month's anomalous 35.9% drop and then some. Permit issuance dropped 8% for single-family homes and 3.4% for multifamily. Single-family permit issuance hasn't been this low since November 1991.

Overall starts were a bit better than expected thanks to a big pop in multifamily construction. But look behind the headlines and you see that the housing recession is continuing to deepen. Case in point: Both starts and permit issuance in the single family home market have plunged to the lowest level since 1991. In fact, they've declined for seven months in a row.

If there's an upside to all this, it's that lower construction activity will eventually bring housing supply back in line with demand. But it'll take a while. We have roughly 150,000 to 200,000 excess new homes on the market and about 2 million more existing homes than is customary. Meanwhile, the "demand" side of the housing equation is coming under pressure from tightening lending standards. More banks are tightening lending standards on mortgages now than at any time on record.

Bottom line: Until we see some stabilization in both supply AND demand, the elusive housing recovery is going to keep getting pushed out into the future.

Freddie Mac attack

Wow -- there's some nasty news out of the Government Sponsored Enterprise Freddie Mac this morning. But before I get to it, let's review just what kind of company Freddie Mac is.

Freddie and sister firm Fannie Mae buy mortgages from lenders for their own portfolios. They also help lenders bundle home loans into mortgage-backed securities for sale to investors. They charge lenders a "guarantee" fee and assume the credit risk during that process. If the underlying borrowers behind the mortgages in the MBS default, Fannie Mae ensures mortgage bond investors get timely payments of principal and interest anyway. Together, the two companies own or guarantee loans representing roughly 40% of the U.S. mortgage market.

That's a great business model when the housing and mortgage markets are in good shape. It's a terrible one when those markets are experiencing the worst downturn in modern U.S. history, as they are now.

Indeed, a few days ago, we learned that Fannie Mae's third-quarter loss more than doubled to $1.39 billion due to derivatives contract hits and rising credit costs. And the rabbit hole reportedly may go even deeper. A Fortune article the other day noted that Fannie Mae changed the way it calculates its credit loss ratio, a measure of bad loans as a percentage of total loans. That made its credit loss ratio look better, but some are questioning whether the change was a valid one. Fannie Mae held a conference call to try to assuage investor fears, but it failed miserably. The stock kept declining.

Now, this morning, Freddie Mac is out on the tape saying it lost a hefty $2.02 billion in the third quarter. That's a huge jump from $715 million a year earlier. It also slashed the value of net assets by roughly $8.1 billion. Moreover, its credit costs (provisions for losses related to souring loans and foreclosed property) skyrocketed to $1.2 billion from $112 million a year earlier. Freddie Mac also said it has hired Goldman Sachs and Lehman Brothers to help the firm raise capital. And by the way, the firm is warning that it could slash its Q4 dividend by 50%.

The stock has already dropped from around $60 to $37.50 at yesterday's close. It was recently trading down to $32 and change in the premarket.

Housing market index hugging its lows

The National Association of Home Builders just released its latest monthly index. The Housing Market Index tracks what home builders think about the state of business. In November ...

* The overall Housing Market Index held steady at 19 (October's reading was revised up by a point from the originally reported level of 18). That was slightly better than the consensus forecast of a decline to 17. But a reading of 19 is still the lowest since the NAHB started publishing its index in 1985. It's also well off the year-ago level of 33 and the cycle peak of 72 in June 2005.

* Among the subindices, the index measuring present single family home sales remained at 18. The index measuring expectations about future sales dipped a point to 25 from 26, while the index measuring prospective buyer traffic inched up to 17 from 15.

* Regionally, the index measuring prospective buyer traffic rose in two regions (the West -- to 18 from 15 -- and the Northeast -- to 27 from 26). It dropped in the Midwest -- to 13 from 14 -- and the South -- to 19 from 21.

November looks like another crummy month for the housing industry. The NAHB is blaming negative media reports for the weakness. But that's nothing compared to the tough underlying fundamentals. In no particular order, they include: the tightening mortgage market, slumping consumer confidence, rising jobless claims, a weakening economy, and excess housing inventories. These forces should continue to weigh on home sales and home prices well into next year -- no matter what's on the front pages of the nation's newspapers.

Goldman Sachs: Mortgage mess to curtail lending by $2 trillion

I've read enough reports and stories about the potential fallout from the mortgage mess to make my head spin. Most are very well-reasoned and informative. But some really stand out, like a Goldman Sachs report just published by the firm's Chief Economist Jan Hatzius

He concluded the global credit market slump could cut global lending activity by $2 trillion, roughly 7% of the total amount of U.S. household, corporate and government debt outstanding. That estimate assumes financial firms will reduce lending by an amount equal to 10 times the loss of capital they experience.

Interesting research to say the least. You can read a Reuters story on the report here, and a Bloomberg story on it here.

Meanwhile, on the economic front, Fed Governor Randall Kroszner tried to dampen expectations for more interest rate cuts. He said the Fed knows the economy will experience a "rough patch," adding:

"Home sales seem likely to weaken further given the difficulties faced by some potential buyers in obtaining a mortgage and, perhaps, some concerns on their part about buying into a falling market. Moreover, with the inventory of unsold homes already quite high relative to sales, a further weakening of demand is likely to prompt additional cutbacks in construction.

"In the mortgage market, two considerations suggest that conditions for subprime borrowers will get worse before they get better. First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house."

But Kroszner also implied that officials believe the rate cuts to date should be enough to restore growth over time. Specifically, he said:

"Looking further ahead, the current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate."

I doubt that's what Wall Street wants to hear, but it is what it is. I think it's undeniable that the economy is slowing right now. The latest datatpoint this morning showed that industrial production dropped 0.5% in October, vs. forecasts for a 0.1% gain. In fact, production declined in all three sub-categories (manufacturing, mining, and utilities). Capacity utilization (a measure of how much available productive capacity is being used) dipped to 81.7%. That too was below expectations.

NovaStar fading...

NovaStar Financial -- one of the companies that rode the subprime boom to dizzying heights -- appears to be the latest one whose star is fading. The company's shares peaked at an adjusted $250 in 2004. They're off about 50% today to around $2. The news from AP ...

"NovaStar Financial Inc.'s stock plummeted Thursday after the beleaguered home lender posted a nearly $600 million loss, said its shares are likely to be booted off the New York Stock Exchange and warned of heightened risk of bankruptcy.

"Many of NovaStar Financial's competitors -- including American Home Mortgage Investment Corp. and New Century Financial Corp. -- have gone out of business this year. NovaStar Financial has laid off much of its staff and stopped issuing mortgage loans this year as the mortgage industry plunged into distress.

"For the third quarter, NovaStar lost $598 million. This stemmed from various charges reflecting how much value its portfolio has lost."

For some perspective on the size of NovaStar, the firm originated $11.2 billion in nonconforming loans in 2006. That compares with almost $60 billion at New Century Financial, which flamed out spectacularly earlier this year.

Rising inflation and more write-downs ...

Some early headlines to ponder over your bagel and coffee ...

* The Consumer Price Index climbed 0.3% last month, while core prices (excluding food and energy) gained 0.2%. Those were in line with what the economists were expecting, but they're definitely not good news. Indeed, the year-over-year inflation rate is now running at 3.5%, the fastest pace since August 2006. Core prices are up 2.2%, outside of the 1% to 2% range that analysts presume the Fed would like to see.

How did the categories break down? Medical costs jumped 0.6% and transportation prices rose 0.4%. Food and beverage costs were up 0.3% ... housing costs were up 0.2% ... and education and communication prices were up 0.4%. Apparel was the lone bright spot, with prices flat between September and October. If you're a real inflation wonk and want even more details, you can read the whole report here.

* There's some "good" news out of the U.K. this morning. Barclays is "only" taking a $2.7 billion hit on its subprime exposure. Market scuttlebutt called for losses of up to $10 billion. More here. Of course, the rumor mill never stops churning. According to the Wall Street Journal, some are speculating that UBS will take a Q4 hit of around $7 billion.

In the early going, stock futures are weakening amid this news while bond prices are up a bit (and interest rates are, consequently, heading lower).

Money market rumblings

Money market funds -- you know, those "cash like" investments that are as close to risk-free as investments get -- are having some problems.

In a story called "Investor Safe Haven Becomes a Concern," the New York Times reports ...

"In another sign of turmoil in the credit markets, large investment firms, having sought out the high yields for their money market funds, are being forced to protect the funds from losses brought on by investments that no longer seem safe.

"The moves have cost the firms hundreds of millions of dollars, a price that could climb if credit market problems worsen."

Meanwhile, in a Barron's article this afternoon, we're learning of a very short-term bond fund managed by General Electric that's having problems. According to Barron's ...

"A SHORT-TERM INSTITUTIONAL BOND RUN MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.

"The setback at GE Asset Management's GEAM Trust Enhanced Cash Trust is the latest in a series of problems encountered by money-market and short-term bond funds from the turmoil in the mortgage and asset-securities markets.

"Legg Mason, Wachovia and Bank of America have had to provide financial support to their money-market funds to prevent their funds from "breaking the buck," or falling below the $1 asset value that money funds seek to preserve.

"The GE fund, totaling $5 billion, is an "enhanced" cash fund, meaning it seeks to provide a slightly higher yield than a money-market fund while preserving principal and maintaining an asset value of $1 per share."

The housing bubble and bust is the most visible consequence of the Fed's dramatic rate-cutting campaign earlier this decade. But lowering the federal funds rate to 1% had another, more subtle, yet just as important, impact on the capital markets -- it ignited a global search for yield.

Pension fund managers, bond fund managers, hedge funds, and other investors could no longer generate reasonable returns on less-risky securities, like U.S. Treasuries. So they plowed into esoteric, higher-yielding bonds, CDOs, CLOs, SIVs, and other vehicles. Now, many of those higher-risk securities are blowing up in investors' faces. And based on some of this reporting, we're getting dangerously close to the point where one or more money funds could break the sacrosanct $1 net asset value.

The latest on the economy ... and Fed projections

We're getting a fair amount of economic data this morning. So let me try to recap it quickly:

* The Producer Price Index rose just 0.1% between September and October, compared with forecasts for a 0.3% increase. The "core" PPI was flat, vs. a 0.2% forecast. However, the PPI is up 6.1% year-over-year, the highest reading since September 2005 (when the gain was 2.9%). The core PPI is up 2.5%, also the fastest since 9/05.

* Overall retail sales gained 0.2% in October, and 0.2% if you exclude autos. That was roughly in line with projections. Furniture sales were down 0.9%, reflecting weakness in the housing market, while food and beverage and gasoline station spending both climbed (0.4% and 0.8% respectively). This likely reflects inflation in food and energy prices. Spending in other categories (general merchandise at -0.1%, health stores at +0.2% and clothing at +0.1%) was relatively subdued.

* Meanwhile, Federal Reserve Chairman Ben Bernanke is talking about Fed economic forecasts today. He says the Fed will now publish forecasts about overall future inflation (as opposed to just "core" inflation), and will release its official forecasts quarterly (up from twice a year currently). There will also be some more detail added about the projections of individual Fed members.

The overall impact on the bond market? Prices are down and rates are up. The long bond futures were recently off a half-point, while 10-year note yields were recently up about 4 basis points to 4.30%. Stocks are up, while the dollar is modestly lower against some currencies (euro, Aussie), but up against others (Japanese yen, British pound).

September pending home sales inch higher

The National Association of Realtors just released data on pending home sales for September. This data series tracks contract signing activity vs. contract closings (which is what the regular monthly sales data tallies). That makes it a leading indicator for future closed sales. So what did the numbers show?

* Pending sales notched a small gain in September. Sales rose 0.2% between August and September, compared with forecasts for a 2% decline.

* However, the pending home sales index – at 85.7 – is still down 20.4% from 107.6 a year ago. The August reading was the lowest on record (The NAR has pending sales data going back to 2001).

* Pendings fell in two out of four regions of the country – down 10.1% in the Northeast and 0.1% in the West. Meanwhile, sales popped 5.4% in the Midwest and 1.5% in the South.

How would I characterize the September pending home sales data? Better than a sharp stick in the eye. Sales inched higher overall, compared with expectations for a decline. It seems the Federal Reserve's surprise interest rate cut may have helped bring a few buyers out of the woodwork.

But there are a few key flies in the ointment. First, the September reading is still the second worst on record. Second, a couple of home builders have indicated that the housing market deteriorated in October vs. September. And third, we're experiencing renewed credit turmoil -- something that's prompting lenders to tighten mortgage standards. Those don't bode well for the future. I still doubt we'll see a lasting market rebound until later in 2008 or possibly 2009.

Black October for local housing market

If you're a long-time reader of this blog, then you know that each month, I highlight some "unofficial" local sales data. It comes courtesy of the real estate brokerage firm Illustrated Properties. These figures never line up exactly with those provided by the Florida Association of Realtors. But they do tend to point toward the same trends. And based on the early data, it looks like we had a "Black October" for sales in the greater Palm Beach County, FL area.

Some details:

* There were just 484 sales last month, down from 782 a year earlier. That's a decline of 38.1%.

* The supply of homes for sale jumped to 24,823 from 21,479 a year earlier. That's a rise of 15.6% and it puts us back within spitting distance of the May-June inventory peak. Worse, it equates to a whopping 51 months worth of supply at the current sales pace.

* Lastly, the median price of an existing home plunged to $250,000 from $290,000 in October 2006. That 13.8% drop is the biggest decline I can recall seeing yet. "Average Days on Market" also surged to 150 from 116 a year earlier.

These figures are a stark reminder of just how much the Florida real estate market has soured in the past two years. The Federal Reserve is starting to cut interest rates in order to jump start sales. But it's up against tighter mortgage markets, declining consumer confidence, and a major supply overhang. In other words, home sellers are still in a tight spot, and will likely remain so for the foreseeable future.

Home Depot earnings sink, while builders put sales on hold

Just a few random notes while we await the release of September pending home sales (due out at 3 p.m. today rather than the customary 10 a.m. EST) ...

* Retailer Home Depot said third quarter earnings dropped to $1.1 billion, or 60 cents a share, from $1.5 billion, or 73 cents in the year-earlier period. Sales dipped for a second quarter, something that hasn't happened at Home Depot since 1982, per Bloomberg.

* Meanwhile, the Wall Street Journal notes that some home builders are just stopping home sales all together in certain communities. An excerpt:

"As the glut of unsold home remains stubbornly high and housing demand slides, home builders face a dilemma: to sell, or not to sell?

"Lennar Corp., for one, has joined the "not to sell" camp at its development in Orange County, Calif. The Miami company plans to finish building 259 homes -- the first phase of a 1,100-unit development in Irvine -- but it has decided not to sell any of them until the constrained mortgage market and swollen housing inventory improves.

"We are better off holding off on sales at this asset and not discounting as steeply as the market is discounting right now," says Emile Haddad, Lennar's chief investment officer, who oversees the company's large West Coast projects. "It doesn't make sense for us to sell it in an environment that as strained as it is right now."

"Mr. Haddad says Lennar will monitor the Orange County market on a monthly basis, but "this might be put on hold for the whole year of 2008." Lennar also is halting development of a large community planned near Angel Stadium of Anaheim, despite preparing the land to support the project."

E*Trade has 4.74 million retail accounts. Mine are among 'em.

You know how they say "A recession is when your neighbor loses his job. A depression is when you lose yours." How about a new twist: "A banking industry problem is when your neighbor's bank fails. A banking industry crisis is when yours does."

I couldn't help a little gallows humor as I sit here watching shares of E*Trade Financial implode. The stock plunged 59% today amid worries about the company's earnings, its mortgage holdings, and large potential writedowns. A Citigroup analyst went so far as to project a 15% change of bankruptcy for E*Trade ... a suggestion that E*Trade rebutted, referring to the comments as "irresponsible."

Frankly, this news is unsettling as a customer. You don't know what to believe. You don't want to go through the hassle of transferring assets, of having your funds locked up for a period of time, and all that. And ultimately, you have SIPC coverage as a nice backstop ... plus the possibility another broker could just swoop in and sweep up the firm at a bargain price, putting an end to the "crisis." But you also can't get that nagging voice out of the back of your head that it might be better to act sooner rather than later. What a mess.

$52 billion? $75 billion? Do I hear $400 billion?

Watching the loss estimates for the mortgage debacle is a little like watching a live auction. Analysts keep raising their paddles, and shouting out higher and higher numbers -- like they're bidding for a prized Picasso. Or maybe the more appropriate image is a foreclosure auction for Inland Empire homes.

Anyway, Credit Suisse published a July estimate of $52 billion. That was its projection of total write-downs related to the subprime mess. Pimco was a bit more aggressive in the spring -- $75 billion. Then a few days ago, Lehman Brothers put the price tag at $250 billion. And this morning, Deutsche Bank said a total hit of $300 billion to $400 billion is more realistic. That estimate includes write-downs that banks and brokers will take, as well as losses that investors in mortgage-related securities will eat.

Now do you see why I've been saying for so long that this downturn will ultimately prove to be the biggest housing and mortgage market bust in decades?

Meanwhile, it's worth noting that banks are trying to make progress on the Super-SIV/M-LEC plan (let's be honest, by the way ... it's a bailout program). The New York Times reported on some positive developments, from Wall Street's perspective, over the weekend. Click here for the full story. Personally, I like the image of top bankers celebrating with 12 packs of Bud Light. I'm guessing that similar high-level meetings among the elite of the global banking world in the spring would have been celebrated with bottles of Cristal. Boy how times change.

Wachovia drops a credit bomb and Fannie loses big bucks

Wachovia became the latest financial firm to enter the profit confessional booth this morning. It said its credit losses from the mortgage market have surged to $1.7 billion in the current quarter. It is setting aside up to $600 million for bad loans, and it said that CDOs linked to subprime mortgages lost $1.1 billion in value in October alone. In a conference call, the company is saying that the housing market is deterioration "very quickly," with Florida and California markets in the worst shape.

Meanwhile, at Fannie Mae, losses are mounting fast. The company's third-quarter net loss more than doubled to $1.39 billion, fueled by large losses on derivatives. The firm is finally getting caught up on its financial reporting, after being delinquent for ages due to accounting problems. Falling home prices and rising mortgage delinquencies helped drive credit losses up by $1.6 billion to $2 billion in the first nine months of 2007.

Who's next on the firing line? How much deeper does the rabbit hole go? All I can say is that we had the biggest housing and mortgage bubble in modern history. And now, we're experiencing one of the most severe busts. The financial toll is going to be large, very large.

More mortgage casualties...

Delta Financial is out after the bell announcing some significant problems. The non-conforming mortgage firm said it lost $39.6 million in the September quarter vs. year-ago net income of $8 million. It's also letting 470 workers go and seeking working capital to keep the business going. The commentary sounds downright grim (emphasis mine). Have a gander ...

"We are disappointed to report a loss for the third quarter,” explained Hugh Miller, president and chief executive officer. “A variety of unprecedented market events took place during the quarter, which had a negative impact on not only our earnings, but those of virtually every company in the lending sector. In response to these events, the Company took important steps during the quarter that enabled us to continue operating when many others were unable.

“But more recently, the secondary markets, which began to improve since September, took a turn for the worse, initially driven by the rating agencies’ sudden downgrade of tens of billions of dollars worth of mortgage-backed and related securities,” stated Mr. Miller. “This and other developments have severely limited the ability of companies in our sector to complete securitizations as a source of financing at this time."

Meanwhile, HSBC Holdings is ceasing mortgage-backed securities sales and trading in the U.S. The firm said it will jettison 120 workers as part of its exit from the business. HSBC recently shuttered its Decision One subprime lending business.

Bernanke: Rock, meet hard place

Federal Reserve Board Chairman Ben Bernanke's testimony before the Joint Economic Committee has just been released. My general sense is that the Fed is caught between a rock and a had place -- and Bernanke knows it. Specifically, economic growth is being threatened by tightening lending standards and the slumping housing market. But inflation pressures are building due to the slumping dollar and soaring commodity prices. How did his testimony address those facts? Here are a few excerpts (with emphasis mine in all cases):

EXCERPT #1 (on the overall economic state of affairs right now):

"Since I last appeared before this Committee in March, the U.S. economy has performed reasonably well. On preliminary estimates, real gross domestic product (GDP) grew at an average pace of nearly 4 percent over the second and third quarters despite the ongoing correction in the housing market. Core inflation has improved modestly, although recent increases in energy prices will likely lead overall inflation to rise for a time.

"However, the economic outlook has been importantly affected by recent developments in financial markets, which have come under significant pressure in the past few months. The financial turmoil was triggered by investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates. The continuing increase in the rate of serious delinquencies for such mortgages reflects in part a decline in underwriting standards in recent years as well as softening house prices. Delinquencies on these mortgages are likely to rise further in coming quarters as a sizable number of recent-vintage subprime loans experience their first interest rate resets."

EXCERPT #2 (on financial market turmoil impacting the real economy):

"To be sure, the recent developments may well lead to a healthier financial system in the medium to long term: Increased investor scrutiny of structured credit products is likely to lead ultimately to greater transparency in these products and to better differentiation among assets of varying quality. Investors have also become more cautious and are demanding greater compensation for bearing risk. In the short term, however, these events do imply a greater measure of financial restraint on economic growth as credit becomes more expensive and difficult to obtain. "

EXCERPT #3 (on the outlook for inflation):

"The Committee projected overall and core inflation to be in a range consistent with price stability next year. Supporting this view were modest improvements in core inflation over the course of the year, inflation expectations that appeared reasonably well anchored, and futures quotes suggesting that investors saw food and energy prices coming off their recent peaks next year. But the inflation outlook was also seen as subject to important upside risks. In particular, prices of crude oil and other commodities had increased sharply in recent weeks, and the foreign exchange value of the dollar had weakened. These factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well."

EXCERPT #4 (on the very latest economic data):

"In the days since the October FOMC meeting, the few data releases that have become available have continued to suggest that the overall economy remained resilient in recent months. However, financial market volatility and strains have persisted. Incoming information on the performance of mortgage-related assets has intensified investors' concerns about credit market developments and the implications of the downturn in the housing market for economic growth. In addition, further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity. The FOMC will continue to carefully assess the implications for the outlook of the incoming economic data and financial market developments and will act as needed to foster price stability and sustainable economic growth."

Again, the consistent message here is that the Fed is somewhat boxed in. Its past irresponsible monetary policy created a huge bubble in housing, which has since burst. That is flooding the banking system with bad loans, delinquencies, and foreclosures. The Fed probably wants to target that with more aggressive easing. But doing so risks weakening the dollar further and giving speculators even more easy money with which to pile into the commodities market. In other words, the threat of stagflation is very real.

NYTimes: Home Equity ATM drying up

There's a very interesting story in today's New York Times titled "Homeowners’ Reduced Equity May Slow Spending" The general gist of the piece: That as home prices fall, homeowners will have less equity to tap and spend via home equity loans and home equity lines of credit. What kind of numbers are we talking about? Here's an excerpt:

"From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data.

"But in the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly one-fourth, according to the Kennedy and Greenspan data."

And here's a bit more color on the potential impact on spending:

"Only a year ago, money taken out of houses was still more than 9 percent of the nation’s disposable income, Mr. Zandi calculated, using a sampling of Equifax credit reports to supplement Fed data. By this fall, it had dropped to about 5 percent, a difference of about $350 billion a year."

But is this really such a bad thing? I mean, am I the only person who thinks it's completely imprudent to "liquify" home equity and blow it on frivolous things? Just look at the person the Times selected to illustrate the "terrible" impact of this downturn in home equity on America. Marshall Whittey of Reno, Nevada, we're told, got married at an estate in Napa, honeymooned in Tahiti, bought a 21-foot boat and two flat-screen TVs, then "sold his old truck and bought a new one, he said, 'just ’cause I didn’t like the color.'" Now -- horrors -- he has to cut back because the housing ATM has run dry ... and an investment property he owns is probably underwater.

I don't know Mr. Whittey. And maybe I'm just old-fashioned. But when I see this stuff, I really have to wonder how we as Americans completely lost our collective mind during the bubble. Sigh.

Where to begin on a day like today?

I hardly know where to begin on a day like today. Keeping up with all the news and market developments is next to impossible. A few developments of note:

* Richmond Fed president Jeffrey Lacker and Fed Governor Frederic Mishkin are both out on the tape with some comments about the economy, lending, and risk. There isn't much new news in what they had to say, but if you're interested, you can check out coverage of Lacker here and Mishkin here.

* A Chinese functionary shook the heck out of the currency markets overnight by talking about the possibility of reserve diversification in that nation. China has accumulated a massive pile of reserves (more than $1.4 trillion and counting) and has been a large buyer of U.S. Treasuries (with about $400 billion at last count). If it does move more money out of the dollar and dollar-based assets, that's yet another negative for the greenback.

* The bond insurers are out pleading their case in the face of a total meltdown in their share prices. Ambac Financial Group said investors are wrongly assuming that mark-to-market losses in their holdings will result in actual claims being paid. Of course, not everyone agrees. Egan-Jones Ratings had some choice comments yesterday about how the insurers face "massive" losses.

* And there are some interesting analyst reports to mention. Royal Bank of Scotland says banks and brokers will have to take up to $100 billion of writedowns on so-called Level 3 assets -- assets whose value is essentially a "guess" based on theoretical estimates the companies holding those assets come up with, not actual market transactions. Comforting, eh? The blame for the writedowns lies with the Financial Accounting Standards Board's rule 157, which you can read more about here if you're looking for something to help you sleep.

Meanwhile, Morgan Stanley is out talking about how credit card companies are the next ones that will have to revise loss estimates higher amid a deterioration in consumer credit quality. That makes sense -- you can't just magically "refi away" your crushing card debt if you have no equity.

* Washington Mutual also said the housing and mortgage markets will continue to stink. And last but not least, JPMorgan Chase said it's not giving up on the SIV bailout fund. CEO Jamie Dimon said "a lot of people are working on it" in a Bloomberg story. I posted some brief thoughts on this M-LEC monster here.

UPDATE: New York Attorney General Andrew Cuomo's appraisal investigation has broadened to include Fannie Mae and Freddie Mac. Lots to follow here. You can read the latest press release here, the Fannie Mae and Freddie Mac responses, and my thoughts on the original investigation news here.

Today's dollar decline brought to you by the letters "C, A, and D"

If you haven't noticed, the U.S. dollar's steady transformation into confetti is continuing today, especially against the Canadian dollar (CAD is the abbreviation for the "Loonie" currency -- hence, the Sesame Street reference). In fact, Bloomberg now reports that the Canadian dollar is at its highest level against the USD -- roughly $1.08 -- in world history (or at least since Canada started floating its currency in 1950.)

Too bad my grandparents didn't hold on to that cabin on Lake Temagami. I used to love when our family vacationed there as a kid -- the canoeing, the fishing, the trips to the Bear Island trading post. And let's be honest, given the CAD-USD translation effect and the general boom in Canada's economy, I'm sure it'd be worth a pretty penny today!

But seriously, at some point even Helicopter Ben has to sit up and take notice of this dollar decline, doesn't he? It's the clear, #1 force (in my book) behind $97 oil and the surge in other dollar-denominated commodities. And it's going to fuel inflationary pressures, no matter what claptrap you may hear out of Washington about how inflation is "contained." We may finally get "official" confirmation of that fact on Friday, when October import price data is released.

More housing dispatches -- falling orders, rising writedowns

We're getting some more color on the housing and mortgage markets from a bunch of builders and lenders. So let's quickly go through the news ...

* Florida landowner and developer St. Joe said it lost $6.8 million, or 9 cents a share, in the most recent quarter. A year ago, it earned $6 million, or 8 cents a share. Sales dropped 36% and the firm took pretax losses of $20.4 million to write down the value of land, future home sites, and a wood products plant.

* Hovnanian Enterprises released some preliminary data about its performance in the fiscal fourth quarter that ended October 31. The company said net contracts dropped 10% from a year earlier, and that the cancellation rate climbed to 40% from 35%. It also noted that October was an ugly month, saying "the sales pace in most of the company's markets significantly deteriorated when compared of the sales pace of recent months."

* Beazer Homes, for its part, said it will take charges of up to $230 million to account for the reduced value of land. The firm said new home orders plunged 53% in the fourth quarter, and that its cancellation rate surged to 68%.

* Finally, embattled mortgage lender IndyMac Bancorp said it lost a hefty $202.7 million, or $2.77 per share, in the third quarter. The company had forecast a loss of up to 50 cents per share. It slashed its dividend in half and announced more than 1,500 layoffs. CEO Michael Perry dubbed this "the most severe downturn our industry has experienced in modern times."

Fed's latest quaterly loan officer data tells us the credit crunch is underway

Every quarter, the Federal Reserve conducts a study of bank loan demand and underwriting standards. The "Senior Loan Officer Opinion Survey on Bank Lending Practices" (yes, it's a mouthful!), in the words of the Fed, is designed to shed some light on "changes in the standards and terms of the banks' lending and the state of business and household demand for loans."

The latest survey (PDF link) was conducted in October; 52 domestic banks and 20 foreign banks with operations here in the U.S. responded. The results are reported in terms of "net tightening/loosening." Specifically, the Fed adds up the percentage of banks that either "tightened considerably" or "tightened somewhat" in a given loan category and nets that out against the percentage of banks that "eased somewhat" or "eased considerably." On this page, which has historical data, a positive percentage figure means more banks tightened than loosened; a negative percentage figure means more banks loosened than tightened.

So what did the just-released October survey show? Widespread tightening of lending standards. In other words, we have clear evidence of a nascent credit crunch. The details:

* A net 19.2% of respondents said they were tightening standards on Commercial and Industrial (C&I) loans to large and medium sized firms. That was the highest net tightening percentage
since Q1 2003.

* Spreads are widening. Specifically, Fed data shows that a net 34.6% of banks are charging wider spreads over their cost of funds on C&I loans to large and medium sized businesses. A quarter earlier, a net 32.1% of lenders reported they were making loans at tighter spreads. The October reading was the highest since Q3 2002, an indication that borrowing costs are going up for corporate borrowers.

* So what about residential real estate? No surprise there. Lenders are tightening the purse strings substantially. Please note: The Fed used to report data on overall residential mortgage standards. Now, it breaks the figures out into prime, nontraditional (payment option ARMs, Alt-A loans), and subprime categories .

With that caveat aside, the net percentage of lenders tightening on nontraditional mortgages jumped to 60% from 40.5% in the prior quarter. The net percentage of lenders tightening prime mortgage standards rose to 40.8% from 14.3%. The net percentage of lenders tightening subprime standards was roughly unchanged at 55.5% (vs. 56.3% in the prior two quarters).

For perspective sake, the overall mortgage tightening index last peaked at 32.7% in Q1 1991. So the tightening readings we're seeing now are UNPRECEDENTED in the history of the data.

* Commercial real estate financing is also getting harder to obtain. A net 50% of banks reported that they were tightening CRE standards. That was up from 25% in Q3 2007 and the highest reading since Q4 1990 (61.68%). This is a big deal. It's a sign that real estate lending fears are spilling over into the commercial mortgage market.

Write-downs, charges, and losses, oh my!

Forget lions, tigers, and bears. That's plenty of other news on Wall Street to scare the heck out of Dorothy this morning. Let's get right to it ...

* Citigroup jettisoned its Chief Executive Officer Chuck Prince over the weekend. The global bank also is on track to take another $8 billion to $11 billion in impairments on its subprime mortgage and bond book in the fourth quarter. It already took a $7 billion hit in Q3. The cost of debt default protection on Citigroup bonds has risen, while Fitch Ratings has lowered its Citigroup debt credit rating to AA from AA+.

* The Wall Street Journal reports that big lenders don't like the idea of allowing bankruptcy judges to restructure mortgage terms and conditions to help borrowers avoid foreclosure. Currently, judges can only restructure terms and conditions on unsecured, non-mortgage debt (credit cards and the like). Here's one excerpt of how things might work under proposed legislation:

"The new bill, sponsored by Reps. Brad Miller (D., N.C.) and Linda Sanchez (D., Calif.), would allow bankruptcy judges to change the interest rate and length of a mortgage for borrowers in bankruptcy, in an effort to avoid foreclosure. It could also potentially allow judges to change the balance of a loan. For example, if a borrower near foreclosure owed $125,000 on a house now worth $100,000, the judge could mark $25,000 as 'unsecured debt,' which would make it much harder for the bank to recover that portion."

* The Financial Times weighs in on why it's so darn hard figuring out who is losing how much on subprime mortgages and related securities. It's worth a read if you have the time. A key excerpt:

"When Merrill Lynch, the US bank, announced 10 days ago that it was taking $8bn-worth of losses on mortgage-related securities, bankers and regulators around the world reeled in shock. For the writedown was twice the size of the losses that Merrill had forecast just a two and a half weeks earlier – a “staggering” multi-billion dollar gap, as Standard and Poor’s, the US credit rating agency, observed.

"But last week, investors received an even more staggering set of numbers. As financial analysts perused Merrill’s results, some came to the conclusion that the US bank could be forced to make $4bn more write-offs in the coming months.

"These calculations were not limited to Merrill: after UBS unveiled $3.4bn (€2.3bn, £1.6bn) of third-quarter mortgage-related losses last week, Merrill Lynch analysts warned that the Swiss bank would need to take up to $8bn more losses in the fourth quarter of this year. Meanwhile, Citigroup's share price slumped on rumours that it may need to acknowledge another $10bn of losses.

"Such a tsunami of red ink would undoubtedly be shocking at any time. But right now, this news is proving particularly unsettling for investors for two particular reasons. First, the numbers offer an unpleasant reminder that the pain from this summer’s credit turmoil is still far from over – contrary to what some bullish American bankers and policymakers were trying to claim a few weeks ago. “To judge from secondary market prices, losses on mortgage inventory are likely to be larger in the fourth quarter than the third quarter,” warns Tim Bond, analyst at Barclays Capital, the UK bank.

"Second, the write-downs have reminded investors just how little is known about where the bodies from this summer’s credit turmoil might lie. Perhaps the most shocking thing about recent announcements is that while big banks might have now written down their mortgage holdings by more than $20bn, this does not appear to capture all the potential losses."